<PAGE>
Prospectus Asset Allocation
Portfolios
May 1, 1999
GOLDMAN SACHS VARIABLE INSURANCE TRUST
.Goldman Sachs Conservative Strategy Portfolio
.Goldman Sachs Balanced Strategy Portfolio
.Goldman Sachs Growth and Income Strategy Portfolio
.Goldman Sachs Growth Strategy Portfolio
.Goldman Sachs Aggressive Growth Strategy Portfolio
[ARTWORK APPEARS HERE]
THE SECURITIES AND EXCHANGE COMMISSION HAS
NOT APPROVED OR DISAPPROVED THESE SECURITIES
OR PASSED UPON THE ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
AN INVESTMENT IN A PORTFOLIO IS NOT A BANK
DEPOSIT AND IS NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY. AN INVESTMENT IN A
PORTFOLIO INVOLVES INVESTMENT RISKS,
INCLUDING POSSIBLE LOSS OF PRINCIPAL. [GOLDMAN SACHS LOGO APPEARS HERE]
<PAGE>
General Investment Management Approach
Goldman Sachs Asset Management, a separate operating division of Goldman,
Sachs & Co. ("Goldman Sachs"), serves as investment adviser (the "Investment
Adviser") to five asset allocation portfolios: the Conservative Strategy
Portfolio, Balanced Strategy Portfolio, Growth and Income Strategy Portfolio,
Growth Strategy Portfolio and Aggressive Growth Strategy Portfolio. The Port-
folios are intended for investors who prefer to have their asset allocation
decisions made by professional money managers. Each Portfolio seeks to
achieve its objectives by investing in a combination of underlying funds for
which Goldman Sachs now or in the future acts as investment adviser or prin-
cipal underwriter (the "Underlying Funds"). Some of these Underlying Funds
invest primarily in fixed-income or money market securities (the "Underlying
Fixed-Income Funds") and other Underlying Funds invest primarily in equity
securities (the "Underlying Equity Funds"). An investor may choose to invest
in one or more of the Portfolios based on individual investment goals, risk
tolerance, and financial circumstances.
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 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.
The Asset Allocation Investment Process involves investing a Portfolio's
assets in other Goldman Sachs Funds within specified equity and fixed-income
percentage ranges.
- --------------------------------------------------------------------------------
Goldman Sachs' Asset Allocation Investment Philosophy:
The Investment Adviser's Quantitative Research Group uses disciplined quanti-
tative models to determine the relative attractiveness of the world's stock,
bond and currency markets. These models use financial and economic variables
to capture fundamental relationships that the Quantitative Research Group
believes make sense. While the Investment Adviser's process is rigorous and
quantitative, it also incorporates clear economic reasoning behind each
recommendation.
Each Portfolio starts with a strategic allocation among the various asset
classes. The Investment Adviser then tactically deviates 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 allocation of a
given Portfolio result in higher risk that the tactical allocation will
underperform the strategic allocation. However, the Investment Adviser's risk
control process balances the amount any asset class can be overweighted in
seeking to achieve higher expected returns against the amount of risk imposed
by that deviation from the strategic allocation. The Investment Adviser
employs Goldman Sachs' proprietary Black-Litterman asset allocation technique
in an effort to optimally balance these two goals.
1
<PAGE>
Portfolio Investment Objectives and Strategies
Goldman Sachs Variable Insurance Trust (the "Trust") offers shares of the
Portfolios to separate accounts of 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 public. The
participating insurance companies, not the owners of the variable annuity
contracts or life insurance policies or participants therein, are sharehold-
ers of a Portfolio. Each Portfolio pools the monies of these separate
accounts and invests these monies in a portfolio of securities pursuant to
the Portfolio's stated investment objectives.
Goldman Sachs Conservative Strategy Portfolio
PORTFOLIO FACTS
- --------------------------------------------------------------------------------
Objective: Current income, consistent with the preservation of capital
and secondarily the potential for capital appreciation
Investment Focus: Primarily domestic fixed-income funds (approximately 80%)
focusing on short-term investments and money market funds,
with the balance in domestic stock funds and a small
allocation to a global bond fund
Investment Style: Asset Allocation
INVESTMENT OBJECTIVE
The Portfolio seeks current income, consistent with the preservation of capi-
tal and secondarily also considers the potential for capital appreciation.
PRINCIPAL INVESTMENT STRATEGY
Under normal conditions, approximately 80% of the Portfolio's total assets
will be allocated among Underlying Fixed-Income Funds, with a focus on short-
term investments including money market funds. Allocation to Underlying
Equity Funds is intended to add diversification and enhance returns, but will
also add some volatility. The Investment Adviser expects that the 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. It is expected that the Portfolio will invest more than 25% of its
assets in the Short Duration Government Fund. The Portfolio may not invest in
Underlying Equity Funds that invest principally in foreign equity securities.
Goldman Sachs Balanced Strategy Portfolio
PORTFOLIO FACTS
- --------------------------------------------------------------------------------
Objective: Current income and long-term capital appre-ciation
Investment Focus: Domestic fixed-income funds (approximately 60%), with the
remaining bal-ance in domes-tic and international stock
funds and a small alloca-tion to a global bond fund
Investment Style: Asset Allocation
INVESTMENT OBJECTIVE
The Portfolio seeks current income and long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGY
Under normal conditions, approximately 60% of the Portfolio's total assets
will be allocated among Underlying Fixed-Income Funds. Allocation to Under-
lying Equity Funds is intended to add diversification and enhance returns,
but will also add some volatility. The Investment Adviser expects that the
Portfolio will invest a relatively significant percentage of its equity allo-
cation in the CORE Large Cap Growth, CORE Large Cap Value and CORE Interna-
tional Equity Funds and will invest a relatively significant percentage of
its assets in the Global Income Fund. It is expected that the Portfolio will
invest more than 25% of its assets in the Short Duration Government Fund.
2
<PAGE>
PORTFOLIO INVESTMENT OBJECTIVES AND STRATEGIES
Goldman Sachs Growth and Income Strategy Portfolio
PORTFOLIO FACTS
- --------------------------------------------------------------------------------
Objective: Long-term capital appreciation and current income
Investment Focus: Domestic and international fixed- income and stock funds
Investment Style: Asset Allocation
INVESTMENT OBJECTIVE
The Portfolio seeks long-term capital appreciation and current income.
PRINCIPAL INVESTMENT STRATEGY
Under normal conditions, approximately 60% of the Portfolio's total assets
will be allocated among Underlying Equity Funds, which are intended to pro-
vide the capital appreciation component. Allocation to Underlying Fixed-
Income Funds is intended to provide the income component. The Investment
Adviser expects that the Portfolio will invest a relatively significant per-
centage of its equity allocation in the CORE Large Cap Growth, CORE Large Cap
Value and CORE International Equity Funds and will invest a relatively sig-
nificant percentage of its assets in the Core Fixed Income and Global Income
Funds.
Goldman Sachs Growth Strategy Portfolio
PORTFOLIO FACTS
- --------------------------------------------------------------------------------
Objective: Long-term capital appreciation and secondarily current
income
Investment Focus: Primarily a blend of domestic large cap, small cap and
international stock funds (approximately 80%), with the
balance in domestic fixed-income funds and a small alloca-
tion to a global bond fund
Investment Style: Asset Allocation
INVESTMENT OBJECTIVE
The Portfolio seeks long-term capital appreciation and secondarily current
income.
PRINCIPAL INVESTMENT STRATEGY
Under normal conditions, approximately 80% of the 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 intended to provide diversifi-
cation. The Investment Adviser expects that the Portfolio will invest a rela-
tively significant percentage of its equity allocation in the CORE Large Cap
Growth, CORE Large Cap Value and CORE International Equity Funds.
3
<PAGE>
Goldman Sachs Aggressive Growth Strategy Portfolio
PORTFOLIO FACTS
- --------------------------------------------------------------------------------
Objective: Long-term capital appreciation
Investment Focus: Equity funds, with a greater focus on international and
small cap investments
Investment Style: Asset Allocation
INVESTMENT OBJECTIVE
The Portfolio seeks long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGY
Under normal conditions, 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. The Investment Adviser expects that
the Portfolio will invest a relatively significant percentage of its assets
in the CORE Large Cap Growth, CORE Large Cap Value and CORE International
Equity Funds.
4
<PAGE>
Principal Investment Strategies
Each Portfolio seeks to achieve its investment objective by investing within
specified equity and fixed-income ranges among Underlying Funds. The tables
below illustrate the current Underlying Equity/Fixed-Income Fund allocation
targets and ranges for each Portfolio:
Equity/Fixed-Income Range
(Percentage of Each Portfolio's Total Assets)
<TABLE>
<CAPTION>
Portfolio Target Range
----------------------------------------
<S> <C> <C>
Conservative Strategy
Equity 20% 0%-25%
Fixed-Income 80% 75%-100%
----------------------------------------
Balanced Strategy
Equity 40% 20%-60%
Fixed-Income 60% 40%-80%
----------------------------------------
Growth and Income
Strategy
Equity 60% 40%-80%
Fixed-Income 40% 20%-60%
----------------------------------------
Growth Strategy
Equity 80% 60%-100%
Fixed-Income 20% 0%-40%
----------------------------------------
Aggressive Growth
Strategy
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
objective.
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.
While each Portfolio can invest in any or all of the Underlying Funds, it is
expected that each Portfolio will normally invest in only some of the Under-
lying Funds at any particular time. Each Portfolio's investment in any of the
Underlying Funds may, and in some cases is expected to, exceed 25% of such
Portfolio's total assets.
THE PARTICULAR UNDERLYING FUNDS IN WHICH EACH PORTFOLIO MAY INVEST, THE
EQUITY/FIXED- INCOME TARGETS AND RANGES AND THE INVESTMENTS IN EACH UNDER-
LYING FUND MAY BE CHANGED FROM TIME TO TIME WITHOUT SHAREHOLDER APPROVAL.
In addition, each Portfolio's investment objectives and all policies not spe-
cifically designated as fundamental in this Prospectus or the Statement of
Additional Information (the "Additional Statement") are non-fundamental and
may be changed without shareholder approval. If there is a change in a Port-
folio's investment objective, you should consider whether that Portfolio
remains an appropriate investment in light of your then current financial
position and needs.
5
<PAGE>
Principal Risks of the Portfolios
Loss of money is a risk of investing in each Portfolio. An investment in a
Portfolio is not a deposit of any bank and is not insured or guaranteed by
the Federal Deposit Insurance Corporation or any other governmental agency.
While the Portfolios offer a greater level of diversification than many other
types of mutual funds, a single Portfolio may not provide a complete invest-
ment program for an investor. The following summarizes the important risks
that apply to the Portfolios and may result in a loss of your investment.
There can be no assurance that a Portfolio will achieve its investment objec-
tive.
.Investing in the Underlying Funds. The investments of each Portfolio are
concentrated in the Underlying Funds, and each Portfolio's investment per-
formance 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 objective 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 Portfolios and
the Underlying Funds, will fluctuate in response to various market and eco-
nomic factors related to the equity and fixed-income markets, as well as the
financial condition and prospects of issuers in which the Underlying Funds
invest. There can be no assurance that the investment objective of any Port-
folio or any Underlying Fund will be achieved.
.Investments of the Underlying Funds. Because the Portfolios invest in the
Underlying Funds, the Portfolios' shareholders will be affected by the
investment policies of the Underlying Funds in direct proportion to the
amount of assets the Portfolios allocate to those Funds. Each Portfolio may
invest in Underlying Funds that in turn invest in small capitalization com-
panies and foreign issuers and thus are subject to additional risks, includ-
ing 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 deriv-
ative securities; enter into forward currency transactions; lend their port-
folio 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 ("REITs") and other issuers in the
real estate industry; purchase restricted and illiquid securities; 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 and the Additional Statement.
.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 pay-
able 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. You may invest in the Underlying Funds directly. By investing in
the Underlying Funds indirectly through a Portfolio, you 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.
.Temporary Investments. Although the Portfolios normally seek to remain sub-
stantially invested in the Underlying Funds, each Portfolio may invest a
portion of its assets in high-quality, short-term debt obligations (includ-
ing commercial paper, certificates of deposit, bankers' acceptances, repur-
chase 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) to maintain liquidity, to meet
shareholder redemptions and for other short-term cash needs. Also, there may
be times when, in the opinion of the Investment Adviser, abnormal market or
economic conditions warrant that, for temporary defensive purposes, a Port-
folio may invest without limitation in short-term obligations. When a Port-
folio's assets are invested in such investments, the Portfolio may not be
achieving its investment objective.
.Other Risks. Each Portfolio is subject to other risks, such as (1) the risk
that the operations of a Portfolio and the Underlying Funds in which it
invests, or the value of their securities, will be disrupted by the "Year
2000 Problem;" (2) the risk that a Portfolio will not be able to pay redemp-
tion proceeds within the period stated in this Prospectus because of unusual
market conditions, an unusually high volume of redemption requests or other
reasons (Liquidity Risk); or (3) the risk that a strategy used by the
Investment Adviser may fail to produce the intended results (Management
Risk).
6
<PAGE>
Description of the Underlying Funds
DESCRIPTION OF THE UNDERLYING FUNDS
The following is a concise description of the investment objectives and prac-
tices of each of the Underlying Funds that are available for investment by
the Portfolios as of the date of this Prospectus. Currently, all of the
Underlying Funds are investment portfolios of either Goldman Sachs Variable
Insurance Trust or Goldman Sachs Trust, a separately organized investment
company sponsored by Goldman Sachs. A Portfolio may also invest in other
Underlying Funds not listed below that may become available for investment in
the future at the discretion of the Investment Adviser without shareholder
approval. Additional information regarding the investment practices of the
Underlying Funds is provided in Appendix A to this Prospectus and the Addi-
tional Statement. No offer is made in this Prospectus of any of the Under-
lying Funds.
<TABLE>
<CAPTION>
Underlying Fund Name Investment Objectives Investment Criteria
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Goldman Sachs Variable
Insurance Trust ("VIT")
Equity Funds
VIT Growth and Income Long-term growth of At least 65% of total assets in equity
capital and growth of securities that the investment adviser
income. considers to have favorable prospects for
capital appreciation and/or dividend paying
ability.
-------------------------------------------------------------------------------------------------
VIT CORE U.S. Equity Long-term growth of At least 90% of total assets in equity
capital and dividend securities of U.S. issuers, including certain
income. foreign issuers 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.
-------------------------------------------------------------------------------------------------
VIT CORE Large Cap Long-term growth of At least 90% of total assets in equity
Growth capital. Dividend income securities of U.S. issuers, including certain
is a secondary foreign issuers traded in the United States.
consideration. 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.
-------------------------------------------------------------------------------------------------
VIT CORE Large Cap Value Long-term growth of At least 90% of total assets in equity
capital and dividend securities of U.S. issuers, including certain
income. foreign issuers 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.
-------------------------------------------------------------------------------------------------
VIT CORE Small Cap Long-term growth of At least 90% of total assets in equity
Equity capital. securities of U.S. issuers, including certain
foreign issuers 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.
-------------------------------------------------------------------------------------------------
VIT CORE International Long-term growth of At least 90% of total assets in equity
Equity capital. securities of companies organized outside the
United States or whose securities are
principally traded outside 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 unhedged
Morgan Stanley Capital International (MSCI)
Europe, Australasia and Far East Index (the
"EAFE Index"). The Fund may employ certain
currency management techniques.
-------------------------------------------------------------------------------------------------
VIT Capital Growth Long-term capital At least 90% of total assets in a diversified
growth. portfolio of equity securities. Long-term
capital appreciation potential is considered
in selecting investments.
-------------------------------------------------------------------------------------------------
</TABLE> 7
<PAGE>
<TABLE>
<CAPTION>
Underlying Fund Name Investment Objectives Investment Criteria
-------------------------------------------------------------------------------------------------
<S> <C> <C>
VIT Mid Cap Value* Long-term capital At least 65% of total assets in equity
appreciation. securities of companies with public stock
market capitalizations within the range of
the market capitalization of companies
constituting the Russell Midcap Index at the
time of the investment (currently between
$400 million and $16 billion).
-------------------------------------------------------------------------------------------------
VIT International Equity Long-term capital Substantially all, and at least 65%, of total
appreciation. 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.
-------------------------------------------------------------------------------------------------
Goldman Sachs Trust
("GST") Equity Funds
GST Small Cap Value Long-term capital At least 65% of total assets in equity
growth. securities of companies with public stock
market capitalizations of $1 billion or less
at the time of investment.
-------------------------------------------------------------------------------------------------
GST Emerging Markets Long-term capital Substantially all, and at least 65%, of total
Equity appreciation. assets in equity securities of emerging
country issuers. The Fund may employ certain
currency management techniques.
-------------------------------------------------------------------------------------------------
GST Asia Growth Long-term capital Substantially all, and at least 65%, of total
appreciation. assets in equity securities of companies in
China, Hong Kong, India, Indonesia, Malaysia,
Pakistan, the Philippines, Singapore, South
Korea, Sri Lanka, Taiwan and Thailand. The
Fund may employ certain currency management
techniques.
-------------------------------------------------------------------------------------------------
GST Real Estate Total return comprised Substantially all, and at least 80%, of total
Securities of long-term growth of assets in a diversified portfolio of equity
capital and dividend securities of issuers that are primarily
income. engaged in or related to the real estate
industry. The Fund expects that a substantial
portion of its total assets will be invested
in REITS.
-------------------------------------------------------------------------------------------------
GST Japanese Equity Long-term capital Substantially all, and at least 65%, of total
appreciation. assets in equity securities of Japanese
companies. The Fund may employ certain
currency management techniques.
-------------------------------------------------------------------------------------------------
GST European Equity Long-term capital Substantially all, and at least 65%, of total
appreciation. assets in equity securities of European
companies. The Fund may employ certain
currency management techniques.
-------------------------------------------------------------------------------------------------
GST International Small Long-term capital Substantially all, and at least 65%, of total
Cap appreciation. 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>
*Formerly, "VIT Mid Cap Equity."
8
<PAGE>
DESCRIPTION OF THE UNDERLYING FUNDS
<TABLE>
<CAPTION>
Approximate
Underlying Investment Duration or Interest Rate
Fund Name Objectives Maturity Sensitivity Investment Sector Credit Quality Other Investments
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Goldman Sachs VIT
Fixed-Income Funds
VIT Short Duration A high level of Target 2-year At least 65% of Non-U.S. Up to 35% of
Government current income Duration = U.S. total assets in Government total assets
and 2 year U.S. Treasury U.S. government Securities- may be
secondarily, in Treasury note securities and Minimum = invested in
seeking current Security plus repurchase BBB/Baa non-U.S.
income, may or minus .5 agreements government
also consider years collateralized by securities
the potential Maximum such securities. such as
for capital Duration* = 3 privately
appreciation. years issued
mortgage-
backed
securities,
asset-backed
securities,
municipal
securities and
corporate
securities.
--------------------------------------------------------------------------------------------------------------------------
VIT Global Income A high total Target 6-year Securities of Minimum = Mortgage-
return, Duration* = bond U.S. and foreign BBB/Baa backed and
emphasizing J.P. Morgan governments and At least 50% asset-backed
current income, Global corporations. = AAA/Aaa securities,
and, to a Government foreign
lesser extent, Bond Index currencies and
providing (hedged) plus repurchase
opportunities or minus 2.5 agreements
for capital years Maximum collateralized
appreciation. Duration* = by U.S.
7.5 years Government
Securities or
certain
foreign
government
securities.
--------------------------------------------------------------------------------------------------------------------------
GST Fixed-Income Funds
GST Financial Square Maximize Maximum 3-month Money market High Quality N/A
Prime Obligations current income Maturity Treasury instruments (short-term
to the extent of Individual bill including ratings of
consistent with Investments = securities issued A-1, P-1 or
the maintenance 13 months at or guaranteed by comparable
of liquidity. time of the U.S. quality).
purchase. government, its
Maximum agencies,
Dollar- instrumentalities
Weighted or sponsored
Average enterprises
Portfolio ("U.S. Government
Maturity = 90 Securities"),
days U.S. bank
obligations,
commercial paper
and other short-
term obligations
of U.S.
corporations,
governmental and
other entities;
asset-backed and
receivables-
backed
securities; and
related
repurchase
agreements.
--------------------------------------------------------------------------------------------------------------------------
GST Adjustable Rate A high level of Target 9-month At least 65% of U.S. Fixed-rate
Government current income, Duration* = U.S. total assets in Government mortgage pass-
consistent with 6-month to 1- Treasury U.S. Government Securities through
low volatility year bill Securities that securities and
of principal. U.S. Treasury are adjustable repurchase
Securities rate mortgage agreements
Maximum pass-through collateralized
Duration* = 2 securities and by U.S.
years other mortgage Government
securities with Securities.
periodic interest
rate resets.
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Under normal interest rate conditions. 9
<PAGE>
<TABLE>
<CAPTION>
Approximate
Underlying Investment Duration or Interest Rate
Fund Name Objectives Maturity Sensitivity Investment Sector Credit Quality Other Investments
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
GST Government A high level of Target Duration* = 5-year At least 65% of U.S. Non-government
Income current income, Lehman Brothers U.S. assets in U.S. Government mortgage pass-
consistent with Mutual Fund Treasury Government Securities through
safety of Government/Mortgage note Securities, and non-U.S. securities,
principal. Index plus or minus including Government asset-backed
1 year mortgage-backed Securities = securities and
Maximum Duration* = U.S. Government AAA/Aaa corporate
6 years Securities and fixed-income
repurchase securities.
agreements
collateralized
by such
securities.
----------------------------------------------------------------------------------------------------------------------------
GST Core Fixed Total return Target Duration* = 5-year At least 65% of Minimum = Foreign fixed-
Income consisting of Lehman Brothers U.S. assets in BBB/Baa; income,
capital Aggregate Bond Treasury fixed-income Minimum for municipal and
appreciation Index plus or minus note securities, non-dollar convertible
and income that 1 year Maximum including U.S. securities = securities,
exceeds the Duration* = 6 years Government AA/Aa foreign
total return of Securities, currencies and
the Lehman corporate, repurchase
Brothers mortgage-backed agreements
Aggregate Bond and asset- collateralized
Index. backed by U.S.
securities. Government
Securities.
----------------------------------------------------------------------------------------------------------------------------
GST High Yield A high level of Target Duration* = 6-year At least 65% of At least 65% Mortgage-
current income Lehman Brothers U.S. assets in = BB/Ba or backed and
and capital High Yield Bond Treasury fixed-income below asset-backed
appreciation. Index plus or minus note securities securities,
2.5 years Maximum rated below U.S.
Duration* = 7.5 investment Government
years grade, Securities,
including U.S. investment
and non-U.S. grade
dollar corporate
corporate debt, fixed-income
foreign securities,
government structured
securities, securities,
convertible foreign
securities and currencies and
preferred repurchase
stock. agreements
collateralized
by U.S.
Government
Securities.
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Under normal interest rate conditions.
10
<PAGE>
Principal Risks of the Underlying Funds
The following summarizes important risks that apply to the Underlying Funds
and may result in a loss of your investment in a Portfolio. There can be no
assurance that an Underlying Fund will achieve its investment objective.
RISKS THAT APPLY TO ALL UNDERLYING FUNDS:
.Interest Rate Risk--The risk that when interest rates increase, fixed-income
securities held by an Underlying Fund will decline in value. Long-term
fixed-income securities will normally have more price volatility because of
this risk than short-term securities.
.Credit/Default Risk--The risk that an issuer of fixed-income securities held
by an Underlying Fund (which may have low credit ratings) may default on its
obligation to pay interest and repay principal.
.Market Risk--The risk that the value of the securities in which an Under-
lying Fund invests may go up or down in response to the prospects of indi-
vidual companies and/or general economic conditions. Price changes may be
temporary or last for extended periods.
.Derivatives Risk--The risk that loss may result from an Underlying Fund's
investments in options, futures, swaps, structured securities and other
derivative instruments. These instruments may be leveraged so that small
changes may produce disproportionate losses to an Underlying Fund.
.Foreign Risk--The risk that when an Underlying Fund invests in foreign secu-
rities, it will be subject to the risks of loss that are not typically asso-
ciated with domestic issuers. Loss may result because of less foreign
government regulation, less public information and less economic, political
and social stability. Loss may also result from the imposition of exchange
controls, confiscations and other government restrictions. The Underlying
Funds will also be subject to the risk of negative foreign currency rate
fluctuations. Foreign risks will normally be greatest when an Underlying
Fund invests in issuers located in emerging countries.
.Management Risk--The risk that a strategy used by an investment adviser to
the Underlying Funds may fail to produce the intended results.
.Liquidity Risk--The risk that an Underlying Fund will not be able to pay
redemption proceeds within the time period stated in this Prospectus because
of unusual market conditions, an unusually high volume of redemption
requests, or other reasons. Underlying Funds that invest in non-investment
grade fixed-income securities, small capitalization stocks, REITs, or emerg-
ing country issuers will be especially subject to the risk that during cer-
tain periods the liquidity of particular issuers or industries, or all
securities within these investment categories, will shrink or disappear sud-
denly and without warning as a result of adverse economic, market or politi-
cal events, or adverse investor perceptions whether or not accurate.
.Other Risks--Each Underlying Fund is subject to other risks, such as the
risk that its operations, or the value of its portfolio securities, will be
disrupted by the "Year 2000 Problem."
RISKS THAT APPLY PRIMARILY TO THE UNDERLYING FIXED-INCOME FUNDS:
.Call Risk--The risk that an issuer will exercise its right to pay principal
on an obligation held by an Underlying Fund (such as a Mortgage-Backed Secu-
rity) earlier than expected. This may happen when there is a decline in
interest rates. Under these circumstances, an Underlying 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--The risk that an issuer will exercise its right to pay prin-
cipal on an obligation held by an Underlying Fund (such as a Mortgage-Backed
Security) later than expected. This may happen when there is a rise in
interest rates. Under these circumstances, the value of an obligation will
decrease, and an Underlying Fund will also suffer from the inability to
invest in higher yielding securities.
.U.S. Government Securities Risk--The risk that the U.S. government will not
provide financial support to U.S. government agencies, instrumentalities or
sponsored enterprises if it is not obligated to do so by law.
RISK THAT APPLIES PRIMARILY TO THE UNDERLYING EQUITY FUNDS:
.Stock Risk--The risk that stock prices have historically risen and fallen in
periodic cycles. As of the date of this Prospectus, U.S. stock markets and
certain foreign stock markets were trading at or close to record high lev-
els. There is no guarantee that such levels will continue.
RISKS THAT ARE PARTICULARLY IMPORTANT FOR SPECIFIC UNDERLYING FUNDS:
.Country Risk--The GST European Equity Fund invests primarily in equity secu-
rities of European companies. The GST Japanese Equity Fund invests primarily
in equity securities of Japanese companies. The GST Asia Growth Fund invests
primarily in equity securities of Asian issuers. The VIT Global Income Fund
is non- diversified. The VIT Global
11
<PAGE>
Income 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 investments of these or other Underlying Funds in
issuers located in a particular country or region will subject the Under-
lying Fund, to a greater extent than if investments were less concentrated,
to losses arising from adverse developments affecting those issuers or coun-
tries.
.Emerging Countries Risk--Certain Underlying Funds invest in emerging country
securities. The securities markets of Asian, Latin American, Eastern Europe-
an, African and other emerging countries are less liquid, are especially
subject to greater price volatility, have smaller market capitalizations,
have less government regulation and are not subject to as extensive and fre-
quent accounting, financial and other reporting requirements as the securi-
ties markets of more developed countries. Further, investment in equity
securities of issuers located in Russia and certain other emerging countries
involves risk of loss resulting from problems in share registration and cus-
tody and substantial economic and political disruptions. These risks are not
normally associated with investment in more developed countries.
.Small Cap Stock and REIT Risk--Certain Underlying Funds invest in small cap
stocks and REITs. The securities of small capitalization companies and REITs
involve greater risks than those associated with larger, more established
companies and may be subject to more abrupt or erratic price movements.
Securities of such issuers may lack sufficient market liquidity to enable an
Underlying Fund to effect sales at an advantageous time or without a sub-
stantial drop in price.
."Junk Bond" Risk--Certain Underlying Funds invest in non-investment grade
fixed-income securities (commonly known as "junk bonds") that are considered
predominantly speculative by traditional investment standards. Non-invest-
ment grade fixed-income securities and unrated securities of comparable
credit quality are subject to the increased risk of an issuer's inability to
meet principal and interest obligations. These securities may be subject to
greater price volatility due to such factors as specific corporate develop-
ments, interest rate sensitivity, negative perceptions of the junk bond mar-
kets generally and less secondary market liquidity.
More information about the portfolio securities and investment techniques of
the Underlying Funds, and their associated risks, is provided in Appendix A.
You should consider the investment risks discussed in this section and in
Appendix A. Both are important to your investment choice.
Portfolio Performance
The Portfolios do not have long-term performance records because they have
been in operation for less than one calendar year. Each Portfolio commenced
operations on April 1, 1999.
12
<PAGE>
Service Providers
INVESTMENT ADVISERS
<TABLE>
<CAPTION>
Investment Adviser Portfolio
----------------------------------------------------------------------------
<S> <C>
Goldman Sachs Asset Management Conservative Strategy
("GSAM") Balanced Strategy
One New York Plaza Growth and Income Strategy
New York, New York 10004 Growth Strategy
Aggressive Growth Strategy
----------------------------------------------------------------------------
Except as noted below, GSAM also serves as investment adviser to each Under-
lying Fund.
<CAPTION>
Investment Adviser Underlying Fund
----------------------------------------------------------------------------
<S> <C>
GST Adjustable Rate
Goldman Sachs Funds Management, L.P. ("GSFM") Government
One New York Plaza
New York, New York 10004
----------------------------------------------------------------------------
Goldman Sachs Asset Management VIT International Equity
International ("GSAMI") GST Japanese Equity
133 Peterborough Court GST European Equity
London EC4A 2BB England GST International Small Cap
GST Emerging Markets Equity
GST Asia Growth
VIT Global Income
----------------------------------------------------------------------------
</TABLE>
GSAM is a separate operating division of Goldman Sachs, which registered as
an investment adviser in 1981. GSFM, a registered investment adviser since
1990, is a Delaware limited partnership which is an affiliate of Goldman
Sachs. GSAMI, a member of the Investment Management Regulatory Organization
Limited since 1990 and a registered investment adviser since 1991, is an
affiliate of Goldman Sachs. The Goldman Sachs Group, L.P., which controls the
Investment Advisers, announced that it will pursue an initial public offering
of the firm in the late spring or early summer of 1999. Simultaneously with
the offering, the Goldman Sachs Group, L.P. will merge into The Goldman Sachs
Group, Inc. As of February 28, 1999, GSAM, GSFM and GSAMI, together with
their affiliates, acted as investment adviser or distributor for assets in
excess of $199 billion.
Under an Asset Allocation Management Agreement with each Portfolio, the
Investment Adviser, subject to the general supervision of the Trustees, pro-
vides 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.
The Investment Adviser also performs the following additional services for
the Portfolios:
.Supervises all non-advisory operations of the Portfolios
.Provides personnel to perform necessary executive, administrative and cleri-
cal services to the Portfolios
.Arranges for the preparation of all required tax returns, reports to share-
holders, prospectuses and statements of additional information and other
reports filed with the Securities and Exchange Commission (the "SEC") and
other regulatory authorities
.Maintains the records of each Portfolio
.Provides office space and all necessary office equipment and services
The Investment Adviser, Distributor, and/or their affiliates may, from time
to time, pay compensation from their own assets (and not as an additional
charge to the Underlying Funds) to participating insurance companies for
administrative services that such participating insurance companies provide
to their variable annuity and variable life insurance contract owners who are
invested in the Underlying Funds. In addition, the Investment Adviser, Dis-
tributor, and/or their affiliates may, from time to time, pay compensation
from their own assets (and not as an additional charge to the Underlying
Funds) to various securities dealers (including affiliates of participating
insurance companies) that distribute variable annuity contracts and/or vari-
able life insurance contracts of such participating insurance 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.
MANAGEMENT FEES
As compensation for its services and its assumption of certain expenses, the
Investment Adviser is entitled to the following fees, computed daily and pay-
able monthly, at the annual rates listed below:
<TABLE>
<CAPTION>
Other Expenses
Contractual (after applicable
Portfolio Rate limitations)*
----------------------------------------------------------
<S> <C> <C>
Conservative Strategy 0.15% 0.10%
Balanced Strategy 0.15% 0.10%
Growth and Income Strategy 0.15% 0.10%
Growth Strategy 0.15% 0.10%
Aggressive Growth Strategy 0.15% 0.10%
----------------------------------------------------------
</TABLE>
* The Investment Adviser has voluntarily agreed to reduce or limit certain
"Other Expenses" of the Portfolios (excluding asset allocation fees, taxes,
interest, brokerage fees, litigation, indemnification and other extraordinary
expenses) to the extent such expenses exceed 0.10% per annum of a Portfolio's
average daily net assets. Such reductions or limits, if any, may be discon-
tinued or modified by the Investment Adviser in its discretion at any time.
13
<PAGE>
In addition, each Portfolio, as a shareholder in the Underlying Funds, will
indirectly bear a proportionate share of any investment management fees and
other expenses paid by the Underlying Funds. The following chart shows the
current total net operating expense ratios (management fee plus other operat-
ing expenses) of the Institutional Shares of each Underlying Fund after
applicable fee waivers and expense limitations in which the Portfolios may
invest. In addition, the following chart shows the contractual investment
management fees payable to the investment adviser and its affiliates by the
Underlying Funds (in each case as an annualized percentage of a Fund's aver-
age 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 Net
Contractual Operating
Management Expense
Underlying Fund Fee Ratio
---------------------------------------------------------------------------
<S> <C> <C>
VIT Short Duration Government 0.55% 0.70%
VIT Global Income 0.90% 1.05%
VIT Growth and Income 0.75% 0.90%
VIT CORE U.S. Equity 0.70% 0.80%
VIT CORE Large Cap Growth 0.70% 0.80%
VIT CORE Large Cap Value 0.70% 0.80%
VIT CORE Small Cap Equity 0.75% 0.90%
VIT Capital Growth 0.75% 0.90%
VIT CORE International Equity 0.85% 1.10%
VIT Mid Cap Value* 0.80% 0.95%
VIT International Equity 1.00% 1.25%
GST Adjustable Rate Government 0.40% 0.49%
GST Core Fixed Income 0.40% 0.54%
GST Government Income 0.65% 0.58%
GST Small Cap Value 1.00% 1.10%
GST European Equity 1.00% 1.14%
GST Japanese Equity 1.00% 1.05%
GST International Small Cap 1.20% 1.40%
GST Emerging Markets Equity 1.20% 1.39%
GST Asia Growth 1.00% 1.20%
GST Real Estate Securities 1.00% 1.04%
GST Financial Square Prime Obligations Money Market 0.205% 0.18%
GST High Yield 0.70% 0.76%
---------------------------------------------------------------------------
</TABLE>
* Formerly, "VIT Mid Cap Equity."
14
<PAGE>
SERVICE PROVIDERS
PORTFOLIO MANAGERS
Robert B. Litterman, Ph.D., a Managing Director of Goldman Sachs, is the
Director of Quantitative Research and Risk Management for GSAM. Mr. Litterman
is the co-developer, along with the late Fischer Black, of the Black-
Litterman Global Asset Allocation Model, a key tool in GSAM's asset alloca-
tion process. As Head of Quantitative Research, Mr. Litterman oversees
quantitative strategies for portfolio management. As Head of Risk Management,
he oversees the risk management processes used by GSAM and oversees the inde-
pendent Risk Monitoring Group. Prior to coming to GSAM, Mr. Litterman was the
head of the Firmwide Risk department since becoming a Partner in 1994. Pre-
ceding his time in the Operations, Technology and Finance Division,
Mr. Litterman spent eight years in the Fixed Income Division's research
department where he was co-director of the research and model development
group.
Quantitative Research Team
.The 20-person Quantitative Research Team includes six Ph.Ds, with extensive
academic and practitioner experience
.Disciplined, quantitative models are used to determine the relative attrac-
tiveness of the world's stock, bond and currency markets
.Theory and economic intuition guide the investment process
------------------------------------------------------------------------------
Quantitative Research Team
<TABLE>
<CAPTION>
Years
Primarily
Name and Title Responsible Five Year Employment History
------------------------------------------------------------------------------------------------
<S> <C> <C>
Mark M. Carhart, Ph.D., CFA Since 1999 Mr. Carhart joined the Investment Adviser as a
Vice President, Co-Head member of the Quantitative Research and Risk
Quantitative Research and Management team in 1997. From August 1995 to
Senior Portfolio Manager 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.
------------------------------------------------------------------------------------------------
Raymond J. Iwanowski Since 1999 Mr. Iwanowski joined the Investment Adviser as
Vice President, Co-Head an associate and portfolio manager in 1997. From
Quantitative Research and 1993 to 1997, he was a Vice President and head
Senior Portfolio Manager of the Fixed Derivatives Client Research group
at Salomon Brothers.
------------------------------------------------------------------------------------------------
Neil Chriss, Ph.D. Since 1999 Mr. Chriss joined the Investment Adviser in
Vice President and Portfolio 1998. From 1996 to 1998, he worked in the equity
Manager division of Morgan Stanley Dean Witter. From
1994 to 1996, he was a post-doctoral fellow in
the Mathematics Department of Harvard
University.
------------------------------------------------------------------------------------------------
Giorgio DeSantis, Ph.D. Since 1999 Mr. DeSantis joined the Investment Adviser in
Vice President and Portfolio 1998. From 1992 to 1998, he was Assistant
Manager Professor of Finance and Business Economics at
the Marshall School of Business at USC.
------------------------------------------------------------------------------------------------
William J. Fallon, Ph.D. Since 1999 Mr. Fallon joined the Investment Adviser in
Vice President and Portfolio 1998. From 1996 to 1998, he worked in the
Manager Firmwide Risk Group of Goldman Sachs. From 1991
to 1996, he attended Columbia University, where
he earned a Ph.D. in Finance.
------------------------------------------------------------------------------------------------
Guang-Liang He, PhD. Since 1999 Mr. He joined the Investment Adviser in 1998. In
Vice President and Portfolio 1997, he worked in the Firmwide Risk Group of
Manager Goldman Sachs. From 1992 to 1997, he worked at
Quantitative Financial Strategies, Inc.
------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
DISTRIBUTOR AND TRANSFER AGENT
Goldman Sachs, 85 Broad Street, New York, New York 10004, serves as the
exclusive distributor (the "Distributor") of each Portfolio's shares. Goldman
Sachs, 4900 Sears Tower, Chicago, Illinois 60606-6372, also serves as each
Portfolio's transfer agent (the "Transfer Agent") and, as such, performs var-
ious shareholder servicing functions.
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 activi-
ties of Goldman Sachs may present conflicts of interest with respect to an
Underlying Fund or limit an Underlying 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 Underlying
Funds and/or which engage in and compete for transactions in the same types
of securities, currencies and instruments as the Underlying 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 Underlying Funds. The results of an Under-
lying Fund's investment activities, therefore, may differ from those of
Goldman Sachs and its affiliates, and it is possible that an Underlying Fund
could sustain losses during periods in which Goldman Sachs and its affiliates
and other accounts achieve significant profits on their trading for proprie-
tary 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. An Underlying 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.
YEAR 2000
Many computer systems were designed using only two digits to signify the year
(for example, "98" for "1998"). On January 1, 2000, if these computer systems
are not corrected, they may incorrectly interpret "00" as the year "1900"
rather than the year "2000," leading to computer shutdowns or errors (com-
monly known as the "Year 2000 Problem"). To the extent these systems conduct
forward-looking calculations, these computer problems may occur prior to Jan-
uary 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 ade-
quately address this problem in a timely manner.
In order to address the Year 2000 Problem, the Investment Adviser has taken
the following measures:
.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.
.The Investment Adviser has sought assurances from the Portfolios' 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 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. The Investment Adviser
may obtain such Year 2000 information from various sources which the Invest-
ment Adviser believes to be reliable, including the issuers' public regula-
tory 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' other service providers will be
sufficient to avoid any adverse effect on the Portfolios due to the Year 2000
Problem.
16
<PAGE>
Dividends
Dividends from net investment income are declared and paid by each Portfolio
at least annually. Over the course of the year, accrued and paid dividends
will equal 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 ("NAV") such shares on the pay-
ment date, unless a participating insurance company's 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 capi-
tal.
Shareholder Guide
The following section will provide you with answers to some of the most often
asked questions regarding buying and selling the Portfolios' shares.
How Can I Purchase Or Sell Shares Of The Portfolios?
Shares of the Portfolios are not sold directly to the public. Instead, Port-
folio shares are sold to unaffiliated separate accounts that fund variable
annuity and variable life insurance contracts issued by participating insur-
ance companies. You may purchase or sell (redeem) shares of the Portfolios
through variable annuity contracts and variable life insurance policies
offered through the separate accounts. The variable annuity contracts and
variable life insurance policies are described in the separate prospectuses
issued by the participating insurance companies. You should refer to those
prospectuses 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 Portfolios.
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 annu-
ity contracts and variable life insurance policies issued by the participat-
ing insurance companies) to be effected on that day pursuant to variable
annuity contracts and variable life insurance policies.
The separate accounts of unaffiliated participating insurance companies may
purchase shares of the Portfolios. 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 cur-
rently 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 hold-
ers.
17
<PAGE>
Shareholder Guide (continued)
Shares of the Portfolios (including new Portfolios that might be added to the
Trust) may also be offered to:
.Unregistered separate accounts of various participating insurance companies
through which variable annuity contracts and variable life insurance poli-
cies are sold in non-public offerings.
.Unregistered separate accounts of various participating insurance companies
through which variable annuity contracts and variable life insurance poli-
cies are offered exclusively to qualified pension and profit-sharing plans
and/or certain governmental plans.
.Qualified pension and profit-sharing plans.
How Are Shares Priced?
Shares of a Portfolio are purchased and sold at the Portfolio's NAV. The
Portfolios calculate NAV as follows:
NAV = (Value of Assets of the Portfolio) - (Liabilities of the Portfolio)
-------------------------------------------------------------------
Number of the Portfolio's Outstanding Shares
The Portfolios' investments are valued based on market quotations, which may
be furnished by a pricing service or provided by securities dealers. If accu-
rate quotations are not readily available, the fair value of the Portfolios'
investments may be determined 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 amor-
tized cost.
.NAV per share of each Portfolio is calculated by the Portfolio's custodian
each business day as of the close of regular trading on the New York Stock
Exchange (normally 4:00 p.m. New York time). Portfolio shares will not be
priced on any day the New York Stock Exchange is closed.
.Shares are purchased and redeemed at the NAV next calculated after an order
is received in proper form by the Trust.
Note: The time at which transactions and shares are priced and the time by
which orders must be received may be changed in case of an emergency or if
regular trading on the New York Stock Exchange is stopped at a time other
than 4:00 p.m. New York time.
Foreign securities may trade in their local markets on days a Portfolio is
closed. As a result, the NAV of a Portfolio that invests in Underlying Funds
that hold foreign securities may be impacted on days when its shares may not
be purchased or redeemed.
In addition, the impact of events that occur after the publication of market
quotations used by an Underlying Fund to price its securities but before the
close of regular trading on the New York Stock Exchange will normally not be
reflected in an Underlying Fund's next determined NAV unless the Trust, in
its discretion, makes an adjustment in light of the nature and materiality of
the event, its effect on Underlying Fund operations and other relevant fac-
tors.
Do I Have To Pay Any Fees When Purchasing Or Selling Shares Of The
Portfolios?
The Portfolios themselves do not charge 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 vari-
able annuity contracts or variable life insurance policies. These fees should
be described in the participating insurance companies' prospectuses.
What Else Should I Know About Share Purchases And Redemptions?
The Trust reserves the right to:
.Suspend the right of redemption under certain extraordinary circumstances in
accordance with the rules of the SEC.
.Suspend the offering of shares for a period of time.
.Reject any purchase order.
Orders received by the Trust are effected on business days. The separate
accounts purchase and redeem shares of each Underlying Fund at the Underlying
Fund'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.
What Types Of Reports Will I Be Sent Regarding Investments In The Portfolios?
As a holder of a variable annuity contract or variable life insurance policy,
you will receive annual reports containing audited financial statements and
semiannual reports from your participating insurance company.
What Are The Portfolios' Voting Procedures?
Participating insurance companies, not the owners of the variable annuity
contracts or variable life insurance policies or participants therein, are
shareholders of a Portfolio. To the extent required by law:
.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.
.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
18
<PAGE>
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 is more fully set forth in the prospectus relating to those
accounts issued by the participating insurance companies.
Taxation
Each Portfolio is treated as a separate corporate entity for federal tax pur-
poses. Each Portfolio intends to elect to be treated as a regulated invest-
ment company and to qualify for such treatment for each taxable year under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code").
In addition, each Portfolio intends to qualify under the Code with respect to
the diversification requirements related to variable contracts. Provided that
a Portfolio and a separate account investing in the Portfolio satisfy appli-
cable tax requirements, the Portfolio will not be subject to federal tax and
any distributions from the Portfolio to the separate 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 variable annuity or variable life insurance contracts
should refer to the prospectuses with respect to such contracts for further
information regarding the tax treatment of the contracts and the separate
accounts in which the contracts are invested.
19
<PAGE>
Appendix A Additional Information on the Underlying Funds
This Appendix provides further information on certain types of securities and
techniques that may be used by the Underlying Funds, including their associ-
ated risks. Additional information is provided in the Additional Statement,
which is available upon request, and in the prospectuses of the Underlying
Funds.
The Underlying Equity Funds invest primarily in common stocks and other
equity securities, including 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"). The Underlying Fixed-Income Funds invest pri-
marily in fixed-income securities, including senior and subordinated corpo-
rate debt obligations (such as bonds, debentures, notes and commercial
paper), convertible and non-convertible corporate debt obligations, loan par-
ticipations and preferred stock.
The Adjustable Rate Government Fund invests in U.S. Government Securities and
related repurchase agreements, and neither this Underlying Fund, the Govern-
ment Income Fund nor the Financial Square Prime Obligations Fund makes for-
eign investments. The investments of the Financial Square Prime Obligations
Fund are limited by SEC regulations applicable to money market funds as
described in its prospectus, and do not include many of the types of invest-
ments 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.
A. GENERAL RISKS OF THE UNDERLYING FUNDS
The Underlying Equity Funds will be subject to the risks associated with com-
mon stocks and other equity securities. In general, stock values fluctuate in
response to the activities of individual companies and in response to general
market and economic conditions. Accordingly, the value of the stocks that an
Underlying Fund holds may decline over short or extended periods. The stock
markets tend to be cyclical, with periods when stock prices generally rise
and periods when prices generally decline.
The Underlying Fixed-Income Funds will be subject to the risks associated
with fixed-income securities. These risks include interest rate risk, credit
risk and call/extension risk. In general, interest rate risk involves the
risk that when interest rates decline, the market value of fixed-income secu-
rities tends to increase. Conversely, when interest rates increase, the mar-
ket value of fixed-income securities tends to decline. Credit risk involves
the risk that the issuer could default on its obligations and an Underlying
Fund will not recover its investment. Call risk and extension risk are nor-
mally present in adjustable rate mortgage loans ("ARMs"), mortgage-backed
securities and asset-backed securities. For example, 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 (exten-
sion risk). In general, if interest rates on new mortgage loans fall suffi-
ciently 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. In
either case, a change in the prepayment rate can result in losses to invest-
ors.
The Financial Square Prime Obligations Fund attempts to maintain a stable NAV
of $1.00 per share and values its assets using the amortized cost method in
accordance with SEC regulations. There is no assurance, however, that the
Financial Square Prime Obligations Fund will be successful in maintaining its
per share value at $1.00 on a continuous basis. The per share NAVs of the
other Underlying Funds are expected to fluctuate on a daily basis.
The portfolio turnover rates of the Underlying Funds have ranged from 30% to
315% during their most recent fiscal years. A high rate of portfolio turnover
(100% or more) involves correspondingly greater expenses which must be borne
by an Underlying Fund and its shareholders. 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 an Underlying Fund's
portfolio securities, excluding securities having a maturity at the date of
purchase of one year or less. There can be no assurance that the turnover
rates of the Underlying Funds will remain within this range during subsequent
fiscal years. Higher turnover rates may result in higher brokerage costs and
expenses for the Underlying Funds. In addition, higher turnover rates may
result in higher taxable realized gains for shareholders.
B. OTHER RISKS OF THE UNDERLYING FUNDS
Risks of Investing in Small Capitalization Companies and REITs. Investments
in small capitalization companies and REITs involve greater risk and portfo-
lio price volatility than investments in larger capitalization stocks. Among
the reasons for the greater price volatility of these investments 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 be thinly traded and may have
A-1
<PAGE>
to be sold at a discount from current market prices or in small lots over an
extended period of time. In addition, these securities are subject to the
risk that during certain periods the liquidity of particular issuers or
industries, or all securities in these investment categories, will shrink or
disappear suddenly and without warning as a result of adverse economic or
market conditions, or adverse investor perceptions, whether or not accurate.
Because of the lack of sufficient market liquidity, an Underlying Fund may
incur losses because it will be required to effect sales at a disadvantageous
time and only then at a substantial drop in price. Small capitalization com-
panies and REITs include "unseasoned" issuers that do not have an established
financial history; often have limited product lines, markets or financial
resources; may depend on or use a few key personnel for management; and may
be susceptible to losses and risks of bankruptcy. Transaction costs for these
investments are often higher than those for larger capitalization companies.
Investments in small capitalization companies and REITs may be more difficult
to price precisely than other types of securities because of their character-
istics and lower trading volumes.
Risks of Foreign Investments. Certain of the Underlying Funds may invest in
foreign securities in accordance with their investment objectives and poli-
cies. Foreign investments involve special risks that are not typically asso-
ciated with 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 rela-
tive to the U.S. dollar would reduce the value of the portfolio security. In
addition, if the currency in which an Underlying 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 Underlying 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 par-
ticipating nations in the Economic and Monetary Union presents unique uncer-
tainties, 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 may in
the future become members of the European Union 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
held by the Underlying Funds.
Brokerage commissions, custodial services and other costs relating to invest-
ment 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 regula-
tion 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 liq-
uid and more volatile than securities of comparable domestic issuers. Efforts
in foreign countries to remediate potential Year 2000 problems are not as
extensive as those in the United States. As a result, the operations of for-
eign markets, foreign issuers and foreign governments may be disrupted by the
Year 2000 Problem, and the investment portfolio of an Underlying Fund may be
adversely affected. Furthermore, with respect to certain foreign countries,
there is a possibility of nationalization, expropriation or confiscatory tax-
ation, imposition of withholding or other taxes on dividend or interest pay-
ments (or, in some cases, capital gains), limitations on the removal of funds
or other assets of the Underlying Funds, and political or social instability
or diplomatic developments which could affect investments in those countries.
Concentration of an Underlying Fund's assets in one or a few countries and
currencies will subject an Underlying Fund to greater risks than if an Under-
lying Fund's assets were not geographically concentrated.
Investment in sovereign debt obligations by certain Underlying Funds involves
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 pay interest when due in
accordance with the terms of such debt, and an Underlying Fund may have
A-2
<PAGE>
APPENDIX A
limited recourse to compel payment in the event of a default. Periods of eco-
nomic uncertainty may result in volatility of market prices of sovereign
debt, and in turn an Underlying Fund's NAV, to a greater extent than the vol-
atility inherent in debt obligations of U.S. issuers.
A sovereign debtor's willingness or ability to repay principal and pay inter-
est 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.
Investments in foreign securities may take the form of sponsored and
unsponsored American Depository Receipts ("ADRs") and Global Depository
Receipts ("GDRs"). Certain Underlying Funds may also invest in European
Depository Receipts ("EDRs") or other similar instruments representing secu-
rities of foreign issuers. 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.
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 under-
lying security.
Risks of Emerging Countries. Certain Underlying Funds may invest in securi-
ties of issuers located in emerging countries. The risks of foreign invest-
ment are heightened when the issuer is located in an emerging country.
Emerging countries are generally located in the Asia-Pacific region, Eastern
Europe, Latin and South America and Africa. An Underlying Fund's purchase and
sale of portfolio securities in certain emerging countries may be constrained
by limitations as to daily changes in the prices of listed securities, peri-
odic 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 an Underlying Fund, the investment adviser,
its affiliates and their respective clients and other service providers. An
Underlying Fund may not be able to sell securities in circumstances where
price, trading or settlement volume limitations have been reached.
Foreign investment in the securities markets of certain emerging countries is
restricted or controlled to varying degrees which may limit investment in
such countries or increase the administrative costs of such investments. For
example, certain Asian countries require governmental approval prior to
investments by foreign persons or limit investment by foreign persons to only
a specified percentage of an issuer's outstanding securities or a specific
class of securities which may have less advantageous terms (including price)
than securities of the issuer available for purchase by nationals. In addi-
tion, certain countries may restrict or prohibit investment opportunities in
issuers or industries deemed important to national interests. Such restric-
tions may affect the market price, liquidity and rights of securities that
may be purchased by an Underlying 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, it is anticipated
that an Underlying Fund may invest in such countries through other investment
funds in such countries.
Many emerging countries have experienced currency devaluations and substan-
tial (and, in some cases, extremely high) rates of inflation, which have had
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 part-
ners, trade barriers, exchange controls, managed adjustments in relative cur-
rency values and other protectionist measures imposed or negotiated by the
countries with which they trade.
Many emerging countries are subject to a substantial degree of economic,
political and social instability. Governments of some emerging countries are
authoritarian in nature or have been installed or removed as a result of mil-
itary 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 emerging countries. Unanticipated political or social develop-
ments may result in sudden and significant investment losses. Investing in
emerging countries involves greater 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.
An Underlying 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 Underlying Fund.
Settlement procedures in emerging countries are frequently less developed and
reliable than those in the United States and often may involve an Underlying
Fund's delivery of securities
A-3
<PAGE>
before receipt of payment for their sale. In addition, significant delays are
common in certain markets in registering the transfer of securities. Settle-
ment 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 inabil-
ity to complete its contractual obligations. The creditworthiness of the
local securities firms used by the Underlying Funds in emerging countries may
not be as sound as the creditworthiness of firms used in more developed coun-
tries. As a result, the Underlying Fund may be subject to a greater risk of
loss if a securities firm defaults in the performance of its responsibili-
ties.
The small size and inexperience of the securities markets in certain emerging
countries and the limited volume of trading in securities in those countries
may make an Underlying Fund's investments in such countries less liquid and
more volatile than investments in countries with more developed securities
markets (such as the United States, Japan and most Western European coun-
tries). An Underlying Fund's investments in emerging countries are subject to
the risk that the liquidity of a particular investment, or investments gener-
ally, in such countries will shrink or disappear suddenly and without warning
as a result of adverse economic, market or political conditions, or adverse
investor perceptions, whether or not accurate. Because of the lack of suffi-
cient market liquidity, an Underlying Fund may incur losses because it will
be required to effect sales at a disadvantageous time and then only at a sub-
stantial drop in price. Investments in emerging countries may be more diffi-
cult to price precisely because of the characteristics discussed above and
lower trading volumes.
An Underlying Fund's use of foreign currency management techniques in emerg-
ing countries may be limited. Due to the limited market for these instruments
in emerging countries, the investment adviser does not currently anticipate
that a significant portion of the Underlying Funds' currency exposure in
emerging countries, if any, will be covered by such instruments.
Risks of Derivative Investments. An Underlying Fund's transactions, if any,
in options, futures, options on futures, swaps, interest rate caps, floors
and collars, structured securities, inverse floating-rate securities,
stripped mortgage-backed securities and currency transactions involve addi-
tional risk of loss. Loss can result from a lack of correlation between
changes in the value of derivative instruments and the portfolio assets (if
any) being hedged, the potential illiquidity of the markets for derivative
instruments, or the risks arising from margin requirements and related lever-
age factors associated with such transactions. The use of these management
techniques also involves the risk of loss if the investment adviser is incor-
rect in its expectation of fluctuations in securities prices, interest rates
or currency prices. The Underlying Funds may also invest in derivative
investments for non-hedging purposes (that is, to seek to increase total
return. Investing for non-hedging purposes is considered a speculative prac-
tice and presents even greater risk of loss.
Derivative mortgage-backed securities (such as principal-only ("POs"), inter-
est-only ("IOs") or inverse floating rate securities) are particularly
exposed to call and extension risks. Small changes in mortgage prepayments
can significantly impact the cash flow and the market value of these securi-
ties. In general, the risk of faster than anticipated prepayments 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.
Some floating-rate derivative debt securities can present more complex types
of derivative and interest rate risks. For example, range floaters are sub-
ject to the risk that the coupon will be reduced below market rates if a des-
ignated 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 Illiquid Securities. The Underlying Funds may invest up to 15% (10%
in the case of the Financial Square Prime Obligations Fund) of their net
assets in illiquid securities which cannot be disposed of in seven days in
the ordinary course of business at fair value. Illiquid securities include:
.Both domestic and foreign securities that are not readily marketable
.Certain municipal leases and participation interests
.Certain stripped mortgage-backed securities
.Repurchase agreements and time deposits with a notice or demand period of
more than seven days
.Certain over-the-counter options
.Certain restricted securities, unless it is determined, based upon a review
of the trading markets for a specific restricted security, that the
restricted security is eligible for resale pursuant to Rule 144A under the
Securities Act of 1933 ("144A Securities") and, therefore, is liquid.
A-4
<PAGE>
APPENDIX A
Investing in 144A Securities 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 compa-
rable securities for which a liquid market exists.
Credit Risks. Debt securities purchased by the Underlying Funds may include
securities (including zero coupon bonds) issued by the U.S. government (and
its agencies, instrumentalities and sponsored enterprises), foreign govern-
ments, domestic and foreign corporations, banks and other issuers. Some of
these fixed-income securities are described in the next section below. Fur-
ther information is provided in the Additional Statement.
Debt securities rated BBB or higher by Standard & Poor's Ratings Group
("Standard & Poor's") or Baa or higher by Moody's Investors Services, Inc.
("Moody's") are considered "investment grade." 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. A security will be
deemed to have met a rating requirement if it receives the minimum required
rating from at least one such rating organization even though it has been
rated below the minimum rating by one or more other rating organizations, or
if unrated by such rating organizations, is determined by the Investment
Adviser to be of comparable credit quality. If a security satisfies a Fund's
minimum rating criteria at the time of purchase and is subsequently down-
graded below such rating, the Underlying 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 Underlying Fund and its shareholders.
Certain Underlying Funds may invest in fixed-income securities rated BB or Ba
or below (or comparable unrated securities) which are commonly referred to as
"junk bonds." Junk bonds are considered predominantly speculative and may be
questionable as to principal and interest payments.
In some cases, junk 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 present greater speculative risks than those associated
with investment in investment grade bonds. Also, to the extent that the rat-
ing assigned to a security in an Underlying Fund's portfolio is downgraded by
a rating organization, the market price and liquidity of such security may be
adversely affected.
Non-Diversification and Geographic Risks. The Global Income Fund is regis-
tered as a "non-diversified" Fund under the Act and is, therefore, more sus-
ceptible to adverse developments affecting any single issuer. In addition,
the Global Income Fund, and certain other Underlying Funds, may invest more
than 25% of their total assets in the securities of corporate and governmen-
tal issuers located in a particular foreign country or region. Concentration
of the investments of these or other Underlying Funds in issuers located in a
particular country or region will subject the Underlying Fund, to a greater
extent than if investments were less concentrated, to losses arising from
adverse developments affecting those issuers or countries.
Temporary Investment Risks. The Underlying Funds may invest a substantial
portion, and in some cases all, of their total assets, in cash equivalents
for temporary periods. When an Underlying Fund's assets are invested in such
instruments, the Underlying Fund may not be achieving its investment objec-
tive.
C. INVESTMENT SECURITIES AND TECHNIQUES
This section provides further information on certain types of securities and
investment techniques that may be used by the Underlying Funds, including
their associated risks. Further information is provided in the Additional
Statement, which is available upon request.
U.S. Government Securities and Related Custodial Receipts. Each Underlying
Fund may invest in U.S. Government Securities and related custodial receipts.
U.S. Government Securities include U.S. Treasury obligations and obligations
issued or guaranteed by U.S. government agencies, instrumentalities or spon-
sored enterprises. U.S. Government Securities may be 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 pur-
chase certain obligations of the issuer (such as the Federal National Mort-
gage Association ("Fannie Mae") and Federal Home Loan Mortgage Corporation
("Freddie Mac")); or (d) only the credit of the issuer. U.S. Government Secu-
rities also include Treasury receipts, zero coupon bonds and other stripped
U.S. Government Securities, where the interest and principal components of
stripped U.S. Government Securities are traded independently.
Interests in U.S. Government Securities may be purchased in the form of cus-
todial receipts that evidence ownership of future interest payments, princi-
pal payments or both on certain notes or bonds issued or guaranteed as to
principal and interest by the U.S. government, its agencies, instrumentali-
ties, political subdivisions or authorities. For certain securities law pur-
poses,
A-5
<PAGE>
custodial receipts are not considered obligations of the U.S. government.
Mortgage-Backed Securities. The Underlying Funds (other than 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"))
may invest in securities that represent direct or indirect participations in,
or are collateralized by and payable from, mortgage loans secured by real
property ("Mortgage-Backed Securities"). Mortgage-Backed Securities can be
backed by either fixed rate mortgage loans or adjustable rate mortgage loans,
and may be issued by either a governmental or non-governmental entity. Pri-
vately issued Mortgage-Backed Securities are normally structured with one or
more types of "credit enhancement." However, these Mortgage-Backed Securities
typically do not have the same credit standing as U.S. government guaranteed
Mortgage-Backed Securities.
Mortgage-Backed Securities may 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. 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 qual-
ifies for special tax treatment, and invests in certain mortgages principally
secured by interests in real property and other permitted investments. Mort-
gage-Backed Securities also include stripped Mortgage-Backed Securities
("SMBS"), which are derivative multiple class Mortgage-Backed Securities.
SMBS are usually structured with two different classes: one that receives
100% of the interest payments and the other that receives 100% of the princi-
pal payments from a pool of mortgage loans. The market value of SMBS consist-
ing entirely of principal payments generally is unusually volatile in
response to changes in interest rates. The yields on SMBS that receive 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 Underlying Funds (other than the CORE Equity
Funds), may also invest in asset-backed securities. Asset-backed securities
are securities whose principal and interest payments are collateralized by
pools of assets such as auto loans, credit card receivables, leases, install-
ment contracts and personal property. Asset-backed securities are often sub-
ject to more rapid repayment than their stated maturity date would indicate
as a result of the pass-through of prepayments of principal on the underlying
loans. During periods of declining interest rates, prepayment of loans under-
lying 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. Asset-backed securities present credit risks that are not presented by
Mortgage-Backed Securities. This is because asset-backed securities generally
do not have the benefit of a security interest in collateral that is compara-
ble in quality 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. In the event of a default, an Underlying Fund
may suffer a loss if it cannot sell collateral quickly and receive the amount
it is owed.
Municipal Securities. Certain Underlying Funds may invest in securities and
instruments issued by state and local governmental issuers. Municipal securi-
ties consist of bonds, notes, commercial paper and other instruments (includ-
ing participation interests in such securities) issued by or on behalf of
states, territories and possessions of the United States (including the Dis-
trict of Columbia) and their political subdivisions, agencies or instrumen-
talities. Such securities may pay fixed, variable or floating rates of
interest. Municipal securities are often issued to obtain funds for various
public purposes, including the construction of a wide range of public facili-
ties such as bridges, highways, housing, hospitals, mass transportation,
schools, streets and water and sewer works. Other public purposes for which
municipal securities may be issued include refunding outstanding obligations,
obtaining funds for general operating expenses, and obtaining funds to lend
to other public institutions and facilities. Municipal securities in which
the Underlying Funds may invest include private activity bonds, municipal
leases, certificates of participation, pre-refunded municipal securities and
auction rate securities.
Corporate and Bank Obligations; Trust Preferred Securities; Convertible Secu-
rities. Certain Underlying Funds may invest in corporate debt obligations,
trust preferred securities and convertible securities. Corporate debt obliga-
tions include bonds, notes, debentures and other obligations of U.S. or for-
eign corporations to pay interest and repay principal, and include securities
issued by banks and other financial institutions. Banks are subject to exten-
sive but different governmental
A-6
<PAGE>
APPENDIX A
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. 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. The securities are
generally senior in claim to standard preferred stock but junior to other
bondholders.
Convertible securities are preferred stock or debt obligations that are con-
vertible into common stock. Convertible securities generally offer lower
interest or dividend yields than nonconvertible securities of similar quali-
ty. Convertible securities in which an Underlying Fund invests are subject to
the same rating criteria as its other investments in fixed-income securities.
Convertible securities have both equity and fixed-income risk characteris-
tics. Like all fixed-income securities, the value of convertible securities
is susceptible to the risk of market losses attributable to changes in inter-
est rates. Generally, 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 of the convertible secu-
rity, 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, like a fixed-income 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.
Zero Coupon, Deferred Interest, Pay-In-Kind and Capital Appreciation Bonds.
Certain Underlying Funds may invest in zero coupon, deferred interest, pay-
in-kind and capital appreciation bonds. These securities are issued at a dis-
count from their face value because interest payments are typically postponed
until maturity. Pay-in-kind securities are securities that have interest pay-
able by the delivery of additional securities. The market prices of these
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.
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 CORE Equity Funds, which only invest in debt instru-
ments 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
Value 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 specu-
lative and may be questionable as to principal and interest payments as
described above.
Structured Securities and Inverse Floaters. Certain Underlying Funds may
invest in structured securities. Structured securities are securities whose
value is determined by reference to changes in the value of specific curren-
cies, 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.
Structured securities may be positively or negatively indexed, so that appre-
ciation 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 inter-
est 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 present a greater degree of market risk than other types of fixed-income
securities, and may be more volatile, less liquid and more difficult to price
accurately than less complex securities.
Structured securities include, but are not limited to, inverse floating rate
debt securities ("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
A-7
<PAGE>
higher the degree of leverage of an inverse floater, the greater the volatil-
ity of its market value.
Foreign Currency Transactions. Certain Underlying Funds may, to the extent
consistent with their investment policies, purchase or sell foreign curren-
cies on a cash basis or through forward contracts. A forward contract
involves an obligation to purchase or sell a specific currency at a future
date at a price set at the time of the contract. An Underlying Fund may
engage in foreign currency transactions for hedging purposes and to seek to
protect against anticipated changes in future foreign currency exchange
rates. In addition, certain Underlying Funds may also enter into such trans-
actions to seek to increase total return, which is considered a speculative
practice.
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 investment adviser determines that there is a pattern of
correlation between the two currencies. An Underlying 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 (e.g., the Investment Adviser
anticipates that the foreign currency will appreciate against the U.S.
dollar).
Currency exchange rates may fluctuate significantly over short periods of
time, causing, along with other factors, an Underlying Fund's NAV to fluctu-
ate. Currency exchange rates also can be affected unpredictably by the inter-
vention of 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.
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 a contract would deprive an Underlying Fund of unrealized profits,
transaction costs or the benefits of a currency hedge, or could force the
Underlying Fund to cover its purchase or sale commitments, if any, at the
current market price.
Options on Securities, Securities Indices and Foreign Currencies. A put
option gives the purchaser of the option the right to sell, and the writer
(seller) of the option the obligation to buy, the underlying instrument dur-
ing the option period. A call option gives the purchaser of the option the
right to buy, and the writer (seller) of the option the obligation to sell,
the underlying instrument during the option period. Each Underlying Fund may
write (sell) covered call and put options and purchase put and call options
on any securities in which it may invest or on any securities index comprised
of securities in which it may invest. An Underlying Fund that invests in for-
eign securities may also purchase and sell (write) put and call options on
foreign currencies.
The writing and purchase of options is a highly specialized activity which
involves special investment risks. Options may be used for either hedging or
cross-hedging purposes, or to seek to increase total return (which is consid-
ered a speculative activity). The successful use of options depends in part
on the ability of an investment adviser to manage future price fluctuations
and the degree of correlation between the options and securities (or curren-
cy) markets. If an investment adviser is incorrect in its expectation of
changes in market prices or determination of the correlation between the
instruments or indices on which options are written and purchased and the
instruments in an Underlying Fund's investment portfolio, the Underlying Fund
may incur losses that it would not otherwise incur. The use of options can
also increase an Underlying Fund's transaction costs. Options written or pur-
chased by the Underlying Funds may be traded on either U.S. or foreign
exchanges or over-the-counter. Foreign and over-the-counter options will
present greater possibility of loss because of their greater illiquidity and
credit risks.
Yield Curve Options. Certain Underlying Funds 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 desig-
nated securities, rather than the prices of the individual securities, and is
settled through cash payments. Accordingly, a yield curve option is profit-
able 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.
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 a 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.
Futures Contracts and Options on Futures Contracts. Futures contracts are
standardized, exchange-traded contracts that provide for the sale or purchase
of a specified financial instrument or currency at a future time at a speci-
fied price. An option on a futures contract gives the purchaser the right
(and
A-8
<PAGE>
APPENDIX A
the writer of the option the obligation) to assume a position in a futures
contract at a specified exercise price within a specified period of time. A
futures contract may be based on various securities (such as U.S. Government
Securities), foreign currencies, securities indices and other financial
instruments and indices. Certain Underlying Funds may engage in futures
transactions on both U.S. and foreign exchanges.
Certain Underlying Funds may purchase and sell futures contracts, and pur-
chase and write call and put options on futures contracts, in order to seek
to increase total return or to hedge against changes in interest rates, secu-
rities prices or to the extent the Underlying Fund invests in foreign securi-
ties, currency exchange rates, or to otherwise manage their term structures,
sector selection and durations in accordance with their investment objectives
and policies. An Underlying Fund may also enter into closing purchase and
sale transactions with respect to such contracts and options. 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. An Underlying Fund may not purchase or sell futures con-
tracts 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 an Underlying Fund's net assets.
Futures contracts and related options present the following risks:
.While an underlying Fund may benefit from the use of futures and options on
futures, unanticipated changes in interest rates, securities prices or cur-
rency exchange rates may result in a poorer overall performance than if the
Underlying Fund had not entered into any futures contracts or options trans-
actions.
.Because perfect correlation between a futures position and portfolio posi-
tion that is intended to be protected is impossible to achieve, the desired
protection may not be obtained and an Underlying Fund may be exposed to
additional risk of loss.
.The loss incurred by an 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 an Underlying Fund's NAV.
.As a result of the low margin deposits normally required in futures trading,
a relatively small price movement in a futures contract may result in sub-
stantial losses to an Underlying Fund.
.Futures contracts and options on futures may be illiquid, and exchanges may
limit fluctuations in futures contract prices during a single day.
.Foreign exchanges may not provide the same protection as U.S. exchanges.
Preferred Stock, Warrants and Rights. Certain 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 own-
ers. Unlike debt securities, the obligations of an issuer of preferred stock,
including dividend and other payment obligations, may not typically be accel-
erated by the holders of such preferred stock on the occurrence of an event
of default or other non- compliance by the issuer of the preferred stock.
Warrants and other rights are options to buy a stated number of shares of
common stock at a specified price at any time during the life of the warrant.
The holders of warrants and rights have no voting rights, receive no divi-
dends and have no rights with respect to the assets of the issuer.
Loan Participations. Certain Underlying Funds may invest in loan participa-
tions. 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. Loan participation interests 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 participa-
tion in the seller's share of the loan. When the Underlying Fund acts as co-
lender in connection with a participation interest or when it acquires
certain participation interests, the Underlying Fund will have direct
recourse against the borrower if the borrower fails to pay scheduled princi-
pal and interest. In cases where the Underlying Fund lacks direct recourse,
it will look to the agent bank to enforce appropriate credit remedies against
the borrower. In these cases, the Underlying 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. Moreover, under the terms of the loan participation,
the Underlying Fund may be regarded as a creditor of the agent bank (rather
than of the underlying corporate borrower), so that the Underlying Fund may
also be subject to the risk that the agent bank may become insolvent.
Real Estate Investment Trusts ("REITs"). The Real Estate Securities Fund
expects to invest a substantial portion of its
A-9
<PAGE>
total assets in REITs, which are pooled investment vehicles that invest pri-
marily in either real estate or real estate related loans. In addition, other
Underlying Equity Funds may invest in REITs from time to time. 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 the
ability of the REITs' managers, and are subject to heavy cash flow dependen-
cy, 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.
Other Investment Companies. An Underlying Fund may invest in securities of
other investment companies (including SPDRs and WEBs, as described below)
subject to statutory limitations. These limitations include a prohibition on
any Underlying Fund acquiring more than 3% of the voting shares of any other
investment company, and a prohibition on investing more than 5% of an Under-
lying Fund's total assets in securities of any one investment company or more
than 10% of its total assets in securities of all investment companies. An
Underlying Fund will indirectly bear its proportionate share of any manage-
ment fees and other expenses paid by such other investment companies. Such
other investment companies will have investment objectives, policies and
restrictions substantially similar to those of the Underlying Fund and will
be subject to substantially the same risks.
.Standard and Poor's Depository Receipts. The Underlying Equity Funds may,
consistent with their investment policies, purchase Standard & Poor's Depos-
itory Receipts ("SPDRs"). SPDRs are securities traded on the American Stock
Exchange (the "AMEX") 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. SPDR Trust is sponsored by a subsidiary of the AMEX. 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 price
movement of SPDRs may not perfectly parallel the price action of the S&P
500.
.World Equity Benchmark Shares. World Equity Benchmark Shares ("WEBS") are
shares of an investment company that invests substantially all of its assets
in securities included in the MSCI indices for specified countries. WEBS are
listed on the AMEX, and were initially offered to the public in 1996. The
market prices of WEBS are expected to fluctuate in accordance with both
changes in the NAVs of their underlying indices and supply and demand of
WEBS on the AMEX. To date, WEBS have traded at relatively modest discounts
and premiums to their NAVs. However, WEBS have a limited operating history
and information is lacking regarding the actual performance and trading
liquidity of WEBS for extended periods or over complete market cycles. In
addition, there is no assurance that the requirements of the AMEX necessary
to maintain the listing of WEBS will continue to be met or will remain
unchanged. In the event substantial market or other disruptions affecting
WEBS should occur in the future, the liquidity and value of an Underlying
Equity Fund's shares could also be substantially and adversely affected. If
such disruptions were to occur, an Underlying Equity Fund could be required
to reconsider the use of WEBS as part of its investment strategy.
Unseasoned Companies. Certain Underlying Funds may invest in companies (in-
cluding 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 rating organization. The securi-
ties 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.
Non-Investment Grade Fixed-Income Securities. Non-investment grade fixed-
income securities and unrated securities of comparable credit quality (com-
monly known as "junk bonds") 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 are subject to the
increased risk of an issuer's inability to meet principal and interest obli-
gations. These securities, also referred to as high yield securities, may be
subject to greater price volatility due to such factors as specific corporate
developments, interest rate sensitivity, negative perceptions of the junk
bond markets generally and less secondary market liquidity.
Non-investment grade fixed-income securities are generally unsecured and are
often subordinated to the rights of other creditors of the issuers of such
securities. Investment by an Underlying Fund in defaulted securities poses
additional risk
A-10
<PAGE>
APPENDIX A
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.
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 dividend income or other components of return on an equity invest-
ment (for example, 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 an Underlying Fund to invest in a market with-
out owning or taking physical custody of securities in circumstances in which
direct investment may be restricted for legal reasons or is otherwise imprac-
tical. Equity swaps are derivatives and their value can be very volatile. To
the extent that an investment adviser does not accurately analyze and predict
the potential relative fluctuation of the components swapped with another
party, an Underlying 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 sensi-
tive to changes in interest rates. Furthermore, an Underlying Fund may suffer
a loss if the counterparty defaults.
When-Issued Securities and Forward Commitments. Each Underlying Fund may pur-
chase when-issued securities and make contracts to purchase or sell securi-
ties for a fixed price at a future date beyond customary settlement time.
When-issued securities are securities that have been authorized, but not yet
issued. When-issued securities are purchased in order to secure what is con-
sidered to be an advantageous price and yield to the Underlying Fund at the
time of entering into the transaction. A forward commitment involves the
entering into a contract 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
before the settlement date. Conversely, the sale of securities on a forward
commitment basis involves the risk that the value of the securities sold may
increase before the settlement date. Although an Underlying Fund will gener-
ally purchase securities on a when-issued or forward commitment basis with
the intention of acquiring securities for its portfolio, an Underlying Fund
may dispose of when-issued securities or forward commitments prior to settle-
ment if its investment adviser deems it appropriate.
Repurchase Agreements. Repurchase agreements involve the purchase of securi-
ties subject to the seller's agreement to repurchase them at a mutually
agreed upon date and price. 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. Some Underlying
Funds may also enter into repurchase agreements involving certain foreign
government securities.
If the other party or "seller" defaults, an Underlying Fund might suffer a
loss to the extent that the proceeds from the sale of the underlying securi-
ties and other collateral held by the Underlying Fund are less than the
repurchase price and the Underlying Fund's cost associated with delay and
enforcement of the repurchase agreement. In addition, in the event of bank-
ruptcy of the seller, an Fund could suffer additional losses if a court
determines that the Fund's interest in the collateral is not enforceable.
In evaluating whether to enter into a repurchase agreement, an investment
adviser will carefully consider the creditworthiness of the seller. Certain
Underlying Funds, together with other registered investment companies having
advisory agreements with the Investment Adviser or any of 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 agree-
ments.
Lending of Portfolio Securities. Each Underlying Fund may engage in securi-
ties lending. Securities lending involves the lending of securities owned by
an Underlying Fund to financial institutions such as certain broker-dealers.
The borrowers are required to secure their loans continuously with cash, cash
equivalents, U.S. Government Securities or letters of credit in an amount at
least equal to the market value of the securities loaned. Cash collateral may
be invested in cash equivalents. If an investment adviser determines to make
securities loans, the value of the securities loaned may not exceed 33 1/3%
of the value of the total assets of an Underlying Fund (including the loan
collateral).
An Underlying Fund may lend its securities to increase its income. An Under-
lying Fund may, however, experience 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 Underlying Fund.
Short Sales Against-the-Box. Certain Underlying Funds may make short sales
against-the-box. A short sale against-the-box means that at all times when a
short position is open the Underlying Fund will own an equal amount of secu-
rities sold short, or securities convertible into or exchangeable for, with-
out the payment of any further consideration, an equal amount of the
securities of the same issuer as the securities sold short.
A-11
<PAGE>
Mortgage Dollar Rolls. Certain Underlying Funds may enter into "mortgage dol-
lar rolls." In mortgage dollar rolls, an Underlying Fund sells securities for
delivery in the current month and simultaneously contracts with the same
counterparty to repurchase substantially similar (same type, coupon and matu-
rity) 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 benefits
to the extent of any difference between (a) the price received for the secu-
rities sold and (b) the lower forward price for the future purchase and/or
fee income plus the interest earned on the cash proceeds of the securities
sold. Unless the benefits of a mortgage dollar roll exceed the income, capi-
tal appreciation and gain or loss due to mortgage prepayments that would have
been realized on the securities sold as part of the roll, the use of this
technique will diminish the Underlying Fund's performance.
Successful use of mortgage dollar rolls depends upon an investment adviser's
ability to predict correctly interest rates and mortgage prepayments. If the
investment adviser is incorrect in its prediction, an Underlying Fund may
experience a loss. 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 and do not treat them as borrowings.
Borrowings and Reverse Repurchase Agreements. Each Underlying Fund can borrow
money from banks, and certain Underlying Funds may enter into reverse repur-
chase agreements with banks and other financial institutions in amounts not
exceeding one-third of their total assets. Reverse repurchase agreements
involve the sale of securities held by an Underlying Fund subject to the
Underlying Fund's agreement to repurchase them at a mutually agreed upon date
and price (including interest). These transactions may be entered into as a
temporary measure for emergency purposes or to meet redemption requests.
Reverse repurchase agreements may also be entered into when the investment
adviser expects that the interest income to be earned from the investment of
the transaction proceeds will be greater than the related interest expense.
Borrowings and reverse repurchase agreements involve leveraging. If the secu-
rities held by an Underlying Fund decline in value while these transactions
are outstanding, the NAV of the Underlying Fund's outstanding shares will
decline in value by proportionately more than the decline in value of the
securities. In addition, reverse repurchase agreements involve the risk that
any interest income earned by an Underlying Fund (from the investment of the
proceeds) will be less than the interest expense of the transaction, that the
market value of the securities sold by an Underlying Fund will decline below
the price the Underlying Fund is obligated to pay to repurchase the securi-
ties, and that the securities may not be returned to the Underlying Fund.
Interest Rate Swaps, Mortgage Swaps, Credit Swaps, Currency Swaps and Inter-
est Rate Caps, Floors and Collars. To the extent consistent with their
investment policies, the Underlying Funds may enter into interest rate swaps,
mortgage swaps, credit swaps, currency swaps and interest rate caps, floors
and collars. Interest rate swaps involve the exchange by an Underlying Fund
with another party of their respective commitments to pay or receive inter-
est, such as an exchange of fixed-rate payments for floating rate payments.
Mortgage swaps are similar to interest rate swaps in that they represent com-
mitments to pay and receive interest. The notional principal amount, however,
is tied to a reference pool or pools of mortgages. 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. Currency swaps involve the exchange of
the parties' respective rights to make or receive payments in specified cur-
rencies. The purchase of an interest rate cap entitles the purchaser, to the
extent that a specified index exceeds a predetermined interest rate, to
receive payment of interest on a notional principal amount from the party
selling such interest rate cap. The purchase of an interest rate floor enti-
tles the purchaser, to the extent that a specified index falls below a prede-
termined 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.
An Underlying Fund may enter into swap transactions for hedging purposes or
to seek to increase total return. The use of interest rate, mortgage, credit
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 transac-
tions. If an investment adviser is incorrect in its forecasts of market val-
ue, interest rates and currency exchange rates, the investment performance of
an Underlying Fund would be less favorable than it would have been if these
investment techniques were not used.
A-12
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
GENERAL INVESTMENT
MANAGEMENT APPROACH ........ 1
PORTFOLIO INVESTMENT
OBJECTIVES AND STRATEGIES... 2
Goldman Sachs Conservative
Strategy Portfolio.......... 2
Goldman Sachs Balanced
Strategy Portfolio.......... 2
Goldman Sachs Growth and
Income Strategy Portfolio... 3
Goldman Sachs Growth
Strategy Portfolio.......... 3
Goldman Sachs Aggressive
Growth Strategy Portfolio... 4
PRINCIPAL INVESTMENT
STRATEGIES.................. 5
PRINCIPAL RISKS OF THE
PORTFOLIOS.................. 6
DESCRIPTION OF THE
UNDERLYING FUNDS............ 7
PRINCIPAL RISKS OF THE
UNDERLYING FUNDS............ 11
PORTFOLIO PERFORMANCE....... 12
SERVICE PROVIDERS........... 13
DIVIDENDS................... 17
SHAREHOLDER GUIDE........... 17
TAXATION.................... 19
APPENDIX A -- ADDITIONAL
INFORMATION ON THE
UNDERLYING FUNDS.......... A-1
</TABLE>
<PAGE>
Goldman Sachs Variable Insurance Trust
Prospectus
Shares of the Trust are offered to separate accounts of participating life
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 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 indi-
cate 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 solicita-
tion.
FOR MORE INFORMATION
Annual/Semiannual Report
Additional information about the Portfolios' investments is available in the
Portfolios' annual and semiannual reports to shareholders. In the Portfolios'
annual reports, you will find a discussion of the market conditions and
investment strategies that significantly affected the Portfolios' performance
during the last fiscal year.
Your insurance company will provide you with annual and semiannual reports
for those Portfolios serving as the investment vehicle for your variable
annuity contract or variable life insurance policy.
Statement of Additional Information
Additional information about the Portfolios and their policies is also avail-
able in the Portfolios' Statement of Additional Information ("Additional
Statement"). The Additional Statement is incorporated by reference into this
Prospectus (is legally considered part of this Prospectus).
The Additional Statement is available free upon request by calling Goldman
Sachs at 1-800-621-2550.
To obtain other information and for shareholder inquiries:
By telephone - Call 1-800-621-2550
By mail - Goldman Sachs Funds,
4900 Sears Tower-60th Floor
Chicago, IL 60606-6372
By e-mail - [email protected]
On the Internet - Text-only versions of Trust documents are located online
and may be downloaded from: SEC - http://www.sec.gov
You may review and obtain copies of Trust documents by visiting the SEC's
Public Reference Room in Washington, D.C. You may also obtain copies of Trust
documents by sending your request and a duplicating fee to the SEC's Public
Reference Section, Washington, D.C. 20549-6009. Information on the operation
of the public reference room may be obtained by calling the SEC at 1-800-SEC-
0330.
[LOGO OF GOLDMAN SACHS APPEARS HERE]
The Trust's investment company registration number is 811-08361.
<PAGE>
Prospectus May 1, 1999
GOLDMAN SACHS VARIABLE INSURANCE TRUST
.Goldman Sachs Growth
and Income Fund
.Goldman Sachs CORE
U.S. Equity Fund
.Goldman Sachs CORE
Large Cap Growth Fund
.Goldman Sachs CORE
Large Cap Value Fund
.Goldman Sachs CORE
Small Cap Equity Fund
.Goldman Sachs Capital
Growth Fund
.Goldman Sachs Mid Cap Value
Fund (formerly Mid Cap Equity)
.Goldman Sachs CORE
International Equity Fund
.Goldman Sachs
International Equity Fund
.Goldman Sachs Short
Duration Government Fund
.Goldman Sachs Global
Income Fund
.Goldman Sachs High
Yield Fund
[LOGO] Goldman
Sachs
THE SECURITIES AND EXCHANGE COMMISSION HAS
NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
AN INVESTMENT IN A PORTFOLIO IS NOT A BANK
DEPOSIT AND IS NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY. AN INVESTMENT IN A
PORTFOLIO INVOLVES INVESTMENT RISKS,
INCLUDING POSSIBLE LOSS OF PRINCIPAL.
<PAGE>
General Investment Management Approach
Goldman Sachs Asset Management ("GSAM"), a separate operating division of
Goldman, Sachs & Co. ("Goldman Sachs"), serves as investment adviser to the
Growth and Income, CORE U.S. Equity, CORE Large Cap Growth, CORE Large Cap
Value, CORE Small Cap Equity, Capital Growth, Mid Cap Value (formerly "Mid
Cap Equity"), CORE International Equity, Short Duration Government and High
Yield Funds. Goldman Sachs Asset Management International ("GSAMI") serves as
investment adviser to the International Equity and Global Income Funds. GSAM
and GSAMI are each referred to in this Prospectus as the "Investment
Adviser."
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 com-
parable even though the funds have the same Investment Adviser.
Goldman Sachs' Investment Philosophies for the Growth and Income, CORE U.S.
Equity, CORE Large Cap Growth, CORE Large Cap Value, CORE Small Cap Equity,
Capital Growth, Mid Cap Value, CORE International Equity and International
Equity Funds (the "Equity Funds"):
EQUITY FUNDS
VALUE STYLE FUNDS
Goldman Sachs' Value Investment Philosophy:
The Investment Adviser seeks companies that are discounted due to:
.Company-specific problems that are over-discounted in the marketplace.
.Cyclically out-of-favor status.
.Unrecognized positive fundamentals.
The Investment Adviser seeks to identify value through:
.Performing intensive hands-on fundamental research.
.Maintaining a long-term investment horizon.
.A team approach to decision making.
Value exists when a stock's price becomes inexpensive relative to the
company's estimated earnings and/or dividend-paying ability over the long-
term.
- --------------------------------------------------------------------------------
GROWTH STYLE FUNDS
Goldman Sachs' Growth Investment Philosophy:
1. Invest as if buying the company/business, not simply trading its stock:
.Understand the business, management, products and competition.
.Perform intensive, hands-on fundamental research.
.Seek businesses with strategic competitive advantages.
.Over the long-term, expect each company's stock price ultimately to track
the growth of the business.
2. Buy high-quality growth businesses that possess strong business fran-
chises, favorable long-term prospects and excellent management.
3. Purchase superior long-term growth companies at a favorable price--seek to
purchase at a fair valuation, giving the investor the potential to fully
capture returns from above-average growth rates.
Growth companies have earnings expectations that exceed those of the stock
market as a whole.
- --------------------------------------------------------------------------------
QUANTITATIVE ("CORE") STYLE FUNDS
Goldman Sachs' CORE Investment Philosophy:
Goldman Sachs' quantitative style of funds--CORE--emphasizes the two building
blocks of active management: stock selection and portfolio construction.
I. CORE Stock Selection
The CORE U.S. Equity, CORE Large Cap Growth, CORE Large Cap Value, CORE Small
Cap Equity and CORE International Equity Funds (the "CORE Funds") use
Goldman Sachs' proprietary multifactor models (each a "Multifactor Model"),
which are rigorous computerized rating systems used to forecast the returns
of securities held in each Fund's portfolio. The Multifactor Models incorpo-
rate common variables covering measures of:
.Value (price-to-book, price-to-earnings, cash flow to enterprise value)
.Momentum (earnings momentum, price momentum, sustainable growth)
.Risk (market risk, company-specific risk, earnings risk)
.Research (fundamental research ratings of Goldman Sachs and other analysts)
All of the above factors are carefully evaluated within the Multifactor Mod-
els since each has demonstrated a significant impact on the performance of
the securities and markets they were designed to forecast. Stock selection in
this process combines both our quantitative and qualitative analysis.
1
<PAGE>
II. CORE Portfolio Construction
A proprietary computer optimizer calculates every security combination (at
every possible weighting) to construct the most efficient risk/return portfo-
lio given each CORE Fund benchmark. In this process, the Investment Adviser
manages risk by limiting deviations from the benchmark, running size and sec-
tor neutral portfolios.
Goldman Sachs CORE Funds are fully invested, broadly diversified and offer
consistent overall portfolio characteristics. They may serve as good
foundations on which to build a portfolio.
- --------------------------------------------------------------------------------
ACTIVE INTERNATIONAL STYLE FUND
Goldman Sachs' Active International Investment Philosophy:
<TABLE>
<CAPTION>
How the Investment
Belief Adviser Acts on Belief
- ---------------------------------------------
<C> <S>
.Equity markets Seeks excess return
are inefficient through team driven,
research intensive and
bottom-up stock
selection.
.Returns are Seeks to capitalize on
variable variability of market and
regional returns through
asset allocation
decisions.
.Corporate Seeks to conduct
fundamentals rigorous, firsthand
ultimately research of business and
drive share company management.
price
.A business' Seeks to realize value
intrinsic value through a long-term
will be investment horizon.
achieved over
time
.Portfolio risk Seeks to systematically
must be monitor and manage risk
carefully through diversification,
analyzed and multifactor risk models
monitored and currency management.
</TABLE>
The Investment Adviser attempts to manage risk in the Fund through disci-
plined portfolio construction and continual portfolio review and analysis. As
a result, bottom-up stock selection, driven by fundamental research, should
be a main driver of returns.
- --------------------------------------------------------------------------------
Goldman Sachs' Investment Philosophy for the Short Duration Government,
Global Income and High Yield Funds (the "Fixed Income Funds"):
FIXED INCOME FUNDS
ACTIVE MANAGEMENT WITHIN A RISK-MANAGED FRAMEWORK
Goldman Sachs' Fixed Income Investing Philosophy
The Investment Adviser employs a disciplined, multi-step process to evaluate
potential investments:
1. Sector Allocation - The Investment Adviser assesses the relative value of
different investment sectors (such as U.S. corporate, asset-backed and
mortgage-backed securities) to create investment strategies that meet each
Fund's objectives.
2. Security Selection - In selecting securities for each Fund, the Investment
Adviser draws on the extensive resources of Goldman Sachs, including
fixed-income research professionals.
3. Yield Curve Strategies - The Investment Adviser adjusts the term structure
of the Funds based on its expectations of changes in the shape of the
yield curve while closely controlling the overall duration of the Fund.
The Investment Adviser de-emphasizes interest rate predictions as a means of
generating incremental return. Instead, the Investment Adviser seeks to add
value through the selection of particular securities and investment sector
allocation as described above.
With every fixed-income portfolio, the Investment Adviser applies a team
approach that emphasizes risk management and capitalizes on Goldman Sachs'
extensive research capabilities.
- --------------------------------------------------------------------------------
Each of the Fixed Income Funds described in this Prospectus has a target
duration. A Fund's duration approximates its price sensitivity to changes in
interest rates. Maturity measures the time until final payment is due; it
takes no account of the pattern of a security's cash flows over time. In com-
puting portfolio duration, a 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 oth-
erwise noted.
Each of the Fixed Income Funds also has credit rating requirements for the
securities they buy. A Fund will deem a security to
2
<PAGE>
have met its minimum credit rating requirement if the security has the
required rating at the time of purchase from at least one nationally recog-
nized statistical rating organization ("NRSRO") even though it has been rated
below the minimum rating by one or more other NRSROs. Unrated securities may
be purchased by a Fund if they are determined by the Investment Adviser to be
of comparable quality. If a security satisfies a Fund's minimum rating
requirement 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 down-
grade occurs, the Investment Adviser will consider what action, including the
sale of such security, is in the best interests of a Fund and its sharehold-
ers.
Fund Investment Objectives and Strategies
Goldman Sachs Variable Insurance Trust (the "Trust") offers shares of the
Funds to separate accounts of participating insurance companies for the pur-
pose of funding variable annuity contracts and variable life insurance poli-
cies. Shares of the Trust are not offered directly to the 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. Each Fund pools the monies of these separate accounts
and invests these monies in a portfolio of securities pursuant to the Fund's
stated investment objectives.
Goldman Sachs Growth and Income Fund
FUND FACTS
------------------------------------------------------------------------------
Objective: Long-term growth of capital and growth of income
Benchmark: S&P 500 Index
Investment Large capitalization U.S. stocks that are believed to be
Focus: undervalued or undiscovered by the marketplace
Investment Value
Style:
INVESTMENT OBJECTIVE
The Fund seeks long-term growth of capital and growth of income.
PRINCIPAL INVESTMENT STRATEGIES
Equity Securities. The Fund invests, under normal circumstances, at least 65%
of its total assets in equity securities that the Investment Adviser consid-
ers to have favorable prospects for capital appreciation and/or dividend-pay-
ing ability. Although the Fund will invest primarily in publicly traded U.S.
securities, it may invest up to 25% of its total assets in foreign securi-
ties, including securities of issuers in countries with emerging markets or
economies ("emerging countries") and securities quoted in foreign currencies.
Other. The Fund may also invest up to 35% of its total assets in fixed-income
securities, such as corporate debt and bank obligations, that offer the
potential to further the Fund's investment objective.
Goldman Sachs CORE U.S. Equity Fund
FUND FACTS
------------------------------------------------------------------------------
Objective: Long-term growth of capital and dividend income
Benchmark: S&P 500 Index
Investment Large-cap U.S. equity securities
Focus:
Investment Quantitative, applied to large-cap growth and value (blend)
Style: stocks
INVESTMENT OBJECTIVE
The Fund seeks long-term growth of capital and dividend income. The Fund
seeks this objective through a broadly diversified portfolio of large-cap and
blue chip equity securities representing all major sectors of the U.S. econo-
my.
PRINCIPAL INVESTMENT STRATEGIES
Equity Securities. The Fund invests, under normal circumstances, at least 90%
of its total assets in equity securities of U.S. issuers, including foreign
issuers that are traded in the United States.
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 repre-
sentation in most major sectors of the U.S. economy and a portfolio of compa-
nies with average long-term earnings growth expectations and dividend yields.
Other. The Fund's investments in fixed-income securities are limited to secu-
rities that are considered cash equivalents.
3
<PAGE>
Goldman Sachs CORE Large Cap Growth Fund
FUND FACTS
------------------------------------------------------------------------------
Objective: Long-term growth of capital; dividend income is a secondary
consideration
Benchmark: Russell 1000 Growth Index
Investment Large-cap, growth-oriented U.S. stocks
Focus:
Investment Quantitative, applied to large-cap growth stocks
Style:
INVESTMENT OBJECTIVE
The Fund seeks long-term growth of capital. The Fund seeks this 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.
PRINCIPAL INVESTMENT STRATEGIES
Equity Securities. The Fund invests, under normal circumstances, at least 90%
of its total assets in equity securities of U.S. issuers, including foreign
issuers that are traded in the United States.
The Investment Adviser emphasizes a company's growth prospects in analyzing
equity securities to be purchased by the Fund. The Fund's investments are
selected using both a variety of quantitative techniques and fundamental
research in seeking to maximize the Fund's expected return, while maintaining
risk, style, capitalization and industry characteristics similar to the Rus-
sell 1000 Growth Index. The Fund seeks a portfolio comprised of companies
with above average capitalizations and earnings growth expectations and below
average dividend yields.
Other. The Fund's investments in fixed-income securities are limited to secu-
rities that are considered cash equivalents.
Goldman Sachs CORE Large Cap Value Fund
FUND FACTS
------------------------------------------------------------------------------
Objective: Long-term growth of capital and dividend income
Benchmark: Russell 1000 Value Index
Investment Diversified portfolio of equity securities of large-cap U.S.
Focus: issuers selling at low to modest valuations
Investment Quantitative, applied to large-cap value stocks
Style:
INVESTMENT OBJECTIVE
The Fund seeks long-term growth of capital and dividend income. The Fund
seeks this objective through a broadly diversified portfolio of equity secu-
rities 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.
PRINCIPAL INVESTMENT STRATEGIES
Equity Securities. The Fund invests, under normal circumstances, at least 90%
of its total assets in equity securities of U.S. issuers, including foreign
issuers that are traded in the United States.
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 comprised of companies with above average capitalizations and low
to moderate valuations as measured by price/earnings ratios, book value and
other fundamental accounting measures.
Other. The Fund's investments in fixed-income securities are limited to secu-
rities that are considered cash equivalents.
4
<PAGE>
FUND INVESTMENT OBJECTIVE AND STRATEGIES
Goldman Sachs CORE Small Cap Equity Fund
FUND FACTS
------------------------------------------------------------------------------
Objective: Long-term growth of capital
Benchmark: Russell 2000 Index
Investment Stocks of small capitalization U.S. companies
Focus:
Investment Quantitative, applied to small cap growth and value (blend)
Style: stocks
INVESTMENT OBJECTIVE
The Fund seeks long-term growth of capital. The Fund seeks this 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.
PRINCIPAL INVESTMENT STRATEGIES
Equity Securities. The Fund invests, under normal circumstances, at least 90%
of its total assets in equity securities of U.S. issuers, including foreign
issuers that are traded in the United States.
The Fund's investments are selected using both a variety of quantitative
techniques and fundamental research in seeking to maximize the Fund's
expected return, while maintaining risk, style, capitalization and industry
characteristics similar to the Russell 2000 Index. The Fund seeks a portfolio
comprised of companies with small market capitalizations, strong expected
earnings growth and momentum, and better valuation and risk characteristics
than the Russell 2000 Index. 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.
Other. The Fund's investments in fixed-income securities are limited to secu-
rities that are considered cash equivalents.
Goldman Sachs Capital Growth Fund
FUND FACTS
------------------------------------------------------------------------------
Objective: Long-term growth of capital
Benchmark: S&P 500 Index
Investment Large-cap U.S. equity securities that offer long-term capital
Focus: appreciation potential
Investment Growth
Style:
INVESTMENT OBJECTIVE
The Fund seeks long-term growth of capital.
PRINCIPAL INVESTMENT STRATEGIES
Equity Securities. The 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 secu-
rities that are considered by the Investment Adviser to have long-term capi-
tal appreciation potential. Although the Fund invests primarily in publicly
traded U.S. securities, it may invest up to 10% of its total assets in for-
eign securities, including securities of issuers in emerging countries and
securities quoted in foreign currencies.
5
<PAGE>
Goldman Sachs Mid Cap Value Fund
FUND FACTS
------------------------------------------------------------------------------
Objective: Long-term capital appreciation
Benchmark: Russell Midcap Index
Investment Mid-capitalization U.S. stocks that are believed to be
Focus: undervalued or undiscovered by the marketplace
Investment Value
Style:
INVESTMENT OBJECTIVE
The Fund seeks long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
Equity Securities. The Fund invests, under normal circumstances, substan-
tially 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 constitut-
ing the Russell Midcap Index at the time of investment (currently between
$400 million and $16 billion). If the capitalization of an issuer decreases
below $400 million or increases above $16 billion after purchase, the Fund
may, but is not required to, sell the securities. Dividend income, if any, is
an incidental consideration. Although the Fund will invest primarily in pub-
licly 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.
Other. The Fund may also invest up to 35% of its total assets in fixed-income
securities, such as corporate debt and bank obligations.
Goldman Sachs CORE International Equity Fund
FUND FACTS
------------------------------------------------------------------------------
Objective: Long-term growth of capital
Benchmarks: MSCI Europe, Australiasia, Far East ("EAFE") Index (unhedged)
Investment Large-capitalization equity securities of companies that are
Focus: organized outside the United States or whose securities are
primarily traded outside the United States
Investment Quantitative
Style:
INVESTMENT OBJECTIVE
The Fund seeks long-term growth of capital. The Fund seeks this objective
through a broadly diversified portfolio of equity securities of large-cap
companies that are organized outside the United States or whose securities
are principally traded outside the United States.
PRINCIPAL INVESTMENT STRATEGIES
Equity Securities. The Fund invests, under normal circumstances, at least 90%
of its total assets in equity securities of companies that are organized out-
side the United States or whose securities are principally traded outside the
United States.
The Fund may allocate its assets among countries as determined by the Invest-
ment Adviser from time to time, provided the Fund's assets are invested in at
least three foreign countries. The Fund may invest in the securities of
issuers in emerging countries.
The Fund seeks broad representation of large-cap issuers across major coun-
tries 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.
Other. The Fund's investments in fixed-income securities are limited to secu-
rities that are considered cash equivalents.
6
<PAGE>
FUND INVESTMENT OBJECTIVES AND STRATEGIES
Goldman Sachs International Equity Fund
FUND FACTS
------------------------------------------------------------------------------
Objective: Long-term capital appreciation
Benchmark: FT/S&P Actuaries Europe & Pacific Index (unhedged)
Investment Equity securities of companies organized outside the United
Focus: States or whose securities are principally traded outside the
United States
Investment Active International
Style:
INVESTMENT OBJECTIVE
The Fund seeks long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
Equity Securities. The Fund invests, under normal circumstances, substan-
tially all, and at least 65% of its total assets in equity securities of com-
panies that are organized outside the United States or whose securities are
principally traded outside the United States.
The Fund may allocate its assets among countries as determined by the Invest-
ment Adviser from time to time, provided 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 securi-
ties of issuers located in the developed countries of Western Europe and in
Japan. However, the Fund may also invest in the securities of issuers located
in Australia, Canada, New Zealand and in emerging countries. Currently,
emerging countries include, among others, most Latin American, African, Asian
and Eastern European nations.
Other. The Fund may also invest up to 35% of its total assets in fixed-income
securities, such as corporate debt and bank obligations.
Goldman Sachs Short Duration Government Fund
FUND FACTS
------------------------------------------------------------------------------
Objective: High level of current income and, secondarily, may consider
potential for capital appreciation
Benchmark: Two-Year U.S. Treasury Security
Investment U.S. Government Securities
Focus:
INVESTMENT OBJECTIVE
The Fund seeks a high level of current income and secondarily, in seeking
current income, may also consider the potential for capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
The Fund invests, under normal circumstances, at least 65% of its total
assets in securities issued or guaranteed by the U.S. government, its agen-
cies, instrumentalities or sponsored enterprises ("U.S. Government Securi-
ties") and in repurchase agreements collateralized by such securities. The
remainder of the Fund's assets may be invested in non-U.S. Government Securi-
ties such as privately issued mortgage-backed securities, asset-backed secu-
rities, municipal securities and corporate securities. 100% of the Fund's
portfolio will be invested in U.S. dollar-denominated securities.
Duration (under normal interest rate conditions):
Target = Two-Year U.S. Treasury Security plus or minus 0.5 years
Maximum = 3 years
Expected Approximate Interest Rate Sensitivity: 2-year U.S. Treasury note
Credit Quality: Minimum = BBB or Baa at time of purchase.
Securities will either be rated by an NRSRO or, if unrated, will be deter-
mined by the Investment Adviser to be of comparable quality.
7
<PAGE>
Goldman Sachs Global Income Fund
FUND FACTS
------------------------------------------------------------------------------
Objective: High total return emphasizing current income
Benchmark: J.P. Morgan Global Government Bond Index (hedged)
Investment Fixed-income securities of U.S. and foreign issuers
Focus:
INVESTMENT OBJECTIVE
The Fund seeks a high total return, emphasizing current income, and, to a
lesser extent, providing opportunities for capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
The Fund invests primarily in a portfolio of high quality fixed-income secu-
rities of U.S. and foreign issuers and enters into transactions in foreign
currencies. Under normal market conditions, the Fund will:
.Have at least 30% of its total assets, after considering the effect of cur-
rency positions, denominated in U.S. dollars
.Invest in securities of issuers in at least three countries
.Seek 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
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. Not more
than 25% of the Fund's total assets will be invested in securities of issuers
in any other single foreign country. The Fund may also invest up to 10% of
its total assets in issuers in emerging countries.
The fixed-income securities in which the Fund may invest include:
.U.S. Government Securities and custodial receipts therefor
.Securities issued or guaranteed by a foreign government or any of its polit-
ical subdivisions, authorities, agencies, instrumentalities or by suprana-
tional entities
.Corporate debt securities
.Certificates of deposit and bankers' acceptances issued or guaranteed by, or
time deposits maintained at, U.S. or foreign banks (and their branches wher-
ever located) having total assets of more than $1 billion
.Commercial paper
.Mortgage-backed and asset-backed securities
The Global Income Fund is "non-diversified" under the Investment Company Act
of 1940 (the "Act"), and may invest more of its assets in fewer issuers than
"diversified" mutual funds. Therefore, the Global Income Fund may be more
susceptible to adverse developments affecting any single issuer held in its
portfolio, and may be more susceptible to greater losses because of these
developments.
Duration (under normal interest rate conditions):
Target = J.P. Morgan Global Government Bond Index (hedged) plus or minus 2.5
years
Maximum = 7.5 years
Expected Approximate Interest Rate Sensitivity: 6-year government bond
Credit Quality:
Minimum = BBB or Baa at time of purchase; At least 50% of total assets = AAA
or Aaa
Securities will either be rated by a NRSRO or, if unrated, determined by the
Investment Adviser to be of comparable quality
8
<PAGE>
FUND INVESTMENT OBJECTIVES AND STRATEGIES
Goldman Sachs High Yield Fund
FUND FACTS
------------------------------------------------------------------------------
Objective: High level of current income and may also consider the potential
for capital appreciation
Benchmark: Lehman Brothers High Yield Bond Index
Investment High yield, fixed-income securities rated below investment grade
Focus:
INVESTMENT OBJECTIVE
The Fund seeks a high level of current income and may also consider the
potential for capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
The Fund invests, under normal circumstances, at least 65% of its total
assets in high yield, fixed-income securities rated, at the time of invest-
ment, below investment grade. Non-investment grade securities are securities
rated BB, Ba or below by a NRSRO, or, if unrated, determined by the Invest-
ment 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, deben-
tures, notes and commercial paper)
.Convertible and non-convertible corporate debt obligations
.Loan participations
.Custodial receipts
.Municipal securities
.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 emerging
countries) 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. 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.
Duration (under normal interest rate conditions):
Target = Lehman Brothers High Yield Bond Index plus or minus 2.5 years
Maximum = 7.5 years
Expected Approximate Interest Rate Sensitivity: 6-year U.S. Treasury note
Credit Quality: At least 65% of total assets = BB or Ba or lower at the time
of investment or, if unrated, determined by the Investment Adviser to be of
comparable quality
Non-investment grade fixed-income securities (commonly known as "junk bonds")
tend to offer higher yields than higher rated securities with similar maturi-
ties. Non-investment grade fixed-income securities are, however, considered
speculative and generally involve greater price volatility and greater risk
of loss of principal and interest than higher rated securities. The Fund may
purchase the securities of issuers that are in default.
9
<PAGE>
Other Investment Practices and Securities (Equity Funds)
The table below identifies some of the investment techniques that may (but are
not required to) be used by the Equity Funds in seeking to achieve their
investment objectives. The table also highlights the differences among the
Funds in their use of these techniques and other investment practices and
investment securities. Numbers in this table show allowable usage only; for
actual usage, consult the Fund's annual/semiannual reports. For more informa-
tion see Appendix A.
10 Percent of total assets (italic type)
10 Percent of net assets (roman type)
. No specific percentage limitation on usage; limited only by the objectives
and strategies of the Fund
- -- Not permitted
<TABLE>
<CAPTION>
Growth and CORE U.S. CORE Large CORE Large CORE Small CORE International
Income Equity Cap Growth Cap Value Cap Equity Capital Mid Cap International Equity
Fund Fund Fund Fund Fund Growth Fund Value Fund Equity Fund Fund
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment
Practices
Borrowings 33 1/3 33 1/3 33 1/3 33 1/3 33 1/3 33 1/3 33 1/3 33 1/3 33 1/3
Cross Hedging of
Currencies - - - - - - - . .
Currency Swaps - - - - - - - . .
Custodial
receipts . . . . . . . . .
Equity Swaps 10 10 10 10 10 10 10 10 10
Foreign Currency
Transactions* . . . . . . . . .
Futures
Contracts and
Options on
Futures
Contracts . ./1/ ./2/ ./2/ ./2/ . . . .
Investment
Company
Securities
(including
World Equity
Benchmark
Shares and
Standard &
Poor's
Depository
Receipts) 10 10 10 10 10 10 10 10 10
Options on
Foreign
Currencies/3/ . . . . . . . . .
Options on
Securities and
Securities
Indices/4/ . . . . . . . . .
Repurchase
Agreements . . . . . . . . .
Securities
Lending 33 1/3 33 1/3 33 1/3 33 1/3 33 1/3 33 1/3 33 1/3 33 1/3 33 1/3
Short Sales
Against the Box 25 - - - - 25 25 - 25
Unseasoned
Companies . . . . . . . . .
Warrants and
Stock Purchase
Rights . . . . . . . . .
When-Issued and
Foward
Commitments . . . . . . . . .
- ----------------------------------------------------------------------------------------------------------
Investment
Securities
American,
European and
Global
Depository
Receipts . ./5/ ./5/ ./5/ ./5/ . . . .
Asset-Backed and
Mortgage-Backed
Securities/13/ . - - - - . . - .
Bank
Obligations/13/ . . . . . . . . .
Convertible
Securities/6/,/13/ . . . . . . . . .
Corporate Debt
Obligations/13/ . ./7/ ./7/ ./7/ ./7/ . . 10/7/ 35
Equity
Securities 65+ 90+ 90+ 90+ 90+ 90+ 65+ 90+ 65+
Emerging Country
Securities 25/12/ - - - - 10/12/ 25/12/ 25 .
Fixed Income
Securities/8/ 35 10/7/ 10/7/ 10/7/ 10/7/ 10 35 10/7/ 35
Foreign
Securities 25/12/ ./9/ ./9/ ./9/ ./9/ 10/12/ 25/12/ . .
Foreign
Government
Securities/13/ - - - - - - - . .
Non-Investment
Grade Fixed
Income
Securities 10/10/ - - - - 10/10/ 10/11/ - 35/10/
Real Estate
Investment
Trusts
("REITS") . . . . . . . . .
Structured
Securities/13/ . . . . . . . . .
Temporary
Investments 100 35 35 35 35 100 100 35 100
U.S. Government
Securities/13/ . . . . . . . . .
- ----------------------------------------------------------------------------------------------------------
</TABLE>
* Limited by the amount the Fund invests in foreign securities.
/1/The.CORE U.S. Equity Fund may enter into futures transactions only with
respect to the S&P 500 Index.
/2/The.CORE Large Cap Growth, CORE Large Cap Value and CORE Small Cap Equity
Funds may enter into futures transactions only with respect to a represen-
tative index.
/3/The.Funds may purchase and sell call and put options.
/4/The.Funds may sell covered call and put options and purchase call and put
options.
/5/The.CORE Funds other than the CORE International Equity Fund may not invest
in European Depository Receipts.
/6/The.CORE Funds have no minimum rating criteria and all other Funds use the
same rating criteria for convertible and non-convertible debt securities.
/7/Cash.equivalents only.
/8/Except.as noted under "Non-Investment Grade Fixed Income Securities,"
fixed-income securities must be investment grade (i.e., BBB or higher by
Standard & Poor's or Baa or higher by Moody's).
/9/Equity.securities of foreign issuers must be traded in the United States.
/10/May.be BB or lower by Standard & Poor's or Ba or lower by Moody's.
/11/Must.be at least B or higher by Standard and Poor's or Moody's.
/12/Growth.and Income, Capital Growth and Mid Cap Value Funds may invest in the
aggregate up to 25%, 10% and 25%, respectively, of their total assets in
foreign securities, including emerging country securities.
/13/Limited.by the amount the Fund invests in fixed-income securities.
10
<PAGE>
Other Investment Practices and Securities
(Fixed Income Funds)
The table below identifies some of the investment techniques that may (but
are not required to) be used by the Fixed Income Funds in seeking to achieve
their investment objectives. This table also highlights the differences among
the Funds in their use of these techniques and other investment practices and
investment securities. Numbers in this table show allowable usage only; for
actual usage, consult the Fund's annual/semiannual reports. For more informa-
tion see Appendix A.
10 Percent of total assets (italic type)
10 Percent of net assets (roman type)
. No specific percentage limitation on usage; limited only by the
objectives and strategies of the Fund
-- Not permitted
<TABLE>
<CAPTION>
Short Duration Global High
Government Income Yield
Fund Fund Fund
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Investment Practices
Borrowings 33 1/3 33 1/3 33 1/3
Credit and Interest Rate Swaps . . .
Currency Options and Futures -- . .
Cross Hedging of Currencies -- . .
Currency Swaps -- . .
Financial Futures Contracts . . .
Forward Foreign Currency Exchange Contracts -- . .
Interest Rate Floors, Caps and Collars . . .
Mortgage Dollar Rolls . . --
Mortgage Swaps . . .
Options (including Options on Futures) . . .
Options on Foreign Currencies -- . .
Repurchase Agreements . . .
Securities Lending 33 1/3 33 1/3 33 1/3
Standby Commitments and Tender Option Bonds -- -- --
When Issued and Forward Commitments . . .
-----------------------------------------------------------------------------
Investment Securities
Asset-Backed Securities . . .
Bank Obligations -- . .
Convertible Securities -- -- .
Corporate Debt Obligations and Trust
Preferred Securities ./5/ . .
Emerging Country Securities -- 10/2/ 25/2/
Foreign Securities/1/ -- 25+/2/ 25/2/
Loan Participations -- -- .
Mortgage-Backed Securities
Adjustable Rate Mortgage Loans . . .
Collateralized Mortgage Obligations . . .
Multiple Class Mortgage-Backed Securities . . .
Privately Issued Mortgage-Backed Securities . . .
Stripped Mortgage-Backed Securities . . .
Non-Investment Grade Fixed Income Securities -- -- 65+/3/
Preferred Stock, Warrants and Rights -- -- .
Structured Securities -- . .
Taxable Municipal Securities . -- .
Tax-Free Municipal Securities . -- .
Temporary Investments . . ./4/
-----------------------------------------------------------------------------
</TABLE>
/1/Includes.issuers domiciled in one country and issuing securities denomi-
nated in the currency of another.
/2/Of.the Funds' investments in foreign securities, 10% and 25% of total
assets may be invested in emerging countries by Global Income and High
Yield Funds, respectively.
/3/High.Yield Fund may invest up to 35% of its total assets in investment
grade securities under normal conditions.
/4/High.Yield Fund may for this purpose invest in investment grade securities
without limit.
/5/Short.Duration Government Fund may only invest in corporate debt obliga-
tions.
11
<PAGE>
Principal Risks of the Funds
Loss of money is a risk of investing in each Fund. An investment in a Fund is
not a deposit of any bank and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other governmental agency. The following
summarizes important risks that apply to the Funds and may result in a loss
of your investment. None of the Funds should be relied upon as a complete
investment program. There can be no assurance that a Fund will achieve its
investment objective.
. Applicable
--Not Applicable
<TABLE>
<CAPTION>
Call,
Extension
and U.S. Non- Small
Interest Credit/ Government Emerging Diversification Cap/
Fund Rate Default Securities Foreign Countries and Geographic REIT Derivatives Management Liquidity Stock Market
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Growth and
Income . . -- . . -- -- . . . . .
CORE U.S.
Equity . . -- . . -- -- . . . . .
CORE Large Cap
Growth . . -- . . -- -- . . . . .
CORE Large Cap
Value . . -- . . -- -- . . . . .
CORE Small Cap
Equity . . -- . . -- . . . . . .
Capital Growth . . -- . . -- -- . . . . .
Mid Cap Value . . -- . . -- . . . . . .
CORE
International
Equity . . -- . . -- -- . . . . .
International
Equity . . -- . . -- -- . . . . .
Short Duration
Government . . . -- -- -- -- . . . -- .
Global Income . . . . . . -- . . . -- .
High Yield . . . . . -- -- . . . -- .
--------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Junk
Fund Bond Other
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Growth and
Income . .
CORE U.S.
Equity -- .
CORE Large Cap
Growth -- .
CORE Large Cap
Value -- .
CORE Small Cap
Equity -- .
Capital Growth . .
Mid Cap Value . .
CORE
International
Equity -- .
International
Equity . .
Short Duration
Government -- .
Global Income -- .
High Yield . .
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
RISKS THAT APPLY TO ALL FUNDS:
.Interest Rate Risk--The risk that when interest rates increase, fixed-income
securities held by a Fund will decline in value. Long-term fixed-income
securities will normally have more price volatility because of this risk
than short-term securities.
.Credit/Default Risk--The risk that an issuer of fixed-income securities held
by a Fund (which may have low credit ratings) may default on its obligation
to pay interest and repay principal.
.Derivatives Risk--The risk that loss may result from a Fund's investments in
options, futures, swaps, structured securities and other derivative instru-
ments. These instruments may be leveraged so that small changes may produce
disproportionate losses to a Fund.
.Management Risk--The risk that a strategy used by the Investment Adviser may
fail to produce the intended results.
.Liquidity Risk--The risk that a Fund will not be able to pay redemption pro-
ceeds within the time period stated in this Prospectus because of unusual
market conditions, an unusually high volume of redemption requests, or other
reasons. Funds that invest in non-investment grade fixed-income securities,
small capitalization stocks, REITs and emerging country issuers will be
especially subject to the risk that during certain periods the liquidity of
particular issuers or industries, or all securities within these investment
categories, will shrink or disappear suddenly and without warning as a
result of adverse economic market or political events, or adverse investor
perceptions whether or not accurate.
.Market Risk--The risk that the value of the securities in which a Fund
invests may go up or down in response to the prospects of individual compa-
nies and/or general economic conditions. Price changes may be temporary or
last for extended periods.
.Other Risks--Each Fund is subject to other risks, such as the risk that its
operations, or the value of its portfolio securities, will be disrupted by
the "Year 2000 Problem."
12
<PAGE>
PRINCIPAL RISKS OF THE FUNDS
RISKS THAT APPLY PRIMARILY TO THE EQUITY FUNDS:
.Stock Risk--The risk that stock prices have historically risen and fallen in
periodic cycles. As of the date of this Prospectus, U.S. stock markets and
certain foreign stock markets were trading at or close to record high lev-
els. There is no guarantee that such levels will continue.
RISKS THAT APPLY PRIMARILY TO THE FIXED INCOME FUNDS:
.Call Risk--The risk that an issuer will exercise its right to pay principal
on an obligation held by a Fund (such as a mortgage-backed security) earlier
than expected. This may happen when there is a decline in interest rates.
Under these 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--The risk that an issuer will exercise its right to pay prin-
cipal on an obligation held by a Fund (such as a mortgage-backed security)
later than expected. This may happen when there is a rise in interest rates.
Under these circumstances, the value of the obligation will decrease, and a
Fund will also suffer from the inability to invest in higher yielding secu-
rities.
.U.S. Government Securities Risk--The risk that the U.S. government will not
provide financial support to U.S. government agencies, instrumentalities or
sponsored enterprises if it is not obligated to do so by law.
RISKS THAT ARE PARTICULARLY IMPORTANT FOR SPECIFIC FUNDS:
.Foreign Risks--The risk that when a Fund invests in foreign securities, it
will be subject to risks of loss not typically associated with domestic
issuers. Loss may result because of less foreign government regulation, less
public information and less economic, political and social stability. Loss
may also result from the imposition of exchange controls, confiscations and
other government restrictions. A Fund will also be subject to the risk of
negative foreign currency rate fluctuations. Foreign risks will normally be
greatest when a Fund invests in issuers located in emerging countries.
.Emerging Countries Risk--The securities markets of Asian, Latin American,
Eastern European, African and other emerging countries are less liquid, are
especially subject to greater price volatility, have smaller market capital-
izations, have less government regulation and are not subject to as exten-
sive and frequent accounting, financial and other reporting requirements as
the securities markets of more developed countries. Further, investment in
equity securities of issuers located in Russia and certain other emerging
countries involves risk of loss resulting from problems in share registra-
tion and custody and substantial economic and political disruptions. These
risks are not normally associated with investment in more developed coun-
tries.
.Non-Diversification and Geographic Risks--The Global Income Fund is non-
diversified. It may invest more than 25% of its total assets in the securi-
ties 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 investments of this or other Funds, in issuers
located in a particular country or region will subject the Funds, to a
greater extent than if investments were less concentrated, to the risks of
adverse securities markets, exchange rates and social, political, regulatory
or economic events in that country or region.
.Small Cap Stock and REIT Risk--The securities of small capitalization stocks
and REITs involve greater risks than those associated with larger, more
established companies and may be subject to more abrupt or erratic price
movements. Securities of such issuers may lack sufficient market liquidity
to enable a Fund to effect sales at an advantageous time or without a sub-
stantial drop in price.
."Junk Bond" Risk--Non-investment grade fixed-income securities (commonly
known as "junk bonds") are considered predominantly speculative by tradi-
tional investment standards. Non-investment grade fixed-income securities
and unrated securities of comparable credit quality are subject to the
increased risk of an issuer's inability to meet principal and interest obli-
gations. These 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.
More information about the Funds' portfolio securities and investment tech-
niques, and their associated risks, is provided in Appendix A. You should con-
sider the investment risks discussed in this section and in Appendix A. Both
are important to your investment choice.
13
<PAGE>
Fund Performance Service Providers
The Funds do not have long-term performance records because they have been in
operation for less than one calendar year. The Growth and Income, Interna-
tional Equity and Global Income Funds commenced operations on January 12,
1998. The CORE U.S. Equity, CORE Large Cap Growth and CORE Small Cap Equity
Funds commenced operations on February 13, 1998. The Capital Growth Fund com-
menced operations on April 30, 1998. The Mid Cap Value Fund commenced opera-
tions on May 1, 1998. The CORE Large Cap Value, CORE International Equity and
Short Duration Government Funds commenced operations on April 1, 1999. The
High Yield Fund had not commenced operations as of the date of this Prospec-
tus. Since these Funds have less than one calendar year's performance, no
performance information is provided in this section. See Appendix B for the
Funds' financial highlights.
INVESTMENT ADVISERS
<TABLE>
<CAPTION>
Investment Advisers Fund
- ---------------------------------------------------
<S> <C>
Goldman Sachs Asset Management ("GSAM") Growth and Income
One New York Plaza CORE U.S. Equity
New York, New York 10004 CORE Large Cap Growth
CORE Large Cap Value
CORE Small Cap Equity
Capital Growth
Mid Cap Value
CORE International Equity
Short Duration Government
High Yield
- ---------------------------------------------------
Goldman Sachs Asset Management International International Equity
("GSAMI") Global Income
133 Peterborough Court
London EC4A 2BB
England
- ---------------------------------------------------
</TABLE>
GSAM is a separate operating division of Goldman Sachs, which registered as
an investment adviser in 1981. GSAMI, a member of the Investment Management
Regulatory Organization Limited since 1990 and a registered investment
adviser since 1991, is an affiliate of Goldman Sachs. The Goldman Sachs
Group, L.P., which controls the Investment Advisers, announced that it will
pursue an initial public offering of the firm in the late spring or early
summer of 1999. Simultaneously with the offering, the Goldman Sachs Group,
L.P. will merge into The Goldman Sachs Group, Inc. As of February 28, 1999,
GSAM and GSAMI, together with their affiliates, acted as investment adviser
or distributor for assets in excess of $199 billion.
The Investment Adviser provides day-to-day advice regarding the Funds' port-
folio transactions. The Investment Adviser makes the investment decisions for
the Funds and places purchase and sale orders for the Funds' portfolio trans-
actions in U.S. and foreign markets. As permitted by applicable law, these
orders may be directed to any brokers, including Goldman Sachs and its affil-
iates. While the Investment Adviser is ultimately responsible for the manage-
ment of the Funds, it 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
has access to the research and certain proprietary technical models developed
by Goldman Sachs, and may apply quantitative and qualitative analysis in
determining the appropriate allocations among categories of issuers and types
of securities.
14
<PAGE>
SERVICE PROVIDERS
The Investment Adviser also performs the following additional services for
the Funds:
.Supervises all non-advisory operations of the Funds
.Provides personnel to perform necessary executive, administrative and cleri-
cal services to the Funds
.Arranges for the preparation of all required tax returns, reports to share-
holders, prospectuses and statements of additional information ("Additional
Statement") and other reports filed with the Securities and Exchange Commis-
sion (the "SEC") and other regulatory authorities
.Maintains the records of each Fund
.Provides office space and all necessary office equipment and services
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.
MANAGEMENT FEES
As compensation for its services and its assumption of certain expenses, the
Investment Adviser is entitled to the following fees, computed daily and pay-
able monthly, at the annual rates listed below:
<TABLE>
<CAPTION>
Other Expenses
(after applicable
GSAM: Contractual Rate limitation)*
- ---------------------------------------------------------------
<S> <C> <C>
Growth and Income 0.75% 0.15%
CORE U.S. Equity 0.70% 0.10%
CORE Large Cap Growth 0.70% 0.10%
CORE Large Cap Value 0.70% 0.10%
CORE Small Cap Equity 0.75% 0.15%
Capital Growth 0.75% 0.15%
Mid Cap Value 0.80% 0.15%
CORE International Equity 0.85% 0.25%
Short Duration Government 0.55% 0.15%
High Yield 0.70% 0.15%
- ---------------------------------------------------------------
GSAMI:
- ---------------------------------------------------------------
International Equity 1.00% 0.25%
Global Income 0.90% 0.15%
- ---------------------------------------------------------------
</TABLE>
* The Investment Adviser has voluntarily agreed to reduce or limit certain
other expenses (excluding management fees, taxes, interest, brokerage fees,
litigation, indemnification and other extraordinary expenses) to the extent
such expenses exceed the percentage stated in the table above (as calculated
per annum) of each Fund's respective average daily net assets. Such reduc-
tions 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.
15
<PAGE>
VALUE TEAM
M. Roch Hillenbrand, a Managing Director of Goldman Sachs, is the Head of
Global Equities for GSAM, overseeing the United States, Europe, Japan, and
non-Japan Asia. In this capacity, he is responsible for managing the group as
it defines and implements global portfolio management processes that are
consistent, reliable and predictable. Mr. Hillenbrand is also President of
Commodities Corporation LLC, of which Goldman Sachs is the parent company.
Over the course of his 18-year career at Commodities Corporation, Mr.
Hillenbrand has had extensive experience in dealing with internal and
external investment managers who have managed a range of futures and equities
strategies across multiple markets, using a variety of styles.
.Thirteen portfolio managers/analysts compose the Investment Adviser's value
investment team
.Multi-sector focus provides a balanced perspective
.Across all value products, the Investment Adviser leverages the industry
research expertise of its small-, mid- and large-cap investment teams
------------------------------------------------------------------------------
Value Team
<TABLE>
<CAPTION>
Years
Primarily
Name and Title Fund Responsibility Responsible Five Year Employment History
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Eileen A. Aptman Portfolio Manager-- Since Ms. Aptman joined the Investment Adviser as a
Vice President Mid Cap Value 1998 research analyst in 1993. She became a portfolio
manager in 1996.
-------------------------------------------------------------------------------------------------------------
Paul D. Farrell Senior Portfolio Manager-- Since Mr. Farrell joined the Investment Adviser as a
Managing Director Mid Cap Value 1998 portfolio manager in 1991. In 1998, he became
Growth and Income 1999 responsible for managing the Investment
Adviser's Value team.
-------------------------------------------------------------------------------------------------------------
Matthew B. McLennan Portfolio Manager-- Since Mr. McLennan joined the Investment Adviser as a
Vice President Mid Cap Value 1998 research analyst in 1995 and became a portfolio
manager in 1996. From 1994 to 1995, he worked in
the Investment Banking Division of Goldman Sachs
in Australia. From 1991 to 1994, Mr. McLennan
worked at Queensland Investment Corporation in
Australia.
-------------------------------------------------------------------------------------------------------------
Karma Wilson Portfolio Manager-- Since Ms. Wilson joined the Investment Adviser as a
Vice President Growth and Income 1998 portfolio manager in 1994. Prior to 1994, she
Mid Cap Value 1998 was an investment analyst with Bankers Trust
Australia Ltd.
-------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
SERVICE PROVIDERS
QUANTITATIVE EQUITY TEAM
.A stable and growing team supported by an extensive internal staff
.Access to the research ideas of Goldman Sachs' renowned Global Investment
Research Department
.More than $22 billion in equities currently under management
------------------------------------------------------------------------------
Quantitative Equity Team
<TABLE>
<CAPTION>
Years
Primarily
Name and Title Fund Responsibility Responsible Five Year Employment History
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Melissa Brown Senior Portfolio Manager-- Since Ms. Brown joined the Investment Adviser as a
Vice President CORE U.S. Equity 1998 portfolio manager in 1998. From 1984 to 1998, she
CORE Large Cap Growth 1998 was the director of Quantitative Equity Research
CORE Large Cap Value 1999 and served on the Investment Policy Committee at
CORE Small Cap Equity 1998 Prudential Securities.
CORE International Equity 1999
---------------------------------------------------------------------------------------------------------------
Mark M. Carhart Senior Portfolio Manager-- Since Mr. Carhart joined the Investment Adviser as a
Vice President CORE International Equity 1999 member of the Quantitative Research and Risk
Management team in 1997. From August 1995 to
September 1997, he was Assistant Professor of
Finance at the Marshall School of Business at USC
and a Senior Fellow of the Wharton Financial
Institutions Center. From 1993 to 1995, he was a
lecturer and graduate student at the University
of Chicago Graduate School of Business.
---------------------------------------------------------------------------------------------------------------
Kent A. Clark Senior Portfolio Manager-- Since Mr. Clark joined the Investment Adviser as a
Managing Director CORE U.S. Equity 1998 portfolio manager in the quantitative equity
CORE Large Cap Growth 1998 management team in 1992.
CORE Large Cap Value 1999
CORE Small Cap Equity 1998
CORE International Equity 1999
---------------------------------------------------------------------------------------------------------------
Raymond J. Iwanowski Portfolio Manager-- Since Mr. Iwanowski joined the Investment Adviser as an
Vice President CORE International Equity 1999 associate and portfolio manager in 1997. From
1993 to 1997, he was a Vice President and head of
the Fixed Derivatives Client Research group at
Salomon Brothers.
---------------------------------------------------------------------------------------------------------------
Robert C. Jones Senior Portfolio Manager-- Since Mr. Jones joined the Investment Adviser as a
Managing Director CORE U.S. Equity 1998 portfolio manager in 1989.
CORE Large Cap Growth 1998
CORE Large Cap Value 1999
CORE Small Cap Equity 1998
CORE International Equity 1999
---------------------------------------------------------------------------------------------------------------
Victor H. Pinter Senior Portfolio Manager-- Since Mr. Pinter joined the Investment Adviser as a
Vice President CORE U.S. Equity 1998 research analyst in 1990. He became a portfolio
CORE Large Cap Growth 1998 manager in 1992.
CORE Large Cap Value 1999
CORE Small Cap Equity 1998
CORE International Equity 1999
---------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
GROWTH EQUITY INVESTMENT TEAM
.18 year consistent investment style applied through diverse and complete
market cycles
.More than $11 billion in equities currently under management
.More than 150 client account relationships
.A portfolio management and analytical team with more than 130 years combined
investment experience
------------------------------------------------------------------------------
Growth Equity Investment Team
<TABLE>
<CAPTION>
Years
Primarily
Name and Title Fund Responsibility Responsible Five Year Employment History
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
George D. Adler Senior Portfolio Manager-- Since Mr. Adler joined the Investment Adviser as a
Vice President Capital Growth 1998 portfolio manager in 1997. From 1990 to 1997, he
was a portfolio manager at Liberty Investment
Management, Inc. ("Liberty").
-----------------------------------------------------------------------------------------------------------------
Robert G. Collins Senior Portfolio Manager-- Since Mr. Collins joined the Investment Adviser as a
Vice President Capital Growth 1998 portfolio manager and Co-Chair of the Growth
Equity Investment Committee in 1997. From 1991 to
1997, he was a portfolio manager at Liberty. His
past experience includes work as a special
situations analyst with Raymond James &
Associates for five years.
-----------------------------------------------------------------------------------------------------------------
Herbert E. Ehlers Senior Portfolio Manager-- Since Mr. Ehlers joined the Investment Adviser as a
Managing Director Capital Growth 1998 senior portfolio manager and Chief Investment
Officer of the Growth Equity Team in 1997. From
1994 to 1997, he was the Chief Investment Officer
and Chairman of Liberty. He was a portfolio
manager and President at Liberty's predecessor
firm, Eagle Asset Management ("Eagle"), from 1984
to 1994.
-----------------------------------------------------------------------------------------------------------------
Gregory H. Ekizian Senior Portfolio Manager-- Since Mr. Ekizian joined the Investment Adviser as
Vice President Capital Growth 1998 portfolio manager and Co-Chair of the Growth
Equity Investment Committee in 1997. From 1990 to
1997, he was a portfolio manager at Liberty and
its predecessor firm, Eagle.
-----------------------------------------------------------------------------------------------------------------
David G. Shell Senior Portfolio Manager-- Since Mr. Shell joined the Investment Adviser as a
Vice President Capital Growth 1998 portfolio manager in 1997. From 1987 to 1997, he
was a portfolio manager at Liberty and its
predecessor firm, Eagle.
-----------------------------------------------------------------------------------------------------------------
Ernest C. Segundo, Jr. Senior Portfolio Manager-- Since Mr. Segundo joined the Investment Adviser as a
Vice President Capital Growth 1998 portfolio manager in 1997. From 1992 to 1997, he
was a portfolio manager at Liberty.
-----------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
SERVICE PROVIDERS
INTERNATIONAL EQUITY MANAGEMENT TEAM
.Global portfolio teams based in London, Singapore, Tokyo and New York. Local
presence is a key to the Investment Adviser's fundamental research capabili-
ties
.Team manages over $27 billion in international equities for retail, institu-
tional and high net worth clients
.Focus on bottom-up stock selection as main driver of returns, though the
team leverages the asset allocation, currency and risk management capabili-
ties of the Investment Adviser
------------------------------------------------------------------------------
London-Based Management Team
<TABLE>
<CAPTION>
Years
Primarily
Name and Title Fund Responsibility Responsible Five Year Employment History
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Ivor H. Farman Senior Portfolio Manager-- Since Mr. Farman joined the Investment Adviser
Executive Director International Equity Fund 1998 as a senior portfolio manager in 1996.
From 1995 to 1996, he was responsible for
originating and marketing French equity
ideas at Exane in Paris. Prior to 1995, he
spent five years engaged in French equity
research and marketing at Banque Nationale
de Paris and Schroders in London.
------------------------------------------------------------------------------------------------------
Paul Greener Senior Portfolio Manager-- Since Mr. Greener joined the Investment Adviser
Associate International Equity 1999 as a member of the Pan-European Equity
Team responsible for European general
retailers, business services and
technology sectors in 1996. From 1994 to
1996, he was an equity analyst at CIN
Management. Prior to 1994, he was a
student at the University of Birmingham.
------------------------------------------------------------------------------------------------------
Susan Noble Senior Portfolio Manager-- Since Ms. Noble joined the Investment Adviser as
Executive Director International Equity Fund 1998 a senior portfolio manager and head of the
European Equity team in October 1997. From
1986 to 1997, she worked at Fleming
Investment Management in London, where she
most recently was Portfolio Management
Director for the European equity
investment strategy and process.
------------------------------------------------------------------------------------------------------
Singapore-Based Management Team
<CAPTION>
Years
Primarily
Name and Title Fund Responsibility Responsible Five Year Employment History
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Alice Lui Portfolio Manager-- Since Ms. Lui joined the Investment Adviser as a
Vice President International Equity Fund 1994 portfolio manager in 1990.
------------------------------------------------------------------------------------------------------
Ravi Shanker Senior Portfolio Manager-- Since Mr. Shanker joined the Investment Adviser
Vice President International Equity Fund 1999 as an operations manager in 1997. From
July 1996 to 1997, he worked for Goldman
Sachs in Singapore as a strategic adviser
for transactions involving infrastructure
industries in Asia. From 1988 to 1996, he
worked for Goldman Sachs as an investment
banker in the Investment Banking Division.
------------------------------------------------------------------------------------------------------
Siew-Hua Thio Portfolio Manager-- Since Ms. Thio joined the Investment Adviser as
Vice President International Equity Fund 1998 a portfolio manager in 1998. From 1997 to
1998, she was Head of Research for
Indosuez WI Carr in Singapore. From 1993
to 1997, she was a research analyst at the
same firm.
------------------------------------------------------------------------------------------------------
Tokyo-Based Management Team
<CAPTION>
Years
Primarily
Name and Title Fund Responsibility Responsible Five Year Employment History
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shogo Maeda Senior Portfolio Manager-- Since Mr. Maeda joined the Investment Adviser as
Managing Director International Equity Fund 1998 a portfolio manager in 1994. From 1987 to
1994, he worked at Nomura Investment
Management Incorporated as a Senior
Portfolio Manager.
------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
FIXED INCOME INVESTMENT TEAM
.The fixed-income portfolio management team is comprised of a deep team of
sector specialists
.The team strives to maximize risk-adjusted returns by de-emphasizing inter-
est rate anticipation and focusing on security selection and sector alloca-
tion
.The team manages approximately $40 billion in fixed-income assets for
retail, institutional and high net worth clients
------------------------------------------------------------------------------
Short Duration Government Investment Team
<TABLE>
<CAPTION>
Years
Primarily
Name and Title Fund Responsibility Responsible Five Year Employment History
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Jonathan A. Beinner Senior Portfolio Manager-- Since Mr. Beinner joined the Investment Adviser as
Managing Director and Short Duration Government 1999 a portfolio manager in 1990.
Co-Head U.S. Fixed
Income
------------------------------------------------------------------------------------------------------------------
James B. Clark Portfolio Manager-- Since Mr. Clark joined the Investment Adviser as a
Vice President Short Duration Government 1999 portfolio manager in 1994 after working as
an investment manager in the mortgage-backed
securities group at Travelers Insurance
Company.
------------------------------------------------------------------------------------------------------------------
Peter A. Dion Portfolio Manager-- Since Mr. Dion joined the Investment Adviser as an
Vice President Short Duration Government 1999 analyst in 1992. From 1994 to 1995 he was an
associate portfolio manager.
------------------------------------------------------------------------------------------------------------------
C. Richard Lucy Portfolio Manager-- Since Mr. Lucy joined the Investment Adviser as a
Managing Director and Short Duration Government Fund 1999 portfolio manager in 1992.
Co-Head U.S. Fixed
Income
------------------------------------------------------------------------------------------------------------------
James P. McCarthy Portfolio Manager-- Since Mr. McCarthy joined the Investment Adviser
Vice President Short Duration Government Fund 1999 as a portfolio manager in 1995 after working
four years at Nomura Securities, where he
was an assistant vice president and an
adjustable rate mortgage trader.
------------------------------------------------------------------------------------------------------------------
High Yield Investment Team
<CAPTION>
Years
Primarily
Name and Title Fund Responsibility Responsible Five Year Employment History
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Rachel Golder Portfolio Manager-- Since Ms. Golder joined the Investment Adviser as
Vice President High Yield Fund 1999 a portfolio manager in 1997. She is
responsible for managing high yield assets.
Prior to joining the Investment Adviser, she
spent six years at Saudi International Bank
as a high yield credit analyst and portfolio
manager.
------------------------------------------------------------------------------------------------------------------
Andrew Jessop Portfolio Manager-- Since Mr. Jessop joined the Investment Adviser as
Vice President High Yield Fund 1999 a portfolio manager in 1997. He is
responsible for managing high yield assets.
Previously, he worked six years managing
high yield portfolios at Saudi International
Bank in London.
------------------------------------------------------------------------------------------------------------------
Michael L. Pasternak Portfolio Manager-- Since Mr. Pasternak is a product manager for high
Vice President High Yield Fund 1999 yield assets and contributes to the
management of high yield assets. He joined
the Investment Adviser as a portfolio
manager in 1997. Prior to that, he spent
eight years managing high yield corporate
bond and loan portfolios at Saudi
International Bank in London.
------------------------------------------------------------------------------------------------------------------
Christopher Testa Portfolio Manager-- Since Mr. Testa joined the Investment Adviser as a
Vice President and High Yield Fund 1999 research analyst in 1994 and is head of
Director of Credit fixed-income research. He has been
Research responsible for managing high yield assets
since 1997.
------------------------------------------------------------------------------------------------------------------
Global Fixed Income Investment Team
<CAPTION>
Years
Primarily
Name and Title Fund Responsibility Responsible Five Year Employment History
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Stephen Fitzgerald Portfolio Manager-- Since Mr. Fitzgerald joined the Investment Adviser
Managing Director and Global Income Fund 1998 as a portfolio manager in 1992.
Chief Investment Officer
for International Fixed
Income
------------------------------------------------------------------------------------------------------------------
Andrew Wilson Portfolio Manager-- Since Mr. Wilson joined the Investment Adviser as
Executive Director Global Income Fund 1998 a portfolio manager in 1995. Prior to his
current position, he spent three years as an
Assistant Director at Rothschild Asset
Management, where he was responsible for
managing global and international bond
portfolios with specific focus on the U.S.,
Canadian, Australian and Japanese economies.
------------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
SERVICE PROVIDERS
DISTRIBUTOR AND TRANSFER AGENT
Goldman Sachs, 85 Broad Street, New York, New York 10004, serves as the
exclusive distributor (the "Distributor") of each Fund's shares. Goldman
Sachs, 4900 Sears Tower, Chicago, Illinois 60606-6372, also serves as the
Funds' transfer agent (the "Transfer Agent") and, as such, performs various
shareholder servicing functions.
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 activi-
ties of Goldman Sachs may present conflicts of interest with respect to a
Fund or limit a Fund's investment activities. Goldman Sachs and its affili-
ates 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 inter-
est. A Fund's activities may be limited because of regulatory restrictions
applicable to Goldman Sachs and its affiliates, and/or their internal poli-
cies designed to comply with such restrictions.
YEAR 2000
Many computer systems were designed using only two digits to signify the year
(for example, "98" for "1998"). On January 1,
2000, if these computer systems are not corrected, they may incorrectly
interpret "00" as the year "1900" rather than the year "2000," leading to
computer shutdowns or errors (commonly known as the "Year 2000 Problem"). To
the extent these systems conduct forward-looking calculations, these computer
problems may occur prior to January 1, 2000. Like other investment companies
and financial and business organizations, the Funds could be adversely
affected in their ability to process securities trades, price securities,
provide shareholder account services and otherwise conduct normal business
operations if the 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:
.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.
.The Investment Adviser has sought assurances from the Funds' other service
providers that they are taking the steps necessary so that they do not expe-
rience Year 2000 Problems, and the Investment Adviser will continue to moni-
tor 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 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 suffi-
cient to avoid any adverse effect on the Funds due to the Year 2000 Problem.
21
<PAGE>
Dividends Shareholder Guide
Dividends from net investment income are declared and paid by each Fund at
least annually. Over the course of the year, accrued and paid dividends will
equal 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 ("NAV") of such shares on the payment date, unless an
insurance company's 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.
The following section will provide you with answers to some of the most often
asked questions regarding buying and selling the Funds' shares.
How Can I Purchase Or Sell Shares Of The Funds?
Shares of the Funds are not sold directly to the public. Instead, Fund shares
are sold to unaffiliated separate accounts that fund variable annuity and
variable life insurance contracts issued by participating insurance compa-
nies. You may purchase or sell (redeem) shares of the Funds through variable
annuity contracts and variable life insurance policies offered through the
separate accounts. The variable annuity contracts and variable life insurance
policies are described in the separate prospectuses issued by the participat-
ing insurance companies. You should refer to those prospectuses for informa-
tion 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 Funds.
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 annu-
ity contracts and variable life insurance policies issued by the participat-
ing insurance companies) to be effected on that day pursuant to variable
annuity contracts and variable life insurance policies.
The separate accounts of unaffiliated participating insurance companies may
purchase shares of the Funds. 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 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 unaffili-
ated 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.
22
<PAGE>
SHAREHOLDER GUIDE
Shares of the Funds (including new Funds that might be added to the Trust)
may also be offered to:
.Unregistered separate accounts of various participating insurance companies
through which variable annuity contracts and variable life insurance poli-
cies are sold in non-public offerings.
.Unregistered separate accounts of various participating insurance companies
through which variable annuity contracts and variable life insurance poli-
cies are offered exclusively to qualified pension and profit-sharing plans
and/or certain governmental plans.
.Qualified pension and profit-sharing plans. The Trust does not currently
anticipate offering shares directly to such plans.
How Are Shares Priced?
Shares of a Fund are purchased and sold at the Fund's NAV. The Funds calcu-
late NAV as follows:
NAV = (Value of Assets of the Fund)--(Liabilities of the Fund)
Number of the Fund's Outstanding Shares
The Funds' investments are valued based on market quotations, which may be
furnished by a pricing service or provided by securities dealers. If accurate
quotations are not readily available, the fair value of the Funds' invest-
ments may be determined based on yield equivalents, a pricing matrix or other
sources, under valuation procedures established by the Trustees. Debt obliga-
tions with a remaining maturity of 60 days or less are valued at amortized
cost.
.NAV per share of each Fund is calculated by the Fund's custodian on each
business day as of the close of regular trading on the New York Stock
Exchange (normally 4:00 p.m. New York time). Fund shares will not be priced
on any day the New York Stock Exchange is closed.
.Shares are purchased and redeemed at the NAV next calculated after an order
is received in proper form by the Trust.
Note: The time at which transactions and shares are priced and the time by
which orders must be received may be changed in case of an emergency or if
regular trading on the New York Stock Exchange is stopped at a time other
than 4:00 p.m. New York time.
Foreign securities may trade in their local markets on days a Fund is closed.
As a result, the NAV of a Fund that holds foreign securities may be impacted
on days when its shares may not be purchased or redeemed.
In addition, the impact of events that occur after the publication of market
quotations 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 a Fund's next determined NAV unless the Trust, in its discretion, makes an
adjustment in light of the nature and materiality of the event, its effects
on Fund operations and other relevant factors.
Do I Have To Pay Any Fees When Purchasing Or Selling Shares Of The Funds?
The Funds themselves do not charge 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 annu-
ity contracts or variable life insurance policies. These fees should be
described in the participating insurance companies' prospectuses.
What Else Should I Know About Share Purchases And Redemptions?
The Trust reserves the right to:
.Suspend the right of redemption under certain extraordinary circumstances in
accordance with the rules of the SEC.
.Suspend the offering of shares for a period of time.
.Reject any purchase order.
Orders received by the Trust are effected on business days. The separate
accounts purchase and redeem shares of each Fund at the Fund'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.
What Types Of Reports Will I Be Sent Regarding Investments In The Funds?
As a holder of a variable annuity contract or variable life insurance policy,
you will receive annual reports containing audited financial statements and
semiannual reports from your participating insurance company.
What Are The Funds' Voting Procedures?
Participating insurance companies, not the owners of the variable annuity
contracts or variable life insurance policies or participants therein, are
shareholders of a Fund. To the extent required by law:
.The participating insurance companies will vote Fund shares held in the sep-
arate accounts in a manner consistent with timely voting instructions
received from the holders of variable annuity contracts and variable life
insurance policies.
.The participating insurance companies will vote Fund shares held in the sep-
arate accounts for which no timely instructions are received from the hold-
ers of variable annuity contracts and variable life insurance policies, as
well as shares
23
<PAGE>
Taxation
they own, in the same proportion as those shares for which voting instruc-
tions are received.
Fund shares held by unregistered separate accounts or qualified plans will be
voted for or against any proposition in the same proportion as all other Fund
shares are voted unless the unregistered separate account's participating
insurance company or the plan makes other arrangements.
Additional information concerning voting rights of the participants in the
separate accounts is more fully set forth in the prospectus relating to those
accounts issued by the participating insurance companies.
Each Fund is treated as a separate corporate entity for federal tax purposes.
Each Fund intends to elect to be treated as a regulated investment company
and to qualify for such treatment for each taxable year under Subchapter M of
the Internal Revenue Code of 1986, as amended (the "Code"). In addition, each
Fund intends to qualify under the Code with respect to the diversification
requirements related to variable contracts. Provided that a Fund and a sepa-
rate account investing in the Fund satisfy applicable tax requirements, the
Fund will not be subject to federal tax and any distributions from the Fund
to the separate account will be exempt from current federal income taxation
to the extent that such distributions accumulate in a variable annuity con-
tract or a variable life insurance contract.
Persons investing in variable annuity or variable life insurance contracts
should refer to the prospectuses with respect to such contracts for further
information regarding the tax treatment of the contracts and the separate
accounts in which the contracts are invested.
24
<PAGE>
Appendix A
Additional Information on Portfolio Risks, Securities and Techniques
A. GENERAL PORTFOLIO RISKS
To the extent they invest in equity securities, the Funds will be subject to
the risks associated with equity securities. "Equity securities" include com-
mon 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 sim-
ilar enterprises, warrants and stock purchase rights. In general, stock val-
ues fluctuate in response to the activities of individual companies and in
response to general market and economic conditions. Accordingly, the value of
the stocks that a Fund holds may decline over short or extended periods. The
stock markets tend to be cyclical, with periods when stock prices generally
rise and periods when prices generally decline. The volatility of equity
securities means that the value of your investment in the Funds may increase
or decrease. As of the date of this Prospectus, certain stock markets were
trading at or close to record high levels and there can be no guarantee that
such levels will continue.
To the extent they invest in fixed-income securities, the Funds will be sub-
ject to the risks associated with fixed-income securities. These risks
include interest rate risk, credit risk and call/extension risk. In general,
interest rate risk involves the risk that 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. Credit risk involves the risk that the issuer could default on its
obligations, and a Fund will not recover its investment. Call risk and exten-
sion risk are normally present in adjustable rate mortgage loans ("ARMs"),
mortgage-backed securities and asset-backed securities. For example, homeown-
ers 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). 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. In
either case, a change in the prepayment rate can result in losses to invest-
ors.
The Investment Adviser will not consider the portfolio turnover rate a limit-
ing factor in making investment decisions for a Fund. A high rate of portfo-
lio turnover (100% or more) involves correspondingly greater expenses which
must be borne by a Fund and its shareholders. 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. See "Financial Highlights" in Appendix B for a statement of
the Funds' historical portfolio turnover rates.
The following sections provide further information on certain types of secu-
rities and investment techniques that may be used by the Funds, including
their associated risks. Additional information is provided in the Additional
Statement, which is available upon request. Among other things, the Addi-
tional Statement describes certain fundamental investment restrictions that
cannot be changed without shareholder approval. You should note, however,
that all policies not specifically designated as fundamental are non-funda-
mental and may be changed without shareholder approval. If there is a change
in a Fund's investment objective, you should consider whether that Fund
remains an appropriate investment in light of your then current financial
position and needs.
B. OTHER PORTFOLIO RISKS
Risks of Investing in Small Capitalization Companies and REITs. Investments
in small capitalization companies and REITs involve greater risk and portfo-
lio price volatility than investments in larger capitalization stocks. Among
the reasons for the greater price volatility of these investments 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 be thinly traded and may have to be sold at a discount from
current market prices or in small lots over an extended period of time. In
addition, these securities are subject to the risk that during certain peri-
ods the liquidity of particular issuers or industries, or all securities in
these investment categories, will shrink or disappear suddenly and without
warning as a result of adverse economic or market conditions, or adverse
investor perceptions whether or not accurate. Because of the lack of suffi-
cient market liquidity, a Fund may incur losses because it will be required
to effect sales at a disadvantageous time and only then at a substantial drop
in price. Small capitalization companies and REITs include "unseasoned"
issuers that do not have an established financial history; often have limited
product lines, markets or financial resources; may depend on or use a few key
personnel for management; and may be susceptible to losses and risks of bank-
ruptcy. Transaction costs for these investments are often higher than those
of larger capitalization companies. Investments in small capitalization com-
panies and REITs may be more difficult to price precisely than other types of
securities because of their characteristics and lower trading volumes.
25
<PAGE>
Credit Risks. Debt securities purchased by the Funds may include securities
(including zero coupon bonds) issued by the U.S. government (and its agen-
cies, instrumentalities and sponsored enterprises), foreign governments,
domestic and foreign corporations, banks and other issuers. Further informa-
tion is provided in the Additional Statement.
Debt securities rated BBB or higher by Standard & Poor's or Baa or higher by
Moody's are considered "investment grade." Securities rated BBB or Baa are
considered medium-grade obligations with speculative characteristics, and
adverse economic conditions or changing circumstances may weaken the issuers'
capacity to pay interest and repay principal. A security will be deemed to
have met a rating requirement if it receives the minimum required rating from
at least one such rating organization even though it has been rated below the
minimum rating by one or more other rating organizations, or if unrated by
such rating organizations, is determined by the Investment Adviser to be of
comparable credit quality.
Certain Funds may invest in fixed-income securities rated BB or Ba or below
(or comparable unrated securities) which are commonly referred to as "junk
bonds." Junk bonds are considered predominately speculative and may be ques-
tionable as to principal and interest payments.
In some cases, junk 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 present greater speculative risks than those associated
with investment in investment grade bonds. Also, to the extent that the rat-
ing assigned to a security in a Fund's portfolio is downgraded by a rating
organization, the market price and liquidity of such security may be
adversely affected.
Risks of Derivative Investments. 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, stripped mortgage-
backed securities and currency transactions involve additional risk of loss.
Loss can result from a lack of correlation between changes in the value of
derivative instruments and the portfolio assets (if any) being hedged, the
potential illiquidity of the markets for derivative instruments, or the risks
arising from margin requirements and related leverage factors associated with
such transactions. The use of these management techniques involves the risk
of loss if the Investment Adviser is incorrect in its expectation of fluctua-
tions in securities prices, interest rates or currency prices. Each Fund may
also invest in derivative investments for non-hedging purposes (that is, to
seek to increase total return). Investing for non-hedging purposes is consid-
ered as a speculative practice and presents even greater risk of loss.
Derivative mortgage-backed securities (such as principal-only ("POs"), inter-
est-only ("IOs") or inverse floating rate securities) are particularly
exposed to call and extension risks. Small changes in mortgage prepayments
can significantly impact the cash flow and the market value of these securi-
ties. In general, the risk of faster than anticipated prepayments 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.
Some floating-rate derivative debt securities can present more complex types
of derivative and interest rate risks. For example, range floaters are sub-
ject to the risk that the coupon will be reduced below market rates if a des-
ignated 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 Foreign Investments. Foreign investments involve special risks that
are not typically associated with U.S. dollar denominated or quoted securi-
ties of U.S. issuers. Foreign investments may be affected by changes in cur-
rency 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. dol-
lar before such income is distributed as dividends to shareholders or con-
verted 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 par-
ticipating 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 rela-
tive 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
26
<PAGE>
APPENDIX A
whether the conversion of the currencies of other countries that now are or
may in the future become members of the European Union 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 secu-
rities held by the Funds.
Brokerage commissions, custodial services and other costs relating to invest-
ment 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
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. secu-
rities markets and securities of many foreign issuers are
less liquid and more volatile than securities of comparable domestic issuers.
Efforts in foreign countries to remediate potential Year 2000 problems are
not as extensive as those in the United States. As a result, the operations
of foreign markets, foreign issuers and foreign governments may be disrupted
by the Year 2000 Problem, and the investment portfolio of a Fund may be
adversely affected. Furthermore, with respect to certain foreign countries,
there is a possibility of nationalization, expropriation or confiscatory tax-
ation, imposition of withholding or other taxes on dividend or interest pay-
ments (or, in some cases, capital gains), limitations on the removal of funds
or other assets of the Funds, and political or social instability or diplo-
matic developments which could affect investments in those countries.
Concentration of a Fund's assets in one or a few countries and currencies
will subject a Fund to greater risks than if a Fund's assets were not geo-
graphically concentrated.
Investment in sovereign debt obligations by certain Funds involves 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 pay interest when due in accordance
with the terms of such debt, and a Fund may have limited recourse to compel
payment in the event of a default. Periods of economic uncertainty may result
in volatility of market prices of sovereign debt, and in turn a 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 inter-
est 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.
Investments in foreign securities may take the form of sponsored and
unsponsored American Depository Receipts ("ADRs") and Global Depository
Receipts ("GDRs"). Certain Funds may also invest in European Depository
Receipts ("EDRs") or other similar instruments representing securities of
foreign issuers. 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. 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.
Risks of Emerging Countries. Certain Funds may invest in securities of
issuers located in emerging countries. The risks of foreign investment are
heightened when the issuer is located in an emerging country. Emerging coun-
tries are generally located in the Asia-Pacific region, Eastern Europe, Latin
and South America and Africa. A Fund's purchase and sale of portfolio securi-
ties in certain emerging countries may be constrained by limitations as to
daily changes in the prices of listed securities, periodic trading or settle-
ment volume and/or limitations on aggregate holdings of foreign investors.
Such limitations may be computed based on the aggregate trading volume by or
holdings of a Fund, the Investment Adviser, its affiliates and their respec-
tive clients and other service providers. A Fund may not be able to sell
securities in circumstances where price, trading or settlement volume limita-
tions have been reached.
Foreign investment in the securities markets of certain emerging countries is
restricted or controlled to varying degrees which may limit investment in
such countries or increase the administrative costs of such investments. For
example, certain Asian countries require governmental approval prior to
investments by foreign persons or limit investment by foreign persons to only
a specified percentage of an issuer's outstanding securities or a specific
class of securities which may have less advantageous terms (including price)
than securities of the issuer available for purchase by nationals. In addi-
tion, certain countries may restrict or prohibit investment opportunities in
issuers or industries deemed important to national interests. Such restric-
tions 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
27
<PAGE>
emerging countries is subject to restrictions such as the need for governmen-
tal 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 coun-
tries.
Many emerging countries are subject to a substantial degree of economic,
political and social instability. Governments of some emerging countries are
authoritarian in nature or have been installed or removed as a result of mil-
itary 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 emerging countries. Unanticipated political or social develop-
ments may result in sudden and significant investment losses. Investing in
emerging countries involves greater 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.
Many emerging countries have experienced currency devaluations and substan-
tial (and, in some cases, extremely high) rates of inflation, which have had
a negative effect on the economies and securities markets of those 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 part-
ners, trade barriers, exchange controls, managed adjustments in relative cur-
rency values and other protectionist measures imposed or negotiated by the
countries with which they trade.
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 often 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. The creditworthiness of the local securities firms
used by the Funds in emerging countries may not be as sound as the
creditworthi-
ness of firms used in more developed countries. As a result, the Fund may be
subject to a greater risk of loss if a securities firm defaults in the per-
formance of its responsibilities.
The small size and inexperience of the securities markets in certain emerging
countries and the limited volume of trading in securities in those countries
may make a Fund's investments in such countries less liquid and more volatile
than investments in countries with more developed securities markets (such as
the United States, Japan and most Western European countries). A Fund's
investments in emerging countries are subject to the risk that the liquidity
of a particular investment, or investments generally, in such countries will
shrink or disappear suddenly and without warning as a result of adverse eco-
nomic, market or political conditions, or adverse investor perceptions,
whether or not accurate. Because of the lack of sufficient market liquidity,
a Fund may incur losses because it will be required to effect sales at a dis-
advantageous time and then only at a substantial drop in price. Investments
in emerging countries may be more difficult to price precisely because of the
characteristics discussed above and lower trading volumes.
A Fund's use of foreign currency management techniques in emerging countries
may be limited. Due to the limited market for these instruments in emerging
countries, the Investment Adviser does not currently anticipate that a sig-
nificant portion of the Funds' currency exposure in emerging countries, if
any, will be covered by such instruments.
Risks of Illiquid Securities. The Funds may invest up to 15% of their net
assets in illiquid securities which cannot be disposed of in seven days in
the ordinary course of business at fair value. Illiquid securities include:
.Both domestic and foreign securities that are not readily marketable
.Certain municipal leases and participation interests
.Certain stripped mortgage-backed securities
.Repurchase agreements and time deposits with a notice or demand period of
more than seven days
.Certain over-the-counter options
.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 pursuant to Rule 144A under the
Securities Act of 1933 ("144A Securities") and, therefore, is liquid
Investing in 144A Securities may decrease the liquidity of a Fund's portfolio
to the extent that qualified institutional buyers become for a time uninter-
ested in purchasing these restricted securities. The purchase price and sub-
sequent valuation of restricted and illiquid securities normally reflect a
discount,
28
<PAGE>
APPENDIX A
which may be significant, from the market price of comparable securities for
which a liquid market exists.
Non-Diversification and Geographic Risks. The Global Income Fund is regis-
tered as a "non-diversified" fund under the Act and is, therefore, more sus-
ceptible to adverse developments affecting any single issuer. In addition,
the Global Income Fund, and certain other Funds, may invest more than 25% of
their total assets in the securities of corporate and governmental issuers
located in a particular foreign country or region. 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
that country or region.
Temporary Investment Risks. Each Fund (other than the CORE Funds) may invest
up to 100% of its total assets, and each CORE Fund may invest up to 35% of
its total assets, in short-term debt securities. When a Fund's assets are
invested in such instruments, the Fund may not be achieving its investment
objective.
C. PORTFOLIO SECURITIES AND TECHNIQUES
This section provides further information on certain types of securities and
investment techniques that may be used by the Funds, including their associ-
ated risks. Further information is provided in the Additional Statement,
which is available upon request.
U.S. Government Securities and Related Custodial Receipts. Each Fund may
invest in U.S. Government Securities and related custodial receipts. U.S.
Government Securities include U.S. Treasury obligations and obligations
issued or guaranteed by U.S. government agencies, instrumentalities or spon-
sored enterprises. U.S. Government Securities may be 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 pur-
chase certain obligations of the issuer (such as the Federal National Mort-
gage Association ("Fannie Mae") and Federal Home Loan Mortgage Corporation
("Freddie Mac")); or (d) only the credit of the issuer. U.S. Government Secu-
rities also include Treasury receipts, zero coupon bonds and other stripped
U.S. Government Securities, where the interest and principal components of
stripped U.S. Government Securities are traded independently.
Interests in U.S. Government Securities may be purchased in the form of cus-
todial receipts that evidence ownership of future interest payments, princi-
pal payments or both on certain notes or bonds issued or guaranteed as to
principal and interest by the U.S. government, its agencies, instrumentali-
ties, political subdivisions or authorities. For certain securities law pur-
poses, custodial receipts are not considered obligations of the U.S.
government.
Mortgage-Backed Securities. Certain Funds may invest in mortgage-backed secu-
rities. Mortgage-backed securities represent direct or indirect participa-
tions in, or are collateralized by and payable from, mortgage loans secured
by real property. Mortgage-backed securities can be backed by either fixed
rate mortgage loans or adjustable rate mortgage loans, and may be issued by
either a governmental or non-governmental entity. Privately issued mortgage-
backed securities are normally
structured with one or more types of "credit enhancement." However, these
mortgage-backed securities typically do not have the same credit standing as
U.S. government guaranteed mortgage-backed securities.
Mortgage-backed securities may include multiple class securities, including
collateralized mortgage obligations ("CMOs") and Real Estate Mortgage Invest-
ment Conduit ("REMIC") pass-through or participation certificates. CMOs pro-
vide 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. 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 qual-
ifies for special tax treatment and invests in certain mortgages principally
secured by interests in real property and other permitted investments.
Mortgaged-backed securities also include stripped mortgage-backed securities
("SMBS"), which are derivative multiple class mortgage-backed securities.
SMBS are usually structured with two different classes: one that receives
100% of the interest payments and the other that receives 100% of the princi-
pal payments from a pool of mortgage loans. The market value of SMBS consist-
ing entirely of principal payments generally is unusually volatile in
response to changes in interest rates. The yields on SMBS that receive 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. Certain Funds may invest in asset-backed securities.
Asset-backed securities are securities whose principal and interest payments
are collateralized by pools of assets such as auto loans, credit card receiv-
ables, leases, installment contracts and personal property. Asset-backed
securities are often subject to more rapid repayment than their stated matu-
rity date would indicate as a result of the pass-through of prepayments of
principal on the underlying loans. During periods of declining interest
rates, prepayment of loans underlying
29
<PAGE>
asset-backed securities can be expected to accelerate. Accordingly, a Fund's
ability to maintain positions in such securities will be affected by reduc-
tions 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. Asset-backed
securities present credit risks that are not presented by mortgage-backed
securities. This is 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. In the event of a default, a Fund may suffer a loss if it cannot
sell collateral quickly and receive the amount it is owed.
Bank Obligations. Certain Funds may invest in obligations issued or guaran-
teed by U.S. or foreign banks. Bank obligations include time deposits, bank-
ers' acceptances and certificates of deposit, may be general obligations of
the parent bank or may be limited to the issuing branch by the terms of the
specific obligations or by government regulation. Banks are subject to exten-
sive 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 condi-
tions as well as exposure to credit losses arising from possible financial
difficulties of borrowers play an important part in the operation of this
industry.
Municipal Securities. Certain Funds may invest in securities and instruments
issued by state and local government issuers. Municipal securities in which a
Fund may invest consist of bonds, notes, commercial paper and other instru-
ments (including participation interests in such securities) 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. Such securities may pay fixed, variable or floating rates
of interest. Municipal securities are often issued to obtain funds for vari-
ous public purposes, including the construction of a wide range of public
facilities such as bridges, highways, housing, hospitals, mass transporta-
tion, schools, streets and water and sewer works. Other public purposes for
which Municipal securities may be issued include refunding outstanding obli-
gations, obtaining funds for general operating expenses, and obtaining funds
to lend to other public institutions and facilities. Municipal securities in
which a Fund may invest include private activity bonds, municipal leases,
certificates of participation, pre-refunded municipal securities and auction
rate securities.
Corporate Debt Obligations; Trust Preferred Securities; Convertible Securi-
ties. Corporate debt obligations include bonds, notes, debentures and other
obligations of corporations to pay interest and repay principal, and include
securities issued by banks and other financial institutions. Certain Funds
may invest in corporate debt obligations issued by U.S. and certain non-U.S.
issuers which issue securities denominated in the U.S. dollar (including Yan-
kee and Euro obligations). In addition to obligations of corporations, corpo-
rate debt obligations include securities issued by banks and other financial
institutions and supranational entities (i.e., the World Bank, the Interna-
tional Monetary Fund, etc.). 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. The securities are generally senior in
claim to standard preferred stock but junior to other bondholders.
Certain Funds may invest in convertible securities. Convertible securities
are preferred stock or debt obligations that are convertible into common
stock. Convertible securities generally offer lower interest or dividend
yields than non-convertible securities of similar quality. Convertible secu-
rities in which a Fund invests are subject to the same rating criteria as its
other investments in fixed-income securities. Convertible securities have
both equity and fixed-income risk characteristics. Like all fixed-income
securities, the value of convertible securities is susceptible to the risk of
market losses attributable to changes in interest rates. Generally, the mar-
ket 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 of the convertible security, 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, like a fixed-income 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.
Zero Coupon, Deferred Interest, Pay-In-Kind and Capital Appreciation Bonds.
Certain Funds may invest in zero coupon, deferred interest, pay-in-kind and
capital appreciation bonds. Zero coupon, deferred interest, pay-in-kind and
capital appreciation bonds are issued at a discount from their face value
because interest payments are typically postponed until maturity. Pay-in-kind
securities are securities that have interest payable by the delivery of addi-
tional securities. The market prices of these securities generally are more
volatile than the market prices of interest-bearing securities and are likely
to
30
<PAGE>
APPENDIX A
respond to a greater degree to changes in interest rates than interest-bear-
ing securities having similar maturities and credit quality.
Rating Criteria. The rating requirements for each of the Fixed Income Funds
are stated above. Except as noted below, the Equity Funds (other than the
CORE Equity Funds, which only invest in debt instruments that are cash equiv-
alents) may invest in debt securities rated at least investment grade at the
time of investment. Investment grade debt securities are securities rated BBB
or higher by Standard & Poor's or Baa or higher by Moody's. The Growth and
Income, Capital Growth and International Equity Funds may invest up to 10%,
10% and 35%, 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 secu-
rities rated D by Moody's or Standard & Poor's. The Mid Cap Value Fund may
invest up to 10% of its total assets in below investment grade debt securi-
ties rated B or higher by Standard & Poor's or Moody's. Fixed-income securi-
ties 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 above.
Structured Securities and Inverse Floaters. Certain Funds may invest in
structured securities and inverse floaters. Structured securities are securi-
ties whose value is determined by reference to changes in the value of spe-
cific currencies, interest rates, commodities, indices or other financial
indicators (the "Reference") or the relative change in two or more Refer-
ences. The interest rate or the principal amount payable upon maturity or
redemption may be increased or decreased depending upon changes in the appli-
cable Reference. 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 addi-
tion, 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 present a greater degree of market risk than other
types of fixed-income securities, and may be more volatile, less liquid and
more difficult to price accurately than less complex securities.
Structured securities include, but are not limited to, inverse floating rate
debt securities ("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.
Foreign Currency Transactions. The Funds may, to the extent consistent with
their investment policies, purchase or sell foreign currencies on a cash
basis or through forward contracts. A forward contract involves an obligation
to purchase or sell a specific currency at a future date at a price set at
the time of the contract. A Fund may engage in foreign currency transactions
for hedging purposes and to seek to protect against anticipated changes in
future foreign currency exchange rates. In addition, certain Funds may also
enter into such transactions to seek to increase total return, which is con-
sidered a speculative practice.
Some Funds may also engage in cross-hedging by using forward contracts in a
currency different from that in which the hedged security is denominated or
quoted if the Investment Adviser determines that there is a pattern of corre-
lation between the two 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 (e.g., the Investment Adviser may anticipate
that the
foreign currency will appreciate against the U.S. dollar).
Currency exchange rates may fluctuate significantly over short periods of
time causing, along with other factors, a Fund's NAV to fluctuate (when the
Fund's NAV fluctuates, the value of your shares may go up or down). 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 United States or abroad.
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 a contract would deprive a Fund of unrealized profits, transaction
costs or the benefits of a currency hedge or could force the Fund to cover
its purchase or sale commitments, if any, at the current market price.
Options on Securities, Securities Indices and Foreign Currencies. A put
option gives the purchaser of the option the right to sell, and the writer
(seller) of the option the obligation to buy, the underlying instrument dur-
ing the option period. A
31
<PAGE>
call option gives the purchaser of the option the right to buy, and the
writer (seller) of the option the obligation to sell, the underlying instru-
ment during the option period. Certain Funds may write (sell) covered call
and put options and purchase put and call options on any securities in which
it may invest or on any securities index comprised of securities in which it
may invest. A Fund that invests in foreign securities may also
purchase and sell (write) put and call options on foreign currencies.
The writing and purchase of options is a highly specialized activity which
involves special investment risks. Options may be used for either hedging or
cross-hedging purposes, or to seek to increase total return (which is consid-
ered a speculative activity). The successful use of options 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 (or curren-
cy) markets. If the Investment Adviser is incorrect in its expectation of
changes in market prices or determination of the correlation between the
instruments or indices on which options are written and purchased and the
instruments in a Fund's investment portfolio, the Fund may incur losses that
it would not otherwise incur. The use of options can also increase a Fund's
transaction costs. Options written or purchased by the Funds may be traded on
either U.S. or foreign exchanges or over-the-counter. Foreign and over-the-
counter options will present greater possibility of loss because of their
greater liquidity and credit risks.
Yield Curve Options. Certain Funds 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 desig-
nated securities, rather than the prices of the individual securities, and is
settled through cash payments. Accordingly, a yield curve option is profit-
able 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.
The trading of yield curve options is subject to all of the risks associated
with the trading of other types of options. In addition, such options present
a 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.
Futures Contracts and Options on Futures Contracts. Futures contracts are
standardized, exchange-traded contracts that provide for the sale or purchase
of a specified financial instrument or currency at a future time at a speci-
fied price. An option on a futures contract gives the purchaser the right
(and the writer of the option the obligation) to assume a position in a
futures contract at a specified exercise price within a specified period of
time. A futures contract may be based on various securities (such as U.S.
Government Securities), foreign currencies, securities indices and other
financial instruments and indices. The Funds may engage in futures transac-
tions on both U.S. and foreign exchanges.
Each Fund may purchase and sell futures contracts, and purchase and write
call and put options on futures contracts, in order to seek to increase total
return or to hedge against changes in interest rates, securities prices or,
to the extent a Fund invests in foreign securities, currency exchange rates,
or to otherwise manage their term structures, sector selections and durations
in accordance with their investment objectives and policies. The Funds may
also enter into closing purchase and sale transactions with respect to such
contracts and options. 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 immedi-
ately thereafter the sum of the amount of initial margin deposits and premi-
ums 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.
Futures contracts and related options present the following risks:
.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 a 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 posi-
tion that is intended to be protected is impossible to achieve, the desired
protection may not be obtained and a Fund may be exposed to additional risk
of loss.
.The loss incurred by a Fund in entering into futures contracts and in writ-
ing 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 NAV.
.As a result of the low margin deposits normally required in futures trading,
a relatively small price movement in a futures contract may result in sub-
stantial losses to a Fund.
.Futures contracts and options on futures may be illiquid, and
32
<PAGE>
APPENDIX A
exchanges may limit fluctuations in futures contract prices during a single
day.
.Foreign exchanges may not provide the same protection as U.S. exchanges.
Loan Participations. Certain Funds may invest in loan participations. 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. A Fund
may only invest in loans to issuers in whose obligations it may otherwise
invest. Loan participation interests may take the form of a direct or co-
lending relationship with the corporate borrower, an assignment of an inter-
est in the loan by a co-lender or another participant, or a participation in
the seller's share of the loan. When a Fund acts as co-lender in connection
with a participation interest or when it acquires certain participation
interests, the Fund will have direct recourse against the borrower if the
borrower fails to pay scheduled principal and interest. In cases where the
Fund lacks direct recourse, it will look to the agent bank to enforce appro-
priate credit remedies against the borrower. In these cases, the Fund may be
subject to delays, expenses and risks that are greater than those that would
have been involved if the Fund had purchased a direct obligation (such as
commercial paper) of such borrower. Moreover, under the terms of the loan
participation, the Fund may be regarded as a creditor of the agent bank
(rather than of the underlying corporate borrower), so that the Fund may also
be subject to the risk that the agent bank may become insolvent.
Preferred Stock, Warrants and Rights. Certain 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 divi-
dend and other payment obligations, may not typically be accelerated by the
holders of such preferred stock on the occurrence of an event of default or
other non-compliance by the issuer of the preferred stock.
Warrants and other rights are options to buy a stated number of shares of
common stock at a specified price at any time during the life of the warrant.
The holders of warrants and rights have no voting rights, receive no divi-
dends and have no rights with respect to the assets of the issuer.
Other Investment Companies. Each Fund may invest in other investment compa-
nies (including SPDRs and WEBs, as defined below) subject to statutory limi-
tations prescribed by the Act. These limitations include a prohibition on any
Fund acquiring more than 3% of the voting shares of any other investment com-
pany, and a prohibition on investing more than 5% of a Fund's total assets in
securities of any one investment company or more than 10% of its total assets
in securities of all investment companies. A Fund will indirectly bear its
proportionate share of any management fees and other expenses paid by such
other investment companies. Such other investment companies will have invest-
ment objectives, policies and restrictions substantially similar to those of
the acquiring Fund and will be subject to substantially the same risks.
.Standard & Poor's Depository Receipts. The Funds may, consistent with their
investment policies, purchase Standard & Poor's Depository Receipts
("SPDRs"). SPDRs are securities traded on the American Stock Exchange
("AMEX") 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.
The SPDR Trust is sponsored by a subsidiary of the AMEX. SPDRs may be used
for several reasons, including, but not limited to, facilitating the han-
dling of cash flows or trading, or reducing transaction costs. The price
movement of SPDRs may not perfectly parallel the price action of the S&P
500.
.World Equity Benchmark Shares. World Equity Benchmark Shares ("WEBS") are
shares of an investment company that invests substantially all of its assets
in securities included in the MSCI indices for specified countries. WEBS are
listed on the AMEX and were initially offered to the public in 1996. The
market prices of WEBS are expected to fluctuate in accordance with both
changes in the NAVs of their underlying indices and supply and demand of
WEBS on the AMEX. To date, WEBS have traded at relatively modest discounts
and premiums to their NAVs. However, WEBS have a limited operating history
and information is lacking regarding the actual performance and trading
liquidity of WEBS for extended periods or over complete market cycles. In
addition, there is no assurance that the requirements of the AMEX necessary
to maintain the listing of WEBS will continue to be met or will remain
unchanged. In the event substantial market or other disruptions affecting
WEBS should occur in the future, the liquidity and value of a Fund's shares
could also be substantially and adversely affected. If such disruptions were
to occur, a Fund could be required to reconsider the use of WEBS as part of
its investment strategy.
Unseasoned Companies. Each Fund may invest in companies (including predeces-
sors) 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 lim-
ited 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.
33
<PAGE>
Risks of Investing in Non-Investment Grade Fixed-Income Securities. Certain
Funds may invest in non-investment grade fixed-income securities. Non-invest-
ment grade fixed-income securities and unrated securities of comparable
credit quality (commonly known as "junk bonds") are considered predominantly
speculative by traditional investment standards. In some cases, these obliga-
tions may be highly speculative and have poor prospects for reaching invest-
ment grade standing. Non-investment grade fixed-income securities 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 corpo-
rate developments, interest rate sensitivity, negative perceptions of the
junk bond markets generally and less secondary market liquidity.
Non-investment grade fixed-income securities are often issued in connection
with a corporate reorganization or restructuring or as part of a merger,
acquisition, takeover or similar event. They are also issued by less estab-
lished companies seeking to expand. Such issuers are often highly leveraged
and generally less able than more established or less leveraged entities to
make scheduled payments of principal and interest in the event of adverse
developments or business conditions.
The market value of non-investment grade fixed-income securities tends to
reflect individual corporate developments to a greater extent than that of
higher rated securities which react primarily to fluctuations in the general
level of interest rates. As a result, a Fund's ability to achieve its invest-
ment objectives may depend to a greater extent on the Investment Adviser's
judgment concerning the creditworthiness of issuers than funds which invest
in higher-rated securities. Issuers of non-investment grade fixed-income
securities may not be able to make use of more traditional methods of financ-
ing and their ability to service debt obligations may be affected more
adversely than issuers of higher rated securities by economic downturns, spe-
cific corporate developments or the issuer's inability to meet specific pro-
jected business forecasts. Negative publicity about the junk bond market and
investor perceptions regarding lower rated securities, whether or not based
on fundamental analysis, may depress the prices for such securities.
A holder's risk of loss from default is significantly greater for non-invest-
ment grade fixed-income securities than is the case for holders of other debt
securities because such non-investment grade securities are generally
unsecured and are often subordinated to the rights of other creditors of the
issuers of such securities. Investment by a Fund in defaulted securities
poses additional risk of loss should nonpayment of principal and interest
continue in respect of such securities. Even if such securities are held to
maturity, recovery by a Fund of its initial investment and any anticipated
income or appreciation is uncertain.
The secondary market for non-investment grade fixed-income securities is con-
centrated in relatively few market makers and is dominated by institutional
investors, including mutual funds, insurance companies and other financial
institutions. Accordingly, the secondary market for such securities is not as
liquid as, and is more volatile than, the secondary market for higher rated
securities. In addition, market trading volume for high yield fixed-income
securities is generally lower and the secondary market for such securities
could 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 mar-
ket liquidity, a Fund may incur losses because it will be required to effect
sales at a disadvantageous time and after a substantial drop in price. These
factors may have an adverse effect on the market price and a Fund's ability
to dispose of particular portfolio investments. A less liquid secondary mar-
ket also may make it more difficult for a Fund to obtain precise valuations
of the high yield securities in its portfolio.
Credit ratings issued by credit rating agencies are designed to evaluate the
safety of principal and interest payments of rated
securities. They do not, however, evaluate the market value risk of non-
investment grade securities and, therefore, may not fully reflect the true
risks of an investment. In addition, credit rating agencies may or may not
make timely changes in a rating to reflect changes in the economy or in the
conditions of the issuer that affect the market value of the security. Conse-
quently, credit ratings are used only as a preliminary indicator of invest-
ment quality. Investments in non-investment grade and comparable unrated
obligations will be more dependent on the Investment Adviser's credit analy-
sis than would be the case with investments in investment grade debt obliga-
tions.
Equity Swaps. Certain Funds may invest in equity swaps. Equity swaps allow
the parties to a swap agreement to exchange the dividend income or other com-
ponents of return on an equity investment (for example, 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
34
<PAGE>
APPENDIX A
swapped with another party, a Fund may suffer a loss. The value of some com-
ponents of an equity swap (such as the dividends on a common stock) may also
be sensitive to changes in interest rates. Furthermore, a Fund may suffer a
loss if the counterparty defaults.
When-Issued Securities and Forward Commitments.
Each Fund may purchase when-issued securities and make contracts to purchase
or sell securities for a fixed price at a future date beyond customary set-
tlement time. When-issued securities are securities that have been autho-
rized, but not yet issued. When-issued securities are purchased 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. A forward commitment involves
the entering into a contract 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
before the settlement date. Conversely, the sale of securities on a forward
commitment basis involves the risk that the value of the securities sold may
increase before the settlement date. Although a Fund will 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.
Repurchase Agreements. Repurchase agreements involve the purchase of securi-
ties subject to the seller's agreement to repurchase them at a mutually
agreed upon date and price. 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. Certain Funds may also
enter into repurchase agreements involving certain foreign government securi-
ties.
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 are less than the repurchase price and the Fund's
costs associated with delay and enforcement of the repurchase agreement. In
addition, in the event of bankruptcy of the seller, a Fund could suffer addi-
tional losses if a court determines that the Fund's interest in the collat-
eral is not enforceable.
In evaluating whether to enter into a repurchase agreement, the Investment
Adviser will carefully consider the creditworthiness of the seller. Distribu-
tions of the income from repurchase agreements will be taxable to a Fund's
shareholders. In addition, certain Funds, together with other registered
investment companies having advisory agreements with the Investment Adviser
or any of 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. Each Fund may engage in securities lending.
Securities lending involves the lending of securities owned by a Fund to
financial institutions such as certain broker-dealers. The borrowers are
required to secure their loans continuously with cash, cash equivalents, U.S.
Government Securities or letters of credit 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 of a Fund (including the loan collateral).
A Fund may lend its securities to increase its income. A Fund may, however,
experience delay in the recovery of its securities or possible loss if the
institution with which it has engaged in a portfolio loan transaction
breaches its agreement with the Fund.
Short Sales Against-the-Box. Certain Funds may make short sales against-the-
box. A short sale against-the-box means that at all times when a short posi-
tion is open the Fund will own an equal amount of securities sold short, or
securities convertible into or exchangeable for, without payment of any fur-
ther consideration, an equal amount of the securities of the same issuer as
the securities sold short.
Mortgage Dollar Rolls. Certain Funds may enter into "mortgage dollar rolls."
A mortgage dollar roll involves the sale by a Fund of securities for delivery
in the current month. The Fund simultaneously contracts with the same
counterparty to repurchase substantially similar (same type, coupon and matu-
rity) 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 benefits to the extent of any dif-
ference between (a) the price received for the securities sold and (b) the
lower forward price for the future purchase and/or fee income plus the inter-
est earned on the cash proceeds of the securities sold. Unless the benefits
of a mortgage dollar roll exceed the income, capital appreciation and gain or
loss due to mortgage prepayments that would have been realized on the securi-
ties sold as part of the roll, the use of this technique will diminish a
Fund's investment performance.
Successful use of mortgage dollar rolls depends upon the Investment Adviser's
ability to predict correctly interest rates and mortgage prepayments. If the
Investment Adviser is incorrect
35
<PAGE>
in its prediction, a Fund may experience a loss. For financial reporting and
tax purposes, the Funds treat mortgage dollar rolls as two separate transac-
tions: one involving the purchase of a security and a separate transaction
involving a sale. The Funds do not currently intend to enter into mortgage
dollar rolls that are accounted for as a financing, and do not treat them as
borrowings.
Borrowings and Reverse Repurchase Agreements.
The Funds can borrow money from banks and certain Funds may enter into
reverse repurchase agreements with banks and other financial institutions in
amounts not exceeding one-third of their total assets. Reverse repurchase
agreements involve the sale of securities held by a Fund subject to the
Fund's agreement to repurchase them at a mutually agreed upon date and price
(including interest). These transactions may be entered into as a temporary
measure for emergency purposes or to meet redemption requests. Reverse repur-
chase agreements may also be entered into when the Investment Adviser expects
that the interest income to be earned from the investment of the transaction
proceeds will be greater than the related interest expense. Borrowings and
reverse repurchase agreements involve leveraging. If the securities held by a
Fund decline in value while these transactions are outstanding, the NAV of
the Fund's outstanding shares will decline in value by proportionately more
than the decline in value of the securities. In addition, reverse repurchase
agreements involve the risk that any interest income earned by a Fund (from
the investment of the proceeds) will be less than the interest expense of the
transaction, that the market value of the securities sold by a Fund will
decline below the price the Fund is obligated to pay to repurchase the secu-
rities, and that the securities may not be returned to the Fund.
Interest Rate Swaps, Mortgage Swaps, Credit Swaps, Currency Swaps and Inter-
est Rate Caps, Floors and Collars. Certain Funds may invest in interest rate
swaps, mortgage swaps, credit swaps, currency swaps and interest rate caps,
floors and collars. Interest rate swaps involve the exchange by a Fund with
another party of their respective commitments to pay or receive interest,
such as an exchange of fixed rate payments for floating rate payments. Mort-
gage swaps are similar to interest rate swaps in that they represent commit-
ments to pay and receive interest. The notional principal amount, however, is
tied to a reference pool or pools of mortgages. 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. Currency swaps involve the exchange of
the parties' respective rights to make or receive payments in specified cur-
rencies. The purchase of an interest rate cap entitles the purchaser, to the
extent that a specified index exceeds a predetermined interest rate, to
receive payment of interest on a notional principal amount from the party
selling such interest rate cap. The purchase of an interest rate floor enti-
tles the purchaser, to the extent that a specified index falls below a prede-
termined 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.
A Fund may enter into swap transactions for hedging purposes or to seek to
increase total return. The use of interest rate, mortgage, credit and cur-
rency 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 the
Investment Adviser is incorrect in its forecasts of market value, interest
rates and currency exchange rates, the investment performance of a Fund would
be less favorable than it would have been if these investment techniques were
not used.
REITs. Certain Funds may invest in REITS. REITS are pooled investment vehi-
cles 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 proper-
ties owned by the REIT or securing mortgage loans held by the REIT. 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 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 geograph-
ically, by property type or in certain other respects, these risks may be
heightened. A Fund will indirectly bear its proportionate share of any
expenses, including management fees, paid by a REIT in which it invests.
36
<PAGE>
[This page intentionally left blank]
37
<PAGE>
Appendix B
Financial Highlights
The financial highlights tables are intended to help you understand a Fund's
financial performance since its commencement of operations. Certain informa-
tion reflects financial results for a single Fund share. The total returns in
the table represent the rate that an investor would have earned or lost on an
investment in a Fund (assuming reinvestment of all dividends and distribu-
tions). This information has been audited by Arthur Andersen LLP, whose
report, along with a Fund's financial statements, is included in the Fund's
annual report (available upon request without charge). During the period
shown, the Trust did not offer the CORE Large Cap Value, CORE International
Equity, Short Duration Government and High Yield Funds. Accordingly, there
are no financial highlights for these Funds.
<TABLE>
<CAPTION>
Income from
investment operations/(b)/ Distributions to shareholders
------------------------------- ------------------------------
Net realized
and unrealized
gain (loss) on
Net asset investments, In excess
value, Net futures and From net of net From net
beginning investment foreign currency investment investment realized
of period income related transactions income income gain
-----------------------------------------------------------------------------------------------
For the Period Ended December 31, 1998(a)
<S> <C> <C> <C> <C> <C> <C>
Growth and Income Fund $10.00 $0.09 $ 0.45 $(0.09) $ -- $ --
-----------------------------------------------------------------------------------------------
CORE U.S. Equity Fund 10.00 0.05 1.42 (0.05) -- --
-----------------------------------------------------------------------------------------------
CORE Large Cap Growth
Fund 10.00 0.02 1.68 (0.02) -- --
-----------------------------------------------------------------------------------------------
CORE Small Cap Equity
Fund 10.00 0.02 (0.95) (0.02) (0.01) --
-----------------------------------------------------------------------------------------------
Capital Growth Fund 10.00 0.03 1.31 (0.03) -- --
-----------------------------------------------------------------------------------------------
Mid Cap Value Fund 10.00 0.07 (1.43) (0.07) -- --
-----------------------------------------------------------------------------------------------
International Equity
Fund 10.00 0.02 1.98 -- -- (0.09)
-----------------------------------------------------------------------------------------------
Global Income Fund 10.00 0.45 0.38 (0.40) -- (0.11)
-----------------------------------------------------------------------------------------------
</TABLE>
(a) The Growth and Income, International Equity and Global Income Funds com-
menced operations on January 12, 1998; the CORE U.S. Equity, CORE Large
Cap Growth and CORE Small Cap Equity Funds commenced operations on Febru-
ary 13, 1998; the Capital Growth and Mid Cap Equity Funds commenced oper-
ations on April 30, 1998 and May 1, 1998, respectively. Effective May 1,
1999 the Mid Cap Equity Fund's name was changed to Mid Cap Value Fund.
(b) Includes the balancing effect of calculating per share amounts.
(c) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of period.
(d) Annualized.
38
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
Ratios assuming
no expense
reimbursements
---------------------------
Ratio of
Ratio net
Net Ratio of net investment
Net increase Net asset assets at of net investment Ratio of income
(decrease) value, end of expenses income expenses (loss) to Portfolio
in net end of Total period to average to average to average average turnover
asset value period return(c) (in 000's) net assets(d) net assets(d) net assets(d) net assets(d) rate
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0.45 $10.45 5.47 % $13,814 0.90% 1.85% 2.69% 0.06 % 88%
-----------------------------------------------------------------------------------------------------------------
1.42 11.42 14.73 9,809 0.80 0.70 2.83 (1.33) 75
-----------------------------------------------------------------------------------------------------------------
1.68 11.68 16.99 8,214 0.80 0.20 2.87 (1.87) 69
-----------------------------------------------------------------------------------------------------------------
(0.96) 9.04 (9.30) 4,841 0.90 0.30 3.92 (2.72) 74
-----------------------------------------------------------------------------------------------------------------
1.31 11.31 13.40 4,463 0.90 0.42 4.92 (3.60) 20
-----------------------------------------------------------------------------------------------------------------
(1.43) 8.57 (13.56) 5,604 0.95 1.74 4.79 (2.10) 38
-----------------------------------------------------------------------------------------------------------------
1.91 11.91 20.07 11,206 1.25 0.23 2.97 (1.49) 76
-----------------------------------------------------------------------------------------------------------------
0.32 10.32 8.29 5,741 1.05 4.59 3.30 2.34 203
-----------------------------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
GENERAL INVESTMENT MANAGEMENT APPROACH .................................. 1
FUND INVESTMENT OBJECTIVES AND STRATEGIES................................ 3
Goldman Sachs Growth and Income Fund..................................... 3
Goldman Sachs CORE U.S. Equity Fund...................................... 3
Goldman Sachs CORE Large Cap Growth Fund................................. 4
Goldman Sachs CORE Large Cap Value Fund.................................. 4
Goldman Sachs CORE Small Cap Equity Fund................................. 5
Goldman Sachs Capital Growth Fund........................................ 5
Goldman Sachs Mid Cap Value Fund......................................... 6
Goldman Sachs CORE International Equity Fund............................. 6
Goldman Sachs International Equity Fund.................................. 7
Goldman Sachs Short Duration Government Fund............................. 7
Goldman Sachs Global Income Fund......................................... 8
Goldman Sachs High Yield Fund............................................ 9
OTHER INVESTMENT PRACTICES AND SECURITIES................................ 10
PRINCIPAL RISKS OF THE FUNDS............................................. 12
FUND PERFORMANCE......................................................... 14
SERVICE PROVIDERS........................................................ 14
DIVIDENDS................................................................ 22
SHAREHOLDER GUIDE........................................................ 22
TAXATION................................................................. 24
APPENDIX A--ADDITIONAL INFORMATION ON PORTFOLIO RISKS, SECURITIES AND
TECHNIQUES............................................................... 25
APPENDIX B--FINANCIAL HIGHLIGHTS......................................... 38
</TABLE>
<PAGE>
Goldman Sachs Variable Insurance Trust
Prospectus
Shares of the Trust are offered to separate accounts of participating life
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 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 pro-
spectus. Inclusion in this prospectus of a Fund which is not available under
your contract or policy is not to be considered a solicitation.
FOR MORE INFORMATION
Annual/Semiannual Report
Additional information about the Funds' investments is available in the
Funds' annual and semi annual reports to shareholders. In the Funds' annual
reports, you will find a discussion of the market conditions and investment
strategies that significantly affected the Funds' performance during their
last fiscal year.
Your insurance company will provide you with annual and semiannual reports
for those Funds serving as the investment vehicle for your variable annuity
contract or variable life insurance policy.
Statement of Additional Information
Additional information about the Funds and their policies is also available
in the Funds' Statement of Additional Information. The Additional Statement
is incorporated by reference into this Prospectus (is legally considered part
of this Prospectus).
The Additional Statement is available free upon request by calling Goldman
Sachs at 1-800-621-2550.
To obtain other information and for shareholder inquiries:
By telephone - Call 1-800-621-2550
By mail - Goldman, Sachs Funds
4900 Sears Tower - 60th Floor
Chicago, IL 60606-6372
By e-mail - [email protected]
On the Internet - Text-only versions of Trust documents are located online
and may be downloaded from: SEC - http://www.sec.gov
You may review and obtain copies of Trust documents by visiting the SEC's
Public Reference Room in Washington, D.C. You may also obtain copies of Trust
documents by sending your request and a duplicating fee to the SEC's Public
Reference Section, Washington, D.C. 20549-6009. Information on the operation
of the public reference room may be obtained by calling the SEC at 1-800-SEC-
0330.
[LOGO] GOLDMAN
SACHS
The Trust's investment company registration number is 811-08361.
VITPRO
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
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)
4900 Sears Tower
Chicago, Illinois 60606-6303
This Statement of Additional Information (the "Additional Statement") is
not a Prospectus. This Additional Statement should be read in conjunction with
the prospectus for Goldman Sachs 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 dated May 1, 1999 as amended and/or supplemented from time to
time (the "Prospectus"), which may be obtained without charge from Goldman,
Sachs & Co. by calling the telephone number, or writing to one of the addresses,
listed below.
The date of this Additional Statement is May 1, 1999.
<PAGE>
TABLE OF CONTENTS
Page
----
INTRODUCTION.................................................................B-1
INVESTMENT OBJECTIVES AND POLICIES...........................................B-3
DESCRIPTION OF INVESTMENT SECURITIES AND PRACTICES..........................B-18
INVESTMENT RESTRICTIONS.....................................................B-66
MANAGEMENT..................................................................B-68
EXPENSES....................................................................B-85
PORTFOLIO TRANSACTIONS AND BROKERAGE........................................B-86
NET ASSET VALUE.............................................................B-88
PERFORMANCE INFORMATION.....................................................B-90
SHARES OF THE TRUST.........................................................B-94
TAXATION....................................................................B-97
OTHER INFORMATION..........................................................B-100
APPENDIX A...................................................................A-1
APPENDIX B...................................................................B-1
GOLDMAN SACHS ASSET MANAGEMENT GOLDMAN, SACHS & CO.
Adviser to: Transfer Agent
Goldman Sachs Conservative Strategy Portfolio 4900 Sears Tower
Goldman Sachs Balanced Strategy Portfolio Chicago, IL 60606
Goldman Sachs Growth and Income Strategy
Portfolio GOLDMAN, SACHS & CO.
Goldman Sachs Growth Strategic Portfolio Distributor
Goldman Sachs Aggressive Growth Strategy 85 Broad Street
Portfolio New York, New York 10004
One New York Plaza
New York, New York 10004
Toll free.......800-292-4726
<PAGE>
INTRODUCTION
Goldman Sachs Variable Insurance Trust (the "Trust" or "VIT," as the case
may be) 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 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
"Portfolios"). Other series of the Trust are described in a separate Additional
Statement. No shares of the Portfolios were offered during the fiscal year ended
December 31, 1998.
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 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 Portfolio is a separately managed, diversified mutual fund with its
own investment objectives and policies. Each 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 and of Goldman Sachs Trust, a separately registered
open-end investment company ("GST"). The Underlying Funds that are available for
investment by the Portfolios as of the date of this Additional Statement are the
VIT Growth and Income Fund ("Growth and Income Fund"), VIT CORE U.S. Equity Fund
("CORE U.S. Equity Fund"), VIT CORE Large Cap Growth Fund ("CORE Large Cap
Growth Fund"), VIT CORE Large Cap Value Fund ("CORE Large Cap Value Fund"), VIT
CORE Small Cap Equity Fund ("CORE Small Cap Equity Fund"), VIT Capital Growth
Fund ("Capital Growth Fund"), VIT Mid Cap Value Fund ("Mid Cap Value Fund"), VIT
CORE International Equity Fund ("CORE International Equity Fund"), VIT
International Equity Fund ("International Equity Fund")VIT Short Duration
Government Fund ("Short Duration Government Fund"), VIT Global Income Fund
("Global Income Fund"), GST Small Cap Value Fund ("Small Cap Value Fund'), GST
Emerging Markets Equity Fund ("Emerging Markets Equity Fund"), GST Asia Growth
Fund ("Asia Growth Fund"), GST Real Estate Securities Fund ("Real Estate
Securities Fund'), GST Japanese Equity Fund ("Japanese Equity Fund"), GST
European Equity Fund ("European Equity Fund"), GST International Small Cap Fund
("International Small Cap Fund"), GST Financial Square Prime Obligations Fund
("Prime Obligations Fund"), GST Adjustable Rate Government Fund ("Adjustable
Rate Government Fund"), GST Government Income Fund ("Government Income Fund"),
GST Financial Square Prime Obligations Fund ("Prime Obligations Fund"), GST
Adjustable Rate Government fund ("Adjustable Rate Government Fund"), GST
Government Income Fund ("Government Income Fund"), GST Core Fixed Income Fund
("Core Fixed Income
B-1
<PAGE>
Fund") and GST High Yield Fund ("High Yield Fund"). A Portfolio may also invest
in other Underlying Funds not listed below that may become available for
investment in the future at the discretion of the Investment Adviser without
shareholder approval.
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-2
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Normally, each of the Asset Allocation Portfolios will be predominantly
invested in shares of the Underlying Funds. The value of the Underlying Funds'
investments, and the net asset value of the shares of both the Underlying Funds
and the Portfolios will fluctuate with market, economic and, to the extent
applicable, foreign exchange conditions, so that an investment in any of the
Portfolios may be worth more or less when redeemed than when purchased. 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. There is no assurance that any Portfolio or Underlying Fund will
achieve its objective.
Description of Underlying Funds
Goldman Sachs Variable Insurance Trust ("VIT") Growth and Income Fund
Objectives. This Fund seeks 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, such as corporate debt and bank obligations, that offer the
potential to further the Fund's investment objective. 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 long-term growth of capital and dividend
income. The Fund seeks this 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
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 of companies with average long-term earnings growth
expectations and dividend yields.
B-3
<PAGE>
Other. The Fund's investments in fixed-income securities are limited to
securities that are considered cash equivalents.
VIT CORE Large Cap Growth Fund
Objective. This Fund seeks long-term growth of capital. The Fund seeks
this 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
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.
Other. 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 long-term growth of capital and dividend
income. The Fund seeks this 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.
Other. The Fund's investments in fixed-income securities are limited to
securities that are considered cash equivalents.
B-4
<PAGE>
VIT CORE Small Cap Equity Fund
Objective. This Fund seeks long-term growth of capital. The Fund seeks
this 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 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. 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.
Other. The Fund's investments in fixed-income securities are limited to
securities that are considered cash equivalents.
VIT Capital Growth Fund
Objective. This Fund seeks 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.
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 Value Fund
Objective. This Fund seeks 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 decreases below
$400 million or increases above $16 billion after purchase, the Fund may, but is
not required to, sell the securities. Dividend income, if any, is an incidental
consideration.
B-5
<PAGE>
Other. This Fund may invest up to 35% of its total assets in fixed-income
securities, such as corporate debt and bank obligations. 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 International Equity Fund
Objective. This Fund seeks long-term growth of capital. The Fund seeks
this objective through a broadly diversified portfolio of equity securities of
large-cap 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 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 countries with emerging markets or economies which involve certain risks
which are not present in investments in more developed countries.
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.
Other. The Fund's investments in fixed-income securities are limited to
securities that are considered to be cash equivalents.
VIT International Equity Fund
Objective. This Fund seeks 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.
B-6
<PAGE>
Currently, emerging countries include among others, most Latin American,
African, Asian and Eastern European nations. 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 $1 billion at the time of investment.
Other. Up to 35% of the Fund's total assets may be invested in
fixed-income securities, such as corporate debt and bank obligations.
VIT Short Duration Government Fund
Objective. This Fund seeks a high level of current income and,
secondarily, in seeking current income, 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 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 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-U.S. government securities such as privately issued
Mortgage-Backed Securities, Asset-Backed Securities, municipal securities and
corporate securities. 100% of the Fund's assets will be invested in U.S.
dollar-denominated securities.
Credit Quality. All securities purchased by the Fund will be rated, at the
time of investment, at least BBB or Baa by one Nationally Recognized Statistical
Rating Organization ("NRSRO") or, if unrated, will be determined by the
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. The Fund may purchase securities on a when-issued or
forward commitment basis.
VIT Global Income Fund
Objective. This Fund seeks a high total return, emphasizing current
income, and, to a lesser extent, providing opportunities 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 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 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.
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 purchase, at least BBB or Baa by an NRSRO. However, the Fund will invest
at least 50% of its total assets in securities rated, at the time of purchase,
AAA or Aaa by an NRSRO. Unrated securities will be determined by the Fund's
investment adviser to be of comparable quality. 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, options on foreign currencies, 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. 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
B-8
<PAGE>
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 purchase
securities on a when-issued or forward commitment basis.
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.
The Fund may also invest up to 10% of its total assets in issuers in countries
with emerging markets and economies.
Goldman Sachs Trust ("GST") Small Cap Value Fund
Objective. The Fund seeks long-term growth of capital.
Primary Investment Focus. The 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 $1 billion, 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 companies with public stock market capitalizations in excess of $1 billion at
the time of investment and in fixed-income securities, such as corporate debt
and bank obligations. 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.
B-9
<PAGE>
GST Emerging Markets Equity Fund
Objective. This Fund seeks 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
emerging country issuers. 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 as well as any other emerging country to the extent that
foreign investors are permitted by applicable law to make such investments:
Argentina, Botswana, Brazil, Chile, China, Colombia, the Czech Republic, Egypt,
Greece, Hong Kong, Hungary, India, Indonesia, Israel, Jordan, Kenya, Malaysia,
Mexico, Morocco, Pakistan, Peru, the Philippines, Poland, Portugal, Russia,
Singapore, South Africa, South Korea, Sri Lanka, Taiwan, Thailand, Turkey,
Venezuela and Zimbabwe.
An emerging country issuer is any company that either: (i) derives 50% or
more of its total revenue from goods produced, sales made or services performed
in one or more emerging countries; (ii) is organized under the laws of, or has a
principal office in, an emerging country; (iii) maintains 50% or more of its
assets in one or more of the emerging countries; or (iv) has a class of its
securities whose principal securities markets is in an emerging country.
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.
Investments in emerging countries involve certain risks which are not present in
investments in more developed countries.
Other. The Fund may invest in the aggregate up to 35% of its total assets
in (i) fixed-income securities, such as corporate debt and bank obligations, of
private and governmental emerging country issuers; and (ii) equity and
fixed-income securities, such as corporate debt and bank obligations, of issuers
in developed countries.
B-10
<PAGE>
GST Asia Growth Fund
Objective. This Fund seeks 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
Asian issuers. An Asian issuer is any company that either: (i) has a class of
its securities whose principal securities markets is in one or more Asian
countries; (ii) derives 50% or more of its total revenue from goods produced,
sales made or services performed in one or more of the Asian countries; (iii)
maintains 50% or more of its assets in one or more Asian countries; or (iv) is
organized under the laws of, or has a principal office in, an Asian country.
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.
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. 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. For example, on
January 31, 1999 (the end of the Fund's last fiscal year), more than 25% of the
Fund's assets were invested in securities traded in Hong Kong.
Other. 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 such as corporate debt and bank obligations.
GST Real Estate Securities Fund
Objective. This Fund seeks 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 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 assets will be invested in REITs and 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.
The Fund's investment strategy is based on the premise that property
market fundamentals are the primary determinant of growth, underlying the
success of companies in the
B-11
<PAGE>
real estate industry. The Fund's investment adviser focuses on companies that
can achieve sustainable growth in cash flow and dividend paying capability. The
investment adviser attempts to purchase securities so that its underlying
portfolio will be diversified geographically and by property type.
Investing in REITs involves certain unique risks in addition to those
risks associated with investing in the real estate industry in general. Equity
REITs may be affected by changes in the value of the underlying property owned
by the REITs.
Mortgage REITs may be affected by the quality of any credit extended.
REITs are dependent upon management skill, may not be diversified, and are
subject to heavy cash flow dependency, default by borrowers and
self-liquidation. REITs are also subject to the possibilities of failing to
qualify for tax free pass-through of income and failing to maintain their
exemptions from investment company registration. REITs whose underlying
properties are concentrated in a particular industry or geographic region are
also subject to risks affecting such industries and regions.
REITs (especially mortgage REITs) are also subject to interest rate risks.
When interest rates decline, the value of a REIT's investment in fixed rate
obligations can be expected to rise. Conversely, when interest rates rise, the
value of a REIT's investment in fixed rate obligations can be expected to
decline.
Shares of REITs. The Fund may invest without limitation in shares of
REITs. REITs are pooled investment vehicles that invest primarily in either real
estate or real estate related loans. 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. This Fund may invest up to 20% of its total assets in fixed-income
securities, such as corporate debt and bank obligations, that offer the
potential to further the Fund's investment objective. In addition, although the
Fund will invest primarily in publicly traded U.S. securities, it may invest up
to 15% of its total assets in foreign securities, including securities of
issuers in emerging countries and securities quoted in foreign currencies.
GST Japanese Equity Fund
Objective. This Fund seeks long-term capital appreciation.
B-12
<PAGE>
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. A Japanese issuer is a company that either: (i) has a class
of its securities whose principal securities markets is in Japan; (ii) is
organized under the laws of, or has a principal office in Japan; (iii) derives
50% or more of its total revenue from goods produced, sales made or services
performed in Japan; or (iv) maintains 50% or more of its assets in Japan. 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,
such as corporate debt and bank obligations. Many of the emerging countries in
which the Fund may invest involve risks that are not present in investments in
more developed countries.
GST European Equity Fund
Objective. This Fund seeks 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
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. A European issuer is a company that either: (i) has
a class of its securities whose principal securities markets is in a European
country; (ii) derives 50% or more of its total revenue from goods produced,
sales made or services performed in one or more of the European countries; (iii)
maintains 50% or more of its assets in one or more of the European countries; or
(iv) is organized under the laws of, or has a principal office in, a European
country. The Fund may allocate its assets among different countries as
determined by its investment adviser from time to time, 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.
Currently, emerging countries include, among others, most Latin American,
African, Asian, most Eastern European nations, including 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,
such as corporate debt and bank obligations.
GST International Small Cap Fund
Objective. This Fund seeks long-term capital appreciation.
Primary Investment Focus. The Fund invests, under normal circumstances,
substantially all, and at least 65% of its total assets in equity securities of
companies with public stock market
B-13
<PAGE>
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. Currently, emerging countries include, among
others, most Latin American, African, Asian and Eastern European nations. Many
of the countries in which the Fund may invest involve risks which are not
present in investments in more developed countries.
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, such as corporate debt and bank obligations. 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.
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 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.
GST Adjustable Rate Government Fund
Objective. This Fund seeks to provide a high level of current income,
consistent with low volatility of principal.
B-14
<PAGE>
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 bill.
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, 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 Government Income Fund
Objective. This Fund seeks 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.
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.
B-15
<PAGE>
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 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's investments in non-dollar denominated
obligations will not exceed 25% of its total assets at the time of investment,
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' capability to pay interest and
repay principal. The securities currently included in the Index have at least
one year remaining to maturity; have an outstanding principal amount of at least
$100 million; and are issued by the following types of issuers, with each
category receiving a different weighting in the Index: U.S. Treasury; agencies,
authorities or instrumentalities of the U.S. government; issuers of
Mortgage-Backed Securities; utilities; industrial issuers; financial
institutions; foreign issuers; and issuers of Asset-Backed Securities. In
pursuing its investment objective, the Fund uses the Index as its performance
benchmark, but the Fund will not attempt to replicate the Index. The Fund,
therefore, may invest in securities that are not included in the
B-16
<PAGE>
Index. 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 purchase, 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.
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, options on foreign currencies, 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 a high level of current income and may also
consider the potential for capital appreciation.
Duration. Under normal interest rate conditions, the Fund's duration is
expected to be equal to that of the Fund's benchmark, the Lehman Brothers High
Yield Bond Index, plus or minus 2.5 years. In addition, under normal interest
rate conditions, the Fund's maximum duration will not exceed 7.5 years. The
approximate interest rate sensitivity of the Fund is expected to be comparable
to a 6-year 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
B-17
<PAGE>
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.
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 at least 65% of its total assets in
securities rated BB or Ba or lower at the time of investment or, if unrated,
determined by the Fund's investment adviser to be of comparable quality. The
Fund may purchase 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 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, and currency, credit, mortgage and interest rate swaps.
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
The Adjustable Rate Government Fund invests in U.S. Government Securities
and related repurchase agreements, and neither this Fund, the Government Income
Fund nor the Financial Square Prime Obligations Fund makes foreign investments.
The investments of the Financial Square Prime Obligations Fund are limited by
Securities and Exchange Commission ("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.
As stated in the Prospectus, the Portfolios may also invest a portion of
their assets in high quality, short-term debt obligations and engage in certain
other investment practices. Further information about the Underlying Funds and
their respective investment objectives and policies is included in their
Prospectuses and Additional Statements. There is no assurance that any Portfolio
or Underlying Fund will achieve its objective.
Corporate Debt Obligations
Each Underlying Fund (other than the Adjustable Rate Government Fund) may
invest in debt obligations issued by U.S. or foreign corporations, including
obligations of industrial, utility and financial issuers (Short Duration
Government Fund may invest in obligations which issue securities denominated in
the U.S. dollar, i.e., Yankee and Euro obligations). CORE Large Cap Value, CORE
U.S. Equity, CORE Large Cap Growth, CORE Small Cap Equity and CORE International
Equity Funds' investments in debt securities are limited to 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
B-19
<PAGE>
dated bond (for example 30 years) with preferred features. The preferred
features are that payment of interest can be deferred for a specified period
without initiating a default event. From a bondholder's viewpoint, the
securities are senior in claim to standard preferred but are junior to other
bondholders. From the issuer's viewpoint, the securities are attractive because
their interest is deductible for tax purposes like other types of debt
instruments.
High Yield Securities. Bonds rated BB or below by Standard & Poor's
Ratings Group ("Standard & Poor's") or Ba or below by Moody's Investors Service,
Inc. ("Moody's") (or comparable rated and unrated securities) are commonly
referred to as "junk bonds" and are considered speculative. The ability of their
issuers to make principal and interest payments may be questionable. In some
cases, such bonds may be highly speculative, have poor prospects for reaching
investment grade standing and be in default. As a result, investment in such
bonds will entail greater risks than those associated with investment grade
bonds (i.e., bonds rated AAA, AA, A or BBB by Standard and Poor's or Aaa, Aa, A
or Baa by Moody's). Analysis of the 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 are often highly
leveraged, and may not be able to make use of more traditional methods of
financing. 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
B-20
<PAGE>
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 high yield,
fixed-income securities is the supply and demand for similarly rated securities.
In addition, the prices of fixed-income securities fluctuate in response to the
general level of interest rates. Fluctuations in the prices of portfolio
securities subsequent to their acquisition will not affect cash income from such
securities but will be reflected in an Underlying Fund's net asset value.
The risk of loss from default for the holders of high yield, fixed-income
securities is significantly greater than is the case for holders of other debt
securities because such high yield, fixed-income securities are generally
unsecured and are often subordinated to the rights of other creditors of the
issuers of such securities. Investment by an Underlying Fund in already
defaulted securities poses an additional risk of loss should nonpayment of
principal and interest 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. In addition,
an Underlying Fund may incur additional expenses to the extent that it is
required to seek recovery relating to the default in the payment of principal or
interest on such securities or otherwise protect its investments. 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
B-21
<PAGE>
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.
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.
Because the market for high yield securities is still relatively new and
has not weathered a major economic recession, it is unknown what effects such a
recession might have on such securities. A widespread economic downturn could
result in increased defaults and losses.
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.
B-22
<PAGE>
For example, in the event of the bankruptcy or insolvency of the corporate
borrower, a loan participation may be subject to certain defenses by the
borrower as a result of improper conduct by the agent bank. Moreover, under the
terms of the loan participation, the High Yield Fund may be regarded as a
creditor of the agent bank (rather than of the underlying corporate borrower),
so that the High Yield Fund may also be subject to the risk that the agent bank
may become insolvent. The secondary market, if any, for these loan
participations is limited and any loan participations purchased by the High
Yield Fund will be regarded as illiquid.
For purposes of certain investment limitations pertaining to
diversification of the High Yield Fund's portfolio investments, the issuer of a
loan participation will be the underlying borrower. However, in cases where the
High Yield Fund does not have recourse directly against the borrower, both the
borrower and each agent bank and co-lender interposed between the High Yield
Fund and the borrower will be deemed issuers of a loan participation.
Obligations of the United States, Its Agencies, Instrumentalities and Sponsored
Enterprises
Each Underlying Fund may invest in U.S. government securities, which are
obligations issued or guaranteed by the U.S. government and its agencies,
instrumentalities or sponsored enterprises ("U.S. Government Securities"). 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 suitable secondary market, such participations are regarded as illiquid.
Each Underlying Fund may also purchase U.S. Government Securities in
private placements and 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").
B-23
<PAGE>
Bank Obligations
Certain of the Underlying Funds may invest in debt obligations issued or
guaranteed by United States and foreign banks. Bank obligations, including
without limitation, time deposits, bankers' acceptances and certificates of
deposit, may be general obligations of the parent bank or may be 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
B-24
<PAGE>
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. A
portion of the discount with respect to stripped tax-exempt securities or their
coupons may be taxable.
Zero Coupon Bonds
An Underlying Fund's investment 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 an
Underlying Fund defaults, the Fund may obtain no return at all on its
investment. Each Underlying 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 Underlying Fund's distribution obligations.
Variable and Floating Rate Securities
The interest rates payable on certain fixed-income securities in which an
Underlying Fund may invest are not fixed and may fluctuate based upon changes in
market rates. A variable rate obligation has an interest rate which is adjusted
at predesignated periods in response to changes in the market rate of interest
on which the 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 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.
B-25
<PAGE>
Custodial Receipts
Each Underlying Fund may invest in custodial receipts in respect of
securities issued or guaranteed as to principal and interest by the U.S.
government, its agencies, instrumentalities, political subdivisions or
authorities. Such custodial receipts evidence ownership of future interest
payments, principal payments or both on certain notes or bonds issued or
guaranteed as to principal and interest 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 in which the Short Duration Government, Core Fixed Income and High
Yield Funds may invest include private activity bonds, municipal leases,
certificates of participation, pre-refunded municipal securities and auction
rate 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.
B-26
<PAGE>
An entire issue of Municipal Securities may be purchased by one or a small
number of institutional investors such as the Short Duration Government, High
Yield and Core Fixed Income Funds. Thus, the issue may not be said to be
publicly offered. Unlike some securities that are not publicly offered, a
secondary market exists for many Municipal Securities that were not publicly
offered initially and such securities may be readily marketable.
The obligations of the issuer to pay the principal of and interest on a
Municipal Security are subject to the provisions of bankruptcy, insolvency and
other laws affecting the rights and remedies of creditors, such as the Federal
Bankruptcy Act, and laws, if any, that may be enacted by Congress or state
legislatures extending the time for payment of principal or interest or imposing
other constraints upon the enforcement of such obligations. There is also the
possibility that, as a result of litigation or other conditions, the power or
ability of the issuer to pay when due principal of or interest on a Municipal
Security may be materially affected.
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
B-27
<PAGE>
Trustees of the Trust, to be liquid securities for the purpose of such
limitation. In determining the liquidity of municipal lease obligations and
certificates of participation, the investment adviser will consider a variety of
factors including: (1) the willingness of dealers to bid for the security; (2)
the number of dealers willing to purchase or sell the obligation and the number
of other potential buyers; (3) the frequency of trades or quotes for the
obligation; and (4) the nature of the marketplace trades. In addition, the
investment adviser will consider factors unique to particular lease obligations
and certificates of participation affecting the marketability thereof. These
include the general creditworthiness of the issuer, the importance to the issuer
of the property covered by the lease and the likelihood that the marketability
of the obligation will be maintained throughout the time the obligation is held
by an Underlying Fund.
The Underlying Funds may purchase participations in Municipal Securities
held by a commercial bank or other financial institution. Such participations
provide an Underlying Fund with the right to a pro rata undivided interest in
the underlying Municipal Securities. In addition, 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
B-28
<PAGE>
Underlying Fund's portfolio are called prior to the maturity, the Underlying
Fund will be required to reinvest the proceeds on such securities at an earlier
date and may be able to do so only at lower yields, thereby reducing the
Underlying Fund's return on its portfolio securities.
Mortgage Loans and Mortgage-Backed Securities
General Characteristics. Certain of the 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 an Underlying 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 an Underlying 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 an Underlying 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.
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 Rate Mortgage Loans ("ARMs"). ARMs generally provide for a
fixed initial mortgage interest rate for a specified period of time. Thereafter,
the interest rates (the "Mortgage Interest Rates") may be subject to periodic
adjustment based on changes in the applicable index rate (the "Index Rate"). The
adjusted rate would be equal to the Index Rate plus a fixed percentage spread
over the Index Rate established for each ARM at the time of its origination.
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.
B-29
<PAGE>
Adjustable interest rates can cause payment increases that some mortgagors
may find difficult to make. However, certain ARMs may provide that the Mortgage
Interest Rate may not be adjusted to a rate above an applicable lifetime maximum
rate or below an applicable lifetime minimum rate for such ARM. Certain ARMs may
also be subject to limitations on the maximum amount by which the Mortgage
Interest Rate may adjust for any single adjustment period (the "Maximum
Adjustment"). Other ARMs ("Negatively Amortizing ARMs") may provide instead or
as well for limitations on changes in the monthly payment on such ARMs.
Limitations on monthly payments can result in monthly payments which are greater
or less than the amount necessary to amortize a Negatively Amortizing ARM by its
maturity at the Mortgage Interest Rate in effect in any particular month. In the
event that a monthly payment is not sufficient to pay the interest accruing on a
Negatively Amortizing ARM, any such excess interest is added to the principal
balance of the loan, causing negative amortization, and will be repaid through
future monthly payments. It may take borrowers under Negatively Amortizing ARMs
longer periods of time to build up equity and may increase the likelihood of
default by such borrowers. In the event that a monthly payment exceeds the sum
of the interest accrued at the applicable Mortgage Interest Rate and the
principal payment which would have been necessary to amortize the outstanding
principal balance over the remaining term of the loan, the excess (or
"accelerated amortization") further reduces the principal balance of the ARM.
Negatively Amortizing ARMs do not provide for the extension of their original
maturity to accommodate changes in their Mortgage Interest Rate. As a result,
unless there is a periodic recalculation of the payment amount (which there
generally is), the final payment may be substantially larger than the other
payments. These limitations on periodic increases in interest rates and on
changes in monthly payments 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
B-30
<PAGE>
market rate levels and tend to be somewhat less volatile. The degree of
volatility in the market value of an Underlying Fund's portfolio and, therefore,
in the net asset value of an Underlying Fund's shares will be a function of the
length of the interest rate reset periods and the degree of volatility in the
applicable indices.
Fixed-Rate Mortgage Loans. Generally, fixed-rate mortgage loans included
in a mortgage pool (the "Fixed-Rate Mortgage Loans") will bear simple interest
at fixed annual rates and have original terms to maturity ranging from 5 to 40
years. Fixed-Rate Mortgage Loans generally provide for monthly payments of
principal and interest in substantially equal installments for the term of the
mortgage note in sufficient amounts to fully amortize principal by maturity,
although certain Fixed-Rate Mortgage Loans provide for a large final "balloon"
payment upon maturity.
Legal Considerations of Mortgage Loans. The following is a discussion of
certain legal and regulatory aspects of the mortgage loans. 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 an Underlying Fund's
receipt of payments derived from principal or interest on mortgage loans
affected by such regulations.
1. Foreclosure. A foreclosure of a defaulted mortgage loan may be delayed due
to compliance with statutory notice or service of process provisions,
difficulties in locating necessary parties or legal challenges to the
mortgagee's right to foreclose. Depending upon market conditions, the
ultimate proceeds of the sale of foreclosed property may not equal the
amounts owed on the Mortgage-Backed Securities.
Furthermore, courts in some cases have imposed general equitable
principles upon foreclosure generally designed to relieve the borrower
from the legal effect of default and 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
B-31
<PAGE>
mortgage loan. If a court relieves a borrower's obligation to repay
amounts otherwise due on a mortgage loan, the mortgage loan servicer will
not be required to advance such amounts, and any loss may be borne by the
holders of securities backed by such loans. In addition, numerous federal
and state consumer protection laws impose penalties for failure to comply
with specific requirements in connection with origination and servicing of
mortgage loans.
4. "Due-on-Sale" Provisions. Fixed-rate mortgage loans may contain a
so-called "due-on-sale" clause permitting acceleration of the maturity of
the mortgage loan if the borrower transfers the property. The Garn-St.
Germain Depository Institutions Act of 1982 sets forth nine specific
instances in which no mortgage lender covered by that Act may exercise a
"due-on-sale" clause upon a transfer of property. The inability to enforce
a "due-on-sale" clause or the lack of such a clause in mortgage loan
documents may result in a mortgage loan being assumed by a purchaser of
the property that bears an interest rate below the current market rate.
5. Usury Laws. Some states prohibit charging interest on mortgage loans in
excess of statutory limits. If such limits are exceeded, substantial
penalties may be incurred and, in some cases, enforceability of the
obligation to pay principal and interest may be affected.
Government Guaranteed Mortgage-Backed Securities. There are several types
of guaranteed Mortgage-Backed Securities currently available, including
guaranteed mortgage pass-through certificates and multiple class securities,
which include guaranteed Real Estate Mortgage Investment Conduit Certificates
("REMIC Certificates"), collateralized mortgage obligations and stripped
Mortgage-Backed Securities. An Underlying Fund is permitted to invest in other
types of Mortgage-Backed Securities that may be available in the future to the
extent consistent with its investment policies and objective.
An Underlying 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
B-32
<PAGE>
by Fannie Mae. Each Pool consists of residential mortgage loans ("Mortgage
Loans") either previously owned by Fannie Mae or purchased by it in connection
with the formation of the Pool. The Mortgage Loans may be either conventional
Mortgage Loans (i.e., not insured or guaranteed by any U.S. Government agency)
or Mortgage Loans that are either insured by the FHA or guaranteed by the
Veterans Administration ("VA"). However, the Mortgage Loans in Fannie Mae Pools
are primarily conventional Mortgage Loans. The lenders originating and servicing
the Mortgage Loans are subject to certain eligibility requirements established
by Fannie Mae.
Fannie Mae has certain contractual responsibilities. With respect to each
Pool, Fannie Mae is obligated to distribute scheduled monthly installments of
principal and interest after Fannie Mae's servicing and guaranty fee, whether or
not received, to Certificate holders. Fannie Mae also is obligated to distribute
to holders of Certificates an amount equal to the full principal balance of any
foreclosed Mortgage Loan, whether or not such principal balance is actually
recovered. The obligations of Fannie Mae under its guaranty of the Fannie Mae
Certificates are obligations solely of Fannie Mae.
Freddie Mac Certificates. Freddie Mac is a publicly held U.S. Government
sponsored enterprise. The principal activity of Freddie Mac currently is the
purchase of first lien, conventional, residential mortgage loans and
participation interests in such mortgage loans and their resale in the form of
mortgage securities, primarily Freddie Mac Certificates. A Freddie Mac
Certificate represents a pro rata interest in a group of mortgage loans or
participation in mortgage loans (a "Freddie Mac Certificate group") purchased by
Freddie Mac.
Freddie Mac guarantees to each registered holder of a Freddie Mac
Certificate the timely payment of interest at the rate provided for by such
Freddie Mac Certificate (whether or not received on the underlying loans).
Freddie Mac also guarantees to each registered Certificate holder ultimate
collection of all principal of the related mortgage loans, without any offset or
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
B-33
<PAGE>
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,
certain of the Underlying Funds may invest in both government guaranteed and
privately issued mortgage pass-through securities ("Mortgage Pass-Throughs");
that is, fixed or adjustable rate Mortgage-Backed Securities which provide for
monthly payments that are a "pass-through" of the monthly interest and principal
payments (including any prepayments) made by the individual borrowers on the
pooled mortgage loans, net of any fees or other amounts paid to any guarantor,
administrator and/or servicer of the underlying mortgage loans.
The following discussion describes only a few of the wide variety of
structures of Mortgage Pass-Throughs that are available or may be issued.
Description of Certificates. Mortgage Pass-Throughs may be issued in one
or more classes of senior certificates and one or more classes of subordinate
certificates. Each such class may bear a different pass-through rate. Generally,
each certificate will evidence the specified interest of the holder thereof in
the payments of principal or interest or both in respect of the mortgage pool
comprising part of the trust fund for such certificates.
Any class of certificates may also be divided into subclasses entitled to
varying amounts of principal and interest. If a REMIC election has been made,
certificates of such subclasses may be entitled to payments on the basis of a
stated principal balance and stated interest rate, and payments among different
subclasses may be made on a sequential, concurrent, pro rata or disproportionate
basis, or any combination thereof. The stated interest rate on any such subclass
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
B-34
<PAGE>
related certificate-holders under the agreements pursuant to which such
certificates are issued. A rating organization's ratings take into consideration
the credit quality of the related mortgage pool, including any credit support
providers, structural and legal aspects associated with such certificates, and
the extent to which the payment stream on such mortgage pool is adequate to make
payments required by such certificates. A rating organization's ratings on such
certificates do not, however, constitute a statement regarding frequency of
prepayments on the related mortgage loans. In addition, the rating assigned by a
rating organization to a certificate does not address the remote possibility
that, in the event of the insolvency of the issuer of certificates where a
subordinated interest was retained, the issuance and sale of the senior
certificates may be recharacterized as a financing and, as a result of such
recharacterization, payments on such certificates may be affected.
Credit Enhancement. Credit support falls generally into two categories:
(i) liquidity protection and (ii) protection against losses resulting from
default by an obligor on the underlying assets. Liquidity protection refers to
the provision of advances, generally by the entity administering the pools of
mortgages, the provision of a reserve fund, or a combination thereof, to ensure,
subject to certain limitations, that scheduled payments on the underlying pool
are made in a timely fashion. Protection against losses resulting from default
ensures ultimate payment of the obligations on at least a portion of the assets
in the pool. Such credit support can be provided by, among other things, payment
guarantees, letters of credit, pool insurance, subordination, or any combination
thereof.
Subordination; Shifting of Interest; Reserve Fund. In order to achieve
ratings on one or more classes of Mortgage Pass-Throughs, one or more classes of
certificates may be subordinate certificates which provide that the rights of
the subordinate certificate-holders to receive any or a specified portion of
distributions with respect to the underlying mortgage loans may be 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
B-35
<PAGE>
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 to them and
will protect the senior certificate-holders against certain losses; however, in
certain circumstances the Reserve Fund could be depleted and temporary
shortfalls could result. In the event that 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
B-36
<PAGE>
special purpose subsidiaries of the foregoing. In general, CMOs are debt
obligations of a legal entity that are collateralized by, and multiple class
Mortgage-Backed Securities represent direct ownership interests in, a pool of
mortgage loans or Mortgage-Backed Securities the payments on which are used to
make payments on the CMOs or multiple class Mortgage-Backed Securities.
Fannie Mae REMIC Certificates are issued and guaranteed as to timely
distribution of principal and interest by Fannie Mae. In addition, Fannie Mae
will be obligated to distribute the principal balance of each class of REMIC
Certificates in full, whether or not sufficient funds are otherwise available.
Freddie Mac guarantees the timely payment of interest on Freddie Mac REMIC
Certificates and also guarantees the payment of principal as payments are
required to be made on the underlying mortgage participation certificates
("PCs"). PCs represent undivided interests in specified level payment,
residential mortgages or participations therein purchased by Freddie Mac and
placed in a PC pool. With respect to principal payments on PCs, Freddie Mac
generally guarantees ultimate collection of all principal of the related
mortgage loans without offset or deduction. Freddie Mac also guarantees timely
payment of principal of certain PCs.
CMOs and guaranteed REMIC Certificates issued by Fannie Mae and Freddie
Mac are types of multiple class Mortgage-Backed Securities. Investors may
purchase beneficial interests in REMICs, which are known as "regular" interests
or "residual" interests. The Underlying Funds do not intend to purchase residual
interests in REMICs. The REMIC Certificates represent beneficial ownership
interests in a REMIC trust, generally consisting of mortgage loans or Fannie
Mae, Freddie Mac or Ginnie Mae guaranteed Mortgage-Backed Securities (the
"Mortgage Assets"). The obligations of Fannie Mae or Freddie Mac under their
respective guaranty of the REMIC Certificates are obligations solely of Fannie
Mae or Freddie Mac, respectively.
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.
B-37
<PAGE>
Additional structures of CMOs and REMIC Certificates include, among
others, "parallel pay" CMOs and REMIC Certificates. Parallel pay CMOs or REMIC
Certificates are those which are structured to apply principal payments and
prepayments of the Mortgage Assets to two or more classes concurrently on a
proportionate or disproportionate basis. These simultaneous payments are taken
into account in calculating the final distribution date of each class.
A wide variety of REMIC Certificates may be issued in parallel pay or
sequential pay structures. These securities include accrual certificates (also
known as "Z-Bonds"), which only accrue interest at a specified rate until all
other certificates having an earlier final distribution date have been retired
and are converted thereafter to an interest-paying security, and planned
amortization class ("PAC") certificates, which are parallel pay REMIC
Certificates that generally require that specified amounts of principal be
applied on each payment date to one or more classes or REMIC Certificates (the
"PAC Certificates"), even though all other principal payments and prepayments of
the Mortgage Assets are then required to be applied to one or more other classes
of the Certificates. The scheduled principal payments for the PAC Certificates
generally have the highest priority on each payment date after interest due has
been paid to all classes entitled to receive interest currently. Shortfalls, if
any, are added to the amount payable on the next payment date. The PAC
Certificate payment schedule is taken into account in calculating the final
distribution date of each class of PAC. In order to create PAC tranches, one or
more tranches generally must be created that absorb most of the volatility in
the underlying mortgage assets. These tranches tend to have market prices and
yields that are much more volatile than other PAC classes.
Stripped Mortgage-Backed Securities. Certain of the 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
B-38
<PAGE>
issued by a financial institution unaffiliated with the trust or corporation, or
other credit enhancements may be present.
Certain Underlying Funds may invest in asset-backed securities. Like
Mortgage-Backed Securities, asset-backed securities are often subject to more
rapid repayment than their stated maturity date would indicate as a result of
the pass-through of prepayments of principal on the underlying loans. During
periods of declining interest rates, prepayment of loans underlying asset-backed
securities can be expected to accelerate. Accordingly, an Underlying Fund's
ability to maintain positions in such securities will be affected by reductions
in the principal amount of such securities resulting from prepayments, and its
ability to reinvest the returns of principal at comparable yields is subject to
generally prevailing interest rates at that time. To the extent that an
Underlying Fund invests in asset-backed securities, the values of such Fund's
portfolio securities will vary with changes in market interest rates generally
and the differentials in yields among various kinds of asset-backed securities.
Asset-backed securities present certain additional risks that are not
presented by Mortgage-Backed Securities because asset-backed securities
generally do not have the benefit of a security interest in collateral that is
comparable to Mortgage Assets. Credit card receivables are generally unsecured
and the debtors on such receivables are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set-off certain amounts owed on the credit cards, thereby reducing the
balance due. Automobile receivables generally are secured, but by automobiles
rather than residential real property. Most issuers of automobile receivables
permit the loan servicers to retain possession of the underlying obligations. If
the servicer were to sell these obligations to another party, there is a risk
that the purchaser would acquire an interest superior to that of the holders of
the asset-backed securities. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of the automobile receivables may not have a
proper security interest in the underlying automobiles. Therefore, there is the
possibility that, in some cases, recoveries on repossessed collateral may not be
available to support payments on these securities.
Futures Contracts and Options on Futures Contracts
Each Underlying Fund may purchase and sell futures contracts and may also
purchase and write options on futures contracts. CORE Large Cap Value, CORE
Large Cap Growth and CORE Small Cap Equity 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. An Underlying 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 an Underlying 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
B-39
<PAGE>
regulates activities of any foreign exchange or boards of trade, including the
execution, delivery and clearing of transactions, or has the power to compel
enforcement of the rules of a foreign exchange or board of trade or any
applicable foreign law. This is true even if the exchange is formally linked to
a domestic market so that a position taken on the market may be liquidated by a
transaction on another market. Moreover, such laws or regulations will vary
depending on the foreign country in which the foreign futures or foreign options
transaction occurs. For these reasons, persons who trade foreign futures or
foreign options contracts may not be afforded certain of the protective measures
provided by the Commodity Exchange Act, the CFTC's regulations and the rules of
the National Futures Association and any domestic exchange, including the right
to use reparations proceedings before the CFTC and arbitration proceedings
provided by the National Futures Association or any domestic futures exchange.
In particular, an Underlying 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 to offset a decline in the value of its current
portfolio securities through the sale of futures contracts. When interest rates
are falling or securities 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 purchase and sell futures contracts on a
specified currency in order to seek to increase total return or to hedge against
changes in currency exchange rates. An Underlying Fixed-Income Fund 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 markets are not normally held to maturity,
but are instead liquidated through offsetting transactions which may result in a
profit or a loss. While futures contracts on securities or currency will usually
be liquidated in this manner, an Underlying Fund may instead make or take
delivery of the underlying securities or currency whenever it appears
economically advantageous for the Underlying Fund to do so. A clearing
corporation associated with the exchange on which futures on securities or
currency 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 or rate of return on portfolio securities or securities that an Underlying
Fund proposes to acquire or the exchange rate of currencies in which portfolio
securities are denominated or quoted. 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 foreign currency rates that would adversely affect the U.S. dollar
value of the Fund's portfolio securities. Such
B-40
<PAGE>
futures contracts may include contracts for the future delivery of securities
held by a Fund or securities with characteristics similar to those of a Fund's
portfolio securities. Similarly, certain Underlying Funds may sell futures
contracts on any currency in which its portfolio securities are quoted or
denominated or in one currency to seek to hedge against fluctuations in the
value of securities quoted or denominated in a different currency if there is an
established historical pattern of correlation between the two currencies. If, in
the opinion of an Underlying Fund's investment adviser, there is a sufficient
degree of correlation between price trends for an Underlying Fund's portfolio
securities and futures contracts based on other financial instruments,
securities indices or other indices, the Fund may also enter into such futures
contracts as part of its hedging strategy. Although under some circumstances
prices of securities in an Underlying Fund's portfolio may be more or less
volatile than prices of such futures contracts, its investment adviser will
attempt to estimate the extent of this volatility difference based on historical
patterns and compensate for any such differential by having the Fund enter into
a greater or lesser number of futures contracts or by attempting to achieve only
a partial hedge against price changes affecting the Fund's securities portfolio.
When hedging of this character is successful, any depreciation in the value of
portfolio securities will be substantially offset by appreciation in the value
of the futures position. On the other hand, any unanticipated appreciation in
the value of 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 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.
B-41
<PAGE>
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option on the same financial
instrument. There is no guarantee that such closing transactions can be
effected. An Underlying Fund's ability to establish and close out positions on
such options will be subject to the development and maintenance of a liquid
market.
Other Considerations. An Underlying Fund will engage in futures
transactions and 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 an Underlying 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 an Underlying Fund's trading in
futures depends upon the ability of the applicable investment adviser to analyze
correctly the futures markets.
Options on Securities and Securities Indices
Writing Covered Options. Certain of the Underlying Funds may write (sell)
covered call and put options on any securities in which they may invest or on
any securities index based on securities in which it may invest. An Underlying
Fund may purchase and write such options on
B-42
<PAGE>
securities that are listed on national domestic securities exchanges or foreign
securities exchanges or traded in the over-the-counter market. A call option
written by an Underlying Fund obligates such Fund to sell specified securities
to the holder of the option at a specified price if the option is exercised at
any time before the expiration date. All call options written by an Underlying
Fund are covered, which means that such Fund will own the securities subject to
the option as long as the option is outstanding or such Fund will use the other
methods described below. An Underlying Fund's purpose in writing covered call
options is to realize greater income than would be realized on portfolio
securities transactions alone. However, an Underlying Fund may forego the
opportunity to profit from an increase in the market price of the underlying
security.
A put option written by an Underlying Fund would obligate such Fund to
purchase specified securities from the option holder at a specified price if the
option is exercised at any time before the expiration date. All put options
written by an Underlying Fund would be covered, which means that such Fund will
segregate cash or liquid assets with a value at least equal to the exercise
price of the put option or will use the other methods described below. 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 or by an offsetting forward contract 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 consisting 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 settlement 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 Underlying Fund) upon conversion
or exchange of other securities in its portfolio. An Underlying Fund may also
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-
B-43
<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. Each Underlying Fund (other than Financial Square
Prime Obligations 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 may purchase call options in anticipation of an
increase, or put options in anticipation of a decrease ("protection puts"), 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 on the purchase of a
call option 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. 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. Each Underlying Fixed-Income Fund and the Real Estate
Securities Fund may enter into options on the yield "spread" or differential
between two securities. Such transactions are referred to as "yield curve"
options. In contrast to other types of options, a yield curve option is based on
the difference between the yields of designated securities, rather than the
prices of the individual securities, and is settled through cash payments.
Accordingly, a yield curve option is profitable to the holder if this
differential widens (in the case of a call) or narrows (in the case of a put),
regardless of whether the yields of the underlying securities increase or
decrease.
An Underlying Fund may purchase or write yield curve options for the same
purposes as other options on securities. For example, an Underlying Fund may
purchase a call option on the yield spread between two securities if the Fund
owns one of the securities and anticipates purchasing the other security and
wants to hedge against an adverse change in the yield spread
B-44
<PAGE>
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 as the market for other types of options.
Risks Associated with Options Transactions. There is no assurance that a
liquid secondary market on a domestic or foreign options exchange will exist for
any particular exchange-traded option or at any particular time. If an
Underlying Fund is unable to effect a closing purchase transaction with respect
to covered options it has written, the Fund will not be able to sell the
underlying securities or dispose of segregated assets until the options expire
or are exercised. Similarly, if an Underlying Fund is unable to effect a closing
sale transaction with respect to options it has purchased, it will have to
exercise the options in order to realize any profit and will incur transaction
costs upon the purchase or sale of underlying securities.
Reasons for the absence of a liquid secondary market on an exchange
include the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening or closing
transactions or both; (iii) trading halts, suspensions or other restrictions may
be imposed with respect to particular classes or series of options; (iv) unusual
or unforeseen circumstances may interrupt normal operations on an exchange; (v)
the facilities of an exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume; or (vi) one or more
exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that exchange that had been issued by the Options Clearing
Corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
An Underlying Fund may purchase and sell both options that are traded on
U.S. and foreign exchanges and options traded over-the-counter with
broker-dealers who make markets in these options. The ability to terminate
over-the-counter options is more limited than with
B-45
<PAGE>
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 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 an investment adviser to predict future
price fluctuations and the degree of correlation between the options and
securities markets. If an Underlying Fund's 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 an Underlying 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 an Underlying 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, the
opportunity to invest in foreign countries with economic policies or business
cycles different from those of the United States and the opportunity to reduce
fluctuations in portfolio value by taking advantage of foreign securities
markets that do not necessarily move in a manner parallel to U.S. markets.
B-46
<PAGE>
Investing in foreign securities also involves, however, certain special
risks, including those set forth below, which are not typically associated with
investing in U.S. dollar-denominated or quoted securities of U.S. issuers.
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. To the extent that a Fund is fully invested in
foreign securities while also maintaining currency positions, it may be exposed
to greater combined risk. An Underlying Fund may be subject to currency exposure
independent of its securities positions.
Currency exchange rates may fluctuate significantly over short periods of
time. They generally are determined by the forces of supply and demand in the
foreign exchange markets and the relative merits of investments in different
countries, actual or anticipated changes in interest rates and other complex
factors, as seen from an international perspective. Currency exchange rates also
can be affected unpredictably by intervention by U.S. or foreign governments or
central banks or the failure to intervene or by currency controls or political
developments in the United States or abroad.
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. For example, there may
be no comparable provisions under certain foreign laws to insider trading and
similar investor protection securities laws that apply with respect to
securities transactions consummated in the United States.
Foreign markets also have different clearance and settlement procedures,
and in certain markets there have been times when settlements have been unable
to keep pace with the volume of securities transactions, making it difficult to
conduct such transactions. Such delays in settlement could result in temporary
periods when some of an Underlying Fund's assets are uninvested and no return is
earned on such assets. The inability of an Underlying Fund to make intended
security purchases due to settlement problems could cause the Fund to miss
attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result either in losses to an
Underlying Fund due to subsequent declines in value of the portfolio securities
or, if the Fund has entered into a contract to sell the securities, could result
in possible liability to the purchaser. In addition, with respect to certain
foreign countries, there is the possibility of expropriation or confiscatory
taxation, political or social instability, or diplomatic developments which
could affect an Underlying Fund's investments in those
B-47
<PAGE>
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. 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, a Fund may avoid currency risks during the settlement
period for purchases and sales.
As described more fully below, certain of the 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 Value, Capital Growth and Real Estate Securities Funds may invest, to a
lesser extent, in equity and
B-48
<PAGE>
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, and
in fixed income securities quoted or denominated in a currency other than U.S.
dollars.
Investments in debt securities of emerging market issuers involve special
risks. The development of a market for such securities is a relatively recent
phenomenon, and 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. In certain countries, there may
be few publicly traded securities, and the market may be dominated by a few
issuers or sectors. 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 adverse 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. The limited size of many of the
securities markets can cause prices to be erratic for reasons apart from factors
that affect the soundness and competitiveness of the securities' issuers. For
example, prices may be unduly influenced by traders who control prices in these
markets. 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 an Underlying 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
B-49
<PAGE>
laws and regulations. In circumstances where adequate laws exist, it may not be
possible to obtain swift and equitable enforcement of the law.
With respect to investments in certain emerging market countries, archaic
legal systems may have an adverse impact on a Fund. For example, while the
potential liability of a shareholder in a U.S. corporation with respect to acts
of the corporation is generally limited to the amount of the shareholder's
investment, the notion of limited liability is less clear in certain emerging
market countries. Similarly, the rights of investors in emerging market
companies may be more limited than those of shareholders of U.S. corporations.
Foreign investment in the securities markets of certain emerging countries
is restricted or controlled to varying degrees. These restrictions may limit an
Underlying Fund's investment in certain emerging countries and may increase the
expenses of the Fund. Certain emerging countries require governmental approval
prior to investments by foreign persons or limit investment by foreign persons
to only a specified percentage of an issuer's outstanding securities or a
specific class of securities which may have less advantageous terms (including
price) than securities of the company available for purchase by nationals. In
addition, the repatriation of both investment income and capital from several of
the emerging countries 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; (v) ethnic, religious and racial disaffection or
conflict; and (vi) the absence of developed legal structures governing foreign
private investments and private property. 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 Underlying
Funds' assets. For example, most Eastern European countries have had a centrally
planned, socialist economy since shortly after World War II. The governments of
a number of Eastern European countries currently are implementing reforms
directed at political and economic liberalization, including efforts to
decentralize the economic decision-making process and move towards a market
economy. To the extent an Underlying Fund invests in an issuer located (1) in a
country which was formerly part of Yugoslavia, (2) in a country that shares a
border with the former country of Yugoslavia, (3) in a country which is a member
of the North Atlantic Treaty Organization ("NATO"), or (4) in other countries in
Europe, such Fund could suffer investment losses as a result of the recent
conflict between Serbia and the members of NATO. The NATO bombing campaign and
proposed oil embargo (if implemented) could adversely affect an Underlying
Fund's investments. The extent to which this conflict may broaden and involve
other countries such as Russia is unpredictable, and the impact this conflict
may have on an Underlying Fund is uncertain.
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
B-50
<PAGE>
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. 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
B-51
<PAGE>
ministers come and go, because of politics as well as personal scandals. While
there appears to be no reason for anticipating civic unrest, it is impossible to
know when the political instability will end and what trade and fiscal policies
might be pursued by the government that emerges.
Japan's heavy dependence on international trade has been adversely
affected by trade tariffs and other protectionist measures as well as the
economic condition of its trading partners. While Japan subsidizes its
agricultural industry, only 19% of its land is suitable for cultivation and it
is only 50% self-sufficient in food production. Accordingly, it is highly
dependent on large imports of wheat, sorghum and soybeans. In addition,
industry, its most important economic sector, depends on imported raw materials
and fuels, including iron ore, copper, oil and many forest products. Japan's
high volume of exports, such as automobiles, machine tools and semiconductors,
have caused trade tensions, particularly with the United States. Some trade
agreements, however, have been implemented to reduce these tensions. The
relaxing of official and de facto barriers to imports, or hardships created by
any pressures brought by trading partners, could adversely affect Japan's
economy. A substantial rise in world oil or commodity prices could also have a
negative affect. The strength of the yen itself may prove an impediment to
strong continued exports and economic recovery, because it makes Japanese goods
sold in other countries more expensive and reduces the value of foreign earnings
repatriated to Japan. Because the Japanese economy is so dependent on exports,
any fall-off in exports may be seen as a sign of economic weakness, which may
adversely affect the market.
Geologically, Japan is located in a volatile area of the world, and has
historically been vulnerable to earthquakes, volcanoes and other natural
disasters. As demonstrated by the Kobe earthquake in January of 1995, in which
5,000 people were killed and billions of dollars of damage was sustained, these
natural disasters can be significant enough to affect the country's economy.
Sovereign Debt Obligations. Investments in sovereign debt obligations
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
B-52
<PAGE>
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.
Brady Bonds. Certain foreign debt obligations, customarily referred to as
"Brady Bonds," are created through the exchange of existing commercial bank
loans to foreign entities for new obligations in connection with debt
restructuring under a plan introduced by former U.S. Secretary of the Treasury,
Nicholas F. Brady (the "Brady Plan"). Brady Bonds may be fully or partially
collateralized or uncollateralized and issued in various currencies (although
most are U.S. dollar denominated). In the event of a default on collateralized
Brady Bonds for which obligations are accelerated, the collateral for the
payment of principal will not be distributed to investors, nor will such
obligations be sold and the proceeds distributed. The collateral will be held by
the collateral agent to the scheduled maturity of the defaulted Brady Bonds,
which will continue to be outstanding, at which time the face amount of the
collateral will equal the principal payments which would have then been due on
the Brady Bonds in the normal course. In light of the residual risk of the Brady
Bonds and, among other factors, the history of default with respect to
commercial bank loans by public and private entities of countries issuing Brady
Bonds, investments in Brady Bonds may be speculative.
Forward Foreign Currency Exchange Contracts. Certain of the Underlying
Funds may enter into forward foreign currency exchange contracts for hedging
purposes and to seek to protect against changes in future foreign currency
exchange rates. Certain of the Underlying 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 purchase transaction involving the purchase or
sale of an offsetting contract. Closing purchase transactions with respect to
forward contracts are often, but not always, effected with the currency trader
who is a party to the original forward contract.
An Underlying Fund may enter into forward foreign currency exchange
contracts in several circumstances. First, when an Underlying Fund enters into a
contract for the purchase or sale of a security denominated or quoted in a
foreign currency, or when the Fund anticipates the receipt in a foreign currency
of dividend or interest payments on such a security which it holds, the Fund may
desire to "lock in" the U.S. dollar price of the security or the U.S. dollar
equivalent of such dividend or interest payment, as the case may be. By entering
into a forward contract for the purchase or sale, for a fixed amount of U.S.
dollars, of the amount of foreign currency involved in the underlying
transactions, the Underlying Fund may 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
B-53
<PAGE>
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.
Certain of the Underlying 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 an Underlying 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 an Underlying 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 Underlying 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 Underlying Fund's total
assets committed to the consummation of forward foreign currency exchange
contracts requiring the Fund to purchase foreign currencies and foreclosed
contracts entered into to seek to increase total return. The segregated assets
will be market-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 an Underlying 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. Certain of the Underlying 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
B-54
<PAGE>
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. Certain of the
Underlying Funds may, to the extent they invest in foreign securities, 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 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.
Options on currency may be used for either hedging or cross-hedging
purposes, which involves writing or purchasing options on one currency to seek
to hedge against changes in exchange rates for a different currency with a
pattern of correlation or to seek to increase total return when an 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 included in the
Underlying Fund's portfolio.
A call option written by an Underlying Fund obligates such Fund to sell a
specified currency to the holder of the option at a specified price if the
option is exercised at any time
B-55
<PAGE>
before the expiration date. A put option written by an Underlying Fund obligates
such Fund to purchase a 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 written 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
may enter into closing sale transactions in order to realize gains or minimize
losses on purchased options.
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 an 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 the 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 a 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 U.S. dollar value of an Underlying Fund's portfolio securities
due to currency exchange rate fluctuations. An Underlying Fund would ordinarily
realize a gain if, during the option period, the value of the underlying
currency decreased below the exercise price sufficiently to more than cover the
premium and transaction costs; otherwise the Underlying 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.
B-56
<PAGE>
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. Although a Fund will
generally purchase or write only those options for which there appears to be an
active secondary market, there is no assurance that a liquid secondary market on
an exchange will exist for any particular option, or at any particular time. For
some options, no secondary market on an exchange may exist. 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.
Mortgage Dollar Rolls
Certain of the Underlying 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
B-57
<PAGE>
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 stocks in an issuer's capital
structure and consequently entail less risk than the issuer's common stock. In
evaluating a convertible security, an Underlying Fund's investment adviser will
give primary emphasis to the attractiveness of the Underlying common stock.
Convertible debt securities are equity investments for purposes of each Fund's
investment policies.
Preferred Securities
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 preferred stock on the occurrence of an event of
default (such as a covenant default or filing of a bankruptcy petition) or other
non-compliance by the issuer with the terms of the preferred stock. Often,
however, on the occurrence of any such event of default or non-compliance by the
issuer, preferred stockholders will be entitled to gain representation on the
issuer's board of directors or increase their existing board representation. In
addition, preferred stockholders may be granted voting rights with respect to
certain issues on the occurrence of any event of default.
B-58
<PAGE>
Currency Swaps, Mortgage Swaps, Credit Swaps, Index Swaps and Interest Rate
Swaps, Caps, Floors and Collars
Certain Underlying Funds may enter into currency swaps for both hedging
purposes and to seek to increase total return. In addition, certain of the
Underlying Fixed-Income Funds and Real Estate Securities Fund 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. 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 cap entitles the purchaser, to the
extent that a specified index exceeds a predetermined interest rate, to receive
payment of interest on a notional principal amount from the party selling such
interest rate cap. The purchase of an interest rate floor entitles the
purchaser, to the extent that a specified index falls below a predetermined
interest rate, to receive payments of interest on a notional principal amount
from the party selling the interest rate floor. An interest rate collar is the
combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates.
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, mortgage and index 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. In
contrast, currency swaps usually involve the delivery of the a gross payment
stream in one designated currency in exchange for the gross payment stream in
another designated currency. Therefore, the entire principal value of a currency
swap is subject to the risk that the other party to the swap will default on its
contractual delivery obligations. To the extent that an Underlying Fund's
potential exposure in a transaction involving a swap or an interest rate floor,
cap or collar is covered by the segregation of cash or liquid assets or
otherwise, 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.
B-59
<PAGE>
An Underlying Equity Fund will not enter into swap transactions unless the
unsecured commercial paper, senior debt or claims paying ability of the other
party thereto is considered to be investment grade by its investment adviser.
The Underlying Fixed-Income Funds will not enter into any mortgage, credit or
interest rate swap transactions unless the unsecured commercial paper, senior
debt or claims-paying ability of the other party is rated either A or A-1 or
better by Standard & Poor's or A 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
Each Underlying Equity Fund 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. Equity swaps may also be used for hedging purposes or
to seek to increase total return. The counterparty to an equity swap contract
will typically be a bank, investment banking firm or broker/dealer. Equity swaps
may be structured in different ways. For example, a counterparty may agree to
pay the Underlying Fund the amount, if any, by which the notional amount of the
equity swap contract would have increased in value had it been invested in the
particular stocks, plus the dividends that would have been received on those
stocks. In these cases, the Underlying Fund may 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 the 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. In other cases, the counterparty and the
Underlying Fund may each agree to pay the other the difference between the
relative
B-60
<PAGE>
investment performances that would have been achieved if the notional amount of
the equity swap contract had been invested in different stocks (or indices of
stocks).
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. Inasmuch as these transactions are
entered into for hedging purposes or are offset by segregated cash or liquid
assets to cover the Underlying Fund's potential exposure, 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.
An Underlying Fund will not enter into equity swap transactions unless the
unsecured commercial paper, senior debt or claims paying ability of the other
party thereto is considered to be investment grade by the investment adviser.
Real Estate Investment Trusts
The 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-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.
B-61
<PAGE>
Lending of Portfolio Securities
Each Underlying Fund 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 or letters of intent 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
Each Underlying Fund may purchase securities on a when-issued basis or
purchase or sell securities on a forward commitment basis. These transactions
involve a commitment by 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. An Underlying
Fund may also sell securities it has committed to purchase before those
securities are delivered to the Fund on the settlement date. The Underlying
Funds may 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 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.
B-62
<PAGE>
Investment in Unseasoned Companies
Each Underlying Fund may invest a portion of its 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 all 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 management 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 management fees paid by such money market fund
to the investment adviser or its affiliates.
Each 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 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
B-63
<PAGE>
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.
Certain 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. Certain 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
Each Underlying 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. Certain Underlying Funds may also enter into
repurchase agreements involving certain foreign government securities. 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 Underlying 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 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
B-64
<PAGE>
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 management 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
Certain Underlying Funds may borrow money 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, its
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 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. Certain commercial paper issued in reliance on Section 4(2) of the 1933
Act is treated like Rule 144A Securities. The Trustees have adopted guidelines
under which the Underlying Funds' investment advisers determine and monitor the
liquidity of the Funds' portfolio securities. This investment practice could
have the effect of increasing the level of illiquidity in an Underlying Fund to
the extent that qualified institutional buyers become for a time uninterested in
purchasing these instruments.
The purchase price and subsequent valuation of restricted securities may
reflect a discount from the price at which such securities trade when they are
not restricted, since the restriction may make them less liquid. The amount of
the discount from the prevailing market
B-65
<PAGE>
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 without the affirmative vote of the
holders of a majority (as defined in the Act) of the outstanding voting
securities of the affected Portfolio. The investment objective of each Portfolio
and all other investment policies or practices of each Portfolio 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 Portfolio present at a meeting,
if the holders of more than 50% of the outstanding shares of the Trust or a
Portfolio are present or represented by proxy, or (b) more than 50% of the
shares of the Trust or a Portfolio. 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 Portfolio. With respect to the Portfolios' 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 Portfolio may not:
(1) make any investment inconsistent with the Portfolio's
classification as a diversified company;
(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
instrumentalities). (For the purposes of this restriction,
investment companies and 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
B-66
<PAGE>
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 Portfolio 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 Portfolio may, to the
extent permitted by applicable law, borrow up to an additional
5% of its total assets for temporary purposes, (c) the
Portfolio may obtain such short-term credits as may be
necessary for the clearance of purchases and sales of
portfolio securities, (d) the Portfolio may purchase
securities on margin to the extent permitted by applicable law
and (e) the Portfolio 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 Portfolio'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 Portfolio may be
deemed to be an underwriting;
(6) purchase, hold or deal in real estate, although a Portfolio
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 Portfolio as a result of
the ownership of securities;
(7) invest in commodities or commodity contracts, except that the
Portfolio 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 Portfolio 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 Portfolio.
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.
B-67
<PAGE>
A Portfolio may not:
(a) Invest in companies for the purpose of exercising control or
management (but this does not prevent a 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 Portfolio's net assets in illiquid
investments including repurchase agreements with a notice or demand
period of 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 Portfolio'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 Portfolios may invest have adopted
certain investment restrictions which may be more or less restrictive than those
listed above, thereby allowing a 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 together with their respective positions and a brief statement of
their principal occupations during the past five years. Trustees and officers
deemed to be "interested persons" of the Trust for purposes of the Act are
indicated by an asterisk.
B-68
<PAGE>
Name, Age Positions Principal Occupation(s)
And Address With Trust During Past 5 Years
- ----------- ---------- ---------------------
Ashok N. Bakhru, 57 Chairman Trustee, Chairman of the Board
P.O. Box 143 & Trustee and Trustee - Goldman Sachs
Lima, PA 19037 Trust (registered investment
company); President, ABN
Associates (July 1994 -March 1996
and November 1998 to present);
Executive Vice President -
Finance and Administration and
Chief Financial Officer, Coty
Inc. (manufacturer of fragrances
and cosmetics) (April
1996-November 1998); 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); Director, Private
Equity Investors - III (since
November 1998); Trustee, Citizens
Scholarship Foundation of America
(since 1998).
B-69
<PAGE>
Name, Age Positions Principal Occupation(s)
And Address With Trust During Past 5 Years
- ----------- ---------- ---------------------
*David B. Ford, 53 Trustee Trustee - Goldman Sachs Trust
One New York Plaza (registered investment company);
New York, NY 10004 Director, Commodities Corp. LLC
(futures and commodities traders)
(since April 1997); Managing
Director, J. Aron & Company
(commodity dealer and risk
management adviser) (since
November 1996); Managing
Director, Goldman Sachs & Co.
Investment Banking Division
(since November 1996); Chief
Executive Officer and Director,
CIN Management (investment
adviser) (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 Asset Management Division
(since November 1995); Co-Head
and Director, Goldman Sachs Funds
Management Inc. (since November
1995 and December 1994,
respectively); and Chairman and
Director, Goldman Sachs Asset
Management Japan Limited (since
November 1994).
*Douglas C. Grip, 37 Trustee Trustee and President - Goldman
One New York Plaza & President Sachs Trust (registered
New York, NY 10004 investment company); Managing
Director, Goldman Sachs Asset
Management Division (since
November 1997); President,
Goldman Sachs Fund Group (since
April 1996); and President, MFS
Retirement Services Inc., of
Massachusetts Financial Services
(prior thereto).
B-70
<PAGE>
Name, Age Positions Principal Occupation(s)
And Address With Trust During Past 5 Years
- ----------- ---------- ---------------------
*John P. McNulty, 46 Trustee Trustee - Goldman Sachs Trust
One New York Plaza (registered investment company);
New York, NY 10004 Managing Director, Goldman Sachs
(since November 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); Co-Head,
GSAM (November 1995 to present);
Director, Global Capital
Reinsurance (insurance) (since
1989); Director, Commodities
Corp. LLC (since April 1997); and
Limited Partner of Goldman Sachs
(1994 - November 1995) and
Trustee- Trust for Credit Unions
(registered investment company)
(since January 1996).
Mary P. McPherson, 63 Trustee Vice President and Senior
The Andrew W. Mellon Program Officer, The Andrew W.
Foundation Mellon Foundation (provider of
140 East 62nd Street grants for conservation,
New York, NY 10021 environmental and educational
purposes) (since October 1997);
President of Bryn Mawr College
(1978-1997); Director, Smith
College (since 1998); Director,
Josiah Macy, Jr. Foundation
(health education programs)
(since 1977); Director of the
Philadelphia Contributionship
(insurance) (since 1985);
Director, Amherst College
(1986-1998); Director, Dayton
Hudson Corporation (general
merchandising retailing)
(1988-1997); Director of The
Spenser Foundation (educational
research) (since 1993); and
member of PNC Advisory Board
(banking) (since 1993).
B-71
<PAGE>
Name, Age Positions Principal Occupation(s)
And Address With Trust During Past 5 Years
- ----------- ---------- ---------------------
*Alan A. Shuch, 49 Trustee Trustee - Goldman Sachs Trust
One New York Plaza (registered investment company);
New York, NY 10004 Limited Partner, Goldman Sachs
(since December 1994); Consultant
to GSAM (since December 1994);
Director, Chief Operating Officer
and Vice President of Goldman
Sachs Funds Management Inc. (from
November 1993 - November 1994);
Chairman and Director, Goldman
Sachs Asset Management - Japan
Limited (November 1993 - November
1994); Director, Goldman Sachs
Asset Management International
(November 1993 - November 1994);
and General Partner, Goldman
Sachs & Co. Investment Banking
Division (December 1986 -November
1994).
Jackson W. Smart, Jr., 68 Trustee Trustee - Goldman Sachs Trust
One Northfield Plaza, Suite (registered investment company);
218 Chairman, Executive Committee
Northfield, IL 60093 and Director, 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)
(October 1988 - December 1997);
Director, Federal Express
Corporation (NYSE) (since 1976);
Director, Evanston Hospital
Corporation (since 1980).
B-72
<PAGE>
Name, Age Positions Principal Occupation(s)
And Address With Trust During Past 5 Years
- ----------- ---------- ---------------------
William H. Springer, 69 Trustee Trustee - Goldman Sachs Trust
701 Morningside Drive (registered investment company);
Lake Forest, IL 60045 Director, The Walgreen Co. (a
retail drug store business)
(since April 1988); Director of
Baker, Fentress & Co. (a
closed-end, non-diversified
management investment company)
(April 1992 - present); and
Chairman and Trustee, Northern
Institutional Funds (since April
1984).
Richard P. Strubel, 59 Trustee Trustee - Goldman Sachs Trust
737 N. Michigan Ave., Suite (registered investment company);
1405 Director, Gildan Activewear Inc.
Chicago, IL 60611 (since February 1999); Managing
Director, 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); and Trustee,
Northern Institutional Funds
(since December 1982).
*Nancy L. Mucker, 49 Vice President Vice President - Goldman Sachs
4900 Sears Tower Trust (registered investment
Chicago, IL 60606 company); Vice President,
Goldman Sachs (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);
New York, NY 10004 Vice President, Goldman Sachs
(since July 1995); and Banking
Director, Investors Bank and
Trust (November 1993 - July
1995).
B-73
<PAGE>
Name, Age Positions Principal Occupation(s)
And Address With Trust During Past 5 Years
- ----------- ---------- ---------------------
*James A. Fitzpatrick, 39 Vice President Vice President - Goldman Sachs
4900 Sears Tower Trust (registered investment
Chicago, IL 60606 company); Vice President,
Goldman Sachs (since 1998); Vice
President of GSAM (since April
1997); Vice President and General
Manager, First Data Corporation -
Investor Services Group (1994 to
1997).
*Jesse Cole, 35 Vice President Vice President - Goldman Sachs
4900 Sears Tower Trust (registered investment
Chicago, IL 60606 company); Vice President, GSAM
(June 1998 to Present); Vice
President, AIM Management Group,
Inc. (investment advisor) (April
1996-June 1998); and Assistant
Vice President, The Northern
Trust Company (June 1987-April
1996).
*Philip V. Giucace, Jr., 37 Assistant Assistant Treasurer - Goldman
One New York Plaza Treasurer Sachs Trust (registered
New York, NY 10004 investment company); Vice
President, Goldman Sachs (May
1992-Present).
*Dee Moran, 33 Assistant Assistant Treasurer - Goldman
One New York Plaza Treasurer Sachs Trust (registered
New York, NY 10004 investment company) (since
1999); Vice President, Mutual
Fund Administration, GSAM
(since 1995).
*Adrien Deberghes, 31 Assistant Assistant Treasurer - Goldman
One New York Plaza Treasurer Sachs Trust (registered
New York, NY 10004 investment company) (since
1999); Vice President, Mutual
Fund Administration, GSAM
(since 1998); Senior Associate,
GSAM (1997-1998).
*Anne Marcel, 40 Vice President Vice President - Goldman Sachs
4900 Sears Tower Trust (registered investment
Chicago, IL 60606 company); Vice President, GSAM
(June 1998-Present); and Vice
President, Stein Roe & Farnham,
Inc. (October 1992-June 1998).
*Michael J. Richman, 38 Secretary Secretary - Goldman Sachs Trust
85 Broad Street (registered investment company);
New York, NY 10004 General Counsel of the Funds
Group of GSAM (since December
1997); Associate General Counsel
of GSAM (February 1994 -December
1997); Counsel to the Funds
Group, GSAM (June 1992 -December
1997); Associate General Counsel,
Goldman Sachs (since December
1998); Vice President of Goldman
Sachs (since June 1992); and
Assistant General Counsel of
Goldman Sachs (June 1992 -
December 1998).
B-74
<PAGE>
Name, Age Positions Principal Occupation(s)
And Address With Trust During Past 5 Years
- ----------- ---------- ---------------------
*Howard B. Surloff, 33 Assistant Assistant Secretary - Goldman
85 Broad Street Secretary Sachs Trust (registered
New York, NY 10004 investment company); Assistant
General Counsel, GSAM and
Associate General Counsel to the
Funds Group (since December
1997); Assistant General Counsel
and Vice President, Goldman Sachs
(since November 1993 and May
1994, respectively); Counsel to
the Funds Group, GSAM (November
1993 - December 1997); and
Associate of Shereff, Friedman,
Hoffman & Goodman (October 1990
to November 1993).
*Valerie A. Zondorak, 33 Assistant Assistant Secretary - Goldman
85 Broad Street Secretary Sachs Trust (registered
New York, NY 10004 investment company); Assistant
General Counsel, GSAM and
Assistant General Counsel to the
Funds Group (since December
1997); Vice President and
Assistant General Counsel,
Goldman Sachs (since March 1997);
Assistant General Counsel,
Goldman Sachs (since December
1997); Counsel to the Funds
Group, GSAM (March 1997 -December
1997); and Associate of Shereff,
Friedman, Hoffman & Goodman
(September 1990 to February
1997).
*Deborah A. Farrell, 27 Assistant Assistant Secretary - Goldman
85 Broad Street Secretary Sachs Trust (registered
New York, NY 10004 investment company); Legal
Products Analyst, Goldman Sachs
(since December 1998); Legal
Assistant, Goldman Sachs (January
1996 - December 1998); Assistant
Secretary to the Funds Group
(1996 to present); Executive
Secretary, Goldman Sachs (January
1994 - January 1996); and Legal
Secretary, Cleary, Gottlieb,
Steen and Hamilton (September
1990 to January 1994).
B-75
<PAGE>
Name, Age Positions Principal Occupation(s)
And Address With Trust During Past 5 Years
- ----------- ---------- ---------------------
*Kaysie P. Uniacke, 38 Assistant Assistant Secretary - Goldman
One New York Plaza Secretary Sachs Trust (registered
New York, NY 10004 investment company); Managing
Director, GSAM (since 1997); Vice
President and Senior Portfolio
Manager GSAM (1988 to 1997).
*Elizabeth D. Anderson, 29 Assistant Assistant Secretary - Goldman
One New York Plaza Secretary Sachs Trust (registered
New York, NY 10004 investment company); Portfolio
Manager, GSAM (since April 1996);
Junior Portfolio Manager, GSAM
(1995 - April 1996); Funds
Trading Assistant, GSAM (1993 -
1995); Compliance Analyst,
Prudential Insurance (1991 -
1993).
*Amy E. Belanger, 29 Assistant Assistant Secretary - Goldman
85 Broad Street Secretary Sachs Trust (registered
New York, NY 10004 investment company) (since
1999); Counsel, Goldman Sachs
(since 1998); Associate,
Dechert Price & Rhoads
(September 1996-1998).
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.
B-76
<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 ended
December 31, 1998:
Pension or Total
Retirement Compensation
Benefits from Goldman Sachs
Aggregate Accrued as Funds Complex
Compensation Part of (including the
Name of Trustee from the Portfolios/2/ Trust's Expenses Trust)/3/
- --------------- -------------------- ---------------- -------
Ashok N. Bakhru/1/ $0 $117,065
David B. Ford 0 0 0
Douglas C. Grip 0 0 0
John P. McNulty 0 0 0
Mary P. McPherson 0 0 90,875
Alan A. Shuch 0 0 0
Jackson W. Smart 0 0 84,875
William H. Springer 0 0 84,875
Richard P. Strubel 0 0 84,875
- --------------
/1/ Includes compensation as Chairman of the Board of Trustees.
/2/ Reflects amount paid by the Portfolios during fiscal year ended
December 31, 1998. During this fiscal year, no shares of the
Portfolios were offered.
/3/ The Goldman Sachs Funds complex consists of Goldman Sachs Trust and
Goldman Sachs Variable Insurance Trust. Goldman Sachs Trust
consisted of 45 mutual funds, on December 31, 1998. Goldman Sachs
Variable Insurance Trust consisted of 8 mutual funds on December 31,
1998.
B-77
<PAGE>
Management Services
GSAM, One New York Plaza, New York, New York, a separate operating
division of Goldman Sachs, serves as Adviser to the Portfolios and, except as
noted, to each Underlying Fund. 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, 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 "Service Providers" in the Portfolios' Prospectus for a
description of the Adviser's duties to the Portfolios. 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.
The Goldman Sachs Group, L.P., which controls the Portfolios' Adviser and
the investment adviser of each Underlying Fund, announced that it will pursue an
initial public offering of the firm in the late spring or early summer of 1999.
Simultaneously with the offering, the Goldman Sachs Group, L.P. will merge into
The Goldman Sachs Group, Inc.
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 United States 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. The Goldman
Sachs Global Investment Research Department covers approximately 2,200
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. The Advisers and the Underlying Funds' investment
advisers manage some of the world's largest institutional investors.
For more than a decade, Goldman Sachs has been among the top-ranked firms
in Institutional Investor's annual "All-America Research Team" survey. In
addition, many of Goldman Sachs' economists, securities analysts, portfolio
strategists and credit analysts have
B-78
<PAGE>
consistently been highly ranked in respected industry surveys conducted in the
U.S. and abroad. Goldman Sachs is also among the leading investment firms using
quantitative analytics (now used by a growing number of investors) to structure
and evaluate portfolios. For example, Goldman Sachs' options evaluation model
analyzes each security's term, coupon and call option, producing an overall
analysis of the security's value relative to its interest risk.
In managing the Funds, the Advisers have access to Goldman Sachs'
economics research. The Economics Research Department, based in London, 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 various external
surveys such as Extel, Institutional Investor and Reuters. These rankings
acknowledge the achievements of the Farm's economists strategists and equity
analysts.
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
B-79
<PAGE>
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 different mortgage market sectors and
evaluates 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
B-80
<PAGE>
computer-based tools for analyzing fixed-income securities and markets,
developing new fixed income products and structuring portfolio strategies for
investment policy and tactical asset allocation decisions. The Credit Department
tracks specific governments, regions and industries and from time to time may
review the credit quality of an Underlying 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 Portfolios and the Underlying Funds
provide that their investment advisers may render similar services to others as
long as the services provided thereunder are not impaired thereby.
The Portfolios' management agreement was initially 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.
The Portfolios' management agreement was most recently approved by the Trustees,
including a majority of the Trustees who are not parties to the management
agreement or "interested persons" of any party thereto on April 27, 1999. These
arrangements were approved by the sole shareholder of each Portfolio on February
3, 1999 by consent action to satisfy conditions imposed by the SEC in connection
with the registration of shares of the Portfolios. The management agreement will
remain in effect with respect to each Portfolio 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 Portfolio 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 Portfolio 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
Portfolio on 60 days' written notice to the Adviser and by the Adviser on 60
days' written notice to the Trust.
Under the Portfolios' management agreement, the Adviser also: (i)
supervises all non-advisory operations of each Portfolio; (ii) provides
personnel to perform such executive, administrative and clerical services as are
reasonably necessary to provide effective administration of each Portfolio;
(iii) arranges for at each Portfolio'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 Portfolio's records;
B-81
<PAGE>
and (v) provides office space and all necessary office equipment and services.
As compensation for its services and assumption of certain expenses under the
management agreement, the Adviser is entitled to a fee, computed daily and
payable monthly, at an annual rate of 0.15% of each Portfolio's average daily
net assets.
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 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 Portfolios and the Underlying Funds and/or
which engage in transactions in the same types of securities, currencies and
instruments as the Underlying Funds. Goldman Sachs and its affiliates are major
participants in the global currency, equities, swap and fixed income markets, in
each case both on a proprietary basis and for the accounts of customers. As
such, Goldman Sachs and its affiliates are actively engaged in transactions in
the same securities, currencies and instruments in which the Underlying Funds
invest. Such activities could affect the prices and availability of the
securities, currencies and instruments in which the Underlying Funds invest,
which could have an adverse impact on each Underlying Fund's (and, consequently,
each Portfolio'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
B-82
<PAGE>
activities or strategies, or the activities or strategies used for other
accounts managed by them, for the benefit of the management of the Underlying
Funds and it is not anticipated that the investment advisers will have access to
such information for the purpose of managing the Underlying Funds. The
proprietary activities or portfolio strategies of Goldman Sachs and its
affiliates or the activities or strategies used for accounts managed by them or
other customer accounts could conflict with the transactions and strategies
employed by the investment advisers in managing the Underlying Funds.
The results of each Underlying Fund's investment activities may differ
significantly from the results achieved by the investment advisers and their
affiliates for their proprietary accounts or accounts (including investment
companies or collective investment vehicles) managed or advised by them. It is
possible that Goldman Sachs and its affiliates and such other accounts will
achieve investment results which are substantially more or less favorable than
the results achieved by an Underlying Fund. Moreover, it is possible that an
Underlying Fund will sustain losses during 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, currencies 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 Portfolios 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, currencies 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,
B-83
<PAGE>
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 Portfolios. To the extent affiliated transactions are
permitted, the Underlying Funds will deal with Goldman Sachs and its affiliates
on an arms-length basis.
Each Underlying Fund will be required to establish business relationships
with its counterparties based on the Underlying Fund's own credit standing.
Neither Goldman Sachs nor its affiliates will have any obligation to allow their
credit to be used in connection with an Underlying Fund's establishment of its
business relationships, nor is it expected that an Underlying Fund's
counterparties will rely on the credit of Goldman Sachs or any of its affiliates
in evaluating the Underlying Fund's creditworthiness.
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 shares of the
Portfolios pursuant to a "best efforts" arrangement as provided by a
distribution agreement with the Trust on behalf of each Portfolio. Shares of the
Portfolios are offered and sold on a continuous basis by Goldman Sachs, acting
as agent. Under the distribution agreement, each Portfolio 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 Portfolio
as a broker or dealer. Each Portfolio will also pay the fees and expenses of
preparing,
B-84
<PAGE>
printing and mailing prospectuses annually to existing shareholders and any
notice, proxy statement, report, prospectus or other communication to
shareholders of the Portfolio, printing and mailing confirmations of purchases
of shares, any issue taxes or any initial transfer taxes, a portion of toll-free
telephone service for shareholders, wiring funds for share purchases and
redemptions (unless paid by the shareholder who initiates the transaction),
printing and postage of business reply envelopes and a portion of the computer
terminals used by both the Portfolio 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 Portfolio.
As agent, the Distributor currently offers shares of each Portfolio on a
continuous basis to the separate accounts of Participating Insurance Companies
in all states in which such Portfolio 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 Portfolio.
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 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
B-85
<PAGE>
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.
Custodian and Sub-Custodians
State Street, 1776 Heritage Drive, North Quincy, Massachusetts 02110, 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 Andersen LLP, independent public accountants, 225 Franklin Street,
Boston, Massachusetts 02110, have been selected as auditors of the Trust. In
addition to audit services, Arthur Andersen LLP prepares the Trust's federal and
state tax returns, and provides consultation and assistance on accounting,
internal control and related matters.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser is responsible with respect to the Portfolios (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.
B-86
<PAGE>
In placing orders for portfolio securities of an Underlying Fund, the
Underlying Funds' advisers are generally required to give primary consideration
to obtaining the most favorable execution and net price available. This means
that an investment adviser will seek to execute each transaction at a price and
commission, if any, which provides the most favorable total cost or proceeds
reasonably attainable in the circumstances. As permitted by Section 28(e) of the
Securities Exchange Act of 1934, the Underlying Fund may pay a broker which
provides brokerage and research services an amount of disclosed commission in
excess of the commission which another broker would have charged for effecting
that transaction. Such practice is subject to (i) a good faith determination by
the Trustees that such commission is reasonable in light of the services
provided; and (ii) to such policies as the Trustees may adopt from time to time.
While the Underlying Funds' investment advisers generally seek reasonably
competitive spreads or commissions, an Underlying Fund will not necessarily be
paying the lowest spread or commission available. Within the framework of this
policy, the investment advisers will consider research and investment services
provided by brokers or dealers who effect or are parties to portfolio
transactions of an Underlying Fund, the investment advisers and their
affiliates, or their other clients. Such research and investment services are
those which brokerage houses customarily provide to institutional investors and
include research reports on particular industries and companies, economic
surveys and analyses, recommendations as to specific securities and other
products or services (e.g., quotation equipment and computer related costs and
expenses), advice concerning the value of securities, the advisability of
investing in, purchasing or selling securities, the availability of securities
or the purchasers or sellers of securities, furnishing analyses and reports
concerning issuers, industries, securities, economic factors and trends,
portfolio strategy and performance of accounts, effecting securities
transactions and performing functions incidental thereto (such as clearance and
settlement) and providing lawful and appropriate assistance to the investment
advisers in the performance of their decision-making responsibilities. Such
services are used by the investment advisers in connection with all of their
investment activities, and some of such services obtained in connection with the
execution of transactions for an Underlying Fund may be used in managing other
investment accounts. Conversely, brokers furnishing such services may be
selected for the execution of transactions of such other accounts, whose
aggregate assets are far larger than those of an Underlying Fund, and the
services furnished by such brokers may be used by the investment advisers in
providing management services for the Trust.
In circumstances where two or more broker-dealers offer comparable prices
and execution capability, preference may be given to a broker-dealer which has
sold shares of an Underlying Fund 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
B-87
<PAGE>
best net price and most favorable execution under the circumstances. In such
event, allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the particular investment
adviser in the manner it considers to be equitable and consistent with its
fiduciary obligations to such Fund and such other customers. In some instances,
this procedure may adversely affect the price and size of the position
obtainable for an Underlying Fund.
Commission rates in the U.S. are established pursuant to negotiations with
the broker based on the quality and quantity of execution services provided by
the broker in the light of generally prevailing rates. The allocation of orders
among brokers and the commission rates paid are reviewed periodically by the
Trustees.
Subject to the above considerations, the Underlying Funds' investment
advisers may use Goldman Sachs as a broker for an Underlying Fund. In order for
Goldman Sachs to effect any portfolio transactions for an Underlying Fund, the
commissions, fees or other remuneration received by Goldman Sachs must be
reasonable and fair compared to the commissions, fees or other remuneration paid
to other brokers in connection with comparable transactions involving similar
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 Portfolio. In accordance with procedures
adopted by the Trustees, the net asset value per share of each Portfolio is
calculated by determining the value of the net assets attributable to that
Portfolio 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 Portfolio may compute its
net asset value as of any time permitted pursuant to any exemption, order or
statement of the SEC or its staff.
B-88
<PAGE>
In determining the net asset value of a Portfolio, the net asset value of
the Underlying Funds' shares held by the Portfolio will be their net asset value
at the time of computation.
Financial Square Prime Obligations Fund values all of its portfolio
securities using the amortized cost valuation method pursuant to Rule 2a-7 under
the Act. Portfolio securities of the other Underlying Funds 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 closing bid price, or if a closing bid price is not available,
at either the exchange or system-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 last sale price or, if not
available, at the bid price 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 last bid price at the
time the net asset value is determined; (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 normally 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
B-89
<PAGE>
which the Underlying 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 used by
an Underlying Fund to price its securities but before the close of regular
trading on the New York Stock Exchange will normally not be reflected in an
Underlying Fund's next determined net asset value unless the Trust, in its
discretion, makes an adjustment in light of the nature and materiality of the
event, its effect on Underlying Fund operations and other relevant factors.
The proceeds received by each Portfolio 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 Portfolio and constitute the underlying assets of
that Portfolio. The assets of each Portfolio will be segregated on the books of
account, and will be charged with the liabilities in respect of such Portfolio
and with a share of the general liabilities of the Trust. Expenses of the Trust
with respect to the Portfolios and the other series of the Trust are generally
allocated in proportion to the net asset values of the respective Portfolios or
series except where allocations of direct expenses can otherwise be fairly made.
PERFORMANCE INFORMATION
A Portfolio 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.
B-90
<PAGE>
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.
Each Portfolio may 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 mutual
fund statistical services and investments for which reliable performance
information is available.
Occasionally statistics may be used to specify Portfolio volatility or
risk. Measures of volatility or risk are generally used to compare a Portfolio's
net asset value or performance relative to a market index. One measure of
volatility is beta. Beta is the volatility of a Portfolio 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 Portfolio'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
Portfolio'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
B-91
<PAGE>
compounded yields of taxable, tax-free and U.S. Government money funds); (k) the
Hambrecht & Quist Growth Stock Index; (l) the NASDAQ OTC Composite Prime Return;
(m) the Russell Midcap Index; (n) the Russell 2000 Index - Total Return; (o)
Russell 1000 Growth Index-Total Return; (p) the Value-Line Composite-Price
Return; (q) the Wilshire 4500 Index; (r) the FT-Actuaries Europe and Pacific
Index; (s) historical investment data supplied by the research departments of
Goldman Sachs, Lehman Brothers, First Boston Corporation, Morgan Stanley
including (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 Portfolios and the Underlying Funds.
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 Portfolio 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:
o cost associated with aging parents;
o funding a college education (including its actual and estimated
cost);
o health care expenses (including actual and projected expenses);
o long-term disabilities (including the availability of, and coverage
provided by, disability insurance);
o 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);
o asset allocation strategies and the benefits of diversifying among
asset classes;
o the benefits of international and emerging market investments;
B-92
<PAGE>
o the effects of inflation on investing and saving;
o the benefits of establishing and maintaining a regular pattern of
investing and the benefits of dollar-cost averaging; and
o 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:
o 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 Portfolio;
o 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;
o total stock market capitalizations of specific countries and regions
on a global basis;
o performance of securities markets of specific countries and regions;
o value of a dollar amount invested in a particular market or type of
security over different periods of time;
o 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;
o credit ratings of domestic government bonds in various countries;
o price volatility comparisons of types of securities over different
periods of time; and
o 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.
B-93
<PAGE>
From time to time, advertisements or information may include a discussion
of certain attributes or benefits to be derived by an investment in the
Portfolio. Such advertisements or information may include symbols, headlines or
other material which highlight or summarize the information discussed in more
detail in the communication.
The Trust may from time to time summarize the substance of discussions
contained in shareholder reports in advertisements and publish the Adviser's
views as to markets, the rationale for a Portfolio'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 Portfolio's performance data will be based on historical results and
will not be intended to indicate future performance. A Portfolio's total return,
yield and distribution rate will vary based on market conditions, portfolio
expenses, portfolio investments and other factors. The value of a Portfolio'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 Portfolio's holdings available to investors upon
request.
SHARES OF THE TRUST
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 Agreement and Declaration of Trust
to create and classify shares of beneficial interest 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.
B-94
<PAGE>
Rule 18f-2 under the Act provides that any matter required to be submitted
by the provisions of the Act or applicable state law, or otherwise, to the
holders of the outstanding voting securities of an investment company such as
the Trust shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares of each class or
series affected by such matter. Rule 18f-2 further provides that a class or
series shall be deemed to be affected by a matter unless the interests of each
class or series in the matter are substantially 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 Agreement and Declaration of Trust and such other matters as
the Trustees may determine or may be required by law.
The Agreement and 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 Agreement and 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 Agreement and 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)
B-95
<PAGE>
the inability of the Trust or any successor series or class to maintain its
assets at an appropriate size; (ii) changes in laws or regulations governing the
Trust, series or class or affecting assets of the type in which it invests; or
(iii) economic developments or trends having a significant adverse impact on
their business or operations.
The Agreement and 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 Agreement and Declaration of Trust permits the Trustees to amend the
Agreement and 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
Agreement and 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 Portfolios 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 Agreement and Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of a Portfolio. 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 Agreement and
Declaration of Trust provides for indemnification by the relevant Portfolio for
all loss suffered by a shareholder as a result of an obligation of the series.
The Agreement and 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 Agreement and
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
B-96
<PAGE>
under Delaware law who hold at least 10% of the outstanding shares of the
series, or 10% of the outstanding shares of the class to which such action
relates, shall join in the request for the Trustees to commence such action; and
(b) the Trustees must be afforded a reasonable amount of time to consider such
shareholder request and to investigate the basis and to employ other advisers in
considering the merits of the request and shall require an undertaking by the
shareholders making such request to reimburse the Portfolio for the expense of
any such advisers in the event that the Trustees determine not to bring such
action.
The Agreement and 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 Agreement and 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 Portfolios 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 Portfolio 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 Portfolio. 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 Portfolio 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, Portfolio shares, assuming that the variable life insurance
policies and annuity contracts qualify under the Code, as life insurance or
annuities, respectively, and that the shareholders are treated as owners of the
Portfolio 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
B-97
<PAGE>
summary also does not describe the tax consequences applicable to the owners of
the Portfolio shares because the Portfolio shares will be sold only to insurance
companies. Thus, purchasers of Portfolio shares must consult their own tax
advisers regarding the federal, state, and local tax consequences of owning
Portfolio shares.
Each Portfolio is a separate taxable entity. Each of the Portfolios
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 Portfolio 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 Portfolio 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 Portfolio'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 Portfolio'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
Portfolio and engaged in the same, similar or related trades or businesses.
If a Portfolio complies with such provisions, then in any taxable year in
which such Portfolio 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 Portfolio (but not its shareholders) will be
relieved of federal income tax on any income of the Portfolio, including
long-term capital gains, distributed to shareholders. However, if a Portfolio
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
Portfolio retains any net capital gain, the Portfolio may designate the retained
amount as undistributed capital gains in a notice to its shareholders who, if
subject to U.S. federal income tax on long-term capital gains, (i) will be
required to include in income for federal income tax purposes, as long-term
capital gain, their shares of such undistributed amount, and (ii) will be
entitled to credit their proportionate shares of the tax paid by the Portfolio
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 Portfolio will
be increased by an amount equal under current law to 65% of the amount of
undistributed net capital gain included in the
B-98
<PAGE>
shareholder's gross income. Each Portfolio 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, International
Equity, European Equity, Japanese Equity, International Small Cap, Emerging
Markets Equity, Asia Growth or Global Income Funds and may therefore make it
more difficult for such a Fund to satisfy the distribution requirements
described above, as well as the excise tax distribution requirements described
below. However, each Fund generally expects to be able to obtain sufficient cash
to satisfy such requirements from new investors, the sale of securities or other
sources. If for any taxable year a Portfolio 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 Portfolio 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"). Each Portfolio is a Closed Fund. Some
of the Underlying Funds are Closed Funds; some are not.
If the segregated asset account upon which a variable contract is based is
not "adequately diversified" under the foregoing rules for each calendar
quarter, then (a) the variable contract is not treated as a life insurance
contract or annuity contract under the Code for all subsequent periods during
which such account is not "adequately diversified" and (b) the holders of such
contract must include as ordinary income the "income on the contract" for each
taxable year. Further, the income on a life insurance contract for all prior
taxable years is treated as received or accrued during the
B-99
<PAGE>
taxable year of the policyholder in which the contract ceases to meet the
definition of a "life insurance contract" under the Code. The "income on the
contract" is, generally, the excess of (i) the sum of the increase in the net
surrender value of the contract during the taxable year and the cost of the life
insurance protection provided under the contract during the year, over (ii) the
premiums paid under the contract during the taxable year. In addition, if a
Portfolio did not constitute a Closed Fund, the holders of the contracts and
annuities which invest in the Fund through a segregated asset account might be
treated as owners of Portfolio shares and might be subject to tax on
distributions made by the Fund.
In order to avoid a 4% federal excise tax, each Portfolio may be required
to 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
Portfolio paid no federal income tax. For federal income tax purposes, dividends
declared by a Portfolio 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 Portfolios 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 Portfolio 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 Portfolio may be subject to state or local taxes in jurisdictions in
which such Portfolio may be deemed to be doing business. In addition, in those
states or localities which have income tax laws, the treatment of such Portfolio
and its shareholders under such laws may differ from their treatment under
federal income tax laws, and investment in such Portfolio may have tax
consequences for shareholders different from those of a direct investment in
such Portfolio's portfolio securities.
OTHER INFORMATION
As described in the Prospectus, shares of the Portfolios are sold and
redeemed at their net asset value as next determined after receipt of the
purchase or redemption order. Each purchase is confirmed to the Separate Account
in a written statement of the number of shares purchased and the aggregate
number of shares currently held.
B-100
<PAGE>
Each Portfolio will normally redeem shares solely in cash up to the lesser
of $250,000 or 1% of the net asset value of the Portfolio during any 90-day
period for any one shareholder. Each Portfolio, however, reserves the right to
pay redemptions exceeding $250,000 or 1% of the net asset value of the Portfolio
at the time of redemption by a distribution in kind of securities (instead of
cash) from such Portfolio. The securities distributed in kind would be readily
marketable and would be valued for this purpose using the same method employed
in calculating the Portfolio'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 Portfolio 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 Portfolio 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
Portfolio. (The Trust may also suspend or postpone the recordation of the
transfer of shares upon the occurrence of any of the foregoing conditions.)
The Prospectus and this Additional Statement do not contain all the
information included in the Registration Statement filed with the SEC under the
1933 Act with respect to the securities offered by the Prospectus. Certain
portions of the Registration Statement have been omitted from the Prospectus and
this Additional Statement pursuant to the rules and regulations of the SEC. The
Registration Statement including the exhibits filed therewith may be examined at
the office of the SEC in Washington, D.C.
Statements contained in the Prospectus or in this Additional Statement as
to the contents of any contract or other document referred to are not
necessarily complete, and, in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement of which the Prospectus and this Additional Statement form a part,
each such statement being qualified in all respects by such reference.
B-101
<PAGE>
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
A-4
<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
A-5
<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.
A-9
<PAGE>
"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.
A-10
<PAGE>
APPENDIX B
BUSINESS PRINCIPLES OF GOLDMAN, SACHS & CO.
Goldman Sachs is noted for its Business Principles, which guide all of the
firm's activities and serve as the basis for its distinguished reputation among
investors worldwide.
Our client's interests always come first. Our experience shows that if we
serve our clients well, our own success will follow.
OUR ASSETS ARE OUR PEOPLE, CAPITAL AND REPUTATION. If any of these is
ever diminished, the last 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 other 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.
OUR PROFITS ARE A KEY TO OUR SUCCESS. They replenish our capital and
attract and keep our best people. It is our practice to share our profits
generously with all who help create them. Profitability is crucial to our
future.
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 maintain the loyalty, the intimacy and the
esprit de corps that we all treasure and that contribute greatly to our success.
B-1
<PAGE>
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 extinction.
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.
B-2
<PAGE>
GOLDMAN, SACHS & CO.'S INVESTMENT BANKING AND SECURITIES ACTIVITIES
Goldman Sachs is a leading financial services firm traditionally known on
Wall Street and around the world for its institutional and private client
service.
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 issues from
1989-1997.
The number one lead manager of U.S. common stock offerings for the past
nine years (1989-1997).*
The number one lead manager for initial public offerings (IPOs) worldwide
(1989-1997).
- ----------
* Source: Securities Data Corporation. Common stock ranking excludes REITs,
Investment Trusts and Rights.
B-3
<PAGE>
GOLDMAN, SACHS & CO.'S HISTORY OF EXCELLENCE
1869 Marcus Goldman opens Goldman Sachs for business
1890 Dow Jones Industrial Average first published
1896 Goldman, Sachs & Co. joins New York Stock Exchange
1906 Goldman, Sachs & Co. takes Sears Roebuck & Co. public (at 93 years,
the firm's longest-standing client relationship)
Dow Jones Industrial Average tops 100
1925 Goldman, Sachs & Co. finances Warner Brothers, producer of the first
talking film
1956 Goldman, Sachs & Co. co-manages Ford's public offering, the largest
to date
1970 Goldman, Sachs & Co. opens London office
1972 Dow Jones Industrial Average breaks 1000
1986 Goldman, Sachs & Co. takes Microsoft public
1988 Goldman Sachs Asset Management is formally established
1991 Goldman, Sachs & Co. provides advisory services for the largest
privatization in the region of the sale of Telefonos de Mexico
1995 Goldman Sachs Asset Management introduces Global Tactical Asset
Allocation Program
Dow Jones Industrial Average breaks 5000
1996 Goldman, Sachs & Co. takes Deutsche Telecom public
Dow Jones Industrial Average breaks 6000
1997 Dow Jones Industrial Average breaks 7000
Goldman Sachs Asset Management increases assets under management by
100% over 1996
1998 Goldman Sachs Asset Management reaches $195.5 billion in assets
under Management.
Dow Jones Industrial Average breaks 9000
1999 Goldman Sachs becomes a public company
B-4
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
GOLDMAN SACHS GROWTH AND INCOME FUND
GOLDMAN SACHS CORE U.S. EQUITY FUND
GOLDMAN SACHS CORE LARGE CAP GROWTH FUND
GOLDMAN SACHS CORE LARGE CAP VALUE FUND
GOLDMAN SACHS CORE SMALL CAP EQUITY FUND
GOLDMAN SACHS CAPITAL GROWTH FUND
GOLDMAN SACHS MID CAP VALUE FUND
(FORMERLY, GOLDMAN SACHS MID CAP EQUITY FUND)
GOLDMAN SACHS CORE INTERNATIONAL EQUITY FUND
GOLDMAN SACHS INTERNATIONAL EQUITY FUND
GOLDMAN SACHS SHORT DURATION GOVERNMENT FUND
GOLDMAN SACHS GLOBAL INCOME FUND
GOLDMAN SACHS HIGH YIELD FUND
(PORTFOLIOS OF GOLDMAN SACHS VARIABLE INSURANCE TRUST)
4900 Sears Tower
Chicago, Illinois 60606-6303
This Statement of Additional Information (the "Additional Statement") is
not a Prospectus. This Additional Statement should be read in conjunction with
the prospectus for Goldman Sachs Growth and Income Fund, Goldman Sachs CORE U.S.
Equity Fund, Goldman Sachs CORE Large Cap Growth Fund, Goldman Sachs CORE Large
Cap Value Fund, Goldman Sachs CORE Small Cap Equity Fund, Goldman Sachs Capital
Growth Fund, Goldman Sachs Mid Cap Value Fund, Goldman Sachs CORE International
Equity Fund, Goldman Sachs International Equity Fund, Goldman Sachs Short
Duration Government Fund, Goldman Sachs Global Income Fund and Goldman Sachs
High Yield Fund dated May 1, 1999 as amended and/or supplemented from time to
time (the "Prospectus"), which may be obtained without charge from Goldman,
Sachs & Co. by calling the telephone number, or writing to one of the addresses,
listed below.
The audited financial statements and related Report of Independent Public
Accountants, contained in the 1998 Annual Report of each of the Funds are
incorporated herein by reference into this Additional Statement. No other part
of the Annual or any Semi-Annual Report is incorporated by reference herein.
Copies of the Annual Report may be obtained upon request and without charge by
calling Goldman, Sachs & Co. toll free at 800-292-4726.
The date of this Additional Statement is May 1, 1999.
<PAGE>
TABLE OF CONTENTS
Page
----
INTRODUCTION...............................................................B-1
INVESTMENT OBJECTIVES AND POLICIES.........................................B-2
INVESTMENT RESTRICTIONS...................................................B-56
MANAGEMENT................................................................B-58
PORTFOLIO TRANSACTIONS AND BROKERAGE......................................B-77
NET ASSET VALUE...........................................................B-81
PERFORMANCE INFORMATION...................................................B-83
SHARES OF THE TRUST.......................................................B-88
TAXATION..................................................................B-92
OTHER INFORMATION.........................................................B-96
FINANCIAL STATEMENTS......................................................B-97
APPENDIX A.................................................................A-1
BUSINESS PRINCIPLES OF GOLDMAN, SACHS & CO.................................B-1
-i-
<PAGE>
GOLDMAN SACHS ASSET MANAGEMENT GOLDMAN, SACHS & CO.
Adviser to: Distributor
Goldman Sachs Growth and Income Fund 85 Broad Street
Goldman Sachs CORE U.S. Equity Fund New York, New York 10004
Goldman Sachs CORE Large Cap Growth Fund
Goldman Sachs CORE Large Cap Value Fund GOLDMAN SACHS ASSET MANAGEMENT
Goldman Sachs CORE Small Cap Equity Fund INTERNATIONAL
Goldman Sachs Capital Growth Fund Adviser to:
Goldman Sachs Mid Cap Value Fund Goldman Sachs International
Goldman Sachs CORE International Equity Fund Equity Fund
Goldman Sachs Short Duration Government Fund Goldman Sachs Global Income
Goldman Sachs High Yield Fund Fund
One New York Plaza 133 Peterborough Court
New York, New York 10004 London, England EC4A 2BB
GOLDMAN, SACHS & CO.
Transfer Agent
4900 Sears Tower
Chicago, IL 60606
Toll free.......800-292-4726
-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 Growth and
Income Fund ("Growth and Income Fund"), CORE U.S. Equity Fund ("CORE U.S. Equity
Fund"), Goldman Sachs CORE Large Cap Growth Fund ("CORE Large Cap Growth Fund"),
Goldman Sachs CORE Large Cap Value Fund ("CORE Large Cap Value Fund"), Goldman
Sachs CORE Small Cap Equity Fund ("CORE Small Cap Equity Fund"), Goldman Sachs
Capital Growth Fund ("Capital Growth Fund"), Goldman Sachs Mid Cap Value Fund
("Mid Cap Value Fund"), Goldman Sachs CORE International Equity Fund ("CORE
International Equity Fund"), Goldman Sachs International Equity Fund
("International Equity Fund"), (collectively referred to herein as the "Equity
Funds"), Goldman Sachs Short Duration Government Fund ("Short Duration
Government Fund"), Goldman Sachs Global Income Fund ("Global Income Fund") and
Goldman Sachs High Yield Fund ("High Yield Fund") (collectively referred to
herein as the "Fixed Income Funds" and collectively with the Equity Funds
referred to herein as the "Funds"). Other series of the Trust are described in a
separate Additional Statement. No shares of the CORE Large Cap Value Fund, CORE
International Equity Fund or Short Duration Government Fund were offered during
the fiscal year ended December 31, 1998.
Each Fund is a series of Goldman Sachs Variable Insurance Trust, which was
formed under the laws of the state of Delaware on September 16, 1997. The
Trustees have authority under the Trust's charter to create and classify shares
of beneficial interests in separate series and to classify and reclassify any
series or portfolio of shares into one or more classes, without further action
by shareholders. Additional series may be added in the future.
Goldman Sachs Asset Management ("GSAM"), a separate operating division of
Goldman, Sachs & Co. ("Goldman Sachs"), serves as investment adviser to the
Growth and Income, CORE U.S. Equity, CORE Large Cap Growth, CORE Large Cap
Value, CORE Small Cap Equity, Capital Growth, Mid Cap Value, CORE International
Equity, Short Duration Government and High Yield Funds. Goldman Sachs Asset
Management International ("GSAMI"), an affiliate of Goldman Sachs, serves as
investment adviser to the International Equity and Global Income Funds. GSAM and
GSAMI are sometimes referred to collectively herein as the "Advisers." Goldman
Sachs serves as each Fund's distributor and transfer agent. Each Fund's
custodian is State Street Bank and Trust Company ("State Street").
B-1
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Each Fund has distinct investment objectives and policies. There can be no
assurance that a Fund's objectives will be achieved. Each Fund (except the
Global Income Fund) is a diversified open-end management company as defined in
the Investment Company Act of 1940, as amended (the "Act"). The Global Income
Fund is a non-diversified open-end management company.
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.
General Information Regarding All Equity Funds.
The Investment Adviser may purchase for the equity Funds common stocks,
preferred stocks, interests in real estate investment trusts, convertible debt
obligations, convertible preferred stocks, equity interests in trusts,
partnerships, joint ventures, limited liability companies and similar
enterprises, warrants and stock purchase rights ("equity securities"). In
choosing a Fund's securities, the Investment Adviser utilizes first-hand
fundamental research, including visiting company facilities to assess operations
and to meet decision-makers. The Investment Adviser may also use macro analysis
of numerous economic and valuation variables to anticipate changes in company
earnings and the overall investment climate. The Investment Adviser is able to
draw on the research and market expertise of the Goldman Sachs Global Investment
Research Department and other affiliates of the Investment Adviser, as well as
information provided by other securities dealers. Equity securities in a Fund's
portfolio will generally be sold when the Investment Adviser believes that the
market price fully reflects or exceeds the securities' fundamental valuation or
when other more attractive investments are identified.
Value Style Funds. The Growth and Income Fund and Mid Cap Value Fund are
managed using a value oriented approach. The Investment Adviser evaluates
securities using fundamental analysis and intends to purchase equity securities
that are, in its view, underpriced relative to a combination of such companies'
long-term earnings prospects, growth rate, free cash flow and/or dividend-paying
ability. Consideration will be given to the business quality of the issuer.
Factors positively affecting the Investment Adviser's view of that quality
include the competitiveness and degree of regulation in the markets in which the
company operates, the existence of a management team with a record of success,
the position of the company in the markets in which it operates, the level of
the company's financial leverage and the sustainable return on capital invested
in the business. The Funds may also purchase securities of companies that have
experienced difficulties and that, in the opinion of the Investment Adviser, are
available at attractive prices.
Growth Style Funds. The Capital Growth Fund is managed using a growth
equity oriented approach. Equity securities for this Fund are selected based on
their prospects for above average growth. The Investment Adviser will select
securities of growth companies trading, in the Investment Adviser's opinion, at
a reasonable price relative to other industries, competitors and historical
price/earnings multiples. The Fund will generally invest in companies whose
earnings are
B-2
<PAGE>
believed to be in a relatively strong growth trend, or, to a lesser extent, in
companies in which significant further growth is not anticipated but whose
market value per share is thought to be undervalued. In order to determine
whether a security has favorable growth prospects, the Investment Adviser
ordinarily looks for one or more of the following characteristics in relation to
the security's prevailing price: prospects for above average sales and earnings
growth per share; high return on invested capital; free cash flow generation;
sound balance sheet, financial and accounting policies, and overall financial
strength; strong competitive advantages; effective research, product
development, and marketing; pricing flexibility; strength of management; and
general operating characteristics that will enable the company to compete
successfully in its marketplace.
Quantitative Style Funds. CORE U.S. Equity, CORE Large Cap Growth, CORE
Large Cap Value, CORE Small Cap Equity and CORE International Equity Funds (the
"CORE Equity Funds") are managed using both quantitative and fundamental
techniques. CORE is an acronym for "Computer-Optimized, Research-Enhanced,"
which reflects the CORE Funds' investment process. This investment process and
the proprietary multifactor model used to implement it are discussed below.
Investment Process. The Investment Adviser begins with a broad universe of
U.S. equity securities for CORE U.S. Equity, CORE Large Cap Growth, CORE Large
Cap Value and CORE Small Cap Equity Funds (the "CORE U.S. Equity Funds"), and a
broad universe of foreign equity securities for CORE International Equity Fund.
As described more fully below, the Investment Adviser uses a proprietary
multifactor model (the "Multifactor Model") to forecast the returns of different
markets, currencies and individual securities. In the case of an equity security
followed by the Goldman Sachs Global Investment Research Department (the
"Research Department"), a rating is assigned based upon the Research
Department's evaluation. In the discretion of the Investment Adviser, ratings
may also be assigned to equity securities based on research ratings obtained
from other industry sources.
In building a diversified portfolio for each CORE Equity 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 U.S. Funds use one Multifactor Model to forecast the
returns of securities held in each Fund's portfolio. CORE International Equity
Fund uses multiple Multifactor Models to forecast returns. Currently, CORE
International Equity Fund uses one model to forecast equity market returns, one
model to forecast currency returns and 22 separate models to forecast individual
equity security returns in 22 different countries. Despite this variety, all
Multifactor Models incorporate common variables covering measures of value,
growth, momentum and risk (e.g., book/price ratio, earnings/price ratio, price
momentum, price volatility, consensus growth forecasts, earnings estimate
revisions, earnings stability, and, in the
B-3
<PAGE>
case of models for CORE International Equity Fund, currency momentum and country
political risk ratings). All of the factors used in the Multifactor Models have
been shown to significantly impact the performance of the securities, currencies
and markets they were designed to forecast.
The weightings assigned to the factors in the Multifactor Model used by
the CORE U.S. Funds are derived using a statistical formulation that considers
each factor's historical performance in different market environments. As such,
the U.S. Multifactor Model is designed to evaluate each security using only the
factors that are statistically related to returns in the anticipated market
environment. Because they include many disparate factors, the 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. By using a variety of relevant
factors to select securities, currencies or markets, the Investment 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 Investment 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 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.
Research Department. In assigning ratings to equity securities, the
Research Department uses a four category rating system ranging from "recommended
for purchase" to "likely to under perform." The ratings reflect the analyst's
judgment as to the investment results of a specific security and incorporate
economic outlook, valuation, risk and a variety of other factors.
By employing both a quantitative (i.e., the Multifactor Models) and a
qualitative (i.e., research enhanced) method of selecting securities, each CORE
Equity Fund seeks to capitalize on the strengths of each discipline.
Other Information. 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. CORE U.S. Equity Fund may enter into futures transactions only with
respect to the S&P 500 Index and the CORE Large Cap Growth, CORE Large Cap Value
and CORE Small Cap Equity Funds may enter into futures transactions only with
respect to a representative index in order to keep a Fund's effective equity
exposure close to 100%. For example, if cash balances are equal to 5% of the net
assets, the Fund may enter into long futures
B-4
<PAGE>
contracts covering an amount equal to 5% of the Fund's net assets. As cash
balances fluctuate based on new contributions or withdrawals, a Fund may enter
into additional contracts or close out existing positions.
Additional Information About International Equity Fund
The International Equity Fund is 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 and Asia. 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 this Fund 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.
International Equity Fund will seek to achieve its investment objective by
investing primarily in equity securities of companies that are organized outside
the United States or whose securities are principally traded outside the United
States. Because research coverage outside the United States is fragmented and
relatively unsophisticated, many foreign companies that are well-positioned to
grow and prosper have not come to the attention of investors. GSAMI believes
that the high historical returns and less efficient pricing of foreign markets
create favorable conditions for the International Equity Fund's highly focused
investment approach. For a description of the risks of the International Equity
Fund's investments in Asia, see "Investing in Emerging Markets."
A Rigorous Process of Stock Selection. Using fundamental industry and
company research, GSAMI's equity team in London, Singapore and Tokyo seeks to
identify companies that may achieve superior long-term returns. Stocks are
carefully selected for the International Equity Fund's portfolio through a
three-stage investment process. Because the International Equity Fund is a
long-term holder of stocks, the portfolio managers adjust the Fund's portfolio
only when expected returns fall below acceptable levels or when the portfolio
managers identify substantially more attractive investments.
Using the research of Goldman Sachs as well as information gathered from
other sources in Europe and the Asia-Pacific region, the Adviser seeks to
identify attractive industries around the world. Such industries are expected to
have favorable underlying economics and allow companies to generate sustainable
and predictable high returns. As a rule, they are less economically sensitive,
relatively free of regulation and favor strong franchises.
Within these industries the Adviser seeks to identify well-run companies
that enjoy a stable competitive advantage and are able to benefit from the
favorable dynamics of the industry. This
B-5
<PAGE>
stage includes analyzing the current and expected financial performance of the
company; contacting suppliers, customers and competitors; and meeting with
management. In particular, the portfolio managers look for companies whose
managers have a strong commitment to both maintaining the high returns of the
existing business and reinvesting the capital generated at high rates of return.
Management should act in the interests of the owners and seek to maximize
returns to all stockholders.
GSAMI's currency team manages the foreign exchange risk embedded in
foreign equities by means of a currency overlay program. The program may be
utilized to protect the value of foreign investments in sustained periods of
dollar appreciation and to add returns by seeking to take advantage of foreign
exchange fluctuations.
The members of GSAMI's international equity team bring together years of
experience in analyzing and investing in companies in Europe and the
Asia-Pacific region. Their expertise spans a wide range of skills including
investment analysis, investment management, investment banking and business
consulting. GSAMI's worldwide staff of over 300 professionals includes portfolio
managers based in London, Singapore and Tokyo who bring firsthand knowledge of
their local markets and companies to every investment decision.
Short Duration Government Fund
Short Duration Government Fund is designed for investors who seek a high
level of current income and secondarily, in seeking current income, the
potential for capital appreciation. The 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-U.S. Government Securities such as
privately issued mortgage-backed securities, asset-backed securities, municipal
securities and corporate securities. 100% of the Fund's portfolio will be
invested in U.S. dollar-denominated securities. The Fund's non U.S. Government
Securities will be rated, at the time of investment, at least BBB or Baa by one
nationally recognized statistical rating organization ("NRSRO") or, if unrated,
will be determined by the Investment Adviser to be of comparable quality.
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.
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
B-6
<PAGE>
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.
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 two-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 bring together many years of experience in the
analysis, valuation and trading of U.S. fixed-income securities.
Global Income Fund
Global Income Fund is designed for investors seeking high total return,
emphasizing current income, to a lesser extent, opportunities for capital
appreciation. However, investing in the Fund involves certain risks and there is
no assurance that the Fund will achieve its investment objective. The securities
in which the Fund invests will be rated, at the time of investment, at least BBB
or Baa by an NRSRO or, if unrated, will be determined by the Adviser to be of
comparable quality. However, at least 50% of the Fund's total assets will be
invested in securities having a rating from an NRSRO of AAA or Aaa at the time
of investment. 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.
In selecting securities for the Fund, portfolio managers consider such
factors as the security's duration, sector and credit quality rating as well as
the security's yield and prospects for capital appreciation. In determining the
countries and currencies in which the Fund will invest, the Fund's portfolio
managers form opinions based primarily on the views of Goldman Sachs' economists
as well as information provided by securities dealers, including information
relating to factors such as interest rates, inflation, monetary and fiscal
policies, taxation, and political climate. The portfolio managers apply the
Black-Litterman Model (the "Model") to their views to develop a portfolio that
produces, in the view of the Adviser, the optimal expected return for a given
level of risk. The Model factors in the opinions of the portfolio managers,
adjusting for their level of confidence in such opinions, with the views implied
by an international capital asset pricing formula. The Model is also used to
maintain the level of portfolio risk within the guidelines established by the
Adviser.
B-7
<PAGE>
High Total Return. Global Income Fund's portfolio managers will seek out
the highest yielding bonds in the global fixed-income market that meet the
Global Income Fund's credit quality standards and certain other criteria.
Capital Appreciation. Investing in the foreign bond markets offers the
potential for capital appreciation due to both interest rate and currency
exchange rate fluctuations. The portfolio managers attempt to identify
investments with appreciation potential by carefully evaluating trends affecting
a country's currency as well as a country's fundamental economic strength.
However, there is a risk of capital depreciation as a result of unanticipated
interest rate and currency fluctuations.
Portfolio Management Flexibility. Global Income Fund is actively managed.
The Fund's portfolio managers invest in countries that, in their judgment, meet
the Fund's investment guidelines and often have strong currencies and stable
economies and in securities that they believe offer favorable performance
prospects.
Relative Stability of Principal. Global Income Fund may be able to reduce
principal fluctuation by investing in foreign countries with economic policies
or business cycles different from those of the United States and in foreign
securities markets that do not necessarily move in the same direction or
magnitude as the U.S. market. Investing in a broad range of U.S. and foreign
fixed-income securities and currencies reduces the dependence of the Fund's
performance on developments in any particular market to the extent that adverse
events in one market are offset by favorable events in other markets. The Fund's
policy of investing primarily in high quality securities may also reduce
principal fluctuation. However, there is no assurance that these strategies will
always be successful.
Professional Management. Individual U.S. investors may prefer professional
management of their global bond and currency portfolios because a
well-diversified portfolio requires a large amount of capital and because the
size of the global market requires access to extensive resources and a
substantial commitment of time.
High Yield Fund
High Yield Fund's Investment Process. 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 Adviser will attempt to take advantage of pricing inefficiencies
in the fixed-income markets. GSAM starts the investment process with economic
analysis based on research generated by the Goldman Sachs Global Economic
Research Group and others to determine broad growth trends, industry-specific
events and market forecasts. The market value of non-investment grade fixed
income securities tend to reflect individual developments within a company to a
greater extent than higher rated corporate debt or Treasury bonds that react
primarily to fluctuations in interest rates. Therefore, determining the
creditworthiness of issuers is critical. To that end, the High Yield Fund's
portfolio managers have access to Goldman, Sachs & Co.'s highly regarded Credit
Research and Global Investment Research Departments, as well as analysis from
the firm's High Yield Research Group, a dedicated
B-8
<PAGE>
group of 13 professionals in the high yield and emerging market corporate bond
research area, consisting of industry and regional market specialists. In
addition, the Fund's portfolio managers may review the opinions of the two
largest independent credit rating agencies, Standard & Poor's Ratings Group and
Moody's Investors Services, Inc. High Yield Fund's portfolio managers and credit
analysts also conduct their own in-depth analysis of each issue considered for
inclusion in the Fund's portfolio. The portfolio managers and credit analysts
evaluate such factors as a company's competitive position, the strength of its
balance sheet, its ability to withstand economic downturns and its potential to
generate ample cash flow to service its debt. The ability to accurately analyze
a company's future cash flow by correctly anticipating the impact of economic,
industry-wide and specific events are critical to successful high yield
investing. GSAM's goal is to identify companies with the potential to strengthen
their balance sheets by increasing their earnings, reducing their debt or
effecting a turnaround. GSAM analyzes trends in a company's debt picture (i.e.,
the level of its interest coverage) as well as new developments in its capital
structure on an ongoing basis. GSAM believes that this ongoing reassessment is
more valuable than relying on a "snapshot" view of a company's ability to
service debt at one or two points in time.
High Yield Fund's portfolio is diversified among different sectors and
industries on a global basis in an effort to reduce overall risk. While GSAM
will avoid excessive concentration in any one industry, the Fund's specific
industry weightings are the result of individual security selection. Emerging
market debt considered for the High Yield Fund's portfolio will be selected by
specialists knowledgeable about the political and economic structure of those
economies.
Return on and Risks of High Yield Securities. High yield bonds can deliver
consistently higher yields and total return (and higher volatility) than either
investment grade corporate bonds or U.S. Treasury bonds. However, because these
non-investment grade securities involve higher risks in return for higher
income, they are best suited to long-term investors who are financially secure
enough to withstand volatility and the risks associated with such investments.
Different types of fixed income securities may react differently to changes in
the economy. High yield bonds, like stocks, tend to perform best when the
economy is strong, inflation is low and companies experience healthy profits,
which can lead to higher stock prices and higher credit ratings. Government
bonds are likely to appreciate more in a weaker economy when interest rates are
declining. In certain types of markets, adding some diversification in the high
yield asset class may help to increase returns and decrease overall portfolio
risk.
For high yield, non-investment grade securities, as for most investments,
there is a direct relationship between risk and return. Along with their
potential to deliver higher yields and greater capital appreciation than most
other types of fixed income securities, high yield securities are subject to
higher risk of loss, greater volatility and are considered speculative by
traditional investment standards. The most significant risk associated with high
yield securities is credit risk: the risk that the company issuing a high yield
security may have difficulty in meeting its principal and/or interest payments
on a timely basis. As a result, extensive credit research and diversification
are essential factors in managing risk in the high yield arena. To a lesser
extent, high yield bonds are also subject to interest rate risk: when interest
rates increase, the value of fixed income securities tends to decline.
B-9
<PAGE>
Corporate Debt Obligations
Each Fund may, under normal market conditions, invest in corporate debt
obligations, including obligations of industrial, utility and financial issuers.
CORE U.S. Equity, CORE Large Cap Growth, CORE Large Cap Value, CORE Small Cap
Equity and CORE International Equity Funds' investments in debt securities are
limited to 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 Advisers will attempt to
reduce these risks through portfolio diversification and by analysis of each
issuer and its ability to make timely payments of income and principal, as well
as broad economic trends and corporate developments.
Trust Preferreds. The 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 Investor Service,
Inc. ("Moody's") (or comparable rated and unrated securities) are commonly
referred to as "junk bonds" and are considered speculative. The ability of their
issuers to make principal and interest payments may be questionable. In some
cases, such bonds may be highly speculative, have poor prospects for reaching
investment grade standing and be in default. As a result, investment in such
bonds will entail greater risks than those associated with investment grade
bonds (i.e., bonds rated AAA, AA, A or BBB by Standard and Poor's or Aaa, Aa, A
or Baa by Moody's). Analysis of the creditworthiness of issuers of high yield
securities may be more complex than for issuers of higher quality debt
securities, and the ability of a Fund to achieve its investment objective may,
to the extent of its investments in high yield securities, be more dependent
upon such creditworthiness analysis than would be the case if the Fund were
investing in higher quality securities. See
B-10
<PAGE>
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 tend to reflect
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 are often highly
leveraged, and may not be able to make use of more traditional methods of
financing. 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 Growth and Income,
Capital Growth, Mid Cap Value, International Equity and High Yield Funds invest,
the yields and prices of such securities may tend to fluctuate more than those
for higher-rated securities. In the lower quality segments of the fixed-income
securities market, changes in perceptions of issuers' creditworthiness tend to
occur more frequently and in a more pronounced manner than do changes in higher
quality segments of the fixed-income securities market, resulting in greater
yield and price volatility.
Another factor which causes fluctuations in the prices of high yield,
fixed-income securities is the supply and demand for similarly rated securities.
In addition, the prices of fixed-income securities fluctuate in response to the
general level of interest rates. Fluctuations in the prices of portfolio
securities subsequent to their acquisition will not affect cash income from such
securities but will be reflected in a Fund's net asset value.
The risk of loss from default for the holders of high yield, fixed-income
securities is significantly greater than is the case for holders of other debt
securities because such high yield, fixed-income securities are generally
unsecured and are often subordinated to the rights of other creditors of the
issuers of such securities. Investment by a Fund in already defaulted securities
poses an additional risk of loss should nonpayment of principal and interest
continue in respect of such securities. Even if such securities are held to
maturity, recovery by a Fund of its initial investment and any anticipated
income or appreciation is uncertain. In addition, a Fund may incur additional
expenses to the extent that it is required to seek recovery relating to the
default in the payment of principal or interest on such securities or otherwise
protect its interests. A Fund may be
B-11
<PAGE>
required to liquidate other portfolio securities to satisfy a Fund's annual
distribution obligations in respect of accrued interest income on securities
which are subsequently written off, even though the Fund has not received any
cash payments of such interest.
The secondary market for high yield, fixed-income securities is
concentrated in relatively few markets and is dominated by institutional
investors, including mutual funds, insurance companies and other financial
institutions. Accordingly, the secondary market for such securities is not as
liquid as and is more volatile than the secondary market for higher-rated
securities. In addition, the trading volume for high-yield, fixed-income
securities is generally lower than that of higher 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 a Fund's net
asset value. A less liquid secondary market also may make it more difficult for
a Fund to obtain precise valuations of the high yield securities in its
portfolio.
Certain proposed and recently enacted federal laws could adversely affect
the secondary market for high yield securities and the financial condition of
issuers of these securities. The form of proposed legislation and the
probability of such legislation being enacted is uncertain.
Non-investment grade or high-yield, fixed-income securities also present
risks based on payment expectations. High yield, fixed-income securities
frequently contain "call" or buy-back features which permit the issuer to call
or repurchase the security from its holder. If an issuer exercises such a "call
option" and redeems the security, a Fund may have to replace such security with
a lower-yielding security, resulting in a decreased return for investors. In
addition, if a Fund experiences unexpected net redemptions of its shares, it may
be forced to sell its higher-rated securities, resulting in a decline in the
overall credit quality of the Fund's portfolio and increasing the exposure of
the Fund to the risks of high yield securities.
Credit ratings issued by credit rating agencies are designed to evaluate
the safety of principal and interest payments of rated securities. They do not,
however, evaluate the market value risk of non-investment grade securities and,
therefore, may not fully reflect the true risks of an investment. In addition,
credit rating agencies may or may not make timely changes in a rating to reflect
changes in the economy or in the conditions of the issuer that affect the market
value of the security. Consequently, credit ratings are used only as a
preliminary indicator of investment quality. Investments in non-investment grade
and comparable unrated obligations will be more dependent on the Adviser's
credit analysis than would be the case with investments in investment-grade debt
obligations. The Adviser employs its own credit research and analysis, which
includes a study of existing debt, capital structure, ability to service debt
and to pay dividends, the issuer's sensitivity to economic conditions, its
operating history and the current trend of earnings. The Adviser monitors the
investments in a Fund's portfolio and evaluates whether to dispose of or to
retain non-investment grade and comparable unrated securities whose credit
ratings or credit quality may have changed.
B-12
<PAGE>
Because the market for high yield securities is still relatively new and
has not weathered a major economic recession, it is unknown what affects such a
recession might have on such securities. A widespread economic downturn could
result in increased defaults and losses.
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 Fund had purchased a direct obligation (such as commercial
paper) of such borrower. For example, in the event of the bankruptcy or
insolvency of the corporate borrower, a loan participation may be subject to
certain defenses by the borrower as a result of improper conduct by the agent
bank. Moreover, under the terms of the loan participation, the High Yield Fund
may be regarded as a creditor of the agent bank (rather than of the underlying
corporate borrower), so that the High Yield Fund may also be subject to the risk
that the agent bank may become insolvent. The secondary market, if any, for
these loan participations is limited and any loan participations purchased by
the High Yield Fund will be regarded as illiquid.
For purposes of certain investment limitations pertaining to
diversification of the High Yield Fund's portfolio investments, the issuer of a
loan participation will be the underlying borrower. However, in cases where the
High Yield Fund does not have recourse directly against the borrower, both the
borrower and each agent bank and co-lender interposed between the High Yield
Fund and the borrower will be deemed issuers of a loan participation.
B-13
<PAGE>
Obligations of the United States, Its Agencies, Instrumentalities and Sponsored
Enterprises
Each Fund may invest in U.S. government securities, which are obligations
issued or guaranteed by the U.S. government and its agencies, instrumentalities
or sponsored enterprises ("U.S. Government Securities"). 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 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 suitable secondary market, such
participations are regarded as illiquid.
Each Fund may also purchase U.S. Government Securities in private
placements and 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
Each Fund (other than Short Duration Government Fund) may invest in debt
obligations issued or guaranteed by United States and foreign banks. Bank
obligations, including without limitation, time deposits, bankers' acceptances
and certificates of deposit, may be general obligations of the parent bank or
may be 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
B-14
<PAGE>
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
Short Duration Government, Global Income and High Yield Funds may invest
in deferred interest and capital appreciation bonds and pay-in-kind ("PIK")
securities. Deferred interest and capital appreciation bonds are debt securities
issued or sold at a discount from their face value and which do not entitle the
holder to any periodic payment of interest prior to maturity or a specified
date. The original issue discount varies depending on the time remaining until
maturity or cash payment date, prevailing interest rates, the liquidity of the
security and the perceived credit quality of the issuer. These securities also
may take the form of debt securities that have been stripped of their unmatured
interest coupons, the coupons themselves or receipts or certificates
representing interests in such stripped debt obligations or coupons. The market
prices of deferred interest, capital appreciation bonds and PIK securities
generally are more volatile than the market prices of interest bearing
securities and are likely to respond to a greater degree to changes in interest
rates than interest bearing securities having similar maturities and credit
quality.
PIK securities may be debt obligations or preferred shares that provide
the issuer with the option of paying interest or dividends on such obligations
in cash or in the form of additional securities rather than cash. Similar to
zero coupon bonds and deferred interest bonds, PIK securities are designed to
give an issuer flexibility in managing cash flow. PIK securities that are debt
securities can either be senior or subordinated debt and generally trade flat
(i.e., without accrued interest). The trading price of PIK debt securities
generally reflects the market value of the underlying debt plus an amount
representing accrued interest since the last interest payment.
Deferred interest, capital appreciation and PIK securities involve the
additional risk that, unlike securities that periodically pay interest to
maturity, a Fund will realize no cash until a specified future payment date
unless a portion of such securities is sold and, if the issuer of such
securities defaults, a Fund may obtain no return at all on its investment. In
addition, even though such securities do not provide for the payment of current
interest in cash, the Funds are nonetheless required to accrue income on such
investments for each taxable year and generally are required to distribute such
accrued amounts (net of deductible expenses, if any) to avoid being subject to
tax. Because no cash is generally received at the time of the accrual, a Fund
may be required to liquidate other portfolio securities to obtain sufficient
cash to satisfy federal tax distribution requirements applicable to the Fund. A
portion of the discount with respect to stripped tax-exempt securities or their
coupons may be taxable. See "Taxation."
B-15
<PAGE>
Zero Coupon Bonds
A Fund's investments in fixed-income securities may include zero coupon
bonds, which are debt obligations issued or purchased at a significant discount
from face value. The discount approximates the total amount of interest the
bonds would have accrued and compounded over the period until maturity. Zero
coupon bonds do not require the periodic payment of interest. Such investments
benefit the issuer by mitigating its need for cash to meet debt service but also
require a higher rate of return to attract investors who are willing to defer
receipt of such cash. Such investments may experience greater volatility in
market value than debt obligations which provide for regular payments of
interest. In addition, if an issuer of zero coupon bonds held by a Fund
defaults, the Fund may obtain no return at all on its investment. Each Fund will
accrue income on such investments for each taxable year which (net of deductible
expenses, if any) is distributable to shareholders and which, because no cash is
generally received at the time of accrual, may require the liquidation of other
portfolio securities to obtain sufficient cash to satisfy the Fund's
distribution obligations. See "Taxation."
Variable and Floating Rate Securities
The interest rates payable on certain fixed income securities in which a
Fund may invest are not fixed and may fluctuate based upon changes in market
rates. A variable rate obligation has an interest rate which is adjusted at
predesignated periods in response to changes in the market rate of interest on
which the interest rate is based. Variable and floating rate obligations are
less effective than fixed rate instruments at locking in a particular yield.
Nevertheless, such obligations may fluctuate in value in response to interest
rate changes if there is a delay between changes in market interest rates and
the interest reset date for the obligation.
The Short Duration Government, Global Income and High Yield Funds may
invest in "leveraged" inverse floating rate debt instruments ("inverse
floaters"), including "leveraged inverse floaters." The interest rate on inverse
floaters resets in the opposite direction from the market rate of interest to
which the inverse floater is indexed. An inverse floater may be considered to be
leveraged to the extent that its interest rate varies by a magnitude that
exceeds the magnitude of the change in the index rate of interest. The higher
the degree of leverage of an inverse floater, the greater the volatility of its
market value. Accordingly, the duration of an inverse floater may exceed its
stated final maturity. Certain inverse floaters may be deemed to be illiquid
securities for purposes of each Fund's limitation on illiquid investments.
Custodial Receipts
Each Fund may invest in custodial receipts in respect of securities issued
or guaranteed as to principal and interest by the U.S. government, its agencies,
instrumentalities, political subdivisions or authorities. Such custodial
receipts evidence ownership of future interest payments, principal payments or
both on certain notes or bonds issued or guaranteed as to principal and interest
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
B-16
<PAGE>
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
Short Duration Government Fund and High Yield Fund may invest in municipal
securities. Municipal securities consist of bonds, notes, commercial paper 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"), the
interest on which is exempt from regular federal income tax (i.e., excluded from
gross income for federal income tax purposes but not necessarily exempt from the
federal alternative minimum tax or from the income taxes of any state or local
government). In addition, Municipal Securities include participation interests
in such securities the interest on which is, in the opinion of bond counsel or
counsel selected by the Adviser, excluded from gross income for federal income
tax purposes. The Short Duration Government Fund and High Yield Fund may revise
their definition of Municipal Securities in the future to include other types of
securities that currently exist, the interest on which is or will be, in the
opinion of such counsel, excluded from gross income for federal income tax
purposes, provided that investing in such securities is consistent with each
Fund's investment objective and policies.
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.
B-17
<PAGE>
For the purpose of applying the Fund's investment restrictions, the
identification of the issuer of a Municipal Security which is not a general
obligation is made by the Adviser based on the characteristics of the Municipal
Security, the most important of which is the source of funds for the payment of
principal and interest on such securities.
An entire issue of Municipal Securities may be purchased by one or a small
number of institutional investors such as the Short Duration Government Fund and
High Yield Fund. Thus, the issue may not be said to be publicly offered. Unlike
some securities that are not publicly offered, a secondary market exists for
many Municipal Securities that were not publicly offered initially and such
securities may be readily marketable.
The credit rating assigned to Municipal Securities may reflect the
existence of guarantees, letters of credit or other credit enhancement features
available to the issuers or holders of such Municipal Securities.
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. The Short Duration Government and High Yield Funds may invest in
municipal 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 a 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
B-18
<PAGE>
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 the Fund's limitation on investments
in illiquid securities. Other municipal lease obligations and certificates of
participation acquired by the Fund may be determined by the 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 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 Adviser will consider factors unique to particular lease obligations and
certificates of participation affecting the marketability thereof. These include
the general creditworthiness of the issuer, the importance to the issuer of the
property covered by the lease and the likelihood that the marketability of the
obligation will be maintained throughout the time the obligation is held by a
Fund.
The Short Duration Government Fund and High Yield Fund may purchase
participations in Municipal Securities held by a commercial bank or other
financial institution. Such participations provide the Fund with the right to a
pro rata undivided interest in the underlying Municipal Securities. In addition,
such participations generally provide the Fund with the right to demand payment,
on not more than seven days' notice, of all or any part of the Fund's
participation interest in the underlying Municipal Security, plus accrued
interest. The High Yield 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 Adviser, the interest from such participations is exempt
from regular federal income tax.
Auction Rate Securities. The Short Duration Government Fund and High Yield Fund
may invest in auction rate securities. Auction rate securities consist of
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. The
Fund will take the time remaining until the next scheduled auction date into
account for purpose of determining the securities' duration.
Dividends on auction rate preferred securities issued by a closed-end fund
may be designated as exempt from federal income tax to the extent they are
attributable to exempt income earned by the fund on the securities in its
portfolio and distributed to holders of the preferred securities, provided that
the preferred securities are treated as equity securities for federal income tax
purposes and the closed-end fund complies with certain tests under the Code.
B-19
<PAGE>
The Fund's investments in auction rate securities of closed-end funds are
subject to the limitations prescribed by the Act. The Funds will indirectly bear
their proportionate share of any management and other fees paid by such
closed-end funds in addition to the advisory fees payable directly by the Fund.
Other Types of Municipal Securities. Other types of Municipal Securities in
which the Short Duration Government Fund and High Yield Fund 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 a Fund's portfolio are called prior
to the maturity, the 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 Fund's return on its portfolio securities.
Mortgage Loans and Mortgage-Backed Securities
General Characteristics. Each Fund (other than CORE U.S. Equity, CORE
Large Cap Growth, CORE Large Cap Value, CORE Small Cap Equity and CORE
International Equity Funds) may invest in Mortgage-Backed Securities. Each
mortgage pool underlying Mortgage-Backed Securities consists of mortgage loans
evidenced by promissory notes secured by first mortgages or first deeds of trust
or other similar security instruments creating a first lien on owner occupied
and non-owner occupied one-unit to four-unit residential properties, multifamily
(i.e., five or more) properties, agriculture properties, commercial properties
and mixed use properties (the "Mortgaged Properties"). The Mortgaged Properties
may consist of detached individual dwelling units, multifamily dwelling units,
individual condominiums, townhouses, duplexes, triplexes, fourplexes, row
houses, individual units in planned unit developments and other attached
dwelling units. The Mortgaged Properties may also include residential investment
properties and second homes.
The investment characteristics of adjustable and fixed rate
Mortgage-Backed Securities differ from those of traditional fixed income
securities. The major differences include the payment of interest and principal
on Mortgage-Backed Securities on a more frequent (usually monthly) schedule, and
the possibility that principal may be prepaid at any time due to prepayments on
the underlying mortgage loans or other assets. These differences can result in
significantly greater price and yield volatility than is the case with
traditional fixed income securities. As a result, if a Fund purchases
Mortgage-Backed Securities at a premium, a faster than expected prepayment rate
will reduce both the market value and the yield to maturity from those which
were anticipated. A prepayment rate that is slower than expected will have the
opposite effect of increasing yield to maturity and market value. Conversely, if
a Fund purchases Mortgage-Backed Securities at a discount, faster than expected
prepayments will increase, while slower than expected prepayments will reduce
yield to maturity and market values. To the extent that a Fund invests in
Mortgage-Backed Securities, the Advisers may seek to manage these potential
risks by investing in a variety of Mortgage-Backed Securities and by using
certain hedging techniques.
B-20
<PAGE>
Adjustable Rate Mortgage Loans ("ARMs"). ARMs generally provide for a
fixed initial mortgage interest rate for a specified period of time. Thereafter,
the interest rates (the "Mortgage Interest Rates") may be subject to periodic
adjustment based on changes in the applicable index rate (the "Index Rate"). The
adjusted rate would be equal to the Index Rate plus a fixed percentage spread
over the Index Rate established for each ARM at the time of its origination.
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 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.
B-21
<PAGE>
There are two main categories of indices which provide the basis for rate
adjustments on ARMs: those based on U.S. Treasury securities and those derived
from a calculated measure, such as a cost of funds index or a moving average of
mortgage rates. Commonly utilized indices include the one-year, three-year and
five-year constant maturity Treasury rates, the three-month Treasury bill rate,
the 180-day Treasury bill rate, rates on longer-term Treasury securities, the
11th District Federal Home Loan Bank Cost of Funds, the National Median Cost of
Funds, the one-month, three-month, six-month or one-year London Interbank
Offered Rate, the prime rate of a specific bank or commercial paper rates. Some
indices, such as the one-year constant maturity Treasury rate, closely mirror
changes in market interest rate levels. Others, such as the 11th District
Federal Home Loan Bank Cost of Funds index, tend to lag behind changes in market
rate levels and tend to be somewhat less volatile. The degree of volatility in
the market value of each Fund's portfolio and, therefore, in the net asset value
of each Fund's shares will be a function of the length of the interest rate
reset periods and the degree of volatility in the applicable indices.
Fixed-Rate Mortgage Loans. Generally, fixed-rate mortgage loans included
in a mortgage pool (the "Fixed-Rate Mortgage Loans") will bear simple interest
at fixed annual rates and have original terms to maturity ranging from 5 to 40
years. Fixed-Rate Mortgage Loans generally provide for monthly payments of
principal and interest in substantially equal installments for the term of the
mortgage note in sufficient amounts to fully amortize principal by maturity,
although certain Fixed-Rate Mortgage Loans provide for a large final "balloon"
payment upon maturity.
Legal Considerations of Mortgage Loans. The following is a discussion of
certain legal and regulatory aspects of the mortgage loans in which the Funds
may invest. These regulations may impair the ability of a mortgage lender to
enforce its rights under the mortgage documents. These regulations may adversely
affect the Funds' investments in Mortgage-Backed Securities (including those
issued or guaranteed by the U.S. government, its agencies or instrumentalities)
by delaying the Funds' receipt of payments derived from principal or interest on
mortgage loans affected by such regulations.
1. Foreclosure. A foreclosure of a defaulted mortgage loan may be delayed due
to compliance with statutory notice or service of process provisions,
difficulties in locating necessary parties or legal challenges to the
mortgagee's right to foreclose. Depending upon market conditions, the
ultimate 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.
B-22
<PAGE>
3. Legislative Limitations. In addition to anti-deficiency and related
legislation, numerous other federal and state statutory provisions,
including the federal bankruptcy laws and state laws affording relief to
debtors, may interfere with or affect the ability of a secured mortgage
lender to enforce its security interest. For example, a bankruptcy court
may grant the debtor a reasonable time to cure a default on a mortgage
loan, including a payment default. The court in certain instances may also
reduce the monthly payments due under such mortgage loan, change the rate
of interest, reduce the principal balance of the loan to the then-current
appraised value of the related mortgaged property, alter the mortgage loan
repayment schedule and grant priority of certain liens over the lien of
the mortgage loan. If a court relieves a borrower's obligation to repay
amounts otherwise due on a mortgage loan, the mortgage loan servicer will
not be required to advance such amounts, and any loss may be borne by the
holders of securities backed by such loans. In addition, numerous federal
and state consumer protection laws impose penalties for failure to comply
with specific requirements in connection with origination and servicing of
mortgage loans.
4. "Due-on-Sale" Provisions. Fixed-rate mortgage loans may contain a
so-called "due-on-sale" clause permitting acceleration of the maturity of
the mortgage loan if the borrower transfers the property. The Garn-St.
Germain Depository Institutions Act of 1982 sets forth nine specific
instances in which no mortgage lender covered by that Act may exercise a
"due-on-sale" clause upon a transfer of property. The inability to enforce
a "due-on-sale" clause or the lack of such a clause in mortgage loan
documents may result in a mortgage loan being assumed by a purchaser of
the property that bears an interest rate below the current market rate.
5. Usury Laws. Some states prohibit charging interest on mortgage loans in
excess of statutory limits. If such limits are exceeded, substantial
penalties may be incurred and, in some cases, enforceability of the
obligation to pay principal and interest may be affected.
Government Guaranteed Mortgage-Backed Securities. There are several types
of guaranteed Mortgage-Backed Securities currently available, including
guaranteed mortgage pass-through certificates and multiple class securities,
which include guaranteed Real Estate Mortgage Investment Conduit Certificates
("REMIC Certificates"), other collateralized mortgage obligations and stripped
Mortgage-Backed Securities. A Fund is permitted to invest in other types of
Mortgage-Backed Securities that may be available in the future to the extent
consistent with its investment policies and objective.
A Fund's investments in Mortgage-Backed Securities may include securities
issued or guaranteed by the U.S. Government or one of its agencies, authorities,
instrumentalities or sponsored enterprises, such as the Government National
Mortgage Association ("Ginnie Mae"), the Federal National Mortgage Association
("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac").
Ginnie Mae Certificates. Ginnie Mae is a wholly-owned corporate
instrumentality of the United States. Ginnie Mae is authorized to guarantee the
timely payment of the principal of and interest on certificates that are based
on and backed by a pool of mortgage loans insured by the
B-23
<PAGE>
Federal Housing Administration ("FHA Loans"), or guaranteed by the Veterans
Administration ("VA Loans"), or by pools of other eligible mortgage loans. In
order to meet its obligations under any guaranty, Ginnie Mae is authorized to
borrow from the United States Treasury in an unlimited amount.
Fannie Mae Certificates. Fannie Mae is a stockholder-owned corporation
chartered under an act of the United States Congress. Each Fannie Mae
Certificate is issued and guaranteed by Fannie Mae and represents an undivided
interest in a pool of mortgage loans (a "Pool") formed by Fannie Mae. Each Pool
consists of residential mortgage loans ("Mortgage Loans") either previously
owned by Fannie Mae or purchased by it in connection with the formation of the
Pool. The Mortgage Loans may be either conventional Mortgage Loans (i.e., not
insured or guaranteed by any U.S. Government agency) or Mortgage Loans that are
either insured by the Federal Housing Administration ("FHA") or guaranteed by
the Veterans Administration ("VA"). However, the Mortgage Loans in Fannie Mae
Pools are primarily conventional Mortgage Loans. The lenders originating and
servicing the Mortgage Loans are subject to certain eligibility requirements
established by Fannie Mae.
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
B-24
<PAGE>
may include whole loans, participation interests in whole loans and undivided
interests in whole loans and participations comprising another Freddie Mac
Certificate group.
Conventional Mortgage Loans. The conventional mortgage loans underlying
the Freddie Mac and Fannie Mae Certificates consist of adjustable rate or
fixed-rate mortgage loans with original terms to maturity of between five and
thirty years. Substantially all of these mortgage loans are secured by first
liens on one- to four-family residential properties or multi-family projects.
Each 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. Certain Funds (other than CORE U.S.
Equity, CORE Large Cap Growth, CORE Large Cap Value, CORE Small Cap Equity and
CORE International Equity Funds) may invest in both government guaranteed and
privately issued mortgage pass-through securities ("Mortgage Pass-Throughs");
that is, fixed or adjustable rate Mortgage-Backed Securities which provide for
monthly payments that are a "pass-through" of the monthly interest and principal
payments (including any prepayments) made by the individual borrowers on the
pooled mortgage loans, net of any fees or other amounts paid to any guarantor,
administrator and/or servicer of the underlying mortgage loans.
The following discussion describes only a few of the wide variety of
structures of Mortgage Pass-Throughs that are available or may be issued.
Description of Certificates. Mortgage Pass-Throughs may be issued in
one or more classes of senior certificates and one or more classes of
subordinate certificates. Each such class may bear a different pass-through
rate. Generally, each certificate will evidence the specified interest of the
holder thereof in the payments of principal or interest or both in respect of
the mortgage pool comprising part of the trust fund for such certificates.
Any class of certificates may also be divided into subclasses entitled to
varying amounts of principal and interest. If a REMIC election has been made,
certificates of such subclasses may be entitled to payments on the basis of a
stated principal balance and stated interest rate, and payments among different
subclasses may be made on a sequential, concurrent, pro rata or disproportionate
basis, or any combination thereof. The stated interest rate on any such subclass
of certificates may be a fixed rate or one which varies in direct or inverse
relationship to an objective interest index.
Generally, each registered holder of a certificate will be entitled to
receive its pro rata share of monthly distributions of all or a portion of
principal of the underlying mortgage loans or of interest on the principal
balances thereof, which accrues at the applicable mortgage pass-through rate, or
both. The difference between the mortgage interest rate and the related mortgage
pass-through rate (less the amount, if any, of retained yield) with respect to
each mortgage loan will generally be paid to the servicer as a servicing fee.
Since certain adjustable rate 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
B-25
<PAGE>
outstanding principal balance of the related mortgage loan during the relevant
period at the applicable mortgage interest rate. In such event, the amount of
interest that is treated as deferred interest will be added to the principal
balance of the related mortgage loan and will be distributed pro rata to
certificate-holders as principal of such mortgage loan when paid by the
mortgagor in subsequent monthly payments or at maturity.
Ratings. The ratings assigned by a rating organization to Mortgage
Pass-Throughs address the likelihood of the receipt of all distributions on the
underlying mortgage loans by the related certificate-holders under the
agreements pursuant to which such certificates are issued. A rating
organization's ratings take into consideration the credit quality of the related
mortgage pool, including any credit support providers, structural and legal
aspects associated with such certificates, and the extent to which the payment
stream on such mortgage pool is adequate to make payments required by such
certificates. A rating organization's ratings on such certificates do not,
however, constitute a statement regarding frequency of prepayments on the
related mortgage loans. In addition, the rating assigned by a rating
organization to a certificate does not address the remote possibility that, in
the event of the insolvency of the issuer of certificates where a subordinated
interest was retained, the issuance and sale of the senior certificates may be
recharacterized as a financing and, as a result of such recharacterization,
payments on such certificates may be affected.
Credit Enhancement. Credit support falls generally into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from default by an obligor on the underlying assets. Liquidity
protection refers to the provision of advances, generally by the entity
administering the pools of mortgages, the provision of a reserve fund, or a
combination thereof, to ensure, subject to certain limitations, that scheduled
payments on the underlying pool are made in a timely fashion. Protection against
losses resulting from default ensures ultimate payment of the obligations on at
least a portion of the assets in the pool. Such credit support can be provided
by among other things, payment guarantees, letters of credit, pool insurance,
subordination, or any combination thereof.
Subordination; Shifting of Interest; Reserve Fund. In order to
achieve ratings on one or more classes of Mortgage Pass-Throughs, one or more
classes of certificates may be subordinate certificates which provide that the
rights of the subordinate certificate-holders to receive any or a specified
portion of distributions with respect to the underlying mortgage loans may be
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
B-26
<PAGE>
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 to them and
will protect the senior certificate-holders against certain losses; however, in
certain circumstances the Reserve Fund could be depleted and temporary
shortfalls could result. In the event that 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.
B-27
<PAGE>
Multiple Class Mortgage-Backed Securities and Collateralized
Mortgage Obligations. A Fund may invest in multiple class securities including
collateralized mortgage obligations ("CMOs") and REMIC Certificates. These
securities may be issued by U.S. Government agencies and instrumentalities such
as Fannie Mae or Freddie Mac or by trusts formed by private originators of, or
investors in, mortgage loans, including savings and loan associations, mortgage
bankers, commercial banks, insurance companies, investment banks and special
purpose subsidiaries of the foregoing. In general, CMOs are debt obligations of
a legal entity that are collateralized by, and multiple class Mortgage-Backed
Securities represent direct ownership interests in, a pool of mortgage loans or
Mortgage-Backed Securities the payments on which are used to make payments on
the CMOs or multiple class Mortgage-Backed Securities.
Fannie Mae REMIC Certificates are issued and guaranteed as to timely
distribution of principal and interest by Fannie Mae. In addition, Fannie Mae
will be obligated to distribute the principal balance of each class of REMIC
Certificates in full, whether or not sufficient funds are otherwise available.
Freddie Mac guarantees the timely payment of interest on Freddie Mac REMIC
Certificates and also guarantees the payment of principal as payments are
required to be made on the underlying mortgage participation certificates
("PCs"). PCs represent undivided interests in specified level payment,
residential mortgages or participations therein purchased by Freddie Mac and
placed in a PC pool. With respect to principal payments on PCs, Freddie Mac
generally guarantees ultimate collection of all principal of the related
mortgage loans without offset or deduction. Freddie Mac also guarantees timely
payment of principal of certain PCs.
CMOs and guaranteed REMIC Certificates issued by Fannie Mae and Freddie
Mac are types of multiple class Mortgage-Backed Securities. Investors may
purchase beneficial interests in REMICs, which are known as "regular" interests
or "residual" interests. The Funds do not intend to purchase residual interests
in REMICs. The REMIC Certificates represent beneficial ownership interests in a
REMIC trust, generally consisting of mortgage loans or Fannie Mae, Freddie Mac
or Ginnie Mae guaranteed mortgage-backed securities (the "Mortgage Assets"). The
obligations of Fannie Mae or Freddie Mac under their respective guaranty of the
REMIC Certificates are obligations solely of Fannie Mae or Freddie Mac,
respectively.
CMOs and REMIC Certificates are issued in multiple classes. Each class of
CMOs or REMIC Certificates, often referred to as a "tranche," is issued at a
specific adjustable or fixed interest rate and must be fully retired no later
than its final distribution date. Principal prepayments on the Mortgage Loans or
the Mortgage Assets underlying the CMOs or REMIC Certificates may cause some or
all of the classes of CMOs or REMIC Certificates to be retired substantially
earlier than their final distribution dates. Generally, interest is paid or
accrues on all classes of CMOs or REMIC Certificates on a monthly basis.
The principal of and interest on the Mortgage Assets may be allocated
among the several classes of CMOs or REMIC Certificates in various ways. In
certain structures (known as "sequential pay" CMOs or REMIC Certificates),
payments of principal, including any principal
B-28
<PAGE>
prepayments, on the Mortgage Assets generally are applied to the classes of CMOs
or REMIC Certificates in the order of their respective final distribution dates.
Thus, no payment of principal will be made on any class of sequential pay CMOs
or REMIC Certificates until all other classes having an earlier final
distribution date have been paid in full.
Additional structures of CMOs and REMIC Certificates include, among
others, "parallel pay" CMOs and REMIC Certificates. Parallel pay CMOs or REMIC
Certificates are those which are structured to apply principal payments and
prepayments of the Mortgage Assets to two or more classes concurrently on a
proportionate or disproportionate basis. These simultaneous payments are taken
into account in calculating the final distribution date of each class.
A wide variety of REMIC Certificates may be issued in parallel pay or
sequential pay structures. These securities include accrual certificates (also
known as "Z-Bonds"), which only accrue interest at a specified rate until all
other certificates having an earlier final distribution date have been retired
and are converted thereafter to an interest-paying security, and planned
amortization class ("PAC") certificates, which are parallel pay REMIC
Certificates that generally require that specified amounts of principal be
applied on each payment date to one or more classes or REMIC Certificates (the
"PAC Certificates"), even though all other principal payments and prepayments of
the Mortgage Assets are then required to be applied to one or more other classes
of the Certificates. The scheduled principal payments for the PAC Certificates
generally have the highest priority on each payment date after interest due has
been paid to all classes entitled to receive interest currently. Shortfalls, if
any, are added to the amount payable on the next payment date. The PAC
Certificate payment schedule is taken into account in calculating the final
distribution date of each class of PAC. In order to create PAC tranches, one or
more tranches generally must be created that absorb most of the volatility in
the underlying mortgage assets. These tranches tend to have market prices and
yields that are much more volatile than other PAC classes.
Stripped Mortgage-Backed Securities. The Short Duration Government, Global
Income and High Yield Funds may invest in stripped mortgage-backed securities
("SMBS"), which are derivative multiclass mortgage securities, issued or
guaranteed by the U.S. Government, its agencies or instrumentalities or by
private issuers. Although the market for such securities is increasingly liquid,
privately issued SMBS may not be readily marketable and will be considered
illiquid for purposes of the Fund's limitation on investments in illiquid
securities. A Fund's 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.
B-29
<PAGE>
Asset-Backed Securities
Each Fund (except the CORE U.S. Equity, CORE Large Cap Growth, CORE Large
Cap Value, CORE Small Cap Equity and CORE International Equity Funds) may invest
in asset-backed securities. Asset-backed securities represent participation in,
or are secured by and payable from, assets such as motor vehicle installment
sales, installment loan contracts, leases of various types of real and personal
property, receivables from revolving credit (credit card) agreements and other
categories of receivables. Such assets are securitized through the use of trusts
and special purpose corporations. Payments or distributions of principal and
interest may be guaranteed up to certain amounts and for a certain time period
by a letter of credit or a pool insurance policy issued by a financial
institution unaffiliated with the trust or corporation, or other credit
enhancements may be present.
Like Mortgage-Backed Securities, asset-backed securities are often subject
to more rapid repayment than their stated maturity date would indicate as a
result of the pass-through of prepayments of principal on the underlying loans.
A Fund's ability to maintain positions in such securities will be affected by
reductions in the principal amount of such securities resulting from
prepayments, and its ability to reinvest the returns of principal at comparable
yields is subject to generally prevailing interest rates at that time. To the
extent that a Fund invests in asset-backed securities, the values of such Fund's
portfolio securities will vary with changes in market interest rates generally
and the differentials in yields among various kinds of asset-backed securities.
Asset-backed securities present certain additional risks that are not
presented by Mortgage-Backed Securities because asset-backed securities
generally do not have the benefit of a security interest in collateral that is
comparable to mortgage assets. Credit card receivables are generally unsecured
and the debtors on such receivables are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set-off certain amounts owed on the credit cards, thereby reducing the
balance due. Automobile receivables generally are secured, but by automobiles
rather than residential real property. Most issuers of automobile receivables
permit the loan servicers to retain possession of the underlying obligations. If
the servicer were to sell these obligations to another party, there is a risk
that the purchaser would acquire an interest superior to that of the holders of
the asset-backed securities. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of the automobile receivables may not have a
proper security interest in the underlying automobiles. Therefore, there is the
possibility that, in some cases, recoveries on repossessed collateral may not be
available to support payments on these securities.
Futures Contracts and Options on Futures Contracts
Each Fund may purchase and sell futures contracts and may also purchase
and write options on futures contracts. CORE Large Cap Growth, CORE Large Cap
Value and CORE Small Cap Equity 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.
B-30
<PAGE>
Government securities), securities indices, foreign currencies and other
financial instruments and indices. Each Fund will engage in futures and related
options transactions, only for bona fide hedging purposes as defined below or
for purposes of seeking to increase total return to the extent permitted by
regulations of the Commodity Futures Trading Commission ("CFTC"). All futures
contracts entered into by a Fund are traded on U.S. exchanges or boards of trade
that are licensed and regulated by the CFTC or on foreign exchanges. Neither the
CFTC, National Futures Association nor any domestic exchange regulates
activities of any foreign exchange or boards of trade, including the execution,
delivery and clearing of transactions, or has the power to compel enforcement of
the rules of a foreign exchange or board of trade or any applicable foreign law.
This is true even if the exchange is formally linked to a domestic market so
that a position taken on the market may be liquidated by a transaction on
another market. Moreover, such laws or regulations will vary depending on the
foreign country in which the foreign futures or foreign options transaction
occurs. For these reasons, persons who trade foreign futures or foreign options
contracts may not be afforded certain of the protective measures provided by the
Commodity Exchange Act, the CFTC's regulations and the rules of the National
Futures Association and any domestic exchange, including the right to use
reparations proceedings before the CFTC and arbitration proceedings provided by
the National Futures Association or any domestic futures exchange. In
particular, a Fund's investments in foreign futures or foreign options
transactions may not be provided the same protections in respect of transactions
on United States futures exchanges.
Futures Contracts. A futures contract may generally be described as an
agreement between two parties to buy and sell particular financial instruments
or currencies for an agreed price during a designated month (or to deliver the
final cash settlement price, in the case of a contract relating to an index or
otherwise not calling for physical delivery at the end of trading in the
contract).
When interest rates are rising or securities prices are falling, a Fund
can seek to offset a decline in the value of its current portfolio securities
through the sale of futures contracts. When interest rates are falling or
securities prices are rising, a Fund, through the purchase of futures contracts,
can attempt to secure better rates or prices than might later be available in
the market when it effects anticipated purchases. Similarly, each Fund (other
than CORE U.S. Equity, CORE Large Cap Growth, CORE Large Cap Value, CORE Small
Cap Equity and Short Duration Government Funds) can purchase and sell futures
contracts on a specified currency in order to seek to increase total return or
to hedge against changes in currency exchange rates. Each Fund (other than CORE
U.S. Equity, CORE Large Cap Growth, CORE Large Cap Value, CORE Small Cap Equity
and Short Duration Government Funds) can purchase futures contracts on foreign
currency to establish the price in U.S. dollars of a security quoted or
denominated in such currency that such Fund has acquired or expects to acquire.
The Short Duration Government, Global Income and High Yield 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 markets are not normally held to maturity,
but are instead liquidated through offsetting transactions which may result in a
profit or a loss. While futures contracts on securities or currency will usually
be liquidated 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
B-31
<PAGE>
futures on securities or currencies 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 or rate of return on portfolio securities or securities that a Fund
proposes to acquire or the exchange rate of currencies in which portfolio
securities are denominated or quoted. A Fund may, for example, take a "short"
position in the futures market by selling futures contracts to seek to hedge
against an anticipated rise in interest rates or a decline in market prices or
(other than CORE U.S. Equity, CORE Large Cap Growth, CORE Large Cap Value, CORE
Small Cap Equity and Short Duration Government Funds) foreign currency rates
that would adversely affect U.S. dollar value of the Fund's portfolio
securities. Such futures contracts may include contracts for the future delivery
of securities held by a Fund or securities with characteristics similar to those
of a Fund's portfolio securities. Similarly, each Fund (other than CORE U.S.
Equity, CORE Large Cap Growth, CORE Large Cap Value, CORE Small Cap Equity and
Short Duration Government Funds) may sell futures contracts on any currencies in
which its portfolio securities are quoted or denominated or in one currency to
seek to hedge against fluctuations in the value of securities quoted or
denominated in a different currency if there is an established historical
pattern of correlation between the two currencies. If, in the opinion of the
applicable Adviser, there is a sufficient degree of correlation between price
trends for a Fund's portfolio securities and futures contracts based on other
financial instruments, securities indices or other indices, a Fund may also
enter into such futures contracts as part of its hedging strategy. Although
under some circumstances prices of securities in a Fund's portfolio may be more
or less volatile than prices of such futures contracts, the Advisers will
attempt to estimate the extent of this volatility difference based on historical
patterns and compensate for any such differential by having a Fund enter into a
greater or lesser number of futures contracts or by attempting to achieve only a
partial hedge against price changes affecting a Fund's 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 a Fund's portfolio securities would be substantially offset by a
decline in the value of the futures position.
On other occasions, a Fund may take a "long" position by purchasing
futures contracts. This may be done, for example, when a 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 that are currently available.
Options on Futures Contracts. The acquisition of put and call options on
futures contracts will give a Fund the right (but not the obligation), for a
specified price, to sell or to purchase, respectively, the underlying futures
contract at any time during the option period. As the purchaser of an option on
a futures contract, a Fund obtains the benefit of the futures position if prices
move in a favorable direction but limits its risk of loss in the event of an
unfavorable price movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium
which may partially offset a decline in the value of a Fund's assets. By writing
a call option, a Fund becomes obligated,
B-32
<PAGE>
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 a Fund intends to
purchase. However, a Fund becomes obligated upon exercise of the option to
purchase a futures contract if the option is exercised, which may have a value
lower than the exercise price. Thus, the loss incurred by a Fund in writing
options on futures is potentially unlimited and may exceed the amount of the
premium received. A Fund will incur transaction costs in connection with the
writing of options on futures.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option on the same financial
instrument. There is no guarantee that such closing transactions can be
effected. A Fund's ability to establish and close out positions on such options
will be subject to the development and maintenance of a liquid market.
Other Considerations. Each Fund will engage in futures transactions and
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 a 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 a 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 the 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 a Fund than if it had not
entered into any futures contracts or options transactions. In the event of an
imperfect correlation between a futures position and a portfolio position which
is intended to be protected, the desired protection may not be obtained and a
Fund may be exposed to risk of loss.
Perfect correlation between a Fund's futures positions and portfolio
positions will be difficult to achieve because no futures contracts based on
individual equity or corporate fixed-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
B-33
<PAGE>
futures to seek to increase total return depends upon the ability of its
investment adviser to analyze correctly the futures markets.
Options on Securities and Securities Indices
Writing Covered Options. Each Fund may write (sell) covered call and put
options on any securities in which it may invest or on any securities index
based on securities in which it may invest. A Fund may purchase and write such
options on securities that are listed on national domestic securities exchanges
or foreign securities exchanges or traded in the over-the-counter market. A call
option written by a Fund obligates such Fund to sell specified securities to the
holder of the option at a specified price if the option is exercised at any time
before the expiration date. All call options written by a Fund are covered,
which means that such Fund will own the securities subject to the option as long
as the option is outstanding or such Fund will use the other methods described
below. A Fund's purpose in writing covered call options is to realize greater
income than would be realized on portfolio securities transactions alone.
However, a Fund may forego the opportunity to profit from an increase in the
market price of the underlying security.
A put option written by a Fund would obligate such Fund to purchase
specified securities from the option holder at a specified price if the option
is exercised at any time before the expiration date. All put options written by
a Fund would be covered, which means that such Fund will segregate cash or
liquid assets with a value at least equal to the exercise price of the put
option or will use the other methods described below. The purpose of writing
such options is to generate additional income for the Fund. However, in return
for the option premium, each Fund accepts the risk that it may be required to
purchase the underlying securities at a price in excess of the securities'
market value at the time of purchase.
Call and put options written by a Fund will also be considered to be
covered to the extent that the Fund's liabilities under such options are wholly
or partially offset by its rights under call and put options purchased by the
Fund or by an offsetting forward contract which, by virtue of its exercise price
or otherwise, reduces a Fund's net exposure on its written option position.
Options on securities indices are similar to options on securities, except
that the exercise of securities index options requires cash settlement payments
and does not involve the actual purchase or sale of securities. In addition,
securities index options are designed to reflect price fluctuations in a group
of securities or segment of the securities market rather than price fluctuations
in a single security.
A Fund may cover call options on a securities index by owning securities
whose price changes are expected to be similar to those of the underlying index,
or by having an absolute and immediate right to acquire such securities without
additional cash consideration (or for additional cash consideration which has
been segregated by the Fund) upon conversion or exchange of other securities in
its portfolio. A Fund may also 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.
B-34
<PAGE>
A Fund may terminate its obligations under an exchange-traded call or put
option by purchasing an option identical to the one it has written. Obligations
under over-the-counter options may be terminated only by entering into an
offsetting transaction with the counterparty to such option. Such purchases are
referred to as "closing purchase transactions."
Purchasing Options. Each Fund may purchase put and call options on any
securities in which it may invest or options on any securities index composed of
securities in which it may invest. A Fund would also be able to enter into
closing sale transactions in order to realize gains or minimize losses on
options it had purchased.
A Fund may purchase call options in anticipation of an increase, or put
options in anticipation of a decrease (`protective puts"), in the market value
of securities of the type in which it may invest. The purchase of a call option
would entitle a Fund, in return for the premium paid, to purchase specified
securities at a specified price during the option period. A Fund would
ordinarily realize a gain on the purchase of a call option if, during the option
period, the value of such securities exceeded the sum of the exercise price, the
premium paid and transaction costs; otherwise such a Fund would realize either
no gain or a loss on the purchase of the call option. The purchase of a put
option would entitle a Fund, in exchange for the premium paid, to sell specified
securities at a specified price during the option period. The purchase of
protective puts is designed to offset or hedge against a decline in the market
value of a Fund's securities. Put options may also be purchased by a Fund for
the purpose of affirmatively benefiting from a decline in the price of
securities which it does not own. A Fund would ordinarily realize a gain if,
during the option period, the value of the underlying securities decreased below
the exercise price sufficiently to more than cover the premium and transaction
costs; otherwise 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 the underlying
portfolio securities.
A Fund would purchase put and call options on securities indices for the
same purposes as it would purchase options on individual securities. For a
description of options on securities indices, see "Writing Covered Options"
above.
Yield Curve Options. The Short Duration Government, Global Income and High
Yield Funds 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.
The Short Duration Government, Global Income and High Yield Funds may
purchase or write yield curve options for the same purposes as other options on
securities. For example, the Short Duration Government, Global Income and High
Yield Funds may purchase a call option on the yield spread between two
securities if any such Fund owns one of the securities and anticipates
purchasing the other security and wants to hedge against an adverse change in
the yield spread
B-35
<PAGE>
between the two securities. Short Duration Government Global Income and High
Yield Funds may also purchase or write yield curve options in an effort to
increase their current income if, in the judgment of the Adviser, the Funds will
be able to profit from movements in the spread between the yields of the
underlying securities. The trading of yield curve options is subject to all of
the risks associated with the trading of other types of options. In addition,
however, such options present risk of loss even if the yield of one of the
underlying securities remains constant, or if the spread moves in a direction or
to an extent which was not anticipated.
Yield curve options written by the Short Duration Government, Global
Income and High Yield Funds will be "covered." A call (or put) option is covered
if a Fund holds another call (or put) option on the spread between the same two
securities and segregates cash or liquid assets sufficient to cover the Fund's
net liability under the two options. Therefore, a Fund's liability for such a
covered option is generally limited to the difference between the amount of the
Fund's liability under the option written by the Fund less the value of the
option held by the Fund. Yield curve options may also be covered in such other
manner as may be in accordance with the requirements of the counterparty with
which the option is traded and applicable laws and regulations. Yield curve
options are traded over-the-counter, and the trading markets for these options
may not be as developed as the markets for other types of options.
Risks Associated with Options Transactions. There is no assurance that a
liquid secondary market on a domestic or foreign options exchange will exist for
any particular exchange-traded option or at any particular time. If a Fund is
unable to effect a closing purchase transaction with respect to covered options
it has written, the Fund will not be able to sell the underlying securities or
dispose of segregated assets until the options expire or are exercised.
Similarly, if a Fund is unable to effect a closing sale transaction with respect
to options it has purchased, it will have to exercise the options in order to
realize any profit and will incur transaction costs upon the purchase or sale of
underlying securities.
Reasons for the absence of a liquid secondary market on an exchange
include the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening or closing
transactions or both; (iii) trading halts, suspensions or other restrictions may
be imposed with respect to particular classes or series of options; (iv) unusual
or unforeseen circumstances may interrupt normal operations on an exchange; (v)
the facilities of an exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume; or (vi) one or more
exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that exchange that had been issued by the Options Clearing
Corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
Each Fund may purchase and sell both options that are traded on U.S. and
foreign exchanges and options traded over-the-counter with broker-dealers who
make markets in these options. The ability to terminate over-the-counter options
is more limited than with exchange-traded options and
B-36
<PAGE>
may involve the risk that broker-dealers participating in such transactions will
not fulfill their obligations.
Transactions by each 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 a Fund may write or purchase may be
affected by options written or purchased by other investment advisory clients of
the Advisers. An exchange, board of trade or other trading facility may order
the liquidation of positions found to be in excess of these limits, and it may
impose certain other sanctions.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The use of options to seek to
increase total return involves the risk of loss if the 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
Adviser's ability to predict future price fluctuations and the degree of
correlation between the options and securities markets. If the 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
Each Fund other than the Short Duration Government and Global Income Funds
may invest in warrants or rights (other than those acquired in units or attached
to other securities) which entitle the holder to buy equity securities at a
specific price for a specific period of time. A Fund will invest in warrants and
rights only if such securities are deemed appropriate by the 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
Each Fund (except the Short Duration Government Fund) may invest in
securities of foreign issuers. The Growth and Income, Capital Growth, Mid Cap
Value, CORE International Equity, International Equity, Global Income and High
Yield Funds may invest in the aggregate up to 25%, 10%, 25%, 90%, 65%, 25% and
25%, respectively, of their total assets in foreign securities, including
securities of issuers located in emerging countries. With respect to the CORE
U.S. Equity, CORE Large Cap Growth, CORE Large Cap Value and CORE Small Cap
Equity Funds, equity securities of foreign issuers must be traded in the United
States.
Investments in foreign securities may offer potential benefits that are
not available from investing exclusively in U.S. dollar-denominated domestic
issues. Such benefits may include the
B-37
<PAGE>
opportunity to invest in foreign issuers that appear, in the opinion of the
applicable Adviser, to offer the potential for long-term growth of capital and
income, the opportunity to invest in foreign countries with economic policies or
business cycles different from those of the United States and the opportunity to
reduce fluctuations in portfolio value by taking advantage of foreign securities
markets that do not necessarily move in a manner parallel to U.S. markets.
Investing in foreign securities also involves, however, certain special
risks, including those set forth below, which are not typically associated with
investing in U.S. dollar-denominated or quoted securities of U.S. issuers.
Investments in foreign securities usually involve currencies of foreign
countries. Accordingly, any Fund that invests in foreign securities may be
affected favorably or unfavorably by changes in currency rates and in exchange
control regulations and may incur costs in connection with conversions between
various currencies. CORE International Equity, International Equity, Global
Income and High Yield Funds may be subject to currency exposure independent of
their securities positions. To the extent that a Fund is fully invested in
foreign securities while also maintaining currency positions, it may be exposed
to 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.
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. For example, there may
be no comparable provisions under certain foreign laws to insider trading and
similar investor protection securities laws that apply with respect to
securities transactions consummated 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 a Fund's assets are uninvested and no return is earned on
such assets. The inability of a Fund to make intended security purchases due to
settlement problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement
problems could result either in losses to the Fund
B-38
<PAGE>
due to subsequent declines in value of the portfolio securities or, if the Fund
has entered into a contract to sell the securities, could result in possible
liability to the purchaser. In addition, with respect to certain foreign
countries, there is the possibility of expropriation or confiscatory taxation,
political or social instability, or diplomatic developments which could affect a
Fund's investments in those countries. Moreover, individual foreign economies
may differ favorably or unfavorably from the U.S. economy in such respects as
growth of gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position.
Each Fund other than the Short Duration Government, Global Income and High
Yield Funds may invest in foreign securities which take the form of sponsored
and unsponsored American Depository Receipts ("ADRs") and Global Depository
Receipts ("GDRs") and (except for CORE U.S. Equity, CORE Large Cap Growth, CORE
Large Cap Value, CORE Small Cap Equity, Short Duration Government, Global Income
and High Yield Funds) European Depository Receipts ("EDRs") or other similar
instruments representing securities of foreign issuers (together, "Depository
Receipts").
ADRs represent the right to receive securities of foreign issuers
deposited in a domestic bank or a correspondent bank. ADRs are traded on
domestic exchanges or in the U.S. over-the-counter market and, generally, are in
registered form. EDRs and GDRs are receipts evidencing an arrangement with a
non-U.S. bank similar to that for ADRs and are designed for use in the non-U.S.
securities markets. EDRs and GDRs are not necessarily quoted in the same
currency as the underlying security.
To the extent a Fund acquires Depository Receipts through banks which do
not have a contractual relationship with the foreign issuer of the security
underlying the Depository Receipts to issue and service such Depository Receipts
(unsponsored), there may be an increased possibility that the Fund would not
become aware of and be able to respond to corporate actions such as stock splits
or rights offerings involving the foreign issuer in a timely manner. In
addition, the lack of information may result in inefficiencies in the valuation
of such instruments. 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, a Fund may avoid currency risks during the settlement period for
purchases and sales.
As described more fully below, each Fund (except CORE U.S. Equity, CORE
Large Cap Growth, CORE Large Cap Value, CORE Small Cap Equity and Short Duration
Government 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.
B-39
<PAGE>
Investing in Emerging Markets. The CORE International Equity and
International Equity Funds are intended for long-term investors who can accept
the risks associated with investing primarily in equity and equity-related
securities of foreign issuers, including emerging country issuers, as well as
the risks associated with investments quoted or denominated in foreign
currencies. Growth and Income, Mid Cap Value and Capital Growth Funds may
invest, to a lesser extent, in equity and equity-related securities of foreign
issuers, including emerging country issuers. Global Income and High Yield Funds
may invest in debt securities of foreign issuers, including issuers in emerging
countries, and in fixed income securities quoted or denominated in a currency
other than U.S. dollars.
Investments in debt securities of emerging market issuers involve special
risks. The development of a market for such securities is a relatively recent
phenomenon, and 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. In certain countries, there may
be few publicly traded securities, and the market may be dominated by a few
issues or sectors. 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. 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. The limited size of many of these securities markets can
cause prices to be erratic for reasons apart from factors that affect the
soundness and competitiveness of securities issues. For example, prices may be
unduly influenced by traders who control large positions in these markets.
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.
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
B-40
<PAGE>
and regulations. In circumstances where adequate laws exist, it may not be
possible to obtain swift and equitable enforcement of the law.
With respect to investments in certain emerging market countries, archaic
legal systems may have an adverse impact on a Fund. For example, while the
potential liability of a shareholder in a U.S. corporation with respect to acts
of the corporation is generally limited to the amount of the shareholder's
investment, the notion of limited liability is less clear in certain emerging
market countries. Similarly, the rights of investors in emerging market
companies may be more limited than those of shareholders of U.S. corporations.
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 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 a Fund. A Fund may be required to
establish special custodial or other arrangements before investing in certain
emerging countries.
Each of the emerging countries may be subject to a greater degree of
economic, political and social instability than is the case in the United
States, Japan and most Western European countries. 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; (v) ethnic, religious and racial disaffection or
conflict; and (vi) the absence of developed legal structures governing foreign
private investments and private property. Such economic, political and social
instability could disrupt the principal financial markets in which the Funds may
invest and adversely affect the value of the Funds' assets. A Fund's investments
could in the future be adversely affected by any increase in taxes or by
political, economic or diplomatic developments. Certain Funds may seek
investment opportunities within the former "east bloc" countries in Eastern
Europe. See "Investment Objective and Policies" in the prospectus. All or a
substantial portion of such investments may be considered "not readily
marketable" for purposes of the limitations set forth below. For example, most
Eastern European countries have had a centrally planned, socialist economy since
shortly after World War II. The governments of a number of Eastern European
countries currently are implementing reforms directed at political and economic
liberalization, including efforts to decentralize the economic decision-making
process and move towards a market economy. However, business entities in many
Eastern European countries do not have any recent history of operating in a
market-oriented economy, and the ultimate impact of Eastern European countries'
attempts to move toward more market-oriented economies is currently unclear. In
addition, any change in the leadership or policies of Eastern European countries
may halt the expansion of or reverse the liberalization of foreign investment
policies now occurring and adversely affect existing investment opportunities.
To the extent a Fund invests in an issuer located (1) in a country which was
formerly part of Yugoslavia, (2) in a country that shares a border with the
former country of Yugoslavia, (3) in a country which is a member of the North
Atlantic Treaty Organization ("NATO"), or (4) in other countries in Europe, such
Fund could suffer investment losses as a result of the recent conflict between
Serbia and the members of NATO. The NATO bombing campaign and proposed oil
embargo (if implemented) could adversely affect a Fund's investments. The extent
to which this conflict may broaden and involve other countries such as Russia is
unpredictable, and the impact this conflict may have on a Fund is uncertain.
B-41
<PAGE>
The economies of emerging countries may differ unfavorably from the U.S.
economy in such respects as growth of gross domestic product, rate of inflation,
capital reinvestment, resources, self-sufficiency and balance of payments. Many
emerging countries have experienced in the past, and continue to experience,
high rates of inflation. In certain countries inflation has at times accelerated
rapidly to hyperinflationary levels, creating a negative interest rate
environment and sharply eroding the value of outstanding financial assets in
those countries. The economies of many emerging countries are heavily dependent
upon international trade and are accordingly affected by protective trade
barriers and the economic conditions of their trading partners. In addition, the
economies of some emerging countries are vulnerable to weakness in world prices
for their commodity exports.
A Fund's income and, in some cases, capital gains from foreign stocks and
securities will be subject to applicable taxation in certain of the countries in
which it invests, and treaties between the U.S. and such countries may not be
available in some cases to reduce the otherwise applicable tax rates.
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 a Fund's assets remain uninvested and no
return is earned thereon. Inability 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. 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.
Sovereign Debt Obligations. The CORE International Equity, International
Equity, Global Income and High Yield Funds may invest in 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 a Fund may have limited
recourse in the event of a default. During periods of economic uncertainty, the
market prices of sovereign debt, and a Fund's net asset value, may be more
volatile than prices of debt obligations of U.S. issuers. In the past, the
governments of certain emerging markets have encountered difficulties in
servicing their debt obligations, withheld payments of principal and interest
and declared moratoria on the payment of principal and interest on their
sovereign debts.
A sovereign debtor's willingness or ability to repay principal and pay
interest in a timely manner may be affected by, among other factors, its cash
flow situation, the extent of its foreign currency reserves, the availability of
sufficient foreign exchange, the relative size of the debt service
B-42
<PAGE>
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.
Brady Bonds. Certain foreign debt obligations, customarily referred to as
"Brady Bonds," are created through the exchange of existing commercial bank
loans to foreign entities for new obligations in connection with debt
restructuring under a plan introduced by former U.S. Secretary of the Treasury,
Nicholas F. Brady (the "Brady Plan"). Brady Bonds may be fully or partially
collateralized or uncollateralized and issued in various currencies (although
most are U.S. dollar denominated). In the event of a default on collateralized
Brady Bonds for which obligations are accelerated, the collateral for the
payment of principal will not be distributed to investors, nor will such
obligations be sold and the proceeds distributed. The collateral will be held by
the collateral agent to the scheduled maturity of the defaulted Brady Bonds,
which will continue to be outstanding, at which time the face amount of the
collateral will equal the principal payments which would have then been due on
the Brady Bonds in the normal course. In light of the residual risk of the Brady
Bonds and, among other factors, the history of default with respect to
commercial bank loans by public and private entities of countries issuing Brady
Bonds, investments in Brady Bonds may be speculative.
Forward Foreign Currency Exchange Contracts. Growth and Income, Mid Cap
Value and Capital Growth Funds may enter into forward foreign currency exchange
contracts for hedging purposes. International Equity, CORE International Equity,
Global Income and High Yield Funds may enter into forward foreign currency
exchange contracts for hedging purposes and to seek to increase total return. A
forward foreign currency exchange contract involves an obligation to purchase or
sell a specific currency at a future date, which may be any fixed number of days
from the date of the contract agreed upon by the parties, at a price set at the
time of the contract. These contracts are traded in the interbank market between
currency traders (usually large commercial banks) and their customers. A forward
contract generally has no deposit requirement, and no commissions are generally
charged at any stage for trades.
At the maturity of a forward contract a Fund may either accept or make
delivery of the currency specified in the contract or, at or prior to maturity,
enter into a closing purchase transaction involving the purchase or sale of an
offsetting contract. Closing purchase transactions with respect to forward
contracts are often, but not always, effected with the currency trader who is a
party to the original forward contract.
A Fund may enter into forward foreign currency exchange contracts in
several circumstances. First, when a Fund enters into a contract for the
purchase or sale of a security denominated or quoted in a foreign currency, or
when 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
B-43
<PAGE>
payment, as the case may be. By entering into a forward contract for the
purchase or sale, for a fixed amount of U.S. dollars, of the amount of foreign
currency involved in the underlying transactions, the Fund may attempt to
protect itself against an adverse change in the relationship between the U.S.
dollar and the subject foreign currency during the period between the date on
which the security is purchased or sold, or on which the dividend or interest
payment is declared, and the date on which such payments are made or received.
Additionally, when the Adviser believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar, it may
enter into a forward contract to sell, for a fixed amount of U.S. dollars, the
amount of foreign currency approximating the value of some or all of such Fund's
portfolio securities quoted or denominated in such foreign currency. The precise
matching of the forward contract amounts and the value of the securities
involved will not generally be possible because the future value of such
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the
contract is entered into and the date it matures. Using forward contracts to
protect the value of a Fund's portfolio securities against a decline in the
value of a currency does not eliminate fluctuations in the underlying prices of
the securities. It simply establishes a rate of exchange which a Fund can
achieve at some future point in time. The precise projection of short-term
currency market movements is not possible, and short-term hedging provides a
means of fixing the U.S. dollar value of only a portion of a Fund's foreign
assets.
The CORE International Equity, International Equity, Global Income and
High Yield Funds may engage in cross-hedging by using forward contracts in one
currency to hedge against fluctuations in the value of securities quoted or
denominated in a different currency if the Adviser determines that there is a
pattern of correlation between the two currencies. The CORE International
Equity, International Equity, Global Income and High Yield Funds may also
purchase and sell forward contracts to seek to increase total return when the
Adviser anticipates that the foreign currency will appreciate or depreciate in
value, but securities quoted or denominated in that currency do not present
attractive investment opportunities and are not held in the Fund's portfolio.
Unless otherwise covered, cash or liquid assets 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 return. The segregated assets will be 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, a Fund's ability to utilize forward
foreign currency exchange contracts may be restricted. The Global Income and
High Yield Funds will not enter into a forward contract with a term of greater
than one year.
While a Fund may enter into forward contracts to reduce currency exchange
rate risks, transactions in such contracts involve certain other risks. Thus,
while the Fund may benefit from such transactions, unanticipated changes in
currency prices may result in a poorer overall performance for the Fund than if
it had not engaged in any such transactions. Moreover, there may
B-44
<PAGE>
be imperfect correlation between a Fund's portfolio holdings of securities
quoted or denominated in a particular currency and forward contracts entered
into by such Fund. Such imperfect correlation may cause a Fund to sustain losses
which will prevent the Fund from achieving a complete hedge or expose the Fund
to risk of foreign exchange loss.
Markets for trading foreign forward currency contracts offer less
protection against defaults than is available when trading in currency
instruments on an exchange. Forward contracts are subject to the risk that the
counterparty to such contract will default on its obligation. Since a forward
foreign currency exchange contract is not guaranteed by an exchange or
clearinghouse, a default on the contract would deprive a Fund of unrealized
profits, transaction costs or the benefits of a currency hedge or force the Fund
to cover its purchase or sale commitments, if any, at the current market price.
Forward contracts are subject to the risk that the counterparty to such
contract will default on its obligations. Since a forward foreign currency
exchange contract is not guaranteed by an exchange or clearinghouse, a default
on the contract would deprive a Fund of unrealized profits, transaction costs or
the benefits of a currency hedge or force the Fund to cover its purchase or sale
commitments, if any, at the current market price. A Fund will not enter into
such transactions unless the credit quality of the unsecured senior debt or the
claims-paying ability of the counterparty is considered to be investment grade
by the Adviser.
Writing and Purchasing Currency Call and Put Options. Each Fund (except
CORE U.S. Equity, CORE Large Cap Value, CORE Large Cap Growth, CORE Small Cap
Equity and Short Duration Government 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 a Fund seeks to close out an option,
the Fund could be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The purchase of an
option on foreign currency may constitute an effective hedge against exchange
rate fluctuations; however, in the event of exchange rate movements adverse to a
Fund's position, the Fund may forfeit the entire amount of the premium plus
related transaction costs. Options on foreign currencies written or purchased by
a Fund will be traded on U.S. and foreign exchanges or over-the-counter.
CORE International Equity, International Equity, Global Income and High
Yield Funds may use options on currency to cross-hedge, which involves writing
or purchasing options on one currency to seek to hedge against changes in
exchange rates for a different currency with a pattern of correlation. In
addition, CORE International Equity, International Equity, Global Income and
High Yield Funds may purchase call or put options on currency to seek to
increase total return when the 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.
B-45
<PAGE>
A call option written by a Fund obligates the Fund to sell a specified
currency to the holder of the option at a specified price if the option is
exercised at any time before the expiration date. A put option written by a Fund
obligates the Fund to purchase a specified currency from the option holder at a
specified price if the option is exercised at any time before the expiration
date. The writing of currency options involves a risk that a Fund will, upon
exercise of the option, be required to sell currency subject to a call at a
price that is less than the currency's market value or be required to purchase
currency subject to a put at a price that exceeds the currency's market value.
For a description of how to cover written put and call options, see "Writing
Covered Options" above.
A Fund may terminate its obligations under a written call or put option by
purchasing an option identical to the one it has written. Such purchases are
referred to as "closing purchase transactions." A Fund may enter into closing
sale transactions in order to realize gains or minimize losses on purchased
options.
A Fund would normally purchase call options on foreign currency in
anticipation of an increase in the U.S. dollar value of currency in which
securities to be acquired by the Fund are quoted or denominated. The purchase of
a call option would entitle a Fund, in return for the premium paid, to purchase
specified currency at a specified price during the option period. A Fund would
ordinarily realize a gain if, during the option period, the value of such
currency exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise, the Fund would realize either no gain or a loss on
the purchase of the call option.
A Fund would normally purchase put options in anticipation of a decline in
the U.S. dollar value of the currency in which securities in its portfolio are
quoted or denominated ("protective puts"). The purchase of a put option would
entitle a Fund, in exchange for the premium paid, to sell a 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 U.S. dollar value
of a Fund's portfolio securities due to currency exchange rate fluctuations. A
Fund would ordinarily realize a gain if, during the option period, the value of
the underlying currency decreased below the exercise price sufficiently to more
than cover the premium and transaction costs; otherwise, the Fund would realize
either no gain or a loss on the purchase of the put option. Gains and losses on
the purchase of protective put options would tend to be offset by countervailing
changes in the value of underlying currency or portfolio securities.
In addition to using options for the hedging purposes described above,
CORE International Equity, International Equity, Global Income and High Yield
Funds may use options on currency to seek to increase total return. CORE
International Equity, International Equity, Global Income and High Yield Funds
may write (sell) covered put and call options on any currency in order to
realize greater income than would be realized on portfolio securities
transactions alone. However, in writing covered call options for additional
income, CORE International Equity, International Equity, Global Income and High
Yield Funds may forego the opportunity to profit from an increase in the market
value of the underlying currency. Also, when writing put options, CORE
International Equity, International Equity, Global Income and High Yield Funds
accept, in return for the option premium, the risk that they may be required to
purchase the underlying currency at a price in excess of the currency's market
value at the time of purchase.
B-46
<PAGE>
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. Although a Fund will
generally purchase or write only those options for which there appears to be an
active secondary market, there is no assurance that a liquid secondary market on
an exchange will exist for any particular option, or at any particular time. For
some options, no secondary market on an exchange may exist. In such event, it
might not be possible to effect closing transactions in particular options, with
the result that a Fund would have to exercise its options in order to realize
any profit and would incur transaction costs upon the sale of underlying
securities pursuant to the exercise of put options. If a Fund as a covered call
option writer is unable to effect a closing purchase transaction in a secondary
market, it 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.
A Fund may purchase and write over-the-counter options to the extent
consistent with its limitation on investments in illiquid securities. Trading in
over-the-counter options is subject to the risk that the other party will be
unable or unwilling to close out options purchased or written by a Fund.
The amount of the premiums which a Fund may pay or receive may be
adversely affected as new or existing institutions, including other investment
companies, engage in or increase their option purchasing and writing activities.
Mortgage Dollar Rolls
Short Duration Government and Global Income Funds may enter into mortgage
"dollar rolls" in which a Fund sells securities for delivery in the current
month and simultaneously contracts with the same counterparty to repurchase
similar (same type, coupon and maturity), but not identical securities on a
specified future date. During the roll period, a Fund loses the right to receive
principal and interest paid on the securities sold. However, a Fund would
benefit to the extent of any difference between the price received for the
securities sold and the lower forward price for the future purchase (often
referred to as the "drop") or fee income plus the interest earned on the cash
proceeds of the securities sold until the settlement date of the forward
purchase. Unless such benefits exceed the income, capital appreciation and gain
or loss due to mortgage prepayments that would have been realized on the
securities sold as part of the mortgage dollar roll, the use of this technique
will diminish the investment performance of a Fund compared with what such
performance would have been without the use of mortgage dollar rolls. All cash
proceeds will be invested in instruments that are permissible investments for
the applicable Fund. Each Fund will segregate until the settlement date cash or
liquid assets, as permitted by applicable law, in an amount equal to its forward
purchase price.
B-47
<PAGE>
For financial reporting and tax purposes, the Short Duration Government
and Global Income Funds treat mortgage dollar rolls as two separate
transactions; one involving the purchase of a security and a separate
transaction involving a sale. The Short Duration Government and Global Income
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 a Fund sells the security becomes insolvent, a Fund's
right to purchase or repurchase the mortgage-related securities subject to the
mortgage dollar roll may be restricted and the instrument which a Fund is
required to repurchase may be worth less than an instrument which a Fund
originally held. Successful use of mortgage dollar rolls will depend upon the
Adviser's ability to manage a Fund's interest rate and mortgage prepayments
exposure. For these reasons, there is no assurance that mortgage dollar rolls
can be successfully employed.
Convertible Securities
Each Fund (except the Short Duration Government and Global Income Funds)
may invest in 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 stocks in an issuer's
capital structure and consequently entail less risk than the issuer's common
stock. In evaluating a convertible security, the Adviser will give primary
emphasis to the attractiveness of the underlying common stock. Convertible debt
securities are equity investments for purposes of each Fund's investment
policies.
Preferred Securities
Each Fund (except the Short Duration Government and Global Income Funds)
may invest in preferred securities. Unlike debt securities, the obligations of
an issuer of preferred stock, including dividend and other payment obligations,
may not typically be accelerated by the holders of such preferred stock on the
occurrence of an event of default (such as a covenant default or filing of a
bankruptcy petition) or other non-compliance by the issuer with the terms of the
preferred stock. Often, however, on the occurrence of any such event of default
or non-compliance by the issuer, preferred stockholders will be entitled to gain
representation on the issuer's board of directors or increase their existing
board representation. In addition, preferred stockholders may be granted voting
rights with respect to certain issues on the occurrence of any event of default.
B-48
<PAGE>
Currency Swaps, Mortgage Swaps, Credit Swaps and Interest Rate Swaps, Caps,
Floors and Collars
The CORE International Equity, International Equity, 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,
Global Income and High Yield Funds may enter into mortgage, credit and interest
rate swaps and other interest rate swap arrangements such as rate caps, floors
and collars, for hedging purposes or to seek to increase total return. Currency
swaps involve the exchange by a Fund with another party of their respective
rights to make or receive payments in specified currencies. Interest rate swaps
involve the exchange by a Fund with another party of their respective
commitments to pay or receive interest, such as an exchange of fixed rate
payments for floating rate payments. Mortgage swaps are similar to interest rate
swaps in that they represent commitments to pay and receive interest. The
notional principal amount, however, is tied to a reference pool or pools of
mortgages. 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 cap entitles the purchaser, to the extent that a specified
index exceeds a predetermined interest rate, to receive payment of interest on a
notional principal amount from the party selling such interest rate cap. The
purchase of an interest rate floor entitles the purchaser, to the extent that a
specified index falls below a predetermined interest rate, to receive payments
of interest on a notional principal amount from the party selling the interest
rate floor. An interest rate collar is the combination of a cap and a floor that
preserves a certain return within a predetermined range of interest rates.
A Fund will enter into interest rate and mortgage 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 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 and mortgage swaps is limited to the net amount of
interest payments that the Fund is contractually obligated to make. If the other
party to an interest rate or mortgage swap defaults, the Fund's risk of loss
consists of the net amount of interest payments that the Fund is contractually
entitled to receive. In contrast, currency swaps usually involve the delivery of
a gross payment stream in one designated currency in exchange for the gross
payment stream in another designated currency. Therefore, the entire 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
Fund's potential exposure in a transaction involving a swap or an interest rate
floor, cap or collar is covered by the segregation of cash or liquid assets or
otherwise, the Funds and the Advisers believe that transactions do not
constitute senior securities under the Act and, accordingly, will not treat them
as being subject to a Fund's borrowing restrictions.
The CORE International Equity and International 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 the Adviser. The Short Duration Government Fund will not
enter into any mortgage, credit or interest rate swap transactions unless
B-49
<PAGE>
the unsecured commercial paper, senior debt or claims-paying ability of the
other party is rated either A or A-1 or better by Standard & Poor's or A 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 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, a Fund will have contractual remedies
pursuant to the agreements related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively liquid in
comparison with the markets for other similar instruments which are traded in
the interbank market. The Advisers, under the supervision of the Board of
Trustees, are responsible for determining and monitoring the liquidity of the
Funds' transactions in swaps, caps, floors and collars.
The use of interest rate, mortgage, credit and currency swaps, as well as
interest rate caps, floors and collars, is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If an Adviser is incorrect in its
forecasts of market values, interest rates and currency exchange rates, the
investment performance of a Fund would be less favorable than it would have been
if this investment technique were not used.
Equity Swaps
The Growth and Income, CORE U.S. Equity, CORE Large Cap Growth, CORE Large
Cap Value, CORE Small Cap Equity, Capital Growth, Mid Cap Value Fund, CORE
International Equity and International 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. Equity swaps may also be used for hedging
purposes or to seek to increase total return. The counterparty to an equity swap
contract will typically be a bank, investment banking firm or broker/dealer.
Equity swap transactions may be structured in different ways. For example, a
counterparty may agree to pay the Fund the amount, if any, by which the notional
amount of the equity swap contract would have increased in value had it been
invested in the particular stocks or an index of stocks, plus the dividends that
would have been received on those stocks. In these cases, the Fund may 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 Fund on the equity swap contract should be the gain or loss on
the notional amount plus dividends on the stocks less the interest paid by the
Fund on the notional amount. In other cases, the counterparty and the Fund may
each agree to pay the other the difference between the relative investment
performances that would have been achieved if the notional amount of the equity
swap contract had been invested in different stocks (or indices of stocks).
B-50
<PAGE>
A 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 a Fund is contractually obligated to make. If
the other party to an equity swap defaults, a Fund's risk of loss consists of
the net amount of payments that such Fund is contractually entitled to receive,
if any. Inasmuch as these transactions are entered into for hedging purposes or
are offset by segregated cash or liquid assets to cover the Fund's potential
obligations, the Funds and their 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.
A Fund will not enter into swap transactions unless the unsecured
commercial paper, senior debt or claims paying ability of the other party is
considered to be investment grade by the Advisor.
Real Estate Investment Trusts
The 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 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 Funds, REITs are not taxed on income distributed to shareholders
provided they comply with certain requirements under the Code. A Fund will
indirectly bear its proportionate share of expenses incurred by REITs in which
it invests in addition to the expenses incurred directly by the Fund.
Investing in REITs involves certain unique risks. Equity REITs may be
affected by changes in the value of the underlying property owned by such REITs,
while mortgage REITs may be affected by the quality of any credit extended.
REITs are dependent upon management skills, are not diversified (except to the
extent the Code requires), and are subject to the risks of financing projects.
REITs are subject to heavy cash flow dependency, default by borrowers,
self-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
Each Fund 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 or letters of credit maintained
B-51
<PAGE>
on a current basis at an amount at least equal to the market value of the
securities loaned. A Fund would be required to have the right to call a loan and
obtain the securities loaned at any time on five days' notice. For the duration
of a loan, a Fund would continue to receive the equivalent of the interest or
dividends paid by the issuer on the securities loaned and would also receive
compensation from investment of the collateral. A Fund would not have the right
to vote any securities having voting rights during the existence of the loan,
but a Fund would call the loan in anticipation of an important vote to be taken
among holders of the securities or the giving or withholding of their consent on
a material matter affecting the investment. As with other extensions of credit
there are risks of delay in recovering, or even loss of rights in, the
collateral should the borrower of the securities fail financially. However, the
loans would be made only to firms deemed by the Advisers to be of good standing,
and when, in the judgment of the Advisers, the consideration which can be earned
currently from securities loans of this type justifies the attendant risk. If
the Advisers determine to make securities loans, it is intended that the value
of the securities loaned would not exceed one-third of the value of the total
assets of a Fund (including the loan collateral).
When-Issued Securities and Forward Commitments
Each Fund may purchase securities on a when-issued basis or purchase or
sell securities on a forward commitment basis. These transactions involve a
commitment by a Fund to purchase or sell securities at a future date. The price
of the underlying securities (usually expressed in terms of yield) and the date
when the securities will be delivered and paid for (the settlement date) are
fixed at the time the transaction is negotiated. When-issued purchases and
forward commitment transactions are negotiated directly with the other party,
and such commitments are not traded on exchanges. A Fund will purchase
securities on a when-issued basis or purchase or sell securities on a forward
commitment basis only with the intention of completing the transaction and
actually purchasing or selling the securities. If deemed advisable as a matter
of investment strategy, however, a Fund may dispose of or negotiate a commitment
after entering into it. A Fund may also sell securities it has committed to
purchase before those securities are delivered to the Fund on the settlement
date. The Funds may realize a capital gain or loss in connection with these
transactions. For purposes of determining a Fund's duration, the maturity of
when-issued or forward commitment securities will be calculated from the
commitment date. A Fund is required to segregate, until three days prior to the
settlement date, cash and liquid assets in an amount sufficient to meet the
purchase price. Alternatively, a Fund may enter into offsetting contracts for
the forward sale of other securities that it owns. Securities purchased or sold
on a when-issued or forward commitment basis involve a risk of loss if the value
of the security to be purchased declines prior to the settlement date or if the
value of the security to be sold increases prior to the settlement date.
B-52
<PAGE>
Investment in Unseasoned Companies
Each Fund may invest 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 Fund reserves the right to invest up to 10% of its total assets,
calculated at the time of purchase in the securities of other investment
companies (including, with respect to each Fund except Short Duration
Government, Global Income and High Yield Funds, SPDRs) but, may not invest more
than 5% of its total assets in the securities of any one investment company or
acquire more than 3% of the voting securities of any other investment company.
Pursuant to an exemptive order obtained from the SEC, the Funds may invest in
money market funds for which an Adviser or any of its affiliates serves as
investment adviser. A Fund will indirectly bear its proportionate share of any
management fees and other expenses paid by investment companies in which it
invests in addition to the advisory and administration fees paid by the Fund.
However, to the extent that the Fund invests in a money market fund for which an
Adviser or any of its affiliates acts as adviser, the management fees payable by
the Fund to an Adviser or its affiliates will be reduced by an amount equal to
the Fund's proportionate share of the management fees paid by such money market
fund to the Adviser or any of its affiliates.
Each Fund (other than the Short Duration Government, Global Income and
High Yield Funds) may also invest in SPDRs. SPDRs are interests in a unit
investment trust ("UIT") that may be obtained from the UIT or purchased in the
secondary market (SPDRs are listed on the American Stock Exchange).
The UIT will issue SPDRs in aggregations known as "Creation Units" in
exchange for a "Portfolio Deposit" consisting of (a) a portfolio of securities
substantially similar to the component securities ("Index Securities") of the
Standard & Poor's 500 Composite Stock Price Index (the "S&P Index"), (b) a cash
payment equal to a pro rata portion of the dividends accrued on the UIT's
portfolio securities since the last dividend payment by the UIT, net of expenses
and liabilities, and (c) a cash payment or credit ("Balancing Amount") designed
to equalize the net asset value of the S&P Index and the net asset value of a
Portfolio Deposit.
SPDRs are not individually redeemable, except upon termination of the UIT.
To redeem, the 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 Fund
will receive Index Securities and cash identical to the Portfolio Deposit
required of an investor wishing to purchase a Creation Unit that day.
B-53
<PAGE>
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.
Each Fund (other then CORE U.S. Equity, CORE Large Cap Growth, CORE Large
Cap Value, CORE Small Cap Equity and Short Duration Government 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.
Each Fund (other than Short Duration Government Fund) may, subject to the
limitations stated above, invest in World Equity Benchmark Shares ("WEB") and
similar securities that invest in securities included in foreign securities
indices.
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. CORE International Equity, International Equity,
Global Income and High Yield Funds may also enter into repurchase agreements
involving certain foreign government securities. A repurchase agreement is an
arrangement under which a Fund purchases securities and the seller agrees to
repurchase the securities within a particular time and at a specified price.
Custody of the securities is maintained by a Fund's custodian. The repurchase
price may be higher than the purchase price, the difference being income to a
Fund, or the purchase and repurchase prices may be the same, with interest at a
stated rate due to a Fund together with the repurchase price on repurchase. In
either case, the income to a Fund is unrelated to the interest rate on the
security subject to the repurchase agreement.
For purposes of the Act and generally for tax purposes, a repurchase
agreement is deemed to be a loan from a Fund to the seller of the security. For
other purposes, it is not always clear whether a court would consider the
security purchased by a Fund subject to a repurchase agreement as being owned by
a Fund or as being collateral for a loan by a Fund to the seller. In the event
of commencement of bankruptcy or insolvency proceedings with respect to the
seller of the security before repurchase of the security under a repurchase
agreement, a Fund may encounter delay and incur costs before being able to sell
the security. Such a delay may involve loss of interest or a decline in price of
the security. If the court characterizes the transaction as a loan and a Fund
has not perfected a security interest in the security, a Fund may be required to
return the security to the seller's estate and be treated as an unsecured
creditor of the seller. As an unsecured creditor, a Fund would be at risk of
losing some or all of the principal and interest involved in the transaction.
The Advisers seek to minimize the risk of loss from repurchase agreements
by analyzing the creditworthiness of the obligor, in this case the seller of the
security. Apart from the risk of bankruptcy or insolvency proceedings, there is
also the risk that the seller may fail to repurchase the security. However, if
the market value of the security subject to the repurchase agreement becomes
B-54
<PAGE>
less than the repurchase price (including accrued interest), a Fund will direct
the seller of the security to deliver additional securities so that the market
value of all securities subject to the repurchase agreement equals or exceeds
the repurchase price. Certain repurchase agreements which provide for settlement
in more than seven days can be liquidated before the nominal fixed term on seven
days or less notice. Such repurchase agreements will be regarded as liquid
instruments.
In addition, a Fund, together with other registered investment companies
having management agreements with the Advisers or their affiliates, may transfer
uninvested cash balances into a single joint account, the daily aggregate
balance of which will be invested in one or more repurchase agreements.
Reverse Repurchase Agreements
A Fund may borrow money by entering into transactions called reverse
repurchase agreements. Under these arrangements, a 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 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 a 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 a Fund's outstanding shares.
When a 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 the 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
Each Fund may purchase securities that are not registered or offered in an
exempt non-public offering ("Restricted Securities") under the Securities Act of
1933, as amended ("1933 Act"), including securities eligible for resale to
"qualified institutional buyers" pursuant to Rule 144A under the 1933 Act.
However, a Fund will not invest more than 15% of its net assets in illiquid
investments, which 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. Certain commercial paper issued in reliance on Section 4(2) of the 1933
Act is treated like Rule 144A Securities. The Trustees have adopted guidelines
under which the Advisers determine and monitor the liquidity of the Funds'
portfolio securities. This investment practice could have the effect of
increasing the level of illiquidity in a Fund to the extent that qualified
institutional buyers become for a time uninterested in purchasing these
instruments.
B-55
<PAGE>
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.
Non-Diversified Status
Since the Global Income Fund is "non-diversified" under the Act, it is
subject only to certain federal tax diversification requirements. Under federal
tax laws, Global Income Fund may, with respect to 50% of its total assets,
invest up to 25% of its total assets in the securities of any issuer (except
that this limitation does not apply to U.S. Government Securities). With respect
to the remaining 50% of the Fund's total assets, (1) the Fund may not invest
more than 5% of its total assets in the securities of any one issuer (other than
the U.S. Government), and (2) the Fund may not acquire more than 10% of the
outstanding voting securities of any one issuer. These tests apply at the end of
each quarter of its taxable year and are subject to certain conditions and
limitations under the Code.
Portfolio Turnover
Each 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 without the affirmative vote of the
holders of a majority (as defined in the Act) of the outstanding voting
securities of the affected Fund. The investment objective of each Fund and all
other investment policies or practices of each Fund are considered by the Trust
not to be fundamental and accordingly may be changed without shareholder
approval. See "Investment Objectives and Policies" in the Prospectus. For
purposes of the Act, "majority" means the lesser of (a) 67% or more of the
shares of the Trust or a Fund present at a meeting, if the holders of more than
50% of the outstanding shares of the Trust or a Fund are present or represented
by proxy, or (b) more than 50% of the shares of the Trust or a Fund. For
purposes of the following limitations, any limitation which involves a maximum
percentage shall not be considered violated unless an excess over the percentage
occurs immediately after, and is caused by, an acquisition or encumbrance of
securities or assets of, or borrowings by, a Fund. With respect to the Funds'
fundamental investment restriction no. 3, asset coverage of at least 300% (as
defined in the Act), inclusive of any amounts borrowed, must be maintained at
all times.
B-56
<PAGE>
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 the U.S. government
or any of its agencies or instrumentalities). (For the
purposes of this restriction, state and municipal governments
and their agencies, authorities and instrumentalities are not
deemed to be industries; telephone companies are considered to
be a separate industry from water, gas or electric utilities;
personal credit finance companies and business credit finance
companies are deemed to be separate industries; and
wholly-owned finance companies are considered to be in the
industry of their parents if their activities are primarily
related to financing the activities of their parents). This
restriction does not apply to investments in municipal
securities which have been pre-refunded 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;
B-57
<PAGE>
(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.
In addition to the fundamental policies mentioned above, the Trustees have
adopted the following non-fundamental policies which can be changed or amended
by action of the Trustees without approval of shareholders.
A Fund may not:
(a) Invest in companies for the purpose of exercising control or
management;
(b) Invest more than 15% of the Fund's net assets in illiquid
investments including repurchase agreements with a notice or demand
period of more than seven days, securities which are not readily
marketable and restricted securities not eligible for resale
pursuant to Rule 144A under the 1933 Act;
(c) Purchase additional securities if the Fund's borrowings (excluding
covered mortgage dollar rolls) exceed 5% of its net assets; or
(d) Make short sales of securities, except short sales against the box.
MANAGEMENT
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 together with their respective positions and a brief statement of
their principal occupations during the past five years. Trustees and officers
deemed to be "interested persons" of the Trust for purposes of the Act are
indicated by an asterisk.
B-58
<PAGE>
Name, Age Positions Principal Occupation(s)
And Address With Trust During Past 5 Years
- ----------- ---------- ---------------------
Ashok N. Bakhru, 57 Chairman Chairman of the Board and
P.O. Box 143 & Trustee Trustee - Goldman Sachs Trust
Lima, PA 19037 (registered investment company);
President, ABN Associates (July
1994 -March 1996 and November 1998
to present); Executive Vice
President-Finance and
Administration and Chief Financial
Officer, Coty Inc. (manufacturer
of fragrances and cosmetics)
(April 1996-November 1998); 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); Director, Private
Equity Investors - III (since
November 1998); Trustee, Citizens
Scholarship Foundation of America
(since 1998).
B-59
<PAGE>
Name, Age Positions Principal Occupation(s)
And Address With Trust During Past 5 Years
- ----------- ---------- ---------------------
*David B. Ford, 53 Trustee Trustee - Goldman Sachs Trust
One New York Plaza (registered investment company);
New York, NY 10004 Director, Commodities Corp. LLC
(futures and commodities traders)
(since April 1997); Managing
Director, J. Aron & Company
(commodity dealer and risk
management adviser) (since
November 1996); Managing Director,
Goldman Sachs & Co. Investment
Banking Division (since November
1996); Chief Executive Officer and
Director, CIN Management
(investment adviser) (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 Asset
Management Division (since
November 1995); Co-Head and
Director, Goldman Sachs Funds
Management Inc. (since November
1995 and December 1994,
respectively); and Chairman and
Director, Goldman Sachs Asset
Management Japan Limited (since
November 1994).
*Douglas C. Grip, 37 Trustee Trustee and President - Goldman
One New York Plaza & President Sachs Trust (registered
New York, NY 10004 investment company); Managing
Director, Goldman Sachs Asset
Management Division (since
November 1997); President, Goldman
Sachs Fund Group (since April
1996); and President, MFS
Retirement Services Inc., of
Massachusetts Financial Services
(prior thereto).
B-60
<PAGE>
Name, Age Positions Principal Occupation(s)
And Address With Trust During Past 5 Years
- ----------- ---------- ---------------------
*John P. McNulty, 46 Trustee Trustee - Goldman Sachs Trust
One New York Plaza (registered investment company);
New York, NY 10004 Managing Director, Goldman Sachs
(since November 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); Co-Head,
GSAM (November 1995 to present);
Director, Global Capital
Reinsurance (insurance) (since
1989); Director, Commodities Corp.
LLC (since April 1997); and
Limited Partner of Goldman, Sachs
& Co. (1994 - November 1995) and
Trustee, Trust for Credit Unions
(registered investment company)
(since January 1996).
Mary P. McPherson, 63 Trustee Trustee - Goldman Sachs Trust
The Andrew W. (registered investment company);
Mellon Foundation Vice President and Senior
140 East 62nd Street Program Officer, The Andrew W.
New York, NY 10021 Mellon Foundation (provider of
grants for conservation,
environmental and educational
purposes) (since October 1997);
President of Bryn Mawr College
(1978-1997); Director, Smith
College (since 1998); Director,
Josiah Macy, Jr. Foundation
(health education programs) (since
1977); Director of the
Philadelphia Contributionship
(insurance) (since 1985); Director
of Amherst College (1986-1998);
Director, Dayton Hudson
Corporation (general merchandising
retailing) (1988-1997); Director
of The Spenser Foundation
(educational research) (since
1993); and member of PNC Advisory
Board (banking) (since 1993).
B-61
<PAGE>
Name, Age Positions Principal Occupation(s)
And Address With Trust During Past 5 Years
- ----------- ---------- ---------------------
*Alan A. Shuch, 49 Trustee Trustee - Goldman Sachs Trust
One New York Plaza (registered investment company);
New York, NY 10004 Limited Partner, Goldman Sachs
(since December 1994); Consultant
to GSAM (since December 1994);
Director, Chief Operating Officer
and Vice President of Goldman
Sachs Funds Management, Inc. (from
November 1993 - November 1994);
Chairman and Director, Goldman
Sachs Asset Management - Japan
Limited (November 1993 - November
1994); Director, Goldman Sachs
Asset Management International
(November 1993 - November 1994);
and General Partner, Goldman Sachs
& Co. Investment Banking Division
(December 1986 -November 1994).
Jackson W. Smart, Jr., 68 Trustee Trustee - Goldman Sachs Trust
One Northfield Plaza, (registered investment company);
Suite 218 Chairman, Executive Committee
Northfield, IL 60093 and Director, 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)
(October 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
701 Morningside Drive (registered investment company);
Lake Forest, IL 60045 Director, The Walgreen Co. (a
retail drug store business) (since
April 1988); Director of Baker,
Fentress & Co. (a closed-end,
non-diversified management
investment company) (April 1992 -
present); and Chairman and
Trustee, Northern Institutional
Funds (since April 1984).
B-62
<PAGE>
Name, Age Positions Principal Occupation(s)
And Address With Trust During Past 5 Years
- ----------- ---------- ---------------------
Richard P. Strubel, 59 Trustee Trustee - Goldman Sachs Trust
737 N. Michigan Ave., (registered investment company);
Suite 1405 Director, Gildan Activewear Inc.
Chicago, IL 60611 (since February 1999); Director
of Kaynar Technologies Inc.
(since March 1997); Managing
Director, Tandem Partners, Inc.
(since 1990); President and
Chief Executive Officer,
Microdot, Inc. (a diversified
manufacturer of fastening
systems and connectors) (January
1984 - October 1994); and
Trustee, Northern Institutional
Funds (since December 1982).
*Nancy L. Mucker, 49 Vice President Vice President - Goldman Sachs
4900 Sears Tower Trust (registered investment
Chicago, IL 60606 company); Vice President,
Goldman Sachs (since April 1985);
Co-Manager of Shareholder
Servicing of Goldman Sachs Asset
Management (since November 1989).
*John M. Perlowski, 34 Treasurer Treasurer - Goldman Sachs Trust
One New York Plaza (registered investment company);
New York, NY 10004 Vice President, Goldman Sachs
(since July 1995); Banking
Director, Investors Bank and
Trust (November 1993 - July
1995).
*James A. Fitzpatrick, 39 Vice President Vice President - Goldman Sachs
4900 Sears Tower Trust (registered investment
Chicago, IL 60606 company); Vice President,
Goldman Sachs (since 1998); Vice
President of GSAM (since April
1997); Vice President and General
Manager, First Data Corporation -
Investor Services Group (1994 to
1997).
B-63
<PAGE>
Name, Age Positions Principal Occupation(s)
And Address With Trust During Past 5 Years
- ----------- ---------- ---------------------
*Jesse Cole, 35 Vice President Vice President - Goldman Sachs
4900 Sears Tower Trust (registered investment
Chicago, IL 60606 company); Vice President, GSAM
(June 1998 to Present); Vice
President, AIM Management Group,
Inc. (investment adviser) (April
1996-June 1998); Assistant Vice
President, the Northern Trust
Company (June 1987-April 1996).
*Philip V. Giuca, Jr., 37 Assistant Assistant Treasurer - Goldman
One New York Plaza Treasurer Sachs Trust (registered
New York, NY 10004 investment company); Vice
President, Goldman Sachs (May
1992-Present).
*Dee Moran, 33 Assistant Assistant Treasurer - Goldman
One New York Plaza Treasurer Sachs Trust (registered investment
New York, NY 10004 company)(since 1999); Vice
President, Mutual Fund
Administration, GSAM (since 1995).
*Adrien Deberghes, 31 Assistant Assistant Treasurer - Goldman
One New York Plaza Treasurer Sachs Trust (registered investment
New York, NY 10004 company)(since 1999); Vice
President, Mutual Fund
Administration, GSAM (since 1998);
Senior Associate, GSAM
(1997-1998).
*Anne Marcel, 40 Vice President Vice President - Goldman Sachs
4900 Sears Tower Trust (registered investment
Chicago, IL 60606 company); Vice President, GSAM
(June 1998-Present); and Vice
President, Stein Roe & Farnham,
Inc. (October 1992-June 1998).
*Michael J. Richman, 38 Secretary Secretary - Goldman Sachs Trust
85 Broad Street (registered investment company);
New York, NY 10004 General Counsel of the Funds
Group of GSAM (since December
1997); Associate General Counsel
of GSAM (February 1994 -December
1997); Counsel to the Funds Group,
GSAM (June 1992 -December 1997);
Associate General Counsel, Goldman
Sachs (since December 1998); Vice
President of Goldman Sachs (since
June 1992); and Assistant General
Counsel of Goldman Sachs (June
1992 to December 1998).
B-64
<PAGE>
Name, Age Positions Principal Occupation(s)
And Address With Trust During Past 5 Years
- ----------- ---------- ---------------------
*Howard B. Surloff, 33 Assistant Assistant Secretary - Goldman
85 Broad Street Secretary Sachs Trust (registered
New York, NY 10004 investment company); Assistant
General Counsel, GSAM and
Associate General Counsel to the
Funds Group (since December 1997);
Assistant General Counsel and Vice
President, Goldman Sachs (since
November 1993 and May 1994,
respectively); Counsel to the
Funds Group, GSAM (since November
1993); and Associate of Shereff,
Friedman, Hoffman & Goodman
(September 1990 to February 1997).
*Valerie A. Zondorak, 33 Assistant Assistant Secretary - Goldman
85 Broad Street Secretary Sachs Trust (registered
New York, NY 10004 investment company); Assistant
General Counsel, GSAM and
Assistant General Counsel to the
Funds Group (since December 1997);
Vice President and Counsel,
Goldman Sachs (since March 1997);
Assistant General Counsel, Goldman
Sachs (since December 1997);
Counsel to the Funds Group, GSAM
(March 1997 -December 1997); and
Associate of Shereff, Friedman,
Hoffman & Goodman (September 1990
to February 1997).
*Deborah A. Farrell, 27 Assistant Assistant Secretary - Goldman
85 Broad Street Secretary Sachs Trust (registered
New York, NY 10004 investment company); Legal
Products Analyst, Goldman Sachs
(since December 1998); Legal
Assistant, Goldman Sachs (January
1996 - December 1998); Assistant
Secretary to the Funds Group (1996
to present); Executive Secretary,
Goldman Sachs (January 1994 -
January 1996); and Legal
Secretary, Cleary, Gottlieb, Steen
and Hamilton (September 1990
-January 1994).
B-65
<PAGE>
Name, Age Positions Principal Occupation(s)
And Address With Trust During Past 5 Years
- ----------- ---------- ---------------------
*Kaysie P. Uniacke, 38 Assistant Assistant Secretary - Goldman
One New York Plaza Secretary Sachs Trust (registered
New York, NY 10004 investment company); Managing
Director, GSAM (since 1997); Vice
President and Senior Portfolio
Manager, GSAM (since 1988).
*Elizabeth D. Anderson, 29 Assistant Assistant Secretary - Goldman
One New York Plaza Secretary Sachs Trust (registered
New York, NY 10004 investment company); Portfolio
Manager, GSAM (since April 1996);
Junior Portfolio Manager, GSAM
(1995 - April 1996); Funds Trading
Assistant, GSAM (1993 - 1995); and
Compliance Analyst, Prudential
Insurance (1991 - 1993).
*Amy E. Belanger, 29 Assistant Assistant Secretary - Goldman
85 Broad Street Secretary Sachs Trust (registered investment
New York, NY 10004 company)(since 1999); Counsel,
Goldman Sachs (since 1998);
Associate, Dechert Price & Rhoades
(September 1996-1998).
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. As of February 25, 1999 the Trustees and officers of the Trust as a
group owned less than 1% of the outstanding shares of beneficial interest of
each Fund.
The Trust pays each Trustee, other than those who are "interested persons"
of Goldman Sachs, a fee for each Trustee meeting attended and an annual fee.
Such Trustees are also reimbursed for travel expenses incurred in connection
with attending such meetings.
B-66
<PAGE>
The following table sets forth certain information with respect to the
compensation of each Trustee of the Trust for the fiscal year ended December 31,
1998:
<TABLE>
<CAPTION>
Pension or Total
Retirement Compensation
Benefits from Goldman Sachs
Aggregate Accrued as Funds Complex
Compensation Part of (including the
Name of Trustee from the Portfolios/2/ Trust's Expenses Trust)/3/
- --------------- ---------------------- ---------------- ---------
<S> <C> <C> <C>
Ashok N. Bakhru/1/ $10,691 $0 $117,065
David B. Ford 0 0 0
Douglas C. Grip 0 0 0
John P. McNulty 0 0 0
Mary P. McPherson $8,471 0 $90,875
Alan A. Shuch 0 0 0
Jackson W. Smart $7,529 0 $84,875
William H. Springer $7,529 0 $84,875
Richard P. Strubel $7,529 0 $84,875
</TABLE>
- ----------
1. Includes compensation as Chairman of the Board of Trustees.
2. Reflects amount paid by the Portfolios during fiscal year ended
December 31, 1998.
3. The Goldman Sachs Funds complex consists of Goldman Sachs Trust and
Goldman Sachs Variable Insurance Trust. Goldman Sachs Trust
consisted of 45 mutual funds, on December 31, 1998. Goldman Sachs
Variable Insurance Trust consisted of 8 mutual funds on December 31,
1998.
B-67
<PAGE>
Management Services
GSAM, One New York Plaza, New York, New York, a separate operating
division of Goldman Sachs, serves as investment adviser to Growth and Income,
CORE U.S. Equity, CORE Large Cap Growth, CORE Large Cap Value, CORE Small Cap
Equity, Capital Growth, Mid Cap Value, CORE International Equity, Short Duration
Government and High Yield Funds. GSAMI, 133 Peterborough Court, London, England,
EC4A 2BB serves as investment adviser to International Equity and Global Income
Funds. See "Service Providers" in the Funds' Prospectus for a description of the
applicable 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.
The Goldman Sachs Group, L.P., which controls the Funds' Advisers,
announced that it will pursue an initial public offering of the firm in the late
spring or early summer of 1999. Simultaneously with the offering, the Goldman
Sachs Group, L.P. will merge into The Goldman Sachs Group, Inc.
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 United States 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 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. The Goldman Sachs Global Investment Research Department
covers approximately 2,200 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. The Advisers
manage money for some of the world's largest institutional investors.
For more than a decade, Goldman Sachs has been among the top-ranked firms
in Institutional Investor's annual "All-America Research Team" survey. In
addition, many of Goldman Sachs' economists, securities analysts, portfolio
strategists and credit analysts have consistently been highly ranked in
respected industry surveys conducted in the U.S. and abroad. Goldman Sachs is
also among the leading investment firms using quantitative analytics (now used
by a growing number of investors) to structure and evaluate portfolios. For
example, Goldman
B-68
<PAGE>
Sachs' options evaluation model analyzes each security's term and call option,
providing an overall analysis of the security's value relative to its interest
risk.
In managing the Funds, the Advisers have access to Goldman Sachs'
economics research. The Economics Research Department, based in London, 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 various external
surveys such as Extel, Institutional Investors and Reuters. These rankings
acknowledge the achievements of the Firms economists, strategists and equity
analysts.
In structuring the Short Duration Government Fund's securities portfolio,
the Adviser will review the existing overall economic and mortgage market
trends. The Adviser will then study yield spreads, the implied volatility and
the shape of the yield curve. The Adviser will then apply this analysis to a
list of eligible securities that meet the Fund's investment guidelines.
The Short Duration Government and High Yield Funds' Adviser expects to
utilize Goldman Sachs' sophisticated option-adjusted analytics to help make
strategic asset allocations within the markets for U.S. government,
Mortgage-Backed and other securities and to employ this technology periodically
to re-evaluate the Funds' investments as market conditions change. Goldman Sachs
has also developed a prepayment model designed to estimate mortgage prepayments
and cash flows under different interest rate scenarios. Because a
Mortgage-Backed Security incorporates the borrower's right to prepay the
mortgage, the Adviser uses 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 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 Adviser considers 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 Adviser will first
evaluate the absolute level of a security's OAS considering its liquidity and
its interest rate, volatility and prepayment sensitivity. The Adviser will then
analyze its value relative to alternative investments and to its own
investments. The Adviser will also measure a security's interest rate risk by
computing an option adjusted duration (OAD). The Adviser believes a security's
OAD is a better measurement of its price sensitivity than cash flow duration,
which systematically misstates portfolio duration. The Adviser also evaluates
returns for different mortgage market sectors and evaluates the credit risk of
individual securities. This sophisticated technical analysis allows the Adviser
to develop portfolio and trading strategies using Mortgage-Backed Securities
that are believed to be superior investments on a risk-adjusted basis and which
provide the flexibility to meet the respective Fund's duration targets and cash
flow pattern requirements.
Because the OAS is adjusted for the differing characteristics of the
underlying securities, the OAS of different Mortgage-Backed Securities can be
compared directly as an indication of their relative value in the market. The
Advisers also expect to use OAS-based pricing methods to
B-69
<PAGE>
calculate projected security returns under different, discrete interest rate
scenarios, and Goldman Sachs' proprietary prepayment model to generate yield
estimates under these scenarios. The OAS, scenario returns, expected returns,
and yields of securities in the mortgage market can be combined and analyzed in
an optimal risk-return matching framework.
The Advisers will use OAS analytics to choose what they believe is an
appropriate portfolio of investments for a 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 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 Advisers also expect to use OAS analytics to evaluate the mortgage
market on an ongoing basis. Changes in the relative value of various
Mortgage-Backed Securities could suggest tactical trading opportunities for the
Funds. The Advisers will have access to both current market analysis as well as
historical information on the relative value relationships among different
Mortgage-Backed Securities. Current market analysis and historical information
is available in the Goldman Sachs database for most actively traded
Mortgage-Backed Securities.
Goldman Sachs has agreed to provide the Advisers, on a non-exclusive
basis, use of its mortgage prepayment model, OAS model and any other proprietary
services which it now has or may develop, to the extent such services are made
available to other similar customers. Use of these services by the Advisers with
respect to a Fund does not preclude Goldman Sachs from providing these services
to third parties or using such services as a basis for trading for its own
account or the account of others.
The fixed-income research capabilities of Goldman Sachs available to the
Advisers include the Goldman Sachs Fixed-Income Research Department and the
Credit Department. The Fixed-Income Research Department monitors developments in
U.S. and foreign fixed-income markets, assesses the outlooks for various sectors
of the markets and provides relative value comparisons, as well as analyzes
trading opportunities within and across market sectors. The Fixed-Income
Research Department is at the forefront in developing and using computer-based
tools for analyzing fixed-income securities and markets, developing new fixed
income products and structuring portfolio strategies for investment policy and
tactical asset allocation decisions. The Credit Department tracks specific
governments, regions and industries and from time to time may review the credit
quality of a Fund's investments.
In addition to fixed-income research and credit research, the Adviser, in
managing the Global Income Fund, is supported by Goldman Sachs' economics
research. The Economics Research Department, based in London, conducts economic,
financial and currency markets research which analyzes economic trends and
interest and exchange rate movements 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
B-70
<PAGE>
earned top rankings in various external surveys such as Extel, Institutional
Investor and Reuters. These rankings acknowledge the achievements of the firm's
economists, strategists and equity analysts.
In allocating assets among foreign countries and currencies for the Funds
which can invest in foreign securities, the Advisers will have access to the
Global Asset Allocation Model. The model is based on the observation that the
prices of all financial assets, including foreign currencies, will adjust until
investors globally are comfortable holding the pool of outstanding assets. Using
the model, the Advisers will estimate the total returns from each currency
sector which are consistent with the average investor holding a portfolio equal
to the market capitalization of the financial assets among those currency
sectors. These estimated equilibrium returns are then combined with the
expectations of Goldman Sachs' research professionals to produce an optimal
currency and asset allocation for the level of risk suitable for a Fund given
its investment objectives and criteria.
The Funds' Management Agreement provides that the Advisers may render
similar services to others as long as the services provided thereunder are not
impaired thereby.
The Management Agreement with respect to the Growth and Income, CORE U.S.
Equity, CORE Large Cap Growth, CORE Small Cap Equity, International Equity,
Global Income and High Yield Funds was initially approved by the Trustees,
including a majority of the Trustees who are not parties to the management
agreement or "interested persons" (as such term is defined in the Act) of any
party thereto (the "non-interested Trustees"), on October 21, 1997. The
Management Agreement with respect to the CORE Large Cap Value, CORE
International Equity and Short Duration Government Funds was initially approved
by the Trustees, including a majority of the non-interested Trustees, on January
22, 1999. The Funds' Management Agreement was most recently approved by the
Trustees, including a majority of the Trustees who are not parties to the
Management Agreement or "interested persons" of any party thereto on April 27,
1999. The arrangement was approved by the sole shareholder of the Growth and
Income, CORE U.S. Equity, CORE Large Cap Growth, CORE Small Cap Equity,
International Equity, Global Income and High Yield Funds on September 26, 1997,
and by the sole shareholder of the CORE Large Cap Value, CORE International
Equity and Short Duration Government Funds 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 each 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.
Pursuant to the Management Agreements, the Advisers are entitled to
receive the fees listed below, payable monthly of such Fund's average daily net
assets.
B-71
<PAGE>
Management
Fund Fee
- ---- ---
GSAM
Growth and Income Fund .75%
CORE U.S. Equity Fund .70%
CORE Large Cap Growth Fund .70%
CORE Large Cap Value Fund .70%
CORE Small Cap Equity Fund .75%
Capital Growth Fund .75%
Mid Cap Value Fund .80%
CORE International Equity Fund .85%
Short Duration Government Fund .55%
High Yield Fund .70%
GSAMI
International Equity Fund 1.00%
Global Income Fund .90%
For the fiscal period ended December 31, 1998, the amount of the
investment advisory fees incurred by each Fund then in existence were as
follows:
1998
----
Growth and Income Fund/1/ $47,801
CORE U.S. Equity Fund/2/ 41,825
CORE Large Cap Growth Fund/2/ 37,366
CORE Large Cap Value Fund/3/ N/A
CORE Small Cap Equity Fund/2/ 32,003
Capital Growth Fund/4/ 17,067
Mid Cap Value Fund/5/ 18,776
CORE International Equity Fund/3/ N/A
International Equity Fund/1/ 85,560
Short Duration Government Fund/3/ N/A
Global Income Fund/1/ 46,434
High Yield Fund/6/ N/A
- ----------
/1/ Commenced operations on January 12, 1998.
/2/ Commenced operations on February 13, 1998.
/3/ Commenced operations on April 1, 1999.
/4/ Commenced operations on April 30, 1998.
/5/ Commenced operations on May 1, 1998.
B-72
<PAGE>
6 Not Operational.
Under the Management Agreement, each Adviser also: (i) supervises all
non-advisory operations of each Fund that it advises; (ii) provides personnel to
perform such executive, administrative and clerical services as are reasonably
necessary to provide effective administration of each Fund; (iii) arranges for
at each Fund's expense (a) the preparation of all required tax returns, (b) the
preparation and submission of reports to existing shareholders, (c) the periodic
updating of prospectuses and statements of additional information and (d) the
preparation of reports to be filed with the SEC and other regulatory
authorities; (iv) maintains each Fund's records; and (v) provides office space
and all necessary office equipment and services.
Activities of Goldman Sachs and Its Affiliates and Other Accounts Managed
by Goldman Sachs. The involvement of the Advisers, Goldman Sachs and their
affiliates in the management of, or their interest in, other accounts and other
activities of Goldman Sachs may present conflicts of interest with respect to
the Funds or impede their investment activities.
Goldman Sachs and its affiliates, including, without limitation, the
Advisers and their advisory affiliates, have proprietary interests in, and may
manage or advise with respect to, accounts or funds (including separate accounts
and other funds and collective investment vehicles) which have investment
objectives similar to those of the Funds and/or which engage in transactions in
the same types of securities, currencies and instruments as the Funds. Goldman
Sachs and its affiliates are major participants in the global currency,
equities, swap and fixed income markets, in each case both on a proprietary
basis and for the accounts of customers. As such, Goldman Sachs and its
affiliates are actively engaged in transactions in the same securities,
currencies and instruments in which the Funds invest. Such activities could
affect the prices and availability of the securities, currencies and instruments
in which the Funds invest, which could have an adverse impact on each Fund's
performance. Such transactions, particularly in respect of proprietary accounts
or customer accounts other than those included in the Advisers' and their
advisory affiliates' asset management activities, will be executed independently
of the Funds' transactions and thus at prices or rates that may be more or less
favorable. When the Advisers and their advisory affiliates seek to purchase or
sell the same assets for their managed accounts, including the Funds, the assets
actually purchased or sold may be allocated among the accounts on a basis
determined in the good faith discretion of such entities to be equitable. In
some cases, this system may adversely affect the size or the price of the assets
purchased or sold for the Funds.
From time to time, the Funds' activities may be restricted because of
regulatory restrictions applicable to Goldman Sachs and its affiliates, and/or
their internal policies designed to comply with such restrictions. As a result,
there may be periods, for example, when the Advisers and/or their affiliates
will not initiate or recommend certain types of transactions in certain
securities or instruments with respect to which the Advisers and/or their
affiliates are performing services or when position limits have been reached.
In connection with their management of the Funds, the Advisers may have
access to certain fundamental analysis and proprietary technical models
developed by Goldman Sachs and other affiliates. The Advisers will not be under
any obligation, however, to effect transactions on behalf
B-73
<PAGE>
of the Funds in accordance with such analysis and models. In addition, neither
Goldman Sachs nor any of its affiliates will have any obligation to make
available any information regarding their proprietary activities or strategies,
or the activities or strategies used for other accounts managed by them, for the
benefit of the management of the Funds and it is not anticipated that the
Advisers will have access to such information for the purpose of managing the
Funds. The proprietary activities or portfolio strategies of Goldman Sachs and
its affiliates or the activities or strategies used for accounts managed by them
or other customer accounts could conflict with the transactions and strategies
employed by the Advisers in managing the Funds.
The results of each Fund's investment activities may differ significantly
from the results achieved by the Advisers and their affiliates for their
proprietary accounts or accounts (including investment companies or collective
investment vehicles) managed or advised by them. It is possible that Goldman
Sachs and its affiliates and such other accounts will achieve investment results
which are substantially more or less favorable than the results achieved by a
Fund. Moreover, it is possible that a Fund will sustain losses during periods in
which Goldman Sachs and its affiliates achieve significant profits on their
trading for proprietary or other accounts. The opposite result is also possible.
The investment activities of Goldman Sachs and its affiliates for their
proprietary accounts and accounts under their management may also limit the
investment opportunities for the 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 a Fund's activities
but will not be involved in the day-to-day management of such Fund. In such
instances, those individuals may, as a result, obtain information regarding the
Fund's proposed investment activities which is not generally available to the
public. In addition, by virtue of their affiliation with Goldman Sachs, any such
member of an investment policy committee will have direct or indirect interests
in the activities of Goldman Sachs and its affiliates in securities, currencies
and investments similar to those in which the Fund invests.
In addition, certain principals and certain of the employees of the
Advisers are also principals or employees of Goldman Sachs or their affiliated
entities. As a result, the performance by these principals and employees of
their obligations to such other entities may be a consideration of which
investors in the Funds should be aware.
Each Adviser may enter into transactions and invest in currencies or
instruments on behalf of a Fund in which customers of Goldman Sachs serve as the
counterparty, principal or issuer. In such cases, such party's interests in the
transaction will be adverse to the interests of a Fund, and such party may have
no incentive to assure that the Funds obtain the best possible prices or terms
in connection with the transactions. Goldman Sachs and its affiliates may also
create, write or issue derivative instruments for customers of Goldman Sachs or
its affiliates, the underlying securities, currencies or instruments of which
may be those in which a Fund invests or which may be based on the performance of
a Fund. The Funds may, subject to applicable law, purchase investments which
B-74
<PAGE>
are the subject of an underwriting or other distribution by Goldman Sachs or its
affiliates and may also enter transactions with other clients of Goldman Sachs
or its affiliates where such other clients have interests adverse to those of
the Funds. At times, these activities may cause departments of Goldman Sachs or
its affiliates to give advice to clients that may cause these clients to take
actions adverse to the interests of the Funds. To the extent affiliated
transactions are permitted, the Funds will deal with Goldman Sachs and its
affiliates on an arms-length basis.
Each Fund will be required to establish business relationships with its
counterparties based on the Fund's own credit standing. Neither Goldman Sachs
nor its affiliates will have any obligation to allow their credit to be used in
connection with a Fund's establishment of its business relationships, nor is it
expected that a Fund's counterparties will rely on the credit of Goldman Sachs
or any of its affiliates in evaluating the Fund's creditworthiness.
It is possible that a Fund's holdings will include securities of entities
for which Goldman Sachs performs investment banking services as well as
securities of entities in which Goldman Sachs makes a market. From time to time,
Goldman Sachs' activities may limit the Funds' flexibility in purchases and
sales of securities. When Goldman Sachs is engaged in an underwriting or other
distribution of securities of an entity, the Advisers may be prohibited from
purchasing or recommending the purchase of certain securities of that entity for
the Funds.
Distributor and Transfer Agent
Goldman Sachs serves as the exclusive distributor of shares 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
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.
B-75
<PAGE>
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
with respect to each Fund 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. For
the last fiscal year the amount paid to Goldman Sachs by each Fund then in
existence were as follows under the fee schedules then in effect:
1998
----
Growth and Income Fund/1/ $26,530
CORE U.S. Equity Fund/2/ 26,705
CORE Large Cap Growth Fund/2/ 25,676
CORE Large Cap Value Fund/3/ N/A
CORE Small Cap Equity Fund/2/ 26,065
Capital Growth Fund/4/ 21,905
Mid Cap Value Fund/5/ 18,123
CORE International Equity Fund/3/ N/A
International Equity Fund/1/ 28,662
Short Duration Government Fund/3/ N/A
Global Income Fund/1/ 27,998
High Yield Fund/6/ N/A
- ----------
/1/ Commenced operations on January 12, 1998.
/2/ Commenced operations on February 13, 1998.
/3/ Commenced operations on April 1, 1999.
/4/ Commenced operations on April 30, 1998.
/5/ Commenced operations on May 1, 1998.
/6/ Not Operational.
B-76
<PAGE>
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.
Custodian
State Street, 1776 Heritage Drive, North Quincy, Massachusetts 02110, 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 in foreign securities and to hold cash and currencies for the Trust.
Independent Public Accountants
Arthur Andersen LLP, independent public accountants, 225 Franklin Street,
Boston, Massachusetts 02110, have been selected as auditors of the Trust. In
addition to audit services, Arthur Andersen LLP prepares the Trust's federal and
state tax returns, and provides consultation and assistance on accounting,
internal control and related matters.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Advisers are responsible for decisions to buy and sell securities, 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.
B-77
<PAGE>
In the over-the-counter market, securities are generally traded on a "net"
basis with dealers acting as principal for their own accounts without a stated
commission, although the price of a security usually includes a profit to the
dealer. In underwritten offerings, securities are purchased at a fixed price
which includes an amount of compensation to the underwriter, generally referred
to as the underwriter's concession or discount. On occasion, certain money
market instruments may be purchased directly from an issuer, in which case no
commissions or discounts are paid.
The portfolio transactions for the Fixed Income Funds are generally
effected at a net price without a broker's commission (i.e., a dealer is dealing
with a Fund as principal and receives compensation equal to the spread between
the dealer's cost for a given security and the resale price of such security).
In certain foreign countries, debt securities in which the Global Income Fund
and High Yield Fund may invest are traded on exchanges at fixed commission
rates.
In placing orders for portfolio securities of a Fund, the Advisers are
generally required to give primary consideration to obtaining the most favorable
execution and net price available. This means that an Adviser will seek to
execute each transaction at a price and commission, if any, which provides the
most favorable total cost or proceeds reasonably attainable in the
circumstances. As permitted by Section 28(e) of the Securities Exchange Act of
1934, the Fund may pay a broker which provides brokerage and research services
an amount of disclosed commission in excess of the commission which another
broker would have charged for effecting that transaction. Such practice is
subject to (i) a good faith determination by the Trustees that such commission
is reasonable in light of the services provided; and (ii) to such policies as
the Trustees may adopt from time to time. While the Advisers generally seek
reasonably competitive spreads or commissions, a Fund will not necessarily be
paying the lowest spread or commission available. Within the framework of this
policy, the Advisers will consider research and investment services provided by
brokers or dealers who effect or are parties to portfolio transactions of a
Fund, the Advisers and their affiliates, or their other clients. Such research
and investment services are those which brokerage houses customarily provide to
institutional investors and include research reports on particular industries
and companies, economic surveys and analyses, recommendations as to specific
securities and other products or services (e.g., quotation equipment and
computer related costs and expenses), advice concerning the value of securities,
the advisability of investing in, purchasing or selling securities, the
availability of securities or the purchasers or sellers of securities,
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and performance of accounts,
effecting securities transactions and performing functions incidental thereto
(such as clearance and settlement) and providing lawful and appropriate
assistance to the Advisers in the performance of their decision-making
responsibilities. Such services are used by the Advisers in connection with all
of their investment activities, and some of such services obtained in connection
with the execution of transactions for a Fund may be used in managing other
investment accounts. Conversely, brokers furnishing such services may be
selected for the execution of transactions of such other accounts, whose
aggregate assets are far larger than those of a Fund, and the services furnished
by such brokers may be used by the Advisers in providing management services for
the Trust.
In circumstances where two or more broker-dealers offer comparable prices
and execution capability, preference may be given to a broker-dealer which has
sold shares of the Fund as well as
B-78
<PAGE>
shares of other investment companies or accounts managed by the Advisers. This
policy does not imply a commitment to execute all portfolio transactions through
all broker-dealers that sell shares of the Fund.
On occasions when an Adviser deems the purchase or sale of a security to
be in the best interest of a Fund as well as its other customers (including any
other fund or other investment company or advisory account for which such
Adviser acts as investment adviser or subadviser), the Adviser, to the extent
permitted by applicable laws and regulations, may aggregate the securities to be
sold or purchased for the Fund with those to be sold or purchased for such other
customers in order to obtain the best net price and most favorable execution
under the circumstances. In such event, allocation of the securities so
purchased or sold, as well as the expenses incurred in the transaction, will be
made by the applicable Adviser in the manner it considers to be equitable and
consistent with its fiduciary obligations to such Fund and such other customers.
In some instances, this procedure may adversely affect the price and size of the
position obtainable for a Fund.
Commission rates in the U.S. are established pursuant to negotiations with
the broker based on the quality and quantity of execution services provided by
the broker in the light of generally prevailing rates. The allocation of orders
among brokers and the commission rates paid are reviewed periodically by the
Trustees.
Subject to the above considerations, the Advisers may use Goldman Sachs as
a broker for a Fund. In order for Goldman Sachs to effect any portfolio
transactions for each Fund, the commissions, fees or other remuneration received
by Goldman Sachs must be reasonable and fair compared to the commissions, fees
or other remuneration paid to other brokers in connection with comparable
transactions involving similar 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.
B-79
<PAGE>
For the past fiscal year, each Fund in existence paid brokerage commissions as
follows:
<TABLE>
<CAPTION>
Total Total Brokerage
Brokerage Amount of Commissions
Total Commissions Transaction Paid
Brokerage Paid to on which to Brokers
Commissions Affiliated Commissions Providing
Paid Persons Paid Research
---- ------- ---- --------
<S> <C> <C> <C> <C>
Fiscal Year Ended
December 31, 1998:/1/
Growth and Income Fund $27,909 15.7(%)2 6.1(%)3 N/A
CORE U.S. Equity Fund 9,120 24.4(%)2 32.1(%)3 N/A
CORE Large Cap Growth Fund 10,573 22.1(%)2 35.9(%)3 N/A
CORE Large Cap Value Fund/4/ N/A N/A N/A N/A
CORE Small Cap Equity Fund 19,041 20.8(%)2 43.2(%)3 N/A
Capital Growth Fund 5,429 0.3(%)2 18.6(%)3 N/A
Mid Cap Value Fund 12,803 6.8(%)2 3.6(%)3 N/A
CORE International Equity Fund/4/ N/A N/A N/A N/A
International Equity Fund 47,226 10.4(%)2 2.6(%)3 N/A
Short Duration Government Fund/4/ N/A N/A N/A N/A
Global Income Fund N/A N/A N/A N/A
High Yield Fund/4/ N/A N/A N/A N/A
</TABLE>
- ----------
/1/ The Growth and Income, International Equity and Global Income Funds
commenced operations on January 12, 1998; the CORE U.S. Equity, CORE Large
Cap Growth and CORE Small Cap Equity Funds commenced operations on
February 13, 1998; the Capital Growth and Mid Cap Value Funds commenced
operations on April 30, 1998 and May 1, 1998, respectively.
/2/ Percentage of total commissions paid.
/3/ Percentage of total amount of transactions involving the payment of
commissions effected through affiliated persons.
/4/ Not operational during the fiscal year ended December 31, 1998. The CORE
Large Cap Value, CORE International Equity, and Short Duration Government
Funds commenced operations on April 1, 1999.
B-80
<PAGE>
During the fiscal year ended December 31, 1998, the Trust acquired and
sold securities of its regular broker/dealers. As of December 31, 1998, the
Trust held the following amounts of securities of its regular broker/dealers, as
defined in Rule 10b-1 under the Act, or their parents ($ in thousands):
Fund Broker/Dealer Amount
- ---- ------------- ------
Growth and Income Fund Donalson, Lufkin & Jenrette, Inc. $ 77
J.P. Morgan Securities, Inc. 357
CORE U.S. Equity Fund Lehman Brothers Inc. 106
Merrill Lynch & Co. 73
CORE Large Cap Growth Fund Lehman Brothers Inc. 22
Merrill Lynch & Co. 93
CORE Large Cap Value Fund/1/ N/A N/A
CORE Small Cap Equity Fund N/A N/A
Capital Growth Fund Donalson, Lufkin & Jenrette, Inc. 11
J.P. Morgan Securities, Inc. 51
Mid Cap Value Fund Donalson, Lufkin & Jenrette, Inc. 186
J.P. Morgan Securities, Inc. 867
CORE International Equity Fund/1/ N/A N/A
International Equity Fund N/A N/A
Short Duration Government Fund/1/ N/A N/A
Global Income Fund Merrill Lynch & Co. 102
High Yield Fund/1/ N/A N/A
- ----------
/1/ As of December 31, 1998, the Fund had not yet commenced operations.
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
B-81
<PAGE>
Fund may compute its net asset value as of any time permitted pursuant to any
exemption, order or statement of the SEC or its staff.
Portfolio securities of a Fund 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 closing bid price, or if a closing bid price is not available, at either the
exchange or system 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 last sale price or, if not available at the
bid price 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 last bid price at the time net asset
value is determined; (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 normally 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 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 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
B-82
<PAGE>
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 a Fund's next
determined net asset value unless the Trust, in its discretion, makes an
adjustment in light of the nature and materiality of the event, its effect on
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.
B-83
<PAGE>
Each Fund may 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, or 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
B-84
<PAGE>
departments of Goldman Sachs, Lehman Brothers, First Boston Corporation, Morgan
Stanley (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:
o cost associated with aging parents;
o funding a college education (including its actual and estimated
cost);
o health care expenses (including actual and projected expenses);
o long-term disabilities (including the availability of, and coverage
provided by, disability insurance);
o 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);
o asset allocation strategies and the benefits of diversifying among
asset classes;
o the benefits of international and emerging market investments;
o the effects of inflation on investing and saving;
o the benefits of establishing and maintaining a regular pattern of
investing and the benefits of dollar-cost averaging; and
B-85
<PAGE>
o 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:
o 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;
o 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;
o total stock market capitalizations of specific countries and regions
on a global basis;
o performance of securities markets of specific countries and regions;
o value of a dollar amount invested in a particular market or type of
security over different periods of time;
o 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;
o credit ratings of domestic government bonds in various countries;
o price volatility comparisons of types of securities over different
periods of time; and
o 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.
B-86
<PAGE>
VALUE OF $1,000 INVESTMENT
(AVERAGE ANNUAL TOTAL RETURN)
<TABLE>
<CAPTION>
Assuming expense Assuming no
Fund Time Period reimbursements expense reimbursements
- ---- ----------- -------------- ----------------------
<S> <C> <C> <C>
Growth and Income Fund 1/12/98 - 12/31/98 - Since inception* 5.47% 3.66%
CORE U.S. Equity Fund 2/13/98 - 12/31/98 - Since inception* 14.73% 12.71%
CORE Large Cap Growth Fund 2/13/98 - 12/31/98 - Since inception* 16.99% 14.89%
CORE Small Cap Equity Fund 2/13/98 - 12/31/98 - Since inception* (9.30)% (11.72)%
Capital Growth Fund 4/30/98 - 12/31/98 - Since inception* 13.40% 10.40%
Mid Cap Value Fund 5/1/98 - 12/31/98 - Since inception* (13.56)% (15.81)%
International Equity Fund 1/12/98 - 12/31/98 - Since inception* 20.07% 18.10%
Global Income Fund 1/12/98 - 12/31/98 - Since inception* 8.29% 5.97%
</TABLE>
- ----------
All returns are average annual total returns. No information is provided with
respect to the CORE Large Cap Value, CORE International Equity, Short Duration
Government and High Yield Funds as such Funds had not commenced operations as of
December 31, 1998.
* Represents an aggregate total return (not annualized) since this fund has
not completed a full twelve months of operations.
B-87
<PAGE>
From time to time, advertisements or information may include a discussion
of certain attributes or benefits to be derived by an investment in the Fund.
Such advertisements or information may include symbols, headlines or other
material which highlight or summarize the information discussed in more detail
in the communication.
The Trust may from time to time summarize the substance of discussions
contained in shareholder reports in advertisements and publish the Adviser's
views as to markets, the rationale for a Fund's investments and discussions of a
Fund's current asset allocation.
In addition, from time to time, advertisements or information may include
a discussion of asset allocation models developed by GSAM and/or its affiliates,
certain attributes or benefits to be derived from asset allocation strategies
and the Goldman Sachs mutual funds that may be offered as investment options for
the 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
B-88
<PAGE>
securities of an investment company such as the Trust shall not be deemed to
have been effectively acted upon unless approved by the holders of a majority of
the outstanding shares of each class or series affected by such matter. Rule
18f-2 further provides that a class or series shall be deemed to be affected by
a matter unless the interests of each class or series in the matter are
substantially 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
B-89
<PAGE>
(iii) economic developments or trends having a significant adverse impact on
their business or operations.
The Declaration of Trust authorizes the Trustees without shareholder
approval to cause the Trust, or any series thereof, to merge or consolidate with
any corporation, association, trust or other organization or sell or exchange
all or substantially all of the property belonging to the Trust or any series
thereof. In addition, the Trustees, without shareholder approval, may adopt a
master-feeder structure by investing all or a portion of the assets of a series
of the Trust in the securities of another open-end investment company.
The Declaration of Trust permits the Trustees to amend the Declaration of
Trust without a shareholder vote. However, shareholders of the Trust have the
right to vote on any amendment (i) that would affect the voting rights of
shareholders; (ii) that is required by law to be approved by shareholders; (iii)
that would amend the voting provisions of the Declaration of Trust; or (iv) that
the Trustees determine to submit to shareholders.
The Trustees may appoint separate Trustees with respect to one or more
series or classes of the Trust's shares (the "Series Trustees"). Series Trustees
may, but are not required to, serve as Trustees of the Trust or any other series
or class of the Trust. The Series Trustees have, to the exclusion of any other
Trustees of the Delaware Trust, all the powers and authorities of Trustees under
the Trust Instrument with respect to any other series or class.
As of February 25, 1999, the following entities owned of record or
beneficially more than 5% of the outstanding shares of the Growth and Income
Fund: The Goldman Sachs Group, Seed Account, 85 Broad Street, 10th Floor, New
York, NY 10004-2434 (14%); Sun Life of Canada, P.O. Box 9134, Boston, MA
02117-9134 (14%); Life of Virginia, 6610 West Broad Street, Richmond, VA
23230-1799 (31%); COVA Financial Services Life Insurance Company, 4700 Weston
Parkway, Suite 200, West Des Moines, IA 50266-6718 (32%); and The Ohio National
Life Insurance Company, One Financial Way, Cincinnati, OH 45242-5851 (6%).
As of February 25, 1999, the following entities owned of record or
beneficially more than 5% of the outstanding shares of the CORE U.S. Equity
Fund: The Goldman Sachs Group, Seed Account, 85 Broad Street, 10th Floor, New
York, NY 10004-2434 (50%); Sun Life of Canada, P.O. Box 9134, Boston, MA
02117-9134 (39%); and The Ohio National Life Insurance Company, One Financial
Way, Cincinnati, OH 45242-5851 (9%).
As of February 25, 1999, the following entities owned of record or
beneficially more than 5% of the outstanding shares of the CORE Large Cap Growth
Fund: The Goldman Sachs Group, Seed Account, 85 Broad Street, 10th Floor, New
York, NY 10004-2434 (65%); and Sun Life of Canada, P.O. Box 9134, Boston, MA
02117-9134 (33%).
As of February 25, 1999, the following entities owned of record or
beneficially more than 5% of the outstanding shares of the CORE Small Cap Equity
Fund: The Goldman Sachs Group, Seed Account, 85 Broad Street, 10th Floor, New
York, NY 10004-2434 (92%); and Sun Life of Canada, P.O. Box 9134, Boston, MA
02117-9134 (6%).
B-90
<PAGE>
As of February 25, 1999, the following entities owned of record or
beneficially more than 5% of the outstanding shares of the Capital Growth Fund:
The Goldman Sachs Group, Seed Account, 85 Broad Street, 10th Floor, New York, NY
10004-2434 (72%) and The Ohio National Life Insurance Company, One Financial
Way, Cincinnati, OH 45242-5851 (27%).
As of February 25, 1999, the following entities owned of record or
beneficially more than 5% of the outstanding shares of the Mid Cap Equity Fund:
The Goldman Sachs Group, Seed Account, 85 Broad Street, 10th Floor, New York, NY
10004-2434 (28%) and Life of Virginia, 6610 West Broad Street, Richmond, VA
23230-1799 (70%).
As of February 25, 1999, the following entities owned of record or
beneficially more than 5% of the outstanding shares of the International Equity
Fund, The Goldman Sachs Group, Seed Account, 85 Broad Street, 10th Floor, New
York, NY 10004-2434 (81%) and COVA Financial Services Life Insurance Company,
4700 Weston Parkway, Suite 200, West Des Moines, IA 50266-6718 (12%).
As of February 25, 1999, the Goldman Sachs Group, 85 Broad Street, 10th
Floor, New York, NY 10004-2434, owned of record or beneficially 92% of the
outstanding shares of the Global Income Fund.
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
B-91
<PAGE>
shareholder request and to investigate the basis and to employ other advisers in
considering the merits of the request and shall require an undertaking by the
shareholders making such request to reimburse the Fund for the expense of any
such advisers in the event that the Trustees determine not to bring such action.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against liability to which he or she
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
or her office.
TAXATION
Shares of the Funds are offered only to Separate Accounts that fund
variable annuity contracts and variable insurance policies issued by
Participating Insurance Companies. See the Prospectus for such contracts for a
discussion of the special taxation of insurance companies with respect to the
Separate Accounts, the variable annuity contracts, variable insurance policies,
and the holders thereof.
The following is a summary of the principal U.S. federal income, and
certain state and local, tax considerations regarding the purchase, ownership
and disposition of shares in each Fund of the Trust. This summary does not
address special tax rules 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 Prospectus. The
discussions below and in the Prospectus are not intended as substitutes for
careful tax planning.
The holders of variable life insurance policies or annuity contracts
should not be subject to tax with respect to distributions made on, or
redemptions of, 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 Portfolio shares.
B-92
<PAGE>
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
B-93
<PAGE>
required to include in income for federal income tax purposes, as long-term
capital gain, their shares of such undistributed amount, and (ii) will be
entitled to credit their proportionate shares of the tax paid by the Fund
against their U.S. federal income tax liabilities, if any, and to claim refunds
to the extent the credit exceeds such liabilities. For U.S. federal income tax
purposes, the tax basis of shares owned by a shareholder of the Fund will be
increased by an amount equal to a percentage of the amount of undistributed net
capital gain included in the shareholder's gross income. Each Fund intends to
distribute for each taxable year to its shareholders all or substantially all of
its investment company taxable income, net capital gain and any net tax-exempt
interest. Exchange control or other foreign laws, regulations or practices may
restrict repatriation of investment income, capital or the proceeds of
securities sales by foreign investors such as the International Equity or Global
Income Funds and may therefore make it more difficult for such a Fund to satisfy
the distribution requirements described above, as well as the excise tax
distribution requirements described below. However, each Fund generally expects
to be able to obtain sufficient cash to satisfy such requirements from new
investors, the sale of securities or other sources. If for any taxable year a
Fund does not qualify as a regulated investment company, it will be taxed on all
of its investment company taxable income and net capital gain at corporate
rates, and its distributions to shareholders will be taxable as ordinary
dividends to the extent of its current and accumulated earnings and profits.
As of December 31, 1998, the following Funds had capital loss
carryforwards for U.S. federal tax purposes.
Year of
Amount Expiration
------ ----------
Growth and Income Fund $382,000 2006
CORE U.S. Equity Fund 237,000 2006
CORE Large Cap Growth Fund 628,000 2006
CORE Small Cap Equity Fund 760,000 2006
Capital Growth Fund 22,000 2006
Mid Cap Value Fund 138,000 2006
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
B-94
<PAGE>
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"). Each Fund will be a Closed Fund.
If the segregated asset account upon which a variable contract is based is
not "adequately diversified" under the foregoing rules for each calendar
quarter, then (a) the variable contract is not treated as a life insurance
contract or annuity contract under the Code for all subsequent periods during
which such account is not "adequately diversified" and (b) the holders of such
contract must include as ordinary income the "income on the contract" for each
taxable year. Further, the income on a life insurance contract for all prior
taxable years is treated as received or accrued during the taxable year of the
policyholder in which the contract ceases to meet the definition of a "life
insurance contract" under the Code. The "income on the contract" is, generally,
the excess of (i) the sum of the increase in the net surrender value of the
contract during the taxable year and the cost of the life insurance protection
provided under the contract during the year, over (ii) the premiums paid under
the contract during the taxable year. In addition, if a Fund did not constitute
a Closed Fund, the holders of the contracts and annuities which invest in the
Fund through a segregated asset account might be treated as owners of Fund
shares and might be subject to tax on distributions made by the Fund.
In order to avoid a 4% federal excise tax, each Fund may be required to
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 of the Funds will be subject to foreign taxes on their income
(possibly including, in some cases, capital gains) from foreign securities. Tax
conventions between certain countries and the U.S. may reduce or eliminate such
taxes in some cases.
B-95
<PAGE>
Investments in lower-rated securities may present special tax issues for a
Fund to the extent actual or anticipated defaults may be more likely with
respect to such securities. Tax rules are not entirely clear about issues such
as when a Fund may cease to accrue interest, original issue discount, or market
discount; when and to what extent deductions may be taken for bad debts or
worthless securities; how payments received on obligations in default should be
allocated between principal and income; and whether exchanges of debt
obligations in a workout context are taxable. These and other issues will be
addressed by a Fund, in the event it invests in such securities, in order to
seek to eliminate or minimize any adverse tax consequences.
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 Prospectus, shares of the Funds are sold and redeemed
at their net asset value as next determined after receipt of the purchase or
redemption order. Each purchase is confirmed to the Separate Account in a
written statement of the number of shares purchased and the aggregate number of
shares currently held.
Each Fund will 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 Prospectus and this Additional Statement do not contain all the
information included in the Registration Statement filed with the SEC under the
1933 Act with respect to the securities
B-96
<PAGE>
offered by the Prospectus. Certain portions of the Registration Statement have
been omitted from the Prospectus and this Additional Statement pursuant to the
rules and regulations of the SEC. The Registration Statement including the
exhibits filed therewith may be examined at the office of the SEC in Washington,
D.C.
Statements contained in the Prospectus or in this Additional Statement as
to the contents of any contract or other document referred to are not
necessarily complete, and, in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement of which the Prospectus and this Additional Statement form a part,
each such statement being qualified in all respects by such reference.
FINANCIAL STATEMENTS
The audited financial statements and related Report of Independent Public
Accountants, contained in the 1998 Annual Report of each of the Funds are
incorporated herein by reference into this Additional Statement. No other part
of the Annual or any Semi-Annual Report is incorporated by reference herein.
Copies of the Annual Report may be obtained upon request and without charge by
calling Goldman, Sachs & Co. toll free at 800-292-4726.
B-97
<PAGE>
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:
"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
A-1
<PAGE>
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."
"TBW-3" - This designation represents Thomson BankWatch's lowest
investment-grade category and indicates that while the obligation is more
susceptible to adverse
A-3
<PAGE>
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 obligation. Adverse business, financial or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
A-4
<PAGE>
"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 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-5
<PAGE>
"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.
"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.
A-6
<PAGE>
"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.
"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.
A-7
<PAGE>
"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.
"D" - This designation indicates that the long-term debt is in
default.
A-8
<PAGE>
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.
"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.
A-9
<PAGE>
"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.
A-10
<PAGE>
APPENDIX B
BUSINESS PRINCIPLES OF GOLDMAN, SACHS & CO.
Goldman Sachs is noted for its Business Principles, which guide all of the
firm's activities and serve as the basis for its distinguished reputation among
investors worldwide.
Our client's interests always come first. Our experience shows that if we
serve our clients well, our own success will follow.
OUR ASSETS ARE OUR PEOPLE, CAPITAL AND REPUTATION. If any of these is ever
diminished, the last 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 other 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.
OUR PROFITS ARE A KEY TO OUR SUCCESS. They replenish our capital and
attract and keep our best people. It is our practice to share our profits
generously with all who help create them. Profitability is crucial to our
future.
We consider our size an asset that we try hard to preserve. We want to be
big enough to undertake the largest project that any of our clients could
contemplate, yet small enough to
B-1
<PAGE>
maintain the loyalty, the intimacy and the esprit de corps that we all treasure
and that contribute greatly to our success.
We constantly strive to anticipate the rapidly changing needs of our
clients and to develop new services to meet those needs. We know that the world
of finance will not stand still and that complacency can lead to extinction.
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.
B-2
<PAGE>
GOLDMAN, SACHS & CO.'S INVESTMENT BANKING AND SECURITIES ACTIVITIES
Goldman Sachs is a leading financial services firm traditionally known on
Wall Street and around the world for its institutional and private client
services.
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 issues from
1989-1997.
The number one lead manager of U.S. common stock offerings for the past
nine years (1989-1997).*
The number one lead manager for initial public offerings (IPOs) worldwide
(1989-1997).
- ----------
* Source: Securities Data Corporation. Common stock ranking excludes REITs,
Investment Trust and Rights.
B-3
<PAGE>
GOLDMAN, SACHS & CO.'S HISTORY OF EXCELLENCE
1869 Marcus Goldman opens Goldman Sachs for business
1890 Dow Jones Industrial Average first published
1896 Goldman, Sachs & Co. joins New York Stock Exchange
1906 Goldman, Sachs & Co. takes Sears Roebuck & Co. public (at 93 years, the
firm's longest-standing client relationship)
Dow Jones Industrial Average tops 100
1925 Goldman, Sachs & Co. finances Warner Brothers, producer of the first
talking film
1956 Goldman, Sachs & Co. co-manages Ford's public offering, the largest to
date
1970 Goldman, Sachs & Co. opens London office
1972 Dow Jones Industrial Average breaks 1000
1986 Goldman, Sachs & Co. takes Microsoft public
1988 Goldman Sachs Asset Management is formally established
1991 Goldman, Sachs & Co. provides advisory services for the largest
privatization in the region of the sale of Telefonos de Mexico
1995 Goldman Sachs Asset Management introduces Global Tactical Asset Allocation
Program
Dow Jones Industrial Average breaks 5000
1996 Goldman, Sachs & Co. takes Deutsche Telecom public
Dow Jones Industrial Average breaks 6000
1997 Dow Jones Industrial Average breaks 7000
Goldman Sachs Asset Management increases assets under management by 100%
over 1996
1998 Goldman Sachs Asset Management reaches $195.5 billion in assets under
Management
Dow Jones Industrial Average breaks 9000
1999 Goldman Sachs becomes a public company.
B-4
