<PAGE>
As filed with the Securities and Exchange Commission on February 26, 1999
Registration No. 333-35883
811-08361
===========================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. _ [_]
Post-Effective Amendment No. 2 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 3 [X]
------------------------------
GOLDMAN SACHS VARIABLE INSURANCE TRUST
(Exact Name of Registrant as Specified in Charter)
4900 Sears Tower
Chicago, Illinois 60606
(Address of Principal Executive Offices)
Registrant's Telephone Number, including area code: (312) 993-4400
Michael J. Richman
Goldman, Sachs & Co.
85 Broad Street - 12th Floor
New York, New York 10004
(Name and Address of Agent for Service)
copies to:
Jeffrey A. Dalke, Esq.
Drinker Biddle & Reath LLP
Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, Pennsylvania 19107-3496
It is proposed that this filing will become effective (check appropriate box):
[_] Immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(1)
[X] on May 1, 1999 pursuant to paragraph (a)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[_] on (date) pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
[_] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
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GOLDMAN SACHS VARIABLE INSURANCE TRUST
- --------------------------------------------------------------------------------
May 1,
1999
. 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
. Goldman Sachs High Yield Fund
[GOLDMAN SACHS LOGO APPEARS HERE]
Prospectus
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 FUND IS NOT A BANK DEPOSIT
AND IS NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT
AGENCY. AN INVESTMENT IN A FUND INVOLVES
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF
PRINCIPAL.
(BACKGROUND LOGO APPEARS HERE)
<PAGE>
General Investment Management Approach and Investment Styles
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.
Goldman Sachs Asset Management and Goldman Sachs Asset Management Interna-
tional 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' Investing 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:
.First hand 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.
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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 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.
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QUANTITATIVE ("CORE") STYLE FUNDS
Goldman Sachs' Quantitative Multifactor Models
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 incorporate 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)
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.
1
<PAGE>
Goldman Sachs' CORE Funds provide broad foundation portfolios for investors
to build upon.
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ACTIVELY MANAGED INTERNATIONAL FUND
Goldman Sachs Actively Managed Investment Philosophy
<TABLE>
<CAPTION>
How the Investment
Belief Adviser Acts on Belief
- ---------------------------------------------
<C> <S>
.Equity markets Seek excess return
are inefficient through team driven,
research intensive and
bottom-up stock
selection.
.Returns are Seek to capitalize on
variable variability of market and
regional returns through
value-added asset
allocation decisions.
.Corporate Seek to conduct rigorous,
fundamentals first-hand research of
ultimately business and company
drive share management.
price
.A businesses' Seek to realize value
intrinsic value through a long-term
will be investment horizon.
achieved over
time
.Portfolio risk Seek to systematically
must be monitor and manage risk
carefully through diversification,
analyzed and multifactor risk models
monitored and currency management.
</TABLE>
Equity securities for these Funds are evaluated based on a bottom-up stock
selection process, disciplined portfolio construction, and continual portfo-
lio review and analysis.
- --------------------------------------------------------------------------------
Goldman Sachs' Investing 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
The Investment Adviser employs a disciplined, multi-step process to evaluate
potential fixed-income investments:
1. Sector Allocation - The Investment Adviser assesses relative value of dif-
ferent investment sectors (such as U.S. corporate, asset-backed and mort-
gage-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 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 pat-
tern of a security's cash flows over time. In computing 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 otherwise noted.
Each of the Fixed Income Funds has credit rating requirements for the securi-
ties they buy. A Fund will deem a security to have met its minimum credit
rating requirement if the security has the required rating at the time of
purchase from at least one nationally recognized statistical rating organiza-
tion ("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 pur-
chase and is subsequently downgraded below such rating, the Fund will not be
required to dispose of such security. If a downgrade occurs, the Investment
Adviser will consider what
2
<PAGE>
Fund Investment Objectives and Strategies
action, including the sale of such security, is in the best interests of a
Fund and its shareholders.
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. The participating insurance companies, not the owners of the variable
annuity contracts or variable life insurance policies or participants there-
in, 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
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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 emerging countries ("emerging coun-
tries") and securities quoted in foreign currencies. Emerging countries are
countries with economies or securities markets that are considered by the
Investment Adviser not to be fully developed.
Other. The Fund may also invest up to 35% of its total assets in fixed-income
securities that offer the potential to further the Fund's investment objec-
tive.
Goldman Sachs CORE U.S. Equity Fund
FUND FACTS
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Objective: Long-term growth of capital and dividend income
Benchmark: S&P 500 Index
Investment U.S. equity securities representing a variety of industries
Focus:
Investment Blend (Value and Growth), enhanced by a proprietary quantitative
Style: model
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
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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 Growth, enhanced by a proprietary quantitative model
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 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
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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 Value, enhanced by a proprietary quantitative model
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 honorable
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 Blend (Value and Growth), enhanced by a proprietary quantitative
Style: model
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 U.S. equity securities that offer long-term capital appreciation
Focus: 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 growth of capital
Benchmark: Russell Midcap Value 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 Value 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 primar-
ily 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.
Other. The Fund may also invest up to 35% of its total assets in fixed-income
securities.
Goldman Sachs CORE International Equity Fund
FUND FACTS
- --------------------------------------------------------------------------------
Objective: Long-term growth of capital
Benchmarks: Morgan Stanley Capital International Europe, Australia, 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 securities of issuers
of emerging countries, which involve risks that are not present in invest-
ments in more developed 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 Actively Managed
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. Many of the
emerging countries in which the Fund may invest involve risks that are not
present in investments in more developed countries.
Other. The Fund may also invest up to 35% of its total assets in fixed-income
securities.
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 market conditions, 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.
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.
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: U.S. Government Securities and repurchase agreements collat-
eralized by such securities
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 capital
appreciation potential
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.
For your information, set forth below is the average distribution of ratings
for the portfolio securities (including commercial paper and non-convertible
bonds) held by the Fund during the fiscal year ended December 31, 1998:
Credit Quality
<TABLE>
<CAPTION>
Percentage of
Fund's assets
- ----------------------------------------------
<S> <C>
AAA/Aaa 4.7%
AA/Aa 0%
A 0%
BBB/Baa 0.5%
BB/Ba 7.2%
B 82.4%
CCC/Caa 1.1%
Not rated
Comparable to A 0%
Comparable to BBB/Baa 0%
Comparable to BB/Ba or lower 0.9%
Comparable to CCC 3.2%
-----
100.0%
=====
</TABLE>
9
<PAGE>
Other Investment Practices and Securities (Equity Funds)
The table below identifies some of the investment practices and securities that
may (but are not required to) be used by the Equity Funds. Numbers in this
table show allowable usage only; for actual usage, consult the Fund's
annual/semiannual reports. For more information see Appendix A.
10 Percent of total assets (italic type)
10 Percent of net assets (roman type)
. No asset 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 Value Cap Growth 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 . . . . . . . . .
- -----------------------------------------------------------------------------------------------------------------------------------
Investment
Securities
American,
European and
Global
Depository
Receipts . ./5/ ./5/ ./5/ ./5/ . . . .
Asset-Backed and
Mortgage-Backed
Securities . - - - - . . - .
Bank Obligations . . . . . . . . .
Convertible
Securities/6/ . . . . . . . . .
Corporate Debt
Obligations . ./7/ ./7/ ./7/ ./7/ . . . .
Equity
Securities 65+ 90+ 90+ 90+ 90+ 90+ 65+ 90+ 65+
Emerging Market
Securities 25 - - - - 10 25 25 .
Fixed Income
Securities/8/ 35 ./7/ ./7/ ./7/ ./7/ . 35 ./7/ 35
Foreign
Securities 25/7/ ./9/ ./9/ ./9/ ./9/ 10/7/ 25 . .
Foreign
Government
Securities - - - - - - - . .
Non-Investment
Grade Fixed
Income
Securities 10/10/ - - - - 10/10/ 10/11/ - 35/10
Real Estate
Investment
Trusts . . . . . . . . .
Structured
Securities . . . . . . . . .
Temporary
Defensive
Investments 100 35 35 35 35 100 100 35 100
U.S. Government
Securities . . . . . . . . .
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/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/May.purchase and sell call and put options.
/4/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 are rated at least investment grade (i.e., BBB or
higher by Standard & Poor's Rating Group ("Standard & Poor's") or Baa or
higher by Moody's Investor's Service, Inc. ("Moody's").
/9/Equity.securities of foreign issuers must be traded in the United States.
/10/May.be rated BB or lower by Standard & Poor's or Ba or lower by Moody's.
/11/Must.be rated at least B or higher by Standard and Poor's or Moody's.
10
<PAGE>
Other Investment Practices and Securities
(Fixed Income Funds)
Each of the Fixed Income Funds may use active management techniques to manage
its duration and term structure, to manage its exposure (if any) to foreign
currencies and to seek enhanced returns. The table below identifies some of
these techniques that may (but are not required to) be used by the Fixed
Income Funds. 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 information see
Appendix A.
10 Percent of total assets (italic type)
10 Percent of net assets (roman type)
. No asset 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 -- -- --
-----------------------------------------------------------------------------
Investment Securities
Asset-Backed Securities ./1/ . .
Bank Obligations -- . .
Convertible Securities -- -- .
Corporate Debt Obligations and Trust
Preferred Securities -- . .
Emerging Market Securities -- 10 25
Foreign Securities/2/ -- . ./3/
Foreign Government Securities -- . .
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+/4/
Preferred Stock, Warrants and Rights -- -- .
Structured Securities -- . .
Taxable Municipal Securities -- -- .
Tax-Free Municipal Securities -- -- .
Temporary Defensive Investments . . ./5/
-----------------------------------------------------------------------------
</TABLE>
/1/Short.Duration Government Fund may only invest in asset-backed securities
that are issued or guaranteed by U.S. government agencies, instrumentali-
ties or sponsored enterprises.
/2/Includes.issuers domiciled in one country issuing securities denominated
in the currency of another.
/3/High.Yield Fund investments in non-U.S. dollar-denominated fixed-income
securities is limited to 25% of total assets.
/4/High.Yield Fund may invest up to 35% of its total assets in investment
grade securities under normal conditions.
/5/High.Yield Fund may for this purpose invest in investment grade securities
without limit.
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
Principal Investment Risks
<TABLE>
<CAPTION>
Call,
Extension Non-
and U.S. Diversification Small
Interest Credit/ Government Emerging and Geographic Cap/ Liquidity
Fund Rate Default Securities Foreign Markets Risks REIT Derivatives Management Risk 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:
.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.
.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.
.Foreign Risks--The risk that when a Fund invests in foreign securities, it
will be subject to special risks of loss not typically associated with
domestic issuers. Loss may result because of less foreign government regula-
tion, less public information and less economic, political and social sta-
bility. 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.
.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 small capitalization stocks, REITs and 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 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:
.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.
.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 such circumstances, a Fund may be unable to recoup all of its initial
investment and will also suffer from having to reinvest in lower yielding
securities.
.Extension Risk--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 such circumstances, the value of the obligation will decrease, and a
Fund will also suffer from the inability to invest in higher yielding secu-
rities.
.Government Securities Risk--The risk that the U.S. government will not pro-
vide 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:
.Emerging Markets 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 also 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 issuers located in a
particular country or region will subject the Fund, 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.
."Junk Bond" Risk--Each Fund except the CORE Funds may invest in non-invest-
ment grade fixed-income securities (commonly known as "junk bonds") that are
considered predominantly speculative by traditional investment standards.
Non-investment grade fixed-income securities and unrated securities of com-
parable 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 cor-
porate developments, interest rate sensitivity, negative perceptions of the
junk bond markets generally and less secondary market liquidity.
.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.
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 and High Yield Funds had not commenced operations
as of the date of this Prospectus. Since these Funds have less than one cal-
endar year's performance, no performance information is provided in this sec-
tion. See Appendix B for the Funds' financial highlights.
INVESTMENT ADVISERS
<TABLE>
<CAPTION>
Investment Adviser 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. As of December 31,
1998, GSAM and GSAMI, together with their affiliates, acted as investment
adviser or distributor for assets in excess of $195 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 the U.S. and foreign markets. As permitted by applicable law,
these orders may be directed to any brokers, including Goldman Sachs and its
affiliates. While the Investment Adviser is ultimately responsible for the
management 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 analy-
sis in determining the appropriate allocations among the 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
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 calcu-
lated per annum) of each Fund's respective average daily net assets. Such
reductions or limits, if any, are calculated monthly on a cumulative basis.
The Investment Adviser may discontinue or modify any limitations in the
future at its discretion.
15
<PAGE>
VALUE TEAM
M. Roch Hillenbrand, a Managing Director of Goldman, Sachs & Co., is the Head
of Global Equities for Goldman Sachs Asset Management, overseeing U.S.,
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. Roch is also
President of Commodities Corporation LLC, of which Goldman, Sachs & Co. is
the parent company. Over the course of his 18-year career at Commodities
Corporation, Roch 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.
All of the Value Style Funds, which include the Growth and Income Fund and
Mid Cap Value Fund, are managed on a team basis with certain members of the
team taking primary responsibility for particular Funds. Each member of the
team generally participates in the active discussion of the composition,
structure and strategy of each Fund. The members of the Value Team are Eileen
Aptman, Paul D. Farrell, Matthew B. McLennan and Karma Wilson.
.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 in
Vice President Mid Cap Value 1998 1993.
- -------------------------------------------------------------------------------------------------------------
Paul D. Farrell Senior Portfolio Manager-- Since Mr. Farrell joined the Investment Adviser in
Managing Director Mid Cap Value 1998 1991. In 1998, he became responsible for
Growth and Income 1999 managing the Investment Adviser's Value team.
- -------------------------------------------------------------------------------------------------------------
Matthew B. McLennan Portfolio Manager-- Since Mr. McLennan joined the Investment Adviser in
Vice President Mid Cap Value 1998 1995. 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 in
Vice President Growth and Income 1998 1994. Prior to 1994, she was an investment
Mid Cap Value 1998 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 $19 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 Portfolio Manager-- Since Ms. Brown joined the Investment Adviser in 1998.
Vice President CORE U.S. Equity 1998 From 1984 to 1998, she was the director of
CORE Large Cap Growth 1998 Quantitative Equity Research and served on the
CORE Large Cap Value 1999 Investment Policy Committee at Prudential
CORE Small Cap Equity 1998 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. Prior to
1995, he attended the University of Chicago where
he earned a PhD in finance.
- ----------------------------------------------------------------------------------------------------------------
Kent A. Clark Senior Portfolio Manager-- Since Mr. Clark joined the Investment Adviser in 1992.
Managing Director CORE U.S. Equity 1998
CORE Large Cap Growth 1998
CORE Large Cap Value 1999
CORE Small Cap Equity 1998
CORE International Equity 1999
- ----------------------------------------------------------------------------------------------------------------
Raymond J. Iwanowski Portfolio Manager-- Since Mr. Iwanowski jointed the Investment Adviser as
Vice President CORE International Equity 1999 an associate and portfolio manager in 1997. From
1993 to 1997, he was a Vice President and head of
the Fixed Derivatives Client Research Group at
Salomon Brothers.
- ----------------------------------------------------------------------------------------------------------------
Robert C. Jones Senior Portfolio Manager-- Since Mr. Jones joined the Investment Adviser in 1989.
Managing Director CORE U.S. Equity 1998
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 in 1990.
Vice President CORE U.S. Equity 1998
CORE Large Cap Growth 1998
CORE Large Cap Value 1999
CORE Small Cap Equity 1998
CORE International Equity 1999
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
GROWTH EQUITY TEAM
. 17 year consistent investment style applied through diverse and complete
market cycles
. More than $8 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 Investment Team
<TABLE>
<CAPTION>
Years
Primarily
Name and Title Fund Responsibility Responsible Five Year Employment History
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
George D. Adler Portfolio Manager-- Since Mr. Adler joined the Investment Adviser in 1997.
Vice President Capital Growth 1998 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 in
Vice President Capital Growth 1998 1997. From 1991 to 1997, he was a portfolio
manager at Liberty.
- ------------------------------------------------------------------------------------------------------------------
Herbert E. Ehlers Senior Portfolio Manager-- Since Mr. Ehlers joined the Investment Adviser in 1997.
Managing Director Capital Growth 1998 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 in
Vice President Capital Growth 1998 1997. From 1990 to 1997, he was a portfolio
manager at Liberty and its predecessor firm,
Eagle.
- ------------------------------------------------------------------------------------------------------------------
David G. Shell Portfolio Manager-- Since Mr. Shell joined the Investment Adviser in 1997.
Vice President Capital Growth 1998 From 1987 to 1997, he was a portfolio manager at
Liberty and its predecessor firm, Eagle.
- ------------------------------------------------------------------------------------------------------------------
Ernest C. Segundo, Jr. Portfolio Manager-- Since Mr. Segundo joined the Investment Adviser in
Vice President Capital Growth 1998 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
.Teams manage 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
teams leverage 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 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 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.
- -----------------------------------------------------------------------------------------------------------
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>
Warwick M. Negus Portfolio Manager-- Since Mr. Negus joined the Investment Adviser as
Managing Director and International Equity Fund 1998 a portfolio manager in 1994. From 1987 to
Co-Head Emerging 1994, he was a Vice President of Bankers
Market Equities Trust Australia Ltd where he was the Chief
Investment Officer of their Southeast
Asian investment team. He is also a member
of the Investment Adviser's global asset
allocation committee.
- -----------------------------------------------------------------------------------------------------------
Tokyo-Based Management Team
<CAPTION>
Years
Primarily
Name and Title Fund Responsibility Responsible Five Year Employment History
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Guy P. de C. Bennett Portfolio Manager-- Since Mr. Bennett joined the Investment Adviser
Vice President International Equity Fund 1998 as a portfolio manager in 1996 and is also
co-head of GSAM's Japanese Equity Group in
Tokyo. From 1984 to 1996, he was a
portfolio manager and an Executive
Director at CIN Management.
- -----------------------------------------------------------------------------------------------------------
Shogo Maeda 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
.Manages approximately $40 billion in fixed income assets for retail, insti-
tutional 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 in
Managing Director and Short Duration Government 1999 1990.
Co-Head U.S. Fixed
Income
- -----------------------------------------------------------------------------------------------------------------
James B. Clark Portfolio Manager-- Since Mr. Clark joined the Investment Adviser in
Vice President Short Duration Government 1999 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 in
Vice President Short Duration Government 1999 1992.
- -----------------------------------------------------------------------------------------------------------------
C. Richard Lucy Portfolio Manager-- Since Mr. Lucy joined the Investment Adviser in
Managing Director and Short Duration Government Fund 1999 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 in 1993 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 in
Vice President High Yield Fund 1999 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 in
Vice President High Yield Fund 1999 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 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 in
Vice President and High Yield Fund 1999 1994. He is responsible for managing high
Director of Credit yield assets.
Research
- -----------------------------------------------------------------------------------------------------------------
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
Executive Director, Global Income Fund 1998 in 1992.
Managing
Director and Chief
Investment
Officer for
International Income
- -----------------------------------------------------------------------------------------------------------------
Andrew Wilson Portfolio Manager-- Since Mr. Wilson joined the Investment Adviser in
Executive Director Global Income Fund 1998 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, also serves as the Funds'
transfer agent (the "Transfer Agent") and as such performs various share-
holder 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," which may lead to computer shutdowns or errors
(commonly known as the "Year 2000 Problem"). To the extent these systems con-
duct forward-looking calculations, these computer problems may occur prior to
January 1, 2000. Like other investment companies and financial and business
organizations, the Funds could be adversely affected in their ability to
process securities trades, price securities, provide shareholder account
services and otherwise conduct normal business operations if the computer
systems used by the Investment Adviser or the Funds' other 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 prepared-
ness of the issuers of securities held by the Funds. 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 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
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 of such shares on the payment date, unless an insur-
ance 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.
Shareholder Guide
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 these
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 sale of Fund shares to 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 inter-
est. 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 treat-
ment or other considerations or due to conflicts among the unaffiliated par-
ticipating insurance companies. If, however, a material unreconcilable
conflict arises between the holders of variable annuity contracts and vari-
able life insurance policies of unaffiliated participating insurance compa-
nies, 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 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 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 Fund are purchased and sold at the Fund's net asset value per
share ("NAV"). The Funds calculate 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 each busi-
ness 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.
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.
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 they own, in the same proportion as those shares for which
voting instructions are received.
Fund shares held by unregistered separate accounts or qualified plans will be
voted for or against any proposition in the same proportion as all other Fund
shares are voted unless the unregistered separate account's participating
insurance company or the plan makes other arrangements.
Additional information concerning voting rights of the participants in the
separate accounts is more fully set forth in the prospectus relating to those
accounts issued by the participating insurance companies.
23
<PAGE>
Taxation
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 an 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 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.
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. See "Financial Highlights" in
Appendix B for a statement of the Funds' historical portfolio turnover rates.
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 average 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 also 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 the other types of
securities because of their characteristics and lower trading volumes.
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 spon-
A-1
<PAGE>
sored enterprises), foreign governments, domestic and foreign corporations,
banks and other issuers. Some of these fixed-income securities are described
in the next section below. Further information 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 their
investors' 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, the extent that the rating
assigned to a security in a Fund's portfolio is downgraded by a rating organ-
ization, 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 to seek to increase
total return may be regarded as a speculative practice and involves the risk
of loss if the Investment Adviser is incorrect in its expectation of 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), which is considered 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.
Floating-rate derivative debt securities can present more complex types of
derivative and interest rate risks. For example, range floaters are subject
to the risk that the coupon will be reduced below market rates if a desig-
nated interest rate floats outside of a specified interest rate band or col-
lar. 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, the currency in which a Fund receives divi-
dends, interest or other payments declines in value against the U.S. dollar
before such income is distributed as dividends to shareholders or converted
to U.S. dollars, the Fund may have to sell portfolio securities to obtain
sufficient cash to pay such dividends.
The introduction of a single currency, the euro, on January 1, 1999 for 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
A-2
<PAGE>
APPENDIX A -- ADDITIONAL INFORMATION ON PORTFOLIO RISKS, SECURITIES AND
TECHNIQUES
European countries participating in the euro will converge over time; and
whether the conversion of the currencies of other countries that now are or
may in the future become members of the European Union ("EU"), may have an
impact on the euro. These or other factors, including political and economic
risks, could cause market disruptions, and could adversely affect the value
of securities 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.
Furthermore, with respect to certain foreign countries, there is a possibil-
ity of nationalization, expropriation or confiscatory taxation, imposition of
withholding or other taxes on dividend or interest payments (or, in some
cases, capital gains), limitations on the removal of funds or other assets of
the Funds, and political or social instability or diplomatic developments
which could affect investments in those countries.
Concentration of a Fund's assets in one of 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 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 that invest in securities of
issuers in emerging countries will be subject to heightened risks. Emerging
countries are generally located in
the Asia-Pacific region, Eastern Europe, Latin and South Amer- ica and Afri-
ca. A Fund's purchase and sale of portfolio securities in certain emerging
countries may be constrained by limitations as to daily changes in the prices
of listed securities, periodic trading or settlement volume and/or limita-
tions on aggregate holdings of foreign investors. Such limitations may be
computed based on the aggregate trading volume by or holdings of a Fund, the
Investment Adviser, its affiliates and their respective clients and other
service providers. A Fund may not be able to sell securities in circumstances
where price, trading or settlement volume limitations have been reached.
Foreign investment in the securities markets of certain emerging countries is
restricted or controlled to varying degrees which may limit investment in
such countries or increase the administrative costs of such investments. For
example, certain Asian countries require governmental approval prior to
investments by foreign persons or limit investment by foreign persons to only
a specified percentage of an issuer's outstanding securities or a specific
class of securities which may have less advantageous terms (including price)
than securities of the issuer available for purchase by nationals. In 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
emerging countries is subject to restrictions such as the need
A-3
<PAGE>
for governmental consents. Due to restrictions on direct investment in equity
securities in certain Asian countries, such as Taiwan, it is anticipated that
a Fund may invest in such countries only through other investment funds in
such countries.
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.
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 Fund in emerging countries may not be as sound as the creditwor-
thiness 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.
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 particular investment, or investment 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 only then at a substantial drop in price. Investments
in emerging countries may be more difficult to price precisely because of
their characteristics 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 Investing in Non-Investment Grade Fixed-Income Securities. Non-
investment grade fixed-income securities and unrated securities of comparable
credit quality
(commonly known as "junk bonds") are considered predomi
nantly 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 obligations. These securities, also referred to as high yield secu-
rities, may be subject to greater price volatility due to such factors as
specific corporate developments, interest rate sensitivity, negative percep-
tions 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 objec-
A-4
<PAGE>
APPENDIX A -- ADDITIONAL INFORMATION ON PORTFOLIO RISKS, SECURITIES AND
TECHNIQUES
tives 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 financing and their
ability to service debt obligations may be affected more adversely than
issuers of higher-rated securities by economic downturns, specific corporate
developments or the issuer's inability to meet specific projected business
forecasts. Negative publicity about the junk bond market and investor percep-
tions 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. These factors may have an adverse
effect on the market price and a Fund's ability to dispose of particular
portfolio investments. A less liquid secondary market also may make it more
difficult for a Fund to obtain precise valuations of the high yield securi-
ties 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
security rating to reflect changes in the economy or in the conditions of the
issuer that affect the market value of the security. Consequently, credit
ratings are used only as a preliminary indicator of investment quality.
Investments in non-investment grade and comparable unrated obligations will
be more dependent on the Investment Adviser's credit analysis than would be
the case with investments in investment-grade debt obligations.
Risks of Illiquid Securities. The Funds may invest up to 15% of its net
assets in illiquid securities that 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
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, which may be significant, from the market price of comparable secu-
rities for which a liquid market exists.
Risks of Non-Diversification and Concentration. The Global Income Fund is
registered as a "non-diversified" Fund under the 1940 Act and is, therefore,
more susceptible to adverse developments affecting any single issuer. In
addition, the Global Income Fund, and certain other 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 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 securi-
ties 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.
A-5
<PAGE>
C. PORTFOLIO SECURITIES AND TECHNIQUES
U.S. Government Securities and Related Custodial Receipts. U.S. Government
Securities include U.S. Treasury obligations and obligations issued or guar-
anteed by U.S. government agencies, instrumentalities or sponsored enter-
prises. 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 Associ-
ation ("Ginnie Mae")); (b) the right of the issuer to borrow from the U.S.
Treasury (such as securities of the Student Loan Marketing Association); (c)
the discretionary authority of the U.S. government to purchase certain obli-
gations of the issuer (such as the Federal National Mortgage Association
("Fannie Mae") and Federal Home Loan Mortgage Corporation ("Freddie Mac"));
or (d) only the credit of the issuer. U.S. Government Securities also include
Treasury receipts, zero coupon bonds and other stripped U.S. Government Secu-
rities, where the interest and principal components of stripped U.S. Govern-
ment 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. Mortgage-backed securities (Mortgage-Backed Secu-
rities) represent direct or indirect participations 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-gov-
ernmental 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 and
stripped mortgage-backed securities ("SMBS"). 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 qualifies for special tax treat-
ment under the Code 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. Asset-backed securities are securities whose princi-
pal and interest payments are collateralized by pools of assets such as auto
loans, credit card receivables, leases, installment contracts and personal
property. Asset-backed securities are often subject to more rapid repayment
than their stated maturity date would indicate as a result of the pass-
through of prepayments of principal on the underlying loans. During periods
of declining interest rates, prepayment of loans underlying asset-backed
securities can be expected to accelerate. Accordingly, a Fund's ability to
maintain positions in such securities will be affected by reductions in the
principal amount of such securities resulting from prepayments, and its abil-
ity 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 col-
lateral 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.
Municipal Securities. Certain Funds may make limited investments in instru-
ments issued by state and local governmental issuers. The securities may
include private activity bonds, municipal leases, certificates of participa-
tion 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
A-6
<PAGE>
APPENDIX A -- ADDITIONAL INFORMATION ON PORTFOLIO RISKS, SECURITIES AND
TECHNIQUES
by banks and other financial institutions. A trust preferred or capital secu-
rity 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 gen-
erally senior in claim to standard preferred stock but junior to other bond-
holders.
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 non-convertible securities of similar quali-
ty. Convertible securities in which a Fund invests are subject to the same
rating criteria as its other investments in fixed-income securities. Convert-
ible securities have both equity and fixed-income risk characteristics. Like
all fixed-income securities, the value of convertible securities is suscepti-
ble to the risk of market losses attributable to changes in interest 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 con-
vertible 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.
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 additional securities. The mar-
ket 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 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. 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
its 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 considered
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 secu-
rity is denominated or quoted if the
A-7
<PAGE>
Investment Adviser determines that there is a pattern of correlation between
the two currencies. A Fund may hold foreign currency received in connection
with investments in foreign securities when, in the judgment of the Invest-
ment Adviser, it would be beneficial to convert such currency into U.S. dol-
lars at a later date.
Currency exchange rates may fluctuate significantly over short periods of
time causing, along with other factors, a Fund's NAV to fluctuate. 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 or the bene-
fits 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 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. 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 may also, to the extent it invests
in foreign securities, purchase and sell (write) put and call options on for-
eign 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, 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 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.
The Funds 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
currency exchange rates or to the extent applicable, otherwise manage their
term structures and durations in accordance with their investment objectives
and policies. Each Fund may also enter into closing purchase and sale trans-
actions 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 imme-
A-8
<PAGE>
APPENDIX A -- ADDITIONAL INFORMATION ON PORTFOLIO RISKS, SECURITIES AND
TECHNIQUES
diately thereafter the sum of the amount of initial margin deposits and pre-
miums 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 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. Loan
participation interests may take the form of a direct or co-lending relation-
ship 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 Fund acts as co-lender in connection with a participa-
tion 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 appropriate credit reme-
dies 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 under-
lying 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 dividends and have no
rights with respect to the assets of the issuer.
Standard & Poor's Depository Receipts. Certain Funds may, consistent with its
investment policies, purchase Standard & Poor's Depository Receipts
("SPDRs"). SPDRs are American Stock Exchange-traded securities that represent
ownership in the SPDR Trust, a trust which has been established to accu
mulate 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 spon-
sored by a subsidiary of the American Stock Exchange. SPDRs may be used for
several reasons, including, but not limited to, facilitating the handling of
cash flows or trading, or reducing transaction costs. The 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 American Stock Exchange (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 net asset values 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 net asset
values. 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 sub-
stantial market or other disruptions
A-9
<PAGE>
affecting WEBS should occur in the future, the liquidity and value of a
Fund's shares could also be substantially and adversely affected, and the
Fund's ability to provide investment results approximating the performance of
securities in the EAFE Index could be impaired. If such disruptions were to
occur, a Fund could be required to reconsider the use of WEBS as part of its
investment strategy.
Other Investment Companies. The Funds may invest in securities of other
investment companies subject to the limitations prescribed by the Investment
Company Act. These limitations include a prohibition on any Fund acquiring
more than 3% of the voting shares of any other investment company, and a pro-
hibition 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 investment objectives, policies and restrictions substantially similar
to those of the acquiring Fund and will be subject to substantially the same
risks.
Equity Swaps. Equity swaps allow the parties to a swap agreement to exchange
the dividend income or other components of return on an equity investment
(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 swapped with another
party, a Fund may suffer a loss. The value of some components of an equity
swap (such as the dividends on a common stock) may also be sensitive to
changes in interest rates. Furthermore, a Fund may suffer a loss if the
counterparty defaults.
When-Issued Securities and Forward Commitments.
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 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 sold securities 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 before settlement whenever 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
losses if a court determines that the Fund's interest in the collateral is
unenforceable.
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. 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 col-
lateral may be invested in cash equivalents. If the Investment Adviser deter-
mines 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-10
<PAGE>
APPENDIX A -- ADDITIONAL INFORMATION ON PORTFOLIO RISKS, SECURITIES AND
TECHNIQUES
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 in its prediction, a Fund may experience a
loss. For financial reporting and tax purposes, the Funds treat mortgage dol-
lar rolls as two separate transactions: one involving the purchase of a secu-
rity 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 enter into reverse repurchase
agreements with banks and other financial institutions in amounts not exceed-
ing one-third of its total assets. Reverse repurchase agreements involve the
sale of securities held by a Fund subject to the Fund's agreement to repur-
chase 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 securities held by a Fund decline in
value while these transactions are outstanding, the NAV of the Fund's out-
standing shares will decline in value by proportionately more than the
decline in value of the securities. In addition, reverse repurchase agree-
ments 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. 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. Currency swaps involve
the exchange of the parties' respective rights to make or receive payments in
specified currencies. The purchase of an interest rate cap entitles the pur-
chaser, 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 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
A-11
<PAGE>
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. REITS are pooled investment vehicles that invest primarily in either
real estate or real estate related loans. The value of a REIT is affected by
changes in the value of the properties owned by the REIT or securing mortgage
loans held by the REIT. REITs are dependent upon 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 geographically, by property type, 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.
A-12
<PAGE>
[This page intentionally left blank]
<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).
<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 Equity 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.
The accompanying notes are an integral part of these financial statements.
B-2
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
<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>
B-3
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
GENERAL INVESTMENT
MANAGEMENT APPROACH AND
INVESTMENT STYLES........... 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................ A-1
APPENDIX B--FINANCIAL
HIGHLIGHTS................ B-2
</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 & Co.,
85 Broad Street,
New York, New York 10004
By [email protected]
On the Internet--Text-only versions of Trust documents are located online and
may be downloaded from: SEC--http://www.sec.gov
Goldman Sachs--http://www.gs.com (Prospectus Only)
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 APPEARS HERE]
The Trust's investment company registration number is 811-08361.
<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 TERMS "PORTFOLIOS" AND "FUNDS" MAY BE
USED INTERCHANGEABLY HEREIN TO REFER TO THE
"PORTFOLIOS".
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
and Investment Styles
Goldman Sachs Asset Management, a separate operating division of Goldman,
Sachs & Co. ("Goldman Sachs" or the "Investment Adviser"), serves as invest-
ment 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 (referred
to as the "Portfolios"). The Portfolios 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 principal underwriter. Some of these Underlying Funds
invest primarily in fixed-income or money market securities (the "Underlying
Fixed-Income Funds"); other Underlying Funds invest primarily in equity secu-
rities (the "Underlying Equity Funds").
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.
You should consider an investment in a Portfolio based on your personal
objectives, investment time horizon, tolerance for risk and personal finan-
cial circumstances. For example, the Aggressive Growth Strategy Portfolio
intends to invest substantially all of its assets in Underlying Equity Funds.
If you are seeking capital appreciation potential, with a longer time horizon
and a tolerance for volatility, might consider this Portfolio. Conversely, if
you are seeking more income, with a shorter time horizon and a lower toler-
ance for volatility, you might consider the Conservative Strategy Portfolio
or Balanced Strategy Portfolio, which invest a larger portion of their assets
in Underlying Fixed Income.
The Asset Allocation Investment Philosophy 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 it believes make sense. While the
Investment Adviser's process is rigorous and quantitative, it also incorpo-
rates clear economic reasoning behind each recommendation.
Each Portfolio starts with a "base-line" or 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 tac-
tical process seeks to add value by overweighing attractive markets and
underweighing unattractive markets. Greater deviations from the strategic
allocation of a given Portfolio result in higher risk that the tactical allo-
cation will underperform the strategic allocation. However, the Investment
Adviser's risk control process balances the amount any asset class can be
overweighed in seeking to achieve higher expected returns against the amount
of risk imposed by that deviation from the strategic allocation. The Invest-
ment Adviser employs Goldman, Sachs & Co.'s proprietary Black-Litterman asset
allocation technique in an effort to optimally balance these two goals. This
technique combines the Quantitative Research Group's market forecast with
economic equilibrium in seeking to construct risk-controlled portfolios.
1
<PAGE>
Portfolio Investment Objectives and Strategies
Goldman Sachs Variable Insurance Trust (the "Trust") offers Shares of the
Portfolios to separate amounts of participating insurance companies for the
purpose of funding variable annuity contracts and variable life insurance
policies. The participating insurance companies, not the owners of the vari-
able annuity contracts or life insurance policies or participants therein,
are shareholders of a Portfolio. Each Portfolio pools the monies of these
separate amounts and invests these monies in a portfolio of securities pursu-
ant to the Portfolio's stated investment objectives.
Goldman Sachs Conservative Strategy Portfolio
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
International Underlying Equity Funds.
Goldman Sachs Balanced Strategy Portfolio
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
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
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
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 having dif-
ferent combinations of investments and different degrees of potential invest-
ment risk and reward. 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>
Name of Portfolio Target Range
- -----------------------------------------
<S> <C> <C>
Conservative Strategy
Portfolio
Equity 20% 0%-25%
Fixed-Income 80% 75%-100%
- -----------------------------------------
Balanced Strategy
Portfolio
Equity 40% 20%-60%
Fixed-Income 60% 40%-80%
- -----------------------------------------
Growth and Income
Strategy Portfolio
Equity 60% 40%-80%
Fixed-Income 40% 20%-60%
- -----------------------------------------
Growth Strategy
Portfolio
Equity 80% 60%-100%
Fixed-Income 20% 0%-40%
- -----------------------------------------
Aggressive Growth
Strategy Portfolio
Equity 100% 75%-100%
Fixed-Income 0% 0%-25%
- -----------------------------------------
</TABLE>
The Investment Adviser will invest in particular Underlying Funds based on
various criteria. Among other things, the Investment Adviser will analyze the
Underlying Funds' respective investment objectives, policies and investment
strategies in order to determine which Underlying Funds, in combination with
other Underlying Funds, are appropriate in light of a Portfolio's investment
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 UNDERLYING
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
positions 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 types of risks
from which loss may result:
.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 objectives as well as the allocation among those Underlying Funds
by the Investment Adviser. The value of the Underlying Funds' investments,
and the net asset values ("NAV") of the shares of both the 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 to the Underlying
Funds invest. There can be no assurance that the investment objectives of
any Portfolio or any Underlying Fund will be achieved.
.Investments of the Underlying Funds. Because 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 Goldman Sachs Trust (the "Trust") may also have
conflicting interests in fulfilling their fiduciary duties to both the Port-
folios 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.
.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 value of their securities, will be disrupted by the "Year 2000
Problem;" (2) the risk that a Portfolio will not be able to pay redemption
proceeds within the period stated in its prospectus because of unusual mar-
ket conditions, high volume of redemption requests or other reasons (Liquid-
ity 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 for 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>
Fund Name Investment Objectives Investment Criteria
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Goldman Sachs Variable Long-term growth of At least 65% of total assets in equity
Insurance Trust ("VIT") capital and growth of securities that the investment adviser
Equity Funds income. considers to have favorable prospects for
VIT Growth and Income 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 seeks to achieve its objective
through a broadly diversified portfolio of
large cap and blue chip equity securities
representing all major sectors of the U.S.
economy. The Fund's investments are selected
using both a variety of quantitative
techniques and fundamental research in
seeking to maximize the Fund's expected
return, while maintaining risk, style,
capitalization and industry characteristics
similar to the S&P 500 Index.
- --------------------------------------------------------------------------------------------------
VIT CORE Large Cap Long-term growth of 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 U.S. The Fund
consideration. seeks to achieve its objective through a
broadly diversified portfolio of equity
securities of large cap U.S. issuers that are
expected to have better prospects for
earnings growth than the growth rate of the
general domestic economy. The Fund's
investments are selected using both a variety
of quantitative techniques and fundamental
research in seeking to maximize the Fund's
expected return, while maintaining risk,
style, capitalization and industry
characteristics similar to the Russell 1000
Growth Index.
- --------------------------------------------------------------------------------------------------
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 seeks to achieve its objective
through a broadly diversified portfolio of
equity securities of large cap U.S. issuers
that are selling at low to modest valuations
relative to general market measures such as
earnings, book value and other fundamental
accounting measures, and that are expected to
have favorable prospects of capital
appreciation and/or dividend-paying ability.
The Fund's investments are selected using
both a variety of quantitative techniques and
fundamental research in seeking to maximize
the Fund's expected return, while maintaining
risk, style, capitalization and industry
characteristics similar to the Russell 1000
Value Index.
- --------------------------------------------------------------------------------------------------
VIT CORE Small Cap Long-term growth of At least 90% of total assets in equity
Equity capital. securities of U.S. issuers, including certain
foreign issuers traded in the U.S. The Fund
seeks to achieve its investment objective
through a broadly diversified portfolio of
equity securities of U.S. issuers which are
included in the Russell 2000 Index at the
time of investment. The Fund's investments
are selected using both a variety of
quantitative techniques and fundamental
research in seeking to maximize the Fund's
expected return, while maintaining risk,
style, capitalization and industry
characteristics similar to the Russell 2000
Index.
-------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Fund Name Investment Objectives Investment Criteria
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
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 seeks broad representation of large
cap issuers across major countries and
sectors of the international economy. The
Fund's investments are selected using both a
variety of quantitative techniques and
fundamental research in seeking to maximize
the Fund's expected return, while maintaining
risk, style, capitalization and industry
characteristics similar to the unhedged
Morgan Stanley Capital International (MSCI)
Europe, Australasia and Far East Index (the
"EAFE Index"). The Fund may employ certain
currency management techniques.
- --------------------------------------------------------------------------------------------------
VIT Capital Growth Long-term capital At least 90% of total assets in a diversified
growth. portfolio of equity securities. Long-term
capital appreciation potential is considered
in selecting investments.
- --------------------------------------------------------------------------------------------------
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 Long-term capital At least 65% of total assets in equity
("GST") Equity Funds growth. securities of companies with public stock
GST Small Cap Value 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>
8
<PAGE>
DESCRIPTION OF THE UNDERLYING FUNDS
<TABLE>
<CAPTION>
Approximate
Investment Duration or Interest Rate
Fund Objectives Maturity Sensitivity Investment Sector Credit Quality Other Investments
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
VIT Fixed Income A high level of Target Duration = 2-year At least 65% of U.S. Mortgage pass-
Funds current income 2 year U.S. U.S. total assets in Government through
VIT Short Duration and Treasury Security Treasury U.S. Government Securities securities and
Government Fund secondarily, in plus or minus .5 note Securities and other
seeking current years repurchase securities
income, may Maximum Duration* = agreements representing
also consider 3 years collateralized by an interest in
the potential such securities. or
for capital collateralized
appreciation. by mortgage
loans.
- -------------------------------------------------------------------------------------------------------------------------------
VIT Global Income A high total Target Duration = 6-year Securities of Minimum = Mortgage and
Fund return, J.P. Morgan Global government U.S. and foreign BBB/Baa asset-backed
emphasizing Government Bond bond governments and At least 50% securities,
current income, Index (hedged) plus corporations. = AAA/Aaa foreign
and, to a or minus 2.5 years currencies and
lesser extent, Maximum Duration* = repurchase
providing 7.5 years agreements
opportunities collateralized
for capital by U.S.
appreciation. Government
Securities or
certain
foreign
government
securities.
- -------------------------------------------------------------------------------------------------------------------------------
GST Fixed Income Maximize Maximum Maturity 3-month Money market High Quality N/A
Funds current income of Individual Treasury instruments (short-term
GST Financial to the extent Investments = 13 bill including ratings of
Square Prime consistent with months at time of securities issued A-1, P-1 or
Obligations Fund the maintenance purchase. Maximum or guaranteed by comparable
of liquidity. Dollar-Weighted the U.S. quality).
Average Portfolio government, its
Maturity = 90 days agencies,
instrumentalities
or sponsored
enterprises
("U.S. Government
Securities"),
U.S. bank
obligations,
commercial paper
and other short-
term obligations
of U.S.
corporations,
governmental and
other entities,
and related
repurchase
agreements.
- -------------------------------------------------------------------------------------------------------------------------------
GST Adjustable Rate A high level of Target Duration = 9-month At least 65% of U.S. Fixed-rate
Government Fund current income, 6-month to 1-year U.S. total assets in Government mortgage pass-
consistent with U.S. Treasury Treasury U.S. Government Securities through
low volatility Securities Maximum bill Securities that securities and
of principal. Duration* = 2 years are adjustable repurchase
rate mortgage agreements
pass-through collateralized
securities and by U.S.
other mortgage Government
securities with Securities.
periodic interest
rate resets.
- -------------------------------------------------------------------------------------------------------------------------------
GST Government A high level of Target Duration = 5-year At least 65% of U.S. Non-government
Income Fund 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.
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Under normal interest rate conditions.
9
<PAGE>
<TABLE>
<CAPTION>
Approximate
Investment Duration or Interest Rate
Fund Objectives Maturity Sensitivity Investment Sector Credit Quality Other Investments
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
GST Core Fixed Total return Target 5-year At least 65% of Minimum = Foreign fixed-
Income Fund consisting of Duration = U.S. assets in BBB/Baa income,
capital Lehman Treasury fixed-income Minimum for municipal and
appreciation Brothers note securities, non-dollar convertible
and income that Aggregate Bond including U.S. securities = securities,
exceeds the Index plus or Government AA/Aa foreign
total return of minus 1 year Securities, currencies and
the Lehman Maximum corporate, repurchase
Brothers Duration* = 6 mortgage-backed agreements
Aggregate Bond years and asset- collateralized
Index. backed by U.S.
securities. Government
Securities.
- -----------------------------------------------------------------------------------------------------------------------
GST High Yield Fund A high level of Target 6-year Except for At least 65% Mortgage-
current income Duration = U.S. temporary = BB/Ba or backed and
and capital Lehman Treasury defensive below asset-backed
appreciation. Brothers High note purposes, at securities,
Yield Bond least 65% of U.S.
Index plus or assets in Government
minus 2.5 fixed-income Securities,
years Maximum securities investment
Duration* = rated below grade
7.5 years investment corporate
grade, fixed-income
including U.S. securities,
and non-U.S. structured
dollar securities,
corporate debt, foreign
foreign currencies and
government repurchase
securities, agreements
convertible collateralized
securities and by U.S.
preferred Government
stock. Securities.
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
*Under normal interest rate conditions.
10
<PAGE>
PRINCIPAL RISKS OF THE UNDERLYING FUNDS
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:
.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.
.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. Funds that invest in small capitalization
stocks, REITs and emerging country issues 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 eco-
nomic, market or political 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:
.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.
.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 such circumstances, the value of an obligation will
decrease, and an Underlying Fund will also suffer from the inability to
invest in higher yielding securities.
.Government Securities Risk--The risk that the U.S. government will not pro-
vide 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:
.Non-Diversification and Geographic Risks--The European Equity Fund invests
primarily in equity securities of European companies. The Japanese Equity
Fund invests primarily in equity securities of Japanese companies. The
Global Income Fund may invest more than 25% of its total assets in the secu-
rities of corporate and governmental issuers located in each of Canada, Ger-
many, 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 not so concen-
trated, to the risks of adverse securities markets,
11
<PAGE>
exchange rates and social, political, regulatory or economic events which
may occur in that country or region.
.Foreign Risks--Underlying Funds that invest in foreign securities will be
subject to risks of loss with respect to their foreign investments that are
not typically associated with domestic issuers. Loss may result because of
less foreign government regulation, less public information and less econom-
ic, 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 cur-
rency rate fluctuations. Foreign risks will normally be greatest when an
Underlying Fund invests in issuers located in emerging countries.
.Emerging Markets 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.
."Junk Bond" Risk--The High Yield Fund will 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 payment obligations. These 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.
.Small Cap Stock and REIT Risks--The securities of small capitalization com-
panies 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 substantial drop in price.
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.
12
<PAGE>
Portfolio Performance
The Portfolios do not have long-term performance records because they have
been in operation for less than one calendar year. The Portfolios commenced
operations as of the date of this Prospectus.
13
<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>
Goldman Sachs Funds Management, L.P. CORE U.S. Equity
("GSFM") Capital Growth
One New York Plaza CORE Large Cap Value
New York, New York 10004 Adjustable Rate Government
Short Duration Government Fund
- -----------------------------------------------------------------------------
Goldman Sachs Asset Management International Equity
International ("GSAMI") Japanese Equity
133 Peterborough Court European Equity
London EC4A 2BB England International Small Cap
Emerging Markets Equity
Asia Growth
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. As of December 31, 1998, GSAM, GSFM and GSAMI,
together with their affiliates, acted as investment adviser or distributor
for assets in excess of $195 billion.
Under an Asset Allocation Management Agreement ("Management Agreement") with
each Portfolio, the Investment Adviser, subject to the general supervision of
the Trustees, provides day-to-day advice as to each Portfolio's investment
transactions, including determinations concerning changes to (a) the Under-
lying Funds in which the Portfolios may invest and (b) the percentage range
of assets of any Portfolio that may be invested in the Underlying Equity
Funds and the Underlying Fixed Income Funds as separate groups. Goldman Sachs
has agreed to permit the Portfolios to use the name "Goldman Sachs" or a
derivative thereof as part of each Portfolio's name for as long as a Portfo-
lio's Management Agreement is in effect.
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 and other
reports filed with the Securities and Exchange Commission (the "SEC") and
other regulatory authorities
.Maintains the records of each Fund
.Provides office space and all necessary office equipment and services
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.
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 operating expense ratios (management fee plus other operating
expenses) of the class of shares of each Underlying Fund in effect as of
December 31, 1998 in which the Portfolios may invest. In addition, the fol-
lowing 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 average net assets).
14
<PAGE>
SERVICE PROVIDERS
Absent voluntary fee waivers and/or expense reimbursements, which may be dis-
continued at any time, the total operating expense ratios of certain Under-
lying Funds would be higher.
<TABLE>
<CAPTION>
Total
Contractual Operating
Management Expense
Underlying Funds 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 Cap Growth 0.75% 0.90%
VIT Mid Cap Value 0.80% 0.95%
VIT International Equity 1.00% 1.25%
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>
15
<PAGE>
PORTFOLIO MANAGERS
Quantitative Research Team
.The 20-person Quantitative Research Team includes six Ph.Ds and one CFA,
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.
<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 Chairman, 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>
16
<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 Portfolio's shares. Goldman
Sachs, 4900 Sears Tower, Chicago, Illinois 60606, also serves as each Portfo-
lio's 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 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.
17
<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 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
Portfolio's dividends may constitute a return of capital.
18
<PAGE>
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.
Shares of the Portfolios (including new Portfolios that might be added to the
Trust) may 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 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 net asset
value per share ("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 Portfolios' investments may be
valued based on yield equivalents, a pricing matrix or other sources, under
valuation procedures established by the Trustees. Debt obligations with a
remaining maturity of 60 days or less are valued at amortized cost.
.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
19
<PAGE>
materiality of the event, its effect on Fund operations and other relevant
factors.
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.
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 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.
20
<PAGE>
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.
21
<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 Short Duration Government and Adjustable Rate Government Funds invest in
Government Securities and related repurchase agreements, and neither of these
Funds, the Government Income Fund nor the Financial Square Prime Obligations
Fund makes foreign investments. The investments of the Financial Square Prime
Obligations Fund are limited by SEC regulations applicable to money market
funds as described in its prospectus, and do not include many of the types of
investments discussed below that are permitted for the other Underlying
Funds. With these exceptions, and the further exceptions noted below, the
following description applies generally to the Underlying Funds.
A. DESCRIPTION OF THE UNDERLYING FUNDS
Underlying Equity Funds
The investment advisers of the Underlying Equity Funds may, in choosing secu-
rities, utilize first-hand fundamental research, including visiting company
facilities to assess operations and to meet decision-makers. The investment
advisers may also use macro analysis of numerous economic and valuation vari-
ables to anticipate changes in company earnings and the overall investment
climate. The investment advisers are able to draw on the research and market
expertise of the Goldman Sachs Global Investment Research Department and
other affiliates, as well as information provided by other securities deal-
ers. Equity securities held by an Underlying Equity Fund will generally be
sold when an investment adviser believes that the market price fully reflects
or exceeds the securities' fundamental valuation or when other more attrac-
tive investments are identified.
Domestic Value Style Funds. The Growth and Income, Mid Cap Value and Small
Cap Value Funds are managed using a value oriented approach. The Funds'
investment adviser evaluates securities using fundamental analysis and
intends to purchase equity securities that are, in its view, underpriced
relative to a combination of such companies' long-term earnings prospects,
growth rate, free cash flow and/or dividend-paying ability.
Consideration will be given to the business quality of the issuer. Factors
positively affecting the investment adviser's view of that quality include
the competitiveness and degree of regulation in the markets in which the com-
pany 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. These Underlying Funds may also purchase securities
of companies that have experienced difficulties and that, in the opinion of
the investment adviser, are available at attractive prices.
Domestic Growth Style Fund. The Capital Growth Fund is managed using a growth
oriented approach. Equity securities for this Fund are selected based on
their prospects for above average growth. The Fund's investment adviser will
select securities of growth companies trading, in the investment adviser's
opinion, at a reasonable price relative to other industries, competitors and
historical price/earnings multiples. The Fund will generally invest in compa-
nies whose earnings are believed to be in a relatively strong growth trend
or, to a lesser extent, in companies in which significant further growth is
not anticipated but whose market value per share is thought to be underval-
ued.
Quantitative Style Funds. The CORE U.S. Equity, CORE Large Cap Growth, CORE
Large Cap Value, CORE Small Cap Equity and CORE International Equity Funds
(the "CORE Equity Funds") are managed using both quantitative and fundamental
techniques. CORE is an acronym for "Computer-Optimized, Research-Enhanced,"
which reflects the Funds' investment process. This investment process and the
proprietary multifactor model used to implement it are discussed below.
Quantitative Investment Process. The Funds' investment advisers begin with a
broad universe of U.S. equity securities for the CORE U.S. Equity, CORE Large
Cap Growth, CORE Large Cap Value and CORE Small Cap Equity Funds (the "CORE
U.S. Equity Funds"), and a broad universe of foreign equity securities for
the CORE International Equity Fund. The investment advisers use proprietary
multifactor models (each a "Multifactor Model") to forecast the returns of
different markets, currencies and individual securities. In the case of an
U.S. equity security followed by the Goldman Sachs Global Investment Research
Department (the "Research Department"), a rat-
A-1
<PAGE>
ing is assigned based upon the Research Department's evaluation. In the dis-
cretion of the investment adviser, ratings may also be assigned to U.S.
equity securities based on research ratings obtained from other industry
sources. In the case of a foreign equity security, an investment adviser may
rely on research from both the Research Department and other industry sourc-
es.
In building a diversified portfolio for each CORE Equity Fund, an investment
adviser utilizes optimization techniques to seek to maximize the Fund's
expected return, while maintaining a risk profile similar to the Fund's
benchmark. Each portfolio consists primarily of securities rated highest by
the foregoing investment process and has risk characteristics and industry
weightings similar to the relevant Fund's benchmark.
Quantitative Multifactor Models. The Multifactor Models are rigorous comput-
erized rating systems for forecasting the returns of different equity mar-
kets, currencies, and individual equity securities according to fundamental
investment characteristics. The CORE U.S. Equity Funds use one Multifactor
Model to forecast the returns of securities held in each Fund's portfolio.
The CORE International Equity Fund uses multiple Multifactor Models to fore-
cast returns. Currently, the CORE International Equity Fund uses one model to
forecast equity market returns, one model to forecast currency returns and 22
separate models to forecast individual equity security returns in 22 differ-
ent countries. Despite this variety, all Multifactor Models incorporate com-
mon variables covering measures of value, growth, momentum and risk (e.g.,
book/price ratio, earnings/price ratio, price momentum, price volatility,
consensus growth forecasts, earnings estimate revisions, earnings stability,
and, in the case of models for the CORE International Equity Fund, currency
momentum and country political risk ratings). All of the factors used in the
Multifactor Models have been shown to significantly impact the performance of
the securities, currencies and markets they were designed to forecast.
The weightings assigned to the factors in the Multifactor Model used by the
CORE U.S. Equity Funds are derived using a statistical formulation that con-
siders 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 Funds' investment advisers believe that all the Multifactor Models are
broader in scope and provide a more thorough evaluation than most convention-
al, quantitative models. Securities and markets ranked highest by the rele-
vant Multifactor Model do not have one dominant investment characteristic;
rather, they possess an attractive combination of investment characteristics.
Research Department. In assigning ratings to equity securities, the Research
Department uses a four category rating system ranging from "recommended for
purchase" to "likely to underperform." The ratings reflect the analyst's
judgment as to the investment results of a specific security and incorporate
economic outlook, valuation, risk and a variety of other factors.
By employing both a quantitative (i.e., the Multifactor Models) and a quali-
tative (i.e., research enhanced) method of selecting securities, each CORE
Equity Fund seeks to capitalize on the strengths of each discipline.
Actively Managed International Funds. The International Equity, Japanese
Equity, European Equity, International Small Cap, Emerging Markets Equity and
Asia Growth Funds are managed using an active international approach. This
approach utilizes a consistent process of stock selection undertaken by port-
folio management teams located within each of the major investment regions,
including Europe, Japan, Asia and the United States. In selecting securities,
the investment adviser uses a long-term, bottom-up strategy based on first-
hand fundamental research that is designed to give broad exposure to the
available opportunities while seeking to add return primarily through stock
selection. Equity securities for these Funds are evaluated based on three key
factors--the business, the management and the valuation. The investment
adviser ordinarily seeks securities that have, in its opinion, superior earn-
ings 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.
Real Estate Securities Fund. The investment strategy of the Real Estate Secu-
rities Fund is based on the premise that property market fundamentals are the
primary determinant of growth underlying the success of companies in the real
estate industry. The Fund's research and investment process is designed to
identify those companies with strong property fundamentals and strong manage-
ment teams. This process is includes real estate market research and securi-
ties analysis. The Fund's investment adviser will take into account
fundamental trends in underlying property markets as determined by proprie-
tary models, research of local real estate markets, earnings, cash flow
growth and stability, the relationship between asset values and market prices
of the securities and dividend payment history. The investment adviser will
attempt to purchase securities so that its underlying portfolio will be
diversified geographically and by property type.
A-2
<PAGE>
APPENDIX A -- ADDITIONAL INFORMATION ON THE UNDERLYING FUNDS
Underlying Fixed-Income Funds
As stated above, each Underlying Fixed-Income Fund has policies relating to
its duration (or maturity in the case of the Financial Square Prime Obliga-
tions Fund). A Fund's duration approximates its price sensitivity to changes
in interest rates. Maturity measures the time until final payment is due; it
takes no account of the pattern of a security's cash flows over time. In com-
puting portfolio duration, an Underlying Fixed-Income 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 port-
folio maturity or the maximum stated maturity with respect to individual
securities unless otherwise noted.
Except for the Financial Square Prime Obligations Fund (which is subject to
more restrictive SEC regulations applicable to money market funds), an Under-
lying Fixed-Income Fund will deem a security to have met its minimum credit
rating requirement if the security receives the minimum required long-term
rating (or the equivalent short-term credit rating) at the time of purchase
from at least one rating organization (including, but not limited to, Stan-
dard & Poor's Ratings Group ("S&P") and Moody's Investors Service, Inc.
("Moody's")) even though it has been rated below the minimum rating by one or
more other rating organizations, or, if unrated by a rating organization, is
determined by the Fund's investment adviser to be of comparable quality. If a
security satisfies a Fund's minimum rating criteria at the time of purchase
and is subsequently downgraded below such rating, the Fund will not be
required to dispose of such security. If a downgrade occurs, the Fund's
investment adviser will consider what action, including the sale of such
security, is in the best interest of the Fund and its shareholders.
The Underlying Fixed-Income Funds may (but are not required to) employ cer-
tain active management techniques to manage their duration and term struc-
ture, to seek to hedge exposure to foreign currencies and to seek to enhance
returns. These techniques include (with respect to one or more of the Funds),
but are not limited to, the use of financial futures contracts, option con-
tracts (including options on futures), forward foreign currency exchange con-
tracts, currency options and futures, currency, mortgage, credit and interest
rate swaps and interest rate floors, caps and collars. Currency and interest
rate management techniques involve risks different from those associated with
investing solely in U.S. dollar-denominated fixed-income securities of U.S.
issuers. Certain of the Funds may invest in custodial receipts, municipal
securities and convertible securities. The Funds may also employ other
investment techniques to seek to enhance returns, such as lending portfolio
securities and entering into mortgage dollar rolls, repurchase agreements,
reverse repurchase agreements and other investment practices.
B. 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 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 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 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 extension risk are normally 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 (extension risk). In general, if interest rates on new
mortgage loans fall sufficiently below the interest rates on existing out-
standing 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 investors.
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 turnover rates of the Underlying Funds have ranged from 41% to 315% dur-
ing their most recent fiscal years. There can be no assurance that the turn-
over 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
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<PAGE>
for the Underlying Funds. In addition, higher turnover rates may result in
higher taxable realized gains for shareholders.
C. 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 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, an Underlying Fund may incur losses because it will
be required to effect sales at a disadvantageous time and only then at a sub-
stantial drop in price. Small capitalization companies and REITs also 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 capital-
ization companies and REITs may be more difficult to price precisely than
other types of securities because of their characteristics and lower trading
volumes.
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), which is considered 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.
Floating-rate derivative debt securities can present more complex types of
derivative and interest rate risks. For example, range floaters are subject
to the risk that the coupon will be reduced below market rates if a desig-
nated interest rate floats outside of a specified interest rate band or col-
lar. 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. 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.
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 whether the conversion of the currencies of other countries in the
European Union ("EU"), such as the United Kingdom and Denmark, into the euro
and the admission of other non-EU countries such as Poland, Latvia and Lithu-
ania as members of
A-4
<PAGE>
APPENDIX A -- ADDITIONAL INFORMATION ON THE UNDERLYING FUNDS
the EU may have an impact on the euro. These or other factors, including
political and economic risks, could cause market disruptions, and could
adversely affect the value of securities 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. Fur-
thermore, with respect to certain foreign countries, there is a possibility
of nationalization, expropriation or confiscatory taxation, imposition of
withholding or other taxes on dividend or interest payments (or, in some
cases, capital gains), limitations on the removal of funds or other assets of
the Underlying Funds, and political or social instability or diplomatic
developments which could affect investments in those countries.
Concentration of an Underlying Fund's assets in one of 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 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 interest when due in accordance with the terms of such
debt, and an Underlying Fund may have limited recourse to compel payment in
the event of a default. Periods of economic uncertainty may result in vola-
tility of market prices of sovereign debt, and in turn the Underlying Fund's
NAV, to a greater extent than the volatility inherent in debt obligations of
U.S. issuers.
A sovereign debtor's willingness or ability to repay principal and pay 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. The
International Equity, European Equity, International Small Cap, Emerging Mar-
kets Equity and Asia Growth Funds may each invest without limit in the secu-
rities of issuers in emerging countries. Up to 35% of the total assets of the
Emerging Markets Equity Fund may be invested in securities of issuers in any
one emerging country. The Growth and Income, Small Cap Value, Mid Cap Equity,
High Yield and CORE International Equity Funds may each invest up to 25%, and
the Core Fixed Income, Global Income and Capital Growth Funds may each invest
up to 10%, of their respective total assets in securities of issuers in
emerging countries.
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, such as Taiwan,
it is antici-
A-5
<PAGE>
pated that an Underlying Fund may invest in such countries only through other
investment funds in such countries.
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 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.
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 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 an Underlying Fund to value its portfolio securities and could
cause the Underlying Fund to miss attractive investment opportunities, to
have a portion of its assets uninvested or to incur losses due to the failure
of a counterparty to pay for securities the Underlying Fund has delivered or
the Underlying Fund's inability to complete its contractual obligations. The
creditworthiness of the local securities firms used by the Underlying Fund in
emerging countries may not be as sound as the creditworthiness of firms used
in more developed countries, thus subjecting the Underlying Fund to a greater
risk of loss if a securities firm defaults in the performance of its respon-
sibilities.
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 only then at a sub-
stantial drop in price. Investments in emerging countries may be more diffi-
cult to price precisely because of their characteristics 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 Investing in Non-Investment Grade Fixed-Income Securities. Non-
investment 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 generally unsecured and are
often subordinated to the rights of other creditors of the issuers of such
securities. Investment byan Underlying Fund in defaulted securities poses
additional risk of loss should nonpayment of principal and interest continue
in respect
A-6
<PAGE>
APPENDIX A -- ADDITIONAL INFORMATION ON THE UNDERLYING FUNDS
of such securities. Even if such securities are held to maturity, recovery
byan Underlying Fund of its initial investment and any anticipated income or
appreciation is uncertain.
Risks of Illiquid Securities. The Underlying Funds may invest up to 15% (10%
in the case of the Financial Square Prime Obligations Fund) of its net assets
in illiquid securities which cannot be disposed of in seven days in the ordi-
nary 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
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.
Risks of Non-Diversification and Concentration. The Global Income Fund is
registered as a "non-diversified" Fund under the 1940 Act and is, therefore,
more susceptible to adverse developments affecting any single issuer. In
addition, the Global Income Fund, and certain other Underlying Funds, may
invest more than 25% of their total assets in the securities of corporate and
governmental issuers located in a particular foreign country or region. Con-
centration 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 Underlying 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 an Underlying
Fund's assets are invested in such instruments, the Underlying Fund may not
be achieving its investment objective.
D. INVESTMENT SECURITIES AND TECHNIQUES
U.S. Government Securities. The Underlying Funds may invest in U.S. Govern-
ment Securities. Generally, these securities include U.S. Treasury obliga-
tions and obligations issued or guaranteed by U.S. government agencies,
instrumentalities or sponsored enterprises. U.S. Government Securities also
include Treasury receipts and U.S. Government Securities that have been
stripped by the U.S. Government, where the interest and principal components
of the securities are traded independently. Interests in U.S. Government
securities may be purchased in the form of custodial receipts.
Mortgage-Backed Securities. The Underlying Funds (other than the five CORE
Equity Funds) may invest in so-called "Mortgage-Backed Securities." These
securities represent direct or indirect participations in, or are collateral-
ized 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 nor-
mally structured with one or more types of "credit enhancement." However,
these Mortgage-Backed Securities typically do not have the same credit stand-
ing as U.S. government guaranteed Mortgage-Backed Securities.
Mortgage-Backed Securities may include multiple class securities, including
collateralized mortgage obligations ("CMOs"), real estate mortgage investment
conduit ("REMIC") pass-through or participation certificates and stripped
mortgage-backed securities ("SMBS"). CMOs provide an investor with a speci-
fied 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 qualifies for special tax treat-
ment under the Internal Revenue Code of 1986, as amended (the "Code"), and
invests in certain mortgages principally secured by interests in real prop-
erty and other permitted investments. SMBS are derivative multiple class
Mortgage-Backed Securities. The market value of SMBS consisting 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.
A-7
<PAGE>
Asset-Backed Securities. The Underlying Funds (other than the five CORE
Equity Funds, may also invest in asset-backed securities. Certain Funds'
investments in Asset-Backed Securities are limited to securities that are
issued or guaranteed by U.S. government agencies, instrumentalities or spon-
sored enterprises. Asset-backed securities are securities whose principal and
interest payments are collateralized by pools of assets such as auto loans,
credit card receivables, leases, installment contracts and personal property.
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 pre-
payments 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 gener-
ally 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 secu-
rity interest in collateral that is comparable in quality to mortgage assets.
There is the possibility that, in some cases, recoveries on repossessed col-
lateral 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 make limited investments
in instruments issued by state and local governmental issuers. These securi-
ties may include private activity bonds, municipal leases, certificates of
participation and "auction rate" securities.
Corporate Debt Obligations; Trust Preferred Securities; Convertible Securi-
ties. The Underlying Funds may invest in corporate debt obligations, trust
preferred securities and convertible securities. 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. 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.
Each Underlying Fund 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 five CORE Equity Funds, which only invest in debt
instruments that are cash equivalents) may invest in debt securities rated at
least investment grade at the time of investment. Investment grade debt secu-
rities are securities rated BBB or higher by Standard & Poor's or Baa or
higher by Moody's. The Growth and Income, Capital Growth, Small Cap Value,
International Equity, Japanese Equity, European Equity, International Small
Cap, Emerging Markets Equity, Asia Growth and Real Estate Securities Funds
may invest up to 10%, 10%, 35%, 35%, 35%, 35%, 35%, 35%, 35% and 20%, respec-
tively, of their total assets in debt securities which are rated in the low-
est rating categories by Standard & Poor's or Moody's (i.e., BB or lower by
Standard & Poor's or Ba or lower by Moody's), including securities rated D by
Moody's or Standard & Poor's. The Mid Cap Equity Fund may invest up to 10% of
its total assets in below investment grade debt securities rated B or higher
by Standard
A-8
<PAGE>
APPENDIX A -- ADDITIONAL INFORMATION ON THE UNDERLYING FUNDS
& Poor's or Moody's. Fixed-income securities rated BB or Ba or below (or com-
parable 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. The Underlying Funds may invest
in structured securities. Structured securities are securities whose value is
determined by reference to changes in the value of specific currencies,
interest rates, commodities, indices or other financial indicators (the "Ref-
erence") 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 float-
ers"). 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. An Underlying Fund may, to the extent consis-
tent with its investment policies, purchase or sell foreign currencies on a
cash basis or through forward contracts. A forward contract involves an obli-
gation 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 trans-
actions 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 transactions to seek to increase
total return, which is considered 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 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
its investment adviser, it would be beneficial to convert such currency into
U.S. dollars at a later date.
Currency exchange rates may fluctuate significantly over short periods of
time causing, along with other factors, an Underlying Fund's value 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,
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
(other than the CORE U.S. Equity, CORE Large Cap Growth and CORE Large Cap
Value 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 securi-
ties index comprised of securities in which it may invest. An Underlying Fund
may also, to the extent it invests in foreign securities, 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
A-9
<PAGE>
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 purchased
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 liquidity and credit risks.
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 Underlying Funds may engage in futures
transactions on both U.S. and foreign exchanges.
The Underlying Funds 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, securi-
ties prices or currency exchange rates or to otherwise manage their term
structures and durations in accordance with their investment objectives and
policies. The Underlying Funds 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 Commis-
sion or to seek to increase total return to the extent permitted by such reg-
ulations. The Underlying Funds may not purchase or sell futures contracts or
purchase or sell related options to seek to increase total return, except for
closing purchase or sale transactions, if immediately thereafter the sum of
the amount of initial margin deposits and premiums paid on an 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
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 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. The Underlying Funds may invest in pre-
ferred stock, warrants and rights. Preferred stocks are securities that rep-
resent an ownership interest providing the holder with claims on the issuer's
earnings and assets before common stock owners but after bond owners. Unlike
debt securities, the obligations of an issuer of preferred stock, including
dividend and other payment obligations, may not typically be accelerated by
the holders of such preferred stock on the occurrence of an event of default
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 dividends and have no
rights with respect to the assets of the issuer.
Real Estate Investment Trusts ("REITs"). The Real Estate Securities Fund
expects to invest a substantial portion of its total assets in REITs, which
are pooled investment vehicles that invest primarily in either real estate or
real estate related loans. In addition, 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' manag-
ers, and are subject to heavy cash flow dependency, default by borrowers and
the qualification of the REITs under applicable regulatory requirements for
favorable federal income tax treatment. REITs are
A-10
<PAGE>
APPENDIX A -- ADDITIONAL INFORMATION ON THE UNDERLYING FUNDS
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.
Standard and Poor's Depository Receipts. Each Underlying Equity Fund may,
consistent with its investment policies, purchase Standard & Poor's Deposi-
tory Receipts ("SPDRs"). SPDRs are American Stock Exchange-traded securities
that represent ownership in the SPDR Trust, a trust which has been estab-
lished 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 American Stock Exchange. SPDRs may
be used for several reasons, including, but not limited to, facilitating the
handling of cash flows or trading or reducing transaction costs. The 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 American Stock Exchange (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 net asset values 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 net asset
values. 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 sub-
stantial market or other disruptions affecting WEBS should occur in the
future, the liquidity and value of an Underlying Fund's shares could also be
substantially and adversely affected, and the Underlying Fund's ability to
provide investment results approximating the performance of securities in the
EAFE Index could be impaired. If such disruptions were to occur, an Under-
lying Fund could be required to reconsider the use of WEBS as part of its
investment strategy.
Other Investment Companies. An Underlying Fund may invest in securities of
other investment companies subject to the limitations prescribed by the
Investment Company Act. These limitations include a prohibition on any Fund
acquiring more than 3% of the voting shares of any other investment company,
and a prohibition on investing more than 5% of an Underlying 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 management fees and other
expenses paid by such other investment companies. Such other investment com-
panies will have investment objectives, policies and restrictions substan-
tially similar to those of the acquiring Fund and will be subject to
substantially the same risks.
Equity Swaps. Each Underlying Equity Fund may invest up to 10% of its total
assets in equity swaps. Equity swaps allow the parties to a swap agreement to
exchange the dividend income or other components of return on an equity
investment (e.g., a group of equity securities or an index) for a component
of return on another non-equity or equity investment.
An equity swap may be used by 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. When-issued securities are
securities that have been authorized, but not yet issued. When-issued securi-
ties are purchased in order to secure what is considered to be an advanta-
geous price and yield to an 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 sold securities may
increase before
A-11
<PAGE>
the settlement date. Although an Underlying Fund will generally 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 before settlement whenever 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. 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. 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 securities and other collateral held by the Underlying Fund in
connection with the repurchase agreement are less than the repurchase price
and the cost of the Underlying Fund associated with delay and enforcement of
the repurchase agreement. In addition, in the event of bankruptcy 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, the Investment
Adviser will carefully consider the creditworthiness of the seller. Distribu-
tions of the income from repurchase agreements will be taxable to an Under-
lying Fund's shareholders. In addition, 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 agreements.
Lending of Portfolio Securities. Securities lending involves the lending of
securities owned by an Underlying Fund to financial institutions such as cer-
tain broker-dealers. The borrowers are required to secure their loans contin-
uously 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 Under-
lying 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
or possible loss 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.
Mortgage Dollar Rolls. The Underlying Fixed-Income Funds (except the High
Yield Fund) and the Real Estate Securities Fund may enter into "mortgage dol-
lar rolls." A mortgage dollar roll involves the sale by an Underlying Fund of
securities for delivery in the current month. The Underlying Fund simultane-
ously contracts with the same counterparty to repurchase substantially simi-
lar (same type, coupon and maturity) 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 securities 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, capital 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 performance of the
Underlying Fund.
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 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. The Underlying Funds can borrow
money from banks and enter into reverse repurchase agreements with banks and
other financial institutions in amounts not exceeding one-third of its total
A-12
<PAGE>
APPENDIX A -- ADDITIONAL INFORMATION ON THE UNDERLYING FUNDS
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 pur-
poses 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 agree-
ments involve leveraging. If the securities 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 repur-
chase 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 securities, 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 the 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.
Miscellaneous Techniques
In addition to the techniques and investments described above, certain Under-
lying Funds may engage in the following techniques and investments: (i) yield
curve options (Underlying Fixed-Income Funds and Real Estate Securities Fund
only); (ii) loan participations (High Yield Fund only); and (iii) unseasoned
companies.
A-13
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Page
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<S> <C>
GENERAL INVESTMENT
MANAGEMENT APPROACH AND
INVESTMENT STYLES........... 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 AND PRINCIPAL
RISKS OF THE
UNDERLYING FUNDS............ 7
PORTFOLIO PERFORMANCE....... 13
SERVICE PROVIDERS........... 14
DIVIDENDS................... 18
SHAREHOLDER GUIDE........... 19
TAXATION.................... 21
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 semi-annual reports to shareholders. In the Portfo-
lios' annual reports, you will find a discussion of the market conditions and
investment strategies that significantly affected the Portfolios' performance
during their 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 & Co.,
85 Broad Street,
New York, New York 10004
By [email protected]
On the Internet--Text-only versions of Trust documents are located online and
may be downloaded from: SEC--http://www.sec.gov
Goldman Sachs--http://www.gs.com
(Prospectus Only)
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. The Trust's investment company registration number is 811-08361.
[LOGO]
<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)
One New York Plaza
New York, New York 10004
This Statement of Additional Information (the "Additional Statement")
is not a Prospectus. This Additional Statement should be read in conjunction
with the prospectus for Goldman Sachs Growth and Income Fund, Goldman Sachs CORE
U.S. Equity Fund, Goldman Sachs CORE Large Cap Growth Fund, Goldman Sachs CORE
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
<TABLE>
<CAPTION>
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<S> <C>
INTRODUCTION...........................................................B-1
INVESTMENT OBJECTIVES AND POLICIES.....................................B-2
INVESTMENT RESTRICTIONS...............................................B-52
MANAGEMENT............................................................B-54
PORTFOLIO TRANSACTIONS AND BROKERAGE..................................B-72
NET ASSET VALUE.......................................................B-76
PERFORMANCE INFORMATION...............................................B-78
SHARES OF THE TRUST...................................................B-83
TAXATION..............................................................B-86
OTHER INFORMATION.....................................................B-90
FINANCIAL STATEMENTS..................................................B-91
APPENDIX A.............................................................A-1
APPENDIX B.............................................................B-1
</TABLE>
-i-
<PAGE>
GOLDMAN SACHS ASSET MANAGEMENT
Adviser to:
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 Short Duration Government Fund
Goldman Sachs High Yield Fund
One New York Plaza
New York, New York 10004
GOLDMAN, SACHS & CO.
Transfer Agent
4900 Sears Tower
Chicago, IL 60606
GOLDMAN, SACHS & CO.
Distributor
85 Broad Street
New York, New York 10004
GOLDMAN SACHS ASSET MANAGEMENT INTERNATIONAL
Adviser to:
Goldman Sachs International Equity Fund
Goldman Sachs Global Income Fund
133 Peterborough Court
London, England EC4A 2BB
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.
Each Fund is a series of Goldman Sachs Variable Insurance Trust, which
was formed under the laws of the state of Delaware on September 16, 1997. The
Trustees have authority under the Trust's charter to create and classify shares
of beneficial interests in separate series and to classify and reclassify any
series or portfolio of shares into one or more classes, without further action
by shareholders. Additional series may be added in the future. Each Fund is a
separately managed, diversified Mutual Fund with its own investment objectives
and policies.
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'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. There is
no assurance that any Fund will achieve its objective.
CORE U.S. Equity, CORE Large Cap Growth, CORE Large Cap Value, CORE Small Cap
Equity and CORE International Equity Funds
Under normal circumstances, these Funds will invest at least 90% of
their total assets in equity securities. The investment strategy of the CORE
U.S. Equity, CORE Large Cap Growth, CORE Large Cap Value, CORE Small Cap Equity
and CORE International Equity Funds will be implemented to the extent it is
consistent with maintaining a Fund's qualification as a regulated investment
company under the Internal Revenue Code.
Since normal settlement for equity securities is three trading days (for
certain international markets settlement may be longer), the Funds will need to
hold cash balances to satisfy shareholder redemption requests. Such cash
balances will normally range from 2% to 5% of a Fund's net assets. The Funds may
purchase futures contracts only with respect to the S&P 500 Index (in the case
of CORE U.S. Equity Fund) and a representative index (in the case of CORE Large
Cap Growth, CORE Large Cap Value and CORE Small Cap Equity Funds) in order to
keep a Fund's effective equity exposure close to 100%. For example, if cash
balances are equal to 10% of the net assets, the Fund may enter into long
futures contracts covering an amount equal to 10% of the Fund's net assets. As
cash balances fluctuate based on new contributions or withdrawals, a Fund may
enter into additional contracts or close out existing positions. The CORE
International Equity Fund may purchase other types of futures contracts as
described under "Investment Policies - Futures Contracts and Options on Futures
Contracts."
The Multifactor Models. The Multifactor Models are rigorous computerized
rating systems for evaluating different equity markets, currencies and
individual equity securities according to a variety of investment
characteristics (or factors). The factors used by the Multifactor Models
incorporate many variables studied by traditional fundamental analysts and cover
measures of value, growth, momentum, risk (e.g. price/earnings ratio, book/price
ratio, growth forecasts, earning estimate revisions, price momentum, volatility
and earnings stability). All of these factors have been shown to significantly
impact the performance of the equity securities, currencies and markets they
were designated to forecast.
Because they include many disparate factors, the Adviser believes that
the Multifactor Models are broader in scope and provide a more thorough
evaluation than most conventional, value-oriented quantitative models. As a
result, the securities, currencies and markets ranked highest by the Multifactor
Models do not have one dominant investment characteristic (such as a low
price/earnings ratio); rather, such securities or markets possess many different
investment characteristics. By using a variety of relevant factors to select
securities, currencies and markets the Adviser believes that the Fund will be
better balanced and have more consistent
B-2
<PAGE>
performance than an investment portfolio that uses only one or two factors to
select such investments.
The Adviser will monitor, and may occasionally suggest and make changes
to, the method by which securities, currencies and 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.
International Equity Fund
- -------------------------
International Equity Fund will seek to achieve its investment objective
by investing primarily in equity and equity-related securities of issuers that
are organized outside the United States or whose securities are principally
traded outside the United States. Because research coverage outside the United
States is fragmented and relatively unsophisticated, many foreign companies that
are well-positioned to grow and prosper have not come to the attention of
investors. GSAMI believes that the high historical returns and less efficient
pricing of foreign markets create favorable conditions for International Equity
Fund's highly focused investment approach. For a description of the risks of the
International Equity Fund's investments in Asia, see "Investing in Emerging
Markets, including Asia."
A Rigorous Process of Stock Selection. Using fundamental industry and
company research, GSAMI's equity team in London, Singapore and Tokyo seeks to
identify companies that may achieve superior long-term returns. Stocks are
carefully selected for International Equity Fund's portfolio through a
three-stage investment process. Because International Equity Fund is a long-term
holder of stocks, the portfolio managers adjust International Equity Fund's
portfolio only when expected returns fall below acceptable levels or when the
portfolio managers identify substantially more attractive investments.
Using the research of Goldman Sachs as well as information gathered from
other sources in Europe and the Asia-Pacific region, the Adviser seeks to
identify attractive industries around the world. Such industries are expected to
have favorable underlying economics and allow companies to generate sustainable
and predictable high returns. As a rule, they are less economically sensitive,
relatively free of regulation and favor strong franchises.
Within these industries the Adviser seeks to identify well-run companies
that enjoy a stable competitive advantage and are able to benefit from the
favorable dynamics of the industry. This stage includes analyzing the current
and expected financial performance of the company; contacting suppliers,
customers and competitors; and meeting with management. In particular, the
portfolio managers look for companies whose managers have a strong commitment to
both maintaining the high returns of the existing business and reinvesting the
capital generated at high
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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, relative stability of principal and the high
credit quality of securities issued or guaranteed by the U.S. government, its
agencies, instrumentalities or sponsored enterprises, without incurring the
administrative and accounting burdens involved in direct investment.
Market and economic conditions may affect the investments of the Short
Duration Government Fund differently than the investments normally purchased by
such investors. Relative to U.S. Treasury and non-fluctuating money market
instruments, the market value of adjustable rate mortgage securities in which
the Short Duration Government Fund may invest may be adversely affected by
increases in market interest rates. Conversely, decreases in market interest
rates may result in less capital appreciation for adjustable rate mortgage
securities in relation to U.S. Treasury and money market investments.
High Current Income. The Short Duration Government Fund seeks a higher
current yield than that offered by money market funds or by bank certificates of
deposit and money market accounts. However, the Short Duration Government Fund
does not maintain a constant net asset value per share and is subject to greater
fluctuations in the value of its shares than a money market fund. Unlike bank
certificates of deposit and money market accounts, investments in shares of the
Short Duration Government Fund are not insured or guaranteed by any government
agency. The Short Duration Government Fund seeks to provide such high current
income without sacrificing credit quality.
Relative Low Volatility of Principal. The Short Duration Government
Fund seeks to minimize net asset value fluctuations by utilizing certain
interest rate hedging techniques and by maintaining a maximum duration of not
more than three years. The duration target of the Short Duration Government Fund
is that of the 2-year U.S. Treasury Security
B-4
<PAGE>
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 a combination of
high income, capital appreciation, stability of principal, experienced
professional management, flexibility and liquidity. However, investing in the
Fund involves certain risks and there is no assurance that the Fund will achieve
its investment objective. The securities in which the Fund invests will be
rated, at the time of investment, at least BBB or Baa by a nationally recognized
statistical rating organization ("NRSRO") or, if unrated, will be determined by
the 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.
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.
High Income. Global Income Fund's portfolio managers will seek out the
highest yielding bonds in the global fixed-income market that meet the Global
Income Fund's credit quality standards and certain other criteria.
Capital Appreciation. Investing in the foreign bond markets offers the
potential for capital appreciation due to both interest rate and currency
exchange rate fluctuations. The portfolio managers attempt to identify
investments with appreciation potential by carefully evaluating trends affecting
a country's currency as well as a country's fundamental economic
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<PAGE>
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, 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 tends to reflect individual developments within a company to a
greater extent than higher rated corporate debt or Treasury bonds that react
primarily to fluctuations in interest rates. Therefore, determining the
creditworthiness of issuers is critical. To that end, the High Yield Fund's
portfolio managers have access to Goldman, Sachs & Co.'s highly regarded Credit
Research and Global Investment Research Departments, as well as analysis from
the firm's High Yield Research Group, a dedicated group of 14 professionals in
the high yield and emerging market corporate bond research area, consisting of
industry and regional market specialists. In addition, the Fund's portfolio
managers may review the opinions of the two largest independent credit rating
agencies, Standard & Poor's Ratings Group and Moody's Investors Services, Inc.
High Yield Fund's portfolio managers and credit analysts also conduct their own
in-depth analysis of each issue considered for inclusion in the Fund's
portfolio. The portfolio managers and credit analysts evaluate such factors as a
company's competitive position, the strength of its balance sheet, its ability
to withstand economic downturns and its potential to generate ample cash flow to
service its debt. The ability to accurately analyze a company's future cash flow
by
B-6
<PAGE>
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.
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Corporate Debt Obligations
- --------------------------
Each Fund (other than the Short Duration Government 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 may only invest in debt securities that are cash
equivalents. Corporate debt obligations are subject to the risk of an issuer's
inability to meet principal and interest payments on the obligations and may
also be subject to price volatility due to such factors as market interest
rates, market perception of the creditworthiness of the issuer and general
market liquidity.
Fixed-income securities rated BBB or Baa are considered medium-grade
obligations with speculative characteristics, and adverse economic conditions or
changing circumstances may weaken their issuers' capacity to pay interest and
repay principal. Medium to lower rated and comparable non-rated securities tend
to offer higher yields than higher rated securities with the same maturities
because the historical financial condition of the issuers of such securities may
not have been as strong as that of other issuers. Since medium to lower rated
securities generally involve greater risks of loss of income and principal than
higher rated securities, investors should consider carefully the relative risks
associated with investment in securities which carry medium to lower ratings and
in comparable unrated securities. In addition to the risk of default, there are
the related costs of recovery on defaulted issues. The 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
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<PAGE>
securities. See Appendix A to this Additional Statement for a description of the
corporate bond and preferred stock ratings by Standard & Poor's, Moody's, Fitch
IBCA, Inc. and Duff & Phelps.
The amount of high yield, fixed-income securities proliferated in the
1980s and early 1990s as a result of increased merger and acquisition and
leveraged buyout activity. Such securities are also issued by less-established
corporations desiring to expand. Risks associated with acquiring the securities
of such issuers generally are greater than is the case with higher rated
securities because such issuers are often less creditworthy companies or are
highly leveraged and generally less able than more established or less leveraged
entities to make scheduled payments of principal and interest.
The market values of high yield, fixed-income securities tends to
reflect those individual corporate developments to a greater extent than do
those of higher rated securities, which react primarily to fluctuations in the
general level of interest rates. Issuers of such high yield securities may not
be able to make use of more traditional methods of financing and their ability
to service debt obligations may be more adversely affected than issuers of
higher rated securities by economic downturns, specific corporate developments
or the issuers' inability to meet specific projected business forecasts. These
non-investment grade securities also tend to be more sensitive to economic
conditions than higher-rated securities. Negative publicity about the junk bond
market and investor perceptions regarding lower-rated securities, whether or not
based on fundamental analysis, may depress the prices for such securities.
Since investors generally perceive that there are greater risks
associated with non-investment grade securities of the type in which the Growth
and Income, Capital Growth, Mid Cap Value, International Equity, Global Income
and High Yield Funds invest, the yields and prices of such securities may tend
to fluctuate more than those for higher-rated securities. In the lower quality
segments of the fixed-income securities market, changes in perceptions of
issuers' creditworthiness tend to occur more frequently and in a more pronounced
manner than do changes in higher quality segments of the fixed-income securities
market, resulting in greater yield and price volatility.
Another factor which causes fluctuations in the prices of fixed-income
securities is the supply and demand for similarly rated securities. In addition,
the prices of fixed-income securities fluctuate in response to the general level
of interest rates. Fluctuations in the prices of portfolio securities subsequent
to their acquisition will not affect cash income from such securities but will
be reflected in a Fund's net asset value.
The risk of loss from default for the holders of high yield,
fixed-income securities is significantly greater than is the case for holders of
other debt securities because such high yield, fixed-income securities are
generally unsecured and are often subordinated to the rights of other creditors
of the issuers of such securities. Investment by a Fund in already defaulted
securities poses an additional risk of loss should nonpayment of principal and
interest continue in respect of such securities. Even if such securities are
held to maturity, recovery by a Fund of its initial investment and any
anticipated income or appreciation is uncertain. A Fund may be required to
liquidate other portfolio securities to satisfy a Fund's annual distribution
obligations in respect of
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<PAGE>
accrued interest income on securities which are subsequently written off, even
though the Fund has not received any cash payments of such interest. 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 retain non-investment grade and
comparable unrated securities whose credit ratings or credit quality have
changed.
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. A Fund may also incur additional
expenses to the extent that it is required to seek recovery upon a default in
the payment of principal or interest on a portfolio security.
Credit ratings issued by credit rating agencies are designed to evaluate
the safety of principal and interest payments of rated securities. They do not,
however, evaluate the market value risk of non-investment grade securities and,
therefore, may not fully reflect the true risks of an investment. In addition,
credit rating agencies may or may not make timely changes in a rating to reflect
changes in the economy or in the conditions of the issuer that affect the market
value of the security. Consequently, credit ratings are used only as a
preliminary indicator of investment quality. Investments in non-investment grade
and comparable unrated obligations will be more dependent on the Adviser's
credit analysis than would be the case with investments
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<PAGE>
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.
Loan Participations. The High Yield Fund may invest in loan
participations. Such loans must be to issuers in whose obligations the High
Yield Fund may invest. A loan participation is an interest in a loan to a U.S.
or foreign company or other borrower which is administered and sold by a
financial intermediary. In a typical corporate loan syndication, a number of
lenders, usually banks (co-lenders), lend a corporate borrower a specified sum
pursuant to the terms and conditions of a loan agreement. One of the co-lenders
usually agrees to act as the agent bank with respect to the loan.
Participation interests acquired by the High Yield Fund may take the
form of a direct or co-lending relationship with the corporate borrower, an
assignment of an interest in the loan by a co-lender or another participant, or
a participation in the seller's share of the loan. When the High Yield Fund acts
as co-lender in connection with a participation interest or when the High Yield
Fund acquires certain participation interests, the High Yield Fund will have
direct recourse against the borrower if the borrower fails to pay scheduled
principal and interest. In cases where the High Yield Fund lacks direct
recourse, it will look to the agent bank to enforce appropriate credit remedies
against the borrower. In these cases, the High Yield Fund may be subject to
delays, expenses and risks that are greater than those that would have been
involved if the Underlying Fund had purchased a direct obligation (such as
commercial paper) of such borrower. For example, in the event of the bankruptcy
or insolvency of the corporate borrower, a loan participation may be subject to
certain defenses by the borrower as a result of improper conduct by the agent
bank. Moreover, under the terms of the loan participation, the High Yield Fund
may be regarded as a creditor of the agent bank (rather than of the underlying
corporate borrower), so that the High Yield Fund may also be subject to the risk
that the agent bank may become insolvent. The secondary market, if any, for
these loan participations is limited and any loan participations purchased by
the High Yield Fund will be regarded as illiquid.
For purposes of certain investment limitations pertaining to
diversification of the High Yield Fund's portfolio investments, the issuer of a
loan participation will be the underlying borrower. However, in cases where the
High Yield Fund does not have recourse directly against the borrower, both the
borrower and each agent bank and co-lender interposed between the High Yield
Fund and the borrower will be deemed issuers of a loan participation.
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Obligations of the United States, Its Agencies, Instrumentalities and Sponsored
- -------------------------------------------------------------------------------
Enterprises
- -----------
Each Fund may invest in U.S. government securities ("U.S. Government
Securities"), which are obligations issued or guaranteed by the U.S. government
and its agencies, instrumentalities or sponsored enterprises. Some U.S.
Government Securities (such as Treasury bills, notes and bonds, which differ
only in their interest rates, maturities and times of issuance) are supported by
the full faith and credit of the United States of America. Others, such as
obligations issued or guaranteed by U.S. government agencies, instrumentalities
or sponsored enterprises, are supported either by (a) the right of the issuer to
borrow from the Treasury (such as securities of Federal Home Loan Banks), (b)
the discretionary authority of the U.S. government to purchase the agency's
obligations (such as securities of Federal National Mortgage Association
("Fannie Mae")) or (c) only the credit of the issuer (such as securities of the
Financing Corporation). The U.S. government is under no legal obligation, in
general, to purchase the obligations of its agencies, instrumentalities or
sponsored enterprises. No assurance can be given that the U.S. government will
provide financial support to the U.S. government agencies, instrumentalities or
sponsored enterprises in the future.
U.S. Government Securities include (to the extent consistent with the
Investment Company Act of 1940, as amended (the "Act")) securities for which the
payment of principal and interest is backed by an irrevocable letter of credit
issued by the U.S. government, or its agencies, instrumentalities or sponsored
enterprises. U.S. Government Securities also include (to the extent consistent
with the Act) participations in loans made to foreign governments or their
agencies that are guaranteed as to principal and interest by the U.S. government
or its agencies, instrumentalities or sponsored enterprises. The secondary
market for certain of these participations is extremely limited. In the absence
of a 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.
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<PAGE>
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
- -------------------------------------------------------------
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."
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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, with respect to no more than 5% of net assets, invest in
custodial receipts in respect of securities issued or guaranteed as to principal
and interest by the U.S. government, its agencies, instrumentalities, political
subdivisions or authorities. Such custodial receipts evidence ownership of
future interest payments, principal payments or both on certain notes or bonds
issued 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"
B-14
<PAGE>
("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
- --------------------
High Yield Fund may invest in municipal securities. Municipal
securities consist of bonds, notes and other instruments issued by or on behalf
of states, territories and possessions of the United States (including the
District of Columbia) and their political subdivisions, agencies or
instrumentalities ("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 High
Yield Fund may revise its 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
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<PAGE>
the security of Municipal Securities both within and between these two principal
classifications.
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 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 High Yield Fund 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,
B-16
<PAGE>
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 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 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.
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<PAGE>
Auction Rate Securities
- -----------------------
The 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.
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 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
B-18
<PAGE>
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.
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
B-19
<PAGE>
pay the interest accruing on a Negatively Amortizing ARM, any such excess
interest is added to the principal balance of the loan, causing negative
amortization, and will be repaid through future monthly payments. It may take
borrowers under Negatively Amortizing ARMs longer periods of time to build up
equity and may increase the likelihood of default by such borrowers. In the
event that a monthly payment exceeds the sum of the interest accrued at the
applicable Mortgage Interest Rate and the principal payment which would have
been necessary to amortize the outstanding principal balance over the remaining
term of the loan, the excess (or "accelerated amortization") further reduces the
principal balance of the ARM. Negatively Amortizing ARMs do not provide for the
extension of their original maturity to accommodate changes in their Mortgage
Interest Rate. As a result, unless there is a periodic recalculation of the
payment amount (which there generally is), the final payment may be
substantially larger than the other payments. These limitations on periodic
increases in interest rates and on changes in monthly payments protect borrowers
from unlimited interest rate and payment increases.
ARMs also have the risk of prepayments. The rate of principal
prepayments with respect to ARMs has fluctuated in recent years. As with
fixed-rate mortgage loans, ARMs may be subject to a greater rate of principal
repayments in a declining interest rate environment resulting in lower yields to
a Fund. For example, if prevailing interest rates fall significantly, ARMS could
be subject to higher prepayment rates (than if prevailing interest rates remain
constant or increase) because the availability of low fixed-rate mortgages may
encourage mortgagors to refinance their ARMs to "lock-in" a fixed-rate mortgage.
Conversely, if prevailing interest rates rise significantly, ARMs may prepay
more slowly. As with fixed-rate mortgages, ARM prepayment rates vary in both
stable and changing interest rate environments.
There are two main categories of indices which provide the basis for
rate adjustments on ARMs: those based on U.S. Treasury securities and those
derived from a calculated measure, such as a cost of funds index or a moving
average of mortgage rates. Commonly utilized indices include the one-year,
three-year and five-year constant maturity Treasury rates, the three-month
Treasury bill rate, the 180-day Treasury bill rate, rates on longer-term
Treasury securities, the 11th District Federal Home Loan Bank Cost of Funds, the
National Median Cost of Funds, the one-month, three-month, six-month or one-year
London Interbank Offered Rate, the prime rate of a specific bank or commercial
paper rates. Some indices, such as the one-year constant maturity Treasury rate,
closely mirror changes in market interest rate levels. Others, such as the 11th
District Federal Home Loan Bank Cost of Funds index, tend to lag behind changes
in market rate levels and tend to be somewhat less volatile. The degree of
volatility in the market value of 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
B-20
<PAGE>
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.
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
B-21
<PAGE>
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 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
B-22
<PAGE>
also is obligated to distribute to holders of Certificates an amount equal to
the full principal balance of any foreclosed Mortgage Loan, whether or not such
principal balance is actually recovered. The obligations of Fannie Mae under its
guaranty of the Fannie Mae Certificates are obligations solely of Fannie Mae.
Freddie Mac Certificates. Freddie Mac is a publicly held U.S. Government
sponsored enterprise. The principal activity of Freddie Mac currently is the
purchase of first lien, conventional, residential mortgage loans and
participation interests in such mortgage loans and their resale in the form of
mortgage securities, primarily Freddie Mac Certificates. A Freddie Mac
Certificate represents a pro rata interest in a group of mortgage loans or
participation in mortgage loans (a "Freddie Mac Certificate group") purchased by
Freddie Mac.
Freddie Mac guarantees to each registered holder of a Freddie Mac
Certificate the timely payment of interest at the rate provided for by such
Freddie Mac Certificate (whether or not received on the underlying loans).
Freddie Mac also guarantees to each registered Certificate holder ultimate
collection of all principal of the related mortgage loans, without any offset or
deduction, but does not, generally, guarantee the timely payment of scheduled
principal. The obligations of Freddie Mac under its guaranty of Freddie Mac
Certificates are obligations solely of Freddie Mac.
The mortgage loans underlying the Freddie Mac and Fannie Mae
Certificates consist of adjustable rate or fixed rate mortgage loans with
original terms to maturity of between five and thirty years. Substantially all
of these mortgage loans are secured by first liens on one-to-four-family
residential properties or multifamily projects. Each mortgage loan must meet the
applicable standards set forth in the law creating Freddie Mac or Fannie Mae. A
Freddie Mac Certificate group may include whole loans, participation interests
in whole loans and undivided interests in whole loans and participations
comprising another Freddie Mac Certificate group.
Conventional Mortgage Loans. The conventional mortgage loans underlying
the Freddie Mac and Fannie Mae Certificates consist of adjustable rate or
fixed-rate mortgage loans with original terms to maturity of between five and
thirty years. Substantially all of these mortgage loans are secured by first
liens on one- to four-family residential properties or multi-family projects.
Each mortgage loan must meet the applicable standards set forth in the law
creating Freddie Mac or Fannie Mae. A Freddie Mac Certificate group may include
whole loans, participation interests in whole loans, undivided interests in
whole loans and participations comprising another Freddie Mac Certificate group.
Mortgage Pass-Through Securities. Each Fund (other than CORE U.S.
Equity, CORE Large Cap Growth, CORE Large Cap Value, CORE Small Cap Equity, Mid
Cap Value 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.
B-23
<PAGE>
The following discussion describes only a few of the wide variety of
structures of Mortgage Pass-Throughs that are available or may be issued.
Description of Certificates. Mortgage Pass-Throughs may be
issued in one or more classes of senior certificates and one or more classes of
subordinate certificates. Each such class may bear a different pass-through
rate. Generally, each certificate will evidence the specified interest of the
holder thereof in the payments of principal or interest or both in respect of
the mortgage pool comprising part of the trust fund for such certificates.
Any class of certificates may also be divided into subclasses entitled
to varying amounts of principal and interest. If a REMIC election has been made,
certificates of such subclasses may be entitled to payments on the basis of a
stated principal balance and stated interest rate, and payments among different
subclasses may be made on a sequential, concurrent, pro rata or disproportionate
--------
basis, or any combination thereof. The stated interest rate on any such subclass
of certificates may be a fixed rate or one which varies in direct or inverse
relationship to an objective interest index.
Generally, each registered holder of a certificate will be entitled to
receive its pro rata share of monthly distributions of all or a portion of
--------
principal of the underlying mortgage loans or of interest on the principal
balances thereof, which accrues at the applicable mortgage pass-through rate, or
both. The difference between the mortgage interest rate and the related mortgage
pass-through rate (less the amount, if any, of retained yield) with respect to
each mortgage loan will generally be paid to the servicer as a servicing fee.
Since certain adjustable rate mortgage loans included in a mortgage pool may
provide for deferred interest (i.e., negative amortization), the amount of
interest actually paid by a mortgagor in any month may be less than the amount
of interest accrued on the outstanding principal balance of the related mortgage
loan during the relevant period at the applicable mortgage interest rate. In
such event, the amount of interest that is treated as deferred interest will be
added to the principal balance of the related mortgage loan and will be
distributed pro rata to certificate-holders as principal of such mortgage loan
--------
when paid by the mortgagor in subsequent monthly payments or at maturity.
Ratings. The ratings assigned by a rating organization to
Mortgage Pass-Throughs address the likelihood of the receipt of all
distributions on the underlying mortgage loans by the related
certificate-holders under the agreements pursuant to which such certificates are
issued. A rating organization's ratings take into consideration the credit
quality of the related mortgage pool, including any credit support providers,
structural and legal aspects associated with such certificates, and the extent
to which the payment stream on such mortgage pool is adequate to make payments
required by such certificates. A rating organization's ratings on such
certificates 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.
B-24
<PAGE>
Credit Enhancement. Credit support falls generally into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from default by an obligor on the underlying assets. Liquidity
protection refers to the provision of advances, generally by the entity
administering the pools of mortgages, the provision of a reserve fund, or a
combination thereof, to ensure, subject to certain limitations, that scheduled
payments on the underlying pool are made in a timely fashion. Protection against
losses resulting from default ensures ultimate payment of the obligations on at
least a portion of the assets in the pool. Such credit support can be provided
by among other things, payment guarantees, letters of credit, pool insurance,
subordination, or any combination thereof.
Subordination; Shifting of Interest; Reserve Fund. In order to
achieve ratings on one or more classes of Mortgage Pass-Throughs, one or more
classes of certificates may be subordinate certificates which provide that the
rights of the subordinate certificate-holders to receive any or a specified
portion of distributions with respect to the underlying mortgage loans may be
subordinated to the rights of the senior certificate-holders. If so structured,
the subordination feature may be enhanced by distributing to the senior
certificate-holders on certain distribution dates, as payment of principal, a
specified percentage (which generally declines over time) of all principal
payments received during the preceding prepayment period ("shifting interest
credit enhancement"). This will have the effect of accelerating the amortization
of the senior certificates while increasing the interest in the trust fund
evidenced by the subordinate certificates. Increasing the interest of the
subordinate certificates relative to that of the senior certificates is intended
to preserve the availability of the subordination provided by the subordinate
certificates. In addition, because the senior certificate-holders in a shifting
interest credit enhancement structure are entitled to receive a percentage of
principal prepayments which is greater than their proportionate interest in the
trust fund, the rate of principal prepayments on the mortgage loans will have an
even greater effect on the rate of principal payments and the amount of interest
payments on, and the yield to maturity of, the senior certificates.
In addition to providing for a preferential right of the senior
certificate-holders to receive current distributions from the mortgage pool, a
reserve fund may be established relating to such certificates (the "Reserve
Fund"). The Reserve Fund may be created with an initial cash deposit by the
originator or servicer and augmented by the retention of distributions otherwise
available to the subordinate certificate-holders or by excess servicing fees
until the Reserve Fund reaches a specified amount.
The subordination feature, and any Reserve Fund, are intended to enhance
the likelihood of timely receipt by senior certificate-holders of the full
amount of scheduled monthly payments of principal and interest due 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
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<PAGE>
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. 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
B-26
<PAGE>
Mac and placed in a PC pool. With respect to principal payments on PCs, Freddie
Mac generally guarantees ultimate collection of all principal of the related
mortgage loans without offset or deduction. Freddie Mac also guarantees timely
payment of principal of certain PCs.
CMOs and guaranteed REMIC Certificates issued by Fannie Mae and Freddie
Mac are types of multiple class Mortgage-Backed Securities. Investors may
purchase beneficial interests in REMICs, which are known as "regular" interests
or "residual" interests. The Funds do not intend to purchase residual interests
in REMICs. The REMIC Certificates represent beneficial ownership interests in a
REMIC trust, generally consisting of mortgage loans or Fannie Mae, Freddie Mac
or Ginnie Mae guaranteed mortgage-backed securities (the "Mortgage Assets"). The
obligations of Fannie Mae or Freddie Mac under their respective guaranty of the
REMIC Certificates are obligations solely of Fannie Mae or Freddie Mac,
respectively.
CMOs and REMIC Certificates are issued in multiple classes. Each class
of CMOs or REMIC Certificates, often referred to as a "tranche," is issued at a
specific adjustable or fixed interest rate and must be fully retired no later
than its final distribution date. Principal prepayments on the Mortgage Loans or
the Mortgage Assets underlying the CMOs or REMIC Certificates may cause some or
all of the classes of CMOs or REMIC Certificates to be retired substantially
earlier than their final distribution dates. Generally, interest is paid or
accrues on all classes of CMOs or REMIC Certificates on a monthly basis.
The principal of and interest on the Mortgage Assets may be allocated
among the several classes of CMOs or REMIC Certificates in various ways. In
certain structures (known as "sequential pay" CMOs or REMIC Certificates),
payments of principal, including any principal prepayments, on the Mortgage
Assets generally are applied to the classes of CMOs or REMIC Certificates in the
order of their respective final distribution dates. Thus, no payment of
principal will be made on any class of sequential pay CMOs or REMIC Certificates
until all other classes having an earlier final distribution date have been paid
in full.
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
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<PAGE>
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.
Asset-Backed Securities
- -----------------------
Asset-backed securities represent participation in, or are secured by
and payable from, assets such as motor vehicle installment sales, installment
loan contracts, leases of various types of real and personal property,
receivables from revolving credit (credit card) agreements and other categories
of receivables. Such assets are securitized through the use of trusts and
special purpose corporations. Payments or distributions of principal and
interest may be guaranteed up to certain amounts and for a certain time period
by a letter of credit or a pool insurance policy issued by a financial
institution unaffiliated with the trust or corporation, or other credit
enhancements may be present.
Like Mortgage-Backed Securities, asset-backed securities are often
subject to more rapid repayment than their stated maturity date would indicate
as a result of the pass-through of prepayments of principal on the underlying
loans. During periods of declining interest rates, prepayment of loans
underlying asset-backed securities can be expected to accelerate. Accordingly, a
Fund's ability to maintain positions in such securities will be affected by
reductions in the principal amount of such securities resulting from
prepayments, and its ability to reinvest the returns of principal at comparable
yields is subject to generally prevailing interest rates at that time. To the
extent that a Fund invests in asset-backed securities, the values of such Fund's
portfolio securities will vary with changes in market interest rates generally
and the differentials in yields among various kinds of asset-backed securities.
Asset-backed securities present certain additional risks that are not
presented by Mortgage-Backed Securities because asset-backed securities
generally do not have the benefit of a security interest in collateral that is
comparable to Mortgage Assets. Credit card receivables are generally unsecured
and the debtors on such receivables are entitled to the protection of a number
of state
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<PAGE>
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 and CORE Large Cap
Value Funds may only enter into such transactions with respect to a
representative index. CORE U.S. Equity Fund may enter into future contracts only
with respect to the S&P 500 Index. The other Funds may purchase and sell futures
contracts based on various securities (such as U.S. Government securities),
securities indices, foreign currencies and other financial instruments and
indices. Each Fund will engage in futures and related options transactions, only
for bona fide hedging purposes as defined below or for purposes of seeking to
increase total return to the extent permitted by regulations of the Commodity
Futures Trading Commission ("CFTC"). 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 or 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).
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<PAGE>
When interest rates are rising or securities prices are falling, a Fund
can seek through the sale of futures contracts to offset a decline in the value
of its current portfolio securities. When rates are falling or prices are
rising, a Fund, through the purchase of futures contracts, can attempt to secure
better rates or prices than might later be available in the market when it
effects anticipated purchases. Similarly, each Fund (other than CORE U.S.
Equity, CORE Large Cap Growth, CORE Large Cap Value, CORE Small Cap Equity and
Short Duration Government Funds) can sell futures contracts on a specified
currency to protect against a decline in the value of such currency and its
portfolio securities which are quoted or denominated in such currency. Each Fund
(other than CORE U.S. Equity, CORE Large Cap Growth, 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 market are not normally held to maturity,
but are instead liquidated through offsetting transactions which may result in a
profit or a loss. While each Fund will usually liquidate futures contracts on
securities or currency in this manner, a Fund may instead make or take delivery
of the underlying securities or currency whenever it appears economically
advantageous for the Fund to do so. A clearing corporation associated with the
exchange on which futures are traded guarantees that, if still open, the sale or
purchase will be performed on the settlement date.
Hedging Strategies. Hedging, by use of futures contracts, seeks to
establish with more certainty than would otherwise be possible the effective
price, rate of return or currency exchange rate on portfolio securities or
securities that a Fund owns or proposes to acquire. A Fund may, for example,
take a "short" position in the futures market by selling futures contracts to
seek to hedge against an anticipated rise in interest rates or a decline in
market prices or (other than CORE U.S. Equity, CORE Large Cap Growth, CORE Large
Cap Value and CORE Small Cap Equity Funds) foreign currency rates that would
adversely affect the dollar value of such Fund's portfolio securities.
Similarly, each Fund (other than CORE U.S. Equity, CORE Large Cap Growth, CORE
Large Cap Value, CORE Small Cap Equity and Short Duration Government Funds) may
sell futures contracts on a currency in which its portfolio securities are
quoted or denominated or in one currency to seek to hedge against fluctuations
in the value of securities quoted or denominated in a different currency if
there is an established historical pattern of correlation between the two
currencies. If, in the opinion of the applicable Adviser, there is a sufficient
degree of correlation between price trends for a Fund's portfolio securities and
futures contracts based on other financial instruments, securities indices or
other indices, a Fund may also enter into such futures contracts as part of its
hedging strategy. Although under some circumstances prices of securities in a
Fund's portfolio may be more or less volatile than prices of such futures
contracts, the Advisers will attempt to estimate the extent of this volatility
difference based on historical patterns and compensate for any such differential
by having a Fund enter into a greater or lesser number of futures contracts or
by attempting to achieve only a partial hedge against price changes affecting a
Fund's securities portfolio. When hedging of this
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<PAGE>
character is successful, any depreciation in the value of portfolio securities
will be substantially offset by appreciation in the value of the futures
position. On the other hand, any unanticipated appreciation in the value of a
Fund's portfolio securities would be substantially offset by a decline in the
value of the futures position.
On other occasions, a Fund may take a "long" position by purchasing such
futures contracts. This 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 or rates that are currently
available.
Options on Futures Contracts. The acquisition of put and call options on
futures contracts will give a Fund the right (but not the obligation), for a
specified price, to sell or to purchase, respectively, the underlying futures
contract at any time during the option period. As the purchaser of an option on
a futures contract, a Fund obtains the benefit of the futures position if prices
move in a favorable direction but limits its risk of loss in the event of an
unfavorable price movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium
which may partially offset a decline in the value of a Fund's assets. By writing
a call option, a Fund becomes obligated, in exchange for the premium, 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 an Underlying Fund
to qualify as a regulated investment company for federal income tax
purposes.
B-31
<PAGE>
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 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 (other than CORE U.S. Equity, CORE
Large Cap Growth and CORE Large Cap Value Funds) 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 would have segregated cash
or liquid assets with a value at least equal to the exercise price of the put
option. The purpose of writing such options is to generate additional income for
the 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.
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<PAGE>
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.
In addition, a written call option or put option may be covered by
segregating cash or liquid assets (either of which may be quoted or denominated
in any currency), by entering into an offsetting forward contract and/or by
purchasing an offsetting option which, by virtue of its exercise price or
otherwise, reduces a Fund's net exposure on its written option position.
A Fund may also write (sell) covered call and put options on any
securities index composed of securities in which it may invest. Options on
securities indices are similar to options on securities, except that the
exercise of securities index options requires cash payments and does not involve
the actual purchase or sale of securities. In addition, securities index options
are designed to reflect price fluctuations in a group of securities or segment
of the securities market rather than price fluctuations in a single
security.
A Fund may cover call options on a securities index by owning securities
whose price changes are expected to be similar to those of the underlying index,
or by having an absolute and immediate right to acquire such securities without
additional cash consideration (or for additional cash consideration 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.
A Fund may terminate its obligations under an exchange-traded call or
put option by purchasing an option identical to the one it has written.
Obligations under over-the-counter options may be terminated only by entering
into an offsetting transaction with the counterparty to such option. Such
purchases are referred to as "closing purchase transactions."
Purchasing Options. Each Fund (other than the CORE U.S. Equity, CORE
Large Cap Growth and CORE Large Cap Value Funds) may purchase put and call
options on any securities in which it may invest or options on any securities
index composed of securities in which it may invest. A Fund would also be able
to enter into closing sale transactions in order to realize gains or minimize
losses on options it had purchased.
A Fund would normally purchase call options in anticipation of an
increase in the market value of securities of the type in which it may invest.
The purchase of a call option would entitle a Fund, in return for the premium
paid, to purchase specified securities at a specified price during the option
period. A Fund would ordinarily realize a gain if, during the option period, the
value of such securities exceeded the sum of the exercise price, the premium
paid and transaction costs; otherwise such a Fund would realize either no gain
or a loss on the purchase of the call option.
A Fund would normally purchase put options in anticipation of a decline
in the market value of securities in its portfolio ("protective puts"), or in
securities in which it may invest. The
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<PAGE>
purchase of a put option would entitle a Fund, in exchange for the premium paid,
to sell specified securities at a specified price during the option period. The
purchase of protective puts is designed to offset or hedge against a decline in
the market value of a Fund's securities. Put options may also be purchased by a
Fund for the purpose of affirmatively benefiting from a decline in the price of
securities which it does not own. A Fund would ordinarily realize a gain if,
during the option period, the value of the underlying securities decreased below
the exercise price sufficiently to more than cover the premium and transaction
costs; otherwise such a Fund would realize either no gain or a loss on the
purchase of the put option. Gains and losses on the purchase of protective put
options would tend to be offset by countervailing changes in the value of the
underlying portfolio securities.
A Fund would purchase put and call options on securities indices for the
same purposes as it would purchase options on individual securities. For a
description of options on securities indices, see "Writing Covered Options"
above.
Yield Curve Options. The Short Duration Government, Global Income and
High Yield Funds, with respect to up to 5% of their net assets, may enter into
options on the yield "spread" or differential between two securities. Such
transactions are referred to as "yield curve" options. In contrast to other
types of options, a yield curve option is based on the difference between the
yields of designated securities, rather than the prices of the individual
securities, and is settled through cash payments. Accordingly, a yield curve
option is profitable to the holder if this differential widens (in the case of a
call) or narrows (in the case of a put), regardless of whether the yields of the
underlying securities increase or decrease.
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 between the two securities. Global Income and High Yield Funds
may also purchase or write yield curve options in an effort to increase their
current income if, in the judgment of the Adviser, the Funds will be able to
profit from movements in the spread between the yields of the 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
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<PAGE>
regulations. Yield curve options are traded over-the-counter, and the trading
markets for these options may not be as developed.
Risks Associated with Options Transactions. There is no assurance that a
liquid secondary market on a domestic or foreign options exchange will exist for
any particular exchange-traded option or at any particular time. If 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 may involve the risk that
broker-dealers participating in such transactions will not fulfill their
obligations. Until such time as the staff of the Securities and Exchange
Commission ("SEC") changes its position, each Fund will treat purchased
over-the-counter options and all assets used to cover written over-the-counter
options as illiquid securities, except that with respect to options written with
primary dealers in U.S. Government securities pursuant to an agreement requiring
a closing purchase transaction at a formula price, the amount of illiquid
securities may be calculated with reference to the formula.
Transactions by each Fund in options 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
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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 up to 5% of its net assets, calculated at the time of purchase,
in warrants or rights (other than those acquired in units or attached to other
securities) which entitle the holder to buy equity securities at a specific
price for a specific period of time. A Fund will invest in warrants and rights
only if such 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
- -------------------
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 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 than investments in U.S. securities,
the opportunity to invest in foreign countries with economic policies or
business cycles different from those of the United States and the opportunity to
reduce fluctuations in portfolio value by taking advantage of foreign securities
markets that do not necessarily move in a manner parallel to U.S. markets.
Investing in foreign securities also involves, however, certain special
considerations, including those set forth below, which are not typically
associated with investing in U.S. dollar-denominated or quoted securities of
U.S. issuers. Investments in foreign securities usually involve currencies of
foreign countries. Accordingly, any Fund that invests in foreign securities may
be affected favorably or unfavorably by changes in currency rates and in
exchange control regulations and may incur costs in connection with conversions
between various currencies. International Equity, Global Income and High Yield
Funds may be subject to currency exposure independent of their securities
positions. 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.
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Currency exchange rates may fluctuate significantly over short periods
of time. They generally are determined by the forces of supply and demand in the
foreign exchange markets and the relative merits of investments in different
countries, actual or anticipated changes in interest rates and other complex
factors, as seen from an international perspective. Currency exchange rates also
can be affected unpredictably by intervention by U.S. or foreign governments or
central banks or the failure to intervene or by currency controls or political
developments in the United States or abroad. To the extent that a substantial
portion of a Fund's total assets, adjusted to reflect the Fund's net position
after giving effect to currency transactions, is denominated or quoted in the
currencies of foreign countries, the Fund will be more susceptible to the risk
of adverse economic and political developments within those countries. In
addition, if the currency in which a Fund receives dividends, interest or other
payment declines in value against the U.S. dollar before such income is
distributed as dividends to shareholders or converted to U.S. dollars, the Fund
may have to sell portfolio securities to obtain sufficient cash to pay such
dividends.
Since foreign issuers generally are not subject to uniform accounting,
auditing and financial reporting standards, practices and requirements
comparable to those applicable to U.S. companies, there may be less publicly
available information about a foreign company than about a U.S. company. Volume
and liquidity in most foreign securities markets are less than in the United
States and securities of many foreign companies are less liquid and more
volatile than securities of comparable U.S. companies. Fixed commissions on
foreign securities exchanges are generally higher than negotiated commissions on
U.S. exchanges, although each Fund endeavors to achieve the most favorable net
results on its portfolio transactions. There is generally less government
supervision and regulation of foreign securities exchanges, brokers, dealers and
listed and unlisted companies than in the United States.
Foreign markets also have different clearance and settlement procedures,
and in certain markets there have been times when settlements have been unable
to keep pace with the volume of securities transactions, making it difficult to
conduct such transactions. Such delays in settlement could result in temporary
periods when some of a Fund's assets are uninvested and no return is earned on
such assets. The inability of a Fund to make intended security purchases due to
settlement problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement
problems could result either in losses to the Fund due to subsequent declines in
value of the portfolio securities or, if the Fund has entered into a contract to
sell the securities, could result in possible liability to the purchaser. In
addition, with respect to certain foreign countries, there is the possibility of
expropriation or confiscatory taxation, political or social instability, or
diplomatic developments which could affect a Fund's investments in those
countries. Moreover, individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross national
product, rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments position.
Investments in foreign securities may take the form of sponsored and
unsponsored American Depository Receipts ("ADRs") and Global Depository Receipts
("GDRs") and
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<PAGE>
European Depository Receipts ("EDRs") or other similar instruments representing
securities of foreign issuers (together, "Depository Receipts").
ADRs represent the right to receive securities of foreign issuers
deposited in a domestic bank or a correspondent bank. ADRs are traded on
domestic exchanges or in the U.S. over-the-counter market and, generally, are in
registered form. EDRs and GDRs are receipts evidencing an arrangement with a
non-U.S. bank similar to that for ADRs and are designed for use in the non-U.S.
securities markets. EDRs and GDRs are not necessarily quoted in the same
currency as the underlying security.
To the extent a Fund acquires Depository Receipts through banks which do
not have a contractual relationship with the foreign issuer of the security
underlying the Depository Receipts to issue and service such Depository Receipts
(unsponsored), there may be an increased possibility that the Fund would not
become aware of and be able to respond to corporate actions such as stock splits
or rights offerings involving the foreign issuer in a timely manner. In
addition, the lack of information may result in inefficiencies in the valuation
of such instruments.
Each Fund (except CORE U.S. Equity, CORE Large Cap Growth, 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.
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. In addition, certain of the CORE International Equity, International
Equity and High Yield Funds' potential investment and management techniques
entail special risks.
Each of the securities markets of the Emerging Countries is less liquid
and subject to greater price volatility and has a smaller market capitalization
than the U.S. securities markets. Issuers and securities markets in such
countries are not subject to as extensive and frequent accounting, financial and
other reporting requirements or as comprehensive government
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<PAGE>
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 instruments, 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. Additionally, market making and
arbitrage activities are generally less extensive in such markets, which may
contribute to increased volatility and reduced liquidity of such markets. The
limited liquidity of Emerging Country securities may also affect a Fund's
ability to accurately value its portfolio securities or to acquire or dispose of
such securities at the price and times it wishes to do so. The risks associated
with reduced liquidity may be particularly acute to the extent that a Fund needs
cash to meet redemption requests, to pay dividends and other distributions or to
pay its expenses.
Transaction costs, including brokerage commissions or dealer mark-ups,
in Emerging Countries may be higher than in the United States and other
developed securities markets. In addition, existing laws and regulations are
often inconsistently applied. As legal systems in Emerging Countries develop,
foreign investors may be adversely affected by new or amended laws and
regulations. In circumstances where adequate laws exist, it may not be possible
to obtain swift and equitable enforcement of the law.
Foreign investment in the securities markets of certain Emerging
Countries is restricted or controlled to varying degrees. These restrictions may
limit a Fund's investment in certain Emerging Countries and may increase the
expenses of the Fund. Certain Emerging Countries 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.
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<PAGE>
Each of the Emerging Countries may be subject to a greater degree of
economic, political and social instability than is the case in the United
States, Japan and most Western European countries. This instability may result
from, among other things, the following: (i) authoritarian governments or
military involvement in political and economic decision making, including
changes or attempted changes in governments through extra-constitutional means;
(ii) popular unrest associated with demands for improved political, economic or
social conditions; (iii) internal insurgencies; (iv) hostile relations with
neighboring countries; and (v) ethnic, religious and racial disaffection or
conflict. Such economic, political and social instability could disrupt the
principal financial markets in which the Funds may invest and adversely affect
the value of the Funds' assets.
The economies of Emerging Countries may differ unfavorably from the U.S.
economy in such respects as growth of gross domestic product, rate of inflation,
capital reinvestment, resources, self-sufficiency and balance of payments. Many
Emerging Countries have experienced in the past, and continue to experience,
high rates of inflation. In certain countries inflation has at times accelerated
rapidly to hyperinflationary levels, creating a negative interest rate
environment and sharply eroding the value of outstanding financial assets in
those countries. The economies of many Emerging Countries are heavily dependent
upon international trade and are accordingly affected by protective trade
barriers and the economic conditions of their trading partners. In addition, the
economies of some Emerging Countries are vulnerable to weakness in world prices
for their commodity exports.
A Fund's income and, in some cases, capital gains from foreign stocks
and securities will be subject to applicable taxation in certain of the
countries in which it invests, and treaties between the U.S. and such countries
may not be available in some cases to reduce the otherwise applicable tax rates.
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 uninvested and no return is
earned thereon. Inability to make intended security purchases or sale 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. 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
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<PAGE>
the past, the governments of certain emerging markets have encountered
difficulties in servicing their debt obligations, withheld payments of principal
and interest and declared moratoria on the payment of principal and interest on
their sovereign debts.
A sovereign debtor's willingness or ability to repay principal and pay
interest in a timely manner may be affected by, among other factors, its cash
flow situation, the extent of its foreign currency reserves, the availability of
sufficient foreign exchange, the relative size of the debt service burden, the
sovereign debtor's policy toward principal international lenders and local
political constraints. Sovereign debtors may also be dependent on expected
disbursements from foreign governments, multinational agencies and other
entities to reduce principal and interest arrearages on their debt. The failure
of a sovereign debtor to implement economic reforms, achieve specified levels of
economic performance or repay principal or interest when due may result in the
cancellation of the third parties' commitments to lend funds to the sovereign
debtor, which may further impair such debtor's ability or willingness to timely
service its debts.
Forward Foreign Currency Exchange Contracts. Growth and Income, Mid Cap
Value and Capital Growth Funds may enter into forward foreign currency exchange
contracts for hedging purposes. International Equity, Global Income and High
Yield Funds may enter into forward foreign currency exchange contracts for
hedging purposes and to seek to increase total return. A forward foreign
currency exchange contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded in the interbank market 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 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
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<PAGE>
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 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
B-42
<PAGE>
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 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.
A call option written by a Fund obligates a Fund to sell specified
currency to the holder of the option at a specified price if the option is
exercised before the expiration date. A put option written by a Fund would
obligate a Fund to purchase specified currency from the option holder at a
specified price if the option is exercised at any time before the expiration
date. The writing of currency options involves a risk that a Fund will, 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.
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<PAGE>
A Fund may terminate its obligations under a call or put option by
purchasing an option identical to the one it has written. Such purchases are
referred to as "closing purchase transactions." A Fund would also be able to
enter into closing sale transactions in order to realize gains or minimize
losses on options purchased by the Fund.
A Fund would normally purchase call options on foreign currency in
anticipation of an increase in the U.S. dollar value of currency in which
securities to be acquired by a Fund are quoted or denominated. The purchase of a
call option would entitle the Fund, in return for the premium paid, to purchase
specified currency at a specified price during the option period. A Fund would
ordinarily realize a gain if, during the option period, the value of such
currency exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise, the Fund would realize either no gain or a loss on
the purchase of the call option.
A Fund would normally purchase put options in anticipation of a decline
in the U.S. dollar value of currency in which securities in its portfolio are
quoted or denominated ("protective puts"). The purchase of a put option would
entitle a Fund, in exchange for the premium paid, to sell specified currency at
a specified price during the option period. The purchase of protective puts is
designed merely to offset or hedge against a decline in the dollar value of a
Fund's portfolio securities due to currency exchange rate fluctuations. A Fund
would ordinarily realize a gain if, during the option period, the value of the
underlying currency decreased below the exercise price sufficiently to more than
cover the premium and transaction costs; otherwise, the Fund would realize
either no gain or a loss on the purchase of the put option. Gains and losses on
the purchase of protective put options would tend to be offset by countervailing
changes in the value of underlying currency or portfolio securities.
In addition to using options for the hedging purposes described above,
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.
Special Risks Associated With Options on Currency. An exchange traded
option position may be closed out only on an options exchange which provides a
secondary market for an option of the same series. There is no assurance that a
liquid secondary market on an exchange will exist for any particular option, or
at any particular time. In such event, it might not be possible to effect
closing transactions in particular options, with the result that a Fund
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<PAGE>
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.
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
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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
- ----------------------
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.
Currency Swaps, Mortgage Swaps, Credit Swaps, Index Swaps and Interest Rate
- ---------------------------------------------------------------------------
Swaps, Caps, Floors and Collars
- -------------------------------
The CORE International Equity, International Equity, the Short Duration
Government, 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, 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 a Fund
with another party of their respective rights to make or receive payments in
specified currencies. Interest rate swaps involve the exchange by a Fund with
another party of their respective commitments to pay or receive interest, such
as an exchange of fixed rate payments for floating rate payments. Mortgage swaps
are similar to interest rate swaps in that they represent commitments to pay and
receive interest. The notional principal amount, however, is tied to a reference
pool or pools of mortgages. Index swaps involve the exchange by a Fund with
another party of the respective amounts payable with respect to a notional
principal amount at interest rates equal to two specified indices. The purchase
of an interest rate cap entitles the purchaser, to the extent that a specified
index exceeds a predetermined interest rate, to receive payment of interest on a
notional principal amount from the party selling such interest rate cap. Credit
swaps involve the receipt of floating or fixed rate payments in exchange for
assuming potential credit losses of an underlying security. Credit swaps give
one party to a transaction the right to dispose of or acquire an asset (or group
of assets), or the right to receive or make a payment from the other party, upon
the occurrence of specified credit events. The purchase of an interest rate
floor entitles the purchaser, to the extent that a specified index falls below a
predetermined interest rate, to receive payments of interest on a notional
B-46
<PAGE>
principal amount from the party selling the interest rate floor. An interest
rate collar is the combination of a cap and a floor that preserves a certain
return within a predetermined range of interest rates. Since interest rate,
mortgage and currency swaps and interest rate caps, floors and collars are
individually negotiated, each Fund expects to achieve an acceptable degree of
correlation between its portfolio investments and its swap, cap, floor and
collar positions.
A Fund will enter into interest rate, mortgage and index swaps only on a
net basis, which means that the two payment streams are netted out, with the
Fund receiving or paying, as the case may be, only the net amount of the two
payments. Interest rate, index and mortgage swaps do not involve the delivery of
securities, other underlying assets or principal. Accordingly, the risk of loss
with respect to interest rate, index and mortgage swaps is limited to the net
amount of interest payments that the Fund is contractually obligated to make. If
the other party to an interest rate, index or mortgage swap defaults, the Fund's
risk of loss consists of the net amount of interest payments that the Fund is
contractually entitled to receive, if any. In contrast, currency swaps usually
involve the delivery of the entire principal amount of one designated currency
in exchange for the other designated currency. Therefore, the entire principal
value of a currency swap is subject to the risk that the other party to the swap
will default on its contractual delivery obligations. To the extent that the net
amount payable under an interest rate, index or mortgage swap and the entire
amount of the payment stream payable by a Fund under a currency swap or an
interest rate floor, cap or collar are covered by segregated cash or liquid
assets, the Funds and the Advisers believe that transactions do not constitute
senior securities under the Act and, accordingly, will not treat them as being
subject to a Fund's borrowing restrictions.
The 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 interest rate, mortgage or credit swap transactions unless the
unsecured commercial paper, senior debt or claims-paying ability of the other
party is rated either AA or A-1 or better by Standard & Poor's or Aa or P-1 or
better by Moody's or, if unrated by such rating agencies, determined to be of
comparable quality by the applicable investment adviser. The 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.
B-47
<PAGE>
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 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 Equity Funds may enter into equity swap contracts to invest in a
market without owning or taking physical custody of securities in circumstances
in which direct investment is restricted for legal reasons or is otherwise
impracticable. The counterparty to an equity swap contract will typically be a
bank, investment banking firm or broker/dealer. The counterparty will generally
agree to pay the Fund the amount, if any, by which the notional amount of the
equity swap contract would have increased in value had it been invested in the
particular stocks, plus the dividends that would have been received on those
stocks. The Fund will agree to pay to the counterparty a floating rate of
interest on the notional amount of the equity swap contract plus the amount, if
any, by which that notional amount would have decreased in value had it been
invested in such stocks. Therefore, the return to the Fund on any equity swap
contract should be the gain or loss on the notional amount plus dividends on the
stocks less the interest paid by the Fund on the notional amount.
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. The net amount of the excess, if any, of a Fund's obligations over its
entitlements with respect to each equity swap will be accrued on a daily basis
and an amount of cash or liquid assets, having an aggregate net asset value at
least equal to such accrued excess will be segregated. Inasmuch as these
transactions are entered into for hedging purposes or are offset by segregated
cash or liquid assets, as permitted by applicable law, the 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.
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
B-48
<PAGE>
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. [The Short Duration Government,
Global Income and High Yield Funds may not engage in portfolio securities
lending in excess of 5% of net assets.] Under present regulatory policies, such
loans may be made to institutions such as brokers or dealers and would be
required to be secured continuously by collateral in cash, cash equivalents or
U.S. Government securities maintained on a current basis at an amount at least
equal to the market value of the securities loaned. A Fund would be required to
have the right to call a loan and obtain the securities loaned at any time on
five days' notice. For the duration of a loan, a Fund would continue to receive
the equivalent of the interest or dividends paid by the issuer on the securities
loaned and would also receive compensation from investment of the collateral. A
Fund would not have the right to vote any securities having voting rights during
the existence of the loan, but a Fund would call the loan in anticipation of an
important vote to be taken among holders of the securities or the giving or
withholding of their consent on a material matter affecting the investment. As
with other extensions of credit there are risks of delay in recovering, or even
loss of rights in, the collateral should the borrower of the securities fail
financially. However, the loans would be made only to firms deemed by the
Advisers to be of good standing, and when, in the judgment of the Advisers, the
consideration which can be earned currently from securities loans of this type
justifies the attendant risk. If the Advisers determine to make securities
loans, it is intended that the value of the securities loaned would not exceed
one-third of the value of the total assets of a Fund (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
B-49
<PAGE>
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. The Funds may also realize
a capital gain or loss in connection with these transactions. For purposes of
determining a Fund's duration, the maturity of when-issued or forward commitment
securities will be calculated from the commitment date. A Fund is required to
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.
Investment in Unseasoned Companies
- ----------------------------------
Each Fund may invest [up to 5% of its net assets,] [calculated at the
time of purchase,] in companies (including predecessors) which have operated
less than three years, except that this limitation does not apply to debt
securities which have been rated investment grade or better by at least one
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 Equity Fund reserves the right to invest [up to 5% of its net] and
each Fixed Income Fund reserves the right to invest [up to 10% of its total
assets], calculated at the time of investment in the securities of other
investment companies. Each Fixed Income Fund may not invest more than 5% of its
total assets in the securities of any one investment company. No Fund may
acquire more than 3% of the voting securities of any other investment company.
Pursuant to an exemptive order obtained from the SEC, the Funds may invest in
money market funds for which an Adviser or any of its affiliates serves as
investment adviser. A Fund will indirectly bear its proportionate share of any
management fees and other expenses paid by investment companies in which it
invests in addition to the advisory and administration fees paid by the Fund.
However, to the extent that the Fund invests in a money market fund for which an
Adviser or any of its affiliates acts as adviser, the advisory and
administration fees payable by the Fund to an Adviser or its affiliates will be
reduced by an amount equal to the Fund's proportionate share of the advisory and
administration fees paid by such money market fund to the Adviser or any of its
affiliates.
Each Equity Fund may also invest in SPDRs. SPDRs are interests in a unit
investment trust ("UIT") that may be obtained from the UIT or purchased in the
secondary market (SPDRs are listed on the American Stock Exchange).
The UIT will issue SPDRs in aggregations known as "Creation Units" in
exchange for a "Portfolio Deposit" consisting of (a) a portfolio of securities
substantially similar to the
B-50
<PAGE>
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.
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 CORE U.S. Equity, CORE Large Cap Growth, CORE Large Cap
Value, CORE Small Cap Equity and Short Duration Government Funds) may invest in
World Equity Benchmark Shares ("WEBS") and similar securities that invest in
securities included in foreign securities indices.
Repurchase Agreements
- ---------------------
Each Fund may enter into repurchase agreements with selected
broker-dealers, banks or other financial institutions. A repurchase agreement is
an arrangement under which a Fund purchases securities and the seller agrees to
repurchase the securities within a particular time and at a specified price.
Custody of the securities is maintained by a Fund's custodian. The repurchase
price may be higher than the purchase price, the difference being income to a
Fund, or the purchase and repurchase prices may be the same, with interest at a
stated rate due to a Fund together with the repurchase price on repurchase. In
either case, the income to a Fund is unrelated to the interest rate on the
security subject to the repurchase agreement.
For purposes of the Act and generally for tax purposes, a repurchase
agreement is deemed to be a loan from a Fund to the seller of the security. For
other purposes, it is not 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
B-51
<PAGE>
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 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 advisory agreements with the Advisers or their affiliates, may transfer
uninvested cash balances into a single joint account, the daily aggregate
balance of which will be invested in one or more repurchase agreements.
Reverse Repurchase Agreements
- -----------------------------
The Fixed Income Funds may borrow money for temporary purposes 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.
B-52
<PAGE>
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. 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.
The purchase price and subsequent valuation of restricted securities may
reflect a discount from the price at which such securities trade when they are
not restricted, since the restriction may make them less liquid. The amount of
the discount from the prevailing market price is expected to vary depending upon
the type of security, the character of the issuer, the party who will bear the
expenses of registering the restricted securities and prevailing supply and
demand conditions.
Portfolio Turnover
- ------------------
Each Underlying Fund may engage in active short-term trading to benefit
from yield disparities among different issues of securities or among the markets
for fixed-income securities, or for other reasons. It is anticipated that the
portfolio turnover rate of each Fund will vary from year to year.
INVESTMENT RESTRICTIONS
The following investment restrictions have been adopted by the Trust as
fundamental policies that cannot be changed 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.
B-53
<PAGE>
With respect to the Funds' fundamental investment restriction no. 3, asset
coverage of at least 300% (as defined in the Act), inclusive of any amounts
borrowed, must be maintained at all times.
As a matter of fundamental policy, a Fund may not:
(1) make any investment inconsistent with the Fund's
classification as a diversified company under the Act.
This restriction does not, however, apply to any Fund
classified as a non-diversified company under the Act;
(2) invest 25% or more of its total assets in the
securities of one or more issuers conducting their
principal business activities in the same industry
(excluding investment companies and the U.S. government
or any of its agencies or 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
B-54
<PAGE>
and sell real estate acquired by a Fund as a result of
the ownership of securities;
(7) invest in commodities or commodity contracts, except
that the Fund may invest in currency and financial
instruments and contracts that are commodities or
commodity contracts; or
(8) issue senior securities to the extent such issuance
would violate applicable law.
Each Fund may, notwithstanding any other fundamental investment
restriction or policy, invest some or all of its assets in a single open-end
investment company or series thereof with substantially the same investment
objective, restrictions and policies as the Fund.
In addition to the fundamental policies mentioned above, the Trustees
have adopted the following non-fundamental policies which can be changed or
amended by action of the Trustees without approval of shareholders.
A Fund may not:
(a) Invest in companies for the purpose of exercising control or
management;
(b) Invest more than 15% of the Fund's net assets in illiquid
investments including repurchase agreements maturing in more
than seven days, securities which are not readily marketable and
restricted securities not eligible for resale pursuant to Rule
144A under the 1933 Act;
(c) Purchase additional securities if the Fund's borrowings
(excluding covered mortgage dollar rolls) exceed 5% of its net
assets; or
(d) Make short sales of securities, except short sales against the
box.
MANAGEMENT
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-55
<PAGE>
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation(s)
And Address With Trust During Past 5 Years
- ----------- ---------- ---------------------
<S> <C> <C>
Ashok N. Bakhru, 56 Chairman Chairman of the Board of Trustees - Goldman
1325 Ave. of the Americas & Trustee Sachs Trust (registered investment company);
New York, NY 10019 Executive Vice President - Finance and
Administration and Chief Financial Officer,
Coty Inc. (since April 1996); President, ABN
Associates (July 1994 - March 1996); Senior Vice
President of Scott Paper Company (until June 1994);
Director of Arkwright Mutual Insurance Company
(1994-Present); Trustee of International House of
Philadelphia (1989-Present); Member of Cornell
University Council (1992-Present); Trustee of the
Walnut Street Theater (1992-Present).
*David B. Ford, 52 Trustee Trustee - Goldman Sachs Trust (registered
One New York Plaza investment company); Director, Commodities
New York, NY 10004 Corp. LLC (since April 1997); Managing Director,
J. Aron & Company (since November 1996); Managing
Director, Goldman, Sachs & Co. Investment Banking
Division (since November 1996); Director, CIN Management
(since August 1996); Chief Executive Officer & Managing
Director and Director, Goldman Sachs Asset Management
International (since November 1995 and December 1994,
respectively); Co-Head, Goldman, Sachs & Co. Asset
Management Division (since November 1995); Co-Head and
Director, Goldman Sachs Funds Management Inc. (since
November 1995 and December 1994, respectively); Chairman
and Director, Goldman Sachs Asset Management Japan
Limited (since November 1994).
</TABLE>
B-56
<PAGE>
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation(s)
And Address With Trust During Past 5 Years
- ----------- ---------- ---------------------
<S> <C> <C>
*Douglas C. Grip, 36 Trustee Trustee and President - Goldman Sachs Trust
One New York Plaza & President (registered investment company); Managing
New York, NY 10004 Director, Goldman, Sachs & Co. Asset Management
Division (since November 1997); President, Goldman
Sachs Fund Group (since April 1996); President,
MFS Retirement Services Inc., of Massachusetts Financial
Services (prior thereto).
*John P. McNulty, 46 Trustee Trustee - Goldman Sachs Trust (registered
One New York Plaza investment company); Managing Director, Goldman
New York, NY 10004 Sachs (since 1996); General Partner, J. Aron &
Company (since November 1995); Director and
Co-Head, Goldman Sachs Funds Management Inc.
(since November 1995); Director, Goldman Sachs
Asset Management International (since January
1996); Director, Global Capital Reinsurance
(since 1989); Director, Commodities Corp. LLC
(since April 1997); Limited Partner of Goldman,
Sachs & Co.(1994 - November 1995).
</TABLE>
B-57
<PAGE>
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation(s)
And Address With Trust During Past 5 Years
- ----------- ---------- ---------------------
<S> <C> <C>
Mary P. McPherson, 63 Trustee Trustee - Goldman Sachs Trust (registered
The Andrew W. investment company); Vice President and Senior
Mellon Foundation Program Officer, The Andrew W. Mellon Foundation
140 East 62nd Street (since October 1997); President Emeritus of
New York, NY 10021 Bryn Mawr College (1978-1997); Director of Josiah
Macy, Jr. Foundation (since 1977); Director of the
Philadelphia Contributionship (since 1985); Director
of Amherst College (since 1986); Director of Dayton
Hudson Corporation (1988-1997); Director of the Spenser
Foundation (since 1993); and member of PNC Advisory
Board (since 1993).
*Alan A. Shuch, 49 Trustee Trustee - Goldman Sachs Trust (registered investment
One New York Plaza company); Limited Partner, Goldman, Sachs & Co.
New York, NY 10004 (since 1994); Consultant to Goldman Sachs Asset
Management (since 1994); Director, Chief Operating
Officer and Vice President of Goldman Sachs Funds
Management, Inc. (from November 1993 - November 1994);
President and Chief Operating Officer, GSAM - Japan
Limited (November 1993 - November 1994); Director, Goldman
Sachs Asset Management International (November 1993 -
November 1994); General Partner, Goldman, Sachs & Co.
Investment Banking (December 1986 - November 1994).
</TABLE>
B-58
<PAGE>
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation(s)
And Address With Trust During Past 5 Years
- ----------- ---------- ---------------------
<S> <C> <C>
Jackson W. Smart, Jr., 68 Trustee Trustee - Goldman Sachs Trust (registered
One Northfield Plaza Suite 218 investment company); Chairman, Executive Committee,
Northfield, IL 60093 First Commonwealth, Inc. (a managed dental care company)
(since January 1996); Chairman and Chief Executive
Officer, MSP Communications Inc. (a company engaged in
radio broadcasting) (November 1988 - December 1997);
Director, Federal Express Corporation (NYSE) (since 1976);
Director, Evanston Hospital Corporation (since 1980).
William H. Springer, 69 Trustee Trustee - Goldman Sachs Trust (registered
701 Morningside Drive investment company); Director, Walgreen Co. (a
Lake Forest, IL 60045 retail drug store business) (since April 1998);
Director of Baker, Fentress & Co. (a closed-end,
non-diversified management investment company) (April
1992 - present); Trustee, Northern Institutional Funds
(since April 1984).
</TABLE>
B-59
<PAGE>
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation(s)
And Address With Trust During Past 5 Years
- ----------- ---------- ---------------------
<S> <C> <C>
Richard P. Strubel, 59 Trustee Trustee - Goldman Sachs Trust (registered
737 N. Michigan Ave., Suite 1405 investment company); Managing Director, Tandem
Chicago, IL 60611 Partners, Inc. (since 1990); Director of Kaynar
Technologies Inc. (since March 1997); President
and Chief Executive Officer, Microdot, Inc. (a
diversified manufacturer of fastening systems
and connectors) (January 1984 - October 1994);
Trustee, Northern Institutional Funds (since
December 1982).
*Nancy L. Mucker, 49 Vice President Vice President - Goldman Sachs Trust registered
4900 Sears Tower investment company); Vice President, Goldman,
Chicago, IL 60606 Sachs & Co. (since April 1985); Co-Manager of
Shareholder Servicing of GSAM (since November 1989).
*John M. Perlowski, 34 Treasurer Treasurer - Goldman Sachs Trust (registered
One New York Plaza investment company); Vice President, Goldman,
New York, NY 10004 Sachs & Co. Incorporated (since July 1995);
Director, Investors Bank and Trust (November
1993 - July 1995).
*James A. Fitzpatrick, 38 Vice President Vice President - Goldman Sachs Trust
4900 Sears Tower (registered investment company); Vice President
Chicago, IL 60606 of Goldman Sachs Asset Management (since April
1997); Vice President and General Manager, First
Data Corporation - Investor Services Group
(prior thereto).
</TABLE>
B-60
<PAGE>
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation(s)
And Address With Trust During Past 5 Years
- ----------- ---------- -----------------------
<S> <C> <C>
Jesse Cole, 35 Vice President Vice President - Goldman Sachs Trust
4900 Sears Tower (registered investment company); Vice
Chicago, IL 60606 President, Goldman Sachs Asset Management (June
1998 to Present); Vice President, AIM Management
Group, Inc. (investment adviser) (April 1996-June
1998); Assistant Vice President, The Northern
Trust Company (June 1987-April 1996).
Philip V. Giuca , Jr., 36 Assistant Assistant Treasurer - Goldman Sachs Trust
10 Hanover Square Treasurer (registered investment company); Vice
New York, NY 10004 President, Goldman, Sachs & Co. (May
1992-Present); Tax Accountant, Goldman, Sachs &
Co. (December 1990-May 1992).
Anne Marcel, 40 Vice President Vice President - Goldman Sachs Trust
4900 Sears Tower (registered investment company); Vice
Chicago, IL 60606 President, Goldman Sachs Asset Management
(June 1998-Present); Vice President, Stein Roe &
Farnham, Inc. (October 1992-June 1998).
</TABLE>
B-61
<PAGE>
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation(s)
And Address With Trust During Past 5 Years
- ----------- ---------- ---------------------
<S> <C> <C>
*Michael J. Richman, 38 Secretary Secretary - Goldman Sachs Trust (registered
85 Broad Street investment company); General Counsel of the
New York, NY 10004 Funds Group of Goldman Sachs Asset Management
(since December 1997); Associate General Counsel
of Goldman Sachs Asset Management (February 1994
- December 1997); Vice President and Assistant
General Counsel of Goldman, Sachs & Co. (since
June 1992); Counsel to the Funds Group, GSAM
(June 1992 - December 1997); Partner, Hale and
Dorr (September 1991 - June 1992).
*Howard B. Surloff, 33 Assistant Assistant Secretary - Goldman Sachs Trust
85 Broad Street Secretary (registered investment company); Assistant
New York, NY 10004 General Counsel, Goldman Sachs Asset Management
and Associate General Counsel to the Funds Group
(since December 1997); Assistant General Counsel
and Vice President, Goldman, Sachs & Co.(since
November 1993 and May 1994, respectively);
Counsel to the Funds Group, Goldman Sachs Asset
Management (November 1993 - December 1997);
Associate of Shereff, Friedman, Hoffman &
Goodman (prior thereto).
</TABLE>
B-62
<PAGE>
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation(s)
And Address With Trust During Past 5 Years
- ----------- ---------- ---------------------
<S> <C> <C>
*Valerie A. Zondorak, 32 Assistant Assistant Secretary - Goldman Sachs Trust
85 Broad Street Secretary (registered investment company); Assistant
New York, NY 10004 General Counsel, Goldman Sachs Asset Management
and Assistant General Counsel to the Funds Group
(since December 1997); Vice President and
Assistant General Counsel, Goldman, Sachs &
Co.(since March 1997 and December 1997,
respectively); Counsel to the Funds Group,
Goldman Sachs Asset Management (March 1997 -
December 1997); Associate of Shereff, Friedman,
Hoffman & Goodman (prior thereto).
*Steven E. Hartstein, 35 Assistant Assistant Secretary - Goldman Sachs Trust
85 Broad Street Secretary (registered investment company); Associate,
New York, NY 10004 Goldman, Sachs & Co. (since December 1998);
Legal Products Analyst, Goldman, Sachs & Co.
(June 1993 - December 1998); Funds Compliance
Officer, Citibank Global Asset Management
(August 1991 - June 1993).
*Deborah A. Farrell, 27 Assistant Assistant Secretary - Goldman Sachs Trust
85 Broad Street Secretary (registered investment company); Legal Products
New York, NY 10004 Analyst, Goldman, Sachs & Co. (since December
1998); Legal Assistant, Goldman, Sachs & Co.
(January 1996 - December 1998); Executive
Secretary, Goldman, Sachs & Co. (January 1994 -
January 1996); Legal Secretary, Cleary,
Gottlieb, Steen and Hamilton (September 1990 -
January 1994).
</TABLE>
B-63
<PAGE>
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation(s)
And Address With Trust During Past 5 Years
- ----------- ---------- ---------------------
<S> <C> <C>
*Kaysie P. Uniacke, 37 Assistant Assistant Secretary - Goldman Sachs Trust
One New York Plaza Secretary (registered investment company); Managing
New York, NY 10004 Director, Goldman Sachs Asset Management (since
1997); Vice President and Senior Portfolio
Manager, Goldman Sachs Asset Management (since
1988).
*Elizabeth D. Anderson, 29 Assistant Assistant Secretary - Goldman Sachs Trust
One New York Plaza Secretary (registered investment company); Portfolio
New York, NY 10004 Manager, Goldman Sachs Asset Management (since
April 1996); Junior Portfolio Manager, Goldman
Sachs Asset Management (1995 - April 1996);
Funds Trading Assistant, Goldman Sachs Asset
Management (1993 - 1995); Compliance Analyst,
Prudential Insurance (1991 - 1993).
</TABLE>
Each interested Trustee and officer of the Trust holds comparable
positions with certain other investment companies of which Goldman Sachs, GSAM
or one of their affiliates is the investment adviser, administrator and/or
distributor. As of __________, 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.
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<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 Mutual Funds Complex
Compensation Part of (including the
Name of Trustee from the Portfolios1 Trust's Expenses Trust)2
- --------------- -------------------- ---------------- -------
<S> <C> <C> <C>
Ashok N. Bakhru* $117,065 $0 $117,065
David B. Ford 0 0 0
Douglas C. Grip 0 0 0
John P. McNulty 0 0 0
Mary P. McPherson 90,875 0 90,875
Alan A. Shuch 0 0 0
Jackson W. Smart 84,875 0 84,875
William H. Springer 84,875 0 84,875
Richard P. Strubel 84,875 0 84,875
</TABLE>
- --------------
* Includes compensation as Chairman of the Board of Trustees.
1. Reflects amount paid by Goldman Sachs Variable Insurance Trust
during fiscal year ended December 31, 1998.
2. The Goldman Sachs Funds complex consists of Goldman Sachs
Trust and Goldman Sachs Variable Insurance Trust. Goldman
Sachs Trust consisted of ___ mutual funds, including eight
fixed-income funds, on December 31, 1998. Goldman Sachs
Variable Insurance Trust consisted of 8 mutual funds.
B-65
<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.
Founded in 1869, Goldman Sachs is among the oldest and largest
investment banking firms in the United States. Goldman Sachs is a leader in
developing portfolio strategies and in many fields of investing and financing,
participating in financial markets worldwide and serving individuals,
institutions, corporations and governments. Goldman Sachs is also among the
principal market sources for current and thorough information on companies,
industrial sectors, markets, economies and currencies, and trades and makes
markets in a wide range of equity and debt securities 24-hours a day. The firm
is headquartered in New York and has offices throughout the U.S. and in Beijing,
Brazil, Frankfurt, George Town, Hong Kong, London, Madrid, Mexico City, Milan,
Montreal, Osaka, Paris, Sao Paulo, Seoul, Shanghai, Singapore, Sydney, Taipei,
Tokyo, Toronto, Vancouver and Zurich. It has trading professionals throughout
the United States, as well as in London, Tokyo, Hong Kong and Singapore. The
active participation of Goldman Sachs in the world's financial markets enhances
its ability to identify attractive investments.
The Advisers are able to draw on the substantial research and market
expertise of Goldman Sachs whose investment research effort is one of the
largest in the industry. With an annual equity research budget approaching $200
million, the Goldman Sachs Global Investment Research Department covers
approximately 2,000 companies, including approximately 1,000 U.S. corporations
in 60 industries. The in-depth information and analyses generated by Goldman
Sachs' research analysts are available to the Advisers. For more than a decade,
Goldman Sachs has been among the top-ranked firms in Institutional Investor's
annual "All-America Research Team" survey. In addition, many of Goldman Sachs'
economists, securities analysts, portfolio strategists and credit analysts have
consistently been highly ranked in respected industry surveys conducted in the
U.S. and abroad. Goldman Sachs is also among the leading investment firms using
quantitative analytics (now used by a growing number of investors) to structure
and evaluate portfolios.
In managing the Funds, the Advisers have access to Goldman Sachs'
economics research. The Economics Research Department conducts economic,
financial and currency markets research which analyzes economic trends and
interest and exchange rate movement worldwide. The Economics Research Department
tracks factors such as inflation and money supply figures, balance of trade
figures, economic growth, commodity prices, monetary and
B-66
<PAGE>
fiscal policies, and political events that can influence interest rates and
currency trends. The success of Goldman Sachs' international research team has
brought wide recognition to its members. The team has earned top rankings in the
Institutional Investor's annual "All British Research Team Survey" in the
following categories: Economics (U.K.) 1986-1993; Economics/International
1989-1993; and Currency Forecasting 1986-1993. In addition, the team has also
earned top rankings in the annual "Extel Financial Survey" of U.K. investment
managers in the following categories: U.K. Economy 1989-1995; International
Economies 1986, 1988-1995; International Government Bond Market 1993-1995; and
Currency Movements 1986-1993.
In structuring 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 evaluate 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 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
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.
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<PAGE>
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 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
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<PAGE>
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 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, 1998. 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 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.
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<PAGE>
Management Management Fee
Fund Fee Without Limitation
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 Fund1 $47,801
CORE U.S. Equity Fund2 41,825
CORE Large Cap Growth Fund2 37,366
CORE Large Cap ValueFund3 N/A
CORE Small Cap Equity Fund2 32,003
Capital Growth Fund4 17,067
Mid Cap Value Fund5 18,776
CORE International Equity Fund3 N/A
International Equity Fund1 85,560
Short Duration Government Fund3 N/A
Global Income Fund1 46,434
High Yield Fund6 N/A
- -------------------------------
1 Commenced operations on January 12, 19998.
2 Commenced operations on February 13, 1998.
3 Commenced operations on March 8, 1999.
4 Commenced operations on April 30, 1998.
5 Commenced operations on May 1, 1998.
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<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. 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 its good faith
discretion to be equitable. In some cases, this system may adversely affect the
size or the price of the assets purchased or sold for the Funds.
From time to time, the Funds' activities may be restricted because of
regulatory restrictions applicable to Goldman Sachs and its affiliates, and/or
their internal policies designed to comply with such restrictions. As a result,
there may be periods, for example, when the Advisers and/or their affiliates
will not initiate or recommend certain types of transactions in certain
securities or instruments with respect to which the Advisers and/or their
affiliates are performing services or when position limits have been reached.
In connection with their management of the Funds, the Advisers may have
access to certain fundamental analysis and proprietary technical models
developed by Goldman Sachs and
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<PAGE>
other affiliates. The Advisers will not be under any obligation, however, to
effect transactions on behalf of the Funds in accordance with such analysis and
models. In addition, neither Goldman Sachs nor any of its affiliates will have
any obligation to make available any information regarding their proprietary
activities or strategies, or the activities or strategies used for other
accounts managed by them, for the benefit of the management of the Funds and it
is not anticipated that the Advisers will have access to such information for
the purpose of managing the Funds. The proprietary activities or portfolio
strategies of Goldman Sachs and its affiliates or the activities or strategies
used for accounts managed by them or other customer accounts could conflict with
the transactions and strategies employed by the Advisers in managing the Funds.
The results of each Fund's investment activities may differ
significantly from the results achieved by the Advisers and their affiliates for
their proprietary accounts or accounts (including investment companies or
collective investment vehicles) managed or advised by them. It is possible that
Goldman Sachs and its affiliates and such other accounts will achieve investment
results which are substantially more or less favorable than the results achieved
by a Fund. Moreover, it is possible that a Fund will sustain losses during
periods in which Goldman Sachs and its affiliates achieve significant profits on
their trading for proprietary or other accounts. The opposite result is also
possible.
The investment activities of Goldman Sachs and its affiliates for their
proprietary accounts and accounts under their management may also limit the
investment opportunities for the Fund in certain emerging markets in which
limitations are imposed upon the aggregate amount of investment, in the
aggregate or individual issuers, by affiliated foreign investors.
An investment policy committee which may include partners of Goldman
Sachs and its affiliates may develop general policies regarding a Fund's
activities but will not be involved in the day-to-day management of such Fund.
In such instances, those individuals may, as a result, obtain information
regarding the Fund's proposed investment activities which is not generally
available to the public. In addition, by virtue of their affiliation with
Goldman Sachs, any such member of an investment policy committee will have
direct or indirect interests in the activities of Goldman Sachs and its
affiliates in securities and investments similar to those in which the Fund
invests.
In addition, certain principals and certain of the employees of the
Advisers are also principals or employees of Goldman Sachs or their affiliated
entities. As a result, the performance by these principals and employees of
their obligations to such other entities may be a consideration of which
investors in the Funds should be aware.
Each Adviser may enter into transactions and invest in currencies or
instruments on behalf of a Fund in which customers of Goldman Sachs serve as the
counterparty, principal or issuer. In such cases, such party's interests in the
transaction will be adverse to the interests of a Fund, and such party may have
no incentive to assure that the Funds obtain the best possible prices or terms
in connection with the transactions. Goldman Sachs and its affiliates may also
create, write or issue derivative instruments for customers of Goldman Sachs or
its affiliates, the underlying securities or instruments of which may be those
in which a Fund invests or which
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<PAGE>
may be based on the performance of a Fund. The Funds may, subject to applicable
law, purchase investments which are the subject of an underwriting or other
distribution by Goldman Sachs or its affiliates and may also enter transactions
with other clients of Goldman Sachs or its affiliates where such other clients
have interests adverse to those of the Funds. At times, these activities may
cause departments of Goldman Sachs or its affiliates to give advice to clients
that may cause these clients to take actions adverse to the interests of the
Funds. To the extent affiliated transactions are permitted, the Funds will deal
with Goldman Sachs and its affiliates on an arms-length basis.
Each Fund will be required to establish business relationships with its
counterparties based on the Fund's own credit standing. Neither Goldman Sachs
nor its affiliates will have any obligation to allow their credit to be used in
connection with a Fund's establishment of its business relationships, nor is it
expected that a Fund's counterparties will rely on the credit of Goldman Sachs
or any of its affiliates in evaluating the Fund's creditworthiness.
It is possible that a Fund's holdings will include securities of
entities for which Goldman Sachs performs investment banking services as well as
securities of entities in which Goldman Sachs makes a market. From time to time,
Goldman Sachs' activities may limit the Funds' flexibility in purchases and
sales of securities. When Goldman Sachs is engaged in an underwriting or other
distribution of securities of an entity, the Advisers may be prohibited from
purchasing or recommending the purchase of certain securities of that entity for
the Funds.
Distributor and Transfer Agent
- ------------------------------
Goldman Sachs serves as the exclusive distributor of the Funds pursuant
to a "best efforts" arrangement as provided by a distribution agreement with the
Trust on behalf of each Fund. Shares of the Funds are offered and sold on a
continuous basis by Goldman Sachs, acting as agent. Under the distribution
agreement, each Fund is responsible for, among other things, the payment of all
fees and expenses in connection with the preparation and filing of any
registration statement and prospectus covering the issue and sale of shares, and
the registration and qualification of shares for sale with the SEC and in the
various states, including registering the Fund as a broker or dealer. Each Fund
will also pay the fees and expenses of preparing, printing and mailing
prospectuses annually to existing shareholders and any notice, proxy statement,
report, prospectus or other communication to shareholders of the Fund, printing
and mailing confirmations of purchases of shares, any issue taxes or any initial
transfer taxes, a portion of toll-free telephone service for shareholders,
wiring funds for share purchases and redemptions (unless paid by the shareholder
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
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<PAGE>
qualification and registration as a broker or dealer under federal and state
laws, a portion of the toll-free telephone service and of computer terminals,
and of any activity which is primarily intended to result in the sale of shares
issued by each Fund.
As agent, the Distributor currently offers shares of each Fund on a
continuous basis to the separate accounts of Participating Insurance Companies
in all states in which such Fund may from time to time be registered or where
permitted by applicable law. The underwriting agreements provide that the
Distributor accepts orders for shares at net asset value without sales
commission or load being charged. The Distributor has made no firm commitment to
acquire shares of any Fund.
Goldman Sachs serves as the Trust's transfer agent. Under its transfer
agency agreement with the Trust, Goldman Sachs has undertaken with the Trust to
(i) record the issuance, transfer and redemption of shares, (ii) provide
confirmations of purchases and redemptions, and quarterly statements, as well as
certain other statements, (iii) provide certain information to the Trust's
custodian and the relevant sub-custodian in connection with redemptions, (iv)
provide dividend crediting and certain disbursing agent services, (v) maintain
shareholder accounts, (vi) provide certain state Blue Sky and other information,
(vii) provide shareholders and certain regulatory authorities with tax related
information, (viii) respond to shareholder inquires, and (ix) render certain
other miscellaneous services. 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 Fund1 $26,530
CORE U.S. Equity Fund2 26,705
CORE Large Cap Growth Fund2 25,676
CORE Large Cap Value Fund3 N/A
CORE Small Cap Equity Fund2 26,065
Capital Growth Fund4 21,905
Mid Cap Value Fund5 18,123
CORE International Equity Fund3 N/A
International Equity Fund1 28,662
Short Duration Government Fund3 N/A
Global Income Fund1 27,998
High Yield Fund6 N/A
- --------------------------
1 Commenced operations on January 12, 19998.
2 Commenced operations on February 13, 1998.
3 Commenced operations on March 8, 1999.
4 Commenced operations on April 30, 1998.
5 Commenced operations on May 1, 1998.
6 Not Operational.
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.
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<PAGE>
Custodian
- ---------
State Street, P.O. Box 1776, Boston, Massachusetts 02105, is the
custodian of the Trust's portfolio securities and cash. State Street also
maintains the Trust's accounting records. State Street may appoint
sub-custodians from time to time to hold certain securities purchased by the
Trust and to hold cash for the Trust.
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.
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
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<PAGE>
that transaction. Such practice is subject to (i) a good faith determination by
the Trustees that such commission is reasonable in light of the services
provided; and (ii) to such policies as the Trustees may adopt from time to time.
While the Advisers generally seek reasonably competitive spreads or commissions,
a Fund will not necessarily be paying the lowest spread or commission available.
Within the framework of this policy, the Advisers will consider research and
investment services provided by brokers or dealers who effect or are parties to
portfolio transactions of a Fund, the Advisers and their affiliates, or their
other clients. Such research and investment services are those which brokerage
houses customarily provide to institutional investors and include research
reports on particular industries and companies, economic surveys and analyses,
recommendations as to specific securities and other products or services (e.g.,
quotation equipment and computer related costs and expenses), advice concerning
the value of securities, the advisability of investing in, purchasing or selling
securities, the availability of securities or the purchasers or sellers of
securities, furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy and performance of
accounts, effecting securities transactions and performing functions incidental
thereto (such as clearance and settlement) and providing lawful and appropriate
assistance to the Advisers in the performance of their decision-making
responsibilities. Such services are used by the Advisers in connection with all
of their investment activities, and some of such services obtained in connection
with the execution of transactions for a Fund may be used in managing other
investment accounts. Conversely, brokers furnishing such services may be
selected for the execution of transactions of such other accounts, whose
aggregate assets are far larger than those of a Fund, and the services furnished
by such brokers may be used by the Advisers in providing management services for
the Trust.
In circumstances where two or more broker-dealers offer comparable
prices and execution capability, preference may be given to a broker-dealer
which has sold shares of the Fund as well as shares of other investment
companies or accounts managed by the Advisers. This policy does not imply a
commitment to execute all portfolio transactions through all broker-dealers that
sell shares of the Fund.
On occasions when an Adviser deems the purchase or sale of a security
to be in the best interest of a Fund as well as its other customers (including
any other fund or other investment company or advisory account for which such
Adviser acts as investment adviser or subadviser), the Adviser, to the extent
permitted by applicable laws and regulations, may aggregate the securities to be
sold or purchased for the Fund with those to be sold or purchased for such 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
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<PAGE>
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-77
<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
Fiscal Year Ended
December 31, 1998:
<S> <C> <C> <C> <C> <C> <C>
Growth and Income Fund $27,909 15.7 (%)1 6.1 (%)2 N/A
CORE U.S. Equity Fund 9,120 24.4 (%)1 32.1 (%)2 N/A
CORE Large Cap Growth Fund 10,573 22.1 (%)1 35.9 (%)2 N/A
CORE Large Cap Value Fund3 N/A N/A N/A N/A
CORE Small Cap Equity Fund 19,041 20.8 (%)1 43.2 (%)2 N/A
Capital Growth Fund 5,429 0.3 (%)1 18.6 (%)2 N/A
Mid Cap Value Fund 12,803 6.8 (%)1 3.6 (%)2 N/A
CORE International Equity Fund3 N/A N/A N/A N/A N/A
International Equity Fund 47,226 10.4 (%)1 2.6 (%)2 N/A
Short Duration Government Fund3 N/A N/A N/A N/A
Global Income Fund (%)1 (%)2 N/A
High Yield Fund3 N/A N/A N/A N/A
- ----------------------------
</TABLE>
1 Percentage of total commissions paid.
2 Percentage of total amount of transactions involving the payment of
commissions effected through affiliated persons.
3 Not operational.
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<PAGE>
During the fiscal year ended December 31, 1998, the Trust acquired and
sold securities of its regular broker/dealers. As of December 31, 1998, the
Trust held the following amounts of securities of its regular broker/dealers, as
defined in Rule 10b-1 under the Act, or their parents ($ in thousands):
Fund Broker/Dealer Amount
Growth and Income Fund Donaldson, 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 N/A N/A
CORE Small Cap Equity Fund N/A N/A
Capital Growth Fund Donaldson, Lufkin & Jenrette, Inc $ 11
J.P. Morgan Securities, Inc. $ 51
Mid Cap Value Fund Donaldson, Lufkin & Jenrette, Inc. $ 186
J.P. Morgan Securities, Inc. $ 867
Core International Equity Fund N/A N/A
International Equity Fund N/A N/A
Short Duration Government Fund N/A N/A
Global Income Fund Merrill Lynch & Co. $ 102
High Yield Fund N/A N/A
NET ASSET VALUE
Under the Act, the Trustees are responsible for determining in good
faith the fair value of securities of each Fund. In accordance with procedures
adopted by the Trustees, the net asset value per share of each Fund is
calculated by determining the value of the net assets attributable to that Fund
and dividing by the number of outstanding shares. All securities are valued as
of the close of regular trading on the New York Stock Exchange (normally, but
not always, 3:00 p.m. Chicago time and 4:00 p.m. New York time) on each Business
Day. The term "Business Day" means any day the New York Stock Exchange is open
for trading which is Monday through Friday except for holidays. The New York
Stock Exchange is closed on the following holidays: New Year's Day, Martin
Luther King, Jr. Day, Presidents' Day (observed), Good Friday, Memorial Day
(observed), Independence Day (observed), Labor Day, Thanksgiving Day and
Christmas Day (observed).
In the event that the New York Stock Exchange or the national
securities exchange on which stock options are traded adopt different trading
hours on either a permanent or temporary basis, the Trustees will reconsider the
time at which net asset value is computed. In addition, each Fund may compute
its net asset value as of any time permitted pursuant to any exemption, order or
statement of the SEC or its staff.
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 mean between the closing bid and asked prices, or if closing bid and asked
prices are not available, at the exchange defined close price on the exchange or
system in which such securities are principally traded. If the relevant exchange
or system has not closed by the above-mentioned time for determining the Fund's
net asset value, the securities will be valued at the mean between the bid and
the asked prices at the time the net asset value is determined; (b)
over-the-counter securities not quoted on NASDAQ will be valued at the last sale
price on the valuation day or, if no sale occurs, at the mean between the last
bid and asked price; (c) equity securities for which no prices are obtained
under sections (a) or (b) hereof, including those for which a pricing service
supplies no exchange quotation or a quotation that is believed by the portfolio
manager/trader to be inaccurate, will be valued
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<PAGE>
at their fair value in accordance with procedures approved by the Board of
Trustees; (d) fixed-income securities with a remaining maturity of 60 days or
more for which accurate market quotations are readily available will be valued
according to dealer-supplied bid quotations or bid quotations from a recognized
pricing service (e.g., Merrill Lynch, J.J. Kenny, Muller Data Corp., Bloonberg,
EJV, Reuters or Standard & Poor's); (e) fixed-income securities for which
quotations are not readily available are valued by the 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 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
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 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.
B-80
<PAGE>
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.
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
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<PAGE>
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
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
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<PAGE>
Interbank Offered Rate; (ff) historical data concerning the performance of
adjustable and fixed-rate mortgage loans; and (gg) the Tokyo Price Index. The
composition of the investments in such indices and the characteristics of such
benchmark investments are not identical to, and in some cases are very different
from, those of the Fund's portfolio. These indices and averages are generally
unmanaged and the items included in the calculations of such indices and
averages may not be identical to the formulas used by a Fund to calculate its
performance figures.
Information used in advertisements and materials furnished to present
and prospective investors may include statements or illustrations relating to
the appropriateness of certain types of securities and/or mutual funds to meet
specific financial goals. Such information may address:
. cost associated with aging parents;
. funding a college education (including its actual and estimated
cost);
. health care expenses (including actual and projected expenses);
. long-term disabilities (including the availability of, and
coverage provided by, disability insurance);
. retirement (including the availability of social security
benefits, the tax treatment of such benefits and statistics and
other information relating to maintaining a particular standard
of living and outliving existing assets);
. asset allocation strategies and the benefits of diversifying
among asset classes;
. the benefits of international and emerging market investments;
. the effects of inflation on investing and saving;
. the benefits of establishing and maintaining a regular pattern
of investing and the benefits of dollar-cost averaging; and
. measures of portfolio risk, including but not limited to, alpha,
beta and standard deviation.
The Trust may from time to time use comparisons, graphs or charts in
advertisements to depict the following types of information:
. the performance of various types of securities (common stocks,
small company stocks, taxable money market funds, U.S. Treasury
securities, adjustable rate mortgage securities, government
securities and municipal bonds) over time.
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<PAGE>
However, the characteristics of these securities are not
identical to, and may be very different from, those of a
Fund;
. the dollar and non-dollar based returns of various market
indices (i.e., Morgan Stanley Capital International EAFE Index,
FT-Actuaries Europe & Pacific Index and the Standard & Poor's
Index of 500 Common Stocks) over varying periods of time;
. total stock market capitalizations of specific countries and
regions on a global basis;
. performance of securities markets of specific countries and
regions;
. value of a dollar amount invested in a particular market or type
of security over different periods of time;
. volatility of total return of various market indices (i.e.
Lehman Government Bond Index, S&P 500 Index, IBC/Donoghue's
Money Fund Average/ All Taxable Index) over varying periods of
time;
. credit ratings of domestic government bonds in various
countries;
. price volatility comparisons of types of securities over
different periods of time; and
. price and yield comparisons of a particular security over
different periods of time.
In addition, the Trust may from time to time include rankings of
Goldman, Sachs & Co.'s research department by publications such as the
Institutional Investor and the Wall Street Journal in advertisements.
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<PAGE>
INTRODUCTION
VALUE OF $1,000 INVESTMENT
(AVERAGE ANNUAL TOTAL RETURN)
<TABLE>
<CAPTION>
Fund Time Period Assuming expense Assuming no
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.
* Represents an aggregate total return (not annualized) since this Fund has not
completed a full twelve months of operations.
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<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.
B-86
<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 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
B-87
<PAGE>
events that the Trustees may take into account in making such determination
include (i) the inability of the Trust or any successor series or class to
maintain its assets at an appropriate size; (ii) changes in laws or regulations
governing the Trust, series or class or affecting assets of the type in which it
invests; or (iii) economic developments or trends having a significant adverse
impact on their business or operations.
The Declaration of Trust authorizes the Trustees without shareholder
approval to cause the Trust, or any series thereof, to merge or consolidate with
any corporation, association, trust or other organization or sell or exchange
all or substantially all of the property belonging to the Trust or any series
thereof. In addition, the Trustees, without shareholder approval, may adopt a
master-feeder structure by investing all or a portion of the assets of a series
of the Trust in the securities of another open-end investment company.
The Declaration of Trust permits the Trustees to amend the Declaration
of Trust without a shareholder vote. However, shareholders of the Trust have the
right to vote on any amendment (i) that would affect the voting rights of
shareholders; (ii) that is required by law to be approved by shareholders; (iii)
that would amend the voting provisions of the Declaration of Trust; or (iv) that
the Trustees determine to submit to shareholders.
The Trustees may appoint separate Trustees with respect to one or more
series or classes of the Trust's shares (the "Series Trustees"). Series Trustees
may, but are not required to, serve as Trustees of the Trust or any other series
or class of the Trust. The Series Trustees have, to the exclusion of any other
Trustees of the Delaware Trust, all the powers and authorities of Trustees under
the Trust Instrument with respect to any other series or class.
[Add 5% Shareholders]
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.
B-88
<PAGE>
In addition to the requirements under Delaware law, the Declaration of
Trust provides that shareholders of a series may bring a derivative action on
behalf of the series only if the following conditions are met: (a) shareholders
eligible to bring such derivative action under Delaware law who hold at least
10% of the outstanding shares of the series, or 10% of the outstanding shares of
the class to which such action relates, shall join in the request for the
Trustees to commence such action; and (b) the Trustees must be afforded a
reasonable amount of time to consider such shareholder request and to
investigate the basis and to employ other advisers in considering the merits of
the request and shall require an undertaking by the shareholders making such
request to reimburse the Fund for the expense of any such advisers in the event
that the Trustees determine not to bring such action.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against liability to which he or she
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
or her office.
[If the Funds have capital loss carryforwards, we may want to add this
information similar to other SAIs]
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
B-89
<PAGE>
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.
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
B-90
<PAGE>
net short-term capital gain in excess of net long-term capital loss, certain net
realized foreign exchange gains and any other taxable income other than "net
capital gain," as defined below, and is reduced by deductible expenses), and at
least 90% of the excess of its gross tax-exempt interest income (if any) over
certain disallowed deductions, such Fund (but not its shareholders) will be
relieved of federal income tax on any income of the Fund, including long-term
capital gains, distributed to shareholders. However, if a Fund retains any
investment company taxable income or "net capital gain" (the excess of net
long-term capital gain over net short-term capital loss), it will be subject to
a tax at regular corporate rates on the amount retained. If the Fund retains any
net capital gain, the Fund may designate the retained amount as undistributed
capital gains in a notice to its shareholders who, if subject to U.S. federal
income tax on long-term capital gains, (i) will be required to include in income
for federal income tax purposes, as long-term capital gain, their shares of such
undistributed amount, and (ii) will be entitled to credit their proportionate
shares of the tax paid by the Fund against their U.S. federal income tax
liabilities, if any, and to claim refunds to the extent the credit exceeds such
liabilities. For U.S. federal income tax purposes, the tax basis 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 carry forwards 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 Caqp Growth Fund 628,000 2006
- --------------------------------------------------------------------------------
CORE Small Cap Equity Fund 760,000 2006
- --------------------------------------------------------------------------------
Capital Growth Fund 22,000 2006
- --------------------------------------------------------------------------------
Mid Cap Equity 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 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
B-91
<PAGE>
addition, a segregated asset account with respect to a variable life insurance
contract is treated as adequately diversified to the extent of its investment in
securities issued by the United States Treasury.
For purposes of these alternative diversification tests, a segregated
asset account investing in shares of a regulated investment company will be
entitled to "look through" the regulated investment company to its pro rata
portion of the regulated investment company's assets, provided that the shares
of such regulated investment company are held only by insurance companies and
certain fund managers (a "Closed Fund").
If the segregated asset account upon which a variable contract is based
is not "adequately diversified" under the foregoing rules for each calendar
quarter, then (a) the variable contract is not treated as a life insurance
contract or annuity contract under the Code for all subsequent periods during
which such account is not "adequately diversified" and (b) the holders of such
contract must include as ordinary income the "income on the contract" for each
taxable year. Further, the income on a life insurance contract for all prior
taxable years is treated as received or accrued during the taxable year of the
policyholder in which the contract ceases to meet the definition of a "life
insurance contract" under the Code. The "income on the contract" is, generally,
the excess of (i) the sum of the increase in the net surrender value of the
contract during the taxable year and the cost of the life insurance protection
provided under the contract during the year, over (ii) the premiums paid under
the contract during the taxable year. In addition, if a Fund does not constitute
a Closed Fund, the holders of the contracts and annuities which invest in the
Fund through a segregated asset account may be treated as owners of Fund shares
and may be subject to tax on distributions made by the Fund.
In order to avoid a 4% federal excise tax, each Fund must distribute
(or be deemed to have distributed) by December 31 of each calendar year at least
98% of its taxable ordinary income for such year, at least 98% of the excess of
its capital gains over its capital losses (generally computed on the basis of
the one-year period ending on October 31 of such year), and all taxable ordinary
income and the excess of capital gains over capital losses for the previous year
that were not distributed for such year and on which the Fund paid no federal
income tax. For federal income tax purposes, dividends declared by a Fund in
October, November or December to shareholders of record on a specified date in
such a month and paid during January of the following year are taxable to such
shareholders as if received on December 31 of the year declared. The Funds
anticipate that they will generally make timely distributions of income and
capital gains in compliance with these requirements so that they will generally
not be required to pay the excise tax. For federal income tax purposes, each
Fund is permitted to carry forward a net capital loss in any year to offset its
own capital gains, if any, during the eight years following the year of the
loss.
Certain 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-92
<PAGE>
State and Local
- ---------------
Each Fund may be subject to state or local taxes in jurisdictions in
which such Fund may be deemed to be doing business. In addition, in those states
or localities which have income tax laws, the treatment of such Fund and its
shareholders under such laws may differ from their treatment under federal
income tax laws, and investment in such Fund may have tax consequences for
shareholders different from those of a direct investment in such Fund's
portfolio securities.
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 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.
B-93
<PAGE>
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-94
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST GROWTH AND INCOME FUND
Statement of Investments
December 31, 1998
<TABLE>
<CAPTION>
Shares Description Value
<C> <S> <C>
Common Stocks - 94.0%
Aerospace/Defense - 5.9%
2,500 Boeing Co. $ 81,563
4,600 General Motors Corp. Class H (Hughes) 182,563
1,100 Honeywell Inc 82,844
2,600 Lockheed Martin Corp. 220,350
4,900 Raytheon Co. * 253,269
----------
820,589
-------------------------------------------------------------
Auto Suppliers - 2.4%
1,300 Federal-Mogul Corp. 77,350
3,100 Lucasvarity PLC-ADR 103,850
2,400 Magna International, Inc. 148,800
----------
330,000
-------------------------------------------------------------
Auto/Vehicle - 3.6%
1,400 Ford Motor Co. 82,162
3,800 General Motors Corp. 271,937
6,000 Volvo Aktiebolaget ADR B 139,875
----------
493,974
-------------------------------------------------------------
Banks - 9.0%
5,100 BankAmerica Corp. 306,637
6,300 Bank One Corp. 321,694
3,000 Chase Manhattan Corp. 204,187
5,400 First Union Corp. 328,387
2,100 Wells Fargo & Co. 83,869
----------
1,244,774
-------------------------------------------------------------
Broadcast Media - 0.6%
1,900 Mediaone Group, Inc. 89,300
-------------------------------------------------------------
Chemical Products - 1.1%
1,500 Du Pont (E.I.) de Nemours & Co. 79,594
1,100 Minnesota Mining and Manufacturing Co. 78,238
----------
157,832
-------------------------------------------------------------
Construction/Environmental Services - 2.1%
6,600 Browning-Ferris Industries, Inc. 187,687
2,200 Waste Management, Inc. 102,575
----------
290,262
-------------------------------------------------------------
Consumer Staples - 0.6%
1,800 Corning, Inc. 81,000
-------------------------------------------------------------
Department Stores - 3.5%
3,000 Dayton Hudson Corp. 162,750
3,100 Federated Department Stores, Inc.* 135,044
4,400 Sears Roebuck & Co. 187,000
----------
484,794
-------------------------------------------------------------
Electronics & Other Electrical Equipment - 0.5%
1,000 Philips Electronics NV 67,688
-------------------------------------------------------------
Energy Refining & Marketing - 1.1%
3,400 Tosco Corp. 87,975
2,000 USX-Marathon Group, Inc. 60,250
----------
148,225
-------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Shares Description Value
<C> <S> <C>
Common Stocks - (continued)
Enterprise Systems - 1.8%
1,200 Hewlett-Packard Co. $ 81,975
500 International Business Machines, Inc. 92,375
600 Xerox Corp. 70,800
----------
245,150
--------------------------------------------------------------
Entertainment & Leisure - 2.4%
9,600 Hilton Hotels Corp. 183,600
9,900 Mirage Resorts, Inc.* 147,881
----------
331,481
--------------------------------------------------------------
Food & Beverages - 3.2%
10,900 Archer Daniels Midland Co. 187,344
2,700 Conagra, Inc. 85,050
2,600 Ralston Purina Co. 84,175
1,000 Unilever NV 82,938
----------
439,507
--------------------------------------------------------------
Forest Products - 1.1%
2,500 Georgia-Pacific Corp. 146,406
--------------------------------------------------------------
Health Suppliers/Services - 1.2%
1,300 Baxter International, Inc. 83,606
1,000 Johnson & Johnson 83,875
----------
167,481
--------------------------------------------------------------
Healthcare Management - 5.6%
4,500 Aetna, Inc. 353,812
6,600 Columbia/HCA Healthcare Corp. 163,350
9,600 Tenet Healthcare Corp.* 252,000
----------
769,162
--------------------------------------------------------------
Insurance Life - 1.4%
2,500 Cigna Corp. 193,281
--------------------------------------------------------------
Insurance Property and Casualty - 2.8%
4,300 Allstate Corp. 166,087
4,000 Hartford Financial Services Group, Inc. 219,500
----------
385,587
--------------------------------------------------------------
Insurance Services - 3.5%
3,400 Loews Corp. 334,050
3,700 Provident Companies, Inc. 153,550
----------
487,600
--------------------------------------------------------------
Integrated Oil - 7.4%
4,100 Atlantic Richfield Co. 267,525
4,800 Elf Aquitaine ADR 271,800
1,100 Exxon Corp. 80,437
4,200 Occidental Petroleum Corp. 70,875
5,600 Royal Dutch Petroleum Co. 268,100
1,200 Texaco, Inc. 63,450
----------
1,022,187
--------------------------------------------------------------
Logistics/Rail - 0.5%
1,900 Burlington Northern Santa Fe 64,125
--------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST GROWTH AND INCOME FUND
Statement of Investments
December 31, 1998
<TABLE>
<CAPTION>
Shares Description Value
<C> <S> <C>
Common Stocks - (continued)
Media & Communications - 3.5%
700 Alltel Corporation $ 41,869
2,800 CBS, Inc. 91,700
1,200 Gannett Co. 77,400
4,800 New York Times Co. 166,500
1,700 U.S. West, Inc. 109,863
----------
487,332
-----------------------------------------------------------
Nonferrous Metals - 0.6%
1,100 Aluminum Company of America* 82,019
-----------------------------------------------------------
Oil & Gas Services - 1.6%
4,700 Halliburton Co. 139,238
3,300 Transocean Offshore, Inc. 88,481
----------
227,719
-----------------------------------------------------------
Packaging - 1.0%
4,300 Crown Cork & Seal, Inc. 132,494
-----------------------------------------------------------
Personal Computers and Peripherals - 0.5%
1,800 Compaq Computer Corp. 75,487
-----------------------------------------------------------
Pharmaceuticals - 1.5%
2,100 American Home Products Corp. 118,256
1,500 Pharmacia & Upjohn, Inc. 84,938
----------
203,194
-----------------------------------------------------------
Publishing - 1.0%
4,300 Dun & Bradstreet Corp. 135,719
-----------------------------------------------------------
Recreational Products - 1.1%
4,100 Hasbro, Inc. 148,113
-----------------------------------------------------------
Semiconductors - 0.6%
700 Intel Corp. 82,994
-----------------------------------------------------------
Software & Services - 1.8%
7,900 First Data Corp. 250,331
-----------------------------------------------------------
Specialty Finance & Agencies - 1.1%
4,800 C.I.T. Group, Inc. 152,700
-----------------------------------------------------------
Specialty Retail - 1.7%
3,000 TJX Companies, Inc. 87,000
9,000 Toys R US, Inc.* 151,875
----------
238,875
-----------------------------------------------------------
Telecommunications - 6.1%
3,500 AT&T Corp. 263,375
5,800 BCE, Inc. 220,037
1,600 Bellsouth Corp. 79,800
3,100 GTE Corp. 201,500
1,500 Tele Communications, Inc. - Liberty* 82,969
----------
847,681
-----------------------------------------------------------
Tire & Other Related Rubber Products - 0.5%
1,500 Goodyear Tire & Rubber Co. 75,656
-----------------------------------------------------------
Tobacco - 4.2%
7,900 Philip Morris Co., Inc. 422,650
5,100 RJR Nabisco Holdings, Corp. 151,406
----------
574,056
-----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Shares Description Value
<C> <S> <C>
Common Stocks - (continued)
Utilities - 5.9%
1,500 Consolidated Edison, Inc. $ 79,312
5,400 Entergy Corp. 168,075
6,400 Northeast Utilities* 102,400
2,500 P G & E Corporation 78,750
8,700 Pacificorp 183,244
5,100 Unicom Corp. 196,669
-----------
808,450
-----------------------------------------------------
TOTAL COMMON STOCKS
(Cost $12,728,418) $12,983,225
-----------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
<S> <C> <C> <C>
U.S. Treasury Obligation - 0.7%
U.S. Treasury Bill
$100,000 4.40%(a) 02/04/99 $ 99,588
-----------------------------------------------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATION
(Cost $99,588) $ 99,588
-----------------------------------------------------------------------------------------------
Repurchase Agreement - 5.1%
Joint Repurchase Agreement Account(b)
$700,000 4.89% 01/04/99 $ 700,000
-----------------------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENT
(Cost $700,000) $ 700,000
-----------------------------------------------------------------------------------------------
TOTAL INVESTMENTS
(Cost $13,528,006)(c) $13,782,813
-----------------------------------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $ 674,983
Gross unrealized loss for investments in which
cost exceeds value (493,329)
-----------------------------------------------------------------------------------------------
Net unrealized gain $ 181,654
-----------------------------------------------------------------------------------------------
</TABLE>
* Non-income producing security.
(a) The interest rate disclosed for the security represents effective yield
to maturity.
(b) The repurchase agreement is fully collateralized by Federal Agency
obligations.
(c) The aggregate cost for federal income tax purposes is $13,601,159.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
------------------------------------------------------------------------------
Investment Abbreviations:
ADR--American Depository Receipt
------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST CORE U.S. EQUITY FUND
Statement of Investments
December 31, 1998
<TABLE>
<CAPTION>
Shares Description Value
<C> <S> <C>
Common Stocks - 96.4%
Aerospace/Defense - 2.3%
2,100 General Motors Corp. Class H (Hughes) $ 83,344
800 Honeywell, Inc. 60,250
800 United Technologies Corp. 87,000
----------
230,594
---------------------------------------------------------------
Agriculture/Heavy Equipment - 0.5%
400 Case Corp. 8,725
700 Caterpillar, Inc. 32,200
200 Deere & Co. 6,625
----------
47,550
---------------------------------------------------------------
Airlines - 0.8%
900 AMR Corp.* 53,437
400 Delta Air Lines, Inc. 20,800
----------
74,237
---------------------------------------------------------------
Alcohol - 0.3%
500 Anheuser Busch Companies, Inc. 32,812
---------------------------------------------------------------
Auto/ Vehicle - 2.5%
498 Daimlerchrysler AG 47,839
2,700 Ford Motor Co. 158,456
800 Hertz Corp. 36,500
----------
242,795
---------------------------------------------------------------
Banks - 3.0%
2,331 BankAmerica Corp. 140,151
600 Bank of New York, Inc. 24,150
324 Bank One Corp. 16,544
1,400 Chase Manhattan Corp. 95,287
600 U.S. Bancorp 21,300
----------
297,432
---------------------------------------------------------------
Basic Industries - 0.3%
200 Aluminum Company of America* 14,913
900 Barrick Gold Corp. 17,550
----------
32,463
---------------------------------------------------------------
Chemical Products - 2.4%
100 Avery Dennison Corp. 4,506
1,300 Dow Chemicals Co. 118,219
500 Du Pont (E.I.) de Nemours & Co. 26,531
600 Millennium Chemicals, Inc. 11,925
200 Minnesota Mining and Manufacturing Co. 14,225
300 Ppg Industries, Inc. 17,475
2,000 Solutia, Inc. 44,750
----------
237,631
---------------------------------------------------------------
Computer Services/Software - 1.0%
1,900 Gateway 2000, Inc.* 97,256
---------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Shares Description Value
<C> <S> <C>
Common Stocks - (continued)
Conglomerates - 0.5%
500 Allied Signal, Inc. $ 22,156
400 Tyco International, Ltd. 30,175
----------
52,331
--------------------------------------------------------------
Construction/Environmental Services - 0.1%
300 Fluor Corp. 12,769
--------------------------------------------------------------
Consumer Products - 0.6%
700 Eastman Kodak Co. 50,400
400 Sara Lee Corp. 11,275
----------
61,675
--------------------------------------------------------------
Consumer Staples - 1.8%
600 Clorox Co. 70,087
600 Gillette Co. 28,987
900 Procter & Gamble Co. 82,181
----------
181,255
--------------------------------------------------------------
Electronics & Other Electrical Equipment - 4.2%
700 Emerson Electric Co.* 42,350
3,600 General Electric Co. 367,425
----------
409,775
--------------------------------------------------------------
Enterprise Systems - 5.4%
400 Ceridian Corp.* 27,925
500 EMC Corp. 42,500
400 Hewlett-Packard Co. 27,325
1,600 International Business Machines, Inc. 295,600
800 Unisys Corp.* 27,550
900 Xerox Corp. 106,200
----------
527,100
--------------------------------------------------------------
Entertainment & Leisure - 0.6%
200 Carnival Cruise Lines Corp. 9,600
200 Viacom, Inc. Class B* 14,800
1,200 Walt Disney Co. 36,000
----------
60,400
--------------------------------------------------------------
Financial Services - 0.4%
400 American Express Co. 40,900
--------------------------------------------------------------
Food & Beverages - 2.8%
1,890 Archer Daniels Midland Co. 32,484
1,700 Coca Cola Co. 113,687
300 Interstate Bakeries Corp. 7,931
800 Pepsico, Inc. 32,750
1,100 Unilever NV 91,231
----------
278,083
--------------------------------------------------------------
Health Suppliers/Services - 2.0%
200 Arterial Vascular Engineering, Inc.* 10,500
450 Cardinal Health, Inc. 34,144
200 Guidant Corp. 22,050
1,500 Johnson & Johnson 125,813
----------
192,507
--------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST CORE U.S. EQUITY FUND
Statement of Investments
December 31, 1998
<TABLE>
<CAPTION>
Shares Description Value
<C> <S> <C>
Common Stocks - (continued)
Healthcare Management - 0.8%
900 Columbia/HCA Healthcare Corp. $ 22,275
600 Lincare Holdings, Inc.* 24,338
800 Tenet Healthcare Corp.* 21,000
100 Wellpoint Health Networks, Inc.* 8,700
----------
76,313
--------------------------------------------------------------------
Hotels & Restaurants - 0.3%
600 Tricon Global Restaurants, Inc.* 30,075
--------------------------------------------------------------------
Industrial Machinery - 0.5%
1,000 Ingersoll-Rand Co. 46,938
--------------------------------------------------------------------
Insurance-Life - 4.0%
4,400 American General Corp.* 343,200
700 Equitable Companies, Inc. 40,512
100 SunAmerica, Inc. 8,113
----------
391,825
--------------------------------------------------------------------
Insurance-Property and Casualty - 3.3%
200 Allmerica Financial Corp. 11,575
1,800 Allstate Corp. 69,525
1,250 American International Group, Inc. 120,781
300 Conseco, Inc. 9,169
400 Hartford Financial Services Group, Inc. 21,950
2,900 Travelers Property & Casualty Corp. 89,900
----------
322,900
--------------------------------------------------------------------
Insurance Services - 0.4%
400 AMBAC, Inc. 24,075
200 MBIA, Inc. 13,113
----------
37,188
--------------------------------------------------------------------
Integrated Oil - 6.5%
100 Chevron Corp. 8,294
5,600 Exxon Corp. 409,500
700 Mobil Corp. 60,988
2,700 Royal Dutch Petroleum ADR 129,263
500 Texaco, Inc. 26,438
----------
634,483
--------------------------------------------------------------------
Internet Services - 0.5%
200 Yahoo!* 47,388
--------------------------------------------------------------------
Investment Brokers & Managers - 3.0%
2,400 Lehman Brothers Holdings, Inc. 105,750
1,100 Merrill Lynch & Company, Inc. 73,425
1,600 Morgan Stanley, Dean Witter, Discover & Co. 113,600
----------
292,775
--------------------------------------------------------------------
Local Exchange Companies - 2.5%
1,000 Bell Atlantic Corp.* 53,000
2,200 Bellsouth Corp. 109,725
1,300 GTE Corp. 84,500
----------
247,225
--------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Shares Description Value
<C> <S> <C>
Common Stocks - (continued)
Media & Communications - 2.2%
600 Gannett Co. $ 38,700
100 Mcgraw-hill Companies, Inc. 10,188
300 Meredith Corp. 11,363
1,300 SBC Communications, Inc. 69,713
800 Time Warner, Inc. 49,650
500 Tribune Co. 33,000
----------
212,614
-----------------------------------------------------------
Oil Refining & Marketing - 0.1%
300 Sunoco, Inc. 10,819
-----------------------------------------------------------
Packaging - 0.2%
500 Owens-Illinois, Inc.* 15,313
-----------------------------------------------------------
Personal Computers and Peripherals - 1.0%
600 Dell Computer Corporation* 43,912
500 Lexmark International Group, Inc.* 50,250
----------
94,162
-----------------------------------------------------------
Pharmaceuticals - 9.6%
1,000 Abbott Laboratories 49,000
1,300 American Home Products Corp. 73,206
1,100 Amgen, Inc.* 115,019
1,500 Biogen, Inc.* 124,500
900 Bristol-Myers Squibb Co. 120,431
400 Eli Lilly & Co. 35,550
700 Merck & Co. 103,381
1,200 Pfizer, Inc. 150,525
2,000 Schering-Plough Corp. 110,500
800 Warner-Lambert Co. 60,150
----------
942,262
-----------------------------------------------------------
Recreational Products - 0.4%
800 Hasbro, Inc.* 28,900
400 Mattel, Inc. 9,125
----------
38,025
-----------------------------------------------------------
Restaurants & Hotels - 0.4%
500 McDonalds Corp. 38,313
-----------------------------------------------------------
Retail - 3.0%
1,600 Dayton Hudson Corp. 86,800
800 Federated Department Stores, Inc.* 34,850
500 Ingram Micro, Inc.* 17,438
1,900 Wal Mart Stores, Inc. 154,731
----------
293,819
-----------------------------------------------------------
Semiconductors - 2.8%
2,300 Intel Corp. 272,694
-----------------------------------------------------------
Software & Services - 4.1%
300 Automatic Data Processing, Inc. 24,056
400 Computer Sciences Corp.* 25,775
200 Compuware Corp.* 15,625
2,400 Microsoft Corp.* 332,850
----------
398,306
-----------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST CORE U.S. EQUITY FUND
<TABLE>
<CAPTION>
Shares Description Value
<C> <S> <C>
Common Stocks - (continued)
Specialty Finance & Agencies - 1.0%
890 Associates First Capital Corp. $ 37,714
750 Providian Financial Corp. 56,250
----------
93,964
---------------------------------------------------------------
Specialty Retail - 3.2%
800 Abercrombie & Fitch Co.* 56,600
400 American Greetings Corp. 16,425
2,300 Best Buy Co., Inc.* 141,162
200 Home Depot, Inc. 12,238
700 Lowes Companies, Inc. 35,831
500 Ross Stores, Inc. 19,688
100 Tandy Corp. 4,119
800 TJX Companies, Inc. 23,200
----------
309,263
---------------------------------------------------------------
Steel - 0.3%
3,300 Bethlehem Steel Corp.* 27,637
---------------------------------------------------------------
Supermarkets - 2.3%
1,100 Albertson's, Inc. 70,056
3,600 Food Lion, Inc. 38,250
1,000 Kroger Co.* 60,500
1,000 Safeway, Inc.* 60,937
----------
229,743
---------------------------------------------------------------
Telecommunications - 5.2%
700 Ameritech Corp. 44,362
4,400 AT&T Corp. 331,100
1,100 MCI Worldcom, Inc.* 78,925
400 Sprint Corp. (FON Group) 33,650
200 Sprint Corp. (PCS Group)* 4,625
400 Tele Communications, Inc. (TCI Group)* 22,125
----------
514,787
---------------------------------------------------------------
Telecommunications Equipment - 2.4%
1,400 Cisco Systems, Inc.* 129,937
1,000 Lucent Technologies, Inc. 110,000
----------
239,937
---------------------------------------------------------------
Tobacco - 2.4%
4,000 Fortune Brands, Inc. 126,500
2,100 Philip Morris Companies, Inc. 112,350
----------
238,850
---------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Shares Description Value
<C> <S> <C>
Common Stocks - (continued)
Utilities - 2.5%
700 Dominion Resources, Inc. $ 32,725
500 Duke Energy Co. 32,031
900 Edison International, Inc. 25,088
600 FPL Group, Inc. 36,975
200 Pinnacle West Capital Corp. 8,475
1,600 Texas Utilities Co. 74,700
900 Unicom Corp. 34,706
----------
244,700
-------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $8,156,434) $9,451,883
-------------------------------------------------------------------
Other Investment - 4.1%
3,266 Standard & Poor's 500 Depositary Receipt* $ 401,718
-------------------------------------------------------------------
TOTAL OTHER INVESTMENT
(Cost $384,060) $ 401,718
-------------------------------------------------------------------
TOTAL INVESTMENTS
(Cost $8,540,494)(a) $9,853,601
-------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $1,560,535
Gross unrealized loss for investments in which
cost exceeds value (247,428)
-------------------------------------------------------------------
Net unrealized gain $1,313,107
-------------------------------------------------------------------
</TABLE>
*Non-income producing security.
(a) The amount stated also represents aggregate cost for federal income tax
purposes.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
------------------------------------------------------------------------------
Investment Abbreviations:
ADR--American Depository Receipt
------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST CORE LARGE CAP GROWTH FUND
Statement of Investments
December 31, 1998
<TABLE>
<CAPTION>
Shares Description Value
<C> <S> <C>
Common Stocks - 95.6%
Aerospace/Defense--0.7%
1,300 General Motors Corp. Class H (Hughes) $ 51,594
100 Honeywell, Inc. 7,531
----------
59,125
---------------------------------------------------------------
Agriculture/Heavy Equipment - 0.8%
900 Caterpillar, Inc. 41,400
600 Dover Corp. 21,975
----------
63,375
---------------------------------------------------------------
Alcohol - 1.9%
700 Anheuser Busch Companies, Inc. 45,937
1,400 Brown Forman Corp. Class B 105,962
----------
151,899
---------------------------------------------------------------
Auto/Vehicle - 1.3%
500 Ford Motor Co. 29,344
1,700 Hertz Corp. 77,562
----------
106,906
---------------------------------------------------------------
Banks - 0.7%
139 BankAmerica Corp. 8,357
1,700 Dime Bancorp, Inc. 44,944
----------
53,301
---------------------------------------------------------------
Basic Industries - 0.2%
1,000 Barrick Gold Corp. 19,500
---------------------------------------------------------------
Chemical Products - 1.1%
300 Avery Dennison Corp. 13,519
500 Dow Chemicals Co. 45,469
300 IMC Global, Inc. 6,413
100 Minnesota Mining and Manufacturing Co. 7,113
900 Solutia, Inc. 20,138
----------
92,652
---------------------------------------------------------------
Conglomerates - 0.4%
400 Tyco International, Ltd. 30,175
---------------------------------------------------------------
Consumer Products - 2.5%
2,800 Eastman Kodak Co. 201,600
---------------------------------------------------------------
Consumer Staples - 1.7%
300 Clorox Co. 35,044
1,100 Procter & Gamble Co. 100,444
----------
135,488
---------------------------------------------------------------
Electronics & Other Electrical Equipment - 5.5%
600 Emerson Electric Co. 36,300
3,800 General Electric Co. 387,837
500 Johnson Controls, Inc. 29,500
----------
453,637
---------------------------------------------------------------
Energy Refining & Marketing - 0.1%
100 Columbia Gas Systems, Inc. 5,775
---------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Shares Description Value
<C> <S> <C>
Common Stocks - (continued)
Enterprise Systems - 4.6%
400 Ceridian Corp.* $ 27,925
1,000 EMC Corp.* 85,000
200 Hewlett-Packard Co. 13,662
600 International Business Machines, Inc. 110,850
600 Sun Microsystems, Inc.* 51,375
1,300 Unisys Corp.* 44,769
400 Xerox Corp. 47,200
----------
380,781
--------------------------------------------------------------
Entertainment & Leisure - 1.3%
1,200 Carnival Cruise Lines Corp. 57,600
700 Viacom, Inc. Class B* 51,800
----------
109,400
--------------------------------------------------------------
Financial Services - 0.4%
300 American Express Co. 30,675
--------------------------------------------------------------
Food & Beverages - 5.1%
1,365 Archer Daniels Midland Co. 23,461
2,000 Coca-Cola Co. 133,750
600 Coca-Cola Enterprises, Inc. 21,450
1,500 IBP, Inc. 43,688
1,900 Pepsico, Inc. 77,781
1,400 Unilever NV 116,113
----------
416,243
--------------------------------------------------------------
Health Suppliers/Services - 4.5%
100 Allergan, Inc. 6,475
2,000 Bergen Brunswig Corp. 69,750
600 Biomet, Inc. 24,150
300 Cardinal Health, Inc. 22,762
2,900 Johnson & Johnson 243,238
----------
366,375
--------------------------------------------------------------
Healthcare Management - 2.7%
900 Beverly Enterprises, Inc.* 6,075
1,700 Columbia/HCA Healthcare Corp. 42,075
200 Lincare Holdings, Inc.* 8,113
700 Tenet Healthcare Corp.* 18,375
1,700 Wellpoint Health Networks, Inc.* 147,900
----------
222,538
--------------------------------------------------------------
Hotels & Restaurants - 0.2%
300 Tricon Global Restaurants, Inc.* 15,038
--------------------------------------------------------------
Household Durables - 0.1%
100 Newell Co. 4,125
--------------------------------------------------------------
Insurance-Life - 0.9%
700 Equitable Companies, Inc. 40,512
400 Nationwide Financial Services, Inc. 20,675
200 SunAmerica, Inc. 16,225
----------
77,412
--------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
15
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST CORE LARGE CAP GROWTH FUND
Statement of Investments
December 31, 1998
<TABLE>
<CAPTION>
Shares Description Value
<C> <S> <C>
Common Stocks - (continued)
Insurance-Property and Casualty - 0.9%
450 American International Group, Inc. $ 43,481
1,100 Travelers Property & Casualty Corp. 34,100
---------
77,581
-------------------------------------------------------------------
Insurance Services - 0.4%
200 AMBAC, Inc. 12,037
11 Berkshire Hathaway, Inc.* 24,675
---------
36,712
-------------------------------------------------------------------
Integrated Oil - 0.5%
500 Exxon Corp. 36,562
100 Royal Dutch Petroleum ADR 4,788
---------
41,350
-------------------------------------------------------------------
Internet Services - 2.3%
1,000 America Online, Inc.* 144,750
200 Yahoo!* 47,388
---------
192,138
-------------------------------------------------------------------
Investment Brokers & Managers - 2.4%
500 Lehman Brothers Holdings, Inc. 22,031
1,400 Merrill Lynch & Company, Inc. 93,450
1,100 Morgan Stanley, Dean Witter, Discover & Co. 78,100
---------
193,581
-------------------------------------------------------------------
Local Exchange Companies - 0.8%
1,000 GTE Corp. 65,000
-------------------------------------------------------------------
Media & Communications - 0.6%
800 Gannett Co. 51,600
-------------------------------------------------------------------
Oil & Gas Services - 0.3%
472 Schlumberger, Ltd. 21,771
-------------------------------------------------------------------
Oil Refining & Marketing - 0.1%
300 Sunoco, Inc. 10,819
-------------------------------------------------------------------
Personal Computers and Peripherals - 2.2%
300 Apple Computer, Inc.* 12,281
200 Compaq Computer Corp. 8,387
1,500 Dell Computer Corporation* 109,781
500 Lexmark International Group, Inc.* 50,250
---------
180,699
-------------------------------------------------------------------
Pharmaceuticals - 13.5%
2,800 Abbott Laboratories 137,200
800 American Home Products Corp. 45,050
800 Amgen, Inc.* 83,650
300 Biogen, Inc.* 24,900
1,100 Bristol-Myers Squibb Co. 147,194
600 Eli Lilly & Co. 53,325
1,200 Merck & Co. 177,225
1,900 Pfizer, Inc. 238,331
</TABLE>
<TABLE>
<CAPTION>
Shares Description Value
<C> <S> <C>
Common Stocks - (continued)
Pharmaceuticals - (continued)
1,800 Schering-Plough Corp. $ 99,450
1,400 Warner-Lambert Co. 105,263
----------
1,111,588
-----------------------------------------------------------
Publishing - 0.5%
1,300 Dun & Bradstreet Corp. 41,031
-----------------------------------------------------------
Recreational Products - 0.2%
600 Mattel, Inc. 13,688
-----------------------------------------------------------
Retail - 4.5%
200 Ann Taylor Stores Corporate* 7,887
1,800 Dayton Hudson Corp. 97,650
700 Federated Department Stores, Inc.* 30,494
1,400 Ingram Micro, Inc.* 48,825
800 Saks, Inc.* 25,250
2,000 Wal Mart Stores, Inc. 162,875
----------
372,981
-----------------------------------------------------------
Semiconductors - 4.0%
2,600 Intel Corp. 308,263
600 Tech Data Corp.* 24,150
----------
332,413
-----------------------------------------------------------
Software & Services - 6.7%
700 Automatic Data Processing, Inc. 56,131
300 BMC Software, Inc.* 13,369
200 Cadence Design Systems, Inc.* 5,950
400 Computer Sciences Corp.* 25,775
400 Compuware Corp.* 31,250
200 Learning Company, Inc.* 5,188
3,000 Microsoft Corp.* 416,063
----------
553,726
-----------------------------------------------------------
Specialty Finance & Agencies - 1.0%
500 C.I.T. Group, Inc. 15,906
900 Providian Financial Corp. 67,500
----------
83,406
-----------------------------------------------------------
Specialty Retail - 3.7%
1,300 Best Buy Co., Inc.* 79,787
200 CVS Corp. 11,000
2,200 Home Depot, Inc. 134,612
500 Lowes Companies, Inc. 25,594
1,800 TJX Companies, Inc. 52,200
----------
303,193
-----------------------------------------------------------
Steel - 0.2%
2,000 Bethlehem Steel Corp.* 16,750
-----------------------------------------------------------
Supermarkets - 2.1%
300 Albertson's, Inc. 19,106
1,500 Food Lion, Inc. 15,937
700 Kroger Co.* 42,350
1,600 Safeway, Inc.* 97,500
----------
174,893
-----------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
16
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST CORE LARGE CAP GROWTH FUND
<TABLE>
<CAPTION>
Shares Description Value
<C> <S> <C>
Common Stocks - (continued)
Telecommunications - 2.0%
1,200 AT&T Corp. $ 90,300
1,024 MCI Worldcom, Inc.* 73,472
----------
163,772
-------------------------------------------------------------------
Telecommunications Equipment - 7.6%
3,000 Cisco Systems, Inc. * 278,437
5,000 General Instrument Corp.* 169,687
1,400 Lucent Technologies, Inc. 154,000
500 Northern Telecom, Ltd. 25,063
----------
627,187
-------------------------------------------------------------------
Textiles - 0.2%
900 Jones Apparel Group, Inc.* 19,856
-------------------------------------------------------------------
Tobacco - 2.1%
600 Fortune Brands, Inc. 18,975
2,800 Philip Morris Companies, Inc. 149,800
----------
168,775
-------------------------------------------------------------------
Transportation/rail - 0.1%
300 The St. Joe Company 7,031
-------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $6,176,310) $7,857,561
-------------------------------------------------------------------
Other Investment - 3.8%
2,530 Standard & Poor's 500 Depositary Receipt* $ 311,190
-------------------------------------------------------------------
TOTAL OTHER INVESTMENT
(Cost $296,487) $ 311,190
-------------------------------------------------------------------
TOTAL INVESTMENTS
(Cost $6,472,797)(a) $8,168,751
-------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $1,830,073
Gross unrealized loss for investments in which
cost exceeds value (134,201)
-------------------------------------------------------------------
Net unrealized gain $1,695,872
-------------------------------------------------------------------
</TABLE>
* Non-income producing security.
(a) The aggregate cost for federal income tax purposes is $6,472,879.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
------------------------------------------------------------------------------
Investment Abbreviations:
ADR--American Depositary Receipt
------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
17
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST CORE SMALL CAP EQUITY FUND
Statement of Investments
December 31, 1998
<TABLE>
<CAPTION>
Shares Description Value
<C> <S> <C>
Common Stocks - 99.9%
Advertising & Marketing - 0.2%
200 Advo, Inc.* $ 5,275
100 Valassis Communications, Inc.* 5,163
----------
10,438
----------------------------------------------------------
Aerospace/Defense - 0.7%
750 AAR Corp. 17,906
300 Fairchild Corp. * 4,725
200 Gencorp, Inc. 4,987
400 Oea, Inc. 4,725
----------
32,343
----------------------------------------------------------
Agriculture/Heavy Equipment - 0.7%
800 Allied Products Corp. 5,050
400 Cort Business Services Corp.* 9,700
300 Terex Corp.* 8,569
343 United Rentals, Inc.* 11,362
----------
34,681
----------------------------------------------------------
Airfreight, Truck & Other - 0.5%
200 Airborne Freight Corp. 7,213
200 Avondale Industries, Inc.* 5,800
200 Seacor Smit, Inc.* 9,888
----------
22,901
----------------------------------------------------------
Airlines - 1.1%
500 Alaska Air Group, Inc.* 22,125
700 America West Holdings Corp.* 11,900
200 Asa Holdings, Inc. 6,100
100 Atlas Air, Inc.* 4,893
200 Skywest, Inc. 6,538
----------
51,556
----------------------------------------------------------
Alcoholic Beverages - 0.7%
400 Adolph Coors Co. Class B 22,575
100 Canandaigua Brands, Inc.* 5,781
800 The Boston Beer Company, Inc.* 6,800
----------
35,156
----------------------------------------------------------
Auto/Vehicle - 0.5%
500 Avis Rent A Car, Inc.* 12,093
400 Budget Group, Inc.* 6,350
300 Wabash National Corp. 6,094
----------
24,537
----------------------------------------------------------
Auto Suppliers - 1.7%
200 A.O. Smith Corp. 4,913
400 Arvin Industries, Inc. 16,675
100 Borg Warner Automotive, Inc. 5,581
200 Clarcor, Inc. 4,000
200 Csk Auto Corp.* 5,337
300 Excel Industries, Inc. 5,250
300 Modine Manufacturing Co. 10,875
200 SPX Corp.* 13,400
500 Standard Products Co. 10,188
300 Superior Industries International 8,344
----------
84,563
----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Shares Description Value
<C> <S> <C>
Common Stocks - (continued)
Banks - 6.1%
300 Bancorp South, Inc. $ 5,418
300 Bancwest Corporation 14,400
855 CNB Bancshares, Inc. 39,864
220 CVB Financial Corp. 4,950
400 Commerce Bancorp, Inc. 21,000
300 Cullen Frost Bankers, Inc. 16,462
200 Downey Financial Corp. 5,087
1,000 First Commonwealth Financial Corp. 24,500
400 First Republic Bank* 10,025
100 Greater Bay Bancorp 3,375
300 Hubco, Inc. 9,037
300 Imperial Bancorp* 4,987
600 Independence Community BA* 9,563
100 Mainstreet Financial Corp. 4,644
206 Mid America Bancorp 5,588
400 One Valley Bancorp, Inc. 13,150
133 Oriental Financial Group 4,165
100 Pacific Capital Bancorp 2,575
500 Republic Security Financial 6,063
200 Riggs National Corp. 4,075
400 Roslyn Bancorp, Inc. 8,600
1,000 Southwest Bancorp of Texas, Inc.* 17,875
400 Staten Island Bancorp, Inc. 7,975
200 Sterling Bancorp 4,563
200 Triangle Bancorp, Inc. 3,163
115 Trustco Bank Corp. 3,450
500 United Bankshares, Inc. 13,250
500 UST Corp. 11,781
200 Westamerica Bancorp 7,350
100 Western Bancorp 2,925
100 Whitney Holding Corp. 3,750
----------
293,610
-------------------------------------------------------------
Broadcast Media - 1.0%
500 Century Communications * 15,859
500 Cox Radio, Inc. * 21,125
300 Macromedia, Inc.* 10,106
----------
47,090
-------------------------------------------------------------
Business Services - 5.3%
100 Abacus Direct Corp* 4,550
100 Abm Industries, Inc. 3,463
400 AC Nielsen Corp.* 11,300
300 Acxiom Corp.* 9,300
100 Catalina Marketing Corp.* 6,837
100 Computer Task Group 2,712
300 Cotelligent, Inc.* 6,394
200 Devry, Inc.* 6,125
200 Excite, Inc.* 8,412
200 Ha-lo Industries, Inc.* 7,525
100 Incyte Pharmaceuticals, Inc.* 3,737
100 Infoseek Corp.* 4,937
700 Interim Services, Inc.* 16,363
100 International Telecomm Data Systems* 1,475
1,800 Landauer, Inc. 58,275
200 Legato Systems, Inc.* 13,187
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST CORE SMALL CAP EQUITY FUND
Statement of Investments
December 31, 1998
<TABLE>
<CAPTION>
Shares Description Value
<C> <S> <C>
Common Stocks - (continued)
Business Services - (continued)
200 Lycos, Inc.* $ 11,112
100 Medquist, Inc.* 3,950
400 Metzler Group, Inc.* 19,475
300 Mindspring Enterprises, Inc.* 18,319
200 National Data Corp. 9,737
200 Service Experts, Inc.* 5,850
400 StaffMark, Inc.* 8,950
200 Sylvan Learning System, Inc.* 6,100
200 Urs Corporation* 4,675
200 Wallace Computer Services, Inc. 5,275
----------
258,035
--------------------------------------------------------------
Chemical Products - 1.5%
500 Bio-Rad Laboratories, Inc.* 10,500
200 Cambrex Corporation 4,800
200 Catalytica, Inc.* 3,600
600 Dexter Corp. 18,862
300 Nova Corp.* 10,406
200 Scotts Co.* 7,688
300 Wd 40 Co. 8,588
900 Wellman, Inc. 9,169
----------
73,613
--------------------------------------------------------------
Chemicals-Commodity - 0.5%
200 Geon Co. 4,600
500 Winstar Communications, Inc.* 19,500
----------
24,100
--------------------------------------------------------------
Commercial Products - 0.3%
400 Knoll, Inc.* 11,850
100 Vwr Scientific Products Corp.* 1,738
----------
13,588
--------------------------------------------------------------
Commercial Services - 1.8%
800 Bowne & Company, Inc. 14,300
300 Century Business Services, Inc.* 4,312
200 Dendrite International, Inc.* 4,994
300 Integrated Electrical Services, Inc.* 6,675
500 Metamor Worldwide, Inc.* 12,500
900 Sensormatic Electronics* 6,244
200 Standard Register Co. 6,188
700 Wackenhut Corp. 17,806
400 World Color Press Co.* 12,175
----------
85,194
--------------------------------------------------------------
Communications & Media Service - 2.2%
300 Adelphia Communications * 13,725
300 Aliant Communications, Inc. 12,263
500 American Tower Corp.* 14,781
300 CFW Communications Co. 7,012
600 Centennial Cellular Corp.* 24,600
400 E Spire Communications, Inc.* 2,550
100 Exodus Communications* 6,425
500 Foster Wheeler Corp. 6,594
300 Kaman Corp. 4,819
200 Regal Beloit Corp. 4,600
</TABLE>
<TABLE>
<CAPTION>
Shares Description Value
<C> <S> <C>
Common Stocks - (continued)
Communications & Media Service - (continued)
100 Transaction Network Services* $ 2,006
200 Vanguard Cellular System* 5,163
----------
104,538
-----------------------------------------------------------
Computer Services/Software - 4.1%
1,200 Acclaim Entertainment, Inc.* 14,700
200 American Management Systems, Inc.* 8,000
200 Apex PC Solutions, Inc.* 5,775
200 Aris Corp.* 2,388
100 Aspect Development, Inc.* 4,431
400 Avt Corporation* 11,600
200 Axent Technologies, Inc.* 6,112
300 Broadvision, Inc.* 9,600
400 CACI International, Inc.* 6,750
200 Cerner Corp.* 5,350
200 Clarify, Inc.* 4,887
200 Geotel Communications Corp.* 7,450
200 Hnc Software, Inc.* 8,087
300 Hyperion Solutions Corp.* 5,400
300 Idt Corp.* 4,612
800 Informix Corp.* 7,900
100 Jack Henry & Assoc., Inc. 4,975
100 Mercury Interactive Corp.* 6,325
500 Microchip Technology, Inc.* 18,500
100 Peregrine Systems, Inc.* 4,638
600 Rational Software Corp.* 15,900
400 Read Rite Corp.* 5,913
100 Sapient Corporation* 5,600
300 Software AG Systems, Inc.* 5,438
200 Transaction Systems Architects* 10,000
200 Wind River Systems, Inc.* 9,400
----------
199,731
-----------------------------------------------------------
Construction/Environmental Services - 2.7%
500 ACX Technologies, Inc.* 6,625
165 Allied Waste Industries, Inc.* 3,898
200 Ameron International Corp. 7,400
300 Butler Manufacturing Co. 6,712
400 Carlisle Companies, Inc. 20,650
200 Coachmen Industries, Inc. 5,250
300 Comfort Systems U.S.A.* 5,362
400 Dycom Industries, Inc.* 22,850
100 Elcor Corporation 3,231
200 Florida Rock Industrial, Inc. 6,200
300 Granite Construction, Inc. 10,069
200 Lone Star Industries, Inc. 7,362
200 Nci Building Systems, Inc.* 5,625
100 Stone & Webster, Inc. 3,325
300 Texas Industries, Inc. 8,081
300 Tower Automotive, Inc.* 7,481
----------
130,121
-----------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
22
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST CORE SMALL CAP EQUITY FUND
<TABLE>
<CAPTION>
Shares Description Value
<C> <S> <C>
Common Stocks - (continued)
Consumer Products - 0.7%
800 Herbalife International, Inc. $ 11,400
600 Jo-ann Stores, Inc.* 9,675
200 Nu Skin Asia Pacific, Inc.* 4,725
500 Playtex Products, Inc.* 8,031
----------
33,831
-----------------------------------------------------------
Consumer Staples - 0.4%
300 First Brands Corp. 11,831
500 Media Arts Group, Inc.* 7,031
----------
18,862
-----------------------------------------------------------
Diversified Manufacturing - 0.7%
600 Federal Signal Corp. 16,425
300 General Cable Corp. 6,150
200 Getchell Gold Corp.* 5,450
100 Precision Castparts Corp. 4,425
----------
32,450
-----------------------------------------------------------
Electrical Services - 1.6%
100 Black Hills Corp. 2,637
100 Cilcorp, Inc. 6,119
500 Eastern Utilities Assoc. 14,125
200 Empire District Electric Co. 4,950
400 Hawaiian Electric Industries, Inc. 16,100
100 Minnesota Power & Light Co. 4,400
300 Nevada Power Company 7,800
200 Rochester Gas & Electric 6,250
100 United Illuminating Co. 5,150
500 Washington Water Power Co. 9,625
----------
77,156
-----------------------------------------------------------
Electronics & Other Electrical Equipment - 1.7%
300 Baldor Electric Co. 6,075
100 Barnes Group, Inc. 2,938
200 C-cube Microsystems, Inc.* 5,425
300 Group Maintenance America* 3,637
100 Hughes Supply, Inc. 2,925
100 Jabil Circuit, Inc.* 7,462
200 Kuhlman Corp. 7,575
100 Micro Systems, Inc.* 3,288
200 Novellus Systems, Inc.* 9,900
300 Park Electrochemical Corp. 8,588
400 Silicon Valley Group, Inc.* 5,100
400 Technitrol, Inc. 12,750
300 Unitrode Corp.* 5,250
200 Watsco, Inc. 3,350
----------
84,263
-----------------------------------------------------------
Energy Refining & Marketing - 1.0%
600 Berry Petroleum Co. 8,512
300 Calpine Corp.* 7,575
200 Holly Corp. 3,375
200 Newfield Exploration Co.* 4,175
1,000 Octel Corp.* 13,875
300 Penn Va Corp. 5,513
400 Snyder Oil Corporation 5,325
----------
48,350
-----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Shares Description Value
<C> <S> <C>
Common Stocks - (continued)
Engineering - 0.2%
200 Jacobs Engineering Group, Inc.* $ 8,150
---------------------------------------------------------------
Enterprise Systems - 0.4%
400 Avid Technology, Inc.* 9,350
300 Electronics For Imaging, Inc.* 12,056
----------
21,406
---------------------------------------------------------------
Entertainment & Leisure - 0.8%
300 Hollywood Entertainment Co.* 8,175
300 Premier Parks, Inc.* 9,075
1,400 Sunterra Corp.* 21,000
----------
38,250
---------------------------------------------------------------
Financial Services - 1.8%
500 Americredit Corp.* 6,906
300 Chittenden Corp. 9,600
1,100 Credit Acceptance Corp. * 8,044
300 Everen Capital Corp. 6,825
300 F & M National Corp. 8,981
100 Fair Isaac & Co., Inc. 4,619
100 Fund American Enterprises Holdings 14,006
300 JSB Financial, Inc. 16,312
315 NBT Bancorp, Inc. 7,363
200 Reliance Bancorp, Inc. 5,563
----------
88,219
---------------------------------------------------------------
Food & Beverages - 1.2%
400 Agribrands International* 12,000
200 Corn Products International 6,075
400 International Multifoods Corp. 10,325
400 Michael Foods, Inc. 12,000
300 Pilgrims Pride Corp. 5,981
300 Ralcorp Holdings, Inc.* 5,475
300 Universal Foods Corp. 8,231
----------
60,087
---------------------------------------------------------------
Forest Products - 0.8%
200 Kimball International, Inc. Class-B 3,800
700 Schweitzer-Mauduit International, Inc. 10,806
1,800 Unisource Worldwide, Inc. 13,050
500 United Stationers, Inc.* 13,000
----------
40,656
---------------------------------------------------------------
Gaming - 0.5%
2,700 Boyd Gaming Corp.* 8,944
600 Dover Downs Entertainment, Inc. 7,237
1,000 Grand Casinos, Inc.* 8,062
----------
24,243
---------------------------------------------------------------
Healthcare Management - 1.8%
1,600 American Homepatient, Inc.* 2,900
907 Charter One Financial, Inc. 25,169
700 Integrated Health Services, Inc. 9,887
1,300 Mariner Post-acute Network* 5,931
100 Maximus, Inc.* 3,700
1,600 Novacare, Inc.* 4,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST CORE SMALL CAP EQUITY FUND
Statement of Investments
December 31, 1998
<TABLE>
<CAPTION>
Shares Description Value
<C> <S> <C>
Common Stocks - (continued)
Healthcare Management - (continued)
600 OEC Medical Systems, Inc.* $ 18,862
200 Quest Diagnostics, Inc.* 3,563
200 Sierra Health Services, Inc.* 4,213
1,100 Sun Healthcare Group, Inc.* 7,219
----------
85,444
----------------------------------------------------------
Health & Medical Services - 5.0%
200 Agouron Pharmaceuticals, Inc.* 11,750
1,200 Ameripath, Inc.* 10,725
300 Amerisource Health Corp.* 19,500
200 Ballard Medical Products 4,863
100 Barr Labs, Inc.* 4,800
600 Chemed Corp. 20,100
400 Covance, Inc.* 11,650
200 Diagnostic Products Corp. 6,225
100 Entremed, Inc.* 2,100
200 Gilead Sciences, Inc. * 8,212
200 Hanger Orthopedic Group* 4,500
200 Icos Corp.* 5,950
200 Idexx Laboratories, Inc.* 5,381
100 Idx Systems Corp.* 4,400
100 Inhale Therapeutic Systems* 3,300
100 International Network Services* 6,650
400 Ivax Corp.* 4,975
100 Jones Pharmaceutical, Inc. 3,650
200 Maxxim Medical, Inc.* 5,950
100 Medicis Pharmaceutical Co.* 5,962
100 Medimmune, Inc.* 9,944
200 Millennium Pharmaceutical* 5,175
200 Neurogen Corp.* 3,500
100 Pathogenesis Corp.* 5,800
100 Pediatrix Medical Group, Inc.** 5,994
400 Primark Corp.* 10,850
200 Protein Design Labs, Inc.* 4,625
200 Renal Care Group, Inc.* 5,763
300 Roberts Pharmaceutical Co.* 6,525
100 Sepracor, Inc.* 8,813
300 Sequus Pharmaceuticals, Inc.* 6,075
200 Vertex Pharmaceuticals, Inc.* 5,950
200 Veterinary Centers America, Inc.* 3,988
100 Visx, Inc.* 8,744
----------
242,389
----------------------------------------------------------
Health Suppliers/Services - 2.3%
200 Haemonetics Corp.* 4,550
400 Imation Corporation* 7,000
900 Input/Output, Inc.* 6,581
200 Mettler-toldeo, Inc.* 5,612
300 Owens & Minor, Inc. 4,725
1,200 Priority Healthcare Corp.* 62,250
400 PSS World Medical, Inc.* 9,200
400 Thermo Bioanalysis* 5,300
150 Xomed Surgical Products, Inc.* 4,800
----------
110,018
----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Shares Description Value
<C> <S> <C>
Common Stocks - (continued)
Home Builders - 2.2%
400 Champion Enterprises, Inc.* $ 10,950
800 Fairfield Communities, Inc.* 8,850
600 Kaufman & Broad Home Co. 17,250
600 Lennar Corp. 15,150
400 NVR, Inc.* 19,075
400 Pulte Corp. 11,125
300 Ryland Group, Inc. 8,663
300 Toll Brothers, Inc.* 6,769
200 U S Home Corp.* 6,650
----------
104,482
--------------------------------------------------------------
Home Furnishing & Services - 0.5%
200 Ethan Allen Interiors, Inc. 8,200
500 Furniture Brands International, Inc.* 13,625
----------
21,825
--------------------------------------------------------------
Hotels & Restaurants - 1.5%
800 Buffets, Inc.* 9,550
100 Harveys Casino Resorts 2,769
600 Lubys Cafeterias, Inc. 9,262
800 Ruby Tuesday, Inc. 17,000
850 Sonic Corp.* 21,144
2,500 Sunburst Hospitality Corp.* 10,625
----------
70,350
--------------------------------------------------------------
Household Durables - 0.3%
300 La-Z-Boy, Inc. 5,344
300 Mascotech, Inc. 5,137
100 Pillowtex Corp. 2,675
----------
13,156
--------------------------------------------------------------
Industrial Machinery - 1.5%
600 Applied Power, Inc. 22,650
200 Briggs & Stratton Corp. 9,975
100 Idex Corp. 2,450
500 Kaydon Corp. 20,031
200 Nacco Industries, Inc. 18,400
----------
73,506
--------------------------------------------------------------
Information Management - 1.4%
800 BA Merchant Services, Inc.* 16,100
100 Choicepoint, Inc.* 6,450
300 Earthlink Network, Inc.* 17,100
1,600 Infousa, Inc. Class B* 8,400
200 Mastech Corporation* 5,725
100 National Computer Systems, Inc. 3,700
200 Sabre Group Holdings, Inc.* 8,900
----------
66,375
--------------------------------------------------------------
Insurance Brokers & Other Insurance - 2.9%
500 Arthur J Gallagher & Co. 22,062
700 Capital Re Corp. 14,044
440 Fidelity National Financial, Inc. 13,420
300 Financial Security Assurance Holdings 16,275
500 First American Financial Corp. 16,062
200 Express Scripts, Inc.* 13,425
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST CORE SMALL CAP EQUITY FUND
<TABLE>
<CAPTION>
Shares Description Value
<C> <S> <C>
Common Stocks - (continued)
Insurance Brokers & Other Insurance - (continued)
100 E. W. Blanch Holding, Inc. $ 4,744
1,000 Hilb Rogal & Hamilton Co. 19,875
100 Landamerica Financial Group 5,581
100 Poe & Brown, Inc. 3,494
400 SCPIE Holdings, Inc. 12,125
----------
141,107
------------------------------------------------------------
Insurance-Life - 1.9%
200 America Heritage Life Investments 4,887
200 ARM Financial Group, Inc. 4,437
326 Delphi Financial Group, Inc.* 17,095
1,000 FBL Financial Group, Inc. 24,250
200 Hartford Life, Inc. 11,650
200 Nationwide Financial Services, Inc. 10,338
300 Reinsurance Group of America, Inc. 21,000
----------
93,657
------------------------------------------------------------
Insurance-Property and Casualty - 1.7%
600 American Medical Security Group 8,738
900 Argonaut Group, Inc. 22,050
400 Chartwell Re Corp. 9,500
300 Commerce Group, Inc. 10,631
600 Fremont General Corp. 14,850
200 Pxre Corp. 5,013
300 Tig Holdings, Inc. 4,669
400 Zenith National Insurance Corp. 9,250
----------
84,701
------------------------------------------------------------
Investment Brokers & Managers - 0.6%
100 Dain Rauscher Corp. 2,950
900 Friedman Billings Ramsey* 5,850
300 Jeffries Group, Inc. 14,888
200 John Nuveen Co. 7,425
----------
31,113
------------------------------------------------------------
Machinery - 0.9%
500 Columbus Mckinnon Corp. 9,000
800 Commercial Intertech Corp. 10,350
200 Flowserve Corporation 3,312
800 Thomas Industries, Inc. 15,700
100 Zebra Technologies, Inc.* 2,875
----------
41,237
------------------------------------------------------------
Media & Communications - 1.1%
1,700 Ascent Entertainment Group* 12,538
500 Big Flower Press Holdings, Inc.* 11,031
600 McClatchy Newspapers, Inc. 21,225
100 Media General, Inc. 5,300
100 Metris Companies, Inc. 5,031
----------
55,125
------------------------------------------------------------
Metals-Diversified - 0.2%
500 Asarco, Inc. 7,531
400 Southern Peru Copper Corp. 3,775
----------
11,306
------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Shares Description Value
<C> <S> <C>
Common Stocks - (continued)
Mining - 0.1%
800 Hecla Mining Co.* $ 2,900
-----------------------------------------------------
Nonferrous Metals - 0.8%
500 AFC Cable Systems, Inc.* 16,813
1,500 Battle Mountain Gold Co. 6,188
650 Encore Wire Corp.* 6,012
100 Stillwater Mining Company* 4,100
100 Superior Telecom, Inc. 4,725
----------
37,838
-----------------------------------------------------
Office & Business Equipment - 1.9%
100 Adac Laboratories* 1,997
100 Csg Systems* 7,900
300 Data General Corp.* 4,931
300 Gerber Scientific, Inc. 7,144
300 Micron Electronics, Inc.* 5,194
400 Network Appliances, Inc.* 18,000
500 Pairgain Technologies, Inc.* 3,844
400 Psinet, Inc.* 8,350
200 Safeguard Scientifics, Inc.* 5,488
300 Wang Laboratories, Inc.* 8,325
400 Xircom, Inc.* 13,600
300 Xylan Corp.* 5,269
----------
90,042
-----------------------------------------------------
Oil & Gas Exploration - 0.4%
1,200 Cabot Oil & Gas Corp. 18,000
100 Devon Energy Corp. 3,069
----------
21,069
-----------------------------------------------------
Oil & Gas Services - 1.0%
500 Barrett Resources Corp.* 12,000
200 Cross Timbers Oil Co. 1,500
200 Hanover Compressor* 5,137
100 Peoples Energy Corp. 3,988
1,200 Pool Energy Services Co.* 12,975
600 Seitel, Inc.* 7,463
400 Veritas DGC, Inc.* 5,200
----------
48,263
-----------------------------------------------------
Packaging & Container - 0.2%
400 Aptargroup, Inc. 11,225
-----------------------------------------------------
Paper & Forest Products - 0.5%
300 Glatfelter (PH) Co. 3,712
300 Longview Fibre Co. 3,469
500 Potlatch Corp. 18,438
----------
25,619
-----------------------------------------------------
Personal Computers and Peripherals - 1.2%
600 Banctec, Inc.* 7,538
400 Bell & Howell Company* 15,125
1,200 CHS Electronics, Inc.* 20,325
100 Scm Microsystems, Inc.* 7,106
200 Visio Corp.* 7,313
----------
57,407
-----------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST CORE SMALL CAP EQUITY FUND
Statement of Investments
December 31, 1998
<TABLE>
<CAPTION>
Shares Description Value
<C> <S> <C>
Common Stocks - (continued)
Pharmaceuticals - 1.5%
800 Alpharma, Inc. $ 28,250
200 Applied Micro Circuits* 6,794
500 Bindley Western Industries, Inc. 24,625
300 ICN Pharmaceuticals, Inc. 6,787
1,200 NBTY, Inc.* 8,550
----------
75,006
---------------------------------------------------------
Pipelines - 1.3%
800 Aquarion Co. 32,800
900 Oneok, Inc. 32,513
----------
65,313
---------------------------------------------------------
Real Estate - 0.6%
600 Calmat Co. 18,525
400 Ingles Markets, Inc. 4,375
300 Security Capital Group, Inc.* 4,069
----------
26,969
---------------------------------------------------------
Recreational Products - 0.8%
800 Huffy Corp. 13,200
200 Jostens, Inc. 5,237
800 Russ Berrie and Company, Inc. 18,800
200 Strum Ruger & Co., Inc. 2,388
----------
39,625
---------------------------------------------------------
Recreational Services - 0.1%
200 Carematrix Corporation* 6,125
---------------------------------------------------------
Restaurants & Hotels - 0.1%
200 CEC Entertainment, Inc.* 5,550
---------------------------------------------------------
Retail - 3.9%
125 99 Cents Only Stores* 6,141
300 Ames Deparment Stores, Inc.* 8,100
300 Anntaylor Stores Corp.* 11,831
500 Blair Corp. 11,094
200 Central Garden & Pet Co.* 2,875
300 Department 56, Inc.* 11,269
1,400 Genesco, Inc.* 7,962
200 Genovese Drug Stores 5,700
400 Hancock Fabrics, Inc. 3,350
200 Haverty Furniture Cos., Inc. 4,200
500 Heilig Meyers Co. 3,344
100 Henry Schein, Inc.* 4,475
400 Inacom Corp.* 5,950
200 Long Drug Stores, Inc. 7,500
500 Michaels Stores, Inc.* 9,047
200 Micro Warehouse, Inc.* 6,762
300 Musicland Stores Corp.* 4,481
500 Petsmart, Inc.* 5,500
1,250 Pier 1 Imports, Inc. 12,109
400 The Buckle, Inc.* 9,600
200 Transworld Entertainment Corp.* 3,813
500 Unifirst Corporation 11,406
200 Williams-Sonoma, Inc.* 8,063
700 Zale Corp.* 22,575
----------
187,147
---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Shares Description Value
<C> <S> <C>
Common Stocks - (continued)
Savings and Loans - 0.8%
600 FirstFed Financial Corp.* $ 10,725
1,960 Sovereign Bancorp, Inc. 27,930
----------
38,655
-----------------------------------------------------------------
Semiconductors - 2.6%
300 Aavid Thermal Technologies* 5,063
700 Anixter International, Inc.* 14,218
200 Benchmark Electronics, Inc.* 7,325
600 Brightpoint, Inc.* 8,250
200 CTS Corporation 8,700
600 Cypress Semiconductor Corp.* 4,987
200 Dallas Semiconductor Corp. 8,150
400 Esterline Technologies Corp.* 8,700
200 Level One Communications, Inc.* 7,100
200 Marshall Industries, Inc.* 4,900
300 Methode Electronics, Inc. 4,687
100 Micrel, Inc.* 5,500
400 Neomagic Corp.* 8,850
200 Oak Industries, Inc.* 7,000
200 Pmc-Sierra, Inc.* 12,625
100 Sanmina Corp.* 6,250
200 Smart Modular Technologies* 5,550
----------
127,855
-----------------------------------------------------------------
Software & Services - 1.1%
300 Avant Corporation* 4,800
200 Complete Business Solution* 6,775
200 Computer Horizons Corp.* 5,325
186 DST Systems, Inc.* 10,614
200 Learning Company, Inc.* 5,187
300 New Era of Networks Inc* 13,200
100 Realnetworks, Inc.* 3,588
300 Systems & Computer Tech Corp.* 4,125
----------
53,614
-----------------------------------------------------------------
Specialty Finance & Agencies - 0.6%
100 Rambus, Inc.* 9,625
1,300 Resource Bancshares Mortgage Group, Inc. 21,531
----------
31,156
-----------------------------------------------------------------
Specialty Retail - 1.0%
700 Fingerhut Companies, Inc. 10,806
500 Goody's Family Clothing Inc.* 5,016
900 Handleman Co.* 12,656
200 Insight Enterprises, Inc.* 10,175
200 Linens-n-Things, Inc.* 7,925
250 Pacific Sunwear of California, Inc.* 4,094
----------
50,672
-----------------------------------------------------------------
Steel - 1.7%
200 A. M. Castle & Co. 3,000
1,100 AK Steel Holding Corp. 25,850
1,500 Bethlehem Steel Corp.* 12,562
100 Cleveland Cliffs, Inc. 4,031
600 LTV Corp. 3,487
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST CORE SMALL CAP EQUITY FUND
<TABLE>
<CAPTION>
Shares Description Value
<C> <S> <C>
Common Stocks - (continued)
Steel - (continued)
1,700 National Steel Corp. $ 12,112
400 Quanex Corp. 9,025
400 Reliance Steel & Aluminum Corp. 11,050
----------
81,117
---------------------------------------------------------
Supermarkets - 0.5%
1,100 Fleming Companies, Inc. 11,412
200 Great A&P Tea Co., Inc. 5,925
100 Whole Foods Market, Inc.* 4,838
----------
22,175
---------------------------------------------------------
Telecommunications - 0.2%
1,900 Paging Network, Inc.* 8,906
---------------------------------------------------------
Telecommunications Equipment - 1.2%
75 Ascend Communications, Inc.* 4,931
300 Aspect Telecommunications Corp.* 5,175
100 Concord Communications, Inc.* 5,675
100 L-3 Communications Corp.* 4,656
200 Plantronics, Inc.* 17,200
400 Polycom, Inc.* 8,900
300 Skytel Communications, Inc.* 6,638
300 Tekelec* 4,969
----------
58,144
---------------------------------------------------------
Textiles - 1.8%
100 American Eagle Outfitters* 6,663
300 Brown Group, Inc. 5,269
100 Footstar, Inc.* 2,500
300 Kellwood Company 7,500
200 Kenneth Cole Productions* 3,750
500 Nautica Enterprises, Inc.* 7,500
500 Oxford Industries, Inc. 14,125
500 Phillips-van Heusen Corp. 3,594
200 Quiksilver, Inc.* 6,000
100 Rayonier, Inc. 4,594
300 Russell Corp. 6,094
300 Springs Industries, Inc. 12,431
200 Talbots, Inc. 6,275
----------
86,295
---------------------------------------------------------
Tires & Rubber - 0.4%
400 Bandag, Inc. 15,975
300 Mark IV Industries, Inc. 3,900
----------
19,875
---------------------------------------------------------
Tobacco - 0.3%
700 Dimon Incorporated 5,206
300 Universal Corp. 10,538
----------
15,744
---------------------------------------------------------
Transportation/Storage - 0.5%
300 Alexander & Baldwin, Inc. 6,975
100 Midwest Express Holdings* 2,631
300 Overseas Shipholding Group 4,819
</TABLE>
<TABLE>
<CAPTION>
Shares Description Value
<C> <S> <C>
Common Stocks - (continued)
Transportation/Storage - (continued)
200 Wisconsin Central Transportation* $ 3,438
100 Xtra Corp. 4,138
----------
22,001
--------------------------------------------------------------
Trucking - 1.3%
1,400 Consolidated Freightways Corp.* 22,225
1,400 Rollins Truck Leasing Corp. 20,650
1,000 Yellow Corp.* 19,125
----------
62,000
--------------------------------------------------------------
Utilities - 2.2%
200 Agl Resources, Inc. 4,613
600 California Water Services Group 18,787
200 Equitable Resources, Inc. 5,825
100 Idacorp, Inc. 3,619
100 Laclede Gas Co. 2,675
300 Northwestern Corporation 7,931
1,200 Public Service Company of New Mexico 24,525
100 South Jersey Industries 2,619
400 Southwestern Energy Co. 3,000
400 TNP Enterprises, Inc. 15,175
400 Ugi Corporation 9,500
200 United Water Resource, Inc. 4,788
100 Wps Resources Corp. 3,525
----------
106,582
--------------------------------------------------------------
Waste Management - 0.1%
100 Eastern Environment Services* 2,969
--------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $4,534,117) $4,835,367
--------------------------------------------------------------
TOTAL INVESTMENTS
(Cost $4,534,117)(a) $4,835,367
--------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for investments in
which value exceeds cost $ 836,486
Gross unrealized loss for investments in
which cost exceeds value (546,676)
--------------------------------------------------------------
Net unrealized gain $ 289,810
--------------------------------------------------------------
</TABLE>
* Non-income producing security.
(a) The aggregate cost for federal income tax purposes is $4,545,557.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST CAPITAL GROWTH FUND
Statement of Investments
December 31, 1998
<TABLE>
<CAPTION>
Shares Description Value
<C> <S> <C>
Common Stocks - 95.9%
Advertising & Marketing - 1.6%
1,400 Valassis Communications, Inc.* $ 72,275
-----------------------------------------------------------------
Appliance - 2.3%
1,000 General Electric Co. 102,062
-----------------------------------------------------------------
Banks - 7.4%
1,600 BankAmerica Corp. 96,200
1,400 Bank One Corp. 71,487
750 Citigroup, Inc. 37,125
600 First Union Corp. 36,487
1,300 State Street Boston Corp. 90,431
----------
331,730
-----------------------------------------------------------------
Chemical Products - 0.7%
300 Du Pont (E.I.) de Nemours & Co. 15,919
200 Minnesota Mining and Manufacturing Co. 14,225
----------
30,144
-----------------------------------------------------------------
Commercial Services - 1.4%
900 Ecolab, Inc. 32,569
700 Galileo International, Inc. 30,450
----------
63,019
-----------------------------------------------------------------
Consumer Staples - 6.0%
1,400 Avon Products, Inc. 61,950
200 Clorox Co. 23,362
1,000 Colgate Palmolive Co. 92,875
500 Gillette Co. 24,156
700 Procter & Gamble Co. 63,919
----------
266,262
-----------------------------------------------------------------
Energy Refining & Marketing - 2.6%
2,400 AES Corp.* 113,700
-----------------------------------------------------------------
Enterprise Systems - 3.1%
800 EMC Corp. 68,000
200 International Business Machines, Inc. 36,950
400 Sun Microsystems, Inc.* 34,250
----------
139,200
-----------------------------------------------------------------
Entertainment & Leisure - 0.8%
1,200 Marriott International, Inc. 34,800
-----------------------------------------------------------------
Food & Beverages - 6.0%
800 Coca Cola Co. 53,500
1,100 Nabisco Holdings Corp. 45,650
1,500 Pepsico, Inc. 61,406
1,900 Ralston Purina Co. 61,513
500 William Wrigley Jr. Co. 44,781
----------
266,850
-----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Shares Description Value
<S> <C> <C>
Common Stocks - (continued)
Funeral Services - 2.0%
2,400 Service Corp. International $ 91,350
-------------------------------------------------------------
Health Suppliers/Services - 1.5%
800 Johnson & Johnson 67,100
-------------------------------------------------------------
Healthcare Management - 0.9%
500 Aetna, Inc. 39,312
-------------------------------------------------------------
Insurance Brokers & Other Insurance - 0.5%
400 AMBAC, Inc. 24,075
-------------------------------------------------------------
Insurance-Life - 2.4%
400 Hartford Life, Inc. 23,300
500 Nationwide Financial Services, Inc. 25,844
700 SunAmerica, Inc. 56,787
----------
105,931
-------------------------------------------------------------
Integrated Oil - 2.2%
100 Atlantic Richfield Co. 6,525
400 Exxon Corp. 29,250
300 Mobil Corp. 26,138
500 Texaco, Inc. 26,438
300 Unocal Corp. 8,756
----------
97,107
-------------------------------------------------------------
Internet Services - 1.0%
300 America Online, Inc.* 43,425
-------------------------------------------------------------
Media & Communications - 17.6%
2,200 AH Belo Corp. 43,862
800 Cablevision Systems Corp.* 40,150
2,900 CBS, Inc. 94,975
500 Central Newspapers, Inc. 35,719
1,400 Chancellor Media Corp.* 67,025
400 Comcast Corp. 23,475
600 Gannett Co. 38,700
1,800 HBO & Co. 51,637
1,800 Infinity Broadcasting Corp.* 49,275
700 Jacor Communications, Inc.* 45,062
900 New York Times Co. 31,219
2,300 Liberty Media Group* 105,944
1,300 TCI Group* 71,906
1,000 Time Warner, Inc. 62,062
300 Tribune Co. 19,800
300 Ziff Davis, Inc.* 4,744
----------
785,555
-------------------------------------------------------------
Oil & Gas Services - 1.3%
1,300 Schlumberger, Ltd. 59,963
-------------------------------------------------------------
Pharmaceuticals - 9.8%
1,600 American Home Products Corp. 90,100
800 Bristol-Myers Squibb Co. 107,050
900 Pfizer, Inc. 112,894
800 Schering-Plough Corp. 44,200
1,100 Warner-Lambert Co. 82,706
----------
436,950
-------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
31
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST CAPITAL GROWTH FUND
Statement of Investments
December 31, 1998
<TABLE>
<CAPTION>
Shares Description Value
<C> <S> <C>
Common Stocks - (continued)
Recreational Products - 0.8%
1,000 Hasbro, Inc. $ 36,125
----------------------------------------------------------------
Retail - 1.8%
1,000 Wal-Mart Stores, Inc. 81,437
----------------------------------------------------------------
Semiconductors - 0.8%
300 Intel Corp. 35,569
----------------------------------------------------------------
Software & Services - 5.2%
1,900 First Data Corp. 60,206
1,000 Microsoft Corp.* 138,688
700 Sterling Commerce, Inc.* 31,500
----------
230,394
----------------------------------------------------------------
Specialty Finance & Agencies - 6.6%
600 C.I.T. Group, Inc. 19,088
1,600 Federal Home Loan Mortgage Corp. 103,100
1,300 Federal National Mortgage Association 96,200
3,000 MBNA Corp. 74,813
----------
293,201
----------------------------------------------------------------
Specialty Retail - 1.8%
600 Home Depot, Inc. 36,713
1,100 Tandy Corp. 45,306
----------
82,019
----------------------------------------------------------------
Supermarkets - 2.7%
500 CVS Corp. 27,500
600 Rite Aid Corp. 29,738
1,100 Walgreen Co. 64,419
----------
121,657
----------------------------------------------------------------
Telecommunications - 1.0%
600 MCI Worldcom, Inc.* 43,050
----------------------------------------------------------------
Telecommunications Equipment - 2.7%
700 Cisco Systems, Inc.* 64,969
500 Lucent Technologies, Inc. 55,000
----------
119,969
----------------------------------------------------------------
Tobacco - 1.4%
1,200 Philip Morris Companies, Inc. 64,200
----------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $3,745,142) $4,278,431
----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
<C> <S> <C> <C>
Repurchase Agreement - 2.2%
Joint Repurchase Agreement Account(a)
$100,000 4.89% 01/04/99 $ 100,000
--------------------------------------------
TOTAL REPURCHASE AGREEMENT
(Cost $100,000) $ 100,000
--------------------------------------------
TOTAL INVESTMENTS
(Cost $3,845,142)(b) $4,378,431
--------------------------------------------
Federal Income Tax Informa-
tion:
Gross unrealized gain for
investments in which value
exceeds cost $ 669,406
Gross unrealized loss for
investments in which cost
exceeds value (137,940)
--------------------------------------------
Net unrealized gain $ 531,466
--------------------------------------------
</TABLE>
* Non-income producing security.
(a) The repurchase agreement is fully collateralized by Federal Agency
obligations.
(b) The aggregate cost for federal income tax purposes is $3,846,965.
The percentage shown for each investment category reflects the value of in-
vestments in that category as a percentage of total net assets.
The accompanying notes are an integral part of these financial statements.
32
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST MID CAP EQUITY FUND
Statement of Investments
December 31, 1998
<TABLE>
<CAPTION>
Shares Description Value
<C> <S> <C>
Common Stocks - 70.3%
Air Freight, Truck & Other - 1.4%
2,100 CNF Transportation, Inc. $ 78,881
---------------------------------------------------------------
Auto Suppliers - 4.1%
500 Federal-Mogul Corp. 29,750
1,300 Lear Corp.* 50,050
2,200 Lucasvarity PLC ADR 73,700
1,200 Magna International, Inc. 74,400
----------
227,900
---------------------------------------------------------------
Banks - 4.0%
5,200 Pacific Century Financial Corp. 126,750
2,100 Republic New York Corp. 95,681
----------
222,431
---------------------------------------------------------------
Chemical Products - 1.0%
2,100 IMC Global, Inc. 44,888
400 Olin Corp. 11,325
----------
56,213
---------------------------------------------------------------
Construction/Environmental Services - 1.0%
1,900 Browning-Ferris Industries, Inc. 54,031
---------------------------------------------------------------
Consumer Staples - 0.9%
5,900 Perrigo Co.* 51,994
---------------------------------------------------------------
Department Stores - 2.0%
1,200 Federated Department Stores, Inc.* 52,275
1,400 Sears Roebuck & Co. 59,500
----------
111,775
---------------------------------------------------------------
Electronics - 4.5%
2,300 Avnet, Inc. 139,150
7,750 Vishay Intertechnology, Inc.* 112,375
----------
251,525
---------------------------------------------------------------
Energy Refining & Marketing - 1.7%
3,100 Tosco Corp. 80,213
600 USX-Marathon Group, Inc. 18,075
----------
98,288
---------------------------------------------------------------
Entertainment & Leisure - 3.4%
3,400 Hilton Hotels Corp. 65,025
3,200 Mirage Resorts, Inc.* 47,800
1,600 Tricon Global Restaurants, Inc.* 80,200
----------
193,025
---------------------------------------------------------------
Forest Products - 4.8%
1,300 Georgia-Pacific Corp. 76,131
5,500 Georgia-Pacific Corp. (Timber Group) 130,969
4,061 Smurfit-Stone Container Corp.* 64,215
----------
271,315
---------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Shares Description Value
<C> <S> <C>
Common Stocks - (continued)
Healthcare Management - 6.4%
1,900 Aetna, Inc. $ 149,387
5,800 Quest Diagnostics Inc.* 103,312
4,000 Tenet Healthcare Corp.* 105,000
----------
357,699
------------------------------------------------------------------
Insurance Brokers & Other Insurance - 2.3%
1,300 Loews Corp. 127,725
------------------------------------------------------------------
Insurance-Life - 0.8%
400 Reliastar Financial Corp. 18,450
700 Torchmark Corp. 24,719
----------
43,169
------------------------------------------------------------------
Insurance-Property and Casualty - 2.2%
800 Allmerica Financial Corp. 46,300
1,200 CNA Financial Corp.* 48,300
700 Everest Reinsurance Holdings, Inc. 27,256
----------
121,856
------------------------------------------------------------------
Integrated Oil - 1.9%
1,000 Elf Aquitaine ADR 56,625
2,900 Occidental Petroleum Corp. 48,938
----------
105,563
------------------------------------------------------------------
Investment Brokers & Managers - 1.7%
68 Waddell & Reed Financial, Inc. 1,611
3,993 Waddell & Reed Financial, Inc. Class B* 92,837
----------
94,448
------------------------------------------------------------------
Logistics/Rail - 1.2%
3,700 Canadian Pacific, Ltd. 69,837
------------------------------------------------------------------
Media & Communications - 3.0%
2,300 AH Belo Corp. 45,856
1,800 Dun & Bradstreet Corp. 56,813
1,900 New York Times Co. 65,906
----------
168,575
------------------------------------------------------------------
Oil & Gas Services - 2.8%
2,700 Baker Hughes, Inc. 47,756
2,200 Transocean Offshore, Inc. 58,988
1,600 Veritas DGC, Inc.* 20,800
1,600 Weatherford International* 31,000
----------
158,544
------------------------------------------------------------------
Packaging - 1.6%
1,400 Crown Cork & Seal, Inc. 43,138
900 Sealed Air Corp.* 45,956
----------
89,094
------------------------------------------------------------------
Personal Computers and Peripherals - 1.9%
5,100 Quantum Corp.* 108,375
------------------------------------------------------------------
Recreational Products - 1.3%
2,000 Hasbro, Inc. 72,250
------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
36
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST MID CAP EQUITY FUND
<TABLE>
<CAPTION>
Shares Description Value
<C> <S> <C>
Common Stocks - (continued)
Specialty Finance & Agencies - 1.8%
1,600 C.I.T. Group, Inc. $ 50,900
900 Finova Group, Inc. 48,544
----------
99,444
------------------------------------------------------
Specialty Retail - 1.1%
3,600 Toys R Us, Inc.* 60,750
------------------------------------------------------
Steel - 3.2%
2,400 AK Steel Holding Corp. 56,400
5,900 Ispat International NV 45,725
4,200 Ucar International, Inc.* 74,813
----------
176,938
------------------------------------------------------
Supermarkets - 1.2%
6,500 Fleming Companies, Inc. 67,437
------------------------------------------------------
Textiles - 0.8%
3,300 Fruit of the Loom, Inc.* 45,581
------------------------------------------------------
Tire & Other Related Rubber Products - 0.9%
1,000 Goodyear Tire & Rubber Co. 50,437
------------------------------------------------------
Tobacco - 2.0%
1,600 RJR Nabisco Holdings, Corp. 47,500
1,900 UST, Inc. 66,263
----------
113,763
------------------------------------------------------
Utilities - 3.4%
8,000 CMP Group, Inc. 151,000
2,400 Northeast Utilities* 38,400
----------
189,400
------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $4,093,358) $3,938,263
------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
<S> <C> <C> <C>
U.S. Treasury Obligation - 1.1%
United States Treasury Bill
$60,000 4.57%(a) 02/04/99 59,738
---------------------------------------------------------------------------------------------------
TOTAL U.S. Treasury Obligation
(Cost $59,738) $ 59,738
---------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
<S> <C> <C> <C>
Repurchase Agreement - 30.3%
Joint Repurchase Agreement Account(b)
$1,700,000 4.89% 01/04/99 $1,700,000
-------------------------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENT
(Cost $1,700,000) $1,700,000
-------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS
(Cost $5,853,096)(c) $5,698,001
-------------------------------------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost
$ 200,558
Gross unrealized loss for investments in which
cost exceeds value
(397,485)
-------------------------------------------------------------------------------------------------
Net unrealized loss $ (196,927)
-------------------------------------------------------------------------------------------------
</TABLE>
Futures contracts open at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Number of
Contracts Settlement Unrealized
Type Long(d) Month Gain
<S> <C> <C> <C>
-----------------------------------------------------
S&P 500 Stock Index 3 March 1999 $ 42,855
-----------------------------------------------------
</TABLE>
* Non-income producing security.
(a) The interest rate disclosed for this security represents the effective
yield to maturity and is being segregated as collateral for open futures
contracts.
(b) The repurchase agreement is fully collateralized by Federal Agency
obligations and is being segregated as collateral for open futures
contracts.
(c) The aggregate cost for federal income tax purposes is $5,894,928.
(d) Each S&P 500 Stock Index represents $250,000 in notional par value. The
total net notional amount and net market value are $750,000 and $934,125,
respectively. The determination of notional amounts as presented here are
indicative only of volume of activity and not a measure of market risk.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
------------------------------------------------------------------------------
Investment Abbreviations:
ADR--American Depository Receipt
------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
37
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST INTERNATIONAL EQUITY FUND
Statement of Investments
December 31, 1998
<TABLE>
<CAPTION>
Shares Description Value
<C> <S> <C>
Common Stocks - 93.4%
Australian Dollar - 2.8%
2,800 AMP, Ltd. (Insurance) $ 35,474
13,800 Fosters Brewing Group, Ltd. (Alcohol) 37,377
3,768 Lend Lease Corp. (Financial Services) 50,797
4,550 Tab Corp Holdings, Ltd. (Entertainment & Leisure) 27,882
15,500 Telstra Corp. (Utilities) 72,471
7,100 Westpac Banking Corp. (Banks) 47,510
12,200 Woolworths, Ltd. (Retail) 41,536
----------
313,047
-----------------------------------------------------------------------------
British Pound Sterling - 14.2%
7,812 Glaxo Wellcome PLC (Pharmaceuticals) 268,923
11,804 Great Universal Stores PLC (Retail) 124,531
23,798 Hays PLC (Business Services) 209,552
38,949 Misys PLC (Business Services) 286,019
46,164 Rentokil Initial PLC (Business Services) 348,972
17,658 Select Appointments Holdings PLC (Business Services) 181,890
10,753 Vodafone Group PLC (Utilities) 174,721
----------
1,594,608
-----------------------------------------------------------------------------
Danish Krone - 1.8%
1,995 ISS International Service System (Business Services) 129,775
515 Novo-Nordisk A/S (Pharmaceuticals) 67,973
----------
197,748
-----------------------------------------------------------------------------
French Franc - 12.3%
1,551 Axa (Insurance) 224,702
1,930 Dexia France (Banks) 297,215
597 Vivendi (Utilities) 154,829
2,276 Elf Aquitaine (Oil & Gas) 262,976
2,325 STMicroelectronics (Electronics) 182,973
1,556 Societe Generale (Banks) 251,866
----------
1,374,561
-----------------------------------------------------------------------------
Hong Kong Dollar - 1.9%
5,000 Asia Satellite Telecom Holdings, Ltd. (Utilities) 8,906
13,000 Cheung Kong Holdings, Ltd. (Real Estate) 93,545
42,000 China Telecom (Hong Kong), Ltd. (Utilities) 72,642
8,000 CLP Holdings, Ltd. (Utilities) 39,858
----------
214,951
-----------------------------------------------------------------------------
Irish Punt - 3.3%
16,528 Bank of Ireland (Banks) 367,491
-----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Shares Description Value
<C> <S> <C>
Common Stocks - (continued)
Italian Lira - 3.5%
3,085 Arnoldo Mondadori Editore SPA (Utilities) $ 40,768
92,618 SEAT Pagine Gialle (Media & Communications) 71,139
38,903 Telecom Italia Mobile SPA (Utilities) 287,046
----------
398,953
-------------------------------------------------------------------------
Japanese Yen - 21.6%
2,500 Aderans Company, Ltd. (Retail) 77,621
6,000 Canon, Inc. (Computers/Office) 128,173
3,400 Circle K Japan Co. (Retail) 149,474
4,000 Fuji Photo Film, Ltd. (Entertainment & Leisure) 148,607
1,300 Ito En, Ltd. (Food & Beverages) 67,041
7,000 Kao Corp. (Consumer Goods) 157,895
11,000 Kirin Brewery, Ltd. (Alcohol) 140,115
7,000 Kokuyo Company, Ltd. (Computers/Office) 94,180
3,000 Mirai Industry Company, Ltd. (Electronics) 29,987
25,000 Mitsui Marine & Fire (Insurance) 131,579
10,000 NGK Insulators, Ltd. (Diversified Industrial
Manufacturing) 128,881
1,300 Nintendo Company, Ltd. (Entertainment & Leisure) 125,918
3 NTT Mobile Communications (Utilities) 123,395
1,000 Rohm Co. (Electronics) 91,022
8,000 Sankyo Company, Ltd. (Pharmaceuticals) 174,790
1,100 SMC Corp. (Industrial Machinery) 87,766
2,000 Takefuji Corp. (Financial Services) 145,953
2,000 TDK Corp. (Consumer Goods) 182,751
8,000 Toppan Forms Company, Ltd. (Printing) 142,238
3,000 Yamanouchi Pharmaceutical (Pharmaceuticals) 96,594
----------
2,423,980
-------------------------------------------------------------------------
Netherlands Guilder - 12.3%
1,939 Aegon NV (Insurance) 238,001
2,974 Benckiser NV (Consumer Goods) 194,710
10,691 TNT Post Groep NV (Business Services) 344,284
7,625 VNU (Media & Communications) 287,353
1,470 Wolters Kluwer NV (Media & Communications) 314,391
----------
1,378,739
-------------------------------------------------------------------------
Portuguese Escudo - 1.5%
7,516 Electricidade de Portugal SA (Utilities) 165,554
-------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
42
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
Shares Description Value
<C> <S> <C>
Common Stocks - (continued)
Singapore Dollar - 0.6%
3,000 Singapore Airlines, Ltd. (Transportation) $ 21,987
4,000 Singapore Press Holdings, Ltd. (Media &
Communications) 43,610
-----------
65,597
------------------------------------------------------------------------
Spanish Peseta - 3.1%
10,275 Banco Santander SA (Banks) 203,881
3,277 Telefonica de Espana SA (Utilities) 145,496
-----------
349,377
------------------------------------------------------------------------
Swedish Krona - 6.9%
6,090 Ericsson Telecommunications (Computers/Office) 144,664
15,942 Securitas AB (Business Services) 247,230
8,099 Skandia Forsakring (Insurance) 123,606
9,969 ForeningSparbanken AB (Banks) 257,667
-----------
773,167
------------------------------------------------------------------------
Swiss Franc - 7.6%
452 Adecco SA (Business Services) 206,307
115 Nestle SA (Food & Beverages) 250,309
114 Novartis AG (Pharmaceuticals) 224,066
548 UBS AG (Banks) 168,345
-----------
849,027
------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $9,174,972) $10,466,800
------------------------------------------------------------------------
Preferred Stock - 2.2%
German Deutschemark - 2.2%
2,749 Henkel KGAA - Vorzug (Chemical Products) $ 245,770
------------------------------------------------------------------------
TOTAL PREFERRED STOCK
(Cost $193,435) $ 245,770
------------------------------------------------------------------------
Rights - 0.0%
Spanish Peseta - 0.0%
3,277 Telefonica de Espana SA* (Utilities) $ 2,905
------------------------------------------------------------------------
TOTAL RIGHTS
(Cost $0) $ 2,905
------------------------------------------------------------------------
TOTAL INVESTMENTS
(Cost $9,368,407)(a) $10,715,475
------------------------------------------------------------------------
</TABLE>
<TABLE>
----------------------------
<S> <C> <C>
Federal Income
Tax Informa-
tion:
Gross
unrealized gain
for investments
in which value
exceeds cost $1,626,347
Gross
unrealized loss
for investments
in which cost
exceeds value (291,763)
----------------------------
Net unrealized
gain $1,334,584
----------------------------
</TABLE>
*Non-income producing security.
(a)The aggregate cost for federal income tax purposes is $9,380,891.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
<TABLE>
Common and Preferred Stock
Industry Concentrations
<S> <C>
Alcohol 1.3%
Banks 14.2
Business Services 17.4
Chemical Products 2.2
Computers/Office 3.3
Consumer Goods 4.8
Diversified
Industrial
Manufacturing 1.2
Electronics 2.7
Entertainment &
Leisure 2.7
Financial
Services 1.8
Food & Beverages 2.8
Industrial
Machinery 0.8
Insurance 7.1
Media &
Communications 6.4
Oil & Gas 2.2
Pharmaceuticals 7.4
Printing 1.3
Real Estate 0.8
Retail 3.5
Transportation 0.2
Utilities 11.5
-----------------------------
TOTAL COMMON AND
PREFERRED STOCK 95.6%
-----------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
43
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST GLOBAL INCOME FUND
Statement of Investments
December 31, 1998
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount(a) Rate Date Value
<S> <C> <C> <C>
Foreign Debt Obligations - 43.5%
British Pound Sterling - 10.7%
United Kingdom Treasury
BPS 200,000 9.50% 10/25/04(b) $ 416,264
100,000 7.75 09/08/06(b) 201,208
----------
$ 617,472
------------------------------------------------------------------------------------
Canadian Dollar - 1.8%
Government of Canada
CAD 150,000 6.00% 06/01/08(b) $ 106,232
------------------------------------------------------------------------------------
Danish Krone - 5.1%
Kingdom of Denmark
DKK 1,600,000 8.00% 05/15/03(b) $ 291,807
------------------------------------------------------------------------------------
French Franc - 1.0%
Government of France
FRF 200,000 8.50% 04/25/23(b) $ 55,395
------------------------------------------------------------------------------------
German Deutschemark - 7.4%
Federal Republic of Germany
DEM 300,000 6.00% 01/04/07 $ 206,381
300,000 6.25 01/04/24(b) 216,679
----------
$ 423,060
------------------------------------------------------------------------------------
Italian Lira - 4.2%
Republic of Italy
ITL 70,000,000 6.75% 07/01/07(b) $ 50,586
200,000,000 9.00 11/01/23(b) 189,878
----------
$ 240,464
------------------------------------------------------------------------------------
Japanese Yen - 10.5%
Asian Development Bank
JPY 20,000,000 5.63% 02/18/02 $ 200,749
Government of Japan
40,000,000 0.90 12/22/08(b) 313,100
International Bank for Reconstruction and Development
10,000,000 2.00 02/18/08 87,990
----------
$ 601,839
------------------------------------------------------------------------------------
Spanish Peseta - 2.8%
Government of Spain
ESP 20,000,000 6.00% 01/31/08(b) $ 161,976
------------------------------------------------------------------------------------
TOTAL FOREIGN DEBT OBLIGATIONS
(Cost $2,408,994) $2,498,245
------------------------------------------------------------------------------------
Corporate Bonds - 24.3%
British Pound Sterling - 3.2%
Abbey National Treasury
BPS 100,000 8.00% 04/02/03 $ 183,051
------------------------------------------------------------------------------------
German Deutschemark - 2.2%
Baden-Wuerttembergische Land--Finance
DEM 200,000 5.38% 02/05/10 $ 129,478
------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount(a) Rate Date Value
<S> <C> <C> <C>
Corporate Bonds - continued
United States Dollar - 18.9%
Bayerische Landesbank Girozentrale
USD 250,000 6.63% 06/25/07 $ 264,610
Ford Motor Credit Corp.
200,000 6.13 04/28/03 203,624
International Bank for Reconstruction and Development
100,000 5.63 03/17/03 101,163
100,000 5.75 02/06/08 103,610
Merrill Lynch and Company, Inc.
100,000 6.00 02/12/03 101,500
Nederlandse Waterschapsbank
100,000 6.13 02/13/08 104,277
Ontario Hydro
100,000 6.10 01/30/08(b) 104,283
Prudential Insurance Company of America
100,000 6.38 07/23/06 102,070
----------
$1,085,137
--------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost $1,353,196) $1,397,666
--------------------------------------------------------------------------------------
U.S. Treasury Obligations - 23.3%
United States Treasury Bond
USD 100,000 6.75% 08/15/26(b) $ 119,796
United States Treasury Notes
300,000 5.38 01/31/00(b) 302,250
100,000 6.25 02/15/03 105,750
650,000 7.00 07/15/06(b) 740,084
60,000 6.63 05/15/07(b) 67,472
--------------------------------------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $1,303,679) $1,335,352
--------------------------------------------------------------------------------------
TOTAL INVESTMENTS
(Cost $5,065,869)(c) $5,231,263
--------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
47
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST GLOBAL INCOME FUND
Statement of Investments
December 31, 1998
<TABLE>
---------------------------
<S> <C> <C>
Federal Income Tax
Information:
Gross
unrealized gain
for investments
in which value
exceeds cost $ 194,013
Gross
unrealized loss
for investments
in which cost
exceeds value (30,476)
---------------------------
Net unrealized
gain $ 163,537
---------------------------
</TABLE>
(a) The principal amount of each security is stated in the currency in which
the bond is denominated. See below.
BPS = British Pound Sterling
ITL = Italian Lira
CAD = Canadian Dollar
JPY = Japanese Yen
DKK = Danish Krone
ESP = Spanish Peseta
DEM = German Deutschemark
USD = United States Dollar
FRF = French Franc
(b) The security is being segregated as collateral for forward foreign
currency exchange contracts.
(c) The aggregate cost for federal income tax purposes is $5,067,726.
Interest rates represent either the stated coupon rate, annualized yield on
date of purchase for discounted notes, or for floating rate securities, the
current reset rate, which is based upon current interest rate indices.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
The accompanying notes are an integral part of these financial statements.
48
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
Report of Independent Public Accountants
To the Shareholders and Board of Trustees of Goldman Sachs Variable Insurance
Trust
We have audited the accompanying statements of assets and liabilities of
Goldman Sachs Growth and Income Fund, CORE U.S. Equity Fund, CORE Large Cap
Growth Fund, CORE Small Cap Equity Fund, Capital Growth Fund, Mid Cap Equity
Fund, International Equity Fund and Global Income Fund, portfolios
constituting the Goldman Sachs Variable Insurance Trust (a Delaware Business
Trust), including the statements of investments, as of December 31, 1998, and
the related statements of operations and the statements of changes in net
assets and the financial highlights for the periods presented. These
financial statements and the financial highlights are the responsibility of
the Funds' management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and the
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of December 31, 1998 by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights
referred to above present fairly, in all material respects, the financial
position of each of the respective portfolios constituting the Goldman Sachs
Variable Insurance Trust as of December 31, 1998, the results of their
operations, the changes in their net assets and the financial highlights for
the periods presented, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 4, 1999
49
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
Statements of Assets and Liabilities
December 31, 1998
<TABLE>
<CAPTION>
Growth and
Income Fund
Assets:
<S> <C>
Investment in securities, at value (identified cost
$13,528,006, $8,540,494, $6,472,797, $4,534,117, $3,845,142,
$5,853,096, $9,368,407, $5,065,869) $13,782,813
Cash 26,407
Receivables:
Investment securities sold 1,595
Forward foreign currency exchange contracts --
Fund shares sold 19,406
Dividends and interest 18,110
Variation margin --
Deferred organization expenses 16,656
Other assets 18,237
----------------------------------------------------------------------------
Total assets 13,883,224
----------------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased --
Forward foreign currency exchange contracts --
Fund shares repurchased 8,923
Management fees 8,273
Transfer Agent fees 8,039
Accrued expenses and other liabilities 43,560
----------------------------------------------------------------------------
Total liabilities 68,795
----------------------------------------------------------------------------
Net Assets:
Paid-in capital 14,014,385
Accumulated distributions in excess of net investment income --
Accumulated undistributed net realized gain (loss) on
investments, futures and foreign currency transactions (454,763)
Net unrealized gain (loss) on investments, futures and
translation of assets and liabilities denominated in foreign
currencies 254,807
----------------------------------------------------------------------------
NET ASSETS $13,814,429
----------------------------------------------------------------------------
Total shares of beneficial interest outstanding, no par value
(unlimited shares authorized) 1,321,884
Net asset value and redemption price per share $ 10.45
----------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
50
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
<TABLE>
<CAPTION>
CORE U.S. CORE Large Cap CORE Small Cap Capital Mid Cap International Global
Equity Fund Growth Fund Equity Fund Growth Fund Equity Fund Equity Fund Income Fund
<S> <C> <C> <C> <C> <C> <C>
$9,853,601 $8,168,751 $4,835,367 $4,378,431 $5,698,001 $10,715,475 $5,231,263
-- 4,865 13,918 73,811 3,458 499,083 400,438
24,697 12,349 -- 15,993 15,800 920 --
-- -- -- -- -- 7,328 31,618
2,856 45,885 -- 104,170 18 25,906 1,123
10,823 7,378 3,401 3,095 4,013 13,343 139,066
-- -- -- -- 2,550 -- --
17,019 17,020 17,020 17,882 17,893 16,656 16,656
16,711 22,617 24,078 10,181 9,588 20,905 17,118
----------------------------------------------------------------------------------------------------
9,925,707 8,278,865 4,893,784 4,603,563 5,751,321 11,299,616 5,837,282
----------------------------------------------------------------------------------------------------
9,904 9,904 -- 67,350 63,290 -- --
-- -- -- -- -- 25,104 37,513
35,833 247 95 -- 8,290 516 813
5,581 4,566 2,922 2,563 3,433 8,993 4,381
10,955 8,802 6,280 9,310 9,704 10,003 8,609
54,573 40,957 43,595 61,286 62,708 49,278 44,680
----------------------------------------------------------------------------------------------------
116,846 64,476 52,892 140,509 147,425 93,894 95,996
----------------------------------------------------------------------------------------------------
8,732,725 7,146,086 5,311,057 3,953,090 5,939,157 9,870,592 5,585,944
-- -- -- -- -- (12,690) (6,552)
(236,971) (627,651) (771,415) (23,325) (223,029) 7,926 (1,856)
1,313,107 1,695,954 301,250 533,289 (112,232) 1,339,894 163,750
----------------------------------------------------------------------------------------------------
$9,808,861 $8,214,389 $4,840,892 $4,463,054 $5,603,896 $11,205,722 $5,741,286
----------------------------------------------------------------------------------------------------
859,002 703,221 535,508 394,437 653,841 941,060 556,488
$ 11.42 $ 11.68 $ 9.04 $ 11.31 $ 8.57 $ 11.91 $ 10.32
----------------------------------------------------------------------------------------------------
</TABLE>
51
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
Statements of Operations
For the Period Ended December 31, 1998(a)
<TABLE>
<CAPTION>
Growth and
Income Fund
<S> <C>
Investment income(b):
Dividends $ 98,920
Interest 76,118
-----------------------------------------------------------------------------
Total income 175,038
-----------------------------------------------------------------------------
Expenses:
Management fees 47,801
Custodian fees 43,223
Transfer agent fees 26,530
Professional fees 34,553
Amortization of deferred organization expenses 4,016
Trustee fees 5,543
Other 9,537
-----------------------------------------------------------------------------
Total expenses 171,203
-----------------------------------------------------------------------------
Less -- expenses reimbursed by Goldman Sachs (113,842)
-----------------------------------------------------------------------------
Net expenses 57,361
-----------------------------------------------------------------------------
NET INVESTMENT INCOME 117,677
-----------------------------------------------------------------------------
Realized and unrealized gain (loss) on investments, futures and foreign
currency transactions:
Net realized gain (loss) from:
Investment transactions (510,320)
Futures transactions 55,557
Foreign currency related transactions --
Net change in unrealized gain (loss) on:
Investments 254,807
Futures --
Translation of assets and liabilities denominated
in foreign currencies --
-----------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments, futures and foreign currency
transactions (199,956)
-----------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS $ (82,279)
-----------------------------------------------------------------------------
</TABLE>
(a) 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 Equity Funds commenced
operations on April 30, 1998 and May 1, 1998, respectively.
(b) For the Growth and Income, CORE U.S. Equity, CORE Large Cap Growth, Mid
Cap Equity, International Equity and Global Income Funds, taxes withheld
on dividends and interest were $766, $427, $225, $325, $15,495 and
$1,422, respectively.
The accompanying notes are an integral part of these financial statements.
52
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
<TABLE>
<CAPTION>
CORE U.S. CORE Large Cap CORE Small Cap Capital Mid Cap International Global
Equity Fund Growth Fund Equity Fund Growth Fund Equity Fund Equity Fund Income Fund
<S> <C> <C> <C> <C> <C> <C>
$ 79,736 $ 46,614 $ 46,750 $ 24,980 $ 26,963 $ 111,164 $ --
9,937 6,653 4,631 5,084 36,107 15,850 291,028
----------------------------------------------------------------------------------------------------
89,673 53,267 51,381 30,064 63,070 127,014 291,028
----------------------------------------------------------------------------------------------------
41,825 37,366 32,003 17,067 18,776 85,560 46,434
46,810 36,700 55,644 25,156 27,974 84,442 37,983
26,705 25,676 26,065 21,905 18,123 28,662 27,998
34,785 34,786 34,785 33,867 33,869 36,589 38,754
3,654 3,654 3,654 2,791 2,778 4,016 4,016
5,544 5,542 5,544 5,544 5,316 5,557 5,543
9,539 9,547 9,550 5,600 5,597 9,549 9,499
----------------------------------------------------------------------------------------------------
168,862 153,271 167,245 111,930 112,433 254,375 170,227
----------------------------------------------------------------------------------------------------
(121,062) (110,583) (128,862) (91,450) (90,137) (147,424) (116,054)
----------------------------------------------------------------------------------------------------
47,800 42,688 38,383 20,480 22,296 106,951 54,173
----------------------------------------------------------------------------------------------------
41,873 10,579 12,998 9,584 40,774 20,063 236,855
----------------------------------------------------------------------------------------------------
(189,538) (618,244) (771,415) (23,325) (177,110) 97,996 100,192
(47,433) (9,407) -- -- (45,919) -- --
-- -- -- -- (2) (38,843) (76,247)
1,313,107 1,695,954 301,250 533,289 (155,095) 1,347,068 165,394
-- -- -- -- 42,855 --
-- -- -- -- 8 (7,174) (1,644)
----------------------------------------------------------------------------------------------------
1,076,136 1,068,303 (470,165) 509,964 (335,263) 1,399,047 187,695
----------------------------------------------------------------------------------------------------
$1,118,009 $1,078,882 $(457,167) $519,548 $(294,489) $1,419,110 $ 424,550
----------------------------------------------------------------------------------------------------
</TABLE>
53
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
Statements of Changes in Net Assets
For the Period Ended December 31, 1998(a)
<TABLE>
<CAPTION>
Growth and
Income Fund
<S> <C>
From operations:
Net investment income $ 117,677
Net realized gain (loss) on investments, futures and foreign
currency transactions (454,763)
Net change in unrealized gain (loss) on investments, futures
and translation of assets and liabilities denominated in
foreign currencies 254,807
------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations (82,279)
------------------------------------------------------------------------------
Distributions to shareholders:
From net investment income (117,677)
In excess of net investment income (3,441)
From net realized gain on investment transactions --
------------------------------------------------------------------------------
Total distributions to shareholders (121,118)
------------------------------------------------------------------------------
From share transactions:
Proceeds from sales of shares 14,318,816
Reinvestment of dividends and distributions 121,118
Cost of shares repurchased (522,108)
------------------------------------------------------------------------------
Net increase in net assets resulting from share transactions 13,917,826
------------------------------------------------------------------------------
TOTAL INCREASE 13,714,429
------------------------------------------------------------------------------
Net assets:
Beginning of period 100,000
------------------------------------------------------------------------------
End of period $13,814,429
------------------------------------------------------------------------------
Accumulated distributions in excess of net investment income $ --
------------------------------------------------------------------------------
Summary of share transactions:
Shares sold 1,362,585
Shares issued on reinvestment of dividends and distributions 11,782
Shares repurchased (52,483)
------------------------------------------------------------------------------
TOTAL 1,321,884
------------------------------------------------------------------------------
</TABLE>
(a) 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 Equity Funds commenced
operations on April 30, 1998 and May 1, 1998, respectively.
The accompanying notes are an integral part of these financial statements.
54
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
<TABLE>
<CAPTION>
CORE U.S. CORE Large Cap CORE Small Cap Capital Mid Cap International Global
Equity Fund Growth Fund Equity Fund Growth Fund Equity Fund Equity Fund Income Fund
<S> <C> <C> <C> <C> <C> <C>
$ 41,873 $ 10,579 $ 12,998 $ 9,584 $ 40,774 $ 20,063 $ 236,855
(236,971) (627,651) (771,415) (23,325) (223,031) 59,153 23,945
1,313,107 1,695,954 301,250 533,289 (112,232) 1,339,894 163,750
------------------------------------------------------------------------------------------------
1,118,009 1,078,882 (457,167) 519,548 (294,489) 1,419,110 424,550
------------------------------------------------------------------------------------------------
(41,873) (10,579) (12,998) (9,584) (40,774) -- (213,231)
(1,567) (1,864) (1,946) (1,046) (2,334) -- --
-- -- -- -- -- (85,668) (57,323)
------------------------------------------------------------------------------------------------
(43,440) (12,443) (14,944) (10,630) (43,108) (85,668) (270,554)
------------------------------------------------------------------------------------------------
9,097,369 7,271,607 5,329,424 3,988,296 6,990,413 9,861,289 5,338,273
43,440 12,443 14,944 10,630 43,107 85,668 270,269
(406,517) (136,100) (31,365) (44,790) (1,092,027) (74,677) (21,252)
------------------------------------------------------------------------------------------------
8,734,292 7,147,950 5,313,003 3,954,136 5,941,493 9,872,280 5,587,290
------------------------------------------------------------------------------------------------
9,808,861 8,214,389 4,840,892 4,463,054 5,603,896 11,205,722 5,741,286
------------------------------------------------------------------------------------------------
-- -- -- -- -- -- --
------------------------------------------------------------------------------------------------
$9,808,861 $8,214,389 $4,840,892 $4,463,054 $ 5,603,896 $11,205,722 $5,741,286
------------------------------------------------------------------------------------------------
$ -- $ -- $ -- $ -- $ -- $ (12,690) $ (6,552)
------------------------------------------------------------------------------------------------
893,251 715,088 537,211 397,752 781,599 940,178 532,484
3,963 1,122 1,756 995 5,238 7,521 26,012
(38,212) (12,989) (3,459) (4,310) (132,996) (6,639) (2,008)
------------------------------------------------------------------------------------------------
859,002 703,221 535,508 394,437 653,841 941,060 556,488
------------------------------------------------------------------------------------------------
</TABLE>
55
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
<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 Equity 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
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 Equity Funds commenced
operations on April 30, 1998 and May 1, 1998, respectively.
(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.
The accompanying notes are an integral part of these financial statements.
56
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
<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>
57
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
Notes to Financial Statements
December 31, 1998
1. ORGANIZATION
Goldman Sachs Variable Insurance Trust (the "Trust") is a Delaware business
trust registered under the Investment Company Act of 1940, as amended ("the
Act") as an open-end, management investment company. The Trust includes
Goldman Sachs Growth and Income Fund ("Growth and Income"), Goldman Sachs
CORE U.S. Equity Fund ("CORE U.S. Equity"), Goldman Sachs CORE Large Cap
Growth Fund ("CORE Large Cap Growth"), Goldman Sachs CORE Small Cap Equity
Fund ("CORE Small Cap Equity"), Goldman Sachs Capital Growth Fund ("Capital
Growth"), Goldman Sachs Mid Cap Equity Fund ("Mid Cap Equity"), Goldman Sachs
International Equity Fund ("International Equity") and Goldman Sachs Global
Income Fund ("Global Income"), collectively, "the Funds" or individually a
"Fund". Each Fund, except the Global Income Fund is diversified under the
Act. The Global Income Fund is a "non-diversified" Fund under the Act.
Shares of the Trust may be purchased and held by separate accounts of par-
ticipating life insurance companies for the purpose of funding variable annu-
ity contracts and variable life insurance policies. Shares of the Trust are
not offered directly to the general public.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Funds. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make es-
timates and assumptions that may affect the reported amounts.
A. Investment Valuation -- Securities listed on any U.S. or foreign stock ex-
change or on the National Association of Securities Dealers Automated Quota-
tions System ("NASDAQ") will be valued at the last sale price on the exchange
or system in which they are principally traded on the valuation date. If
there is no sale on the valuation day, securities traded will be valued at
the mean between the closing bid and asked prices. Over-the-counter securi-
ties not quoted on NASDAQ will be valued at the last sale price on the valua-
tion day or, if no sale occurs, at the mean between the last bid and asked
price. Debt securities are valued at prices supplied by an independent pric-
ing service, which reflect broker/dealer-supplied valuations and matrix pric-
ing systems. Short-term debt obligations maturing in sixty days or less are
valued at amortized cost. Restricted securities, and other securities for
which quotations are not readily available, are valued at fair value using
methods approved by the Board of Trustees of the Trust.
B. Securities Transactions and Investment Income -- Securities transactions
are recorded on the trade date. Realized gains and losses on sales of invest-
ments are calculated on the identified-cost basis. Dividend income is re-
corded on the ex-dividend date. Dividends for which the fund has the choice
to receive either cash or stock are recognized as investment income in an
amount equal to the cash dividend. Interest income is determined on the basis
of interest accrued, premium amortized and discount earned. Growth and Income
and Global Income do not amortize premiums. In addition, it is the Funds'
policy to accrue for estimated capital gains taxes on foreign securities held
by the Funds, which are subject to such taxes.
C. Foreign Currency Translations -- Amounts denominated in foreign currencies
are translated into U.S. dollars on the following basis: (i) investment valu-
ations, other assets and liabilities initially expressed in foreign curren-
cies are converted each business day into U.S. dollars based upon current
exchange rates; (ii) purchases and sales of foreign investments, income and
expenses are converted into U.S. dollars based upon currency exchange rates
prevailing on the respective dates of such transactions.
58
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
Net realized and unrealized gain (loss) on foreign currency transactions
will represent: (i) foreign currency exchange gains and losses from the sale
and holdings of foreign currencies; (ii) gains and losses between trade date
and settlement date on investment securities transactions and forward ex-
change contracts; and (iii) gains and losses from the difference between
amounts of interest and dividend recorded and the amounts actually received.
D. Forward Foreign Currency Exchange Contracts -- International Equity and
Global Income may enter into forward foreign currency exchange contracts for
the purchase or sale of a specific foreign currency at a fixed price on a fu-
ture date as a hedge or cross-hedge against either specific transactions or
portfolio positions. International Equity and Global Income may also purchase
and sell forward contracts to seek to increase total return. All commitments
are "marked-to-market" daily at the applicable translation rates and any re-
sulting unrealized gains or losses are recorded in each Fund's financial
statements. The Funds record realized gains or losses at the time the forward
contract is offset by entry into a closing transaction or extinguished by de-
livery of the currency. Risks may arise upon entering into these contracts
from the potential inability of counterparties to meet the terms of their
contracts and from unanticipated movements in the value of a foreign currency
relative to the U.S. dollar.
E. Mortgage Dollar Rolls -- The Global Income may enter into mortgage "dollar
rolls" in which the Fund sells securities in the current month for delivery
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, the Fund loses the right to receive
principal and interest paid on the securities sold. However, the Fund bene-
fits to the extent of any difference between the price received for the secu-
rities 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 pur-
chase. The Fund will hold and maintain in a segregated account, until the
settlement date, cash or liquid assets, high-grade debt securities in an
amount equal to the forward purchase price. For financial reporting and tax
reporting purposes, the Fund treats mortgage dollar rolls as two separate
transactions; one involving the purchase of a security and a separate trans-
action involving a sale.
F. Futures Contracts -- The Funds may enter into futures transactions to
hedge against changes in interest rates, securities prices, currency exchange
rates or to seek an increase of total return.
Upon entering into a futures contract, the Funds are required to deposit
with a broker an amount of cash or securities equal to the minimum initial
margin requirement of the futures exchange on which the contract is traded.
Payments for mark to market on futures contracts ("variation margin") are
paid or received by the Funds daily, dependent on the daily fluctuations in
the value of the contracts, and are recorded for financial reporting purposes
as unrealized gains or losses. When contracts are closed, the Funds realize a
gain or loss equal to the difference between the value of the futures con-
tract to sell and the value of futures contract to buy. Gains and losses are
reported in the Statements of Operations.
The use of futures contracts involve, to varying degrees, elements of mar-
ket and counterparty risk which may exceed the amounts recognized in the
Statements of Assets and Liabilities. Changes in the value of the futures
contract may not directly correlate with changes in the value of the under-
lying securities. This risk may decrease the effectiveness of the Funds'
hedging strategies and potentially result in a loss.
G. Federal Taxes -- It is each Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and
to distribute each year substantially all of its investment company taxable
and tax-
exempt income to its shareholders. Accordingly, no federal tax provisions are
required.
59
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
Notes to Financial Statements
December 31, 1998
The characterization of distributions to shareholders for financial report-
ing purposes is determined in accordance with income tax rules. Therefore,
the source of a portfolio's distributions may be shown in the accompanying
financial statements as either from or in excess of net investment income or
net realized gain on investment transactions, or from paid-in-capital, de-
pending on the type of book/tax differences that may exist as well as timing
differences.
As of December 31, 1998, the following Funds had capital loss carryforwards
for U.S. federal tax purposes. This amount is available to be carried forward
to offset future capital gains to the extent permitted by applicable laws or
regulations.
<TABLE>
<CAPTION>
Year of
Fund Amount Expiration
- -----------------------------------------------
<S> <C> <C>
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 Equity Fund 138,000 2006
- -----------------------------------------------
</TABLE>
H. Deferred Organization Expenses -- Organization-related costs are being am-
ortized on a straight-line basis over a period of five years. Included in
"Accrued expenses and other liabilities" in the accompanying Statements of
Assets and Liabilities, the Capital Growth and Mid Cap Equity Funds each owed
$11,781 to an affiliate for organization expenses incurred for the period
ended December 31, 1998.
The deferred organization costs for the Growth and Income, International
Equity and Global Income Funds each have an unamortized period remaining
through January 12, 2003; the CORE U.S. Equity, CORE Large Cap Growth and
CORE Small Cap Equity Funds each have an unamortized period remaining through
February 13, 2003; the Capital Growth and Mid Cap Equity Funds have an unam-
ortized period remaining through April 30, 2003 and May 1, 2003, respective-
ly.
I. Expenses -- Expenses incurred by the Trust that do not specifically relate
to an individual portfolio of the Trust are generally allocated to the port-
folios on a pro-rata basis.
3. AGREEMENTS
Pursuant to the Investment Management Agreement (the "Agreement"), Goldman
Sachs Asset Management ("GSAM"), a separate operating division of Goldman,
Sachs & Co. ("Goldman Sachs"), serves as the investment advisor for the
Growth and Income, CORE U.S. Equity, CORE Large Cap Growth, CORE Small Cap
Equity, Capital Growth and Mid Cap Equity Funds. Goldman Sachs Asset Manage-
ment International ("GSAMI"), an affiliate of Goldman Sachs, serves as the
investment advisor for International Equity and Global Income Fund. Under the
Agreement, the advisers, subject to the general supervision of the Trust's
Board of Trustees, manage the Funds' portfolios (GSAM and GSAMI are each re-
ferred to herein as the "investment advisor.") As compensation for the serv-
ices rendered pursuant to the Agreement, the assumption of the expenses
related thereto and administering the Funds' business affairs, including pro-
viding facilities, the advisor is entitled to a fee, computed daily and pay-
able monthly at an annual rate equal to .75%, .70%, .70%, .75%, .75%, .80%,
1.00% and .90% of average daily net assets of Growth and Income, CORE U.S.
Equity, CORE Large Cap Growth, CORE Small Cap Equity, Capital Growth, Mid Cap
Equity, International Equity and Global Income, respectively.
The advisor has voluntarily agreed to limit certain "Other Expenses" of the
Funds (excluding management fees, taxes, interest, brokerage fees, litigation
and indemnification and other extraordinary expenses) to the extent that such
expenses exceed .15%, .10%, .10%, .15%, .15%, .15%, .25% and .15% of the av-
erage daily net assets of Growth and Income, CORE
60
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
U.S. Equity, CORE Large Cap Growth, CORE Small Cap Equity, Capital Growth,
Mid Cap Equity, International Equity and Global Income, respectively.
Goldman Sachs also serves as the Transfer Agent of the Funds for a fee.
Goldmans Sachs serves as the distributor of each Fund's shares at no cost to
the Funds.
As of December 31, 1998, Goldman Sachs was the beneficial owner of 16%,
58%, 71%, 94%, 76%, 31%, 83% and 94% of the outstanding shares of the Growth
and Income, CORE U.S. Equity, CORE Large Cap Growth, CORE Small Cap Equity,
Capital Growth, Mid Cap, International Equity and Global Income Funds, re-
spectively.
For the period ended December 31, 1998, the advisor has voluntarily agreed
to reimburse other expenses as follows (amounts in thousands):
<TABLE>
<CAPTION>
Reimbursement
Fund Reimbursement Outstanding
-----------------------------------------------------------------------------------------
<S> <C> <C>
Growth and Income $114 $18
-----------------------------------------------------------------------------------------
CORE U.S. Equity 121 17
-----------------------------------------------------------------------------------------
CORE Large Cap Growth 111 23
-----------------------------------------------------------------------------------------
CORE Small Cap Equity 129 24
-----------------------------------------------------------------------------------------
Capital Growth 91 10
-----------------------------------------------------------------------------------------
Mid Cap Equity 90 10
-----------------------------------------------------------------------------------------
International Equity 147 21
-----------------------------------------------------------------------------------------
Global Income 116 17
-----------------------------------------------------------------------------------------
</TABLE>
The reimbursement outstanding balance is included in other assets in the ac-
companying statements of assets and liabilities.
4. PORTFOLIO SECURITY TRANSACTIONS
Purchases and proceeds of sales or maturities of long-term securities for the
period ended December 31, 1998, were as follows:
<TABLE>
<CAPTION>
Sales or Sales or Maturities
Purchases of Purchases Maturities of (excluding U.S.
U.S. Government (excluding U.S. U.S. Government Government and
and agency Government and and agency agency
obligations agency obligations) obligations obligations)
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Growth and
Income -- $18,156,349 -- $4,917,610
--------------------------------------------------------------------------------------
CORE U.S. Eq-
uity -- 13,803,509 -- 5,073,477
--------------------------------------------------------------------------------------
CORE Large
Cap Growth -- 11,263,545 -- 4,172,504
--------------------------------------------------------------------------------------
CORE Small
Cap Equity -- 8,849,890 -- 3,544,358
--------------------------------------------------------------------------------------
Capital
Growth -- 4,425,556 -- 657,008
--------------------------------------------------------------------------------------
Mid Cap Eq-
uity -- 5,312,296 -- 1,041,828
--------------------------------------------------------------------------------------
International
Equity -- 15,832,457 -- 6,562,046
--------------------------------------------------------------------------------------
Global Income 3,427,184 11,517,813 2,311,961 7,667,469
--------------------------------------------------------------------------------------
</TABLE>
61
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
Notes to Financial Statements
December 31, 1998
At December 31, 1998, the International Equity Fund had open forward for-
eign currency exchange contracts both to purchase and sell foreign currencies
as follows:
<TABLE>
<CAPTION>
Forward Foreign Currency Contractual Current Unrealized
Purchase Contracts Value Value Gain (Loss)
------------------------------------------------------------------------------
<S> <C> <C> <C>
Deutschemark Expiring 1/25/99 $ 280,271 $ 278,458 $ (1,813)
Deutschemark Expiring 1/29/99 118,176 116,509 (1,667)
Deutschemark Expiring 1/29/99 14,387 14,323 (64)
Japanese Yen Expiring 2/10/99 116,038 120,640 4,602
------------------------------------------------------------------------------
TOTAL FORWARD FOREIGN CURRENCY PURCHASE
CONTRACTS $ 528,872 $ 529,930 $ 1,058
------------------------------------------------------------------------------
------------------------------------------------------------------------------
<CAPTION>
Forward Foreign Currency Contractual Current Unrealized
Sale Contracts Value Value Gain (Loss)
------------------------------------------------------------------------------
<S> <C> <C> <C>
British Pound Expiring 1/29/99 $ 118,177 $ 116,152 $ 2,025
British Pound Expiring 1/29/99 14,862 14,934 (72)
Hong Kong Dollar Expiring 12/8/99 223,411 226,290 (2,879)
Japanese Yen Expiring 3/4/99 113,877 120,995 (7,118)
Swiss Franc Expiring 2/17/99 256,746 259,189 (2,443)
------------------------------------------------------------------------------
TOTAL FORWARD FOREIGN CURRENCY SALE CON-
TRACTS $ 727,073 $ 737,560 $(10,487)
------------------------------------------------------------------------------
At December 31, 1998, the Global Income Fund had open forward foreign cur-
rency exchange contracts both to purchase and sell foreign currencies as fol-
lows:
<CAPTION>
Forward Foreign Currency Contractual Current Unrealized
Purchase Contracts Value Value Gain (Loss)
------------------------------------------------------------------------------
<S> <C> <C> <C>
Deutschemark Expiring 1/29/99 $ 39,666 $ 39,491 $ (175)
Swedish Krona Expiring 1/22/99 34,792 33,470 (1,322)
------------------------------------------------------------------------------
TOTAL FORWARD FOREIGN CURRENCY PURCHASE
CONTRACTS $ 74,458 $ 72,961 (1,497)
------------------------------------------------------------------------------
------------------------------------------------------------------------------
<CAPTION>
Forward Foreign Currency Contractual Current Unrealized
Sale Contracts Value Value Gain Loss)
------------------------------------------------------------------------------
<S> <C> <C> <C>
Canadian Dollar Expiring 2/22/99 $ 103,083 $ 104,328 $ (1,245)
British Pound Expiring 1/29/99 551,755 540,935 10,820
British Pound Expiring 1/29/99 63,793 63,603 190
British Pound Expiring 1/29/99 212,560 209,942 2,618
Deutschemark Expiring 1/22/99 36,363 35,729 634
Deutschemark Expiring 1/25/99 22,189 22,257 (68)
Deutschemark Expiring 1/25/99 214,864 215,958 (1,094)
Deutschemark Expiring 1/25/99 54,000 53,898 102
Deutschemark Expiring 2/10/99 109,441 108,721 720
Danish Krone Expiring 1/13/99 307,274 301,110 6,164
French Franc Expiring 1/14/99 54,356 53,188 1,168
Italian Lira Expiring 1/12/99 230,317 231,693 (1,376)
Japanese Yen Expiring 2/10/99 380,011 392,114 (12,103)
Japanese Yen Expiring 2/10/99 77,473 80,188 (2,715)
Japanese Yen Expiring 2/10/99 1,428 1,510 (82)
Japanese Yen Expiring 2/10/99 167,003 171,393 (4,390)
Spanish Pesta Expiring 1/20/99 161,325 161,976 (651)
Swiss Franc Expiring 2/17/99 134,530 135,810 (1,280)
------------------------------------------------------------------------------
TOTAL FORWARD FOREIGN CURRENCY SALE CON-
TRACTS $2,881,765 $2,884,353 $ (2,588)
------------------------------------------------------------------------------
</TABLE>
62
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
The contractual amounts of forward foreign currency exchange contracts do
not necessarily represent the amounts potentially subject to risk. The mea-
surement of the risks associated with these instruments is meaningful only
when all related and offsetting transactions are considered. At December 31,
1998, International Equity and Global Income had sufficient cash and/or secu-
rities to cover any commitments under these contracts.
At December 31, 1998, the International Equity and Global Income Funds have
recorded open forward foreign currency contracts which are included in the
accompanying Statements of Assets and Liabilities according to the following
amounts:
<TABLE>
<CAPTION>
International Equity Global Income
Fund Fund
-----------------------------------------------------------------------------
<S> <C> <C>
Receivable for open forward foreign
currency exchange contracts $ 6,627 $22,416
-----------------------------------------------------------------------------
Payable for open forward foreign currency
exchange contracts 16,056 26,501
-----------------------------------------------------------------------------
</TABLE>
Included in the receivable and payable for foreign currency exchange con-
tracts in the accompanying Statements of Assets and Liabilities are closed
but unsettled forward foreign currency exchange contracts of the following
amounts as of December 31, 1998:
<TABLE>
<CAPTION>
International Equity Global Income
Fund Fund
----------------------------------------------------------------------------
<S> <C> <C>
Receivable for closed but unsettled
forward foreign currency exchange
contracts $ 701 $ 9,202
----------------------------------------------------------------------------
Payable for closed but unsettled forward
foreign currency exchange contracts 9,048 11,012
----------------------------------------------------------------------------
</TABLE>
Mid Cap Equity is due $2,550 from Goldman Sachs related to variation margin
on futures contracts as of December 31, 1998. For the period ended December
31, 1998, the Trust paid Goldman Sachs approximately $14,000 of brokerage
commissions from portfolio transactions.
5. REPURCHASE AGREEMENTS
During the term of a repurchase agreement, the value of the underlying secu-
rities, including accrued interest, is required to equal or exceed the value
of the repurchase agreement. The underlying securities for all repurchase
agreements are held in safekeeping at the Funds' custodian.
6. JOINT REPURCHASE AGREEMENT ACCOUNT
The Funds, together with other registered investment companies having manage-
ment agreements with GSAM or their affiliates, transfer uninvested cash into
joint accounts, the daily aggregate balance of which is invested in one or
more repurchase agreements.
63
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
Notes to Financial Statements
December 31, 1998
At December 31, 1998, Growth and Income, Capital Growth and Mid Cap had un-
divided interests in the repurchase agreements in the following joint account
which equaled $700,000, $100,000 and $1,700,000, respectively, in principal
amount. At December 31, 1998, the following repurchase agreements held in
this joint account were fully collateralized by Federal Agency obligations.
<TABLE>
<CAPTION>
Principal Interest Maturity Amortized
Repurchase Agreements Amount Rate Date Cost
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ABN-AMRO, Inc. $120,000,000 5.15% 01/04/1999 $ 120,000,000
------------------------------------------------------------------------------
Deutsche Bank 77,300,000 5.07 01/04/1999 77,300,000
------------------------------------------------------------------------------
Donaldson, Lufkin &
Jenrette, Inc. 150,000,000 4.95 01/04/1999 150,000,000
------------------------------------------------------------------------------
J.P. Morgan Securities, Inc. 700,000,000 4.75 01/04/1999 700,000,000
------------------------------------------------------------------------------
Morgan Stanley & Co. 200,000,000 4.95 01/04/1999 200,000,000
------------------------------------------------------------------------------
NationsBanc Montgomery
Securities LLC 125,000,000 5.15 01/04/1999 125,000,000
------------------------------------------------------------------------------
TOTAL JOINT REPURCHASE
AGREEMENT ACCOUNT $1,372,300,000
------------------------------------------------------------------------------
</TABLE>
7. LINE OF CREDIT FACILITY
The Funds participate in a $250,000,000 uncommitted, unsecured revolving line
of credit facility. The facility is to be used solely for temporary or emer-
gency purposes. Under the most restrictive arrangement, each Fund must own
securities having a market value in excess of 300% of the total bank
borrowings. The interest rate on the borrowings is based on the Federal Funds
Rate at the time of participation. During the period ended December 31, 1998,
the Funds did not have any borrowings under this facility.
8. CERTAIN RECLASSIFICATIONS
In accordance with statement 93-2, the Growth and Income, CORE U.S. Equity,
CORE Large Cap Growth, CORE Small Cap Equity, Capital Growth, Mid Cap Equity,
International Equity and Global Income Funds have reclassified $3,441,
$1,567, $1,864, $1,946, $1,046, $2,336, $1,688 and $1,346, respectively, from
paid in capital to accumulated undistributed net investment income. Addition-
ally, the Mid Cap Equity, International Equity and the Global Income Funds
have reclassified $2, $34,441 and $31,522, respectively, from accumulated un-
distributed net realized loss on investments, futures, and foreign currency
transactions to accumulated undistributed net investment income. These re-
classifications have no impact on the net asset value of the Funds and are
designed to present the Funds' capital accounts on a tax basis.
64
<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.
A-2
<PAGE>
"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.
"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.
A-3
<PAGE>
"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 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
A-4
<PAGE>
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.
"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.
A-5
<PAGE>
"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" - 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
A-6
<PAGE>
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.
"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.
A-7
<PAGE>
"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.
"CCC," "CC" and "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.
A-8
<PAGE>
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.
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.
A-9
<PAGE>
"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.
"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
assets diminish, reputation is the most difficult to restore. We are dedicated
to complying fully with the letter and spirit of the laws, rules and ethical
principles that govern us. Our continued success depends upon unswerving
adherence to this standard.
We take great pride in the professional quality of our work. We have an
uncompromising determination to achieve excellence in everything we undertake.
Though we may be involved in a wide variety and heavy volume of activity, we
would, if it came to a choice, rather be best than biggest.
We stress creativity and imagination in everything we do. While
recognizing that the old way may still be the best way, we constantly strive to
find a better solution to a client's problems. We pride ourselves on having
pioneered many of the practices and techniques that have become standard in the
industry.
We make an unusual effort to identify and recruit the very best person
for every job. Although our activities are measured in billions of dollars, we
select our people one by one. In a service business, we know that without the
best people, we cannot be the best firm.
We offer our people the opportunity to move ahead more rapidly than is
possible at most other places. We have yet to find limits to the responsibility
that our best people are able to assume. Advancement depends solely on ability,
performance and contribution to the Firm's success, without regard to race,
color, religion, sex, age, national origin, disability, sexual orientation, or
any impermissible criterion or circumstance.
B-1
<PAGE>
We stress teamwork in everything we do. While individual creativity is
always encouraged, we have found that team effort often produces the best
results. We have no room for those who put their personal interests ahead of the
interests of the Firm and its clients.
The dedication of our people to the Firm and the intense effort they
give their jobs are greater than one finds in most other organizations. We think
that this is an important part of our success.
We consider our size an asset that we try hard to preserve. We want to
be big enough to undertake the largest project that any of our clients could
contemplate, yet small enough to maintain the loyalty, the intimacy and the
esprit de corps that we all treasure and that contribute greatly to our
success.
We constantly strive to anticipate the rapidly changing needs of our
clients and to develop new services to meet those needs. We know that the world
of finance will not stand still and that complacency can lead to
distinction.
We regularly receive confidential information as part of our normal
client relationships. To breach a confidence or to use confidential information
improperly or carelessly would be unthinkable.
Our business is highly competitive, and we aggressively seek to expand
our client relationships. However, we must always be fair competitors and must
never denigrate other firms.
Integrity and honesty are the heart of our business. We expect our
people to maintain high ethical standards in everything they do, both in their
work for the firm and in their personal lives.
GOLDMAN, SACHS & CO.'S INVESTMENT BANKING AND SECURITIES ACTIVITIES
Goldman, Sachs & Co. is a leading global investment banking and
securities firm with a number of distinguishing characteristics.
Privately owned and ranked among Wall Street's best capitalized firms,
with partners' capital of approximately $6.1 billion as of November 28,
1997.
With thirty-seven offices around the world, Goldman Sachs employs over
11,000 professionals focused on opportunities in major markets.
The number one underwriter of all international equity issuers from
(1993-1996).
A research budget of $200 million for 1997.
B-2
<PAGE>
Premier lead manager of negotiated municipal bond offerings over the
past six years (1990-1996).*
The number one lead manager of U.S. common stock offerings for the past
eight years (1989-1996).
The number one lead manager for initial public offerings (IPOs)
worldwide (1989-1996).
- --------
* Source: Securities Data Corporation. Common stock ranking excludes
REITs, Investment Trusts and Rights.
B-3
<PAGE>
GOLDMAN, SACHS & CO.'S HISTORY OF EXCELLENCE
1865 End of Civil War
1869 Marcus Goldman opens Goldman Sachs
1890 Dow Jones Industrial Average first published
1896 Goldman Sachs joins New York Stock Exchange
1906 Goldman Sachs takes Sears Roebuck & Co. public (longest-standing client
relationship)
Dow Jones Industrial Average tops 100
1925 Goldman Sachs finances Warner Brothers, producer of the first talking
film
1956 Goldman Sachs co-manages Ford's public offering, the largest to date
1970 London office opens
1972 Dow Jones Industrial Average breaks 1000
1986 Goldman Sachs takes Microsoft public
1991 Provides advisory services for the largest privatization in the region
of the sale of Telefonos de Mexico
1995 Dow Jones Industrial Average breaks 5000
1996 Goldman Sachs takes Deutsche Telecom public
Dow Jones Industrial Average breaks 6000
1997 Dow Jones Industrial Average breaks 7000
Goldman Sachs increases assets under management by 100% over 1996
B-4
<PAGE>
PART 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)
One New York Plaza
New York, New York 10004
This Statement of Additional Information (the "Additional Statement") is not a
Prospectus. This Additional Statement should be read in conjunction with the
prospectus for Goldman Sachs 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
<TABLE>
<CAPTION>
Page
<S> <C>
INTRODUCTION.......................................................... B-1
INVESTMENT OBJECTIVES AND POLICIES.................................... B-2
DESCRIPTION OF INVESTMENT SECURITIES AND PRACTICES.................... B-17
MANAGEMENT............................................................ B-65
PORTFOLIO TRANSACTIONS AND BROKERAGE.................................. B-82
NET ASSET VALUE....................................................... B-84
PERFORMANCE INFORMATION............................................... B-86
SHARES OF THE TRUST................................................... B-91
TAXATION.............................................................. B-93
OTHER INFORMATION..................................................... B-97
APPENDIX A............................................................ A-1
APPENDIX B............................................................ B-1
</TABLE>
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 Growth Strategic Portfolio
Goldman Sachs Aggressive Growth Strategy Portfolio GOLDMAN, SACHS & CO.
One New York Plaza Distributor
New York, New York 10004 85 Broad Street
New York, New York 10004
Toll free.......800-292-472 6
-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 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.
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
B-1
<PAGE>
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").
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 to provide investors with long-term growth of
----------
capital and growth of income.
Primary Investment Focus. This Fund invests, under normal circumstances, at
------------------------
least 65% of its total assets in equity securities that its investment adviser
considers to have favorable prospects for capital appreciation and/or dividend-
paying ability.
Other. This Fund may invest up to 35% of its total assets in fixed-income
-----
securities that, in the opinion of its investment adviser, offer the potential
to further the Fund's investment objectives. In addition, although the Fund
will invest primarily in publicly traded U.S. securities, it may invest up to
25% of its total assets in foreign securities, including securities of issuers
in Emerging Countries and securities quoted in foreign currencies.
VIT CORE U.S. Equity Fund
Objective. This Fund seeks to provide investors with long-term growth of
---------
capital and dividend income. The Fund seeks to achieve its objective through a
broadly diversified portfolio of large cap and blue chip equity securities
representing all major sectors of the U.S. economy.
Primary Investment Focus. This Fund invests, under normal circumstances, at
------------------------
least 90% of its total assets in equity securities of U.S. issuers, including
certain foreign issuers that are traded in the United States. The Fund's
investments are selected using both a variety of quantitative techniques and
fundamental research in seeking to maximize the Fund's expected return, while
maintaining risk, style, capitalization and industry characteristics similar to
the S&P 500 Index. The Fund seeks a broad representation in most major sectors
of the U.S.
B-3
<PAGE>
economy and a portfolio composed of companies with average long-term earnings
growth expectations and dividend yields. The Fund's investments in fixed-income
securities are limited to securities that are considered cash equivalents.
VIT CORE Large Cap Growth Fund
Objective. This Fund seeks to provide investors with long-term growth of
---------
capital. The Fund seeks to achieve its objective through a broadly diversified
portfolio of equity securities of large cap U.S. issuers that are expected to
have better prospects for earnings growth than the growth rate of the general
domestic economy. Dividend income is a secondary consideration.
Primary Investment Focus. This Fund invests, under normal circumstances, at
------------------------
least 90% of its total assets in equity securities of U.S. issuers, including
certain foreign issuers that are traded in the United States. The Fund's
investment adviser emphasizes a company's growth prospects in analyzing equity
securities to be purchased by the Fund. The Fund's investments are selected
using both a variety of quantitative techniques and fundamental research in
seeking to maximize the Fund's expected return, while maintaining risk, style,
capitalization and industry characteristics similar to the Russell 1000 Growth
Index. The Fund seeks a portfolio composed of companies with above average
capitalizations and earnings growth expectations and below average dividend
yields. The Fund's investments in fixed-income securities are limited to
securities that are considered cash equivalents.
VIT CORE Large Cap Value Fund
Objective. This Fund seeks to provide investors with long-term growth of
---------
capital and dividend income. The Fund seeks to achieve its objective through a
broadly diversified portfolio of equity securities of large cap U.S. issuers
that are selling at low to modest valuations relative to general market measures
such as earnings, book value and other fundamental accounting measures, and that
are expected to have favorable prospects for capital appreciation and/or
dividend-paying ability.
Primary Investment Focus. This Fund invests, under normal circumstances, at
------------------------
least 90% of its total assets in equity securities of U.S. issuers, including
certain foreign issuers that are traded in the United States. The Fund's
investments are selected using both a variety of quantitative techniques and
fundamental research in seeking to maximize the Fund's expected return, while
maintaining risk, style, capitalization and industry characteristics similar to
the Russell 1000 Value Index. The Fund seeks a portfolio composed of companies
with above average capitalizations and low to moderate valuations as measured by
price/earnings ratios, book value and other fundamental accounting measures.
The Fund's investments in fixed-income securities are limited to securities that
are considered cash equivalents.
B-4
<PAGE>
VIT CORE Small Cap Equity Fund
Objective. This Fund seeks to provide investors with long-term growth of
---------
capital. The Fund seeks to achieve its objective through a broadly diversified
portfolio of equity securities of U.S. issuers which are included in the Russell
2000 Index at the time of investment.
Primary Investment Focus. This Fund invests, under normal circumstances, at
------------------------
least 90% of its total assets in equity securities of U.S. issuers, including
certain foreign issuers that are 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.
The Fund's investments in fixed-income securities are limited to securities that
are considered cash equivalents.
VIT CORE International Equity Fund
Objective. This Fund seeks to provide investors with long-term growth of
---------
capital. The Fund seeks to achieve its objective through a broadly diversified
portfolio of large cap equity securities of companies that are organized outside
the United States or whose securities are principally traded outside the United
States.
Primary Investment Focus. This Fund invests, under normal circumstances, at
------------------------
least 90% of its total assets in equity securities of companies that are
organized outside the United States or whose securities are principally traded
outside the United States. The Fund seeks broad representation of large cap
issuers across major countries and sectors of the international economy. The
Fund's investments are selected using both a variety of quantitative techniques
and fundamental research in seeking to maximize the Fund's expected return,
while maintaining risk, style, capitalization and industry characteristics
similar to the EAFE Index. In addition, the Fund seeks a portfolio composed of
companies with attractive valuations and stronger momentum characteristics than
the EAFE Index.
The Fund may allocate its assets among countries as determined by its
investment adviser from time to time, provided the Fund's assets are invested in
at least three foreign countries. The Fund may invest in securities of issuers
in Emerging Countries which involve certain risks which are not present in
investments in more developed countries.
VIT Capital Growth Fund
Objective. This Fund seeks to provide investors with long-term growth of
---------
capital.
B-5
<PAGE>
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 to provide investors with long-term capital
---------
appreciation.
Primary Investment Focus. This Fund invests, under normal circumstances,
------------------------
substantially all of its assets in equity securities and at least 65% of its
total assets in equity securities of Mid-Cap Companies with public stock market
capitalizations (based upon shares available for trading on an unrestricted
basis) within the range of the market capitalization of companies constituting
the Russell Midcap Index at the time of investment (currently between $400
million and $16 billion). If the capitalization of an issuer increases above
$16 billion after purchase of such issuer's securities, the Fund may, but is not
required to, sell the securities. Dividend income, if any, is an incidental
consideration.
Other. This Fund may invest up to 35% of its total assets in fixed-income
-----
securities. In addition, although the Fund will invest primarily in publicly
traded U.S. securities, it may invest up to 25% of its total assets in foreign
securities, including securities of issuers in Emerging Countries and securities
quoted in foreign currencies.
VIT International Equity Fund
Objective. This Fund seeks to provide investors with long-term capital
---------
appreciation.
Primary Investment Focus. This Fund invests, under normal circumstances,
------------------------
substantially all, and at least 65%, of its total assets in equity securities of
companies that are organized outside the United States or whose securities are
principally traded outside the United States. The Fund may allocate its assets
among countries as determined by its investment adviser from time to time
provided that the Fund's assets are invested in at least three foreign
countries. The Fund expects to invest a substantial portion of its assets in
the securities of issuers located in the developed countries of Western Europe
and in Japan. However, the Fund may also invest in the securities of issuers
located in Australia, Canada, New Zealand and Emerging Countries. Many of the
countries in which the Fund may invest have emerging markets or economies which
involve certain risks which are not present in investments in more developed
countries. The Fund intends to invest in companies with public stock market
capitalizations that are larger than those in which the International Small Cap
Fund primarily intends to invest.
B-6
<PAGE>
Other. Up to 35% of the Fund's total assets may be invested in fixed-income
-----
securities.
VIT Short Duration Government Fund
Objective. This Fund seeks to provide a high level of current income.
---------
Secondarily, the Fund may, in seeking current income, also consider the
potential for capital appreciation.
Duration. Under normal interest rate conditions, the Fund's duration is
--------
expected to be equal to that of the Fund's benchmark, the two-year U.S. Treasury
security, plus or minus .5 years. In addition, under normal interest rate
conditions, the Fund's maximum duration will not exceed three years. The
approximate interest rate sensitivity of the Fund is expected to be comparable
to a two-year bond.
Investment Sector. This Fund invests, under normal market conditions, at
-----------------
least 65% of its total assets in U.S. Government Securities and in repurchase
agreements collateralized by such securities. Substantially all of the Fund's
assets will be invested in U.S. Government Securities. 100% of the Fund's
portfolio will be invested in U.S. dollar-denominated securities.
Credit Quality. This Fund invests in U.S. Government Securities and
--------------
repurchase agreements collateralized by such securities.
Other. This Fund may employ certain active management techniques to manage
-----
its duration and term structure and to seek to enhance returns. These
techniques include, but are not limited to, the use of financial futures
contracts, option contracts (including options on futures), mortgage and
interest rate swaps and interest rate floors, caps and collars. The Fund may
also employ other investment techniques to seek to enhance returns, such as
lending portfolio securities and entering into mortgage dollar rolls, repurchase
agreements and other investment practices.
VIT Global Income Fund
Objective. This Fund seeks to provide investors with a high total return,
---------
emphasizing current income, and, to a lesser extent, providing opportunities for
capital appreciation.
Duration. Under normal interest rate conditions, the Fund's duration is
--------
expected to be equal to that of the Fund's benchmark, the J.P. Morgan Global
Government Bond Index (hedged), plus or minus 2.5 years. In addition, under
normal interest rate conditions, the Fund's maximum duration will not exceed 7.5
years. The approximate interest rate sensitivity of the Fund is expected to be
comparable to a six-year bond.
Investment Sector. The Fund invests primarily in a portfolio of high quality
-----------------
fixed-income securities of U.S. and foreign issuers and enters into transactions
in foreign currencies. Under normal market conditions, the Fund will (i) have at
least 30% of its total assets, after considering the effect of currency
positions, denominated in U.S. dollars and (ii) invest in
B-7
<PAGE>
securities of issuers in at least three countries. The Fund may also invest up
to 10% of its total assets in issuers in countries with emerging markets and
economies. The Fund seeks to meet its investment objective by pursuing
investment opportunities in foreign and domestic fixed-income securities markets
and by engaging in currency transactions to seek to enhance returns and to seek
to hedge its portfolio against currency exchange rate fluctuations.
The fixed-income securities in which the Fund may invest include: (i) U.S.
Government Securities and custodial receipts therefor; (ii) securities issued or
guaranteed by a foreign government or any of its political subdivisions,
authorities, agencies, instrumentalities or by supranational entities (i.e.,
international organizations designated or supported by governmental entities to
promote economic reconstruction or development, such as the World Bank); (iii)
corporate debt securities; (iv) certificates of deposit and bankers' acceptances
issued or guaranteed by, or time deposits maintained at, U.S. or foreign banks
(and their branches wherever located) having total assets of more than $1
billion; (v) commercial paper; and (vi) Mortgage-Backed and Asset-Backed
Securities.
Credit Quality. All securities purchased by the Fund will be rated, at the
--------------
time of investment, at least BBB or Baa by an a Nationally Recognized
Statistical Rating Organization ("NRSRO"). However, the Fund will invest at
least 50% of its total assets in securities rated, at the time of investment,
AAA or Aaa by an NRSRO. Unrated securities will be determined by the investment
adviser to be of comparable quality. Fixed-income securities rated BBB or Baa
are considered medium-grade obligations with speculative characteristics, and
adverse economic conditions or changing circumstances may weaken their issuers'
capacity to pay interest and repay principal.
Other. This Fund may employ certain active management techniques to manage
-----
its duration and term structure, to seek to hedge its exposure to foreign
currencies and to seek to enhance returns. These techniques include, but are
not limited to, the use of financial futures contracts, option contracts
(including options on futures), forward foreign currency exchange contracts,
currency options and futures, currency, mortgage, and interest rate swaps and
interest rate floors, caps and collars. Currency management techniques involve
risks different from those associated with investing solely in U.S. dollar-
denominated fixed-income securities of U.S. issuers. It is expected that the
Fund will use certain currency techniques to seek to hedge against currency
exchange rate fluctuations or to seek to increase total return. While the Fund
will have both long and short currency positions, its net long and short foreign
currency exposure will not exceed the value of the Fund's total assets. To the
extent that the Fund is fully invested in foreign securities while also
maintaining currency positions, it may be exposed to greater combined risk. The
Fund's net currency positions may expose it to risks independent of its
securities positions. The Fund may also employ other investment techniques to
seek to enhance returns, such as lending portfolio securities and entering into
mortgage dollar rolls, repurchase agreements and other investment practices.
The Fund may invest more than 25% of its total assets in the securities of
corporate and governmental issuers located in each of Canada, Germany, Japan,
and the United Kingdom as well as in the securities of U.S. issuers.
Concentration of the Fund's investments in such issuers
B-8
<PAGE>
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.
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 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 the Fund's adviser to be strategically
positioned for consistent long-term growth. Although the Fund invests 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.
Small Capitalization Companies. This Fund invests in companies which its
------------------------------
investment adviser believes are well managed niche businesses that have the
potential to achieve high or improving returns on capital and/or above average
sustainable growth. The Fund may invest in securities of small market
capitalization companies which may have experienced financial difficulties.
Investments may also be made in companies that are in the early stages of their
life and that the Fund's investment adviser believes have significant growth
potential. The investment adviser believes that the companies in which the Fund
may invest offer greater opportunity for growth of capital than larger, more
mature, better known companies. However, investments in such small market
capitalization companies involve special risks.
Other. This Fund may invest in the aggregate up to 35% of its total assets in
-----
the equity securities of companies with public stock market capitalizations in
excess of $1 billion at the time of investment and in fixed-income securities.
In addition, although the Fund will invest primarily in publicly traded U.S.
securities, it may invest up to 25% of its total assets in foreign securities,
including securities of issuers in Emerging Countries and securities quoted in
foreign currencies.
B-9
<PAGE>
GST Emerging Markets Equity Fund
Objective. This Fund seeks to provide investors with long-term capital
---------
appreciation.
Primary Investment Focus. This Fund invests, under normal market
------------------------
circumstances, substantially all, and at least 65%, of its total assets in
equity securities of Emerging Country issuers. For purposes of the Fund's
investment policies, Emerging Countries are countries with economies or
securities markets that are considered by the Fund's investment adviser not to
be fully developed. The investment adviser may consider classifications by the
World Bank, the International Finance Corporation or the United Nations and its
agencies in determining whether a country is emerging or developed. Currently,
Emerging Countries include, among others, most Latin American, African, Asian
and Eastern European nations. The Fund's investment adviser currently intends
that the Fund's investment focus will be in the following Emerging Countries:
Argentina, Botswana, Brazil, Chile, China, Colombia, the Czech Republic, Egypt,
Greece, Hong Kong, Hungary, India, Indonesia, Israel, Jordan, Kenya, Malaysia,
Mexico, Morocco, Pakistan, Peru, the Philippines, Poland, Portugal, Russia,
Singapore, South Africa, South Korea, Sri Lanka, Taiwan, Thailand, Turkey,
Venezuela and Zimbabwe.
An Emerging Country issuer is any entity that satisfies at least one of the
following criteria: (i) it derives 50% or more of its total revenue from goods
produced, sales made or
B-10
<PAGE>
services performed in one or more Emerging Countries; (ii) it is organized under
the laws of, or has a principal office in, an Emerging Country; (iii) it
maintains 50% or more of its assets in one or more of the Emerging Countries; or
(iv) the principal securities trading market for a class of its securities is in
an Emerging Country.
Investments in Emerging Countries involve certain risks which are not present
in investments in more developed countries. The Fund may purchase privately
placed equity securities, equity securities of companies that are in the process
of being privatized by foreign governments, securities of issuers that have not
paid dividends on a timely basis, equity securities of issuers that have
experienced difficulties, and securities of companies without performance
records.
Other. Under normal circumstances, this Fund maintains investments in at
-----
least six Emerging Countries, and will not invest more than 35% of its total
assets in securities of issuers in any one Emerging Country. Allocation of the
Fund's investments will depend upon the relative attractiveness of the Emerging
Country markets and particular issuers. In addition, macro-economic factors and
the portfolio managers' and Goldman Sachs economists' views of the relative
attractiveness of Emerging Countries and currencies are considered in allocating
the Fund's assets among Emerging Countries. Concentration of the Fund's assets
in one or a few Emerging Countries and currencies will subject the Fund to
greater risks than if the Fund's assets were not geographically concentrated.
The Fund may invest in the aggregate up to 35% of its total assets in (i) fixed-
income securities of private and governmental Emerging Country issuers; and (ii)
equity and fixed-income securities of issuers in developed countries.
GST Asia Growth Fund
Objective. This Fund seeks to provide investors with long-term capital
---------
appreciation.
Primary Investment Focus. This Fund invests, under normal market
------------------------
circumstances, substantially all, and at least 65%, of its total assets in
equity securities of companies that satisfy at least one of the following
criteria: (i) their securities are traded principally on stock exchanges in one
or more of the Asian countries; (ii) they derive 50% or more of their total
revenue from goods produced, sales made or services performed in one or more of
the Asian countries; (iii) they maintain 50% or more of their assets in one or
more of the Asian countries; or (iv) they are organized under the laws of one of
the Asian countries. The Fund seeks to achieve its objective by investing
primarily in equity securities of Asian companies which are considered by the
Fund's investment adviser to have long-term capital appreciation potential.
Many of the countries in which the Fund may invest have emerging markets or
economies which involve certain risks which are not present in investments in
more developed countries. The Fund may purchase equity securities of issuers
that have not paid dividends on a timely basis, securities of companies that
have experienced difficulties, and securities of companies without performance
records.
Other. This Fund may allocate its assets among the Asian countries as
-----
determined from time to time by its investment adviser. For purposes of the
Fund's investment policies, Asian
B-11
<PAGE>
countries are China, Hong Kong, India, Indonesia, Malaysia, Pakistan, the
Philippines, Singapore, South Korea, Sri Lanka, Taiwan and Thailand as well as
any other country in Asia (other than Japan) to the extent that foreign
investors are permitted by applicable law to make such investments. Allocation
of the Fund's investments will depend upon the Fund's investment adviser's view
of relative attractiveness of the Asian markets and particular issuers. For
example, on January 31, 1998 (the end of the Fund's last fiscal year), more than
35% of the Fund's assets were invested in securities traded in Hong Kong.
Concentration of the Fund's assets in one or a few of the Asian countries and
Asian currencies will subject the Fund to greater risks than if the Fund's
assets were not geographically concentrated. The Fund may invest in the
aggregate up to 35% of its total assets in equity securities of issuers in other
countries, including Japan, and in fixed-income securities.
GST Real Estate Securities Fund
Objective. This Fund seeks to provide investors with total return comprised
---------
of long-term growth of capital and dividend income.
Primary Investment Focus. This Fund will invest, under normal circumstances,
------------------------
substantially all, and at least 80%, of its total assets in issuers that are
primarily engaged in or related to the real estate industry. The Fund seeks to
achieve its investment objective by investing in a diversified portfolio of
equity securities of REITs and other real estate industry companies. A "real
estate industry company" is a company that derives at least 50% of its gross
revenues or net profits from the ownership, development, construction,
financing, management or sale of commercial, industrial or residential real
estate or interests therein.
Shares of REITs. The Fund may invest without limitation in shares of REITs.
---------------
REITs are pooled investment vehicles which invest primarily in income producing
real estate or real estate related loans or interests. REITs are generally
classified as equity REITs, mortgage REITs or a combination of equity and
mortgage REITs. Equity REITs invest the majority of their assets directly in
real property and derive income primarily from the collection of rents. Equity
REITs can also realize capital gains by selling properties that have appreciated
in value. Mortgage REITs invest the majority of their assets in real estate
mortgages and derive income from the collection of interest payments. Similar
to investment companies such as the Fund, REITs are not taxed on income
distributed to shareholders provided they comply with several requirements of
the Internal Revenue Code of 1986, as amended (the "Code"). The Fund will
indirectly bear its proportionate share of expenses incurred by REITs in which
the Fund invests in addition to the expenses directly by the Fund.
Other. Under normal circumstances, this Fund may invest up to 20% of its
-----
total assets in fixed-income securities that, in the opinion of its investment
adviser, offer the potential to further the Fund's investment objectives. In
addition, although the Fund will invest primarily in publicly traded U.S.
securities, it may invest up to 15% of its net assets in foreign securities.
B-12
<PAGE>
GST Japanese Equity Fund
Objective. This Fund seeks to provide investors with long-term capital
---------
appreciation.
Primary Investment Focus. The Fund invests, under normal circumstances,
------------------------
substantially all, and at least 65%, of its total assets in equity securities of
Japanese companies. Japanese companies include those organized under the laws
of Japan or whose shares are traded primarily on a Japanese stock exchange as
well as those whose shares are registered with the Japan Securities Dealers
Association for trading primarily on Japan's over-the-counter market. The
Fund's concentration in Japanese companies will expose it to the risk of adverse
social, political and economic events which occur in Japan or affect the
Japanese markets.
Other. The Fund may invest in the aggregate up to 35% of its total assets in
-----
equity securities of non-Japanese companies and in fixed-income securities.
GST European Equity Fund
Objective. This Fund seeks to provide investors with long-term capital
---------
appreciation.
Primary Investment Focus. The Fund invests, under normal market
------------------------
circumstances, substantially all, and at least 65%, of its total assets in
equity securities of European companies. Because of its focus, the Fund will be
more susceptible to European economic, market, political and local risks than a
fund that is more geographically diversified. "European companies" are
companies that satisfy at least one of the following criteria: (i) their
securities are traded principally on stock exchanges in one or more of the
European countries; (ii) they derive 50% or more of their total revenue from
goods produced, sales made or services performed in one or more of the European
countries; (iii) they maintain 50% or more of their assets in one or more of the
European countries; or (iv) they are organized under the laws of a European
country. The Fund may allocate its assets among different countries as
determined by its investment adviser, provided that the Fund's assets are
invested in at least three European countries. It is currently anticipated that
a majority of the Fund's assets will be invested in the equity securities of
large cap companies located in the developed countries of Western Europe.
However, the Fund may also invest, without limit, in mid cap companies and small
cap companies, as well as companies located in Emerging Countries in which the
Emerging Markets Equity Fund may invest, including Eastern European countries
and the European 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.
GST International Small Cap Fund
Objective. This Fund seeks to provide investors with long-term capital
---------
appreciation.
B-13
<PAGE>
Primary Investment Focus. The Fund invests, under normal market
------------------------
circumstances, substantially all, and at least 65%, of its total assets in
equity securities of companies with public stock market capitalizations of $1
billion or less at the time of investment that are organized outside the U.S. or
whose securities are principally traded outside the U.S. The Fund may allocate
its assets among countries as determined by its investment adviser from time to
time provided that the Fund's assets are invested in at least three foreign
countries. The Fund expects to invest a substantial portion of its assets in
small cap securities of companies in the developed countries of Western Europe,
Japan and Asia. However, the Fund may also invest in the securities of issuers
located in Australia, Canada, New Zealand and the Emerging Countries in which
the Emerging Markets Equity Fund may invest. Many of the countries in which the
Fund may invest have emerging markets economics which involve certain risks,
which are not present in investments in more developed countries. If the market
capitalization of a company held by the Fund increases above $1 billion, the
Fund may, consistent with its investment objective, continue to hold the
security.
Other. The Fund may invest in the aggregate up to 35% of its total assets in
-----
equity securities of larger cap companies with public stock market
capitalizations of more than $1 billion at the time of investment and in fixed-
income securities.
GST Financial Square Prime Obligations Fund
Objective. This Fund seeks to maximize current income to the extent
---------
consistent with the preservation of capital and the maintenance of liquidity by
investing exclusively in high quality money market instruments.
Primary Investment Focus. This Fund invests in securities of the U.S.
------------------------
Government, its agencies, authorities and instrumentalities, obligations of U.S.
banks, commercial paper, and other short-term obligations of U.S. companies,
states, municipalities and other entities and repurchase agreements. Securities
purchased by the Fund will be determined by its investment adviser to present
minimal credit risks, and will have remaining maturities (as determined in
accordance with regulatory requirements) of 13 months or less at the time of
purchase. The dollar-weighted average maturity of the Fund will not exceed 90
days.
Other. The investments of this Fund are limited by regulations applicable to
-----
money market funds as described in its Prospectus, and do not include many of
the types of investments discussed below that are permitted for the other
Underlying Funds. Although this Fund attempts to maintain a stable net asset
value of $1.00 per share, there is no assurance that it will be able to do so on
a continuous basis. Like investments in the other Underlying Funds, an
investment in this Fund is neither insured nor guaranteed by the U.S. Government
or any governmental authority.
GST Adjustable Rate Government Fund
Objective. This Fund seeks to provide investors with a high level of current
---------
income, consistent with low volatility of principal.
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 note.
Investment Sector. This Fund invests, under normal circumstances, at least
-----------------
65% of its total assets in U.S. Government Securities that are adjustable rate
mortgage pass-through securities and other mortgage securities with periodic
interest rate resets. The remainder of the Fund's assets (up to 35%) may be
invested in other U.S. Government Securities, including fixed rate mortgage
pass-through securities, other securities representing an interest in or
collateralized by adjustable rate and fixed rate mortgage loans ("Mortgage-
Backed Securities") and repurchase agreements collateralized by U.S. Government
Securities. Substantially all of the Fund's assets will be invested in U.S.
Government Securities. 100% of the Fund's portfolio will be invested in U.S.
dollar-denominated securities.
Credit Quality. This Fund invests in U.S. Government Securities and
--------------
repurchase agreements collateralized by such securities.
Other. This Fund may employ certain active management techniques to manage
-----
its duration and term structure and to seek to enhance returns. These
techniques include, but are not limited to, the use of financial futures
contracts, option contracts (including options on futures), mortgage and
interest rate swaps and interest rate floors, caps and collars. The Fund may
also employ other investment techniques to seek to enhance returns, such as
lending portfolio securities and entering into mortgage dollar rolls, repurchase
agreements and other investment practices.
GST Government Income Fund
Objective. This Fund seeks to provide investors with a high level of current
---------
income, consistent with safety of principal.
Duration. Under normal interest rate conditions, the Fund's duration is
--------
expected to be equal to that of the Fund's benchmark, the Lehman Brothers Mutual
Fund Government/Mortgage Index, plus or minus one year. In addition, under
normal interest rate conditions, the Fund's maximum duration will not exceed six
years. The approximate interest rate sensitivity of the Fund is expected to be
comparable to a five-year bond.
Investment Sector. This Fund invests, under normal circumstances, at least
-----------------
65% of its total assets in U.S. Government Securities and in repurchase
agreements collateralized by such securities. The remainder of the Fund's
assets may be invested in non-government securities such as privately issued
Mortgage-Backed Securities, Asset-Backed Securities and corporate securities.
100% of the Fund's portfolio will be invested in U.S. dollar-denominated
securities.
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 to provide investors with a total return
---------
consisting of capital appreciation and income that exceeds the total return of
the Lehman Brothers Aggregate Bond Index (the "Index").
Duration. Under normal interest rate conditions, the Fund's duration is
--------
expected to be equal to that of the Fund's benchmark, the Lehman Brothers
Aggregate Bond Index, plus or minus one year. In addition, under normal interest
rate conditions, the Fund's maximum duration will not exceed six years. The
approximate interest rate sensitivity of the Fund is expected to be comparable
to a five-year bond.
Investment Sector. This Fund invests, under normal circumstances, at least
-----------------
65% of its total assets in fixed-income securities, including U.S. Government
Securities, corporate debt securities, Mortgage-Backed Securities, and Asset-
Backed Securities. The Fund may invest up to 25% of its total assets in
obligations of domestic and foreign issuers which are denominated in currencies
other than the U.S. dollar, 10% of which may be invested in issuers in countries
with emerging markets and economies. A number of investment strategies will be
used to achieve the Fund's investment objective, including market sector
selection, determination of yield curve exposure, and issuer selection. In
addition, the Fund's investment adviser will attempt to take advantage of
pricing inefficiencies in the fixed-income markets.
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. The Index is a
trademark of Lehman Brothers. Inclusion of a security in the Index does
not
B-16
<PAGE>
imply an opinion by Lehman Brothers as to its attractiveness or appropriateness
for investment. Although Lehman Brothers obtains factual information used in
connection with the Index from sources which it considers reliable, Lehman
Brothers claims no responsibility for the accuracy, completeness or timeliness
of such information and has no liability to any person for any loss arising from
results obtained from the use of the Index data.
Credit Quality. All U.S. dollar-denominated fixed-income securities purchased
--------------
by the Fund will be rated, at the time of investment, at least BBB or Baa by an
NRSRO or, if unrated, will be determined by the Fund's investment adviser to be
of comparable quality. The non-U.S. dollar-denominated fixed-income securities
in which the Fund may invest will be rated, at the time of investment, at least
AA or Aa by an NRSRO or, if unrated, will be determined by the Fund's investment
adviser to be of comparable quality. Fixed-income securities rated BBB or Baa
are considered medium-grade obligations with speculative characteristics and
adverse economic conditions or changing circumstances may weaken their issuers'
capability to pay interest and repay principal.
Other. This Fund may employ certain active management techniques to manage
-----
its duration and term structure, to seek to hedge its exposure to foreign
currencies and to seek to enhance returns. These techniques include, but are
not limited to, the use of financial futures contracts, option contracts
(including options on futures), forward foreign currency exchange contracts,
currency options and futures, currency, mortgage, credit and interest rate swaps
and interest rate floors, caps and collars. Currency management techniques
involve risks different from those associated with investing solely in U.S.
dollar-denominated fixed-income securities of U.S. issuers. It is expected that
the Fund will use certain currency techniques to seek to hedge against currency
exchange rate fluctuations or to seek to increase total return. The Fund may
invest in custodial receipts, Municipal Securities and convertible securities.
The Fund may also employ other investment techniques to seek to enhance returns,
such as lending portfolio securities and entering into mortgage dollar rolls,
repurchase agreements and other investment practices.
GST High Yield Fund
Objective. This Fund seeks to provide investors with a high level of current
---------
income and may also consider the potential for capital appreciation.
Duration. Under normal interest rate conditions, the Fund's duration is
--------
expected to be equal to that of the Fund's benchmark, the Lehman Brothers High
Yield Bond Index, plus or minus 2.5 years. In addition, under normal interest
rate conditions, the Fund's maximum duration will not exceed 7.5 years. The
approximate interest rate sensitivity of the Fund is expected to be comparable
to a 6-year bond.
Investment Sector. This Fund invests, under normal circumstances, at least
-----------------
65% of its total assets in high yield, fixed-income securities rated, at the
time of investment, below investment grade. Non-investment grade securities are
securities rated BB, Ba or below by an NRSRO, or, if unrated, determined by the
investment adviser to be of comparable quality. The
B-17
<PAGE>
Fund may invest in all types of fixed-income securities, including senior and
subordinated corporate debt obligations (such as bonds, debentures, notes and
commercial paper), convertible and non-convertible corporate debt obligations,
loan participations, custodial receipts, municipal securities and preferred
stock. The Fund may invest up to 25% of its total assets in obligations of
domestic and foreign issuers (including securities of issuers located in
countries with emerging markets and economies) which are denominated in
currencies other than the U.S. dollar. Under normal market conditions, the Fund
may invest up to 35% of its total assets in investment grade fixed-income
securities, including U.S. Government Securities, Asset-Backed and Mortgage-
Backed Securities and corporate securities. The Fund may also invest in common
stocks, warrants, rights and other equity securities, but will generally hold
such equity investments only when debt or preferred stock of the issuer of such
equity securities is held by the Fund. A number of investment strategies are
used to seek to achieve the Fund's investment objective, including market sector
selection, determination of yield curve exposure, and issuer selection. In
addition, the Fund's investment adviser will attempt to take advantage of
pricing inefficiencies in the fixed-income markets.
Credit Quality. This Fund invests primarily in high yield, fixed-income
--------------
securities rated below investment grade, including securities of issuers in
default. Non-investment grade securities (commonly known as "junk bonds") tend
to offer higher yields than higher rated securities with similar maturities.
Non-investment grade securities are, however, considered speculative and
generally involve greater price volatility and greater risk of loss of principal
and interest than higher rated securities. See "Description of Investment
Securities and Practices." A description of the corporate bond and preferred
stock ratings is contained in Appendix A to this Additional Statement.
Other. This Fund may employ certain active management techniques to manage
-----
its duration and term structure, to seek to hedge its exposure to foreign
securities and to seek to enhance returns. These techniques include, but are
not limited to, the use of financial futures contracts, option contracts
(including options on futures), forward foreign currency exchange contracts,
currency options and futures, currency, mortgage, credit and interest rate
swaps, and interest rate floors, caps and collars. Currency management
techniques involve risks different from those associated with investing solely
in U.S. dollar-denominated fixed-income securities of U.S. issuers. It is
expected that the Fund will use certain currency techniques to seek to hedge
against currency exchange rate fluctuations or to seek to increase total return.
The Fund may also employ other investment techniques to seek to enhance returns,
such as lending portfolio securities and entering into repurchase agreements and
other investment practices.
DESCRIPTION OF INVESTMENT SECURITIES AND PRACTICES
This section describes in further detail certain investment securities and
practices that are applicable 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. The following description also applies to those securities and
practices of the Portfolios, as applicable.
B-18
<PAGE>
Corporate Debt Obligations
- --------------------------
Each Underlying Fund (other than the Adjustable Rate Government and Short
Duration Government Funds) may, under normal market conditions, invest in
corporate debt obligations, including obligations of industrial, utility and
financial issuers. CORE Large Cap Value, CORE U.S. Equity, CORE Large Cap
Growth, CORE Small Cap Equity and CORE International Equity Funds may only
invest in debt securities that are cash equivalents. Corporate debt obligations
are subject to the risk of an issuer's inability to meet principal and interest
payments on the obligations and may also be subject to price volatility due to
such factors as market interest rates, market perception of the creditworthiness
of the issuer and general market liquidity.
Fixed-income securities rated BBB or Baa are considered medium-grade
obligations with speculative characteristics, and adverse economic conditions or
changing circumstances may weaken their issuers' capacity to pay interest and
repay principal. Medium to lower rated and comparable non-rated securities tend
to offer higher yields than higher rated securities with the same maturities
because the historical financial condition of the issuers of such securities may
not have been as strong as that of other issuers. Since medium to lower rated
securities generally involve greater risks of loss of income and principal than
higher rated securities, investors should consider carefully the relative risks
associated with investment in securities which carry medium to lower ratings and
in comparable unrated securities. In addition to the risk of default, there are
the related costs of recovery on defaulted issues. The investment advisers of
the Underlying Funds will attempt to reduce these risks through portfolio
diversification and by analysis of each issuer and its ability to make timely
payments of income and principal, as well as broad economic trends and corporate
developments.
Trust Preferreds. The Government Income, Core Fixed Income, Global Income and
----------------
High Yield Funds may invest in trust preferred securities. A trust preferred or
capital security is a long dated bond (for example 30 years) with preferred
features. The preferred features are that payment of interest can be deferred
for a specified period without initiating a default event. From a bondholder's
viewpoint, the securities are senior in claim to standard preferred but are
junior to other bondholders. From the issuer's viewpoint, the securities are
attractive because their interest is deductible for tax purposes like other
types of debt instruments.
High Yield Securities. Bonds rated BB or below by Standard & Poor's Ratings
---------------------
Group ("Standard & Poor's") or Ba or below by Moody's Investors Service, Inc.
("Moody's") (or comparable rated and unrated securities) are commonly referred
to as "junk bonds" and are considered speculative. The ability of their issuers
to make principal and interest payments may be questionable. In some cases,
such bonds may be highly speculative, have poor prospects for reaching
investment grade standing and be in default. As a result, investment in such
bonds will entail greater risks than those associated with investment grade
bonds (i.e., bonds rated AAA, AA, A or BBB by Standard and Poor's or Aaa, Aa, A
or Baa by Moody's). Analysis of the 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
B-19
<PAGE>
objective may, to the extent of its investments in high yield securities, be
more dependent upon such creditworthiness analysis than would be the case if a
Fund were investing in higher quality securities. See Appendix A to this
Additional Statement for a description of the corporate bond and preferred stock
ratings by Standard & Poor's, Moody's, Fitch IBCA, Inc. and Duff & Phelps.
The amount of high yield, fixed-income securities proliferated in the 1980s
and early 1990s as a result of increased merger and acquisition and leveraged
buyout activity. Such securities are also issued by less-established
corporations desiring to expand. Risks associated with acquiring the securities
of such issuers generally are greater than is the case with higher rated
securities because such issuers are often less creditworthy companies or are
highly leveraged and generally less able than more established or less leveraged
entities to make scheduled payments of principal and interest.
The market values of high yield, fixed-income securities tends to reflect
those individual corporate developments to a greater extent than do those of
higher rated securities, which react primarily to fluctuations in the general
level of interest rates. Issuers of such high yield securities may not be able
to make use of more traditional methods of financing and their ability to
service debt obligations may be more adversely affected than issuers of higher
rated securities by economic downturns, specific corporate developments or the
issuers' inability to meet specific projected business forecasts. These non-
investment grade securities also tend to be more sensitive to economic
conditions than higher-rated securities. Negative publicity about the junk bond
market and investor perceptions regarding lower-rated securities, whether or not
based on fundamental analysis, may depress the prices for such securities.
Since investors generally perceive that there are greater risks associated
with non-investment grade securities of the type in which the Underlying Funds
may invest, the yields and prices of such securities may tend to fluctuate more
than those for higher-rated securities. In the lower quality segments of the
fixed-income securities market, changes in perceptions of issuers'
creditworthiness tend to occur more frequently and in a more pronounced manner
than do changes in higher quality segments of the fixed-income securities
market, resulting in greater yield and price volatility.
Another factor which causes fluctuations in the prices of fixed-income
securities is the supply and demand for similarly rated securities. In
addition, the prices of fixed-income securities fluctuate in response to the
general level of interest rates. Fluctuations in the prices of portfolio
securities subsequent to their acquisition will not affect cash income from such
securities but will be reflected in an Underlying Fund's net asset value.
The risk of loss from default for the holders of high yield, fixed-income
securities is significantly greater than is the case for holders of other debt
securities because such high yield, fixed-income securities are generally
unsecured and are often subordinated to the rights of other creditors of the
issuers of such securities. Investment by an Underlying Fund in already
defaulted securities poses an additional risk of loss should nonpayment of
principal and interest 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
B-20
<PAGE>
uncertain. An Underlying Fund may be required to liquidate other portfolio
securities to satisfy the Underlying Fund's annual distribution obligations in
respect of accrued interest income on securities which are subsequently written
off, even though the Underlying Fund has not received any cash payments of such
interest.
The secondary market for high yield, fixed-income securities is concentrated
in relatively few markets and is dominated by institutional investors, including
mutual funds, insurance companies and other financial institutions. Accordingly,
the secondary market for such securities is not as liquid as and is more
volatile than the secondary market for higher-rated securities. In addition, the
trading volume for high-yield, fixed-income securities is generally lower than
that of higher rated securities and the secondary market for high yield, fixed-
income securities could shrink or disappear suddenly and without warning as a
result of adverse market or economic conditions independent of any specific
adverse changes in the condition of a particular issuer.
Because of the lack of sufficient market liquidity, a Fund may incur losses
because it will be required to effect sales at a disadvantageous time and then
only at a substantial drop in price. Prices realized upon the sale of such
lower rated or unrated securities, under these circumstances, may be less than
the prices used in calculating an Underlying Fund's net asset value. A less
liquid secondary market also may make it more difficult for an Underlying Fund
to obtain precise valuations of the high yield securities in its portfolio.
Certain proposed and recently enacted federal laws could adversely affect the
secondary market for high yield securities and the financial condition of
issuers of these securities. The form of proposed legislation and the
probability of such legislation being enacted is uncertain.
Non-investment grade or high-yield, fixed-income securities also present risks
based on payment expectations. High yield, fixed-income securities frequently
contain "call" or buy-back features which permit the issuer to call or
repurchase the security from its holder. If an issuer exercises such a "call
option" and redeems the security, an Underlying Fund may have to replace such
security with a lower-yielding security, resulting in a decreased return for
investors. In addition, if an Underlying Fund experiences unexpected net
redemptions of its shares, it may be forced to sell its higher-rated securities,
resulting in a decline in the overall credit quality of the Underlying Fund's
portfolio and increasing the exposure of the Underlying Fund to the risks of
high yield securities. An Underlying Fund may also incur additional expenses to
the extent that it is required to seek recovery upon a default in the payment of
principal or interest on a portfolio security.
Credit ratings issued by credit rating agencies are designed to evaluate the
safety of principal and interest payments of rated securities. They do not,
however, evaluate the market value risk of non-investment grade securities and,
therefore, may not fully reflect the true risks of an investment. In addition,
credit rating agencies may or may not make timely changes in a rating to reflect
changes in the economy or in the conditions of the issuer that affect the market
value of the security. Consequently, credit ratings are used only as a
preliminary indicator of investment quality. Investments in non-investment
grade and comparable unrated obligations will be more dependent on the credit
analysis of an Underlying Fund's investment adviser than
B-21
<PAGE>
would be the case with investments in investment-grade debt obligations. An
Underlying Fund's investment adviser employs its own credit research and
analysis, which includes a study of existing debt, capital structure, ability to
service debt and to pay dividends, the issuer's sensitivity to economic
conditions, its operating history and the current trend of earnings. The
investment adviser monitors the investments in an Underlying Fund's portfolio
and evaluates whether to dispose of or to retain non-investment grade and
comparable unrated securities whose credit ratings or credit quality may have
changed.
Loan Participations. The High Yield Fund may invest in loan participations.
-------------------
Such loans must be to issuers in whose obligations the High Yield Fund may
invest. A loan participation is an interest in a loan to a U.S. or foreign
company or other borrower which is administered and sold by a financial
intermediary. In a typical corporate loan syndication, a number of lenders,
usually banks (co-lenders), lend a corporate borrower a specified sum pursuant
to the terms and conditions of a loan agreement. One of the co-lenders usually
agrees to act as the agent bank with respect to the loan.
Participation interests acquired by the High Yield Fund may take the form of a
direct or co-lending relationship with the corporate borrower, an assignment of
an interest in the loan by a co-lender or another participant, or a
participation in the seller's share of the loan. When the High Yield Fund acts
as co-lender in connection with a participation interest or when the High Yield
Fund acquires certain participation interests, the High Yield Fund will have
direct recourse against the borrower if the borrower fails to pay scheduled
principal and interest. In cases where the High Yield Fund lacks direct
recourse, it will look to the agent bank to enforce appropriate credit remedies
against the borrower. In these cases, the High Yield Fund may be subject to
delays, expenses and risks that are greater than those that would have been
involved if the Underlying Fund had purchased a direct obligation (such as
commercial paper) of such borrower. For example, in the event of the bankruptcy
or insolvency of the corporate borrower, a loan participation may be subject to
certain defenses by the borrower as a result of improper conduct by the agent
bank. Moreover, under the terms of the loan participation, the High Yield Fund
may be regarded as a creditor of the agent bank (rather than of the underlying
corporate borrower), so that the High Yield Fund may also be subject to the risk
that the agent bank may become insolvent. The secondary market, if any, for
these loan participations is limited and any loan participations purchased by
the High Yield Fund will be regarded as illiquid.
For purposes of certain investment limitations pertaining to diversification
of the High Yield Fund's portfolio investments, the issuer of a loan
participation will be the underlying borrower. However, in cases where the High
Yield Fund does not have recourse directly against the borrower, both the
borrower and each agent bank and co-lender interposed between the High Yield
Fund and the borrower will be deemed issuers of a loan participation.
Obligations of the United States, Its Agencies, Instrumentalities and Sponsored
- -------------------------------------------------------------------------------
Enterprises
- -----------
Each Underlying Fund may invest in U.S. government securities ("U.S.
Government Securities"), which are obligations issued or guaranteed by the U.S.
government and its agencies, instrumentalities or sponsored enterprises. Some
U.S. Government Securities (such as Treasury
B-22
<PAGE>
bills, notes and bonds, which differ only in their interest rates, maturities
and times of issuance) are supported by the full faith and credit of the United
States of America. Others, such as obligations issued or guaranteed by U.S.
government agencies, instrumentalities or sponsored enterprises, are supported
either by (a) the right of the issuer to borrow from the Treasury (such as
securities of Federal Home Loan Banks), (b) the discretionary authority of the
U.S. government to purchase the agency's obligations (such as securities of
Federal National Mortgage Association ("Fannie Mae")) or (c) only the credit of
the issuer (such as securities of the Financing Corporation). The U.S.
government is under no legal obligation, in general, to purchase the obligations
of its agencies, instrumentalities or sponsored enterprises. No assurance can be
given that the U.S. government will provide financial support to the U.S.
government agencies, instrumentalities or sponsored enterprises in the future.
U.S. Government Securities include (to the extent consistent with the
Investment Company Act of 1940, as amended (the "Act")) securities for which the
payment of principal and interest is backed by an irrevocable letter of credit
issued by the U.S. government, or its agencies, instrumentalities or sponsored
enterprises. U.S. Government Securities also include (to the extent consistent
with the Act) participations in loans made to foreign governments or their
agencies that are guaranteed as to principal and interest by the U.S. government
or its agencies, instrumentalities or sponsored enterprises. The secondary
market for certain of these participations is extremely limited. In the absence
of a substantial secondary market, such participations are regarded as illiquid.
Each Underlying Fund may also purchase U.S. Government Securities in private
placements, subject to the such Fund's limitation on investment in illiquid
securities.
The Underlying Funds may also invest in separately traded principal and
interest components of securities guaranteed or issued by the U.S. Treasury that
are traded independently under the separate trading of registered interest and
principal of securities program ("STRIPS").
Bank Obligations
- ----------------
Certain of the Underlying Funds may invest in debt obligations issued or
guaranteed by United States and foreign banks. Bank obligations, including
without limitation, time deposits, bankers' acceptances and certificates of
deposit, may be general obligations of the parent bank or 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.
B-23
<PAGE>
Deferred Interest, Pay-in-Kind and Capital Appreciation Bonds
- -------------------------------------------------------------
Certain of the Underlying Funds expect to invest in deferred interest and
capital appreciation bonds and pay-in-kind ("PIK") securities. Deferred
interest and capital appreciation bonds are debt securities issued or sold at a
discount from their face value and which do not entitle the holder to any
periodic payment of interest prior to maturity or a specified date. The
original issue discount varies depending on the time remaining until maturity or
cash payment date, prevailing interest rates, the liquidity of the security and
the perceived credit quality of the issuer. These securities also may take the
form of debt securities that have been stripped of their unmatured interest
coupons, the coupons themselves or receipts or certificates representing
interests in such stripped debt obligations or coupons. The market prices of
deferred interest, capital appreciation bonds and PIK securities generally are
more volatile than the market prices of interest bearing securities and are
likely to respond to a greater degree to changes in interest rates than interest
bearing securities having similar maturities and credit quality.
PIK securities may be debt obligations or preferred shares that provide the
issuer with the option of paying interest or dividends on such obligations in
cash or in the form of additional securities rather than cash. Similar to zero
coupon bonds and deferred interest bonds, PIK securities are designed to give an
issuer flexibility in managing cash flow. PIK securities that are debt
securities can either be senior or subordinated debt and generally trade flat
(i.e., without accrued interest). The trading price of PIK debt securities
generally reflects the market value of the underlying debt plus an amount
representing accrued interest since the last interest payment.
Deferred interest, capital appreciation and PIK securities involve the
additional risk that, unlike securities that periodically pay interest to
maturity, a Fund will realize no cash until a specified future payment date
unless a portion of such securities is sold and, if the issuer of such
securities defaults, a Fund may obtain no return at all on its investment. In
addition, even though such securities do not provide for the payment of current
interest in cash, the Funds are nonetheless required to accrue income on such
investments for each taxable year and generally are required to distribute such
accrued amounts (net of deductible expenses, if any) to avoid being subject to
tax. Because no cash is generally received at the time of the accrual, a Fund
may be required to liquidate other portfolio securities to obtain sufficient
cash to satisfy federal tax distribution requirements applicable to the
Underlying Fund.
Zero Coupon Bonds
- -----------------
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
B-24
<PAGE>
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.
Custodial Receipts
- ------------------
Each Underlying Fund may invest up to 5% of its net assets in custodial
receipts in respect of securities issued or guaranteed as to principal and
interest by the U.S. Government, its agencies, instrumentalities, political
subdivisions or authorities. Such custodial receipts evidence ownership of
future interest payments, principal payments or both on certain notes or bonds
issued by the U.S. Government, its agencies, instrumentalities, political
subdivisions or authorities. These custodial receipts are known by various
names, including "Treasury Receipts," "Treasury Investors Growth Receipts"
("TIGRs"), and "Certificates of Accrual on Treasury Securities" ("CATs"). For
certain securities law purposes, custodial receipts are not considered U.S.
Government securities.
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").
B-25
<PAGE>
Municipal Securities are often issued to obtain funds for various public
purposes including refunding outstanding obligations, obtaining funds for
general operating expenses, and obtaining funds to lend to other public
institutions and facilities. Municipal Securities also include certain
"private activity bonds" or industrial development bonds, which are issued by or
on behalf of public authorities to provide financing aid to acquire sites or
construct or equip facilities within a municipality for privately or publicly
owned corporations.
The two principal classifications of Municipal Securities are "general
obligations" and "revenue obligations." General obligations are secured by the
issuer's pledge of its full faith and credit for the payment of principal and
interest, although the characteristics and enforcement of general obligations
may vary according to the law applicable to the particular issuer. Revenue
obligations, which include, but are not limited to, private activity bonds,
resource recovery bonds, certificates of participation and certain municipal
notes, are not backed by the credit and taxing authority of the issuer, and are
payable solely from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise or other
specific revenue source. Nevertheless, the obligations of the issuer of a
revenue obligation may be backed by a letter of credit, guarantee or insurance.
General obligations and revenue obligations may be issued in a variety of forms,
including commercial paper, fixed, variable and floating rate securities, tender
option bonds, auction rate bonds and zero coupon bonds, deferred interest bonds
and capital appreciation bonds.
In addition to general obligations and revenue obligations, there is a variety
of hybrid and special types of Municipal Securities. There are also numerous
differences in the security of Municipal Securities both within and between
these two principal classifications.
An entire issue of Municipal Securities may be purchased by one or a small
number of institutional investors such as the High Yield and Core Fixed Income
Funds. Thus, the issue may not be said to be publicly offered. Unlike some
securities that are not publicly offered, a secondary market exists for many
Municipal Securities that were not publicly offered initially and such
securities may be readily marketable.
The obligations of the issuer to pay the principal of and interest on a
Municipal Security are subject to the provisions of bankruptcy, insolvency and
other laws affecting the rights and remedies of creditors, such as the Federal
Bankruptcy Act, and laws, if any, that may be enacted by Congress or state
legislatures extending the time for payment of principal or interest or imposing
other constraints upon the enforcement of such obligations. There is also the
possibility that, as a result of litigation or other conditions, the power or
ability of the issuer to pay when due principal of or interest on a Municipal
Security may be materially affected.
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
B-26
<PAGE>
bonds. Leases and installment purchase or conditional sale contracts (which
normally provide for title to the leased asset to pass eventually to the
governmental issuer) have evolved as a means for governmental issuers to acquire
property and equipment without meeting the constitutional and statutory
requirements for the issuance of debt. The debt issuance limitations are deemed
to be inapplicable because of the inclusion in many leases or contracts of "non-
appropriation" clauses that relieve the governmental issuer of any obligation to
make future payments under the lease or contract unless money is appropriated
for such purpose by the appropriate legislative body on a yearly or other
periodic basis. In addition, such leases or contracts may be subject to the
temporary abatement of payments in the event the issuer is prevented from
maintaining occupancy of the leased premises or utilizing the leased equipment.
Although the obligations may be secured by the leased equipment or facilities,
the disposition of the property in the event of non-appropriation or foreclosure
might prove difficult, time consuming and costly, and result in a delay in
recovering or the failure to fully recover an Underlying Fund's original
investment.
Certificates of participation represent undivided interests in municipal
leases, installment purchase agreements or other instruments. The certificates
are typically issued by a trust or other entity which has received an assignment
of the payments to be made by the state or political subdivision under such
leases or installment purchase agreements.
Certain municipal lease obligations and certificates of participation may be
deemed to be illiquid for the purpose of an Underlying Fund's limitation on
investments in illiquid securities. Other municipal lease obligations and
certificates of participation acquired by an Underlying Fund may be determined
by its investment adviser, pursuant to guidelines adopted by the Trustees of the
Trust, to be liquid securities for the purpose of such limitation. In
determining the liquidity of municipal lease obligations and certificates of
participation, the investment adviser will consider a variety of factors
including: (1) the willingness of dealers to bid for the security; (2) the
number of dealers willing to purchase or sell the obligation and the number of
other potential buyers; (3) the frequency of trades or quotes for the
obligation; and (4) the nature of the marketplace trades. In addition, the
investment adviser will consider factors unique to particular lease obligations
and certificates of participation affecting the marketability thereof. These
include the general creditworthiness of the issuer, the importance to the issuer
of the property covered by the lease and the likelihood that the marketability
of the obligation will be maintained throughout the time the obligation is held
by an Underlying Fund.
The Underlying Funds may purchase participations in Municipal Securities held
by a commercial bank or other financial institution. Such participations
provide an Underlying Fund with the right to a pro rata undivided interest in
the underlying Municipal Securities. In addition, 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.
B-27
<PAGE>
Auction Rate Securities. Municipal Securities also include auction rate
-----------------------
Municipal Securities and auction rate preferred securities issued by closed-end
investment companies that invest primarily in Municipal Securities
(collectively, "auction rate securities"). Provided that the auction mechanism
is successful, auction rate securities usually permit the holder to sell the
securities in an auction at par value at specified intervals. The dividend is
reset by "Dutch" auction in which bids are made by broker-dealers and other
institutions for a certain amount of securities at a specified minimum yield.
The dividend rate set by the auction is the lowest interest or dividend rate
that covers all securities offered for sale. While this process is designed to
permit auction rate securities to be traded at par value, there is some risk
that an auction will fail due to insufficient demand for the securities.
An Underlying Fund's investments in auction rate securities of closed-end
funds are subject to the limitations prescribed by the Act. An Underlying Fund
will indirectly bear its proportionate share of any management and other fees
paid by such closed-end funds in addition to the advisory fees payable directly
by the Underlying Funds.
Other Types of Municipal Securities. Other types of Municipal Securities in
-----------------------------------
which certain of the Underlying Funds may invest include municipal notes, tax-
exempt commercial paper, pre-refunded municipal bonds, industrial development
bonds and insured municipal obligations.
Call Risk and Reinvestment Risk. Municipal Securities may include "call"
-------------------------------
provisions which permit the issuers of such securities, at any time or after a
specified period, to redeem the securities prior to their stated maturity. In
the event that Municipal Securities held in an Underlying Fund's portfolio are
called prior to the maturity, the Underlying Fund will be required to reinvest
the proceeds on such securities at an earlier date and may be able to do so only
at lower yields, thereby reducing the Underlying Fund's return on its portfolio
securities.
Mortgage Loans and Mortgage-Backed Securities
- ---------------------------------------------
General Characteristics. 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
B-28
<PAGE>
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.
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
B-29
<PAGE>
amount (which there generally is), the final payment may be substantially larger
than the other payments. These limitations on periodic increases in interest
rates and on changes in monthly payments protect borrowers from unlimited
interest rate and payment increases.
ARMs also have the risk of prepayments. The rate of principal prepayments
with respect to ARMs has fluctuated in recent years. As with fixed-rate
mortgage loans, ARMs may be subject to a greater rate of principal repayments in
a declining interest rate environment resulting in lower yields to a Fund. For
example, if prevailing interest rates fall significantly, ARMs could be subject
to higher prepayment rates (than if prevailing interest rates remain constant or
increase) because the availability of low fixed-rate mortgages may encourage
mortgagors to refinance their ARMs to "lock-in" a fixed-rate mortgage.
Conversely, if prevailing interest rates rise significantly, ARMs may prepay
more slowly. As with fixed-rate mortgages, ARM prepayment rates vary in both
stable and changing interest rate environments.
There are two main categories of indices which provide the basis for rate
adjustments on ARMs: those based on U.S. Treasury securities and those derived
from a calculated measure, such as a cost of funds index or a moving average of
mortgage rates. Commonly utilized indices include the one-year, three-year and
five-year constant maturity Treasury rates, the three-month Treasury bill rate,
the 180-day Treasury bill rate, rates on longer-term Treasury securities, the
11th District Federal Home Loan Bank Cost of Funds, the National Median Cost of
Funds, the one-month, three-month, six-month or one-year London Interbank
Offered Rate, the prime rate of a specific bank or commercial paper rates. Some
indices, such as the one-year constant maturity Treasury rate, closely mirror
changes in market interest rate levels. Others, such as the 11th District
Federal Home Loan Bank Cost of Funds index, tend to lag behind changes in market
rate levels and tend to be somewhat less volatile. The degree of volatility in
the market value of 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 in which certain of
the Underlying Funds may invest. These regulations may impair the ability of a
mortgage lender to enforce its rights under the mortgage documents. These
regulations may adversely affect a Fund's investments in Mortgage-Backed
Securities (including those issued or guaranteed by the U.S. government, its
agencies or instrumentalities) by delaying an Underlying Fund's receipt of
payments derived from principal or interest on mortgage loans affected by such
regulations.
B-30
<PAGE>
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 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.
B-31
<PAGE>
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 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
B-32
<PAGE>
their resale in the form of mortgage securities, primarily Freddie Mac
Certificates. A Freddie Mac Certificate represents a pro rata interest in a
group of mortgage loans or participation in mortgage loans (a "Freddie Mac
Certificate group") purchased by Freddie Mac.
Freddie Mac guarantees to each registered holder of a Freddie Mac Certificate
the timely payment of interest at the rate provided for by such Freddie Mac
Certificate (whether or not received on the underlying loans). Freddie Mac also
guarantees to each registered Certificate holder ultimate collection of all
principal of the related mortgage loans, without any offset or deduction, but
does not, generally, guarantee the timely payment of scheduled principal. The
obligations of Freddie Mac under its guaranty of Freddie Mac Certificates are
obligations solely of Freddie Mac.
The mortgage loans underlying the Freddie Mac and Fannie Mae Certificates
consist of adjustable rate or fixed rate mortgage loans with original terms to
maturity of between five and thirty years. Substantially all of these mortgage
loans are secured by first liens on one-to-four-family residential properties or
multifamily projects. Each mortgage loan must meet the applicable standards set
forth in the law creating Freddie Mac or Fannie Mae. A Freddie Mac Certificate
group may include whole loans, participation interests in whole loans, undivided
interests in whole loans and participations comprising another Freddie Mac
Certificate group.
Conventional Mortgage Loans. The conventional mortgage loans underlying the
---------------------------
Freddie Mac and Fannie Mae Certificates consist of adjustable rate or fixed-rate
mortgage loans with original terms to maturity of between five and thirty years.
Substantially all of these mortgage loans are secured by first liens on one- to
four-family residential properties or multi-family projects. Each mortgage loan
must meet the applicable standards set forth in the law creating Freddie Mac or
Fannie Mae. A Freddie Mac Certificate group may include whole loans,
participation interests in whole loans, undivided interests in whole loans and
participations comprising another Freddie Mac Certificate group.
Mortgage Pass-Through Securities. As described in the Prospectuses, 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.
B-33
<PAGE>
Any class of certificates may also be divided into subclasses entitled to
varying amounts of principal and interest. If a REMIC election has been made,
certificates of such subclasses may be entitled to payments on the basis of a
stated principal balance and stated interest rate, and payments among different
subclasses may be made on a sequential, concurrent, pro rata or disproportionate
basis, or any combination thereof. The stated interest rate on any such
subclass of certificates may be a fixed rate or one which varies in direct or
inverse relationship to an objective interest index.
Generally, each registered holder of a certificate will be entitled to receive
its pro rata share of monthly distributions of all or a portion of principal of
the underlying mortgage loans or of interest on the principal balances thereof,
which accrues at the applicable mortgage pass-through rate, or both. The
difference between the mortgage interest rate and the related mortgage pass-
through rate (less the amount, if any, of retained yield) with respect to each
mortgage loan will generally be paid to the servicer as a servicing fee. Since
certain adjustable rate mortgage loans included in a mortgage pool may provide
for deferred interest (i.e., negative amortization), the amount of interest
actually paid by a mortgagor in any month may be less than the amount of
interest accrued on the outstanding principal balance of the related mortgage
loan during the relevant period at the applicable mortgage interest rate. In
such event, the amount of interest that is treated as deferred interest will be
added to the principal balance of the related mortgage loan and will be
distributed pro rata to certificate-holders as principal of such mortgage loan
when paid by the mortgagor in subsequent monthly payments or at maturity.
Ratings. The ratings assigned by a rating organization to Mortgage Pass-
-------
Throughs address the likelihood of the receipt of all distributions on the
underlying mortgage loans by the related certificate-holders under the
agreements pursuant to which such certificates are issued. A rating
organization's ratings take into consideration the credit quality of the related
mortgage pool, including any credit support providers, structural and legal
aspects associated with such certificates, and the extent to which the payment
stream on such mortgage pool is adequate to make payments required by such
certificates. A rating organization's ratings on such certificates 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
B-34
<PAGE>
be provided by, among other things, payment guarantees, letters of credit, pool
insurance, subordination, or any combination thereof.
Subordination; Shifting of Interest; Reserve Fund. In order to achieve
-------------------------------------------------
ratings on one or more classes of Mortgage Pass-Throughs, one or more classes of
certificates may be subordinate certificates which provide that the rights of
the subordinate certificate-holders to receive any or a specified portion of
distributions with respect to the underlying mortgage loans may be subordinated
to the rights of the senior certificate-holders. If so structured, the
subordination feature may be enhanced by distributing to the senior certificate-
holders on certain distribution dates, as payment of principal, a specified
percentage (which generally declines over time) of all principal payments
received during the preceding prepayment period ("shifting interest credit
enhancement"). This will have the effect of accelerating the amortization of
the senior certificates while increasing the interest in the trust fund
evidenced by the subordinate certificates. Increasing the interest of the
subordinate certificates relative to that of the senior certificates is intended
to preserve the availability of the subordination provided by the subordinate
certificates. In addition, because the senior certificate-holders in a shifting
interest credit enhancement structure are entitled to receive a percentage of
principal prepayments which is greater than their proportionate interest in the
trust fund, the rate of principal prepayments on the mortgage loans will have an
even greater effect on the rate of principal payments and the amount of interest
payments on, and the yield to maturity of, the senior certificates.
In addition to providing for a preferential right of the senior certificate-
holders to receive current distributions from the mortgage pool, a reserve fund
may be established relating to such certificates (the "Reserve Fund"). The
Reserve Fund may be created with an initial cash deposit by the originator or
servicer and augmented by the retention of distributions otherwise available to
the subordinate certificate-holders or by excess servicing fees until the
Reserve Fund reaches a specified amount.
The subordination feature, and any Reserve Fund, are intended to enhance the
likelihood of timely receipt by senior certificate-holders of the full amount of
scheduled monthly payments of principal and interest due them and will protect
the senior certificate-holders against certain losses; however, in certain
circumstances the Reserve Fund could be depleted and temporary shortfalls could
result. In the event the Reserve Fund is depleted before the subordinated
amount is reduced to zero, senior certificate-holders will nevertheless have a
preferential right to receive current distributions from the mortgage pool to
the extent of the then outstanding subordinated amount. Unless otherwise
specified, until the subordinated amount is reduced to zero, on any distribution
date any amount otherwise distributable to the subordinate certificates or, to
the extent specified, in the Reserve Fund will generally be used to offset the
amount of any losses realized with respect to the mortgage loans ("Realized
Losses"). Realized Losses remaining after application of such amounts will
generally be applied to reduce the ownership interest of the subordinate
certificates in the mortgage pool. If the subordinated amount has been reduced
to zero, Realized Losses generally will be allocated pro rata among all
certificate-holders in proportion to their respective outstanding interests in
the mortgage pool.
B-35
<PAGE>
Alternative Credit Enhancement. As an alternative, or in addition to the
------------------------------
credit enhancement afforded by subordination, credit enhancement for Mortgage
Pass-Throughs may be provided by mortgage insurance, hazard insurance, by the
deposit of cash, certificates of deposit, letters of credit, a limited guaranty
or by such other methods as are acceptable to a rating agency. In certain
circumstances, such as where credit enhancement is provided by guarantees or a
letter of credit, the security is subject to credit risk because of its exposure
to an external credit enhancement provider.
Voluntary Advances. Generally, in the event of delinquencies in payments on
------------------
the mortgage loans underlying the Mortgage Pass-Throughs, the servicer agrees to
make advances of cash for the benefit of certificate-holders, but only to the
extent that it determines such voluntary advances will be recoverable from
future payments and collections on the mortgage loans or otherwise.
Optional Termination. Generally, the servicer may, at its option with respect
--------------------
to any certificates, repurchase all of the underlying mortgage loans remaining
outstanding at such time as the aggregate outstanding principal balance of such
mortgage loans is less than a specified percentage (generally 5-10%) of the
aggregate outstanding principal balance of the mortgage loans as of the cut-off
date specified with respect to such series.
Multiple Class Mortgage-Backed Securities and Collateralized Mortgage
---------------------------------------------------------------------
Obligations. An Underlying Fund may invest in multiple class securities
- -----------
including collateralized mortgage obligations ("CMOs") and REMIC Certificates.
These securities may be issued by U.S. Government agencies and instrumentalities
such as Fannie Mae or Freddie Mac or by trusts formed by private originators of,
or investors in, mortgage loans, including savings and loan associations,
mortgage bankers, commercial banks, insurance companies, investment banks and
special purpose subsidiaries of the foregoing. In general, CMOs are debt
obligations of a legal entity that are collateralized by, and multiple class
Mortgage-Backed Securities represent direct ownership interests in, a pool of
mortgage loans or Mortgage-Backed Securities the payments on which are used to
make payments on the CMOs or multiple class Mortgage-Backed Securities.
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.
B-36
<PAGE>
CMOs and guaranteed REMIC Certificates issued by Fannie Mae and Freddie Mac
are types of multiple class Mortgage-Backed Securities. Investors may purchase
beneficial interests in REMICs, which are known as "regular" interests or
"residual" interests. The Underlying Funds do not intend to purchase residual
interests in REMICs. The REMIC Certificates represent beneficial ownership
interests in a REMIC trust, generally consisting of mortgage loans or Fannie
Mae, Freddie Mac or Ginnie Mae guaranteed Mortgage-Backed Securities (the
"Mortgage Assets"). The obligations of Fannie Mae or Freddie Mac under their
respective guaranty of the REMIC Certificates are obligations solely of Fannie
Mae or Freddie Mac, respectively.
CMOs and REMIC Certificates are issued in multiple classes. Each class of
CMOs or REMIC Certificates, often referred to as a "tranche," is issued at a
specific adjustable or fixed interest rate and must be fully retired no later
than its final distribution date. Principal prepayments on the Mortgage Loans
or the Mortgage Assets underlying the CMOs or REMIC Certificates may cause some
or all of the classes of CMOs or REMIC Certificates to be retired substantially
earlier than their final distribution dates. Generally, interest is paid or
accrues on all classes of CMOs or REMIC Certificates on a monthly basis.
The principal of and interest on the Mortgage Assets may be allocated among
the several classes of CMOs or REMIC Certificates in various ways. In certain
structures (known as "sequential pay" CMOs or REMIC Certificates), payments of
principal, including any principal prepayments, on the Mortgage Assets generally
are applied to the classes of CMOs or REMIC Certificates in the order of their
respective final distribution dates. Thus, no payment of principal will be made
on any class of sequential pay CMOs or REMIC Certificates until all other
classes having an earlier final distribution date have been paid in full.
Additional structures of CMOs and REMIC Certificates include, among others,
"parallel pay" CMOs and REMIC Certificates. Parallel pay CMOs or REMIC
Certificates are those which are structured to apply principal payments and
prepayments of the Mortgage Assets to two or more classes concurrently on a
proportionate or disproportionate basis. These simultaneous payments are taken
into account in calculating the final distribution date of each class.
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
B-37
<PAGE>
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 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
B-38
<PAGE>
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 (other than Financial Square Prime Obligations Fund) may
purchase and sell futures contracts and may also purchase and write options on
futures contracts. CORE Large Cap Value and CORE Large Cap Growth Funds may
only enter into such transactions with respect to a representative index. Core
U.S. Equity Fund may enter into futures contracts only with respect to the S&P
500 Index. The other Funds may purchase and sell futures contracts based on
various securities (such as U.S. Government securities), securities indices,
foreign currencies and other financial instruments and indices. 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 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
B-39
<PAGE>
contract relating to an index or otherwise not calling for physical delivery at
the end of trading in the contract).
When interest rates are rising or securities prices are falling, an Underlying
Fund can seek through the sale of futures contracts to offset a decline in the
value of its current portfolio securities. When rates are falling or prices are
rising, an Underlying Fund, through the purchase of futures contracts, can
attempt to secure better rates or prices than might later be available in the
market when it effects anticipated purchases. Similarly, an Underlying Fund may
sell futures contracts on a specified currency to protect against a decline in
the value of such currency and its portfolio securities which are quoted or
denominated in such currency, or purchase futures contracts on foreign currency
to establish the price in U.S. dollars of a security quoted or denominated in
such currency that such Fund has acquired or expects to acquire. The Underlying
Fixed-Income Funds may also use futures contracts to manage their term
structure, sector selection and duration in accordance with their investment
objectives and policies.
Positions taken in the futures market are not normally held to maturity, but
are instead liquidated through offsetting transactions which may result in a
profit or a loss. While an Underlying Fund will usually liquidate futures
contracts on securities or currency in this manner, 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 are traded
guarantees that, if still open, the sale or purchase will be performed on the
settlement date.
Hedging Strategies. Hedging, by use of futures contracts, seeks to establish
------------------
with more certainty than would otherwise be possible the effective price, rate
of return or currency exchange rate on portfolio securities or securities that
an Underlying Fund owns or proposes to acquire. An Underlying Fund may, for
example, take a "short" position in the futures market by selling futures
contracts to seek to hedge against an anticipated rise in interest rates or a
decline in market prices or (other than CORE Large Cap Value, CORE U.S. Equity,
CORE Large Cap Growth and CORE Small Cap Equity Funds) foreign currency rates
that would adversely affect the dollar value of such Fund's portfolio
securities. Similarly, certain Underlying Funds may sell futures contracts on a
currency in which its portfolio securities are quoted or denominated or in one
currency to seek to hedge against fluctuations in the value of securities quoted
or denominated in a different currency if there is an established historical
pattern of correlation between the two currencies. If, in the opinion of an
Underlying Fund's investment adviser, there is a sufficient degree of
correlation between price trends for an Underlying Fund's portfolio securities
and futures contracts based on other financial instruments, securities indices
or other indices, the Fund may also enter into such futures contracts as part of
its hedging strategy. Although under some circumstances prices of securities in
an Underlying Fund's portfolio may be more or less volatile than prices of such
futures contracts, its investment adviser will attempt to estimate the extent of
this volatility difference based on historical patterns and compensate for any
such differential by having the Fund enter into a greater or lesser number of
futures contracts or by attempting to achieve only a partial hedge against price
changes affecting the Fund's portfolio securities. When hedging of this
character is successful, any depreciation in the value of portfolio securities
will be substantially offset by appreciation in the value of the futures
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position. On the other hand, any unanticipated appreciation in the value of an
Underlying Fund's portfolio securities would be substantially offset by a
decline in the value of the futures position.
On other occasions, an Underlying Fund may take a "long" position by
purchasing futures contracts. This may be done, for example, when an Underlying
Fund anticipates the subsequent purchase of particular securities when it has
the necessary cash, but expects the prices or currency exchange rates then
available in the applicable market to be less favorable than prices or rates
that are currently available.
Options on Futures Contracts. The acquisition of put and call options on
----------------------------
futures contracts will give an Underlying Fund the right (but not the
obligation), for a specified price, to sell or to purchase, respectively, the
underlying futures contract at any time during the option period. As the
purchaser of an option on a futures contract, an Underlying Fund obtains the
benefit of the futures position if prices move in a favorable direction but
limits its risk of loss in the event of an unfavorable price movement to the
loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium which
may partially offset a decline in the value of an Underlying Fund's assets. By
writing a call option, an Underlying Fund becomes obligated, in exchange for the
premium, to sell a futures contract if the option is exercised, which may have a
value higher than the exercise price. Conversely, the writing of a put option
on a futures contract generates a premium, which may partially offset an
increase in the price of securities that an Underlying Fund intends to purchase.
However, an Underlying Fund becomes obligated upon exercise of the option to
purchase a futures contract if the option is exercised, which may have a value
lower than the exercise price. Thus, the loss incurred by an Underlying Fund in
writing options on futures is potentially unlimited and may exceed the amount of
the premium received. An Underlying Fund will incur transaction costs in
connection with the writing of options on futures.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option on the same financial
instrument. There is no guarantee that such closing transactions can be
effected. An Underlying Fund's ability to 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
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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 a Fund's trading in 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. Certain of the Underlying Funds may write (sell)
-----------------------
covered call and put options on any securities in which they may invest. An
Underlying Fund may purchase and write such options on securities that are
listed on national domestic securities exchanges or foreign securities exchanges
or traded in the over-the-counter market. A call option written by an
Underlying Fund obligates such Fund to sell specified securities to the holder
of the option at a specified price if the option is exercised at any time before
the expiration date. All call options written by an Underlying Fund are
covered, which means that such Fund will own the securities subject to the
option as long as the option is outstanding or such Fund will use the other
methods described below. An Underlying Fund's purpose in writing covered call
options is to realize greater income than would be realized on portfolio
securities transactions alone. However, an Underlying Fund may forego the
opportunity to profit from an increase in the market price of the underlying
security.
A put option written by an Underlying Fund would obligate such Fund to
purchase specified securities from the option holder at a specified price if the
option is exercised at any time before the expiration date. All put options
written by an Underlying Fund would be covered, which means that such Fund would
have segregated cash or liquid assets with a value at least equal to the
exercise price of the put option. The purpose of writing such options is to
generate additional income for the Underlying Fund. However, in return for the
option premium,
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an Underlying Fund accepts the risk that it may be required to purchase the
underlying securities at a price in excess of the securities' market value at
the time of purchase.
Call and put options written by an Underlying Fund will also be considered to
be covered to the extent that the Fund's liabilities under such options are
wholly or partially offset by its rights under call and put options purchased by
the Fund.
In addition, a written call option or put option may be covered by segregating
cash or liquid assets (either of which may be quoted or denominated in any
currency), by entering into an offsetting forward contract and/or by purchasing
an offsetting option which, by virtue of its exercise price or otherwise,
reduces an Underlying Fund's net exposure on its written option position.
An Underlying Fund may also write (sell) covered call and put options on any
securities index composed of securities in which it may invest. Options on
securities indices are similar to options on securities, except that the
exercise of securities index options requires cash payments and does not involve
the actual purchase or sale of securities. In addition, securities index
options are designed to reflect price fluctuations in a group of securities or
segment of the securities market rather than price fluctuations in a single
security.
An Underlying Fund may cover call options on a securities index by owning
securities whose price changes are expected to be similar to those of the
underlying index, or by having an absolute and immediate right to acquire such
securities without additional cash consideration (or for additional cash
consideration which has been segregated by the Underlying Fund) upon conversion
or exchange of other securities in its portfolio. An Underlying Fund may cover
call and put options on a securities index by segregating cash or liquid assets
with a value equal to the exercise price or by using the other methods described
above.
An Underlying Fund may terminate its obligations under an exchange-traded call
or put option by purchasing an option identical to the one it has written.
Obligations under over-the-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 CORE Large Cap Value,
------------------
CORE U.S. Equity, CORE Large Cap Growth and 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 would normally purchase call options in anticipation of an
increase in the market value of securities of the type in which it may invest.
The purchase of a call option would entitle an Underlying Fund, in return for
the premium paid, to purchase specified securities at a specified price during
the option period. An Underlying Fund would ordinarily realize a gain if,
during the option period, the value of such securities exceeded the sum of the
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exercise price, the premium paid and transaction costs; otherwise such Fund
would realize either no gain or a loss on the purchase of the call option.
An Underlying Fund would normally purchase put options in anticipation of a
decline in the market value of securities in its portfolio ("protective puts"),
or in securities in which it may invest. The purchase of a put option would
entitle an Underlying Fund, in exchange for the premium paid, to sell specified
securities at a specified price during the option period. The purchase of
protective puts is designed to offset or hedge against a decline in the market
value of an Underlying Fund's securities. Put options may also be purchased by
an Underlying Fund for the purpose of affirmatively benefiting from a decline in
the price of securities which it does not own. An Underlying Fund would
ordinarily realize a gain if, during the option period, the value of the
underlying securities decreased below the exercise price sufficiently to more
than cover the premium and transaction costs; otherwise such a Fund would
realize either no gain or a loss on the purchase of the put option. Gains and
losses on the purchase of protective put options would tend to be offset by
countervailing changes in the value of the underlying portfolio securities.
An Underlying Fund would purchase put and call options on securities indices
for the same purposes as it would purchase options on individual securities.
For a description of options on securities indices, see "Writing Covered
Options" above.
Yield Curve Options. Each Underlying Fixed-Income Fund may enter into options
-------------------
on the yield "spread" or differential between two securities. Such transactions
are referred to as "yield curve" options. In contrast to other types of
options, a yield curve option is based on the difference between the yields of
designated securities, rather than the prices of the individual securities, and
is settled through cash payments. Accordingly, a yield curve option is
profitable to the holder if this differential widens (in the case of a call) or
narrows (in the case of a put), regardless of whether the yields of the
underlying securities increase or decrease.
An Underlying Fund may purchase or write yield curve options for the same
purposes as other options on securities. For example, an Underlying Fund may
purchase a call option on the yield spread between two securities if the Fund
owns one of the securities and anticipates purchasing the other security and
wants to hedge against an adverse change in the yield spread between the two
securities. An Underlying Fund may also purchase or write yield curve options
in an effort to increase current income if, in the judgment of its investment
adviser, the Fund will be able to profit from movements in the spread between
the yields of the underlying securities. The trading of yield curve options is
subject to all of the risks associated with the trading of other types of
options. In addition, however, such options present risk of loss even if the
yield of one of the underlying securities remains constant, or if the spread
moves in a direction or to an extent which was not anticipated.
Yield curve options written by an Underlying Fund will be "covered." A call
(or put) option is covered if an Underlying Fund holds another call (or put)
option on the spread between the same two securities and segregates cash or
liquid assets sufficient to cover the Fund's net liability under the two
options. Therefore, an Underlying Fund's liability for such a covered
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<PAGE>
option is generally limited to the difference between the amount of the Fund's
liability under the option written by the Fund less the value of the option held
by the Fund. Yield curve options may also be covered in such other manner as may
be in accordance with the requirements of the counterparty with which the option
is traded and applicable laws and regulations. Yield curve options are traded
over-the-counter, and the trading markets for these options may not be as
developed.
Risks Associated with Options Transactions. There is no assurance that a
------------------------------------------
liquid secondary market on a domestic or foreign options exchange will exist for
any particular exchange-traded option or at any particular time. If an
Underlying Fund is unable to effect a closing purchase transaction with respect
to covered options it has written, the Fund will not be able to sell the
underlying securities or dispose of segregated assets until the options expire
or are exercised. Similarly, if an Underlying Fund is unable to effect a
closing sale transaction with respect to options it has purchased, it will have
to exercise the options in order to realize any profit and will incur
transaction costs upon the purchase or sale of underlying securities.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening or closing
transactions or both; (iii) trading halts, suspensions or other restrictions may
be imposed with respect to particular classes or series of options; (iv) unusual
or unforeseen circumstances may interrupt normal operations on an exchange; (v)
the facilities of an exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume; or (vi) one or more
exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that exchange that had been issued by the Options Clearing
Corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
An Underlying Fund may purchase and sell both options that are traded on U.S.
and foreign exchanges and options traded over-the-counter with broker-dealers
who make markets in these options. The ability to terminate over-the-counter
options is more limited than with exchange-traded options and may involve the
risk that broker-dealers participating in such transactions will not fulfill
their obligations.
Transactions by an Underlying Fund in options will be subject to limitations
established by each of the exchanges, boards of trade or other trading
facilities governing the maximum number of options in each class which may be
written or purchased by a single investor or group of investors acting in
concert. Thus, the number of options which an Underlying Fund may write or
purchase may be affected by options written or purchased by other investment
advisory clients of the Underlying Funds' investment advisers. An exchange,
board of trade or other trading facility may order the liquidation of positions
found to be in excess of these limits, and it may impose certain other
sanctions.
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<PAGE>
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The use of options to seek to
increase total return involves the risk of loss if an investment adviser is
incorrect in its expectation of fluctuations in securities prices or interest
rates. The successful use of options for hedging purposes also depends in part
on the ability of an investment adviser to predict future price fluctuations and
the degree of correlation between the options and securities markets. If an
investment adviser is incorrect in its expectation of changes in securities
prices or determination of the correlation between the securities indices on
which options are written and purchased and the securities in a Fund's
investment portfolio, the investment performance of the Fund will be less
favorable than it would have been in the absence of such options transactions.
The writing of options could increase a Fund's portfolio turnover rate and,
therefore, associated brokerage commissions or spreads.
Warrants and Stock Purchase Rights
- ----------------------------------
Certain of the Underlying Funds may invest a portion of their assets in
warrants or rights (including those acquired in units or attached to other
securities) which entitle the holder to buy equity securities at a specific
price for a specific period of time. An Underlying Fund will invest in warrants
and rights only if such securities are deemed appropriate by its investment
adviser for investment by the Fund. Warrants and rights have no voting rights,
receive no dividends and have no rights with respect to the assets of the
issuer.
Foreign Investments
- -------------------
Investments in foreign securities may offer potential benefits not available
from investments solely in U.S. dollar-denominated or quoted securities of
domestic issuers. Such benefits may include the opportunity to invest in
foreign issuers that appear, in the opinion of a Fund's investment adviser, to
offer the potential for long-term growth of capital and income than investments
in U.S. securities, the opportunity to invest in foreign countries with economic
policies or business cycles different from those of the United States and the
opportunity to reduce fluctuations in portfolio value by taking advantage of
foreign securities markets that do not necessarily move in a manner parallel to
U.S. markets.
Investing in foreign securities also involves, however, certain special
considerations, including those set forth below, which are not typically
associated with investing in U.S. dollar-denominated or quoted securities of
U.S. issuers. Investments in foreign securities usually involve currencies of
foreign countries. Accordingly, any Underlying Fund that invests in foreign
securities may be affected favorably or unfavorably by changes in currency rates
and in exchange control regulations and may incur costs in connection with
conversions between various currencies. 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.
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<PAGE>
Currency exchange rates may fluctuate significantly over short periods of
time. They generally are determined by the forces of supply and demand in the
foreign exchange markets and the relative merits of investments in different
countries, actual or anticipated changes in interest rates and other complex
factors, as seen from an international perspective. Currency exchange rates
also can be affected unpredictably by intervention by U.S. or foreign
governments or central banks or the failure to intervene or by currency controls
or political developments in the United States or abroad. To the extent that a
substantial portion of an Underlying Fund's total assets, adjusted to reflect
the Fund's net position after giving effect to currency transactions, is
denominated or quoted in the currencies of foreign countries, the Fund will be
more susceptible to the risk of adverse economic and political developments
within those countries. In addition, if the currency in which an Underlying
Fund receives dividends, interest or other payment declines in value against the
U.S. dollar before such income is distributed as dividends to shareholders or
converted to U.S. dollars, the Fund may have to sell portfolio securities to
obtain sufficient cash to pay such dividends.
Since foreign issuers generally are not subject to uniform accounting,
auditing and financial reporting standards, practices and requirements
comparable to those applicable to U.S. companies, there may be less publicly
available information about a foreign company than about a U.S. company. Volume
and liquidity in most foreign securities markets are less than in the United
States and securities of many foreign companies are less liquid and more
volatile than securities of comparable U.S. companies. Fixed commissions on
foreign securities exchanges are generally higher than negotiated commissions on
U.S. exchanges, although each Fund endeavors to achieve the most favorable net
results on its portfolio transactions. There is generally less government
supervision and regulation of foreign securities exchanges, brokers, dealers and
listed and unlisted companies than in the United States.
Foreign markets also have different clearance and settlement procedures, and
in certain markets there have been times when settlements have been unable to
keep pace with the volume of securities transactions, making it difficult to
conduct such transactions. Such delays in settlement could result in temporary
periods when some of an Underlying Fund's assets are uninvested and no return is
earned on such assets. The inability of an Underlying Fund to make intended
security purchases due to settlement problems could cause the Fund to miss
attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result either in losses to an
Underlying Fund due to subsequent declines in value of the portfolio securities
or, if the Fund has entered into a contract to sell the securities, could result
in possible liability to the purchaser. In addition, with respect to certain
foreign countries, there is the possibility of expropriation or confiscatory
taxation, political or social instability, or diplomatic developments which
could affect an Underlying Fund's investments in those countries. Moreover,
individual foreign economies may differ favorably or unfavorably from the U.S.
economy in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payments
position.
Investments in foreign securities may take the form of sponsored and
unsponsored American Depository Receipts ("ADRs"), Global Depository Receipts
("GDRs"), European
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<PAGE>
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.
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 and Capital Growth Funds may invest, to a lesser extent, in equity and
equity-related securities of foreign issuers, including Emerging Country
issuers. The Core Fixed Income, Global Income and High Yield Funds may invest in
debt securities of foreign issuers, including issuers in Emerging Countries. In
addition, certain of the potential investment and management techniques of these
Underlying Funds entail special risks.
Each of the securities markets of the Emerging Countries is less liquid and
subject to greater price volatility and has a smaller market capitalization than
the U.S. securities markets. Issuers and securities markets in such countries
are not subject to as extensive and frequent
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<PAGE>
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. 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 laws and regulations. In
circumstances where adequate laws exist, it may not be possible to obtain swift
and equitable enforcement of the law.
Foreign investment in the securities markets of certain Emerging Countries is
restricted or controlled to varying degrees. These restrictions may limit 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
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<PAGE>
Underlying Fund may be required to establish special custodial or other
arrangements before investing in certain Emerging Countries.
Each of the Emerging Countries may be subject to a greater degree of economic,
political and social instability than is the case in the United States, Japan
and most Western European countries. This instability may result from, among
other things, the following: (i) authoritarian governments or military
involvement in political and economic decision making, including changes or
attempted changes in governments through extra-constitutional means; (ii)
popular unrest associated with demands for improved political, economic or
social conditions; (iii) internal insurgencies; (iv) hostile relations with
neighboring countries; and (v) ethnic, religious and racial disaffection or
conflict. Such economic, political and social instability could disrupt the
principal financial markets in which the Underlying Funds may invest and
adversely affect the value of the Underlying Funds' assets.
The economies of Emerging Countries may differ unfavorably from the U.S.
economy in such respects as growth of gross domestic product, rate of inflation,
capital reinvestment, resources, self-sufficiency and balance of payments. Many
Emerging Countries have experienced in the past, and continue to experience,
high rates of inflation. In certain countries inflation has at times
accelerated rapidly to hyperinflationary levels, creating a negative interest
rate environment and sharply eroding the value of outstanding financial assets
in those countries. The economies of many Emerging Countries are heavily
dependent upon international trade and are accordingly affected by protective
trade barriers and the economic conditions of their trading partners. In
addition, the economies of some Emerging Countries are vulnerable to weakness in
world prices for their commodity exports.
An Underlying Fund's income and, in some cases, capital gains from foreign
stocks and securities will be subject to applicable taxation in certain of the
countries in which it invests, and treaties between the U.S. and such countries
may not be available in some cases to reduce the otherwise applicable tax rates.
Foreign markets may also have different clearance and settlement procedures
and in certain U.S. markets, there have been times when settlements have been
unable to keep pace with the volume of securities transactions making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when a portion of an Underlying Fund's assets is uninvested
and no return is earned thereon. The inability of an Underlying Fund to make
intended security purchases or sales due to settlement problems could result
either in losses to the Fund due to subsequent declines in value of the
portfolio securities or, if the Fund has entered into a contract to sell the
securities, could result in possible liability of the Fund to the purchaser.
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
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last three decades. The boom in Japan's equity and property markets during the
expansion of the late 1980's supported high rates of investment and consumer
spending on durable goods, but both of these components of demand have now
retreated sharply following the decline in asset prices. Profits have fallen
sharply, unemployment has reached a historical high and consumer confidence is
low. The banking sector continues to suffer from non-performing loans and this
economy is subject to deflationary pressures. Numerous discount-rate cuts since
its peak in 1991, a succession of fiscal stimulus packages, support plans for
the debt-burdened financial system and spending for reconstruction following the
Kobe earthquake may help to contain the recessionary forces, but substantial
uncertainties remain.
In addition to the cyclical downturn, Japan is suffering through structural
adjustments. The Japanese have seen a deterioration of their competitiveness
due to high wages, a strong currency and structural rigidities. Finally, Japan
is reforming its political process and deregulating its economy. This has
brought about turmoil, uncertainty and a crisis of confidence.
While the Japanese governmental system itself seems stable, the dynamics of
the country's politics have been unpredictable in recent years. The economic
crisis of 1990-92 brought the downfall of the conservative Liberal Democratic
Party, which had ruled since 1955. Since then, the country has seen a series of
unstable multi-party coalitions and several prime ministers come and go, because
of politics as well as personal scandals. While there appears to be no reason
for anticipating civic unrest, it is impossible to know when the political
instability will end and what trade and fiscal policies might be pursued by the
government that emerges.
Japan's heavy dependence on international trade has been adversely affected by
trade tariffs and other protectionist measures as well as the economic condition
of its trading partners. While Japan subsidizes its agricultural industry, only
19% of its land is suitable for cultivation and it is only 50% self-sufficient
in food production. Accordingly, it is highly dependent on large imports of
wheat, sorghum and soybeans. In addition, industry, its most important economic
sector, depends on imported raw materials and fuels, including iron ore, copper,
oil and many forest products. Japan's high volume of exports, such as
automobiles, machine tools and semiconductors, have caused trade tensions,
particularly with the United States. Some trade agreements, however, have been
implemented to reduce these tensions. The relaxing of official and de facto
barriers to imports, or hardships created by any pressures brought by trading
partners, could adversely affect Japan's economy. A substantial rise in world
oil or commodity prices could also have a negative affect. The strength of the
yen itself may prove an impediment to strong continued exports and economic
recovery, because it makes Japanese goods sold in other countries more expensive
and reduces the value of foreign earnings repatriated to Japan. 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.
B-51
<PAGE>
Sovereign Debt Obligations. Investments in sovereign debt obligations involve
special risks not present in corporate debt obligations. The issuer of the
sovereign debt or the governmental authorities that control the repayment of the
debt may be unable or unwilling to repay principal or interest when due, and an
Underlying Fund may have limited recourse in the event of a default. During
periods of economic uncertainty, the market prices of sovereign debt, and an
Underlying Fund's net asset value, may be more volatile than prices of debt
obligations of U.S. issuers. In the past, the governments of certain emerging
markets have encountered difficulties in servicing their debt obligations,
withheld payments of principal and interest and declared moratoria on the
payment of principal and interest on their sovereign debts.
A sovereign debtor's willingness or ability to repay principal and pay
interest in a timely manner may be affected by, among other factors, its cash
flow situation, the extent of its foreign currency reserves, the availability of
sufficient foreign exchange, the relative size of the debt service burden, the
sovereign debtor's policy toward principal international lenders and local
political constraints. Sovereign debtors may also be dependent on expected
disbursements from foreign governments, multinational agencies and other
entities to reduce principal and interest arrearages on their debt. The failure
of a sovereign debtor to implement economic reforms, achieve specified levels of
economic performance or repay principal or interest when due may result in the
cancellation of the third parties' commitments to lend funds to the sovereign
debtor, which may further impair such debtor's ability or willingness to timely
service its debts.
Forward Foreign Currency Exchange Contracts. Certain of the Underlying Funds
may enter into forward foreign currency exchange contracts for hedging purposes.
CORE International Equity, International Equity, European Equity, Japanese
Equity, International Small Cap, Emerging Markets Equity, Asia Growth, Global
Income, Core Fixed Income and High Yield Funds may also enter into forward
foreign currency exchange contracts to seek to increase total return. A forward
foreign currency exchange contract involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. These contracts are traded in the interbank market between
currency traders (usually large commercial banks) and their customers. A
forward contract generally has no deposit requirement, and no commissions are
generally charged at any stage for trades.
At the maturity of a forward contract an Underlying Fund may either accept or
make delivery of the currency specified in the contract or, at or prior to
maturity, enter into a closing transaction involving the purchase or sale of an
offsetting contract. Closing transactions with 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
B-52
<PAGE>
of such dividend or interest payment, as the case may be. By entering into a
forward contract for the purchase or sale, for a fixed amount of dollars, of the
amount of foreign currency involved in the underlying transactions, the
Underlying Fund will attempt to protect itself against an adverse change in the
relationship between the U.S. dollar and the subject foreign currency during the
period between the date on which the security is purchased or sold, or on which
the dividend or interest payment is declared, and the date on which such
payments are made or received.
Additionally, when an Underlying Fund's investment adviser believes that the
currency of a particular foreign country may suffer a substantial decline
against the U.S. dollar, it may enter into a forward contract to sell, for a
fixed amount of U.S. dollars, the amount of foreign currency approximating the
value of some or all of the Fund's portfolio securities quoted or denominated in
such foreign currency. The precise matching of the forward contract amounts and
the value of the securities involved will not generally be possible because the
future value of such securities in foreign currencies will change as a
consequence of market movements in the value of those securities between the
date on which the contract is entered into and the date it matures. Using
forward contracts to protect the value of an Underlying Fund's portfolio
securities against a decline in the value of a currency does not eliminate
fluctuations in the underlying prices of the securities. It simply establishes
a rate of exchange which an Underlying Fund can achieve at some future point in
time. The precise projection of short-term currency market movements is not
possible, and short-term hedging provides a means of fixing the U.S. dollar
value of only a portion of an Underlying Fund's foreign assets.
The CORE International Equity, International Equity, European Equity, Japanese
Equity, International Small Cap, Emerging Markets Equity, Asia Growth, Core
Fixed Income, Global Income and High Yield Funds may engage in cross-hedging by
using forward contracts in one currency to hedge against fluctuations in the
value of securities quoted or denominated in a different currency if 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. The Core Fixed Income, Global Income and High
Yield Funds will not enter into a forward contract with a term of greater than
one year.
B-53
<PAGE>
While an Underlying Fund may enter into forward contracts to reduce currency
exchange rate risks, transactions in such contracts involve certain other risks.
Thus, while an Underlying Fund may benefit from such transactions, unanticipated
changes in currency prices may result in a poorer overall performance for the
Fund than if it had not engaged in any such transactions. Moreover, there may
be imperfect correlation between an Underlying Fund's portfolio holdings of
securities quoted or denominated in a particular currency and forward contracts
entered into by such Fund. Such imperfect correlation may cause an Underlying
Fund to sustain losses which will prevent the Fund from achieving a complete
hedge or expose the Fund to risk of foreign exchange loss.
Markets for trading foreign forward currency contracts offer less protection
against defaults than is available when trading in currency instruments on an
exchange. Forward contracts are subject to the risk that the counterparty to
such contract will default on its obligations. Since a forward foreign currency
exchange contract is not guaranteed by an exchange or clearinghouse, a default
on the contract would deprive an Underlying Fund of unrealized profits,
transaction costs or the benefits of a currency hedge or force the Fund to cover
its purchase or sale commitments, if any, at the current market price.
Forward contracts are subject to the risk that the counterparty to such
contract will default on its obligations. Since a forward foreign currency
exchange contract is not guaranteed by an exchange or clearinghouse, a default
on the contract would deprive an Underlying Fund of unrealized profits,
transaction costs or the benefits of a currency hedge or force the Fund to cover
its purchase or sale commitments, if any, at the current market price. An
Underlying Fund will not enter into such transactions unless the credit quality
of the unsecured senior debt or the claims-paying ability of the counterparty is
considered to be investment grade by its investment adviser.
Writing and Purchasing Currency Call and Put Options. Certain of the
Underlying Funds may write covered put and call options and purchase put and
call options on foreign currencies for the purpose of protecting against
declines in the U.S. dollar value of foreign portfolio securities and against
increases in the U.S. dollar cost of foreign securities to be acquired. As with
other kinds of option transactions, however, the writing of an option on foreign
currency will constitute only a partial hedge, up to the amount of the premium
received. If and when an Underlying Fund seeks to close out an option, the Fund
could be required to purchase or sell foreign currencies at disadvantageous
exchange rates, thereby incurring losses. The purchase of an option on foreign
currency may constitute an effective hedge against exchange rate fluctuations;
however, in the event of exchange rate movements adverse to an Underlying Fund's
position, the Fund may forfeit the entire amount of the premium plus related
transaction costs. Options on foreign currencies written or purchased by an
Underlying Fund will be traded on U.S. and foreign exchanges or over-the-
counter.
CORE International Equity, International Equity, European Equity, Japanese
Equity, International Small Cap, Emerging Markets Equity, Asia Growth, Core
Fixed Income, Global Income and High Yield Funds may use options on currency to
cross-hedge, which involves
B-54
<PAGE>
writing or purchasing options on one currency to hedge against changes in
exchange rates for a different currency with a pattern of correlation. In
addition, certain Underlying Funds may purchase call or put options on currency
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
specified currency to the holder of the option at a specified price if the
option is exercised before the expiration date. A put option written by an
Underlying Fund would obligate such Fund to purchase specified currency from the
option holder at a specified price if the option is exercised at any time before
the expiration date. The writing of currency options involves a risk that the
Underlying Fund will, upon exercise of the option, be required to sell currency
subject to a call at a price that is less than the currency's market value or be
required to purchase currency subject to a put at a price that exceeds the
currency's market value. For a description of how to cover written put and call
options, see "Writing Covered Options" above.
An Underlying Fund may terminate its obligations under a call or put option by
purchasing an option identical to the one it has written. Such purchases are
referred to as "closing purchase transactions." An Underlying Fund would also
be able to enter into closing sale transactions in order to realize gains or
minimize losses on options purchased by the Underlying Fund.
An Underlying Fund would normally purchase call options on foreign currency in
anticipation of an increase in the U.S. dollar value of currency in which
securities to be acquired by the Fund are quoted or denominated. The purchase
of a call option would entitle the Underlying Fund, in return for the premium
paid, to purchase specified currency at a specified price during the option
period. An Underlying Fund would ordinarily realize a gain if, during the
option period, the value of such currency exceeded the sum of the exercise
price, the premium paid and transaction costs; otherwise the Underlying Fund
would realize either no gain or a loss on the purchase of the call option.
An Underlying Fund would normally purchase put options in anticipation of a
decline in the U.S. dollar value of currency in which securities in its
portfolio are quoted or denominated ("protective puts"). The purchase of a put
option would entitle an Underlying Fund, in exchange for the premium paid, to
sell specified currency at a specified price during the option period. The
purchase of protective puts is designed merely to offset or hedge against a
decline in the dollar 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.
B-55
<PAGE>
In addition to using options for the hedging purposes described above, certain
Underlying Funds may use options on currency to seek to increase total return.
These Underlying Funds may write (sell) covered put and call options on any
currency in order to realize greater income than would be realized on portfolio
securities transactions alone. However, in writing covered call options for
additional income, an Underlying Fund may forego the opportunity to profit from
an increase in the market value of the underlying currency. Also, when writing
put options, an Underlying Fund accepts, in return for the option premium, the
risk that it may be required to purchase the underlying currency at a price in
excess of the currency's market value at the time of purchase.
Special Risks Associated With Options on Currency. An exchange traded option
position may be closed out only on an options exchange which provides a
secondary market for an option of the same series. There is no assurance that a
liquid secondary market on an exchange will exist for any particular option, or
at any particular time. In such event, it might not be possible to effect
closing transactions in particular options, with the result that an Underlying
Fund would have to exercise its options in order to realize any profit and would
incur transaction costs upon the sale of underlying securities pursuant to the
exercise of put options. If an Underlying Fund as a covered call option writer
is unable to effect a closing purchase transaction in a secondary market, it may
not be able to sell the underlying currency (or security quoted or denominated
in that currency) until the option expires or it delivers the underlying
currency upon exercise.
There is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain of the facilities of the
Options Clearing Corporation inadequate, and thereby result in the institution
by an exchange of special procedures which may interfere with the timely
execution of customers' orders.
An Underlying Fund may purchase and write over-the-counter options to the
extent consistent with its limitation on investments in illiquid securities.
Trading in over-the-counter options is subject to the risk that the other party
will be unable or unwilling to close out options purchased or written by an
Underlying Fund.
The amount of the premiums which an Underlying Fund may pay or receive may be
adversely affected as new or existing institutions, including other investment
companies, engage in or increase their option purchasing and writing activities.
Mortgage Dollar Rolls
- ---------------------
Certain of the Underlying Fixed-Income Funds may enter into mortgage "dollar
rolls" in which an Underlying Fund sells securities for delivery in the current
month and simultaneously contracts with the same counterparty to repurchase
similar (same type, coupon and maturity), but not identical securities on a
specified future date. During the roll period, an Underlying Fund loses the
right to receive principal and interest paid on the securities sold. However,
an Underlying Fund would benefit to the extent of any difference between the
price received for the securities sold and the lower forward price for the
future purchase (often referred
B-56
<PAGE>
to as the "drop") or fee income plus the interest earned on the cash proceeds of
the securities sold until the settlement date of the forward purchase. Unless
such benefits exceed the income, capital appreciation and gain or loss due to
mortgage prepayments that would have been realized on the securities sold as
part of the mortgage dollar roll, the use of this technique will diminish the
investment performance of an Underlying Fund compared with what such performance
would have been without the use of mortgage dollar rolls. All cash proceeds will
be invested in instruments that are permissible investments for the applicable
Underlying Fund. An Underlying Fund will segregate until the settlement date
cash or liquid assets, as permitted by applicable law, in an amount equal to its
forward purchase price.
For financial reporting and tax purposes, the Underlying Funds treat mortgage
dollar rolls as two separate transactions; one involving the purchase of a
security and a separate transaction involving a sale. The Underlying Funds do
not currently intend to enter into mortgage dollar rolls that are accounted for
as a financing.
Mortgage dollar rolls involve certain risks including the following: if the
broker-dealer to whom an Underlying Fund sells the security becomes insolvent,
an Underlying Fund's right to purchase or repurchase the mortgage-related
securities subject to the mortgage dollar roll may be restricted and the
instrument which an Underlying Fund is required to repurchase may be worth less
than an instrument which the Fund originally held. Successful use of mortgage
dollar rolls will depend upon the ability of an Underlying Fund's investment
adviser to manage the Fund's interest rate and mortgage prepayments exposure.
For these reasons, there is no assurance that mortgage dollar rolls can be
successfully employed.
Convertible Securities
- ----------------------
Convertible securities include corporate notes or preferred stock but are
ordinarily long-term debt obligations of the issuer convertible at a stated
exchange rate into common stock of the issuer. As with all debt securities, the
market value of convertible securities tends to decline as interest rates
increase and, conversely, to increase as interest rates decline. Convertible
securities generally offer lower interest or dividend yields than non-
convertible securities of similar quality. However, when the market price of
the common stock underlying a convertible security exceeds the conversion price,
the price of the convertible security tends to reflect the value of the
underlying common stock. As the market price of the underlying common stock
declines, the convertible security tends to trade increasingly on a yield basis,
and thus may not depreciate to the same extent as the underlying common stock.
Convertible securities rank senior to common stocks in an issuer's capital
structure and consequently entail less risk than the issuer's common stock.
Currency Swaps, Mortgage Swaps, Credit Swaps, Index Swaps and Interest Rate
- ---------------------------------------------------------------------------
Swaps, Caps, Floors and Collars
- -------------------------------
The CORE International Equity, International Equity, Emerging Markets Equity,
European Equity, Japanese Equity, Asia Growth, International Small Cap, Core
Fixed Income, Global Income and High Yield Funds may enter into currency swaps
for both hedging purposes
B-57
<PAGE>
and to seek to increase total return. In addition, 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. The
purchase of an interest rate cap entitles the purchaser, to the extent that a
specified index exceeds a predetermined interest rate, to receive payment of
interest on a notional principal amount from the party selling such interest
rate cap. Credit swaps involve the receipt of floating or fixed rate payments in
exchange for assuming potential credit losses of an underlying security. Credit
swaps give one party to a transaction the right to dispose of or acquire an
asset (or group of assets), or the right to receive or make a payment from the
other party, upon the occurrence of specified credit events. The purchase of an
interest rate floor entitles the purchaser, to the extent that a specified index
falls below a predetermined interest rate, to receive payments of interest on a
notional principal amount from the party selling the interest rate floor. An
interest rate collar is the combination of a cap and a floor that preserves a
certain return within a predetermined range of interest rates. Since interest
rate, mortgage and currency swaps and interest rate caps, floors and collars are
individually negotiated, each Underlying Fund expects to achieve an acceptable
degree of correlation between its portfolio investments and its swap, cap, floor
and collar positions.
An Underlying Fund will enter into interest rate, mortgage and index swaps
only on a net basis, which means that the two payment streams are netted out,
with the Fund receiving or paying, as the case may be, only the net amount of
the two payments. Interest rate, index and mortgage swaps do not involve the
delivery of securities, other underlying assets or principal. Accordingly, the
risk of loss with respect to interest rate, index and mortgage swaps is limited
to the net amount of interest payments that the Underlying Fund is contractually
obligated to make. If the other party to an interest rate, index or mortgage
swap defaults, the Underlying Fund's risk of loss consists of the net amount of
interest payments that the Fund is contractually entitled to receive, if any.
In contrast, currency swaps usually involve the delivery of the entire principal
amount of one designated currency in exchange for the other designated currency.
Therefore, the entire principal value of a currency swap is subject to the risk
that the other party to the swap will default on its contractual delivery
obligations. To the extent that the net amount payable under an interest rate,
index or mortgage swap and the entire amount of the payment stream payable by an
Underlying Fund under a currency swap or an interest rate floor, cap or collar
are covered by segregated cash or liquid assets, the Underlying Funds and their
investment advisers believe that transactions do not constitute senior
securities under the Act and, accordingly, will not treat them as being subject
to a Fund's borrowing restrictions.
B-58
<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 interest rate,
mortgage or credit swap transactions unless the unsecured commercial paper,
senior debt or claims-paying ability of the other party is rated either AA or A-
1 or better by Standard & Poor's or Aa or P-1 or better by Moody's or, if
unrated by such rating agencies, determined to be of comparable quality by the
applicable investment adviser. The Core Fixed Income, Global Income and High
Yield Funds will not enter into any currency swap transactions unless the
unsecured commercial paper senior debt or claims-paying ability of the other
party thereto is rated investment grade by Standard & Poor's or Moody's or their
equivalent ratings or, if unrated by such rating agencies, determined to be of
comparable quality by the applicable investment adviser. If there is a default
by the other party to such a transaction, an Underlying Fund will have
contractual remedies pursuant to the agreements related to the transaction.
The swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. As a result, the swap market has
become relatively liquid in comparison with the markets for other similar
instruments which are traded in the interbank market. The investment advisers,
under the supervision of the Board of Trustees, are responsible for determining
and monitoring the liquidity of the Underlying Funds' transactions in swaps,
caps, floors and collars.
The use of interest rate, mortgage, credit, index and currency swaps, as well
as interest rate caps, floors and collars, is a highly specialized activity
which involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. If an Underlying Fund's
investment adviser is incorrect in its forecasts of market values, interest
rates and currency exchange rates, the investment performance of the Fund would
be less favorable than it would have been if this investment technique were not
used.
Equity Swaps
- ------------
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. The counterparty to an equity swap contract will
typically be a bank, investment banking firm or broker/dealer. The counterparty
will generally agree to pay the Underlying Fund the amount, if any, by which the
notional amount of the equity swap contract would have increased in value had it
been invested in the particular stocks, plus the dividends that would have been
received on those stocks. The Underlying Fund will agree to pay to the
counterparty a floating rate of interest on the notional amount of the equity
swap contract plus the amount, if any, by which that notional amount would have
decreased in value had it been invested in such stocks. Therefore, the return
to the Underlying Fund on any equity swap contract should be the gain or loss on
the notional amount plus dividends on the stocks less the interest paid by the
Underlying Fund on the notional amount.
B-59
<PAGE>
An Underlying Fund will enter into equity swaps only on a net basis, which
means that the two payment streams are netted out, with the Fund receiving or
paying, as the case may be, only the net amount of the two payments. Payments
may be made at the conclusion of an equity swap contract or periodically during
its term. Equity swaps do not involve the delivery of securities or other
underlying assets. Accordingly, the risk of loss with respect to equity swaps
is limited to the net amount of payments that an Underlying Fund is
contractually obligated to make. If the other party to an equity swap defaults,
an Underlying Fund's risk of loss consists of the net amount of payments that
such Fund is contractually entitled to receive, if any. The net amount of the
excess, if any, of an Underlying Fund's obligations over its entitlements with
respect to each equity swap will be accrued on a daily basis and an amount of
cash or liquid assets, having an aggregate net asset value at least equal to
such accrued excess will be segregated. Inasmuch as these transactions are
entered into for hedging purposes or are offset by segregated cash or liquid
assets, as permitted by applicable law, the Underlying Funds and their
investment advisers believe that transactions do not constitute senior
securities under the Act and, accordingly, will not treat them as being subject
to a Fund's borrowing restrictions.
Real Estate Investment Trusts
- -----------------------------
The 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-60
<PAGE>
Lending of Portfolio Securities
- -------------------------------
The Underlying Funds may lend portfolio securities. Under present regulatory
policies, such loans may be made to institutions such as brokers or dealers and
would be required to be secured continuously by collateral in cash, cash
equivalents or U.S. Government securities maintained on a current basis at an
amount at least equal to the market value of the securities loaned. An
Underlying Fund would be required to have the right to call a loan and obtain
the securities loaned at any time on five days' notice. For the duration of a
loan, an Underlying Fund would continue to receive the equivalent of the
interest or dividends paid by the issuer on the securities loaned and would also
receive compensation from investment of the collateral. An Underlying Fund
would not have the right to vote any securities having voting rights during the
existence of the loan, but the Fund would call the loan in anticipation of an
important vote to be taken among holders of the securities or the giving or
withholding of their consent on a material matter affecting the investment. As
with other extensions of credit there are risks of delay in recovering, or even
loss of rights in, the collateral should the borrower of the securities fail
financially. However, the loans would be made only to firms deemed by an
Underlying Fund's investment adviser to be of good standing, and when, in the
judgment of the investment adviser, the consideration which can be earned
currently from securities loans of this type justifies the attendant risk. If
an investment adviser determines to make securities loans, it is intended that
the value of the securities loaned would not exceed one-third of the value of
the total assets of an Underlying Fund (including the loan collateral).
When-Issued Securities and Forward Commitments
- ----------------------------------------------
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. The
Underlying Funds may also realize a capital gain or loss in connection with
these transactions. For purposes of determining an Underlying Fund's duration,
the maturity of when-issued or forward commitment securities will be calculated
from the commitment date. An Underlying Fund is required to segregate until
three days prior to the settlement date, cash and liquid assets 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-61
<PAGE>
Investment in Unseasoned Companies
- ----------------------------------
The Underlying Funds may invest a portion of their net assets in companies
(including predecessors) which have operated less than three years, except that
this limitation does not apply to debt securities which have been rated
investment grade or better by at least one NRSRO. The securities of such
companies may have limited liquidity, which can result in their being priced
higher or lower than might otherwise be the case. In addition, investments in
unseasoned companies are more speculative and entail greater risk than do
investments in companies with an established operating record.
Other Investment Companies
- --------------------------
Each of the Underlying Funds may make limited investments in the securities of
other investment companies including, pursuant to an exemptive order obtained
from the SEC, money market funds for which the Adviser or any of its affiliates
serve as investment adviser. An Underlying Fund will indirectly bear its
proportionate share of any management fees and other expenses paid by investment
companies in which it invests in addition to the advisory and administration
fees paid by the Fund. However, to the extent that an Underlying Fund invests
in a money market fund for which the Adviser or any of its affiliates acts as
adviser, the advisory and administration fees payable by the Fund to the
investment adviser or its affiliates will be reduced by an amount equal to the
Fund's proportionate share of the advisory and administration fees paid by such
money market fund to the investment adviser or its affiliates.
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-62
<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 selected
broker-dealers, banks or other financial institutions. A repurchase agreement
is an arrangement under which an Underlying Fund purchases securities and the
seller agrees to repurchase the securities within a particular time and at a
specified price. Custody of the securities is maintained by an Underlying
Fund's custodian. The repurchase price may be higher than the purchase price,
the difference being income to an Underlying Fund, or the purchase and
repurchase prices may be the same, with interest at a stated rate due to the
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 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.
B-63
<PAGE>
In addition, an Underlying Fund, together with other registered investment
companies having advisory agreements with the Adviser or its affiliates, may
transfer uninvested cash balances into a single joint account, the daily
aggregate balance of which will be invested in one or more repurchase
agreements.
Reverse Repurchase Agreements
- -----------------------------
Certain Underlying Funds may borrow money for temporary purposes by entering
into transactions called reverse repurchase agreements. Under these
arrangements, an Underlying Fund will sell portfolio securities to dealers in
U.S. Government Securities or members of the Federal Reserve System, with an
agreement to repurchase the security on an agreed date, price and interest
payment. The Core Fixed Income, Global Income and High Yield Funds may also
enter into reverse repurchase agreements involving certain foreign government
securities. Reverse repurchase agreements involve the possible risk that the
value of portfolio securities an Underlying Fund relinquishes may decline below
the price the Fund must pay when the transaction closes. Borrowings may magnify
the potential for gain or loss on amounts invested resulting in an increase in
the speculative character of an Underlying Fund's outstanding shares.
When an Underlying Fund enters into a reverse repurchase agreement, in 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. The Trustees have adopted guidelines under which the Underlying Funds'
investment advisers determine and monitor the liquidity of the Funds' portfolio
securities. This investment practice could have the effect of increasing the
level of illiquidity in an Underlying Fund to the extent that qualified
institutional buyers become for a time uninterested in purchasing these
instruments.
The purchase price and subsequent valuation of restricted securities may
reflect a discount from the price at which such securities trade when they are
not restricted, since the restriction may make them less liquid. The amount of
the discount from the prevailing market price is expected to vary depending upon
the type of security, the character of the issuer, the party who will bear the
expenses of registering the restricted securities and prevailing supply and
demand conditions.
B-64
<PAGE>
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 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;
B-65
<PAGE>
(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-66
<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 maturing in more than seven
days, securities which are not readily marketable and restricted
securities not eligible for resale pursuant to Rule 144A under the 1933
Act;
(c) Purchase additional securities if the 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-67
<PAGE>
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation(s)
And Address With Trust During Past 5 Years
- ----------- -------------- ----------------------
<S> <C> <C>
Ashok N. Bakhru, 56 Chairman Chairman of the Board of Trustees --
1325 Ave. of the Americas & Trustee Goldman Sachs Trust (registered
New York, NY 10019 investment company); Executive Vice
President Finance and Administration
and Chief Financial Officer, Coty Inc.
(since April 1996); President, ABN
Associates (July 1994 -March 1996);
Senior Vice President of Scott Paper
Company (until June 1994); Director of
Arkwright Mutual Insurance Company
(1994-Present); Trustee of International
House of Philadelphia (1989-Present);
Member of Cornell University Council
(1992-Present); Trustee of the Walnut
Street Theater (1992-Present).
*David B. Ford, 52 Trustee Trustee Goldman Sachs Trust (registered
One New York Plaza investment company); Director,
New York, NY 10004 Commodities Corp. LLC (since April
1997); Managing Director, J. Aron &
Company (since November 1996); Managing
Director, Goldman, Sachs & Co.
Investment Banking Division (since
November 1996); Director, CIN Management
(since August 1996); Chief Executive
Officer & Managing Director and
Director, Goldman Sachs Asset Management
International (since November 1995 and
December 1994, respectively); Co-Head,
Goldman, Sachs & Co. Asset Management
Division (since November 1995); Co-Head
and Director, Goldman Sachs Funds
Management Inc. (since November 1995 and
December 1994, respectively); Chairman
and Director, Goldman Sachs Asset
Management Japan Limited (since November
1994).
</TABLE>
B-68
<PAGE>
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation(s)
And Address With Trust During Past 5 Years
- ----------- ---------- -----------------------
<S> <C> <C>
*Douglas C. Grip, 36 Trustee Trustee and President -- Goldman Sachs
One New York Plaza & President Trust (registered investment company);
New York, NY 10004 Managing Director, Goldman, Sachs & Co.
Asset Management Division (since
November 1997); President, Goldman Sachs
Fund Group (since April 1996);
President, MFS Retirement Services Inc.,
of Massachusetts Financial Services
(prior thereto).
*John P. McNulty, 46 Trustee Trustee -- Goldman Sachs Trust (registered
One New York Plaza investment company); Managing Director,
New York, NY 10004 Goldman Sachs (since 1996); General
Partner, J. Aron & Company (since
November 1995); Director and Co-Head,
Goldman Sachs Funds Management Inc.
(since November 1995); Director, Goldman
Sachs Asset Management International
(since January 1996); Director, Global
Capital Reinsurance (since 1989);
Director, Commodities Corp. LLC (since
April 1997); Limited Partner of Goldman,
Sachs & Co. (1994 - November 1995).
</TABLE>
B-69
<PAGE>
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation(s)
And Address With Trust During Past 5 Years
- ----------- ---------- -----------------------
<S> <C> <C>
Mary P. McPherson, 63 Trustee Trustee -- Goldman Sachs Trust (registered
The Andrew W. Mellon Foundation investment company); Vice President and
140 East 62nd Street Senior Program Officer, The Andrew W.
New York, NY 10021 Mellon Foundation (since October 1997);
President of Bryn Mawr College
(1978-1997); Director of Josiah Macy,
Jr. Foundation (since 1977); Director of
the Philadelphia Contributionship (since
1985); Director of Amherst College
(since 1986); Director of Dayton Hudson
Corporation (1988-1997); Director of the
Spenser Foundation (since 1993); and
member of PNC Advisory Board (since
1993).
*Alan A. Shuch, 49 Trustee Trustee -- Goldman Sachs Trust (registered
One New York Plaza investment company); Limited Partner,
New York, NY 10004 Goldman, Sachs & Co.(since 1994);
Consultant to Goldman Sachs Asset
Management (since 1994); Director, Chief
Operating Officer and Vice President of
Goldman Sachs Funds Management Inc.
(from November 1993 -- November 1994);
President and Chief Operating Officer,
GSAM Japan Limited (November 1993 --
November 1994); Director, Goldman Sachs
Asset Management International (November
1993 -- November 1994); General Partner,
Goldman, Sachs & Co. Investment Banking
(December 1986 -- November 1994).
</TABLE>
B-70
<PAGE>
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation(s)
And Address With Trust During Past 5 Years
- ----------- ---------- -----------------------
<S> <C> <C>
Jackson W. Smart, Jr., 68 Trustee Trustee -- Goldman Sachs Trust (registered
One Northfield Plaza Suite 218 investment company); Chairman, Executive
Northfield, IL 60093 Committee, First Commonwealth, Inc. (a
managed dental care company) (since
January 1996); Chairman and Chief
Executive Officer, MSP Communications
Inc. (a company engaged in radio
broadcasting) (November 1988 -- December
1997); Director, Federal Express
Corporation (NYSE) (since 1976);
Director, Evanston Hospital Corporation
(since 1980).
William H. Springer, 69 Trustee Trustee -- Goldman Sachs Trust (registered
701 Morningside Drive investment company); Director, Walgreen
Lake Forest, IL 60045 Co. (a retail drug store business)
(since April 1998); Director of Baker,
Fentress & Co. (a closed-end,
non-diversified management investment
company) (April 1992 - present);
Trustee, Northern Institutional Funds
(since April 1984).
</TABLE>
B-71
<PAGE>
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation(s)
And Address With Trust During Past 5 Years
- ----------- ---------- --------------------
<S> <C> <C>
Richard P. Strubel, 59 Trustee Trustee - Goldman Sachs Trust (registered
737 N. Michigan Ave., Suite 1405 investment company); Managing Director,
Chicago, IL 60611 Tandem Partners, Inc. (since 1990);
Director of Kaynar Technologies Inc.
(since March 1997); 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); Trustee, Northern Institutional
Funds (since December 1982).
*Nancy L. Mucker, 49 Vice President Vice President - Goldman Sachs Trust
4900 Sears Tower (registered investment company); Vice
Chicago, IL 60606 President, Goldman, Sachs & Co. (since
April 1985); Co-Manager of Shareholder
Servicing of GSAM (since November 1989).
*John M. Perlowski, 34 Treasurer Treasurer - Goldman Sachs Trust
One New York Plaza (registered investment company); Vice
New York, NY 10004 President, Goldman, Sachs & Co.
Incorporated (since July 1995);
Director, Investors Bank and Trust
(November 1993 - July 1995).
*James A. Fitzpatrick, 38 Vice President Vice President--Goldman Sachs Trust
4900 Sears Tower (registered investment company); Vice
Chicago, IL 60606 President of Goldman Sachs Asset
Management (since April 1997); Vice
President and General Manager, First
Data Corporation - Investor Services
Group (prior thereto).
</TABLE>
B-72
<PAGE>
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation(s)
And Address With Trust During Past 5 Years
- ----------- ---------- ----------------------
<S> <C> <C>
Jesse Cole, 35 Vice President Vice President -- Goldman Sachs Trust
4900 Sears Tower (registered investment company); Vice
Chicago, IL 60606 President, Goldman Sachs Asset
Management (June 1998 to Present); Vice
President, AIM Management Group, Inc.
(investment advisor) (April 1996-June
1998); Assistant Vice President, The
Northern Trust Company (June 1987-April
1996).
Philip V. Giuca , Jr., 36 Assistant Treasurer Vice President -- Goldman Sachs Trust
10 Hanover Square (registered investment company); Vice
New York, NY 10004 President, Goldman, Sachs & Co. (May
1992-Present); Tax Accountant, Goldman,
Sachs & Co. (December 1990-May 1992).
Anne Marcel, 40 Vice President Vice President -- Goldman Sachs Trust
4900 Sears Tower (registered investment company); Vice
Chicago, IL 60606 President, Goldman Sachs Asset
Management (June 1998-Present); Vice
President, Stein Roe & Farnham, Inc.
(October 1992-June 1998).
</TABLE>
B-73
<PAGE>
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation(s)
And Address With Trust During Past 5 Years
- ----------- ---------- ----------------------
<S> <C> <C>
*Michael J. Richman, 38 Secretary Secretary -- Goldman Sachs Trust
85 Broad Street (registered investment company); General
New York, NY 10004 Counsel of the Funds Group of Goldman
Sachs Asset Management (since December
1997); Associate General Counsel of
Goldman Sachs Asset Management (February
1994 -- December 1997); Vice President and
Assistant General Counsel of Goldman,
Sachs & Co. (since June 1992); Counsel
to the Funds Group, GSAM (June 1992 --
December 1997); Partner, Hale and Dorr
(September 1991 - June 1992).
*Howard B. Surloff, 33 Assistant Secretary Assistant Secretary -- Goldman Sachs Trust
85 Broad Street (registered investment company);
New York, NY 10004 Assistant General Counsel, Goldman Sachs
Asset Management and Associate General
Counsel to the Funds Group (since
December 1997); Assistant General
Counsel and Vice President, Goldman,
Sachs & Co.(since November 1993 and May
1994, respectively); Counsel to the
Funds Group, Goldman Sachs Asset
Management (November 1993 - December
1997); Associate of Shereff, Friedman,
Hoffman & Goodman (prior thereto).
</TABLE>
B-74
<PAGE>
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation(s)
And Address With Trust During Past 5 Years
- ----------- ---------- ----------------------
<S> <C> <C>
*Valerie A. Zondorak, 32 Assistant Secretary Assistant Secretary -- Goldman Sachs Trust
85 Broad Street (registered investment company);
New York, NY 10004 Assistant General Counsel, Goldman Sachs
Asset Management and Assistant General
Counsel to the Funds Group (since
December 1997); Vice President and
Assistant General Counsel, Goldman,
Sachs & Co.(since March 1997 and
December 1997, respectively); Counsel to
the Funds Group, Goldman Sachs Asset
Management (March 1997 - December 1997);
Associate of Shereff, Friedman, Hoffman
& Goodman (prior thereto).
*Steven E. Hartstein, 35 Assistant Secretary Assistant Secretary -- Goldman Sachs Trust
85 Broad Street (registered investment company);
New York, NY 10004 Associate, Goldman, Sachs & Co. (since
December 1998); Legal Products Analyst,
Goldman, Sachs & Co. (June 1993 --
December 1998); Funds Compliance
Officer, Citibank Global Asset
Management (August 1991 -- June 1993).
*Deborah A. Farrell, 27 Assistant Secretary Assistant Secretary -- Goldman Sachs Trust
85 Broad Street (registered investment company); Legal
New York, NY 10004 Products Analyst, Goldman, Sachs & Co.
(since December 1998); Legal Assistant,
Goldman, Sachs & Co. (January 1996 --
December 1998); Executive Secretary,
Goldman, Sachs & Co. (January 1994 --
January 1996); Legal Secretary, Cleary,
Gottlieb, Steen and Hamilton (September
1990 -- January 1994).
</TABLE>
B-75
<PAGE>
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation(s)
And Address With Trust During Past 5 Years
- ----------- -------------- ----------------------
<S> <C> <C>
*Kaysie P. Uniacke, 37 Assistant Secretary Assistant Secretary -- Goldman Sachs Trust
One New York Plaza (registered investment company);
New York, NY 10004 Managing Director, Goldman Sachs Asset
Management (since 1997); Vice President
and Senior Portfolio Manager, Goldman
Sachs Asset Management (since 1988).
*Elizabeth D. Anderson, 29 Assistant Secretary Assistant Secretary -- Goldman Sachs Trust
One New York Plaza (registered investment company);
New York, NY 10004 Portfolio Manager, Goldman Sachs Asset
Management (since April 1996); Junior
Portfolio Manager, Goldman Sachs Asset
Management (1995 -- April 1996); Funds
Trading Assistant, Goldman Sachs Asset
Management (1993 -- 1995); Compliance
Analyst, Prudential Insurance (1991 -
1993).
</TABLE>
Each interested Trustee and officer of the Trust holds comparable positions
with certain other investment companies of which Goldman Sachs, GSAM or one of
their affiliates is the investment adviser, administrator and/or distributor. As
of ___________, 1999 the Trustees and officers of the Trust as a group owned
less than 1% of the outstanding shares of beneficial interest of each
Portfolio.
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:
<TABLE>
<CAPTION>
Pension or Total
Retirement Compensation
Benefits from Goldman Sachs
Aggregate Accrued as Mutual Funds Complex
Compensation Part of (including the
Name of Trustee from the Trust/1/ Trust's Expenses Trust)**
- --------------- ----------------- ---------------- --------------------
<S> <C> <C> <C>
Ashok N. Bakhru* $ $
David B. Ford 0 0 0
Douglas C. Grip 0 0 0
John P. McNulty 0 0 0
Mary P. McPherson 0
Alan A. Shuch 0 0 0
Jackson W. Smart 0
William H. Springer 0
Richard P. Strubel 0
</TABLE>
- --------------
* Includes compensation as Chairman of the Board of Trustees.
1 Reflects amount paid by Goldman Sachs Variable Insurance Trust during
fiscal year ended December 31, 1998.
2 The Goldman Sachs Funds complex consists of Goldman Sachs Trust and
Goldman Sachs Variable Insurance Trust. Goldman Sachs Trust consisted
of ___ mutual funds, including eight fixed-income funds, on December
31, 1998. Goldman Sachs Variable Insurance Trust consisted of 8
mutual funds.
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, European Equity,
International Small Cap, Emerging Markets Equity, Asia Growth and Global Income
Funds. As a company with unlimited liability under the laws of England, GSAMI is
regulated by the Investment Management Regulatory Organization Limited, a United
Kingdom self-regulatory organization, in the conduct of its investment advisory
business. See "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.
Founded in 1869, Goldman Sachs is among the oldest and largest investment
banking firms in the United States. Goldman Sachs is a leader in developing
portfolio strategies and in many fields of investing and financing,
participating in financial markets worldwide and serving individuals,
institutions, corporations and governments. Goldman Sachs is also among the
principal market sources for current and thorough information on companies,
industrial sectors, markets, economies and currencies, and trades and makes
markets in a wide range of equity and debt securities 24-hours a day. The firm
is headquartered in New York and has offices throughout the U.S. and in Beijing,
Brazil, Frankfurt, George Town, Hong Kong, London, Madrid, Mexico City, Milan,
Montreal, Osaka, Paris, Sao Paulo, Seoul, Shanghai, Singapore, Sydney, Taipei,
Tokyo, Toronto, Vancouver and Zurich. It has trading professionals throughout
the United States, as well as in London, Tokyo, Hong Kong and Singapore. The
active participation of Goldman Sachs in the world's financial markets enhances
its ability to identify attractive investments.
The Adviser and the Underlying Funds' investment advisers are able to draw on
the substantial research and market expertise of Goldman Sachs whose investment
research effort is one of the largest in the industry. With an annual equity
research budget approaching $200 million, the Goldman Sachs Global Investment
Research Department covers approximately 2,000 companies, including
approximately 1,000 U.S. corporations in 60 industries. The in-depth information
and analyses generated by Goldman Sachs' research analysts are available to the
Advisers. For more than a decade, Goldman Sachs has been among the top-ranked
firms in Institutional Investor's annual "All-America Research Team" survey. In
addition, many of Goldman Sachs' economists, securities analysts, portfolio
strategists and credit analysts have consistently been highly ranked in
respected industry surveys conducted in the U.S. and abroad. Goldman Sachs is
also among the leading investment firms using quantitative analytics (now used
by a growing number of investors) to structure and evaluate portfolios.
In managing the Funds, the Advisers have access to Goldman Sachs' economics
research. The Economics Research Department conducts economic, financial and
currency markets
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research which analyzes economic trends and interest and exchange rate movement
worldwide. The Economics Research Department tracks factors such as inflation
and money supply figures, balance of trade figures, economic growth, commodity
prices, monetary and fiscal policies, and political events that can influence
interest rates and currency trends. The success of Goldman Sachs' international
research team has brought wide recognition to its members. The team has earned
top rankings in the Institutional Investor's annual "All British Research Team
Survey" in the following categories: Economics (U.K.) 1986-1993;
Economics/International 1989-1993; and Currency Forecasting 1986-1993. In
addition, the team has also earned top rankings in the annual "Extel Financial
Survey" of U.K. investment managers in the following categories: U.K. Economy
1989-1995; International Economies 1986, 1988-1995; International Government
Bond Market 1993-1995; and Currency Movements 1986-1993.
In structuring Adjustable Rate Government Fund's and Short Duration Government
Fund's respective securities portfolios, their investment adviser will review
the existing overall economic and mortgage market trends. The investment
adviser will then study yield spreads, the implied volatility and the shape of
the yield curve. The investment adviser will then apply this analysis to a list
of eligible securities that meet the respective Fund's investment guidelines.
With respect to Adjustable Rate Government Fund, this analysis is used to plan a
two-part portfolio, which will consist of a "core" portfolio of ARMs and a
"relative value" portfolio of other mortgage assets that can enhance portfolio
returns and lower risk (such as investments in CMO floating-rate tranches and
interest only SMBS).
With respect to the Adjustable Rate Government Fund, Government Income Fund,
Short Duration Government Fund, High Yield Fund and Core Fixed Income Fund, the
Funds' investment advisers expect to utilize Goldman Sachs' sophisticated
option-adjusted analytics to help make strategic asset allocations within the
markets for U.S. government, Mortgage-Backed and other securities and to employ
this technology periodically to re-evaluate the Funds' investments as market
conditions change. Goldman Sachs has also developed a prepayment model designed
to estimate mortgage prepayments and cash flows under different interest rate
scenarios. Because a Mortgage-Backed Security incorporates the borrower's right
to prepay the mortgage, the investment advisers use a sophisticated option-
adjusted spread (OAS) model to measure expected returns. A security's OAS is a
function of the level and shape of the yield curve, volatility and the
particular investment adviser's expectation of how a change in interest rates
will affect prepayment levels. Since the OAS model assumes a relationship
between prepayments and interest rates, the investment advisers consider it a
better way to measure a security's expected return and absolute and relative
values than yield to maturity. In using OAS technology, the investment advisers
will first evaluate the absolute level of a security's OAS considering its
liquidity and its interest rate, volatility and prepayment sensitivity. The
investment advisers will then analyze its value relative to alternative
investments and to its own investments. The investment advisers will also
measure a security's interest rate risk by computing an option adjusted duration
(OAD). The investment advisers believe a security's OAD is a better measurement
of its price sensitivity than cash flow duration, which systematically misstates
portfolio duration. The investment advisers also evaluate returns for different
mortgage market sectors and evaluate the credit risk of individual securities.
This sophisticated technical analysis allows the investment advisers to develop
portfolio and trading
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strategies using Mortgage-Backed Securities that are believed to be superior
investments on a risk-adjusted basis and which provide the flexibility to meet
the respective Funds' duration targets and cash flow pattern requirements.
Because the OAS is adjusted for the differing characteristics of the
underlying securities, the OAS of different Mortgage-Backed Securities can be
compared directly as an indication of their relative value in the market. The
Underlying Funds' investment advisers also expect to use OAS-based pricing
methods to calculate projected security returns under different, discrete
interest rate scenarios, and Goldman Sachs' proprietary prepayment model to
generate yield estimates under these scenarios. The OAS, scenario returns,
expected returns, and yields of securities in the mortgage market can be
combined and analyzed in an optimal risk-return matching framework.
The investment advisers will use OAS analytics to choose what they believe is
an appropriate portfolio of investments for an Underlying Fund from a universe
of eligible investments. In connection with initial portfolio selections, in
addition to using OAS analytics as an aid to meeting each Fund's particular
composition and performance targets, the investment advisers will also take into
account important market criteria like the available supply and relative
liquidity of various mortgage securities in structuring the portfolio.
The Underlying Funds' investment advisers also expect to use OAS analytics to
evaluate the mortgage market on an ongoing basis. Changes in the relative value
of various Mortgage-Backed Securities could suggest tactical trading
opportunities for the Underlying Funds. The investment adviser will have access
to both current market analysis as well as historical information on the
relative value relationships among different Mortgage-Backed Securities.
Current market analysis and historical information is available in the Goldman
Sachs database for most actively traded Mortgage-Backed Securities.
Goldman Sachs has agreed to provide the Underlying Funds' investment adviser,
on a non-exclusive basis, use of its mortgage prepayment model, OAS model and
any other proprietary services which it now has or may develop, to the extent
such services are made available to other similar customers. Use of these
services by the investment adviser with respect to an Underlying Fund does not
preclude Goldman Sachs from providing these services to third parties or using
such services as a basis for trading for its own account or the account of
others.
The fixed-income research capabilities of Goldman Sachs available to the
Underlying Funds' investment adviser include the Goldman Sachs Fixed Income
Research Department and the Credit Department. The Fixed-Income Research
Department monitors developments in U.S. and foreign fixed-income markets,
assesses the outlooks for various sectors of the markets and provides relative
value comparisons, as well as analyzes trading opportunities within and across
market sectors. The Fixed-Income Research Department is at the forefront in
developing and using computer-based tools for analyzing fixed-income securities
and markets, developing new fixed income products and structuring portfolio
strategies for investment policy and tactical asset
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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 approved by the Trustees, including a
majority of the Trustees who are not parties to the management agreement or
"interested persons" (as such term is defined in the Act) of any party thereto
(the "non-interested Trustees"), on January 22, 1999. These arrangements were
approved by the sole shareholder of each 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;
and (v) provides office space and all necessary office equipment and
services.
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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. 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 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
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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 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 or instruments of which may be those in
which an Underlying Fund invests or which may be based on the performance of an
Underlying Fund. The Underlying Funds may, subject to applicable law, purchase
investments which are the subject of an underwriting or other distribution by
Goldman Sachs or its affiliates and may also enter transactions with other
clients of Goldman Sachs or its affiliates where such other clients have
interests adverse to those of the
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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 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, 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
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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 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, P.O. Box 1776, Boston, Massachusetts 02171, is the custodian
of the Trust's portfolio securities and cash. State Street also maintains the
Trust's accounting records. State Street may appoint sub-custodians from time
to time to hold certain securities purchased by the Trust and to hold cash for
the Trust.
Independent Public Accountants
- ------------------------------
Arthur 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.
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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.
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,
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purchasing or selling securities, the availability of securities or the
purchasers or sellers of securities, furnishing analyses and reports concerning
issuers, industries, securities, economic factors and trends, portfolio strategy
and performance of accounts, effecting securities transactions and performing
functions incidental thereto (such as clearance and settlement) and providing
lawful and appropriate assistance to the investment advisers in the performance
of their decision-making responsibilities. Such services are used by the
investment advisers in connection with all of their investment activities, and
some of such services obtained in connection with the execution of transactions
for an Underlying Fund may be used in managing other investment accounts.
Conversely, brokers furnishing such services may be selected for the execution
of transactions of such other accounts, whose aggregate assets are far larger
than those of an Underlying Fund, and the services furnished by such brokers may
be used by the investment advisers in providing management services for the
Trust.
In circumstances where two or more broker-dealers offer comparable prices
and execution capability, preference may be given to a broker-dealer which has
sold shares of an Underlying Fund as well as shares of other investment
companies or accounts managed by the Underlying Funds' investment advisers.
This policy does not imply a commitment to execute all portfolio transactions
through all broker-dealers that sell shares of the Underlying Fund.
On occasions when an Underlying Fund's investment adviser deems the
purchase or sale of a security to be in the best interest of an Underlying Fund
as well as its other customers (including any other fund or other investment
company or advisory account for which such investment adviser acts as investment
adviser or subadviser), the investment adviser, to the extent permitted by
applicable laws and regulations, may aggregate the securities to be sold or
purchased for the Underlying Fund with those to be sold or purchased for such
other customers in order to obtain the best net price and most favorable
execution under the circumstances. In such event, allocation of the securities
so purchased or sold, as well as the expenses incurred in the transaction, will
be made by the particular investment adviser in the manner it considers to be
equitable and consistent with 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-
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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.
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. Other portfolio securities for which accurate market quotations are
available are valued as follows: (a) securities listed on any U.S. or foreign
stock exchange or on the National Association of Securities Dealers Automated
Quotations System ("NASDAQ") will be valued at the last sale price on the
exchange or system in which they are principally traded, on the valuation date.
If there is no sale on the valuation day, securities traded will be valued at
the mean between the closing bid and asked prices, or if closing bid and asked
prices are not available, at the exchange defined close price on the exchange or
system in which such securities are principally traded. If the relevant
exchange or system has not closed by the above-mentioned time for determining
the Fund's net asset value, the securities will be valued at the mean between
the bid and the asked prices at the time the net asset value is determined; (b)
over-the-counter securities not quoted on NASDAQ will be valued at the last sale
price on the valuation day or, if no sale occurs, at the mean between the last
bid and asked price; (c) equity securities for which no prices are obtained
under sections (a) or (b) hereof, including those for which a pricing service
supplies no exchange quotation or a
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quotation that is believed by the portfolio manager/trader to be inaccurate,
will be valued at their fair value in accordance with procedures approved by the
Board of Trustees; (d) fixed-income securities with a remaining maturity of 60
days or more for which accurate market quotations are readily available will be
valued according to dealer-supplied bid quotations or bid quotations from a
recognized pricing service (e.g., Merrill Lynch, J.J. Kenny, Muller Data Corp.,
Bloonberg, EJV, Reuters or Standard & Poor's); (e) fixed-income securities for
which quotations are not readily available are valued by the investment adviser
based on valuation models that take into account spread and daily yield changes
on government securities in the appropriate market (i.e. matrix pricing); (f)
debt securities with a remaining maturity of 60 days or less are valued by the
particular investment adviser at amortized cost, which the Trustees have
determined to approximate fair value; and (g) all other instruments, including
those for which a pricing service supplies no exchange quotation or a quotation
that is believed by the portfolio manager/trader to be inaccurate, will be
valued at fair value in accordance with the valuation procedures approved by the
Board of Trustees.
The value of all assets and liabilities expressed in foreign currencies
will be converted into U.S. dollar values at current exchange rates of such
currencies against U.S. dollars last quoted by any major bank. If such
quotations are not available, the rate of exchange will be determined in good
faith by or under procedures established by the Board of Trustees.
Generally, trading in securities on European and Far Eastern securities
exchanges and on over-the-counter markets is substantially completed at various
times prior to the close of business on each Business Day in New York (i.e., a
day on which the New York Stock Exchange is open for trading). In addition,
European or Far Eastern securities trading generally or in a particular country
or countries may not take place on all Business Days in New York. Furthermore,
trading takes place in various foreign markets on days which are not Business
Days in New York and days on which the 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 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
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 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.
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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.
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 or a cumulative average, year-by-
year or other basis for various specified periods by means of quotations,
charts, graphs or schedules. In addition to the above, each Portfolio may from
time to time advertise its performance relative to certain averages, performance
rankings, indices, other information prepared by mutual fund statistical
services and investments for which reliable performance information is
available.
Occasionally statistics may be used to specify 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
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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 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;
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(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. 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 Portfolio'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 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:
. cost associated with aging parents;
. funding a college education (including its actual and estimated cost);
. health care expenses (including actual and projected expenses);
. long-term disabilities (including the availability of, and coverage
provided by, disability insurance);
. retirement (including the availability of social security benefits, the
tax treatment of such benefits and statistics and other information
relating to maintaining a particular standard of living and outliving
existing assets);
. asset allocation strategies and the benefits of diversifying among asset
classes;
. the benefits of international and emerging market investments;
. the effects of inflation on investing and saving;
. the benefits of establishing and maintaining a regular pattern of
investing and the benefits of dollar-cost averaging; and
. measures of portfolio risk, including but not limited to, alpha, beta
and standard deviation.
The Trust may from time to time use comparisons, graphs or charts in
advertisements to depict the following types of information:
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. 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;
. the dollar and non-dollar based returns of various market indices (i.e.,
Morgan Stanley Capital International EAFE Index, FT-Actuaries Europe &
Pacific Index and the Standard & Poor's Index of 500 Common Stocks) over
varying periods of time;
. total stock market capitalizations of specific countries and regions on
a global basis;
. performance of securities markets of specific countries and regions;
. value of a dollar amount invested in a particular market or type of
security over different periods of time;
. volatility of total return of various market indices (i.e. Lehman
Government Bond Index, S&P 500 Index, IBC/Donoghue's Money Fund Average/
All Taxable Index) over varying periods of time;
. credit ratings of domestic government bonds in various countries;
. price volatility comparisons of types of securities over different
periods of time; and
. price and yield comparisons of a particular security over different
periods of time.
In addition, the Trust may from time to time include rankings of Goldman,
Sachs & Co.'s research department by publications such as the Institutional
Investor and the Wall Street Journal in advertisements.
From time to time, advertisements or information may include a discussion
of certain attributes or benefits to be derived by an investment in the
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
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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 Declaration of Trust to create and
classify shares of beneficial interests in separate series, without further
action by shareholders. Additional series may be added in the future. The
Trustees also have authority to classify and reclassify any series or portfolio
of shares into one or more classes.
Certain aspects of the shares may be altered after advance notice to
shareholders if it is deemed necessary in order to satisfy certain tax
regulatory requirements.
When issued, shares are fully paid and non-assessable. In the event of
liquidation, shareholders are entitled to share pro rata in the net assets of
the applicable class of the relevant Fund available for distribution to such
shareholders. All shares are freely transferable and have no preemptive,
subscription or conversion rights.
Rule 18f-2 under the Act provides that any matter required to be submitted
by the provisions of the Act or applicable state law, or otherwise, to the
holders of the outstanding voting securities of an investment company such as
the Trust shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares of each class or
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
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will be entitled, as determined by the Trustees, either to one vote for each
share or to one vote for each dollar of net asset value represented by such
shares on all matters presented to shareholders including the elections of
Trustees (this method of voting being referred to as "dollar based voting").
However, to the extent required by the Act or otherwise determined by the
Trustees, series and classes of the Trust will vote separately from each other.
Shareholders of the Trust do not have cumulative voting rights in the election
of Trustees. Meetings of shareholders of the Trust, or any series or class
thereof, may be called by the Trustees, certain officers or upon the written
request of holders of 10% or more of the shares entitled to vote at such
meetings. The Trustees will call a special meeting of shareholders for the
purpose of electing Trustees if, at any time, less than a majority of Trustees
holding office at the time were elected by shareholders. The shareholders of the
Trust will have voting rights only with respect to the limited number of matters
specified in the Declaration of Trust and such other matters as the Trustees may
determine or may be required by law.
The Declaration of Trust provides for indemnification of Trustees and
officers of the Trust unless the recipient is adjudicated (i) to be liable by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of such person's office or (ii) not to
have acted in good faith in the reasonable belief that such person's actions
were in the best interest of the Trust. The Declaration of Trust provides that,
if any shareholder or former shareholder of any series is held personally liable
solely by reason of being or having been a shareholder and not because of the
shareholder's acts or omissions or for some other reason, the shareholder or
former shareholder (or heirs, executors, administrators, legal representatives
or general successors) shall be held harmless from and indemnified against all
loss and expense arising from such liability. The Trust, acting on behalf of
any affected series, must, upon request by such shareholder, assume the defense
of any claim made against such shareholder for any act or obligation of the
series and satisfy any judgment thereon from the assets of the series.
The Declaration of Trust permits the termination of the Trust or of any
series or class of the Trust (i) by a majority of the affected shareholders at a
meeting of shareholders of the Trust, series or class; or (ii) by a majority of
the Trustees without shareholder approval if the Trustees determine that such
action is in the best interest of the Trust or its shareholders. The factors and
events that the Trustees may take into account in making such determination
include (i) the inability of the Trust or any successor series or class to
maintain its assets at an appropriate size; (ii) changes in laws or regulations
governing the Trust, series or class or affecting assets of the type in which it
invests; or (iii) economic developments or trends having a significant adverse
impact on their business or operations.
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.
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The Declaration of Trust permits the Trustees to amend the Declaration of
Trust without a shareholder vote. However, shareholders of the Trust have the
right to vote on any amendment (i) that would affect the voting rights of
shareholders; (ii) that is required by law to be approved by shareholders; (iii)
that would amend the voting provisions of the Declaration of Trust; or (iv) that
the Trustees determine to submit to shareholders.
The Trustees may appoint separate Trustees with respect to one or more
series or classes of the Trust's shares (the "Series Trustees"). Series Trustees
may, but are not required to, serve as Trustees of the Trust or any other series
or class of the Trust. The Series Trustees have, to the exclusion of any other
Trustees of the Delaware Trust, all the powers and authorities of Trustees under
the Trust Instrument with respect to any other series or class.
Shareholder and Trustee Liability
- ---------------------------------
Under Delaware law, the shareholders of the 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 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 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 Declaration of Trust also provides that a
series shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the series and satisfy any judgment
thereon. In view of the above, the risk of personal liability of shareholders
of a Delaware business trust is remote.
In addition to the requirements under Delaware law, the Declaration of
Trust provides that shareholders of a series may bring a derivative action on
behalf of the series only if the following conditions are met: (a) shareholders
eligible to bring such derivative action under Delaware law who hold at least
10% of the outstanding shares of the series, or 10% of the outstanding shares of
the class to which such action relates, shall join in the request for the
Trustees to commence such action; and (b) the Trustees must be afforded a
reasonable amount of time to consider such shareholder request and to
investigate the basis and to employ other advisers in considering the merits of
the request and shall require an undertaking by the shareholders making such
request to reimburse the Portfolio 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,
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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 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").
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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 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
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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").
If the segregated asset account upon which a variable contract is based is
not "adequately diversified" under the foregoing rules for each calendar
quarter, then (a) the variable contract is not treated as a life insurance
contract or annuity contract under the Code for all subsequent periods during
which such account is not "adequately diversified" and (b) the holders of such
contract must include as ordinary income the "income on the contract" for each
taxable year. Further, the income on a life insurance contract for all prior
taxable years is treated as received or accrued during the taxable year of the
policyholder in which the contract ceases to meet the definition of a "life
insurance contract" under the Code. The "income on the contract" is, generally,
the excess of (i) the sum of the increase in the net surrender value of the
contract during the taxable year and the cost of the life insurance protection
provided under the contract during the year, over (ii) the premiums paid under
the contract during the taxable year. In addition, if a Portfolio does not
constitute a Closed Fund, the holders of the contracts and
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annuities which invest in the Fund through a segregated asset account may be
treated as owners of Portfolio shares and may be subject to tax on distributions
made by the Fund.
In order to avoid a 4% federal excise tax, each Portfolio must distribute
(or be deemed to have distributed) by December 31 of each calendar year at least
98% of its taxable ordinary income for such year, at least 98% of the excess of
its capital gains over its capital losses (generally computed on the basis of
the one-year period ending on October 31 of such year), and all taxable ordinary
income and the excess of capital gains over capital losses for the previous year
that were not distributed for such year and on which the 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.
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
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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.
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APPENDIX A
DESCRIPTION OF BOND RATINGS, INCLUDING MUNICIPAL BONDS
MOODY'S INVESTORS SERVICE, INC.
Bond Ratings
- ------------
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"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.
- --------------------
/1/The rating systems described herein are believed to be the most recent
ratings systems available from Moody's Investors Service, Inc. and Standard &
Poor's Ratings Group at the date of this Additional Statement for the securities
listed. Ratings are generally given to securities at the time of issuance. While
the rating agencies may from time to time revise such ratings, they undertake no
obligation to do so.
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Con. (---): Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Note: 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.
Description of Ratings of Commercial Paper
- ------------------------------------------
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually senior debt obligations not having an original maturity in
excess of one year. Moody's commercial paper rating categories are as follows:
Prime-1: Issuers (or supporting institutions) rated Prime-1 have a
superior ability for repayment of senior short-term debt obligations.
Prime-1 repayment ability will often be evidenced by many of the following
characteristics:
- Leading market positions in well established industries;
- High rates of return on funds employed;
- Conservative capitalization structures with moderate reliance on
debt and ample asset protection;
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation; and
- Well established access to a range of financial markets and
assured sources of alternate liquidity.
Prime-2: Issuers (or supporting institutions) rated Prime-2 have a strong
ability for repayment of short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Prime-3: Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The
effect of industry characteristics and
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market compositions may be more pronounced. Variability in earnings and
profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
Not Prime: Issuers do not fall within any of the Prime rating categories.
Description of Ratings of State and Municipal Notes
- ---------------------------------------------------
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade ("MIG") and variable rate demand obligations
are designated Variable Moody's Investment Grade ("VMIG"). Such ratings
recognize the differences between short-term credit risk and long-term risk.
Factors affecting the liquidity of the borrower and short-term cyclical elements
are critical in short-term ratings, while other factors of major importance in
bond risk, long-term secular trends for example, may be less important over the
short run. Symbols used will be as follows:
MIG-1/VMIG-1: This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad based access to the market for refinancing.
MIG-2/VMIG-2: This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
MIG-3/VMIG-3: This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
MIG-4/VMIG-4: This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and although
not distinctly or predominantly speculative, there is specific risk.
SG: This designation denotes speculative quality. Debt instruments in
this category lack margins of protection.
STANDARD & POOR'S RATINGS GROUP
Bond Ratings
- ------------
AAA: Bonds and debt rated AAA have the highest rating assigned by Standard
& Poor's. Capacity to meet the financial commitment on the obligation is
extremely strong.
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AA: Bonds and debt rated AA have a very strong capacity to meet the
financial commitment on the obligation and differ from the higher rated issues
only in small degree.
A: Bonds and debt rated A have a strong capacity to meet the financial
commitment on the obligation although they are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than bonds
in higher rated categories.
BBB: Bonds and debt rated BBB are regarded as having an adequate capacity
to meet the financial commitment on the obligation. Whereas they normally
exhibit adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the obligor to
meet the financial commitment on the obligation for bonds in this category than
in higher rated categories.
BB, B, CCC, CC, C: Bonds and debt rated BB, B, CCC, CC and C are regarded,
on balance, as having significant speculative characteristics with respect to
capacity to meet the financial commitment on the obligation. BB indicates the
least degree of speculation and C the highest. While such bonds will likely have
some quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
BB: Bonds and debt rated BB have less vulnerability to non-payment other
speculative issues. However, such securities face major ongoing uncertainties
or exposure to adverse business, financial, or economic conditions which could
lead to inadequate capacity to meet financial commitment on the obligation.
B: Bonds and debt rated B are more vulnerable to non-payment but currently
have the capacity to meet the financial commitment on the obligation. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to meet the financial commitment on the obligation.
CCC: Bonds and debt rated CCC are currently vulnerable to non-payment, and
are dependent upon favorable business, financial, and economic conditions to
meet the financial commitment on the obligation. In the event of adverse
business, financial, or economic conditions, the obligor is not likely to have
the capacity to meet the financial commitment on the obligation.
CC: The rating CC is typically applied to bonds and debt that are
currently highly vulnerable to non-payment.
C: The rating C may be used to cover a situation where a bankruptcy
petition has been filed, but debt service payments on the obligations are being
continued.
D: Bonds and debt rated D are in default. The D rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such
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<PAGE>
grace period. The D rating also will be used upon the filing of a bankruptcy
petition if debt service payments are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
r: This symbol is attached to ratings of instruments with significant
non-credit risks. Examples of such obligations are: securities whose principal
or interest return is indexed to equities, commodities, or currencies; certain
floaters; and interest-only and principal-only mortgage securities. The absence
of an "r" symbol should not be taken as an indication that an obligation will
exhibit no volatility or variability in total return.
Description of Ratings of Commercial Paper
- ------------------------------------------
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Standard & Poor's commercial paper rating categories are as follows:
A-1: This highest category indicates that the capacity to meet the
financial commitment on the obligation is strong. Those issues determined to
possess strong capacity to meet the financial commitment on the obligation are
denoted with a plus sign (+) designation.
A-2: Capacity to meet the financial commitment on the obligation on issues
with this designation is satisfactory. However, the obligations are somewhat
more susceptible to the adverse effects of changes in circumstances and economic
conditions than obligations in higher rating categories.
A-3: Obligations exhibit adequate protection parameters. However, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity of the obligor to meet its financial commitment on the
obligation.
B: Obligations are regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
C: Obligations are currently vulnerable to nonpayment and are dependent
upon favorable business, financial, and economic conditions for the obligor to
meet its financial commitment on the obligation.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes such payments
will be made during such grace period. The D rating category will also be used
upon the filing of a bankruptcy petition or the taking of a similar action if
payments on an obligation are jeopardized.
A-5
<PAGE>
Description of Ratings of Municipal Notes
- -----------------------------------------
A Standard & Poor's note rating reflects the liquidity concerns and market
access risks unique to notes. Notes due in three years or less will likely
receive a note rating.
Note rating symbols are as follows:
SP-1: Strong capacity to pay principal and interest. Those issues determined
to possess very strong safety characteristics will be given a plus (+)
designation.
SP-2: Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term
of the notes.
SP-3: Speculative capacity to pay principal and interest.
FITCH IBCA, INC.
Long-Term Debt and Preferred Stock
- ----------------------------------
The ratings represent Fitch's assessment of the issuer's ability to meet
the obligations of a specific debt issue or class of debt. The ratings take
into consideration special features of the issue, its relationship to other
obligations of the issuer, the current financial condition and operative
performance of the issuer and of any guarantor, as well as the political and
economic environment that might affect the issuer's future financial strength
and credit quality.
AAA: Bonds rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong capacity for
timely repayment of financial commitments. This capacity is unlikely to be
adversely affected by foreseeable events.
AA: Bonds rated AA are considered to be investment grade and of very high
credit quality. The obligor's capacity for timely repayment of financial
commitments is very strong. This capacity is not significantly vulnerable to
foreseeable future events.
A: Bonds rated A are considered to be investment grade and of high credit
quality. The obligor's capacity for timely repayment of financial commitments
is considered to be strong. This capacity may, nevertheless, be more vulnerable
to adverse changes in economic conditions than bonds with higher ratings.
BBB: Bonds rated BBB are considered to be investment grade and of good
credit quality. The obligor's capacity for timely repayment of financial
commitments is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to impair this capacity.
A-6
<PAGE>
BB: Bonds are considered speculative. These ratings indicate that there is
a possibility of credit risk developing, particularly as the result of adverse
economic changes over time; however, business or financial alternatives may be
available to allow financial commitments to be met. Securities rated in this
category are not investment grade.
B: Bonds are considered highly speculative. These ratings indicate that
significant credit risk is present, but a limited margin of safety remains.
Financial commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.
"CCC", "CC", "C" - Bonds have high default risk. Capacity for meeting
financial commitments is reliant upon sustained, favorable business or economic
developments. "CC" ratings indicate that default of some kind appears probable,
and "C" ratings signal imminent default.
DDD, DD, and D: Bonds are in default. Such bonds are not meeting
obligations and are extremely speculative. DDD represents the highest potential
for recovery on these bonds, and D represents the lowest potential for recovery.
Plus (+) and minus (-) signs are used for ratings from and including AA to
B, to indicate the relative position of a credit within the rating category.
Short-Term Ratings
- ------------------
Fitch IBCA short-term ratings apply to debt obligations that have time
horizons of less than 12 months for most obligations, or up to three years for
U.S. public finance securities. The following summarizes the rating categories
used by Fitch IBCA for short-term obligations:
F1: Securities possess the highest credit quality. This designation
indicates the strongest capacity for timely payment of financial commitments and
may have an added "+" to denote any exceptionally strong credit feature.
F2: Securities possess good credit quality. This designation indicates a
satisfactory capacity for timely payment of financial commitments, but the
margin of safety is not as great as in the case of the higher ratings.
F3: Securities possess fair credit quality. This designation indicates
that the capacity for timely payment of financial commitments is adequate;
however, near-term adverse changes could result in a reduction to non-investment
grade.
B: Securities possess speculative credit quality. This designation
indicates minimal capacity for timely payment of financial commitments, plus
vulnerability to near-term adverse changes in financial and economic conditions.
A-7
<PAGE>
C: Securities possess high default risk. This designation indicates that
the capacity for meeting financial commitments is solely reliant upon a
sustained, favorable business and economic environment.
D: Securities are in actual or imminent payment default.
Duff & Phelps
-------------
Long-Term Debt and Preferred Stock
- ----------------------------------
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic conditions.
A+, A, A-: Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
BBB+, BBB, BBB-: Below average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may move
up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that obligations
will not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or into
a higher or lower rating grade.
CCC: Well below investment grade securities. Considerable uncertainty
exists as to timely payment of principal, interest or preferred dividends.
Protection factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD: Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payment.
DP: Represents preferred stock with dividend arrearages.
A-8
<PAGE>
Commercial Paper/Certificates of Deposits
- -----------------------------------------
D-1+: Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or ready access to alternative sources
of funds, is outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
D-1: Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk
factors are minor.
D-1-: High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are
very small.
D-2: Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge
total financing requirements, access to capital markets is good. Risk
factors are small.
D-3: Satisfactory liquidity and other protection factors qualify issues as
to investment grade. Risk factors are larger and subject to more
variation. Nevertheless, timely payment is expected.
D-4: Speculative investment characteristics. Liquidity is not sufficient
to insure against disruption in debt service. Operating factors and
market access may be subject to a high degree of variation.
D-5: Issuer failed to meet scheduled principal and/or interest payments.
Notes: Bonds which are unrated may expose the investor to risks with respect to
capacity to pay interest or repay principal which are similar to the risks of
lower-rated bonds. The Fund is dependent on the Investment Adviser's judgment,
analysis and experience in the evaluation of such bonds.
Investors should note that the assignment of a rating to a bond by a rating
service may not reflect the effect of recent developments on the issuer's
ability to make interest and principal payments.
A-9
<PAGE>
APPENDIX B
BUSINESS PRINCIPLES OF GOLDMAN, SACHS & CO.
Goldman Sachs is noted for its Business Principles, which guide all of the
firm's activities and serve as the basis for its distinguished reputation among
investors worldwide.
Our client's interests always come first. Our experience shows that if we
serve our clients well, our own success will follow.
Our assets are our people, capital and reputation. If any of these assets
diminish, reputation is the most difficult to restore. We are dedicated to
complying fully with the letter and spirit of the laws, rules and ethical
principles that govern us. Our continued success depends upon unswerving
adherence to this standard.
We take great pride in the professional quality of our work. We have an
uncompromising determination to achieve excellence in everything we undertake.
Though we may be involved in a wide variety and heavy volume of activity, we
would, if it came to a choice, rather be best than biggest.
We stress creativity and imagination in everything we do. While recognizing
that the old way may still be the best way, we constantly strive to find a
better solution to a client's problems. We pride ourselves on having pioneered
many of the practices and techniques that have become standard in the industry.
We make an unusual effort to identify and recruit the very best person for
every job. Although our activities are measured in billions of dollars, we
select our people one by one. In a service business, we know that without the
best people, we cannot be the best firm.
We offer our people the opportunity to move ahead more rapidly than is
possible at most other places. We have yet to find limits to the responsibility
that our best people are able to assume. Advancement depends solely on ability,
performance and contribution to the Firm's success, without regard to race,
color, religion, sex, age, national origin, disability, sexual orientation, or
any impermissible criterion or circumstance.
We stress teamwork in everything we do. While individual creativity is
always encouraged, we have found that team effort often produces the best
results. We have no room for those who put their personal interests ahead of
the interests of the Firm and its clients.
The dedication of our people to the Firm and the intense effort they give
their jobs are greater than one finds in most other organizations. We think
that this is an important part of our success.
We consider our size an asset that we try hard to preserve. We want to be
big enough to undertake the largest project that any of our clients could
contemplate, yet small enough to
B-1
<PAGE>
maintain the loyalty, the intimacy and the esprit de corps that we all treasure
and that contribute greatly to our success.
We constantly strive to anticipate the rapidly changing needs of our
clients and to develop new services to meet those needs. We know that the world
of finance will not stand still and that complacency can lead to distinction.
We regularly receive confidential information as part of our normal client
relationships. To breach a confidence or to use confidential information
improperly or carelessly would be unthinkable.
Our business is highly competitive, and we aggressively seek to expand our
client relationships. However, we must always be fair competitors and must
never denigrate other firms.
Integrity and honesty are the heart of our business. We expect our people
to maintain high ethical standards in everything they do, both in their work for
the firm and in their personal lives.
GOLDMAN, SACHS & CO.'S INVESTMENT BANKING AND SECURITIES ACTIVITIES
Goldman, Sachs & Co. is a leading global investment banking and securities
firm with a number of distinguishing characteristics.
Privately owned and ranked among Wall Street's best capitalized firms, with
partners' capital of approximately $6.1 billion as of November 28, 1997.
With thirty-seven offices around the world, Goldman Sachs employs over
11,000 professionals focused on opportunities in major markets.
The number one underwriter of all international equity issuers from (1993-
1996).
A research budget of $200 million for 1997.
Premier lead manager of negotiated municipal bond offerings over the past
six years (1990-1996).*
The number one lead manager of U.S. common stock offerings for the past
eight years (1989-1996).
The number one lead manager for initial public offerings (IPOs) worldwide
(1989-1996).
- --------------------------
* Source: Securities Data Corporation. Common stock ranking excludes REITs,
====================================
Investment Trusts and Rights.
B-2
<PAGE>
B-3
<PAGE>
GOLDMAN, SACHS & CO.'S HISTORY OF EXCELLENCE
1865 End of Civil War
1869 Marcus Goldman opens Goldman Sachs
1890 Dow Jones Industrial Average first published
1896 Goldman Sachs joins New York Stock Exchange
1906 Goldman Sachs takes Sears Roebuck & Co. public (longest-standing client
relationship)
Dow Jones Industrial Average tops 100
1925 Goldman Sachs finances Warner Brothers, producer of the first talking
film
1956 Goldman Sachs co-manages Ford's public offering, the largest to date
1970 London office opens
1972 Dow Jones Industrial Average breaks 1000
1986 Goldman Sachs takes Microsoft public
1991 Provides advisory services for the largest privatization in the region
of the sale of Telefonos de Mexico
1995 Dow Jones Industrial Average breaks 5000
1996 Goldman Sachs takes Deutsche Telecom public
Dow Jones Industrial Average breaks 6000
1997 Dow Jones Industrial Average breaks 7000
Goldman Sachs increases assets under management by 100% over 1996
B-4
<PAGE>
PART C - OTHER INFORMATION
Item 23 Exhibits
--------
(a) (1) Agreement and Declaration of Trust dated September 16, 1997
is incorporated herein by reference to exhibit (1) of the
Registration Statement on Form N-1A (No. 333-35883 and
811-8854) filed with the Securities and Exchange Commission
("Commission") on September 18, 1997 (Accession No.
0000950130-97-004157) (the "Initial Registration
Statement").
(2) Amendment No. 1 dated October 21, 1997 to Agreement and
Declaration of Trust is incorporated herein by reference to
exhibit (1)(b) of Pre-Effective Amendment No. 1 of the
Registration Statement on Form N-1A (No. 333-35883 and
811-8854) filed with the Commission on December 23, 1997
(Accession No. 0000950130-97-005710) ("Pre-Effective
Amendment No. 1").
(3) Amendment No. 2 dated January 22, 1999 to Agreement and
Declaration of Trust.
(b) By-Laws of Registrant dated September 16, 1997 are incorporated
herein by reference to exhibit (2) of the Initial Registration
Statement.
(c) Not Applicable.
(d) (1) Management Agreement among Registrant, Goldman Sachs Asset
Management and Goldman Sachs Asset Management International
on behalf of the Growth and Income, CORE U.S. Equity, CORE
Large Cap Growth, CORE Small Cap Equity, Mid Cap Equity,
Capital Growth, International Equity, Global Income and High
Yield Funds is incorporated herein by reference to exhibit
(5) of Pre-Effective Amendment No. 1.
(2) Amended Annex A to Management Agreement among Registrant,
Goldman Sachs Asset Management and Goldman Sachs Asset
Management International on behalf of the CORE Large Cap
Value, CORE International Equity and Short Duration
Government Funds.
(3) Management Agreement among Registrant and Goldman Sachs
Asset Management on behalf of the Goldman Sachs Conservative
C-1
<PAGE>
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, (the
"Asset Allocation Portfolios").
(e) Amended and Restated Distribution Agreement between Registrant
and Goldman, Sachs & Co. dated January 22, 1999.
(f) Not Applicable.
(g) (1) Custodian Agreement between Registrant and State Street Bank
and Trust Company dated December 31, 1997 is incorporated
herein by reference to exhibit (8) of Post-Effective
Amendment No. 1 of the Registration Statement on Form N-1A
(No. 333-35883 and 811-8854) filed with the Commission on
November 18, 1998 (Accession No. 0000950130-98-005579)
("Post-Effective Amendment No. 1").
(2) Amended Fee Schedule relating to Custodian Agreement between
Registrant and State Street Bank and Trust Company, dated
January 22, 1999 (Goldman Sachs CORE Large Cap Value Fund,
Goldman Sachs CORE International Equity Fund and Goldman
Sachs Short Duration Government Fund).
(3) Amended Fee Schedule relating to Custodian Agreement between
Registrant and State Street Bank and Trust Company, dated
January 22, 1999 (Asset Allocation Portfolios).
(h) (1) Transfer Agency Agreement between Registrant and Goldman,
Sachs & Co. dated October 21, 1997 is incorporated herein by
reference to exhibit (9)(a) of Pre-Effective Amendment
No. 1.
(2) Amended Fee Schedule relating to Transfer Agency Agreement
between Registrant and Goldman, Sachs & Co., dated January
22, 1999 (Goldman Sachs CORE Large Cap Value Fund, Goldman
Sachs Core International Equity Fund and Goldman Sachs Short
Duration Government Fund).
(3) Amended Fee Schedule relating to Transfer Agency Agreement
between Registrant and Goldman, Sachs & Co., dated January
22, 1999 (Asset Allocation Portfolios).
C-2
<PAGE>
(4) Form of Participation Agreement is incorporated herein by
reference to Exhibit (9)(b) of Pre-Effective Amendment No.
1.
(i) (1) Opinion and consent of counsel relating to the Goldman Sachs
Growth and Income, Goldman Sachs CORE U.S. Equity, Goldman
Sachs CORE Large Cap Growth, Goldman Sachs CORE Small Cap
Equity, Goldman Sachs Capital Growth, Goldman Sachs Mid Cap
Equity, Goldman Sachs International Equity, Goldman Sachs
Global Income and Goldman Sachs High Yield Funds is
incorporated herein by reference to exhibit (10)(a) of
Pre-Effective Amendment No. 1.
(2) Opinion and consent of counsel relating to the Goldman Sachs
CORE Large Cap Value Fund, Goldman Sachs CORE International
Equity Fund, Goldman Sachs Short Duration Government Fund,
Goldman Sachs Conservative Strategy Portfolio, Goldman Sachs
Balanced Strategy Portfolio, Goldman Sachs Growth and Income
Strategy Portfolio, Goldman Sachs Growth Strategy Portfolio
and Goldman Sachs Aggressive Growth Strategy Portfolio.
(j) Consent of Independent Auditors.
(k) Not Applicable.
(l) Purchase Agreement between Registrant and The Goldman Sachs
Group, L.P dated December 12, 1997 is incorporated herein by
reference to exhibit (13) of Pre-Effective Amendment No 1.
(m) Not Applicable.
(n) Financial Data Schedules.
(o) Not Applicable.
(p) Powers of Attorney of Messrs. Bakhru, Grip, Perlowski, Ford,
McNulty, Shuch, Smart, Springer and Strubel and Mmes. McPherson
are incorporated herein by reference to Post-Effective Amendment
No. 1.
Item 24 Persons Controlled By or Under Common Control with Registrant
-------------------------------------------------------------
Not applicable.
C-3
<PAGE>
Item 25 Indemnification
---------------
Article IV of the Agreement and Declaration of Trust of Goldman Sachs
Variable Insurance Trust, a Delaware business trust (incorporated herein by
reference as Exhibit 23(a)(1) hereto), provides for indemnification of the
Trustees and officers of the Trust, subject to certain limitations.
Each Management Agreement provides that the applicable Investment
Adviser will not be liable for any error of judgement or mistake of law of for
any loss suffered by a Fund, except a loss resulting from willful misfeasance,
bad faith or gross negligence on the part of the Investment Adviser or from
reckless disregard by the Investment Adviser of its obligations and duties under
the Management Agreement. The Management Agreement relating to the Growth and
Income, CORE U.S. Equity, CORE Large Cap Growth, CORE Small Cap Equity, Mid Cap
Equity, Capital Growth, International Equity, Global Income and High Yield Funds
is incorporated herein by reference to Exhibit 23(d)(1). The Management
Agreement relating to the Asset Allocation Portfolios is included herewith as
Exhibit 23(d)(3).
Section 9 of the Amended and Restated Distribution Agreement between
the Registrant and Goldman, Sachs & Co. (included herewith as Exhibit 23(e)) and
Section 7 of the Transfer Agency Agreement between the Registrant and Goldman,
Sachs & Co. (incorporated herein by reference as Exhibit 23(h)(1) provide that
the Registrant will indemnify Goldman, Sachs & Co. against certain liabilities.
Mutual fund and trustees and officers liability policies purchased
jointly by the Registrant, Goldman Sachs Trust, Trust for Credit Unions,
Northern Institutional Funds (formerly The Benchmark Funds) and The Commerce
Funds insure such persons and their respective trustees, partners, officers and
employees, subject to the policies' coverage limits and exclusions and varying
deductibles, against loss resulting from claims by reason of any act, error,
omission, misstatement, misleading statement, neglect or breach of duty.
Item 26 Business and Other Connections of Investment Adviser
----------------------------------------------------
The business and other connections of the officers and Managing
Directors of Goldman, Sachs & Co., Goldman Sachs Funds Management, L.P., and
Goldman Sachs Asset Management International are listed on their respective
Forms ADV as currently filed with the Commission (File Nos. 801-16048, 801-37591
and 801-38157, respectively) the text of which is, in each case, hereby
incorporated by reference.
C-4
<PAGE>
Item 27 Principal Underwriter
---------------------
(a) Goldman, Sachs & Co. or an affiliate or a division thereof
currently serves as investment adviser and distributor of the units of Trust for
Credit Unions and for shares of Goldman Sachs Trust. Goldman, Sachs & Co. or a
division thereof currently serves as administrator and distributor of the units
of shares of Northern Institutional Funds (formerly The Benchmark Funds) and The
Commerce Funds.
(b) Set forth below is certain information pertaining to the Managing
Directors of Goldman, Sachs & Co., the Registrant's principal underwriter, who
are members of Goldman, Sachs & Co.'s Executive Committee. None of the members
of the executive committee holds a position or office with the Registrant.
GOLDMAN SACHS EXECUTIVE COMMITTEE
Jon S. Corzine (1) Co-Chairman
Robert J. Hurst (1) Managing Director
Henry M. Paulson, Jr. (1) Chief Executive Officer, Co-
Chairman
John A. Thain (1)(3) Co-Chief Operating Officer
John L. Thornton (3) Co-Chief Operating Officer
Roy J. Zuckerberg (2) Managing Director
- ----------------------
(1) 85 Broad Street, New York, NY 10004
(2) One New York Plaza, New York, NY 10004
(3) Peterborough Court, 133 Fleet Street, London EC4A 2BB,
England
(c) Not applicable.
Item 28 Location of Accounts and Records
--------------------------------
The Declaration of Trust, By-laws and minute books of the Registrant
and certain investment adviser records are in the physical possession of Goldman
Sachs Asset Management, One New York Plaza, New York, New York 10004. All other
accounts, books and other documents required to be maintained under Section
31(a) of the Investment Company Act of 1940 and the Rule promulgated thereunder
are in the physical possession of State Street Bank and Trust Company, P.O. Box
1713, Boston, Massachusetts 02105 except for certain transfer agency and
underwriting records which are maintained by Goldman, Sachs & Co., 4900 Sears
Tower, Chicago, Illinois 60606.
C-5
<PAGE>
Item 29 Management Services
-------------------
Not Applicable.
Item 30 Undertakings
------------
Not Applicable.
C-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment No. 2 to its Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
and State of New York, on the 26th day of February, 1999.
GOLDMAN SACHS VARIABLE INSURANCE TRUST
Registrant
By: * Douglas C. Grip
---------------------
Douglas C. Grip
President
Pursuant to the requirements of the Securities Act of 1933,
this Post-Effective Amendment No. 2 to Registrant's Registration Statement has
been signed by the following persons in the capacities and on the dates
indicated:
Signature Title Date
- --------- ----- ----
*Ashok N. Bakhru Chairman and February 26, 1999
- ---------------------- Trustee
Ashok N. Bakhru
*Douglas C. Grip President and February 26, 1999
- --------------------- Trustee
Douglas C. Grip
*John M. Perlowski Principal Accounting February 26, 1999
- --------------------- Officer and Principal
John M. Perlowski Financial Officer
*David B. Ford Trustee February 26, 1999
- ---------------------
David B. Ford
*John P. McNulty Trustee February 26, 1999
- ---------------------
John P. McNulty
*Mary P. McPherson Trustee February 26, 1999
- ---------------------
Mary P. McPherson
*Alan A. Shuch Trustee February 26, 1999
- ---------------------
Alan A. Shuch
*Jackson W. Smart, Jr. Trustee February 26, 1999
- ---------------------
Jackson W. Smart, Jr.
*William H. Springer Trustee February 26, 1999
- ---------------------
William H. Springer
*Richard P. Strubel Trustee February 26, 1999
- ---------------------
Richard P. Strubel
*By: /s/ Michael J. Richman
------------------------
Michael J. Richman
Attorney-in-Fact
*Pursuant to a power of attorney previously filed.
C-7
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
Certificate of Secretary
The undersigned Secretary of Goldman Sachs Variable Insurance Trust hereby
certifies that the following resolution was duly adopted by the Board of
Trustees of said Trust on April 22, 1998 and remains in effect on the date
hereof:
FURTHER RESOLVED, that the Trustees and Officers of the Trusts who may
be required to execute any amendments to the Trust's Registration Statement
be, and each hereby is, authorized to execute a power of attorney
appointing James A. Fitzpatrick, Douglas C. Grip, John W. Mosior, Nancy L.
Mucker, John W. Perlowski, Michael J. Richman, Howard B. Surloff and
Valerie A. Zondorak, jointly and severally, their attorneys-in-fact, each
with power of substitution, for said Trustees and Officers in any and all
capacities to sign the Registration Statement under the Securities Act of
1933 and the Investment Company Act of 1940 of the Trusts and any and all
amendments to such Registration Statement, and to file the same, with
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all
that each of said attorneys-in-fact, or his or her substitute or
substitutes, may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 26th day of February,
1999.
GOLDMAN SACHS VARIABLE INSURANCE TRUST
/s/ Michael J. Richman
----------------------
Michael J. Richman
Secretary
<PAGE>
EXHIBIT INDEX
(a)(3) Amemdment No. 2 dated January 22, 1999 to Agreement and Declaration of
Trust.
(d)(2) Amended Annex A to Management Agreement.
(d)(3) Management Agreement.
(e) Amended and Restated Distribution Agreement.
(g)(2) Amended Fee Schedule relating to Custodian Agreement (Goldman Sachs CORE
Large Cap Value Fund, Goldman Sachs CORE International Equity Fund and Goldman
Sachs Short Duration Government Fund).
(g)(3) Amended Fee Schedule relating to Custodian Agreement (Asset Allocation
Portfolios).
(h)(2) Amended Fee Schedule relating to Transfer Agency Agreement(Goldman Sachs
CORE Large Cap Value Fund, Goldman Sachs CORE International Equity Fund and
Goldman Sachs Short Duration Government Fund).
(h)(3) Amended Fee Schedule relating to Transfer Agency Agreement (Asset
Allocation Portfolios).
(i)(2) Opinion and consent of counsel.
(j) Consent of Independent Auditors.
(n) Financial Data Schedules.
<PAGE>
Exhibit (a)(3)
GOLDMAN SACHS VARIABLE INSURANCE TRUST
AMENDMENT NO. 2 TO AGREEMENT
AND DECLARATION OF TRUST
The undersigned Secretary/Assistant Secretary of Goldman Sachs Variable
Insurance Trust hereby certifies that the following resolutions were duly
adopted by the Board of Trustees of said Trust on January 22, 1999:
RESOLVED, that the Agreement and Declaration of Trust be
amended as contemplated in Article V, Section 1 by establishing and
designating a class of shares of beneficial interest of 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, Goldman Sachs CORE Large Cap Value Fund, Goldman
Sachs CORE International Equity Fund, and Goldman Sachs Short Duration
Government Fund to have the relative rights and preferences set forth
in the prospectus offering such class shares; and
FURTHER RESOLVED, that the President, any Vice President, the
Secretary, any Assistant Secretary and the Treasurer of the Trust be,
and they hereby are, severally authorized to execute an instrument in
writing effecting the aforesaid amendment and to cause the same to be
filed wherever in the discretion of such officers such filing is
appropriate.
As of January 22, 1999 /s/ Michael Richman
---------------------------
Name: Michael Richman
Title: Assistant Secretary
<PAGE>
Exhibit (d)(2)
Amended Annex A
The compensation payable under Paragraph 5 of the Management Agreement between
Goldman Sachs Variable Insurance Trust and each of the undersigned shall be as
follows:
Goldman Sachs Asset Management Annual Rate (%)
- ------------------------------ ---------------
Goldman Sachs High Yield Fund 0.70
Goldman Sachs Growth and Income Fund 0.75
Goldman Sachs CORE Large Cap Growth Fund 0.70
Goldman Sachs Mid Cap Equity Fund 0.80
Goldman Sachs CORE Small Cap Equity Fund 0.75
Goldman Sachs CORE U.S. Equity Fund 0.70
Goldman Sachs Capital Growth Fund 0.75
Goldman Sachs CORE Large Cap Value Fund 0.70
Goldman Sachs CORE International Equity Fund 0.85
Goldman Sachs Short Duration Government Fund 0.55
Goldman Sachs Asset Management International
- --------------------------------------------
Goldman Sachs Global Income Fund 0.90
Goldman Sachs International Equity Fund 1.00
Dated: January 22,1999.
GOLDMAN SACHS VARIABLE INSURANCE TRUST
By: [signature illegible]
---------------------------
Title:
---------------------------
GOLDMAN SACHS ASSET MANAGEMENT,
a division of Goldman, Sachs & Co.
By: [signature illegible]
---------------------------
Title:
---------------------------
GOLDMAN SACHS ASSET MANAGEMENT INTERNATIONAL,
an affiliate of Goldman, Sachs & Co.
By: [signature illegible]
---------------------------
Title:
---------------------------
-1-
<PAGE>
EXHIBIT (D)(3)
GOLDMAN SACHS VARIABLE INSURANCE TRUST
4900 Sears Tower
Chicago, Illinois 60606
January 22, 1999
MANAGEMENT AGREEMENT
(ASSET ALLOCATION PORTFOLIOS)
-----------------------------
Goldman Sachs Asset Management
One New York Plaza
New York, New York 10004
Dear Sirs:
Goldman Sachs Variable Insurance Trust (the "Registrant") is organized as a
business trust under the laws of the State of Delaware to engage in the business
of an investment company. The shares of the Registrant ("Shares") may be divided
into multiple series ("Series"), including the Series listed on Annex A
(including any Series added to Annex A in the future, each a "Fund"). Each
Series will represent the interests in a separate portfolio of securities and
other assets. Each Series may be terminated, and additional Series established,
from time to time by action of the Trustees. The Registrant, on behalf of the
respective Funds, has selected you to act as an investment adviser and
administrator of the Funds designated on Annex A and to provide certain services
with respect to those Funds, as more fully set forth below, and you are willing
to act as such investment adviser and administrator and to perform such services
under the terms and conditions hereinafter set forth. Accordingly, the
Registrant agrees with you as follows:
1. Name of Registrant. The Registrant may use any name including or derived from
------------------
the name "Goldman Sachs" in connection with a Fund only for so long as this
Agreement or any extension, renewal or amendment hereof remains in effect,
including any similar agreement with any organization which shall have succeeded
to your business as investment adviser or administrator. Upon the termination of
this Agreement, the Registrant (to the extent that it lawfully can) will cause
the Funds to cease to use such a name or any other name indicating that it is
advised by or otherwise connected with you or any organization which shall have
so succeeded to your business.
<PAGE>
2. Affiliated Advisers and Sub-Advisors. At your discretion, you may provide
------------------------------------
advisory and administration services through your own employees or the employees
of one or more affiliated companies that are qualified to act as investment
adviser or administrator to the Registrant under applicable law and are under
the common control of Goldman, Sachs & Co. provided that (a) all persons, when
providing services hereunder, are functioning as part of an organized group of
persons; and (b) such organized group of persons is managed at all times by your
authorized officers. You may also engage one or more investment advisers which
are either registered as such or specifically exempt from registration under the
Investment Advisers Act of 1940, as amended, to act as sub-advisers to provide
with respect to any Fund certain services set forth in paragraphs 3 and 6
hereof, all as shall be set forth in a written contract to which the Registrant,
on behalf of the particular Fund, and you shall be parties, which contract shall
be subject to approval by the vote of a majority of the Trustees who are not
interested persons of you, the sub-adviser, or of the Registrant, cast in person
at a meeting called for the purpose of voting on such approval and by the vote
of a majority of the outstanding voting securities of the Fund and otherwise
consistent with the terms of the Investment Company Act of 1940, as amended (the
"1940 Act").
3. MANAGEMENT SERVICES.
--------------------
(a) You will regularly provide each Fund with investment
research, advice and supervision and will furnish continuously an
investment program for each Fund consistent with the investment objectives
and policies of the Fund. You will determine from time to time what
securities shall be purchased for a Fund, what securities shall be held or
sold by a Fund, and what portion of a Fund's assets shall be held
uninvested as cash, subject always to the provisions of the Registrant's
Declaration of Trust and By-Laws and of the 1940 Act, and to the investment
objectives, policies and restrictions of the Fund, as each of the same
shall be from time to time in effect, and subject, further, to such
policies and instructions as the Trustees of the Registrant may from time
to time establish. Without limiting the generality of the foregoing, you
will, subject to the foregoing limitations, (i) determine the amount each
Fund will invest, directly or indirectly, in equity, fixed income and money
market securities, (ii)evaluate the attributes of any investment company in
which a Fund may invest and (iii) determine the amount of each Fund's
assets that are invested in any one or more investment companies from time
to time.
(b) Subject to the general supervision of the Trustees of the
Registrant, you will provide certain administrative services to each Fund.
You will, to the extent such services are not required to be performed by
others pursuant to the custodian agreement (or the transfer agency
agreement to the extent that a person other than you is serving thereunder
as the Registrant's transfer agent), (i) provide supervision of all aspects
of each Fund's operations not referred to in paragraph (a) above; (ii)
provide each Fund with personnel to perform such executive, administrative
and clerical services as are reasonably necessary to provide effective
administration of the Fund; (iii) arrange for, at the Registrant's expense,
(A) the preparation for each Fund of all required tax returns, (B) the
preparation and submission of reports to existing shareholders and (c) the
periodic updating of the Fund's prospectuses and statements of additional
information and the preparation of reports filed with the Securities and
Exchange Commission and other
-2-
<PAGE>
regulatory authorities; (iv) maintain all of the Funds' records; and (v)
provide the Funds with adequate office space and all necessary office
equipment and services including telephone service, heat, utilities,
stationery supplies and similar items.
(c) You will also provide to the Registrant's Trustees such periodic
and special reports as the Trustees may reasonably request. You shall for
all purposes herein be deemed to be an independent contractor and shall,
except as otherwise expressly provided or authorized, have no authority to
act for or represent the Registrant or the Funds in any way or otherwise be
deemed an agent of the Registrant or the Funds.
(d) You will maintain all books and records with respect to the
Funds' securities transactions required by sub-paragraphs (b)(5), (6), (7),
(9) and (10) and paragraph (f) of Rule 31a-1 under the 1940 Act (other than
those records being maintained by the Funds' custodian or transfer agent)
and preserve such records for the periods prescribed therefor by Rule 31a-2
of the 1940 Act. You will also provide to the Registrant's Trustees such
periodic and special reports as the Board may reasonably request.
(e) You will notify the Registrant of any change in your membership
within a reasonable time after such change.
(f) Your services hereunder are not deemed exclusive and you shall be
free to render similar services to others.
4. Allocation of Charges and Expenses. You will pay all costs incurred by you
----------------------------------
in connection with the performance of your duties under paragraph 3. You will
pay the compensation and expenses of all personnel of yours and will make
available, without expense to the Funds, the services of such of your partners,
officers and employees as may duly be elected officers or Trustees of the
Registrant, subject to their individual consent to serve and to any limitations
imposed by law. You will not be required to pay any expenses of any Fund other
than those specifically allocated to you in this paragraph 4. In particular, but
without limiting the generality of the foregoing, you will not be required to
pay: (a) organization expenses of the Funds; (b) fees and expenses incurred by
the Funds in connection with membership in investment company organizations; (c)
brokers' commissions; (d) payment for portfolio pricing services to a pricing
agent, if any; (e) legal, auditing or accounting expenses (including an
allocable portion of the cost of your employees rendering legal and accounting
services to the Fund); (f) taxes or governmental fees; (g) the fees and expenses
of the transfer agent of the Registrant; (h) the cost of preparing stock
certificates or any other expenses, including clerical expenses of issue,
redemption or repurchase of Shares of the Fund; (i) the expenses of and fees for
registering or qualifying Shares for sale and of maintaining the registration of
the Funds and registering the Registrant as a broker or a dealer; (j) the fees
and expenses of Trustees of the Registrant who are not affiliated with you; (k)
the cost of preparing and distributing reports and notices to shareholders, the
Securities and Exchange Commission and other regulatory authorities; (l) the
fees or disbursements of custodians of each Fund's assets, including expenses
incurred in the performance of any obligations enumerated by the Declaration of
Trust or By-Laws of the Registrant insofar as they govern agreements with any
such custodian; or (m) litigation and indemnification expenses and other
extraordinary expenses not incurred in the
-3-
<PAGE>
ordinary course of the Fund's business. You shall not be required to pay
expenses of activities which are primarily intended to result in sales of Shares
of the Funds.
5. Compensation of the Manager.
---------------------------
(a) For all services to be rendered and payments made as provided in
paragraphs 3 and 4 hereof, the Registrant on behalf of each Fund will pay
you each month a fee at an annual rate equal to the percentage of the
average daily net assets of the Fund set forth with respect to such Fund on
Annex A. The "average daily net assets" of a Fund shall be determined on
the basis set forth in the Fund's prospectus(es) or otherwise consistent
with the 1940 Act and the regulations promulgated thereunder.
(b) In addition to the foregoing, you may from time to time agree not
to impose all or a portion of your fee otherwise payable hereunder (in
advance of the time such fee or portion thereof would otherwise accrue)
and/or undertake to pay or reimburse a Fund for all or a portion of its
expenses not otherwise required to be borne or reimbursed by you. Any such
fee reduction or undertaking may be discontinued or modified by you at any
time.
6. Avoidance of Inconsistent Position. In connection with purchases or sales
----------------------------------
of portfolio securities for the account of the Funds, neither you nor any of
your partners, officers or employees will act as a principal, except as
otherwise permitted by the 1940 Act. You or your agent shall arrange for the
placing of all orders for the purchase and sale of portfolio securities for each
Fund's account with brokers or dealers (including Goldman, Sachs & Co.)
selected by you. In the selection of such brokers or dealers (including Goldman,
Sachs & Co.) and the placing of such orders, you are directed at all times to
seek for the Funds the most favorable execution and net price available. It is
also understood that it is desirable for the Funds that you have access to
supplemental investment and market research and security and economic analyses
provided by brokers who may execute brokerage transactions at a higher cost to a
Fund than may result when allocating brokerage to other brokers on the basis of
seeking the most favorable price and efficient execution. Therefore, you are
authorized to place orders for the purchase and sale of securities for the Funds
with such brokers, subject to review by the Registrant's Trustees from time to
time with respect to the extent and continuation of this practice. It is
understood that the services provided by such brokers may be useful to you
in connection with your services to other clients. If any occasion should arise
in which you give any advice to your clients concerning the Shares of the
Funds, you will act solely as investment counsel for such clients and not in any
way on behalf of any Fund. You may, on occasions when you deem the purchase or
sale of a security to be in the best interests of a Fund as well as your other
customers (including any other Series or any other investment company or
advisory account for which you or any of your affiliates acts as an investment
adviser), aggregate, to the extent permitted by applicable laws and
regulations, the securities to be sold or purchased in order to obtain the best
net price and the most favorable execution. In such event, allocation of the
securities so purchased or sold, as well as the expenses incurred in the
transaction, will be made by you in the manner you consider to be the most
equitable and consistent with your fiduciary obligations to the Fund and to such
other customers. In addition, you are authorized to take into account the sale
of Shares of the Registrant in allocating purchase and sale orders for portfolio
securities to brokers or dealers (including brokers and dealers that are
affiliated with you), provided that you believe that the
-4-
<PAGE>
quality of the transaction and the commission is comparable to what they would
be with other qualified firms.
7. Limitation of Liability of Manager and Fund. You shall not be liable for
-------------------------------------------
any error of judgment or mistake of law or for any loss suffered by a Fund in
connection with the matters to which this Agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence on your part
in the performance of your duties or from reckless disregard by you of your
obligations and duties under this Agreement. Any person, even though also
employed by you, who may be or become an employee of and paid by the Registrant
or the Funds shall be deemed, when acting within the scope of his employment by
the Funds, to be acting in such employment solely for the Funds and not as your
employee or agent. A Fund shall not be liable for any claims against any other
Fund or Series of the Registrant.
8. Duration and Termination of this Agreement. This Agreement shall remain in
------------------------------------------
force as to each Fund until June 30, 2000 and shall continue for periods of one
year thereafter, but only so long as such continuance is specifically approved
at least annually (a) by the vote of a majority of the Trustees who are not
interested persons (as defined in the 1940 Act) of the Registrant and have no
financial interest in this Agreement, cast in person at a meeting called for the
purpose of voting on such approval and (b) by a vote of a majority of the
Trustees of the Registrant or of a majority of the outstanding voting securities
of such Fund. The aforesaid requirement that continuance of this Agreement be
"specifically approved at least annually" shall be construed in a manner
consistent with the 1940 Act and the rules and regulations thereunder. This
Agreement may, on 60 days written notice to the other party, be terminated in
its entirety or as to a particular Fund at any time without the payment of any
penalty, by the Trustees of the Registrant, by vote of a majority of the
outstanding voting securities of a Fund, or by you. This Agreement shall
automatically terminate in the event of its assignment. In interpreting the
provisions of this Agreement, the definitions contained in Section 2(a) of the
1940 Act (particularly the definitions of "interested person," "assignment" and
"majority of the outstanding voting securities"), as from time to time amended,
shall be applied, subject, however, to such exemptions as may be granted by the
Securities and Exchange Commission by any rule, regulation or order.
9 Amendment of this Agreement. No provisions of this Agreement may be
---------------------------
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought. No amendment of this Agreement shall be
effective as to a Fund until approved by vote of the holders of a majority of
the outstanding voting securities of such Fund and by a majority of the Trustees
of the Registrant, including a majority of the Trustees who are not interest
persons (as defined in the 1940 Act) of the Registrant and have no financial
interest in this Agreement, cast in person at a meeting called for the purpose
of voting on such amendment. Notwithstanding the foregoing, this Agreement may
be amended at any time to add to a new Fund to Annex A, or for any other reason
permitted by the 1940 Act and the regulations and interpretations thereunder,
provided such amendment is approved by a majority of the Trustees of the
Registrant, including a majority of the Trustees who are not interested persons
(as defined in the 1940 Act) of the Registrant and have no financial interest in
this Agreement. This paragraph does not apply to any agreement described in
paragraph 5(b) hereof, which shall be effective during the period you specify in
a prospectus, sticker, or other document made available to current or
prospective shareholders.
-5-
<PAGE>
10. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of New York.
11. Miscellaneous. The captions in this Agreement are included for convenience
-------------
of reference only and in no way define or delimit any of the provisions hereof
or otherwise affect their construction or effect. This Agreement may be
executed simultaneously in two or more counterparts, each of which shall be
deemed an original, but all of which together shall constitute one and the same
instrument.
The name Goldman Sachs Variable Insurance Trust is the designation of the
Trustees for the time being under an Agreement and Declaration of Trust dated
September 16, 1997 as amended from time to time, and all persons dealing with
the Trust or a Fund must look solely to the property of the Trust or such Fund
for the enforcement of any claims as none of the Trustees, officers, agents or
shareholders assume any personal liability for obligations entered into on
behalf of the Trust.
If you are in agreement with the foregoing, please sign the form of
acceptance on the Registrant counterpart of this letter and return such
conterpart to the Registrant, whereupon this letter shall become a binding
contract.
Yours very truly,
GOLDMAN SACHS VARIABLE INSURANCE TRUST
Attest: /s/ Michael Richman By: /s/ Douglas Grip
--------------------- ------------------------
Secretary of the Registrant President of the Registrant
The foregoing Agreement is hereby accepted as of the date thereof.
GOLDMAN SACHS ASSET MANAGEMENT,
A DIVISION OF GOLDMAN, SACHS & CO.
ATTEST: /s/ Michael Richman By: [SIGNATURE ILLEGIBLE]
--------------------- ------------------------
Counsel to the Funds Group Managing Director
-6-
<PAGE>
Annex A
Goldman Sachs Asset Management will provide the services provided for in the
attached Management Agreement with respect to the following Funds:
Goldman Sachs Growth Strategy Portfolio
Goldman Sachs Aggressive Growth Strategy Portfolio
Goldman Sachs Balanced Strategy Portfolio
Goldman Sachs Growth and Income Strategy Portfolio
Goldman Sachs Conservative Strategy Portfolio
For the services provided to the Funds under the Management Agreement Goldman
Sachs Asset Management will be entitled to receive a fee, with respect to each
Fund, equal to .15% (annualized) of a Fund's average daily net assets. The
Registrant understands that Goldman Sachs Asset Management and its affiliates
may receive compensation, inter alia, from the Funds for other, non-management
----- ----
services, and from investment companies in which the Funds invest for services
provided to such companies.
Dated: January 22, 1999
GOLDMAN SACHS VARIABLE
INSURANCE TRUST
By:[SIGNATURE ILLEGIBLE]
---------------------------------
Title:______________________________
GOLDMAN SACHS ASSET MANAGEMENT,
a division of Goldman, Sachs & Co.
By:[SIGNATURE ILLEGIBLE]
---------------------------------
Title:______________________________
-7-
<PAGE>
EXHIBIT (E)
GOLDMAN SACHS VARIABLE INSURANCE TRUST
AMENDED AND RESTATED DISTRIBUTION AGREEMENT
Jan. 22, 1999
- -------
Goldman, Sachs & Co.
85 Broad Street
New York, New YOrk 10004
Dear Sirs:
This is to confirm that, in consideration of the agreements hereinafter
contained, the undersigned, Goldman Sachs Variable Insurance Trust (the
"Trust"), an open-end management investment company organized as a business
-----
trust under the laws of the State of Delaware, and consisting of one or more
separate series, has appointed you, the "Distributor", and that you shall be the
-----------
exclusive distributor in connection with the offering and sale of the shares of
beneficial interest, no par value per share (the "Shares"), corresponding to
------
each of the series of the Trust listed in Exhibit A, as the same may be
---------
supplemented from time to time (each such series, a "Fund"), Each Fund may offer
----
one or more classes of its shares (each a "Class") which Classes shall have such
-----
relative rights and conditions and shall be sold in the manner set forth from
time to time in the Trust's Registration Statements, as defined below. The
organization, administration and policies of each Fund are described in its
respective Prospectuses and SAIs (as those terms are defined below). (This
letter, as amended from time to time, shall be referred to hereinafter as the
"Agreement".)
---------
1. DEFINITIONS.
-----------
(a) The terms which follow, when used in this Agreement, shall have
the meanings indicated.
"Effective Date" shall mean the date that any Registration Statement
--------------
or any post-effective amendment thereto becomes effective.
"Preliminary Prospectus" shall mean any preliminary prospectus
----------------------
relating to the Shares of a Fund or Funds or one or more Classes included
in any Registration Statement or filed with the Securities and Exchange
Commission (the "Commission") pursuant to Rule 497(a).
----------
"Prospectus" shall mean any prospectus relating to the Shares of a
----------
Fund or Funds or one or more Classes, filed with the Commission pursuant to
Rule 497 or, if no filing pursuant to Rule 497 is required, the form of
final prospectus relating thereto included in
<PAGE>
any Registration Statement, in each case together with any amendments or
supplements thereto.
"Registration Statement" shall mean any registration statement on
----------------------
Form N-1A relating to the Shares of a Fund, including all exhibits thereto,
as of the Effective Date of the most recent post-effective amendment
thereto. The registration statements of the Trust may be separately filed
with the Commission according to its fixed income, equity and money market
fund offerings.
"Rule 497" refers to such rule (or any successor rule or rules)
--------
under the Securities Act (as defined in Section 2 below).
"SAI" shall mean any statement of additional information relating to
---
the Shares of a Fund or Funds or one or more Classes, filed with the
Commission pursuant to Rule 497 or, if no filing pursuant to Rule 497 is
required, the final statement of additional information included in any
Registration Statement.
The "Initial Acceptance Date" of any Fund shall mean the first date
-----------------------
on which the Trust sells Shares of such Fund pursuant to any Registration
Statement.
References in this Agreement to "Rules and Regulations" shall be
---------------------
deemed to be references to such rules and regulations as then in effect,
and references to this Agreement and the Fund Agreements (as defined in
Section 2 below), shall be deemed to be references to such agreements as
then in effect.
2. REPRESENTATIONS AND WARRANTIES. The Trust represents and warrants to and
------------------------------
agrees with you, for your benefit, as set forth below in this Section 2.
Each of the representations, warranties and agreements made in this Section
2 shall be deemed made on the date hereof, on the date of any filing of any
Prospectus pursuant to Rule 497 and any Effective Date after the date
hereof, with the same effect as if made on each such date.
(a) The Trust meets the requirements for use of Form N-1A under the
Securities Act of 1933, as amended (the "Securities Act"), the Investment
--------------
Company Act of 1940, as amended (the "Investment Company Act"), and the
----------------------
Rules and Regulations of the Commission under each such Act and in respect
of said form (or of such successor form as the Commission may adopt). The
Trust has filed with the Commission an initial Registration Statement (File
Number 333-35883) on Form N-1A with respect to an indefinite number of
Shares of the Funds and is duly registered as an open-end management
investment company. The Registration Statement has become effective and no
stop order suspending its effectiveness has been issued and no proceeding
for that purpose has been initiated or threatened by the Commission.
-2-
<PAGE>
(b) The Trust's notification of registration on Form N-8A (as amended)
complies with the applicable requirements of the Investment Company Act and the
Rules and Regulations thereunder.
(c) Each Registration Statement, Prospectus and SAI conform, and any
further amendments or supplements to any Registration Statement, Prospectus or
SAI will conform, in all material respects, with the Securities Act and
Investment Company Act and the Rules and Regulations thereunder; the
Prospectuses and the SAIs do not include any untrue statement of a material fact
or omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; and, on each Effective Date, the Registration Statements did not and
will not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein not misleading; provided, however, that the Trust makes no
-------- -------
representations or warranties as to the information contained in or omitted from
any Registration Statement, Prospectus or SAI in reliance upon and in conformity
with information furnished in writing to the Trust by you (with respect to
information relating solely to your role as distributor of the Shares of the
Funds) expressly for use therein.
(d) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary Prospectus,
at the time of filing thereof, conformed in all material respects to the
requirements of the Securities Act and the Rules and Regulations of the
Commission thereunder, and did not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading; provided, however, that this representation and
warranty shall not apply to any statements or omissions made in reliance upon
and in conformity with information furnished in writing to the Trust by you
(with respect to information relating solely to your role as the exclusive
distributor of the Shares of the Funds) expressly for use therein.
(e) The Trust has been duly created and is lawfully and validly existing
as a business trust under the laws of the State of Delaware, and has, on the
date hereof, and will have, on and after the date hereof, full power and
authority to own its properties and conduct its business as described in each
Registration Statement, Prospectus and SAI, and is duly qualified to do business
under the laws of each jurisdiction which requires such qualification wherein it
owns or leases material properties or conducts material business.
(f) The Trusts's authorized capitalization is as set forth in the
Registration Statements. Issuance of the Shares of the Funds as contemplated by
this Agreement and by each Prospectus and SAI has been duly and validly
authorized, and the Shares of the Funds, when issued and paid for as
contemplated hereby and thereby, will be fully-paid and, except as contemplated
by the Prospectus and SAI, nonassessable and will conform to the
-3-
<PAGE>
description thereof contained in the corresponding Prospectus and SAI. The
holders of outstanding shares of each Fund are not entitled to preemptive
or other rights to subscribe for the Shares of any Fund, other than as
contemplated by the Prospectus and SAI relating to each fund.
(g) This Agreement has been duly authorized, executed and delivered
by the Trust.
(h) On or prior to the Initial Acceptance Date, all of the agreements
described in each Prospectus and SAI relating to the Fund or Funds whose
Shares are first being sold on such date (collectively, the "Fund
----
Agreements") will have been duly authorized, executed and delivered by the
----------
Trust, and will comply in all material respects with the Investment Company
Act and the Rules and Regulations thereunder.
(i) The Fund Agreements constitute or will constitute, on and after
the Initial Acceptance Date, assuming due authorization, execution and
delivery by the parties thereto other than the Trust, valid and legally
binding instruments, enforceable in accordance with their respective terms,
subject, as to enforceability, to bankruptcy, insolvency, reorganization,
and other laws of general applicability relating to or affecting creditors'
rights and to general equity principles.
(j) No consent, approval, authorization or order of any court or
governmental agency or body is or shall be required, as the case may be,
for the consummation from time to time of the transactions contemplated by
this Agreement and the Fund Agreements, except such as may be required (i)
under the Securities Act, the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), the Investment Company Act, the Rules and Regulations
------------
under each of the foregoing or the Conduct Rules of the National
Association of Securities Dealers, Inc. (the "NASD") (any of which that
----
were required before offers were made will have been obtained before such
offers were made and all of which will have been obtained, with respect to
each Fund, by the Effective Date of the post-effective amendment relating
to the Fund, except for those which become required under such acts or
rules or any other law or regulation after the Fund's Effective Date but
that were not required before such Effective Date, all of which shall be
obtained in a timely manner) or (ii) state securities laws of any
jurisdiction in connection with the issuance, offer or redemption of the
Shares of each Fund by the Trust.
(k) The operations and activities of the Trust and each Fund as
contemplated by the Prospectuses and the SAIs, the performance by the Trust
and each Fund of this Agreement and the Fund Agreements, the making of the
offer or the sale of Shares of each Fund and consummation from time to time
of such sales, the redemption of Shares of each Fund, or any other
transactions contemplated herein, in the Fund Agreements, in the
Prospectuses or in the SAIs, will not conflict with, result in a breach of,
or constitute a default under, the declaration of trust or the Trust's By-
laws or, in any material respect, the
-4-
<PAGE>
terms of any other agreement or instrument to which the Trust is a party or
by which it is bound, or any order or regulation applicable to the Trust of
any court, regulatory body, administrative agency, governmental body or
arbitrator having jurisdiction over the Trust.
(l) There is not pending, or to the best knowledge of the Trust,
threatened, any action, suit or proceeding before any court or governmental
agency, authority or body or any arbitrator to which the Trust is (or, to
the best knowledge of the Trust, is threatened to be) a party, of a
character required to be described in any Registration Statement,
Prospectus or SAI which is not described as required.
(m) There is no contract or other document of a character required to
be described in any Registration Statement, Prospectus or SAI, or to be
filed as an exhibit, which is not described or filed as required.
(n) Except as stated or contemplated in the Registration Statements,
Prospectuses and SAIs, (i) the Trust has not incurred any liabilities or
obligations, direct or contingent, or entered into any transactions,
whether or not in the ordinary course of business, that are material to the
Trust, (ii) there has not been any material adverse change, or, any
development involving a prospective material adverse change, in the
condition (financial or other) of the Trust, (iii) there has been no
dividend or distribution paid or declared in respect of the Trust, and (iv)
the Trust has not incurred any indebtedness for borrowed money.
(o) Each Fund will elect or has elected to be treated as a regulated
investment company as defined in Section 851 (a) of the Internal Revenue
Code of 1986 for its first taxable year and will operate so as to qualify
as such in its current and all subsequent taxable years.
(p) Except as stated or contemplated in any Prospectus or SAI, the
Trust owns all of its assets free and clear in all material respects of all
liens, security interests, pledges, mortgages, charges and other
encumbrances or defects.
3. SALES OF THE SHARES; OTHER SERVICES AS DISTRIBUTOR.
---------------------------------------------------
(a) The Trust hereby grants to you exclusive authority to distribute
the Trust shares to insurance companies ("Participating Insurance
-----------------------
Companies") and their separate accounts ("Participating Accounts") to find
--------- ----------------------
certain variable annuity contracts or variable life insurance policies (the
"Contracts") and to other persons or plans ("Participating Plans") that
-------- -------------------
qualify to purchase shares of the Trust under Section 817(h) of the
Internal Revenue Code and the regulations thereunder without impairing the
ability of the Participating Accounts to consider the portfolio investments
of the Trust as constituting investments of such Accounts for the purpose
of satisfying the diversification requirements of Section 817(h) (all such
persons being referred to herein as "Qualified Persons"). Such
-----------------
-5-
<PAGE>
authority shall include the right to select which Series or Classes of Shares
shall be made available to any Qualified Person. Such Shares shall be made
available to a Qualified Person (each purchasing Qualified Person being referred
to herein as a "Participating Investor") consistent with this Agreement, with
the relevant Prospectus, and with the terms and conditions of any exemptive
order obtained by the Trust from the SEC or SEC rule or regulation relied upon
by the Trust and, in the case of a Participating Insurance Company or a
Participating Plan owning more than 10% of the Trust's Shares, pursuant to an
agreement containing provisions consistent with the form of Participation
Agreement attached hereto. You are hereby authorized to enter into Participation
Agreements with Qualified Persons, and in connection therewith to make such
changes to the form of Participation Agreement attached hereto as you deem
appropriate in the circumstances, provided that the executed agreement is
consistent with the form of Participation Agreement attached hereto and with any
other Participation Agreements then in effect. You shall have the right to
suspend or terminate the offering of Shares to any Participating Investor
subject to any applicable conditions in the Participation Agreement with such
investor. In any event, the Trust reserves the right in its sole discretion to
refuse to accept a request for the purchase of Shares.
(b) You acknowledge that the only information provided to you by the
Trust is that contained in each Registration Statement, Prospectus and SAI.
Neither you nor any other persons is authorized by the Trust to give any
information or to make any representations, other than those contained in the
relevant Registration Statement, Prospectus and SAI and any sales literature
approved by appropriate representatives of the Trust. You may undertake or
arrange for such advertising and promotion as you believe is reasonable in
connection with the solicitation of orders to purchase Shares of a Fund;
provided, however, that you will provide the Trust with and obtain the Trust's
approval of copies of any advertising and promotional materials approved,
produced or used by you prior to their use (unless otherwise agreed by the
parties hereto). You will file such materials with the commission and the NASD
as may be required by the Exchange Act and the Investment Company Act and the
Rules and Regulations thereunder and by the rules of the NASD.
(c) You agree to perform such services as are described in each
Registration Statement, Prospectus and SAI as to be performed by the Distributor
including, without limitation, distributing Account Information Forms.
(d) All of your activities as distributor of the Shares of the Funds
shall comply, in all material respects, with all applicable laws, Rules and
Regulations, including, without limitation, all rules and regulations made or
adopted by the Commission or by any securities association registered under the
exchange Act, including the NASD, as in effect from time to time.
-6-
<PAGE>
4. Offering by the Distributor.
---------------------------
(a) You will act as agent for the Trust in the distribution of Shares
of the Funds and you agree to use your best efforts to offer and sell Shares of
the Funds as provided for in Section 3 of this Agreement. You may also subscribe
for Shares of a Fund as principal for resale to Participating Investors,
provided you qualify as a Qualified Person. You shall devote reasonable time and
effort to effect sales of Shares of the Funds, but you shall not be obligated to
sell any specific number of Shares. Nothing contained herein shall prevent you
from entering into like distribution arrangements with other investment
companies. The Trust may appoint Participating Insurance Companies that have
entered into Participation Agreements as an agent of the Trust for the limited
purpose or receiving purchase and redemption requests on behalf of their
Participating Account (but not with respect to any Trust shares that may be held
in the general account of such Company) for Shares of those Series or Classes
made available thereunder, based on allocations of amounts to the Participating
Account or subaccounts thereof under the Contracts, other transactions relating
to the Contracts or the Participating Account and customary processing of the
Contracts.
(b) The Trust shall redeem Shares of any Fund presented to it by
Participating Investors at the price determined in accordance with, and in the
manner set forth in, the Prospectus for such Fund and the Participation
Agreement with such investor, as applicable.
(c) Unless you are otherwise notified by the Trust, any right granted
to you to accept orders for Shares of any Fund or to make sales on behalf of the
Trust or to purchase Shares of any Fund for resale will not apply to (i) Shares
issued in connection with the merger or consolidation of any other investment
company with the Trust or its acquisition, by purchase or otherwise, of all or
substantially all of the assets of any investment company or substantially all
the outstanding securities of any such company, and (ii) Shares that may be
offered by the Trust to shareholders by virtue of their being such shareholders.
5. Compensation.
------------
(a) It is not anticipated that any Shares will be subject to a sales
charge or a contingent deferred sales charge. In the event that any Shares of a
Class are subject to a sales charge or a contingent deferred sales charge, you
will be entitled to receive that portion of the sales charges or contingent
deferred sales charge applicable to sales of Shares of a Class as set forth in
the relevant Prospectus.
(b) The Trust may enter into Plans of Distribution pursuant to Rule
12b-1 under the 1940 Act ("Rule 12b-1 Plans") with respect to certain classes of
certain Funds. The Trust shall pay to you as distributor of such Classes the
compensation pursuant to the Rule 12b-1 Plans as shall be set forth from time to
time in the Prospectuses and SAIs and provided for under the Rule 12b-1 Plan.
-7-
<PAGE>
(c) The Trust shall not be obligated to pay you compensation with respect
to your distribution of Shares that are not subject to a sales charge;
contingent deferred sales charge or Rule 12b-1 Plan. The amounts payable as
compensation pursuant to this Section 5 shall be subject to the limitations in
Section 2830 of the Conduct Rules of the NASD, to the extent applicable to the
Trust.
6. Undertakings. The Trust agrees with you, for your benefit, that:
------------
(a) The Trust shall sell Shares of Funds in accordance with the terms
of each Participation Agreement or otherwise so long as it has such Shares
available for sale and, in the case of sales covered by any Participation
Agreement, no suspensions or terminations thereunder are in effect, and shall
cause the transfer agent (the "Transfer Agent") to record on its books the
--------------
ownership of such Shares registered in such names and amounts as you have
requested in writing or other means, as promptly as practicable in accordance
with the terms and conditions of any Participation Agreements and the relevant
Prospectus. The Trust will make such filings under the Investment Company Act
with, and pay such fees to, the Commission as are necessary or required to
register Shares of any Fund sold by you on behalf of the Trust. Prior to the
termination of this Agreement, the Trust will not file any amendment to any
Registration Statement or amendment or supplement to any Prospectus or SAI
(whether pursuant to the Securities Act, the Investment Company Act, or
otherwise) without prior notice to you; provided, however, that nothing
-------- -------
contained in this Agreement shall in any way limit the Trust's right to file
such amendments to any Registration Statement, or amendments or supplements to
any Prospectus or SAI as the Trust may deem advisable, such right being in all
respects absolute and unconditional, it being understood that this proviso shall
not relieve the Trust of its obligation to give prior notice of any such
amendment or supplement to you. Subject to the foregoing sentence, if the filing
of any Prospectus or SAI, as the case may be, contained in any Registration
Statement at the relevant Effective Date, or any amendment or supplement
thereto, is required under Rule 497, the Trust will cause such Prospectus or
SAI, and any amendment or supplement thereto, to be filed with the Commission
pursuant to the applicable paragraph of Rule 497 within the time period
prescribed and will, if requested, provide evidence satisfactory to you of such
timely filing. The Trust will promptly advise you (i) when such Prospectus or
SAI shall have been filed (if required) with the Commission pursuant to Rule
497, (ii) when, prior to termination of this Agreement, any amendment to any
Registration Statement shall have been filed or become effective, (iii) of any
request by the Commission for any amendment of any Registration Statement or
amendment or supplement to any Prospectus or SAI or for any additional
information relating to or that could affect disclosure in any of the foregoing,
(iv) of the issuance by the Commission of any order suspending the effectiveness
of any Registration Statement, or suspending the registration of the Trust under
the Investment Company Act, or the institution or (to the best knowledge of the
Trust) threatening of any proceeding for that purpose, and (v) of the receipt by
the Trust of any notification with respect to the suspension of the
qualification of the offer or sale of
-8-
<PAGE>
Shares of a Fund in any jurisdiction or the initiation or (to the best knowledge
of the Trust) threatening of any proceeding for such purpose. The Trust will use
its best efforts to prevent the issuance of any such order or suspension and, if
issued, to obtain as soon as possible the withdrawal or suspension thereof.
(b) If, at any time when a Prospectus or SAI is required to be
delivered under the Securities Act, any event occurs as a result of which such
Prospectus or SAI would include any untrue statement of a material fact or omit
to state any material fact necessary to make the statements therein, in the
light of the circumstances under which they were made not misleading, or if it
shall be necessary to amend any Registration Statement or amend or supplement
any Prospectus or SAI to comply with the Securities Act, the Investment Company
Act or the Rules and Regulations thereunder, the Trust will notify you promptly
of any such circumstances and promptly will prepare and file with the
commission, subject to the third sentence of Section 6(a), an amendment or
supplement which will correct such statement or omission or effect such
compliance.
(c) As soon as practicable (giving effect to the normal periodic
reporting requirements under the Investment Company Act and the Rules and
Regulations thereunder), the Trust will make generally available to its
shareholders and, subject to Section 8 of this Agreement, to you, a report
containing the financial statements required to be included in such reports
under Section 30(d) of the Investment Company Act and Rule 30d-1 thereunder.
(d) Subject to Section 8 of this Agreement, the Trust will furnish to
you as many conformed copies of the Registration Statements including exhibits
thereto, on each Effective Date, as you may reasonably request for yourself
and, so long as a delivery of a Prospectus or SAI by you may be required by law,
the number of copies of each Prospectus and each SAI as you may reasonably
request for yourself.
(e) Consistent with the practice of mutual funds whose shares are made
available only to Qualified Persons, the Trust shall undertake to comply with
the terms and conditions relevant exemptions from the securities laws of such
of the 50 states of the United States, the District of Columbia, the
Commonwealth of Puerto Rico, the Territory of Guam and such other jurisdictions
as you and the Trust may approve. To the extent that exemptions from securities
laws in any such jurisdiction are not available to the Trust and its Shares, the
Trust shall use its best efforts to comply with the registration, notification
or qualifications in effect as long as may be reasonably requested by you,
provided that the Trust shall not be required in connection herewith or as
condition hereto to qualify as foreign corporation or to execute a general
consent, to service of process in any jurisdiction. You shall furnish such
information and other material relating to your affairs and activities as may be
required by the Trust in connection with such qualifications.
-9-
<PAGE>
(f) The Trust shall keep you fully informed with respect to its affairs
and, subject to Section 8 of this Agreement, the trust, if so requested, will
furnish to you, as soon as they are available, copies of all reports,
communications and financial statements sent by the Trust to its shareholders
or filed by, or on behalf of, the Trust with the Commission.
(g) The Trust, if so requested, shall furnish to you a copy of the
opinion of counsel for the Trust to the effect that the Shares issued by the
Trust are legally issued, fully paid and nonassessable. The Trust further agrees
that if, in connection with the filing of any post-effective amendment to any
Registration Statement after the date of this Agreement:
(i) a change is made to the statements under the caption "Shares
of the Fund" in any Prospectus or SAI that is deemed material by you,
the Trust, if so requested, shall furnish to you an opinion of counsel
for the Trust, dated the date of such post-effective amendment, to the
effect of Section 2 (to the extent it relates to the description of the
Shares);
(ii) the Fund Agreements are amended or modified in any manner,
the Trust, if so requested, shall furnish to you an opinion of counsel
for the Trust, dated the date of such post-effective amendment; or
(iii) any change is made to the statements under the caption
"Taxation" in any Prospectus or SAI, the Trust, if so requested, shall
furnish to you an opinion of counsel for the Trust, dated the date of
such post-effective amendment.
Any opinion or statement furnished pursuant to this Section 6(g) shall be
modified as necessary to relate to this Agreement and the Fund Agreements and
the Rules and Regulations as then in effect.
(h) The Trust, if so requested, shall furnish to you on each subsequent
Effective Date with respect to an amendment of a Registration Statement which
first included certified financial statements for the preceding fiscal year, in
respect of a Fund, a copy of the report of the Trust's independent public
accountants with respect to the financial statements and selected per share data
and ratios relating to such Fund, addressed to you. The Trust further agrees
that the Trust, if so requested, shall furnish to you (i) on each date on which
the Trust, pursuant to the preceding sentence, furnishes to you a report of its
independent public accountants, a certificate of its treasurer or assistant
treasurer in a form reasonably satisfactory to you describing in reasonable
detail how the figures included under the captions "Portfolio Transactions" and
"Performance Information" (or similar captions) in the prospectus or SAI of such
Fund and the figures relating to the aggregate amounts of remuneration paid to
officers, trustees and members of the advisory board and affiliated persons
thereof (as required by Section 30(d)(5) of the Investment Company Act)
-10-
<PAGE>
were calculated and confirming that such calculations are in conformity
with the Rules and Regulations under the Investment Company Act and (ii)
on each date the Trust files with the Commission the Trust's required
semi-annual financial statements, an certificate of its treasurer or
assistant treasurer in a form reasonably satisfactory to you, describing
the manner in which such financial statements were prepared and
confirming that such financial statements have been prepared in
conformity with the Rules and Regulations under the Investment Company
Act.
7. Conditions to Your Obligations as Distributor and Principal Underwriter.
-----------------------------------------------------------------------
Your obligations as distributor of the Shares of the Funds shall be
subject to the accuracy of the representations and warranties on the
part of the Trust contained herein as of the dates when made or deemed
to have been made, to the accuracy in all material respects of the
statements made in any certificates, letters or opinions delivered
pursuant to the provisions of Sections 6 or 7 of this Agreement, to the
performance by the Trust of its obligations hereunder and the following
additional conditions:
(a) If filing of any Prospectus or SAI, or any amendment or
supplement to any Prospectus or SAI, or any other document is required
pursuant to any applicable provision of Rule 497, such Prospectus or
SAI, or any such amendment or supplement and other document will be
filed in the manner and within the time period required by the
applicable provision of Rule 497; and no order suspending the
effectiveness of the amendment shall have been issued and no proceedings
for that purpose shall have been instituted or, to the best knowledge of
the Trust, threatened and the Trust shall have complied with any request
of the Commission for additional information (to be included in the
relevant Registration Statement, Prospectus, SAI or as the Commission
otherwise shall have requested).
(b) At the Initial Acceptance Date with respect to each Fund,
you shall have received from counsel to the Distributor, if so
requested, such opinion or opinions, dated the Initial Acceptance Date,
with respect to the issuance and sale of the Shares, the relevant
Registration Statement, Prospectus and SAI and other related matters as
you may reasonably require, and the Trust shall have furnished to such
counsel such documents as they may request for the purpose of enabling
them to pass upon such matters.
(c) There shall not have been any change, or any development
involving a prospective change, in or affecting the Trust the effect of
which in any case is, in your good faith judgment, so material and
adverse as to make it impractical or inadvisable to proceed with the
offering of Shares of the Funds as contemplated by this Agreement.
(d) On or after the date hereof there shall not have occurred
any of the following: (i) a suspension or material limitation in trading
in securities generally on the New York Stock Exchange; (ii) a general
moratorium on commercial banking activities in New York declared by
either Federal or New York State authorities; (iii) the outbreak or
escalation of hostilities involving the United States or the declaration
of a national
-11-
<PAGE>
emergency or war if the effect of any such event specified in this Clause
(iii) in your judgment makes it impracticable or inadvisable to proceed with
the public offering or the delivery of the Shares of a Fund on the terms and
in the manner contemplated in any Prospectus.
(e) The Trust shall have furnished to you such further information,
certificates and documents as you may have reasonably requested.
If any of the conditions specified in this Section 7 shall not have been
fulfilled in all material respects when and as provided in this Agreement, or
if any of the opinions, certificates or letters mentioned above or elsewhere
in this Agreement shall not be in all material respects reasonably
satisfactory in form and substance to you, this Agreement and all your
obligations hereunder may be cancelled by you. In the event of such
cancellation, the Trust shall remain liable for the expenses set forth in
Section 8.
8. Expenses.
--------
(a) The Trust will pay (or will enter into arrangements, including
Participation Agreements, providing that parties other than you will pay) all
fees and expenses:
(1) in connection with the preparation, setting in type and
filing of the Registration Statements (including Prospectuses and SAIs) under
the Securities Act or the Investment Company Act, or both, and any amendments or
supplements thereto that may be made from time to time;
(2) in connection with the exemption, registration,
notification and qualification of Shares of the Funds for sale in the various
jurisdictions in accordance with Section 6(c) of this Agreement (including
registering the Trust as a broker or dealer or any officer of the Trust or other
person as agent or salesman of the Trust in any such jurisdictions);
(3) of preparing, setting in type, printing and mailing any
notice, proxy statement, report, Prospectus, SAI or other communication to
shareholders in their capacity as such;
(4) of preparing, setting in type, printing and mailing
Prospectuses annually, and any supplements thereto, to existing shareholders;
(5) in connection with the issue and transfer of Shares of
the Funds resulting from the acceptance by you of orders to purchase Shares of
the Funds placed with you by investors, including the expenses of printing and
mailing confirmations of such purchase orders and the expenses of
-12-
<PAGE>
printing and mailing a Prospectus included with the confirmation of such order
and, if requested by the purchaser, an SAI;
(6) of any issue taxes or any initial transfer taxes;
(7) of WATS (or equivalent) telephone lines other than the portion
allocated to you in this Section 8;
(8) of wiring funds in payment of Shares purchases or in satisfaction
of redemption or repurchase requests, unless such expenses are paid for by the
investor or shareholder who initiates the transaction;
(9) of the cost of printing and postage of business reply envelopes
sent to shareholder;
(10) of one of more CRT terminals connected with the computer
facilities of the Transfer Agent other than the portion allocated to you in this
Section 8;
(11) permitted to be paid or assumed by any Fund or Funds, or any Class
thereof pursuant to (a) Rule 12b-1 Plan adopted by such Fund or Funds in
conformity with the requirements of Rule 12b-1 under the Investment Company Act
("Rule 12b-1) or any successor rule, notwithstanding any other provision to the
contrary herein or (b) any other plan adopted by a Fund providing for account
adminstration or shareholder liaison services (a "Service Plan");
(12) of the expenses of setting in type, printing and postage of any
periodic newsletter to shareholder other than the portion allocated to you in
this Section 8; and
(13) of the salaries and overhead of persons employed by you as
shareholder representatives other than the portion allocated to you in this
Section 8.
(b) Except as provided in any Rule 12b-1 Plan or Service Plan, you shall pay
or arrange for the payment of all fees and expenses.
(1) of printing and distributing any Prospectuses or reports prepared
for your use in connection with the offering of Shares of the Funds to the
extent not paid for by the Trust of any Participating Insurance Company under a
Participation Agreement;
-13-
<PAGE>
(2) of preparing, setting in type, printing and mailing any
other literature used by you in connection with the offering of Shares
of the Funds to the extent not paid for by the Trust or any
Participating Insurance Company under a Participation Agreement;
(3) of advertising in connection with the offering of Shares of
the Funds to the extent not paid for by the Trust or any Participating
Insurance Company under a Participation Agreement;
(4) incurred in connection with your registration as a broker
or dealer or the registration or qualification of your officers,
partners, directors, agents or representatives under Federal and state
laws;
(5) of that portion of WATS (or equivalent) telephone lines
allocated to you on the basis of use by investors (but not shareholders)
who request information or Prospectuses;
(6) of that portion of the expense of setting in type, printing
and postage of any periodic newsletter to shareholders attributable to
promotional material included in such newsletter at your request
concerning investment companies other than the Trust or concerning the
Trust to the extent you are required to assume the expense thereof
pursuant to this Section 8, except such material which is limited to
information, such as listings of other investment companies and their
investment objectives, given in connection with the exchange privilege
as from time to time described in the Prospectuses;
(7) of that portion of the salaries and overhead of persons
employed by you as a shareholder representatives attributable to the
time spent by such persons in responding to requests from investors, but
not shareholders, for information about the Trust;
(8) of any activity which is primarily intended to result in
the sale of Shares of any Class of a Fund, unless a 12b-1 Plan shall be
in effect which provides that shares of such Classes shall bear some or
all of such expenses, in which case such Class shall bear such expenses
in accordance with such Plan; and
(9) of that portion of one or more CRT terminals connected with
the computer facilities of the Transfer Agent attributable to your use
of such terminal(s) to gain access to such of the Transfer Agent's
records as also serve as your records.
-14-
<PAGE>
Expenses which are to be allocated between you and the Trust
shall be allocated pursuant to reasonable procedures or formulae
mutually agreed upon from time to time, which procedures or
formulae shall to the extent practicable reflect studies of
relevant empirical data.
9. Indemnification and Contribution.
--------------------------------
(a) The Trust will indemnify you and hold you harmless against
any losses, claims, damages or liabilities, to which you may become
subject, under the Securities Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement
of a material fact contained in any Preliminary Prospectus, Registration
Statement, Prospectus, or SAI or arise out of or are based upon the
omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statement therein not
misleading, and will reimburse you for any legal or other expenses
reasonably incurred by you in connection with investigating or defending
any such action or claim; provided, however, that the Trust shall not be
liable in any such case to the extent that any such loss, claim, damage
or liability arises out of or is based upon untrue statement or alleged
untrue statement or omission or alleged omission made in any
Registration Statement, any Preliminary Prospectus, or any Prospectus or
SAI in reliance upon and in conformity with written information
furnished to the Trust by you expressly for use therein.
(b) You will indemnify and hold harmless the trust against any
losses, claims damages or liabilities to which the trust may become
subject, under the Securities Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof), arise
out of or are based upon an untrue statement or alleged untrue statement
of a material fact contained in any Registration Statement, any
Preliminary Prospectus, or any Prospectus or SAI, or arise out of or are
based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was made in any Registration Statement, any
Preliminary Prospectus, or any Prospectus or SAI in reliance upon and in
conformity with written information furnished to the Trust by you
expressly for use therein; and will reimburse the Trust for any legal or
other expenses reasonably incurred by the Trust in connection with
investigating or defending any such action or claim.
(c) Promptly after receipt by an indemnified party under
subsection (a) or (b) above of notice of the commencement of any action,
such indemnified party shall, if a claim in respect thereof is to be
made against the indemnifying party under such subsection, notify the
indemnifying party in writing of the commencement thereof; but the
omission so to notify the indemnifying party shall not relieve it from
any liability which it may have to any indemnified party otherwise than
under such subsection. In case any such action shall be brought against
any indemnified party and it shall notify the indemnifying party of the
-15-
<PAGE>
commencement thereof the indemnifying party shall be entitled to participate
therein and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party (who shall not, except with the
consent of the indemnified party, be counsel to the indemnifying party), and,
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party shall not be
liable to such indemnified party under such subsection for any legal expenses of
other counsel or any other expenses, in each case subsequently incurred by such
indemnified party, in connection with the defense thereof other than reasonable
costs of investigation.
(d) If the indemnification provided for in this Section 9 is unavailable
to, or insufficient to hold harmless, an indemnified party under subsection (a)
or (b) above in respect of any losses, claims, damages or liabilities (or
actions in respect thereof) referred to therein, then each indemnifying party
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages or liabilities (or actions in respect
thereof) in such proportion as is appropriate to reflect the relative benefits
received by the Trust on the one hand and you on the other from the offering of
the Shares of the Fund or Funds in respect of which such losses, claims, damages
or liabilities (or actions in respect thereof) arose. If, however, the
allocation provided by the immediately preceding sentence is not permitted by
applicable law or if the indemnified party failed to give the notice required
under subsection (c) above, then each indemnifying party shall contribute to
such amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Trust on the one hand and you on the other in connection with the
statements or omissions which resulted in such losses, claims, damages or
liabilities (or actions in respect thereof) as well as any other relative
equitable considerations. The relative benefits received by the Trust on the one
hand and you on the other shall be deemed to be in the same proportion as the
total net proceeds from the offering of the Shares of the relevant Funds (before
deducting expenses) received by the Trust bear to the total compensation
received by you in selling Shares of such Funds under this Agreement, including
any sales charge as set forth in the Prospectus. The relative fault shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Trust on the one hand or
you on the other and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Trust and you agree that it would not be just and equitable if the
contributions pursuant to this subsection (d) were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to above in this subsection (d). The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages or liabilities (or actions in respect thereof) referred to above
in this subsection (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
subsection (d), you shall not be required to contribute any amount in excess of
the
-16-
<PAGE>
amount by which the total price at which the Shares of the relevant Funds sold
by you and distributed to the public were offered to the public exceeds the
amount of any damages which you have otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
(e) The obligations of the Trust under this Section 9 shall be in
addition to any liability which the Trust may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls you
within the meaning of the Securities Act; and your obligations under this
Section 9 shall be in addition to any liability which you may otherwise have
and shall extend, upon the same terms and conditions, to each trustee or officer
of the Trust (including any person who, with his consent, is named in the
relevant Registration Statement as about to become a trustee of the Trust) and
to each person, if any, who controls the Trust within the meaning of the
Securities Act.
10. Term.
----
(a) This Agreement shall commence on the date first set forth above and
continue in effect until June 30, 1999 and then for successive annual periods
after June 30, 1999, provided such continuance after the initial term is
specifically approved at least annually by (i) the Trustees of the Trust or (ii)
a vote of a majority (as defined in the Investment Company Act) of the Fund's
outstanding voting securities, provided that in either event the continuance is
also approved by a vote of a majority of the Trustees of the Trust who are not
interested persons (as defined in the Investment Company Act) of the Trust or
any party to this Agreement, by vote cast in person at a meeting called for
the purpose of voting on such approval. The Trust authorizes you, if and when
you so determine, to assign to a third party any payments with respect to one or
more Classes of Shares that you are entitled to receive for your services
hereunder, including any payments of initial or deferred sales charges or
payments in accordance with a Rule 12b-1 or Service Plan so long as such Plan is
in effect, free and clear of any offset, defense or counterclaim the Trust may
have against you and except to the extent that any change or modification after
the date hereof of (x) the provisions of the Investment Company Act, the Rules
and Regulations thereunder or other applicable law or (y) any interpretation of
the Investment Company Act, the Rules and Regulations thereunder or other
applicable law shall restrict your right to make such transfer free and clear of
any offset, defense or counterclaim.
(b) The sale of Shares of the Funds in accordance with the terms of
this Agreement shall be subject to termination or suspension in the absolute
discretion of the Trust, by notice given to you as set forth in Section 12
hereof.
-17-
<PAGE>
(c) This Agreement will terminate automatically in the event of its
assignment (as defined in the Investment Company Act).
11. Representation and Indemnities to Survive. The respective agreements,
-----------------------------------------
representations, warranties, indemnities and other statements of the Trust
and you set forth in or made pursuant to this Agreement will, to the extent
permitted by applicable law, remain in full force and effect, regardless of
any investigation made by or on behalf of you, any Authorized Dealer or the
Trust, or any of the controlling persons referred to in Section 9 hereof,
and will survive the offer of the Shares of the Funds. The provisions of
Section 8, 9 and 11 hereof and your right to receive any contingent deferred
sale charges shall, to the extent permitted by applicable law, survive the
termination or cancellation of this Agreement.
12. Notices. All communications hereunder will be in writing and effective only
-------
on receipt, and, if sent to you, mailed, delivered or telegraphed and
confirmed to you at Goldman, Sachs & Co., 85 Broad Street, New York, New
York 10004, Attention: Registration Department (Distributors - Goldman Sachs
Funds) or, if sent to the Trust, mailed, delivered or telegraphed and
confirmed to it at Goldman Sachs Trust, 4900 Sears Tower, Chicago, Ill.
60606, Attention: Secretary.
13. Affiliates. The Trust recognizes that your partners, officers and employees
----------
may from time to time serve as directors, trustees, officers and employees
of corporations and business entities (including other investment
companies), and that you or your affiliates may enter into distribution or
other agreements with other corporations and business entities.
14. Successors. This Agreement will inure to the benefit of and be binding upon
----------
the parties hereto and their respective successors and, to the extent set
forth herein, each of the officers, trustees and controlling persons
referred to in Section 9 hereof, and no other person will have any right or
obligation hereunder.
15. Applicable Law. This Agreement will be governed by and construed in
--------------
accordance with the laws of the State of New York.
16. Miscellaneous. The captions in this Agreement are included for convenience
-------------
of reference only and in no way define or delimit any of the provisions
hereof or otherwise affect their construction or effect. This Agreement may
be executed simultaneously in two or more counterparts, each of which shall
be deemed an original, but all of which together shall constitute one and
the same instrument.
The name "Goldman Sachs Variable Insurance Trust" is the designation of the
Trustees for the time being under an Agreement and Declaration of Trust
dated September 16, 1997, as amended from time to time, and all persons
dealing with the Trust must look solely to the property of the Trust for the
enforcement of any claims against the Trust as neither the
-18-
<PAGE>
Trustees, officers, agents or shareholders assume any personal liability
for obligations entered into on behalf of the Trust. No series of the
Trust shall be liable for any claims against any other series of the
Trust.
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to us the enclosed duplicate hereof, whereupon this
letter and your acceptance shall represent a binding agreement between you and
the Trust, and, to the extent set forth herein, shall be for the benefit of each
Authorized Dealer.
Very truly yours,
GOLDMAN SACHS VARIABLE INSURANCE TRUST
By: /s/ Douglas C. Grip
---------------------------------
Name: Douglas C. Grip
Title: President
The foregoing Agreement is
hereby confirmed and accepted
as of the date first above
written.
/s/ David B. Ford
- -----------------------
(Goldman, Sachs & Co.)
David B. Ford
-19-
<PAGE>
EXHIBIT A
---------
Series ("Funds") of GOLDMAN SACHS VARIABLE INSURANCE TRUST, a Delaware business
- -------------------------------------------------------------------------------
trust (the "Trust")
- -------------------
GOLDMAN SACHS FIXED INCOME FUNDS:
- --------------------------------
Goldman Sachs Global Income Fund
Goldman Sachs High Yield Fund
Goldman Sachs Short Duration Government Fund
GOLDMAN SACHS EQUITY FUNDS:
- --------------------------
Goldman Sachs CORE Large Cap Growth Fund
Goldman Sachs CORE U.S. Equity Fund
Goldman Sachs CORE Small Cap Equity Fund
Goldman Sachs Growth and Income Fund
Goldman Sachs Capital Growth Fund
Goldman Sachs International Equity Fund
Goldman Sachs Mid Cap Equity Fund
Goldman Sachs CORE Large Cap Value Fund
Goldman Sachs CORE International Equity Fund
GOLDMAN SACHS ASSET ALLOCATION PORTFOLIOS:
- -----------------------------------------
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
-20-
<PAGE>
[LOGO OF STATE STREET APPEARS HERE] Exhibit (g)(2)
STATE STREET BANK AND TRUST COMPANY
CUSTODIAN FEE SCHEDULE
GOLDMAN SACHS VARIABLE INSURANCE TRUST
Goldman Sachs CORE Large Cap Value Fund
Goldman Sachs CORE International Equity Fund
Goldman Sachs Short Duration Government Fund
--------------------------------------------------------------------------
I. Administration
--------------
Custody, Portfolio and Fund Accounting Service-Maintain custody of fund
----------------------------------------------
assets. Settle portfolio purchases and sales. Report buy and sell fails.
Determine and collect portfolio income. Make cash disbursements and report
cash transactions. Maintain investment ledgers, provide selected portfolio
transactions, position and income reports. Maintain general ledger and
capital stock accounts. Prepare daily trial balance. Calculate net asset
value daily. Provide selected general ledger reports.
The administration fee shown below is an annual charge, billed and payable
monthly, based on average monthly net assets.
ANNUAL FEES PER PORTFOLIO
-------------------------
Fund Net Assets Annual Fees
--------------- -----------
First One Billion 1/100 of 1%
Next One Billion 1/133 of 1%
Excess 1/200 of 1%
Minimum Monthly Charges $1500.00
Monthly Multiple Class Fee Per Additional Class:
2nd Class $900.00
3rd Class $750.00
Each additional class $600.00
II. Global Custody-Comprised of asset charges and transaction charges.
--------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Group I Group II Group III Group IV Group V Group VI Group VII Group VIII
- ------- -------- --------- -------- ------- -------- --------- ----------
Canada Austria Australia Finland Argentina Bangladesh Cyprus Russia
Euroclear Hong Kong Belgium France Brazil Botswana Ghana Swaziland
South Africa Malaysia Denmark Indonesia Chile Colombia Uruguay Zambia
Mexico New Zealand Ireland China Czech
Singapore Netherlands Italy Greece Egypt
Thailand Norway Korea India Ecuador
United Kingdom Switzerland Phillippines Poland Hungary
W. Germany Sweden Portugal India-
Slovakia Standard
Sri Lanka Chartered
Spain Israel
Taiwan Jamaica
Turkey Jordan
Venezuela Kenya
Mauritius
Morocco
Namibia
Pakistan
Peru
Tunisia
Zimbabwe
</TABLE>
<PAGE>
[LOGO OF STATE STREET APPEARS HERE]
STATE STREET BANK AND TRUST COMPANY
CUSTODIAN FEE SCHEDULE
GOLDMAN SACHS VARIABLE INSURANCE TRUST
Goldman Sachs CORE Large Cap Value Fund
Goldman Sachs CORE International Equity Fund
Goldman Sachs Short Duration Government Fund
-----------------------------------------------------------
<TABLE>
<CAPTION>
Asset Charge
- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(in Basic Points) Group I Group II Group III Group IV Group V Group VI Group VII Group VIII
------- -------- --------- -------- ------- -------- --------- ----------
5 7 10 12 15 40 50 60
Transaction Charges:
Group I Group II Group III Group IV Group V Group VI Group VII Group VIII
------- -------- --------- -------- ------- -------- --------- ----------
$25 $30 $45 $60 $75 $125 $150 $150
</TABLE>
Japan - 6 Basic Points Asset Charge - $20 Transaction Charge
III. Portfolio Trades - For each line item processed
-----------------------------------------------
State Street Bank Repos $ 7.00
DTC or Fed Book Entry $10.00
New York Physical Settlements $20.00
Maturity Collections $ 8.00
PTC Purchase, Sales, Deposit or Withdrawal $20.00
All other Trades $16.00
IV Options
-------
Option charge for each option written or closing
contract, per issue, per broker $25.00
Option expiration charge, per issue, per broker $15.00
Option exercised charge, per issue, per broker $15.00
<PAGE>
[LOGO OF STATE STREET APPEARS HERE]
STATE STREET BANK AND TRUST COMPANY
CUSTODIAN FEE SCHEDULE
GOLDMAN SACHS VARIABLE INSURANCE TRUST
Goldman Sachs CORE Large Cap Value Fund
Goldman Sachs CORE International Equity Fund
Goldman Sachs Short Duration Government Fund
-----------------------------------------------------------
V. Lending of Securities
---------------------
Deliver loaned securities versus cash collateral $20.00
Deliver loaned securities versus securities collateral $30.00
Receive/deliver additional cash collateral $ 6.00
Substitutions of securities collateral $30.00
Deliver cash collateral versus receipt of
loaned securities $15.00
Deliver securities collateral versus receipt
of loaned securities $25.00
Loan administration -- mark-to-market per
day, per loan $ 3.00
VI. Interest Rate Futures
---------------------
Transactions -- no security movement $ 8.00
VII. Holdings Charge
---------------
For each issue maintained -- monthly charge $ 5.00
VIII. Principal Reduction Payments
----------------------------
Per paydown $10.00
IX. Dividend Charges (For items held at the Request
----------------
of Traders over record date in street form) $50.00
X. Special Services
----------------
Fees for activities of a non-recurring nature such as fund
consolidations or reorganizations, extraordinary security shipments and the
preparation of special reports will be subject to negotiation. Fees for
automated pricing, yield calculation and other special items will be negotiated
separately.
<PAGE>
[LOGO OF STATE STREET APPEARS HERE]
STATE STREET BANK AND TRUST COMPANY
CUSTODIAN FEE SCHEDULE
GOLDMAN SACHS VARIABLE INSURANCE TRUST
Goldman Sachs CORE Large Cap Value Fund
Goldman Sachs CORE International Equity Fund
Goldman Sachs Short Duration Government Fund
-----------------------------------------------------------------
XI. Out-of-Pocket Expenses
----------------------
A billing for the recovery of applicable out-of-pocket expenses will be
made as of the end of each month. Out-of-pocket expenses include, but are
not limited to the following:
Telephone
Wire Charges ($4.70) per wire in and $4.55 out)
Postage and Insurance
Courier Service
Duplicating
Legal Fees
Supplies Related to Fund Records
Rush Transfer - $8.00 Each
Transfer Fees
Sub-Custodian Charges
PriceWaterhouse Audit Letter
Federal Reserve Fee for Return Check items over $2,500-$4.25
GNMA Transfer-$15 each
Ptc Deposit/Withdrawal for same day turnarounds-$50.00
GOLDMAN SACHS VARIABLE INSURANCE TRUST STATE STREET BANK & TRUST CO.
By: [signature illegible] By: G. COLUCCIO
-------------------------- --------------------------
Title: Treasurer Title: Vice President
----------------------- -----------------------
Date: 1/99 Date: 2/2/99
----------------------- -----------------------
<PAGE>
[LOGO OF STATE Exhibit (g)(3)
STREET APPEARS
HERE]
STATE STREET BANK AND TRUST COMPANY
CUSTODIAN FEE SCHEDULE
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
- --------------------------------------------------------------------------------
I. Administration
--------------
Custody, Portfolio and Fund Accounting Service - Maintain custody of fund
----------------------------------------------
assets. Settle portfolio purchases and sales. Report buy and sell fails.
Determine and collect portfolio income. Make cash disbursements and report
cash transactions. Maintain investment ledgers, provide selected portfolio
transactions, position and income reports. Maintain general ledger and
capital stock accounts. Prepare daily trial balance. Calculate net asset
value daily. Provide selected general ledger reports.
The administration fee shown below is an annual charge, billed and payable
monthly.
ANNUAL FEES PER PORTFOLIO
-------------------------
Annual Fees $30,000.00
II. Portfolio Trades - For each line item processed
-----------------------------------------------
State Street Bank Repos $ 7.00
DTC or Fed Book Entry $10.00
III. Special Services
----------------
Fees for activities of a non-recurring nature such as fund consolidations
or reorganizations, extraordinary security shipments and the preparation of
special reports will be subject to negotiation. Fees for automated pricing,
yield calculation and other special items will be negotiated separately.
IV. Out-of-Pocket Expenses
----------------------
A billing for the recovery of applicable out-of-pocket expenses will be
made as of the end of each month. Out-of-pocket expenses include, but are
not limited to the following:
Telephone
Wire Charges ($4.70 per wire in and $4.55 out)
Postage and Insurance
Courier Service
Duplicating
Legal Fees
Supplies Related to Fund Records
Rush Transfer -- $8.00 Each
Transfer Fees
Sub-Custodian Charges
Price Waterhouse Audit Letter
Federal Reserve Fee for Return Check items over $2,500 - $4.25
GNMA Transfer - $15.00 each
PTC Deposit/Withdrawal for same day turnarounds - $50.00
<PAGE>
[LOGO OF STATE STREET APPEARS HERE]
STATE STREET BANK AND TRUST COMPANY
CUSTODIAN FEE SCHEDULE
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
-----------------------------------------------------------
GOLDMAN SACHS VARIABLE INSURANCE TRUST STATE STREET BANK & TRUST CO.
By: [signature illegible] By: G. Coluccio
-------------------------------- --------------------------------
Title: Treasurer Title: Vice President
---------------------------- ----------------------------
Date: 1/99 Date: 2/2/99
------------------------------ ------------------------------
<PAGE>
Exhibit (h)(2)
GOLDMAN, SACHS & CO.
Fee Information for Services as
Plan, Transfer and Dividend Disbursing Agent
GOLDMAN SACHS VARIABLE INSURANCE TRUST
--------------------------------------
on behalf of
Goldman Sachs CORE Large & Cap Value Fund
Goldman Sachs CORE International Equity Fund
Goldman Sachs Short Duration Government Fund
GENERAL
- -------
Fees are based on an annual per shareholder account charge, transaction related
expenses, and out-of-pocket expenses (including those out-of-pocket expenses
payable to servicing agents).
- --------------------------------------------------------------------------------
Per Portfolio Charge $1,000 per month
- --------------------------------------------------------------------------------
Annual Fee Per Shareholder Account $7.50
- --------------------------------------------------------------------------------
OTHER FEES*
- -----------
- --------------------------------------------------------------------------------
Manually Entered Share and Maintenance Transactions $1.00 each
- --------------------------------------------------------------------------------
Telephone Calls $1.00 each
- --------------------------------------------------------------------------------
Manually Entered Trades $5.00 each
- --------------------------------------------------------------------------------
Correspondence $1.00 each
- --------------------------------------------------------------------------------
New Account Set-Up Charge $4.00 per new account
- --------------------------------------------------------------------------------
* Fees accrue to transfer agent or servicing agent based upon which party
performed the services.
Goldman, Sachs & Co. Goldman Sachs CORE Large & Cap Value Fund
Goldman Sachs CORE International Equity Fund
Goldman Sachs Short Duration Government Fund
By: /s/ David B. Ford By: [signature illegible]
------------------------------ ----------------------------------------
(Authorized Officer) (Authorized Officer)
Date: January 22, 1999 Date:
----------------------------- --------------------------------------
<PAGE>
Exhibit (h)(3)
GOLDMAN, SACHS & CO.
Fee Information for Services as
Plan, Transfer and Dividend Disbursing Agent
GOLDMAN SACHS VARIABLE INSURANCE TRUST
--------------------------------------
on behalf of
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
GENERAL
- -------
Fees are based on an annual per shareholder account charge, transaction related
expenses, and out-of-pocket expenses (including those out-of-pocket expenses
payable to servicing agents).
- --------------------------------------------------------------------------------
Per Portfolio Charge $1,000 per month
- --------------------------------------------------------------------------------
Annual Fee Per Shareholder Account $7.50
- --------------------------------------------------------------------------------
OTHER FEES*
- ----------
- --------------------------------------------------------------------------------
Manually Entered Share and Maintenance Transactions $1.00 each
- --------------------------------------------------------------------------------
Telephone Calls $1.00 each
- --------------------------------------------------------------------------------
Manually Entered Trades $5.00 each
- --------------------------------------------------------------------------------
Correspondence $1.00 each
- --------------------------------------------------------------------------------
New Account Set-Up Charge $4.00 per new account
- --------------------------------------------------------------------------------
* Fee accrue to transfer agent or servicing agent based upon which party
performed the services.
Goldman, Sachs & co. 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
By: /s/ David B. Ford
------------------------
(Authorized Officer) By: [SIGNATURE ILLEGIBLE]
--------------------------
Date: January 22, 1999 (Authorized Officer)
-----------------
Date:
-----------------
<PAGE>
Law Offices
DRINKER BIDDLE & REATH LLP
Philadelphia National Bank Building Exhibit (i)(2)
1345 Chestnut Street
Philadelphia, PA 19107-3496
Telephone: (215) 988-2700
TELEX: 834684
FAX: (215) 988-2757
February 1, 1999
Goldman Sachs Variable Insurance Trust
4900 Sears Tower
Chicago, IL 60606
RE: CORE Large Cap Value Fund, CORE International Equity Fund, Short Duration
Government Fund, Conservative Strategy Portfolio, Balanced Strategy
Portfolio, Growth and Income Strategy Portfolio, Growth Strategy Portfolio
and Aggressive Growth Strategy Portfolio of Goldman Sachs Variable
Insurance Trust
Ladies and Gentlemen:
We have acted as counsel to Goldman Sachs Variable Insurance Trust, a
Delaware business trust (the "Trust"), in connection with the registration under
the Securities Act of 1933, as amended, of shares of beneficial interest
("Shares") in eight series, or portfolios, of the Trust. The eight series are
the Goldman Sachs CORE Large Cap Value Fund, Goldman Sachs CORE International
Equity Fund, Goldman Sachs Short Duration Government Fund, Goldman Sachs
Conservative Strategy Portfolio, Goldman Sachs Balanced Strategy Portfolio,
Goldman Sachs Growth and Income Strategy Portfolio, Goldman Sachs Growth
Strategy Portfolio, and Goldman Sachs Aggressive Growth Strategy Portfolio. The
Trust is authorized to issue an unlimited number of Shares in each of the
aforesaid series.
We have reviewed the Trust's Declaration of Trust, its by-laws, and
certain resolutions adopted by its Trustees and have considered such other legal
and factual matters as we have deemed appropriate.
This opinion is based exclusively on the Delaware Business Trust Act
and the federal law of the United States of America.
Based on the foregoing we are of the opinion that the Shares, when
issued against payment therefor as described in the Trust's prospectuses
relating thereto, will be legally issued, fully paid and non-assessable by the
Trust, and that the holders of the Shares will be entitled to the same
limitation of personal liability extended to stockholders of private
corporations for profit organized under the general corporation law of the State
of Delaware (except that we express no opinion as to such holders who are also
Trustees of the Trust). Pursuant to Section 2 of Article VIII of the Declaration
of Trust, the Trustees have the power to cause shareholders, or shareholders of
a particular series, to pay certain custodian, transfer, servicing or similar
agent charges by setting off the same against declared but unpaid dividends or
by reducing Share ownership (or by both means).
<PAGE>
February 1, 1999
Page 2
We hereby consent to the filing of this opinion with the Securities and
Exchange Commission as part of a Post-Effective Amendment to the Trust's
Registration Statement on Form N-1A. Except as provided in this paragraph, the
opinion set forth above is expressed solely for the benefit of the addressee
hereof in connection with the matters contemplated hereby and may not be relied
upon by, or filed with, any other person or entity or for any other purpose
without our prior written consent.
Very truly yours,
/s/ Drinker Biddle & Reath LLP
DRINKER BIDDLE & REATH LLP
<PAGE>
Exhibit 99J
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
for Goldman Sachs Variable Insurance Trust dated February 4, 1999 (and all
references to our firm) included in or made a part of Post-Effective Amendment
No. 2 and Amendment No. 3 to Registration Statement File Nos. 333-35883 and
811-08361, respectively.
/s/ ARTHUR ANDERSEN LLP
- ---------------------------
Boston, Massachusetts
February 22, 1999
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ANNUAL REPORT DATED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<SERIES>
<NUMBER> 061
<NAME> Goldman Sachs Growth and Income Fund
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-12-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 13,528,006
<INVESTMENTS-AT-VALUE> 13,782,813
<RECEIVABLES> 39,111
<ASSETS-OTHER> 61,300
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 13,883,224
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 68,795
<TOTAL-LIABILITIES> 68,795
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 14,014,385
<SHARES-COMMON-STOCK> 1,321,884
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (454,763)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 254,807
<NET-ASSETS> 13,814,429
<DIVIDEND-INCOME> 98,920
<INTEREST-INCOME> 76,118
<OTHER-INCOME> 0
<EXPENSES-NET> (57,361)
<NET-INVESTMENT-INCOME> 117,677
<REALIZED-GAINS-CURRENT> (454,763)
<APPREC-INCREASE-CURRENT> 254,807
<NET-CHANGE-FROM-OPS> (82,279)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (121,118)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,362,585
<NUMBER-OF-SHARES-REDEEMED> (52,483)
<SHARES-REINVESTED> 11,782
<NET-CHANGE-IN-ASSETS> 13,714,429
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 47,801
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 171,203
<AVERAGE-NET-ASSETS> 6,571,559
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.09
<PER-SHARE-GAIN-APPREC> 0.45
<PER-SHARE-DIVIDEND> (0.09)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.45
<EXPENSE-RATIO> 0.90
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ANNUAL REPORT DATED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<SERIES>
<NUMBER> 041
<NAME> Goldman Sachs CORE U.S. Equity Fund
<S> <C>
<PERIOD-TYPE> 11-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> FEB-13-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 8,540,494
<INVESTMENTS-AT-VALUE> 9,853,601
<RECEIVABLES> 38,376
<ASSETS-OTHER> 33,730
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 9,925,707
<PAYABLE-FOR-SECURITIES> 9,904
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 106,942
<TOTAL-LIABILITIES> 116,846
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 8,732,725
<SHARES-COMMON-STOCK> 859,002
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (236,971)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,313,107
<NET-ASSETS> 9,808,861
<DIVIDEND-INCOME> 79,736
<INTEREST-INCOME> 9,937
<OTHER-INCOME> 0
<EXPENSES-NET> (47,800)
<NET-INVESTMENT-INCOME> 41,873
<REALIZED-GAINS-CURRENT> (236,971)
<APPREC-INCREASE-CURRENT> 1,313,107
<NET-CHANGE-FROM-OPS> 1,118,009
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (43,440)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 893,251
<NUMBER-OF-SHARES-REDEEMED> (38,212)
<SHARES-REINVESTED> 3,963
<NET-CHANGE-IN-ASSETS> 9,808,861
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 41,825
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 168,862
<AVERAGE-NET-ASSETS> 6,772,916
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.05
<PER-SHARE-GAIN-APPREC> 1.42
<PER-SHARE-DIVIDEND> (0.05)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.42
<EXPENSE-RATIO> 0.80
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ANNUAL REPORT DATED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<SERIES>
<NUMBER> 021
<NAME> Goldman Sachs CORE Lg Cap Growth Fund
<S> <C>
<PERIOD-TYPE> 11-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> FEB-13-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 6,472,797
<INVESTMENTS-AT-VALUE> 8,168,751
<RECEIVABLES> 65,612
<ASSETS-OTHER> 44,502
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 8,278,865
<PAYABLE-FOR-SECURITIES> 9,904
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 54,572
<TOTAL-LIABILITIES> 64,476
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 7,146,086
<SHARES-COMMON-STOCK> 703,221
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (627,651)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,695,954
<NET-ASSETS> 8,214,389
<DIVIDEND-INCOME> 46,614
<INTEREST-INCOME> 6,653
<OTHER-INCOME> 0
<EXPENSES-NET> (42,688)
<NET-INVESTMENT-INCOME> 10,579
<REALIZED-GAINS-CURRENT> (627,651)
<APPREC-INCREASE-CURRENT> 1,695,954
<NET-CHANGE-FROM-OPS> 1,078,882
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (12,443)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 715,088
<NUMBER-OF-SHARES-REDEEMED> (12,989)
<SHARES-REINVESTED> 1,122
<NET-CHANGE-IN-ASSETS> 8,214,389
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 37,366
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 153,271
<AVERAGE-NET-ASSETS> 6,050,886
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.02
<PER-SHARE-GAIN-APPREC> 1.68
<PER-SHARE-DIVIDEND> (0.02)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.68
<EXPENSE-RATIO> 0.80
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ANNUAL REPORT DATED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<SERIES>
<NUMBER> 031
<NAME> Goldman Sachs CORE Small Cap Equ Fund
<S> <C>
<PERIOD-TYPE> 11-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> FEB-13-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 4,534,117
<INVESTMENTS-AT-VALUE> 4,835,367
<RECEIVABLES> 3,401
<ASSETS-OTHER> 55,016
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 4,893,784
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 52,892
<TOTAL-LIABILITIES> 52,892
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5,311,057
<SHARES-COMMON-STOCK> 535,508
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (771,415)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 301,250
<NET-ASSETS> 4,840,892
<DIVIDEND-INCOME> 46,750
<INTEREST-INCOME> 4,631
<OTHER-INCOME> 0
<EXPENSES-NET> (38,383)
<NET-INVESTMENT-INCOME> 12,998
<REALIZED-GAINS-CURRENT> (771,415)
<APPREC-INCREASE-CURRENT> 301,250
<NET-CHANGE-FROM-OPS> (457,167)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (14,944)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 537,211
<NUMBER-OF-SHARES-REDEEMED> (3,459)
<SHARES-REINVESTED> 1,756
<NET-CHANGE-IN-ASSETS> 4,840,892
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 32,003
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 167,245
<AVERAGE-NET-ASSETS> 4,834,216
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.02
<PER-SHARE-GAIN-APPREC> (0.95)
<PER-SHARE-DIVIDEND> (0.02)
<PER-SHARE-DISTRIBUTIONS> (0.01)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.04
<EXPENSE-RATIO> 0.90
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ANNUAL REPORT DATED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<SERIES>
<NUMBER> 011
<NAME> Goldman Sachs Capital Growth Fund
<S> <C>
<PERIOD-TYPE> 8-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-30-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 3,845,142
<INVESTMENTS-AT-VALUE> 4,378,431
<RECEIVABLES> 123,258
<ASSETS-OTHER> 101,874
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 4,603,563
<PAYABLE-FOR-SECURITIES> 67,350
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 73,159
<TOTAL-LIABILITIES> 140,509
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 3,953,090
<SHARES-COMMON-STOCK> 394,437
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (23,325)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 533,289
<NET-ASSETS> 4,463,054
<DIVIDEND-INCOME> 24,980
<INTEREST-INCOME> 5,084
<OTHER-INCOME> 0
<EXPENSES-NET> (20,480)
<NET-INVESTMENT-INCOME> 9,584
<REALIZED-GAINS-CURRENT> (23,325)
<APPREC-INCREASE-CURRENT> 533,289
<NET-CHANGE-FROM-OPS> 519,548
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (10,630)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 397,752
<NUMBER-OF-SHARES-REDEEMED> (4,310)
<SHARES-REINVESTED> 995
<NET-CHANGE-IN-ASSETS> 4,463,054
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 17,067
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 111,930
<AVERAGE-NET-ASSETS> 3,376,414
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.03
<PER-SHARE-GAIN-APPREC> 1.31
<PER-SHARE-DIVIDEND> (0.03)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.31
<EXPENSE-RATIO> 0.90
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ANNUAL REPORT DATED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<SERIES>
<NUMBER> 081
<NAME> Goldman Sachs Mid Cap Equity Fund
<S> <C>
<PERIOD-TYPE> 8-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> MAY-1-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 5,853,096
<INVESTMENTS-AT-VALUE> 5,698,001
<RECEIVABLES> 19,831
<ASSETS-OTHER> 33,489
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 5,751,321
<PAYABLE-FOR-SECURITIES> 63,290
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 84,135
<TOTAL-LIABILITIES> 147,425
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5,939,157
<SHARES-COMMON-STOCK> 653,841
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (223,029)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (112,232)
<NET-ASSETS> 5,603,896
<DIVIDEND-INCOME> 26,963
<INTEREST-INCOME> 36,107
<OTHER-INCOME> 0
<EXPENSES-NET> (22,296)
<NET-INVESTMENT-INCOME> 40,774
<REALIZED-GAINS-CURRENT> (223,031)
<APPREC-INCREASE-CURRENT> (112,232)
<NET-CHANGE-FROM-OPS> (294,489)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (43,108)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 781,599
<NUMBER-OF-SHARES-REDEEMED> (132,996)
<SHARES-REINVESTED> 5,238
<NET-CHANGE-IN-ASSETS> 5,603,896
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 18,776
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 112,433
<AVERAGE-NET-ASSETS> 3,496,495
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.07
<PER-SHARE-GAIN-APPREC> (1.43)
<PER-SHARE-DIVIDEND> (0.07)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.57
<EXPENSE-RATIO> 0.95
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ANNUAL REPORT DATED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<SERIES>
<NUMBER> 071
<NAME> Goldman Sachs Intl Equity Fund
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-12-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 9,368,407
<INVESTMENTS-AT-VALUE> 10,715,475
<RECEIVABLES> 47,497
<ASSETS-OTHER> 536,644
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 11,299,616
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 93,894
<TOTAL-LIABILITIES> 93,894
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 9,870,592
<SHARES-COMMON-STOCK> 941,060
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (12,690)
<ACCUMULATED-NET-GAINS> 7,926
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,339,894
<NET-ASSETS> 11,205,722
<DIVIDEND-INCOME> 111,164
<INTEREST-INCOME> 15,850
<OTHER-INCOME> 0
<EXPENSES-NET> (106,951)
<NET-INVESTMENT-INCOME> 20,063
<REALIZED-GAINS-CURRENT> 59,153
<APPREC-INCREASE-CURRENT> 1,339,894
<NET-CHANGE-FROM-OPS> 1,419,110
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (85,668)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 940,178
<NUMBER-OF-SHARES-REDEEMED> (6,639)
<SHARES-REINVESTED> 7,521
<NET-CHANGE-IN-ASSETS> 11,205,722
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 85,560
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 254,375
<AVERAGE-NET-ASSETS> 8,821,859
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.02
<PER-SHARE-GAIN-APPREC> 1.98
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (0.09)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.91
<EXPENSE-RATIO> 1.25
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ANNUAL REPORT DATED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<SERIES>
<NUMBER> 051
<NAME> Goldman Sachs Global Income Fund
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-12-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 5,065,869
<INVESTMENTS-AT-VALUE> 5,231,263
<RECEIVABLES> 171,807
<ASSETS-OTHER> 434,212
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 5,837,282
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 95,996
<TOTAL-LIABILITIES> 95,996
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5,585,944
<SHARES-COMMON-STOCK> 556,488
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (6,552)
<ACCUMULATED-NET-GAINS> (1,856)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 163,750
<NET-ASSETS> 5,741,286
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 291,028
<OTHER-INCOME> 0
<EXPENSES-NET> (54,173)
<NET-INVESTMENT-INCOME> 236,855
<REALIZED-GAINS-CURRENT> 23,945
<APPREC-INCREASE-CURRENT> 163,750
<NET-CHANGE-FROM-OPS> 424,550
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (213,231)
<DISTRIBUTIONS-OF-GAINS> (57,323)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 532,484
<NUMBER-OF-SHARES-REDEEMED> (2,008)
<SHARES-REINVESTED> 26,012
<NET-CHANGE-IN-ASSETS> 5,741,286
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 46,434
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 170,227
<AVERAGE-NET-ASSETS> 5,319,728
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.45
<PER-SHARE-GAIN-APPREC> 0.38
<PER-SHARE-DIVIDEND> (0.40)
<PER-SHARE-DISTRIBUTIONS> (0.11)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.32
<EXPENSE-RATIO> 1.05
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
