<PAGE>
April 28, 2000
Prospectus
GOLDMAN SACHS VARIABLE INSURANCE TRUST
. Goldman Sachs Internet Tollkeeper Fund/(SM)/
[LOGO OF GOLDMAN SACHS]
THE SECURITIES AND EXCHANGE COMMISSION HAS
NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
AN INVESTMENT IN THE FUND IS NOT A BANK
DEPOSIT AND IS NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY
OTHER GOVERNMENT AGENCY. AN INVESTMENT IN
THE FUND INVOLVES INVESTMENT RISKS,
INCLUDING POSSIBLE LOSS OF PRINCIPAL.
[GRAPHIC]
<PAGE>
NOT FDIC-INSURED May Lose Value No Bank Guarantee
<PAGE>
General Investment Management Approach
Goldman Sachs Asset Management, a unit of the Investment Management Division
of Goldman, Sachs & Co. ("Goldman Sachs"), serves as investment adviser to
the Internet Tollkeeper Fund (the "Fund"), a portfolio of the Goldman Sachs
Variable Insurance Trust (the "Trust"). Goldman Sachs Asset Management is
referred to in this Prospectus as the "Investment Adviser."
The Trust offers shares of the Fund to separate accounts of participating
insurance companies for the purpose of funding variable annuity contracts and
variable life insurance policies. Shares of the Trust are not offered
directly to the public. The participating insurance companies, not the owners
of the variable annuity contracts or variable life insurance policies or par-
ticipants therein, are shareholders of the Fund. The Fund pools the monies of
these separate accounts and invests these monies in a portfolio of securities
pursuant to the Fund's stated investment objective.
THE FUND INVESTS IN
"INTERNET TOLLKEEPER"
COMPANIES, AND ITS NET
ASSET VALUE (NAV) MAY
FLUCTUATE SUBSTANTIALLY
OVER TIME. BECAUSE THE FUND
CONCENTRATES ITS
INVESTMENTS IN INTERNET
TOLLKEEPER COMPANIES, THE
FUND'S PERFORMANCE MAY BE
SUBSTANTIALLY DIFFERENT
FROM THE RETURNS OF THE
BROADER STOCK MARKET AND OF
"PURE" INTERNET FUNDS. PAST
PERFORMANCE IS NOT AN
INDICATION OF FUTURE
RETURNS AND, DEPENDING ON
THE TIMING OF YOUR
INVESTMENT, YOU MAY LOSE
MONEY EVEN IF THE FUND'S
PAST RETURNS HAVE BEEN
POSITIVE. THE FUND'S
POSSIBLE PARTICIPATION IN
THE INITIAL PUBLIC OFFERING
(IPO) MARKET DURING ITS
INITIAL START-UP PHASE MAY
HAVE A MAGNIFIED IMPACT ON
THE FUND'S PERFORMANCE
BECAUSE IT IS A NEW FUND
WITH A RELATIVELY SMALL
ASSET BASE. AS THE FUND'S
ASSETS GROW, IT IS PROBABLE
THAT THE EFFECT OF IPO
INVESTMENTS ON THE FUND'S
FUTURE PERFORMANCE WILL NOT
BE AS SIGNIFICANT.
The investment objective and policies of the Fund is similar to the invest-
ment 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 Fund 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 Fund has the same Investment Adviser.
Goldman Sachs' Investment Philosophy for the Internet Tollkeeper Fund:
GROWTH STYLE FUNDS--INTERNET TOLLKEEPER FUND
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 in the value of the business.
2. Buy high-quality growth businesses that possess strong business fran-
chises, favorable long-term prospects and excellent management.
3. Purchase superior long-term growth companies at a favorable price--seek
to purchase at a fair valuation, giving the investor the potential to
fully capture returns from above-average growth rates.
Growth companies have earnings expectations that exceed those of the stock
market as a whole.
- --------------------------------------------------------------------------------
1
<PAGE>
Fund Investment Objectives and Strategies
Goldman Sachs Internet Tollkeeper Fund
FUND FACTS
------------------------------------------------------------------------------
Objective: Long-term growth of capital
Investment U.S. equity securities that offer long-term capital appreciation
Focus: with a primary focus on the media, telecommunications, technology
and Internet sectors
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 and at least 65% of its total assets
in equity securities of "Internet Tollkeeper" companies (as described below),
which are companies in the media, telecommunications, technology and Internet
sectors which provide access, infrastructure, content and services to
Internet companies and Internet users. The Fund seeks to achieve its invest-
ment objective by investing in equity securities of companies that the
Investment Adviser believes will benefit from the growth of the Internet by
providing access, infrastructure, content and services to Internet companies
and customers. The Fund may also invest up to 35% of its total assets in
other companies whose rapid adoption of an Internet strategy is expected to
improve their cost structure, revenue opportunities or competitive advantage
and Internet-based companies that the Investment Adviser believes exhibit a
sustainable business model. Although the Fund invests primarily in publicly
traded U.S. securities, it may invest up to 25% of its total assets in for-
eign securities, including securities of issuers in emerging markets or coun-
tries ("emerging countries") and securities quoted in foreign currencies.
The Internet. The Internet is a global collection of connected computers that
allows commercial and professional organizations, educational institutions,
government agencies, and individuals to communicate electronically, access
and share information, and conduct business.
The Internet has had, and is expected to continue to have, a significant
impact on the global economy, as it changes the way many companies operate.
Benefits of the Internet for businesses may include global scalability,
acquisition of new clients, new revenue sources and increased efficiencies.
Internet Tollkeepers. The Fund intends to invest a substantial portion of its
assets in companies the Investment Adviser describes as Internet Tollkeepers.
In general, the Investment Adviser defines a tollkeeper as a company with
predictable, sustainable or recurring revenue streams. Like a toll collector
for a highway or bridge, these tollkeeper companies may grow revenue by
increasing "traffic," or customers and sales, and raising "tolls," or prices.
The Investment Adviser believes that the characteristics of many of these
tollkeepers, including dominant market share and strong brand name, should
enable them to consistently grow their business. An Internet Tollkeeper is a
company that has developed or is seeking to develop predictable, sustainable
or recurring revenue streams by applying the above characteristics to the
growth of the Internet. The Investment Adviser does not define companies that
merely have an Internet site or sell some products over the Internet as
Internet Tollkeepers (although the Investment Adviser may invest in such com-
panies as part of the Fund's 35% basket of securities which are or may not be
Internet Tollkeepers).
Internet Tollkeepers are media, telecommunications, technology and Internet
companies which provide access, infrastructure, content and services to
Internet companies and Internet users. The following represent examples of
each of these types of companies, but should not be construed to exclude
other types of Internet Tollkeepers:
. Access providers enable individuals and businesses to connect to the
Internet through, for example, cable systems or the telephone network.
. Infrastructure companies provide items such as servers, routers, software
and storage necessary for companies to participate in the Internet.
. Media content providers own copyrights, distribution networks and/or pro-
gramming. Traditional media companies stand to benefit from an increase in
advertising spending by Internet companies. Copyright owners stand to bene-
fit from a new distribution channel for their music and video properties.
They also will benefit from increasing demand for traditional items like
CD's and DVD's driven by aggressive competition among Internet retailers.
. Service providers may facilitate transactions, communications, security,
computer programming and back-office func-
2
<PAGE>
FUND INVESTMENT OBJECTIVES AND STRATEGIES
tions for Internet businesses. For example, Internet companies may contract
out advertising sales or credit card clearing to service providers.
Our Approach to Investing in the Internet. While the Internet is clearly a
significant force in shaping businesses and driving the economy, the Invest-
ment Adviser believes that many Internet-based companies may not have sus-
tainable growth. Many Internet-based companies that are engaged in electronic
commerce are focused on driving sales volume and competing with other
Internet-based companies. Often, this competition is based on price, and if
these companies do not own strong franchises, then the Investment Adviser
believes there could be significant uncertainty regarding their long-term
profitability.
The Investment Adviser believes that another attractive way to invest in the
Internet sector is to invest in businesses participating in the growth of the
Internet that potentially have long-lasting strategic advantages. Character-
istics of these companies may include: dominant market share, strong brand
names, recurring revenue streams, cost advantages, economies of scale, finan-
cial strength, technological advantages and strong, experienced management
teams.
Beneficiaries of the Internet that may meet the above criteria include those
companies (Internet Tollkeepers) providing access, infrastructure, content,
and services to Internet companies and Internet users. The Fund will also
invest in companies whose rapid adoption of an Internet strategy is expected
to improve their cost structure or competitive advantage. Internet-based com-
panies that exhibit a sustainable business model may also be candidates for
purchase by the Fund. The Investment Adviser pays careful attention to the
stock prices of these companies, seeking to purchase them at a discount to
their intrinsic value.
Because of its narrow industry focus, the Fund's investment performance will
be closely tied to many factors which affect the Internet and Internet-
related industries. These factors include intense competition, consumer pref-
erences, problems with product compatibility and government regulation.
Internet and Internet-related securities may experience significant price
movements caused by disproportionate investor optimism or pessimism with lit-
tle or no basis in fundamental economic conditions. As a result, the Fund's
NAV is more likely to have greater fluctuations than that of a Fund which
invests in other industries.
3
<PAGE>
Other Investment Practices and Securities
The table below identifies some of the investment techniques that may (but
are not required to) be used by the Fund in seeking to achieve its investment
objective. Numbers in this table show allowable usage only; for actual usage,
consult the Fund's annual and semi-annual reports. The semi-annual report for
the Fund for the period ending June 30, 2000 will become available to share-
holders in August 2000. For more information see Appendix A.
10 Percent of total assets (italic type)
10 Percent of net assets (roman type)
. No specific percentage limitation on usage; limited only by the
objectives and strategies of the Fund
<TABLE>
<CAPTION>
Internet
Tollkeeper
Fund
--------------------------------------------
-- Not permitted
<S> <C>
Investment Practices
Borrowings 33 1/3
Credit, currency, index,
interest rate and mortgage
swaps -
Custodial receipts .
Equity Swaps* 15
Foreign Currency Transactions** .
Futures Contracts and Options
on Futures Contracts .
Interest rate caps, floors and
collars -
Investment Company Securities
(including exchange-traded
funds) 10
Mortgage Dollar Rolls -
Options on Foreign
Currencies/1/ .
Options on Securities and
Securities Indices/2/ .
Repurchase Agreements .
Securities Lending 33 1/3
Short Sales Against the Box 25
Unseasoned Companies .
Warrants and Stock Purchase
Rights .
When-Issued Securities and
Forward Commitments .
--------------------------------------------
</TABLE>
* Limited to 15% of net assets (together with other illiquid securities)
for all structured securities which are not deemed to be liquid and all
swap transactions.
** Limited by the amount the Fund invests in foreign securities.
/1/ May purchase and sell call and put options.
/2/ May sell covered call and put options and purchase call and put options.
<TABLE>
<CAPTION>
Internet
Tollkeeper
Fund
--------------------------------------------
<S> <C>
Investment Securities
American, European and Global
Depository Receipts .
Asset-Backed and Mortgage-
Backed Securities/3/ .
Bank Obligations/3/ .
Convertible Securities/4/ .
Corporate Debt Obligations/3/ .
Equity Securities 90+
Emerging Country Securities/5/ 25
Fixed Income Securities 10
Foreign Securities/5/ 25
Non-Investment Grade Fixed
Income Securities/6/ 10
Real Estate Investment Trusts
("REITs") .
Stripped Mortgage Backed
Securities/3/ -
Structured Securities* .
Temporary Investments 100
U.S. Government Securities/3/ .
Yield Curve Options and Inverse
Floating Rate Securities -
</TABLE>
------------------------------------------------------------------------------
/3/ Limited by the amount the Fund invests in fixed-income securities.
/4/ Convertible securities purchased by the Fund use the same rating criteria
for convertible and non-convertible debt securities.
/5/ The Fund may invest in the aggregate up to 25% of its total assets in
foreign securities, including emerging country securities.
/6/ May be BB or lower by Standard & Poor's or Ba or lower by Moody's.
4
<PAGE>
Principal Risks of the Fund
Loss of money is a risk of investing in the Fund. An investment in the 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 Fund and may result in a loss of
your investment. The Fund should not be relied upon as a complete investment
program. There can be no assurance that the Fund will achieve its investment
objective.
<TABLE>
<CAPTION>
Internet
Tollkeeper
. Applicable Fund
-----------------------------------
<S> <C>
Internet .
Stock .
Credit/Default .
Foreign .
Emerging Countries .
Industry Concentration .
Derivatives .
Interest Rate .
Management .
Market .
Liquidity .
-----------------------------------
</TABLE>
RISKS THAT APPLY TO THE FUND:
. Internet Risk--The risk that the stock prices of Internet and Internet-
related companies will experience significant price movements as a result
of intense worldwide competition, consumer preferences, product compatibil-
ity, product obsolescence, government regulation, excessive investor opti-
mism or pessimism, or other factors.
. 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
levels. There is no guarantee that such levels will continue.
. Credit/Default Risk--The risk that an issuer or guarantor of fixed-income
securities held by the Fund (which may have low credit ratings) may default
on its obligation to pay interest and repay principal.
. Foreign Risk--The risk that when the Fund invests in foreign securities, it
will be subject to risk of loss not typically associated with domestic
issuers. Loss may result because of less foreign government regulation,
less public information and less economic, political and social stability.
Loss may also result from the imposition of exchange controls, confisca-
tions and other government restrictions. The Fund will also be subject to
the risk of negative foreign currency rate fluctuations. Foreign risks will
normally be greatest when the Fund invests in issuers located in emerging
countries.
. Emerging Countries Risk--The securities markets of Asian, Latin American,
Eastern European, African and other emerging countries are less liquid, are
especially subject to greater price volatility, have smaller market capi-
talizations, have less government regulation and are not subject to as
extensive and frequent accounting, financial and other reporting require-
ments as the securities markets of more developed countries. Further,
investment in equity securities of issuers located in Russia and certain
other emerging countries involves risk of loss resulting from problems in
share registration and custody and substantial economic and political dis-
ruptions. These risks are not normally associated with investments in more
developed countries.
. Industry Concentration Risk--The risk that the Fund concentrates its
investments in specific industry sectors that have historically experienced
substantial price volatility. The Fund is subject to greater risk of loss
as a result of adverse economic, business or other developments than if its
investments were diversified across different industry sectors. Securities
of issuers held by the Fund may lack sufficient market liquidity to enable
the Fund to sell the securities at an advantageous time or without a sub-
stantial drop in price.
. Derivatives Risk--The risk that loss may result from the 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 the Fund.
. Interest Rate Risk--The risk that when interest rates increase, securities
held by the Fund will decline in value. Long-term fixed-income securities
will normally have more price volatility because of this risk than short-
term securities.
. Management Risk--The risk that a strategy used by the Investment Adviser
may fail to produce the intended results.
. Market Risk--The risk that the value of the securities in which the 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.
. Liquidity Risk--The risk that the Fund will not be able to pay redemption
proceeds within the time period stated in this Prospectus because of unu-
sual market conditions, an unusually high volume of redemption requests, or
other reasons. A Fund that invests in non-investment grade fixed-income
securities, small capitalization stocks, REITs and emerging country issuers
will be especially subject to the risk that during certain periods the
liquidity of particular issuers or industries, or all securities within
these investment categories, will
5
<PAGE>
Fund Performance
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.
More information about the Fund's portfolio securities and investment tech-
niques, 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.
HOW THE FUND HAS PERFORMED
The Fund commenced operations as of the date of this Prospectus. Therefore,
no performance information is provided in this section.
6
<PAGE>
Service Providers
INVESTMENT ADVISER
Investment Adviser
-----------------------------
Goldman Sachs Asset Management ("GSAM")
32 Old Slip
New York, New York 10005
-----------------------------
As of September 1, 1999, the Investment Management Division ("IMD") was
established as a new operating division of Goldman Sachs. This newly created
entity includes GSAM. Goldman Sachs registered as an investment adviser in
1981. The Goldman Sachs Group, L.P., which controlled the Investment Adviser,
merged into The Goldman Sachs Group, Inc. as a result of an initial public
offering. As of December 31, 1999, GSAM, along with other units of IMD, had
assets under management of $258.5 billion.
The Investment Adviser provides day-to-day advice regarding the Fund's port-
folio transactions. The Investment Adviser makes the investment decisions for
the Fund and places purchase and sale orders for the Fund's portfolio trans-
actions in U.S. and foreign markets. As permitted by applicable law, these
orders may be directed to any brokers, including Goldman Sachs and its affil-
iates. While the Investment Adviser is ultimately responsible for the manage-
ment of the Fund, 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 will apply quantitative and qualitative analysis in
determining the appropriate allocations among categories of issuers and types
of securities.
The Investment Adviser also performs the following additional services for
the Fund:
. Supervises all non-advisory operations of the Fund
. Provides personnel to perform necessary executive, administrative and cler-
ical services to the Fund
. 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 the Fund
. Provides office space and all necessary office equipment and services
The Investment Adviser, Distributor, and/or their affiliates may, from time
to time, pay compensation from their own assets (and not as an additional
charge to the Fund) to participating insurance companies for administrative
services that such companies provide to their variable annuity and variable
life insurance contract owners who are invested in the Fund. In addition, the
Investment Adviser, Distributor, and/or their affiliates may, from time to
time, pay compensation from their own assets (and not as an additional charge
to the Fund) to various securities dealers (including affiliates of partici-
pating insurance companies) that distribute variable annuity contracts and/or
variable life insurance contracts of such companies in connection with the
sale, distribution and/or servicing of such contracts and subject to applica-
ble National Association of Securities Dealers rules, contribute to various
cash and non-cash incentive arrangements to promote the sale of such con-
tracts.
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 (as a percentage of the Fund's
average daily net assets):
<TABLE>
<CAPTION>
Other Expenses
(after applicable
Contractual Rate limitation)*
--------------------------------------------------------
<S> <C> <C>
Internet Tollkeeper 1.00% 0.25%
--------------------------------------------------------
</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 the Fund's average daily net assets. Such reductions or
limits, if any, are calculated monthly on a cumulative basis. The Invest-
ment Adviser may discontinue or modify any limitations in the future at its
discretion.
7
<PAGE>
FUND MANAGERS
M. Roch Hillenbrand, a Managing Director of Goldman Sachs since 1997, is the
Head of Global Equities for GSAM, overseeing the United States, Europe,
Japan, and non-Japan Asia. In this capacity, he is responsible for managing
the group as it defines and implements global portfolio management processes
that are consistent, reliable and predictable. Since 1981, Mr. Hillenbrand
has been President of Commodities Corporation LLC, of which Goldman Sachs is
the parent company. Over the course of his 19-year career at Commodities Cor-
poration, Mr. Hillenbrand has had extensive experience in dealing with inter-
nal and external investment managers who have managed a range of futures and
equities strategies across multiple markets, using a variety of styles.
GROWTH EQUITY INVESTMENT TEAM
. 19 year consistent investment style applied through diverse and complete
market cycles
. More than $20 billion in equities currently under management
. More than 300 client account relationships
. A portfolio management and analytical team with more than 160 years com-
bined investment experience
------------------------------------------------------------------------------
Growth Equity Investment Team
<TABLE>
<CAPTION>
Years
Primarily
Name and Title Fund Responsibility Responsible Five Year Employment History
---------------------------------------------------------------------------------------------------------------
<C> <C> <C> <S>
George D. Adler Senior Portfolio Manager-- Since Mr. Adler joined the Investment Adviser as a
Vice President Internet Tollkeeper 2000 portfolio manager in 1997. From 1990 to 1997, he
was a portfolio manager at Liberty Investment
Management, Inc. ("Liberty") and its predecessor
firm Eagle Asset Management ("Eagle").
---------------------------------------------------------------------------------------------------------------
Steve Barry Senior Portfolio Manager-- Since Mr. Barry joined the Investment Adviser as a
Vice President Internet Tollkeeper 2000 portfolio manager in 1999. From 1988 to 1999, he
was a portfolio manager at Alliance Capital
Management.
---------------------------------------------------------------------------------------------------------------
Robert G. Collins Senior Portfolio Manager-- Since Mr. Collins joined the Investment Adviser as
Vice President Internet Tollkeeper 2000 portfolio manager and Co-Chair of the Growth
Equity Investment Committee in 1997. From 1991
to 1997, he was a portfolio manager at Liberty
and its predecessor firm, Eagle. His past
experience includes work as a special situations
analyst with Raymond James & Associates for five
years.
---------------------------------------------------------------------------------------------------------------
Herbert E. Ehlers Senior Portfolio Manager-- Since Mr. Ehlers joined the Investment Adviser as a
Managing Director Internet Tollkeeper 2000 senior portfolio manager and Chief Investment
Officer of the Growth Equity team in 1997. From
1994 to 1997, he was the Chief Investment
Officer and Chairman of Liberty. From 1984 to
1994, he was a portfolio manager and President
at Liberty's predecessor firm, Eagle.
---------------------------------------------------------------------------------------------------------------
Gregory H. Ekizian Senior Portfolio Manager-- Since Mr. Ekizian joined the Investment Adviser as
Vice President Internet Tollkeeper 2000 portfolio manager and Co-Chair of the Growth
Equity Investment Committee in 1997. From 1990
to 1997, he was a portfolio manager at Liberty
and its predecessor firm, Eagle.
---------------------------------------------------------------------------------------------------------------
Scott Kolar Portfolio Manager-- Since Mr. Kolar joined the Investment Adviser as an
Associate Internet Tollkeeper 2000 equity analyst in 1997 and became a portfolio
manager in 1999. From 1994 to 1997, he was an
equity analyst and information systems
specialist at Liberty.
---------------------------------------------------------------------------------------------------------------
Ernest C. Segundo, Jr. Senior Portfolio Manager-- Since Mr. Segundo joined the Investment Adviser as a
Vice President Internet Tollkeeper 2000 portfolio manager in 1997. From 1992 to 1997, he
was a portfolio manager at Liberty and its
predecessor firm, Eagle.
---------------------------------------------------------------------------------------------------------------
David G. Shell Senior Portfolio Manager-- Since Mr. Shell joined the Investment Adviser as a
Vice President Internet Tollkeeper 2000 portfolio manager in 1997. From 1987 to 1997, he
was a portfolio manager at Liberty and its
predecessor firm, Eagle.
---------------------------------------------------------------------------------------------------------------
</TABLE>
8
<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 the Fund's shares. Goldman
Sachs, 4900 Sears Tower, Chicago, Illinois 60606-6372, also serves as the
Fund'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 the
Fund or limit the 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 Fund and/or which engage in and
compete for transactions in the same type of securities, currencies and
instruments as the Fund. 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 Fund. The
results of the Fund's investment activities, therefore, may differ from those
of Goldman Sachs and its affiliates, and it is possible that the 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 Fund may, from time to time, enter into
transactions in which other clients of Goldman Sachs have an adverse inter-
est. The 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
Goldman Sachs spent a total of approximately $185 million over the past sev-
eral years to address the potential hardware, software and other computer and
technology problems associated with the transition to Year 2000 and to con-
firm that its service providers did the same. As a result of those efforts,
Goldman Sachs has not experienced any material disruptions in its operations
in connection with, or following, the transition to the Year 2000.
9
<PAGE>
Dividends
Dividends from net investment income and capital gain net income are declared
and paid by the Fund at least annually. Over the course of the year, accrued
and paid dividends will equal all or substantially all of the Fund's net
investment income and capital gain net income. The Fund will also pay divi-
dends from net realized capital gains, reduced by available capital losses,
annually. All dividends and capital gain distributions will be automatically
reinvested in additional shares of the Fund at the NAV of such shares on the
payment date, unless an insurance company's separate account is permitted to
hold cash and elects to receive payment in cash. From time to time, a portion
of the 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 Fund's shares.
How Can I Purchase Or Sell Shares Of The Fund?
Shares of the Fund 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 Fund through variable
annuity contracts and variable life insurance policies offered through the
separate accounts. The variable annuity contracts and variable life insurance
policies are described in the separate prospectuses issued by the participat-
ing insurance companies. You should refer to those prospectuses for informa-
tion on how to purchase a variable annuity contract or variable life
insurance policy, how to select the Fund as an investment option for your
contract or policy and how to redeem monies from the Fund.
The separate accounts of the participating insurance companies place orders
to purchase and redeem shares of the Fund 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 Fund. The sale of Fund shares to these unaffiliated
separate accounts may present certain conflicts of interests among variable
annuity owners, variable life insurance policy owners and plan investors. The
Trust's Board of Trustees will monitor the Trust for the existence of any
material irreconcilable conflict of interest. The Trust currently does not
foresee any disadvantages to the holders of variable annuity contracts and
variable life insurance policies arising from the fact that interests of the
holders of variable annuity contracts and variable life insurance policies
may differ due to differences of tax treatment or other considerations or due
to conflicts among the unaffiliated participating insurance companies. If,
however, a material unreconcilable conflict arises between the holders of
variable annuity contracts and variable life insurance policies of unaffili-
ated participating insurance companies, a participating insurance company may
be required to withdraw the assets allocable to some or all of the separate
accounts from the Fund. Any such withdrawal could disrupt orderly portfolio
management to the potential detriment of such holders.
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SHAREHOLDER GUIDE
Shares of the Fund (and other existing and new Funds that might be added to
the Trust) may also be offered to:
. Unregistered separate accounts of various participating insurance companies
through which variable annuity contracts and variable life insurance poli-
cies are sold in non-public offerings.
. Unregistered separate accounts of various participating insurance companies
through which variable annuity contracts and variable life insurance poli-
cies are offered exclusively to qualified pension and profit-sharing plans
and/or certain governmental plans.
. Qualified pension and profit-sharing plans. The Trust does not currently
anticipate offering shares directly to such plans.
How Are Shares Priced?
Shares of the Fund are purchased and sold at the Fund's NAV. The Fund calcu-
lates NAV as follows:
NAV = (Value of Assets of the Fund)--(Liabilities of the Fund)
--------------------------------------------------------
Number of the Fund's Outstanding Shares
The Fund's investments are valued based on market quotations or, if accurate
quotations are not readily available, the fair value of the Fund's invest-
ments may be determined in good faith under procedures established by the
Trustees.
. NAV per share of the Fund is calculated by the Fund's custodian on each
business day as of the close of regular trading on the New York Stock
Exchange (normally 4:00 p.m. New York time). Fund shares will not be priced
on any day the New York Stock Exchange is closed.
. Shares are purchased and redeemed at the NAV next calculated after an order
is received in proper form by the Trust.
Note: The time at which transactions and shares are priced and the time by
which orders must be received may be changed in case of an emergency or if
regular trading on the New York Stock Exchange is stopped at a time other
than 4:00 p.m. New York time.
Foreign securities may trade in their local markets on days the Fund is
closed. As a result, if the Fund holds foreign securities, its NAV 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 the Fund to price its securities (for example, in foreign
markets), but before the close of regular trading on the New York Stock
Exchange will normally not be reflected in the Fund's next determined NAV
unless the Trust, in its discretion, makes an adjustment in light of the
nature and materiality of the event, its effects on Fund operations and other
relevant factors.
Do I Have To Pay Any Fees When Purchasing Or Selling Shares Of The Fund?
The Fund itself does not charge any fees when it sells or redeems its shares.
Surrender charges, mortality and expense risk fees and other charges may be
assessed by participating insurance companies under the variable annuity con-
tracts 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.
. Close the Fund to new investors from time to time and reopen the Fund when-
ever it is deemed appropriate by the Fund's Investment Adviser.
Orders received by the Trust are effected on business days. The separate
accounts purchase and redeem shares of the Fund at the Fund's NAV per share
calculated as of the day an order is received by a Fund although such pur-
chases and redemptions may be executed the next morning. Redemption proceeds
paid by wire transfer will normally be wired in federal funds on the next
business day after the Trust receives actual notice of the redemption order,
but may be paid up to three business days after receipt of actual notice of
the order.
What Types Of Reports Will I Be Sent Regarding Investments In The Fund?
As a holder of a variable annuity contract or variable life insurance policy,
you will receive annual reports containing audited financial statements and
semi-annual reports from your participating insurance company.
What Are The Fund's Voting Procedures?
Participating insurance companies, not the owners of the variable annuity
contracts or variable life insurance policies or participants therein, are
shareholders of the Fund. To the extent required by law:
. The participating insurance companies will vote Fund shares held in the
separate accounts in a manner consistent with timely voting instructions
received from the holders of variable annuity contracts and variable life
insurance policies.
. The participating insurance companies will vote Fund shares held in the
separate accounts for which no timely instructions are received from the
holders of variable annuity contracts and variable life insurance policies,
as well as shares they own, in the same proportion as those shares for
which voting instructions are received.
11
<PAGE>
It is anticipated that Fund shares held by unregistered separate accounts or
qualified plans generally 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.
Taxation
The Fund is treated as a separate corporate entity for federal tax purposes.
The 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, the Fund
intends to qualify under the Code with respect to the diversification
requirements related to variable contracts. Provided that the Fund and a sep-
arate 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.
12
<PAGE>
Appendix A
Additional Information on Portfolio Risks, Securities and Techniques
A. General Portfolio Risks
The Fund will be subject to the risks associated with equity securities. "Eq-
uity securities" may include common stocks, preferred stocks, interests in
real estate investment trusts, convertible debt obligations, convertible pre-
ferred stocks, equity interests in trusts, partnerships, joint ventures, lim-
ited liability companies and similar enterprises, warrants and stock purchase
rights. In general, stock values fluctuate in response to the activities of
individual companies and in response to general market and economic condi-
tions. Accordingly, the value of the stocks that the 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 Fund may increase or decrease. As of the date of this Pro-
spectus, 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 that the Fund invests in fixed-income securities, it will also
be subject to the risks associated with its 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. Con-
versely, when interest rates increase, the market value of fixed-income secu-
rities tends to decline. Credit risk involves the risk that an issuer could
default on its obligations, and the Fund will not recover its investment.
Call risk and extension risk are normally present in mortgage-backed securi-
ties 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 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 investors.
The Investment Adviser will not consider the portfolio turnover rate a limit-
ing factor in making investment decisions for the Fund. A high rate of port-
folio turnover (100% or more) involves correspondingly greater expenses which
must be borne by the Fund and its shareholders, and is also likely to result
in higher short-term capital gains taxable to shareholders. The portfolio
turnover rate is calculated by dividing the lesser of the dollar amount of
sales or purchases of portfolio securities by the average monthly value of
the Fund's portfolio securities, excluding securities having a maturity at
the date of purchase of one year or less.
The following sections provide further information on certain types of secu-
rities and investment techniques that may be used by the Fund, 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 investment objectives and policies not specifically designated as
fundamental are non-fundamental and may be changed without shareholder
approval. If there is a change in the Fund's investment objective, you should
consider whether the Fund remains an appropriate investment in light of your
then current financial position and needs.
B. Other Portfolio Risks
Risks of Investing In Internet and Internet-Related Companies. Internet and
Internet-related companies are generally subject to a rate of change in tech-
nology which is higher than other industries and often requires extensive and
sustained investment in research and development. As a result, Internet and
Internet-related companies are exposed to the risk of rapid product obsoles-
cence. Changes in governmental policies, such as telephone and cable regula-
tions and anti-trust enforcement, and the need for regulatory approvals may
have an adverse effect on the products, services and securities of Internet
and Internet-related companies. Internet and Internet-related companies may
also produce or use products or services that prove commercially unsuccess-
ful. In addition, intense worldwide competitive pressures and changing
demand, evolving industry standards, challenges in achieving product capabil-
ity, loss of patent protection or proprietary rights, reduction or interrup-
tion in the supply of key components, changes in strategic alliances,
frequent mergers or acquisitions or other factors can have a significant
effect on the financial conditions of companies in these industries. Competi-
tive pressures in the Internet and Internet-related industries may affect
negatively the financial condition of Internet and Internet-related compa-
nies. Internet and Internet-related companies are also subject to the risk of
service disruptions and the risk of losses arising out of litigation related
to these losses. Many Internet companies have exceptionally high price-to-
earnings ratios with little or no earnings histories, and many Internet com-
panies are currently operating at a loss and may never be profitable. In
certain instances,
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<PAGE>
Internet and Internet-related securities may experience significant price
movements caused by disproportionate investor optimism or pessimism with lit-
tle or no basis in fundamental economic conditions. As a result of these and
other reasons, investments in the Internet and Internet-related industry can
experience sudden and rapid appreciation and depreciation.
Risks of Investing in Small Capitalization Companies and REITs. The Fund may
invest in small capitalization companies and REITs. Investments in small cap-
italization companies and REITs involve greater risk and portfolio price vol-
atility 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 periods the liquidity
of particular issuers or industries, or all securities in these investment
categories, will shrink or disappear suddenly and without warning as a result
of adverse economic or market conditions, or adverse investor perceptions
whether or not accurate. Because of the lack of sufficient market liquidity,
the 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 cap-
italization companies and REITs include "unseasoned" issuers that do not have
an established financial history; often have limited product lines, markets
or financial resources; may depend on or use a few key personnel for manage-
ment; and may be susceptible to losses and risks of bankruptcy. Transaction
costs for these investments are often higher than those of larger capitaliza-
tion companies. Investments in small capitalization 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 Foreign Investments. The Fund may invest in foreign investments.
Foreign investments involve special risks that are not typically associated
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 relative
to the U.S. dollar would reduce the value of the portfolio security. In addi-
tion, if the currency in which the Fund receives dividends, interest or other
payments declines in value against the U.S. dollar before such income is dis-
tributed 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 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 Fund. Because of the number of countries
using this single currency, a significant portion of the foreign assets held
by the Fund may be denominated in the euro.
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 Fund, and political or social instability or diplomatic developments
which could affect investments in those countries.
14
<PAGE>
APPENDIX A
Concentration of the Fund's assets in one or a few countries and currencies
will subject the Fund to greater risks than if the Fund's assets were not
geographically concentrated.
Investments in foreign securities may take the form of sponsored and
unsponsored American Depository Receipts ("ADRs"), Global Depository Receipts
("GDRs") and European Depository Receipts ("EDRs") or other similar instru-
ments representing securities of foreign issuers. ADRs represent the right to
receive securities of foreign issuers deposited in a domestic bank or a cor-
respondent 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. The Fund may invest in securities of issuers
located in emerging countries. The risks of foreign investment are heightened
when the issuer is located in an emerging country. Emerging countries are
generally located in the Asia-Pacific region, Eastern Europe, Latin and South
America and Africa. The Fund's purchase and sale of portfolio securities in
certain emerging countries may be constrained by limitations as to daily
changes in the prices of listed securities, periodic trading or settlement
volume and/or limitations on aggregate holdings of foreign investors. Such
limitations may be computed based on the aggregate trading volume by or hold-
ings of the Fund, the Investment Adviser, its affiliates and their respective
clients and other service providers. The Fund may not be able to sell securi-
ties 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 the Fund. The repatriation of both investment income and
capital from certain emerging countries is subject to restrictions such as
the need for governmental consents. Due to restrictions on direct investment
in equity securities in certain Asian countries, it is anticipated that the
Fund may invest in such countries through other investment funds in such
countries.
Many emerging countries have experienced currency devaluations and substan-
tial (and, in some cases, extremely high) rates of inflation, which have had
a negative effect on the economies and securities markets of such emerging
countries. Economies in emerging countries generally are dependent heavily
upon commodity prices and international trade and, accordingly, have been and
may continue to be affected adversely by the economies of their trading part-
ners, trade barriers, exchange controls, managed adjustments in relative cur-
rency values and other protectionist measures imposed or negotiated by the
countries with which they trade.
Many emerging countries are subject to a substantial degree of economic,
political and social instability. Governments of some emerging countries are
authoritarian in nature or have been installed or removed as a result of mil-
itary coups, while governments in other emerging countries have periodically
used force to suppress civil dissent. Disparities of wealth, the pace and
success of democratization, and ethnic, religious and racial disaffection,
among other factors, have also led to social unrest, violence and/or labor
unrest in some emerging countries. Unanticipated political or social develop-
ments may result in sudden and significant investment losses. Investing in
emerging countries involves greater risk of loss due to expropriation,
nationalization, confiscation of assets and property or the imposition of
restrictions on foreign investments and on repatriation of capital invested.
The Fund's investment in emerging countries may also be subject to withhold-
ing 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 the 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 the 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. As a result, the Fund may
be subject to a greater risk
15
<PAGE>
of loss if a securities firm defaults in the performance of its responsibili-
ties.
The small size and inexperience of the securities markets in certain emerging
countries and the limited volume of trading in securities in those countries
may make the Fund's investments in such countries less liquid and more vola-
tile than investments in countries with more developed securities markets
(such as the United States, Japan and most Western European countries). The
Fund's investments in emerging countries are subject to the risk that the
liquidity of a particular investment, or investments generally, in such coun-
tries will shrink or disappear suddenly and without warning as a result of
adverse economic, market or political conditions or adverse investor percep-
tions, whether or not accurate. Because of the lack of sufficient market
liquidity, the 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.
Investments in emerging countries may be more difficult to price precisely
because of the characteristics discussed above and lower trading volumes.
The Fund's use of foreign currency management techniques in emerging coun-
tries 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 Fund's currency exposure in emerging countries,
if any, will be covered by such instruments.
Risks of Derivative Investments. The Fund's transactions in options, futures,
options on futures, swaps, interest rate caps, floors and collars, structured
securities and currency transactions involve additional risk of loss. Loss
can result from a lack of correlation between changes in the value of deriva-
tive instruments and the portfolio assets (if any) being hedged, the poten-
tial 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 also involves the
risk of loss if the Investment Adviser is incorrect in its expectation of
fluctuations in securities prices, interest rates or currency prices. The
Fund may also invest in derivative investments for non-hedging purposes (that
is, to seek to increase total return). Investing for non-hedging purposes is
considered a speculative practice and presents even greater risk of loss.
Risks of Illiquid Securities. The Fund may invest up to 15% 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 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 structured securities and all swap transactions
. Certain restricted securities, unless it is determined, based upon a review
of the trading markets for a specific restricted security, that such
restricted security is eligible for resale pursuant to Rule 144A under the
Securities Act of 1933 ("144A Securities") and, therefore, is liquid.
Investing in 144A Securities may decrease the liquidity of the Fund's portfo-
lio to the extent that qualified institutional buyers become for a time unin-
terested in purchasing these restricted securities. The purchase price and
subsequent valuation of restricted and illiquid securities normally reflect a
discount, which may be significant, from the market price of comparable secu-
rities for which a liquid market exists.
Credit Risks. Debt securities purchased by the Fund may include securities
(including zero coupon bonds) issued by the U.S. government (and its agen-
cies, instrumentalities and sponsored enterprises), domestic and foreign cor-
porations, banks and other issuers. 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
issuers' capacity to pay interest and repay principal. A security will be
deemed to have met a rating requirement if it receives the minimum required
rating from at least one such rating organization even though it has been
rated below the minimum rating by one or more other rating organizations, or
if unrated by such rating organizations, determined by the Investment Adviser
to be of comparable credit quality.
The Fund may invest in fixed-income securities rated BB or Ba or below (or
comparable unrated securities) which are commonly referred to as "junk
bonds." Junk bonds are considered predominantly speculative and may be ques-
tionable as to principal and interest payments.
In some cases, junk bonds may be highly speculative, have poor prospects for
reaching investment grade standing and be in default. As a result, investment
in such bonds will present greater speculative risks than those associated
with investment in investment grade bonds. Also, to the extent that the rat-
ing assigned to a security in the Fund's portfolio is downgraded by
16
<PAGE>
APPENDIX A
a rating organization, the market price and liquidity of such security may be
adversely affected.
Temporary Investment Risks. The Fund may, for temporary defensive purposes,
invest a certain percentage of its total assets in:
. U.S. government securities
. Commercial paper rated at least A-2 by Standard & Poor's or P-2 by Moody's
. Certificates of deposit
. Bankers' acceptances
. Repurchase agreements
. Non-convertible preferred stocks and non-convertible corporate bonds with a
remaining maturity of less than one year
When the Fund's assets are invested in such instruments, the Fund may not be
achieving its investment objective.
C. Portfolio Securities and Techniques
This section provides further information on certain types of securities and
investment techniques that may be used by the Fund, including its associated
risks. Further information is provided in the Additional Statement, which is
available upon request.
Convertible Securities. The Fund may invest in convertible securities. Con-
vertible securities are preferred stock or debt obligations that are convert-
ible into common stock. Convertible securities generally offer lower interest
or dividend yields than non-convertible securities of similar quality. Con-
vertible securities in which the Fund invests are subject to the same rating
criteria as its other investments in fixed-income securities. Convertible
securities have both equity and fixed-income risk characteristics. Like all
fixed-income securities, the value of convertible securities is susceptible
to the risk of market losses attributable to changes in interest rates. Gen-
erally, the market value of convertible securities tends to decline as inter-
est rates increase and, conversely, to increase as interest rates decline.
However, when the market price of the common stock underlying a convertible
security exceeds the conversion price of the convertible security, the con-
vertible 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 increas-
ingly on a yield basis, and thus may not decline in price to the same extent
as the underlying common stock.
Foreign Currency Transactions. The Fund 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. The 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, the Fund may also enter
into such transactions to seek to increase total return, which is considered
a speculative practice.
Currency exchange rates may fluctuate significantly over short periods of
time, causing, along with other factors, the Fund's NAV to fluctuate (when
the Fund's NAV fluctuates, the value of your shares may go up or down). Cur-
rency 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 the Fund of unrealized profits, transac-
tion costs or the benefits of a currency hedge or could force the Fund to
cover its purchase or sale commitments, if any, at the current market price.
Structured Securities. The Fund may invest in structured securities. Struc-
tured 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 "Reference") or the relative
change in two or more References. The interest rate or the principal amount
payable upon maturity or redemption may be increased or decreased depending
upon changes in the applicable Reference. Structured securities may be posi-
tively or negatively indexed, so that appreciation of the Reference may pro-
duce an increase or decrease in the interest rate or value of the security at
maturity. In addition, changes in the interest rates or the value of the
security at maturity may be a multiple of changes in the value of the Refer-
ence. Consequently, structured securities may present a greater degree of
market risk than other types of fixed-income securities and may be more vola-
tile, less liquid and more difficult to price accurately than less complex
securities.
REITs. The Fund may invest in 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
17
<PAGE>
the ability of the REITs' managers, and are subject to heavy cash flow depen-
dency, default by borrowers and the qualification of the REITs under applica-
ble 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 or in certain other respects, these risks may be heightened.
The Fund will indirectly bear its proportionate share of any expenses,
including management fees, paid by a REIT in which it invests.
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. The Fund may write (sell)
covered call and put options and purchase put and call options on any securi-
ties in which they may invest or on any securities index comprised of securi-
ties in which they may invest. The Fund may also, to the extent that 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 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 the Fund's investment portfolio, the Fund may incur losses
that it would not otherwise incur. The use of options can also increase the
Fund's transaction costs. Options written or purchased by the Fund may be
traded on either U.S. or foreign exchanges or over-the-counter. Foreign and
over-the-counter options will present greater possibility of loss because of
their greater illiquidity and credit risks.
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 Fund may engage in futures transac-
tions on both U.S. and foreign exchanges.
The Fund may purchase and sell futures contracts, and purchase and write call
and put options on futures contracts, in order to seek to increase total
return or to hedge against changes in interest rates, securities prices or,
to the extent the Fund invests in foreign securities, currency exchange
rates, or to otherwise manage its term structure, sector selection and dura-
tion in accordance with its investment objectives and policies. The Fund may
also enter into closing purchase and sale transactions with respect to such
contracts and options. The Fund will engage in futures and related options
transactions for bona fide hedging purposes as defined in regulations of the
Commodity Futures Trading Commission or to seek to increase total return to
the extent permitted by such regulations. The Fund may not purchase or sell
futures contracts or purchase or sell related options to seek to increase
total return, except for closing purchase or sale transactions, if immedi-
ately thereafter the sum of the amount of initial margin deposits and premi-
ums paid on the Fund's outstanding positions in futures and related options
entered into for the purpose of seeking to increase total return would exceed
5% of the market value of the Fund's net assets.
Futures contracts and related options present the following risks:
. While the Fund may benefit from the use of futures and options on futures,
unanticipated changes in interest rates, securities prices or currency
exchange rates may result in poorer overall performance than if the Fund
had not entered into any futures contracts or options transactions.
. Because perfect correlation between a futures position and portfolio posi-
tion that is intended to be protected is impossible to achieve, the desired
protection may not be obtained and the Fund may be exposed to additional
risk of loss.
. The loss incurred by the Fund in entering into futures contracts and in
writing call options on futures is potentially unlimited and may exceed the
amount of the premium received.
. Futures markets are highly volatile and the use of futures may increase the
volatility of the Fund's NAV.
. As a result of the low margin deposits normally required in futures trad-
ing, a relatively small price movement in a futures contract may result in
substantial losses to the Fund.
18
<PAGE>
APPENDIX A
. 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.
Equity Swaps. The Fund may invest in equity swaps. Equity swaps allow the
parties to a swap agreement to exchange the dividend income or other compo-
nents of return on an equity investment (for example, a group of equity secu-
rities or an index) for a component of return on another non-equity or equity
investment.
An equity swap may be used by the 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, the 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, the Fund may suffer a loss if the
counterparty defaults.
When-Issued Securities and Forward Commitments. The Fund may purchase when-
issued securities and enter into 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 considered to be an
advantageous price and yield to the Fund at the time of entering into the
transaction. A forward commitment involves the entering into a contract to
purchase or sell securities for a fixed price at a future date beyond the
customary settlement period.
The purchase of securities on a when-issued or forward commitment basis
involves a risk of loss if the value of the security to be purchased declines
before the settlement date. Conversely, the sale of securities on a forward
commitment basis involves the risk that the value of the securities sold may
increase before the settlement date. Although the Fund will generally pur-
chase securities on a when-issued or forward commitment basis with the inten-
tion of acquiring the securities for its portfolio, the Fund may dispose of
when-issued securities or forward commitments prior to settlement if the
Investment Adviser deems it appropriate.
Repurchase Agreements. Repurchase agreements involve the purchase of securi-
ties subject to the seller's agreement to repurchase them at a mutually
agreed upon date and price. The 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.
If the other party or "seller" defaults, the 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, the Fund could suffer
additional losses if a court determines that the Fund's interest in the col-
lateral is not enforceable.
In evaluating whether to enter into a repurchase agreement, the Investment
Adviser will carefully consider the creditworthiness of the seller. The Fund,
together with other registered investment companies having advisory agree-
ments 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. The Fund may engage in securities lending.
Securities lending involves the lending of securities owned by the Fund to
financial institutions such as certain broker-dealers. The borrowers are
required to secure their loan continuously with cash, cash equivalents, U.S.
government securities or letters of credit in an amount at least equal to the
market value of the securities loaned. Cash collateral may be invested in
cash equivalents. To the extent that cash collateral is invested in other
investment securities, such collateral will be subject to market depreciation
or appreciation, and the Fund will be responsible for any loss that might
result from its investment of the borrowers' collateral. If the Investment
Adviser determines to make securities loans, the value of the securities
loaned may not exceed 33 1/3% of the value of the total assets of the Fund
(including the loan collateral).
The Fund may lend its securities to increase its income. The Fund may, howev-
er, experience delay in the recovery of its securities, or a capital 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. The Fund 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 Fund will own an equal amount of securities sold short, or securi-
ties convertible into or exchangeable for, without payment of any further
consideration, an equal amount of the securities of the same issuer as the
securities sold short.
19
<PAGE>
Preferred Stock, Warrants and Rights. The Fund may invest in preferred stock,
warrants and rights. Preferred stocks are securities that represent an owner-
ship interest providing the holder with claims on the issuer's earnings and
assets before common stock owners but after bond owners. Unlike debt securi-
ties, 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
or right. 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.
Other Investment Companies. The Fund may invest in securities of other
investment companies (including SPDRs and WEBs as defined below and other
exchange-traded funds) subject to statutory limitations prescribed by the
Investment Company Act of 1940 (the "Act"). These limitations include a pro-
hibition on the Fund acquiring more than 3% of the voting shares of any other
investment company, and a prohibition on investing more than 5% of the 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. The 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. Exchange-traded funds such as SPDRs and WEBs
are shares of unaffiliated investment companies which are traded like tradi-
tional equity securities on a national securities exchange or the NASDAQ
National Market System.
. Standard & Poor's Depository Receipts. The Fund may, consistent with its
investment policies, purchase Standard & Poor's Depository Receipts
("SPDRs"). SPDRs are securities traded on the American Stock Exchange
("AMEX") that represent ownership in the SPDR Trust, a trust which has been
established to accumulate and hold a portfolio of common stocks that is
intended to track the price performance and dividend yield of the S&P 500.
The SPDR Trust is sponsored by a subsidiary of the AMEX. SPDRs may be used
for several reasons, including, but not limited to, facilitating the han-
dling of cash flows or trading, or reducing transaction costs. The price
movement of SPDRs may not perfectly parallel the price action of the S&P
500.
. World Equity Benchmark Shares. World Equity Benchmark Shares ("WEBS") are
shares of an investment company that invests substantially all of its
assets in securities included in the MSCI indices for specified countries.
WEBS are listed on the AMEX and were initially offered to the public in
1996. The market prices of WEBS are expected to fluctuate in accordance
with both changes in the NAVs of their underlying indices and supply and
demand of WEBS on the AMEX. To date, WEBS have traded at relatively modest
discounts and premiums to their NAVs. However, WEBS have a limited operat-
ing history and information is lacking regarding the actual performance and
trading liquidity of WEBS for extended periods or over complete market
cycles. In addition, there is no assurance that the requirements of the
AMEX necessary to maintain the listing of WEBS will continue to be met or
will remain unchanged. In the event substantial market or other disruptions
affecting WEBS should occur in the future, the liquidity and value of the
Fund's shares could also be substantially and adversely affected. If such
disruptions were to occur, the Fund could be required to reconsider the use
of WEBS as part of its investment strategy.
Unseasoned Companies. The Fund may invest in companies (including predeces-
sors) which have operated less than three years. The securities of such com-
panies 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.
Corporate Debt Obligations. Corporate debt obligations include bonds, notes,
debentures, commercial paper and other obligations of corporations to pay
interest and repay principal, and include securities issued by banks and
other financial institutions. The Fund may invest in corporate debt obliga-
tions issued by U.S. and certain non-U.S. issuers which issue securities
denominated in the U.S. dollar (including Yankee and Euro obligations). In
addition to obligations of corporations, corporate debt obligations include
securities issued by banks and other financial institutions and supranational
entities (i.e., the World Bank, the International Monetary Fund, etc.).
Bank Obligations. The Fund may invest in obligations issued or guaranteed by
U.S. or foreign banks. Bank obligations, including without limitations, time
deposits, bankers' acceptances and certificates of deposit, may be general
obligations of the parent bank or may be limited to the issuing branch by the
terms of the specific obligations or by government regulations. Banks are
subject to extensive but different governmental regu-
20
<PAGE>
APPENDIX A
lations which may limit both the amount and types of loans which may be made
and interest rates which may be charged. In addition, the profitability of
the banking industry is largely dependent upon the availability and cost of
funds for the purpose of financing lending operations under prevailing money
market conditions. General economic conditions as well as exposure to credit
losses arising from possible financial difficulties of borrowers play an
important part in the operation of this industry.
U.S. Government Securities. The Fund may invest in U.S. government securi-
ties. U.S. government securities include U.S. Treasury obligations and obli-
gations issued or guaranteed by U.S. government agencies, instrumentalities
or sponsored enterprises. U.S. government securities may be supported by (a)
the full faith and credit of the U.S. Treasury (such as the Government
National Mortgage Association ("Ginnie Mae")); (b) the right of the issuer to
borrow from the U.S. Treasury (such as securities of the Student Loan Market-
ing Association); (c) the discretionary authority of the U.S. government to
purchase certain obligations of the issuer (such as the Federal National
Mortgage Association ("Fannie Mae") and Federal Home Loan Mortgage Corpora-
tion ("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 securities, where the interest and principal compo-
nents of stripped U.S. government securities are traded independently.
Custodial Receipts. The Fund may invest in custodial receipts. Interests in
U.S. government securities may be purchased in the form of custodial receipts
that 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. For certain securities law purposes, custodial
receipts are not considered obligations of the U.S. government.
Mortgage-Backed Securities. The Fund may invest in mortgage-backed securi-
ties. Mortgage-backed securities 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 mort-
gage loans or adjustable rate mortgage loans, and may be issued by either a
governmental or non-governmental entity. Privately issued mortgage-backed
securities are normally structured with one or more types of "credit enhance-
ment." However, these mortgage-backed securities typically do not have the
same credit standing as U.S. government guaranteed mortgage-backed
securities.
Mortgage-backed securities may include multiple class securities, including
collateralized mortgage obligations ("CMOs") and Real Estate Mortgage Invest-
ment Conduit ("REMIC") pass-through or participation certificates. CMOs pro-
vide an investor with a specified interest in the cash flow from a pool of
underlying mortgages or of other mortgage-backed securities. CMOs are issued
in multiple classes. In many cases, payments of principal are applied to the
CMO classes in the order of their respective stated maturities, so that no
principal payments will be made on a CMO class until all other classes having
an earlier stated maturity date are paid in full. A REMIC is a CMO that qual-
ifies for special tax treatment and invests in certain mortgages principally
secured by interests in real property and other permitted investments.
Mortgaged-backed securities also include stripped mortgage-backed securities
("SMBS"), which are derivative multiple class mortgage-backed securities.
SMBS are usually structured with two different classes: one that receives
substantially all of the interest payments and the other that receives sub-
stantially all of the principal payments from a pool of mortgage loans. 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 gener-
ally higher than prevailing market yields on other mortgage-backed securities
because their cash flow patterns are more volatile and there is a greater
risk that the initial investment will not be fully recouped.
Asset-Backed Securities. The Fund may invest in asset-backed securities.
Asset-backed securities are securities whose principal and interest payments
are collateralized by pools of assets such as auto loans, credit card receiv-
ables, leases, installment contracts and personal property. Asset-backed
securities are often subject to more rapid repayment than their stated matu-
rity date would indicate as a result of the pass-through of prepayments of
principal on the underlying loans. During periods of declining interest
rates, prepayment of loans underlying asset-backed securities can be expected
to accelerate. Accordingly, the Fund's ability to maintain positions in such
securities will be affected by reductions in the principal amount of such
securities resulting from prepayments, and its ability to reinvest the
returns of principal at comparable yields is subject to generally prevailing
interest rates at that time. Asset-backed securities present credit risks
that are not presented by mortgage-backed securities. This is because asset-
backed securities generally do not have the benefit of a security interest in
collateral that is comparable to mortgage assets. There is the possibility
that, in some cases, recoveries on repossessed collateral
21
<PAGE>
may not be available to support payments on these securities. In the event of
a default, the Fund may suffer a loss if it cannot sell collateral quickly
and receive the amount it is owed.
Borrowings. The Fund can borrow money from banks and other financial institu-
tions in amounts not exceeding one-third of its total assets for temporary or
emergency purposes. The Fund may not make additional investments if
borrowings exceed 5% of its total assets.
22
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Page
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<S> <C>
GENERAL INVESTMENT MANAGEMENT APPROACH .................................. 1
FUND INVESTMENT OBJECTIVES AND STRATEGIES................................ 2
Goldman Sachs Internet Tollkeeper Fund................................... 2
OTHER INVESTMENT PRACTICES AND SECURITIES................................ 4
PRINCIPAL RISKS OF THE FUND.............................................. 5
FUND PERFORMANCE......................................................... 6
SERVICE PROVIDERS........................................................ 7
DIVIDENDS................................................................ 10
SHAREHOLDER GUIDE........................................................ 10
TAXATION................................................................. 12
APPENDIX A--ADDITIONAL INFORMATION ON PORTFOLIO RISKS, SECURITIES AND
TECHNIQUES............................................................... 13
</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. This 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
whether the Fund is available and should be read in conjunction with this
Prospectus. Inclusion in this Prospectus of the Fund which is not available
under your contract or policy is not to be considered a solicitation.
FOR MORE INFORMATION
Annual/Semi-annual Report
Additional information about the Fund's investments is available in the
Fund's annual and semi-annual reports to shareholders. In the Fund annual
reports, you will find a discussion of the market conditions and investment
strategies that significantly affected the Fund's performance during their
last fiscal year. As of the date of this Prospectus, the Fund had not com-
menced operations, and its semi-annual report for the period ended June 30,
2000 will become available in August 2000.
Your insurance company will provide you with annual and semi-annual reports
if the Fund serves as an investment vehicle for your variable annuity con-
tract or variable life insurance policy.
Statement of Additional Information
Additional information about the Fund and its policies is also available in
the Fund's Additional Statement. The Additional Statement is incorporated by
reference into this Prospectus (is legally considered part of this Prospec-
tus).
The Additional Statement is available free upon request by calling Goldman
Sachs at 1-800-621-2550.
To obtain other information and for shareholder inquiries:
By telephone - Call 1-800-621-2550
By mail - Goldman Sachs Funds
4900 Sears Tower - 60th Floor
Chicago, IL 60606-6372
By e-mail - [email protected]
On the Internet - Text-only versions of Trust documents are located online
and may be downloaded from:
SEC EDGAR database - http://www.sec.gov
You may review and obtain copies of Trust documents by visiting the SEC's
Public Reference Room in Washington, D.C. You may also obtain copies of Trust
documents, after paying a duplicating fee, by writing to the SEC's Public
Reference Section, Washington, D.C. 20549-0102 or by electronic request to:
[email protected]. Information on the operation of the public reference room
may be obtained by calling the SEC at (202) 942-8090.
[GOLDMAN SACHS LOGO]
The Trust's investment company registration number is 811-08361.
Goldman Sachs Internet Tollkeeper Fund is a service mark of Goldman, Sachs &
Co.
TOLLVITPRO
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
GOLDMAN SACHS INTERNET TOLLKEEPER FUND
(A PORTFOLIO OF GOLDMAN SACHS VARIABLE INSURANCE TRUST)
4900 Sears Tower
Chicago, Illinois 60606-6303
This Statement of Additional Information (the "Additional Statement") is
not a Prospectus. This Additional Statement should be read in conjunction with
the prospectus for Goldman Sachs Internet Tollkeeper Fund dated April 28, 2000
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 April 28, 2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
INTRODUCTION................................................ B-1
INVESTMENT POLICIES......................................... B-2
INVESTMENT RESTRICTIONS..................................... B-35
MANAGEMENT.................................................. B-38
PORTFOLIO TRANSACTIONS AND BROKERAGE.. ..................... B-54
NET ASSET VALUE............................................. B-56
PERFORMANCE INFORMATION..................................... B-57
SHARES OF THE TRUST......................................... B-62
TAXATION.................................................... B-64
OTHER INFORMATION........................................... B-68
APPENDIX A.................................................. 1-A
APPENDIX B - BUSINESS PRINCIPLES OF GOLDMAN, SACHS & CO..... 1-B
</TABLE>
<PAGE>
GOLDMAN SACHS ASSET MANAGEMENT GOLDMAN, SACHS & CO.
Investment Adviser Distributor
32 Old Slip 85 Broad Street
New York, New York 10005 New York, New York 10004
GOLDMAN, SACHS & CO.
Transfer Agent
4900 Sears Tower
Chicago, IL 60606
Toll free.......800-292-4726
<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. This Additional Statement
describes the Trust's Goldman Sachs Internet Tollkeeper Fund (the "Fund").
Other series of the Trust are described in separate Additional Statements. As
of the date of this Additional Statement, the Fund had not commenced investment
operations.
The Fund is a series of Goldman Sachs Variable Insurance Trust, which was
formed under the laws of the state of Delaware on September 16, 1997. The
Trustees have authority under the Trust's charter to create and classify shares
of beneficial interests in separate series and to classify and reclassify any
series or portfolio of shares into one or more classes, without further action
by shareholders. Additional series may be added in the future.
Goldman Sachs Asset Management ("GSAM" or the "Investment Adviser"), a unit
of the Investment Management Division of Goldman, Sachs & Co. ("Goldman Sachs"),
serves as Investment Adviser to the Fund. In addition, Goldman Sachs serves as
the Fund's distributor and transfer agent. The Fund's custodian is State Street
Bank and Trust Company ("State Street").
The following information relates to and supplements the description of the
Fund's investment policies contained in the Prospectus. See the Prospectus for
a fuller description of the Fund's investment objective and policies. There is
no assurance that the Fund will achieve its objective.
B-1
<PAGE>
INVESTMENT POLICIES
The Fund has a distinct investment objective and policies. There can be no
assurance that the Fund's objective will be achieved. The Fund is a
diversified, open-end management company as defined in the Investment Company
Act of 1940, as amended (the "Act").
The Fund's share price will fluctuate with market, economic and foreign
exchange conditions, so that an investment in the Fund may be worth more or less
when redeemed than when purchased. The Fund should not be relied upon as a
complete investment program.
General Information Regarding The Fund.
- --------------------------------------
The Investment Adviser may purchase for the Fund common stocks, preferred
stocks, interests in real estate investment trusts, convertible debt
obligations, convertible preferred stocks, equity interests in trusts,
partnerships, joint ventures, limited liability companies and similar
enterprises, warrants and stock purchase rights ("equity securities"). In
choosing a Fund's securities, the Investment Adviser utilizes first-hand
fundamental research, including visiting company facilities to assess operations
and to meet decision-makers. The Investment Adviser may also use macro analysis
of numerous economic and valuation variables to anticipate changes in company
earnings and the overall investment climate. The Investment Adviser is able to
draw on the research and market expertise of the Goldman Sachs Global Investment
Research Department and other affiliates of the Investment Adviser, as well as
information provided by other securities dealers. Equity securities in a Fund's
portfolio will generally be sold when the Investment Adviser believes that the
market price fully reflects or exceeds the securities' fundamental valuation or
when other more attractive investments are identified.
Growth Style. The Internet Tollkeeper Fund is managed using a growth equity
oriented approach. Equity securities for this Fund are selected based on their
prospects for above average growth. The Investment Adviser will select
securities of growth companies trading, in the Investment Adviser's opinion, at
a reasonable price relative to other industries, competitors and historical
price/earnings multiples. The Fund will generally invest in companies whose
earnings are believed to be in a relatively strong growth trend, or, to a lesser
extent, in companies in which significant further growth is not anticipated but
whose market value per share is thought to be undervalued. In order to determine
whether a security has favorable growth prospects, the Investment Adviser
ordinarily looks for one or more of the following characteristics in relation to
the security's prevailing price: prospects for above average sales and earnings
growth per share; high return on invested capital; free cash flow generation;
sound balance sheet, financial and accounting policies, and overall financial
strength; strong competitive advantages; effective research, product
development, and marketing; pricing flexibility; strength of management; and
general operating characteristics that will enable the company to compete
successfully in its marketplace.
The Internet Generally. The Internet is a global collection of connected
computers that allows commercial and professional organizations, educational
institutions, government agencies, and consumers to communicate electronically,
access and share information and
B-2
<PAGE>
conduct business. It is dramatically changing the way consumers and businesses
are buying and selling goods and services. The World Wide Web, a means of
graphically interfacing with the Internet, provides companies with the ability
to reach a global audience with greater operating efficiency and conveniently
provides consumers with a broad selection of services and products.
Historical technological breakthroughs like the invention of the telephone,
electricity and the automobile changed the way people lived and conducted
commerce. As with previous advancements in communication there is a tremendous
amount of excitement and activity being generated by people researching
information, consumers shopping for products, companies improving their business
plans and investors seeking to capitalize on opportunities. The advent of the
radio, television and the personal computer was also met with a high degree of
excitement and many of the companies that were associated with the new
technology received high stock valuations. Only a few of these original
companies were able to achieve long-term success. The Investment Adviser
believes that it is difficult to predict which of the new Internet companies
will ultimately succeed but that there will be many established companies that
will benefit from the growth of the Internet.
Origins of the Internet. The evolution of the Internet began as a result of
the Cold War. In 1962, The Rand Corporation was asked by the United States
military to devise a military communication network that could survive a nuclear
war. The basic premise of the network was to have a decentralized network that
would still be able to deliver messages to their destinations even if some nodes
(cities) were destroyed along the route.
The first network called ARAPNET connected four universities in 1969. The
original use of the network was for long-distance computation that allowed
researchers to collaborate on projects. A secondary use also evolved as people
began to use the network as an electronic post office to trade e-mails. As
networking technology improved and the number of personal computers increased,
the Internet evolved into much more than a global communications medium. Today,
electronic commerce has become an integral part of the global economy.
International Data Corporation (IDC) estimates that at the end of 1998, there
were over 97 million web users worldwide.
Growth of the Internet. Personal and business use of the Internet is
growing quickly. Personal uses of the Internet have advanced beyond teenage
chat rooms and pictorials featuring the emperor's clothing to sending electronic
mail, researching information, accessing on-line versions of publications,
getting maps and driving directions and listing group or association schedules
and events. Businesses are offering products and services to both consumers and
business clients. Forrestor Research has estimated that business to consumer
electronic commerce was $8 billion in 1998 and business to business commerce was
$43 billion. Companies are offering products and services that do not require
the customer's physical presence to purchase including books, music, videos,
airline tickets and stock trading. Business to business commerce will likely
benefit as companies are better equipped and connected than most consumers.
B-3
<PAGE>
Risk Considerations Regarding the Internet Industry. The market in which
many Internet companies compete is characterized by rapidly changing technology,
evolving industry standards, frequent new service and product announcements,
introductions and enhancements and changing customer demands. The failure of an
Internet company to adapt to such changes could have a material adverse effect
on the company's business, results of operations and financial condition. In
addition, the widespread adoption of new Internet, networking or
telecommunications technologies or other technological changes could require
substantial expenditures by an Internet company to modify or adapt its services
or infrastructure, which could have a material adverse effect on an Internet
company's business, results of operations and financial condition.
The success of the many Internet companies will also depend in large part
upon the development and maintenance of the infrastructure of the World Wide Web
for providing reliable Web access and services, such as a reliable network
backbone with the necessary speed, data capacity and security, or timely
development of complementary products such as high speed modems. There can be
no assurance that the infrastructure or complementary products or services
necessary to make the Web a viable commercial marketplace for the long term will
be developed or that if they are developed, that the Web will become a viable
commercial marketplace for services such as those offered by Internet companies.
The market for the purchase of products and services over the Internet is a
new and emerging market. If acceptance and growth of Internet use does not
occur, an Internet company's business and financial performance will suffer.
Although there has been substantial interest in the commercial possibilities for
the Internet, many businesses and consumers have been slow to purchase Internet
access services for a number of reasons, including inconsistent quality of
service, lack of availability of cost-effective, high-speed service, a limited
number of local access points for corporate users, inability to integrate
business applications on the Internet, the need to deal with multiple and
frequently incompatible vendors, inadequate protection of the confidentiality of
stored data and information moving across the Internet and a lack of tools to
simplify Internet access and use. It is possible that a sufficiently broad base
of consumers may not adopt, or continue to use, the Internet as a medium of
commerce.
Despite the implementation of security measures, an Internet company's
networks may be vulnerable to unauthorized access, computer viruses and other
disruptive problems. Internet companies have in the past experienced, and may
in the future experience, interruptions in service as a result of the accidental
or intentional actions of Internet users, current and former employees or
others. Unauthorized access could also potentially jeopardize the security of
confidential information stored in the computer systems of a company and its
subscribers. These events may result in liability of the company to its
subscribers and also may deter potential subscribers.
The law relating to the liability of online services companies for
information carried on or disseminated through their services is currently
unsettled. It is possible that claims could be made against online services
companies under both United States and foreign law for defamation, libel,
invasion of privacy, negligence, copyright or trademark infringement, or other
B-4
<PAGE>
theories based on the nature and content of the materials disseminated through
their services. Several private lawsuits seeking to impose such liability upon
other online services companies are currently pending. In addition, legislation
has been proposed that imposes liability for or prohibits the transmission over
the Internet of certain types of information. The increased attention focused
upon liability issues as a result of these lawsuits and legislative proposals
could also impact the growth of Internet use.
It is possible that a number of laws and regulations may be adopted with
respect to the Internet or other online services covering issues such as user
privacy, freedom of expression, pricing, content and quality of products and
services, taxation, advertising, intellectual property rights and information
security. The nature of such governmental action and the manner in which it may
be interpreted and enforced cannot be fully determined. Such action could
subject an Internet company and/or its customers to potential liability, which
in turn could have an adverse effect on the Internet company's business, results
of operations and financial condition. The adoption of any such laws or
regulations might also decrease the rate of growth of Internet use, which in
turn could decrease the demand for the services of Internet companies or
increase the cost of doing business or in some other manner have a material
adverse effect on an Internet company's business, results of operations and
financial condition. In addition, applicability to the Internet of existing
laws governing issues such as property ownership, copyrights and other
intellectual property issues, taxation, libel, obscenity and personal privacy is
uncertain. The vast majority of such laws were adopted prior to the advent of
the Internet and related technologies and, as a result, do not contemplate or
address the unique issues of the Internet and related technologies.
Several states have also proposed legislation that would limit the uses of
personal user information gathered online or require online services to
establish privacy policies. The Federal Trade Commission has also recently
settled a proceeding with one online service regarding the manner in which
personal information is collected from users and provided to third parties.
Changes to existing laws or the passage of new laws intended to address these
issues, including some recently proposed changes, could create uncertainty in
the marketplace that could reduce demand for the services of an Internet company
or increase the cost of doing business as a result of litigation costs or
increased service delivery costs, or could in some other manner have a material
adverse effect an Internet company's business, results of operations and
financial condition.
Internet companies do not collect sales or other similar taxes. However,
one or more states may seek to impose sales tax collection obligations on
Internet companies which engage in or facilitate online commerce, and a number
of proposals have been made at the state and local level that would impose
additional taxes on the sale of goods and services through the Internet. Such
proposals, if adopted, could substantially impair the growth of electronic
commerce, and could adversely affect an Internet company's opportunity to derive
financial benefit from such activities. Moreover, a successful assertion by one
or more states or any foreign country that an Internet company should collect
sales or other taxes on the exchange of merchandise on its system could have a
material adverse effect on an Internet company's business, results of operations
and financial condition.
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<PAGE>
Legislation limiting the ability of the states to impose taxes on Internet-
based transactions has been proposed in the U.S. Congress. There can be no
assurance that this legislation will ultimately be enacted into law or that the
final version of this legislation will not contain a limited time period in
which such tax moratorium will apply. In the event that the tax moratorium is
imposed for a limited time period, there can be no assurance that the
legislation will be renewed at the end of such period. Failure to enact or
renew this legislation could allow various states to impose taxes on Internet-
based commerce and the imposition of such taxes could have a material adverse
affect on an Internet company's business, results of operations and financial
condition.
Other Information. Since normal settlement for equity securities is three
trading days (for certain international markets settlement may be longer), the
Fund will need to hold cash balances to satisfy shareholder redemption requests.
Such cash balances will normally range from 2% to 5% of the Fund's net assets.
Additionally, the Fund may purchase futures contracts to manage its cash
position. For example, if cash balances are equal to 5% of the net assets, the
Fund may enter into long futures contracts covering an amount equal to 5% of the
Fund's net assets. As cash balances fluctuate based on new contributions or
withdrawals, the Fund may enter into additional contracts or close out existing
positions.
Corporate Debt Obligations
- --------------------------
The Fund may, under normal market conditions, invest in corporate debt
obligations, including obligations of industrial, utility and financial issuers.
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.
An economic downturn could severely affect the ability of highly leveraged
issuers of junk bond securities to service their debt obligations or to repay
their obligations upon maturity. Factors having an adverse impact on the market
value of junk bonds will have an adverse effect on the Fund's net asset value to
the extent it invests in such securities. In addition, the Fund may incur
additional expenses to the extent it is required to seek recovery upon a default
in payment of principal or interest on its portfolio holdings.
The secondary market for junk bonds, which is concentrated in relatively few
market makers, may not be as liquid as the secondary market for more highly
rated securities. This reduced liquidity may have an adverse effect on the
ability of the Fund to dispose of a particular security when necessary to meet
its redemption requests or other liquidity needs. Under adverse market or
economic conditions, the secondary market for junk bonds could contract further,
independent of any specific adverse changes in the condition of a particular
issuer. As a result, the Investment Adviser could find it difficult to sell
these securities or may be able to sell the securities only at prices lower than
if such securities were widely traded. Prices realized upon the sale of such
lower rated or unrated securities, under such circumstances, may be less than
the prices used in calculating the Fund's net asset value.
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Since investors generally perceive that there are greater risks associated
with the medium to lower rated securities of the type in which the Fund 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 the Fund's net asset value.
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 Adviser 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.
The Investment Adviser employs its own credit research and analysis, which
includes a study of existing debt, capital structure, ability to service debt
and to pay dividends, the issuer's sensitivity to economic conditions, its
operating history and the current trend of earnings. The Investment Adviser
continually monitors the investments in the 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.
U.S. Government Securities
- --------------------------
The Fund may invest in U.S. Government securities. Generally, these
securities include U.S. Treasury obligations and obligations issued or
guaranteed by U.S. Government agencies, instrumentalities or sponsored
enterprises. U.S. Government securities also include Treasury receipts and other
stripped U.S. Government securities, where the interest and principal components
of stripped U.S. Government Securities are traded independently. The Fund may
also invest in zero coupon U.S. Treasury securities and in zero coupon
securities issued by financial institutions, which represent a proportionate
interest in underlying U.S. Treasury securities. A zero coupon security pays no
interest to its holder during its life and its value consists of the difference
between its face value at maturity and its cost. The market prices of zero
coupon securities generally are more volatile than the market prices of
securities that pay interest periodically.
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<PAGE>
Bank Obligations
- ----------------
The Fund may invest in obligations issued or guaranteed by U.S. or foreign
banks. Bank obligations, including without limitation, time deposits, bankers'
acceptances and certificates of deposit, may be general obligations of the
parent bank or may be limited to the issuing branch by the terms of the specific
obligations or government regulation. Banks are subject to extensive but
different governmental regulations which may limit both the amount and types of
loans which may be made and interest rates which may be charged. In addition,
the profitability of the banking industry is largely dependent upon the
availability and cost of funds for the purpose of financing lending operations
under prevailing money market conditions. General economic conditions as well
as exposure to credit losses arising from possible financial difficulties of
borrowers play an important part in the operation of this industry.
Zero Coupon Bonds
- -----------------
The 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 the Fund
defaults, the Fund may obtain no return at all on its investment. The Fund will
accrue income on such investments for each taxable year which (net of deductible
expenses, if any) is distributable to shareholders and which, because no cash is
generally received at the time of accrual, may require the liquidation of other
portfolio securities to obtain sufficient cash to satisfy the Fund's
distribution obligations.
Variable and Floating Rate Securities
- -------------------------------------
The interest rates payable on certain fixed income securities in which the
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.
Custodial Receipts
- ------------------
The Fund may invest in custodial receipts in respect of securities issued or
guaranteed as to principal and interest by the U.S. Government, its agencies,
instrumentalities, political subdivisions or authorities. Such custodial
receipts evidence ownership of future interest payments, principal
B-8
<PAGE>
payments or both on certain notes or bonds issued or guaranteed as to principal
and interest by the U.S. Government, its agencies, instrumentalities, political
subdivisions or authorities. These custodial receipts are known by various
names, including "Treasury Receipts," "Treasury Investors Growth Receipts"
("TIGRs"), and "Certificates of Accrual on Treasury Securities" ("CATs"). For
certain securities law purposes, custodial receipts are not considered U.S.
Government Securities.
Mortgage-Backed Securities
- --------------------------
General Characteristics. The Fund 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 the 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 the 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 the Fund invests in mortgage-backed
securities, the Investment Adviser may seek to manage these potential risks by
investing in a variety of mortgage-backed securities and by using certain
hedging techniques.
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. The 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.
The 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
B-9
<PAGE>
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 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.
B-10
<PAGE>
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.
Mortgage Pass-Through Securities. The Fund may invest in both government
guaranteed and privately issued mortgage pass-through securities ("Mortgage
Pass-Throughs"); that is, fixed or adjustable rate mortgage-backed securities
which provide for monthly payments that are a "pass-through" of the monthly
interest and principal payments (including any prepayments) made by the
individual borrowers on the pooled mortgage loans, net of any fees or other
amounts paid to any guarantor, administrator and/or servicer of the underlying
mortgage loans.
The following discussion describes only a few of the wide variety of
structures of Mortgage Pass-Throughs that are available or may be issued.
Description of Certificates. Mortgage Pass-Throughs may be issued in
one or more classes of senior certificates and one or more classes of
subordinate certificates. Each such class may bear a different pass-through
rate. Generally, each certificate will evidence the specified interest of the
holder thereof in the payments of principal or interest or both in respect of
the mortgage pool comprising part of the trust fund for such certificates.
Any class of certificates may also be divided into subclasses entitled to
varying amounts of principal and interest. If a REMIC election has been made,
certificates of such subclasses may be entitled to payments on the basis of a
stated principal balance and stated interest rate, and payments among different
subclasses may be made on a sequential, concurrent, pro rata or disproportionate
--- ----
basis, or any combination thereof. The stated interest rate on any such
subclass of certificates may be a fixed rate or one which varies in direct or
inverse relationship to an objective interest index.
Generally, each registered holder of a certificate will be entitled to
receive its pro rata share of monthly distributions of all or a portion of
--- ----
principal of the underlying mortgage loans or of interest on the principal
balances thereof, which accrues at the applicable mortgage pass-through rate, or
both. The difference between the mortgage interest rate and the related
mortgage pass-through rate (less the amount, if any, of retained yield) with
respect to each mortgage loan will generally be paid to the servicer as a
servicing fee. Since certain adjustable rate mortgage loans included in a
mortgage pool may provide for deferred interest (i.e., negative amortization),
the amount of interest actually paid by a mortgagor in any month may be less
than the amount of interest accrued on the outstanding principal balance of the
related mortgage loan during the relevant period at the applicable mortgage
interest rate. In such event, the amount of interest that is treated as
deferred interest will be added to the principal balance of the related mortgage
loan and will be distributed pro rata to certificate-holders as principal of
--------
such mortgage loan when paid by the mortgagor in subsequent monthly payments or
at maturity.
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<PAGE>
Ratings. The ratings assigned by a rating organization to Mortgage
Pass-Throughs address the likelihood of the receipt of all distributions on the
underlying mortgage loans by the related certificate-holders under the
agreements pursuant to which such certificates are issued. A rating
organization's ratings take into consideration the credit quality of the related
mortgage pool, including any credit support providers, structural and legal
aspects associated with such certificates, and the extent to which the payment
stream on such mortgage pool is adequate to make payments required by such
certificates. A rating organization's ratings on such certificates do not,
however, constitute a statement regarding frequency of prepayments on the
related mortgage loans. In addition, the rating assigned by a rating
organization to a certificate does not address the remote possibility that, in
the event of the insolvency of the issuer of certificates where a subordinated
interest was retained, the issuance and sale of the senior certificates may be
recharacterized as a financing and, as a result of such recharacterization,
payments on such certificates may be affected.
Credit Enhancement. Credit support falls generally into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from default by an obligor on the underlying assets. Liquidity
protection refers to the provision of advances, generally by the entity
administering the pools of mortgages, the provision of a reserve fund, or a
combination thereof, to ensure, subject to certain limitations, that scheduled
payments on the underlying pool are made in a timely fashion. Protection
against losses resulting from default ensures ultimate payment of the
obligations on at least a portion of the assets in the pool. Such credit
support can be provided by among other things, payment guarantees, letters of
credit, pool insurance, subordination, or any combination thereof.
Subordination; Shifting of Interest; Reserve Fund. In order to achieve
ratings on one or more classes of Mortgage Pass-Throughs, one or more classes of
certificates may be subordinate certificates which provide that the rights of
the subordinate certificate-holders to receive any or a specified portion of
distributions with respect to the underlying mortgage loans may be subordinated
to the rights of the senior certificate-holders. If so structured, the
subordination feature may be enhanced by distributing to the senior certificate-
holders on certain distribution dates, as payment of principal, a specified
percentage (which generally declines over time) of all principal payments
received during the preceding prepayment period ("shifting interest credit
enhancement"). This will have the effect of accelerating the amortization of
the senior certificates while increasing the interest in the trust fund
evidenced by the subordinate certificates. Increasing the interest of the
subordinate certificates relative to that of the senior certificates is intended
to preserve the availability of the subordination provided by the subordinate
certificates. In addition, because the senior certificate-holders in a shifting
interest credit enhancement structure are entitled to receive a percentage of
principal prepayments which is greater than their proportionate interest in the
trust fund, the rate of principal prepayments on the mortgage loans will 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
B-12
<PAGE>
the originator or servicer and augmented by the retention of distributions
otherwise available to the subordinate certificate-holders or by excess
servicing fees until the Reserve Fund reaches a specified amount.
The subordination feature, and any Reserve Fund, are intended to enhance the
likelihood of timely receipt by senior certificate-holders of the full amount of
scheduled monthly payments of principal and interest due to them and will
protect the senior certificate-holders against certain losses; however, in
certain circumstances the Reserve Fund could be depleted and temporary
shortfalls could result. In the event that the Reserve Fund is depleted before
the subordinated amount is reduced to zero, senior certificate-holders will
nevertheless have a preferential right to receive current distributions from the
mortgage pool to the extent of the then outstanding subordinated amount. Unless
otherwise specified, until the subordinated amount is reduced to zero, on any
distribution date any amount otherwise distributable to the subordinate
certificates or, to the extent specified, in the Reserve Fund will generally be
used to offset the amount of any losses realized with respect to the mortgage
loans ("Realized Losses"). Realized Losses remaining after application of such
amounts will generally be applied to reduce the ownership interest of the
subordinate certificates in the mortgage pool. If the subordinated amount has
been reduced to zero, Realized Losses generally will be allocated pro rata among
--------
all certificate-holders in proportion to their respective outstanding interests
in the mortgage pool.
Alternative Credit Enhancement. As an alternative, or in addition to
the credit enhancement afforded by subordination, credit enhancement for
Mortgage Pass-Throughs may be provided by mortgage insurance, hazard insurance,
by the deposit of cash, certificates of deposit, letters of credit, a limited
guaranty or by such other methods as are acceptable to a rating agency. In
certain circumstances, such as where credit enhancement is provided by
guarantees or a letter of credit, the security is subject to credit risk because
of its exposure to an external credit enhancement provider.
Voluntary Advances. Generally, in the event of delinquencies in
payments on the mortgage loans underlying the Mortgage Pass-Throughs, the
servicer agrees to make advances of cash for the benefit of certificate-holders,
but only to the extent that it determines such voluntary advances will be
recoverable from future payments and collections on the mortgage loans or
otherwise.
Optional Termination. Generally, the servicer may, at its option with
respect to any certificates, repurchase all of the underlying mortgage loans
remaining outstanding at such time if 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. The 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,
B-13
<PAGE>
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 participation therein purchased by Freddie Mac and
placed in a PC pool. With respect to principal payments on PCs, Freddie Mac
generally guarantees ultimate collection of all principal of the related
mortgage loans without offset or deduction. Freddie Mac also guarantees timely
payment of principal of certain PCs.
CMOs and guaranteed REMIC Certificates issued by Fannie Mae and Freddie Mac
are types of multiple class mortgage-backed securities. Investors may purchase
beneficial interests in REMICs, which are known as "regular" interests or
"residual" interests. The Fund does not intend to purchase residual interests in
REMICs. The REMIC Certificates represent beneficial ownership interests in a
REMIC trust, generally consisting of mortgage loans or Fannie Mae, Freddie Mac
or Ginnie Mae guaranteed mortgage-backed securities (the "Mortgage Assets").
The obligations of Fannie Mae or Freddie Mac under their respective guaranty of
the REMIC Certificates are obligations solely of Fannie Mae or Freddie Mac,
respectively.
CMOs and REMIC Certificates are issued in multiple classes. Each class of
CMOs or REMIC Certificates, often referred to as a "tranche," is issued at a
specific adjustable or fixed interest rate and must be fully retired no later
than its final distribution date. Principal prepayments on the Mortgage Loans
or the Mortgage Assets underlying the CMOs or REMIC Certificates may cause some
or all of the classes of CMOs or REMIC Certificates to be retired substantially
earlier than their final distribution dates. Generally, interest is paid or
accrues on all classes of CMOs or REMIC Certificates on a monthly basis.
The principal of and interest on the Mortgage Assets may be allocated among
the several classes of CMOs or REMIC Certificates in various ways. In certain
structures (known as "sequential pay" CMOs or REMIC Certificates), payments of
principal, including any principal prepayments, on the Mortgage Assets generally
are applied to the classes of CMOs or REMIC Certificates in the order of their
respective final distribution dates. Thus, no payment of principal will be made
on any class of sequential pay CMOs or REMIC Certificates until all other
classes having an earlier final distribution date have been paid in full.
B-14
<PAGE>
Additional structures of CMOs and REMIC Certificates include, among others,
"parallel pay" CMOs and REMIC Certificates. Parallel pay CMOs or REMIC
Certificates are those which are structured to apply principal payments and
prepayments of the Mortgage Assets to two or more classes concurrently on a
proportionate or disproportionate basis. These simultaneous payments are taken
into account in calculating the final distribution date of each class.
A wide variety of REMIC Certificates may be issued in parallel pay or
sequential pay structures. These securities include accrual certificates (also
known as "Z-Bonds"), which only accrue interest at a specified rate until all
other certificates having an earlier final distribution date have been retired
and are converted thereafter to an interest-paying security, and planned
amortization class ("PAC") certificates, which are parallel pay REMIC
Certificates that generally require that specified amounts of principal be
applied on each payment date to one or more classes or REMIC Certificates (the
"PAC Certificates"), even though all other principal payments and prepayments of
the Mortgage Assets are then required to be applied to one or more other classes
of the Certificates. The scheduled principal payments for the PAC Certificates
generally have the highest priority on each payment date after interest due has
been paid to all classes entitled to receive interest currently. Shortfalls, if
any, are added to the amount payable on the next payment date. The PAC
Certificate payment schedule is taken into account in calculating the final
distribution date of each class of PAC. In order to create PAC tranches, one or
more tranches generally must be created that absorb most of the volatility in
the underlying mortgage assets. These tranches tend to have market prices and
yields that are much more volatile than other PAC classes.
Asset-Backed Securities
- -----------------------
The Fund may invest in asset-backed securities. Asset-backed securities
represent participation in, or are secured by and payable from, assets such as
motor vehicle installment sales, installment loan contracts, leases of various
types of real and personal property, receivables from revolving credit (credit
card) agreements and other categories of receivables. Such assets are
securitized through the use of trusts and special purpose corporations. Payments
or distributions of principal and interest may be guaranteed up to certain
amounts and for a certain time period by a letter of credit or a pool insurance
policy issued by a financial institution unaffiliated with the trust or
corporation, or other credit enhancements may be present.
Like mortgage-backed securities, asset-backed securities are often subject
to more rapid repayment than their stated maturity date would indicate as a
result of the pass-through of prepayments of principal on the underlying loans.
The 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 the Fund invests in asset-backed securities, the values of the
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
B-15
<PAGE>
security interest in collateral that is comparable to mortgage assets. Credit
card receivables are generally unsecured and the debtors on such receivables are
entitled to the protection of a number of state and federal consumer credit
laws, many of which give such debtors the right to set-off certain amounts owed
on the credit cards, thereby reducing the balance due. Automobile receivables
generally are secured, but by automobiles rather than residential real property.
Most issuers of automobile receivables permit the loan servicers to retain
possession of the underlying obligations. If the servicer were to sell these
obligations to another party, there is a risk that the purchaser would acquire
an interest superior to that of the holders of the asset-backed securities. In
addition, because of the large number of vehicles involved in a typical issuance
and technical requirements under state laws, the trustee for the holders of the
automobile receivables may not have a proper security interest in the underlying
automobiles. Therefore, there is the possibility that, in some cases, recoveries
on repossessed collateral may not be available to support payments on these
securities.
Futures Contracts and Options on Futures Contracts
- --------------------------------------------------
The Fund may purchase and sell futures contracts and may also purchase and
write options on futures contracts. The Fund 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. The 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 the 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, the 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
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).
B-16
<PAGE>
When interest rates are rising or securities prices are falling, the 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, the 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, the Fund can purchase and sell
futures contracts on a specified currency in order to seek to increase total
return or to hedge against changes in currency exchange rates. The Fund 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 the Fund has
acquired or expects to acquire.
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 the Fund will usually liquidate futures contracts on
securities or currency in this manner, the 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 the Fund owns or proposes to acquire. The Fund may, for
example, take a "short" position in the futures market by selling futures
contracts to seek to hedge against an anticipated rise in interest rates or a
decline in market prices or foreign currency rates that would adversely affect
the dollar value of the Fund's portfolio securities. Similarly, the Fund may
sell futures contracts on any currencies in which its portfolio securities are
quoted or denominated or in one currency to seek to hedge against fluctuations
in the value of securities quoted or denominated in a different currency if
there is an established historical pattern of correlation between the two
currencies. If, in the opinion of the Investment Adviser, there is a sufficient
degree of correlation between price trends for the 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
the Fund's portfolio may be more or less volatile than prices of such futures
contracts, the Investment Adviser will attempt to estimate the extent of this
volatility difference based on historical patterns and compensate for any such
differential by having the Fund enter into a greater or lesser number of futures
contracts or by attempting to achieve only a partial hedge against price changes
affecting the Fund's portfolio securities. When hedging of this character is
successful, any depreciation in the value of portfolio securities will be
substantially offset by appreciation in the value of the futures position. On
the other hand, any unanticipated appreciation in the value of the Fund's
portfolio securities would be substantially offset by a decline in the value of
the futures position.
On other occasions, the Fund may take a "long" position by purchasing
futures contracts. This would be done, for example, when the Fund anticipates
the subsequent purchase of particular securities when it has the necessary cash,
but expects the prices or currency exchange rates then available in the
applicable market to be less favorable than prices or rates that are currently
available.
B-17
<PAGE>
Options on Futures Contracts. The acquisition of put and call options on
futures contracts will give the 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, the 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 the Fund's assets. By writing a
call option, the 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 the Fund intends to purchase. However, the Fund
becomes obligated 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 the Fund in writing options on futures is potentially unlimited and may
exceed the amount of the premium received. The 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. The 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. The 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 the 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 the 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. The Fund will engage in transactions in futures contracts and related
options transactions only to the extent such transactions are consistent with
the requirements of the Internal Revenue Code, as amended (the "Code"), for
maintaining its qualification as a regulated investment company for federal
income tax purposes.
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in certain cases, require the Fund to
segregate with its custodian cash or liquid assets in an amount equal to the
underlying value of such contracts and options.
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. Thus,
unanticipated changes in interest rates, securities prices or currency exchange
rates may result in a poorer overall performance for the Fund
B-18
<PAGE>
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 the Fund may be exposed to risk of loss.
Perfect correlation between the 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 the 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 the Fund's trading in futures depends upon the ability of its
Investment Adviser to analyze correctly the futures markets.
Options on Securities and Securities Indices
- --------------------------------------------
Writing Covered Options. The Fund may write (sell) covered call and put
options on any securities in which it may invest. The Fund may, to the extent
it invests in foreign securities, write (sell) put and call options on foreign
currencies. A call option written by the Fund obligates the 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 the Fund are covered, which means that the Fund will own the
securities subject to the option as long as the option is outstanding or the
Fund will use the other methods described below. The Fund's purpose in writing
covered call options is to realize greater income than would be realized on
portfolio securities transactions alone. However, the Fund may forego the
opportunity to profit from an increase in the market price of the underlying
security.
A put option written by the Fund would obligate the 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
the Fund would be covered, which means that the Fund will segregate cash or
liquid assets with a value at least equal to the exercise price of the put
option or will use the other methods described below. The purpose of writing
such options is to generate additional income for the Fund. However, in return
for the option premium, the 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 the Fund will also be considered to be
covered to the extent that the Fund's liabilities under such options are wholly
or partially offset by its rights under call and put options purchased by the
Fund or by an offsetting forward contract which, by virtue of its exercise price
or otherwise, reduces the Fund's net exposure on its written option position.
The Fund may also write (sell) covered call and put options on any
securities index consisting of securities in which it may invest. Options on
securities indices are similar to options on securities, except that the
exercise of securities index options requires cash 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.
B-19
<PAGE>
The 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. The 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.
The Fund may terminate its obligations under an exchange traded call or put
option by purchasing an option identical to the one it has written. Obligations
under over-the-counter options may be terminated only by entering into an
offsetting transaction with the counterparty to such option. Such purchases are
referred to as "closing purchase transactions."
Purchasing Options. The Fund may purchase put and call options on any
securities in which it may invest or options on any securities index composed of
securities in which it may invest. The Fund may also, to the extent that it
invests in foreign securities, purchase put and call options on foreign
securities. The Fund would also be able to enter into closing sale transactions
in order to realize gains or minimize losses on options it had purchased.
The Fund may 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 the Fund, in return for the premium paid, to
purchase specified securities at a specified price during the option period.
The 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 the Fund would realize either no gain or a loss on
the purchase of the call option.
The Fund may 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 the 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 the Fund's securities. Put
options may also be purchased by the Fund for the purpose of affirmatively
benefiting from a decline in the price of securities which it does not own. The
Fund would ordinarily realize a gain if, during the option period, the value of
the underlying securities decreased below the exercise price sufficiently to
more than cover the premium and transaction costs; otherwise the Fund would
realize either no gain or a loss on the purchase of the put option. Gains and
losses on the purchase of protective put options would tend to be offset by
countervailing changes in the value of the underlying portfolio securities.
The 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.
Risks Associated with Options Transactions. There is no assurance that a
liquid secondary market on an options exchange will exist for any particular
exchange-traded option or at
B-20
<PAGE>
any particular time. If the 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 the 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.
The 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 the Fund in options on securities and indices will be
subject to limitations established by each of the exchanges, boards of trade or
other trading facilities governing the maximum number of options in each class
which may be written or purchased by a single investor or group of investors
acting in concert. Thus, the number of options which the Fund may write or
purchase may be affected by options written or purchased by other investment
advisory clients of the Investment Adviser. An exchange, board of trade or
other trading facility may order the liquidation of positions found to be in
excess of these limits, and it may impose certain other sanctions.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The use of options to seek to
increase total return involves the risk of loss if the Investment Adviser is
incorrect in its expectation of fluctuations in securities prices or interest
rates. The successful use of options for hedging purposes also depends in part
on the ability of the Investment Adviser to manage future price fluctuations and
the degree of correlation between the options and securities (or currency)
markets. If the Investment Adviser is incorrect in its expectation of changes
in securities prices or determination of the correlation between the securities
indices on which options are written and purchased and the securities in the
Fund's investment portfolio, the investment performance of the Fund will be less
favorable than it would have been in
B-21
<PAGE>
the absence of such options transactions. The writing of options could increase
the Fund's portfolio turnover rate and, therefore, associated brokerage
commissions or spreads.
Real Estate Investment Trusts
- -----------------------------
The Fund may invest in shares of REITs. REITs are pooled investment
vehicles which invest primarily in real estate or real estate related loans .
REITs are generally classified as equity REITs, mortgage REITs or a combination
of equity and mortgage REITs. Equity REITs invest the majority of their assets
directly in real property and derive income primarily from the collection of
rents. Equity REITs can also realize capital gains by selling properties that
have appreciated in value. Mortgage REITs invest the majority of their assets
in real estate mortgages and derive income from the collection of interest
payments. Like regulated investment companies such as the Fund, REITs are not
taxed on income distributed to shareholders provided they comply with certain
requirements under the Code. The Fund will indirectly bear its proportionate
share of any expenses paid by REITs in which it invests in addition to the
expenses paid by the Fund.
Investing in REITs involves certain unique risks. Equity REITs may be
affected by changes in the value of the underlying property owned by such REITs,
while mortgage REITs may be affected by the quality of any credit extended.
REITs are dependent upon management skills, are not diversified (except to the
extent the Code requires), and are subject to the risks of financing projects.
REITs are subject to heavy cash flow dependency, default by borrowers, self-
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.
Warrants and Stock Purchase Rights
- ----------------------------------
The Fund may invest in warrants or rights (other than those acquired in
units or attached to other securities) which entitle the holder to buy equity
securities at a specific price for a specific period of time. The Fund will
invest in warrants and rights only if such equity securities are deemed
appropriate by the 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 Securities
- ------------------
The Fund may invest up to 25% of its total assets in foreign securities,
including securities of issuers in emerging countries. Investments in foreign
securities may offer potential benefits not available from investments solely in
U.S. dollar-denominated or quoted securities of domestic issuers. Such benefits
may include the opportunity to invest in foreign issuers that appear, in the
opinion of the Investment Adviser, to offer the potential for long-term growth
of capital and income, the opportunity to invest in foreign countries with
economic policies or business cycles different from those of the United States
and the opportunity to reduce fluctuations in portfolio value by taking
advantage of foreign stock markets that do not necessarily move in a manner
parallel to U.S. markets.
B-22
<PAGE>
Investing in foreign securities involves certain special risks, including
those set forth below, which are not typically associated with investing in U.S.
dollar-denominated or quoted securities of U.S. issuers. Investments in foreign
securities usually involve currencies of foreign countries. Accordingly, the
Fund 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. The Fund may be subject to currency
exposure independent of its securities positions. 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.
Currency exchange rates may fluctuate significantly over short periods of
time. They generally are determined by the forces of supply and demand in the
foreign exchange markets and the relative merits of investments in different
countries, actual or anticipated changes in interest rates and other complex
factors, as seen from an international perspective. Currency exchange rates
also can be affected unpredictably by intervention by U.S. or foreign
governments or central banks or the failure to intervene or by currency controls
or political developments in the United States or abroad.
Since foreign issuers generally are not subject to uniform accounting,
auditing and financial reporting standards, practices and requirements
comparable to those applicable to U.S. companies, there may be less publicly
available information about a foreign company than about a U.S. company. Volume
and liquidity in most foreign securities markets are less than in the United
States and securities of many foreign companies are less liquid and more
volatile than securities of comparable U.S. companies. Fixed commissions on
foreign securities exchanges are generally higher than negotiated commissions on
U.S. exchanges, although the 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 the Fund's assets are uninvested and no return is earned on
such assets. The inability of the 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 the 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.
B-23
<PAGE>
The Fund may invest in foreign securities which take the form of sponsored
and unsponsored American Depository Receipts ("ADRs") and Global Depository
Receipts ("GDRs") and may also invest in European Depository Receipts ("EDRs")
or other similar instruments representing securities of foreign issuers
(together, "Depository Receipts").
ADRs represent the right to receive securities of foreign issuers deposited
in a domestic bank or a correspondent bank. ADRs are traded on domestic
exchanges or in the U.S. over-the-counter market and, generally, are in
registered form. EDRs and GDRs are receipts evidencing an arrangement with a
non-U.S. bank similar to that for ADRs and are designed for use in the non-U.S.
securities markets. EDRs and GDRs are not necessarily quoted in the same
currency as the underlying security.
To the extent the Fund acquires Depository Receipts through banks which do
not have a contractual relationship with the foreign issuer of the security
underlying the Depository Receipts to issue and service such Depository Receipts
(unsponsored), there may be an increased possibility that the Fund would not
become aware of and be able to respond to corporate actions such as stock splits
or rights offerings involving the foreign issuer in a timely manner. In
addition, the lack of information may result in inefficiencies in the valuation
of such instruments. Investment in Depository Receipts does not eliminate all
the risks inherent in investing in securities of non-U.S. issuers. The market
value of Depository Receipts is dependent upon the market value of the
underlying securities and fluctuations in the relative value of the currencies
in which the Depository Receipts and the underlying securities are quoted.
However, by investing in Depository Receipts, such as ADRs, that are quoted in
U.S. dollars, the Fund may avoid currency risks during the settlement period for
purchases and sales.
As described more fully below, the Fund 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,
including Asia and Eastern Europe," below.
Investing in Emerging Countries, including Asia and Eastern Europe. Each of
the securities markets of the emerging countries is less liquid and subject to
greater price volatility and has a smaller market capitalization than the U.S.
securities markets. Issuers and securities markets in such countries are not
subject to as extensive and frequent accounting, financial and other reporting
requirements or as comprehensive government regulations as are issuers and
securities markets in the U.S. In particular, the assets and profits appearing
on the financial statements of emerging country issuers may not reflect their
financial position or results of operations in the same manner as financial
statements for U.S. issuers. Substantially less information may be publicly
available about emerging country issuers than is available about issuers in the
United States.
B-24
<PAGE>
Emerging country securities markets are typically marked by a high
concentration of market capitalization and trading volume in a small number of
issuers representing a limited number of industries, as well as a high
concentration of ownership of such securities by a limited number of investors.
The markets for securities in certain emerging countries are in the earliest
stages of their development. Even the markets for relatively widely traded
securities in emerging countries may not be able to absorb, without price
disruptions, a significant increase in trading volume or trades of a size
customarily undertaken by institutional investors in the securities markets of
developed countries. The limited size of many of these securities markets can
cause prices to be erratic for reasons apart from factors that affect the
soundness and competitiveness of the securities issuers. For example, prices
may be unduly influenced by traders who control large positions in these
markets. Additionally, market making and arbitrage activities are generally
less extensive in such markets, which may contribute to increased volatility and
reduced liquidity of such markets. The limited liquidity of emerging country
markets may also affect the Fund's ability to accurately value its portfolio
securities or to acquire or dispose of such securities at the price and time it
wishes to do so or in order to meet redemption requests.
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 the
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 governmental 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 the Fund. The 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 substantially greater
degree of economic, political and social instability and disruption than is the
case in the United States, Japan and most Western European countries. This
instability may result from, among other things, the following: (i)
authoritarian governments or military involvement in political and economic
decision making, including changes or attempted changes in governments through
extra-constitutional means; (ii) popular unrest associated with demands for
improved political, economic or social conditions; (iii) internal insurgencies;
(iv) hostile relations with neighboring countries; (v) ethnic, religious and
racial disaffection or conflict; and (vi) the absence of developed legal
structures governing foreign private investments and private property. Such
B-25
<PAGE>
economic, political and social instability could disrupt the principal financial
markets in which the Fund may invest and adversely affect the value of the
Fund's assets. The Fund's investments could in the future be adversely affected
by any increase in taxes or by political, economic or diplomatic developments.
The Fund may seek investment opportunities within the former "east bloc"
countries in Eastern Europe. All or a substantial portion of such investments
may be considered "not readily marketable" for purposes of the limitation on
illiquid securities set forth below. For example, most Eastern European
countries have had a centrally planned, socialist economy since shortly after
World War II. The governments of a number of Eastern European countries
currently are implementing reforms directed at political and economic
liberalization, including efforts to decentralize the economic decision-making
process and move towards a market economy. However, business entities in many
Eastern European countries do not have any recent history of operating in a
market-oriented economy, and the ultimate impact of Eastern European countries'
attempts to move toward more market-oriented economies is currently unclear. In
addition, any change in the leadership or policies of Eastern European countries
may halt the expansion of or reverse the liberalization of foreign investment
policies now occurring and adversely affect existing investment opportunities.
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.
The Fund's income and, in some cases, capital gains from foreign stocks and
securities will be subject to applicable taxation in certain of the countries in
which it invests, and treaties between the U.S. and such countries may not be
available in some cases to reduce the otherwise applicable tax rates. See
"Taxation."
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 a portion of the assets of the Fund remain uninvested and no return
is earned on such assets. The inability of the 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 to the purchaser.
Forward Foreign Currency Exchange Contracts. The Fund may enter into
forward foreign currency exchange contracts for hedging purposes and to seek to
protect against anticipated changes in future foreign currency exchange rates.
A forward foreign currency exchange contract
B-26
<PAGE>
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 the 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.
The Fund may enter into forward foreign currency exchange contracts in
several circumstances. First, when the 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 will attempt to protect itself against an adverse change in the
relationship between the U.S. dollar and the subject foreign currency during the
period between the date on which the security is purchased or sold, or on which
the dividend or interest payment is declared, and the date on which such
payments are made or received.
Additionally, when the 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 the 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 the 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 the Fund's foreign
assets.
Unless otherwise covered in accordance with applicable regulations, cash or
liquid assets of the Fund will be segregated in an amount equal to the value of
the Fund's total assets committed to the consummation of forward foreign
currency exchange contracts. The segregated assets will be marked-to-market on
a daily basis. If the value of the segregated assets declines, additional cash
or liquid assets will be segregated on a daily basis so that the value of the
assets will equal the amount of the 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
B-27
<PAGE>
such event, the Fund's ability to utilize forward foreign currency exchange
contracts may be restricted.
While the 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 the Fund's portfolio holdings of securities quoted or
denominated in a particular currency and forward contracts entered into by the
Fund. Such imperfect correlation may cause the 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 the Fund of unrealized profits, transaction costs
or the benefits of a currency hedge or force the Fund to cover its purchase or
sale commitments, if any, at the current market price. The Fund will not enter
into forward foreign currency exchange contracts, currency swaps or other
privately negotiated currency instruments unless the credit quality of the
unsecured senior debt or the claims-paying ability of the counterparty is
considered to be investment grade by the Investment Adviser. To the extent that
a substantial portion of the 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.
Writing and Purchasing Currency Call and Put Options. The Fund may, to the
extent that it invests in foreign securities, write 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 the 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 the Fund's position, the Fund may forfeit the
entire amount of the premium plus related transaction costs. Options on foreign
currencies to be written or purchased by the Fund will be traded on U.S. and
foreign exchanges or over-the-counter.
Options on currency may be used for hedging purposes or to seek to increase
total return when the Investment Adviser anticipates that the currency will
appreciate or depreciate in value, but the securities quoted or denominated in
that currency do not present attractive investment opportunities and are not
included in the Fund's portfolio.
B-28
<PAGE>
A call option written by the Fund obligates the Fund to sell a specified
currency to the holder of the option at a specified price if the option is
exercised at any time before the expiration date. A put option written by the
Fund would obligate the Fund to purchase a specified currency from the option
holder at a specified price if the option is exercised at any time before the
expiration date. The writing of currency options involves a risk that the 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.
The 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." The Fund may enter into closing
sale transactions in order to realize gains or minimize losses on options
purchased by the Fund.
The 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 Fund, in return for the premium paid, to
purchase specified currency at a specified price during the option period. The
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.
The Fund would normally purchase put options in anticipation of a decline in
the U.S. dollar value of the currency in which securities in its portfolio are
quoted or denominated ("protective puts"). The purchase of a put option would
entitle the Fund, in exchange for the premium paid, to sell a specified currency
at a specified price during the option period. The purchase of protective puts
is designed merely to offset or hedge against a decline in the U.S. dollar value
of the Fund's portfolio securities due to currency exchange rate fluctuations.
The 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, the
Fund may use options on currency to seek to increase total return. The Fund 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, the Fund
may forego the opportunity to profit from an increase in the market value of the
underlying currency. Also, when writing put options, the Fund accepts, in
return for the option premium, the risk that it may be required to purchase the
underlying currency at a price in excess of the currency's market value at the
time of purchase.
B-29
<PAGE>
Special Risks Associated With Options on Currency. An exchange traded
options position may be closed out only on an options exchange which provides a
secondary market for an option of the same series. Although the Fund will
generally purchase or write only those options for which there appears to be an
active secondary market, there is no assurance that a liquid secondary market on
an exchange will exist for any particular option, or at any particular time.
For some options, no secondary market on an exchange may exist. In such event,
it might not be possible to effect closing transactions in particular options,
with the result that the 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 the Fund as a covered
call option writer is unable to effect a closing purchase transaction in a
secondary market, it will not be able to sell the underlying currency (or
security quoted or denominated in that currency) until the option expires or it
delivers the underlying currency upon exercise.
There is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain of the facilities of the
Options Clearing Corporation inadequate, and thereby result in the institution
by an exchange of special procedures which may interfere with the timely
execution of customers' orders.
The 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 the Fund.
The amount of the premiums which the 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.
Convertible Securities
- ----------------------
The Fund may invest in convertible securities. Convertible securities
include corporate notes or preferred stock but are ordinarily long-term debt
obligations of the issuer convertible at a stated exchange rate into common
stock of the issuer. As with all debt securities, the market value of
convertible securities tends to decline as interest rates increase and,
conversely, to increase as interest rates decline. Convertible securities
generally offer lower interest or dividend yields than non-convertible
securities of similar quality. However, when the market price of the common
stock underlying a convertible security exceeds the conversion price, the
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. Convertible securities rank senior to common stocks in
an issuer's capital structure and consequently entail less risk than the
issuer's common stock. In evaluating a convertible security, the Investment
Adviser will give primary emphasis to the attractiveness of the underlying
common stock. Convertible debt securities are equity investments for purposes
of the Fund's investment policies.
B-30
<PAGE>
Preferred Securities
- --------------------
The Fund may invest in preferred securities. Unlike debt securities, the
obligations of an issuer of preferred stock, including dividend and other
payment obligations, may not typically be accelerated by the holders of
preferred stock on the occurrence of an event of default (such as a covenant
default or filing of a bankruptcy petition) or other non-compliance by the
issuer with the terms of the preferred stock. Often, however, on the occurrence
of any such event of default or non-compliance by the issuer, preferred
stockholders will be entitled to gain representation on the issuer's board of
directors or increase their existing board representation. In addition,
preferred stockholders may be granted voting rights with respect to certain
issues on the occurrence of any event of default.
Equity Swaps
- ------------
The Fund may enter into equity swap contracts to invest in a market without
owning or taking physical custody of securities in circumstances in which direct
investment is restricted for legal reasons or is otherwise impracticable.
Equity swaps may also be used for hedging purposes or to seek to increase total
return. The counterparty to an equity swap contract will typically be a bank,
investment banking firm or broker/dealer. Equity swap contracts may be
structured in different ways. For example, a counterparty may agree to pay the
Fund the amount, if any, by which the notional amount of the equity swap
contract would have increased in value had it been invested in the particular
stocks (or an index of stocks), plus the dividends that would have been received
on those stocks. In these cases, the Fund may agree to pay to the counterparty
a floating rate of interest on the notional amount of the equity swap contract
plus the amount, if any, by which that notional amount would have decreased in
value had it been invested in such stocks. Therefore, the return to the Fund on
the equity swap contract should be the gain or loss on the notional amount plus
dividends on the stocks less the interest paid by the Fund on the notional
amount. In other cases, the counterparty and the Fund may each agree to pay the
other the difference between the relative investment performances that would
have been achieved if the notional amount of the equity swap contract had been
invested in different stocks (or indices of stocks).
The 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 the Fund is contractually obligated to make.
If the other party to an equity swap defaults, the Fund's risk of loss consists
of the net amount of payments that the Fund is contractually entitled to
receive, if any. Inasmuch as these transactions are entered into for hedging
purposes or are offset by segregated cash or liquid assets to cover the Fund's
potential exposure, the Fund and its Investment Adviser believe that
transactions do not constitute senior securities under the Act and, accordingly,
will not treat them as being subject to the Fund's borrowing restrictions.
B-31
<PAGE>
The Fund will not enter into swap transactions unless the unsecured
commercial paper, senior debt or claims paying ability of the other party
thereto is considered to be investment grade by the Investment Adviser.
Lending of Portfolio Securities
- -------------------------------
The Fund may lend portfolio securities. Under present regulatory policies,
such loans may be made to institutions such as brokers or dealers and would be
required to be secured continuously by collateral in cash, cash equivalents,
letters of credit or U.S. Government securities maintained on a current basis
at an amount at least equal to the market value of the securities loaned. The
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,
the 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. The 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 the 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 the 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 the Fund (including the loan
collateral).
Cash received as collateral for securities lending transactions may be
invested in other investment eligible securities. Investing the collateral
subjects it to market depreciation or appreciation, and the Fund is responsible
for any loss that may result from its investment of the borrowed collateral.
When-Issued Securities and Forward Commitments
- ----------------------------------------------
The Fund may purchase when-issued securities and enter into forward
commitments. These transactions involve a commitment by the 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. The 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,
the Fund may dispose of or negotiate a commitment after entering into it. The
Fund may realize a capital gain or loss in connection with these transactions.
For purposes of determining the Fund's duration, the maturity of when-issued or
forward commitment securities will be calculated from the commitment date. The
Fund is required to segregate until three days prior to the settlement date,
cash and liquid assets
B-32
<PAGE>
in an amount sufficient to meet the purchase price. Alternatively, the Fund may
enter into offsetting contracts for the forward sale of other securities that it
owns. Securities purchased or sold on a when-issued or forward commitment basis
involve a risk of loss if the value of the security to be purchased declines
prior to the settlement date or if the value of the security to be sold
increases prior to the settlement date.
Investment in Unseasoned Companies
- ----------------------------------
The Fund may invest in companies (including predecessors) which have
operated less than three years, except that this limitation does not apply to
debt securities which have been rated investment grade or better by at least one
nationally recognized statistical ratings organization ("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
- --------------------------
The Fund reserves the right to invest up to 10% of its total assets in the
securities of all investment companies (including SPDRs, WEBS and other exchange
traded funds) but may neither invest more than 5% of its total assets in any one
investment company nor acquire more than 3% of the voting securities of any
other investment company. Pursuant to an exemptive order obtained from the SEC,
the Fund may invest in money market funds for which the Investment Adviser or
any of its affiliates serves as investment adviser. The 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 other
fees paid by the Fund. However, to the extent that the Fund invests in a money
market fund for which the Investment Adviser or any of its affiliates acts as
investment adviser, the advisory and other fees payable by the Fund to the
Investment Adviser will be reduced by an amount equal to the Fund's
proportionate share of the advisory and administration fees paid by such money
market fund to the investment adviser.
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). There is a 5% limit based on total assets on
investments by any one Fund in SPDRs. The UIT will issue SPDRs in aggregations
known as "Creation Units" in exchange for a "Portfolio Deposit" consisting of
(a) a portfolio of securities substantially similar to the component securities
("Index Securities") of the Standard & Poor's 500 Composite Stock Price Index
(the "S&P Index"), (b) a cash payment equal to a pro rata portion of the
dividends accrued on the UIT's portfolio securities since the last dividend
payment by the UIT, net of expenses and liabilities, and (c) a cash payment or
credit ("Balancing Amount") designed to equalize the net asset value of the S&P
Index and the net asset value of a Portfolio Deposit.
SPDRs are not individually redeemable, except upon termination of the UIT.
To redeem, the Portfolio must accumulate enough SPDRs to reconstitute a Creation
Unit. The liquidity of small holdings of SPDRs, therefore, will depend upon the
existence of a secondary market. Upon
B-33
<PAGE>
redemption of a Creation Unit, the Portfolio will receive Index Securities and
cash identical to the Portfolio Deposit required of an investor wishing to
purchase a Creation Unit that day.
The price of SPDRs is derived from and based upon the securities held by the
UIT. Accordingly, the level of risk involved in the purchase or sale of a SPDR
is similar to the risk involved in the purchase or sale of traditional common
stock, with the exception that the pricing mechanism for SPDRs is based on a
basket of stocks. Disruptions in the markets for the securities underlying
SPDRs purchased or sold by the Funds could result in losses on SPDRs.
The Fund may also purchase shares of investment companies investing
primarily in foreign securities, including "country funds." Country funds have
portfolios consisting primarily of securities of issuers located in one foreign
country or region. The Fund may, subject to the limitations stated above,
invest in World Equity Benchmark Shares ("WEBS") and similar securities that
invest in securities included in foreign securities indices. The Fund may,
subject to the limitation stated above, invest in other types of unaffiliated
investment companies issuing shares which are traded like traditional equity
securities on a national stock exchange or the NASDAQ National Market System.
Repurchase Agreements
- ---------------------
The 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. A repurchase agreement is an arrangement under
which the 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 the Fund's custodian (or subcustodian). The
repurchase price may be higher than the purchase price, the difference being
income to the Fund, or the purchase and repurchase prices may be the same, with
interest at a stated rate due to the Fund together with the repurchase price on
repurchase. In either case, the income to the 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 the Fund to the seller of the security.
For other purposes, it is not always clear whether a court would consider the
security purchased by the Fund subject to a repurchase agreement as being owned
by the 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, the 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
value of the security. If the court characterizes the transaction as a loan and
the 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, the Fund would be
at risk of losing some or all of the principal and interest involved in the
transaction.
B-34
<PAGE>
The 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), the 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, the Fund, together with other registered investment companies
having advisory agreements with the Investment Adviser or its affiliates, may
transfer uninvested cash balances into a single joint account, the daily
aggregate balance of which will be invested in one or more repurchase
agreements.
Portfolio Turnover
- ------------------
The Fund may engage in active short-term trading to benefit from yield
disparities among different issues of securities or among the markets for equity
securities, or for other reasons. It is anticipated that the Fund's portfolio
turnover rate will vary from year to year. During the Fund's first year of
operations its portfolio turnover rate is not expected to exceed 50%.
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 Fund. The Fund's investment objective and all other
investment policies or practices of the Fund are considered by the Trust not to
be fundamental and accordingly may be changed without shareholder approval. See
"Investment Objective 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
Fund present at a meeting, if the holders of more than 50% of the outstanding
shares of the Trust or Fund are present or represented by proxy, or (b) more
than 50% of the shares of the Trust or 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, the Fund. With respect to the Fund's 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.
The Fund may not:
(1) Make any investment inconsistent with the Fund's classification as
a diversified company under the Act.
B-35
<PAGE>
(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, except that the Fund will invest at least 25% of
its total assets in companies in one or more of the media,
telecommunications, technology and/or internet industries
(excluding 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 in 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 the Fund may
purchase and sell securities that are secured by real estate or
interests therein, securities of real estate investment trusts and
mortgage-related securities and may hold and sell real estate
acquired by the 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.
(8) Issue senior securities to the extent such issuance would violate
applicable law.
The 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.
B-36
<PAGE>
The Fund may not:
(a) Invest in companies for the purpose of exercising control or
management.
(b) Invest more than 15% of the Fund's net assets in illiquid investments
including repurchase agreements with a notice or demand period of more
than seven days, securities which are not readily marketable and
restricted securities not eligible for resale pursuant to Rule 144A
under the 1933 Act.
(c) Purchase additional securities if the Fund's borrowings exceed 5% of
its net assets.
(d) Make short sales of securities, except short sales against the box.
B-37
<PAGE>
MANAGEMENT
The Trustees are responsible for deciding matters of general policy and
reviewing the actions of the Investment Adviser, distributor and transfer agent.
The officers of the Trust conduct and supervise the 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.
Name, Age Positions Principal Occupation(s)
and Address with Trust During Past 5 Years
- ----------- ---------- ---------------------
Ashok N. Bakhru, 58 Chairman Chairman of the Board and Trustee -
P.O. Box 143 & Trustee Goldman Sachs Trust (registered
Lima, PA 19037 investment company) (since January
1992); President, ABN Associates (July
1994 -March 1996 and November 1998 to
present); Executive Vice
President-Finance and Administration and
Chief Financial Officer, Coty Inc.
(manufacturer of fragrances and
cosmetics) (April 1996-November 1998);
Senior Vice President of Scott Paper
Company (until June 1994); Director of
Arkwright Mutual Insurance Company
(1984-1999); Trustee of International
House of Philadelphia (since 1989);
Member of Cornell University Council
(since 1992); Trustee of the Walnut
Street Theater (since 1992); Director,
Private Equity Investors - III (since
November 1998); and Trustee, Citizens
Scholarship Foundation of America (since
1998).
B-38
<PAGE>
Name, Age Positions Principal Occupation(s)
and Address with Trust During Past 5 Years
- ----------- ---------- ---------------------
*David B. Ford, 54 Trustee Trustee - Goldman Sachs Trust
32 Old Slip (registered investment company) (since
New York, NY 10005 September 1994); Director, Commodities
Corp. LLC (futures and commodities
traders) (since April 1997); Managing
Director, J. Aron & Company (commodity
dealer and risk management adviser)
(since November 1996); Managing
Director, Goldman Sachs & Co. Investment
Banking Division (since November 1996);
Chief Executive Officer and Director,
CIN Management (investment adviser)
(since August 1996); Chief Executive
Officer & Managing Director and
Director, Goldman Sachs Asset Management
International (since November 1995 and
December 1994, respectively); Co-Head,
Goldman Sachs Asset Management (since
November 1995); Co-Head and Director,
Goldman Sachs Funds Management L.P.
(since November 1995 and December 1994,
respectively); and Chairman and
Director, Goldman Sachs Asset Management
Japan Limited (since November 1994).
*Douglas C. Grip, 37 Trustee Trustee and President - Goldman Sachs
32 Old Slip & President Trust (registered investment company)
New York, NY 10005 (since 1997); Trustee, Trust for Credit
Unions (registered investment company)
(since March 1998); Managing Director,
Goldman Sachs Asset Management Group
(since November 1997); President,
Goldman Sachs Funds Group (since April
1996); and President, MFS Retirement
Services Inc., of Massachusetts
Financial Services (prior thereto).
B-39
<PAGE>
Name, Age Positions Principal Occupation(s)
and Address with Trust During Past 5 Years
- ----------- ---------- ---------------------
*John P. McNulty, 47 Trustee Trustee - Goldman Sachs Trust
32 Old Slip (registered investment company) (since
New York, NY 10005 January 1997); Managing Director,
Goldman Sachs (since November 1996);
Head of Investment Management Division
(since September 1999); General Partner,
J. Aron & Company (since November 1995);
Director and Co-Head, Goldman Sachs
Funds Management L.P. (since November
1995); Director, Goldman Sachs Asset
Management International (since January
1996); Co-Head, GSAM (November 1995 --
September 1999); Director, Global
Capital Reinsurance (insurance) (since
1989); Director, Commodities Corp. LLC
(since April 1997); Limited Partner of
Goldman Sachs (1994 - November 1995);
and Trustee, Trust for Credit Unions
(registered investment company) (January
1996 - March 1998).
B-40
<PAGE>
Name, Age Positions Principal Occupation(s)
and Address with Trust During Past 5 Years
- ----------- ---------- ---------------------
Mary P. McPherson, 64 Trustee Trustee - Goldman Sachs Trust
The Andrew W. (registered investment company) (since
Mellon Foundation 1997); Vice President, The Andrew W.
140 East 62nd Street Mellon Foundation (provider of grants
New York, NY 10021 for conservation, environmental and
educational purposes) (since October
1997); President of Bryn Mawr College
(1978-1997); Director, Smith College
(since 1998); Director, Josiah Macy, Jr.
Foundation (health educational programs)
(since 1977); Director of the
Philadelphia Contributionship
(insurance) (since 1985); Director
Emeritus, Amherst College (1986-1998);
Director, Dayton Hudson Corporation
(general retailing merchandising)
(1988-1997); Director, The Spencer
Foundation (educational research) (since
1993); member of PNC Advisory Board
(banking) (since 1993); and Director,
American School of Classical Studies in
Athens (since 1997).
*Alan A. Shuch, 50 Trustee Trustee - Goldman Sachs Trust
32 Old Slip (registered investment company) (since
New York, NY 10005 October 1989); Limited Partner, Goldman
Sachs (since December 1994); Consultant
to GSAM (since December 1994).
B-41
<PAGE>
Name, Age Positions Principal Occupation(s)
and Address with Trust During Past 5 Years
- ----------- ---------- ---------------------
Jackson W. Smart, Jr., 69 Trustee Trustee - Goldman Sachs Trust
One Northfield Plaza, (registered investment company)
Suite 218 Northfield, (since May 1997); President, Board
IL 60093 Member and Senior Advisor, Smart
Properties, Inc. (since January
2000); Chairman, Executive Committee
and Director, First Commonwealth,
Inc. (a managed dental care company)
(January 1996 - August 1999);
Chairman and Chief Executive Officer,
MSP Communications Inc. (a company
engaged in radio broadcasting)
(October 1988 - December 1997);
Director, Federal Express Corporation
(NYSE) (since 1976); and Director,
Evanston Northwestern Healthcare
(since 1980).
William H. Springer, 70 Trustee Trustee - Goldman Sachs Trust
701 Morningside Drive (registered investment company)
Lake Forest, IL 60045 (since April 1989); Director, The
Walgreen Co. (a retail drug store
business) (April 1988 - January
2000); Director of Baker, Fentress &
Co. (a closed-end, non-diversified
management investment company) (April
1992 - present); and Chairman and
Trustee, Northern Institutional Funds
(since April 1984).
B-42
<PAGE>
Name, Age Positions Principal Occupation(s)
and Address with Trust During Past 5 Years
- ----------- ---------- ---------------------
Richard P. Strubel, 60 Trustee Trustee - Goldman Sachs Trust
500 Lake Cook Road (registered investment company)
Suite 150 (since December 1987); President
Deerfield, IL 60015 and COO, UNext.com (provider of
educational services via the
internet) (since 1999); Director,
Gildan Activewear Inc. (since
February 1999); Director of Kaynar
Technologies Inc. (since March
1997); Managing Director, Tandem
Partners, Inc. (1990 - 1999);
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); and
Director, Cantilever Technologies,
Inc. (since 1999).
*Nancy L. Mucker, 50 Vice President Vice President - Goldman Sachs Trust
4900 Sears Tower (registered investment company);
Chicago, IL 60606 Vice President and Co-Manager of
Funds Group Shareholder Servicing,
Goldman Sachs (since April 1985).
*John M. Perlowski, 35 Treasurer Treasurer - Goldman Sachs Trust
32 Old Slip (registered investment company);
New York, NY 10005 Vice President, Goldman Sachs
(since July 1995); and Banking
Director, Investors Bank and Trust
(November 1993 - July 1995).
*James A. Fitzpatrick, 39 Vice President Vice President - Goldman Sachs Trust
4900 Sears Tower (registered investment company)
Chicago, IL 60606 (since October 1997); Managing
Director, Goldman Sachs (since
October 1999); Vice President of
GSAM (April 1997 - December 1999);
and Vice President and General
Manager, First Data Corporation -
Investor Services Group (1994 to
1997).
B-43
<PAGE>
Name, Age Positions Principal Occupation(s)
and Address with Trust During Past 5 Years
- ----------- ---------- ---------------------
*Jesse Cole, 36 Vice President Vice President - Goldman
4900 Sears Tower Sachs Trust (registered
Chicago, IL 60606 investment company) (since
1998); Vice President, GSAM
(since June 1998); Vice
President, AIM Management
Group, Inc. (investment
adviser) (April 1996-June
1998); and Assistant Vice
President, the Northern
Trust Company (June 1987-
April 1996).
*Philip V. Giuca , Jr., 37 Assistant Assistant Treasurer -
32 Old Slip Treasurer Goldman Sachs Trust
New York, NY 10005 (registered investment
company)(since 1997); and
Vice President, Goldman
Sachs (May 1992-Present).
*Michael J. Richman, 39 Secretary Secretary - Goldman Sachs
32 Old Slip Trust (registered
New York, NY 10005 investment company); General
Counsel of the Funds Group
of GSAM (since December
1997); Associate General
Counsel of GSAM (February
1994 -December 1997);
Counsel to the Funds Group,
GSAM (June 1992 - December
1997); Associate General
Counsel, Goldman Sachs
(since December 1998); Vice
President of Goldman Sachs
(since June 1992); and
Assistant General Counsel of
Goldman Sachs (June 1992 to
December 1998).
B-44
<PAGE>
Name, Age Positions Principal Occupation(s)
and Address with Trust During Past 5 Years
- ----------- ---------- ---------------------
*Howard B. Surloff, 34 Assistant Assistant Secretary - Goldman Sachs
32 Old Slip Secretary Trust (registered investment company)
New York, NY 10005 (since 1993); Assistant General
Counsel, GSAM and General Counsel to
the U.S. Funds Group (since December
1997); Assistant General Counsel and
Vice President, Goldman Sachs (since
November 1993 and May 1994,
respectively); Counsel to the Funds
Group, GSAM (November 1993 - December
1997); and Associate of Shereff,
Friedman, Hoffman & Goodman (October
1990 to November 1993).
*Valerie A. Zondorak, 34 Assistant Assistant Secretary - Goldman Sachs
32 Old Slip Secretary Trust (registered investment company);
New York, NY 10005 Assistant General Counsel, GSAM and
Assistant General Counsel to the Funds
Group (since December 1997); Vice
President and Assistant General
Counsel, Goldman Sachs (since March
1997); and Counsel to the Funds Group,
GSAM (March 1997 - December 1997).
*Deborah A. Farrell, 28 Assistant Assistant Secretary - Goldman Sachs
32 Old Slip Secretary Trust (registered investment company)
New York, NY 10005 (since 1996); Legal Products Analyst,
Goldman Sachs (since December 1998);
Legal Assistant, Goldman Sachs
(January 1996 - December 1998);
Assistant Secretary to the Funds Group
(1996 to present); and Executive
Secretary, Goldman Sachs (January
1994 - January 1996).
B-45
<PAGE>
Name, Age Positions Principal Occupation(s)
and Address with Trust During Past 5 Years
- ----------- ---------- ---------------------
*Kaysie P. Uniacke, 39 Assistant Assistant Secretary - Goldman Sachs
32 Old Slip Secretary Trust (registered investment
New York, NY 10005 company); Managing Director, GSAM
(since 1997); and Vice President and
Senior Portfolio Manager, GSAM (1988
to 1997).
*Elizabeth D. Anderson, 30 Assistant Assistant Secretary - Goldman Sachs
32 Old Slip Secretary Trust (registered investment
New York, NY 10005 company); Portfolio Manager, GSAM
(since April 1996); Junior Portfolio
Manager, GSAM (1995 - April 1996);
and Funds Trading Assistant, GSAM
(1993- 1995).
*Amy E. Belanger, 30 Assistant Assistant Secretary - Goldman Sachs
32 Old Slip Secretary Trust (registered investment
New York, NY 10005 company) (since 1999); Vice
President, Goldman Sachs (since June
1999); Counsel, Goldman Sachs (since
1998); and Associate, Dechert Price
& Rhoads (September 1996-1998).
Each interested Trustee and officer holds comparable positions with certain
other companies of which Goldman Sachs, GSAM or an affiliate thereof is the
investment adviser, administrator and/or distributor.
The Trust pays each Trustee, other than those who are "interested persons"
of Goldman Sachs, a fee for each Trustee meeting attended and an annual fee.
Such Trustees are also reimbursed for travel expenses incurred in connection
with attending such meetings.
The Trust, its Investment Adviser and principal underwriter have adopted
codes of ethics under Rule 17j-1 of the 1940 Act that permit personnel subject
to their particular code of ethics to invest in securities, including securities
that may be purchased or held by the Fund.
B-46
<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,
1999 with respect to each of the Trust's funds then in existence:
<TABLE>
<CAPTION>
Pension or Total
Retirement Compensation
Benefits from Goldman Sachs
Aggregate Accrued as Funds Complex
Compensation Part of (including the
Name of Trustee from the Trust/2/ Trust's Expenses Trust)/3/
- --------------- ----------------- ---------------- ---------
<S> <C> <C> <C>
Ashok N. Bakhru/1/ $23,884.03 $0 $159,884
David B. Ford $0 $0 $ 0
Douglas C. Grip $0 $0 $ 0
John P. McNulty $0 $0 $ 0
Mary P. McPherson $17,716.09 $0 $118,716
Alan A. Shuch $0 $0 $ 0
Jackson W. Smart $17,716.09 $0 $118,716
William H. Springer $17,716.09 $0 $118,716
Richard P. Strubel $17,716.09 $0 $118,716
</TABLE>
______________
1. Includes compensation as Chairman of the Board of Trustees.
2. Reflects amount paid by the Trust during the fiscal year ended
December 31, 1999. During this fiscal year, the Fund had not offered
shares.
3. The Goldman Sachs Fund complex consists of the Goldman Sachs Trust and
Goldman Sachs Variable Insurance Trust. Goldman Sachs Trust consisted
of 51 mutual funds, on December 31, 1999. Goldman Sachs Variable
Insurance Trust consisted of 16 mutual funds on December 31, 1999.
B-47
<PAGE>
Management Services
- -------------------
As stated in the Fund's Prospectus, GSAM, 32 Old Slip, New York, New York,
a unit of the Investment Management Division of Goldman Sachs, 85 Broad Street,
New York, New York, serves as Investment Adviser to the Fund. See "Service
Providers" in the Fund's Prospectuses for a description of the Investment
Adviser's duties to the Fund. The Goldman Sachs Group, Inc. controls the Fund's
Investment Adviser.
Founded in 1869, Goldman Sachs is among the oldest and largest investment
banking firms in the United States. Goldman Sachs is a leader in developing
portfolio strategies and in many fields of investing and financing,
participating in financial markets worldwide and serving individuals,
institutions, corporations and governments. Goldman Sachs is also among the
principal market sources for current and thorough information on companies,
industrial sectors, markets, economies and currencies, and trades and makes
markets in a wide range of equity and debt securities 24-hours a day. The firm
is headquartered in New York and has offices throughout the United States and in
Beijing, Frankfurt, George Town, Hong Kong, London, Madrid, Mexico City, Milan,
Montreal, 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. Goldman Sachs has agreed to permit
the Fund to use the name "Goldman Sachs" or a derivative thereof as part of the
Fund's name for as long as the Fund's Management Agreement is in effect.
The Investment Adviser is able to draw on the substantial research and
market expertise of Goldman Sachs whose investment research effort is one of the
largest in the industry. The Goldman Sachs Global Investment Research Department
covers approximately 2,200 companies, including approximately 1,000 U.S.
corporations in 60 industries. The in-depth information and analyses generated
by Goldman Sachs' research analysts are available to the Investment Adviser.
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 Fund, the Investment Adviser has access to Goldman Sachs'
economics research. The Economics Research Department, based in London,
conducts economic, financial and currency markets research which analyzes
economic trends and interest and exchange rate movement worldwide. The
Economics Research Department tracks factors such as inflation and money supply
figures, balance of trade figures, economic growth, commodity prices, monetary
and fiscal policies, and political events that can influence interest rates and
currency trends. The success of Goldman Sachs' international research team has
brought wide recognition to its members. The team has earned top rankings in
various external surveys such as Extel, Institutional
B-48
<PAGE>
Investor and Reuters. These rankings acknowledge the achievements of the firm's
economists, strategists and equity analysts.
In allocating assets among foreign countries and currencies for the Fund,
the 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 the Fund given its investment
objective and criteria.
The Fund's Management Agreement provides that the Investment Adviser may
render similar services to others as long as the services provided thereunder
are not impaired thereby. The Management Agreement was initially approved with
respect to the Fund 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 February 3, 2000. The Management Agreement was most recently
approved with respect to the Fund by the Trustees, including a majority of the
non-interested Trustees, on April 25, 2000. The Fund's sole shareholder
approved these arrangements on April 27, 2000, by consent action to satisfy
conditions imposed by the SEC in connection with the registration of shares of
the Fund. The Management Agreement will remain in effect with respect to the
Fund until June 30, 2001 and from year to year thereafter provided such
continuance is specifically approved at least annually by (a) the vote of a
majority of the Fund's outstanding voting securities 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 the 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 Fund on 60 days' written notice to the Investment Adviser and by the
Investment Adviser on 60 days' written notice to the Trust.
Pursuant to the Management Agreement, the Investment Adviser is entitled to
receive fees, payable monthly, at the annual rate of 1.00% of the Fund's average
daily net assets. Prior to the date of this Additional Statement, no shares of
the Fund had been offered and, accordingly, no fees were paid by the Fund to the
Investment Adviser pursuant to the Management Agreement.
Under the Management Agreement, the Investment Adviser also: (i) supervises
all non-advisory operations of the Fund; (ii) provides personnel to perform such
executive, administrative and clerical services as are reasonably necessary to
provide effective administration of the Fund; (iii) arranges for at the 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
B-49
<PAGE>
with the SEC and other regulatory authorities; (iv) maintains the 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 Investment Adviser and Goldman Sachs
and their affiliates in the management of, or their interest in, other accounts
and other activities of Goldman Sachs may present conflicts of interest with
respect to the Fund or impede its investment activities.
Goldman Sachs and its affiliates, including, without limitation, the
Investment 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 Fund and/or which engage in
transactions in the same types of securities, currencies and instruments as the
Fund. 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 Fund invests, which could have an
adverse impact on the Fund's performance. Such transactions, particularly in
respect of proprietary accounts or customer accounts other than those included
in the Investment Adviser's and its advisory affiliates' asset management
activities, will be executed independently of the Fund's transactions and thus
at prices or rates that may be more or less favorable. When the Investment
Adviser and its advisory affiliates seek to purchase or sell the same assets for
their managed accounts, including the Fund, the assets actually purchased or
sold may be allocated among the accounts on a basis determined in their 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 Fund.
From time to time, the Fund's 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 Investment Adviser and/or its
affiliates will not initiate or recommend certain types of transactions in
certain securities or instruments with respect to which the Investment Adviser
and/or its affiliates are performing services or when position limits have been
reached.
In connection with their management of the Fund, the Investment Adviser may
have access to certain fundamental analysis and proprietary technical models
developed by Goldman Sachs and other affiliates. The Investment Adviser will
not be under any obligation, however, to effect transactions on behalf of the
Fund 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 Fund and it is not anticipated that the
Investment Adviser will have access to such information for the purpose of
managing the Fund. The proprietary activities or portfolio strategies of Goldman
Sachs and its affiliates or the activities or strategies used for accounts
managed by them or other customer accounts could conflict with the transactions
and strategies employed by the Investment Adviser in managing the Fund.
B-50
<PAGE>
The results of the Fund's investment activities may differ significantly
from the results achieved by the Investment Adviser and its 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 the
Fund. Moreover, it is possible that the 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 the Fund's activities
but will not be involved in the day-to-day management of the 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
Investment Adviser 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 Fund should be aware.
The Investment 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 the Fund, and such party may
have no incentive to assure that the Fund obtains 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 the Fund invests or which may be based on the performance of
the Fund. The Fund 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 Fund. 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 Fund. To the extent affiliated
transactions are permitted, the Fund will deal with Goldman Sachs and its
affiliates on an arms-length basis.
B-51
<PAGE>
The 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 the Fund's establishment of its business relationships, nor is
it expected that the Fund's counterparties will rely on the credit of Goldman
Sachs or any of its affiliates in evaluating the 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 the Fund in order to increase the
assets of the Fund. Increasing the Fund's assets may enhance investment
flexibility and diversification and may contribute to economies of scale that
tend to reduce the Fund's expense ratio. Goldman Sachs reserves the right to
redeem at any time some or all of the shares of the Fund acquired for its own
account. A large redemption of shares of the Fund by Goldman Sachs could
significantly reduce the asset size of the Fund, which might have an adverse
effect on the Fund's investment flexibility, portfolio diversification and
expense ratio. Goldman Sachs will consider the effect of redemptions on the
Fund and other shareholders in deciding whether to redeem its shares.
It is possible that the 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 Fund's flexibility in purchases
and sales of securities. When Goldman Sachs is engaged in an underwriting or
other distribution of securities of an entity, the Investment Adviser may be
prohibited from purchasing or recommending the purchase of certain securities of
that entity for the Fund.
Distributor and Transfer Agent
- ------------------------------
Goldman Sachs, 85 Broad Street, New York, New York 10004, serves as the
exclusive distributor of shares of the Fund pursuant to a "best efforts"
arrangement as provided by a distribution agreement with the Trust on behalf of
the Fund. Shares of the Fund are offered and sold on a continuous basis by
Goldman Sachs, acting as agent. Under the distribution agreement, the 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. The 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.
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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 the Fund.
As agent, the Distributor currently offers shares of the Fund on a
continuous basis to the separate accounts of Participating Insurance Companies
in all states in which the 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 the Fund.
Goldman Sachs, 4900 Sears Tower, Chicago, IL 60606, 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 purchase and redemption confirmations, 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.
Prior to the date of this Additional Statement, no shares of the Fund had been
offered and, accordingly, no fees were paid by the Fund to Goldman Sachs as
transfer agent.
EXPENSES
The Trust is responsible for the payment of its expenses. The expenses
include, without limitation, management fees, custodial and transfer agency
fees; brokerage fees and commissions; filing fees for the registration or
qualification of the Trust's shares under federal or state securities laws;
organizational expenses; fees and expenses incurred by the Trust in connection
with membership in investment company organizations; taxes; interest; costs of
liability insurance, fidelity bonds or indemnification; any costs, expenses or
losses arising out of any liability of, or claim for damages or other relief
asserted against, the Trust for violation of any law; legal and auditing fees
and expenses; expenses of preparing and setting in type prospectuses, Additional
Statements, proxy material, reports and notices and the printing and
distributing of the same to the Trust's shareholders and regulatory authorities;
compensation and expenses of the Trust's "non-interested" Trustees; and
extraordinary expenses, if any, incurred by the Trust.
The imposition of the Investment Adviser's fee, as well as other operating
expenses, will have the effect of reducing the total return to investors. From
time to time, the Investment Adviser may waive receipt of its fees and/or
voluntarily assume certain expenses of the Fund, which would have the effect of
lowering the 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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Custodian
- ---------
State Street, 1776 Heritage Drive, North Quincy, Massachusetts 02110, is
the custodian of the Trust's portfolio securities and cash. State Street also
maintains the Trust's accounting records. State Street may appoint sub-
custodians from time to time to hold certain securities purchased by the Trust
in foreign securities and to hold cash and currencies for the Trust.
Independent Public Accountants
- ------------------------------
Ernst & Young LLP, independent public accountants, 787 Seventh Avenue, New
York, New York 10019, have been selected as auditors of the Trust. In addition
to audit services, Ernst & Young LLP will prepare the Trust's federal and state
tax returns, and will provide consultation and assistance on accounting,
internal control and related matters.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Investment Adviser is responsible for decisions to buy and sell
securities for the Fund, 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.
In placing orders for portfolio securities of the Fund, the Investment
Adviser is generally required to give primary consideration to obtaining the
most favorable execution and net price available. This means that the 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 Fund may pay a broker which provides brokerage and research
services to the Fund 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 a good faith determination that such
commission is reasonable in light of the services provided and to such policies
as the Trustees may adopt from time to time. While the Investment Adviser
generally seeks reasonably competitive spreads or commissions, the Fund will not
necessarily be paying the lowest spread or commission available. Within the
framework of this policy, the Investment Adviser will consider research and
investment services provided by brokers or dealers who effect or are parties to
portfolio transactions of the Fund, the Investment Adviser and its affiliates,
or their other clients. Such research and investment services are those which
brokerage houses customarily provide to institutional investors
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and include research reports on particular industries and companies, economic
surveys and analyses, recommendations as to specific securities and other
products or services (e.g., quotation equipment and computer related costs and
expenses), advice concerning the value of securities, the advisability of
investing in, purchasing or selling securities, the availability of securities
or the purchasers or sellers of securities, furnishing analyses and reports
concerning issuers, industries, securities, economic factors and trends,
portfolio strategy and performance of accounts, effecting securities
transactions and performing functions incidental thereto (such as clearance and
settlement) and providing lawful and appropriate assistance to the Investment
Adviser in the performance of its decision-making responsibilities. Such
services are used by the Investment Adviser in connection with all of its
investment activities, and some of such services obtained in connection with the
execution of transactions for the 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 the Fund, and the services furnished by such brokers may be
used by the Investment Adviser 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 Investment Adviser. 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 the Investment Adviser deems the purchase or sale of a
security to be in the best interest of the Fund as well as its other customers
(including any other fund or other investment company or advisory account for
which the Investment Adviser acts as investment adviser or sub-investment
adviser), the Investment 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 Investment Adviser in
the manner it considers to be equitable and consistent with its fiduciary
obligations to the Fund and such other customers. In some instances, this
procedure may adversely affect the price and size of the position obtainable for
the 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 Investment Adviser may use Goldman
Sachs as a broker for the Fund. In order for Goldman Sachs to effect any
portfolio transactions for the Fund, the commissions, fees or other remuneration
received by Goldman Sachs must be reasonable and fair compared to the
commissions, fees or other remuneration paid to other brokers in connection with
comparable transactions involving similar securities purchased or sold on a
securities exchange during a comparable period of time. This standard would
allow Goldman Sachs to
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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. As of the date of this Additional Statement, no shares of the
Fund had been offered and, accordingly, the Fund paid no brokerage commissions.
NET ASSET VALUE
Under the Act, the Trustees are responsible for determining in good faith
the fair value of the securities of the Fund. In accordance with procedures
adopted by the Trustees, the net value per share of the Fund is calculated by
determining the value of the net assets attributable to the Fund and dividing by
the number of the outstanding shares. All securities are valued as of the close
of regular trading on the New York Stock Exchange (normally, but not always,
4:00 p.m. New York time) on each Business Day. The term "Business Day" means
any day the New York Stock Exchange is open for trading, which is Monday through
Friday except for holidays. The New York Stock Exchange is closed on the
following holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day (observed), Good Friday, Memorial Day (observed), Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
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, the 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 the Fund for which accurate market quotations are
available are valued as follows: (a) securities listed on any U.S. or foreign
stock exchange or on the National Association of Securities Dealers Automated
Quotations System ("NASDAQ") will be valued at the last sale price on the
exchange or system in which they are principally traded on the valuation date.
If there is no sale on the valuation day, securities traded will be valued at
the closing bid price, or if a closing bid price is not available, at either the
exchange or system defined close price on the exchange or system in which such
securities are principally traded. If the relevant exchange or system has not
closed by the above-mentioned time for determining the Fund's net asset value,
the securities will be valued at the last sale price or, if not available at the
bid price at the time the net asset value is determined; (b) over-the-counter
securities not quoted on NASDAQ will be valued at the last sale price on the
valuation day or, if no sale occurs, at the last bid price at the time net asset
value is determined; (c) equity securities for which no prices are obtained
under section (a) or (b), including those for which a pricing service supplies
no exchange quotation or a quotation that is believed by the portfolio
manager/trader to be inaccurate, will be valued at their fair value in
accordance with procedures approved by the Board of Trustees; (d) fixed-income
securities with a remaining maturity of 60 days or more for which accurate
market quotations are readily available will normally be valued according to
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dealer-supplied bid quotations or bid quotations from a recognized pricing
service (e.g., Merrill Lynch, J.J. Kenny, Muller Data Corp., Bloomberg, EJV,
Reuters or Standard & Poor's); (e) fixed-income securities for which accurate
market 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
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 Fund's net asset value is 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 the Fund to price its securities but before the close of regular trading on
the New York Stock Exchange will normally not be reflected in the Fund's next
determined NAV unless the Trust, in its discretion, makes an adjustment in light
of the nature and materiality of the event, its effect on Fund operations and
other relevant factors.
The proceeds received by the 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 the Fund and constitute the underlying assets of the Fund. The
Fund's assets 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 Fund and the
other series of the Trust are generally allocated in proportion to the net asset
values of the respective Funds or series except where allocations of direct
expenses can otherwise be fairly made.
PERFORMANCE INFORMATION
The 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.
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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.
The 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, the 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 the Fund relative to the total market. A beta
of more than 1.00 indicates volatility greater than the market, and a beta of
less than 1.00 indicates volatility less than the market. Another measure of
volatility or risk is standard deviation. Standard deviation is used to measure
variability of net asset value or total return around an average, over a
specified period of time. The premise is that greater volatility connotes
greater risk undertaken in achieving performance.
From time to time the Trust may publish an indication of the 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
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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 the 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) the Russell 1000 Value Index; (p) the Russell 1000
Growth Index-Total Return; (q) the Value-Line Composite-Price Return; (r) the
Wilshire 4500 Index; (s) the FT-Actuaries Europe and Pacific Index; (t)
historical investment data supplied by the research departments of Goldman
Sachs, Lehman Brothers, First Boston Corporation, Morgan Stanley (including 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; (u) CDA/Wiesenberger Investment Companies Services or
Wiesenberger Investment Companies Service; (v) The Goldman Sachs Commodities
Index; (w) information produced by Micropal, Inc.; and (x) 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 the 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);
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. health care expenses (including actual and projected expenses);
. long-term disabilities (including the availability of, and coverage
provided by, disability insurance);
. retirement (including the availability of social security benefits, the
tax treatment of such benefits and statistics and other information
relating to maintaining a particular standard of living and outliving
existing assets);
. asset allocation strategies and the benefits of diversifying among asset
classes;
. the benefits of international and emerging market investments;
. the effects of inflation on investing and saving;
. the benefits of establishing and maintaining a regular pattern of
investing and the benefits of dollar-cost averaging; and
. measures of portfolio risk, including but not limited to, alpha, beta and
standard deviation.
The Trust may from time to time use comparisons, graphs or charts in
advertisements to depict the following types of information:
. the performance of various types of securities (common stocks, small
company stocks, taxable money market funds, U.S. Treasury securities,
adjustable rate mortgage securities, government securities and municipal
bonds) over time. However, the characteristics of these securities are
not identical to, and may be very different from, those of the 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;
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. volatility of total return of various market indices (i.e. Lehman
Government Bond Index, S&P 500 Index, IBC/Donoghue's Money Fund Average/
All Taxable Index) over varying periods of time;
. credit ratings of domestic government bonds in various countries;
. price volatility comparisons of types of securities over different
periods of time; and
. price and yield comparisons of a particular security over different
periods of time.
In addition, the Trust may from time to time include rankings of Goldman,
Sachs & Co.'s research department by publications such as the Institutional
Investor and the Wall Street Journal in advertisements.
From time to time, advertisements or information may include a discussion
of certain attributes or benefits to be derived by an investment in the Fund.
Such advertisements or information may include symbols, headlines or other
material which highlight or summarize the information discussed in more detail
in the communication.
The Trust may from time to time summarize the substance of discussions
contained in shareholder reports in advertisements and publish the Investment
Adviser's views as to markets, the rationale for a Fund's investments and
discussions of the 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.
The Fund's performance data will be based on historical results and will
not be intended to indicate future performance. The Fund's total return, yield
and distribution rate will vary based on market conditions, portfolio expenses,
portfolio investments and other factors. The value of the 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 the Fund's holdings available to investors upon request.
As of the date of this Additional Statement, no shares of the Fund had been
offered and, accordingly, no performance information is available.
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SHARES OF THE TRUST
The 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 Agreement and 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 will be entitled, as determined by the Trustees
without the vote or consent of the shareholders, either to one vote for each
share or to one vote for each dollar of net asset value represented by such
shares on all matters presented to shareholders including the elections of
Trustees (this method of voting being referred to as "dollar based voting").
However, to the extent required by the Act or otherwise determined by the
Trustees, series and classes of the Trust will vote separately from each other.
Shareholders of the Trust do not have cumulative voting rights in the election
of Trustees. Meetings of shareholders of the Trust, or any series or class
thereof, may be called by the Trustees, certain officers or upon the written
request of holders of 10% or more of the shares entitled to vote at such
meetings. The Trustees will call a special meeting of shareholders for the
purpose of electing Trustees if, at any time, less than a majority of Trustees
holding office at the time were elected by shareholders. The shareholders of
the Trust will have voting rights only with respect to the limited number of
matters specified in the Agreement and Declaration of Trust and such other
matters as the Trustees may determine or may be required by law.
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The Agreement and Declaration of Trust provides for indemnification of
Trustees and officers of the Trust unless the recipient is adjudicated (i) to be
liable by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of such person's office or (ii)
not to have acted in good faith in the reasonable belief that such person's
actions were in the best interest of the Trust. The Agreement and Declaration
of Trust provides that, if any shareholder or former shareholder of any series
is held personally liable solely by reason of being or having been a shareholder
and not because of the shareholder's acts or omissions or for some other reason,
the shareholder or former shareholder (or heirs, executors, administrators,
legal representatives or general successors) shall be held harmless from and
indemnified against all loss and expense arising from such liability. The
Trust, acting on behalf of any affected series, must, upon request by such
shareholder, assume the defense of any claim made against such shareholder for
any act or obligation of the series and satisfy any judgment thereon from the
assets of the series.
The Agreement and Declaration of Trust permits the termination of the Trust
or of any series or class of the Trust (i) by a majority of the affected
shareholders at a meeting of shareholders of the Trust, series or class; or (ii)
by a majority of the Trustees without shareholder approval if the Trustees
determine that such action is in the best interest of the Trust or its
shareholders. The factors and events that the Trustees may take into account in
making such determination include (i) the inability of the Trust or any
successor series or class to maintain its assets at an appropriate size; (ii)
changes in laws or regulations governing the Trust, series or class or affecting
assets of the type in which it invests; or (iii) economic developments or trends
having a significant adverse impact on their business or operations.
The Agreement and Declaration of Trust authorizes the Trustees without
shareholder approval to cause the Trust, or any series thereof, to merge or
consolidate with any corporation, association, trust or other organization or
sell or exchange all or substantially all of the property belonging to the Trust
or any series thereof. In addition, the Trustees, without shareholder approval,
may adopt a master-feeder structure by investing all or a portion of the assets
of a series of the Trust in the securities of another open-end investment
company.
The Agreement and Declaration of Trust permits the Trustees to amend the
Agreement and Declaration of Trust without a shareholder vote. However,
shareholders of the Trust have the right to vote on any amendment (i) that would
affect the voting rights of shareholders; (ii) that is required by law to be
approved by shareholders; (iii) that would amend the voting provisions of the
Agreement and Declaration of Trust; or (iv) that the Trustees determine to
submit to shareholders.
The Trustees may appoint separate Trustees with respect to one or more
series or classes of the Trust's shares (the "Series Trustees"). Series Trustees
may, but are not required to, serve as Trustees of the Trust or any other series
or class of the Trust. The Series Trustees have, to the exclusion of any other
Trustees of the Delaware Trust, all the powers and authorities of Trustees under
the Agreement and Declaration of Trust with respect to any other series or
class.
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<PAGE>
Shareholder and Trustee Liability
- ---------------------------------
Under Delaware law, the shareholders of the Fund are not generally subject
to liability for the debts or obligations of the Trust. Similarly, Delaware law
provides that a series of the Trust will not be liable for the debts or
obligations of any other series of the Trust. However, no similar statutory or
other authority limiting business trust shareholder liability exists in other
states. As a result, to the extent that a Delaware business trust or a
shareholder is subject to the jurisdiction of courts of such other states, the
courts may not apply Delaware law and may thereby subject the Delaware business
trust shareholders to liability. To guard against this risk, the Agreement and
Declaration of Trust contains an express disclaimer of shareholder liability for
acts or obligations of the 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 Agreement and 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 Agreement and Declaration of Trust
also provides that a series shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of the series and satisfy
any judgment thereon. In view of the above, the risk of personal liability of
shareholders of a Delaware business trust is remote.
In addition to the requirements under Delaware law, the Agreement and
Declaration of Trust provides that shareholders of a series may bring a
derivative action on behalf of the series only if the following conditions are
met: (a) shareholders eligible to bring such derivative action 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 of such claim. The Trustees will be entitled to retain
counsel or other advisers in considering the merits of the request and may
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 Agreement and Declaration of Trust further provides that the Trustees
will not be liable for errors of judgment or mistakes of fact or law, but
nothing in the Agreement and Declaration of Trust protects a Trustee against
liability to which he or she would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his or her office.
TAXATION
Shares of the Fund 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 Fund shares. This
B-64
<PAGE>
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 the 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 the Fund that are not described in the Prospectus. The
discussions below and in the Prospectus are not intended as substitutes for
careful tax planning.
The holders of variable life insurance policies or annuity contracts should
not be subject to tax with respect to distributions made on, or redemptions of,
Fund shares, assuming that the variable life insurance policies and annuity
contracts qualify under the Code, as life insurance or annuities, respectively,
and that the shareholders are treated as owners of the Fund shares. Thus, this
summary does not describe the tax consequences to a holder of a life insurance
policy or annuity contract as a result of the ownership of such policies or
contracts. Policy or contract holders must consult the prospectuses of their
respective policies or contracts for information concerning the federal income
tax consequences of owning such policies or contracts. This summary also does
not describe the tax consequences applicable to the owners of the Fund shares
because the Fund shares will be sold only to insurance companies. Thus,
purchasers of Fund shares must consult their own tax advisers regarding the
federal, state, and local tax consequences of owning Portfolio shares.
The Fund is a separate taxable entity. The Fund intends to elect to be
treated and intends to qualify for each taxable year as a regulated investment
company under Subchapter M of the Code.
There are certain tax requirements that the Fund must follow in order to
avoid federal taxation. In its efforts to adhere to these requirements, the
Fund may have to limit its investment activities in some types of instruments.
Qualification as a regulated investment company under the Code requires, among
other things, that (a) the 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) the 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 the 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 the 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 the Fund earns
B-65
<PAGE>
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 the Fund as in the hands of such an entity; consequently, the
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 the 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 the Fund's portfolio or anticipated to be acquired may
not qualify as "directly-related" under these tests.
If the Fund complies with such provisions, then in any taxable year in
which the Fund distributes, in compliance with the Code's timing and other
requirements, at least 90% of its "investment company taxable income" (which
includes dividends, taxable interest, taxable accrued original issue discount
and market discount income, income from securities lending, any net short-term
capital gain in excess of net long-term capital loss, certain net realized
foreign exchange gains and any other taxable income other than "net capital
gain," as defined below, and is reduced by deductible expenses), and at least
90% of the excess of its gross tax-exempt interest income (if any) over certain
disallowed deductions, the 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 the 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. The 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 and may therefore make it more difficult for the Fund to
satisfy the distribution requirements described above, as well as the excise tax
distribution requirements described below. The 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.
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<PAGE>
The Fund intends to comply with the diversification requirements imposed by
Section 817(h) of the Code and the regulations thereunder. Under Code Section
817(h), a variable life insurance or annuity contract will not be treated as a
life insurance policy or annuity contract, respectively, under the Code, unless
the segregated asset account upon which such contract or policy is based is
"adequately diversified." A segregated asset account will be adequately
diversified if it satisfies one of two alternative tests set forth in the
Treasury Regulations. Specifically, the Treasury Regulations provide that,
except as permitted by the "safe harbor" discussed below, as of the end of each
calendar quarter (or within 30 days thereafter) no more than 55% of the
segregated asset account's total assets may be represented by any one
investment, no more than 70% by any two investments, no more than 80% by any
three investments and no more than 90% by any four investments. For this
purpose, all securities of the same issuer are considered a single investment,
and each U.S. Government agency and instrumentality is considered a separate
issuer. As a safe harbor, a segregated asset account will be treated as being
adequately diversified if the diversification requirements under Subchapter M
are satisfied and no more than 55% of the value of the account's total assets
are cash and cash items, U.S. Government securities and securities of other
regulated investment companies. In addition, a segregated asset account with
respect to a variable life insurance contract is treated as adequately
diversified to the extent of its investment in securities issued by the United
States Treasury.
For purposes of these alternative diversification tests, a segregated asset
account investing in shares of a regulated investment company will be entitled
to "look through" the regulated investment company to its pro rata portion of
the regulated investment company's assets, provided that the shares of such
regulated investment company are held only by insurance companies and certain
fund managers (a "Closed Fund"). The Fund will be a Closed Fund.
If the segregated asset account upon which a variable contract is based is
not "adequately diversified" under the foregoing rules for each calendar
quarter, then (a) the variable contract is not treated as a life insurance
contract or annuity contract under the Code for all subsequent periods during
which such account is not "adequately diversified" and (b) the holders of such
contract must include as ordinary income the "income on the contract" for each
taxable year. Further, the income on a life insurance contract for all prior
taxable years is treated as received or accrued during the taxable year of the
policyholder in which the contract ceases to meet the definition of a "life
insurance contract" under the Code. The "income on the contract" is, generally,
the excess of (i) the sum of the increase in the net surrender value of the
contract during the taxable year and the cost of the life insurance protection
provided under the contract during the year, over (ii) the premiums paid under
the contract during the taxable year. In addition, if the Fund did not
constitute a Closed Fund, the holders of the contracts and annuities which
invest in the Fund through a segregated asset account might be treated as owners
of Fund shares and might be subject to tax on distributions made by the Fund.
In order to avoid a 4% federal excise tax, the Fund may be required to
distribute (or be deemed to have distributed) by December 31 of each calendar
year at least 98% of its taxable ordinary income for such year, at least 98% of
the excess of its capital gains over its capital losses (generally computed on
the basis of the one-year period ending on October 31 of such year), and all
taxable ordinary income and the excess of capital gains over capital losses for
the previous year that
B-67
<PAGE>
were not distributed for such year and on which the Fund paid no federal income
tax. For federal income tax purposes, dividends declared by the 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 Fund
anticipates that it 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, the 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.
The Fund will be subject to foreign taxes on its income (possibly
including, in some cases, capital gains) from foreign securities. Tax
conventions between certain countries and the U.S. may reduce or eliminate such
taxes in some cases.
Investments in lower-rated securities may present special tax issues for
the Fund to the extent actual or anticipated defaults may be more likely with
respect to such securities. Tax rules are not entirely clear about issues such
as when the Fund may cease to accrue interest, original issue discount, or
market discount; when and to what extent deductions may be taken for bad debts
or worthless securities; how payments received on obligations in default should
be allocated between principal and income; and whether exchanges of debt
obligations in a workout context are taxable. These and other issues will be
addressed by the Fund, in the event it invests in such securities, in order to
seek to eliminate or minimize any adverse tax consequences.
State and Local
- ---------------
Each Fund may be subject to state or local taxes in jurisdictions in which
such Fund may be deemed to be doing business. In addition, in those states or
localities which have income tax laws, the treatment of such Fund and its
shareholders under such laws may differ from their treatment under federal
income tax laws, and investment in such Fund may have tax consequences for
shareholders different from those of a direct investment in such Fund's
portfolio securities.
OTHER INFORMATION
As described in the Prospectus, shares of the Fund 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.
The 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. The 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
B-68
<PAGE>
"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 the
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 the 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 the Fund.
(The Trust may also suspend or postpone the recordation of the transfer of
shares upon the occurrence of any of the foregoing conditions.)
The Prospectus and this Additional Statement do not contain all the
information included in the Registration Statement filed with the SEC under the
1933 Act with respect to the securities offered by the Prospectus. Certain
portions of the Registration Statement have been omitted from the Prospectus and
this Additional Statement pursuant to the rules and regulations of the SEC. The
Registration Statement including the exhibits filed therewith may be examined at
the office of the SEC in Washington, D.C.
Statements contained in the Prospectus or in this Additional Statement as
to the contents of any contract or other document referred to are not
necessarily complete, and, in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement of which the Prospectus and this Additional Statement form a part,
each such statement being qualified in all respects by such reference.
B-69
<PAGE>
APPENDIX A
----------
Commercial Paper Ratings
- ------------------------
A Standard & Poor's commercial paper rating is a current opinion of the
creditworthiness of an obligor with respect to financial obligations 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 Standard & Poor's 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.
Local Currency and Foreign Currency Risks
Country risk considerations are a standard part of Standard & Poor's analysis
for credit ratings on any issuer or issue. Currency of repayment is a key
factor in this analysis. An obligor's capacity to repay foreign obligations may
be lower than its capacity to repay obligations in its local currency due to the
sovereign government's own relatively lower capacity
1-A
<PAGE>
to repay external versus domestic debt. These sovereign risk considerations are
incorporated in the debt ratings assigned to specific issues. Foreign currency
issuer ratings are also distinguished from local currency issuer ratings to
identify those instances where sovereign risks make them different for the same
issuer.
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually senior debt obligations not having an original maturity in
excess of one year, unless explicitly noted. The following summarizes the
rating categories used by Moody's for commercial paper:
"Prime-1" - Issuers (or supporting institutions) have a superior ability
for repayment of senior short-term debt obligations. Prime-1 repayment ability
will often be 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.
2-A
<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 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 best 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 uncertain 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 a
capacity for meeting financial commitments which is highly uncertain and solely
reliant upon a sustained, favorable business and economic environment.
"D" - Securities are in actual or imminent payment default.
3-A
<PAGE>
Thomson Financial 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 Financial BankWatch:
"TBW-1" - This designation represents Thomson Financial 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 Financial 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 Financial 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 Financial BankWatch's lowest
rating category and indicates that the obligation is regarded as non-investment
grade and therefore speculative.
Corporate and Municipal Long-Term Debt Ratings
- ----------------------------------------------
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - An obligation rated "AAA" has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is extremely strong.
"AA" - An obligation rated "AA" differs from the highest rated obligations
only in small degree. The obligor's capacity to meet its financial commitment
on the obligation is very strong.
"A" - An obligation rated "A" is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
"BBB" - An obligation rated "BBB" exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
4-A
<PAGE>
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 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 Standard & Poor's
believes that such payments will be made during such grace period. The "D"
rating also will be used upon the filing of a bankruptcy petition 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.
"c" - The `c' subscript is used to provide additional information to
investors that the bank may terminate its obligation to purchase tendered bonds
if the long-term credit rating of the issuer is below an investment-grade level
and/or the issuer's bonds are deemed taxable.
p - The letter `p' indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project financed by
the debt being rated and indicates that payment of debt service requirements is
largely or entirely dependent upon the successful, timely completion of the
project. This rating, however, while addressing credit quality subsequent to
completion of the project, makes no comment on the likelihood of or the risk of
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default upon failure of such completion. The investor should exercise his own
judgment with respect to such likelihood and risk.
* - Continuance of the ratings is contingent upon Standard & Poor's
receipt of an executed copy of the escrow agreement or closing documentation
confirming investments and cash flows.
"r" - The `r' highlights derivative, hybrid, and certain other
obligations that Standard & Poor's believes may experience high volatility or
high variability in expected returns as a result of noncredit risks. Examples of
such obligations are securities with principal or interest return indexed to
equities, commodities, or currencies; certain swaps and options; and interest-
only and principal-only mortgage securities. The absence of an `r' symbol should
not be taken as an indication that an obligation will exhibit no volatility or
variability in total return.
N.R. Indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular obligation as a matter of policy. Debt obligations
of issuers outside the United States and its territories are rated on the same
basis as domestic corporate and municipal issues. The ratings measure the
creditworthiness of the obligor but do not take into account currency exchange
and related uncertainties.
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
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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" indicates poor standing; "Ca" represents obligations
which are speculative in a high degree; and "C" represents the lowest rated
class of bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (...) - Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operating experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic
rating classification from "Aa" through "Caa". The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of its generic rating category.
The following summarizes the long-term debt ratings used by Duff & Phelps
for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The risk
factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered to be of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A" - Debt possesses protection factors which are average but adequate.
However, risk factors are more variable in periods of greater economic stress.
"BBB" - Debt possesses below-average protection factors but such protection
factors are still considered sufficient for prudent investment. Considerable
variability in risk is present during economic cycles. This is the lowest
investment grade category.
"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.
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To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
The following summarizes the ratings used by Fitch IBCA for corporate and
municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest credit
quality. These ratings denote the lowest expectation of credit risk and are
assigned only in case of exceptionally strong capacity for timely payment of
financial commitments. This capacity is highly unlikely to be adversely
affected by foreseeable events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. These ratings denote a very low expectation of credit risk and
indicate very strong capacity for timely payment of financial commitments. This
capacity is not significantly vulnerable to foreseeable events.
"A" - Bonds considered to be investment grade and of high credit quality.
These ratings denote a low expectation of credit risk and indicate strong
capacity for timely payment of financial commitments. This capacity may,
nevertheless, be more vulnerable to changes in circumstances or in economic
conditions than is the case for higher ratings.
"BBB" - Bonds considered to be investment grade and of good credit quality.
These ratings denote that there is currently a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered adequate,
but adverse changes in circumstances and in economic conditions are more likely
to impair this capacity. This is the lowest investment grade category.
"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 change 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. The ratings of obligations in
this category are based on their prospects for achieving partial or full
recovery in a reorganization or
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liquidation of the obligor. While expectedrecovery values are highly speculative
and cannot be estimated with any precision, the following serve as general
guidelines. "DDD" obligations have the highest potential for recovery, around
90%-100% of outstanding amounts and accrued interest. "DD" indicates potential
recoveries in the range of 50%-90%, and "D" the lowest recovery potential, i.e.,
below 50%.
Entities rated in this category have defaulted on some or all of their
obligations. Entities rated "DDD" have the highest prospect for resumption of
performance or continued operation with or without a formal reorganization
process. Entities rated "DD" and "D" are generally undergoing a formal
reorganization or liquidation process; those rated "DD" are likely to satisfy a
higher portion of their outstanding obligations, while entities rated "D" have a
poor prospect for repaying all obligations.
To provide more detailed indications of credit quality, the Fitch IBCA
ratings from and including "AA" to "CCC" may be modified by the addition of a
plus (+) or minus (-) sign to denote relative standing within these major rating
categories.
`NR' indicates the Fitch IBCA does not rate the issuer or issue in
question.
`Withdrawn': A rating is withdrawn when Fitch IBCA deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
RatingAlert: Ratings are placed on RatingAlert to notify investors that
there is a reasonable probability of a rating change and the likely direction of
such change. These are designated as "Positive", indicating a potential upgrade,
"Negative", for a potential downgrade, or "Evolving", if ratings may be raised,
lowered or maintained. RatingAlert is typically resolved over a relatively short
period.
Thomson Financial 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.
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"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," - A rating of BB suggests that the likelihood of default is
considerably less than for lower-rated issues, although there are significant
uncertainties that could affect the ability to adequately service debt
obligations.
"B" - Issues rated B show a higher degree of uncertainty and therefore
greater likelihood of default than higher-rated issues. Adverse developments
could negatively affect the payment of interest and principal on a timely basis.
"CCC" - Issues rated CCC clearly have a high likelihood of default, with
little capacity to address further adverse changes in financial circumstances.
"CC" - This rating is applied to issues that are subordinate to other
obligations rated CCC and are afforded less protection in the event of
bankruptcy or reorganization.
"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 note rating reflects the liquidity factors and market
access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's 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 a very strong
capacity to pay debt service are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory capacity
to pay principal and interest, with some vulnerability to adverse financial and
economic changes over the term of the notes.
"SP-3" - The issuers of these municipal notes exhibit speculative capacity
to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term loans
are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are
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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. Margins of
protection 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 margins of protection.
Fitch IBCA and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.
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APPENDIX B
BUSINESS PRINCIPLES OF GOLDMAN, SACHS & CO.
Goldman Sachs is noted for its Business Principles, which guide all of the
firm's activities and serve as the basis for its distinguished reputation among
investors worldwide.
Our client's interests always come first. Our experience shows that if we
serve our clients well, our own success will follow.
Our assets are our people, capital and reputation. If any of these is ever
diminished, the last is the most difficult to restore. We are dedicated to
complying fully with the letter and spirit of the laws, rules and ethical
principles that govern us. Our continued success depends upon unswerving
adherence to this standard.
We take great pride in the professional quality of our work. We have an
uncompromising determination to achieve excellence in everything we undertake.
Though we may be involved in a wide variety and heavy volume of activity, we
would, if it came to a choice, rather be best than biggest.
We stress creativity and imagination in everything we do. While recognizing
that the old way may still be the best way, we constantly strive to find a
better solution to a client's problems. We pride ourselves on having pioneered
many of the practices and techniques that have become standard in the industry.
We make an unusual effort to identify and recruit the very best person for
every job. Although our activities are measured in billions of dollars, we
select our people one by one. In a service business, we know that without the
best people, we cannot be the best firm.
We offer our people the opportunity to move ahead more rapidly than is
possible at most other places. We have yet to find limits to the responsibility
that our best people are able to assume. Advancement depends solely on ability,
performance and contribution to the Firm's success, without regard to race,
color, religion, sex, age, national origin, disability, sexual orientation, or
any other impermissible criterion or circumstance.
We stress teamwork in everything we do. While individual creativity is
always encouraged, we have found that team effort often produces the best
results. We have no room for those who put their personal interests ahead of
the interests of the Firm and its clients.
The dedication of our people to the Firm and the intense effort they give
their jobs are greater than one finds in most other organizations. We think
that this is an important part of our success.
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Our profits are a key to our success. They replenish our capital and
attract and keep our best people. It is our practice to share our profits
generously with all who help create them. Profitability is crucial to our
future.
We consider our size an asset that we try hard to preserve. We want to be
big enough to undertake the largest project that any of our clients could
contemplate, yet small enough to maintain the loyalty, the intimacy and the
esprit de corps that we all treasure and that contribute greatly to our success.
We constantly strive to anticipate the rapidly changing needs of our
clients and to develop new services to meet those needs. We know that the world
of finance will not stand still and that complacency can lead to extinction.
We regularly receive confidential information as part of our normal client
relationships. To breach a confidence or to use confidential information
improperly or carelessly would be unthinkable.
Our business is highly competitive, and we aggressively seek to expand our
client relationships. However, we must always be fair to 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.
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GOLDMAN, SACHS & CO.'S INVESTMENT BANKING AND SECURITIES ACTIVITIES
Goldman Sachs is a leading financial services firm traditionally known on
Wall Street and around the world for its institutional and private client
services.
With thirty-seven offices around the world Goldman Sachs employs over
11,000 professionals focused on opportunities in major markets.
The number one underwriter of all international equity issues from 1989-
1997.
The number one lead manager of U.S. common stock offerings for the past
nine years (1989-1997).*
The number one lead manager for initial public offerings (IPOs) worldwide
(1989-1997).
___________________________
* Source: Securities Data Corporation. Common stock ranking excludes REITs,
Investment Trust and Rights.
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GOLDMAN, SACHS & CO.'S HISTORY OF EXCELLENCE
1869 Marcus Goldman opens Goldman Sachs for business
1890 Dow Jones Industrial Average first published
1896 Goldman, Sachs & Co. joins New York Stock Exchange
1906 Goldman, Sachs & Co. takes Sears Roebuck & Co. public (at 93 years,
the firm's longest-standing client relationship)
Dow Jones Industrial Average tops 100
1925 Goldman, Sachs & Co. finances Warner Brothers, producer of the first
talking film
1956 Goldman, Sachs & Co. co-manages Ford's public offering, the largest to
date
1970 Goldman, Sachs & Co. opens London office
1972 Dow Jones Industrial Average breaks 1000
1986 Goldman, Sachs & Co. takes Microsoft public
1988 Goldman Sachs Asset Management is formally established
1991 Goldman, Sachs & Co. provides advisory services for the largest
privatization in the region of the sale of Telefonos de Mexico
1995 Goldman Sachs Asset Management introduces Global Tactical Asset
Allocation Program
Dow Jones Industrial Average breaks 5000
1996 Goldman, Sachs & Co. takes Deutsche Telecom public
Dow Jones Industrial Average breaks 6000
1997 Dow Jones Industrial Average breaks 7000
Goldman Sachs Asset Management increases assets under management by
100% over 1996
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1998 Goldman Sachs Asset Management reaches $195.5 billion in assets under
Management
Dow Jones Industrial Average breaks 9000
1999 Goldman Sachs becomes a public company
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