<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
CLASS A SHARES
CLASS B SHARES
GOLDMAN SACHS BALANCED FUND
GOLDMAN SACHS GROWTH AND INCOME FUND
GOLDMAN SACHS CORE U.S. EQUITY FUND
GOLDMAN SACHS CORE LARGE CAP GROWTH FUND
GOLDMAN SACHS CAPITAL GROWTH FUND
GOLDMAN SACHS INTERNATIONAL EQUITY FUND
GOLDMAN SACHS SMALL CAP EQUITY FUND
GOLDMAN SACHS EMERGING MARKETS EQUITY FUND
GOLDMAN SACHS ASIA GROWTH FUND
(EQUITY PORTFOLIOS OF GOLDMAN SACHS TRUST)
One New York Plaza
New York, New York 10004
This Statement of Additional Information (the "Additional Statement") is
not a Prospectus. This Additional Statement should be read in conjunction with
the prospectus for the Class A Shares and Class B Shares of Goldman Sachs
Balanced Fund, Goldman Sachs Growth and Income Fund, Goldman Sachs CORE U.S.
Equity Fund, Goldman Sachs CORE Large Cap Growth Fund, Goldman Sachs Capital
Growth Fund, Goldman Sachs International Equity Fund, Goldman Sachs Small Cap
Equity Fund, Goldman Sachs Emerging Markets Equity Fund and Goldman Sachs Asia
Growth Fund dated May 1, 1997 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.
TABLE OF CONTENTS
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Page
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Introduction......................................... B-3
Investment Policies.................................. B-4
Investment Restrictions.............................. B-32
Management........................................... B-34
Portfolio Transactions and Brokerage................. B-47
Net Asset Value...................................... B-53
Performance Information.............................. B-54
Shares of the Trust.................................. B-73
Taxation............................................. B-76
Financial Statements................................. B-83
Other Information.................................... B-83
Distribution and Authorized Dealer Service Plans..... B-84
Other Information Regarding Purchases, Redemptions,
Exchanges and Dividends............................. B-90
Appendix A:.......................................... 1-A
Appendix B:.......................................... 1-B
Appendix C:.......................................... 1-C
</TABLE>
The date of this Additional Statement is May 1, 1997.
<PAGE>
GOLDMAN SACHS FUNDS MANAGEMENT, L.P. GOLDMAN, SACHS & CO.
Adviser to: Distributor
Goldman Sachs CORE U.S. Equity Fund 85 Broad Street
Goldman Sachs Capital Growth Fund New York, New York 10004
One New York Plaza
New York, New York 10004
GOLDMAN SACHS ASSET MANAGEMENT GOLDMAN SACHS ASSET
Adviser to: MANAGEMENT INTERNATIONAL
Goldman Sachs Balanced Fund Adviser to:
Goldman Sachs Growth and Income Fund Goldman Sachs International Equity
Fund
Goldman Sachs CORE Large Cap Growth Fund Goldman Sachs Emerging Markets Equity
Goldman Sachs Small Cap Equity Fund Fund
One New York Plaza Goldman Sachs Asia Growth Fund
New York, New York 10004 133 Peterborough Court
London, England EC4A 2BB
GOLDMAN, SACHS & CO.
Transfer Agent
4900 Sears Tower
Chicago, Illinois 60606
Toll free.......800-526-7384
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<PAGE>
INTRODUCTION
Goldman Sachs Trust (the "Trust") is an open-end, management investment
company. The following series of the Trust are described in this Additional
Statement: Goldman Sachs Balanced Fund ("Balanced Fund"), Goldman Sachs Growth
and Income Fund ("Growth and Income Fund"), CORE U.S. Equity Fund ("CORE U.S.
Equity Fund")(formerly known as "Goldman Sachs Select Equity Fund"), Goldman
Sachs CORE Large Cap Growth Fund ("CORE Large Cap Growth Fund"), Goldman Sachs
Mid Cap Equity Fund ("Mid Cap Equity Fund"), Goldman Sachs Capital Growth Fund
("Capital Growth Fund"), Goldman Sachs International Equity Fund
("International Equity Fund"), Goldman Sachs Small Cap Equity Fund ("Small Cap
Equity Fund"), Goldman Sachs Emerging Markets Equity Fund ("Emerging Markets
Equity Fund") and Goldman Sachs Asia Growth Fund ("Asia Growth Fund")
(collectively referred to herein as the "Funds").
The Funds were initially organized as a series of a corporation formed under
the laws of the State of Maryland on September 27, 1989 and were reorganized as
a Delaware business trust as of April 30, 1997. The Trustees have authority
under the Trust's charter to create and classify shares into separate series and
to classify and reclassify any series or portfolio of shares into one or more
classes without further action by shareholders. Pursuant thereto, the Trustees
have created the Funds and other series. Additional series may be added in the
future from time to time. The Growth and Income, CORE U.S. Equity, CORE Large
Cap Growth, International Equity, Emerging Markets Equity and Asia Growth Funds
currently offer four classes of shares: Class A Shares, Class B Shares,
Institutional Shares and Service Shares. The Balanced, Capital Growth and Small
Cap Equity Funds currently offer two classes of shares: Class A and Class B
Shares. The Mid Cap Equity Fund currently offers two classes of shares:
Institutional Shares and Service Shares. See "Shares of the Trust."
Goldman Sachs Asset Management, ("GSAM") a separate operating division of
Goldman, Sachs & Co. ("Goldman Sachs"), serves as investment adviser to the
Balanced, Growth and Income, CORE Large Cap Growth, Mid Cap Equity and Small Cap
Equity Funds. Goldman Sachs Fund Management, L.P., ("GSFM") an affiliate of
Goldman Sachs, serves as investment adviser to the CORE U.S. Equity and Capital
Growth Funds. Goldman Sachs Asset Management International ("GSAMI"), an
affiliate of Goldman Sachs, serves as investment adviser to the International
Equity, Emerging Markets Equity and Asia Growth Funds. GSAM, GSFM and GSAMI
are sometimes referred to collectively herein as the "Advisers." Goldman Sachs
serves as each Fund's distributor and transfer agent. Each Fund's custodian is
State Street Bank and Trust Company ("State Street").
The following information relates to and supplements the description of each
Fund's investment policies contained in the Prospectus. See the Prospectus for
a fuller description of the Funds' investment objectives and policies. There is
no assurance that each Fund will achieve its objective.
B-3
<PAGE>
INVESTMENT POLICIES
Each Fund's share price will fluctuate with market, economic and, to the
extent applicable, foreign exchange conditions, so that an investment in any of
the Funds may be worth more or less when redeemed than when purchased. None of
the Funds should be relied upon as a complete investment program.
BALANCED FUND
=============
The investment objective of the Balanced Fund is to provide shareholders
with long-term capital growth and current income. The Balanced Fund seeks to
achieve its investment objective by investing in a balanced portfolio
diversified among both equity and fixed income securities.
Balanced Fund is intended to provide a foundation on which an investor can
build an investment portfolio or to serve as the core of an investment program,
depending on the investor's goals. Balanced Fund is designed for relatively
conservative investors who seek a combination of long-term capital growth and
current income in a single investment. Balanced Fund offers a portfolio of
equity and fixed income securities intended to provide less volatility than a
portfolio completely invested in equity securities and greater diversification
than a portfolio invested in only one asset class. Balanced Fund may be
appropriate for people who seek capital appreciation but are concerned about the
volatility typically associated with a fund that invests solely in stocks and
other equity securities.
FIXED INCOME STRATEGIES DESIGNED TO MAXIMIZE RETURN AND MANAGE RISK
GSAM's approach to managing the fixed income portion of Balanced Fund's
portfolio seeks to provide high returns relative to a market benchmark, the
Lehman Brothers Aggregate Bond Index, while also seeking to provide high current
income. This approach emphasizes (1) sector allocation strategies which enable
GSAM to tactically overweight or underweight one sector of the fixed-income
market (i.e., mortgages, corporate bonds, U.S. Treasuries, non-dollar bonds,
emerging market debt) versus another; (2) individual security selection based on
identifying relative value (fixed income securities inexpensive relative to
others in their sector); and (3) to a lesser extent, strategies based on GSAM's
expectation of the direction of interest rates or the spread between short-term
and long-term interest rates such as yield curve strategy.
GSAM seeks to manage fixed income portfolio risk in a number of ways. These
include diversifying the fixed income portion of the Balanced Fund's portfolio
among various types of fixed income securities and utilizing sophisticated
quantitative models to understand how the fixed income portion of the portfolio
will perform under a variety of market and economic scenarios. In addition,
GSAM uses extensive credit analysis to select and to monitor any investment-
grade or non-investment grade bonds that may be included in the Balanced Fund's
portfolio. In employing this and other investment strategies, the GSAM team has
access to extensive fundamental research and analysis available through Goldman
Sachs and a broad range of other sources.
A number of investment strategies will be used in selecting fixed income
securities for the Fund's portfolio. GSAM's fixed income investment philosophy
is to actively manage the portfolio within a risk-controlled framework. The
Adviser de-emphasizes interest rate anticipation by monitoring the duration of
the portfolio within a narrow range of the Adviser's target duration, and
instead focuses on seeking to add value through sector selection, security
selection and yield curve strategies.
MARKET SECTOR SELECTION. Market sector selection is the underweighting or
overweighting of one or more market sectors (i.e., U.S. Treasuries, U.S.
Government agency securities, corporate securities,
B-4
<PAGE>
mortgage-backed securities and asset-backed securities). GSAM may decide to
overweight or underweight a given market sector or subsector (e.g., within the
corporate sector, industrials, financial issuers and utilities) based on, among
other things, expectations of future yield spreads between different sectors or
subsectors.
ISSUER SELECTION. Issuer selection is the purchase and sale of corporate
securities based on a corporation's current and expected credit standing (within
the constraints imposed by Balanced Fund's minimum credit quality requirements).
This strategy focuses on four types of investment-grade corporate issuers.
Selection of securities from the first type of issuers -those with low but
stable credit - is intended to enhance total returns by providing incremental
yield. Selecting securities from the second type of issuers - those with low
and intermediate but improving credit quality - is intended to enhance total
returns in two stages. Initially, these securities are expected to provide
incremental yield. Eventually, price appreciation should occur relative to
alternative securities as credit quality improves, the nationally recognized
statistical rating organizations upgrade credit ratings, and credit spreads
narrow. Securities from the third type of issuers - issuers with deteriorating
credit quality - will be avoided, since total returns are typically enhanced by
avoiding the widening of credit spreads and the consequent relative price
depreciation. Finally, total returns can be enhanced by focusing on securities
that are rated differently by different rating organizations. If the securities
are trading in line with the higher published quality rating while GSAM concurs
with the lower published quality rating, the securities would generally be sold
and any potential price deterioration avoided. On the other hand, if the
securities are trading in line with the lower published quality rating while the
higher published quality rating is considered more realistic, the securities may
be purchased in anticipation of the expected market reevaluation and relative
price appreciation.
YIELD CURVE STRATEGY. Yield curve strategy consists of overweighting or
underweighting different maturity sectors relative to a benchmark to take
advantage of the shape of the yield curve. Three alternative maturity sector
selections are available: a "barbell" strategy in which short and long maturity
sectors are overweighted while intermediate maturity sectors are underweighted;
a "bullet" strategy in which, conversely, short-and long-maturity sectors are
underweighted while intermediate-maturity sectors are overweighted; and a
"neutral yield curve" strategy in which the maturity distribution mirrors that
of a benchmark.
CORE U.S. EQUITY AND CORE LARGE CAP GROWTH FUNDS
================================================
Under normal circumstances, the Funds will invest at least 90% of their
total assets in equity securities.
The investment strategy of the CORE U.S. Equity and CORE Large Cap Growth
Funds will be implemented to the extent it is consistent with maintaining a
Fund's qualification as a regulated investment company under the Internal
Revenue Code. A Fund's strategy may be limited, in particular, by the
requirement for such qualification that less than 30% of the Fund's gross income
for its taxable year be derived from the sale or other disposition of stocks or
securities or certain other investments (generally including options and futures
contracts) held for less than three months.
Since normal settlement for equity securities is three trading days, the
Funds will need to hold cash balances to satisfy shareholder redemption
requests. Such cash balances will normally range from 2% to 5% of a Fund's net
assets. The Funds may purchase futures contracts only with respect to the S&P
500 Index (in the case of CORE U.S. Equity Fund) and a representative index (in
the case of CORE Large Cap Growth Fund) in order to keep a Fund's effective
equity exposure close to 100%. For example, if cash balances are equal to 10%
of the net assets, the Fund may enter into long futures contracts covering an
amount equal to 10% of the Fund's net assets. As cash balances fluctuate based
on new contributions or withdrawals, a Fund may enter into additional contracts
or close out existing positions.
B-5
<PAGE>
THE MULTIFACTOR MODEL. The Multifactor Model is a rigorous computerized
rating system for evaluating equity securities according to a variety of
investment characteristics (or factors). The factors used by the Multifactor
Model incorporate many variables studied by traditional fundamental analysts and
cover measures of value, growth, momentum, risk (e.g. price/earnings ratio,
book/price ratio, growth forecasts, earning estimate revisions, price momentum,
volatility and earnings stability). All of these factors have been shown to
significantly impact the performance of equity securities.
Because it includes many disparate factors, the Adviser believes that the
Multifactor Model is broader in scope and provides a more thorough evaluation
than most conventional, value-oriented quantitative models. As a result, the
securities ranked highest by the Multifactor Model do not have one dominant
investment characteristic (such as a low price/earnings ratio); rather, such
securities possess many different investment characteristics. By using a
variety of relevant factors to select securities, the Adviser believes that the
Fund will be better balanced and have more consistent performance than an
investment portfolio that uses only one or two factors to select securities.
The Adviser will monitor, and may occasionally suggest and make changes to,
the method by which securities are selected for or weighted in the Fund. Such
changes (which may be the result of changes in the Multifactor Model or the
method of applying the Multifactor Model) may include: (i) evolutionary changes
to the structure of the Multifactor Model (e.g., the addition of new factors or
a new means of weighting the factors); (ii) changes in trading procedures (e.g.,
trading frequency or the manner in which the Fund uses futures); or (iii)
changes in the method by which securities are weighted in the Fund. Any such
changes will preserve the Fund's basic investment philosophy of combining
qualitative and quantitative methods of selecting securities using a disciplined
investment process.
INTERNATIONAL EQUITY FUND
=========================
International Equity Fund will seek to achieve its investment objective by
investing primarily in equity and equity-related securities of issuers that are
organized outside the United States or whose securities are principally traded
outside the United States. Because research coverage outside the United States
is fragmented and relatively unsophisticated, many foreign companies that are
well-positioned to grow and prosper have not come to the attention of investors.
GSAMI believes that the high historical returns and less efficient pricing of
foreign markets create favorable conditions for International Equity Fund's
highly focused investment approach. For a description of the risks of the
International Equity Fund's investments in Asia, see "Investing in Emerging
Markets, including Asia."
A RIGOROUS PROCESS OF STOCK SELECTION. Using fundamental industry and
company research, GSAMI's equity team in London, Singapore and Tokyo seeks to
identify companies that may achieve superior long-term returns. Stocks are
carefully selected for International Equity Fund's portfolio through a three-
stage investment process. Because International Equity Fund is a long-term
holder of stocks, the portfolio managers adjust International Equity Fund's
portfolio only when expected returns fall below acceptable levels or when the
portfolio managers identify substantially more attractive investments.
Using the research of Goldman Sachs as well as information gathered from
other sources in Europe and the Asia-Pacific region, the Adviser seeks to
identify attractive industries around the world. Such industries are expected
to have favorable underlying economics and allow companies to generate
sustainable and predictable high returns. As a rule, they are less economically
sensitive, relatively free of regulation and favor strong franchises.
Within these industries the Adviser seeks to identify well-run companies
that enjoy a stable competitive advantage and are able to benefit from the
favorable dynamics of the industry. This stage includes analyzing the current
and expected financial performance of the company; contacting suppliers,
B-6
<PAGE>
customers and competitors; and meeting with management. In particular, the
portfolio managers look for companies whose managers have a strong commitment to
both maintaining the high returns of the existing business and reinvesting the
capital generated at high rates of return. Management should act in the
interests of the owners and seek to maximize returns to all stockholders.
GSAMI's currency team manages the foreign exchange risk embedded in foreign
equities by means of a currency overlay program. The program may be utilized to
protect the value of foreign investments in sustained periods of dollar
appreciation and to add returns by seeking to take advantage of foreign exchange
fluctuations.
The members of GSAMI's international equity team bring together years of
experience in analyzing and investing in companies in Europe and the Asia-
Pacific region. Their expertise spans a wide range of skills including
investment analysis, investment management, investment banking and business
consulting. GSAM's worldwide staff of over 300 professionals includes portfolio
managers based in London, Singapore and Tokyo who bring firsthand knowledge of
their local markets and companies to every investment decision.
CORPORATE DEBT OBLIGATIONS
==========================
Each Fund may, under normal market conditions, invest in corporate debt
obligations, including obligations of industrial, utility and financial issuers.
CORE U.S. Equity and Core Large Cap Growth Funds may only invest in debt
securities that are cash equivalents. Corporate debt obligations are subject to
the risk of an issuer's inability to meet principal and interest payments on the
obligations and may also be subject to price volatility due to such factors as
market interest rates, market perception of the creditworthiness of the issuer
and general market liquidity.
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 a Fund's net asset value to
the extent it invests in such securities. In addition, a 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 Balanced, Growth and Income, Capital Growth, Mid Cap Equity, Small
Cap Equity, Emerging Markets Equity and Asia Growth Funds to dispose of a
particular security when necessary to meet their 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
Advisers 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 a Fund's net
asset value.
Since investors generally perceive that there are greater risks associated
with the medium to lower rated securities of the type in which Balanced, Growth
and Income, Capital Growth, Mid Cap Equity, Small Cap Equity, Emerging Markets
Equity and Asia Growth Funds may invest, the yields and prices of such
securities may tend to fluctuate more than those for higher rated securities.
In the lower quality segments of the fixed-income securities market, changes in
perceptions of issuers' creditworthiness tend to occur more frequently and in a
more pronounced manner than do changes in higher quality segments of the fixed-
income securities market, resulting in greater yield and price volatility.
B-7
<PAGE>
Another factor which causes fluctuations in the prices of fixed-income
securities is the supply and demand for similarly rated securities. In
addition, the prices of fixed-income securities fluctuate in response to the
general level of interest rates. Fluctuations in the prices of portfolio
securities subsequent to their acquisition will not affect cash income from such
securities but will be reflected in a Fund's net asset value.
Medium to lower rated and comparable non-rated securities tend to offer
higher yields than higher rated securities with the same maturities because the
historical financial condition of the issuers of such securities may not have
been as strong as that of other issuers. Since medium to lower rated securities
generally involve greater risks of loss of income and principal than higher
rated securities, investors should consider carefully the relative risks
associated with investment in securities which carry medium to lower ratings and
in comparable unrated securities. In addition to the risk of default, there are
the related costs of recovery on defaulted issues. The Advisers will attempt to
reduce these risks through portfolio diversification and by analysis of each
issuer and its ability to make timely payments of income and principal, as well
as broad economic trends and corporate developments.
ZERO COUPON BONDS
=================
A Fund's investments in fixed income securities may include zero coupon
bonds, which are debt obligations issued or purchased at a significant discount
from face value. The discount approximates the total amount of interest the
bonds would have accrued and compounded over the period until maturity. Zero
coupon bonds do not require the periodic payment of interest. Such investments
benefit the issuer by mitigating its need for cash to meet debt service but also
require a higher rate of return to attract investors who are willing to defer
receipt of such cash. Such investments may experience greater volatility in
market value than debt obligations which provide for regular payments of
interest. In addition, if an issuer of zero coupon bonds held by a Fund
defaults, the Fund may obtain no return at all on its investment. Each Fund
will accrue income on such investments for each taxable year which (net of
deductible expenses, if any) is distributable to shareholders and which, because
no cash is generally received at the time of accrual, may require the
liquidation of other portfolio securities to obtain sufficient cash to satisfy
the Fund's distribution obligations. See "Taxation."
VARIABLE AND FLOATING RATE SECURITIES
=====================================
The interest rates payable on certain fixed income securities in which a
Fund may invest are not fixed and may fluctuate based upon changes in market
rates. A variable rate obligation has an interest rate which is adjusted at
predesignated periods in response to changes in the market rate of interest on
which the interest rate is based. Variable and floating rate obligations are
less effective than fixed rate instruments at locking in a particular yield.
Nevertheless, such obligations may fluctuate in value in response to interest
rate changes if there is a delay between changes in market interest rates and
the interest reset date for the obligation.
CUSTODIAL RECEIPTS
==================
Each Fund may invest up to 5% of its net assets in custodial receipts in
respect of securities issued or guaranteed as to principal and interest by the
U.S. Government, its agencies, instrumentalities, political subdivisions or
authorities. Such custodial receipts evidence ownership of future interest
payments, principal payments or both on certain notes or bonds issued by the
U.S. Government, its agencies, instrumentalities, political subdivisions or
authorities. These custodial receipts are known by various names, including
"Treasury Receipts," "Treasury Investors Growth Receipts" ("TIGRs"), and
"Certificates of Accrual on Treasury Securities" ("CATs"). For certain
securities law purposes, custodial receipts are not considered U.S. Government
securities.
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<PAGE>
MUNICIPAL SECURITIES
====================
Balanced Fund may invest up to 5% of its net assets in municipal securities.
Municipal securities consist of bonds, notes and other instruments issued by or
on behalf of states, territories and possessions of the United States (including
the District of Columbia) and their political subdivisions, agencies or
instrumentalities, the interest on which is exempt from regular federal income
tax. Municipal securities are often issued to obtain funds for various public
purposes. Municipal securities also include "private activity bonds" or
industrial development bonds, which are issued by or on behalf of public
authorities to obtain funds for privately operated facilities, such as airports
and waste disposal facilities, and, in some cases, commercial and industrial
facilities.
The yields and market values of municipal securities are determined
primarily by the general level of interest rates, the creditworthiness of the
issuers of municipal securities and economic and political conditions affecting
such issuers. Due to their tax exempt status, the yields and market prices of
municipal securities may be adversely affected by changes in tax rates and
policies, which may have less effect on the market for taxable fixed income
securities. Moreover, certain types of municipal securities, such as housing
revenue bonds, involve prepayment risks which could affect the yield on such
securities.
Investments in municipal securities are subject to the risk that the issuer
could default on its obligations. Such a default could result from the
inadequacy of the sources or revenues from which interest and principal payments
are to be made or the assets collateralizing such obligations. Revenue bonds,
including private activity bonds, are backed only by specific assets or revenue
sources and not by the full faith and credit of the governmental issuer.
MORTGAGE-BACKED SECURITIES
==========================
GENERAL CHARACTERISTICS. Each Fund (other than CORE U.S. Equity and CORE
Large Cap Growth Funds) may invest in mortgage-backed securities. Each mortgage
pool underlying mortgage-backed securities consists of mortgage loans evidenced
by promissory notes secured by first mortgages or first deeds of trust or other
similar security instruments creating a first lien on owner occupied and non-
owner occupied one-unit to four-unit residential properties, multifamily (i.e.,
five or more) properties, agriculture properties, commercial properties and
mixed use properties (the "Mortgaged Properties"). The Mortgaged Properties may
consist of detached individual dwelling units, multifamily dwelling units,
individual condominiums, townhouses, duplexes, triplexes, fourplexes, row
houses, individual units in planned unit developments and other attached
dwelling units. The Mortgaged Properties may also include residential
investment properties and second homes.
The investment characteristics of adjustable and fixed rate mortgage-backed
securities differ from those of traditional fixed income securities. The major
differences include the payment of interest and principal on mortgage-backed
securities on a more frequent (usually monthly) schedule, and the possibility
that principal may be prepaid at any time due to prepayments on the underlying
mortgage loans or other assets. These differences can result in significantly
greater price and yield volatility than is the case with traditional fixed
income securities. As a result, if a Fund purchases mortgage-backed securities
at a premium, a faster than expected prepayment rate will reduce both the market
value and the yield to maturity from those which were anticipated. A prepayment
rate that is slower than expected will have the opposite effect of increasing
yield to maturity and market value. Conversely, if a Fund purchases mortgage-
backed securities at a discount, faster than expected prepayments will increase,
while slower than expected prepayments will reduce yield to maturity and market
values. To the extent that a Fund invests in mortgage-backed securities, the
Advisers may seek to manage these potential risks by investing in a variety of
mortgage-backed securities and by using certain hedging techniques.
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<PAGE>
GOVERNMENT GUARANTEED MORTGAGE-BACKED SECURITIES. There are several types
of guaranteed mortgage-backed securities currently available, including
guaranteed mortgage pass-through certificates and multiple class securities,
which include guaranteed Real Estate Mortgage Investment Conduit Certificates
("REMIC Certificates"), collateralized mortgage obligations and stripped
mortgage-backed securities. A Fund is permitted to invest in other types of
mortgage-backed securities that may be available in the future to the extent
consistent with its investment policies and objective.
A Fund's investments in mortgage-backed securities may include securities
issued or guaranteed by the U.S. Government or one of its agencies, authorities,
instrumentalities or sponsored enterprises, such as the Government National
Mortgage Association ("Ginnie Mae"), the Federal National Mortgage Association
("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac").
GINNIE MAE CERTIFICATES. Ginnie Mae is a wholly-owned corporate
instrumentality of the United States. Ginnie Mae is authorized to guarantee the
timely payment of the principal of and interest on certificates that are based
on and backed by a pool of mortgage loans insured by the Federal Housing
Administration ("FHA Loans"), or guaranteed by the Veterans Administration ("VA
Loans"), or by pools of other eligible mortgage loans. In order to meet its
obligations under any guaranty, Ginnie Mae is authorized to borrow from the
United States Treasury in an unlimited amount.
FANNIE MAE CERTIFICATES. Fannie Mae is a stockholder-owned corporation
chartered under an act of the United States Congress. Each Fannie Mae
Certificate is issued and guaranteed by Fannie Mae and represents an undivided
interest in a pool of mortgage loans (a "Pool") formed by Fannie Mae. Each Pool
consists of residential mortgage loans ("Mortgage Loans") either previously
owned by Fannie Mae or purchased by it in connection with the formation of the
Pool. The Mortgage Loans may be either conventional Mortgage Loans (i.e., not
insured or guaranteed by any U.S. Government agency) or Mortgage Loans that are
either insured by the Federal Housing Administration ("FHA") or guaranteed by
the Veterans Administration ("VA"). However, the Mortgage Loans in Fannie Mae
Pools are primarily conventional Mortgage Loans. The lenders originating and
servicing the Mortgage Loans are subject to certain eligibility requirements
established by Fannie Mae.
Fannie Mae has certain contractual responsibilities. With respect to each
Pool, Fannie Mae is obligated to distribute scheduled monthly installments of
principal and interest after Fannie Mae's servicing and guaranty fee, whether or
not received, to Certificate holders. Fannie Mae 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.
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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. Each Fund (other than CORE U.S. Equity
and CORE Large Cap Growth Funds) may invest in both government guaranteed and
privately issued mortgage pass-through securities ("Mortgage Pass-Throughs");
that is, fixed or adjustable rate mortgage-backed securities which provide for
monthly payments that are a "pass-through" of the monthly interest and principal
payments (including any prepayments) made by the individual borrowers on the
pooled mortgage loans, net of any fees or other amounts paid to any guarantor,
administrator and/or servicer of the underlying mortgage loans.
The following discussion describes only a few of the wide variety of
structures of Mortgage Pass-Throughs that are available or may be issued.
DESCRIPTION OF CERTIFICATES. Mortgage Pass-Throughs may be issued in one or
more classes of senior certificates and one or more classes of subordinate
certificates. Each such class may bear a different pass-through rate.
Generally, each certificate will evidence the specified interest of the holder
thereof in the payments of principal or interest or both in respect of the
mortgage pool comprising part of the trust fund for such certificates.
Any class of certificates may also be divided into subclasses entitled to
varying amounts of principal and interest. If a REMIC election has been made,
certificates of such subclasses may be entitled to payments on the basis of a
stated principal balance and stated interest rate, and payments among different
subclasses may be made on a sequential, concurrent, pro rata or disproportionate
--- ----
basis, or any combination thereof. The stated interest rate on any such
subclass of certificates may be a fixed rate or one which varies in direct or
inverse relationship to an objective interest index.
Generally, each registered holder of a certificate will be entitled to
receive its pro rata share of monthly distributions of all or a portion of
--- ----
principal of the underlying mortgage loans or of interest on the principal
balances thereof, which accrues at the applicable mortgage pass-through rate, or
both. The difference between the mortgage interest rate and the related
mortgage pass-through rate (less the amount, if any, of retained yield) with
respect to each mortgage loan will generally be paid to the servicer as a
servicing fee. Since certain adjustable rate mortgage loans included in a
mortgage pool may provide for deferred interest (i.e., negative amortization),
the amount of interest actually paid by a mortgagor in any month may be less
than the amount of interest accrued on the outstanding principal balance of the
related mortgage loan during the relevant period at the applicable mortgage
interest rate. In such event, the amount of interest that is treated as
deferred interest will be added to the principal balance of the related mortgage
loan and will be distributed pro rata to certificate-holders as principal of
--- ----
such mortgage loan when paid by the mortgagor in subsequent monthly payments or
at maturity.
RATINGS. The ratings assigned by a rating organization to Mortgage Pass-
Throughs address the likelihood of the receipt of all distributions on the
underlying mortgage loans by the 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
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<PAGE>
rating organization's ratings on such certificates do not, however, constitute a
statement regarding frequency of prepayments on the related mortgage loans. In
addition, the rating assigned by a rating organization to a certificate does not
address the remote possibility that, in the event of the insolvency of the
issuer of certificates where a subordinated interest was retained, the issuance
and sale of the senior certificates may be recharacterized as a financing and,
as a result of such recharacterization, payments on such certificates may be
affected.
CREDIT ENHANCEMENT. Credit support falls generally into two categories:
(i) liquidity protection and (ii) protection against losses resulting from
default by an obligor on the underlying assets. Liquidity protection refers to
the provision of advances, generally by the entity administering the pools of
mortgages, the provision of a reserve fund, or a combination thereof, to ensure,
subject to certain limitations, that scheduled payments on the underlying pool
are made in a timely fashion. Protection against losses resulting from default
ensures ultimate payment of the obligations on at least a portion of the assets
in the pool. Such credit support can be provided by among other things, payment
guarantees, letters of credit, pool insurance, subordination, or any combination
thereof.
SUBORDINATION; SHIFTING OF INTEREST; RESERVE FUND. In order to achieve
ratings on one or more classes of Mortgage Pass-Throughs, one or more classes of
certificates may be subordinate certificates which provide that the rights of
the subordinate certificate-holders to receive any or a specified portion of
distributions with respect to the underlying mortgage loans may be subordinated
to the rights of the senior certificate-holders. If so structured, the
subordination feature may be enhanced by distributing to the senior certificate-
holders on certain distribution dates, as payment of principal, a specified
percentage (which generally declines over time) of all principal payments
received during the preceding prepayment period ("shifting interest credit
enhancement"). This will have the effect of accelerating the amortization of
the senior certificates while increasing the interest in the trust fund
evidenced by the subordinate certificates. Increasing the interest of the
subordinate certificates relative to that of the senior certificates is intended
to preserve the availability of the subordination provided by the subordinate
certificates. In addition, because the senior certificate-holders in a shifting
interest credit enhancement structure are entitled to receive a percentage of
principal prepayments which is greater than their proportionate interest in the
trust fund, the rate of principal prepayments on the mortgage loans will have an
even greater effect on the rate of principal payments and the amount of interest
payments on, and the yield to maturity of, the senior certificates.
In addition to providing for a preferential right of the senior certificate-
holders to receive current distributions from the mortgage pool, a reserve fund
may be established relating to such certificates (the "Reserve Fund"). The
Reserve Fund may be created with an initial cash deposit by the originator or
servicer and augmented by the retention of distributions otherwise available to
the subordinate certificate-holders or by excess servicing fees until the
Reserve Fund reaches a specified amount.
The subordination feature, and any Reserve Fund, are intended to enhance the
likelihood of timely receipt by senior certificate-holders of the full amount of
scheduled monthly payments of principal and interest due them and will protect
the senior certificate-holders against certain losses; however, in certain
circumstances the Reserve Fund could be depleted and temporary shortfalls could
result. In the event the Reserve Fund is depleted before the subordinated
amount is reduced to zero, senior certificate-holders will nevertheless have a
preferential right to receive current distributions from the mortgage pool to
the extent of the then outstanding subordinated amount. Unless otherwise
specified, until the subordinated amount is reduced to zero, on any distribution
date any amount otherwise distributable to the subordinate certificates or, to
the extent specified, in the Reserve Fund will generally be used to offset the
amount of any losses realized with respect to the mortgage loans ("Realized
Losses"). Realized Losses remaining after application of such amounts will
generally be applied to reduce the ownership interest of the subordinate
certificates in the mortgage pool. If the subordinated amount has been reduced
to zero,
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<PAGE>
Realized Losses generally will be allocated pro rata among all certificate-
--- ----
holders in proportion to their respective outstanding interests in the mortgage
pool.
ALTERNATIVE CREDIT ENHANCEMENT. As an alternative, or in addition to the
credit enhancement afforded by subordination, credit enhancement for Mortgage
Pass-Throughs may be provided by mortgage insurance, hazard insurance, by the
deposit of cash, certificates of deposit, letters of credit, a limited guaranty
or by such other methods as are acceptable to a rating agency. In certain
circumstances, such as where credit enhancement is provided by guarantees or a
letter of credit, the security is subject to credit risk because of its exposure
to an external credit enhancement provider.
VOLUNTARY ADVANCES. Generally, in the event of delinquencies in payments on
the mortgage loans underlying the Mortgage Pass-Throughs, the servicer agrees to
make advances of cash for the benefit of certificate-holders, but only to the
extent that it determines such voluntary advances will be recoverable from
future payments and collections on the mortgage loans or otherwise.
OPTIONAL TERMINATION. Generally, the servicer may, at its option with
respect to any certificates, repurchase all of the underlying mortgage loans
remaining outstanding at such time as the aggregate outstanding principal
balance of such mortgage loans is less than a specified percentage (generally 5-
10%) of the aggregate outstanding principal balance of the mortgage loans as of
the cut-off date specified with respect to such series.
MULTIPLE CLASS MORTGAGE-BACKED SECURITIES AND COLLATERALIZED MORTGAGE
OBLIGATIONS. A Fund may invest in multiple class securities including
collateralized mortgage obligations ("CMOs") and REMIC Certificates. These
securities may be issued by U.S. Government agencies and instrumentalities such
as Fannie Mae or Freddie Mac or by trusts formed by private originators of, or
investors in, mortgage loans, including savings and loan associations, mortgage
bankers, commercial banks, insurance companies, investment banks and special
purpose subsidiaries of the foregoing. In general, CMOs are debt obligations of
a legal entity that are collateralized by, and multiple class mortgage-backed
securities represent direct ownership interests in, a pool of mortgage loans or
mortgage-backed securities the payments on which are used to make payments on
the CMOs or multiple class mortgage-backed securities.
Fannie Mae REMIC Certificates are issued and guaranteed as to timely
distribution of principal and interest by Fannie Mae. In addition, Fannie Mae
will be obligated to distribute the principal balance of each class of REMIC
Certificates in full, whether or not sufficient funds are otherwise available.
Freddie Mac guarantees the timely payment of interest on Freddie Mac REMIC
Certificates and also guarantees the payment of principal as payments are
required to be made on the underlying mortgage participation certificates
("PCs"). PCs represent undivided interests in specified level payment,
residential mortgages or 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 Funds do not intend to purchase residual interests in
REMICs. The REMIC Certificates represent beneficial ownership interests in a
REMIC trust, generally consisting of mortgage loans or Fannie Mae, Freddie Mac
or Ginnie Mae guaranteed mortgage-backed securities (the "Mortgage Assets").
The obligations of Fannie Mae or Freddie Mac under their
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<PAGE>
respective guaranty of the REMIC Certificates are obligations solely of Fannie
Mae or Freddie Mac, respectively.
CMOs and REMIC Certificates are issued in multiple classes. Each class of
CMOs or REMIC Certificates, often referred to as a "tranche," is issued at a
specific adjustable or fixed interest rate and must be fully retired no later
than its final distribution date. Principal prepayments on the Mortgage Loans
or the Mortgage Assets underlying the CMOs or REMIC Certificates may cause some
or all of the classes of CMOs or REMIC Certificates to be retired substantially
earlier than their final distribution dates. Generally, interest is paid or
accrues on all classes of CMOs or REMIC Certificates on a monthly basis.
The principal of and interest on the Mortgage Assets may be allocated among
the several classes of CMOs or REMIC Certificates in various ways. In certain
structures (known as "sequential pay" CMOs or REMIC Certificates), payments of
principal, including any principal prepayments, on the Mortgage Assets generally
are applied to the classes of CMOs or REMIC Certificates in the order of their
respective final distribution dates. Thus, no payment of principal will be made
on any class of sequential pay CMOs or REMIC Certificates until all other
classes having an earlier final distribution date have been paid in full.
Additional structures of CMOs and REMIC Certificates include, among others,
"parallel pay" CMOs and REMIC Certificates. Parallel pay CMOs or REMIC
Certificates are those which are structured to apply principal payments and
prepayments of the Mortgage Assets to two or more classes concurrently on a
proportionate or disproportionate basis. These simultaneous payments are taken
into account in calculating the final distribution date of each class.
A wide variety of REMIC Certificates may be issued in parallel pay or
sequential pay structures. These securities include accrual certificates (also
known as "Z-Bonds"), which only accrue interest at a specified rate until all
other certificates having an earlier final distribution date have been retired
and are converted thereafter to an interest-paying security, and planned
amortization class ("PAC") certificates, which are parallel pay REMIC
Certificates that generally require that specified amounts of principal be
applied on each payment date to one or more classes or REMIC Certificates (the
"PAC Certificates"), even though all other principal payments and prepayments of
the Mortgage Assets are then required to be applied to one or more other classes
of the Certificates. The scheduled principal payments for the PAC Certificates
generally have the highest priority on each payment date after interest due has
been paid to all classes entitled to receive interest currently. Shortfalls, if
any, are added to the amount payable on the next payment date. The PAC
Certificate payment schedule is taken into account in calculating the final
distribution date of each class of PAC. In order to create PAC tranches, one or
more tranches generally must be created that absorb most of the volatility in
the underlying mortgage assets. These tranches tend to have market prices and
yields that are much more volatile than other PAC classes.
STRIPPED MORTGAGE-BACKED SECURITIES. Balanced Fund may invest in stripped
mortgage-backed securities ("SMBS"), which are derivative multiclass mortgage
securities. Although the market for such securities is increasingly liquid,
certain SMBS may not be readily marketable and will be considered illiquid for
purposes of the Fund's limitation on investments in illiquid securities. The
market value of the class consisting entirely of principal payments generally is
unusually volatile in response to changes in interest rates. The yields on a
class of SMBS that receives all or most of the interest from Mortgage Assets are
generally higher than prevailing market yields on other mortgage-backed
securities because their cash flow patterns are more volatile and there is a
greater risk that the initial investment will not be fully recouped.
INVERSE FLOATING RATE SECURITIES
================================
Balanced Fund may invest up to 5% of its net assets in leveraged inverse
floating rate debt instruments ("inverse floaters"). The interest rate on an
inverse floater resets in the opposite direction from
B-14
<PAGE>
the market rate of interest to which the inverse floater is indexed . An
inverse floater may be considered to be leveraged to the extent that its
interest rate varies by a magnitude that exceeds the magnitude of the change in
the index rate of interest. The higher degree of leverage inherent in inverse
floaters is associated with greater volatility in their market values.
Accordingly, the duration of an inverse floater may exceed its stated final
maturity. Certain inverse floaters may be deemed to be illiquid securities for
purposes of the Fund's 15% limitation on investments in such securities.
ASSET-BACKED SECURITIES
=======================
Asset-backed securities represent participation in, or are secured by and
payable from, assets such as motor vehicle installment sales, installment loan
contracts, leases of various types of real and personal property, receivables
from revolving credit (credit card) agreements and other categories of
receivables. Such assets are securitized through the use of trusts and special
purpose corporations. Payments or distributions of principal and interest may be
guaranteed up to certain amounts and for a certain time period by a letter of
credit or a pool insurance policy issued by a financial institution unaffiliated
with the trust or corporation, or other credit enhancements may be present.
Like mortgage-backed securities, asset-backed securities are often subject
to more rapid repayment than their stated maturity date would indicate as a
result of the pass-through of prepayments of principal on the underlying loans.
A Fund's ability to maintain positions in such securities will be affected by
reductions in the principal amount of such securities resulting from
prepayments, and its ability to reinvest the returns of principal at comparable
yields is subject to generally prevailing interest rates at that time. To the
extent that a Fund invests in asset-backed securities, the values of such Fund's
portfolio securities will vary with changes in market interest rates generally
and the differentials in yields among various kinds of asset-backed securities.
Asset-backed securities present certain additional risks that are not
presented by mortgage-backed securities because asset-backed securities
generally do not have the benefit of a security interest in collateral that is
comparable to mortgage assets. Credit card receivables are generally unsecured
and the debtors on such receivables are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set-off certain amounts owed on the credit cards, thereby reducing the
balance due. Automobile receivables generally are secured, but by automobiles
rather than residential real property. Most issuers of automobile receivables
permit the loan servicers to retain possession of the underlying obligations.
If the servicer were to sell these obligations to another party, there is a
risk that the purchaser would acquire an interest superior to that of the
holders of the asset-backed securities. In addition, because of the large
number of vehicles involved in a typical issuance and technical requirements
under state laws, the trustee for the holders of the automobile receivables may
not have a proper security interest in the underlying automobiles. Therefore,
there is the possibility that, in some cases, recoveries on repossessed
collateral may not be available to support payments on these securities.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
==================================================
Each Fund may purchase and sell futures contracts and may also purchase and
write options on futures contracts. CORE U.S. Equity and CORE Large Cap Growth
Funds may only enter into such transactions with respect to the S&P 500 Index,
for the CORE U.S. Equity Fund and a respective index in the case of the CORE
Large Cap Growth Fund. The other Funds may purchase and sell futures contracts
based on various securities (such as U.S. Government securities), securities
indices, foreign currencies and other financial instruments and indices. Each
Fund will engage in futures and related options transactions, only for bona fide
hedging purposes as defined below or for purposes of seeking to increase total
return to the extent permitted by regulations of the Commodity Futures Trading
Commission
B-15
<PAGE>
("CFTC"). All futures contracts entered into by a Fund are traded on U.S.
exchanges or boards of trade that are licensed and regulated by the CFTC or on
foreign exchanges.
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).
When interest rates are rising or securities prices are falling, a Fund can
seek through the sale of futures contracts to offset a decline in the value of
its current portfolio securities. When rates are falling or prices are rising,
a Fund, through the purchase of futures contracts, can attempt to secure better
rates or prices than might later be available in the market when it effects
anticipated purchases. Similarly, each Fund (other than CORE U.S. Equity and
CORE Large Cap Growth Funds) can sell futures contracts on a specified currency
to protect against a decline in the value of such currency and its portfolio
securities which are quoted or denominated in such currency. Each Fund (other
than CORE U.S. Equity and CORE Large Cap Growth Funds) can purchase futures
contracts on foreign currency to establish the price in U.S. dollars of a
security quoted or denominated in such currency that such Fund has acquired or
expects to acquire.
Positions taken in the futures market are not normally held to maturity, but
are instead liquidated through offsetting transactions which may result in a
profit or a loss. While each Fund will usually liquidate futures contracts on
securities or currency in this manner, a Fund may instead make or take delivery
of the underlying securities or currency whenever it appears economically
advantageous for the Fund to do so. A clearing corporation associated with the
exchange on which futures are traded guarantees that, if still open, the sale or
purchase will be performed on the settlement date.
HEDGING STRATEGIES. Hedging, by use of futures contracts, seeks to
establish with more certainty than would otherwise be possible the effective
price, rate of return or currency exchange rate on portfolio securities or
securities that a Fund owns or proposes to acquire. A Fund may, for example,
take a "short" position in the futures market by selling futures contracts to
seek to hedge against an anticipated rise in interest rates or a decline in
market prices or (other than CORE U.S. Equity and CORE Large Cap Growth Funds)
foreign currency rates that would adversely affect the dollar value of such
Fund's portfolio securities. Similarly, each Fund (other than CORE U.S. Equity
and CORE Large Cap Growth Funds) may sell futures contracts on a currency in
which its portfolio securities are quoted or denominated or in one currency to
seek to hedge against fluctuations in the value of securities quoted or
denominated in a different currency if there is an established historical
pattern of correlation between the two currencies. If, in the opinion of the
applicable Adviser, there is a sufficient degree of correlation between price
trends for a Fund's portfolio securities and futures contracts based on other
financial instruments, securities indices or other indices, a Fund may also
enter into such futures contracts as part of its hedging strategy. Although
under some circumstances prices of securities in a Fund's portfolio may be more
or less volatile than prices of such futures contracts, the Advisers will
attempt to estimate the extent of this volatility difference based on historical
patterns and compensate for any such differential by having a Fund enter into a
greater or lesser number of futures contracts or by attempting to achieve only a
partial hedge against price changes affecting a Fund's securities portfolio.
When hedging of this character is successful, any depreciation in the value of
portfolio securities will be substantially offset by appreciation in the value
of the futures position. On the other hand, any unanticipated appreciation in
the value of a Fund's portfolio securities would be substantially offset by a
decline in the value of the futures position.
On other occasions, a Fund may take a "long" position by purchasing such
futures contracts. This would be done, for example, when a Fund anticipates the
subsequent purchase of particular securities
B-16
<PAGE>
when it has the necessary cash, but expects the prices or currency exchange
rates then available in the applicable market to be less favorable than prices
or rates that are currently available.
OPTIONS ON FUTURES CONTRACTS. The acquisition of put and call options on
futures contracts will give a Fund the right (but not the obligation), for a
specified price, to sell or to purchase, respectively, the underlying futures
contract at any time during the option period. As the purchaser of an option on
a futures contract, a Fund obtains the benefit of the futures position if prices
move in a favorable direction but limits its risk of loss in the event of an
unfavorable price movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium which
may partially offset a decline in the value of a Fund's assets. By writing a
call option, a Fund becomes obligated, in exchange for the premium, to sell a
futures contract if the option is exercised, which may have a value higher than
the exercise price. Conversely, the writing of a put option on a futures
contract generates a premium, which may partially offset an increase in the
price of securities that a Fund intends to purchase. However, a Fund becomes
obligated to purchase a futures contract if the option is exercised, which may
have a value lower than the exercise price. Thus, the loss incurred by a Fund
in writing options on futures is potentially unlimited and may exceed the amount
of the premium received. A Fund will incur transaction costs in connection with
the writing of options on futures.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option on the same financial
instrument. There is no guarantee that such closing transactions can be
effected. A Fund's ability to establish and close out positions on such options
will be subject to the development and maintenance of a liquid market.
OTHER CONSIDERATIONS. Each Fund will engage in futures transactions and
will engage in related options transactions only for bona fide hedging as
defined in the regulations of the CFTC or to seek to increase total return to
the extent permitted by such regulations. A Fund will determine that the price
fluctuations in the futures contracts and options on futures used for hedging
purposes are substantially related to price fluctuations in securities held by
the Fund or which it expects to purchase. Except as stated below, each Fund's
futures transactions will be entered into for traditional hedging purposes --
i.e., futures contracts will be sold to protect against a decline in the price
of securities (or the currency in which they are quoted or denominated) that the
Fund owns, or futures contracts will be purchased to protect the Fund against an
increase in the price of securities (or the currency in which they are quoted or
denominated) it intends to purchase. As evidence of this hedging intent, each
Fund expects that on 75% or more of the occasions on which it takes a long
futures or option position (involving the purchase of futures contracts), the
Fund will have purchased, or will be in the process of purchasing, equivalent
amounts of related securities (or assets quoted or denominated in the related
currency) in the cash market at the time when the futures or options position is
closed out. However, in particular cases, when it is economically advantageous
for a Fund to do so, a long futures position may be terminated or an option may
expire without the corresponding purchase of securities or other assets.
As an alternative to literal compliance with the bona fide hedging
definition, a CFTC regulation permits a Fund to elect to comply with a different
test. Under this test the aggregate initial margin and premiums required to
establish positions in futures contracts and options on futures to seek to
increase total return may not exceed 5% of the net asset value of such Fund's
portfolio, after taking into account unrealized profits and losses on any such
positions and excluding the amount by which such options were in-the-money at
the time of purchase. A Fund will engage in transactions in currency forward
contracts futures contracts and, for a Fund permitted to do so, related options
transactions only to the extent such transactions are consistent with the
requirements of the Code for maintaining its qualification as a regulated
investment company for federal income tax purposes (see "Taxation").
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<PAGE>
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating a Fund to purchase securities or currencies, require the Fund to
segregate 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 a Fund than if it had not
entered into any futures contracts or options transactions. In the event of an
imperfect correlation between a futures position and a portfolio position which
is intended to be protected, the desired protection may not be obtained and a
Fund may be exposed to risk of loss.
Perfect correlation between a Fund's futures positions and portfolio
positions will be difficult to achieve because no futures contracts based on
individual equity or corporate fixed-income securities are currently available.
The only futures contracts available to hedge a Fund's portfolio are various
futures on U.S. Government securities, securities indices and foreign
currencies. In addition, it is not possible for a Fund to hedge fully or
perfectly against currency fluctuations affecting the value of securities quoted
or denominated in foreign currencies because the value of such securities is
likely to fluctuate as a result of independent factors not related to currency
fluctuations.
OPTIONS ON SECURITIES AND SECURITIES INDICES
============================================
WRITING COVERED OPTIONS. Each Fund may write (sell) covered call and put
options on any securities in which it may invest (other than CORE U.S. Equity
and CORE Large Cap Growth Funds). A call option written by a Fund obligates
such Fund to sell specified securities to the holder of the option at a
specified price if the option is exercised at any time before the expiration
date. All call options written by a Fund are covered, which means that such
Fund will own the securities subject to the option as long as the option is
outstanding or such Fund will use the other methods described below. A Fund's
purpose in writing covered call options is to realize greater income than would
be realized on portfolio securities transactions alone. However, a Fund may
forego the opportunity to profit from an increase in the market price of the
underlying security.
A put option written by a Fund would obligate such Fund to purchase
specified securities from the option holder at a specified price if the option
is exercised at any time before the expiration date. All put options written by
a Fund would be covered, which means that such Fund would have deposited with
its custodian cash or liquid assets with a value at least equal to the exercise
price of the put option. The purpose of writing such options is to generate
additional income for the Fund. However, in return for the option premium, each
Fund accepts the risk that it may be required to purchase the underlying
securities at a price in excess of the securities' market value at the time of
purchase.
Call and put options written by a Fund will also be considered to be covered
to the extent that the Fund's liabilities under such options are wholly or
partially offset by its rights under call and put options purchased by the Fund.
In addition, a written call option or put option may be covered by
maintaining cash or liquid assets (either of which may be quoted or denominated
in any currency) in a segregated account, by entering into an offsetting forward
contract and/or by purchasing an offsetting option which, by virtue of its
exercise price or otherwise, reduces a Fund's net exposure on its written option
position.
A Fund may also write (sell) covered call and put options on any securities
index composed of securities in which it may invest. Options on securities
indices are similar to options on securities, except
B-18
<PAGE>
that the exercise of securities index options requires cash payments and does
not involve the actual purchase or sale of securities. In addition, securities
index options are designed to reflect price fluctuations in a group of
securities or segment of the securities market rather than price fluctuations in
a single security.
A Fund may cover call options on a securities index by owning securities
whose price changes are expected to be similar to those of the underlying index,
or by having an absolute and immediate right to acquire such securities without
additional cash consideration (or for additional cash consideration held in a
segregated account by its custodian) upon conversion or exchange of other
securities in its portfolio. A Fund may cover call and put options on a
securities index by maintaining cash or liquid assets with a value equal to the
exercise price in a segregated account with its custodian.
A Fund may terminate its obligations under an exchange traded call or put
option by purchasing an option identical to the one it has written. Obligations
under over-the-counter options may be terminated only by entering into an
offsetting transaction with the counterparty to such option. Such purchases are
referred to as "closing purchase transactions."
PURCHASING OPTIONS. Each Fund (other than the CORE U.S. Equity and CORE
Large Cap Growth Funds) may purchase put and call options on any securities in
which it may invest or options on any securities index composed of securities in
which it may invest. A Fund would also be able to enter into closing sale
transactions in order to realize gains or minimize losses on options it had
purchased.
A Fund would normally purchase call options in anticipation of an increase
in the market value of securities of the type in which it may invest. The
purchase of a call option would entitle a Fund, in return for the premium paid,
to purchase specified securities at a specified price during the option period.
A Fund would ordinarily realize a gain if, during the option period, the value
of such securities exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise such a Fund would realize either no gain or a loss
on the purchase of the call option.
A Fund would normally purchase put options in anticipation of a decline in
the market value of securities in its portfolio ("protective puts") or in
securities in which it may invest. The purchase of a put option would entitle a
Fund, in exchange for the premium paid, to sell specified securities at a
specified price during the option period. The purchase of protective puts is
designed to offset or hedge against a decline in the market value of a Fund's
securities. Put options may also be purchased by a Fund for the purpose of
affirmatively benefiting from a decline in the price of securities which it does
not own. A Fund would ordinarily realize a gain if, during the option period,
the value of the underlying securities decreased below the exercise price
sufficiently to more than cover the premium and transaction costs; otherwise
such a Fund would realize either no gain or a loss on the purchase of the put
option. Gains and losses on the purchase of protective put options would tend
to be offset by countervailing changes in the value of the underlying portfolio
securities.
A Fund would purchase put and call options on securities indices for the
same purposes as it would purchase options on individual securities. For a
description of options on securities indices, see "Writing Covered Options"
above.
YIELD CURVE OPTIONS. Balanced Fund, with respect to up to 5% of its net
assets, may enter into options on the yield "spread" or differential between two
securities. Such transactions are referred to as "yield curve" options. In
contrast to other types of options, a yield curve option is based on the
difference between the yields of designated securities, rather than the prices
of the individual securities, and is settled through cash payments.
Accordingly, a yield curve option is profitable to the holder if this
differential
B-19
<PAGE>
widens (in the case of a call) or narrows (in the case of a put), regardless of
whether the yields of the underlying securities increase or decrease.
Balanced Fund may purchase or write yield curve options for the same
purposes as other options on securities. For example, Balanced Fund may
purchase a call option on the yield spread between two securities if it owns one
of the securities and anticipates purchasing the other security and wants to
hedge against an adverse change in the yield spread between the two securities.
Balanced Fund may also purchase or write yield curve options in an effort to
increase its current income if, in the judgment of the Adviser, Balanced Fund
will be able to profit from movements in the spread between the yields of the
underlying securities. The trading of yield curve options is subject to all of
the risks associated with the trading of other types of options. In addition,
however, such options present risk of loss even if the yield of one of the
underlying securities remains constant, if the spread moves in a direction or to
an extent which was not anticipated.
Yield curve options written by the Balanced Fund will be "covered." A call
(or put) option is covered if the Balanced Fund holds another call (or put)
option on the spread between the same two securities and maintains in a
segregated account with its custodian cash or liquid assets sufficient to cover
the Balanced Fund's net liability under the two options. Therefore, the
Balanced Fund's liability for such a covered option is generally limited to the
difference between the amount of the Balanced Fund's liability under the option
written by the Balanced Fund less the value of the option held by the Balanced
Fund. Yield curve options may also be covered in such other manner as may be in
accordance with the requirements of the counterparty with which the option is
traded and applicable laws and regulations. Yield curve options are traded
over-the-counter, and because they have been only recently introduced,
established trading markets for these options have not yet developed.
RISKS ASSOCIATED WITH OPTIONS TRANSACTIONS. There is no assurance that a
liquid secondary market on an options exchange will exist for any particular
exchange-traded option or at any particular time. If a Fund is unable to effect
a closing purchase transaction with respect to covered options it has written,
the Fund will not be able to sell the underlying securities or dispose of assets
held in a segregated account until the options expire or are exercised.
Similarly, if a Fund is unable to effect a closing sale transaction with respect
to options it has purchased, it will have to exercise the options in order to
realize any profit and will incur transaction costs upon the purchase or sale of
underlying securities.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening or closing
transactions or both; (iii) trading halts, suspensions or other restrictions may
be imposed with respect to particular classes or series of options; (iv) unusual
or unforeseen circumstances may interrupt normal operations on an exchange; (v)
the facilities of an exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume; or (vi) one or more
exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that exchange that had been issued by the Options Clearing
Corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
Each Fund may purchase and sell both options that are traded on U.S. and
foreign exchanges and options traded over-the-counter with broker-dealers who
make markets in these options. The ability to terminate over-the-counter
options is more limited than with exchange-traded options and may involve the
risk that broker-dealers participating in such transactions will not fulfill
their obligations. Until such time as the staff of the Securities and Exchange
Commission ("SEC") changes its position, each Fund will treat purchased over-
the-counter options and all assets used to cover written over-the-counter
options as illiquid
B-20
<PAGE>
securities, except that with respect to options written with primary dealers in
U.S. Government securities pursuant to an agreement requiring a closing purchase
transaction at a formula price, the amount of illiquid securities may be
calculated with reference to the formula.
Transactions by each Fund in options 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 a Fund may write or
purchase may be affected by options written or purchased by other investment
advisory clients of the Advisers. An exchange, board of trade or other trading
facility may order the liquidation of positions found to be in excess of these
limits, and it may impose certain other sanctions.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of protective
puts for hedging purposes depends in part on the Adviser's ability to predict
future price fluctuations and the degree of correlation between the options and
securities markets.
REAL ESTATE INVESTMENT TRUSTS
=============================
Each Fund may invest in shares of REITs. REITs are pooled investment
vehicles which invest primarily in income producing real estate or real estate
related loans or interest. REITs are generally classified as equity REITs,
mortgage REITs or a combination of equity and mortgage REITs. Equity REITs
invest the majority of their assets directly in real property and derive income
primarily from the collection of rents. Equity REITs can also realize capital
gains by selling properties that have appreciated in value. Mortgage REITs
invest the majority of their assets in real estate mortgages and derive income
from the collection of interest payments. Like regulated investment companies
such as the Funds, REITs are not taxed on income distributed to shareholders
provided they comply with certain requirements under the Code. A Fund will
indirectly bear its proportionate share of any expenses paid by REITs in which
it invests in addition to the expenses paid by a 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 Investment Company Act of 1940, as amended (the "Act").
REITs (especially mortgage REITs) are also subject to interest rate risks.
WARRANTS AND STOCK PURCHASE RIGHTS
==================================
Each Fund may invest up to 5% of its net assets, calculated at the time of
purchase, in warrants or rights (other than those acquired in units or attached
to other securities) which entitle the holder to buy equity securities at a
specific price for a specific period of time. A Fund will invest in warrants
and rights only if such equity securities are deemed appropriate by the Adviser
for investment by the Fund. CORE U.S. Equity and CORE Large Cap Growth Funds
have no present intention of acquiring warrants or rights. Warrants and rights
have no voting rights, receive no dividends and have no rights with respect to
the assets of the issuer.
B-21
<PAGE>
FOREIGN SECURITIES
==================
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 applicable Adviser, to offer
better opportunity for long-term growth of capital and income than investments
in U.S. securities, the opportunity to invest in foreign countries with economic
policies or business cycles different from those of the United States and the
opportunity to reduce fluctuations in portfolio value by taking advantage of
foreign stock markets that do not necessarily move in a manner parallel to U.S.
markets.
Investing in foreign securities involves certain special considerations,
including those set forth below, which are not typically associated with
investing in U.S. dollar-denominated or quoted securities of U.S. issuers.
Investments in foreign securities usually involve currencies of foreign
countries. Accordingly, any Fund that invests in foreign securities may be
affected favorably or unfavorably by changes in currency rates and in exchange
control regulations and may incur costs in connection with conversions between
various currencies. Balanced, International Equity, Emerging Markets Equity and
Asia Growth Funds may be subject to currency exposure independent of their
securities positions.
Currency exchange rates may fluctuate significantly over short periods of
time. They generally are determined by the forces of supply and demand in the
foreign exchange markets and the relative merits of investments in different
countries, actual or anticipated changes in interest rates and other complex
factors, as seen from an international perspective. Currency exchange rates
also can be affected unpredictably by intervention by U.S. or foreign
governments or central banks or the failure to intervene or by currency controls
or political developments in the United States or abroad.
Since foreign issuers generally are not subject to uniform accounting,
auditing and financial reporting standards, practices and requirements
comparable to those applicable to U.S. companies, there may be less publicly
available information about a foreign company than about a U.S. company. Volume
and liquidity in most foreign securities markets are less than in the United
States and securities of many foreign companies are less liquid and more
volatile than securities of comparable U.S. companies. Fixed commissions on
foreign securities exchanges are generally higher than negotiated commissions on
U.S. exchanges, although each Fund endeavors to achieve the most favorable net
results on its portfolio transactions. There is generally less government
supervision and regulation of foreign securities exchanges, brokers, dealers and
listed and unlisted companies than in the United States.
Foreign markets also have different clearance and settlement procedures, and
in certain markets there have been times when settlements have been unable to
keep pace with the volume of securities transactions, making it difficult to
conduct such transactions. Such delays in settlement could result in temporary
periods when some of a Fund's assets are uninvested and no return is earned on
such assets. The inability of a Fund to make intended security purchases due to
settlement problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement
problems could result either in losses to the Fund due to subsequent declines in
value of the portfolio securities or, if the Fund has entered into a contract to
sell the securities, could result in possible liability to the purchaser. In
addition, with respect to certain foreign countries, there is the possibility of
expropriation or confiscatory taxation, political or social instability, or
diplomatic developments which could affect a Fund's investments in those
countries. Moreover, individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross national
product, rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments position.
Each Fund may invest in foreign securities which take the form of sponsored
and unsponsored American Depository Receipts ("ADRs") and Global Depository
Receipts ("GDRs") and (except for CORE U.S. Equity and CORE Large Cap Growth
Funds) may also invest in European Depository Receipts
B-22
<PAGE>
("EDRs") or other similar instruments representing securities of foreign issuers
(together, "Depository Receipts").
ADRs represent the right to receive securities of foreign issuers deposited
in a domestic bank or a correspondent bank. ADRs are traded on domestic
exchanges or in the U.S. over-the-counter market and, generally, are in
registered form. EDRs and GDRs are receipts evidencing an arrangement with a
non-U.S. bank similar to that for ADRs and are designed for use in the non-U.S.
securities markets. EDRs and GDRs are not necessarily quoted in the same
currency as the underlying security.
To the extent a Fund acquires Depository Receipts through banks which do not
have a contractual relationship with the foreign issuer of the security
underlying the Depository Receipts to issue and service such Depository Receipts
(unsponsored), there may be an increased possibility that the Fund would not
become aware of and be able to respond to corporate actions such as stock splits
or rights offerings involving the foreign issuer in a timely manner. In
addition, the lack of information may result in inefficiencies in the valuation
of such instruments.
Each Fund (except CORE U.S. Equity and CORE Large Cap Growth Funds) may
invest in countries with emerging economies or securities markets. Political
and economic structures in many of such countries may be undergoing significant
evolution and rapid development, and such countries may lack the social,
political and economic stability characteristic of more developed countries.
Certain of such countries may have in the past failed to recognize private
property rights and have at times nationalized or expropriated the assets of
private companies. As a result, the risks described above, including the risks
of nationalization or expropriation of assets, may be heightened. See "Investing
in Emerging Markets, including Asia," below.
A Fund (other than CORE U.S. Equity and CORE Large Cap Growth Funds) may
invest in securities of issuers domiciled in a country other than the country in
whose currency the instrument is denominated or quoted. The Funds may also
invest in securities quoted or denominated in the European Currency Unit
("ECU"), which is a "basket" consisting of specified amounts of the currencies
of certain of the member states of the European Community. The specific amounts
of currencies comprising the ECU may be adjusted by the Council of Ministers of
the European Community from time to time to reflect changes in relative values
of the underlying currencies. In addition, the Funds may invest in securities
quoted or denominated in other currency "baskets."
INVESTING IN EMERGING MARKETS , INCLUDING ASIA. International Equity,
==============================================
Asia Growth and Emerging Markets Equity Funds are intended for long-term
investors who can accept the risks associated with investing primarily in equity
and equity-related securities of foreign issuers, including Emerging Countries
issuers (in the case of Emerging Markets Equity and International Equity Funds)
and Asian Companies (as defined in the Prospectus) (in the case of Asia Growth
Fund), as well as the risks associated with investments quoted or denominated in
foreign currencies. Balanced, Growth and Income, Small Cap Equity, Mid Cap
Equity and Capital Growth Funds may invest, to a lesser extent, in equity and
equity-related securities of foreign issuers; including Emerging Countries
issuers. In addition, certain of Balanced, International Equity, Emerging
Markets Equity and Asia Growth Fund's potential investment and management
techniques entail special risks. Asia Growth Fund concentrates on companies that
the Advisers believe are taking full advantage of the region's growth and that
have the potential for long-term capital appreciation. The Advisers believe that
Asia offers an attractive investment environment and that new opportunities will
continue to emerge in the years ahead.
The pace of change in many Emerging Countries, and in particular those in
Asia, over the last 10 years has been rapid. Accelerating economic growth in
the region has combined with capital market development, high government
expenditure, increasing consumer wealth and taxation policies favoring
B-23
<PAGE>
company expansion. As a result, stock market returns in many Emerging Countries
have been relatively attractive. See "Risk Factors" in the Prospectus.
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.
Certain of the Emerging Country securities markets are marked by a high
concentration of market capitalization and trading volume in a small number of
issuers representing a limited number of industries, as well as a high
concentration of ownership of such securities by a limited number of investors.
The markets for securities in certain Emerging Countries are in the earliest
stages of their development. Even the markets for relatively widely traded
securities in Emerging Countries may not be able to absorb, without price
disruptions, a significant increase in trading volume or trades of a size
customarily undertaken by institutional investors in the securities markets of
developed countries. Additionally, market making and arbitrage activities are
generally less extensive in such markets, which may contribute to increased
volatility and reduced liquidity of such markets. The limited liquidity of
Emerging Country markets may also affect a Fund's ability to accurately value
its portfolio securities or to acquire or dispose of 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 several of the Asian
countries is restricted or controlled to varying degrees. These restrictions
may limit a Fund's investment in certain of the Asian countries and may increase
the expenses of the Fund. Certain Emerging Countries require governmental
approval prior to investments by foreign persons or limit investment by foreign
persons to only a specified percentage of an issuer's outstanding securities or
a specific class of securities which may have less advantageous terms (including
price) than securities of the company available for purchase by nationals. In
addition, the repatriation of both investment income and capital from several of
the Emerging Countries is subject to restrictions such as the need for certain
governmental consents. Even where there is no outright restriction on
repatriation of capital, the mechanics of repatriation may affect certain
aspects of the operation of the Balanced, International Equity, Emerging Markets
Equity and Asia Growth Funds. A Fund may be required to establish special
custodial or other arrangements before investing in certain emerging countries.
Each of the Emerging Countries may be subject to a greater degree of
economic, political and social instability than is the case in the United
States, Japan and most Western European countries. Such instability may result
from, among other things, the following: (i) authoritarian governments or
military involvement in political and economic decision making, including
changes or attempted changes in governments through extra-constitutional means;
(ii) popular unrest associated with demands for improved political, economic or
social conditions; (iii) internal insurgencies; (iv) hostile relations with
neighboring countries; and (v) ethnic, religious and racial disaffection or
conflict. Such economic, political and social instability could disrupt the
principal financial markets in which the Funds may invest and adversely affect
the value of the Funds' assets.
B-24
<PAGE>
The economies of Emerging Countries may differ unfavorably from the U.S.
economy in such respects as growth of gross domestic product, rate of inflation,
capital reinvestment, resources, self-sufficiency and balance of payments. Many
Emerging Countries have experienced in the past, and continue to experience,
high rates of inflation. In certain countries inflation has at times
accelerated rapidly to hyperinflationary levels, creating a negative interest
rate environment and sharply eroding the value of outstanding financial assets
in those countries. The economies of many Emerging Countries are heavily
dependent upon international trade and are accordingly affected by protective
trade barriers and the economic conditions of their trading partners. In
addition, the economies of some Emerging Countries are vulnerable to weakness in
world prices for their commodity exports.
A Fund's income and, in some cases, capital gains from foreign stocks and
securities will be subject to applicable taxation in certain of the countries in
which it invests, and treaties between the U.S. and such countries may not be
available in some cases to reduce the otherwise applicable tax rates. 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 a Fund is uninvested and no return is
earned on such assets. The inability of a 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. Growth and Income, Mid Cap
===========================================
Equity, Capital Growth and Small Cap Equity Funds may enter into forward foreign
currency exchange contracts for hedging purposes. Balanced, International
Equity, Emerging Markets Equity and Asia Growth Funds may enter into forward
foreign currency exchange contracts for hedging purposes and to seek to increase
total return. A forward foreign currency exchange contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. These contracts are traded
in the interbank market conducted directly between currency traders (usually
large commercial banks) and their customers. A forward contract generally has no
deposit requirement, and no commissions are generally charged at any stage for
trades.
At the maturity of a forward contract a Fund may either accept or make
delivery of the currency specified in the contract or, at or prior to maturity,
enter into a closing transaction involving the purchase or sale of an offsetting
contract. Closing transactions with respect to forward contracts are usually
effected with the currency trader who is a party to the original forward
contract.
A Fund may enter into forward foreign currency exchange contracts in several
circumstances. First, when a Fund enters into a contract for the purchase or
sale of a security denominated or quoted in a foreign currency, or when a Fund
anticipates the receipt in a foreign currency of dividend or interest payments
on such a security which it holds, the Fund may desire to "lock in" the U.S.
dollar price of the security or the U.S. dollar equivalent of such dividend or
interest payment, as the case may be. By entering into a forward contract for
the purchase or sale, for a fixed amount of dollars, of the amount of foreign
currency involved in the underlying transactions, the 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.
B-25
<PAGE>
Additionally, when the Adviser believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar, it may
enter into a forward contract to sell, for a fixed amount of U.S. dollars, the
amount of foreign currency approximating the value of some or all of such Fund's
portfolio securities quoted or denominated in such foreign currency. The
precise matching of the forward contract amounts and the value of the securities
involved will not generally be possible because the future value of such
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the
contract is entered into and the date it matures. Using forward contracts to
protect the value of a Fund's portfolio securities against a decline in the
value of a currency does not eliminate fluctuations in the underlying prices of
the securities. It simply establishes a rate of exchange which a Fund can
achieve at some future point in time. The precise projection of short-term
currency market movements is not possible, and short-term hedging provides a
means of fixing the U.S. dollar value of only a portion of a Fund's foreign
assets.
Balanced, International Equity, Emerging Markets Equity and Asia Growth
Funds may engage in cross-hedging by using forward contracts in one currency to
hedge against fluctuations in the value of securities quoted or denominated in a
different currency if GSAM or GSAMI determines that there is a pattern of
correlation between the two currencies. Balanced, International Equity,
Emerging Markets Equity and Asia Growth Funds may also purchase and sell forward
contracts to seek to increase total return when GSAM or GSAMI anticipates that
the foreign currency will appreciate or depreciate in value, but securities
quoted or denominated in that currency do not present attractive investment
opportunities and are not held in the Fund's portfolio.
A Fund's custodian will place cash or liquid assets into a segregated
account of such Fund in an amount equal to the value of the Fund's total assets
committed to the consummation of forward foreign currency exchange contracts
requiring the Fund to purchase foreign currencies or, in the case of Balanced,
International Equity, Emerging Markets Equity and Asia Growth Funds forward
contracts entered into to seek to increase total return. If the value of the
securities placed in the segregated account declines, additional cash or liquid
assets will be placed in the account on a daily basis so that the value of the
account will equal the amount of a Fund's commitments with respect to such
contracts. The segregated account will be marked-to-market on a daily basis.
Although the contracts are not presently regulated by the CFTC, the CFTC may in
the future assert authority to regulate these contracts. In such event, a
Fund's ability to utilize forward foreign currency exchange contracts may be
restricted.
While a Fund will enter into forward contracts to reduce currency exchange
rate risks, transactions in such contracts involve certain other risks. Thus,
while the Fund may benefit from such transactions, unanticipated changes in
currency prices may result in a poorer overall performance for the Fund than if
it had not engaged in any such transactions. Moreover, there may be imperfect
correlation between a Fund's portfolio holdings of securities quoted or
denominated in a particular currency and forward contracts entered into by such
Fund. Such imperfect correlation may cause a Fund to sustain losses which will
prevent the Fund from achieving a complete hedge or expose the Fund to risk of
foreign exchange loss.
Markets for trading foreign forward currency contracts offer less
protection against defaults than is available when trading in currency
instruments on an exchange. Since a forward foreign currency exchange contract
is not guaranteed by an exchange or clearinghouse, a default on the contract
would deprive a Fund of unrealized profits or force the Fund to cover its
commitments for purchase or resale, if any, at the current market price.
WRITING AND PURCHASING CURRENCY CALL AND PUT OPTIONS. Each Fund (except
=====================================================
CORE U.S. Equity and CORE Large Cap Growth Funds) may write covered put and call
options and purchase put and call options on foreign currencies for the purpose
of protecting against declines in the U.S. dollar value of portfolio securities
and against increases in the U.S. dollar cost of securities to be acquired. As
with other
B-26
<PAGE>
kinds of option transactions, however, the writing of an option on foreign
currency will constitute only a partial hedge, up to the amount of the premium
received. If and when a Fund seeks to close out an option, the Fund could be
required to purchase or sell foreign currencies at disadvantageous exchange
rates, thereby incurring losses. The purchase of an option on foreign currency
may constitute an effective hedge against exchange rate fluctuations; however,
in the event of exchange rate movements adverse to a Fund's position, the Fund
may forfeit the entire amount of the premium plus related transaction costs.
Options on foreign currencies to be written or purchased by a Fund will be
traded on U.S. and foreign exchanges or over-the-counter.
Balanced, International Equity, Emerging Markets Equity and Asia Growth
Funds may use options on currency to cross-hedge, which involves writing or
purchasing options on one currency to hedge against changes in exchange rates
for a different currency with a pattern of correlation. In addition, Balanced,
International Equity, Emerging Markets Equity and Asia Growth Funds may purchase
call options on currency to seek to increase total return when the Adviser
anticipates that the currency will appreciate in value, but the securities
quoted or denominated in that currency do not present attractive investment
opportunities and are not included in the Fund's portfolio.
A call option written by a Fund obligates a Fund to sell specified currency
to the holder of the option at a specified price if the option is exercised at
any time before the expiration date. A put option written by a Fund would
obligate a Fund to purchase specified currency from the option holder at a
specified price if the option is exercised at any time before the expiration
date. The writing of currency options involves a risk that a Fund will, upon
exercise of the option, be required to sell currency subject to a call at a
price that is less than the currency's market value or be required to purchase
currency subject to a put at a price that exceeds the currency's market value.
For a description of how to cover written put and call options, see "Written
Covered Options" above.
A Fund may terminate its obligations under a call or put option by
purchasing an option identical to the one it has written. Such purchases are
referred to as "closing purchase transactions." A Fund would also be able to
enter into closing sale transactions in order to realize gains or minimize
losses on options purchased by the Fund.
A Fund would normally purchase call options on foreign currency in
anticipation of an increase in the U.S. dollar value of currency in which
securities to be acquired by a Fund are quoted or denominated. The purchase of
a call option would entitle the Fund, in return for the premium paid, to
purchase specified currency at a specified price during the option period. A
Fund would ordinarily realize a gain if, during the option period, the value of
such currency exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise the Fund would realize either no gain or a loss on
the purchase of the call option.
A Fund would normally purchase put options in anticipation of a decline in
the U.S. dollar value of currency in which securities in its portfolio are
quoted or denominated ("protective puts"). The purchase of a put option would
entitle a Fund, in exchange for the premium paid, to sell specified currency at
a specified price during the option period. The purchase of protective puts is
designed merely to offset or hedge against a decline in the dollar value of a
Fund's portfolio securities due to currency exchange rate fluctuations. A Fund
would ordinarily realize a gain if, during the option period, the value of the
underlying currency decreased below the exercise price sufficiently to more than
cover the premium and transaction costs; otherwise the Fund would realize either
no gain or a loss on the purchase of the put option. Gains and losses on the
purchase of protective put options would tend to be offset by countervailing
changes in the value of underlying currency or portfolio securities.
In addition to using options for the hedging purposes described above,
Balanced, International Equity, Emerging Markets Equity and Asia Growth Funds
may use options on currency to seek to increase
B-27
<PAGE>
total return. Balanced, International Equity, Emerging Markets Equity and Asia
Growth Funds may write (sell) covered put and call options on any currency in
order to realize greater income than would be realized on portfolio securities
transactions alone. However, in writing covered call options for additional
income, Balanced, International Equity, Emerging Markets Equity and Asia Growth
Funds may forego the opportunity to profit from an increase in the market value
of the underlying currency. Also, when writing put options, Balanced,
International Equity, Emerging Markets Equity and Asia Growth Funds accept, in
return for the option premium, the risk that they may be required to purchase
the underlying currency at a price in excess of the currency's market value at
the time of purchase.
Balanced, International Equity, Emerging Markets Equity and Asia Growth
Funds would normally purchase call options to seek to increase total return in
anticipation of an increase in the market value of a currency. Balanced,
International Equity, Emerging Markets Equity and Asia Growth Funds 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 Balanced, International Equity, Emerging Markets
Equity and Asia Growth Funds would realize either no gain or a loss on the
purchase of the call option. Put options may be purchased by a Fund for the
purpose of benefiting from a decline in the value of currencies which it does
not own. A Fund would ordinarily realize a gain if, during the option period,
the value of the underlying currency decreased below the exercise price
sufficiently to more than cover the premium and transaction costs. Otherwise
the Fund would realize either no gain or a loss on the purchase of the put
option.
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 a Fund will
generally purchase or write only those options for which there appears to be an
active secondary market, there is no assurance that a liquid secondary market on
an exchange will exist for any particular option, or at any particular time.
For some options no secondary market on an exchange may exist. In such event,
it might not be possible to effect closing transactions in particular options,
with the result that a Fund would have to exercise its options in order to
realize any profit and would incur transaction costs upon the sale of underlying
securities pursuant to the exercise of put options. If a Fund as a covered call
option writer is unable to effect a closing purchase transaction in a secondary
market, it 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.
A Fund may purchase and write over-the-counter options to the extent
consistent with its limitation on investments in illiquid securities. Trading
in over-the-counter options is subject to the risk that the other party will be
unable or unwilling to close out options purchased or written by a Fund.
The amount of the premiums which a Fund may pay or receive may be adversely
affected as new or existing institutions, including other investment companies,
engage in or increase their option purchasing and writing activities.
CURRENCY SWAPS, MORTGAGE SWAPS, INDEX SWAPS AND INTEREST RATE SWAPS, CAPS,
==========================================================================
FLOORS AND COLLARS
==================
The Balanced, International Equity, Emerging Markets Equity and Asia Growth
Funds may, with respect to up to 5% of their net assets, enter into currency
swaps for both hedging purposes and to seek to increase total return. In
addition, the Balanced Fund may, with respect to 5% of its net assets, enter
B-28
<PAGE>
into mortgage, index and interest rate swaps and other interest rate swap
arrangements such as rate caps, floors and collars, for hedging purposes or to
seek to increase total return. Currency swaps involve the exchange by a Fund
with another party of their respective rights to make or receive payments in
specified currencies. Interest rate swaps involve the exchange by a Fund with
another party of their respective commitments to pay or receive interest, such
as an exchange of fixed rate payments for floating rate payments. Mortgage
swaps are similar to interest rate swaps in that they represent commitments to
pay and receive interest. The notional principal amount, however, is tied to a
reference pool or pools of mortgages. Index swaps involve the exchange by a
Fund with another party of the respective amounts payable with respect to a
notional principal amount at interest rates equal to two specified indices. The
purchase of an interest rate cap entitles the purchaser, to the extent that a
specified index exceeds a predetermined interest rate, to receive payment of
interest on a notional principal amount from the party selling such interest
rate cap. The purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below a predetermined interest rate, to
receive payments of interest on a notional principal amount from the party
selling the interest rate floor. An interest rate collar is the combination of
a cap and a floor that preserves a certain return within a predetermined range
of interest rates.
A Fund will enter into interest rate, mortgage and index swaps only on a net
basis, which means that the two payment streams are netted out, with the Fund
receiving or paying, as the case may be, only the net amount of the two
payments. Interest rate, index and mortgage swaps do not involve the delivery
of securities, other underlying assets or principal. Accordingly, the risk of
loss with respect to interest rate, index and mortgage swaps is limited to the
net amount of interest payments that the Fund is contractually obligated to
make. If the other party to an interest rate, index or mortgage swap defaults,
the Fund's risk of loss consists of the net amount of interest payments that the
Fund is contractually entitled to receive. In contrast, currency swaps usually
involve the delivery of a gross payment stream in one designated currency in
exchange for the gross payment stream in another designated currency.
Therefore, the entire payment stream under a currency swap is subject to the
risk that the other party to the swap will default on its contractual delivery
obligations. To the extent that the net amount payable under an interest rate,
index or mortgage swap and the entire amount of the payment stream payable by a
Fund under a currency swap or an interest rate floor, cap or collar is held in a
segregated account consisting of cash or liquid assets the Funds and the
Advisers believe that swaps do not constitute senior securities under the Act
and, accordingly, will not treat them as being subject to a Fund's borrowing
restrictions.
A Fund will not enter into swap transactions unless the unsecured commercial
paper, senior debt or claims paying ability of the other party thereto is
considered to be investment grade by the Adviser.
The use of interest rate, mortgage, index and currency swaps, as well as
interest rate caps, floors and collars, is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If an Adviser is incorrect in its
forecasts of market values, interest rates and currency exchange rates, the
investment performance of a Fund would be less favorable than it would have been
if this investment technique were not used. The staff of the SEC currently take
the position that swaps, caps, floors and collars are illiquid and thus subject
to a Fund's 15% limitation on investments in illiquid securities.
LENDING OF PORTFOLIO SECURITIES
===============================
Each Fund may lend portfolio securities. Under present regulatory policies,
such loans may be made to institutions such as brokers or dealers and would be
required to be secured continuously by collateral in cash, cash equivalents or
U.S. Government securities maintained on a current basis at an
B-29
<PAGE>
amount at least equal to the market value of the securities loaned. A Fund
would be required to have the right to call a loan and obtain the securities
loaned at any time on five days' notice. For the duration of a loan, a Fund
would continue to receive the equivalent of the interest or dividends paid by
the issuer on the securities loaned and would also receive compensation from
investment of the collateral. A Fund would not have the right to vote any
securities having voting rights during the existence of the loan, but a Fund
would call the loan in anticipation of an important vote to be taken among
holders of the securities or the giving or withholding of their consent on a
material matter affecting the investment. As with other extensions of credit
there are risks of delay in recovering, or even loss of rights in, the
collateral should the borrower of the securities fail financially. However, the
loans would be made only to firms deemed by the Advisers to be of good standing,
and when, in the judgment of the Advisers, the consideration which can be
earned currently from securities loans of this type justifies the attendant
risk. If the Advisers determine to make securities loans, it is intended that
the value of the securities loaned would not exceed one-third of the value of
the total assets of a Fund.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
==============================================
Each Fund may purchase securities on a when-issued basis or purchase or
sell securities on a forward commitment basis. These transactions involve a
commitment by a Fund to purchase or sell securities at a future date. The price
of the underlying securities (usually expressed in terms of yield) and the date
when the securities will be delivered and paid for (the settlement date) are
fixed at the time the transaction is negotiated. When-issued purchases and
forward commitment transactions are negotiated directly with the other party,
and such commitments are not traded on exchanges. A Fund will purchase
securities on a when-issued basis or purchase or sell securities on a forward
commitment basis only with the intention of completing the transaction and
actually purchasing or selling the securities. If deemed advisable as a matter
of investment strategy, however, a Fund may dispose of or negotiate a commitment
after entering into it. A Fund may realize a capital gain or loss in connection
with these transactions. For purposes of determining a Fund's duration, the
maturity of when-issued or forward commitment securities will be calculated from
the commitment date. A Fund is required to hold and maintain in a segregated
account with the Fund's custodian until three days prior to the settlement date,
cash and liquid assets in an amount sufficient to meet the purchase price.
Alternatively, a Fund may enter into offsetting contracts for the forward sale
of other securities that it owns. Securities purchased or sold on a when-issued
or forward commitment basis involve a risk of loss if the value of the security
to be purchased declines prior to the settlement date or if the value of the
security to be sold increases prior to the settlement date.
INVESTMENT IN UNSEASONED COMPANIES
==================================
Each Fund may invest up to 5% of its net assets, calculated at the time of
purchase, in companies (including predecessors) which have operated less than
three years, except that this limitation does not apply to debt securities which
have been rated investment grade or better by at least one nationally recognized
statistical rating organization. The securities of such companies may have
limited liquidity, which can result in their being priced higher or lower than
might otherwise be the case. In addition, investments in unseasoned companies
are more speculative and entail greater risk than do investments in companies
with an established operating record.
OTHER INVESTMENT COMPANIES
==========================
A Fund reserves the right to invest up to 5% of its net assets in the
securities of other investment companies but may not acquire more than 3% of the
voting securities of any other investment company. Pursuant to an exemptive
order obtained from the SEC, the Funds may invest in money market funds for
B-30
<PAGE>
which an Adviser or any of its affiliates serves as investment adviser. A Fund
will indirectly bear its proportionate share of any management fees and other
expenses paid by investment companies in which it invests in addition to the
advisory and administration fees paid by the Fund. However, to the extent that
the Fund invests in a money market fund for which an Adviser or any of its
affiliates acts as adviser, the advisory and administration fees payable by the
Fund to an Adviser will be reduced by an amount equal to the Fund's
proportionate share of the advisory and administration fees paid by such money
market fund to the Adviser.
REPURCHASE AGREEMENTS
=====================
Each Fund may enter into repurchase agreements with selected broker-dealers,
banks or other financial institutions. A repurchase agreement is an arrangement
under which a Fund purchases securities and the seller agrees to repurchase the
securities within a particular time and at a specified price. Custody of the
securities is maintained by a Fund's custodian. The repurchase price may be
higher than the purchase price, the difference being income to a Fund, or the
purchase and repurchase prices may be the same, with interest at a stated rate
due to a Fund together with the repurchase price on repurchase. In either case,
the income to a Fund is unrelated to the interest rate on the security subject
to the repurchase agreement.
For purposes of the Act and generally for tax purposes, a repurchase
agreement is deemed to be a loan from a Fund to the seller of the security. For
other purposes, it is not clear whether a court would consider the security
purchased by a Fund subject to a repurchase agreement as being owned by a Fund
or as being collateral for a loan by a Fund to the seller. In the event of
commencement of bankruptcy or insolvency proceedings with respect to the seller
of the security before repurchase of the security under a repurchase agreement,
a Fund may encounter delay and incur costs before being able to sell the
security. Such a delay may involve loss of interest or a decline in price of
the security. If the court characterizes the transaction as a loan and a Fund
has not perfected a security interest in the security, a Fund may be required to
return the security to the seller's estate and be treated as an unsecured
creditor of the seller. As an unsecured creditor, a Fund would be at risk of
losing some or all of the principal and interest involved in the transaction.
As with any unsecured debt instrument purchased for a Fund, the Advisers
seek to minimize the risk of loss from repurchase agreements by analyzing the
creditworthiness of the obligor, in this case the seller of the security. Apart
from the risk of bankruptcy or insolvency proceedings, there is also the risk
that the seller may fail to repurchase the security. However, if the market
value of the security subject to the repurchase agreement becomes less than the
repurchase price (including accrued interest), a Fund will direct the seller of
the security to deliver additional securities so that the market value of all
securities subject to the repurchase agreement equals or exceeds the repurchase
price. Certain repurchase agreements which provide for settlement in more than
seven days can be liquidated before the nominal fixed term on seven days or less
notice. Such repurchase agreements will be regarded as liquid instruments.
In addition, a Fund, together with other registered investment companies
having advisory agreements with the Advisers or their affiliates, may transfer
uninvested cash balances into a single joint account, the daily aggregate
balance of which will be invested in one or more repurchase agreements.
INVESTMENT RESTRICTIONS
B-31
<PAGE>
The following investment restrictions have been adopted by the Trust as
fundamental policies that cannot be changed without the affirmative vote of the
holders of a majority (as defined in the Act) of the outstanding voting
securities of the affected Fund. The investment objective of each Fund and all
other investment policies or practices of each Fund are considered by the Trust
not to be fundamental and accordingly may be changed without shareholder
approval. See "Investment Objectives and Policies" in the Prospectus. For
purposes of the Act, "majority" means the lesser of (a) 67% or more of the
shares of the Trust or a Fund present at a meeting, if the holders of more than
50% of the outstanding shares of the Trust or a Fund are present or represented
by proxy, or (b) more than 50% of the shares of the Trust or a Fund. For
purposes of the following limitations, any limitation which involves a maximum
percentage shall not be considered violated unless an excess over the percentage
occurs immediately after, and is caused by, an acquisition or encumbrance of
securities or assets of, or borrowings by, a Fund. With respect to the Funds'
fundamental investment restriction no. 3, asset coverage of at least 300% (as
defined in the Act), inclusive of any amounts borrowed, must be maintained at
all times.
A Fund may not:
===============
(1) make any investment inconsistent with the Fund's classification as
a diversified company under the Investment Company Act of 1940, as
amended (the "Act"). This restriction does not, however, apply to
any Fund classified as a non-diversified company under the Act.
(2) invest 25% or more of its total assets in the securities of one or
more issuers conducting their principal business activities in the
same industry (excluding the U.S. Government or any of its
agencies or instrumentalities).
(3) borrow money, except (a) the Fund may borrow from banks (as
defined in the Act) or through reverse repurchase agreements in
amounts up to 33-1/3% of its total assets (including the amount
borrowed), (b) the Fund may, to the extent permitted by applicable
law, borrow up to an additional 5% of its total assets for
temporary purposes, (c) the Fund may obtain such short-term
credits as may be necessary for the clearance of purchases and
sales of portfolio securities, (d) the Fund may purchase
securities on margin to the extent permitted by applicable law and
(e) the Fund may engage transactions in mortgage dollar rolls
which are accounted for as financings.
(4) make loans, except through (a) the purchase of debt obligations in
accordance with the Fund's investment objective and policies, (b)
repurchase agreements with banks, brokers, dealers and other
financial institutions, and (c) loans of securities as permitted
by applicable law.
(5) underwrite securities issued by others, except to the extent that
the sale of portfolio securities by the Fund may be deemed to be
an underwriting.
(6) purchase, hold or deal in real estate, although a Fund may
purchase and sell securities that are secured by real estate or
interests therein, securities of real estate investment trusts and
mortgage-related securities and may hold and sell real estate
acquired by a Fund as a result of the ownership of securities.
(7) invest in commodities or commodity contracts, except that the Fund
may invest in currency and financial instruments and contracts
that are commodities or commodity contracts.
B-32
<PAGE>
(8) issue senior securities to the extent such issuance would violate
applicable law.
Each Fund may, notwithstanding any other fundamental investment restriction
or policy, invest some or all of its assets in a single open-end investment
company or series thereof with substantially the same investment objective,
restrictions and policies as the Fund.
In addition to the fundamental policies mentioned above, the Trustees have
adopted the following non-fundamental policies which can be changed or amended
by action of the Trustees without approval of shareholders.
A Fund may not:
(a) Invest in companies for the purpose of excercising control or
management.
(b) Invest more than 15% of the Fund's net assets in illiquid investments
including repurchase agreements maturing in more than seven days,
securities which are not readily marketable and restricted securities
not eligible for resale pursuant to Rule 144A under the 1933 Act.
(c) Purchase additional securities if the Fund's borrowings (excluding
covered mortgage dollar rolls) exceed 5% of its net assets.
(d) Make short sales of securities, except short sales against the box.
B-33
<PAGE>
MANAGEMENT
Information pertaining to the Trustees and officers of the Trust is set
forth below. Trustees and officers deemed to be "interested persons" of the
Trust for purposes of the Act are indicated by an asterisk.
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- ------------------------------------------------------------------------------------------
<S> <C> <C>
Ashok N. Bakhru, 53 Chairman Executive Vice President-Finance and Administration and Chief Financial Officer, Coty Inc.
1325 Ave. of Americas & Trustee (since April 1996); President, ABN Associates (June 1994 through March 1996); Senior Vice
New York, NY 10019 President of Scott Paper Company until June 1994; Director of Arkwright Mutual Insurance
Company; Trustee of International House of Philadelphia; Member of Cornell University
Council;Trustee of the Walnut Street Theater.
*David B. Ford, 51 Trustee Managing Director, Goldman Sachs (since 1996); General Partner, Goldman Sachs (1986-1996); Co-
One New York Plaza Head of Goldman Sachs Asset Management (since December 1994).
New York, NY 10004
*Douglas C. Grip, 35 Trustee Vice President, Goldman Sachs (since May 1996); & President President, MFS Retirement Services
One New York Plaza Inc., of Massachusetts Financial Services (prior thereto).
New York, NY 10004
*John P. McNulty, 44 Trustee Managing Director, Goldman Sachs (since 1996); One General Partner of Goldman Sachs (1990-1994
New York Plaza and 1995-1996); Co-Head of Goldman Sachs Asset Management (since November 1995);
New York, NY 10004 Limited Partner of Goldman Sachs (1994 to November 1995).
Mary P. McPherson, 60 Trustee President of Bryn Mawr College (since 1978); Director of Josiah Macy, Jr, Foundation (since
Taylor Hall 1977); Director of the Philadelphia Contributionship (since 1985); Director of Amherst College
Bryn Mawr, PA 19010 (since 1986); Director of Dayton Hudson Corporation (since 1988); Director of the Spencer
Foundation (since 1993); and member of PNC Advisory Board (since 1993).
</TABLE>
B-34
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- --------------------------- --------------------------------- --------------------------------------------------------------------
<S> <C> <C>
*Alan A. Shuch, 48 Trustee Limited Partner, Goldman Sachs (since 1994); Director and Vice
One New York Plaza President of Goldman Sachs Funds Management Inc. (from April
New York, NY 10004 1990 to November 1994); President and Chief Operating Officer, GSAM
(from September 1988 to November 1994).
Jackson W. Smart, 66 Trustee Chairman, Executive Committee, First Commonwealth, Inc. (a managed
One Northfleld Plaza # 218 dental care company, since January 1996); Chairman and
Northfield, IL 60093 Chief Executive Officer, MSP Communications Inc. (a company engaged
in radio broadcasting) (since November 1988), Director, Federal
Express Corporation (since 1976), Evanston Hospital Corporation
(since 1980), First Commonwealth, Inc. (since 1988) and North
American Private Equity Group (a venture capital fund).
William H. Springer, 67 Trustee Vice Chairman and Chief Financial and Administrative Officer,
701 Morningside Drive (February 1987 to June 1991) of Ameritech (a telecommunications
Lake Forest, IL 60045 holding company; Director, Walgreen Co. (a retail drug store
business); Director of Baker, Fentress & Co. (a closed end,
nondiversified management investment company) (April 1992 to
present).
Richard P. Strubel, 57 Trustee Managing Director, Tandem Partners, Inc. (since 1990); President and
70 West Madison St. Chief Executive Officer, Microdot, Inc. (a diversified manufacturer
Ste. 1400 of fastening systems and connectors)(January 1984 to October 1994).
Chicago, IL 60602
*Scott M. Gilman, 37 Treasurer Director, Mutual Funds Administration, Goldman Sachs Asset
One New York Plaza Management (since April 1994); Assistant Treasurer, Goldman Sachs
New York, NY 10004 Funds Management, Inc. (since March 1993); Vice President, Goldman
Sachs (since March 1990).
*John M. Perlowski, 32 Assistant Vice President, Goldman Sachs (since July 1995); Director, Investors
One New York Plaza Treasurer Bank and Trust, November 1993 to July 1995); Audit Manager of Arthur
New York, NY 10004 Andersen LLP (prior thereto).
*Pauline Taylor, 50 Vice Vice President of Goldman Sachs (since June 1992); Director
4900 Sears Tower President Shareholder Servicing (since June 1992).
Chicago, IL 60606
</TABLE>
B-35
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- --------------------------- --------------------------------- --------------------------------------------------------------------
<S> <C> <C>
*John W. Mosior, 58 Vice Vice President, Goldman Sachs and Manager of Shareholder Servicing
4900 Sears Tower President of GSAM (since November 1989).
Chicago, IL 60606
8Nancy L. Mucker, 47 Vice Vice President, Goldman Sachs (since April 1985); Manager of
4900 Sears Tower President Shareholder Servicing of GSAM since November 1989).
Chicago, IL 60606
*Michael J. Richman, 36 Secretary Associate General Counsel of Goldman Sachs Asset Management (since
85 Broad Street February 1994); Vice President and Assistant General Counsel of
New York, NY 10004 Goldman Sachs (since June 1992); Counsel to the Funds Group, GSAM
(since June 1992); Partner, Hale and Dorr (September 1991 to June
1992).
*Howard B. Surloff, 31 Assistant Assistant General Counsel and Vice President, Goldman Sachs (since
85 Broad Street Secretary November 1993 and May 1994 respectively);Counsel to the Funds Group,
New York, NY 10004 Goldman Sachs Asset Management (since November 1993); Associate of
Shereff Friedman, Hoffman & Goodman (prior thereto).
*Valerie A. Zondorak, 31 Assistant Vice President, Goldman Sachs (since March 1997); Counsel to the
85 Broad Street Secretary Funds Group, Goldman Sachs Asset Management (since March 1997);
New York, New York 10004 Associate of Shereff Friedman, Hoffman & Goodman (prior thereto).
*Steven E. Hartstein, 33 Assistant Legal Products Analyst, Goldman Sachs (June 1993 to present); Funds
85 Broad Street Secretary Compliance Officer, Citibank Global Asset Management (August 1991 to
New York, NY 10004 June 1993).
*Deborah Farrell, 25 Assistant Administrative Assistant, Goldman Sachs since January 1994. Formerly
85 Broad Street Secretary at Cleary Gottlieb, Steen and Hamilton.
New York, NY 10004
Kaysie P. Uniacke, 36 Assistant Vice President and Senior Portfolio Manager, Goldman Sachs Asset
One New York Plaza Secretary Management (since 1988).
New York, NY 10004
</TABLE>
B-36
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- --------------------------- --------------------------------- --------------------------------------------------------------------
<S> <C> <C>
*Elizabeth D.
Anderson, 27 Assistant Portfolio Manager, GSAM (since April 1996); Junior Portfolio
One New York Plaza Secretary Manager, Goldman Sachs Asset Management (since 1993); Funds Trading
New York, NY 10004 Assistant, GSAM (1993-1995); Compliance Analyst, Prudential
Insurance (1991-1993).
</TABLE>
As of March 24,1997, the Trustees and officers of the Trust as a group
owned less than 1% of the outstanding shares of beneficial interest of each
Fund.
The Trust pays each Trustee, other than those who are "interested persons"
of Goldman Sachs, a fee for each Trustee meeting attended and an annual fee.
Such Trustees are also reimbursed for travel expenses incurred in connection
with attending such meetings.
B-37
<PAGE>
The following table sets forth certain information with respect to the
compensation of each Trustee of the Trust (or its predecessors) for the one-year
period ended January 31, 1997:
<TABLE>
<CAPTION>
Pension or Total
Retirement Compensation
Benefits from Goldman Sachs
Aggregate Accrued as Mutual Funds
Compensation Part of (including the
Name of Trustee from the Funds*** Funds' Expenses Funds)*
- ---------------------- ----------------- --------------- ------------------
<S> <C> <C> <C>
Paul C. Nagel, Jr.** $3,775 $0 $62,450
Ashok N. Bakhru 3,969 0 69,299
Marcia L. Beck 0 0 0
David B. Ford 0 0 0
Douglas C. Grip 0 0 0
Alan A. Shuch 0 0 0
Jackson W. Smart 3,388 0 58,954
William H. Springer 3,388 0 58,954
Richard P. Strubel 3,388 0 58,954
</TABLE>
______________
* The Goldman Sachs Mutual Funds consisted of 29 mutual funds on January
31, 1997.
** Retired as of June 30, 1996.
*** Effective May 1, 1997, the Funds were reorganized from series of
Goldman Sachs Equity Portfolios, Inc. (the "Corporation") into the
Trust. The amounts shown in the column reflect compensation paid to
the Trustees by the Corporation.
B-38
<PAGE>
MANAGEMENT SERVICES
===================
As stated in the Funds' Prospectus, GSFM, One New York Plaza, New York, New
York, a Delaware limited partnership and an affiliate of Goldman Sachs, 85 Broad
Street, New York, New York, serves as investment adviser to CORE U.S. Equity and
Capital Growth Funds. GSAM, One New York Plaza, New York, New York, a separate
operating division of Goldman Sachs, serves as investment adviser to Balanced,
Growth and Income, CORE Large Cap Growth, Mid Cap Equity and Small Cap Equity
Funds. GSAMI, 133 Peterborough Court, London, England, EC4A 2BB serves as
investment adviser to International Equity, Emerging Markets Equity and Asia
Growth Funds. See "Management" in the Funds' Prospectus for a description of the
applicable Adviser's duties to the Funds.
Founded in 1869, Goldman Sachs is among the oldest and largest investment
banking firms in the United States. Goldman Sachs is a leader in developing
portfolio strategies and in many fields of investing and financing,
participating in financial markets worldwide and serving individuals,
institutions, corporations and governments. Goldman Sachs is also among the
principal market sources for current and thorough information on companies,
industrial sectors, markets, economies and currencies, and trades and makes
markets in a wide range of equity and debt securities 24-hours a day. The firm
is headquartered in New York and has offices throughout the U.S. and in Beijing,
Frankfurt, George Town, Hong Kong, London, Madrid, Mexico City, Milan, Montreal,
Osaka, Paris, Sao Paulo, Seoul, Shanghai, Singapore, Sydney, Taipei, Tokyo,
Toronto, Vancouver and Zurich. It has trading professionals throughout the
United States, as well as in London, Tokyo, Hong Kong and Singapore. The active
participation of Goldman Sachs in the world's financial markets enhances its
ability to identify attractive investments.
The Advisers are able to draw on the substantial research and market
expertise of Goldman Sachs whose investment research effort is one of the
largest in the industry. With an annual equity research budget approaching $160
million, the Goldman Sachs Global Investment Research Department covers
approximately 1,700 companies, including approximately 1,000 U.S. corporations
in 60 industries. The in-depth information and analyses generated by Goldman
Sachs' research analysts are available to the Advisers. For more than a decade,
Goldman Sachs has been among the top-ranked firms in Institutional Investor's
annual "All-America Research Team" survey. In addition, many of Goldman Sachs'
economists, securities analysts, portfolio strategists and credit analysts have
consistently been highly ranked in respected industry surveys conducted in the
U.S. and abroad. Goldman Sachs is also among the leading investment firms using
quantitative analytics (now used by a growing number of investors) to structure
and evaluate portfolios.
In managing the Funds, the Advisers have access to Goldman Sachs' economics
research. The Economics Research Department conducts economic, financial and
currency markets research which analyzes economic trends and interest and
exchange rate movement worldwide. The Economics Research Department tracks
factors such as inflation and money supply figures, balance of trade figures,
economic growth, commodity prices, monetary and fiscal policies, and political
events that can influence interest rates and currency trends. The success of
Goldman Sachs' international research team has brought wide recognition to its
members. The team has earned top rankings in the Institutional Investor's
annual "All British Research Team Survey" in the following categories:
Economics (U.K.) 1986-1993; Economics/International 1989-1993; and Currency
Forecasting 1986-1993. In addition, the team has also earned top rankings in
the annual "Extel Financial Survey" of U.K. investment managers in the following
categories: U.K. Economy 1989-1995; International Economies 1986, 1988-1995; and
Currency Movements 1986-1993.
In allocating assets among foreign countries and currencies for the Funds
which can invest in foreign securities (in particular, the International Equity,
Emerging Markets Equity and Asia Growth Funds), the Advisers will have access to
the Global Asset Allocation Model. The model is based on the observation that
the prices of all financial assets, including foreign currencies, will adjust
until investors globally are
B-39
<PAGE>
comfortable holding the pool of outstanding assets. Using the model, the
Advisers will estimate the total returns from each currency sector which are
consistent with the average investor holding a portfolio equal to the market
capitalization of the financial assets among those currency sectors. These
estimated equilibrium returns are then combined with the expectations of Goldman
Sachs' research professionals to produce an optimal currency and asset
allocation for the level of risk suitable for a Fund given its investment
objectives and criteria.
Each Fund's management agreement provides that the Advisers may render
similar services to others as long as the services provided by the Advisers
thereunder are not impaired thereby.
The CORE Large Cap Growth and Emerging Markets Equity Funds management
agreements were initially approved by the Trustees, including a majority of the
non-interested Trustees (as defined below) who are not parties to the management
agreement, on April 23, 1997. The other Funds' management agreements were most
recently approved by the Trustees, including a majority of the Trustees who are
not parties to the management agreement or "interested persons" (as such term is
defined in the Act) of any party thereto (the "non-interested Trustees"), on
April 23, 1997. These arrangements were most recently approved by the
shareholders of each Fund (other than CORE Large Cap Growth and Emerging Markets
Equity Funds) on April 21, 1997. Each management agreement will remain in
effect until June 30, 1998 from year to year thereafter provided such
continuance is specifically approved at least annually by (a) the vote of a
majority of the outstanding voting securities of such Fund or a majority of the
Trustees, and (b) the vote of a majority of the non-interested Trustees, cast in
person at a meeting called for the purpose of voting on such approval. Each
management agreement will terminate automatically if assigned (as defined in the
Act) and is terminable at any time without penalty by the Trustees or by vote of
a majority of the outstanding voting securities of the affected Fund on 60 days'
written notice to the Adviser and by the Adviser on 60 days' written notice to
the Trust.
Pursuant to the management agreements the Advisers are entitled to receive
the fees listed below, payable monthly of such Fund's average daily net assets.
In addition, the Advisers voluntarily agreed to limit its management fee to an
annual rate also listed below:
Management Management
With Fee Without Fee
Fund Limitations Limitations
- ---- ----------- -----------
GSAM
Balanced Fund 0.65% 0.65%
Growth and Income Fund 0.70% 0.70%
CORE Large Cap Growth Fund 0.60% 0.75%
Mid Cap Equity Fund 0.75% 0.75%
Small Cap Equity Fund 1.00% 1.00%
GSFM
CORE U.S. Equity Fund 0.75% 0.59%
Capital Growth Fund 1.00% 1.00%
GSAMI
International Equity Fund 1.00% 0.89%
Emerging Markets Equity Fund 1.20% 1.10%
Asia Growth Fund 1.00% 0.86%
B-40
<PAGE>
GSAM, GSFM and GSAMI may discontinue or modify the above limitations in the
future at their discretion, although they have no current intention to do so.
Prior to May 1, 1997, the Funds then in operation had separate investment
advisory (and subadvisory, in the case of the International Equity Fund) and
administration agreements. Effective May 1, 1997, the services under such
agreements were combined in the management agreement. The services required to
be performed for the Funds and the combined advisory (and subadvisory, in the
case of the International Equity Fund) and administration fees payable by the
Funds under the former advisory (and subadvisory, in the case of the
International Equity Fund) and administration agreements are identical to the
services and fees under the management agreement.
For the last three fiscal years the amounts of the combined investment
advisory (and subadvisory, in the case of the International Equity Fund) and
administration fees incurred by each Fund then in existence were as follows:
1997 1996 1995
============= ============= =============
Balanced Fund $ 402,183 $ 193,041 $ 8,858
Growth and Income Fund 3,541,318 2,225,553 790,893
CORE U.S. Equity Fund 1,667,381/3/ 817,563/3/ 693,383/2/
CORE Large Cap Growth Fund/1/ N/A N/A N/A
Capital Growth Fund 8,697,265 9,335,745 8,724,828
Mid Cap Equity Fund/4/ 964,945 489,043 N/A
International Equity Fund 4,124,076/3/ 2,794,872/2/ 3,186,509/2/
Small Cap Equity Fund 2,130,703 2,908,839 3,385,899
Emerging Market Equity Fund/1/ N/A N/A N/A
Asia Growth Fund 2,221,857/3/ 1,563,641/2/ 553,084/2/
- ----------------------------
1 Not Operational.
2 Does not give effect to the agreement (which was not in effect during such
fiscal years) by GSFM, GSAM and GSAMI to limit management fees to 0.59%,
0.89% and 0.86%, respectively of CORE U.S. Equity, International Equity and
Asia Growth Fund's average daily net assets.
3 Gives effect to the agreement (which was in effect as of June 15, 1995) by
GSFM to limit management fees to 0.59%, 0.89% and 0.86%, respectively, of
the CORE U.S. Equity, International Equity and Asia Growth Fund's average
daily net assets. For the fiscal year ended January 31, 1996, had
limitations not been in effect, CORE U.S. Equity Fund would have paid
$1,019,639 in investment management fees. For the fiscal year ended
January 31, 1997, had limitations not been in effect, CORE U.S. Equity,
International Equity and Asia Growth Funds would have paid $2,119,552,
$4,638,203 and $2,583,555, respectively, in investment management fees.
4 Commenced operations on August 1, 1995.
Under the Management Agreement, each Adviser also: (i) supervises all non-
advisory operations of each Fund that it advisers; (ii) provides personnel to
perform such executive, administrative and clerical services as are reasonably
necessary to provide effective administration of each Fund; (iii) arranges for
at each Fund's expense (a) the preparation of all required tax returns, (b) the
preparation and submission of reports to existing shareholders, (c) the periodic
updating of prospectuses and statements of additional information and (d) the
preparation of reports to be filed with the SEC and other regulatory
authorities; (iv) maintains each Fund's records; and (v) provides office space
and all necessary office equipment and services.
B-41
<PAGE>
ACTIVITIES OF GOLDMAN SACHS AND ITS AFFILIATES AND OTHER ACCOUNTS MANAGED
BY GOLDMAN SACHS. The involvement of the Advisers 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 Funds or impede their investment activities.
Goldman Sachs and its affiliates, including, without limitation, the
Advisers and their advisory affiliates, have proprietary interests in, and may
manage or advise with respect to, accounts or funds (including separate accounts
and other funds and collective investment vehicles) which have investment
objectives similar to those of the Funds and/or which engage in transactions in
the same types of securities, currencies and instruments as the Funds. Goldman
Sachs and its affiliates are major participants in the global currency,
equities, swap and fixed income markets, in each case both on a proprietary
basis and for the accounts of customers. As such, Goldman Sachs and its
affiliates are actively engaged in transactions in the same securities,
currencies and instruments in which the Funds invest. Such activities could
affect the prices and availability of the securities, currencies and instruments
in which the Funds will invest, which could have an adverse impact on each
Fund's performance. Such transactions, particularly in respect of proprietary
accounts or customer accounts other than those included in the Advisers' and
their advisory affiliates' asset management activities, will be executed
independently of the Funds' transactions and thus at prices or rates that may be
more or less favorable. When the Advisers and their advisory affiliates seek
to purchase or sell the same assets for their managed accounts, including the
Funds, the assets actually purchased or sold may be allocated among the accounts
on a basis determined in its good faith discretion to be equitable. In some
cases, this system may adversely affect the size or the price of the assets
purchased or sold for the Funds.
From time to time, the Funds' activities may be restricted because of
regulatory restrictions applicable to Goldman Sachs and its affiliates, and/or
their internal policies designed to comply with such restrictions. As a result,
there may be periods, for example, when the Advisers and/or their affiliates
will not initiate or recommend certain types of transactions in certain
securities or instruments with respect to which the Advisers and/or their
affiliates are performing services or when position limits have been reached.
In connection with their management of the Funds, the Advisers may have
access to certain fundamental analysis and proprietary technical models
developed by Goldman Sachs and other affiliates. The Advisers will not be under
any obligation, however, to effect transactions on behalf of the Funds in
accordance with such analysis and models. In addition, neither Goldman Sachs
nor any of its affiliates will have any obligation to make available any
information regarding their proprietary activities or strategies, or the
activities or strategies used for other accounts managed by them, for the
benefit of the management of the Funds and it is not anticipated that the
Advisers will have access to such information for the purpose of managing the
Funds. The proprietary activities or portfolio strategies of Goldman Sachs and
its affiliates or the activities or strategies used for accounts managed by them
or other customer accounts could conflict with the transactions and strategies
employed by the Advisers in managing the Funds.
The results of each Fund's investment activities may differ significantly
from the results achieved by the Advisers and their affiliates for their
proprietary accounts or accounts (including investment companies or collective
investment vehicles) managed or advised by them. It is possible that Goldman
Sachs and its affiliates and such other accounts will achieve investment results
which are substantially more or less favorable than the results achieved by a
Fund. Moreover, it is possible that a Fund will sustain losses during periods
in which Goldman Sachs and its affiliates achieve significant profits on their
trading for proprietary or other accounts. The opposite result is also
possible.
B-42
<PAGE>
The investment activities of Goldman Sachs and its affiliates for their
proprietary accounts and accounts under their management may also limit the
investment opportunities for the Fund in certain emerging markets in which
limitations are imposed upon the aggregate amount of investment, in the
aggregate or individual issuers, by affiliated foreign investors.
An investment policy committee which may include partners of Goldman Sachs
and its affiliates may develop general policies regarding a Fund's activities
but will not be involved in the day-to-day management of such Fund. In such
instances, those individuals may, as a result, obtain information regarding the
Fund's proposed investment activities which is not generally available to the
public. In addition, by virtue of their affiliation with Goldman Sachs, any
such member of an investment policy committee will have direct or indirect
interests in the activities of Goldman Sachs and its affiliates in securities
and investments similar to those in which the Fund invests.
In addition, certain principals and certain of the employees of the
Advisers are also principals or employees of Goldman Sachs or their affiliated
entities. As a result, the performance by these principals and employees of
their obligations to such other entities may be a consideration of which
investors in the Funds should be aware.
Each Adviser may enter into transactions and invest in currencies or
instruments on behalf of a Fund in which customers of Goldman Sachs serve as the
counterparty, principal or issuer. In such cases, such party's interests in the
transaction will be adverse to the interests of a Fund, and such party may have
no incentive to assure that the Funds obtain the best possible prices or terms
in connection with the transactions. Goldman Sachs and its affiliates may also
create, write or issue derivative instruments for customers of Goldman Sachs or
its affiliates, the underlying securities or instruments of which may be those
in which a Fund invests or which may be based on the performance of a Fund. The
Funds may, subject to applicable law, purchase investments which are the subject
of an underwriting or other distribution by Goldman Sachs or its affiliates and
may also enter transactions with other clients of Goldman Sachs or its
affiliates where such other clients have interests adverse to those of the
Funds. At times, these activities may cause departments of the Firm to give
advice to clients that may cause these clients to take actions adverse to the
interests of the client. To the extent affiliated transactions are permitted,
the Funds will deal with Goldman Sachs and its affiliates on an arms-length
basis.
Each Fund will be required to establish business relationships with its
counterparties based on the Fund's own credit standing. Neither Goldman Sachs
nor its affiliates will have any obligation to allow their credit to be used in
connection with a Fund's establishment of its business relationships, nor is it
expected that a Fund's counterparties will rely on the credit of Goldman Sachs
or any of its affiliates in evaluating the Fund's creditworthiness.
From time to time, Goldman Sachs or any of its affiliates may, but is not
required to, purchase and hold shares of a Fund in order to increase the assets
of the Fund. Increasing a 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 a Fund acquired for its own account. A large
redemption of shares of a 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 a Fund and other shareholders
in deciding whether to redeem its shares.
It is possible that a Fund's holdings will include securities of entities
for which Goldman Sachs performs investment banking services as well as
securities of entities in which Goldman Sachs makes a market. From time to
time, Goldman Sachs' activities may limit the Funds' flexibility in purchases
and sales of securities. When Goldman Sachs is engaged in an underwriting or
other distribution of securities
B-43
<PAGE>
of an entity, the Advisers may be prohibited from purchasing or recommending the
purchase of certain securities of that entity for the Funds.
DISTRIBUTOR AND TRANSFER AGENT
==============================
Goldman Sachs serves as the exclusive distributor of shares of the Funds
pursuant to a "best efforts" arrangement as provided by a distribution agreement
with the Trust on behalf of each Fund. Pursuant to the distribution agreement,
after the Prospectus and periodic reports have been prepared, set in type and
mailed to shareholders, Goldman Sachs will pay for the printing and distribution
of copies thereof used in connection with the offering to prospective investors.
Goldman Sachs will also pay for other supplementary sales literature and
advertising costs. Goldman Sachs may enter into sales agreements with certain
investment dealers and other financial service firms (the "Authorized Dealers")
to solicit subscriptions for Class A and Class B Shares of the Funds. Goldman
Sachs receives a portion of the sales charge imposed on the sale, in the case of
Class A Shares, or redemption in the case of Class B Shares, of such Fund
shares. No Class B Shares were outstanding during the fiscal years ended
January 31, 1995 and 1996.
Goldman Sachs retained the following commissions on sales of Class A and
Class B Shares during the following periods:
1997 1996 1995
========== ======== ========
Balanced Fund $ 94,000 $ 28,000 $ 14,000
Growth and Income Fund 555,000 771,000 361,000
CORE U.S. Equity Fund 380,000 108,000 58,000
CORE Large Cap Growth Fund/1/ N/A N/A N/A
Capital Growth Fund 323,000 523,000 815,000
International Equity Fund 1,563,000 211,000 660,000
Small Cap Equity Fund 219,000 202,000 868,000
Emerging Market Equity Fund/1/ N/A N/A N/A
Asia Growth Fund 1,397,000 507,000 829,000
- ----------------------------------------------------------------
1 Not operational.
Goldman Sachs serves as the Trust's transfer agent. Under its transfer
agency agreement with the Trust, Goldman Sachs has undertaken with the Trust to
(i) record the issuance, transfer and redemption of shares, (ii) provide
confirmations of purchases and redemptions, and quarterly statements, as well as
certain other statements, (iii) provide certain information to the Trust's
custodian and the relevant sub-custodian in connection with redemptions, (iv)
provide dividend crediting and certain disbursing agent services, (v) maintain
shareholder accounts, (vi) provide certain state Blue Sky and other information,
(vii) provide shareholders and certain regulatory authorities with tax related
information, (viii) respond to shareholder inquiries, and (ix) render certain
other miscellaneous services. As compensation for the services rendered to the
Trust by Goldman Sachs as transfer agent and the assumption by Goldman Sachs of
the expenses related thereto, Goldman Sachs is entitled to receive a fee with
respect to each Fund with respect to Class A Shares and Class B Shares equal to
$12,000 per year plus $7.50 per account, together with out-of-pocket and
transaction-related expenses (including those out-of-pocket expenses payable to
servicing agents).
B-44
<PAGE>
For the last three fiscal years the amounts paid to Goldman Sachs by each
Fund then in existence for transfer agency services performed were as follows:
<TABLE>
<CAPTION>
Class A & B Class A Class A
1997 1996 1995
==================== ============== ====================
<S> <C> <C> <C>
Balanced Fund $148,576 $ 72,067 $ 20,000
Growth and Income Fund 870,527 542,671 262,158
CORE U.S. Equity Fund 319,246 103,682 151,230
CORE Large Cap Growth Fund/1/ N/A N/A N/A
Capital Growth Fund 908,310 549,844 694,014
International Equity Fund 586,243 129,313 481,169
Small Cap Equity Fund 511,883 254,292 600,618
Emerging Markets Equity Fund/1/ N/A N/A N/A
Asia Growth Fund 385,114 192,097 120,000
<CAPTION>
Institutional Shares Service Shares Institutional Shares
1997 1997 1996
======== ======== ========
<S> <C> <C> <C>
Growth and Income Fund $ 15 $ 488 N/A
CORE U.S. Equity Fund/2/ N/A N/A $ 11,571
CORE Large Cap Growth Fund/1/ N/A N/A N/A
Mid Cap Equity Fund/3/ 51,464 N/A 26,082
International Equity Fund/2/ N/A N/A N/A
Emerging Markets Equity Fund/1/ N/A N/A N/A
Asia Growth Fund/2/ N/A N/A N/A
</TABLE>
___________________________
1 Not operational.
2 Contractually set to 0.
3 Commenced operations on August 1, 1995.
The Trust's distribution and transfer agency agreements each provide
that Goldman Sachs may render similar services to others so long as the services
Goldman Sachs provides thereunder are not impaired thereby. Such agreements
also provide that the Trust will indemnify Goldman Sachs against certain
liabilities.
OTHER PURCHASE INFORMATION
Authorized Dealers and other financial intermediaries provide varying
arrangements for their clients to purchase and redeem Fund shares. Some may
establish higher minimum investment requirements and others may limit the
availability of certain privileges with respect to the purchase and redemption
of shares or the reinvestment of dividends. Firms may arrange with their clients
for other investment or administrative services and may independently establish
and charge additional amounts to their clients for such services, which charges
would reduce a client's return. If shares of a Fund are held in a "street name"
account or were purchased through an Authorized Dealer, shareholders should
contact the Authorized Dealer to purchase, redeem or exchange shares, to make
changes in or give instructions concerning the account or to obtain information
about the account.
B-45
<PAGE>
The Adviser, Distributor and/or their affiliates may pay, out of their
own assets, compensation to Authorized Dealers and other persons for the sale
and distribution of Class A and Class B Shares of the Funds and/or for the
servicing of those shares. These payments ("Additional Payments") would be in
addition to the payments by the Funds described in the Funds' Prospectus and
this Statement of Additional Information for distribution and shareholder
servicing and processing, and would also be in addition to the sales commissions
payable to dealers as set forth in the Prospectus. These Additional Payments
may take the form of "due diligence" payments for an Authorized Dealer's
examination of the Funds and payments for providing extra employee training and
information relating to the Funds; "listing" fees for the placement of the Funds
on a dealer's list of mutual funds available for purchase by its customers;
"finders" or "referral" fees for directing investors to the Funds; "marketing
support" fees for providing assistance in promoting the sale of the Funds' Class
A and Class B Shares; and payments for the sale of Class A and Class B Shares
and/or the maintenance of Shares balances. In addition, the Adviser,
Distributor and/or their affiliates may make Additional Payments for
subaccounting, administrative and/or shareholder processing services that are in
addition to the shareholder servicing and processing fees paid by the Funds.
The Additional Payments made by the Adviser, Distributor and their affiliates
may be a fixed dollar amount, may be based on the number of customer accounts
maintained by an Authorized Dealer, or may be based on a percentage of the value
of Shares sold to, or held by, customers of the Authorized Dealers involved, and
may be different for different Authorized Dealers. Furthermore, the Adviser,
Distributor and/or their affiliates may contribute to various non-cash and cash
incentive arrangements to promote the sale of shares, as well as sponsor various
educational programs, sales contests and/or promotions in which participants may
receive prizes such as travel awards, merchandise and cash and/or investment
research pertaining to particular securities and other financial instruments or
to the securities and financial markets generally, educational information and
related support materials and hardware and/or software. The Adviser,
Distributor and their affiliates may also pay for the travel expenses, meals,
lodging and entertainment of Authorized Dealers and their salespersons and
guests in connection with educational, sales and promotional programs, subject
to applicable NASD regulations. The Distributor currently expects that such
additional bonuses or incentives will not exceed 0.50% of the amount of any
sales.
EXPENSES
========
Except as set forth in the Prospectus under "Management," the Trust is
responsible for the payment of its expenses. The expenses include, without
limitation, the fees payable to the Advisers, the fees and expenses payable to
the Trust's custodian and subcustodians, transfer agent fees, brokerage fees and
commissions, filing fees for the registration or qualification of the Trust's
shares under federal or state securities laws, expenses of the organization of
the Trust, 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 (including the cost of legal and certain accounting services rendered
by employees of GSAM, GSAMI and Goldman Sachs with respect to the Trust),
expenses of preparing and setting in type prospectuses, statements of additional
information, proxy material, reports and notices and the printing and
distributing of the same to the Trust's shareholders and regulatory authorities,
any expenses assumed by a Fund pursuant to its distribution, authorized dealer,
service and administration plans, compensation and expenses of its "non-
interested" Trustees and extraordinary expenses, if any, incurred by the Trust.
Except for fees under any distribution, authorized dealer, service,
administration or service plans applicable to a particular class and transfer
agency fees, all Fund expenses are borne on a non-class specific basis.
The Adviser to the Balanced, Growth and Income, CORE U.S. Equity, CORE
Large Cap Growth, Mid Cap Equity, International Equity, Emerging Markets Equity
and Asia Growth Funds has voluntarily agreed to reduce or limit certain "Other
Expenses" of such Funds (excluding management, distribution, authorized dealer,
administration and service fees, taxes, interest and brokerage fees and
litigation, indemnification and other extraordinary expenses, and in the case of
each Fund other than Balanced and
B-46
<PAGE>
CORE Large Cap Growth Funds, transfer agency fees) to the extent such expenses
exceed 0.10%, 0.11%, 0.06%, 0.05%, 0.06%, 0.20%, 0.16% and 0.24% per annum of
such Funds' average daily net assets, respectively. Such reductions or limits,
if any, are calculated monthly on a cumulative basis and may be discontinued or
modified by the applicable Adviser in its discretion at any time.
Fees and expenses of legal counsel, registering shares of a Fund,
holding meetings and communicating with shareholders may include an allocable
portion of the cost of maintaining an internal legal and compliance department.
Each Fund may also bear an allocable portion of the applicable Adviser's costs
of performing certain accounting services not being provided by a Fund's
Custodian.
For the last three fiscal years the amounts of certain "Other
Expenses" of each Fund then in existence that were reduced or otherwise limited
were as follows:
1997 1996 1995
======== ======== ========
Balanced Fund $319,552 $192,405 $ 95,906
Growth and Income Fund 0 0 106,725
CORE U.S. Equity Fund 104,833 110,581 N/A
CORE Large Cap U.S. Growth Fund/1/ N/A N/A N/A
Capital Growth Fund N/A N/A N/A
Mid Cap Equity Fund/2/ 72,441 85,515 N/A
International Equity Fund 144,265 N/A N/A
Small Cap Equity Fund N/A N/A N/A
Emerging Markets Equity Fund/1/ N/A N/A N/A
Asia Growth Fund 50,407 0 35,905
________________________________
1 Not operational.
2 Commenced operations on August 1, 1995.
CUSTODIAN AND SUB-CUSTODIANS
============================
State Street, P.O. Box 1713, Boston, Massachusetts 02105, is the custodian
of the Trust's portfolio securities and cash. State Street also maintains the
Trust's accounting records. State Street may appoint sub-custodians from time
to time to hold certain securities purchased by the Trust and to hold cash for
the Trust.
INDEPENDENT PUBLIC ACCOUNTANTS
==============================
Arthur Andersen, LLP, independent public accountants, One International
Place, Boston, Massachusetts 02110, have been selected as auditors of the Trust.
In addition to audit services, Arthur Andersen, LLP prepares the Trust's federal
and state tax returns, and provides consultation and assistance on accounting,
internal control and related matters.
B-47
<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Advisers are responsible for decisions to buy and sell securities for
the Funds, 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 a Fund, the Advisers are
generally required to give primary consideration to obtaining the most favorable
price and efficient execution under the circumstances. This means that an
Adviser will seek to execute each transaction at a price and commission, if any,
which provides the most favorable total cost or proceeds reasonably attainable
in the circumstances. As permitted by Section 28(e) of the Securities Exchange
Act of 1934, the Fund may pay a broker which provides brokerage and research
services 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 by the
Trustees 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
Advisers generally seek reasonably competitive spreads or commissions, a Fund
will not necessarily be paying the lowest spread or commission available.
Within the framework of this policy, the Advisers will consider research and
investment services provided by brokers or dealers who effect or are parties to
portfolio transactions of a Fund, the Advisers and their affiliates, or their
other clients. Such research and investment services are those which brokerage
houses customarily provide to institutional investors and include research
reports on particular industries and companies, economic surveys and analyses,
recommendations as to specific securities and other products or services (e.g.,
quotation equipment and computer related costs and expenses), advice concerning
the value of securities, the advisability of investing in, purchasing or selling
securities, the availability of securities or the purchasers or sellers of
securities, furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy and performance of
accounts, effecting securities transactions and performing functions incidental
thereto (such as clearance and settlement) and providing lawful and appropriate
assistance to the Advisers in the performance of their decision-making
responsibilities. Such services are used by the Advisers in connection with all
of their investment activities, and some of such services obtained in connection
with the execution of transactions for a Fund may be used in managing other
investment accounts. Conversely, brokers furnishing such services may be
selected for the execution of transactions of such other accounts, whose
aggregate assets are far larger than those of a Fund, and the services furnished
by such brokers may be used by the Advisers in providing management services for
the Trust.
In circumstances where two or more broker-dealers offer comparable prices
and execution capability, preference may be given to a broker-dealer which has
sold shares of the Fund as well as shares of other investment companies or
accounts managed by the Advisers. This policy does not imply a commitment to
execute all portfolio transactions through all broker-dealers that sell shares
of the Fund.
On occasions when an Adviser deems the purchase or sale of a security to be
in the best interest of a Fund as well as its other customers (including any
other fund or other investment company or advisory
B-48
<PAGE>
account for which such Adviser acts as investment adviser or subadviser), the
Adviser, to the extent permitted by applicable laws and regulations, may
aggregate the securities to be sold or purchased for the Fund with those to be
sold or purchased for such other customers in order to obtain the best net price
and most favorable execution under the circumstances. In such event,
allocation of the securities so purchased or sold, as well as the expenses
incurred in the transaction, will be made by the applicable Adviser in the
manner it considers to be equitable and consistent with its fiduciary
obligations to such Fund and such other customers. In some instances, this
procedure may adversely affect the price and size of the position obtainable for
a Fund.
Commission rates in the U.S. are established pursuant to negotiations with
the broker based on the quality and quantity of execution services provided by
the broker in the light of generally prevailing rates. The allocation of orders
among brokers and the commission rates paid are reviewed periodically by the
Trustees.
Subject to the above considerations, the Advisers may use Goldman Sachs as
a broker for a Fund. In order for Goldman Sachs to effect any portfolio
transactions for each Fund, the commissions, fees or other remuneration received
by Goldman Sachs must be reasonable and fair compared to the commissions, fees
or other remuneration paid to other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time. This standard would
allow Goldman Sachs to receive no more than the remuneration which would be
expected to be received by an unaffiliated broker in a commensurate arm's-length
transaction. Furthermore, the Trustees, including a majority of the Trustees who
are not "interested" Trustees, have adopted procedures which are reasonably
designed to provide that any commissions, fees or other remuneration paid to
Goldman Sachs are consistent with the foregoing standard. Brokerage transactions
with Goldman Sachs are also subject to such fiduciary standards as may be
imposed upon Goldman Sachs by applicable law.
B-49
<PAGE>
For the past three fiscal years, each Fund in existence paid brokerage
commissions as follows:
<TABLE>
<CAPTION>
Total Total Brokerage
Brokerage Amount of Commissions
Total Commissions Transaction Paid
Brokerage Paid to on which to Brokers
Commissions Affiliated Commissions Providing
Paid Persons/2/ Paid/3/ Research
=========== ================== =================== ===========
<S> <C> <C> <C> <C>
Fiscal Year Ended
January 31, 1997:
Balanced Fund $ 62,072 $ 5,112 (8%)/1/ $ 1,057,742(15%)/2/ $0
Growth and Income Fund 779,396 77,587(10%)/1/ 13,310,208(9%)/2/ 0
CORE U.S. Equity Fund 279,620 0(0%)/1/ 6,706,824(0%)/2/ 0
CORE Large Cap Growth Fund/(3)/ N/A N/A N/A N/A
Capital Growth Fund 1,460,140 304,052(21%)/1/ 29,920,578(1%)/2/ 42,039
Mid Cap Equity Fund 364,294 22,134(6%)/1/ 6,655,100(7%)/2/ 0
International Equity Fund 1,529,436 0(0%) 48,059,958(0%)/2/ 0
Small Cap Equity Fund 758,205 36,087(5%)/1/ 16,439,842(1%)/2/ 0
Emerging Markets Equity Fund/(3)/ N/A N/A N/A N/A
Asia Growth Fund 1,554,313 50,624(3%)/1/ 102,609,295(4%)/2/ 0
</TABLE>
B-50
<PAGE>
<TABLE>
<CAPTION>
Total Total Brokerage
Brokerage Amount of Commissions
Total Commissions Transaction Paid
Brokerage Paid to on which to Brokers
Commissions Affiliated Commissions Providing
Paid Persons/2/ Paid/3/ Research
=========== ================== ======================== ===========
<S> <C> <C> <C> <C>
Fiscal Year Ended
January 31, 1996:
Balanced Fund $ 56,860 $ 7,391(13%)/(1)/ $ 29,697,202(13%)/(2)/ $0
Growth and Income Fund 841,605 71,218(8%)/(1)/ 425,040,430(9%)/(2)/ 0
CORE U.S. Equity Fund 121,424 0(0%)/(1)/ 148,427,497(0%)/(2)/ 0
CORE Large Cap Growth Fund/(3)/ N/A N/A N/A N/A
Capital Growth Fund 1,979,949 284,660(14%)/(1)/ 1,034,755,196(11%)/(2)/ 0
Mid Cap Equity Fund 315,212 40,935(13%)/(1)/ 142,547,552(11%)/(2)/ 0
International Equity Fund 1,260,992 13,629(1%)/(1)/ 359,700,166(1%)/(2)/ 0
Small Cap Equity Fund 690,234 72,980(11%)/(1)/ 170,616,044(6%)/(2)/ 0
Emerging Markets Equity Fund/(3)/ N/A N/A N/A N/A
Asia Growth Fund 1,676,525 3,778(0%)/(1)/ 247,662,049(2%)/(2)/ 0
</TABLE>
B-51
<PAGE>
<TABLE>
<CAPTION>
Total Total Brokerage
Brokerage Amount of Commissions
Total Commissions Transaction Paid
Brokerage Paid to on which to Brokers
Commissions Affiliated Commissions Providing
Paid Persons/2/ Paid/3/ Research
=========== ================ ==================== ===========
<S> <C> <C> <C> <C>
Fiscal Year Ended
January 31, 1995:
Balanced Fund $ 9,652 $ 1,522(16%)/1/ $ 7,216,224(10%)/2/ $0
Growth and Income Fund 637,080 77,404(12%)/1/ 468,165,610(7%)/2/ 0
CORE U.S. Equity Fund 119,192 0(0%)/1/ 99,616,396(0%)/2/ 0
CORE Large Cap Growth Fund/(3)/ N/A N/A N/A N/A
Capital Growth Fund 1,427,413 273,076(19%)/1/ 786,135,073(13%)/2/ 0
Mid Cap Equity Fund N/A N/A N/A N/A
International Fund 1,799,525 0(0%)/1/ 546,364,113(0%)/2/ 0
Small Cap Equity Fund 555,667 23,137(4%)/1/ 392,235,715(2%)/2/ 0
Emerging Markets Equity Fund/(3)/ N/A N/A N/A N/A
Asia Growth Fund 1,002,148 67,754(7%)/1/ 171,880,775(2%)/2/ 0
</TABLE>
- ----------------------------
1 Percentage of total amount of transactions involving the payment of
commissions effected through affiliated persons.
2 Percentage of total commissions paid.
3 Not operational.
B-52
<PAGE>
During the fiscal year ended January 31, 1997, the Trust acquired and sold
securities of its regular broker-dealers: all brokers below and JP Morgan. As
of January 31, 1997, the Trust held the following amounts of securities of its
regular broker/dealers, as defined in Rule 10b-1 under the Act, or their parents
($ in thousands):
<TABLE>
<CAPTION>
Fund Broker/Dealer Amount
- ------------------------ ---------------- -------
<S> <C> <C>
Balanced Fund Bear Stearns $ 6,679
Lehman Brothers 2,098
Chase Securities 490
Growth and Income Fund Chase Securities $ 6,003
Lehman Brothers 11,099
Bear Stearns 19,457
Core US Equity Fund Chase Securities 1,193
Smith Barney 6,439
Merrill Lynch 4,423
Morgan Stanley 2,188
Salomon Brothers 4,249
Bear Stearns 2,614
Lehman Brothers 659
Capital Growth Fund Bear Stearns 13,286
Lehman Brothers 3,349
Mid Cap Equity Fund Lehman Brothers 2,151
Bear Stearns 2,977
Small Cap Equity Fund Bear Stearns 12,052
Lehman Brothers 3,038
</TABLE>
NET ASSET VALUE
Under the Act, the Trustees are responsible for determining in good
faith the fair value of securities of each Fund. In accordance with procedures
adopted by the Trustees, the net value per share of each class of each Fund is
calculated by determining the value of the net assets attributable to each class
of that Fund and dividing by the number of outstanding shares of that class.
All securities are valued as of the close of regular trading on the New York
Stock Exchange (normally 4:00 p.m. New York time) on each Business Day (as
defined in the Prospectus).
In the event that the New York Stock Exchange or the national
securities exchange on which stock options are traded adopt different trading
hours on either a permanent or temporary basis, the Trustees will reconsider the
time at which net asset value is computed. In addition, each Fund may compute
its net asset value as of any time permitted pursuant to any exemption, order or
statement of the SEC or its staff.
Portfolio securities of 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
B-53
<PAGE>
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 principally: (i) on a U.S. exchange or NASDAQ will be valued at the mean
between the closing bid and asked prices; and (ii) on a foreign exchange will be
valued at the last sale price (also referred to as the close price). The last
sale price for securities traded principally on a foreign exchange will be
determined as of the close of the London Stock Exchange or, for securities
traded on exchanges located in the Asia Pacific region, noon London time; (b)
debt securities will be valued using a pricing service approved by the Trustees
if such prices are believed by the investment adviser to accurately represent
market value; (c) overnight repurchase agreements will be valued by the
investment adviser at cost; (d) term repurchase agreements (i.e., those whose
maturity exceeds seven days) and interest rate swaps, caps, collars and floors
will be valued at the average of the bid quotations obtained daily from at least
two dealers or, for term repurchase agreements, recognized counterparties; (e)
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; (f) spot and forward foreign currency exchange contracts
will be valued using a pricing service such as Reuters then calculating the mean
between the last bid and asked quotations supplied by certain independent
dealers in such contracts; (g) exchange-traded options and futures contracts
will be valued by the custodian bank at the last sale price on the exchange
where such contracts and options are principally traded; and (h) over-the-
counter options will be valued by an independent unaffiliated broker identified
by the portfolio manager/trader and contacted by the custodian bank; and (i) all
other securities, 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 as stated in the
valuation procedures which were approved by the Board of Trustees. For all
brokers used in this process, the custodian bank will send a letter to the
broker furnishing the quotation. If accurate quotations are not readily
available, such contracts will be valued by an independent unaffiliated broker
identified by the portfolio manager/trader and contacted by the custodian bank.
If broker quotes are used, the portfolio manager/trader will identify one
independent unaffiliated broker from whom the custodian bank will obtain prices
daily and another independent unaffiliated broker from whom the custodian bank
will obtain quotes at least weekly. The custodian bank will promptly notify the
portfolio manager/trader and a member of the GSAM Valuation Committee or a
designee thereof of any deviations equal to or greater than 3% between the
weekly quote and the daily quotes for the date that the weekly quotes were
obtained. The investment adviser will promptly provide instructions to the
custodian bank. For all brokers used in this process, the custodian bank will
send a letter to the broker furnishing the quotation.
Generally, trading in securities on European and Far Eastern
securities exchanges and on over-the-counter markets is substantially completed
at various times prior to the close of business on each Business Day in New York
(i.e., a day on which the New York Stock Exchange is open for trading). In
addition, European or Far Eastern securities trading generally or in a
particular country or countries may not take place on all Business Days in New
York. Furthermore, trading takes place in various foreign markets on days which
are not Business Days in New York and days on which the Funds' net asset values
are not calculated. Such calculation does not take place contemporaneously with
the determination of the prices of the majority of the portfolio securities used
in such calculation. Events affecting the values of portfolio securities that
occur between the time their prices are determined and the close of regular
trading
B-54
<PAGE>
on the New York Stock Exchange will not be reflected in a Fund's calculation of
net asset values unless the Trustees deem that the particular event would
materially affect net asset value, in which case an adjustment will be made.
The proceeds received by each Fund and each other series of the Trust
from the issue or sale of its shares, and all net investment income, realized
and unrealized gain and proceeds thereof, subject only to the rights of
creditors, will be specifically allocated to such Fund and constitute the
underlying assets of that Fund or series. The underlying assets of each Fund
will be segregated on the books of account, and will be charged with the
liabilities in respect of such Fund and with a share of the general liabilities
of the Trust. Expenses of the Trust with respect to the Funds and the other
series of the Trust are generally allocated in proportion to the net asset
values of the respective Funds or series except where allocations of direct
expenses can otherwise be fairly made.
PERFORMANCE INFORMATION
A Fund may from time to time quote or otherwise use total return,
yield and/or distribution rate information in advertisements, shareholder
reports or sales literature. Average annual total return and yield are computed
pursuant to formulas specified by the SEC.
Yield is computed by dividing net investment income earned during a
recent thirty-day period by the product of the average daily number of shares
outstanding and entitled to receive dividends during the period and the maximum
public offering price per share on the last day of the relevant period. The
results are compounded on a bond equivalent (semi-annual) basis and then
annualized. Net investment income per share is equal to the dividends and
interest earned during the period, reduced by accrued expenses for the period.
The calculation of net investment income for these purposes may differ from the
net investment income determined for accounting purposes.
The distribution rate for a specified period is calculated by
annualizing distributions of net investment income for such period and dividing
this amount by the net asset value per share or maximum public offering price on
the last day of the period.
Average annual total return for a specified period is derived by
calculating the actual dollar amount of the investment return on a $1,000
investment made at the maximum public offering price at the beginning of the
period, and then calculating the annual compounded rate of return which would
produce that amount, assuming a redemption at the end of the period. This
calculation assumes a complete redemption of the investment. It also assumes
that all dividends and distributions are reinvested at net asset value on the
reinvestment dates during the period.
Year-by-year total return and cumulative total return for a specified
period are each derived by calculating the percentage rate required to make a
$1,000 investment (made at the maximum public offering price with all
distributions reinvested) at the beginning of such period equal to the actual
total value of such investment at the end of such period. The following table
indicates the total return (capital changes plus reinvestment of all
distributions) on a hypothetical investment of $1,000 in a Fund for the periods
indicated.
Occasionally statistics may be used to specify Fund volatility or
risk. Measures of volatility or risk are generally used to compare a Fund's net
asset value or performance relative to a market index. One measure of
volatility is beta. Beta is the volatility of a fund relative to the total
market. A beta of more than 1.00 indicates volatility greater than the market,
and a beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is used
B-55
<PAGE>
to measure variability of net asset value or total return around an average,
over a specified period of time. The premise is that greater volatility
connotes greater risk undertaken in achieving performance.
From time to time the Trust may publish an indication of a Fund's past
performance as measured by independent sources such as (but not limited to)
Lipper Analytical Services, Inc., Morningstar Mutual Funds, Weisenberger
Investment Companies Service, Donoghue's Money Fund Report, Micropal, Barron's,
Business Week, Consumer's Digest, Consumer's Report, Investors Business Daily,
The New York Times, Kiplinger's Personal Finance Magazine, Changing Times,
Financial World, Forbes, Fortune, Money, Personal Investor, Sylvia Porter's
Personal Finance and The Wall Street Journal. The Trust may also advertise
information which has been provided to the NASD for publication in regional and
local newspapers. In addition, the Trust may from time to time advertise a
Fund's performance relative to certain indices and benchmark investments,
including: (a) the Lipper Analytical Services, Inc. Mutual Fund Performance
Analysis, Fixed Income Analysis and Mutual Fund Indices (which measure total
return and average current yield for the mutual fund industry and rank mutual
fund performance); (b) the CDA Mutual Fund Report published by CDA Investment
Technologies, Inc. (which analyzes price, risk and various measures of return
for the mutual fund industry); (c) the Consumer Price Index published by the
U.S. Bureau of Labor Statistics (which measures changes in the price of goods
and services); (d) Stocks, Bonds, Bills and Inflation published by Ibbotson
Associates (which provides historical performance figures for stocks, government
securities and inflation); (e) the Salomon Brothers' World Bond Index (which
measures the total return in U.S. dollar terms of government bonds, Eurobonds
and foreign bonds of ten countries, with all such bonds having a minimum
maturity of five years); (f) the Lehman Brothers Aggregate Bond Index or its
component indices; (g) the Standard & Poor's Bond Indices (which measure yield
and price of corporate, municipal and U.S. Government bonds); (h) the J.P.
Morgan Global Government Bond Index; (i) other taxable investments including
certificates of deposit (CDs), money market deposit accounts (MMDAs), checking
accounts, savings accounts, money market mutual funds and repurchase agreements;
(j) Donoghues' Money Fund Report (which provides industry averages for 7-day
annualized and compounded yields of taxable, tax-free and U.S. Government money
funds); (k) the Hambrecht & Quist Growth Stock Index; (l) the NASDAQ OTC
Composite Prime Return; (m) the Russell Midcap Index; (n) the Russell 2000 Index
- - Total Return; (o) Russell 1000 Growth Index-Total Return; (p) the Value-Line
Composite-Price Return; (q) the Wilshire 4500 Index; (r) the FT-Actuaries Europe
and Pacific Index, and (s) historical investment data supplied by the research
departments of Goldman Sachs, Lehman Brothers, First Boston Corporation, Morgan
Stanley including (EAFE), and the Morgan Stanley Capital International Combined
Asia ex Japan Free Index, the Morgan Stanley Capital International Emerging
Markets Free Index, Salomon Brothers, Merrill Lynch, Donaldson Lufkin and
Jenrette or other providers of such data; (t) the FT-Actuaries Europe and
Pacific Index; (u) CDA/Wiesenberger Investment Companies Services or
Wiesenberger Investment Companies Service; (v) The Goldman Sachs Commodities
Index; and (w) information produced by Micropal, Inc.. The composition of the
investments in such indices and the characteristics of such benchmark
investments are not identical to, and in some cases are very different from,
those of the Fund's portfolio. These indices and averages are generally
unmanaged and the items included in the calculations of such indices and
averages may not be identical to the formulas used by a Fund to calculate its
performance figures.
Information used in advertisements and materials furnished to present
and prospective investors may include statements or illustrations relating to
the appropriateness of certain types of securities and/or mutual funds to meet
specific financial goals. Such information may address:
- cost associated with aging parents;
- funding a college education (including its actual and estimated cost);
- health care expenses (including actual and projected expenses);
- long-term disabilities (including the availability of, and coverage
provided by, disability insurance);
B-56
<PAGE>
- 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, long-term government bonds, treasury bills and
certificates of deposit) over time. However, the characteristics of
these securities are not identical to, and may be very different from,
those of a Fund's portfolio;
. the dollar and non-dollar based returns of various market indices (i.e.,
Morgan Stanley Capital International EAFE Index, FT-Actuaries Europe &
Pacific Index and the Standard & Poor's Index of 500 Common Stocks) over
varying periods of time;
. total stock market capitalizations of specific countries and regions on a
global basis;
. performance of securities markets of specific countries and regions; and
. value of a dollar amount invested in a particular market or type of
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.
The CORE Large Cap Growth Fund was organized on May 1, 1997 and has no
operating or performance history prior thereto. However, in accordance with
interpretive positions expressed by the staff of the SEC, the Fund has adopted
the adjusted performance record of a separate account managed by the Advisers
for periods prior to the Funds' commencement of operations which converted into
Class A Shares as of the commencement date. Any quotation of performance data of
this Fund relating to this period will include the adjusted performance record
of the applicable separate account. The performance record of the separate
account quoted by the Fund have been adjusted downward based on the expenses
applicable to Class A Shares (the class into which the separate account
transferred) to reflect the expenses expected to be incurred by the Fund as
stated in the expense table in the Prospectus. These expenses include any sales
charges and asset-based charges (i.e., fees under Distribution and Authorized
Dealer Service Plans) imposed and other operating expenses. Total return
quotations will be calculated pursuant to SEC approved methodology. Prior to May
1, 1997, the separate account was a separate investment advisory account under
discretionary management by the Adviser and had substantially similar investment
objectives, policies and strategies as the Fund. Unlike the Fund, the separate
account was not registered as an investment company under the Act and therefore
was not subject to certain investment restrictions and operational requirements
that are imposed on investment companies by the Act. If the separate account had
been registered as an investment company under the Act, the separate account's
performance may have been adversely affected by such restrictions and
requirements. On May 1, 1997, the separate account transferred a portion of its
assets to the Fund in exchange for Fund shares. The performance record of each
other class has been linked to the performance of the separate account
B-57
<PAGE>
(based on Class A expenses) and the Class A performance for any periods prior
to commencement of operations of a class of shares.
B-58
<PAGE>
<TABLE>
<CAPTION>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
Assuming no voluntary
waiver of fees and no
expense reimbursements
------------------------
Assumes Assumes Assumes Assumes
5.5% sales no sales 5.5% sales no sales
Fund Class Time Period charge charge charge charge
- --------------------------- ------------- ---------------------------------- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Balanced Fund A 10/12/94-1/31/97 - Since inception 17.41% 20.32% 15.50% 18.27%
Balanced Fund A 2/1/96-1/31/97 - One year 12.07% 18.59% 11.22% 17.69%
Balanced Fund B 5/1/96-1/31/97 - Since inception* N/A 16.22% N/A 15.79%
Growth and Income A 2/5/93-1/31/97 - Since inception 17.31% 18.98% 16.50% 18.17%
Growth and Income A 2/1/96-1/31/97 - One year 21.39% 28.42% 21.13% 28.14%
Growth and Income B 5/1/96-1/31/97 - Since inception* N/A 22.23% N/A 22.23%
Growth and Income Institutional 6/3/96-1/31/97 - Since inception* N/A 20.77% N/A 20.77%
Growth and Income Service 3/6/96-1/31/97 - Since inception* N/A 23.87% N/A 23.87%
CORE U.S. Equity A 5/24/91-1/31/97 - Since inception 13.54% 14.67% 13.25% 14.38%
CORE U.S. Equity A 2/1/92-1/31/97 - Five year 13.99% 15.29% 13.70% 15.00%
CORE U.S. Equity A 2/1/96-1/31/97 - One year 16.98% 23.75% 16.69% 23.44%
CORE U.S. Equity B 5/1/96-1/31/97 - Since inception* N/A 18.59% N/A 18.47%
CORE U.S. Equity Institutional 6/15/95-1/31/97 - Since inception N/A 28.04% N/A 27.74%
CORE U.S. Equity Institutional 2/1/96-1/31/97 - One year N/A 24.63% N/A 24.39%
CORE U.S. Equity Service 6/7/96-1/31/97 - Since inception* N/A 15.92% N/A 15.71%
CORE Large Cap Growth A 11/1/91-1/31/97 - Since inception 18.46% 19.78% 17.30% 18.61%
CORE Large Cap Growth A 2/1/92-1/31/97 - Five year 17.53% 18.85% 16.38% 17.68%
CORE Large Cap Growth A 2/1/96-1/31/97 - One year 27.09% 34.54% 25.85% 33.23%
Capital Growth A 4/20/90-1/31/97 - Since inception 15.57% 16.54% 15.24% 16.21%
Capital Growth A 2/1/92-1/31/97 - Five year 15.42% 16.73% 15.14% 16.44%
Capital Growth A 2/1/96-1/31/97 - One year 19.04% 25.97% 18.75% 25.66%
Capital Growth B 5/1/96-1/31/97 - Since inception* N/A 19.39% N/A 19.39%
</TABLE>
B-59
<PAGE>
<TABLE>
<CAPTION>
Assuming no voluntary
waiver of fees and no
expense reimbursements
----------------------
Assumes Assumes Assumes Assumes
5.5% sales no sales 5.5% sales no sales
Fund Class Time Period charge charge charge charge
- -------------------------- ------------- ---------------------------------- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Mid Cap Equity Institutional 8/1/95-1/31/97 - Since inception N/A 21.65% N/A 21.55%
Mid Cap Equity Institutional 2/1/96-1/31/97 - One year N/A 25.63% N/A 25.55%
International Equity A 12/1/92-1/31/97 - Since inception 9.66% 11.15% 9.40% 10.90%
International Equity A 2/1/96-1/31/97 - One year 7.26% 13.48% 7.05% 13.26%
International Equity B 5/1/96-1/31/97 - Since inception* N/A 2.83% N/A 2.75%
International Equity Institutional 2/7/96-1/31/97 - Since inception* N/A 12.53% N/A 12.38%
International Equity Service 3/6/96-1/31/97 - Since inception* N/A 10.42% N/A 10.28%
Small Cap A 10/22/92-1/31/97- Since inception 12.12% 13.61% 11.79% 13.28%
Small Cap A 2/1/96-1/31/97 - One year 20.27% 27.28% 19.98% 26.97%
Small Cap B 5/1/96-1/31/97 - Since inception* N/A 5.39% N/A 5.39%
Asia Growth A 7/8/94-1/31/97 - Since inception 4.46% 6.78% 4.15% 6.47%
Asia Growth A 2/1/96-1/31/97 - One year -6.44% -1.01% -6.59% -1.17%
Asia Growth B 5/1/96-1/31/97 - Since inception * N/A -6.02% N/A -6.06%
Asia Growth Institutional 2/2/96-1/31/97 - Since inception * N/A -1.09% N/A -1.24%
- --------------------------
</TABLE>
All returns are average annual total returns.
* Represents an aggregate total return (not annualized) since this class has
not completed a full twelve months of operations.
B-60
<PAGE>
From time to time, advertisements or information may include a
discussion of certain attributes or benefits to be derived by an investment in
the Fund. Such advertisements or information may include symbols, headlines or
other material which highlight or summarize the information discussed in more
detail in the communication.
The Trust may from time to time summarize the substance of discussions
contained in shareholder reports in advertisements and publish the adviser's
views as to markets, the rationale for a Fund's investments and discussions of a
Fund's current asset allocation.
In addition, from time to time, advertisements or information may
include a discussion of asset allocation models developed by GSAM and/or its
affiliates, certain attributes or benefits to be derived from asset allocation
strategies and the Goldman Sachs mutual funds that may be offered as investment
options for the strategic asset allocations. Such advertisements and
information may also include GSAM's current economic outlook and domestic and
international market views to suggest periodic tactical modifications to current
asset allocation strategies. Such advertisements and information may include
other materials which highlight or summarize the services provided in support of
an asset allocation program.
A Fund's performance data will be based on historical results and will
not be intended to indicate future performance. A Fund's total return and yield
will vary based on market conditions, portfolio expenses, portfolio investments
and other factors. The value of a Fund's shares will fluctuate and an
investor's shares may be worth more or less than their original cost upon
redemption. The Trust may also, at its discretion, from time to time make a
list of a Fund's holdings available to investors upon request.
Total return will be calculated separately for each class of shares in
existence. Because each class of shares may be subject to different expenses,
total return with respect to each class of shares of a Fund will differ.
SHARES OF THE TRUST
The Funds were reorganized from series of a Maryland corporation as
part of Goldman Sachs Trust, a Delaware business trust, by a Declaration of
Trust dated January 28, 1997, on April 30, 1997.
The Act requires that where more than one class or series of shares
exists, each class or series must be preferred over all other classes or series
in respect of assets specifically allocated to such class or series. The
Trustees also have authority to classify and reclassify any series of shares
into one or more classes of shares. As of the date of this Additional
Statement, the Trustees have classified the shares of the Mid Cap Equity Fund
into two classes: Institutional and Service Shares. Balanced, Capital Growth
and Small Cap Equity Funds have been classified into two classes: Class A and
Class B Shares. Growth and Income, CORE U.S. Equity, CORE Large Cap Growth,
International Equity, Emerging Markets Equity and Asia Growth Funds have been
classified into four classes: Institutional Shares, Service Shares, Class A
Shares and Class B Shares.
Each Institutional Share, Service Share, Class A Share and Class B
Share of a Fund represents a proportionate interest in the assets belonging to
the applicable class of the Fund. All expenses of a Fund are borne at the same
rate by each class of shares, except that fees under Service Plans are borne
exclusively by Service Shares, fees under Distribution and Authorized Dealer
Service Plans are borne exclusively by Class A Shares or Class B Shares and
transfer agency fees are borne at different rates by Class A Shares or Class B
Shares than Institutional and Service Shares. The Trustees may determine in the
future that it is appropriate to allocate other expenses differently between
classes of shares and may do so to the extent consistent with the rules of the
SEC and positions of the Internal Revenue Service. Each class of shares may
have different minimum investment requirements and be entitled to different
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shareholder services. Currently, shares of a class may only be exchanged for
shares of the same or an equivalent class of another fund. See "Exchange
Privilege" in the Prospectus.
Institutional Shares may be purchased at net asset value without a
sales charge for accounts in the name of an investor or institution that is not
compensated by a Fund for services provided to the institution's customers.
Service Shares may be purchased at net asset value without a sales
charge for accounts held in the name of an institution that, directly or
indirectly, provides certain account administration and shareholder liaison
services to its customers, including maintenance of account records and
processing orders to purchase, redeem and exchange Service Shares. Service
Shares bear the cost of account administration fees at the annual rate of up to
0.50% of the average daily net assets of the Fund attributable to Service
Shares.
Class A Shares are sold, with an initial sales charge of up to 5.5%,
through brokers and dealers who are members of the National Association of
Securities Dealers, Inc. and certain other financial service firms that have
sales agreements with Goldman Sachs. Class A Shares bear the cost of
distribution (Rule 12b-1) fees at the aggregate rate of up to 0.25% of the
average daily net assets of such Class A Shares. Class A Shares also bear the
cost of an Authorized Dealer Service Plan at an annual rate of up to 0.25% of
the average daily net assets attributable to Class A Shares.
Class B Shares of the Funds are sold subject to a contingent deferred
sales charge of up to 5.0% through brokers and dealers who are members of the
National Association of Securities Dealers Inc. and certain other financial
services firms that have sales arrangements with Goldman Sachs. Class B Shares
bear the cost of distribution (Rule 12b-1) fees at the aggregate rate of up to
0.75% of the average daily net assets attributable to Class B Shares. Class B
Shares also bear the cost of an Authorized Dealer Service Plan at an annual rate
of up to 0.25% of the average daily net assets attributable to Class B Shares.
It is possible that an institution or its affiliate may offer
different classes of shares (i.e., Institutional, Service, Class A Shares and
Class B Shares) to its customers and thus receive different compensation with
respect to different classes of shares of each Fund. Dividends paid by each
Fund, if any with respect to each class of shares will be calculated in the same
manner, at the same time on the same day and will be the same amount, except for
differences caused by the differences in expenses discussed above. Similarly,
the net asset value per share may differ depending upon the class of shares
purchased.
Certain aspects of the shares may be altered after advance notice to
shareholders if it is deemed necessary in order to satisfy certain tax
regulatory requirements.
When issued, shares are fully paid and non-assessable. In the event
of liquidation, shareholders are entitled to share pro rata in the net assets of
the applicable class of the relevant Fund available for distribution to such
shareholders. All shares entitle their holders to one vote per share, are
freely transferable and have no preemptive, subscription or conversion rights.
As of April 1, 1997, State Street Bank & Trust Company as Trustee (GS
Profit Sharing Master Trust), Attn. Louis Pereira, P.O. Box 1992, Boston, MA
02105-1992, was recordholder of 97.88% of Mid Cap Equity Fund's outstanding
shares; Trukan and Co., Attn: K. Ufford, P.O. Box 3699, Wichita, KS 67201-3699,
was recordholder of 6.80% of Balanced Fund's outstanding shares; Frontier Trust
Co. Inc. Trustee (FBO Dade County Public Schools), Attn: Agnes R. McMurray,
Fringe Benefits Management Co., 1720 S. Gadsden St., Tallahassee, FL 32301-5547,
was recordholder of 6.80% of Balanced Fund's outstanding shares; and State
Street Bank & Trust Company as Trustee (Goldman Sachs Employees'
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Pension Plan), Attn: Louis Pereria, P.O. Box 1992, Boston, MA 02105-1992, was
recordholder of 5.10% of the Small Cap Equity Fund's outstanding shares.
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 directors from the separate voting
requirements of Rule 18f-2.
The Trust is not required to hold annual meetings of shareholders and
does not intend to hold such meetings. In the event that a meeting of
shareholders is held, each share of the Trust will be entitled, as determined by
the Trustees, either to one vote for each share or to one vote for each dollar
of net asset value represented by such shares on all matters presented to
shareholders including the elections of Trustees (this method of voting being
referred to as "dollar based voting"). However, to the extent required by the
Act or otherwise determined by the Trustees, series and classes of the Trust
will vote separately from each other. Shareholders of the Trust do not have
cumulative voting rights in the election of Trustees. Meetings of shareholders
of the Trust, or any series or class thereof, may be called by the Trustees,
certain officers or upon the written request of holders of 10% or more of the
shares entitled to vote at such meetings. The shareholders of the Trust will
have voting rights only with respect to the limited number of matters specified
in the Declaration of Trust and such other matters as the Trustees may determine
or may be required by law.
The Declaration of Trust provides for indemnification of Trustees,
officers and agents of the Trust unless the recipient is adjudicated (i) to be
liable by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of such person's office or (ii)
not to have acted in good faith in the reasonable belief that such person's
actions were in the best interest of the Trust. The Declaration of Trust
provides that, if any shareholder or former shareholder of any series is held
personally liable solely by reason of being or having been a shareholder and not
because of the shareholder's acts or omissions or for some other reason, the
shareholder or former shareholder (or heirs, executors, administrators, legal
representatives or general successors) shall be held harmless from and
indemnified against all loss and expense arising form such liability. The Trust,
acting on behalf of any affected series, must, upon request by such shareholder,
assume the defense of any claim made against such shareholder for any act or
obligation of the series and satisfy any judgment thereon from the assets of the
series.
The Declaration of Trust permits the termination of the Trust or of
any series or class of the Trust (i) by a majority of the affected shareholders
at a meeting of shareholders of the Trust, series or class; or (ii) by a
majority of the Trustees without shareholder approval if the Trustees determine
that such action is in the best interest of the Trust or its shareholders. The
factors and events that the Trustees may take into account in making such
determination include (i) the inability of the Trust or any successor series or
class to maintain its assets at an appropriate size; (ii) changes in laws or
regulations governing the Trust, series or class or affecting assets of the type
in which it invests; or (iii) economic developments or trends having a
significant adverse impact on their business or operations.
The Declaration of Trust authorizes the Trustees without shareholder
approval to cause the Trust, or any series thereof, to merge or consolidate with
any corporation, association, trust or their 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
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or a portion of the assets of a series of the Trust in the securities of another
open-end investment company.
The Declaration of Trust permits the Trustees to amend the Declaration
of Trust without a shareholder vote. However, shareholders of the Trust have the
right to vote on any amendment (i) that would affect the voting rights of
shareholder, (ii) that is required by law to be approved by shareholders; (iii)
that would amend the voting provisions of the Declaration of Trust; or (iv) that
the Trustees determine to submit to shareholders.
The Trustees may appoint separate Trustees with respect to one or more
series or classes of the Trust's shares (the "Series Trustees"). Series Trustees
may, but are not required to, serve as Trustees of the Trust or any other series
or class of the Trust. The Series Trustees have, to the exclusion of any other
Trustees of the Delaware Trust, all the powers and authorities of Trustees under
the Trust Instrument with respect to any other series or class.
SHAREHOLDER AND TRUSTEE LIABILITY
Under Delaware Law, the shareholders of the Funds are not generally
subject to liability for the debts or obligations of the Trust. Similarly,
Delaware law provides that a series of the Trust will not be liable for the
debts or obligations of any other series of the Trust. However, no similar
statutory or other authority limiting business trust shareholder liability
exists in other states. As a result, to the extent that a Delaware business
trust or a shareholder is subject to the jurisdiction of courts of such other
states, the courts may not apply Delaware law and may thereby subject the
Delaware business trust shareholders to liability. To guard against this risk,
the Declaration of Trust contains an express disclaimer of shareholder liability
for acts or obligations of a Fund. Notice of such disclaimer will normally be
given in each agreement, obligation or instrument entered into or executed by a
series or the Trustees. The Declaration of Trust provides for indemnification
by the relevant Fund for all loss suffered by a shareholder as a result of an
obligation of the series. The Declaration of Trust also provides that a series
shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the series and satisfy any judgment
thereon. In view of the above, the risk of personal liability of shareholders
of a Delaware business trust is remote.
In addition to the requirements under Delaware law, the Declaration of
Trust provides that shareholders of a series may bring a derivative action on
behalf of the series only if the following conditions are met: (a) shareholders
eligible to bring such derivative action under Delaware law who hold at least
10% of the outstanding shares of the series, or 10% of the outstanding shares of
the class to which such action relates, shall join in the request for the
Trustees to commence such action; and (b) the Trustees must be afforded a
reasonable amount of time to consider such shareholder request and to
investigate the basis and to employ other advisers in considering the merits of
the request and shall require an undertaking by the shareholders making such
request to reimburse the series for the expense of any such advisers in the
event that the Trustees determine not to bring such action.
The Declaration of Trust further provides that the Trustees will not
be liable for error of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against liability to which he or she
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
or her office.
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TAXATION
The following is a summary of the principal U.S. federal income, and
certain state and local, tax considerations regarding the purchase, ownership
and disposition of shares in each Fund of the Trust. This summary does not
address special tax rules applicable to certain classes of investors, such as
tax-exempt entities, insurance companies and financial institutions. Each
prospective shareholder is urged to consult his own tax adviser with respect to
the specific federal, state, local and foreign tax consequences of investing in
each Fund. The summary is based on the laws in effect on the date of this
Additional Statement, which are subject to change.
GENERAL
=======
Each Fund is a separate taxable entity. CORE Large Cap Growth and
Emerging Markets Equity Funds each intends to elect and each other Fund has
elected to be treated and intends to qualify for each taxable year as a
regulated investment company under Subchapter M of the Code.
Qualification as a regulated investment company under the Code
requires, among other things, that (a) a Fund derive at least 90% of its gross
income for its taxable year from dividends, interest, payments with respect to
securities loans and gains from the sale or other disposition of stocks or
securities or foreign currencies, or other income (including but not limited to
gains from options, futures, and forward contracts) derived with respect to its
business of investing in such stock, securities or currencies (the "90% gross
income test"); (b) such Fund derive less than 30% of its gross income from the
sale or other disposition of any of the following which was held for less than
three months: (i) stock or securities; (ii) options, futures or forward
contracts (other than options, futures or forward contracts on foreign
currencies); and (iii) foreign currencies and foreign currency options, futures
and forward contracts that are not directly related to the Fund's principal
business of investing in stocks or securities or options and futures with
respect to stocks or securities (the "short-short test"); and (c) such Fund
diversify its holdings so that, at the close of each quarter of its taxable
year, (i) at least 50% of the market value of such Fund's total (gross) assets
is comprised of cash, cash items, U.S. Government securities, securities of
other regulated investment companies and other securities limited in respect of
any one issuer to an amount not greater in value than 5% of the value of such
Fund's total assets and to not more than 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its total
(gross) assets is invested in the securities of any one issuer (other than U.S.
Government securities and securities of other regulated investment companies) or
two or more issuers controlled by the Fund and engaged in the same, similar or
related trades or businesses. Gains from the sale or other disposition of
foreign currencies (or options, futures or forward contracts on foreign
currencies) that are not directly related to a Fund's principal business of
investing in stock or securities or options and futures with respect to stock or
securities will be treated as gains from the sale of investments held less than
three months under the short-short test (even though characterized as ordinary
income for some purposes) if such currencies or instruments were held for less
than three months. For purposes of the 90% gross income test, income that a Fund
earns from equity interests in certain entities that are not treated as
corporations (e.g., partnerships or trusts) for U.S. tax purposes will generally
have the same character for such Fund as in the hands of such an entity;
consequently, a Fund may be required to limit its equity investments in such
entities that earn fee income, rental income, or other nonqualifying income. In
addition, future Treasury regulations could provide that qualifying income under
the 90% gross income test will not include gains from foreign currency
transactions that are not directly related to a Fund's principal business of
investing in stock or securities or options and futures with respect to stock
or securities. Using foreign currency positions or entering into foreign
currency options, futures and forward or swap contracts for
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purposes other than hedging currency risk with respect to securities in a Fund's
portfolio or anticipated to be acquired may not qualify as "directly-related"
under these tests.
If a Fund complies with such provisions, then in any taxable year in
which such Fund distributes, in compliance with the Code's timing and other
requirements, at least 90% of its "investment company taxable income" (which
includes dividends, taxable interest, taxable accrued original issue discount
and market discount income, income from securities lending, any net short-term
capital gain in excess of net long-term capital loss, certain net realized
foreign exchange gains and any other taxable income other than "net capital
gain," as defined below, and is reduced by deductible expenses), and at least
90% of the excess of its gross tax-exempt interest income (if any) over certain
disallowed deductions, such Fund (but not its shareholders) will be relieved of
federal income tax on any income of the Fund, including long-term capital gains,
distributed to shareholders. However, if a Fund retains any investment company
taxable income or "net capital gain" (the excess of net long-term capital gain
over net short-term capital loss), it will be subject to a tax at regular
corporate rates on the amount retained. If the Fund retains any net capital
gain, the Fund may designate the retained amount as undistributed capital gains
in a notice to its shareholders who, if subject to U.S. federal income tax on
long-term capital gains, (i) will be required to include in income for federal
income tax purposes, as long-term capital gain, their shares of such
undistributed amount, and (ii) will be entitled to credit their proportionate
shares of the tax paid by the Fund against their U.S. federal income tax
liabilities, if any, and to claim refunds to the extent the credit exceeds such
liabilities. For U.S. federal income tax purposes, the tax basis of shares
owned by a shareholder of the Fund will be increased by an amount equal under
current law to 65% of the amount of undistributed net capital gain included in
the shareholder's gross income. Each Fund intends to distribute for each
taxable year to its shareholders all or substantially all of its investment
company taxable income, net capital gain and any net tax-exempt interest.
Exchange control or other foreign laws, regulations or practices may restrict
repatriation of investment income, capital or the proceeds of securities sales
by foreign investors such as the International Equity, Emerging Markets Equity
or Asia Growth Funds and may therefore make it more difficult for such a Fund to
satisfy the distribution requirements described above, as well as the excise tax
distribution requirements described below. However, each Fund generally expects
to be able to obtain sufficient cash to satisfy such requirements from new
investors, the sale of securities or other sources. If for any taxable year a
Fund does not qualify as a regulated investment company, it will be taxed on all
of its investment company taxable income and net capital gain at corporate
rates, and its distributions to shareholders will be taxable as ordinary
dividends to the extent of its current and accumulated earnings and profits.
In order to avoid a 4% federal excise tax, each Fund must distribute
(or be deemed to have distributed) by December 31 of each calendar year at least
98% of its taxable ordinary income for such year, at least 98% of the excess of
its capital gains over its capital losses (generally computed on the basis of
the one-year period ending on October 31 of such year), and all taxable ordinary
income and the excess of capital gains over capital losses for the previous year
that were not distributed for such year and on which the Fund paid no federal
income tax. For federal income tax purposes, dividends declared by a Fund in
October, November or December to shareholders of record on a specified date in
such a month and paid during January of the following year are taxable to such
shareholders as if received on December 31 of the year declared. The Funds
anticipate that they will generally make timely distributions of income and
capital gains in compliance with these requirements so that they will generally
not be required to pay the excise tax. For federal income tax purposes, each
Fund is permitted to carry forward a net capital loss in any year to offset its
own capital gains, if any, during the eight years following the year of the
loss. Asia Growth Fund had approximately $184,000, $5,487,000 and $9,825,000 at
January 31, 1997 of capital loss carry forwards expiring in 2002, 2003, and
2004, respectively, for federal tax purposes. These amounts are available to be
carried forward to offset future capital gains to the extent permitted by the
Code and applicable tax regulations.
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Gains and losses on the sale, lapse, or other termination of options
and futures contracts, options thereon and certain forward contracts (except
certain foreign currency options, forward contracts and futures contracts) will
generally be treated as capital gains and losses. Certain of the futures
contracts, forward contracts and options held by a Fund will be required to be
"marked-to-market" for federal income tax purposes, that is, treated as having
been sold at their fair market value on the last day of the Fund's taxable year.
These provisions may require a Fund to recognize income or gains without a
concurrent receipt of cash. Any gain or loss recognized on actual or deemed
sales of these futures contracts, forward contracts, or options will (except for
certain foreign currency options, forward contracts, and futures contracts) be
treated as 60% long-term capital gain or loss and 40% short-term capital gain or
loss. As a result of certain hedging transactions entered into by a Fund, the
Fund may be required to defer the recognition of losses on futures contracts,
forward contracts, and options or underlying securities or foreign currencies to
the extent of any unrecognized gains on related positions held by such Fund and
the characterization of gains or losses as long-term or short-term may be
changed. The tax provisions described above applicable to options, futures and
forward contracts may affect the amount, timing and character of a Fund's
distributions to shareholders. The short-short test described above may limit a
Fund's ability to use options, forward contracts, and futures transactions as
well as its ability to engage in short sales. Moreover, application of certain
requirements for qualification as a regulated investment company and/or these
tax rules to certain investment practices, such as dollar rolls, or certain
derivatives such as interest rate swaps, floors, caps and collars and currency,
mortgage or index swaps may be unclear in some respects, and a Fund may
therefore be required to limit its participation in such transactions. Certain
tax elections may be available to a Fund to mitigate some of the unfavorable
consequences described in this paragraph.
Section 988 of the Code contains special tax rules applicable to
certain foreign currency transactions and instruments that may affect the
amount, timing and character of income, gain or loss recognized by a Fund.
Under these rules, foreign exchange gain or loss realized with respect to
foreign currencies and certain futures and options thereon, foreign currency-
denominated debt instruments, foreign currency forward contracts, and foreign
currency-denominated payables and receivables will generally be treated as
ordinary income or loss, although in some cases elections may be available that
would alter this treatment. If a net foreign exchange loss treated as ordinary
loss under Section 988 of the Code were to exceed a Fund's investment company
taxable income (computed without regard to such loss) for a taxable year, the
resulting loss would not be deductible by the Fund or its shareholders in future
years. Net loss, if any, from certain foregoing currency transactions or
instruments could exceed net investment income otherwise calculated for
accounting purposes with the result being either no dividends being paid or a
portion of a Fund's dividends being treated as a return of capital for tax
purposes, nontaxable to the extent of a shareholder's tax basis in his shares
and, once such basis is exhausted, generally giving rise to capital gains.
A Fund's investment in zero coupon securities, deferred interest
securities, certain structured securities or other securities bearing original
issue discount or, if a Fund elects to include market discount in income
currently, market discount, as well as any "mark to market" gain from certain
options, futures or forward contracts, as described above, will generally cause
it to realize income or gain prior to the receipt of cash payments with respect
to these securities or contracts. In order to obtain cash to enable it to
distribute this income or gain, maintain its qualification as a regulated
investment company and avoid federal income or excise taxes, the Fund may be
required to liquidate portfolio securities that it might otherwise have
continued to hold.
Each Fund (other than CORE U.S. Equity and CORE Large Cap Growth
Funds) anticipates that it 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. If, as may occur for International Equity, Emerging
Markets Equity and Asia Growth Funds, more than 50% of a Fund's total assets at
the close of any taxable year consists of stock or
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securities of foreign corporations, the Fund may file an election with the
Internal Revenue Service pursuant to which shareholders of the Fund would be
required to (i) include in ordinary gross income (in addition to taxable
dividends actually received) their pro rata shares of foreign income taxes paid
by the Fund that are treated as income taxes under U.S. tax regulations (which
excludes, for example, stamp taxes, securities transaction taxes, and similar
taxes) even though not actually received by such shareholders, and (ii) treat
such respective pro rata portions as foreign income taxes paid by them.
If the International Equity, Emerging Markets Equity and Asia Growth
Funds make this election, its respective shareholders may then deduct such pro
rata portions of qualified foreign taxes in computing their taxable incomes, or,
alternatively, use them as foreign tax credits, subject to applicable
limitations, against their U.S. federal income taxes. Shareholders who do not
itemize deductions for federal income tax purposes will not, however, be able to
deduct their pro rata portion of foreign taxes paid by a Fund, although such
shareholders will be required to include their shares of such taxes in gross
income if the election is made.
If a shareholder chooses to take credit for the foreign taxes deemed
paid by such shareholder as a result of any such election by International
Equity, Emerging Markets Equity or Asia Growth Funds, the amount of the credit
that may be claimed in any year may not exceed the same proportion of the U.S.
tax against which such credit is taken which the shareholder's taxable income
from foreign sources (but not in excess of the shareholder's entire taxable
income) bears to his entire taxable income. For this purpose, distributions
from long-term and short-term capital gains or foreign currency gains by a Fund
will generally not be treated as income from foreign sources. This foreign tax
credit limitation may also be applied separately to certain specific categories
of foreign-source income and the related foreign taxes. As a result of these
rules, which have different effects depending upon each shareholder's particular
tax situation, certain shareholders of International Equity, Emerging Markets
Equity and Asia Growth Funds may not be able to claim a credit for the full
amount of their proportionate share of the foreign taxes paid by such Fund even
if the election is made by such a Fund.
Shareholders who are not liable for U.S. federal income taxes,
including tax-exempt shareholders, will ordinarily not benefit from this
election. Each year, if any, that the International Equity, Emerging Markets
Equity or Asia Growth Funds files the election described above, its shareholders
will be notified of the amount of (i) each shareholder's pro rata share of
qualified foreign taxes paid by a Fund and (ii) the portion of Fund dividends
which represents income from each foreign country. The other Funds will not be
entitled to elect to pass foreign taxes and associated credits or deductions
through to their shareholders because they will not satisfy the 50% requirement
described above. If a Fund cannot or does not make this election, it may deduct
such taxes in computing the amount it is required to distribute.
If a Fund acquires stock (including, under proposed regulations, an
option to acquire stock such as is inherent in a convertible bond) in certain
foreign corporations that receive at least 75% of their annual gross income from
passive sources (such as interest, dividends, rents, royalties or capital gain)
or hold at least 50% of their assets in investments producing such passive
income ("passive foreign investment companies"), the Fund could be subject to
federal income tax and additional interest charges on "excess distributions"
received from such companies or gain from the sale of stock in such companies,
even if all income or gain actually received by the Fund is timely distributed
to its shareholders. The Fund would not be able to pass through to its
shareholders any credit or deduction for such a tax. In some cases, elections
may be available that would ameliorate these adverse tax consequences, but such
elections would require the Fund to include certain amounts as income or gain
(subject to the distribution requirements described above) without a concurrent
receipt of cash. Each Fund may limit and/or manage its holdings in passive
foreign investment companies to minimize its tax liability or maximize its
return from these investments.
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Investments in lower-rated securities may present special tax issues
for a Fund to the extent actual or anticipated defaults may be more likely with
respect to such securities. Tax rules are not entirely clear about issues such
as when a Fund may cease to accrue interest, original issue discount, or market
discount; when and to what extent deductions may be taken for bad debts or
worthless securities; how payments received on obligations in default should be
allocated between principal and income; and whether exchanges of debt
obligations in a workout context are taxable. These and other issues will be
addressed by a Fund, in the event it invests in such securities, in order to
seek to eliminate or minimize any adverse tax consequences.
TAXABLE U.S. SHAREHOLDERS - DISTRIBUTIONS
=========================================
For U.S. federal income tax purposes, distributions by a Fund, whether
reinvested in additional shares or paid in cash, generally will be taxable to
shareholders who are subject to tax. Shareholders receiving a distribution in
the form of newly issued shares will be treated for U.S. federal income tax
purposes as receiving a distribution in an amount equal to the amount of cash
they would have received had they elected to receive cash and will have a cost
basis in each share received equal to such amount divided by the number of
shares received.
Distributions from investment company taxable income for the year will
be taxable as ordinary income. Distributions designated as derived from a
Fund's dividend income, if any, that would be eligible for the dividends
received deduction if such Fund were not a regulated investment company may be
eligible, for the dividends received deduction for corporations. The dividends-
received deduction, if available, is reduced to the extent the shares with
respect to which the dividends are received are treated as debt-financed under
federal income tax law and is eliminated if the shares are deemed to have been
held for less than a minimum period, generally 46 days. Because eligible
dividends are limited to those a Fund receives from U.S. domestic corporations,
it is unlikely that a substantial portion of the distributions made by
International Equity, Asia Growth and Emerging Markets Equity Funds will qualify
for the dividends-received deduction. The entire dividend, including the
deducted amount, is considered in determining the excess, if any, of a corporate
shareholder's adjusted current earnings over its alternative minimum taxable
income, which may increase its liability for the federal alternative minimum
tax, and the dividend may, if it is treated as an "extraordinary dividend" under
the Code, reduce such shareholder's tax basis in its shares of a Fund. Capital
gain dividends (i.e., dividends from net capital gain) if designated as such in
a written notice to shareholders mailed not later than 60 days after a Fund's
taxable year closes, will be taxed to shareholders as long-term capital gain
regardless of how long shares have been held by shareholders, but are not
eligible for the dividends received deduction for corporations. Distributions,
if any, that are in excess of a Fund's current and accumulated earnings and
profits will first reduce a shareholder's tax basis in his shares and, after
such basis is reduced to zero, will generally constitute capital gains to a
shareholder who holds his shares as capital assets.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions, and certain prohibited transactions is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their tax
advisers for more information.
TAXABLE U.S. SHAREHOLDERS - SALE OF SHARES
==========================================
When a shareholder's shares are sold, redeemed or otherwise disposed
of in a transaction that is treated as a sale for tax purposes, the shareholder
will generally recognize gain or loss equal to the difference between the
shareholder's adjusted tax basis in the shares and the cash, or fair market
value of any property, received. Assuming the shareholder holds the shares as a
capital asset at the time of such sale, such gain or loss should be capital in
character, and long-term if the shareholder has a tax holding period for the
shares of more than one year, otherwise short-term, subject to the rules
described
B-69
<PAGE>
below. Shareholders should consult their own tax advisers with reference to
their particular circumstances to determine whether a redemption (including an
exchange) or other disposition of Fund shares is properly treated as a sale for
tax purposes, as is assumed in this discussion. If a shareholder receives a
capital gain dividend with respect to shares and such shares have a tax holding
period of six months or less at the time of a sale or redemption of such shares,
then any loss the shareholder realizes on the sale or redemption will be treated
as a long-term capital loss to the extent of such capital gain dividend. All or
a portion of any sales load paid upon the purchase of shares of a Fund will not
be taken into account in determining gain or loss on the redemption or exchange
of such shares within 90 days after their purchase to the extent the redemption
proceeds are reinvested, or the exchange is effected, without payment of an
additional sales load pursuant to the reinvestment or exchange privilege. The
load not taken into account will be added to the tax basis of the newly-acquired
shares. Additionally, any loss realized on a sale or redemption of shares of a
Fund may be disallowed under "wash sale" rules to the extent the shares disposed
of are replaced with other shares of the same Fund within a period of 61 days
beginning 30 days before and ending 30 days after the shares are disposed of,
such as pursuant to a dividend reinvestment in shares of such Fund. If
disallowed, the loss will be reflected in an adjustment to the basis of the
shares acquired.
Each Fund may be required to withhold, as "backup withholding,"
federal income tax at a rate of 31% from dividends (including capital gain
dividends) and share redemption and exchange proceeds to individuals and other
non-exempt shareholders who fail to furnish such Fund with a correct taxpayer
identification number ("TIN") certified under penalties of perjury, or if the
Internal Revenue Service or a broker notifies the Fund that the payee is subject
to backup withholding as a result of failing to properly report interest or
dividend income to the Internal Revenue Service or that the TIN furnished by the
payee to the Fund is incorrect, or if (when required to do so) the payee fails
to certify under penalties of perjury that it is not subject to backup
withholding. A Fund may refuse to accept an application that does not contain
any required TIN or certification that the TIN provided is correct. If the
backup withholding provisions are applicable, any such dividends and proceeds,
whether paid in cash or reinvested in additional shares, will be reduced by the
amounts required to be withheld. Any amounts withheld may be credited against a
shareholder's U.S. federal income tax liability.
NON-U.S. SHAREHOLDERS
=====================
The discussion above relates solely to U.S. federal income tax law as
it applies to "U.S. persons" subject to tax under such law. Shareholders who, as
to the United States, are not "U.S. persons," (i.e., are nonresident aliens,
foreign corporations, fiduciaries of foreign trusts or estates, foreign
partnerships or other non-U.S. investors) generally will be subject to U.S.
federal withholding tax at the rate of 30% on distributions treated as ordinary
income unless the tax is reduced or eliminated pursuant to a tax treaty or the
dividends are effectively connected with a U.S. trade or business of the
shareholder. In the latter case the dividends will be subject to tax on a net
income basis at the graduated rates applicable to U.S. individuals or domestic
corporations. Distributions of net capital gain, including amounts retained by
a Fund which are designated as undistributed capital gains, to a non-U.S.
shareholder will not be subject to U.S. federal income or withholding tax unless
the distributions are effectively connected with the shareholder's trade or
business in the United States or, in the case of a shareholder who is a
nonresident alien individual, the shareholder is present in the United States
for 183 days or more during the taxable year and certain other conditions are
met. Non-U.S. shareholders may also be subject to U.S. federal withholding tax
on deemed income resulting from any election by International Equity, Emerging
Markets Equity or Asia Growth Funds to treat qualified foreign taxes it pays as
passed through to shareholders (as described above), but they may not be able to
claim a U.S. tax credit or deduction with respect to such taxes.
Any capital gain realized by a non-U.S. shareholder upon a sale or
redemption of shares of a Fund will not be subject to U.S. federal income or
withholding tax unless the gain is effectively connected with
B-70
<PAGE>
the shareholder's trade or business in the U.S., or in the case of a shareholder
who is a nonresident alien individual, the shareholder is present in the U.S.
for 183 days or more during the taxable year and certain other conditions are
met.
Non-U.S. persons who fail to furnish a Fund with an IRS Form W-8 or an
acceptable substitute may be subject to backup withholding at the rate of 31% on
capital gain dividends and the proceeds of redemptions and exchanges. Each
shareholder who is not a U.S. person should consult his or her tax adviser
regarding the U.S. and non-U.S. tax consequences of ownership of shares of and
receipt of distributions from the Funds.
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. Shareholders should consult their own tax advisers
concerning these matters.
FINANCIAL STATEMENTS
The audited financial statements and related Reports of Independent
Public Accountants, contained in the 1997 Annual Report of each of the Funds,
are incorporated herein by reference into this Additional Statement and attached
hereto.
OTHER INFORMATION
Class A Shares of each Fund are sold at a maximum sales charge of
5.5%. Using the initial offering price per share, as of January 31, 1997, the
maximum offering price of each Fund's Class A shares would be as follows:
Maximum Offering
Net Asset Sales Price to
Value Charge Public
--------- -------- --------
Balanced Fund $18.78 $1.09 $19.87
Growth and Income Fund 23.18 1.35 24.53
CORE U.S. Equity Fund 23.32 1.36 24.68
CORE Large Cap Growth Fund N/A N/A N/A
Capital Growth Fund 16.73 0.97 17.70
International Equity Fund 19.32 1.12 20.44
Small Cap Equity Fund 20.91 1.22 22.13
Emerging Markets Equity Fund N/A N/A N/A
Asia Growth Fund 16.31 0.95 17.26
Each Fund will redeem shares solely in cash up to the lesser of $250,000 or 1%
of the net asset value of the Fund during any 90-day period for any one
shareholder. Each Fund, however, reserves the right to pay redemptions
exceeding $250,000 or 1% of the net asset value of the Fund at the time of
redemption by a distribution in kind of securities (instead of cash) from such
Fund. The securities distributed in kind would be readily marketable and would
be valued for this purpose using the same method employed in
B-71
<PAGE>
calculating the Fund's net asset value per share. See "Net Asset Value." If a
shareholder receives redemption proceeds in kind, the shareholder should expect
to incur transaction costs upon the disposition of the securities received in
the redemption.
The right of a shareholder to redeem shares and the date of payment by each
Fund may be suspended for more than seven days for any period during which the
New York Stock Exchange is closed, other than the customary weekends or
holidays, or when trading on such Exchange is restricted as determined by the
SEC; or during any emergency, as determined by the SEC, as a result of which it
is not reasonably practicable for such Fund to dispose of securities owned by it
or fairly to determine the value of its net assets; or for such other period as
the SEC may by order permit for the protection of shareholders of such Fund.
The 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.
DISTRIBUTION AND AUTHORIZED DEALER SERVICE PLANS
CLASS A DISTRIBUTION PLANS. As described in the Prospectus, the Trust with
respect to Class A Shares of each Fund has adopted a distribution plan (the
"Class A Plans") pursuant to Rule 12b-1 under the Act. See "Distribution and
Authorized Dealer Service Plan" in the Prospectus.
The Class A Plans were most recently approved on April 23, 1997 by a
majority vote of the Trustees, including a majority of the non-interested
Trustees who have no direct or indirect financial interest in the Class A Plans,
cast in person at a meeting called for the purpose of approving the Class A
Plans. The compensation payable under the Class A Plans may not exceed 0.25%
per annum of each Fund's average daily net assets.
Currently, Goldman Sachs has voluntarily agreed to waive the entire amount
of such fee for the Balanced, CORE Large Cap Growth, Capital Growth and Small
Cap Equity Funds and to limit the amount of such fee to 0.21% of average daily
net asset attributable to Class A Shares of CORE U.S. Equity, International
Equity and Asia Growth Funds; and to limit the amount of such fee to 0.04% of
the average daily net asset attributable to Class A shares of the Growth and
Income Fund. Goldman Sachs has no current intention of modifying or
discontinuing such waiver but may do so in the future at its discretion.
Each Class A Plan was amended effective April 30, 1997 for each of the
Funds then in existence to reduce the fee payable under the Plan from 0.50% of
average daily net assets attributable to Class A Shares. At the time of such
amendment the Trustees approved the Authorized Dealer Service Plan pursuant to
which personal and account maintenance services are provided. See "Management --
Authorized Dealer Service Plans."
B-72
<PAGE>
For the fiscal year ended January 31, 1997 the amounts paid to Goldman
Sachs pursuant to its Class A Plan by each Fund then in existence were as
follows:
1997
========
Balanced Fund $ 0
Growth and Income Fund 139,025
CORE U.S. Equity Fund 363,264
CORE Large Cap Growth Fund/1/ N/A
Capital Growth Fund 0
International Equity Fund 900,274
Small Cap Equity Fund 0
Emerging Markets Equity Fund/1/ N/A
Asia Growth Fund 526,448
- ------------------
1 Not operational.
Had Goldman Sachs' voluntary limitations not been in effect the Funds
would have paid Goldman Sachs the following fees during the fiscal year ended
1997 pursuant to their respective Class A Plans:
1997
==========
Balanced Fund $ 153,392
Growth and Income Fund 1,252,257
CORE U.S. Equity Fund 432,457
CORE Large Cap Growth Fund/1/ N/A
Capital Growth Fund 2,171,462
International Equity Fund 1,071,755
Small Cap Equity Fund 529,684
Emerging Markets Equity Fund/1/ N/A
Asia Growth Fund 626,724
- ------------------
1 Not operational.
B-73
<PAGE>
During the fiscal year ended January 31, 1997, Goldman Sachs incurred the
following expenses in connection with distribution under the Class A Plan of
each applicable Fund then in existence:
<TABLE>
<CAPTION>
Compensation Printing and Preparation
and Expenses Allocable Mailing of and
of the Overhead, Prospectuses Distribution
Distributor Telephone to Other of Sales
Compensation & Its Sales and Travel Than Current Literature and
To Dealers Personnel Expenses Shareholders Advertising
============ ============ ========== ============ ==============
<S> <C> <C> <C> <C> <C>
Fiscal Year Ended
January 31, 1997:
Balanced Fund/(1)/ $0 $ 0 $ 0 $ 0 $ 0
Growth and Income Fund/(1)/ 0 897,444 823,000 64,500 158,500
CORE U.S. Equity Fund 0 714,665 684,000 51,000 281,000
CORE Large Cap Growth Fund/(2)/ N/A N/A N/A N/A N/A
Capital Growth Fund/(1)/ N/A N/A N/A N/A N/A
International Equity Fund/(1)/ 0 1,124,203 952,000 70,500 363,955
Small Cap Equity Fund/(1)/ N/A N/A N/A N/A N/A
Asia Growth Fund/(1)/ 0 558,465 343,000 37,000 155,500
Emerging Market Equity Fund/(2)/ N/A N/A N/A N/A N/A
</TABLE>
The table above reflects amounts expended by Goldman Sachs, which amounts are in
excess of the compensation received by Goldman Sachs under the Class A Plans.
The payments under the Class A Plans were used by Goldman Sachs to compensate it
for the expenses shown above on a pro-rata basis.
(1) COMMENCING JUNE 1, 1995, GOLDMAN SACHS IS NOT IMPOSING THE 0.25% 12B-1 FEE
FOR THESE FUNDS. AS NO DISTRIBUTION REVENUE HAS BEEN EARNED AFTER THIS DATE
FOR THESE FUNDS, NO EXPENSES ARE REFLECTED ABOVE.
(2) NOT OPERATIONAL.
B-74
<PAGE>
The Class A Plans are compensation plans which provide for the payment of a
specified fee without regard to the expenses actually incurred by Goldman Sachs.
If such fee exceeds Goldman Sach's expenses, Goldman Sachs may realize a profit
from these arrangements. If the Class A Plans were terminated by the Trustees
and no successor plans were adopted, each Fund would cease to make payments to
Goldman Sachs under the Class A Plans and Goldman Sachs would be unable to
recover the amount of any of its unreimbursed distribution expenditures.
Under the Class A Plans, Goldman Sachs, as distributor of each Fund's Class
A shares, will provide to the Trustees for their review, and the Trustees will
review at least quarterly, a written report of the services provided and amounts
expended by Goldman Sachs under the Class A Plans and the purposes for which
such services were performed and expenditures were made.
The Class A Plans will remain in effect until May 1, 1998 and from year to
year thereafter, provided that such continuance is approved annually by a
majority vote of the Trustees, including a majority of the non-interested
Trustees who have no direct or indirect financial interest in the Class A Plans.
A Class A Plan may not be amended to increase materially the amount to be spent
for the services described therein as to a Fund without approval of a majority
of the outstanding voting securities of the affected Fund. All material
amendments of the Class A Plan must also be approved by the Trustees in the
manner described above. A Class A Plan may be terminated at any time as to any
Fund without payment of any penalty by a vote of a majority of the non-
interested Trustees or by vote of a majority of the Class A Shares of the
applicable Fund. So long as the Class A Plans are in effect, the selection and
nomination of non-interested Trustees shall be committed to the discretion of
the non-interested Trustees. The Trustees have determined that in their
judgment there is a reasonable likelihood that the Class A Plans will benefit
the Funds and their Class A shareholders.
CLASS B DISTRIBUTION PLANS. As described in the Prospectus, the Trust has
adopted on behalf of the Funds distribution plans (the "Class B Plans") pursuant
to Rule 12b-1 under the Act with respect to the Class B shares. See
"Distribution and Authorized Dealer Service Plans" in the Prospectus.
The Class B Plans were most recently approved for the Funds (except
Emerging Markets Equity Fund) on April 23, 1997 and for the Emerging Markets
Equity Fund on January 28, 1997, by a majority vote of the Trustees, including a
majority of the non-interested Trustees who have no direct or indirect financial
interest in the Class B Plans, cast in person at a meeting called for the
purpose of approving the Class B Plans.
With respect to each Fund, the compensation payable under the Class B Plans
is equal to 0.75% per annum of the average daily net assets attributable to
Class B Shares of that Fund. The fees received by Goldman Sachs under the Class
B Plans and contingent deferred sales charge on Class B Shares may be sold by
Goldman Sachs as distributor to entities which provide financing for payments to
Authorized Dealers in respect of sales of Class B Shares. To the extent such
fee is not paid to such dealers, Goldman Sachs may retain such fee as
compensation for its services and expenses of distributing the Funds' Class B
Shares. If such fee exceeds Goldman Sachs' expenses, Goldman Sachs may realize
a profit from these arrangements.
B-75
<PAGE>
During the fiscal year ended January 31, 1997, Goldman Sachs incurred the
following fees under the Class B Plan of each applicable Fund then in existence:
Balanced Fund $ 3,861
Growth and Income Fund 28,075
CORE U.S. Equity Fund 36,508
CORE Large Cap Growth Fund/1/ N/A
Capital Growth Fund 7,632
International Equity Fund 44,148
Small Cap Fund 8,973
Emerging Markets Equity Fund/1/ N/A
Asia Growth Fund 10,229
- ------------------
1 Not operational.
The Class B Plans are compensation plans which provide for the payment of a
specified distribution fee without regard to the distribution expenses actually
incurred by Goldman Sachs. If the Class B Plans were terminated by the Trustees
and no successor plan were adopted, the Funds would cease to make distribution
payments to Goldman Sachs and Goldman Sachs would be unable to recover the
amount of any of its unreimbursed distribution expenditures.
Under the Class B Plans, Goldman Sachs, as distributor of the Funds'
shares, will provide to the Board of Trustees for its review, and the Board will
review at least quarterly, a written report of the services provided and amounts
expended by Goldman Sachs under the Class B Plans and the purposes for which
such services were performed and expenditures were made.
The Class B Plans will remain in effect until May 1, 1998 and from year to
year, provided such continuance is approved annually by a majority vote of the
Trustees, including a majority of the non-interested Trustees. A Class B Plan
may not be amended to increase materially the amount to be spent for the
services described therein as to any Fund without approval of a majority of the
outstanding Class B Shares of that Fund. All material amendments of the Class B
Plans must also be approved by the Trustees in the manner described above. With
respect to any Fund, a Class B Plan may be terminated at any time without
payment of any penalty by a vote of the majority of the non-interested Trustees
or by vote of a majority of the outstanding voting securities of the Class B
Shares of that Fund. So long as a Class B Plans are in effect, the selection
and nomination of non-interested Trustees shall be committed to the discretion
of the non-interested Trustees. The Trustees have determined that in their
judgment there is a reasonable likelihood that the Class B Plans will benefit
each Fund and their respective Class B shareholders.
AUTHORIZED DEALER SERVICE PLANS. As described in the prospectus, each
Fund's Class A and Class B Shares have adopted a non-Rule 12b-1 Authorized
Dealer Service Plan (each a "Service Plan") pursuant to which Goldman Sachs and
Authorized Dealers are compensated for the provision of personal and account
maintenance services. The Service Plan of Emerging Markets Equity Fund was
initially approved on January 28, 1997 and the Service Plans of CORE Large Cap
Growth Fund were initially approved on April 23, 1997 by a majority vote of the
Trustees, including a majority of the non-interested Trustees who have no direct
or indirect financial interest in the Service Plan. Each Service Plan of each
other Fund was most recently approved by the Trustees, including a majority of
the non-interested Trustees who have no direct or indirect financial interest in
the Service Plan, at a meeting held on April 23, 1997. Each Fund's Service Plan
provides for the compensation for personal and account maintenance
B-76
<PAGE>
services at an annual rate of up to 0.25% of the Fund's average daily net assets
attributable to Class A or Class B shares.
For the fiscal year ended January 31, 1997 and for the period June 1, 1995
(commencement of each Service Plan) through January 31, 1996, each Fund that was
operational paid Authorized Dealer Service fees at the foregoing rate for each
Fund's Class A shares. During the period May 1, 1996 (commencement of each
Class B Service Plan) through January 31, 1997, Authorized Dealer Service fees
were paid with respect to each Fund's Class B shares which were then in
operation at the foregoing rate.
For the fiscal year ended January 31, 1997 and for the period June 1, 1995
through January 31, 1996, the amounts paid to Goldman Sachs pursuant to its
Class A Authorized Dealer Service Plan and for the period May 1, 1996
(commencement of Class B Service Plan) through January 31, 1997, the amounts
paid to Goldman Sachs pursuant ot its Class B Service Plan was:
Class A Class B Class A
1997 1997 1996
========== ======= ==========
Balanced Fund $ 153,392 $ 1,294 $ 64,145
Growth and Income Fund 1,252,257 9,358 603,426
CORE U.S. Equity Fund 432,457 12,169 182,881
CORE Large Cap U.S. Growth Fund/1/ N/A N/A N/A
Capital Growth Fund 2,171,462 2,854 1,563,448
International Equity Fund 1,071,755 14,733 470,027
Small Cap Fund 569,684 2,992 454,857
Emerging Market Equity Fund/1/ N/A N/A N/A
Asia Growth Fund 626,724 3,410 276,754
- -----------------
1 Not operational
The Service Plans of each Fund will remain in effect until May 1, 1998, and
from year to year thereafter, provided that the continuance of each service plan
is approved annually by a majority vote of the Trustees, including a majority of
the non-interested Trustees who have no direct or indirect financial interest in
the Service Plans. All material amendments of the Service Plans must also be
approved by the Trustees in the manner described above. The Service Plans may
be terminated at any time as to any Fund without payment of any penalty by a
vote of a majority of the non-interested Trustees or by vote of a majority of
the outstanding voting securities of the affected Fund. The Trustees have
determined that in their judgment there is a reasonable likelihood that the
Service Plans will benefit the Funds and their shareholders.
OTHER INFORMATION REGARDING PURCHASES, REDEMPTIONS,
EXCHANGES AND DIVIDENDS
The following information supplements the information in the Prospectus
under the captions "How to Invest," "How to Sell Shares of the Funds" and
"Dividends." Please see the Prospectus for more complete information.
B-77
<PAGE>
OTHER PURCHASE INFORMATION
==========================
If shares of a Fund are held in a "street name" account with an Authorized
Dealer, all recordkeeping, transaction processing and payments of distributions
relating to the beneficial owner's account will be performed by the Authorized
Dealer, and not by the Fund and its Transfer Agent. Since the Funds will have
no record of the beneficial owner's transactions, a beneficial owner should
contact the Authorized Dealer to purchase, redeem or exchange shares, to make
changes in or give instructions concerning the account or to obtain information
about the account. The transfer of shares in a "street name" account to an
account with another dealer or to an account directly with the Fund involves
special procedures and will require the beneficial owner to obtain historical
purchase information about the shares in the account from the Authorized Dealer.
RIGHT OF ACCUMULATION (CLASS A)
===============================
A Class A shareholder qualifies for cumulative quantity discounts if the
current purchase price of the new investment plus the shareholder's current
holdings of existing Class A shares (acquired by purchase or exchange) of the
Funds and Class A shares of any other Goldman Sachs Fund (as defined in the
Prospectus) total the requisite amount for receiving a discount. For example,
if a shareholder owns shares with a current market value of $35,000 and
purchases additional Class A shares of any Fund with a purchase price of
$25,000, the sales charge for the $25,000 purchase would be 4.75% (the rate
applicable to a single purchase of more than $60,000). Class A shares purchased
without the imposition of a sales charge may not be aggregated with Class A
shares purchased subject to a sales charge. Class A shares of the Funds and any
other Goldman Sachs Fund purchased (i) by an individual, his spouse and his
minor children, and (ii) by a trustee, guardian or other fiduciary of a single
trust estate or a single fiduciary account, will be combined for the purpose of
determining whether a purchase will qualify for such right of accumulation and,
if qualifying, the applicable sales charge level. For purposes of applying the
right of accumulation, shares of the Funds and any other Goldman Sachs Fund
purchased by an existing client of the Private Client Services Division of
Goldman Sachs will be combined with Class A shares held by any other account
over which such client or the client's spouse exercises investment or voting
power. In addition, Class A shares of the Funds and Class A shares of any other
Goldman Sachs Fund purchased by partners, directors, officers or employees of
the same business organization, groups of individuals represented by and
investing on the recommendation of the same accounting firm, certain affinity
groups or other similar organizations (collectively, "eligible persons") may be
combined for the purpose of determining whether a purchase will qualify for the
right of accumulation and, if qualifying, the applicable sales charge level.
This right of accumulation is subject to the following conditions: (i) the
business organization's, group's or firm's agreement to cooperate in the
offering of the Funds' shares to eligible persons; and (ii) notification to the
Funds at the time of purchase that the investor is eligible for this right of
accumulation.
STATEMENT OF INTENTION (CLASS A)
================================
If a shareholder anticipates purchasing at least $50,000 of Class A shares
of a Fund alone or in combination with Class A shares of any other Goldman Sachs
Fund within a 13-month period, the shareholder may purchase shares of the Fund
at a reduced sales charge by submitting a Statement of Intention (the
"Statement"). Shares purchased pursuant to a Statement will be eligible for the
same sales charge discount that would have been available if all of the
purchases had been made at the same time. The shareholder or his Authorized
Dealer must inform Goldman Sachs that the Statement is in effect each time
shares are purchased. There is no obligation to purchase the full amount of
shares indicated in the Statement. A shareholder may include the value of all
Class A shares on which a sales charge has previously been paid as an
"accumulation credit" toward the completion of the Statement, but a price
readjustment will be made only on Class A shares purchased within ninety (90)
days before submitting the Statement. The Statement authorizes the Transfer
Agent to hold in escrow a sufficient number of shares
B-78
<PAGE>
which can be redeemed to make up any difference in the sales charge on the
amount actually invested. For purposes of satisfying the amount specified on
the Statement, the gross amount of each investment, exclusive of any
appreciation on shares previously purchased, will be taken into account.
CROSS-REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS
=================================================
A Fund shareholder should obtain and read the prospectus relating to any
other Fund, Goldman Sachs Fund or ILA Portfolio (as defined in the Prospectus)
and its shares or units and consider its investment objective, policies and
applicable fees before electing cross-reinvestment into that Fund or Portfolio.
The election to cross-reinvest dividends and capital gain distributions will not
affect the tax treatment of such dividends and distributions, which will be
treated as received by the shareholder and then used to purchase shares of the
acquired fund. Such reinvestment of dividends and distributions in shares of
other Goldman Sachs Funds or in units of ILA Portfolios is available only in
states where such reinvestment may legally be made.
AUTOMATIC EXCHANGE PROGRAM
==========================
A Fund shareholder may elect cross-reinvestment into an identical account
or an account registered in a different name or with a different address, social
security or other taxpayer identification number, provided that the account in
the acquired fund has been established, appropriate signatures have been
obtained and the minimum initial investment requirement has been satisfied. A
Fund shareholder should obtain and read the prospectus relating to any other
Goldman Sachs Portfolio and its shares and consider its investment objective,
policies and applicable fees and expenses before electing an automatic exchange
into that Goldman Sachs Portfolio.
SYSTEMATIC WITHDRAWAL PLAN
==========================
A systematic withdrawal plan (the "Systematic Withdrawal Plan") is
available to shareholders of a Fund whose shares are worth at least $5,000. The
Systematic Withdrawal Plan provides for monthly payments to the participating
shareholder of any amount not less than $50.
Dividends and capital gain distributions on shares held under the
Systematic Withdrawal Plan are reinvested in additional full and fractional
shares of the applicable Fund at net asset value. The Transfer Agent acts as
agent for the shareholder in redeeming sufficient full and fractional shares to
provide the amount of the systematic withdrawal payment. The Systematic
Withdrawal Plan may be terminated at any time. Goldman Sachs reserves the right
to initiate a fee of up to $5 per withdrawal, upon thirty (30) days written
notice to the shareholder. Withdrawal payments should not be considered to be
dividends, yield or income. If periodic withdrawals continuously exceed new
purchases and reinvested dividends and capital gains distributions, the
shareholder's original investment will be correspondingly reduced and ultimately
exhausted. The maintenance of a withdrawal plan concurrently with purchases of
additional Class A or Class B shares would be disadvantageous because of the
sales charge imposed on purchases of Class A shares or the imposition of a CDSC
on redemptions of Class A and Class B shares. The CDSC applicable to Class B
shares redeemed under a systematic withdrawal plan may be waived. See "How to
Invest -- Waiver or Reduction of Continent Deferred Sales Charge" in the
Prospectus. In addition, each withdrawal constitutes a redemption of shares,
and any gain or loss realized must be reported for federal and state income tax
purposes. A shareholder should consult his or her own tax adviser with regard
to the tax consequences of participating in the Systematic Withdrawal Plan. For
further information or to request a Systematic Withdrawal Plan, please write or
call the Transfer Agent.
B-79
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders
- --------------------------------------------------------------------------------
Dear Shareholders:
The U.S. equity market rewarded investors with excellent returns once
again in the 12-month period ended January 31, 1997. Most European markets
achieved significant gains as well, with several outpacing the U.S., while the
performance of Asian markets varied widely. We are pleased to report that most
of the Goldman Sachs equity funds performed very well in this generally
favorable global equity environment.
U.S. Stocks Continued to Climb Amid Heightened Volatility
The U.S. stock market surged to record levels during the period under
review, rising an impressive 26.3% (as measured by the Standard & Poor's 500
stock index). During 1996, the market advanced in a "staircase" pattern, where
notable gains are achieved within a relatively short time and are followed by a
period of choppy trading. For example, after a run-up from January through
mid-February, market volatility notably increased, as investor sentiment
vacillated between two contradictory concerns. With some economic news,
investors feared that the economy was growing too quickly, making higher
inflation a possibility, while other news caused them to worry that the economy
was slowing, putting earnings at risk. In May, investors briefly overcame their
fears and sent the market higher, but their concerns quickly re-emerged and
caused the market to settle into another choppy trading range that culminated in
a sharp sell-off in July.
By August, sentiment significantly improved when data indicated that
earnings growth was more resilient than generally expected and inflation
remained under control. Thus reassured, investors propelled stocks to record
highs during the second half of the period, with the Dow Jones Industrial
Average crossing the 6000 mark for the first time by mid-October. The ascent
continued through the end of the period, with the Dow climbing to 7000 by
mid-February 1997.
Though small-cap stocks led the market during the first half of the
year, the post-July rally was dominated by large-cap, growth companies.
Furthermore, the rally was very narrowly focused, with a handful of large-cap
stocks (primarily in the technology, finance and pharmaceutical sectors)
contributing substantially to the S&P 500 index's performance for the period.
After a Weak Start, Economic Growth Rebounded, Then Moderated
When the period began, lackluster consumer spending and the General
Motors strike restrained economic growth, but the economy still advanced faster
than expected, with first-quarter real GDP growth of 2.0% (annualized). Momentum
accelerated even more dramatically during the second quarter, as industrial
activity, automobile sales and home sales all showed significant improvement. As
a result, second-quarter real GDP rose a robust 4.7% (annualized), its highest
rate in two years.
The economy's torrid growth cooled markedly during the third quarter
with an annualized real GDP growth of 2.1%, largely due to lackluster consumer
spending and a widening U.S. trade deficit. This slowdown proved to be
temporary, however, as the economy strengthened from October through December.
Fourth-quarter real GDP
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Table of Contents
<S> <C>
Introduction/Market Overview............................................. 1
Goldman Sachs Balanced Fund.............................................. 4
Goldman Sachs Select Equity Fund......................................... 14
Goldman Sachs Growth and Income Fund..................................... 22
Goldman Sachs Capital Growth Fund........................................ 28
Goldman Sachs Small Cap Equity Fund...................................... 34
Goldman Sachs International Equity Fund.................................. 40
Goldman Sachs Asia Growth Fund........................................... 48
Financial Statements..................................................... 56
Notes to Financial Statements............................................ 64
Financial Highlights..................................................... 74
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
1
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders (continued)
growth was revised to 3.9% (annualized), reflecting a narrowing trade deficit,
rising consumer spending and accelerating manufacturing activity. Despite firm
growth, underlying inflation remained surprisingly mild. For all of 1996,
consumer prices rose only 2.9%. In January 1997, most indicators suggested that
the economy would continue to advance.
The U.S. Federal Reserve cut the Federal funds rate by 25 basis
points in January 1996, just prior to the start of the period, in response to
generally poor year-end economic conditions. Though stronger than expected
growth shifted investor expectations from further Federal Reserve interest rate
cuts to potential tightening, the Fed then left rates unchanged. As of January
31, 1997, the Federal funds rate remained at 5.25%.
The Dollar Resumed Its Climb Against the Yen and the Mark Following a Brief July
Slide
During the period under review, the dollar continued to strengthen,
rising to a 47-month high against the yen and a 31-month high against the mark.
Though the dollar declined briefly in July along with the U.S. stock market, it
quickly rebounded in August and continued to rally through the end of the
period. The dollar's climb was reflective of several developments, including the
relative strength of the U.S. economy, reductions in the budget deficit and
controlled inflation. Despite the run-up, Goldman Sachs' economists do not
expect a major impact on U.S. growth in 1997, nor do they anticipate a major
decrease in exports, as the dollar's effect on U.S. trade flows is relatively
small and stretched out over time. Furthermore, domestic demand in Canada and
Mexico, which together accounted for nearly one-third of U.S. exports in 1996,
is expected to rise.
The International Market Environment: European Equities Performed Well, Japan
Declined Sharply and Asian Markets Were Mixed Amid Increased Volatility
During the period under review, most global economies experienced
modest growth, but long-awaited recoveries in Europe and Japan fell short of
expectations. In Europe, several major economies, such as Germany and France,
continued to be plagued by weaker than expected manufacturing activity and
record-high unemployment, while others, such as the U.K., clearly accelerated.
In contrast to the mixed economic conditions, most European equity markets
performed very well, buoyed by healthy corporate profits. Though the Japanese
economy strengthened, equities declined due to concerns regarding the
sustainability of earnings growth as well as fears that the newly elected
government would delay deregulation. In January 1997, the already weak Japanese
market sold off sharply when the government announced an austerity program that
was expected to curb growth. In other Asian countries, key elections heightened
political uncertainty throughout the region and a marked slowdown in economic
growth increased volatility.
Outlook in the U.S.: Economic Growth Is Expected to Continue to Strengthen
Goldman Sachs' economists expect first-quarter real GDP growth to
slow to just under 2.0% (annualized) due to a widening trade deficit. However,
this slowdown should not be interpreted as any change in economic fundamentals,
as underlying demand remains firm and consumer confidence, income and employment
trends continue to support consumer spending. The favorable economic environment
of moderate growth and low inflation appears likely to persist in the near term,
which could translate to a seventh year of profit growth for U.S. corporations
in 1997 and another good year for U.S. equities, though not likely as strong as
last year. As always, equity performance can be affected by changes in the
economic environment, such as higher than expected inflation, which could lead
to a Fed tightening by midyear, or an unforeseen faltering of economic growth.
After the outstanding performance of the past two years, it is
important to maintain realistic expectations from your equity investments. As
increased volatility during 1996 demonstrated, equities can go down as well as
up. Over the long run, however, stocks have historically outperformed other
asset classes, rewarding investors committed to a long-term investment horizon.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
A Major Addition to Our Active Equity Management Team
We are pleased to announce that we have recently acquired Liberty
Investment Management, a Tampa, Florida-based investment advisory firm with an
impressive 16-year track record. Liberty's Chief Investment Officer, Herbert
Ehlers, and his portfolio management team have assumed primary responsibility
for the Goldman Sachs Capital Growth Fund, which they will manage using a
"growth at a reasonable price" investment style. The Liberty group adds both
breadth and depth to the Goldman Sachs U.S. Active Equity team, and we look
forward to working with them.
In conclusion, thank you for making the Goldman Sachs equity funds part of
your long-term financial plan.
Sincerely,
/s/ David B. Ford /s/ John P. McNulty
David B. Ford John P. McNulty
Co-Head, Co-Head,
Goldman Sachs Goldman Sachs
Asset Management Asset Management
March 3, 1997
- --------------------------------------------------------------------------------
3
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Balanced Fund
- --------------------------------------------------------------------------------
Objective and Investment Approach
The Goldman Sachs Balanced Fund seeks to provide investors with a
combination of long-term growth of capital and current income by investing in a
diversified portfolio that includes both equity and fixed income securities.
Under normal market conditions, the fund is expected to maintain an asset mix of
45% to 65% in equity securities, with the remainder (at a minimum 25%) in fixed
income securities. The fund's portfolio management team will review the fund's
asset mix on a regular basis and adjust it to reflect changes in the economic
environment.
Stocks are selected using a value style, identifying those judged to
be inexpensive relative to their expected long-term earnings and ability to pay
dividends. We also consider the degree to which a company's management is
committed to increasing value for shareholders.
In the fixed income portion of the portfolio, we actively manage the
portfolio within a risk-controlled framework. We seek to minimize interest rate
risk relative to the portfolio's benchmark, and focus on seeking to add value
through sector selection, security selection and yield curve strategies.
Performance Review: Equity, Fixed Income and Asset Allocation Contributed to
Strong Results
<TABLE>
<CAPTION>
Fund Total Return
(based on net Benchmark
asset value) Total Return+
------------ -------------
<S> <C> <C>
Class A (1/31/96 - 1/31/97)* 18.59% 15.51%
Class B (5/1/96 - 1/31/97)* 16.22% 14.99%
</TABLE>
* Class A and B share performance assumes reinvestment of all dividends and
distributions, a complete redemption at the net asset value at the end of the
period and no initial sales charge or contingent deferred sales charge.
Performance for Class B shares is a cumulative total return (not annualized)
from their inception through the end of the period.
+ The benchmark is a combination of the S&P 500 stock index (weighted at 55%)
and the Lehman Brothers Aggregate Bond Index (weighted at 45%).
We are pleased to report that during the period under review, the
fund's Class A and Class B shares outperformed the benchmark. In addition, the
fund's Class A shares ranked within the top 15% of the Lipper balanced fund
category (35th of 281) for the 12-month period ended January 31, 1997, according
to Lipper Analytical Services, Inc. (Please note that Lipper rankings do not
take sales charges into account and that past performance is not a guarantee of
future results. Class B shares were not ranked because they did not exist during
the full year.)
The equity and fixed income portions of the fund both performed
favorably, with equity investments contributing most to fund results. In
addition, our asset allocation decisions also benefited performance. During the
spring of 1996, we reduced the fund's equity weightings in favor of fixed income
investments, which worked in its favor when equities fell sharply in July. In
October, we increased the fund's equity weighting, just prior to a significant
rally in the stock market. As of January 31, 1997, the fund's asset mix based on
net assets was 54% in equities, 42% in fixed income and the remainder in cash
equivalents.
Best Performing Equity Investments Included Technology, Finance and Energy
Stocks
The fund's best performing stocks came from a wide range of
industries, particularly technology, finance and energy. Technology holdings
that performed well included Intel Corp., the dominant microprocessor
manufacturer, which we sold after it climbed sharply due to stronger than
expected personal computer sales and reached our target price, and Avnet, Inc.,
the second largest distributor of semiconductors and other electronic
components. In the financial sector, BankAmerica Corp. increased its focus on
aggressive capital management, and NationsBank Corp. began to realize the
benefits of cost cuts. Top-performing energy-related investments were Tosco
Corp., an oil refiner and distributor, which continued its ambitious acquisition
strategy, and Texaco Inc., which benefited from higher petroleum prices and a
successful restructuring program. Disappointing performers included three
companies that suffered from
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
overcapacity in their respective industries: Georgia-Pacific Corp. and Stone
Container Corp., both manufacturers of paper products, and Geon Corp., a
manufacturer of polyvinyl chloride.
One of the fund's new investments was Unicom Corp., an electric
utility that operates 12 nuclear units at six sites. Unicom generates excess
capital and, unlike many other electric utilities, has no utility power purchase
problems. We established a position after its stock price declined due to a
mandated increase in spending on operations and maintenance, an issue that
management believes will not impair the company's long-term prospects. During
the period, we sold several stocks after they appreciated and reached our price
targets, including Anheuser-Busch Co., Inc., the world's largest brewer, and
Greenpoint Financial Corp., a New York-based thrift.
<TABLE>
<CAPTION>
Top 10 Equity Holdings as of January 31, 1997
Percentage of
Total
Company Line of Business Net Assets
<S> <C> <C>
Aetna Inc. Healthcare 1.9%
Management
Tenet Healthcare Corp. Hospitals 1.9%
Cigna Corp. Insurance 1.7%
Lear Corp. Autoparts/Original 1.7%
Equipment
Brunswick Corp. Pleasure 1.7%
Boats/Marine
Engines
Goodyear Tire & Rubber Co. Tire and Rubber 1.6%
Products
Dean Witter Discover & Co. Financial Services 1.6%
Avnet, Inc. Electronic 1.5%
Components
Distributor
Philip Morris Companies, Tobacco and Food 1.5%
Inc. Products
Owens-Illinois, Inc. Packaging 1.5%
</TABLE>
Corporate and Emerging Market Debt Sectors Led the Fund's Fixed Income
Performance
The fixed income sectors that contributed most to the fund's
performance were its corporate bond holdings and emerging market debt
securities. Corporate bonds benefited when many companies reported positive
earnings growth throughout the period. Emerging market debt was one of the
fund's smaller allocations during the year but performed extremely well due to
positive emerging country credit trends and supportive cash flows resulting from
global investors' persistent search for incremental yield. In addition, the
fund's investments in the mortgage and asset-backed sectors also performed well,
reflecting healthy investor demand.
The fund's largest fixed income allocation was mortgage-backed
securities (MBS), which accounted for a 12.9% position in terms of total net
assets, up from 10.0% a year ago. The MBS sector fared particularly well during
the first half of the period, when interest rates rose and prepayment fears
abated. We gradually trimmed the fund's exposure in the corporate bond sector to
9.8%, down from 13.2% a year ago, as it became more fully valued. The fund's
asset-backed securities (ABS) weighting was 4.8%, and they continued to offer
incremental yield over similar duration Treasuries. U.S. Treasuries, with an
8.5% allocation, were used together with futures to manage the fund's interest
rate risk. Finally, 3.3% of the fund was invested in emerging market debt, where
we stressed higher credit, short-duration bonds, and 0.7% was invested in
government agency securities.
Outlook
We believe that, overall, the stock market is moderately overvalued
and is therefore unlikely to match the strong return it achieved in 1996.
However, it is important to note that even after last year's rally, the fund's
equity holdings continue to be attractively valued. We expect that our emphasis
on using extensive fundamental research to identify stocks selling below their
- --------------------------------------------------------------------------------
5
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Balanced Fund (continued)
- --------------------------------------------------------------------------------
intrinsic value will continue to serve us well in 1997's potentially more
challenging stock market environment.
We have a relatively cautious view of the fixed income markets in the
coming months due to a possible tightening by the Federal Reserve later in the
year, which would impact the prices of fixed income securities. In the MBS
market, the pace of mortgage prepayments remains stable, and we continue to
identify specific securities that present attractive investment opportunities.
We have a moderately optimistic view for the corporate sector, where we will
continue to emphasize short-duration bonds that offer attractive incremental
yield over Treasuries. Finally, we believe ABS still offer attractive value
relative to other similarly rated securities, and we expect new supply to
continue to be met with enthusiastic demand.
Going forward, we will continue to actively allocate the portfolio's
asset mix between the equity and fixed income sectors to take advantage of
changing market conditions throughout the coming year.
/s/ Ronald E. Gutfleish /s/ Jonathan A. Beinner
Ronald E. Gutfleish Jonathan A. Beinner
Senior Portfolio Manager, Co-Head,
U.S. Active Equity Value U.S. Fixed Income
/s/ G. Lee Anderson /s/ c. Richard Lucy
G. Lee Anderson C. Richard Lucy
Portfolio Manager, Co-Head,
U.S. Active Equity Value U.S. Fixed Income
/s/ Eileen A. Aptman /s/ Richard H. Buckholz
Eileen A. Aptman Richard H. Buckholz
Portfolio Manager, Portfolio Manager,
U.S. Active Equity Value U.S. Fixed Income
March 3, 1997
- --------------------------------------------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Balanced Fund
January 31, 1997
- --------------------------------------------------------------------------------
The following graphs show the value as of January 31, 1997, of a $10,000
investment made (with and without the maximum sales charge of 5.5% and
redemption charge of 5.0% for Class A and B, respectively) on the inception date
of each class. For comparative purposes, the performance of the Fund's
benchmarks (the Standard and Poor's 500 index ("S&P 500") and the Lehman
Brothers Aggregate Bond Index (LBABI)) are shown for the appropriate time
periods. All performance data shown represents past performance and should not
be considered indicative of future performance which will fluctuate with changes
in market conditions. These performance fluctuations will cause an investor's
shares, when redeemed, to be worth more or less than their original cost.
<TABLE>
<CAPTION>
Class A
[LINE GRAPH APPEARS HERE]
GS Balanced GS Balanced
Class A Class A
(w/sales charge) (no sales charge) LBABI S&P 500
---------------- ----------------- ----- -------
<S> <C> <C> <C> <C>
10/12/94 9,450 10,000 10,000 10,000
1/31/95 9,532 10,087 10,233 10,184
1/31/96 12,211 12,922 11,966 14,123
1/31/97 14,488 15,331 12,357 17,842
<CAPTION>
Class B
[LINE GRAPH APPEARS HERE]
GS Balanced GS Balanced
Class B Class B
(no redemp. charge) (w/redemp. charge) LBABI S&P 500
------------------- ------------------ ----- -------
<S> <C> <C> <C> <C>
5/1/96 10,000 10,000 10,000 10,000
1/31/97 11,622 11,122 10,642 12,218
</TABLE>
---------------------------------------
Average Annual Total Return
---------------------------------------
One Year Since Inception/(a)/
------------------------------- ------------------ -------------------
Class A, no sales charge 18.59% 20.32%
------------------------------- ------------------ -------------------
Class A, w/sales charge 12.07% 17.41%
------------------------------- ------------------ -------------------
Class B, no redemption charge N/A 16.22%/(b)/
------------------------------- ------------------ -------------------
Class B, w/redemption charge N/A 11.22%/(b)/
------------------------------- ------------------ -------------------
/(a)/ Class A and B shares commenced operations October 12, 1994 and May 1,
1996, respectively.
/(b)/ An aggregate total return (not annualized) is shown instead of an average
annual total return since this class has not completed a full twelve
months of operations.
7
<PAGE>
Statement of Investments
- --------------------------------------------------------------------
Goldman Sachs Balanced Fund
January 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Shares Description Value
====================================================================
<S> <C> <C>
Common Stocks--53.0%
Airlines--1.8%
7,700 AMR Corp.* $ 619,850
32,600 Continental Airlines, Inc.* 908,725
- --------------------------------------------------------------------
1,528,575
- --------------------------------------------------------------------
Appliance Manufacturer--0.9%
28,600 Sunbeam Corp. 793,650
- --------------------------------------------------------------------
Auto/Original Equipment Manufacturer--1.7%
38,200 Lear Corp.* 1,427,725
- --------------------------------------------------------------------
Auto/Vehicle--1.0%
25,600 Ford Motor Co. 824,400
- --------------------------------------------------------------------
Banks--4.5%
10,300 BankAmerica Corp. 1,149,738
5,300 Chase Manhattan Corp. 490,250
9,400 Fleet Financial Group, Inc. 507,600
9,300 NationsBank Corp. 1,004,400
7,400 Republic Bank of New York Corp. 655,825
- --------------------------------------------------------------------
3,807,813
- --------------------------------------------------------------------
Chemicals-Commodity--1.1%
31,400 Geon Co. 588,750
7,600 Union Carbide Corp. 344,850
- --------------------------------------------------------------------
933,600
- --------------------------------------------------------------------
Defense--2.1%
17,900 McDonnell Douglas Corp. 1,203,775
6,200 Northrop Grumman Corp. 484,375
1,900 Thiokol Corp. 106,400
- --------------------------------------------------------------------
1,794,550
- --------------------------------------------------------------------
Department Stores--0.8%
13,900 Sears Roebuck & Co. 667,200
- --------------------------------------------------------------------
Electric Utilities--2.8%
5,500 CMS Energy Corp. 184,250
43,000 Long Island Lighting Co. 978,250
49,600 Unicom Corp. 1,171,800
- --------------------------------------------------------------------
2,334,300
- --------------------------------------------------------------------
Food--1.5%
40,200 Chiquita Brands International, Inc. 587,925
4,000 Unilever Inc. 658,000
- --------------------------------------------------------------------
1,245,925
- --------------------------------------------------------------------
Forest Products--1.1%
12,400 Georgia Pacific Corp. 912,950
- --------------------------------------------------------------------
Health Suppliers/Services--1.3%
23,300 Baxter International, Inc. 1,074,713
- --------------------------------------------------------------------
Healthcare Management--3.8%
20,400 Aetna Inc. 1,611,600
57,800 Tenet Healthcare Corp.* 1,560,600
- --------------------------------------------------------------------
3,172,200
- --------------------------------------------------------------------
Home Builders--1.8%
18,200 Centex Corp. 709,800
28,200 Lennar Corp. 750,825
- --------------------------------------------------------------------
1,460,625
- --------------------------------------------------------------------
Insurance-Life--2.5%
9,500 Cigna Corp. 1,440,438
11,700 Lincoln National Corp. 627,413
- --------------------------------------------------------------------
2,067,851
- --------------------------------------------------------------------
Insurance-Property and Casualty--1.6%
9,200 Allmerica Financial Corp. 336,950
16,100 Partner Re Holding Ltd. 571,550
12,700 Tig Holdings, Inc. 439,738
- --------------------------------------------------------------------
1,348,238
- --------------------------------------------------------------------
Integrated Oil--2.6%
8,100 Atlantic Richfield Co. 1,071,225
10,300 Texaco, Inc. 1,090,513
- --------------------------------------------------------------------
2,161,738
- --------------------------------------------------------------------
Logistics/Rail--1.0%
30,400 Canadian Pacific Ltd. 824,600
- --------------------------------------------------------------------
Logistics/Trucking--1.2%
39,600 Consolidated Freightways, Inc. 1,004,850
- --------------------------------------------------------------------
Oil Refining & Marketing--1.9%
12,800 Ashland Inc. 552,000
11,300 Tosco Corp. 1,000,050
- --------------------------------------------------------------------
1,552,050
- --------------------------------------------------------------------
Packaging--1.5%
52,500 Owens-Illinois Inc.* 1,246,875
- --------------------------------------------------------------------
- --------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial
statements.
8
<PAGE>
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Shares Description Value
====================================================================
<S> <C> <C>
Common Stocks (continued)
Recreational Products--1.7%
55,500 Brunswick Corp. $ 1,394,438
- --------------------------------------------------------------------
Security and Commodity Brokers, Dealers and Services--0.5%
13,100 Lehman Brothers Holdings, Inc. 414,288
- --------------------------------------------------------------------
Semiconductors & Electronics--1.5%
20,700 Avnet Inc. 1,280,813
- --------------------------------------------------------------------
Software--0.5%
13,800 Autodesk Inc. 436,425
- --------------------------------------------------------------------
Specialty Finance--1.6%
34,200 Dean Witter Discover & Co. 1,303,875
- --------------------------------------------------------------------
Steel--1.0%
20,200 AK Steel Holding Corp. 813,050
- --------------------------------------------------------------------
Supermarkets--2.0%
56,300 Fleming Companies, Inc. 907,838
24,600 Supervalu, Inc. 759,525
- --------------------------------------------------------------------
1,667,363
- --------------------------------------------------------------------
Textiles--1.3%
27,500 Fruit of The Loom, Inc.* 1,103,438
- --------------------------------------------------------------------
Tire & Other Related Rubber Products--1.6%
24,000 Goodyear Tire & Rubber Co. 1,308,000
- --------------------------------------------------------------------
Tobacco--2.8%
4,200 Loews Corp. 415,275
10,700 Philip Morris Companies, Inc. 1,271,963
12,100 RJR Nabisco, Inc. 396,275
8,500 Universal Corp. 263,500
- --------------------------------------------------------------------
2,347,013
- --------------------------------------------------------------------
Total Common Stocks
(Cost $35,773,086) $44,253,131
====================================================================
Preferred Stocks--0.1%
Media Content--0.1%
63 Time Warner, Inc. 10.25% $ 69,064
- --------------------------------------------------------------------
Tobacco--0.0%
3,400 RJR Nabisco, Inc., class C 9.25% 22,525
- --------------------------------------------------------------------
Total Preferred Stocks
(Cost $84,320) $ 91,589
====================================================================
Rights--1.1%
Forest Products--0.7%
42,000 Stone Container Corp. * exp. 08/08/98 $ 567,000
Technology Capital Goods--0.4%
10,800 Teradyne, Inc.* exp. 03/26/00 333,450
- --------------------------------------------------------------------
Total Rights
(Cost $923,718) $ 900,450
====================================================================
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
====================================================================
<S> <C> <C> <C>
Fixed Income--41.5%
Asset-Backed Securities--4.8%
Airplanes Pass Through Trust Series 1, Class C
$ 100,000 8.15% 03/15/19 $ 102,655
Asset Securitization Corp., Series 1996, Class A1
250,000 6.88 11/13/26 249,609
Case Equipment Loan Trust, Series 1995-A, Class A
74,286 7.30 03/15/02 75,124
Chemical Bank Master Credit Card Trust, Series 1995-2, Class A
140,000 6.23 06/15/03 139,343
Chevy Chase Auto Receivables Trust Series 1995-2, Class A
74,323 5.80 06/15/02 74,137
Discover Card Master Trust 1994-2, Class A
70,000 5.83 10/16/04 70,613
Discover Card Master Trust 1996-2, Class A
110,000 5.70 07/18/05 110,550
Discover Card Master Trust 1996-4, Class A
740,000 5.86 10/16/13 751,329
Discover Card Master Trust 1996-4, Class B
420,000 6.03 10/16/13 424,460
Fasco Auto Trust, Series 1996-1
266,114 6.65 11/15/01 267,223
Fingerhut Master Trust, Series 1996-1, Class A
200,000 6.45 02/20/02 200,936
Navistar Financial Trust, Series 1995-A, Class A2
134,590 6.55 11/20/01 135,347
Navistar Financial Trust, Series 1995-b, Class A3
120,000 6.05 04/15/02 120,000
Sears Credit Account Master Trust, Series 1995-2, Class A
700,000 8.10 06/15/04 733,026
- --------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial
statements.
9
<PAGE>
Statement of Investments
- --------------------------------------------------------------------
Goldman Sachs Balanced Fund (continued)
January 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
====================================================================
<S> <C> <C> <C>
Asset-Backed Securities (continued)
Sears Credit Card Master Trust, Series 1995-3, Class A
$ 70,000 7.00% 10/15/04 $ 71,268
Standard Credit Card Master Trust, Series 1994-4, Class A
110,000 8.25 11/07/03 117,322
Standard Credit Card Master Trust, Series 1995-1, Class A
360,000 8.25 01/07/07 389,135
- --------------------------------------------------------------------
Total Asset-Backed Securities
(Cost $4,019,726) $ 4,032,077
====================================================================
Corporate Bonds--9.8%
Finance Bonds--3.6%
BankAmerica Corp.
$ 500,000 7.75% 07/15/02 $ 520,600
Capital One Bank
200,000 8.33 02/10/97 200,056
250,000 8.13 02/27/98 254,825
Conseco Finance
120,000 8.70 11/15/26 122,912
Continental Bank
100,000 12.50 04/01/01 120,501
Countrywide Funding Corp.
100,000 6.08 07/14/99 99,368
150,000 8.00 12/15/26 147,029
Edison Mission Energy Funding Corp.
100,000 6.77 09/15/03 99,852
Fleet Mortgage Group, Inc.
250,000 6.50 06/15/00 248,888
Golden West Financial Corp.
200,000 10.25 12/01/00 223,894
Meditrust, Inc.
120,000 7.82 09/10/26 128,021
Mic Finance Trust
80,000 8.38 02/01/27 80,442
Olympic Financial Ltd.
95,000 13.00 05/01/00 107,350
PXRE Cap Trust
65,000 8.85 02/01/27 65,847
Signet Banking Corp.
$ 500,000 9.63% 06/01/99 $ 531,870
Washington Real Estate
55,000 7.13 08/13/03 54,745
- --------------------------------------------------------------------
Total Finance Bonds
(Cost $3,035,271) $ 3,006,200
====================================================================
Industrial Bonds--5.6%
360 Communications Co.
$ 195,000 7.13% 03/01/03 $ 193,518
Auburn Hills Trust
90,000 12.00 05/01/20 134,352
Blockbuster Entertainment
50,000 6.63 02/15/98 49,995
Chelsea GCA Realty
226,000 7.75 01/26/01 228,362
DVI Equipment Lease Trust
434,745 6.55 07/10/04 434,605
Ford Motor Credit Co.
40,000 8.38 01/15/00 42,038
General Motors Acceptance Corp.
170,000 7.13 05/10/00 173,087
210,000 5.63 02/05/01 202,810
H + T Master Trust, Class A2
220,000 8.18 08/15/02 220,000
K Mart Corp.
40,000 9.55 06/30/98 40,290
40,000 9.60 09/15/98 40,845
Loewen Group International
50,000 7.75 10/15/01 50,000
News America Holdings, Inc.
160,000 7.50 03/01/00 163,784
Northwest Airlines
217,076 8.97 01/02/15 226,558
NWA
68,025 8.26 03/10/06 71,149
- --------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial
statements.
10
<PAGE>
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
====================================================================
<S> <C> <C> <C>
Corporate Bonds (continued)
Industrial Bonds (continued)
Oryx Energy Co.
$ 245,000 9.50% 11/01/99 $ 259,252
RJR Nabisco Inc.
135,000 8.00 07/15/01 136,184
160,000 8.63 12/01/02 164,654
Rogers Cablesystems, Inc.
115,000 9.63 08/01/02 119,600
Tele-Communications, Inc.
295,000 6.19 09/15/03 292,956
125,000 9.65 10/01/03 133,951
20,000 6.82 09/15/10 19,899
Tenet Healthcare Corp.
60,000 9.63 09/01/02 65,100
Time Warner, Inc.
375,000 7.45 02/01/98 378,776
125,000 9.63 05/01/02 139,444
250,000 7.98 08/15/04 256,243
Tosco Corp.
110,000 7.00 07/15/00 110,793
U.S. Home Corp.
70,000 7.95 03/01/01 68,250
USI American Holdings Corp.
60,000 7.25 12/01/06 58,540
Viacom International
80,000 9.13 08/15/99 81,800
95,000 10.25 09/15/01 103,550
- --------------------------------------------------------------------
Total Industrial Bonds
(Cost $4,650,412) $ 4,660,385
====================================================================
Utility Bonds--0.6%
Arkla Inc.
$ 250,000 9.20% 12/18/97 $ 255,665
Central Maine Power Co.
100,000 7.38 01/01/99 100,138
160,000 7.45 08/30/99 159,134
- --------------------------------------------------------------------
Total Utility Bonds
(Cost $521,661) $ 514,937
====================================================================
- --------------------------------------------------------------------
====================================================================
Total Corporate Bonds
(Cost $8,207,344) $ 8,181,522
====================================================================
Government Bonds--1.2%
Australia Commonwealth
AUD1,000,000 7.50% 07/15/05 $ 769,138
Province of Quebec
$ 200,000 13.25 09/15/14 238,976
- --------------------------------------------------------------------
Total Government Bonds
(Cost $1,033,387) $ 1,008,114
====================================================================
Emerging Market Debt--3.3%
Argentina Bocan
$ 144,111 5.69% 04/01/01 $ 138,490
Asia Pulp and Paper International Finance Co.
100,000 7.26(a) 04/03/97 98,614
200,000 8.30 06/28/99 198,118
90,000 10.25 10/01/00 90,754
Banco De Commercio Exterior
30,000 8.63 06/02/00 30,979
BCO De Colombia
110,000 8.63 06/02/00 113,590
Bridas Corp.
170,000 12.50 11/15/99 181,433
Bridas Corp. Gtd Euro Medium
60,000 9.50 06/17/99 60,147
Corp. Andina de Fomento
160,000 7.25 04/30/98 161,774
Emp Ica Soc Contro
110,000 9.75 02/11/98 111,440
Empresa Col Petroleos
80,000 7.25 07/08/98 80,566
Financiera Energy Nacional
230,000 5.88 02/17/98 226,062
60,000 8.13 04/09/98 60,347
200,000 8.46 06/19/98 201,876
80,000 9.38 06/15/06 82,847
- --------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial
statements.
11
<PAGE>
Statement of Investments
- --------------------------------------------------------------------
Goldman Sachs Balanced Fund (continued)
January 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
====================================================================
<S> <C> <C> <C>
Emerging Market Debt (continued)
Grupo Industrial Durango
$ 120,000 12.00% 07/15/01 $ 127,978
Grupo Televisa
20,000 11.38 05/15/03 21,425
Imexsa Export Trust
100,000 10.13 05/31/03 104,190
Inst Fomento Industrial
290,000 8.38 07/29/01 295,707
PT Indah Kiat
50,000 8.88 11/01/00 49,518
Republic of Argentina
89,600 8.63 04/06/98 90,730
150,000 5.63 04/01/00 75,600
Sampoerna International
50,000 8.38 06/15/06 51,208
YPF Sociedad Anonima
111,483 7.50 10/26/02 113,132
- --------------------------------------------------------------------
Total Emerging Market Debt
(Cost $2,710,872) $ 2,766,525
====================================================================
Government Agency Obligations--0.7%
Federal National Mortgage Association
$ 520,000 8.50% 02/01/05 $ 545,917
- --------------------------------------------------------------------
Total Government Agency Obligations
(Cost $566,963) $ 545,917
====================================================================
Mortgage Backed Obligations--12.9%
Federal Home Loan Mortgage Corp.
$ 2,000,000 7.50% TBA-30yr/(b)/ $ 2,003,740
Federal National Mortgage Association
2,000,000 8.00 TBA-30yr/(b)/ 2,042,500
1,000,000 6.50 TBA-15yr/(b)(d)/ 990,930
95,702 8.50 09/01/06/(d)/ 100,068
119,291 8.50 03/01/07/(d)/ 124,733
677,419 8.50 03/01/10/(d)/ 707,985
1,000,000 3.50 05/25/19 869,370
====================================================================
Government National Mortgage Association
$ 1,000,000 7.50% TBA-30yr/(b)/ $ 1,002,180
963,086 7.50 05/15/23 969,404
1,005,709 7.00 07/15/23 990,311
1,000,000 7.00 08/15/23 984,690
- --------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $10,687,107) $10,785,911
====================================================================
Sovereign Credit--0.2%
State of Israel
$ 150,000 6.38% 12/15/05 $ 141,983
- --------------------------------------------------------------------
Total Sovereign Credit
(Cost $139,082) $ 141,983
====================================================================
U.S. Treasury Obligations--8.5%
United States Treasury Bonds
$ 470,000 12.00% 08/15/13/(d)/ $ 666,592
120,000 8.75 05/15/17/(d)/ 144,619
30,000 8.88 08/15/17 36,595
580,000 8.75 05/15/20 704,068
160,000 8.75 08/15/20/(d)/ 194,400
680,000 7.63 02/15/25 743,430
United States Treasury Notes
1,200,000 6.88 08/31/99 1,223,628
1,000,000 6.13 07/31/00 999,220
900,000 7.88 11/15/04 977,202
United States Treasury Principal Only Stripped Securities/(a)/
80,000 6.03/(a)/ 08/15/99 68,774
740,000 6.55/(a)/ 11/15/04/(d)/ 447,552
320,000 6.59/(a)/ 05/15/05 186,781
2,200,000 7.09/(a)/ 02/15/19 473,968
890,000 7.10/(a)/ 05/15/20 175,205
- --------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $7,102,563) $ 7,042,034
====================================================================
- --------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial
statements.
12
<PAGE>
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
====================================================================
<S> <C> <C> <C>
Yankee Bonds--0.1%
Korea Electric Power
$ 93,927 7.40% 04/01/16 $ 93,712
- --------------------------------------------------------------------
Total Yankee Bonds
(Cost $90,825) $ 93,712
====================================================================
Total Fixed Income
(Cost $34,557,869) $34,597,795
- --------------------------------------------------------------------
Short-Term Obligations--0.2%
Argentina Treasury Bill
$ 40,000 6.00%/(a)/ 02/14/97 $ 39,896
Banco Nacional de Com
50,000 10.63 06/23/97 51,291
Republic of Argentina
90,000 6.29(a) 05/16/97 88,166
- --------------------------------------------------------------------
Total Short-Term Obligations
(Cost $179,353) $ 179,353
====================================================================
Repurchase Agreement--11.0%
Joint Repurchase Agreement Account
$ 9,200,000 5.63% 02/03/97/(d)/ $ 9,200,000
- --------------------------------------------------------------------
Total Repurchase Agreement
(Cost $9,200,000) $ 9,200,000
====================================================================
Total Investments
(Cost $80,718,346)/(c)/ $89,222,318
====================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $ 9,461,225
Gross unrealized loss for investments in which
cost exceeds value (981,857)
- --------------------------------------------------------------------
Net unrealized gain $ 8,479,368
====================================================================
<CAPTION>
- --------------------------------------------------------------------
====================================================================
Futures contracts open at January 31, 1997 are as follows:
Number of
Contracts Settlement Unrealized
Type Long(e) Month Gain(Loss)
- ------------------------- ------------ --------------- -----------
<S> <C> <C> <C>
2-Year U.S. Treasury Note 5 March 1997 $(3,438)
10-Year U.S. Treasury Bond 15 March 1997 (25,500)
30-Year U.S. Treasury Bond 2 March 1997 (3,969)
S&P 500 Stock Index 4 March 1997 123,100
- -------------------------------------------------------------------
$90,193
- -------------------------------------------------------------------
</TABLE>
* Non-income producing security.
/(a)/ The interest rate disclosed for these securitites represents effective
yields to maturity.
/(b)/ TBA (To Be Assigned) securities are purchased on a forward commitment
basis with an approximate (generally +/-2.5%) principal amount and no
definite maturity date. The actual principal amount and maturity date will
be determined upon settlement when the specific mortgage pools are
assigned.
/(c)/ The aggregate cost for federal income tax purposes is $80,742,950.
/(d)/ Portions of these securities are being segregated as collateral for
futures contracts, TBA (To Be Assigned) securities, covered short sales
and/or mortgage dollar rolls.
/(e)/ Each 2-Year U.S. Treasury Note contract represents $200,000 in notional
par value. Each 10-Year and 30-Year U.S. Treasury Bond contract represents
$100,000 in notional par value. Each S&P 500 Stock Index represents
$50,000 in notional par value. The total net notional amount and market
value at risk are $2,900,000 and $4,463,969, respectively. The
determination of notional amounts does not consider market risk factors
and therefore notional amounts as presented here are indicative only of
volume of activity and not a measure of market risk.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
13
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Select Equity Fund
- --------------------------------------------------------------------------------
Objective and Investment Approach
The Goldman Sachs Select Equity Fund is designed to provide investors with
a broadly diversified portfolio that can be used as a core holding on which to
build an investment program. The fund's investment objective is to provide
investors with long-term growth of capital and dividend income through
investment in a broadly diversified portfolio of predominantly large-cap and
blue-chip equity securities representing all major sectors of the U.S. economy.
The fund's mandate is to remain fully invested with industry diversification,
capitalization and risk characteristics similar to the aggregate U.S. stock
market as represented by the S&P 500 stock index. Therefore, the fund's relative
performance compared with the market comes almost exclusively from stock
selection within sectors. We believe the fund offers investors an attractive
combination of value and growth, without assuming more risk than the broad
market.
The fund employs a disciplined approach that combines fundamental
investment research provided by the Goldman Sachs Global Investment Research
Department with quantitative analysis generated by the Asset Management
Division's proprietary model. Our quantitative system evaluates each stock using
many different criteria including valuation measures, growth expectations,
earnings momentum and risk. It also objectively analyzes the impact of current
economic conditions on different types of stocks. Those stocks ranked highly by
both our quantitative model and by Goldman Sachs research are selected for the
fund's portfolio.
Performance Review: Quantitative Model Contributed to the Fund's Performance
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fund Total
Return S&P 500
(based on net Total
asset value) Return
----------- ------
<S> <C> <C>
Class A (1/31/96 -1/31/97)* 23.75% 26.25%
Class B (5/1/96 -1/31/97)* 18.59% 22.18%
Institutional (1/31/96 -1/31/97)* 24.63% 26.25%
Service (6/7/96 - 1/31/97)* 15.92% 18.36%
</TABLE>
- --------------------------------------------------------------------------------
* Class A, B, Institutional and Service share performance assumes reinvestment
of all dividends and distributions, a complete redemption at the net asset value
at the end of the period and no initial sales charge or contingent deferred
sales charge. Performance for Class B and Service shares is a cumulative total
return (not annualized) from their inception through the end of the period.
During the period, the fund achieved strong absolute returns, with most of
its gains occurring in the second half of the year. When the period began, the
fund performed well primarily due to successful stock selection. The Research
Department's qualitative ratings were particularly helpful early in the period,
when its analysis helped the fund steer clear of underperforming stocks. During
the latter half of the year, most of the fund's positive performance came from
the Asset Management Division's quantitative model.
Of the three themes considered by our quantitative model -- value, growth
and low-risk -- stocks with value-oriented features, such as low price/earnings
ratios, received the highest weighting during most of the period. This emphasis
did not work in the fund's favor during the second and third quarters of 1996,
when stocks with growth characteristics (strong near-term growth expectations
and high price/earnings multiples) outperformed value-oriented stocks. In the
fourth quarter, however, our emphasis on value proved to be extremely
successful, as stocks with value characteristics soared to record highs and
outperformed the other themes by a substantial margin. As a result of this
dramatic rebound, value emerged as the dominant investment style for the year.
Despite the positive results from our quantitative model, the fund
underperformed the index because it was
- --------------------------------------------------------------------------------
14
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
unable to keep pace with the dramatic outperformance of the largest 50 stocks,
which accounted for a significant portion of the market's gains. In addition,
the fund held a slightly higher cash position than usual as the volume of new
assets invested in the fund rapidly increased, particularly during the fourth
quarter, when the top 50 stocks surged. To address this issue, at the end of
1996 the fund instituted new procedures to ensure that cash balances will be
invested more rapidly. Furthermore, we expect that any future market advance
will broaden to include stocks beyond the top 50.
The fund's best performers were large-capitalization stocks from a wide
range of sectors, including banks (BankAmerica Corp. and NationsBank Corp.),
technology companies (Intel Corp., Microsoft Corp. and IBM Corp.), consumer
staples (Procter & Gamble Co.), electrical equipment (General Electric Co.) and
tobacco (Philip Morris Companies, Inc.).
Stocks that fell short of our expectations included some of the fund's
utility, telecommunication and oil investments such as Unicom Corp., Airtouch
Communications, Inc. and Tenneco, Inc.
Portfolio Composition: Model Increasingly Favored Stocks With Defensive
Characteristics
As of January 31, 1997, the fund held 141 stocks. While its sector
exposures were generally in line with the S&P 500 index, the fund was
overweighted in electric/gas (5.8% for the fund versus 3.3% for the S&P 500) and
energy (10.1% versus 8.0%) and underweighted in consumer nondurables (10.2%
versus 12.9%) and telecommunications (3.9% versus 6.3%). These over- and
underweightings, as shown in Table II, were the result of the fund's stock
selection process and were not a reflection of our economic forecast for
specific sectors.
During the first quarter of 1996, the Fund's quantitative model favored
growth characteristics (such as earnings momentum and price momentum) and put a
smaller, but still positive, weight on stocks with value or low-risk
characteristics (e.g., low beta and low "disappointment" risk). As the year
progressed, the fund's strategy became somewhat more defensive as our
quantitative model increased its weighting in value and low-risk themes. This
shift was triggered by a number of indicators that pointed toward emerging
excesses in the equity market: Low cash cushions held by equity mutual funds,
the increasing volatility of equity prices, the record-low dividend yields and
the divergence in returns between stocks and bonds.
As a result of our more defensive posture, over the past year we gradually
increased the fund's weighting in energy-related companies such as Texaco Inc.
and Atlantic Richfield Co., both newcomers to the fund's 10 largest holdings. We
also decreased the fund's exposure to consumer noncyclicals, which includes
food/agriculture companies (e.g., IBP, Inc. and Kellogg Co.).
As of the end of the period, the fund's major valuation characteristics
were more attractive than the benchmark. These included a lower price/earnings
ratio based on 1997 estimated earnings (15.9x versus 17.3x for the S&P 500) as
well as a lower price/book ratio (3.0x versus 3.4x). The fund achieved these
favorable valuation levels while maintaining growth and risk characteristics in
line with those of the S&P 500.
Table I: Top 10 Portfolio Holdings as of 1/31/97
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percentage of
Total Net
Company Line of Business Assets
<S> <C> <C>
General Electric Co. Electronics 2.9%
Intel Corp. Semiconductors 2.8%
and Electronics
Exxon Corp. Petroleum and 2.2%
Natural Gas
Microsoft Corp. Computer Software 2.1%
Texaco Inc. Petroleum and 2.0%
Natural Gas
Merck & Co., Inc. Pharmaceuticals 1.9%
Atlantic Richfield Co. Petroleum and 1.7%
Natural Gas
Bristol-Myers Squibb Co. Pharmaceuticals 1.7%
Philip Morris Companies, Tobacco and Food 1.7%
Inc. Products
Travelers Group, Inc. Financial Services 1.6%
</TABLE>
- --------------------------------------------------------------------------------
15
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Select Equity Fund (continued)
- --------------------------------------------------------------------------------
Table II: Sector Breakout as of 1/31/97
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percentage of
Percentage S&P 500
Industry Sectors of Portfolio Index Difference
<S> <C> <C> <C>
Finance 17.8% 16.2% 1.6%
Consumer Nondurables 10.2% 12.9% -2.7%
Energy 10.1% 8.0% 2.1%
Health 9.6% 10.4% -0.8%
Technology 9.3% 10.9% -1.6%
Basic Industry 7.9% 7.1% 0.8%
Capital Spending 6.5% 5.6% 0.9%
Electric/Gas 5.8% 3.3% 2.5%
Miscellaneous 4.4% 5.0% -0.6%
Retail 4.3% 3.6% 0.7%
Telecommunications 3.9% 6.3% -2.4%
Consumer Services 3.8% 4.8% -1.0%
Consumer Durables 2.6% 2.5% 0.1%
Aerospace 1.8% 2.0% -0.2%
Transportation 1.1% 1.4% -0.3%
Cash 1.0% 0.0% 1.0%
</TABLE>
- --------------------------------------------------------------------------------
Outlook
Goldman Sachs expects the U.S. equity market to continue to advance in
1997, although returns will likely be more modest than the unusually strong
results of 1995 and 1996. In addition, we expect equity gains to broaden beyond
the top 50 stocks. In 1997, we will continue to maintain a balanced approach by
considering risk, value and growth simultaneously.
However, the relative importance of avoiding riskier stocks has increased in the
current market environment, which is likely to result in greater emphasis on
defensive stocks with below-average price volatility, attractive valuations and
lower possibility of near-term earnings disappointments.
/s/ Robert C. Jones
Robert C. Jones
Senior Portfolio Manager,
Quantitative Equity
/s/ Kent A. Clark
Kent A. Clark
Portfolio Manager,
Quantitative Equity
/s/ Victor H. Pinter
Victor H. Pinter
Portfolio Manager,
Quantitative Equity
March 3, 1997
- --------------------------------------------------------------------------------
16
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Select Equity Fund
January 31, 1997
- --------------------------------------------------------------------------------
The following graphs show the value, as of January 31, 1997, of a $10,000
investment made (with and without the maximum sales charge of 5.5% and
redemption charge of 5.0% for Class A and B, respectively) on the inception date
of each class. For comparative purposes, the performance of the Fund's benchmark
(the Standard and Poor's 500 Index ("S&P 500")) is shown for the appropriate
time periods. All performance data shown represents past performance and should
not be considered indicative of future performance which will fluctuate with
changes in market conditions. These performance fluctuations will cause an
investor's shares, when redeemed, to be worth more or less than their original
cost.
<TABLE>
<CAPTION>
Class A
[LINE GRAPH APPEARS HERE]
GS Select Eq GS Select Eq
Class A Class A
(w/sales charge) (no/sales charge) S&P 500
---------------- ---------------- -------
<S> <C> <C> <C>
5/24/91 9,450 10,000 10,000
1/31/92 10,112 10,701 11,092
1/31/93 10,548 11,162 12,266
1/31/94 12,144 12,851 13,846
1/31/95 12,009 12,708 13,919
1/31/96 16,654 17,617 19,306
1/31/97 20,613 21,813 24,390
<CAPTION>
Class B
[LINE GRAPH APPEARS HERE]
GS Select Eq GS Select Eq
Class B Class B
(no redemption charge) (w/redemption charge) S&P 500
---------------------- --------------------- -------
<S> <C> <C> <C>
5/1/96 10,000 10,000 10,000
1/31/97 11,859 11,359 12,218
<CAPTION>
Institutional
[LINE GRAPH APPEARS HERE]
GS Select Eq
Institutional Class S&P 500
------------------- -------
<S> <C> <C>
6/15/95 10,000 10,000
1/31/96 12,014 12,029
1/31/97 14,983 15,197
<CAPTION>
Service
[LINE GRAPH APPEARS HERE]
GS Select Eq
Serv. Class S&P 500
------------ -------
<S> <C> <C>
6/7/96 10,000 10,000
1/31/97 11,592 11,836
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------
Average Annual Total Return
------------------------------------------------
One Year Since Inception/(a)/
- --------------------------------------------------------------------------------
<S> <C> <C>
Class A, no sales charge 23.75% 14.67%
- --------------------------------------------------------------------------------
Class A, w/sales charge 16.98% 13.54%
- --------------------------------------------------------------------------------
Class B, no redemption charge N/A 18.59% /(b)/
- --------------------------------------------------------------------------------
Class B, w/redemption charge N/A 13.59% /(b)/
- --------------------------------------------------------------------------------
Institutional Class 24.63% 28.04%
- --------------------------------------------------------------------------------
Service Class N/A 15.92% /(b)/
- --------------------------------------------------------------------------------
</TABLE>
/(a)/ Class A, Class B, Institutional and Service shares commenced operations on
May 24, 1991, May 1, 1996, June 15, 1995 and June 7, 1996, respectively.
/(b)/ An aggregate total return (not annualized) is shown instead of an average
annual total return since these classes have not completed a full twelve
months of operations.
- --------------------------------------------------------------------------------
17
<PAGE>
Statement of Investments
Goldman Sachs Select Equity Fund
- --------------------------------------------------------------------
January 31, 1997
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Shares Description Value
- --------------------------------------------------------------------
<S> <C> <C>
Common Stocks--97.3%
Aerospace--0.8%
43,600 United Technologies Corp. $ 3,041,100
- --------------------------------------------------------------------
Agency/Government--0.9%
93,800 Federal National Mortgage Assn. 3,705,100
- --------------------------------------------------------------------
Agriculture/Heavy Equipment--2.5%
25,100 Case Corp. 1,330,300
55,500 Caterpillar, Inc. 4,308,188
44,100 Conagra, Inc. 2,227,050
48,900 Tenneco, Inc. 1,956,000
- --------------------------------------------------------------------
9,821,538
- --------------------------------------------------------------------
Airlines--1.2%
19,700 AMR Corp.* 1,585,850
38,500 Delta Air Lines, Inc. 3,041,500
- --------------------------------------------------------------------
4,627,350
- --------------------------------------------------------------------
Alcohol--0.2%
21,600 Anheuser Busch Companies, Inc. 918,000
- --------------------------------------------------------------------
Appliance Manufacturer--1.0%
38,300 Emerson Electric Co. 3,782,125
- --------------------------------------------------------------------
Auto/Original Equipment Manufacturer--0.3%
23,100 Cummins Engine, Inc. 1,215,638
- --------------------------------------------------------------------
Auto/Vehicle--1.5%
25,200 Chrysler Corp. 878,850
32,200 Ford Motor Co. 1,034,425
70,700 General Motors Corp. 4,171,300
- --------------------------------------------------------------------
6,084,575
- --------------------------------------------------------------------
Bank Holding Companies--0.4%
26,000 Comerica, Inc. 1,485,250
- --------------------------------------------------------------------
Banks--6.0%
33,550 Banc One Corp. 1,522,331
48,000 Bank of New York, Inc. 1,758,000
46,400 BankAmerica Corp. 5,179,400
12,900 Chase Manhattan Corp. 1,193,250
25,800 Citicorp 3,002,475
28,500 First Bank System, Inc. 2,166,000
34,400 First Chicago Corp. 1,965,100
6,400 First Union Corp. 535,200
48,400 NationsBank Corp. 5,227,200
4,500 Wells Fargo & Company $ 1,371,375
- --------------------------------------------------------------------
23,920,331
- --------------------------------------------------------------------
Beverages--1.6%
41,900 Coca Cola Co. 2,424,963
115,300 Pepsico, Inc. 4,021,088
- --------------------------------------------------------------------
6,446,051
- --------------------------------------------------------------------
Business Services--0.2%
19,100 Automatic Data Processing, Inc. 790,263
- --------------------------------------------------------------------
Chemicals-Commodity--2.1%
46,000 Dow Chemicals Co. 3,547,750
20,600 Du Pont EI de Nemours 2,258,275
68,900 Monsanto Co. 2,609,588
- --------------------------------------------------------------------
8,415,613
- --------------------------------------------------------------------
Chemicals-Specialty--1.0%
37,800 Allied Signal, Inc. 2,655,450
27,700 Morton International, Inc. 1,125,313
- --------------------------------------------------------------------
3,780,763
- --------------------------------------------------------------------
Commercial Services--0.3%
32,500 Interim Services, Inc.* 1,178,125
- --------------------------------------------------------------------
Communications Services Companies--1.5%
75,500 Airtouch Communications, Inc.* 1,953,563
96,100 Sprint Corp. 3,916,075
- --------------------------------------------------------------------
5,869,638
- --------------------------------------------------------------------
Communications Technology--0.8%
37,403 Lucent Technologies, Inc. 2,029,113
15,200 Motorola Inc. 1,037,400
- --------------------------------------------------------------------
3,066,513
- --------------------------------------------------------------------
Computers--0.9%
65,200 Hewlett Packard Co. 3,431,150
- --------------------------------------------------------------------
Computers & Peripherals--3.7%
45,400 Cisco Systems, Inc.* 3,166,650
35,000 Compaq Computer Corp.* 3,040,625
20,300 Eastman Kodak Co. 1,761,025
33,400 International Business Machines 5,252,150
51,100 Sun Microsystems, Inc.* 1,622,425
- --------------------------------------------------------------------
14,842,875
- --------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
18
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Shares Description Value
- --------------------------------------------------------------------
<S> <C> <C>
Common Stocks (continued)
Construction/Environmental Services--0.2%
13,300 Armstrong World Industries, Inc. $ 944,300
- --------------------------------------------------------------------
Consumer Staples--3.4%
51,700 American Home Products Corp. 3,276,488
13,300 Clorox Co. 1,577,713
60,200 Gillette Co. 4,906,300
33,400 Procter & Gamble Co. 3,857,700
- --------------------------------------------------------------------
13,618,201
- --------------------------------------------------------------------
Defense--1.4%
5,400 Boeing Co. 578,475
17,700 McDonnell Douglas Corp. 1,190,325
18,500 Textron, Inc. 1,801,438
36,800 TRW, Inc. 1,867,600
- --------------------------------------------------------------------
5,437,838
- --------------------------------------------------------------------
Department Stores--3.2%
147,400 Dayton Hudson Corp. 5,545,925
38,000 Federated Dept. Stores, Inc.* 1,249,250
18,900 Mercantile Stores Co. 926,100
65,700 Sears Roebuck & Co. 3,153,600
72,100 Walmart Stores, Inc. 1,712,375
- --------------------------------------------------------------------
12,587,250
- --------------------------------------------------------------------
Electric Utilities--4.7%
76,300 Duke Power Co. 3,576,563
128,700 Edison International, Inc. 2,750,963
31,500 Empresa Nacional de Electric ADR 2,071,125
139,600 Niagara Mohawk Power* 1,413,450
57,700 Public Service Company of New Mexico 1,154,000
92,800 Texas Utilities Co. 3,758,400
156,300 Unicom Corp. 3,692,588
- --------------------------------------------------------------------
18,417,089
- --------------------------------------------------------------------
Electrical Equipment Manufacturer--2.9%
112,200 General Electric Co. 11,556,600
- --------------------------------------------------------------------
Financial Services--0.7%
53,300 Providian Corp. 2,871,538
- --------------------------------------------------------------------
Food Producers--0.5%
10,600 CPC International, Inc. 814,875
16,400 Ralston Purina Co. 1,289,450
- --------------------------------------------------------------------
2,104,325
- --------------------------------------------------------------------
Forest Products--2.6%
78,600 Avery Dennison Corp. 2,878,725
32,000 Champion International Corp. 1,340,000
32,600 Georgia Pacific Corp. 2,400,175
26,000 International Paper Co. 1,062,750
19,700 Mead Corp. 1,108,125
30,700 Weyerhaeuser Co. 1,396,850
- --------------------------------------------------------------------
10,186,625
- --------------------------------------------------------------------
Funeral Services--0.2%
29,600 Service Corp. International 858,400
- --------------------------------------------------------------------
Gas Distribution & Pipeline--1.2%
55,600 Columbia Gas Systems, Inc. 3,620,950
22,900 Panenergy Corp. 1,056,263
- --------------------------------------------------------------------
4,677,213
- --------------------------------------------------------------------
Health Suppliers/Services--1.3%
73,200 Johnson & Johnson 4,218,150
15,800 Medtronic Inc. 1,082,300
- --------------------------------------------------------------------
5,300,450
- --------------------------------------------------------------------
Healthcare Management--0.8%
55,800 Columbia HCA Healthcare 2,204,100
38,300 Manor Care, Inc. 976,650
- --------------------------------------------------------------------
3,180,750
- --------------------------------------------------------------------
Information Management--0.7%
114,100 Dun & Bradstreet Corp. 2,738,400
- --------------------------------------------------------------------
Insurance Brokers & Other Insurance--0.3%
24,600 Exel Insurance Ltd. 1,042,425
- --------------------------------------------------------------------
Insurance-Life--2.6%
29,100 American General Corp. 1,160,363
18,700 Cigna Corp. 2,835,388
122,933 Travelers Group, Inc. 6,438,616
- --------------------------------------------------------------------
10,434,367
- --------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
Statement of Investments
- --------------------------------------------------------------------
Goldman Sachs Select Equity Fund (continued)
January 31, 1997
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value
====================================================================
<S> <C> <C>
Common Stocks (continued)
Insurance-Property and Casualty--2.2%
25,956 Allstate Corp. $ 1,706,607
36,850 American International Group, Inc. 4,463,456
68,500 Safeco Corp. 2,603,000
- --------------------------------------------------------------------
8,773,063
- --------------------------------------------------------------------
Integrated Oil--11.1%
22,100 Amoco Corp. 1,922,700
51,800 Atlantic Richfield Co. 6,850,550
84,300 Exxon Corp. 8,735,574
46,800 Kerr McGee Corp. 3,217,500
17,200 Mobil Corp. 2,257,500
52,000 Norsk Hydro ADR 2,925,000
32,000 Phillips Petroleum Co. 1,412,000
26,600 Royal Dutch Petroleum ADR 4,615,100
75,700 Texaco, Inc. 8,014,738
97,300 Unocal Corp. 4,098,763
- --------------------------------------------------------------------
44,049,425
- --------------------------------------------------------------------
Investment Brokers & Managers--2.7%
52,500 Merrill Lynch Co. 4,423,125
38,300 Morgan Stanley Group, Inc. 2,187,888
76,900 Salomon, Inc. 4,248,725
- --------------------------------------------------------------------
10,859,738
- --------------------------------------------------------------------
Local Phone Companies--2.3%
53,600 Ameritech Corp. 3,202,600
67,100 GTE Corp. 3,153,700
104,900 Worldcom, Inc.* 2,635,613
- --------------------------------------------------------------------
8,991,913
- --------------------------------------------------------------------
Machinery and Equipment--0.6%
20,100 Dover Corp. 994,950
29,300 Ingersoll-Rand Co. 1,336,813
- --------------------------------------------------------------------
2,331,763
- --------------------------------------------------------------------
Media/Entertainment--1.4%
41,400 King World Productions, Inc.* 1,619,775
54,942 Walt Disney Co. 4,024,502
- --------------------------------------------------------------------
5,644,277
- --------------------------------------------------------------------
Nonferrous Metals--1.3%
15,900 Phelps Dodge Corp. 1,111,013
72,800 Tyco International Ltd. 4,158,700
- --------------------------------------------------------------------
5,269,713
- --------------------------------------------------------------------
Office & Business Equipment--0.5%
36,400 Xerox Corp. 2,133,950
- --------------------------------------------------------------------
Oil & Gas Exploration--0.4%
31,100 Burlington Resources, Inc. 1,547,225
- --------------------------------------------------------------------
Pharmaceuticals--6.7%
51,100 Abbott Labs 2,778,563
53,100 Bristol Myers Squibb 6,743,700
18,600 Eli Lilly & Co. 1,620,525
82,100 Merck & Co. 7,450,575
23,600 Pfizer, Inc. 2,191,850
31,700 Pharmacia & Upjohn, Inc. 1,180,825
47,600 Schering Plough Corp. 3,599,750
13,800 Warner Lambert Co. 1,110,900
- --------------------------------------------------------------------
26,676,688
- --------------------------------------------------------------------
Recreational Products--0.2%
29,407 Mattel, Inc. 827,072
- --------------------------------------------------------------------
Restaurants & Hotels--1.0%
14,000 HFS, Inc.* 980,000
23,000 ITT Corp.* 1,313,875
40,200 McDonalds Corp. 1,829,100
- --------------------------------------------------------------------
4,122,975
- --------------------------------------------------------------------
Retail--0.7%
34,100 Home Depot, Inc. 1,687,950
29,900 TJX Companies, Inc. 1,188,525
- --------------------------------------------------------------------
2,876,475
- --------------------------------------------------------------------
Retail-Specialty--1.2%
48,200 Gap, Inc. 1,385,750
49,600 Nike, Inc. 3,366,600
- --------------------------------------------------------------------
4,752,350
- --------------------------------------------------------------------
Semiconductors & Electronics--2.8%
67,800 Intel Corp. 11,000,550
- --------------------------------------------------------------------
Software--2.7%
33,350 Computer Associates International,
Inc. 1,513,256
79,900 Microsoft Corp.* 8,149,800
24,600 Oracle Corp.* 956,325
- --------------------------------------------------------------------
10,619,381
- --------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Shares Description Value
====================================================================
<S> <C> <C>
Common Stocks (continued)
Supermarkets--0.9%
63,300 Great A&P Tea Co., Inc. $ 1,978,125
31,200 Safeway, Inc.* 1,489,800
- --------------------------------------------------------------------
3,467,925
- --------------------------------------------------------------------
Technical Services--0.4%
22,800 3Com Corp.* 1,530,450
- --------------------------------------------------------------------
Technology Capital Goods--0.7%
18,800 Applied Materials, Inc.* 928,250
22,000 Harris Corp. 1,674,750
- --------------------------------------------------------------------
2,603,000
- --------------------------------------------------------------------
Telecommunications--0.2%
17,000 Tellabs, Inc.* 700,188
- --------------------------------------------------------------------
Textiles--1.1%
22,500 Liz Claiborne, Inc. 947,813
33,200 Sara Lee Corp. 1,311,400
30,800 VF Corp. 2,048,200
- --------------------------------------------------------------------
4,307,413
- --------------------------------------------------------------------
Tire & Other Related Rubber Products--0.8%
36,800 BF Goodrich Co. 1,508,800
29,800 Goodyear Tire & Rubber Co. 1,624,100
- --------------------------------------------------------------------
3,132,900
- --------------------------------------------------------------------
Tobacco--1.7%
55,600 Philip Morris Companies, Inc. 6,609,450
- --------------------------------------------------------------------
Total Common Stocks
(Cost $294,916,122) $ 385,205,653
====================================================================
Rights--0.9%
Insurance--0.2%
9,400 MBIA, Inc.,* exp. 12/12/01 $ 903,575
- --------------------------------------------------------------------
Insurance-Life--0.4%
36,400 Protective Life Corp.*, exp. 07/13/97 1,442,350
- --------------------------------------------------------------------
Specialty Finance--0.3%
19,100 Beneficial Corp.,* exp. 11/23/97 1,284,475
- --------------------------------------------------------------------
Total Rights
(Cost $2,826,759) $ 3,630,400
- --------------------------------------------------------------------
<CAPTION>
Principal
Amount Description Value
====================================================================
<S> <C> <C>
U.S. Treasury Obligations--0.2%
$ 841,000 U.S. Treasury Bill
5.08%, 05/29/97/(b)/ $ 827,118
- --------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $827,118) $ 827,118
- --------------------------------------------------------------------
Repurchase Agreement--0.9%
$ 3,600,000 Joint Repurchase Agreement Account
5.63%, 02/03/97 $ 3,600,000
- --------------------------------------------------------------------
Total Repurchase Agreements
(Cost $3,600,000) $ 3,600,000
- --------------------------------------------------------------------
Total Investments
(Cost $302,169,999)/(a)/ $ 393,263,171
====================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in
which value exceeds cost $ 94,373,749
Gross unrealized loss for investments in
which cost exceeds value (3,489,045)
- --------------------------------------------------------------------
Net unrealized gain $ 90,884,704
====================================================================
</TABLE>
<TABLE>
<CAPTION>
Futures Contracts open at January 31, 1997 are as follows:
Number of
Contracts Settlement Unrealized
Type Long/(c)/ Month Gain
- ------------------------- ------------- ------------ ----------------
<S> <C> <C> <C>
S&P 500 Stock Index 7 March 1997 $91,800
</TABLE>
* Non-income producing security.
/(a)/The aggregate cost for federal income tax purposes is $302,378,467.
/(b)/Portion of this security is being segregated as collateral for futures
contracts.
/(c)/Each S&P 500 Stock Index represents $50,000 in notional par value. The
total net notional amount and net market value at risk are $350,000 and
$2,756,250, respectively. The determination of notional amounts does not
consider market risk factors and therefore notional amounts as presented
here are indicative only of volume of activity and not a measure of market
risk.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Growth and Income Fund
- --------------------------------------------------------------------------------
Objective and Investment Approach
The Goldman Sachs Growth and Income Fund seeks long-term growth of
capital and growth of income primarily through investments in a diversified
portfolio of common stocks and other equity securities. The fund is managed with
a value style, which means we focus on companies whose stocks we believe are
inexpensive relative to their expected long-term earnings growth and their
ability to pay dividends. Investments may include well-known companies that are
temporarily out of favor due to cyclical economic conditions or are experiencing
near-term difficulties the portfolio managers judge to be temporary in nature.
In-depth fundamental research of a company's financial structure, its
competitive position in the market and its management's commitment to increasing
shareholder value are all critical parts of the fund's investment approach.
Though we are not sector investors, we closely monitor the fund's sector and
industry exposures compared with the benchmark in an effort to avoid
unintentional over- or underweightings.
Performance Review: The Fund Outperformed the Index...
<TABLE>
<CAPTION>
- ------------------------------------- ----------------- -----------
Fund Total
Return S&P 500
(based on net Total
asset value) Return
----------- ------
<S> <C> <C>
Class A (1/31/96 - 1/31/97)* 28.42% 26.25%
Class B (5/1/96 - 1/31/97)* 22.23% 22.18%
Institutional (6/3/96 - 1/31/97)* 20.77% 19.11%
Service (3/6/96 - 1/31/97)* 23.87% 22.20%
- ------------------------------------- ----------------- -----------
</TABLE>
* Class A, B, Institutional and Service share performance assumes reinvestment
of all dividends and distributions, a complete redemption at the net asset value
at the end of the period and no initial sales charge or contingent deferred
sales charge. Performance for Class B, Institutional and Service shares is a
cumulative total return (not annualized) from their inceptions through the end
of the period.
The U.S. stock market continued to soar during the period under
review, adding to the impressive performance recorded during the prior year.
Most of the market's gains occurred during the latter half of the period, when
equities rebounded strongly following a sharp correction in July.
We are pleased to report that all of the fund's share classes
outperformed the S&P 500 stock index during the past fiscal year. Most notably,
its Class A shares returned 28.42% (at net asset value) versus 26.25% for the
index. During the period, the fund increased its regular quarterly dividend.
...And Fared Very Well Relative to Its Peers
We are proud to announce that for the three-year period ended January
31, 1997, the fund's Class A shares were rated "five stars" (out of 1,858
domestic equity funds) by Morningstar, Inc., an independent mutual fund rating
agency. The "five star" designation is Morningstar's highest rating for
historical risk-adjusted performance, and is given to mutual funds that
Morningstar determines to be in the top 10% of their category.1
In addition, the fund's Class A shares ranked within the top 10% of
the Lipper growth and income category (53rd of 533) for the 12-month period
ended January 31, 1997, according to Lipper Analytical Services, Inc. (Please
note that Lipper rankings do not take sales charges into account and that past
performance is not a guarantee of future results. Class B, Institutional and
Service shares
- -------------------------
1 Source: (C) 1997 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 1/31/97.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five- and ten-year average annual returns (where applicable) in excess of 90-day
Treasury bill returns with appropriate fee and sales charge adjustments and a
risk factor that reflects fund performance below 90-day Treasury bill returns.
The one-year rating is calculated using the same methodology, but is not a
component of the overall rating. For the one-year period, the Class A shares
received four stars and was rated among 2,990 domestic equity funds. The
Morningstar rating applies only to the fund's Class A shares; the fund's Class
B, Institutional and Service shares have not been rated. Class B, Institutional
and Service shares are subject to additional fees and expenses that may have the
effect of lowering performance and may affect any future Morningstar rating.
Morningstar rates funds against peers in the same category. In all, there are
five Morningstar categories (domestic equity, international equity, fixed
income, municipal and hybrid). Morningstar ratings range from five stars
(highest) to one star (lowest). Funds with five-star ratings are in the top 10%
of their category, four-star ratings in the next 22.5%, three stars the next
35%, two stars the next 22.5% and one star the lowest 10% of their categories.
22
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
were not ranked because they did not exist during the full year.)
Financial, Technology and Energy Stocks Were Among the Fund's Best Performers
The fund's outperformance came from successful stock selection in a
wide range of industries, led by finance, its largest sector weighting at 18.0%.
Technology and energy investments also did well. In addition, the fund benefited
significantly from our decision to limit its exposure in the media and
communication sector. Our concerns regarding increased competition between the
local exchange and long-distance companies and high valuations in the sector
proved to be on target.
In the financial sector, top performers were BankAmerica Corp. and
NationsBank Corp., the country's third and fourth largest banks, respectively.
BankAmerica Corp. increased its focus on aggressive capital management, which
resulted in its exiting unprofitable businesses and buying back some of its
stock. NationsBank Corp. acquired Bank South Corp. and Boatmen's Bancshares,
Inc., and investors began to realize the benefits of its cost structure due to
its acquisitions over the past few years.
Technology holdings that performed well included Intel Corp., the
dominant microprocessor manufacturer, which was purchased when the sector was
depressed due to concerns that the personal computer upgrade cycle had slowed.
Intel quickly rebounded when investors recognized the advantages of its dominant
market position, and we subsequently sold the stock when it reached our target
price. We saw solid gains from Avnet, Inc., the second largest distributor of
semiconductors and other electronic components, which we viewed as an
inexpensive opportunity to participate in the growth of the technology sector.
The fund was also well served by a number of its energy-related
investments. Tosco Corp., an oil refiner and distributor, more than doubled in
price as it continued to consolidate its market position through an ambitious
acquisition strategy, and Texaco Inc. benefited from higher petroleum prices and
a restructuring program that meaningfully improved profits.
In addition, several holdings appreciated due to special situations.
Our confidence in Long Island Lighting Co., a New York-based utility, which had
been shunned by many other investors, was handsomely rewarded when the stock
soared after Brooklyn Union Gas Co. made an attractive bid for the company in
January. The fund also benefited when McDonnell Douglas Corp., one of our
long-term positions, was acquired by Boeing Co. at a very favorable price.
Sunbeam Corp., a leading consumer products company, met with an enthusiastic
investor response to the aggressive restructuring program initiated by its new
CEO.
Paper and Chemical Stocks Were Weak
Disappointing performers included three companies impacted by
overcapacity in their respective industries: Georgia-Pacific Corp. and Stone
Container Corp., both manufacturers of paper products, and Geon Corp., a
manufacturer of polyvinyl chloride. We continue to have confidence in these
companies and expect their prospects to improve over time.
Additional Investments in a Variety of Sectors
During the period, we added a number of new holdings. These included
Dean Witter, Discover & Co., which we viewed as undervalued based on the
potential of its broker-dealer/asset management business and its large Discover
credit card business. In February 1997, Dean Witter, Discover & Co. announced
its intention to merge with investment bank Morgan Stanley. We also invested in
Unicom Corp., an electric utility that operates 12 nuclear units at six sites.
Unicom generates excess capital and, unlike many other electric utilities, has
no utility power purchase problems. We established a position after its stock
price declined due to a mandated increase in spending on operations and
maintenance, an issue that management believes will not impair the company's
long-
23
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Growth and Income Fund (continued)
- --------------------------------------------------------------------------------
term prospects. Also notable was our decision to increase the fund's
position in Tenet Healthcare Corp., a long-term holding, based on its prospects
for improved efficiencies resulting from the integration of its acquisition of
OrNda Healthcorp., a for-profit hospital chain.
Sales Included Several Financial and Technology Positions
We sold several stocks after they appreciated and reached our price
targets. These included Anheuser-Busch Co., Inc., the world's largest brewer,
which reported strong earnings; Greenpoint Financial Corp., which benefited from
increased investor appreciation of the value of its
"no-documentation--low-documentation" mortgage franchise; and technology
holdings Compaq Computer Corp. and Intel Corp.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Top 10 Portfolio Holdings as of January 31, 1997
Percentage
of Total Net
<S> <C> <C>
Company Line of Business Assets
Aetna Inc. Healthcare Service 3.3%
Provider
Tenet Healthcare Corp. Hospitals 3.3%
Lear Corp. Autoparts/Original 3.0%
Equipment
Cigna Corp. Insurance 2.9%
Brunswick Corp. Pleasure 2.9%
Boats/Marine
Engines
Dean Witter, Discover & Co. Financial Services 2.8%
Goodyear Tire & Rubber Co. Tire and Rubber 2.8%
Products
Philip Morris Companies, Tobacco and Food 2.7%
Inc. Products
Avnet, Inc. Electronic 2.7%
Components
Distributor
BankAmerica Corp. Commercial Bank 2.6%
- --------------------------------------------------------------------
</TABLE>
Outlook
As we enter the seventh year of a bull market for U.S. equities, we
view the market as moderately overvalued and therefore unlikely to match the
strong return it achieved in 1996. In this environment, it is particularly
noteworthy that the fund's holdings continue to be attractively valued even
after last year's rally. Our focus on undervalued stocks and extensive
fundamental research will continue to be extremely important in the more
challenging market we anticipate ahead.
/s/ Ronald E. Gutfleish /s/ G. Lee Anderson
- ------------------------ -------------------------
Ronald E. Gutfleish G. Lee Anderson
Senior Portfolio Manager, Portfolio Manager,
U.S. Active Equity Value U.S. Active Equity Value
/s/ Eileen A. Aptman
--------------------
Eileen A. Aptman
Portfolio Manager,
U.S. Active Equity Value
March 3, 1997
24
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Growth and Income Fund
January 31, 1997
- -------------------------------------------------------------------------------
The following graphs show the value, as of January 31, 1997, of a $10,000
investment made (with and without the maximum sales charge of 5.5% and
redemption charge of 5.0% for Class A and B, respectively) on the inception date
of each class. For comparative purposes, the performance of the Fund's benchmark
(the Standard and Poor's 500 Index ("S&P 500")) is shown for the appropriate
time periods. All performance data shown represents past performance and should
not be considered indicative of future performance which will fluctuate with
changes in market conditions. These performance fluctuations will cause an
investor's shares, when redeemed, to be worth more or less than their original
cost.
<TABLE>
<CAPTION>
Class A
[LINE GRAPH APPEARS HERE]
GS Growth & Inc GS Growth & Inc
Class A Class A
(w/sales charge) (no sales charge) S&P 500
---------------- ----------------- -------
<S> <C> <C> <C>
2/5/93 $ 9,450 $10,000 $10,000
1/31/94 10,686 11,308 11,073
1/31/95 11,110 11,757 11,132
1/31/96 14,716 15,573 15,436
1/31/97 18,911 20,012 19,501
<CAPTION>
Class B
[LINE GRAPH APPEARS HERE]
GS Growth & Inc GS Growth & Inc
Class B Class B
(no redemp charge) (w/redemp charge) S&P 500
------------------ ----------------- -------
<S> <C> <C> <C>
5/1/96 $10,000 $10,000 $10,000
1/31/97 12,223 11,723 12,218
<CAPTION>
Institutional
[LINE GRAPH APPEARS HERE]
GS Growth & Inc
Institutional Class S&P 500
------------------- -------
<S> <C> <C>
6/3/96 $10,000 $10,000
1/31/97 12,077 11,911
<CAPTION>
Service
[LINE GRAPH APPEARS HERE]
GS Growth & Inc
Service Class S&P 500
--------------- -------
<S> <C> <C>
3/6/96 $10,000 $10,000
1/31/97 12,387 12,220
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------
Average Annual Total Return
--------------------------------------------
One Year Since Inception /(a)/
- --------------------------------------------------------------------------------
<S> <C> <C>
Class A, no sales charge 28.42% 18.98%
- --------------------------------------------------------------------------------
Class A, w/sales charge 21.39% 17.31%
- --------------------------------------------------------------------------------
Class B, no redemption charge N/A 22.23% /(b)/
- --------------------------------------------------------------------------------
Class B, w/redemption charge N/A 17.23% /(b)/
- --------------------------------------------------------------------------------
Institutional Class N/A 20.77% /(b)/
- --------------------------------------------------------------------------------
Service Class N/A 23.87% /(b)/
- --------------------------------------------------------------------------------
</TABLE>
/(a)/ Class A, Class B, Institutional and Service shares commenced operations on
February 5, 1993, May 1, 1996, June 3, 1996 and March 6, 1996,
respectively.
/(b)/ An aggregate total return (not annualized) is shown instead of an average
annual total return since these classes have not completed a full twelve
months of operations.
- --------------------------------------------------------------------------------
25
<PAGE>
Statement of Investments
- -------------------------------------------------------------------
Goldman Sachs Growth and Income Fund
January 31, 1997
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Shares Description Value
===================================================================
<S> <C> <C>
Common Stocks--93.2%
Airlines--3.2%
96,100 AMR Corp.* $ 7,736,050
463,600 Continental Airlines, Inc.* 12,980,800
- -------------------------------------------------------------------
20,716,850
- -------------------------------------------------------------------
Appliance Manufacturer--1.9%
440,900 Sunbeam Corp. 12,234,975
- -------------------------------------------------------------------
Auto/Original Equipment Manufacturer--3.0%
512,800 Lear Corp.* 19,165,900
- -------------------------------------------------------------------
Auto/Vehicle--2.0%
394,800 Ford Motor Co. 12,682,950
- -------------------------------------------------------------------
Banks--8.3%
146,600 BankAmerica Corp. 16,364,225
64,900 Chase Manhattan Corp. 6,003,250
117,800 Fleet Financial Group Inc. 6,361,200
146,900 NationsBank Corp. 15,865,200
96,500 Republic of New York Corp. 8,552,313
- -------------------------------------------------------------------
53,146,188
- -------------------------------------------------------------------
Chemicals-Commodity--2.0%
439,800 Geon Co. 8,246,250
97,400 Union Carbide Corp. 4,419,525
- -------------------------------------------------------------------
12,665,775
- -------------------------------------------------------------------
Defense--3.4%
225,100 McDonnell Douglas Corp. 15,137,975
79,800 Northrop Grumman Corp. 6,234,375
6,300 Thiokol Corp. 352,800
- -------------------------------------------------------------------
21,725,150
- -------------------------------------------------------------------
Department Stores--1.6%
207,700 Sears Roebuck & Co. 9,969,600
- -------------------------------------------------------------------
Electric Utilities--5.1%
95,100 CMS Energy Corp. 3,185,850
641,400 Long Island Lighting Co. 14,591,850
632,300 Unicom Corp. 14,938,088
- -------------------------------------------------------------------
32,715,788
- -------------------------------------------------------------------
Food--2.8%
582,200 Chiquita Brands International, Inc. 8,514,675
58,400 Unilever Inc. 9,606,800
- -------------------------------------------------------------------
18,121,475
- -------------------------------------------------------------------
Forest Products--1.9%
161,500 Georgia Pacific Corp. 11,890,438
- -------------------------------------------------------------------
Health Suppliers/Services--2.0%
280,800 Baxter International, Inc. 12,951,900
- -------------------------------------------------------------------
Healthcare Management--6.6%
266,400 Aetna Inc. 21,045,600
768,500 Tenet Healthcare Corp.* 20,749,500
- -------------------------------------------------------------------
41,795,100
- -------------------------------------------------------------------
Home Builders--3.1%
232,800 Centex Corp. 9,079,200
388,500 Lennar Corp. 10,343,813
- -------------------------------------------------------------------
19,423,013
- -------------------------------------------------------------------
Insurance-Life--4.3%
123,600 Cigna Corp. 18,740,850
166,200 Lincoln National Corp. 8,912,475
- -------------------------------------------------------------------
27,653,325
- -------------------------------------------------------------------
Insurance-Property & Casualty--1.4%
16,100 Integon Corp. 223,388
237,600 Partner Re Holding Ltd. 8,434,800
- -------------------------------------------------------------------
8,658,188
- -------------------------------------------------------------------
Integrated Oil--4.8%
121,400 Atlantic Richfield Co. 16,055,150
138,900 Texaco, Inc. 14,706,038
- -------------------------------------------------------------------
30,761,188
- -------------------------------------------------------------------
Logistics/Rails--1.8%
415,700 Canadian Pacific Ltd. 11,275,863
- -------------------------------------------------------------------
Logistics/Trucking--2.0%
512,100 Consolidated Freightways, Inc. 12,994,538
- -------------------------------------------------------------------
Oil Refining & Marketing--3.6%
187,700 Ashland Inc. 8,094,563
166,800 Tosco Corp. 14,761,800
- -------------------------------------------------------------------
22,856,363
- -------------------------------------------------------------------
Packaging--2.5%
661,600 Owens Illinois Corp.* 15,713,000
- -------------------------------------------------------------------
Recreational Products--2.9%
724,800 Brunswick Corp. 18,210,600
- -------------------------------------------------------------------
- -------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
- -------------------------------------------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Shares Description Value
- -------------------------------------------------------------------
<C> <S> <C>
Common Stocks (continued)
Security and Commodity Brokers, Dealers and Services--1.0%
195,900 Lehman Brothers Holdings, Inc. $ 6,195,338
- -------------------------------------------------------------------
Semiconductors & Electronics--2.7%
275,100 Avnet, Inc. 17,021,813
- -------------------------------------------------------------------
Software--1.1%
214,300 Autodesk, Inc. 6,777,238
- -------------------------------------------------------------------
Specialty Finance--2.8%
470,200 Dean Witter Discover & Co. 17,926,375
- -------------------------------------------------------------------
Steel--1.6%
251,600 AK Steel Holding Corp. 10,126,900
- -------------------------------------------------------------------
Supermarkets--3.4%
726,500 Fleming Companies, Inc. 11,714,813
316,700 Supervalu, Inc. 9,778,113
- -------------------------------------------------------------------
21,492,926
- -------------------------------------------------------------------
Textiles--2.4%
374,400 Fruit of The Loom, Inc.* 15,022,800
- -------------------------------------------------------------------
Tire & Other Related Rubber Products--2.8%
320,900 Goodyear Tire & Rubber Co. 17,489,050
- -------------------------------------------------------------------
Tobacco--5.2%
63,700 Loews Corp. 6,298,338
144,700 Philip Morris Companies, Inc. 17,201,204
187,480 RJR Nabisco, Inc. 6,139,970
115,600 Universal Corp. 3,583,600
- -------------------------------------------------------------------
33,223,112
- -------------------------------------------------------------------
Total Common Stocks
(Cost $465,569,279) $ 592,603,719
===================================================================
Preferred Stocks--0.6%
Food--0.3%
44,600 Chiquita Brands International, Inc.
Convertible, 5.75% $ 2,073,900
- -------------------------------------------------------------------
Tobacco--0.3%
287,100 RJR Nabisco, Inc., Class C 9.25% 1,902,038
- -------------------------------------------------------------------
Total Preferred Stocks
(Cost $3,843,410) $ 3,975,938
===================================================================
Rights--2.0%
Forest Products--1.2%
579,100 Stone Container Corp.,* exp.
08/08/98 $ 7,817,850
- -------------------------------------------------------------------
Technology Capital Goods--0.8%
166,300 Teradyne, Inc.,* exp. 03/26/00 5,134,513
- -------------------------------------------------------------------
Total Rights
(Cost $13,294,493) $ 12,952,363
===================================================================
Repurchase Agreements--4.2%
- -------------------------------------------------------------------
$ 26,800,000 Joint Repurchase Agreement Account
5.63%, 02/03/97 $ 26,800,000
- -------------------------------------------------------------------
Total Repurchase Agreements
(Cost $26,800,000) $ 26,800,000
===================================================================
<CAPTION>
Contracts Description Value
===================================================================
<C> <S> <C>
Options*--0.4%
1,340 S & P 500 Index Put, Strike 750
exp. 06/97 $ 2,244,500
1,439 S & P 500 Index Put, Strike 700
exp. 03/97 377,738
- -------------------------------------------------------------------
Total Options
(Cost $4,105,525) $ 2,622,238
===================================================================
Total Investments
(Cost $513,612,707)/(a)/ $ 638,954,258
===================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $136,933,045
Gross unrealized loss for investments in which
cost exceeds value (11,607,531)
- -------------------------------------------------------------------
Net unrealized gain $125,325,514
===================================================================
</TABLE>
* Non-income producing security.
/(a)/The aggregate cost for federal income tax purposes is $513,628,744. The
percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- -------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
Letter to Shareholders
- -------------------------------------------------------------------------------
Goldman Sachs Capital Growth Fund
- --------------------------------------------------------------------------------
Objective and Investment Approach
The Goldman Sachs Capital Growth Fund seeks long-term growth of capital
primarily through investments in a portfolio of large-capitalization stocks. We
use extensive fundamental research to identify companies in a diversified range
of industries that we believe offer attractive growth potential at a reasonable
price.
The fund's investment management team believes that wealth is created
through the long-term ownership of growing businesses. As such, we view each
stock purchase as if we were buying the entire business. To implement this
investment strategy, we focus on growing companies with characteristics such as
strong brand franchises, dominant market share, recurring revenue, product
pricing flexibility, long product life cycles, high returns on invested capital,
high profit margins, strong free cash flow, excellent management and favorable
long-term prospects. Finally, we will buy a stock meeting our rigorous criteria
only if it trades at a reasonable discount to the company's intrinsic value.
Performance Review: Fund Achieved Strong Results
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Fund Total Return S&P 500
(based on net Total
asset value) Return
----------- ------
<S> <C> <C>
Class A (1/31/96 - 1/31/97)* 25.97% 26.25%
Class B (5/1/96 - 1/31/97)* 19.39% 22.18%
- --------------------------------------------------------------------
</TABLE>
* Class A and B share performance assumes reinvestment of all dividends and
distributions, a complete redemption at the net asset value at the end of the
period and no initial sales charge or contingent deferred sales charge.
Performance for Class B shares is a cumulative total return (not annualized)
from their inception through the end of the period.
During the 12-month period ended January 31, 1997, the fund's Class A shares
achieved a total return of approximately 26%, in line with the S&P 500 stock
index, reflecting the robust equity market, particularly during the second half
of the period. The fund's Class B shares also achieved strong absolute results;
however, a partial year of only nine months is obviously too short a time frame
to meaningfully measure long-term performance.
We are pleased to report that for the five-year period ended January
31, 1997, the fund's Class A shares were rated "four stars" (out of 1,072
domestic equity funds) by Morningstar, Inc., an independent mutual fund rating
agency./1/ In addition, the fund's Class A shares fared well versus its peers in
the Lipper growth fund category, placing in the top third (187th out of 685) for
the 12-month period and in the top quartile (56th out of 263) for the five-year
period, as of January 31, 1997, according to Lipper Analytical Services, Inc.
(Please note that Lipper rankings do not take sales charges into account and
that past performance is not a guarantee of future results. Lipper did not rank
the fund's Class B shares.)
Top Performers Included Financial, Technology and Defense Stocks
The fund's best performers during the period came from a variety of sectors,
particularly financial services (20.4% of the portfolio), technology (9.1%) and
defense/aerospace (3.2%).
. Top performers in the financial sector included MBNA Corp. and First USA
Inc., the nation's third and fourth largest credit card issuers, respectively,
which both reported better than expected earnings and loan growth. In
- --------
/1/ Source: (C) 1997 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 1/31/97.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five- and ten-year average annual returns (where applicable) in excess of 90-day
Treasury bill returns with appropriate fee and sales charge adjustments and a
risk factor that reflects fund performance below 90-day Treasury bill returns.
The one-year rating is calculated using the same methodology, but is not a
component of the overall rating. The fund's Class A shares received three stars
for both the three- and one-year periods. The Class A shares were rated among
1,858 and 2,990 domestic equity funds for the three- and one-year periods,
respectively. The Morningstar rating applies only to the fund's Class A shares;
the fund's Class B shares have not been rated. Class B shares are subject to
additional fees and expenses that may have the effect of lowering performance
and may affect any future Morningstar rating. Morningstar rates funds against
peers in the same category. In all, there are five Morningstar categories
(domestic equity, international equity, fixed income, municipal and hybrid).
Morningstar ratings range from five stars (highest) to one star (lowest). Funds
with five-star ratings are in the top 10% of their category, four-star ratings
in the next 22.5%, three stars the next 35%, two stars the next 22.5% and one
star the lowest 10% of their categories.
- --------------------------------------------------------------------------------
28
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
addition, these companies benefited from continuing industry consolidation,
with First USA performing particularly well after Banc One announced that it was
acquiring the company. Two of the fund's commercial bank holdings, BankAmerica
Corp. and NationsBank Corp., appreciated due to successful cost cutting, strong
earnings growth and aggressive capital management, and PartnerRe Holding Ltd., a
worldwide provider of catastrophe reinsurance, rose on strong earnings.
. Several of our technology holdings also performed well. During the first
half of the period, we increased the fund's positions in Intel Corp., the
dominant microprocessor manufacturer, and Compaq Computer Corp., the world's
largest manufacturer of personal computers, when their prices slumped because of
concerns regarding slowing computer sales. This strategy significantly
contributed to the fund's performance when computer sales were stronger than
expected. We subsequently sold Compaq Computer when it reached our target price
but continue to hold Intel, which more than tripled in price during the period.
. Consolidation in the defense industry helped two of the fund's long-
standing investments in that sector. McDonnell Douglas Corp. climbed over 50%
after the announcement of its proposed merger with Boeing Co., and Northrop
Grumman Corp. was buoyed by its purchase of Westinghouse Electric Corp.'s
defense electronics businesses.
Specific Paper, Airline and Insurance Stocks Lagged
Not all of the fund's holdings fulfilled our expectations. For example,
Georgia-Pacific Corp., a manufacturer of paper products, suffered from an
industry oversupply and a consequent decline in paper and pulp prices; AMR
Corp., the holding company of American Airlines, was impacted by concerns
regarding competition from discount carriers; and Integon Corp., a provider of
automobile insurance, experienced a higher than expected increase in claims and
lower earnings.
New Additions in Consumer Product Companies and Pharmaceuticals
During the period, we initiated several positions that reflect our new
emphasis on large-capitalization stocks with world-class franchises and/or
strong brand names. For example, we added Procter & Gamble Co., one of the
strongest marketers in the U.S. with a stable of brand name products, many of
which hold number one or number two positions in their respective markets. Over
the past decade, the company has achieved steady growth in revenues and
earnings, exactly the type of consistent operating history that we favor.
Another recent investment was Coca-Cola Co., a world-class company with four of
the five leading carbonated soft drinks -- Coca-Cola, Diet Coke, Sprite and
Fanta. With 80% of its business coming from abroad, we expect Coca-Cola's long-
term earnings growth to continue as it further penetrates the emerging markets
of China, India, Latin America, Southeast Asia, Eastern Europe and Russia.
Other new positions included pharmaceutical companies Bristol-Myers
Squibb Co., Johnson & Johnson Co. and Pfizer, Inc., which are attractive because
of their strong new product flow, huge free cash flow, earnings growth and
essentially net debt-free balance sheets. We believe these companies are
positioned to be major beneficiaries as the baby boomers age and require more
health-related products and services over the coming decades.
Sales Included Several Investments in Cyclical Industries
During the period, we sold Kirby Corp. and Trinity Industries after we lost
confidence in their managements' attempts to improve their competitive
positions, and cyclical stocks such as Quanex Corp. and Harnischfeger
Industries, Inc. after they were unable to improve their profitability in
difficult industry conditions. In contrast, we sold the fund's long-held
position in Millipore Corp., an industrial filter producer, after it reached our
target price.
- --------------------------------------------------------------------------------
29
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Capital Growth Fund (continued)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Top 10 Portfolio Holdings as of January 31, 1997
<TABLE>
<CAPTION>
Percentage
of Total
Company Line of Business Net Assets
<S> <C> <C>
First USA, Inc. Financial Services 4.5%
Intel Corp. Semiconductors and 4.3%
Electronics
NationsBank Corp. Commercial Bank 3.4%
Aetna Inc. Healthcare 3.4%
Management
Texaco Inc. International 3.3%
Integrated Oil
Company
BankAmerica Corp. Commercial Bank 3.2%
Tenet Healthcare Corp. Hospitals 3.0%
Philip Morris Companies, Tobacco and Food 3.0%
Inc. Products
Baxter International, Inc. Medical Supplies 2.9%
PartnerRe Ltd. Insurance 2.7%
- --------------------------------------------------------------------
</TABLE>
Outlook
We believe that the global political and economic environments will
continue to remain favorable for the financial markets. In our opinion, the
outlook for the U.S. stock market is attractive, as we expect it to continue to
benefit from low inflation, moderate growth and high levels of consumer
confidence. In addition, we anticipate that the equity market will continue to
be buoyed as baby boomers increase their savings and 401(k) investment plans
grow. To enhance the fund's ability to benefit from the positive investing
climate, we expect to continue to diversify the portfolio among industry sectors
and increase its holdings of large-cap stocks, with the intention of both
providing favorable long-term returns and reducing portfolio risk.
We want to emphasize that investing is a marathon, not a sprint.
Notwithstanding the excellent performance the fund has recently experienced, we
have a long-term investment horizon. In a nutshell, we hope to be able to
purchase great companies with attractive business characteristics and favorable
long-term outlooks, and then patiently hold them for an extended period of time
so that their growth compounds.
/s/ Herbert E. Ehlers
Herbert E. Ehlers
Senior Portfolio Manager,
U.S. Active Equity Growth
/s/ Robert G. Collins
Robert G. Collins
Portfolio Manager,
U.S. Active Equity Growth
/s/ Gregory H. Ekizian
Gregory H. Ekizian
Portfolio Manager,
U.S. Active Equity Growth
March 3, 1997
- --------------------------------------------------------------------------------
30
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Capital Growth Fund
January 31, 1997
- -------------------------------------------------------------------------------
The following graphs show the value, as of January 31, 1997, of a $10,000
investment made (with and without the maximum sales charge of 5.5% and
redemption charge of 5.0% for Class A and B, respectively) on the inception date
of each class. For comparative purposes, the performance of the Fund's benchmark
(the Standard and Poor's 500 Index ("S&P 500")) is shown for the appropriate
time periods. All performance data shown represents past performance and should
not be considered indicative of future performance which will fluctuate with
changes in market conditions. These performance fluctuations will cause an
investor's shares, when redeemed, to be worth more or less than their original
cost.
Class A
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
GS Capital Growth GS Capital Growth
Class A Class A
(w/sales charge) (no sales charge) S&P 500
----------------- ----------------- -------
<S> <C> <C> <C>
4/20/90 9,450 10,000 10,000
1/31/91 9,529 10,084 10,552
1/31/92 12,322 13,040 12,946
1/31/93 14,542 15,388 14,316
1/31/94 16,998 17,987 16,160
1/31/95 16,254 17,200 16,246
1/31/96 21,203 22,437 22,528
1/31/97 26,726 28,282 28,460
</TABLE>
Class B
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
GS Capital Growth GS Capital Growth
Class B Class B
(no redemp. charge) (w/redemp. charge) S&P 500
------------------- ------------------ -------
<S> <C> <C> <C>
5/1/96 $10,000 $10,000 $10,000
1/31/97 11,939 11,439 12,218
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------
Average Annual Total Return
----------------------------------------------
One Year Five Year Since Inception/(a)/
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A, no sales charge 25.97% 16.73% 16.54%
- ------------------------------------------------------------------------------
Class A, w/sales charge 19.04% 15.42% 15.57%
- ------------------------------------------------------------------------------
Class B, no redemption charge N/A N/A 19.39%/(b)/
- ------------------------------------------------------------------------------
Class B, w/redemption charge N/A N/A 14.39%/(b)/
- ------------------------------------------------------------------------------
</TABLE>
/(a)/Class A and Class B shares commenced operations on April 20, 1990 and
May 1, 1996, respectively.
/(b)/An aggregate total return (not annualized) is shown instead of an average
annual total return since this class has not completed a full twelve months
of operations.
- --------------------------------------------------------------------------------
31
<PAGE>
Statement of Investments
- --------------------------------------------------------------------
Goldman Sachs Capital Growth Fund
January 31, 1997
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Shares Description Value
====================================================================
<S> <C> <C>
Common Stocks--98.9%
Advertising & Marketing--1.8%
888,900 Valassis Communications, Inc.* $ 16,333,538
- --------------------------------------------------------------------
Airlines--1.5%
176,500 AMR Corp.* 14,208,250
- --------------------------------------------------------------------
Auto/Original Equipment Manufacturer--1.6%
391,900 Lear Corp.* 14,647,262
- --------------------------------------------------------------------
Banks--6.6%
263,700 BankAmerica Corp. 29,435,512
291,500 NationsBank Corp. 31,482,000
- --------------------------------------------------------------------
60,917,512
- --------------------------------------------------------------------
Beverages--2.1%
155,100 Coca Cola Co. 8,976,413
293,800 Pepsico, Inc. 10,246,275
- --------------------------------------------------------------------
19,222,688
- --------------------------------------------------------------------
Commercial Services--0.9%
226,500 Ecolab Inc. 8,380,500
- --------------------------------------------------------------------
Communications Technology--1.7%
290,860 Lucent Technologies, Inc. 15,779,155
- --------------------------------------------------------------------
Construction/Environmental Services--2.0%
497,500 WMX Technologies, Inc. 18,220,938
- --------------------------------------------------------------------
Consumer Staples--4.0%
150,800 Avon Products Inc. 9,462,700
109,000 Gillette Co. 8,883,500
160,940 Procter & Gamble Co. 18,588,570
- --------------------------------------------------------------------
36,934,770
- --------------------------------------------------------------------
Defense--3.2%
226,800 McDonnell Douglas Corp. 15,252,300
187,500 Northrop Grumman Corp. 14,648,438
- --------------------------------------------------------------------
29,900,738
- --------------------------------------------------------------------
Electric Utilities--1.6%
669,400 Long Island Lighting Co. 15,228,850
- --------------------------------------------------------------------
Electrical Equipment Manufacturer--1.0%
89,400 General Electric Co. 9,208,200
- --------------------------------------------------------------------
Electronics & Semiconductors--1.5%
219,700 Avnet Inc. 13,593,937
- --------------------------------------------------------------------
Food--1.8%
186,500 Nabisco Holdings Corp. 7,133,625
160,480 William Wrigley Jr. Co. 9,327,900
- --------------------------------------------------------------------
16,461,525
- --------------------------------------------------------------------
Forest Products--2.2%
273,500 Georgia Pacific Corp. 20,136,437
- --------------------------------------------------------------------
Health Suppliers/Services--8.4%
589,600 Baxter International, Inc. 27,195,300
477,500 Fisher Scientific International, Inc. 20,950,312
176,400 Johnson & Johnson 10,165,050
277,600 Perkin-Elmer Corp. 19,397,300
- --------------------------------------------------------------------
77,707,962
- --------------------------------------------------------------------
Healthcare Management--8.5%
395,760 Aetna Inc. 31,265,040
487,650 Columbia HCA Healthcare 19,262,175
1,021,400 Tenet Healthcare Corp.* 27,577,800
- --------------------------------------------------------------------
78,105,015
- --------------------------------------------------------------------
Hotels & Restaurants--1.0%
169,720 Marriott International, Inc. 9,016,375
- --------------------------------------------------------------------
Information Management--1.9%
241,000 First Data Corp. 8,676,000
135,670 Reuters Holdings Corp. ADR 8,665,921
- --------------------------------------------------------------------
17,341,921
- --------------------------------------------------------------------
Insurance-Property and Casualty--3.2%
356,650 Integon Corp. 4,948,519
703,800 PartnerRe Holding Ltd. 24,984,900
- --------------------------------------------------------------------
29,933,419
- --------------------------------------------------------------------
Integrated Oil--6.7%
68,700 Amoco Corp. 5,976,900
52,700 Atlantic Richfield Co. 6,969,575
90,900 Mobil Corp. 11,930,625
41,200 Royal Dutch Petroleum ADR 7,148,200
284,800 Texaco, Inc. 30,153,200
- --------------------------------------------------------------------
62,178,500
- --------------------------------------------------------------------
Logistics/Rails--1.6%
556,900 Canadian Pacific Ltd. 15,105,912
- --------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
32
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Shares Description Value
- --------------------------------------------------------------------
<S> <C> <C>
Common Stocks (continued)
Media Content--4.6%
166,200 Gaylord Entertainment Co. $ 4,258,875
261,800 Knight Ridder, Inc. 10,046,575
530,700 Telecommunication Liberty
Media Group* 10,083,300
237,610 Time Warner Inc. 9,147,985
130,400 Walt Disney Co. 9,551,800
- --------------------------------------------------------------------
43,088,535
- --------------------------------------------------------------------
Packaging--1.6%
614,000 Owens Illinois Corp.* 14,582,500
- --------------------------------------------------------------------
Pharmaceuticals--2.3%
90,500 Bristol Myers Squibb 11,493,500
104,300 Pfizer, Inc. 9,686,863
- --------------------------------------------------------------------
21,180,363
- --------------------------------------------------------------------
Retail Trade--1.0%
222,600 Walgreen Co. 9,154,425
- --------------------------------------------------------------------
Retail-Department Stores--2.1%
658,400 Dillard Department Stores, Inc. 19,669,700
- --------------------------------------------------------------------
Security and Commodity Brokers, Dealers and Services--2.0%
571,000 Lehman Brothers Holdings, Inc. 18,057,875
- --------------------------------------------------------------------
Semiconductors & Electronics--4.3%
247,000 Intel Corp. 40,075,750
- --------------------------------------------------------------------
Specialty Finance & Agency--8.6%
345,300 Federal National Mortgage Assn. 13,639,350
828,200 First USA, Inc. 41,927,625
683,925 MBNA Corp. 23,595,413
- --------------------------------------------------------------------
79,162,388
- --------------------------------------------------------------------
Specialty Retail--1.0%
311,900 Service Corp. International 9,045,100
- --------------------------------------------------------------------
Technology Capital Goods--1.5%
286,400 Applied Materials Inc.* 14,141,000
- --------------------------------------------------------------------
Tire & Other Related Rubber Products--2.1%
362,400 Goodyear Tire & Rubber Co. 19,750,800
- --------------------------------------------------------------------
Tobacco--3.0%
229,400 Philip Morris Companies, Inc. 27,269,925
- --------------------------------------------------------------------
Total Common Stocks
(Cost $661,066,240) $ 913,741,765
- --------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------
Principal
Amount Description Value
====================================================================
<S> <C> <C>
Repurchase Agreement--2.0%
$18,300,000 Joint Repurchase Agreement Account
5.63%, 02/03/97 $ 18,300,000
- --------------------------------------------------------------------
Total Repurchase Agreement
(Cost $18,300,000) $ 18,300,000
- --------------------------------------------------------------------
Total Investments
(Cost $679,366,240)(a) $ 932,041,765
- --------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for investments in
which value exceeds cost $ 255,377,138
Gross unrealized loss for investments in
which cost exceeds value (3,163,091)
- --------------------------------------------------------------------
Net unrealized gain $ 252,214,047
====================================================================
</TABLE>
* Non-income producing security.
(a) The aggregate cost for federal income tax purposes is $679,827,718.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
33
<PAGE>
Letter to Shareholders
- ----------------------------------------------------------------------
Goldman Sachs Small Cap Equity Fund
- ----------------------------------------------------------------------
Objective and Investment Approach
The Goldman Sachs Small Cap Equity Fund's objective is long-term
capital appreciation, primarily through investments in equity securities of U.S.
companies with market capitalizations of $1 billion or less. The fund is managed
using a "business value" approach to investing, which means we look for
attractive companies with high or improving returns on capital that we believe
can achieve solid, sustainable growth, as well as generate free cash after
investing for future growth. This approach differs markedly from many emerging
growth small-cap funds that invest in companies with high price-to-earnings
multiples solely on the basis of rapid, but frequently unsustainable, growth
rates. Using our own rigorous fundamental research, which includes meeting with
a company's management and examining a company's competitors, customers and
suppliers, we build the fund's portfolio one stock at a time.
Performance Review: Class A Shares Outperformed the Benchmark and the S&P 500
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
<S> <C> <C>
Fund Total Return Russell
(based on net 2000 Total
asset value) Return
----------- ------
Class A (1/31/96 - 1/31/97)* 27.28% 18.95%
Class B (5/1/96 - 1/31/97)* 5.39% 7.32%
- --------------------------------------------------------------------
</TABLE>
* Class A and B share performance assumes reinvestment of all dividends and
distributions, a complete redemption at the net asset value at the end of the
period and no initial sales charge or contingent deferred sales charge.
Performance for Class B shares is a cumulative total return (not annualized)
from their inception through the end of the period.
During the period under review, small-cap stocks achieved strong
returns but still underperformed large-cap stocks. Small-caps began the period
on a strong note, outpacing large-caps from February through May, then gave up
their early lead during June and July when the market experienced a sharp
correction. While both large-cap and small-cap stocks sold off, small-caps were
particularly hard hit. During the latter half of the period, the market surged
to record highs, but small-caps trailed their larger peers as investors rushed
to participate in the rising market, but hedged their bets by sticking with the
largest, most liquid stocks.
Despite the small-cap sector's waning momentum, we are pleased to
report that the fund's Class A shares returned 27.28% (at net asset value),
outperforming both its benchmark, the Russell 2000 index (18.95%), and the
large-cap S&P 500 stock index (26.25%). In addition, the fund's Class A shares
placed in the top third of the Lipper small-company growth fund category
(ranking 129th out of 394) for the 12-month period ended January 31, 1997,
according to Lipper Analytical Services, Inc. (Please note that Lipper rankings
do not take sales charges into account and that past performance is not a
guarantee of future results. Lipper did not rank the fund's Class B shares.) The
fund's Class B shares also achieved positive returns, but did not fare as well
because their inception coincided with the start of a more difficult market
environment for small-cap stocks.
The fund's performance was especially strong during the first half of
the period, when a number of its long-held investments performed well. These
positions included some companies that had experienced temporary difficulties
and rebounded on improving fundamentals, as well as companies that had been
relatively undiscovered and garnered increased investor awareness due to
continued strong earnings gains. The fund also performed better than the broader
market during the summer correction, when expensive, momentum-type stocks were
hit harder than those with inexpensive valuations, which the fund typically
emphasizes. In contrast, during the second half of the period, stocks with
momentum characteristics rebounded, while the types of stocks that the fund
stresses did not perform as strongly. In addition, the fund experienced price
corrections in several holdings due to earnings volatility.
The fund's top performers during the period came from a wide variety
of industries, with Black Box Corp. and Morningstar Group, Inc. contributing
significantly to overall results. Black Box Corp., a catalog marketer of
34
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
communications and networking products, was the fund's largest holding in the
beginning of the period and climbed substantially as it continued to achieve
record revenues and profits due to successful direct marketing efforts and new
product introductions. The position in Black Box was then sold after it reached
our target price. Morningstar Group, Inc., a manufacturer of specialty foods,
was the fund's eighth largest holding at the start of the period and nearly
tripled in price when it consolidated its market position through internal
growth, new product introductions and several attractive acquisitions. The fund
has held Morningstar Group for over four years; it is a good example of our
willingness to hold strong businesses until the market recognizes their true
value.
Other strong performers included American Safety Razor Co., the
leading U.S. manufacturer of private-brand and value-priced shaving blades,
which benefited from internal profit enhancement efforts and particularly strong
sales of its branded and private-label shaving and personal care products;
Movado Group, Inc., the owner of the Movado, Concord and Esquire watch brands,
which rebounded due to significant sales growth, new licensing agreements and
increased analyst coverage; J. Baker, Inc., a diversified retailer of footwear
and apparel, which announced its intention to sell its shoe division in order to
focus its resources on its successful "Casual Male Big & Tall" stores; and
Nimbus CD International, Inc., a CD and CD-ROM manufacturer that we sold after
it rose sharply due to high investor expectations of future DVD (digital video
disk) demand. Finally, several financial holdings performed well, such as Horace
Mann Educators Co., a provider of property, casualty and life insurance for the
educator market, and Terra Nova Bermuda Holdings, a worldwide provider of
property casualty insurance and reinsurance.
Not all of the fund's holdings fulfilled our expectations. Several
stocks were hurt by disappointing earnings, although we continue to believe in
their long-term prospects. For example, Landstar System, Inc. experienced
weakness when the restructuring of its trucking operations from a fixed cost to
a variable cost business took longer than expected. In addition, Central Maine
Power Co. was impacted by uncertainty in the regulatory environment, and Alpine
Lace Brands, Inc., a developer and marketer of cheese products, declined due to
an increase in commodity cheese prices. We took advantage of lower prices and
increased the fund's positions in all three stocks. In contrast, we liquidated
two other underperformers, Musicland Stores Corp. and Levitz Furniture Inc.,
because their fundamental businesses continued to deteriorate.
Recent Additions
During the period, we initiated a number of positions that have
already contributed to performance. These included Linens 'N Things, Inc., a
retailer of home accessories, which was attractively valued versus its key
competitor, Bed, Bath and Beyond, and has significant store expansion and margin
improvement potential, and Sun Healthcare Group, Inc., a well-managed
owner/operator of nursing homes with attractive long-term growth potential.
Though Sun Healthcare Group has been temporarily impacted by a government
investigation of one of its subsidiaries, we believe this issue is fully
reflected in the current stock price. In the technology sector, we added
DecisionOne Holdings Corp., the leading independent provider of computer
hardware and maintenance support services to U.S. companies. We intend to
continue to focus on technology-related service providers and distributors that
we believe are positioned to benefit from the expected long-term growth of the
sector but are not dependent on the success of any single product or service.
Other new investments were APS Holding Corp., a distributor of
automotive parts, which was depressed by industry- and company-specific issues
that we believe to be temporary, and Friedman's, Inc., a retailer of inexpensive
jewelry with significant expansion potential and a very low-cost operating
strategy. We also added two specialty insurance companies, SCPIE Holdings, Inc.
and Symon's International Group, Inc.
35
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Small Cap Equity Fund (continued)
- --------------------------------------------------------------------------------
Sales Included Several Financial Holdings
The fund sold several stocks after they appreciated and reached our
target prices. These included a number of financial holdings, such as Greenpoint
Financial Corp., the leading national lender of "no-documentation--low-
documentation" mortgages; Dime Bancorp, Inc., the fifth largest thrift in the
U.S.; and Western National Corporation, a marketer of annuity products.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Top 10 Portfolio Holdings as of January 31, 1997
Percentage of
Total Net
Company Line of Business Assets
<S> <C> <C>
Movado Group, Inc. Luxury and 5.6%
Affordable Watch
Distributor
DecisionOne Holdings Corp. Computer Support 4.9%
Provider
Sun Healthcare Group, Inc. Healthcare Services 3.9%
APS Holding Corp. Automotive Parts 3.6%
Distributor
Mariner Health Group, Inc. Healthcare Services 3.6%
Groupe AB Television 3.5%
Programming
Distributor
Friedman's, Inc. Jewelry Retailer 3.5%
J. Baker, Inc. Specialty Apparel 3.5%
Heritage Media Corp. Marketing Services 3.4%
Provider
Linens 'N Things, Inc. Home Products 3.1%
Retailer
- --------------------------------------------------------------------
</TABLE>
Outlook
One of the key factors that will affect equity performance during
1997 will be the continuation of the favorable economic environment of moderate
growth and low inflation, which would ensure that both the corporate earnings
outlook and the interest rate climate remain hospitable. Small-capitalization
stocks as a group currently appear undervalued relative to large-cap stocks and
to their own expected earnings potential. We believe that corporate earnings
growth will slow somewhat in 1997, and to the extent that smaller companies can
achieve better earnings growth than larger companies, they should perform
relatively well. The performance of small-caps will particularly depend on
investors broadening their focus from the largest, most liquid stocks to
smaller, less widely followed issues. We are optimistic regarding the fund's
future performance based on the strong earnings growth and the free cash flow we
expect from many of our top holdings, as well as from new investments.
/s/ Paul D. Farrell
Paul D. Farrell
Senior Portfolio Manager,
U.S. Active Equity Value
/s/ Matthew B. McLennan
Matthew B. McLennan
Assistant Portfolio Manager,
U.S. Active Equity Value
/s/ Timothy G. Ebright
Timothy G. Ebright
Portfolio Manager,
U.S. Active Equity Growth
March 3, 1997
36
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Small Cap Equity Fund
January 31, 1997
- -------------------------------------------------------------------------------
The following graphs show the value, as of January 31, 1997, of a $10,000
investment made (with and without the maximum sales charge of 5.5% and
redemption charge of 5.0% for Class A and B, respectively) on the inception date
of each class. For comparative purposes, the performance of the Fund's
benchmarks (the Standard and Poor's 500 Index ("S&P 500") and the Russell 2000)
are shown for the appropriate time periods. All performance data shown
represents past performance and should not be considered indicative of future
performance which will fluctuate with changes in market conditions. These
performance fluctuations will cause an investor's shares, when redeemed, to be
worth more or less than their original cost.
Class A
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
GS Small Cap Class A GS Small Cap Class A Russell
(w/sales charge) (no sales charge) S&P 500 2000
-------------------- --------------------- ------- -------
<S> <C> <C> <C> <C>
10/22/92 $ 9,450 10,000 $10,000 $10,000
1/31/93 11,138 11,786 10,655 11,733
1/31/94 14,494 15,337 12,027 13,914
1/31/95 11,953 12,649 12,091 13,078
1/31/96 12,813 13,559 16,768 17,010
1/31/97 16,320 17,270 21,183 20,242
</TABLE>
Class B
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
GS Small Cap Class B GS Small Cap Class B Russell
(no redemp. charge) (w/redemp. charge) S&P 500 2000
-------------------- -------------------- ------- -------
<S> <C> <C> <C> <C>
5/1/96 $10,000 $10,000 $10,000 $10,000
1/31/97 10,539 10,039 12,218 10,732
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------
Average Annual Total Return
-----------------------------------------
One Year Since Inception/(a)/
-------------------------------------------------------------------------
<S> <C> <C>
Class A, no sales charge 27.28% 13.61%
-------------------------------------------------------------------------
Class A, w/sales charge 20.27% 12.12%
-------------------------------------------------------------------------
Class B, no redemption charge N/A 5.39%/(b)/
-------------------------------------------------------------------------
Class B, w/redemption charge N/A 0.39%/(b)/
-------------------------------------------------------------------------
</TABLE>
/(a)/ Class A and Class B shares commenced operations on October 22, 1992
and May 1, 1996, respectively.
/(b)/ An aggregate total return (not annualized) is shown instead of an
average annual total return since this class has not completed a full
twelve months of operations.
- --------------------------------------------------------------------------------
37
<PAGE>
Statement of Investments
- --------------------------------------------------------------------
Goldman Sachs Small Cap Equity Fund
January 31, 1997
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value
====================================================================
<S> <C> <C>
Common Stocks--92.5%
- --------------------------------------------------------------------
Auto/Original Equipment Manufacturer--3.6%
777,200 APS Holding Corp.* $ 7,869,150
- --------------------------------------------------------------------
Commercial Products--2.4%
211,000 Figgie International, Inc. Class A* 2,611,125
231,400 Figgie International, Inc. Class B* 2,487,550
- --------------------------------------------------------------------
5,098,675
- --------------------------------------------------------------------
Commercial Services--1.0%
539,200 Opinion Research Corp.* 2,022,000
- --------------------------------------------------------------------
Computers & Peripherals--7.5%
598,700 DecisionOne Holdings Corp.* 10,477,250
467,100 Multiple Zones International, Inc.* 5,605,200
- --------------------------------------------------------------------
16,082,450
- --------------------------------------------------------------------
Consumer Staples--3.8%
270,700 American Safety Razor Co.* 3,958,987
389,400 Spartech Corp. 4,234,725
- --------------------------------------------------------------------
8,193,712
- --------------------------------------------------------------------
Electric Utilities--2.2%
433,900 Central Maine Power Co. 4,827,137
- --------------------------------------------------------------------
Electrical Equipment--2.3%
240,100 Carbide/Graphite Group* 5,012,087
- --------------------------------------------------------------------
Food--2.3%
374,600 Alpine Lace Brands, Inc.* 2,341,250
109,000 Morningstar Group, Inc.* 2,588,750
- --------------------------------------------------------------------
4,930,000
- --------------------------------------------------------------------
Healthcare Management--9.0%
20,100 Health Systems International, Inc.* 520,088
798,000 Mariner Health Group, Inc.* 7,780,500
517,100 Sun Healthcare Group, Inc.* 8,402,875
146,200 Trigon Healthcare, Inc.* 2,595,050
- --------------------------------------------------------------------
19,298,513
- --------------------------------------------------------------------
Home Furnishing & Services--2.9%
221,500 Congoleum Corp.* 3,156,375
160,900 Synthetic Industries, Inc.* 3,036,988
- --------------------------------------------------------------------
6,193,363
- --------------------------------------------------------------------
Insurance Specialty--1.6%
63,100 Old Republic International Corp. 1,695,812
83,900 Scpie Holdings, Inc.* 1,761,900
- --------------------------------------------------------------------
3,457,712
- --------------------------------------------------------------------
Insurance-Life--0.3%
36,000 AmerUs Life Holdings, Inc.* 711,000
- --------------------------------------------------------------------
Insurance-Property and Casualty--6.0%
50,500 Horace Mann Educators Co. 2,158,875
206,500 IPC Holdings Ltd. 4,943,094
92,200 Symons International Group* 1,475,200
215,800 Terra Nova Bermuda Holdings 4,262,050
- --------------------------------------------------------------------
12,839,219
- --------------------------------------------------------------------
Leisure--1.0%
210,700 Trump Hotels & Casino Resorts,
Inc.* 2,212,350
- --------------------------------------------------------------------
Media Content--9.0%
596,300 Groupe AB SA ADR* 7,602,825
609,800 Heritage Media Corp.* 7,393,825
432,300 International Post Ltd.* 1,729,200
324,200 Platinum Entertainment, Inc.* 2,674,650
- --------------------------------------------------------------------
19,400,500
- --------------------------------------------------------------------
Metal Products--0.5%
57,200 Doncasters Plc ADR* 1,122,550
- --------------------------------------------------------------------
Packaging--0.7%
88,100 Shorewood Packaging Corp.* 1,596,813
- --------------------------------------------------------------------
Real Estate--0.7%
73,700 Insignia Financial Group, Inc.* 1,538,487
- --------------------------------------------------------------------
Recreation Products--5.6%
539,200 Movado Group, Inc. 12,064,600
- --------------------------------------------------------------------
Restaurants & Hotels--6.4%
262,400 IHOP Corp.* 6,461,600
399,300 Mortons Restaurant Group, Inc.* 6,438,713
40,000 Sonic Corp.* 815,000
- --------------------------------------------------------------------
13,715,313
- --------------------------------------------------------------------
Retail Hardgoods--4.7%
731,000 Brookstone Inc.* 5,939,375
290,700 Finlay Enterprises, Inc.* 4,287,825
- --------------------------------------------------------------------
10,227,200
- --------------------------------------------------------------------
</TABLE>
38
<PAGE>
- --------------------------------------------------------------------
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value
====================================================================
<S> <C> <C>
Common Stocks (continued)
Specialty Retail--12.7%
506,200 Friedmans, Inc.* $ 7,593,000
242,000 General Nutrition Companies, Inc.* 4,386,250
1,500 Hibbett Sporting Goods, Inc.* 24,375
1,100,400 J. Baker, Inc. 7,565,250
87,000 Leslies Poolmart, Inc.* 1,141,875
307,200 Linens N'Things, Inc.* 6,758,400
- --------------------------------------------------------------------
27,469,150
- --------------------------------------------------------------------
Telephone Communications--0.3%
15,400 Telephone & Data Systems, Inc. 587,125
- --------------------------------------------------------------------
Textiles--1.6%
87,800 Samsonite Corp.* 3,468,100
- --------------------------------------------------------------------
Trucking--2.3%
207,100 Landstar Systems, Inc.* 4,918,625
- --------------------------------------------------------------------
Voice, Video and Data--2.1%
263,200 Pegasus Communications, Inc.* 3,224,200
142,700 Rural Cellular Corp.* 1,391,325
- --------------------------------------------------------------------
4,615,525
- --------------------------------------------------------------------
Total Common Stocks
(Cost $194,261,908) $199,471,356
====================================================================
<CAPTION>
Principal
Amount Description Value
====================================================================
<S> <C> <C>
Corporate Bond--0.2%
- --------------------------------------------------------------------
$ 500,000 J. Baker, Inc.
7.0%, 06/01/02 $ 412,500
- --------------------------------------------------------------------
Total Corporate Bond
(Cost $498,387) $ 412,500
====================================================================
Repurchase Agreement--7.7%
- --------------------------------------------------------------------
$16,600,000 Joint Repurchase Agreement Account
5.63%, 02/03/97 $ 16,600,000
- --------------------------------------------------------------------
Total Repurchase Agreement
(Cost $16,600,000) $ 16,600,000
====================================================================
<CAPTION>
Contracts Description Value
====================================================================
<S> <C> <C>
Options*--0.5%
200 S&P 500 Index Put Strike 725
exp. 03/97 $ 95,000
351 S&P 500 Index Put Strike 700
exp. 03/97 92,138
560 S&P 500 Index Put Strike 750
exp. 06/97 938,000
- --------------------------------------------------------------------
Total Options
(Cost $1,643,182) $ 1,125,138
====================================================================
Total Investments
(Cost $213,003,477)/(a)/ $217,608,994
====================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in
which value exceeds cost $ 31,335,604
Gross unrealized loss for investments in
which cost exceeds value (26,835,810)
- --------------------------------------------------------------------
Net unrealized gain $ 4,499,794
====================================================================
</TABLE>
* Non-income producing security.
/(a)/The aggregate cost for federal income tax purposes is $213,109,200.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
39
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs International Equity Fund
- --------------------------------------------------------------------------------
Objective and Investment Approach
The Goldman Sachs International Equity Fund seeks long-term capital
appreciation by investing in equity securities of companies organized or traded
outside the U.S. that we believe have the potential to appreciate over the long
term. The fund focuses on growing companies that are attractively valued and
have strong, competitive positions in their respective industries. The fund's
portfolio managers are based in London, Tokyo and Singapore and their knowledge
of local markets plays an important role in uncovering investment opportunities.
While the fund does not allocate assets across specific countries based on
top-down economic or market forecasts, the portfolio managers strive to manage
risk by remaining diversified by country and industry sector and by closely
monitoring economic and political events in countries in which the fund does
invest.
Economic and Market Overview: European Markets Were Strong Despite Weak
Economies; Asia Faltered
Economic growth was slower than expected in many countries during the
period, prompting further monetary easing in much of Europe and continued very
low short-term interest rates in Japan. European equity markets performed very
well despite the growth shortfall, benefiting from an increased focus on
improving shareholder value. The Japanese market declined significantly, while
results in other Asian markets were mixed.
. Europe. The economies of several European markets, such as the U.K., Norway
and Ireland, strengthened during the period, but overall growth remained weak
throughout most of Europe. A number of European countries attempted to stimulate
their economies through monetary easing, but maintained tight fiscal policies in
an effort to reduce their budget deficits enough to qualify for European
Monetary Union. This strategy proved to be only modestly successful, as
unemployment remained at record highs, particularly in Germany. Though the
recovery was somewhat disappointing, European equity markets rose 26.6% during
the period (as measured by the FT/S&P Actuaries Europe Index in terms of local
currencies), fueled by low inflation, low interest rates and relatively strong
bond markets. In addition, corporate profits improved, reflecting increased
emphasis on cost cutting and restructuring. The equity markets of Finland, Spain
and Sweden were among the strongest performers, while British stocks lagged much
of Europe due to a strengthening currency (which made U.K. exports more
expensive) and expectations of increases in short-term interest rates.
. Japan. The Japanese economy strengthened during the period, but earnings
growth fell short of expectations. For the 12-month period ended January 31,
Japanese stocks (as measured by the TOPIX index in yen) declined 14.9%, with
approximately half of the loss occurring in January 1997 alone. During the first
half of the period, the Japanese market was bolstered by heavy demand from
Europe and the U.S., but foreign investors subsequently became net sellers when
the economic recovery softened and raised uncertainty surrounding the
sustainability of corporate profits. The weaker corporate earnings outlook
resulted in a conspicuous divergence between the performance of the largest
international blue-chip stocks and the rest of the market, particularly in the
third quarter. Lackluster investor sentiment was further exacerbated at the end
of the year due to increased pessimism that the Liberal Democratic Party (LDP)
government's higher taxes and scant spending on public works would dampen the
economy.
. Asia (ex-Japan). Asian stock markets rose 2.4% during the period, as measured
by the MSCI All Country Asia Free (Ex Japan) Index (in terms of local
currencies). Asian markets began the period on a strong note, but several
markets faltered during the spring and summer due to a host of issues. These
included political uncertainty arising from national elections in several Asian
countries as well as slowing economic growth throughout the region, principally
due to weak electronics exports. From
- --------------------------------------------------------------------------------
40
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
September 1996 through January 1997, the region generally improved due to
stronger corporate earnings and stabilizing exports. The performance of the
individual markets varied widely. Malaysia was one of the region's best
performing markets during the period under review, rising 18.4%; Hong Kong, the
largest market in the region, performed well with a 12.0% return; and Thailand
was by far the weakest market, declining 45.3% (all in local currency terms).
Performance Review: Security Selection, Country Allocations and Industry
Weightings All Contributed to Strong Performance
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Fund Total FT/S&P
Return Actuaries
(based on Europe &
net asset Pacific Index
value) Total Return
------ ------------
<S> <C> <C>
Class A (1/31/96 - 1/31/97)* 13.48% 1.27%
Class B (5/1/96 - 1/31/97)* 2.83% -4.22%
Institutional (2/7/96 - 1/31/97)* 12.53% 0.53%
Service (3/6/96 - 1/31/97)* 10.42% 0.86%
- ------------------------------------------------------------------------------
</TABLE>
* Class A, B, Institutional and Service share performance assumes reinvestment
of all dividends and distributions, a complete redemption at the net asset value
at the end of the period and no initial sales charge or contingent deferred
sales charge. Performance for Class B, Institutional and Service shares is a
cumulative total return (not annualized) from their inception through the end of
the period.
The fund performed extremely well during the period under review,
with all of its share classes outperforming the benchmark, the Financial
Times/S&P Actuaries Europe & Pacific Index ("Europac") unhedged. Europac is a
capitalization-weighted composite of approximately 1,500 stocks from 23
countries in Europe and the Asia-Pacific region and is calculated on a monthly
basis. We are also pleased to note that the fund's Class A shares placed in the
top third of the Lipper international fund category (ranking 93rd out of 342)
for the 12-month period ended January 31, 1997, according to Lipper Analytical
Services, Inc. (Please note that Lipper rankings do not take sales charges into
account and that past performance is not a guarantee of future results. Lipper
did not rank the fund's Class B, Institutional or Service shares.)
The primary driver of the fund's superior performance was successful
stock selection, as we continued to focus on growing companies that actively
increased shareholder value through actions such as cost cutting, share buybacks
or restructuring. In addition, country allocations that worked in the fund's
favor were its overweighting in Sweden, one of the strongest performing markets
during the period, and its underweighting in Japan, one of the weakest, each the
result of our bottom-up approach to stock selection. The fund's industry
allocations also added value. The fund was overweighted in business services and
diversified consumer goods/services, which were among the best performing
sectors, and underweighted in financial services and basic industries, which
performed relatively poorly.
In terms of currency exposure, though the fund's neutral exposure is
unhedged, it was substantially hedged against the yen, which benefited
performance significantly when the yen continued to fall against the dollar. In
addition, the fund was partially hedged against some European currencies, such
as the Deutsche mark and the Swiss franc, which worked in its favor when the
dollar rose against those currencies.
The fund's Class B shares outperformed the benchmark by a wide
margin, but their performance was not as strong as the other share classes
because they began operations in May, after equity prices had already risen
significantly.
Portfolio Composition: A Widely Diversified Portfolio
As of January 31, 1997, the fund held positions in 56 companies based
in 16 countries. In terms of total portfolio assets, the five largest country
exposures were Japan (27.3%), the U.K. (12.6%), Germany (7.1%), Sweden (7.0%)
and Switzerland (6.8%).
Europe. At the end of the period, the portfolio's 53.0% allocation in European
stocks was in line with that of the benchmark (54.1%). In general, growth stocks
led the
- --------------------------------------------------------------------------------
41
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs International Equity Fund (continued)
- --------------------------------------------------------------------------------
market during the period. Many of the fund's European holdings were
growth-oriented stocks that benefited from positive earnings surprises and
successful efforts by senior management to enhance equity returns and
shareholder value. Several of the portfolio's longer term European holdings
were, once again, among its strongest performers. Securitas (Sweden), the
largest security services company in Europe, more than doubled during the
period, boosted by earnings from companies it acquired in Germany, France and
Portugal. Fresenius (Germany), a major producer of medical supplies, rose over
140% as it merged its global kidney dialysis division with W. R. Grace's
National Medical Center healthcare subsidiary and spun off the resulting
business, Fresenius Medical Care. Ericsson (Sweden), one of the world's leading
suppliers of mobile telephones and infrastructure, rebounded from weakness early
in the period when it achieved very good earnings, which reassured investors
that it was not suffering from margin pressure or weak mobile telephone orders.
Other strong performers were Randstad Holdings (Netherlands), the leading
temporary help organization in its market, which reported healthy sales and
earnings as its business continued to expand, and Comptoirs Modernes (France), a
supermarket chain operator, which gained market share in France and made
important acquisitions in Spain.
Several of the fund's newer additions also contributed to its
positive results. These included two pharmaceutical companies: Hoechst
(Germany), whose acquisition and restructuring plans indicate a commitment to
improving shareholder value, and Novartis (Switzerland), which was formed
through the merger of Ciba-Geigy and Sandoz and is expected to benefit from
significant cost reductions as well as new product development. Other
significant new positions that performed well were SGS Thomson (France), one of
the 10 largest semiconductor manufacturers in the world, which operates in the
high-value-added, application-specific sector of the market, and Telecom Italia
Mobile (Italy), the leading mobile telephone operator in Italy, which generates
strong cash flow and is extremely profitable.
Japan. Approximately 27% of the fund was invested in Japan, which was
underweighted relative to the benchmark (32.1%). The fund's Japanese stocks
fared better than the market, as we avoided banks and brokerages, two of the
weakest industries. We invested in companies with relatively robust earnings
visibility and good valuations, particularly favoring management that improved
cost competitiveness and strengthened their core business. The fund's best
performing Japanese stocks were TDK Corp., an electronic components manufacturer
that reported better than expected earnings due to strong sales of personal
computer-related components; Hoya Corp., an optical glass manufacturer that
aggressively restructured its operations and successfully diversified its
business so that it now dominates the glass magnetic disc market; and Mirai
Industry, a market leader in electric cables, pipes and other electric wiring
that introduced new products and cut costs. In contrast, Kyocera Corp., an
electronics components manufacturer, reported disappointing results due to
increased competition in the semiconductor and communication equipment
businesses. A new addition was Takeda Chemical Industry, the largest
pharmaceutical company in Japan, where aggressive new management initiatives
rapidly expanded overseas sales and improved the profitability of its
prescription drug business.
Asia-Pacific. Asia, a 13.5% allocation (excluding Japan), was slightly
overweighted compared with the benchmark's 10.7%, with Hong Kong representing
the largest country position at 6.7% of the portfolio. For most of the period,
the fund was overweighted in Malaysia, Hong Kong and Australia, which were three
of the better performing Asian markets. Though the performance of some of the
other markets fell short of expectations, our stock selection within the region
worked in the fund's favor. Several of the fund's top performers were financial
stocks, including Commerce Asset-Holdings, the fifth largest financial group in
Malaysia, which benefited from its merchant banking operations and strong loan
growth, and HSBC Holdings, a Hong Kong-based banking and financial services
organization, which reported strong results due to its dominant market position.
New holdings include Australia & New Zealand Bank Group, a bank that is
positioned to benefit from the potential deregulation in Australia's financial
services sector, and Asia Satellite Telecommunications Holdings Ltd., a
- --------------------------------------------------------------------------------
42
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
leading satellite owner and operator in the Asia-Pacific region that owns prime
orbital slots that are expected to result in high utilization rates and fees.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Top 10 Portfolio Holdings as of January 31, 1997
Percentage
of Total
Company Country Line of Business Net Assets
<S> <C> <C> <C>
HSBC Holdings Hong Kong Banking and 3.0%
Finance
Novartis Switzerland Pharmaceuticals 3.0%
Fresenius Germany Kidney Dialysis 2.4%
Equipment
TDK Corp. Japan Tape and Disc 2.4%
Manufacturer
Telecom Italia Italy Mobile Tele- 2.4%
Mobile communications
Operator
Canon, Inc. Japan Office Equipment 2.4%
Manufacturer
Adecco Switzerland Temporary Help 2.4%
Services
Adidas Germany Sporting Goods 2.4%
Manufacturer
Hoechst Germany Chemical and 2.3%
Drug
Manufacturer
Hoya Corp. Japan Optical Glass 2.3%
Manufacturer
- --------------------------------------------------------------------
</TABLE>
Outlook
In the near term, we expect most international economies to continue
to experience moderate growth and subdued inflation. We are particularly
positive on the prospects for the European markets in 1997, where we expect a
modest acceleration in economic growth and a continuation of healthy corporate
earnings growth helped by cost cutting as well as restructuring initiatives.
We are currently most concerned about Japan. Despite the sharp
correction, we expect to remain underweighted in the Japanese market because of
our negative view of the banking sector and only modest earnings recoveries in
nonmanufacturing sectors. Lack of investor confidence in the government's
commitment to deregulation, as well as simultaneous weakness in the bond and
currency markets, have all impacted market sentiment. In this state of
uncertainty, superior stock selection will be essential, and we intend to
emphasize companies with clear earnings visibility, strong management and
attractive valuations. Despite the generally poor conditions, the earnings for
the fund's Japanese holdings are above expectations and are being upgraded. In
non-Japan Asia, corporate earnings reports have been mixed, but we believe
improved political stability and export growth should help stocks in 1997.
Finally, we are pleased to report that we have expanded our
international equity team in all geographic regions to support our effort to
seek out the most promising companies around the world.
/s/ Roderick D. Jack
Roderick D. Jack
Senior Portfolio Manager, London
/s/ Marcel Jongen
Marcel Jongen
Senior Portfolio Manager, London
/s/ Shogo Maeda
Shogo Maeda
Senior Portfolio Manager, Tokyo
/s/ Warwick M. Negus
Warwick M. Negus
Senior Portfolio Manager, Singapore
March 3, 1997
- --------------------------------------------------------------------------------
43
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs International Equity Fund
January 31, 1997
- --------------------------------------------------------------------------------
The following graphs show the value, as of January 31, 1997, of a $10,000
investment made (with and without the maximum sales charge of 5.5% and
redemption charge of 5.0% for Class A and Class B, respectively) on the
inception date of each class. For comparative purposes, the performance of the
Fund's benchmark (the Financial Times-Actuaries World Euro-Pacific Index
Unhedged ("FT Euro-Pac (Unhedged)/(b)/) is shown for the appropriate time
periods. All performance data shown represents past performance and should not
be considered indicative of future performance which will fluctuate with changes
in market conditions. These performance fluctuations will cause an investor's
shares, when redeemed, to be worth more or less than their original cost.
<TABLE>
<CAPTION>
Class A
[LINE GRAPH APPEARS HERE]
GS Intl Eq GS Intl Eq
Class A Class A FT Euro-Pac Ft Euro-Pac
(w/sales charge) (no sales charge) (Comb )(b) (Unhedged)
---------------- ----------------- ----------- -----------
<S> <C> <C> <C> <C>
12/1/92 9,450 10,000 10,000 10,000
1/31/93 9,566 10,123 10,063 10,055
1/31/94 12,066 12,768 13,498 14,399
1/31/95 10,058 10,643 12,119 13,902
1/31/96 12,942 13,695 13,983 16,039
1/31/97 14,961 15,546 14,160 16,243
<CAPTION>
Class B
[LINE GRAPH APPEARS HERE]
GS Intl Eq GS Intl Eq
Class B Class B FT Euro-Pac
(w/sales charge) (no sales charge) (Unhedged)
---------------- ----------------- -----------
<S> <C> <C> <C>
5/1/96 10,000 10,000 10,000
1/31/97 10,283 9,783 9,578
<CAPTION>
Institutional
[LINE GRAPH APPEARS HERE]
GS Intl Equity FT Euro-Pac
Institutional Class (Unhedged)
------------------- -----------
<S> <C> <C>
2/7/96 10,000 10,000
1/31/97 11,253 10,053
<CAPTION>
Service
[LINE GRAPH APPEARS HERE]
GS Intl Equity FT Euro-Pac
Service Class (Unhedged)
-------------- -----------
<S> <C> <C>
3/6/97 10,000 10,000
1/31/97 11,042 10,086
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------
Average Annual Total Return
----------------------------------------
One Year Since Inception/(a)/
- -------------------------------------- ------------------- --------------------
<S> <C> <C>
Class A, no sales charge 13.48% 11.15%
- -------------------------------------- ------------------- --------------------
Class A, w/sales charge 7.26% 9.66%
- -------------------------------------- ------------------- --------------------
Class B, no redemption charge N/A 2.83% /(c)/
- -------------------------------------- ------------------- --------------------
Class B, w/redemption charge N/A (2.17)%/(c)/
- -------------------------------------- ------------------- --------------------
Institutional Class N/A 12.53% /(c)/
- -------------------------------------- ------------------- --------------------
Service Class N/A 10.42% /(c)/
- -------------------------------------- ------------------- --------------------
</TABLE>
/(a)/ Class A, Class B, Institutional and Service shares commenced operations
on December 1, 1992, May 1, 1996, February 7, 1996 and March 6, 1996,
respectively.
/(b)/ Beginning on September 1, 1994, the Class A shares began using the
unhedged FT Euro-Pac as its benchmark (prior thereto, Class A used the
hedged FT Euro-Pac). The combined FT Euro-Pac represents the hedged FT
Euro-Pac performance up to August 31, 1994 and the unhedged FT Euro-Pac
performance from September 1, 1994 through January 31, 1997.
/(c)/ An aggregate total return (not annualized) is shown instead of an average
annual total return since these classes have not completed a full twelve
months of operations.
- --------------------------------------------------------------------------------
44
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs International Equity Fund
January 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value
====================================================================
<S> <C> <C>
Common Stocks--91.5%
Australian Dollar--3.6%
1,851,658 Australia & New Zealand Bank Group
(Commercial Banks) $ 11,355,706
1,564,955 Woodside Petroleum, Ltd. (Oil &
Gas) 11,053,763
- --------------------------------------------------------------------
22,409,469
- --------------------------------------------------------------------
Austrian Schilling--1.2%
105,400 Oesterreichische Elektrizitats
(Utilities) 7,698,241
- --------------------------------------------------------------------
Belgian Franc--0.2%
14,400 Dexia (Financial Services) 1,372,240
- --------------------------------------------------------------------
British Pound Sterling--12.6%
1,391,569 British Airport Authority
(Transportation) 11,661,442
1,788,649 Electrocomponents (Wholesale
Trade) 12,753,546
1,261,210 Premier Farnell PLC (Electronics) 10,670,067
706,368 Misys PLC (Business Services and
Computer Software) 12,393,414
1,708,700 Rentokil Group (Business Services) 12,553,100
473,916 Siebe (Machinery and Engineering
Services) 7,973,270
873,509 Standard Chartered (Banking) 10,497,224
- --------------------------------------------------------------------
78,502,063
- --------------------------------------------------------------------
Deutsche Mark--4.7%
155,760 Adidas AG (Textiles) 14,749,495
343,320 Hoechst AG (Healthcare) 14,439,672
- --------------------------------------------------------------------
29,189,167
- --------------------------------------------------------------------
French Franc--6.4%
22,531 Comptoirs Modernes (Retail) 11,749,983
40,720 CLF Dexia (Financial Services) 3,649,869
95,602 CLF Dexia - Registered Shares 8,569,124
(Financial Services)
63,189 Seita (Tobacco) 2,400,553
193,600 SGS Thomson Microelectronics
(Electronics) 13,882,408
- --------------------------------------------------------------------
40,251,937
- --------------------------------------------------------------------
Hong Kong Dollar--6.7%
4,148,000 Asia Satellite Tel.
(Telecommunications) 9,233,837
816,800 HSBC Holdings (Commercial Banks) 18,920,583
1,185,000 Sun Hung Kai Properties Co. (Real
Estate) 13,380,759
- --------------------------------------------------------------------
41,535,179
- --------------------------------------------------------------------
Irish Pound--2.3%
1,491,014 Bank of Ireland (Commercial Banks) 14,247,624
- --------------------------------------------------------------------
Italian Lira--2.4%
3,000,500 Telecom Italia Mobile (Utilities) 8,930,448
3,574,000 Telecom Italia Mobile (Di Risp
Shares) (Utilities) 6,095,944
- --------------------------------------------------------------------
15,026,392
- --------------------------------------------------------------------
Japanese Yen--27.3%
206,000 Aderans Company Ltd. (Retail) 4,808,281
702,000 Canon, Inc. (Office Equipment
Manufacturer) 14,880,119
363,000 Hoya Corp. (Electronics and
Instrumentation) 14,520,599
297,400 Inaba Denkisangyo (Industrial) 5,396,346
458,000 Kokuyo Co., Ltd. (Office Equipment
Manufacturer) 9,594,787
149,000 Kyocera Corp. (Electronics) 8,749,887
358,000 Max Co. (Electronics and
Instrumentation) 5,432,966
238,900 Mirai Industry Co. (Electrical
Equipment Manufacturer) 5,852,060
1,927,000 Mitsubishi Heavy Industries Ltd.
(Engineering) 13,874,972
1,530,000 Mitsui Marine & Fire (Insurance) 8,215,019
450,100 Santen Pharmaceutical Co.
(Healthcare) 8,352,716
92,800 Sanyo Shinpan Financial
(Financial) 5,204,668
</TABLE>
- --------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
45
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs International Equity Fund (continued)
January 31, 1997
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value
====================================================================
<S> <C> <C>
Common Stocks (continued)
Japanese Yen (continued)
322,000 Shimachu (Retail-Furniture) $ 6,905,027
213,900 SMC Corp. (Machinery) 13,125,622
410,000 Taikisha Ltd. (Machinery) 5,038,558
570,000 Takeda Chemical Industry
(Healthcare) 11,235,927
235,000 TDK Corp. (Consumer Goods) 15,040,620
464,000 Tostem Corp. (Construction) 10,906,842
146,800 York Benimaru (Retail) 3,922,900
- --------------------------------------------------------------------
171,057,916
- --------------------------------------------------------------------
Malaysian Ringgit--1.9%
1,328,000 Commerce Asset Holdings
(Commercial Banks) 10,683,829
581,000 Leader Universal Holdings
(Metals-Diversified) 1,168,544
- --------------------------------------------------------------------
11,852,373
- --------------------------------------------------------------------
Netherlands Guilder--5.0%
146,070 Aegon (Insurance) 8,951,011
136,180 Randstad Holdings (Business
Services) 9,471,458
102,016 Wolters Kluwer (Media) 12,602,793
- --------------------------------------------------------------------
31,025,262
- --------------------------------------------------------------------
Singapore Dollar--1.5%
1,511,000 Singapore Land (Real Estate) 9,123,100
- --------------------------------------------------------------------
Spanish Peseta--1.9%
63,595 Banco Popular (Commercial Banks) 11,571,494
- --------------------------------------------------------------------
Swedish Krona--7.0%
335,300 Ericsson Telecommunications
(Computer - Office) 11,255,719
268,440 Hoganas AB (Metal Products) 8,455,037
405,970 Securitas AB (Business Services) 12,057,737
3,469,100 Swedish Match AB (Tobacco) 11,741,304
- --------------------------------------------------------------------
43,509,797
- --------------------------------------------------------------------
Swiss Franc--6.8%
52,468 Adecco SA (Business Services) 14,753,971
6,726 Cie Financier Richemont AG
(Consumer Goods) 9,231,858
16,335 Novartis AG (Healthcare) 18,730,002
- --------------------------------------------------------------------
42,715,831
- --------------------------------------------------------------------
Total Common Stocks
(Cost $503,926,410) $ 571,088,085
====================================================================
Preferred Stock--2.4%
- --------------------------------------------------------------------
Deutsche Mark--2.4%
74,790 Fresenius AG (Health Care),
Non-voting $ 15,042,126
- --------------------------------------------------------------------
Total Preferred Stock
(Cost $4,437,079) $ 15,042,126
====================================================================
<CAPTION>
Principal
Amount Description Value
====================================================================
<S> <C> <C>
Short-Term Obligations--6.6%
- --------------------------------------------------------------------
$ 41,394,109 State Street Bank & Trust
Euro-Time Deposit 5.5%, 02/03/97** $ 41,394,109
- --------------------------------------------------------------------
Total Short-Term Obligations
(Cost $41,394,109) $ 41,394,109
====================================================================
Total Investments
(Cost $549,757,598)/(a)/ $ 627,524,320
====================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in
which value exceeds cost $108,968,495
Gross unrealized loss for investments in
which cost exceeds value (31,533,818)
- --------------------------------------------------------------------
Net unrealized gain $ 77,434,677
====================================================================
</TABLE>
/(a)/ The aggregate cost for federal income tax purposes is $550,089,643.
* Non-income producing security.
** A portion of this security has been segregated for extended
settlement securities.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an intergral part of these financial statements.
46
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------
Common and Preferred Stock Industry Concentrations
====================================================================
<S> <C>
Business Services 7.8%
Commercial Banks 12.4%
Computer Software and Services 2.0%
Computer - Office 1.8%
Construction 1.7%
Consumer Goods 3.9%
Electrical Equipment Manufacturer 0.9%
Electronics 5.3%
Electronics and Instrumentation 3.2%
Engineering 2.2%
Financial 0.8%
Financial Services 2.2%
Health Care 10.9%
Industrial 0.9%
Insurance 2.7%
Machinery 2.9%
Machinery and Engineering Services 1.3%
Media 2.0%
Metal Products 1.4%
Metals-Diversified 0.2%
Office Equipment Manufacturer 3.9%
Oil & Gas 1.8%
Real Estate 3.6%
Retail 3.3%
Retail-Furniture 1.1%
Telecommunications 1.5%
Textiles 2.4%
Tobacco 2.3%
Transportation 1.9%
Utilities 3.6%
Wholesale Trade 2.0%
- --------------------------------------------------------------------
Total Common and Preferred Stock 93.9%
====================================================================
</TABLE>
The accompanying notes are an integral part of these financial
statements.
- --------------------------------------------------------------------
47
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Asia Growth Fund
- --------------------------------------------------------------------------------
Objective and Investment Approach
The Goldman Sachs Asia Growth Fund seeks long-term capital appreciation by
investing in a limited number of carefully selected companies located in 12
Asian markets, including China, Hong Kong, India, Indonesia, Malaysia, Pakistan,
the Philippines, Singapore, South Korea, Sri Lanka, Taiwan and Thailand.
We utilize extensive fundamental research in our search for well-managed
companies whose stock prices are, in our opinion, undervalued in the
marketplace. Because many companies in the Asian region are growing at
relatively rapid rates, we consider a company's return on capital, its
price-to-book value and the predictability of its earnings stream as among the
best measures of its intrinsic value. A strong market position and a skilled
management team dedicated to maximizing shareholder returns are also important
to us. Our investment process includes face-to-face meetings with senior
management as well as frequent contact with a company's customers, suppliers and
competitors.
While our primary focus is on stock selection, we seek to carefully manage
risk by diversifying the fund's portfolio in terms of countries, industry
sectors and size of capitalization. We are also mindful of making certain that
the market for a particular stock is relatively liquid, so we can easily sell a
position if our opinion changes. From time to time, we may choose to
significantly overweight or underweight our holdings in one country compared
with our benchmark, if we believe there is a compelling reason to do so.
Finally, we closely monitor the potential impact of political and economic
events in the region on particular companies and adjust the portfolio
accordingly.
Market Overview: Results Were Mixed in Asian Markets
As a group, the Asian stock markets rose 2.37% during the period, as
measured by the MSCI All Country Asia Free (Ex Japan) Index (without dividends
reinvested). The weak performance indicated by the Index masks the wide
divergence of performance among the individual Asian markets, as several
countries rose more than 10% while others fell more than 20%. The period under
review began on a strong note, but the region quickly sold off in mid-February
when investors became unnerved by rising political tension between China and
Taiwan. Though the Asian markets briefly rebounded, investor interest was
dampened again during the spring and summer due to uncertainty surrounding
national elections in several countries, a decline in exports and slowing
economic growth. From October 1996 through January 1997, most Asian markets
recovered due to improving corporate earnings and signs of stabilizing export
growth.
In terms of individual markets, Taiwan, Malaysia and Indonesia were the
strongest performers, rising 56.0%, 21.9% and 17.5%, respectively (in U.S.
dollar terms), with each overcoming brief setbacks such as negative short-term
economic data and political upheaval. Other positive markets were India, which
was the region's strongest performer during the first half of the year and
subsequently gave back some of its gains, and the Philippines, where healthy
economic growth and declining inflation renewed investor interest. Hong Kong,
the most heavily weighted country in the Index, posted lackluster results early
in the period, then rebounded to close the period with a 12.0% gain due to a
favorable interest rate environment and a soaring property market. The weakest
performer was Thailand, which dropped 46.5%. Thailand was impacted by a very
large budget deficit, exacerbated by the slowdown of computer-related exports as
well as a tear in the speculative bubble in the real estate market, as
nonperforming property loans caused problems in the banking sector. South Korea
and Singapore were weak as well, declining approximately 34% and 7%,
respectively. South Korean equities were affected by an ongoing investigation of
government corruption and a weakening economy, and Singapore's market fell due
to soft electronics exports.
- --------------------------------------------------------------------------------
48
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Performance Review: Country Allocations Affected the Fund's Performance
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Fund Total MSCI AC
Return Asia Free
(based on net (Ex Japan)
asset value) Index +
------------ -----
<S> <C> <C>
Class A (1/31/96 - 1/31/97)* -1.01% 2.37%
Class B (5/1/96 - 1/31/97)* -6.02% -2.50%
Institutional (2/2/96 - 1/31/97)* -1.09% 2.06%
- -------------------------------------------------------------------
</TABLE>
* Class A, B and Institutional share performance assumes reinvestment of all
dividends and distributions, a complete redemption at the net asset value at
the end of the period and no initial sales charge or contingent deferred sales
charge. Performance for Class B and Institutional shares is a cumulative total
return (not annualized) from their inception through the end of the period.
+ Represents a price-only index that does not reflect reinvested dividends.
During the period under review, stock selection benefited the fund as a
number of holdings achieved strong returns. The fund's performance was
nonetheless affected by its country over- and underweightings relative to the
Index when individual markets performed better or worse than expected. For
example, Taiwan and Malaysia were two of the region's best performing markets,
but the fund was underweighted in those countries and therefore did not fully
participate in their rallies.
Financial, Property and Infrastructure Stocks Were the Strongest Performers
The fund's best performers during the period were its positions in the
financial, real estate and infrastructure sectors. Top financial stocks included
two of our Hong Kong investments, HSBC Holdings PLC, one of the world's largest
banking and financial services companies, and Wing Hang Bank Ltd., a provider of
banking, foreign exchange and treasury services, which both benefited from
strong growth in mortgage loans resulting from Hong Kong's robust property
market. Metropolitan Bank and Trust, the Philippines' largest bank in terms of
assets, rose substantially due to the growing Philippine economy and aggressive
branch expansion, and Commerce Asset-Holdings, the fifth largest financial group
in Malaysia, benefited from its merchant banking operations and strong loan
growth.
In the real estate sector, Hong Kong's booming property market buoyed
several of the fund's holdings. These included Sun Hung Kai Properties, one of
the largest and best managed property companies in Hong Kong; Henderson Land
Development, a large property development and investment holding company that
concentrates on mass residential developments; and HKR International Ltd., a
real estate developer that primarily focuses on residential development in
Discovery Bay on Lantau Island (a self-contained community that offers a
"quality lifestyle").
Other strong performers were two Malaysian companies that benefited from
the government's commitment to improve the country's infrastructure. Road
Builder Malaysia Holdings, a contractor specializing in civil engineering and
road construction, continued its strategic expansion and diversification, and
United Engineers Malaysia, Malaysia's largest builder and operator of toll
roads, rose due to the opening of several new roads.
Stocks that did not fulfill our expectations included Leader Universal
Holdings, Malaysia's leading manufacturer of power and telecommunication cable,
which reported lower than expected earnings due to very low export margins;
Industrial Finance Corp. of Thailand (IFCT), which declined in sympathy with
Thailand's financial sector; and Tata Engineering and Locomotive Company
(TELCO), India's largest vehicle manufacturer, which slumped on speculation
concerning rising inventories and general market uncertainty. We significantly
reduced the fund's position in Leader Universal Holdings and IFCT, but we
continue to have confidence in TELCO, which has strong fundamentals and fared
well relative to the broader Indian market.
Portfolio Composition
As of January 31, 1997, 97.1% of the fund's total market value was
invested in equities while 2.2% was in cash equivalents, with the remainder in
other securities. The fund's five largest country exposures were Hong Kong
(39.9%), Malaysia (13.5%), Singapore (10.1%), India (9.9%) and Indonesia (5.2%).
At the end of the period, the portfolio was overweighted relative to the Index
in Hong Kong, India and South Korea, slightly underweighted in
- --------------------------------------------------------------------------------
49
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Asia Growth Fund (continued)
- --------------------------------------------------------------------------------
the Philippines, and significantly underweighted in Thailand, Singapore,
Malaysia and Taiwan.
Additions in Real Estate and Security Services, Reductions in Several Existing
Positions
During the period, we added Hysan Development Company, a property
investment company that owns a number of commercial and residential properties
in Hong Kong and should be a beneficiary of rising rental prices, and
Taiwan-Sogo Shinkong, a security services company that controls approximately
38% of the market in Taiwan and is expected to experience growing demand from
residential clients. Other portfolio changes included the trimming of several
positions in Hong Kong after they appreciated significantly and became more
fully valued. These included Sun Hung Kai Properties, Henderson Land Development
and HKR International Ltd.
<TABLE>
<CAPTION>
Top 10 Portfolio Holdings as of January 31, 1997
Percentage
Line of of Total
Company Country Business Net Assets
<S> <C> <C> <C>
HKR International Hong Kong Property 4.4%
Ltd.
Road Builder Malaysia Infrastructure 4.1%
Malaysia Holdings
Swire Pacific Ltd. Hong Kong Conglomerate 4.1%
Metropolitan Bank Philippines Banking and 3.8%
and Trust Finance
Wing Hang Bank Hong Kong Banking and 3.9%
Ltd. Finance
Henderson Land Hong Kong Property 3.7%
Development
HSBC Holdings PLC Hong Kong Banking and 3.5%
Finance
Hutchison Hong Kong Conglomerate 3.5%
Whampoa
Sun Hung Kai Hong Kong Property 3.5%
Properties
Commerce Asset- Malaysia Conglomerate 3.5%
Holdings
</TABLE>
Outlook
In 1997, we expect export growth to strengthen, which should stimulate
economies throughout the region. With most of the region's elections now over,
the region should also benefit from greater political stability in 1997. Though
the recent death of Deng Xiaoping may increase near-term volatility, we remain
optimistic that the handover of Hong Kong to China will proceed smoothly, as it
is in China's best interests to maintain Hong Kong's current economic success.
We intend to increase the fund's weightings in Malaysia, the Philippines and
Indonesia, markets that we expect to benefit from stable currencies and good
economic fundamentals. In September 1996, the benchmark established a new
weighting in Taiwan and doubled its weighting in Korea, and we are actively
seeking investment opportunities in these countries. We continue to have a
favorable view of India but are still cautious regarding Thailand and Singapore,
where real estate overdevelopment may continue to hinder their respective
markets for the near term.
In general, we believe that Asian equities are attractively valued on a
historical basis. We expect that economic growth in the region may slow somewhat
to 5% to 7% annually, still approximately double versus the U.S., one of the
world's most mature economies. Over time, we intend to broaden our emphasis from
companies that tend to do well in the earliest stages of emerging economies to
companies that we believe are poised to benefit most from the region's internal
growth. These include new start-ups, consumer-related products and services, and
infrastructure companies.
On another front, we are pleased to announce that we have recently
expanded our portfolio management team. Our new team members will focus
primarily on real estate companies, conglomerates and cyclical industries, and
they will enhance our ability to seek out companies with above-average growth
potential.
50
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
We appreciate your continued support in what has been a challenging period
for the region and the fund. Going forward, we remain confident that the region
continues to offer many attractive investment opportunities for investors with a
long-term view.
/s/ Warwick M. Negus
Warwick M. Negus
Senior Portfolio Manager,
Asia Active Equity
/s/ Alice Lui
Alice Lui
Portfolio Manager,
Asia Active Equity
/s/ Ravi Shanker
Ravi Shanker
Portfolio Manager,
Asia Active Equity
/s/ Karma A. Wilson
Karma A. Wilson
Portfolio Manager,
Asia Active Equity
March 3, 1997
- --------------------------------------------------------------------------------
51
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Asia Growth Fund
January 31, 1997
- --------------------------------------------------------------------------------
The following graphs show the value, as of January 31, 1997, of a $10,000
investment made (with and without the maximum sales charge of 5.5% and
redemption charge of 5.0% for Class A and B, respectively) on the inception date
of each class. For comparative purposes, the performance of the Fund's benchmark
(the Morgan Stanley Capital International Combined Asia (ex Japan) Index ("MSCI
Combined Asia-ex Japan")) is shown for the appropriate time periods. All
performance data shown represents past performance and should not be considered
indicative of future performance which will fluctuate with changes in market
conditions. These performance fluctuations will cause an investor's shares, when
redeemed, to be worth more or less than their original cost.
Class A
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
GS Asia Growth GS Asia Growth
Class A Class A MSCI
(w/sales charge) (no sales charge) Combined
---------------- ----------------- --------
<S> <C> <C> <C>
7/8/94 $ 9,450 $10,000 $10,000
1/31/95 8,934 9,454 9,074
1/31/96 11,300 11,958 11,129
1/31/97 11,186 11,837 11,393
</TABLE>
Class B
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
GS Asia Growth GS Asia Growth
Class B Class B MSCI
(w/redemp. charge) (no redemp. charge) Combined
------------------- ------------------ --------
<S> <C> <C> <C>
5/1/96 $10,000 $10,000 $10,000
1/31/97 9,398 8,928 9,750
</TABLE>
Institutional
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
GS Asia Growth MSCI
Institutional Combined
-------------- --------
<S> <C> <C>
2/2/96 $10,000 $10,000
1/31/97 9,891 10,206
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------
Average Annual Total Return
----------------------------------------
One Year Since Inception/(a)/
- -------------------------------------------------------------------------
<S> <C> <C>
Class A, no sales charge (1.01)% 6.78%
- -------------------------------------------------------------------------
Class A, w/sales charge (6.44)% (4.46)%
- -------------------------------------------------------------------------
Class B, no redemption charge N/A (6.02)%/(b)/
- -------------------------------------------------------------------------
Class B, w/redemption charge N/A (10.72)%/(b)/
- -------------------------------------------------------------------------
Institutional Class N/A (1.09)%/(b)/
- -------------------------------------------------------------------------
</TABLE>
/(a)/ Class A, Class B and Institutional shares commenced operations July 8,
1994, May 1, 1996 and February 2, 1996, respectively.
/(b)/ An aggregate total return (not annualized) is shown instead of an average
annual total return since these classes have not completed a full twelve
months of operations.
- --------------------------------------------------------------------------------
52
<PAGE>
Statement of Investments
- --------------------------------------------------------------------
Goldman Sachs Asia Growth Fund
- --------------------------------------------------------------------
January 31, 1997
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value
====================================================================
Common Stocks--96.0%
<S> <C> <C>
Hong Kong Dollar--39.9%
3,734,000 Asia Satellite Tel.*
(Telecommunications) $ 8,312,234
1,107,000 Henderson Land Development Co.
(Recreational Services) 10,250,000
7,947,440 HKR International Ltd.
(Real Estate) 12,358,582
2,731,000 Hong Kong Electric Holdings
(Utility) 9,709,517
426,000 HSBC Holdings
(Commercial Banks) 9,867,983
1,305,000 Hutchison Whampoa
(Conglomerates) 9,851,916
2,513,000 Hysan Development
(Utility) 9,145,257
9,735,666 JCG Holdings Ltd.
(Financial Services) 8,669,002
2,308,200 San Miguel Brewery Ltd.
(Breweries) 1,049,994
869,000 Sun Hung Kai Properties Co.
(Real Estate) 9,812,556
1,262,000 Swire Pacific Ltd. "A"
(Transportation) 11,603,755
2,316,500 Wing Hang Bank Ltd.
(Financial Services) 11,030,952
- --------------------------------------------------------------------
111,661,748
- --------------------------------------------------------------------
Indian Rupee--9.9%
235,000 Brook Bond Lipton India Ltd.
(Food) 2,438,494
372,900 Colgate Palmolive
(Conglomerates) 2,613,421
259,600 Hindustan Lever Ltd.
(Household Products) 6,423,018
10,000 Larsen & Toubro Ltd.
(Engineering) 65,272
143,500 Larsen & Toubro Ltd. GDR
(Engineering) 1,919,313
214,000 Larsen & Toubro LTD. GDS
(Engineering) 2,862,250
434,250 Mahindra & Mahindra Ltd.
(Autos and Trucks) 4,339,472
165,750 Mahindra & Mahindra GDR
(Autos and Trucks) 1,895,351
4,000 Niit Limited
(Computers) 32,022
80,000 Tata Engineering & Locomotive Ltd.
GDR (Engineering) 786,000
446,600 Tata Engineering & Locomotive Ltd.
GDS (Engineering) 4,387,845
- --------------------------------------------------------------------
27,762,458
- --------------------------------------------------------------------
Indonesian Rupiah--5.2%
2,374,750 Indofoods Sukses Makmur - Foreign
(Food) 5,245,031
2,346,000 PT Bank of Bali - Foreign
(Banking) 5,675,011
2,613,000 PT Jaya Real Property - Foreign
(Real Estate) 3,627,640
- --------------------------------------------------------------------
14,547,682
- --------------------------------------------------------------------
Malaysian Ringgit--13.2%
1,217,000 Commerce Asset Holdings
(Conglomerates) 9,790,829
623,000 Leader Universal Holdings
(Electronics) 1,253,017
1,936,000 Road Builder Malaysia Holdings
(Construction) 11,603,540
941,000 Tenaga National Berhad
(Utility) 4,504,385
1,081,000 United Engineers Malaysia Holdings
(Construction) 9,696,822
- --------------------------------------------------------------------
36,848,593
- --------------------------------------------------------------------
New Taiwan Dollar--2.5%
2,118,000 Taiwan Sogo Shinkong Securities
(Financial Services) 7,103,755
- --------------------------------------------------------------------
Philippine Peso--4.6%
18,189,000 Centennial City Inc.
(Real Estate) 2,208,911
- --------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
53
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Asia Growth Fund (continued)
January 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value
====================================================================
<S> <C> <C>
Common Stocks (continued)
Philippine Peso (continued)
393,454 Metropolitan Bank and Trust
(Banking) $ 10,750,925
- --------------------------------------------------------------------
12,959,836
- --------------------------------------------------------------------
Singapore Dollar--9.9%
639,000 Overseas Union Bank - Foreign
(Banking) 5,174,457
1,149,000 Singapore Land
(Real Estate) 6,937,420
383,000 Singapore Press Holdings - Foreign
(Printing & Publishing) 7,671,970
2,195,000 Straits Steamship Land
(Conglomerates) 7,795,852
- --------------------------------------------------------------------
27,579,699
- --------------------------------------------------------------------
South Korean Won--3.8%
168,920 Korea Mobile Telecommunications
Corp. ADR* (Telecommunications) 2,512,685
4,759 Korea Mobile Telecommunications
Corp. (Telecommunications) 5,228,904
7,132 Samsung Fire & Marine Insurance
(Insurance) 2,982,743
- --------------------------------------------------------------------
10,724,332
- --------------------------------------------------------------------
Thai Baht--3.9%
723,800 Electricity Generating Public Co.
(Utility) 1,815,785
758,100 Electricity Generating Public Co.
Foreign(Utility) 1,843,315
1,989,000 Industrial Finance Corp - Foreign
(Financial Services) 5,220,069
425,000 Jasmine International Co. - Foreign
(Diversified) 602,808
1,617,500 Thai Telephone & Telecom Corp. -
Foreign (Telecommunications) 1,326,587
- --------------------------------------------------------------------
10,808,564
- --------------------------------------------------------------------
United States Dollar--3.1%
387,000 Korea Electric Power Corp. ADR*
(Utilities) 8,562,375
- --------------------------------------------------------------------
Total Common Stocks
(Cost $237,846,163) $268,559,042
====================================================================
Rights & Warrants*--0.3%
Singapore Dollar--0.2%
356,750 Straits Steamship Land, exp. 12/12/00
(Conglomerate)- warrants 494,149
Thai Baht--0.1%
808,750 Thai Telephone & Telecom Corp., exp.
03/07/97 (Telecommunications)-rights 351,155
- --------------------------------------------------------------------
Total Rights & Warrants
(Cost $287,980) $ 845,304
====================================================================
<CAPTION>
Principal
Amount Description Value
====================================================================
<S> <C> <C>
Corporate Bonds--0.3%
Malaysian Ringitt--0.3%
MYR United Engineers Malaysia
1,024,000 (Construction) 4.00%, 05/22/99 $ 848,528
- --------------------------------------------------------------------
Total Corporate Bonds
(Cost $521,580) $ 848,528
====================================================================
Short-Term Obligations--2.2%
$ 6,200,104 State Street Bank & Trust Euro-Time
Deposit, 5.50%, 02/03/97 $ 6,200,104
- --------------------------------------------------------------------
Total Short-Term Obligations
(Cost $6,200,104) $ 6,200,104
====================================================================
Total Investments
(Cost $244,855,827)/(a)/ $276,452,978
====================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in
which value exceeds cost $ 45,982,425
Gross unrealized loss for investments in
which cost exceeds value (14,998,273)
====================================================================
Net unrealized gain $ 30,984,152
====================================================================
</TABLE>
* Non-income producing security.
/(a)/The aggregate cost for federal income tax purposes is $244,890,862.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
54
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Common Stock, Rights, Warrants, and Corporate Bond Industry
Concentrations
====================================================================
<S> <C>
Autos and Trucks 2.2%
Banking 7.8%
Breweries 0.4%
Commercial Banks 3.5%
Conglomerates 10.9%
Construction 7.9%
Diversified 0.2%
Electronics 0.4%
Engineering 3.6%
Financial Services 11.5%
Food 2.7%
Household Products 2.3%
Insurance 1.1%
Printing & Publishing 2.7%
Real Estate 12.5%
Recreational Services 3.7%
Telecommunications 6.3%
Transportation 4.1%
Utilities 12.8%
- --------------------------------------------------------------------
Total Common Stock, Rights, Warrants, and
Corporate Bonds 96.6%
====================================================================
</TABLE>
- --------------------------------------------------------------------------------
55
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- -------------------------------------------------------------------------------
Statements of Assets and Liabilities
January 31, 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Goldman Sachs Goldman Sachs
Balanced Select Equity
Fund Fund
===============================================
<S> <C> <C>
Assets:
Investments in securities, at value (identified cost $80,718,346, $302,169,999,
$513,612,707, $679,366,240, $213,003,477, $549,757,598 and $244,855,827,
respectively) $89,222,318 $393,263,171
Cash, at value 13,884 9,802
Receivables:
Investment securities sold 3,947,652 --
Forward foreign currency exchange contracts 6,692 --
Fund shares sold 565,860 3,095,601
Dividends and interest, at value 451,554 387,080
Variation margin 10,928 95,387
Deferred organization expenses, net 36,173 --
Other assets 97,786 8,495
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets 94,352,847 396,859,536
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased 9,690,219 --
Forward foreign currency exchange contracts -- --
Fund shares repurchased 44,298 548,016
Amounts owed to affiliates 97,949 388,699
Covered securities sold short (cash received, $936,984) 938,808 --
Accrued expenses and other liabilities 61,446 89,126
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 10,832,720 1,025,841
- -----------------------------------------------------------------------------------------------------------------------------------
Net Assets:
Paid-in capital 73,750,866 300,246,199
Accumulated undistributed (distributions in excess of) net investment income 180,204 --
(loss)
Accumulated undistributed (distributions in excess of) net realized gain (loss)
on investment, option and futures transactions 977,487 4,402,524
Accumulated net realized foreign currency gain (loss) 12,575 --
Net unrealized gain on investments, options and futures 8,611,563 91,184,972
Net unrealized loss on translation of assets and liabilities denominated in
foreign currencies (12,568) --
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets $83,520,127 $395,833,695
===================================================================================================================================
<CAPTION>
Class A Class B Class A Class B
------------ -------------- ------------- ------------
<S> <C> <C> <C> <C>
Total shares of beneficial interest outstanding, $.001 par
value (100,000,000 and 25,000,000 shares authorized for
each Class A and B, respectively) 4,336,101 112,660 9,688,806 744,222
Net asset and Class A redemption value per share (a) $18.78 $18.73 $23.32 $23.18
Maximum public offering price per share (Class A NAV x
1.0582) $19.87 $18.73 $24.68 $23.18
Institutional Service Institutional Service
------------ -------------- ------------- ------------
Total shares of beneficial interest outstanding, $.001 par
value (50,000,000 shares per each class authorized) -- -- 6,351,958 157,464
Net asset value, offering and redemption price per share -- -- $23.44 $23.27
===============================================================================================================================
(a) At redemption, Class B shares are subject to a contingent deferred sales charge assessed on the amount equal to the lesser
of the current net asset value or the original purchase price of the shares.
===============================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
56
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs Goldman Sachs Goldman Sachs Goldman Sachs Goldman Sachs
Growth and Income Capital Growth Small Cap Equity International Equity Asia Growth
Fund Fund Fund Fund Fund
==================================================================================================================================
<S> <C> <C> <C> <C>
$638,954,258 $932,041,765 $217,608,994 $627,524,320 $276,452,978
59,158 94,994 30,728 1,735,366 1,060,177
1,632,491 1,390,277 4,392,159 959,642 3,093,623
-- -- -- 2,684,757 --
4,847,992 1,524,356 820,288 4,794,141 685,136
572,159 706,624 85,173 440,308 262,880
-- -- -- -- --
19,321 -- 13,467 14,573 77,113
14,043 16,281 2,597 10,188 770
- ----------------------------------------------------------------------------------------------------------------------------------
646,099,422 935,774,297 222,953,406 638,163,295 281,632,677
- ----------------------------------------------------------------------------------------------------------------------------------
9,130,091 9,797,231 6,585,828 8,912,558 --
-- -- -- 3,434,535 1,495
414,917 850,523 165,072 198,616 694,794
716,432 1,160,456 345,810 833,473 400,444
-- -- -- -- --
21,990 99,060 121,890 255,084 846,340
- ----------------------------------------------------------------------------------------------------------------------------------
10,283,430 11,907,270 7,218,600 13,634,266 1,943,073
- ----------------------------------------------------------------------------------------------------------------------------------
492,994,560 657,200,330 203,743,684 542,859,953 266,426,371
(193,256) (275,552) -- (25,666) (1,316,323)
17,673,137 14,266,724 7,385,605 2,530,732 (16,027,669)
-- -- -- (917,847) (411,919)
125,341,551 252,675,525 4,605,517 112,491,393 33,014,375
-- -- -- (32,409,536) (1,995,231)
- ----------------------------------------------------------------------------------------------------------------------------------
$635,815,992 $923,867,027 $215,734,806 $624,529,029 $279,689,604
==================================================================================================================================
<CAPTION>
Class A Class B Class A Class B Class A Class B Class A Class B Class A Class B
- ------------- ---------- ------------- ---------- ------------ ------------ ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
26,534,286 751,089 55,021,724 193,240 10,140,493 176,544 27,765,580 997,807 16,122,122 206,387
$23.18 $23.10 $16.73 $16.67 $20.91 $20.80 $19.32 $19.24 $16.31 $16.24
$24.53 $23.10 $17.70 $16.67 $22.13 $20.80 $20.44 $19.24 $17.26 $16.24
<CAPTION>
Institutional Service Institutional Service Institutional Service Institutional Service Institutional Service
- ------------- ---------- ------------- ---------- ------------- ------------ ------------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
8,321 136,977 -- -- -- -- 3,524,169 34,830 815,499 --
$23.19 $23.17 -- -- -- -- $19.40 $19.34 $16.33 --
==================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
57
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Statements of Operations
For the Year Ended January 31, 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs Goldman Sachs
Balanced Select Equity
Fund Fund
===================================
<S> <C> <C>
Investment income:
Dividends /(a)/ $ 838,092 $ 5,629,026
Interest /(b)/ 2,107,288 541,011
- ----------------------------------------------------------------------------------------------------------------------------------
Total income 2,945,380 6,170,037
- ----------------------------------------------------------------------------------------------------------------------------------
Expenses: /(c)/
Investment advisory fees 309,372 1,413,035
Administration fees 92,811 706,517
Distribution fees 157,253 468,965
Authorized dealer service fees 154,686 444,626
Custodian fees 93,352 95,947
Transfer agent fees 148,576 319,246
Professional Fees 71,598 74,319
Amortization of deferred organization expenses 13,468 9,549
Director fees 1,171 2,728
Other 53,077 96,414
- ----------------------------------------------------------------------------------------------------------------------------------
Total expenses 1,095,364 3,631,346
Less--expenses reimbursed and fees waived by Goldman Sachs (472,758) (626,188)
- ----------------------------------------------------------------------------------------------------------------------------------
Net expenses 622,606 3,005,158
- ----------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 2,322,774 3,164,879
- ----------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment, option, futures and foreign
currency transactions:
Net realized gain (loss) from:
Investment transactions 3,811,127 14,386,845
Options written (2,680) --
Futures transactions 148,013 645,873
Foreign currency related transactions 12,575 --
Net change in unrealized gain (loss) on:
Investments 5,008,557 49,393,370
Futures 14,475 67,175
Translation of assets and liabilities denominated in foreign currencies (12,568) --
- ----------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment, option, futures and foreign currency
transactions 8,979,499 64,493,263
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $ 11,302,273 $ 67,658,142
==================================================================================================================================
</TABLE>
/(a)/ For the Balanced, Select Equity, Growth and Income, Capital Growth, Small
Cap Equity, International Equity and Asia Growth Funds, taxes withheld on
dividends were $1,496, $42,274, $23,285, $53,869, $4,211, $900,877 and
$372,334, respectively.
/(b)/ For the Balanced Fund, taxes withheld on interest were $969.
/(c)/ Certain expenses reflected in the above statement of operations are
incurred on a class specific basis.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
58
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------
Goldman Sachs Goldman Sachs
Growth and Income Capital Growth
Fund Fund
<S> ========================================
Investment income: <C> <C>
Dividends /(a)/ $ 13,008,785 $ 14,748,431
Interest /(b)/ 1,235,823 2,802,840
- ---------------------------------------------------------------------------------------------------------------------------------
Total income 14,244,608 17,551,271
- ---------------------------------------------------------------------------------------------------------------------------------
Expenses: /(c)/
Investment advisory fees 2,782,464 6,522,949
Administration fees 758,854 2,174,316
Distribution fees 1,280,332 2,179,405
Authorized dealer service fees 1,261,615 2,174,316
Custodian fees 102,394 129,556
Transfer agent fees 871,030 908,310
Professional Fees 75,891 74,529
Amortization of deferred organization expenses 19,164 --
Director fees 6,744 13,973
Other 144,279 208,397
- ----------------------------------------------------------------------------------------------------------------------------------
Total expenses 7,302,767 14,385,751
Less--expenses reimbursed and fees waived by Goldman Sachs (1,113,014) (2,171,272)
- ----------------------------------------------------------------------------------------------------------------------------------
Net expenses 6,189,753 12,213,979
- ----------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 8,054,855 5,337,292
- ----------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment, option, futures and foreign
currency transactions:
Net realized gain (loss) from:
Investment transactions 58,221,421 53,687,297
Options written (37,206) --
Futures transactions 45,994 --
Foreign currency related transactions -- --
Net change in unrealized gain (loss) on:
Investments 67,575,111 145,350,120
Futures -- --
Translation of assets and liabilities denominated in foreign currencies -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment, option, futures and foreign curren
transactions 125,805,320 199,037,417
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $133,860,175 $204,374,709
====================================================================================================================================
<CAPTION>
-------------------------------------------
Goldman Sachs Goldman Sachs
Small Cap Equity International Equity
Fund Fund
<S> ===========================================
Investment income: <C> <C>
Dividends /(a)/ $ 968,945 $ 5,944,299
Interest /(b)/ 896,528 1,533,039
- ------------------------------------------------------------------------------------------------------------------------------------
Total income 1,865,473 7,477,338
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses: /(c)/
Investment advisory fees 1,598,027 3,478,689
Administration fees 532,676 1,159,514
Distribution fees 538,657 1,115,919
Authorized dealer service fees 532,676 1,086,488
Custodian fees 63,636 786,004
Transfer agent fees 511,883 586,243
Professional Fees 72,844 84,162
Amortization of deferred organization expenses 18,742 17,603
Director fees 3,842 5,519
Other 73,764 229,722
- ------------------------------------------------------------------------------------------------------------------------------------
Total expenses 3,946,747 8,549,863
Less--expenses reimbursed and fees waived by Goldman Sachs (529,684) (829,788)
- ------------------------------------------------------------------------------------------------------------------------------------
Net expenses 3,417,063 7,720,075
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (1,551,590) (242,737)
- ------------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment, option, futures and foreign
currency transactions:
Net realized gain (loss) from:
Investment transactions 29,166,218 16,714,697
Options written (398,365) --
Futures transactions -- --
Foreign currency related transactions -- 146,694
Net change in unrealized gain (loss) on:
Investments 22,913,571 60,236,901
Futures -- --
Translation of assets and liabilities denominated in foreign currencies -- (28,245,657)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment, option, futures and foreign
currency transactions 51,681,424 48,852,635
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $50,129,834 $48,609,898
====================================================================================================================================
<CAPTION>
-----------------
Goldman Sachs
Asia Growth
Fund
<S> ==================
Investment income: <C>
Dividends /(a)/ $ 4,216,521
Interest /(b)/ 716,243
- -----------------------------------------------------------------------------------------------------------
Total income 4,932,764
- -----------------------------------------------------------------------------------------------------------
Expenses: /(c)/
Investment advisory fees 1,937,658
Administration fees 645,897
Distribution fees 636,953
Authorized dealer service fees 630,134
Custodian fees 499,487
Transfer agent fees 385,114
Professional Fees 84,316
Amortization of deferred organization expenses 31,711
Director fees 3,496
Other 51,032
- -----------------------------------------------------------------------------------------------------------
Total expenses 4,905,798
Less--expenses reimbursed and fees waived by Goldman Sachs (511,880)
- -----------------------------------------------------------------------------------------------------------
Net expenses 4,393,918
- -----------------------------------------------------------------------------------------------------------
Net investment income (loss) 538,846
- -----------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment, option, futures and foreign
currency transactions:
Net realized gain (loss) from:
Investment transactions (7,294,240)
Options written --
Futures transactions (141,910)
Foreign currency related transactions (1,099,538)
Net change in unrealized gain (loss) on:
Investments 5,823,115
Futures --
Translation of assets and liabilities denominated in foreign currencies (599,549)
- -----------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment, option, futures and foreign
currency transactions (3,312,122)
- -----------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $(2,773,276)
===========================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
59
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- -------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended January 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Goldman Sachs Goldman Sachs
Balanced Select Equity
Fund Fund
===============================================
<S> <C> <C>
From operations:
Net investment income (loss) $ 2,322,774 $ 3,164,879
Net realized gain (loss) on investment, option and futures transactions 3,956,460 15,032,718
Net realized gain (loss) on foreign currency related transactions 12,575 --
Net change in unrealized gain (loss) on investments, options and futures 5,023,032 49,460,545
Net change in unrealized loss on translation of assets and liabilities
denominated in foreign currencies (12,568) --
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations 11,302,273 67,658,142
- -----------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
From net investment income
Class A shares (2,259,972) (1,515,575)
Class B shares (13,466) (4,750)
Institutional shares -- (1,606,175)
Service shares -- (6,666)
In excess of net investment income
Class A shares (7,504) --
Class B shares -- (118,421)
Institutional shares -- (34,205)
Service shares -- (16,030)
From net realized gain on investment, option and futures transactions
Class A shares (3,654,841) (7,174,235)
Class B shares (77,400) (440,131)
Institutional shares -- (4,675,726)
Service shares -- (68,472)
- -----------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (6,013,183) (15,660,386)
-----------------------------------------------------------------------------------------------------------------------------------
From share transactions:
Net proceeds from sales of shares 29,174,047 167,209,718
Reinvestment of dividends and distributions 5,694,651 14,904,237
Cost of shares repurchased (7,565,668) (32,152,494)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from share transactions 27,303,030 149,961,461
- -----------------------------------------------------------------------------------------------------------------------------------
Total increase 32,592,120 201,959,217
Net assets:
Beginning of year 50,928,007 193,874,478
===================================================================================================================================
End of year $ 83,520,127 $ 395,833,695
===================================================================================================================================
Accumulated undistributed (distributions in excess of) net investment income $ 180,204 $ --
===================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
60
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs Equity Portfolios, Inc.
- ----------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs Goldman Sachs Goldman Sachs
Statements of Changes in Net Assets Growth and Income Capital Growth Small Cap
For the Year Ended January 31, 1997 Fund Fund Equity Fund
====================================================
<S> <C> <C> <C>
From operations:
Net investment income (loss) $ 8,054,855 $ 5,337,292 $ (1,551,590
Net realized gain (loss) on investment, option and futures transactions 58,230,209 53,687,297 28,767,853
Net realized gain (loss) on foreign currency related transactions -- -- --
Net change in unrealized gain (loss) on investments, options and futures 67,575,111 145,350,120 22,913,571
Net change in unrealized loss on translation of assets and liabilities
denominated in foreign currencies -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations 133,860,175 204,374,709 50,129,834
- ----------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
From net investment income
Class A shares (8,111,894) (5,948,617) --
Class B shares (5,818) -- --
Institutional shares (494) -- --
Service shares (11,500) -- --
In excess of net investment income
Class A shares (135,533) (258,749) --
Class B shares (48,273) (12,838) --
Institutional shares (380) --
Service shares (9,070) -- --
From net realized gain on investment, option and futures transactions
Class A shares (46,442,616) (91,862,169) (10,210,264)
Class B shares (754,312) (179,327) (149,626)
Institutional shares (9,971) -- --
Service shares (255,610) -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (55,785,471) (98,261,700) (10,359,890)
- ----------------------------------------------------------------------------------------------------------------------------------
From share transactions:
Net proceeds from sales of shares 140,362,846 76,008,897 56,119,213
Reinvestment of dividends and distributions 53,352,809 90,088,874 9,876,571
Cost of shares repurchased (72,730,939) (229,399,817) (95,024,895)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from share transactions 120,984,716 (63,302,046) (29,029,111)
- ----------------------------------------------------------------------------------------------------------------------------------
Total increase 199,059,420 42,810,963 10,740,833
Net Asssets:
Beginning of Year 436,756,572 881,056,064 204,993,973
==================================================================================================================================
End of Year $635,815,992 $923,867,027 $ 215,734,806
==================================================================================================================================
Accumulated distributed (distributions in excess investment income) $ (193,256) $ (275,552) $ --
==================================================================================================================================
<CAPTION>
-----------------------------------------------------
Statements of Changes in Net Assets Goldman Sachs Goldman Sachs
For the Year Ended January 31, 1997 International Asia Growth
Equity Fund Fund
====================================================
<S> <C> <C>
From operations:
Net investment income (loss) $ (242,737) $ 538,846
Net realized gain (loss) on investment, option and futures transactions 16,714,697 (7,436,150)
Net realized gain (loss) on foreign currency related transactions 146,694 (1,099,538)
Net change in unrealized gain (loss) on investments, options and futures 60,236,901 5,823,115
Net change in unrealized loss on translation of assets and liabilities
denominated in foreign currencies (28,245,657) (599,549)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations 48,609,898 (2,773,276)
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
From net investment income
Class A shares -- (206,784)
Class B shares -- --
Institutional shares (106,712) --
Service shares -- --
In excess of net investment income
Class A shares -- --
Class B shares -- (5,064)
Institutional shares -- (83,075)
Service shares -- --
From net realized gain on investment, option and futures transactions
Class A shares (5,358,559) --
Class B shares (159,717) --
Institutional shares (689,171) --
Service shares (3,947) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (6,318,106) (294,923)
- ------------------------------------------------------------------------------------------------------------------------------------
From share transactions:
Net proceeds from sales of shares 321,475,961 144,448,826
Reinvestment of dividends and distributions 5,481,492 221,279
Cost of shares repurchased (75,580,037) (67,451,011)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from share transactions 251,377,416 77,219,094
- ----------------------------------------------------------------------------------------------------------------------------------
Total increase
Net assets: 293,669,208 74,150,895
Beginning of year 330,859,821 205,538,709
===================================================================================================================================
End of year $624,529,029 $279,689,604
====================================================================================================================================
Accumulated undistributed (distributions in excess of) net investment income $ (25,666) $ (1,316,323)
===================================================================================================================================
</TABLE>
61
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended January 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Goldman Sachs Goldman Sach
Balanced Select Equity
Fund Fund
==============================================
<S> <C> <C>
From operations:
Net investment income (loss) $ 1,083,645 $ 1,518,160
Net realized gain (loss) on investment, option and futures transactions 1,715,887 4,687,943
Net realized gain on foreign currency related transactions -- --
Net change in unrealized gain on investments, options and futures 3,518,420 37,068,509
Net change in unrealized loss on translation of assets and liabilities
denominated in foreign currencies -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 6,317,952 43,274,612
- ----------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
From net investment income (991,655) (1,610,216)
In excess of net investment income -- --
From net realized gain on investment, option and futures transactions (962,754) (3,527,188)
- ----------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (1,954,409) (5,137,404)
- ----------------------------------------------------------------------------------------------------------------------------------
From share transactions:
Net proceeds from sales of shares 41,736,040 102,149,318
Reinvestment of dividends and distributions 1,802,563 4,880,575
Cost of shares repurchased (4,483,707) (46,260,132)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from share transactions 39,054,896 60,769,761
- ----------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) 43,418,439 98,906,969
Net assets:
Beginning of year 7,509,568 94,967,509
==================================================================================================================================
End of year $ 50,928,007 $ 193,874,478
==================================================================================================================================
Accumulated undistributed (distributions in excess of) net investment income $ 125,304 $ 86,854
==================================================================================================================================
Summary of share transactions:
===================================================================================================================================
<CAPTION>
Class A Class A Institutional
-------------- -------------- --------------
<S> <C> <C> <C>
Shares sold 2,578,356 2,479,285 3,220,915
Reinvestment of dividends and distributions 108,023 161,481 97,993
Shares repurchased (271,753) (2,578,247) (30,492)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding 2,414,626 62,519 3,288,416
==================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
62
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs Goldman Sachs Goldman Sachs Goldman Sachs Goldman Sachs
Growth and Income Capital Growth Small Cap International Asia Growth
Fund Fund Equity Fund Equity Fund Fund
=================================================================================================================================
<S> <C> <C> <C> <C>
$ 5,307,925 $ 6,032,534 $ (1,717,759) $ 725,369 $ 1,643,482
18,815,320 188,790,639 (5,033,599) (8,757,936) (5,766,395)
-- -- -- 21,213,851 416,433
58,081,439 53,559,848 30,594,034 69,834,990 42,480,420
-- -- -- (12,612,130) (1,710,833)
- --------------------------------------------------------------------------------------------------------------------------------
82,204,684 248,383,021 23,842,676 70,404,144 37,063,107
- ---------------------------------------------------------------------------------------------------------------------------------
(5,300,032) (6,289,354) -- (9,491,864) (1,787,451)
-- -- -- -- (1,657,672)
(11,998,907) (139,713,660) (161,357) (14,089,155) --
- ---------------------------------------------------------------------------------------------------------------------------------
(17,298,939) (146,003,014) (161,357) (23,581,019) (3,445,123)
- ---------------------------------------------------------------------------------------------------------------------------------
199,623,973 144,529,476 56,891,181 85,900,104 88,560,430
16,219,024 131,979,456 149,801 21,651,092 2,951,847
(37,764,413) (359,937,680) (195,215,538) (98,600,969) (43,889,831)
- ---------------------------------------------------------------------------------------------------------------------------------
178,078,584 (83,428,748) (138,174,556) 8,950,227 47,622,446
- ---------------------------------------------------------------------------------------------------------------------------------
242,984,329 18,951,259 (114,493,237) 55,773,352 81,240,430
193,772,243 862,104,805 319,487,210 275,086,469 124,298,279
=================================================================================================================================
$436,756,572 $ 881,056,064 $ 204,993,973 $ 330,859,821 $ 205,538,709
=================================================================================================================================
$ 56,087 $ 607,360 $ -- $ 227,683 $ (1,630,536)
=================================================================================================================================
Class A Class A Class A Class A Class A
------------- --------------- --------------- -------------- --------------
10,766,604 9,130,715 3,285,739 5,082,572 5,830,049
848,870 9,145,811 8,585 1,286,112 197,978
(2,027,335) (22,215,374) (11,228,873) (6,067,690) (2,898,305)
- ---------------------------------------------------------------------------------------------------------------------------------
9,588,139 (3,938,848) (7,934,549) 300,994 3,129,722
=================================================================================================================================
- -------------------------------------------------------------------- ----------------------------------------------------------
</TABLE>
63
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements
January 31, 1997
- --------------------------------------------------------------------------------
1. Organization
Goldman Sachs Equity Portfolios, Inc. (the "Company") is a Maryland corporation
registered under the Investment Company Act of 1940, as amended, as an open-end,
diversified management investment company. Included in this report are the
financial statements for the Goldman Sachs Balanced Fund ("Balanced Fund"),
Goldman Sachs Select Equity Fund ("Select Equity Fund"), Goldman Sachs Growth
and Income Fund ("Growth and Income Fund"), Goldman Sachs Capital Growth Fund
("Capital Growth Fund"), Goldman Sachs Small Cap Equity Fund ("Small Cap Equity
Fund"), Goldman Sachs International Equity Fund ("International Equity Fund")
and Goldman Sachs Asia Growth Fund ("Asia Growth Fund"), collectively, "the
Funds." The Select Equity, Growth and Income, International Equity and Asia
Growth Funds offer four classes of shares - Class A, Class B, Institutional and
Service. The Balanced, Capital Growth and Small Cap Equity Funds offer two
classes of shares - Class A and Class B.
2. Significant Accounting Policies
The following is a summary of the significant accounting policies consistently
followed by the Company. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that may affect the reported amounts.
A. Investment Valuation
- ------------------------
Investments in securities traded on a U.S. or foreign securities exchange or the
NASDAQ system are valued daily at their last sale or closing price on the
principal exchange on which they are traded or NASDAQ. If no sale occurs,
securities traded on a U.S. exchange or NASDAQ are valued at the mean between
the closing bid and asked price, and securities traded on a foreign exchange
will be valued at the official bid price. Unlisted equity and debt securities
for which market quotations are available are valued at the mean between the
most recent bid and asked prices. Debt securities are valued at prices supplied
by an independent pricing service, which reflect broker/dealer-supplied
valuations and matrix pricing systems. Short-term debt obligations maturing in
sixty days or less are valued at amortized cost. Restricted securities, and
other securities for which quotations are not readily available, are valued at
fair value using methods approved by the Board of Directors of the Company.
B. Securities Transactions and Investment Income
- -------------------------------------------------
Securities transactions are recorded on the trade date. Realized gains and
losses on sales of investments are calculated on the identified-cost basis.
Dividend income is recorded on the ex-dividend date. Dividends for which the
Funds have the choice to receive either cash or stock are recognized as
investment income in an amount equal to the cash dividend. This amount is also
used as an estimate of the fair value of the stock received. Interest income is
determined on the basis of interest accrued, premium amortized and discount
earned with the exception of the Balanced Fund which does not amortize premiums.
In addition, it is the Funds' policy to accrue for estimated capital gains taxes
on foreign securities held by the Funds subject to such taxes.
C. Mortgage Dollar Rolls
- -------------------------
The Balanced Fund may enter into mortgage "dollar rolls" in which the Fund sells
securities in the current month for delivery and simultaneously contracts with
the same counterparty to repurchase similar (same type, coupon and maturity) but
not identical securities on a specified future date. For financial reporting and
tax reporting purposes, the Fund treats mortgage dollar rolls as two separate
transactions; one involving the purchase of a security and a separate
transaction involving a sale.
D. Foreign Currency Translations
- ---------------------------------
The books and records of the Company are maintained in U.S. dollars. Amounts
denominated in foreign currencies are translated into U.S. dollars on the
following basis: (i) investment valuations, other assets and liabilities
initially expressed in foreign currencies are converted each business day into
U.S. dollars based on current exchange rates; (ii) purchases and sales of
foreign investments,
- --------------------------------------------------------------------------------
64
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
income and expenses are converted into U.S. dollars based on currency exchange
rates prevailing on the respective dates of such transactions.
Net realized and unrealized gain (loss) on foreign currency transactions
will represent: (i) foreign exchange gains and losses from the sale and holdings
of foreign currencies and investments; (ii) gains and losses between trade date
and settlement date on investment securities transactions and forward exchange
contracts; and (iii) gains and losses from the difference between amounts of
dividends and interest recorded and the amounts actually received.
E. Forward Foreign Currency Exchange Contracts
- -----------------------------------------------
Certain of the Funds are authorized to enter into forward foreign currency
exchange contracts for the purchase of a specific foreign currency at a fixed
price on a future date as a hedge or cross-hedge against either specific
transactions or portfolio positions. The International Equity and Asia Growth
Funds may enter into such contracts to seek to increase total return. All
commitments are "marked-to-market" daily at the applicable translation rates and
any resulting unrealized gains or losses are recorded in the funds' financial
statements. The Funds record realized gains or losses at the time the forward
contract is offset by entry into a closing transaction or extinguished by
delivery of the currency. Risks may arise upon entering these contracts from the
potential inability of counterparties to meet the terms of their contracts and
from unanticipated movements in the value of a foreign currency relative to the
U.S. dollar.
F. Short Securities Positions
- ------------------------------
The Funds (other than the Select Equity Fund) may enter into covered short
sales. Short securities positions are accounted for at cost and subsequently
marked to market to reflect the current market value of the position. The market
value of the short position is recorded as a liability on the fund's records and
any difference between this market value and cash received is reported as
unrealized gain or loss. Gains and losses are realized when a short
- --------------------------------------------------------------------------------
position is closed out by delivering securities back to the broker.
At January 31, 1997, the Balanced Fund had the following covered short positions
open:
- -------------------------------------------------------------------------------
Short Position
Issuer Par Value Market Value
- --------------------------- --------------- --------------------
FNMA TBA 15-Year $900,000 $938,808
- -------------------------------------------------------------------------------
G. Federal Taxes
- -----------------
It is the Funds' policy to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute each year
substantially all of their investment company taxable income and capital gains
to their shareholders. Accordingly, no federal tax provisions are required. The
characterization of distributions to shareholders for financial reporting
purposes is determined in accordance with income tax rules. Therefore, the
source of the Funds' distributions may be shown in the accompanying financial
statements as either from or in excess of net investment income or net realized
gain on investment transactions, or from capital, depending on the type of
book/tax differences that may exist as well as timing differences associated
with having different book and tax year ends.
Asia Growth Fund had approximately $184,000, $5,487,000 and $9,825,000 at
January 31, 1997 of capital loss carryforward expiring in 2002, 2003 and 2004
for federal tax purposes. These amounts are available to be carried forward to
offset future capital gains to the extent permitted by applicable laws or
regulations.
H. Deferred Organization Expenses
- ----------------------------------
Organization-related costs are being amortized on a straight-line basis over a
period of five years.
I. Expenses
- ------------
Expenses incurred by the Company which do not specifically relate to an
individual fund of the Company are allocated to the Funds based on each Fund's
relative
- --------------------------------------------------------------------------------
65
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
January 31, 1997
- --------------------------------------------------------------------------------
average net assets for the period.
Class A and Class B shares bear all expenses and fees relating to the
distribution and authorized dealer service plans as well as other expenses which
are directly attributable to such shares. Each class of Shares separately bears
their respective class-specific transfer agency fees. Service Shares separately
bear a service fee.
J. Option Accounting Principles
- --------------------------------
When certain of the Funds write call or put options, an amount equal to the
premium received is recorded as an asset and as an equivalent liability. The
amount of the liability is subsequently marked-to-market to reflect the current
market value of the option written. When a written option expires on its
stipulated expiration date or the funds enter into a closing purchase
transaction, the funds realize a gain or loss without regard to any unrealized
gain or loss on the underlying security, and the liability related to such
option is extinguished. When a written call option is exercised, the funds
realize a gain or loss from the sale of the underlying security, and the
proceeds of the sale are increased by the premium originally received. When a
written put option is exercised, the amount of the premium originally received
will reduce the cost of the security which the funds purchase upon exercise.
There is a risk of loss from a change in value of such options which may exceed
the related premiums received.
Upon the purchase of a call option or a protective put option by the Funds
the premium paid is recorded as an investment and subsequently marked-to-market
to reflect the current market value of the option. If an option which the Funds
have purchased expires on the stipulated expiration date, the funds will realize
a loss in the amount of the cost of the option. If the funds enter into a
closing sale transaction, the funds will realize a gain or loss, depending on
whether the sale proceeds from the closing sale transaction are greater or less
than the cost of the option. If the Funds exercise a purchased put option, the
funds will realize a gain or loss from the sale of the underlying security, and
the proceeds from such sale will be decreased by the premium originally paid. If
the Funds exercise a purchased call option, the cost of the security which the
funds purchase upon exercise will be increased by the premium originally paid.
K. Futures Contracts
- ---------------------
The Funds may enter into futures transactions in order to hedge against changes
in interest rates, securities prices or currency exchange rates or to seek to
increase total return. The Select Equity Fund may enter into such transactions
only with respect to the S&P 500 Index. A Fund will engage in futures
transactions only for bona fide hedging purposes as defined in regulations of
the CFTC or to seek to increase total return (except with respect to
transactions by the Balanced, Growth and Income, Select Equity, Capital Growth
and Small Cap Equity Funds, in futures on foreign currencies) to the extent
permitted by such regulations. The use of futures contracts involve, to varying
degrees, elements of market risk which may exceed the amounts recognized in the
Statements of Assets and Liabilities.
Upon entering into a futures contract, the Funds are required to deposit
with a broker an amount of cash or securities equal to the minimum "initial
margin" requirement of the futures exchange on which the contract is traded.
Subsequent payments ("variation margin") are made or received by the Funds each
day, dependent on the daily fluctuations in the value of the contract, and are
recorded for financial reporting purposes as unrealized gains or losses. When
entering into a closing transaction, the Funds will realize a gain or loss equal
to the difference between the value of the futures contract to sell and the
futures contract to buy. Futures contracts are valued at the most recent price,
unless such price does not reflect the fair market value of the contract, in
which case the position will be valued using methods approved by the Board of
Directors of the Company.
Certain risks may arise upon entering into futures contracts. The
predominant risk is that the changes in the value of the futures contract may
not directly correlate with changes in the value of the underlying securities.
This risk may decrease the effectiveness of the Funds'
- --------------------------------------------------------------------------------
66
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
hedging strategies and may also result in a loss to the Funds.
3. Agreements
Goldman Sachs Asset Management ("GSAM"), a separate operating division of
Goldman, Sachs & Co. ("Goldman Sachs"), acts as investment adviser to the
Balanced, Growth and Income, Small Cap Equity and International Equity Funds;
Goldman Sachs Funds Management, L.P. ("GSFM"), an affiliate of Goldman Sachs,
acts as investment adviser to the Select Equity and Capital Growth Funds; and
Goldman Sachs Asset Management International ("GSAM International") acts as
investment adviser to the Asia Growth Fund and subadviser to the International
Equity Fund. Under the Investment Advisory and Subadvisory Agreements, GSAM,
GSFM and GSAM International (the "Investment Advisors"), subject to the general
supervision of the Company's Board of Directors, manage the Company's
portfolios. As compensation for the services rendered under the Investment
Advisory Agreements and the assumption of the expenses related thereto, GSAM is
entitled to a fee, computed daily and payable monthly, at an annual rate equal
to .50%, .55%, .75% and .25% of the average daily net assets of the Balanced,
Growth and Income, Small Cap Equity and International Equity Funds,
respectively. GSFM is entitled to a fee of .50% and .75% of the average daily
net assets of the Select Equity and Capital Growth Funds, respectively. GSAM
International is entitled to an advisory fee for the Asia Growth Fund and a
subadvisory fee for the International Equity Fund of .75% and .50% of the
average daily net assets for those funds, respectively.
GSAM also acts as the Funds' administrator pursuant to Administration
Agreements. Under these Administration Agreements, GSAM administers the Funds'
business affairs, including providing facilities. As compensation for the
services rendered pursuant to the Administration Agreements, GSAM is entitled to
a fee of .15% of the average daily net assets of the Balanced and Growth and
Income Funds, and .25% of the average daily net assets of the Select Equity,
Capital Growth, Small Cap Equity, International Equity and Asia Growth Funds.
Goldman Sachs has voluntarily agreed to reduce or limit certain "Other
Expenses" for the Balanced, Select Equity, Growth and Income, International
Equity and Asia Growth Funds (excluding advisory, administration, service,
distribution and authorized dealer service fees and litigation and
indemnification costs, taxes, interest, brokerage commissions and extraordinary
expenses and with the exception of the Balanced Fund, transfer agent fees) until
further notice to the extent such expenses exceed .10%, .06%, .11%, .20% and
.24% of the average daily net assets of the funds, respectively.
Goldman Sachs serves as the Distributor of shares of the Funds pursuant to
Distribution Agreements. Goldman Sachs may receive a portion of the Class A
salesload and Class B back-end salesload imposed and has advised the Company
that it retained approximately $94,000, $380,000, $555,000, $323,000, $219,000,
$1,563,000 and $1,397,000 during the year ended January 31, 1997 for the
Balanced, Select Equity, Growth and Income, Capital Growth, Small Cap Equity,
International Equity and Asia Growth Funds, respectively.
The Company, on behalf of each Fund, has adopted a Distribution Plan (the
"Distribution Plan") pursuant to Rule 12b-1. Under the Distribution Plan,
Goldman Sachs is entitled to a quarterly fee from each Fund for distribution
services equal, on an annual basis, to .25% and .75% of a Fund's average daily
net assets attributable to Class A and Class B shares, respectively.
The Company, on behalf of each Fund, has adopted an Authorized Dealer
Service Plan (the "Service Plan") pursuant to which Goldman Sachs and Authorized
Dealers are compensated for providing personal and account maintenance services.
Each Fund pays a fee under its Service Plan equal, on an annual basis, to .25%
of its average daily net assets attributable to Class A and Class B shares.
Goldman Sachs also serves as the Transfer Agent of the funds for a fee.
For the year ended January 31, 1997, the Advisors, Administrator and
Distributor have voluntarily agreed to waive certain fees and reimburse other
expenses as follows (in thousands):
- --------------------------------------------------------------------------------
67
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
January 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Waivers
------- Reimburse-
Admin- Class A Reimburse- ment
Fund Adviser istrator 12b-1 ment Outstanding
- ------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balanced $ -- $ -- $ 153 $ 320 $ 88
Select Equity 170 282 69 105 3
Growth and
Income -- -- 1,113 -- --
Capital
Growth -- -- 2,171 -- --
Small Cap
Equity -- -- 530 -- --
International
Equity 50 464 171 145 --
Asia Growth 103 259 100 50 --
</TABLE>
The Investment Advisors, Administrator and Distributor may discontinue or
modify such waivers and limitations in the future at their discretion.
At January 31, 1997, the amounts owed to affiliates were as follows(in
thousands):
<TABLE>
<CAPTION>
Authorized
Admin- Distri- Dealer Transfer
Fund Adviser istrator butor Service Agent Total
- --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balanced $ 33 $ 10 $ 2 $ 15 $ 38 $ 98
Select Equity 143 49 56 57 84 389
Growth and
Income 284 78 28 119 207 716
Capital
Growth 568 190 2 190 210 1,160
Small Cap
Equity 134 45 2 45 120 346
International
Equity 391 78 105 116 143 833
Asia Growth 171 36 50 53 90 400
</TABLE>
4. Portfolio Securities Transactions
Purchases and proceeds of sales or maturities of securities (excluding
short-term investments, futures and options) for the year ended January 31,
1997, were as follows:
<TABLE>
<CAPTION>
Sales or
Fund Purchases Maturities
- --------- --------------- -------------
<S> <C> <C>
Balanced $146,297,709 $123,056,708
Select Equity 242,635,637 102,479,847
Growth and Income 330,177,173 256,802,366
Capital Growth 436,178,218 569,122,643
Small Cap Equity 202,036,820 256,627,457
International Equity 400,682,323 166,164,906
Asia Growth 192,125,629 118,802,040
</TABLE>
Included in the above amounts were purchases and proceeds of sales or
maturities of governmental securities for the Balanced Fund in the amounts of
$99,727,748 and $91,845,598, respectively.
For the year ended January 31, 1997, written put option transactions in the
Balanced Fund were as follows:
<TABLE>
<CAPTION>
Number of Premium
Written Options Contracts Received
- ---------------------- ------------- -------------
<S> <C> <C>
Balance outstanding at
beginning of year 0 $ 0
Options written 32 5,416
Options repurchased (32) (5,416)
--------------- ---------------
Balance outstanding,
end of year 0 $ 0
=============== ===============
</TABLE>
For the year ended January 31, 1997, written call option transactions in the
Growth and Income Fund were as follows:
<TABLE>
<CAPTION>
Number of Premium
Written Options Contracts Received
- ---------------------- ------------- -------------
<S> <C> <C>
Balance outstanding at
beginning of year 0 $ 0
Options written 438 73,608
Options repurchased (438) (73,608)
--------------- ---------------
Balance outstanding,
end of year 0 $ 0
=============== ===============
</TABLE>
- --------------------------------------------------------------------------------
68
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
For the year ended January 31, 1997, written put option transactions in the
Small Cap Equity Fund were as follows:
<TABLE>
<CAPTION>
Number of Premium
Written Options Contracts Received
- ---------------------- ------------- -------------
<S> <C> <C>
Balance outstanding at
beginning of year 0 $ 0
Options written 2,100 575,871
Options expired (9) (2,026)
Options exercised (1,091) (238,096)
Options repurchased (1,000) (335,749)
--------------- ---------------
Balance outstanding,
end of year 0 $ 0
=============== ===============
</TABLE>
Certain risks arise related to call and put options from the possible
inability of counterparties to meet the terms of their contracts.
At January 31, 1997, the Balanced Fund had the following outstanding forward
foreign currency exchange contracts:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Foreign Currency Value on Unrealized
Sale Contracts Settlement Date Current Value Gain
- --------------------------------------------------------------------
<S> <C> <C> <C>
Australian Dollar
expiring 3/14/97 $777,277 $770,585 $6,692
- --------------------------------------------------------------------
Total Foreign
Currency Sale
Contracts $777,277 $770,585 $6,692
- --------------------------------------------------------------------
</TABLE>
At January 31, 1997, the International Equity Fund had the following
outstanding forward foreign currency exchange contracts:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Foreign Currency Value on Unrealized
Sale Contracts Settlement Date Current Value Gain (Loss)
- --------------------------------------------------------------------
<S> <C> <C> <C>
Swiss Franc
expiring 4/28/97 $39,343,000 $39,665,062 $ (322,062)
Deutsche Mark
expiring 2/27/97 22,305,725 22,183,180 122,545
Hong Kong Dollar
expiring 8/8/97 38,565,981 38,530,005 35,976
Japanese Yen
expiring 4/24/97 122,316,352 119,792,909 2,523,443
- --------------------------------------------------------------------
Total Foreign Currency
Sale Contracts $222,531,058 $220,171,156 $2,359,902
- --------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------
Foreign Currency Value on Unrealized
Purchase Contracts Settlement Date Current Value Gain (Loss)
- --------------------------------------------------------------------
<S> <C> <C> <C>
Hong Kong Dollar
expiring 2/3/97 $35,454 $35,454 $--
- --------------------------------------------------------------------
Total Foreign Currency
Purchase Contracts $35,454 $35,454 $--
- --------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The contractual amounts of forward foreign currency exchange contracts do
not necessarily represent the amounts potentially subject to risk. The
measurement of the risks associated with these instruments is meaningful only
when all related and offsetting transactions are considered. At January 31,
1997, the Balanced and International Equity Fund's had sufficient cash and
securities to cover any commitments under these contracts.
The Balanced and International Equity Funds have recorded a "Receivable for
forward foreign currency exchange contracts" and "Payable for forward foreign
currency exchange contracts" resulting from open and closed but not settled
forward foreign currency exchange contracts of $6,692 and $0, and $2,684,757 and
$3,434,535, respectively, in the accompanying Statements of Assets and
Liabilities. Included in these amounts for the International Equity Fund are
$2,793 and $3,112,473, respectively, related to forward contracts closed but not
settled as of January 31, 1997.
For the year ended January 31, 1997, Goldman Sachs earned approximately
$5,000, $78,000, $304,000, $36,000, $11,000 and $66,000 of brokerage commissions
from portfolio transactions executed on behalf of the Balanced, Growth and
Income, Capital Growth, Small Cap Equity, International Equity and Asia Growth
Funds, respectively.
5. Repurchase Agreements
During the term of a repurchase agreement, the value of the underlying
securities, including accrued interest, is required to equal or exceed the value
of the repurchase agreement. The underlying securities for all repurchase
agreements are held in safekeeping at the Funds' custodian.
- --------------------------------------------------------------------------------
69
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
January 31, 1997
- --------------------------------------------------------------------------------
6. Joint Repurchase Agreement Account
The Funds, together with other registered investment companies having advisory
agreements with GSAM or GSFM, transfer uninvested cash balances into joint
accounts, the daily aggregate balance of which is invested in one or more
repurchase agreements. The underlying securities for the repurchase agreements
are U.S. Treasury and agency obligations. At January 31, 1997, the Balanced,
Select Equity, Growth and Income, Capital Growth and Small Cap Equity Funds had
undivided interests in the repurchase agreements in the following joint account
which equaled $9,200,000, $3,600,000, $26,800,000, $18,300,000 and $16,600,000,
respectively, in principal amount. At January 31, 1997, the repurchase
agreements held in this joint account, along with the corresponding underlying
securities (including the type of security, market value, interest rate and
maturity date) were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
- --------------------------------------------------------------------
Bear Stearns Securities, Inc., dated 01/31/97, repurchase
price $800,375,333 (GNMA: $26,604,837, 7.50%, 10/15/26;
FNMA: $720,411,516, 5.50%-8.00%, 02/01/09-09/01/26;
FHLMC: $77,372,676, 6.00%-8.00%, 04/01/98-07/01/26)
<S> <C> <C> <C>
$800,000,000 5.63% 02/03/97 $ 800,000,000
<CAPTION>
Nomura Securities, Inc. dated 01/31/97, repurchase price
$100,047,083 (GNMA: $102,007,864, 5.50%-10.25%
01/15/20-01/20/27)
<S> <C> <C> <C>
100,000,000 5.65 02/03/97 100,000,000
<CAPTION>
Lehman Government Securities, dated 01/31/97, repurchase
price $201,894,173 (U.S. Treasury Notes: $191,656,654,
6.38%, 01/15/00-08/15/02; U.S. Treasury Stripped
Securities: $14,095,535, 05/15/02-11/15/03)
<S> <C> <C> <C>
201,800,000 5.60 02/03/97 201,800,000
</TABLE>
- --------------------------------------------------------------------
Total Joint Repurchase Agreement Account $ 1,101,800,000
- --------------------------------------------------------------------
7. Line of Credit Facility
The Funds participate in a $250,000,000 uncommitted, unsecured revolving line of
credit facility. In addition, the Funds, except the Select Equity Fund,
participate in a $50,000,000 committed, unsecured revolving line of credit
facility. Both facilities are to be used solely for temporary or emergency
purposes. Under the most restrictive arrangement, each Fund must own securities
having a market value in excess of 300% of the total bank borrowings. The
interest rate on the borrowings is based on the Federal Funds rate. The
committed facility also requires a fee to be paid based on the amount of the
commitment which has not been utilized. During the year ended January 31, 1997,
the Funds did not have any borrowings under these facilities.
8. Transactions With Affiliated Companies
A Fund is considered to be invested in an affiliated company if that Fund owns
greater than five percent of the outstanding voting securities of such company.
Transactions during the year ended January 31, 1997 which are considered to be
affiliates of Small Cap Equity are as follows (dollar amounts in thousands):
<TABLE>
<CAPTION>
Purchases Sales Realized Dividend Market
Affiliate Name at Cost Proceeds Gain/(Loss) Income Value
- --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
American Safety
Razor $ -- $5,751 $ 289 $ -- $ --
- --------------------------------------------------------------------
Alpine Lace
Brands, Inc. 7,790 -- -- -- 2,341
- --------------------------------------------------------------------
APS Holding
Corp. 10,305 654 290 -- 7,869
- --------------------------------------------------------------------
J. Baker, Inc. 1,591 1,349 (1,090) 60 7,565
- --------------------------------------------------------------------
Black Box, Inc. -- 23,013 14,149 -- --
- --------------------------------------------------------------------
Brookstone, Inc. -- 2,722 (758) -- 5,939
- --------------------------------------------------------------------
Congoleum Corp. -- 2,323 (102) -- 3,156
- --------------------------------------------------------------------
Hollinger
International
Corp. -- 10,903 (1,311) 112 --
- --------------------------------------------------------------------
International Post
Ltd. -- 2,215 (3,933) -- 1,729
- --------------------------------------------------------------------
Morningstar
Group Inc. -- 12,216 6,346 -- --
- --------------------------------------------------------------------
Mortons
Restaurant
Group, Inc. -- 4,106 1,625 -- 6,439
- --------------------------------------------------------------------
Opinion Research
Corp. -- -- -- -- 2,022
- --------------------------------------------------------------------
Pegasus
Communications
Corp. 3,697 -- -- -- 3,224
- --------------------------------------------------------------------
Platinum
Entertainment
Corp. 3,354 -- -- -- 2,675
- --------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
70
<PAGE>
9. Other Matters
As of January 31, 1997, Goldman, Sachs & Co. Employees Profit Sharing and
Retirement Income Plan was the beneficial owner of approximately 14% of the
outstanding shares of the Select Equity Fund.
10. Certain Reclassifications
In accordance with Statement of Position 93-2, the Balanced, Select Equity,
Growth and Income, International Equity and Asia Growth Funds have reclassified
$13,068, $9,549, $18,764, $302,042 and $31,712, respectively, from paid-in
capital to accumulated undistributed net investment income. Additionally, the
Small Cap Equity Fund has reclassified $1,532,848 from accumulated net realized
gains on investments to accumulated net investment loss and $18,742 from paid-in
capital to accumulated net investment loss. The Select Equity Fund reclassified
$40,540 from accumulated net realized gains on investments to distributions in
excess of net investment income. The International Equity Fund and the Asia
Growth Fund have reclassified $205,942 and $338,857 from accumulated net
realized foreign currency loss to distributions in excess of net investment
income, respectively. The Asia Growth Fund also reclassified $377,435 from
accumulated net realized gains on investments to distributions in excess of net
investment income. These reclassifications have no impact on the net asset value
of the Funds and are designed to present the Funds' capital accounts on a tax
basis.
71
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
January 31, 1997
- --------------------------------------------------------------------------------
11. Summary of Share Transactions
Share activity for the year ended January 31, 1997 is as follows:
<TABLE>
<CAPTION>
Balanced Fund Select Equity Fund Growth and Income Fund
- ------------------------------------------------------------------------------------------------------------------
Shares Dollars Shares Dollars Shares Dollars
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A shares
Shares sold 1,529,469 $27,172,279 3,862,697 $81,642,386 5,616,082 $121,074,992
Reinvestment of dividends
and distributions 310,437 5,598,883 370,586 8,175,333 2,390,917 52,287,188
Shares repurchased (446,535) (7,533,272) (1,109,202) (23,823,146) (3,328,038) (72,163,062)
-------------------------------------------------------------------------------------
1,393,371 25,237,890 3,124,081 65,994,573 4,678,961 101,199,118
-------------------------------------------------------------------------------------
Class B shares
Shares sold 109,171 2,001,768 733,802 15,946,016 729,877 16,222,639
Reinvestment of dividends
and distributions 5,284 95,768 24,314 535,407 35,976 787,421
Shares repurchased (1,795) (32,396) (13,894) (310,118) (14,764) (340,546)
-------------------------------------------------------------------------------------
112,660 2,065,140 744,222 16,171,305 751,089 16,669,514
-------------------------------------------------------------------------------------
Institutional shares
Shares sold -- -- 3,151,881 66,277,175 8,228 186,173
Reinvestment of dividends
and distributions -- -- 275,197 6,102,331 92 2,020
Shares repurchased -- -- (363,536) (7,991,198) -- --
-------------------------------------------------------------------------------------
-- -- 3,063,542 64,388,308 8,321 188,193
-------------------------------------------------------------------------------------
Service shares
Shares sold -- -- 154,590 3,344,141 134,652 2,879,042
Reinvestment of dividends
and distributions -- -- 4,126 91,166 12,587 276,180
Shares repurchased -- -- (1,252) (28,032) (10,262) (227,331)
-------------------------------------------------------------------------------------
-- -- 157,464 3,407,275 136,977 2,927,891
-------------------------------------------------------------------------------------
Net increase (decrease) in
shares 1,506,031 $27,303,030 7,089,309 $149,961,461 5,575,348 $120,984,716
=====================================================================================
<CAPTION>
Capital Growth Fund
- -------------------------------------------------------
Shares Dollars
--------------------------
<S> <C> <C>
Class A shares
Shares sold 4,677,047 $73,029,007
Reinvestment of dividends
and distributions 5,870,272 89,898,521
Shares repurchased (14,635,348) (229,277,58)
----------------------------
(4,088,029) (66,350,058)
----------------------------
Class B shares
Shares sold 188,331 2,979,890
Reinvestment of dividends
and distributions 12,408 190,353
Shares repurchased (7,499) (122,231)
----------------------------
193,240 3,048,012
----------------------------
Institutional shares
Shares sold -- --
Reinvestment of dividends
and distributions -- --
Shares repurchased -- --
----------------------------
----------------------------
Service shares
Shares sold -- --
Reinvestment of dividends
and distributions -- --
Shares repurchased -- --
----------------------------
-- --
----------------------------
Net increase (decrease) in
shares (3,894,789) $(63,302,046)
============================
</TABLE>
- --------------------------------------------------------------------------------
72
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Small Cap Equity Fund International Equity Fund Asia Growth Fund
- ----------------------------------------------------------------------------------------------------------------
Shares Dollars Shares Dollars Shares Dollars
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A shares
Shares sold 2,508,268 $52,353,524 12,103,239 $230,847,197 7,588,351 $124,281,405
Reinvestment of dividends
and distributions 475,255 9,732,097 241,377 4,749,851 11,669 184,607
Shares repurchased (4,697,902) (94,933,279) (3,820,157) (72,226,935) (3,945,614) (63,723,269)
------------------------------------------------------------------------------------
(1,714,379) (32,847,658) 8,524,459 163,370,113 3,654,406 60,742,743
------------------------------------------------------------------------------------
Class B shares
Shares sold 173,849 3,765,689 1,000,064 19,327,085 210,879 3,433,876
Reinvestment of dividends
and distributions 7,086 144,474 7,924 155,475 279 4,391
Shares repurchased (4,391) (91,616) (10,181) (198,263) (4,771) (76,391)
------------------------------------------------------------------------------------
176,544 3,818,547 997,807 19,284,297 206,387 3,361,876
------------------------------------------------------------------------------------
Institutional shares
Shares sold -- -- 3,657,119 70,627,799 1,041,822 16,733,545
Reinvestment of dividends
and distributions -- -- 28,973 572,219 2,040 32,281
Shares repurchased -- -- (161,923) (3,153,741) (228,363) (3,651,351)
------------------------------------------------------------------------------------
-- -- 3,524,169 68,046,277 815,499 13,114,475
------------------------------------------------------------------------------------
Service shares
Shares sold -- -- 34,686 673,880 -- --
Reinvestment of dividends
and distributions -- -- 200 3,947 -- --
Shares repurchased -- -- (56) (1,098) -- --
------------------------------------------------------------------------------------
-- -- 34,830 676,729 -- --
------------------------------------------------------------------------------------
Net increase (decrease) in
shares (1,537,835) $(29,029,111) 13,081,265 $251,377,416 4,676,292 $77,219,094
=====================================================================================
<CAPTION>
Share activity for the year ended January 31, 1996 is as follows:
Select Equity Fund
- -------------------------------------------------------------
Shares Dollars
------------- ---------------
<S> <C> <C>
Class A shares
Shares sold 2,479,285 $44,569,920
Reinvestment of dividends and 161,481
distributions 3,032,597
Shares repurchased (2,578,247) (45,692,944)
------------- ---------------
62,519 1,909,573
------------- ---------------
Institutional shares
Shares sold 3,220,915 57,579,398
Reinvestment of dividends and
distributions 97,993 1,847,978
Shares repurchased (30,492) (567,188)
------------- ----------------
3,288,416 $58,860,188
------------- ----------------
Net increase 3,350,935 $60,769,761
============= ================
</TABLE>
- --------------------------------------------------------------------------------
73
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Income (loss) from Distributions to
investment operations/h/ shareholders
------------------------------- ------------------------------------------
Net realized From
and unrealized net realized
Net asset gain (loss) on From gain on In excess
value, Net investments, net investment of net
beginning investment options and investment and futures investment
of period income futures income transactions income
-----------------------------------------------------------------------------------------
BALANCED FUND
- ------------------------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997 - Class A Shares................ $17.31 $0.66 $2.47 $(0.66) $(1.00) --
1997 - Class B Shares/b/............. 17.46 0.42 2.34 (0.42) (1.00) (0.07)
1996 - Class A Shares................ 14.22 0.51 3.43 (0.50) (0.35) --
For the Period Ended January 31,
- --------------------------------
1995 - Class A Shares/d/............. 14.18 0.10 0.02 (0.08) -- --
<CAPTION>
Net asset
Net increase value, Portfolio Average
in net end of Total turnover commission
asset value period return/a/ rate rate/g/
---------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
- ------------------------------
<S> <C> <C> <C> <C> <C>
1997 - Class A Shares................ $1.47 $18.78 18.59% 208.11/f/ $.0587
1997 - Class B Shares(b)............. 1.27 18.73 16.22/c/ 208.11/f/ .0587
1996 - Class A Shares................ 3.09 17.31 28.10 197.10/f/ --
For the Period Ended January 31,
- -------------------------------------
1995 - Class A Shares/d/............. 0.04 14.22 0.87/c/ 14.71/c/ --
<CAPTION>
Ratio assuming no
voluntary waiver of fees
or expense limitations
-------------------------------
Net Ratio of Ratio of net Ratio of net
assets at net investment Ratio of investment
end of expenses to income to expenses to income (loss)
period average net average net average to average
(in 000s) assets assets net assets net assets
-----------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
- ------------------------------
<S> <C> <C> <C> <C> <C>
1997 - Class A Shares................ $81,410 1.00% 3.76% 1.77% 2.99%
1997 - Class B Shares/b/............. 2,110 1.75/e/ 2.59/e/ 2.27/e/ 2.07/e/
1996 - Class A Shares................ 50,928 1.00 3.65 1.90 2.75
For the Period Ended January 31,
- --------------------------------
1995 - Class A Shares/d/............. 7,510 1.00/e/ 3.39/e/ 8.29/e/ (3.90)/e/
</TABLE>
- --------------------------
/a/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no sales
or redemption charges. Total return would be reduced if a sales or
redemption charge were taken into account.
/b/ For the period from May 1, 1996 (commencement of operations) to January 31,
1997.
/c/ Not annualized.
/d/ For the period from October 12, 1994 (commencement of operations) to
January 31, 1995.
/e/ Annualized.
/f/ Includes the effect of mortgage dollar roll transactions.
/g/ For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged. This rate may vary due to various types
of transactions and number of security trades executed.
/h/ Includes the balancing effect of calculating per share amounts.
- --------------------------------------------------------------------------------
(The accompanying notes are an integral part of these financial statements.)
74
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Income (loss) from Distributions to
investment operations/(h)/ shareholders
========================== ====================================
Net realized From
and unrealized net realized
Net asset gain (loss) on From gain on In excess
value, Net investments, net investment of net
beginning investment options and investment and futures investment
of period income futures income transactions income
============================================================================
SELECT EQUITY FUND
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Year Ended January 31,
==============================
1997 - Class A Shares ........................ 19.66 $0.16 $4.46 $(0.16) $(0.80) --
1997 - Class B Shares/(f)/.................... 20.44 0.04 3.70 (0.04) (0.80) (0.16)
1997 - Institutional Shares .................. 19.71 0.30 4.51 (0.28) (0.80) --
1997 - Service Shares/(f)/.................... 21.02 0.13 3.15 (0.13) (0.80) (0.10)
1996 - Class A Shares ........................ 14.61 0.19 5.43 (0.16) (0.41) --
1996 - Institutional Shares/(d)/.............. 16.97 0.16 3.23 (0.24) (0.41) --
1995 - Class A Shares ........................ 15.93 0.20 (0.38) (0.20) (0.94) --
1994 - Class A Shares ........................ 15.46 0.17 2.08 (0.17) (1.61) --
1993 - Class A Shares ........................ 15.05 0.22 0.41 (0.22) -- --
For the Period Ended January 31,
================================
1992 - Class A Shares/(e)/.................... 14.17 0.11 0.88 (0.11) -- --
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Net Net Net
increase asset assets
(decrease) value, Portfolio Average end of
in net end of Total turnover commission period
asset value period return/(a)/ rate rate/(g)/ (in 000s)
======================================================================
SELECT EQUITY FUND
- ------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
===============================
<S> <C> <C> <C> <C> <C> <C>
1997 - Class A Shares .............. $3.66 $23.32 23.75% 37.28% $.0417 $225,968
1997 - Class B Shares/(f)/.......... 2.74 23.18 18.59/(b)/ 37.28 .0417 17,258
1997 - Institutional Shares ........ 3.73 23.44 24.63 37.28 .0417 148,942
1997 - Service Shares/(f)/.......... 2.25 23.27 15.92/(b)/ 37.28 .0417 3,666
1996 - Class A Shares .............. 5.05 19.66 38.63 39.35 -- 129,045
1996 - Institutional Shares/(d)/.... 2.74 19.71 20.14/(b)/ 39.35/(b)/ -- 64,829
1995 - Class A Shares .............. (1.32) 14.61 (1.10) 56.18 -- 94,968
1994 - Class A Shares .............. 0.47 15.93 15.12 87.73 -- 92,769
1993 - Class A Shares .............. 0.41 15.46 4.30 144.93 -- 117,757
For the Period Ended January 31,
================================
1992 - Class A Shares/(e)/............ 0.88 15.05 7.01/(b)/ 135.02(c) -- 151,142
</TABLE>
<TABLE>
<CAPTION>
Ratios assuming no
voluntary waiver of fees
or expense limitations
-------------------------
Ratio of Ratio of net Ratio of net
net investment Ratio of investment
expenses income to expenses to income
to average average net average to average
assets assets net assets net assets
==================================================
SELECT EQUITY FUND
- -----------------------------------------------------------------------------------------------------
For the Year Ended January 31,
==============================
<S> <C> <C> <C> <C>
1997 - Class A Shares ........................ 1.29% 0.91% 1.53% 0.67%
1997 - Class B Shares/(f)/.................... 1.83/(c)/ 0.06/(c)/ 2.00/(c)/ (0.11)/(c)/
1997 - Institutional Shares .................. 0.65 1.52 0.85 1.32
1997 - Service Shares/(f)/.................... 1.15/(c)/ 0.69/(c)/ 1.35/(c)/ 0.49/(c)/
1996 - Class A Shares ........................ 1.25 1.01 1.55 0.71
1996 - Institutional Shares/(d)/.............. 0.65/(c)/ 1.49/(c)/ 0.96/(c)/ 1.18/(c)/
1995 - Class A Shares ........................ 1.38 1.33 1.63 1.08
1994 - Class A Shares ........................ 1.42 0.92 1.67 0.67
1993 - Class A Shares ........................ 1.28 1.30 1.53 1.05
For the Period Ended January 31,
================================
1992 - Class A Shares/(e)/.................... 1.57/(c)/ 1.24/(c)/ 1.82/(c)/ 0.99/(c)/
</TABLE>
- --------------
/(a)/ Assumes investment at the net asset value at the beginning of the
period, reinvestment of all dividends and distributions, a complete
redemption of the investment at the net asset value at the end of the
period and no sales or redemption charges. Total return would be reduced if
a sales or redemption charge were taken into account.
/(b)/ Not annualized.
/(c)/ Annualized.
/(d)/ For the period from June 15, 1995 (commencement of operations) to January
31, 1996.
/(e)/ For the period from May 24, 1991 (commencement of operations) to January
31, 1992.
/(f)/ For the period from May 1 and June 7, 1996 (commencement of operations) to
January 31, 1997 for Class B and Service shares, respectively.
/(g)/ For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged. This rate may vary due to various types
of transactions and number of security trades executed.
/(h)/ Includes the balancing effect of calculating per share amounts.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
75
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from
investment
operations/(h)/ Distributions to shareholders
====================== =====================================
Net
realized
and From net
Net unrealized realized
asset gain(loss) gain In Net
value, on on excess Increase
beginning Net investments From net investment of net Additional in net
of investment and investment and option investment paid-in asset
period income options income transactions income capital value
===============================================================================================
GROWTH AND INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
==============================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997 - Class A Shares ............. $19.98 $0.35 $5.18 $(0.35) $(1.97) $ (0.01) $ -- $3.20
1997 - Class B Shares/(f)/ ........ 20.82 0.17 4.31 (0.17) (1.97) (0.06) -- 2.28
1997 - Institutional Shares/(f)/ .. 21.25 0.29 3.96 (0.30) (1.97) (0.04) -- 1.94
1997 - Service Shares/(f)/ ........ 20.71 0.28 4.50 (0.28) (1.97) (0.07) -- 2.46
1996 - Class A Shares ............. 15.80 0.33 4.75 (0.30) (0.60) -- -- 4.18
1995 - Class A Shares ............. 15.79 0.20/(b)/ 0.30/(b)/ (0.20) (0.33) (0.07) 0.11/(b)/ 0.01
<CAPTION>
For the Period Ended January 31,
==================================
<S>
1994 - Class A Shares/(c)/......... 14.18 0.15 1.68 (0.15) (0.06) (0.01) -- 1.61
</TABLE>
<TABLE>
<CAPTION>
Ratio of Ratio of
Net net net
Net assets expenses investment
asset at to income to
value Total Portfolio Average end of average average
end of return turnover commission period net net
period /(a)/ rate rate/(g)/ (in 000s) assets assets
===================================================================================
GROWTH AND INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
==============================
<S> <C> <C> <C> <C> <C> <C> <C>
1997 - Class A Shares ............. $23.18 28.42% 53.03% $.0586 $615,103 1.22% 1.60%
1997 - Class B Shares/(f)/ ........ 23.10 22.23/(d)/ 53.03 .0586 17,346 1.93/(e)/ 0.15/(e)/
1997 - Institutional Shares/(f)/ .. 23.19 20.77/(d)/ 53.03 .0586 193 0.82/(e)/ 1.36/(e)/
1997 - Service Shares/(f)/ ........ 23.17 23.87/(d)/ 53.03 .0586 3,174 1.32/(e)/ 0.94/(e)/
1996 - Class A Shares ............. 19.98 32.45 57.93 -- 436,757 1.20 1.67
1995 - Class A Shares ............. 15.80 3.97 71.80 -- 193,772 1.25 1.28
<CAPTION>
For the Period Ended January 31,
==================================
<S> <C> <C> <C> <C> <C> <C> <C>
1994 - Class A Shares/(c)/......... 15.79 13.08/(d)/102.23/(d)/ -- 41,528 1.25/(e)/ 1.23/(e)/
</TABLE>
<TABLE>
<CAPTION>
Ratios assuming no
voluntary waiver of fees
or expense limitations
=================================
Ratio of
Ratio of net investment
expenses income (loss)
to average to average
net assets net assets
=================================
GROWTH AND INCOME FUND
- -----------------------------------------------------------------------------
For the Year Ended January 31,
==============================
<S> <C> <C>
1997 - Class A Shares ............. 1.43% 1.39%
1997 - Class B Shares/(f/) ........ 1.93/(e)/ 0.15/(e)/
1997 - Institutional Shares/(f)/ .. 0.82/(e)/ 1.36/(e)/
1997 - Service Shares/(f)/ ........ 1.32/(e)/ 0.94/(e)/
1996 - Class A Shares ............. 1.45 1.42
1995 - Class A Shares ............. 1.58 0.95
<CAPTION>
For the Period Ended January 31,
==================================
<S>
1994 - Class A Shares/(c)/......... 3.24/(e)/ (0.76)/(e)/
</TABLE>
- ----------------------------------
/(a)/Assumes investment at the net asset v alue at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no sales
or redemption charges. Total return would be reduced if a sales or
redemption charge were taken into account.
/(b)/Calculated based on the average shares outstanding methodology.
/(c)/For the period from February 5, 1993 (commencement of operations) to
January 31, 1994.
/(d)/Not annualized.
/(e)/Annualized.
/(f)/For the period from March 6, May 1 and June 3, 1996 (commencement of
operations) to January 31, 1997 for Service, Class B and Institutional
shares, respectively.
/(g)/For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged. This rate may vary due to various types
of transactions and number of security trades executed.
/(h)/Includes the balancing effect of calculating per share amounts.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
76
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from
investment operations/(g)/ Distributions to shareholders
=========================== =============================================
Net realized
and unrealized From net
Net asset gain (loss) on realized gain In excess
value, Net investments, From net on investments, of net
beginning investment options and investment options investment
of period income futures income and futures income
=======================================================================================
CAPITAL GROWTH FUND
- -----------------------------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
==============================
<S> <C> <C> <C> <C> <C> <C>
1997 - Class A Shares.................... $14.91 $0.10 $3.56 $ (0.10) $ (1.72) $(0.02)
1997 - Class B Shares(b)................. 15.67 0.01 2.81 (0.01) (1.72) (0.09)
1996 - Class A Shares.................... 13.67 0.12 3.93 (0.12) (2.69) --
1995 - Class A Shares.................... 15.96 0.03 (0.69) (0.01) (1.62) --
1994 - Class A Shares.................... 14.64 0.02 2.40 (0.01) (1.07) (0.02)
1993 - Class A Shares.................... 13.65 0.06 2.28 (0.07) (1.28) --
1992 - Class A Shares.................... 11.10 0.28 2.90 (0.31) (0.32) --
For the Period Ended January 31,
================================
1991 - Class A Shares/(c)/............... 11.34 0.34 (0.27) (0.31) -- --
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Net
Net increase Net asset assets at
(decrease) value, Portfolio Average end of
in net end of Total turnover commission period
asset value period return/(a)/ rate rate/(f)/ (in 000s)
=======================================================================================
- -----------------------------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
==============================
<S> <C> <C> <C> <C> <C> <C>
1997 - Class A Shares.................... $1.82 $16.73 25.97% 52.92% $.0563 $920,646
1997 - Class B Shares(b)................. 1.00 16.67 19.39/(d)/ 52.92 .0563 3,221
1996 - Class A Shares.................... 1.24 14.91 30.45 63.90 -- 881,056
1995 - Class A Shares.................... (2.29) 13.67 (4.38) 38.36 -- 862,105
1994 - Class A Shares.................... 1.32 15.96 16.89 36.12 -- 833,682
1993 - Class A Shares.................... 0.99 14.64 18.01 58.93 -- 665,976
1992 - Class A Shares.................... 2.55 13.65 29.31 48.93 -- 500,307
For the Period Ended January 31,
================================
1991 - Class A Shares(c)................. (0.24) 11.10 0.84/(d)/ 35.63/(d)/ -- 437,533
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Ratios assuming no
voluntary waiver of fees
=============================
Ratio of Ratio of net Ratio of net
net investment Ratio of investment
expenses to income (loss) to expenses to income (loss)
average net average average to average
assets net assets net assets net assets
====================================================================
- ----------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
==============================
<S> <C> <C> <C> <C>
1997 - Class A Shares.................... 1.40% 0.62% 1.65% 0.37%
1997 - Class B Shares/(b)/................. 2.15/(e)/ (0.39)/(e)/ 2.15/(e)/ (0.39)/(e)/
1996 - Class A Shares.................... 1.36 0.65 1.61 0.40
1995 - Class A Shares.................... 1.38 0.16 1.63 (0.09)
1994 - Class A Shares.................... 1.38 0.13 1.63 (0.12)
1993 - Class A Shares.................... 1.41 0.42 1.66 0.17
1992 - Class A Shares.................... 1.53 2.09 1.78 1.84
For the Period Ended January 31,
- --------------------------------
1991 - Class A Shares/(c)/............... 1.27/(d)/ 3.24/(d)/ 1.47/(d)/ 3.04/(d)/
</TABLE>
- --------------------------
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no sales
or redemption charges. Total return would be reduced if a sales or
redemption charge were taken into account.
/(b)/For the period from May 1, 1996 (commencement of operations) to
January 31, 1997.
/(c)/For the period from April 20, 1990 (commencement of operations) to January
31, 1991.
/(d)/Not annualized.
/(e)/Annualized.
/(f)/For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged. This rate may vary due to various types
of transactions and number of security trades executed.
/(g)/Includes the balancing effect of calculating per share amounts.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
77
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from Distributions to
investment operations/(g)/ shareholders
=========================== =======================================
From In excess
net of
Net realized realized realized Net
and unrealized gain on gains on increase
Net asset Net gain (loss) on From investment, investment (decrease)
value, investment investments, net option and option and in net
beginning income options and investment futures futures asset
of period (loss) futures income transactions transactions value
==============================================================================================
SMALL CAP EQUITY FUND
- -----------------------------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
===================================
<S> <C> <C> <C> <C> <C> <C> <C>
1997 - Class A Shares ............. $17.29 $(0.21) $4.92 $ - $(1.09) $ - $3.62
1997 - Class B Shares/(b)/......... 20.79 (0.11) 1.21 - (1.09) - 0.01
1996 - Class A Shares ............. 16.14 (0.23) 1.39 - (0.01) - 1.15
1995 - Class A Shares ............. 20.67 (0.07) (3.53) - (0.69) (0.24) (4.53)
1994 - Class A Shares ............. 16.68 (0.04) 5.03 - (1.00) - 3.99
For the Period Ended January 31,
===================================
1993 - Class A Shares/(c)/......... 14.18 0.03 2.50 (0.03) - - 2.50
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Net asset Net assets
value, Portfolio Average at end of
end of Total turnover commission period
period return/(a)/ rate rate/(f)/ (in 000s)
================================================================
SMALL CAP EQUITY FUND
- ---------------------------------------------------------------------------------------------------
For the Year Ended January 31,
===================================
<S> <C> <C> <C> <C> <C>
1997 - Class A Shares ............. $20.91 27.28% 99.46% $.0461 $212,061
1997 - Class B Shares/(b)/......... 20.80 5.39/(d)/ 99.46 .0461 3,674
1996 - Class A Shares ............. 17.29 7.20 57.58 - 204,994
1995 - Class A Shares ............. 16.14 (17.53) 43.67 - 319,487
1994 - Class A Shares ............. 20.67 30.13 56.81 - 261,074
For the Period Ended January 31,
===================================
1993 - Class A Shares/(c)/......... 16.68 17.86/(d)/ 7.12/( e)/ - 59,339
<CAPTION>
- ---------------------------------------------------------------------------------------------
Ratios assuming no
voluntary waiver of fees
Ratio of ===========================
Ratio of net Ratio of
net investment Ratio of net
expenses income expenses investment
to average (loss) to to average loss to
net average net net average net
assets assets assets assets
=======================================================
SMALL CAP EQUITY FUND
- ---------------------------------------------------------------------------------------------
For the Year Ended January 31,
===================================
<S> <C> <C> <C> <C>
1997 - Class A Shares ............. 1.60% (0.72)% 1.85% (0.97)%
1997 - Class B Shares/(b)/......... 2.35/(e)/ (1.63)/(e)/ 2.35/(e)/ (1.63)/(e)/
1996 - Class A Shares ............. 1.41 (0.59) 1.66 (0.84)
1995 - Class A Shares ............. 1.53 (0.53) 1.78 (0.78)
1994 - Class A Shares ............. 1.60 (0.45) 1.85 (0.70)
For the Period Ended January 31,
===================================
1993 - Class A Shares/(c)/......... 1.65/(e)/ 0.62/(e)/ 2.70/(e)/ (0.43)/(e)/
- ------------------
</TABLE>
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no sales
or redemption charges. Total return would be reduced if a sales or
redemption charge were taken into account.
/(b)/For the period from May 1, 1996 (commencement of operations) to January 31,
1997.
/(c)/For the period from October 22, 1992 (commencement of operations) to
January 31, 1993.
/(d)/Not annualized.
/(e)/Annualized.
/(f)/For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged. This rate may vary due to various types
of transactions and number of security trades executed.
/(g)/Includes the balancing effect of calculating per share amounts.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
78
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from Distributions
investment operations/(g)/ to shareholders
================================================= ==============================
Net Net realized From net
realized and unrealized realized
and unrealized gain (loss) gain on
Net asset gain (loss) on on foreign From investment,
value, Net investments, currency net option and
beginning investment options related investment futures
of period income (loss) and futures transactions income transactions
============================================================================================
INTERNATIONAL EQUITY FUND
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Year Ended January 31,
=====================================
1997 - Class A Shares............... $17.20 $0.10 $3.51 $(1.28) $ -- $(0.21)
1997 - Class B Shares/(e)/.......... 18.91 (0.06) 0.94 (0.34) -- (0.21)
1997 - Institutional Shares/(e)/.... 17.45 0.04 3.39 (1.24) (0.03) (0.21)
1997 - Service Shares/(e)/.......... 17.70 (0.02) 2.95 (1.08) -- (0.21)
1996 - Class A Shares .............. 14.52 0.13 2.58 1.42 (0.58) (0.87)
1995 - Class A Shares............... 18.10 0.06 (3.04) (0.01) -- (0.59)
1994 - Class A Shares............... 14.35 0.05 4.08 (0.38) -- --
For the Period Ended January 31,
=====================================
1993 - Class A Shares/(b)/.......... 14.18 (0.01) 0.29 (0.11) -- --
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Net
increase Net asset
(decrease) value, Portfolio Average Net assets at
in net asset end of Total turnover commission end of period
value period return/(a)/ rate rate/(f)/ (in 000s)
==================================================================================
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Year Ended January 31,
========================================
1997 - Class A Shares................... $ 2.12 $19.32 13.48% 38.01% $.0318 $536,283
1997 - Class B Shares/(e)/.............. 0.33 19.24 2.83/(c)/ 38.01 .0318 19,198
1997 - Institutional Shares/(e)/........ 1.95 19.40 12.53/(c)/ 38.01 .0318 68,374
1997 - Service Shares/(e)/.............. 1.64 19.34 10.42/(c)/ 38.01 .0318 674
1996 - Class A Shares .................. 2.68 17.20 28.68 68.48 -- 330,860
1995 - Class A Shares................... (3.58) 14.52 (16.65) 84.54 -- 275,086
1994 - Class A Shares................... 3.75 18.10 26.13 60.04 -- 269,091
For the Period Ended January 31,
========================================
1993 - Class A Shares/(b)/.............. 0.17 14.35 1.23/(c)/ 0.00 -- 66,063
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Ratios assuming no
voluntary waiver of fees or
expense limitations
===============================
Ratio of net Ratio of
Ratio of investment net investment
net income Ratio of income
expenses to (loss) to expenses (loss)
average net average net to average to average
assets assets net assets net assets
=============================================================
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
For the Year Ended January 31,
========================================
1997 - Class A Shares................... 1.69% (0.07)% 1.88% (0.26)%
1997 - Class B Shares/(e)/.............. 2.23/(d)/ (0.97)/(d)/ 2.38/(d)/ (1.12)/(d)/
1997 - Institutional Shares/(e)/........ 1.10/(d)/ 0.43/(d)/ 1.25/(d)/ 0.28/(d)/
1997 - Service Shares/(e)/.............. 1.60/(d)/ (0.40)/(d)/ 1.75/(d)/ (0.55)/(d)/
1996 - Class A Shares .................. 1.52 0.26 1.77 0.01
1995 - Class A Shares................... 1.73 0.40 1.98 0.15
1994 - Class A Shares................... 1.76 0.51 2.01 0.26
For the Period Ended January 31,
========================================
1993 - Class A Shares/(b)/.............. 1.80/(d)/ (0.42)/(d)/ 2.58/(d)/ (1.20)/(d)/
</TABLE>
- --------------------------
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no sales
or redemption charges. Total return would be reduced if a sales or
redemption charge were taken into account.
/(b)/For the period from December 1, 1992 (commencement of operations) to
January 31, 1993.
/(c)/Not annualized.
/(d)/Annualized.
/(e)/For the period from February 7, March 6 and May 1, 1996 (commencement of
operations) to January 31, 1997 for Institutional, Service and Class B
shares, respectively.
/(f)/For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged. This rate may vary due to various types
of transactions and number of security trades executed.
/(g)/Includes the balancing effect of calculating per share amounts.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
79
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) Distributions to
from investment operations /(g)/ shareholders
--------------------------------------------- ------------------------------
Net
realized and
unrealized
Net Net gain on
asset Net realized and foreign
value, investment unrealized currency From net In excess
beginning income gain(loss) on related investment of net investment
of period (loss) investments transactions income income
----------------------------------------------------------------------------------------
ASIA GROWTH FUND
- ----------------------------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997 - Class A Shares..................... $16.49 $ 0.06 $(0.11) $(0.12) $(0.01) $ --
1997 - Class B Shares/(e)/................ 17.31 (0.05) (0.48) (0.51) -- (0.03)
1997 - Institutional Shares/(e)/.......... 16.61 0.04 (0.11) (0.11) (0.04) (0.06)
1996 - Class A Shares..................... 13.31 0.17 3.44 (0.12) (0.17) (0.14)
For the Period Ended January 31,
- --------------------------------
1995 - Class A Shares/(b)/................ 14.18 0.11 (0.89) 0.01 (0.10) --
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Net
increase Net
(decrease) asset
in net value, Portfolio Average Net assets at
asset end of Total turnover commission end of period
value period return/(a)/ rate rate/(f)/ (000s)
------------------------------------------------------------------------------------
ASIA GROWTH FUND
- ------------------------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997 - Class A Shares..................... $(0.18) $16.31 (1.01)% 48.40% $.0151 $263,014
1997 - Class B Shares/(e)/................ (1.07) 16.24 (6.02)/(c)/ 48.40 .0151 3,354
1997 - Institutional Shares/(e)/.......... (0.28) 16.33 (1.09)/(c)/ 48.40 .0151 13,322
1996 - Class A Shares..................... 3.18 16.49 26.49 88.80 -- 205,539
For the Period Ended January 31,
- --------------------------------
1995 - Class A Shares/(b)/................ (0.87) 13.31 (5.46)/(c)/ 36.08/(c)/ -- 124,298
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios assuming no
voluntary waiver of fees
or expense limitations
------------------------------
Ratio Ratio Ratio
of net of net Ratio of of net
expenses to investment expenses investment
Net assets at average income(loss) to average income(loss)
end of period net to average net to average
(000s) assets net assets assets net assets
-------------------------------------------------------------------------------
ASIA GROWTH FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
- ------------------------------
<S> <C> <C> <C> <C> <C>
1997 - Class A Shares................................ $263,014 1.67% 0.20% 1.87% 0.00%
1997 - Class B Shares/(e)/........................... 3,354 2.21/(d)/ (0.56)/(d)/ 2.37/(d)/ (0.72)/(d)/
1997 - Institutional Shares/(e)/..................... 13,322 1.10/(d)/ 0.54/(d)/ 1.26/(d)/ 0.38/(d)/
1996 - Class A Shares................................ 205,539 1.77 1.05 2.02 0.80
For the Period Ended January 31,
- --------------------------------
1995 - Class A Shares/(b)/........................... 124,298 1.90/(d)/ 1.83/(d)/ 2.38/(d)/ 1.35/(d)/
</TABLE>
- --------------------------
(a) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no sales
or redemption charges. Total return would be reduced if a sales or
redemption charge were taken into account.
(b) For the period from July 8, 1994 (commencement of operations) to January 31,
1995.
(c) Not annualized.
(d) Annualized.
(e) For the period from February 2 and May 1, 1996 (commencement of operations)
to January 31, 1997 for Institutional and Class B shares, respectively.
(f) For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate on security transactions on which
commissions are charged. This rate may vary due to various types of
transactions and number of security trades executed.
(g) Includes the balancing effect of calculating per share amounts.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
80
<PAGE>
- --------------------------------------------------------------------------------
Report of Independent Public Accountants
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of the
Goldman Sachs Equity Portfolios, Inc.:
We have audited the accompanying statements of assets and liabilities of the
Goldman Sachs Equity Portfolios, Inc. (a Maryland Corporation), comprising the
Balanced Fund, Select Equity Fund, Growth and Income Fund, Capital Growth Fund,
Small Cap Equity Fund, International Equity Fund and Asia Growth Fund, including
the statements of investments, as of January 31, 1997 and the related statements
of operations, the statements of changes in net assets and the financial
highlights for each of the periods presented. These financial statements and the
financial highlights are the responsibility of the Funds' management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
January 31, 1997 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and the financial highlights
referred to above present fairly, in all material respects, the financial
position of each of the respective portfolios constituting Goldman Sachs Equity
Portfolios, Inc. as of January 31, 1997 the results of their operations and the
changes in their net assets and the financial highlights for the periods
presented, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 15, 1997
- --------------------------------------------------------------------------------
81
<PAGE>
- --------------------------------------------------------------------------------
- -------------------------------------- ----------------------------------------
[This Page Intentionally Left Blank]
- -------------------------------------- ----------------------------------------
82
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
This Annual Report is authorized for distribution to prospective investors only
when preceded or accompanied by a Goldman Sachs Equity Portfolios, Inc.
Prospectus which contains facts concerning the Fund's objectives and policies,
management, expenses and other information.
- --------------------------------------------------------------------------------
83
<PAGE>
Goldman Sachs
One New York Plaza
New York, NY 10004
Directors
Ashok N. Bakhru, Chairman
David B. Ford
Douglas C. Grip
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
Officers
Douglas C. Grip, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
Goldman Sachs
Investment Adviser, Administrator,
Distributor and Transfer Agent
The Goldman Sachs
Equity Portfolios
- -------------------
Annual Report
January 31, 1997
Goldman Sachs Balanced Fund
Goldman Sachs Select Equity Fund
Goldman Sachs Growth and Income Fund
Goldman Sachs Capital Growth Fund
Goldman Sachs Small Cap Equity Fund
Goldman Sachs International Equity Fund
Goldman Sachs Asia Growth Fund
[LOGO OF GOLDMAN SACHS APPEARS HERE]
<PAGE>
Appendix A
DESCRIPTION OF BOND RATINGS*
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment some time in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
- -------------------------------
* The rating system described herein are believed to be the most recent ratings
systems available from Moody's Investors Service, Inc. and Standard and Poor's
Ratings Group at the date of this Additional Statement for the securities
listed. Ratings are generally given to securities at the time of issuance.
While the rating agencies may from time to time revise such ratings, they
undertake no obligation to do so, and the ratings indicated do not necessarily
represent ratings which will be given to these securities on the date of the
Fund's fiscal year end.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
1-A
<PAGE>
Ca: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Unrated: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believe
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1 and B1.
STANDARD & POOR'S RATINGS GROUP
AAA: Bonds rated AAA have the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA: Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the higher rated issues only in small degree.
A: Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than in higher rated categories.
BB, B, CCC, CC, C: Bonds rated BB, B, CCC, CC and C are regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal. BB indicates the least degree of speculation and C the
highest. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties of major risk
exposures to adverse conditions.
2-A
<PAGE>
D: Bonds rated D are in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due, even
if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The D rating
also will be used upon the filing of a bankruptcy petition if debt service
payments are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
N.R.: Not rated.
3-A
<PAGE>
Appendix B
BUSINESS PRINCIPLES OF GOLDMAN, SACHS & CO.
Goldman Sachs is noted for its Business Principles, which guide all of the
firm's activities and serve as the basis for its distinguished reputation among
investors worldwide.
OUR CLIENT'S INTERESTS ALWAYS COME FIRST. Our experience shows that if we
serve our clients well, our own success will follow.
OUR ASSETS ARE OUR PEOPLE, CAPITAL AND REPUTATION. If any of these assets
diminish, reputation is the most difficult to restore. We are dedicated to
complying fully with the letter and spirit of the laws, rules and ethical
principles that govern us. Our continued success depends upon unswerving
adherence to this standard.
WE TAKE GREAT PRIDE IN THE PROFESSIONAL QUALITY OF OUR WORK. We have an
uncompromising determination to achieve excellence in everything we undertake.
Though we may be involved in a wide variety and heavy volume of activity, we
would, if it came to a choice, rather be best than biggest.
WE STRESS CREATIVITY AND IMAGINATION IN EVERYTHING WE DO. While recognizing
that the old way may still be the best way, we constantly strive to find a
better solution to a client's problems. We pride ourselves on having pioneered
many of the practices and techniques that have become standard in the industry.
WE 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.
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.
1-B
<PAGE>
GOLDMAN, SACHS & CO.'S INVESTMENT BANKING AND SECURITIES ACTIVITIES
Goldman, Sachs & Co. is a leading global investment banking and securities
firm with a number of distinguishing characteristics.
. Privately owned and ranked among Wall Street's best capitalized firms,
with partners' capital of approximately $5.3 billion as of November
29, 1996.
. With thirty-four offices around the world, Goldman Sachs employs over
9,000 professionals focused on opportunities in major markets.
. A research budget of $200 million for 1997.
. The number one lead manager of U.S. common stock offerings for the
past eight years (1989-1996).*
* Source: Securities Data Corporation. Common stock ranking excludes REITs,
====================================
Investment Trusts and Rights.
2-B
<PAGE>
GOLDMAN, SACHS & CO.'S HISTORY OF EXCELLENCE
1865 End of Civil War
1869 Marcus Goldman opens Goldman Sachs
1890 Dow Jones Industrial Average first published
1896 Goldman Sachs joins New York Stock Exchange
1906 Goldman Sachs takes Sears Roebuck public (oldest ongoing client)
Dow Jones Industrial Average tops 100
1925 Goldman Sachs finances Warner Brothers, producer of the first talking
film
1956 Goldman Sachs co-manages Ford's public offering, the largest to date
1970 London office opens
1972 Dow Jones Industrial Average breaks 1000
1986 Goldman Sachs takes Microsoft public
1990 Provides advisory services for the largest privatization in the region
of the sale of Telefonos de Mexico
1992 Dow Jones Industrial Average breaks 3000
1993 Goldman Sachs is lead manager in taking Allstate public, largest
equity offering to date ($2.4 billion)
1995 Dow Jones Industrial Average breaks 4000
1996 Dow Jones Industrial Average breaks 6000
3-B
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
INSTITUTIONAL SHARES
GOLDMAN SACHS GROWTH AND INCOME FUND
GOLDMAN SACHS CORE U.S. EQUITY FUND
GOLDMAN SACHS LARGE CAP GROWTH FUND
GOLDMAN SACHS MID CAP EQUITY FUND
GOLDMAN SACHS INTERNATIONAL EQUITY FUND
GOLDMAN SACHS EMERGING MARKETS EQUITY FUND
GOLDMAN SACHS ASIA GROWTH FUND
(EQUITY PORTFOLIOS OF GOLDMAN SACHS TRUST) One New York Plaza
New York, New York 10004
This Statement of Additional Information (the "Additional Statement") is
not a Prospectus. This Additional Statement should be read in conjunction with
the Prospectus for the Institutional Shares of Goldman Sachs Growth and Income
Fund, Goldman Sachs CORE U.S. Equity Fund, Goldman Sachs Large Cap Growth Fund,
Goldman Sachs Mid Cap Equity Fund, Goldman Sachs International Equity Fund,
Goldman Sachs Emerging Markets Equity Fund and Goldman Sachs Asia Growth Fund
dated May 1, 1997, as amended and/or supplemented from time to time (the
"Prospectus"), which may be obtained without charge from Goldman, Sachs & Co. at
the telephone number, or writing to one of the addresses, listed below.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Page
====
Introduction.......................... B-3
Investment Policies................... B-4
Investment Restrictions............... B-32
Management............................ B-34
Portfolio Transactions and Brokerage.. B-48
Net Asset Value....................... B-53
Performance Information............... B-55
Shares of the Trust................... B-61
Taxation.............................. B-65
Financial Statements.................. B-71
Other Information..................... B-71
Distribution and Authorized Dealer
Service Plans....................... B-72
Other Information Regarding Purchases,
Redemptions, Exchanges and
Dividends........................... B-77
Appendix A:........................... 1-A
</TABLE>
Appendix B:........................... 1-B
The date of this Additional Statement is May 1, 1997.
<PAGE>
GOLDMAN, SACHS & CO. GOLDMAN SACHS FUNDS
Distributor MANAGEMENT, L.P.
85 Broad Street Investment Adviser to
New York, New York 10004 Goldman Sachs CORE U.S. Equity Fund
One New York Plaza
GOLDMAN, SACHS & CO. New York, New York 10004
Transfer Agent
4900 Sears Tower GOLDMAN SACHS ASSET MANAGEMENT
Chicago, Illinois 60606 Investment Adviser to:
Goldman Sachs CORE Large Cap Growth Fund,
Goldman Sachs Growth and Income Fund,
GOLDMAN SACHS ASSET and Goldman Sachs Mid Cap Equity Fund
MANAGEMENT INTERNATIONAL One New York Plaza
Investment Adviser to: New York, New York 10004
Goldman Sachs International
Equity Fund
Goldman Sachs Asia Growth Fund,
Goldman Sachs Emerging Markets
Equity Fund
133 Peterborough Court
London, England EC4A 2BB
TOLL FREE (IN U.S.).......800-621-2550
<PAGE>
INTRODUCTION
Goldman Sachs Trust (the "Trust") is an open-end, management investment
company. The following series of the Trust are described in this Additional
Statement: Goldman Sachs Balanced Fund ("Balanced Fund"), Goldman Sachs Growth
and Income Fund ("Growth and Income Fund"), CORE U.S. Equity Fund ("CORE U.S.
Equity Fund")(formerly known as "Goldman Sachs Select Equity Fund"), Goldman
Sachs CORE Large Cap Growth Fund ("CORE Large Cap Growth Fund"), Goldman Sachs
Mid Cap Equity Fund ("Mid Cap Equity Fund"), Goldman Sachs Capital Growth Fund
("Capital Growth Fund"), Goldman Sachs International Equity Fund
("International Equity Fund"), Goldman Sachs Small Cap Equity Fund ("Small Cap
Equity Fund"), Goldman Sachs Emerging Markets Equity Fund ("Emerging Markets
Equity Fund") and Goldman Sachs Asia Growth Fund ("Asia Growth Fund")
(collectively referred to herein as the "Funds").
The Funds were initially organized as a series of a corporation formed under
the laws of the State of Maryland on September 27, 1989 and were reorganized as
a Delaware business trust as of April 30, 1997. The Trustees have authority
under the Trust's charter to create and classify shares into separate series and
to classify and reclassify any series or portfolio of shares into one or more
classes without further action by shareholders. Pursuant thereto, the Trustees
have created the Funds and other series. Additional series may be added in the
future from time to time. The Growth and Income, CORE U.S. Equity, CORE Large
Cap Growth, International Equity, Emerging Markets Equity and Asia Growth Funds
currently offer four classes of shares: Class A Shares, Class B Shares,
Institutional Shares and Service Shares. The Balanced, Capital Growth and Small
Cap Equity Funds currently offer two classes of shares: Class A and Class B
Shares. The Mid Cap Equity Fund currently offers two classes of shares:
Institutional Shares and Service Shares. See "Shares of the Trust."
Goldman Sachs Asset Management, ("GSAM") a separate operating division of
Goldman, Sachs & Co. ("Goldman Sachs"), serves as investment adviser to the
Balanced, Growth and Income, CORE Large Cap Growth, Mid Cap Equity and Small Cap
Equity Funds. Goldman Sachs Fund Management, L.P., ("GSFM") an affiliate of
Goldman Sachs, serves as investment adviser to the CORE U.S. Equity and Capital
Growth Funds. Goldman Sachs Asset Management International ("GSAMI"), an
affiliate of Goldman Sachs, serves as investment adviser to the International
Equity, Emerging Markets Equity and Asia Growth Funds. GSAM, GSFM and GSAMI
are sometimes referred to collectively herein as the "Advisers." Goldman Sachs
serves as each Fund's distributor and transfer agent. Each Fund's custodian is
State Street Bank and Trust Company ("State Street").
The following information relates to and supplements the description of each
Fund's investment policies contained in the Prospectus. See the Prospectus for
a fuller description of the Funds' investment objectives and policies. There is
no assurance that each Fund will achieve its objective.
B-3
<PAGE>
INVESTMENT POLICIES
Each Fund's share price will fluctuate with market, economic and, to the
extent applicable, foreign exchange conditions, so that an investment in any of
the Funds may be worth more or less when redeemed than when purchased. None of
the Funds should be relied upon as a complete investment program.
BALANCED FUND
=============
The investment objective of the Balanced Fund is to provide shareholders
with long-term capital growth and current income. The Balanced Fund seeks to
achieve its investment objective by investing in a balanced portfolio
diversified among both equity and fixed income securities.
Balanced Fund is intended to provide a foundation on which an investor can
build an investment portfolio or to serve as the core of an investment program,
depending on the investor's goals. Balanced Fund is designed for relatively
conservative investors who seek a combination of long-term capital growth and
current income in a single investment. Balanced Fund offers a portfolio of
equity and fixed income securities intended to provide less volatility than a
portfolio completely invested in equity securities and greater diversification
than a portfolio invested in only one asset class. Balanced Fund may be
appropriate for people who seek capital appreciation but are concerned about the
volatility typically associated with a fund that invests solely in stocks and
other equity securities.
FIXED INCOME STRATEGIES DESIGNED TO MAXIMIZE RETURN AND MANAGE RISK
GSAM's approach to managing the fixed income portion of Balanced Fund's
portfolio seeks to provide high returns relative to a market benchmark, the
Lehman Brothers Aggregate Bond Index, while also seeking to provide high current
income. This approach emphasizes (1) sector allocation strategies which enable
GSAM to tactically overweight or underweight one sector of the fixed-income
market (i.e., mortgages, corporate bonds, U.S. Treasuries, non-dollar bonds,
emerging market debt) versus another; (2) individual security selection based on
identifying relative value (fixed income securities inexpensive relative to
others in their sector); and (3) to a lesser extent, strategies based on GSAM's
expectation of the direction of interest rates or the spread between short-term
and long-term interest rates such as yield curve strategy.
GSAM seeks to manage fixed income portfolio risk in a number of ways. These
include diversifying the fixed income portion of the Balanced Fund's portfolio
among various types of fixed income securities and utilizing sophisticated
quantitative models to understand how the fixed income portion of the portfolio
will perform under a variety of market and economic scenarios. In addition,
GSAM uses extensive credit analysis to select and to monitor any investment-
grade or non-investment grade bonds that may be included in the Balanced Fund's
portfolio. In employing this and other investment strategies, the GSAM team has
access to extensive fundamental research and analysis available through Goldman
Sachs and a broad range of other sources.
A number of investment strategies will be used in selecting fixed income
securities for the Fund's portfolio. GSAM's fixed income investment philosophy
is to actively manage the portfolio within a risk-controlled framework. The
Adviser de-emphasizes interest rate anticipation by monitoring the duration of
the portfolio within a narrow range of the Adviser's target duration, and
instead focuses on seeking to add value through sector selection, security
selection and yield curve strategies.
MARKET SECTOR SELECTION. Market sector selection is the underweighting or
overweighting of one or more market sectors (i.e., U.S. Treasuries, U.S.
Government agency securities, corporate securities,
B-4
<PAGE>
mortgage-backed securities and asset-backed securities). GSAM may decide to
overweight or underweight a given market sector or subsector (e.g., within the
corporate sector, industrials, financial issuers and utilities) based on, among
other things, expectations of future yield spreads between different sectors or
subsectors.
ISSUER SELECTION. Issuer selection is the purchase and sale of corporate
securities based on a corporation's current and expected credit standing (within
the constraints imposed by Balanced Fund's minimum credit quality requirements).
This strategy focuses on four types of investment-grade corporate issuers.
Selection of securities from the first type of issuers -those with low but
stable credit - is intended to enhance total returns by providing incremental
yield. Selecting securities from the second type of issuers - those with low
and intermediate but improving credit quality - is intended to enhance total
returns in two stages. Initially, these securities are expected to provide
incremental yield. Eventually, price appreciation should occur relative to
alternative securities as credit quality improves, the nationally recognized
statistical rating organizations upgrade credit ratings, and credit spreads
narrow. Securities from the third type of issuers - issuers with deteriorating
credit quality - will be avoided, since total returns are typically enhanced by
avoiding the widening of credit spreads and the consequent relative price
depreciation. Finally, total returns can be enhanced by focusing on securities
that are rated differently by different rating organizations. If the securities
are trading in line with the higher published quality rating while GSAM concurs
with the lower published quality rating, the securities would generally be sold
and any potential price deterioration avoided. On the other hand, if the
securities are trading in line with the lower published quality rating while the
higher published quality rating is considered more realistic, the securities may
be purchased in anticipation of the expected market reevaluation and relative
price appreciation.
YIELD CURVE STRATEGY. Yield curve strategy consists of overweighting or
underweighting different maturity sectors relative to a benchmark to take
advantage of the shape of the yield curve. Three alternative maturity sector
selections are available: a "barbell" strategy in which short and long maturity
sectors are overweighted while intermediate maturity sectors are underweighted;
a "bullet" strategy in which, conversely, short-and long-maturity sectors are
underweighted while intermediate-maturity sectors are overweighted; and a
"neutral yield curve" strategy in which the maturity distribution mirrors that
of a benchmark.
CORE U.S. EQUITY AND CORE LARGE CAP GROWTH FUNDS
================================================
Under normal circumstances, the Funds will invest at least 90% of their
total assets in equity securities.
The investment strategy of the CORE U.S. Equity and CORE Large Cap Growth
Funds will be implemented to the extent it is consistent with maintaining a
Fund's qualification as a regulated investment company under the Internal
Revenue Code. A Fund's strategy may be limited, in particular, by the
requirement for such qualification that less than 30% of the Fund's gross income
for its taxable year be derived from the sale or other disposition of stocks or
securities or certain other investments (generally including options and futures
contracts) held for less than three months.
Since normal settlement for equity securities is three trading days, the
Funds will need to hold cash balances to satisfy shareholder redemption
requests. Such cash balances will normally range from 2% to 5% of a Fund's net
assets. The Funds may purchase futures contracts only with respect to the S&P
500 Index (in the case of CORE U.S. Equity Fund) and a representative index (in
the case of CORE Large Cap Growth Fund) in order to keep a Fund's effective
equity exposure close to 100%. For example, if cash balances are equal to 10%
of the net assets, the Fund may enter into long futures contracts covering an
amount equal to 10% of the Fund's net assets. As cash balances fluctuate based
on new contributions or withdrawals, a Fund may enter into additional contracts
or close out existing positions.
B-5
<PAGE>
THE MULTIFACTOR MODEL. The Multifactor Model is a rigorous computerized
rating system for evaluating equity securities according to a variety of
investment characteristics (or factors). The factors used by the Multifactor
Model incorporate many variables studied by traditional fundamental analysts and
cover measures of value, growth, momentum, risk (e.g. price/earnings ratio,
book/price ratio, growth forecasts, earning estimate revisions, price momentum,
volatility and earnings stability). All of these factors have been shown to
significantly impact the performance of equity securities.
Because it includes many disparate factors, the Adviser believes that the
Multifactor Model is broader in scope and provides a more thorough evaluation
than most conventional, value-oriented quantitative models. As a result, the
securities ranked highest by the Multifactor Model do not have one dominant
investment characteristic (such as a low price/earnings ratio); rather, such
securities possess many different investment characteristics. By using a
variety of relevant factors to select securities, the Adviser believes that the
Fund will be better balanced and have more consistent performance than an
investment portfolio that uses only one or two factors to select securities.
The Adviser will monitor, and may occasionally suggest and make changes to,
the method by which securities are selected for or weighted in the Fund. Such
changes (which may be the result of changes in the Multifactor Model or the
method of applying the Multifactor Model) may include: (i) evolutionary changes
to the structure of the Multifactor Model (e.g., the addition of new factors or
a new means of weighting the factors); (ii) changes in trading procedures (e.g.,
trading frequency or the manner in which the Fund uses futures); or (iii)
changes in the method by which securities are weighted in the Fund. Any such
changes will preserve the Fund's basic investment philosophy of combining
qualitative and quantitative methods of selecting securities using a disciplined
investment process.
INTERNATIONAL EQUITY FUND
=========================
International Equity Fund will seek to achieve its investment objective by
investing primarily in equity and equity-related securities of issuers that are
organized outside the United States or whose securities are principally traded
outside the United States. Because research coverage outside the United States
is fragmented and relatively unsophisticated, many foreign companies that are
well-positioned to grow and prosper have not come to the attention of investors.
GSAMI believes that the high historical returns and less efficient pricing of
foreign markets create favorable conditions for International Equity Fund's
highly focused investment approach. For a description of the risks of the
International Equity Fund's investments in Asia, see "Investing in Emerging
Markets, including Asia."
A RIGOROUS PROCESS OF STOCK SELECTION. Using fundamental industry and
company research, GSAMI's equity team in London, Singapore and Tokyo seeks to
identify companies that may achieve superior long-term returns. Stocks are
carefully selected for International Equity Fund's portfolio through a three-
stage investment process. Because International Equity Fund is a long-term
holder of stocks, the portfolio managers adjust International Equity Fund's
portfolio only when expected returns fall below acceptable levels or when the
portfolio managers identify substantially more attractive investments.
Using the research of Goldman Sachs as well as information gathered from
other sources in Europe and the Asia-Pacific region, the Adviser seeks to
identify attractive industries around the world. Such industries are expected
to have favorable underlying economics and allow companies to generate
sustainable and predictable high returns. As a rule, they are less economically
sensitive, relatively free of regulation and favor strong franchises.
Within these industries the Adviser seeks to identify well-run companies
that enjoy a stable competitive advantage and are able to benefit from the
favorable dynamics of the industry. This stage includes analyzing the current
and expected financial performance of the company; contacting suppliers,
B-6
<PAGE>
customers and competitors; and meeting with management. In particular, the
portfolio managers look for companies whose managers have a strong commitment to
both maintaining the high returns of the existing business and reinvesting the
capital generated at high rates of return. Management should act in the
interests of the owners and seek to maximize returns to all stockholders.
GSAMI's currency team manages the foreign exchange risk embedded in foreign
equities by means of a currency overlay program. The program may be utilized to
protect the value of foreign investments in sustained periods of dollar
appreciation and to add returns by seeking to take advantage of foreign exchange
fluctuations.
The members of GSAMI's international equity team bring together years of
experience in analyzing and investing in companies in Europe and the Asia-
Pacific region. Their expertise spans a wide range of skills including
investment analysis, investment management, investment banking and business
consulting. GSAM's worldwide staff of over 300 professionals includes portfolio
managers based in London, Singapore and Tokyo who bring firsthand knowledge of
their local markets and companies to every investment decision.
CORPORATE DEBT OBLIGATIONS
==========================
Each Fund may, under normal market conditions, invest in corporate debt
obligations, including obligations of industrial, utility and financial issuers.
CORE U.S. Equity and Core Large Cap Growth Funds may only invest in debt
securities that are cash equivalents. Corporate debt obligations are subject to
the risk of an issuer's inability to meet principal and interest payments on the
obligations and may also be subject to price volatility due to such factors as
market interest rates, market perception of the creditworthiness of the issuer
and general market liquidity.
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 a Fund's net asset value to
the extent it invests in such securities. In addition, a 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 Balanced, Growth and Income, Capital Growth, Mid Cap Equity, Small
Cap Equity, Emerging Markets Equity and Asia Growth Funds to dispose of a
particular security when necessary to meet their 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
Advisers 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 a Fund's net
asset value.
Since investors generally perceive that there are greater risks associated
with the medium to lower rated securities of the type in which Balanced, Growth
and Income, Capital Growth, Mid Cap Equity, Small Cap Equity, Emerging Markets
Equity and Asia Growth Funds may invest, the yields and prices of such
securities may tend to fluctuate more than those for higher rated securities.
In the lower quality segments of the fixed-income securities market, changes in
perceptions of issuers' creditworthiness tend to occur more frequently and in a
more pronounced manner than do changes in higher quality segments of the fixed-
income securities market, resulting in greater yield and price volatility.
B-7
<PAGE>
Another factor which causes fluctuations in the prices of fixed-income
securities is the supply and demand for similarly rated securities. In
addition, the prices of fixed-income securities fluctuate in response to the
general level of interest rates. Fluctuations in the prices of portfolio
securities subsequent to their acquisition will not affect cash income from such
securities but will be reflected in a Fund's net asset value.
Medium to lower rated and comparable non-rated securities tend to offer
higher yields than higher rated securities with the same maturities because the
historical financial condition of the issuers of such securities may not have
been as strong as that of other issuers. Since medium to lower rated securities
generally involve greater risks of loss of income and principal than higher
rated securities, investors should consider carefully the relative risks
associated with investment in securities which carry medium to lower ratings and
in comparable unrated securities. In addition to the risk of default, there are
the related costs of recovery on defaulted issues. The Advisers will attempt to
reduce these risks through portfolio diversification and by analysis of each
issuer and its ability to make timely payments of income and principal, as well
as broad economic trends and corporate developments.
ZERO COUPON BONDS
=================
A Fund's investments in fixed income securities may include zero coupon
bonds, which are debt obligations issued or purchased at a significant discount
from face value. The discount approximates the total amount of interest the
bonds would have accrued and compounded over the period until maturity. Zero
coupon bonds do not require the periodic payment of interest. Such investments
benefit the issuer by mitigating its need for cash to meet debt service but also
require a higher rate of return to attract investors who are willing to defer
receipt of such cash. Such investments may experience greater volatility in
market value than debt obligations which provide for regular payments of
interest. In addition, if an issuer of zero coupon bonds held by a Fund
defaults, the Fund may obtain no return at all on its investment. Each Fund
will accrue income on such investments for each taxable year which (net of
deductible expenses, if any) is distributable to shareholders and which, because
no cash is generally received at the time of accrual, may require the
liquidation of other portfolio securities to obtain sufficient cash to satisfy
the Fund's distribution obligations. See "Taxation."
VARIABLE AND FLOATING RATE SECURITIES
=====================================
The interest rates payable on certain fixed income securities in which a
Fund may invest are not fixed and may fluctuate based upon changes in market
rates. A variable rate obligation has an interest rate which is adjusted at
predesignated periods in response to changes in the market rate of interest on
which the interest rate is based. Variable and floating rate obligations are
less effective than fixed rate instruments at locking in a particular yield.
Nevertheless, such obligations may fluctuate in value in response to interest
rate changes if there is a delay between changes in market interest rates and
the interest reset date for the obligation.
CUSTODIAL RECEIPTS
==================
Each Fund may invest up to 5% of its net assets in custodial receipts in
respect of securities issued or guaranteed as to principal and interest by the
U.S. Government, its agencies, instrumentalities, political subdivisions or
authorities. Such custodial receipts evidence ownership of future interest
payments, principal payments or both on certain notes or bonds issued by the
U.S. Government, its agencies, instrumentalities, political subdivisions or
authorities. These custodial receipts are known by various names, including
"Treasury Receipts," "Treasury Investors Growth Receipts" ("TIGRs"), and
"Certificates of Accrual on Treasury Securities" ("CATs"). For certain
securities law purposes, custodial receipts are not considered U.S. Government
securities.
B-8
<PAGE>
MUNICIPAL SECURITIES
====================
Balanced Fund may invest up to 5% of its net assets in municipal securities.
Municipal securities consist of bonds, notes and other instruments issued by or
on behalf of states, territories and possessions of the United States (including
the District of Columbia) and their political subdivisions, agencies or
instrumentalities, the interest on which is exempt from regular federal income
tax. Municipal securities are often issued to obtain funds for various public
purposes. Municipal securities also include "private activity bonds" or
industrial development bonds, which are issued by or on behalf of public
authorities to obtain funds for privately operated facilities, such as airports
and waste disposal facilities, and, in some cases, commercial and industrial
facilities.
The yields and market values of municipal securities are determined
primarily by the general level of interest rates, the creditworthiness of the
issuers of municipal securities and economic and political conditions affecting
such issuers. Due to their tax exempt status, the yields and market prices of
municipal securities may be adversely affected by changes in tax rates and
policies, which may have less effect on the market for taxable fixed income
securities. Moreover, certain types of municipal securities, such as housing
revenue bonds, involve prepayment risks which could affect the yield on such
securities.
Investments in municipal securities are subject to the risk that the issuer
could default on its obligations. Such a default could result from the
inadequacy of the sources or revenues from which interest and principal payments
are to be made or the assets collateralizing such obligations. Revenue bonds,
including private activity bonds, are backed only by specific assets or revenue
sources and not by the full faith and credit of the governmental issuer.
MORTGAGE-BACKED SECURITIES
==========================
GENERAL CHARACTERISTICS. Each Fund (other than CORE U.S. Equity and CORE
Large Cap Growth Funds) may invest in mortgage-backed securities. Each mortgage
pool underlying mortgage-backed securities consists of mortgage loans evidenced
by promissory notes secured by first mortgages or first deeds of trust or other
similar security instruments creating a first lien on owner occupied and non-
owner occupied one-unit to four-unit residential properties, multifamily (i.e.,
five or more) properties, agriculture properties, commercial properties and
mixed use properties (the "Mortgaged Properties"). The Mortgaged Properties may
consist of detached individual dwelling units, multifamily dwelling units,
individual condominiums, townhouses, duplexes, triplexes, fourplexes, row
houses, individual units in planned unit developments and other attached
dwelling units. The Mortgaged Properties may also include residential
investment properties and second homes.
The investment characteristics of adjustable and fixed rate mortgage-backed
securities differ from those of traditional fixed income securities. The major
differences include the payment of interest and principal on mortgage-backed
securities on a more frequent (usually monthly) schedule, and the possibility
that principal may be prepaid at any time due to prepayments on the underlying
mortgage loans or other assets. These differences can result in significantly
greater price and yield volatility than is the case with traditional fixed
income securities. As a result, if a Fund purchases mortgage-backed securities
at a premium, a faster than expected prepayment rate will reduce both the market
value and the yield to maturity from those which were anticipated. A prepayment
rate that is slower than expected will have the opposite effect of increasing
yield to maturity and market value. Conversely, if a Fund purchases mortgage-
backed securities at a discount, faster than expected prepayments will increase,
while slower than expected prepayments will reduce yield to maturity and market
values. To the extent that a Fund invests in mortgage-backed securities, the
Advisers may seek to manage these potential risks by investing in a variety of
mortgage-backed securities and by using certain hedging techniques.
B-9
<PAGE>
GOVERNMENT GUARANTEED MORTGAGE-BACKED SECURITIES. There are several types
of guaranteed mortgage-backed securities currently available, including
guaranteed mortgage pass-through certificates and multiple class securities,
which include guaranteed Real Estate Mortgage Investment Conduit Certificates
("REMIC Certificates"), collateralized mortgage obligations and stripped
mortgage-backed securities. A Fund is permitted to invest in other types of
mortgage-backed securities that may be available in the future to the extent
consistent with its investment policies and objective.
A Fund's investments in mortgage-backed securities may include securities
issued or guaranteed by the U.S. Government or one of its agencies, authorities,
instrumentalities or sponsored enterprises, such as the Government National
Mortgage Association ("Ginnie Mae"), the Federal National Mortgage Association
("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac").
GINNIE MAE CERTIFICATES. Ginnie Mae is a wholly-owned corporate
instrumentality of the United States. Ginnie Mae is authorized to guarantee the
timely payment of the principal of and interest on certificates that are based
on and backed by a pool of mortgage loans insured by the Federal Housing
Administration ("FHA Loans"), or guaranteed by the Veterans Administration ("VA
Loans"), or by pools of other eligible mortgage loans. In order to meet its
obligations under any guaranty, Ginnie Mae is authorized to borrow from the
United States Treasury in an unlimited amount.
FANNIE MAE CERTIFICATES. Fannie Mae is a stockholder-owned corporation
chartered under an act of the United States Congress. Each Fannie Mae
Certificate is issued and guaranteed by Fannie Mae and represents an undivided
interest in a pool of mortgage loans (a "Pool") formed by Fannie Mae. Each Pool
consists of residential mortgage loans ("Mortgage Loans") either previously
owned by Fannie Mae or purchased by it in connection with the formation of the
Pool. The Mortgage Loans may be either conventional Mortgage Loans (i.e., not
insured or guaranteed by any U.S. Government agency) or Mortgage Loans that are
either insured by the Federal Housing Administration ("FHA") or guaranteed by
the Veterans Administration ("VA"). However, the Mortgage Loans in Fannie Mae
Pools are primarily conventional Mortgage Loans. The lenders originating and
servicing the Mortgage Loans are subject to certain eligibility requirements
established by Fannie Mae.
Fannie Mae has certain contractual responsibilities. With respect to each
Pool, Fannie Mae is obligated to distribute scheduled monthly installments of
principal and interest after Fannie Mae's servicing and guaranty fee, whether or
not received, to Certificate holders. Fannie Mae 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.
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<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. Each Fund (other than CORE U.S. Equity
and CORE Large Cap Growth Funds) may invest in both government guaranteed and
privately issued mortgage pass-through securities ("Mortgage Pass-Throughs");
that is, fixed or adjustable rate mortgage-backed securities which provide for
monthly payments that are a "pass-through" of the monthly interest and principal
payments (including any prepayments) made by the individual borrowers on the
pooled mortgage loans, net of any fees or other amounts paid to any guarantor,
administrator and/or servicer of the underlying mortgage loans.
The following discussion describes only a few of the wide variety of
structures of Mortgage Pass-Throughs that are available or may be issued.
DESCRIPTION OF CERTIFICATES. Mortgage Pass-Throughs may be issued in one or
more classes of senior certificates and one or more classes of subordinate
certificates. Each such class may bear a different pass-through rate.
Generally, each certificate will evidence the specified interest of the holder
thereof in the payments of principal or interest or both in respect of the
mortgage pool comprising part of the trust fund for such certificates.
Any class of certificates may also be divided into subclasses entitled to
varying amounts of principal and interest. If a REMIC election has been made,
certificates of such subclasses may be entitled to payments on the basis of a
stated principal balance and stated interest rate, and payments among different
subclasses may be made on a sequential, concurrent, pro rata or disproportionate
--- ----
basis, or any combination thereof. The stated interest rate on any such
subclass of certificates may be a fixed rate or one which varies in direct or
inverse relationship to an objective interest index.
Generally, each registered holder of a certificate will be entitled to
receive its pro rata share of monthly distributions of all or a portion of
--- ----
principal of the underlying mortgage loans or of interest on the principal
balances thereof, which accrues at the applicable mortgage pass-through rate, or
both. The difference between the mortgage interest rate and the related
mortgage pass-through rate (less the amount, if any, of retained yield) with
respect to each mortgage loan will generally be paid to the servicer as a
servicing fee. Since certain adjustable rate mortgage loans included in a
mortgage pool may provide for deferred interest (i.e., negative amortization),
the amount of interest actually paid by a mortgagor in any month may be less
than the amount of interest accrued on the outstanding principal balance of the
related mortgage loan during the relevant period at the applicable mortgage
interest rate. In such event, the amount of interest that is treated as
deferred interest will be added to the principal balance of the related mortgage
loan and will be distributed pro rata to certificate-holders as principal of
--- ----
such mortgage loan when paid by the mortgagor in subsequent monthly payments or
at maturity.
RATINGS. The ratings assigned by a rating organization to Mortgage Pass-
Throughs address the likelihood of the receipt of all distributions on the
underlying mortgage loans by the 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
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<PAGE>
rating organization's ratings on such certificates do not, however, constitute a
statement regarding frequency of prepayments on the related mortgage loans. In
addition, the rating assigned by a rating organization to a certificate does not
address the remote possibility that, in the event of the insolvency of the
issuer of certificates where a subordinated interest was retained, the issuance
and sale of the senior certificates may be recharacterized as a financing and,
as a result of such recharacterization, payments on such certificates may be
affected.
CREDIT ENHANCEMENT. Credit support falls generally into two categories:
(i) liquidity protection and (ii) protection against losses resulting from
default by an obligor on the underlying assets. Liquidity protection refers to
the provision of advances, generally by the entity administering the pools of
mortgages, the provision of a reserve fund, or a combination thereof, to ensure,
subject to certain limitations, that scheduled payments on the underlying pool
are made in a timely fashion. Protection against losses resulting from default
ensures ultimate payment of the obligations on at least a portion of the assets
in the pool. Such credit support can be provided by among other things, payment
guarantees, letters of credit, pool insurance, subordination, or any combination
thereof.
SUBORDINATION; SHIFTING OF INTEREST; RESERVE FUND. In order to achieve
ratings on one or more classes of Mortgage Pass-Throughs, one or more classes of
certificates may be subordinate certificates which provide that the rights of
the subordinate certificate-holders to receive any or a specified portion of
distributions with respect to the underlying mortgage loans may be subordinated
to the rights of the senior certificate-holders. If so structured, the
subordination feature may be enhanced by distributing to the senior certificate-
holders on certain distribution dates, as payment of principal, a specified
percentage (which generally declines over time) of all principal payments
received during the preceding prepayment period ("shifting interest credit
enhancement"). This will have the effect of accelerating the amortization of
the senior certificates while increasing the interest in the trust fund
evidenced by the subordinate certificates. Increasing the interest of the
subordinate certificates relative to that of the senior certificates is intended
to preserve the availability of the subordination provided by the subordinate
certificates. In addition, because the senior certificate-holders in a shifting
interest credit enhancement structure are entitled to receive a percentage of
principal prepayments which is greater than their proportionate interest in the
trust fund, the rate of principal prepayments on the mortgage loans will have an
even greater effect on the rate of principal payments and the amount of interest
payments on, and the yield to maturity of, the senior certificates.
In addition to providing for a preferential right of the senior certificate-
holders to receive current distributions from the mortgage pool, a reserve fund
may be established relating to such certificates (the "Reserve Fund"). The
Reserve Fund may be created with an initial cash deposit by the originator or
servicer and augmented by the retention of distributions otherwise available to
the subordinate certificate-holders or by excess servicing fees until the
Reserve Fund reaches a specified amount.
The subordination feature, and any Reserve Fund, are intended to enhance the
likelihood of timely receipt by senior certificate-holders of the full amount of
scheduled monthly payments of principal and interest due them and will protect
the senior certificate-holders against certain losses; however, in certain
circumstances the Reserve Fund could be depleted and temporary shortfalls could
result. In the event the Reserve Fund is depleted before the subordinated
amount is reduced to zero, senior certificate-holders will nevertheless have a
preferential right to receive current distributions from the mortgage pool to
the extent of the then outstanding subordinated amount. Unless otherwise
specified, until the subordinated amount is reduced to zero, on any distribution
date any amount otherwise distributable to the subordinate certificates or, to
the extent specified, in the Reserve Fund will generally be used to offset the
amount of any losses realized with respect to the mortgage loans ("Realized
Losses"). Realized Losses remaining after application of such amounts will
generally be applied to reduce the ownership interest of the subordinate
certificates in the mortgage pool. If the subordinated amount has been reduced
to zero,
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<PAGE>
Realized Losses generally will be allocated pro rata among all certificate-
--- ----
holders in proportion to their respective outstanding interests in the mortgage
pool.
ALTERNATIVE CREDIT ENHANCEMENT. As an alternative, or in addition to the
credit enhancement afforded by subordination, credit enhancement for Mortgage
Pass-Throughs may be provided by mortgage insurance, hazard insurance, by the
deposit of cash, certificates of deposit, letters of credit, a limited guaranty
or by such other methods as are acceptable to a rating agency. In certain
circumstances, such as where credit enhancement is provided by guarantees or a
letter of credit, the security is subject to credit risk because of its exposure
to an external credit enhancement provider.
VOLUNTARY ADVANCES. Generally, in the event of delinquencies in payments on
the mortgage loans underlying the Mortgage Pass-Throughs, the servicer agrees to
make advances of cash for the benefit of certificate-holders, but only to the
extent that it determines such voluntary advances will be recoverable from
future payments and collections on the mortgage loans or otherwise.
OPTIONAL TERMINATION. Generally, the servicer may, at its option with
respect to any certificates, repurchase all of the underlying mortgage loans
remaining outstanding at such time as the aggregate outstanding principal
balance of such mortgage loans is less than a specified percentage (generally 5-
10%) of the aggregate outstanding principal balance of the mortgage loans as of
the cut-off date specified with respect to such series.
MULTIPLE CLASS MORTGAGE-BACKED SECURITIES AND COLLATERALIZED MORTGAGE
OBLIGATIONS. A Fund may invest in multiple class securities including
collateralized mortgage obligations ("CMOs") and REMIC Certificates. These
securities may be issued by U.S. Government agencies and instrumentalities such
as Fannie Mae or Freddie Mac or by trusts formed by private originators of, or
investors in, mortgage loans, including savings and loan associations, mortgage
bankers, commercial banks, insurance companies, investment banks and special
purpose subsidiaries of the foregoing. In general, CMOs are debt obligations of
a legal entity that are collateralized by, and multiple class mortgage-backed
securities represent direct ownership interests in, a pool of mortgage loans or
mortgage-backed securities the payments on which are used to make payments on
the CMOs or multiple class mortgage-backed securities.
Fannie Mae REMIC Certificates are issued and guaranteed as to timely
distribution of principal and interest by Fannie Mae. In addition, Fannie Mae
will be obligated to distribute the principal balance of each class of REMIC
Certificates in full, whether or not sufficient funds are otherwise available.
Freddie Mac guarantees the timely payment of interest on Freddie Mac REMIC
Certificates and also guarantees the payment of principal as payments are
required to be made on the underlying mortgage participation certificates
("PCs"). PCs represent undivided interests in specified level payment,
residential mortgages or 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 Funds do not intend to purchase residual interests in
REMICs. The REMIC Certificates represent beneficial ownership interests in a
REMIC trust, generally consisting of mortgage loans or Fannie Mae, Freddie Mac
or Ginnie Mae guaranteed mortgage-backed securities (the "Mortgage Assets").
The obligations of Fannie Mae or Freddie Mac under their
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<PAGE>
respective guaranty of the REMIC Certificates are obligations solely of Fannie
Mae or Freddie Mac, respectively.
CMOs and REMIC Certificates are issued in multiple classes. Each class of
CMOs or REMIC Certificates, often referred to as a "tranche," is issued at a
specific adjustable or fixed interest rate and must be fully retired no later
than its final distribution date. Principal prepayments on the Mortgage Loans
or the Mortgage Assets underlying the CMOs or REMIC Certificates may cause some
or all of the classes of CMOs or REMIC Certificates to be retired substantially
earlier than their final distribution dates. Generally, interest is paid or
accrues on all classes of CMOs or REMIC Certificates on a monthly basis.
The principal of and interest on the Mortgage Assets may be allocated among
the several classes of CMOs or REMIC Certificates in various ways. In certain
structures (known as "sequential pay" CMOs or REMIC Certificates), payments of
principal, including any principal prepayments, on the Mortgage Assets generally
are applied to the classes of CMOs or REMIC Certificates in the order of their
respective final distribution dates. Thus, no payment of principal will be made
on any class of sequential pay CMOs or REMIC Certificates until all other
classes having an earlier final distribution date have been paid in full.
Additional structures of CMOs and REMIC Certificates include, among others,
"parallel pay" CMOs and REMIC Certificates. Parallel pay CMOs or REMIC
Certificates are those which are structured to apply principal payments and
prepayments of the Mortgage Assets to two or more classes concurrently on a
proportionate or disproportionate basis. These simultaneous payments are taken
into account in calculating the final distribution date of each class.
A wide variety of REMIC Certificates may be issued in parallel pay or
sequential pay structures. These securities include accrual certificates (also
known as "Z-Bonds"), which only accrue interest at a specified rate until all
other certificates having an earlier final distribution date have been retired
and are converted thereafter to an interest-paying security, and planned
amortization class ("PAC") certificates, which are parallel pay REMIC
Certificates that generally require that specified amounts of principal be
applied on each payment date to one or more classes or REMIC Certificates (the
"PAC Certificates"), even though all other principal payments and prepayments of
the Mortgage Assets are then required to be applied to one or more other classes
of the Certificates. The scheduled principal payments for the PAC Certificates
generally have the highest priority on each payment date after interest due has
been paid to all classes entitled to receive interest currently. Shortfalls, if
any, are added to the amount payable on the next payment date. The PAC
Certificate payment schedule is taken into account in calculating the final
distribution date of each class of PAC. In order to create PAC tranches, one or
more tranches generally must be created that absorb most of the volatility in
the underlying mortgage assets. These tranches tend to have market prices and
yields that are much more volatile than other PAC classes.
STRIPPED MORTGAGE-BACKED SECURITIES. Balanced Fund may invest in stripped
mortgage-backed securities ("SMBS"), which are derivative multiclass mortgage
securities. Although the market for such securities is increasingly liquid,
certain SMBS may not be readily marketable and will be considered illiquid for
purposes of the Fund's limitation on investments in illiquid securities. The
market value of the class consisting entirely of principal payments generally is
unusually volatile in response to changes in interest rates. The yields on a
class of SMBS that receives all or most of the interest from Mortgage Assets are
generally higher than prevailing market yields on other mortgage-backed
securities because their cash flow patterns are more volatile and there is a
greater risk that the initial investment will not be fully recouped.
INVERSE FLOATING RATE SECURITIES
================================
Balanced Fund may invest up to 5% of its net assets in leveraged inverse
floating rate debt instruments ("inverse floaters"). The interest rate on an
inverse floater resets in the opposite direction from
B-14
<PAGE>
the market rate of interest to which the inverse floater is indexed . An
inverse floater may be considered to be leveraged to the extent that its
interest rate varies by a magnitude that exceeds the magnitude of the change in
the index rate of interest. The higher degree of leverage inherent in inverse
floaters is associated with greater volatility in their market values.
Accordingly, the duration of an inverse floater may exceed its stated final
maturity. Certain inverse floaters may be deemed to be illiquid securities for
purposes of the Fund's 15% limitation on investments in such securities.
ASSET-BACKED SECURITIES
=======================
Asset-backed securities represent participation in, or are secured by and
payable from, assets such as motor vehicle installment sales, installment loan
contracts, leases of various types of real and personal property, receivables
from revolving credit (credit card) agreements and other categories of
receivables. Such assets are securitized through the use of trusts and special
purpose corporations. Payments or distributions of principal and interest may be
guaranteed up to certain amounts and for a certain time period by a letter of
credit or a pool insurance policy issued by a financial institution unaffiliated
with the trust or corporation, or other credit enhancements may be present.
Like mortgage-backed securities, asset-backed securities are often subject
to more rapid repayment than their stated maturity date would indicate as a
result of the pass-through of prepayments of principal on the underlying loans.
A Fund's ability to maintain positions in such securities will be affected by
reductions in the principal amount of such securities resulting from
prepayments, and its ability to reinvest the returns of principal at comparable
yields is subject to generally prevailing interest rates at that time. To the
extent that a Fund invests in asset-backed securities, the values of such Fund's
portfolio securities will vary with changes in market interest rates generally
and the differentials in yields among various kinds of asset-backed securities.
Asset-backed securities present certain additional risks that are not
presented by mortgage-backed securities because asset-backed securities
generally do not have the benefit of a security interest in collateral that is
comparable to mortgage assets. Credit card receivables are generally unsecured
and the debtors on such receivables are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set-off certain amounts owed on the credit cards, thereby reducing the
balance due. Automobile receivables generally are secured, but by automobiles
rather than residential real property. Most issuers of automobile receivables
permit the loan servicers to retain possession of the underlying obligations.
If the servicer were to sell these obligations to another party, there is a
risk that the purchaser would acquire an interest superior to that of the
holders of the asset-backed securities. In addition, because of the large
number of vehicles involved in a typical issuance and technical requirements
under state laws, the trustee for the holders of the automobile receivables may
not have a proper security interest in the underlying automobiles. Therefore,
there is the possibility that, in some cases, recoveries on repossessed
collateral may not be available to support payments on these securities.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
==================================================
Each Fund may purchase and sell futures contracts and may also purchase and
write options on futures contracts. CORE U.S. Equity and CORE Large Cap Growth
Funds may only enter into such transactions with respect to the S&P 500 Index,
for the CORE U.S. Equity Fund and a respective index in the case of the CORE
Large Cap Growth Fund. The other Funds may purchase and sell futures contracts
based on various securities (such as U.S. Government securities), securities
indices, foreign currencies and other financial instruments and indices. Each
Fund will engage in futures and related options transactions, only for bona fide
hedging purposes as defined below or for purposes of seeking to increase total
return to the extent permitted by regulations of the Commodity Futures Trading
Commission
B-15
<PAGE>
("CFTC"). All futures contracts entered into by a Fund are traded on U.S.
exchanges or boards of trade that are licensed and regulated by the CFTC or on
foreign exchanges.
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).
When interest rates are rising or securities prices are falling, a Fund can
seek through the sale of futures contracts to offset a decline in the value of
its current portfolio securities. When rates are falling or prices are rising,
a Fund, through the purchase of futures contracts, can attempt to secure better
rates or prices than might later be available in the market when it effects
anticipated purchases. Similarly, each Fund (other than CORE U.S. Equity and
CORE Large Cap Growth Funds) can sell futures contracts on a specified currency
to protect against a decline in the value of such currency and its portfolio
securities which are quoted or denominated in such currency. Each Fund (other
than CORE U.S. Equity and CORE Large Cap Growth Funds) can purchase futures
contracts on foreign currency to establish the price in U.S. dollars of a
security quoted or denominated in such currency that such Fund has acquired or
expects to acquire.
Positions taken in the futures market are not normally held to maturity, but
are instead liquidated through offsetting transactions which may result in a
profit or a loss. While each Fund will usually liquidate futures contracts on
securities or currency in this manner, a Fund may instead make or take delivery
of the underlying securities or currency whenever it appears economically
advantageous for the Fund to do so. A clearing corporation associated with the
exchange on which futures are traded guarantees that, if still open, the sale or
purchase will be performed on the settlement date.
HEDGING STRATEGIES. Hedging, by use of futures contracts, seeks to
establish with more certainty than would otherwise be possible the effective
price, rate of return or currency exchange rate on portfolio securities or
securities that a Fund owns or proposes to acquire. A Fund may, for example,
take a "short" position in the futures market by selling futures contracts to
seek to hedge against an anticipated rise in interest rates or a decline in
market prices or (other than CORE U.S. Equity and CORE Large Cap Growth Funds)
foreign currency rates that would adversely affect the dollar value of such
Fund's portfolio securities. Similarly, each Fund (other than CORE U.S. Equity
and CORE Large Cap Growth Funds) may sell futures contracts on a currency in
which its portfolio securities are quoted or denominated or in one currency to
seek to hedge against fluctuations in the value of securities quoted or
denominated in a different currency if there is an established historical
pattern of correlation between the two currencies. If, in the opinion of the
applicable Adviser, there is a sufficient degree of correlation between price
trends for a Fund's portfolio securities and futures contracts based on other
financial instruments, securities indices or other indices, a Fund may also
enter into such futures contracts as part of its hedging strategy. Although
under some circumstances prices of securities in a Fund's portfolio may be more
or less volatile than prices of such futures contracts, the Advisers will
attempt to estimate the extent of this volatility difference based on historical
patterns and compensate for any such differential by having a Fund enter into a
greater or lesser number of futures contracts or by attempting to achieve only a
partial hedge against price changes affecting a Fund's securities portfolio.
When hedging of this character is successful, any depreciation in the value of
portfolio securities will be substantially offset by appreciation in the value
of the futures position. On the other hand, any unanticipated appreciation in
the value of a Fund's portfolio securities would be substantially offset by a
decline in the value of the futures position.
On other occasions, a Fund may take a "long" position by purchasing such
futures contracts. This would be done, for example, when a Fund anticipates the
subsequent purchase of particular securities
B-16
<PAGE>
when it has the necessary cash, but expects the prices or currency exchange
rates then available in the applicable market to be less favorable than prices
or rates that are currently available.
OPTIONS ON FUTURES CONTRACTS. The acquisition of put and call options on
futures contracts will give a Fund the right (but not the obligation), for a
specified price, to sell or to purchase, respectively, the underlying futures
contract at any time during the option period. As the purchaser of an option on
a futures contract, a Fund obtains the benefit of the futures position if prices
move in a favorable direction but limits its risk of loss in the event of an
unfavorable price movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium which
may partially offset a decline in the value of a Fund's assets. By writing a
call option, a Fund becomes obligated, in exchange for the premium, to sell a
futures contract if the option is exercised, which may have a value higher than
the exercise price. Conversely, the writing of a put option on a futures
contract generates a premium, which may partially offset an increase in the
price of securities that a Fund intends to purchase. However, a Fund becomes
obligated to purchase a futures contract if the option is exercised, which may
have a value lower than the exercise price. Thus, the loss incurred by a Fund
in writing options on futures is potentially unlimited and may exceed the amount
of the premium received. A Fund will incur transaction costs in connection with
the writing of options on futures.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option on the same financial
instrument. There is no guarantee that such closing transactions can be
effected. A Fund's ability to establish and close out positions on such options
will be subject to the development and maintenance of a liquid market.
OTHER CONSIDERATIONS. Each Fund will engage in futures transactions and
will engage in related options transactions only for bona fide hedging as
defined in the regulations of the CFTC or to seek to increase total return to
the extent permitted by such regulations. A Fund will determine that the price
fluctuations in the futures contracts and options on futures used for hedging
purposes are substantially related to price fluctuations in securities held by
the Fund or which it expects to purchase. Except as stated below, each Fund's
futures transactions will be entered into for traditional hedging purposes --
i.e., futures contracts will be sold to protect against a decline in the price
of securities (or the currency in which they are quoted or denominated) that the
Fund owns, or futures contracts will be purchased to protect the Fund against an
increase in the price of securities (or the currency in which they are quoted or
denominated) it intends to purchase. As evidence of this hedging intent, each
Fund expects that on 75% or more of the occasions on which it takes a long
futures or option position (involving the purchase of futures contracts), the
Fund will have purchased, or will be in the process of purchasing, equivalent
amounts of related securities (or assets quoted or denominated in the related
currency) in the cash market at the time when the futures or options position is
closed out. However, in particular cases, when it is economically advantageous
for a Fund to do so, a long futures position may be terminated or an option may
expire without the corresponding purchase of securities or other assets.
As an alternative to literal compliance with the bona fide hedging
definition, a CFTC regulation permits a Fund to elect to comply with a different
test. Under this test the aggregate initial margin and premiums required to
establish positions in futures contracts and options on futures to seek to
increase total return may not exceed 5% of the net asset value of such Fund's
portfolio, after taking into account unrealized profits and losses on any such
positions and excluding the amount by which such options were in-the-money at
the time of purchase. A Fund will engage in transactions in currency forward
contracts futures contracts and, for a Fund permitted to do so, related options
transactions only to the extent such transactions are consistent with the
requirements of the Code for maintaining its qualification as a regulated
investment company for federal income tax purposes (see "Taxation").
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<PAGE>
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating a Fund to purchase securities or currencies, require the Fund to
segregate 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 a Fund than if it had not
entered into any futures contracts or options transactions. In the event of an
imperfect correlation between a futures position and a portfolio position which
is intended to be protected, the desired protection may not be obtained and a
Fund may be exposed to risk of loss.
Perfect correlation between a Fund's futures positions and portfolio
positions will be difficult to achieve because no futures contracts based on
individual equity or corporate fixed-income securities are currently available.
The only futures contracts available to hedge a Fund's portfolio are various
futures on U.S. Government securities, securities indices and foreign
currencies. In addition, it is not possible for a Fund to hedge fully or
perfectly against currency fluctuations affecting the value of securities quoted
or denominated in foreign currencies because the value of such securities is
likely to fluctuate as a result of independent factors not related to currency
fluctuations.
OPTIONS ON SECURITIES AND SECURITIES INDICES
============================================
WRITING COVERED OPTIONS. Each Fund may write (sell) covered call and put
options on any securities in which it may invest (other than CORE U.S. Equity
and CORE Large Cap Growth Funds). A call option written by a Fund obligates
such Fund to sell specified securities to the holder of the option at a
specified price if the option is exercised at any time before the expiration
date. All call options written by a Fund are covered, which means that such
Fund will own the securities subject to the option as long as the option is
outstanding or such Fund will use the other methods described below. A Fund's
purpose in writing covered call options is to realize greater income than would
be realized on portfolio securities transactions alone. However, a Fund may
forego the opportunity to profit from an increase in the market price of the
underlying security.
A put option written by a Fund would obligate such Fund to purchase
specified securities from the option holder at a specified price if the option
is exercised at any time before the expiration date. All put options written by
a Fund would be covered, which means that such Fund would have deposited with
its custodian cash or liquid assets with a value at least equal to the exercise
price of the put option. The purpose of writing such options is to generate
additional income for the Fund. However, in return for the option premium, each
Fund accepts the risk that it may be required to purchase the underlying
securities at a price in excess of the securities' market value at the time of
purchase.
Call and put options written by a Fund will also be considered to be covered
to the extent that the Fund's liabilities under such options are wholly or
partially offset by its rights under call and put options purchased by the Fund.
In addition, a written call option or put option may be covered by
maintaining cash or liquid assets (either of which may be quoted or denominated
in any currency) in a segregated account, by entering into an offsetting forward
contract and/or by purchasing an offsetting option which, by virtue of its
exercise price or otherwise, reduces a Fund's net exposure on its written option
position.
A Fund may also write (sell) covered call and put options on any securities
index composed of securities in which it may invest. Options on securities
indices are similar to options on securities, except
B-18
<PAGE>
that the exercise of securities index options requires cash payments and does
not involve the actual purchase or sale of securities. In addition, securities
index options are designed to reflect price fluctuations in a group of
securities or segment of the securities market rather than price fluctuations in
a single security.
A Fund may cover call options on a securities index by owning securities
whose price changes are expected to be similar to those of the underlying index,
or by having an absolute and immediate right to acquire such securities without
additional cash consideration (or for additional cash consideration held in a
segregated account by its custodian) upon conversion or exchange of other
securities in its portfolio. A Fund may cover call and put options on a
securities index by maintaining cash or liquid assets with a value equal to the
exercise price in a segregated account with its custodian.
A Fund may terminate its obligations under an exchange traded call or put
option by purchasing an option identical to the one it has written. Obligations
under over-the-counter options may be terminated only by entering into an
offsetting transaction with the counterparty to such option. Such purchases are
referred to as "closing purchase transactions."
PURCHASING OPTIONS. Each Fund (other than the CORE U.S. Equity and CORE
Large Cap Growth Funds) may purchase put and call options on any securities in
which it may invest or options on any securities index composed of securities in
which it may invest. A Fund would also be able to enter into closing sale
transactions in order to realize gains or minimize losses on options it had
purchased.
A Fund would normally purchase call options in anticipation of an increase
in the market value of securities of the type in which it may invest. The
purchase of a call option would entitle a Fund, in return for the premium paid,
to purchase specified securities at a specified price during the option period.
A Fund would ordinarily realize a gain if, during the option period, the value
of such securities exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise such a Fund would realize either no gain or a loss
on the purchase of the call option.
A Fund would normally purchase put options in anticipation of a decline in
the market value of securities in its portfolio ("protective puts") or in
securities in which it may invest. The purchase of a put option would entitle a
Fund, in exchange for the premium paid, to sell specified securities at a
specified price during the option period. The purchase of protective puts is
designed to offset or hedge against a decline in the market value of a Fund's
securities. Put options may also be purchased by a Fund for the purpose of
affirmatively benefiting from a decline in the price of securities which it does
not own. A Fund would ordinarily realize a gain if, during the option period,
the value of the underlying securities decreased below the exercise price
sufficiently to more than cover the premium and transaction costs; otherwise
such a Fund would realize either no gain or a loss on the purchase of the put
option. Gains and losses on the purchase of protective put options would tend
to be offset by countervailing changes in the value of the underlying portfolio
securities.
A Fund would purchase put and call options on securities indices for the
same purposes as it would purchase options on individual securities. For a
description of options on securities indices, see "Writing Covered Options"
above.
YIELD CURVE OPTIONS. Balanced Fund, with respect to up to 5% of its net
assets, may enter into options on the yield "spread" or differential between two
securities. Such transactions are referred to as "yield curve" options. In
contrast to other types of options, a yield curve option is based on the
difference between the yields of designated securities, rather than the prices
of the individual securities, and is settled through cash payments.
Accordingly, a yield curve option is profitable to the holder if this
differential
B-19
<PAGE>
widens (in the case of a call) or narrows (in the case of a put), regardless of
whether the yields of the underlying securities increase or decrease.
Balanced Fund may purchase or write yield curve options for the same
purposes as other options on securities. For example, Balanced Fund may
purchase a call option on the yield spread between two securities if it owns one
of the securities and anticipates purchasing the other security and wants to
hedge against an adverse change in the yield spread between the two securities.
Balanced Fund may also purchase or write yield curve options in an effort to
increase its current income if, in the judgment of the Adviser, Balanced Fund
will be able to profit from movements in the spread between the yields of the
underlying securities. The trading of yield curve options is subject to all of
the risks associated with the trading of other types of options. In addition,
however, such options present risk of loss even if the yield of one of the
underlying securities remains constant, if the spread moves in a direction or to
an extent which was not anticipated.
Yield curve options written by the Balanced Fund will be "covered." A call
(or put) option is covered if the Balanced Fund holds another call (or put)
option on the spread between the same two securities and maintains in a
segregated account with its custodian cash or liquid assets sufficient to cover
the Balanced Fund's net liability under the two options. Therefore, the
Balanced Fund's liability for such a covered option is generally limited to the
difference between the amount of the Balanced Fund's liability under the option
written by the Balanced Fund less the value of the option held by the Balanced
Fund. Yield curve options may also be covered in such other manner as may be in
accordance with the requirements of the counterparty with which the option is
traded and applicable laws and regulations. Yield curve options are traded
over-the-counter, and because they have been only recently introduced,
established trading markets for these options have not yet developed.
RISKS ASSOCIATED WITH OPTIONS TRANSACTIONS. There is no assurance that a
liquid secondary market on an options exchange will exist for any particular
exchange-traded option or at any particular time. If a Fund is unable to effect
a closing purchase transaction with respect to covered options it has written,
the Fund will not be able to sell the underlying securities or dispose of assets
held in a segregated account until the options expire or are exercised.
Similarly, if a Fund is unable to effect a closing sale transaction with respect
to options it has purchased, it will have to exercise the options in order to
realize any profit and will incur transaction costs upon the purchase or sale of
underlying securities.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening or closing
transactions or both; (iii) trading halts, suspensions or other restrictions may
be imposed with respect to particular classes or series of options; (iv) unusual
or unforeseen circumstances may interrupt normal operations on an exchange; (v)
the facilities of an exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume; or (vi) one or more
exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that exchange that had been issued by the Options Clearing
Corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
Each Fund may purchase and sell both options that are traded on U.S. and
foreign exchanges and options traded over-the-counter with broker-dealers who
make markets in these options. The ability to terminate over-the-counter
options is more limited than with exchange-traded options and may involve the
risk that broker-dealers participating in such transactions will not fulfill
their obligations. Until such time as the staff of the Securities and Exchange
Commission ("SEC") changes its position, each Fund will treat purchased over-
the-counter options and all assets used to cover written over-the-counter
options as illiquid
B-20
<PAGE>
securities, except that with respect to options written with primary dealers in
U.S. Government securities pursuant to an agreement requiring a closing purchase
transaction at a formula price, the amount of illiquid securities may be
calculated with reference to the formula.
Transactions by each Fund in options 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 a Fund may write or
purchase may be affected by options written or purchased by other investment
advisory clients of the Advisers. An exchange, board of trade or other trading
facility may order the liquidation of positions found to be in excess of these
limits, and it may impose certain other sanctions.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of protective
puts for hedging purposes depends in part on the Adviser's ability to predict
future price fluctuations and the degree of correlation between the options and
securities markets.
REAL ESTATE INVESTMENT TRUSTS
=============================
Each Fund may invest in shares of REITs. REITs are pooled investment
vehicles which invest primarily in income producing real estate or real estate
related loans or interest. REITs are generally classified as equity REITs,
mortgage REITs or a combination of equity and mortgage REITs. Equity REITs
invest the majority of their assets directly in real property and derive income
primarily from the collection of rents. Equity REITs can also realize capital
gains by selling properties that have appreciated in value. Mortgage REITs
invest the majority of their assets in real estate mortgages and derive income
from the collection of interest payments. Like regulated investment companies
such as the Funds, REITs are not taxed on income distributed to shareholders
provided they comply with certain requirements under the Code. A Fund will
indirectly bear its proportionate share of any expenses paid by REITs in which
it invests in addition to the expenses paid by a 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 Investment Company Act of 1940, as amended (the "Act").
REITs (especially mortgage REITs) are also subject to interest rate risks.
WARRANTS AND STOCK PURCHASE RIGHTS
==================================
Each Fund may invest up to 5% of its net assets, calculated at the time of
purchase, in warrants or rights (other than those acquired in units or attached
to other securities) which entitle the holder to buy equity securities at a
specific price for a specific period of time. A Fund will invest in warrants
and rights only if such equity securities are deemed appropriate by the Adviser
for investment by the Fund. CORE U.S. Equity and CORE Large Cap Growth Funds
have no present intention of acquiring warrants or rights. Warrants and rights
have no voting rights, receive no dividends and have no rights with respect to
the assets of the issuer.
B-21
<PAGE>
FOREIGN SECURITIES
==================
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 applicable Adviser, to offer
better opportunity for long-term growth of capital and income than investments
in U.S. securities, the opportunity to invest in foreign countries with economic
policies or business cycles different from those of the United States and the
opportunity to reduce fluctuations in portfolio value by taking advantage of
foreign stock markets that do not necessarily move in a manner parallel to U.S.
markets.
Investing in foreign securities involves certain special considerations,
including those set forth below, which are not typically associated with
investing in U.S. dollar-denominated or quoted securities of U.S. issuers.
Investments in foreign securities usually involve currencies of foreign
countries. Accordingly, any Fund that invests in foreign securities may be
affected favorably or unfavorably by changes in currency rates and in exchange
control regulations and may incur costs in connection with conversions between
various currencies. Balanced, International Equity, Emerging Markets Equity and
Asia Growth Funds may be subject to currency exposure independent of their
securities positions.
Currency exchange rates may fluctuate significantly over short periods of
time. They generally are determined by the forces of supply and demand in the
foreign exchange markets and the relative merits of investments in different
countries, actual or anticipated changes in interest rates and other complex
factors, as seen from an international perspective. Currency exchange rates
also can be affected unpredictably by intervention by U.S. or foreign
governments or central banks or the failure to intervene or by currency controls
or political developments in the United States or abroad.
Since foreign issuers generally are not subject to uniform accounting,
auditing and financial reporting standards, practices and requirements
comparable to those applicable to U.S. companies, there may be less publicly
available information about a foreign company than about a U.S. company. Volume
and liquidity in most foreign securities markets are less than in the United
States and securities of many foreign companies are less liquid and more
volatile than securities of comparable U.S. companies. Fixed commissions on
foreign securities exchanges are generally higher than negotiated commissions on
U.S. exchanges, although each Fund endeavors to achieve the most favorable net
results on its portfolio transactions. There is generally less government
supervision and regulation of foreign securities exchanges, brokers, dealers and
listed and unlisted companies than in the United States.
Foreign markets also have different clearance and settlement procedures, and
in certain markets there have been times when settlements have been unable to
keep pace with the volume of securities transactions, making it difficult to
conduct such transactions. Such delays in settlement could result in temporary
periods when some of a Fund's assets are uninvested and no return is earned on
such assets. The inability of a Fund to make intended security purchases due to
settlement problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement
problems could result either in losses to the Fund due to subsequent declines in
value of the portfolio securities or, if the Fund has entered into a contract to
sell the securities, could result in possible liability to the purchaser. In
addition, with respect to certain foreign countries, there is the possibility of
expropriation or confiscatory taxation, political or social instability, or
diplomatic developments which could affect a Fund's investments in those
countries. Moreover, individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross national
product, rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments position.
Each Fund may invest in foreign securities which take the form of sponsored
and unsponsored American Depository Receipts ("ADRs") and Global Depository
Receipts ("GDRs") and (except for CORE U.S. Equity and CORE Large Cap Growth
Funds) may also invest in European Depository Receipts
B-22
<PAGE>
("EDRs") or other similar instruments representing securities of foreign issuers
(together, "Depository Receipts").
ADRs represent the right to receive securities of foreign issuers deposited
in a domestic bank or a correspondent bank. ADRs are traded on domestic
exchanges or in the U.S. over-the-counter market and, generally, are in
registered form. EDRs and GDRs are receipts evidencing an arrangement with a
non-U.S. bank similar to that for ADRs and are designed for use in the non-U.S.
securities markets. EDRs and GDRs are not necessarily quoted in the same
currency as the underlying security.
To the extent a Fund acquires Depository Receipts through banks which do not
have a contractual relationship with the foreign issuer of the security
underlying the Depository Receipts to issue and service such Depository Receipts
(unsponsored), there may be an increased possibility that the Fund would not
become aware of and be able to respond to corporate actions such as stock splits
or rights offerings involving the foreign issuer in a timely manner. In
addition, the lack of information may result in inefficiencies in the valuation
of such instruments.
Each Fund (except CORE U.S. Equity and CORE Large Cap Growth Funds) may
invest in countries with emerging economies or securities markets. Political
and economic structures in many of such countries may be undergoing significant
evolution and rapid development, and such countries may lack the social,
political and economic stability characteristic of more developed countries.
Certain of such countries may have in the past failed to recognize private
property rights and have at times nationalized or expropriated the assets of
private companies. As a result, the risks described above, including the risks
of nationalization or expropriation of assets, may be heightened. See "Investing
in Emerging Markets, including Asia," below.
A Fund (other than CORE U.S. Equity and CORE Large Cap Growth Funds) may
invest in securities of issuers domiciled in a country other than the country in
whose currency the instrument is denominated or quoted. The Funds may also
invest in securities quoted or denominated in the European Currency Unit
("ECU"), which is a "basket" consisting of specified amounts of the currencies
of certain of the member states of the European Community. The specific amounts
of currencies comprising the ECU may be adjusted by the Council of Ministers of
the European Community from time to time to reflect changes in relative values
of the underlying currencies. In addition, the Funds may invest in securities
quoted or denominated in other currency "baskets."
INVESTING IN EMERGING MARKETS , INCLUDING ASIA. International Equity,
==============================================
Asia Growth and Emerging Markets Equity Funds are intended for long-term
investors who can accept the risks associated with investing primarily in equity
and equity-related securities of foreign issuers, including Emerging Countries
issuers (in the case of Emerging Markets Equity and International Equity Funds)
and Asian Companies (as defined in the Prospectus) (in the case of Asia Growth
Fund), as well as the risks associated with investments quoted or denominated in
foreign currencies. Balanced, Growth and Income, Small Cap Equity, Mid Cap
Equity and Capital Growth Funds may invest, to a lesser extent, in equity and
equity-related securities of foreign issuers; including Emerging Countries
issuers. In addition, certain of Balanced, International Equity, Emerging
Markets Equity and Asia Growth Fund's potential investment and management
techniques entail special risks. Asia Growth Fund concentrates on companies that
the Advisers believe are taking full advantage of the region's growth and that
have the potential for long-term capital appreciation. The Advisers believe that
Asia offers an attractive investment environment and that new opportunities will
continue to emerge in the years ahead.
The pace of change in many Emerging Countries, and in particular those in
Asia, over the last 10 years has been rapid. Accelerating economic growth in
the region has combined with capital market development, high government
expenditure, increasing consumer wealth and taxation policies favoring
B-23
<PAGE>
company expansion. As a result, stock market returns in many Emerging Countries
have been relatively attractive. See "Risk Factors" in the Prospectus.
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.
Certain of the Emerging Country securities markets are marked by a high
concentration of market capitalization and trading volume in a small number of
issuers representing a limited number of industries, as well as a high
concentration of ownership of such securities by a limited number of investors.
The markets for securities in certain Emerging Countries are in the earliest
stages of their development. Even the markets for relatively widely traded
securities in Emerging Countries may not be able to absorb, without price
disruptions, a significant increase in trading volume or trades of a size
customarily undertaken by institutional investors in the securities markets of
developed countries. Additionally, market making and arbitrage activities are
generally less extensive in such markets, which may contribute to increased
volatility and reduced liquidity of such markets. The limited liquidity of
Emerging Country markets may also affect a Fund's ability to accurately value
its portfolio securities or to acquire or dispose of 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 several of the Asian
countries is restricted or controlled to varying degrees. These restrictions
may limit a Fund's investment in certain of the Asian countries and may increase
the expenses of the Fund. Certain Emerging Countries require governmental
approval prior to investments by foreign persons or limit investment by foreign
persons to only a specified percentage of an issuer's outstanding securities or
a specific class of securities which may have less advantageous terms (including
price) than securities of the company available for purchase by nationals. In
addition, the repatriation of both investment income and capital from several of
the Emerging Countries is subject to restrictions such as the need for certain
governmental consents. Even where there is no outright restriction on
repatriation of capital, the mechanics of repatriation may affect certain
aspects of the operation of the Balanced, International Equity, Emerging Markets
Equity and Asia Growth Funds. A Fund may be required to establish special
custodial or other arrangements before investing in certain emerging countries.
Each of the Emerging Countries may be subject to a greater degree of
economic, political and social instability than is the case in the United
States, Japan and most Western European countries. Such instability may result
from, among other things, the following: (i) authoritarian governments or
military involvement in political and economic decision making, including
changes or attempted changes in governments through extra-constitutional means;
(ii) popular unrest associated with demands for improved political, economic or
social conditions; (iii) internal insurgencies; (iv) hostile relations with
neighboring countries; and (v) ethnic, religious and racial disaffection or
conflict. Such economic, political and social instability could disrupt the
principal financial markets in which the Funds may invest and adversely affect
the value of the Funds' assets.
B-24
<PAGE>
The economies of Emerging Countries may differ unfavorably from the U.S.
economy in such respects as growth of gross domestic product, rate of inflation,
capital reinvestment, resources, self-sufficiency and balance of payments. Many
Emerging Countries have experienced in the past, and continue to experience,
high rates of inflation. In certain countries inflation has at times
accelerated rapidly to hyperinflationary levels, creating a negative interest
rate environment and sharply eroding the value of outstanding financial assets
in those countries. The economies of many Emerging Countries are heavily
dependent upon international trade and are accordingly affected by protective
trade barriers and the economic conditions of their trading partners. In
addition, the economies of some Emerging Countries are vulnerable to weakness in
world prices for their commodity exports.
A Fund's income and, in some cases, capital gains from foreign stocks and
securities will be subject to applicable taxation in certain of the countries in
which it invests, and treaties between the U.S. and such countries may not be
available in some cases to reduce the otherwise applicable tax rates. 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 a Fund is uninvested and no return is
earned on such assets. The inability of a 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. Growth and Income, Mid Cap
===========================================
Equity, Capital Growth and Small Cap Equity Funds may enter into forward foreign
currency exchange contracts for hedging purposes. Balanced, International
Equity, Emerging Markets Equity and Asia Growth Funds may enter into forward
foreign currency exchange contracts for hedging purposes and to seek to increase
total return. A forward foreign currency exchange contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. These contracts are traded
in the interbank market conducted directly between currency traders (usually
large commercial banks) and their customers. A forward contract generally has no
deposit requirement, and no commissions are generally charged at any stage for
trades.
At the maturity of a forward contract a Fund may either accept or make
delivery of the currency specified in the contract or, at or prior to maturity,
enter into a closing transaction involving the purchase or sale of an offsetting
contract. Closing transactions with respect to forward contracts are usually
effected with the currency trader who is a party to the original forward
contract.
A Fund may enter into forward foreign currency exchange contracts in several
circumstances. First, when a Fund enters into a contract for the purchase or
sale of a security denominated or quoted in a foreign currency, or when a Fund
anticipates the receipt in a foreign currency of dividend or interest payments
on such a security which it holds, the Fund may desire to "lock in" the U.S.
dollar price of the security or the U.S. dollar equivalent of such dividend or
interest payment, as the case may be. By entering into a forward contract for
the purchase or sale, for a fixed amount of dollars, of the amount of foreign
currency involved in the underlying transactions, the 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.
B-25
<PAGE>
Additionally, when the Adviser believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar, it may
enter into a forward contract to sell, for a fixed amount of U.S. dollars, the
amount of foreign currency approximating the value of some or all of such Fund's
portfolio securities quoted or denominated in such foreign currency. The
precise matching of the forward contract amounts and the value of the securities
involved will not generally be possible because the future value of such
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the
contract is entered into and the date it matures. Using forward contracts to
protect the value of a Fund's portfolio securities against a decline in the
value of a currency does not eliminate fluctuations in the underlying prices of
the securities. It simply establishes a rate of exchange which a Fund can
achieve at some future point in time. The precise projection of short-term
currency market movements is not possible, and short-term hedging provides a
means of fixing the U.S. dollar value of only a portion of a Fund's foreign
assets.
Balanced, International Equity, Emerging Markets Equity and Asia Growth
Funds may engage in cross-hedging by using forward contracts in one currency to
hedge against fluctuations in the value of securities quoted or denominated in a
different currency if GSAM or GSAMI determines that there is a pattern of
correlation between the two currencies. Balanced, International Equity,
Emerging Markets Equity and Asia Growth Funds may also purchase and sell forward
contracts to seek to increase total return when GSAM or GSAMI anticipates that
the foreign currency will appreciate or depreciate in value, but securities
quoted or denominated in that currency do not present attractive investment
opportunities and are not held in the Fund's portfolio.
A Fund's custodian will place cash or liquid assets into a segregated
account of such Fund in an amount equal to the value of the Fund's total assets
committed to the consummation of forward foreign currency exchange contracts
requiring the Fund to purchase foreign currencies or, in the case of Balanced,
International Equity, Emerging Markets Equity and Asia Growth Funds forward
contracts entered into to seek to increase total return. If the value of the
securities placed in the segregated account declines, additional cash or liquid
assets will be placed in the account on a daily basis so that the value of the
account will equal the amount of a Fund's commitments with respect to such
contracts. The segregated account will be marked-to-market on a daily basis.
Although the contracts are not presently regulated by the CFTC, the CFTC may in
the future assert authority to regulate these contracts. In such event, a
Fund's ability to utilize forward foreign currency exchange contracts may be
restricted.
While a Fund will enter into forward contracts to reduce currency exchange
rate risks, transactions in such contracts involve certain other risks. Thus,
while the Fund may benefit from such transactions, unanticipated changes in
currency prices may result in a poorer overall performance for the Fund than if
it had not engaged in any such transactions. Moreover, there may be imperfect
correlation between a Fund's portfolio holdings of securities quoted or
denominated in a particular currency and forward contracts entered into by such
Fund. Such imperfect correlation may cause a Fund to sustain losses which will
prevent the Fund from achieving a complete hedge or expose the Fund to risk of
foreign exchange loss.
Markets for trading foreign forward currency contracts offer less
protection against defaults than is available when trading in currency
instruments on an exchange. Since a forward foreign currency exchange contract
is not guaranteed by an exchange or clearinghouse, a default on the contract
would deprive a Fund of unrealized profits or force the Fund to cover its
commitments for purchase or resale, if any, at the current market price.
WRITING AND PURCHASING CURRENCY CALL AND PUT OPTIONS. Each Fund (except
=====================================================
CORE U.S. Equity and CORE Large Cap Growth Funds) may write covered put and call
options and purchase put and call options on foreign currencies for the purpose
of protecting against declines in the U.S. dollar value of portfolio securities
and against increases in the U.S. dollar cost of securities to be acquired. As
with other
B-26
<PAGE>
kinds of option transactions, however, the writing of an option on foreign
currency will constitute only a partial hedge, up to the amount of the premium
received. If and when a Fund seeks to close out an option, the Fund could be
required to purchase or sell foreign currencies at disadvantageous exchange
rates, thereby incurring losses. The purchase of an option on foreign currency
may constitute an effective hedge against exchange rate fluctuations; however,
in the event of exchange rate movements adverse to a Fund's position, the Fund
may forfeit the entire amount of the premium plus related transaction costs.
Options on foreign currencies to be written or purchased by a Fund will be
traded on U.S. and foreign exchanges or over-the-counter.
Balanced, International Equity, Emerging Markets Equity and Asia Growth
Funds may use options on currency to cross-hedge, which involves writing or
purchasing options on one currency to hedge against changes in exchange rates
for a different currency with a pattern of correlation. In addition, Balanced,
International Equity, Emerging Markets Equity and Asia Growth Funds may purchase
call options on currency to seek to increase total return when the Adviser
anticipates that the currency will appreciate in value, but the securities
quoted or denominated in that currency do not present attractive investment
opportunities and are not included in the Fund's portfolio.
A call option written by a Fund obligates a Fund to sell specified currency
to the holder of the option at a specified price if the option is exercised at
any time before the expiration date. A put option written by a Fund would
obligate a Fund to purchase specified currency from the option holder at a
specified price if the option is exercised at any time before the expiration
date. The writing of currency options involves a risk that a Fund will, upon
exercise of the option, be required to sell currency subject to a call at a
price that is less than the currency's market value or be required to purchase
currency subject to a put at a price that exceeds the currency's market value.
For a description of how to cover written put and call options, see "Written
Covered Options" above.
A Fund may terminate its obligations under a call or put option by
purchasing an option identical to the one it has written. Such purchases are
referred to as "closing purchase transactions." A Fund would also be able to
enter into closing sale transactions in order to realize gains or minimize
losses on options purchased by the Fund.
A Fund would normally purchase call options on foreign currency in
anticipation of an increase in the U.S. dollar value of currency in which
securities to be acquired by a Fund are quoted or denominated. The purchase of
a call option would entitle the Fund, in return for the premium paid, to
purchase specified currency at a specified price during the option period. A
Fund would ordinarily realize a gain if, during the option period, the value of
such currency exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise the Fund would realize either no gain or a loss on
the purchase of the call option.
A Fund would normally purchase put options in anticipation of a decline in
the U.S. dollar value of currency in which securities in its portfolio are
quoted or denominated ("protective puts"). The purchase of a put option would
entitle a Fund, in exchange for the premium paid, to sell specified currency at
a specified price during the option period. The purchase of protective puts is
designed merely to offset or hedge against a decline in the dollar value of a
Fund's portfolio securities due to currency exchange rate fluctuations. A Fund
would ordinarily realize a gain if, during the option period, the value of the
underlying currency decreased below the exercise price sufficiently to more than
cover the premium and transaction costs; otherwise the Fund would realize either
no gain or a loss on the purchase of the put option. Gains and losses on the
purchase of protective put options would tend to be offset by countervailing
changes in the value of underlying currency or portfolio securities.
In addition to using options for the hedging purposes described above,
Balanced, International Equity, Emerging Markets Equity and Asia Growth Funds
may use options on currency to seek to increase
B-27
<PAGE>
total return. Balanced, International Equity, Emerging Markets Equity and Asia
Growth Funds may write (sell) covered put and call options on any currency in
order to realize greater income than would be realized on portfolio securities
transactions alone. However, in writing covered call options for additional
income, Balanced, International Equity, Emerging Markets Equity and Asia Growth
Funds may forego the opportunity to profit from an increase in the market value
of the underlying currency. Also, when writing put options, Balanced,
International Equity, Emerging Markets Equity and Asia Growth Funds accept, in
return for the option premium, the risk that they may be required to purchase
the underlying currency at a price in excess of the currency's market value at
the time of purchase.
Balanced, International Equity, Emerging Markets Equity and Asia Growth
Funds would normally purchase call options to seek to increase total return in
anticipation of an increase in the market value of a currency. Balanced,
International Equity, Emerging Markets Equity and Asia Growth Funds 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 Balanced, International Equity, Emerging Markets
Equity and Asia Growth Funds would realize either no gain or a loss on the
purchase of the call option. Put options may be purchased by a Fund for the
purpose of benefiting from a decline in the value of currencies which it does
not own. A Fund would ordinarily realize a gain if, during the option period,
the value of the underlying currency decreased below the exercise price
sufficiently to more than cover the premium and transaction costs. Otherwise
the Fund would realize either no gain or a loss on the purchase of the put
option.
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 a Fund will
generally purchase or write only those options for which there appears to be an
active secondary market, there is no assurance that a liquid secondary market on
an exchange will exist for any particular option, or at any particular time.
For some options no secondary market on an exchange may exist. In such event,
it might not be possible to effect closing transactions in particular options,
with the result that a Fund would have to exercise its options in order to
realize any profit and would incur transaction costs upon the sale of underlying
securities pursuant to the exercise of put options. If a Fund as a covered call
option writer is unable to effect a closing purchase transaction in a secondary
market, it 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.
A Fund may purchase and write over-the-counter options to the extent
consistent with its limitation on investments in illiquid securities. Trading
in over-the-counter options is subject to the risk that the other party will be
unable or unwilling to close out options purchased or written by a Fund.
The amount of the premiums which a Fund may pay or receive may be adversely
affected as new or existing institutions, including other investment companies,
engage in or increase their option purchasing and writing activities.
CURRENCY SWAPS, MORTGAGE SWAPS, INDEX SWAPS AND INTEREST RATE SWAPS, CAPS,
==========================================================================
FLOORS AND COLLARS
==================
The Balanced, International Equity, Emerging Markets Equity and Asia Growth
Funds may, with respect to up to 5% of their net assets, enter into currency
swaps for both hedging purposes and to seek to increase total return. In
addition, the Balanced Fund may, with respect to 5% of its net assets, enter
B-28
<PAGE>
into mortgage, index and interest rate swaps and other interest rate swap
arrangements such as rate caps, floors and collars, for hedging purposes or to
seek to increase total return. Currency swaps involve the exchange by a Fund
with another party of their respective rights to make or receive payments in
specified currencies. Interest rate swaps involve the exchange by a Fund with
another party of their respective commitments to pay or receive interest, such
as an exchange of fixed rate payments for floating rate payments. Mortgage
swaps are similar to interest rate swaps in that they represent commitments to
pay and receive interest. The notional principal amount, however, is tied to a
reference pool or pools of mortgages. Index swaps involve the exchange by a
Fund with another party of the respective amounts payable with respect to a
notional principal amount at interest rates equal to two specified indices. The
purchase of an interest rate cap entitles the purchaser, to the extent that a
specified index exceeds a predetermined interest rate, to receive payment of
interest on a notional principal amount from the party selling such interest
rate cap. The purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below a predetermined interest rate, to
receive payments of interest on a notional principal amount from the party
selling the interest rate floor. An interest rate collar is the combination of
a cap and a floor that preserves a certain return within a predetermined range
of interest rates.
A Fund will enter into interest rate, mortgage and index swaps only on a net
basis, which means that the two payment streams are netted out, with the Fund
receiving or paying, as the case may be, only the net amount of the two
payments. Interest rate, index and mortgage swaps do not involve the delivery
of securities, other underlying assets or principal. Accordingly, the risk of
loss with respect to interest rate, index and mortgage swaps is limited to the
net amount of interest payments that the Fund is contractually obligated to
make. If the other party to an interest rate, index or mortgage swap defaults,
the Fund's risk of loss consists of the net amount of interest payments that the
Fund is contractually entitled to receive. In contrast, currency swaps usually
involve the delivery of a gross payment stream in one designated currency in
exchange for the gross payment stream in another designated currency.
Therefore, the entire payment stream under a currency swap is subject to the
risk that the other party to the swap will default on its contractual delivery
obligations. To the extent that the net amount payable under an interest rate,
index or mortgage swap and the entire amount of the payment stream payable by a
Fund under a currency swap or an interest rate floor, cap or collar is held in a
segregated account consisting of cash or liquid assets the Funds and the
Advisers believe that swaps do not constitute senior securities under the Act
and, accordingly, will not treat them as being subject to a Fund's borrowing
restrictions.
A Fund will not enter into swap transactions unless the unsecured commercial
paper, senior debt or claims paying ability of the other party thereto is
considered to be investment grade by the Adviser.
The use of interest rate, mortgage, index and currency swaps, as well as
interest rate caps, floors and collars, is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If an Adviser is incorrect in its
forecasts of market values, interest rates and currency exchange rates, the
investment performance of a Fund would be less favorable than it would have been
if this investment technique were not used. The staff of the SEC currently take
the position that swaps, caps, floors and collars are illiquid and thus subject
to a Fund's 15% limitation on investments in illiquid securities.
LENDING OF PORTFOLIO SECURITIES
===============================
Each Fund may lend portfolio securities. Under present regulatory policies,
such loans may be made to institutions such as brokers or dealers and would be
required to be secured continuously by collateral in cash, cash equivalents or
U.S. Government securities maintained on a current basis at an
B-29
<PAGE>
amount at least equal to the market value of the securities loaned. A Fund
would be required to have the right to call a loan and obtain the securities
loaned at any time on five days' notice. For the duration of a loan, a Fund
would continue to receive the equivalent of the interest or dividends paid by
the issuer on the securities loaned and would also receive compensation from
investment of the collateral. A Fund would not have the right to vote any
securities having voting rights during the existence of the loan, but a Fund
would call the loan in anticipation of an important vote to be taken among
holders of the securities or the giving or withholding of their consent on a
material matter affecting the investment. As with other extensions of credit
there are risks of delay in recovering, or even loss of rights in, the
collateral should the borrower of the securities fail financially. However, the
loans would be made only to firms deemed by the Advisers to be of good standing,
and when, in the judgment of the Advisers, the consideration which can be
earned currently from securities loans of this type justifies the attendant
risk. If the Advisers determine to make securities loans, it is intended that
the value of the securities loaned would not exceed one-third of the value of
the total assets of a Fund.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
==============================================
Each Fund may purchase securities on a when-issued basis or purchase or
sell securities on a forward commitment basis. These transactions involve a
commitment by a Fund to purchase or sell securities at a future date. The price
of the underlying securities (usually expressed in terms of yield) and the date
when the securities will be delivered and paid for (the settlement date) are
fixed at the time the transaction is negotiated. When-issued purchases and
forward commitment transactions are negotiated directly with the other party,
and such commitments are not traded on exchanges. A Fund will purchase
securities on a when-issued basis or purchase or sell securities on a forward
commitment basis only with the intention of completing the transaction and
actually purchasing or selling the securities. If deemed advisable as a matter
of investment strategy, however, a Fund may dispose of or negotiate a commitment
after entering into it. A Fund may realize a capital gain or loss in connection
with these transactions. For purposes of determining a Fund's duration, the
maturity of when-issued or forward commitment securities will be calculated from
the commitment date. A Fund is required to hold and maintain in a segregated
account with the Fund's custodian until three days prior to the settlement date,
cash and liquid assets in an amount sufficient to meet the purchase price.
Alternatively, a Fund may enter into offsetting contracts for the forward sale
of other securities that it owns. Securities purchased or sold on a when-issued
or forward commitment basis involve a risk of loss if the value of the security
to be purchased declines prior to the settlement date or if the value of the
security to be sold increases prior to the settlement date.
INVESTMENT IN UNSEASONED COMPANIES
==================================
Each Fund may invest up to 5% of its net assets, calculated at the time of
purchase, in companies (including predecessors) which have operated less than
three years, except that this limitation does not apply to debt securities which
have been rated investment grade or better by at least one nationally recognized
statistical rating organization. The securities of such companies may have
limited liquidity, which can result in their being priced higher or lower than
might otherwise be the case. In addition, investments in unseasoned companies
are more speculative and entail greater risk than do investments in companies
with an established operating record.
OTHER INVESTMENT COMPANIES
==========================
A Fund reserves the right to invest up to 5% of its net assets in the
securities of other investment companies but may not acquire more than 3% of the
voting securities of any other investment company. Pursuant to an exemptive
order obtained from the SEC, the Funds may invest in money market funds for
B-30
<PAGE>
which an Adviser or any of its affiliates serves as investment adviser. A Fund
will indirectly bear its proportionate share of any management fees and other
expenses paid by investment companies in which it invests in addition to the
advisory and administration fees paid by the Fund. However, to the extent that
the Fund invests in a money market fund for which an Adviser or any of its
affiliates acts as adviser, the advisory and administration fees payable by the
Fund to an Adviser will be reduced by an amount equal to the Fund's
proportionate share of the advisory and administration fees paid by such money
market fund to the Adviser.
REPURCHASE AGREEMENTS
=====================
Each Fund may enter into repurchase agreements with selected broker-dealers,
banks or other financial institutions. A repurchase agreement is an arrangement
under which a Fund purchases securities and the seller agrees to repurchase the
securities within a particular time and at a specified price. Custody of the
securities is maintained by a Fund's custodian. The repurchase price may be
higher than the purchase price, the difference being income to a Fund, or the
purchase and repurchase prices may be the same, with interest at a stated rate
due to a Fund together with the repurchase price on repurchase. In either case,
the income to a Fund is unrelated to the interest rate on the security subject
to the repurchase agreement.
For purposes of the Act and generally for tax purposes, a repurchase
agreement is deemed to be a loan from a Fund to the seller of the security. For
other purposes, it is not clear whether a court would consider the security
purchased by a Fund subject to a repurchase agreement as being owned by a Fund
or as being collateral for a loan by a Fund to the seller. In the event of
commencement of bankruptcy or insolvency proceedings with respect to the seller
of the security before repurchase of the security under a repurchase agreement,
a Fund may encounter delay and incur costs before being able to sell the
security. Such a delay may involve loss of interest or a decline in price of
the security. If the court characterizes the transaction as a loan and a Fund
has not perfected a security interest in the security, a Fund may be required to
return the security to the seller's estate and be treated as an unsecured
creditor of the seller. As an unsecured creditor, a Fund would be at risk of
losing some or all of the principal and interest involved in the transaction.
As with any unsecured debt instrument purchased for a Fund, the Advisers
seek to minimize the risk of loss from repurchase agreements by analyzing the
creditworthiness of the obligor, in this case the seller of the security. Apart
from the risk of bankruptcy or insolvency proceedings, there is also the risk
that the seller may fail to repurchase the security. However, if the market
value of the security subject to the repurchase agreement becomes less than the
repurchase price (including accrued interest), a Fund will direct the seller of
the security to deliver additional securities so that the market value of all
securities subject to the repurchase agreement equals or exceeds the repurchase
price. Certain repurchase agreements which provide for settlement in more than
seven days can be liquidated before the nominal fixed term on seven days or less
notice. Such repurchase agreements will be regarded as liquid instruments.
In addition, a Fund, together with other registered investment companies
having advisory agreements with the Advisers or their affiliates, may transfer
uninvested cash balances into a single joint account, the daily aggregate
balance of which will be invested in one or more repurchase agreements.
INVESTMENT RESTRICTIONS
B-31
<PAGE>
The following investment restrictions have been adopted by the Trust as
fundamental policies that cannot be changed without the affirmative vote of the
holders of a majority (as defined in the Act) of the outstanding voting
securities of the affected Fund. The investment objective of each Fund and all
other investment policies or practices of each Fund are considered by the Trust
not to be fundamental and accordingly may be changed without shareholder
approval. See "Investment Objectives and Policies" in the Prospectus. For
purposes of the Act, "majority" means the lesser of (a) 67% or more of the
shares of the Trust or a Fund present at a meeting, if the holders of more than
50% of the outstanding shares of the Trust or a Fund are present or represented
by proxy, or (b) more than 50% of the shares of the Trust or a Fund. For
purposes of the following limitations, any limitation which involves a maximum
percentage shall not be considered violated unless an excess over the percentage
occurs immediately after, and is caused by, an acquisition or encumbrance of
securities or assets of, or borrowings by, a Fund. With respect to the Funds'
fundamental investment restriction no. 3, asset coverage of at least 300% (as
defined in the Act), inclusive of any amounts borrowed, must be maintained at
all times.
A Fund may not:
===============
(1) make any investment inconsistent with the Fund's classification as
a diversified company under the Investment Company Act of 1940, as
amended (the "Act"). This restriction does not, however, apply to
any Fund classified as a non-diversified company under the Act.
(2) invest 25% or more of its total assets in the securities of one or
more issuers conducting their principal business activities in the
same industry (excluding the U.S. Government or any of its
agencies or instrumentalities).
(3) borrow money, except (a) the Fund may borrow from banks (as
defined in the Act) or through reverse repurchase agreements in
amounts up to 33-1/3% of its total assets (including the amount
borrowed), (b) the Fund may, to the extent permitted by applicable
law, borrow up to an additional 5% of its total assets for
temporary purposes, (c) the Fund may obtain such short-term
credits as may be necessary for the clearance of purchases and
sales of portfolio securities, (d) the Fund may purchase
securities on margin to the extent permitted by applicable law and
(e) the Fund may engage transactions in mortgage dollar rolls
which are accounted for as financings.
(4) make loans, except through (a) the purchase of debt obligations in
accordance with the Fund's investment objective and policies, (b)
repurchase agreements with banks, brokers, dealers and other
financial institutions, and (c) loans of securities as permitted
by applicable law.
(5) underwrite securities issued by others, except to the extent that
the sale of portfolio securities by the Fund may be deemed to be
an underwriting.
(6) purchase, hold or deal in real estate, although a Fund may
purchase and sell securities that are secured by real estate or
interests therein, securities of real estate investment trusts and
mortgage-related securities and may hold and sell real estate
acquired by a Fund as a result of the ownership of securities.
(7) invest in commodities or commodity contracts, except that the Fund
may invest in currency and financial instruments and contracts
that are commodities or commodity contracts.
B-32
<PAGE>
(8) issue senior securities to the extent such issuance would violate
applicable law.
Each Fund may, notwithstanding any other fundamental investment restriction
or policy, invest some or all of its assets in a single open-end investment
company or series thereof with substantially the same investment objective,
restrictions and policies as the Fund.
In addition to the fundamental policies mentioned above, the Trustees have
adopted the following non-fundamental policies which can be changed or amended
by action of the Trustees without approval of shareholders.
A Fund may not:
(a) Invest in companies for the purpose of excercising control or
management.
(b) Invest more than 15% of the Fund's net assets in illiquid investments
including repurchase agreements maturing in more than seven days,
securities which are not readily marketable and restricted securities
not eligible for resale pursuant to Rule 144A under the 1933 Act.
(c) Purchase additional securities if the Fund's borrowings (excluding
covered mortgage dollar rolls) exceed 5% of its net assets.
(d) Make short sales of securities, except short sales against the box.
B-33
<PAGE>
MANAGEMENT
Information pertaining to the Trustees and officers of the Trust is set
forth below. Trustees and officers deemed to be "interested persons" of the
Trust for purposes of the Act are indicated by an asterisk.
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- ------------------------------------------------------------------------------------------
<S> <C> <C>
Ashok N. Bakhru, 53 Chairman Executive Vice President-Finance and Administration and Chief Financial Officer, Coty Inc.
1325 Ave. of Americas & Trustee (since April 1996); President, ABN Associates (June 1994 through March 1996); Senior Vice
New York, NY 10019 President of Scott Paper Company until June 1994; Director of Arkwright Mutual Insurance
Company; Trustee of International House of Philadelphia; Member of Cornell University
Council;Trustee of the Walnut Street Theater.
*David B. Ford, 51 Trustee Managing Director, Goldman Sachs (since 1996); General Partner, Goldman Sachs (1986-1996); Co-
One New York Plaza Head of Goldman Sachs Asset Management (since December 1994).
New York, NY 10004
*Douglas C. Grip, 35 Trustee Vice President, Goldman Sachs (since May 1996); & President President, MFS Retirement Services
One New York Plaza Inc., of Massachusetts Financial Services (prior thereto).
New York, NY 10004
*John P. McNulty, 44 Trustee Managing Director, Goldman Sachs (since 1996); One General Partner of Goldman Sachs (1990-1994
New York Plaza and 1995-1996); Co-Head of Goldman Sachs Asset Management (since November 1995);
New York, NY 10004 Limited Partner of Goldman Sachs (1994 to November 1995).
Mary P. McPherson, 60 Trustee President of Bryn Mawr College (since 1978); Director of Josiah Macy, Jr, Foundation (since
Taylor Hall 1977); Director of the Philadelphia Contributionship (since 1985); Director of Amherst College
Bryn Mawr, PA 19010 (since 1986); Director of Dayton Hudson Corporation (since 1988); Director of the Spencer
Foundation (since 1993); and member of PNC Advisory Board (since 1993).
</TABLE>
B-34
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- --------------------------- --------------------------------- --------------------------------------------------------------------
<S> <C> <C>
*Alan A. Shuch, 48 Trustee Limited Partner, Goldman Sachs (since 1994); Director and Vice
One New York Plaza President of Goldman Sachs Funds Management Inc. (from April
New York, NY 10004 1990 to November 1994); President and Chief Operating Officer, GSAM
(from September 1988 to November 1994).
Jackson W. Smart, 66 Trustee Chairman, Executive Committee, First Commonwealth, Inc. (a managed
One Northfleld Plaza # 218 dental care company, since January 1996); Chairman and
Northfield, IL 60093 Chief Executive Officer, MSP Communications Inc. (a company engaged
in radio broadcasting) (since November 1988), Director, Federal
Express Corporation (since 1976), Evanston Hospital Corporation
(since 1980), First Commonwealth, Inc. (since 1988) and North
American Private Equity Group (a venture capital fund).
William H. Springer, 67 Trustee Vice Chairman and Chief Financial and Administrative Officer,
701 Morningside Drive (February 1987 to June 1991) of Ameritech (a telecommunications
Lake Forest, IL 60045 holding company; Director, Walgreen Co. (a retail drug store
business); Director of Baker, Fentress & Co. (a closed end,
nondiversified management investment company) (April 1992 to
present).
Richard P. Strubel, 57 Trustee Managing Director, Tandem Partners, Inc. (since 1990); President and
70 West Madison St. Chief Executive Officer, Microdot, Inc. (a diversified manufacturer
Ste. 1400 of fastening systems and connectors)(January 1984 to October 1994).
Chicago, IL 60602
*Scott M. Gilman, 37 Treasurer Director, Mutual Funds Administration, Goldman Sachs Asset
One New York Plaza Management (since April 1994); Assistant Treasurer, Goldman Sachs
New York, NY 10004 Funds Management, Inc. (since March 1993); Vice President, Goldman
Sachs (since March 1990).
*John M. Perlowski, 32 Assistant Vice President, Goldman Sachs (since July 1995); Director, Investors
One New York Plaza Treasurer Bank and Trust, November 1993 to July 1995); Audit Manager of Arthur
New York, NY 10004 Andersen LLP (prior thereto).
*Pauline Taylor, 50 Vice Vice President of Goldman Sachs (since June 1992); Director
4900 Sears Tower President Shareholder Servicing (since June 1992).
Chicago, IL 60606
</TABLE>
B-35
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- --------------------------- --------------------------------- --------------------------------------------------------------------
<S> <C> <C>
*John W. Mosior, 58 Vice Vice President, Goldman Sachs and Manager of Shareholder Servicing
4900 Sears Tower President of GSAM (since November 1989).
Chicago, IL 60606
8Nancy L. Mucker, 47 Vice Vice President, Goldman Sachs (since April 1985); Manager of
4900 Sears Tower President Shareholder Servicing of GSAM since November 1989).
Chicago, IL 60606
*Michael J. Richman, 36 Secretary Associate General Counsel of Goldman Sachs Asset Management (since
85 Broad Street February 1994); Vice President and Assistant General Counsel of
New York, NY 10004 Goldman Sachs (since June 1992); Counsel to the Funds Group, GSAM
(since June 1992); Partner, Hale and Dorr (September 1991 to June
1992).
*Howard B. Surloff, 31 Assistant Assistant General Counsel and Vice President, Goldman Sachs (since
85 Broad Street Secretary November 1993 and May 1994 respectively);Counsel to the Funds Group,
New York, NY 10004 Goldman Sachs Asset Management (since November 1993); Associate of
Shereff Friedman, Hoffman & Goodman (prior thereto).
*Valerie A. Zondorak, 31 Assistant Vice President, Goldman Sachs (since March 1997); Counsel to the
85 Broad Street Secretary Funds Group, Goldman Sachs Asset Management (since March 1997);
New York, New York 10004 Associate of Shereff Friedman, Hoffman & Goodman (prior thereto).
*Steven E. Hartstein, 33 Assistant Legal Products Analyst, Goldman Sachs (June 1993 to present); Funds
85 Broad Street Secretary Compliance Officer, Citibank Global Asset Management (August 1991 to
New York, NY 10004 June 1993).
*Deborah Farrell, 25 Assistant Administrative Assistant, Goldman Sachs since January 1994. Formerly
85 Broad Street Secretary at Cleary Gottlieb, Steen and Hamilton.
New York, NY 10004
Kaysie P. Uniacke, 36 Assistant Vice President and Senior Portfolio Manager, Goldman Sachs Asset
One New York Plaza Secretary Management (since 1988).
New York, NY 10004
</TABLE>
B-36
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- --------------------------- --------------------------------- --------------------------------------------------------------------
<S> <C> <C>
*Elizabeth D.
Anderson, 27 Assistant Portfolio Manager, GSAM (since April 1996); Junior Portfolio
One New York Plaza Secretary Manager, Goldman Sachs Asset Management (since 1993); Funds Trading
New York, NY 10004 Assistant, GSAM (1993-1995); Compliance Analyst, Prudential
Insurance (1991-1993).
</TABLE>
As of March 24,1997, the Trustees and officers of the Trust as a group
owned less than 1% of the outstanding shares of beneficial interest of each
Fund.
The Trust pays each Trustee, other than those who are "interested persons"
of Goldman Sachs, a fee for each Trustee meeting attended and an annual fee.
Such Trustees are also reimbursed for travel expenses incurred in connection
with attending such meetings.
B-37
<PAGE>
The following table sets forth certain information with respect to the
compensation of each Trustee of the Trust (or its predecessors) for the one-year
period ended January 31, 1997:
<TABLE>
<CAPTION>
Pension or Total
Retirement Compensation
Benefits from Goldman Sachs
Aggregate Accrued as Mutual Funds
Compensation Part of (including the
Name of Trustee from the Funds*** Funds' Expenses Funds)*
- ---------------------- ----------------- --------------- ------------------
<S> <C> <C> <C>
Paul C. Nagel, Jr.** $3,775 $0 $62,450
Ashok N. Bakhru 3,969 0 69,299
Marcia L. Beck 0 0 0
David B. Ford 0 0 0
Douglas C. Grip 0 0 0
Alan A. Shuch 0 0 0
Jackson W. Smart 3,388 0 58,954
William H. Springer 3,388 0 58,954
Richard P. Strubel 3,388 0 58,954
</TABLE>
______________
* The Goldman Sachs Mutual Funds consisted of 29 mutual funds on January
31, 1997.
** Retired as of June 30, 1996.
*** Effective May 1, 1997, the Funds were reorganized from series of
Goldman Sachs Equity Portfolios, Inc. (the "Corporation") into the
Trust. The amounts shown in the column reflect compensation paid to
the Trustees by the Corporation.
B-38
<PAGE>
MANAGEMENT SERVICES
===================
As stated in the Funds' Prospectus, GSFM, One New York Plaza, New York, New
York, a Delaware limited partnership and an affiliate of Goldman Sachs, 85 Broad
Street, New York, New York, serves as investment adviser to CORE U.S. Equity and
Capital Growth Funds. GSAM, One New York Plaza, New York, New York, a separate
operating division of Goldman Sachs, serves as investment adviser to Balanced,
Growth and Income, CORE Large Cap Growth, Mid Cap Equity and Small Cap Equity
Funds. GSAMI, 133 Peterborough Court, London, England, EC4A 2BB serves as
investment adviser to International Equity, Emerging Markets Equity and Asia
Growth Funds. See "Management" in the Funds' Prospectus for a description of the
applicable Adviser's duties to the Funds.
Founded in 1869, Goldman Sachs is among the oldest and largest investment
banking firms in the United States. Goldman Sachs is a leader in developing
portfolio strategies and in many fields of investing and financing,
participating in financial markets worldwide and serving individuals,
institutions, corporations and governments. Goldman Sachs is also among the
principal market sources for current and thorough information on companies,
industrial sectors, markets, economies and currencies, and trades and makes
markets in a wide range of equity and debt securities 24-hours a day. The firm
is headquartered in New York and has offices throughout the U.S. and in Beijing,
Frankfurt, George Town, Hong Kong, London, Madrid, Mexico City, Milan, Montreal,
Osaka, Paris, Sao Paulo, Seoul, Shanghai, Singapore, Sydney, Taipei, Tokyo,
Toronto, Vancouver and Zurich. It has trading professionals throughout the
United States, as well as in London, Tokyo, Hong Kong and Singapore. The active
participation of Goldman Sachs in the world's financial markets enhances its
ability to identify attractive investments.
The Advisers are able to draw on the substantial research and market
expertise of Goldman Sachs whose investment research effort is one of the
largest in the industry. With an annual equity research budget approaching $160
million, the Goldman Sachs Global Investment Research Department covers
approximately 1,700 companies, including approximately 1,000 U.S. corporations
in 60 industries. The in-depth information and analyses generated by Goldman
Sachs' research analysts are available to the Advisers. For more than a decade,
Goldman Sachs has been among the top-ranked firms in Institutional Investor's
annual "All-America Research Team" survey. In addition, many of Goldman Sachs'
economists, securities analysts, portfolio strategists and credit analysts have
consistently been highly ranked in respected industry surveys conducted in the
U.S. and abroad. Goldman Sachs is also among the leading investment firms using
quantitative analytics (now used by a growing number of investors) to structure
and evaluate portfolios.
In managing the Funds, the Advisers have access to Goldman Sachs' economics
research. The Economics Research Department conducts economic, financial and
currency markets research which analyzes economic trends and interest and
exchange rate movement worldwide. The Economics Research Department tracks
factors such as inflation and money supply figures, balance of trade figures,
economic growth, commodity prices, monetary and fiscal policies, and political
events that can influence interest rates and currency trends. The success of
Goldman Sachs' international research team has brought wide recognition to its
members. The team has earned top rankings in the Institutional Investor's
annual "All British Research Team Survey" in the following categories:
Economics (U.K.) 1986-1993; Economics/International 1989-1993; and Currency
Forecasting 1986-1993. In addition, the team has also earned top rankings in
the annual "Extel Financial Survey" of U.K. investment managers in the following
categories: U.K. Economy 1989-1995; International Economies 1986, 1988-1995; and
Currency Movements 1986-1993.
In allocating assets among foreign countries and currencies for the Funds
which can invest in foreign securities (in particular, the International Equity,
Emerging Markets Equity and Asia Growth Funds), the Advisers will have access to
the Global Asset Allocation Model. The model is based on the observation that
the prices of all financial assets, including foreign currencies, will adjust
until investors globally are
B-39
<PAGE>
comfortable holding the pool of outstanding assets. Using the model, the
Advisers will estimate the total returns from each currency sector which are
consistent with the average investor holding a portfolio equal to the market
capitalization of the financial assets among those currency sectors. These
estimated equilibrium returns are then combined with the expectations of Goldman
Sachs' research professionals to produce an optimal currency and asset
allocation for the level of risk suitable for a Fund given its investment
objectives and criteria.
Each Fund's management agreement provides that the Advisers may render
similar services to others as long as the services provided by the Advisers
thereunder are not impaired thereby.
The CORE Large Cap Growth and Emerging Markets Equity Funds management
agreements were initially approved by the Trustees, including a majority of the
non-interested Trustees (as defined below) who are not parties to the management
agreement, on April 23, 1997. The other Funds' management agreements were most
recently approved by the Trustees, including a majority of the Trustees who are
not parties to the management agreement or "interested persons" (as such term is
defined in the Act) of any party thereto (the "non-interested Trustees"), on
April 23, 1997. These arrangements were most recently approved by the
shareholders of each Fund (other than CORE Large Cap Growth and Emerging Markets
Equity Funds) on April 21, 1997. Each management agreement will remain in
effect until June 30, 1998 from year to year thereafter provided such
continuance is specifically approved at least annually by (a) the vote of a
majority of the outstanding voting securities of such Fund or a majority of the
Trustees, and (b) the vote of a majority of the non-interested Trustees, cast in
person at a meeting called for the purpose of voting on such approval. Each
management agreement will terminate automatically if assigned (as defined in the
Act) and is terminable at any time without penalty by the Trustees or by vote of
a majority of the outstanding voting securities of the affected Fund on 60 days'
written notice to the Adviser and by the Adviser on 60 days' written notice to
the Trust.
Pursuant to the management agreements the Advisers are entitled to receive
the fees listed below, payable monthly of such Fund's average daily net assets.
In addition, the Advisers voluntarily agreed to limit its management fee to an
annual rate also listed below:
Management Management
With Fee Without Fee
Fund Limitations Limitations
- ---- ----------- -----------
GSAM
Balanced Fund 0.65% 0.65%
Growth and Income Fund 0.70% 0.70%
CORE Large Cap Growth Fund 0.60% 0.75%
Mid Cap Equity Fund 0.75% 0.75%
Small Cap Equity Fund 1.00% 1.00%
GSFM
CORE U.S. Equity Fund 0.75% 0.59%
Capital Growth Fund 1.00% 1.00%
GSAMI
International Equity Fund 1.00% 0.89%
Emerging Markets Equity Fund 1.20% 1.10%
Asia Growth Fund 1.00% 0.86%
B-40
<PAGE>
GSAM, GSFM and GSAMI may discontinue or modify the above limitations in the
future at their discretion, although they have no current intention to do so.
Prior to May 1, 1997, the Funds then in operation had separate investment
advisory (and subadvisory, in the case of the International Equity Fund) and
administration agreements. Effective May 1, 1997, the services under such
agreements were combined in the management agreement. The services required to
be performed for the Funds and the combined advisory (and subadvisory, in the
case of the International Equity Fund) and administration fees payable by the
Funds under the former advisory (and subadvisory, in the case of the
International Equity Fund) and administration agreements are identical to the
services and fees under the management agreement.
For the last three fiscal years the amounts of the combined investment
advisory (and subadvisory, in the case of the International Equity Fund) and
administration fees incurred by each Fund then in existence were as follows:
1997 1996 1995
============= ============= =============
Balanced Fund $ 402,183 $ 193,041 $ 8,858
Growth and Income Fund 3,541,318 2,225,553 790,893
CORE U.S. Equity Fund 1,667,381/3/ 817,563/3/ 693,383/2/
CORE Large Cap Growth Fund/1/ N/A N/A N/A
Capital Growth Fund 8,697,265 9,335,745 8,724,828
Mid Cap Equity Fund/4/ 964,945 489,043 N/A
International Equity Fund 4,124,076/3/ 2,794,872/2/ 3,186,509/2/
Small Cap Equity Fund 2,130,703 2,908,839 3,385,899
Emerging Market Equity Fund/1/ N/A N/A N/A
Asia Growth Fund 2,221,857/3/ 1,563,641/2/ 553,084/2/
- ----------------------------
1 Not Operational.
2 Does not give effect to the agreement (which was not in effect during such
fiscal years) by GSFM, GSAM and GSAMI to limit management fees to 0.59%,
0.89% and 0.86%, respectively of CORE U.S. Equity, International Equity and
Asia Growth Fund's average daily net assets.
3 Gives effect to the agreement (which was in effect as of June 15, 1995) by
GSFM to limit management fees to 0.59%, 0.89% and 0.86%, respectively, of
the CORE U.S. Equity, International Equity and Asia Growth Fund's average
daily net assets. For the fiscal year ended January 31, 1996, had
limitations not been in effect, CORE U.S. Equity Fund would have paid
$1,019,639 in investment management fees. For the fiscal year ended
January 31, 1997, had limitations not been in effect, CORE U.S. Equity,
International Equity and Asia Growth Funds would have paid $2,119,552,
$4,638,203 and $2,583,555, respectively, in investment management fees.
4 Commenced operations on August 1, 1995.
Under the Management Agreement, each Adviser also: (i) supervises all non-
advisory operations of each Fund that it advisers; (ii) provides personnel to
perform such executive, administrative and clerical services as are reasonably
necessary to provide effective administration of each Fund; (iii) arranges for
at each Fund's expense (a) the preparation of all required tax returns, (b) the
preparation and submission of reports to existing shareholders, (c) the periodic
updating of prospectuses and statements of additional information and (d) the
preparation of reports to be filed with the SEC and other regulatory
authorities; (iv) maintains each Fund's records; and (v) provides office space
and all necessary office equipment and services.
B-41
<PAGE>
ACTIVITIES OF GOLDMAN SACHS AND ITS AFFILIATES AND OTHER ACCOUNTS MANAGED
BY GOLDMAN SACHS. The involvement of the Advisers 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 Funds or impede their investment activities.
Goldman Sachs and its affiliates, including, without limitation, the
Advisers and their advisory affiliates, have proprietary interests in, and may
manage or advise with respect to, accounts or funds (including separate accounts
and other funds and collective investment vehicles) which have investment
objectives similar to those of the Funds and/or which engage in transactions in
the same types of securities, currencies and instruments as the Funds. Goldman
Sachs and its affiliates are major participants in the global currency,
equities, swap and fixed income markets, in each case both on a proprietary
basis and for the accounts of customers. As such, Goldman Sachs and its
affiliates are actively engaged in transactions in the same securities,
currencies and instruments in which the Funds invest. Such activities could
affect the prices and availability of the securities, currencies and instruments
in which the Funds will invest, which could have an adverse impact on each
Fund's performance. Such transactions, particularly in respect of proprietary
accounts or customer accounts other than those included in the Advisers' and
their advisory affiliates' asset management activities, will be executed
independently of the Funds' transactions and thus at prices or rates that may be
more or less favorable. When the Advisers and their advisory affiliates seek
to purchase or sell the same assets for their managed accounts, including the
Funds, the assets actually purchased or sold may be allocated among the accounts
on a basis determined in its good faith discretion to be equitable. In some
cases, this system may adversely affect the size or the price of the assets
purchased or sold for the Funds.
From time to time, the Funds' activities may be restricted because of
regulatory restrictions applicable to Goldman Sachs and its affiliates, and/or
their internal policies designed to comply with such restrictions. As a result,
there may be periods, for example, when the Advisers and/or their affiliates
will not initiate or recommend certain types of transactions in certain
securities or instruments with respect to which the Advisers and/or their
affiliates are performing services or when position limits have been reached.
In connection with their management of the Funds, the Advisers may have
access to certain fundamental analysis and proprietary technical models
developed by Goldman Sachs and other affiliates. The Advisers will not be under
any obligation, however, to effect transactions on behalf of the Funds in
accordance with such analysis and models. In addition, neither Goldman Sachs
nor any of its affiliates will have any obligation to make available any
information regarding their proprietary activities or strategies, or the
activities or strategies used for other accounts managed by them, for the
benefit of the management of the Funds and it is not anticipated that the
Advisers will have access to such information for the purpose of managing the
Funds. The proprietary activities or portfolio strategies of Goldman Sachs and
its affiliates or the activities or strategies used for accounts managed by them
or other customer accounts could conflict with the transactions and strategies
employed by the Advisers in managing the Funds.
The results of each Fund's investment activities may differ significantly
from the results achieved by the Advisers and their affiliates for their
proprietary accounts or accounts (including investment companies or collective
investment vehicles) managed or advised by them. It is possible that Goldman
Sachs and its affiliates and such other accounts will achieve investment results
which are substantially more or less favorable than the results achieved by a
Fund. Moreover, it is possible that a Fund will sustain losses during periods
in which Goldman Sachs and its affiliates achieve significant profits on their
trading for proprietary or other accounts. The opposite result is also
possible.
B-42
<PAGE>
The investment activities of Goldman Sachs and its affiliates for their
proprietary accounts and accounts under their management may also limit the
investment opportunities for the Fund in certain emerging markets in which
limitations are imposed upon the aggregate amount of investment, in the
aggregate or individual issuers, by affiliated foreign investors.
An investment policy committee which may include partners of Goldman Sachs
and its affiliates may develop general policies regarding a Fund's activities
but will not be involved in the day-to-day management of such Fund. In such
instances, those individuals may, as a result, obtain information regarding the
Fund's proposed investment activities which is not generally available to the
public. In addition, by virtue of their affiliation with Goldman Sachs, any
such member of an investment policy committee will have direct or indirect
interests in the activities of Goldman Sachs and its affiliates in securities
and investments similar to those in which the Fund invests.
In addition, certain principals and certain of the employees of the
Advisers are also principals or employees of Goldman Sachs or their affiliated
entities. As a result, the performance by these principals and employees of
their obligations to such other entities may be a consideration of which
investors in the Funds should be aware.
Each Adviser may enter into transactions and invest in currencies or
instruments on behalf of a Fund in which customers of Goldman Sachs serve as the
counterparty, principal or issuer. In such cases, such party's interests in the
transaction will be adverse to the interests of a Fund, and such party may have
no incentive to assure that the Funds obtain the best possible prices or terms
in connection with the transactions. Goldman Sachs and its affiliates may also
create, write or issue derivative instruments for customers of Goldman Sachs or
its affiliates, the underlying securities or instruments of which may be those
in which a Fund invests or which may be based on the performance of a Fund. The
Funds may, subject to applicable law, purchase investments which are the subject
of an underwriting or other distribution by Goldman Sachs or its affiliates and
may also enter transactions with other clients of Goldman Sachs or its
affiliates where such other clients have interests adverse to those of the
Funds. At times, these activities may cause departments of the Firm to give
advice to clients that may cause these clients to take actions adverse to the
interests of the client. To the extent affiliated transactions are permitted,
the Funds will deal with Goldman Sachs and its affiliates on an arms-length
basis.
Each Fund will be required to establish business relationships with its
counterparties based on the Fund's own credit standing. Neither Goldman Sachs
nor its affiliates will have any obligation to allow their credit to be used in
connection with a Fund's establishment of its business relationships, nor is it
expected that a Fund's counterparties will rely on the credit of Goldman Sachs
or any of its affiliates in evaluating the Fund's creditworthiness.
From time to time, Goldman Sachs or any of its affiliates may, but is not
required to, purchase and hold shares of a Fund in order to increase the assets
of the Fund. Increasing a 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 a Fund acquired for its own account. A large
redemption of shares of a 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 a Fund and other shareholders
in deciding whether to redeem its shares.
It is possible that a Fund's holdings will include securities of entities
for which Goldman Sachs performs investment banking services as well as
securities of entities in which Goldman Sachs makes a market. From time to
time, Goldman Sachs' activities may limit the Funds' flexibility in purchases
and sales of securities. When Goldman Sachs is engaged in an underwriting or
other distribution of securities
B-43
<PAGE>
of an entity, the Advisers may be prohibited from purchasing or recommending the
purchase of certain securities of that entity for the Funds.
DISTRIBUTOR AND TRANSFER AGENT
==============================
Goldman Sachs serves as the exclusive distributor of shares of the Funds
pursuant to a "best efforts" arrangement as provided by a distribution agreement
with the Trust on behalf of each Fund. Pursuant to the distribution agreement,
after the Prospectus and periodic reports have been prepared, set in type and
mailed to shareholders, Goldman Sachs will pay for the printing and distribution
of copies thereof used in connection with the offering to prospective investors.
Goldman Sachs will also pay for other supplementary sales literature and
advertising costs. Goldman Sachs may enter into sales agreements with certain
investment dealers and other financial service firms (the "Authorized Dealers")
to solicit subscriptions for Class A and Class B Shares of the Funds. Goldman
Sachs receives a portion of the sales charge imposed on the sale, in the case of
Class A Shares, or redemption in the case of Class B Shares, of such Fund
shares. No Class B Shares were outstanding during the fiscal years ended
January 31, 1995 and 1996.
Goldman Sachs retained the following commissions on sales of Class A and
Class B Shares during the following periods:
1997 1996 1995
========== ======== ========
Balanced Fund $ 94,000 $ 28,000 $ 14,000
Growth and Income Fund 555,000 771,000 361,000
CORE U.S. Equity Fund 380,000 108,000 58,000
CORE Large Cap Growth Fund/1/ N/A N/A N/A
Capital Growth Fund 323,000 523,000 815,000
International Equity Fund 1,563,000 211,000 660,000
Small Cap Equity Fund 219,000 202,000 868,000
Emerging Market Equity Fund/1/ N/A N/A N/A
Asia Growth Fund 1,397,000 507,000 829,000
- ----------------------------------------------------------------
1 Not operational.
Goldman Sachs serves as the Trust's transfer agent. Under its transfer
agency agreement with the Trust, Goldman Sachs has undertaken with the Trust to
(i) record the issuance, transfer and redemption of shares, (ii) provide
confirmations of purchases and redemptions, and quarterly statements, as well as
certain other statements, (iii) provide certain information to the Trust's
custodian and the relevant sub-custodian in connection with redemptions, (iv)
provide dividend crediting and certain disbursing agent services, (v) maintain
shareholder accounts, (vi) provide certain state Blue Sky and other information,
(vii) provide shareholders and certain regulatory authorities with tax related
information, (viii) respond to shareholder inquiries, and (ix) render certain
other miscellaneous services. As compensation for the services rendered to the
Trust by Goldman Sachs as transfer agent and the assumption by Goldman Sachs of
the expenses related thereto, Goldman Sachs is entitled to receive a fee with
respect to each Fund with respect to Class A Shares and Class B Shares equal to
$12,000 per year plus $7.50 per account, together with out-of-pocket and
transaction-related expenses (including those out-of-pocket expenses payable to
servicing agents).
B-44
<PAGE>
For the last three fiscal years the amounts paid to Goldman Sachs by each
Fund then in existence for transfer agency services performed were as follows:
<TABLE>
<CAPTION>
Class A & B Class A Class A
1997 1996 1995
==================== ============== ====================
<S> <C> <C> <C>
Balanced Fund $148,576 $ 72,067 $ 20,000
Growth and Income Fund 870,527 542,671 262,158
CORE U.S. Equity Fund 319,246 103,682 151,230
CORE Large Cap Growth Fund/1/ N/A N/A N/A
Capital Growth Fund 908,310 549,844 694,014
International Equity Fund 586,243 129,313 481,169
Small Cap Equity Fund 511,883 254,292 600,618
Emerging Markets Equity Fund/1/ N/A N/A N/A
Asia Growth Fund 385,114 192,097 120,000
<CAPTION>
Institutional Shares Service Shares Institutional Shares
1997 1997 1996
======== ======== ========
<S> <C> <C> <C>
Growth and Income Fund $ 15 $ 488 N/A
CORE U.S. Equity Fund/2/ N/A N/A $ 11,571
CORE Large Cap Growth Fund/1/ N/A N/A N/A
Mid Cap Equity Fund/3/ 51,464 N/A 26,082
International Equity Fund/2/ N/A N/A N/A
Emerging Markets Equity Fund/1/ N/A N/A N/A
Asia Growth Fund/2/ N/A N/A N/A
</TABLE>
___________________________
1 Not operational.
2 Contractually set to 0.
3 Commenced operations on August 1, 1995.
The Trust's distribution and transfer agency agreements each provide
that Goldman Sachs may render similar services to others so long as the services
Goldman Sachs provides thereunder are not impaired thereby. Such agreements
also provide that the Trust will indemnify Goldman Sachs against certain
liabilities.
OTHER PURCHASE INFORMATION
Authorized Dealers and other financial intermediaries provide varying
arrangements for their clients to purchase and redeem Fund shares. Some may
establish higher minimum investment requirements and others may limit the
availability of certain privileges with respect to the purchase and redemption
of shares or the reinvestment of dividends. Firms may arrange with their clients
for other investment or administrative services and may independently establish
and charge additional amounts to their clients for such services, which charges
would reduce a client's return. If shares of a Fund are held in a "street name"
account or were purchased through an Authorized Dealer, shareholders should
contact the Authorized Dealer to purchase, redeem or exchange shares, to make
changes in or give instructions concerning the account or to obtain information
about the account.
B-45
<PAGE>
The Adviser, Distributor and/or their affiliates may pay, out of their
own assets, compensation to Authorized Dealers and other persons for the sale
and distribution of Class A and Class B Shares of the Funds and/or for the
servicing of those shares. These payments ("Additional Payments") would be in
addition to the payments by the Funds described in the Funds' Prospectus and
this Statement of Additional Information for distribution and shareholder
servicing and processing, and would also be in addition to the sales commissions
payable to dealers as set forth in the Prospectus. These Additional Payments
may take the form of "due diligence" payments for an Authorized Dealer's
examination of the Funds and payments for providing extra employee training and
information relating to the Funds; "listing" fees for the placement of the Funds
on a dealer's list of mutual funds available for purchase by its customers;
"finders" or "referral" fees for directing investors to the Funds; "marketing
support" fees for providing assistance in promoting the sale of the Funds' Class
A and Class B Shares; and payments for the sale of Class A and Class B Shares
and/or the maintenance of Shares balances. In addition, the Adviser,
Distributor and/or their affiliates may make Additional Payments for
subaccounting, administrative and/or shareholder processing services that are in
addition to the shareholder servicing and processing fees paid by the Funds.
The Additional Payments made by the Adviser, Distributor and their affiliates
may be a fixed dollar amount, may be based on the number of customer accounts
maintained by an Authorized Dealer, or may be based on a percentage of the value
of Shares sold to, or held by, customers of the Authorized Dealers involved, and
may be different for different Authorized Dealers. Furthermore, the Adviser,
Distributor and/or their affiliates may contribute to various non-cash and cash
incentive arrangements to promote the sale of shares, as well as sponsor various
educational programs, sales contests and/or promotions in which participants may
receive prizes such as travel awards, merchandise and cash and/or investment
research pertaining to particular securities and other financial instruments or
to the securities and financial markets generally, educational information and
related support materials and hardware and/or software. The Adviser,
Distributor and their affiliates may also pay for the travel expenses, meals,
lodging and entertainment of Authorized Dealers and their salespersons and
guests in connection with educational, sales and promotional programs, subject
to applicable NASD regulations. The Distributor currently expects that such
additional bonuses or incentives will not exceed 0.50% of the amount of any
sales.
EXPENSES
========
Except as set forth in the Prospectus under "Management," the Trust is
responsible for the payment of its expenses. The expenses include, without
limitation, the fees payable to the Advisers, the fees and expenses payable to
the Trust's custodian and subcustodians, transfer agent fees, brokerage fees and
commissions, filing fees for the registration or qualification of the Trust's
shares under federal or state securities laws, expenses of the organization of
the Trust, 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 (including the cost of legal and certain accounting services rendered
by employees of GSAM, GSAMI and Goldman Sachs with respect to the Trust),
expenses of preparing and setting in type prospectuses, statements of additional
information, proxy material, reports and notices and the printing and
distributing of the same to the Trust's shareholders and regulatory authorities,
any expenses assumed by a Fund pursuant to its distribution, authorized dealer,
service and administration plans, compensation and expenses of its "non-
interested" Trustees and extraordinary expenses, if any, incurred by the Trust.
Except for fees under any distribution, authorized dealer, service,
administration or service plans applicable to a particular class and transfer
agency fees, all Fund expenses are borne on a non-class specific basis.
The Adviser to the Balanced, Growth and Income, CORE U.S. Equity, CORE
Large Cap Growth, Mid Cap Equity, International Equity, Emerging Markets Equity
and Asia Growth Funds has voluntarily agreed to reduce or limit certain "Other
Expenses" of such Funds (excluding management, distribution, authorized dealer,
administration and service fees, taxes, interest and brokerage fees and
litigation, indemnification and other extraordinary expenses, and in the case of
each Fund other than Balanced and
B-46
<PAGE>
CORE Large Cap Growth Funds, transfer agency fees) to the extent such expenses
exceed 0.10%, 0.11%, 0.06%, 0.05%, 0.06%, 0.20%, 0.16% and 0.24% per annum of
such Funds' average daily net assets, respectively. Such reductions or limits,
if any, are calculated monthly on a cumulative basis and may be discontinued or
modified by the applicable Adviser in its discretion at any time.
Fees and expenses of legal counsel, registering shares of a Fund,
holding meetings and communicating with shareholders may include an allocable
portion of the cost of maintaining an internal legal and compliance department.
Each Fund may also bear an allocable portion of the applicable Adviser's costs
of performing certain accounting services not being provided by a Fund's
Custodian.
For the last three fiscal years the amounts of certain "Other
Expenses" of each Fund then in existence that were reduced or otherwise limited
were as follows:
1997 1996 1995
======== ======== ========
Balanced Fund $319,552 $192,405 $ 95,906
Growth and Income Fund 0 0 106,725
CORE U.S. Equity Fund 104,833 110,581 N/A
CORE Large Cap U.S. Growth Fund/1/ N/A N/A N/A
Capital Growth Fund N/A N/A N/A
Mid Cap Equity Fund/2/ 72,441 85,515 N/A
International Equity Fund 144,265 N/A N/A
Small Cap Equity Fund N/A N/A N/A
Emerging Markets Equity Fund/1/ N/A N/A N/A
Asia Growth Fund 50,407 0 35,905
________________________________
1 Not operational.
2 Commenced operations on August 1, 1995.
CUSTODIAN AND SUB-CUSTODIANS
============================
State Street, P.O. Box 1713, Boston, Massachusetts 02105, is the custodian
of the Trust's portfolio securities and cash. State Street also maintains the
Trust's accounting records. State Street may appoint sub-custodians from time
to time to hold certain securities purchased by the Trust and to hold cash for
the Trust.
INDEPENDENT PUBLIC ACCOUNTANTS
==============================
Arthur Andersen, LLP, independent public accountants, One International
Place, Boston, Massachusetts 02110, have been selected as auditors of the Trust.
In addition to audit services, Arthur Andersen, LLP prepares the Trust's federal
and state tax returns, and provides consultation and assistance on accounting,
internal control and related matters.
B-47
<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Advisers are responsible for decisions to buy and sell securities for
the Funds, 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 a Fund, the Advisers are
generally required to give primary consideration to obtaining the most favorable
price and efficient execution under the circumstances. This means that an
Adviser will seek to execute each transaction at a price and commission, if any,
which provides the most favorable total cost or proceeds reasonably attainable
in the circumstances. As permitted by Section 28(e) of the Securities Exchange
Act of 1934, the Fund may pay a broker which provides brokerage and research
services 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 by the
Trustees 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
Advisers generally seek reasonably competitive spreads or commissions, a Fund
will not necessarily be paying the lowest spread or commission available.
Within the framework of this policy, the Advisers will consider research and
investment services provided by brokers or dealers who effect or are parties to
portfolio transactions of a Fund, the Advisers and their affiliates, or their
other clients. Such research and investment services are those which brokerage
houses customarily provide to institutional investors and include research
reports on particular industries and companies, economic surveys and analyses,
recommendations as to specific securities and other products or services (e.g.,
quotation equipment and computer related costs and expenses), advice concerning
the value of securities, the advisability of investing in, purchasing or selling
securities, the availability of securities or the purchasers or sellers of
securities, furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy and performance of
accounts, effecting securities transactions and performing functions incidental
thereto (such as clearance and settlement) and providing lawful and appropriate
assistance to the Advisers in the performance of their decision-making
responsibilities. Such services are used by the Advisers in connection with all
of their investment activities, and some of such services obtained in connection
with the execution of transactions for a Fund may be used in managing other
investment accounts. Conversely, brokers furnishing such services may be
selected for the execution of transactions of such other accounts, whose
aggregate assets are far larger than those of a Fund, and the services furnished
by such brokers may be used by the Advisers in providing management services for
the Trust.
In circumstances where two or more broker-dealers offer comparable prices
and execution capability, preference may be given to a broker-dealer which has
sold shares of the Fund as well as shares of other investment companies or
accounts managed by the Advisers. This policy does not imply a commitment to
execute all portfolio transactions through all broker-dealers that sell shares
of the Fund.
On occasions when an Adviser deems the purchase or sale of a security to be
in the best interest of a Fund as well as its other customers (including any
other fund or other investment company or advisory
B-48
<PAGE>
account for which such Adviser acts as investment adviser or subadviser), the
Adviser, to the extent permitted by applicable laws and regulations, may
aggregate the securities to be sold or purchased for the Fund with those to be
sold or purchased for such other customers in order to obtain the best net price
and most favorable execution under the circumstances. In such event,
allocation of the securities so purchased or sold, as well as the expenses
incurred in the transaction, will be made by the applicable Adviser in the
manner it considers to be equitable and consistent with its fiduciary
obligations to such Fund and such other customers. In some instances, this
procedure may adversely affect the price and size of the position obtainable for
a Fund.
Commission rates in the U.S. are established pursuant to negotiations with
the broker based on the quality and quantity of execution services provided by
the broker in the light of generally prevailing rates. The allocation of orders
among brokers and the commission rates paid are reviewed periodically by the
Trustees.
Subject to the above considerations, the Advisers may use Goldman Sachs as
a broker for a Fund. In order for Goldman Sachs to effect any portfolio
transactions for each Fund, the commissions, fees or other remuneration received
by Goldman Sachs must be reasonable and fair compared to the commissions, fees
or other remuneration paid to other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time. This standard would
allow Goldman Sachs to receive no more than the remuneration which would be
expected to be received by an unaffiliated broker in a commensurate arm's-length
transaction. Furthermore, the Trustees, including a majority of the Trustees who
are not "interested" Trustees, have adopted procedures which are reasonably
designed to provide that any commissions, fees or other remuneration paid to
Goldman Sachs are consistent with the foregoing standard. Brokerage transactions
with Goldman Sachs are also subject to such fiduciary standards as may be
imposed upon Goldman Sachs by applicable law.
B-49
<PAGE>
For the past three fiscal years, each Fund in existence paid brokerage
commissions as follows:
<TABLE>
<CAPTION>
Total Total Brokerage
Brokerage Amount of Commissions
Total Commissions Transaction Paid
Brokerage Paid to on which to Brokers
Commissions Affiliated Commissions Providing
Paid Persons/2/ Paid/3/ Research
=========== ================== =================== ===========
<S> <C> <C> <C> <C>
Fiscal Year Ended
January 31, 1997:
Balanced Fund $ 62,072 $ 5,112 (8%)/1/ $ 1,057,742(15%)/2/ $0
Growth and Income Fund 779,396 77,587(10%)/1/ 13,310,208(9%)/2/ 0
CORE U.S. Equity Fund 279,620 0(0%)/1/ 6,706,824(0%)/2/ 0
CORE Large Cap Growth Fund/(3)/ N/A N/A N/A N/A
Capital Growth Fund 1,460,140 304,052(21%)/1/ 29,920,578(1%)/2/ 42,039
Mid Cap Equity Fund 364,294 22,134(6%)/1/ 6,655,100(7%)/2/ 0
International Equity Fund 1,529,436 0(0%) 48,059,958(0%)/2/ 0
Small Cap Equity Fund 758,205 36,087(5%)/1/ 16,439,842(1%)/2/ 0
Emerging Markets Equity Fund/(3)/ N/A N/A N/A N/A
Asia Growth Fund 1,554,313 50,624(3%)/1/ 102,609,295(4%)/2/ 0
</TABLE>
B-50
<PAGE>
<TABLE>
<CAPTION>
Total Total Brokerage
Brokerage Amount of Commissions
Total Commissions Transaction Paid
Brokerage Paid to on which to Brokers
Commissions Affiliated Commissions Providing
Paid Persons/2/ Paid/3/ Research
=========== ================== ======================== ===========
<S> <C> <C> <C> <C>
Fiscal Year Ended
January 31, 1996:
Balanced Fund $ 56,860 $ 7,391(13%)/(1)/ $ 29,697,202(13%)/(2)/ $0
Growth and Income Fund 841,605 71,218(8%)/(1)/ 425,040,430(9%)/(2)/ 0
CORE U.S. Equity Fund 121,424 0(0%)/(1)/ 148,427,497(0%)/(2)/ 0
CORE Large Cap Growth Fund/(3)/ N/A N/A N/A N/A
Capital Growth Fund 1,979,949 284,660(14%)/(1)/ 1,034,755,196(11%)/(2)/ 0
Mid Cap Equity Fund 315,212 40,935(13%)/(1)/ 142,547,552(11%)/(2)/ 0
International Equity Fund 1,260,992 13,629(1%)/(1)/ 359,700,166(1%)/(2)/ 0
Small Cap Equity Fund 690,234 72,980(11%)/(1)/ 170,616,044(6%)/(2)/ 0
Emerging Markets Equity Fund/(3)/ N/A N/A N/A N/A
Asia Growth Fund 1,676,525 3,778(0%)/(1)/ 247,662,049(2%)/(2)/ 0
</TABLE>
B-51
<PAGE>
<TABLE>
<CAPTION>
Total Total Brokerage
Brokerage Amount of Commissions
Total Commissions Transaction Paid
Brokerage Paid to on which to Brokers
Commissions Affiliated Commissions Providing
Paid Persons/2/ Paid/3/ Research
=========== ================ ==================== ===========
<S> <C> <C> <C> <C>
Fiscal Year Ended
January 31, 1995:
Balanced Fund $ 9,652 $ 1,522(16%)/1/ $ 7,216,224(10%)/2/ $0
Growth and Income Fund 637,080 77,404(12%)/1/ 468,165,610(7%)/2/ 0
CORE U.S. Equity Fund 119,192 0(0%)/1/ 99,616,396(0%)/2/ 0
CORE Large Cap Growth Fund/(3)/ N/A N/A N/A N/A
Capital Growth Fund 1,427,413 273,076(19%)/1/ 786,135,073(13%)/2/ 0
Mid Cap Equity Fund N/A N/A N/A N/A
International Fund 1,799,525 0(0%)/1/ 546,364,113(0%)/2/ 0
Small Cap Equity Fund 555,667 23,137(4%)/1/ 392,235,715(2%)/2/ 0
Emerging Markets Equity Fund/(3)/ N/A N/A N/A N/A
Asia Growth Fund 1,002,148 67,754(7%)/1/ 171,880,775(2%)/2/ 0
</TABLE>
- ----------------------------
1 Percentage of total amount of transactions involving the payment of
commissions effected through affiliated persons.
2 Percentage of total commissions paid.
3 Not operational.
B-52
<PAGE>
During the fiscal year ended January 31, 1997, the Trust acquired and sold
securities of its regular broker-dealers: all brokers below and JP Morgan. As
of January 31, 1997, the Trust held the following amounts of securities of its
regular broker/dealers, as defined in Rule 10b-1 under the Act, or their parents
($ in thousands):
<TABLE>
<CAPTION>
Fund Broker/Dealer Amount
- ------------------------ ---------------- -------
<S> <C> <C>
Balanced Fund Bear Stearns $ 6,679
Lehman Brothers 2,098
Chase Securities 490
Growth and Income Fund Chase Securities $ 6,003
Lehman Brothers 11,099
Bear Stearns 19,457
Core US Equity Fund Chase Securities 1,193
Smith Barney 6,439
Merrill Lynch 4,423
Morgan Stanley 2,188
Salomon Brothers 4,249
Bear Stearns 2,614
Lehman Brothers 659
Capital Growth Fund Bear Stearns 13,286
Lehman Brothers 3,349
Mid Cap Equity Fund Lehman Brothers 2,151
Bear Stearns 2,977
Small Cap Equity Fund Bear Stearns 12,052
Lehman Brothers 3,038
</TABLE>
NET ASSET VALUE
Under the Act, the Trustees are responsible for determining in good
faith the fair value of securities of each Fund. In accordance with procedures
adopted by the Trustees, the net value per share of each class of each Fund is
calculated by determining the value of the net assets attributable to each class
of that Fund and dividing by the number of outstanding shares of that class.
All securities are valued as of the close of regular trading on the New York
Stock Exchange (normally 4:00 p.m. New York time) on each Business Day (as
defined in the Prospectus).
In the event that the New York Stock Exchange or the national
securities exchange on which stock options are traded adopt different trading
hours on either a permanent or temporary basis, the Trustees will reconsider the
time at which net asset value is computed. In addition, each Fund may compute
its net asset value as of any time permitted pursuant to any exemption, order or
statement of the SEC or its staff.
Portfolio securities of 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
B-53
<PAGE>
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 principally: (i) on a U.S. exchange or NASDAQ will be valued at the mean
between the closing bid and asked prices; and (ii) on a foreign exchange will be
valued at the last sale price (also referred to as the close price). The last
sale price for securities traded principally on a foreign exchange will be
determined as of the close of the London Stock Exchange or, for securities
traded on exchanges located in the Asia Pacific region, noon London time; (b)
debt securities will be valued using a pricing service approved by the Trustees
if such prices are believed by the investment adviser to accurately represent
market value; (c) overnight repurchase agreements will be valued by the
investment adviser at cost; (d) term repurchase agreements (i.e., those whose
maturity exceeds seven days) and interest rate swaps, caps, collars and floors
will be valued at the average of the bid quotations obtained daily from at least
two dealers or, for term repurchase agreements, recognized counterparties; (e)
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; (f) spot and forward foreign currency exchange contracts
will be valued using a pricing service such as Reuters then calculating the mean
between the last bid and asked quotations supplied by certain independent
dealers in such contracts; (g) exchange-traded options and futures contracts
will be valued by the custodian bank at the last sale price on the exchange
where such contracts and options are principally traded; and (h) over-the-
counter options will be valued by an independent unaffiliated broker identified
by the portfolio manager/trader and contacted by the custodian bank; and (i) all
other securities, 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 as stated in the
valuation procedures which were approved by the Board of Trustees. For all
brokers used in this process, the custodian bank will send a letter to the
broker furnishing the quotation. If accurate quotations are not readily
available, such contracts will be valued by an independent unaffiliated broker
identified by the portfolio manager/trader and contacted by the custodian bank.
If broker quotes are used, the portfolio manager/trader will identify one
independent unaffiliated broker from whom the custodian bank will obtain prices
daily and another independent unaffiliated broker from whom the custodian bank
will obtain quotes at least weekly. The custodian bank will promptly notify the
portfolio manager/trader and a member of the GSAM Valuation Committee or a
designee thereof of any deviations equal to or greater than 3% between the
weekly quote and the daily quotes for the date that the weekly quotes were
obtained. The investment adviser will promptly provide instructions to the
custodian bank. For all brokers used in this process, the custodian bank will
send a letter to the broker furnishing the quotation.
Generally, trading in securities on European and Far Eastern
securities exchanges and on over-the-counter markets is substantially completed
at various times prior to the close of business on each Business Day in New York
(i.e., a day on which the New York Stock Exchange is open for trading). In
addition, European or Far Eastern securities trading generally or in a
particular country or countries may not take place on all Business Days in New
York. Furthermore, trading takes place in various foreign markets on days which
are not Business Days in New York and days on which the Funds' net asset values
are not calculated. Such calculation does not take place contemporaneously with
the determination of the prices of the majority of the portfolio securities used
in such calculation. Events affecting the values of portfolio securities that
occur between the time their prices are determined and the close of regular
trading
B-54
<PAGE>
on the New York Stock Exchange will not be reflected in a Fund's calculation of
net asset values unless the Trustees deem that the particular event would
materially affect net asset value, in which case an adjustment will be made.
The proceeds received by each Fund and each other series of the Trust
from the issue or sale of its shares, and all net investment income, realized
and unrealized gain and proceeds thereof, subject only to the rights of
creditors, will be specifically allocated to such Fund and constitute the
underlying assets of that Fund or series. The underlying assets of each Fund
will be segregated on the books of account, and will be charged with the
liabilities in respect of such Fund and with a share of the general liabilities
of the Trust. Expenses of the Trust with respect to the Funds and the other
series of the Trust are generally allocated in proportion to the net asset
values of the respective Funds or series except where allocations of direct
expenses can otherwise be fairly made.
PERFORMANCE INFORMATION
A Fund may from time to time quote or otherwise use total return,
yield and/or distribution rate information in advertisements, shareholder
reports or sales literature. Average annual total return and yield are computed
pursuant to formulas specified by the SEC.
Yield is computed by dividing net investment income earned during a
recent thirty-day period by the product of the average daily number of shares
outstanding and entitled to receive dividends during the period and the maximum
public offering price per share on the last day of the relevant period. The
results are compounded on a bond equivalent (semi-annual) basis and then
annualized. Net investment income per share is equal to the dividends and
interest earned during the period, reduced by accrued expenses for the period.
The calculation of net investment income for these purposes may differ from the
net investment income determined for accounting purposes.
The distribution rate for a specified period is calculated by
annualizing distributions of net investment income for such period and dividing
this amount by the net asset value per share or maximum public offering price on
the last day of the period.
Average annual total return for a specified period is derived by
calculating the actual dollar amount of the investment return on a $1,000
investment made at the maximum public offering price at the beginning of the
period, and then calculating the annual compounded rate of return which would
produce that amount, assuming a redemption at the end of the period. This
calculation assumes a complete redemption of the investment. It also assumes
that all dividends and distributions are reinvested at net asset value on the
reinvestment dates during the period.
Year-by-year total return and cumulative total return for a specified
period are each derived by calculating the percentage rate required to make a
$1,000 investment (made at the maximum public offering price with all
distributions reinvested) at the beginning of such period equal to the actual
total value of such investment at the end of such period. The following table
indicates the total return (capital changes plus reinvestment of all
distributions) on a hypothetical investment of $1,000 in a Fund for the periods
indicated.
Occasionally statistics may be used to specify Fund volatility or
risk. Measures of volatility or risk are generally used to compare a Fund's net
asset value or performance relative to a market index. One measure of
volatility is beta. Beta is the volatility of a fund relative to the total
market. A beta of more than 1.00 indicates volatility greater than the market,
and a beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is used
B-55
<PAGE>
to measure variability of net asset value or total return around an average,
over a specified period of time. The premise is that greater volatility
connotes greater risk undertaken in achieving performance.
From time to time the Trust may publish an indication of a Fund's past
performance as measured by independent sources such as (but not limited to)
Lipper Analytical Services, Inc., Morningstar Mutual Funds, Weisenberger
Investment Companies Service, Donoghue's Money Fund Report, Micropal, Barron's,
Business Week, Consumer's Digest, Consumer's Report, Investors Business Daily,
The New York Times, Kiplinger's Personal Finance Magazine, Changing Times,
Financial World, Forbes, Fortune, Money, Personal Investor, Sylvia Porter's
Personal Finance and The Wall Street Journal. The Trust may also advertise
information which has been provided to the NASD for publication in regional and
local newspapers. In addition, the Trust may from time to time advertise a
Fund's performance relative to certain indices and benchmark investments,
including: (a) the Lipper Analytical Services, Inc. Mutual Fund Performance
Analysis, Fixed Income Analysis and Mutual Fund Indices (which measure total
return and average current yield for the mutual fund industry and rank mutual
fund performance); (b) the CDA Mutual Fund Report published by CDA Investment
Technologies, Inc. (which analyzes price, risk and various measures of return
for the mutual fund industry); (c) the Consumer Price Index published by the
U.S. Bureau of Labor Statistics (which measures changes in the price of goods
and services); (d) Stocks, Bonds, Bills and Inflation published by Ibbotson
Associates (which provides historical performance figures for stocks, government
securities and inflation); (e) the Salomon Brothers' World Bond Index (which
measures the total return in U.S. dollar terms of government bonds, Eurobonds
and foreign bonds of ten countries, with all such bonds having a minimum
maturity of five years); (f) the Lehman Brothers Aggregate Bond Index or its
component indices; (g) the Standard & Poor's Bond Indices (which measure yield
and price of corporate, municipal and U.S. Government bonds); (h) the J.P.
Morgan Global Government Bond Index; (i) other taxable investments including
certificates of deposit (CDs), money market deposit accounts (MMDAs), checking
accounts, savings accounts, money market mutual funds and repurchase agreements;
(j) Donoghues' Money Fund Report (which provides industry averages for 7-day
annualized and compounded yields of taxable, tax-free and U.S. Government money
funds); (k) the Hambrecht & Quist Growth Stock Index; (l) the NASDAQ OTC
Composite Prime Return; (m) the Russell Midcap Index; (n) the Russell 2000 Index
- - Total Return; (o) Russell 1000 Growth Index-Total Return; (p) the Value-Line
Composite-Price Return; (q) the Wilshire 4500 Index; (r) the FT-Actuaries Europe
and Pacific Index, and (s) historical investment data supplied by the research
departments of Goldman Sachs, Lehman Brothers, First Boston Corporation, Morgan
Stanley including (EAFE), and the Morgan Stanley Capital International Combined
Asia ex Japan Free Index, the Morgan Stanley Capital International Emerging
Markets Free Index, Salomon Brothers, Merrill Lynch, Donaldson Lufkin and
Jenrette or other providers of such data; (t) the FT-Actuaries Europe and
Pacific Index; (u) CDA/Wiesenberger Investment Companies Services or
Wiesenberger Investment Companies Service; (v) The Goldman Sachs Commodities
Index; and (w) information produced by Micropal, Inc.. The composition of the
investments in such indices and the characteristics of such benchmark
investments are not identical to, and in some cases are very different from,
those of the Fund's portfolio. These indices and averages are generally
unmanaged and the items included in the calculations of such indices and
averages may not be identical to the formulas used by a Fund to calculate its
performance figures.
Information used in advertisements and materials furnished to present
and prospective investors may include statements or illustrations relating to
the appropriateness of certain types of securities and/or mutual funds to meet
specific financial goals. Such information may address:
- cost associated with aging parents;
- funding a college education (including its actual and estimated cost);
- health care expenses (including actual and projected expenses);
- long-term disabilities (including the availability of, and coverage
provided by, disability insurance);
B-56
<PAGE>
- 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, long-term government bonds, treasury bills and
certificates of deposit) over time. However, the characteristics of
these securities are not identical to, and may be very different from,
those of a Fund's portfolio;
. the dollar and non-dollar based returns of various market indices (i.e.,
Morgan Stanley Capital International EAFE Index, FT-Actuaries Europe &
Pacific Index and the Standard & Poor's Index of 500 Common Stocks) over
varying periods of time;
. total stock market capitalizations of specific countries and regions on a
global basis;
. performance of securities markets of specific countries and regions; and
. value of a dollar amount invested in a particular market or type of
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.
The CORE Large Cap Growth Fund was organized on May 1, 1997 and has no
operating or performance history prior thereto. However, in accordance with
interpretive positions expressed by the staff of the SEC, the Fund has adopted
the adjusted performance record of a separate account managed by the Advisers
for periods prior to the Funds' commencement of operations which converted into
Class A Shares as of the commencement date. Any quotation of performance data of
this Fund relating to this period will include the adjusted performance record
of the applicable separate account. The performance record of the separate
account quoted by the Fund have been adjusted downward based on the expenses
applicable to Class A Shares (the class into which the separate account
transferred) to reflect the expenses expected to be incurred by the Fund as
stated in the expense table in the Prospectus. These expenses include any sales
charges and asset-based charges (i.e., fees under Distribution and Authorized
Dealer Service Plans) imposed and other operating expenses. Total return
quotations will be calculated pursuant to SEC approved methodology. Prior to May
1, 1997, the separate account was a separate investment advisory account under
discretionary management by the Adviser and had substantially similar investment
objectives, policies and strategies as the Fund. Unlike the Fund, the separate
account was not registered as an investment company under the Act and therefore
was not subject to certain investment restrictions and operational requirements
that are imposed on investment companies by the Act. If the separate account had
been registered as an investment company under the Act, the separate account's
performance may have been adversely affected by such restrictions and
requirements. On May 1, 1997, the separate account transferred a portion of its
assets to the Fund in exchange for Fund shares. The performance record of each
other class has been linked to the performance of the separate account
B-57
<PAGE>
(based on Class A expenses) and the Class A performance for any periods prior
to commencement of operations of a class of shares.
B-58
<PAGE>
<TABLE>
<CAPTION>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
Assuming no voluntary
waiver of fees and no
expense reimbursements
------------------------
Assumes Assumes Assumes Assumes
5.5% sales no sales 5.5% sales no sales
Fund Class Time Period charge charge charge charge
- --------------------------- ------------- ---------------------------------- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Balanced Fund A 10/12/94-1/31/97 - Since inception 17.41% 20.32% 15.50% 18.27%
Balanced Fund A 2/1/96-1/31/97 - One year 12.07% 18.59% 11.22% 17.69%
Balanced Fund B 5/1/96-1/31/97 - Since inception* N/A 16.22% N/A 15.79%
Growth and Income A 2/5/93-1/31/97 - Since inception 17.31% 18.98% 16.50% 18.17%
Growth and Income A 2/1/96-1/31/97 - One year 21.39% 28.42% 21.13% 28.14%
Growth and Income B 5/1/96-1/31/97 - Since inception* N/A 22.23% N/A 22.23%
Growth and Income Institutional 6/3/96-1/31/97 - Since inception* N/A 20.77% N/A 20.77%
Growth and Income Service 3/6/96-1/31/97 - Since inception* N/A 23.87% N/A 23.87%
CORE U.S. Equity A 5/24/91-1/31/97 - Since inception 13.54% 14.67% 13.25% 14.38%
CORE U.S. Equity A 2/1/92-1/31/97 - Five year 13.99% 15.29% 13.70% 15.00%
CORE U.S. Equity A 2/1/96-1/31/97 - One year 16.98% 23.75% 16.69% 23.44%
CORE U.S. Equity B 5/1/96-1/31/97 - Since inception* N/A 18.59% N/A 18.47%
CORE U.S. Equity Institutional 6/15/95-1/31/97 - Since inception N/A 28.04% N/A 27.74%
CORE U.S. Equity Institutional 2/1/96-1/31/97 - One year N/A 24.63% N/A 24.39%
CORE U.S. Equity Service 6/7/96-1/31/97 - Since inception* N/A 15.92% N/A 15.71%
CORE Large Cap Growth A 11/1/91-1/31/97 - Since inception 18.46% 19.78% 17.30% 18.61%
CORE Large Cap Growth A 2/1/92-1/31/97 - Five year 17.53% 18.85% 16.38% 17.68%
CORE Large Cap Growth A 2/1/96-1/31/97 - One year 27.09% 34.54% 25.85% 33.23%
Capital Growth A 4/20/90-1/31/97 - Since inception 15.57% 16.54% 15.24% 16.21%
Capital Growth A 2/1/92-1/31/97 - Five year 15.42% 16.73% 15.14% 16.44%
Capital Growth A 2/1/96-1/31/97 - One year 19.04% 25.97% 18.75% 25.66%
Capital Growth B 5/1/96-1/31/97 - Since inception* N/A 19.39% N/A 19.39%
</TABLE>
B-59
<PAGE>
<TABLE>
<CAPTION>
Assuming no voluntary
waiver of fees and no
expense reimbursements
----------------------
Assumes Assumes Assumes Assumes
5.5% sales no sales 5.5% sales no sales
Fund Class Time Period charge charge charge charge
- -------------------------- ------------- ---------------------------------- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Mid Cap Equity Institutional 8/1/95-1/31/97 - Since inception N/A 21.65% N/A 21.55%
Mid Cap Equity Institutional 2/1/96-1/31/97 - One year N/A 25.63% N/A 25.55%
International Equity A 12/1/92-1/31/97 - Since inception 9.66% 11.15% 9.40% 10.90%
International Equity A 2/1/96-1/31/97 - One year 7.26% 13.48% 7.05% 13.26%
International Equity B 5/1/96-1/31/97 - Since inception* N/A 2.83% N/A 2.75%
International Equity Institutional 2/7/96-1/31/97 - Since inception* N/A 12.53% N/A 12.38%
International Equity Service 3/6/96-1/31/97 - Since inception* N/A 10.42% N/A 10.28%
Small Cap A 10/22/92-1/31/97- Since inception 12.12% 13.61% 11.79% 13.28%
Small Cap A 2/1/96-1/31/97 - One year 20.27% 27.28% 19.98% 26.97%
Small Cap B 5/1/96-1/31/97 - Since inception* N/A 5.39% N/A 5.39%
Asia Growth A 7/8/94-1/31/97 - Since inception 4.46% 6.78% 4.15% 6.47%
Asia Growth A 2/1/96-1/31/97 - One year -6.44% -1.01% -6.59% -1.17%
Asia Growth B 5/1/96-1/31/97 - Since inception * N/A -6.02% N/A -6.06%
Asia Growth Institutional 2/2/96-1/31/97 - Since inception * N/A -1.09% N/A -1.24%
- --------------------------
</TABLE>
All returns are average annual total returns.
* Represents an aggregate total return (not annualized) since this class has
not completed a full twelve months of operations.
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From time to time, advertisements or information may include a
discussion of certain attributes or benefits to be derived by an investment in
the Fund. Such advertisements or information may include symbols, headlines or
other material which highlight or summarize the information discussed in more
detail in the communication.
The Trust may from time to time summarize the substance of discussions
contained in shareholder reports in advertisements and publish the adviser's
views as to markets, the rationale for a Fund's investments and discussions of a
Fund's current asset allocation.
In addition, from time to time, advertisements or information may
include a discussion of asset allocation models developed by GSAM and/or its
affiliates, certain attributes or benefits to be derived from asset allocation
strategies and the Goldman Sachs mutual funds that may be offered as investment
options for the strategic asset allocations. Such advertisements and
information may also include GSAM's current economic outlook and domestic and
international market views to suggest periodic tactical modifications to current
asset allocation strategies. Such advertisements and information may include
other materials which highlight or summarize the services provided in support of
an asset allocation program.
A Fund's performance data will be based on historical results and will
not be intended to indicate future performance. A Fund's total return and yield
will vary based on market conditions, portfolio expenses, portfolio investments
and other factors. The value of a Fund's shares will fluctuate and an
investor's shares may be worth more or less than their original cost upon
redemption. The Trust may also, at its discretion, from time to time make a
list of a Fund's holdings available to investors upon request.
Total return will be calculated separately for each class of shares in
existence. Because each class of shares may be subject to different expenses,
total return with respect to each class of shares of a Fund will differ.
SHARES OF THE TRUST
The Funds were reorganized from series of a Maryland corporation as
part of Goldman Sachs Trust, a Delaware business trust, by a Declaration of
Trust dated January 28, 1997, on April 30, 1997.
The Act requires that where more than one class or series of shares
exists, each class or series must be preferred over all other classes or series
in respect of assets specifically allocated to such class or series. The
Trustees also have authority to classify and reclassify any series of shares
into one or more classes of shares. As of the date of this Additional
Statement, the Trustees have classified the shares of the Mid Cap Equity Fund
into two classes: Institutional and Service Shares. Balanced, Capital Growth
and Small Cap Equity Funds have been classified into two classes: Class A and
Class B Shares. Growth and Income, CORE U.S. Equity, CORE Large Cap Growth,
International Equity, Emerging Markets Equity and Asia Growth Funds have been
classified into four classes: Institutional Shares, Service Shares, Class A
Shares and Class B Shares.
Each Institutional Share, Service Share, Class A Share and Class B
Share of a Fund represents a proportionate interest in the assets belonging to
the applicable class of the Fund. All expenses of a Fund are borne at the same
rate by each class of shares, except that fees under Service Plans are borne
exclusively by Service Shares, fees under Distribution and Authorized Dealer
Service Plans are borne exclusively by Class A Shares or Class B Shares and
transfer agency fees are borne at different rates by Class A Shares or Class B
Shares than Institutional and Service Shares. The Trustees may determine in the
future that it is appropriate to allocate other expenses differently between
classes of shares and may do so to the extent consistent with the rules of the
SEC and positions of the Internal Revenue Service. Each class of shares may
have different minimum investment requirements and be entitled to different
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shareholder services. Currently, shares of a class may only be exchanged for
shares of the same or an equivalent class of another fund. See "Exchange
Privilege" in the Prospectus.
Institutional Shares may be purchased at net asset value without a
sales charge for accounts in the name of an investor or institution that is not
compensated by a Fund for services provided to the institution's customers.
Service Shares may be purchased at net asset value without a sales
charge for accounts held in the name of an institution that, directly or
indirectly, provides certain account administration and shareholder liaison
services to its customers, including maintenance of account records and
processing orders to purchase, redeem and exchange Service Shares. Service
Shares bear the cost of account administration fees at the annual rate of up to
0.50% of the average daily net assets of the Fund attributable to Service
Shares.
Class A Shares are sold, with an initial sales charge of up to 5.5%,
through brokers and dealers who are members of the National Association of
Securities Dealers, Inc. and certain other financial service firms that have
sales agreements with Goldman Sachs. Class A Shares bear the cost of
distribution (Rule 12b-1) fees at the aggregate rate of up to 0.25% of the
average daily net assets of such Class A Shares. Class A Shares also bear the
cost of an Authorized Dealer Service Plan at an annual rate of up to 0.25% of
the average daily net assets attributable to Class A Shares.
Class B Shares of the Funds are sold subject to a contingent deferred
sales charge of up to 5.0% through brokers and dealers who are members of the
National Association of Securities Dealers Inc. and certain other financial
services firms that have sales arrangements with Goldman Sachs. Class B Shares
bear the cost of distribution (Rule 12b-1) fees at the aggregate rate of up to
0.75% of the average daily net assets attributable to Class B Shares. Class B
Shares also bear the cost of an Authorized Dealer Service Plan at an annual rate
of up to 0.25% of the average daily net assets attributable to Class B Shares.
It is possible that an institution or its affiliate may offer
different classes of shares (i.e., Institutional, Service, Class A Shares and
Class B Shares) to its customers and thus receive different compensation with
respect to different classes of shares of each Fund. Dividends paid by each
Fund, if any with respect to each class of shares will be calculated in the same
manner, at the same time on the same day and will be the same amount, except for
differences caused by the differences in expenses discussed above. Similarly,
the net asset value per share may differ depending upon the class of shares
purchased.
Certain aspects of the shares may be altered after advance notice to
shareholders if it is deemed necessary in order to satisfy certain tax
regulatory requirements.
When issued, shares are fully paid and non-assessable. In the event
of liquidation, shareholders are entitled to share pro rata in the net assets of
the applicable class of the relevant Fund available for distribution to such
shareholders. All shares entitle their holders to one vote per share, are
freely transferable and have no preemptive, subscription or conversion rights.
As of April 1, 1997, State Street Bank & Trust Company as Trustee (GS
Profit Sharing Master Trust), Attn. Louis Pereira, P.O. Box 1992, Boston, MA
02105-1992, was recordholder of 97.88% of Mid Cap Equity Fund's outstanding
shares; Trukan and Co., Attn: K. Ufford, P.O. Box 3699, Wichita, KS 67201-3699,
was recordholder of 6.80% of Balanced Fund's outstanding shares; Frontier Trust
Co. Inc. Trustee (FBO Dade County Public Schools), Attn: Agnes R. McMurray,
Fringe Benefits Management Co., 1720 S. Gadsden St., Tallahassee, FL 32301-5547,
was recordholder of 6.80% of Balanced Fund's outstanding shares; and State
Street Bank & Trust Company as Trustee (Goldman Sachs Employees'
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<PAGE>
Pension Plan), Attn: Louis Pereria, P.O. Box 1992, Boston, MA 02105-1992, was
recordholder of 5.10% of the Small Cap Equity Fund's outstanding shares.
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 directors from the separate voting
requirements of Rule 18f-2.
The Trust is not required to hold annual meetings of shareholders and
does not intend to hold such meetings. In the event that a meeting of
shareholders is held, each share of the Trust will be entitled, as determined by
the Trustees, either to one vote for each share or to one vote for each dollar
of net asset value represented by such shares on all matters presented to
shareholders including the elections of Trustees (this method of voting being
referred to as "dollar based voting"). However, to the extent required by the
Act or otherwise determined by the Trustees, series and classes of the Trust
will vote separately from each other. Shareholders of the Trust do not have
cumulative voting rights in the election of Trustees. Meetings of shareholders
of the Trust, or any series or class thereof, may be called by the Trustees,
certain officers or upon the written request of holders of 10% or more of the
shares entitled to vote at such meetings. The shareholders of the Trust will
have voting rights only with respect to the limited number of matters specified
in the Declaration of Trust and such other matters as the Trustees may determine
or may be required by law.
The Declaration of Trust provides for indemnification of Trustees,
officers and agents of the Trust unless the recipient is adjudicated (i) to be
liable by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of such person's office or (ii)
not to have acted in good faith in the reasonable belief that such person's
actions were in the best interest of the Trust. The Declaration of Trust
provides that, if any shareholder or former shareholder of any series is held
personally liable solely by reason of being or having been a shareholder and not
because of the shareholder's acts or omissions or for some other reason, the
shareholder or former shareholder (or heirs, executors, administrators, legal
representatives or general successors) shall be held harmless from and
indemnified against all loss and expense arising form such liability. The Trust,
acting on behalf of any affected series, must, upon request by such shareholder,
assume the defense of any claim made against such shareholder for any act or
obligation of the series and satisfy any judgment thereon from the assets of the
series.
The Declaration of Trust permits the termination of the Trust or of
any series or class of the Trust (i) by a majority of the affected shareholders
at a meeting of shareholders of the Trust, series or class; or (ii) by a
majority of the Trustees without shareholder approval if the Trustees determine
that such action is in the best interest of the Trust or its shareholders. The
factors and events that the Trustees may take into account in making such
determination include (i) the inability of the Trust or any successor series or
class to maintain its assets at an appropriate size; (ii) changes in laws or
regulations governing the Trust, series or class or affecting assets of the type
in which it invests; or (iii) economic developments or trends having a
significant adverse impact on their business or operations.
The Declaration of Trust authorizes the Trustees without shareholder
approval to cause the Trust, or any series thereof, to merge or consolidate with
any corporation, association, trust or their 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
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or a portion of the assets of a series of the Trust in the securities of another
open-end investment company.
The Declaration of Trust permits the Trustees to amend the Declaration
of Trust without a shareholder vote. However, shareholders of the Trust have the
right to vote on any amendment (i) that would affect the voting rights of
shareholder, (ii) that is required by law to be approved by shareholders; (iii)
that would amend the voting provisions of the Declaration of Trust; or (iv) that
the Trustees determine to submit to shareholders.
The Trustees may appoint separate Trustees with respect to one or more
series or classes of the Trust's shares (the "Series Trustees"). Series Trustees
may, but are not required to, serve as Trustees of the Trust or any other series
or class of the Trust. The Series Trustees have, to the exclusion of any other
Trustees of the Delaware Trust, all the powers and authorities of Trustees under
the Trust Instrument with respect to any other series or class.
SHAREHOLDER AND TRUSTEE LIABILITY
Under Delaware Law, the shareholders of the Funds are not generally
subject to liability for the debts or obligations of the Trust. Similarly,
Delaware law provides that a series of the Trust will not be liable for the
debts or obligations of any other series of the Trust. However, no similar
statutory or other authority limiting business trust shareholder liability
exists in other states. As a result, to the extent that a Delaware business
trust or a shareholder is subject to the jurisdiction of courts of such other
states, the courts may not apply Delaware law and may thereby subject the
Delaware business trust shareholders to liability. To guard against this risk,
the Declaration of Trust contains an express disclaimer of shareholder liability
for acts or obligations of a Fund. Notice of such disclaimer will normally be
given in each agreement, obligation or instrument entered into or executed by a
series or the Trustees. The Declaration of Trust provides for indemnification
by the relevant Fund for all loss suffered by a shareholder as a result of an
obligation of the series. The Declaration of Trust also provides that a series
shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the series and satisfy any judgment
thereon. In view of the above, the risk of personal liability of shareholders
of a Delaware business trust is remote.
In addition to the requirements under Delaware law, the Declaration of
Trust provides that shareholders of a series may bring a derivative action on
behalf of the series only if the following conditions are met: (a) shareholders
eligible to bring such derivative action under Delaware law who hold at least
10% of the outstanding shares of the series, or 10% of the outstanding shares of
the class to which such action relates, shall join in the request for the
Trustees to commence such action; and (b) the Trustees must be afforded a
reasonable amount of time to consider such shareholder request and to
investigate the basis and to employ other advisers in considering the merits of
the request and shall require an undertaking by the shareholders making such
request to reimburse the series for the expense of any such advisers in the
event that the Trustees determine not to bring such action.
The Declaration of Trust further provides that the Trustees will not
be liable for error of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against liability to which he or she
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
or her office.
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<PAGE>
TAXATION
The following is a summary of the principal U.S. federal income, and
certain state and local, tax considerations regarding the purchase, ownership
and disposition of shares in each Fund of the Trust. This summary does not
address special tax rules applicable to certain classes of investors, such as
tax-exempt entities, insurance companies and financial institutions. Each
prospective shareholder is urged to consult his own tax adviser with respect to
the specific federal, state, local and foreign tax consequences of investing in
each Fund. The summary is based on the laws in effect on the date of this
Additional Statement, which are subject to change.
GENERAL
=======
Each Fund is a separate taxable entity. CORE Large Cap Growth and
Emerging Markets Equity Funds each intends to elect and each other Fund has
elected to be treated and intends to qualify for each taxable year as a
regulated investment company under Subchapter M of the Code.
Qualification as a regulated investment company under the Code
requires, among other things, that (a) a Fund derive at least 90% of its gross
income for its taxable year from dividends, interest, payments with respect to
securities loans and gains from the sale or other disposition of stocks or
securities or foreign currencies, or other income (including but not limited to
gains from options, futures, and forward contracts) derived with respect to its
business of investing in such stock, securities or currencies (the "90% gross
income test"); (b) such Fund derive less than 30% of its gross income from the
sale or other disposition of any of the following which was held for less than
three months: (i) stock or securities; (ii) options, futures or forward
contracts (other than options, futures or forward contracts on foreign
currencies); and (iii) foreign currencies and foreign currency options, futures
and forward contracts that are not directly related to the Fund's principal
business of investing in stocks or securities or options and futures with
respect to stocks or securities (the "short-short test"); and (c) such Fund
diversify its holdings so that, at the close of each quarter of its taxable
year, (i) at least 50% of the market value of such Fund's total (gross) assets
is comprised of cash, cash items, U.S. Government securities, securities of
other regulated investment companies and other securities limited in respect of
any one issuer to an amount not greater in value than 5% of the value of such
Fund's total assets and to not more than 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its total
(gross) assets is invested in the securities of any one issuer (other than U.S.
Government securities and securities of other regulated investment companies) or
two or more issuers controlled by the Fund and engaged in the same, similar or
related trades or businesses. Gains from the sale or other disposition of
foreign currencies (or options, futures or forward contracts on foreign
currencies) that are not directly related to a Fund's principal business of
investing in stock or securities or options and futures with respect to stock or
securities will be treated as gains from the sale of investments held less than
three months under the short-short test (even though characterized as ordinary
income for some purposes) if such currencies or instruments were held for less
than three months. For purposes of the 90% gross income test, income that a Fund
earns from equity interests in certain entities that are not treated as
corporations (e.g., partnerships or trusts) for U.S. tax purposes will generally
have the same character for such Fund as in the hands of such an entity;
consequently, a Fund may be required to limit its equity investments in such
entities that earn fee income, rental income, or other nonqualifying income. In
addition, future Treasury regulations could provide that qualifying income under
the 90% gross income test will not include gains from foreign currency
transactions that are not directly related to a Fund's principal business of
investing in stock or securities or options and futures with respect to stock
or securities. Using foreign currency positions or entering into foreign
currency options, futures and forward or swap contracts for
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purposes other than hedging currency risk with respect to securities in a Fund's
portfolio or anticipated to be acquired may not qualify as "directly-related"
under these tests.
If a Fund complies with such provisions, then in any taxable year in
which such Fund distributes, in compliance with the Code's timing and other
requirements, at least 90% of its "investment company taxable income" (which
includes dividends, taxable interest, taxable accrued original issue discount
and market discount income, income from securities lending, any net short-term
capital gain in excess of net long-term capital loss, certain net realized
foreign exchange gains and any other taxable income other than "net capital
gain," as defined below, and is reduced by deductible expenses), and at least
90% of the excess of its gross tax-exempt interest income (if any) over certain
disallowed deductions, such Fund (but not its shareholders) will be relieved of
federal income tax on any income of the Fund, including long-term capital gains,
distributed to shareholders. However, if a Fund retains any investment company
taxable income or "net capital gain" (the excess of net long-term capital gain
over net short-term capital loss), it will be subject to a tax at regular
corporate rates on the amount retained. If the Fund retains any net capital
gain, the Fund may designate the retained amount as undistributed capital gains
in a notice to its shareholders who, if subject to U.S. federal income tax on
long-term capital gains, (i) will be required to include in income for federal
income tax purposes, as long-term capital gain, their shares of such
undistributed amount, and (ii) will be entitled to credit their proportionate
shares of the tax paid by the Fund against their U.S. federal income tax
liabilities, if any, and to claim refunds to the extent the credit exceeds such
liabilities. For U.S. federal income tax purposes, the tax basis of shares
owned by a shareholder of the Fund will be increased by an amount equal under
current law to 65% of the amount of undistributed net capital gain included in
the shareholder's gross income. Each Fund intends to distribute for each
taxable year to its shareholders all or substantially all of its investment
company taxable income, net capital gain and any net tax-exempt interest.
Exchange control or other foreign laws, regulations or practices may restrict
repatriation of investment income, capital or the proceeds of securities sales
by foreign investors such as the International Equity, Emerging Markets Equity
or Asia Growth Funds and may therefore make it more difficult for such a Fund to
satisfy the distribution requirements described above, as well as the excise tax
distribution requirements described below. However, each Fund generally expects
to be able to obtain sufficient cash to satisfy such requirements from new
investors, the sale of securities or other sources. If for any taxable year a
Fund does not qualify as a regulated investment company, it will be taxed on all
of its investment company taxable income and net capital gain at corporate
rates, and its distributions to shareholders will be taxable as ordinary
dividends to the extent of its current and accumulated earnings and profits.
In order to avoid a 4% federal excise tax, each Fund must distribute
(or be deemed to have distributed) by December 31 of each calendar year at least
98% of its taxable ordinary income for such year, at least 98% of the excess of
its capital gains over its capital losses (generally computed on the basis of
the one-year period ending on October 31 of such year), and all taxable ordinary
income and the excess of capital gains over capital losses for the previous year
that were not distributed for such year and on which the Fund paid no federal
income tax. For federal income tax purposes, dividends declared by a Fund in
October, November or December to shareholders of record on a specified date in
such a month and paid during January of the following year are taxable to such
shareholders as if received on December 31 of the year declared. The Funds
anticipate that they will generally make timely distributions of income and
capital gains in compliance with these requirements so that they will generally
not be required to pay the excise tax. For federal income tax purposes, each
Fund is permitted to carry forward a net capital loss in any year to offset its
own capital gains, if any, during the eight years following the year of the
loss. Asia Growth Fund had approximately $184,000, $5,487,000 and $9,825,000 at
January 31, 1997 of capital loss carry forwards expiring in 2002, 2003, and
2004, respectively, for federal tax purposes. These amounts are available to be
carried forward to offset future capital gains to the extent permitted by the
Code and applicable tax regulations.
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<PAGE>
Gains and losses on the sale, lapse, or other termination of options
and futures contracts, options thereon and certain forward contracts (except
certain foreign currency options, forward contracts and futures contracts) will
generally be treated as capital gains and losses. Certain of the futures
contracts, forward contracts and options held by a Fund will be required to be
"marked-to-market" for federal income tax purposes, that is, treated as having
been sold at their fair market value on the last day of the Fund's taxable year.
These provisions may require a Fund to recognize income or gains without a
concurrent receipt of cash. Any gain or loss recognized on actual or deemed
sales of these futures contracts, forward contracts, or options will (except for
certain foreign currency options, forward contracts, and futures contracts) be
treated as 60% long-term capital gain or loss and 40% short-term capital gain or
loss. As a result of certain hedging transactions entered into by a Fund, the
Fund may be required to defer the recognition of losses on futures contracts,
forward contracts, and options or underlying securities or foreign currencies to
the extent of any unrecognized gains on related positions held by such Fund and
the characterization of gains or losses as long-term or short-term may be
changed. The tax provisions described above applicable to options, futures and
forward contracts may affect the amount, timing and character of a Fund's
distributions to shareholders. The short-short test described above may limit a
Fund's ability to use options, forward contracts, and futures transactions as
well as its ability to engage in short sales. Moreover, application of certain
requirements for qualification as a regulated investment company and/or these
tax rules to certain investment practices, such as dollar rolls, or certain
derivatives such as interest rate swaps, floors, caps and collars and currency,
mortgage or index swaps may be unclear in some respects, and a Fund may
therefore be required to limit its participation in such transactions. Certain
tax elections may be available to a Fund to mitigate some of the unfavorable
consequences described in this paragraph.
Section 988 of the Code contains special tax rules applicable to
certain foreign currency transactions and instruments that may affect the
amount, timing and character of income, gain or loss recognized by a Fund.
Under these rules, foreign exchange gain or loss realized with respect to
foreign currencies and certain futures and options thereon, foreign currency-
denominated debt instruments, foreign currency forward contracts, and foreign
currency-denominated payables and receivables will generally be treated as
ordinary income or loss, although in some cases elections may be available that
would alter this treatment. If a net foreign exchange loss treated as ordinary
loss under Section 988 of the Code were to exceed a Fund's investment company
taxable income (computed without regard to such loss) for a taxable year, the
resulting loss would not be deductible by the Fund or its shareholders in future
years. Net loss, if any, from certain foregoing currency transactions or
instruments could exceed net investment income otherwise calculated for
accounting purposes with the result being either no dividends being paid or a
portion of a Fund's dividends being treated as a return of capital for tax
purposes, nontaxable to the extent of a shareholder's tax basis in his shares
and, once such basis is exhausted, generally giving rise to capital gains.
A Fund's investment in zero coupon securities, deferred interest
securities, certain structured securities or other securities bearing original
issue discount or, if a Fund elects to include market discount in income
currently, market discount, as well as any "mark to market" gain from certain
options, futures or forward contracts, as described above, will generally cause
it to realize income or gain prior to the receipt of cash payments with respect
to these securities or contracts. In order to obtain cash to enable it to
distribute this income or gain, maintain its qualification as a regulated
investment company and avoid federal income or excise taxes, the Fund may be
required to liquidate portfolio securities that it might otherwise have
continued to hold.
Each Fund (other than CORE U.S. Equity and CORE Large Cap Growth
Funds) anticipates that it 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. If, as may occur for International Equity, Emerging
Markets Equity and Asia Growth Funds, more than 50% of a Fund's total assets at
the close of any taxable year consists of stock or
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securities of foreign corporations, the Fund may file an election with the
Internal Revenue Service pursuant to which shareholders of the Fund would be
required to (i) include in ordinary gross income (in addition to taxable
dividends actually received) their pro rata shares of foreign income taxes paid
by the Fund that are treated as income taxes under U.S. tax regulations (which
excludes, for example, stamp taxes, securities transaction taxes, and similar
taxes) even though not actually received by such shareholders, and (ii) treat
such respective pro rata portions as foreign income taxes paid by them.
If the International Equity, Emerging Markets Equity and Asia Growth
Funds make this election, its respective shareholders may then deduct such pro
rata portions of qualified foreign taxes in computing their taxable incomes, or,
alternatively, use them as foreign tax credits, subject to applicable
limitations, against their U.S. federal income taxes. Shareholders who do not
itemize deductions for federal income tax purposes will not, however, be able to
deduct their pro rata portion of foreign taxes paid by a Fund, although such
shareholders will be required to include their shares of such taxes in gross
income if the election is made.
If a shareholder chooses to take credit for the foreign taxes deemed
paid by such shareholder as a result of any such election by International
Equity, Emerging Markets Equity or Asia Growth Funds, the amount of the credit
that may be claimed in any year may not exceed the same proportion of the U.S.
tax against which such credit is taken which the shareholder's taxable income
from foreign sources (but not in excess of the shareholder's entire taxable
income) bears to his entire taxable income. For this purpose, distributions
from long-term and short-term capital gains or foreign currency gains by a Fund
will generally not be treated as income from foreign sources. This foreign tax
credit limitation may also be applied separately to certain specific categories
of foreign-source income and the related foreign taxes. As a result of these
rules, which have different effects depending upon each shareholder's particular
tax situation, certain shareholders of International Equity, Emerging Markets
Equity and Asia Growth Funds may not be able to claim a credit for the full
amount of their proportionate share of the foreign taxes paid by such Fund even
if the election is made by such a Fund.
Shareholders who are not liable for U.S. federal income taxes,
including tax-exempt shareholders, will ordinarily not benefit from this
election. Each year, if any, that the International Equity, Emerging Markets
Equity or Asia Growth Funds files the election described above, its shareholders
will be notified of the amount of (i) each shareholder's pro rata share of
qualified foreign taxes paid by a Fund and (ii) the portion of Fund dividends
which represents income from each foreign country. The other Funds will not be
entitled to elect to pass foreign taxes and associated credits or deductions
through to their shareholders because they will not satisfy the 50% requirement
described above. If a Fund cannot or does not make this election, it may deduct
such taxes in computing the amount it is required to distribute.
If a Fund acquires stock (including, under proposed regulations, an
option to acquire stock such as is inherent in a convertible bond) in certain
foreign corporations that receive at least 75% of their annual gross income from
passive sources (such as interest, dividends, rents, royalties or capital gain)
or hold at least 50% of their assets in investments producing such passive
income ("passive foreign investment companies"), the Fund could be subject to
federal income tax and additional interest charges on "excess distributions"
received from such companies or gain from the sale of stock in such companies,
even if all income or gain actually received by the Fund is timely distributed
to its shareholders. The Fund would not be able to pass through to its
shareholders any credit or deduction for such a tax. In some cases, elections
may be available that would ameliorate these adverse tax consequences, but such
elections would require the Fund to include certain amounts as income or gain
(subject to the distribution requirements described above) without a concurrent
receipt of cash. Each Fund may limit and/or manage its holdings in passive
foreign investment companies to minimize its tax liability or maximize its
return from these investments.
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Investments in lower-rated securities may present special tax issues
for a Fund to the extent actual or anticipated defaults may be more likely with
respect to such securities. Tax rules are not entirely clear about issues such
as when a Fund may cease to accrue interest, original issue discount, or market
discount; when and to what extent deductions may be taken for bad debts or
worthless securities; how payments received on obligations in default should be
allocated between principal and income; and whether exchanges of debt
obligations in a workout context are taxable. These and other issues will be
addressed by a Fund, in the event it invests in such securities, in order to
seek to eliminate or minimize any adverse tax consequences.
TAXABLE U.S. SHAREHOLDERS - DISTRIBUTIONS
=========================================
For U.S. federal income tax purposes, distributions by a Fund, whether
reinvested in additional shares or paid in cash, generally will be taxable to
shareholders who are subject to tax. Shareholders receiving a distribution in
the form of newly issued shares will be treated for U.S. federal income tax
purposes as receiving a distribution in an amount equal to the amount of cash
they would have received had they elected to receive cash and will have a cost
basis in each share received equal to such amount divided by the number of
shares received.
Distributions from investment company taxable income for the year will
be taxable as ordinary income. Distributions designated as derived from a
Fund's dividend income, if any, that would be eligible for the dividends
received deduction if such Fund were not a regulated investment company may be
eligible, for the dividends received deduction for corporations. The dividends-
received deduction, if available, is reduced to the extent the shares with
respect to which the dividends are received are treated as debt-financed under
federal income tax law and is eliminated if the shares are deemed to have been
held for less than a minimum period, generally 46 days. Because eligible
dividends are limited to those a Fund receives from U.S. domestic corporations,
it is unlikely that a substantial portion of the distributions made by
International Equity, Asia Growth and Emerging Markets Equity Funds will qualify
for the dividends-received deduction. The entire dividend, including the
deducted amount, is considered in determining the excess, if any, of a corporate
shareholder's adjusted current earnings over its alternative minimum taxable
income, which may increase its liability for the federal alternative minimum
tax, and the dividend may, if it is treated as an "extraordinary dividend" under
the Code, reduce such shareholder's tax basis in its shares of a Fund. Capital
gain dividends (i.e., dividends from net capital gain) if designated as such in
a written notice to shareholders mailed not later than 60 days after a Fund's
taxable year closes, will be taxed to shareholders as long-term capital gain
regardless of how long shares have been held by shareholders, but are not
eligible for the dividends received deduction for corporations. Distributions,
if any, that are in excess of a Fund's current and accumulated earnings and
profits will first reduce a shareholder's tax basis in his shares and, after
such basis is reduced to zero, will generally constitute capital gains to a
shareholder who holds his shares as capital assets.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions, and certain prohibited transactions is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their tax
advisers for more information.
TAXABLE U.S. SHAREHOLDERS - SALE OF SHARES
==========================================
When a shareholder's shares are sold, redeemed or otherwise disposed
of in a transaction that is treated as a sale for tax purposes, the shareholder
will generally recognize gain or loss equal to the difference between the
shareholder's adjusted tax basis in the shares and the cash, or fair market
value of any property, received. Assuming the shareholder holds the shares as a
capital asset at the time of such sale, such gain or loss should be capital in
character, and long-term if the shareholder has a tax holding period for the
shares of more than one year, otherwise short-term, subject to the rules
described
B-69
<PAGE>
below. Shareholders should consult their own tax advisers with reference to
their particular circumstances to determine whether a redemption (including an
exchange) or other disposition of Fund shares is properly treated as a sale for
tax purposes, as is assumed in this discussion. If a shareholder receives a
capital gain dividend with respect to shares and such shares have a tax holding
period of six months or less at the time of a sale or redemption of such shares,
then any loss the shareholder realizes on the sale or redemption will be treated
as a long-term capital loss to the extent of such capital gain dividend. All or
a portion of any sales load paid upon the purchase of shares of a Fund will not
be taken into account in determining gain or loss on the redemption or exchange
of such shares within 90 days after their purchase to the extent the redemption
proceeds are reinvested, or the exchange is effected, without payment of an
additional sales load pursuant to the reinvestment or exchange privilege. The
load not taken into account will be added to the tax basis of the newly-acquired
shares. Additionally, any loss realized on a sale or redemption of shares of a
Fund may be disallowed under "wash sale" rules to the extent the shares disposed
of are replaced with other shares of the same Fund within a period of 61 days
beginning 30 days before and ending 30 days after the shares are disposed of,
such as pursuant to a dividend reinvestment in shares of such Fund. If
disallowed, the loss will be reflected in an adjustment to the basis of the
shares acquired.
Each Fund may be required to withhold, as "backup withholding,"
federal income tax at a rate of 31% from dividends (including capital gain
dividends) and share redemption and exchange proceeds to individuals and other
non-exempt shareholders who fail to furnish such Fund with a correct taxpayer
identification number ("TIN") certified under penalties of perjury, or if the
Internal Revenue Service or a broker notifies the Fund that the payee is subject
to backup withholding as a result of failing to properly report interest or
dividend income to the Internal Revenue Service or that the TIN furnished by the
payee to the Fund is incorrect, or if (when required to do so) the payee fails
to certify under penalties of perjury that it is not subject to backup
withholding. A Fund may refuse to accept an application that does not contain
any required TIN or certification that the TIN provided is correct. If the
backup withholding provisions are applicable, any such dividends and proceeds,
whether paid in cash or reinvested in additional shares, will be reduced by the
amounts required to be withheld. Any amounts withheld may be credited against a
shareholder's U.S. federal income tax liability.
NON-U.S. SHAREHOLDERS
=====================
The discussion above relates solely to U.S. federal income tax law as
it applies to "U.S. persons" subject to tax under such law. Shareholders who, as
to the United States, are not "U.S. persons," (i.e., are nonresident aliens,
foreign corporations, fiduciaries of foreign trusts or estates, foreign
partnerships or other non-U.S. investors) generally will be subject to U.S.
federal withholding tax at the rate of 30% on distributions treated as ordinary
income unless the tax is reduced or eliminated pursuant to a tax treaty or the
dividends are effectively connected with a U.S. trade or business of the
shareholder. In the latter case the dividends will be subject to tax on a net
income basis at the graduated rates applicable to U.S. individuals or domestic
corporations. Distributions of net capital gain, including amounts retained by
a Fund which are designated as undistributed capital gains, to a non-U.S.
shareholder will not be subject to U.S. federal income or withholding tax unless
the distributions are effectively connected with the shareholder's trade or
business in the United States or, in the case of a shareholder who is a
nonresident alien individual, the shareholder is present in the United States
for 183 days or more during the taxable year and certain other conditions are
met. Non-U.S. shareholders may also be subject to U.S. federal withholding tax
on deemed income resulting from any election by International Equity, Emerging
Markets Equity or Asia Growth Funds to treat qualified foreign taxes it pays as
passed through to shareholders (as described above), but they may not be able to
claim a U.S. tax credit or deduction with respect to such taxes.
Any capital gain realized by a non-U.S. shareholder upon a sale or
redemption of shares of a Fund will not be subject to U.S. federal income or
withholding tax unless the gain is effectively connected with
B-70
<PAGE>
the shareholder's trade or business in the U.S., or in the case of a shareholder
who is a nonresident alien individual, the shareholder is present in the U.S.
for 183 days or more during the taxable year and certain other conditions are
met.
Non-U.S. persons who fail to furnish a Fund with an IRS Form W-8 or an
acceptable substitute may be subject to backup withholding at the rate of 31% on
capital gain dividends and the proceeds of redemptions and exchanges. Each
shareholder who is not a U.S. person should consult his or her tax adviser
regarding the U.S. and non-U.S. tax consequences of ownership of shares of and
receipt of distributions from the Funds.
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. Shareholders should consult their own tax advisers
concerning these matters.
FINANCIAL STATEMENTS
The audited financial statements and related Reports of Independent
Public Accountants, contained in the 1997 Annual Report of each of the Funds,
are incorporated herein by reference into this Additional Statement and attached
hereto.
OTHER INFORMATION
Class A Shares of each Fund are sold at a maximum sales charge of
5.5%. Using the initial offering price per share, as of January 31, 1997, the
maximum offering price of each Fund's Class A shares would be as follows:
Maximum Offering
Net Asset Sales Price to
Value Charge Public
--------- -------- --------
Balanced Fund $18.78 $1.09 $19.87
Growth and Income Fund 23.18 1.35 24.53
CORE U.S. Equity Fund 23.32 1.36 24.68
CORE Large Cap Growth Fund N/A N/A N/A
Capital Growth Fund 16.73 0.97 17.70
International Equity Fund 19.32 1.12 20.44
Small Cap Equity Fund 20.91 1.22 22.13
Emerging Markets Equity Fund N/A N/A N/A
Asia Growth Fund 16.31 0.95 17.26
Each Fund will redeem shares solely in cash up to the lesser of $250,000 or 1%
of the net asset value of the Fund during any 90-day period for any one
shareholder. Each Fund, however, reserves the right to pay redemptions
exceeding $250,000 or 1% of the net asset value of the Fund at the time of
redemption by a distribution in kind of securities (instead of cash) from such
Fund. The securities distributed in kind would be readily marketable and would
be valued for this purpose using the same method employed in
B-71
<PAGE>
calculating the Fund's net asset value per share. See "Net Asset Value." If a
shareholder receives redemption proceeds in kind, the shareholder should expect
to incur transaction costs upon the disposition of the securities received in
the redemption.
The right of a shareholder to redeem shares and the date of payment by each
Fund may be suspended for more than seven days for any period during which the
New York Stock Exchange is closed, other than the customary weekends or
holidays, or when trading on such Exchange is restricted as determined by the
SEC; or during any emergency, as determined by the SEC, as a result of which it
is not reasonably practicable for such Fund to dispose of securities owned by it
or fairly to determine the value of its net assets; or for such other period as
the SEC may by order permit for the protection of shareholders of such Fund.
The 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.
DISTRIBUTION AND AUTHORIZED DEALER SERVICE PLANS
CLASS A DISTRIBUTION PLANS. As described in the Prospectus, the Trust with
respect to Class A Shares of each Fund has adopted a distribution plan (the
"Class A Plans") pursuant to Rule 12b-1 under the Act. See "Distribution and
Authorized Dealer Service Plan" in the Prospectus.
The Class A Plans were most recently approved on April 23, 1997 by a
majority vote of the Trustees, including a majority of the non-interested
Trustees who have no direct or indirect financial interest in the Class A Plans,
cast in person at a meeting called for the purpose of approving the Class A
Plans. The compensation payable under the Class A Plans may not exceed 0.25%
per annum of each Fund's average daily net assets.
Currently, Goldman Sachs has voluntarily agreed to waive the entire amount
of such fee for the Balanced, CORE Large Cap Growth, Capital Growth and Small
Cap Equity Funds and to limit the amount of such fee to 0.21% of average daily
net asset attributable to Class A Shares of CORE U.S. Equity, International
Equity and Asia Growth Funds; and to limit the amount of such fee to 0.04% of
the average daily net asset attributable to Class A shares of the Growth and
Income Fund. Goldman Sachs has no current intention of modifying or
discontinuing such waiver but may do so in the future at its discretion.
Each Class A Plan was amended effective April 30, 1997 for each of the
Funds then in existence to reduce the fee payable under the Plan from 0.50% of
average daily net assets attributable to Class A Shares. At the time of such
amendment the Trustees approved the Authorized Dealer Service Plan pursuant to
which personal and account maintenance services are provided. See "Management --
Authorized Dealer Service Plans."
B-72
<PAGE>
For the fiscal year ended January 31, 1997 the amounts paid to Goldman
Sachs pursuant to its Class A Plan by each Fund then in existence were as
follows:
1997
========
Balanced Fund $ 0
Growth and Income Fund 139,025
CORE U.S. Equity Fund 363,264
CORE Large Cap Growth Fund/1/ N/A
Capital Growth Fund 0
International Equity Fund 900,274
Small Cap Equity Fund 0
Emerging Markets Equity Fund/1/ N/A
Asia Growth Fund 526,448
- ------------------
1 Not operational.
Had Goldman Sachs' voluntary limitations not been in effect the Funds
would have paid Goldman Sachs the following fees during the fiscal year ended
1997 pursuant to their respective Class A Plans:
1997
==========
Balanced Fund $ 153,392
Growth and Income Fund 1,252,257
CORE U.S. Equity Fund 432,457
CORE Large Cap Growth Fund/1/ N/A
Capital Growth Fund 2,171,462
International Equity Fund 1,071,755
Small Cap Equity Fund 529,684
Emerging Markets Equity Fund/1/ N/A
Asia Growth Fund 626,724
- ------------------
1 Not operational.
B-73
<PAGE>
During the fiscal year ended January 31, 1997, Goldman Sachs incurred the
following expenses in connection with distribution under the Class A Plan of
each applicable Fund then in existence:
<TABLE>
<CAPTION>
Compensation Printing and Preparation
and Expenses Allocable Mailing of and
of the Overhead, Prospectuses Distribution
Distributor Telephone to Other of Sales
Compensation & Its Sales and Travel Than Current Literature and
To Dealers Personnel Expenses Shareholders Advertising
============ ============ ========== ============ ==============
<S> <C> <C> <C> <C> <C>
Fiscal Year Ended
January 31, 1997:
Balanced Fund/(1)/ $0 $ 0 $ 0 $ 0 $ 0
Growth and Income Fund/(1)/ 0 897,444 823,000 64,500 158,500
CORE U.S. Equity Fund 0 714,665 684,000 51,000 281,000
CORE Large Cap Growth Fund/(2)/ N/A N/A N/A N/A N/A
Capital Growth Fund/(1)/ N/A N/A N/A N/A N/A
International Equity Fund/(1)/ 0 1,124,203 952,000 70,500 363,955
Small Cap Equity Fund/(1)/ N/A N/A N/A N/A N/A
Asia Growth Fund/(1)/ 0 558,465 343,000 37,000 155,500
Emerging Market Equity Fund/(2)/ N/A N/A N/A N/A N/A
</TABLE>
The table above reflects amounts expended by Goldman Sachs, which amounts are in
excess of the compensation received by Goldman Sachs under the Class A Plans.
The payments under the Class A Plans were used by Goldman Sachs to compensate it
for the expenses shown above on a pro-rata basis.
(1) COMMENCING JUNE 1, 1995, GOLDMAN SACHS IS NOT IMPOSING THE 0.25% 12B-1 FEE
FOR THESE FUNDS. AS NO DISTRIBUTION REVENUE HAS BEEN EARNED AFTER THIS DATE
FOR THESE FUNDS, NO EXPENSES ARE REFLECTED ABOVE.
(2) NOT OPERATIONAL.
B-74
<PAGE>
The Class A Plans are compensation plans which provide for the payment of a
specified fee without regard to the expenses actually incurred by Goldman Sachs.
If such fee exceeds Goldman Sach's expenses, Goldman Sachs may realize a profit
from these arrangements. If the Class A Plans were terminated by the Trustees
and no successor plans were adopted, each Fund would cease to make payments to
Goldman Sachs under the Class A Plans and Goldman Sachs would be unable to
recover the amount of any of its unreimbursed distribution expenditures.
Under the Class A Plans, Goldman Sachs, as distributor of each Fund's Class
A shares, will provide to the Trustees for their review, and the Trustees will
review at least quarterly, a written report of the services provided and amounts
expended by Goldman Sachs under the Class A Plans and the purposes for which
such services were performed and expenditures were made.
The Class A Plans will remain in effect until May 1, 1998 and from year to
year thereafter, provided that such continuance is approved annually by a
majority vote of the Trustees, including a majority of the non-interested
Trustees who have no direct or indirect financial interest in the Class A Plans.
A Class A Plan may not be amended to increase materially the amount to be spent
for the services described therein as to a Fund without approval of a majority
of the outstanding voting securities of the affected Fund. All material
amendments of the Class A Plan must also be approved by the Trustees in the
manner described above. A Class A Plan may be terminated at any time as to any
Fund without payment of any penalty by a vote of a majority of the non-
interested Trustees or by vote of a majority of the Class A Shares of the
applicable Fund. So long as the Class A Plans are in effect, the selection and
nomination of non-interested Trustees shall be committed to the discretion of
the non-interested Trustees. The Trustees have determined that in their
judgment there is a reasonable likelihood that the Class A Plans will benefit
the Funds and their Class A shareholders.
CLASS B DISTRIBUTION PLANS. As described in the Prospectus, the Trust has
adopted on behalf of the Funds distribution plans (the "Class B Plans") pursuant
to Rule 12b-1 under the Act with respect to the Class B shares. See
"Distribution and Authorized Dealer Service Plans" in the Prospectus.
The Class B Plans were most recently approved for the Funds (except
Emerging Markets Equity Fund) on April 23, 1997 and for the Emerging Markets
Equity Fund on January 28, 1997, by a majority vote of the Trustees, including a
majority of the non-interested Trustees who have no direct or indirect financial
interest in the Class B Plans, cast in person at a meeting called for the
purpose of approving the Class B Plans.
With respect to each Fund, the compensation payable under the Class B Plans
is equal to 0.75% per annum of the average daily net assets attributable to
Class B Shares of that Fund. The fees received by Goldman Sachs under the Class
B Plans and contingent deferred sales charge on Class B Shares may be sold by
Goldman Sachs as distributor to entities which provide financing for payments to
Authorized Dealers in respect of sales of Class B Shares. To the extent such
fee is not paid to such dealers, Goldman Sachs may retain such fee as
compensation for its services and expenses of distributing the Funds' Class B
Shares. If such fee exceeds Goldman Sachs' expenses, Goldman Sachs may realize
a profit from these arrangements.
B-75
<PAGE>
During the fiscal year ended January 31, 1997, Goldman Sachs incurred the
following fees under the Class B Plan of each applicable Fund then in existence:
Balanced Fund $ 3,861
Growth and Income Fund 28,075
CORE U.S. Equity Fund 36,508
CORE Large Cap Growth Fund/1/ N/A
Capital Growth Fund 7,632
International Equity Fund 44,148
Small Cap Fund 8,973
Emerging Markets Equity Fund/1/ N/A
Asia Growth Fund 10,229
- ------------------
1 Not operational.
The Class B Plans are compensation plans which provide for the payment of a
specified distribution fee without regard to the distribution expenses actually
incurred by Goldman Sachs. If the Class B Plans were terminated by the Trustees
and no successor plan were adopted, the Funds would cease to make distribution
payments to Goldman Sachs and Goldman Sachs would be unable to recover the
amount of any of its unreimbursed distribution expenditures.
Under the Class B Plans, Goldman Sachs, as distributor of the Funds'
shares, will provide to the Board of Trustees for its review, and the Board will
review at least quarterly, a written report of the services provided and amounts
expended by Goldman Sachs under the Class B Plans and the purposes for which
such services were performed and expenditures were made.
The Class B Plans will remain in effect until May 1, 1998 and from year to
year, provided such continuance is approved annually by a majority vote of the
Trustees, including a majority of the non-interested Trustees. A Class B Plan
may not be amended to increase materially the amount to be spent for the
services described therein as to any Fund without approval of a majority of the
outstanding Class B Shares of that Fund. All material amendments of the Class B
Plans must also be approved by the Trustees in the manner described above. With
respect to any Fund, a Class B Plan may be terminated at any time without
payment of any penalty by a vote of the majority of the non-interested Trustees
or by vote of a majority of the outstanding voting securities of the Class B
Shares of that Fund. So long as a Class B Plans are in effect, the selection
and nomination of non-interested Trustees shall be committed to the discretion
of the non-interested Trustees. The Trustees have determined that in their
judgment there is a reasonable likelihood that the Class B Plans will benefit
each Fund and their respective Class B shareholders.
AUTHORIZED DEALER SERVICE PLANS. As described in the prospectus, each
Fund's Class A and Class B Shares have adopted a non-Rule 12b-1 Authorized
Dealer Service Plan (each a "Service Plan") pursuant to which Goldman Sachs and
Authorized Dealers are compensated for the provision of personal and account
maintenance services. The Service Plan of Emerging Markets Equity Fund was
initially approved on January 28, 1997 and the Service Plans of CORE Large Cap
Growth Fund were initially approved on April 23, 1997 by a majority vote of the
Trustees, including a majority of the non-interested Trustees who have no direct
or indirect financial interest in the Service Plan. Each Service Plan of each
other Fund was most recently approved by the Trustees, including a majority of
the non-interested Trustees who have no direct or indirect financial interest in
the Service Plan, at a meeting held on April 23, 1997. Each Fund's Service Plan
provides for the compensation for personal and account maintenance
B-76
<PAGE>
services at an annual rate of up to 0.25% of the Fund's average daily net assets
attributable to Class A or Class B shares.
For the fiscal year ended January 31, 1997 and for the period June 1, 1995
(commencement of each Service Plan) through January 31, 1996, each Fund that was
operational paid Authorized Dealer Service fees at the foregoing rate for each
Fund's Class A shares. During the period May 1, 1996 (commencement of each
Class B Service Plan) through January 31, 1997, Authorized Dealer Service fees
were paid with respect to each Fund's Class B shares which were then in
operation at the foregoing rate.
For the fiscal year ended January 31, 1997 and for the period June 1, 1995
through January 31, 1996, the amounts paid to Goldman Sachs pursuant to its
Class A Authorized Dealer Service Plan and for the period May 1, 1996
(commencement of Class B Service Plan) through January 31, 1997, the amounts
paid to Goldman Sachs pursuant ot its Class B Service Plan was:
Class A Class B Class A
1997 1997 1996
========== ======= ==========
Balanced Fund $ 153,392 $ 1,294 $ 64,145
Growth and Income Fund 1,252,257 9,358 603,426
CORE U.S. Equity Fund 432,457 12,169 182,881
CORE Large Cap U.S. Growth Fund/1/ N/A N/A N/A
Capital Growth Fund 2,171,462 2,854 1,563,448
International Equity Fund 1,071,755 14,733 470,027
Small Cap Fund 569,684 2,992 454,857
Emerging Market Equity Fund/1/ N/A N/A N/A
Asia Growth Fund 626,724 3,410 276,754
- -----------------
1 Not operational
The Service Plans of each Fund will remain in effect until May 1, 1998, and
from year to year thereafter, provided that the continuance of each service plan
is approved annually by a majority vote of the Trustees, including a majority of
the non-interested Trustees who have no direct or indirect financial interest in
the Service Plans. All material amendments of the Service Plans must also be
approved by the Trustees in the manner described above. The Service Plans may
be terminated at any time as to any Fund without payment of any penalty by a
vote of a majority of the non-interested Trustees or by vote of a majority of
the outstanding voting securities of the affected Fund. The Trustees have
determined that in their judgment there is a reasonable likelihood that the
Service Plans will benefit the Funds and their shareholders.
OTHER INFORMATION REGARDING PURCHASES, REDEMPTIONS,
EXCHANGES AND DIVIDENDS
The following information supplements the information in the Prospectus
under the captions "How to Invest," "How to Sell Shares of the Funds" and
"Dividends." Please see the Prospectus for more complete information.
B-77
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders
- --------------------------------------------------------------------------------
Dear Shareholders:
The U.S. equity market rewarded investors with excellent returns once
again in the 12-month period ended January 31, 1997. Most European markets
achieved significant gains as well, with several outpacing the U.S., while the
performance of Asian markets varied widely. We are pleased to report that most
of the Goldman Sachs equity funds performed very well in this generally
favorable global equity environment.
U.S. Stocks Continued to Climb Amid Heightened Volatility
The U.S. stock market surged to record levels during the period under
review, rising an impressive 26.3% (as measured by the Standard & Poor's 500
stock index). During 1996, the market advanced in a "staircase" pattern, where
notable gains are achieved within a relatively short time and are followed by a
period of choppy trading. For example, after a run-up from January through
mid-February, market volatility notably increased, as investor sentiment
vacillated between two contradictory concerns. With some economic news,
investors feared that the economy was growing too quickly, making higher
inflation a possibility, while other news caused them to worry that the economy
was slowing, putting earnings at risk. In May, investors briefly overcame their
fears and sent the market higher, but their concerns quickly re-emerged and
caused the market to settle into another choppy trading range that culminated in
a sharp sell-off in July.
By August, sentiment significantly improved when data indicated that
earnings growth was more resilient than generally expected and inflation
remained under control. Thus reassured, investors propelled stocks to record
highs during the second half of the period, with the Dow Jones Industrial
Average crossing the 6000 mark for the first time by mid-October. The ascent
continued through the end of the period, with the Dow climbing to 7000 by
mid-February 1997.
Though small-cap stocks led the market during the first half of the
year, the post-July rally was dominated by large-cap, growth companies.
Furthermore, the rally was very narrowly focused, with a handful of large-cap
stocks (primarily in the technology, finance and pharmaceutical sectors)
contributing substantially to the S&P 500 index's performance for the period.
After a Weak Start, Economic Growth Rebounded, Then Moderated
When the period began, lackluster consumer spending and the General
Motors strike restrained economic growth, but the economy still advanced faster
than expected, with first-quarter real GDP growth of 2.0% (annualized). Momentum
accelerated even more dramatically during the second quarter, as industrial
activity, automobile sales and home sales all showed significant improvement. As
a result, second-quarter real GDP rose a robust 4.7% (annualized), its highest
rate in two years.
The economy's torrid growth cooled markedly during the third quarter
with an annualized real GDP growth of 2.1%, largely due to lackluster consumer
spending and a widening U.S. trade deficit. This slowdown proved to be
temporary, however, as the economy strengthened from October through December.
Fourth-quarter real GDP
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Table of Contents
<S> <C>
Introduction/Market Overview............................................. 1
Goldman Sachs Balanced Fund.............................................. 4
Goldman Sachs Select Equity Fund......................................... 14
Goldman Sachs Growth and Income Fund..................................... 22
Goldman Sachs Capital Growth Fund........................................ 28
Goldman Sachs Small Cap Equity Fund...................................... 34
Goldman Sachs International Equity Fund.................................. 40
Goldman Sachs Asia Growth Fund........................................... 48
Financial Statements..................................................... 56
Notes to Financial Statements............................................ 64
Financial Highlights..................................................... 74
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
1
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders (continued)
growth was revised to 3.9% (annualized), reflecting a narrowing trade deficit,
rising consumer spending and accelerating manufacturing activity. Despite firm
growth, underlying inflation remained surprisingly mild. For all of 1996,
consumer prices rose only 2.9%. In January 1997, most indicators suggested that
the economy would continue to advance.
The U.S. Federal Reserve cut the Federal funds rate by 25 basis
points in January 1996, just prior to the start of the period, in response to
generally poor year-end economic conditions. Though stronger than expected
growth shifted investor expectations from further Federal Reserve interest rate
cuts to potential tightening, the Fed then left rates unchanged. As of January
31, 1997, the Federal funds rate remained at 5.25%.
The Dollar Resumed Its Climb Against the Yen and the Mark Following a Brief July
Slide
During the period under review, the dollar continued to strengthen,
rising to a 47-month high against the yen and a 31-month high against the mark.
Though the dollar declined briefly in July along with the U.S. stock market, it
quickly rebounded in August and continued to rally through the end of the
period. The dollar's climb was reflective of several developments, including the
relative strength of the U.S. economy, reductions in the budget deficit and
controlled inflation. Despite the run-up, Goldman Sachs' economists do not
expect a major impact on U.S. growth in 1997, nor do they anticipate a major
decrease in exports, as the dollar's effect on U.S. trade flows is relatively
small and stretched out over time. Furthermore, domestic demand in Canada and
Mexico, which together accounted for nearly one-third of U.S. exports in 1996,
is expected to rise.
The International Market Environment: European Equities Performed Well, Japan
Declined Sharply and Asian Markets Were Mixed Amid Increased Volatility
During the period under review, most global economies experienced
modest growth, but long-awaited recoveries in Europe and Japan fell short of
expectations. In Europe, several major economies, such as Germany and France,
continued to be plagued by weaker than expected manufacturing activity and
record-high unemployment, while others, such as the U.K., clearly accelerated.
In contrast to the mixed economic conditions, most European equity markets
performed very well, buoyed by healthy corporate profits. Though the Japanese
economy strengthened, equities declined due to concerns regarding the
sustainability of earnings growth as well as fears that the newly elected
government would delay deregulation. In January 1997, the already weak Japanese
market sold off sharply when the government announced an austerity program that
was expected to curb growth. In other Asian countries, key elections heightened
political uncertainty throughout the region and a marked slowdown in economic
growth increased volatility.
Outlook in the U.S.: Economic Growth Is Expected to Continue to Strengthen
Goldman Sachs' economists expect first-quarter real GDP growth to
slow to just under 2.0% (annualized) due to a widening trade deficit. However,
this slowdown should not be interpreted as any change in economic fundamentals,
as underlying demand remains firm and consumer confidence, income and employment
trends continue to support consumer spending. The favorable economic environment
of moderate growth and low inflation appears likely to persist in the near term,
which could translate to a seventh year of profit growth for U.S. corporations
in 1997 and another good year for U.S. equities, though not likely as strong as
last year. As always, equity performance can be affected by changes in the
economic environment, such as higher than expected inflation, which could lead
to a Fed tightening by midyear, or an unforeseen faltering of economic growth.
After the outstanding performance of the past two years, it is
important to maintain realistic expectations from your equity investments. As
increased volatility during 1996 demonstrated, equities can go down as well as
up. Over the long run, however, stocks have historically outperformed other
asset classes, rewarding investors committed to a long-term investment horizon.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
A Major Addition to Our Active Equity Management Team
We are pleased to announce that we have recently acquired Liberty
Investment Management, a Tampa, Florida-based investment advisory firm with an
impressive 16-year track record. Liberty's Chief Investment Officer, Herbert
Ehlers, and his portfolio management team have assumed primary responsibility
for the Goldman Sachs Capital Growth Fund, which they will manage using a
"growth at a reasonable price" investment style. The Liberty group adds both
breadth and depth to the Goldman Sachs U.S. Active Equity team, and we look
forward to working with them.
In conclusion, thank you for making the Goldman Sachs equity funds part of
your long-term financial plan.
Sincerely,
/s/ David B. Ford /s/ John P. McNulty
David B. Ford John P. McNulty
Co-Head, Co-Head,
Goldman Sachs Goldman Sachs
Asset Management Asset Management
March 3, 1997
- --------------------------------------------------------------------------------
3
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Balanced Fund
- --------------------------------------------------------------------------------
Objective and Investment Approach
The Goldman Sachs Balanced Fund seeks to provide investors with a
combination of long-term growth of capital and current income by investing in a
diversified portfolio that includes both equity and fixed income securities.
Under normal market conditions, the fund is expected to maintain an asset mix of
45% to 65% in equity securities, with the remainder (at a minimum 25%) in fixed
income securities. The fund's portfolio management team will review the fund's
asset mix on a regular basis and adjust it to reflect changes in the economic
environment.
Stocks are selected using a value style, identifying those judged to
be inexpensive relative to their expected long-term earnings and ability to pay
dividends. We also consider the degree to which a company's management is
committed to increasing value for shareholders.
In the fixed income portion of the portfolio, we actively manage the
portfolio within a risk-controlled framework. We seek to minimize interest rate
risk relative to the portfolio's benchmark, and focus on seeking to add value
through sector selection, security selection and yield curve strategies.
Performance Review: Equity, Fixed Income and Asset Allocation Contributed to
Strong Results
<TABLE>
<CAPTION>
Fund Total Return
(based on net Benchmark
asset value) Total Return+
------------ -------------
<S> <C> <C>
Class A (1/31/96 - 1/31/97)* 18.59% 15.51%
Class B (5/1/96 - 1/31/97)* 16.22% 14.99%
</TABLE>
* Class A and B share performance assumes reinvestment of all dividends and
distributions, a complete redemption at the net asset value at the end of the
period and no initial sales charge or contingent deferred sales charge.
Performance for Class B shares is a cumulative total return (not annualized)
from their inception through the end of the period.
+ The benchmark is a combination of the S&P 500 stock index (weighted at 55%)
and the Lehman Brothers Aggregate Bond Index (weighted at 45%).
We are pleased to report that during the period under review, the
fund's Class A and Class B shares outperformed the benchmark. In addition, the
fund's Class A shares ranked within the top 15% of the Lipper balanced fund
category (35th of 281) for the 12-month period ended January 31, 1997, according
to Lipper Analytical Services, Inc. (Please note that Lipper rankings do not
take sales charges into account and that past performance is not a guarantee of
future results. Class B shares were not ranked because they did not exist during
the full year.)
The equity and fixed income portions of the fund both performed
favorably, with equity investments contributing most to fund results. In
addition, our asset allocation decisions also benefited performance. During the
spring of 1996, we reduced the fund's equity weightings in favor of fixed income
investments, which worked in its favor when equities fell sharply in July. In
October, we increased the fund's equity weighting, just prior to a significant
rally in the stock market. As of January 31, 1997, the fund's asset mix based on
net assets was 54% in equities, 42% in fixed income and the remainder in cash
equivalents.
Best Performing Equity Investments Included Technology, Finance and Energy
Stocks
The fund's best performing stocks came from a wide range of
industries, particularly technology, finance and energy. Technology holdings
that performed well included Intel Corp., the dominant microprocessor
manufacturer, which we sold after it climbed sharply due to stronger than
expected personal computer sales and reached our target price, and Avnet, Inc.,
the second largest distributor of semiconductors and other electronic
components. In the financial sector, BankAmerica Corp. increased its focus on
aggressive capital management, and NationsBank Corp. began to realize the
benefits of cost cuts. Top-performing energy-related investments were Tosco
Corp., an oil refiner and distributor, which continued its ambitious acquisition
strategy, and Texaco Inc., which benefited from higher petroleum prices and a
successful restructuring program. Disappointing performers included three
companies that suffered from
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
overcapacity in their respective industries: Georgia-Pacific Corp. and Stone
Container Corp., both manufacturers of paper products, and Geon Corp., a
manufacturer of polyvinyl chloride.
One of the fund's new investments was Unicom Corp., an electric
utility that operates 12 nuclear units at six sites. Unicom generates excess
capital and, unlike many other electric utilities, has no utility power purchase
problems. We established a position after its stock price declined due to a
mandated increase in spending on operations and maintenance, an issue that
management believes will not impair the company's long-term prospects. During
the period, we sold several stocks after they appreciated and reached our price
targets, including Anheuser-Busch Co., Inc., the world's largest brewer, and
Greenpoint Financial Corp., a New York-based thrift.
<TABLE>
<CAPTION>
Top 10 Equity Holdings as of January 31, 1997
Percentage of
Total
Company Line of Business Net Assets
<S> <C> <C>
Aetna Inc. Healthcare 1.9%
Management
Tenet Healthcare Corp. Hospitals 1.9%
Cigna Corp. Insurance 1.7%
Lear Corp. Autoparts/Original 1.7%
Equipment
Brunswick Corp. Pleasure 1.7%
Boats/Marine
Engines
Goodyear Tire & Rubber Co. Tire and Rubber 1.6%
Products
Dean Witter Discover & Co. Financial Services 1.6%
Avnet, Inc. Electronic 1.5%
Components
Distributor
Philip Morris Companies, Tobacco and Food 1.5%
Inc. Products
Owens-Illinois, Inc. Packaging 1.5%
</TABLE>
Corporate and Emerging Market Debt Sectors Led the Fund's Fixed Income
Performance
The fixed income sectors that contributed most to the fund's
performance were its corporate bond holdings and emerging market debt
securities. Corporate bonds benefited when many companies reported positive
earnings growth throughout the period. Emerging market debt was one of the
fund's smaller allocations during the year but performed extremely well due to
positive emerging country credit trends and supportive cash flows resulting from
global investors' persistent search for incremental yield. In addition, the
fund's investments in the mortgage and asset-backed sectors also performed well,
reflecting healthy investor demand.
The fund's largest fixed income allocation was mortgage-backed
securities (MBS), which accounted for a 12.9% position in terms of total net
assets, up from 10.0% a year ago. The MBS sector fared particularly well during
the first half of the period, when interest rates rose and prepayment fears
abated. We gradually trimmed the fund's exposure in the corporate bond sector to
9.8%, down from 13.2% a year ago, as it became more fully valued. The fund's
asset-backed securities (ABS) weighting was 4.8%, and they continued to offer
incremental yield over similar duration Treasuries. U.S. Treasuries, with an
8.5% allocation, were used together with futures to manage the fund's interest
rate risk. Finally, 3.3% of the fund was invested in emerging market debt, where
we stressed higher credit, short-duration bonds, and 0.7% was invested in
government agency securities.
Outlook
We believe that, overall, the stock market is moderately overvalued
and is therefore unlikely to match the strong return it achieved in 1996.
However, it is important to note that even after last year's rally, the fund's
equity holdings continue to be attractively valued. We expect that our emphasis
on using extensive fundamental research to identify stocks selling below their
- --------------------------------------------------------------------------------
5
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Balanced Fund (continued)
- --------------------------------------------------------------------------------
intrinsic value will continue to serve us well in 1997's potentially more
challenging stock market environment.
We have a relatively cautious view of the fixed income markets in the
coming months due to a possible tightening by the Federal Reserve later in the
year, which would impact the prices of fixed income securities. In the MBS
market, the pace of mortgage prepayments remains stable, and we continue to
identify specific securities that present attractive investment opportunities.
We have a moderately optimistic view for the corporate sector, where we will
continue to emphasize short-duration bonds that offer attractive incremental
yield over Treasuries. Finally, we believe ABS still offer attractive value
relative to other similarly rated securities, and we expect new supply to
continue to be met with enthusiastic demand.
Going forward, we will continue to actively allocate the portfolio's
asset mix between the equity and fixed income sectors to take advantage of
changing market conditions throughout the coming year.
/s/ Ronald E. Gutfleish /s/ Jonathan A. Beinner
Ronald E. Gutfleish Jonathan A. Beinner
Senior Portfolio Manager, Co-Head,
U.S. Active Equity Value U.S. Fixed Income
/s/ G. Lee Anderson /s/ c. Richard Lucy
G. Lee Anderson C. Richard Lucy
Portfolio Manager, Co-Head,
U.S. Active Equity Value U.S. Fixed Income
/s/ Eileen A. Aptman /s/ Richard H. Buckholz
Eileen A. Aptman Richard H. Buckholz
Portfolio Manager, Portfolio Manager,
U.S. Active Equity Value U.S. Fixed Income
March 3, 1997
- --------------------------------------------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Balanced Fund
January 31, 1997
- --------------------------------------------------------------------------------
The following graphs show the value as of January 31, 1997, of a $10,000
investment made (with and without the maximum sales charge of 5.5% and
redemption charge of 5.0% for Class A and B, respectively) on the inception date
of each class. For comparative purposes, the performance of the Fund's
benchmarks (the Standard and Poor's 500 index ("S&P 500") and the Lehman
Brothers Aggregate Bond Index (LBABI)) are shown for the appropriate time
periods. All performance data shown represents past performance and should not
be considered indicative of future performance which will fluctuate with changes
in market conditions. These performance fluctuations will cause an investor's
shares, when redeemed, to be worth more or less than their original cost.
<TABLE>
<CAPTION>
Class A
[LINE GRAPH APPEARS HERE]
GS Balanced GS Balanced
Class A Class A
(w/sales charge) (no sales charge) LBABI S&P 500
---------------- ----------------- ----- -------
<S> <C> <C> <C> <C>
10/12/94 9,450 10,000 10,000 10,000
1/31/95 9,532 10,087 10,233 10,184
1/31/96 12,211 12,922 11,966 14,123
1/31/97 14,488 15,331 12,357 17,842
<CAPTION>
Class B
[LINE GRAPH APPEARS HERE]
GS Balanced GS Balanced
Class B Class B
(no redemp. charge) (w/redemp. charge) LBABI S&P 500
------------------- ------------------ ----- -------
<S> <C> <C> <C> <C>
5/1/96 10,000 10,000 10,000 10,000
1/31/97 11,622 11,122 10,642 12,218
</TABLE>
---------------------------------------
Average Annual Total Return
---------------------------------------
One Year Since Inception/(a)/
------------------------------- ------------------ -------------------
Class A, no sales charge 18.59% 20.32%
------------------------------- ------------------ -------------------
Class A, w/sales charge 12.07% 17.41%
------------------------------- ------------------ -------------------
Class B, no redemption charge N/A 16.22%/(b)/
------------------------------- ------------------ -------------------
Class B, w/redemption charge N/A 11.22%/(b)/
------------------------------- ------------------ -------------------
/(a)/ Class A and B shares commenced operations October 12, 1994 and May 1,
1996, respectively.
/(b)/ An aggregate total return (not annualized) is shown instead of an average
annual total return since this class has not completed a full twelve
months of operations.
7
<PAGE>
Statement of Investments
- --------------------------------------------------------------------
Goldman Sachs Balanced Fund
January 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Shares Description Value
====================================================================
<S> <C> <C>
Common Stocks--53.0%
Airlines--1.8%
7,700 AMR Corp.* $ 619,850
32,600 Continental Airlines, Inc.* 908,725
- --------------------------------------------------------------------
1,528,575
- --------------------------------------------------------------------
Appliance Manufacturer--0.9%
28,600 Sunbeam Corp. 793,650
- --------------------------------------------------------------------
Auto/Original Equipment Manufacturer--1.7%
38,200 Lear Corp.* 1,427,725
- --------------------------------------------------------------------
Auto/Vehicle--1.0%
25,600 Ford Motor Co. 824,400
- --------------------------------------------------------------------
Banks--4.5%
10,300 BankAmerica Corp. 1,149,738
5,300 Chase Manhattan Corp. 490,250
9,400 Fleet Financial Group, Inc. 507,600
9,300 NationsBank Corp. 1,004,400
7,400 Republic Bank of New York Corp. 655,825
- --------------------------------------------------------------------
3,807,813
- --------------------------------------------------------------------
Chemicals-Commodity--1.1%
31,400 Geon Co. 588,750
7,600 Union Carbide Corp. 344,850
- --------------------------------------------------------------------
933,600
- --------------------------------------------------------------------
Defense--2.1%
17,900 McDonnell Douglas Corp. 1,203,775
6,200 Northrop Grumman Corp. 484,375
1,900 Thiokol Corp. 106,400
- --------------------------------------------------------------------
1,794,550
- --------------------------------------------------------------------
Department Stores--0.8%
13,900 Sears Roebuck & Co. 667,200
- --------------------------------------------------------------------
Electric Utilities--2.8%
5,500 CMS Energy Corp. 184,250
43,000 Long Island Lighting Co. 978,250
49,600 Unicom Corp. 1,171,800
- --------------------------------------------------------------------
2,334,300
- --------------------------------------------------------------------
Food--1.5%
40,200 Chiquita Brands International, Inc. 587,925
4,000 Unilever Inc. 658,000
- --------------------------------------------------------------------
1,245,925
- --------------------------------------------------------------------
Forest Products--1.1%
12,400 Georgia Pacific Corp. 912,950
- --------------------------------------------------------------------
Health Suppliers/Services--1.3%
23,300 Baxter International, Inc. 1,074,713
- --------------------------------------------------------------------
Healthcare Management--3.8%
20,400 Aetna Inc. 1,611,600
57,800 Tenet Healthcare Corp.* 1,560,600
- --------------------------------------------------------------------
3,172,200
- --------------------------------------------------------------------
Home Builders--1.8%
18,200 Centex Corp. 709,800
28,200 Lennar Corp. 750,825
- --------------------------------------------------------------------
1,460,625
- --------------------------------------------------------------------
Insurance-Life--2.5%
9,500 Cigna Corp. 1,440,438
11,700 Lincoln National Corp. 627,413
- --------------------------------------------------------------------
2,067,851
- --------------------------------------------------------------------
Insurance-Property and Casualty--1.6%
9,200 Allmerica Financial Corp. 336,950
16,100 Partner Re Holding Ltd. 571,550
12,700 Tig Holdings, Inc. 439,738
- --------------------------------------------------------------------
1,348,238
- --------------------------------------------------------------------
Integrated Oil--2.6%
8,100 Atlantic Richfield Co. 1,071,225
10,300 Texaco, Inc. 1,090,513
- --------------------------------------------------------------------
2,161,738
- --------------------------------------------------------------------
Logistics/Rail--1.0%
30,400 Canadian Pacific Ltd. 824,600
- --------------------------------------------------------------------
Logistics/Trucking--1.2%
39,600 Consolidated Freightways, Inc. 1,004,850
- --------------------------------------------------------------------
Oil Refining & Marketing--1.9%
12,800 Ashland Inc. 552,000
11,300 Tosco Corp. 1,000,050
- --------------------------------------------------------------------
1,552,050
- --------------------------------------------------------------------
Packaging--1.5%
52,500 Owens-Illinois Inc.* 1,246,875
- --------------------------------------------------------------------
- --------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial
statements.
8
<PAGE>
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Shares Description Value
====================================================================
<S> <C> <C>
Common Stocks (continued)
Recreational Products--1.7%
55,500 Brunswick Corp. $ 1,394,438
- --------------------------------------------------------------------
Security and Commodity Brokers, Dealers and Services--0.5%
13,100 Lehman Brothers Holdings, Inc. 414,288
- --------------------------------------------------------------------
Semiconductors & Electronics--1.5%
20,700 Avnet Inc. 1,280,813
- --------------------------------------------------------------------
Software--0.5%
13,800 Autodesk Inc. 436,425
- --------------------------------------------------------------------
Specialty Finance--1.6%
34,200 Dean Witter Discover & Co. 1,303,875
- --------------------------------------------------------------------
Steel--1.0%
20,200 AK Steel Holding Corp. 813,050
- --------------------------------------------------------------------
Supermarkets--2.0%
56,300 Fleming Companies, Inc. 907,838
24,600 Supervalu, Inc. 759,525
- --------------------------------------------------------------------
1,667,363
- --------------------------------------------------------------------
Textiles--1.3%
27,500 Fruit of The Loom, Inc.* 1,103,438
- --------------------------------------------------------------------
Tire & Other Related Rubber Products--1.6%
24,000 Goodyear Tire & Rubber Co. 1,308,000
- --------------------------------------------------------------------
Tobacco--2.8%
4,200 Loews Corp. 415,275
10,700 Philip Morris Companies, Inc. 1,271,963
12,100 RJR Nabisco, Inc. 396,275
8,500 Universal Corp. 263,500
- --------------------------------------------------------------------
2,347,013
- --------------------------------------------------------------------
Total Common Stocks
(Cost $35,773,086) $44,253,131
====================================================================
Preferred Stocks--0.1%
Media Content--0.1%
63 Time Warner, Inc. 10.25% $ 69,064
- --------------------------------------------------------------------
Tobacco--0.0%
3,400 RJR Nabisco, Inc., class C 9.25% 22,525
- --------------------------------------------------------------------
Total Preferred Stocks
(Cost $84,320) $ 91,589
====================================================================
Rights--1.1%
Forest Products--0.7%
42,000 Stone Container Corp. * exp. 08/08/98 $ 567,000
Technology Capital Goods--0.4%
10,800 Teradyne, Inc.* exp. 03/26/00 333,450
- --------------------------------------------------------------------
Total Rights
(Cost $923,718) $ 900,450
====================================================================
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
====================================================================
<S> <C> <C> <C>
Fixed Income--41.5%
Asset-Backed Securities--4.8%
Airplanes Pass Through Trust Series 1, Class C
$ 100,000 8.15% 03/15/19 $ 102,655
Asset Securitization Corp., Series 1996, Class A1
250,000 6.88 11/13/26 249,609
Case Equipment Loan Trust, Series 1995-A, Class A
74,286 7.30 03/15/02 75,124
Chemical Bank Master Credit Card Trust, Series 1995-2, Class A
140,000 6.23 06/15/03 139,343
Chevy Chase Auto Receivables Trust Series 1995-2, Class A
74,323 5.80 06/15/02 74,137
Discover Card Master Trust 1994-2, Class A
70,000 5.83 10/16/04 70,613
Discover Card Master Trust 1996-2, Class A
110,000 5.70 07/18/05 110,550
Discover Card Master Trust 1996-4, Class A
740,000 5.86 10/16/13 751,329
Discover Card Master Trust 1996-4, Class B
420,000 6.03 10/16/13 424,460
Fasco Auto Trust, Series 1996-1
266,114 6.65 11/15/01 267,223
Fingerhut Master Trust, Series 1996-1, Class A
200,000 6.45 02/20/02 200,936
Navistar Financial Trust, Series 1995-A, Class A2
134,590 6.55 11/20/01 135,347
Navistar Financial Trust, Series 1995-b, Class A3
120,000 6.05 04/15/02 120,000
Sears Credit Account Master Trust, Series 1995-2, Class A
700,000 8.10 06/15/04 733,026
- --------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial
statements.
9
<PAGE>
Statement of Investments
- --------------------------------------------------------------------
Goldman Sachs Balanced Fund (continued)
January 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
====================================================================
<S> <C> <C> <C>
Asset-Backed Securities (continued)
Sears Credit Card Master Trust, Series 1995-3, Class A
$ 70,000 7.00% 10/15/04 $ 71,268
Standard Credit Card Master Trust, Series 1994-4, Class A
110,000 8.25 11/07/03 117,322
Standard Credit Card Master Trust, Series 1995-1, Class A
360,000 8.25 01/07/07 389,135
- --------------------------------------------------------------------
Total Asset-Backed Securities
(Cost $4,019,726) $ 4,032,077
====================================================================
Corporate Bonds--9.8%
Finance Bonds--3.6%
BankAmerica Corp.
$ 500,000 7.75% 07/15/02 $ 520,600
Capital One Bank
200,000 8.33 02/10/97 200,056
250,000 8.13 02/27/98 254,825
Conseco Finance
120,000 8.70 11/15/26 122,912
Continental Bank
100,000 12.50 04/01/01 120,501
Countrywide Funding Corp.
100,000 6.08 07/14/99 99,368
150,000 8.00 12/15/26 147,029
Edison Mission Energy Funding Corp.
100,000 6.77 09/15/03 99,852
Fleet Mortgage Group, Inc.
250,000 6.50 06/15/00 248,888
Golden West Financial Corp.
200,000 10.25 12/01/00 223,894
Meditrust, Inc.
120,000 7.82 09/10/26 128,021
Mic Finance Trust
80,000 8.38 02/01/27 80,442
Olympic Financial Ltd.
95,000 13.00 05/01/00 107,350
PXRE Cap Trust
65,000 8.85 02/01/27 65,847
Signet Banking Corp.
$ 500,000 9.63% 06/01/99 $ 531,870
Washington Real Estate
55,000 7.13 08/13/03 54,745
- --------------------------------------------------------------------
Total Finance Bonds
(Cost $3,035,271) $ 3,006,200
====================================================================
Industrial Bonds--5.6%
360 Communications Co.
$ 195,000 7.13% 03/01/03 $ 193,518
Auburn Hills Trust
90,000 12.00 05/01/20 134,352
Blockbuster Entertainment
50,000 6.63 02/15/98 49,995
Chelsea GCA Realty
226,000 7.75 01/26/01 228,362
DVI Equipment Lease Trust
434,745 6.55 07/10/04 434,605
Ford Motor Credit Co.
40,000 8.38 01/15/00 42,038
General Motors Acceptance Corp.
170,000 7.13 05/10/00 173,087
210,000 5.63 02/05/01 202,810
H + T Master Trust, Class A2
220,000 8.18 08/15/02 220,000
K Mart Corp.
40,000 9.55 06/30/98 40,290
40,000 9.60 09/15/98 40,845
Loewen Group International
50,000 7.75 10/15/01 50,000
News America Holdings, Inc.
160,000 7.50 03/01/00 163,784
Northwest Airlines
217,076 8.97 01/02/15 226,558
NWA
68,025 8.26 03/10/06 71,149
- --------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial
statements.
10
<PAGE>
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
====================================================================
<S> <C> <C> <C>
Corporate Bonds (continued)
Industrial Bonds (continued)
Oryx Energy Co.
$ 245,000 9.50% 11/01/99 $ 259,252
RJR Nabisco Inc.
135,000 8.00 07/15/01 136,184
160,000 8.63 12/01/02 164,654
Rogers Cablesystems, Inc.
115,000 9.63 08/01/02 119,600
Tele-Communications, Inc.
295,000 6.19 09/15/03 292,956
125,000 9.65 10/01/03 133,951
20,000 6.82 09/15/10 19,899
Tenet Healthcare Corp.
60,000 9.63 09/01/02 65,100
Time Warner, Inc.
375,000 7.45 02/01/98 378,776
125,000 9.63 05/01/02 139,444
250,000 7.98 08/15/04 256,243
Tosco Corp.
110,000 7.00 07/15/00 110,793
U.S. Home Corp.
70,000 7.95 03/01/01 68,250
USI American Holdings Corp.
60,000 7.25 12/01/06 58,540
Viacom International
80,000 9.13 08/15/99 81,800
95,000 10.25 09/15/01 103,550
- --------------------------------------------------------------------
Total Industrial Bonds
(Cost $4,650,412) $ 4,660,385
====================================================================
Utility Bonds--0.6%
Arkla Inc.
$ 250,000 9.20% 12/18/97 $ 255,665
Central Maine Power Co.
100,000 7.38 01/01/99 100,138
160,000 7.45 08/30/99 159,134
- --------------------------------------------------------------------
Total Utility Bonds
(Cost $521,661) $ 514,937
====================================================================
- --------------------------------------------------------------------
====================================================================
Total Corporate Bonds
(Cost $8,207,344) $ 8,181,522
====================================================================
Government Bonds--1.2%
Australia Commonwealth
AUD1,000,000 7.50% 07/15/05 $ 769,138
Province of Quebec
$ 200,000 13.25 09/15/14 238,976
- --------------------------------------------------------------------
Total Government Bonds
(Cost $1,033,387) $ 1,008,114
====================================================================
Emerging Market Debt--3.3%
Argentina Bocan
$ 144,111 5.69% 04/01/01 $ 138,490
Asia Pulp and Paper International Finance Co.
100,000 7.26(a) 04/03/97 98,614
200,000 8.30 06/28/99 198,118
90,000 10.25 10/01/00 90,754
Banco De Commercio Exterior
30,000 8.63 06/02/00 30,979
BCO De Colombia
110,000 8.63 06/02/00 113,590
Bridas Corp.
170,000 12.50 11/15/99 181,433
Bridas Corp. Gtd Euro Medium
60,000 9.50 06/17/99 60,147
Corp. Andina de Fomento
160,000 7.25 04/30/98 161,774
Emp Ica Soc Contro
110,000 9.75 02/11/98 111,440
Empresa Col Petroleos
80,000 7.25 07/08/98 80,566
Financiera Energy Nacional
230,000 5.88 02/17/98 226,062
60,000 8.13 04/09/98 60,347
200,000 8.46 06/19/98 201,876
80,000 9.38 06/15/06 82,847
- --------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial
statements.
11
<PAGE>
Statement of Investments
- --------------------------------------------------------------------
Goldman Sachs Balanced Fund (continued)
January 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
====================================================================
<S> <C> <C> <C>
Emerging Market Debt (continued)
Grupo Industrial Durango
$ 120,000 12.00% 07/15/01 $ 127,978
Grupo Televisa
20,000 11.38 05/15/03 21,425
Imexsa Export Trust
100,000 10.13 05/31/03 104,190
Inst Fomento Industrial
290,000 8.38 07/29/01 295,707
PT Indah Kiat
50,000 8.88 11/01/00 49,518
Republic of Argentina
89,600 8.63 04/06/98 90,730
150,000 5.63 04/01/00 75,600
Sampoerna International
50,000 8.38 06/15/06 51,208
YPF Sociedad Anonima
111,483 7.50 10/26/02 113,132
- --------------------------------------------------------------------
Total Emerging Market Debt
(Cost $2,710,872) $ 2,766,525
====================================================================
Government Agency Obligations--0.7%
Federal National Mortgage Association
$ 520,000 8.50% 02/01/05 $ 545,917
- --------------------------------------------------------------------
Total Government Agency Obligations
(Cost $566,963) $ 545,917
====================================================================
Mortgage Backed Obligations--12.9%
Federal Home Loan Mortgage Corp.
$ 2,000,000 7.50% TBA-30yr/(b)/ $ 2,003,740
Federal National Mortgage Association
2,000,000 8.00 TBA-30yr/(b)/ 2,042,500
1,000,000 6.50 TBA-15yr/(b)(d)/ 990,930
95,702 8.50 09/01/06/(d)/ 100,068
119,291 8.50 03/01/07/(d)/ 124,733
677,419 8.50 03/01/10/(d)/ 707,985
1,000,000 3.50 05/25/19 869,370
====================================================================
Government National Mortgage Association
$ 1,000,000 7.50% TBA-30yr/(b)/ $ 1,002,180
963,086 7.50 05/15/23 969,404
1,005,709 7.00 07/15/23 990,311
1,000,000 7.00 08/15/23 984,690
- --------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $10,687,107) $10,785,911
====================================================================
Sovereign Credit--0.2%
State of Israel
$ 150,000 6.38% 12/15/05 $ 141,983
- --------------------------------------------------------------------
Total Sovereign Credit
(Cost $139,082) $ 141,983
====================================================================
U.S. Treasury Obligations--8.5%
United States Treasury Bonds
$ 470,000 12.00% 08/15/13/(d)/ $ 666,592
120,000 8.75 05/15/17/(d)/ 144,619
30,000 8.88 08/15/17 36,595
580,000 8.75 05/15/20 704,068
160,000 8.75 08/15/20/(d)/ 194,400
680,000 7.63 02/15/25 743,430
United States Treasury Notes
1,200,000 6.88 08/31/99 1,223,628
1,000,000 6.13 07/31/00 999,220
900,000 7.88 11/15/04 977,202
United States Treasury Principal Only Stripped Securities/(a)/
80,000 6.03/(a)/ 08/15/99 68,774
740,000 6.55/(a)/ 11/15/04/(d)/ 447,552
320,000 6.59/(a)/ 05/15/05 186,781
2,200,000 7.09/(a)/ 02/15/19 473,968
890,000 7.10/(a)/ 05/15/20 175,205
- --------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $7,102,563) $ 7,042,034
====================================================================
- --------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial
statements.
12
<PAGE>
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
====================================================================
<S> <C> <C> <C>
Yankee Bonds--0.1%
Korea Electric Power
$ 93,927 7.40% 04/01/16 $ 93,712
- --------------------------------------------------------------------
Total Yankee Bonds
(Cost $90,825) $ 93,712
====================================================================
Total Fixed Income
(Cost $34,557,869) $34,597,795
- --------------------------------------------------------------------
Short-Term Obligations--0.2%
Argentina Treasury Bill
$ 40,000 6.00%/(a)/ 02/14/97 $ 39,896
Banco Nacional de Com
50,000 10.63 06/23/97 51,291
Republic of Argentina
90,000 6.29(a) 05/16/97 88,166
- --------------------------------------------------------------------
Total Short-Term Obligations
(Cost $179,353) $ 179,353
====================================================================
Repurchase Agreement--11.0%
Joint Repurchase Agreement Account
$ 9,200,000 5.63% 02/03/97/(d)/ $ 9,200,000
- --------------------------------------------------------------------
Total Repurchase Agreement
(Cost $9,200,000) $ 9,200,000
====================================================================
Total Investments
(Cost $80,718,346)/(c)/ $89,222,318
====================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $ 9,461,225
Gross unrealized loss for investments in which
cost exceeds value (981,857)
- --------------------------------------------------------------------
Net unrealized gain $ 8,479,368
====================================================================
<CAPTION>
- --------------------------------------------------------------------
====================================================================
Futures contracts open at January 31, 1997 are as follows:
Number of
Contracts Settlement Unrealized
Type Long(e) Month Gain(Loss)
- ------------------------- ------------ --------------- -----------
<S> <C> <C> <C>
2-Year U.S. Treasury Note 5 March 1997 $(3,438)
10-Year U.S. Treasury Bond 15 March 1997 (25,500)
30-Year U.S. Treasury Bond 2 March 1997 (3,969)
S&P 500 Stock Index 4 March 1997 123,100
- -------------------------------------------------------------------
$90,193
- -------------------------------------------------------------------
</TABLE>
* Non-income producing security.
/(a)/ The interest rate disclosed for these securitites represents effective
yields to maturity.
/(b)/ TBA (To Be Assigned) securities are purchased on a forward commitment
basis with an approximate (generally +/-2.5%) principal amount and no
definite maturity date. The actual principal amount and maturity date will
be determined upon settlement when the specific mortgage pools are
assigned.
/(c)/ The aggregate cost for federal income tax purposes is $80,742,950.
/(d)/ Portions of these securities are being segregated as collateral for
futures contracts, TBA (To Be Assigned) securities, covered short sales
and/or mortgage dollar rolls.
/(e)/ Each 2-Year U.S. Treasury Note contract represents $200,000 in notional
par value. Each 10-Year and 30-Year U.S. Treasury Bond contract represents
$100,000 in notional par value. Each S&P 500 Stock Index represents
$50,000 in notional par value. The total net notional amount and market
value at risk are $2,900,000 and $4,463,969, respectively. The
determination of notional amounts does not consider market risk factors
and therefore notional amounts as presented here are indicative only of
volume of activity and not a measure of market risk.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
13
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Select Equity Fund
- --------------------------------------------------------------------------------
Objective and Investment Approach
The Goldman Sachs Select Equity Fund is designed to provide investors with
a broadly diversified portfolio that can be used as a core holding on which to
build an investment program. The fund's investment objective is to provide
investors with long-term growth of capital and dividend income through
investment in a broadly diversified portfolio of predominantly large-cap and
blue-chip equity securities representing all major sectors of the U.S. economy.
The fund's mandate is to remain fully invested with industry diversification,
capitalization and risk characteristics similar to the aggregate U.S. stock
market as represented by the S&P 500 stock index. Therefore, the fund's relative
performance compared with the market comes almost exclusively from stock
selection within sectors. We believe the fund offers investors an attractive
combination of value and growth, without assuming more risk than the broad
market.
The fund employs a disciplined approach that combines fundamental
investment research provided by the Goldman Sachs Global Investment Research
Department with quantitative analysis generated by the Asset Management
Division's proprietary model. Our quantitative system evaluates each stock using
many different criteria including valuation measures, growth expectations,
earnings momentum and risk. It also objectively analyzes the impact of current
economic conditions on different types of stocks. Those stocks ranked highly by
both our quantitative model and by Goldman Sachs research are selected for the
fund's portfolio.
Performance Review: Quantitative Model Contributed to the Fund's Performance
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fund Total
Return S&P 500
(based on net Total
asset value) Return
----------- ------
<S> <C> <C>
Class A (1/31/96 -1/31/97)* 23.75% 26.25%
Class B (5/1/96 -1/31/97)* 18.59% 22.18%
Institutional (1/31/96 -1/31/97)* 24.63% 26.25%
Service (6/7/96 - 1/31/97)* 15.92% 18.36%
</TABLE>
- --------------------------------------------------------------------------------
* Class A, B, Institutional and Service share performance assumes reinvestment
of all dividends and distributions, a complete redemption at the net asset value
at the end of the period and no initial sales charge or contingent deferred
sales charge. Performance for Class B and Service shares is a cumulative total
return (not annualized) from their inception through the end of the period.
During the period, the fund achieved strong absolute returns, with most of
its gains occurring in the second half of the year. When the period began, the
fund performed well primarily due to successful stock selection. The Research
Department's qualitative ratings were particularly helpful early in the period,
when its analysis helped the fund steer clear of underperforming stocks. During
the latter half of the year, most of the fund's positive performance came from
the Asset Management Division's quantitative model.
Of the three themes considered by our quantitative model -- value, growth
and low-risk -- stocks with value-oriented features, such as low price/earnings
ratios, received the highest weighting during most of the period. This emphasis
did not work in the fund's favor during the second and third quarters of 1996,
when stocks with growth characteristics (strong near-term growth expectations
and high price/earnings multiples) outperformed value-oriented stocks. In the
fourth quarter, however, our emphasis on value proved to be extremely
successful, as stocks with value characteristics soared to record highs and
outperformed the other themes by a substantial margin. As a result of this
dramatic rebound, value emerged as the dominant investment style for the year.
Despite the positive results from our quantitative model, the fund
underperformed the index because it was
- --------------------------------------------------------------------------------
14
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
unable to keep pace with the dramatic outperformance of the largest 50 stocks,
which accounted for a significant portion of the market's gains. In addition,
the fund held a slightly higher cash position than usual as the volume of new
assets invested in the fund rapidly increased, particularly during the fourth
quarter, when the top 50 stocks surged. To address this issue, at the end of
1996 the fund instituted new procedures to ensure that cash balances will be
invested more rapidly. Furthermore, we expect that any future market advance
will broaden to include stocks beyond the top 50.
The fund's best performers were large-capitalization stocks from a wide
range of sectors, including banks (BankAmerica Corp. and NationsBank Corp.),
technology companies (Intel Corp., Microsoft Corp. and IBM Corp.), consumer
staples (Procter & Gamble Co.), electrical equipment (General Electric Co.) and
tobacco (Philip Morris Companies, Inc.).
Stocks that fell short of our expectations included some of the fund's
utility, telecommunication and oil investments such as Unicom Corp., Airtouch
Communications, Inc. and Tenneco, Inc.
Portfolio Composition: Model Increasingly Favored Stocks With Defensive
Characteristics
As of January 31, 1997, the fund held 141 stocks. While its sector
exposures were generally in line with the S&P 500 index, the fund was
overweighted in electric/gas (5.8% for the fund versus 3.3% for the S&P 500) and
energy (10.1% versus 8.0%) and underweighted in consumer nondurables (10.2%
versus 12.9%) and telecommunications (3.9% versus 6.3%). These over- and
underweightings, as shown in Table II, were the result of the fund's stock
selection process and were not a reflection of our economic forecast for
specific sectors.
During the first quarter of 1996, the Fund's quantitative model favored
growth characteristics (such as earnings momentum and price momentum) and put a
smaller, but still positive, weight on stocks with value or low-risk
characteristics (e.g., low beta and low "disappointment" risk). As the year
progressed, the fund's strategy became somewhat more defensive as our
quantitative model increased its weighting in value and low-risk themes. This
shift was triggered by a number of indicators that pointed toward emerging
excesses in the equity market: Low cash cushions held by equity mutual funds,
the increasing volatility of equity prices, the record-low dividend yields and
the divergence in returns between stocks and bonds.
As a result of our more defensive posture, over the past year we gradually
increased the fund's weighting in energy-related companies such as Texaco Inc.
and Atlantic Richfield Co., both newcomers to the fund's 10 largest holdings. We
also decreased the fund's exposure to consumer noncyclicals, which includes
food/agriculture companies (e.g., IBP, Inc. and Kellogg Co.).
As of the end of the period, the fund's major valuation characteristics
were more attractive than the benchmark. These included a lower price/earnings
ratio based on 1997 estimated earnings (15.9x versus 17.3x for the S&P 500) as
well as a lower price/book ratio (3.0x versus 3.4x). The fund achieved these
favorable valuation levels while maintaining growth and risk characteristics in
line with those of the S&P 500.
Table I: Top 10 Portfolio Holdings as of 1/31/97
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percentage of
Total Net
Company Line of Business Assets
<S> <C> <C>
General Electric Co. Electronics 2.9%
Intel Corp. Semiconductors 2.8%
and Electronics
Exxon Corp. Petroleum and 2.2%
Natural Gas
Microsoft Corp. Computer Software 2.1%
Texaco Inc. Petroleum and 2.0%
Natural Gas
Merck & Co., Inc. Pharmaceuticals 1.9%
Atlantic Richfield Co. Petroleum and 1.7%
Natural Gas
Bristol-Myers Squibb Co. Pharmaceuticals 1.7%
Philip Morris Companies, Tobacco and Food 1.7%
Inc. Products
Travelers Group, Inc. Financial Services 1.6%
</TABLE>
- --------------------------------------------------------------------------------
15
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Select Equity Fund (continued)
- --------------------------------------------------------------------------------
Table II: Sector Breakout as of 1/31/97
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percentage of
Percentage S&P 500
Industry Sectors of Portfolio Index Difference
<S> <C> <C> <C>
Finance 17.8% 16.2% 1.6%
Consumer Nondurables 10.2% 12.9% -2.7%
Energy 10.1% 8.0% 2.1%
Health 9.6% 10.4% -0.8%
Technology 9.3% 10.9% -1.6%
Basic Industry 7.9% 7.1% 0.8%
Capital Spending 6.5% 5.6% 0.9%
Electric/Gas 5.8% 3.3% 2.5%
Miscellaneous 4.4% 5.0% -0.6%
Retail 4.3% 3.6% 0.7%
Telecommunications 3.9% 6.3% -2.4%
Consumer Services 3.8% 4.8% -1.0%
Consumer Durables 2.6% 2.5% 0.1%
Aerospace 1.8% 2.0% -0.2%
Transportation 1.1% 1.4% -0.3%
Cash 1.0% 0.0% 1.0%
</TABLE>
- --------------------------------------------------------------------------------
Outlook
Goldman Sachs expects the U.S. equity market to continue to advance in
1997, although returns will likely be more modest than the unusually strong
results of 1995 and 1996. In addition, we expect equity gains to broaden beyond
the top 50 stocks. In 1997, we will continue to maintain a balanced approach by
considering risk, value and growth simultaneously.
However, the relative importance of avoiding riskier stocks has increased in the
current market environment, which is likely to result in greater emphasis on
defensive stocks with below-average price volatility, attractive valuations and
lower possibility of near-term earnings disappointments.
/s/ Robert C. Jones
Robert C. Jones
Senior Portfolio Manager,
Quantitative Equity
/s/ Kent A. Clark
Kent A. Clark
Portfolio Manager,
Quantitative Equity
/s/ Victor H. Pinter
Victor H. Pinter
Portfolio Manager,
Quantitative Equity
March 3, 1997
- --------------------------------------------------------------------------------
16
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Select Equity Fund
January 31, 1997
- --------------------------------------------------------------------------------
The following graphs show the value, as of January 31, 1997, of a $10,000
investment made (with and without the maximum sales charge of 5.5% and
redemption charge of 5.0% for Class A and B, respectively) on the inception date
of each class. For comparative purposes, the performance of the Fund's benchmark
(the Standard and Poor's 500 Index ("S&P 500")) is shown for the appropriate
time periods. All performance data shown represents past performance and should
not be considered indicative of future performance which will fluctuate with
changes in market conditions. These performance fluctuations will cause an
investor's shares, when redeemed, to be worth more or less than their original
cost.
<TABLE>
<CAPTION>
Class A
[LINE GRAPH APPEARS HERE]
GS Select Eq GS Select Eq
Class A Class A
(w/sales charge) (no/sales charge) S&P 500
---------------- ---------------- -------
<S> <C> <C> <C>
5/24/91 9,450 10,000 10,000
1/31/92 10,112 10,701 11,092
1/31/93 10,548 11,162 12,266
1/31/94 12,144 12,851 13,846
1/31/95 12,009 12,708 13,919
1/31/96 16,654 17,617 19,306
1/31/97 20,613 21,813 24,390
<CAPTION>
Class B
[LINE GRAPH APPEARS HERE]
GS Select Eq GS Select Eq
Class B Class B
(no redemption charge) (w/redemption charge) S&P 500
---------------------- --------------------- -------
<S> <C> <C> <C>
5/1/96 10,000 10,000 10,000
1/31/97 11,859 11,359 12,218
<CAPTION>
Institutional
[LINE GRAPH APPEARS HERE]
GS Select Eq
Institutional Class S&P 500
------------------- -------
<S> <C> <C>
6/15/95 10,000 10,000
1/31/96 12,014 12,029
1/31/97 14,983 15,197
<CAPTION>
Service
[LINE GRAPH APPEARS HERE]
GS Select Eq
Serv. Class S&P 500
------------ -------
<S> <C> <C>
6/7/96 10,000 10,000
1/31/97 11,592 11,836
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------
Average Annual Total Return
------------------------------------------------
One Year Since Inception/(a)/
- --------------------------------------------------------------------------------
<S> <C> <C>
Class A, no sales charge 23.75% 14.67%
- --------------------------------------------------------------------------------
Class A, w/sales charge 16.98% 13.54%
- --------------------------------------------------------------------------------
Class B, no redemption charge N/A 18.59% /(b)/
- --------------------------------------------------------------------------------
Class B, w/redemption charge N/A 13.59% /(b)/
- --------------------------------------------------------------------------------
Institutional Class 24.63% 28.04%
- --------------------------------------------------------------------------------
Service Class N/A 15.92% /(b)/
- --------------------------------------------------------------------------------
</TABLE>
/(a)/ Class A, Class B, Institutional and Service shares commenced operations on
May 24, 1991, May 1, 1996, June 15, 1995 and June 7, 1996, respectively.
/(b)/ An aggregate total return (not annualized) is shown instead of an average
annual total return since these classes have not completed a full twelve
months of operations.
- --------------------------------------------------------------------------------
17
<PAGE>
Statement of Investments
Goldman Sachs Select Equity Fund
- --------------------------------------------------------------------
January 31, 1997
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Shares Description Value
- --------------------------------------------------------------------
<S> <C> <C>
Common Stocks--97.3%
Aerospace--0.8%
43,600 United Technologies Corp. $ 3,041,100
- --------------------------------------------------------------------
Agency/Government--0.9%
93,800 Federal National Mortgage Assn. 3,705,100
- --------------------------------------------------------------------
Agriculture/Heavy Equipment--2.5%
25,100 Case Corp. 1,330,300
55,500 Caterpillar, Inc. 4,308,188
44,100 Conagra, Inc. 2,227,050
48,900 Tenneco, Inc. 1,956,000
- --------------------------------------------------------------------
9,821,538
- --------------------------------------------------------------------
Airlines--1.2%
19,700 AMR Corp.* 1,585,850
38,500 Delta Air Lines, Inc. 3,041,500
- --------------------------------------------------------------------
4,627,350
- --------------------------------------------------------------------
Alcohol--0.2%
21,600 Anheuser Busch Companies, Inc. 918,000
- --------------------------------------------------------------------
Appliance Manufacturer--1.0%
38,300 Emerson Electric Co. 3,782,125
- --------------------------------------------------------------------
Auto/Original Equipment Manufacturer--0.3%
23,100 Cummins Engine, Inc. 1,215,638
- --------------------------------------------------------------------
Auto/Vehicle--1.5%
25,200 Chrysler Corp. 878,850
32,200 Ford Motor Co. 1,034,425
70,700 General Motors Corp. 4,171,300
- --------------------------------------------------------------------
6,084,575
- --------------------------------------------------------------------
Bank Holding Companies--0.4%
26,000 Comerica, Inc. 1,485,250
- --------------------------------------------------------------------
Banks--6.0%
33,550 Banc One Corp. 1,522,331
48,000 Bank of New York, Inc. 1,758,000
46,400 BankAmerica Corp. 5,179,400
12,900 Chase Manhattan Corp. 1,193,250
25,800 Citicorp 3,002,475
28,500 First Bank System, Inc. 2,166,000
34,400 First Chicago Corp. 1,965,100
6,400 First Union Corp. 535,200
48,400 NationsBank Corp. 5,227,200
4,500 Wells Fargo & Company $ 1,371,375
- --------------------------------------------------------------------
23,920,331
- --------------------------------------------------------------------
Beverages--1.6%
41,900 Coca Cola Co. 2,424,963
115,300 Pepsico, Inc. 4,021,088
- --------------------------------------------------------------------
6,446,051
- --------------------------------------------------------------------
Business Services--0.2%
19,100 Automatic Data Processing, Inc. 790,263
- --------------------------------------------------------------------
Chemicals-Commodity--2.1%
46,000 Dow Chemicals Co. 3,547,750
20,600 Du Pont EI de Nemours 2,258,275
68,900 Monsanto Co. 2,609,588
- --------------------------------------------------------------------
8,415,613
- --------------------------------------------------------------------
Chemicals-Specialty--1.0%
37,800 Allied Signal, Inc. 2,655,450
27,700 Morton International, Inc. 1,125,313
- --------------------------------------------------------------------
3,780,763
- --------------------------------------------------------------------
Commercial Services--0.3%
32,500 Interim Services, Inc.* 1,178,125
- --------------------------------------------------------------------
Communications Services Companies--1.5%
75,500 Airtouch Communications, Inc.* 1,953,563
96,100 Sprint Corp. 3,916,075
- --------------------------------------------------------------------
5,869,638
- --------------------------------------------------------------------
Communications Technology--0.8%
37,403 Lucent Technologies, Inc. 2,029,113
15,200 Motorola Inc. 1,037,400
- --------------------------------------------------------------------
3,066,513
- --------------------------------------------------------------------
Computers--0.9%
65,200 Hewlett Packard Co. 3,431,150
- --------------------------------------------------------------------
Computers & Peripherals--3.7%
45,400 Cisco Systems, Inc.* 3,166,650
35,000 Compaq Computer Corp.* 3,040,625
20,300 Eastman Kodak Co. 1,761,025
33,400 International Business Machines 5,252,150
51,100 Sun Microsystems, Inc.* 1,622,425
- --------------------------------------------------------------------
14,842,875
- --------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
18
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Shares Description Value
- --------------------------------------------------------------------
<S> <C> <C>
Common Stocks (continued)
Construction/Environmental Services--0.2%
13,300 Armstrong World Industries, Inc. $ 944,300
- --------------------------------------------------------------------
Consumer Staples--3.4%
51,700 American Home Products Corp. 3,276,488
13,300 Clorox Co. 1,577,713
60,200 Gillette Co. 4,906,300
33,400 Procter & Gamble Co. 3,857,700
- --------------------------------------------------------------------
13,618,201
- --------------------------------------------------------------------
Defense--1.4%
5,400 Boeing Co. 578,475
17,700 McDonnell Douglas Corp. 1,190,325
18,500 Textron, Inc. 1,801,438
36,800 TRW, Inc. 1,867,600
- --------------------------------------------------------------------
5,437,838
- --------------------------------------------------------------------
Department Stores--3.2%
147,400 Dayton Hudson Corp. 5,545,925
38,000 Federated Dept. Stores, Inc.* 1,249,250
18,900 Mercantile Stores Co. 926,100
65,700 Sears Roebuck & Co. 3,153,600
72,100 Walmart Stores, Inc. 1,712,375
- --------------------------------------------------------------------
12,587,250
- --------------------------------------------------------------------
Electric Utilities--4.7%
76,300 Duke Power Co. 3,576,563
128,700 Edison International, Inc. 2,750,963
31,500 Empresa Nacional de Electric ADR 2,071,125
139,600 Niagara Mohawk Power* 1,413,450
57,700 Public Service Company of New Mexico 1,154,000
92,800 Texas Utilities Co. 3,758,400
156,300 Unicom Corp. 3,692,588
- --------------------------------------------------------------------
18,417,089
- --------------------------------------------------------------------
Electrical Equipment Manufacturer--2.9%
112,200 General Electric Co. 11,556,600
- --------------------------------------------------------------------
Financial Services--0.7%
53,300 Providian Corp. 2,871,538
- --------------------------------------------------------------------
Food Producers--0.5%
10,600 CPC International, Inc. 814,875
16,400 Ralston Purina Co. 1,289,450
- --------------------------------------------------------------------
2,104,325
- --------------------------------------------------------------------
Forest Products--2.6%
78,600 Avery Dennison Corp. 2,878,725
32,000 Champion International Corp. 1,340,000
32,600 Georgia Pacific Corp. 2,400,175
26,000 International Paper Co. 1,062,750
19,700 Mead Corp. 1,108,125
30,700 Weyerhaeuser Co. 1,396,850
- --------------------------------------------------------------------
10,186,625
- --------------------------------------------------------------------
Funeral Services--0.2%
29,600 Service Corp. International 858,400
- --------------------------------------------------------------------
Gas Distribution & Pipeline--1.2%
55,600 Columbia Gas Systems, Inc. 3,620,950
22,900 Panenergy Corp. 1,056,263
- --------------------------------------------------------------------
4,677,213
- --------------------------------------------------------------------
Health Suppliers/Services--1.3%
73,200 Johnson & Johnson 4,218,150
15,800 Medtronic Inc. 1,082,300
- --------------------------------------------------------------------
5,300,450
- --------------------------------------------------------------------
Healthcare Management--0.8%
55,800 Columbia HCA Healthcare 2,204,100
38,300 Manor Care, Inc. 976,650
- --------------------------------------------------------------------
3,180,750
- --------------------------------------------------------------------
Information Management--0.7%
114,100 Dun & Bradstreet Corp. 2,738,400
- --------------------------------------------------------------------
Insurance Brokers & Other Insurance--0.3%
24,600 Exel Insurance Ltd. 1,042,425
- --------------------------------------------------------------------
Insurance-Life--2.6%
29,100 American General Corp. 1,160,363
18,700 Cigna Corp. 2,835,388
122,933 Travelers Group, Inc. 6,438,616
- --------------------------------------------------------------------
10,434,367
- --------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
Statement of Investments
- --------------------------------------------------------------------
Goldman Sachs Select Equity Fund (continued)
January 31, 1997
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value
====================================================================
<S> <C> <C>
Common Stocks (continued)
Insurance-Property and Casualty--2.2%
25,956 Allstate Corp. $ 1,706,607
36,850 American International Group, Inc. 4,463,456
68,500 Safeco Corp. 2,603,000
- --------------------------------------------------------------------
8,773,063
- --------------------------------------------------------------------
Integrated Oil--11.1%
22,100 Amoco Corp. 1,922,700
51,800 Atlantic Richfield Co. 6,850,550
84,300 Exxon Corp. 8,735,574
46,800 Kerr McGee Corp. 3,217,500
17,200 Mobil Corp. 2,257,500
52,000 Norsk Hydro ADR 2,925,000
32,000 Phillips Petroleum Co. 1,412,000
26,600 Royal Dutch Petroleum ADR 4,615,100
75,700 Texaco, Inc. 8,014,738
97,300 Unocal Corp. 4,098,763
- --------------------------------------------------------------------
44,049,425
- --------------------------------------------------------------------
Investment Brokers & Managers--2.7%
52,500 Merrill Lynch Co. 4,423,125
38,300 Morgan Stanley Group, Inc. 2,187,888
76,900 Salomon, Inc. 4,248,725
- --------------------------------------------------------------------
10,859,738
- --------------------------------------------------------------------
Local Phone Companies--2.3%
53,600 Ameritech Corp. 3,202,600
67,100 GTE Corp. 3,153,700
104,900 Worldcom, Inc.* 2,635,613
- --------------------------------------------------------------------
8,991,913
- --------------------------------------------------------------------
Machinery and Equipment--0.6%
20,100 Dover Corp. 994,950
29,300 Ingersoll-Rand Co. 1,336,813
- --------------------------------------------------------------------
2,331,763
- --------------------------------------------------------------------
Media/Entertainment--1.4%
41,400 King World Productions, Inc.* 1,619,775
54,942 Walt Disney Co. 4,024,502
- --------------------------------------------------------------------
5,644,277
- --------------------------------------------------------------------
Nonferrous Metals--1.3%
15,900 Phelps Dodge Corp. 1,111,013
72,800 Tyco International Ltd. 4,158,700
- --------------------------------------------------------------------
5,269,713
- --------------------------------------------------------------------
Office & Business Equipment--0.5%
36,400 Xerox Corp. 2,133,950
- --------------------------------------------------------------------
Oil & Gas Exploration--0.4%
31,100 Burlington Resources, Inc. 1,547,225
- --------------------------------------------------------------------
Pharmaceuticals--6.7%
51,100 Abbott Labs 2,778,563
53,100 Bristol Myers Squibb 6,743,700
18,600 Eli Lilly & Co. 1,620,525
82,100 Merck & Co. 7,450,575
23,600 Pfizer, Inc. 2,191,850
31,700 Pharmacia & Upjohn, Inc. 1,180,825
47,600 Schering Plough Corp. 3,599,750
13,800 Warner Lambert Co. 1,110,900
- --------------------------------------------------------------------
26,676,688
- --------------------------------------------------------------------
Recreational Products--0.2%
29,407 Mattel, Inc. 827,072
- --------------------------------------------------------------------
Restaurants & Hotels--1.0%
14,000 HFS, Inc.* 980,000
23,000 ITT Corp.* 1,313,875
40,200 McDonalds Corp. 1,829,100
- --------------------------------------------------------------------
4,122,975
- --------------------------------------------------------------------
Retail--0.7%
34,100 Home Depot, Inc. 1,687,950
29,900 TJX Companies, Inc. 1,188,525
- --------------------------------------------------------------------
2,876,475
- --------------------------------------------------------------------
Retail-Specialty--1.2%
48,200 Gap, Inc. 1,385,750
49,600 Nike, Inc. 3,366,600
- --------------------------------------------------------------------
4,752,350
- --------------------------------------------------------------------
Semiconductors & Electronics--2.8%
67,800 Intel Corp. 11,000,550
- --------------------------------------------------------------------
Software--2.7%
33,350 Computer Associates International,
Inc. 1,513,256
79,900 Microsoft Corp.* 8,149,800
24,600 Oracle Corp.* 956,325
- --------------------------------------------------------------------
10,619,381
- --------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Shares Description Value
====================================================================
<S> <C> <C>
Common Stocks (continued)
Supermarkets--0.9%
63,300 Great A&P Tea Co., Inc. $ 1,978,125
31,200 Safeway, Inc.* 1,489,800
- --------------------------------------------------------------------
3,467,925
- --------------------------------------------------------------------
Technical Services--0.4%
22,800 3Com Corp.* 1,530,450
- --------------------------------------------------------------------
Technology Capital Goods--0.7%
18,800 Applied Materials, Inc.* 928,250
22,000 Harris Corp. 1,674,750
- --------------------------------------------------------------------
2,603,000
- --------------------------------------------------------------------
Telecommunications--0.2%
17,000 Tellabs, Inc.* 700,188
- --------------------------------------------------------------------
Textiles--1.1%
22,500 Liz Claiborne, Inc. 947,813
33,200 Sara Lee Corp. 1,311,400
30,800 VF Corp. 2,048,200
- --------------------------------------------------------------------
4,307,413
- --------------------------------------------------------------------
Tire & Other Related Rubber Products--0.8%
36,800 BF Goodrich Co. 1,508,800
29,800 Goodyear Tire & Rubber Co. 1,624,100
- --------------------------------------------------------------------
3,132,900
- --------------------------------------------------------------------
Tobacco--1.7%
55,600 Philip Morris Companies, Inc. 6,609,450
- --------------------------------------------------------------------
Total Common Stocks
(Cost $294,916,122) $ 385,205,653
====================================================================
Rights--0.9%
Insurance--0.2%
9,400 MBIA, Inc.,* exp. 12/12/01 $ 903,575
- --------------------------------------------------------------------
Insurance-Life--0.4%
36,400 Protective Life Corp.*, exp. 07/13/97 1,442,350
- --------------------------------------------------------------------
Specialty Finance--0.3%
19,100 Beneficial Corp.,* exp. 11/23/97 1,284,475
- --------------------------------------------------------------------
Total Rights
(Cost $2,826,759) $ 3,630,400
- --------------------------------------------------------------------
<CAPTION>
Principal
Amount Description Value
====================================================================
<S> <C> <C>
U.S. Treasury Obligations--0.2%
$ 841,000 U.S. Treasury Bill
5.08%, 05/29/97/(b)/ $ 827,118
- --------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $827,118) $ 827,118
- --------------------------------------------------------------------
Repurchase Agreement--0.9%
$ 3,600,000 Joint Repurchase Agreement Account
5.63%, 02/03/97 $ 3,600,000
- --------------------------------------------------------------------
Total Repurchase Agreements
(Cost $3,600,000) $ 3,600,000
- --------------------------------------------------------------------
Total Investments
(Cost $302,169,999)/(a)/ $ 393,263,171
====================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in
which value exceeds cost $ 94,373,749
Gross unrealized loss for investments in
which cost exceeds value (3,489,045)
- --------------------------------------------------------------------
Net unrealized gain $ 90,884,704
====================================================================
</TABLE>
<TABLE>
<CAPTION>
Futures Contracts open at January 31, 1997 are as follows:
Number of
Contracts Settlement Unrealized
Type Long/(c)/ Month Gain
- ------------------------- ------------- ------------ ----------------
<S> <C> <C> <C>
S&P 500 Stock Index 7 March 1997 $91,800
</TABLE>
* Non-income producing security.
/(a)/The aggregate cost for federal income tax purposes is $302,378,467.
/(b)/Portion of this security is being segregated as collateral for futures
contracts.
/(c)/Each S&P 500 Stock Index represents $50,000 in notional par value. The
total net notional amount and net market value at risk are $350,000 and
$2,756,250, respectively. The determination of notional amounts does not
consider market risk factors and therefore notional amounts as presented
here are indicative only of volume of activity and not a measure of market
risk.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Growth and Income Fund
- --------------------------------------------------------------------------------
Objective and Investment Approach
The Goldman Sachs Growth and Income Fund seeks long-term growth of
capital and growth of income primarily through investments in a diversified
portfolio of common stocks and other equity securities. The fund is managed with
a value style, which means we focus on companies whose stocks we believe are
inexpensive relative to their expected long-term earnings growth and their
ability to pay dividends. Investments may include well-known companies that are
temporarily out of favor due to cyclical economic conditions or are experiencing
near-term difficulties the portfolio managers judge to be temporary in nature.
In-depth fundamental research of a company's financial structure, its
competitive position in the market and its management's commitment to increasing
shareholder value are all critical parts of the fund's investment approach.
Though we are not sector investors, we closely monitor the fund's sector and
industry exposures compared with the benchmark in an effort to avoid
unintentional over- or underweightings.
Performance Review: The Fund Outperformed the Index...
<TABLE>
<CAPTION>
- ------------------------------------- ----------------- -----------
Fund Total
Return S&P 500
(based on net Total
asset value) Return
----------- ------
<S> <C> <C>
Class A (1/31/96 - 1/31/97)* 28.42% 26.25%
Class B (5/1/96 - 1/31/97)* 22.23% 22.18%
Institutional (6/3/96 - 1/31/97)* 20.77% 19.11%
Service (3/6/96 - 1/31/97)* 23.87% 22.20%
- ------------------------------------- ----------------- -----------
</TABLE>
* Class A, B, Institutional and Service share performance assumes reinvestment
of all dividends and distributions, a complete redemption at the net asset value
at the end of the period and no initial sales charge or contingent deferred
sales charge. Performance for Class B, Institutional and Service shares is a
cumulative total return (not annualized) from their inceptions through the end
of the period.
The U.S. stock market continued to soar during the period under
review, adding to the impressive performance recorded during the prior year.
Most of the market's gains occurred during the latter half of the period, when
equities rebounded strongly following a sharp correction in July.
We are pleased to report that all of the fund's share classes
outperformed the S&P 500 stock index during the past fiscal year. Most notably,
its Class A shares returned 28.42% (at net asset value) versus 26.25% for the
index. During the period, the fund increased its regular quarterly dividend.
...And Fared Very Well Relative to Its Peers
We are proud to announce that for the three-year period ended January
31, 1997, the fund's Class A shares were rated "five stars" (out of 1,858
domestic equity funds) by Morningstar, Inc., an independent mutual fund rating
agency. The "five star" designation is Morningstar's highest rating for
historical risk-adjusted performance, and is given to mutual funds that
Morningstar determines to be in the top 10% of their category.1
In addition, the fund's Class A shares ranked within the top 10% of
the Lipper growth and income category (53rd of 533) for the 12-month period
ended January 31, 1997, according to Lipper Analytical Services, Inc. (Please
note that Lipper rankings do not take sales charges into account and that past
performance is not a guarantee of future results. Class B, Institutional and
Service shares
- -------------------------
1 Source: (C) 1997 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 1/31/97.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five- and ten-year average annual returns (where applicable) in excess of 90-day
Treasury bill returns with appropriate fee and sales charge adjustments and a
risk factor that reflects fund performance below 90-day Treasury bill returns.
The one-year rating is calculated using the same methodology, but is not a
component of the overall rating. For the one-year period, the Class A shares
received four stars and was rated among 2,990 domestic equity funds. The
Morningstar rating applies only to the fund's Class A shares; the fund's Class
B, Institutional and Service shares have not been rated. Class B, Institutional
and Service shares are subject to additional fees and expenses that may have the
effect of lowering performance and may affect any future Morningstar rating.
Morningstar rates funds against peers in the same category. In all, there are
five Morningstar categories (domestic equity, international equity, fixed
income, municipal and hybrid). Morningstar ratings range from five stars
(highest) to one star (lowest). Funds with five-star ratings are in the top 10%
of their category, four-star ratings in the next 22.5%, three stars the next
35%, two stars the next 22.5% and one star the lowest 10% of their categories.
22
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
were not ranked because they did not exist during the full year.)
Financial, Technology and Energy Stocks Were Among the Fund's Best Performers
The fund's outperformance came from successful stock selection in a
wide range of industries, led by finance, its largest sector weighting at 18.0%.
Technology and energy investments also did well. In addition, the fund benefited
significantly from our decision to limit its exposure in the media and
communication sector. Our concerns regarding increased competition between the
local exchange and long-distance companies and high valuations in the sector
proved to be on target.
In the financial sector, top performers were BankAmerica Corp. and
NationsBank Corp., the country's third and fourth largest banks, respectively.
BankAmerica Corp. increased its focus on aggressive capital management, which
resulted in its exiting unprofitable businesses and buying back some of its
stock. NationsBank Corp. acquired Bank South Corp. and Boatmen's Bancshares,
Inc., and investors began to realize the benefits of its cost structure due to
its acquisitions over the past few years.
Technology holdings that performed well included Intel Corp., the
dominant microprocessor manufacturer, which was purchased when the sector was
depressed due to concerns that the personal computer upgrade cycle had slowed.
Intel quickly rebounded when investors recognized the advantages of its dominant
market position, and we subsequently sold the stock when it reached our target
price. We saw solid gains from Avnet, Inc., the second largest distributor of
semiconductors and other electronic components, which we viewed as an
inexpensive opportunity to participate in the growth of the technology sector.
The fund was also well served by a number of its energy-related
investments. Tosco Corp., an oil refiner and distributor, more than doubled in
price as it continued to consolidate its market position through an ambitious
acquisition strategy, and Texaco Inc. benefited from higher petroleum prices and
a restructuring program that meaningfully improved profits.
In addition, several holdings appreciated due to special situations.
Our confidence in Long Island Lighting Co., a New York-based utility, which had
been shunned by many other investors, was handsomely rewarded when the stock
soared after Brooklyn Union Gas Co. made an attractive bid for the company in
January. The fund also benefited when McDonnell Douglas Corp., one of our
long-term positions, was acquired by Boeing Co. at a very favorable price.
Sunbeam Corp., a leading consumer products company, met with an enthusiastic
investor response to the aggressive restructuring program initiated by its new
CEO.
Paper and Chemical Stocks Were Weak
Disappointing performers included three companies impacted by
overcapacity in their respective industries: Georgia-Pacific Corp. and Stone
Container Corp., both manufacturers of paper products, and Geon Corp., a
manufacturer of polyvinyl chloride. We continue to have confidence in these
companies and expect their prospects to improve over time.
Additional Investments in a Variety of Sectors
During the period, we added a number of new holdings. These included
Dean Witter, Discover & Co., which we viewed as undervalued based on the
potential of its broker-dealer/asset management business and its large Discover
credit card business. In February 1997, Dean Witter, Discover & Co. announced
its intention to merge with investment bank Morgan Stanley. We also invested in
Unicom Corp., an electric utility that operates 12 nuclear units at six sites.
Unicom generates excess capital and, unlike many other electric utilities, has
no utility power purchase problems. We established a position after its stock
price declined due to a mandated increase in spending on operations and
maintenance, an issue that management believes will not impair the company's
long-
23
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Growth and Income Fund (continued)
- --------------------------------------------------------------------------------
term prospects. Also notable was our decision to increase the fund's
position in Tenet Healthcare Corp., a long-term holding, based on its prospects
for improved efficiencies resulting from the integration of its acquisition of
OrNda Healthcorp., a for-profit hospital chain.
Sales Included Several Financial and Technology Positions
We sold several stocks after they appreciated and reached our price
targets. These included Anheuser-Busch Co., Inc., the world's largest brewer,
which reported strong earnings; Greenpoint Financial Corp., which benefited from
increased investor appreciation of the value of its
"no-documentation--low-documentation" mortgage franchise; and technology
holdings Compaq Computer Corp. and Intel Corp.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Top 10 Portfolio Holdings as of January 31, 1997
Percentage
of Total Net
<S> <C> <C>
Company Line of Business Assets
Aetna Inc. Healthcare Service 3.3%
Provider
Tenet Healthcare Corp. Hospitals 3.3%
Lear Corp. Autoparts/Original 3.0%
Equipment
Cigna Corp. Insurance 2.9%
Brunswick Corp. Pleasure 2.9%
Boats/Marine
Engines
Dean Witter, Discover & Co. Financial Services 2.8%
Goodyear Tire & Rubber Co. Tire and Rubber 2.8%
Products
Philip Morris Companies, Tobacco and Food 2.7%
Inc. Products
Avnet, Inc. Electronic 2.7%
Components
Distributor
BankAmerica Corp. Commercial Bank 2.6%
- --------------------------------------------------------------------
</TABLE>
Outlook
As we enter the seventh year of a bull market for U.S. equities, we
view the market as moderately overvalued and therefore unlikely to match the
strong return it achieved in 1996. In this environment, it is particularly
noteworthy that the fund's holdings continue to be attractively valued even
after last year's rally. Our focus on undervalued stocks and extensive
fundamental research will continue to be extremely important in the more
challenging market we anticipate ahead.
/s/ Ronald E. Gutfleish /s/ G. Lee Anderson
- ------------------------ -------------------------
Ronald E. Gutfleish G. Lee Anderson
Senior Portfolio Manager, Portfolio Manager,
U.S. Active Equity Value U.S. Active Equity Value
/s/ Eileen A. Aptman
--------------------
Eileen A. Aptman
Portfolio Manager,
U.S. Active Equity Value
March 3, 1997
24
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Growth and Income Fund
January 31, 1997
- -------------------------------------------------------------------------------
The following graphs show the value, as of January 31, 1997, of a $10,000
investment made (with and without the maximum sales charge of 5.5% and
redemption charge of 5.0% for Class A and B, respectively) on the inception date
of each class. For comparative purposes, the performance of the Fund's benchmark
(the Standard and Poor's 500 Index ("S&P 500")) is shown for the appropriate
time periods. All performance data shown represents past performance and should
not be considered indicative of future performance which will fluctuate with
changes in market conditions. These performance fluctuations will cause an
investor's shares, when redeemed, to be worth more or less than their original
cost.
<TABLE>
<CAPTION>
Class A
[LINE GRAPH APPEARS HERE]
GS Growth & Inc GS Growth & Inc
Class A Class A
(w/sales charge) (no sales charge) S&P 500
---------------- ----------------- -------
<S> <C> <C> <C>
2/5/93 $ 9,450 $10,000 $10,000
1/31/94 10,686 11,308 11,073
1/31/95 11,110 11,757 11,132
1/31/96 14,716 15,573 15,436
1/31/97 18,911 20,012 19,501
<CAPTION>
Class B
[LINE GRAPH APPEARS HERE]
GS Growth & Inc GS Growth & Inc
Class B Class B
(no redemp charge) (w/redemp charge) S&P 500
------------------ ----------------- -------
<S> <C> <C> <C>
5/1/96 $10,000 $10,000 $10,000
1/31/97 12,223 11,723 12,218
<CAPTION>
Institutional
[LINE GRAPH APPEARS HERE]
GS Growth & Inc
Institutional Class S&P 500
------------------- -------
<S> <C> <C>
6/3/96 $10,000 $10,000
1/31/97 12,077 11,911
<CAPTION>
Service
[LINE GRAPH APPEARS HERE]
GS Growth & Inc
Service Class S&P 500
--------------- -------
<S> <C> <C>
3/6/96 $10,000 $10,000
1/31/97 12,387 12,220
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------
Average Annual Total Return
--------------------------------------------
One Year Since Inception /(a)/
- --------------------------------------------------------------------------------
<S> <C> <C>
Class A, no sales charge 28.42% 18.98%
- --------------------------------------------------------------------------------
Class A, w/sales charge 21.39% 17.31%
- --------------------------------------------------------------------------------
Class B, no redemption charge N/A 22.23% /(b)/
- --------------------------------------------------------------------------------
Class B, w/redemption charge N/A 17.23% /(b)/
- --------------------------------------------------------------------------------
Institutional Class N/A 20.77% /(b)/
- --------------------------------------------------------------------------------
Service Class N/A 23.87% /(b)/
- --------------------------------------------------------------------------------
</TABLE>
/(a)/ Class A, Class B, Institutional and Service shares commenced operations on
February 5, 1993, May 1, 1996, June 3, 1996 and March 6, 1996,
respectively.
/(b)/ An aggregate total return (not annualized) is shown instead of an average
annual total return since these classes have not completed a full twelve
months of operations.
- --------------------------------------------------------------------------------
25
<PAGE>
Statement of Investments
- -------------------------------------------------------------------
Goldman Sachs Growth and Income Fund
January 31, 1997
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Shares Description Value
===================================================================
<S> <C> <C>
Common Stocks--93.2%
Airlines--3.2%
96,100 AMR Corp.* $ 7,736,050
463,600 Continental Airlines, Inc.* 12,980,800
- -------------------------------------------------------------------
20,716,850
- -------------------------------------------------------------------
Appliance Manufacturer--1.9%
440,900 Sunbeam Corp. 12,234,975
- -------------------------------------------------------------------
Auto/Original Equipment Manufacturer--3.0%
512,800 Lear Corp.* 19,165,900
- -------------------------------------------------------------------
Auto/Vehicle--2.0%
394,800 Ford Motor Co. 12,682,950
- -------------------------------------------------------------------
Banks--8.3%
146,600 BankAmerica Corp. 16,364,225
64,900 Chase Manhattan Corp. 6,003,250
117,800 Fleet Financial Group Inc. 6,361,200
146,900 NationsBank Corp. 15,865,200
96,500 Republic of New York Corp. 8,552,313
- -------------------------------------------------------------------
53,146,188
- -------------------------------------------------------------------
Chemicals-Commodity--2.0%
439,800 Geon Co. 8,246,250
97,400 Union Carbide Corp. 4,419,525
- -------------------------------------------------------------------
12,665,775
- -------------------------------------------------------------------
Defense--3.4%
225,100 McDonnell Douglas Corp. 15,137,975
79,800 Northrop Grumman Corp. 6,234,375
6,300 Thiokol Corp. 352,800
- -------------------------------------------------------------------
21,725,150
- -------------------------------------------------------------------
Department Stores--1.6%
207,700 Sears Roebuck & Co. 9,969,600
- -------------------------------------------------------------------
Electric Utilities--5.1%
95,100 CMS Energy Corp. 3,185,850
641,400 Long Island Lighting Co. 14,591,850
632,300 Unicom Corp. 14,938,088
- -------------------------------------------------------------------
32,715,788
- -------------------------------------------------------------------
Food--2.8%
582,200 Chiquita Brands International, Inc. 8,514,675
58,400 Unilever Inc. 9,606,800
- -------------------------------------------------------------------
18,121,475
- -------------------------------------------------------------------
Forest Products--1.9%
161,500 Georgia Pacific Corp. 11,890,438
- -------------------------------------------------------------------
Health Suppliers/Services--2.0%
280,800 Baxter International, Inc. 12,951,900
- -------------------------------------------------------------------
Healthcare Management--6.6%
266,400 Aetna Inc. 21,045,600
768,500 Tenet Healthcare Corp.* 20,749,500
- -------------------------------------------------------------------
41,795,100
- -------------------------------------------------------------------
Home Builders--3.1%
232,800 Centex Corp. 9,079,200
388,500 Lennar Corp. 10,343,813
- -------------------------------------------------------------------
19,423,013
- -------------------------------------------------------------------
Insurance-Life--4.3%
123,600 Cigna Corp. 18,740,850
166,200 Lincoln National Corp. 8,912,475
- -------------------------------------------------------------------
27,653,325
- -------------------------------------------------------------------
Insurance-Property & Casualty--1.4%
16,100 Integon Corp. 223,388
237,600 Partner Re Holding Ltd. 8,434,800
- -------------------------------------------------------------------
8,658,188
- -------------------------------------------------------------------
Integrated Oil--4.8%
121,400 Atlantic Richfield Co. 16,055,150
138,900 Texaco, Inc. 14,706,038
- -------------------------------------------------------------------
30,761,188
- -------------------------------------------------------------------
Logistics/Rails--1.8%
415,700 Canadian Pacific Ltd. 11,275,863
- -------------------------------------------------------------------
Logistics/Trucking--2.0%
512,100 Consolidated Freightways, Inc. 12,994,538
- -------------------------------------------------------------------
Oil Refining & Marketing--3.6%
187,700 Ashland Inc. 8,094,563
166,800 Tosco Corp. 14,761,800
- -------------------------------------------------------------------
22,856,363
- -------------------------------------------------------------------
Packaging--2.5%
661,600 Owens Illinois Corp.* 15,713,000
- -------------------------------------------------------------------
Recreational Products--2.9%
724,800 Brunswick Corp. 18,210,600
- -------------------------------------------------------------------
- -------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
- -------------------------------------------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Shares Description Value
- -------------------------------------------------------------------
<C> <S> <C>
Common Stocks (continued)
Security and Commodity Brokers, Dealers and Services--1.0%
195,900 Lehman Brothers Holdings, Inc. $ 6,195,338
- -------------------------------------------------------------------
Semiconductors & Electronics--2.7%
275,100 Avnet, Inc. 17,021,813
- -------------------------------------------------------------------
Software--1.1%
214,300 Autodesk, Inc. 6,777,238
- -------------------------------------------------------------------
Specialty Finance--2.8%
470,200 Dean Witter Discover & Co. 17,926,375
- -------------------------------------------------------------------
Steel--1.6%
251,600 AK Steel Holding Corp. 10,126,900
- -------------------------------------------------------------------
Supermarkets--3.4%
726,500 Fleming Companies, Inc. 11,714,813
316,700 Supervalu, Inc. 9,778,113
- -------------------------------------------------------------------
21,492,926
- -------------------------------------------------------------------
Textiles--2.4%
374,400 Fruit of The Loom, Inc.* 15,022,800
- -------------------------------------------------------------------
Tire & Other Related Rubber Products--2.8%
320,900 Goodyear Tire & Rubber Co. 17,489,050
- -------------------------------------------------------------------
Tobacco--5.2%
63,700 Loews Corp. 6,298,338
144,700 Philip Morris Companies, Inc. 17,201,204
187,480 RJR Nabisco, Inc. 6,139,970
115,600 Universal Corp. 3,583,600
- -------------------------------------------------------------------
33,223,112
- -------------------------------------------------------------------
Total Common Stocks
(Cost $465,569,279) $ 592,603,719
===================================================================
Preferred Stocks--0.6%
Food--0.3%
44,600 Chiquita Brands International, Inc.
Convertible, 5.75% $ 2,073,900
- -------------------------------------------------------------------
Tobacco--0.3%
287,100 RJR Nabisco, Inc., Class C 9.25% 1,902,038
- -------------------------------------------------------------------
Total Preferred Stocks
(Cost $3,843,410) $ 3,975,938
===================================================================
Rights--2.0%
Forest Products--1.2%
579,100 Stone Container Corp.,* exp.
08/08/98 $ 7,817,850
- -------------------------------------------------------------------
Technology Capital Goods--0.8%
166,300 Teradyne, Inc.,* exp. 03/26/00 5,134,513
- -------------------------------------------------------------------
Total Rights
(Cost $13,294,493) $ 12,952,363
===================================================================
Repurchase Agreements--4.2%
- -------------------------------------------------------------------
$ 26,800,000 Joint Repurchase Agreement Account
5.63%, 02/03/97 $ 26,800,000
- -------------------------------------------------------------------
Total Repurchase Agreements
(Cost $26,800,000) $ 26,800,000
===================================================================
<CAPTION>
Contracts Description Value
===================================================================
<C> <S> <C>
Options*--0.4%
1,340 S & P 500 Index Put, Strike 750
exp. 06/97 $ 2,244,500
1,439 S & P 500 Index Put, Strike 700
exp. 03/97 377,738
- -------------------------------------------------------------------
Total Options
(Cost $4,105,525) $ 2,622,238
===================================================================
Total Investments
(Cost $513,612,707)/(a)/ $ 638,954,258
===================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $136,933,045
Gross unrealized loss for investments in which
cost exceeds value (11,607,531)
- -------------------------------------------------------------------
Net unrealized gain $125,325,514
===================================================================
</TABLE>
* Non-income producing security.
/(a)/The aggregate cost for federal income tax purposes is $513,628,744. The
percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- -------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
Letter to Shareholders
- -------------------------------------------------------------------------------
Goldman Sachs Capital Growth Fund
- --------------------------------------------------------------------------------
Objective and Investment Approach
The Goldman Sachs Capital Growth Fund seeks long-term growth of capital
primarily through investments in a portfolio of large-capitalization stocks. We
use extensive fundamental research to identify companies in a diversified range
of industries that we believe offer attractive growth potential at a reasonable
price.
The fund's investment management team believes that wealth is created
through the long-term ownership of growing businesses. As such, we view each
stock purchase as if we were buying the entire business. To implement this
investment strategy, we focus on growing companies with characteristics such as
strong brand franchises, dominant market share, recurring revenue, product
pricing flexibility, long product life cycles, high returns on invested capital,
high profit margins, strong free cash flow, excellent management and favorable
long-term prospects. Finally, we will buy a stock meeting our rigorous criteria
only if it trades at a reasonable discount to the company's intrinsic value.
Performance Review: Fund Achieved Strong Results
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Fund Total Return S&P 500
(based on net Total
asset value) Return
----------- ------
<S> <C> <C>
Class A (1/31/96 - 1/31/97)* 25.97% 26.25%
Class B (5/1/96 - 1/31/97)* 19.39% 22.18%
- --------------------------------------------------------------------
</TABLE>
* Class A and B share performance assumes reinvestment of all dividends and
distributions, a complete redemption at the net asset value at the end of the
period and no initial sales charge or contingent deferred sales charge.
Performance for Class B shares is a cumulative total return (not annualized)
from their inception through the end of the period.
During the 12-month period ended January 31, 1997, the fund's Class A shares
achieved a total return of approximately 26%, in line with the S&P 500 stock
index, reflecting the robust equity market, particularly during the second half
of the period. The fund's Class B shares also achieved strong absolute results;
however, a partial year of only nine months is obviously too short a time frame
to meaningfully measure long-term performance.
We are pleased to report that for the five-year period ended January
31, 1997, the fund's Class A shares were rated "four stars" (out of 1,072
domestic equity funds) by Morningstar, Inc., an independent mutual fund rating
agency./1/ In addition, the fund's Class A shares fared well versus its peers in
the Lipper growth fund category, placing in the top third (187th out of 685) for
the 12-month period and in the top quartile (56th out of 263) for the five-year
period, as of January 31, 1997, according to Lipper Analytical Services, Inc.
(Please note that Lipper rankings do not take sales charges into account and
that past performance is not a guarantee of future results. Lipper did not rank
the fund's Class B shares.)
Top Performers Included Financial, Technology and Defense Stocks
The fund's best performers during the period came from a variety of sectors,
particularly financial services (20.4% of the portfolio), technology (9.1%) and
defense/aerospace (3.2%).
. Top performers in the financial sector included MBNA Corp. and First USA
Inc., the nation's third and fourth largest credit card issuers, respectively,
which both reported better than expected earnings and loan growth. In
- --------
/1/ Source: (C) 1997 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 1/31/97.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five- and ten-year average annual returns (where applicable) in excess of 90-day
Treasury bill returns with appropriate fee and sales charge adjustments and a
risk factor that reflects fund performance below 90-day Treasury bill returns.
The one-year rating is calculated using the same methodology, but is not a
component of the overall rating. The fund's Class A shares received three stars
for both the three- and one-year periods. The Class A shares were rated among
1,858 and 2,990 domestic equity funds for the three- and one-year periods,
respectively. The Morningstar rating applies only to the fund's Class A shares;
the fund's Class B shares have not been rated. Class B shares are subject to
additional fees and expenses that may have the effect of lowering performance
and may affect any future Morningstar rating. Morningstar rates funds against
peers in the same category. In all, there are five Morningstar categories
(domestic equity, international equity, fixed income, municipal and hybrid).
Morningstar ratings range from five stars (highest) to one star (lowest). Funds
with five-star ratings are in the top 10% of their category, four-star ratings
in the next 22.5%, three stars the next 35%, two stars the next 22.5% and one
star the lowest 10% of their categories.
- --------------------------------------------------------------------------------
28
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
addition, these companies benefited from continuing industry consolidation,
with First USA performing particularly well after Banc One announced that it was
acquiring the company. Two of the fund's commercial bank holdings, BankAmerica
Corp. and NationsBank Corp., appreciated due to successful cost cutting, strong
earnings growth and aggressive capital management, and PartnerRe Holding Ltd., a
worldwide provider of catastrophe reinsurance, rose on strong earnings.
. Several of our technology holdings also performed well. During the first
half of the period, we increased the fund's positions in Intel Corp., the
dominant microprocessor manufacturer, and Compaq Computer Corp., the world's
largest manufacturer of personal computers, when their prices slumped because of
concerns regarding slowing computer sales. This strategy significantly
contributed to the fund's performance when computer sales were stronger than
expected. We subsequently sold Compaq Computer when it reached our target price
but continue to hold Intel, which more than tripled in price during the period.
. Consolidation in the defense industry helped two of the fund's long-
standing investments in that sector. McDonnell Douglas Corp. climbed over 50%
after the announcement of its proposed merger with Boeing Co., and Northrop
Grumman Corp. was buoyed by its purchase of Westinghouse Electric Corp.'s
defense electronics businesses.
Specific Paper, Airline and Insurance Stocks Lagged
Not all of the fund's holdings fulfilled our expectations. For example,
Georgia-Pacific Corp., a manufacturer of paper products, suffered from an
industry oversupply and a consequent decline in paper and pulp prices; AMR
Corp., the holding company of American Airlines, was impacted by concerns
regarding competition from discount carriers; and Integon Corp., a provider of
automobile insurance, experienced a higher than expected increase in claims and
lower earnings.
New Additions in Consumer Product Companies and Pharmaceuticals
During the period, we initiated several positions that reflect our new
emphasis on large-capitalization stocks with world-class franchises and/or
strong brand names. For example, we added Procter & Gamble Co., one of the
strongest marketers in the U.S. with a stable of brand name products, many of
which hold number one or number two positions in their respective markets. Over
the past decade, the company has achieved steady growth in revenues and
earnings, exactly the type of consistent operating history that we favor.
Another recent investment was Coca-Cola Co., a world-class company with four of
the five leading carbonated soft drinks -- Coca-Cola, Diet Coke, Sprite and
Fanta. With 80% of its business coming from abroad, we expect Coca-Cola's long-
term earnings growth to continue as it further penetrates the emerging markets
of China, India, Latin America, Southeast Asia, Eastern Europe and Russia.
Other new positions included pharmaceutical companies Bristol-Myers
Squibb Co., Johnson & Johnson Co. and Pfizer, Inc., which are attractive because
of their strong new product flow, huge free cash flow, earnings growth and
essentially net debt-free balance sheets. We believe these companies are
positioned to be major beneficiaries as the baby boomers age and require more
health-related products and services over the coming decades.
Sales Included Several Investments in Cyclical Industries
During the period, we sold Kirby Corp. and Trinity Industries after we lost
confidence in their managements' attempts to improve their competitive
positions, and cyclical stocks such as Quanex Corp. and Harnischfeger
Industries, Inc. after they were unable to improve their profitability in
difficult industry conditions. In contrast, we sold the fund's long-held
position in Millipore Corp., an industrial filter producer, after it reached our
target price.
- --------------------------------------------------------------------------------
29
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Capital Growth Fund (continued)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Top 10 Portfolio Holdings as of January 31, 1997
<TABLE>
<CAPTION>
Percentage
of Total
Company Line of Business Net Assets
<S> <C> <C>
First USA, Inc. Financial Services 4.5%
Intel Corp. Semiconductors and 4.3%
Electronics
NationsBank Corp. Commercial Bank 3.4%
Aetna Inc. Healthcare 3.4%
Management
Texaco Inc. International 3.3%
Integrated Oil
Company
BankAmerica Corp. Commercial Bank 3.2%
Tenet Healthcare Corp. Hospitals 3.0%
Philip Morris Companies, Tobacco and Food 3.0%
Inc. Products
Baxter International, Inc. Medical Supplies 2.9%
PartnerRe Ltd. Insurance 2.7%
- --------------------------------------------------------------------
</TABLE>
Outlook
We believe that the global political and economic environments will
continue to remain favorable for the financial markets. In our opinion, the
outlook for the U.S. stock market is attractive, as we expect it to continue to
benefit from low inflation, moderate growth and high levels of consumer
confidence. In addition, we anticipate that the equity market will continue to
be buoyed as baby boomers increase their savings and 401(k) investment plans
grow. To enhance the fund's ability to benefit from the positive investing
climate, we expect to continue to diversify the portfolio among industry sectors
and increase its holdings of large-cap stocks, with the intention of both
providing favorable long-term returns and reducing portfolio risk.
We want to emphasize that investing is a marathon, not a sprint.
Notwithstanding the excellent performance the fund has recently experienced, we
have a long-term investment horizon. In a nutshell, we hope to be able to
purchase great companies with attractive business characteristics and favorable
long-term outlooks, and then patiently hold them for an extended period of time
so that their growth compounds.
/s/ Herbert E. Ehlers
Herbert E. Ehlers
Senior Portfolio Manager,
U.S. Active Equity Growth
/s/ Robert G. Collins
Robert G. Collins
Portfolio Manager,
U.S. Active Equity Growth
/s/ Gregory H. Ekizian
Gregory H. Ekizian
Portfolio Manager,
U.S. Active Equity Growth
March 3, 1997
- --------------------------------------------------------------------------------
30
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Capital Growth Fund
January 31, 1997
- -------------------------------------------------------------------------------
The following graphs show the value, as of January 31, 1997, of a $10,000
investment made (with and without the maximum sales charge of 5.5% and
redemption charge of 5.0% for Class A and B, respectively) on the inception date
of each class. For comparative purposes, the performance of the Fund's benchmark
(the Standard and Poor's 500 Index ("S&P 500")) is shown for the appropriate
time periods. All performance data shown represents past performance and should
not be considered indicative of future performance which will fluctuate with
changes in market conditions. These performance fluctuations will cause an
investor's shares, when redeemed, to be worth more or less than their original
cost.
Class A
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
GS Capital Growth GS Capital Growth
Class A Class A
(w/sales charge) (no sales charge) S&P 500
----------------- ----------------- -------
<S> <C> <C> <C>
4/20/90 9,450 10,000 10,000
1/31/91 9,529 10,084 10,552
1/31/92 12,322 13,040 12,946
1/31/93 14,542 15,388 14,316
1/31/94 16,998 17,987 16,160
1/31/95 16,254 17,200 16,246
1/31/96 21,203 22,437 22,528
1/31/97 26,726 28,282 28,460
</TABLE>
Class B
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
GS Capital Growth GS Capital Growth
Class B Class B
(no redemp. charge) (w/redemp. charge) S&P 500
------------------- ------------------ -------
<S> <C> <C> <C>
5/1/96 $10,000 $10,000 $10,000
1/31/97 11,939 11,439 12,218
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------
Average Annual Total Return
----------------------------------------------
One Year Five Year Since Inception/(a)/
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A, no sales charge 25.97% 16.73% 16.54%
- ------------------------------------------------------------------------------
Class A, w/sales charge 19.04% 15.42% 15.57%
- ------------------------------------------------------------------------------
Class B, no redemption charge N/A N/A 19.39%/(b)/
- ------------------------------------------------------------------------------
Class B, w/redemption charge N/A N/A 14.39%/(b)/
- ------------------------------------------------------------------------------
</TABLE>
/(a)/Class A and Class B shares commenced operations on April 20, 1990 and
May 1, 1996, respectively.
/(b)/An aggregate total return (not annualized) is shown instead of an average
annual total return since this class has not completed a full twelve months
of operations.
- --------------------------------------------------------------------------------
31
<PAGE>
Statement of Investments
- --------------------------------------------------------------------
Goldman Sachs Capital Growth Fund
January 31, 1997
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Shares Description Value
====================================================================
<S> <C> <C>
Common Stocks--98.9%
Advertising & Marketing--1.8%
888,900 Valassis Communications, Inc.* $ 16,333,538
- --------------------------------------------------------------------
Airlines--1.5%
176,500 AMR Corp.* 14,208,250
- --------------------------------------------------------------------
Auto/Original Equipment Manufacturer--1.6%
391,900 Lear Corp.* 14,647,262
- --------------------------------------------------------------------
Banks--6.6%
263,700 BankAmerica Corp. 29,435,512
291,500 NationsBank Corp. 31,482,000
- --------------------------------------------------------------------
60,917,512
- --------------------------------------------------------------------
Beverages--2.1%
155,100 Coca Cola Co. 8,976,413
293,800 Pepsico, Inc. 10,246,275
- --------------------------------------------------------------------
19,222,688
- --------------------------------------------------------------------
Commercial Services--0.9%
226,500 Ecolab Inc. 8,380,500
- --------------------------------------------------------------------
Communications Technology--1.7%
290,860 Lucent Technologies, Inc. 15,779,155
- --------------------------------------------------------------------
Construction/Environmental Services--2.0%
497,500 WMX Technologies, Inc. 18,220,938
- --------------------------------------------------------------------
Consumer Staples--4.0%
150,800 Avon Products Inc. 9,462,700
109,000 Gillette Co. 8,883,500
160,940 Procter & Gamble Co. 18,588,570
- --------------------------------------------------------------------
36,934,770
- --------------------------------------------------------------------
Defense--3.2%
226,800 McDonnell Douglas Corp. 15,252,300
187,500 Northrop Grumman Corp. 14,648,438
- --------------------------------------------------------------------
29,900,738
- --------------------------------------------------------------------
Electric Utilities--1.6%
669,400 Long Island Lighting Co. 15,228,850
- --------------------------------------------------------------------
Electrical Equipment Manufacturer--1.0%
89,400 General Electric Co. 9,208,200
- --------------------------------------------------------------------
Electronics & Semiconductors--1.5%
219,700 Avnet Inc. 13,593,937
- --------------------------------------------------------------------
Food--1.8%
186,500 Nabisco Holdings Corp. 7,133,625
160,480 William Wrigley Jr. Co. 9,327,900
- --------------------------------------------------------------------
16,461,525
- --------------------------------------------------------------------
Forest Products--2.2%
273,500 Georgia Pacific Corp. 20,136,437
- --------------------------------------------------------------------
Health Suppliers/Services--8.4%
589,600 Baxter International, Inc. 27,195,300
477,500 Fisher Scientific International, Inc. 20,950,312
176,400 Johnson & Johnson 10,165,050
277,600 Perkin-Elmer Corp. 19,397,300
- --------------------------------------------------------------------
77,707,962
- --------------------------------------------------------------------
Healthcare Management--8.5%
395,760 Aetna Inc. 31,265,040
487,650 Columbia HCA Healthcare 19,262,175
1,021,400 Tenet Healthcare Corp.* 27,577,800
- --------------------------------------------------------------------
78,105,015
- --------------------------------------------------------------------
Hotels & Restaurants--1.0%
169,720 Marriott International, Inc. 9,016,375
- --------------------------------------------------------------------
Information Management--1.9%
241,000 First Data Corp. 8,676,000
135,670 Reuters Holdings Corp. ADR 8,665,921
- --------------------------------------------------------------------
17,341,921
- --------------------------------------------------------------------
Insurance-Property and Casualty--3.2%
356,650 Integon Corp. 4,948,519
703,800 PartnerRe Holding Ltd. 24,984,900
- --------------------------------------------------------------------
29,933,419
- --------------------------------------------------------------------
Integrated Oil--6.7%
68,700 Amoco Corp. 5,976,900
52,700 Atlantic Richfield Co. 6,969,575
90,900 Mobil Corp. 11,930,625
41,200 Royal Dutch Petroleum ADR 7,148,200
284,800 Texaco, Inc. 30,153,200
- --------------------------------------------------------------------
62,178,500
- --------------------------------------------------------------------
Logistics/Rails--1.6%
556,900 Canadian Pacific Ltd. 15,105,912
- --------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
32
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Shares Description Value
- --------------------------------------------------------------------
<S> <C> <C>
Common Stocks (continued)
Media Content--4.6%
166,200 Gaylord Entertainment Co. $ 4,258,875
261,800 Knight Ridder, Inc. 10,046,575
530,700 Telecommunication Liberty
Media Group* 10,083,300
237,610 Time Warner Inc. 9,147,985
130,400 Walt Disney Co. 9,551,800
- --------------------------------------------------------------------
43,088,535
- --------------------------------------------------------------------
Packaging--1.6%
614,000 Owens Illinois Corp.* 14,582,500
- --------------------------------------------------------------------
Pharmaceuticals--2.3%
90,500 Bristol Myers Squibb 11,493,500
104,300 Pfizer, Inc. 9,686,863
- --------------------------------------------------------------------
21,180,363
- --------------------------------------------------------------------
Retail Trade--1.0%
222,600 Walgreen Co. 9,154,425
- --------------------------------------------------------------------
Retail-Department Stores--2.1%
658,400 Dillard Department Stores, Inc. 19,669,700
- --------------------------------------------------------------------
Security and Commodity Brokers, Dealers and Services--2.0%
571,000 Lehman Brothers Holdings, Inc. 18,057,875
- --------------------------------------------------------------------
Semiconductors & Electronics--4.3%
247,000 Intel Corp. 40,075,750
- --------------------------------------------------------------------
Specialty Finance & Agency--8.6%
345,300 Federal National Mortgage Assn. 13,639,350
828,200 First USA, Inc. 41,927,625
683,925 MBNA Corp. 23,595,413
- --------------------------------------------------------------------
79,162,388
- --------------------------------------------------------------------
Specialty Retail--1.0%
311,900 Service Corp. International 9,045,100
- --------------------------------------------------------------------
Technology Capital Goods--1.5%
286,400 Applied Materials Inc.* 14,141,000
- --------------------------------------------------------------------
Tire & Other Related Rubber Products--2.1%
362,400 Goodyear Tire & Rubber Co. 19,750,800
- --------------------------------------------------------------------
Tobacco--3.0%
229,400 Philip Morris Companies, Inc. 27,269,925
- --------------------------------------------------------------------
Total Common Stocks
(Cost $661,066,240) $ 913,741,765
- --------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------
Principal
Amount Description Value
====================================================================
<S> <C> <C>
Repurchase Agreement--2.0%
$18,300,000 Joint Repurchase Agreement Account
5.63%, 02/03/97 $ 18,300,000
- --------------------------------------------------------------------
Total Repurchase Agreement
(Cost $18,300,000) $ 18,300,000
- --------------------------------------------------------------------
Total Investments
(Cost $679,366,240)(a) $ 932,041,765
- --------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for investments in
which value exceeds cost $ 255,377,138
Gross unrealized loss for investments in
which cost exceeds value (3,163,091)
- --------------------------------------------------------------------
Net unrealized gain $ 252,214,047
====================================================================
</TABLE>
* Non-income producing security.
(a) The aggregate cost for federal income tax purposes is $679,827,718.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
33
<PAGE>
Letter to Shareholders
- ----------------------------------------------------------------------
Goldman Sachs Small Cap Equity Fund
- ----------------------------------------------------------------------
Objective and Investment Approach
The Goldman Sachs Small Cap Equity Fund's objective is long-term
capital appreciation, primarily through investments in equity securities of U.S.
companies with market capitalizations of $1 billion or less. The fund is managed
using a "business value" approach to investing, which means we look for
attractive companies with high or improving returns on capital that we believe
can achieve solid, sustainable growth, as well as generate free cash after
investing for future growth. This approach differs markedly from many emerging
growth small-cap funds that invest in companies with high price-to-earnings
multiples solely on the basis of rapid, but frequently unsustainable, growth
rates. Using our own rigorous fundamental research, which includes meeting with
a company's management and examining a company's competitors, customers and
suppliers, we build the fund's portfolio one stock at a time.
Performance Review: Class A Shares Outperformed the Benchmark and the S&P 500
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
<S> <C> <C>
Fund Total Return Russell
(based on net 2000 Total
asset value) Return
----------- ------
Class A (1/31/96 - 1/31/97)* 27.28% 18.95%
Class B (5/1/96 - 1/31/97)* 5.39% 7.32%
- --------------------------------------------------------------------
</TABLE>
* Class A and B share performance assumes reinvestment of all dividends and
distributions, a complete redemption at the net asset value at the end of the
period and no initial sales charge or contingent deferred sales charge.
Performance for Class B shares is a cumulative total return (not annualized)
from their inception through the end of the period.
During the period under review, small-cap stocks achieved strong
returns but still underperformed large-cap stocks. Small-caps began the period
on a strong note, outpacing large-caps from February through May, then gave up
their early lead during June and July when the market experienced a sharp
correction. While both large-cap and small-cap stocks sold off, small-caps were
particularly hard hit. During the latter half of the period, the market surged
to record highs, but small-caps trailed their larger peers as investors rushed
to participate in the rising market, but hedged their bets by sticking with the
largest, most liquid stocks.
Despite the small-cap sector's waning momentum, we are pleased to
report that the fund's Class A shares returned 27.28% (at net asset value),
outperforming both its benchmark, the Russell 2000 index (18.95%), and the
large-cap S&P 500 stock index (26.25%). In addition, the fund's Class A shares
placed in the top third of the Lipper small-company growth fund category
(ranking 129th out of 394) for the 12-month period ended January 31, 1997,
according to Lipper Analytical Services, Inc. (Please note that Lipper rankings
do not take sales charges into account and that past performance is not a
guarantee of future results. Lipper did not rank the fund's Class B shares.) The
fund's Class B shares also achieved positive returns, but did not fare as well
because their inception coincided with the start of a more difficult market
environment for small-cap stocks.
The fund's performance was especially strong during the first half of
the period, when a number of its long-held investments performed well. These
positions included some companies that had experienced temporary difficulties
and rebounded on improving fundamentals, as well as companies that had been
relatively undiscovered and garnered increased investor awareness due to
continued strong earnings gains. The fund also performed better than the broader
market during the summer correction, when expensive, momentum-type stocks were
hit harder than those with inexpensive valuations, which the fund typically
emphasizes. In contrast, during the second half of the period, stocks with
momentum characteristics rebounded, while the types of stocks that the fund
stresses did not perform as strongly. In addition, the fund experienced price
corrections in several holdings due to earnings volatility.
The fund's top performers during the period came from a wide variety
of industries, with Black Box Corp. and Morningstar Group, Inc. contributing
significantly to overall results. Black Box Corp., a catalog marketer of
34
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
communications and networking products, was the fund's largest holding in the
beginning of the period and climbed substantially as it continued to achieve
record revenues and profits due to successful direct marketing efforts and new
product introductions. The position in Black Box was then sold after it reached
our target price. Morningstar Group, Inc., a manufacturer of specialty foods,
was the fund's eighth largest holding at the start of the period and nearly
tripled in price when it consolidated its market position through internal
growth, new product introductions and several attractive acquisitions. The fund
has held Morningstar Group for over four years; it is a good example of our
willingness to hold strong businesses until the market recognizes their true
value.
Other strong performers included American Safety Razor Co., the
leading U.S. manufacturer of private-brand and value-priced shaving blades,
which benefited from internal profit enhancement efforts and particularly strong
sales of its branded and private-label shaving and personal care products;
Movado Group, Inc., the owner of the Movado, Concord and Esquire watch brands,
which rebounded due to significant sales growth, new licensing agreements and
increased analyst coverage; J. Baker, Inc., a diversified retailer of footwear
and apparel, which announced its intention to sell its shoe division in order to
focus its resources on its successful "Casual Male Big & Tall" stores; and
Nimbus CD International, Inc., a CD and CD-ROM manufacturer that we sold after
it rose sharply due to high investor expectations of future DVD (digital video
disk) demand. Finally, several financial holdings performed well, such as Horace
Mann Educators Co., a provider of property, casualty and life insurance for the
educator market, and Terra Nova Bermuda Holdings, a worldwide provider of
property casualty insurance and reinsurance.
Not all of the fund's holdings fulfilled our expectations. Several
stocks were hurt by disappointing earnings, although we continue to believe in
their long-term prospects. For example, Landstar System, Inc. experienced
weakness when the restructuring of its trucking operations from a fixed cost to
a variable cost business took longer than expected. In addition, Central Maine
Power Co. was impacted by uncertainty in the regulatory environment, and Alpine
Lace Brands, Inc., a developer and marketer of cheese products, declined due to
an increase in commodity cheese prices. We took advantage of lower prices and
increased the fund's positions in all three stocks. In contrast, we liquidated
two other underperformers, Musicland Stores Corp. and Levitz Furniture Inc.,
because their fundamental businesses continued to deteriorate.
Recent Additions
During the period, we initiated a number of positions that have
already contributed to performance. These included Linens 'N Things, Inc., a
retailer of home accessories, which was attractively valued versus its key
competitor, Bed, Bath and Beyond, and has significant store expansion and margin
improvement potential, and Sun Healthcare Group, Inc., a well-managed
owner/operator of nursing homes with attractive long-term growth potential.
Though Sun Healthcare Group has been temporarily impacted by a government
investigation of one of its subsidiaries, we believe this issue is fully
reflected in the current stock price. In the technology sector, we added
DecisionOne Holdings Corp., the leading independent provider of computer
hardware and maintenance support services to U.S. companies. We intend to
continue to focus on technology-related service providers and distributors that
we believe are positioned to benefit from the expected long-term growth of the
sector but are not dependent on the success of any single product or service.
Other new investments were APS Holding Corp., a distributor of
automotive parts, which was depressed by industry- and company-specific issues
that we believe to be temporary, and Friedman's, Inc., a retailer of inexpensive
jewelry with significant expansion potential and a very low-cost operating
strategy. We also added two specialty insurance companies, SCPIE Holdings, Inc.
and Symon's International Group, Inc.
35
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Small Cap Equity Fund (continued)
- --------------------------------------------------------------------------------
Sales Included Several Financial Holdings
The fund sold several stocks after they appreciated and reached our
target prices. These included a number of financial holdings, such as Greenpoint
Financial Corp., the leading national lender of "no-documentation--low-
documentation" mortgages; Dime Bancorp, Inc., the fifth largest thrift in the
U.S.; and Western National Corporation, a marketer of annuity products.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Top 10 Portfolio Holdings as of January 31, 1997
Percentage of
Total Net
Company Line of Business Assets
<S> <C> <C>
Movado Group, Inc. Luxury and 5.6%
Affordable Watch
Distributor
DecisionOne Holdings Corp. Computer Support 4.9%
Provider
Sun Healthcare Group, Inc. Healthcare Services 3.9%
APS Holding Corp. Automotive Parts 3.6%
Distributor
Mariner Health Group, Inc. Healthcare Services 3.6%
Groupe AB Television 3.5%
Programming
Distributor
Friedman's, Inc. Jewelry Retailer 3.5%
J. Baker, Inc. Specialty Apparel 3.5%
Heritage Media Corp. Marketing Services 3.4%
Provider
Linens 'N Things, Inc. Home Products 3.1%
Retailer
- --------------------------------------------------------------------
</TABLE>
Outlook
One of the key factors that will affect equity performance during
1997 will be the continuation of the favorable economic environment of moderate
growth and low inflation, which would ensure that both the corporate earnings
outlook and the interest rate climate remain hospitable. Small-capitalization
stocks as a group currently appear undervalued relative to large-cap stocks and
to their own expected earnings potential. We believe that corporate earnings
growth will slow somewhat in 1997, and to the extent that smaller companies can
achieve better earnings growth than larger companies, they should perform
relatively well. The performance of small-caps will particularly depend on
investors broadening their focus from the largest, most liquid stocks to
smaller, less widely followed issues. We are optimistic regarding the fund's
future performance based on the strong earnings growth and the free cash flow we
expect from many of our top holdings, as well as from new investments.
/s/ Paul D. Farrell
Paul D. Farrell
Senior Portfolio Manager,
U.S. Active Equity Value
/s/ Matthew B. McLennan
Matthew B. McLennan
Assistant Portfolio Manager,
U.S. Active Equity Value
/s/ Timothy G. Ebright
Timothy G. Ebright
Portfolio Manager,
U.S. Active Equity Growth
March 3, 1997
36
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Small Cap Equity Fund
January 31, 1997
- -------------------------------------------------------------------------------
The following graphs show the value, as of January 31, 1997, of a $10,000
investment made (with and without the maximum sales charge of 5.5% and
redemption charge of 5.0% for Class A and B, respectively) on the inception date
of each class. For comparative purposes, the performance of the Fund's
benchmarks (the Standard and Poor's 500 Index ("S&P 500") and the Russell 2000)
are shown for the appropriate time periods. All performance data shown
represents past performance and should not be considered indicative of future
performance which will fluctuate with changes in market conditions. These
performance fluctuations will cause an investor's shares, when redeemed, to be
worth more or less than their original cost.
Class A
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
GS Small Cap Class A GS Small Cap Class A Russell
(w/sales charge) (no sales charge) S&P 500 2000
-------------------- --------------------- ------- -------
<S> <C> <C> <C> <C>
10/22/92 $ 9,450 10,000 $10,000 $10,000
1/31/93 11,138 11,786 10,655 11,733
1/31/94 14,494 15,337 12,027 13,914
1/31/95 11,953 12,649 12,091 13,078
1/31/96 12,813 13,559 16,768 17,010
1/31/97 16,320 17,270 21,183 20,242
</TABLE>
Class B
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
GS Small Cap Class B GS Small Cap Class B Russell
(no redemp. charge) (w/redemp. charge) S&P 500 2000
-------------------- -------------------- ------- -------
<S> <C> <C> <C> <C>
5/1/96 $10,000 $10,000 $10,000 $10,000
1/31/97 10,539 10,039 12,218 10,732
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------
Average Annual Total Return
-----------------------------------------
One Year Since Inception/(a)/
-------------------------------------------------------------------------
<S> <C> <C>
Class A, no sales charge 27.28% 13.61%
-------------------------------------------------------------------------
Class A, w/sales charge 20.27% 12.12%
-------------------------------------------------------------------------
Class B, no redemption charge N/A 5.39%/(b)/
-------------------------------------------------------------------------
Class B, w/redemption charge N/A 0.39%/(b)/
-------------------------------------------------------------------------
</TABLE>
/(a)/ Class A and Class B shares commenced operations on October 22, 1992
and May 1, 1996, respectively.
/(b)/ An aggregate total return (not annualized) is shown instead of an
average annual total return since this class has not completed a full
twelve months of operations.
- --------------------------------------------------------------------------------
37
<PAGE>
Statement of Investments
- --------------------------------------------------------------------
Goldman Sachs Small Cap Equity Fund
January 31, 1997
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value
====================================================================
<S> <C> <C>
Common Stocks--92.5%
- --------------------------------------------------------------------
Auto/Original Equipment Manufacturer--3.6%
777,200 APS Holding Corp.* $ 7,869,150
- --------------------------------------------------------------------
Commercial Products--2.4%
211,000 Figgie International, Inc. Class A* 2,611,125
231,400 Figgie International, Inc. Class B* 2,487,550
- --------------------------------------------------------------------
5,098,675
- --------------------------------------------------------------------
Commercial Services--1.0%
539,200 Opinion Research Corp.* 2,022,000
- --------------------------------------------------------------------
Computers & Peripherals--7.5%
598,700 DecisionOne Holdings Corp.* 10,477,250
467,100 Multiple Zones International, Inc.* 5,605,200
- --------------------------------------------------------------------
16,082,450
- --------------------------------------------------------------------
Consumer Staples--3.8%
270,700 American Safety Razor Co.* 3,958,987
389,400 Spartech Corp. 4,234,725
- --------------------------------------------------------------------
8,193,712
- --------------------------------------------------------------------
Electric Utilities--2.2%
433,900 Central Maine Power Co. 4,827,137
- --------------------------------------------------------------------
Electrical Equipment--2.3%
240,100 Carbide/Graphite Group* 5,012,087
- --------------------------------------------------------------------
Food--2.3%
374,600 Alpine Lace Brands, Inc.* 2,341,250
109,000 Morningstar Group, Inc.* 2,588,750
- --------------------------------------------------------------------
4,930,000
- --------------------------------------------------------------------
Healthcare Management--9.0%
20,100 Health Systems International, Inc.* 520,088
798,000 Mariner Health Group, Inc.* 7,780,500
517,100 Sun Healthcare Group, Inc.* 8,402,875
146,200 Trigon Healthcare, Inc.* 2,595,050
- --------------------------------------------------------------------
19,298,513
- --------------------------------------------------------------------
Home Furnishing & Services--2.9%
221,500 Congoleum Corp.* 3,156,375
160,900 Synthetic Industries, Inc.* 3,036,988
- --------------------------------------------------------------------
6,193,363
- --------------------------------------------------------------------
Insurance Specialty--1.6%
63,100 Old Republic International Corp. 1,695,812
83,900 Scpie Holdings, Inc.* 1,761,900
- --------------------------------------------------------------------
3,457,712
- --------------------------------------------------------------------
Insurance-Life--0.3%
36,000 AmerUs Life Holdings, Inc.* 711,000
- --------------------------------------------------------------------
Insurance-Property and Casualty--6.0%
50,500 Horace Mann Educators Co. 2,158,875
206,500 IPC Holdings Ltd. 4,943,094
92,200 Symons International Group* 1,475,200
215,800 Terra Nova Bermuda Holdings 4,262,050
- --------------------------------------------------------------------
12,839,219
- --------------------------------------------------------------------
Leisure--1.0%
210,700 Trump Hotels & Casino Resorts,
Inc.* 2,212,350
- --------------------------------------------------------------------
Media Content--9.0%
596,300 Groupe AB SA ADR* 7,602,825
609,800 Heritage Media Corp.* 7,393,825
432,300 International Post Ltd.* 1,729,200
324,200 Platinum Entertainment, Inc.* 2,674,650
- --------------------------------------------------------------------
19,400,500
- --------------------------------------------------------------------
Metal Products--0.5%
57,200 Doncasters Plc ADR* 1,122,550
- --------------------------------------------------------------------
Packaging--0.7%
88,100 Shorewood Packaging Corp.* 1,596,813
- --------------------------------------------------------------------
Real Estate--0.7%
73,700 Insignia Financial Group, Inc.* 1,538,487
- --------------------------------------------------------------------
Recreation Products--5.6%
539,200 Movado Group, Inc. 12,064,600
- --------------------------------------------------------------------
Restaurants & Hotels--6.4%
262,400 IHOP Corp.* 6,461,600
399,300 Mortons Restaurant Group, Inc.* 6,438,713
40,000 Sonic Corp.* 815,000
- --------------------------------------------------------------------
13,715,313
- --------------------------------------------------------------------
Retail Hardgoods--4.7%
731,000 Brookstone Inc.* 5,939,375
290,700 Finlay Enterprises, Inc.* 4,287,825
- --------------------------------------------------------------------
10,227,200
- --------------------------------------------------------------------
</TABLE>
38
<PAGE>
- --------------------------------------------------------------------
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value
====================================================================
<S> <C> <C>
Common Stocks (continued)
Specialty Retail--12.7%
506,200 Friedmans, Inc.* $ 7,593,000
242,000 General Nutrition Companies, Inc.* 4,386,250
1,500 Hibbett Sporting Goods, Inc.* 24,375
1,100,400 J. Baker, Inc. 7,565,250
87,000 Leslies Poolmart, Inc.* 1,141,875
307,200 Linens N'Things, Inc.* 6,758,400
- --------------------------------------------------------------------
27,469,150
- --------------------------------------------------------------------
Telephone Communications--0.3%
15,400 Telephone & Data Systems, Inc. 587,125
- --------------------------------------------------------------------
Textiles--1.6%
87,800 Samsonite Corp.* 3,468,100
- --------------------------------------------------------------------
Trucking--2.3%
207,100 Landstar Systems, Inc.* 4,918,625
- --------------------------------------------------------------------
Voice, Video and Data--2.1%
263,200 Pegasus Communications, Inc.* 3,224,200
142,700 Rural Cellular Corp.* 1,391,325
- --------------------------------------------------------------------
4,615,525
- --------------------------------------------------------------------
Total Common Stocks
(Cost $194,261,908) $199,471,356
====================================================================
<CAPTION>
Principal
Amount Description Value
====================================================================
<S> <C> <C>
Corporate Bond--0.2%
- --------------------------------------------------------------------
$ 500,000 J. Baker, Inc.
7.0%, 06/01/02 $ 412,500
- --------------------------------------------------------------------
Total Corporate Bond
(Cost $498,387) $ 412,500
====================================================================
Repurchase Agreement--7.7%
- --------------------------------------------------------------------
$16,600,000 Joint Repurchase Agreement Account
5.63%, 02/03/97 $ 16,600,000
- --------------------------------------------------------------------
Total Repurchase Agreement
(Cost $16,600,000) $ 16,600,000
====================================================================
<CAPTION>
Contracts Description Value
====================================================================
<S> <C> <C>
Options*--0.5%
200 S&P 500 Index Put Strike 725
exp. 03/97 $ 95,000
351 S&P 500 Index Put Strike 700
exp. 03/97 92,138
560 S&P 500 Index Put Strike 750
exp. 06/97 938,000
- --------------------------------------------------------------------
Total Options
(Cost $1,643,182) $ 1,125,138
====================================================================
Total Investments
(Cost $213,003,477)/(a)/ $217,608,994
====================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in
which value exceeds cost $ 31,335,604
Gross unrealized loss for investments in
which cost exceeds value (26,835,810)
- --------------------------------------------------------------------
Net unrealized gain $ 4,499,794
====================================================================
</TABLE>
* Non-income producing security.
/(a)/The aggregate cost for federal income tax purposes is $213,109,200.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
39
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs International Equity Fund
- --------------------------------------------------------------------------------
Objective and Investment Approach
The Goldman Sachs International Equity Fund seeks long-term capital
appreciation by investing in equity securities of companies organized or traded
outside the U.S. that we believe have the potential to appreciate over the long
term. The fund focuses on growing companies that are attractively valued and
have strong, competitive positions in their respective industries. The fund's
portfolio managers are based in London, Tokyo and Singapore and their knowledge
of local markets plays an important role in uncovering investment opportunities.
While the fund does not allocate assets across specific countries based on
top-down economic or market forecasts, the portfolio managers strive to manage
risk by remaining diversified by country and industry sector and by closely
monitoring economic and political events in countries in which the fund does
invest.
Economic and Market Overview: European Markets Were Strong Despite Weak
Economies; Asia Faltered
Economic growth was slower than expected in many countries during the
period, prompting further monetary easing in much of Europe and continued very
low short-term interest rates in Japan. European equity markets performed very
well despite the growth shortfall, benefiting from an increased focus on
improving shareholder value. The Japanese market declined significantly, while
results in other Asian markets were mixed.
. Europe. The economies of several European markets, such as the U.K., Norway
and Ireland, strengthened during the period, but overall growth remained weak
throughout most of Europe. A number of European countries attempted to stimulate
their economies through monetary easing, but maintained tight fiscal policies in
an effort to reduce their budget deficits enough to qualify for European
Monetary Union. This strategy proved to be only modestly successful, as
unemployment remained at record highs, particularly in Germany. Though the
recovery was somewhat disappointing, European equity markets rose 26.6% during
the period (as measured by the FT/S&P Actuaries Europe Index in terms of local
currencies), fueled by low inflation, low interest rates and relatively strong
bond markets. In addition, corporate profits improved, reflecting increased
emphasis on cost cutting and restructuring. The equity markets of Finland, Spain
and Sweden were among the strongest performers, while British stocks lagged much
of Europe due to a strengthening currency (which made U.K. exports more
expensive) and expectations of increases in short-term interest rates.
. Japan. The Japanese economy strengthened during the period, but earnings
growth fell short of expectations. For the 12-month period ended January 31,
Japanese stocks (as measured by the TOPIX index in yen) declined 14.9%, with
approximately half of the loss occurring in January 1997 alone. During the first
half of the period, the Japanese market was bolstered by heavy demand from
Europe and the U.S., but foreign investors subsequently became net sellers when
the economic recovery softened and raised uncertainty surrounding the
sustainability of corporate profits. The weaker corporate earnings outlook
resulted in a conspicuous divergence between the performance of the largest
international blue-chip stocks and the rest of the market, particularly in the
third quarter. Lackluster investor sentiment was further exacerbated at the end
of the year due to increased pessimism that the Liberal Democratic Party (LDP)
government's higher taxes and scant spending on public works would dampen the
economy.
. Asia (ex-Japan). Asian stock markets rose 2.4% during the period, as measured
by the MSCI All Country Asia Free (Ex Japan) Index (in terms of local
currencies). Asian markets began the period on a strong note, but several
markets faltered during the spring and summer due to a host of issues. These
included political uncertainty arising from national elections in several Asian
countries as well as slowing economic growth throughout the region, principally
due to weak electronics exports. From
- --------------------------------------------------------------------------------
40
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
September 1996 through January 1997, the region generally improved due to
stronger corporate earnings and stabilizing exports. The performance of the
individual markets varied widely. Malaysia was one of the region's best
performing markets during the period under review, rising 18.4%; Hong Kong, the
largest market in the region, performed well with a 12.0% return; and Thailand
was by far the weakest market, declining 45.3% (all in local currency terms).
Performance Review: Security Selection, Country Allocations and Industry
Weightings All Contributed to Strong Performance
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Fund Total FT/S&P
Return Actuaries
(based on Europe &
net asset Pacific Index
value) Total Return
------ ------------
<S> <C> <C>
Class A (1/31/96 - 1/31/97)* 13.48% 1.27%
Class B (5/1/96 - 1/31/97)* 2.83% -4.22%
Institutional (2/7/96 - 1/31/97)* 12.53% 0.53%
Service (3/6/96 - 1/31/97)* 10.42% 0.86%
- ------------------------------------------------------------------------------
</TABLE>
* Class A, B, Institutional and Service share performance assumes reinvestment
of all dividends and distributions, a complete redemption at the net asset value
at the end of the period and no initial sales charge or contingent deferred
sales charge. Performance for Class B, Institutional and Service shares is a
cumulative total return (not annualized) from their inception through the end of
the period.
The fund performed extremely well during the period under review,
with all of its share classes outperforming the benchmark, the Financial
Times/S&P Actuaries Europe & Pacific Index ("Europac") unhedged. Europac is a
capitalization-weighted composite of approximately 1,500 stocks from 23
countries in Europe and the Asia-Pacific region and is calculated on a monthly
basis. We are also pleased to note that the fund's Class A shares placed in the
top third of the Lipper international fund category (ranking 93rd out of 342)
for the 12-month period ended January 31, 1997, according to Lipper Analytical
Services, Inc. (Please note that Lipper rankings do not take sales charges into
account and that past performance is not a guarantee of future results. Lipper
did not rank the fund's Class B, Institutional or Service shares.)
The primary driver of the fund's superior performance was successful
stock selection, as we continued to focus on growing companies that actively
increased shareholder value through actions such as cost cutting, share buybacks
or restructuring. In addition, country allocations that worked in the fund's
favor were its overweighting in Sweden, one of the strongest performing markets
during the period, and its underweighting in Japan, one of the weakest, each the
result of our bottom-up approach to stock selection. The fund's industry
allocations also added value. The fund was overweighted in business services and
diversified consumer goods/services, which were among the best performing
sectors, and underweighted in financial services and basic industries, which
performed relatively poorly.
In terms of currency exposure, though the fund's neutral exposure is
unhedged, it was substantially hedged against the yen, which benefited
performance significantly when the yen continued to fall against the dollar. In
addition, the fund was partially hedged against some European currencies, such
as the Deutsche mark and the Swiss franc, which worked in its favor when the
dollar rose against those currencies.
The fund's Class B shares outperformed the benchmark by a wide
margin, but their performance was not as strong as the other share classes
because they began operations in May, after equity prices had already risen
significantly.
Portfolio Composition: A Widely Diversified Portfolio
As of January 31, 1997, the fund held positions in 56 companies based
in 16 countries. In terms of total portfolio assets, the five largest country
exposures were Japan (27.3%), the U.K. (12.6%), Germany (7.1%), Sweden (7.0%)
and Switzerland (6.8%).
Europe. At the end of the period, the portfolio's 53.0% allocation in European
stocks was in line with that of the benchmark (54.1%). In general, growth stocks
led the
- --------------------------------------------------------------------------------
41
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs International Equity Fund (continued)
- --------------------------------------------------------------------------------
market during the period. Many of the fund's European holdings were
growth-oriented stocks that benefited from positive earnings surprises and
successful efforts by senior management to enhance equity returns and
shareholder value. Several of the portfolio's longer term European holdings
were, once again, among its strongest performers. Securitas (Sweden), the
largest security services company in Europe, more than doubled during the
period, boosted by earnings from companies it acquired in Germany, France and
Portugal. Fresenius (Germany), a major producer of medical supplies, rose over
140% as it merged its global kidney dialysis division with W. R. Grace's
National Medical Center healthcare subsidiary and spun off the resulting
business, Fresenius Medical Care. Ericsson (Sweden), one of the world's leading
suppliers of mobile telephones and infrastructure, rebounded from weakness early
in the period when it achieved very good earnings, which reassured investors
that it was not suffering from margin pressure or weak mobile telephone orders.
Other strong performers were Randstad Holdings (Netherlands), the leading
temporary help organization in its market, which reported healthy sales and
earnings as its business continued to expand, and Comptoirs Modernes (France), a
supermarket chain operator, which gained market share in France and made
important acquisitions in Spain.
Several of the fund's newer additions also contributed to its
positive results. These included two pharmaceutical companies: Hoechst
(Germany), whose acquisition and restructuring plans indicate a commitment to
improving shareholder value, and Novartis (Switzerland), which was formed
through the merger of Ciba-Geigy and Sandoz and is expected to benefit from
significant cost reductions as well as new product development. Other
significant new positions that performed well were SGS Thomson (France), one of
the 10 largest semiconductor manufacturers in the world, which operates in the
high-value-added, application-specific sector of the market, and Telecom Italia
Mobile (Italy), the leading mobile telephone operator in Italy, which generates
strong cash flow and is extremely profitable.
Japan. Approximately 27% of the fund was invested in Japan, which was
underweighted relative to the benchmark (32.1%). The fund's Japanese stocks
fared better than the market, as we avoided banks and brokerages, two of the
weakest industries. We invested in companies with relatively robust earnings
visibility and good valuations, particularly favoring management that improved
cost competitiveness and strengthened their core business. The fund's best
performing Japanese stocks were TDK Corp., an electronic components manufacturer
that reported better than expected earnings due to strong sales of personal
computer-related components; Hoya Corp., an optical glass manufacturer that
aggressively restructured its operations and successfully diversified its
business so that it now dominates the glass magnetic disc market; and Mirai
Industry, a market leader in electric cables, pipes and other electric wiring
that introduced new products and cut costs. In contrast, Kyocera Corp., an
electronics components manufacturer, reported disappointing results due to
increased competition in the semiconductor and communication equipment
businesses. A new addition was Takeda Chemical Industry, the largest
pharmaceutical company in Japan, where aggressive new management initiatives
rapidly expanded overseas sales and improved the profitability of its
prescription drug business.
Asia-Pacific. Asia, a 13.5% allocation (excluding Japan), was slightly
overweighted compared with the benchmark's 10.7%, with Hong Kong representing
the largest country position at 6.7% of the portfolio. For most of the period,
the fund was overweighted in Malaysia, Hong Kong and Australia, which were three
of the better performing Asian markets. Though the performance of some of the
other markets fell short of expectations, our stock selection within the region
worked in the fund's favor. Several of the fund's top performers were financial
stocks, including Commerce Asset-Holdings, the fifth largest financial group in
Malaysia, which benefited from its merchant banking operations and strong loan
growth, and HSBC Holdings, a Hong Kong-based banking and financial services
organization, which reported strong results due to its dominant market position.
New holdings include Australia & New Zealand Bank Group, a bank that is
positioned to benefit from the potential deregulation in Australia's financial
services sector, and Asia Satellite Telecommunications Holdings Ltd., a
- --------------------------------------------------------------------------------
42
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
leading satellite owner and operator in the Asia-Pacific region that owns prime
orbital slots that are expected to result in high utilization rates and fees.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Top 10 Portfolio Holdings as of January 31, 1997
Percentage
of Total
Company Country Line of Business Net Assets
<S> <C> <C> <C>
HSBC Holdings Hong Kong Banking and 3.0%
Finance
Novartis Switzerland Pharmaceuticals 3.0%
Fresenius Germany Kidney Dialysis 2.4%
Equipment
TDK Corp. Japan Tape and Disc 2.4%
Manufacturer
Telecom Italia Italy Mobile Tele- 2.4%
Mobile communications
Operator
Canon, Inc. Japan Office Equipment 2.4%
Manufacturer
Adecco Switzerland Temporary Help 2.4%
Services
Adidas Germany Sporting Goods 2.4%
Manufacturer
Hoechst Germany Chemical and 2.3%
Drug
Manufacturer
Hoya Corp. Japan Optical Glass 2.3%
Manufacturer
- --------------------------------------------------------------------
</TABLE>
Outlook
In the near term, we expect most international economies to continue
to experience moderate growth and subdued inflation. We are particularly
positive on the prospects for the European markets in 1997, where we expect a
modest acceleration in economic growth and a continuation of healthy corporate
earnings growth helped by cost cutting as well as restructuring initiatives.
We are currently most concerned about Japan. Despite the sharp
correction, we expect to remain underweighted in the Japanese market because of
our negative view of the banking sector and only modest earnings recoveries in
nonmanufacturing sectors. Lack of investor confidence in the government's
commitment to deregulation, as well as simultaneous weakness in the bond and
currency markets, have all impacted market sentiment. In this state of
uncertainty, superior stock selection will be essential, and we intend to
emphasize companies with clear earnings visibility, strong management and
attractive valuations. Despite the generally poor conditions, the earnings for
the fund's Japanese holdings are above expectations and are being upgraded. In
non-Japan Asia, corporate earnings reports have been mixed, but we believe
improved political stability and export growth should help stocks in 1997.
Finally, we are pleased to report that we have expanded our
international equity team in all geographic regions to support our effort to
seek out the most promising companies around the world.
/s/ Roderick D. Jack
Roderick D. Jack
Senior Portfolio Manager, London
/s/ Marcel Jongen
Marcel Jongen
Senior Portfolio Manager, London
/s/ Shogo Maeda
Shogo Maeda
Senior Portfolio Manager, Tokyo
/s/ Warwick M. Negus
Warwick M. Negus
Senior Portfolio Manager, Singapore
March 3, 1997
- --------------------------------------------------------------------------------
43
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs International Equity Fund
January 31, 1997
- --------------------------------------------------------------------------------
The following graphs show the value, as of January 31, 1997, of a $10,000
investment made (with and without the maximum sales charge of 5.5% and
redemption charge of 5.0% for Class A and Class B, respectively) on the
inception date of each class. For comparative purposes, the performance of the
Fund's benchmark (the Financial Times-Actuaries World Euro-Pacific Index
Unhedged ("FT Euro-Pac (Unhedged)/(b)/) is shown for the appropriate time
periods. All performance data shown represents past performance and should not
be considered indicative of future performance which will fluctuate with changes
in market conditions. These performance fluctuations will cause an investor's
shares, when redeemed, to be worth more or less than their original cost.
<TABLE>
<CAPTION>
Class A
[LINE GRAPH APPEARS HERE]
GS Intl Eq GS Intl Eq
Class A Class A FT Euro-Pac Ft Euro-Pac
(w/sales charge) (no sales charge) (Comb )(b) (Unhedged)
---------------- ----------------- ----------- -----------
<S> <C> <C> <C> <C>
12/1/92 9,450 10,000 10,000 10,000
1/31/93 9,566 10,123 10,063 10,055
1/31/94 12,066 12,768 13,498 14,399
1/31/95 10,058 10,643 12,119 13,902
1/31/96 12,942 13,695 13,983 16,039
1/31/97 14,961 15,546 14,160 16,243
<CAPTION>
Class B
[LINE GRAPH APPEARS HERE]
GS Intl Eq GS Intl Eq
Class B Class B FT Euro-Pac
(w/sales charge) (no sales charge) (Unhedged)
---------------- ----------------- -----------
<S> <C> <C> <C>
5/1/96 10,000 10,000 10,000
1/31/97 10,283 9,783 9,578
<CAPTION>
Institutional
[LINE GRAPH APPEARS HERE]
GS Intl Equity FT Euro-Pac
Institutional Class (Unhedged)
------------------- -----------
<S> <C> <C>
2/7/96 10,000 10,000
1/31/97 11,253 10,053
<CAPTION>
Service
[LINE GRAPH APPEARS HERE]
GS Intl Equity FT Euro-Pac
Service Class (Unhedged)
-------------- -----------
<S> <C> <C>
3/6/97 10,000 10,000
1/31/97 11,042 10,086
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------
Average Annual Total Return
----------------------------------------
One Year Since Inception/(a)/
- -------------------------------------- ------------------- --------------------
<S> <C> <C>
Class A, no sales charge 13.48% 11.15%
- -------------------------------------- ------------------- --------------------
Class A, w/sales charge 7.26% 9.66%
- -------------------------------------- ------------------- --------------------
Class B, no redemption charge N/A 2.83% /(c)/
- -------------------------------------- ------------------- --------------------
Class B, w/redemption charge N/A (2.17)%/(c)/
- -------------------------------------- ------------------- --------------------
Institutional Class N/A 12.53% /(c)/
- -------------------------------------- ------------------- --------------------
Service Class N/A 10.42% /(c)/
- -------------------------------------- ------------------- --------------------
</TABLE>
/(a)/ Class A, Class B, Institutional and Service shares commenced operations
on December 1, 1992, May 1, 1996, February 7, 1996 and March 6, 1996,
respectively.
/(b)/ Beginning on September 1, 1994, the Class A shares began using the
unhedged FT Euro-Pac as its benchmark (prior thereto, Class A used the
hedged FT Euro-Pac). The combined FT Euro-Pac represents the hedged FT
Euro-Pac performance up to August 31, 1994 and the unhedged FT Euro-Pac
performance from September 1, 1994 through January 31, 1997.
/(c)/ An aggregate total return (not annualized) is shown instead of an average
annual total return since these classes have not completed a full twelve
months of operations.
- --------------------------------------------------------------------------------
44
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs International Equity Fund
January 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value
====================================================================
<S> <C> <C>
Common Stocks--91.5%
Australian Dollar--3.6%
1,851,658 Australia & New Zealand Bank Group
(Commercial Banks) $ 11,355,706
1,564,955 Woodside Petroleum, Ltd. (Oil &
Gas) 11,053,763
- --------------------------------------------------------------------
22,409,469
- --------------------------------------------------------------------
Austrian Schilling--1.2%
105,400 Oesterreichische Elektrizitats
(Utilities) 7,698,241
- --------------------------------------------------------------------
Belgian Franc--0.2%
14,400 Dexia (Financial Services) 1,372,240
- --------------------------------------------------------------------
British Pound Sterling--12.6%
1,391,569 British Airport Authority
(Transportation) 11,661,442
1,788,649 Electrocomponents (Wholesale
Trade) 12,753,546
1,261,210 Premier Farnell PLC (Electronics) 10,670,067
706,368 Misys PLC (Business Services and
Computer Software) 12,393,414
1,708,700 Rentokil Group (Business Services) 12,553,100
473,916 Siebe (Machinery and Engineering
Services) 7,973,270
873,509 Standard Chartered (Banking) 10,497,224
- --------------------------------------------------------------------
78,502,063
- --------------------------------------------------------------------
Deutsche Mark--4.7%
155,760 Adidas AG (Textiles) 14,749,495
343,320 Hoechst AG (Healthcare) 14,439,672
- --------------------------------------------------------------------
29,189,167
- --------------------------------------------------------------------
French Franc--6.4%
22,531 Comptoirs Modernes (Retail) 11,749,983
40,720 CLF Dexia (Financial Services) 3,649,869
95,602 CLF Dexia - Registered Shares 8,569,124
(Financial Services)
63,189 Seita (Tobacco) 2,400,553
193,600 SGS Thomson Microelectronics
(Electronics) 13,882,408
- --------------------------------------------------------------------
40,251,937
- --------------------------------------------------------------------
Hong Kong Dollar--6.7%
4,148,000 Asia Satellite Tel.
(Telecommunications) 9,233,837
816,800 HSBC Holdings (Commercial Banks) 18,920,583
1,185,000 Sun Hung Kai Properties Co. (Real
Estate) 13,380,759
- --------------------------------------------------------------------
41,535,179
- --------------------------------------------------------------------
Irish Pound--2.3%
1,491,014 Bank of Ireland (Commercial Banks) 14,247,624
- --------------------------------------------------------------------
Italian Lira--2.4%
3,000,500 Telecom Italia Mobile (Utilities) 8,930,448
3,574,000 Telecom Italia Mobile (Di Risp
Shares) (Utilities) 6,095,944
- --------------------------------------------------------------------
15,026,392
- --------------------------------------------------------------------
Japanese Yen--27.3%
206,000 Aderans Company Ltd. (Retail) 4,808,281
702,000 Canon, Inc. (Office Equipment
Manufacturer) 14,880,119
363,000 Hoya Corp. (Electronics and
Instrumentation) 14,520,599
297,400 Inaba Denkisangyo (Industrial) 5,396,346
458,000 Kokuyo Co., Ltd. (Office Equipment
Manufacturer) 9,594,787
149,000 Kyocera Corp. (Electronics) 8,749,887
358,000 Max Co. (Electronics and
Instrumentation) 5,432,966
238,900 Mirai Industry Co. (Electrical
Equipment Manufacturer) 5,852,060
1,927,000 Mitsubishi Heavy Industries Ltd.
(Engineering) 13,874,972
1,530,000 Mitsui Marine & Fire (Insurance) 8,215,019
450,100 Santen Pharmaceutical Co.
(Healthcare) 8,352,716
92,800 Sanyo Shinpan Financial
(Financial) 5,204,668
</TABLE>
- --------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
45
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs International Equity Fund (continued)
January 31, 1997
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value
====================================================================
<S> <C> <C>
Common Stocks (continued)
Japanese Yen (continued)
322,000 Shimachu (Retail-Furniture) $ 6,905,027
213,900 SMC Corp. (Machinery) 13,125,622
410,000 Taikisha Ltd. (Machinery) 5,038,558
570,000 Takeda Chemical Industry
(Healthcare) 11,235,927
235,000 TDK Corp. (Consumer Goods) 15,040,620
464,000 Tostem Corp. (Construction) 10,906,842
146,800 York Benimaru (Retail) 3,922,900
- --------------------------------------------------------------------
171,057,916
- --------------------------------------------------------------------
Malaysian Ringgit--1.9%
1,328,000 Commerce Asset Holdings
(Commercial Banks) 10,683,829
581,000 Leader Universal Holdings
(Metals-Diversified) 1,168,544
- --------------------------------------------------------------------
11,852,373
- --------------------------------------------------------------------
Netherlands Guilder--5.0%
146,070 Aegon (Insurance) 8,951,011
136,180 Randstad Holdings (Business
Services) 9,471,458
102,016 Wolters Kluwer (Media) 12,602,793
- --------------------------------------------------------------------
31,025,262
- --------------------------------------------------------------------
Singapore Dollar--1.5%
1,511,000 Singapore Land (Real Estate) 9,123,100
- --------------------------------------------------------------------
Spanish Peseta--1.9%
63,595 Banco Popular (Commercial Banks) 11,571,494
- --------------------------------------------------------------------
Swedish Krona--7.0%
335,300 Ericsson Telecommunications
(Computer - Office) 11,255,719
268,440 Hoganas AB (Metal Products) 8,455,037
405,970 Securitas AB (Business Services) 12,057,737
3,469,100 Swedish Match AB (Tobacco) 11,741,304
- --------------------------------------------------------------------
43,509,797
- --------------------------------------------------------------------
Swiss Franc--6.8%
52,468 Adecco SA (Business Services) 14,753,971
6,726 Cie Financier Richemont AG
(Consumer Goods) 9,231,858
16,335 Novartis AG (Healthcare) 18,730,002
- --------------------------------------------------------------------
42,715,831
- --------------------------------------------------------------------
Total Common Stocks
(Cost $503,926,410) $ 571,088,085
====================================================================
Preferred Stock--2.4%
- --------------------------------------------------------------------
Deutsche Mark--2.4%
74,790 Fresenius AG (Health Care),
Non-voting $ 15,042,126
- --------------------------------------------------------------------
Total Preferred Stock
(Cost $4,437,079) $ 15,042,126
====================================================================
<CAPTION>
Principal
Amount Description Value
====================================================================
<S> <C> <C>
Short-Term Obligations--6.6%
- --------------------------------------------------------------------
$ 41,394,109 State Street Bank & Trust
Euro-Time Deposit 5.5%, 02/03/97** $ 41,394,109
- --------------------------------------------------------------------
Total Short-Term Obligations
(Cost $41,394,109) $ 41,394,109
====================================================================
Total Investments
(Cost $549,757,598)/(a)/ $ 627,524,320
====================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in
which value exceeds cost $108,968,495
Gross unrealized loss for investments in
which cost exceeds value (31,533,818)
- --------------------------------------------------------------------
Net unrealized gain $ 77,434,677
====================================================================
</TABLE>
/(a)/ The aggregate cost for federal income tax purposes is $550,089,643.
* Non-income producing security.
** A portion of this security has been segregated for extended
settlement securities.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an intergral part of these financial statements.
46
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------
Common and Preferred Stock Industry Concentrations
====================================================================
<S> <C>
Business Services 7.8%
Commercial Banks 12.4%
Computer Software and Services 2.0%
Computer - Office 1.8%
Construction 1.7%
Consumer Goods 3.9%
Electrical Equipment Manufacturer 0.9%
Electronics 5.3%
Electronics and Instrumentation 3.2%
Engineering 2.2%
Financial 0.8%
Financial Services 2.2%
Health Care 10.9%
Industrial 0.9%
Insurance 2.7%
Machinery 2.9%
Machinery and Engineering Services 1.3%
Media 2.0%
Metal Products 1.4%
Metals-Diversified 0.2%
Office Equipment Manufacturer 3.9%
Oil & Gas 1.8%
Real Estate 3.6%
Retail 3.3%
Retail-Furniture 1.1%
Telecommunications 1.5%
Textiles 2.4%
Tobacco 2.3%
Transportation 1.9%
Utilities 3.6%
Wholesale Trade 2.0%
- --------------------------------------------------------------------
Total Common and Preferred Stock 93.9%
====================================================================
</TABLE>
The accompanying notes are an integral part of these financial
statements.
- --------------------------------------------------------------------
47
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Asia Growth Fund
- --------------------------------------------------------------------------------
Objective and Investment Approach
The Goldman Sachs Asia Growth Fund seeks long-term capital appreciation by
investing in a limited number of carefully selected companies located in 12
Asian markets, including China, Hong Kong, India, Indonesia, Malaysia, Pakistan,
the Philippines, Singapore, South Korea, Sri Lanka, Taiwan and Thailand.
We utilize extensive fundamental research in our search for well-managed
companies whose stock prices are, in our opinion, undervalued in the
marketplace. Because many companies in the Asian region are growing at
relatively rapid rates, we consider a company's return on capital, its
price-to-book value and the predictability of its earnings stream as among the
best measures of its intrinsic value. A strong market position and a skilled
management team dedicated to maximizing shareholder returns are also important
to us. Our investment process includes face-to-face meetings with senior
management as well as frequent contact with a company's customers, suppliers and
competitors.
While our primary focus is on stock selection, we seek to carefully manage
risk by diversifying the fund's portfolio in terms of countries, industry
sectors and size of capitalization. We are also mindful of making certain that
the market for a particular stock is relatively liquid, so we can easily sell a
position if our opinion changes. From time to time, we may choose to
significantly overweight or underweight our holdings in one country compared
with our benchmark, if we believe there is a compelling reason to do so.
Finally, we closely monitor the potential impact of political and economic
events in the region on particular companies and adjust the portfolio
accordingly.
Market Overview: Results Were Mixed in Asian Markets
As a group, the Asian stock markets rose 2.37% during the period, as
measured by the MSCI All Country Asia Free (Ex Japan) Index (without dividends
reinvested). The weak performance indicated by the Index masks the wide
divergence of performance among the individual Asian markets, as several
countries rose more than 10% while others fell more than 20%. The period under
review began on a strong note, but the region quickly sold off in mid-February
when investors became unnerved by rising political tension between China and
Taiwan. Though the Asian markets briefly rebounded, investor interest was
dampened again during the spring and summer due to uncertainty surrounding
national elections in several countries, a decline in exports and slowing
economic growth. From October 1996 through January 1997, most Asian markets
recovered due to improving corporate earnings and signs of stabilizing export
growth.
In terms of individual markets, Taiwan, Malaysia and Indonesia were the
strongest performers, rising 56.0%, 21.9% and 17.5%, respectively (in U.S.
dollar terms), with each overcoming brief setbacks such as negative short-term
economic data and political upheaval. Other positive markets were India, which
was the region's strongest performer during the first half of the year and
subsequently gave back some of its gains, and the Philippines, where healthy
economic growth and declining inflation renewed investor interest. Hong Kong,
the most heavily weighted country in the Index, posted lackluster results early
in the period, then rebounded to close the period with a 12.0% gain due to a
favorable interest rate environment and a soaring property market. The weakest
performer was Thailand, which dropped 46.5%. Thailand was impacted by a very
large budget deficit, exacerbated by the slowdown of computer-related exports as
well as a tear in the speculative bubble in the real estate market, as
nonperforming property loans caused problems in the banking sector. South Korea
and Singapore were weak as well, declining approximately 34% and 7%,
respectively. South Korean equities were affected by an ongoing investigation of
government corruption and a weakening economy, and Singapore's market fell due
to soft electronics exports.
- --------------------------------------------------------------------------------
48
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Performance Review: Country Allocations Affected the Fund's Performance
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Fund Total MSCI AC
Return Asia Free
(based on net (Ex Japan)
asset value) Index +
------------ -----
<S> <C> <C>
Class A (1/31/96 - 1/31/97)* -1.01% 2.37%
Class B (5/1/96 - 1/31/97)* -6.02% -2.50%
Institutional (2/2/96 - 1/31/97)* -1.09% 2.06%
- -------------------------------------------------------------------
</TABLE>
* Class A, B and Institutional share performance assumes reinvestment of all
dividends and distributions, a complete redemption at the net asset value at
the end of the period and no initial sales charge or contingent deferred sales
charge. Performance for Class B and Institutional shares is a cumulative total
return (not annualized) from their inception through the end of the period.
+ Represents a price-only index that does not reflect reinvested dividends.
During the period under review, stock selection benefited the fund as a
number of holdings achieved strong returns. The fund's performance was
nonetheless affected by its country over- and underweightings relative to the
Index when individual markets performed better or worse than expected. For
example, Taiwan and Malaysia were two of the region's best performing markets,
but the fund was underweighted in those countries and therefore did not fully
participate in their rallies.
Financial, Property and Infrastructure Stocks Were the Strongest Performers
The fund's best performers during the period were its positions in the
financial, real estate and infrastructure sectors. Top financial stocks included
two of our Hong Kong investments, HSBC Holdings PLC, one of the world's largest
banking and financial services companies, and Wing Hang Bank Ltd., a provider of
banking, foreign exchange and treasury services, which both benefited from
strong growth in mortgage loans resulting from Hong Kong's robust property
market. Metropolitan Bank and Trust, the Philippines' largest bank in terms of
assets, rose substantially due to the growing Philippine economy and aggressive
branch expansion, and Commerce Asset-Holdings, the fifth largest financial group
in Malaysia, benefited from its merchant banking operations and strong loan
growth.
In the real estate sector, Hong Kong's booming property market buoyed
several of the fund's holdings. These included Sun Hung Kai Properties, one of
the largest and best managed property companies in Hong Kong; Henderson Land
Development, a large property development and investment holding company that
concentrates on mass residential developments; and HKR International Ltd., a
real estate developer that primarily focuses on residential development in
Discovery Bay on Lantau Island (a self-contained community that offers a
"quality lifestyle").
Other strong performers were two Malaysian companies that benefited from
the government's commitment to improve the country's infrastructure. Road
Builder Malaysia Holdings, a contractor specializing in civil engineering and
road construction, continued its strategic expansion and diversification, and
United Engineers Malaysia, Malaysia's largest builder and operator of toll
roads, rose due to the opening of several new roads.
Stocks that did not fulfill our expectations included Leader Universal
Holdings, Malaysia's leading manufacturer of power and telecommunication cable,
which reported lower than expected earnings due to very low export margins;
Industrial Finance Corp. of Thailand (IFCT), which declined in sympathy with
Thailand's financial sector; and Tata Engineering and Locomotive Company
(TELCO), India's largest vehicle manufacturer, which slumped on speculation
concerning rising inventories and general market uncertainty. We significantly
reduced the fund's position in Leader Universal Holdings and IFCT, but we
continue to have confidence in TELCO, which has strong fundamentals and fared
well relative to the broader Indian market.
Portfolio Composition
As of January 31, 1997, 97.1% of the fund's total market value was
invested in equities while 2.2% was in cash equivalents, with the remainder in
other securities. The fund's five largest country exposures were Hong Kong
(39.9%), Malaysia (13.5%), Singapore (10.1%), India (9.9%) and Indonesia (5.2%).
At the end of the period, the portfolio was overweighted relative to the Index
in Hong Kong, India and South Korea, slightly underweighted in
- --------------------------------------------------------------------------------
49
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Asia Growth Fund (continued)
- --------------------------------------------------------------------------------
the Philippines, and significantly underweighted in Thailand, Singapore,
Malaysia and Taiwan.
Additions in Real Estate and Security Services, Reductions in Several Existing
Positions
During the period, we added Hysan Development Company, a property
investment company that owns a number of commercial and residential properties
in Hong Kong and should be a beneficiary of rising rental prices, and
Taiwan-Sogo Shinkong, a security services company that controls approximately
38% of the market in Taiwan and is expected to experience growing demand from
residential clients. Other portfolio changes included the trimming of several
positions in Hong Kong after they appreciated significantly and became more
fully valued. These included Sun Hung Kai Properties, Henderson Land Development
and HKR International Ltd.
<TABLE>
<CAPTION>
Top 10 Portfolio Holdings as of January 31, 1997
Percentage
Line of of Total
Company Country Business Net Assets
<S> <C> <C> <C>
HKR International Hong Kong Property 4.4%
Ltd.
Road Builder Malaysia Infrastructure 4.1%
Malaysia Holdings
Swire Pacific Ltd. Hong Kong Conglomerate 4.1%
Metropolitan Bank Philippines Banking and 3.8%
and Trust Finance
Wing Hang Bank Hong Kong Banking and 3.9%
Ltd. Finance
Henderson Land Hong Kong Property 3.7%
Development
HSBC Holdings PLC Hong Kong Banking and 3.5%
Finance
Hutchison Hong Kong Conglomerate 3.5%
Whampoa
Sun Hung Kai Hong Kong Property 3.5%
Properties
Commerce Asset- Malaysia Conglomerate 3.5%
Holdings
</TABLE>
Outlook
In 1997, we expect export growth to strengthen, which should stimulate
economies throughout the region. With most of the region's elections now over,
the region should also benefit from greater political stability in 1997. Though
the recent death of Deng Xiaoping may increase near-term volatility, we remain
optimistic that the handover of Hong Kong to China will proceed smoothly, as it
is in China's best interests to maintain Hong Kong's current economic success.
We intend to increase the fund's weightings in Malaysia, the Philippines and
Indonesia, markets that we expect to benefit from stable currencies and good
economic fundamentals. In September 1996, the benchmark established a new
weighting in Taiwan and doubled its weighting in Korea, and we are actively
seeking investment opportunities in these countries. We continue to have a
favorable view of India but are still cautious regarding Thailand and Singapore,
where real estate overdevelopment may continue to hinder their respective
markets for the near term.
In general, we believe that Asian equities are attractively valued on a
historical basis. We expect that economic growth in the region may slow somewhat
to 5% to 7% annually, still approximately double versus the U.S., one of the
world's most mature economies. Over time, we intend to broaden our emphasis from
companies that tend to do well in the earliest stages of emerging economies to
companies that we believe are poised to benefit most from the region's internal
growth. These include new start-ups, consumer-related products and services, and
infrastructure companies.
On another front, we are pleased to announce that we have recently
expanded our portfolio management team. Our new team members will focus
primarily on real estate companies, conglomerates and cyclical industries, and
they will enhance our ability to seek out companies with above-average growth
potential.
50
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
We appreciate your continued support in what has been a challenging period
for the region and the fund. Going forward, we remain confident that the region
continues to offer many attractive investment opportunities for investors with a
long-term view.
/s/ Warwick M. Negus
Warwick M. Negus
Senior Portfolio Manager,
Asia Active Equity
/s/ Alice Lui
Alice Lui
Portfolio Manager,
Asia Active Equity
/s/ Ravi Shanker
Ravi Shanker
Portfolio Manager,
Asia Active Equity
/s/ Karma A. Wilson
Karma A. Wilson
Portfolio Manager,
Asia Active Equity
March 3, 1997
- --------------------------------------------------------------------------------
51
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Asia Growth Fund
January 31, 1997
- --------------------------------------------------------------------------------
The following graphs show the value, as of January 31, 1997, of a $10,000
investment made (with and without the maximum sales charge of 5.5% and
redemption charge of 5.0% for Class A and B, respectively) on the inception date
of each class. For comparative purposes, the performance of the Fund's benchmark
(the Morgan Stanley Capital International Combined Asia (ex Japan) Index ("MSCI
Combined Asia-ex Japan")) is shown for the appropriate time periods. All
performance data shown represents past performance and should not be considered
indicative of future performance which will fluctuate with changes in market
conditions. These performance fluctuations will cause an investor's shares, when
redeemed, to be worth more or less than their original cost.
Class A
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
GS Asia Growth GS Asia Growth
Class A Class A MSCI
(w/sales charge) (no sales charge) Combined
---------------- ----------------- --------
<S> <C> <C> <C>
7/8/94 $ 9,450 $10,000 $10,000
1/31/95 8,934 9,454 9,074
1/31/96 11,300 11,958 11,129
1/31/97 11,186 11,837 11,393
</TABLE>
Class B
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
GS Asia Growth GS Asia Growth
Class B Class B MSCI
(w/redemp. charge) (no redemp. charge) Combined
------------------- ------------------ --------
<S> <C> <C> <C>
5/1/96 $10,000 $10,000 $10,000
1/31/97 9,398 8,928 9,750
</TABLE>
Institutional
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
GS Asia Growth MSCI
Institutional Combined
-------------- --------
<S> <C> <C>
2/2/96 $10,000 $10,000
1/31/97 9,891 10,206
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------
Average Annual Total Return
----------------------------------------
One Year Since Inception/(a)/
- -------------------------------------------------------------------------
<S> <C> <C>
Class A, no sales charge (1.01)% 6.78%
- -------------------------------------------------------------------------
Class A, w/sales charge (6.44)% (4.46)%
- -------------------------------------------------------------------------
Class B, no redemption charge N/A (6.02)%/(b)/
- -------------------------------------------------------------------------
Class B, w/redemption charge N/A (10.72)%/(b)/
- -------------------------------------------------------------------------
Institutional Class N/A (1.09)%/(b)/
- -------------------------------------------------------------------------
</TABLE>
/(a)/ Class A, Class B and Institutional shares commenced operations July 8,
1994, May 1, 1996 and February 2, 1996, respectively.
/(b)/ An aggregate total return (not annualized) is shown instead of an average
annual total return since these classes have not completed a full twelve
months of operations.
- --------------------------------------------------------------------------------
52
<PAGE>
Statement of Investments
- --------------------------------------------------------------------
Goldman Sachs Asia Growth Fund
- --------------------------------------------------------------------
January 31, 1997
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value
====================================================================
Common Stocks--96.0%
<S> <C> <C>
Hong Kong Dollar--39.9%
3,734,000 Asia Satellite Tel.*
(Telecommunications) $ 8,312,234
1,107,000 Henderson Land Development Co.
(Recreational Services) 10,250,000
7,947,440 HKR International Ltd.
(Real Estate) 12,358,582
2,731,000 Hong Kong Electric Holdings
(Utility) 9,709,517
426,000 HSBC Holdings
(Commercial Banks) 9,867,983
1,305,000 Hutchison Whampoa
(Conglomerates) 9,851,916
2,513,000 Hysan Development
(Utility) 9,145,257
9,735,666 JCG Holdings Ltd.
(Financial Services) 8,669,002
2,308,200 San Miguel Brewery Ltd.
(Breweries) 1,049,994
869,000 Sun Hung Kai Properties Co.
(Real Estate) 9,812,556
1,262,000 Swire Pacific Ltd. "A"
(Transportation) 11,603,755
2,316,500 Wing Hang Bank Ltd.
(Financial Services) 11,030,952
- --------------------------------------------------------------------
111,661,748
- --------------------------------------------------------------------
Indian Rupee--9.9%
235,000 Brook Bond Lipton India Ltd.
(Food) 2,438,494
372,900 Colgate Palmolive
(Conglomerates) 2,613,421
259,600 Hindustan Lever Ltd.
(Household Products) 6,423,018
10,000 Larsen & Toubro Ltd.
(Engineering) 65,272
143,500 Larsen & Toubro Ltd. GDR
(Engineering) 1,919,313
214,000 Larsen & Toubro LTD. GDS
(Engineering) 2,862,250
434,250 Mahindra & Mahindra Ltd.
(Autos and Trucks) 4,339,472
165,750 Mahindra & Mahindra GDR
(Autos and Trucks) 1,895,351
4,000 Niit Limited
(Computers) 32,022
80,000 Tata Engineering & Locomotive Ltd.
GDR (Engineering) 786,000
446,600 Tata Engineering & Locomotive Ltd.
GDS (Engineering) 4,387,845
- --------------------------------------------------------------------
27,762,458
- --------------------------------------------------------------------
Indonesian Rupiah--5.2%
2,374,750 Indofoods Sukses Makmur - Foreign
(Food) 5,245,031
2,346,000 PT Bank of Bali - Foreign
(Banking) 5,675,011
2,613,000 PT Jaya Real Property - Foreign
(Real Estate) 3,627,640
- --------------------------------------------------------------------
14,547,682
- --------------------------------------------------------------------
Malaysian Ringgit--13.2%
1,217,000 Commerce Asset Holdings
(Conglomerates) 9,790,829
623,000 Leader Universal Holdings
(Electronics) 1,253,017
1,936,000 Road Builder Malaysia Holdings
(Construction) 11,603,540
941,000 Tenaga National Berhad
(Utility) 4,504,385
1,081,000 United Engineers Malaysia Holdings
(Construction) 9,696,822
- --------------------------------------------------------------------
36,848,593
- --------------------------------------------------------------------
New Taiwan Dollar--2.5%
2,118,000 Taiwan Sogo Shinkong Securities
(Financial Services) 7,103,755
- --------------------------------------------------------------------
Philippine Peso--4.6%
18,189,000 Centennial City Inc.
(Real Estate) 2,208,911
- --------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
53
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Asia Growth Fund (continued)
January 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value
====================================================================
<S> <C> <C>
Common Stocks (continued)
Philippine Peso (continued)
393,454 Metropolitan Bank and Trust
(Banking) $ 10,750,925
- --------------------------------------------------------------------
12,959,836
- --------------------------------------------------------------------
Singapore Dollar--9.9%
639,000 Overseas Union Bank - Foreign
(Banking) 5,174,457
1,149,000 Singapore Land
(Real Estate) 6,937,420
383,000 Singapore Press Holdings - Foreign
(Printing & Publishing) 7,671,970
2,195,000 Straits Steamship Land
(Conglomerates) 7,795,852
- --------------------------------------------------------------------
27,579,699
- --------------------------------------------------------------------
South Korean Won--3.8%
168,920 Korea Mobile Telecommunications
Corp. ADR* (Telecommunications) 2,512,685
4,759 Korea Mobile Telecommunications
Corp. (Telecommunications) 5,228,904
7,132 Samsung Fire & Marine Insurance
(Insurance) 2,982,743
- --------------------------------------------------------------------
10,724,332
- --------------------------------------------------------------------
Thai Baht--3.9%
723,800 Electricity Generating Public Co.
(Utility) 1,815,785
758,100 Electricity Generating Public Co.
Foreign(Utility) 1,843,315
1,989,000 Industrial Finance Corp - Foreign
(Financial Services) 5,220,069
425,000 Jasmine International Co. - Foreign
(Diversified) 602,808
1,617,500 Thai Telephone & Telecom Corp. -
Foreign (Telecommunications) 1,326,587
- --------------------------------------------------------------------
10,808,564
- --------------------------------------------------------------------
United States Dollar--3.1%
387,000 Korea Electric Power Corp. ADR*
(Utilities) 8,562,375
- --------------------------------------------------------------------
Total Common Stocks
(Cost $237,846,163) $268,559,042
====================================================================
Rights & Warrants*--0.3%
Singapore Dollar--0.2%
356,750 Straits Steamship Land, exp. 12/12/00
(Conglomerate)- warrants 494,149
Thai Baht--0.1%
808,750 Thai Telephone & Telecom Corp., exp.
03/07/97 (Telecommunications)-rights 351,155
- --------------------------------------------------------------------
Total Rights & Warrants
(Cost $287,980) $ 845,304
====================================================================
<CAPTION>
Principal
Amount Description Value
====================================================================
<S> <C> <C>
Corporate Bonds--0.3%
Malaysian Ringitt--0.3%
MYR United Engineers Malaysia
1,024,000 (Construction) 4.00%, 05/22/99 $ 848,528
- --------------------------------------------------------------------
Total Corporate Bonds
(Cost $521,580) $ 848,528
====================================================================
Short-Term Obligations--2.2%
$ 6,200,104 State Street Bank & Trust Euro-Time
Deposit, 5.50%, 02/03/97 $ 6,200,104
- --------------------------------------------------------------------
Total Short-Term Obligations
(Cost $6,200,104) $ 6,200,104
====================================================================
Total Investments
(Cost $244,855,827)/(a)/ $276,452,978
====================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in
which value exceeds cost $ 45,982,425
Gross unrealized loss for investments in
which cost exceeds value (14,998,273)
====================================================================
Net unrealized gain $ 30,984,152
====================================================================
</TABLE>
* Non-income producing security.
/(a)/The aggregate cost for federal income tax purposes is $244,890,862.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
54
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Common Stock, Rights, Warrants, and Corporate Bond Industry
Concentrations
====================================================================
<S> <C>
Autos and Trucks 2.2%
Banking 7.8%
Breweries 0.4%
Commercial Banks 3.5%
Conglomerates 10.9%
Construction 7.9%
Diversified 0.2%
Electronics 0.4%
Engineering 3.6%
Financial Services 11.5%
Food 2.7%
Household Products 2.3%
Insurance 1.1%
Printing & Publishing 2.7%
Real Estate 12.5%
Recreational Services 3.7%
Telecommunications 6.3%
Transportation 4.1%
Utilities 12.8%
- --------------------------------------------------------------------
Total Common Stock, Rights, Warrants, and
Corporate Bonds 96.6%
====================================================================
</TABLE>
- --------------------------------------------------------------------------------
55
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- -------------------------------------------------------------------------------
Statements of Assets and Liabilities
January 31, 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Goldman Sachs Goldman Sachs
Balanced Select Equity
Fund Fund
===============================================
<S> <C> <C>
Assets:
Investments in securities, at value (identified cost $80,718,346, $302,169,999,
$513,612,707, $679,366,240, $213,003,477, $549,757,598 and $244,855,827,
respectively) $89,222,318 $393,263,171
Cash, at value 13,884 9,802
Receivables:
Investment securities sold 3,947,652 --
Forward foreign currency exchange contracts 6,692 --
Fund shares sold 565,860 3,095,601
Dividends and interest, at value 451,554 387,080
Variation margin 10,928 95,387
Deferred organization expenses, net 36,173 --
Other assets 97,786 8,495
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets 94,352,847 396,859,536
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased 9,690,219 --
Forward foreign currency exchange contracts -- --
Fund shares repurchased 44,298 548,016
Amounts owed to affiliates 97,949 388,699
Covered securities sold short (cash received, $936,984) 938,808 --
Accrued expenses and other liabilities 61,446 89,126
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 10,832,720 1,025,841
- -----------------------------------------------------------------------------------------------------------------------------------
Net Assets:
Paid-in capital 73,750,866 300,246,199
Accumulated undistributed (distributions in excess of) net investment income 180,204 --
(loss)
Accumulated undistributed (distributions in excess of) net realized gain (loss)
on investment, option and futures transactions 977,487 4,402,524
Accumulated net realized foreign currency gain (loss) 12,575 --
Net unrealized gain on investments, options and futures 8,611,563 91,184,972
Net unrealized loss on translation of assets and liabilities denominated in
foreign currencies (12,568) --
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets $83,520,127 $395,833,695
===================================================================================================================================
<CAPTION>
Class A Class B Class A Class B
------------ -------------- ------------- ------------
<S> <C> <C> <C> <C>
Total shares of beneficial interest outstanding, $.001 par
value (100,000,000 and 25,000,000 shares authorized for
each Class A and B, respectively) 4,336,101 112,660 9,688,806 744,222
Net asset and Class A redemption value per share (a) $18.78 $18.73 $23.32 $23.18
Maximum public offering price per share (Class A NAV x
1.0582) $19.87 $18.73 $24.68 $23.18
Institutional Service Institutional Service
------------ -------------- ------------- ------------
Total shares of beneficial interest outstanding, $.001 par
value (50,000,000 shares per each class authorized) -- -- 6,351,958 157,464
Net asset value, offering and redemption price per share -- -- $23.44 $23.27
===============================================================================================================================
(a) At redemption, Class B shares are subject to a contingent deferred sales charge assessed on the amount equal to the lesser
of the current net asset value or the original purchase price of the shares.
===============================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
56
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs Goldman Sachs Goldman Sachs Goldman Sachs Goldman Sachs
Growth and Income Capital Growth Small Cap Equity International Equity Asia Growth
Fund Fund Fund Fund Fund
==================================================================================================================================
<S> <C> <C> <C> <C>
$638,954,258 $932,041,765 $217,608,994 $627,524,320 $276,452,978
59,158 94,994 30,728 1,735,366 1,060,177
1,632,491 1,390,277 4,392,159 959,642 3,093,623
-- -- -- 2,684,757 --
4,847,992 1,524,356 820,288 4,794,141 685,136
572,159 706,624 85,173 440,308 262,880
-- -- -- -- --
19,321 -- 13,467 14,573 77,113
14,043 16,281 2,597 10,188 770
- ----------------------------------------------------------------------------------------------------------------------------------
646,099,422 935,774,297 222,953,406 638,163,295 281,632,677
- ----------------------------------------------------------------------------------------------------------------------------------
9,130,091 9,797,231 6,585,828 8,912,558 --
-- -- -- 3,434,535 1,495
414,917 850,523 165,072 198,616 694,794
716,432 1,160,456 345,810 833,473 400,444
-- -- -- -- --
21,990 99,060 121,890 255,084 846,340
- ----------------------------------------------------------------------------------------------------------------------------------
10,283,430 11,907,270 7,218,600 13,634,266 1,943,073
- ----------------------------------------------------------------------------------------------------------------------------------
492,994,560 657,200,330 203,743,684 542,859,953 266,426,371
(193,256) (275,552) -- (25,666) (1,316,323)
17,673,137 14,266,724 7,385,605 2,530,732 (16,027,669)
-- -- -- (917,847) (411,919)
125,341,551 252,675,525 4,605,517 112,491,393 33,014,375
-- -- -- (32,409,536) (1,995,231)
- ----------------------------------------------------------------------------------------------------------------------------------
$635,815,992 $923,867,027 $215,734,806 $624,529,029 $279,689,604
==================================================================================================================================
<CAPTION>
Class A Class B Class A Class B Class A Class B Class A Class B Class A Class B
- ------------- ---------- ------------- ---------- ------------ ------------ ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
26,534,286 751,089 55,021,724 193,240 10,140,493 176,544 27,765,580 997,807 16,122,122 206,387
$23.18 $23.10 $16.73 $16.67 $20.91 $20.80 $19.32 $19.24 $16.31 $16.24
$24.53 $23.10 $17.70 $16.67 $22.13 $20.80 $20.44 $19.24 $17.26 $16.24
<CAPTION>
Institutional Service Institutional Service Institutional Service Institutional Service Institutional Service
- ------------- ---------- ------------- ---------- ------------- ------------ ------------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
8,321 136,977 -- -- -- -- 3,524,169 34,830 815,499 --
$23.19 $23.17 -- -- -- -- $19.40 $19.34 $16.33 --
==================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
57
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Statements of Operations
For the Year Ended January 31, 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs Goldman Sachs
Balanced Select Equity
Fund Fund
===================================
<S> <C> <C>
Investment income:
Dividends /(a)/ $ 838,092 $ 5,629,026
Interest /(b)/ 2,107,288 541,011
- ----------------------------------------------------------------------------------------------------------------------------------
Total income 2,945,380 6,170,037
- ----------------------------------------------------------------------------------------------------------------------------------
Expenses: /(c)/
Investment advisory fees 309,372 1,413,035
Administration fees 92,811 706,517
Distribution fees 157,253 468,965
Authorized dealer service fees 154,686 444,626
Custodian fees 93,352 95,947
Transfer agent fees 148,576 319,246
Professional Fees 71,598 74,319
Amortization of deferred organization expenses 13,468 9,549
Director fees 1,171 2,728
Other 53,077 96,414
- ----------------------------------------------------------------------------------------------------------------------------------
Total expenses 1,095,364 3,631,346
Less--expenses reimbursed and fees waived by Goldman Sachs (472,758) (626,188)
- ----------------------------------------------------------------------------------------------------------------------------------
Net expenses 622,606 3,005,158
- ----------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 2,322,774 3,164,879
- ----------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment, option, futures and foreign
currency transactions:
Net realized gain (loss) from:
Investment transactions 3,811,127 14,386,845
Options written (2,680) --
Futures transactions 148,013 645,873
Foreign currency related transactions 12,575 --
Net change in unrealized gain (loss) on:
Investments 5,008,557 49,393,370
Futures 14,475 67,175
Translation of assets and liabilities denominated in foreign currencies (12,568) --
- ----------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment, option, futures and foreign currency
transactions 8,979,499 64,493,263
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $ 11,302,273 $ 67,658,142
==================================================================================================================================
</TABLE>
/(a)/ For the Balanced, Select Equity, Growth and Income, Capital Growth, Small
Cap Equity, International Equity and Asia Growth Funds, taxes withheld on
dividends were $1,496, $42,274, $23,285, $53,869, $4,211, $900,877 and
$372,334, respectively.
/(b)/ For the Balanced Fund, taxes withheld on interest were $969.
/(c)/ Certain expenses reflected in the above statement of operations are
incurred on a class specific basis.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
58
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------
Goldman Sachs Goldman Sachs
Growth and Income Capital Growth
Fund Fund
<S> ========================================
Investment income: <C> <C>
Dividends /(a)/ $ 13,008,785 $ 14,748,431
Interest /(b)/ 1,235,823 2,802,840
- ---------------------------------------------------------------------------------------------------------------------------------
Total income 14,244,608 17,551,271
- ---------------------------------------------------------------------------------------------------------------------------------
Expenses: /(c)/
Investment advisory fees 2,782,464 6,522,949
Administration fees 758,854 2,174,316
Distribution fees 1,280,332 2,179,405
Authorized dealer service fees 1,261,615 2,174,316
Custodian fees 102,394 129,556
Transfer agent fees 871,030 908,310
Professional Fees 75,891 74,529
Amortization of deferred organization expenses 19,164 --
Director fees 6,744 13,973
Other 144,279 208,397
- ----------------------------------------------------------------------------------------------------------------------------------
Total expenses 7,302,767 14,385,751
Less--expenses reimbursed and fees waived by Goldman Sachs (1,113,014) (2,171,272)
- ----------------------------------------------------------------------------------------------------------------------------------
Net expenses 6,189,753 12,213,979
- ----------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 8,054,855 5,337,292
- ----------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment, option, futures and foreign
currency transactions:
Net realized gain (loss) from:
Investment transactions 58,221,421 53,687,297
Options written (37,206) --
Futures transactions 45,994 --
Foreign currency related transactions -- --
Net change in unrealized gain (loss) on:
Investments 67,575,111 145,350,120
Futures -- --
Translation of assets and liabilities denominated in foreign currencies -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment, option, futures and foreign curren
transactions 125,805,320 199,037,417
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $133,860,175 $204,374,709
====================================================================================================================================
<CAPTION>
-------------------------------------------
Goldman Sachs Goldman Sachs
Small Cap Equity International Equity
Fund Fund
<S> ===========================================
Investment income: <C> <C>
Dividends /(a)/ $ 968,945 $ 5,944,299
Interest /(b)/ 896,528 1,533,039
- ------------------------------------------------------------------------------------------------------------------------------------
Total income 1,865,473 7,477,338
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses: /(c)/
Investment advisory fees 1,598,027 3,478,689
Administration fees 532,676 1,159,514
Distribution fees 538,657 1,115,919
Authorized dealer service fees 532,676 1,086,488
Custodian fees 63,636 786,004
Transfer agent fees 511,883 586,243
Professional Fees 72,844 84,162
Amortization of deferred organization expenses 18,742 17,603
Director fees 3,842 5,519
Other 73,764 229,722
- ------------------------------------------------------------------------------------------------------------------------------------
Total expenses 3,946,747 8,549,863
Less--expenses reimbursed and fees waived by Goldman Sachs (529,684) (829,788)
- ------------------------------------------------------------------------------------------------------------------------------------
Net expenses 3,417,063 7,720,075
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (1,551,590) (242,737)
- ------------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment, option, futures and foreign
currency transactions:
Net realized gain (loss) from:
Investment transactions 29,166,218 16,714,697
Options written (398,365) --
Futures transactions -- --
Foreign currency related transactions -- 146,694
Net change in unrealized gain (loss) on:
Investments 22,913,571 60,236,901
Futures -- --
Translation of assets and liabilities denominated in foreign currencies -- (28,245,657)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment, option, futures and foreign
currency transactions 51,681,424 48,852,635
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $50,129,834 $48,609,898
====================================================================================================================================
<CAPTION>
-----------------
Goldman Sachs
Asia Growth
Fund
<S> ==================
Investment income: <C>
Dividends /(a)/ $ 4,216,521
Interest /(b)/ 716,243
- -----------------------------------------------------------------------------------------------------------
Total income 4,932,764
- -----------------------------------------------------------------------------------------------------------
Expenses: /(c)/
Investment advisory fees 1,937,658
Administration fees 645,897
Distribution fees 636,953
Authorized dealer service fees 630,134
Custodian fees 499,487
Transfer agent fees 385,114
Professional Fees 84,316
Amortization of deferred organization expenses 31,711
Director fees 3,496
Other 51,032
- -----------------------------------------------------------------------------------------------------------
Total expenses 4,905,798
Less--expenses reimbursed and fees waived by Goldman Sachs (511,880)
- -----------------------------------------------------------------------------------------------------------
Net expenses 4,393,918
- -----------------------------------------------------------------------------------------------------------
Net investment income (loss) 538,846
- -----------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment, option, futures and foreign
currency transactions:
Net realized gain (loss) from:
Investment transactions (7,294,240)
Options written --
Futures transactions (141,910)
Foreign currency related transactions (1,099,538)
Net change in unrealized gain (loss) on:
Investments 5,823,115
Futures --
Translation of assets and liabilities denominated in foreign currencies (599,549)
- -----------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment, option, futures and foreign
currency transactions (3,312,122)
- -----------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $(2,773,276)
===========================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
59
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- -------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended January 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Goldman Sachs Goldman Sachs
Balanced Select Equity
Fund Fund
===============================================
<S> <C> <C>
From operations:
Net investment income (loss) $ 2,322,774 $ 3,164,879
Net realized gain (loss) on investment, option and futures transactions 3,956,460 15,032,718
Net realized gain (loss) on foreign currency related transactions 12,575 --
Net change in unrealized gain (loss) on investments, options and futures 5,023,032 49,460,545
Net change in unrealized loss on translation of assets and liabilities
denominated in foreign currencies (12,568) --
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations 11,302,273 67,658,142
- -----------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
From net investment income
Class A shares (2,259,972) (1,515,575)
Class B shares (13,466) (4,750)
Institutional shares -- (1,606,175)
Service shares -- (6,666)
In excess of net investment income
Class A shares (7,504) --
Class B shares -- (118,421)
Institutional shares -- (34,205)
Service shares -- (16,030)
From net realized gain on investment, option and futures transactions
Class A shares (3,654,841) (7,174,235)
Class B shares (77,400) (440,131)
Institutional shares -- (4,675,726)
Service shares -- (68,472)
- -----------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (6,013,183) (15,660,386)
-----------------------------------------------------------------------------------------------------------------------------------
From share transactions:
Net proceeds from sales of shares 29,174,047 167,209,718
Reinvestment of dividends and distributions 5,694,651 14,904,237
Cost of shares repurchased (7,565,668) (32,152,494)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from share transactions 27,303,030 149,961,461
- -----------------------------------------------------------------------------------------------------------------------------------
Total increase 32,592,120 201,959,217
Net assets:
Beginning of year 50,928,007 193,874,478
===================================================================================================================================
End of year $ 83,520,127 $ 395,833,695
===================================================================================================================================
Accumulated undistributed (distributions in excess of) net investment income $ 180,204 $ --
===================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
60
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs Equity Portfolios, Inc.
- ----------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs Goldman Sachs Goldman Sachs
Statements of Changes in Net Assets Growth and Income Capital Growth Small Cap
For the Year Ended January 31, 1997 Fund Fund Equity Fund
====================================================
<S> <C> <C> <C>
From operations:
Net investment income (loss) $ 8,054,855 $ 5,337,292 $ (1,551,590
Net realized gain (loss) on investment, option and futures transactions 58,230,209 53,687,297 28,767,853
Net realized gain (loss) on foreign currency related transactions -- -- --
Net change in unrealized gain (loss) on investments, options and futures 67,575,111 145,350,120 22,913,571
Net change in unrealized loss on translation of assets and liabilities
denominated in foreign currencies -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations 133,860,175 204,374,709 50,129,834
- ----------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
From net investment income
Class A shares (8,111,894) (5,948,617) --
Class B shares (5,818) -- --
Institutional shares (494) -- --
Service shares (11,500) -- --
In excess of net investment income
Class A shares (135,533) (258,749) --
Class B shares (48,273) (12,838) --
Institutional shares (380) --
Service shares (9,070) -- --
From net realized gain on investment, option and futures transactions
Class A shares (46,442,616) (91,862,169) (10,210,264)
Class B shares (754,312) (179,327) (149,626)
Institutional shares (9,971) -- --
Service shares (255,610) -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (55,785,471) (98,261,700) (10,359,890)
- ----------------------------------------------------------------------------------------------------------------------------------
From share transactions:
Net proceeds from sales of shares 140,362,846 76,008,897 56,119,213
Reinvestment of dividends and distributions 53,352,809 90,088,874 9,876,571
Cost of shares repurchased (72,730,939) (229,399,817) (95,024,895)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from share transactions 120,984,716 (63,302,046) (29,029,111)
- ----------------------------------------------------------------------------------------------------------------------------------
Total increase 199,059,420 42,810,963 10,740,833
Net Asssets:
Beginning of Year 436,756,572 881,056,064 204,993,973
==================================================================================================================================
End of Year $635,815,992 $923,867,027 $ 215,734,806
==================================================================================================================================
Accumulated distributed (distributions in excess investment income) $ (193,256) $ (275,552) $ --
==================================================================================================================================
<CAPTION>
-----------------------------------------------------
Statements of Changes in Net Assets Goldman Sachs Goldman Sachs
For the Year Ended January 31, 1997 International Asia Growth
Equity Fund Fund
====================================================
<S> <C> <C>
From operations:
Net investment income (loss) $ (242,737) $ 538,846
Net realized gain (loss) on investment, option and futures transactions 16,714,697 (7,436,150)
Net realized gain (loss) on foreign currency related transactions 146,694 (1,099,538)
Net change in unrealized gain (loss) on investments, options and futures 60,236,901 5,823,115
Net change in unrealized loss on translation of assets and liabilities
denominated in foreign currencies (28,245,657) (599,549)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations 48,609,898 (2,773,276)
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
From net investment income
Class A shares -- (206,784)
Class B shares -- --
Institutional shares (106,712) --
Service shares -- --
In excess of net investment income
Class A shares -- --
Class B shares -- (5,064)
Institutional shares -- (83,075)
Service shares -- --
From net realized gain on investment, option and futures transactions
Class A shares (5,358,559) --
Class B shares (159,717) --
Institutional shares (689,171) --
Service shares (3,947) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (6,318,106) (294,923)
- ------------------------------------------------------------------------------------------------------------------------------------
From share transactions:
Net proceeds from sales of shares 321,475,961 144,448,826
Reinvestment of dividends and distributions 5,481,492 221,279
Cost of shares repurchased (75,580,037) (67,451,011)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from share transactions 251,377,416 77,219,094
- ----------------------------------------------------------------------------------------------------------------------------------
Total increase
Net assets: 293,669,208 74,150,895
Beginning of year 330,859,821 205,538,709
===================================================================================================================================
End of year $624,529,029 $279,689,604
====================================================================================================================================
Accumulated undistributed (distributions in excess of) net investment income $ (25,666) $ (1,316,323)
===================================================================================================================================
</TABLE>
61
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended January 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Goldman Sachs Goldman Sach
Balanced Select Equity
Fund Fund
==============================================
<S> <C> <C>
From operations:
Net investment income (loss) $ 1,083,645 $ 1,518,160
Net realized gain (loss) on investment, option and futures transactions 1,715,887 4,687,943
Net realized gain on foreign currency related transactions -- --
Net change in unrealized gain on investments, options and futures 3,518,420 37,068,509
Net change in unrealized loss on translation of assets and liabilities
denominated in foreign currencies -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 6,317,952 43,274,612
- ----------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
From net investment income (991,655) (1,610,216)
In excess of net investment income -- --
From net realized gain on investment, option and futures transactions (962,754) (3,527,188)
- ----------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (1,954,409) (5,137,404)
- ----------------------------------------------------------------------------------------------------------------------------------
From share transactions:
Net proceeds from sales of shares 41,736,040 102,149,318
Reinvestment of dividends and distributions 1,802,563 4,880,575
Cost of shares repurchased (4,483,707) (46,260,132)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from share transactions 39,054,896 60,769,761
- ----------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) 43,418,439 98,906,969
Net assets:
Beginning of year 7,509,568 94,967,509
==================================================================================================================================
End of year $ 50,928,007 $ 193,874,478
==================================================================================================================================
Accumulated undistributed (distributions in excess of) net investment income $ 125,304 $ 86,854
==================================================================================================================================
Summary of share transactions:
===================================================================================================================================
<CAPTION>
Class A Class A Institutional
-------------- -------------- --------------
<S> <C> <C> <C>
Shares sold 2,578,356 2,479,285 3,220,915
Reinvestment of dividends and distributions 108,023 161,481 97,993
Shares repurchased (271,753) (2,578,247) (30,492)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding 2,414,626 62,519 3,288,416
==================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
62
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs Goldman Sachs Goldman Sachs Goldman Sachs Goldman Sachs
Growth and Income Capital Growth Small Cap International Asia Growth
Fund Fund Equity Fund Equity Fund Fund
=================================================================================================================================
<S> <C> <C> <C> <C>
$ 5,307,925 $ 6,032,534 $ (1,717,759) $ 725,369 $ 1,643,482
18,815,320 188,790,639 (5,033,599) (8,757,936) (5,766,395)
-- -- -- 21,213,851 416,433
58,081,439 53,559,848 30,594,034 69,834,990 42,480,420
-- -- -- (12,612,130) (1,710,833)
- --------------------------------------------------------------------------------------------------------------------------------
82,204,684 248,383,021 23,842,676 70,404,144 37,063,107
- ---------------------------------------------------------------------------------------------------------------------------------
(5,300,032) (6,289,354) -- (9,491,864) (1,787,451)
-- -- -- -- (1,657,672)
(11,998,907) (139,713,660) (161,357) (14,089,155) --
- ---------------------------------------------------------------------------------------------------------------------------------
(17,298,939) (146,003,014) (161,357) (23,581,019) (3,445,123)
- ---------------------------------------------------------------------------------------------------------------------------------
199,623,973 144,529,476 56,891,181 85,900,104 88,560,430
16,219,024 131,979,456 149,801 21,651,092 2,951,847
(37,764,413) (359,937,680) (195,215,538) (98,600,969) (43,889,831)
- ---------------------------------------------------------------------------------------------------------------------------------
178,078,584 (83,428,748) (138,174,556) 8,950,227 47,622,446
- ---------------------------------------------------------------------------------------------------------------------------------
242,984,329 18,951,259 (114,493,237) 55,773,352 81,240,430
193,772,243 862,104,805 319,487,210 275,086,469 124,298,279
=================================================================================================================================
$436,756,572 $ 881,056,064 $ 204,993,973 $ 330,859,821 $ 205,538,709
=================================================================================================================================
$ 56,087 $ 607,360 $ -- $ 227,683 $ (1,630,536)
=================================================================================================================================
Class A Class A Class A Class A Class A
------------- --------------- --------------- -------------- --------------
10,766,604 9,130,715 3,285,739 5,082,572 5,830,049
848,870 9,145,811 8,585 1,286,112 197,978
(2,027,335) (22,215,374) (11,228,873) (6,067,690) (2,898,305)
- ---------------------------------------------------------------------------------------------------------------------------------
9,588,139 (3,938,848) (7,934,549) 300,994 3,129,722
=================================================================================================================================
- -------------------------------------------------------------------- ----------------------------------------------------------
</TABLE>
63
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements
January 31, 1997
- --------------------------------------------------------------------------------
1. Organization
Goldman Sachs Equity Portfolios, Inc. (the "Company") is a Maryland corporation
registered under the Investment Company Act of 1940, as amended, as an open-end,
diversified management investment company. Included in this report are the
financial statements for the Goldman Sachs Balanced Fund ("Balanced Fund"),
Goldman Sachs Select Equity Fund ("Select Equity Fund"), Goldman Sachs Growth
and Income Fund ("Growth and Income Fund"), Goldman Sachs Capital Growth Fund
("Capital Growth Fund"), Goldman Sachs Small Cap Equity Fund ("Small Cap Equity
Fund"), Goldman Sachs International Equity Fund ("International Equity Fund")
and Goldman Sachs Asia Growth Fund ("Asia Growth Fund"), collectively, "the
Funds." The Select Equity, Growth and Income, International Equity and Asia
Growth Funds offer four classes of shares - Class A, Class B, Institutional and
Service. The Balanced, Capital Growth and Small Cap Equity Funds offer two
classes of shares - Class A and Class B.
2. Significant Accounting Policies
The following is a summary of the significant accounting policies consistently
followed by the Company. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that may affect the reported amounts.
A. Investment Valuation
- ------------------------
Investments in securities traded on a U.S. or foreign securities exchange or the
NASDAQ system are valued daily at their last sale or closing price on the
principal exchange on which they are traded or NASDAQ. If no sale occurs,
securities traded on a U.S. exchange or NASDAQ are valued at the mean between
the closing bid and asked price, and securities traded on a foreign exchange
will be valued at the official bid price. Unlisted equity and debt securities
for which market quotations are available are valued at the mean between the
most recent bid and asked prices. Debt securities are valued at prices supplied
by an independent pricing service, which reflect broker/dealer-supplied
valuations and matrix pricing systems. Short-term debt obligations maturing in
sixty days or less are valued at amortized cost. Restricted securities, and
other securities for which quotations are not readily available, are valued at
fair value using methods approved by the Board of Directors of the Company.
B. Securities Transactions and Investment Income
- -------------------------------------------------
Securities transactions are recorded on the trade date. Realized gains and
losses on sales of investments are calculated on the identified-cost basis.
Dividend income is recorded on the ex-dividend date. Dividends for which the
Funds have the choice to receive either cash or stock are recognized as
investment income in an amount equal to the cash dividend. This amount is also
used as an estimate of the fair value of the stock received. Interest income is
determined on the basis of interest accrued, premium amortized and discount
earned with the exception of the Balanced Fund which does not amortize premiums.
In addition, it is the Funds' policy to accrue for estimated capital gains taxes
on foreign securities held by the Funds subject to such taxes.
C. Mortgage Dollar Rolls
- -------------------------
The Balanced Fund may enter into mortgage "dollar rolls" in which the Fund sells
securities in the current month for delivery and simultaneously contracts with
the same counterparty to repurchase similar (same type, coupon and maturity) but
not identical securities on a specified future date. For financial reporting and
tax reporting purposes, the Fund treats mortgage dollar rolls as two separate
transactions; one involving the purchase of a security and a separate
transaction involving a sale.
D. Foreign Currency Translations
- ---------------------------------
The books and records of the Company are maintained in U.S. dollars. Amounts
denominated in foreign currencies are translated into U.S. dollars on the
following basis: (i) investment valuations, other assets and liabilities
initially expressed in foreign currencies are converted each business day into
U.S. dollars based on current exchange rates; (ii) purchases and sales of
foreign investments,
- --------------------------------------------------------------------------------
64
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
income and expenses are converted into U.S. dollars based on currency exchange
rates prevailing on the respective dates of such transactions.
Net realized and unrealized gain (loss) on foreign currency transactions
will represent: (i) foreign exchange gains and losses from the sale and holdings
of foreign currencies and investments; (ii) gains and losses between trade date
and settlement date on investment securities transactions and forward exchange
contracts; and (iii) gains and losses from the difference between amounts of
dividends and interest recorded and the amounts actually received.
E. Forward Foreign Currency Exchange Contracts
- -----------------------------------------------
Certain of the Funds are authorized to enter into forward foreign currency
exchange contracts for the purchase of a specific foreign currency at a fixed
price on a future date as a hedge or cross-hedge against either specific
transactions or portfolio positions. The International Equity and Asia Growth
Funds may enter into such contracts to seek to increase total return. All
commitments are "marked-to-market" daily at the applicable translation rates and
any resulting unrealized gains or losses are recorded in the funds' financial
statements. The Funds record realized gains or losses at the time the forward
contract is offset by entry into a closing transaction or extinguished by
delivery of the currency. Risks may arise upon entering these contracts from the
potential inability of counterparties to meet the terms of their contracts and
from unanticipated movements in the value of a foreign currency relative to the
U.S. dollar.
F. Short Securities Positions
- ------------------------------
The Funds (other than the Select Equity Fund) may enter into covered short
sales. Short securities positions are accounted for at cost and subsequently
marked to market to reflect the current market value of the position. The market
value of the short position is recorded as a liability on the fund's records and
any difference between this market value and cash received is reported as
unrealized gain or loss. Gains and losses are realized when a short
- --------------------------------------------------------------------------------
position is closed out by delivering securities back to the broker.
At January 31, 1997, the Balanced Fund had the following covered short positions
open:
- -------------------------------------------------------------------------------
Short Position
Issuer Par Value Market Value
- --------------------------- --------------- --------------------
FNMA TBA 15-Year $900,000 $938,808
- -------------------------------------------------------------------------------
G. Federal Taxes
- -----------------
It is the Funds' policy to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute each year
substantially all of their investment company taxable income and capital gains
to their shareholders. Accordingly, no federal tax provisions are required. The
characterization of distributions to shareholders for financial reporting
purposes is determined in accordance with income tax rules. Therefore, the
source of the Funds' distributions may be shown in the accompanying financial
statements as either from or in excess of net investment income or net realized
gain on investment transactions, or from capital, depending on the type of
book/tax differences that may exist as well as timing differences associated
with having different book and tax year ends.
Asia Growth Fund had approximately $184,000, $5,487,000 and $9,825,000 at
January 31, 1997 of capital loss carryforward expiring in 2002, 2003 and 2004
for federal tax purposes. These amounts are available to be carried forward to
offset future capital gains to the extent permitted by applicable laws or
regulations.
H. Deferred Organization Expenses
- ----------------------------------
Organization-related costs are being amortized on a straight-line basis over a
period of five years.
I. Expenses
- ------------
Expenses incurred by the Company which do not specifically relate to an
individual fund of the Company are allocated to the Funds based on each Fund's
relative
- --------------------------------------------------------------------------------
65
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
January 31, 1997
- --------------------------------------------------------------------------------
average net assets for the period.
Class A and Class B shares bear all expenses and fees relating to the
distribution and authorized dealer service plans as well as other expenses which
are directly attributable to such shares. Each class of Shares separately bears
their respective class-specific transfer agency fees. Service Shares separately
bear a service fee.
J. Option Accounting Principles
- --------------------------------
When certain of the Funds write call or put options, an amount equal to the
premium received is recorded as an asset and as an equivalent liability. The
amount of the liability is subsequently marked-to-market to reflect the current
market value of the option written. When a written option expires on its
stipulated expiration date or the funds enter into a closing purchase
transaction, the funds realize a gain or loss without regard to any unrealized
gain or loss on the underlying security, and the liability related to such
option is extinguished. When a written call option is exercised, the funds
realize a gain or loss from the sale of the underlying security, and the
proceeds of the sale are increased by the premium originally received. When a
written put option is exercised, the amount of the premium originally received
will reduce the cost of the security which the funds purchase upon exercise.
There is a risk of loss from a change in value of such options which may exceed
the related premiums received.
Upon the purchase of a call option or a protective put option by the Funds
the premium paid is recorded as an investment and subsequently marked-to-market
to reflect the current market value of the option. If an option which the Funds
have purchased expires on the stipulated expiration date, the funds will realize
a loss in the amount of the cost of the option. If the funds enter into a
closing sale transaction, the funds will realize a gain or loss, depending on
whether the sale proceeds from the closing sale transaction are greater or less
than the cost of the option. If the Funds exercise a purchased put option, the
funds will realize a gain or loss from the sale of the underlying security, and
the proceeds from such sale will be decreased by the premium originally paid. If
the Funds exercise a purchased call option, the cost of the security which the
funds purchase upon exercise will be increased by the premium originally paid.
K. Futures Contracts
- ---------------------
The Funds may enter into futures transactions in order to hedge against changes
in interest rates, securities prices or currency exchange rates or to seek to
increase total return. The Select Equity Fund may enter into such transactions
only with respect to the S&P 500 Index. A Fund will engage in futures
transactions only for bona fide hedging purposes as defined in regulations of
the CFTC or to seek to increase total return (except with respect to
transactions by the Balanced, Growth and Income, Select Equity, Capital Growth
and Small Cap Equity Funds, in futures on foreign currencies) to the extent
permitted by such regulations. The use of futures contracts involve, to varying
degrees, elements of market risk which may exceed the amounts recognized in the
Statements of Assets and Liabilities.
Upon entering into a futures contract, the Funds are required to deposit
with a broker an amount of cash or securities equal to the minimum "initial
margin" requirement of the futures exchange on which the contract is traded.
Subsequent payments ("variation margin") are made or received by the Funds each
day, dependent on the daily fluctuations in the value of the contract, and are
recorded for financial reporting purposes as unrealized gains or losses. When
entering into a closing transaction, the Funds will realize a gain or loss equal
to the difference between the value of the futures contract to sell and the
futures contract to buy. Futures contracts are valued at the most recent price,
unless such price does not reflect the fair market value of the contract, in
which case the position will be valued using methods approved by the Board of
Directors of the Company.
Certain risks may arise upon entering into futures contracts. The
predominant risk is that the changes in the value of the futures contract may
not directly correlate with changes in the value of the underlying securities.
This risk may decrease the effectiveness of the Funds'
- --------------------------------------------------------------------------------
66
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
hedging strategies and may also result in a loss to the Funds.
3. Agreements
Goldman Sachs Asset Management ("GSAM"), a separate operating division of
Goldman, Sachs & Co. ("Goldman Sachs"), acts as investment adviser to the
Balanced, Growth and Income, Small Cap Equity and International Equity Funds;
Goldman Sachs Funds Management, L.P. ("GSFM"), an affiliate of Goldman Sachs,
acts as investment adviser to the Select Equity and Capital Growth Funds; and
Goldman Sachs Asset Management International ("GSAM International") acts as
investment adviser to the Asia Growth Fund and subadviser to the International
Equity Fund. Under the Investment Advisory and Subadvisory Agreements, GSAM,
GSFM and GSAM International (the "Investment Advisors"), subject to the general
supervision of the Company's Board of Directors, manage the Company's
portfolios. As compensation for the services rendered under the Investment
Advisory Agreements and the assumption of the expenses related thereto, GSAM is
entitled to a fee, computed daily and payable monthly, at an annual rate equal
to .50%, .55%, .75% and .25% of the average daily net assets of the Balanced,
Growth and Income, Small Cap Equity and International Equity Funds,
respectively. GSFM is entitled to a fee of .50% and .75% of the average daily
net assets of the Select Equity and Capital Growth Funds, respectively. GSAM
International is entitled to an advisory fee for the Asia Growth Fund and a
subadvisory fee for the International Equity Fund of .75% and .50% of the
average daily net assets for those funds, respectively.
GSAM also acts as the Funds' administrator pursuant to Administration
Agreements. Under these Administration Agreements, GSAM administers the Funds'
business affairs, including providing facilities. As compensation for the
services rendered pursuant to the Administration Agreements, GSAM is entitled to
a fee of .15% of the average daily net assets of the Balanced and Growth and
Income Funds, and .25% of the average daily net assets of the Select Equity,
Capital Growth, Small Cap Equity, International Equity and Asia Growth Funds.
Goldman Sachs has voluntarily agreed to reduce or limit certain "Other
Expenses" for the Balanced, Select Equity, Growth and Income, International
Equity and Asia Growth Funds (excluding advisory, administration, service,
distribution and authorized dealer service fees and litigation and
indemnification costs, taxes, interest, brokerage commissions and extraordinary
expenses and with the exception of the Balanced Fund, transfer agent fees) until
further notice to the extent such expenses exceed .10%, .06%, .11%, .20% and
.24% of the average daily net assets of the funds, respectively.
Goldman Sachs serves as the Distributor of shares of the Funds pursuant to
Distribution Agreements. Goldman Sachs may receive a portion of the Class A
salesload and Class B back-end salesload imposed and has advised the Company
that it retained approximately $94,000, $380,000, $555,000, $323,000, $219,000,
$1,563,000 and $1,397,000 during the year ended January 31, 1997 for the
Balanced, Select Equity, Growth and Income, Capital Growth, Small Cap Equity,
International Equity and Asia Growth Funds, respectively.
The Company, on behalf of each Fund, has adopted a Distribution Plan (the
"Distribution Plan") pursuant to Rule 12b-1. Under the Distribution Plan,
Goldman Sachs is entitled to a quarterly fee from each Fund for distribution
services equal, on an annual basis, to .25% and .75% of a Fund's average daily
net assets attributable to Class A and Class B shares, respectively.
The Company, on behalf of each Fund, has adopted an Authorized Dealer
Service Plan (the "Service Plan") pursuant to which Goldman Sachs and Authorized
Dealers are compensated for providing personal and account maintenance services.
Each Fund pays a fee under its Service Plan equal, on an annual basis, to .25%
of its average daily net assets attributable to Class A and Class B shares.
Goldman Sachs also serves as the Transfer Agent of the funds for a fee.
For the year ended January 31, 1997, the Advisors, Administrator and
Distributor have voluntarily agreed to waive certain fees and reimburse other
expenses as follows (in thousands):
- --------------------------------------------------------------------------------
67
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
January 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Waivers
------- Reimburse-
Admin- Class A Reimburse- ment
Fund Adviser istrator 12b-1 ment Outstanding
- ------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balanced $ -- $ -- $ 153 $ 320 $ 88
Select Equity 170 282 69 105 3
Growth and
Income -- -- 1,113 -- --
Capital
Growth -- -- 2,171 -- --
Small Cap
Equity -- -- 530 -- --
International
Equity 50 464 171 145 --
Asia Growth 103 259 100 50 --
</TABLE>
The Investment Advisors, Administrator and Distributor may discontinue or
modify such waivers and limitations in the future at their discretion.
At January 31, 1997, the amounts owed to affiliates were as follows(in
thousands):
<TABLE>
<CAPTION>
Authorized
Admin- Distri- Dealer Transfer
Fund Adviser istrator butor Service Agent Total
- --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balanced $ 33 $ 10 $ 2 $ 15 $ 38 $ 98
Select Equity 143 49 56 57 84 389
Growth and
Income 284 78 28 119 207 716
Capital
Growth 568 190 2 190 210 1,160
Small Cap
Equity 134 45 2 45 120 346
International
Equity 391 78 105 116 143 833
Asia Growth 171 36 50 53 90 400
</TABLE>
4. Portfolio Securities Transactions
Purchases and proceeds of sales or maturities of securities (excluding
short-term investments, futures and options) for the year ended January 31,
1997, were as follows:
<TABLE>
<CAPTION>
Sales or
Fund Purchases Maturities
- --------- --------------- -------------
<S> <C> <C>
Balanced $146,297,709 $123,056,708
Select Equity 242,635,637 102,479,847
Growth and Income 330,177,173 256,802,366
Capital Growth 436,178,218 569,122,643
Small Cap Equity 202,036,820 256,627,457
International Equity 400,682,323 166,164,906
Asia Growth 192,125,629 118,802,040
</TABLE>
Included in the above amounts were purchases and proceeds of sales or
maturities of governmental securities for the Balanced Fund in the amounts of
$99,727,748 and $91,845,598, respectively.
For the year ended January 31, 1997, written put option transactions in the
Balanced Fund were as follows:
<TABLE>
<CAPTION>
Number of Premium
Written Options Contracts Received
- ---------------------- ------------- -------------
<S> <C> <C>
Balance outstanding at
beginning of year 0 $ 0
Options written 32 5,416
Options repurchased (32) (5,416)
--------------- ---------------
Balance outstanding,
end of year 0 $ 0
=============== ===============
</TABLE>
For the year ended January 31, 1997, written call option transactions in the
Growth and Income Fund were as follows:
<TABLE>
<CAPTION>
Number of Premium
Written Options Contracts Received
- ---------------------- ------------- -------------
<S> <C> <C>
Balance outstanding at
beginning of year 0 $ 0
Options written 438 73,608
Options repurchased (438) (73,608)
--------------- ---------------
Balance outstanding,
end of year 0 $ 0
=============== ===============
</TABLE>
- --------------------------------------------------------------------------------
68
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
For the year ended January 31, 1997, written put option transactions in the
Small Cap Equity Fund were as follows:
<TABLE>
<CAPTION>
Number of Premium
Written Options Contracts Received
- ---------------------- ------------- -------------
<S> <C> <C>
Balance outstanding at
beginning of year 0 $ 0
Options written 2,100 575,871
Options expired (9) (2,026)
Options exercised (1,091) (238,096)
Options repurchased (1,000) (335,749)
--------------- ---------------
Balance outstanding,
end of year 0 $ 0
=============== ===============
</TABLE>
Certain risks arise related to call and put options from the possible
inability of counterparties to meet the terms of their contracts.
At January 31, 1997, the Balanced Fund had the following outstanding forward
foreign currency exchange contracts:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Foreign Currency Value on Unrealized
Sale Contracts Settlement Date Current Value Gain
- --------------------------------------------------------------------
<S> <C> <C> <C>
Australian Dollar
expiring 3/14/97 $777,277 $770,585 $6,692
- --------------------------------------------------------------------
Total Foreign
Currency Sale
Contracts $777,277 $770,585 $6,692
- --------------------------------------------------------------------
</TABLE>
At January 31, 1997, the International Equity Fund had the following
outstanding forward foreign currency exchange contracts:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Foreign Currency Value on Unrealized
Sale Contracts Settlement Date Current Value Gain (Loss)
- --------------------------------------------------------------------
<S> <C> <C> <C>
Swiss Franc
expiring 4/28/97 $39,343,000 $39,665,062 $ (322,062)
Deutsche Mark
expiring 2/27/97 22,305,725 22,183,180 122,545
Hong Kong Dollar
expiring 8/8/97 38,565,981 38,530,005 35,976
Japanese Yen
expiring 4/24/97 122,316,352 119,792,909 2,523,443
- --------------------------------------------------------------------
Total Foreign Currency
Sale Contracts $222,531,058 $220,171,156 $2,359,902
- --------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------
Foreign Currency Value on Unrealized
Purchase Contracts Settlement Date Current Value Gain (Loss)
- --------------------------------------------------------------------
<S> <C> <C> <C>
Hong Kong Dollar
expiring 2/3/97 $35,454 $35,454 $--
- --------------------------------------------------------------------
Total Foreign Currency
Purchase Contracts $35,454 $35,454 $--
- --------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The contractual amounts of forward foreign currency exchange contracts do
not necessarily represent the amounts potentially subject to risk. The
measurement of the risks associated with these instruments is meaningful only
when all related and offsetting transactions are considered. At January 31,
1997, the Balanced and International Equity Fund's had sufficient cash and
securities to cover any commitments under these contracts.
The Balanced and International Equity Funds have recorded a "Receivable for
forward foreign currency exchange contracts" and "Payable for forward foreign
currency exchange contracts" resulting from open and closed but not settled
forward foreign currency exchange contracts of $6,692 and $0, and $2,684,757 and
$3,434,535, respectively, in the accompanying Statements of Assets and
Liabilities. Included in these amounts for the International Equity Fund are
$2,793 and $3,112,473, respectively, related to forward contracts closed but not
settled as of January 31, 1997.
For the year ended January 31, 1997, Goldman Sachs earned approximately
$5,000, $78,000, $304,000, $36,000, $11,000 and $66,000 of brokerage commissions
from portfolio transactions executed on behalf of the Balanced, Growth and
Income, Capital Growth, Small Cap Equity, International Equity and Asia Growth
Funds, respectively.
5. Repurchase Agreements
During the term of a repurchase agreement, the value of the underlying
securities, including accrued interest, is required to equal or exceed the value
of the repurchase agreement. The underlying securities for all repurchase
agreements are held in safekeeping at the Funds' custodian.
- --------------------------------------------------------------------------------
69
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
January 31, 1997
- --------------------------------------------------------------------------------
6. Joint Repurchase Agreement Account
The Funds, together with other registered investment companies having advisory
agreements with GSAM or GSFM, transfer uninvested cash balances into joint
accounts, the daily aggregate balance of which is invested in one or more
repurchase agreements. The underlying securities for the repurchase agreements
are U.S. Treasury and agency obligations. At January 31, 1997, the Balanced,
Select Equity, Growth and Income, Capital Growth and Small Cap Equity Funds had
undivided interests in the repurchase agreements in the following joint account
which equaled $9,200,000, $3,600,000, $26,800,000, $18,300,000 and $16,600,000,
respectively, in principal amount. At January 31, 1997, the repurchase
agreements held in this joint account, along with the corresponding underlying
securities (including the type of security, market value, interest rate and
maturity date) were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
- --------------------------------------------------------------------
Bear Stearns Securities, Inc., dated 01/31/97, repurchase
price $800,375,333 (GNMA: $26,604,837, 7.50%, 10/15/26;
FNMA: $720,411,516, 5.50%-8.00%, 02/01/09-09/01/26;
FHLMC: $77,372,676, 6.00%-8.00%, 04/01/98-07/01/26)
<S> <C> <C> <C>
$800,000,000 5.63% 02/03/97 $ 800,000,000
<CAPTION>
Nomura Securities, Inc. dated 01/31/97, repurchase price
$100,047,083 (GNMA: $102,007,864, 5.50%-10.25%
01/15/20-01/20/27)
<S> <C> <C> <C>
100,000,000 5.65 02/03/97 100,000,000
<CAPTION>
Lehman Government Securities, dated 01/31/97, repurchase
price $201,894,173 (U.S. Treasury Notes: $191,656,654,
6.38%, 01/15/00-08/15/02; U.S. Treasury Stripped
Securities: $14,095,535, 05/15/02-11/15/03)
<S> <C> <C> <C>
201,800,000 5.60 02/03/97 201,800,000
</TABLE>
- --------------------------------------------------------------------
Total Joint Repurchase Agreement Account $ 1,101,800,000
- --------------------------------------------------------------------
7. Line of Credit Facility
The Funds participate in a $250,000,000 uncommitted, unsecured revolving line of
credit facility. In addition, the Funds, except the Select Equity Fund,
participate in a $50,000,000 committed, unsecured revolving line of credit
facility. Both facilities are to be used solely for temporary or emergency
purposes. Under the most restrictive arrangement, each Fund must own securities
having a market value in excess of 300% of the total bank borrowings. The
interest rate on the borrowings is based on the Federal Funds rate. The
committed facility also requires a fee to be paid based on the amount of the
commitment which has not been utilized. During the year ended January 31, 1997,
the Funds did not have any borrowings under these facilities.
8. Transactions With Affiliated Companies
A Fund is considered to be invested in an affiliated company if that Fund owns
greater than five percent of the outstanding voting securities of such company.
Transactions during the year ended January 31, 1997 which are considered to be
affiliates of Small Cap Equity are as follows (dollar amounts in thousands):
<TABLE>
<CAPTION>
Purchases Sales Realized Dividend Market
Affiliate Name at Cost Proceeds Gain/(Loss) Income Value
- --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
American Safety
Razor $ -- $5,751 $ 289 $ -- $ --
- --------------------------------------------------------------------
Alpine Lace
Brands, Inc. 7,790 -- -- -- 2,341
- --------------------------------------------------------------------
APS Holding
Corp. 10,305 654 290 -- 7,869
- --------------------------------------------------------------------
J. Baker, Inc. 1,591 1,349 (1,090) 60 7,565
- --------------------------------------------------------------------
Black Box, Inc. -- 23,013 14,149 -- --
- --------------------------------------------------------------------
Brookstone, Inc. -- 2,722 (758) -- 5,939
- --------------------------------------------------------------------
Congoleum Corp. -- 2,323 (102) -- 3,156
- --------------------------------------------------------------------
Hollinger
International
Corp. -- 10,903 (1,311) 112 --
- --------------------------------------------------------------------
International Post
Ltd. -- 2,215 (3,933) -- 1,729
- --------------------------------------------------------------------
Morningstar
Group Inc. -- 12,216 6,346 -- --
- --------------------------------------------------------------------
Mortons
Restaurant
Group, Inc. -- 4,106 1,625 -- 6,439
- --------------------------------------------------------------------
Opinion Research
Corp. -- -- -- -- 2,022
- --------------------------------------------------------------------
Pegasus
Communications
Corp. 3,697 -- -- -- 3,224
- --------------------------------------------------------------------
Platinum
Entertainment
Corp. 3,354 -- -- -- 2,675
- --------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
70
<PAGE>
9. Other Matters
As of January 31, 1997, Goldman, Sachs & Co. Employees Profit Sharing and
Retirement Income Plan was the beneficial owner of approximately 14% of the
outstanding shares of the Select Equity Fund.
10. Certain Reclassifications
In accordance with Statement of Position 93-2, the Balanced, Select Equity,
Growth and Income, International Equity and Asia Growth Funds have reclassified
$13,068, $9,549, $18,764, $302,042 and $31,712, respectively, from paid-in
capital to accumulated undistributed net investment income. Additionally, the
Small Cap Equity Fund has reclassified $1,532,848 from accumulated net realized
gains on investments to accumulated net investment loss and $18,742 from paid-in
capital to accumulated net investment loss. The Select Equity Fund reclassified
$40,540 from accumulated net realized gains on investments to distributions in
excess of net investment income. The International Equity Fund and the Asia
Growth Fund have reclassified $205,942 and $338,857 from accumulated net
realized foreign currency loss to distributions in excess of net investment
income, respectively. The Asia Growth Fund also reclassified $377,435 from
accumulated net realized gains on investments to distributions in excess of net
investment income. These reclassifications have no impact on the net asset value
of the Funds and are designed to present the Funds' capital accounts on a tax
basis.
71
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
January 31, 1997
- --------------------------------------------------------------------------------
11. Summary of Share Transactions
Share activity for the year ended January 31, 1997 is as follows:
<TABLE>
<CAPTION>
Balanced Fund Select Equity Fund Growth and Income Fund
- ------------------------------------------------------------------------------------------------------------------
Shares Dollars Shares Dollars Shares Dollars
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A shares
Shares sold 1,529,469 $27,172,279 3,862,697 $81,642,386 5,616,082 $121,074,992
Reinvestment of dividends
and distributions 310,437 5,598,883 370,586 8,175,333 2,390,917 52,287,188
Shares repurchased (446,535) (7,533,272) (1,109,202) (23,823,146) (3,328,038) (72,163,062)
-------------------------------------------------------------------------------------
1,393,371 25,237,890 3,124,081 65,994,573 4,678,961 101,199,118
-------------------------------------------------------------------------------------
Class B shares
Shares sold 109,171 2,001,768 733,802 15,946,016 729,877 16,222,639
Reinvestment of dividends
and distributions 5,284 95,768 24,314 535,407 35,976 787,421
Shares repurchased (1,795) (32,396) (13,894) (310,118) (14,764) (340,546)
-------------------------------------------------------------------------------------
112,660 2,065,140 744,222 16,171,305 751,089 16,669,514
-------------------------------------------------------------------------------------
Institutional shares
Shares sold -- -- 3,151,881 66,277,175 8,228 186,173
Reinvestment of dividends
and distributions -- -- 275,197 6,102,331 92 2,020
Shares repurchased -- -- (363,536) (7,991,198) -- --
-------------------------------------------------------------------------------------
-- -- 3,063,542 64,388,308 8,321 188,193
-------------------------------------------------------------------------------------
Service shares
Shares sold -- -- 154,590 3,344,141 134,652 2,879,042
Reinvestment of dividends
and distributions -- -- 4,126 91,166 12,587 276,180
Shares repurchased -- -- (1,252) (28,032) (10,262) (227,331)
-------------------------------------------------------------------------------------
-- -- 157,464 3,407,275 136,977 2,927,891
-------------------------------------------------------------------------------------
Net increase (decrease) in
shares 1,506,031 $27,303,030 7,089,309 $149,961,461 5,575,348 $120,984,716
=====================================================================================
<CAPTION>
Capital Growth Fund
- -------------------------------------------------------
Shares Dollars
--------------------------
<S> <C> <C>
Class A shares
Shares sold 4,677,047 $73,029,007
Reinvestment of dividends
and distributions 5,870,272 89,898,521
Shares repurchased (14,635,348) (229,277,58)
----------------------------
(4,088,029) (66,350,058)
----------------------------
Class B shares
Shares sold 188,331 2,979,890
Reinvestment of dividends
and distributions 12,408 190,353
Shares repurchased (7,499) (122,231)
----------------------------
193,240 3,048,012
----------------------------
Institutional shares
Shares sold -- --
Reinvestment of dividends
and distributions -- --
Shares repurchased -- --
----------------------------
----------------------------
Service shares
Shares sold -- --
Reinvestment of dividends
and distributions -- --
Shares repurchased -- --
----------------------------
-- --
----------------------------
Net increase (decrease) in
shares (3,894,789) $(63,302,046)
============================
</TABLE>
- --------------------------------------------------------------------------------
72
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Small Cap Equity Fund International Equity Fund Asia Growth Fund
- ----------------------------------------------------------------------------------------------------------------
Shares Dollars Shares Dollars Shares Dollars
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A shares
Shares sold 2,508,268 $52,353,524 12,103,239 $230,847,197 7,588,351 $124,281,405
Reinvestment of dividends
and distributions 475,255 9,732,097 241,377 4,749,851 11,669 184,607
Shares repurchased (4,697,902) (94,933,279) (3,820,157) (72,226,935) (3,945,614) (63,723,269)
------------------------------------------------------------------------------------
(1,714,379) (32,847,658) 8,524,459 163,370,113 3,654,406 60,742,743
------------------------------------------------------------------------------------
Class B shares
Shares sold 173,849 3,765,689 1,000,064 19,327,085 210,879 3,433,876
Reinvestment of dividends
and distributions 7,086 144,474 7,924 155,475 279 4,391
Shares repurchased (4,391) (91,616) (10,181) (198,263) (4,771) (76,391)
------------------------------------------------------------------------------------
176,544 3,818,547 997,807 19,284,297 206,387 3,361,876
------------------------------------------------------------------------------------
Institutional shares
Shares sold -- -- 3,657,119 70,627,799 1,041,822 16,733,545
Reinvestment of dividends
and distributions -- -- 28,973 572,219 2,040 32,281
Shares repurchased -- -- (161,923) (3,153,741) (228,363) (3,651,351)
------------------------------------------------------------------------------------
-- -- 3,524,169 68,046,277 815,499 13,114,475
------------------------------------------------------------------------------------
Service shares
Shares sold -- -- 34,686 673,880 -- --
Reinvestment of dividends
and distributions -- -- 200 3,947 -- --
Shares repurchased -- -- (56) (1,098) -- --
------------------------------------------------------------------------------------
-- -- 34,830 676,729 -- --
------------------------------------------------------------------------------------
Net increase (decrease) in
shares (1,537,835) $(29,029,111) 13,081,265 $251,377,416 4,676,292 $77,219,094
=====================================================================================
<CAPTION>
Share activity for the year ended January 31, 1996 is as follows:
Select Equity Fund
- -------------------------------------------------------------
Shares Dollars
------------- ---------------
<S> <C> <C>
Class A shares
Shares sold 2,479,285 $44,569,920
Reinvestment of dividends and 161,481
distributions 3,032,597
Shares repurchased (2,578,247) (45,692,944)
------------- ---------------
62,519 1,909,573
------------- ---------------
Institutional shares
Shares sold 3,220,915 57,579,398
Reinvestment of dividends and
distributions 97,993 1,847,978
Shares repurchased (30,492) (567,188)
------------- ----------------
3,288,416 $58,860,188
------------- ----------------
Net increase 3,350,935 $60,769,761
============= ================
</TABLE>
- --------------------------------------------------------------------------------
73
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Income (loss) from Distributions to
investment operations/h/ shareholders
------------------------------- ------------------------------------------
Net realized From
and unrealized net realized
Net asset gain (loss) on From gain on In excess
value, Net investments, net investment of net
beginning investment options and investment and futures investment
of period income futures income transactions income
-----------------------------------------------------------------------------------------
BALANCED FUND
- ------------------------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997 - Class A Shares................ $17.31 $0.66 $2.47 $(0.66) $(1.00) --
1997 - Class B Shares/b/............. 17.46 0.42 2.34 (0.42) (1.00) (0.07)
1996 - Class A Shares................ 14.22 0.51 3.43 (0.50) (0.35) --
For the Period Ended January 31,
- --------------------------------
1995 - Class A Shares/d/............. 14.18 0.10 0.02 (0.08) -- --
<CAPTION>
Net asset
Net increase value, Portfolio Average
in net end of Total turnover commission
asset value period return/a/ rate rate/g/
---------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
- ------------------------------
<S> <C> <C> <C> <C> <C>
1997 - Class A Shares................ $1.47 $18.78 18.59% 208.11/f/ $.0587
1997 - Class B Shares(b)............. 1.27 18.73 16.22/c/ 208.11/f/ .0587
1996 - Class A Shares................ 3.09 17.31 28.10 197.10/f/ --
For the Period Ended January 31,
- -------------------------------------
1995 - Class A Shares/d/............. 0.04 14.22 0.87/c/ 14.71/c/ --
<CAPTION>
Ratio assuming no
voluntary waiver of fees
or expense limitations
-------------------------------
Net Ratio of Ratio of net Ratio of net
assets at net investment Ratio of investment
end of expenses to income to expenses to income (loss)
period average net average net average to average
(in 000s) assets assets net assets net assets
-----------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
- ------------------------------
<S> <C> <C> <C> <C> <C>
1997 - Class A Shares................ $81,410 1.00% 3.76% 1.77% 2.99%
1997 - Class B Shares/b/............. 2,110 1.75/e/ 2.59/e/ 2.27/e/ 2.07/e/
1996 - Class A Shares................ 50,928 1.00 3.65 1.90 2.75
For the Period Ended January 31,
- --------------------------------
1995 - Class A Shares/d/............. 7,510 1.00/e/ 3.39/e/ 8.29/e/ (3.90)/e/
</TABLE>
- --------------------------
/a/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no sales
or redemption charges. Total return would be reduced if a sales or
redemption charge were taken into account.
/b/ For the period from May 1, 1996 (commencement of operations) to January 31,
1997.
/c/ Not annualized.
/d/ For the period from October 12, 1994 (commencement of operations) to
January 31, 1995.
/e/ Annualized.
/f/ Includes the effect of mortgage dollar roll transactions.
/g/ For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged. This rate may vary due to various types
of transactions and number of security trades executed.
/h/ Includes the balancing effect of calculating per share amounts.
- --------------------------------------------------------------------------------
(The accompanying notes are an integral part of these financial statements.)
74
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Income (loss) from Distributions to
investment operations/(h)/ shareholders
========================== ====================================
Net realized From
and unrealized net realized
Net asset gain (loss) on From gain on In excess
value, Net investments, net investment of net
beginning investment options and investment and futures investment
of period income futures income transactions income
============================================================================
SELECT EQUITY FUND
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Year Ended January 31,
==============================
1997 - Class A Shares ........................ 19.66 $0.16 $4.46 $(0.16) $(0.80) --
1997 - Class B Shares/(f)/.................... 20.44 0.04 3.70 (0.04) (0.80) (0.16)
1997 - Institutional Shares .................. 19.71 0.30 4.51 (0.28) (0.80) --
1997 - Service Shares/(f)/.................... 21.02 0.13 3.15 (0.13) (0.80) (0.10)
1996 - Class A Shares ........................ 14.61 0.19 5.43 (0.16) (0.41) --
1996 - Institutional Shares/(d)/.............. 16.97 0.16 3.23 (0.24) (0.41) --
1995 - Class A Shares ........................ 15.93 0.20 (0.38) (0.20) (0.94) --
1994 - Class A Shares ........................ 15.46 0.17 2.08 (0.17) (1.61) --
1993 - Class A Shares ........................ 15.05 0.22 0.41 (0.22) -- --
For the Period Ended January 31,
================================
1992 - Class A Shares/(e)/.................... 14.17 0.11 0.88 (0.11) -- --
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Net Net Net
increase asset assets
(decrease) value, Portfolio Average end of
in net end of Total turnover commission period
asset value period return/(a)/ rate rate/(g)/ (in 000s)
======================================================================
SELECT EQUITY FUND
- ------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
===============================
<S> <C> <C> <C> <C> <C> <C>
1997 - Class A Shares .............. $3.66 $23.32 23.75% 37.28% $.0417 $225,968
1997 - Class B Shares/(f)/.......... 2.74 23.18 18.59/(b)/ 37.28 .0417 17,258
1997 - Institutional Shares ........ 3.73 23.44 24.63 37.28 .0417 148,942
1997 - Service Shares/(f)/.......... 2.25 23.27 15.92/(b)/ 37.28 .0417 3,666
1996 - Class A Shares .............. 5.05 19.66 38.63 39.35 -- 129,045
1996 - Institutional Shares/(d)/.... 2.74 19.71 20.14/(b)/ 39.35/(b)/ -- 64,829
1995 - Class A Shares .............. (1.32) 14.61 (1.10) 56.18 -- 94,968
1994 - Class A Shares .............. 0.47 15.93 15.12 87.73 -- 92,769
1993 - Class A Shares .............. 0.41 15.46 4.30 144.93 -- 117,757
For the Period Ended January 31,
================================
1992 - Class A Shares/(e)/............ 0.88 15.05 7.01/(b)/ 135.02(c) -- 151,142
</TABLE>
<TABLE>
<CAPTION>
Ratios assuming no
voluntary waiver of fees
or expense limitations
-------------------------
Ratio of Ratio of net Ratio of net
net investment Ratio of investment
expenses income to expenses to income
to average average net average to average
assets assets net assets net assets
==================================================
SELECT EQUITY FUND
- -----------------------------------------------------------------------------------------------------
For the Year Ended January 31,
==============================
<S> <C> <C> <C> <C>
1997 - Class A Shares ........................ 1.29% 0.91% 1.53% 0.67%
1997 - Class B Shares/(f)/.................... 1.83/(c)/ 0.06/(c)/ 2.00/(c)/ (0.11)/(c)/
1997 - Institutional Shares .................. 0.65 1.52 0.85 1.32
1997 - Service Shares/(f)/.................... 1.15/(c)/ 0.69/(c)/ 1.35/(c)/ 0.49/(c)/
1996 - Class A Shares ........................ 1.25 1.01 1.55 0.71
1996 - Institutional Shares/(d)/.............. 0.65/(c)/ 1.49/(c)/ 0.96/(c)/ 1.18/(c)/
1995 - Class A Shares ........................ 1.38 1.33 1.63 1.08
1994 - Class A Shares ........................ 1.42 0.92 1.67 0.67
1993 - Class A Shares ........................ 1.28 1.30 1.53 1.05
For the Period Ended January 31,
================================
1992 - Class A Shares/(e)/.................... 1.57/(c)/ 1.24/(c)/ 1.82/(c)/ 0.99/(c)/
</TABLE>
- --------------
/(a)/ Assumes investment at the net asset value at the beginning of the
period, reinvestment of all dividends and distributions, a complete
redemption of the investment at the net asset value at the end of the
period and no sales or redemption charges. Total return would be reduced if
a sales or redemption charge were taken into account.
/(b)/ Not annualized.
/(c)/ Annualized.
/(d)/ For the period from June 15, 1995 (commencement of operations) to January
31, 1996.
/(e)/ For the period from May 24, 1991 (commencement of operations) to January
31, 1992.
/(f)/ For the period from May 1 and June 7, 1996 (commencement of operations) to
January 31, 1997 for Class B and Service shares, respectively.
/(g)/ For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged. This rate may vary due to various types
of transactions and number of security trades executed.
/(h)/ Includes the balancing effect of calculating per share amounts.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
75
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from
investment
operations/(h)/ Distributions to shareholders
====================== =====================================
Net
realized
and From net
Net unrealized realized
asset gain(loss) gain In Net
value, on on excess Increase
beginning Net investments From net investment of net Additional in net
of investment and investment and option investment paid-in asset
period income options income transactions income capital value
===============================================================================================
GROWTH AND INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
==============================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997 - Class A Shares ............. $19.98 $0.35 $5.18 $(0.35) $(1.97) $ (0.01) $ -- $3.20
1997 - Class B Shares/(f)/ ........ 20.82 0.17 4.31 (0.17) (1.97) (0.06) -- 2.28
1997 - Institutional Shares/(f)/ .. 21.25 0.29 3.96 (0.30) (1.97) (0.04) -- 1.94
1997 - Service Shares/(f)/ ........ 20.71 0.28 4.50 (0.28) (1.97) (0.07) -- 2.46
1996 - Class A Shares ............. 15.80 0.33 4.75 (0.30) (0.60) -- -- 4.18
1995 - Class A Shares ............. 15.79 0.20/(b)/ 0.30/(b)/ (0.20) (0.33) (0.07) 0.11/(b)/ 0.01
<CAPTION>
For the Period Ended January 31,
==================================
<S>
1994 - Class A Shares/(c)/......... 14.18 0.15 1.68 (0.15) (0.06) (0.01) -- 1.61
</TABLE>
<TABLE>
<CAPTION>
Ratio of Ratio of
Net net net
Net assets expenses investment
asset at to income to
value Total Portfolio Average end of average average
end of return turnover commission period net net
period /(a)/ rate rate/(g)/ (in 000s) assets assets
===================================================================================
GROWTH AND INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
==============================
<S> <C> <C> <C> <C> <C> <C> <C>
1997 - Class A Shares ............. $23.18 28.42% 53.03% $.0586 $615,103 1.22% 1.60%
1997 - Class B Shares/(f)/ ........ 23.10 22.23/(d)/ 53.03 .0586 17,346 1.93/(e)/ 0.15/(e)/
1997 - Institutional Shares/(f)/ .. 23.19 20.77/(d)/ 53.03 .0586 193 0.82/(e)/ 1.36/(e)/
1997 - Service Shares/(f)/ ........ 23.17 23.87/(d)/ 53.03 .0586 3,174 1.32/(e)/ 0.94/(e)/
1996 - Class A Shares ............. 19.98 32.45 57.93 -- 436,757 1.20 1.67
1995 - Class A Shares ............. 15.80 3.97 71.80 -- 193,772 1.25 1.28
<CAPTION>
For the Period Ended January 31,
==================================
<S> <C> <C> <C> <C> <C> <C> <C>
1994 - Class A Shares/(c)/......... 15.79 13.08/(d)/102.23/(d)/ -- 41,528 1.25/(e)/ 1.23/(e)/
</TABLE>
<TABLE>
<CAPTION>
Ratios assuming no
voluntary waiver of fees
or expense limitations
=================================
Ratio of
Ratio of net investment
expenses income (loss)
to average to average
net assets net assets
=================================
GROWTH AND INCOME FUND
- -----------------------------------------------------------------------------
For the Year Ended January 31,
==============================
<S> <C> <C>
1997 - Class A Shares ............. 1.43% 1.39%
1997 - Class B Shares/(f/) ........ 1.93/(e)/ 0.15/(e)/
1997 - Institutional Shares/(f)/ .. 0.82/(e)/ 1.36/(e)/
1997 - Service Shares/(f)/ ........ 1.32/(e)/ 0.94/(e)/
1996 - Class A Shares ............. 1.45 1.42
1995 - Class A Shares ............. 1.58 0.95
<CAPTION>
For the Period Ended January 31,
==================================
<S>
1994 - Class A Shares/(c)/......... 3.24/(e)/ (0.76)/(e)/
</TABLE>
- ----------------------------------
/(a)/Assumes investment at the net asset v alue at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no sales
or redemption charges. Total return would be reduced if a sales or
redemption charge were taken into account.
/(b)/Calculated based on the average shares outstanding methodology.
/(c)/For the period from February 5, 1993 (commencement of operations) to
January 31, 1994.
/(d)/Not annualized.
/(e)/Annualized.
/(f)/For the period from March 6, May 1 and June 3, 1996 (commencement of
operations) to January 31, 1997 for Service, Class B and Institutional
shares, respectively.
/(g)/For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged. This rate may vary due to various types
of transactions and number of security trades executed.
/(h)/Includes the balancing effect of calculating per share amounts.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
76
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from
investment operations/(g)/ Distributions to shareholders
=========================== =============================================
Net realized
and unrealized From net
Net asset gain (loss) on realized gain In excess
value, Net investments, From net on investments, of net
beginning investment options and investment options investment
of period income futures income and futures income
=======================================================================================
CAPITAL GROWTH FUND
- -----------------------------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
==============================
<S> <C> <C> <C> <C> <C> <C>
1997 - Class A Shares.................... $14.91 $0.10 $3.56 $ (0.10) $ (1.72) $(0.02)
1997 - Class B Shares(b)................. 15.67 0.01 2.81 (0.01) (1.72) (0.09)
1996 - Class A Shares.................... 13.67 0.12 3.93 (0.12) (2.69) --
1995 - Class A Shares.................... 15.96 0.03 (0.69) (0.01) (1.62) --
1994 - Class A Shares.................... 14.64 0.02 2.40 (0.01) (1.07) (0.02)
1993 - Class A Shares.................... 13.65 0.06 2.28 (0.07) (1.28) --
1992 - Class A Shares.................... 11.10 0.28 2.90 (0.31) (0.32) --
For the Period Ended January 31,
================================
1991 - Class A Shares/(c)/............... 11.34 0.34 (0.27) (0.31) -- --
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Net
Net increase Net asset assets at
(decrease) value, Portfolio Average end of
in net end of Total turnover commission period
asset value period return/(a)/ rate rate/(f)/ (in 000s)
=======================================================================================
- -----------------------------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
==============================
<S> <C> <C> <C> <C> <C> <C>
1997 - Class A Shares.................... $1.82 $16.73 25.97% 52.92% $.0563 $920,646
1997 - Class B Shares(b)................. 1.00 16.67 19.39/(d)/ 52.92 .0563 3,221
1996 - Class A Shares.................... 1.24 14.91 30.45 63.90 -- 881,056
1995 - Class A Shares.................... (2.29) 13.67 (4.38) 38.36 -- 862,105
1994 - Class A Shares.................... 1.32 15.96 16.89 36.12 -- 833,682
1993 - Class A Shares.................... 0.99 14.64 18.01 58.93 -- 665,976
1992 - Class A Shares.................... 2.55 13.65 29.31 48.93 -- 500,307
For the Period Ended January 31,
================================
1991 - Class A Shares(c)................. (0.24) 11.10 0.84/(d)/ 35.63/(d)/ -- 437,533
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Ratios assuming no
voluntary waiver of fees
=============================
Ratio of Ratio of net Ratio of net
net investment Ratio of investment
expenses to income (loss) to expenses to income (loss)
average net average average to average
assets net assets net assets net assets
====================================================================
- ----------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
==============================
<S> <C> <C> <C> <C>
1997 - Class A Shares.................... 1.40% 0.62% 1.65% 0.37%
1997 - Class B Shares/(b)/................. 2.15/(e)/ (0.39)/(e)/ 2.15/(e)/ (0.39)/(e)/
1996 - Class A Shares.................... 1.36 0.65 1.61 0.40
1995 - Class A Shares.................... 1.38 0.16 1.63 (0.09)
1994 - Class A Shares.................... 1.38 0.13 1.63 (0.12)
1993 - Class A Shares.................... 1.41 0.42 1.66 0.17
1992 - Class A Shares.................... 1.53 2.09 1.78 1.84
For the Period Ended January 31,
- --------------------------------
1991 - Class A Shares/(c)/............... 1.27/(d)/ 3.24/(d)/ 1.47/(d)/ 3.04/(d)/
</TABLE>
- --------------------------
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no sales
or redemption charges. Total return would be reduced if a sales or
redemption charge were taken into account.
/(b)/For the period from May 1, 1996 (commencement of operations) to
January 31, 1997.
/(c)/For the period from April 20, 1990 (commencement of operations) to January
31, 1991.
/(d)/Not annualized.
/(e)/Annualized.
/(f)/For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged. This rate may vary due to various types
of transactions and number of security trades executed.
/(g)/Includes the balancing effect of calculating per share amounts.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
77
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from Distributions to
investment operations/(g)/ shareholders
=========================== =======================================
From In excess
net of
Net realized realized realized Net
and unrealized gain on gains on increase
Net asset Net gain (loss) on From investment, investment (decrease)
value, investment investments, net option and option and in net
beginning income options and investment futures futures asset
of period (loss) futures income transactions transactions value
==============================================================================================
SMALL CAP EQUITY FUND
- -----------------------------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
===================================
<S> <C> <C> <C> <C> <C> <C> <C>
1997 - Class A Shares ............. $17.29 $(0.21) $4.92 $ - $(1.09) $ - $3.62
1997 - Class B Shares/(b)/......... 20.79 (0.11) 1.21 - (1.09) - 0.01
1996 - Class A Shares ............. 16.14 (0.23) 1.39 - (0.01) - 1.15
1995 - Class A Shares ............. 20.67 (0.07) (3.53) - (0.69) (0.24) (4.53)
1994 - Class A Shares ............. 16.68 (0.04) 5.03 - (1.00) - 3.99
For the Period Ended January 31,
===================================
1993 - Class A Shares/(c)/......... 14.18 0.03 2.50 (0.03) - - 2.50
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Net asset Net assets
value, Portfolio Average at end of
end of Total turnover commission period
period return/(a)/ rate rate/(f)/ (in 000s)
================================================================
SMALL CAP EQUITY FUND
- ---------------------------------------------------------------------------------------------------
For the Year Ended January 31,
===================================
<S> <C> <C> <C> <C> <C>
1997 - Class A Shares ............. $20.91 27.28% 99.46% $.0461 $212,061
1997 - Class B Shares/(b)/......... 20.80 5.39/(d)/ 99.46 .0461 3,674
1996 - Class A Shares ............. 17.29 7.20 57.58 - 204,994
1995 - Class A Shares ............. 16.14 (17.53) 43.67 - 319,487
1994 - Class A Shares ............. 20.67 30.13 56.81 - 261,074
For the Period Ended January 31,
===================================
1993 - Class A Shares/(c)/......... 16.68 17.86/(d)/ 7.12/( e)/ - 59,339
<CAPTION>
- ---------------------------------------------------------------------------------------------
Ratios assuming no
voluntary waiver of fees
Ratio of ===========================
Ratio of net Ratio of
net investment Ratio of net
expenses income expenses investment
to average (loss) to to average loss to
net average net net average net
assets assets assets assets
=======================================================
SMALL CAP EQUITY FUND
- ---------------------------------------------------------------------------------------------
For the Year Ended January 31,
===================================
<S> <C> <C> <C> <C>
1997 - Class A Shares ............. 1.60% (0.72)% 1.85% (0.97)%
1997 - Class B Shares/(b)/......... 2.35/(e)/ (1.63)/(e)/ 2.35/(e)/ (1.63)/(e)/
1996 - Class A Shares ............. 1.41 (0.59) 1.66 (0.84)
1995 - Class A Shares ............. 1.53 (0.53) 1.78 (0.78)
1994 - Class A Shares ............. 1.60 (0.45) 1.85 (0.70)
For the Period Ended January 31,
===================================
1993 - Class A Shares/(c)/......... 1.65/(e)/ 0.62/(e)/ 2.70/(e)/ (0.43)/(e)/
- ------------------
</TABLE>
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no sales
or redemption charges. Total return would be reduced if a sales or
redemption charge were taken into account.
/(b)/For the period from May 1, 1996 (commencement of operations) to January 31,
1997.
/(c)/For the period from October 22, 1992 (commencement of operations) to
January 31, 1993.
/(d)/Not annualized.
/(e)/Annualized.
/(f)/For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged. This rate may vary due to various types
of transactions and number of security trades executed.
/(g)/Includes the balancing effect of calculating per share amounts.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
78
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from Distributions
investment operations/(g)/ to shareholders
================================================= ==============================
Net Net realized From net
realized and unrealized realized
and unrealized gain (loss) gain on
Net asset gain (loss) on on foreign From investment,
value, Net investments, currency net option and
beginning investment options related investment futures
of period income (loss) and futures transactions income transactions
============================================================================================
INTERNATIONAL EQUITY FUND
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Year Ended January 31,
=====================================
1997 - Class A Shares............... $17.20 $0.10 $3.51 $(1.28) $ -- $(0.21)
1997 - Class B Shares/(e)/.......... 18.91 (0.06) 0.94 (0.34) -- (0.21)
1997 - Institutional Shares/(e)/.... 17.45 0.04 3.39 (1.24) (0.03) (0.21)
1997 - Service Shares/(e)/.......... 17.70 (0.02) 2.95 (1.08) -- (0.21)
1996 - Class A Shares .............. 14.52 0.13 2.58 1.42 (0.58) (0.87)
1995 - Class A Shares............... 18.10 0.06 (3.04) (0.01) -- (0.59)
1994 - Class A Shares............... 14.35 0.05 4.08 (0.38) -- --
For the Period Ended January 31,
=====================================
1993 - Class A Shares/(b)/.......... 14.18 (0.01) 0.29 (0.11) -- --
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Net
increase Net asset
(decrease) value, Portfolio Average Net assets at
in net asset end of Total turnover commission end of period
value period return/(a)/ rate rate/(f)/ (in 000s)
==================================================================================
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Year Ended January 31,
========================================
1997 - Class A Shares................... $ 2.12 $19.32 13.48% 38.01% $.0318 $536,283
1997 - Class B Shares/(e)/.............. 0.33 19.24 2.83/(c)/ 38.01 .0318 19,198
1997 - Institutional Shares/(e)/........ 1.95 19.40 12.53/(c)/ 38.01 .0318 68,374
1997 - Service Shares/(e)/.............. 1.64 19.34 10.42/(c)/ 38.01 .0318 674
1996 - Class A Shares .................. 2.68 17.20 28.68 68.48 -- 330,860
1995 - Class A Shares................... (3.58) 14.52 (16.65) 84.54 -- 275,086
1994 - Class A Shares................... 3.75 18.10 26.13 60.04 -- 269,091
For the Period Ended January 31,
========================================
1993 - Class A Shares/(b)/.............. 0.17 14.35 1.23/(c)/ 0.00 -- 66,063
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Ratios assuming no
voluntary waiver of fees or
expense limitations
===============================
Ratio of net Ratio of
Ratio of investment net investment
net income Ratio of income
expenses to (loss) to expenses (loss)
average net average net to average to average
assets assets net assets net assets
=============================================================
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
For the Year Ended January 31,
========================================
1997 - Class A Shares................... 1.69% (0.07)% 1.88% (0.26)%
1997 - Class B Shares/(e)/.............. 2.23/(d)/ (0.97)/(d)/ 2.38/(d)/ (1.12)/(d)/
1997 - Institutional Shares/(e)/........ 1.10/(d)/ 0.43/(d)/ 1.25/(d)/ 0.28/(d)/
1997 - Service Shares/(e)/.............. 1.60/(d)/ (0.40)/(d)/ 1.75/(d)/ (0.55)/(d)/
1996 - Class A Shares .................. 1.52 0.26 1.77 0.01
1995 - Class A Shares................... 1.73 0.40 1.98 0.15
1994 - Class A Shares................... 1.76 0.51 2.01 0.26
For the Period Ended January 31,
========================================
1993 - Class A Shares/(b)/.............. 1.80/(d)/ (0.42)/(d)/ 2.58/(d)/ (1.20)/(d)/
</TABLE>
- --------------------------
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no sales
or redemption charges. Total return would be reduced if a sales or
redemption charge were taken into account.
/(b)/For the period from December 1, 1992 (commencement of operations) to
January 31, 1993.
/(c)/Not annualized.
/(d)/Annualized.
/(e)/For the period from February 7, March 6 and May 1, 1996 (commencement of
operations) to January 31, 1997 for Institutional, Service and Class B
shares, respectively.
/(f)/For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged. This rate may vary due to various types
of transactions and number of security trades executed.
/(g)/Includes the balancing effect of calculating per share amounts.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
79
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) Distributions to
from investment operations /(g)/ shareholders
--------------------------------------------- ------------------------------
Net
realized and
unrealized
Net Net gain on
asset Net realized and foreign
value, investment unrealized currency From net In excess
beginning income gain(loss) on related investment of net investment
of period (loss) investments transactions income income
----------------------------------------------------------------------------------------
ASIA GROWTH FUND
- ----------------------------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997 - Class A Shares..................... $16.49 $ 0.06 $(0.11) $(0.12) $(0.01) $ --
1997 - Class B Shares/(e)/................ 17.31 (0.05) (0.48) (0.51) -- (0.03)
1997 - Institutional Shares/(e)/.......... 16.61 0.04 (0.11) (0.11) (0.04) (0.06)
1996 - Class A Shares..................... 13.31 0.17 3.44 (0.12) (0.17) (0.14)
For the Period Ended January 31,
- --------------------------------
1995 - Class A Shares/(b)/................ 14.18 0.11 (0.89) 0.01 (0.10) --
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Net
increase Net
(decrease) asset
in net value, Portfolio Average Net assets at
asset end of Total turnover commission end of period
value period return/(a)/ rate rate/(f)/ (000s)
------------------------------------------------------------------------------------
ASIA GROWTH FUND
- ------------------------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997 - Class A Shares..................... $(0.18) $16.31 (1.01)% 48.40% $.0151 $263,014
1997 - Class B Shares/(e)/................ (1.07) 16.24 (6.02)/(c)/ 48.40 .0151 3,354
1997 - Institutional Shares/(e)/.......... (0.28) 16.33 (1.09)/(c)/ 48.40 .0151 13,322
1996 - Class A Shares..................... 3.18 16.49 26.49 88.80 -- 205,539
For the Period Ended January 31,
- --------------------------------
1995 - Class A Shares/(b)/................ (0.87) 13.31 (5.46)/(c)/ 36.08/(c)/ -- 124,298
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios assuming no
voluntary waiver of fees
or expense limitations
------------------------------
Ratio Ratio Ratio
of net of net Ratio of of net
expenses to investment expenses investment
Net assets at average income(loss) to average income(loss)
end of period net to average net to average
(000s) assets net assets assets net assets
-------------------------------------------------------------------------------
ASIA GROWTH FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
- ------------------------------
<S> <C> <C> <C> <C> <C>
1997 - Class A Shares................................ $263,014 1.67% 0.20% 1.87% 0.00%
1997 - Class B Shares/(e)/........................... 3,354 2.21/(d)/ (0.56)/(d)/ 2.37/(d)/ (0.72)/(d)/
1997 - Institutional Shares/(e)/..................... 13,322 1.10/(d)/ 0.54/(d)/ 1.26/(d)/ 0.38/(d)/
1996 - Class A Shares................................ 205,539 1.77 1.05 2.02 0.80
For the Period Ended January 31,
- --------------------------------
1995 - Class A Shares/(b)/........................... 124,298 1.90/(d)/ 1.83/(d)/ 2.38/(d)/ 1.35/(d)/
</TABLE>
- --------------------------
(a) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no sales
or redemption charges. Total return would be reduced if a sales or
redemption charge were taken into account.
(b) For the period from July 8, 1994 (commencement of operations) to January 31,
1995.
(c) Not annualized.
(d) Annualized.
(e) For the period from February 2 and May 1, 1996 (commencement of operations)
to January 31, 1997 for Institutional and Class B shares, respectively.
(f) For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate on security transactions on which
commissions are charged. This rate may vary due to various types of
transactions and number of security trades executed.
(g) Includes the balancing effect of calculating per share amounts.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
80
<PAGE>
- --------------------------------------------------------------------------------
Report of Independent Public Accountants
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of the
Goldman Sachs Equity Portfolios, Inc.:
We have audited the accompanying statements of assets and liabilities of the
Goldman Sachs Equity Portfolios, Inc. (a Maryland Corporation), comprising the
Balanced Fund, Select Equity Fund, Growth and Income Fund, Capital Growth Fund,
Small Cap Equity Fund, International Equity Fund and Asia Growth Fund, including
the statements of investments, as of January 31, 1997 and the related statements
of operations, the statements of changes in net assets and the financial
highlights for each of the periods presented. These financial statements and the
financial highlights are the responsibility of the Funds' management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
January 31, 1997 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and the financial highlights
referred to above present fairly, in all material respects, the financial
position of each of the respective portfolios constituting Goldman Sachs Equity
Portfolios, Inc. as of January 31, 1997 the results of their operations and the
changes in their net assets and the financial highlights for the periods
presented, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 15, 1997
- --------------------------------------------------------------------------------
81
<PAGE>
- --------------------------------------------------------------------------------
- -------------------------------------- ----------------------------------------
[This Page Intentionally Left Blank]
- -------------------------------------- ----------------------------------------
82
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
This Annual Report is authorized for distribution to prospective investors only
when preceded or accompanied by a Goldman Sachs Equity Portfolios, Inc.
Prospectus which contains facts concerning the Fund's objectives and policies,
management, expenses and other information.
- --------------------------------------------------------------------------------
83
<PAGE>
Goldman Sachs
One New York Plaza
New York, NY 10004
Directors
Ashok N. Bakhru, Chairman
David B. Ford
Douglas C. Grip
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
Officers
Douglas C. Grip, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
Goldman Sachs
Investment Adviser, Administrator,
Distributor and Transfer Agent
The Goldman Sachs
Equity Portfolios
- -------------------
Annual Report
January 31, 1997
Goldman Sachs Balanced Fund
Goldman Sachs Select Equity Fund
Goldman Sachs Growth and Income Fund
Goldman Sachs Capital Growth Fund
Goldman Sachs Small Cap Equity Fund
Goldman Sachs International Equity Fund
Goldman Sachs Asia Growth Fund
[LOGO OF GOLDMAN SACHS APPEARS HERE]
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GOLDMAN SACHS MID-CAP EQUITY FUND
- --------------------------------------------------------------------------------
DEAR SHAREHOLDERS:
We are pleased to have the opportunity to discuss the performance and holdings
of the Goldman Sachs Mid-Cap Equity Fund for the 12 months ended January 31,
1997. The U.S. equity market rewarded investors with excellent returns once
again in 1996, with the Goldman Sachs Mid-Cap Equity Fund outperforming its
benchmark by a wide margin during the period under review. To help put the
fund's performance in perspective, we will also provide a brief overview of the
economic and investment environment.
OBJECTIVE AND INVESTMENT APPROACH
The Goldman Sachs Mid-Cap Equity Fund seeks long-term capital growth primarily
by investing at least 65% of its total assets in equities with market
capitalizations of between $500 million and $7 billion at the time of
investment. However, the fund currently intends to emphasize investments in
companies with market capitalizations of under $5 billion at the time of
investment. The fund is managed with a value style, which means we focus on
companies whose stocks we believe are inexpensive relative to their expected
long-term earnings growth and their asset value. Investments may include well-
known companies that are temporarily out of favor due to cyclical economic
conditions or are experiencing near-term difficulties the portfolio managers
judge to be temporary in nature. In-depth fundamental research of a company's
financial structure, its competitive position in the market and its management's
commitment to increasing shareholder value are all critical parts of the fund's
investment approach. Though we are not sector investors, we closely monitor the
fund's sector and industry exposures compared with the benchmark in an effort to
avoid unintentional over- or underweightings.
MID-CAPS PERFORMED WELL, BUT LAGGED LARGE-CAPS
The U.S. stock market surged to record levels during the period under review,
rising an impressive 26.3% (as measured by the Standard & Poor's 500 stock
index). After a run-up from January through mid-February, market volatility
notably increased, as investor sentiment vacillated between two contradictory
concerns. With some economic news, investors feared that the economy was growing
too quickly, making higher inflation a possibility, while other news caused them
to worry that the economy was slowing, putting earnings at risk. In May,
investors briefly overcame their fears and sent the market higher, but their
concerns quickly reemerged and caused the market to settle into another choppy
trading range that culminated in a sharp sell-off in July. However, stock
prices rebounded throughout the second half of the period, as investors became
more confident that the environment of low inflation, moderate economic growth
and healthy corporate earnings would persist. Though small-cap stocks led the
market during the first half of the year, the post-July rally was dominated by a
handful of large-cap, growth companies.
During the period, the mid-cap sector of the stock market recorded a total
return of 20.9% (as measured by the Russell Midcap index), lagging its larger
peers but slightly outperforming small-cap stocks, which rose 19.0% (as measured
by the Russell 2000 index). The divergence between the performance of the
different stock capitalizations was primarily a reflection of investors "flight
to quality" in the uncertain market, with investors favoring large-cap growth
companies that were highly liquid.
1
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GOLDMAN SACHS MID-CAP EQUITY FUND (cont'd)
- --------------------------------------------------------------------------------
ECONOMIC GROWTH REBOUNDED AFTER A WEAK START, THEN MODERATED
When the period began, lackluster consumer spending, harsh winter weather and
the General Motors strike restrained economic growth. Despite these adverse
conditions, the economy advanced faster than expected, with first-quarter real
GDP growth reported at 2.0% (annualized). Momentum accelerated even more
dramatically during the second quarter, as industrial activity, automobile sales
and home sales all showed significant improvement. As a result, second-quarter
GDP rose a robust 4.7% (annualized), its highest rate in two years.
The economy's torrid growth cooled markedly during the third quarter, with
annualized real GDP slowing to 2.1%, largely due to lackluster consumer spending
and a widening U.S. trade deficit. This slowdown proved to be temporary,
however, as a wide range of economic reports pointed toward renewed strength
from October through December. Fourth-quarter real GDP growth was revised to
3.9% (annualized), reflecting a narrowing trade deficit, rising consumer
spending and accelerating manufacturing activity. In January 1997, the economic
data suggested that the economy's advance was continuing. Despite firm growth,
underlying inflation remained surprisingly mild. For all of 1996, consumer
prices rose only 2.9%.
The U.S. Federal Reserve cut the Federal funds rate by 25 basis points in
January 1996, just prior to the start of the period. Though stronger than
expected growth shifted investor expectations from further Federal Reserve
interest rate cuts to potential tightening, the Fed then left rates unchanged.
As of January 31, 1997, the Federal funds rate remained at 5.25%.
PERFORMANCE REVIEW: STRONG OUTPERFORMANCE, LED BY OUR TECHNOLOGY, FINANCIAL AND
ENERGY STOCKS
For the 12-month period ended January 31, 1997, the Goldman Sachs Mid-Cap
Equity Fund had a total return of 25.63% based on net asset value, significantly
outperforming the 20.90% total return of the fund's benchmark, the Russell
Midcap Index. We are also pleased to note that the fund fared very well
compared with its peers. For the 12-month period ended January 31, 1997, the
fund ranked within the top 20% of the Lipper mid-cap fund category (30th of
157), according to Lipper Analytical Services, Inc. (Please note that Lipper
rankings do not take sales charges into account and that past performance is not
a guarantee of future results.)
The fund's strong results came primarily during the second half of the period,
and can be attributed to successful stock selection. The best performing stocks
came from a wide range of sectors, with technology, financial and energy-related
investments performing particularly well. In addition, the fund benefited from
several of its positions in consumer nondurables, a sector that had been
underweighted early in the period and subsequently increased.
The fund's top performers included a number of manufacturers of computer-
related components. For example, we took advantage of the slump in technology
stocks in early 1996 by establishing a position in TERADYNE, INC., a
manufacturer of semiconductor testing equipment, at an extremely inexpensive
price. The stock then rebounded much faster than we anticipated in advance of
the turnaround of the semiconductor cycle. Other successful holdings in the
sector were the best performing initial public offering of 1996, CYMER, INC., a
producer of excimer lasers used to etch semiconductors, and SEAGATE TECHNOLOGY,
INC., the world's largest independent disk-drive maker. Seagate Technology
spent much of the past year
2
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GOLDMAN SACHS MID-CAP EQUITY FUND (cont'd)
- --------------------------------------------------------------------------------
integrating its acquisition of Conner Peripherals, Inc., which gave it a
dominant market share and made it the most vertically integrated hard disk-drive
manufacturer. By the end of the period, we sold the fund's position in Cymer and
reduced Teradyne and Seagate Technology as they appreciated and became less
undervalued.
In the financial sector, several of our bank and insurance holdings performed
extremely well. Bank stocks included GREENPOINT FINANCIAL CORP., which reported
strong demand for its "no-documentation" and "low-documentation" mortgages;
REPUBLIC BANK OF NEW YORK CORP., which achieved an earnings improvement due to
better than expected revenues and non-interest expense control; and STANDARD FED
BANCORPORATION, a Michigan-based thrift that is in the process of being
acquired, which we sold after it reached our target price. In the insurance
industry, OLD REPUBLIC INTERNATIONAL CORP. enhanced shareholder value in a slow
premium growth environment by improving its capital management, which included a
stock buyback program; USLIFE CORP. surged amid takeover speculation, and
ALLMERICA FINANCIAL CORP. announced a restructuring that would combine its four
units.
The fund also benefited from several of its energy and consumer nondurable
investments. TOSCO CORP., an oil refiner and distributor, continued to
consolidate its market position through an ambitious acquisition strategy, and
LONG ISLAND LIGHTING CO., a New York-based utility, agreed to be acquired by
Brooklyn Union Gas Co. at a very attractive price. In the consumer nondurable
sector, SUNBEAM CORP., a leading consumer products company, surged due to the
aggressive restructuring program initiated by its new CEO; and FRUIT OF THE
LOOM, INC. performed well due to increased investor recognition of its ability
to improve future cash flow.
DIFFICULT INDUSTRY CONDITIONS IMPACTED SEVERAL HOLDINGS
Fund holdings that did not fulfill our expectations included several companies
that were affected by difficult industry conditions. These included GEON CORP.,
VISHAY INTERTECHNOLOGY, INC. and STONE CONTAINER CORP., which all suffered when
their respective businesses -- chemicals, electronic capacitors, and pulp and
paper products -- came under pressure due to increased competition and
overcapacity. Another disappointment was CENTRAL MAINE POWER CO., which was
impacted by continuing uncertainty in the regulatory environment for electric
utilities. We believe that the market has overreacted to the short-term
problems facing these companies and the fund continued to hold them as of the
end of the period.
NEW INVESTMENTS ADDED DIVERSIFICATION
After many holdings performed extremely well and were sold upon reaching our
price targets, we initiated several new investments that we determined were very
undervalued. These included two stocks that were among the fund's 10 largest
positions as of the end of the period under review: INTERNATIONAL MULTIFOODS
CORP. and UNICOM CORP. International Multifoods Corp., a distributor of
specialty foods, has a relatively low valuation, a high degree of operating
leverage and new management that is expected to improve profitability,
particularly in its vending distribution business. Unicom Corp., an electric
utility that operates 12 nuclear units at six sites, generates excess capital
and, unlike many other electric utilities, has no utility power purchase
problems. We established a position after its stock price declined due to a
mandated increase in spending on operations and maintenance, an issue that
management believes will not impair the company's long-term prospects.
We established a major position in PERRIGO CO., the largest manufacturer of
store-brand health and
3
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GOLDMAN SACHS MID-CAP EQUITY FUND (cont'd)
- --------------------------------------------------------------------------------
beauty aids, over-the-counter pharmaceuticals and nutritional products. We
expect Perrigo to benefit from stricter cost controls as well as its "over-the-
counter switch" business, where it produces drugs that are equivalent to brand-
name products after the original drug patents expire. These products are a
significant new source of revenues because they command higher margins and have
higher unit growth. Another new position was IMATION CORP., a spin-off of 3M
Co., which manufactures products for data storage, printing and publishing,
medical imaging and photography. Imation has a strong balance sheet and is using
the cash flow generated by its older businesses to develop new products such as
high-capacity disks.
We significantly increased the fund's existing position in THIOKOL CORP., a
defense/aerospace company that has a debt-free balance sheet, trades at a very
low earnings multiple and is reducing its dependence on the federal government.
As part of this strategy, Thiokol formed a joint venture to manufacture
components for commercial aircraft, which will enable it to benefit from an
expected upturn in the aircraft cycle.
<TABLE>
<CAPTION>
TOP 10 EQUITY HOLDINGS AS OF JANUARY 31, 1997
COMPANY LINE OF BUSINESS PERCENTAGE OF TOTAL NET ASSETS
<S> <C> <C>
Thiokol Corp. Defense/Aerospace 3.0%
Shopko Stores, Inc. Discount Retailer 2.5%
Goodyear Tire & Rubber Co. Tire and Rubber Products 2.5%
Republic Bank of New York Corp. Bank 2.5%
Long Island Lighting Co. Electric Utilities 2.5%
International Multi-foods Corp. Food Distributor 2.4%
Avnet, Inc. Electronic Components Distributor 2.4%
USLife Corporation Insurance 2.4%
Unicom Corp. Utility 2.4%
Owens-Illinois, Inc. Packaging 2.4%
</TABLE>
OUTLOOK
As of this writing, we believe the stock market, in general, is somewhat
overvalued. Though we still expect the market to achieve positive results in
1997, its returns are unlikely to match the strong returns of 1995 or 1996.
Despite the expensive market, the fund's current holdings are attractively
valued and we expect them to continue to perform well. We intend to continue to
utilize extensive fundamental research to identify attractive, undervalued
stocks with solid long-term prospects.
Sincerely,
/s/ Eileen A. Aptman
Eileen A. Aptman
Portfolio Manager
/s/ Ronald E. Gutfleish
Ronald E. Gutfleish
Portfolio Manager
U.S. Active Equity Value
March 3, 1997
4
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GOLDMAN SACHS MID-CAP EQUITY FUND
- --------------------------------------------------------------------------------
The following graph shows the value, as of January 31, 1997, of a $1,000,000
investment made on the inception date of the Fund. For comparative purposes,
the performance of the Fund's benchmark (the Russell Midcap Index ("Russell
Midcap")) is shown for the appropriate time periods. All performance data shown
represents past performance and should not be considered indicative of future
performance which will fluctuate with changes in market conditions. These
performance fluctuations will cause an investor's shares, when redeemed, to be
worth more or less than their original cost.
(dollars in thousands)
[LINE GRAPH APPEARS HERE]
GS MIDCAP RUSSELL MIDCAP
8/1/95 $1,000 $1,000
1/31/96 $1,069 $1,094
1/31/97 $1,344 $1,523
<TABLE>
<CAPTION>
Average Annual Total Return
-----------------------------------
One Year Since Inception
(a)
-----------------------------------
<S> <C> <C>
Institutional 25.63% 21.65%
Shares
</TABLE>
(a) Institutional shares commenced operations on August 1, 1995.
5
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
- --------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS
January 31, 1997
<TABLE>
<CAPTION>
Shares Description Value
- -------------------------------------------------------------
<S> <C> <C>
Common Stocks--96.5%
Airlines--2.0%
102,400 Continental Airlines, $ 2,867,200
Inc.*
- -------------------------------------------------------------
APPLIANCE MANUFACTURER--1.8%
95,300 Sunbeam Corp., Inc. 2,644,575
- -------------------------------------------------------------
AUTO--ORIGINAL EQUIPMENT MANUFACTURER--0.7%
48,500 Exide Corp. 1,091,250
- -------------------------------------------------------------
BANKS--4.1%
27,600 Greenpoint Financial Corp. 1,504,200
40,700 Republic Bank of New York 3,607,038
Corp.
14,800 Unionbancal Corp. 791,800
5,903,038
- -------------------------------------------------------------
CHEMICALS--COMMODITY--1.2%
94,600 Geon Co. 1,773,750
- -------------------------------------------------------------
COMPUTERS AND PERIPHERALS--3.2%
124,300 Decisionone Corp. 2,175,250
48,000 Seagate Technology, Inc.* 2,472,000
4,647,250
- -------------------------------------------------------------
CONSUMER STAPLES--1.8%
56,135 Block Drug Company, Inc. 2,638,345
- -------------------------------------------------------------
DEFENSE--3.0%
76,600 Thiokol Corp. 4,289,600
DEPARTMENT STORES--2.5%
228,000 Shopko Stores, Inc. 3,619,500
- -------------------------------------------------------------
ELECTRIC UTILITIES--8.6%
242,100 Central Maine Power Co. 2,693,362
38,500 CMS Energy Corp. 1,289,750
158,100 Long Island Lighting Co. 3,596,775
147,500 Niagara Mohawk Power 1,493,437
Corp.*
145,900 Unicom Corp. 3,446,888
12,520,212
- -------------------------------------------------------------
FOOD--4.1%
161,900 Chiquita Brands 2,367,788
International, Inc.
197,000 International Multifoods 3,546,000
Corp.
5,913,788
- -------------------------------------------------------------
FOREST PRODUCTS--2.7%
31,000 Georgia-Pacific Corp. 2,282,375
130,000 Stone Container Corp. 1,755,000
4,037,375
- -------------------------------------------------------------
HEALTHCARE MANAGEMENT--4.8%
57,800 Health Systems 1,495,575
International, Inc.*
104,900 Horizon CMS Healthcare 1,442,375
Corp.
126,400 Tenet Healthcare Corp.* 3,412,800
33,000 Trigon Healthcare Inc. 585,750
6,936,500
- -------------------------------------------------------------
HOME BUILDERS--3.1%
46,000 Centex Corp. 1,794,000
104,600 Lennar Corp. 2,784,975
4,578,975
- -------------------------------------------------------------
INSURANCE--LIFE--3.8%
36,900 Reliastar Financial Corp. 2,047,950
84,700 US Life Corp. 3,472,700
5,520,650
- -------------------------------------------------------------
<CAPTION>
Shares Description Value
- -------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
INSURANCE--PROPERTY AND CASUALTY--3.8%
90,100 Allmerica Financial Group $ 3,299,912
84,300 American States Financial 2,223,413
Corp.*
5,523,325
- -------------------------------------------------------------
INSURANCE BROKERS--1.5%
80,900 Old Republic 2,174,187
International
Corp.
- -------------------------------------------------------------
INVESTMENT BROKERS AND MANAGERS--1.0%
44,300 Lehman Brothers Holdings, 1,400,987
Inc.
- -------------------------------------------------------------
LOGISTICS/TRUCKING--1.9%
106,800 Consolidated Freightways, 2,710,050
Inc.
- -------------------------------------------------------------
LEISURE--2.1%
115,300 Royal Caribbean Cruise 3,041,038
Lines
- -------------------------------------------------------------
MACHINERY--0.9%
22,400 Tecumseh Products, Inc. 1,293,600
MEDIA--1.2%
76,200 Carmike Cinemas 1,809,750
- -------------------------------------------------------------
MEDICAL--2.5%
68,800 Owens and Minor, Inc. 705,200
272,700 Perrigo Co. 2,897,438
3,602,638
- -------------------------------------------------------------
OIL REFINING AND MARKETING--5.5%
59,400 Ashland Inc. 2,561,625
34,600 Tosco Corp. 3,062,100
71,700 Valero Energy Corp. 2,419,875
8,043,600
- -------------------------------------------------------------
PACKAGING--2.4%
144,000 Owens-Illinois Inc.* 3,420,000
- -------------------------------------------------------------
RECREATIONAL PRODUCTS--1.7%
149,300 Outboard Marine Corp. 2,482,112
RESTAURANTS--1.8%
369,800 Darden Restaurants 2,681,050
- -------------------------------------------------------------
SEMICONDUCTORS AND ELECTRONICS--7.8%
56,600 Avnet, Inc. 3,502,125
98,000 Imation Corp. 2,854,250
69,200 Silicon Valley Group, 1,859,750
Inc.*
124,250 Vishay Intertechnology, 2,997,531
Inc.*
11,213,656
- -------------------------------------------------------------
SOFTWARE--1.4%
62,900 Autodesk, Inc. 1,989,213
- -------------------------------------------------------------
STEEL--1.8%
63,600 AK Steel Holding Corp. 2,559,900
- -------------------------------------------------------------
SUPERMARKETS--1.9%
168,800 Fleming Companies, Inc. 2,721,900
TECHNOLOGY CAPITAL GOODS--1.9%
91,700 Teradyne, Inc.* 2,831,238
- -------------------------------------------------------------
TEXTILES--4.1%
141,100 Angelica Corp. 2,698,537
82,300 Fruit of the Loom, Inc.* 3,302,287
6,000,824
- -------------------------------------------------------------
TIRE AND OTHER RELATED
RUBBER PRODUCTS--2.5%
66,200 Goodyear Tire & Rubber Co. 3,607,900
- -------------------------------------------------------------
TOBACCO--1.4%
67,000 Universal Corp. 2,077,000
- -------------------------------------------------------------
TOTAL COMMON STOCKS (Cost $118,250,113) $ 140,165,976
- -------------------------------------------------------------
</TABLE>
6
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
- --------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS (continued)
January 31, 1997
<TABLE>
<CAPTION>
Principal Amount
Interest Rate Maturity Date Value
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
REPURCHASE AGREEMENT--2.8%
Joint Repurchase Agreement Account
$4,100,000 5.63% 02/03/97 $ 4,100,000
- -----------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENT
(Cost $4,100,000) $ 4,100,000
TOTAL INVESTMENTS (COST $122,350,113)** $144,265,976
- -----------------------------------------------------------------------------------
FEDERAL INCOME TAX INFORMATION:
Gross unrealized gain for investments in which value exceeds cost
$ 27,053,378
Gross unrealized loss for investments in which cost exceeds value
(5,196,819)
- -----------------------------------------------------------------------------------
Net unrealized gain $ 21,856,559
- -----------------------------------------------------------------------------------
</TABLE>
* Non-income producing security.
** The aggregate cost for federal income tax purposes is $122,409,417.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
7
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
January 31, 1997
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Investment in securities, at value (identified cost $144,265,976
$122,350,113)
Cash 31,121
Receivables:
Fund shares sold 87,576
Investment securities sold 4,552,534
Dividends and interest 56,999
Deferred organization expenses, net 60,056
Other assets 10,218
TOTAL ASSETS 149,064,480
LIABILITIES:
Payables:
Investment securities purchased 3,687,585
Investment advisory fees 71,762
Administration fees 18,370
Transfer agent fees 4,807
Accrued expenses and other liabilities 28,626
TOTAL LIABILITIES 3,811,150
NET ASSETS:
Paid-in capital 115,859,949
Distributions in excess of net investment income (25,142)
Accumulated undistributed net realized gain on investment and 7,502,660
option transactions
Net unrealized gain on investments 21,915,863
NET ASSETS $145,253,330
Total shares of beneficial interest outstanding, $.001 par 7,755,774
value (50,000,000 shares authorized)
Net asset value, offering and redemption price per share (net $18.73
assets/shares outstanding)
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
Goldman Sachs Mid-Cap Fund
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
For the Year Ended January 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INVESTMENT INCOME:
<S> <C>
Dividends $ 2,631,906
Interest 188,358
TOTAL INCOME 2,820,264
- -----------------------------------------------------
EXPENSES:
Investment adviser fees 771,956
Administration fees 192,989
Professional fees 68,906
Transfer agent fees 51,464
Custodian fees 29,506
Amortization of deferred organization 17,213
expenses
Directors' fees 2,234
Other 31,778
- -----------------------------------------------------
TOTAL EXPENSES $1,166,046
Less Expenses reimbursable by Goldman (72,441)
Sachs
NET EXPENSES 1,093,605
NET INVESTMENT INCOME 1,726,659
- -----------------------------------------------------
REALIZED AND UNREALIZED GAIN ON
INVESTMENT AND OPTION TRANSACTIONS:
Net realized gain on investment 13,627,039
transactions
Net realized gain on options written 40,466
Net change in unrealized gain on 14,749,074
investments
- -----------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON 28,416,579
INVESTMENT AND OPTION TRANSACTIONS
- -----------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING $30,143,238
FROM OPERATIONS
- -----------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Selected Data for a Share Outstanding throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED PERIOD ENDED
JANUARY 31, 1997 JANUARY 31, 1996 (A)
---------------------------- ---------------------------
<S> <C> <C> <C> <C>
FROM OPERATIONS:
Net investment income $ 1,726,659 $ 1,088,855
Net realized gain on investment 13,627,039 547,655
transactions
Net realized gain (loss) on options 40,466 (83,442)
written
Net change in unrealized gain on 14,749,074 7,166,789
investments
- ------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting
from operations 30,143,238 8,719,857
- ------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (1,837,675) (986,293)
In excess of net investment income (25,142) ---
From net realized gains (6,629,058) ---
Total distributions to shareholders (8,491,875) (986,293)
- ------------------------------------------------------------------------------------------------------------
FROM SHARE TRANSACTIONS: SHARES SHARES
- ------------------------------------------------------------------------------------------------------------
Proceeds from sales of shares 227,071 3,933,239 9,029,858 135,730,361
Reinvestment of dividends and 483,747 8,489,760 64,045 986,293
distributions
Cost of shares repurchased (1,480,859) (24,491,993) (568,088) (8,779,257)
Net increase (decrease) in net assets
resulting from share transactions (770,041) (12,068,994) 8,525,815 127,937,397
- ------------------------------------------------------------------------------------------------------------
TOTAL INCREASE 9,582,369 135,670,961
NET ASSETS:
Beginning of period 135,670,961 ---
End of period $145,253,330 $135,670,961
- ------------------------------------------------------------------------------------------------------------
Accumulated undistributed
(distributions in excess of) net $ (25,142) $ 102,562
investment income
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(a) For the period from August 1, 1995 (commencement of operations) to January
31, 1996.
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED PERIOD ENDED
JANUARY 31, 1997 JANUARY 31, 1996 (a)
------------------------------------------------------
<S> <C> <C>
Net asset value, beginning of period $ 15.91 $ 15.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.24 0.13
Net realized and unrealized gain on investments 3.77 0.90
and options
- ------------------------------------------------------------------------------------------------------------
Total income (loss) from investment operations 4.01 1.03
- ------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.24) (0.12)
- ------------------------------------------------------------------------------------------------------------
In excess of net investment income (0.02) --
Net realized gain on investments and option (0.93) --
transactions
- ------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (1.19) (0.12)
- ------------------------------------------------------------------------------------------------------------
Net increase in net asset value 2.82 0.91
- ------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 18.73 $ 15.91
Total return /(b)/ 25.63% 6.89% /(d)/
Portfolio turnover rate 74.03% 58.77% /(d)/
Average commission rate /(e)/ $ 0.0547 --
Net assets at end of period $145,253,330 $135,670,961
Ratio of net expenses to average net assets /(c)/ 0.85% 0.85%
Ratio of net investment income to average net assets /(c)/ 1.35% 1.67%
Ratios assuming no expense limitations:
Ratio of expenses to average net assets /(c)/ 0.91% 0.98%
Ratio of net investment income to average net assets /(c)/ 1.29% 1.54%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ For the period from August 1, 1995 (commencement of operations) to January
31, 1996.
/(b)/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions and a complete redemption
of the investment at the net asset value at the end of the period.
/(c)/ Annualized.
/(d)/ Not annualized.
/(e)/ For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged. This rate may vary due to various types
of transactions and number of security trades executed.
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
January 31, 1997
- --------------------------------------------------------------------------------
1. ORGANIZATION
Goldman Sachs Mid-Cap Equity Fund ("the Fund") is a separate diversified
portfolio of Goldman SachsEquity Portfolios, Inc. (the "Company"). The Company
consists of eight funds and is a Marylandcorporation registered under the
Investment Company Act of 1940, as amended, as an open-end,management investment
company. The Fund offers two classes of shares - Institutional shares
andService shares. No Service shares were outstanding as of January 31, 1997.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significantaccounting policies consistently
followed by the Fund. The preparation of financial statements inconformity with
generally accepted accounting principles requires management to make
estimatesand assumptions that may affect the reported amounts.
A. Investment Valuation
- -- --------------------
Investments in securities traded on a U.S. or foreignsecurities exchange or the
NASDAQ system are valued daily at their last sale or closing price on
theprincipal exchange on which they are traded or NASDAQ. If no sale occurs,
securities traded on aU.S. exchange or NASDAQ are valued at the mean between the
closing bid and asked price, andsecurities traded on a foreign exchange will be
valued at the official bid price. Unlisted equity anddebt securities for which
market quotations are available are valued at the mean between the mostrecent
bid and asked prices. Debt securities are valued at prices supplied by an
independent pricingservice, which reflect broker/dealer-supplied valuations and
matrix pricing systems. Short-termdebt obligations maturing in sixty days or
less are valued at amortized cost. Restricted securities, andother securities
for which quotations are not readily available, are valued at fair value using
methodsapproved by the Board of Directors of the Company.
B. Securities Transactions and Investment Income
- -- ---------------------------------------------
Securities transactions are recorded on the tradedate. Realized gains and
losses on sales of investments are calculated on the identified-costbasis.
Dividend income is recorded on the ex-dividend date. Dividends for which the
Fund hasthe choice to receive either cash or stock are recognized as investment
income in an amountequal to the cash dividend. This amount is also used as an
estimate of the fair value of the stockreceived. Interest income is determined
on a basis of interest accrued, premium amortized anddiscount earned.
C. Federal Taxes
- -- -------------
It is the Fund's policy to comply with the requirements of the Internal Revenue
Codeapplicable to regulated investment companies and to distribute substantially
all of its investmentcompany taxable income and capital gains to its
shareholders. Accordingly, no federal tax provisionis required. The
characterization of distributions to shareholders for financial reporting
purposes isdetermined in accordance with income tax rules. Therefore, the source
of a portfolio's distributionsmay be shown in the accompanying financial
statements as either from or in excess of netinvestment income or net realized
gain on investment transactions, or from capital, dependingon the type of
book/tax differences that may exist.
D. Deferred Organization Expenses
- -- ------------------------------
Organization-related costs are being amortized on a straight-line basis over a
period of five years.
12
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
January 31, 1997
- --------------------------------------------------------------------------------
E. Expenses
- -- --------
Expenses incurred by the Company which do notspecifically relate to an
individual fund of the Company are allocated to the funds based on eachfund's
relative average net assets for the period.
F. Option Accounting Principles
- -- ----------------------------
When the Fund writes call or put options, an amount equal to the premium
received is recordedas an asset and as an equivalent liability. The amount of
the liability is subsequently marked-to-market to reflect the current market
value of the option written. When a written option expires onits stipulated
expiration date or the Fund enters into a closing purchase transaction, the Fund
realizes again or loss without regard to any unrealized gain or loss on the
underlying security, and the liabilityrelated to such option is extinguished.
When a written call option is exercised, the Fund realizes again or loss from
the sale of the underlying security, and the proceeds of the sale are
increasedby the premium originally received. When a written put option is
exercised, the amount of thepremium originally received will reduce the cost of
the security which the Fund purchases uponexercise. There is a risk of loss
from a change in value of such options which may exceed the relatedpremiums
received.
Upon the purchase of a call option or aprotective put option by the Fund, the
premium paid is recorded as an investment and subsequentlymarked-to-market to
reflect the current market value of the option. If an option which the Fundhas
purchased expires on the stipulated expiration date, the Fund will realize a
loss in the amount ofthe cost of the option. If the Fund enters into a closing
sale transaction, the Fund will realize a gainor loss, depending on whether the
sale proceeds from the closing sale transaction are greater or lessthan the cost
of the option. If the Fund exercises a purchased put option, the Fund will
realize a gainor loss from the sale of the underlying security, and the proceeds
from such sale will be decreased bythe premium originally paid. If the Fund
exercises a purchased call option, the cost of the securitywhich the Fund
purchases upon exercise will be increased by the premium originally paid.
G. Futures Contracts
- -- -----------------
The Fund may enter into financial futures contracts for hedging purposes or to
increase total return. Upon entering into a futures contract, the Fund is
required to deposit with a broker an amount of cashor securities equal to the
minimum "initial margin" requirement of the futures exchange on which
thecontract is traded. Subsequent payments ("variation margin") are made or
received by theFund each day, dependent on the daily fluctuations in the value
of the underlying index, and arerecorded for financial reporting purposes as
unrealized gains or losses by the Fund. Whenentering into a closing
transaction, for book purposes, the Fund will realize a gain or loss equalto the
difference between the value of the futures contract to sell and the futures
contract to buy. Futures contracts are valued at the most recent settlement
price, unless such price does not reflectthe fair market value of the contract,
in which case the position will be valued using methods approvedby the Board of
Directors of the Company.
Certain risks may arise upon entering intofutures contracts. The predominant
risk is that the changes in the value of the futures contract may notdirectly
correlate with changes in the value of the underlying securities. This risk may
decrease theeffectiveness of the Fund's hedging strategies and may also result
in a loss to the Fund.
13
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
January 31, 1997
- --------------------------------------------------------------------------------
3. AGREEMENTS
Goldman Sachs Asset Management ("GSAM"), aseparate operating division of
Goldman, Sachs & Co. ("Goldman Sachs"), acts as the Fund'sinvestment adviser
pursuant to an Investment Advisory Agreement. Under the InvestmentAdvisory
Agreement, GSAM, subject to the general supervision of the Company's Board of
Directors,manages the Fund's portfolio. As compensation for the services
rendered under the AdvisoryAgreement and the assumption of the expenses related
thereto, GSAM is entitled to a fee,computed daily and payable monthly, at an
annual rate equal to .60% of the Fund's average daily netassets.
GSAM also acts as the Fund's administratorpursuant to an Administration
Agreement. Under the Administration Agreement, GSAM administersthe Fund's
business affairs, including providing facilities. As compensation for the
servicesrendered pursuant to the Administration Agreement, the Fund pays GSAM a
fee, computeddaily and payable monthly, at an annual rate equal to .15% of the
Fund's average daily net assets.
Goldman Sachs has voluntarily agreed to reduce or limit certain "Other
Expenses" (excludingadvisory, administration, service plan and transfer agent
fees and litigation, indemnification, taxes,interest, brokerage commissions and
extraordinary expenses) until further notice to the extent suchexpenses exceed
.06% of the average daily net assets of the Fund. For the year ended January
31,1997, these expense reimbursements amounted to $72,441 and Goldman Sachs owed
the Fund $8,717at year end.
Goldman Sachs serves as the Distributor ofshares of the Fund pursuant to a
distribution agreement and receives no fee. Goldman Sachsalso serves as the
Transfer Agent of the Fund for a fee.
4. LINE OF CREDIT FACILITY
The Fund participates in a $250,000,000 uncommitted, unsecured revolving line of
creditfacility. In addition, the Fund participates in a $50,000,000 committed,
unsecured revolving lineof credit facility. Both facilities are to be used
solely for temporary or emergency purposes. Under the most restrictive
arrangement, the Fund must own securities having a market value inexcess of 300%
of the total bank borrowings. The interest rate on the borrowings is based on
theFederal Funds rate. The committed facility also requires a fee to be paid
based on the amount of thecommitment which has not been utilized. During the
year ended January 31, 1997, the Fund did nothave any borrowings under these
facilities.
5. PORTFOLIO SECURITIES TRANSACTIONS
Purchases and proceeds of sales or maturities ofsecurities (excluding short-term
investments and options) for the year ended January 31, 1997 were$92,601,511 and
$112,186,001, respectively.
For the year ended January 31, 1997, optiontransactions in the Fund were as
follows:
<TABLE>
<CAPTION>
Put Options written Contracts Premium Received
- ----------------------------------------------------
<S> <C> <C>
Balance outstanding,
beginning of period -- $ --
Options written 240 40,466
Options expired (240) (40,466)
- ----------------------------------------------------
Balance outstanding,
end of period -- $ 0
- ----------------------------------------------------
</TABLE>
Certain risks arise related to written call or put options from the possible
inability of counterpartiesto meet terms of their contracts.
For the year ended January 31, 1997, GoldmanSachs earned approximately $22,000
of brokerage commissions from portfolio transactions executedon behalf of the
Fund.
14
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
January 31, 1997
- --------------------------------------------------------------------------------
6. REPURCHASE AGREEMENTS
During the term of a repurchase agreement, thevalue of the underlying
securities, including accrued interest, is required to equal or exceed thevalue
of the repurchase agreement. The underlying securities for all repurchase
agreements are held insafekeeping at the Fund's custodian.
7. JOINT REPURCHASE AGREEMENT ACCOUNT
The Fund, together with other registered investment companies having advisory
agreements withGSAM, transfer uninvested cash balances into joint accounts, the
daily aggregate balance of which isinvested in one or more repurchase
agreements. The underlying securities for the repurchaseagreements are U.S.
Treasury obligations. At January 31, 1997, the Fund had an undividedinterest
in the repurchase agreements in the following joint account which equaled
$4,100,000in principal amount. At January 31, 1997, the repurchase agreements
held in this joint account,along with the corresponding underlying securities
(including the type of security, market value,interest rate and maturity date)
were as follows:
<TABLE>
<CAPTION>
Principal Interest Maturity Amortized
Amount Rate Date Cost
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Bear Stearns Securities, dated 01/31/97, repurchase price
$800,375,333 (GNMA: $26,604,837, 7.50%, 10/15/26; FNMA:
$720,411,516, 5.50% - 8.00%, 02/01/09 -09/01/26; FHLMC:
77,372,676, 6.0% -$ 8.0%, 04/01/98 - 07/01/26)
$800,000,000 5.63% 02/03/97 $ 800,000,000
Nomura Securities, dated 01/31/97, repurchase price
$100,047,083 (GNMA: $102,007,864, 5.5% - 10.25%
01/15/20 - 01/20/27)
100,000,000 5.65 02/03/97 100,000,000
Lehman Government Securities, dated 01/31/97, repurchase
price $201,894,173 (U.S. Treasury Notes: $191,656,654,
6.375%, 01/15/00-08/15/02; U.S. Treasury Stripped
Securities: $14,095,535 05/15/02 - 11/15/03)
201,800,000 5.60 02/03/97 201,800,000
TOTAL JOINT REPURCHASE AGREEMENT ACCOUNT $1,101,800,000
- --------------------------------------------------------------------------------
</TABLE>
8. CERTAIN RECLASSIFICATIONS
In accordance with Statement of Position 93-2, theMid-Cap Equity Fund has
reclassified $8,454 from paid-in capital to distributions in excess of
netinvestment income. These reclassifications have no impact on the net asset
value of the Fund and isdesigned to present the Fund's capital accounts on a tax
basis.
9. OTHER MATTERS
As of January 31, 1997, The Goldman, Sachs & Co. Employees Profit Sharing and
Retirement IncomePlan was the beneficial owner of approximately 98% of the
outstanding shares of the Fund.
15
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of GoldmanSachs Mid-Cap Equity Fund:
We have audited the accompanying statement ofassets and liabilities of Goldman
Sachs Mid-Cap Equity Fund, one of the portfolios constituting Goldman Sachs
Equity Portfolios, Inc., including the statement of investments, as of January
31, 1997, and the relatedstatement of operations and the statement of changes in
net assets and the financial highlights for the periodspresented. These
financial statements and the financial highlights are the responsibility of the
fund's management. Our responsibility is to express an opinion on these
financial statements and the financial highlightsbased on our audits.
We conducted our audits in accordance withgenerally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtainreasonable assurance about whether the financial statements and the
financial highlights are free ofmaterial misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts anddisclosures in
the financial statements. Our procedures included confirmation of securities
owned as of January 31, 1997 by correspondence with the custodian and brokers.
An audit also includes assessing the accountingprinciples used and significant
estimates made by management, as well as evaluating the overall
financialstatement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements and the financial highlights referred
to above present fairly, in allmaterial respects, the financial position of
Goldman Sachs Mid-Cap Equity Fund as of January 31, 1997, theresults of its
operations and the changes in its net assets and the financial highlights for
the periods presented, inconformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 15, 1997
16
<PAGE>
Goldman Sachs
1 New York Plaza
New York, NY 10004
DIRECTORS
Ashok N. Bakhru, Chairman
David B. Ford
Douglas C. Grip
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
OFFICERS
Douglas C. Grip, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
GOLDMAN SACHS
Investment Adviser, Administrator,
Distributor and Transfer Agent
17
<PAGE>
Appendix A
DESCRIPTION OF BOND RATINGS*
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment some time in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
- -------------------------------
* The rating system described herein are believed to be the most recent ratings
systems available from Moody's Investors Service, Inc. and Standard and Poor's
Ratings Group at the date of this Additional Statement for the securities
listed. Ratings are generally given to securities at the time of issuance.
While the rating agencies may from time to time revise such ratings, they
undertake no obligation to do so, and the ratings indicated do not necessarily
represent ratings which will be given to these securities on the date of the
Fund's fiscal year end.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
1-A
<PAGE>
Ca: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Unrated: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believe
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1 and B1.
STANDARD & POOR'S RATINGS GROUP
AAA: Bonds rated AAA have the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA: Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the higher rated issues only in small degree.
A: Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than in higher rated categories.
BB, B, CCC, CC, C: Bonds rated BB, B, CCC, CC and C are regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal. BB indicates the least degree of speculation and C the
highest. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties of major risk
exposures to adverse conditions.
2-A
<PAGE>
D: Bonds rated D are in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due, even
if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The D rating
also will be used upon the filing of a bankruptcy petition if debt service
payments are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
N.R.: Not rated.
3-A
<PAGE>
Appendix B
BUSINESS PRINCIPLES OF GOLDMAN, SACHS & CO.
Goldman Sachs is noted for its Business Principles, which guide all of the
firm's activities and serve as the basis for its distinguished reputation among
investors worldwide.
OUR CLIENT'S INTERESTS ALWAYS COME FIRST. Our experience shows that if we
serve our clients well, our own success will follow.
OUR ASSETS ARE OUR PEOPLE, CAPITAL AND REPUTATION. If any of these assets
diminish, reputation is the most difficult to restore. We are dedicated to
complying fully with the letter and spirit of the laws, rules and ethical
principles that govern us. Our continued success depends upon unswerving
adherence to this standard.
WE TAKE GREAT PRIDE IN THE PROFESSIONAL QUALITY OF OUR WORK. We have an
uncompromising determination to achieve excellence in everything we undertake.
Though we may be involved in a wide variety and heavy volume of activity, we
would, if it came to a choice, rather be best than biggest.
WE STRESS CREATIVITY AND IMAGINATION IN EVERYTHING WE DO. While recognizing
that the old way may still be the best way, we constantly strive to find a
better solution to a client's problems. We pride ourselves on having pioneered
many of the practices and techniques that have become standard in the industry.
WE 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.
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.
1-B
<PAGE>
GOLDMAN, SACHS & CO.'S INVESTMENT BANKING AND SECURITIES ACTIVITIES
Goldman, Sachs & Co. is a leading global investment banking and securities
firm with a number of distinguishing characteristics.
. Privately owned and ranked among Wall Street's best capitalized firms,
with partners' capital of approximately $5.3 billion as of November
29, 1996.
. With thirty-four offices around the world, Goldman Sachs employs over
9,000 professionals focused on opportunities in major markets.
. A research budget of $200 million for 1997.
. The number one lead manager of U.S. common stock offerings for the
past eight years (1989-1996).*
* Source: Securities Data Corporation. Common stock ranking excludes REITs,
====================================
Investment Trusts and Rights.
2-B
<PAGE>
GOLDMAN, SACHS & CO.'S HISTORY OF EXCELLENCE
1865 End of Civil War
1869 Marcus Goldman opens Goldman Sachs
1890 Dow Jones Industrial Average first published
1896 Goldman Sachs joins New York Stock Exchange
1906 Goldman Sachs takes Sears Roebuck public (oldest ongoing client)
Dow Jones Industrial Average tops 100
1925 Goldman Sachs finances Warner Brothers, producer of the first talking
film
1956 Goldman Sachs co-manages Ford's public offering, the largest to date
1970 London office opens
1972 Dow Jones Industrial Average breaks 1000
1986 Goldman Sachs takes Microsoft public
1990 Provides advisory services for the largest privatization in the region
of the sale of Telefonos de Mexico
1992 Dow Jones Industrial Average breaks 3000
1993 Goldman Sachs is lead manager in taking Allstate public, largest
equity offering to date ($2.4 billion)
1995 Dow Jones Industrial Average breaks 4000
1996 Dow Jones Industrial Average breaks 6000
3-B
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
SERVICE SHARES
GOLDMAN SACHS GROWTH AND INCOME FUND
GOLDMAN SACHS CORE U.S. EQUITY FUND
GOLDMAN SACHS LARGE CAP GROWTH FUND
GOLDMAN SACHS MID CAP EQUITY FUND
GOLDMAN SACHS INTERNATIONAL EQUITY FUND
GOLDMAN SACHS EMERGING MARKETS EQUITY FUND
GOLDMAN SACHS ASIA GROWTH FUND
(EQUITY PORTFOLIOS OF GOLDMAN SACHS TRUST) One New York Plaza
New York, New York 10004
This Statement of Additional Information (the "Additional Statement") is not a
Prospectus. This Additional Statement should be read in conjunction with the
Prospectus for the Service Shares of Goldman Sachs Growth and Income Fund,
Goldman Sachs CORE U.S. Equity Fund, Goldman Sachs Large Cap Growth Fund,
Goldman Sachs Mid Cap Equity Fund, Goldman Sachs International Equity Fund,
Goldman Sachs Emerging Markets Equity Fund and Goldman Sachs Asia Growth Fund,
dated May 1, 1997, as amended and/or supplemented from time to time (the
"Prospectus"), which may be obtained without charge from institutions ("Service
Organizations") that hold Service Shares for the benefit of their customers,
Goldman, Sachs & Co. at the telephone number, or writing to one of the
addresses, listed below.
<TABLE>
<CAPTION>
TABLE OF CONTENTS Page
====
<S> <C>
Introduction.......................... B-3
Investment Policies................... B-4
Investment Restrictions............... B-32
Management............................ B-34
Portfolio Transactions and Brokerage.. B-48
Net Asset Value....................... B-53
Performance Information............... B-55
Shares of the Trust................... B-61
Taxation.............................. B-65
Financial Statements.................. B-71
Other Information..................... B-71
Distribution and Authorized Dealer
Service Plans....................... B-72
Other Information Regarding Purchases,
Redemptions, Exchanges and
Dividends........................... B-77
Service Plan.......................... B-78
Appendix A:........................... 1-A
</TABLE>
Appendix B:........................... 1-B
The date of this Additional Statement is May 1, 1997.
<PAGE>
GOLDMAN, SACHS & CO. GOLDMAN SACHS FUNDS
Distributor MANAGEMENT, L.P.
85 Broad Street Investment Adviser to
New York, New York 10004 Goldman Sachs CORE U.S. Equity Fund
One New York Plaza
GOLDMAN, SACHS & CO. New York, New York 10004
Transfer Agent
4900 Sears Tower GOLDMAN SACHS ASSET MANAGEMENT
Chicago, Illinois 60606 Investment Adviser to:
Goldman Sachs CORE Large Cap Growth Fund,
Goldman Sachs Growth and Income Fund,
GOLDMAN SACHS ASSET and Goldman Sachs Mid Cap Equity Fund
MANAGEMENT INTERNATIONAL One New York Plaza
Investment Adviser to: New York, New York 10004
Goldman Sachs International
Equity Fund
Goldman Sachs Emerging Markets
Equity Fund,
Goldman Sachs Asia Growth Fund
133 Peterborough
London, England EC4A 2BB
Toll free (in U.S.).......800-621-2550
<PAGE>
INTRODUCTION
Goldman Sachs Trust (the "Trust") is an open-end, management investment
company. The following series of the Trust are described in this Additional
Statement: Goldman Sachs Balanced Fund ("Balanced Fund"), Goldman Sachs Growth
and Income Fund ("Growth and Income Fund"), CORE U.S. Equity Fund ("CORE U.S.
Equity Fund")(formerly known as "Goldman Sachs Select Equity Fund"), Goldman
Sachs CORE Large Cap Growth Fund ("CORE Large Cap Growth Fund"), Goldman Sachs
Mid Cap Equity Fund ("Mid Cap Equity Fund"), Goldman Sachs Capital Growth Fund
("Capital Growth Fund"), Goldman Sachs International Equity Fund
("International Equity Fund"), Goldman Sachs Small Cap Equity Fund ("Small Cap
Equity Fund"), Goldman Sachs Emerging Markets Equity Fund ("Emerging Markets
Equity Fund") and Goldman Sachs Asia Growth Fund ("Asia Growth Fund")
(collectively referred to herein as the "Funds").
The Funds were initially organized as a series of a corporation formed under
the laws of the State of Maryland on September 27, 1989 and were reorganized as
a Delaware business trust as of April 30, 1997. The Trustees have authority
under the Trust's charter to create and classify shares into separate series and
to classify and reclassify any series or portfolio of shares into one or more
classes without further action by shareholders. Pursuant thereto, the Trustees
have created the Funds and other series. Additional series may be added in the
future from time to time. The Growth and Income, CORE U.S. Equity, CORE Large
Cap Growth, International Equity, Emerging Markets Equity and Asia Growth Funds
currently offer four classes of shares: Class A Shares, Class B Shares,
Institutional Shares and Service Shares. The Balanced, Capital Growth and Small
Cap Equity Funds currently offer two classes of shares: Class A and Class B
Shares. The Mid Cap Equity Fund currently offers two classes of shares:
Institutional Shares and Service Shares. See "Shares of the Trust."
Goldman Sachs Asset Management, ("GSAM") a separate operating division of
Goldman, Sachs & Co. ("Goldman Sachs"), serves as investment adviser to the
Balanced, Growth and Income, CORE Large Cap Growth, Mid Cap Equity and Small Cap
Equity Funds. Goldman Sachs Fund Management, L.P., ("GSFM") an affiliate of
Goldman Sachs, serves as investment adviser to the CORE U.S. Equity and Capital
Growth Funds. Goldman Sachs Asset Management International ("GSAMI"), an
affiliate of Goldman Sachs, serves as investment adviser to the International
Equity, Emerging Markets Equity and Asia Growth Funds. GSAM, GSFM and GSAMI
are sometimes referred to collectively herein as the "Advisers." Goldman Sachs
serves as each Fund's distributor and transfer agent. Each Fund's custodian is
State Street Bank and Trust Company ("State Street").
The following information relates to and supplements the description of each
Fund's investment policies contained in the Prospectus. See the Prospectus for
a fuller description of the Funds' investment objectives and policies. There is
no assurance that each Fund will achieve its objective.
B-3
<PAGE>
INVESTMENT POLICIES
Each Fund's share price will fluctuate with market, economic and, to the
extent applicable, foreign exchange conditions, so that an investment in any of
the Funds may be worth more or less when redeemed than when purchased. None of
the Funds should be relied upon as a complete investment program.
BALANCED FUND
=============
The investment objective of the Balanced Fund is to provide shareholders
with long-term capital growth and current income. The Balanced Fund seeks to
achieve its investment objective by investing in a balanced portfolio
diversified among both equity and fixed income securities.
Balanced Fund is intended to provide a foundation on which an investor can
build an investment portfolio or to serve as the core of an investment program,
depending on the investor's goals. Balanced Fund is designed for relatively
conservative investors who seek a combination of long-term capital growth and
current income in a single investment. Balanced Fund offers a portfolio of
equity and fixed income securities intended to provide less volatility than a
portfolio completely invested in equity securities and greater diversification
than a portfolio invested in only one asset class. Balanced Fund may be
appropriate for people who seek capital appreciation but are concerned about the
volatility typically associated with a fund that invests solely in stocks and
other equity securities.
FIXED INCOME STRATEGIES DESIGNED TO MAXIMIZE RETURN AND MANAGE RISK
GSAM's approach to managing the fixed income portion of Balanced Fund's
portfolio seeks to provide high returns relative to a market benchmark, the
Lehman Brothers Aggregate Bond Index, while also seeking to provide high current
income. This approach emphasizes (1) sector allocation strategies which enable
GSAM to tactically overweight or underweight one sector of the fixed-income
market (i.e., mortgages, corporate bonds, U.S. Treasuries, non-dollar bonds,
emerging market debt) versus another; (2) individual security selection based on
identifying relative value (fixed income securities inexpensive relative to
others in their sector); and (3) to a lesser extent, strategies based on GSAM's
expectation of the direction of interest rates or the spread between short-term
and long-term interest rates such as yield curve strategy.
GSAM seeks to manage fixed income portfolio risk in a number of ways. These
include diversifying the fixed income portion of the Balanced Fund's portfolio
among various types of fixed income securities and utilizing sophisticated
quantitative models to understand how the fixed income portion of the portfolio
will perform under a variety of market and economic scenarios. In addition,
GSAM uses extensive credit analysis to select and to monitor any investment-
grade or non-investment grade bonds that may be included in the Balanced Fund's
portfolio. In employing this and other investment strategies, the GSAM team has
access to extensive fundamental research and analysis available through Goldman
Sachs and a broad range of other sources.
A number of investment strategies will be used in selecting fixed income
securities for the Fund's portfolio. GSAM's fixed income investment philosophy
is to actively manage the portfolio within a risk-controlled framework. The
Adviser de-emphasizes interest rate anticipation by monitoring the duration of
the portfolio within a narrow range of the Adviser's target duration, and
instead focuses on seeking to add value through sector selection, security
selection and yield curve strategies.
MARKET SECTOR SELECTION. Market sector selection is the underweighting or
overweighting of one or more market sectors (i.e., U.S. Treasuries, U.S.
Government agency securities, corporate securities,
B-4
<PAGE>
mortgage-backed securities and asset-backed securities). GSAM may decide to
overweight or underweight a given market sector or subsector (e.g., within the
corporate sector, industrials, financial issuers and utilities) based on, among
other things, expectations of future yield spreads between different sectors or
subsectors.
ISSUER SELECTION. Issuer selection is the purchase and sale of corporate
securities based on a corporation's current and expected credit standing (within
the constraints imposed by Balanced Fund's minimum credit quality requirements).
This strategy focuses on four types of investment-grade corporate issuers.
Selection of securities from the first type of issuers -those with low but
stable credit - is intended to enhance total returns by providing incremental
yield. Selecting securities from the second type of issuers - those with low
and intermediate but improving credit quality - is intended to enhance total
returns in two stages. Initially, these securities are expected to provide
incremental yield. Eventually, price appreciation should occur relative to
alternative securities as credit quality improves, the nationally recognized
statistical rating organizations upgrade credit ratings, and credit spreads
narrow. Securities from the third type of issuers - issuers with deteriorating
credit quality - will be avoided, since total returns are typically enhanced by
avoiding the widening of credit spreads and the consequent relative price
depreciation. Finally, total returns can be enhanced by focusing on securities
that are rated differently by different rating organizations. If the securities
are trading in line with the higher published quality rating while GSAM concurs
with the lower published quality rating, the securities would generally be sold
and any potential price deterioration avoided. On the other hand, if the
securities are trading in line with the lower published quality rating while the
higher published quality rating is considered more realistic, the securities may
be purchased in anticipation of the expected market reevaluation and relative
price appreciation.
YIELD CURVE STRATEGY. Yield curve strategy consists of overweighting or
underweighting different maturity sectors relative to a benchmark to take
advantage of the shape of the yield curve. Three alternative maturity sector
selections are available: a "barbell" strategy in which short and long maturity
sectors are overweighted while intermediate maturity sectors are underweighted;
a "bullet" strategy in which, conversely, short-and long-maturity sectors are
underweighted while intermediate-maturity sectors are overweighted; and a
"neutral yield curve" strategy in which the maturity distribution mirrors that
of a benchmark.
CORE U.S. EQUITY AND CORE LARGE CAP GROWTH FUNDS
================================================
Under normal circumstances, the Funds will invest at least 90% of their
total assets in equity securities.
The investment strategy of the CORE U.S. Equity and CORE Large Cap Growth
Funds will be implemented to the extent it is consistent with maintaining a
Fund's qualification as a regulated investment company under the Internal
Revenue Code. A Fund's strategy may be limited, in particular, by the
requirement for such qualification that less than 30% of the Fund's gross income
for its taxable year be derived from the sale or other disposition of stocks or
securities or certain other investments (generally including options and futures
contracts) held for less than three months.
Since normal settlement for equity securities is three trading days, the
Funds will need to hold cash balances to satisfy shareholder redemption
requests. Such cash balances will normally range from 2% to 5% of a Fund's net
assets. The Funds may purchase futures contracts only with respect to the S&P
500 Index (in the case of CORE U.S. Equity Fund) and a representative index (in
the case of CORE Large Cap Growth Fund) in order to keep a Fund's effective
equity exposure close to 100%. For example, if cash balances are equal to 10%
of the net assets, the Fund may enter into long futures contracts covering an
amount equal to 10% of the Fund's net assets. As cash balances fluctuate based
on new contributions or withdrawals, a Fund may enter into additional contracts
or close out existing positions.
B-5
<PAGE>
THE MULTIFACTOR MODEL. The Multifactor Model is a rigorous computerized
rating system for evaluating equity securities according to a variety of
investment characteristics (or factors). The factors used by the Multifactor
Model incorporate many variables studied by traditional fundamental analysts and
cover measures of value, growth, momentum, risk (e.g. price/earnings ratio,
book/price ratio, growth forecasts, earning estimate revisions, price momentum,
volatility and earnings stability). All of these factors have been shown to
significantly impact the performance of equity securities.
Because it includes many disparate factors, the Adviser believes that the
Multifactor Model is broader in scope and provides a more thorough evaluation
than most conventional, value-oriented quantitative models. As a result, the
securities ranked highest by the Multifactor Model do not have one dominant
investment characteristic (such as a low price/earnings ratio); rather, such
securities possess many different investment characteristics. By using a
variety of relevant factors to select securities, the Adviser believes that the
Fund will be better balanced and have more consistent performance than an
investment portfolio that uses only one or two factors to select securities.
The Adviser will monitor, and may occasionally suggest and make changes to,
the method by which securities are selected for or weighted in the Fund. Such
changes (which may be the result of changes in the Multifactor Model or the
method of applying the Multifactor Model) may include: (i) evolutionary changes
to the structure of the Multifactor Model (e.g., the addition of new factors or
a new means of weighting the factors); (ii) changes in trading procedures (e.g.,
trading frequency or the manner in which the Fund uses futures); or (iii)
changes in the method by which securities are weighted in the Fund. Any such
changes will preserve the Fund's basic investment philosophy of combining
qualitative and quantitative methods of selecting securities using a disciplined
investment process.
INTERNATIONAL EQUITY FUND
=========================
International Equity Fund will seek to achieve its investment objective by
investing primarily in equity and equity-related securities of issuers that are
organized outside the United States or whose securities are principally traded
outside the United States. Because research coverage outside the United States
is fragmented and relatively unsophisticated, many foreign companies that are
well-positioned to grow and prosper have not come to the attention of investors.
GSAMI believes that the high historical returns and less efficient pricing of
foreign markets create favorable conditions for International Equity Fund's
highly focused investment approach. For a description of the risks of the
International Equity Fund's investments in Asia, see "Investing in Emerging
Markets, including Asia."
A RIGOROUS PROCESS OF STOCK SELECTION. Using fundamental industry and
company research, GSAMI's equity team in London, Singapore and Tokyo seeks to
identify companies that may achieve superior long-term returns. Stocks are
carefully selected for International Equity Fund's portfolio through a three-
stage investment process. Because International Equity Fund is a long-term
holder of stocks, the portfolio managers adjust International Equity Fund's
portfolio only when expected returns fall below acceptable levels or when the
portfolio managers identify substantially more attractive investments.
Using the research of Goldman Sachs as well as information gathered from
other sources in Europe and the Asia-Pacific region, the Adviser seeks to
identify attractive industries around the world. Such industries are expected
to have favorable underlying economics and allow companies to generate
sustainable and predictable high returns. As a rule, they are less economically
sensitive, relatively free of regulation and favor strong franchises.
Within these industries the Adviser seeks to identify well-run companies
that enjoy a stable competitive advantage and are able to benefit from the
favorable dynamics of the industry. This stage includes analyzing the current
and expected financial performance of the company; contacting suppliers,
B-6
<PAGE>
customers and competitors; and meeting with management. In particular, the
portfolio managers look for companies whose managers have a strong commitment to
both maintaining the high returns of the existing business and reinvesting the
capital generated at high rates of return. Management should act in the
interests of the owners and seek to maximize returns to all stockholders.
GSAMI's currency team manages the foreign exchange risk embedded in foreign
equities by means of a currency overlay program. The program may be utilized to
protect the value of foreign investments in sustained periods of dollar
appreciation and to add returns by seeking to take advantage of foreign exchange
fluctuations.
The members of GSAMI's international equity team bring together years of
experience in analyzing and investing in companies in Europe and the Asia-
Pacific region. Their expertise spans a wide range of skills including
investment analysis, investment management, investment banking and business
consulting. GSAM's worldwide staff of over 300 professionals includes portfolio
managers based in London, Singapore and Tokyo who bring firsthand knowledge of
their local markets and companies to every investment decision.
CORPORATE DEBT OBLIGATIONS
==========================
Each Fund may, under normal market conditions, invest in corporate debt
obligations, including obligations of industrial, utility and financial issuers.
CORE U.S. Equity and Core Large Cap Growth Funds may only invest in debt
securities that are cash equivalents. Corporate debt obligations are subject to
the risk of an issuer's inability to meet principal and interest payments on the
obligations and may also be subject to price volatility due to such factors as
market interest rates, market perception of the creditworthiness of the issuer
and general market liquidity.
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 a Fund's net asset value to
the extent it invests in such securities. In addition, a 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 Balanced, Growth and Income, Capital Growth, Mid Cap Equity, Small
Cap Equity, Emerging Markets Equity and Asia Growth Funds to dispose of a
particular security when necessary to meet their 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
Advisers 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 a Fund's net
asset value.
Since investors generally perceive that there are greater risks associated
with the medium to lower rated securities of the type in which Balanced, Growth
and Income, Capital Growth, Mid Cap Equity, Small Cap Equity, Emerging Markets
Equity and Asia Growth Funds may invest, the yields and prices of such
securities may tend to fluctuate more than those for higher rated securities.
In the lower quality segments of the fixed-income securities market, changes in
perceptions of issuers' creditworthiness tend to occur more frequently and in a
more pronounced manner than do changes in higher quality segments of the fixed-
income securities market, resulting in greater yield and price volatility.
B-7
<PAGE>
Another factor which causes fluctuations in the prices of fixed-income
securities is the supply and demand for similarly rated securities. In
addition, the prices of fixed-income securities fluctuate in response to the
general level of interest rates. Fluctuations in the prices of portfolio
securities subsequent to their acquisition will not affect cash income from such
securities but will be reflected in a Fund's net asset value.
Medium to lower rated and comparable non-rated securities tend to offer
higher yields than higher rated securities with the same maturities because the
historical financial condition of the issuers of such securities may not have
been as strong as that of other issuers. Since medium to lower rated securities
generally involve greater risks of loss of income and principal than higher
rated securities, investors should consider carefully the relative risks
associated with investment in securities which carry medium to lower ratings and
in comparable unrated securities. In addition to the risk of default, there are
the related costs of recovery on defaulted issues. The Advisers will attempt to
reduce these risks through portfolio diversification and by analysis of each
issuer and its ability to make timely payments of income and principal, as well
as broad economic trends and corporate developments.
ZERO COUPON BONDS
=================
A Fund's investments in fixed income securities may include zero coupon
bonds, which are debt obligations issued or purchased at a significant discount
from face value. The discount approximates the total amount of interest the
bonds would have accrued and compounded over the period until maturity. Zero
coupon bonds do not require the periodic payment of interest. Such investments
benefit the issuer by mitigating its need for cash to meet debt service but also
require a higher rate of return to attract investors who are willing to defer
receipt of such cash. Such investments may experience greater volatility in
market value than debt obligations which provide for regular payments of
interest. In addition, if an issuer of zero coupon bonds held by a Fund
defaults, the Fund may obtain no return at all on its investment. Each Fund
will accrue income on such investments for each taxable year which (net of
deductible expenses, if any) is distributable to shareholders and which, because
no cash is generally received at the time of accrual, may require the
liquidation of other portfolio securities to obtain sufficient cash to satisfy
the Fund's distribution obligations. See "Taxation."
VARIABLE AND FLOATING RATE SECURITIES
=====================================
The interest rates payable on certain fixed income securities in which a
Fund may invest are not fixed and may fluctuate based upon changes in market
rates. A variable rate obligation has an interest rate which is adjusted at
predesignated periods in response to changes in the market rate of interest on
which the interest rate is based. Variable and floating rate obligations are
less effective than fixed rate instruments at locking in a particular yield.
Nevertheless, such obligations may fluctuate in value in response to interest
rate changes if there is a delay between changes in market interest rates and
the interest reset date for the obligation.
CUSTODIAL RECEIPTS
==================
Each Fund may invest up to 5% of its net assets in custodial receipts in
respect of securities issued or guaranteed as to principal and interest by the
U.S. Government, its agencies, instrumentalities, political subdivisions or
authorities. Such custodial receipts evidence ownership of future interest
payments, principal payments or both on certain notes or bonds issued by the
U.S. Government, its agencies, instrumentalities, political subdivisions or
authorities. These custodial receipts are known by various names, including
"Treasury Receipts," "Treasury Investors Growth Receipts" ("TIGRs"), and
"Certificates of Accrual on Treasury Securities" ("CATs"). For certain
securities law purposes, custodial receipts are not considered U.S. Government
securities.
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<PAGE>
MUNICIPAL SECURITIES
====================
Balanced Fund may invest up to 5% of its net assets in municipal securities.
Municipal securities consist of bonds, notes and other instruments issued by or
on behalf of states, territories and possessions of the United States (including
the District of Columbia) and their political subdivisions, agencies or
instrumentalities, the interest on which is exempt from regular federal income
tax. Municipal securities are often issued to obtain funds for various public
purposes. Municipal securities also include "private activity bonds" or
industrial development bonds, which are issued by or on behalf of public
authorities to obtain funds for privately operated facilities, such as airports
and waste disposal facilities, and, in some cases, commercial and industrial
facilities.
The yields and market values of municipal securities are determined
primarily by the general level of interest rates, the creditworthiness of the
issuers of municipal securities and economic and political conditions affecting
such issuers. Due to their tax exempt status, the yields and market prices of
municipal securities may be adversely affected by changes in tax rates and
policies, which may have less effect on the market for taxable fixed income
securities. Moreover, certain types of municipal securities, such as housing
revenue bonds, involve prepayment risks which could affect the yield on such
securities.
Investments in municipal securities are subject to the risk that the issuer
could default on its obligations. Such a default could result from the
inadequacy of the sources or revenues from which interest and principal payments
are to be made or the assets collateralizing such obligations. Revenue bonds,
including private activity bonds, are backed only by specific assets or revenue
sources and not by the full faith and credit of the governmental issuer.
MORTGAGE-BACKED SECURITIES
==========================
GENERAL CHARACTERISTICS. Each Fund (other than CORE U.S. Equity and CORE
Large Cap Growth Funds) may invest in mortgage-backed securities. Each mortgage
pool underlying mortgage-backed securities consists of mortgage loans evidenced
by promissory notes secured by first mortgages or first deeds of trust or other
similar security instruments creating a first lien on owner occupied and non-
owner occupied one-unit to four-unit residential properties, multifamily (i.e.,
five or more) properties, agriculture properties, commercial properties and
mixed use properties (the "Mortgaged Properties"). The Mortgaged Properties may
consist of detached individual dwelling units, multifamily dwelling units,
individual condominiums, townhouses, duplexes, triplexes, fourplexes, row
houses, individual units in planned unit developments and other attached
dwelling units. The Mortgaged Properties may also include residential
investment properties and second homes.
The investment characteristics of adjustable and fixed rate mortgage-backed
securities differ from those of traditional fixed income securities. The major
differences include the payment of interest and principal on mortgage-backed
securities on a more frequent (usually monthly) schedule, and the possibility
that principal may be prepaid at any time due to prepayments on the underlying
mortgage loans or other assets. These differences can result in significantly
greater price and yield volatility than is the case with traditional fixed
income securities. As a result, if a Fund purchases mortgage-backed securities
at a premium, a faster than expected prepayment rate will reduce both the market
value and the yield to maturity from those which were anticipated. A prepayment
rate that is slower than expected will have the opposite effect of increasing
yield to maturity and market value. Conversely, if a Fund purchases mortgage-
backed securities at a discount, faster than expected prepayments will increase,
while slower than expected prepayments will reduce yield to maturity and market
values. To the extent that a Fund invests in mortgage-backed securities, the
Advisers may seek to manage these potential risks by investing in a variety of
mortgage-backed securities and by using certain hedging techniques.
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<PAGE>
GOVERNMENT GUARANTEED MORTGAGE-BACKED SECURITIES. There are several types
of guaranteed mortgage-backed securities currently available, including
guaranteed mortgage pass-through certificates and multiple class securities,
which include guaranteed Real Estate Mortgage Investment Conduit Certificates
("REMIC Certificates"), collateralized mortgage obligations and stripped
mortgage-backed securities. A Fund is permitted to invest in other types of
mortgage-backed securities that may be available in the future to the extent
consistent with its investment policies and objective.
A Fund's investments in mortgage-backed securities may include securities
issued or guaranteed by the U.S. Government or one of its agencies, authorities,
instrumentalities or sponsored enterprises, such as the Government National
Mortgage Association ("Ginnie Mae"), the Federal National Mortgage Association
("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac").
GINNIE MAE CERTIFICATES. Ginnie Mae is a wholly-owned corporate
instrumentality of the United States. Ginnie Mae is authorized to guarantee the
timely payment of the principal of and interest on certificates that are based
on and backed by a pool of mortgage loans insured by the Federal Housing
Administration ("FHA Loans"), or guaranteed by the Veterans Administration ("VA
Loans"), or by pools of other eligible mortgage loans. In order to meet its
obligations under any guaranty, Ginnie Mae is authorized to borrow from the
United States Treasury in an unlimited amount.
FANNIE MAE CERTIFICATES. Fannie Mae is a stockholder-owned corporation
chartered under an act of the United States Congress. Each Fannie Mae
Certificate is issued and guaranteed by Fannie Mae and represents an undivided
interest in a pool of mortgage loans (a "Pool") formed by Fannie Mae. Each Pool
consists of residential mortgage loans ("Mortgage Loans") either previously
owned by Fannie Mae or purchased by it in connection with the formation of the
Pool. The Mortgage Loans may be either conventional Mortgage Loans (i.e., not
insured or guaranteed by any U.S. Government agency) or Mortgage Loans that are
either insured by the Federal Housing Administration ("FHA") or guaranteed by
the Veterans Administration ("VA"). However, the Mortgage Loans in Fannie Mae
Pools are primarily conventional Mortgage Loans. The lenders originating and
servicing the Mortgage Loans are subject to certain eligibility requirements
established by Fannie Mae.
Fannie Mae has certain contractual responsibilities. With respect to each
Pool, Fannie Mae is obligated to distribute scheduled monthly installments of
principal and interest after Fannie Mae's servicing and guaranty fee, whether or
not received, to Certificate holders. Fannie Mae 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. Each Fund (other than CORE U.S. Equity
and CORE Large Cap Growth Funds) may invest in both government guaranteed and
privately issued mortgage pass-through securities ("Mortgage Pass-Throughs");
that is, fixed or adjustable rate mortgage-backed securities which provide for
monthly payments that are a "pass-through" of the monthly interest and principal
payments (including any prepayments) made by the individual borrowers on the
pooled mortgage loans, net of any fees or other amounts paid to any guarantor,
administrator and/or servicer of the underlying mortgage loans.
The following discussion describes only a few of the wide variety of
structures of Mortgage Pass-Throughs that are available or may be issued.
DESCRIPTION OF CERTIFICATES. Mortgage Pass-Throughs may be issued in one or
more classes of senior certificates and one or more classes of subordinate
certificates. Each such class may bear a different pass-through rate.
Generally, each certificate will evidence the specified interest of the holder
thereof in the payments of principal or interest or both in respect of the
mortgage pool comprising part of the trust fund for such certificates.
Any class of certificates may also be divided into subclasses entitled to
varying amounts of principal and interest. If a REMIC election has been made,
certificates of such subclasses may be entitled to payments on the basis of a
stated principal balance and stated interest rate, and payments among different
subclasses may be made on a sequential, concurrent, pro rata or disproportionate
--- ----
basis, or any combination thereof. The stated interest rate on any such
subclass of certificates may be a fixed rate or one which varies in direct or
inverse relationship to an objective interest index.
Generally, each registered holder of a certificate will be entitled to
receive its pro rata share of monthly distributions of all or a portion of
--- ----
principal of the underlying mortgage loans or of interest on the principal
balances thereof, which accrues at the applicable mortgage pass-through rate, or
both. The difference between the mortgage interest rate and the related
mortgage pass-through rate (less the amount, if any, of retained yield) with
respect to each mortgage loan will generally be paid to the servicer as a
servicing fee. Since certain adjustable rate mortgage loans included in a
mortgage pool may provide for deferred interest (i.e., negative amortization),
the amount of interest actually paid by a mortgagor in any month may be less
than the amount of interest accrued on the outstanding principal balance of the
related mortgage loan during the relevant period at the applicable mortgage
interest rate. In such event, the amount of interest that is treated as
deferred interest will be added to the principal balance of the related mortgage
loan and will be distributed pro rata to certificate-holders as principal of
--- ----
such mortgage loan when paid by the mortgagor in subsequent monthly payments or
at maturity.
RATINGS. The ratings assigned by a rating organization to Mortgage Pass-
Throughs address the likelihood of the receipt of all distributions on the
underlying mortgage loans by the 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
B-11
<PAGE>
rating organization's ratings on such certificates do not, however, constitute a
statement regarding frequency of prepayments on the related mortgage loans. In
addition, the rating assigned by a rating organization to a certificate does not
address the remote possibility that, in the event of the insolvency of the
issuer of certificates where a subordinated interest was retained, the issuance
and sale of the senior certificates may be recharacterized as a financing and,
as a result of such recharacterization, payments on such certificates may be
affected.
CREDIT ENHANCEMENT. Credit support falls generally into two categories:
(i) liquidity protection and (ii) protection against losses resulting from
default by an obligor on the underlying assets. Liquidity protection refers to
the provision of advances, generally by the entity administering the pools of
mortgages, the provision of a reserve fund, or a combination thereof, to ensure,
subject to certain limitations, that scheduled payments on the underlying pool
are made in a timely fashion. Protection against losses resulting from default
ensures ultimate payment of the obligations on at least a portion of the assets
in the pool. Such credit support can be provided by among other things, payment
guarantees, letters of credit, pool insurance, subordination, or any combination
thereof.
SUBORDINATION; SHIFTING OF INTEREST; RESERVE FUND. In order to achieve
ratings on one or more classes of Mortgage Pass-Throughs, one or more classes of
certificates may be subordinate certificates which provide that the rights of
the subordinate certificate-holders to receive any or a specified portion of
distributions with respect to the underlying mortgage loans may be subordinated
to the rights of the senior certificate-holders. If so structured, the
subordination feature may be enhanced by distributing to the senior certificate-
holders on certain distribution dates, as payment of principal, a specified
percentage (which generally declines over time) of all principal payments
received during the preceding prepayment period ("shifting interest credit
enhancement"). This will have the effect of accelerating the amortization of
the senior certificates while increasing the interest in the trust fund
evidenced by the subordinate certificates. Increasing the interest of the
subordinate certificates relative to that of the senior certificates is intended
to preserve the availability of the subordination provided by the subordinate
certificates. In addition, because the senior certificate-holders in a shifting
interest credit enhancement structure are entitled to receive a percentage of
principal prepayments which is greater than their proportionate interest in the
trust fund, the rate of principal prepayments on the mortgage loans will have an
even greater effect on the rate of principal payments and the amount of interest
payments on, and the yield to maturity of, the senior certificates.
In addition to providing for a preferential right of the senior certificate-
holders to receive current distributions from the mortgage pool, a reserve fund
may be established relating to such certificates (the "Reserve Fund"). The
Reserve Fund may be created with an initial cash deposit by the originator or
servicer and augmented by the retention of distributions otherwise available to
the subordinate certificate-holders or by excess servicing fees until the
Reserve Fund reaches a specified amount.
The subordination feature, and any Reserve Fund, are intended to enhance the
likelihood of timely receipt by senior certificate-holders of the full amount of
scheduled monthly payments of principal and interest due them and will protect
the senior certificate-holders against certain losses; however, in certain
circumstances the Reserve Fund could be depleted and temporary shortfalls could
result. In the event the Reserve Fund is depleted before the subordinated
amount is reduced to zero, senior certificate-holders will nevertheless have a
preferential right to receive current distributions from the mortgage pool to
the extent of the then outstanding subordinated amount. Unless otherwise
specified, until the subordinated amount is reduced to zero, on any distribution
date any amount otherwise distributable to the subordinate certificates or, to
the extent specified, in the Reserve Fund will generally be used to offset the
amount of any losses realized with respect to the mortgage loans ("Realized
Losses"). Realized Losses remaining after application of such amounts will
generally be applied to reduce the ownership interest of the subordinate
certificates in the mortgage pool. If the subordinated amount has been reduced
to zero,
B-12
<PAGE>
Realized Losses generally will be allocated pro rata among all certificate-
--- ----
holders in proportion to their respective outstanding interests in the mortgage
pool.
ALTERNATIVE CREDIT ENHANCEMENT. As an alternative, or in addition to the
credit enhancement afforded by subordination, credit enhancement for Mortgage
Pass-Throughs may be provided by mortgage insurance, hazard insurance, by the
deposit of cash, certificates of deposit, letters of credit, a limited guaranty
or by such other methods as are acceptable to a rating agency. In certain
circumstances, such as where credit enhancement is provided by guarantees or a
letter of credit, the security is subject to credit risk because of its exposure
to an external credit enhancement provider.
VOLUNTARY ADVANCES. Generally, in the event of delinquencies in payments on
the mortgage loans underlying the Mortgage Pass-Throughs, the servicer agrees to
make advances of cash for the benefit of certificate-holders, but only to the
extent that it determines such voluntary advances will be recoverable from
future payments and collections on the mortgage loans or otherwise.
OPTIONAL TERMINATION. Generally, the servicer may, at its option with
respect to any certificates, repurchase all of the underlying mortgage loans
remaining outstanding at such time as the aggregate outstanding principal
balance of such mortgage loans is less than a specified percentage (generally 5-
10%) of the aggregate outstanding principal balance of the mortgage loans as of
the cut-off date specified with respect to such series.
MULTIPLE CLASS MORTGAGE-BACKED SECURITIES AND COLLATERALIZED MORTGAGE
OBLIGATIONS. A Fund may invest in multiple class securities including
collateralized mortgage obligations ("CMOs") and REMIC Certificates. These
securities may be issued by U.S. Government agencies and instrumentalities such
as Fannie Mae or Freddie Mac or by trusts formed by private originators of, or
investors in, mortgage loans, including savings and loan associations, mortgage
bankers, commercial banks, insurance companies, investment banks and special
purpose subsidiaries of the foregoing. In general, CMOs are debt obligations of
a legal entity that are collateralized by, and multiple class mortgage-backed
securities represent direct ownership interests in, a pool of mortgage loans or
mortgage-backed securities the payments on which are used to make payments on
the CMOs or multiple class mortgage-backed securities.
Fannie Mae REMIC Certificates are issued and guaranteed as to timely
distribution of principal and interest by Fannie Mae. In addition, Fannie Mae
will be obligated to distribute the principal balance of each class of REMIC
Certificates in full, whether or not sufficient funds are otherwise available.
Freddie Mac guarantees the timely payment of interest on Freddie Mac REMIC
Certificates and also guarantees the payment of principal as payments are
required to be made on the underlying mortgage participation certificates
("PCs"). PCs represent undivided interests in specified level payment,
residential mortgages or 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 Funds do not intend to purchase residual interests in
REMICs. The REMIC Certificates represent beneficial ownership interests in a
REMIC trust, generally consisting of mortgage loans or Fannie Mae, Freddie Mac
or Ginnie Mae guaranteed mortgage-backed securities (the "Mortgage Assets").
The obligations of Fannie Mae or Freddie Mac under their
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<PAGE>
respective guaranty of the REMIC Certificates are obligations solely of Fannie
Mae or Freddie Mac, respectively.
CMOs and REMIC Certificates are issued in multiple classes. Each class of
CMOs or REMIC Certificates, often referred to as a "tranche," is issued at a
specific adjustable or fixed interest rate and must be fully retired no later
than its final distribution date. Principal prepayments on the Mortgage Loans
or the Mortgage Assets underlying the CMOs or REMIC Certificates may cause some
or all of the classes of CMOs or REMIC Certificates to be retired substantially
earlier than their final distribution dates. Generally, interest is paid or
accrues on all classes of CMOs or REMIC Certificates on a monthly basis.
The principal of and interest on the Mortgage Assets may be allocated among
the several classes of CMOs or REMIC Certificates in various ways. In certain
structures (known as "sequential pay" CMOs or REMIC Certificates), payments of
principal, including any principal prepayments, on the Mortgage Assets generally
are applied to the classes of CMOs or REMIC Certificates in the order of their
respective final distribution dates. Thus, no payment of principal will be made
on any class of sequential pay CMOs or REMIC Certificates until all other
classes having an earlier final distribution date have been paid in full.
Additional structures of CMOs and REMIC Certificates include, among others,
"parallel pay" CMOs and REMIC Certificates. Parallel pay CMOs or REMIC
Certificates are those which are structured to apply principal payments and
prepayments of the Mortgage Assets to two or more classes concurrently on a
proportionate or disproportionate basis. These simultaneous payments are taken
into account in calculating the final distribution date of each class.
A wide variety of REMIC Certificates may be issued in parallel pay or
sequential pay structures. These securities include accrual certificates (also
known as "Z-Bonds"), which only accrue interest at a specified rate until all
other certificates having an earlier final distribution date have been retired
and are converted thereafter to an interest-paying security, and planned
amortization class ("PAC") certificates, which are parallel pay REMIC
Certificates that generally require that specified amounts of principal be
applied on each payment date to one or more classes or REMIC Certificates (the
"PAC Certificates"), even though all other principal payments and prepayments of
the Mortgage Assets are then required to be applied to one or more other classes
of the Certificates. The scheduled principal payments for the PAC Certificates
generally have the highest priority on each payment date after interest due has
been paid to all classes entitled to receive interest currently. Shortfalls, if
any, are added to the amount payable on the next payment date. The PAC
Certificate payment schedule is taken into account in calculating the final
distribution date of each class of PAC. In order to create PAC tranches, one or
more tranches generally must be created that absorb most of the volatility in
the underlying mortgage assets. These tranches tend to have market prices and
yields that are much more volatile than other PAC classes.
STRIPPED MORTGAGE-BACKED SECURITIES. Balanced Fund may invest in stripped
mortgage-backed securities ("SMBS"), which are derivative multiclass mortgage
securities. Although the market for such securities is increasingly liquid,
certain SMBS may not be readily marketable and will be considered illiquid for
purposes of the Fund's limitation on investments in illiquid securities. The
market value of the class consisting entirely of principal payments generally is
unusually volatile in response to changes in interest rates. The yields on a
class of SMBS that receives all or most of the interest from Mortgage Assets are
generally higher than prevailing market yields on other mortgage-backed
securities because their cash flow patterns are more volatile and there is a
greater risk that the initial investment will not be fully recouped.
INVERSE FLOATING RATE SECURITIES
================================
Balanced Fund may invest up to 5% of its net assets in leveraged inverse
floating rate debt instruments ("inverse floaters"). The interest rate on an
inverse floater resets in the opposite direction from
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<PAGE>
the market rate of interest to which the inverse floater is indexed . An
inverse floater may be considered to be leveraged to the extent that its
interest rate varies by a magnitude that exceeds the magnitude of the change in
the index rate of interest. The higher degree of leverage inherent in inverse
floaters is associated with greater volatility in their market values.
Accordingly, the duration of an inverse floater may exceed its stated final
maturity. Certain inverse floaters may be deemed to be illiquid securities for
purposes of the Fund's 15% limitation on investments in such securities.
ASSET-BACKED SECURITIES
=======================
Asset-backed securities represent participation in, or are secured by and
payable from, assets such as motor vehicle installment sales, installment loan
contracts, leases of various types of real and personal property, receivables
from revolving credit (credit card) agreements and other categories of
receivables. Such assets are securitized through the use of trusts and special
purpose corporations. Payments or distributions of principal and interest may be
guaranteed up to certain amounts and for a certain time period by a letter of
credit or a pool insurance policy issued by a financial institution unaffiliated
with the trust or corporation, or other credit enhancements may be present.
Like mortgage-backed securities, asset-backed securities are often subject
to more rapid repayment than their stated maturity date would indicate as a
result of the pass-through of prepayments of principal on the underlying loans.
A Fund's ability to maintain positions in such securities will be affected by
reductions in the principal amount of such securities resulting from
prepayments, and its ability to reinvest the returns of principal at comparable
yields is subject to generally prevailing interest rates at that time. To the
extent that a Fund invests in asset-backed securities, the values of such Fund's
portfolio securities will vary with changes in market interest rates generally
and the differentials in yields among various kinds of asset-backed securities.
Asset-backed securities present certain additional risks that are not
presented by mortgage-backed securities because asset-backed securities
generally do not have the benefit of a security interest in collateral that is
comparable to mortgage assets. Credit card receivables are generally unsecured
and the debtors on such receivables are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set-off certain amounts owed on the credit cards, thereby reducing the
balance due. Automobile receivables generally are secured, but by automobiles
rather than residential real property. Most issuers of automobile receivables
permit the loan servicers to retain possession of the underlying obligations.
If the servicer were to sell these obligations to another party, there is a
risk that the purchaser would acquire an interest superior to that of the
holders of the asset-backed securities. In addition, because of the large
number of vehicles involved in a typical issuance and technical requirements
under state laws, the trustee for the holders of the automobile receivables may
not have a proper security interest in the underlying automobiles. Therefore,
there is the possibility that, in some cases, recoveries on repossessed
collateral may not be available to support payments on these securities.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
==================================================
Each Fund may purchase and sell futures contracts and may also purchase and
write options on futures contracts. CORE U.S. Equity and CORE Large Cap Growth
Funds may only enter into such transactions with respect to the S&P 500 Index,
for the CORE U.S. Equity Fund and a respective index in the case of the CORE
Large Cap Growth Fund. The other Funds may purchase and sell futures contracts
based on various securities (such as U.S. Government securities), securities
indices, foreign currencies and other financial instruments and indices. Each
Fund will engage in futures and related options transactions, only for bona fide
hedging purposes as defined below or for purposes of seeking to increase total
return to the extent permitted by regulations of the Commodity Futures Trading
Commission
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<PAGE>
("CFTC"). All futures contracts entered into by a Fund are traded on U.S.
exchanges or boards of trade that are licensed and regulated by the CFTC or on
foreign exchanges.
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).
When interest rates are rising or securities prices are falling, a Fund can
seek through the sale of futures contracts to offset a decline in the value of
its current portfolio securities. When rates are falling or prices are rising,
a Fund, through the purchase of futures contracts, can attempt to secure better
rates or prices than might later be available in the market when it effects
anticipated purchases. Similarly, each Fund (other than CORE U.S. Equity and
CORE Large Cap Growth Funds) can sell futures contracts on a specified currency
to protect against a decline in the value of such currency and its portfolio
securities which are quoted or denominated in such currency. Each Fund (other
than CORE U.S. Equity and CORE Large Cap Growth Funds) can purchase futures
contracts on foreign currency to establish the price in U.S. dollars of a
security quoted or denominated in such currency that such Fund has acquired or
expects to acquire.
Positions taken in the futures market are not normally held to maturity, but
are instead liquidated through offsetting transactions which may result in a
profit or a loss. While each Fund will usually liquidate futures contracts on
securities or currency in this manner, a Fund may instead make or take delivery
of the underlying securities or currency whenever it appears economically
advantageous for the Fund to do so. A clearing corporation associated with the
exchange on which futures are traded guarantees that, if still open, the sale or
purchase will be performed on the settlement date.
HEDGING STRATEGIES. Hedging, by use of futures contracts, seeks to
establish with more certainty than would otherwise be possible the effective
price, rate of return or currency exchange rate on portfolio securities or
securities that a Fund owns or proposes to acquire. A Fund may, for example,
take a "short" position in the futures market by selling futures contracts to
seek to hedge against an anticipated rise in interest rates or a decline in
market prices or (other than CORE U.S. Equity and CORE Large Cap Growth Funds)
foreign currency rates that would adversely affect the dollar value of such
Fund's portfolio securities. Similarly, each Fund (other than CORE U.S. Equity
and CORE Large Cap Growth Funds) may sell futures contracts on a currency in
which its portfolio securities are quoted or denominated or in one currency to
seek to hedge against fluctuations in the value of securities quoted or
denominated in a different currency if there is an established historical
pattern of correlation between the two currencies. If, in the opinion of the
applicable Adviser, there is a sufficient degree of correlation between price
trends for a Fund's portfolio securities and futures contracts based on other
financial instruments, securities indices or other indices, a Fund may also
enter into such futures contracts as part of its hedging strategy. Although
under some circumstances prices of securities in a Fund's portfolio may be more
or less volatile than prices of such futures contracts, the Advisers will
attempt to estimate the extent of this volatility difference based on historical
patterns and compensate for any such differential by having a Fund enter into a
greater or lesser number of futures contracts or by attempting to achieve only a
partial hedge against price changes affecting a Fund's securities portfolio.
When hedging of this character is successful, any depreciation in the value of
portfolio securities will be substantially offset by appreciation in the value
of the futures position. On the other hand, any unanticipated appreciation in
the value of a Fund's portfolio securities would be substantially offset by a
decline in the value of the futures position.
On other occasions, a Fund may take a "long" position by purchasing such
futures contracts. This would be done, for example, when a Fund anticipates the
subsequent purchase of particular securities
B-16
<PAGE>
when it has the necessary cash, but expects the prices or currency exchange
rates then available in the applicable market to be less favorable than prices
or rates that are currently available.
OPTIONS ON FUTURES CONTRACTS. The acquisition of put and call options on
futures contracts will give a Fund the right (but not the obligation), for a
specified price, to sell or to purchase, respectively, the underlying futures
contract at any time during the option period. As the purchaser of an option on
a futures contract, a Fund obtains the benefit of the futures position if prices
move in a favorable direction but limits its risk of loss in the event of an
unfavorable price movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium which
may partially offset a decline in the value of a Fund's assets. By writing a
call option, a Fund becomes obligated, in exchange for the premium, to sell a
futures contract if the option is exercised, which may have a value higher than
the exercise price. Conversely, the writing of a put option on a futures
contract generates a premium, which may partially offset an increase in the
price of securities that a Fund intends to purchase. However, a Fund becomes
obligated to purchase a futures contract if the option is exercised, which may
have a value lower than the exercise price. Thus, the loss incurred by a Fund
in writing options on futures is potentially unlimited and may exceed the amount
of the premium received. A Fund will incur transaction costs in connection with
the writing of options on futures.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option on the same financial
instrument. There is no guarantee that such closing transactions can be
effected. A Fund's ability to establish and close out positions on such options
will be subject to the development and maintenance of a liquid market.
OTHER CONSIDERATIONS. Each Fund will engage in futures transactions and
will engage in related options transactions only for bona fide hedging as
defined in the regulations of the CFTC or to seek to increase total return to
the extent permitted by such regulations. A Fund will determine that the price
fluctuations in the futures contracts and options on futures used for hedging
purposes are substantially related to price fluctuations in securities held by
the Fund or which it expects to purchase. Except as stated below, each Fund's
futures transactions will be entered into for traditional hedging purposes --
i.e., futures contracts will be sold to protect against a decline in the price
of securities (or the currency in which they are quoted or denominated) that the
Fund owns, or futures contracts will be purchased to protect the Fund against an
increase in the price of securities (or the currency in which they are quoted or
denominated) it intends to purchase. As evidence of this hedging intent, each
Fund expects that on 75% or more of the occasions on which it takes a long
futures or option position (involving the purchase of futures contracts), the
Fund will have purchased, or will be in the process of purchasing, equivalent
amounts of related securities (or assets quoted or denominated in the related
currency) in the cash market at the time when the futures or options position is
closed out. However, in particular cases, when it is economically advantageous
for a Fund to do so, a long futures position may be terminated or an option may
expire without the corresponding purchase of securities or other assets.
As an alternative to literal compliance with the bona fide hedging
definition, a CFTC regulation permits a Fund to elect to comply with a different
test. Under this test the aggregate initial margin and premiums required to
establish positions in futures contracts and options on futures to seek to
increase total return may not exceed 5% of the net asset value of such Fund's
portfolio, after taking into account unrealized profits and losses on any such
positions and excluding the amount by which such options were in-the-money at
the time of purchase. A Fund will engage in transactions in currency forward
contracts futures contracts and, for a Fund permitted to do so, related options
transactions only to the extent such transactions are consistent with the
requirements of the Code for maintaining its qualification as a regulated
investment company for federal income tax purposes (see "Taxation").
B-17
<PAGE>
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating a Fund to purchase securities or currencies, require the Fund to
segregate 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 a Fund than if it had not
entered into any futures contracts or options transactions. In the event of an
imperfect correlation between a futures position and a portfolio position which
is intended to be protected, the desired protection may not be obtained and a
Fund may be exposed to risk of loss.
Perfect correlation between a Fund's futures positions and portfolio
positions will be difficult to achieve because no futures contracts based on
individual equity or corporate fixed-income securities are currently available.
The only futures contracts available to hedge a Fund's portfolio are various
futures on U.S. Government securities, securities indices and foreign
currencies. In addition, it is not possible for a Fund to hedge fully or
perfectly against currency fluctuations affecting the value of securities quoted
or denominated in foreign currencies because the value of such securities is
likely to fluctuate as a result of independent factors not related to currency
fluctuations.
OPTIONS ON SECURITIES AND SECURITIES INDICES
============================================
WRITING COVERED OPTIONS. Each Fund may write (sell) covered call and put
options on any securities in which it may invest (other than CORE U.S. Equity
and CORE Large Cap Growth Funds). A call option written by a Fund obligates
such Fund to sell specified securities to the holder of the option at a
specified price if the option is exercised at any time before the expiration
date. All call options written by a Fund are covered, which means that such
Fund will own the securities subject to the option as long as the option is
outstanding or such Fund will use the other methods described below. A Fund's
purpose in writing covered call options is to realize greater income than would
be realized on portfolio securities transactions alone. However, a Fund may
forego the opportunity to profit from an increase in the market price of the
underlying security.
A put option written by a Fund would obligate such Fund to purchase
specified securities from the option holder at a specified price if the option
is exercised at any time before the expiration date. All put options written by
a Fund would be covered, which means that such Fund would have deposited with
its custodian cash or liquid assets with a value at least equal to the exercise
price of the put option. The purpose of writing such options is to generate
additional income for the Fund. However, in return for the option premium, each
Fund accepts the risk that it may be required to purchase the underlying
securities at a price in excess of the securities' market value at the time of
purchase.
Call and put options written by a Fund will also be considered to be covered
to the extent that the Fund's liabilities under such options are wholly or
partially offset by its rights under call and put options purchased by the Fund.
In addition, a written call option or put option may be covered by
maintaining cash or liquid assets (either of which may be quoted or denominated
in any currency) in a segregated account, by entering into an offsetting forward
contract and/or by purchasing an offsetting option which, by virtue of its
exercise price or otherwise, reduces a Fund's net exposure on its written option
position.
A Fund may also write (sell) covered call and put options on any securities
index composed of securities in which it may invest. Options on securities
indices are similar to options on securities, except
B-18
<PAGE>
that the exercise of securities index options requires cash payments and does
not involve the actual purchase or sale of securities. In addition, securities
index options are designed to reflect price fluctuations in a group of
securities or segment of the securities market rather than price fluctuations in
a single security.
A Fund may cover call options on a securities index by owning securities
whose price changes are expected to be similar to those of the underlying index,
or by having an absolute and immediate right to acquire such securities without
additional cash consideration (or for additional cash consideration held in a
segregated account by its custodian) upon conversion or exchange of other
securities in its portfolio. A Fund may cover call and put options on a
securities index by maintaining cash or liquid assets with a value equal to the
exercise price in a segregated account with its custodian.
A Fund may terminate its obligations under an exchange traded call or put
option by purchasing an option identical to the one it has written. Obligations
under over-the-counter options may be terminated only by entering into an
offsetting transaction with the counterparty to such option. Such purchases are
referred to as "closing purchase transactions."
PURCHASING OPTIONS. Each Fund (other than the CORE U.S. Equity and CORE
Large Cap Growth Funds) may purchase put and call options on any securities in
which it may invest or options on any securities index composed of securities in
which it may invest. A Fund would also be able to enter into closing sale
transactions in order to realize gains or minimize losses on options it had
purchased.
A Fund would normally purchase call options in anticipation of an increase
in the market value of securities of the type in which it may invest. The
purchase of a call option would entitle a Fund, in return for the premium paid,
to purchase specified securities at a specified price during the option period.
A Fund would ordinarily realize a gain if, during the option period, the value
of such securities exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise such a Fund would realize either no gain or a loss
on the purchase of the call option.
A Fund would normally purchase put options in anticipation of a decline in
the market value of securities in its portfolio ("protective puts") or in
securities in which it may invest. The purchase of a put option would entitle a
Fund, in exchange for the premium paid, to sell specified securities at a
specified price during the option period. The purchase of protective puts is
designed to offset or hedge against a decline in the market value of a Fund's
securities. Put options may also be purchased by a Fund for the purpose of
affirmatively benefiting from a decline in the price of securities which it does
not own. A Fund would ordinarily realize a gain if, during the option period,
the value of the underlying securities decreased below the exercise price
sufficiently to more than cover the premium and transaction costs; otherwise
such a Fund would realize either no gain or a loss on the purchase of the put
option. Gains and losses on the purchase of protective put options would tend
to be offset by countervailing changes in the value of the underlying portfolio
securities.
A Fund would purchase put and call options on securities indices for the
same purposes as it would purchase options on individual securities. For a
description of options on securities indices, see "Writing Covered Options"
above.
YIELD CURVE OPTIONS. Balanced Fund, with respect to up to 5% of its net
assets, may enter into options on the yield "spread" or differential between two
securities. Such transactions are referred to as "yield curve" options. In
contrast to other types of options, a yield curve option is based on the
difference between the yields of designated securities, rather than the prices
of the individual securities, and is settled through cash payments.
Accordingly, a yield curve option is profitable to the holder if this
differential
B-19
<PAGE>
widens (in the case of a call) or narrows (in the case of a put), regardless of
whether the yields of the underlying securities increase or decrease.
Balanced Fund may purchase or write yield curve options for the same
purposes as other options on securities. For example, Balanced Fund may
purchase a call option on the yield spread between two securities if it owns one
of the securities and anticipates purchasing the other security and wants to
hedge against an adverse change in the yield spread between the two securities.
Balanced Fund may also purchase or write yield curve options in an effort to
increase its current income if, in the judgment of the Adviser, Balanced Fund
will be able to profit from movements in the spread between the yields of the
underlying securities. The trading of yield curve options is subject to all of
the risks associated with the trading of other types of options. In addition,
however, such options present risk of loss even if the yield of one of the
underlying securities remains constant, if the spread moves in a direction or to
an extent which was not anticipated.
Yield curve options written by the Balanced Fund will be "covered." A call
(or put) option is covered if the Balanced Fund holds another call (or put)
option on the spread between the same two securities and maintains in a
segregated account with its custodian cash or liquid assets sufficient to cover
the Balanced Fund's net liability under the two options. Therefore, the
Balanced Fund's liability for such a covered option is generally limited to the
difference between the amount of the Balanced Fund's liability under the option
written by the Balanced Fund less the value of the option held by the Balanced
Fund. Yield curve options may also be covered in such other manner as may be in
accordance with the requirements of the counterparty with which the option is
traded and applicable laws and regulations. Yield curve options are traded
over-the-counter, and because they have been only recently introduced,
established trading markets for these options have not yet developed.
RISKS ASSOCIATED WITH OPTIONS TRANSACTIONS. There is no assurance that a
liquid secondary market on an options exchange will exist for any particular
exchange-traded option or at any particular time. If a Fund is unable to effect
a closing purchase transaction with respect to covered options it has written,
the Fund will not be able to sell the underlying securities or dispose of assets
held in a segregated account until the options expire or are exercised.
Similarly, if a Fund is unable to effect a closing sale transaction with respect
to options it has purchased, it will have to exercise the options in order to
realize any profit and will incur transaction costs upon the purchase or sale of
underlying securities.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening or closing
transactions or both; (iii) trading halts, suspensions or other restrictions may
be imposed with respect to particular classes or series of options; (iv) unusual
or unforeseen circumstances may interrupt normal operations on an exchange; (v)
the facilities of an exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume; or (vi) one or more
exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that exchange that had been issued by the Options Clearing
Corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
Each Fund may purchase and sell both options that are traded on U.S. and
foreign exchanges and options traded over-the-counter with broker-dealers who
make markets in these options. The ability to terminate over-the-counter
options is more limited than with exchange-traded options and may involve the
risk that broker-dealers participating in such transactions will not fulfill
their obligations. Until such time as the staff of the Securities and Exchange
Commission ("SEC") changes its position, each Fund will treat purchased over-
the-counter options and all assets used to cover written over-the-counter
options as illiquid
B-20
<PAGE>
securities, except that with respect to options written with primary dealers in
U.S. Government securities pursuant to an agreement requiring a closing purchase
transaction at a formula price, the amount of illiquid securities may be
calculated with reference to the formula.
Transactions by each Fund in options 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 a Fund may write or
purchase may be affected by options written or purchased by other investment
advisory clients of the Advisers. An exchange, board of trade or other trading
facility may order the liquidation of positions found to be in excess of these
limits, and it may impose certain other sanctions.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of protective
puts for hedging purposes depends in part on the Adviser's ability to predict
future price fluctuations and the degree of correlation between the options and
securities markets.
REAL ESTATE INVESTMENT TRUSTS
=============================
Each Fund may invest in shares of REITs. REITs are pooled investment
vehicles which invest primarily in income producing real estate or real estate
related loans or interest. REITs are generally classified as equity REITs,
mortgage REITs or a combination of equity and mortgage REITs. Equity REITs
invest the majority of their assets directly in real property and derive income
primarily from the collection of rents. Equity REITs can also realize capital
gains by selling properties that have appreciated in value. Mortgage REITs
invest the majority of their assets in real estate mortgages and derive income
from the collection of interest payments. Like regulated investment companies
such as the Funds, REITs are not taxed on income distributed to shareholders
provided they comply with certain requirements under the Code. A Fund will
indirectly bear its proportionate share of any expenses paid by REITs in which
it invests in addition to the expenses paid by a 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 Investment Company Act of 1940, as amended (the "Act").
REITs (especially mortgage REITs) are also subject to interest rate risks.
WARRANTS AND STOCK PURCHASE RIGHTS
==================================
Each Fund may invest up to 5% of its net assets, calculated at the time of
purchase, in warrants or rights (other than those acquired in units or attached
to other securities) which entitle the holder to buy equity securities at a
specific price for a specific period of time. A Fund will invest in warrants
and rights only if such equity securities are deemed appropriate by the Adviser
for investment by the Fund. CORE U.S. Equity and CORE Large Cap Growth Funds
have no present intention of acquiring warrants or rights. Warrants and rights
have no voting rights, receive no dividends and have no rights with respect to
the assets of the issuer.
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<PAGE>
FOREIGN SECURITIES
==================
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 applicable Adviser, to offer
better opportunity for long-term growth of capital and income than investments
in U.S. securities, the opportunity to invest in foreign countries with economic
policies or business cycles different from those of the United States and the
opportunity to reduce fluctuations in portfolio value by taking advantage of
foreign stock markets that do not necessarily move in a manner parallel to U.S.
markets.
Investing in foreign securities involves certain special considerations,
including those set forth below, which are not typically associated with
investing in U.S. dollar-denominated or quoted securities of U.S. issuers.
Investments in foreign securities usually involve currencies of foreign
countries. Accordingly, any Fund that invests in foreign securities may be
affected favorably or unfavorably by changes in currency rates and in exchange
control regulations and may incur costs in connection with conversions between
various currencies. Balanced, International Equity, Emerging Markets Equity and
Asia Growth Funds may be subject to currency exposure independent of their
securities positions.
Currency exchange rates may fluctuate significantly over short periods of
time. They generally are determined by the forces of supply and demand in the
foreign exchange markets and the relative merits of investments in different
countries, actual or anticipated changes in interest rates and other complex
factors, as seen from an international perspective. Currency exchange rates
also can be affected unpredictably by intervention by U.S. or foreign
governments or central banks or the failure to intervene or by currency controls
or political developments in the United States or abroad.
Since foreign issuers generally are not subject to uniform accounting,
auditing and financial reporting standards, practices and requirements
comparable to those applicable to U.S. companies, there may be less publicly
available information about a foreign company than about a U.S. company. Volume
and liquidity in most foreign securities markets are less than in the United
States and securities of many foreign companies are less liquid and more
volatile than securities of comparable U.S. companies. Fixed commissions on
foreign securities exchanges are generally higher than negotiated commissions on
U.S. exchanges, although each Fund endeavors to achieve the most favorable net
results on its portfolio transactions. There is generally less government
supervision and regulation of foreign securities exchanges, brokers, dealers and
listed and unlisted companies than in the United States.
Foreign markets also have different clearance and settlement procedures, and
in certain markets there have been times when settlements have been unable to
keep pace with the volume of securities transactions, making it difficult to
conduct such transactions. Such delays in settlement could result in temporary
periods when some of a Fund's assets are uninvested and no return is earned on
such assets. The inability of a Fund to make intended security purchases due to
settlement problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement
problems could result either in losses to the Fund due to subsequent declines in
value of the portfolio securities or, if the Fund has entered into a contract to
sell the securities, could result in possible liability to the purchaser. In
addition, with respect to certain foreign countries, there is the possibility of
expropriation or confiscatory taxation, political or social instability, or
diplomatic developments which could affect a Fund's investments in those
countries. Moreover, individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross national
product, rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments position.
Each Fund may invest in foreign securities which take the form of sponsored
and unsponsored American Depository Receipts ("ADRs") and Global Depository
Receipts ("GDRs") and (except for CORE U.S. Equity and CORE Large Cap Growth
Funds) may also invest in European Depository Receipts
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<PAGE>
("EDRs") or other similar instruments representing securities of foreign issuers
(together, "Depository Receipts").
ADRs represent the right to receive securities of foreign issuers deposited
in a domestic bank or a correspondent bank. ADRs are traded on domestic
exchanges or in the U.S. over-the-counter market and, generally, are in
registered form. EDRs and GDRs are receipts evidencing an arrangement with a
non-U.S. bank similar to that for ADRs and are designed for use in the non-U.S.
securities markets. EDRs and GDRs are not necessarily quoted in the same
currency as the underlying security.
To the extent a Fund acquires Depository Receipts through banks which do not
have a contractual relationship with the foreign issuer of the security
underlying the Depository Receipts to issue and service such Depository Receipts
(unsponsored), there may be an increased possibility that the Fund would not
become aware of and be able to respond to corporate actions such as stock splits
or rights offerings involving the foreign issuer in a timely manner. In
addition, the lack of information may result in inefficiencies in the valuation
of such instruments.
Each Fund (except CORE U.S. Equity and CORE Large Cap Growth Funds) may
invest in countries with emerging economies or securities markets. Political
and economic structures in many of such countries may be undergoing significant
evolution and rapid development, and such countries may lack the social,
political and economic stability characteristic of more developed countries.
Certain of such countries may have in the past failed to recognize private
property rights and have at times nationalized or expropriated the assets of
private companies. As a result, the risks described above, including the risks
of nationalization or expropriation of assets, may be heightened. See "Investing
in Emerging Markets, including Asia," below.
A Fund (other than CORE U.S. Equity and CORE Large Cap Growth Funds) may
invest in securities of issuers domiciled in a country other than the country in
whose currency the instrument is denominated or quoted. The Funds may also
invest in securities quoted or denominated in the European Currency Unit
("ECU"), which is a "basket" consisting of specified amounts of the currencies
of certain of the member states of the European Community. The specific amounts
of currencies comprising the ECU may be adjusted by the Council of Ministers of
the European Community from time to time to reflect changes in relative values
of the underlying currencies. In addition, the Funds may invest in securities
quoted or denominated in other currency "baskets."
INVESTING IN EMERGING MARKETS , INCLUDING ASIA. International Equity,
==============================================
Asia Growth and Emerging Markets Equity Funds are intended for long-term
investors who can accept the risks associated with investing primarily in equity
and equity-related securities of foreign issuers, including Emerging Countries
issuers (in the case of Emerging Markets Equity and International Equity Funds)
and Asian Companies (as defined in the Prospectus) (in the case of Asia Growth
Fund), as well as the risks associated with investments quoted or denominated in
foreign currencies. Balanced, Growth and Income, Small Cap Equity, Mid Cap
Equity and Capital Growth Funds may invest, to a lesser extent, in equity and
equity-related securities of foreign issuers; including Emerging Countries
issuers. In addition, certain of Balanced, International Equity, Emerging
Markets Equity and Asia Growth Fund's potential investment and management
techniques entail special risks. Asia Growth Fund concentrates on companies that
the Advisers believe are taking full advantage of the region's growth and that
have the potential for long-term capital appreciation. The Advisers believe that
Asia offers an attractive investment environment and that new opportunities will
continue to emerge in the years ahead.
The pace of change in many Emerging Countries, and in particular those in
Asia, over the last 10 years has been rapid. Accelerating economic growth in
the region has combined with capital market development, high government
expenditure, increasing consumer wealth and taxation policies favoring
B-23
<PAGE>
company expansion. As a result, stock market returns in many Emerging Countries
have been relatively attractive. See "Risk Factors" in the Prospectus.
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.
Certain of the Emerging Country securities markets are marked by a high
concentration of market capitalization and trading volume in a small number of
issuers representing a limited number of industries, as well as a high
concentration of ownership of such securities by a limited number of investors.
The markets for securities in certain Emerging Countries are in the earliest
stages of their development. Even the markets for relatively widely traded
securities in Emerging Countries may not be able to absorb, without price
disruptions, a significant increase in trading volume or trades of a size
customarily undertaken by institutional investors in the securities markets of
developed countries. Additionally, market making and arbitrage activities are
generally less extensive in such markets, which may contribute to increased
volatility and reduced liquidity of such markets. The limited liquidity of
Emerging Country markets may also affect a Fund's ability to accurately value
its portfolio securities or to acquire or dispose of 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 several of the Asian
countries is restricted or controlled to varying degrees. These restrictions
may limit a Fund's investment in certain of the Asian countries and may increase
the expenses of the Fund. Certain Emerging Countries require governmental
approval prior to investments by foreign persons or limit investment by foreign
persons to only a specified percentage of an issuer's outstanding securities or
a specific class of securities which may have less advantageous terms (including
price) than securities of the company available for purchase by nationals. In
addition, the repatriation of both investment income and capital from several of
the Emerging Countries is subject to restrictions such as the need for certain
governmental consents. Even where there is no outright restriction on
repatriation of capital, the mechanics of repatriation may affect certain
aspects of the operation of the Balanced, International Equity, Emerging Markets
Equity and Asia Growth Funds. A Fund may be required to establish special
custodial or other arrangements before investing in certain emerging countries.
Each of the Emerging Countries may be subject to a greater degree of
economic, political and social instability than is the case in the United
States, Japan and most Western European countries. Such instability may result
from, among other things, the following: (i) authoritarian governments or
military involvement in political and economic decision making, including
changes or attempted changes in governments through extra-constitutional means;
(ii) popular unrest associated with demands for improved political, economic or
social conditions; (iii) internal insurgencies; (iv) hostile relations with
neighboring countries; and (v) ethnic, religious and racial disaffection or
conflict. Such economic, political and social instability could disrupt the
principal financial markets in which the Funds may invest and adversely affect
the value of the Funds' assets.
B-24
<PAGE>
The economies of Emerging Countries may differ unfavorably from the U.S.
economy in such respects as growth of gross domestic product, rate of inflation,
capital reinvestment, resources, self-sufficiency and balance of payments. Many
Emerging Countries have experienced in the past, and continue to experience,
high rates of inflation. In certain countries inflation has at times
accelerated rapidly to hyperinflationary levels, creating a negative interest
rate environment and sharply eroding the value of outstanding financial assets
in those countries. The economies of many Emerging Countries are heavily
dependent upon international trade and are accordingly affected by protective
trade barriers and the economic conditions of their trading partners. In
addition, the economies of some Emerging Countries are vulnerable to weakness in
world prices for their commodity exports.
A Fund's income and, in some cases, capital gains from foreign stocks and
securities will be subject to applicable taxation in certain of the countries in
which it invests, and treaties between the U.S. and such countries may not be
available in some cases to reduce the otherwise applicable tax rates. 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 a Fund is uninvested and no return is
earned on such assets. The inability of a 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. Growth and Income, Mid Cap
===========================================
Equity, Capital Growth and Small Cap Equity Funds may enter into forward foreign
currency exchange contracts for hedging purposes. Balanced, International
Equity, Emerging Markets Equity and Asia Growth Funds may enter into forward
foreign currency exchange contracts for hedging purposes and to seek to increase
total return. A forward foreign currency exchange contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. These contracts are traded
in the interbank market conducted directly between currency traders (usually
large commercial banks) and their customers. A forward contract generally has no
deposit requirement, and no commissions are generally charged at any stage for
trades.
At the maturity of a forward contract a Fund may either accept or make
delivery of the currency specified in the contract or, at or prior to maturity,
enter into a closing transaction involving the purchase or sale of an offsetting
contract. Closing transactions with respect to forward contracts are usually
effected with the currency trader who is a party to the original forward
contract.
A Fund may enter into forward foreign currency exchange contracts in several
circumstances. First, when a Fund enters into a contract for the purchase or
sale of a security denominated or quoted in a foreign currency, or when a Fund
anticipates the receipt in a foreign currency of dividend or interest payments
on such a security which it holds, the Fund may desire to "lock in" the U.S.
dollar price of the security or the U.S. dollar equivalent of such dividend or
interest payment, as the case may be. By entering into a forward contract for
the purchase or sale, for a fixed amount of dollars, of the amount of foreign
currency involved in the underlying transactions, the 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.
B-25
<PAGE>
Additionally, when the Adviser believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar, it may
enter into a forward contract to sell, for a fixed amount of U.S. dollars, the
amount of foreign currency approximating the value of some or all of such Fund's
portfolio securities quoted or denominated in such foreign currency. The
precise matching of the forward contract amounts and the value of the securities
involved will not generally be possible because the future value of such
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the
contract is entered into and the date it matures. Using forward contracts to
protect the value of a Fund's portfolio securities against a decline in the
value of a currency does not eliminate fluctuations in the underlying prices of
the securities. It simply establishes a rate of exchange which a Fund can
achieve at some future point in time. The precise projection of short-term
currency market movements is not possible, and short-term hedging provides a
means of fixing the U.S. dollar value of only a portion of a Fund's foreign
assets.
Balanced, International Equity, Emerging Markets Equity and Asia Growth
Funds may engage in cross-hedging by using forward contracts in one currency to
hedge against fluctuations in the value of securities quoted or denominated in a
different currency if GSAM or GSAMI determines that there is a pattern of
correlation between the two currencies. Balanced, International Equity,
Emerging Markets Equity and Asia Growth Funds may also purchase and sell forward
contracts to seek to increase total return when GSAM or GSAMI anticipates that
the foreign currency will appreciate or depreciate in value, but securities
quoted or denominated in that currency do not present attractive investment
opportunities and are not held in the Fund's portfolio.
A Fund's custodian will place cash or liquid assets into a segregated
account of such Fund in an amount equal to the value of the Fund's total assets
committed to the consummation of forward foreign currency exchange contracts
requiring the Fund to purchase foreign currencies or, in the case of Balanced,
International Equity, Emerging Markets Equity and Asia Growth Funds forward
contracts entered into to seek to increase total return. If the value of the
securities placed in the segregated account declines, additional cash or liquid
assets will be placed in the account on a daily basis so that the value of the
account will equal the amount of a Fund's commitments with respect to such
contracts. The segregated account will be marked-to-market on a daily basis.
Although the contracts are not presently regulated by the CFTC, the CFTC may in
the future assert authority to regulate these contracts. In such event, a
Fund's ability to utilize forward foreign currency exchange contracts may be
restricted.
While a Fund will enter into forward contracts to reduce currency exchange
rate risks, transactions in such contracts involve certain other risks. Thus,
while the Fund may benefit from such transactions, unanticipated changes in
currency prices may result in a poorer overall performance for the Fund than if
it had not engaged in any such transactions. Moreover, there may be imperfect
correlation between a Fund's portfolio holdings of securities quoted or
denominated in a particular currency and forward contracts entered into by such
Fund. Such imperfect correlation may cause a Fund to sustain losses which will
prevent the Fund from achieving a complete hedge or expose the Fund to risk of
foreign exchange loss.
Markets for trading foreign forward currency contracts offer less
protection against defaults than is available when trading in currency
instruments on an exchange. Since a forward foreign currency exchange contract
is not guaranteed by an exchange or clearinghouse, a default on the contract
would deprive a Fund of unrealized profits or force the Fund to cover its
commitments for purchase or resale, if any, at the current market price.
WRITING AND PURCHASING CURRENCY CALL AND PUT OPTIONS. Each Fund (except
=====================================================
CORE U.S. Equity and CORE Large Cap Growth Funds) may write covered put and call
options and purchase put and call options on foreign currencies for the purpose
of protecting against declines in the U.S. dollar value of portfolio securities
and against increases in the U.S. dollar cost of securities to be acquired. As
with other
B-26
<PAGE>
kinds of option transactions, however, the writing of an option on foreign
currency will constitute only a partial hedge, up to the amount of the premium
received. If and when a Fund seeks to close out an option, the Fund could be
required to purchase or sell foreign currencies at disadvantageous exchange
rates, thereby incurring losses. The purchase of an option on foreign currency
may constitute an effective hedge against exchange rate fluctuations; however,
in the event of exchange rate movements adverse to a Fund's position, the Fund
may forfeit the entire amount of the premium plus related transaction costs.
Options on foreign currencies to be written or purchased by a Fund will be
traded on U.S. and foreign exchanges or over-the-counter.
Balanced, International Equity, Emerging Markets Equity and Asia Growth
Funds may use options on currency to cross-hedge, which involves writing or
purchasing options on one currency to hedge against changes in exchange rates
for a different currency with a pattern of correlation. In addition, Balanced,
International Equity, Emerging Markets Equity and Asia Growth Funds may purchase
call options on currency to seek to increase total return when the Adviser
anticipates that the currency will appreciate in value, but the securities
quoted or denominated in that currency do not present attractive investment
opportunities and are not included in the Fund's portfolio.
A call option written by a Fund obligates a Fund to sell specified currency
to the holder of the option at a specified price if the option is exercised at
any time before the expiration date. A put option written by a Fund would
obligate a Fund to purchase specified currency from the option holder at a
specified price if the option is exercised at any time before the expiration
date. The writing of currency options involves a risk that a Fund will, upon
exercise of the option, be required to sell currency subject to a call at a
price that is less than the currency's market value or be required to purchase
currency subject to a put at a price that exceeds the currency's market value.
For a description of how to cover written put and call options, see "Written
Covered Options" above.
A Fund may terminate its obligations under a call or put option by
purchasing an option identical to the one it has written. Such purchases are
referred to as "closing purchase transactions." A Fund would also be able to
enter into closing sale transactions in order to realize gains or minimize
losses on options purchased by the Fund.
A Fund would normally purchase call options on foreign currency in
anticipation of an increase in the U.S. dollar value of currency in which
securities to be acquired by a Fund are quoted or denominated. The purchase of
a call option would entitle the Fund, in return for the premium paid, to
purchase specified currency at a specified price during the option period. A
Fund would ordinarily realize a gain if, during the option period, the value of
such currency exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise the Fund would realize either no gain or a loss on
the purchase of the call option.
A Fund would normally purchase put options in anticipation of a decline in
the U.S. dollar value of currency in which securities in its portfolio are
quoted or denominated ("protective puts"). The purchase of a put option would
entitle a Fund, in exchange for the premium paid, to sell specified currency at
a specified price during the option period. The purchase of protective puts is
designed merely to offset or hedge against a decline in the dollar value of a
Fund's portfolio securities due to currency exchange rate fluctuations. A Fund
would ordinarily realize a gain if, during the option period, the value of the
underlying currency decreased below the exercise price sufficiently to more than
cover the premium and transaction costs; otherwise the Fund would realize either
no gain or a loss on the purchase of the put option. Gains and losses on the
purchase of protective put options would tend to be offset by countervailing
changes in the value of underlying currency or portfolio securities.
In addition to using options for the hedging purposes described above,
Balanced, International Equity, Emerging Markets Equity and Asia Growth Funds
may use options on currency to seek to increase
B-27
<PAGE>
total return. Balanced, International Equity, Emerging Markets Equity and Asia
Growth Funds may write (sell) covered put and call options on any currency in
order to realize greater income than would be realized on portfolio securities
transactions alone. However, in writing covered call options for additional
income, Balanced, International Equity, Emerging Markets Equity and Asia Growth
Funds may forego the opportunity to profit from an increase in the market value
of the underlying currency. Also, when writing put options, Balanced,
International Equity, Emerging Markets Equity and Asia Growth Funds accept, in
return for the option premium, the risk that they may be required to purchase
the underlying currency at a price in excess of the currency's market value at
the time of purchase.
Balanced, International Equity, Emerging Markets Equity and Asia Growth
Funds would normally purchase call options to seek to increase total return in
anticipation of an increase in the market value of a currency. Balanced,
International Equity, Emerging Markets Equity and Asia Growth Funds 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 Balanced, International Equity, Emerging Markets
Equity and Asia Growth Funds would realize either no gain or a loss on the
purchase of the call option. Put options may be purchased by a Fund for the
purpose of benefiting from a decline in the value of currencies which it does
not own. A Fund would ordinarily realize a gain if, during the option period,
the value of the underlying currency decreased below the exercise price
sufficiently to more than cover the premium and transaction costs. Otherwise
the Fund would realize either no gain or a loss on the purchase of the put
option.
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 a Fund will
generally purchase or write only those options for which there appears to be an
active secondary market, there is no assurance that a liquid secondary market on
an exchange will exist for any particular option, or at any particular time.
For some options no secondary market on an exchange may exist. In such event,
it might not be possible to effect closing transactions in particular options,
with the result that a Fund would have to exercise its options in order to
realize any profit and would incur transaction costs upon the sale of underlying
securities pursuant to the exercise of put options. If a Fund as a covered call
option writer is unable to effect a closing purchase transaction in a secondary
market, it 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.
A Fund may purchase and write over-the-counter options to the extent
consistent with its limitation on investments in illiquid securities. Trading
in over-the-counter options is subject to the risk that the other party will be
unable or unwilling to close out options purchased or written by a Fund.
The amount of the premiums which a Fund may pay or receive may be adversely
affected as new or existing institutions, including other investment companies,
engage in or increase their option purchasing and writing activities.
CURRENCY SWAPS, MORTGAGE SWAPS, INDEX SWAPS AND INTEREST RATE SWAPS, CAPS,
==========================================================================
FLOORS AND COLLARS
==================
The Balanced, International Equity, Emerging Markets Equity and Asia Growth
Funds may, with respect to up to 5% of their net assets, enter into currency
swaps for both hedging purposes and to seek to increase total return. In
addition, the Balanced Fund may, with respect to 5% of its net assets, enter
B-28
<PAGE>
into mortgage, index and interest rate swaps and other interest rate swap
arrangements such as rate caps, floors and collars, for hedging purposes or to
seek to increase total return. Currency swaps involve the exchange by a Fund
with another party of their respective rights to make or receive payments in
specified currencies. Interest rate swaps involve the exchange by a Fund with
another party of their respective commitments to pay or receive interest, such
as an exchange of fixed rate payments for floating rate payments. Mortgage
swaps are similar to interest rate swaps in that they represent commitments to
pay and receive interest. The notional principal amount, however, is tied to a
reference pool or pools of mortgages. Index swaps involve the exchange by a
Fund with another party of the respective amounts payable with respect to a
notional principal amount at interest rates equal to two specified indices. The
purchase of an interest rate cap entitles the purchaser, to the extent that a
specified index exceeds a predetermined interest rate, to receive payment of
interest on a notional principal amount from the party selling such interest
rate cap. The purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below a predetermined interest rate, to
receive payments of interest on a notional principal amount from the party
selling the interest rate floor. An interest rate collar is the combination of
a cap and a floor that preserves a certain return within a predetermined range
of interest rates.
A Fund will enter into interest rate, mortgage and index swaps only on a net
basis, which means that the two payment streams are netted out, with the Fund
receiving or paying, as the case may be, only the net amount of the two
payments. Interest rate, index and mortgage swaps do not involve the delivery
of securities, other underlying assets or principal. Accordingly, the risk of
loss with respect to interest rate, index and mortgage swaps is limited to the
net amount of interest payments that the Fund is contractually obligated to
make. If the other party to an interest rate, index or mortgage swap defaults,
the Fund's risk of loss consists of the net amount of interest payments that the
Fund is contractually entitled to receive. In contrast, currency swaps usually
involve the delivery of a gross payment stream in one designated currency in
exchange for the gross payment stream in another designated currency.
Therefore, the entire payment stream under a currency swap is subject to the
risk that the other party to the swap will default on its contractual delivery
obligations. To the extent that the net amount payable under an interest rate,
index or mortgage swap and the entire amount of the payment stream payable by a
Fund under a currency swap or an interest rate floor, cap or collar is held in a
segregated account consisting of cash or liquid assets the Funds and the
Advisers believe that swaps do not constitute senior securities under the Act
and, accordingly, will not treat them as being subject to a Fund's borrowing
restrictions.
A Fund will not enter into swap transactions unless the unsecured commercial
paper, senior debt or claims paying ability of the other party thereto is
considered to be investment grade by the Adviser.
The use of interest rate, mortgage, index and currency swaps, as well as
interest rate caps, floors and collars, is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If an Adviser is incorrect in its
forecasts of market values, interest rates and currency exchange rates, the
investment performance of a Fund would be less favorable than it would have been
if this investment technique were not used. The staff of the SEC currently take
the position that swaps, caps, floors and collars are illiquid and thus subject
to a Fund's 15% limitation on investments in illiquid securities.
LENDING OF PORTFOLIO SECURITIES
===============================
Each Fund may lend portfolio securities. Under present regulatory policies,
such loans may be made to institutions such as brokers or dealers and would be
required to be secured continuously by collateral in cash, cash equivalents or
U.S. Government securities maintained on a current basis at an
B-29
<PAGE>
amount at least equal to the market value of the securities loaned. A Fund
would be required to have the right to call a loan and obtain the securities
loaned at any time on five days' notice. For the duration of a loan, a Fund
would continue to receive the equivalent of the interest or dividends paid by
the issuer on the securities loaned and would also receive compensation from
investment of the collateral. A Fund would not have the right to vote any
securities having voting rights during the existence of the loan, but a Fund
would call the loan in anticipation of an important vote to be taken among
holders of the securities or the giving or withholding of their consent on a
material matter affecting the investment. As with other extensions of credit
there are risks of delay in recovering, or even loss of rights in, the
collateral should the borrower of the securities fail financially. However, the
loans would be made only to firms deemed by the Advisers to be of good standing,
and when, in the judgment of the Advisers, the consideration which can be
earned currently from securities loans of this type justifies the attendant
risk. If the Advisers determine to make securities loans, it is intended that
the value of the securities loaned would not exceed one-third of the value of
the total assets of a Fund.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
==============================================
Each Fund may purchase securities on a when-issued basis or purchase or
sell securities on a forward commitment basis. These transactions involve a
commitment by a Fund to purchase or sell securities at a future date. The price
of the underlying securities (usually expressed in terms of yield) and the date
when the securities will be delivered and paid for (the settlement date) are
fixed at the time the transaction is negotiated. When-issued purchases and
forward commitment transactions are negotiated directly with the other party,
and such commitments are not traded on exchanges. A Fund will purchase
securities on a when-issued basis or purchase or sell securities on a forward
commitment basis only with the intention of completing the transaction and
actually purchasing or selling the securities. If deemed advisable as a matter
of investment strategy, however, a Fund may dispose of or negotiate a commitment
after entering into it. A Fund may realize a capital gain or loss in connection
with these transactions. For purposes of determining a Fund's duration, the
maturity of when-issued or forward commitment securities will be calculated from
the commitment date. A Fund is required to hold and maintain in a segregated
account with the Fund's custodian until three days prior to the settlement date,
cash and liquid assets in an amount sufficient to meet the purchase price.
Alternatively, a Fund may enter into offsetting contracts for the forward sale
of other securities that it owns. Securities purchased or sold on a when-issued
or forward commitment basis involve a risk of loss if the value of the security
to be purchased declines prior to the settlement date or if the value of the
security to be sold increases prior to the settlement date.
INVESTMENT IN UNSEASONED COMPANIES
==================================
Each Fund may invest up to 5% of its net assets, calculated at the time of
purchase, in companies (including predecessors) which have operated less than
three years, except that this limitation does not apply to debt securities which
have been rated investment grade or better by at least one nationally recognized
statistical rating organization. The securities of such companies may have
limited liquidity, which can result in their being priced higher or lower than
might otherwise be the case. In addition, investments in unseasoned companies
are more speculative and entail greater risk than do investments in companies
with an established operating record.
OTHER INVESTMENT COMPANIES
==========================
A Fund reserves the right to invest up to 5% of its net assets in the
securities of other investment companies but may not acquire more than 3% of the
voting securities of any other investment company. Pursuant to an exemptive
order obtained from the SEC, the Funds may invest in money market funds for
B-30
<PAGE>
which an Adviser or any of its affiliates serves as investment adviser. A Fund
will indirectly bear its proportionate share of any management fees and other
expenses paid by investment companies in which it invests in addition to the
advisory and administration fees paid by the Fund. However, to the extent that
the Fund invests in a money market fund for which an Adviser or any of its
affiliates acts as adviser, the advisory and administration fees payable by the
Fund to an Adviser will be reduced by an amount equal to the Fund's
proportionate share of the advisory and administration fees paid by such money
market fund to the Adviser.
REPURCHASE AGREEMENTS
=====================
Each Fund may enter into repurchase agreements with selected broker-dealers,
banks or other financial institutions. A repurchase agreement is an arrangement
under which a Fund purchases securities and the seller agrees to repurchase the
securities within a particular time and at a specified price. Custody of the
securities is maintained by a Fund's custodian. The repurchase price may be
higher than the purchase price, the difference being income to a Fund, or the
purchase and repurchase prices may be the same, with interest at a stated rate
due to a Fund together with the repurchase price on repurchase. In either case,
the income to a Fund is unrelated to the interest rate on the security subject
to the repurchase agreement.
For purposes of the Act and generally for tax purposes, a repurchase
agreement is deemed to be a loan from a Fund to the seller of the security. For
other purposes, it is not clear whether a court would consider the security
purchased by a Fund subject to a repurchase agreement as being owned by a Fund
or as being collateral for a loan by a Fund to the seller. In the event of
commencement of bankruptcy or insolvency proceedings with respect to the seller
of the security before repurchase of the security under a repurchase agreement,
a Fund may encounter delay and incur costs before being able to sell the
security. Such a delay may involve loss of interest or a decline in price of
the security. If the court characterizes the transaction as a loan and a Fund
has not perfected a security interest in the security, a Fund may be required to
return the security to the seller's estate and be treated as an unsecured
creditor of the seller. As an unsecured creditor, a Fund would be at risk of
losing some or all of the principal and interest involved in the transaction.
As with any unsecured debt instrument purchased for a Fund, the Advisers
seek to minimize the risk of loss from repurchase agreements by analyzing the
creditworthiness of the obligor, in this case the seller of the security. Apart
from the risk of bankruptcy or insolvency proceedings, there is also the risk
that the seller may fail to repurchase the security. However, if the market
value of the security subject to the repurchase agreement becomes less than the
repurchase price (including accrued interest), a Fund will direct the seller of
the security to deliver additional securities so that the market value of all
securities subject to the repurchase agreement equals or exceeds the repurchase
price. Certain repurchase agreements which provide for settlement in more than
seven days can be liquidated before the nominal fixed term on seven days or less
notice. Such repurchase agreements will be regarded as liquid instruments.
In addition, a Fund, together with other registered investment companies
having advisory agreements with the Advisers or their affiliates, may transfer
uninvested cash balances into a single joint account, the daily aggregate
balance of which will be invested in one or more repurchase agreements.
INVESTMENT RESTRICTIONS
B-31
<PAGE>
The following investment restrictions have been adopted by the Trust as
fundamental policies that cannot be changed without the affirmative vote of the
holders of a majority (as defined in the Act) of the outstanding voting
securities of the affected Fund. The investment objective of each Fund and all
other investment policies or practices of each Fund are considered by the Trust
not to be fundamental and accordingly may be changed without shareholder
approval. See "Investment Objectives and Policies" in the Prospectus. For
purposes of the Act, "majority" means the lesser of (a) 67% or more of the
shares of the Trust or a Fund present at a meeting, if the holders of more than
50% of the outstanding shares of the Trust or a Fund are present or represented
by proxy, or (b) more than 50% of the shares of the Trust or a Fund. For
purposes of the following limitations, any limitation which involves a maximum
percentage shall not be considered violated unless an excess over the percentage
occurs immediately after, and is caused by, an acquisition or encumbrance of
securities or assets of, or borrowings by, a Fund. With respect to the Funds'
fundamental investment restriction no. 3, asset coverage of at least 300% (as
defined in the Act), inclusive of any amounts borrowed, must be maintained at
all times.
A Fund may not:
===============
(1) make any investment inconsistent with the Fund's classification as
a diversified company under the Investment Company Act of 1940, as
amended (the "Act"). This restriction does not, however, apply to
any Fund classified as a non-diversified company under the Act.
(2) invest 25% or more of its total assets in the securities of one or
more issuers conducting their principal business activities in the
same industry (excluding the U.S. Government or any of its
agencies or instrumentalities).
(3) borrow money, except (a) the Fund may borrow from banks (as
defined in the Act) or through reverse repurchase agreements in
amounts up to 33-1/3% of its total assets (including the amount
borrowed), (b) the Fund may, to the extent permitted by applicable
law, borrow up to an additional 5% of its total assets for
temporary purposes, (c) the Fund may obtain such short-term
credits as may be necessary for the clearance of purchases and
sales of portfolio securities, (d) the Fund may purchase
securities on margin to the extent permitted by applicable law and
(e) the Fund may engage transactions in mortgage dollar rolls
which are accounted for as financings.
(4) make loans, except through (a) the purchase of debt obligations in
accordance with the Fund's investment objective and policies, (b)
repurchase agreements with banks, brokers, dealers and other
financial institutions, and (c) loans of securities as permitted
by applicable law.
(5) underwrite securities issued by others, except to the extent that
the sale of portfolio securities by the Fund may be deemed to be
an underwriting.
(6) purchase, hold or deal in real estate, although a Fund may
purchase and sell securities that are secured by real estate or
interests therein, securities of real estate investment trusts and
mortgage-related securities and may hold and sell real estate
acquired by a Fund as a result of the ownership of securities.
(7) invest in commodities or commodity contracts, except that the Fund
may invest in currency and financial instruments and contracts
that are commodities or commodity contracts.
B-32
<PAGE>
(8) issue senior securities to the extent such issuance would violate
applicable law.
Each Fund may, notwithstanding any other fundamental investment restriction
or policy, invest some or all of its assets in a single open-end investment
company or series thereof with substantially the same investment objective,
restrictions and policies as the Fund.
In addition to the fundamental policies mentioned above, the Trustees have
adopted the following non-fundamental policies which can be changed or amended
by action of the Trustees without approval of shareholders.
A Fund may not:
(a) Invest in companies for the purpose of excercising control or
management.
(b) Invest more than 15% of the Fund's net assets in illiquid investments
including repurchase agreements maturing in more than seven days,
securities which are not readily marketable and restricted securities
not eligible for resale pursuant to Rule 144A under the 1933 Act.
(c) Purchase additional securities if the Fund's borrowings (excluding
covered mortgage dollar rolls) exceed 5% of its net assets.
(d) Make short sales of securities, except short sales against the box.
B-33
<PAGE>
MANAGEMENT
Information pertaining to the Trustees and officers of the Trust is set
forth below. Trustees and officers deemed to be "interested persons" of the
Trust for purposes of the Act are indicated by an asterisk.
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- ------------------------------------------------------------------------------------------
<S> <C> <C>
Ashok N. Bakhru, 53 Chairman Executive Vice President-Finance and Administration and Chief Financial Officer, Coty Inc.
1325 Ave. of Americas & Trustee (since April 1996); President, ABN Associates (June 1994 through March 1996); Senior Vice
New York, NY 10019 President of Scott Paper Company until June 1994; Director of Arkwright Mutual Insurance
Company; Trustee of International House of Philadelphia; Member of Cornell University
Council;Trustee of the Walnut Street Theater.
*David B. Ford, 51 Trustee Managing Director, Goldman Sachs (since 1996); General Partner, Goldman Sachs (1986-1996); Co-
One New York Plaza Head of Goldman Sachs Asset Management (since December 1994).
New York, NY 10004
*Douglas C. Grip, 35 Trustee Vice President, Goldman Sachs (since May 1996); & President President, MFS Retirement Services
One New York Plaza Inc., of Massachusetts Financial Services (prior thereto).
New York, NY 10004
*John P. McNulty, 44 Trustee Managing Director, Goldman Sachs (since 1996); One General Partner of Goldman Sachs (1990-1994
New York Plaza and 1995-1996); Co-Head of Goldman Sachs Asset Management (since November 1995);
New York, NY 10004 Limited Partner of Goldman Sachs (1994 to November 1995).
Mary P. McPherson, 60 Trustee President of Bryn Mawr College (since 1978); Director of Josiah Macy, Jr, Foundation (since
Taylor Hall 1977); Director of the Philadelphia Contributionship (since 1985); Director of Amherst College
Bryn Mawr, PA 19010 (since 1986); Director of Dayton Hudson Corporation (since 1988); Director of the Spencer
Foundation (since 1993); and member of PNC Advisory Board (since 1993).
</TABLE>
B-34
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- --------------------------- --------------------------------- --------------------------------------------------------------------
<S> <C> <C>
*Alan A. Shuch, 48 Trustee Limited Partner, Goldman Sachs (since 1994); Director and Vice
One New York Plaza President of Goldman Sachs Funds Management Inc. (from April
New York, NY 10004 1990 to November 1994); President and Chief Operating Officer, GSAM
(from September 1988 to November 1994).
Jackson W. Smart, 66 Trustee Chairman, Executive Committee, First Commonwealth, Inc. (a managed
One Northfleld Plaza # 218 dental care company, since January 1996); Chairman and
Northfield, IL 60093 Chief Executive Officer, MSP Communications Inc. (a company engaged
in radio broadcasting) (since November 1988), Director, Federal
Express Corporation (since 1976), Evanston Hospital Corporation
(since 1980), First Commonwealth, Inc. (since 1988) and North
American Private Equity Group (a venture capital fund).
William H. Springer, 67 Trustee Vice Chairman and Chief Financial and Administrative Officer,
701 Morningside Drive (February 1987 to June 1991) of Ameritech (a telecommunications
Lake Forest, IL 60045 holding company; Director, Walgreen Co. (a retail drug store
business); Director of Baker, Fentress & Co. (a closed end,
nondiversified management investment company) (April 1992 to
present).
Richard P. Strubel, 57 Trustee Managing Director, Tandem Partners, Inc. (since 1990); President and
70 West Madison St. Chief Executive Officer, Microdot, Inc. (a diversified manufacturer
Ste. 1400 of fastening systems and connectors)(January 1984 to October 1994).
Chicago, IL 60602
*Scott M. Gilman, 37 Treasurer Director, Mutual Funds Administration, Goldman Sachs Asset
One New York Plaza Management (since April 1994); Assistant Treasurer, Goldman Sachs
New York, NY 10004 Funds Management, Inc. (since March 1993); Vice President, Goldman
Sachs (since March 1990).
*John M. Perlowski, 32 Assistant Vice President, Goldman Sachs (since July 1995); Director, Investors
One New York Plaza Treasurer Bank and Trust, November 1993 to July 1995); Audit Manager of Arthur
New York, NY 10004 Andersen LLP (prior thereto).
*Pauline Taylor, 50 Vice Vice President of Goldman Sachs (since June 1992); Director
4900 Sears Tower President Shareholder Servicing (since June 1992).
Chicago, IL 60606
</TABLE>
B-35
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- --------------------------- --------------------------------- --------------------------------------------------------------------
<S> <C> <C>
*John W. Mosior, 58 Vice Vice President, Goldman Sachs and Manager of Shareholder Servicing
4900 Sears Tower President of GSAM (since November 1989).
Chicago, IL 60606
8Nancy L. Mucker, 47 Vice Vice President, Goldman Sachs (since April 1985); Manager of
4900 Sears Tower President Shareholder Servicing of GSAM since November 1989).
Chicago, IL 60606
*Michael J. Richman, 36 Secretary Associate General Counsel of Goldman Sachs Asset Management (since
85 Broad Street February 1994); Vice President and Assistant General Counsel of
New York, NY 10004 Goldman Sachs (since June 1992); Counsel to the Funds Group, GSAM
(since June 1992); Partner, Hale and Dorr (September 1991 to June
1992).
*Howard B. Surloff, 31 Assistant Assistant General Counsel and Vice President, Goldman Sachs (since
85 Broad Street Secretary November 1993 and May 1994 respectively);Counsel to the Funds Group,
New York, NY 10004 Goldman Sachs Asset Management (since November 1993); Associate of
Shereff Friedman, Hoffman & Goodman (prior thereto).
*Valerie A. Zondorak, 31 Assistant Vice President, Goldman Sachs (since March 1997); Counsel to the
85 Broad Street Secretary Funds Group, Goldman Sachs Asset Management (since March 1997);
New York, New York 10004 Associate of Shereff Friedman, Hoffman & Goodman (prior thereto).
*Steven E. Hartstein, 33 Assistant Legal Products Analyst, Goldman Sachs (June 1993 to present); Funds
85 Broad Street Secretary Compliance Officer, Citibank Global Asset Management (August 1991 to
New York, NY 10004 June 1993).
*Deborah Farrell, 25 Assistant Administrative Assistant, Goldman Sachs since January 1994. Formerly
85 Broad Street Secretary at Cleary Gottlieb, Steen and Hamilton.
New York, NY 10004
Kaysie P. Uniacke, 36 Assistant Vice President and Senior Portfolio Manager, Goldman Sachs Asset
One New York Plaza Secretary Management (since 1988).
New York, NY 10004
</TABLE>
B-36
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- --------------------------- --------------------------------- --------------------------------------------------------------------
<S> <C> <C>
*Elizabeth D.
Anderson, 27 Assistant Portfolio Manager, GSAM (since April 1996); Junior Portfolio
One New York Plaza Secretary Manager, Goldman Sachs Asset Management (since 1993); Funds Trading
New York, NY 10004 Assistant, GSAM (1993-1995); Compliance Analyst, Prudential
Insurance (1991-1993).
</TABLE>
As of March 24,1997, the Trustees and officers of the Trust as a group
owned less than 1% of the outstanding shares of beneficial interest of each
Fund.
The Trust pays each Trustee, other than those who are "interested persons"
of Goldman Sachs, a fee for each Trustee meeting attended and an annual fee.
Such Trustees are also reimbursed for travel expenses incurred in connection
with attending such meetings.
B-37
<PAGE>
The following table sets forth certain information with respect to the
compensation of each Trustee of the Trust (or its predecessors) for the one-year
period ended January 31, 1997:
<TABLE>
<CAPTION>
Pension or Total
Retirement Compensation
Benefits from Goldman Sachs
Aggregate Accrued as Mutual Funds
Compensation Part of (including the
Name of Trustee from the Funds*** Funds' Expenses Funds)*
- ---------------------- ----------------- --------------- ------------------
<S> <C> <C> <C>
Paul C. Nagel, Jr.** $3,775 $0 $62,450
Ashok N. Bakhru 3,969 0 69,299
Marcia L. Beck 0 0 0
David B. Ford 0 0 0
Douglas C. Grip 0 0 0
Alan A. Shuch 0 0 0
Jackson W. Smart 3,388 0 58,954
William H. Springer 3,388 0 58,954
Richard P. Strubel 3,388 0 58,954
</TABLE>
______________
* The Goldman Sachs Mutual Funds consisted of 29 mutual funds on January
31, 1997.
** Retired as of June 30, 1996.
*** Effective May 1, 1997, the Funds were reorganized from series of
Goldman Sachs Equity Portfolios, Inc. (the "Corporation") into the
Trust. The amounts shown in the column reflect compensation paid to
the Trustees by the Corporation.
B-38
<PAGE>
MANAGEMENT SERVICES
===================
As stated in the Funds' Prospectus, GSFM, One New York Plaza, New York, New
York, a Delaware limited partnership and an affiliate of Goldman Sachs, 85 Broad
Street, New York, New York, serves as investment adviser to CORE U.S. Equity and
Capital Growth Funds. GSAM, One New York Plaza, New York, New York, a separate
operating division of Goldman Sachs, serves as investment adviser to Balanced,
Growth and Income, CORE Large Cap Growth, Mid Cap Equity and Small Cap Equity
Funds. GSAMI, 133 Peterborough Court, London, England, EC4A 2BB serves as
investment adviser to International Equity, Emerging Markets Equity and Asia
Growth Funds. See "Management" in the Funds' Prospectus for a description of the
applicable Adviser's duties to the Funds.
Founded in 1869, Goldman Sachs is among the oldest and largest investment
banking firms in the United States. Goldman Sachs is a leader in developing
portfolio strategies and in many fields of investing and financing,
participating in financial markets worldwide and serving individuals,
institutions, corporations and governments. Goldman Sachs is also among the
principal market sources for current and thorough information on companies,
industrial sectors, markets, economies and currencies, and trades and makes
markets in a wide range of equity and debt securities 24-hours a day. The firm
is headquartered in New York and has offices throughout the U.S. and in Beijing,
Frankfurt, George Town, Hong Kong, London, Madrid, Mexico City, Milan, Montreal,
Osaka, Paris, Sao Paulo, Seoul, Shanghai, Singapore, Sydney, Taipei, Tokyo,
Toronto, Vancouver and Zurich. It has trading professionals throughout the
United States, as well as in London, Tokyo, Hong Kong and Singapore. The active
participation of Goldman Sachs in the world's financial markets enhances its
ability to identify attractive investments.
The Advisers are able to draw on the substantial research and market
expertise of Goldman Sachs whose investment research effort is one of the
largest in the industry. With an annual equity research budget approaching $160
million, the Goldman Sachs Global Investment Research Department covers
approximately 1,700 companies, including approximately 1,000 U.S. corporations
in 60 industries. The in-depth information and analyses generated by Goldman
Sachs' research analysts are available to the Advisers. For more than a decade,
Goldman Sachs has been among the top-ranked firms in Institutional Investor's
annual "All-America Research Team" survey. In addition, many of Goldman Sachs'
economists, securities analysts, portfolio strategists and credit analysts have
consistently been highly ranked in respected industry surveys conducted in the
U.S. and abroad. Goldman Sachs is also among the leading investment firms using
quantitative analytics (now used by a growing number of investors) to structure
and evaluate portfolios.
In managing the Funds, the Advisers have access to Goldman Sachs' economics
research. The Economics Research Department conducts economic, financial and
currency markets research which analyzes economic trends and interest and
exchange rate movement worldwide. The Economics Research Department tracks
factors such as inflation and money supply figures, balance of trade figures,
economic growth, commodity prices, monetary and fiscal policies, and political
events that can influence interest rates and currency trends. The success of
Goldman Sachs' international research team has brought wide recognition to its
members. The team has earned top rankings in the Institutional Investor's
annual "All British Research Team Survey" in the following categories:
Economics (U.K.) 1986-1993; Economics/International 1989-1993; and Currency
Forecasting 1986-1993. In addition, the team has also earned top rankings in
the annual "Extel Financial Survey" of U.K. investment managers in the following
categories: U.K. Economy 1989-1995; International Economies 1986, 1988-1995; and
Currency Movements 1986-1993.
In allocating assets among foreign countries and currencies for the Funds
which can invest in foreign securities (in particular, the International Equity,
Emerging Markets Equity and Asia Growth Funds), the Advisers will have access to
the Global Asset Allocation Model. The model is based on the observation that
the prices of all financial assets, including foreign currencies, will adjust
until investors globally are
B-39
<PAGE>
comfortable holding the pool of outstanding assets. Using the model, the
Advisers will estimate the total returns from each currency sector which are
consistent with the average investor holding a portfolio equal to the market
capitalization of the financial assets among those currency sectors. These
estimated equilibrium returns are then combined with the expectations of Goldman
Sachs' research professionals to produce an optimal currency and asset
allocation for the level of risk suitable for a Fund given its investment
objectives and criteria.
Each Fund's management agreement provides that the Advisers may render
similar services to others as long as the services provided by the Advisers
thereunder are not impaired thereby.
The CORE Large Cap Growth and Emerging Markets Equity Funds management
agreements were initially approved by the Trustees, including a majority of the
non-interested Trustees (as defined below) who are not parties to the management
agreement, on April 23, 1997. The other Funds' management agreements were most
recently approved by the Trustees, including a majority of the Trustees who are
not parties to the management agreement or "interested persons" (as such term is
defined in the Act) of any party thereto (the "non-interested Trustees"), on
April 23, 1997. These arrangements were most recently approved by the
shareholders of each Fund (other than CORE Large Cap Growth and Emerging Markets
Equity Funds) on April 21, 1997. Each management agreement will remain in
effect until June 30, 1998 from year to year thereafter provided such
continuance is specifically approved at least annually by (a) the vote of a
majority of the outstanding voting securities of such Fund or a majority of the
Trustees, and (b) the vote of a majority of the non-interested Trustees, cast in
person at a meeting called for the purpose of voting on such approval. Each
management agreement will terminate automatically if assigned (as defined in the
Act) and is terminable at any time without penalty by the Trustees or by vote of
a majority of the outstanding voting securities of the affected Fund on 60 days'
written notice to the Adviser and by the Adviser on 60 days' written notice to
the Trust.
Pursuant to the management agreements the Advisers are entitled to receive
the fees listed below, payable monthly of such Fund's average daily net assets.
In addition, the Advisers voluntarily agreed to limit its management fee to an
annual rate also listed below:
Management Management
With Fee Without Fee
Fund Limitations Limitations
- ---- ----------- -----------
GSAM
Balanced Fund 0.65% 0.65%
Growth and Income Fund 0.70% 0.70%
CORE Large Cap Growth Fund 0.60% 0.75%
Mid Cap Equity Fund 0.75% 0.75%
Small Cap Equity Fund 1.00% 1.00%
GSFM
CORE U.S. Equity Fund 0.75% 0.59%
Capital Growth Fund 1.00% 1.00%
GSAMI
International Equity Fund 1.00% 0.89%
Emerging Markets Equity Fund 1.20% 1.10%
Asia Growth Fund 1.00% 0.86%
B-40
<PAGE>
GSAM, GSFM and GSAMI may discontinue or modify the above limitations in the
future at their discretion, although they have no current intention to do so.
Prior to May 1, 1997, the Funds then in operation had separate investment
advisory (and subadvisory, in the case of the International Equity Fund) and
administration agreements. Effective May 1, 1997, the services under such
agreements were combined in the management agreement. The services required to
be performed for the Funds and the combined advisory (and subadvisory, in the
case of the International Equity Fund) and administration fees payable by the
Funds under the former advisory (and subadvisory, in the case of the
International Equity Fund) and administration agreements are identical to the
services and fees under the management agreement.
For the last three fiscal years the amounts of the combined investment
advisory (and subadvisory, in the case of the International Equity Fund) and
administration fees incurred by each Fund then in existence were as follows:
1997 1996 1995
============= ============= =============
Balanced Fund $ 402,183 $ 193,041 $ 8,858
Growth and Income Fund 3,541,318 2,225,553 790,893
CORE U.S. Equity Fund 1,667,381/3/ 817,563/3/ 693,383/2/
CORE Large Cap Growth Fund/1/ N/A N/A N/A
Capital Growth Fund 8,697,265 9,335,745 8,724,828
Mid Cap Equity Fund/4/ 964,945 489,043 N/A
International Equity Fund 4,124,076/3/ 2,794,872/2/ 3,186,509/2/
Small Cap Equity Fund 2,130,703 2,908,839 3,385,899
Emerging Market Equity Fund/1/ N/A N/A N/A
Asia Growth Fund 2,221,857/3/ 1,563,641/2/ 553,084/2/
- ----------------------------
1 Not Operational.
2 Does not give effect to the agreement (which was not in effect during such
fiscal years) by GSFM, GSAM and GSAMI to limit management fees to 0.59%,
0.89% and 0.86%, respectively of CORE U.S. Equity, International Equity and
Asia Growth Fund's average daily net assets.
3 Gives effect to the agreement (which was in effect as of June 15, 1995) by
GSFM to limit management fees to 0.59%, 0.89% and 0.86%, respectively, of
the CORE U.S. Equity, International Equity and Asia Growth Fund's average
daily net assets. For the fiscal year ended January 31, 1996, had
limitations not been in effect, CORE U.S. Equity Fund would have paid
$1,019,639 in investment management fees. For the fiscal year ended
January 31, 1997, had limitations not been in effect, CORE U.S. Equity,
International Equity and Asia Growth Funds would have paid $2,119,552,
$4,638,203 and $2,583,555, respectively, in investment management fees.
4 Commenced operations on August 1, 1995.
Under the Management Agreement, each Adviser also: (i) supervises all non-
advisory operations of each Fund that it advisers; (ii) provides personnel to
perform such executive, administrative and clerical services as are reasonably
necessary to provide effective administration of each Fund; (iii) arranges for
at each Fund's expense (a) the preparation of all required tax returns, (b) the
preparation and submission of reports to existing shareholders, (c) the periodic
updating of prospectuses and statements of additional information and (d) the
preparation of reports to be filed with the SEC and other regulatory
authorities; (iv) maintains each Fund's records; and (v) provides office space
and all necessary office equipment and services.
B-41
<PAGE>
ACTIVITIES OF GOLDMAN SACHS AND ITS AFFILIATES AND OTHER ACCOUNTS MANAGED
BY GOLDMAN SACHS. The involvement of the Advisers 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 Funds or impede their investment activities.
Goldman Sachs and its affiliates, including, without limitation, the
Advisers and their advisory affiliates, have proprietary interests in, and may
manage or advise with respect to, accounts or funds (including separate accounts
and other funds and collective investment vehicles) which have investment
objectives similar to those of the Funds and/or which engage in transactions in
the same types of securities, currencies and instruments as the Funds. Goldman
Sachs and its affiliates are major participants in the global currency,
equities, swap and fixed income markets, in each case both on a proprietary
basis and for the accounts of customers. As such, Goldman Sachs and its
affiliates are actively engaged in transactions in the same securities,
currencies and instruments in which the Funds invest. Such activities could
affect the prices and availability of the securities, currencies and instruments
in which the Funds will invest, which could have an adverse impact on each
Fund's performance. Such transactions, particularly in respect of proprietary
accounts or customer accounts other than those included in the Advisers' and
their advisory affiliates' asset management activities, will be executed
independently of the Funds' transactions and thus at prices or rates that may be
more or less favorable. When the Advisers and their advisory affiliates seek
to purchase or sell the same assets for their managed accounts, including the
Funds, the assets actually purchased or sold may be allocated among the accounts
on a basis determined in its good faith discretion to be equitable. In some
cases, this system may adversely affect the size or the price of the assets
purchased or sold for the Funds.
From time to time, the Funds' activities may be restricted because of
regulatory restrictions applicable to Goldman Sachs and its affiliates, and/or
their internal policies designed to comply with such restrictions. As a result,
there may be periods, for example, when the Advisers and/or their affiliates
will not initiate or recommend certain types of transactions in certain
securities or instruments with respect to which the Advisers and/or their
affiliates are performing services or when position limits have been reached.
In connection with their management of the Funds, the Advisers may have
access to certain fundamental analysis and proprietary technical models
developed by Goldman Sachs and other affiliates. The Advisers will not be under
any obligation, however, to effect transactions on behalf of the Funds in
accordance with such analysis and models. In addition, neither Goldman Sachs
nor any of its affiliates will have any obligation to make available any
information regarding their proprietary activities or strategies, or the
activities or strategies used for other accounts managed by them, for the
benefit of the management of the Funds and it is not anticipated that the
Advisers will have access to such information for the purpose of managing the
Funds. The proprietary activities or portfolio strategies of Goldman Sachs and
its affiliates or the activities or strategies used for accounts managed by them
or other customer accounts could conflict with the transactions and strategies
employed by the Advisers in managing the Funds.
The results of each Fund's investment activities may differ significantly
from the results achieved by the Advisers and their affiliates for their
proprietary accounts or accounts (including investment companies or collective
investment vehicles) managed or advised by them. It is possible that Goldman
Sachs and its affiliates and such other accounts will achieve investment results
which are substantially more or less favorable than the results achieved by a
Fund. Moreover, it is possible that a Fund will sustain losses during periods
in which Goldman Sachs and its affiliates achieve significant profits on their
trading for proprietary or other accounts. The opposite result is also
possible.
B-42
<PAGE>
The investment activities of Goldman Sachs and its affiliates for their
proprietary accounts and accounts under their management may also limit the
investment opportunities for the Fund in certain emerging markets in which
limitations are imposed upon the aggregate amount of investment, in the
aggregate or individual issuers, by affiliated foreign investors.
An investment policy committee which may include partners of Goldman Sachs
and its affiliates may develop general policies regarding a Fund's activities
but will not be involved in the day-to-day management of such Fund. In such
instances, those individuals may, as a result, obtain information regarding the
Fund's proposed investment activities which is not generally available to the
public. In addition, by virtue of their affiliation with Goldman Sachs, any
such member of an investment policy committee will have direct or indirect
interests in the activities of Goldman Sachs and its affiliates in securities
and investments similar to those in which the Fund invests.
In addition, certain principals and certain of the employees of the
Advisers are also principals or employees of Goldman Sachs or their affiliated
entities. As a result, the performance by these principals and employees of
their obligations to such other entities may be a consideration of which
investors in the Funds should be aware.
Each Adviser may enter into transactions and invest in currencies or
instruments on behalf of a Fund in which customers of Goldman Sachs serve as the
counterparty, principal or issuer. In such cases, such party's interests in the
transaction will be adverse to the interests of a Fund, and such party may have
no incentive to assure that the Funds obtain the best possible prices or terms
in connection with the transactions. Goldman Sachs and its affiliates may also
create, write or issue derivative instruments for customers of Goldman Sachs or
its affiliates, the underlying securities or instruments of which may be those
in which a Fund invests or which may be based on the performance of a Fund. The
Funds may, subject to applicable law, purchase investments which are the subject
of an underwriting or other distribution by Goldman Sachs or its affiliates and
may also enter transactions with other clients of Goldman Sachs or its
affiliates where such other clients have interests adverse to those of the
Funds. At times, these activities may cause departments of the Firm to give
advice to clients that may cause these clients to take actions adverse to the
interests of the client. To the extent affiliated transactions are permitted,
the Funds will deal with Goldman Sachs and its affiliates on an arms-length
basis.
Each Fund will be required to establish business relationships with its
counterparties based on the Fund's own credit standing. Neither Goldman Sachs
nor its affiliates will have any obligation to allow their credit to be used in
connection with a Fund's establishment of its business relationships, nor is it
expected that a Fund's counterparties will rely on the credit of Goldman Sachs
or any of its affiliates in evaluating the Fund's creditworthiness.
From time to time, Goldman Sachs or any of its affiliates may, but is not
required to, purchase and hold shares of a Fund in order to increase the assets
of the Fund. Increasing a 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 a Fund acquired for its own account. A large
redemption of shares of a 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 a Fund and other shareholders
in deciding whether to redeem its shares.
It is possible that a Fund's holdings will include securities of entities
for which Goldman Sachs performs investment banking services as well as
securities of entities in which Goldman Sachs makes a market. From time to
time, Goldman Sachs' activities may limit the Funds' flexibility in purchases
and sales of securities. When Goldman Sachs is engaged in an underwriting or
other distribution of securities
B-43
<PAGE>
of an entity, the Advisers may be prohibited from purchasing or recommending the
purchase of certain securities of that entity for the Funds.
DISTRIBUTOR AND TRANSFER AGENT
==============================
Goldman Sachs serves as the exclusive distributor of shares of the Funds
pursuant to a "best efforts" arrangement as provided by a distribution agreement
with the Trust on behalf of each Fund. Pursuant to the distribution agreement,
after the Prospectus and periodic reports have been prepared, set in type and
mailed to shareholders, Goldman Sachs will pay for the printing and distribution
of copies thereof used in connection with the offering to prospective investors.
Goldman Sachs will also pay for other supplementary sales literature and
advertising costs. Goldman Sachs may enter into sales agreements with certain
investment dealers and other financial service firms (the "Authorized Dealers")
to solicit subscriptions for Class A and Class B Shares of the Funds. Goldman
Sachs receives a portion of the sales charge imposed on the sale, in the case of
Class A Shares, or redemption in the case of Class B Shares, of such Fund
shares. No Class B Shares were outstanding during the fiscal years ended
January 31, 1995 and 1996.
Goldman Sachs retained the following commissions on sales of Class A and
Class B Shares during the following periods:
1997 1996 1995
========== ======== ========
Balanced Fund $ 94,000 $ 28,000 $ 14,000
Growth and Income Fund 555,000 771,000 361,000
CORE U.S. Equity Fund 380,000 108,000 58,000
CORE Large Cap Growth Fund/1/ N/A N/A N/A
Capital Growth Fund 323,000 523,000 815,000
International Equity Fund 1,563,000 211,000 660,000
Small Cap Equity Fund 219,000 202,000 868,000
Emerging Market Equity Fund/1/ N/A N/A N/A
Asia Growth Fund 1,397,000 507,000 829,000
- ----------------------------------------------------------------
1 Not operational.
Goldman Sachs serves as the Trust's transfer agent. Under its transfer
agency agreement with the Trust, Goldman Sachs has undertaken with the Trust to
(i) record the issuance, transfer and redemption of shares, (ii) provide
confirmations of purchases and redemptions, and quarterly statements, as well as
certain other statements, (iii) provide certain information to the Trust's
custodian and the relevant sub-custodian in connection with redemptions, (iv)
provide dividend crediting and certain disbursing agent services, (v) maintain
shareholder accounts, (vi) provide certain state Blue Sky and other information,
(vii) provide shareholders and certain regulatory authorities with tax related
information, (viii) respond to shareholder inquiries, and (ix) render certain
other miscellaneous services. As compensation for the services rendered to the
Trust by Goldman Sachs as transfer agent and the assumption by Goldman Sachs of
the expenses related thereto, Goldman Sachs is entitled to receive a fee with
respect to each Fund with respect to Class A Shares and Class B Shares equal to
$12,000 per year plus $7.50 per account, together with out-of-pocket and
transaction-related expenses (including those out-of-pocket expenses payable to
servicing agents).
B-44
<PAGE>
For the last three fiscal years the amounts paid to Goldman Sachs by each
Fund then in existence for transfer agency services performed were as follows:
<TABLE>
<CAPTION>
Class A & B Class A Class A
1997 1996 1995
==================== ============== ====================
<S> <C> <C> <C>
Balanced Fund $148,576 $ 72,067 $ 20,000
Growth and Income Fund 870,527 542,671 262,158
CORE U.S. Equity Fund 319,246 103,682 151,230
CORE Large Cap Growth Fund/1/ N/A N/A N/A
Capital Growth Fund 908,310 549,844 694,014
International Equity Fund 586,243 129,313 481,169
Small Cap Equity Fund 511,883 254,292 600,618
Emerging Markets Equity Fund/1/ N/A N/A N/A
Asia Growth Fund 385,114 192,097 120,000
<CAPTION>
Institutional Shares Service Shares Institutional Shares
1997 1997 1996
======== ======== ========
<S> <C> <C> <C>
Growth and Income Fund $ 15 $ 488 N/A
CORE U.S. Equity Fund/2/ N/A N/A $ 11,571
CORE Large Cap Growth Fund/1/ N/A N/A N/A
Mid Cap Equity Fund/3/ 51,464 N/A 26,082
International Equity Fund/2/ N/A N/A N/A
Emerging Markets Equity Fund/1/ N/A N/A N/A
Asia Growth Fund/2/ N/A N/A N/A
</TABLE>
___________________________
1 Not operational.
2 Contractually set to 0.
3 Commenced operations on August 1, 1995.
The Trust's distribution and transfer agency agreements each provide
that Goldman Sachs may render similar services to others so long as the services
Goldman Sachs provides thereunder are not impaired thereby. Such agreements
also provide that the Trust will indemnify Goldman Sachs against certain
liabilities.
OTHER PURCHASE INFORMATION
Authorized Dealers and other financial intermediaries provide varying
arrangements for their clients to purchase and redeem Fund shares. Some may
establish higher minimum investment requirements and others may limit the
availability of certain privileges with respect to the purchase and redemption
of shares or the reinvestment of dividends. Firms may arrange with their clients
for other investment or administrative services and may independently establish
and charge additional amounts to their clients for such services, which charges
would reduce a client's return. If shares of a Fund are held in a "street name"
account or were purchased through an Authorized Dealer, shareholders should
contact the Authorized Dealer to purchase, redeem or exchange shares, to make
changes in or give instructions concerning the account or to obtain information
about the account.
B-45
<PAGE>
The Adviser, Distributor and/or their affiliates may pay, out of their
own assets, compensation to Authorized Dealers and other persons for the sale
and distribution of Class A and Class B Shares of the Funds and/or for the
servicing of those shares. These payments ("Additional Payments") would be in
addition to the payments by the Funds described in the Funds' Prospectus and
this Statement of Additional Information for distribution and shareholder
servicing and processing, and would also be in addition to the sales commissions
payable to dealers as set forth in the Prospectus. These Additional Payments
may take the form of "due diligence" payments for an Authorized Dealer's
examination of the Funds and payments for providing extra employee training and
information relating to the Funds; "listing" fees for the placement of the Funds
on a dealer's list of mutual funds available for purchase by its customers;
"finders" or "referral" fees for directing investors to the Funds; "marketing
support" fees for providing assistance in promoting the sale of the Funds' Class
A and Class B Shares; and payments for the sale of Class A and Class B Shares
and/or the maintenance of Shares balances. In addition, the Adviser,
Distributor and/or their affiliates may make Additional Payments for
subaccounting, administrative and/or shareholder processing services that are in
addition to the shareholder servicing and processing fees paid by the Funds.
The Additional Payments made by the Adviser, Distributor and their affiliates
may be a fixed dollar amount, may be based on the number of customer accounts
maintained by an Authorized Dealer, or may be based on a percentage of the value
of Shares sold to, or held by, customers of the Authorized Dealers involved, and
may be different for different Authorized Dealers. Furthermore, the Adviser,
Distributor and/or their affiliates may contribute to various non-cash and cash
incentive arrangements to promote the sale of shares, as well as sponsor various
educational programs, sales contests and/or promotions in which participants may
receive prizes such as travel awards, merchandise and cash and/or investment
research pertaining to particular securities and other financial instruments or
to the securities and financial markets generally, educational information and
related support materials and hardware and/or software. The Adviser,
Distributor and their affiliates may also pay for the travel expenses, meals,
lodging and entertainment of Authorized Dealers and their salespersons and
guests in connection with educational, sales and promotional programs, subject
to applicable NASD regulations. The Distributor currently expects that such
additional bonuses or incentives will not exceed 0.50% of the amount of any
sales.
EXPENSES
========
Except as set forth in the Prospectus under "Management," the Trust is
responsible for the payment of its expenses. The expenses include, without
limitation, the fees payable to the Advisers, the fees and expenses payable to
the Trust's custodian and subcustodians, transfer agent fees, brokerage fees and
commissions, filing fees for the registration or qualification of the Trust's
shares under federal or state securities laws, expenses of the organization of
the Trust, 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 (including the cost of legal and certain accounting services rendered
by employees of GSAM, GSAMI and Goldman Sachs with respect to the Trust),
expenses of preparing and setting in type prospectuses, statements of additional
information, proxy material, reports and notices and the printing and
distributing of the same to the Trust's shareholders and regulatory authorities,
any expenses assumed by a Fund pursuant to its distribution, authorized dealer,
service and administration plans, compensation and expenses of its "non-
interested" Trustees and extraordinary expenses, if any, incurred by the Trust.
Except for fees under any distribution, authorized dealer, service,
administration or service plans applicable to a particular class and transfer
agency fees, all Fund expenses are borne on a non-class specific basis.
The Adviser to the Balanced, Growth and Income, CORE U.S. Equity, CORE
Large Cap Growth, Mid Cap Equity, International Equity, Emerging Markets Equity
and Asia Growth Funds has voluntarily agreed to reduce or limit certain "Other
Expenses" of such Funds (excluding management, distribution, authorized dealer,
administration and service fees, taxes, interest and brokerage fees and
litigation, indemnification and other extraordinary expenses, and in the case of
each Fund other than Balanced and
B-46
<PAGE>
CORE Large Cap Growth Funds, transfer agency fees) to the extent such expenses
exceed 0.10%, 0.11%, 0.06%, 0.05%, 0.06%, 0.20%, 0.16% and 0.24% per annum of
such Funds' average daily net assets, respectively. Such reductions or limits,
if any, are calculated monthly on a cumulative basis and may be discontinued or
modified by the applicable Adviser in its discretion at any time.
Fees and expenses of legal counsel, registering shares of a Fund,
holding meetings and communicating with shareholders may include an allocable
portion of the cost of maintaining an internal legal and compliance department.
Each Fund may also bear an allocable portion of the applicable Adviser's costs
of performing certain accounting services not being provided by a Fund's
Custodian.
For the last three fiscal years the amounts of certain "Other
Expenses" of each Fund then in existence that were reduced or otherwise limited
were as follows:
1997 1996 1995
======== ======== ========
Balanced Fund $319,552 $192,405 $ 95,906
Growth and Income Fund 0 0 106,725
CORE U.S. Equity Fund 104,833 110,581 N/A
CORE Large Cap U.S. Growth Fund/1/ N/A N/A N/A
Capital Growth Fund N/A N/A N/A
Mid Cap Equity Fund/2/ 72,441 85,515 N/A
International Equity Fund 144,265 N/A N/A
Small Cap Equity Fund N/A N/A N/A
Emerging Markets Equity Fund/1/ N/A N/A N/A
Asia Growth Fund 50,407 0 35,905
________________________________
1 Not operational.
2 Commenced operations on August 1, 1995.
CUSTODIAN AND SUB-CUSTODIANS
============================
State Street, P.O. Box 1713, Boston, Massachusetts 02105, is the custodian
of the Trust's portfolio securities and cash. State Street also maintains the
Trust's accounting records. State Street may appoint sub-custodians from time
to time to hold certain securities purchased by the Trust and to hold cash for
the Trust.
INDEPENDENT PUBLIC ACCOUNTANTS
==============================
Arthur Andersen, LLP, independent public accountants, One International
Place, Boston, Massachusetts 02110, have been selected as auditors of the Trust.
In addition to audit services, Arthur Andersen, LLP prepares the Trust's federal
and state tax returns, and provides consultation and assistance on accounting,
internal control and related matters.
B-47
<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Advisers are responsible for decisions to buy and sell securities for
the Funds, 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 a Fund, the Advisers are
generally required to give primary consideration to obtaining the most favorable
price and efficient execution under the circumstances. This means that an
Adviser will seek to execute each transaction at a price and commission, if any,
which provides the most favorable total cost or proceeds reasonably attainable
in the circumstances. As permitted by Section 28(e) of the Securities Exchange
Act of 1934, the Fund may pay a broker which provides brokerage and research
services 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 by the
Trustees 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
Advisers generally seek reasonably competitive spreads or commissions, a Fund
will not necessarily be paying the lowest spread or commission available.
Within the framework of this policy, the Advisers will consider research and
investment services provided by brokers or dealers who effect or are parties to
portfolio transactions of a Fund, the Advisers and their affiliates, or their
other clients. Such research and investment services are those which brokerage
houses customarily provide to institutional investors and include research
reports on particular industries and companies, economic surveys and analyses,
recommendations as to specific securities and other products or services (e.g.,
quotation equipment and computer related costs and expenses), advice concerning
the value of securities, the advisability of investing in, purchasing or selling
securities, the availability of securities or the purchasers or sellers of
securities, furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy and performance of
accounts, effecting securities transactions and performing functions incidental
thereto (such as clearance and settlement) and providing lawful and appropriate
assistance to the Advisers in the performance of their decision-making
responsibilities. Such services are used by the Advisers in connection with all
of their investment activities, and some of such services obtained in connection
with the execution of transactions for a Fund may be used in managing other
investment accounts. Conversely, brokers furnishing such services may be
selected for the execution of transactions of such other accounts, whose
aggregate assets are far larger than those of a Fund, and the services furnished
by such brokers may be used by the Advisers in providing management services for
the Trust.
In circumstances where two or more broker-dealers offer comparable prices
and execution capability, preference may be given to a broker-dealer which has
sold shares of the Fund as well as shares of other investment companies or
accounts managed by the Advisers. This policy does not imply a commitment to
execute all portfolio transactions through all broker-dealers that sell shares
of the Fund.
On occasions when an Adviser deems the purchase or sale of a security to be
in the best interest of a Fund as well as its other customers (including any
other fund or other investment company or advisory
B-48
<PAGE>
account for which such Adviser acts as investment adviser or subadviser), the
Adviser, to the extent permitted by applicable laws and regulations, may
aggregate the securities to be sold or purchased for the Fund with those to be
sold or purchased for such other customers in order to obtain the best net price
and most favorable execution under the circumstances. In such event,
allocation of the securities so purchased or sold, as well as the expenses
incurred in the transaction, will be made by the applicable Adviser in the
manner it considers to be equitable and consistent with its fiduciary
obligations to such Fund and such other customers. In some instances, this
procedure may adversely affect the price and size of the position obtainable for
a Fund.
Commission rates in the U.S. are established pursuant to negotiations with
the broker based on the quality and quantity of execution services provided by
the broker in the light of generally prevailing rates. The allocation of orders
among brokers and the commission rates paid are reviewed periodically by the
Trustees.
Subject to the above considerations, the Advisers may use Goldman Sachs as
a broker for a Fund. In order for Goldman Sachs to effect any portfolio
transactions for each Fund, the commissions, fees or other remuneration received
by Goldman Sachs must be reasonable and fair compared to the commissions, fees
or other remuneration paid to other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time. This standard would
allow Goldman Sachs to receive no more than the remuneration which would be
expected to be received by an unaffiliated broker in a commensurate arm's-length
transaction. Furthermore, the Trustees, including a majority of the Trustees who
are not "interested" Trustees, have adopted procedures which are reasonably
designed to provide that any commissions, fees or other remuneration paid to
Goldman Sachs are consistent with the foregoing standard. Brokerage transactions
with Goldman Sachs are also subject to such fiduciary standards as may be
imposed upon Goldman Sachs by applicable law.
B-49
<PAGE>
For the past three fiscal years, each Fund in existence paid brokerage
commissions as follows:
<TABLE>
<CAPTION>
Total Total Brokerage
Brokerage Amount of Commissions
Total Commissions Transaction Paid
Brokerage Paid to on which to Brokers
Commissions Affiliated Commissions Providing
Paid Persons/2/ Paid/3/ Research
=========== ================== =================== ===========
<S> <C> <C> <C> <C>
Fiscal Year Ended
January 31, 1997:
Balanced Fund $ 62,072 $ 5,112 (8%)/1/ $ 1,057,742(15%)/2/ $0
Growth and Income Fund 779,396 77,587(10%)/1/ 13,310,208(9%)/2/ 0
CORE U.S. Equity Fund 279,620 0(0%)/1/ 6,706,824(0%)/2/ 0
CORE Large Cap Growth Fund/(3)/ N/A N/A N/A N/A
Capital Growth Fund 1,460,140 304,052(21%)/1/ 29,920,578(1%)/2/ 42,039
Mid Cap Equity Fund 364,294 22,134(6%)/1/ 6,655,100(7%)/2/ 0
International Equity Fund 1,529,436 0(0%) 48,059,958(0%)/2/ 0
Small Cap Equity Fund 758,205 36,087(5%)/1/ 16,439,842(1%)/2/ 0
Emerging Markets Equity Fund/(3)/ N/A N/A N/A N/A
Asia Growth Fund 1,554,313 50,624(3%)/1/ 102,609,295(4%)/2/ 0
</TABLE>
B-50
<PAGE>
<TABLE>
<CAPTION>
Total Total Brokerage
Brokerage Amount of Commissions
Total Commissions Transaction Paid
Brokerage Paid to on which to Brokers
Commissions Affiliated Commissions Providing
Paid Persons/2/ Paid/3/ Research
=========== ================== ======================== ===========
<S> <C> <C> <C> <C>
Fiscal Year Ended
January 31, 1996:
Balanced Fund $ 56,860 $ 7,391(13%)/(1)/ $ 29,697,202(13%)/(2)/ $0
Growth and Income Fund 841,605 71,218(8%)/(1)/ 425,040,430(9%)/(2)/ 0
CORE U.S. Equity Fund 121,424 0(0%)/(1)/ 148,427,497(0%)/(2)/ 0
CORE Large Cap Growth Fund/(3)/ N/A N/A N/A N/A
Capital Growth Fund 1,979,949 284,660(14%)/(1)/ 1,034,755,196(11%)/(2)/ 0
Mid Cap Equity Fund 315,212 40,935(13%)/(1)/ 142,547,552(11%)/(2)/ 0
International Equity Fund 1,260,992 13,629(1%)/(1)/ 359,700,166(1%)/(2)/ 0
Small Cap Equity Fund 690,234 72,980(11%)/(1)/ 170,616,044(6%)/(2)/ 0
Emerging Markets Equity Fund/(3)/ N/A N/A N/A N/A
Asia Growth Fund 1,676,525 3,778(0%)/(1)/ 247,662,049(2%)/(2)/ 0
</TABLE>
B-51
<PAGE>
<TABLE>
<CAPTION>
Total Total Brokerage
Brokerage Amount of Commissions
Total Commissions Transaction Paid
Brokerage Paid to on which to Brokers
Commissions Affiliated Commissions Providing
Paid Persons/2/ Paid/3/ Research
=========== ================ ==================== ===========
<S> <C> <C> <C> <C>
Fiscal Year Ended
January 31, 1995:
Balanced Fund $ 9,652 $ 1,522(16%)/1/ $ 7,216,224(10%)/2/ $0
Growth and Income Fund 637,080 77,404(12%)/1/ 468,165,610(7%)/2/ 0
CORE U.S. Equity Fund 119,192 0(0%)/1/ 99,616,396(0%)/2/ 0
CORE Large Cap Growth Fund/(3)/ N/A N/A N/A N/A
Capital Growth Fund 1,427,413 273,076(19%)/1/ 786,135,073(13%)/2/ 0
Mid Cap Equity Fund N/A N/A N/A N/A
International Fund 1,799,525 0(0%)/1/ 546,364,113(0%)/2/ 0
Small Cap Equity Fund 555,667 23,137(4%)/1/ 392,235,715(2%)/2/ 0
Emerging Markets Equity Fund/(3)/ N/A N/A N/A N/A
Asia Growth Fund 1,002,148 67,754(7%)/1/ 171,880,775(2%)/2/ 0
</TABLE>
- ----------------------------
1 Percentage of total amount of transactions involving the payment of
commissions effected through affiliated persons.
2 Percentage of total commissions paid.
3 Not operational.
B-52
<PAGE>
During the fiscal year ended January 31, 1997, the Trust acquired and sold
securities of its regular broker-dealers: all brokers below and JP Morgan. As
of January 31, 1997, the Trust held the following amounts of securities of its
regular broker/dealers, as defined in Rule 10b-1 under the Act, or their parents
($ in thousands):
<TABLE>
<CAPTION>
Fund Broker/Dealer Amount
- ------------------------ ---------------- -------
<S> <C> <C>
Balanced Fund Bear Stearns $ 6,679
Lehman Brothers 2,098
Chase Securities 490
Growth and Income Fund Chase Securities $ 6,003
Lehman Brothers 11,099
Bear Stearns 19,457
Core US Equity Fund Chase Securities 1,193
Smith Barney 6,439
Merrill Lynch 4,423
Morgan Stanley 2,188
Salomon Brothers 4,249
Bear Stearns 2,614
Lehman Brothers 659
Capital Growth Fund Bear Stearns 13,286
Lehman Brothers 3,349
Mid Cap Equity Fund Lehman Brothers 2,151
Bear Stearns 2,977
Small Cap Equity Fund Bear Stearns 12,052
Lehman Brothers 3,038
</TABLE>
NET ASSET VALUE
Under the Act, the Trustees are responsible for determining in good
faith the fair value of securities of each Fund. In accordance with procedures
adopted by the Trustees, the net value per share of each class of each Fund is
calculated by determining the value of the net assets attributable to each class
of that Fund and dividing by the number of outstanding shares of that class.
All securities are valued as of the close of regular trading on the New York
Stock Exchange (normally 4:00 p.m. New York time) on each Business Day (as
defined in the Prospectus).
In the event that the New York Stock Exchange or the national
securities exchange on which stock options are traded adopt different trading
hours on either a permanent or temporary basis, the Trustees will reconsider the
time at which net asset value is computed. In addition, each Fund may compute
its net asset value as of any time permitted pursuant to any exemption, order or
statement of the SEC or its staff.
Portfolio securities of 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
B-53
<PAGE>
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 principally: (i) on a U.S. exchange or NASDAQ will be valued at the mean
between the closing bid and asked prices; and (ii) on a foreign exchange will be
valued at the last sale price (also referred to as the close price). The last
sale price for securities traded principally on a foreign exchange will be
determined as of the close of the London Stock Exchange or, for securities
traded on exchanges located in the Asia Pacific region, noon London time; (b)
debt securities will be valued using a pricing service approved by the Trustees
if such prices are believed by the investment adviser to accurately represent
market value; (c) overnight repurchase agreements will be valued by the
investment adviser at cost; (d) term repurchase agreements (i.e., those whose
maturity exceeds seven days) and interest rate swaps, caps, collars and floors
will be valued at the average of the bid quotations obtained daily from at least
two dealers or, for term repurchase agreements, recognized counterparties; (e)
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; (f) spot and forward foreign currency exchange contracts
will be valued using a pricing service such as Reuters then calculating the mean
between the last bid and asked quotations supplied by certain independent
dealers in such contracts; (g) exchange-traded options and futures contracts
will be valued by the custodian bank at the last sale price on the exchange
where such contracts and options are principally traded; and (h) over-the-
counter options will be valued by an independent unaffiliated broker identified
by the portfolio manager/trader and contacted by the custodian bank; and (i) all
other securities, 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 as stated in the
valuation procedures which were approved by the Board of Trustees. For all
brokers used in this process, the custodian bank will send a letter to the
broker furnishing the quotation. If accurate quotations are not readily
available, such contracts will be valued by an independent unaffiliated broker
identified by the portfolio manager/trader and contacted by the custodian bank.
If broker quotes are used, the portfolio manager/trader will identify one
independent unaffiliated broker from whom the custodian bank will obtain prices
daily and another independent unaffiliated broker from whom the custodian bank
will obtain quotes at least weekly. The custodian bank will promptly notify the
portfolio manager/trader and a member of the GSAM Valuation Committee or a
designee thereof of any deviations equal to or greater than 3% between the
weekly quote and the daily quotes for the date that the weekly quotes were
obtained. The investment adviser will promptly provide instructions to the
custodian bank. For all brokers used in this process, the custodian bank will
send a letter to the broker furnishing the quotation.
Generally, trading in securities on European and Far Eastern
securities exchanges and on over-the-counter markets is substantially completed
at various times prior to the close of business on each Business Day in New York
(i.e., a day on which the New York Stock Exchange is open for trading). In
addition, European or Far Eastern securities trading generally or in a
particular country or countries may not take place on all Business Days in New
York. Furthermore, trading takes place in various foreign markets on days which
are not Business Days in New York and days on which the Funds' net asset values
are not calculated. Such calculation does not take place contemporaneously with
the determination of the prices of the majority of the portfolio securities used
in such calculation. Events affecting the values of portfolio securities that
occur between the time their prices are determined and the close of regular
trading
B-54
<PAGE>
on the New York Stock Exchange will not be reflected in a Fund's calculation of
net asset values unless the Trustees deem that the particular event would
materially affect net asset value, in which case an adjustment will be made.
The proceeds received by each Fund and each other series of the Trust
from the issue or sale of its shares, and all net investment income, realized
and unrealized gain and proceeds thereof, subject only to the rights of
creditors, will be specifically allocated to such Fund and constitute the
underlying assets of that Fund or series. The underlying assets of each Fund
will be segregated on the books of account, and will be charged with the
liabilities in respect of such Fund and with a share of the general liabilities
of the Trust. Expenses of the Trust with respect to the Funds and the other
series of the Trust are generally allocated in proportion to the net asset
values of the respective Funds or series except where allocations of direct
expenses can otherwise be fairly made.
PERFORMANCE INFORMATION
A Fund may from time to time quote or otherwise use total return,
yield and/or distribution rate information in advertisements, shareholder
reports or sales literature. Average annual total return and yield are computed
pursuant to formulas specified by the SEC.
Yield is computed by dividing net investment income earned during a
recent thirty-day period by the product of the average daily number of shares
outstanding and entitled to receive dividends during the period and the maximum
public offering price per share on the last day of the relevant period. The
results are compounded on a bond equivalent (semi-annual) basis and then
annualized. Net investment income per share is equal to the dividends and
interest earned during the period, reduced by accrued expenses for the period.
The calculation of net investment income for these purposes may differ from the
net investment income determined for accounting purposes.
The distribution rate for a specified period is calculated by
annualizing distributions of net investment income for such period and dividing
this amount by the net asset value per share or maximum public offering price on
the last day of the period.
Average annual total return for a specified period is derived by
calculating the actual dollar amount of the investment return on a $1,000
investment made at the maximum public offering price at the beginning of the
period, and then calculating the annual compounded rate of return which would
produce that amount, assuming a redemption at the end of the period. This
calculation assumes a complete redemption of the investment. It also assumes
that all dividends and distributions are reinvested at net asset value on the
reinvestment dates during the period.
Year-by-year total return and cumulative total return for a specified
period are each derived by calculating the percentage rate required to make a
$1,000 investment (made at the maximum public offering price with all
distributions reinvested) at the beginning of such period equal to the actual
total value of such investment at the end of such period. The following table
indicates the total return (capital changes plus reinvestment of all
distributions) on a hypothetical investment of $1,000 in a Fund for the periods
indicated.
Occasionally statistics may be used to specify Fund volatility or
risk. Measures of volatility or risk are generally used to compare a Fund's net
asset value or performance relative to a market index. One measure of
volatility is beta. Beta is the volatility of a fund relative to the total
market. A beta of more than 1.00 indicates volatility greater than the market,
and a beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is used
B-55
<PAGE>
to measure variability of net asset value or total return around an average,
over a specified period of time. The premise is that greater volatility
connotes greater risk undertaken in achieving performance.
From time to time the Trust may publish an indication of a Fund's past
performance as measured by independent sources such as (but not limited to)
Lipper Analytical Services, Inc., Morningstar Mutual Funds, Weisenberger
Investment Companies Service, Donoghue's Money Fund Report, Micropal, Barron's,
Business Week, Consumer's Digest, Consumer's Report, Investors Business Daily,
The New York Times, Kiplinger's Personal Finance Magazine, Changing Times,
Financial World, Forbes, Fortune, Money, Personal Investor, Sylvia Porter's
Personal Finance and The Wall Street Journal. The Trust may also advertise
information which has been provided to the NASD for publication in regional and
local newspapers. In addition, the Trust may from time to time advertise a
Fund's performance relative to certain indices and benchmark investments,
including: (a) the Lipper Analytical Services, Inc. Mutual Fund Performance
Analysis, Fixed Income Analysis and Mutual Fund Indices (which measure total
return and average current yield for the mutual fund industry and rank mutual
fund performance); (b) the CDA Mutual Fund Report published by CDA Investment
Technologies, Inc. (which analyzes price, risk and various measures of return
for the mutual fund industry); (c) the Consumer Price Index published by the
U.S. Bureau of Labor Statistics (which measures changes in the price of goods
and services); (d) Stocks, Bonds, Bills and Inflation published by Ibbotson
Associates (which provides historical performance figures for stocks, government
securities and inflation); (e) the Salomon Brothers' World Bond Index (which
measures the total return in U.S. dollar terms of government bonds, Eurobonds
and foreign bonds of ten countries, with all such bonds having a minimum
maturity of five years); (f) the Lehman Brothers Aggregate Bond Index or its
component indices; (g) the Standard & Poor's Bond Indices (which measure yield
and price of corporate, municipal and U.S. Government bonds); (h) the J.P.
Morgan Global Government Bond Index; (i) other taxable investments including
certificates of deposit (CDs), money market deposit accounts (MMDAs), checking
accounts, savings accounts, money market mutual funds and repurchase agreements;
(j) Donoghues' Money Fund Report (which provides industry averages for 7-day
annualized and compounded yields of taxable, tax-free and U.S. Government money
funds); (k) the Hambrecht & Quist Growth Stock Index; (l) the NASDAQ OTC
Composite Prime Return; (m) the Russell Midcap Index; (n) the Russell 2000 Index
- - Total Return; (o) Russell 1000 Growth Index-Total Return; (p) the Value-Line
Composite-Price Return; (q) the Wilshire 4500 Index; (r) the FT-Actuaries Europe
and Pacific Index, and (s) historical investment data supplied by the research
departments of Goldman Sachs, Lehman Brothers, First Boston Corporation, Morgan
Stanley including (EAFE), and the Morgan Stanley Capital International Combined
Asia ex Japan Free Index, the Morgan Stanley Capital International Emerging
Markets Free Index, Salomon Brothers, Merrill Lynch, Donaldson Lufkin and
Jenrette or other providers of such data; (t) the FT-Actuaries Europe and
Pacific Index; (u) CDA/Wiesenberger Investment Companies Services or
Wiesenberger Investment Companies Service; (v) The Goldman Sachs Commodities
Index; and (w) information produced by Micropal, Inc.. The composition of the
investments in such indices and the characteristics of such benchmark
investments are not identical to, and in some cases are very different from,
those of the Fund's portfolio. These indices and averages are generally
unmanaged and the items included in the calculations of such indices and
averages may not be identical to the formulas used by a Fund to calculate its
performance figures.
Information used in advertisements and materials furnished to present
and prospective investors may include statements or illustrations relating to
the appropriateness of certain types of securities and/or mutual funds to meet
specific financial goals. Such information may address:
- cost associated with aging parents;
- funding a college education (including its actual and estimated cost);
- health care expenses (including actual and projected expenses);
- long-term disabilities (including the availability of, and coverage
provided by, disability insurance);
B-56
<PAGE>
- 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, long-term government bonds, treasury bills and
certificates of deposit) over time. However, the characteristics of
these securities are not identical to, and may be very different from,
those of a Fund's portfolio;
. the dollar and non-dollar based returns of various market indices (i.e.,
Morgan Stanley Capital International EAFE Index, FT-Actuaries Europe &
Pacific Index and the Standard & Poor's Index of 500 Common Stocks) over
varying periods of time;
. total stock market capitalizations of specific countries and regions on a
global basis;
. performance of securities markets of specific countries and regions; and
. value of a dollar amount invested in a particular market or type of
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.
The CORE Large Cap Growth Fund was organized on May 1, 1997 and has no
operating or performance history prior thereto. However, in accordance with
interpretive positions expressed by the staff of the SEC, the Fund has adopted
the adjusted performance record of a separate account managed by the Advisers
for periods prior to the Funds' commencement of operations which converted into
Class A Shares as of the commencement date. Any quotation of performance data of
this Fund relating to this period will include the adjusted performance record
of the applicable separate account. The performance record of the separate
account quoted by the Fund have been adjusted downward based on the expenses
applicable to Class A Shares (the class into which the separate account
transferred) to reflect the expenses expected to be incurred by the Fund as
stated in the expense table in the Prospectus. These expenses include any sales
charges and asset-based charges (i.e., fees under Distribution and Authorized
Dealer Service Plans) imposed and other operating expenses. Total return
quotations will be calculated pursuant to SEC approved methodology. Prior to May
1, 1997, the separate account was a separate investment advisory account under
discretionary management by the Adviser and had substantially similar investment
objectives, policies and strategies as the Fund. Unlike the Fund, the separate
account was not registered as an investment company under the Act and therefore
was not subject to certain investment restrictions and operational requirements
that are imposed on investment companies by the Act. If the separate account had
been registered as an investment company under the Act, the separate account's
performance may have been adversely affected by such restrictions and
requirements. On May 1, 1997, the separate account transferred a portion of its
assets to the Fund in exchange for Fund shares. The performance record of each
other class has been linked to the performance of the separate account
B-57
<PAGE>
(based on Class A expenses) and the Class A performance for any periods prior
to commencement of operations of a class of shares.
B-58
<PAGE>
<TABLE>
<CAPTION>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
Assuming no voluntary
waiver of fees and no
expense reimbursements
------------------------
Assumes Assumes Assumes Assumes
5.5% sales no sales 5.5% sales no sales
Fund Class Time Period charge charge charge charge
- --------------------------- ------------- ---------------------------------- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Balanced Fund A 10/12/94-1/31/97 - Since inception 17.41% 20.32% 15.50% 18.27%
Balanced Fund A 2/1/96-1/31/97 - One year 12.07% 18.59% 11.22% 17.69%
Balanced Fund B 5/1/96-1/31/97 - Since inception* N/A 16.22% N/A 15.79%
Growth and Income A 2/5/93-1/31/97 - Since inception 17.31% 18.98% 16.50% 18.17%
Growth and Income A 2/1/96-1/31/97 - One year 21.39% 28.42% 21.13% 28.14%
Growth and Income B 5/1/96-1/31/97 - Since inception* N/A 22.23% N/A 22.23%
Growth and Income Institutional 6/3/96-1/31/97 - Since inception* N/A 20.77% N/A 20.77%
Growth and Income Service 3/6/96-1/31/97 - Since inception* N/A 23.87% N/A 23.87%
CORE U.S. Equity A 5/24/91-1/31/97 - Since inception 13.54% 14.67% 13.25% 14.38%
CORE U.S. Equity A 2/1/92-1/31/97 - Five year 13.99% 15.29% 13.70% 15.00%
CORE U.S. Equity A 2/1/96-1/31/97 - One year 16.98% 23.75% 16.69% 23.44%
CORE U.S. Equity B 5/1/96-1/31/97 - Since inception* N/A 18.59% N/A 18.47%
CORE U.S. Equity Institutional 6/15/95-1/31/97 - Since inception N/A 28.04% N/A 27.74%
CORE U.S. Equity Institutional 2/1/96-1/31/97 - One year N/A 24.63% N/A 24.39%
CORE U.S. Equity Service 6/7/96-1/31/97 - Since inception* N/A 15.92% N/A 15.71%
CORE Large Cap Growth A 11/1/91-1/31/97 - Since inception 18.46% 19.78% 17.30% 18.61%
CORE Large Cap Growth A 2/1/92-1/31/97 - Five year 17.53% 18.85% 16.38% 17.68%
CORE Large Cap Growth A 2/1/96-1/31/97 - One year 27.09% 34.54% 25.85% 33.23%
Capital Growth A 4/20/90-1/31/97 - Since inception 15.57% 16.54% 15.24% 16.21%
Capital Growth A 2/1/92-1/31/97 - Five year 15.42% 16.73% 15.14% 16.44%
Capital Growth A 2/1/96-1/31/97 - One year 19.04% 25.97% 18.75% 25.66%
Capital Growth B 5/1/96-1/31/97 - Since inception* N/A 19.39% N/A 19.39%
</TABLE>
B-59
<PAGE>
<TABLE>
<CAPTION>
Assuming no voluntary
waiver of fees and no
expense reimbursements
----------------------
Assumes Assumes Assumes Assumes
5.5% sales no sales 5.5% sales no sales
Fund Class Time Period charge charge charge charge
- -------------------------- ------------- ---------------------------------- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Mid Cap Equity Institutional 8/1/95-1/31/97 - Since inception N/A 21.65% N/A 21.55%
Mid Cap Equity Institutional 2/1/96-1/31/97 - One year N/A 25.63% N/A 25.55%
International Equity A 12/1/92-1/31/97 - Since inception 9.66% 11.15% 9.40% 10.90%
International Equity A 2/1/96-1/31/97 - One year 7.26% 13.48% 7.05% 13.26%
International Equity B 5/1/96-1/31/97 - Since inception* N/A 2.83% N/A 2.75%
International Equity Institutional 2/7/96-1/31/97 - Since inception* N/A 12.53% N/A 12.38%
International Equity Service 3/6/96-1/31/97 - Since inception* N/A 10.42% N/A 10.28%
Small Cap A 10/22/92-1/31/97- Since inception 12.12% 13.61% 11.79% 13.28%
Small Cap A 2/1/96-1/31/97 - One year 20.27% 27.28% 19.98% 26.97%
Small Cap B 5/1/96-1/31/97 - Since inception* N/A 5.39% N/A 5.39%
Asia Growth A 7/8/94-1/31/97 - Since inception 4.46% 6.78% 4.15% 6.47%
Asia Growth A 2/1/96-1/31/97 - One year -6.44% -1.01% -6.59% -1.17%
Asia Growth B 5/1/96-1/31/97 - Since inception * N/A -6.02% N/A -6.06%
Asia Growth Institutional 2/2/96-1/31/97 - Since inception * N/A -1.09% N/A -1.24%
- --------------------------
</TABLE>
All returns are average annual total returns.
* Represents an aggregate total return (not annualized) since this class has
not completed a full twelve months of operations.
B-60
<PAGE>
From time to time, advertisements or information may include a
discussion of certain attributes or benefits to be derived by an investment in
the Fund. Such advertisements or information may include symbols, headlines or
other material which highlight or summarize the information discussed in more
detail in the communication.
The Trust may from time to time summarize the substance of discussions
contained in shareholder reports in advertisements and publish the adviser's
views as to markets, the rationale for a Fund's investments and discussions of a
Fund's current asset allocation.
In addition, from time to time, advertisements or information may
include a discussion of asset allocation models developed by GSAM and/or its
affiliates, certain attributes or benefits to be derived from asset allocation
strategies and the Goldman Sachs mutual funds that may be offered as investment
options for the strategic asset allocations. Such advertisements and
information may also include GSAM's current economic outlook and domestic and
international market views to suggest periodic tactical modifications to current
asset allocation strategies. Such advertisements and information may include
other materials which highlight or summarize the services provided in support of
an asset allocation program.
A Fund's performance data will be based on historical results and will
not be intended to indicate future performance. A Fund's total return and yield
will vary based on market conditions, portfolio expenses, portfolio investments
and other factors. The value of a Fund's shares will fluctuate and an
investor's shares may be worth more or less than their original cost upon
redemption. The Trust may also, at its discretion, from time to time make a
list of a Fund's holdings available to investors upon request.
Total return will be calculated separately for each class of shares in
existence. Because each class of shares may be subject to different expenses,
total return with respect to each class of shares of a Fund will differ.
SHARES OF THE TRUST
The Funds were reorganized from series of a Maryland corporation as
part of Goldman Sachs Trust, a Delaware business trust, by a Declaration of
Trust dated January 28, 1997, on April 30, 1997.
The Act requires that where more than one class or series of shares
exists, each class or series must be preferred over all other classes or series
in respect of assets specifically allocated to such class or series. The
Trustees also have authority to classify and reclassify any series of shares
into one or more classes of shares. As of the date of this Additional
Statement, the Trustees have classified the shares of the Mid Cap Equity Fund
into two classes: Institutional and Service Shares. Balanced, Capital Growth
and Small Cap Equity Funds have been classified into two classes: Class A and
Class B Shares. Growth and Income, CORE U.S. Equity, CORE Large Cap Growth,
International Equity, Emerging Markets Equity and Asia Growth Funds have been
classified into four classes: Institutional Shares, Service Shares, Class A
Shares and Class B Shares.
Each Institutional Share, Service Share, Class A Share and Class B
Share of a Fund represents a proportionate interest in the assets belonging to
the applicable class of the Fund. All expenses of a Fund are borne at the same
rate by each class of shares, except that fees under Service Plans are borne
exclusively by Service Shares, fees under Distribution and Authorized Dealer
Service Plans are borne exclusively by Class A Shares or Class B Shares and
transfer agency fees are borne at different rates by Class A Shares or Class B
Shares than Institutional and Service Shares. The Trustees may determine in the
future that it is appropriate to allocate other expenses differently between
classes of shares and may do so to the extent consistent with the rules of the
SEC and positions of the Internal Revenue Service. Each class of shares may
have different minimum investment requirements and be entitled to different
B-61
<PAGE>
shareholder services. Currently, shares of a class may only be exchanged for
shares of the same or an equivalent class of another fund. See "Exchange
Privilege" in the Prospectus.
Institutional Shares may be purchased at net asset value without a
sales charge for accounts in the name of an investor or institution that is not
compensated by a Fund for services provided to the institution's customers.
Service Shares may be purchased at net asset value without a sales
charge for accounts held in the name of an institution that, directly or
indirectly, provides certain account administration and shareholder liaison
services to its customers, including maintenance of account records and
processing orders to purchase, redeem and exchange Service Shares. Service
Shares bear the cost of account administration fees at the annual rate of up to
0.50% of the average daily net assets of the Fund attributable to Service
Shares.
Class A Shares are sold, with an initial sales charge of up to 5.5%,
through brokers and dealers who are members of the National Association of
Securities Dealers, Inc. and certain other financial service firms that have
sales agreements with Goldman Sachs. Class A Shares bear the cost of
distribution (Rule 12b-1) fees at the aggregate rate of up to 0.25% of the
average daily net assets of such Class A Shares. Class A Shares also bear the
cost of an Authorized Dealer Service Plan at an annual rate of up to 0.25% of
the average daily net assets attributable to Class A Shares.
Class B Shares of the Funds are sold subject to a contingent deferred
sales charge of up to 5.0% through brokers and dealers who are members of the
National Association of Securities Dealers Inc. and certain other financial
services firms that have sales arrangements with Goldman Sachs. Class B Shares
bear the cost of distribution (Rule 12b-1) fees at the aggregate rate of up to
0.75% of the average daily net assets attributable to Class B Shares. Class B
Shares also bear the cost of an Authorized Dealer Service Plan at an annual rate
of up to 0.25% of the average daily net assets attributable to Class B Shares.
It is possible that an institution or its affiliate may offer
different classes of shares (i.e., Institutional, Service, Class A Shares and
Class B Shares) to its customers and thus receive different compensation with
respect to different classes of shares of each Fund. Dividends paid by each
Fund, if any with respect to each class of shares will be calculated in the same
manner, at the same time on the same day and will be the same amount, except for
differences caused by the differences in expenses discussed above. Similarly,
the net asset value per share may differ depending upon the class of shares
purchased.
Certain aspects of the shares may be altered after advance notice to
shareholders if it is deemed necessary in order to satisfy certain tax
regulatory requirements.
When issued, shares are fully paid and non-assessable. In the event
of liquidation, shareholders are entitled to share pro rata in the net assets of
the applicable class of the relevant Fund available for distribution to such
shareholders. All shares entitle their holders to one vote per share, are
freely transferable and have no preemptive, subscription or conversion rights.
As of April 1, 1997, State Street Bank & Trust Company as Trustee (GS
Profit Sharing Master Trust), Attn. Louis Pereira, P.O. Box 1992, Boston, MA
02105-1992, was recordholder of 97.88% of Mid Cap Equity Fund's outstanding
shares; Trukan and Co., Attn: K. Ufford, P.O. Box 3699, Wichita, KS 67201-3699,
was recordholder of 6.80% of Balanced Fund's outstanding shares; Frontier Trust
Co. Inc. Trustee (FBO Dade County Public Schools), Attn: Agnes R. McMurray,
Fringe Benefits Management Co., 1720 S. Gadsden St., Tallahassee, FL 32301-5547,
was recordholder of 6.80% of Balanced Fund's outstanding shares; and State
Street Bank & Trust Company as Trustee (Goldman Sachs Employees'
B-62
<PAGE>
Pension Plan), Attn: Louis Pereria, P.O. Box 1992, Boston, MA 02105-1992, was
recordholder of 5.10% of the Small Cap Equity Fund's outstanding shares.
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 directors from the separate voting
requirements of Rule 18f-2.
The Trust is not required to hold annual meetings of shareholders and
does not intend to hold such meetings. In the event that a meeting of
shareholders is held, each share of the Trust will be entitled, as determined by
the Trustees, either to one vote for each share or to one vote for each dollar
of net asset value represented by such shares on all matters presented to
shareholders including the elections of Trustees (this method of voting being
referred to as "dollar based voting"). However, to the extent required by the
Act or otherwise determined by the Trustees, series and classes of the Trust
will vote separately from each other. Shareholders of the Trust do not have
cumulative voting rights in the election of Trustees. Meetings of shareholders
of the Trust, or any series or class thereof, may be called by the Trustees,
certain officers or upon the written request of holders of 10% or more of the
shares entitled to vote at such meetings. The shareholders of the Trust will
have voting rights only with respect to the limited number of matters specified
in the Declaration of Trust and such other matters as the Trustees may determine
or may be required by law.
The Declaration of Trust provides for indemnification of Trustees,
officers and agents of the Trust unless the recipient is adjudicated (i) to be
liable by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of such person's office or (ii)
not to have acted in good faith in the reasonable belief that such person's
actions were in the best interest of the Trust. The Declaration of Trust
provides that, if any shareholder or former shareholder of any series is held
personally liable solely by reason of being or having been a shareholder and not
because of the shareholder's acts or omissions or for some other reason, the
shareholder or former shareholder (or heirs, executors, administrators, legal
representatives or general successors) shall be held harmless from and
indemnified against all loss and expense arising form such liability. The Trust,
acting on behalf of any affected series, must, upon request by such shareholder,
assume the defense of any claim made against such shareholder for any act or
obligation of the series and satisfy any judgment thereon from the assets of the
series.
The Declaration of Trust permits the termination of the Trust or of
any series or class of the Trust (i) by a majority of the affected shareholders
at a meeting of shareholders of the Trust, series or class; or (ii) by a
majority of the Trustees without shareholder approval if the Trustees determine
that such action is in the best interest of the Trust or its shareholders. The
factors and events that the Trustees may take into account in making such
determination include (i) the inability of the Trust or any successor series or
class to maintain its assets at an appropriate size; (ii) changes in laws or
regulations governing the Trust, series or class or affecting assets of the type
in which it invests; or (iii) economic developments or trends having a
significant adverse impact on their business or operations.
The Declaration of Trust authorizes the Trustees without shareholder
approval to cause the Trust, or any series thereof, to merge or consolidate with
any corporation, association, trust or their 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
B-63
<PAGE>
or a portion of the assets of a series of the Trust in the securities of another
open-end investment company.
The Declaration of Trust permits the Trustees to amend the Declaration
of Trust without a shareholder vote. However, shareholders of the Trust have the
right to vote on any amendment (i) that would affect the voting rights of
shareholder, (ii) that is required by law to be approved by shareholders; (iii)
that would amend the voting provisions of the Declaration of Trust; or (iv) that
the Trustees determine to submit to shareholders.
The Trustees may appoint separate Trustees with respect to one or more
series or classes of the Trust's shares (the "Series Trustees"). Series Trustees
may, but are not required to, serve as Trustees of the Trust or any other series
or class of the Trust. The Series Trustees have, to the exclusion of any other
Trustees of the Delaware Trust, all the powers and authorities of Trustees under
the Trust Instrument with respect to any other series or class.
SHAREHOLDER AND TRUSTEE LIABILITY
Under Delaware Law, the shareholders of the Funds are not generally
subject to liability for the debts or obligations of the Trust. Similarly,
Delaware law provides that a series of the Trust will not be liable for the
debts or obligations of any other series of the Trust. However, no similar
statutory or other authority limiting business trust shareholder liability
exists in other states. As a result, to the extent that a Delaware business
trust or a shareholder is subject to the jurisdiction of courts of such other
states, the courts may not apply Delaware law and may thereby subject the
Delaware business trust shareholders to liability. To guard against this risk,
the Declaration of Trust contains an express disclaimer of shareholder liability
for acts or obligations of a Fund. Notice of such disclaimer will normally be
given in each agreement, obligation or instrument entered into or executed by a
series or the Trustees. The Declaration of Trust provides for indemnification
by the relevant Fund for all loss suffered by a shareholder as a result of an
obligation of the series. The Declaration of Trust also provides that a series
shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the series and satisfy any judgment
thereon. In view of the above, the risk of personal liability of shareholders
of a Delaware business trust is remote.
In addition to the requirements under Delaware law, the Declaration of
Trust provides that shareholders of a series may bring a derivative action on
behalf of the series only if the following conditions are met: (a) shareholders
eligible to bring such derivative action under Delaware law who hold at least
10% of the outstanding shares of the series, or 10% of the outstanding shares of
the class to which such action relates, shall join in the request for the
Trustees to commence such action; and (b) the Trustees must be afforded a
reasonable amount of time to consider such shareholder request and to
investigate the basis and to employ other advisers in considering the merits of
the request and shall require an undertaking by the shareholders making such
request to reimburse the series for the expense of any such advisers in the
event that the Trustees determine not to bring such action.
The Declaration of Trust further provides that the Trustees will not
be liable for error of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against liability to which he or she
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
or her office.
B-64
<PAGE>
TAXATION
The following is a summary of the principal U.S. federal income, and
certain state and local, tax considerations regarding the purchase, ownership
and disposition of shares in each Fund of the Trust. This summary does not
address special tax rules applicable to certain classes of investors, such as
tax-exempt entities, insurance companies and financial institutions. Each
prospective shareholder is urged to consult his own tax adviser with respect to
the specific federal, state, local and foreign tax consequences of investing in
each Fund. The summary is based on the laws in effect on the date of this
Additional Statement, which are subject to change.
GENERAL
=======
Each Fund is a separate taxable entity. CORE Large Cap Growth and
Emerging Markets Equity Funds each intends to elect and each other Fund has
elected to be treated and intends to qualify for each taxable year as a
regulated investment company under Subchapter M of the Code.
Qualification as a regulated investment company under the Code
requires, among other things, that (a) a Fund derive at least 90% of its gross
income for its taxable year from dividends, interest, payments with respect to
securities loans and gains from the sale or other disposition of stocks or
securities or foreign currencies, or other income (including but not limited to
gains from options, futures, and forward contracts) derived with respect to its
business of investing in such stock, securities or currencies (the "90% gross
income test"); (b) such Fund derive less than 30% of its gross income from the
sale or other disposition of any of the following which was held for less than
three months: (i) stock or securities; (ii) options, futures or forward
contracts (other than options, futures or forward contracts on foreign
currencies); and (iii) foreign currencies and foreign currency options, futures
and forward contracts that are not directly related to the Fund's principal
business of investing in stocks or securities or options and futures with
respect to stocks or securities (the "short-short test"); and (c) such Fund
diversify its holdings so that, at the close of each quarter of its taxable
year, (i) at least 50% of the market value of such Fund's total (gross) assets
is comprised of cash, cash items, U.S. Government securities, securities of
other regulated investment companies and other securities limited in respect of
any one issuer to an amount not greater in value than 5% of the value of such
Fund's total assets and to not more than 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its total
(gross) assets is invested in the securities of any one issuer (other than U.S.
Government securities and securities of other regulated investment companies) or
two or more issuers controlled by the Fund and engaged in the same, similar or
related trades or businesses. Gains from the sale or other disposition of
foreign currencies (or options, futures or forward contracts on foreign
currencies) that are not directly related to a Fund's principal business of
investing in stock or securities or options and futures with respect to stock or
securities will be treated as gains from the sale of investments held less than
three months under the short-short test (even though characterized as ordinary
income for some purposes) if such currencies or instruments were held for less
than three months. For purposes of the 90% gross income test, income that a Fund
earns from equity interests in certain entities that are not treated as
corporations (e.g., partnerships or trusts) for U.S. tax purposes will generally
have the same character for such Fund as in the hands of such an entity;
consequently, a Fund may be required to limit its equity investments in such
entities that earn fee income, rental income, or other nonqualifying income. In
addition, future Treasury regulations could provide that qualifying income under
the 90% gross income test will not include gains from foreign currency
transactions that are not directly related to a Fund's principal business of
investing in stock or securities or options and futures with respect to stock
or securities. Using foreign currency positions or entering into foreign
currency options, futures and forward or swap contracts for
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<PAGE>
purposes other than hedging currency risk with respect to securities in a Fund's
portfolio or anticipated to be acquired may not qualify as "directly-related"
under these tests.
If a Fund complies with such provisions, then in any taxable year in
which such Fund distributes, in compliance with the Code's timing and other
requirements, at least 90% of its "investment company taxable income" (which
includes dividends, taxable interest, taxable accrued original issue discount
and market discount income, income from securities lending, any net short-term
capital gain in excess of net long-term capital loss, certain net realized
foreign exchange gains and any other taxable income other than "net capital
gain," as defined below, and is reduced by deductible expenses), and at least
90% of the excess of its gross tax-exempt interest income (if any) over certain
disallowed deductions, such Fund (but not its shareholders) will be relieved of
federal income tax on any income of the Fund, including long-term capital gains,
distributed to shareholders. However, if a Fund retains any investment company
taxable income or "net capital gain" (the excess of net long-term capital gain
over net short-term capital loss), it will be subject to a tax at regular
corporate rates on the amount retained. If the Fund retains any net capital
gain, the Fund may designate the retained amount as undistributed capital gains
in a notice to its shareholders who, if subject to U.S. federal income tax on
long-term capital gains, (i) will be required to include in income for federal
income tax purposes, as long-term capital gain, their shares of such
undistributed amount, and (ii) will be entitled to credit their proportionate
shares of the tax paid by the Fund against their U.S. federal income tax
liabilities, if any, and to claim refunds to the extent the credit exceeds such
liabilities. For U.S. federal income tax purposes, the tax basis of shares
owned by a shareholder of the Fund will be increased by an amount equal under
current law to 65% of the amount of undistributed net capital gain included in
the shareholder's gross income. Each Fund intends to distribute for each
taxable year to its shareholders all or substantially all of its investment
company taxable income, net capital gain and any net tax-exempt interest.
Exchange control or other foreign laws, regulations or practices may restrict
repatriation of investment income, capital or the proceeds of securities sales
by foreign investors such as the International Equity, Emerging Markets Equity
or Asia Growth Funds and may therefore make it more difficult for such a Fund to
satisfy the distribution requirements described above, as well as the excise tax
distribution requirements described below. However, each Fund generally expects
to be able to obtain sufficient cash to satisfy such requirements from new
investors, the sale of securities or other sources. If for any taxable year a
Fund does not qualify as a regulated investment company, it will be taxed on all
of its investment company taxable income and net capital gain at corporate
rates, and its distributions to shareholders will be taxable as ordinary
dividends to the extent of its current and accumulated earnings and profits.
In order to avoid a 4% federal excise tax, each Fund must distribute
(or be deemed to have distributed) by December 31 of each calendar year at least
98% of its taxable ordinary income for such year, at least 98% of the excess of
its capital gains over its capital losses (generally computed on the basis of
the one-year period ending on October 31 of such year), and all taxable ordinary
income and the excess of capital gains over capital losses for the previous year
that were not distributed for such year and on which the Fund paid no federal
income tax. For federal income tax purposes, dividends declared by a Fund in
October, November or December to shareholders of record on a specified date in
such a month and paid during January of the following year are taxable to such
shareholders as if received on December 31 of the year declared. The Funds
anticipate that they will generally make timely distributions of income and
capital gains in compliance with these requirements so that they will generally
not be required to pay the excise tax. For federal income tax purposes, each
Fund is permitted to carry forward a net capital loss in any year to offset its
own capital gains, if any, during the eight years following the year of the
loss. Asia Growth Fund had approximately $184,000, $5,487,000 and $9,825,000 at
January 31, 1997 of capital loss carry forwards expiring in 2002, 2003, and
2004, respectively, for federal tax purposes. These amounts are available to be
carried forward to offset future capital gains to the extent permitted by the
Code and applicable tax regulations.
B-66
<PAGE>
Gains and losses on the sale, lapse, or other termination of options
and futures contracts, options thereon and certain forward contracts (except
certain foreign currency options, forward contracts and futures contracts) will
generally be treated as capital gains and losses. Certain of the futures
contracts, forward contracts and options held by a Fund will be required to be
"marked-to-market" for federal income tax purposes, that is, treated as having
been sold at their fair market value on the last day of the Fund's taxable year.
These provisions may require a Fund to recognize income or gains without a
concurrent receipt of cash. Any gain or loss recognized on actual or deemed
sales of these futures contracts, forward contracts, or options will (except for
certain foreign currency options, forward contracts, and futures contracts) be
treated as 60% long-term capital gain or loss and 40% short-term capital gain or
loss. As a result of certain hedging transactions entered into by a Fund, the
Fund may be required to defer the recognition of losses on futures contracts,
forward contracts, and options or underlying securities or foreign currencies to
the extent of any unrecognized gains on related positions held by such Fund and
the characterization of gains or losses as long-term or short-term may be
changed. The tax provisions described above applicable to options, futures and
forward contracts may affect the amount, timing and character of a Fund's
distributions to shareholders. The short-short test described above may limit a
Fund's ability to use options, forward contracts, and futures transactions as
well as its ability to engage in short sales. Moreover, application of certain
requirements for qualification as a regulated investment company and/or these
tax rules to certain investment practices, such as dollar rolls, or certain
derivatives such as interest rate swaps, floors, caps and collars and currency,
mortgage or index swaps may be unclear in some respects, and a Fund may
therefore be required to limit its participation in such transactions. Certain
tax elections may be available to a Fund to mitigate some of the unfavorable
consequences described in this paragraph.
Section 988 of the Code contains special tax rules applicable to
certain foreign currency transactions and instruments that may affect the
amount, timing and character of income, gain or loss recognized by a Fund.
Under these rules, foreign exchange gain or loss realized with respect to
foreign currencies and certain futures and options thereon, foreign currency-
denominated debt instruments, foreign currency forward contracts, and foreign
currency-denominated payables and receivables will generally be treated as
ordinary income or loss, although in some cases elections may be available that
would alter this treatment. If a net foreign exchange loss treated as ordinary
loss under Section 988 of the Code were to exceed a Fund's investment company
taxable income (computed without regard to such loss) for a taxable year, the
resulting loss would not be deductible by the Fund or its shareholders in future
years. Net loss, if any, from certain foregoing currency transactions or
instruments could exceed net investment income otherwise calculated for
accounting purposes with the result being either no dividends being paid or a
portion of a Fund's dividends being treated as a return of capital for tax
purposes, nontaxable to the extent of a shareholder's tax basis in his shares
and, once such basis is exhausted, generally giving rise to capital gains.
A Fund's investment in zero coupon securities, deferred interest
securities, certain structured securities or other securities bearing original
issue discount or, if a Fund elects to include market discount in income
currently, market discount, as well as any "mark to market" gain from certain
options, futures or forward contracts, as described above, will generally cause
it to realize income or gain prior to the receipt of cash payments with respect
to these securities or contracts. In order to obtain cash to enable it to
distribute this income or gain, maintain its qualification as a regulated
investment company and avoid federal income or excise taxes, the Fund may be
required to liquidate portfolio securities that it might otherwise have
continued to hold.
Each Fund (other than CORE U.S. Equity and CORE Large Cap Growth
Funds) anticipates that it 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. If, as may occur for International Equity, Emerging
Markets Equity and Asia Growth Funds, more than 50% of a Fund's total assets at
the close of any taxable year consists of stock or
B-67
<PAGE>
securities of foreign corporations, the Fund may file an election with the
Internal Revenue Service pursuant to which shareholders of the Fund would be
required to (i) include in ordinary gross income (in addition to taxable
dividends actually received) their pro rata shares of foreign income taxes paid
by the Fund that are treated as income taxes under U.S. tax regulations (which
excludes, for example, stamp taxes, securities transaction taxes, and similar
taxes) even though not actually received by such shareholders, and (ii) treat
such respective pro rata portions as foreign income taxes paid by them.
If the International Equity, Emerging Markets Equity and Asia Growth
Funds make this election, its respective shareholders may then deduct such pro
rata portions of qualified foreign taxes in computing their taxable incomes, or,
alternatively, use them as foreign tax credits, subject to applicable
limitations, against their U.S. federal income taxes. Shareholders who do not
itemize deductions for federal income tax purposes will not, however, be able to
deduct their pro rata portion of foreign taxes paid by a Fund, although such
shareholders will be required to include their shares of such taxes in gross
income if the election is made.
If a shareholder chooses to take credit for the foreign taxes deemed
paid by such shareholder as a result of any such election by International
Equity, Emerging Markets Equity or Asia Growth Funds, the amount of the credit
that may be claimed in any year may not exceed the same proportion of the U.S.
tax against which such credit is taken which the shareholder's taxable income
from foreign sources (but not in excess of the shareholder's entire taxable
income) bears to his entire taxable income. For this purpose, distributions
from long-term and short-term capital gains or foreign currency gains by a Fund
will generally not be treated as income from foreign sources. This foreign tax
credit limitation may also be applied separately to certain specific categories
of foreign-source income and the related foreign taxes. As a result of these
rules, which have different effects depending upon each shareholder's particular
tax situation, certain shareholders of International Equity, Emerging Markets
Equity and Asia Growth Funds may not be able to claim a credit for the full
amount of their proportionate share of the foreign taxes paid by such Fund even
if the election is made by such a Fund.
Shareholders who are not liable for U.S. federal income taxes,
including tax-exempt shareholders, will ordinarily not benefit from this
election. Each year, if any, that the International Equity, Emerging Markets
Equity or Asia Growth Funds files the election described above, its shareholders
will be notified of the amount of (i) each shareholder's pro rata share of
qualified foreign taxes paid by a Fund and (ii) the portion of Fund dividends
which represents income from each foreign country. The other Funds will not be
entitled to elect to pass foreign taxes and associated credits or deductions
through to their shareholders because they will not satisfy the 50% requirement
described above. If a Fund cannot or does not make this election, it may deduct
such taxes in computing the amount it is required to distribute.
If a Fund acquires stock (including, under proposed regulations, an
option to acquire stock such as is inherent in a convertible bond) in certain
foreign corporations that receive at least 75% of their annual gross income from
passive sources (such as interest, dividends, rents, royalties or capital gain)
or hold at least 50% of their assets in investments producing such passive
income ("passive foreign investment companies"), the Fund could be subject to
federal income tax and additional interest charges on "excess distributions"
received from such companies or gain from the sale of stock in such companies,
even if all income or gain actually received by the Fund is timely distributed
to its shareholders. The Fund would not be able to pass through to its
shareholders any credit or deduction for such a tax. In some cases, elections
may be available that would ameliorate these adverse tax consequences, but such
elections would require the Fund to include certain amounts as income or gain
(subject to the distribution requirements described above) without a concurrent
receipt of cash. Each Fund may limit and/or manage its holdings in passive
foreign investment companies to minimize its tax liability or maximize its
return from these investments.
B-68
<PAGE>
Investments in lower-rated securities may present special tax issues
for a Fund to the extent actual or anticipated defaults may be more likely with
respect to such securities. Tax rules are not entirely clear about issues such
as when a Fund may cease to accrue interest, original issue discount, or market
discount; when and to what extent deductions may be taken for bad debts or
worthless securities; how payments received on obligations in default should be
allocated between principal and income; and whether exchanges of debt
obligations in a workout context are taxable. These and other issues will be
addressed by a Fund, in the event it invests in such securities, in order to
seek to eliminate or minimize any adverse tax consequences.
TAXABLE U.S. SHAREHOLDERS - DISTRIBUTIONS
=========================================
For U.S. federal income tax purposes, distributions by a Fund, whether
reinvested in additional shares or paid in cash, generally will be taxable to
shareholders who are subject to tax. Shareholders receiving a distribution in
the form of newly issued shares will be treated for U.S. federal income tax
purposes as receiving a distribution in an amount equal to the amount of cash
they would have received had they elected to receive cash and will have a cost
basis in each share received equal to such amount divided by the number of
shares received.
Distributions from investment company taxable income for the year will
be taxable as ordinary income. Distributions designated as derived from a
Fund's dividend income, if any, that would be eligible for the dividends
received deduction if such Fund were not a regulated investment company may be
eligible, for the dividends received deduction for corporations. The dividends-
received deduction, if available, is reduced to the extent the shares with
respect to which the dividends are received are treated as debt-financed under
federal income tax law and is eliminated if the shares are deemed to have been
held for less than a minimum period, generally 46 days. Because eligible
dividends are limited to those a Fund receives from U.S. domestic corporations,
it is unlikely that a substantial portion of the distributions made by
International Equity, Asia Growth and Emerging Markets Equity Funds will qualify
for the dividends-received deduction. The entire dividend, including the
deducted amount, is considered in determining the excess, if any, of a corporate
shareholder's adjusted current earnings over its alternative minimum taxable
income, which may increase its liability for the federal alternative minimum
tax, and the dividend may, if it is treated as an "extraordinary dividend" under
the Code, reduce such shareholder's tax basis in its shares of a Fund. Capital
gain dividends (i.e., dividends from net capital gain) if designated as such in
a written notice to shareholders mailed not later than 60 days after a Fund's
taxable year closes, will be taxed to shareholders as long-term capital gain
regardless of how long shares have been held by shareholders, but are not
eligible for the dividends received deduction for corporations. Distributions,
if any, that are in excess of a Fund's current and accumulated earnings and
profits will first reduce a shareholder's tax basis in his shares and, after
such basis is reduced to zero, will generally constitute capital gains to a
shareholder who holds his shares as capital assets.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions, and certain prohibited transactions is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their tax
advisers for more information.
TAXABLE U.S. SHAREHOLDERS - SALE OF SHARES
==========================================
When a shareholder's shares are sold, redeemed or otherwise disposed
of in a transaction that is treated as a sale for tax purposes, the shareholder
will generally recognize gain or loss equal to the difference between the
shareholder's adjusted tax basis in the shares and the cash, or fair market
value of any property, received. Assuming the shareholder holds the shares as a
capital asset at the time of such sale, such gain or loss should be capital in
character, and long-term if the shareholder has a tax holding period for the
shares of more than one year, otherwise short-term, subject to the rules
described
B-69
<PAGE>
below. Shareholders should consult their own tax advisers with reference to
their particular circumstances to determine whether a redemption (including an
exchange) or other disposition of Fund shares is properly treated as a sale for
tax purposes, as is assumed in this discussion. If a shareholder receives a
capital gain dividend with respect to shares and such shares have a tax holding
period of six months or less at the time of a sale or redemption of such shares,
then any loss the shareholder realizes on the sale or redemption will be treated
as a long-term capital loss to the extent of such capital gain dividend. All or
a portion of any sales load paid upon the purchase of shares of a Fund will not
be taken into account in determining gain or loss on the redemption or exchange
of such shares within 90 days after their purchase to the extent the redemption
proceeds are reinvested, or the exchange is effected, without payment of an
additional sales load pursuant to the reinvestment or exchange privilege. The
load not taken into account will be added to the tax basis of the newly-acquired
shares. Additionally, any loss realized on a sale or redemption of shares of a
Fund may be disallowed under "wash sale" rules to the extent the shares disposed
of are replaced with other shares of the same Fund within a period of 61 days
beginning 30 days before and ending 30 days after the shares are disposed of,
such as pursuant to a dividend reinvestment in shares of such Fund. If
disallowed, the loss will be reflected in an adjustment to the basis of the
shares acquired.
Each Fund may be required to withhold, as "backup withholding,"
federal income tax at a rate of 31% from dividends (including capital gain
dividends) and share redemption and exchange proceeds to individuals and other
non-exempt shareholders who fail to furnish such Fund with a correct taxpayer
identification number ("TIN") certified under penalties of perjury, or if the
Internal Revenue Service or a broker notifies the Fund that the payee is subject
to backup withholding as a result of failing to properly report interest or
dividend income to the Internal Revenue Service or that the TIN furnished by the
payee to the Fund is incorrect, or if (when required to do so) the payee fails
to certify under penalties of perjury that it is not subject to backup
withholding. A Fund may refuse to accept an application that does not contain
any required TIN or certification that the TIN provided is correct. If the
backup withholding provisions are applicable, any such dividends and proceeds,
whether paid in cash or reinvested in additional shares, will be reduced by the
amounts required to be withheld. Any amounts withheld may be credited against a
shareholder's U.S. federal income tax liability.
NON-U.S. SHAREHOLDERS
=====================
The discussion above relates solely to U.S. federal income tax law as
it applies to "U.S. persons" subject to tax under such law. Shareholders who, as
to the United States, are not "U.S. persons," (i.e., are nonresident aliens,
foreign corporations, fiduciaries of foreign trusts or estates, foreign
partnerships or other non-U.S. investors) generally will be subject to U.S.
federal withholding tax at the rate of 30% on distributions treated as ordinary
income unless the tax is reduced or eliminated pursuant to a tax treaty or the
dividends are effectively connected with a U.S. trade or business of the
shareholder. In the latter case the dividends will be subject to tax on a net
income basis at the graduated rates applicable to U.S. individuals or domestic
corporations. Distributions of net capital gain, including amounts retained by
a Fund which are designated as undistributed capital gains, to a non-U.S.
shareholder will not be subject to U.S. federal income or withholding tax unless
the distributions are effectively connected with the shareholder's trade or
business in the United States or, in the case of a shareholder who is a
nonresident alien individual, the shareholder is present in the United States
for 183 days or more during the taxable year and certain other conditions are
met. Non-U.S. shareholders may also be subject to U.S. federal withholding tax
on deemed income resulting from any election by International Equity, Emerging
Markets Equity or Asia Growth Funds to treat qualified foreign taxes it pays as
passed through to shareholders (as described above), but they may not be able to
claim a U.S. tax credit or deduction with respect to such taxes.
Any capital gain realized by a non-U.S. shareholder upon a sale or
redemption of shares of a Fund will not be subject to U.S. federal income or
withholding tax unless the gain is effectively connected with
B-70
<PAGE>
the shareholder's trade or business in the U.S., or in the case of a shareholder
who is a nonresident alien individual, the shareholder is present in the U.S.
for 183 days or more during the taxable year and certain other conditions are
met.
Non-U.S. persons who fail to furnish a Fund with an IRS Form W-8 or an
acceptable substitute may be subject to backup withholding at the rate of 31% on
capital gain dividends and the proceeds of redemptions and exchanges. Each
shareholder who is not a U.S. person should consult his or her tax adviser
regarding the U.S. and non-U.S. tax consequences of ownership of shares of and
receipt of distributions from the Funds.
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. Shareholders should consult their own tax advisers
concerning these matters.
FINANCIAL STATEMENTS
The audited financial statements and related Reports of Independent
Public Accountants, contained in the 1997 Annual Report of each of the Funds,
are incorporated herein by reference into this Additional Statement and attached
hereto.
OTHER INFORMATION
Class A Shares of each Fund are sold at a maximum sales charge of
5.5%. Using the initial offering price per share, as of January 31, 1997, the
maximum offering price of each Fund's Class A shares would be as follows:
Maximum Offering
Net Asset Sales Price to
Value Charge Public
--------- -------- --------
Balanced Fund $18.78 $1.09 $19.87
Growth and Income Fund 23.18 1.35 24.53
CORE U.S. Equity Fund 23.32 1.36 24.68
CORE Large Cap Growth Fund N/A N/A N/A
Capital Growth Fund 16.73 0.97 17.70
International Equity Fund 19.32 1.12 20.44
Small Cap Equity Fund 20.91 1.22 22.13
Emerging Markets Equity Fund N/A N/A N/A
Asia Growth Fund 16.31 0.95 17.26
Each Fund will redeem shares solely in cash up to the lesser of $250,000 or 1%
of the net asset value of the Fund during any 90-day period for any one
shareholder. Each Fund, however, reserves the right to pay redemptions
exceeding $250,000 or 1% of the net asset value of the Fund at the time of
redemption by a distribution in kind of securities (instead of cash) from such
Fund. The securities distributed in kind would be readily marketable and would
be valued for this purpose using the same method employed in
B-71
<PAGE>
calculating the Fund's net asset value per share. See "Net Asset Value." If a
shareholder receives redemption proceeds in kind, the shareholder should expect
to incur transaction costs upon the disposition of the securities received in
the redemption.
The right of a shareholder to redeem shares and the date of payment by each
Fund may be suspended for more than seven days for any period during which the
New York Stock Exchange is closed, other than the customary weekends or
holidays, or when trading on such Exchange is restricted as determined by the
SEC; or during any emergency, as determined by the SEC, as a result of which it
is not reasonably practicable for such Fund to dispose of securities owned by it
or fairly to determine the value of its net assets; or for such other period as
the SEC may by order permit for the protection of shareholders of such Fund.
The 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.
DISTRIBUTION AND AUTHORIZED DEALER SERVICE PLANS
CLASS A DISTRIBUTION PLANS. As described in the Prospectus, the Trust with
respect to Class A Shares of each Fund has adopted a distribution plan (the
"Class A Plans") pursuant to Rule 12b-1 under the Act. See "Distribution and
Authorized Dealer Service Plan" in the Prospectus.
The Class A Plans were most recently approved on April 23, 1997 by a
majority vote of the Trustees, including a majority of the non-interested
Trustees who have no direct or indirect financial interest in the Class A Plans,
cast in person at a meeting called for the purpose of approving the Class A
Plans. The compensation payable under the Class A Plans may not exceed 0.25%
per annum of each Fund's average daily net assets.
Currently, Goldman Sachs has voluntarily agreed to waive the entire amount
of such fee for the Balanced, CORE Large Cap Growth, Capital Growth and Small
Cap Equity Funds and to limit the amount of such fee to 0.21% of average daily
net asset attributable to Class A Shares of CORE U.S. Equity, International
Equity and Asia Growth Funds; and to limit the amount of such fee to 0.04% of
the average daily net asset attributable to Class A shares of the Growth and
Income Fund. Goldman Sachs has no current intention of modifying or
discontinuing such waiver but may do so in the future at its discretion.
Each Class A Plan was amended effective April 30, 1997 for each of the
Funds then in existence to reduce the fee payable under the Plan from 0.50% of
average daily net assets attributable to Class A Shares. At the time of such
amendment the Trustees approved the Authorized Dealer Service Plan pursuant to
which personal and account maintenance services are provided. See "Management --
Authorized Dealer Service Plans."
B-72
<PAGE>
For the fiscal year ended January 31, 1997 the amounts paid to Goldman
Sachs pursuant to its Class A Plan by each Fund then in existence were as
follows:
1997
========
Balanced Fund $ 0
Growth and Income Fund 139,025
CORE U.S. Equity Fund 363,264
CORE Large Cap Growth Fund/1/ N/A
Capital Growth Fund 0
International Equity Fund 900,274
Small Cap Equity Fund 0
Emerging Markets Equity Fund/1/ N/A
Asia Growth Fund 526,448
- ------------------
1 Not operational.
Had Goldman Sachs' voluntary limitations not been in effect the Funds
would have paid Goldman Sachs the following fees during the fiscal year ended
1997 pursuant to their respective Class A Plans:
1997
==========
Balanced Fund $ 153,392
Growth and Income Fund 1,252,257
CORE U.S. Equity Fund 432,457
CORE Large Cap Growth Fund/1/ N/A
Capital Growth Fund 2,171,462
International Equity Fund 1,071,755
Small Cap Equity Fund 529,684
Emerging Markets Equity Fund/1/ N/A
Asia Growth Fund 626,724
- ------------------
1 Not operational.
B-73
<PAGE>
During the fiscal year ended January 31, 1997, Goldman Sachs incurred the
following expenses in connection with distribution under the Class A Plan of
each applicable Fund then in existence:
<TABLE>
<CAPTION>
Compensation Printing and Preparation
and Expenses Allocable Mailing of and
of the Overhead, Prospectuses Distribution
Distributor Telephone to Other of Sales
Compensation & Its Sales and Travel Than Current Literature and
To Dealers Personnel Expenses Shareholders Advertising
============ ============ ========== ============ ==============
<S> <C> <C> <C> <C> <C>
Fiscal Year Ended
January 31, 1997:
Balanced Fund/(1)/ $0 $ 0 $ 0 $ 0 $ 0
Growth and Income Fund/(1)/ 0 897,444 823,000 64,500 158,500
CORE U.S. Equity Fund 0 714,665 684,000 51,000 281,000
CORE Large Cap Growth Fund/(2)/ N/A N/A N/A N/A N/A
Capital Growth Fund/(1)/ N/A N/A N/A N/A N/A
International Equity Fund/(1)/ 0 1,124,203 952,000 70,500 363,955
Small Cap Equity Fund/(1)/ N/A N/A N/A N/A N/A
Asia Growth Fund/(1)/ 0 558,465 343,000 37,000 155,500
Emerging Market Equity Fund/(2)/ N/A N/A N/A N/A N/A
</TABLE>
The table above reflects amounts expended by Goldman Sachs, which amounts are in
excess of the compensation received by Goldman Sachs under the Class A Plans.
The payments under the Class A Plans were used by Goldman Sachs to compensate it
for the expenses shown above on a pro-rata basis.
(1) COMMENCING JUNE 1, 1995, GOLDMAN SACHS IS NOT IMPOSING THE 0.25% 12B-1 FEE
FOR THESE FUNDS. AS NO DISTRIBUTION REVENUE HAS BEEN EARNED AFTER THIS DATE
FOR THESE FUNDS, NO EXPENSES ARE REFLECTED ABOVE.
(2) NOT OPERATIONAL.
B-74
<PAGE>
The Class A Plans are compensation plans which provide for the payment of a
specified fee without regard to the expenses actually incurred by Goldman Sachs.
If such fee exceeds Goldman Sach's expenses, Goldman Sachs may realize a profit
from these arrangements. If the Class A Plans were terminated by the Trustees
and no successor plans were adopted, each Fund would cease to make payments to
Goldman Sachs under the Class A Plans and Goldman Sachs would be unable to
recover the amount of any of its unreimbursed distribution expenditures.
Under the Class A Plans, Goldman Sachs, as distributor of each Fund's Class
A shares, will provide to the Trustees for their review, and the Trustees will
review at least quarterly, a written report of the services provided and amounts
expended by Goldman Sachs under the Class A Plans and the purposes for which
such services were performed and expenditures were made.
The Class A Plans will remain in effect until May 1, 1998 and from year to
year thereafter, provided that such continuance is approved annually by a
majority vote of the Trustees, including a majority of the non-interested
Trustees who have no direct or indirect financial interest in the Class A Plans.
A Class A Plan may not be amended to increase materially the amount to be spent
for the services described therein as to a Fund without approval of a majority
of the outstanding voting securities of the affected Fund. All material
amendments of the Class A Plan must also be approved by the Trustees in the
manner described above. A Class A Plan may be terminated at any time as to any
Fund without payment of any penalty by a vote of a majority of the non-
interested Trustees or by vote of a majority of the Class A Shares of the
applicable Fund. So long as the Class A Plans are in effect, the selection and
nomination of non-interested Trustees shall be committed to the discretion of
the non-interested Trustees. The Trustees have determined that in their
judgment there is a reasonable likelihood that the Class A Plans will benefit
the Funds and their Class A shareholders.
CLASS B DISTRIBUTION PLANS. As described in the Prospectus, the Trust has
adopted on behalf of the Funds distribution plans (the "Class B Plans") pursuant
to Rule 12b-1 under the Act with respect to the Class B shares. See
"Distribution and Authorized Dealer Service Plans" in the Prospectus.
The Class B Plans were most recently approved for the Funds (except
Emerging Markets Equity Fund) on April 23, 1997 and for the Emerging Markets
Equity Fund on January 28, 1997, by a majority vote of the Trustees, including a
majority of the non-interested Trustees who have no direct or indirect financial
interest in the Class B Plans, cast in person at a meeting called for the
purpose of approving the Class B Plans.
With respect to each Fund, the compensation payable under the Class B Plans
is equal to 0.75% per annum of the average daily net assets attributable to
Class B Shares of that Fund. The fees received by Goldman Sachs under the Class
B Plans and contingent deferred sales charge on Class B Shares may be sold by
Goldman Sachs as distributor to entities which provide financing for payments to
Authorized Dealers in respect of sales of Class B Shares. To the extent such
fee is not paid to such dealers, Goldman Sachs may retain such fee as
compensation for its services and expenses of distributing the Funds' Class B
Shares. If such fee exceeds Goldman Sachs' expenses, Goldman Sachs may realize
a profit from these arrangements.
B-75
<PAGE>
During the fiscal year ended January 31, 1997, Goldman Sachs incurred the
following fees under the Class B Plan of each applicable Fund then in existence:
Balanced Fund $ 3,861
Growth and Income Fund 28,075
CORE U.S. Equity Fund 36,508
CORE Large Cap Growth Fund/1/ N/A
Capital Growth Fund 7,632
International Equity Fund 44,148
Small Cap Fund 8,973
Emerging Markets Equity Fund/1/ N/A
Asia Growth Fund 10,229
- ------------------
1 Not operational.
The Class B Plans are compensation plans which provide for the payment of a
specified distribution fee without regard to the distribution expenses actually
incurred by Goldman Sachs. If the Class B Plans were terminated by the Trustees
and no successor plan were adopted, the Funds would cease to make distribution
payments to Goldman Sachs and Goldman Sachs would be unable to recover the
amount of any of its unreimbursed distribution expenditures.
Under the Class B Plans, Goldman Sachs, as distributor of the Funds'
shares, will provide to the Board of Trustees for its review, and the Board will
review at least quarterly, a written report of the services provided and amounts
expended by Goldman Sachs under the Class B Plans and the purposes for which
such services were performed and expenditures were made.
The Class B Plans will remain in effect until May 1, 1998 and from year to
year, provided such continuance is approved annually by a majority vote of the
Trustees, including a majority of the non-interested Trustees. A Class B Plan
may not be amended to increase materially the amount to be spent for the
services described therein as to any Fund without approval of a majority of the
outstanding Class B Shares of that Fund. All material amendments of the Class B
Plans must also be approved by the Trustees in the manner described above. With
respect to any Fund, a Class B Plan may be terminated at any time without
payment of any penalty by a vote of the majority of the non-interested Trustees
or by vote of a majority of the outstanding voting securities of the Class B
Shares of that Fund. So long as a Class B Plans are in effect, the selection
and nomination of non-interested Trustees shall be committed to the discretion
of the non-interested Trustees. The Trustees have determined that in their
judgment there is a reasonable likelihood that the Class B Plans will benefit
each Fund and their respective Class B shareholders.
AUTHORIZED DEALER SERVICE PLANS. As described in the prospectus, each
Fund's Class A and Class B Shares have adopted a non-Rule 12b-1 Authorized
Dealer Service Plan (each a "Service Plan") pursuant to which Goldman Sachs and
Authorized Dealers are compensated for the provision of personal and account
maintenance services. The Service Plan of Emerging Markets Equity Fund was
initially approved on January 28, 1997 and the Service Plans of CORE Large Cap
Growth Fund were initially approved on April 23, 1997 by a majority vote of the
Trustees, including a majority of the non-interested Trustees who have no direct
or indirect financial interest in the Service Plan. Each Service Plan of each
other Fund was most recently approved by the Trustees, including a majority of
the non-interested Trustees who have no direct or indirect financial interest in
the Service Plan, at a meeting held on April 23, 1997. Each Fund's Service Plan
provides for the compensation for personal and account maintenance
B-76
<PAGE>
services at an annual rate of up to 0.25% of the Fund's average daily net assets
attributable to Class A or Class B shares.
For the fiscal year ended January 31, 1997 and for the period June 1, 1995
(commencement of each Service Plan) through January 31, 1996, each Fund that was
operational paid Authorized Dealer Service fees at the foregoing rate for each
Fund's Class A shares. During the period May 1, 1996 (commencement of each
Class B Service Plan) through January 31, 1997, Authorized Dealer Service fees
were paid with respect to each Fund's Class B shares which were then in
operation at the foregoing rate.
For the fiscal year ended January 31, 1997 and for the period June 1, 1995
through January 31, 1996, the amounts paid to Goldman Sachs pursuant to its
Class A Authorized Dealer Service Plan and for the period May 1, 1996
(commencement of Class B Service Plan) through January 31, 1997, the amounts
paid to Goldman Sachs pursuant ot its Class B Service Plan was:
Class A Class B Class A
1997 1997 1996
========== ======= ==========
Balanced Fund $ 153,392 $ 1,294 $ 64,145
Growth and Income Fund 1,252,257 9,358 603,426
CORE U.S. Equity Fund 432,457 12,169 182,881
CORE Large Cap U.S. Growth Fund/1/ N/A N/A N/A
Capital Growth Fund 2,171,462 2,854 1,563,448
International Equity Fund 1,071,755 14,733 470,027
Small Cap Fund 569,684 2,992 454,857
Emerging Market Equity Fund/1/ N/A N/A N/A
Asia Growth Fund 626,724 3,410 276,754
- -----------------
1 Not operational
The Service Plans of each Fund will remain in effect until May 1, 1998, and
from year to year thereafter, provided that the continuance of each service plan
is approved annually by a majority vote of the Trustees, including a majority of
the non-interested Trustees who have no direct or indirect financial interest in
the Service Plans. All material amendments of the Service Plans must also be
approved by the Trustees in the manner described above. The Service Plans may
be terminated at any time as to any Fund without payment of any penalty by a
vote of a majority of the non-interested Trustees or by vote of a majority of
the outstanding voting securities of the affected Fund. The Trustees have
determined that in their judgment there is a reasonable likelihood that the
Service Plans will benefit the Funds and their shareholders.
OTHER INFORMATION REGARDING PURCHASES, REDEMPTIONS,
EXCHANGES AND DIVIDENDS
The following information supplements the information in the Prospectus
under the captions "How to Invest," "How to Sell Shares of the Funds" and
"Dividends." Please see the Prospectus for more complete information.
B-77
<PAGE>
SERVICE PLANS
Each Fund has adopted a service plan (the "Plan") with respect to its Service
Shares which authorizes it to compensate Service Organizations for providing
certain administration services and personal and account maintenance services to
their customers who are or may become beneficial owners of such Shares.
Pursuant to the Plan, each Fund enters into agreements with Service
Organizations which purchase Service Shares of the Fund on behalf of their
customers ("Service Agreements"). Under such Service Agreements the Service
Organizations may perform some or all of the following services: (a) act,
directly or through an agent, as the sole shareholder of record and nominee for
all customers, (b) maintain account records for each customer who beneficially
owns Service Shares of a Fund. (c) answer questions and handle correspondence
from customers regarding their accounts, (d) process customer orders to
purchase, redeem and exchange Service Shares of a Fund, and handle the
transmission of funds representing the customers' purchase price or redemption
proceeds, (e) issue confirmations for transactions in shares by customers, (f)
provide facilities to answer questions from prospective and existing investors
about Service Shares of a Fund, (g) receive and answer investor correspondence,
including requests for prospectuses and statements of additional information,
(h) display and make prospectuses available on the Service Organization's
premises, (i) assist customers in completing application forms, selecting
dividend and other account options and opening custody accounts with the Service
Organization and (j) act as liaison between customers and a Fund, including
obtaining information from the Fund, working with the Fund to correct errors and
resolve problems and providing statistical and other information to a Fund. As
compensation for such services, each Fund will pay each Service Organization a
service fee in an amount up to 0.50% (on an annualized basis) of the average
daily net assets of the Service Shares of such Fund attributable to or held in
the name of such Service Organization.
Each Fund has adopted its Plan pursuant to Rule 12b-1 under the Act in order to
avoid any possibility that payments to the Service Organizations pursuant to the
Service Agreements might violate the Act. Rule 12b-1, which was adopted by the
SEC under the Act, regulates the circumstances under which an investment company
or series thereof may bear expenses associated with the distribution of its
shares. In particular, such an investment company or series thereof cannot
engage directly or indirectly in financing any activity which is primarily
intended to result in the sale of shares issued by the company unless it has
adopted a plan pursuant to, and complies with the other requirements of, such
Rule. The Trust believes that fees paid for the services provided in the Plan
and described above are not expenses incurred primarily for effecting the
distribution of Service Shares. However, should such payments be deemed by a
court or the SEC to be distribution expenses, such payments would be duly
authorized by the Plan.
The Glass-Steagall Act prohibits all entities which receive deposits from
engaging to any extent in the business of issuing, underwriting, selling or
distributing securities, although institutions such as national banks are
permitted to purchase and sell securities upon the order and for the account of
their customers. In addition, under some state securities laws, banks and other
financial institutions purchasing Service Shares on behalf of their customers
may be required to register as dealers. Should future legislative or
administrative action or judicial or administrative decisions or interpretations
prohibit or restrict the activities of one or more of the Service Organizations
in connection with a Fund, such Service Organizations might be required to alter
materially or discontinue the services performed under their Service Agreements.
If one or more of the Service Organizations were restricted from effecting
purchases or sales of Service Shares automatically pursuant to pre-authorized
instructions, for example, effecting such transactions on a manual basis might
affect the size and/or growth of a Fund. Any such alteration or discontinuance
of services could require the Board of Trustees to consider changing a Fund's
method of operations or providing alternative means of offering Service
B-78
<PAGE>
Shares of the Fund to customers of such Service Organizations, in which case the
operation of such Fund, its size and/or its growth might be significantly
altered. It is not anticipated, however, that any alternation of a Fund's
operations would have any effect on the net asset value per share or result in
financial losses to any shareholder.
Conflict of interest restrictions (including the Employee Retirement Income
Security Act of 1974) may apply to a Service Organization's receipt of
compensation paid by a Fund in connection with the investment of fiduciary
assets in Service Shares of a Fund. Service Organizations, including banks
regulated by the Comptroller of the Currency, the Federal Reserve Board or the
Federal Deposit Insurance Corporation, and investment advisers and other money
managers subject to the jurisdiction of the SEC, the Department of Labor or
state securities commissions, are urged to consult legal advisers before
investing fiduciary assets in Service Shares of a Fund. In addition, under
some state securities laws, banks and other financial institutions purchasing
Service Shares on behalf of their customers may be required to register as
dealers.
The Trustees, including a majority of the Trustees who are not interested
persons of the Trust and who have no direct or indirect financial interest in
the operation of the Plans or the related Service Agreements, voted to approve
each Plan and related Service Agreements at a meeting called for the purpose of
voting on such Plans and Service Agreements on April 23, 1997. Each Plan will
be approved by the sole shareholder of Service Shares of each Fund, on April
23, 1997. The Plans and Service Agreements will remain in effect until June 30,
1997 and will continue in effect thereafter only if such continuance is
specifically approved annually by a vote of the Trustees in the manner described
above. The Plans may not be amended to increase materially the amount to be
spent for the services described therein without approval of the Service
Shareholders of the affected Fund and all material amendments of the Plan must
also be approved by the Trustees in the manner described above. The Plan may be
terminated at any time by a majority of the Trustees as described above or by a
vote of a majority of the outstanding Service Shares of the affected Fund. The
Service Agreements may be terminated at any time, without payment of any
penalty, by vote of a majority of the Trustees as described above or by a vote
of a majority of the outstanding Service Shares of the affected Fund on not more
than sixty (60) days' written notice to any other party to the Service
Agreements. The Service Agreements will terminate automatically if assigned.
So long as the Plans are in effect, the selection and nomination of those
Trustees who are not interested persons will be committed to the discretion of
the Trust's Nominating Committee, which consists of all of the non-interested
members of the Trustees. The Trustees has determined that, in its judgment,
there is a reasonable likelihood that the Plans will benefit the Funds and the
holders of Service Shares of the Funds. In the Trustees' quarterly review of
the Plans and Service Agreements, the Board will consider their continued
appropriateness and the level of compensation provided therein.
B-79
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders
- --------------------------------------------------------------------------------
Dear Shareholders:
The U.S. equity market rewarded investors with excellent returns once
again in the 12-month period ended January 31, 1997. Most European markets
achieved significant gains as well, with several outpacing the U.S., while the
performance of Asian markets varied widely. We are pleased to report that most
of the Goldman Sachs equity funds performed very well in this generally
favorable global equity environment.
U.S. Stocks Continued to Climb Amid Heightened Volatility
The U.S. stock market surged to record levels during the period under
review, rising an impressive 26.3% (as measured by the Standard & Poor's 500
stock index). During 1996, the market advanced in a "staircase" pattern, where
notable gains are achieved within a relatively short time and are followed by a
period of choppy trading. For example, after a run-up from January through
mid-February, market volatility notably increased, as investor sentiment
vacillated between two contradictory concerns. With some economic news,
investors feared that the economy was growing too quickly, making higher
inflation a possibility, while other news caused them to worry that the economy
was slowing, putting earnings at risk. In May, investors briefly overcame their
fears and sent the market higher, but their concerns quickly re-emerged and
caused the market to settle into another choppy trading range that culminated in
a sharp sell-off in July.
By August, sentiment significantly improved when data indicated that
earnings growth was more resilient than generally expected and inflation
remained under control. Thus reassured, investors propelled stocks to record
highs during the second half of the period, with the Dow Jones Industrial
Average crossing the 6000 mark for the first time by mid-October. The ascent
continued through the end of the period, with the Dow climbing to 7000 by
mid-February 1997.
Though small-cap stocks led the market during the first half of the
year, the post-July rally was dominated by large-cap, growth companies.
Furthermore, the rally was very narrowly focused, with a handful of large-cap
stocks (primarily in the technology, finance and pharmaceutical sectors)
contributing substantially to the S&P 500 index's performance for the period.
After a Weak Start, Economic Growth Rebounded, Then Moderated
When the period began, lackluster consumer spending and the General
Motors strike restrained economic growth, but the economy still advanced faster
than expected, with first-quarter real GDP growth of 2.0% (annualized). Momentum
accelerated even more dramatically during the second quarter, as industrial
activity, automobile sales and home sales all showed significant improvement. As
a result, second-quarter real GDP rose a robust 4.7% (annualized), its highest
rate in two years.
The economy's torrid growth cooled markedly during the third quarter
with an annualized real GDP growth of 2.1%, largely due to lackluster consumer
spending and a widening U.S. trade deficit. This slowdown proved to be
temporary, however, as the economy strengthened from October through December.
Fourth-quarter real GDP
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Table of Contents
<S> <C>
Introduction/Market Overview............................................. 1
Goldman Sachs Balanced Fund.............................................. 4
Goldman Sachs Select Equity Fund......................................... 14
Goldman Sachs Growth and Income Fund..................................... 22
Goldman Sachs Capital Growth Fund........................................ 28
Goldman Sachs Small Cap Equity Fund...................................... 34
Goldman Sachs International Equity Fund.................................. 40
Goldman Sachs Asia Growth Fund........................................... 48
Financial Statements..................................................... 56
Notes to Financial Statements............................................ 64
Financial Highlights..................................................... 74
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
1
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders (continued)
growth was revised to 3.9% (annualized), reflecting a narrowing trade deficit,
rising consumer spending and accelerating manufacturing activity. Despite firm
growth, underlying inflation remained surprisingly mild. For all of 1996,
consumer prices rose only 2.9%. In January 1997, most indicators suggested that
the economy would continue to advance.
The U.S. Federal Reserve cut the Federal funds rate by 25 basis
points in January 1996, just prior to the start of the period, in response to
generally poor year-end economic conditions. Though stronger than expected
growth shifted investor expectations from further Federal Reserve interest rate
cuts to potential tightening, the Fed then left rates unchanged. As of January
31, 1997, the Federal funds rate remained at 5.25%.
The Dollar Resumed Its Climb Against the Yen and the Mark Following a Brief July
Slide
During the period under review, the dollar continued to strengthen,
rising to a 47-month high against the yen and a 31-month high against the mark.
Though the dollar declined briefly in July along with the U.S. stock market, it
quickly rebounded in August and continued to rally through the end of the
period. The dollar's climb was reflective of several developments, including the
relative strength of the U.S. economy, reductions in the budget deficit and
controlled inflation. Despite the run-up, Goldman Sachs' economists do not
expect a major impact on U.S. growth in 1997, nor do they anticipate a major
decrease in exports, as the dollar's effect on U.S. trade flows is relatively
small and stretched out over time. Furthermore, domestic demand in Canada and
Mexico, which together accounted for nearly one-third of U.S. exports in 1996,
is expected to rise.
The International Market Environment: European Equities Performed Well, Japan
Declined Sharply and Asian Markets Were Mixed Amid Increased Volatility
During the period under review, most global economies experienced
modest growth, but long-awaited recoveries in Europe and Japan fell short of
expectations. In Europe, several major economies, such as Germany and France,
continued to be plagued by weaker than expected manufacturing activity and
record-high unemployment, while others, such as the U.K., clearly accelerated.
In contrast to the mixed economic conditions, most European equity markets
performed very well, buoyed by healthy corporate profits. Though the Japanese
economy strengthened, equities declined due to concerns regarding the
sustainability of earnings growth as well as fears that the newly elected
government would delay deregulation. In January 1997, the already weak Japanese
market sold off sharply when the government announced an austerity program that
was expected to curb growth. In other Asian countries, key elections heightened
political uncertainty throughout the region and a marked slowdown in economic
growth increased volatility.
Outlook in the U.S.: Economic Growth Is Expected to Continue to Strengthen
Goldman Sachs' economists expect first-quarter real GDP growth to
slow to just under 2.0% (annualized) due to a widening trade deficit. However,
this slowdown should not be interpreted as any change in economic fundamentals,
as underlying demand remains firm and consumer confidence, income and employment
trends continue to support consumer spending. The favorable economic environment
of moderate growth and low inflation appears likely to persist in the near term,
which could translate to a seventh year of profit growth for U.S. corporations
in 1997 and another good year for U.S. equities, though not likely as strong as
last year. As always, equity performance can be affected by changes in the
economic environment, such as higher than expected inflation, which could lead
to a Fed tightening by midyear, or an unforeseen faltering of economic growth.
After the outstanding performance of the past two years, it is
important to maintain realistic expectations from your equity investments. As
increased volatility during 1996 demonstrated, equities can go down as well as
up. Over the long run, however, stocks have historically outperformed other
asset classes, rewarding investors committed to a long-term investment horizon.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
A Major Addition to Our Active Equity Management Team
We are pleased to announce that we have recently acquired Liberty
Investment Management, a Tampa, Florida-based investment advisory firm with an
impressive 16-year track record. Liberty's Chief Investment Officer, Herbert
Ehlers, and his portfolio management team have assumed primary responsibility
for the Goldman Sachs Capital Growth Fund, which they will manage using a
"growth at a reasonable price" investment style. The Liberty group adds both
breadth and depth to the Goldman Sachs U.S. Active Equity team, and we look
forward to working with them.
In conclusion, thank you for making the Goldman Sachs equity funds part of
your long-term financial plan.
Sincerely,
/s/ David B. Ford /s/ John P. McNulty
David B. Ford John P. McNulty
Co-Head, Co-Head,
Goldman Sachs Goldman Sachs
Asset Management Asset Management
March 3, 1997
- --------------------------------------------------------------------------------
3
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Balanced Fund
- --------------------------------------------------------------------------------
Objective and Investment Approach
The Goldman Sachs Balanced Fund seeks to provide investors with a
combination of long-term growth of capital and current income by investing in a
diversified portfolio that includes both equity and fixed income securities.
Under normal market conditions, the fund is expected to maintain an asset mix of
45% to 65% in equity securities, with the remainder (at a minimum 25%) in fixed
income securities. The fund's portfolio management team will review the fund's
asset mix on a regular basis and adjust it to reflect changes in the economic
environment.
Stocks are selected using a value style, identifying those judged to
be inexpensive relative to their expected long-term earnings and ability to pay
dividends. We also consider the degree to which a company's management is
committed to increasing value for shareholders.
In the fixed income portion of the portfolio, we actively manage the
portfolio within a risk-controlled framework. We seek to minimize interest rate
risk relative to the portfolio's benchmark, and focus on seeking to add value
through sector selection, security selection and yield curve strategies.
Performance Review: Equity, Fixed Income and Asset Allocation Contributed to
Strong Results
<TABLE>
<CAPTION>
Fund Total Return
(based on net Benchmark
asset value) Total Return+
------------ -------------
<S> <C> <C>
Class A (1/31/96 - 1/31/97)* 18.59% 15.51%
Class B (5/1/96 - 1/31/97)* 16.22% 14.99%
</TABLE>
* Class A and B share performance assumes reinvestment of all dividends and
distributions, a complete redemption at the net asset value at the end of the
period and no initial sales charge or contingent deferred sales charge.
Performance for Class B shares is a cumulative total return (not annualized)
from their inception through the end of the period.
+ The benchmark is a combination of the S&P 500 stock index (weighted at 55%)
and the Lehman Brothers Aggregate Bond Index (weighted at 45%).
We are pleased to report that during the period under review, the
fund's Class A and Class B shares outperformed the benchmark. In addition, the
fund's Class A shares ranked within the top 15% of the Lipper balanced fund
category (35th of 281) for the 12-month period ended January 31, 1997, according
to Lipper Analytical Services, Inc. (Please note that Lipper rankings do not
take sales charges into account and that past performance is not a guarantee of
future results. Class B shares were not ranked because they did not exist during
the full year.)
The equity and fixed income portions of the fund both performed
favorably, with equity investments contributing most to fund results. In
addition, our asset allocation decisions also benefited performance. During the
spring of 1996, we reduced the fund's equity weightings in favor of fixed income
investments, which worked in its favor when equities fell sharply in July. In
October, we increased the fund's equity weighting, just prior to a significant
rally in the stock market. As of January 31, 1997, the fund's asset mix based on
net assets was 54% in equities, 42% in fixed income and the remainder in cash
equivalents.
Best Performing Equity Investments Included Technology, Finance and Energy
Stocks
The fund's best performing stocks came from a wide range of
industries, particularly technology, finance and energy. Technology holdings
that performed well included Intel Corp., the dominant microprocessor
manufacturer, which we sold after it climbed sharply due to stronger than
expected personal computer sales and reached our target price, and Avnet, Inc.,
the second largest distributor of semiconductors and other electronic
components. In the financial sector, BankAmerica Corp. increased its focus on
aggressive capital management, and NationsBank Corp. began to realize the
benefits of cost cuts. Top-performing energy-related investments were Tosco
Corp., an oil refiner and distributor, which continued its ambitious acquisition
strategy, and Texaco Inc., which benefited from higher petroleum prices and a
successful restructuring program. Disappointing performers included three
companies that suffered from
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
overcapacity in their respective industries: Georgia-Pacific Corp. and Stone
Container Corp., both manufacturers of paper products, and Geon Corp., a
manufacturer of polyvinyl chloride.
One of the fund's new investments was Unicom Corp., an electric
utility that operates 12 nuclear units at six sites. Unicom generates excess
capital and, unlike many other electric utilities, has no utility power purchase
problems. We established a position after its stock price declined due to a
mandated increase in spending on operations and maintenance, an issue that
management believes will not impair the company's long-term prospects. During
the period, we sold several stocks after they appreciated and reached our price
targets, including Anheuser-Busch Co., Inc., the world's largest brewer, and
Greenpoint Financial Corp., a New York-based thrift.
<TABLE>
<CAPTION>
Top 10 Equity Holdings as of January 31, 1997
Percentage of
Total
Company Line of Business Net Assets
<S> <C> <C>
Aetna Inc. Healthcare 1.9%
Management
Tenet Healthcare Corp. Hospitals 1.9%
Cigna Corp. Insurance 1.7%
Lear Corp. Autoparts/Original 1.7%
Equipment
Brunswick Corp. Pleasure 1.7%
Boats/Marine
Engines
Goodyear Tire & Rubber Co. Tire and Rubber 1.6%
Products
Dean Witter Discover & Co. Financial Services 1.6%
Avnet, Inc. Electronic 1.5%
Components
Distributor
Philip Morris Companies, Tobacco and Food 1.5%
Inc. Products
Owens-Illinois, Inc. Packaging 1.5%
</TABLE>
Corporate and Emerging Market Debt Sectors Led the Fund's Fixed Income
Performance
The fixed income sectors that contributed most to the fund's
performance were its corporate bond holdings and emerging market debt
securities. Corporate bonds benefited when many companies reported positive
earnings growth throughout the period. Emerging market debt was one of the
fund's smaller allocations during the year but performed extremely well due to
positive emerging country credit trends and supportive cash flows resulting from
global investors' persistent search for incremental yield. In addition, the
fund's investments in the mortgage and asset-backed sectors also performed well,
reflecting healthy investor demand.
The fund's largest fixed income allocation was mortgage-backed
securities (MBS), which accounted for a 12.9% position in terms of total net
assets, up from 10.0% a year ago. The MBS sector fared particularly well during
the first half of the period, when interest rates rose and prepayment fears
abated. We gradually trimmed the fund's exposure in the corporate bond sector to
9.8%, down from 13.2% a year ago, as it became more fully valued. The fund's
asset-backed securities (ABS) weighting was 4.8%, and they continued to offer
incremental yield over similar duration Treasuries. U.S. Treasuries, with an
8.5% allocation, were used together with futures to manage the fund's interest
rate risk. Finally, 3.3% of the fund was invested in emerging market debt, where
we stressed higher credit, short-duration bonds, and 0.7% was invested in
government agency securities.
Outlook
We believe that, overall, the stock market is moderately overvalued
and is therefore unlikely to match the strong return it achieved in 1996.
However, it is important to note that even after last year's rally, the fund's
equity holdings continue to be attractively valued. We expect that our emphasis
on using extensive fundamental research to identify stocks selling below their
- --------------------------------------------------------------------------------
5
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Balanced Fund (continued)
- --------------------------------------------------------------------------------
intrinsic value will continue to serve us well in 1997's potentially more
challenging stock market environment.
We have a relatively cautious view of the fixed income markets in the
coming months due to a possible tightening by the Federal Reserve later in the
year, which would impact the prices of fixed income securities. In the MBS
market, the pace of mortgage prepayments remains stable, and we continue to
identify specific securities that present attractive investment opportunities.
We have a moderately optimistic view for the corporate sector, where we will
continue to emphasize short-duration bonds that offer attractive incremental
yield over Treasuries. Finally, we believe ABS still offer attractive value
relative to other similarly rated securities, and we expect new supply to
continue to be met with enthusiastic demand.
Going forward, we will continue to actively allocate the portfolio's
asset mix between the equity and fixed income sectors to take advantage of
changing market conditions throughout the coming year.
/s/ Ronald E. Gutfleish /s/ Jonathan A. Beinner
Ronald E. Gutfleish Jonathan A. Beinner
Senior Portfolio Manager, Co-Head,
U.S. Active Equity Value U.S. Fixed Income
/s/ G. Lee Anderson /s/ c. Richard Lucy
G. Lee Anderson C. Richard Lucy
Portfolio Manager, Co-Head,
U.S. Active Equity Value U.S. Fixed Income
/s/ Eileen A. Aptman /s/ Richard H. Buckholz
Eileen A. Aptman Richard H. Buckholz
Portfolio Manager, Portfolio Manager,
U.S. Active Equity Value U.S. Fixed Income
March 3, 1997
- --------------------------------------------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Balanced Fund
January 31, 1997
- --------------------------------------------------------------------------------
The following graphs show the value as of January 31, 1997, of a $10,000
investment made (with and without the maximum sales charge of 5.5% and
redemption charge of 5.0% for Class A and B, respectively) on the inception date
of each class. For comparative purposes, the performance of the Fund's
benchmarks (the Standard and Poor's 500 index ("S&P 500") and the Lehman
Brothers Aggregate Bond Index (LBABI)) are shown for the appropriate time
periods. All performance data shown represents past performance and should not
be considered indicative of future performance which will fluctuate with changes
in market conditions. These performance fluctuations will cause an investor's
shares, when redeemed, to be worth more or less than their original cost.
<TABLE>
<CAPTION>
Class A
[LINE GRAPH APPEARS HERE]
GS Balanced GS Balanced
Class A Class A
(w/sales charge) (no sales charge) LBABI S&P 500
---------------- ----------------- ----- -------
<S> <C> <C> <C> <C>
10/12/94 9,450 10,000 10,000 10,000
1/31/95 9,532 10,087 10,233 10,184
1/31/96 12,211 12,922 11,966 14,123
1/31/97 14,488 15,331 12,357 17,842
<CAPTION>
Class B
[LINE GRAPH APPEARS HERE]
GS Balanced GS Balanced
Class B Class B
(no redemp. charge) (w/redemp. charge) LBABI S&P 500
------------------- ------------------ ----- -------
<S> <C> <C> <C> <C>
5/1/96 10,000 10,000 10,000 10,000
1/31/97 11,622 11,122 10,642 12,218
</TABLE>
---------------------------------------
Average Annual Total Return
---------------------------------------
One Year Since Inception/(a)/
------------------------------- ------------------ -------------------
Class A, no sales charge 18.59% 20.32%
------------------------------- ------------------ -------------------
Class A, w/sales charge 12.07% 17.41%
------------------------------- ------------------ -------------------
Class B, no redemption charge N/A 16.22%/(b)/
------------------------------- ------------------ -------------------
Class B, w/redemption charge N/A 11.22%/(b)/
------------------------------- ------------------ -------------------
/(a)/ Class A and B shares commenced operations October 12, 1994 and May 1,
1996, respectively.
/(b)/ An aggregate total return (not annualized) is shown instead of an average
annual total return since this class has not completed a full twelve
months of operations.
7
<PAGE>
Statement of Investments
- --------------------------------------------------------------------
Goldman Sachs Balanced Fund
January 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Shares Description Value
====================================================================
<S> <C> <C>
Common Stocks--53.0%
Airlines--1.8%
7,700 AMR Corp.* $ 619,850
32,600 Continental Airlines, Inc.* 908,725
- --------------------------------------------------------------------
1,528,575
- --------------------------------------------------------------------
Appliance Manufacturer--0.9%
28,600 Sunbeam Corp. 793,650
- --------------------------------------------------------------------
Auto/Original Equipment Manufacturer--1.7%
38,200 Lear Corp.* 1,427,725
- --------------------------------------------------------------------
Auto/Vehicle--1.0%
25,600 Ford Motor Co. 824,400
- --------------------------------------------------------------------
Banks--4.5%
10,300 BankAmerica Corp. 1,149,738
5,300 Chase Manhattan Corp. 490,250
9,400 Fleet Financial Group, Inc. 507,600
9,300 NationsBank Corp. 1,004,400
7,400 Republic Bank of New York Corp. 655,825
- --------------------------------------------------------------------
3,807,813
- --------------------------------------------------------------------
Chemicals-Commodity--1.1%
31,400 Geon Co. 588,750
7,600 Union Carbide Corp. 344,850
- --------------------------------------------------------------------
933,600
- --------------------------------------------------------------------
Defense--2.1%
17,900 McDonnell Douglas Corp. 1,203,775
6,200 Northrop Grumman Corp. 484,375
1,900 Thiokol Corp. 106,400
- --------------------------------------------------------------------
1,794,550
- --------------------------------------------------------------------
Department Stores--0.8%
13,900 Sears Roebuck & Co. 667,200
- --------------------------------------------------------------------
Electric Utilities--2.8%
5,500 CMS Energy Corp. 184,250
43,000 Long Island Lighting Co. 978,250
49,600 Unicom Corp. 1,171,800
- --------------------------------------------------------------------
2,334,300
- --------------------------------------------------------------------
Food--1.5%
40,200 Chiquita Brands International, Inc. 587,925
4,000 Unilever Inc. 658,000
- --------------------------------------------------------------------
1,245,925
- --------------------------------------------------------------------
Forest Products--1.1%
12,400 Georgia Pacific Corp. 912,950
- --------------------------------------------------------------------
Health Suppliers/Services--1.3%
23,300 Baxter International, Inc. 1,074,713
- --------------------------------------------------------------------
Healthcare Management--3.8%
20,400 Aetna Inc. 1,611,600
57,800 Tenet Healthcare Corp.* 1,560,600
- --------------------------------------------------------------------
3,172,200
- --------------------------------------------------------------------
Home Builders--1.8%
18,200 Centex Corp. 709,800
28,200 Lennar Corp. 750,825
- --------------------------------------------------------------------
1,460,625
- --------------------------------------------------------------------
Insurance-Life--2.5%
9,500 Cigna Corp. 1,440,438
11,700 Lincoln National Corp. 627,413
- --------------------------------------------------------------------
2,067,851
- --------------------------------------------------------------------
Insurance-Property and Casualty--1.6%
9,200 Allmerica Financial Corp. 336,950
16,100 Partner Re Holding Ltd. 571,550
12,700 Tig Holdings, Inc. 439,738
- --------------------------------------------------------------------
1,348,238
- --------------------------------------------------------------------
Integrated Oil--2.6%
8,100 Atlantic Richfield Co. 1,071,225
10,300 Texaco, Inc. 1,090,513
- --------------------------------------------------------------------
2,161,738
- --------------------------------------------------------------------
Logistics/Rail--1.0%
30,400 Canadian Pacific Ltd. 824,600
- --------------------------------------------------------------------
Logistics/Trucking--1.2%
39,600 Consolidated Freightways, Inc. 1,004,850
- --------------------------------------------------------------------
Oil Refining & Marketing--1.9%
12,800 Ashland Inc. 552,000
11,300 Tosco Corp. 1,000,050
- --------------------------------------------------------------------
1,552,050
- --------------------------------------------------------------------
Packaging--1.5%
52,500 Owens-Illinois Inc.* 1,246,875
- --------------------------------------------------------------------
- --------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial
statements.
8
<PAGE>
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Shares Description Value
====================================================================
<S> <C> <C>
Common Stocks (continued)
Recreational Products--1.7%
55,500 Brunswick Corp. $ 1,394,438
- --------------------------------------------------------------------
Security and Commodity Brokers, Dealers and Services--0.5%
13,100 Lehman Brothers Holdings, Inc. 414,288
- --------------------------------------------------------------------
Semiconductors & Electronics--1.5%
20,700 Avnet Inc. 1,280,813
- --------------------------------------------------------------------
Software--0.5%
13,800 Autodesk Inc. 436,425
- --------------------------------------------------------------------
Specialty Finance--1.6%
34,200 Dean Witter Discover & Co. 1,303,875
- --------------------------------------------------------------------
Steel--1.0%
20,200 AK Steel Holding Corp. 813,050
- --------------------------------------------------------------------
Supermarkets--2.0%
56,300 Fleming Companies, Inc. 907,838
24,600 Supervalu, Inc. 759,525
- --------------------------------------------------------------------
1,667,363
- --------------------------------------------------------------------
Textiles--1.3%
27,500 Fruit of The Loom, Inc.* 1,103,438
- --------------------------------------------------------------------
Tire & Other Related Rubber Products--1.6%
24,000 Goodyear Tire & Rubber Co. 1,308,000
- --------------------------------------------------------------------
Tobacco--2.8%
4,200 Loews Corp. 415,275
10,700 Philip Morris Companies, Inc. 1,271,963
12,100 RJR Nabisco, Inc. 396,275
8,500 Universal Corp. 263,500
- --------------------------------------------------------------------
2,347,013
- --------------------------------------------------------------------
Total Common Stocks
(Cost $35,773,086) $44,253,131
====================================================================
Preferred Stocks--0.1%
Media Content--0.1%
63 Time Warner, Inc. 10.25% $ 69,064
- --------------------------------------------------------------------
Tobacco--0.0%
3,400 RJR Nabisco, Inc., class C 9.25% 22,525
- --------------------------------------------------------------------
Total Preferred Stocks
(Cost $84,320) $ 91,589
====================================================================
Rights--1.1%
Forest Products--0.7%
42,000 Stone Container Corp. * exp. 08/08/98 $ 567,000
Technology Capital Goods--0.4%
10,800 Teradyne, Inc.* exp. 03/26/00 333,450
- --------------------------------------------------------------------
Total Rights
(Cost $923,718) $ 900,450
====================================================================
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
====================================================================
<S> <C> <C> <C>
Fixed Income--41.5%
Asset-Backed Securities--4.8%
Airplanes Pass Through Trust Series 1, Class C
$ 100,000 8.15% 03/15/19 $ 102,655
Asset Securitization Corp., Series 1996, Class A1
250,000 6.88 11/13/26 249,609
Case Equipment Loan Trust, Series 1995-A, Class A
74,286 7.30 03/15/02 75,124
Chemical Bank Master Credit Card Trust, Series 1995-2, Class A
140,000 6.23 06/15/03 139,343
Chevy Chase Auto Receivables Trust Series 1995-2, Class A
74,323 5.80 06/15/02 74,137
Discover Card Master Trust 1994-2, Class A
70,000 5.83 10/16/04 70,613
Discover Card Master Trust 1996-2, Class A
110,000 5.70 07/18/05 110,550
Discover Card Master Trust 1996-4, Class A
740,000 5.86 10/16/13 751,329
Discover Card Master Trust 1996-4, Class B
420,000 6.03 10/16/13 424,460
Fasco Auto Trust, Series 1996-1
266,114 6.65 11/15/01 267,223
Fingerhut Master Trust, Series 1996-1, Class A
200,000 6.45 02/20/02 200,936
Navistar Financial Trust, Series 1995-A, Class A2
134,590 6.55 11/20/01 135,347
Navistar Financial Trust, Series 1995-b, Class A3
120,000 6.05 04/15/02 120,000
Sears Credit Account Master Trust, Series 1995-2, Class A
700,000 8.10 06/15/04 733,026
- --------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial
statements.
9
<PAGE>
Statement of Investments
- --------------------------------------------------------------------
Goldman Sachs Balanced Fund (continued)
January 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
====================================================================
<S> <C> <C> <C>
Asset-Backed Securities (continued)
Sears Credit Card Master Trust, Series 1995-3, Class A
$ 70,000 7.00% 10/15/04 $ 71,268
Standard Credit Card Master Trust, Series 1994-4, Class A
110,000 8.25 11/07/03 117,322
Standard Credit Card Master Trust, Series 1995-1, Class A
360,000 8.25 01/07/07 389,135
- --------------------------------------------------------------------
Total Asset-Backed Securities
(Cost $4,019,726) $ 4,032,077
====================================================================
Corporate Bonds--9.8%
Finance Bonds--3.6%
BankAmerica Corp.
$ 500,000 7.75% 07/15/02 $ 520,600
Capital One Bank
200,000 8.33 02/10/97 200,056
250,000 8.13 02/27/98 254,825
Conseco Finance
120,000 8.70 11/15/26 122,912
Continental Bank
100,000 12.50 04/01/01 120,501
Countrywide Funding Corp.
100,000 6.08 07/14/99 99,368
150,000 8.00 12/15/26 147,029
Edison Mission Energy Funding Corp.
100,000 6.77 09/15/03 99,852
Fleet Mortgage Group, Inc.
250,000 6.50 06/15/00 248,888
Golden West Financial Corp.
200,000 10.25 12/01/00 223,894
Meditrust, Inc.
120,000 7.82 09/10/26 128,021
Mic Finance Trust
80,000 8.38 02/01/27 80,442
Olympic Financial Ltd.
95,000 13.00 05/01/00 107,350
PXRE Cap Trust
65,000 8.85 02/01/27 65,847
Signet Banking Corp.
$ 500,000 9.63% 06/01/99 $ 531,870
Washington Real Estate
55,000 7.13 08/13/03 54,745
- --------------------------------------------------------------------
Total Finance Bonds
(Cost $3,035,271) $ 3,006,200
====================================================================
Industrial Bonds--5.6%
360 Communications Co.
$ 195,000 7.13% 03/01/03 $ 193,518
Auburn Hills Trust
90,000 12.00 05/01/20 134,352
Blockbuster Entertainment
50,000 6.63 02/15/98 49,995
Chelsea GCA Realty
226,000 7.75 01/26/01 228,362
DVI Equipment Lease Trust
434,745 6.55 07/10/04 434,605
Ford Motor Credit Co.
40,000 8.38 01/15/00 42,038
General Motors Acceptance Corp.
170,000 7.13 05/10/00 173,087
210,000 5.63 02/05/01 202,810
H + T Master Trust, Class A2
220,000 8.18 08/15/02 220,000
K Mart Corp.
40,000 9.55 06/30/98 40,290
40,000 9.60 09/15/98 40,845
Loewen Group International
50,000 7.75 10/15/01 50,000
News America Holdings, Inc.
160,000 7.50 03/01/00 163,784
Northwest Airlines
217,076 8.97 01/02/15 226,558
NWA
68,025 8.26 03/10/06 71,149
- --------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial
statements.
10
<PAGE>
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
====================================================================
<S> <C> <C> <C>
Corporate Bonds (continued)
Industrial Bonds (continued)
Oryx Energy Co.
$ 245,000 9.50% 11/01/99 $ 259,252
RJR Nabisco Inc.
135,000 8.00 07/15/01 136,184
160,000 8.63 12/01/02 164,654
Rogers Cablesystems, Inc.
115,000 9.63 08/01/02 119,600
Tele-Communications, Inc.
295,000 6.19 09/15/03 292,956
125,000 9.65 10/01/03 133,951
20,000 6.82 09/15/10 19,899
Tenet Healthcare Corp.
60,000 9.63 09/01/02 65,100
Time Warner, Inc.
375,000 7.45 02/01/98 378,776
125,000 9.63 05/01/02 139,444
250,000 7.98 08/15/04 256,243
Tosco Corp.
110,000 7.00 07/15/00 110,793
U.S. Home Corp.
70,000 7.95 03/01/01 68,250
USI American Holdings Corp.
60,000 7.25 12/01/06 58,540
Viacom International
80,000 9.13 08/15/99 81,800
95,000 10.25 09/15/01 103,550
- --------------------------------------------------------------------
Total Industrial Bonds
(Cost $4,650,412) $ 4,660,385
====================================================================
Utility Bonds--0.6%
Arkla Inc.
$ 250,000 9.20% 12/18/97 $ 255,665
Central Maine Power Co.
100,000 7.38 01/01/99 100,138
160,000 7.45 08/30/99 159,134
- --------------------------------------------------------------------
Total Utility Bonds
(Cost $521,661) $ 514,937
====================================================================
- --------------------------------------------------------------------
====================================================================
Total Corporate Bonds
(Cost $8,207,344) $ 8,181,522
====================================================================
Government Bonds--1.2%
Australia Commonwealth
AUD1,000,000 7.50% 07/15/05 $ 769,138
Province of Quebec
$ 200,000 13.25 09/15/14 238,976
- --------------------------------------------------------------------
Total Government Bonds
(Cost $1,033,387) $ 1,008,114
====================================================================
Emerging Market Debt--3.3%
Argentina Bocan
$ 144,111 5.69% 04/01/01 $ 138,490
Asia Pulp and Paper International Finance Co.
100,000 7.26(a) 04/03/97 98,614
200,000 8.30 06/28/99 198,118
90,000 10.25 10/01/00 90,754
Banco De Commercio Exterior
30,000 8.63 06/02/00 30,979
BCO De Colombia
110,000 8.63 06/02/00 113,590
Bridas Corp.
170,000 12.50 11/15/99 181,433
Bridas Corp. Gtd Euro Medium
60,000 9.50 06/17/99 60,147
Corp. Andina de Fomento
160,000 7.25 04/30/98 161,774
Emp Ica Soc Contro
110,000 9.75 02/11/98 111,440
Empresa Col Petroleos
80,000 7.25 07/08/98 80,566
Financiera Energy Nacional
230,000 5.88 02/17/98 226,062
60,000 8.13 04/09/98 60,347
200,000 8.46 06/19/98 201,876
80,000 9.38 06/15/06 82,847
- --------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial
statements.
11
<PAGE>
Statement of Investments
- --------------------------------------------------------------------
Goldman Sachs Balanced Fund (continued)
January 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
====================================================================
<S> <C> <C> <C>
Emerging Market Debt (continued)
Grupo Industrial Durango
$ 120,000 12.00% 07/15/01 $ 127,978
Grupo Televisa
20,000 11.38 05/15/03 21,425
Imexsa Export Trust
100,000 10.13 05/31/03 104,190
Inst Fomento Industrial
290,000 8.38 07/29/01 295,707
PT Indah Kiat
50,000 8.88 11/01/00 49,518
Republic of Argentina
89,600 8.63 04/06/98 90,730
150,000 5.63 04/01/00 75,600
Sampoerna International
50,000 8.38 06/15/06 51,208
YPF Sociedad Anonima
111,483 7.50 10/26/02 113,132
- --------------------------------------------------------------------
Total Emerging Market Debt
(Cost $2,710,872) $ 2,766,525
====================================================================
Government Agency Obligations--0.7%
Federal National Mortgage Association
$ 520,000 8.50% 02/01/05 $ 545,917
- --------------------------------------------------------------------
Total Government Agency Obligations
(Cost $566,963) $ 545,917
====================================================================
Mortgage Backed Obligations--12.9%
Federal Home Loan Mortgage Corp.
$ 2,000,000 7.50% TBA-30yr/(b)/ $ 2,003,740
Federal National Mortgage Association
2,000,000 8.00 TBA-30yr/(b)/ 2,042,500
1,000,000 6.50 TBA-15yr/(b)(d)/ 990,930
95,702 8.50 09/01/06/(d)/ 100,068
119,291 8.50 03/01/07/(d)/ 124,733
677,419 8.50 03/01/10/(d)/ 707,985
1,000,000 3.50 05/25/19 869,370
====================================================================
Government National Mortgage Association
$ 1,000,000 7.50% TBA-30yr/(b)/ $ 1,002,180
963,086 7.50 05/15/23 969,404
1,005,709 7.00 07/15/23 990,311
1,000,000 7.00 08/15/23 984,690
- --------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $10,687,107) $10,785,911
====================================================================
Sovereign Credit--0.2%
State of Israel
$ 150,000 6.38% 12/15/05 $ 141,983
- --------------------------------------------------------------------
Total Sovereign Credit
(Cost $139,082) $ 141,983
====================================================================
U.S. Treasury Obligations--8.5%
United States Treasury Bonds
$ 470,000 12.00% 08/15/13/(d)/ $ 666,592
120,000 8.75 05/15/17/(d)/ 144,619
30,000 8.88 08/15/17 36,595
580,000 8.75 05/15/20 704,068
160,000 8.75 08/15/20/(d)/ 194,400
680,000 7.63 02/15/25 743,430
United States Treasury Notes
1,200,000 6.88 08/31/99 1,223,628
1,000,000 6.13 07/31/00 999,220
900,000 7.88 11/15/04 977,202
United States Treasury Principal Only Stripped Securities/(a)/
80,000 6.03/(a)/ 08/15/99 68,774
740,000 6.55/(a)/ 11/15/04/(d)/ 447,552
320,000 6.59/(a)/ 05/15/05 186,781
2,200,000 7.09/(a)/ 02/15/19 473,968
890,000 7.10/(a)/ 05/15/20 175,205
- --------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $7,102,563) $ 7,042,034
====================================================================
- --------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial
statements.
12
<PAGE>
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
====================================================================
<S> <C> <C> <C>
Yankee Bonds--0.1%
Korea Electric Power
$ 93,927 7.40% 04/01/16 $ 93,712
- --------------------------------------------------------------------
Total Yankee Bonds
(Cost $90,825) $ 93,712
====================================================================
Total Fixed Income
(Cost $34,557,869) $34,597,795
- --------------------------------------------------------------------
Short-Term Obligations--0.2%
Argentina Treasury Bill
$ 40,000 6.00%/(a)/ 02/14/97 $ 39,896
Banco Nacional de Com
50,000 10.63 06/23/97 51,291
Republic of Argentina
90,000 6.29(a) 05/16/97 88,166
- --------------------------------------------------------------------
Total Short-Term Obligations
(Cost $179,353) $ 179,353
====================================================================
Repurchase Agreement--11.0%
Joint Repurchase Agreement Account
$ 9,200,000 5.63% 02/03/97/(d)/ $ 9,200,000
- --------------------------------------------------------------------
Total Repurchase Agreement
(Cost $9,200,000) $ 9,200,000
====================================================================
Total Investments
(Cost $80,718,346)/(c)/ $89,222,318
====================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $ 9,461,225
Gross unrealized loss for investments in which
cost exceeds value (981,857)
- --------------------------------------------------------------------
Net unrealized gain $ 8,479,368
====================================================================
<CAPTION>
- --------------------------------------------------------------------
====================================================================
Futures contracts open at January 31, 1997 are as follows:
Number of
Contracts Settlement Unrealized
Type Long(e) Month Gain(Loss)
- ------------------------- ------------ --------------- -----------
<S> <C> <C> <C>
2-Year U.S. Treasury Note 5 March 1997 $(3,438)
10-Year U.S. Treasury Bond 15 March 1997 (25,500)
30-Year U.S. Treasury Bond 2 March 1997 (3,969)
S&P 500 Stock Index 4 March 1997 123,100
- -------------------------------------------------------------------
$90,193
- -------------------------------------------------------------------
</TABLE>
* Non-income producing security.
/(a)/ The interest rate disclosed for these securitites represents effective
yields to maturity.
/(b)/ TBA (To Be Assigned) securities are purchased on a forward commitment
basis with an approximate (generally +/-2.5%) principal amount and no
definite maturity date. The actual principal amount and maturity date will
be determined upon settlement when the specific mortgage pools are
assigned.
/(c)/ The aggregate cost for federal income tax purposes is $80,742,950.
/(d)/ Portions of these securities are being segregated as collateral for
futures contracts, TBA (To Be Assigned) securities, covered short sales
and/or mortgage dollar rolls.
/(e)/ Each 2-Year U.S. Treasury Note contract represents $200,000 in notional
par value. Each 10-Year and 30-Year U.S. Treasury Bond contract represents
$100,000 in notional par value. Each S&P 500 Stock Index represents
$50,000 in notional par value. The total net notional amount and market
value at risk are $2,900,000 and $4,463,969, respectively. The
determination of notional amounts does not consider market risk factors
and therefore notional amounts as presented here are indicative only of
volume of activity and not a measure of market risk.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
13
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Select Equity Fund
- --------------------------------------------------------------------------------
Objective and Investment Approach
The Goldman Sachs Select Equity Fund is designed to provide investors with
a broadly diversified portfolio that can be used as a core holding on which to
build an investment program. The fund's investment objective is to provide
investors with long-term growth of capital and dividend income through
investment in a broadly diversified portfolio of predominantly large-cap and
blue-chip equity securities representing all major sectors of the U.S. economy.
The fund's mandate is to remain fully invested with industry diversification,
capitalization and risk characteristics similar to the aggregate U.S. stock
market as represented by the S&P 500 stock index. Therefore, the fund's relative
performance compared with the market comes almost exclusively from stock
selection within sectors. We believe the fund offers investors an attractive
combination of value and growth, without assuming more risk than the broad
market.
The fund employs a disciplined approach that combines fundamental
investment research provided by the Goldman Sachs Global Investment Research
Department with quantitative analysis generated by the Asset Management
Division's proprietary model. Our quantitative system evaluates each stock using
many different criteria including valuation measures, growth expectations,
earnings momentum and risk. It also objectively analyzes the impact of current
economic conditions on different types of stocks. Those stocks ranked highly by
both our quantitative model and by Goldman Sachs research are selected for the
fund's portfolio.
Performance Review: Quantitative Model Contributed to the Fund's Performance
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fund Total
Return S&P 500
(based on net Total
asset value) Return
----------- ------
<S> <C> <C>
Class A (1/31/96 -1/31/97)* 23.75% 26.25%
Class B (5/1/96 -1/31/97)* 18.59% 22.18%
Institutional (1/31/96 -1/31/97)* 24.63% 26.25%
Service (6/7/96 - 1/31/97)* 15.92% 18.36%
</TABLE>
- --------------------------------------------------------------------------------
* Class A, B, Institutional and Service share performance assumes reinvestment
of all dividends and distributions, a complete redemption at the net asset value
at the end of the period and no initial sales charge or contingent deferred
sales charge. Performance for Class B and Service shares is a cumulative total
return (not annualized) from their inception through the end of the period.
During the period, the fund achieved strong absolute returns, with most of
its gains occurring in the second half of the year. When the period began, the
fund performed well primarily due to successful stock selection. The Research
Department's qualitative ratings were particularly helpful early in the period,
when its analysis helped the fund steer clear of underperforming stocks. During
the latter half of the year, most of the fund's positive performance came from
the Asset Management Division's quantitative model.
Of the three themes considered by our quantitative model -- value, growth
and low-risk -- stocks with value-oriented features, such as low price/earnings
ratios, received the highest weighting during most of the period. This emphasis
did not work in the fund's favor during the second and third quarters of 1996,
when stocks with growth characteristics (strong near-term growth expectations
and high price/earnings multiples) outperformed value-oriented stocks. In the
fourth quarter, however, our emphasis on value proved to be extremely
successful, as stocks with value characteristics soared to record highs and
outperformed the other themes by a substantial margin. As a result of this
dramatic rebound, value emerged as the dominant investment style for the year.
Despite the positive results from our quantitative model, the fund
underperformed the index because it was
- --------------------------------------------------------------------------------
14
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
unable to keep pace with the dramatic outperformance of the largest 50 stocks,
which accounted for a significant portion of the market's gains. In addition,
the fund held a slightly higher cash position than usual as the volume of new
assets invested in the fund rapidly increased, particularly during the fourth
quarter, when the top 50 stocks surged. To address this issue, at the end of
1996 the fund instituted new procedures to ensure that cash balances will be
invested more rapidly. Furthermore, we expect that any future market advance
will broaden to include stocks beyond the top 50.
The fund's best performers were large-capitalization stocks from a wide
range of sectors, including banks (BankAmerica Corp. and NationsBank Corp.),
technology companies (Intel Corp., Microsoft Corp. and IBM Corp.), consumer
staples (Procter & Gamble Co.), electrical equipment (General Electric Co.) and
tobacco (Philip Morris Companies, Inc.).
Stocks that fell short of our expectations included some of the fund's
utility, telecommunication and oil investments such as Unicom Corp., Airtouch
Communications, Inc. and Tenneco, Inc.
Portfolio Composition: Model Increasingly Favored Stocks With Defensive
Characteristics
As of January 31, 1997, the fund held 141 stocks. While its sector
exposures were generally in line with the S&P 500 index, the fund was
overweighted in electric/gas (5.8% for the fund versus 3.3% for the S&P 500) and
energy (10.1% versus 8.0%) and underweighted in consumer nondurables (10.2%
versus 12.9%) and telecommunications (3.9% versus 6.3%). These over- and
underweightings, as shown in Table II, were the result of the fund's stock
selection process and were not a reflection of our economic forecast for
specific sectors.
During the first quarter of 1996, the Fund's quantitative model favored
growth characteristics (such as earnings momentum and price momentum) and put a
smaller, but still positive, weight on stocks with value or low-risk
characteristics (e.g., low beta and low "disappointment" risk). As the year
progressed, the fund's strategy became somewhat more defensive as our
quantitative model increased its weighting in value and low-risk themes. This
shift was triggered by a number of indicators that pointed toward emerging
excesses in the equity market: Low cash cushions held by equity mutual funds,
the increasing volatility of equity prices, the record-low dividend yields and
the divergence in returns between stocks and bonds.
As a result of our more defensive posture, over the past year we gradually
increased the fund's weighting in energy-related companies such as Texaco Inc.
and Atlantic Richfield Co., both newcomers to the fund's 10 largest holdings. We
also decreased the fund's exposure to consumer noncyclicals, which includes
food/agriculture companies (e.g., IBP, Inc. and Kellogg Co.).
As of the end of the period, the fund's major valuation characteristics
were more attractive than the benchmark. These included a lower price/earnings
ratio based on 1997 estimated earnings (15.9x versus 17.3x for the S&P 500) as
well as a lower price/book ratio (3.0x versus 3.4x). The fund achieved these
favorable valuation levels while maintaining growth and risk characteristics in
line with those of the S&P 500.
Table I: Top 10 Portfolio Holdings as of 1/31/97
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percentage of
Total Net
Company Line of Business Assets
<S> <C> <C>
General Electric Co. Electronics 2.9%
Intel Corp. Semiconductors 2.8%
and Electronics
Exxon Corp. Petroleum and 2.2%
Natural Gas
Microsoft Corp. Computer Software 2.1%
Texaco Inc. Petroleum and 2.0%
Natural Gas
Merck & Co., Inc. Pharmaceuticals 1.9%
Atlantic Richfield Co. Petroleum and 1.7%
Natural Gas
Bristol-Myers Squibb Co. Pharmaceuticals 1.7%
Philip Morris Companies, Tobacco and Food 1.7%
Inc. Products
Travelers Group, Inc. Financial Services 1.6%
</TABLE>
- --------------------------------------------------------------------------------
15
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Select Equity Fund (continued)
- --------------------------------------------------------------------------------
Table II: Sector Breakout as of 1/31/97
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percentage of
Percentage S&P 500
Industry Sectors of Portfolio Index Difference
<S> <C> <C> <C>
Finance 17.8% 16.2% 1.6%
Consumer Nondurables 10.2% 12.9% -2.7%
Energy 10.1% 8.0% 2.1%
Health 9.6% 10.4% -0.8%
Technology 9.3% 10.9% -1.6%
Basic Industry 7.9% 7.1% 0.8%
Capital Spending 6.5% 5.6% 0.9%
Electric/Gas 5.8% 3.3% 2.5%
Miscellaneous 4.4% 5.0% -0.6%
Retail 4.3% 3.6% 0.7%
Telecommunications 3.9% 6.3% -2.4%
Consumer Services 3.8% 4.8% -1.0%
Consumer Durables 2.6% 2.5% 0.1%
Aerospace 1.8% 2.0% -0.2%
Transportation 1.1% 1.4% -0.3%
Cash 1.0% 0.0% 1.0%
</TABLE>
- --------------------------------------------------------------------------------
Outlook
Goldman Sachs expects the U.S. equity market to continue to advance in
1997, although returns will likely be more modest than the unusually strong
results of 1995 and 1996. In addition, we expect equity gains to broaden beyond
the top 50 stocks. In 1997, we will continue to maintain a balanced approach by
considering risk, value and growth simultaneously.
However, the relative importance of avoiding riskier stocks has increased in the
current market environment, which is likely to result in greater emphasis on
defensive stocks with below-average price volatility, attractive valuations and
lower possibility of near-term earnings disappointments.
/s/ Robert C. Jones
Robert C. Jones
Senior Portfolio Manager,
Quantitative Equity
/s/ Kent A. Clark
Kent A. Clark
Portfolio Manager,
Quantitative Equity
/s/ Victor H. Pinter
Victor H. Pinter
Portfolio Manager,
Quantitative Equity
March 3, 1997
- --------------------------------------------------------------------------------
16
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Select Equity Fund
January 31, 1997
- --------------------------------------------------------------------------------
The following graphs show the value, as of January 31, 1997, of a $10,000
investment made (with and without the maximum sales charge of 5.5% and
redemption charge of 5.0% for Class A and B, respectively) on the inception date
of each class. For comparative purposes, the performance of the Fund's benchmark
(the Standard and Poor's 500 Index ("S&P 500")) is shown for the appropriate
time periods. All performance data shown represents past performance and should
not be considered indicative of future performance which will fluctuate with
changes in market conditions. These performance fluctuations will cause an
investor's shares, when redeemed, to be worth more or less than their original
cost.
<TABLE>
<CAPTION>
Class A
[LINE GRAPH APPEARS HERE]
GS Select Eq GS Select Eq
Class A Class A
(w/sales charge) (no/sales charge) S&P 500
---------------- ---------------- -------
<S> <C> <C> <C>
5/24/91 9,450 10,000 10,000
1/31/92 10,112 10,701 11,092
1/31/93 10,548 11,162 12,266
1/31/94 12,144 12,851 13,846
1/31/95 12,009 12,708 13,919
1/31/96 16,654 17,617 19,306
1/31/97 20,613 21,813 24,390
<CAPTION>
Class B
[LINE GRAPH APPEARS HERE]
GS Select Eq GS Select Eq
Class B Class B
(no redemption charge) (w/redemption charge) S&P 500
---------------------- --------------------- -------
<S> <C> <C> <C>
5/1/96 10,000 10,000 10,000
1/31/97 11,859 11,359 12,218
<CAPTION>
Institutional
[LINE GRAPH APPEARS HERE]
GS Select Eq
Institutional Class S&P 500
------------------- -------
<S> <C> <C>
6/15/95 10,000 10,000
1/31/96 12,014 12,029
1/31/97 14,983 15,197
<CAPTION>
Service
[LINE GRAPH APPEARS HERE]
GS Select Eq
Serv. Class S&P 500
------------ -------
<S> <C> <C>
6/7/96 10,000 10,000
1/31/97 11,592 11,836
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------
Average Annual Total Return
------------------------------------------------
One Year Since Inception/(a)/
- --------------------------------------------------------------------------------
<S> <C> <C>
Class A, no sales charge 23.75% 14.67%
- --------------------------------------------------------------------------------
Class A, w/sales charge 16.98% 13.54%
- --------------------------------------------------------------------------------
Class B, no redemption charge N/A 18.59% /(b)/
- --------------------------------------------------------------------------------
Class B, w/redemption charge N/A 13.59% /(b)/
- --------------------------------------------------------------------------------
Institutional Class 24.63% 28.04%
- --------------------------------------------------------------------------------
Service Class N/A 15.92% /(b)/
- --------------------------------------------------------------------------------
</TABLE>
/(a)/ Class A, Class B, Institutional and Service shares commenced operations on
May 24, 1991, May 1, 1996, June 15, 1995 and June 7, 1996, respectively.
/(b)/ An aggregate total return (not annualized) is shown instead of an average
annual total return since these classes have not completed a full twelve
months of operations.
- --------------------------------------------------------------------------------
17
<PAGE>
Statement of Investments
Goldman Sachs Select Equity Fund
- --------------------------------------------------------------------
January 31, 1997
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Shares Description Value
- --------------------------------------------------------------------
<S> <C> <C>
Common Stocks--97.3%
Aerospace--0.8%
43,600 United Technologies Corp. $ 3,041,100
- --------------------------------------------------------------------
Agency/Government--0.9%
93,800 Federal National Mortgage Assn. 3,705,100
- --------------------------------------------------------------------
Agriculture/Heavy Equipment--2.5%
25,100 Case Corp. 1,330,300
55,500 Caterpillar, Inc. 4,308,188
44,100 Conagra, Inc. 2,227,050
48,900 Tenneco, Inc. 1,956,000
- --------------------------------------------------------------------
9,821,538
- --------------------------------------------------------------------
Airlines--1.2%
19,700 AMR Corp.* 1,585,850
38,500 Delta Air Lines, Inc. 3,041,500
- --------------------------------------------------------------------
4,627,350
- --------------------------------------------------------------------
Alcohol--0.2%
21,600 Anheuser Busch Companies, Inc. 918,000
- --------------------------------------------------------------------
Appliance Manufacturer--1.0%
38,300 Emerson Electric Co. 3,782,125
- --------------------------------------------------------------------
Auto/Original Equipment Manufacturer--0.3%
23,100 Cummins Engine, Inc. 1,215,638
- --------------------------------------------------------------------
Auto/Vehicle--1.5%
25,200 Chrysler Corp. 878,850
32,200 Ford Motor Co. 1,034,425
70,700 General Motors Corp. 4,171,300
- --------------------------------------------------------------------
6,084,575
- --------------------------------------------------------------------
Bank Holding Companies--0.4%
26,000 Comerica, Inc. 1,485,250
- --------------------------------------------------------------------
Banks--6.0%
33,550 Banc One Corp. 1,522,331
48,000 Bank of New York, Inc. 1,758,000
46,400 BankAmerica Corp. 5,179,400
12,900 Chase Manhattan Corp. 1,193,250
25,800 Citicorp 3,002,475
28,500 First Bank System, Inc. 2,166,000
34,400 First Chicago Corp. 1,965,100
6,400 First Union Corp. 535,200
48,400 NationsBank Corp. 5,227,200
4,500 Wells Fargo & Company $ 1,371,375
- --------------------------------------------------------------------
23,920,331
- --------------------------------------------------------------------
Beverages--1.6%
41,900 Coca Cola Co. 2,424,963
115,300 Pepsico, Inc. 4,021,088
- --------------------------------------------------------------------
6,446,051
- --------------------------------------------------------------------
Business Services--0.2%
19,100 Automatic Data Processing, Inc. 790,263
- --------------------------------------------------------------------
Chemicals-Commodity--2.1%
46,000 Dow Chemicals Co. 3,547,750
20,600 Du Pont EI de Nemours 2,258,275
68,900 Monsanto Co. 2,609,588
- --------------------------------------------------------------------
8,415,613
- --------------------------------------------------------------------
Chemicals-Specialty--1.0%
37,800 Allied Signal, Inc. 2,655,450
27,700 Morton International, Inc. 1,125,313
- --------------------------------------------------------------------
3,780,763
- --------------------------------------------------------------------
Commercial Services--0.3%
32,500 Interim Services, Inc.* 1,178,125
- --------------------------------------------------------------------
Communications Services Companies--1.5%
75,500 Airtouch Communications, Inc.* 1,953,563
96,100 Sprint Corp. 3,916,075
- --------------------------------------------------------------------
5,869,638
- --------------------------------------------------------------------
Communications Technology--0.8%
37,403 Lucent Technologies, Inc. 2,029,113
15,200 Motorola Inc. 1,037,400
- --------------------------------------------------------------------
3,066,513
- --------------------------------------------------------------------
Computers--0.9%
65,200 Hewlett Packard Co. 3,431,150
- --------------------------------------------------------------------
Computers & Peripherals--3.7%
45,400 Cisco Systems, Inc.* 3,166,650
35,000 Compaq Computer Corp.* 3,040,625
20,300 Eastman Kodak Co. 1,761,025
33,400 International Business Machines 5,252,150
51,100 Sun Microsystems, Inc.* 1,622,425
- --------------------------------------------------------------------
14,842,875
- --------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
18
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Shares Description Value
- --------------------------------------------------------------------
<S> <C> <C>
Common Stocks (continued)
Construction/Environmental Services--0.2%
13,300 Armstrong World Industries, Inc. $ 944,300
- --------------------------------------------------------------------
Consumer Staples--3.4%
51,700 American Home Products Corp. 3,276,488
13,300 Clorox Co. 1,577,713
60,200 Gillette Co. 4,906,300
33,400 Procter & Gamble Co. 3,857,700
- --------------------------------------------------------------------
13,618,201
- --------------------------------------------------------------------
Defense--1.4%
5,400 Boeing Co. 578,475
17,700 McDonnell Douglas Corp. 1,190,325
18,500 Textron, Inc. 1,801,438
36,800 TRW, Inc. 1,867,600
- --------------------------------------------------------------------
5,437,838
- --------------------------------------------------------------------
Department Stores--3.2%
147,400 Dayton Hudson Corp. 5,545,925
38,000 Federated Dept. Stores, Inc.* 1,249,250
18,900 Mercantile Stores Co. 926,100
65,700 Sears Roebuck & Co. 3,153,600
72,100 Walmart Stores, Inc. 1,712,375
- --------------------------------------------------------------------
12,587,250
- --------------------------------------------------------------------
Electric Utilities--4.7%
76,300 Duke Power Co. 3,576,563
128,700 Edison International, Inc. 2,750,963
31,500 Empresa Nacional de Electric ADR 2,071,125
139,600 Niagara Mohawk Power* 1,413,450
57,700 Public Service Company of New Mexico 1,154,000
92,800 Texas Utilities Co. 3,758,400
156,300 Unicom Corp. 3,692,588
- --------------------------------------------------------------------
18,417,089
- --------------------------------------------------------------------
Electrical Equipment Manufacturer--2.9%
112,200 General Electric Co. 11,556,600
- --------------------------------------------------------------------
Financial Services--0.7%
53,300 Providian Corp. 2,871,538
- --------------------------------------------------------------------
Food Producers--0.5%
10,600 CPC International, Inc. 814,875
16,400 Ralston Purina Co. 1,289,450
- --------------------------------------------------------------------
2,104,325
- --------------------------------------------------------------------
Forest Products--2.6%
78,600 Avery Dennison Corp. 2,878,725
32,000 Champion International Corp. 1,340,000
32,600 Georgia Pacific Corp. 2,400,175
26,000 International Paper Co. 1,062,750
19,700 Mead Corp. 1,108,125
30,700 Weyerhaeuser Co. 1,396,850
- --------------------------------------------------------------------
10,186,625
- --------------------------------------------------------------------
Funeral Services--0.2%
29,600 Service Corp. International 858,400
- --------------------------------------------------------------------
Gas Distribution & Pipeline--1.2%
55,600 Columbia Gas Systems, Inc. 3,620,950
22,900 Panenergy Corp. 1,056,263
- --------------------------------------------------------------------
4,677,213
- --------------------------------------------------------------------
Health Suppliers/Services--1.3%
73,200 Johnson & Johnson 4,218,150
15,800 Medtronic Inc. 1,082,300
- --------------------------------------------------------------------
5,300,450
- --------------------------------------------------------------------
Healthcare Management--0.8%
55,800 Columbia HCA Healthcare 2,204,100
38,300 Manor Care, Inc. 976,650
- --------------------------------------------------------------------
3,180,750
- --------------------------------------------------------------------
Information Management--0.7%
114,100 Dun & Bradstreet Corp. 2,738,400
- --------------------------------------------------------------------
Insurance Brokers & Other Insurance--0.3%
24,600 Exel Insurance Ltd. 1,042,425
- --------------------------------------------------------------------
Insurance-Life--2.6%
29,100 American General Corp. 1,160,363
18,700 Cigna Corp. 2,835,388
122,933 Travelers Group, Inc. 6,438,616
- --------------------------------------------------------------------
10,434,367
- --------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
Statement of Investments
- --------------------------------------------------------------------
Goldman Sachs Select Equity Fund (continued)
January 31, 1997
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value
====================================================================
<S> <C> <C>
Common Stocks (continued)
Insurance-Property and Casualty--2.2%
25,956 Allstate Corp. $ 1,706,607
36,850 American International Group, Inc. 4,463,456
68,500 Safeco Corp. 2,603,000
- --------------------------------------------------------------------
8,773,063
- --------------------------------------------------------------------
Integrated Oil--11.1%
22,100 Amoco Corp. 1,922,700
51,800 Atlantic Richfield Co. 6,850,550
84,300 Exxon Corp. 8,735,574
46,800 Kerr McGee Corp. 3,217,500
17,200 Mobil Corp. 2,257,500
52,000 Norsk Hydro ADR 2,925,000
32,000 Phillips Petroleum Co. 1,412,000
26,600 Royal Dutch Petroleum ADR 4,615,100
75,700 Texaco, Inc. 8,014,738
97,300 Unocal Corp. 4,098,763
- --------------------------------------------------------------------
44,049,425
- --------------------------------------------------------------------
Investment Brokers & Managers--2.7%
52,500 Merrill Lynch Co. 4,423,125
38,300 Morgan Stanley Group, Inc. 2,187,888
76,900 Salomon, Inc. 4,248,725
- --------------------------------------------------------------------
10,859,738
- --------------------------------------------------------------------
Local Phone Companies--2.3%
53,600 Ameritech Corp. 3,202,600
67,100 GTE Corp. 3,153,700
104,900 Worldcom, Inc.* 2,635,613
- --------------------------------------------------------------------
8,991,913
- --------------------------------------------------------------------
Machinery and Equipment--0.6%
20,100 Dover Corp. 994,950
29,300 Ingersoll-Rand Co. 1,336,813
- --------------------------------------------------------------------
2,331,763
- --------------------------------------------------------------------
Media/Entertainment--1.4%
41,400 King World Productions, Inc.* 1,619,775
54,942 Walt Disney Co. 4,024,502
- --------------------------------------------------------------------
5,644,277
- --------------------------------------------------------------------
Nonferrous Metals--1.3%
15,900 Phelps Dodge Corp. 1,111,013
72,800 Tyco International Ltd. 4,158,700
- --------------------------------------------------------------------
5,269,713
- --------------------------------------------------------------------
Office & Business Equipment--0.5%
36,400 Xerox Corp. 2,133,950
- --------------------------------------------------------------------
Oil & Gas Exploration--0.4%
31,100 Burlington Resources, Inc. 1,547,225
- --------------------------------------------------------------------
Pharmaceuticals--6.7%
51,100 Abbott Labs 2,778,563
53,100 Bristol Myers Squibb 6,743,700
18,600 Eli Lilly & Co. 1,620,525
82,100 Merck & Co. 7,450,575
23,600 Pfizer, Inc. 2,191,850
31,700 Pharmacia & Upjohn, Inc. 1,180,825
47,600 Schering Plough Corp. 3,599,750
13,800 Warner Lambert Co. 1,110,900
- --------------------------------------------------------------------
26,676,688
- --------------------------------------------------------------------
Recreational Products--0.2%
29,407 Mattel, Inc. 827,072
- --------------------------------------------------------------------
Restaurants & Hotels--1.0%
14,000 HFS, Inc.* 980,000
23,000 ITT Corp.* 1,313,875
40,200 McDonalds Corp. 1,829,100
- --------------------------------------------------------------------
4,122,975
- --------------------------------------------------------------------
Retail--0.7%
34,100 Home Depot, Inc. 1,687,950
29,900 TJX Companies, Inc. 1,188,525
- --------------------------------------------------------------------
2,876,475
- --------------------------------------------------------------------
Retail-Specialty--1.2%
48,200 Gap, Inc. 1,385,750
49,600 Nike, Inc. 3,366,600
- --------------------------------------------------------------------
4,752,350
- --------------------------------------------------------------------
Semiconductors & Electronics--2.8%
67,800 Intel Corp. 11,000,550
- --------------------------------------------------------------------
Software--2.7%
33,350 Computer Associates International,
Inc. 1,513,256
79,900 Microsoft Corp.* 8,149,800
24,600 Oracle Corp.* 956,325
- --------------------------------------------------------------------
10,619,381
- --------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Shares Description Value
====================================================================
<S> <C> <C>
Common Stocks (continued)
Supermarkets--0.9%
63,300 Great A&P Tea Co., Inc. $ 1,978,125
31,200 Safeway, Inc.* 1,489,800
- --------------------------------------------------------------------
3,467,925
- --------------------------------------------------------------------
Technical Services--0.4%
22,800 3Com Corp.* 1,530,450
- --------------------------------------------------------------------
Technology Capital Goods--0.7%
18,800 Applied Materials, Inc.* 928,250
22,000 Harris Corp. 1,674,750
- --------------------------------------------------------------------
2,603,000
- --------------------------------------------------------------------
Telecommunications--0.2%
17,000 Tellabs, Inc.* 700,188
- --------------------------------------------------------------------
Textiles--1.1%
22,500 Liz Claiborne, Inc. 947,813
33,200 Sara Lee Corp. 1,311,400
30,800 VF Corp. 2,048,200
- --------------------------------------------------------------------
4,307,413
- --------------------------------------------------------------------
Tire & Other Related Rubber Products--0.8%
36,800 BF Goodrich Co. 1,508,800
29,800 Goodyear Tire & Rubber Co. 1,624,100
- --------------------------------------------------------------------
3,132,900
- --------------------------------------------------------------------
Tobacco--1.7%
55,600 Philip Morris Companies, Inc. 6,609,450
- --------------------------------------------------------------------
Total Common Stocks
(Cost $294,916,122) $ 385,205,653
====================================================================
Rights--0.9%
Insurance--0.2%
9,400 MBIA, Inc.,* exp. 12/12/01 $ 903,575
- --------------------------------------------------------------------
Insurance-Life--0.4%
36,400 Protective Life Corp.*, exp. 07/13/97 1,442,350
- --------------------------------------------------------------------
Specialty Finance--0.3%
19,100 Beneficial Corp.,* exp. 11/23/97 1,284,475
- --------------------------------------------------------------------
Total Rights
(Cost $2,826,759) $ 3,630,400
- --------------------------------------------------------------------
<CAPTION>
Principal
Amount Description Value
====================================================================
<S> <C> <C>
U.S. Treasury Obligations--0.2%
$ 841,000 U.S. Treasury Bill
5.08%, 05/29/97/(b)/ $ 827,118
- --------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $827,118) $ 827,118
- --------------------------------------------------------------------
Repurchase Agreement--0.9%
$ 3,600,000 Joint Repurchase Agreement Account
5.63%, 02/03/97 $ 3,600,000
- --------------------------------------------------------------------
Total Repurchase Agreements
(Cost $3,600,000) $ 3,600,000
- --------------------------------------------------------------------
Total Investments
(Cost $302,169,999)/(a)/ $ 393,263,171
====================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in
which value exceeds cost $ 94,373,749
Gross unrealized loss for investments in
which cost exceeds value (3,489,045)
- --------------------------------------------------------------------
Net unrealized gain $ 90,884,704
====================================================================
</TABLE>
<TABLE>
<CAPTION>
Futures Contracts open at January 31, 1997 are as follows:
Number of
Contracts Settlement Unrealized
Type Long/(c)/ Month Gain
- ------------------------- ------------- ------------ ----------------
<S> <C> <C> <C>
S&P 500 Stock Index 7 March 1997 $91,800
</TABLE>
* Non-income producing security.
/(a)/The aggregate cost for federal income tax purposes is $302,378,467.
/(b)/Portion of this security is being segregated as collateral for futures
contracts.
/(c)/Each S&P 500 Stock Index represents $50,000 in notional par value. The
total net notional amount and net market value at risk are $350,000 and
$2,756,250, respectively. The determination of notional amounts does not
consider market risk factors and therefore notional amounts as presented
here are indicative only of volume of activity and not a measure of market
risk.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Growth and Income Fund
- --------------------------------------------------------------------------------
Objective and Investment Approach
The Goldman Sachs Growth and Income Fund seeks long-term growth of
capital and growth of income primarily through investments in a diversified
portfolio of common stocks and other equity securities. The fund is managed with
a value style, which means we focus on companies whose stocks we believe are
inexpensive relative to their expected long-term earnings growth and their
ability to pay dividends. Investments may include well-known companies that are
temporarily out of favor due to cyclical economic conditions or are experiencing
near-term difficulties the portfolio managers judge to be temporary in nature.
In-depth fundamental research of a company's financial structure, its
competitive position in the market and its management's commitment to increasing
shareholder value are all critical parts of the fund's investment approach.
Though we are not sector investors, we closely monitor the fund's sector and
industry exposures compared with the benchmark in an effort to avoid
unintentional over- or underweightings.
Performance Review: The Fund Outperformed the Index...
<TABLE>
<CAPTION>
- ------------------------------------- ----------------- -----------
Fund Total
Return S&P 500
(based on net Total
asset value) Return
----------- ------
<S> <C> <C>
Class A (1/31/96 - 1/31/97)* 28.42% 26.25%
Class B (5/1/96 - 1/31/97)* 22.23% 22.18%
Institutional (6/3/96 - 1/31/97)* 20.77% 19.11%
Service (3/6/96 - 1/31/97)* 23.87% 22.20%
- ------------------------------------- ----------------- -----------
</TABLE>
* Class A, B, Institutional and Service share performance assumes reinvestment
of all dividends and distributions, a complete redemption at the net asset value
at the end of the period and no initial sales charge or contingent deferred
sales charge. Performance for Class B, Institutional and Service shares is a
cumulative total return (not annualized) from their inceptions through the end
of the period.
The U.S. stock market continued to soar during the period under
review, adding to the impressive performance recorded during the prior year.
Most of the market's gains occurred during the latter half of the period, when
equities rebounded strongly following a sharp correction in July.
We are pleased to report that all of the fund's share classes
outperformed the S&P 500 stock index during the past fiscal year. Most notably,
its Class A shares returned 28.42% (at net asset value) versus 26.25% for the
index. During the period, the fund increased its regular quarterly dividend.
...And Fared Very Well Relative to Its Peers
We are proud to announce that for the three-year period ended January
31, 1997, the fund's Class A shares were rated "five stars" (out of 1,858
domestic equity funds) by Morningstar, Inc., an independent mutual fund rating
agency. The "five star" designation is Morningstar's highest rating for
historical risk-adjusted performance, and is given to mutual funds that
Morningstar determines to be in the top 10% of their category.1
In addition, the fund's Class A shares ranked within the top 10% of
the Lipper growth and income category (53rd of 533) for the 12-month period
ended January 31, 1997, according to Lipper Analytical Services, Inc. (Please
note that Lipper rankings do not take sales charges into account and that past
performance is not a guarantee of future results. Class B, Institutional and
Service shares
- -------------------------
1 Source: (C) 1997 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 1/31/97.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five- and ten-year average annual returns (where applicable) in excess of 90-day
Treasury bill returns with appropriate fee and sales charge adjustments and a
risk factor that reflects fund performance below 90-day Treasury bill returns.
The one-year rating is calculated using the same methodology, but is not a
component of the overall rating. For the one-year period, the Class A shares
received four stars and was rated among 2,990 domestic equity funds. The
Morningstar rating applies only to the fund's Class A shares; the fund's Class
B, Institutional and Service shares have not been rated. Class B, Institutional
and Service shares are subject to additional fees and expenses that may have the
effect of lowering performance and may affect any future Morningstar rating.
Morningstar rates funds against peers in the same category. In all, there are
five Morningstar categories (domestic equity, international equity, fixed
income, municipal and hybrid). Morningstar ratings range from five stars
(highest) to one star (lowest). Funds with five-star ratings are in the top 10%
of their category, four-star ratings in the next 22.5%, three stars the next
35%, two stars the next 22.5% and one star the lowest 10% of their categories.
22
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
were not ranked because they did not exist during the full year.)
Financial, Technology and Energy Stocks Were Among the Fund's Best Performers
The fund's outperformance came from successful stock selection in a
wide range of industries, led by finance, its largest sector weighting at 18.0%.
Technology and energy investments also did well. In addition, the fund benefited
significantly from our decision to limit its exposure in the media and
communication sector. Our concerns regarding increased competition between the
local exchange and long-distance companies and high valuations in the sector
proved to be on target.
In the financial sector, top performers were BankAmerica Corp. and
NationsBank Corp., the country's third and fourth largest banks, respectively.
BankAmerica Corp. increased its focus on aggressive capital management, which
resulted in its exiting unprofitable businesses and buying back some of its
stock. NationsBank Corp. acquired Bank South Corp. and Boatmen's Bancshares,
Inc., and investors began to realize the benefits of its cost structure due to
its acquisitions over the past few years.
Technology holdings that performed well included Intel Corp., the
dominant microprocessor manufacturer, which was purchased when the sector was
depressed due to concerns that the personal computer upgrade cycle had slowed.
Intel quickly rebounded when investors recognized the advantages of its dominant
market position, and we subsequently sold the stock when it reached our target
price. We saw solid gains from Avnet, Inc., the second largest distributor of
semiconductors and other electronic components, which we viewed as an
inexpensive opportunity to participate in the growth of the technology sector.
The fund was also well served by a number of its energy-related
investments. Tosco Corp., an oil refiner and distributor, more than doubled in
price as it continued to consolidate its market position through an ambitious
acquisition strategy, and Texaco Inc. benefited from higher petroleum prices and
a restructuring program that meaningfully improved profits.
In addition, several holdings appreciated due to special situations.
Our confidence in Long Island Lighting Co., a New York-based utility, which had
been shunned by many other investors, was handsomely rewarded when the stock
soared after Brooklyn Union Gas Co. made an attractive bid for the company in
January. The fund also benefited when McDonnell Douglas Corp., one of our
long-term positions, was acquired by Boeing Co. at a very favorable price.
Sunbeam Corp., a leading consumer products company, met with an enthusiastic
investor response to the aggressive restructuring program initiated by its new
CEO.
Paper and Chemical Stocks Were Weak
Disappointing performers included three companies impacted by
overcapacity in their respective industries: Georgia-Pacific Corp. and Stone
Container Corp., both manufacturers of paper products, and Geon Corp., a
manufacturer of polyvinyl chloride. We continue to have confidence in these
companies and expect their prospects to improve over time.
Additional Investments in a Variety of Sectors
During the period, we added a number of new holdings. These included
Dean Witter, Discover & Co., which we viewed as undervalued based on the
potential of its broker-dealer/asset management business and its large Discover
credit card business. In February 1997, Dean Witter, Discover & Co. announced
its intention to merge with investment bank Morgan Stanley. We also invested in
Unicom Corp., an electric utility that operates 12 nuclear units at six sites.
Unicom generates excess capital and, unlike many other electric utilities, has
no utility power purchase problems. We established a position after its stock
price declined due to a mandated increase in spending on operations and
maintenance, an issue that management believes will not impair the company's
long-
23
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Growth and Income Fund (continued)
- --------------------------------------------------------------------------------
term prospects. Also notable was our decision to increase the fund's
position in Tenet Healthcare Corp., a long-term holding, based on its prospects
for improved efficiencies resulting from the integration of its acquisition of
OrNda Healthcorp., a for-profit hospital chain.
Sales Included Several Financial and Technology Positions
We sold several stocks after they appreciated and reached our price
targets. These included Anheuser-Busch Co., Inc., the world's largest brewer,
which reported strong earnings; Greenpoint Financial Corp., which benefited from
increased investor appreciation of the value of its
"no-documentation--low-documentation" mortgage franchise; and technology
holdings Compaq Computer Corp. and Intel Corp.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Top 10 Portfolio Holdings as of January 31, 1997
Percentage
of Total Net
<S> <C> <C>
Company Line of Business Assets
Aetna Inc. Healthcare Service 3.3%
Provider
Tenet Healthcare Corp. Hospitals 3.3%
Lear Corp. Autoparts/Original 3.0%
Equipment
Cigna Corp. Insurance 2.9%
Brunswick Corp. Pleasure 2.9%
Boats/Marine
Engines
Dean Witter, Discover & Co. Financial Services 2.8%
Goodyear Tire & Rubber Co. Tire and Rubber 2.8%
Products
Philip Morris Companies, Tobacco and Food 2.7%
Inc. Products
Avnet, Inc. Electronic 2.7%
Components
Distributor
BankAmerica Corp. Commercial Bank 2.6%
- --------------------------------------------------------------------
</TABLE>
Outlook
As we enter the seventh year of a bull market for U.S. equities, we
view the market as moderately overvalued and therefore unlikely to match the
strong return it achieved in 1996. In this environment, it is particularly
noteworthy that the fund's holdings continue to be attractively valued even
after last year's rally. Our focus on undervalued stocks and extensive
fundamental research will continue to be extremely important in the more
challenging market we anticipate ahead.
/s/ Ronald E. Gutfleish /s/ G. Lee Anderson
- ------------------------ -------------------------
Ronald E. Gutfleish G. Lee Anderson
Senior Portfolio Manager, Portfolio Manager,
U.S. Active Equity Value U.S. Active Equity Value
/s/ Eileen A. Aptman
--------------------
Eileen A. Aptman
Portfolio Manager,
U.S. Active Equity Value
March 3, 1997
24
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Growth and Income Fund
January 31, 1997
- -------------------------------------------------------------------------------
The following graphs show the value, as of January 31, 1997, of a $10,000
investment made (with and without the maximum sales charge of 5.5% and
redemption charge of 5.0% for Class A and B, respectively) on the inception date
of each class. For comparative purposes, the performance of the Fund's benchmark
(the Standard and Poor's 500 Index ("S&P 500")) is shown for the appropriate
time periods. All performance data shown represents past performance and should
not be considered indicative of future performance which will fluctuate with
changes in market conditions. These performance fluctuations will cause an
investor's shares, when redeemed, to be worth more or less than their original
cost.
<TABLE>
<CAPTION>
Class A
[LINE GRAPH APPEARS HERE]
GS Growth & Inc GS Growth & Inc
Class A Class A
(w/sales charge) (no sales charge) S&P 500
---------------- ----------------- -------
<S> <C> <C> <C>
2/5/93 $ 9,450 $10,000 $10,000
1/31/94 10,686 11,308 11,073
1/31/95 11,110 11,757 11,132
1/31/96 14,716 15,573 15,436
1/31/97 18,911 20,012 19,501
<CAPTION>
Class B
[LINE GRAPH APPEARS HERE]
GS Growth & Inc GS Growth & Inc
Class B Class B
(no redemp charge) (w/redemp charge) S&P 500
------------------ ----------------- -------
<S> <C> <C> <C>
5/1/96 $10,000 $10,000 $10,000
1/31/97 12,223 11,723 12,218
<CAPTION>
Institutional
[LINE GRAPH APPEARS HERE]
GS Growth & Inc
Institutional Class S&P 500
------------------- -------
<S> <C> <C>
6/3/96 $10,000 $10,000
1/31/97 12,077 11,911
<CAPTION>
Service
[LINE GRAPH APPEARS HERE]
GS Growth & Inc
Service Class S&P 500
--------------- -------
<S> <C> <C>
3/6/96 $10,000 $10,000
1/31/97 12,387 12,220
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------
Average Annual Total Return
--------------------------------------------
One Year Since Inception /(a)/
- --------------------------------------------------------------------------------
<S> <C> <C>
Class A, no sales charge 28.42% 18.98%
- --------------------------------------------------------------------------------
Class A, w/sales charge 21.39% 17.31%
- --------------------------------------------------------------------------------
Class B, no redemption charge N/A 22.23% /(b)/
- --------------------------------------------------------------------------------
Class B, w/redemption charge N/A 17.23% /(b)/
- --------------------------------------------------------------------------------
Institutional Class N/A 20.77% /(b)/
- --------------------------------------------------------------------------------
Service Class N/A 23.87% /(b)/
- --------------------------------------------------------------------------------
</TABLE>
/(a)/ Class A, Class B, Institutional and Service shares commenced operations on
February 5, 1993, May 1, 1996, June 3, 1996 and March 6, 1996,
respectively.
/(b)/ An aggregate total return (not annualized) is shown instead of an average
annual total return since these classes have not completed a full twelve
months of operations.
- --------------------------------------------------------------------------------
25
<PAGE>
Statement of Investments
- -------------------------------------------------------------------
Goldman Sachs Growth and Income Fund
January 31, 1997
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Shares Description Value
===================================================================
<S> <C> <C>
Common Stocks--93.2%
Airlines--3.2%
96,100 AMR Corp.* $ 7,736,050
463,600 Continental Airlines, Inc.* 12,980,800
- -------------------------------------------------------------------
20,716,850
- -------------------------------------------------------------------
Appliance Manufacturer--1.9%
440,900 Sunbeam Corp. 12,234,975
- -------------------------------------------------------------------
Auto/Original Equipment Manufacturer--3.0%
512,800 Lear Corp.* 19,165,900
- -------------------------------------------------------------------
Auto/Vehicle--2.0%
394,800 Ford Motor Co. 12,682,950
- -------------------------------------------------------------------
Banks--8.3%
146,600 BankAmerica Corp. 16,364,225
64,900 Chase Manhattan Corp. 6,003,250
117,800 Fleet Financial Group Inc. 6,361,200
146,900 NationsBank Corp. 15,865,200
96,500 Republic of New York Corp. 8,552,313
- -------------------------------------------------------------------
53,146,188
- -------------------------------------------------------------------
Chemicals-Commodity--2.0%
439,800 Geon Co. 8,246,250
97,400 Union Carbide Corp. 4,419,525
- -------------------------------------------------------------------
12,665,775
- -------------------------------------------------------------------
Defense--3.4%
225,100 McDonnell Douglas Corp. 15,137,975
79,800 Northrop Grumman Corp. 6,234,375
6,300 Thiokol Corp. 352,800
- -------------------------------------------------------------------
21,725,150
- -------------------------------------------------------------------
Department Stores--1.6%
207,700 Sears Roebuck & Co. 9,969,600
- -------------------------------------------------------------------
Electric Utilities--5.1%
95,100 CMS Energy Corp. 3,185,850
641,400 Long Island Lighting Co. 14,591,850
632,300 Unicom Corp. 14,938,088
- -------------------------------------------------------------------
32,715,788
- -------------------------------------------------------------------
Food--2.8%
582,200 Chiquita Brands International, Inc. 8,514,675
58,400 Unilever Inc. 9,606,800
- -------------------------------------------------------------------
18,121,475
- -------------------------------------------------------------------
Forest Products--1.9%
161,500 Georgia Pacific Corp. 11,890,438
- -------------------------------------------------------------------
Health Suppliers/Services--2.0%
280,800 Baxter International, Inc. 12,951,900
- -------------------------------------------------------------------
Healthcare Management--6.6%
266,400 Aetna Inc. 21,045,600
768,500 Tenet Healthcare Corp.* 20,749,500
- -------------------------------------------------------------------
41,795,100
- -------------------------------------------------------------------
Home Builders--3.1%
232,800 Centex Corp. 9,079,200
388,500 Lennar Corp. 10,343,813
- -------------------------------------------------------------------
19,423,013
- -------------------------------------------------------------------
Insurance-Life--4.3%
123,600 Cigna Corp. 18,740,850
166,200 Lincoln National Corp. 8,912,475
- -------------------------------------------------------------------
27,653,325
- -------------------------------------------------------------------
Insurance-Property & Casualty--1.4%
16,100 Integon Corp. 223,388
237,600 Partner Re Holding Ltd. 8,434,800
- -------------------------------------------------------------------
8,658,188
- -------------------------------------------------------------------
Integrated Oil--4.8%
121,400 Atlantic Richfield Co. 16,055,150
138,900 Texaco, Inc. 14,706,038
- -------------------------------------------------------------------
30,761,188
- -------------------------------------------------------------------
Logistics/Rails--1.8%
415,700 Canadian Pacific Ltd. 11,275,863
- -------------------------------------------------------------------
Logistics/Trucking--2.0%
512,100 Consolidated Freightways, Inc. 12,994,538
- -------------------------------------------------------------------
Oil Refining & Marketing--3.6%
187,700 Ashland Inc. 8,094,563
166,800 Tosco Corp. 14,761,800
- -------------------------------------------------------------------
22,856,363
- -------------------------------------------------------------------
Packaging--2.5%
661,600 Owens Illinois Corp.* 15,713,000
- -------------------------------------------------------------------
Recreational Products--2.9%
724,800 Brunswick Corp. 18,210,600
- -------------------------------------------------------------------
- -------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
- -------------------------------------------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Shares Description Value
- -------------------------------------------------------------------
<C> <S> <C>
Common Stocks (continued)
Security and Commodity Brokers, Dealers and Services--1.0%
195,900 Lehman Brothers Holdings, Inc. $ 6,195,338
- -------------------------------------------------------------------
Semiconductors & Electronics--2.7%
275,100 Avnet, Inc. 17,021,813
- -------------------------------------------------------------------
Software--1.1%
214,300 Autodesk, Inc. 6,777,238
- -------------------------------------------------------------------
Specialty Finance--2.8%
470,200 Dean Witter Discover & Co. 17,926,375
- -------------------------------------------------------------------
Steel--1.6%
251,600 AK Steel Holding Corp. 10,126,900
- -------------------------------------------------------------------
Supermarkets--3.4%
726,500 Fleming Companies, Inc. 11,714,813
316,700 Supervalu, Inc. 9,778,113
- -------------------------------------------------------------------
21,492,926
- -------------------------------------------------------------------
Textiles--2.4%
374,400 Fruit of The Loom, Inc.* 15,022,800
- -------------------------------------------------------------------
Tire & Other Related Rubber Products--2.8%
320,900 Goodyear Tire & Rubber Co. 17,489,050
- -------------------------------------------------------------------
Tobacco--5.2%
63,700 Loews Corp. 6,298,338
144,700 Philip Morris Companies, Inc. 17,201,204
187,480 RJR Nabisco, Inc. 6,139,970
115,600 Universal Corp. 3,583,600
- -------------------------------------------------------------------
33,223,112
- -------------------------------------------------------------------
Total Common Stocks
(Cost $465,569,279) $ 592,603,719
===================================================================
Preferred Stocks--0.6%
Food--0.3%
44,600 Chiquita Brands International, Inc.
Convertible, 5.75% $ 2,073,900
- -------------------------------------------------------------------
Tobacco--0.3%
287,100 RJR Nabisco, Inc., Class C 9.25% 1,902,038
- -------------------------------------------------------------------
Total Preferred Stocks
(Cost $3,843,410) $ 3,975,938
===================================================================
Rights--2.0%
Forest Products--1.2%
579,100 Stone Container Corp.,* exp.
08/08/98 $ 7,817,850
- -------------------------------------------------------------------
Technology Capital Goods--0.8%
166,300 Teradyne, Inc.,* exp. 03/26/00 5,134,513
- -------------------------------------------------------------------
Total Rights
(Cost $13,294,493) $ 12,952,363
===================================================================
Repurchase Agreements--4.2%
- -------------------------------------------------------------------
$ 26,800,000 Joint Repurchase Agreement Account
5.63%, 02/03/97 $ 26,800,000
- -------------------------------------------------------------------
Total Repurchase Agreements
(Cost $26,800,000) $ 26,800,000
===================================================================
<CAPTION>
Contracts Description Value
===================================================================
<C> <S> <C>
Options*--0.4%
1,340 S & P 500 Index Put, Strike 750
exp. 06/97 $ 2,244,500
1,439 S & P 500 Index Put, Strike 700
exp. 03/97 377,738
- -------------------------------------------------------------------
Total Options
(Cost $4,105,525) $ 2,622,238
===================================================================
Total Investments
(Cost $513,612,707)/(a)/ $ 638,954,258
===================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $136,933,045
Gross unrealized loss for investments in which
cost exceeds value (11,607,531)
- -------------------------------------------------------------------
Net unrealized gain $125,325,514
===================================================================
</TABLE>
* Non-income producing security.
/(a)/The aggregate cost for federal income tax purposes is $513,628,744. The
percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- -------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
Letter to Shareholders
- -------------------------------------------------------------------------------
Goldman Sachs Capital Growth Fund
- --------------------------------------------------------------------------------
Objective and Investment Approach
The Goldman Sachs Capital Growth Fund seeks long-term growth of capital
primarily through investments in a portfolio of large-capitalization stocks. We
use extensive fundamental research to identify companies in a diversified range
of industries that we believe offer attractive growth potential at a reasonable
price.
The fund's investment management team believes that wealth is created
through the long-term ownership of growing businesses. As such, we view each
stock purchase as if we were buying the entire business. To implement this
investment strategy, we focus on growing companies with characteristics such as
strong brand franchises, dominant market share, recurring revenue, product
pricing flexibility, long product life cycles, high returns on invested capital,
high profit margins, strong free cash flow, excellent management and favorable
long-term prospects. Finally, we will buy a stock meeting our rigorous criteria
only if it trades at a reasonable discount to the company's intrinsic value.
Performance Review: Fund Achieved Strong Results
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Fund Total Return S&P 500
(based on net Total
asset value) Return
----------- ------
<S> <C> <C>
Class A (1/31/96 - 1/31/97)* 25.97% 26.25%
Class B (5/1/96 - 1/31/97)* 19.39% 22.18%
- --------------------------------------------------------------------
</TABLE>
* Class A and B share performance assumes reinvestment of all dividends and
distributions, a complete redemption at the net asset value at the end of the
period and no initial sales charge or contingent deferred sales charge.
Performance for Class B shares is a cumulative total return (not annualized)
from their inception through the end of the period.
During the 12-month period ended January 31, 1997, the fund's Class A shares
achieved a total return of approximately 26%, in line with the S&P 500 stock
index, reflecting the robust equity market, particularly during the second half
of the period. The fund's Class B shares also achieved strong absolute results;
however, a partial year of only nine months is obviously too short a time frame
to meaningfully measure long-term performance.
We are pleased to report that for the five-year period ended January
31, 1997, the fund's Class A shares were rated "four stars" (out of 1,072
domestic equity funds) by Morningstar, Inc., an independent mutual fund rating
agency./1/ In addition, the fund's Class A shares fared well versus its peers in
the Lipper growth fund category, placing in the top third (187th out of 685) for
the 12-month period and in the top quartile (56th out of 263) for the five-year
period, as of January 31, 1997, according to Lipper Analytical Services, Inc.
(Please note that Lipper rankings do not take sales charges into account and
that past performance is not a guarantee of future results. Lipper did not rank
the fund's Class B shares.)
Top Performers Included Financial, Technology and Defense Stocks
The fund's best performers during the period came from a variety of sectors,
particularly financial services (20.4% of the portfolio), technology (9.1%) and
defense/aerospace (3.2%).
. Top performers in the financial sector included MBNA Corp. and First USA
Inc., the nation's third and fourth largest credit card issuers, respectively,
which both reported better than expected earnings and loan growth. In
- --------
/1/ Source: (C) 1997 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 1/31/97.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five- and ten-year average annual returns (where applicable) in excess of 90-day
Treasury bill returns with appropriate fee and sales charge adjustments and a
risk factor that reflects fund performance below 90-day Treasury bill returns.
The one-year rating is calculated using the same methodology, but is not a
component of the overall rating. The fund's Class A shares received three stars
for both the three- and one-year periods. The Class A shares were rated among
1,858 and 2,990 domestic equity funds for the three- and one-year periods,
respectively. The Morningstar rating applies only to the fund's Class A shares;
the fund's Class B shares have not been rated. Class B shares are subject to
additional fees and expenses that may have the effect of lowering performance
and may affect any future Morningstar rating. Morningstar rates funds against
peers in the same category. In all, there are five Morningstar categories
(domestic equity, international equity, fixed income, municipal and hybrid).
Morningstar ratings range from five stars (highest) to one star (lowest). Funds
with five-star ratings are in the top 10% of their category, four-star ratings
in the next 22.5%, three stars the next 35%, two stars the next 22.5% and one
star the lowest 10% of their categories.
- --------------------------------------------------------------------------------
28
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
addition, these companies benefited from continuing industry consolidation,
with First USA performing particularly well after Banc One announced that it was
acquiring the company. Two of the fund's commercial bank holdings, BankAmerica
Corp. and NationsBank Corp., appreciated due to successful cost cutting, strong
earnings growth and aggressive capital management, and PartnerRe Holding Ltd., a
worldwide provider of catastrophe reinsurance, rose on strong earnings.
. Several of our technology holdings also performed well. During the first
half of the period, we increased the fund's positions in Intel Corp., the
dominant microprocessor manufacturer, and Compaq Computer Corp., the world's
largest manufacturer of personal computers, when their prices slumped because of
concerns regarding slowing computer sales. This strategy significantly
contributed to the fund's performance when computer sales were stronger than
expected. We subsequently sold Compaq Computer when it reached our target price
but continue to hold Intel, which more than tripled in price during the period.
. Consolidation in the defense industry helped two of the fund's long-
standing investments in that sector. McDonnell Douglas Corp. climbed over 50%
after the announcement of its proposed merger with Boeing Co., and Northrop
Grumman Corp. was buoyed by its purchase of Westinghouse Electric Corp.'s
defense electronics businesses.
Specific Paper, Airline and Insurance Stocks Lagged
Not all of the fund's holdings fulfilled our expectations. For example,
Georgia-Pacific Corp., a manufacturer of paper products, suffered from an
industry oversupply and a consequent decline in paper and pulp prices; AMR
Corp., the holding company of American Airlines, was impacted by concerns
regarding competition from discount carriers; and Integon Corp., a provider of
automobile insurance, experienced a higher than expected increase in claims and
lower earnings.
New Additions in Consumer Product Companies and Pharmaceuticals
During the period, we initiated several positions that reflect our new
emphasis on large-capitalization stocks with world-class franchises and/or
strong brand names. For example, we added Procter & Gamble Co., one of the
strongest marketers in the U.S. with a stable of brand name products, many of
which hold number one or number two positions in their respective markets. Over
the past decade, the company has achieved steady growth in revenues and
earnings, exactly the type of consistent operating history that we favor.
Another recent investment was Coca-Cola Co., a world-class company with four of
the five leading carbonated soft drinks -- Coca-Cola, Diet Coke, Sprite and
Fanta. With 80% of its business coming from abroad, we expect Coca-Cola's long-
term earnings growth to continue as it further penetrates the emerging markets
of China, India, Latin America, Southeast Asia, Eastern Europe and Russia.
Other new positions included pharmaceutical companies Bristol-Myers
Squibb Co., Johnson & Johnson Co. and Pfizer, Inc., which are attractive because
of their strong new product flow, huge free cash flow, earnings growth and
essentially net debt-free balance sheets. We believe these companies are
positioned to be major beneficiaries as the baby boomers age and require more
health-related products and services over the coming decades.
Sales Included Several Investments in Cyclical Industries
During the period, we sold Kirby Corp. and Trinity Industries after we lost
confidence in their managements' attempts to improve their competitive
positions, and cyclical stocks such as Quanex Corp. and Harnischfeger
Industries, Inc. after they were unable to improve their profitability in
difficult industry conditions. In contrast, we sold the fund's long-held
position in Millipore Corp., an industrial filter producer, after it reached our
target price.
- --------------------------------------------------------------------------------
29
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Capital Growth Fund (continued)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Top 10 Portfolio Holdings as of January 31, 1997
<TABLE>
<CAPTION>
Percentage
of Total
Company Line of Business Net Assets
<S> <C> <C>
First USA, Inc. Financial Services 4.5%
Intel Corp. Semiconductors and 4.3%
Electronics
NationsBank Corp. Commercial Bank 3.4%
Aetna Inc. Healthcare 3.4%
Management
Texaco Inc. International 3.3%
Integrated Oil
Company
BankAmerica Corp. Commercial Bank 3.2%
Tenet Healthcare Corp. Hospitals 3.0%
Philip Morris Companies, Tobacco and Food 3.0%
Inc. Products
Baxter International, Inc. Medical Supplies 2.9%
PartnerRe Ltd. Insurance 2.7%
- --------------------------------------------------------------------
</TABLE>
Outlook
We believe that the global political and economic environments will
continue to remain favorable for the financial markets. In our opinion, the
outlook for the U.S. stock market is attractive, as we expect it to continue to
benefit from low inflation, moderate growth and high levels of consumer
confidence. In addition, we anticipate that the equity market will continue to
be buoyed as baby boomers increase their savings and 401(k) investment plans
grow. To enhance the fund's ability to benefit from the positive investing
climate, we expect to continue to diversify the portfolio among industry sectors
and increase its holdings of large-cap stocks, with the intention of both
providing favorable long-term returns and reducing portfolio risk.
We want to emphasize that investing is a marathon, not a sprint.
Notwithstanding the excellent performance the fund has recently experienced, we
have a long-term investment horizon. In a nutshell, we hope to be able to
purchase great companies with attractive business characteristics and favorable
long-term outlooks, and then patiently hold them for an extended period of time
so that their growth compounds.
/s/ Herbert E. Ehlers
Herbert E. Ehlers
Senior Portfolio Manager,
U.S. Active Equity Growth
/s/ Robert G. Collins
Robert G. Collins
Portfolio Manager,
U.S. Active Equity Growth
/s/ Gregory H. Ekizian
Gregory H. Ekizian
Portfolio Manager,
U.S. Active Equity Growth
March 3, 1997
- --------------------------------------------------------------------------------
30
<PAGE>
- -------------------------------------------------------------------------------
Goldman Sachs Capital Growth Fund
January 31, 1997
- -------------------------------------------------------------------------------
The following graphs show the value, as of January 31, 1997, of a $10,000
investment made (with and without the maximum sales charge of 5.5% and
redemption charge of 5.0% for Class A and B, respectively) on the inception date
of each class. For comparative purposes, the performance of the Fund's benchmark
(the Standard and Poor's 500 Index ("S&P 500")) is shown for the appropriate
time periods. All performance data shown represents past performance and should
not be considered indicative of future performance which will fluctuate with
changes in market conditions. These performance fluctuations will cause an
investor's shares, when redeemed, to be worth more or less than their original
cost.
Class A
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
GS Capital Growth GS Capital Growth
Class A Class A
(w/sales charge) (no sales charge) S&P 500
----------------- ----------------- -------
<S> <C> <C> <C>
4/20/90 9,450 10,000 10,000
1/31/91 9,529 10,084 10,552
1/31/92 12,322 13,040 12,946
1/31/93 14,542 15,388 14,316
1/31/94 16,998 17,987 16,160
1/31/95 16,254 17,200 16,246
1/31/96 21,203 22,437 22,528
1/31/97 26,726 28,282 28,460
</TABLE>
Class B
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
GS Capital Growth GS Capital Growth
Class B Class B
(no redemp. charge) (w/redemp. charge) S&P 500
------------------- ------------------ -------
<S> <C> <C> <C>
5/1/96 $10,000 $10,000 $10,000
1/31/97 11,939 11,439 12,218
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------
Average Annual Total Return
----------------------------------------------
One Year Five Year Since Inception/(a)/
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A, no sales charge 25.97% 16.73% 16.54%
- ------------------------------------------------------------------------------
Class A, w/sales charge 19.04% 15.42% 15.57%
- ------------------------------------------------------------------------------
Class B, no redemption charge N/A N/A 19.39%/(b)/
- ------------------------------------------------------------------------------
Class B, w/redemption charge N/A N/A 14.39%/(b)/
- ------------------------------------------------------------------------------
</TABLE>
/(a)/Class A and Class B shares commenced operations on April 20, 1990 and
May 1, 1996, respectively.
/(b)/An aggregate total return (not annualized) is shown instead of an average
annual total return since this class has not completed a full twelve months
of operations.
- --------------------------------------------------------------------------------
31
<PAGE>
Statement of Investments
- --------------------------------------------------------------------
Goldman Sachs Capital Growth Fund
January 31, 1997
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Shares Description Value
====================================================================
<S> <C> <C>
Common Stocks--98.9%
Advertising & Marketing--1.8%
888,900 Valassis Communications, Inc.* $ 16,333,538
- --------------------------------------------------------------------
Airlines--1.5%
176,500 AMR Corp.* 14,208,250
- --------------------------------------------------------------------
Auto/Original Equipment Manufacturer--1.6%
391,900 Lear Corp.* 14,647,262
- --------------------------------------------------------------------
Banks--6.6%
263,700 BankAmerica Corp. 29,435,512
291,500 NationsBank Corp. 31,482,000
- --------------------------------------------------------------------
60,917,512
- --------------------------------------------------------------------
Beverages--2.1%
155,100 Coca Cola Co. 8,976,413
293,800 Pepsico, Inc. 10,246,275
- --------------------------------------------------------------------
19,222,688
- --------------------------------------------------------------------
Commercial Services--0.9%
226,500 Ecolab Inc. 8,380,500
- --------------------------------------------------------------------
Communications Technology--1.7%
290,860 Lucent Technologies, Inc. 15,779,155
- --------------------------------------------------------------------
Construction/Environmental Services--2.0%
497,500 WMX Technologies, Inc. 18,220,938
- --------------------------------------------------------------------
Consumer Staples--4.0%
150,800 Avon Products Inc. 9,462,700
109,000 Gillette Co. 8,883,500
160,940 Procter & Gamble Co. 18,588,570
- --------------------------------------------------------------------
36,934,770
- --------------------------------------------------------------------
Defense--3.2%
226,800 McDonnell Douglas Corp. 15,252,300
187,500 Northrop Grumman Corp. 14,648,438
- --------------------------------------------------------------------
29,900,738
- --------------------------------------------------------------------
Electric Utilities--1.6%
669,400 Long Island Lighting Co. 15,228,850
- --------------------------------------------------------------------
Electrical Equipment Manufacturer--1.0%
89,400 General Electric Co. 9,208,200
- --------------------------------------------------------------------
Electronics & Semiconductors--1.5%
219,700 Avnet Inc. 13,593,937
- --------------------------------------------------------------------
Food--1.8%
186,500 Nabisco Holdings Corp. 7,133,625
160,480 William Wrigley Jr. Co. 9,327,900
- --------------------------------------------------------------------
16,461,525
- --------------------------------------------------------------------
Forest Products--2.2%
273,500 Georgia Pacific Corp. 20,136,437
- --------------------------------------------------------------------
Health Suppliers/Services--8.4%
589,600 Baxter International, Inc. 27,195,300
477,500 Fisher Scientific International, Inc. 20,950,312
176,400 Johnson & Johnson 10,165,050
277,600 Perkin-Elmer Corp. 19,397,300
- --------------------------------------------------------------------
77,707,962
- --------------------------------------------------------------------
Healthcare Management--8.5%
395,760 Aetna Inc. 31,265,040
487,650 Columbia HCA Healthcare 19,262,175
1,021,400 Tenet Healthcare Corp.* 27,577,800
- --------------------------------------------------------------------
78,105,015
- --------------------------------------------------------------------
Hotels & Restaurants--1.0%
169,720 Marriott International, Inc. 9,016,375
- --------------------------------------------------------------------
Information Management--1.9%
241,000 First Data Corp. 8,676,000
135,670 Reuters Holdings Corp. ADR 8,665,921
- --------------------------------------------------------------------
17,341,921
- --------------------------------------------------------------------
Insurance-Property and Casualty--3.2%
356,650 Integon Corp. 4,948,519
703,800 PartnerRe Holding Ltd. 24,984,900
- --------------------------------------------------------------------
29,933,419
- --------------------------------------------------------------------
Integrated Oil--6.7%
68,700 Amoco Corp. 5,976,900
52,700 Atlantic Richfield Co. 6,969,575
90,900 Mobil Corp. 11,930,625
41,200 Royal Dutch Petroleum ADR 7,148,200
284,800 Texaco, Inc. 30,153,200
- --------------------------------------------------------------------
62,178,500
- --------------------------------------------------------------------
Logistics/Rails--1.6%
556,900 Canadian Pacific Ltd. 15,105,912
- --------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
32
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Shares Description Value
- --------------------------------------------------------------------
<S> <C> <C>
Common Stocks (continued)
Media Content--4.6%
166,200 Gaylord Entertainment Co. $ 4,258,875
261,800 Knight Ridder, Inc. 10,046,575
530,700 Telecommunication Liberty
Media Group* 10,083,300
237,610 Time Warner Inc. 9,147,985
130,400 Walt Disney Co. 9,551,800
- --------------------------------------------------------------------
43,088,535
- --------------------------------------------------------------------
Packaging--1.6%
614,000 Owens Illinois Corp.* 14,582,500
- --------------------------------------------------------------------
Pharmaceuticals--2.3%
90,500 Bristol Myers Squibb 11,493,500
104,300 Pfizer, Inc. 9,686,863
- --------------------------------------------------------------------
21,180,363
- --------------------------------------------------------------------
Retail Trade--1.0%
222,600 Walgreen Co. 9,154,425
- --------------------------------------------------------------------
Retail-Department Stores--2.1%
658,400 Dillard Department Stores, Inc. 19,669,700
- --------------------------------------------------------------------
Security and Commodity Brokers, Dealers and Services--2.0%
571,000 Lehman Brothers Holdings, Inc. 18,057,875
- --------------------------------------------------------------------
Semiconductors & Electronics--4.3%
247,000 Intel Corp. 40,075,750
- --------------------------------------------------------------------
Specialty Finance & Agency--8.6%
345,300 Federal National Mortgage Assn. 13,639,350
828,200 First USA, Inc. 41,927,625
683,925 MBNA Corp. 23,595,413
- --------------------------------------------------------------------
79,162,388
- --------------------------------------------------------------------
Specialty Retail--1.0%
311,900 Service Corp. International 9,045,100
- --------------------------------------------------------------------
Technology Capital Goods--1.5%
286,400 Applied Materials Inc.* 14,141,000
- --------------------------------------------------------------------
Tire & Other Related Rubber Products--2.1%
362,400 Goodyear Tire & Rubber Co. 19,750,800
- --------------------------------------------------------------------
Tobacco--3.0%
229,400 Philip Morris Companies, Inc. 27,269,925
- --------------------------------------------------------------------
Total Common Stocks
(Cost $661,066,240) $ 913,741,765
- --------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------
Principal
Amount Description Value
====================================================================
<S> <C> <C>
Repurchase Agreement--2.0%
$18,300,000 Joint Repurchase Agreement Account
5.63%, 02/03/97 $ 18,300,000
- --------------------------------------------------------------------
Total Repurchase Agreement
(Cost $18,300,000) $ 18,300,000
- --------------------------------------------------------------------
Total Investments
(Cost $679,366,240)(a) $ 932,041,765
- --------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for investments in
which value exceeds cost $ 255,377,138
Gross unrealized loss for investments in
which cost exceeds value (3,163,091)
- --------------------------------------------------------------------
Net unrealized gain $ 252,214,047
====================================================================
</TABLE>
* Non-income producing security.
(a) The aggregate cost for federal income tax purposes is $679,827,718.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
33
<PAGE>
Letter to Shareholders
- ----------------------------------------------------------------------
Goldman Sachs Small Cap Equity Fund
- ----------------------------------------------------------------------
Objective and Investment Approach
The Goldman Sachs Small Cap Equity Fund's objective is long-term
capital appreciation, primarily through investments in equity securities of U.S.
companies with market capitalizations of $1 billion or less. The fund is managed
using a "business value" approach to investing, which means we look for
attractive companies with high or improving returns on capital that we believe
can achieve solid, sustainable growth, as well as generate free cash after
investing for future growth. This approach differs markedly from many emerging
growth small-cap funds that invest in companies with high price-to-earnings
multiples solely on the basis of rapid, but frequently unsustainable, growth
rates. Using our own rigorous fundamental research, which includes meeting with
a company's management and examining a company's competitors, customers and
suppliers, we build the fund's portfolio one stock at a time.
Performance Review: Class A Shares Outperformed the Benchmark and the S&P 500
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
<S> <C> <C>
Fund Total Return Russell
(based on net 2000 Total
asset value) Return
----------- ------
Class A (1/31/96 - 1/31/97)* 27.28% 18.95%
Class B (5/1/96 - 1/31/97)* 5.39% 7.32%
- --------------------------------------------------------------------
</TABLE>
* Class A and B share performance assumes reinvestment of all dividends and
distributions, a complete redemption at the net asset value at the end of the
period and no initial sales charge or contingent deferred sales charge.
Performance for Class B shares is a cumulative total return (not annualized)
from their inception through the end of the period.
During the period under review, small-cap stocks achieved strong
returns but still underperformed large-cap stocks. Small-caps began the period
on a strong note, outpacing large-caps from February through May, then gave up
their early lead during June and July when the market experienced a sharp
correction. While both large-cap and small-cap stocks sold off, small-caps were
particularly hard hit. During the latter half of the period, the market surged
to record highs, but small-caps trailed their larger peers as investors rushed
to participate in the rising market, but hedged their bets by sticking with the
largest, most liquid stocks.
Despite the small-cap sector's waning momentum, we are pleased to
report that the fund's Class A shares returned 27.28% (at net asset value),
outperforming both its benchmark, the Russell 2000 index (18.95%), and the
large-cap S&P 500 stock index (26.25%). In addition, the fund's Class A shares
placed in the top third of the Lipper small-company growth fund category
(ranking 129th out of 394) for the 12-month period ended January 31, 1997,
according to Lipper Analytical Services, Inc. (Please note that Lipper rankings
do not take sales charges into account and that past performance is not a
guarantee of future results. Lipper did not rank the fund's Class B shares.) The
fund's Class B shares also achieved positive returns, but did not fare as well
because their inception coincided with the start of a more difficult market
environment for small-cap stocks.
The fund's performance was especially strong during the first half of
the period, when a number of its long-held investments performed well. These
positions included some companies that had experienced temporary difficulties
and rebounded on improving fundamentals, as well as companies that had been
relatively undiscovered and garnered increased investor awareness due to
continued strong earnings gains. The fund also performed better than the broader
market during the summer correction, when expensive, momentum-type stocks were
hit harder than those with inexpensive valuations, which the fund typically
emphasizes. In contrast, during the second half of the period, stocks with
momentum characteristics rebounded, while the types of stocks that the fund
stresses did not perform as strongly. In addition, the fund experienced price
corrections in several holdings due to earnings volatility.
The fund's top performers during the period came from a wide variety
of industries, with Black Box Corp. and Morningstar Group, Inc. contributing
significantly to overall results. Black Box Corp., a catalog marketer of
34
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
communications and networking products, was the fund's largest holding in the
beginning of the period and climbed substantially as it continued to achieve
record revenues and profits due to successful direct marketing efforts and new
product introductions. The position in Black Box was then sold after it reached
our target price. Morningstar Group, Inc., a manufacturer of specialty foods,
was the fund's eighth largest holding at the start of the period and nearly
tripled in price when it consolidated its market position through internal
growth, new product introductions and several attractive acquisitions. The fund
has held Morningstar Group for over four years; it is a good example of our
willingness to hold strong businesses until the market recognizes their true
value.
Other strong performers included American Safety Razor Co., the
leading U.S. manufacturer of private-brand and value-priced shaving blades,
which benefited from internal profit enhancement efforts and particularly strong
sales of its branded and private-label shaving and personal care products;
Movado Group, Inc., the owner of the Movado, Concord and Esquire watch brands,
which rebounded due to significant sales growth, new licensing agreements and
increased analyst coverage; J. Baker, Inc., a diversified retailer of footwear
and apparel, which announced its intention to sell its shoe division in order to
focus its resources on its successful "Casual Male Big & Tall" stores; and
Nimbus CD International, Inc., a CD and CD-ROM manufacturer that we sold after
it rose sharply due to high investor expectations of future DVD (digital video
disk) demand. Finally, several financial holdings performed well, such as Horace
Mann Educators Co., a provider of property, casualty and life insurance for the
educator market, and Terra Nova Bermuda Holdings, a worldwide provider of
property casualty insurance and reinsurance.
Not all of the fund's holdings fulfilled our expectations. Several
stocks were hurt by disappointing earnings, although we continue to believe in
their long-term prospects. For example, Landstar System, Inc. experienced
weakness when the restructuring of its trucking operations from a fixed cost to
a variable cost business took longer than expected. In addition, Central Maine
Power Co. was impacted by uncertainty in the regulatory environment, and Alpine
Lace Brands, Inc., a developer and marketer of cheese products, declined due to
an increase in commodity cheese prices. We took advantage of lower prices and
increased the fund's positions in all three stocks. In contrast, we liquidated
two other underperformers, Musicland Stores Corp. and Levitz Furniture Inc.,
because their fundamental businesses continued to deteriorate.
Recent Additions
During the period, we initiated a number of positions that have
already contributed to performance. These included Linens 'N Things, Inc., a
retailer of home accessories, which was attractively valued versus its key
competitor, Bed, Bath and Beyond, and has significant store expansion and margin
improvement potential, and Sun Healthcare Group, Inc., a well-managed
owner/operator of nursing homes with attractive long-term growth potential.
Though Sun Healthcare Group has been temporarily impacted by a government
investigation of one of its subsidiaries, we believe this issue is fully
reflected in the current stock price. In the technology sector, we added
DecisionOne Holdings Corp., the leading independent provider of computer
hardware and maintenance support services to U.S. companies. We intend to
continue to focus on technology-related service providers and distributors that
we believe are positioned to benefit from the expected long-term growth of the
sector but are not dependent on the success of any single product or service.
Other new investments were APS Holding Corp., a distributor of
automotive parts, which was depressed by industry- and company-specific issues
that we believe to be temporary, and Friedman's, Inc., a retailer of inexpensive
jewelry with significant expansion potential and a very low-cost operating
strategy. We also added two specialty insurance companies, SCPIE Holdings, Inc.
and Symon's International Group, Inc.
35
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Small Cap Equity Fund (continued)
- --------------------------------------------------------------------------------
Sales Included Several Financial Holdings
The fund sold several stocks after they appreciated and reached our
target prices. These included a number of financial holdings, such as Greenpoint
Financial Corp., the leading national lender of "no-documentation--low-
documentation" mortgages; Dime Bancorp, Inc., the fifth largest thrift in the
U.S.; and Western National Corporation, a marketer of annuity products.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Top 10 Portfolio Holdings as of January 31, 1997
Percentage of
Total Net
Company Line of Business Assets
<S> <C> <C>
Movado Group, Inc. Luxury and 5.6%
Affordable Watch
Distributor
DecisionOne Holdings Corp. Computer Support 4.9%
Provider
Sun Healthcare Group, Inc. Healthcare Services 3.9%
APS Holding Corp. Automotive Parts 3.6%
Distributor
Mariner Health Group, Inc. Healthcare Services 3.6%
Groupe AB Television 3.5%
Programming
Distributor
Friedman's, Inc. Jewelry Retailer 3.5%
J. Baker, Inc. Specialty Apparel 3.5%
Heritage Media Corp. Marketing Services 3.4%
Provider
Linens 'N Things, Inc. Home Products 3.1%
Retailer
- --------------------------------------------------------------------
</TABLE>
Outlook
One of the key factors that will affect equity performance during
1997 will be the continuation of the favorable economic environment of moderate
growth and low inflation, which would ensure that both the corporate earnings
outlook and the interest rate climate remain hospitable. Small-capitalization
stocks as a group currently appear undervalued relative to large-cap stocks and
to their own expected earnings potential. We believe that corporate earnings
growth will slow somewhat in 1997, and to the extent that smaller companies can
achieve better earnings growth than larger companies, they should perform
relatively well. The performance of small-caps will particularly depend on
investors broadening their focus from the largest, most liquid stocks to
smaller, less widely followed issues. We are optimistic regarding the fund's
future performance based on the strong earnings growth and the free cash flow we
expect from many of our top holdings, as well as from new investments.
/s/ Paul D. Farrell
Paul D. Farrell
Senior Portfolio Manager,
U.S. Active Equity Value
/s/ Matthew B. McLennan
Matthew B. McLennan
Assistant Portfolio Manager,
U.S. Active Equity Value
/s/ Timothy G. Ebright
Timothy G. Ebright
Portfolio Manager,
U.S. Active Equity Growth
March 3, 1997
36
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Small Cap Equity Fund
January 31, 1997
- -------------------------------------------------------------------------------
The following graphs show the value, as of January 31, 1997, of a $10,000
investment made (with and without the maximum sales charge of 5.5% and
redemption charge of 5.0% for Class A and B, respectively) on the inception date
of each class. For comparative purposes, the performance of the Fund's
benchmarks (the Standard and Poor's 500 Index ("S&P 500") and the Russell 2000)
are shown for the appropriate time periods. All performance data shown
represents past performance and should not be considered indicative of future
performance which will fluctuate with changes in market conditions. These
performance fluctuations will cause an investor's shares, when redeemed, to be
worth more or less than their original cost.
Class A
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
GS Small Cap Class A GS Small Cap Class A Russell
(w/sales charge) (no sales charge) S&P 500 2000
-------------------- --------------------- ------- -------
<S> <C> <C> <C> <C>
10/22/92 $ 9,450 10,000 $10,000 $10,000
1/31/93 11,138 11,786 10,655 11,733
1/31/94 14,494 15,337 12,027 13,914
1/31/95 11,953 12,649 12,091 13,078
1/31/96 12,813 13,559 16,768 17,010
1/31/97 16,320 17,270 21,183 20,242
</TABLE>
Class B
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
GS Small Cap Class B GS Small Cap Class B Russell
(no redemp. charge) (w/redemp. charge) S&P 500 2000
-------------------- -------------------- ------- -------
<S> <C> <C> <C> <C>
5/1/96 $10,000 $10,000 $10,000 $10,000
1/31/97 10,539 10,039 12,218 10,732
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------
Average Annual Total Return
-----------------------------------------
One Year Since Inception/(a)/
-------------------------------------------------------------------------
<S> <C> <C>
Class A, no sales charge 27.28% 13.61%
-------------------------------------------------------------------------
Class A, w/sales charge 20.27% 12.12%
-------------------------------------------------------------------------
Class B, no redemption charge N/A 5.39%/(b)/
-------------------------------------------------------------------------
Class B, w/redemption charge N/A 0.39%/(b)/
-------------------------------------------------------------------------
</TABLE>
/(a)/ Class A and Class B shares commenced operations on October 22, 1992
and May 1, 1996, respectively.
/(b)/ An aggregate total return (not annualized) is shown instead of an
average annual total return since this class has not completed a full
twelve months of operations.
- --------------------------------------------------------------------------------
37
<PAGE>
Statement of Investments
- --------------------------------------------------------------------
Goldman Sachs Small Cap Equity Fund
January 31, 1997
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value
====================================================================
<S> <C> <C>
Common Stocks--92.5%
- --------------------------------------------------------------------
Auto/Original Equipment Manufacturer--3.6%
777,200 APS Holding Corp.* $ 7,869,150
- --------------------------------------------------------------------
Commercial Products--2.4%
211,000 Figgie International, Inc. Class A* 2,611,125
231,400 Figgie International, Inc. Class B* 2,487,550
- --------------------------------------------------------------------
5,098,675
- --------------------------------------------------------------------
Commercial Services--1.0%
539,200 Opinion Research Corp.* 2,022,000
- --------------------------------------------------------------------
Computers & Peripherals--7.5%
598,700 DecisionOne Holdings Corp.* 10,477,250
467,100 Multiple Zones International, Inc.* 5,605,200
- --------------------------------------------------------------------
16,082,450
- --------------------------------------------------------------------
Consumer Staples--3.8%
270,700 American Safety Razor Co.* 3,958,987
389,400 Spartech Corp. 4,234,725
- --------------------------------------------------------------------
8,193,712
- --------------------------------------------------------------------
Electric Utilities--2.2%
433,900 Central Maine Power Co. 4,827,137
- --------------------------------------------------------------------
Electrical Equipment--2.3%
240,100 Carbide/Graphite Group* 5,012,087
- --------------------------------------------------------------------
Food--2.3%
374,600 Alpine Lace Brands, Inc.* 2,341,250
109,000 Morningstar Group, Inc.* 2,588,750
- --------------------------------------------------------------------
4,930,000
- --------------------------------------------------------------------
Healthcare Management--9.0%
20,100 Health Systems International, Inc.* 520,088
798,000 Mariner Health Group, Inc.* 7,780,500
517,100 Sun Healthcare Group, Inc.* 8,402,875
146,200 Trigon Healthcare, Inc.* 2,595,050
- --------------------------------------------------------------------
19,298,513
- --------------------------------------------------------------------
Home Furnishing & Services--2.9%
221,500 Congoleum Corp.* 3,156,375
160,900 Synthetic Industries, Inc.* 3,036,988
- --------------------------------------------------------------------
6,193,363
- --------------------------------------------------------------------
Insurance Specialty--1.6%
63,100 Old Republic International Corp. 1,695,812
83,900 Scpie Holdings, Inc.* 1,761,900
- --------------------------------------------------------------------
3,457,712
- --------------------------------------------------------------------
Insurance-Life--0.3%
36,000 AmerUs Life Holdings, Inc.* 711,000
- --------------------------------------------------------------------
Insurance-Property and Casualty--6.0%
50,500 Horace Mann Educators Co. 2,158,875
206,500 IPC Holdings Ltd. 4,943,094
92,200 Symons International Group* 1,475,200
215,800 Terra Nova Bermuda Holdings 4,262,050
- --------------------------------------------------------------------
12,839,219
- --------------------------------------------------------------------
Leisure--1.0%
210,700 Trump Hotels & Casino Resorts,
Inc.* 2,212,350
- --------------------------------------------------------------------
Media Content--9.0%
596,300 Groupe AB SA ADR* 7,602,825
609,800 Heritage Media Corp.* 7,393,825
432,300 International Post Ltd.* 1,729,200
324,200 Platinum Entertainment, Inc.* 2,674,650
- --------------------------------------------------------------------
19,400,500
- --------------------------------------------------------------------
Metal Products--0.5%
57,200 Doncasters Plc ADR* 1,122,550
- --------------------------------------------------------------------
Packaging--0.7%
88,100 Shorewood Packaging Corp.* 1,596,813
- --------------------------------------------------------------------
Real Estate--0.7%
73,700 Insignia Financial Group, Inc.* 1,538,487
- --------------------------------------------------------------------
Recreation Products--5.6%
539,200 Movado Group, Inc. 12,064,600
- --------------------------------------------------------------------
Restaurants & Hotels--6.4%
262,400 IHOP Corp.* 6,461,600
399,300 Mortons Restaurant Group, Inc.* 6,438,713
40,000 Sonic Corp.* 815,000
- --------------------------------------------------------------------
13,715,313
- --------------------------------------------------------------------
Retail Hardgoods--4.7%
731,000 Brookstone Inc.* 5,939,375
290,700 Finlay Enterprises, Inc.* 4,287,825
- --------------------------------------------------------------------
10,227,200
- --------------------------------------------------------------------
</TABLE>
38
<PAGE>
- --------------------------------------------------------------------
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value
====================================================================
<S> <C> <C>
Common Stocks (continued)
Specialty Retail--12.7%
506,200 Friedmans, Inc.* $ 7,593,000
242,000 General Nutrition Companies, Inc.* 4,386,250
1,500 Hibbett Sporting Goods, Inc.* 24,375
1,100,400 J. Baker, Inc. 7,565,250
87,000 Leslies Poolmart, Inc.* 1,141,875
307,200 Linens N'Things, Inc.* 6,758,400
- --------------------------------------------------------------------
27,469,150
- --------------------------------------------------------------------
Telephone Communications--0.3%
15,400 Telephone & Data Systems, Inc. 587,125
- --------------------------------------------------------------------
Textiles--1.6%
87,800 Samsonite Corp.* 3,468,100
- --------------------------------------------------------------------
Trucking--2.3%
207,100 Landstar Systems, Inc.* 4,918,625
- --------------------------------------------------------------------
Voice, Video and Data--2.1%
263,200 Pegasus Communications, Inc.* 3,224,200
142,700 Rural Cellular Corp.* 1,391,325
- --------------------------------------------------------------------
4,615,525
- --------------------------------------------------------------------
Total Common Stocks
(Cost $194,261,908) $199,471,356
====================================================================
<CAPTION>
Principal
Amount Description Value
====================================================================
<S> <C> <C>
Corporate Bond--0.2%
- --------------------------------------------------------------------
$ 500,000 J. Baker, Inc.
7.0%, 06/01/02 $ 412,500
- --------------------------------------------------------------------
Total Corporate Bond
(Cost $498,387) $ 412,500
====================================================================
Repurchase Agreement--7.7%
- --------------------------------------------------------------------
$16,600,000 Joint Repurchase Agreement Account
5.63%, 02/03/97 $ 16,600,000
- --------------------------------------------------------------------
Total Repurchase Agreement
(Cost $16,600,000) $ 16,600,000
====================================================================
<CAPTION>
Contracts Description Value
====================================================================
<S> <C> <C>
Options*--0.5%
200 S&P 500 Index Put Strike 725
exp. 03/97 $ 95,000
351 S&P 500 Index Put Strike 700
exp. 03/97 92,138
560 S&P 500 Index Put Strike 750
exp. 06/97 938,000
- --------------------------------------------------------------------
Total Options
(Cost $1,643,182) $ 1,125,138
====================================================================
Total Investments
(Cost $213,003,477)/(a)/ $217,608,994
====================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in
which value exceeds cost $ 31,335,604
Gross unrealized loss for investments in
which cost exceeds value (26,835,810)
- --------------------------------------------------------------------
Net unrealized gain $ 4,499,794
====================================================================
</TABLE>
* Non-income producing security.
/(a)/The aggregate cost for federal income tax purposes is $213,109,200.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
39
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs International Equity Fund
- --------------------------------------------------------------------------------
Objective and Investment Approach
The Goldman Sachs International Equity Fund seeks long-term capital
appreciation by investing in equity securities of companies organized or traded
outside the U.S. that we believe have the potential to appreciate over the long
term. The fund focuses on growing companies that are attractively valued and
have strong, competitive positions in their respective industries. The fund's
portfolio managers are based in London, Tokyo and Singapore and their knowledge
of local markets plays an important role in uncovering investment opportunities.
While the fund does not allocate assets across specific countries based on
top-down economic or market forecasts, the portfolio managers strive to manage
risk by remaining diversified by country and industry sector and by closely
monitoring economic and political events in countries in which the fund does
invest.
Economic and Market Overview: European Markets Were Strong Despite Weak
Economies; Asia Faltered
Economic growth was slower than expected in many countries during the
period, prompting further monetary easing in much of Europe and continued very
low short-term interest rates in Japan. European equity markets performed very
well despite the growth shortfall, benefiting from an increased focus on
improving shareholder value. The Japanese market declined significantly, while
results in other Asian markets were mixed.
. Europe. The economies of several European markets, such as the U.K., Norway
and Ireland, strengthened during the period, but overall growth remained weak
throughout most of Europe. A number of European countries attempted to stimulate
their economies through monetary easing, but maintained tight fiscal policies in
an effort to reduce their budget deficits enough to qualify for European
Monetary Union. This strategy proved to be only modestly successful, as
unemployment remained at record highs, particularly in Germany. Though the
recovery was somewhat disappointing, European equity markets rose 26.6% during
the period (as measured by the FT/S&P Actuaries Europe Index in terms of local
currencies), fueled by low inflation, low interest rates and relatively strong
bond markets. In addition, corporate profits improved, reflecting increased
emphasis on cost cutting and restructuring. The equity markets of Finland, Spain
and Sweden were among the strongest performers, while British stocks lagged much
of Europe due to a strengthening currency (which made U.K. exports more
expensive) and expectations of increases in short-term interest rates.
. Japan. The Japanese economy strengthened during the period, but earnings
growth fell short of expectations. For the 12-month period ended January 31,
Japanese stocks (as measured by the TOPIX index in yen) declined 14.9%, with
approximately half of the loss occurring in January 1997 alone. During the first
half of the period, the Japanese market was bolstered by heavy demand from
Europe and the U.S., but foreign investors subsequently became net sellers when
the economic recovery softened and raised uncertainty surrounding the
sustainability of corporate profits. The weaker corporate earnings outlook
resulted in a conspicuous divergence between the performance of the largest
international blue-chip stocks and the rest of the market, particularly in the
third quarter. Lackluster investor sentiment was further exacerbated at the end
of the year due to increased pessimism that the Liberal Democratic Party (LDP)
government's higher taxes and scant spending on public works would dampen the
economy.
. Asia (ex-Japan). Asian stock markets rose 2.4% during the period, as measured
by the MSCI All Country Asia Free (Ex Japan) Index (in terms of local
currencies). Asian markets began the period on a strong note, but several
markets faltered during the spring and summer due to a host of issues. These
included political uncertainty arising from national elections in several Asian
countries as well as slowing economic growth throughout the region, principally
due to weak electronics exports. From
- --------------------------------------------------------------------------------
40
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
September 1996 through January 1997, the region generally improved due to
stronger corporate earnings and stabilizing exports. The performance of the
individual markets varied widely. Malaysia was one of the region's best
performing markets during the period under review, rising 18.4%; Hong Kong, the
largest market in the region, performed well with a 12.0% return; and Thailand
was by far the weakest market, declining 45.3% (all in local currency terms).
Performance Review: Security Selection, Country Allocations and Industry
Weightings All Contributed to Strong Performance
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Fund Total FT/S&P
Return Actuaries
(based on Europe &
net asset Pacific Index
value) Total Return
------ ------------
<S> <C> <C>
Class A (1/31/96 - 1/31/97)* 13.48% 1.27%
Class B (5/1/96 - 1/31/97)* 2.83% -4.22%
Institutional (2/7/96 - 1/31/97)* 12.53% 0.53%
Service (3/6/96 - 1/31/97)* 10.42% 0.86%
- ------------------------------------------------------------------------------
</TABLE>
* Class A, B, Institutional and Service share performance assumes reinvestment
of all dividends and distributions, a complete redemption at the net asset value
at the end of the period and no initial sales charge or contingent deferred
sales charge. Performance for Class B, Institutional and Service shares is a
cumulative total return (not annualized) from their inception through the end of
the period.
The fund performed extremely well during the period under review,
with all of its share classes outperforming the benchmark, the Financial
Times/S&P Actuaries Europe & Pacific Index ("Europac") unhedged. Europac is a
capitalization-weighted composite of approximately 1,500 stocks from 23
countries in Europe and the Asia-Pacific region and is calculated on a monthly
basis. We are also pleased to note that the fund's Class A shares placed in the
top third of the Lipper international fund category (ranking 93rd out of 342)
for the 12-month period ended January 31, 1997, according to Lipper Analytical
Services, Inc. (Please note that Lipper rankings do not take sales charges into
account and that past performance is not a guarantee of future results. Lipper
did not rank the fund's Class B, Institutional or Service shares.)
The primary driver of the fund's superior performance was successful
stock selection, as we continued to focus on growing companies that actively
increased shareholder value through actions such as cost cutting, share buybacks
or restructuring. In addition, country allocations that worked in the fund's
favor were its overweighting in Sweden, one of the strongest performing markets
during the period, and its underweighting in Japan, one of the weakest, each the
result of our bottom-up approach to stock selection. The fund's industry
allocations also added value. The fund was overweighted in business services and
diversified consumer goods/services, which were among the best performing
sectors, and underweighted in financial services and basic industries, which
performed relatively poorly.
In terms of currency exposure, though the fund's neutral exposure is
unhedged, it was substantially hedged against the yen, which benefited
performance significantly when the yen continued to fall against the dollar. In
addition, the fund was partially hedged against some European currencies, such
as the Deutsche mark and the Swiss franc, which worked in its favor when the
dollar rose against those currencies.
The fund's Class B shares outperformed the benchmark by a wide
margin, but their performance was not as strong as the other share classes
because they began operations in May, after equity prices had already risen
significantly.
Portfolio Composition: A Widely Diversified Portfolio
As of January 31, 1997, the fund held positions in 56 companies based
in 16 countries. In terms of total portfolio assets, the five largest country
exposures were Japan (27.3%), the U.K. (12.6%), Germany (7.1%), Sweden (7.0%)
and Switzerland (6.8%).
Europe. At the end of the period, the portfolio's 53.0% allocation in European
stocks was in line with that of the benchmark (54.1%). In general, growth stocks
led the
- --------------------------------------------------------------------------------
41
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs International Equity Fund (continued)
- --------------------------------------------------------------------------------
market during the period. Many of the fund's European holdings were
growth-oriented stocks that benefited from positive earnings surprises and
successful efforts by senior management to enhance equity returns and
shareholder value. Several of the portfolio's longer term European holdings
were, once again, among its strongest performers. Securitas (Sweden), the
largest security services company in Europe, more than doubled during the
period, boosted by earnings from companies it acquired in Germany, France and
Portugal. Fresenius (Germany), a major producer of medical supplies, rose over
140% as it merged its global kidney dialysis division with W. R. Grace's
National Medical Center healthcare subsidiary and spun off the resulting
business, Fresenius Medical Care. Ericsson (Sweden), one of the world's leading
suppliers of mobile telephones and infrastructure, rebounded from weakness early
in the period when it achieved very good earnings, which reassured investors
that it was not suffering from margin pressure or weak mobile telephone orders.
Other strong performers were Randstad Holdings (Netherlands), the leading
temporary help organization in its market, which reported healthy sales and
earnings as its business continued to expand, and Comptoirs Modernes (France), a
supermarket chain operator, which gained market share in France and made
important acquisitions in Spain.
Several of the fund's newer additions also contributed to its
positive results. These included two pharmaceutical companies: Hoechst
(Germany), whose acquisition and restructuring plans indicate a commitment to
improving shareholder value, and Novartis (Switzerland), which was formed
through the merger of Ciba-Geigy and Sandoz and is expected to benefit from
significant cost reductions as well as new product development. Other
significant new positions that performed well were SGS Thomson (France), one of
the 10 largest semiconductor manufacturers in the world, which operates in the
high-value-added, application-specific sector of the market, and Telecom Italia
Mobile (Italy), the leading mobile telephone operator in Italy, which generates
strong cash flow and is extremely profitable.
Japan. Approximately 27% of the fund was invested in Japan, which was
underweighted relative to the benchmark (32.1%). The fund's Japanese stocks
fared better than the market, as we avoided banks and brokerages, two of the
weakest industries. We invested in companies with relatively robust earnings
visibility and good valuations, particularly favoring management that improved
cost competitiveness and strengthened their core business. The fund's best
performing Japanese stocks were TDK Corp., an electronic components manufacturer
that reported better than expected earnings due to strong sales of personal
computer-related components; Hoya Corp., an optical glass manufacturer that
aggressively restructured its operations and successfully diversified its
business so that it now dominates the glass magnetic disc market; and Mirai
Industry, a market leader in electric cables, pipes and other electric wiring
that introduced new products and cut costs. In contrast, Kyocera Corp., an
electronics components manufacturer, reported disappointing results due to
increased competition in the semiconductor and communication equipment
businesses. A new addition was Takeda Chemical Industry, the largest
pharmaceutical company in Japan, where aggressive new management initiatives
rapidly expanded overseas sales and improved the profitability of its
prescription drug business.
Asia-Pacific. Asia, a 13.5% allocation (excluding Japan), was slightly
overweighted compared with the benchmark's 10.7%, with Hong Kong representing
the largest country position at 6.7% of the portfolio. For most of the period,
the fund was overweighted in Malaysia, Hong Kong and Australia, which were three
of the better performing Asian markets. Though the performance of some of the
other markets fell short of expectations, our stock selection within the region
worked in the fund's favor. Several of the fund's top performers were financial
stocks, including Commerce Asset-Holdings, the fifth largest financial group in
Malaysia, which benefited from its merchant banking operations and strong loan
growth, and HSBC Holdings, a Hong Kong-based banking and financial services
organization, which reported strong results due to its dominant market position.
New holdings include Australia & New Zealand Bank Group, a bank that is
positioned to benefit from the potential deregulation in Australia's financial
services sector, and Asia Satellite Telecommunications Holdings Ltd., a
- --------------------------------------------------------------------------------
42
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
leading satellite owner and operator in the Asia-Pacific region that owns prime
orbital slots that are expected to result in high utilization rates and fees.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Top 10 Portfolio Holdings as of January 31, 1997
Percentage
of Total
Company Country Line of Business Net Assets
<S> <C> <C> <C>
HSBC Holdings Hong Kong Banking and 3.0%
Finance
Novartis Switzerland Pharmaceuticals 3.0%
Fresenius Germany Kidney Dialysis 2.4%
Equipment
TDK Corp. Japan Tape and Disc 2.4%
Manufacturer
Telecom Italia Italy Mobile Tele- 2.4%
Mobile communications
Operator
Canon, Inc. Japan Office Equipment 2.4%
Manufacturer
Adecco Switzerland Temporary Help 2.4%
Services
Adidas Germany Sporting Goods 2.4%
Manufacturer
Hoechst Germany Chemical and 2.3%
Drug
Manufacturer
Hoya Corp. Japan Optical Glass 2.3%
Manufacturer
- --------------------------------------------------------------------
</TABLE>
Outlook
In the near term, we expect most international economies to continue
to experience moderate growth and subdued inflation. We are particularly
positive on the prospects for the European markets in 1997, where we expect a
modest acceleration in economic growth and a continuation of healthy corporate
earnings growth helped by cost cutting as well as restructuring initiatives.
We are currently most concerned about Japan. Despite the sharp
correction, we expect to remain underweighted in the Japanese market because of
our negative view of the banking sector and only modest earnings recoveries in
nonmanufacturing sectors. Lack of investor confidence in the government's
commitment to deregulation, as well as simultaneous weakness in the bond and
currency markets, have all impacted market sentiment. In this state of
uncertainty, superior stock selection will be essential, and we intend to
emphasize companies with clear earnings visibility, strong management and
attractive valuations. Despite the generally poor conditions, the earnings for
the fund's Japanese holdings are above expectations and are being upgraded. In
non-Japan Asia, corporate earnings reports have been mixed, but we believe
improved political stability and export growth should help stocks in 1997.
Finally, we are pleased to report that we have expanded our
international equity team in all geographic regions to support our effort to
seek out the most promising companies around the world.
/s/ Roderick D. Jack
Roderick D. Jack
Senior Portfolio Manager, London
/s/ Marcel Jongen
Marcel Jongen
Senior Portfolio Manager, London
/s/ Shogo Maeda
Shogo Maeda
Senior Portfolio Manager, Tokyo
/s/ Warwick M. Negus
Warwick M. Negus
Senior Portfolio Manager, Singapore
March 3, 1997
- --------------------------------------------------------------------------------
43
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs International Equity Fund
January 31, 1997
- --------------------------------------------------------------------------------
The following graphs show the value, as of January 31, 1997, of a $10,000
investment made (with and without the maximum sales charge of 5.5% and
redemption charge of 5.0% for Class A and Class B, respectively) on the
inception date of each class. For comparative purposes, the performance of the
Fund's benchmark (the Financial Times-Actuaries World Euro-Pacific Index
Unhedged ("FT Euro-Pac (Unhedged)/(b)/) is shown for the appropriate time
periods. All performance data shown represents past performance and should not
be considered indicative of future performance which will fluctuate with changes
in market conditions. These performance fluctuations will cause an investor's
shares, when redeemed, to be worth more or less than their original cost.
<TABLE>
<CAPTION>
Class A
[LINE GRAPH APPEARS HERE]
GS Intl Eq GS Intl Eq
Class A Class A FT Euro-Pac Ft Euro-Pac
(w/sales charge) (no sales charge) (Comb )(b) (Unhedged)
---------------- ----------------- ----------- -----------
<S> <C> <C> <C> <C>
12/1/92 9,450 10,000 10,000 10,000
1/31/93 9,566 10,123 10,063 10,055
1/31/94 12,066 12,768 13,498 14,399
1/31/95 10,058 10,643 12,119 13,902
1/31/96 12,942 13,695 13,983 16,039
1/31/97 14,961 15,546 14,160 16,243
<CAPTION>
Class B
[LINE GRAPH APPEARS HERE]
GS Intl Eq GS Intl Eq
Class B Class B FT Euro-Pac
(w/sales charge) (no sales charge) (Unhedged)
---------------- ----------------- -----------
<S> <C> <C> <C>
5/1/96 10,000 10,000 10,000
1/31/97 10,283 9,783 9,578
<CAPTION>
Institutional
[LINE GRAPH APPEARS HERE]
GS Intl Equity FT Euro-Pac
Institutional Class (Unhedged)
------------------- -----------
<S> <C> <C>
2/7/96 10,000 10,000
1/31/97 11,253 10,053
<CAPTION>
Service
[LINE GRAPH APPEARS HERE]
GS Intl Equity FT Euro-Pac
Service Class (Unhedged)
-------------- -----------
<S> <C> <C>
3/6/97 10,000 10,000
1/31/97 11,042 10,086
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------
Average Annual Total Return
----------------------------------------
One Year Since Inception/(a)/
- -------------------------------------- ------------------- --------------------
<S> <C> <C>
Class A, no sales charge 13.48% 11.15%
- -------------------------------------- ------------------- --------------------
Class A, w/sales charge 7.26% 9.66%
- -------------------------------------- ------------------- --------------------
Class B, no redemption charge N/A 2.83% /(c)/
- -------------------------------------- ------------------- --------------------
Class B, w/redemption charge N/A (2.17)%/(c)/
- -------------------------------------- ------------------- --------------------
Institutional Class N/A 12.53% /(c)/
- -------------------------------------- ------------------- --------------------
Service Class N/A 10.42% /(c)/
- -------------------------------------- ------------------- --------------------
</TABLE>
/(a)/ Class A, Class B, Institutional and Service shares commenced operations
on December 1, 1992, May 1, 1996, February 7, 1996 and March 6, 1996,
respectively.
/(b)/ Beginning on September 1, 1994, the Class A shares began using the
unhedged FT Euro-Pac as its benchmark (prior thereto, Class A used the
hedged FT Euro-Pac). The combined FT Euro-Pac represents the hedged FT
Euro-Pac performance up to August 31, 1994 and the unhedged FT Euro-Pac
performance from September 1, 1994 through January 31, 1997.
/(c)/ An aggregate total return (not annualized) is shown instead of an average
annual total return since these classes have not completed a full twelve
months of operations.
- --------------------------------------------------------------------------------
44
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs International Equity Fund
January 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value
====================================================================
<S> <C> <C>
Common Stocks--91.5%
Australian Dollar--3.6%
1,851,658 Australia & New Zealand Bank Group
(Commercial Banks) $ 11,355,706
1,564,955 Woodside Petroleum, Ltd. (Oil &
Gas) 11,053,763
- --------------------------------------------------------------------
22,409,469
- --------------------------------------------------------------------
Austrian Schilling--1.2%
105,400 Oesterreichische Elektrizitats
(Utilities) 7,698,241
- --------------------------------------------------------------------
Belgian Franc--0.2%
14,400 Dexia (Financial Services) 1,372,240
- --------------------------------------------------------------------
British Pound Sterling--12.6%
1,391,569 British Airport Authority
(Transportation) 11,661,442
1,788,649 Electrocomponents (Wholesale
Trade) 12,753,546
1,261,210 Premier Farnell PLC (Electronics) 10,670,067
706,368 Misys PLC (Business Services and
Computer Software) 12,393,414
1,708,700 Rentokil Group (Business Services) 12,553,100
473,916 Siebe (Machinery and Engineering
Services) 7,973,270
873,509 Standard Chartered (Banking) 10,497,224
- --------------------------------------------------------------------
78,502,063
- --------------------------------------------------------------------
Deutsche Mark--4.7%
155,760 Adidas AG (Textiles) 14,749,495
343,320 Hoechst AG (Healthcare) 14,439,672
- --------------------------------------------------------------------
29,189,167
- --------------------------------------------------------------------
French Franc--6.4%
22,531 Comptoirs Modernes (Retail) 11,749,983
40,720 CLF Dexia (Financial Services) 3,649,869
95,602 CLF Dexia - Registered Shares 8,569,124
(Financial Services)
63,189 Seita (Tobacco) 2,400,553
193,600 SGS Thomson Microelectronics
(Electronics) 13,882,408
- --------------------------------------------------------------------
40,251,937
- --------------------------------------------------------------------
Hong Kong Dollar--6.7%
4,148,000 Asia Satellite Tel.
(Telecommunications) 9,233,837
816,800 HSBC Holdings (Commercial Banks) 18,920,583
1,185,000 Sun Hung Kai Properties Co. (Real
Estate) 13,380,759
- --------------------------------------------------------------------
41,535,179
- --------------------------------------------------------------------
Irish Pound--2.3%
1,491,014 Bank of Ireland (Commercial Banks) 14,247,624
- --------------------------------------------------------------------
Italian Lira--2.4%
3,000,500 Telecom Italia Mobile (Utilities) 8,930,448
3,574,000 Telecom Italia Mobile (Di Risp
Shares) (Utilities) 6,095,944
- --------------------------------------------------------------------
15,026,392
- --------------------------------------------------------------------
Japanese Yen--27.3%
206,000 Aderans Company Ltd. (Retail) 4,808,281
702,000 Canon, Inc. (Office Equipment
Manufacturer) 14,880,119
363,000 Hoya Corp. (Electronics and
Instrumentation) 14,520,599
297,400 Inaba Denkisangyo (Industrial) 5,396,346
458,000 Kokuyo Co., Ltd. (Office Equipment
Manufacturer) 9,594,787
149,000 Kyocera Corp. (Electronics) 8,749,887
358,000 Max Co. (Electronics and
Instrumentation) 5,432,966
238,900 Mirai Industry Co. (Electrical
Equipment Manufacturer) 5,852,060
1,927,000 Mitsubishi Heavy Industries Ltd.
(Engineering) 13,874,972
1,530,000 Mitsui Marine & Fire (Insurance) 8,215,019
450,100 Santen Pharmaceutical Co.
(Healthcare) 8,352,716
92,800 Sanyo Shinpan Financial
(Financial) 5,204,668
</TABLE>
- --------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
45
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs International Equity Fund (continued)
January 31, 1997
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value
====================================================================
<S> <C> <C>
Common Stocks (continued)
Japanese Yen (continued)
322,000 Shimachu (Retail-Furniture) $ 6,905,027
213,900 SMC Corp. (Machinery) 13,125,622
410,000 Taikisha Ltd. (Machinery) 5,038,558
570,000 Takeda Chemical Industry
(Healthcare) 11,235,927
235,000 TDK Corp. (Consumer Goods) 15,040,620
464,000 Tostem Corp. (Construction) 10,906,842
146,800 York Benimaru (Retail) 3,922,900
- --------------------------------------------------------------------
171,057,916
- --------------------------------------------------------------------
Malaysian Ringgit--1.9%
1,328,000 Commerce Asset Holdings
(Commercial Banks) 10,683,829
581,000 Leader Universal Holdings
(Metals-Diversified) 1,168,544
- --------------------------------------------------------------------
11,852,373
- --------------------------------------------------------------------
Netherlands Guilder--5.0%
146,070 Aegon (Insurance) 8,951,011
136,180 Randstad Holdings (Business
Services) 9,471,458
102,016 Wolters Kluwer (Media) 12,602,793
- --------------------------------------------------------------------
31,025,262
- --------------------------------------------------------------------
Singapore Dollar--1.5%
1,511,000 Singapore Land (Real Estate) 9,123,100
- --------------------------------------------------------------------
Spanish Peseta--1.9%
63,595 Banco Popular (Commercial Banks) 11,571,494
- --------------------------------------------------------------------
Swedish Krona--7.0%
335,300 Ericsson Telecommunications
(Computer - Office) 11,255,719
268,440 Hoganas AB (Metal Products) 8,455,037
405,970 Securitas AB (Business Services) 12,057,737
3,469,100 Swedish Match AB (Tobacco) 11,741,304
- --------------------------------------------------------------------
43,509,797
- --------------------------------------------------------------------
Swiss Franc--6.8%
52,468 Adecco SA (Business Services) 14,753,971
6,726 Cie Financier Richemont AG
(Consumer Goods) 9,231,858
16,335 Novartis AG (Healthcare) 18,730,002
- --------------------------------------------------------------------
42,715,831
- --------------------------------------------------------------------
Total Common Stocks
(Cost $503,926,410) $ 571,088,085
====================================================================
Preferred Stock--2.4%
- --------------------------------------------------------------------
Deutsche Mark--2.4%
74,790 Fresenius AG (Health Care),
Non-voting $ 15,042,126
- --------------------------------------------------------------------
Total Preferred Stock
(Cost $4,437,079) $ 15,042,126
====================================================================
<CAPTION>
Principal
Amount Description Value
====================================================================
<S> <C> <C>
Short-Term Obligations--6.6%
- --------------------------------------------------------------------
$ 41,394,109 State Street Bank & Trust
Euro-Time Deposit 5.5%, 02/03/97** $ 41,394,109
- --------------------------------------------------------------------
Total Short-Term Obligations
(Cost $41,394,109) $ 41,394,109
====================================================================
Total Investments
(Cost $549,757,598)/(a)/ $ 627,524,320
====================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in
which value exceeds cost $108,968,495
Gross unrealized loss for investments in
which cost exceeds value (31,533,818)
- --------------------------------------------------------------------
Net unrealized gain $ 77,434,677
====================================================================
</TABLE>
/(a)/ The aggregate cost for federal income tax purposes is $550,089,643.
* Non-income producing security.
** A portion of this security has been segregated for extended
settlement securities.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an intergral part of these financial statements.
46
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------
Common and Preferred Stock Industry Concentrations
====================================================================
<S> <C>
Business Services 7.8%
Commercial Banks 12.4%
Computer Software and Services 2.0%
Computer - Office 1.8%
Construction 1.7%
Consumer Goods 3.9%
Electrical Equipment Manufacturer 0.9%
Electronics 5.3%
Electronics and Instrumentation 3.2%
Engineering 2.2%
Financial 0.8%
Financial Services 2.2%
Health Care 10.9%
Industrial 0.9%
Insurance 2.7%
Machinery 2.9%
Machinery and Engineering Services 1.3%
Media 2.0%
Metal Products 1.4%
Metals-Diversified 0.2%
Office Equipment Manufacturer 3.9%
Oil & Gas 1.8%
Real Estate 3.6%
Retail 3.3%
Retail-Furniture 1.1%
Telecommunications 1.5%
Textiles 2.4%
Tobacco 2.3%
Transportation 1.9%
Utilities 3.6%
Wholesale Trade 2.0%
- --------------------------------------------------------------------
Total Common and Preferred Stock 93.9%
====================================================================
</TABLE>
The accompanying notes are an integral part of these financial
statements.
- --------------------------------------------------------------------
47
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Asia Growth Fund
- --------------------------------------------------------------------------------
Objective and Investment Approach
The Goldman Sachs Asia Growth Fund seeks long-term capital appreciation by
investing in a limited number of carefully selected companies located in 12
Asian markets, including China, Hong Kong, India, Indonesia, Malaysia, Pakistan,
the Philippines, Singapore, South Korea, Sri Lanka, Taiwan and Thailand.
We utilize extensive fundamental research in our search for well-managed
companies whose stock prices are, in our opinion, undervalued in the
marketplace. Because many companies in the Asian region are growing at
relatively rapid rates, we consider a company's return on capital, its
price-to-book value and the predictability of its earnings stream as among the
best measures of its intrinsic value. A strong market position and a skilled
management team dedicated to maximizing shareholder returns are also important
to us. Our investment process includes face-to-face meetings with senior
management as well as frequent contact with a company's customers, suppliers and
competitors.
While our primary focus is on stock selection, we seek to carefully manage
risk by diversifying the fund's portfolio in terms of countries, industry
sectors and size of capitalization. We are also mindful of making certain that
the market for a particular stock is relatively liquid, so we can easily sell a
position if our opinion changes. From time to time, we may choose to
significantly overweight or underweight our holdings in one country compared
with our benchmark, if we believe there is a compelling reason to do so.
Finally, we closely monitor the potential impact of political and economic
events in the region on particular companies and adjust the portfolio
accordingly.
Market Overview: Results Were Mixed in Asian Markets
As a group, the Asian stock markets rose 2.37% during the period, as
measured by the MSCI All Country Asia Free (Ex Japan) Index (without dividends
reinvested). The weak performance indicated by the Index masks the wide
divergence of performance among the individual Asian markets, as several
countries rose more than 10% while others fell more than 20%. The period under
review began on a strong note, but the region quickly sold off in mid-February
when investors became unnerved by rising political tension between China and
Taiwan. Though the Asian markets briefly rebounded, investor interest was
dampened again during the spring and summer due to uncertainty surrounding
national elections in several countries, a decline in exports and slowing
economic growth. From October 1996 through January 1997, most Asian markets
recovered due to improving corporate earnings and signs of stabilizing export
growth.
In terms of individual markets, Taiwan, Malaysia and Indonesia were the
strongest performers, rising 56.0%, 21.9% and 17.5%, respectively (in U.S.
dollar terms), with each overcoming brief setbacks such as negative short-term
economic data and political upheaval. Other positive markets were India, which
was the region's strongest performer during the first half of the year and
subsequently gave back some of its gains, and the Philippines, where healthy
economic growth and declining inflation renewed investor interest. Hong Kong,
the most heavily weighted country in the Index, posted lackluster results early
in the period, then rebounded to close the period with a 12.0% gain due to a
favorable interest rate environment and a soaring property market. The weakest
performer was Thailand, which dropped 46.5%. Thailand was impacted by a very
large budget deficit, exacerbated by the slowdown of computer-related exports as
well as a tear in the speculative bubble in the real estate market, as
nonperforming property loans caused problems in the banking sector. South Korea
and Singapore were weak as well, declining approximately 34% and 7%,
respectively. South Korean equities were affected by an ongoing investigation of
government corruption and a weakening economy, and Singapore's market fell due
to soft electronics exports.
- --------------------------------------------------------------------------------
48
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Performance Review: Country Allocations Affected the Fund's Performance
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Fund Total MSCI AC
Return Asia Free
(based on net (Ex Japan)
asset value) Index +
------------ -----
<S> <C> <C>
Class A (1/31/96 - 1/31/97)* -1.01% 2.37%
Class B (5/1/96 - 1/31/97)* -6.02% -2.50%
Institutional (2/2/96 - 1/31/97)* -1.09% 2.06%
- -------------------------------------------------------------------
</TABLE>
* Class A, B and Institutional share performance assumes reinvestment of all
dividends and distributions, a complete redemption at the net asset value at
the end of the period and no initial sales charge or contingent deferred sales
charge. Performance for Class B and Institutional shares is a cumulative total
return (not annualized) from their inception through the end of the period.
+ Represents a price-only index that does not reflect reinvested dividends.
During the period under review, stock selection benefited the fund as a
number of holdings achieved strong returns. The fund's performance was
nonetheless affected by its country over- and underweightings relative to the
Index when individual markets performed better or worse than expected. For
example, Taiwan and Malaysia were two of the region's best performing markets,
but the fund was underweighted in those countries and therefore did not fully
participate in their rallies.
Financial, Property and Infrastructure Stocks Were the Strongest Performers
The fund's best performers during the period were its positions in the
financial, real estate and infrastructure sectors. Top financial stocks included
two of our Hong Kong investments, HSBC Holdings PLC, one of the world's largest
banking and financial services companies, and Wing Hang Bank Ltd., a provider of
banking, foreign exchange and treasury services, which both benefited from
strong growth in mortgage loans resulting from Hong Kong's robust property
market. Metropolitan Bank and Trust, the Philippines' largest bank in terms of
assets, rose substantially due to the growing Philippine economy and aggressive
branch expansion, and Commerce Asset-Holdings, the fifth largest financial group
in Malaysia, benefited from its merchant banking operations and strong loan
growth.
In the real estate sector, Hong Kong's booming property market buoyed
several of the fund's holdings. These included Sun Hung Kai Properties, one of
the largest and best managed property companies in Hong Kong; Henderson Land
Development, a large property development and investment holding company that
concentrates on mass residential developments; and HKR International Ltd., a
real estate developer that primarily focuses on residential development in
Discovery Bay on Lantau Island (a self-contained community that offers a
"quality lifestyle").
Other strong performers were two Malaysian companies that benefited from
the government's commitment to improve the country's infrastructure. Road
Builder Malaysia Holdings, a contractor specializing in civil engineering and
road construction, continued its strategic expansion and diversification, and
United Engineers Malaysia, Malaysia's largest builder and operator of toll
roads, rose due to the opening of several new roads.
Stocks that did not fulfill our expectations included Leader Universal
Holdings, Malaysia's leading manufacturer of power and telecommunication cable,
which reported lower than expected earnings due to very low export margins;
Industrial Finance Corp. of Thailand (IFCT), which declined in sympathy with
Thailand's financial sector; and Tata Engineering and Locomotive Company
(TELCO), India's largest vehicle manufacturer, which slumped on speculation
concerning rising inventories and general market uncertainty. We significantly
reduced the fund's position in Leader Universal Holdings and IFCT, but we
continue to have confidence in TELCO, which has strong fundamentals and fared
well relative to the broader Indian market.
Portfolio Composition
As of January 31, 1997, 97.1% of the fund's total market value was
invested in equities while 2.2% was in cash equivalents, with the remainder in
other securities. The fund's five largest country exposures were Hong Kong
(39.9%), Malaysia (13.5%), Singapore (10.1%), India (9.9%) and Indonesia (5.2%).
At the end of the period, the portfolio was overweighted relative to the Index
in Hong Kong, India and South Korea, slightly underweighted in
- --------------------------------------------------------------------------------
49
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Asia Growth Fund (continued)
- --------------------------------------------------------------------------------
the Philippines, and significantly underweighted in Thailand, Singapore,
Malaysia and Taiwan.
Additions in Real Estate and Security Services, Reductions in Several Existing
Positions
During the period, we added Hysan Development Company, a property
investment company that owns a number of commercial and residential properties
in Hong Kong and should be a beneficiary of rising rental prices, and
Taiwan-Sogo Shinkong, a security services company that controls approximately
38% of the market in Taiwan and is expected to experience growing demand from
residential clients. Other portfolio changes included the trimming of several
positions in Hong Kong after they appreciated significantly and became more
fully valued. These included Sun Hung Kai Properties, Henderson Land Development
and HKR International Ltd.
<TABLE>
<CAPTION>
Top 10 Portfolio Holdings as of January 31, 1997
Percentage
Line of of Total
Company Country Business Net Assets
<S> <C> <C> <C>
HKR International Hong Kong Property 4.4%
Ltd.
Road Builder Malaysia Infrastructure 4.1%
Malaysia Holdings
Swire Pacific Ltd. Hong Kong Conglomerate 4.1%
Metropolitan Bank Philippines Banking and 3.8%
and Trust Finance
Wing Hang Bank Hong Kong Banking and 3.9%
Ltd. Finance
Henderson Land Hong Kong Property 3.7%
Development
HSBC Holdings PLC Hong Kong Banking and 3.5%
Finance
Hutchison Hong Kong Conglomerate 3.5%
Whampoa
Sun Hung Kai Hong Kong Property 3.5%
Properties
Commerce Asset- Malaysia Conglomerate 3.5%
Holdings
</TABLE>
Outlook
In 1997, we expect export growth to strengthen, which should stimulate
economies throughout the region. With most of the region's elections now over,
the region should also benefit from greater political stability in 1997. Though
the recent death of Deng Xiaoping may increase near-term volatility, we remain
optimistic that the handover of Hong Kong to China will proceed smoothly, as it
is in China's best interests to maintain Hong Kong's current economic success.
We intend to increase the fund's weightings in Malaysia, the Philippines and
Indonesia, markets that we expect to benefit from stable currencies and good
economic fundamentals. In September 1996, the benchmark established a new
weighting in Taiwan and doubled its weighting in Korea, and we are actively
seeking investment opportunities in these countries. We continue to have a
favorable view of India but are still cautious regarding Thailand and Singapore,
where real estate overdevelopment may continue to hinder their respective
markets for the near term.
In general, we believe that Asian equities are attractively valued on a
historical basis. We expect that economic growth in the region may slow somewhat
to 5% to 7% annually, still approximately double versus the U.S., one of the
world's most mature economies. Over time, we intend to broaden our emphasis from
companies that tend to do well in the earliest stages of emerging economies to
companies that we believe are poised to benefit most from the region's internal
growth. These include new start-ups, consumer-related products and services, and
infrastructure companies.
On another front, we are pleased to announce that we have recently
expanded our portfolio management team. Our new team members will focus
primarily on real estate companies, conglomerates and cyclical industries, and
they will enhance our ability to seek out companies with above-average growth
potential.
50
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
We appreciate your continued support in what has been a challenging period
for the region and the fund. Going forward, we remain confident that the region
continues to offer many attractive investment opportunities for investors with a
long-term view.
/s/ Warwick M. Negus
Warwick M. Negus
Senior Portfolio Manager,
Asia Active Equity
/s/ Alice Lui
Alice Lui
Portfolio Manager,
Asia Active Equity
/s/ Ravi Shanker
Ravi Shanker
Portfolio Manager,
Asia Active Equity
/s/ Karma A. Wilson
Karma A. Wilson
Portfolio Manager,
Asia Active Equity
March 3, 1997
- --------------------------------------------------------------------------------
51
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Asia Growth Fund
January 31, 1997
- --------------------------------------------------------------------------------
The following graphs show the value, as of January 31, 1997, of a $10,000
investment made (with and without the maximum sales charge of 5.5% and
redemption charge of 5.0% for Class A and B, respectively) on the inception date
of each class. For comparative purposes, the performance of the Fund's benchmark
(the Morgan Stanley Capital International Combined Asia (ex Japan) Index ("MSCI
Combined Asia-ex Japan")) is shown for the appropriate time periods. All
performance data shown represents past performance and should not be considered
indicative of future performance which will fluctuate with changes in market
conditions. These performance fluctuations will cause an investor's shares, when
redeemed, to be worth more or less than their original cost.
Class A
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
GS Asia Growth GS Asia Growth
Class A Class A MSCI
(w/sales charge) (no sales charge) Combined
---------------- ----------------- --------
<S> <C> <C> <C>
7/8/94 $ 9,450 $10,000 $10,000
1/31/95 8,934 9,454 9,074
1/31/96 11,300 11,958 11,129
1/31/97 11,186 11,837 11,393
</TABLE>
Class B
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
GS Asia Growth GS Asia Growth
Class B Class B MSCI
(w/redemp. charge) (no redemp. charge) Combined
------------------- ------------------ --------
<S> <C> <C> <C>
5/1/96 $10,000 $10,000 $10,000
1/31/97 9,398 8,928 9,750
</TABLE>
Institutional
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
GS Asia Growth MSCI
Institutional Combined
-------------- --------
<S> <C> <C>
2/2/96 $10,000 $10,000
1/31/97 9,891 10,206
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------
Average Annual Total Return
----------------------------------------
One Year Since Inception/(a)/
- -------------------------------------------------------------------------
<S> <C> <C>
Class A, no sales charge (1.01)% 6.78%
- -------------------------------------------------------------------------
Class A, w/sales charge (6.44)% (4.46)%
- -------------------------------------------------------------------------
Class B, no redemption charge N/A (6.02)%/(b)/
- -------------------------------------------------------------------------
Class B, w/redemption charge N/A (10.72)%/(b)/
- -------------------------------------------------------------------------
Institutional Class N/A (1.09)%/(b)/
- -------------------------------------------------------------------------
</TABLE>
/(a)/ Class A, Class B and Institutional shares commenced operations July 8,
1994, May 1, 1996 and February 2, 1996, respectively.
/(b)/ An aggregate total return (not annualized) is shown instead of an average
annual total return since these classes have not completed a full twelve
months of operations.
- --------------------------------------------------------------------------------
52
<PAGE>
Statement of Investments
- --------------------------------------------------------------------
Goldman Sachs Asia Growth Fund
- --------------------------------------------------------------------
January 31, 1997
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value
====================================================================
Common Stocks--96.0%
<S> <C> <C>
Hong Kong Dollar--39.9%
3,734,000 Asia Satellite Tel.*
(Telecommunications) $ 8,312,234
1,107,000 Henderson Land Development Co.
(Recreational Services) 10,250,000
7,947,440 HKR International Ltd.
(Real Estate) 12,358,582
2,731,000 Hong Kong Electric Holdings
(Utility) 9,709,517
426,000 HSBC Holdings
(Commercial Banks) 9,867,983
1,305,000 Hutchison Whampoa
(Conglomerates) 9,851,916
2,513,000 Hysan Development
(Utility) 9,145,257
9,735,666 JCG Holdings Ltd.
(Financial Services) 8,669,002
2,308,200 San Miguel Brewery Ltd.
(Breweries) 1,049,994
869,000 Sun Hung Kai Properties Co.
(Real Estate) 9,812,556
1,262,000 Swire Pacific Ltd. "A"
(Transportation) 11,603,755
2,316,500 Wing Hang Bank Ltd.
(Financial Services) 11,030,952
- --------------------------------------------------------------------
111,661,748
- --------------------------------------------------------------------
Indian Rupee--9.9%
235,000 Brook Bond Lipton India Ltd.
(Food) 2,438,494
372,900 Colgate Palmolive
(Conglomerates) 2,613,421
259,600 Hindustan Lever Ltd.
(Household Products) 6,423,018
10,000 Larsen & Toubro Ltd.
(Engineering) 65,272
143,500 Larsen & Toubro Ltd. GDR
(Engineering) 1,919,313
214,000 Larsen & Toubro LTD. GDS
(Engineering) 2,862,250
434,250 Mahindra & Mahindra Ltd.
(Autos and Trucks) 4,339,472
165,750 Mahindra & Mahindra GDR
(Autos and Trucks) 1,895,351
4,000 Niit Limited
(Computers) 32,022
80,000 Tata Engineering & Locomotive Ltd.
GDR (Engineering) 786,000
446,600 Tata Engineering & Locomotive Ltd.
GDS (Engineering) 4,387,845
- --------------------------------------------------------------------
27,762,458
- --------------------------------------------------------------------
Indonesian Rupiah--5.2%
2,374,750 Indofoods Sukses Makmur - Foreign
(Food) 5,245,031
2,346,000 PT Bank of Bali - Foreign
(Banking) 5,675,011
2,613,000 PT Jaya Real Property - Foreign
(Real Estate) 3,627,640
- --------------------------------------------------------------------
14,547,682
- --------------------------------------------------------------------
Malaysian Ringgit--13.2%
1,217,000 Commerce Asset Holdings
(Conglomerates) 9,790,829
623,000 Leader Universal Holdings
(Electronics) 1,253,017
1,936,000 Road Builder Malaysia Holdings
(Construction) 11,603,540
941,000 Tenaga National Berhad
(Utility) 4,504,385
1,081,000 United Engineers Malaysia Holdings
(Construction) 9,696,822
- --------------------------------------------------------------------
36,848,593
- --------------------------------------------------------------------
New Taiwan Dollar--2.5%
2,118,000 Taiwan Sogo Shinkong Securities
(Financial Services) 7,103,755
- --------------------------------------------------------------------
Philippine Peso--4.6%
18,189,000 Centennial City Inc.
(Real Estate) 2,208,911
- --------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
53
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Asia Growth Fund (continued)
January 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value
====================================================================
<S> <C> <C>
Common Stocks (continued)
Philippine Peso (continued)
393,454 Metropolitan Bank and Trust
(Banking) $ 10,750,925
- --------------------------------------------------------------------
12,959,836
- --------------------------------------------------------------------
Singapore Dollar--9.9%
639,000 Overseas Union Bank - Foreign
(Banking) 5,174,457
1,149,000 Singapore Land
(Real Estate) 6,937,420
383,000 Singapore Press Holdings - Foreign
(Printing & Publishing) 7,671,970
2,195,000 Straits Steamship Land
(Conglomerates) 7,795,852
- --------------------------------------------------------------------
27,579,699
- --------------------------------------------------------------------
South Korean Won--3.8%
168,920 Korea Mobile Telecommunications
Corp. ADR* (Telecommunications) 2,512,685
4,759 Korea Mobile Telecommunications
Corp. (Telecommunications) 5,228,904
7,132 Samsung Fire & Marine Insurance
(Insurance) 2,982,743
- --------------------------------------------------------------------
10,724,332
- --------------------------------------------------------------------
Thai Baht--3.9%
723,800 Electricity Generating Public Co.
(Utility) 1,815,785
758,100 Electricity Generating Public Co.
Foreign(Utility) 1,843,315
1,989,000 Industrial Finance Corp - Foreign
(Financial Services) 5,220,069
425,000 Jasmine International Co. - Foreign
(Diversified) 602,808
1,617,500 Thai Telephone & Telecom Corp. -
Foreign (Telecommunications) 1,326,587
- --------------------------------------------------------------------
10,808,564
- --------------------------------------------------------------------
United States Dollar--3.1%
387,000 Korea Electric Power Corp. ADR*
(Utilities) 8,562,375
- --------------------------------------------------------------------
Total Common Stocks
(Cost $237,846,163) $268,559,042
====================================================================
Rights & Warrants*--0.3%
Singapore Dollar--0.2%
356,750 Straits Steamship Land, exp. 12/12/00
(Conglomerate)- warrants 494,149
Thai Baht--0.1%
808,750 Thai Telephone & Telecom Corp., exp.
03/07/97 (Telecommunications)-rights 351,155
- --------------------------------------------------------------------
Total Rights & Warrants
(Cost $287,980) $ 845,304
====================================================================
<CAPTION>
Principal
Amount Description Value
====================================================================
<S> <C> <C>
Corporate Bonds--0.3%
Malaysian Ringitt--0.3%
MYR United Engineers Malaysia
1,024,000 (Construction) 4.00%, 05/22/99 $ 848,528
- --------------------------------------------------------------------
Total Corporate Bonds
(Cost $521,580) $ 848,528
====================================================================
Short-Term Obligations--2.2%
$ 6,200,104 State Street Bank & Trust Euro-Time
Deposit, 5.50%, 02/03/97 $ 6,200,104
- --------------------------------------------------------------------
Total Short-Term Obligations
(Cost $6,200,104) $ 6,200,104
====================================================================
Total Investments
(Cost $244,855,827)/(a)/ $276,452,978
====================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in
which value exceeds cost $ 45,982,425
Gross unrealized loss for investments in
which cost exceeds value (14,998,273)
====================================================================
Net unrealized gain $ 30,984,152
====================================================================
</TABLE>
* Non-income producing security.
/(a)/The aggregate cost for federal income tax purposes is $244,890,862.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
54
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Common Stock, Rights, Warrants, and Corporate Bond Industry
Concentrations
====================================================================
<S> <C>
Autos and Trucks 2.2%
Banking 7.8%
Breweries 0.4%
Commercial Banks 3.5%
Conglomerates 10.9%
Construction 7.9%
Diversified 0.2%
Electronics 0.4%
Engineering 3.6%
Financial Services 11.5%
Food 2.7%
Household Products 2.3%
Insurance 1.1%
Printing & Publishing 2.7%
Real Estate 12.5%
Recreational Services 3.7%
Telecommunications 6.3%
Transportation 4.1%
Utilities 12.8%
- --------------------------------------------------------------------
Total Common Stock, Rights, Warrants, and
Corporate Bonds 96.6%
====================================================================
</TABLE>
- --------------------------------------------------------------------------------
55
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- -------------------------------------------------------------------------------
Statements of Assets and Liabilities
January 31, 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Goldman Sachs Goldman Sachs
Balanced Select Equity
Fund Fund
===============================================
<S> <C> <C>
Assets:
Investments in securities, at value (identified cost $80,718,346, $302,169,999,
$513,612,707, $679,366,240, $213,003,477, $549,757,598 and $244,855,827,
respectively) $89,222,318 $393,263,171
Cash, at value 13,884 9,802
Receivables:
Investment securities sold 3,947,652 --
Forward foreign currency exchange contracts 6,692 --
Fund shares sold 565,860 3,095,601
Dividends and interest, at value 451,554 387,080
Variation margin 10,928 95,387
Deferred organization expenses, net 36,173 --
Other assets 97,786 8,495
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets 94,352,847 396,859,536
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased 9,690,219 --
Forward foreign currency exchange contracts -- --
Fund shares repurchased 44,298 548,016
Amounts owed to affiliates 97,949 388,699
Covered securities sold short (cash received, $936,984) 938,808 --
Accrued expenses and other liabilities 61,446 89,126
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 10,832,720 1,025,841
- -----------------------------------------------------------------------------------------------------------------------------------
Net Assets:
Paid-in capital 73,750,866 300,246,199
Accumulated undistributed (distributions in excess of) net investment income 180,204 --
(loss)
Accumulated undistributed (distributions in excess of) net realized gain (loss)
on investment, option and futures transactions 977,487 4,402,524
Accumulated net realized foreign currency gain (loss) 12,575 --
Net unrealized gain on investments, options and futures 8,611,563 91,184,972
Net unrealized loss on translation of assets and liabilities denominated in
foreign currencies (12,568) --
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets $83,520,127 $395,833,695
===================================================================================================================================
<CAPTION>
Class A Class B Class A Class B
------------ -------------- ------------- ------------
<S> <C> <C> <C> <C>
Total shares of beneficial interest outstanding, $.001 par
value (100,000,000 and 25,000,000 shares authorized for
each Class A and B, respectively) 4,336,101 112,660 9,688,806 744,222
Net asset and Class A redemption value per share (a) $18.78 $18.73 $23.32 $23.18
Maximum public offering price per share (Class A NAV x
1.0582) $19.87 $18.73 $24.68 $23.18
Institutional Service Institutional Service
------------ -------------- ------------- ------------
Total shares of beneficial interest outstanding, $.001 par
value (50,000,000 shares per each class authorized) -- -- 6,351,958 157,464
Net asset value, offering and redemption price per share -- -- $23.44 $23.27
===============================================================================================================================
(a) At redemption, Class B shares are subject to a contingent deferred sales charge assessed on the amount equal to the lesser
of the current net asset value or the original purchase price of the shares.
===============================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
56
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs Goldman Sachs Goldman Sachs Goldman Sachs Goldman Sachs
Growth and Income Capital Growth Small Cap Equity International Equity Asia Growth
Fund Fund Fund Fund Fund
==================================================================================================================================
<S> <C> <C> <C> <C>
$638,954,258 $932,041,765 $217,608,994 $627,524,320 $276,452,978
59,158 94,994 30,728 1,735,366 1,060,177
1,632,491 1,390,277 4,392,159 959,642 3,093,623
-- -- -- 2,684,757 --
4,847,992 1,524,356 820,288 4,794,141 685,136
572,159 706,624 85,173 440,308 262,880
-- -- -- -- --
19,321 -- 13,467 14,573 77,113
14,043 16,281 2,597 10,188 770
- ----------------------------------------------------------------------------------------------------------------------------------
646,099,422 935,774,297 222,953,406 638,163,295 281,632,677
- ----------------------------------------------------------------------------------------------------------------------------------
9,130,091 9,797,231 6,585,828 8,912,558 --
-- -- -- 3,434,535 1,495
414,917 850,523 165,072 198,616 694,794
716,432 1,160,456 345,810 833,473 400,444
-- -- -- -- --
21,990 99,060 121,890 255,084 846,340
- ----------------------------------------------------------------------------------------------------------------------------------
10,283,430 11,907,270 7,218,600 13,634,266 1,943,073
- ----------------------------------------------------------------------------------------------------------------------------------
492,994,560 657,200,330 203,743,684 542,859,953 266,426,371
(193,256) (275,552) -- (25,666) (1,316,323)
17,673,137 14,266,724 7,385,605 2,530,732 (16,027,669)
-- -- -- (917,847) (411,919)
125,341,551 252,675,525 4,605,517 112,491,393 33,014,375
-- -- -- (32,409,536) (1,995,231)
- ----------------------------------------------------------------------------------------------------------------------------------
$635,815,992 $923,867,027 $215,734,806 $624,529,029 $279,689,604
==================================================================================================================================
<CAPTION>
Class A Class B Class A Class B Class A Class B Class A Class B Class A Class B
- ------------- ---------- ------------- ---------- ------------ ------------ ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
26,534,286 751,089 55,021,724 193,240 10,140,493 176,544 27,765,580 997,807 16,122,122 206,387
$23.18 $23.10 $16.73 $16.67 $20.91 $20.80 $19.32 $19.24 $16.31 $16.24
$24.53 $23.10 $17.70 $16.67 $22.13 $20.80 $20.44 $19.24 $17.26 $16.24
<CAPTION>
Institutional Service Institutional Service Institutional Service Institutional Service Institutional Service
- ------------- ---------- ------------- ---------- ------------- ------------ ------------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
8,321 136,977 -- -- -- -- 3,524,169 34,830 815,499 --
$23.19 $23.17 -- -- -- -- $19.40 $19.34 $16.33 --
==================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
57
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Statements of Operations
For the Year Ended January 31, 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs Goldman Sachs
Balanced Select Equity
Fund Fund
===================================
<S> <C> <C>
Investment income:
Dividends /(a)/ $ 838,092 $ 5,629,026
Interest /(b)/ 2,107,288 541,011
- ----------------------------------------------------------------------------------------------------------------------------------
Total income 2,945,380 6,170,037
- ----------------------------------------------------------------------------------------------------------------------------------
Expenses: /(c)/
Investment advisory fees 309,372 1,413,035
Administration fees 92,811 706,517
Distribution fees 157,253 468,965
Authorized dealer service fees 154,686 444,626
Custodian fees 93,352 95,947
Transfer agent fees 148,576 319,246
Professional Fees 71,598 74,319
Amortization of deferred organization expenses 13,468 9,549
Director fees 1,171 2,728
Other 53,077 96,414
- ----------------------------------------------------------------------------------------------------------------------------------
Total expenses 1,095,364 3,631,346
Less--expenses reimbursed and fees waived by Goldman Sachs (472,758) (626,188)
- ----------------------------------------------------------------------------------------------------------------------------------
Net expenses 622,606 3,005,158
- ----------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 2,322,774 3,164,879
- ----------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment, option, futures and foreign
currency transactions:
Net realized gain (loss) from:
Investment transactions 3,811,127 14,386,845
Options written (2,680) --
Futures transactions 148,013 645,873
Foreign currency related transactions 12,575 --
Net change in unrealized gain (loss) on:
Investments 5,008,557 49,393,370
Futures 14,475 67,175
Translation of assets and liabilities denominated in foreign currencies (12,568) --
- ----------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment, option, futures and foreign currency
transactions 8,979,499 64,493,263
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $ 11,302,273 $ 67,658,142
==================================================================================================================================
</TABLE>
/(a)/ For the Balanced, Select Equity, Growth and Income, Capital Growth, Small
Cap Equity, International Equity and Asia Growth Funds, taxes withheld on
dividends were $1,496, $42,274, $23,285, $53,869, $4,211, $900,877 and
$372,334, respectively.
/(b)/ For the Balanced Fund, taxes withheld on interest were $969.
/(c)/ Certain expenses reflected in the above statement of operations are
incurred on a class specific basis.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
58
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------
Goldman Sachs Goldman Sachs
Growth and Income Capital Growth
Fund Fund
<S> ========================================
Investment income: <C> <C>
Dividends /(a)/ $ 13,008,785 $ 14,748,431
Interest /(b)/ 1,235,823 2,802,840
- ---------------------------------------------------------------------------------------------------------------------------------
Total income 14,244,608 17,551,271
- ---------------------------------------------------------------------------------------------------------------------------------
Expenses: /(c)/
Investment advisory fees 2,782,464 6,522,949
Administration fees 758,854 2,174,316
Distribution fees 1,280,332 2,179,405
Authorized dealer service fees 1,261,615 2,174,316
Custodian fees 102,394 129,556
Transfer agent fees 871,030 908,310
Professional Fees 75,891 74,529
Amortization of deferred organization expenses 19,164 --
Director fees 6,744 13,973
Other 144,279 208,397
- ----------------------------------------------------------------------------------------------------------------------------------
Total expenses 7,302,767 14,385,751
Less--expenses reimbursed and fees waived by Goldman Sachs (1,113,014) (2,171,272)
- ----------------------------------------------------------------------------------------------------------------------------------
Net expenses 6,189,753 12,213,979
- ----------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 8,054,855 5,337,292
- ----------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment, option, futures and foreign
currency transactions:
Net realized gain (loss) from:
Investment transactions 58,221,421 53,687,297
Options written (37,206) --
Futures transactions 45,994 --
Foreign currency related transactions -- --
Net change in unrealized gain (loss) on:
Investments 67,575,111 145,350,120
Futures -- --
Translation of assets and liabilities denominated in foreign currencies -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment, option, futures and foreign curren
transactions 125,805,320 199,037,417
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $133,860,175 $204,374,709
====================================================================================================================================
<CAPTION>
-------------------------------------------
Goldman Sachs Goldman Sachs
Small Cap Equity International Equity
Fund Fund
<S> ===========================================
Investment income: <C> <C>
Dividends /(a)/ $ 968,945 $ 5,944,299
Interest /(b)/ 896,528 1,533,039
- ------------------------------------------------------------------------------------------------------------------------------------
Total income 1,865,473 7,477,338
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses: /(c)/
Investment advisory fees 1,598,027 3,478,689
Administration fees 532,676 1,159,514
Distribution fees 538,657 1,115,919
Authorized dealer service fees 532,676 1,086,488
Custodian fees 63,636 786,004
Transfer agent fees 511,883 586,243
Professional Fees 72,844 84,162
Amortization of deferred organization expenses 18,742 17,603
Director fees 3,842 5,519
Other 73,764 229,722
- ------------------------------------------------------------------------------------------------------------------------------------
Total expenses 3,946,747 8,549,863
Less--expenses reimbursed and fees waived by Goldman Sachs (529,684) (829,788)
- ------------------------------------------------------------------------------------------------------------------------------------
Net expenses 3,417,063 7,720,075
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (1,551,590) (242,737)
- ------------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment, option, futures and foreign
currency transactions:
Net realized gain (loss) from:
Investment transactions 29,166,218 16,714,697
Options written (398,365) --
Futures transactions -- --
Foreign currency related transactions -- 146,694
Net change in unrealized gain (loss) on:
Investments 22,913,571 60,236,901
Futures -- --
Translation of assets and liabilities denominated in foreign currencies -- (28,245,657)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment, option, futures and foreign
currency transactions 51,681,424 48,852,635
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $50,129,834 $48,609,898
====================================================================================================================================
<CAPTION>
-----------------
Goldman Sachs
Asia Growth
Fund
<S> ==================
Investment income: <C>
Dividends /(a)/ $ 4,216,521
Interest /(b)/ 716,243
- -----------------------------------------------------------------------------------------------------------
Total income 4,932,764
- -----------------------------------------------------------------------------------------------------------
Expenses: /(c)/
Investment advisory fees 1,937,658
Administration fees 645,897
Distribution fees 636,953
Authorized dealer service fees 630,134
Custodian fees 499,487
Transfer agent fees 385,114
Professional Fees 84,316
Amortization of deferred organization expenses 31,711
Director fees 3,496
Other 51,032
- -----------------------------------------------------------------------------------------------------------
Total expenses 4,905,798
Less--expenses reimbursed and fees waived by Goldman Sachs (511,880)
- -----------------------------------------------------------------------------------------------------------
Net expenses 4,393,918
- -----------------------------------------------------------------------------------------------------------
Net investment income (loss) 538,846
- -----------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment, option, futures and foreign
currency transactions:
Net realized gain (loss) from:
Investment transactions (7,294,240)
Options written --
Futures transactions (141,910)
Foreign currency related transactions (1,099,538)
Net change in unrealized gain (loss) on:
Investments 5,823,115
Futures --
Translation of assets and liabilities denominated in foreign currencies (599,549)
- -----------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment, option, futures and foreign
currency transactions (3,312,122)
- -----------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $(2,773,276)
===========================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
59
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- -------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended January 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Goldman Sachs Goldman Sachs
Balanced Select Equity
Fund Fund
===============================================
<S> <C> <C>
From operations:
Net investment income (loss) $ 2,322,774 $ 3,164,879
Net realized gain (loss) on investment, option and futures transactions 3,956,460 15,032,718
Net realized gain (loss) on foreign currency related transactions 12,575 --
Net change in unrealized gain (loss) on investments, options and futures 5,023,032 49,460,545
Net change in unrealized loss on translation of assets and liabilities
denominated in foreign currencies (12,568) --
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations 11,302,273 67,658,142
- -----------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
From net investment income
Class A shares (2,259,972) (1,515,575)
Class B shares (13,466) (4,750)
Institutional shares -- (1,606,175)
Service shares -- (6,666)
In excess of net investment income
Class A shares (7,504) --
Class B shares -- (118,421)
Institutional shares -- (34,205)
Service shares -- (16,030)
From net realized gain on investment, option and futures transactions
Class A shares (3,654,841) (7,174,235)
Class B shares (77,400) (440,131)
Institutional shares -- (4,675,726)
Service shares -- (68,472)
- -----------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (6,013,183) (15,660,386)
-----------------------------------------------------------------------------------------------------------------------------------
From share transactions:
Net proceeds from sales of shares 29,174,047 167,209,718
Reinvestment of dividends and distributions 5,694,651 14,904,237
Cost of shares repurchased (7,565,668) (32,152,494)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from share transactions 27,303,030 149,961,461
- -----------------------------------------------------------------------------------------------------------------------------------
Total increase 32,592,120 201,959,217
Net assets:
Beginning of year 50,928,007 193,874,478
===================================================================================================================================
End of year $ 83,520,127 $ 395,833,695
===================================================================================================================================
Accumulated undistributed (distributions in excess of) net investment income $ 180,204 $ --
===================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
60
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs Equity Portfolios, Inc.
- ----------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs Goldman Sachs Goldman Sachs
Statements of Changes in Net Assets Growth and Income Capital Growth Small Cap
For the Year Ended January 31, 1997 Fund Fund Equity Fund
====================================================
<S> <C> <C> <C>
From operations:
Net investment income (loss) $ 8,054,855 $ 5,337,292 $ (1,551,590
Net realized gain (loss) on investment, option and futures transactions 58,230,209 53,687,297 28,767,853
Net realized gain (loss) on foreign currency related transactions -- -- --
Net change in unrealized gain (loss) on investments, options and futures 67,575,111 145,350,120 22,913,571
Net change in unrealized loss on translation of assets and liabilities
denominated in foreign currencies -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations 133,860,175 204,374,709 50,129,834
- ----------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
From net investment income
Class A shares (8,111,894) (5,948,617) --
Class B shares (5,818) -- --
Institutional shares (494) -- --
Service shares (11,500) -- --
In excess of net investment income
Class A shares (135,533) (258,749) --
Class B shares (48,273) (12,838) --
Institutional shares (380) --
Service shares (9,070) -- --
From net realized gain on investment, option and futures transactions
Class A shares (46,442,616) (91,862,169) (10,210,264)
Class B shares (754,312) (179,327) (149,626)
Institutional shares (9,971) -- --
Service shares (255,610) -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (55,785,471) (98,261,700) (10,359,890)
- ----------------------------------------------------------------------------------------------------------------------------------
From share transactions:
Net proceeds from sales of shares 140,362,846 76,008,897 56,119,213
Reinvestment of dividends and distributions 53,352,809 90,088,874 9,876,571
Cost of shares repurchased (72,730,939) (229,399,817) (95,024,895)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from share transactions 120,984,716 (63,302,046) (29,029,111)
- ----------------------------------------------------------------------------------------------------------------------------------
Total increase 199,059,420 42,810,963 10,740,833
Net Asssets:
Beginning of Year 436,756,572 881,056,064 204,993,973
==================================================================================================================================
End of Year $635,815,992 $923,867,027 $ 215,734,806
==================================================================================================================================
Accumulated distributed (distributions in excess investment income) $ (193,256) $ (275,552) $ --
==================================================================================================================================
<CAPTION>
-----------------------------------------------------
Statements of Changes in Net Assets Goldman Sachs Goldman Sachs
For the Year Ended January 31, 1997 International Asia Growth
Equity Fund Fund
====================================================
<S> <C> <C>
From operations:
Net investment income (loss) $ (242,737) $ 538,846
Net realized gain (loss) on investment, option and futures transactions 16,714,697 (7,436,150)
Net realized gain (loss) on foreign currency related transactions 146,694 (1,099,538)
Net change in unrealized gain (loss) on investments, options and futures 60,236,901 5,823,115
Net change in unrealized loss on translation of assets and liabilities
denominated in foreign currencies (28,245,657) (599,549)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations 48,609,898 (2,773,276)
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
From net investment income
Class A shares -- (206,784)
Class B shares -- --
Institutional shares (106,712) --
Service shares -- --
In excess of net investment income
Class A shares -- --
Class B shares -- (5,064)
Institutional shares -- (83,075)
Service shares -- --
From net realized gain on investment, option and futures transactions
Class A shares (5,358,559) --
Class B shares (159,717) --
Institutional shares (689,171) --
Service shares (3,947) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (6,318,106) (294,923)
- ------------------------------------------------------------------------------------------------------------------------------------
From share transactions:
Net proceeds from sales of shares 321,475,961 144,448,826
Reinvestment of dividends and distributions 5,481,492 221,279
Cost of shares repurchased (75,580,037) (67,451,011)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from share transactions 251,377,416 77,219,094
- ----------------------------------------------------------------------------------------------------------------------------------
Total increase
Net assets: 293,669,208 74,150,895
Beginning of year 330,859,821 205,538,709
===================================================================================================================================
End of year $624,529,029 $279,689,604
====================================================================================================================================
Accumulated undistributed (distributions in excess of) net investment income $ (25,666) $ (1,316,323)
===================================================================================================================================
</TABLE>
61
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended January 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Goldman Sachs Goldman Sach
Balanced Select Equity
Fund Fund
==============================================
<S> <C> <C>
From operations:
Net investment income (loss) $ 1,083,645 $ 1,518,160
Net realized gain (loss) on investment, option and futures transactions 1,715,887 4,687,943
Net realized gain on foreign currency related transactions -- --
Net change in unrealized gain on investments, options and futures 3,518,420 37,068,509
Net change in unrealized loss on translation of assets and liabilities
denominated in foreign currencies -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 6,317,952 43,274,612
- ----------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
From net investment income (991,655) (1,610,216)
In excess of net investment income -- --
From net realized gain on investment, option and futures transactions (962,754) (3,527,188)
- ----------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (1,954,409) (5,137,404)
- ----------------------------------------------------------------------------------------------------------------------------------
From share transactions:
Net proceeds from sales of shares 41,736,040 102,149,318
Reinvestment of dividends and distributions 1,802,563 4,880,575
Cost of shares repurchased (4,483,707) (46,260,132)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from share transactions 39,054,896 60,769,761
- ----------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) 43,418,439 98,906,969
Net assets:
Beginning of year 7,509,568 94,967,509
==================================================================================================================================
End of year $ 50,928,007 $ 193,874,478
==================================================================================================================================
Accumulated undistributed (distributions in excess of) net investment income $ 125,304 $ 86,854
==================================================================================================================================
Summary of share transactions:
===================================================================================================================================
<CAPTION>
Class A Class A Institutional
-------------- -------------- --------------
<S> <C> <C> <C>
Shares sold 2,578,356 2,479,285 3,220,915
Reinvestment of dividends and distributions 108,023 161,481 97,993
Shares repurchased (271,753) (2,578,247) (30,492)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding 2,414,626 62,519 3,288,416
==================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
62
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs Goldman Sachs Goldman Sachs Goldman Sachs Goldman Sachs
Growth and Income Capital Growth Small Cap International Asia Growth
Fund Fund Equity Fund Equity Fund Fund
=================================================================================================================================
<S> <C> <C> <C> <C>
$ 5,307,925 $ 6,032,534 $ (1,717,759) $ 725,369 $ 1,643,482
18,815,320 188,790,639 (5,033,599) (8,757,936) (5,766,395)
-- -- -- 21,213,851 416,433
58,081,439 53,559,848 30,594,034 69,834,990 42,480,420
-- -- -- (12,612,130) (1,710,833)
- --------------------------------------------------------------------------------------------------------------------------------
82,204,684 248,383,021 23,842,676 70,404,144 37,063,107
- ---------------------------------------------------------------------------------------------------------------------------------
(5,300,032) (6,289,354) -- (9,491,864) (1,787,451)
-- -- -- -- (1,657,672)
(11,998,907) (139,713,660) (161,357) (14,089,155) --
- ---------------------------------------------------------------------------------------------------------------------------------
(17,298,939) (146,003,014) (161,357) (23,581,019) (3,445,123)
- ---------------------------------------------------------------------------------------------------------------------------------
199,623,973 144,529,476 56,891,181 85,900,104 88,560,430
16,219,024 131,979,456 149,801 21,651,092 2,951,847
(37,764,413) (359,937,680) (195,215,538) (98,600,969) (43,889,831)
- ---------------------------------------------------------------------------------------------------------------------------------
178,078,584 (83,428,748) (138,174,556) 8,950,227 47,622,446
- ---------------------------------------------------------------------------------------------------------------------------------
242,984,329 18,951,259 (114,493,237) 55,773,352 81,240,430
193,772,243 862,104,805 319,487,210 275,086,469 124,298,279
=================================================================================================================================
$436,756,572 $ 881,056,064 $ 204,993,973 $ 330,859,821 $ 205,538,709
=================================================================================================================================
$ 56,087 $ 607,360 $ -- $ 227,683 $ (1,630,536)
=================================================================================================================================
Class A Class A Class A Class A Class A
------------- --------------- --------------- -------------- --------------
10,766,604 9,130,715 3,285,739 5,082,572 5,830,049
848,870 9,145,811 8,585 1,286,112 197,978
(2,027,335) (22,215,374) (11,228,873) (6,067,690) (2,898,305)
- ---------------------------------------------------------------------------------------------------------------------------------
9,588,139 (3,938,848) (7,934,549) 300,994 3,129,722
=================================================================================================================================
- -------------------------------------------------------------------- ----------------------------------------------------------
</TABLE>
63
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements
January 31, 1997
- --------------------------------------------------------------------------------
1. Organization
Goldman Sachs Equity Portfolios, Inc. (the "Company") is a Maryland corporation
registered under the Investment Company Act of 1940, as amended, as an open-end,
diversified management investment company. Included in this report are the
financial statements for the Goldman Sachs Balanced Fund ("Balanced Fund"),
Goldman Sachs Select Equity Fund ("Select Equity Fund"), Goldman Sachs Growth
and Income Fund ("Growth and Income Fund"), Goldman Sachs Capital Growth Fund
("Capital Growth Fund"), Goldman Sachs Small Cap Equity Fund ("Small Cap Equity
Fund"), Goldman Sachs International Equity Fund ("International Equity Fund")
and Goldman Sachs Asia Growth Fund ("Asia Growth Fund"), collectively, "the
Funds." The Select Equity, Growth and Income, International Equity and Asia
Growth Funds offer four classes of shares - Class A, Class B, Institutional and
Service. The Balanced, Capital Growth and Small Cap Equity Funds offer two
classes of shares - Class A and Class B.
2. Significant Accounting Policies
The following is a summary of the significant accounting policies consistently
followed by the Company. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that may affect the reported amounts.
A. Investment Valuation
- ------------------------
Investments in securities traded on a U.S. or foreign securities exchange or the
NASDAQ system are valued daily at their last sale or closing price on the
principal exchange on which they are traded or NASDAQ. If no sale occurs,
securities traded on a U.S. exchange or NASDAQ are valued at the mean between
the closing bid and asked price, and securities traded on a foreign exchange
will be valued at the official bid price. Unlisted equity and debt securities
for which market quotations are available are valued at the mean between the
most recent bid and asked prices. Debt securities are valued at prices supplied
by an independent pricing service, which reflect broker/dealer-supplied
valuations and matrix pricing systems. Short-term debt obligations maturing in
sixty days or less are valued at amortized cost. Restricted securities, and
other securities for which quotations are not readily available, are valued at
fair value using methods approved by the Board of Directors of the Company.
B. Securities Transactions and Investment Income
- -------------------------------------------------
Securities transactions are recorded on the trade date. Realized gains and
losses on sales of investments are calculated on the identified-cost basis.
Dividend income is recorded on the ex-dividend date. Dividends for which the
Funds have the choice to receive either cash or stock are recognized as
investment income in an amount equal to the cash dividend. This amount is also
used as an estimate of the fair value of the stock received. Interest income is
determined on the basis of interest accrued, premium amortized and discount
earned with the exception of the Balanced Fund which does not amortize premiums.
In addition, it is the Funds' policy to accrue for estimated capital gains taxes
on foreign securities held by the Funds subject to such taxes.
C. Mortgage Dollar Rolls
- -------------------------
The Balanced Fund may enter into mortgage "dollar rolls" in which the Fund sells
securities in the current month for delivery and simultaneously contracts with
the same counterparty to repurchase similar (same type, coupon and maturity) but
not identical securities on a specified future date. For financial reporting and
tax reporting purposes, the Fund treats mortgage dollar rolls as two separate
transactions; one involving the purchase of a security and a separate
transaction involving a sale.
D. Foreign Currency Translations
- ---------------------------------
The books and records of the Company are maintained in U.S. dollars. Amounts
denominated in foreign currencies are translated into U.S. dollars on the
following basis: (i) investment valuations, other assets and liabilities
initially expressed in foreign currencies are converted each business day into
U.S. dollars based on current exchange rates; (ii) purchases and sales of
foreign investments,
- --------------------------------------------------------------------------------
64
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
income and expenses are converted into U.S. dollars based on currency exchange
rates prevailing on the respective dates of such transactions.
Net realized and unrealized gain (loss) on foreign currency transactions
will represent: (i) foreign exchange gains and losses from the sale and holdings
of foreign currencies and investments; (ii) gains and losses between trade date
and settlement date on investment securities transactions and forward exchange
contracts; and (iii) gains and losses from the difference between amounts of
dividends and interest recorded and the amounts actually received.
E. Forward Foreign Currency Exchange Contracts
- -----------------------------------------------
Certain of the Funds are authorized to enter into forward foreign currency
exchange contracts for the purchase of a specific foreign currency at a fixed
price on a future date as a hedge or cross-hedge against either specific
transactions or portfolio positions. The International Equity and Asia Growth
Funds may enter into such contracts to seek to increase total return. All
commitments are "marked-to-market" daily at the applicable translation rates and
any resulting unrealized gains or losses are recorded in the funds' financial
statements. The Funds record realized gains or losses at the time the forward
contract is offset by entry into a closing transaction or extinguished by
delivery of the currency. Risks may arise upon entering these contracts from the
potential inability of counterparties to meet the terms of their contracts and
from unanticipated movements in the value of a foreign currency relative to the
U.S. dollar.
F. Short Securities Positions
- ------------------------------
The Funds (other than the Select Equity Fund) may enter into covered short
sales. Short securities positions are accounted for at cost and subsequently
marked to market to reflect the current market value of the position. The market
value of the short position is recorded as a liability on the fund's records and
any difference between this market value and cash received is reported as
unrealized gain or loss. Gains and losses are realized when a short
- --------------------------------------------------------------------------------
position is closed out by delivering securities back to the broker.
At January 31, 1997, the Balanced Fund had the following covered short positions
open:
- -------------------------------------------------------------------------------
Short Position
Issuer Par Value Market Value
- --------------------------- --------------- --------------------
FNMA TBA 15-Year $900,000 $938,808
- -------------------------------------------------------------------------------
G. Federal Taxes
- -----------------
It is the Funds' policy to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute each year
substantially all of their investment company taxable income and capital gains
to their shareholders. Accordingly, no federal tax provisions are required. The
characterization of distributions to shareholders for financial reporting
purposes is determined in accordance with income tax rules. Therefore, the
source of the Funds' distributions may be shown in the accompanying financial
statements as either from or in excess of net investment income or net realized
gain on investment transactions, or from capital, depending on the type of
book/tax differences that may exist as well as timing differences associated
with having different book and tax year ends.
Asia Growth Fund had approximately $184,000, $5,487,000 and $9,825,000 at
January 31, 1997 of capital loss carryforward expiring in 2002, 2003 and 2004
for federal tax purposes. These amounts are available to be carried forward to
offset future capital gains to the extent permitted by applicable laws or
regulations.
H. Deferred Organization Expenses
- ----------------------------------
Organization-related costs are being amortized on a straight-line basis over a
period of five years.
I. Expenses
- ------------
Expenses incurred by the Company which do not specifically relate to an
individual fund of the Company are allocated to the Funds based on each Fund's
relative
- --------------------------------------------------------------------------------
65
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
January 31, 1997
- --------------------------------------------------------------------------------
average net assets for the period.
Class A and Class B shares bear all expenses and fees relating to the
distribution and authorized dealer service plans as well as other expenses which
are directly attributable to such shares. Each class of Shares separately bears
their respective class-specific transfer agency fees. Service Shares separately
bear a service fee.
J. Option Accounting Principles
- --------------------------------
When certain of the Funds write call or put options, an amount equal to the
premium received is recorded as an asset and as an equivalent liability. The
amount of the liability is subsequently marked-to-market to reflect the current
market value of the option written. When a written option expires on its
stipulated expiration date or the funds enter into a closing purchase
transaction, the funds realize a gain or loss without regard to any unrealized
gain or loss on the underlying security, and the liability related to such
option is extinguished. When a written call option is exercised, the funds
realize a gain or loss from the sale of the underlying security, and the
proceeds of the sale are increased by the premium originally received. When a
written put option is exercised, the amount of the premium originally received
will reduce the cost of the security which the funds purchase upon exercise.
There is a risk of loss from a change in value of such options which may exceed
the related premiums received.
Upon the purchase of a call option or a protective put option by the Funds
the premium paid is recorded as an investment and subsequently marked-to-market
to reflect the current market value of the option. If an option which the Funds
have purchased expires on the stipulated expiration date, the funds will realize
a loss in the amount of the cost of the option. If the funds enter into a
closing sale transaction, the funds will realize a gain or loss, depending on
whether the sale proceeds from the closing sale transaction are greater or less
than the cost of the option. If the Funds exercise a purchased put option, the
funds will realize a gain or loss from the sale of the underlying security, and
the proceeds from such sale will be decreased by the premium originally paid. If
the Funds exercise a purchased call option, the cost of the security which the
funds purchase upon exercise will be increased by the premium originally paid.
K. Futures Contracts
- ---------------------
The Funds may enter into futures transactions in order to hedge against changes
in interest rates, securities prices or currency exchange rates or to seek to
increase total return. The Select Equity Fund may enter into such transactions
only with respect to the S&P 500 Index. A Fund will engage in futures
transactions only for bona fide hedging purposes as defined in regulations of
the CFTC or to seek to increase total return (except with respect to
transactions by the Balanced, Growth and Income, Select Equity, Capital Growth
and Small Cap Equity Funds, in futures on foreign currencies) to the extent
permitted by such regulations. The use of futures contracts involve, to varying
degrees, elements of market risk which may exceed the amounts recognized in the
Statements of Assets and Liabilities.
Upon entering into a futures contract, the Funds are required to deposit
with a broker an amount of cash or securities equal to the minimum "initial
margin" requirement of the futures exchange on which the contract is traded.
Subsequent payments ("variation margin") are made or received by the Funds each
day, dependent on the daily fluctuations in the value of the contract, and are
recorded for financial reporting purposes as unrealized gains or losses. When
entering into a closing transaction, the Funds will realize a gain or loss equal
to the difference between the value of the futures contract to sell and the
futures contract to buy. Futures contracts are valued at the most recent price,
unless such price does not reflect the fair market value of the contract, in
which case the position will be valued using methods approved by the Board of
Directors of the Company.
Certain risks may arise upon entering into futures contracts. The
predominant risk is that the changes in the value of the futures contract may
not directly correlate with changes in the value of the underlying securities.
This risk may decrease the effectiveness of the Funds'
- --------------------------------------------------------------------------------
66
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
hedging strategies and may also result in a loss to the Funds.
3. Agreements
Goldman Sachs Asset Management ("GSAM"), a separate operating division of
Goldman, Sachs & Co. ("Goldman Sachs"), acts as investment adviser to the
Balanced, Growth and Income, Small Cap Equity and International Equity Funds;
Goldman Sachs Funds Management, L.P. ("GSFM"), an affiliate of Goldman Sachs,
acts as investment adviser to the Select Equity and Capital Growth Funds; and
Goldman Sachs Asset Management International ("GSAM International") acts as
investment adviser to the Asia Growth Fund and subadviser to the International
Equity Fund. Under the Investment Advisory and Subadvisory Agreements, GSAM,
GSFM and GSAM International (the "Investment Advisors"), subject to the general
supervision of the Company's Board of Directors, manage the Company's
portfolios. As compensation for the services rendered under the Investment
Advisory Agreements and the assumption of the expenses related thereto, GSAM is
entitled to a fee, computed daily and payable monthly, at an annual rate equal
to .50%, .55%, .75% and .25% of the average daily net assets of the Balanced,
Growth and Income, Small Cap Equity and International Equity Funds,
respectively. GSFM is entitled to a fee of .50% and .75% of the average daily
net assets of the Select Equity and Capital Growth Funds, respectively. GSAM
International is entitled to an advisory fee for the Asia Growth Fund and a
subadvisory fee for the International Equity Fund of .75% and .50% of the
average daily net assets for those funds, respectively.
GSAM also acts as the Funds' administrator pursuant to Administration
Agreements. Under these Administration Agreements, GSAM administers the Funds'
business affairs, including providing facilities. As compensation for the
services rendered pursuant to the Administration Agreements, GSAM is entitled to
a fee of .15% of the average daily net assets of the Balanced and Growth and
Income Funds, and .25% of the average daily net assets of the Select Equity,
Capital Growth, Small Cap Equity, International Equity and Asia Growth Funds.
Goldman Sachs has voluntarily agreed to reduce or limit certain "Other
Expenses" for the Balanced, Select Equity, Growth and Income, International
Equity and Asia Growth Funds (excluding advisory, administration, service,
distribution and authorized dealer service fees and litigation and
indemnification costs, taxes, interest, brokerage commissions and extraordinary
expenses and with the exception of the Balanced Fund, transfer agent fees) until
further notice to the extent such expenses exceed .10%, .06%, .11%, .20% and
.24% of the average daily net assets of the funds, respectively.
Goldman Sachs serves as the Distributor of shares of the Funds pursuant to
Distribution Agreements. Goldman Sachs may receive a portion of the Class A
salesload and Class B back-end salesload imposed and has advised the Company
that it retained approximately $94,000, $380,000, $555,000, $323,000, $219,000,
$1,563,000 and $1,397,000 during the year ended January 31, 1997 for the
Balanced, Select Equity, Growth and Income, Capital Growth, Small Cap Equity,
International Equity and Asia Growth Funds, respectively.
The Company, on behalf of each Fund, has adopted a Distribution Plan (the
"Distribution Plan") pursuant to Rule 12b-1. Under the Distribution Plan,
Goldman Sachs is entitled to a quarterly fee from each Fund for distribution
services equal, on an annual basis, to .25% and .75% of a Fund's average daily
net assets attributable to Class A and Class B shares, respectively.
The Company, on behalf of each Fund, has adopted an Authorized Dealer
Service Plan (the "Service Plan") pursuant to which Goldman Sachs and Authorized
Dealers are compensated for providing personal and account maintenance services.
Each Fund pays a fee under its Service Plan equal, on an annual basis, to .25%
of its average daily net assets attributable to Class A and Class B shares.
Goldman Sachs also serves as the Transfer Agent of the funds for a fee.
For the year ended January 31, 1997, the Advisors, Administrator and
Distributor have voluntarily agreed to waive certain fees and reimburse other
expenses as follows (in thousands):
- --------------------------------------------------------------------------------
67
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
January 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Waivers
------- Reimburse-
Admin- Class A Reimburse- ment
Fund Adviser istrator 12b-1 ment Outstanding
- ------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balanced $ -- $ -- $ 153 $ 320 $ 88
Select Equity 170 282 69 105 3
Growth and
Income -- -- 1,113 -- --
Capital
Growth -- -- 2,171 -- --
Small Cap
Equity -- -- 530 -- --
International
Equity 50 464 171 145 --
Asia Growth 103 259 100 50 --
</TABLE>
The Investment Advisors, Administrator and Distributor may discontinue or
modify such waivers and limitations in the future at their discretion.
At January 31, 1997, the amounts owed to affiliates were as follows(in
thousands):
<TABLE>
<CAPTION>
Authorized
Admin- Distri- Dealer Transfer
Fund Adviser istrator butor Service Agent Total
- --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balanced $ 33 $ 10 $ 2 $ 15 $ 38 $ 98
Select Equity 143 49 56 57 84 389
Growth and
Income 284 78 28 119 207 716
Capital
Growth 568 190 2 190 210 1,160
Small Cap
Equity 134 45 2 45 120 346
International
Equity 391 78 105 116 143 833
Asia Growth 171 36 50 53 90 400
</TABLE>
4. Portfolio Securities Transactions
Purchases and proceeds of sales or maturities of securities (excluding
short-term investments, futures and options) for the year ended January 31,
1997, were as follows:
<TABLE>
<CAPTION>
Sales or
Fund Purchases Maturities
- --------- --------------- -------------
<S> <C> <C>
Balanced $146,297,709 $123,056,708
Select Equity 242,635,637 102,479,847
Growth and Income 330,177,173 256,802,366
Capital Growth 436,178,218 569,122,643
Small Cap Equity 202,036,820 256,627,457
International Equity 400,682,323 166,164,906
Asia Growth 192,125,629 118,802,040
</TABLE>
Included in the above amounts were purchases and proceeds of sales or
maturities of governmental securities for the Balanced Fund in the amounts of
$99,727,748 and $91,845,598, respectively.
For the year ended January 31, 1997, written put option transactions in the
Balanced Fund were as follows:
<TABLE>
<CAPTION>
Number of Premium
Written Options Contracts Received
- ---------------------- ------------- -------------
<S> <C> <C>
Balance outstanding at
beginning of year 0 $ 0
Options written 32 5,416
Options repurchased (32) (5,416)
--------------- ---------------
Balance outstanding,
end of year 0 $ 0
=============== ===============
</TABLE>
For the year ended January 31, 1997, written call option transactions in the
Growth and Income Fund were as follows:
<TABLE>
<CAPTION>
Number of Premium
Written Options Contracts Received
- ---------------------- ------------- -------------
<S> <C> <C>
Balance outstanding at
beginning of year 0 $ 0
Options written 438 73,608
Options repurchased (438) (73,608)
--------------- ---------------
Balance outstanding,
end of year 0 $ 0
=============== ===============
</TABLE>
- --------------------------------------------------------------------------------
68
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
For the year ended January 31, 1997, written put option transactions in the
Small Cap Equity Fund were as follows:
<TABLE>
<CAPTION>
Number of Premium
Written Options Contracts Received
- ---------------------- ------------- -------------
<S> <C> <C>
Balance outstanding at
beginning of year 0 $ 0
Options written 2,100 575,871
Options expired (9) (2,026)
Options exercised (1,091) (238,096)
Options repurchased (1,000) (335,749)
--------------- ---------------
Balance outstanding,
end of year 0 $ 0
=============== ===============
</TABLE>
Certain risks arise related to call and put options from the possible
inability of counterparties to meet the terms of their contracts.
At January 31, 1997, the Balanced Fund had the following outstanding forward
foreign currency exchange contracts:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Foreign Currency Value on Unrealized
Sale Contracts Settlement Date Current Value Gain
- --------------------------------------------------------------------
<S> <C> <C> <C>
Australian Dollar
expiring 3/14/97 $777,277 $770,585 $6,692
- --------------------------------------------------------------------
Total Foreign
Currency Sale
Contracts $777,277 $770,585 $6,692
- --------------------------------------------------------------------
</TABLE>
At January 31, 1997, the International Equity Fund had the following
outstanding forward foreign currency exchange contracts:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Foreign Currency Value on Unrealized
Sale Contracts Settlement Date Current Value Gain (Loss)
- --------------------------------------------------------------------
<S> <C> <C> <C>
Swiss Franc
expiring 4/28/97 $39,343,000 $39,665,062 $ (322,062)
Deutsche Mark
expiring 2/27/97 22,305,725 22,183,180 122,545
Hong Kong Dollar
expiring 8/8/97 38,565,981 38,530,005 35,976
Japanese Yen
expiring 4/24/97 122,316,352 119,792,909 2,523,443
- --------------------------------------------------------------------
Total Foreign Currency
Sale Contracts $222,531,058 $220,171,156 $2,359,902
- --------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------
Foreign Currency Value on Unrealized
Purchase Contracts Settlement Date Current Value Gain (Loss)
- --------------------------------------------------------------------
<S> <C> <C> <C>
Hong Kong Dollar
expiring 2/3/97 $35,454 $35,454 $--
- --------------------------------------------------------------------
Total Foreign Currency
Purchase Contracts $35,454 $35,454 $--
- --------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The contractual amounts of forward foreign currency exchange contracts do
not necessarily represent the amounts potentially subject to risk. The
measurement of the risks associated with these instruments is meaningful only
when all related and offsetting transactions are considered. At January 31,
1997, the Balanced and International Equity Fund's had sufficient cash and
securities to cover any commitments under these contracts.
The Balanced and International Equity Funds have recorded a "Receivable for
forward foreign currency exchange contracts" and "Payable for forward foreign
currency exchange contracts" resulting from open and closed but not settled
forward foreign currency exchange contracts of $6,692 and $0, and $2,684,757 and
$3,434,535, respectively, in the accompanying Statements of Assets and
Liabilities. Included in these amounts for the International Equity Fund are
$2,793 and $3,112,473, respectively, related to forward contracts closed but not
settled as of January 31, 1997.
For the year ended January 31, 1997, Goldman Sachs earned approximately
$5,000, $78,000, $304,000, $36,000, $11,000 and $66,000 of brokerage commissions
from portfolio transactions executed on behalf of the Balanced, Growth and
Income, Capital Growth, Small Cap Equity, International Equity and Asia Growth
Funds, respectively.
5. Repurchase Agreements
During the term of a repurchase agreement, the value of the underlying
securities, including accrued interest, is required to equal or exceed the value
of the repurchase agreement. The underlying securities for all repurchase
agreements are held in safekeeping at the Funds' custodian.
- --------------------------------------------------------------------------------
69
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
January 31, 1997
- --------------------------------------------------------------------------------
6. Joint Repurchase Agreement Account
The Funds, together with other registered investment companies having advisory
agreements with GSAM or GSFM, transfer uninvested cash balances into joint
accounts, the daily aggregate balance of which is invested in one or more
repurchase agreements. The underlying securities for the repurchase agreements
are U.S. Treasury and agency obligations. At January 31, 1997, the Balanced,
Select Equity, Growth and Income, Capital Growth and Small Cap Equity Funds had
undivided interests in the repurchase agreements in the following joint account
which equaled $9,200,000, $3,600,000, $26,800,000, $18,300,000 and $16,600,000,
respectively, in principal amount. At January 31, 1997, the repurchase
agreements held in this joint account, along with the corresponding underlying
securities (including the type of security, market value, interest rate and
maturity date) were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
- --------------------------------------------------------------------
Bear Stearns Securities, Inc., dated 01/31/97, repurchase
price $800,375,333 (GNMA: $26,604,837, 7.50%, 10/15/26;
FNMA: $720,411,516, 5.50%-8.00%, 02/01/09-09/01/26;
FHLMC: $77,372,676, 6.00%-8.00%, 04/01/98-07/01/26)
<S> <C> <C> <C>
$800,000,000 5.63% 02/03/97 $ 800,000,000
<CAPTION>
Nomura Securities, Inc. dated 01/31/97, repurchase price
$100,047,083 (GNMA: $102,007,864, 5.50%-10.25%
01/15/20-01/20/27)
<S> <C> <C> <C>
100,000,000 5.65 02/03/97 100,000,000
<CAPTION>
Lehman Government Securities, dated 01/31/97, repurchase
price $201,894,173 (U.S. Treasury Notes: $191,656,654,
6.38%, 01/15/00-08/15/02; U.S. Treasury Stripped
Securities: $14,095,535, 05/15/02-11/15/03)
<S> <C> <C> <C>
201,800,000 5.60 02/03/97 201,800,000
</TABLE>
- --------------------------------------------------------------------
Total Joint Repurchase Agreement Account $ 1,101,800,000
- --------------------------------------------------------------------
7. Line of Credit Facility
The Funds participate in a $250,000,000 uncommitted, unsecured revolving line of
credit facility. In addition, the Funds, except the Select Equity Fund,
participate in a $50,000,000 committed, unsecured revolving line of credit
facility. Both facilities are to be used solely for temporary or emergency
purposes. Under the most restrictive arrangement, each Fund must own securities
having a market value in excess of 300% of the total bank borrowings. The
interest rate on the borrowings is based on the Federal Funds rate. The
committed facility also requires a fee to be paid based on the amount of the
commitment which has not been utilized. During the year ended January 31, 1997,
the Funds did not have any borrowings under these facilities.
8. Transactions With Affiliated Companies
A Fund is considered to be invested in an affiliated company if that Fund owns
greater than five percent of the outstanding voting securities of such company.
Transactions during the year ended January 31, 1997 which are considered to be
affiliates of Small Cap Equity are as follows (dollar amounts in thousands):
<TABLE>
<CAPTION>
Purchases Sales Realized Dividend Market
Affiliate Name at Cost Proceeds Gain/(Loss) Income Value
- --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
American Safety
Razor $ -- $5,751 $ 289 $ -- $ --
- --------------------------------------------------------------------
Alpine Lace
Brands, Inc. 7,790 -- -- -- 2,341
- --------------------------------------------------------------------
APS Holding
Corp. 10,305 654 290 -- 7,869
- --------------------------------------------------------------------
J. Baker, Inc. 1,591 1,349 (1,090) 60 7,565
- --------------------------------------------------------------------
Black Box, Inc. -- 23,013 14,149 -- --
- --------------------------------------------------------------------
Brookstone, Inc. -- 2,722 (758) -- 5,939
- --------------------------------------------------------------------
Congoleum Corp. -- 2,323 (102) -- 3,156
- --------------------------------------------------------------------
Hollinger
International
Corp. -- 10,903 (1,311) 112 --
- --------------------------------------------------------------------
International Post
Ltd. -- 2,215 (3,933) -- 1,729
- --------------------------------------------------------------------
Morningstar
Group Inc. -- 12,216 6,346 -- --
- --------------------------------------------------------------------
Mortons
Restaurant
Group, Inc. -- 4,106 1,625 -- 6,439
- --------------------------------------------------------------------
Opinion Research
Corp. -- -- -- -- 2,022
- --------------------------------------------------------------------
Pegasus
Communications
Corp. 3,697 -- -- -- 3,224
- --------------------------------------------------------------------
Platinum
Entertainment
Corp. 3,354 -- -- -- 2,675
- --------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
70
<PAGE>
9. Other Matters
As of January 31, 1997, Goldman, Sachs & Co. Employees Profit Sharing and
Retirement Income Plan was the beneficial owner of approximately 14% of the
outstanding shares of the Select Equity Fund.
10. Certain Reclassifications
In accordance with Statement of Position 93-2, the Balanced, Select Equity,
Growth and Income, International Equity and Asia Growth Funds have reclassified
$13,068, $9,549, $18,764, $302,042 and $31,712, respectively, from paid-in
capital to accumulated undistributed net investment income. Additionally, the
Small Cap Equity Fund has reclassified $1,532,848 from accumulated net realized
gains on investments to accumulated net investment loss and $18,742 from paid-in
capital to accumulated net investment loss. The Select Equity Fund reclassified
$40,540 from accumulated net realized gains on investments to distributions in
excess of net investment income. The International Equity Fund and the Asia
Growth Fund have reclassified $205,942 and $338,857 from accumulated net
realized foreign currency loss to distributions in excess of net investment
income, respectively. The Asia Growth Fund also reclassified $377,435 from
accumulated net realized gains on investments to distributions in excess of net
investment income. These reclassifications have no impact on the net asset value
of the Funds and are designed to present the Funds' capital accounts on a tax
basis.
71
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
January 31, 1997
- --------------------------------------------------------------------------------
11. Summary of Share Transactions
Share activity for the year ended January 31, 1997 is as follows:
<TABLE>
<CAPTION>
Balanced Fund Select Equity Fund Growth and Income Fund
- ------------------------------------------------------------------------------------------------------------------
Shares Dollars Shares Dollars Shares Dollars
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A shares
Shares sold 1,529,469 $27,172,279 3,862,697 $81,642,386 5,616,082 $121,074,992
Reinvestment of dividends
and distributions 310,437 5,598,883 370,586 8,175,333 2,390,917 52,287,188
Shares repurchased (446,535) (7,533,272) (1,109,202) (23,823,146) (3,328,038) (72,163,062)
-------------------------------------------------------------------------------------
1,393,371 25,237,890 3,124,081 65,994,573 4,678,961 101,199,118
-------------------------------------------------------------------------------------
Class B shares
Shares sold 109,171 2,001,768 733,802 15,946,016 729,877 16,222,639
Reinvestment of dividends
and distributions 5,284 95,768 24,314 535,407 35,976 787,421
Shares repurchased (1,795) (32,396) (13,894) (310,118) (14,764) (340,546)
-------------------------------------------------------------------------------------
112,660 2,065,140 744,222 16,171,305 751,089 16,669,514
-------------------------------------------------------------------------------------
Institutional shares
Shares sold -- -- 3,151,881 66,277,175 8,228 186,173
Reinvestment of dividends
and distributions -- -- 275,197 6,102,331 92 2,020
Shares repurchased -- -- (363,536) (7,991,198) -- --
-------------------------------------------------------------------------------------
-- -- 3,063,542 64,388,308 8,321 188,193
-------------------------------------------------------------------------------------
Service shares
Shares sold -- -- 154,590 3,344,141 134,652 2,879,042
Reinvestment of dividends
and distributions -- -- 4,126 91,166 12,587 276,180
Shares repurchased -- -- (1,252) (28,032) (10,262) (227,331)
-------------------------------------------------------------------------------------
-- -- 157,464 3,407,275 136,977 2,927,891
-------------------------------------------------------------------------------------
Net increase (decrease) in
shares 1,506,031 $27,303,030 7,089,309 $149,961,461 5,575,348 $120,984,716
=====================================================================================
<CAPTION>
Capital Growth Fund
- -------------------------------------------------------
Shares Dollars
--------------------------
<S> <C> <C>
Class A shares
Shares sold 4,677,047 $73,029,007
Reinvestment of dividends
and distributions 5,870,272 89,898,521
Shares repurchased (14,635,348) (229,277,58)
----------------------------
(4,088,029) (66,350,058)
----------------------------
Class B shares
Shares sold 188,331 2,979,890
Reinvestment of dividends
and distributions 12,408 190,353
Shares repurchased (7,499) (122,231)
----------------------------
193,240 3,048,012
----------------------------
Institutional shares
Shares sold -- --
Reinvestment of dividends
and distributions -- --
Shares repurchased -- --
----------------------------
----------------------------
Service shares
Shares sold -- --
Reinvestment of dividends
and distributions -- --
Shares repurchased -- --
----------------------------
-- --
----------------------------
Net increase (decrease) in
shares (3,894,789) $(63,302,046)
============================
</TABLE>
- --------------------------------------------------------------------------------
72
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Small Cap Equity Fund International Equity Fund Asia Growth Fund
- ----------------------------------------------------------------------------------------------------------------
Shares Dollars Shares Dollars Shares Dollars
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A shares
Shares sold 2,508,268 $52,353,524 12,103,239 $230,847,197 7,588,351 $124,281,405
Reinvestment of dividends
and distributions 475,255 9,732,097 241,377 4,749,851 11,669 184,607
Shares repurchased (4,697,902) (94,933,279) (3,820,157) (72,226,935) (3,945,614) (63,723,269)
------------------------------------------------------------------------------------
(1,714,379) (32,847,658) 8,524,459 163,370,113 3,654,406 60,742,743
------------------------------------------------------------------------------------
Class B shares
Shares sold 173,849 3,765,689 1,000,064 19,327,085 210,879 3,433,876
Reinvestment of dividends
and distributions 7,086 144,474 7,924 155,475 279 4,391
Shares repurchased (4,391) (91,616) (10,181) (198,263) (4,771) (76,391)
------------------------------------------------------------------------------------
176,544 3,818,547 997,807 19,284,297 206,387 3,361,876
------------------------------------------------------------------------------------
Institutional shares
Shares sold -- -- 3,657,119 70,627,799 1,041,822 16,733,545
Reinvestment of dividends
and distributions -- -- 28,973 572,219 2,040 32,281
Shares repurchased -- -- (161,923) (3,153,741) (228,363) (3,651,351)
------------------------------------------------------------------------------------
-- -- 3,524,169 68,046,277 815,499 13,114,475
------------------------------------------------------------------------------------
Service shares
Shares sold -- -- 34,686 673,880 -- --
Reinvestment of dividends
and distributions -- -- 200 3,947 -- --
Shares repurchased -- -- (56) (1,098) -- --
------------------------------------------------------------------------------------
-- -- 34,830 676,729 -- --
------------------------------------------------------------------------------------
Net increase (decrease) in
shares (1,537,835) $(29,029,111) 13,081,265 $251,377,416 4,676,292 $77,219,094
=====================================================================================
<CAPTION>
Share activity for the year ended January 31, 1996 is as follows:
Select Equity Fund
- -------------------------------------------------------------
Shares Dollars
------------- ---------------
<S> <C> <C>
Class A shares
Shares sold 2,479,285 $44,569,920
Reinvestment of dividends and 161,481
distributions 3,032,597
Shares repurchased (2,578,247) (45,692,944)
------------- ---------------
62,519 1,909,573
------------- ---------------
Institutional shares
Shares sold 3,220,915 57,579,398
Reinvestment of dividends and
distributions 97,993 1,847,978
Shares repurchased (30,492) (567,188)
------------- ----------------
3,288,416 $58,860,188
------------- ----------------
Net increase 3,350,935 $60,769,761
============= ================
</TABLE>
- --------------------------------------------------------------------------------
73
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Income (loss) from Distributions to
investment operations/h/ shareholders
------------------------------- ------------------------------------------
Net realized From
and unrealized net realized
Net asset gain (loss) on From gain on In excess
value, Net investments, net investment of net
beginning investment options and investment and futures investment
of period income futures income transactions income
-----------------------------------------------------------------------------------------
BALANCED FUND
- ------------------------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997 - Class A Shares................ $17.31 $0.66 $2.47 $(0.66) $(1.00) --
1997 - Class B Shares/b/............. 17.46 0.42 2.34 (0.42) (1.00) (0.07)
1996 - Class A Shares................ 14.22 0.51 3.43 (0.50) (0.35) --
For the Period Ended January 31,
- --------------------------------
1995 - Class A Shares/d/............. 14.18 0.10 0.02 (0.08) -- --
<CAPTION>
Net asset
Net increase value, Portfolio Average
in net end of Total turnover commission
asset value period return/a/ rate rate/g/
---------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
- ------------------------------
<S> <C> <C> <C> <C> <C>
1997 - Class A Shares................ $1.47 $18.78 18.59% 208.11/f/ $.0587
1997 - Class B Shares(b)............. 1.27 18.73 16.22/c/ 208.11/f/ .0587
1996 - Class A Shares................ 3.09 17.31 28.10 197.10/f/ --
For the Period Ended January 31,
- -------------------------------------
1995 - Class A Shares/d/............. 0.04 14.22 0.87/c/ 14.71/c/ --
<CAPTION>
Ratio assuming no
voluntary waiver of fees
or expense limitations
-------------------------------
Net Ratio of Ratio of net Ratio of net
assets at net investment Ratio of investment
end of expenses to income to expenses to income (loss)
period average net average net average to average
(in 000s) assets assets net assets net assets
-----------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
- ------------------------------
<S> <C> <C> <C> <C> <C>
1997 - Class A Shares................ $81,410 1.00% 3.76% 1.77% 2.99%
1997 - Class B Shares/b/............. 2,110 1.75/e/ 2.59/e/ 2.27/e/ 2.07/e/
1996 - Class A Shares................ 50,928 1.00 3.65 1.90 2.75
For the Period Ended January 31,
- --------------------------------
1995 - Class A Shares/d/............. 7,510 1.00/e/ 3.39/e/ 8.29/e/ (3.90)/e/
</TABLE>
- --------------------------
/a/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no sales
or redemption charges. Total return would be reduced if a sales or
redemption charge were taken into account.
/b/ For the period from May 1, 1996 (commencement of operations) to January 31,
1997.
/c/ Not annualized.
/d/ For the period from October 12, 1994 (commencement of operations) to
January 31, 1995.
/e/ Annualized.
/f/ Includes the effect of mortgage dollar roll transactions.
/g/ For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged. This rate may vary due to various types
of transactions and number of security trades executed.
/h/ Includes the balancing effect of calculating per share amounts.
- --------------------------------------------------------------------------------
(The accompanying notes are an integral part of these financial statements.)
74
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Income (loss) from Distributions to
investment operations/(h)/ shareholders
========================== ====================================
Net realized From
and unrealized net realized
Net asset gain (loss) on From gain on In excess
value, Net investments, net investment of net
beginning investment options and investment and futures investment
of period income futures income transactions income
============================================================================
SELECT EQUITY FUND
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Year Ended January 31,
==============================
1997 - Class A Shares ........................ 19.66 $0.16 $4.46 $(0.16) $(0.80) --
1997 - Class B Shares/(f)/.................... 20.44 0.04 3.70 (0.04) (0.80) (0.16)
1997 - Institutional Shares .................. 19.71 0.30 4.51 (0.28) (0.80) --
1997 - Service Shares/(f)/.................... 21.02 0.13 3.15 (0.13) (0.80) (0.10)
1996 - Class A Shares ........................ 14.61 0.19 5.43 (0.16) (0.41) --
1996 - Institutional Shares/(d)/.............. 16.97 0.16 3.23 (0.24) (0.41) --
1995 - Class A Shares ........................ 15.93 0.20 (0.38) (0.20) (0.94) --
1994 - Class A Shares ........................ 15.46 0.17 2.08 (0.17) (1.61) --
1993 - Class A Shares ........................ 15.05 0.22 0.41 (0.22) -- --
For the Period Ended January 31,
================================
1992 - Class A Shares/(e)/.................... 14.17 0.11 0.88 (0.11) -- --
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Net Net Net
increase asset assets
(decrease) value, Portfolio Average end of
in net end of Total turnover commission period
asset value period return/(a)/ rate rate/(g)/ (in 000s)
======================================================================
SELECT EQUITY FUND
- ------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
===============================
<S> <C> <C> <C> <C> <C> <C>
1997 - Class A Shares .............. $3.66 $23.32 23.75% 37.28% $.0417 $225,968
1997 - Class B Shares/(f)/.......... 2.74 23.18 18.59/(b)/ 37.28 .0417 17,258
1997 - Institutional Shares ........ 3.73 23.44 24.63 37.28 .0417 148,942
1997 - Service Shares/(f)/.......... 2.25 23.27 15.92/(b)/ 37.28 .0417 3,666
1996 - Class A Shares .............. 5.05 19.66 38.63 39.35 -- 129,045
1996 - Institutional Shares/(d)/.... 2.74 19.71 20.14/(b)/ 39.35/(b)/ -- 64,829
1995 - Class A Shares .............. (1.32) 14.61 (1.10) 56.18 -- 94,968
1994 - Class A Shares .............. 0.47 15.93 15.12 87.73 -- 92,769
1993 - Class A Shares .............. 0.41 15.46 4.30 144.93 -- 117,757
For the Period Ended January 31,
================================
1992 - Class A Shares/(e)/............ 0.88 15.05 7.01/(b)/ 135.02(c) -- 151,142
</TABLE>
<TABLE>
<CAPTION>
Ratios assuming no
voluntary waiver of fees
or expense limitations
-------------------------
Ratio of Ratio of net Ratio of net
net investment Ratio of investment
expenses income to expenses to income
to average average net average to average
assets assets net assets net assets
==================================================
SELECT EQUITY FUND
- -----------------------------------------------------------------------------------------------------
For the Year Ended January 31,
==============================
<S> <C> <C> <C> <C>
1997 - Class A Shares ........................ 1.29% 0.91% 1.53% 0.67%
1997 - Class B Shares/(f)/.................... 1.83/(c)/ 0.06/(c)/ 2.00/(c)/ (0.11)/(c)/
1997 - Institutional Shares .................. 0.65 1.52 0.85 1.32
1997 - Service Shares/(f)/.................... 1.15/(c)/ 0.69/(c)/ 1.35/(c)/ 0.49/(c)/
1996 - Class A Shares ........................ 1.25 1.01 1.55 0.71
1996 - Institutional Shares/(d)/.............. 0.65/(c)/ 1.49/(c)/ 0.96/(c)/ 1.18/(c)/
1995 - Class A Shares ........................ 1.38 1.33 1.63 1.08
1994 - Class A Shares ........................ 1.42 0.92 1.67 0.67
1993 - Class A Shares ........................ 1.28 1.30 1.53 1.05
For the Period Ended January 31,
================================
1992 - Class A Shares/(e)/.................... 1.57/(c)/ 1.24/(c)/ 1.82/(c)/ 0.99/(c)/
</TABLE>
- --------------
/(a)/ Assumes investment at the net asset value at the beginning of the
period, reinvestment of all dividends and distributions, a complete
redemption of the investment at the net asset value at the end of the
period and no sales or redemption charges. Total return would be reduced if
a sales or redemption charge were taken into account.
/(b)/ Not annualized.
/(c)/ Annualized.
/(d)/ For the period from June 15, 1995 (commencement of operations) to January
31, 1996.
/(e)/ For the period from May 24, 1991 (commencement of operations) to January
31, 1992.
/(f)/ For the period from May 1 and June 7, 1996 (commencement of operations) to
January 31, 1997 for Class B and Service shares, respectively.
/(g)/ For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged. This rate may vary due to various types
of transactions and number of security trades executed.
/(h)/ Includes the balancing effect of calculating per share amounts.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
75
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from
investment
operations/(h)/ Distributions to shareholders
====================== =====================================
Net
realized
and From net
Net unrealized realized
asset gain(loss) gain In Net
value, on on excess Increase
beginning Net investments From net investment of net Additional in net
of investment and investment and option investment paid-in asset
period income options income transactions income capital value
===============================================================================================
GROWTH AND INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
==============================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997 - Class A Shares ............. $19.98 $0.35 $5.18 $(0.35) $(1.97) $ (0.01) $ -- $3.20
1997 - Class B Shares/(f)/ ........ 20.82 0.17 4.31 (0.17) (1.97) (0.06) -- 2.28
1997 - Institutional Shares/(f)/ .. 21.25 0.29 3.96 (0.30) (1.97) (0.04) -- 1.94
1997 - Service Shares/(f)/ ........ 20.71 0.28 4.50 (0.28) (1.97) (0.07) -- 2.46
1996 - Class A Shares ............. 15.80 0.33 4.75 (0.30) (0.60) -- -- 4.18
1995 - Class A Shares ............. 15.79 0.20/(b)/ 0.30/(b)/ (0.20) (0.33) (0.07) 0.11/(b)/ 0.01
<CAPTION>
For the Period Ended January 31,
==================================
<S>
1994 - Class A Shares/(c)/......... 14.18 0.15 1.68 (0.15) (0.06) (0.01) -- 1.61
</TABLE>
<TABLE>
<CAPTION>
Ratio of Ratio of
Net net net
Net assets expenses investment
asset at to income to
value Total Portfolio Average end of average average
end of return turnover commission period net net
period /(a)/ rate rate/(g)/ (in 000s) assets assets
===================================================================================
GROWTH AND INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
==============================
<S> <C> <C> <C> <C> <C> <C> <C>
1997 - Class A Shares ............. $23.18 28.42% 53.03% $.0586 $615,103 1.22% 1.60%
1997 - Class B Shares/(f)/ ........ 23.10 22.23/(d)/ 53.03 .0586 17,346 1.93/(e)/ 0.15/(e)/
1997 - Institutional Shares/(f)/ .. 23.19 20.77/(d)/ 53.03 .0586 193 0.82/(e)/ 1.36/(e)/
1997 - Service Shares/(f)/ ........ 23.17 23.87/(d)/ 53.03 .0586 3,174 1.32/(e)/ 0.94/(e)/
1996 - Class A Shares ............. 19.98 32.45 57.93 -- 436,757 1.20 1.67
1995 - Class A Shares ............. 15.80 3.97 71.80 -- 193,772 1.25 1.28
<CAPTION>
For the Period Ended January 31,
==================================
<S> <C> <C> <C> <C> <C> <C> <C>
1994 - Class A Shares/(c)/......... 15.79 13.08/(d)/102.23/(d)/ -- 41,528 1.25/(e)/ 1.23/(e)/
</TABLE>
<TABLE>
<CAPTION>
Ratios assuming no
voluntary waiver of fees
or expense limitations
=================================
Ratio of
Ratio of net investment
expenses income (loss)
to average to average
net assets net assets
=================================
GROWTH AND INCOME FUND
- -----------------------------------------------------------------------------
For the Year Ended January 31,
==============================
<S> <C> <C>
1997 - Class A Shares ............. 1.43% 1.39%
1997 - Class B Shares/(f/) ........ 1.93/(e)/ 0.15/(e)/
1997 - Institutional Shares/(f)/ .. 0.82/(e)/ 1.36/(e)/
1997 - Service Shares/(f)/ ........ 1.32/(e)/ 0.94/(e)/
1996 - Class A Shares ............. 1.45 1.42
1995 - Class A Shares ............. 1.58 0.95
<CAPTION>
For the Period Ended January 31,
==================================
<S>
1994 - Class A Shares/(c)/......... 3.24/(e)/ (0.76)/(e)/
</TABLE>
- ----------------------------------
/(a)/Assumes investment at the net asset v alue at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no sales
or redemption charges. Total return would be reduced if a sales or
redemption charge were taken into account.
/(b)/Calculated based on the average shares outstanding methodology.
/(c)/For the period from February 5, 1993 (commencement of operations) to
January 31, 1994.
/(d)/Not annualized.
/(e)/Annualized.
/(f)/For the period from March 6, May 1 and June 3, 1996 (commencement of
operations) to January 31, 1997 for Service, Class B and Institutional
shares, respectively.
/(g)/For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged. This rate may vary due to various types
of transactions and number of security trades executed.
/(h)/Includes the balancing effect of calculating per share amounts.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
76
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from
investment operations/(g)/ Distributions to shareholders
=========================== =============================================
Net realized
and unrealized From net
Net asset gain (loss) on realized gain In excess
value, Net investments, From net on investments, of net
beginning investment options and investment options investment
of period income futures income and futures income
=======================================================================================
CAPITAL GROWTH FUND
- -----------------------------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
==============================
<S> <C> <C> <C> <C> <C> <C>
1997 - Class A Shares.................... $14.91 $0.10 $3.56 $ (0.10) $ (1.72) $(0.02)
1997 - Class B Shares(b)................. 15.67 0.01 2.81 (0.01) (1.72) (0.09)
1996 - Class A Shares.................... 13.67 0.12 3.93 (0.12) (2.69) --
1995 - Class A Shares.................... 15.96 0.03 (0.69) (0.01) (1.62) --
1994 - Class A Shares.................... 14.64 0.02 2.40 (0.01) (1.07) (0.02)
1993 - Class A Shares.................... 13.65 0.06 2.28 (0.07) (1.28) --
1992 - Class A Shares.................... 11.10 0.28 2.90 (0.31) (0.32) --
For the Period Ended January 31,
================================
1991 - Class A Shares/(c)/............... 11.34 0.34 (0.27) (0.31) -- --
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Net
Net increase Net asset assets at
(decrease) value, Portfolio Average end of
in net end of Total turnover commission period
asset value period return/(a)/ rate rate/(f)/ (in 000s)
=======================================================================================
- -----------------------------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
==============================
<S> <C> <C> <C> <C> <C> <C>
1997 - Class A Shares.................... $1.82 $16.73 25.97% 52.92% $.0563 $920,646
1997 - Class B Shares(b)................. 1.00 16.67 19.39/(d)/ 52.92 .0563 3,221
1996 - Class A Shares.................... 1.24 14.91 30.45 63.90 -- 881,056
1995 - Class A Shares.................... (2.29) 13.67 (4.38) 38.36 -- 862,105
1994 - Class A Shares.................... 1.32 15.96 16.89 36.12 -- 833,682
1993 - Class A Shares.................... 0.99 14.64 18.01 58.93 -- 665,976
1992 - Class A Shares.................... 2.55 13.65 29.31 48.93 -- 500,307
For the Period Ended January 31,
================================
1991 - Class A Shares(c)................. (0.24) 11.10 0.84/(d)/ 35.63/(d)/ -- 437,533
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Ratios assuming no
voluntary waiver of fees
=============================
Ratio of Ratio of net Ratio of net
net investment Ratio of investment
expenses to income (loss) to expenses to income (loss)
average net average average to average
assets net assets net assets net assets
====================================================================
- ----------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
==============================
<S> <C> <C> <C> <C>
1997 - Class A Shares.................... 1.40% 0.62% 1.65% 0.37%
1997 - Class B Shares/(b)/................. 2.15/(e)/ (0.39)/(e)/ 2.15/(e)/ (0.39)/(e)/
1996 - Class A Shares.................... 1.36 0.65 1.61 0.40
1995 - Class A Shares.................... 1.38 0.16 1.63 (0.09)
1994 - Class A Shares.................... 1.38 0.13 1.63 (0.12)
1993 - Class A Shares.................... 1.41 0.42 1.66 0.17
1992 - Class A Shares.................... 1.53 2.09 1.78 1.84
For the Period Ended January 31,
- --------------------------------
1991 - Class A Shares/(c)/............... 1.27/(d)/ 3.24/(d)/ 1.47/(d)/ 3.04/(d)/
</TABLE>
- --------------------------
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no sales
or redemption charges. Total return would be reduced if a sales or
redemption charge were taken into account.
/(b)/For the period from May 1, 1996 (commencement of operations) to
January 31, 1997.
/(c)/For the period from April 20, 1990 (commencement of operations) to January
31, 1991.
/(d)/Not annualized.
/(e)/Annualized.
/(f)/For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged. This rate may vary due to various types
of transactions and number of security trades executed.
/(g)/Includes the balancing effect of calculating per share amounts.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
77
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from Distributions to
investment operations/(g)/ shareholders
=========================== =======================================
From In excess
net of
Net realized realized realized Net
and unrealized gain on gains on increase
Net asset Net gain (loss) on From investment, investment (decrease)
value, investment investments, net option and option and in net
beginning income options and investment futures futures asset
of period (loss) futures income transactions transactions value
==============================================================================================
SMALL CAP EQUITY FUND
- -----------------------------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
===================================
<S> <C> <C> <C> <C> <C> <C> <C>
1997 - Class A Shares ............. $17.29 $(0.21) $4.92 $ - $(1.09) $ - $3.62
1997 - Class B Shares/(b)/......... 20.79 (0.11) 1.21 - (1.09) - 0.01
1996 - Class A Shares ............. 16.14 (0.23) 1.39 - (0.01) - 1.15
1995 - Class A Shares ............. 20.67 (0.07) (3.53) - (0.69) (0.24) (4.53)
1994 - Class A Shares ............. 16.68 (0.04) 5.03 - (1.00) - 3.99
For the Period Ended January 31,
===================================
1993 - Class A Shares/(c)/......... 14.18 0.03 2.50 (0.03) - - 2.50
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Net asset Net assets
value, Portfolio Average at end of
end of Total turnover commission period
period return/(a)/ rate rate/(f)/ (in 000s)
================================================================
SMALL CAP EQUITY FUND
- ---------------------------------------------------------------------------------------------------
For the Year Ended January 31,
===================================
<S> <C> <C> <C> <C> <C>
1997 - Class A Shares ............. $20.91 27.28% 99.46% $.0461 $212,061
1997 - Class B Shares/(b)/......... 20.80 5.39/(d)/ 99.46 .0461 3,674
1996 - Class A Shares ............. 17.29 7.20 57.58 - 204,994
1995 - Class A Shares ............. 16.14 (17.53) 43.67 - 319,487
1994 - Class A Shares ............. 20.67 30.13 56.81 - 261,074
For the Period Ended January 31,
===================================
1993 - Class A Shares/(c)/......... 16.68 17.86/(d)/ 7.12/( e)/ - 59,339
<CAPTION>
- ---------------------------------------------------------------------------------------------
Ratios assuming no
voluntary waiver of fees
Ratio of ===========================
Ratio of net Ratio of
net investment Ratio of net
expenses income expenses investment
to average (loss) to to average loss to
net average net net average net
assets assets assets assets
=======================================================
SMALL CAP EQUITY FUND
- ---------------------------------------------------------------------------------------------
For the Year Ended January 31,
===================================
<S> <C> <C> <C> <C>
1997 - Class A Shares ............. 1.60% (0.72)% 1.85% (0.97)%
1997 - Class B Shares/(b)/......... 2.35/(e)/ (1.63)/(e)/ 2.35/(e)/ (1.63)/(e)/
1996 - Class A Shares ............. 1.41 (0.59) 1.66 (0.84)
1995 - Class A Shares ............. 1.53 (0.53) 1.78 (0.78)
1994 - Class A Shares ............. 1.60 (0.45) 1.85 (0.70)
For the Period Ended January 31,
===================================
1993 - Class A Shares/(c)/......... 1.65/(e)/ 0.62/(e)/ 2.70/(e)/ (0.43)/(e)/
- ------------------
</TABLE>
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no sales
or redemption charges. Total return would be reduced if a sales or
redemption charge were taken into account.
/(b)/For the period from May 1, 1996 (commencement of operations) to January 31,
1997.
/(c)/For the period from October 22, 1992 (commencement of operations) to
January 31, 1993.
/(d)/Not annualized.
/(e)/Annualized.
/(f)/For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged. This rate may vary due to various types
of transactions and number of security trades executed.
/(g)/Includes the balancing effect of calculating per share amounts.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
78
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from Distributions
investment operations/(g)/ to shareholders
================================================= ==============================
Net Net realized From net
realized and unrealized realized
and unrealized gain (loss) gain on
Net asset gain (loss) on on foreign From investment,
value, Net investments, currency net option and
beginning investment options related investment futures
of period income (loss) and futures transactions income transactions
============================================================================================
INTERNATIONAL EQUITY FUND
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Year Ended January 31,
=====================================
1997 - Class A Shares............... $17.20 $0.10 $3.51 $(1.28) $ -- $(0.21)
1997 - Class B Shares/(e)/.......... 18.91 (0.06) 0.94 (0.34) -- (0.21)
1997 - Institutional Shares/(e)/.... 17.45 0.04 3.39 (1.24) (0.03) (0.21)
1997 - Service Shares/(e)/.......... 17.70 (0.02) 2.95 (1.08) -- (0.21)
1996 - Class A Shares .............. 14.52 0.13 2.58 1.42 (0.58) (0.87)
1995 - Class A Shares............... 18.10 0.06 (3.04) (0.01) -- (0.59)
1994 - Class A Shares............... 14.35 0.05 4.08 (0.38) -- --
For the Period Ended January 31,
=====================================
1993 - Class A Shares/(b)/.......... 14.18 (0.01) 0.29 (0.11) -- --
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Net
increase Net asset
(decrease) value, Portfolio Average Net assets at
in net asset end of Total turnover commission end of period
value period return/(a)/ rate rate/(f)/ (in 000s)
==================================================================================
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Year Ended January 31,
========================================
1997 - Class A Shares................... $ 2.12 $19.32 13.48% 38.01% $.0318 $536,283
1997 - Class B Shares/(e)/.............. 0.33 19.24 2.83/(c)/ 38.01 .0318 19,198
1997 - Institutional Shares/(e)/........ 1.95 19.40 12.53/(c)/ 38.01 .0318 68,374
1997 - Service Shares/(e)/.............. 1.64 19.34 10.42/(c)/ 38.01 .0318 674
1996 - Class A Shares .................. 2.68 17.20 28.68 68.48 -- 330,860
1995 - Class A Shares................... (3.58) 14.52 (16.65) 84.54 -- 275,086
1994 - Class A Shares................... 3.75 18.10 26.13 60.04 -- 269,091
For the Period Ended January 31,
========================================
1993 - Class A Shares/(b)/.............. 0.17 14.35 1.23/(c)/ 0.00 -- 66,063
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Ratios assuming no
voluntary waiver of fees or
expense limitations
===============================
Ratio of net Ratio of
Ratio of investment net investment
net income Ratio of income
expenses to (loss) to expenses (loss)
average net average net to average to average
assets assets net assets net assets
=============================================================
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
For the Year Ended January 31,
========================================
1997 - Class A Shares................... 1.69% (0.07)% 1.88% (0.26)%
1997 - Class B Shares/(e)/.............. 2.23/(d)/ (0.97)/(d)/ 2.38/(d)/ (1.12)/(d)/
1997 - Institutional Shares/(e)/........ 1.10/(d)/ 0.43/(d)/ 1.25/(d)/ 0.28/(d)/
1997 - Service Shares/(e)/.............. 1.60/(d)/ (0.40)/(d)/ 1.75/(d)/ (0.55)/(d)/
1996 - Class A Shares .................. 1.52 0.26 1.77 0.01
1995 - Class A Shares................... 1.73 0.40 1.98 0.15
1994 - Class A Shares................... 1.76 0.51 2.01 0.26
For the Period Ended January 31,
========================================
1993 - Class A Shares/(b)/.............. 1.80/(d)/ (0.42)/(d)/ 2.58/(d)/ (1.20)/(d)/
</TABLE>
- --------------------------
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no sales
or redemption charges. Total return would be reduced if a sales or
redemption charge were taken into account.
/(b)/For the period from December 1, 1992 (commencement of operations) to
January 31, 1993.
/(c)/Not annualized.
/(d)/Annualized.
/(e)/For the period from February 7, March 6 and May 1, 1996 (commencement of
operations) to January 31, 1997 for Institutional, Service and Class B
shares, respectively.
/(f)/For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged. This rate may vary due to various types
of transactions and number of security trades executed.
/(g)/Includes the balancing effect of calculating per share amounts.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
79
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) Distributions to
from investment operations /(g)/ shareholders
--------------------------------------------- ------------------------------
Net
realized and
unrealized
Net Net gain on
asset Net realized and foreign
value, investment unrealized currency From net In excess
beginning income gain(loss) on related investment of net investment
of period (loss) investments transactions income income
----------------------------------------------------------------------------------------
ASIA GROWTH FUND
- ----------------------------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997 - Class A Shares..................... $16.49 $ 0.06 $(0.11) $(0.12) $(0.01) $ --
1997 - Class B Shares/(e)/................ 17.31 (0.05) (0.48) (0.51) -- (0.03)
1997 - Institutional Shares/(e)/.......... 16.61 0.04 (0.11) (0.11) (0.04) (0.06)
1996 - Class A Shares..................... 13.31 0.17 3.44 (0.12) (0.17) (0.14)
For the Period Ended January 31,
- --------------------------------
1995 - Class A Shares/(b)/................ 14.18 0.11 (0.89) 0.01 (0.10) --
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Net
increase Net
(decrease) asset
in net value, Portfolio Average Net assets at
asset end of Total turnover commission end of period
value period return/(a)/ rate rate/(f)/ (000s)
------------------------------------------------------------------------------------
ASIA GROWTH FUND
- ------------------------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997 - Class A Shares..................... $(0.18) $16.31 (1.01)% 48.40% $.0151 $263,014
1997 - Class B Shares/(e)/................ (1.07) 16.24 (6.02)/(c)/ 48.40 .0151 3,354
1997 - Institutional Shares/(e)/.......... (0.28) 16.33 (1.09)/(c)/ 48.40 .0151 13,322
1996 - Class A Shares..................... 3.18 16.49 26.49 88.80 -- 205,539
For the Period Ended January 31,
- --------------------------------
1995 - Class A Shares/(b)/................ (0.87) 13.31 (5.46)/(c)/ 36.08/(c)/ -- 124,298
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios assuming no
voluntary waiver of fees
or expense limitations
------------------------------
Ratio Ratio Ratio
of net of net Ratio of of net
expenses to investment expenses investment
Net assets at average income(loss) to average income(loss)
end of period net to average net to average
(000s) assets net assets assets net assets
-------------------------------------------------------------------------------
ASIA GROWTH FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
- ------------------------------
<S> <C> <C> <C> <C> <C>
1997 - Class A Shares................................ $263,014 1.67% 0.20% 1.87% 0.00%
1997 - Class B Shares/(e)/........................... 3,354 2.21/(d)/ (0.56)/(d)/ 2.37/(d)/ (0.72)/(d)/
1997 - Institutional Shares/(e)/..................... 13,322 1.10/(d)/ 0.54/(d)/ 1.26/(d)/ 0.38/(d)/
1996 - Class A Shares................................ 205,539 1.77 1.05 2.02 0.80
For the Period Ended January 31,
- --------------------------------
1995 - Class A Shares/(b)/........................... 124,298 1.90/(d)/ 1.83/(d)/ 2.38/(d)/ 1.35/(d)/
</TABLE>
- --------------------------
(a) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no sales
or redemption charges. Total return would be reduced if a sales or
redemption charge were taken into account.
(b) For the period from July 8, 1994 (commencement of operations) to January 31,
1995.
(c) Not annualized.
(d) Annualized.
(e) For the period from February 2 and May 1, 1996 (commencement of operations)
to January 31, 1997 for Institutional and Class B shares, respectively.
(f) For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate on security transactions on which
commissions are charged. This rate may vary due to various types of
transactions and number of security trades executed.
(g) Includes the balancing effect of calculating per share amounts.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
80
<PAGE>
- --------------------------------------------------------------------------------
Report of Independent Public Accountants
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of the
Goldman Sachs Equity Portfolios, Inc.:
We have audited the accompanying statements of assets and liabilities of the
Goldman Sachs Equity Portfolios, Inc. (a Maryland Corporation), comprising the
Balanced Fund, Select Equity Fund, Growth and Income Fund, Capital Growth Fund,
Small Cap Equity Fund, International Equity Fund and Asia Growth Fund, including
the statements of investments, as of January 31, 1997 and the related statements
of operations, the statements of changes in net assets and the financial
highlights for each of the periods presented. These financial statements and the
financial highlights are the responsibility of the Funds' management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
January 31, 1997 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and the financial highlights
referred to above present fairly, in all material respects, the financial
position of each of the respective portfolios constituting Goldman Sachs Equity
Portfolios, Inc. as of January 31, 1997 the results of their operations and the
changes in their net assets and the financial highlights for the periods
presented, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 15, 1997
- --------------------------------------------------------------------------------
81
<PAGE>
- --------------------------------------------------------------------------------
- -------------------------------------- ----------------------------------------
[This Page Intentionally Left Blank]
- -------------------------------------- ----------------------------------------
82
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
This Annual Report is authorized for distribution to prospective investors only
when preceded or accompanied by a Goldman Sachs Equity Portfolios, Inc.
Prospectus which contains facts concerning the Fund's objectives and policies,
management, expenses and other information.
- --------------------------------------------------------------------------------
83
<PAGE>
Goldman Sachs
One New York Plaza
New York, NY 10004
Directors
Ashok N. Bakhru, Chairman
David B. Ford
Douglas C. Grip
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
Officers
Douglas C. Grip, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
Goldman Sachs
Investment Adviser, Administrator,
Distributor and Transfer Agent
The Goldman Sachs
Equity Portfolios
- -------------------
Annual Report
January 31, 1997
Goldman Sachs Balanced Fund
Goldman Sachs Select Equity Fund
Goldman Sachs Growth and Income Fund
Goldman Sachs Capital Growth Fund
Goldman Sachs Small Cap Equity Fund
Goldman Sachs International Equity Fund
Goldman Sachs Asia Growth Fund
[LOGO OF GOLDMAN SACHS APPEARS HERE]
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GOLDMAN SACHS MID-CAP EQUITY FUND
- --------------------------------------------------------------------------------
DEAR SHAREHOLDERS:
We are pleased to have the opportunity to discuss the performance and holdings
of the Goldman Sachs Mid-Cap Equity Fund for the 12 months ended January 31,
1997. The U.S. equity market rewarded investors with excellent returns once
again in 1996, with the Goldman Sachs Mid-Cap Equity Fund outperforming its
benchmark by a wide margin during the period under review. To help put the
fund's performance in perspective, we will also provide a brief overview of the
economic and investment environment.
OBJECTIVE AND INVESTMENT APPROACH
The Goldman Sachs Mid-Cap Equity Fund seeks long-term capital growth primarily
by investing at least 65% of its total assets in equities with market
capitalizations of between $500 million and $7 billion at the time of
investment. However, the fund currently intends to emphasize investments in
companies with market capitalizations of under $5 billion at the time of
investment. The fund is managed with a value style, which means we focus on
companies whose stocks we believe are inexpensive relative to their expected
long-term earnings growth and their asset value. Investments may include well-
known companies that are temporarily out of favor due to cyclical economic
conditions or are experiencing near-term difficulties the portfolio managers
judge to be temporary in nature. In-depth fundamental research of a company's
financial structure, its competitive position in the market and its management's
commitment to increasing shareholder value are all critical parts of the fund's
investment approach. Though we are not sector investors, we closely monitor the
fund's sector and industry exposures compared with the benchmark in an effort to
avoid unintentional over- or underweightings.
MID-CAPS PERFORMED WELL, BUT LAGGED LARGE-CAPS
The U.S. stock market surged to record levels during the period under review,
rising an impressive 26.3% (as measured by the Standard & Poor's 500 stock
index). After a run-up from January through mid-February, market volatility
notably increased, as investor sentiment vacillated between two contradictory
concerns. With some economic news, investors feared that the economy was growing
too quickly, making higher inflation a possibility, while other news caused them
to worry that the economy was slowing, putting earnings at risk. In May,
investors briefly overcame their fears and sent the market higher, but their
concerns quickly reemerged and caused the market to settle into another choppy
trading range that culminated in a sharp sell-off in July. However, stock
prices rebounded throughout the second half of the period, as investors became
more confident that the environment of low inflation, moderate economic growth
and healthy corporate earnings would persist. Though small-cap stocks led the
market during the first half of the year, the post-July rally was dominated by a
handful of large-cap, growth companies.
During the period, the mid-cap sector of the stock market recorded a total
return of 20.9% (as measured by the Russell Midcap index), lagging its larger
peers but slightly outperforming small-cap stocks, which rose 19.0% (as measured
by the Russell 2000 index). The divergence between the performance of the
different stock capitalizations was primarily a reflection of investors "flight
to quality" in the uncertain market, with investors favoring large-cap growth
companies that were highly liquid.
1
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GOLDMAN SACHS MID-CAP EQUITY FUND (cont'd)
- --------------------------------------------------------------------------------
ECONOMIC GROWTH REBOUNDED AFTER A WEAK START, THEN MODERATED
When the period began, lackluster consumer spending, harsh winter weather and
the General Motors strike restrained economic growth. Despite these adverse
conditions, the economy advanced faster than expected, with first-quarter real
GDP growth reported at 2.0% (annualized). Momentum accelerated even more
dramatically during the second quarter, as industrial activity, automobile sales
and home sales all showed significant improvement. As a result, second-quarter
GDP rose a robust 4.7% (annualized), its highest rate in two years.
The economy's torrid growth cooled markedly during the third quarter, with
annualized real GDP slowing to 2.1%, largely due to lackluster consumer spending
and a widening U.S. trade deficit. This slowdown proved to be temporary,
however, as a wide range of economic reports pointed toward renewed strength
from October through December. Fourth-quarter real GDP growth was revised to
3.9% (annualized), reflecting a narrowing trade deficit, rising consumer
spending and accelerating manufacturing activity. In January 1997, the economic
data suggested that the economy's advance was continuing. Despite firm growth,
underlying inflation remained surprisingly mild. For all of 1996, consumer
prices rose only 2.9%.
The U.S. Federal Reserve cut the Federal funds rate by 25 basis points in
January 1996, just prior to the start of the period. Though stronger than
expected growth shifted investor expectations from further Federal Reserve
interest rate cuts to potential tightening, the Fed then left rates unchanged.
As of January 31, 1997, the Federal funds rate remained at 5.25%.
PERFORMANCE REVIEW: STRONG OUTPERFORMANCE, LED BY OUR TECHNOLOGY, FINANCIAL AND
ENERGY STOCKS
For the 12-month period ended January 31, 1997, the Goldman Sachs Mid-Cap
Equity Fund had a total return of 25.63% based on net asset value, significantly
outperforming the 20.90% total return of the fund's benchmark, the Russell
Midcap Index. We are also pleased to note that the fund fared very well
compared with its peers. For the 12-month period ended January 31, 1997, the
fund ranked within the top 20% of the Lipper mid-cap fund category (30th of
157), according to Lipper Analytical Services, Inc. (Please note that Lipper
rankings do not take sales charges into account and that past performance is not
a guarantee of future results.)
The fund's strong results came primarily during the second half of the period,
and can be attributed to successful stock selection. The best performing stocks
came from a wide range of sectors, with technology, financial and energy-related
investments performing particularly well. In addition, the fund benefited from
several of its positions in consumer nondurables, a sector that had been
underweighted early in the period and subsequently increased.
The fund's top performers included a number of manufacturers of computer-
related components. For example, we took advantage of the slump in technology
stocks in early 1996 by establishing a position in TERADYNE, INC., a
manufacturer of semiconductor testing equipment, at an extremely inexpensive
price. The stock then rebounded much faster than we anticipated in advance of
the turnaround of the semiconductor cycle. Other successful holdings in the
sector were the best performing initial public offering of 1996, CYMER, INC., a
producer of excimer lasers used to etch semiconductors, and SEAGATE TECHNOLOGY,
INC., the world's largest independent disk-drive maker. Seagate Technology
spent much of the past year
2
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GOLDMAN SACHS MID-CAP EQUITY FUND (cont'd)
- --------------------------------------------------------------------------------
integrating its acquisition of Conner Peripherals, Inc., which gave it a
dominant market share and made it the most vertically integrated hard disk-drive
manufacturer. By the end of the period, we sold the fund's position in Cymer and
reduced Teradyne and Seagate Technology as they appreciated and became less
undervalued.
In the financial sector, several of our bank and insurance holdings performed
extremely well. Bank stocks included GREENPOINT FINANCIAL CORP., which reported
strong demand for its "no-documentation" and "low-documentation" mortgages;
REPUBLIC BANK OF NEW YORK CORP., which achieved an earnings improvement due to
better than expected revenues and non-interest expense control; and STANDARD FED
BANCORPORATION, a Michigan-based thrift that is in the process of being
acquired, which we sold after it reached our target price. In the insurance
industry, OLD REPUBLIC INTERNATIONAL CORP. enhanced shareholder value in a slow
premium growth environment by improving its capital management, which included a
stock buyback program; USLIFE CORP. surged amid takeover speculation, and
ALLMERICA FINANCIAL CORP. announced a restructuring that would combine its four
units.
The fund also benefited from several of its energy and consumer nondurable
investments. TOSCO CORP., an oil refiner and distributor, continued to
consolidate its market position through an ambitious acquisition strategy, and
LONG ISLAND LIGHTING CO., a New York-based utility, agreed to be acquired by
Brooklyn Union Gas Co. at a very attractive price. In the consumer nondurable
sector, SUNBEAM CORP., a leading consumer products company, surged due to the
aggressive restructuring program initiated by its new CEO; and FRUIT OF THE
LOOM, INC. performed well due to increased investor recognition of its ability
to improve future cash flow.
DIFFICULT INDUSTRY CONDITIONS IMPACTED SEVERAL HOLDINGS
Fund holdings that did not fulfill our expectations included several companies
that were affected by difficult industry conditions. These included GEON CORP.,
VISHAY INTERTECHNOLOGY, INC. and STONE CONTAINER CORP., which all suffered when
their respective businesses -- chemicals, electronic capacitors, and pulp and
paper products -- came under pressure due to increased competition and
overcapacity. Another disappointment was CENTRAL MAINE POWER CO., which was
impacted by continuing uncertainty in the regulatory environment for electric
utilities. We believe that the market has overreacted to the short-term
problems facing these companies and the fund continued to hold them as of the
end of the period.
NEW INVESTMENTS ADDED DIVERSIFICATION
After many holdings performed extremely well and were sold upon reaching our
price targets, we initiated several new investments that we determined were very
undervalued. These included two stocks that were among the fund's 10 largest
positions as of the end of the period under review: INTERNATIONAL MULTIFOODS
CORP. and UNICOM CORP. International Multifoods Corp., a distributor of
specialty foods, has a relatively low valuation, a high degree of operating
leverage and new management that is expected to improve profitability,
particularly in its vending distribution business. Unicom Corp., an electric
utility that operates 12 nuclear units at six sites, generates excess capital
and, unlike many other electric utilities, has no utility power purchase
problems. We established a position after its stock price declined due to a
mandated increase in spending on operations and maintenance, an issue that
management believes will not impair the company's long-term prospects.
We established a major position in PERRIGO CO., the largest manufacturer of
store-brand health and
3
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GOLDMAN SACHS MID-CAP EQUITY FUND (cont'd)
- --------------------------------------------------------------------------------
beauty aids, over-the-counter pharmaceuticals and nutritional products. We
expect Perrigo to benefit from stricter cost controls as well as its "over-the-
counter switch" business, where it produces drugs that are equivalent to brand-
name products after the original drug patents expire. These products are a
significant new source of revenues because they command higher margins and have
higher unit growth. Another new position was IMATION CORP., a spin-off of 3M
Co., which manufactures products for data storage, printing and publishing,
medical imaging and photography. Imation has a strong balance sheet and is using
the cash flow generated by its older businesses to develop new products such as
high-capacity disks.
We significantly increased the fund's existing position in THIOKOL CORP., a
defense/aerospace company that has a debt-free balance sheet, trades at a very
low earnings multiple and is reducing its dependence on the federal government.
As part of this strategy, Thiokol formed a joint venture to manufacture
components for commercial aircraft, which will enable it to benefit from an
expected upturn in the aircraft cycle.
<TABLE>
<CAPTION>
TOP 10 EQUITY HOLDINGS AS OF JANUARY 31, 1997
COMPANY LINE OF BUSINESS PERCENTAGE OF TOTAL NET ASSETS
<S> <C> <C>
Thiokol Corp. Defense/Aerospace 3.0%
Shopko Stores, Inc. Discount Retailer 2.5%
Goodyear Tire & Rubber Co. Tire and Rubber Products 2.5%
Republic Bank of New York Corp. Bank 2.5%
Long Island Lighting Co. Electric Utilities 2.5%
International Multi-foods Corp. Food Distributor 2.4%
Avnet, Inc. Electronic Components Distributor 2.4%
USLife Corporation Insurance 2.4%
Unicom Corp. Utility 2.4%
Owens-Illinois, Inc. Packaging 2.4%
</TABLE>
OUTLOOK
As of this writing, we believe the stock market, in general, is somewhat
overvalued. Though we still expect the market to achieve positive results in
1997, its returns are unlikely to match the strong returns of 1995 or 1996.
Despite the expensive market, the fund's current holdings are attractively
valued and we expect them to continue to perform well. We intend to continue to
utilize extensive fundamental research to identify attractive, undervalued
stocks with solid long-term prospects.
Sincerely,
/s/ Eileen A. Aptman
Eileen A. Aptman
Portfolio Manager
/s/ Ronald E. Gutfleish
Ronald E. Gutfleish
Portfolio Manager
U.S. Active Equity Value
March 3, 1997
4
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GOLDMAN SACHS MID-CAP EQUITY FUND
- --------------------------------------------------------------------------------
The following graph shows the value, as of January 31, 1997, of a $1,000,000
investment made on the inception date of the Fund. For comparative purposes,
the performance of the Fund's benchmark (the Russell Midcap Index ("Russell
Midcap")) is shown for the appropriate time periods. All performance data shown
represents past performance and should not be considered indicative of future
performance which will fluctuate with changes in market conditions. These
performance fluctuations will cause an investor's shares, when redeemed, to be
worth more or less than their original cost.
(dollars in thousands)
[LINE GRAPH APPEARS HERE]
GS MIDCAP RUSSELL MIDCAP
8/1/95 $1,000 $1,000
1/31/96 $1,069 $1,094
1/31/97 $1,344 $1,523
<TABLE>
<CAPTION>
Average Annual Total Return
-----------------------------------
One Year Since Inception
(a)
-----------------------------------
<S> <C> <C>
Institutional 25.63% 21.65%
Shares
</TABLE>
(a) Institutional shares commenced operations on August 1, 1995.
5
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
- --------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS
January 31, 1997
<TABLE>
<CAPTION>
Shares Description Value
- -------------------------------------------------------------
<S> <C> <C>
Common Stocks--96.5%
Airlines--2.0%
102,400 Continental Airlines, $ 2,867,200
Inc.*
- -------------------------------------------------------------
APPLIANCE MANUFACTURER--1.8%
95,300 Sunbeam Corp., Inc. 2,644,575
- -------------------------------------------------------------
AUTO--ORIGINAL EQUIPMENT MANUFACTURER--0.7%
48,500 Exide Corp. 1,091,250
- -------------------------------------------------------------
BANKS--4.1%
27,600 Greenpoint Financial Corp. 1,504,200
40,700 Republic Bank of New York 3,607,038
Corp.
14,800 Unionbancal Corp. 791,800
5,903,038
- -------------------------------------------------------------
CHEMICALS--COMMODITY--1.2%
94,600 Geon Co. 1,773,750
- -------------------------------------------------------------
COMPUTERS AND PERIPHERALS--3.2%
124,300 Decisionone Corp. 2,175,250
48,000 Seagate Technology, Inc.* 2,472,000
4,647,250
- -------------------------------------------------------------
CONSUMER STAPLES--1.8%
56,135 Block Drug Company, Inc. 2,638,345
- -------------------------------------------------------------
DEFENSE--3.0%
76,600 Thiokol Corp. 4,289,600
DEPARTMENT STORES--2.5%
228,000 Shopko Stores, Inc. 3,619,500
- -------------------------------------------------------------
ELECTRIC UTILITIES--8.6%
242,100 Central Maine Power Co. 2,693,362
38,500 CMS Energy Corp. 1,289,750
158,100 Long Island Lighting Co. 3,596,775
147,500 Niagara Mohawk Power 1,493,437
Corp.*
145,900 Unicom Corp. 3,446,888
12,520,212
- -------------------------------------------------------------
FOOD--4.1%
161,900 Chiquita Brands 2,367,788
International, Inc.
197,000 International Multifoods 3,546,000
Corp.
5,913,788
- -------------------------------------------------------------
FOREST PRODUCTS--2.7%
31,000 Georgia-Pacific Corp. 2,282,375
130,000 Stone Container Corp. 1,755,000
4,037,375
- -------------------------------------------------------------
HEALTHCARE MANAGEMENT--4.8%
57,800 Health Systems 1,495,575
International, Inc.*
104,900 Horizon CMS Healthcare 1,442,375
Corp.
126,400 Tenet Healthcare Corp.* 3,412,800
33,000 Trigon Healthcare Inc. 585,750
6,936,500
- -------------------------------------------------------------
HOME BUILDERS--3.1%
46,000 Centex Corp. 1,794,000
104,600 Lennar Corp. 2,784,975
4,578,975
- -------------------------------------------------------------
INSURANCE--LIFE--3.8%
36,900 Reliastar Financial Corp. 2,047,950
84,700 US Life Corp. 3,472,700
5,520,650
- -------------------------------------------------------------
<CAPTION>
Shares Description Value
- -------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
INSURANCE--PROPERTY AND CASUALTY--3.8%
90,100 Allmerica Financial Group $ 3,299,912
84,300 American States Financial 2,223,413
Corp.*
5,523,325
- -------------------------------------------------------------
INSURANCE BROKERS--1.5%
80,900 Old Republic 2,174,187
International
Corp.
- -------------------------------------------------------------
INVESTMENT BROKERS AND MANAGERS--1.0%
44,300 Lehman Brothers Holdings, 1,400,987
Inc.
- -------------------------------------------------------------
LOGISTICS/TRUCKING--1.9%
106,800 Consolidated Freightways, 2,710,050
Inc.
- -------------------------------------------------------------
LEISURE--2.1%
115,300 Royal Caribbean Cruise 3,041,038
Lines
- -------------------------------------------------------------
MACHINERY--0.9%
22,400 Tecumseh Products, Inc. 1,293,600
MEDIA--1.2%
76,200 Carmike Cinemas 1,809,750
- -------------------------------------------------------------
MEDICAL--2.5%
68,800 Owens and Minor, Inc. 705,200
272,700 Perrigo Co. 2,897,438
3,602,638
- -------------------------------------------------------------
OIL REFINING AND MARKETING--5.5%
59,400 Ashland Inc. 2,561,625
34,600 Tosco Corp. 3,062,100
71,700 Valero Energy Corp. 2,419,875
8,043,600
- -------------------------------------------------------------
PACKAGING--2.4%
144,000 Owens-Illinois Inc.* 3,420,000
- -------------------------------------------------------------
RECREATIONAL PRODUCTS--1.7%
149,300 Outboard Marine Corp. 2,482,112
RESTAURANTS--1.8%
369,800 Darden Restaurants 2,681,050
- -------------------------------------------------------------
SEMICONDUCTORS AND ELECTRONICS--7.8%
56,600 Avnet, Inc. 3,502,125
98,000 Imation Corp. 2,854,250
69,200 Silicon Valley Group, 1,859,750
Inc.*
124,250 Vishay Intertechnology, 2,997,531
Inc.*
11,213,656
- -------------------------------------------------------------
SOFTWARE--1.4%
62,900 Autodesk, Inc. 1,989,213
- -------------------------------------------------------------
STEEL--1.8%
63,600 AK Steel Holding Corp. 2,559,900
- -------------------------------------------------------------
SUPERMARKETS--1.9%
168,800 Fleming Companies, Inc. 2,721,900
TECHNOLOGY CAPITAL GOODS--1.9%
91,700 Teradyne, Inc.* 2,831,238
- -------------------------------------------------------------
TEXTILES--4.1%
141,100 Angelica Corp. 2,698,537
82,300 Fruit of the Loom, Inc.* 3,302,287
6,000,824
- -------------------------------------------------------------
TIRE AND OTHER RELATED
RUBBER PRODUCTS--2.5%
66,200 Goodyear Tire & Rubber Co. 3,607,900
- -------------------------------------------------------------
TOBACCO--1.4%
67,000 Universal Corp. 2,077,000
- -------------------------------------------------------------
TOTAL COMMON STOCKS (Cost $118,250,113) $ 140,165,976
- -------------------------------------------------------------
</TABLE>
6
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
- --------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS (continued)
January 31, 1997
<TABLE>
<CAPTION>
Principal Amount
Interest Rate Maturity Date Value
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
REPURCHASE AGREEMENT--2.8%
Joint Repurchase Agreement Account
$4,100,000 5.63% 02/03/97 $ 4,100,000
- -----------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENT
(Cost $4,100,000) $ 4,100,000
TOTAL INVESTMENTS (COST $122,350,113)** $144,265,976
- -----------------------------------------------------------------------------------
FEDERAL INCOME TAX INFORMATION:
Gross unrealized gain for investments in which value exceeds cost
$ 27,053,378
Gross unrealized loss for investments in which cost exceeds value
(5,196,819)
- -----------------------------------------------------------------------------------
Net unrealized gain $ 21,856,559
- -----------------------------------------------------------------------------------
</TABLE>
* Non-income producing security.
** The aggregate cost for federal income tax purposes is $122,409,417.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
7
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
January 31, 1997
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Investment in securities, at value (identified cost $144,265,976
$122,350,113)
Cash 31,121
Receivables:
Fund shares sold 87,576
Investment securities sold 4,552,534
Dividends and interest 56,999
Deferred organization expenses, net 60,056
Other assets 10,218
TOTAL ASSETS 149,064,480
LIABILITIES:
Payables:
Investment securities purchased 3,687,585
Investment advisory fees 71,762
Administration fees 18,370
Transfer agent fees 4,807
Accrued expenses and other liabilities 28,626
TOTAL LIABILITIES 3,811,150
NET ASSETS:
Paid-in capital 115,859,949
Distributions in excess of net investment income (25,142)
Accumulated undistributed net realized gain on investment and 7,502,660
option transactions
Net unrealized gain on investments 21,915,863
NET ASSETS $145,253,330
Total shares of beneficial interest outstanding, $.001 par 7,755,774
value (50,000,000 shares authorized)
Net asset value, offering and redemption price per share (net $18.73
assets/shares outstanding)
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
Goldman Sachs Mid-Cap Fund
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
For the Year Ended January 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INVESTMENT INCOME:
<S> <C>
Dividends $ 2,631,906
Interest 188,358
TOTAL INCOME 2,820,264
- -----------------------------------------------------
EXPENSES:
Investment adviser fees 771,956
Administration fees 192,989
Professional fees 68,906
Transfer agent fees 51,464
Custodian fees 29,506
Amortization of deferred organization 17,213
expenses
Directors' fees 2,234
Other 31,778
- -----------------------------------------------------
TOTAL EXPENSES $1,166,046
Less Expenses reimbursable by Goldman (72,441)
Sachs
NET EXPENSES 1,093,605
NET INVESTMENT INCOME 1,726,659
- -----------------------------------------------------
REALIZED AND UNREALIZED GAIN ON
INVESTMENT AND OPTION TRANSACTIONS:
Net realized gain on investment 13,627,039
transactions
Net realized gain on options written 40,466
Net change in unrealized gain on 14,749,074
investments
- -----------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON 28,416,579
INVESTMENT AND OPTION TRANSACTIONS
- -----------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING $30,143,238
FROM OPERATIONS
- -----------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Selected Data for a Share Outstanding throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED PERIOD ENDED
JANUARY 31, 1997 JANUARY 31, 1996 (A)
---------------------------- ---------------------------
<S> <C> <C> <C> <C>
FROM OPERATIONS:
Net investment income $ 1,726,659 $ 1,088,855
Net realized gain on investment 13,627,039 547,655
transactions
Net realized gain (loss) on options 40,466 (83,442)
written
Net change in unrealized gain on 14,749,074 7,166,789
investments
- ------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting
from operations 30,143,238 8,719,857
- ------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (1,837,675) (986,293)
In excess of net investment income (25,142) ---
From net realized gains (6,629,058) ---
Total distributions to shareholders (8,491,875) (986,293)
- ------------------------------------------------------------------------------------------------------------
FROM SHARE TRANSACTIONS: SHARES SHARES
- ------------------------------------------------------------------------------------------------------------
Proceeds from sales of shares 227,071 3,933,239 9,029,858 135,730,361
Reinvestment of dividends and 483,747 8,489,760 64,045 986,293
distributions
Cost of shares repurchased (1,480,859) (24,491,993) (568,088) (8,779,257)
Net increase (decrease) in net assets
resulting from share transactions (770,041) (12,068,994) 8,525,815 127,937,397
- ------------------------------------------------------------------------------------------------------------
TOTAL INCREASE 9,582,369 135,670,961
NET ASSETS:
Beginning of period 135,670,961 ---
End of period $145,253,330 $135,670,961
- ------------------------------------------------------------------------------------------------------------
Accumulated undistributed
(distributions in excess of) net $ (25,142) $ 102,562
investment income
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(a) For the period from August 1, 1995 (commencement of operations) to January
31, 1996.
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED PERIOD ENDED
JANUARY 31, 1997 JANUARY 31, 1996 (a)
------------------------------------------------------
<S> <C> <C>
Net asset value, beginning of period $ 15.91 $ 15.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.24 0.13
Net realized and unrealized gain on investments 3.77 0.90
and options
- ------------------------------------------------------------------------------------------------------------
Total income (loss) from investment operations 4.01 1.03
- ------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.24) (0.12)
- ------------------------------------------------------------------------------------------------------------
In excess of net investment income (0.02) --
Net realized gain on investments and option (0.93) --
transactions
- ------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (1.19) (0.12)
- ------------------------------------------------------------------------------------------------------------
Net increase in net asset value 2.82 0.91
- ------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 18.73 $ 15.91
Total return /(b)/ 25.63% 6.89% /(d)/
Portfolio turnover rate 74.03% 58.77% /(d)/
Average commission rate /(e)/ $ 0.0547 --
Net assets at end of period $145,253,330 $135,670,961
Ratio of net expenses to average net assets /(c)/ 0.85% 0.85%
Ratio of net investment income to average net assets /(c)/ 1.35% 1.67%
Ratios assuming no expense limitations:
Ratio of expenses to average net assets /(c)/ 0.91% 0.98%
Ratio of net investment income to average net assets /(c)/ 1.29% 1.54%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ For the period from August 1, 1995 (commencement of operations) to January
31, 1996.
/(b)/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions and a complete redemption
of the investment at the net asset value at the end of the period.
/(c)/ Annualized.
/(d)/ Not annualized.
/(e)/ For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged. This rate may vary due to various types
of transactions and number of security trades executed.
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
January 31, 1997
- --------------------------------------------------------------------------------
1. ORGANIZATION
Goldman Sachs Mid-Cap Equity Fund ("the Fund") is a separate diversified
portfolio of Goldman SachsEquity Portfolios, Inc. (the "Company"). The Company
consists of eight funds and is a Marylandcorporation registered under the
Investment Company Act of 1940, as amended, as an open-end,management investment
company. The Fund offers two classes of shares - Institutional shares
andService shares. No Service shares were outstanding as of January 31, 1997.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significantaccounting policies consistently
followed by the Fund. The preparation of financial statements inconformity with
generally accepted accounting principles requires management to make
estimatesand assumptions that may affect the reported amounts.
A. Investment Valuation
- -- --------------------
Investments in securities traded on a U.S. or foreignsecurities exchange or the
NASDAQ system are valued daily at their last sale or closing price on
theprincipal exchange on which they are traded or NASDAQ. If no sale occurs,
securities traded on aU.S. exchange or NASDAQ are valued at the mean between the
closing bid and asked price, andsecurities traded on a foreign exchange will be
valued at the official bid price. Unlisted equity anddebt securities for which
market quotations are available are valued at the mean between the mostrecent
bid and asked prices. Debt securities are valued at prices supplied by an
independent pricingservice, which reflect broker/dealer-supplied valuations and
matrix pricing systems. Short-termdebt obligations maturing in sixty days or
less are valued at amortized cost. Restricted securities, andother securities
for which quotations are not readily available, are valued at fair value using
methodsapproved by the Board of Directors of the Company.
B. Securities Transactions and Investment Income
- -- ---------------------------------------------
Securities transactions are recorded on the tradedate. Realized gains and
losses on sales of investments are calculated on the identified-costbasis.
Dividend income is recorded on the ex-dividend date. Dividends for which the
Fund hasthe choice to receive either cash or stock are recognized as investment
income in an amountequal to the cash dividend. This amount is also used as an
estimate of the fair value of the stockreceived. Interest income is determined
on a basis of interest accrued, premium amortized anddiscount earned.
C. Federal Taxes
- -- -------------
It is the Fund's policy to comply with the requirements of the Internal Revenue
Codeapplicable to regulated investment companies and to distribute substantially
all of its investmentcompany taxable income and capital gains to its
shareholders. Accordingly, no federal tax provisionis required. The
characterization of distributions to shareholders for financial reporting
purposes isdetermined in accordance with income tax rules. Therefore, the source
of a portfolio's distributionsmay be shown in the accompanying financial
statements as either from or in excess of netinvestment income or net realized
gain on investment transactions, or from capital, dependingon the type of
book/tax differences that may exist.
D. Deferred Organization Expenses
- -- ------------------------------
Organization-related costs are being amortized on a straight-line basis over a
period of five years.
12
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
January 31, 1997
- --------------------------------------------------------------------------------
E. Expenses
- -- --------
Expenses incurred by the Company which do notspecifically relate to an
individual fund of the Company are allocated to the funds based on eachfund's
relative average net assets for the period.
F. Option Accounting Principles
- -- ----------------------------
When the Fund writes call or put options, an amount equal to the premium
received is recordedas an asset and as an equivalent liability. The amount of
the liability is subsequently marked-to-market to reflect the current market
value of the option written. When a written option expires onits stipulated
expiration date or the Fund enters into a closing purchase transaction, the Fund
realizes again or loss without regard to any unrealized gain or loss on the
underlying security, and the liabilityrelated to such option is extinguished.
When a written call option is exercised, the Fund realizes again or loss from
the sale of the underlying security, and the proceeds of the sale are
increasedby the premium originally received. When a written put option is
exercised, the amount of thepremium originally received will reduce the cost of
the security which the Fund purchases uponexercise. There is a risk of loss
from a change in value of such options which may exceed the relatedpremiums
received.
Upon the purchase of a call option or aprotective put option by the Fund, the
premium paid is recorded as an investment and subsequentlymarked-to-market to
reflect the current market value of the option. If an option which the Fundhas
purchased expires on the stipulated expiration date, the Fund will realize a
loss in the amount ofthe cost of the option. If the Fund enters into a closing
sale transaction, the Fund will realize a gainor loss, depending on whether the
sale proceeds from the closing sale transaction are greater or lessthan the cost
of the option. If the Fund exercises a purchased put option, the Fund will
realize a gainor loss from the sale of the underlying security, and the proceeds
from such sale will be decreased bythe premium originally paid. If the Fund
exercises a purchased call option, the cost of the securitywhich the Fund
purchases upon exercise will be increased by the premium originally paid.
G. Futures Contracts
- -- -----------------
The Fund may enter into financial futures contracts for hedging purposes or to
increase total return. Upon entering into a futures contract, the Fund is
required to deposit with a broker an amount of cashor securities equal to the
minimum "initial margin" requirement of the futures exchange on which
thecontract is traded. Subsequent payments ("variation margin") are made or
received by theFund each day, dependent on the daily fluctuations in the value
of the underlying index, and arerecorded for financial reporting purposes as
unrealized gains or losses by the Fund. Whenentering into a closing
transaction, for book purposes, the Fund will realize a gain or loss equalto the
difference between the value of the futures contract to sell and the futures
contract to buy. Futures contracts are valued at the most recent settlement
price, unless such price does not reflectthe fair market value of the contract,
in which case the position will be valued using methods approvedby the Board of
Directors of the Company.
Certain risks may arise upon entering intofutures contracts. The predominant
risk is that the changes in the value of the futures contract may notdirectly
correlate with changes in the value of the underlying securities. This risk may
decrease theeffectiveness of the Fund's hedging strategies and may also result
in a loss to the Fund.
13
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
January 31, 1997
- --------------------------------------------------------------------------------
3. AGREEMENTS
Goldman Sachs Asset Management ("GSAM"), aseparate operating division of
Goldman, Sachs & Co. ("Goldman Sachs"), acts as the Fund'sinvestment adviser
pursuant to an Investment Advisory Agreement. Under the InvestmentAdvisory
Agreement, GSAM, subject to the general supervision of the Company's Board of
Directors,manages the Fund's portfolio. As compensation for the services
rendered under the AdvisoryAgreement and the assumption of the expenses related
thereto, GSAM is entitled to a fee,computed daily and payable monthly, at an
annual rate equal to .60% of the Fund's average daily netassets.
GSAM also acts as the Fund's administratorpursuant to an Administration
Agreement. Under the Administration Agreement, GSAM administersthe Fund's
business affairs, including providing facilities. As compensation for the
servicesrendered pursuant to the Administration Agreement, the Fund pays GSAM a
fee, computeddaily and payable monthly, at an annual rate equal to .15% of the
Fund's average daily net assets.
Goldman Sachs has voluntarily agreed to reduce or limit certain "Other
Expenses" (excludingadvisory, administration, service plan and transfer agent
fees and litigation, indemnification, taxes,interest, brokerage commissions and
extraordinary expenses) until further notice to the extent suchexpenses exceed
.06% of the average daily net assets of the Fund. For the year ended January
31,1997, these expense reimbursements amounted to $72,441 and Goldman Sachs owed
the Fund $8,717at year end.
Goldman Sachs serves as the Distributor ofshares of the Fund pursuant to a
distribution agreement and receives no fee. Goldman Sachsalso serves as the
Transfer Agent of the Fund for a fee.
4. LINE OF CREDIT FACILITY
The Fund participates in a $250,000,000 uncommitted, unsecured revolving line of
creditfacility. In addition, the Fund participates in a $50,000,000 committed,
unsecured revolving lineof credit facility. Both facilities are to be used
solely for temporary or emergency purposes. Under the most restrictive
arrangement, the Fund must own securities having a market value inexcess of 300%
of the total bank borrowings. The interest rate on the borrowings is based on
theFederal Funds rate. The committed facility also requires a fee to be paid
based on the amount of thecommitment which has not been utilized. During the
year ended January 31, 1997, the Fund did nothave any borrowings under these
facilities.
5. PORTFOLIO SECURITIES TRANSACTIONS
Purchases and proceeds of sales or maturities ofsecurities (excluding short-term
investments and options) for the year ended January 31, 1997 were$92,601,511 and
$112,186,001, respectively.
For the year ended January 31, 1997, optiontransactions in the Fund were as
follows:
<TABLE>
<CAPTION>
Put Options written Contracts Premium Received
- ----------------------------------------------------
<S> <C> <C>
Balance outstanding,
beginning of period -- $ --
Options written 240 40,466
Options expired (240) (40,466)
- ----------------------------------------------------
Balance outstanding,
end of period -- $ 0
- ----------------------------------------------------
</TABLE>
Certain risks arise related to written call or put options from the possible
inability of counterpartiesto meet terms of their contracts.
For the year ended January 31, 1997, GoldmanSachs earned approximately $22,000
of brokerage commissions from portfolio transactions executedon behalf of the
Fund.
14
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
January 31, 1997
- --------------------------------------------------------------------------------
6. REPURCHASE AGREEMENTS
During the term of a repurchase agreement, thevalue of the underlying
securities, including accrued interest, is required to equal or exceed thevalue
of the repurchase agreement. The underlying securities for all repurchase
agreements are held insafekeeping at the Fund's custodian.
7. JOINT REPURCHASE AGREEMENT ACCOUNT
The Fund, together with other registered investment companies having advisory
agreements withGSAM, transfer uninvested cash balances into joint accounts, the
daily aggregate balance of which isinvested in one or more repurchase
agreements. The underlying securities for the repurchaseagreements are U.S.
Treasury obligations. At January 31, 1997, the Fund had an undividedinterest
in the repurchase agreements in the following joint account which equaled
$4,100,000in principal amount. At January 31, 1997, the repurchase agreements
held in this joint account,along with the corresponding underlying securities
(including the type of security, market value,interest rate and maturity date)
were as follows:
<TABLE>
<CAPTION>
Principal Interest Maturity Amortized
Amount Rate Date Cost
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Bear Stearns Securities, dated 01/31/97, repurchase price
$800,375,333 (GNMA: $26,604,837, 7.50%, 10/15/26; FNMA:
$720,411,516, 5.50% - 8.00%, 02/01/09 -09/01/26; FHLMC:
77,372,676, 6.0% -$ 8.0%, 04/01/98 - 07/01/26)
$800,000,000 5.63% 02/03/97 $ 800,000,000
Nomura Securities, dated 01/31/97, repurchase price
$100,047,083 (GNMA: $102,007,864, 5.5% - 10.25%
01/15/20 - 01/20/27)
100,000,000 5.65 02/03/97 100,000,000
Lehman Government Securities, dated 01/31/97, repurchase
price $201,894,173 (U.S. Treasury Notes: $191,656,654,
6.375%, 01/15/00-08/15/02; U.S. Treasury Stripped
Securities: $14,095,535 05/15/02 - 11/15/03)
201,800,000 5.60 02/03/97 201,800,000
TOTAL JOINT REPURCHASE AGREEMENT ACCOUNT $1,101,800,000
- --------------------------------------------------------------------------------
</TABLE>
8. CERTAIN RECLASSIFICATIONS
In accordance with Statement of Position 93-2, theMid-Cap Equity Fund has
reclassified $8,454 from paid-in capital to distributions in excess of
netinvestment income. These reclassifications have no impact on the net asset
value of the Fund and isdesigned to present the Fund's capital accounts on a tax
basis.
9. OTHER MATTERS
As of January 31, 1997, The Goldman, Sachs & Co. Employees Profit Sharing and
Retirement IncomePlan was the beneficial owner of approximately 98% of the
outstanding shares of the Fund.
15
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of GoldmanSachs Mid-Cap Equity Fund:
We have audited the accompanying statement ofassets and liabilities of Goldman
Sachs Mid-Cap Equity Fund, one of the portfolios constituting Goldman Sachs
Equity Portfolios, Inc., including the statement of investments, as of January
31, 1997, and the relatedstatement of operations and the statement of changes in
net assets and the financial highlights for the periodspresented. These
financial statements and the financial highlights are the responsibility of the
fund's management. Our responsibility is to express an opinion on these
financial statements and the financial highlightsbased on our audits.
We conducted our audits in accordance withgenerally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtainreasonable assurance about whether the financial statements and the
financial highlights are free ofmaterial misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts anddisclosures in
the financial statements. Our procedures included confirmation of securities
owned as of January 31, 1997 by correspondence with the custodian and brokers.
An audit also includes assessing the accountingprinciples used and significant
estimates made by management, as well as evaluating the overall
financialstatement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements and the financial highlights referred
to above present fairly, in allmaterial respects, the financial position of
Goldman Sachs Mid-Cap Equity Fund as of January 31, 1997, theresults of its
operations and the changes in its net assets and the financial highlights for
the periods presented, inconformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 15, 1997
16
<PAGE>
Goldman Sachs
1 New York Plaza
New York, NY 10004
DIRECTORS
Ashok N. Bakhru, Chairman
David B. Ford
Douglas C. Grip
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
OFFICERS
Douglas C. Grip, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
GOLDMAN SACHS
Investment Adviser, Administrator,
Distributor and Transfer Agent
17
<PAGE>
Appendix A
DESCRIPTION OF BOND RATINGS*
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment some time in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
- -------------------------------
* The rating system described herein are believed to be the most recent ratings
systems available from Moody's Investors Service, Inc. and Standard and Poor's
Ratings Group at the date of this Additional Statement for the securities
listed. Ratings are generally given to securities at the time of issuance.
While the rating agencies may from time to time revise such ratings, they
undertake no obligation to do so, and the ratings indicated do not necessarily
represent ratings which will be given to these securities on the date of the
Fund's fiscal year end.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
1-A
<PAGE>
Ca: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Unrated: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believe
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1 and B1.
STANDARD & POOR'S RATINGS GROUP
AAA: Bonds rated AAA have the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA: Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the higher rated issues only in small degree.
A: Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than in higher rated categories.
BB, B, CCC, CC, C: Bonds rated BB, B, CCC, CC and C are regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal. BB indicates the least degree of speculation and C the
highest. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties of major risk
exposures to adverse conditions.
2-A
<PAGE>
D: Bonds rated D are in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due, even
if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The D rating
also will be used upon the filing of a bankruptcy petition if debt service
payments are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
N.R.: Not rated.
3-A
<PAGE>
Appendix B
BUSINESS PRINCIPLES OF GOLDMAN, SACHS & CO.
Goldman Sachs is noted for its Business Principles, which guide all of the
firm's activities and serve as the basis for its distinguished reputation among
investors worldwide.
OUR CLIENT'S INTERESTS ALWAYS COME FIRST. Our experience shows that if we
serve our clients well, our own success will follow.
OUR ASSETS ARE OUR PEOPLE, CAPITAL AND REPUTATION. If any of these assets
diminish, reputation is the most difficult to restore. We are dedicated to
complying fully with the letter and spirit of the laws, rules and ethical
principles that govern us. Our continued success depends upon unswerving
adherence to this standard.
WE TAKE GREAT PRIDE IN THE PROFESSIONAL QUALITY OF OUR WORK. We have an
uncompromising determination to achieve excellence in everything we undertake.
Though we may be involved in a wide variety and heavy volume of activity, we
would, if it came to a choice, rather be best than biggest.
WE STRESS CREATIVITY AND IMAGINATION IN EVERYTHING WE DO. While recognizing
that the old way may still be the best way, we constantly strive to find a
better solution to a client's problems. We pride ourselves on having pioneered
many of the practices and techniques that have become standard in the industry.
WE 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.
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.
1-B
<PAGE>
GOLDMAN, SACHS & CO.'S INVESTMENT BANKING AND SECURITIES ACTIVITIES
Goldman, Sachs & Co. is a leading global investment banking and securities
firm with a number of distinguishing characteristics.
. Privately owned and ranked among Wall Street's best capitalized firms,
with partners' capital of approximately $5.3 billion as of November
29, 1996.
. With thirty-four offices around the world, Goldman Sachs employs over
9,000 professionals focused on opportunities in major markets.
. A research budget of $200 million for 1997.
. The number one lead manager of U.S. common stock offerings for the
past eight years (1989-1996).*
* Source: Securities Data Corporation. Common stock ranking excludes REITs,
====================================
Investment Trusts and Rights.
2-B
<PAGE>
GOLDMAN, SACHS & CO.'S HISTORY OF EXCELLENCE
1865 End of Civil War
1869 Marcus Goldman opens Goldman Sachs
1890 Dow Jones Industrial Average first published
1896 Goldman Sachs joins New York Stock Exchange
1906 Goldman Sachs takes Sears Roebuck public (oldest ongoing client)
Dow Jones Industrial Average tops 100
1925 Goldman Sachs finances Warner Brothers, producer of the first talking
film
1956 Goldman Sachs co-manages Ford's public offering, the largest to date
1970 London office opens
1972 Dow Jones Industrial Average breaks 1000
1986 Goldman Sachs takes Microsoft public
1990 Provides advisory services for the largest privatization in the region
of the sale of Telefonos de Mexico
1992 Dow Jones Industrial Average breaks 3000
1993 Goldman Sachs is lead manager in taking Allstate public, largest
equity offering to date ($2.4 billion)
1995 Dow Jones Industrial Average breaks 4000
1996 Dow Jones Industrial Average breaks 6000
3-B
