<PAGE>
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PROSPECTUS
July 27, 1998
GOLDMAN SACHS REAL ESTATE SECURITIES FUND
CLASS A, B AND C SHARES
The Goldman Sachs Real Estate Securities Fund (the "Fund") seeks total return
comprised of long-term growth of capital and dividend income through
investments in equity securities of issuers that are primarily engaged in or
related to the real estate industry. The Fund expects that a substantial
portion of its total assets will be invested in real estate investment trusts.
Goldman Sachs Asset Management ("GSAM"), New York, New York, a separate
operating division of Goldman, Sachs & Co. ("Goldman Sachs"), serves as
investment adviser to the Fund. GSAM is referred to in this Prospectus as the
"Investment Adviser." Goldman Sachs serves as the Fund's distributor and
transfer agent.
This Prospectus provides information about Goldman Sachs Trust (the "Trust")
and the Fund that a prospective investor should understand before investing.
This Prospectus should be retained for future reference. A Statement of
Additional Information (the "Additional Statement"), dated May 1, 1998, as
revised July 27, 1998, containing further information about the Trust and the
Fund which may be of interest to investors, has been filed with the Securities
and Exchange Commission ("SEC"), is incorporated herein by reference in its
entirety, and may be obtained without charge from Goldman Sachs by calling the
telephone number, or writing to one of the addresses, listed on the back cover
of this Prospectus. The SEC maintains a Web site (http://www.sec.gov) that
contains the Additional Statement and other information regarding the Trust.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR OTHER INSURED DEPOSITORY INSTITUTION, AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD
OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN THE FUND INVOLVES INVESTMENT
RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fund Highlights.................... 3
Fees and Expenses.................. 6
Investment Objectives and Policies. 8
Description of Securities.......... 9
Investment Techniques.............. 13
Risk Factors....................... 17
Investment Restrictions............ 19
Portfolio Turnover................. 19
Management......................... 19
Expenses........................... 22
Reports to Shareholders............ 22
How to Invest...................... 23
</TABLE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Services Available to Shareholders. 29
Distribution and Authorized Dealer
Service
Plans............................. 32
How to Sell Shares of the Fund..... 32
Dividends.......................... 34
Net Asset Value.................... 35
Performance Information............ 35
Shares of the Trust................ 36
Taxation........................... 37
Additional Information............. 38
Appendix .......................... A-1
Account Application
</TABLE>
<PAGE>
FUND HIGHLIGHTS
The following is intended to highlight certain information and is qualified
in its entirety by the more detailed information contained in this Prospectus.
WHAT IS THE GOLDMAN SACHS TRUST?
The Goldman Sachs Trust is an open-end management investment company that
offers its shares ("Shares") in several investment funds (commonly known as
mutual funds). The Real Estate Securities Fund (the "Fund"), a mutual fund
offered under the Trust, pools the monies of investors by selling its Shares to
the public and investing these monies in a portfolio of securities designed to
achieve the Fund's stated investment objectives.
WHAT ARE THE INVESTMENT OBJECTIVES AND POLICIES OF THE FUND?
The Fund has distinct investment objectives and policies. There can be no
assurance that the Fund's objectives will be achieved. The Fund is a
"diversified open-end management company" as defined in the Investment Company
Act of 1940, as amended (the "Act"). For a further description of the Fund's
investment objectives and policies, see "Investment Objectives and Policies,"
"Description of Securities" and "Investment Techniques."
<TABLE>
<C> <S>
INVESTMENT OBJECTIVES Total return comprised of long-term
growth of capital and dividend income.
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INVESTMENT CRITERIA Substantially all, and at least 80%, of
total assets in a diversified portfolio
of equity securities of issuers that
are primarily engaged in or related to
the real estate industry. The Fund
expects that a substantial portion of
its total assets will be invested in
real estate investment trusts
("REITs").
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BENCHMARK Wilshire Real Estate Securities Index
("WARESI")
</TABLE>
WHAT ARE THE RISK FACTORS AND SPECIAL CHARACTERISTICS THAT I SHOULD CONSIDER
BEFORE INVESTING?
The Fund's Share price will fluctuate with market and economic conditions, so
that an investment in the Fund may be worth more or less when redeemed than
when purchased. The Fund should not be relied upon as a complete investment
program. There can be no assurance that the Fund's investment objectives will
be achieved. In view of the specialized nature of the Fund's investments, the
Fund may be suitable only for those investors who are financially able to
assume greater risk and share price volatility than presented by funds that do
not concentrate in the real estate industry. See "Risk Factors."
3
<PAGE>
Risk Factors Associated with the Real Estate Industry. Although the Fund does
not invest directly in real estate, it does invest primarily in common stocks
and other equity securities of REITs and other real estate industry companies
and does have a policy of concentrating its investments in the real estate
industry. Therefore, an investment in the Fund is subject to certain risks
associated with the direct ownership of real estate and with the real estate
industry in general, including possible declines in the value of real estate,
general and local economic conditions, environmental problems and changes in
interest rates. To the extent that assets underlying the Fund's investments are
concentrated geographically, by property type or in certain other respects,
these risks may be heightened. In addition, if the Fund has rental income or
income from the disposition of real property acquired as a result of a default
on securities the Fund owns, the receipt of such income may adversely affect
its ability to retain its tax status as a regulated investment company.
Risks of Investing in REITs. Investing in REITs involves certain unique risks
in addition to those risks associated with investing in the real estate
industry in general. Equity REITs may be affected by changes in the value of,
and income produced by, the underlying property owned by the REITs. Mortgage
REITs may be affected by the quality of any credit extended and interest rate
risk. REITs are dependent upon management skills, may have limited
diversification and are subject to heavy cash flow dependency, default by
borrowers and self-liquidation.
Other. The Fund may invest in foreign securities and lower rated debt
securities and may use certain investment techniques, including derivatives,
forward contracts, options and futures. These investments and investment
techniques will subject the Fund to greater risk.
WHO MANAGES THE FUND?
Goldman Sachs Asset Management serves as Investment Adviser to the Fund. As
of May 21, 1998, the Investment Adviser, together with its affiliates, acted as
investment adviser or distributor for assets in excess of $160.4 billion.
WHO DISTRIBUTES THE FUND'S SHARES?
Goldman Sachs acts as distributor of the Fund's Shares (the "Distributor").
WHAT IS THE MINIMUM INVESTMENT?
<TABLE>
<CAPTION>
MINIMUM
--------------------
INITIAL
PURCHASE ADDITIONAL
TYPE OF PURCHASE AMOUNT INVESTMENTS
---------------- -------- -----------
<S> <C> <C>
Regular Purchases....................................... $1,000 $50
Tax-Sheltered Retirement Plans (excluding SIMPLE IRAs
and Education IRAs) and UGMA/UTMA purchases............ $ 250 $50
SIMPLE IRAs and Education IRAs.......................... $ 50 $50
Automatic Investment Plan............................... $ 50 $50
403(b) Plans............................................ $ 200 $50
</TABLE>
For further information, see "How to Invest--How to Buy Shares of the Fund"
on page 24.
4
<PAGE>
HOW DO I PURCHASE SHARES?
You may purchase Shares of the Fund through Goldman Sachs and certain
investment dealers, including members of the National Association of Securities
Dealers, Inc. (the "NASD") and certain other financial service firms that have
agreements with Goldman Sachs relating to the sale of Shares ("Authorized
Dealers"). See "How to Invest" on page 23.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Fund offers three classes of Shares through this Prospectus. These Shares
may be purchased, at the investor's choice, at a price equal to their next
determined net asset value ("NAV") (i) plus an initial sales charge imposed at
the time of purchase (Class A shares); (ii) with a contingent deferred sales
charge ("CDSC") imposed on redemptions within six years of purchase ("Class B
shares"); or (iii) without any initial sales charge or CDSC, as long as Shares
are held for one year or more ("Class C Shares"). Direct purchases of $1
million or more of Class A Shares will be sold without an initial sales charge
and may be subject to a CDSC at the time of certain redemptions.
<TABLE>
<CAPTION>
MAXIMUM INITIAL MAXIMUM CONTINGENT
SALES CHARGE DEFERRED SALES CHARGE
--------------- ---------------------
<S> <C> <C>
Class A................. 5.5% (See above)
Class B................. N/A 5% declining to 0% after six years
Class C................. N/A 1% if shares are redeemed within 12 months of purchase
</TABLE>
Over time, the CDSC and distribution fees attributable to Class B or Class C
Shares will exceed the initial sales charge and the distribution fees
attributable to Class A Shares. Class B Shares convert to Class A Shares, which
are subject to lower distribution fees, eight years after initial purchase.
Class C Shares, which are subject to the same distribution fees as Class B
Shares, do not convert to Class A Shares and are subject to the higher
distribution fees indefinitely. See "How to Invest--Alternative Purchase
Arrangements" on page 23.
HOW DO I SELL MY SHARES?
You may redeem Shares upon request on any Business Day, as defined under
"Additional Information," at the NAV next determined after receipt of such
request in proper form, subject to any applicable CDSC. See "How to Sell Shares
of the Funds."
HOW DO I RECEIVE DIVIDENDS AND DISTRIBUTIONS?
<TABLE>
<CAPTION>
INVESTMENT INCOME DIVIDENDS CAPITAL GAINS
DECLARED AND PAID DISTRIBUTIONS
--------------------------- -------------
<S> <C> <C>
Quarterly Annually
</TABLE>
You may receive dividends and distributions in additional Shares of the same
class of the Fund in which you have invested or you may elect to receive them
in cash, Shares of the same class of other mutual funds sponsored by Goldman
Sachs (the "Goldman Sachs Funds") or ILA Service Units of the Prime Obligations
Portfolio or the Tax-Exempt Diversified Portfolio, if you hold Class A Shares
of the Fund, or ILA Class B or Class C Units of the Prime Obligations
Portfolio, if you hold Class B or Class C Shares of the Fund (the "ILA
Portfolios"). For further information concerning dividends and distributions,
see "Dividends."
5
<PAGE>
FEES AND EXPENSES
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on Purchases....... 5.5%/1/ none none
Maximum Sales Charge Imposed on Reinvested
Dividends...................................... none none none
Maximum Deferred Sales Charge................... none/1/ 5.0%/2/ 1.0%/3/
Redemption Fees/4/.............................. none none none
Exchange Fees/4/................................ none none none
ANNUAL FUND OPERATING EXPENSES:
(as a percentage of average net assets)/5/
Management Fees................................. 1.00% 1.00% 1.00%
Distribution (Rule 12b-1) Fees.................. 0.25% 0.75% 0.75%
Other Expenses:
Authorized Dealer Service Fees.................. 0.25% 0.25% 0.25%
Other Expenses (after applicable
limitations)/6/................................ 0.18% 0.18% 0.18%
---- ---- ----
TOTAL FUND OPERATING EXPENSES (AFTER FEE AND
EXPENSE LIMITATIONS)/7/......................... 1.68% 2.18% 2.18%
==== ==== ====
</TABLE>
- -------
/1/ As a percentage of the offering price. No sales charge is imposed on
purchases of Class A Shares by certain classes of investors. A CDSC of
1.00% is imposed on certain redemptions (within 18 months of purchase) of
Class A Shares sold without an initial sales charge as part of an
investment of $1 million or more. See "How to Invest--Offering Price--
Class A Shares."
/2/ A CDSC is imposed upon Shares redeemed within six years of purchase at a
rate of 5% in the first year, declining to 1% in the sixth year, and
eliminated thereafter. See "How to Invest--Offering Price--Class B
Shares."
/3/ A CDSC of 1.00% is imposed on Shares redeemed within 12 months of
purchase. See "How to Invest--Offering Price--Class C Shares."
/4/ A transaction fee of $7.50 may be charged for redemption proceeds paid by
wire. In addition to free reinvestments of dividends and distributions in
shares of other Goldman Sachs Funds or units of the ILA Portfolios and
free automatic exchanges pursuant to the Automatic Exchange Program, six
free exchanges are permitted in each twelve month period. A fee of $12.50
may be charged for each subsequent exchange during such period. See "How
to Invest--Exchange Privilege."
/5/ Based on estimated amounts for the current fiscal year.
/6/ The Investment Adviser has voluntarily agreed to reduce or limit certain
other expenses (excluding management, distribution and authorized dealer
service fees, transfer agency fees, taxes, interest and brokerage fees and
litigation, indemnification and other extraordinary expenses) for the Fund
to the extent such expenses exceed 0.00% of the Fund's average daily net
assets.
/7/ Without the limitations and waivers described above, "Other Expenses" and
"Total Operating Expenses" of the Fund for the current fiscal year are
estimated to be as follows:
<TABLE>
<CAPTION>
TOTAL
OTHER OPERATING
EXPENSES EXPENSES
-------- ---------
<S> <C> <C>
Class A.............................................. 0.72% 2.22%
Class B.............................................. 0.72% 2.72%
Class C.............................................. 0.72% 2.72%
</TABLE>
6
<PAGE>
EXAMPLE
You would pay the following expenses on a hypothetical $1,000 investment
(including the maximum sales charge) assuming (i) a 5% annual return; and (ii)
redemption at the end of each time period.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
------ -------
<S> <C> <C>
Class A Shares................................................. $71 $105
Class B Shares
--Assuming complete redemption at end of period................ 72 98
--Assuming no redemption....................................... 22 68
Class C Shares
--Assuming complete redemption at end of period................ 32 68
--Assuming no redemption....................................... 22 68
</TABLE>
The hypothetical example assumes that a CDSC will not apply to redemptions of
Class A Shares within the first 18 months. Class B Shares convert to Class A
Shares eight years after purchase.
The Investment Adviser and Goldman Sachs may modify or discontinue any of
the limitations set forth above in the future at their discretion. The
information set forth in the foregoing table and hypothetical example relates
only to Class A, B and C Shares. The Fund also offers Institutional and
Service Shares, which are subject to different fees and expenses (which affect
performance), have different minimum investment requirements and are entitled
to different services than Class A, Class B and Class C Shares. Information
regarding Institutional and Service Shares may be obtained from your sales
representative or from Goldman Sachs by calling the number on the back cover
page of this Prospectus. Because of the Distribution Plans, long-term
shareholders may pay more than the economic equivalent of the maximum front-
end sales charges permitted by the NASD's rules regarding investment
companies.
In addition to the compensation itemized above, certain institutions that
sell Fund shares and/or their salespersons may receive other compensation in
connection with the sale and distribution of Class A, Class B and Class C
Shares of the Fund or for services to their customers' accounts and/or the
Fund. For additional information regarding such compensation, see "Management"
and "Services Available to Shareholders" in this Prospectus and "Other
Information Regarding Purchases, Redemptions, Exchanges and Dividends" in the
Additional Statement.
The purpose of the foregoing table is to assist investors in understanding
the various fees and expenses of the Fund that an investor will bear directly
or indirectly. The information on the fees and expenses included in the table
and hypothetical example above are based on the Fund's estimated fees and
expenses and should not be considered as representative of past or future
expenses. Actual fees and expenses may be greater or less than those
indicated. Moreover, while the example assumes a 5% annual return, the Fund's
actual performance will vary and may result in an actual return greater or
less than 5%. Information about the actual performance of the Fund will be
contained in the Fund's future annual reports to shareholders, which may be
obtained without charge when they become available. See "Management--
Investment Adviser."
7
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and principal investment policies of the Fund are
described below. Other investment practices and management techniques, which
involve certain risks, are described under "Description of Securities," "Risk
Factors" and "Investment Techniques." There can be no assurance that the
Fund's investment objectives will be achieved.
The Investment Adviser may purchase for the Fund interests in real estate
investment trusts, common stocks, preferred stocks, convertible debt
obligations, convertible preferred stocks, equity interests in trusts,
partnerships, joint ventures, limited liability companies and similar
enterprises, warrants and stock purchase rights ("equity securities"). In
choosing the Fund's securities, the Investment Adviser utilizes first-hand
fundamental research, including visiting company facilities to assess
operations and to meet decision-makers. The Investment Adviser may also use
macro analysis of numerous economic and valuation variables to anticipate
changes in company earnings and the overall investment climate. The Investment
Adviser is able to draw on the research and market expertise of the Goldman
Sachs Global Investment Research Department and other affiliates of the
Investment Adviser, as well as information provided by other securities
dealers. Equity securities in the Fund's portfolio will generally be sold when
the Investment Adviser believes that the market price fully reflects or
exceeds the securities' fundamental valuation or when other more attractive
investments are identified.
The Fund's investment strategy is based on the premise that property market
fundamentals are the primary determinant of growth underlying the success of
companies in the real estate industry. The Fund's research and investment
process is designed to identify those companies with strong property
fundamentals and strong management teams. This process is comprised of real
estate market research and securities analysis. The Investment Adviser's
analysis will focus on determining the degree to which a company can achieve
sustainable growth in cash flow and dividend paying capability. The Investment
Adviser will take into account fundamental trends in underlying property
markets as determined by proprietary models, research of local real estate
markets, earnings, cash flow growth and stability, the relationship between
asset values and market prices of the securities and dividend payment history.
The Investment Adviser will attempt to purchase securities so that its
underlying portfolio will be diversified geographically and by property type.
REAL ESTATE SECURITIES FUND
Objective. The Fund's investment objective is to provide investors with
total return comprised of long-term growth of capital and dividend income.
Primary Investment Focus. The Fund invests, under normal circumstances,
substantially all, and at least 80%, of its total assets in issuers that are
primarily engaged in or related to the real estate industry. The Fund seeks to
achieve its investment objective by investing in a diversified portfolio of
equity securities of REITs and other real estate industry companies. A "real
estate industry company" is a company that derives at least 50% of its gross
revenues or net profits from the ownership, development, construction,
financing, management or sale of commercial, industrial or residential real
estate or interests therein.
Shares of REITs. The Fund may invest without limitation in Shares of REITs.
REITs are pooled investment vehicles which invest primarily in income
producing real estate or real estate related loans or
8
<PAGE>
interests. REITs are generally classified as equity REITs, mortgage REITs or a
combination of equity and mortgage REITs. Equity REITs invest the majority of
their assets directly in real property and derive income primarily from the
collection of rents. Equity REITs can also realize capital gains by selling
properties that have appreciated in value. Mortgage REITs invest the majority
of their assets in real estate mortgages and derive income from the collection
of interest payments. Similar to investment companies such as the Fund, REITs
are not taxed on income distributed to shareholders provided they comply with
several requirements of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund will indirectly bear its proportionate share of expenses
incurred by REITs in which the Fund invests in addition to the expenses
incurred directly by the Fund.
Other. Under normal circumstances, the Fund may invest up to 20% of its
total assets in fixed-income securities that, in the opinion of the Investment
Adviser, offer the potential to further the Fund's investment objectives. In
addition, although the Fund will invest primarily in publicly traded U.S.
securities, it may invest up to 15% of its net assets in foreign securities.
DESCRIPTION OF SECURITIES
The Fund may invest in equity and fixed-income securities in accordance with
the investment policies stated above. Certain of these permitted investments
are described in more detail in this section.
CONVERTIBLE SECURITIES
The Fund may invest in convertible securities, including debt obligations
and preferred stock of the issuer convertible at a stated exchange rate into
common stock of the issuer. Convertible securities generally offer lower
interest or dividend yields than non-convertible securities of similar
quality. As with all fixed-income securities, the market value of convertible
securities tends to decline as interest rates increase and, conversely, to
increase as interest rates decline. However, when the market price of the
common stock underlying a convertible security exceeds the conversion price,
the convertible security tends to reflect the market price of the underlying
common stock. As the market price of the underlying common stock declines, the
convertible security tends to trade increasingly on a yield basis, and thus
may not decline in price to the same extent as the underlying common stock.
Convertible securities rank senior to common stocks in an issuer's capital
structure and consequently entail less risk than the issuer's common stock. In
evaluating a convertible security, the Investment Adviser will give primary
emphasis to the attractiveness of the underlying common stock. The convertible
debt securities in which the Fund may invest are not subject to any minimum
rating criteria. Convertible debt securities are equity investments for
purposes of the Fund's investment policies.
FOREIGN INVESTMENTS
FOREIGN SECURITIES. The Fund may invest in the securities of foreign
issuers. Investments in foreign securities may offer potential benefits that
are not available from investments exclusively in equity securities of
domestic issuers quoted in U.S. dollars. Foreign countries may have economic
policies or business cycles different from those of the U.S. and markets for
foreign securities do not necessarily move in a manner parallel to U.S.
markets.
Investing in the securities of foreign issuers involves certain special
risks, including those set forth below, which are not typically associated
with investing in U.S. dollar denominated or quoted securities of U.S.
issuers. Such investments may be affected by changes in currency rates,
changes in foreign or U.S. laws or restrictions applicable to such investments
and in exchange control regulations (e.g., currency blockage). A decline in
the exchange rate of the currency (i.e., weakening of the currency against the
U.S. dollar) in which a portfolio
9
<PAGE>
security is quoted or denominated relative to the U.S. dollar would reduce the
value of the portfolio security. In addition, if the currency in which the
Fund receives dividends, interest or other payments declines in value against
the U.S. dollar before such income is distributed as dividends to shareholders
or converted to U.S. dollars, the Fund may have to sell portfolio securities
to obtain sufficient cash to pay such dividends. The expected introduction of
a single currency, the euro, on January 1, 1999 for participating nations in
the European Economic and Monetary Union ("Eu") presents unique uncertainties,
including whether the payment and operational systems of banks and other
financial institutions will be ready by the scheduled launch date; the
creation of suitable clearing and settlement payment systems for the new
currency; the legal treatment of certain outstanding financial contracts after
January 1, 1999 that refer to existing currencies rather than the euro; the
establishment and maintenance of exchange rates for currencies being converted
into the euro and the euro; the fluctuation of the euro relative to non-euro
currencies during the transition period from January 1, 1999 to December 31,
2000 and beyond, whether to interest rate, tax and labor regimes and European
countries participating in the euro will converge over time; and whether the
conversion of the currencies of other EU countries, such as the United
Kingdom, Denmark and Greece, into the euro and the admission of other non-EU
countries such as Poland, Latvia and Luthania as members of the EU may have an
adverse impact on the euro. These or other factors, including political and
economic risks, could cause market disruptions before or after the
introduction of the euro, and could adversely affect the value of securities
held by the Fund. Commissions on transactions in foreign securities may be
higher than those for similar transactions on domestic stock markets. In
addition, clearance and settlement procedures may be different in foreign
countries and, in certain markets, such procedures have been unable to keep
pace with the volume of securities transactions, thus making it difficult to
conduct such transactions.
Foreign issuers are not generally subject to uniform accounting, auditing
and financial reporting standards comparable to those applicable to U.S.
issuers. There may be less publicly available information about a foreign
issuer than about a U.S. issuer. In addition, there is generally less
government regulation of foreign markets, companies and securities dealers
than in the United States. Foreign securities markets may have substantially
less volume than U.S. securities markets and securities of many foreign
issuers are less liquid and more volatile than securities of comparable
domestic issuers. Furthermore, with respect to certain foreign countries,
there is a possibility of nationalization, expropriation or confiscatory
taxation, imposition of withholding or other taxes on dividend or interest
payments (or, in some cases, capital gains), limitations on the removal of
funds or other assets of the Fund, political or social instability or
diplomatic developments which could affect investments in those countries.
INVESTMENTS IN ADRS, EDRS AND GDRS. The Fund may invest in foreign
securities which take the form of sponsored and unsponsored American
Depository Receipts ("ADRs") and Global Depository Receipts ("GDRs") and may
also invest in European Depository Receipts ("EDRs") or other similar
instruments representing securities of foreign issuers (together, "Depository
Receipts"). ADRs represent the right to receive securities of foreign issuers
deposited in a domestic bank or a correspondent bank. Prices of ADRs are
quoted in U.S. dollars, and ADRs are traded in the United States on exchanges
or over-the-counter and are sponsored and issued by domestic banks. EDRs and
GDRs are receipts evidencing an arrangement with a non-U.S. bank. EDRs and
GDRs are not necessarily quoted in the same currency as the underlying
security. To the extent the Fund acquires Depository Receipts through banks
which do not have a contractual relationship with the foreign issuer of the
security underlying the Depository Receipts to issue and service such
Depository Receipts (unsponsored Depository Receipts), there may be an
increased possibility that the Fund would not become aware of and be able to
respond to corporate actions, such as stock splits or rights offerings
involving the foreign issuer, in a timely manner. In addition, the lack of
information may result in inefficiencies in the valuation of such instruments.
Investment in Depository Receipts does not eliminate all the risks inherent in
investing in securities
10
<PAGE>
of non-U.S. issuers. The market value of Depository Receipts is dependent upon
the market value of the underlying securities and fluctuations in the relative
value of the currencies in which the Depository Receipt and the underlying
securities are quoted. However, by investing in Depository Receipts, such as
ADRs, that are quoted in U.S. dollars, the Fund may avoid currency risks
during the settlement period for purchases and sales.
FOREIGN CURRENCY TRANSACTIONS. Because investments in foreign issuers will
usually involve currencies of foreign countries, the value of the assets of
the Fund as measured in U.S. dollars will be affected by changes in foreign
currency exchange rates. The Fund may, to the extent it invests in foreign
securities, purchase or sell foreign currencies on a spot basis and may also
purchase or sell forward foreign currency exchange contracts for hedging
purposes and to seek to protect against anticipated changes in future foreign
currency exchange rates. If the Fund enters into a forward foreign currency
exchange contract to buy foreign currency for any purpose, the Fund will
segregate cash or liquid assets in an amount equal to the value of the Fund's
total assets committed to the consummation of the forward contract, or
otherwise cover its position in a manner permitted by the SEC. The Fund will
incur costs in connection with conversions between various currencies. The
Fund may hold foreign currency received in connection with investments in
foreign securities when, in the judgment of the Investment Adviser, it would
be beneficial to convert such currency into U.S. dollars at a later date,
based on anticipated changes in the relevant exchange rate.
Currency exchange rates may fluctuate significantly over short periods of
time causing, along with other factors, the Fund's NAV to fluctuate. Currency
exchange rates generally are determined by the forces of supply and demand in
the foreign exchange markets and the relative merits of investments in
different countries, actual or anticipated changes in interest rates and other
complex factors, as seen from an international perspective. Currency exchange
rates also can be affected unpredictably by the intervention of U.S. or
foreign governments or central banks, or the failure to intervene, or by
currency controls or political developments in the U.S. or abroad. To the
extent that a substantial portion of the Fund's total assets, adjusted to
reflect the Fund's net position after giving effect to currency transactions,
is denominated or quoted in the currencies of foreign countries, the Fund will
be more susceptible to the risk of adverse economic and political developments
within those countries.
The market in forward foreign currency exchange contracts, currency swaps
and other privately negotiated currency instruments offers less protection
against defaults by the other party to such instruments than is available for
currency instruments traded on an exchange. Such contracts are subject to the
risk that the counterparty to the contract will default on its obligations.
Since these contracts are not guaranteed by an exchange or clearinghouse, a
default on the contract would deprive the Fund of unrealized profits,
transaction costs or the benefits of a currency hedge or force the Fund to
cover its purchase or sale commitments, if any, at the current market price.
The Fund will not enter into forward foreign currency exchange contracts,
currency swaps or other privately negotiated currency instruments unless the
credit quality of the unsecured senior debt or the claims-paying ability of
the counterparty is considered to be investment grade by the Investment
Adviser.
FIXED-INCOME SECURITIES
U.S. GOVERNMENT SECURITIES. The Fund may invest in U.S. Government
securities. Generally, these securities include U.S. Treasury obligations and
obligations issued or guaranteed by U.S. Government agencies,
instrumentalities or sponsored enterprises. U.S. Government securities also
include Treasury receipts and other stripped U.S. Government securities, where
the interest and principal components of stripped U.S. Government securities
are traded independently. The Fund may also invest in zero coupon U.S.
Treasury securities and in zero coupon securities issued by financial
institutions, which represent a proportionate interest in underlying U.S.
Treasury securities. A zero coupon security pays no interest to its holder
during its life and its value consists of
11
<PAGE>
the difference between its face value at maturity and its cost. The market
prices of zero coupon securities generally are more volatile than the market
prices of securities that pay interest periodically. See "Taxation" in the
Additional Statement.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. The Fund may invest in
mortgage-backed securities ("Mortgage-Backed Securities"), which represent
direct or indirect participations in, or are collateralized by and payable
from, mortgage loans secured by real property. The Fund may also invest in
asset-backed securities ("Asset-Backed Securities"). The principal and
interest payments on Asset-Backed Securities are collateralized by pools of
assets such as auto loans, credit card receivables, leases, installment
contracts and personal property. Such asset pools are securitized through the
use of special purpose trusts or corporations. Principal and interest payments
may be credit enhanced by a letter of credit, a pool insurance policy or a
senior/subordinated structure.
The Fund may also invest in stripped Mortgage-Backed Securities ("SMBS")
(including interest only and principal only securities), which are derivative
multiple class Mortgage-Backed Securities. SMBS are usually structured with
two different classes: one that receives 100% of the interest payments and the
other that receives 100% of the principal payments from a pool of mortgage
loans. If the underlying mortgage loans experience different than anticipated
prepayments of principal, the Fund may fail to recoup fully its initial
investment in these securities. The market value of the class consisting
entirely of principal payments generally is unusually volatile in response to
changes in interest rates. The yields on a class of SMBS that receives all or
most of the interest from mortgage loans are generally higher than prevailing
market yields on other Mortgage-Backed Securities because their cash flow
patterns are more volatile and there is a greater risk that the initial
investment will not be fully recouped. The Fund's investments in SMBS may
require the Fund to sell portfolio securities to generate sufficient cash to
satisfy certain income distribution requirements.
CORPORATE DEBT OBLIGATIONS. The Fund may invest in corporate debt
obligations. Corporate debt obligations are subject to the risk of an issuer's
inability to meet principal and interest payments on the obligations.
BANK OBLIGATIONS. The Fund may invest in obligations issued or guaranteed by
U.S. or foreign banks. Bank obligations, including without limitation, time
deposits, bankers' acceptances and certificates of deposit, may be general
obligations of the parent bank or may be limited to the issuing branch by the
terms of the specific obligations or by government regulation. Banks are
subject to extensive but different governmental regulations which may limit
both the amount and types of loans which may be made and interest rates which
may be charged. In addition, the profitability of the banking industry is
largely dependent upon the availability and cost of funds for the purpose of
financing lending operations under prevailing money market conditions. General
economic conditions as well as exposure to credit losses arising from possible
financial difficulties of borrowers play an important part in the operation of
this industry.
STRUCTURED SECURITIES. The Fund may invest in structured securities. The
value of the principal of and/or interest on such securities is determined by
reference to changes in the value of specific currencies, interest rates,
commodities, indices or other financial indicators (the "Reference") or the
relative change in two or more References. The interest rate or the principal
amount payable upon maturity or redemption may be increased or decreased
depending upon changes in the applicable Reference. The terms of the
structured securities may provide that in certain circumstances no principal
is due at maturity and, therefore, result in the loss of the Fund's
investment. Structured securities may be positively or negatively indexed, so
that appreciation of the Reference may produce an increase or decrease in the
interest rate or value of the security at maturity. In addition, changes in
the interest rates or the value of the security at maturity may be a multiple
of changes in the value of the Reference. Consequently, structured securities
may entail a greater degree of market risk than other types of fixed-income
securities. Structured securities may also be more volatile, less liquid and
more difficult to price accurately than less complex securities.
12
<PAGE>
RATING CRITERIA. Under normal circumstances, the Fund may invest up to 20%
of its total assets in fixed income securities, including securities which are
unrated or rated in the lowest rating categories by Standard & Poor's Ratings
Group ("Standard & Poor's") or Moody's Investors Service, Inc. ("Moody's")
(i.e., BB or lower by Standard & Poor's or Ba or lower by Moody's), including
securities rated D by Moody's or Standard & Poor's. Fixed-income securities
rated BBB or Baa are considered medium-grade obligations with speculative
characteristics, and adverse economic conditions or changing circumstances may
weaken their issuers' capacity to pay interest and repay principal. Fixed-
income securities rated BB or Ba or below (or comparable unrated securities)
are commonly referred to as "junk bonds" and are considered predominantly
speculative and may be questionable as to principal and interest payments. In
some cases, such bonds may be highly speculative, have poor prospects for
reaching investment grade standing and be in default. As a result, investment
in such bonds will entail greater speculative risks than those associated with
investment in investment grade bonds. Also, to the extent that the rating
assigned to a security in the Fund's portfolio is downgraded by a rating
organization, the market price and liquidity of such security may be adversely
affected. See Appendix A to the Additional Statement for a description of the
corporate bond ratings assigned by Standard & Poor's and Moody's.
UNSEASONED COMPANIES
The Fund may invest in companies (including predecessors) which have
operated less than three years. 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.
INVESTMENT TECHNIQUES
OPTIONS ON SECURITIES AND SECURITIES INDICES
The Fund may write (sell) covered call and put options and purchase call and
put options on any securities in which it may invest or on any securities
index composed of securities in which it may invest. The writing and purchase
of options is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. The use of options to seek to increase total return
involves the risk of loss if the Investment Adviser is incorrect in its
expectation of fluctuations in securities prices or interest rates. The
successful use of options for hedging purposes also depends in part on the
ability of the Investment Adviser to manage future price fluctuations and the
degree of correlation between the options and securities markets. If the
Investment Adviser is incorrect in its expectation of changes in securities
prices or determination of the correlation between the securities indices on
which options are written and purchased and the securities in the Fund's
investment portfolio, the investment performance of the Fund will be less
favorable than it would have been in the absence of such options transactions.
The writing of options could significantly increase the Fund's portfolio
turnover rate and, therefore, associated brokerage commissions or spreads.
OPTIONS ON FOREIGN CURRENCIES
The Fund may, to the extent it invests in foreign securities, purchase and
sell (write) call and put options on foreign currencies for the purpose of
protecting against declines in the U.S. dollar value of foreign portfolio
securities and anticipated dividends on such securities and against increases
in the U.S. dollar cost of foreign securities to be acquired. As with other
kinds of options transactions, however, the writing of an option of a
13
<PAGE>
foreign currency will constitute only a partial hedge, up to the amount of the
premium received. If an option that the Fund has written is exercised, the
Fund could be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The purchase of an
option on foreign currency may constitute an effective hedge against exchange
rate fluctuations; however, in the event of exchange rate movements adverse to
the Fund's position, the Fund may forfeit the entire amount of the premium
plus related transaction costs. Options on foreign currencies written or
purchased by the Fund are traded on U.S. and foreign exchanges or over-the-
counter.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
To seek to increase total return or to hedge against changes in interest
rates, securities prices or currency exchange rates, the Fund may purchase and
sell various kinds of futures contracts, and purchase and write call and put
options on any of such futures contracts. The Fund may also enter into closing
purchase and sale transactions with respect to any such contracts and options.
The futures contracts may be based on various securities (such as U.S.
Government securities), foreign currencies, securities indices and other
financial instruments and indices. The Fund will engage in futures and related
options transactions for bona fide hedging purposes as defined in regulations
of the Commodity Futures Trading Commission or to seek to increase total
return to the extent permitted by such regulations. The Fund may not purchase
or sell futures contracts or purchase or sell related options to seek to
increase total return, except for closing purchase or sale transactions, if
immediately thereafter the sum of the amount of initial margin deposits and
premiums paid on the Fund's outstanding positions in futures and related
options entered into for the purpose of seeking to increase total return would
exceed 5% of the market value of the Fund's net assets. These transactions
involve brokerage costs, require margin deposits and, in the case of contracts
and options obligating the Fund to purchase securities, require the Fund to
segregate and maintain cash or liquid assets with a value equal to the amount
of the Fund's obligations or to otherwise cover the obligations in a manner
permitted by the SEC.
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. See
"Investment Objectives and Policies--Futures Contracts and Options on Futures
Contracts" in the Additional Statement. Thus, while the Fund may benefit from
the use of futures and options on futures, unanticipated changes in interest
rates or securities prices may result in poorer overall performance than if
the Fund had not entered into any futures contracts or options transactions.
Because perfect correlation between a futures position and portfolio position
that is intended to be protected is impossible to achieve, the desired
protection may not be obtained and the Fund may be exposed to risk of loss.
The loss incurred by the Fund in entering into futures contracts and in
writing call options on futures is potentially unlimited and may exceed the
amount of the premium received. Futures markets are highly volatile and the
use of futures may increase the volatility of the Fund's NAV. The
profitability of the Fund's trading in futures to seek to increase total
return depends upon the ability of the Investment Adviser to analyze correctly
the futures markets. In addition, because of the low margin deposits normally
required in futures trading, a relatively small price movement in a futures
contract may result in substantial losses to the Fund. Further, futures
contracts and options on futures may be illiquid, and exchanges may limit
fluctuations in futures contract prices during a single day. The Fund may
engage in futures transactions on both U.S. and foreign exchanges. Foreign
exchanges may not provide the same protection as U.S. exchanges.
EQUITY SWAPS
The Fund may invest up to 10% of its total assets in equity swaps. Equity
swaps allow the parties to a swap agreement to exchange the dividend income or
other components of return on an equity investment (e.g., a group of equity
securities or an index) for a component of return on another non-equity or
equity investment. An equity
14
<PAGE>
swap may be used by the Fund to invest in a market without owning or taking
physical custody of securities in circumstances in which direct investment may
be restricted for legal reasons or is otherwise impractical. Equity swaps are
derivatives and their value can be very volatile. To the extent that the
Investment Adviser does not accurately analyze and predict the potential
relative fluctuation of the components swapped with another party, the Fund
may suffer a loss. The value of some components of an equity swap (such as the
dividends on a common stock) may also be sensitive to changes in interest
rates. Furthermore, during the period a swap is outstanding, the Fund may
suffer a loss if the counterparty defaults. In connection with its investments
in equity swaps, the Fund will either segregate cash or liquid assets or
otherwise cover its obligations in a manner required by the SEC.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
The Fund may purchase when-issued securities. When-issued transactions arise
when securities are purchased by a Fund with payment and delivery taking place
in the future in order to secure what is considered to be an advantageous
price and yield to the Fund at the time of entering into the transaction. The
Fund may also purchase securities on a forward commitment basis; that is, make
contracts to purchase securities for a fixed price at a future date beyond the
customary three-day settlement period. The Fund will segregate cash or liquid
assets in an amount sufficient to meet the purchase price until 3 days prior
to the settlement date. Alternatively, the Fund may enter into offsetting
contracts for the forward sale of other securities that it owns. The purchase
of securities on a when-issued or forward commitment basis involves a risk of
loss if the value of the security to be purchased declines prior to the
settlement date. Although the Fund would generally purchase securities on a
when-issued or forward commitment basis with the intention of acquiring
securities for its portfolio, the Fund may dispose of when-issued securities
or forward commitments prior to settlement if the Investment Adviser deems it
appropriate to do so.
ILLIQUID AND RESTRICTED SECURITIES
The Fund will not invest more than 15% of its net assets in illiquid
investments, which include securities (both foreign and domestic) that are not
readily marketable, certain SMBS, repurchase agreements maturing in more than
7 days, time deposits with a notice or demand period of more than 7 days,
certain over-the-counter options, and certain restricted securities, unless it
is determined, based upon a review of the trading markets for a specific
restricted security, that such restricted security is eligible for resale
pursuant to Rule 144A under the Securities Act of 1933 and, therefore, is
liquid. The Trustees have adopted guidelines under which the Investment
Adviser determines and monitors the liquidity of portfolio securities, subject
to the oversight of the Trustees. Investing in restricted securities eligible
for resale pursuant to Rule 144A may decrease the liquidity of the Fund's
portfolio to the extent that qualified institutional buyers become for a time
uninterested in purchasing these restricted securities. The purchase price and
subsequent valuation of restricted and illiquid securities normally reflect a
discount, which may be significant, from the market price of comparable
securities for which a liquid market exists.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with dealers in U.S.
Government securities and member banks of the Federal Reserve System which
furnish collateral at least equal in value or market price to the amount of
their repurchase obligation. If the other party or "seller" defaults, the Fund
might suffer a loss to the extent that the proceeds from the sale of the
underlying securities and other collateral held by the Fund in connection with
the related repurchase agreement are less than the repurchase price. In
addition, in the event of bankruptcy of the seller or failure of the seller to
repurchase the securities as agreed, the Fund could suffer losses, including
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<PAGE>
loss of interest on or principal of the security and costs associated with
delay and enforcement of the repurchase agreement. The Trustees have reviewed
and approved certain counterparties whom they believe to be creditworthy and
have authorized the Fund to enter into repurchase agreements with such
counterparties. In addition, the Fund, together with other registered
investment companies having management agreements with the Investment Adviser
or its affiliates, may transfer uninvested cash balances into a single joint
account, the daily aggregate balance of which will be invested in one or more
repurchase agreements.
LENDING OF PORTFOLIO SECURITIES
The Fund may seek to increase its income by lending portfolio securities.
Under present regulatory policies, such loans may be made to institutions,
such as certain broker-dealers, and are required to be secured continuously by
collateral in cash, cash equivalents, or U.S. Government securities maintained
on a current basis in an amount at least equal to the market value of the
securities loaned. Cash collateral may be invested in cash equivalents. If the
Investment Adviser determines to make securities loans, the value of the
securities loaned may not exceed 33 1/3% of the value of the total assets of
the Fund (including the loan collateral). The Fund may experience a loss or
delay in the recovery of its securities if the institution with which it has
engaged in a portfolio loan transaction breaches its agreement with the Fund.
SHORT SALES AGAINST-THE-BOX
The Fund may make short sales of securities or maintain a short position,
provided that at all times when a short position is open the Fund owns an
equal amount of such securities or securities convertible into or exchangeable
for, without payment of any further consideration, an equal amount of the
securities of the same issuer as the securities sold short (a short sale
against-the-box). Not more than 25% of the Fund's net assets (determined at
the time of the short sale) may be subject to such short sales. As a result of
recent tax legislation, short sales may not generally be used to defer the
recognition of gain for tax purposes with respect to appreciated securities in
the Fund's portfolio.
TEMPORARY INVESTMENTS
The Fund may, for temporary defensive purposes, invest 100% of its total
assets in U.S. Government securities, repurchase agreements collateralized by
U.S. Government securities, commercial paper rated at least A-2 by Standard &
Poor's or P-2 by Moody's, certificates of deposit, bankers' acceptances,
repurchase agreements, non-convertible preferred stocks and non-convertible
corporate bonds with a remaining maturity of less than one year. When the
Fund's assets are invested in such instruments, the Fund may not be achieving
its investment objective.
MISCELLANEOUS TECHNIQUES
In addition to the techniques and investments described above, the Fund may,
with respect to no more than 5% of its net assets, engage in the following
techniques and investments: (i) warrants and stock purchase rights; (ii)
mortgage swaps, index swaps and interest rate swaps, caps, floors and collars;
(iii) yield curve options and inverse floating rate securities; (iv) other
investment companies; (v) mortgage dollar rolls and (vi) custodial receipts.
For more information see the Additional Statement.
In addition, the Fund may borrow up to 33 1/3% of its total assets from
banks for temporary or emergency purposes. The Fund may not make additional
investments if borrowings (excluding covered mortgage dollar rolls) exceed 5%
of its total assets. For more information see the Additional Statement.
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<PAGE>
RISK FACTORS
RISK FACTORS ASSOCIATED WITH THE REAL ESTATE INDUSTRY. Although the Fund
does not invest directly in real estate, it does invest primarily in
securities of issuers that are engaged in or related to the real estate
industry, and does have a policy of concentrating its investments in the real
estate industry. Therefore, an investment in the Fund is subject to certain
risks associated with the direct ownership of real estate and with the real
estate industry in general. These risks include, among others: possible
declines in the value of real estate; risks related to general and local
economic conditions; possible lack of availability of mortgage funds;
overbuilding; extended vacancies of properties; increases in competition,
property taxes and operating expenses; changes in zoning laws; costs resulting
from the clean-up of, and liability to third parties for damages resulting
from, environmental problems; casualty or condemnation losses; uninsured
damages from floods, earthquakes or other natural disasters; limitations on
and variations in rents; and changes in interest rates. To the extent that
assets underlying the Fund's investments are concentrated geographically, by
property type or in certain other respects, the Fund may be subject to certain
of the foregoing risks to a greater extent.
In addition, if the Fund receives rental income or income from the
disposition of real property acquired as a result of a default on securities
the Fund owns, the receipt of such income or the ownership of such property
may adversely affect the Fund's ability to retain its tax status as a
regulated investment company. Investments by the Fund in securities of
companies providing mortgage servicing will be subject to the risks associated
with refinancings and their impact on servicing rights.
RISKS OF INVESTING IN REITS. Investing in REITs involves certain unique
risks in addition to those risks associated with investing in the real estate
industry in general. Equity REITs may be affected by changes in the value of
the underlying property owned by the REITs. Mortgage REITs may be affected by
the quality of any credit extended. REITs are dependent upon management
skills, may not be diversified, are subject to heavy cash flow dependency,
default by borrowers and self-liquidation. REITs are also subject to the
possibilities of failing to qualify for tax free pass-through of income under
the Code and failing to maintain their exemptions from registration under the
Investment Company Act of 1940, as amended (the "1940 Act"). REITs whose
underlying properties are concentrated in a particular industry or geographic
region are also subject to risks affecting such industries and regions.
REITs (especially mortgage REITs) are also subject to interest rate risks.
When interest rates decline, the value of a REIT's investment in fixed rate
obligations can be expected to rise. Conversely, when interest rates rise, the
value of a REIT's investment in fixed rate obligations can be expected to
decline. In contrast, as interest rates on adjustable rate mortgage loans are
reset periodically, yields on a REIT's investments in such loans will
gradually align themselves to reflect changes in market interest rates,
causing the value of such investments to fluctuate less dramatically in
response to interest rate fluctuations than would investments in fixed rate
obligations.
Investing in REITs involves risks similar to those associated with investing
in small capitalization companies. REITs may have limited financial resources,
may trade less frequently and in a limited volume and may be subject to more
abrupt or erratic price movements than larger capitalization companies.
Historically, small capitalization stocks, such as REITs, have been more
volatile in price than the larger capitalization stocks included in the
Standard & Poor's Index of 500 Common Stocks. Among the reasons for the
greater price volatility of these small company and unseasoned stocks are the
less certain growth prospects of smaller firms and the lower degree of
liquidity in the markets for such stocks.
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<PAGE>
RISKS OF INVESTING IN EQUITY SECURITIES In general, the Fund is subject to
the risks associated with investments in common stocks and other equity
securities. Stock values fluctuate in response to the activities of individual
companies and in response to general market and economic conditions and,
accordingly, the value of the stocks that the Fund holds may decline over
short or extended periods. The U.S. stock markets tend to be cyclical, with
periods when stock prices generally rise and periods when prices generally
decline. As of the date of this Prospectus, domestic stock markets were
trading at or close to record high levels and there can be no guarantee that
such levels will continue.
SPECIAL RISKS OF INVESTMENTS IN EMERGING MARKETS. Investing in the
securities of issuers in Emerging Countries involves risks in addition to
those discussed under "Description of Securities--Foreign Investments." The
Fund may invest up to 15% of its total assets in securities of issuers in
Emerging Countries. Emerging Countries are generally located in the Asia-
Pacific region, Eastern Europe, Latin and South America and Africa.
Foreign investment in the securities markets of certain Emerging Countries
is restricted or controlled to varying degrees which may limit investment in
such countries or increase the administrative costs of such investments.
Certain countries may restrict or prohibit investment opportunities in issuers
or industries deemed important to national interests. Such restrictions may
affect the market price, liquidity and rights of securities that may be
purchased by the Fund. The repatriation of both investment income and capital
from certain Emerging Countries is subject to restrictions such as the need
for governmental consents. Many Emerging Countries may be subject to a greater
degree of economic, political and social instability than is the case in
Western Europe, the United States, Canada, Australia, New Zealand and Japan.
Many Emerging Countries do not have fully democratic governments. For example,
governments of some Emerging Countries are authoritarian in nature or have
been installed or removed as a result of military coups, while governments in
other Emerging Countries have periodically used force to suppress civil
dissent. Many Emerging Countries have experienced currency devaluations, and
substantial and, in some cases, extremely high rates of inflation, which have
a negative effect on the economies and securities markets of such Emerging
Countries. Settlement procedures in Emerging Countries are frequently less
developed and reliable than those in the United States and may involve the
Fund's delivery of securities before receipt of payment for their sale. In
addition, significant delays are common in certain markets in registering the
transfer of securities. Settlement or registration problems may make it more
difficult for the Fund to value its portfolio securities and could cause the
Fund to miss attractive investment opportunities, to have a portion of its
assets uninvested or to incur losses due to the failure of a counterparty to
pay for securities the Fund has delivered or the Fund's inability to complete
its contractual obligations.
RISKS OF INVESTING IN FIXED-INCOME SECURITIES. When interest rates decline,
the market value of fixed- income securities tends to increase. Conversely,
when interest rates increase, the market value of fixed income securities
tends to decline. Volatility of a security's market value will differ
depending upon the security's duration, the issuer and the type of instrument.
Investments in fixed-income securities are subject to the risk that the issuer
could default on its obligations and the Fund could sustain losses on such
investments. A default could impact both interest and principal payments.
RISKS OF DERIVATIVE TRANSACTIONS. The Fund's transactions, if any, in
options, futures, options on futures, swaps, structured securities and
currency transactions involve certain risks, including a possible lack of
correlation between changes in the value of hedging instruments and the
portfolio assets (if any) being hedged, the potential illiquidity of the
markets for derivative instruments, the risks arising from margin requirements
and related leverage factors associated with such transactions. The use of
these management techniques to seek to
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<PAGE>
increase total return may be regarded as a speculative practice and involves
the risk of loss if the Investment Adviser is incorrect in its expectation of
fluctuations in securities prices, interest rates or currency prices. The
Fund's use of certain derivative transactions may be limited by the
requirements of the Internal Revenue Code of 1986, as amended (the "Code"),
for qualification as a regulated investment company.
INVESTMENT RESTRICTIONS
The Fund is subject to certain investment restrictions that are described in
detail under "Investment Restrictions" in the Additional Statement.
Fundamental investment restrictions of the Fund can not be changed without
approval of a majority of the outstanding Shares of the Fund as defined in the
Additional Statement. The Fund's investment objectives and all policies not
specifically designated as fundamental are non-fundamental and may be changed
without shareholder approval. If there is a change in the Fund's investment
objectives, shareholders should consider whether the Fund remains an
appropriate investment in light of their then current financial positions and
needs.
PORTFOLIO TURNOVER
A high rate of portfolio turnover (100% or more) involves correspondingly
greater expenses which must be borne by the Fund and its shareholders and may
under certain circumstances make it more difficult for the Fund to qualify as
a regulated investment company under the Code. It is anticipated that the
annual portfolio turnover rate of the Fund will generally not exceed 100%. The
portfolio turnover rate is calculated by dividing the lesser of the dollar
amount of sales or purchases of portfolio securities by the average monthly
value of the Fund's portfolio securities, excluding securities having a
maturity at the date of purchase of one year or less. The Investment Adviser
will not consider the portfolio turnover rate a determining factor in making
investment decisions for the Fund consistent with the Fund's investment
objectives and portfolio management policies.
MANAGEMENT
TRUSTEES AND OFFICERS
The Trustees are responsible for deciding matters of general policy and
reviewing the actions of the Investment Adviser, Distributor and transfer
agent. The officers of the Trust conduct and supervise the Fund's daily
business operations. The Additional Statement contains information as to the
identity of, and other information about, the Trustees and officers of the
Trust.
INVESTMENT ADVISER
INVESTMENT ADVISER. Goldman Sachs Asset Management, One New York Plaza,
New York, New York 10004, a separate operating division of Goldman Sachs,
serves as investment adviser to the Fund. Goldman Sachs registered as an
investment adviser in 1981. As of May 21, 1998, GSAM together with its
affiliates, acted as investment adviser or distributor for assets in excess of
$160.4 billion.
Under a Management Agreement with the Fund, the Investment Adviser, subject
to the general supervision of the Trustees, provides day-to-day advice as to
the Fund's portfolio transactions. Goldman Sachs has agreed to permit the Fund
to use the name "Goldman Sachs" or a derivative thereof as part of the Fund's
name for as long as the Fund's Management Agreement is in effect.
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<PAGE>
In performing its investment advisory services, the Investment Adviser,
while remaining ultimately responsible for the management of the Fund, is able
to draw upon the research and expertise of its asset management affiliates for
portfolio decisions and management with respect to certain portfolio
securities. In addition, the Investment Adviser will have access to the
research of, and certain proprietary technical models developed by, Goldman
Sachs and may apply quantitative and qualitative analysis in determining the
appropriate allocations among the categories of issuers and types of
securities.
Under the Management Agreement, the Investment Adviser also: (i) supervises
all non-advisory operations of the Fund; (ii) provides personnel to perform
such executive, administrative and clerical services as are reasonably
necessary to provide effective administration of the Fund; (iii) arranges for
at the Fund's expense (a) the preparation of all required tax returns, (b) the
preparation and submission of reports to existing shareholders, (c) the
periodic updating of prospectuses and Additional Statements and (d) the
preparation of reports to be filed with the SEC and other regulatory
authorities; (iv) maintains the Fund's records; and (v) provides office space
and all necessary office equipment and services.
FUND MANAGERS
<TABLE>
<CAPTION>
YEARS
PRIMARILY
NAME AND TITLE RESPONSIBLE FIVE YEAR EMPLOYMENT HISTORY
-------------- ----------- ----------------------------
<C> <C> <S>
Herbert E. Ehlers Since 1998 Mr. Ehlers joined the Investment
Managing Director and Adviser in 1997 and is part of the
Portfolio Manager portfolio management team of the
Real Estate Securities Fund and the
Chief Investment Officer of the
Growth Equity Strategy. From 1994 to
1997, he was the Chief Investment
Officer and Chairman of Liberty
Investment Management Inc. He was a
portfolio manager and president at
Liberty's predecessor firm, Eagle
Asset Management, from 1984 to 1994.
Elizabeth Groves Since 1998 Ms. Groves joined the Investment
Vice President and Adviser in 1998 and is a portfolio
Portfolio Manager manager for the Real Estate
Securities Fund. Her previous
experience includes 12 years in the
real estate and real estate finance
business. From 1991 to 1997, she
worked in the Real Estate Department
of the Investment Banking Division
of Goldman Sachs, where she was
responsible for both public and
private capital market transactions.
</TABLE>
It is the responsibility of the Investment Adviser to make the investment
decisions for the Fund and to place the purchase and sale orders for the
Fund's portfolio transactions in the U.S. and foreign markets. Such orders may
be directed to any broker including, to the extent and in the manner permitted
by applicable law, Goldman
20
<PAGE>
Sachs or its affiliates. In effecting purchases and sales of portfolio
securities for the Fund, the Investment Adviser will seek the best price and
execution of the Fund's orders. In doing so, where two or more brokers or
dealers offer comparable prices and execution for a particular trade,
consideration may be given to whether the broker or dealer provides investment
research or brokerage services or sells shares of any Goldman Sachs Fund. See
the Additional Statement for a further description of the Investment Adviser's
brokerage allocation practices.
As compensation for its services rendered and assumption of certain expenses
pursuant to the Management Agreement, the Investment Adviser is entitled to a
fee, computed daily and payable monthly at an annual rate equal to 1.00% of
the Fund's average daily net assets.
The Investment Adviser has also voluntarily agreed to reduce or limit
certain "Other Expenses" of the Fund (excluding management, distribution and
authorized dealer service fees, transfer agency fees, taxes, interest and
brokerage fees and litigation, indemnification and other extraordinary
expenses) to the extent such expenses exceed 0.00% per annum of the Fund's
average daily net assets. Such reductions or limits, if any, are calculated
monthly on a cumulative basis and may be discontinued or modified by the
Investment Adviser in its discretion at any time.
ACTIVITIES OF GOLDMAN SACHS AND ITS AFFILIATES AND OTHER ACCOUNTS MANAGED BY
GOLDMAN SACHS. The involvement of the Investment Adviser, Goldman Sachs and
their affiliates in the management of, or their interest in, other accounts
and other activities of Goldman Sachs may present conflicts of interest with
respect to the Fund or limit the Fund's investment activities. Goldman Sachs
and its affiliates engage in proprietary trading and advise accounts and funds
which have investment objectives similar to those of the Fund and/or which
engage in and compete for transactions in the same types of securities,
currencies and instruments as the Fund. Goldman Sachs and its affiliates will
not have any obligation to make available any information regarding their
proprietary activities or strategies, or the activities or strategies used for
other accounts managed by them, for the benefit of the management of the Fund.
The results of the Fund's investment activities, therefore, may differ from
those of Goldman Sachs and its affiliates and it is possible that the Fund
could sustain losses during periods in which Goldman Sachs and its affiliates
and other accounts achieve significant profits on their trading for
proprietary or other accounts. In addition, the Fund may, from time to time,
enter into transactions in which other clients of Goldman Sachs have an
adverse interest. From time to time, the Fund's activities may be limited
because of regulatory restrictions applicable to Goldman Sachs and its
affiliates, and/or their internal policies designed to comply with such
restrictions. See "Management--Activities of Goldman Sachs and its Affiliates
and Other Accounts Managed by Goldman Sachs" in the Additional Statement for
further information.
DISTRIBUTOR AND TRANSFER AGENT
Goldman Sachs, 85 Broad Street, New York, New York 10004, serves as the
exclusive distributor (the "Distributor") of the Fund's Shares. Shares may
also be sold by Authorized Dealers. Authorized Dealers include investment
dealers that are members of the NASD and certain other financial service
firms. To become an Authorized Dealer, a dealer or financial service firm must
enter into a sales agreement with Goldman Sachs. The minimum investment
requirements, services, programs and purchase and redemption options for
Shares purchased through a particular Authorized Dealer may be different from
those available to investors purchasing through other Authorized Dealers.
Goldman Sachs, 4900 Sears Tower, Chicago, Illinois 60606, also serves as the
Fund's transfer agent (the "Transfer Agent") and as such performs various
shareholder servicing functions. As compensation for the services rendered to
the Fund by Goldman Sachs (as Transfer Agent), Goldman Sachs is entitled to a
fee from
21
<PAGE>
the Fund, with respect to Class A, Class B and Class C Shares equal to $12,000
per year per Class plus $7.50 per account and out-of-pocket and transaction-
related expenses. Shareholders with inquiries regarding the Fund should
contact Goldman Sachs (as Transfer Agent) at the address or the telephone
number set forth on the back cover page of this Prospectus.
From time to time Goldman Sachs or any of its affiliates may purchase and
hold Shares of the Fund. Goldman Sachs reserves the right to redeem at any
time some or all of the Shares acquired for its own account.
YEAR 2000
Many computer systems were designed using only two digits to signify the
year (for example, "98" for "1998"). On January 1, 2000, if these computer
systems are not corrected, they may incorrectly interpret "00" as the year
"1900" rather than the year "2000," leading to computer shutdowns or errors
(commonly known as the "Year 2000 Problem"). To the extent these systems
conduct forward-looking calculations, these computer problems may occur prior
to January 1, 2000. Like other investment companies and financial and business
organizations, the Fund could be adversely affected in their ability to
process securities trades, price securities, provide shareholder account
services and otherwise conduct normal business operations if the Investment
Adviser or other Fund service providers do not adequately address this problem
in a timely manner. The Investment Adviser has established a dedicated group
to analyze these issues and to implement the systems modifications necessary
to prepare for the Year 2000 Problem. Currently, the Investment Adviser does
not anticipate that the transition to the 21st Century will have any material
impact on its ability to continue to service the Fund at current levels. In
addition, the Investment Adviser has sought assurances from the Fund's other
service providers that they are taking the steps necessary so that they do not
experience Year 2000 Problems, and the Investment Adviser will continue to
monitor the situation. At this time, however, no assurance can be given that
the actions taken by the Investment Adviser and the Fund's other service
providers will be sufficient to avoid any adverse effect on the Fund due to
the Year 2000 Problem.
EXPENSES
The Fund is responsible for the payment of its expenses. The expenses
include, without limitation: fees payable to the Investment Adviser;
distribution and authorized dealer service fees; custodial and transfer agency
fees; brokerage fees and commissions; filing fees for the registration or
qualification of the Fund's Shares under federal or state securities laws,
organizational expenses; fees and expenses incurred in connection with
membership in investment company organizations; taxes; interest; costs of
liability insurance; fidelity bonds or indemnification; any costs, expenses or
losses arising out of any liability of, or claim for damages or other relief
asserted against the Fund for violation of any law; legal and auditing fees
and expenses (including the cost of legal and certain accounting services
rendered by employees of the Investment Adviser and its affiliates with
respect to the Fund); expenses of preparing and setting in type prospectuses,
Additional Statements, proxy material, reports and notices and the printing
and distributing of the same to shareholders and regulatory authorities;
compensation and expenses of the Trust's "non-interested" Trustees; and
extraordinary organizational expenses, if any, incurred by the Trust.
REPORTS TO SHAREHOLDERS
Shareholders will receive an annual report containing audited financial
statements and a semi-annual report. To eliminate unnecessary duplication,
only one copy of such reports may be sent to shareholders with the same
22
<PAGE>
mailing address. Shareholders who desire a duplicate copy of such reports to
be mailed to their residence should contact Goldman Sachs at 800-526-7384.
Each shareholder will also be provided with a printed confirmation for each
transaction in the shareholder's account and an individual quarterly account
statement. A year-to-date statement for any account will be provided upon
request made to Goldman Sachs. The Fund does not generally provide sub-
accounting services.
HOW TO INVEST
ALTERNATIVE PURCHASE ARRANGEMENTS
The Fund continuously offers through this Prospectus Class A, Class B and
Class C Shares, as described more fully in "How to Buy Shares of the Fund." If
you do not specify in your instructions to the Fund which class of Shares you
wish to purchase, the Fund will assume that your instructions apply to Class A
Shares.
CLASS A SHARES. If you invest less than $1 million in Class A Shares you
will pay an initial sales charge. Certain purchases may qualify for reduced
initial sales charges. If you invest $1 million or more in Class A Shares of
the Fund, no sales charge will be imposed at the time of purchase, but you may
incur a deferred sales charge equal to 1.00% if you redeem your Shares within
18 months of purchase. Class A Shares are subject to distribution fees of
0.25% and authorized dealer service fees of 0.25%, per annum, respectively, of
the Fund's average daily net assets attributable to Class A Shares.
CLASS B SHARES. Class B Shares are sold without an initial sales charge, but
are subject to a CDSC of up to 5% if redeemed within six years of purchase.
Class B Shares are subject to distribution and authorized dealer service fees
of 0.75% and 0.25%, per annum, respectively, of the Fund's average daily net
assets attributable to Class B Shares. See "Distribution and Authorized Dealer
Service Plans." Class B Shares will automatically convert to Class A Shares,
based on their relative NAVs, 8 years after the initial purchase. Your entire
investment in Class B Shares is available to work for you from the time you
make your initial investment, but the distribution fee paid by Class B Shares
will cause your Class B Shares (until conversion to Class A Shares) to have a
higher expense ratio and to pay lower dividends, to the extent dividends are
paid, than Class A Shares.
CLASS C SHARES. Class C Shares are sold without an initial sales charge, but
are subject to a CDSC of 1% if redeemed within 12 months of purchase. Class C
Shares are subject to distribution and authorized dealer service fees of 0.75%
and 0.25%, per annum, respectively, of the Fund's average daily net assets
attributable to Class C Shares. See "Distribution and Authorized Dealer
Service Plans." Class C Shares have no conversion feature, and accordingly, an
investor that purchases Class C Shares will be subject to distribution fees
that will be imposed on Class C Shares for an indefinite period, subject to
annual approval by the Fund's Board of Trustees and certain regulatory
limitations. Your entire investment in Class C Shares is available to work for
you from the time you make your initial investment, but the distribution fee
paid by Class C Shares will cause your Class C Shares to have a higher expense
ratio and to pay lower dividends, to the extent dividends are paid, than Class
A Shares (or Class B Shares after conversion to Class A Shares).
FACTORS TO CONSIDER IN CHOOSING CLASS A, CLASS B OR CLASS C SHARES. The
decision as to which class to purchase depends on the amount you invest, the
intended length of the investment and your personal situation. For example, if
you are making an investment of $50,000 or more that qualifies for a reduced
sales charge, you should consider purchasing Class A Shares. A brief
description of when the initial sales charge may be reduced
23
<PAGE>
or eliminated is set forth below under "Right of Accumulation" and "Statement
of Intention." If you prefer not to pay an initial sales charge on an
investment and plan to hold your investment for at least 6 years, you might
consider purchasing Class B Shares. If you prefer not to pay an initial sales
charge and are unsure of the length of your investment or plan to hold your
investment for less than 8 years, you may prefer Class C Shares. There is no
limit on the purchase of Class A Shares. A maximum purchase limitation of
$250,000 and $1,000,000 normally applies to in the aggregate on purchases of
Class B Shares and Class C Shares, respectively. Although Class C Shares are
subject to a CDSC for only twelve months at a lower rate than Class B Shares,
Class C Shares do not have the conversion feature applicable to Class B
Shares, making them subject to higher distribution fees for an indefinite
period. Authorized Dealers may receive different compensation for selling
Class A, Class B or Class C Shares.
HOW TO BUY SHARES OF THE FUND--CLASS A, CLASS B AND CLASS C SHARES
You may purchase Shares of the Fund through any Authorized Dealer (including
Goldman Sachs) or directly from the Fund, c/o National Financial Data
Services, Inc. ("NFDS"), P.O. Box 419711, Kansas City, MO 64141-6711 on any
Business Day (as defined under "Additional Information") at the NAV next
determined after receipt of an order as described below under "Other Purchase
Information," plus, in the case of Class A Shares, any applicable sales
charge. Currently, the Fund's NAV is determined as of the close of regular
trading on the New York Stock Exchange (which is normally, but not always,
4:00 p.m. New York time).
The minimum initial investment in the Fund is $1,000. An initial investment
minimum of $250 applies to purchases in connection with tax-sheltered
retirement plans, Individual Retirement Account Plans (excluding SIMPLE IRAs
and Education IRAs) or accounts established under the Uniform Gift to Minors
Act ("UGMA"), an initial investment minimum of $200 applies to purchases in
connection with 403(b) plans. The minimum initial investment for purchases in
connection with SIMPLE and Education IRAs, as well as purchases through the
Automatic Investment Plan, is $50. The minimum subsequent investment is $50.
These requirements may be waived at the discretion of the Trust's officers.
You may pay for purchases of Shares by check (except that the Trust will not
accept a check drawn on a foreign bank or a third party check), Federal
Reserve draft, federal funds wire, ACH transfer or bank wire. Purchases of
shares by check or Federal Reserve draft should be made payable as follows:
(i) to an investor's Authorized Dealer, if purchased through such Authorized
Dealer, or (ii) to Goldman Sachs Real Estate Securities Fund--(Name of Class
of Shares) and sent to NFDS, P.O. Box 419711, Kansas City, MO 64141-6711.
Federal funds wires, ACH transfers and bank wires should be sent to State
Street Bank and Trust Company ("State Street"). Payment must be received
within three Business Days after receipt of the purchase order. An investor's
Authorized Dealer is responsible for forwarding payment promptly to the Fund.
In order to make an initial investment in the Fund, an investor must
establish an account with the Fund by furnishing to the Fund, Goldman Sachs or
the investor's Authorized Dealer the information in the Account Application
attached to this Prospectus. The Fund may refuse to open an account for any
investor who fails to (i) provide a social security number or other taxpayer
identification number; or (ii) certify that such number is correct (if
required to do so under applicable law).
The Fund reserves the right to redeem Shares of any shareholder whose
account balance is less than $50 as a result of earlier redemptions. Such
redemptions will not be implemented if the value of a shareholder's account
falls below the minimum account balance solely as a result of market
conditions. The Fund will give 60 days' prior written notice to shareholders
whose Shares are being redeemed to allow them to purchase sufficient
additional Shares of the Fund to avoid such redemption. In addition, the Fund
and Goldman Sachs reserve the right to modify the minimum investment, the
manner in which Shares are offered and the sales charge rates applicable to
future purchases of Shares.
24
<PAGE>
OFFERING PRICE--CLASS A SHARES
The offering price of Class A Shares of the Fund is the next determined NAV
per Share plus a sales charge, if any, paid to Goldman Sachs at the time of
purchase of Shares as shown in the following table:
<TABLE>
<CAPTION>
SALES CHARGE MAXIMUM DEALER
SALES CHARGE AS AS PERCENTAGE ALLOWANCE AS
AMOUNT OF PURCHASE PERCENTAGE OF OF NET AMOUNT PERCENTAGE OF
INCLUDING SALES CHARGE, IF ANY)( OFFERING PRICE INVESTED OFFERING PRICE***
- -------------------------------- --------------- ------------- -----------------
<S> <C> <C> <C>
Less than $50,000.............................. 5.50% 5.82% 5.00%
$50,000 up to (but less than) $100,000......... 4.75 4.99 4.00
$100,000 up to (but less than) $250,000........ 3.75 3.90 3.00
$250,000 up to (but less than) $500,000........ 2.75 2.83 2.25
$500,000 up to (but less than) $1 million...... 2.00 2.04 1.75
$1 million or more............................. 0.00* 0.00* **
</TABLE>
- --------
* No sales charge is payable at the time of purchase of Class A Shares of $1
million or more, but a CDSC may be imposed in the event of certain
redemption transactions made within 18 months of purchase.
** Goldman Sachs pays a one-time commission to Authorized Dealers who
initiate or are responsible for purchases of $1 million or more of Shares
of the Fund equal to 1.00% of the amount under $3 million, 0.50% of the
next $2 million, and 0.25% thereafter. Goldman Sachs may also pay, with
respect to all or a portion of the amount purchased, a commission in
accordance with the foregoing schedule to Authorized Dealers who initiate
or are responsible for purchases of $500,000 or more by plans or $1
million or more by "wrap" accounts satisfying the criteria set forth in
(h) or (i) below. Purchases by such plans will be made at NAV with no
initial sales charge, but if all of the Shares held are redeemed within 18
months after the end of the calendar month in which such purchase was
made, a CDSC, as described below, of 1.00% may be imposed upon the plan
sponsor or the third party administrator. In addition, Authorized Dealers
shall remit to Goldman Sachs such payments received in connection with
"wrap" accounts in the event that Shares are redeemed within 18 months
after the end of the calendar month in which the purchase was made.
*** During special promotions, the entire sales charge may be reallowed to
Authorized Dealers. Authorized Dealers to whom substantially the entire
sales charge is reallowed may be deemed to be "underwriters" under the
Securities Act of 1933.
Purchases of $1 million or more of Class A Shares will be made at NAV with
no initial sales charge, but if the Shares are redeemed within 18 months after
the end of the calendar month in which the purchase was made, excluding any
period of time in which the Shares were exchanged into and remained invested
in an ILA Portfolio (the "CDSC period"), a CDSC of 1.00% may be imposed
unless, in certain cases, the investor's Authorized Dealer enters into an
agreement with Goldman Sachs to return all or an applicable prorated portion
of its commission to Goldman Sachs. Any applicable CDSC will be assessed on an
amount equal to the lesser of the current market value or the original
purchase cost of the redeemed Class A Shares. Accordingly, no CDSC will be
imposed on increases in account value above the initial purchase price,
including any dividends which have been reinvested in additional Class A
Shares. Upon redemption of Shares subject to a CDSC, shareholders will receive
that portion of the appreciation in account value attributable to the Shares
actually redeemed. In determining whether a CDSC applies to a redemption, it
will be assumed that the redemption is first made from any Class A Shares in
your account that are not subject to the CDSC. The CDSC is waived on
redemptions in certain circumstances. See "Waiver or Reduction of Contingent
Deferred Sales Charges" below.
Class A Shares of the Fund may be sold at NAV without payment of any sales
charge to: (a) Goldman Sachs, its affiliates or their respective officers,
partners, directors or employees (including retired employees and former
partners), any partnership of which Goldman Sachs is a general partner, any
Trustee or officer of the
25
<PAGE>
Trust and designated family members of any of the above individuals; (b)
qualified retirement plans of Goldman Sachs; (c) trustees or directors of
investment companies for which Goldman Sachs or an affiliate acts as sponsor;
(d) any employee or registered representative of any Authorized Dealer or
their respective spouses, children and parents; (e) banks, trust companies or
other types of depository institutions investing for their own account or
investing for accounts for which they have investment discretion; (f) banks,
trust companies or other types of depository institutions investing for
accounts for which they do not have investment discretion; (g) any state,
county or city, or any instrumentality, department, authority or agency
thereof, which is prohibited by applicable investment laws from paying a sales
charge or commission in connection with the purchase of Shares of a Fund; (h)
pension and profit sharing plans, pension funds and other company-sponsored
benefit plans that (1) buy Shares worth $500,000 or more, or (2) have at the
time of purchase, 100 or more eligible participants, or (3) certify that they
project to have annual plan purchases of $200,000 or more, or (4) are provided
administrative services by certain third-party administrators that have
entered into a special service arrangement with Goldman Sachs relating to such
plan; (i) "wrap" accounts for the benefit of clients of broker-dealers,
financial institutions or financial planners, provided that they have entered
into an agreement with GSAM specifying aggregate minimums and certain
operating policies and standards; (j) registered investment advisers investing
for accounts for which they receive asset-based fees; (k) accounts over which
GSAM or its advisory affiliates have investment discretion; and (l)
shareholders receiving distributions from a qualified retirement plan invested
in the Goldman Sachs Funds and reinvesting such proceeds in a Goldman Sachs
IRA. Purchasers must certify eligibility for an exemption on the Account
Application and notify Goldman Sachs if the shareholder is no longer eligible
for an exemption. Exemptions will be granted subject to confirmation of a
purchaser's entitlement. Investors purchasing Shares of the Fund at NAV
without payment of any initial sales charge may be charged a fee if they
effect transactions in Shares through a broker or agent. In addition, under
certain circumstances, dividends and distributions from any of the Goldman
Sachs Funds may be reinvested in Shares of the Fund at NAV, as described under
"Cross-Reinvestment of Dividends and Distributions and Automatic Exchange
Program."
RIGHT OF ACCUMULATION--CLASS A SHARES
Class A purchasers may qualify for reduced sales charges when the current
market value of holdings (Shares at current offering price), plus new
purchases, reaches $50,000 or more. Class A Shares of the Goldman Sachs Funds
may be combined under the Right of Accumulation. See the Additional Statement
for more information about the Right of Accumulation.
STATEMENT OF INTENTION--CLASS A SHARES
Purchases of $50,000 or more made over a 13-month period are eligible for
reduced sales charges. Class A Shares of the Goldman Sachs Funds may be
combined under the Statement of Intention. See the Additional Statement for
more information about the Statement of Intention.
OFFERING PRICE--CLASS B SHARES
Investors may purchase Class B Shares of the Fund at the next determined NAV
without the imposition of an initial sales charge. However, Class B Shares
redeemed within 6 years of purchase will be subject to a CDSC at the rates
shown in the table below. At redemption, the charge will be assessed on the
amount equal to the lesser of the current market value or the original
purchase cost of the Shares being redeemed. No CDSC will be imposed on
increases in account value above the initial purchase price, including Shares
derived from the reinvestment of dividends or capital gains distributions.
Upon redemption of Shares subject to a CDSC, shareholders will receive that
portion of the appreciation in account value attributable to the Shares
actually redeemed.
26
<PAGE>
The amount of the CDSC, if any, will vary depending on the number of years
from the time of purchase until the time of redemption of Class B Shares. For
the purpose of determining the number of years from the time of any purchase,
all payments during a month will be aggregated and deemed to have been made on
the first day of that month. In processing redemptions of Class B Shares, the
Fund will first redeem Shares not subject to any CDSC, and then Shares held
longest during the applicable period.
<TABLE>
<CAPTION>
CDSC AS A
PERCENTAGE OF
YEAR SINCE DOLLAR AMOUNT
PURCHASE SUBJECT TO CDSC
---------- ---------------
<S> <C>
First........................................................ 5.0%
Second....................................................... 4.0%
Third........................................................ 3.0%
Fourth....................................................... 3.0%
Fifth........................................................ 2.0%
Sixth........................................................ 1.0%
Seventh and thereafter....................................... none
</TABLE>
Proceeds from the CDSC are payable to the Distributor and may be used in
whole or part to defray the Distributor's expenses related to providing
distribution-related services to the Fund in connection with the sale of Class
B Shares, including the payment of compensation to Authorized Dealers. A
commission equal to 4.00% of the amount invested is paid to Authorized
Dealers.
Class B Shares of the Fund will automatically convert into Class A Shares of
the Fund at the end of the calendar quarter that is 8 years after the purchase
date, except as noted below. Class B Shares of the Fund acquired by exchange
from Class B Shares of another Goldman Sachs Fund will convert into Class A
Shares of the Fund based on the date of the initial purchase. Class B Shares
acquired through reinvestment of distributions will convert into Class A
Shares based on the date of the initial purchase of the Shares on which the
distribution was paid. The conversion of Class B Shares to Class A Shares will
not occur at any time the Fund is advised that such conversions may constitute
taxable events for federal tax purposes, which the Fund believes is unlikely.
If conversions do not occur as a result of possible taxability, Class B Shares
would continue to be subject to higher expenses than Class A Shares for an
indeterminate period.
OFFERING PRICE--CLASS C SHARES
Investors may purchase Class C Shares of the Fund at the next determined NAV
without the imposition of an initial sales charge. However, if Class C Shares
are redeemed within 12 months of purchase, a CDSC of 1% will be deducted from
the redemption proceeds. At redemption, the charge will be assessed on the
amount equal to the lesser of the current market value or the original
purchase cost of the Shares being redeemed. No CDSC will be imposed on
increases in account value above the initial purchase price, including Shares
derived from the reinvestment of dividends or capital gains distributions.
Upon redemption of Shares subject to a CDSC, shareholders will receive that
portion of the appreciation in account value attributable to the Shares
actually redeemed.
For the purpose of determining the number of months from the time of any
purchase, all payments during a month will be aggregated and deemed to have
been made on the first day of that month. In processing redemptions of Class C
Shares, the Fund will first redeem Shares held for longer than 12 months, and
then Shares held for the longest period during the 12 month period. Proceeds
from the CDSC are payable to the Distributor and may be used in whole or in
part to defray the Distributor's expenses related to providing distribution-
related
27
<PAGE>
services to the Fund in connection with the sale of Class C Shares, including
the payment of compensation to Authorized Dealers. An amount equal to 1.00% of
the amount invested is paid by the Distributor to Authorized Dealers.
REINVESTMENT OF REDEMPTION PROCEEDS--CLASS A, CLASS B AND CLASS C SHARES
A shareholder who redeems Class A or Class B Shares of the Fund may reinvest
at NAV any portion or all of the redemption proceeds (plus that amount
necessary to acquire a fractional Share to round off the purchase to the
nearest full Share) in Class A Shares of the same Fund or any other Goldman
Sachs Fund. A shareholder who redeems Class C Shares of the Fund may reinvest
at NAV any portion or all of the redemption proceeds (plus that amount
necessary to acquire a fractional Share to round off the purchase to the
nearest full Share) in Class C Shares of the Fund or any other Goldman Sachs
Fund. Shareholders should obtain and read the applicable prospectuses of such
other funds and consider their objectives, policies and applicable fees before
investing in any of such funds. This reinvestment privilege is subject to the
condition that the Shares redeemed have been held for at least 30 days before
the redemption and that the reinvestment is effected within 90 days after such
redemption. If you redeemed Class A or Class C Shares, paid a CDSC upon a
redemption and reinvest in Class A or Class C Shares subject to the conditions
set forth above, your account will be credited with the amount of the CDSC
previously charged, and the reinvested Shares will continue to be subject to a
CDSC. In this case, the holding period of the Class A or Class C Shares
acquired through reinvestment for purposes of computing the CDSC payable upon
a subsequent redemption will include the holding period of the redeemed
Shares. If you redeemed Class B Shares and paid a CDSC upon redemption, you
are permitted to reinvest the redemption proceeds in Class A Shares at NAV as
described above, but the amount of the CDSC paid upon redemption will not be
credited to your account.
A reinvesting shareholder may be subject to tax as a result of such
redemption. If the redemption occurs within 90 days after the original
purchase of Class A Shares, any sales charge paid on the original purchase
cannot be taken into account by a reinvesting shareholder to the extent an
otherwise applicable sales charge is not imposed pursuant to the reinvestment
privilege for purposes of determining gain or loss, if any, realized on the
redemption, but instead will be added to the tax basis of the Class A Shares
received in the reinvestment. To the extent that any loss is realized and
Shares of the same Fund are purchased within 30 days before or after the
redemption, some or all of the loss may not be allowed as a deduction
depending upon the number of Shares purchased. Shareholders should consult
their own tax advisers concerning the tax consequences of a redemption and
reinvestment. Upon receipt of a written request, the reinvestment privilege
may be exercised once annually by a shareholder, except that there is no such
time limit as to the availability of this privilege in connection with
transactions the sole purpose of which is to reinvest the proceeds at NAV in a
tax-sheltered retirement plan.
WAIVER OR REDUCTION OF CONTINGENT DEFERRED SALES CHARGE--CLASS A, B AND C
SHARES.
The CDSC on Class B, Class C and Class A Shares that are subject to a CDSC
may be waived or reduced if the redemption relates to (a) retirement
distributions or loans to participants or beneficiaries from pension and
profit sharing plans, pension funds and other company-sponsored benefit plans
(each a "Plan"); (b) the death or disability (as defined in Section 72(m)(7)
of the Code) of a participant or beneficiary in a Plan; (c) hardship
withdrawals by a participant or beneficiary in a Plan; (d) satisfying the
minimum distribution requirements of the Code; (e) the establishment of
"substantially equal periodic payments" as described in Section 72(t)(2) of
the Code; (f) the separation from service by a participant or beneficiary in a
Plan; (g) the death or disability (as defined in Section 72(m)(7) of the Code)
of a shareholder if the redemption is made within one year of such event; (h)
excess contributions distributed from a Plan; (i) distributions from a
qualified retirement plan invested in the Goldman Sachs Funds which are being
rolled over to a Goldman Sachs IRA; and (j) redemption proceeds
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which are to be reinvested in accounts or non-registered products over which
GSAM or its advisory affiliates have investment discretion. In addition, Class
A, Class B and Class C Shares subject to a Systematic Withdrawal Plan may be
redeemed without a CDSC. However, Goldman Sachs reserves the right to limit
such redemptions, on an annual basis, to 12% each of the value of your Class B
and Class C Shares and 10% of the value of your Class A Shares.
SERVICES AVAILABLE TO SHAREHOLDERS
AUTOMATIC INVESTMENT PLAN
Systematic cash investments may be made through a shareholder's bank via the
Automated Clearing House Network or a shareholder's checking account via bank
draft each month. Required forms are available from Goldman Sachs or any
Authorized Dealer.
CROSS-REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS AND AUTOMATIC EXCHANGE
PROGRAM
A shareholder may elect to cross-reinvest dividends and capital gain
distributions paid by the Fund in Shares of the same class or an equivalent
class of other Goldman Sachs Funds or ILA Portfolios. See "Fund Highlights." A
shareholder may also elect to exchange automatically a specified dollar amount
of Shares of the Fund for Shares of the same class or an equivalent class of
any other Goldman Sachs Fund or ILA Portfolio. Shares acquired through cross-
reinvestment of dividends or the automatic exchange program will be purchased
at NAV and will not be subject to any initial sales charge or CDSC as a result
of the cross-reinvestment or exchange, but Shares subject to a CDSC acquired
under the automatic exchange program may be subject to a CDSC at the time of
redemption from the Fund into which the exchange is made determined on the
basis of the date and value of the investor's initial purchase of the Fund
from which the exchange (or any prior exchange) is made. Automatic exchanges
are made monthly on the 15th day of each month or the first Business Day
thereafter. The minimum dollar amount for automatic exchanges must be at least
$50 per month. Cross-reinvestments and automatic exchanges are subject to the
following conditions: (i) the value of the shareholder's account(s) in the
Fund which is paying the dividend or from which the automatic exchange is
being made must equal or exceed $5,000 and (ii) the value of the account in
the acquired Fund must equal or exceed the acquired fund's minimum initial
investment requirement or the shareholder must elect to continue cross-
reinvestment or automatic exchanges until the value of acquired Fund Shares in
the shareholder's account equals or exceeds the acquired Fund's minimum
initial investment requirement. 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 of the Fund into which dividends are invested or
automatic exchanges are made.
TAX-SHELTERED RETIREMENT PLANS
The Fund offers its Shares for purchase by retirement plans, including
traditional and Roth IRAs for individuals and their spouses, IRA plans for
employees in connection with employer sponsored SEP, SAR-SEP and SIMPLE IRA
plans, 403(b) plans and defined contribution plans such as 401(k) Salary
Reduction Plans. Detailed information concerning these plans may be obtained
from the Transfer Agent. The information sets forth the service fee charged
for retirement plans and describes the federal income tax consequences of
establishing a plan. This information should be read carefully, and
consultation with an attorney or tax adviser may be advisable.
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EXCHANGE PRIVILEGE
Shares of the Fund may be exchanged at NAV without the imposition of an
initial sales charge or CDSC at the time of exchange for Shares of the same
class or an equivalent class of any other Goldman Sachs Fund or ILA Portfolio.
A shareholder needs to obtain and read the prospectus of the Fund into which
the exchange is made. The Shares of these other Funds acquired by an exchange
may later be exchanged for Shares of the same class (or an equivalent class)
of the original Fund at the next determined NAV without the imposition of an
initial sales charge or CDSC if the dollar amount in the Fund resulting from
such exchanges is below the shareholder's all-time highest dollar amount on
which it has previously paid the applicable sales charge. Shares of these
other Funds purchased through dividends and/or capital gains reinvestment may
be exchanged for Shares of the Fund without a sales charge. In addition to
free automatic exchanges pursuant to the Automatic Exchange Program, 6 free
exchanges are permitted in each 12 month period. A fee of $12.50 may be
charged for each subsequent exchange during such period. The exchange
privilege may be materially modified or withdrawn at any time upon 60 days'
notice to shareholders and is subject to certain limitations.
An exchange of Shares subject to a CDSC will not be subject to the
applicable CDSC at the time of exchange. Shares subject to a CDSC acquired in
an exchange will be subject to the CDSC of the Shares originally held. For
purposes of determining the amount of any applicable CDSC, the length of time
a shareholder has owned Shares will be measured from the date the shareholder
acquired the original Shares subject to a CDSC and will not be affected by any
subsequent exchange.
An exchange may be made by identifying the applicable Fund and Class of
Shares and either writing to Goldman Sachs, Attention: Goldman Sachs Real
Estate Securities Fund, Shareholder Services, c/o NFDS, P.O. Box 419711,
Kansas City, MO 64141-6711 or, unless the investor has specifically declined
telephone exchange privileges on the Account Application or elected in writing
not to utilize telephone exchanges, by a telephone request to the Transfer
Agent at 800-526-7384 (7:00 a.m. to 3:00 p.m. Chicago time). Certain
procedures are employed to prevent unauthorized or fraudulent exchange
requests as set forth under "How to Sell Shares of the Fund." Under the
telephone exchange privilege, Shares may be exchanged among accounts with
different names, addresses and social security or other taxpayer
identification numbers only if the exchange instructions are in writing and
received in accordance with the procedures set forth under "How to Sell Shares
of the Fund." In times of drastic economic or market changes, the telephone
exchange privilege may be difficult to implement.
For federal income tax purposes, an exchange, including an automatic
exchange, is treated as a redemption of the Shares surrendered in the
exchange, on which an investor may be subject to tax, followed by a purchase
of Shares received in the exchange. If such redemption occurs within 90 days
after the purchase of such Shares, to the extent a sales charge that would
otherwise apply to the Shares received in the exchange is not imposed, the
sales charge paid on such purchase of Class A Shares cannot be taken into
account by the exchanging shareholder for purposes of determining gain or
loss, if any, realized on such redemption for federal income tax purposes, but
instead will be added to the tax basis of the Shares received in the exchange.
Shareholders should consult their own tax advisers concerning the tax
consequences of an exchange.
Eligible investors may exchange certain classes of Shares for another class
of Shares of the same Fund. For further information, call Goldman Sachs at the
number set forth at the back of the Prospectus.
All exchanges which represent an initial investment in a Fund must satisfy
the minimum investment requirements of the Fund into which the Shares are
being exchanged. Exchanges are available only in states where exchanges may
legally be made.
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OTHER PURCHASE INFORMATION
Authorized Dealers and other financial intermediaries may be authorized to
accept on the Trust's behalf, purchase, exchange and redemption orders placed
by or on behalf of their customers and, if approved by the Trust, to designate
other intermediaries to accept such orders. In these cases, the Fund will be
deemed to have received an order that is in proper form when the order is
accepted by an Authorized Dealer or intermediary on a Business Day. The order
will be priced at the Fund's NAV per Share (adjusted for any applicable sales
charge) next determined after such acceptance. Otherwise, the Fund or Goldman
Sachs must receive an order in proper form before it is effective. Authorized
Dealers and intermediaries will be responsible for transmitting accepted
orders to the Fund within the period agreed upon by them. Customers should
contact their Authorized Dealers or intermediaries to learn whether they are
authorized to accept orders for the Trust.
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 fees not described in this Prospectus to their
clients for such services. If Shares of the 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.
The Fund and Goldman Sachs each reserves the right to reject any specific
purchase order (including exchanges) or to restrict purchases or exchanges by
a particular purchaser (or group of related purchasers). This may occur, for
example, when a purchaser or a group of purchasers' pattern of frequent
purchases, sales or exchanges of Shares of the Fund is evident, or if
purchases, sales or exchanges are, or a subsequent abrupt redemption might be,
of a size that would disrupt management of the Fund.
In the sole discretion of Goldman Sachs, the Fund may accept securities
instead of cash for the purchase of Shares of the Fund. Such purchases will be
permitted only if the Investment Adviser determines that any securities
acquired in this manner are consistent with the Fund's investment objectives,
restrictions and policies and are desirable investments for the Fund.
The Investment Adviser, Distributor, and/or their affiliates also pay
additional compensation from time to time, out of their assets and not as an
additional charge to the Fund, to selected Authorized Dealers and other
persons in connection with the sale, distribution and/or servicing of Shares
of the Funds and other Goldman Sachs Funds (such as additional payments based
on new sales, amounts exceeding pre-established thresholds, or the length of
time their customers' assets have remained in the Fund) and, subject to
applicable NASD regulations, 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 reimbursement of expenses, entertainment and prizes such as travel
awards, merchandise, cash, investment research and educational information and
related support materials. This additional compensation can vary among
Authorized Dealers depending upon such factors as the amounts their customers
have invested (or may invest) in particular Goldman Sachs Funds, the
particular program involved, or the amount of reimbursable expenses.
Additional compensation based on sales may, but is currently not expected to,
exceed 0.50% (annualized) of the amount invested. For further information, see
"Other Information Regarding Purchases, Redemptions, Exchanges and Dividends"
in the Additional Statement.
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DISTRIBUTION AND AUTHORIZED DEALER SERVICE PLANS
DISTRIBUTION PLANS--CLASS A, CLASS B AND CLASS C SHARES
The Trust, on behalf of the Fund's Class A, Class B and Class C Shares, has
adopted distribution plans pursuant to Rule 12b-1 under the 1940 Act (each, a
"Distribution Plan"). Goldman Sachs is entitled to a monthly fee from the Fund
for distribution services equal, on an annual basis, to 0.25%, 0.75% and
0.75%, of the Fund's average daily net assets attributable to Class A, Class B
and Class C Shares, respectively.
Goldman Sachs may use the distribution fee for its expenses of distributing
Class A, Class B and Class C Shares of the Fund. The types of expenses for
which Goldman Sachs may be compensated for distribution services under the
Distribution Plans include compensation paid to and expenses incurred by
Authorized Dealers, Goldman Sachs and their respective officers, employees and
sales representatives, commissions paid to Authorized Dealers; allocable
overhead; telephone and travel expenses; the printing of prospectuses for
prospective shareholders; preparation and distribution of sales literature;
advertising of any type and all other expenses incurred in connection with
activities primarily intended to result in the sale of Class A, Class B and
Class C Shares. If the fees received by Goldman Sachs pursuant to the
Distribution Plans exceed its expenses, Goldman Sachs may realize a profit
from these arrangements. The Distribution Plans will be reviewed and are
subject to approval annually by the Trustees. The aggregate compensation that
may be received under the Distribution Plans for distribution services may not
exceed the limitations imposed by the NASD's Conduct Rules.
In connection with the sale of Class C Shares, Goldman Sachs begins paying
the 0.75% distribution fee as an ongoing commission to Authorized Dealers
after the Shares have been held for one year. Goldman Sachs pays the
distribution fee on a quarterly basis.
AUTHORIZED DEALER SERVICE PLANS
The Trust on behalf of the Fund's Class A, Class B and Class C Shares has
adopted non-Rule 12b-1 Authorized Dealer Service Plans (each a "Service Plan")
pursuant to which Goldman Sachs, Authorized Dealers or other persons are
compensated for providing personal and account maintenance services. The Fund
pays a fee under its Class A, Class B or Class C Service Plan equal on an
annual basis to 0.25% of its average daily net assets attributable to Class A,
Class B or Class C Shares. The fee for personal and account maintenance
services paid pursuant to a Service Plan may be used to make payments to
Goldman Sachs, Authorized Dealers and their officers, sales representatives
and employees for responding to inquiries of, and furnishing assistance to,
shareholders regarding ownership of their shares or their accounts or similar
services not otherwise provided on behalf of the Fund. The Service Plans will
be reviewed and are subject to approval annually by the Trustees.
In connection with the sale of Class C shares, Goldman Sachs begins paying
the 0.25% ongoing service fee to Authorized Dealers after the Shares have been
held for one year. Goldman Sachs pays the service fee on a quarterly basis.
HOW TO SELL SHARES OF THE FUND
The Fund will redeem its Shares upon request of a shareholder on any
Business Day at the NAV next determined after the receipt of such request in
proper form, subject to any applicable CDSC. See "Net Asset Value." Redemption
proceeds will normally be mailed by check to a shareholder within 3 Business
Days of
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receipt of a properly executed request. If the Shares to be redeemed were
recently purchased by check, the Fund may delay transmittal of redemption
proceeds until such time as it has assured itself that good funds have been
collected for the purchase of such Shares. This may take up to 15 days.
Redemption requests may be made by writing to or calling the Transfer Agent at
the address or telephone number set forth on the back cover page of this
Prospectus or an Authorized Dealer.
The Trust accepts telephone requests for redemption of Shares for amounts up
to $50,000 within any 7 calendar day period, except for investors who have
specifically declined telephone redemption privileges on the Account
Application or elected in writing not to utilize telephone redemptions
(proceeds which are sent to a Goldman Sachs brokerage account are not subject
to the $50,000 limit). It may be difficult to implement redemptions by
telephone in times of drastic economic or market changes. By completing an
Account Application, an investor agrees that the Trust, the Distributor and
the Transfer Agent shall not be liable for any loss incurred by the investor
by reason of the Trust accepting unauthorized telephone redemption requests if
the Trust reasonably believes the instructions to be genuine. Thus,
shareholders risk possible losses in the event of a telephone redemption not
authorized by them. The Trust may accept telephone redemption instructions
from any person identifying himself as the owner of an account or the owner's
broker where the owner has not declined in writing to utilize this service.
In an effort to prevent unauthorized or fraudulent redemption and exchange
requests by telephone, Goldman Sachs and NFDS each employ reasonable
procedures specified by the Trust to confirm that such instructions are
genuine. Consequently, proceeds of telephone redemption requests will be sent
only to the shareholder's address of record or authorized bank account
designated in the Account Application and exchanges of Shares will be made
only to an identical account. Telephone requests will also be recorded. The
Trust may implement other procedures from time to time concerning telephone
redemptions and exchanges. If reasonable procedures are not employed, the
Trust may be liable for any loss due to unauthorized or fraudulent
transactions. Proceeds of telephone redemptions will be mailed to the
shareholder's address of record or wired to the authorized bank account
indicated on the Account Application, unless the shareholder provides written
instructions (accompanied by a signature guarantee) indicating another
address. Telephone redemptions will not be accepted during the 30-day period
following any change in a shareholder's address of record. This redemption
option does not apply to Shares held in a "street name" account. Shareholders
whose accounts are held in "street name" should contact their broker of record
who may effect telephone redemptions on their behalf. The Trust reserves the
right to terminate or modify the telephone redemption service at any time.
Written requests for redemptions must be signed by each shareholder with its
signature guaranteed by a bank, a securities broker or dealer, a credit union
having authority to issue signature guarantees, a savings and loan
association, a building and loan association, a cooperative bank, a federal
savings bank or association, a national securities exchange, a registered
securities association or a clearing agency, provided that such institution
satisfies the standards established by the Transfer Agent.
The Fund will also arrange for the proceeds of redemptions effected by any
means to be wired as federal funds to the bank account designated in the
shareholder's Account Application. Redemption proceeds will normally be wired
on the next Business Day in federal funds (for a total of one Business Day
delay) following receipt of a properly executed wire transfer redemption
request. Wiring of redemption proceeds may be delayed one additional Business
Day if the Federal Reserve Bank is closed on the day redemption proceeds would
ordinarily be wired. A transaction fee of $7.50 may be charged for payments of
redemption proceeds by wire. In order to change the bank designated on the
Account Application to receive redemption proceeds, a written request must be
received by the Transfer Agent. This request must be signature guaranteed as
set forth above.
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Further documentation may be required for executors, trustees or corporations.
Once wire transfer instructions have been given by Goldman Sachs or an
Authorized Dealer, neither the Fund, the Trust, Goldman Sachs nor any
Authorized Dealer assumes any further responsibility for the performance of
intermediaries or the shareholder's bank in the transfer process. If a problem
with such performance arises, the shareholder should deal directly with such
intermediaries or bank.
Additional documentation regarding a redemption by any means may be required
to effect a redemption when deemed appropriate by the Transfer Agent. The
request for such redemption will not be considered to have been received in
proper form until such additional documentation has been received.
SYSTEMATIC WITHDRAWAL PLAN
A shareholder may draw on shareholdings systematically via check or ACH in
any amount specified by the shareholder over $50. Checks are only available on
or about the 25th of each month. Each systematic withdrawal is a redemption
and therefore a taxable transaction. A minimum balance of $5,000 in Shares of
the Fund is required. The maintenance of a withdrawal plan concurrently with
purchases of additional Class A, Class B or Class C Shares would be
disadvantageous because of the sales charge imposed on your purchases of Class
A shares or the imposition of a CDSC on your redemptions of Class A, Class B
or Class C Shares. The CDSC applicable to Class A, Class B or Class C Shares
redeemed under a systematic withdrawal plan may be waived. See "How to
Invest--Waiver or Reduction of Contingent Deferred Sales Charge." See the
Additional Statement for more information about the Systematic Withdrawal
Plan.
DIVIDENDS
Each dividend from net investment income and capital gains distributions, if
any, declared by the Fund on its outstanding Shares will, at the election of
each shareholder, be paid in: (i) cash; (ii) additional Shares of the same
class of the Fund, or (iii) Shares of the same or an equivalent class of other
Goldman Sachs Funds or units of the ILA Portfolios (the Prime Obligations
Portfolio only for Class B and Class C), as described under "Cross-
Reinvestment of Dividends and Distributions and Automatic Exchange Program."
This election should initially be made on a shareholder's Account Application
and may be changed upon written notice to Goldman Sachs at any time prior to
the record date for a particular dividend or distribution. If no election is
made, all dividends from net investment income and capital gain distributions
will be reinvested in the applicable Fund.
The election to reinvest dividends and distributions paid by the Fund in
additional Shares or units of the Fund or another Goldman Sachs Fund or ILA
Portfolio 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 or units of the Fund, another Goldman Sachs Fund or an
ILA Portfolio.
The Fund intends that all or substantially all of its net investment income
and net realized capital gains, after reduction by available capital losses,
including any capital losses carried forward from prior years, will be
declared as dividends for each taxable year. The Fund will pay dividends from
net investment income quarterly. The Fund will pay dividends from net
investment income, and dividends from net realized capital gains, reduced by
available capital losses, at least annually. From time to time, a portion of
the Fund's dividends may constitute a return of capital.
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In addition, distributions paid by the Fund's REIT investments often include
a "return of capital." The Code requires a REIT to distribute at least 95% of
its taxable income to investors. In many cases, however, because of "non-cash"
expenses such as property depreciation, an equity REIT's cash flow will exceed
its taxable income. The REIT may distribute this excess cash to offer a more
competitive yield. This portion of the distribution is deemed a return of
capital, and is generally not taxable to shareholders. However, when
shareholders receive a return of capital, the cost basis of their shares is
decreased by the amount of such return of capital. This, in turn, affects the
capital gain or loss realized when Shares of the Fund are exchanged or sold.
Therefore, a shareholder's original investment in the Fund will be reduced by
the amount of the return of capital and capital gains included in a
distribution if such shareholder elects to receive distributions in cash (as
opposed to having them reinvested in additional Shares of the Fund). Once a
shareholder's cost basis is reduced to zero, any return of capital is taxable
as a capital gain.
The Fund's REIT investments often do not provide complete tax information to
the Fund until after the calendar year-end. Consequently, because of this
delay, it may be necessary for the Fund to request permission to extend the
deadline for issuance of Forms 1099-DIV beyond January 31.
At the time of an investor's purchase of Shares of the Fund a portion of the
NAV per Share may be represented by undistributed income of the Fund or
realized or unrealized appreciation of the Fund's portfolio securities.
Therefore, subsequent distributions on such Shares from such income or
realized appreciation may be taxable to the investor even if the NAV of the
investor's Shares is, as a result of the distributions, reduced below the cost
of such Shares and the distributions (or portions thereof) represent a return
of a portion of the purchase price.
NET ASSET VALUE
The NAV per share of each Class of the Fund is calculated by the Fund's
custodian as of the close of regular trading on the New York Stock Exchange
(which is normally, but not always, 3:00 p.m. Chicago time, 4:00 p.m. New York
time), on each Business Day (as such term is defined under "Additional
Information"). The NAV per Share of each Class is calculated by determining
the net assets attributable to each Class and dividing by the number of
outstanding Shares of that Class. Portfolio securities are valued based on
market quotations or, if accurate quotations are not readily available, at
fair value as determined in good faith under procedures established by the
Trustees.
PERFORMANCE INFORMATION
From time to time the Fund may publish average annual total return, yield
and distribution rates in advertisements and communications to shareholders or
prospective investors. Average annual total return is determined by computing
the average annual percentage change in value of $1,000 invested at the
maximum public offering price for specified periods ending with the most
recent calendar quarter, assuming reinvestment of all dividends and
distributions at NAV. The total return calculation assumes a complete
redemption of the investment at the end of the relevant period. Total return
calculations for Class A Shares reflect the effect of paying the maximum
initial sales charge. Investment at a lower sales charge would result in
higher performance figures. Total return calculations for Class B or Class C
Shares reflect deduction of the applicable CDSC imposed
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upon redemption of Class B or Class C Shares held for the applicable period.
The Fund may also from time to time advertise total return on a cumulative,
average, year-by-year or other basis for various specified periods by means of
quotations, charts, graphs or schedules. In addition, the Fund may furnish
total return calculations based on investments at various sales charge levels
or at NAV. Any performance information which is based on the Fund's NAV per
Share would be reduced if any applicable sales charge were taken into account.
In addition to the above, the Fund may from time to time advertise its
performance relative to certain averages, performance rankings, indices, other
information prepared by recognized mutual fund statistical services and
investments for which reliable performance information is available.
The Fund computes its yield by dividing net investment income earned during
a recent 30 day period by the product of the average daily number of Shares
outstanding and entitled to receive dividends during the period and the
maximum offering price per Share on the last day of the relevant period. The
results are compounded on a bond equivalent (semi-annual) basis and then
annualized. Net investment income per Share is equal to the dividends and
interest earned during the period, reduced by accrued expenses for the period.
The calculation of net investment income for these purposes may differ from
the net investment income determined for accounting purposes. The Fund's
quotations of distribution rate are calculated by annualizing the most recent
distribution of net investment income for a monthly, quarterly or other
relevant period and dividing this amount by the NAV per Share on the last day
of the period for which the distribution rate is being calculated.
The Fund's yield, total return and distribution rate will be calculated
separately for each Class of Shares in existence. Because each Class of Shares
may be subject to different expenses, the yield, total return and distribution
rate calculations with respect to each Class of Shares for the same period
will differ. The investment performance of the Class A, Class B and Class C
Shares will be affected by the payment of a sales charge, distribution fees
and other class specific expenses. See "Shares of the Trust."
The Fund's performance quotations do not reflect any fees charged by an
Authorized Dealer to its customer accounts in connection with investments in
the Fund. The investment results of the Fund will fluctuate over time and any
presentation of investment results for any prior period should not be
considered a representation of what an investment may earn or what the Fund's
performance may be in any future period. In addition to information provided
in shareholder reports, the Funds may, in their discretion, from time to time,
make a list of their holdings available to investors upon request.
SHARES OF THE TRUST
The Fund is a series of Goldman Sachs Trust, which was formed under the laws
of the State of Delaware on January 28, 1997. The Trust was formerly a
Maryland corporation and reorganized into the Trust as of April 30, 1997. The
Trustees have authority under the Trust's Declaration of Trust to create and
classify Shares of beneficial interest in separate series, without further
action by shareholders. Additional series may be added in the future. The
Trustees also have authority to classify and reclassify any series or
portfolio of Shares into one or more Classes. Information about the Trust's
other series and Classes is contained in separate prospectuses.
When issued, Shares are fully paid and non-assessable. In the event of
liquidation, shareholders of each Class are entitled to share pro rata in the
net assets of the Fund available for distribution to the shareholders of such
Class. All Shares are freely transferable and have no preemptive, subscription
or conversion rights. Shareholders are entitled to one vote per Share,
provided that, at the option of the Trustees, shareholders will be entitled to
a number of votes based upon the NAVs represented by their Shares.
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The Trust does not intend to hold annual meetings of shareholders. However,
recordholders may, under certain circumstances, as permitted by the Act,
communicate with other shareholders in connection with requiring a special
meeting of shareholders. The Trustees will call a special meeting of
shareholders for the purpose of electing Trustees if, at any time, less than a
majority of Trustees holding office at the time were elected by shareholders.
In the interest of economy and convenience, the Trust does not issue
certificates representing the Fund's Shares. Instead, the Transfer Agent
maintains a record of each shareholder's ownership. Each shareholder of record
receives confirmation of purchase and redemption orders from the Transfer
Agent. Fund Shares and any dividends and distributions paid by the Fund are
reflected in account statements from the Transfer Agent.
TAXATION
FEDERAL TAXES
The Fund is treated as a separate entity for tax purposes. The Fund intends
to elect to be treated as a regulated investment company and intends to
continue to qualify for such treatment for each taxable year under Subchapter
M of the Code. To qualify as such, the Fund must satisfy certain requirements
relating to the sources of its income, diversification of its assets and
distribution of its income to shareholders. As a regulated investment company,
the Fund will not be subject to federal income or excise tax on any net
investment income and net realized capital gains that are distributed to its
shareholders in accordance with certain timing requirements of the Code.
Dividends paid by the Fund from net investment income, certain net realized
foreign exchange gains, the excess of net short-term capital gain over net
long-term capital loss and original issue discount or market discount income
will be taxable to shareholders as ordinary income. Distributions out of the
net capital gain (the excess of net long-term capital gain over net short-term
capital loss), if any, of the Fund will be taxed to shareholders as long-term
capital gains, regardless of the length of time a shareholder has held his or
her Shares or whether such gain was reflected in the price paid for the
Shares. These tax consequences will apply whether distributions are received
in cash or reinvested in Shares. The Fund's dividends that are paid to its
corporate shareholders and are attributable to qualifying dividends the Fund
receives from U.S. domestic corporations may be eligible, in the hands of such
corporate shareholders, for the corporate dividends-received deduction,
subject to certain holding period requirements and debt financing limitations
under the Code. Since dividends the Fund receives from REITs are not
qualifying dividends for this purpose, it is not likely that a substantial
portion of the Fund's dividends will generally qualify for the corporate
dividends-received deduction. Certain distributions paid by the Fund in
January of a given year may be taxable to shareholders as if received the
prior December 31. Shareholders will be informed annually about the amount and
character of distributions received from the Fund for federal income tax
purposes.
Investors should consider the tax implications of buying Shares immediately
prior to a distribution. Investors who purchase Shares shortly before the
record date for a distribution will pay a per Share price that includes the
value of the anticipated distribution and will be taxed on the distribution
even though the distribution represents a return of a portion of the purchase
price.
Redemptions and exchanges of Shares are taxable events.
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Individuals and certain other classes of shareholders may be subject to 31%
backup withholding of federal income tax on distributions, redemptions and
exchanges if they fail to furnish their correct taxpayer identification number
and certain certifications required by the Internal Revenue Service or if they
are otherwise subject to backup withholding. Individuals, corporations and
other shareholders that are not U.S. persons under the Code are subject to
different tax rules and may be subject to nonresident alien withholding at the
rate of 30% (or a lower rate provided by an applicable tax treaty, if any) on
amounts treated as ordinary dividends from the Fund.
The Fund may be subject to foreign withholding or other foreign taxes on
income or gain from certain foreign securities. However, the Fund does not
anticipate that it will be eligible to pass any foreign tax credits through to
its shareholders.
OTHER TAXES
In addition to federal taxes, a shareholder may be subject to state, local
or foreign taxes on payments received from the Fund. A state income (and
possibly local income and/or intangible property) tax exemption may be
available to the extent (if any) the Fund's distributions are derived from
interest on (or, in the case of intangible property taxes, the value of its
assets is attributable to) certain U.S. Government obligations, provided in
some states that certain thresholds for holdings of such obligations and/or
reporting requirements are satisfied. For a further discussion of certain tax
consequences of investing in Shares of the Fund, see "Taxation" in the
Additional Statement. Shareholders are urged to consult their own tax advisers
regarding specific questions as to federal, state and local taxes as well as
to any foreign taxes.
ADDITIONAL INFORMATION
As used in this Prospectus, the term "Business Day" means any day the New
York Stock Exchange is open for trading, which is Monday through Friday except
for holidays. The New York Stock Exchange is closed on the following holidays:
New Year's Day, Martin Luther King, Jr. Day, Presidents' Day (observed), Good
Friday, Memorial Day (observed), Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
38
<PAGE>
APPENDIX
STATEMENT OF INTENTION
(APPLICABLE ONLY TO CLASS A SHARES PURCHASED SUBJECT TO A SALES CHARGE)
If a shareholder anticipates purchasing $50,000 or more of Class A Shares of
the Fund alone or in combination with Class A Shares of another Goldman Sachs
Fund within a 13-month period, the shareholder may obtain Shares of the Fund
at the same reduced sales charge as though the total quantity were invested in
one lump sum by filing this Statement of Intention incorporated by reference
in the Account Application. Income dividends and capital gain distributions
taken in additional Shares will not apply toward the completion of this
Statement of Intention.
To ensure that the reduced price will be received on future purchases, the
investor must inform Goldman Sachs that this Statement of Intention is in
effect each time Shares are purchased. Subject to the conditions mentioned
below, each purchase will be made at the public offering price applicable to a
single transaction of the dollar amount specified on the Account Application.
The investor makes no commitment to purchase additional Shares, but if the
investor's purchases within 13 months plus the value of Shares credited toward
completion do not total the sum specified, the investor will pay the increased
amount of the sales charge prescribed in the Escrow Agreement.
ESCROW AGREEMENT
Out of the initial purchase (or subsequent purchases if necessary) 5% of the
dollar amount specified on the Account Application shall be held in escrow by
the Transfer Agent in the form of Shares registered in the investor's name.
All income dividends and capital gains distributions on escrowed Shares will
be paid to the investor or to his or her order. When the minimum investment so
specified is completed (either prior to or by the end of the 13th month), the
investor will be notified and the escrowed Shares will be released. In signing
the Account Application, the investor irrevocably constitutes and appoints the
Transfer Agent his or her attorney to surrender for redemption any or all
escrowed Shares with full power of substitution in the premises.
If the intended investment is not completed, the investor will be asked to
remit to Goldman Sachs any difference between the sales charge on the amount
specified and on the amount actually attained. If the investor does not within
20 days after written request by Goldman Sachs pay such difference in the
sales charge, the Transfer Agent will redeem an appropriate number of the
escrowed Shares in order to realize such difference. Shares remaining after
any such redemption will be released by the Transfer Agent.
A-1
<PAGE>
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GOLDMAN SACHS ASSET
MANAGEMENT
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
GOLDMAN, SACHS & CO.
DISTRIBUTOR
85 BROAD STREET
NEW YORK, NEW YORK 10004
GOLDMAN, SACHS & CO.
TRANSFER AGENT
4900 SEARS TOWER
CHICAGO, ILLINOIS 60606
STATE STREET BANK AND TRUST COMPANY
CUSTODIAN
1776 HERITAGE DRIVE
NORTH QUINCY, MASSACHUSETTS 02171
ARTHUR ANDERSEN LLP
INDEPENDENT PUBLIC ACCOUNTANTS
225 FRANKLIN STREET
BOSTON, MASSACHUSETTS 02110
TOLL FREE (IN U.S.) . . . . . . . . 800-526-7384
EQ PROAC
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GOLDMAN SACHS
REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
PROSPECTUS
CLASS A, B AND C SHARES
LOGO
Goldman
Sachs
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
PROSPECTUS
July 27, 1998
GOLDMAN SACHS REAL ESTATE SECURITIES FUND
SERVICE SHARES
The Goldman Sachs Real Estate Securities Fund (the "Fund") seeks total return
comprised of long-term growth of capital and dividend income through
investments in equity securities of issuers that are primarily engaged in or
related to the real estate industry. The Fund expects that a substantial
portion of its total assets will be invested in real estate investment trusts.
Goldman Sachs Asset Management ("GSAM"), New York, New York, a separate
operating division of Goldman, Sachs & Co. ("Goldman Sachs"), serves as
investment adviser to the Fund. GSAM is referred to in this Prospectus as the
"Investment Adviser." Goldman Sachs serves as the Fund's distributor and
transfer agent.
This Prospectus provides information about Goldman Sachs Trust (the "Trust")
and the Fund that a prospective investor should understand before investing.
This Prospectus should be retained for future reference. A Statement of
Additional Information (the "Additional Statement"), dated May 1, 1998, as
revised July 27, 1998, containing further information about the Trust and the
Fund which may be of interest to investors, has been filed with the Securities
and Exchange Commission ("SEC"), is incorporated herein by reference in its
entirety, and may be obtained without charge from Service Organizations (as
defined herein), or Goldman Sachs by calling the telephone number, or writing
to one of the addresses, listed on the back cover of this Prospectus. The SEC
maintains a Web site (http://www.sec.gov) that contains the Additional
Statement and other information regarding the Trust.
-----------------
SERVICE SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR OTHER INSURED DEPOSITORY INSTITUTION AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD
OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN THE FUND INVOLVES INVESTMENT
RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fund Highlights.................... 3
Fees and Expenses.................. 5
Investment Objectives and Policies. 6
Description of Securities.......... 7
Investment Techniques.............. 11
Risk Factors....................... 15
Investment Restrictions............ 17
Portfolio Turnover................. 17
Management......................... 17
Expenses........................... 20
Net Asset Value.................... 20
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Performance Information....... 21
Shares of the Trust........... 21
Taxation...................... 22
Additional Information........ 23
Additional Services........... 24
Reports to Shareholders....... 25
Dividends..................... 25
Purchase of Service Shares.... 26
Exchange Privilege............ 27
Redemption of Service Shares.. 27
Appendix...................... A-1
</TABLE>
2
<PAGE>
FUND HIGHLIGHTS
The following is intended to highlight certain information and is qualified
in its entirety by the more detailed information contained in this Prospectus.
WHAT IS THE GOLDMAN SACHS TRUST?
The Goldman Sachs Trust is an open-end management investment company that
offers its shares ("Shares") in several investment funds (commonly known as
mutual funds). The Real Estate Securities Fund (the "Fund"), a mutual fund
offered under the Trust, pools the monies of investors by selling its Shares to
the public and investing these monies in a portfolio of securities designed to
achieve the Fund's stated investment objectives.
WHAT ARE THE INVESTMENT OBJECTIVES AND POLICIES OF THE FUND?
The Fund has distinct investment objectives and policies. There can be no
assurance that the Fund's objectives will be achieved. The Fund is a
"diversified open-end management company" as defined in the Investment Company
Act of 1940, as amended (the "Act"). For a further description of the Fund's
investment objectives and policies, see "Investment Objectives and Policies,"
"Description of Securities" and "Investment Techniques."
<TABLE>
<C> <S>
INVESTMENT OBJECTIVES Total return comprised of long-term
growth of capital and dividend income.
- ----------------------------------------------------------------------------------------
INVESTMENT CRITERIA Substantially all, and at least 80%, of total
assets in a diversified portfolio of equity
securities of issuers that are primarily
engaged in or related to the real estate
industry. The Fund expects that a substantial
portion of its total assets will be invested
in real estate investment trusts ("REITs").
- ----------------------------------------------------------------------------------------
BENCHMARK Wilshire Real Estate Securities Index
("WARESI")
</TABLE>
WHAT ARE THE RISK FACTORS AND SPECIAL CHARACTERISTICS THAT I SHOULD
CONSIDER BEFORE INVESTING?
The Fund's Share price will fluctuate with market and economic conditions, so
that an investment in the Fund may be worth more or less when redeemed than
when purchased. The Fund should not be relied upon as a complete investment
program. There can be no assurance that the Fund's investment objectives will
be achieved. In view of the specialized nature of the Fund's investments, the
Fund may be suitable only for those investors who are financially able to
assume greater risk and share price volatility than presented by funds that do
not concentrate in the real estate industry. See "Risk Factors."
Risk Factors Associated with the Real Estate Industry. Although the Fund does
not invest directly in real estate, it does invest primarily in common stocks
and other equity securities of REITs and other real estate industry companies
and does have a policy of concentrating its investments in the real estate
industry. Therefore, an investment in the Fund is subject to certain risks
associated with the direct ownership of real estate and with the real estate
industry in general, including possible declines in the value of real estate,
general and local economic conditions, environmental problems and changes in
interest rates. To the extent that assets underlying the Fund's investments are
concentrated geographically, by property type or in certain other respects,
these risks may be heightened. In addition, if the Fund has rental income or
income from the disposition of real property acquired as a result of a default
on securities the Fund owns, the receipt of such income may adversely affect
its ability to retain its tax status as a regulated investment company.
3
<PAGE>
Risks of Investing in REITs. Investing in REITs involves certain unique risks
in addition to those risks associated with investing in the real estate
industry in general. Equity REITs may be affected by changes in the value of,
and income produced by, the underlying property owned by the REITs. Mortgage
REITs may be affected by the quality of any credit extended and interest rate
risk. REITs are dependent upon management skills, may have limited
diversification and are subject to heavy cash flow dependency, default by
borrowers and self-liquidation.
Other. The Fund may invest in foreign securities and lower rated debt
securities and may use certain investment techniques, including derivatives,
forward contracts, options and futures. These investments and investment
techniques will subject the Fund to greater risk.
WHO MANAGES THE FUND?
Goldman Sachs Asset Management serves as Investment Adviser to the Fund. As
of May 21, 1998, the Investment Adviser, together with its affiliates, acted as
investment adviser or distributor for assets in excess of $160.4 billion.
WHO DISTRIBUTES THE FUND'S SHARES?
Goldman Sachs acts as distributor of the Fund's Shares (the
"Distributor").
WHAT IS THE MINIMUM INVESTMENT?
The Fund does not have any minimum purchase or account requirements with
respect to Service Shares. A Service Organization may, however, impose a
minimum amount for initial and subsequent investments in Service Shares,
and may establish other requirements such as a minimum account balance.
HOW DO I PURCHASE SERVICE SHARES?
Customers of certain institutions ("Service Organizations") may invest in
Service Shares only through their Service Organizations. Service Shares of
the Fund are purchased at the current net asset value ("NAV") without any
sales load. See "Purchase of Service Shares."
ADDITIONAL SERVICES. The Trust, on behalf of the Fund, has adopted a
Service Plan with respect to the Service Shares which authorizes the Fund
to compensate Service Organizations for providing account administration
and shareholder liaison services to their customers who are the beneficial
owners of such Shares. The Trust, on behalf of the Fund, will enter into
agreements with each Service Organization which will provide for
compensation to the Service Organization in an amount up to 0.50% (on an
annualized basis) of the average daily net assets of the Service Shares of
the Fund attributable to or held in the name of the Service Organization
for its customers. See "Additional Services."
HOW DO I SELL MY SERVICE SHARES?
You may redeem Service Shares upon request on any Business Day, as
defined under "Additional Information," at the NAV next determined after
receipt of such request in proper form. See "Redemption of Service Shares."
HOW DO I RECEIVE DIVIDENDS AND DISTRIBUTIONS?
<TABLE>
<CAPTION>
INVESTMENT INCOME DIVIDENDS CAPITAL GAINS
DECLARED AND PAID DISTRIBUTIONS
----------------- -------------
<S> <C>
Quarterly Annually
</TABLE>
Recordholders of Service Shares may receive dividends and distributions
in additional Service Shares of the Fund in which you have invested or may
elect to receive them in cash. For further information concerning dividends
and distributions, see "Dividends."
4
<PAGE>
FEES AND EXPENSES
(SERVICE SHARES)
<TABLE>
<CAPTION>
FUND
----
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on Purchases.............................. None
Maximum Sales Charge Imposed on Reinvested Dividends................... None
Redemption Fees........................................................ None
Exchange Fees.......................................................... None
ANNUAL FUND OPERATING EXPENSES: (as a percentage of average daily net
assets)/1/
Management Fees........................................................ 1.00%
Service Fees/4/........................................................ 0.50%
Other Expenses (after applicable limitations)/2/....................... 0.04%
----
TOTAL FUND OPERATING EXPENSES (AFTER FEE AND EXPENSE LIMITATIONS)/3/.. 1.54%
====
</TABLE>
- ---------------------
/1/ Based on estimated amounts for the current fiscal year.
/2/ The Investment Adviser voluntarily has agreed to reduce or limit certain
other expenses (excluding management fees, service fees, transfer agency
fees, taxes, interest and brokerage fees and litigation, indemnification
and other extraordinary expenses to the extent such expenses exceed 0.00%
of the Fund's average daily net assets:
/3/ Without the limitations described above, "Other Expenses" and "Total
Operating Expenses" of the Fund for the current fiscal year are estimated
to be 0.58% and 2.08%, respectively as follows:
/4/ Service Organizations may charge other fees to their customers who are
beneficial owners of Service Shares in connection with their customer
accounts. Due to the service fees, a long-term shareholder may pay more
than the economic equivalent of the maximum front-end sales charges
permitted by the NASD's rules regarding investment companies. See
"Additional Services."
<TABLE>
<CAPTION>
EXAMPLE: 1 YEAR 3 YEARS
- -------- ------ -------
<S> <C> <C>
You would pay the following expenses on a hypothetical $1,000
investment, assuming (1) a 5% annual return and (2) redemption
at the end of each time period................................ $16 $49
</TABLE>
The Investment Adviser and Goldman Sachs may modify or discontinue any of
the limitations set forth above in the future at their discretion. The
information set forth in the foregoing table and hypothetical example relates
only to Service Shares of the Fund. The Fund also offers Institutional Shares,
Class A, Class B and Class C Shares, which are subject to different fees and
expenses (which affect performance), have different minimum investment
requirements and are entitled to different services. Information regarding
Institutional, Class A, Class B and Class C Shares may be obtained from an
investor's sales representative or from Goldman Sachs by calling the number on
the back of this Prospectus.
In addition to the compensation itemized above, Service Organizations may
receive other compensation in connection with the sale and distribution of
Service Shares or for services to their customers' accounts and/or the Fund.
For additional information regarding such compensation, see "Additional
Services" in this Prospectus and the Additional Statement.
The purpose of the foregoing table is to assist investors in understanding
the various fees and expenses of the Fund that an investor will bear directly
or indirectly. The information on the fees and expenses included in the table
and hypothetical example above is based on the Fund's estimated fees and
expenses and should not be considered as representative of future expenses.
Actual fees and expenses may be greater or less than those indicated.
Moreover, while the example assumes a 5% annual return, the Fund's actual
performance will vary and may result in an actual return greater or less than
5%. See "Management--Investment Adviser" and "Additional Services."
5
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and principal investment policies of the Fund are
described below. Other investment practices and management techniques, which
involve certain risks are described under "Description of Securities," "Risk
Factors" and "Investment Techniques." There can be no assurance that the
Fund's investment objectives will be achieved.
The Investment Adviser may purchase for the Fund interests in real estate
investment trusts, common stocks, preferred stocks, convertible debt
obligations, convertible preferred stocks, equity interests in trusts,
partnerships, joint ventures, limited liability companies and similar
enterprises, warrants and stock purchase rights ("equity securities"). In
choosing the Fund's securities, the Investment Adviser utilizes first-hand
fundamental research, including visiting company facilities to assess
operations and to meet decision-makers. The Investment Adviser may also use
macro analysis of numerous economic and valuation variables to anticipate
changes in company earnings and the overall investment climate. The Investment
Adviser is able to draw on the research and market expertise of the Goldman
Sachs Global Investment Research Department and other affiliates of the
Investment Adviser, as well as information provided by other securities
dealers. Equity securities in the Fund's portfolio will generally be sold when
the Investment Adviser believes that the market price fully reflects or
exceeds the securities' fundamental valuation or when other more attractive
investments are identified.
The Fund's investment strategy is based on the premise that property market
fundamentals are the primary determinant of growth underlying the success of
companies in the real estate industry. The Fund's research and investment
process is designed to identify those companies with strong property
fundamentals and strong management teams. This process is comprised of real
estate market research and securities analysis. The Investment Adviser's
analysis will focus on determining the degree to which a company can achieve
sustainable growth in cash flow and dividend paying capability. The Investment
Adviser will take into account fundamental trends in underlying property
markets as determined by proprietary models, research of local real estate
markets, earnings, cash flow growth and stability, the relationship between
asset values and market prices of the securities and dividend payment history.
The Investment Adviser will attempt to purchase securities of companies whose
underlying portfolios are diversified geographically and by property type.
REAL ESTATE SECURITIES FUND
Objectives. The Fund's investment objective is to provide investors with
total return comprised of long-term growth of capital and dividend income.
Primary Investment Focus. The Fund invests, under normal circumstances,
substantially all, and at least 80% of its total assets in issuers that are
primarily engaged in or related to the real estate industry. The Fund seeks to
achieve its investment objective by investing in a diversified portfolio of
equity securities of REITs and other real estate industry companies. A "real
estate industry company" is a company that derives at least 50% of its gross
revenues or net profits from the ownership, development, construction,
financing, management or sale of commercial, industrial or residential real
estate or interests therein.
6
<PAGE>
Shares of REITs. The Fund may invest without limitation in shares of REITs.
REITs are pooled investment vehicles which invest primarily in income
producing real estate or real estate related loans or interests. REITs are
generally classified as equity REITs, mortgage REITs or a combination of
equity and mortgage REITs. Equity REITs invest the majority of their assets
directly in real property and derive income primarily from the collection of
rents. Equity REITs can also realize capital gains by selling properties that
have appreciated in value. Mortgage REITs invest the majority of their assets
in real estate mortgages and derive income from the collection of interest
payments. Similar to investment companies such as the Fund, REITs are not
taxed on income distributed to shareholders provided they comply with several
requirements of the Internal Revenue Code of 1986, as amended (the "Code").
REITs are dependent upon cash flow from their investments to repay financing
cost and the ability of the REIT's merger. REITs are also subject to risks
generally associated with investments in real estate. The Fund will indirectly
bear its proportionate share of expenses incurred by REITs in which the Fund
invests in addition to the expenses incurred directly by the Fund.
Other. The Fund may invest up to 20% of its total assets in fixed-income
securities that, in the opinion of the Investment Adviser, offer the potential
to further the Fund's investment objectives. In addition, although the Fund
will invest primarily in publicly traded U.S. securities, it may invest up to
15% of its net assets in foreign securities.
DESCRIPTION OF SECURITIES
The Fund may invest in equity and fixed-income securities in accordance with
the investment policies stated above. Certain of these permitted investments
are described in more detail in this section.
CONVERTIBLE SECURITIES
The Fund may invest in convertible securities, including debt obligations
and preferred stock of the issuer convertible at a stated exchange rate into
common stock of the issuer. Convertible securities generally offer lower
interest or dividend yields than non-convertible securities of similar
quality. As with all fixed-income securities, the market value of convertible
securities tends to decline as interest rates increase and, conversely, to
increase as interest rates decline. However, when the market price of the
common stock underlying a convertible security exceeds the conversion price,
the convertible security tends to reflect the market price of the underlying
common stock. As the market price of the underlying common stock declines, the
convertible security tends to trade increasingly on a yield basis, and thus
may not decline in price to the same extent as the underlying common stock.
Convertible securities rank senior to common stocks in an issuer's capital
structure and consequently entail less risk than the issuer's common stock. In
evaluating a convertible security, the Investment Adviser will give primary
emphasis to the attractiveness of the underlying common stock. The convertible
debt securities in which the Fund may invest are not subject to any minimum
rating criteria. Convertible debt securities are equity investments for
purposes of the Fund's investment policies.
FOREIGN INVESTMENTS
FOREIGN SECURITIES. The Fund may invest in the securities of foreign
issuers. Investments in foreign securities may offer potential benefits that
are not available from investments exclusively in equity securities of
domestic issuers quoted in U.S. dollars. Foreign countries may have economic
policies or business cycles different from those of the U.S. and markets for
foreign securities do not necessarily move in a manner parallel to U.S.
markets.
7
<PAGE>
Investing in the securities of foreign issuers involves certain special
risks, including those set forth below, which are not typically associated
with investing in U.S. dollar denominated or quoted securities of U.S.
issuers. Such investments may be affected by changes in currency rates,
changes in foreign or U.S. laws or restrictions applicable to such investments
and in exchange control regulations (e.g., currency blockage). A decline in
the exchange rate of the currency (i.e., weakening of the currency against the
U.S. dollar) in which a portfolio security is quoted or denominated relative
to the U.S. dollar would reduce the value of the portfolio security. In
addition, if the currency in which the Fund receives dividends, interest or
other payments declines in value against the U.S. dollar before such income is
distributed as dividends to shareholders or converted to U.S. dollars, the
Fund may have to sell portfolio securities to obtain sufficient cash to pay
such dividends. The expected introduction of a single currency, the euro, on
January 1, 1999 for participating nations in the European Economic and
Monetary Union ("EU") presents unique uncertainties, including whether the
payment and operational systems of banks and other financial institutions will
be ready by the scheduled launch date; the creation of suitable clearing and
settlement payment systems for the new currency; the legal treatment of
certain outstanding financial contracts after January 1, 1999 that refer to
existing currencies rather than the euro; the establishment and maintenance of
exchange rates for currencies being converted into the euro and the euro; the
fluctuation of the euro relative to non-euro currencies during the transition
period from January 1, 1999 to December 31, 2000 and beyond, whether to
interest rate, tax and labor regimes and European countries participating in
the euro will converge over time; and whether the conversion of the currencies
of other EU countries, such as the United Kingdom, Denmark and Greece, into
the euro and the admission of other non-EU countries such as Poland, Latvia
and Luthania as members of the EU may have an adverse impact on the euro.
These or other factors, including political and economic risks, could cause
market disruptions before or after the introduction of the euro, and could
adversely affect the value of securities held by the Fund. Commissions on
transactions in foreign securities may be higher than those for similar
transactions on domestic stock markets. In addition, clearance and settlement
procedures may be different in foreign countries and, in certain markets, such
procedures have been unable to keep pace with the volume of securities
transactions, thus making it difficult to conduct such transactions.
Foreign issuers are not generally subject to uniform accounting, auditing
and financial reporting standards comparable to those applicable to U.S.
issuers. There may be less publicly available information about a foreign
issuer than about a U.S. issuer. In addition, there is generally less
government regulation of foreign markets, companies and securities dealers
than in the United States. Foreign securities markets may have substantially
less volume than U.S. securities markets and securities of many foreign
issuers are less liquid and more volatile than securities of comparable
domestic issuers. Furthermore, with respect to certain foreign countries,
there is a possibility of nationalization, expropriation or confiscatory
taxation, imposition of withholding or other taxes on dividend or interest
payments (or, in some cases, capital gains), limitations on the removal of
funds or other assets of the Fund, political or social instability or
diplomatic developments which could affect investments in those countries.
INVESTMENTS IN ADRS, EDRS AND GDRS. The Fund may invest in foreign
securities which take the form of sponsored and unsponsored American
Depository Receipts ("ADRs") and Global Depository Receipts ("GDRs") and may
also invest in European Depository Receipts ("EDRs") or other similar
instruments representing securities of foreign issuers (together, "Depository
Receipts"). ADRs represent the right to receive securities of foreign issuers
deposited in a domestic bank or a correspondent bank. Prices of ADRs are
quoted in U.S. dollars, and ADRs are traded in the United States on exchanges
or over-the-counter and are sponsored and issued by domestic banks. EDRs and
GDRs are receipts evidencing an arrangement with a non-U.S. bank. EDRs and
GDRs are not necessarily quoted in the same currency as the underlying
security. To the extent the Fund acquires Depository Receipts through banks
which do not have a contractual relationship with the foreign issuer
8
<PAGE>
of the security underlying the Depository Receipts to issue and service such
Depository Receipts (unsponsored Depository Receipts), there may be an
increased possibility that the Fund would not become aware of and be able to
respond to corporate actions, such as stock splits or rights offerings
involving the foreign issuer, in a timely manner. In addition, the lack of
information may result in inefficiencies in the valuation of such instruments.
Investment in Depository Receipts does not eliminate all the risks inherent in
investing in securities of non-U.S. issuers. The market value of Depository
Receipts is dependent upon the market value of the underlying securities and
fluctuations in the relative value of the currencies in which the Depository
Receipt and the underlying securities are quoted. However, by investing in
Depository Receipts, such as ADRs, that are quoted in U.S. dollars, the Fund
may avoid currency risks during the settlement period for purchases and sales.
FOREIGN CURRENCY TRANSACTIONS. Because investment in foreign issuers will
usually involve currencies of foreign countries, the value of the assets of
the Fund as measured in U.S. dollars will be affected by changes in foreign
currency exchange rates. The Fund may, to the extent it invests in foreign
securities, purchase or sell foreign currencies on a spot basis and may also
purchase or sell forward foreign currency exchange contracts for hedging
purposes and to seek to protect against anticipated changes in future foreign
currency exchange rates. If the Fund enters into a forward foreign currency
exchange contract to buy foreign currency for any purpose, the Fund will
segregate cash or liquid assets in an amount equal to the value of the Fund's
total assets committed to the consummation of the forward contract, or
otherwise cover its position in a manner permitted by the SEC. The Fund will
incur costs in connection with conversions between various currencies. The
Fund may hold foreign currency received in connection with investments in
foreign securities when, in the judgment of the Investment Adviser, it would
be beneficial to convert such currency into U.S. dollars at a later date,
based on anticipated changes in the relevant exchange rate.
Currency exchange rates may fluctuate significantly over short periods of
time causing, along with other factors, the Fund's NAV to fluctuate. Currency
exchange rates generally are determined by the forces of supply and demand in
the foreign exchange markets and the relative merits of investments in
different countries, actual or anticipated changes in interest rates and other
complex factors, as seen from an international perspective. Currency exchange
rates also can be affected unpredictably by the intervention of U.S. or
foreign governments or central banks, or the failure to intervene, or by
currency controls or political developments in the U.S. or abroad. To the
extent that a substantial portion of the Fund's total assets, adjusted to
reflect the Fund's net position after giving effect to currency transactions,
is denominated or quoted in the currencies of foreign countries, the Fund will
be more susceptible to the risk of adverse economic and political developments
within those countries.
The market in forward foreign currency exchange contracts, currency swaps
and other privately negotiated currency instruments offers less protection
against defaults by the other party to such instruments than is available for
currency instruments traded on an exchange. Such contracts are subject to the
risk that the counterparty to the contract will default on its obligations.
Since these contracts are not guaranteed by an exchange or clearinghouse, a
default on the contract would deprive the Fund of unrealized profits,
transaction costs or the benefits of a currency hedge or force the Fund to
cover its purchase or sale commitments, if any, at the current market price.
The Fund will not enter into forward foreign currency exchange contracts,
currency swaps or other privately negotiated currency instruments unless the
credit quality of the unsecured senior debt or the claims-paying ability of
the counterparty is considered to be investment grade by the Investment
Adviser.
FIXED-INCOME SECURITIES
U.S. GOVERNMENT SECURITIES. The Fund may invest in U.S. Government
securities. Generally, these securities include U.S. Treasury obligations and
obligations issued or guaranteed by U.S. Government agencies,
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<PAGE>
instrumentalities or sponsored enterprises. U.S. Government securities also
include Treasury receipts and other stripped U.S. Government securities, where
the interest and principal components of stripped U.S. Government securities
are traded independently. The Fund may also invest in zero coupon U.S.
Treasury securities and in zero coupon securities issued by financial
institutions, which represent a proportionate interest in underlying U.S.
Treasury securities. A zero coupon security pays no interest to its holder
during its life and its value consists of the difference between its face
value at maturity and its cost. The market prices of zero coupon securities
generally are more volatile than the market prices of securities that pay
interest periodically. See "Taxation" in the Additional Statement.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. The Fund may invest in
mortgage-backed securities ("Mortgage-Backed Securities"), which represent
direct or indirect participations in, or are collateralized by and payable
from, mortgage loans secured by real property. The Fund may also invest in
asset-backed securities ("Asset-Backed Securities"). The principal and
interest payments on Asset-Backed Securities are collateralized by pools of
assets such as auto loans, credit card receivables, leases, installment
contracts and personal property. Such asset pools are securitized through the
use of special purpose trusts or corporations. Principal and interest payments
may be credit enhanced by a letter of credit, a pool insurance policy or a
senior/subordinated structure.
The Fund may also invest in stripped Mortgage-Backed Securities ("SMBS")
(including interest only and principal only securities), which are derivative
multiple class Mortgage-Backed Securities. SMBS are usually structured with
two different classes: one that receives 100% of the interest payments and the
other that receives 100% of the principal payments from a pool of mortgage
loans. If the underlying mortgage loans experience different than anticipated
prepayments of principal, the Fund may fail to recoup fully its initial
investment in these securities. The market value of the class consisting
entirely of principal payments generally is unusually volatile in response to
changes in interest rates. The yields on a class of SMBS that receives all or
most of the interest from mortgage loans are generally higher than prevailing
market yields on other Mortgage-Backed Securities because their cash flow
patterns are more volatile and there is a greater risk that the initial
investment will not be fully recouped. The Fund's investments in SMBS may
require the Fund to sell certain of its portfolio securities to generate
sufficient cash to satisfy certain income distribution requirements.
CORPORATE DEBT OBLIGATIONS. The Fund may invest in corporate debt
obligations. Corporate debt obligations are subject to the risk of an issuer's
inability to meet principal and interest payments on the obligations.
BANK OBLIGATIONS. The Fund may invest in obligations issued or guaranteed by
U.S. or foreign banks. Bank obligations, including without limitation, time
deposits, bankers' acceptances and certificates of deposit, may be general
obligations of the parent bank or may be limited to the issuing branch by the
terms of the specific obligations or by government regulation. Banks are
subject to extensive but different governmental regulations which may limit
both the amount and types of loans which may be made and interest rates which
may be charged. In addition, the profitability of the banking industry is
largely dependent upon the availability and cost of funds for the purpose of
financing lending operations under prevailing money market conditions. General
economic conditions as well as exposure to credit losses arising from possible
financial difficulties of borrowers play an important part in the operation of
this industry.
STRUCTURED SECURITIES. The Fund may invest in structured securities. The
value of the principal of and/or interest on such securities is determined by
reference to changes in the value of specific currencies, interest rates,
commodities, indices or other financial indicators (the "Reference") or the
relative change in two or more
10
<PAGE>
References. The interest rate or the principal amount payable upon maturity or
redemption may be increased or decreased depending upon changes in the
applicable Reference. The terms of the structured securities may provide that
in certain circumstances no principal is due at maturity and, therefore,
result in the loss of the Fund's investment. Structured securities may be
positively or negatively indexed, so that appreciation of the Reference may
produce an increase or decrease in the interest rate or value of the security
at maturity. In addition, changes in the interest rates or the value of the
security at maturity may be a multiple of changes in the value of the
Reference. Consequently, structured securities may entail a greater degree of
market risk than other types of fixed-income securities. Structured securities
may also be more volatile, less liquid and more difficult to accurately price
than less complex securities.
RATING CRITERIA. The Fund may invest up to 20% of its total assets in debt
securities, including securities which are unrated or rated in the lowest
rating categories by Standard & Poor's Ratings Group ("Standard & Poor's") or
Moody's Investors Service, Inc. ("Moody's") (i.e., BB or lower by Standard &
Poor's or Ba or lower by Moody's), including securities rated D by Moody's or
Standard & Poor's. Fixed-income securities rated BBB or Baa are considered
medium-grade obligations with speculative characteristics, and adverse
economic conditions or changing circumstances may weaken their issuers'
capacity to pay interest and repay principal. Fixed-income securities rated BB
or Ba or below (or comparable unrated securities) are commonly referred to as
"junk bonds," and are considered predominately speculative and may be
questionable as to principal and interest payments. In some cases, such bonds
may be highly speculative, have poor prospects for reaching investment grade
standing and be in default. As a result, investment in such bonds will entail
greater speculative risks than those associated with investment in investment
grade bonds. Also, to the extent that the rating assigned to a security in the
Fund's portfolio is downgraded by a rating organization, the market price and
liquidity of such security may be adversely affected. See Appendix A to the
Additional Statement for a description of the corporate bond ratings assigned
by Standard & Poor's and Moody's.
UNSEASONED COMPANIES
The Fund may invest in companies (including predecessors) which have
operated less than three years. 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.
INVESTMENT TECHNIQUES
OPTIONS ON SECURITIES AND SECURITIES INDICES
The Fund may write (sell) covered call and put options and purchase call and
put options on any securities in which it may invest or on any securities
index composed of securities in which it may invest. The writing and purchase
of options is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. The use of options to seek to increase total return
involves the risk of loss if the Investment Adviser is incorrect in its
expectation of fluctuations in securities prices or interest rates. The
successful use of options for hedging purposes also depends in part on the
ability of the Investment Adviser to manage future price fluctuations and the
degree of correlation between the options and securities markets. If the
Investment Adviser is incorrect in its expectation of changes in securities
prices or determination of the correlation between the securities indices on
which options are written and purchased and
11
<PAGE>
the securities in the Fund's investment portfolio, the investment performance
of the Fund will be less favorable than it would have been in the absence of
such options transactions. The writing of options could significantly increase
the Fund's portfolio turnover rate and, therefore, associated brokerage
commissions or spreads.
OPTIONS ON FOREIGN CURRENCIES
The Fund may, to the extent it invests in foreign securities, purchase and
sell (write) call and put options on foreign currencies for the purpose of
protecting against declines in the U.S. dollar value of foreign portfolio
securities and anticipated dividends on such securities and against increases
in the U.S. dollar cost of foreign securities to be acquired. As with other
kinds of options transactions, however, the writing of an option of a foreign
currency will constitute only a partial hedge, up to the amount of the premium
received. If an option that the Fund has written is exercised, the Fund could
be required to purchase or sell foreign currencies at disadvantageous exchange
rates, thereby incurring losses. The purchase of an option on foreign currency
may constitute an effective hedge against exchange rate fluctuations; however,
in the event of exchange rate movements adverse to the Fund's position, the
Fund may forfeit the entire amount of the premium plus related transaction
costs. Options on foreign currencies written or purchased by the Fund are
traded on U.S. and foreign exchanges or over-the-counter.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
To seek to increase total return or to hedge against changes in interest
rates, securities prices or currency exchange rate, the Fund may purchase and
sell various kinds of futures contracts, and purchase and write call and put
options on any of such futures contracts. The Fund may also enter into closing
purchase and sale transactions with respect to any such contracts and options.
The futures contracts may be based on various securities (such as U.S.
Government securities), foreign currencies securities indices and other
financial instruments and indices. The Fund will engage in futures and related
options transactions for bona fide hedging purposes as defined in regulations
of the Commodity Futures Trading Commission or to seek to increase total
return to the extent permitted by such regulations. The Fund may not purchase
or sell futures contracts or purchase or sell related options to seek to
increase total return, except for closing purchase or sale transactions, if
immediately thereafter the sum of the amount of initial margin deposits and
premiums paid on the Fund's outstanding positions in futures and related
options entered into for the purpose of seeking to increase total return would
exceed 5% of the market value of the Fund's net assets. These transactions
involve brokerage costs, require margin deposits and, in the case of contracts
and options obligating the Fund to purchase securities, require the Fund to
segregate and maintain cash or liquid assets with a value equal to the amount
of the Fund's obligations or to otherwise cover the obligations in a manner
permitted by the SEC.
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. See
"Investment Objectives and Policies--Futures Contracts and Options on Futures
Contracts" in the Additional Statement. Thus, while the Fund may benefit from
the use of futures and options on futures, unanticipated changes in interest
rates or securities prices may result in poorer overall performance than if
the Fund had not entered into any futures contracts or options transactions.
Because perfect correlation between a futures position and portfolio position
that is intended to be protected is impossible to achieve, the desired
protection may not be obtained and the Fund may be exposed to risk of loss.
The loss incurred by the Fund in entering into futures contracts and in
writing call options on futures is potentially unlimited and may exceed the
amount of the premium received. Futures markets are highly volatile and the
use of futures may increase the volatility of the Fund's NAV. The
profitability of the Fund's trading in futures to seek to increase total
return depends upon the ability of the Investment Adviser to analyze correctly
the futures
12
<PAGE>
markets. In addition, because of the low margin deposits normally required in
futures trading, a relatively small price movement in a futures contract may
result in substantial losses to the Fund. Further, futures contracts and
options on futures may be illiquid, and exchanges may limit fluctuations in
futures contract prices during a single day. The Fund may engage in futures
transactions on both U.S and foreign exchanges. Foreign exchanges may not
provide the same protections as U.S. exchanges.
EQUITY SWAPS
The Fund may invest up to 10% of its total assets in equity swaps. Equity
swaps allow the parties to a swap agreement to exchange the dividend income or
other components of return on an equity investment (e.g., a group of equity
securities or an index) for a component of return on another non-equity or
equity investment. An equity swap may be used by the Fund to invest in a
market without owning or taking physical custody of securities in
circumstances in which direct investment may be restricted for legal reasons
or is otherwise impractical. Equity swaps are derivatives and their value can
be very volatile. To the extent that the Investment Adviser does not
accurately analyze and predict the potential relative fluctuation of the
components swapped with another party, the Fund may suffer a loss. The value
of some components of an equity swap (such as the dividends on a common stock)
may also be sensitive to changes in interest rates. Furthermore, during the
period a swap is outstanding, the Fund may suffer a loss if the counterparty
defaults. In connection with its investments in equity swaps, the Fund will
either segregate cash or liquid assets or otherwise cover its obligations in a
manner required by the SEC.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
The Fund may purchase when-issued securities. When-issued transactions arise
when securities are purchased by a Fund with payment and delivery taking place
in the future in order to secure what is considered to be an advantageous
price and yield to the Fund at the time of entering into the transaction. The
Fund may also purchase securities on a forward commitment basis; that is, make
contracts to purchase securities for a fixed price at a future date beyond the
customary three-day settlement period. The Fund will segregate cash or liquid
assets in an amount sufficient to meet the purchase price until three days
prior to the settlement date. Alternatively, the Fund may enter into
offsetting contracts for the forward sale of other securities that it owns.
The purchase of securities on a when-issued or forward commitment basis
involves a risk of loss if the value of the security to be purchased declines
prior to the settlement date. Although the Fund would generally purchase
securities on a when-issued or forward commitment basis with the intention of
acquiring securities for its portfolio, the Fund may dispose of when-issued
securities or forward commitments prior to settlement if the Investment
Adviser deems it appropriate to do so.
ILLIQUID AND RESTRICTED SECURITIES
The Fund will not invest more than 15% of its net assets in illiquid
investments, which include securities (both foreign and domestic) that are not
readily marketable, certain stripped mortgage-backed securities, repurchase
agreements maturing in more than seven days, time deposits with a notice or
demand period of more than seven days, certain over-the-counter options and
certain restricted securities, unless it is determined, based upon a review of
the trading markets for a specific restricted security, that such restricted
security is eligible for resale under Rule 144A under the Securities Act of
1933 and, therefore, is liquid. The Trustees have adopted guidelines under
which the Investment Adviser determines and monitors the liquidity of
portfolio securities, subject to the oversight of the Trustees. Investing in
restricted securities eligible for resale pursuant to Rule 144A may decrease
the liquidity of the Fund's portfolio to the extent that qualified
institutional buyers become for a
13
<PAGE>
time uninterested in purchasing these restricted securities. The purchase
price and subsequent valuation of restricted and illiquid securities normally
reflect a discount, which may be significant, from the market price of
comparable securities for which a liquid market exists.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with dealers in U.S.
Government securities and member banks of the Federal Reserve System which
furnish collateral at least equal in value or market price to the amount of
their repurchase obligation. If the other party or "seller" defaults, the Fund
might suffer a loss to the extent that the proceeds from the sale of the
underlying securities and other collateral held by the Fund in connection with
the related repurchase agreement are less than the repurchase price. In
addition, in the event of bankruptcy of the seller or failure of the seller to
repurchase the securities as agreed, the Fund could suffer losses, including
loss of interest on or principal of the security and costs associated with
delay and enforcement of the repurchase agreement. The Trustees have reviewed
and approved certain counterparties whom they believe to be creditworthy and
have authorized the Fund to enter into repurchase agreements with such
counterparties. In addition, the Fund, together with other registered
investment companies having management agreements with the Investment Adviser
or its affiliates, may transfer uninvested cash balances into a single joint
account, the daily aggregate balance of which will be invested in one or more
repurchase agreements.
LENDING OF PORTFOLIO SECURITIES
The Fund may also seek to increase its income by lending portfolio
securities. Under present regulatory policies, such loans may be made to
institutions, such as certain broker-dealers, and are required to be secured
continuously by collateral in cash, cash equivalents, or U.S. Government
securities maintained on a current basis in an amount at least equal to the
market value of the securities loaned. Cash collateral may be invested in cash
equivalents. If the Investment Adviser determines to make securities loans,
the value of the securities loaned may not exceed 33 1/3% of the value of the
total assets of the Fund (including the loan collateral). The Fund may
experience a loss or delay in the recovery of its securities if the
institution with which it has engaged in a portfolio loan transaction breaches
its agreement with the Fund.
SHORT SALES AGAINST-THE-BOX
The Fund may make short sales of securities or maintain a short position,
provided that at all times when a short position is open the Fund owns an
equal amount of such securities or securities convertible into or exchangeable
for, without payment of any further consideration, an equal amount of the
securities of the same issuer as the securities sold short (a short sale
against-the-box). Not more than 25% of the Fund's net assets (determined at
the time of the short sale) may be subject to such short sales. As a result of
recent tax legislation, short sales may no longer be used to defer the
recognition of gain for tax purposes with respect to appreciated securities in
the Fund's portfolio.
TEMPORARY INVESTMENTS
The Fund may, for temporary defensive purposes, invest 100% of its total
assets in U.S. Government securities, repurchase agreements collateralized by
U.S. Government securities, commercial paper rated at least A-2 by Standard &
Poor's or P-2 by Moody's, certificates of deposit, bankers' acceptances,
repurchase agreements, non-convertible preferred stocks and non-convertible
corporate bonds with a remaining maturity of less than one year. When the
Fund's assets are invested in such instruments, the Fund may not be achieving
its investment objectives.
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<PAGE>
MISCELLANEOUS TECHNIQUES
In addition to the techniques and investments described above, the Fund may,
with respect to no more than 5% of its net assets, engage in the following
techniques and investments; (i) warrants and stock purchase rights; (ii)
mortgage swaps, index swaps and interest rate swaps, caps, floors and collars;
(iii) yield curve options and inverse floating rate securities; (iv) other
investment companies; (v) mortgage dollar rolls and (vi) custodial receipts.
For more information see the Additional Statement.
In addition, the Fund may borrow up to 33 1/3% of its total assets from
banks for temporary or emergency purposes. A Fund may not make additional
investments if borrowings (excluding covered mortgage dollar rolls) exceed 5%
of its total assets. For more information see the Additional Statement.
RISK FACTORS
RISK FACTORS ASSOCIATED WITH THE REAL ESTATE INDUSTRY. Although the Fund
does not invest directly in real estate, it does invest primarily in
securities of issuers that are primarily engaged in or related to the real
estate industry, and does have a policy of concentrating its investments in
the real estate industry. Therefore, an investment in the Fund is subject to
certain risks associated with the direct ownership of real estate and with the
real estate industry in general. These risks include, among others: possible
declines in the value of real estate; risks related to general and local
economic conditions; possible lack of availability of mortgage funds;
overbuilding; extended vacancies of properties; increases in competition,
property taxes and operating expenses; changes in zoning laws; costs resulting
from the clean-up of, and liability to third parties for damages resulting
from, environmental problems; casualty or condemnation losses; uninsured
damages from floods, earthquakes or other natural disasters; limitations on
and variations in rents; and changes in interest rates. To the extent that
assets underlying the Fund's investments are concentrated geographically, by
property type or in certain other respects, the Fund may be subject to certain
of the foregoing risks to a greater extent.
In addition, if the Fund receives rental income or income from the
disposition of real property acquired as a result of a default on securities
the Fund owns, the receipt of such income or the ownership of such property
may adversely affect the Fund's ability to retain its tax status as a
regulated investment company. Investments by the Fund in securities of
companies providing mortgage servicing will be subject to the risks associated
with refinancings and their impact on servicing rights.
RISKS OF INVESTING IN REITS. Investing in REITs involves certain unique
risks in addition to those risks associated with investing in the real estate
industry in general. Equity REITs may be affected by changes in the value of
the underlying property owned by the REITs. Mortgage REITs may be affected by
the quality of any credit extended. REITs are dependent upon management
skills, may not be diversified, are subject to heavy cash flow dependency,
default by borrowers and self-liquidation. REITs are also subject to the
possibilities of failing to qualify for tax free pass-through of income under
the Code and failing to maintain their exemptions from registration under the
Investment Company Act of 1940, as amended (the "1940 Act"). REITs whose
underlying properties are concentrated in a particular industry or geographic
region are also subject to risks affecting such industries and regions.
REITs (especially mortgage REITs) are also subject to interest rate risks.
When interest rates decline, the value of a REIT's investment in fixed rate
obligations can be expected to rise. Conversely, when interest rates rise, the
value of a REIT's investment in fixed rate obligations can be expected to
decline. In contrast, as interest
15
<PAGE>
rates on adjustable rate mortgage loans are reset periodically, yields on a
REIT's investments in such loans will gradually align themselves to reflect
changes in market interest rates, causing the value of such investments to
fluctuate less dramatically in response to interest rate fluctuations than
would investments in fixed rate obligations.
Investing in REITs involves risks similar to those associated with investing
in small capitalization companies. REITs may have limited financial resources,
may trade less frequently and in a limited volume and may be subject to more
abrupt or erratic price movements than larger company securities.
Historically, small capitalization stocks, such as REITs have been more
volatile in price than the larger capitalization stocks included in the
Standard & Poor's Index of 500 Common Stocks.
RISKS OF INVESTING IN EQUITY SECURITIES In general, the Fund is subject to
the risks associated with investments in common stocks and other equity
securities. Stock values fluctuate in response to the activities of individual
companies and in response to general market and economic conditions and,
accordingly, the value of the stocks that the Fund holds may decline over
short or extended periods. The U.S. stock markets tend to be cyclical, with
periods when stock prices generally rise and periods when prices generally
decline. As of the date of this Prospectus, domestic stock markets were
trading at or close to record high levels and there can be no guarantee that
such levels will continue.
SPECIAL RISKS OF INVESTMENTS IN EMERGING MARKETS. Investing in the
securities of issuers in Emerging Countries involves risks in addition to
those discussed under "Description of Securities--Foreign Investments." The
Fund may invest up to 15% of its total assets in securities of issuers in
Emerging Countries. Emerging Countries are generally located in the Asia-
Pacific region, Eastern Europe, Latin and South America and Africa.
Foreign investment in the securities markets of certain Emerging Countries
is restricted or controlled to varying degrees which may limit investment in
such countries or increase the administrative costs of such investments.
Certain countries may restrict or prohibit investment opportunities in issuers
or industries deemed important to national interests. Such restrictions may
affect the market price, liquidity and rights of securities that may be
purchased by the Fund. The repatriation of both investment income and capital
from certain Emerging Countries is subject to restrictions such as the need
for governmental consents. Many Emerging Countries may be subject to a greater
degree of economic, political and social instability than is the case in
Western Europe, the United States, Canada, Australia, New Zealand and Japan.
Many Emerging Countries do not have fully democratic governments. For example,
governments of some Emerging Countries are authoritarian in nature or have
been installed or removed as a result of military coups, while governments in
other Emerging Countries have periodically used force to suppress civil
dissent. Many Emerging Countries have experienced currency devaluations and
substantial and, in some cases, extremely high rates of inflation, which have
a negative effect on the economies and securities markets of such Emerging
Countries. Settlement procedures in Emerging Countries are frequently less
developed and reliable than those in the United States and may involve the
Fund's delivery of securities before receipt of payment for their sale. In
addition, significant delays are common in certain markets in registering the
transfer of securities. Settlement or registration problems may make it more
difficult for the Fund to value its portfolio securities and could cause the
Fund to miss attractive investment opportunities, to have a portion of its
assets uninvested or to incur losses due to the failure of a counterparty to
pay for securities the Fund has delivered or the Fund's inability to complete
its contractual obligations.
RISKS OF INVESTING IN FIXED-INCOME SECURITIES. When interest rates decline,
the market value of fixed-income securities tends to increase. Conversely,
when interest rates increase, the market value of fixed-income securities
tends to decline. Volatility of a security's market value will differ
depending upon the security's
16
<PAGE>
duration, the issuer and the type of instrument. Investments in fixed-income
securities are subject to the risk that the issuer could default on its
obligations and the Fund could sustain losses on such investments. A default
could impact both interest and principal payments.
RISKS OF DERIVATIVE TRANSACTIONS. The Fund's transactions, if any, in
options, futures, options on futures, swaps, structured securities and
currency transactions involve certain risks, including a possible lack of
correlation between changes in the value of hedging instruments and the
portfolio assets being hedged, the potential illiquidity of the markets for
derivative instruments, the risks arising from the margin requirements and
related leverage factors associated with such transactions. The use of these
management techniques to seek to increase total return may be regarded as a
speculative practice and involves the risk of loss if the Investment Adviser
is incorrect in its expectation of fluctuations in securities prices, interest
rates or currency prices. The Fund's use of certain derivative transactions
may be limited by the requirements of the Code, for qualification as a
regulated investment company.
INVESTMENT RESTRICTIONS
The Fund is subject to certain investment restrictions that are described in
detail under "Investment Restrictions" in the Additional Statement.
Fundamental investment restrictions of the Fund can not be changed without
approval of a majority of the outstanding Shares of the Fund as defined in the
Additional Statement. The Fund's investment objectives and all policies not
specifically designated as fundamental are non-fundamental and may be changed
without shareholder approval. If there is a change in the Fund's investment
objectives, shareholders should consider whether the Fund remains an
appropriate investment in light of their then current financial positions and
needs.
PORTFOLIO TURNOVER
A high rate of portfolio turnover (100% or more) involves correspondingly
greater expenses which must be borne by the Fund and its shareholders and may
under certain circumstances make it more difficult for the Fund to qualify as
a regulated investment company under the Code. It is anticipated that the
annual portfolio turnover rate of the Fund will generally not exceed 100%. The
portfolio turnover rate is calculated by dividing the lesser of the dollar
amount of sales or purchases of portfolio securities by the average monthly
value of the Fund's portfolio securities, excluding securities having a
maturity at the date of purchase of one year or less. The Investment Adviser
will not consider the portfolio turnover rate a limiting factor in making
investment decisions for a Fund consistent with the Fund's investment
objectives and portfolio management policies.
MANAGEMENT
TRUSTEES AND OFFICERS
The Trustees are responsible for deciding matters of general policy and
reviewing the actions of the Investment Adviser, Distributor and transfer
agent. The officers of the Trust conduct and supervise the Fund's daily
business operations. The Additional Statement contains information as to the
identity of, and other information about, the Trustees and officers of the
Trust.
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<PAGE>
INVESTMENT ADVISER
INVESTMENT ADVISER. Goldman Sachs Asset Management, One New York Plaza, New
York, New York 10004, a separate operating division of Goldman Sachs, serves
as investment adviser to the Fund. Goldman Sachs registered as an investment
adviser in 1981. As of May 21, 1998, GSAM, together with its affiliates, acted
as investment adviser or distributor for assets in excess of $160.4 billion.
Under a Management Agreement with the Fund, the Investment Adviser, subject
to the general supervision of the Trustees, provides day-to-day advice as to
the Fund's portfolio transactions. Goldman Sachs has agreed to permit the
Trust to use the name "Goldman Sachs" or a derivative thereof as part of the
Fund's name for as long as the Fund's Management Agreement is in effect.
In performing its investment advisory services, the Investment Adviser,
while remaining ultimately responsible for the management of the Fund, is able
to draw upon the research and expertise of its asset management affiliates for
portfolio decisions and management with respect to certain portfolio
securities. In addition, the Investment Adviser will have access to the
research of, and certain proprietary technical models developed by, Goldman
Sachs and may apply quantitative and qualitative analysis in determining the
appropriate allocations among the categories of issuers and types of
securities.
Under the Management Agreement, the Investment Adviser also: (i) supervises
all non-advisory operations of the Fund that it advises; (ii) provides
personnel to perform such executive, administrative and clerical services as
are reasonably necessary to provide effective administration of the Fund;
(iii) arranges for at the Fund's expense (a) the preparation of all required
tax returns, (b) the preparation and submission of reports to existing
shareholders, (c) the periodic updating of prospectuses and Additional
Statements and (d) the preparation of reports to be filed with the SEC and
other regulatory authorities; (iv) maintains the Fund's records; and (v)
provides office space and all necessary office equipment and services.
FUND MANAGERS
<TABLE>
<CAPTION>
YEARS
PRIMARILY
NAME AND TITLE RESPONSIBLE FIVE YEAR EMPLOYMENT HISTORY
-------------- ----------- ----------------------------
<C> <C> <S>
Herbert E. Ehlers Since 1998 Mr. Ehlers joined the Investment Adviser in
Managing Director 1997 and is part of the portfolio management
and Portfolio Man- team of the Real Estate Securities Fund and
ager the Chief Investment Officer of the Growth
Equity Strategy. From 1994 to 1997, he was
the Chief Investment Officer of Liberty
Investment Management, Inc. He was a
portfolio manager and president of Liberty's
predecessor from Eagle Asset Management, from
1984 to 1994.
Elizabeth Groves Since 1998 Ms. Groves joined the Investment Adviser in
Vice President and 1998 and is a portfolio manager for the Real
Portfolio Manager Estate Securities Fund. Her previous
experience includes 12 years in the real
estate and real estate finance business. From
1991 to 1997, she worked in the Real Estate
Department of the Investment Banking Division
of Goldman Sachs, where she was responsible
for both public and private capital market
transactions.
</TABLE>
It is the responsibility of the Investment Adviser to make the investment
decisions for the Fund and to place the purchase and sale orders for the
Fund's portfolio transactions in the U.S. and foreign markets. Such orders may
be directed to any broker including, to the extent and in the manner permitted
by applicable law, Goldman
18
<PAGE>
Sachs or its affiliates. In effecting purchases and sales of portfolio
securities for the Fund, the Investment Adviser will seek the best price and
execution of the Fund's orders. In doing so, where two or more brokers or
dealers offer comparable prices and execution for a particular trade,
consideration may be given to whether the broker or dealer provides investment
research or brokerage services or sells shares of any Goldman Sachs Fund. See
the Additional Statement for a further description of the Investment Adviser's
brokerage allocation practices.
As compensation for its services rendered and assumption of certain expenses
pursuant to the Management Agreement, GSAM is entitled to a fee, computed
daily and payable monthly at a rate equal to 1.00% of the Fund's average daily
net assets.
The Investment Adviser has voluntarily agreed to reduce or limit certain
"Other Expenses" of the Fund (excluding management fees, service fees,
transfer agency fees, taxes, interest and brokerage fees and litigation,
indemnification and other extraordinary expenses) to the extent such expenses
exceed 0.00% per annum of the Fund's average daily net assets. Such reductions
or limits, if any, are calculated monthly on a cumulative basis and may be
discontinued or modified by the Investment Adviser in its discretion at any
time.
ACTIVITIES OF GOLDMAN SACHS AND ITS AFFILIATES AND OTHER ACCOUNTS MANAGED BY
GOLDMAN SACHS. The involvement of the Investment Adviser, Goldman Sachs and
their affiliates in the management of, or their interest in, other accounts
and other activities of Goldman Sachs may present conflicts of interest with
respect to the Fund or limit the Fund's investment activities. Goldman Sachs
and its affiliates engage in proprietary trading and advise accounts and funds
which have investment objectives similar to those of the Fund and/or which
engage in and compete for transactions in the same type of securities,
currencies and instruments as the Fund. Goldman Sachs and its affiliates will
not have any obligation to make available any information regarding their
proprietary activities or strategies, or the activities or strategies used for
other accounts managed by them, for the benefit of the management of the Fund.
The results of the Fund's investment activities, therefore, may differ from
those of Goldman Sachs and its affiliates and it is possible that the Fund
could sustain losses during periods in which Goldman Sachs and its affiliates
and other accounts achieve significant profits on their trading for
proprietary or other accounts. In addition, the Fund may, from time to time,
enter into transactions in which other clients of Goldman Sachs have an
adverse interest. From time to time, the Fund's activities may be limited
because of regulatory restrictions applicable to Goldman Sachs and its
affiliates, and/or their internal policies designed to comply with such
restrictions. See "Management--Activities of Goldman Sachs and its Affiliates
and Other Accounts Managed by Goldman Sachs" in the Additional Statement for
further information.
DISTRIBUTOR AND TRANSFER AGENT
Goldman Sachs, 85 Broad Street, New York, New York 10004, serves as the
exclusive distributor (the "Distributor") of the Fund's Shares. Goldman Sachs,
4900 Sears Tower, Chicago, Illinois 60606, also serves as the Fund's transfer
agent (the "Transfer Agent") and as such performs various shareholder
servicing functions. As compensation for the services rendered to the Fund 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 from the
Fund, with respect to the Institutional and Service shares, equal to 0.04% of
the average daily net assets of each Class. Shareholders with inquiries
regarding the Fund should contact Goldman Sachs (as Transfer Agent) at the
address or the telephone number set forth on the back cover page of this
Prospectus. Shares of a Fund may also bear fees paid to Service Organizations
or other persons providing sub-transfer agency and similar services.
From time to time, Goldman Sachs or any of its affiliates may purchase and
hold shares of the Fund. Goldman Sachs reserves the right to redeem at any
time some or all of the Fund shares acquired for its own account.
19
<PAGE>
YEAR 2000
Many computer systems were designed using only two digits to signify the
year (for example, "98" for "1998"). On January 1, 2000, if these computer
systems are not corrected, they may incorrectly interpret "00" as the year
"1900" rather than the year "2000," leading to computer shutdowns or errors
(commonly known as the "Year 2000 Problem"). To the extent these systems
conduct forward-looking calculations, these computer problems may occur prior
to January 1, 2000. Like other investment companies and financial and business
organizations, the Funds could be adversely affected in their ability to
process securities trades, price securities, provide shareholder account
services and otherwise conduct normal business operations if the Investment
Adviser or other Fund service providers do not adequately address this problem
in a timely manner. The Investment Adviser has established a dedicated group
to analyze these issues and to implement the systems modifications necessary
to prepare for the Year 2000 Problem. Currently, the Investment Adviser does
not anticipate that the transition to the 21st Century will have any material
impact on its ability to continue to service the Funds at current levels. In
addition, the Investment Adviser has sought assurances from the Funds' other
service providers that they are taking the steps necessary so that they do not
experience Year 2000 Problems, and the Investment Adviser will continue to
monitor the situation. At this time, however, no assurance can be given that
the accounts taken by the Investment Adviser and the Funds' other service
providers will be sufficient to avoid any adverse effect on the Funds due to
the Year 2000 Problem.
EXPENSES
The Fund is responsible for the payment of its expenses. The expenses
include, without limitation; fees payable to the Investment Adviser;
distribution and authorized dealer service fees; custodial and transfer agency
fees; brokerage fees and commissions; filing fees for the registration or
qualification of the Fund's Shares under federal or state securities laws,
organizational expenses; fees and expenses incurred in connection with
membership in investment company organizations; taxes; interest; costs of
liability insurance; fidelity bonds or indemnification; any costs, expenses or
losses arising out of any liability of, or claim for damages or other relief
asserted against the Fund for violation of any law; legal and auditing fees
and expenses (including the cost of legal and certain accounting services
rendered by employees of the Investment Adviser and its affiliates with
respect to the Fund); expenses of preparing and setting in type prospectuses,
Additional Statements, proxy material, reports and notices and the printing
and distributing of the same to shareholders and regulatory authorities;
compensation and expenses of the Trust's "non-interested" Trustees; and
extraordinary organizational expenses, if any, incurred by the Trust.
NET ASSET VALUE
The NAV per Share of the Class of the Fund is calculated by the Fund's
custodian as of the close of regular trading on the New York Stock Exchange
(which is normally, but not always, 3:00 p.m. Chicago time, 4:00 p.m. New York
time), on each Business Day (as such term is defined under "Additional
Information"). The NAV per Share of each Class is calculated by determining
the net assets attributed to each Class and dividing by the number of
outstanding Shares of that Class. Portfolio securities are valued based on
market quotations or, if accurate quotations are not readily available, at
fair value as determined in good faith under procedures established by the
Trustees.
20
<PAGE>
PERFORMANCE INFORMATION
From time to time the Fund may publish average annual total return, yield
and distribution rates in advertisements and communications to shareholders or
prospective investors. Average annual total return is determined by computing
the average annual percentage change in value of $1,000 invested at the
maximum public offering price for specified periods ending with the most
recent calendar quarter, assuming reinvestment of all dividends and
distributions at NAV. The total return calculation assumes a complete
redemption of the investment at the end of the relevant period. The Fund may
also from time to time advertise total return on a cumulative, average, year-
by-year or other basis for various specified periods by means of quotations,
charts, graphs or schedules. In addition, the Fund may furnish total return
calculations based on investments at various sales charge levels or at NAV.
Any performance information which is based on the Fund's NAV per Share would
be reduced if any applicable sales charge were taken into account. In addition
to the above, the Fund may from time to time advertise its performance
relative to certain averages, performance rankings, indices, other information
prepared by recognized mutual fund statistical services and investments for
which reliable performance information is available.
The Fund computes its yield by dividing net investment income earned during
a recent thirty-day period by the product of the average daily number of
Shares outstanding and entitled to receive dividends during the period and the
maximum offering price per Share on the last day of the relevant period. The
results are compounded on a bond equivalent (semi-annual) basis and then
annualized. Net investment income per Share is equal to the dividends and
interest earned during the period, reduced by accrued expenses for the period.
The calculation of net investment income for these purposes may differ from
the net investment income determined for accounting purposes. The Fund's
quotations of distribution rate are calculated by annualizing the most recent
distribution of net investment income for a monthly, quarterly or other
relevant period and dividing this amount by the NAV per Share on the last day
of the period for which the distribution rates are being calculated.
The Fund's yield, total return and distribution rate will be calculated
separately for each Class of Shares in existence. Because each Class of Shares
may be subject to different expenses, yield, the total return and distribution
rate calculations with respect to each Class of Shares for the same period
will differ. See "Shares of the Trust."
The Fund's performance quotations do not reflect any fees charged by a
Service Organization to its customers' accounts in connection with investments
in the Fund. The investment results of the Fund will fluctuate over time and
any presentation of investment results for any prior period should not be
considered a representation of what an investment may earn or what the Fund's
performance may be in any future period. In addition to information provided
in shareholder reports, the Fund may, in its discretion, from time to time
make a list of its holdings available to investors upon request.
SHARES OF THE TRUST
The Fund is a series of Goldman Sachs Trust, which was formed under the laws
of the State of Delaware on January 28, 1997. The Trust was formerly a
Maryland corporation, and reorganized into the Trust as of April 30, 1997. The
Trustees have authority under the Trust's Declaration of Trust to create and
classify Shares of beneficial interests in separate series, without further
action by shareholders. Additional series may be added in the future. The
Trustees also have authority to classify and reclassify any series or
portfolio of Shares into one or more classes.
21
<PAGE>
When issued, Shares are fully paid and non-assessable. In the event of
liquidation, shareholders of each Class are entitled to share pro rata in the
net assets of the Fund available for distribution to the shareholders of such
Class. All Shares are freely transferable and have no preemptive, subscription
or conversion rights. Shareholders are entitled to one vote per Share,
provided that, at the option of the Trustees, shareholders will be entitled to
a number of votes based upon the NAVs represented by their Shares.
The Trust does not intend to hold annual meetings of shareholders. However,
recordholders may, under certain circumstances, as permitted by the Act,
communicate with other shareholders in connection with requiring a special
meeting of shareholders. The Trustees will call a special meeting of
shareholders for the purpose of electing Trustees if, at any time, less than a
majority of Trustees holding office at the time were elected by shareholders.
In the interest of economy and convenience, the Trust does not issue
certificates representing the Fund's Shares. Instead, the Transfer Agent
maintains a record of each shareholder's ownership. Each shareholder of record
receives confirmation of purchase and redemption orders from the Transfer
Agent. Fund Shares and any dividends and distributions paid by the Fund are
reflected in account statements from the Transfer Agent.
TAXATION
FEDERAL TAXES
The Fund is treated as a separate entity for tax purposes. The Fund intends
to elect to be treated as a regulated investment company and intends to
continue to qualify for such treatment for each taxable year under Subchapter
M of the Code. To qualify as such, the Fund must satisfy certain requirements
relating to the sources of its income, diversification of its assets and
distribution of its income to shareholders. As a regulated investment company,
the Fund will not be subject to federal income or excise tax on any net
investment income and net realized capital gains that are distributed to its
shareholders in accordance with certain timing requirements of the Code.
Dividends paid by the Fund from net investment income, certain net realized
foreign exchange gains, the excess of net short-term capital gain over net
long-term capital loss and original issue discount or market discount income
will be taxable to its shareholders as ordinary income. Distributions out of
the net capital gain (the excess of net long-term capital gain over net short-
term capital loss), if any, of the Fund will be taxed to shareholders as long-
term capital gains, regardless of the length of time a shareholder has held
his or her Shares or whether such gain was reflected in the price paid for the
Shares. These tax consequences will apply whether distributions are received
in cash or reinvested in Shares. The Fund's dividends that are paid to its
corporate shareholders and are attributable to qualifying dividends the Fund
receives from U.S. domestic corporations may be eligible, in the hands of such
corporate shareholders, for the corporate dividends-received deduction,
subject to certain holding period requirements and debt financing limitations
under the Code. Since dividends the Fund receives from REITs are not
qualifying dividends for this purpose, it is not likely that a substantial
portion of the Fund's dividends will generally qualify for the corporate
dividends-received deduction. Certain distributions paid by the Fund in
January of a given year may be taxable to shareholders as if received the
prior December 31. Shareholders will be informed annually about the amount and
character of distributions received from the Fund for federal income tax
purposes.
22
<PAGE>
Investors should consider the tax implications of buying Shares immediately
prior to a distribution. Investors who purchase Shares shortly before the
record date for a distribution will pay a per Share price that includes the
value of the anticipated distribution and will be taxed on the distribution
even though the distribution represents a return of a portion of the purchase
price.
Redemptions and exchanges of Shares are taxable events.
Individuals and certain other classes of shareholders may be subject to 31%
backup withholding of federal income tax on distributions, redemptions and
exchanges if they fail to furnish their correct taxpayer identification number
and certain certifications required by the Internal Revenue Service or if they
are otherwise subject to backup withholding. Individuals, corporations and
other shareholders that are not U.S. persons under the Code are subject to
different tax rules and may be subject to nonresident alien withholding at the
rate of 30% (or a lower rate provided by an applicable tax treaty, if any) on
amounts treated as ordinary dividends from the Fund.
The Fund may be subject to foreign withholding or other foreign taxes on
income or gain from certain foreign securities. However, the Fund does not
anticipate that it will be eligible to pass any foreign tax credits through to
its shareholders.
OTHER TAXES
In addition to federal taxes, a shareholder may be subject to state, local
or foreign taxes on payments received from the Fund. A state income (and
possibly local income and/or intangible property) tax exemption may be
available to the extent (if any) the Fund's distributions are derived from
interest on (or, in the case of intangible property taxes, the value of its
assets is attributable to) certain U.S. Government obligations, provided in
some states that certain thresholds for holdings of such obligations and/or
reporting requirements are satisfied. For a further discussion of certain tax
consequences of investing in Shares of the Fund, see "Taxation" in the
Additional Statement. Shareholders are urged to consult their own tax advisers
regarding specific questions as to federal, state and local taxes as well as
to any foreign taxes.
ADDITIONAL INFORMATION
As used in this Prospectus, the term "Business Day" means any day the New
York Stock Exchange is open for trading, which is Monday through Friday except
for holidays. The New York Stock Exchange is closed on the following holidays:
New Year's Day, Martin Luther King Day, Presidents' Day (observed), Good
Friday, Memorial Day (observed), Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
23
<PAGE>
ADDITIONAL SERVICES
The Trust, on behalf of the Fund, has adopted a Service Plan with respect to
the Service Shares which authorizes the Fund to compensate Service Organiza-
tions for providing account administration and personal and account maintenance
services to their customers who are beneficial owners of such Shares. The
Trust, on behalf of the Fund, enters into agreements with Service Organizations
which purchase Service Shares on behalf of their customers ("Service Agree-
ments"). The Service Agreements provide for compensation to the Service Organi-
zations in an amount up to 0.50% (on an annualized basis) of the average daily
net assets of the Service Shares of the Fund attributable to or held in the
name of the Service Organization for its customers; provided, however, that the
fee paid for personal and account maintenance services may not exceed 0.25% of
such average daily net assets. The services provided by the Service Organiza-
tions may include acting, directly or through an agent, as the sole shareholder
of record, maintaining account records for customers, processing orders to pur-
chase, redeem or exchange Service Shares for customers, responding to inquiries
from prospective and existing shareholders and assisting customers with invest-
ment procedures.
The Trust may authorize certain Service Organizations to accept on the
Trust's behalf, purchase, redemption and exchange orders placed by their cus-
tomers and, if approved by the Trust, to designate other intermediaries to ac-
cept such orders. In these cases, a Fund will be deemed to have received an or-
der in proper form when the order is accepted by the authorized Service Organi-
zation or intermediary on a Business Day, and the order will be priced at a
Fund's NAV per Share next determined after such acceptance. The Service Organi-
zation or intermediary will be responsible for transmitting accepted orders to
the Trust within the period agreed upon by them. A customer may contact its
Service Organization to learn whether the Service Organization is authorized to
accept orders. Service Organizations that are authorized to accept orders for
the Trust may receive payments from the Fund or Goldman Sachs that are in addi-
tion to the payments payable by the Trust under the Service Plan.
Holders of Service Shares of the Fund bear all expenses and fees paid to
Service Organizations under the Service Plan as well as any other expenses
which are directly attributable to such Shares.
Service Organizations may charge fees directly to their customers who are the
beneficial owners of Service Shares in connection with their customer accounts.
These fees would be in addition to any amounts received by the Service Organi-
zation under a Service Agreement and may affect the return earned on an invest-
ment in the Fund. The Trust, on behalf of the Fund, accrues payments made pur-
suant to a Service Agreement daily. All inquiries of beneficial owners of Serv-
ice Shares should be directed to such owners' Service Organization.
The Investment Adviser, Distributor, and/or their affiliates, also pay addi-
tional compensation from time to time, out of their assets and not as an addi-
tional charge to the Fund, to selected Service Organizations and other persons
in connection with the sale of Shares of the Fund and other investment portfo-
lios of the Trust (such as additional payments based on new sales amounts ex-
ceeding pre-established thresholds, or the length of time customer assets have
remained in the Trust) and, subject to applicable NASD regulations, 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 reimbursement of expenses, enter-
tainment and prizes such as travel awards, merchandise, cash, investment re-
search and educational information and related support materials. This addi-
tional compensation can vary among Service Organizations depending
24
<PAGE>
upon such factors as the amounts their customers have invested (or may invest)
in particular investment portfolios of the Trust, and the particular program
involved, or the amount of reimbursement expenses. Additional compensation
based on sales may, but is currently not expected to, exceed 0.50% (annualized)
of the amount invested. For further information, see the Additional Statement.
REPORTS TO SHAREHOLDERS
Recordholders of Service Shares of the Fund will receive an annual report
containing audited financial statements and a semi-annual report. Each
recordholder of Service Shares will also be provided with a printed confirma-
tion for each transaction in its account and a quarterly account statement. A
year-to-date statement for any account will be provided to a Service Organiza-
tion upon request made to Goldman Sachs.
Service Organizations will be responsible for providing services similar to
those described above to their customers who are the beneficial owners of such
Shares. For example, Service Organizations are responsible for providing each
customer exercising investment discretion with quarterly statements with re-
spect to such customer's account in lieu of an immediate confirmation of each
transaction.
DIVIDENDS
Each dividend from net investment income and capital gain distributions, if
any, declared by the Fund on its outstanding Service Shares will, at the elec-
tion of each shareholder, be paid: (i) in cash; or (ii) in additional Service
Shares of the Fund. This election should initially be made on a shareholder's
Account Information Form and may be changed upon written notice to Goldman
Sachs at any time prior to the record date for a particular dividend or distri-
bution. If no election is made, all dividends from net investment income and
capital gain distributions will be reinvested in Service Shares of the Fund.
The election to reinvest dividends and distributions paid by the Fund in ad-
ditional Service Shares of the Fund will not affect the tax treatment of such
dividends and distributions, which will be treated as received by the share-
holder and then used to purchase Service Shares of the Fund.
The Fund intends that all or substantially all its net investment income and
net capital gains, after reduction by available capital losses, including any
capital losses carried forward from prior years, will be declared as dividends
for each taxable year. The Fund will pay dividends from net investment income
quarterly. The Fund will pay dividends from net investment income and dividends
from net realized capital gains, reduced by available capital losses, at least
annually. From time to time, a portion of the Fund's dividends may constitute a
return of capital.
At the time of an investor's purchase of Shares of the Fund a portion of the
NAV per Share may be represented by undistributed income of the Fund or real-
ized or unrealized appreciation of the Fund's portfolio securities. Therefore,
subsequent distributions on such Shares from such income or realized apprecia-
tion may be
25
<PAGE>
taxable to the investor even if the NAV of the investor's Shares is, as a re-
sult of the distributions, reduced below the cost of such Shares and the dis-
tributions (or portions thereof) represent a return of a portion of the pur-
chase price.
PURCHASE OF SERVICE SHARES
Customers of Service Organizations may invest in Service Shares only through
their Service Organizations. Service Shares may be purchased on any Business
Day at the NAV per share next determined after receipt of an order by Goldman
Sachs from a Service Organization. (See "Additional Services" for a description
of limited situations where a Service Organization or other intermediary may be
authorized to accept orders for the Funds.) No sales load will be charged. Cur-
rently, the NAV is determined as of the close of regular trading on the New
York Stock Exchange (which is normally, but not always, 3:00 p.m. Chicago time,
4:00 p.m. New York time) as described under "Net Asset Value." Purchases of
Service Shares of the Fund must be settled within three (3) Business Days of
the receipt of a complete purchase order. Payment of the proceeds of redemption
of Shares purchased by check may be delayed for a period of time as described
under "Redemption of Service Shares."
The Service Organizations are responsible for the timely transmittal of
purchase orders to Goldman Sachs and payments to State Street Bank and Trust
Company ("State Street"). In order to facilitate timely transmittal, the
Service Organizations have established times by which purchase orders and
payments must be received by them.
PURCHASE PROCEDURES
Purchases of Service Shares may be made by a Service Organization placing an
order with Goldman Sachs at 800-621-2550 and either wiring federal funds to
State Street or initiating an ACH transfer. Purchases may also be made by a
Service Organization by check (except that the Trust will not accept a check
drawn on a foreign bank or a third party check) or Federal Reserve draft made
payable to "Goldman Sachs Real Estate Securities Fund--Name of Class of Shares"
and should be directed to "Goldman Sachs Real Estate Securities Fund--Name of
Class of Shares," c/o National Financial Data Services, Inc. ("NFDS"), P.O. Box
419711, Kansas City, MO 64141-6711.
OTHER PURCHASE INFORMATION
The Fund does not have any minimum purchase or account requirements with
respect to Service Shares. A Service Organization may, however, impose a
minimum amount for initial and subsequent investments in Service Shares, and
may establish other requirements such as a minimum account balance. A Service
Organization may effect redemptions of noncomplying accounts, and may impose a
charge for any special services rendered to its customers. Customers should
contact their Service Organization for further information concerning such
requirements and charges.
The Fund reserves the right to redeem Service Shares of any Service Organiza-
tion whose account balance is less than $50 as a result of earlier redemptions.
Such redemptions will not be implemented if the value of a recordholder's ac-
count falls below the minimum account balance solely as a result of market con-
ditions. The Trust will give 60 days' prior written notice to Service Organiza-
tions whose Service Shares are being redeemed to allow them to purchase suffi-
cient additional Service Shares to avoid such redemption.
26
<PAGE>
The Fund and Goldman Sachs each reserves the right to reject any specific
purchase order (including exchanges) or to restrict purchases or exchanges by a
particular purchaser (or group of related purchasers). This may occur, for ex-
ample, when a purchaser or group of purchaser's pattern of frequent purchases,
sales or exchanges of Service Shares of the Fund is evident, or if purchases,
sales, or exchanges are, or a subsequent abrupt redemption might be, of a size
that would disrupt management of the Fund.
In the sole discretion of Goldman Sachs, the Fund may accept securities
instead of cash for the purchase of Shares of the Fund. Such purchases will be
permitted only if the Investment Adviser determines that any securities
acquired in this manner are consistent with the Fund's investment objectives,
restrictions and policies and are desirable investments for the Fund.
EXCHANGE PRIVILEGE
Service Shares of the Fund may be exchanged by a Service Organization for (i)
Service Shares of any other mutual fund sponsored by Goldman Sachs and desig-
nated as an eligible fund for this purpose and (ii) the corresponding class of
any Goldman Sachs Money Market Fund at the NAV next determined either by writ-
ing to Goldman Sachs, Attention: Goldman Sachs Real Estate Securities Fund--
Name of Class of Shares, c/o GSAM Shareholder Services, 4900 Sears Tower, Chi-
cago, Illinois 60606 or, if previously elected in the Fund's Account Informa-
tion Form, by telephone at 800-621-2550 (7:00 a.m. to 5:30 p.m. Chicago time).
A shareholder should obtain and read the prospectus relating to any other fund
and its Shares and consider its investment objectives, policies and applicable
fees before making an exchange. Service Shares acquired by telephone exchange
must be registered in the same name(s) and have the same address as Service
Shares of the Fund for which the exchange is being made.
In an effort to prevent unauthorized or fraudulent exchanges by telephone,
Goldman Sachs employs reasonable procedures as set forth under "Redemption of
Service Shares" to confirm that such instructions are genuine. In times of
drastic economic or market changes the telephone exchange privilege may be dif-
ficult to implement. For federal income tax purposes, an exchange is treated as
a sale of the Service Shares surrendered in the exchange, on which an investor
may realize a gain or loss, followed by a purchase of Service Shares or the
corresponding class of any Goldman Sachs Money Market Fund received in the ex-
change. Shareholders should consult their own tax advisers concerning the tax
consequences of an exchange. Exchanges are available only in states where ex-
changes may legally be made. The exchange privilege may be materially modified
or withdrawn at any time on 60 days' written notice to recordholders of Service
Shares and is subject to certain limitations. See "Purchase of Service Shares."
REDEMPTION OF SERVICE SHARES
The Fund will redeem its Service Shares upon request of the recordholder of
such Shares on any Business Day at the NAV next determined after receipt of
such request in proper form by Goldman Sachs. (See "Additional Services" for a
description of limited situations where a Service Organization or other inter-
mediary may be authorized to accept requests for the Fund.) If Service Shares
to be redeemed were recently purchased by check, the Fund may delay transmittal
of redemption proceeds until such time as it has assured itself that good
27
<PAGE>
funds have been collected for the purchase of such Service Shares. This may
take up to 15 days. Redemption requests may be made by a Service Organization
by writing to or calling the Transfer Agent at the address or telephone number
set forth on the back cover of this Prospectus. A Service Organization may re-
quest redemptions by telephone if the optional telephone redemption privilege
is elected on the Account Information Form. It may be difficult to implement
redemptions by telephone in times of drastic economic or market changes.
In an effort to prevent unauthorized or fraudulent redemption or exchange
requests by telephone, Goldman Sachs employs reasonable procedures specified by
the Trust to confirm that such instructions are genuine. Among other things,
any redemption request that requires money to go to an account or address other
than that designated on the Account Information Form must be in writing and
signed by an authorized person designated on the Account Information Form. Any
such written request is also confirmed by telephone with both the requesting
party and the designated bank account to verify instructions. Exchanges among
accounts with different names, addresses and social security or other taxpayer
identification numbers must be in writing and signed by an authorized person
designated on the Account Information Form. Other procedures may be implemented
from time to time concerning telephone redemptions and exchanges. If reasonable
procedures are not implemented, the Trust may be liable for any loss due to
unauthorized or fraudulent transactions. In all other cases, neither the Fund,
the Trust nor Goldman Sachs will be responsible for the authenticity of
redemption or exchange instructions received by telephone.
The Fund will arrange for the proceeds of redemptions effected by any means
to be wired to the recordholder of Service Shares or, if the recordholder
elects in writing, by check. Redemption proceeds paid by wire transfer will
normally be wired on the next Business Day in federal funds (for a total of
one-day delay), but may be paid up to 3 days after receipt of a properly
executed redemption request. Wiring of redemption proceeds may be delayed one
additional Business Day if the Federal Reserve Bank is closed on the day
redemption proceeds would ordinarily be wired. Redemption proceeds paid by
check will normally be mailed to the address of record within 3 Business Days
of receipt of a properly executed redemption request. Once wire transfer
instructions have been given by Goldman Sachs, neither the Fund, the Trust nor
Goldman Sachs assumes any further responsibility for the performance of
intermediaries or the customer's Service Organization in the transfer process.
If a problem with such performance arises, the customer should deal directly
with such intermediaries or Service Organizations.
Additional documentation regarding a redemption by any means may be required
to effect a redemption when deemed appropriate by the Transfer Agent. The
request for such redemption will not be considered to have been received in
proper form until such additional documentation has been submitted to the
Transfer Agent by the recordholder of Service Shares.
Service Organizations are responsible for the timely transmittal of
redemption requests by their customers to the Transfer Agent. In order to
facilitate timely transmittal of redemption requests, Service Organizations
have established times by which redemption requests must be received by them.
Additional documentation may be required when deemed appropriate by a Service
Organization.
--------------------
28
<PAGE>
APPENDIX
GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON ACCOUNT INFORMATION FORM
You are required by law to provide the Fund with your correct Taxpayer
Identification Number (TIN), regardless of whether you file tax returns.
Failure to do so may subject you to penalties. Failure to provide your correct
TIN and to sign your name in the Certification section of the Account
Information Form could result in withholding of 31% by the Fund for the
federal backup withholding tax on distributions, redemptions, exchanges and
other payments relating to your account.
Any tax withheld may be credited against taxes owed on your federal income
tax return.
If you do not have a TIN, you should apply for one immediately by contacting
your local office of the Social Security Administration or the Internal
Revenue Service (IRS). Backup withholding could also apply to payments
relating to your account prior to the Fund's receipt of your TIN.
Special rules apply for certain entities. For example, for an account
established under a Uniform Gifts or Transfers to Minors Act, the TIN of the
minor should be furnished.
If you have been notified by the IRS that you are subject to backup
withholding because you failed to report all your interest and/or dividend
income on your tax return and you have not been notified by the IRS that such
withholding should cease, you must cross out item (2) in the Certification
section of the Account Information Form.
If you are an exempt recipient, you should furnish your TIN and certify your
exemption by signing the Certification section and writing "exempt" after your
signature. Exempt recipients include: corporations, tax-exempt pension plans
and IRAs, governmental agencies, financial institutions, registered securities
and commodities dealers and others.
If you are a nonresident alien or foreign entity, you must provide a
completed Form W-8 to the Fund in order to avoid backup withholding on certain
payments. Other payments to you may be subject to nonresident alien
withholding of up to 30%.
For further information regarding backup and nonresident alien withholding,
see Sections 3406, 1441 and 1442 of the Code and consult your tax adviser.
A-1
<PAGE>
- --------------------------------------------------------------------------------
GOLDMAN SACHS ASSET
MANAGEMENT
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
GOLDMAN, SACHS & CO.
DISTRIBUTOR
85 BROAD STREET
NEW YORK, NEW YORK 10004
GOLDMAN, SACHS & CO.
TRANSFER AGENT
4900 SEARS TOWER
CHICAGO, ILLINOIS 60606
STATE STREET BANK AND TRUST COMPANY
CUSTODIAN
1776 HERITAGE DRIVE
NORTH QUINCY, MASSACHUSETTS 02171
ARTHUR ANDERSEN, LLP
INDEPENDENT PUBLIC ACCOUNTANTS
225 FRANKLIN STREET
BOSTON, MASSACHUSETTS 02110
TOLL FREE (IN U.S.) . . . . . . . . 800-621-2550
REPROSVC
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GOLDMAN SACHS
REAL ESTATE
SECURITIES FUND
- --------------------------------------------------------------------------------
PROSPECTUS
SERVICE SHARES
LOGO
Goldman
Sachs
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
PROSPECTUS
July 27, 1998
GOLDMAN SACHS REAL ESTATE SECURITIES FUND
INSTITUTIONAL SHARES
The Goldman Sachs Real Estate Securities Fund (the "Fund") seeks total return
comprised of long-term growth of capital and dividend income through
investments in equity securities of issuers that are primarily engaged in or
related to the real estate industry. The Fund expects that a substantial
portion of its total assets will be invested in real estate investment trusts.
Goldman Sachs Asset Management ("GSAM"), New York, New York, a separate
operating division of Goldman, Sachs & Co. ("Goldman Sachs"), serves as
investment adviser to the Fund. GSAM is referred to in this Prospectus as the
"Investment Adviser." Goldman Sachs serves as the Fund's distributor and
transfer agent.
This Prospectus provides information about Goldman Sachs Trust (the "Trust")
and the Fund that a prospective investor should understand before investing.
This Prospectus should be retained for future reference. A Statement of
Additional Information (the "Additional Statement"), dated May 1, 1998, as
revised July 27, 1998, containing further information about the Trust and the
Fund which may be of interest to investors, has been filed with the Securities
and Exchange Commission ("SEC"), is incorporated herein by reference in its
entirety, and may be obtained without charge from Goldman Sachs by calling the
telephone number, or writing to one of the addresses, listed on the back cover
of this Prospectus. The SEC maintains a Web site (http://www.sec.gov) that
contains the Additional Statement and other information regarding the Trust.
-----------------
INSTITUTIONAL SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK OR OTHER INSURED DEPOSITORY INSTITUTION AND
ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN THE FUND
INVOLVES INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fund Highlights.................... 3
Fees and Expenses.................. 5
Investment Objectives and Policies. 6
Description of Securities.......... 7
Investment Techniques.............. 11
Risk Factors....................... 15
Investment Restrictions............ 17
Portfolio Turnover................. 17
Management......................... 17
Expenses........................... 20
Net Asset Value.................... 20
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Performance Information............ 21
Shares of the Trust................ 21
Taxation........................... 22
Additional Information............. 23
Reports to Shareholders............ 24
Dividends.......................... 24
Purchase of Institutional Shares... 24
Exchange Privilege................. 27
Redemption of Institutional Shares. 27
Appendix .......................... A-1
Account Information Form
</TABLE>
2
<PAGE>
FUND HIGHLIGHTS
The following is intended to highlight certain information and is qualified
in its entirety by the more detailed information contained in this Prospectus.
WHAT IS THE GOLDMAN SACHS TRUST?
The Goldman Sachs Trust is an open-end management investment company that
offers its shares ("Shares") in several investment funds (commonly known as
mutual funds). The Real Estate Securities Fund (the "Fund"), a mutual fund
offered under the Trust, pools the monies of investors by selling its Shares to
the public and investing these monies in a portfolio of securities designed to
achieve the Fund's stated investment objectives.
WHAT ARE THE INVESTMENT OBJECTIVES AND POLICIES OF THE FUND?
The Fund has distinct investment objectives and policies. There can be no
assurance that the Fund's objective will be achieved. The Fund is a
"diversified open-end management investment company" as defined in the
Investment Company Act of 1940, as amended (the "Act"). For a further
description of the Fund's investment objectives and policies, see "Investment
Objectives and Policies," "Description of Securities" and "Investment
Techniques."
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE Total return comprised of long-term
growth of capital and dividend
income.
- ----------------------------------------------------------------------------
INVESTMENT CRITERIA Substantially all, and at least 80%,
of total assets in a diversified
portfolio of equity securities of
issuers that are primarily engaged in
or related to the real estate
industry. The Fund expects that a
substantial portion of its total
assets will be invested in real
estate investment trusts ("REITs").
- ----------------------------------------------------------------------------
BENCHMARK Wilshire Real Estate Securities Index
("WARESI").
</TABLE>
WHAT ARE THE RISK FACTORS AND SPECIAL CHARACTERISTICS THAT I SHOULD CONSIDER
BEFORE INVESTING?
The Fund's Share price will fluctuate with market and conditions, so that
an investment in the Fund may be worth more or less when redeemed than when
purchased. The Fund should not be relied upon as a complete investment
program. There can be no assurance that the Fund's investment objective
will be achieved. In view of the specialized nature of the Fund's
investments, the Fund may be suitable only for those investors who are
financially able to assume greater risk and share price volatility than
presented by funds that do not concentrate in the real estate industry. See
"Risk Factors."
Risk Factors Associated with the Real Estate Industry. Although the Fund
does not invest directly in real estate, it does invest primarily in common
stocks and other equity securities of REITs and other real estate industry
companies and does have a policy of concentrating its investments in the
real estate industry. Therefore, an investment in the Fund is subject to
certain risks associated with the direct ownership of real estate and with
3
<PAGE>
the real estate industry in general, including possible declines in the
value of real estate, general and local economic conditions, environmental
problems and changes in interest rates. To the extent that assets
underlying the Fund's investments are concentrated geographically, by
property type or in certain other respects, these risks may be heightened.
In addition, if the Fund has rental income or income from the disposition
of real property acquired as a result of a default on securities the Fund
owns, the receipt of such income may adversely affect its ability to retain
its tax status as a regulated investment company.
Risks of Investing in REITs. Investing in REITs involves certain unique risks
in addition to those risks associated with investing in the real estate
industry in general. Equity REITs may be affected by changes in the value of,
and income produced by, the underlying property owned by the REITs. Mortgage
REITs may be affected by the quality of any credit extended and interest rate
risk. REITs are dependent upon management skills, may have limited
diversification and are subject to heavy cash flow dependency, default by
borrowers and self-liquidation.
Other. The Fund may invest in foreign securities and lower rated debt
securities and may use certain investment techniques, including
derivatives, forward contracts, options and futures. These investments and
investment techniques will subject the Fund to greater risk.
WHO MANAGES THE FUND?
Goldman Sachs Asset Management serves as Investment Adviser to the Fund.
As of May 21, 1998, the Investment Adviser, together with its affiliates,
acted as investment adviser, administrator or distributor for assets in
excess of $160.4 billion.
WHO DISTRIBUTES THE FUND'S SHARES?
Goldman Sachs acts as distributor of the Fund's Shares (the
"Distributor").
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $1,000,000 or $10,000,000 (depending
upon an investor's eligibility) in Institutional Shares of the Fund alone
or in combination with Institutional Shares (or the corresponding class) of
any other mutual fund sponsored by Goldman Sachs and designated as an
eligible fund for this purpose.
HOW DO I PURCHASE INSTITUTIONAL SHARES?
You may purchase Institutional Shares of the Fund through Goldman Sachs.
Institutional Shares are purchased at the current net asset value ("NAV")
without any sales load. See "Purchase of Institutional Shares."
HOW DO I SELL MY INSTITUTIONAL SHARES?
You may redeem Institutional Shares upon request on any Business Day, as
defined under "Additional Information," at the NAV next determined after
receipt of such request in proper form. See "Redemption of Institutional
Shares."
HOW DO I RECEIVE DIVIDENDS AND DISTRIBUTIONS?
<TABLE>
<CAPTION>
INVESTMENT INCOME DIVIDENDS CAPITAL GAINS
DECLARED AND PAID DISTRIBUTIONS
----------------- -------------
<S> <C> <C>
Quarterly Annually
</TABLE>
Recordholders of Institutional Shares may receive dividends and
distributions in additional Institutional Shares of the Fund in which you
have invested or may elect to receive them in cash. For further information
concerning dividends and distributions, see "Dividends."
4
<PAGE>
FEES AND EXPENSES
(INSTITUTIONAL SHARES)
<TABLE>
<CAPTION>
FUND
----
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on Purchases.............................. None
Maximum Sales Charge Imposed on Reinvested Dividends................... None
Redemption Fees........................................................ None
Exchange Fees.......................................................... None
ANNUAL FUND OPERATING EXPENSES: (as a percentage of average daily net
assets)/1/
Management Fees........................................................ 1.00%
Distribution (Rule 12b-1) Fees......................................... None
Other Expenses (after applicable limitations)/2/....................... 0.04%
----
TOTAL FUND OPERATING EXPENSES (AFTER FEE AND EXPENSE LIMITATIONS)/3/.. 1.04%
====
</TABLE>
- ---------------------
/1/ Based on estimated amounts for the current fiscal year.
/2/ The Investment Adviser voluntarily has agreed to reduce or limit certain
other expenses (excluding management fees, transfer agency fees, taxes,
interest and brokerage fees and litigation, indemnification and other
extraordinary expenses) to the extent such expenses exceed 0.00% of the
Fund's average daily net assets:
/3/ Without the limitations described above, "Other Expenses" and "Total
Operating Expenses" of the Fund for the current fiscal year are estimated
to be 0.58% and 1.58%, respectively.
<TABLE>
<CAPTION>
EXAMPLE: 1 YEAR 3 YEARS
- -------- ------ -------
<S> <C> <C>
You would pay the following expenses on a hypothetical $1,000
investment, assuming (1) a 5% annual return and (2) redemption
at the end of each time period:............................... $11 $33
</TABLE>
The Investment Adviser and Goldman Sachs may modify or discontinue any of
the limitations set forth above in the future at their discretion. The
information set forth in the foregoing table and hypothetical example relates
only to Institutional Shares of the Fund. The Fund also offers Service Shares,
Class A, Class B and Class C Shares, which are subject to different fees and
expenses (which affect performance), have different minimum investment
requirements and are entitled to different services. Information regarding
Service, Class A, Class B and Class C Shares may be obtained from an
investor's sales representative or from Goldman Sachs by calling the number on
the back cover of this Prospectus.
Institutions that invest in Institutional Shares on behalf of their
customers may charge fees directly to their customer accounts in connection
with their investments. Such fees, if any, may affect the return such
customers realize with respect to their investments.
Certain institutions may also receive other compensation in connection with
the sales and distribution of Institutional Shares or for services to their
customer's accounts and/or the Fund. For additional information regarding such
compensation, see "Purchase of Institutional Shares" in the Prospectus and the
Additional Statement.
The purpose of the foregoing table is to assist investors in understanding
the various fees and expenses of the Fund that an investor will bear directly
or indirectly. The information on the fees and expenses included in the table
and hypothetical example above are based on the Fund's estimated fees and
expenses and should not be considered as representative of past or future
expenses. Actual fees and expenses may be greater or less than those
indicated. Moreover, while the example assumes a 5% annual return, the Fund's
actual performance will vary and may result in an actual return greater or
less than 5%. See "Management--Investment Adviser."
5
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and principal investment policies of the Fund are
described below. Other investment practices and management techniques, which
involve certain risks are described under "Description of Securities," "Risk
Factors" and "Investment Techniques." There can be no assurance that the
Fund's investment objectives will be achieved.
The Investment Adviser may purchase for the Fund interests in real estate
investment trusts, common stocks, preferred stocks, convertible debt
obligations, convertible preferred stocks, equity interests in trusts,
partnerships, joint ventures, limited liability companies and similar
enterprises, warrants and stock purchase rights ("equity securities"). In
choosing the Fund's securities, the Investment Adviser utilizes first-hand
fundamental research, including visiting company facilities to assess
operations and to meet decision-makers. The Investment Adviser may also use
macro analysis of numerous economic and valuation variables to anticipate
changes in company earnings and the overall investment climate. The Investment
Adviser is able to draw on the research and market expertise of the Goldman
Sachs Global Investment Research Department and other affiliates of the
Investment Adviser, as well as information provided by other securities
dealers. Equity securities in the Fund's portfolio will generally be sold when
the Investment Adviser believes that the market price fully reflects or
exceeds the securities' fundamental valuation or when other more attractive
investments are identified.
The Fund's investment strategy is based on the premise that property market
fundamentals are the primary determinant of growth underlying the success of
companies in the real estate industry. The Fund's research and investment
process is designed to identify those companies with strong property
fundamentals and strong management teams. This process is comprised of real
estate market research and securities analysis. The Investment Adviser's
analysis will focus on determining the degree to which a company can achieve
sustainable growth in cash flow and dividend paying capability. The Investment
Adviser will take into account fundamental trends in underlying property
markets as determined by proprietary models, research of local real estate
markets, earnings, cash flow growth and stability, the relationship between
asset values and market prices of the securities and dividend payment history.
The Investment Adviser will attempt to purchase securities of companies whose
underlying portfolios are diversified geographically and by property type.
REAL ESTATE SECURITIES FUND
Objectives. The Fund's investment objective is to provide investors with
total return comprised of long-term growth of capital and dividend income.
Primary Investment Focus. The Fund invests, under normal circumstances,
substantially all, and at least 80% of its total assets in issuers that are
primarily engaged in or related to the real estate industry. The Fund seeks to
achieve its investment objective by investing in a diversified portfolio of
equity securities of REITs and other real estate industry companies. A "real
estate industry company" is a company that derives at least 50% of its gross
revenues or net profits from the ownership, development, construction,
financing, management or sale of commercial, industrial or residential real
estate or interests therein.
6
<PAGE>
Shares of REITs. The Fund may invest without limitation in shares of REITs.
REITs are pooled investment vehicles which invest primarily in income
producing real estate or real estate related loans or interests. REITs are
generally classified as equity REITs, mortgage REITs or a combination of
equity and mortgage REITs. Equity REITs invest the majority of their assets
directly in real property and derive income primarily from the collection of
rents. Equity REITs can also realize capital gains by selling properties that
have appreciated in value. Mortgage REITs invest the majority of their assets
in real estate mortgages and derive income from the collection of interest
payments. Similar to investment companies such as the Fund, REITs are not
taxed on income distributed to shareholders provided they comply with several
requirements of the Internal Revenue Code of 1986, as amended (the "Code").
REITs are dependent upon cash flow from their investments to repay financing
cost and the ability of the REIT's merger. REITs are also subject to risks
generally associated with investments in real estate. The Fund will indirectly
bear its proportionate share of expenses incurred by REITs in which the Fund
invests in addition to the expenses incurred directly by the Fund.
Other. The Fund may invest up to 20% of its total assets in fixed-income
securities that, in the opinion of the Investment Adviser, offer the potential
to further the Fund's investment objectives. In addition, although the Fund
will invest primarily in publicly traded U.S. securities, it may invest up to
15% of its net assets in foreign securities.
DESCRIPTION OF SECURITIES
The Fund may invest in equity and fixed-income securities in accordance with
the investment policies stated above. Certain of these permitted investments
are described in more detail in this section.
CONVERTIBLE SECURITIES
The Fund may invest in convertible securities, including debt obligations
and preferred stock of the issuer convertible at a stated exchange rate into
common stock of the issuer. Convertible securities generally offer lower
interest or dividend yields than non-convertible securities of similar
quality. As with all fixed-income securities, the market value of convertible
securities tends to decline as interest rates increase and, conversely, to
increase as interest rates decline. However, when the market price of the
common stock underlying a convertible security exceeds the conversion price,
the convertible security tends to reflect the market price of the underlying
common stock. As the market price of the underlying common stock declines, the
convertible security tends to trade increasingly on a yield basis, and thus
may not decline in price to the same extent as the underlying common stock.
Convertible securities rank senior to common stocks in an issuer's capital
structure and consequently entail less risk than the issuer's common stock. In
evaluating a convertible security, the Investment Adviser will give primary
emphasis to the attractiveness of the underlying common stock. The convertible
debt securities in which the Fund may invest are not subject to any minimum
rating criteria. Convertible debt securities are equity investments for
purposes of the Fund's investment policies.
FOREIGN INVESTMENTS
FOREIGN SECURITIES. The Fund may invest in the securities of foreign
issuers. Investments in foreign securities may offer potential benefits that
are not available from investments exclusively in equity securities of
domestic issuers quoted in U.S. dollars. Foreign countries may have economic
policies or business cycles different from those of the U.S. and markets for
foreign securities do not necessarily move in a manner parallel to U.S.
markets.
7
<PAGE>
Investing in the securities of foreign issuers involves certain special
risks, including those set forth below, which are not typically associated
with investing in U.S. dollar denominated or quoted securities of U.S.
issuers. Such investments may be affected by changes in currency rates,
changes in foreign or U.S. laws or restrictions applicable to such investments
and in exchange control regulations (e.g., currency blockage). A decline in
the exchange rate of the currency (i.e., weakening of the currency against the
U.S. dollar) in which a portfolio security is quoted or denominated relative
to the U.S. dollar would reduce the value of the portfolio security. In
addition, if the currency in which the Fund receives dividends, interest or
other payments declines in value against the U.S. dollar before such income is
distributed as dividends to shareholders or converted to U.S. dollars, the
Fund may have to sell portfolio securities to obtain sufficient cash to pay
such dividends. The expected introduction of a single currency, the euro, on
January 1, 1999 for participating nations in the European Economic and
Monetary Union ("EU") presents unique uncertainties, including whether the
payment and operational systems of banks and other financial institutions will
be ready by the scheduled launch date; the creation of suitable clearing and
settlement payment systems for the new currency; the legal treatment of
certain outstanding financial contracts after January 1, 1999 that refer to
existing currencies rather than the euro; the establishment and maintenance of
exchange rates for currencies being converted into the euro and the euro; the
fluctuation of the euro relative to non-euro currencies during the transition
period from January 1, 1999 to December 31, 2000 and beyond, whether to
interest rate, tax and labor regimes and European countries participating in
the euro will converge over time; and whether the conversion of the currencies
of other EU countries, such as the United Kingdom, Denmark and Greece, into
the euro and the admission of other non-EU countries such as Poland, Latvia
and Luthania as members of the EU may have an adverse impact on the euro.
These or other factors, including political and economic risks, could cause
market disruptions before or after the introduction of the euro, and could
adversely affect the value of securities held by the Fund. Commissions on
transactions in foreign securities may be higher than those for similar
transactions on domestic stock markets. In addition, clearance and settlement
procedures may be different in foreign countries and, in certain markets, such
procedures have been unable to keep pace with the volume of securities
transactions, thus making it difficult to conduct such transactions.
Foreign issuers are not generally subject to uniform accounting, auditing
and financial reporting standards comparable to those applicable to U.S.
issuers. There may be less publicly available information about a foreign
issuer than about a U.S. issuer. In addition, there is generally less
government regulation of foreign markets, companies and securities dealers
than in the United States. Foreign securities markets may have substantially
less volume than U.S. securities markets and securities of many foreign
issuers are less liquid and more volatile than securities of comparable
domestic issuers. Furthermore, with respect to certain foreign countries,
there is a possibility of nationalization, expropriation or confiscatory
taxation, imposition of withholding or other taxes on dividend or interest
payments (or, in some cases, capital gains), limitations on the removal of
funds or other assets of the Fund, political or social instability or
diplomatic developments which could affect investments in those countries.
INVESTMENTS IN ADRS, EDRS AND GDRS. The Fund may invest in foreign
securities which take the form of sponsored and unsponsored American
Depository Receipts ("ADRs") and Global Depository Receipts ("GDRs") and may
also invest in European Depository Receipts ("EDRs") or other similar
instruments representing securities of foreign issuers (together, "Depository
Receipts"). ADRs represent the right to receive securities of foreign issuers
deposited in a domestic bank or a correspondent bank. Prices of ADRs are
quoted in U.S. dollars, and ADRs are traded in the United States on exchanges
or over-the-counter and are sponsored and issued by domestic banks. EDRs and
GDRs are receipts evidencing an arrangement with a non-U.S. bank. EDRs and
GDRs are not necessarily quoted in the same currency as the underlying
security. To the extent the Fund acquires Depository Receipts through banks
which do not have a contractual relationship with the foreign issuer
8
<PAGE>
of the security underlying the Depository Receipts to issue and service such
Depository Receipts (unsponsored Depository Receipts), there may be an
increased possibility that the Fund would not become aware of and be able to
respond to corporate actions, such as stock splits or rights offerings
involving the foreign issuer, in a timely manner. In addition, the lack of
information may result in inefficiencies in the valuation of such instruments.
Investment in Depository Receipts does not eliminate all the risks inherent in
investing in securities of non-U.S. issuers. The market value of Depository
Receipts is dependent upon the market value of the underlying securities and
fluctuations in the relative value of the currencies in which the Depository
Receipt and the underlying securities are quoted. However, by investing in
Depository Receipts, such as ADRs, that are quoted in U.S. dollars, the Fund
may avoid currency risks during the settlement period for purchases and sales.
FOREIGN CURRENCY TRANSACTIONS. Because investment in foreign issuers will
usually involve currencies of foreign countries, the value of the assets of
the Fund as measured in U.S. dollars will be affected by changes in foreign
currency exchange rates. The Fund may, to the extent it invests in foreign
securities, purchase or sell foreign currencies on a spot basis and may also
purchase or sell forward foreign currency exchange contracts for hedging
purposes and to seek to protect against anticipated changes in future foreign
currency exchange rates. If the Fund enters into a forward foreign currency
exchange contract to buy foreign currency for any purpose, the Fund will
segregate cash or liquid assets in an amount equal to the value of the Fund's
total assets committed to the consummation of the forward contract, or
otherwise cover its position in a manner permitted by the SEC. The Fund will
incur costs in connection with conversions between various currencies. The
Fund may hold foreign currency received in connection with investments in
foreign securities when, in the judgment of the Investment Adviser, it would
be beneficial to convert such currency into U.S. dollars at a later date,
based on anticipated changes in the relevant exchange rate.
Currency exchange rates may fluctuate significantly over short periods of
time causing, along with other factors, the Fund's NAV to fluctuate. Currency
exchange rates generally are determined by the forces of supply and demand in
the foreign exchange markets and the relative merits of investments in
different countries, actual or anticipated changes in interest rates and other
complex factors, as seen from an international perspective. Currency exchange
rates also can be affected unpredictably by the intervention of U.S. or
foreign governments or central banks, or the failure to intervene, or by
currency controls or political developments in the U.S. or abroad. To the
extent that a substantial portion of the Fund's total assets, adjusted to
reflect the Fund's net position after giving effect to currency transactions,
is denominated or quoted in the currencies of foreign countries, the Fund will
be more susceptible to the risk of adverse economic and political developments
within those countries.
The market in forward foreign currency exchange contracts, currency swaps
and other privately negotiated currency instruments offers less protection
against defaults by the other party to such instruments than is available for
currency instruments traded on an exchange. Such contracts are subject to the
risk that the counterparty to the contract will default on its obligations.
Since these contracts are not guaranteed by an exchange or clearinghouse, a
default on the contract would deprive the Fund of unrealized profits,
transaction costs or the benefits of a currency hedge or force the Fund to
cover its purchase or sale commitments, if any, at the current market price.
The Fund will not enter into forward foreign currency exchange contracts,
currency swaps or other privately negotiated currency instruments unless the
credit quality of the unsecured senior debt or the claims-paying ability of
the counterparty is considered to be investment grade by the Investment
Adviser.
FIXED-INCOME SECURITIES
U.S. GOVERNMENT SECURITIES. The Fund may invest in U.S. Government
securities. Generally, these securities include U.S. Treasury obligations and
obligations issued or guaranteed by U.S. Government agencies,
9
<PAGE>
instrumentalities or sponsored enterprises. U.S. Government securities also
include Treasury receipts and other stripped U.S. Government securities, where
the interest and principal components of stripped U.S. Government securities
are traded independently. The Fund may also invest in zero coupon U.S.
Treasury securities and in zero coupon securities issued by financial
institutions, which represent a proportionate interest in underlying U.S.
Treasury securities. A zero coupon security pays no interest to its holder
during its life and its value consists of the difference between its face
value at maturity and its cost. The market prices of zero coupon securities
generally are more volatile than the market prices of securities that pay
interest periodically. See "Taxation" in the Additional Statement.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. The Fund may invest in
mortgage-backed securities ("Mortgage-Backed Securities"), which represent
direct or indirect participations in, or are collateralized by and payable
from, mortgage loans secured by real property. The Fund may also invest in
asset-backed securities ("Asset-Backed Securities"). The principal and
interest payments on Asset-Backed Securities are collateralized by pools of
assets such as auto loans, credit card receivables, leases, installment
contracts and personal property. Such asset pools are securitized through the
use of special purpose trusts or corporations. Principal and interest payments
may be credit enhanced by a letter of credit, a pool insurance policy or a
senior/subordinated structure.
The Fund may also invest in stripped Mortgage-Backed Securities ("SMBS")
(including interest only and principal only securities), which are derivative
multiple class Mortgage-Backed Securities. SMBS are usually structured with
two different classes: one that receives 100% of the interest payments and the
other that receives 100% of the principal payments from a pool of mortgage
loans. If the underlying mortgage loans experience different than anticipated
prepayments of principal, the Fund may fail to recoup fully its initial
investment in these securities. The market value of the class consisting
entirely of principal payments generally is unusually volatile in response to
changes in interest rates. The yields on a class of SMBS that receives all or
most of the interest from mortgage loans are generally higher than prevailing
market yields on other Mortgage-Backed Securities because their cash flow
patterns are more volatile and there is a greater risk that the initial
investment will not be fully recouped. The Fund's investments in SMBS may
require the Fund to sell certain of its portfolio securities to generate
sufficient cash to satisfy certain income distribution requirements.
CORPORATE DEBT OBLIGATIONS. The Fund may invest in corporate debt
obligations. Corporate debt obligations are subject to the risk of an issuer's
inability to meet principal and interest payments on the obligations.
BANK OBLIGATIONS. The Fund may invest in obligations issued or guaranteed by
U.S. or foreign banks. Bank obligations, including without limitation, time
deposits, bankers' acceptances and certificates of deposit, may be general
obligations of the parent bank or may be limited to the issuing branch by the
terms of the specific obligations or by government regulation. Banks are
subject to extensive but different governmental regulations which may limit
both the amount and types of loans which may be made and interest rates which
may be charged. In addition, the profitability of the banking industry is
largely dependent upon the availability and cost of funds for the purpose of
financing lending operations under prevailing money market conditions. General
economic conditions as well as exposure to credit losses arising from possible
financial difficulties of borrowers play an important part in the operation of
this industry.
STRUCTURED SECURITIES. The Fund may invest in structured securities. The
value of the principal of and/or interest on such securities is determined by
reference to changes in the value of specific currencies, interest rates,
commodities, indices or other financial indicators (the "Reference") or the
relative change in two or more
10
<PAGE>
References. The interest rate or the principal amount payable upon maturity or
redemption may be increased or decreased depending upon changes in the
applicable Reference. The terms of the structured securities may provide that
in certain circumstances no principal is due at maturity and, therefore,
result in the loss of the Fund's investment. Structured securities may be
positively or negatively indexed, so that appreciation of the Reference may
produce an increase or decrease in the interest rate or value of the security
at maturity. In addition, changes in the interest rates or the value of the
security at maturity may be a multiple of changes in the value of the
Reference. Consequently, structured securities may entail a greater degree of
market risk than other types of fixed-income securities. Structured securities
may also be more volatile, less liquid and more difficult to accurately price
than less complex securities.
RATING CRITERIA. The Fund may invest up to 20% of its total assets in debt
securities, including securities which are unrated or rated in the lowest
rating categories by Standard & Poor's Ratings Group ("Standard & Poor's") or
Moody's Investors Service, Inc. ("Moody's") (i.e., BB or lower by Standard &
Poor's or Ba or lower by Moody's), including securities rated D by Moody's or
Standard & Poor's. Fixed-income securities rated BBB or Baa are considered
medium-grade obligations with speculative characteristics, and adverse
economic conditions or changing circumstances may weaken their issuers'
capacity to pay interest and repay principal. Fixed-income securities rated BB
or Ba or below (or comparable unrated securities) are commonly referred to as
"junk bonds," and are considered predominately speculative and may be
questionable as to principal and interest payments. In some cases, such bonds
may be highly speculative, have poor prospects for reaching investment grade
standing and be in default. As a result, investment in such bonds will entail
greater speculative risks than those associated with investment in investment
grade bonds. Also, to the extent that the rating assigned to a security in the
Fund's portfolio is downgraded by a rating organization, the market price and
liquidity of such security may be adversely affected. See Appendix A to the
Additional Statement for a description of the corporate bond ratings assigned
by Standard & Poor's and Moody's.
UNSEASONED COMPANIES
The Fund may invest in companies (including predecessors) which have
operated less than three years. 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.
INVESTMENT TECHNIQUES
OPTIONS ON SECURITIES AND SECURITIES INDICES
The Fund may write (sell) covered call and put options and purchase call and
put options on any securities in which it may invest or on any securities
index composed of securities in which it may invest. The writing and purchase
of options is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. The use of options to seek to increase total return
involves the risk of loss if the Investment Adviser is incorrect in its
expectation of fluctuations in securities prices or interest rates. The
successful use of options for hedging purposes also depends in part on the
ability of the Investment Adviser to manage future price fluctuations and the
degree of correlation between the options and securities markets. If the
Investment Adviser is incorrect in its expectation of changes in securities
prices or determination of the correlation between the securities indices on
which options are written and purchased and
11
<PAGE>
the securities in the Fund's investment portfolio, the investment performance
of the Fund will be less favorable than it would have been in the absence of
such options transactions. The writing of options could significantly increase
the Fund's portfolio turnover rate and, therefore, associated brokerage
commissions or spreads.
OPTIONS ON FOREIGN CURRENCIES
The Fund may, to the extent it invests in foreign securities, purchase and
sell (write) call and put options on foreign currencies for the purpose of
protecting against declines in the U.S. dollar value of foreign portfolio
securities and anticipated dividends on such securities and against increases
in the U.S. dollar cost of foreign securities to be acquired. As with other
kinds of options transactions, however, the writing of an option of a foreign
currency will constitute only a partial hedge, up to the amount of the premium
received. If an option that the Fund has written is exercised, the Fund could
be required to purchase or sell foreign currencies at disadvantageous exchange
rates, thereby incurring losses. The purchase of an option on foreign currency
may constitute an effective hedge against exchange rate fluctuations; however,
in the event of exchange rate movements adverse to the Fund's position, the
Fund may forfeit the entire amount of the premium plus related transaction
costs. Options on foreign currencies written or purchased by the Fund are
traded on U.S. and foreign exchanges or over-the-counter.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
To seek to increase total return or to hedge against changes in interest
rates, securities prices or currency exchange rate, the Fund may purchase and
sell various kinds of futures contracts, and purchase and write call and put
options on any of such futures contracts. The Fund may also enter into closing
purchase and sale transactions with respect to any such contracts and options.
The futures contracts may be based on various securities (such as U.S.
Government securities), foreign currencies securities indices and other
financial instruments and indices. The Fund will engage in futures and related
options transactions for bona fide hedging purposes as defined in regulations
of the Commodity Futures Trading Commission or to seek to increase total
return to the extent permitted by such regulations. The Fund may not purchase
or sell futures contracts or purchase or sell related options to seek to
increase total return, except for closing purchase or sale transactions, if
immediately thereafter the sum of the amount of initial margin deposits and
premiums paid on the Fund's outstanding positions in futures and related
options entered into for the purpose of seeking to increase total return would
exceed 5% of the market value of the Fund's net assets. These transactions
involve brokerage costs, require margin deposits and, in the case of contracts
and options obligating the Fund to purchase securities, require the Fund to
segregate and maintain cash or liquid assets with a value equal to the amount
of the Fund's obligations or to otherwise cover the obligations in a manner
permitted by the SEC.
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. See
"Investment Objectives and Policies--Futures Contracts and Options on Futures
Contracts" in the Additional Statement. Thus, while the Fund may benefit from
the use of futures and options on futures, unanticipated changes in interest
rates or securities prices may result in poorer overall performance than if
the Fund had not entered into any futures contracts or options transactions.
Because perfect correlation between a futures position and portfolio position
that is intended to be protected is impossible to achieve, the desired
protection may not be obtained and the Fund may be exposed to risk of loss.
The loss incurred by the Fund in entering into futures contracts and in
writing call options on futures is potentially unlimited and may exceed the
amount of the premium received. Futures markets are highly volatile and the
use of futures may increase the volatility of the Fund's NAV. The
profitability of the Fund's trading in futures to seek to increase total
return depends upon the ability of the Investment Adviser to analyze correctly
the futures
12
<PAGE>
markets. In addition, because of the low margin deposits normally required in
futures trading, a relatively small price movement in a futures contract may
result in substantial losses to the Fund. Further, futures contracts and
options on futures may be illiquid, and exchanges may limit fluctuations in
futures contract prices during a single day. The Fund may engage in futures
transactions on both U.S and foreign exchanges. Foreign exchanges may not
provide the same protections as U.S. exchanges.
EQUITY SWAPS
The Fund may invest up to 10% of its total assets in equity swaps. Equity
swaps allow the parties to a swap agreement to exchange the dividend income or
other components of return on an equity investment (e.g., a group of equity
securities or an index) for a component of return on another non-equity or
equity investment. An equity swap may be used by the Fund to invest in a
market without owning or taking physical custody of securities in
circumstances in which direct investment may be restricted for legal reasons
or is otherwise impractical. Equity swaps are derivatives and their value can
be very volatile. To the extent that the Investment Adviser does not
accurately analyze and predict the potential relative fluctuation of the
components swapped with another party, the Fund may suffer a loss. The value
of some components of an equity swap (such as the dividends on a common stock)
may also be sensitive to changes in interest rates. Furthermore, during the
period a swap is outstanding, the Fund may suffer a loss if the counterparty
defaults. In connection with its investments in equity swaps, the Fund will
either segregate cash or liquid assets or otherwise cover its obligations in a
manner required by the SEC.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
The Fund may purchase when-issued securities. When-issued transactions arise
when securities are purchased by a Fund with payment and delivery taking place
in the future in order to secure what is considered to be an advantageous
price and yield to the Fund at the time of entering into the transaction. The
Fund may also purchase securities on a forward commitment basis; that is, make
contracts to purchase securities for a fixed price at a future date beyond the
customary three-day settlement period. The Fund will segregate cash or liquid
assets in an amount sufficient to meet the purchase price until three days
prior to the settlement date. Alternatively, the Fund may enter into
offsetting contracts for the forward sale of other securities that it owns.
The purchase of securities on a when-issued or forward commitment basis
involves a risk of loss if the value of the security to be purchased declines
prior to the settlement date. Although the Fund would generally purchase
securities on a when-issued or forward commitment basis with the intention of
acquiring securities for its portfolio, the Fund may dispose of when-issued
securities or forward commitments prior to settlement if the Investment
Adviser deems it appropriate to do so.
ILLIQUID AND RESTRICTED SECURITIES
The Fund will not invest more than 15% of its net assets in illiquid
investments, which include securities (both foreign and domestic) that are not
readily marketable, certain stripped mortgage-backed securities, repurchase
agreements maturing in more than seven days, time deposits with a notice or
demand period of more than seven days, certain over-the-counter options and
certain restricted securities, unless it is determined, based upon a review of
the trading markets for a specific restricted security, that such restricted
security is eligible for resale under Rule 144A under the Securities Act of
1933 and, therefore, is liquid. The Trustees have adopted guidelines under
which the Investment Adviser determines and monitors the liquidity of
portfolio securities, subject to the oversight of the Trustees. Investing in
restricted securities eligible for resale pursuant to Rule 144A may decrease
the liquidity of the Fund's portfolio to the extent that qualified
institutional buyers become for a
13
<PAGE>
time uninterested in purchasing these restricted securities. The purchase
price and subsequent valuation of restricted and illiquid securities normally
reflect a discount, which may be significant, from the market price of
comparable securities for which a liquid market exists.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with dealers in U.S.
Government securities and member banks of the Federal Reserve System which
furnish collateral at least equal in value or market price to the amount of
their repurchase obligation. If the other party or "seller" defaults, the Fund
might suffer a loss to the extent that the proceeds from the sale of the
underlying securities and other collateral held by the Fund in connection with
the related repurchase agreement are less than the repurchase price. In
addition, in the event of bankruptcy of the seller or failure of the seller to
repurchase the securities as agreed, the Fund could suffer losses, including
loss of interest on or principal of the security and costs associated with
delay and enforcement of the repurchase agreement. The Trustees have reviewed
and approved certain counterparties whom they believe to be creditworthy and
have authorized the Fund to enter into repurchase agreements with such
counterparties. In addition, the Fund, together with other registered
investment companies having management agreements with the Investment Adviser
or its affiliates, may transfer uninvested cash balances into a single joint
account, the daily aggregate balance of which will be invested in one or more
repurchase agreements.
LENDING OF PORTFOLIO SECURITIES
The Fund may also seek to increase its income by lending portfolio
securities. Under present regulatory policies, such loans may be made to
institutions, such as certain broker-dealers, and are required to be secured
continuously by collateral in cash, cash equivalents, or U.S. Government
securities maintained on a current basis in an amount at least equal to the
market value of the securities loaned. Cash collateral may be invested in cash
equivalents. If the Investment Adviser determines to make securities loans,
the value of the securities loaned may not exceed 33 1/3% of the value of the
total assets of the Fund (including the loan collateral). The Fund may
experience a loss or delay in the recovery of its securities if the
institution with which it has engaged in a portfolio loan transaction breaches
its agreement with the Fund.
SHORT SALES AGAINST-THE-BOX
The Fund may make short sales of securities or maintain a short position,
provided that at all times when a short position is open the Fund owns an
equal amount of such securities or securities convertible into or exchangeable
for, without payment of any further consideration, an equal amount of the
securities of the same issuer as the securities sold short (a short sale
against-the-box). Not more than 25% of the Fund's net assets (determined at
the time of the short sale) may be subject to such short sales. As a result of
recent tax legislation, short sales may no longer be used to defer the
recognition of gain for tax purposes with respect to appreciated securities in
the Fund's portfolio.
TEMPORARY INVESTMENTS
The Fund may, for temporary defensive purposes, invest 100% of its total
assets in U.S. Government securities, repurchase agreements collateralized by
U.S. Government securities, commercial paper rated at least A-2 by Standard &
Poor's or P-2 by Moody's, certificates of deposit, bankers' acceptances,
repurchase agreements, non-convertible preferred stocks and non-convertible
corporate bonds with a remaining maturity of less than one year. When the
Fund's assets are invested in such instruments, the Fund may not be achieving
its investment objectives.
14
<PAGE>
MISCELLANEOUS TECHNIQUES
In addition to the techniques and investments described above, the Fund may,
with respect to no more than 5% of its net assets, engage in the following
techniques and investments; (i) warrants and stock purchase rights; (ii)
mortgage swaps, index swaps and interest rate swaps, caps, floors and collars;
(iii) yield curve options and inverse floating rate securities; (iv) other
investment companies; (v) mortgage dollar rolls and (vi) custodial receipts.
For more information see the Additional Statement.
In addition, the Fund may borrow up to 33 1/3% of its total assets from
banks for temporary or emergency purposes. A Fund may not make additional
investments if borrowings (excluding covered mortgage dollar rolls) exceed 5%
of its total assets. For more information see the Additional Statement.
RISK FACTORS
RISK FACTORS ASSOCIATED WITH THE REAL ESTATE INDUSTRY. Although the Fund
does not invest directly in real estate, it does invest primarily in
securities of issuers that are primarily engaged in or related to the real
estate industry, and does have a policy of concentrating its investments in
the real estate industry. Therefore, an investment in the Fund is subject to
certain risks associated with the direct ownership of real estate and with the
real estate industry in general. These risks include, among others: possible
declines in the value of real estate; risks related to general and local
economic conditions; possible lack of availability of mortgage funds;
overbuilding; extended vacancies of properties; increases in competition,
property taxes and operating expenses; changes in zoning laws; costs resulting
from the clean-up of, and liability to third parties for damages resulting
from, environmental problems; casualty or condemnation losses; uninsured
damages from floods, earthquakes or other natural disasters; limitations on
and variations in rents; and changes in interest rates. To the extent that
assets underlying the Fund's investments are concentrated geographically, by
property type or in certain other respects, the Fund may be subject to certain
of the foregoing risks to a greater extent.
In addition, if the Fund receives rental income or income from the
disposition of real property acquired as a result of a default on securities
the Fund owns, the receipt of such income or the ownership of such property
may adversely affect the Fund's ability to retain its tax status as a
regulated investment company. Investments by the Fund in securities of
companies providing mortgage servicing will be subject to the risks associated
with refinancings and their impact on servicing rights.
RISKS OF INVESTING IN REITS. Investing in REITs involves certain unique
risks in addition to those risks associated with investing in the real estate
industry in general. Equity REITs may be affected by changes in the value of
the underlying property owned by the REITs. Mortgage REITs may be affected by
the quality of any credit extended. REITs are dependent upon management
skills, may not be diversified, are subject to heavy cash flow dependency,
default by borrowers and self-liquidation. REITs are also subject to the
possibilities of failing to qualify for tax free pass-through of income under
the Code and failing to maintain their exemptions from registration under the
Investment Company Act of 1940, as amended (the "1940 Act"). REITs whose
underlying properties are concentrated in a particular industry or geographic
region are also subject to risks affecting such industries and regions.
REITs (especially mortgage REITs) are also subject to interest rate risks.
When interest rates decline, the value of a REIT's investment in fixed rate
obligations can be expected to rise. Conversely, when interest rates rise, the
value of a REIT's investment in fixed rate obligations can be expected to
decline. In contrast, as interest
15
<PAGE>
rates on adjustable rate mortgage loans are reset periodically, yields on a
REIT's investments in such loans will gradually align themselves to reflect
changes in market interest rates, causing the value of such investments to
fluctuate less dramatically in response to interest rate fluctuations than
would investments in fixed rate obligations.
Investing in REITs involves risks similar to those associated with investing
in small capitalization companies. REITs may have limited financial resources,
may trade less frequently and in a limited volume and may be subject to more
abrupt or erratic price movements than larger company securities.
Historically, small capitalization stocks, such as REITs have been more
volatile in price than the larger capitalization stocks included in the
Standard & Poor's Index of 500 Common Stocks.
RISKS OF INVESTING IN EQUITY SECURITIES In general, the Fund is subject to
the risks associated with investments in common stocks and other equity
securities. Stock values fluctuate in response to the activities of individual
companies and in response to general market and economic conditions and,
accordingly, the value of the stocks that the Fund holds may decline over
short or extended periods. The U.S. stock markets tend to be cyclical, with
periods when stock prices generally rise and periods when prices generally
decline. As of the date of this Prospectus, domestic stock markets were
trading at or close to record high levels and there can be no guarantee that
such levels will continue.
SPECIAL RISKS OF INVESTMENTS IN EMERGING MARKETS. Investing in the
securities of issuers in Emerging Countries involves risks in addition to
those discussed under "Description of Securities--Foreign Investments." The
Fund may invest up to 15% of its total assets in securities of issuers in
Emerging Countries. Emerging Countries are generally located in the Asia-
Pacific region, Eastern Europe, Latin and South America and Africa.
Foreign investment in the securities markets of certain Emerging Countries
is restricted or controlled to varying degrees which may limit investment in
such countries or increase the administrative costs of such investments.
Certain countries may restrict or prohibit investment opportunities in issuers
or industries deemed important to national interests. Such restrictions may
affect the market price, liquidity and rights of securities that may be
purchased by the Fund. The repatriation of both investment income and capital
from certain Emerging Countries is subject to restrictions such as the need
for governmental consents. Many Emerging Countries may be subject to a greater
degree of economic, political and social instability than is the case in
Western Europe, the United States, Canada, Australia, New Zealand and Japan.
Many Emerging Countries do not have fully democratic governments. For example,
governments of some Emerging Countries are authoritarian in nature or have
been installed or removed as a result of military coups, while governments in
other Emerging Countries have periodically used force to suppress civil
dissent. Many Emerging Countries have experienced currency devaluations and
substantial and, in some cases, extremely high rates of inflation, which have
a negative effect on the economies and securities markets of such Emerging
Countries. Settlement procedures in Emerging Countries are frequently less
developed and reliable than those in the United States and may involve the
Fund's delivery of securities before receipt of payment for their sale. In
addition, significant delays are common in certain markets in registering the
transfer of securities. Settlement or registration problems may make it more
difficult for the Fund to value its portfolio securities and could cause the
Fund to miss attractive investment opportunities, to have a portion of its
assets uninvested or to incur losses due to the failure of a counterparty to
pay for securities the Fund has delivered or the Fund's inability to complete
its contractual obligations.
RISKS OF INVESTING IN FIXED-INCOME SECURITIES. When interest rates decline,
the market value of fixed-income securities tends to increase. Conversely,
when interest rates increase, the market value of fixed-income securities
tends to decline. Volatility of a security's market value will differ
depending upon the security's
16
<PAGE>
duration, the issuer and the type of instrument. Investments in fixed-income
securities are subject to the risk that the issuer could default on its
obligations and the Fund could sustain losses on such investments. A default
could impact both interest and principal payments.
RISKS OF DERIVATIVE TRANSACTIONS. The Fund's transactions, if any, in
options, futures, options on futures, swaps, structured securities and
currency transactions involve certain risks, including a possible lack of
correlation between changes in the value of hedging instruments and the
portfolio assets being hedged, the potential illiquidity of the markets for
derivative instruments, the risks arising from the margin requirements and
related leverage factors associated with such transactions. The use of these
management techniques to seek to increase total return may be regarded as a
speculative practice and involves the risk of loss if the Investment Adviser
is incorrect in its expectation of fluctuations in securities prices, interest
rates or currency prices. The Fund's use of certain derivative transactions
may be limited by the requirements of the Code, for qualification as a
regulated investment company.
INVESTMENT RESTRICTIONS
The Fund is subject to certain investment restrictions that are described in
detail under "Investment Restrictions" in the Additional Statement.
Fundamental investment restrictions of the Fund can not be changed without
approval of a majority of the outstanding Shares of the Fund as defined in the
Additional Statement. The Fund's investment objectives and all policies not
specifically designated as fundamental are non-fundamental and may be changed
without shareholder approval. If there is a change in the Fund's investment
objectives, shareholders should consider whether the Fund remains an
appropriate investment in light of their then current financial positions and
needs.
PORTFOLIO TURNOVER
A high rate of portfolio turnover (100% or more) involves correspondingly
greater expenses which must be borne by the Fund and its shareholders and may
under certain circumstances make it more difficult for the Fund to qualify as
a regulated investment company under the Code. It is anticipated that the
annual portfolio turnover rate of the Fund will generally not exceed 100%. The
portfolio turnover rate is calculated by dividing the lesser of the dollar
amount of sales or purchases of portfolio securities by the average monthly
value of the Fund's portfolio securities, excluding securities having a
maturity at the date of purchase of one year or less. The Investment Adviser
will not consider the portfolio turnover rate a limiting factor in making
investment decisions for a Fund consistent with the Fund's investment
objectives and portfolio management policies.
MANAGEMENT
TRUSTEES AND OFFICERS
The Trustees are responsible for deciding matters of general policy and
reviewing the actions of the Investment Adviser, Distributor and transfer
agent. The officers of the Trust conduct and supervise the Fund's daily
business operations. The Additional Statement contains information as to the
identity of, and other information about, the Trustees and officers of the
Trust.
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<PAGE>
INVESTMENT ADVISER
INVESTMENT ADVISER. Goldman Sachs Asset Management, One New York Plaza, New
York, New York 10004, a separate operating division of Goldman Sachs, serves
as investment adviser to the Fund. Goldman Sachs registered as an investment
adviser in 1981. As of May 21, 1998, GSAM, together with its affiliates, acted
as investment adviser or distributor for assets in excess of $160.4 billion.
Under a Management Agreement with the Fund, the Investment Adviser, subject
to the general supervision of the Trustees, provides day-to-day advice as to
the Fund's portfolio transactions. Goldman Sachs has agreed to permit the
Trust to use the name "Goldman Sachs" or a derivative thereof as part of the
Fund's name for as long as the Fund's Management Agreement is in effect.
In performing its investment advisory services, the Investment Adviser,
while remaining ultimately responsible for the management of the Fund, is able
to draw upon the research and expertise of its asset management affiliates for
portfolio decisions and management with respect to certain portfolio
securities. In addition, the Investment Adviser will have access to the
research of, and certain proprietary technical models developed by, Goldman
Sachs and may apply quantitative and qualitative analysis in determining the
appropriate allocations among the categories of issuers and types of
securities.
Under the Management Agreement, the Investment Adviser also: (i) supervises
all non-advisory operations of the Fund that it advises; (ii) provides
personnel to perform such executive, administrative and clerical services as
are reasonably necessary to provide effective administration of the Fund;
(iii) arranges for at the Fund's expense (a) the preparation of all required
tax returns, (b) the preparation and submission of reports to existing
shareholders, (c) the periodic updating of prospectuses and Additional
Statements and (d) the preparation of reports to be filed with the SEC and
other regulatory authorities; (iv) maintains the Fund's records; and (v)
provides office space and all necessary office equipment and services.
FUND MANAGERS
<TABLE>
<CAPTION>
YEARS
PRIMARILY
NAME AND TITLE RESPONSIBLE FIVE YEAR EMPLOYMENT HISTORY
-------------- ----------- ----------------------------
<C> <C> <S>
Herbert E. Ehlers Since 1998 Mr. Ehlers joined the Investment Adviser in
Managing Director 1997 and is part of the portfolio management
and Portfolio Man- team of the Real Estate Securities Fund and
ager the Chief Investment Officer of the Growth
Equity Strategy. From 1994 to 1997, he was
the Chief Investment Officer of Liberty
Investment Management, Inc. He was a
portfolio manager and president of Liberty's
predecessor from Eagle Asset Management, from
1984 to 1994.
Elizabeth Groves Since 1998 Ms. Groves joined the Investment Adviser in
Vice President and 1998 and is a portfolio manager for the Real
Portfolio Manager Estate Securities Fund. Her previous
experience includes 12 years in the real
estate and real estate finance business. From
1991 to 1997, she worked in the Real Estate
Department of the Investment Banking Division
of Goldman Sachs, where she was responsible
for both public and private capital market
transactions.
</TABLE>
It is the responsibility of the Investment Adviser to make the investment
decisions for the Fund and to place the purchase and sale orders for the
Fund's portfolio transactions in the U.S. and foreign markets. Such orders may
be directed to any broker including, to the extent and in the manner permitted
by applicable law, Goldman
18
<PAGE>
Sachs or its affiliates. In effecting purchases and sales of portfolio
securities for the Fund, the Investment Adviser will seek the best price and
execution of the Fund's orders. In doing so, where two or more brokers or
dealers offer comparable prices and execution for a particular trade,
consideration may be given to whether the broker or dealer provides investment
research or brokerage services or sells shares of any Goldman Sachs Fund. See
the Additional Statement for a further description of the Investment Adviser's
brokerage allocation practices.
As compensation for its services rendered and assumption of certain expenses
pursuant to the Management Agreement, GSAM is entitled to a fee, computed
daily and payable monthly at a rate equal to 1.00% of the Fund's average daily
net assets.
The Investment Adviser has voluntarily agreed to reduce or limit certain
"Other Expenses" of the Fund (excluding management fees, service fees,
transfer agency fees, taxes, interest and brokerage fees and litigation,
indemnification and other extraordinary expenses) to the extent such expenses
exceed 0.00% per annum of the Fund's average daily net assets. Such reductions
or limits, if any, are calculated monthly on a cumulative basis and may be
discontinued or modified by the Investment Adviser in its discretion at any
time.
ACTIVITIES OF GOLDMAN SACHS AND ITS AFFILIATES AND OTHER ACCOUNTS MANAGED BY
GOLDMAN SACHS. The involvement of the Investment Adviser, Goldman Sachs and
their affiliates in the management of, or their interest in, other accounts
and other activities of Goldman Sachs may present conflicts of interest with
respect to the Fund or limit the Fund's investment activities. Goldman Sachs
and its affiliates engage in proprietary trading and advise accounts and funds
which have investment objectives similar to those of the Fund and/or which
engage in and compete for transactions in the same type of securities,
currencies and instruments as the Fund. Goldman Sachs and its affiliates will
not have any obligation to make available any information regarding their
proprietary activities or strategies, or the activities or strategies used for
other accounts managed by them, for the benefit of the management of the Fund.
The results of the Fund's investment activities, therefore, may differ from
those of Goldman Sachs and its affiliates and it is possible that the Fund
could sustain losses during periods in which Goldman Sachs and its affiliates
and other accounts achieve significant profits on their trading for
proprietary or other accounts. In addition, the Fund may, from time to time,
enter into transactions in which other clients of Goldman Sachs have an
adverse interest. From time to time, the Fund's activities may be limited
because of regulatory restrictions applicable to Goldman Sachs and its
affiliates, and/or their internal policies designed to comply with such
restrictions. See "Management--Activities of Goldman Sachs and its Affiliates
and Other Accounts Managed by Goldman Sachs" in the Additional Statement for
further information.
DISTRIBUTOR AND TRANSFER AGENT
Goldman Sachs, 85 Broad Street, New York, New York 10004, serves as the
exclusive distributor (the "Distributor") of the Fund's Shares. Goldman Sachs,
4900 Sears Tower, Chicago, Illinois 60606, also serves as the Fund's transfer
agent (the "Transfer Agent") and as such performs various shareholder
servicing functions. As compensation for the services rendered to the Fund 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 from the
Fund, with respect to the Institutional and Service shares, equal to 0.04% of
the average daily net assets of each Class. Shareholders with inquiries
regarding the Fund should contact Goldman Sachs (as Transfer Agent) at the
address or the telephone number set forth on the back cover page of this
Prospectus. Shares of a Fund may also bear fees paid to Service Organizations
or other persons providing sub-transfer agency and similar services.
From time to time, Goldman Sachs or any of its affiliates may purchase and
hold shares of the Fund. Goldman Sachs reserves the right to redeem at any
time some or all of the Fund shares acquired for its own account.
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YEAR 2000
Many computer systems were designed using only two digits to signify the
year (for example, "98" for "1998"). On January 1, 2000, if these computer
systems are not corrected, they may incorrectly interpret "00" as the year
"1900" rather than the year "2000," leading to computer shutdowns or errors
(commonly known as the "Year 2000 Problem"). To the extent these systems
conduct forward-looking calculations, these computer problems may occur prior
to January 1, 2000. Like other investment companies and financial and business
organizations, the Funds could be adversely affected in their ability to
process securities trades, price securities, provide shareholder account
services and otherwise conduct normal business operations if the Investment
Adviser or other Fund service providers do not adequately address this problem
in a timely manner. The Investment Adviser has established a dedicated group
to analyze these issues and to implement the systems modifications necessary
to prepare for the Year 2000 Problem. Currently, the Investment Adviser does
not anticipate that the transition to the 21st Century will have any material
impact on its ability to continue to service the Funds at current levels. In
addition, the Investment Adviser has sought assurances from the Funds' other
service providers that they are taking the steps necessary so that they do not
experience Year 2000 Problems, and the Investment Adviser will continue to
monitor the situation. At this time, however, no assurance can be given that
the accounts taken by the Investment Adviser and the Funds' other service
providers will be sufficient to avoid any adverse effect on the Funds due to
the Year 2000 Problem.
EXPENSES
The Fund is responsible for the payment of its expenses. The expenses
include, without limitation; fees payable to the Investment Adviser;
distribution and authorized dealer service fees; custodial and transfer agency
fees; brokerage fees and commissions; filing fees for the registration or
qualification of the Fund's Shares under federal or state securities laws,
organizational expenses; fees and expenses incurred in connection with
membership in investment company organizations; taxes; interest; costs of
liability insurance; fidelity bonds or indemnification; any costs, expenses or
losses arising out of any liability of, or claim for damages or other relief
asserted against the Fund for violation of any law; legal and auditing fees
and expenses (including the cost of legal and certain accounting services
rendered by employees of the Investment Adviser and its affiliates with
respect to the Fund); expenses of preparing and setting in type prospectuses,
Additional Statements, proxy material, reports and notices and the printing
and distributing of the same to shareholders and regulatory authorities;
compensation and expenses of the Trust's "non-interested" Trustees; and
extraordinary organizational expenses, if any, incurred by the Trust.
NET ASSET VALUE
The NAV per Share of the Class of the Fund is calculated by the Fund's
custodian as of the close of regular trading on the New York Stock Exchange
(which is normally, but not always, 3:00 p.m. Chicago time, 4:00 p.m. New York
time), on each Business Day (as such term is defined under "Additional
Information"). The NAV per Share of each Class is calculated by determining
the net assets attributed to each Class and dividing by the number of
outstanding Shares of that Class. Portfolio securities are valued based on
market quotations or, if accurate quotations are not readily available, at
fair value as determined in good faith under procedures established by the
Trustees.
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PERFORMANCE INFORMATION
From time to time the Fund may publish average annual total return, yield
and distribution rates in advertisements and communications to shareholders or
prospective investors. Average annual total return is determined by computing
the average annual percentage change in value of $1,000 invested at the
maximum public offering price for specified periods ending with the most
recent calendar quarter, assuming reinvestment of all dividends and
distributions at NAV. The total return calculation assumes a complete
redemption of the investment at the end of the relevant period. The Fund may
also from time to time advertise total return on a cumulative, average, year-
by-year or other basis for various specified periods by means of quotations,
charts, graphs or schedules. In addition, the Fund may furnish total return
calculations based on investments at various sales charge levels or at NAV.
Any performance information which is based on the Fund's NAV per Share would
be reduced if any applicable sales charge were taken into account. In addition
to the above, the Fund may from time to time advertise its performance
relative to certain averages, performance rankings, indices, other information
prepared by recognized mutual fund statistical services and investments for
which reliable performance information is available.
The Fund computes its yield by dividing net investment income earned during
a recent thirty-day period by the product of the average daily number of
Shares outstanding and entitled to receive dividends during the period and the
maximum offering price per Share on the last day of the relevant period. The
results are compounded on a bond equivalent (semi-annual) basis and then
annualized. Net investment income per Share is equal to the dividends and
interest earned during the period, reduced by accrued expenses for the period.
The calculation of net investment income for these purposes may differ from
the net investment income determined for accounting purposes. The Fund's
quotations of distribution rate are calculated by annualizing the most recent
distribution of net investment income for a monthly, quarterly or other
relevant period and dividing this amount by the NAV per Share on the last day
of the period for which the distribution rates are being calculated.
The Fund's yield, total return and distribution rate will be calculated
separately for each Class of Shares in existence. Because each Class of Shares
may be subject to different expenses, yield, the total return and distribution
rate calculations with respect to each Class of Shares for the same period
will differ. See "Shares of the Trust."
The Fund's performance quotations do not reflect any fees charged by a
Service Organization to its customers' accounts in connection with investments
in the Fund. The investment results of the Fund will fluctuate over time and
any presentation of investment results for any prior period should not be
considered a representation of what an investment may earn or what the Fund's
performance may be in any future period. In addition to information provided
in shareholder reports, the Fund may, in its discretion, from time to time
make a list of its holdings available to investors upon request.
SHARES OF THE TRUST
The Fund is a series of Goldman Sachs Trust, which was formed under the laws
of the State of Delaware on January 28, 1997. The Trust was formerly a
Maryland corporation, and reorganized into the Trust as of April 30, 1997. The
Trustees have authority under the Trust's Declaration of Trust to create and
classify Shares of beneficial interests in separate series, without further
action by shareholders. Additional series may be added in the future. The
Trustees also have authority to classify and reclassify any series or
portfolio of Shares into one or more classes.
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When issued, Shares are fully paid and non-assessable. In the event of
liquidation, shareholders of each Class are entitled to share pro rata in the
net assets of the Fund available for distribution to the shareholders of such
Class. All Shares are freely transferable and have no preemptive, subscription
or conversion rights. Shareholders are entitled to one vote per Share,
provided that, at the option of the Trustees, shareholders will be entitled to
a number of votes based upon the NAVs represented by their Shares.
The Trust does not intend to hold annual meetings of shareholders. However,
recordholders may, under certain circumstances, as permitted by the Act,
communicate with other shareholders in connection with requiring a special
meeting of shareholders. The Trustees will call a special meeting of
shareholders for the purpose of electing Trustees if, at any time, less than a
majority of Trustees holding office at the time were elected by shareholders.
In the interest of economy and convenience, the Trust does not issue
certificates representing the Fund's Shares. Instead, the Transfer Agent
maintains a record of each shareholder's ownership. Each shareholder of record
receives confirmation of purchase and redemption orders from the Transfer
Agent. Fund Shares and any dividends and distributions paid by the Fund are
reflected in account statements from the Transfer Agent.
TAXATION
FEDERAL TAXES
The Fund is treated as a separate entity for tax purposes. The Fund intends
to elect to be treated as a regulated investment company and intends to
continue to qualify for such treatment for each taxable year under Subchapter
M of the Code. To qualify as such, the Fund must satisfy certain requirements
relating to the sources of its income, diversification of its assets and
distribution of its income to shareholders. As a regulated investment company,
the Fund will not be subject to federal income or excise tax on any net
investment income and net realized capital gains that are distributed to its
shareholders in accordance with certain timing requirements of the Code.
Dividends paid by the Fund from net investment income, certain net realized
foreign exchange gains, the excess of net short-term capital gain over net
long-term capital loss and original issue discount or market discount income
will be taxable to its shareholders as ordinary income. Distributions out of
the net capital gain (the excess of net long-term capital gain over net short-
term capital loss), if any, of the Fund will be taxed to shareholders as long-
term capital gains, regardless of the length of time a shareholder has held
his or her Shares or whether such gain was reflected in the price paid for the
Shares. These tax consequences will apply whether distributions are received
in cash or reinvested in Shares. The Fund's dividends that are paid to its
corporate shareholders and are attributable to qualifying dividends the Fund
receives from U.S. domestic corporations may be eligible, in the hands of such
corporate shareholders, for the corporate dividends-received deduction,
subject to certain holding period requirements and debt financing limitations
under the Code. Since dividends the Fund receives from REITs are not
qualifying dividends for this purpose, it is not likely that a substantial
portion of the Fund's dividends will generally qualify for the corporate
dividends-received deduction. Certain distributions paid by the Fund in
January of a given year may be taxable to shareholders as if received the
prior December 31. Shareholders will be informed annually about the amount and
character of distributions received from the Fund for federal income tax
purposes.
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Investors should consider the tax implications of buying Shares immediately
prior to a distribution. Investors who purchase Shares shortly before the
record date for a distribution will pay a per Share price that includes the
value of the anticipated distribution and will be taxed on the distribution
even though the distribution represents a return of a portion of the purchase
price.
Redemptions and exchanges of Shares are taxable events.
Individuals and certain other classes of shareholders may be subject to 31%
backup withholding of federal income tax on distributions, redemptions and
exchanges if they fail to furnish their correct taxpayer identification number
and certain certifications required by the Internal Revenue Service or if they
are otherwise subject to backup withholding. Individuals, corporations and
other shareholders that are not U.S. persons under the Code are subject to
different tax rules and may be subject to nonresident alien withholding at the
rate of 30% (or a lower rate provided by an applicable tax treaty, if any) on
amounts treated as ordinary dividends from the Fund.
The Fund may be subject to foreign withholding or other foreign taxes on
income or gain from certain foreign securities. However, the Fund does not
anticipate that it will be eligible to pass any foreign tax credits through to
its shareholders.
OTHER TAXES
In addition to federal taxes, a shareholder may be subject to state, local
or foreign taxes on payments received from the Fund. A state income (and
possibly local income and/or intangible property) tax exemption may be
available to the extent (if any) the Fund's distributions are derived from
interest on (or, in the case of intangible property taxes, the value of its
assets is attributable to) certain U.S. Government obligations, provided in
some states that certain thresholds for holdings of such obligations and/or
reporting requirements are satisfied. For a further discussion of certain tax
consequences of investing in Shares of the Fund, see "Taxation" in the
Additional Statement. Shareholders are urged to consult their own tax advisers
regarding specific questions as to federal, state and local taxes as well as
to any foreign taxes.
ADDITIONAL INFORMATION
As used in this Prospectus, the term "Business Day" means any day the New
York Stock Exchange is open for trading, which is Monday through Friday except
for holidays. The New York Stock Exchange is closed on the following holidays:
New Year's Day, Martin Luther King Day, Presidents' Day (observed), Good
Friday, Memorial Day (observed), Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
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REPORTS TO SHAREHOLDERS
Recordholders of Institutional Shares of the Fund will receive an annual
report containing audited financial statements and a semi-annual report. To
eliminate unnecessary duplication, only one copy of such report may be sent to
recordholders with the same mailing address. Recordholders who desire a
duplicate copy of such reports to be mailed to their residence should contact
Goldman Sachs at 800-621-2550. Each recordholder of Institutional Shares will
also be provided with a printed confirmation for each transaction in its
account and a quarterly account statement. A year-to-date statement for any
account will be provided upon request made to Goldman Sachs. The Fund does not
generally provide subaccounting services with respect to beneficial ownership
of Institutional Shares.
DIVIDENDS
Each dividend from net investment income and capital gain distributions, if
any, declared by the Fund on its outstanding Institutional Shares will, at the
election of each shareholder, be paid: (i) in cash; or (ii) in additional
Institutional Shares of the Fund. This election should initially be made on a
shareholder's Account Information Form and may be changed upon written notice
to Goldman Sachs at any time prior to the record date for a particular dividend
or distribution. If no election is made, all dividends from net investment
income and capital gain distributions will be reinvested in Institutional
Shares of the Fund.
The election to reinvest dividends and distributions paid by the Fund in
additional Institutional Shares of the Fund 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 Institutional Shares of the Fund.
The Fund intends that all or substantially all its net investment income and
net capital gains, after reduction by available capital losses, including any
capital losses carried forward from prior years, will be declared as dividends
for each taxable year. The Fund will pay dividends from net investment income
quarterly. The Fund will pay dividends from net investment income and dividends
from net realized capital gains, reduced by available capital losses, at least
annually. From time to time, a portion of the Fund's dividends may constitute a
return of capital.
At the time of an investor's purchase of Shares of the Fund a portion of the
NAV per Share may be represented by undistributed income of the Fund or
realized or unrealized appreciation of the Fund's portfolio securities.
Therefore, subsequent distributions on such Shares from such income or realized
appreciation may be taxable to the investor even if the NAV of the investor's
Shares is, as a result of the distributions, reduced below the cost of such
Shares and the distributions (or portions thereof) represent a return of a
portion of the purchase price.
PURCHASE OF INSTITUTIONAL SHARES
Institutional Shares may be purchased on any Business Day at the NAV per
Share next determined after receipt of an order. No sales load will be charged.
Currently, the NAV is determined as of the close of regular
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trading on the New York Stock Exchange (which is normally, but not always, 3:00
p.m. Chicago time, 4:00 p.m. New York time), as described under "Net Asset
Value". Purchases of Institutional Shares of the Fund must be settled within 3
Business Days of the receipt of a complete purchase order. Payment of the
proceeds of redemption of Shares purchased by check may be delayed for a period
of time as described under "Redemption of Institutional Shares."
Prior to making an initial investment in the Fund, an investor must open an
account with the Fund by furnishing necessary information to the Fund or
Goldman Sachs. An Account Information Form, a copy of which is attached to this
Prospectus, should be used to open such an account. Subsequent purchases may be
made in the manner set forth below.
PURCHASE PROCEDURES
Purchases of Institutional Shares may be made by qualified investors by
placing an order with Goldman Sachs at 800-621-2550 and either wiring federal
funds to State Street Bank and Trust Company ("State Street") or initiating an
ACH transfer. Purchases may also be made by check (except that the Trust will
not accept a check drawn on a foreign bank or a third party check) or Federal
Reserve draft made payable to "Goldman Sachs Real Estate Securities Fund--Name
of Class of Shares" and should be directed to "Goldman Sachs Real Estate
Securities Fund--Name of Class of Shares," c/o National Financial Data
Services, Inc. ("NFDS"), P.O. Box 419711, Kansas City, MO 64141-6711.
MINIMUM INITIAL INVESTMENTS
Institutional Shares of the Fund are offered to (a) banks, trust companies or
other types of depository institutions investing for their own account or on
behalf of their clients; (b) pension and profit sharing plans, pension funds
and other company-sponsored benefit plans; (c) any state, county, city or any
instrumentality, department, authority or agency thereof; (d) corporations and
other for-profit business organizations with assets of at least $100 million or
publicly traded securities outstanding; (e) "wrap" accounts for the benefit of
clients of broker-dealers, financial institutions or financial planners,
provided that they have entered into an agreement with GSAM specifying
aggregate minimums and certain operating policies and standards; and (f)
registered investment advisers investing for accounts for which they receive
asset-based fees. With respect to these investors, the minimum initial
investment is $1,000,000 in Institutional Shares of the Fund alone or in
combination with other assets under the management of GSAM and its affiliates.
The minimum initial investment in Institutional Shares for (a) individual
investors; (b) qualified non-profit organizations, charitable trusts,
foundations and endowments; and (c) accounts over which GSAM or its advisory
affiliates have investment discretion is $10,000,000.
The foregoing minimum investment requirements may be waived at the discretion
of the Trust's officers. In addition, the minimum investment requirement may be
waived for current and former officers, partners, directors or employees of
Goldman Sachs or any of its affiliates or for other investors at the discretion
of the Trust's officers. No minimum amount is required for subsequent
investments.
OTHER PURCHASE INFORMATION
The Trust may authorize certain institutions (including banks, trust
companies, brokers and investment advisers) that provide recordkeeping,
reporting and processing services to their customers to accept on the Trust's
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behalf, purchase, redemption and exchange orders placed by or on behalf of such
customers and, if approved by the Trust, to designate other intermediaries to
accept such orders. In these cases, the Fund will be deemed to have received an
order in proper form by or on behalf of a customer when the order is accepted
by the authorized institution or intermediary on a Business Day, and the order
will be priced at the Fund's NAV per Share next determined after such
acceptance. The institution or intermediary will be responsible for
transmitting accepted orders to the Trust within the period agreed upon by
them. A customer should contact an institution to learn whether it is
authorized to accept orders for the Trust. Such institutions may receive
payments from the Fund or Goldman Sachs for the services provided by them with
respect to the Fund's Institutional Shares. These payments may be in addition
to other servicing and/or sub-transfer agency payments borne by the Fund and
its share classes.
The Investment Adviser, Distributor, and/or their affiliates, may pay other
compensation, from time to time, out of their assets and not as an additional
charge to the Fund; to selected institutions (including banks, trust companies,
brokers and investment advisers) and other persons in connection with the sale
and/or servicing of Shares of the Fund and other investment portfolios of the
Trust (such as additional payments based on new sales, amounts exceeding pre-
established thresholds, or the length of time clients' assets have remained in
the Trust), and subject to applicable NASD regulations, 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 reimbursement of expenses, entertainment and
prizes such as travel awards, merchandise, cash, investment research and
educational information and related support materials. This additional
compensation may vary among institutions depending upon such factors as the
amounts their clients have invested (or may invest) in particular portfolios of
the Trust, the particular program involved, or the amount of reimbursable
expenses. Additional compensation based on sales may, but is currently not
expected to, exceed 0.50% (annualized) of the amount invested. For further
information, see the Additional Statement.
The Fund reserves the right to redeem the Institutional Shares of any
shareholder of record whose account balance is less than $50 as a result of
earlier redemptions. Such redemptions will not be implemented if the value of a
recordholder's account falls below the minimum account balance solely as a
result of market conditions. The Trust will give sixty (60) days' prior written
notice to recordholders whose Institutional Shares are being redeemed to allow
them to purchase sufficient additional Institutional Shares of the Fund to
avoid such redemption.
The Fund and Goldman Sachs each reserves the right to reject any specific
purchase order (including exchanges) or to restrict purchases or exchanges by a
particular purchaser (or group of related purchasers). This may occur, for
example, when a purchaser or group of purchasers' pattern of frequent
purchases, sales or exchanges of Institutional Shares of the Fund is evident,
or if purchases, sales or exchanges are, or a subsequent abrupt redemption
might be, of a size that would disrupt management of the Fund.
In the sole discretion of Goldman Sachs, the Fund may accept securities
instead of cash for the purchase of Shares of the Fund. Such purchases will be
permitted only if the Investment Adviser determines that any securities
acquired in this manner are consistent with the Fund's investment objectives,
restrictions and policies and are desirable investments for the Fund.
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EXCHANGE PRIVILEGE
Institutional Shares of the Fund may be exchanged for (i) Institutional
Shares of any other mutual fund sponsored by Goldman Sachs and designated as an
eligible fund for this purpose and (ii) the corresponding class of any Goldman
Sachs Money Market Fund at the NAV next determined either by writing to Goldman
Sachs, Attention: Goldman Sachs Real Estate Securities Fund--Name of Class of
Shares, c/o GSAM Shareholder Services, 4900 Sears Tower, Chicago, Illinois
60606 or, if previously elected in the Fund's Account Information Form, by
telephone at 800-621-2550 (7:00 a.m. to 5:30 p.m. Chicago time). A shareholder
should obtain and read the prospectus relating to any other fund and its shares
and consider its investment objectives, policies and applicable fees before
making an exchange. Under the telephone exchange privilege, Institutional
Shares may be exchanged among accounts with different names, addresses and
social security or other taxpayer identification numbers only if the exchange
request is in writing and is received in accordance with the procedures set
forth under "Redemptions of Institutional Shares."
In an effort to prevent unauthorized or fraudulent exchanges by telephone,
Goldman Sachs employs reasonable procedures as set forth under "Redemption of
Institutional Shares" to confirm that such instructions are genuine. In times
of drastic economic or market changes the telephone exchange privilege may be
difficult to implement. For federal income tax purposes, an exchange is treated
as a sale of the Institutional Shares surrendered in the exchange on which an
investor may realize a gain or loss, followed by a purchase of Institutional
Shares, or the corresponding class of any Goldman Sachs Money Market Fund
received in the exchange. Shareholders should consult their own tax adviser
concerning the tax consequences of an exchange.
Each exchange which represents an initial investment in the Fund must satisfy
the minimum investment requirements of the Fund into which the Institutional
Shares are being exchanged, except that this requirement may be waived at the
discretion of the officers of the Fund. Exchanges are available only in states
where exchanges may legally be made. The exchange privilege may be materially
modified or withdrawn at any time on sixty (60) days' written notice to holders
of Institutional Shareholders and is subject to certain limitations. See
"Purchase of Institutional Shares."
REDEMPTION OF INSTITUTIONAL SHARES
The Fund will redeem its Institutional Shares upon request of a recordholder
of such Shares on any Business Day at the NAV next determined after receipt of
a request in proper form by Goldman Sachs from the recordholder. (See "Purchase
of Institutional Shares--Other Purchase Information" for a description of
limited situations where an institution or other intermediary may be authorized
to accept requests for the Fund. If Institutional Shares to be redeemed were
recently purchased by check, the Fund may delay transmittal of redemption
proceeds until such time as it has assured itself that good funds have been
collected for the purchase of such Institutional Shares. This may take up to 15
days. Redemption requests may be made by a shareholder of record by writing to
or calling the Transfer Agent at the address or telephone number set forth on
the back cover of this Prospectus. A shareholder of record may request
redemptions by telephone if the optional telephone redemption privilege is
elected on the Account Information Form accompanying this Prospectus. It may be
difficult to implement redemptions by telephone in times of drastic economic or
market changes.
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In an effort to prevent unauthorized or fraudulent redemption or exchange
requests by telephone, Goldman Sachs employs reasonable procedures specified by
the Trust to confirm that such instructions are genuine. Among other things,
any redemption request that requires money to go to an account or address other
than that designated on the Account Information Form must be in writing and
signed by an authorized person designated on the Account Information Form. Any
such written request is also confirmed by telephone with both the requesting
party and the designated bank account to verify instructions. Exchanges among
accounts with different names, addresses and social security or other taxpayer
identification numbers must be in writing and signed by an authorized person
designated on the Account Information Form. Other procedures may be implemented
from time to time concerning telephone redemptions and exchanges. If reasonable
procedures are not implemented, the Trust may be liable for any loss due to
unauthorized or fraudulent transactions. In all other cases, neither the Fund,
the Trust nor Goldman Sachs will be responsible for the authenticity of
redemption or exchange instructions received by telephone.
Written requests for redemptions must be signed by each Institutional
Shareholder whose signature has been guaranteed by a bank, a securities broker
or dealer, a credit union having authority to issue signature guarantees, a
savings and loan association, a building and loan association, a cooperative
bank, a federal savings bank or association, a national securities exchange, a
registered securities association or a clearing agency, provided that such
institution satisfies the standards established by the Transfer Agent.
The Fund will arrange for the proceeds of redemptions effected by any means
to be wired as federal funds to the bank account designated in the
recordholder's Account Information Form or, if the recordholder elects in
writing, by check. Redemption proceeds paid by wire transfer will normally be
wired on the next Business Day in federal funds (for a total one-day delay),
but may be paid up to three (3) Business Days after receipt of a properly
executed redemption request. Wiring of redemption proceeds may be delayed one
additional Business Day if the Federal Reserve Bank is closed on the day
redemption proceeds would originally be wired. Redemption proceeds paid by
check will normally be mailed to the address of record within 3 Business Days
of receipt of a properly executed redemption request. In order to change the
bank designated on the Account Information Form to receive redemption proceeds,
a written request must be received by the Transfer Agent. This request must be
signature guaranteed as set forth above. Further documentation may be required
for executors, trustees or corporations. Once wire transfer instructions have
been given by Goldman Sachs, neither the Fund, the Trust nor Goldman Sachs
assumes any further responsibility for the performance of intermediaries or the
recordholder's bank in the transfer process. If a problem with such performance
arises, the recordholder should deal directly with such intermediaries or bank.
Additional documentation regarding a redemption by any means may be required
to effect a redemption when deemed appropriate by Goldman Sachs. The request
for such redemption will not be considered to have been received in proper form
until such additional documentation has been received.
Institutions (including banks, trust companies, brokers and investment
advisers) are responsible for the timely transmittal of redemption requests by
their customers to the Transfer Agent. In order to facilitate the timely
transmittal of redemption requests, these institutions have established times
by which redemption requests must be received by them. Additional documentation
may be required when deemed appropriate by an institution.
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APPENDIX
GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON ACCOUNT INFORMATION FORM
You are required by law to provide the Fund with your correct Taxpayer
Identification Number (TIN), regardless of whether you file tax returns.
Failure to do so may subject you to penalties. Failure to provide your correct
TIN and to sign your name in the Certification section of the Account
Information Form could result in withholding of 31% by the Fund for the
federal backup withholding tax on distributions, redemptions, exchanges and
other payments relating to your account.
Any tax withheld may be credited against taxes owed on your federal income
tax return.
If you do not have a TIN, you should apply for one immediately by contacting
your local office of the Social Security Administration or the Internal
Revenue Service (IRS). Backup withholding could also apply to payments
relating to your account prior to the Fund's receipt of your TIN.
Special rules apply for certain entities. For example, for an account
established under a Uniform Gifts or Transfers to Minors Act, the TIN of the
minor should be furnished.
If you have been notified by the IRS that you are subject to backup
withholding because you failed to report all your interest and/or dividend
income on your tax return and you have not been notified by the IRS that such
withholding should cease, you must cross out item (2) in the Certification
section of the Account Information Form.
If you are an exempt recipient, you should furnish your TIN and certify your
exemption by signing the Certification section and writing "exempt" after your
signature. Exempt recipients include: corporations, tax-exempt pension plans
and IRAs, governmental agencies, financial institutions, registered securities
and commodities dealers and others.
If you are a nonresident alien or foreign entity, you must provide a
completed Form W-8 to the Fund in order to avoid backup withholding on certain
payments. Other payments to you may be subject to nonresident alien
withholding of up to 30%.
For further information regarding backup and nonresident alien withholding,
see Sections 3406, 1441 and 1442 of the Internal Revenue Code and consult your
tax adviser.
A-1
<PAGE>
- --------------------------------------------------------------------------------
GOLDMAN SACHS ASSET
MANAGEMENT
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
GOLDMAN, SACHS & CO.
DISTRIBUTOR
85 BROAD STREET
NEW YORK, NEW YORK 10004
GOLDMAN, SACHS & CO.
TRANSFER AGENT
4900 SEARS TOWER
CHICAGO, ILLINOIS 60606
STATE STREET BANK AND TRUST COMPANY
CUSTODIAN
1776 HERITAGE DRIVE
NORTH QUINCY, MASSACHUSETTS 02171
ARTHUR ANDERSEN, LLP
INDEPENDENT PUBLIC ACCOUNTANTS
225 FRANKLIN STREET
BOSTON, MASSACHUSETTS 02110
TOLL FREE (IN U.S.) . . . . . . . . 800-621-2550
REPROINST
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GOLDMAN SACHS
REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
PROSPECTUS
INSTITUTIONAL SHARES
LOGO
Goldman
Sachs
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
SERVICE SHARES
INSTITUTIONAL 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 CORE SMALL CAP EQUITY FUND
GOLDMAN SACHS CORE INTERNATIONAL EQUITY FUND
GOLDMAN SACHS CAPITAL GROWTH FUND
GOLDMAN SACHS MID CAP EQUITY FUND
GOLDMAN SACHS INTERNATIONAL EQUITY FUND
GOLDMAN SACHS SMALL CAP VALUE FUND
GOLDMAN SACHS JAPANESE EQUITY FUND
GOLDMAN SACHS INTERNATIONAL SMALL CAP FUND
GOLDMAN SACHS EMERGING MARKETS EQUITY FUND
GOLDMAN SACHS ASIA GROWTH FUND
GOLDMAN SACHS REAL ESTATE SECURITIES FUND
(EQUITY PORTFOLIOS OF GOLDMAN SACHS TRUST)
4900 Sears Tower
Chicago, Illinois 60606-6303
This Statement of Additional Information (the "Additional Statement") is
not a Prospectus. This Additional Statement should be read in conjunction with
the Prospectuses for the Class A Shares, Class B Shares, Class C Shares, Service
Shares and Institutional 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 CORE Small Cap Equity Fund, Goldman Sachs
CORE International Equity Fund, Goldman Sachs Capital Growth Fund, Goldman
Sachs Mid Cap Equity Fund, Goldman Sachs International Equity Fund, Goldman
Sachs Small Cap Value Fund, Goldman Sachs Japanese Equity Fund, Goldman Sachs
International Small Cap Fund, Goldman Sachs Emerging Markets Equity Fund and
Goldman Sachs Asia Growth Fund dated May 1, 1998; and Goldman Sachs Real Estate
Securities Fund dated July 27, 1998 (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.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS Page
----
<S> <C>
INTRODUCTION....................................................................................... B-4
INVESTMENT POLICIES................................................................................ B-5
INVESTMENT RESTRICTIONS............................................................................ B-42
MANAGEMENT......................................................................................... B-44
PORTFOLIO TRANSACTIONS AND BROKERAGE............................................................... B-61
NET ASSET VALUE.................................................................................... B-67
PERFORMANCE INFORMATION............................................................................ B-69
SHARES OF THE TRUST................................................................................ B-77
TAXATION........................................................................................... B-82
FINANCIAL STATEMENTS............................................................................... B-90
OTHER INFORMATION.................................................................................. B-90
DISTRIBUTION AND AUTHORIZED DEALER SERVICE PLANS................................................... B-91
OTHER INFORMATION REGARDING MAXIMUM SALES CHARGE, PURCHASES, REDEMPTIONS, EXCHANGES AND DIVIDENDS.. B-101
SERVICE PLAN....................................................................................... B-105
APPENDIX A......................................................................................... 1-A
APPENDIX B......................................................................................... 1-B
</TABLE>
The date of this Additional Statement is May 1, 1998, as revised July 27, 1998.
B-2
<PAGE>
GOLDMAN SACHS FUNDS MANAGEMENT, L.P.
Adviser to:
Goldman Sachs CORE U.S. Equity Fund
Goldman Sachs Capital Growth Fund
One New York Plaza
New York, New York 10004
GOLDMAN SACHS ASSET MANAGEMENT
Adviser to:
Goldman Sachs Balanced Fund
Goldman Sachs Growth and Income Fund
Goldman Sachs CORE Large Cap Growth Fund
Goldman Sachs CORE Small Cap Equity Fund
Goldman Sachs CORE International Equity Fund
Goldman Sachs Mid Cap Equity Fund
Goldman Sachs Small Cap Value Fund
Goldman Sachs Real Estate Securities Fund
One New York Plaza
New York, New York 10004
GOLDMAN, SACHS & CO.
Transfer Agent
4900 Sears Tower
Chicago, Illinois 60606
GOLDMAN, SACHS & CO.
Distributor
85 Broad Street
New York, New York 10004
GOLDMAN SACHS ASSET
MANAGEMENT INTERNATIONAL
Adviser to:
Goldman Sachs International Equity Fund
Goldman Sachs Japanese Equity Fund
Goldman Sachs International Small Cap Fund
Goldman Sachs Emerging Markets Equity Fund
Goldman Sachs Asia Growth Fund
133 Peterborough Court
London, England EC4A 2BB
Toll free (in U.S.)
Class A, B and C Shares 800-526-7384
Institutional and Services Shares 800-621-2550
B-3
<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"), Goldman Sachs 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 CORE Small Cap Equity Fund ("CORE Small Cap Equity Fund"), Goldman Sachs
CORE International Equity Fund ("CORE International Equity 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 Value Fund ("Small Cap
Value Fund"), Goldman Sachs Japanese Equity Fund ("Japanese Equity Fund"),
Goldman Sachs International Small Cap Fund ("International Small Cap Fund"),
Goldman Sachs Emerging Markets Equity Fund ("Emerging Markets Equity Fund"),
Goldman Sachs Asia Growth Fund ("Asia Growth Fund") and Goldman Sachs Real
Estate Securities Fund ("Real Estate Securities Fund") (collectively referred to
herein as the "Funds").
The Funds, except the Japanese Equity, International Small Cap, CORE Large
Cap Growth, CORE International Equity, CORE Small Cap Equity and Real Estate
Securities 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. Each Fund currently offers
five classes of shares: Class A Shares, Class B Shares, Class C 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, CORE Small Cap Equity, CORE
International Equity, Real Estate Securities, 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, Japanese Equity, International Small Cap, 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
Prospectuses for a fuller description of the Funds' investment objectives and
policies. There is no assurance that each Fund will achieve its objective.
B-4
<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
B-5
<PAGE>
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, 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, CORE LARGE CAP GROWTH, CORE SMALL CAP EQUITY AND CORE
INTERNATIONAL EQUITY FUNDS
________________________________________________________________________
Under normal circumstances, the Funds will invest at least 90% of their
total assets in equity securities.
B-6
<PAGE>
The investment strategy of the CORE U.S. Equity, CORE Large Cap Growth,
CORE Small Cap Equity and CORE International Equity Funds will be implemented to
the extent it is consistent with maintaining a Fund's qualification as a
regulated investment company under the Internal Revenue Code.
Since normal settlement for equity securities is three trading days (for
certain international markets settlement may be longer), the Funds will need to
hold cash balances to satisfy shareholder redemption requests. Such cash
balances will normally range from 2% to 5% of a Fund's net assets. The Core U.S.
Equity and CORE Large Cap Equity 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%. The CORE Small Cap
Equity and CORE International Equity Funds may purchase other types of futures
contracts as described under "Investment Policies Futures Contracts and Options
on Futures Contracts." 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. For
example, if cash balances are equal to 10% of the net assets, the Fund may enter
into long futures contracts covering an amount equal to 10% of the Fund's net
assets. As cash balances fluctuate based on new contributions or withdrawals, a
Fund may enter into additional contracts or close out existing positions.
THE MULTIFACTOR MODELS. The Multifactor Models are rigorous computerized
rating systems for evaluating different equity markets, currencies and
individual equity securities according to a variety of investment
characteristics (or factors). The factors used by the Multifactor Models
incorporate many variables studied by traditional fundamental analysts and cover
measures of value, growth, momentum, risk (e.g. price/earnings ratio, book/price
ratio, growth forecasts, earning estimate revisions, price momentum, volatility
and earnings stability). All of these factors have been shown to significantly
impact the performance of the equity securities, currencies and markets they
were designated to forecast.
Because they include many disparate factors, the Adviser believes that the
Multifactor Models are broader in scope and provide a more thorough evaluation
than most conventional, value-oriented quantitative models. As a result, the
securities, currencies and markets ranked highest by the Multifactor Models do
not have one dominant investment characteristic (such as a low price/earnings
ratio); rather, such securities or markets possess many different investment
characteristics. By using a variety of relevant factors to select securities,
currencies or markets, the Adviser believes that the Fund will be better
balanced and have more consistent performance than an investment portfolio that
uses only one or two factors to select such investments.
The Adviser will monitor, and may occasionally suggest and make changes to,
the method by which securities, currencies or markets are selected for or
weighted in a Fund. Such changes (which may be the result of changes in the
Multifactor Models or the method of applying the Multifactor Models) may
include: (i) evolutionary changes to the structure of the Multifactor Models
(e.g., the addition of new factors or a new means of weighting the factors);
(ii) changes in trading procedures (e.g., trading frequency or the manner in
which a Fund uses futures); or (iii) changes in the method by which securities,
currencies or markets are weighted in a Fund. Any such changes will preserve a
Fund's basic investment philosophy of combining qualitative and
B-7
<PAGE>
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 the International Equity Fund's
highly focused investment approach. For a description of the risks of the
International Equity Fund's investments in Asia, see "Investing in Emerging
Markets, including Asia."
A RIGOROUS PROCESS OF STOCK SELECTION. Using fundamental industry and
company research, GSAMI's equity team in London, Singapore and Tokyo seeks to
identify companies that may achieve superior long-term returns. Stocks are
carefully selected for International Equity Fund's portfolio through a three-
stage investment process. Because International Equity Fund is a long-term
holder of stocks, the portfolio managers adjust International Equity Fund's
portfolio only when expected returns fall below acceptable levels or when the
portfolio managers identify substantially more attractive investments.
Using the research of Goldman Sachs as well as information gathered from
other sources in Europe and the Asia-Pacific region, the Adviser seeks to
identify attractive industries around the world. Such industries are expected
to have favorable underlying economics and allow companies to generate
sustainable and predictable high returns. As a rule, they are less economically
sensitive, relatively free of regulation and favor strong franchises.
Within these industries the Adviser seeks to identify well-run companies
that enjoy a stable competitive advantage and are able to benefit from the
favorable dynamics of the industry. This stage includes analyzing the current
and expected financial performance of the company; contacting suppliers,
customers and competitors; and meeting with management. In particular, the
portfolio managers look for companies whose managers have a strong commitment to
both maintaining the high returns of the existing business and reinvesting the
capital generated at high 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
B-8
<PAGE>
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, CORE Large Cap Growth, CORE Small Cap Equity and CORE
International Equity Funds may only invest in debt securities that are cash
equivalents. Corporate debt obligations are subject to the risk of an issuer's
inability to meet principal and interest payments on the obligations and may
also be subject to price volatility due to such factors as market interest
rates, market perception of the creditworthiness of the issuer and general
market liquidity.
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 Value, International Equity, Japanese Equity, International Small Cap,
Emerging Markets Equity, Asia Growth and Real Estate Securities 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 Value, International
Equity, Japanese Equity, International Small Cap, Emerging Markets Equity, Asia
Growth and Real Estate Securities Funds may invest, the yields and prices of
such securities may tend to fluctuate more than those for higher rated
securities. In the lower quality segments of the fixed-income securities
market, changes in perceptions of issuers' creditworthiness tend to occur more
frequently and in a more pronounced manner than do changes in higher quality
segments of the fixed-income securities market, resulting in greater yield and
price volatility.
Another factor which causes fluctuations in the prices of fixed-income
securities is the supply and demand for similarly rated securities. In
addition, the prices of fixed-income securities fluctuate in response to the
general level of interest rates. Fluctuations in the prices of portfolio
B-9
<PAGE>
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.
B-10
<PAGE>
Government, its agencies, instrumentalities, political subdivisions or
authorities. These custodial receipts are known by various names, including
"Treasury Receipts," "Treasury Investors Growth Receipts" ("TIGRs"), and
"Certificates of Accrual on Treasury Securities" ("CATs"). For certain
securities law purposes, custodial receipts are not considered U.S. Government
securities.
MUNICIPAL SECURITIES
- --------------------
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, CORE
Large Cap Growth, CORE Small Cap Equity and CORE International Equity Funds) may
invest in mortgage-backed securities. Each mortgage pool underlying mortgage-
backed securities consists of mortgage loans evidenced by promissory notes
secured by first mortgages or first deeds of trust or other similar security
instruments creating a first lien on owner occupied and non-owner occupied one-
unit to four-unit residential properties, multifamily (i.e., five or more)
properties, agriculture properties, commercial properties and mixed use
properties (the "Mortgaged Properties"). The Mortgaged Properties may consist
of detached individual dwelling units, multifamily dwelling units, individual
condominiums, townhouses, duplexes, triplexes, fourplexes, row houses,
individual units in planned unit developments and other attached dwelling units.
The Mortgaged Properties may also include residential investment properties and
second homes.
The investment characteristics of adjustable and fixed rate mortgage-backed
securities differ from those of traditional fixed income securities. The major
differences include the payment of
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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.
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.
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Fannie Mae has certain contractual responsibilities. With respect to each
Pool, Fannie Mae is obligated to distribute scheduled monthly installments of
principal and interest after Fannie Mae's servicing and guaranty fee, whether or
not received, to Certificate holders. Fannie Mae also is obligated to
distribute to holders of Certificates an amount equal to the full principal
balance of any foreclosed Mortgage Loan, whether or not such principal balance
is actually recovered. The obligations of Fannie Mae under its guaranty of the
Fannie Mae Certificates are obligations solely of Fannie Mae.
FREDDIE MAC CERTIFICATES. Freddie Mac is a publicly held U.S. Government
sponsored enterprise. The principal activity of Freddie Mac currently is the
purchase of first lien, conventional, residential mortgage loans and
participation interests in such mortgage loans and their resale in the form of
mortgage securities, primarily Freddie Mac Certificates. A Freddie Mac
Certificate represents a pro rata interest in a group of mortgage loans or
participation in mortgage loans (a "Freddie Mac Certificate group") purchased by
Freddie Mac.
Freddie Mac guarantees to each registered holder of a Freddie Mac
Certificate the timely payment of interest at the rate provided for by such
Freddie Mac Certificate (whether or not received on the underlying loans).
Freddie Mac also guarantees to each registered Certificate holder ultimate
collection of all principal of the related mortgage loans, without any offset or
deduction, but does not, generally, guarantee the timely payment of scheduled
principal. The obligations of Freddie Mac under its guaranty of Freddie Mac
Certificates are obligations solely of Freddie Mac.
The mortgage loans underlying the Freddie Mac and Fannie Mae Certificates
consist of adjustable rate or fixed rate mortgage loans with original terms to
maturity of between five and thirty years. Substantially all of these mortgage
loans are secured by first liens on one-to-four-family residential properties or
multifamily projects. Each mortgage loan must meet the applicable standards set
forth in the law creating Freddie Mac or Fannie Mae. A Freddie Mac Certificate
group may include whole loans, participation interests in whole loans 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
, CORE Large Cap Growth, CORE Small Cap Equity and CORE International Equity
Funds) may invest in both government guaranteed and privately issued mortgage
pass-through securities ("Mortgage Pass-Throughs"); that is, fixed or adjustable
rate mortgage-backed securities which provide for monthly payments that are a
"pass-through" of the monthly interest and principal payments (including any
prepayments) made by the individual borrowers on the pooled mortgage loans, net
of any fees or other amounts paid to any guarantor, administrator and/or
servicer of the underlying mortgage loans.
The following discussion describes only a few of the wide variety of
structures of Mortgage Pass-Throughs that are available or may be issued.
DESCRIPTION OF CERTIFICATES. Mortgage Pass-Throughs may be issued in one
or more classes of senior certificates and one or more classes of subordinate
certificates. Each such class
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may bear a different pass-through rate. Generally, each certificate will
evidence the specified interest of the holder thereof in the payments of
principal or interest or both in respect of the mortgage pool comprising part of
the trust fund for such certificates.
Any class of certificates may also be divided into subclasses entitled to
varying amounts of principal and interest. If a REMIC election has been made,
certificates of such subclasses may be entitled to payments on the basis of a
stated principal balance and stated interest rate, and payments among different
subclasses may be made on a sequential, concurrent, pro rata or disproportionate
--------
basis, or any combination thereof. The stated interest rate on any such
subclass of certificates may be a fixed rate or one which varies in direct or
inverse relationship to an objective interest index.
Generally, each registered holder of a certificate will be entitled to
receive its pro rata share of monthly distributions of all or a portion of
--------
principal of the underlying mortgage loans or of interest on the principal
balances thereof, which accrues at the applicable mortgage pass-through rate, or
both. The difference between the mortgage interest rate and the related
mortgage pass-through rate (less the amount, if any, of retained yield) with
respect to each mortgage loan will generally be paid to the servicer as a
servicing fee. Since certain adjustable rate mortgage loans included in a
mortgage pool may provide for deferred interest (i.e., negative amortization),
the amount of interest actually paid by a mortgagor in any month may be less
than the amount of interest accrued on the outstanding principal balance of the
related mortgage loan during the relevant period at the applicable mortgage
interest rate. In such event, the amount of interest that is treated as
deferred interest will be added to the principal balance of the related mortgage
loan and will be distributed pro rata to certificate-holders as principal of
--------
such mortgage loan when paid by the mortgagor in subsequent monthly payments or
at maturity.
RATINGS. The ratings assigned by a rating organization to Mortgage Pass-
Throughs address the likelihood of the receipt of all distributions on the
underlying mortgage loans by the related certificate-holders under the
agreements pursuant to which such certificates are issued. A rating
organization's ratings take into consideration the credit quality of the related
mortgage pool, including any credit support providers, structural and legal
aspects associated with such certificates, and the extent to which the payment
stream on such mortgage pool is adequate to make payments required by such
certificates. A rating organization's ratings on such certificates do not,
however, constitute a statement regarding frequency of prepayments on the
related mortgage loans. In addition, the rating assigned by a rating
organization to a certificate does not address the remote possibility that, in
the event of the insolvency of the issuer of certificates where a subordinated
interest was retained, the issuance and sale of the senior certificates may be
recharacterized as a financing and, as a result of such recharacterization,
payments on such certificates may be affected.
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
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combination thereof.
SUBORDINATION; SHIFTING OF INTEREST; RESERVE FUND. In order to achieve
ratings on one or more classes of Mortgage Pass-Throughs, one or more classes of
certificates may be subordinate certificates which provide that the rights of
the subordinate certificate-holders to receive any or a specified portion of
distributions with respect to the underlying mortgage loans may be subordinated
to the rights of the senior certificate-holders. If so structured, the
subordination feature may be enhanced by distributing to the senior certificate-
holders on certain distribution dates, as payment of principal, a specified
percentage (which generally declines over time) of all principal payments
received during the preceding prepayment period ("shifting interest credit
enhancement"). This will have the effect of accelerating the amortization of
the senior certificates while increasing the interest in the trust fund
evidenced by the subordinate certificates. Increasing the interest of the
subordinate certificates relative to that of the senior certificates is intended
to preserve the availability of the subordination provided by the subordinate
certificates. In addition, because the senior certificate-holders in a shifting
interest credit enhancement structure are entitled to receive a percentage of
principal prepayments which is greater than their proportionate interest in the
trust fund, the rate of principal prepayments on the mortgage loans will have an
even greater effect on the rate of principal payments and the amount of interest
payments on, and the yield to maturity of, the senior certificates.
In addition to providing for a preferential right of the senior
certificate-holders to receive current distributions from the mortgage pool, a
reserve fund may be established relating to such certificates (the "Reserve
Fund"). The Reserve Fund may be created with an initial cash deposit by the
originator or servicer and augmented by the retention of distributions otherwise
available to the subordinate certificate-holders or by excess servicing fees
until the Reserve Fund reaches a specified amount.
The subordination feature, and any Reserve Fund, are intended to enhance
the likelihood of timely receipt by senior certificate-holders of the full
amount of scheduled monthly payments of principal and interest due them and will
protect the senior certificate-holders against certain losses; however, in
certain circumstances the Reserve Fund could be depleted and temporary
shortfalls could result. In the event the Reserve Fund is depleted before the
subordinated amount is reduced to zero, senior certificate-holders will
nevertheless have a preferential right to receive current distributions from the
mortgage pool to the extent of the then outstanding subordinated amount. Unless
otherwise specified, until the subordinated amount is reduced to zero, on any
distribution date any amount otherwise distributable to the subordinate
certificates or, to the extent specified, in the Reserve Fund will generally be
used to offset the amount of any losses realized with respect to the mortgage
loans ("Realized Losses"). Realized Losses remaining after application of such
amounts will generally be applied to reduce the ownership interest of the
subordinate certificates in the mortgage pool. If the subordinated amount has
been reduced to zero, Realized Losses generally will be allocated pro rata among
--------
all certificate-holders in proportion to their respective outstanding interests
in the mortgage pool.
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,
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<PAGE>
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
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<PAGE>
Ginnie Mae guaranteed mortgage- backed securities (the "Mortgage Assets"). The
obligations of Fannie Mae or Freddie Mac under their respective guaranty of the
REMIC Certificates are obligations solely of Fannie Mae or Freddie Mac,
respectively.
CMOs and REMIC Certificates are issued in multiple classes. Each class of
CMOs or REMIC Certificates, often referred to as a "tranche," is issued at a
specific adjustable or fixed interest rate and must be fully retired no later
than its final distribution date. Principal prepayments on the Mortgage Loans
or the Mortgage Assets underlying the CMOs or REMIC Certificates may cause some
or all of the classes of CMOs or REMIC Certificates to be retired substantially
earlier than their final distribution dates. Generally, interest is paid or
accrues on all classes of CMOs or REMIC Certificates on a monthly basis.
The principal of and interest on the Mortgage Assets may be allocated among
the several classes of CMOs or REMIC Certificates in various ways. In certain
structures (known as "sequential pay" CMOs or REMIC Certificates), payments of
principal, including any principal prepayments, on the Mortgage Assets generally
are applied to the classes of CMOs or REMIC Certificates in the order of their
respective final distribution dates. Thus, no payment of principal will be made
on any class of sequential pay CMOs or REMIC Certificates until all other
classes having an earlier final distribution date have been paid in full.
Additional structures of CMOs and REMIC Certificates include, among others,
"parallel pay" CMOs and REMIC Certificates. Parallel pay CMOs or REMIC
Certificates are those which are structured to apply principal payments and
prepayments of the Mortgage Assets to two or more classes concurrently on a
proportionate or disproportionate basis. These simultaneous payments are taken
into account in calculating the final distribution date of each class.
A wide variety of REMIC Certificates may be issued in parallel pay or
sequential pay structures. These securities include accrual certificates (also
known as "Z-Bonds"), which only accrue interest at a specified rate until all
other certificates having an earlier final distribution date have been retired
and are converted thereafter to an interest-paying security, and planned
amortization class ("PAC") certificates, which are parallel pay REMIC
Certificates that generally require that specified amounts of principal be
applied on each payment date to one or more classes or REMIC Certificates (the
"PAC Certificates"), even though all other principal payments and prepayments of
the Mortgage Assets are then required to be applied to one or more other classes
of the Certificates. The scheduled principal payments for the PAC Certificates
generally have the highest priority on each payment date after interest due has
been paid to all classes entitled to receive interest currently. Shortfalls, if
any, are added to the amount payable on the next payment date. The PAC
Certificate payment schedule is taken into account in calculating the final
distribution date of each class of PAC. In order to create PAC tranches, one or
more tranches generally must be created that absorb most of the volatility in
the underlying mortgage assets. These tranches tend to have market prices and
yields that are much more volatile than other PAC classes.
STRIPPED MORTGAGE-BACKED SECURITIES. The Balanced and Real Estate
Securities Funds 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
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<PAGE>
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. The Funds'
investments in SMBS may require the Funds to sell portfolio securities to
generate sufficient cash to certify income distribution requirements.
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 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
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<PAGE>
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.
LOAN PARTICIPATIONS
- -------------------
The Balanced Fund may invest in loan participations. Such loans must be to
issuers in whose obligations the Balanced Fund may invest. A loan participation
is an interest in a loan to a U.S. or foreign company or other borrower which is
administered and sold by a financial intermediary. In a typical corporate loan
syndication, a number of lenders, usually banks (co-lenders), lend a corporate
borrower a specified sum pursuant to the terms and conditions of a loan
agreement. One of the co-lenders usually agrees to act as the agent bank with
respect to the loan.
Participation interests acquired by the Balanced Fund may take the form of
a direct or co-lending relationship with the corporate borrower, an assignment
of an interest in the loan by a co-lender or another participant, or a
participation in the seller's share of the loan. When the Balanced Fund acts as
co-lender in connection with a participation interest or when the Balanced Fund
acquires certain participation interests, the Balanced Fund will have direct
recourse against the borrower if the borrower fails to pay scheduled principal
and interest. In cases where the Balanced Fund lacks direct recourse, it will
look to the agent bank to enforce appropriate credit remedies against the
borrower. In these cases, the Balanced Fund may be subject to delays, expenses
and risks that are greater than those that would have been involved if the Fund
had purchased a direct obligation (such as commercial paper) of such borrower.
For example, in the event of the bankruptcy or insolvency of the corporate
borrower, a loan participation may be subject to certain defenses by the
borrower as a result of improper conduct by the agent bank. Moreover, under the
terms of the loan participation, the Balanced Fund may be regarded as a creditor
of the agent bank (rather than of the underlying corporate borrower), so that
the Balanced Fund may also be subject to the risk that the agent bank may become
insolvent. The secondary market, if any, for these loan participations is
limited and any loan participations purchased by the Balanced Fund will be
regarded as illiquid.
For purposes of certain investment limitations pertaining to
diversification of the Balanced Fund's portfolio investments, the issuer of a
loan participation will be the underlying borrower. However, in cases where the
Balanced Fund does not have recourse directly against the borrower, both the
borrower and each agent bank and co-lender interposed between the Balanced Fund
and the borrower will be deemed issuers of a loan participation.
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
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such transactions with respect to the S&P 500 Index, for the CORE U.S. Equity
Fund and a representative 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
("CFTC"). Futures contracts entered into by a Fund are traded on U.S. exchanges
or boards of trade that are licensed and regulated by the CFTC or on foreign
exchanges. Neither the CFTC, National Futures Association nor any domestic
exchange regulates activities of any foreign exchange or boards of trade,
including the execution, delivery and clearing of transactions, or has the power
to compel enforcement of the rules of a foreign exchange or board of trade or
any applicable foreign law. This is true even if the exchange is formally
linked to a domestic market so that a position taken on the market may be
liquidated by a transaction on another market. Moreover, such laws or
regulations will vary depending on the foreign country in which the foreign
futures or foreign options transaction occurs. For these reasons, persons who
trade foreign futures or foreign options contracts may not be afforded certain
of the protective measures provided by the Commodity Exchange Act, the CFTC's
regulations and the rules of the National Futures Association and any domestic
exchange, including the right to use reparations proceedings before the CFTC and
arbitration proceedings provided by the National Futures Association or any
domestic futures exchange. In particular, a Fund's investments in foreign
futures or foreign options transactions may not be provided the same protections
in respect of transactions on United States futures exchanges.
FUTURES CONTRACTS. A futures contract may generally be described as an
agreement between two parties to buy and sell particular financial instruments
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, CORE
Large Cap Growth and CORE Small Cap Equity Funds) can sell futures contracts on
a specified currency to protect against a decline in the value of such currency
and its portfolio securities which are quoted or denominated in such currency.
Each Fund (other than CORE U.S. Equity, CORE Large Cap Growth and CORE Small Cap
Equity 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
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settlement date.
HEDGING STRATEGIES. Hedging, by use of futures contracts, seeks to
establish with more certainty than would otherwise be possible the effective
price, rate of return or currency exchange rate on portfolio securities or
securities that a Fund owns or proposes to acquire. A Fund may, for example,
take a "short" position in the futures market by selling futures contracts to
seek to hedge against an anticipated rise in interest rates or a decline in
market prices or (other than CORE U.S. Equity, CORE Large Cap Growth and CORE
Small Cap Equity Funds) foreign currency rates that would adversely affect the
dollar value of such Fund's portfolio securities. Similarly, each Fund (other
than CORE U.S. Equity, CORE Large Cap Growth and CORE Small Cap Equity 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 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
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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.
In addition to bona fide hedging, a CFTC regulation permits a Fund to
engage in other future transactions if the aggregate initial margin and premiums
required to establish such positions in futures contracts and options on futures
do not exceed 5% of the net asset value of such Fund's portfolio, after taking
into account unrealized profits and losses on any such positions and excluding
the amount by which such options were in-the-money at the time of purchase. A
Fund will engage in transactions in 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").
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in certain cases, require the Fund to
segregate with its custodian cash or liquid assets in an amount equal to the
underlying value of such contracts and options.
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. Thus,
unanticipated changes in interest rates, securities prices or currency exchange
rates may result in a poorer overall performance for a Fund than if it had not
entered into any futures contracts or options transactions. In the event of an
imperfect correlation between a futures position and a portfolio position which
is intended to be protected, the desired protection may not be obtained and a
Fund may be exposed to risk of loss.
Perfect correlation between a Fund's futures positions and portfolio
positions will be difficult to achieve because no futures contracts based on
individual equity or corporate fixed-income securities are currently available.
In addition, it is not possible for a Fund to hedge fully or perfectly against
currency fluctuations affecting the value of securities quoted or denominated in
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<PAGE>
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 segregated cash or liquid assets (either of which may be quoted or
denominated in any currency), by entering into an offsetting forward contract
and/or by purchasing an offsetting option which, by virtue of its exercise price
or otherwise, reduces a Fund's net exposure on its written option position.
A Fund may also write (sell) covered call and put options on any securities
index composed of securities in which it may invest. Options on securities
indices are similar to options on securities, except that the exercise of
securities index options requires cash payments and does not involve the actual
purchase or sale of securities. In addition, securities index options are
designed to reflect price fluctuations in a group of securities or segment of
the securities market rather than price fluctuations in a single security.
A Fund may cover call options on a securities index by owning securities
whose price changes are expected to be similar to those of the underlying index,
or by having an absolute and immediate right to acquire such securities without
additional cash consideration (or for additional cash consideration which has
been segregated by the Fund) upon conversion or exchange of other securities in
its portfolio. A Fund may cover call and put options on a securities index by
segregating cash or liquid assets with a value equal to the exercise price.
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<PAGE>
A Fund may terminate its obligations under an exchange traded call or put
option by purchasing an option identical to the one it has written. Obligations
under over-the-counter options may be terminated only by entering into an
offsetting transaction with the counterparty to such option. Such purchases are
referred to as "closing purchase transactions."
PURCHASING OPTIONS. Each Fund (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 and Real Estate Securities Funds, with
respect to up to 5% of their net assets, may enter into options on the yield
"spread" or differential between two securities. Such transactions are referred
to as "yield curve" options. In contrast to other types of options, a yield
curve option is based on the difference between the yields of designated
securities, rather than the prices of the individual securities, and is settled
through cash payments. Accordingly, a yield curve option is profitable to the
holder if this differential widens (in the case of a call) or narrows (in the
case of a put), regardless of whether the yields of the underlying securities
increase or decrease.
Balanced and Real Estate Securities Funds may purchase or write yield curve
options for the same purposes as other options on securities. For example,
Balanced and Real Estate Securities Funds may purchase a call option on the
yield spread
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<PAGE>
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 and Real Estate
Securities Funds may also purchase or write yield curve options in an effort to
increase its current income if, in the judgment of the Adviser, Balanced and
Real Estate Securities Funds will be able to profit from movements in the spread
between the yields of the underlying securities. The trading of yield curve
options is subject to all of the risks associated with the trading of other
types of options. In addition, however, such options present risk of loss even
if the yield of one of the underlying securities remains constant, if the spread
moves in a direction or to an extent which was not anticipated.
Yield curve options written by the Balanced and Real Estate Securities
Funds will be "covered." A call (or put) option is covered if the Balanced and
Real Estate Securities Funds hold another call (or put) option on the spread
between the same two securities and segregates cash or liquid assets sufficient
to cover the Balanced and Real Estate Securities Funds' net liability under the
two options. Therefore, the Balanced and Real Estate Securities Funds'
liability for such a covered option is generally limited to the difference
between the amount of the Balanced and Real Estate Securities Funds' liability
under the option written by the Balanced and Real Estate Securities Funds less
the value of the option held by the Balanced and Real Estate Securities Funds.
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
segregated assets until the options expire or are exercised. Similarly, if a
Fund is unable to effect a closing sale transaction with respect to options it
has purchased, it will have to exercise the options in order to realize any
profit and will incur transaction costs upon the purchase or sale of underlying
securities.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening or closing
transactions or both; (iii) trading halts, suspensions or other restrictions may
be imposed with respect to particular classes or series of options; (iv) unusual
or unforeseen circumstances may interrupt normal operations on an exchange; (v)
the facilities of an exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume; or (vi) one or more
exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that exchange that had been issued by the Options Clearing
Corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
Each Fund may purchase and sell both options that are traded on U.S. and
foreign exchanges and options traded over-the-counter with broker-dealers who
make markets in these options. The ability to terminate over-the-counter
options is more limited than with exchange-traded options and may involve the
risk that broker-dealers participating in such transactions will
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<PAGE>
not fulfill their obligations.
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. The Real Estate Securities Fund
expects that a substantial portion of its total assets will be invested in
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
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<PAGE>
for investment by the Fund. CORE U.S. Equity, CORE Large Cap Growth, CORE Small
Cap Equity and CORE International Equity 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.
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 risks, including
those set forth below, which are not typically associated with investing in U.S.
dollar-denominated or quoted securities of U.S. issuers. Investments in foreign
securities usually involve currencies of foreign countries. Accordingly, any
Fund that invests in foreign securities may be affected favorably or unfavorably
by changes in currency rates and in exchange control regulations and may incur
costs in connection with conversions between various currencies. Balanced, CORE
International Equity, International Equity, Japanese Equity, International Small
Cap, 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
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<PAGE>
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, CORE Large Cap Growth and
CORE Small Cap Equity Funds) may also invest in European Depository Receipts
("EDRs") or other similar instruments representing securities of foreign issuers
(together, "Depository Receipts").
ADRs represent the right to receive securities of foreign issuers deposited
in a domestic bank or a correspondent bank. ADRs are traded on domestic
exchanges or in the U.S. over-the-counter market and, generally, are in
registered form. EDRs and GDRs are receipts evidencing an arrangement with a
non-U.S. bank similar to that for ADRs and are designed for use in the non-U.S.
securities markets. EDRs and GDRs are not necessarily quoted in the same
currency as the underlying security.
To the extent a Fund acquires Depository Receipts through banks which do
not have a contractual relationship with the foreign issuer of the security
underlying the Depository Receipts to issue and service such Depository Receipts
(unsponsored), there may be an increased possibility that the Fund would not
become aware of and be able to respond to corporate actions such as stock splits
or rights offerings involving the foreign issuer in a timely manner. In
addition, the lack of information may result in inefficiencies in the valuation
of such instruments.
Each Fund (except CORE U.S. Equity, CORE Large Cap Growth and CORE Small
Cap Equity 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, CORE Large Cap Growth and CORE Small
Cap Equity 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
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<PAGE>
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. CORE International Equity,
International Equity, International Small Cap, Asia Growth and Emerging Markets
Equity Funds are intended for long-term investors who can accept the risks
associated with investing primarily in equity and equity-related securities of
foreign issuers, including Emerging Countries issuers 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 Value, Mid Cap Equity, Capital Growth and
Real Estate Securities Funds may invest, to a lesser extent, in equity and
equity-related securities of foreign issuers, including Emerging Countries
issuers.
The pace of change in many Emerging Countries, and in particular those in
Asia, over the last 10 years has been rapid, marked by substantial economic
change combined with capital market development, high government expenditure,
increased consumer wealth and taxation policies favoring company expansion. 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
B-29
<PAGE>
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 a Fund. A Fund may be required to establish special
custodial or other arrangements before investing in certain emerging countries.
Each of the Emerging Countries may be subject to a greater degree of
economic, political and social instability than is the case in the United
States, Japan and most Western European countries. 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.
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
B-30
<PAGE>
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.
INVESTING IN JAPAN. The Japanese Equity Fund invests in the equity
securities of Japanese companies. Japan's economy, the second-largest in the
world, has grown substantially over the last three decades. The boom in Japan's
equity and property markets during the expansion of the late 1980's supported
high rates of investment and consumer spending on durable goods, but both of
these components of demand have now retreated sharply following the decline in
asset prices. Profits have fallen sharply, unemployment has reached a
historical high and consumer confidence is low. The banking sector continues to
suffer from non-performing loans and this economy is subject to deflationary
pressures. Numerous discount-rate cuts since its peak in 1991, a succession of
fiscal stimulus packages, support plans for the debt-burdened financial system
and spending for reconstruction following the Kobe earthquake may help to
contain the recessionary forces, but substantial uncertainties remain.
In addition to the cyclical downturn, Japan is suffering through structural
adjustments. Like the Europeans, the Japanese have seen a deterioration of
their competitiveness due to high wages, a strong currency and structural
rigidities. Finally, Japan is reforming its political process and deregulating
its economy. This has brought about turmoil, uncertainty and a crisis of
confidence.
While the Japanese governmental system itself seems stable, the dynamics of
the country's politics have been unpredictable in recent years. The economic
crisis of 1990-92 brought the downfall of the conservative Liberal Democratic
Party, which had ruled since 1955. Since then, the country has seen a series of
unstable multi-party coalitions and several prime ministers come and go, because
of politics as well as personal scandals. While there appears to be no reason
for anticipating civic unrest, it is impossible to know when the political
instability will end and what trade and fiscal policies might be pursued by the
government that emerges.
Japan's heavy dependence on international trade has been adversely affected
by trade tariffs and other protectionist measures as well as the economic
condition of its trading partners. While Japan subsidizes its agricultural
industry, only 19% of its land is suitable for cultivation and it is only 50%
self-sufficient in food production. Accordingly, it is highly dependent on
large imports of wheat, sorghum and soybeans. In addition, industry, its most
important economic sector, depends on imported raw materials and fuels,
including iron ore, copper, oil and many forest products. Japan's high volume
of exports, such as automobiles, machine tools and semiconductors, have caused
trade tensions, particularly with the United States. Some trade agreements,
however, have been implemented to reduce these tensions. The relaxing of
official and de facto barriers to imports, or hardships created by any pressures
brought by trading partners, could adversely affect Japan's economy. A
substantial rise in world oil or commodity prices could also have a negative
affect. The strength of the yen itself may prove an impediment to strong
continued exports and economic recovery, because it makes Japanese goods sold in
other countries more expensive and
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reduces the value of foreign earnings repatriated to Japan. Because the
Japanese economy is so dependent on exports, any fall-off in exports may be seen
as a sign of economic weakness, which may adversely affect the market.
Geologically, Japan is located in a volatile area of the world, and has
historically been vulnerable to earthquakes, volcanoes and other natural
disasters. As demonstrated by the Kobe earthquake in January of 1995, in which
5,000 people were killed and billions of dollars of damage was sustained, these
natural disasters can be significant enough to affect the country's economy.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Growth and Income, Mid Cap
Equity, Capital Growth, Small Cap Value and Real Estate Securities Funds may
enter into forward foreign currency exchange contracts for hedging purposes.
Balanced, CORE International Equity, International Equity, Japanese Equity,
International Small Cap, 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 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 often, but
not always, effected with the currency trader who is a party to the original
forward contract.
A Fund may enter into forward foreign currency exchange contracts in
several circumstances. First, when a Fund enters into a contract for the
purchase or sale of a security denominated or quoted in a foreign currency, or
when 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.
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
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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, CORE International Equity, International Equity, Japanese Equity,
International Small Cap, 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, CORE International Equity,
International Equity, Japanese Equity, International Small Cap, 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.
Balanced, CORE International Equity, International Equity, Japanese Equity,
International Small Cap, Emerging Markets Equity and Asia Growth Funds may also
enter into forward contracts to seek to increase total return. Unless otherwise
covered in accordance with applicable regulations, cash or liquid assets of a
Fund will be segregated in an amount equal to the value of the Fund's total
assets committed to the consummation of forward foreign currency exchange
contracts. If the value of the segregated assets declines, additional cash or
liquid assets will be segregated on a daily basis so that the value of the
assets will equal the amount of a Fund's commitments with respect to such
contracts. The segregated assets 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 may enter into forward contracts to reduce currency exchange
rate risks, transactions in such contracts involve certain other risks. Thus,
while the Fund may benefit from such transactions, unanticipated changes in
currency prices may result in a poorer overall performance for the Fund than if
it had not engaged in any such transactions. Moreover, there may be imperfect
correlation between a Fund's portfolio holdings of securities quoted or
denominated in a particular currency and forward contracts entered into by such
Fund. Such imperfect correlation may cause a Fund to sustain losses which will
prevent the Fund from achieving a complete hedge or expose the Fund to risk of
foreign exchange loss.
Markets for trading foreign forward currency contracts offer less
protection against defaults than is available when trading in currency
instruments on an exchange. 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.
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WRITING AND PURCHASING CURRENCY CALL AND PUT OPTIONS. Each Fund (except
CORE U.S. Equity, CORE Large Cap Growth and CORE Small Cap Equity 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 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, CORE International Equity, International Equity, Japanese Equity,
International Small Cap, 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, CORE
International Equity, International Equity, Japanese Equity, International Small
Cap, Emerging Markets Equity and Asia Growth Funds may purchase call or put
options on currency to seek to increase total return when the Adviser
anticipates that the currency will appreciate or depreciate in value, but the
securities quoted or denominated in that currency do not present attractive
investment opportunities and are not included in the Fund's portfolio.
A call option written by a Fund obligates a Fund to sell specified currency
to the holder of the option at a specified price if the option is exercised 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.
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<PAGE>
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, CORE International Equity, International Equity, Japanese Equity,
International Small Cap, Emerging Markets Equity and Asia Growth Funds may use
options on currency to seek to increase total return. Balanced, CORE
International Equity, International Equity, Japanese Equity, International Small
Cap, 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, CORE International Equity,
International Equity, Japanese Equity, International Small Cap, 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, CORE International Equity, International Equity, Japanese
Equity, International Small Cap, 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, CORE International Equity, International Equity, Japanese Equity,
International Small Cap, 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, CORE International
Equity, International Equity, Japanese Equity, International Small Cap, 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, CORE
International Equity, International Equity, Japanese Equity, International Small
Cap, 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
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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, CORE International Equity, International Equity, Japanese
Equity, International Small Cap, 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 and Real Estate Securities Funds may, with respect to 5% of its net
assets, enter 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
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<PAGE>
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
segregated in 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 Advisers, under the supervision
of the Board of Trustees, are responsible for determining and monitoring the
liquidity of the Funds' transactions in swaps, caps, floors and collars.
EQUITY SWAPS
- ------------
Each Fund may enter into equity swap contracts to invest in a market
without owning or taking physical custody of securities in circumstances in
which direct investment is restricted for legal reasons or is otherwise
impracticable. The counterparty to an equity swap contract will typically be a
bank, investment banking firm or broker/dealer. The counterparty will generally
agree to pay the Fund the amount, if any, by which the notional amount of the
equity swap contract would have increased in value had it been invested in the
particular stocks, plus the dividends that would have been received on those
stocks. The Fund will agree to pay to the counterparty a floating rate of
interest on the notional amount of the equity swap contract plus the amount, if
any, by which that notional amount would have decreased in value had it been
invested in such stocks. Therefore, the return to the Fund on any equity swap
contract should be the gain or loss on the notional amount plus dividends on the
stocks less the interest paid by the Fund on the notional
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amount.
A Fund will enter into equity swaps only on a net basis, which means that
the two payment streams are netted out, with the Fund receiving or paying, as
the case may be, only the net amount of the two payments. Payments may be made
at the conclusion of an equity swap contract or periodically during its term.
Equity swaps do not involve the delivery of securities or other underlying
assets. Accordingly, the risk of loss with respect to equity swaps is limited
to the net amount of payments that a Fund is contractually obligated to make.
If the other party to an equity swap defaults, a Fund's risk of loss consists of
the net amount of payments that such Fund is contractually entitled to receive,
if any. The net amount of the excess, if any, of a Fund's obligations over its
entitlements with respect to each equity swap will be accrued on a daily basis
and an amount of cash or liquid assets, having an aggregate net asset value at
least equal to such accrued excess will be maintained in a segregated account by
a Fund's custodian. Inasmuch as these transactions are entered into for hedging
purposes or are offset by segregated cash or liquid assets, as permitted by
applicable law, the Funds and their Investment Advisers believe that
transactions do not constitute senior securities under the Act and, accordingly,
will not treat them as being subject to a Fund's borrowing restrictions.
The swap market has grown substantially in recent years with a large number
of banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. As a result, the swap market has
become relatively liquid in comparison with the markets for other similar
instruments which are traded in the over-the-counter market. The Investment
Advisers, under the supervision of the Board of Trustees, are responsible for
determining and monitoring the liquidity of the Funds' transactions in swaps,
caps, floors and collars.
The Funds will not enter into any swap transactions unless the unsecured
commercial paper, senior debt or claims-paying ability of the other party is
rated A or better by a nationally recognized statistical rating organization.
If there is a default by the other party to such a transaction, a Fund will have
contractual remedies pursuant to the agreements related to the transaction.
The use of equity swaps is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If the Investment Advisers are incorrect in
their forecasts of market values, the investment performance of a Fund would be
less favorable than it would have been if this investment technique were not
used.
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
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
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the collateral. A Fund would not have the right to vote any securities having
voting rights during the existence of the loan, but a Fund would call the loan
in anticipation of an important vote to be taken among holders of the securities
or the giving or withholding of their consent on a material matter affecting the
investment. As with other extensions of credit there are risks of delay in
recovering, or even loss of rights in, the collateral should the borrower of the
securities fail financially. However, the loans would be made only to firms
deemed by the Advisers to be of good standing, and when, in the judgment of the
Advisers, the consideration which can be earned currently from securities loans
of this type justifies the attendant risk. If the Advisers determine to make
securities loans, it is intended that the value of the securities loaned would
not exceed one-third of the value of the total assets of a Fund (including the
loan collateral).
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
- ----------------------------------------------
Each Fund may purchase securities on a when-issued basis or purchase or
sell securities on a forward commitment basis. These transactions involve a
commitment by a Fund to purchase or sell securities at a future date. The price
of the underlying securities (usually expressed in terms of yield) and the date
when the securities will be delivered and paid for (the settlement date) are
fixed at the time the transaction is negotiated. When-issued purchases and
forward commitment transactions are negotiated directly with the other party,
and such commitments are not traded on exchanges. A Fund will purchase
securities on a when-issued basis or purchase or sell securities on a forward
commitment basis only with the intention of completing the transaction and
actually purchasing or selling the securities. If deemed advisable as a matter
of investment strategy, however, a Fund may dispose of or negotiate a commitment
after entering into it. A Fund may realize a capital gain or loss in connection
with these transactions. For purposes of determining a Fund's duration, the
maturity of when-issued or forward commitment securities will be calculated from
the commitment date. A Fund is required to segregate until three days prior to
the settlement date, cash and liquid assets in an amount sufficient to meet the
purchase price. Alternatively, a Fund may enter into offsetting contracts for
the forward sale of other securities that it owns. Securities purchased or sold
on a when-issued or forward commitment basis involve a risk of loss if the value
of the security to be purchased declines prior to the settlement date or if the
value of the security to be sold increases prior to the settlement date.
INVESTMENT IN UNSEASONED COMPANIES
- ----------------------------------
Each Fund may invest up to 5% of its net assets, calculated at the time of
purchase, in companies (including predecessors) which have operated less than
three years, except that this limitation does not apply to debt securities which
have been rated investment grade or better by at least one 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 (including SPDRs) but may not acquire
more than 3% of the voting
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<PAGE>
securities of any other investment company. Pursuant to an exemptive order
obtained from the SEC, the Funds may invest in money market funds for which an
Adviser or any of its affiliates serves as investment adviser. A Fund will
indirectly bear its proportionate share of any management fees and other
expenses paid by investment companies in which it invests in addition to the
advisory and administration fees paid by the Fund. However, to the extent that
the Fund invests in a money market fund for which an Adviser or any of its
affiliates acts as adviser, the advisory and administration fees payable by the
Fund to an Adviser 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.
SPDRs are interests in a unit investment trust ("UIT") that may be obtained
from the UIT or purchased in the secondary market (SPDRs are listed on the
American Stock Exchange). The UIT will issue SPDRs in aggregations known as
"Creation Units" in exchange for a "Portfolio Deposit" consisting of (a) a
portfolio of securities substantially similar to the component securities
("Index Securities") of the Standard & Poor's 500 Composite Stock Price Index
(the "S&P Index"), (b) a cash payment equal to a pro rata portion of the
dividends accrued on the UIT's portfolio securities since the last dividend
payment by the UIT, net of expenses and liabilities, and (c) a cash payment or
credit ("Balancing Amount") designed to equalize the net asset value of the S&P
Index and the net asset value of a Portfolio Deposit.
SPDRs are not individually redeemable, except upon termination of the UIT.
To redeem, the Portfolio must accumulate enough SPDRs to reconstitute a Creation
Unit. The liquidity of small holdings of SPDRs, therefore, will depend upon the
existence of a secondary market. Upon redemption of a Creation Unit, the
Portfolio will receive Index Securities and cash identical to the Portfolio
Deposit required of an investor wishing to purchase a Creation Unit that day.
The price of SPDRs is derived from and based upon the securities held by
the UIT. Accordingly, the level of risk involved in the purchase or sale of a
SPDR is similar to the risk involved in the purchase or sale of traditional
common stock, with the exception that the pricing mechanism for SPDRs is based
on a basket of stocks. Disruptions in the markets for the securities underlying
SPDRs purchased or sold by the Funds could result in losses on SPDRs. Trading
in SPDRs involves risks similar to those risks, described under "Risk Associated
with Options Transactions," involved in the writing of options on securities.
Each Fund (other than CORE U.S. Equity, CORE Large Cap Growth and CORE
Small Cap Equity Funds) may also purchase shares of investment companies
investing primarily in foreign securities, including "country funds." Country
funds have portfolios consisting primarily of securities of issuers located in
one foreign country or region. Each Fund (other than the Real Estate Securities
Fund) may, subject to the limitations stated above, invest in World Equity
Benchmark Shares ("WEBS") and similar securities that invest in securities
included in foreign securities indices.
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
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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
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
B-41
<PAGE>
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 (other than the Goldman Sachs Real Estate
Securities Fund, which will invest at least 25% or more of its
total assets in the real estate 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 in transactions in mortgage dollar
rolls which are accounted for as financings.
(4) Make loans, except through (a) the purchase of debt obligations
in accordance with the Fund's investment objective and policies,
(b) repurchase agreements with banks, brokers, dealers and other
financial institutions, and (c) loans of securities as permitted
by applicable law.
(5) Underwrite securities issued by others, except to the extent that
the sale of portfolio securities by the Fund may be deemed to be
an underwriting.
(6) Purchase, hold or deal in real estate, although a Fund may
purchase and sell securities that are secured by real estate or
interests therein, securities of real estate investment trusts
and mortgage-related securities and may hold and sell real estate
acquired by a Fund as a result of the ownership of securities.
B-42
<PAGE>
(7) Invest in commodities or commodity contracts, except that the
Fund may invest in currency and financial instruments and
contracts that are commodities or commodity contracts.
(8) Issue senior securities to the extent such issuance would violate
applicable law.
Each Fund may, notwithstanding any other fundamental investment
restriction or policy, invest some or all of its assets in a single open-end
investment company or series thereof with substantially the same investment
objective, restrictions and policies as the Fund.
In addition to the fundamental policies mentioned above, the Trustees
have adopted the following non-fundamental policies which can be changed or
amended by action of the Trustees without approval of shareholders.
A Fund may not:
(a) Invest in companies for the purpose of exercising control or
management.
(b) Invest more than 15% of the Fund's net assets in illiquid
investments including repurchase agreements maturing in more than
seven days, securities which are not readily marketable and
restricted securities not eligible for resale pursuant to Rule
144A under the 1933 Act.
(c) Purchase additional securities if the Fund's borrowings
(excluding covered mortgage dollar rolls) exceed 5% of its net
assets.
(d) Make short sales of securities, except short sales against the
box.
B-43
<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, 56 Chairman Executive Vice President - Finance and
1325 Ave. of the Americas & Trustee Administration and Chief Financial
New York, NY 10019 Officer, Coty Inc. (since April 1996);
President, ABN Associates (June 1994
to March 1996); Senior Vice 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, 52 Trustee Managing Director, Goldman Sachs
One New York Plaza (since 1996); General Partner, Goldman
New York, NY 10004 Sachs (1986-1996); Co-Head of Goldman
Sachs Asset Management (since December
1994).
*Douglas C. Grip, 36 Trustee Vice President, Goldman Sachs (since
One New York Plaza & President May 1996); President, MFS Retirement
New York, NY 10004 Services Inc., of Massachusetts
Financial Services (prior thereto).
*John P. McNulty, 46 Trustee Managing Director, Goldman Sachs
One New York Plaza (since 1996); General Partner of
New York, NY 10004 Goldman Sachs (1990-1994 and
1995-1996); Co-Head of Goldman Sachs
Asset Management (since November
1996); Limited Partner of Goldman
Sachs (1994 to November 1995).
Mary P. McPherson, 63 Trustee Vice President and Senior Program
The Andrew W. Mellon Foundation Officer, The Andrew W. Mellon
140 East 62nd Street Foundation (since October 1997);
New York, NY 10021 President Emeritus of Bryn Mawr
College (1978-1997); Director of
</TABLE>
B-44
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- ----------------------
<S> <C> <C>
Josiah Macy, Jr. Foundation (since
1977); Director of the Philadelphi
Contributionship (since 1985);
Director of Amherst College (since
1986); Director of Dayton Hudson
Corporation (since 1988); Director of
the Spenser Foundation (since 1993);
and member of PNC Advisory Board
(since 1993).
*Alan A. Shuch, 49 Trustee Limited Partner, Goldman Sachs (since
One New York Plaza 1994); Director and Vice President of
New York, NY 10004 Goldman Sachs Funds Management, Inc.
(from April 1990 to November 1994);
President and Chief Operating Officer,
GSAM (from September 1988 to November
1994); Limited Partner, Goldman Sachs
since December 1994.
Jackson W. Smart, Jr. 68 Trustee Chairman, Executive Committee, First
One Northfield Plaza #218 Commonwealth, Inc. (a managed dental
Northfield, IL 60093 care company) (since January 1996);
Chairman and 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, 69 Trustee Vice Chairman and Chief Financial and
701 Morningside Drive Administrative Officer of Ameritech (a
Lake Forest, IL 60045 telecommunications holding company)
(February 1987 to June 1991);
Director, Walgreen Co. (a retail drug
store business); Director of Baker,
Fentress & Co. (a closed-end,
non-diversified management investment
company) (April 1992 to present).
</TABLE>
B-45
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- ----------------------
<S> <C> <C>
Richard P. Strubel, 59 Trustee Managing Director, Tandem Partners,
737 N. Michigan Ave., Suite 1405 Inc. (since 1990); Director of Kaynar
Chicago, IL 60611 Technologies Inc. (since March 1997);
President and Chief Executive Officer,
Microdot, Inc. (a diversified
manufacturer of fastening systems and
connectors) (January 1984 to October
1994).
*Nancy L. Mucker, 49 Vice President Vice President, Goldman Sachs (since
4900 Sears Tower April 1985); Manager of Shareholder
Chicago, IL 60606 Servicing of GSAM (since November
1989).
*John M. Perlowski, 34 Treasurer Vice President, Goldman Sachs (since
One New York Plaza July 1995); Director, Investors Bank
New York, NY 10004 and Trust (November 1993 to July
1995). Audit Manager of Arthur
Andersen LLP (prior thereto).
*James A. Fitzpatrick, 38 Vice President Vice President of Goldman Sachs Asset
4900 Sears Tower Management (since April 1997); Vice
Chicago, IL 60606 President and General Manager, First
Data Corporation - Investor Services
Group (prior thereto).
*Michael J. Richman, 38 Secretary General Counsel of the Funds Group of
85 Broad Street Goldman Sachs Asset Management (since
New York, NY 10004 December 1997); Associate General
Counsel of Goldman Sachs Asset
Management (February 1994 to December
1997); Vice President and Assistant
General Counsel of 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, 33 Assistant Assistant General Counsel, Goldman
85 Broad Street Secretary Sachs Asset Management and Associate
New York, NY 10004 General Counsel to the Funds Group
(since December 1997); Assistant
General Counsel and Vice President,
Goldman Sachs (since
</TABLE>
B-46
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- ----------------------
<S> <C> <C>
November 1993 and May 1994,
respectively); Counsel to
the Funds Group, Goldman Sachs Asset
Management (since November 1993);
Associate of Shereff, Friedman,
Hoffman & Goodman (prior thereto).
*Valerie A. Zondorak, 33 Assistant Assistant General Counsel, Goldman
85 Broad Street Secretary Sachs Asset Management and Associate
New York, NY 10004 General Counsel to the Funds Group
(since December 1997); Vice President
and Assistant General Counsel, Goldman
Sachs (since March 1997 and December
1997, respectively); Counsel to the
Funds Group, Goldman Sachs Asset
Management (since March 1997);
Associate of Shereff, Friedman,
Hoffman & Goodman (prior thereto).
*Steven E. Hartstein, 35 Assistant Legal Products Analyst, Goldman Sachs
85 Broad Street Secretary (June 1993 to present); Funds
New York, NY 10004 Compliance Officer, Citibank Global
Asset Management (August 1991 to June
1993).
*Deborah Farrell, 27 Assistant Administrative Assistant, Goldman
85 Broad Street Secretary Sachs (January 1996 to present);
New York, NY 10004 Secretary, Goldman Sachs (January 1994
to January 1996); Secretary, Cleary,
Gottlieb, Steen and Hamilton
(September 1990 to January 1994).
*Kaysie P. Uniacke, 37 Assistant Vice President and Senior Portfolio
One New York Plaza Secretary Manager, Goldman Sachs Asset
New York, NY 10004 Management (since 1988).
</TABLE>
B-47
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- ----------------------
<S> <C> <C>
*Elizabeth D. Anderson, 29 Assistant Portfolio Manager, GSAM (April 1996 to
One New York Plaza Secretary present); Junior Portfolio Manager,
New York, NY 10004 Goldman Sachs Asset Management (1995
to April 1996); Funds Trading
Assistant, GSAM (1993 - 1995);
Compliance Analyst, Prudential
Insurance (1991 - 1993).
</TABLE>
Each interested Trustee and officer holds comparable positions with certain
other companies of which Goldman Sachs, GSAM or an affiliate thereof is the
investment adviser, administrator and/or distributor. As of April 3, 1998, 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-48
<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, 1998:
<TABLE>
<CAPTION>
Pension or Retirement Benefits
Aggregate Accrued as Part of Funds' Total Compensation from Goldman
Compensation ------------------------ Sachs Mutual Funds (including the
Name of Trustee from the Funds Expenses Funds)*
- --------------- -------------- -------- ------
<S> <C> <C> <C>
Ashok N. Bakhru $93,750 $0 $93,750
David B. Ford 0 0 0
Douglas C. Grip 0 0 0
John P. McNulty 0 0 0
Mary P. McPherson 70,500 0 70,500
Alan A. Shuch 0 0 0
Jackson W. Smart 70,500 0 70,500
William H. Springer 70,500 0 70,500
Richard P. Strubel 70,500 0 70,500
</TABLE>
______________
* Includes compensation as Chairman of the Board of Trustees.
** The Goldman Sachs Funds consisted of 43 mutual funds on January 31, 1998.
B-49
<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, CORE Small Cap Equity, CORE
International Equity, Real Estate Securities, Mid Cap Equity and Small Cap Value
Funds. GSAMI, 133 Peterborough Court, London, England, EC4A 2BB serves as
investment adviser to International Equity, Japanese Equity, International Small
Cap, 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 have access to the substantial research and market expertise of
Goldman Sachs whose investment research effort is one of the largest in the
industry. The Goldman Sachs Global Investment Research Department covers
approximately 1,700 companies, including approximately 2,000 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
B-50
<PAGE>
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 CORE International
Equity, International Equity, International Small Cap, 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 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 Japanese Equity and International Small Cap 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, 1998. The CORE Small Cap Equity, CORE International
Equity and Real Estate Securities 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 July 22,
1997. 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 22, 1998. These arrangements were most recently approved by the
shareholders of each Fund (other than CORE Large Cap Growth, CORE Small Cap
Equity, CORE International Equity, Real Estate Securities, Japanese Equity,
International Small Cap and Emerging Markets Equity Funds) on April 21, 1997.
The sole shareholder of the CORE Large Cap Growth Fund approved these
arrangements on April 30, 1997. The sole shareholders of the CORE Small Cap
Equity and CORE International Equity Funds approved these arrangements on August
13, 1997. The sole shareholder of the Japanese Equity and the International
Small Cap Funds approved these arrangements on April 29, 1998. The sole
shareholder of the Emerging Markets Equity and Real Estate Securities Funds
approved these arrangements on December 8, 1997 and April 29, 1998,
respectively. Each management agreement will remain in effect until June 30,
1998 and from year to year thereafter provided such continuance is specifically
approved at least annually
B-51
<PAGE>
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:
<TABLE>
<CAPTION>
Management Management
With Fee Without Fee
Fund Limitations Limitations
- ---- ----------- -----------
<S> <C> <C>
GSAM
Balanced Fund 0.65% 0.65%
Growth and Income Fund 0.70% 0.70%
CORE Large Cap Growth Fund 0.60% 0.75%
CORE Small Cap Equity Fund 0.75% 0.85%
CORE International Equity Fund 0.75% 0.85%
Mid Cap Equity Fund 0.75% 0.75%
Small Cap Value Fund 1.00% 1.00%
Real Estate Securities Fund 1.00% 1.00%
GSFM
CORE U.S. Equity Fund 0.59% 0.75%
Capital Growth Fund 1.00% 1.00%
GSAMI
International Equity Fund 0.90% 1.00%
Japanese Equity Fund 0.90% 1.00%
International Small Cap Fund 1.10% 1.20%
Emerging Markets Equity Fund 1.10% 1.20%
Asia Growth Fund 0.86% 1.00%
</TABLE>
GSAM, GSFM and GSAMI may discontinue or modify the above limitations in
the future at their discretion.
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
B-52
<PAGE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
============= ============ ===========
With Without With Without With Without
Limitations Limitations Limitations Limitations Limitations Limitations
------------- ------------ ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balanced Fund $870,444 $870,844 $402,183 $402,183 $193,041 $193,041
Growth and Income Fund 7,740,380 7,740,380 3,541,318 3,541,318 2,225,553 2,225,553
CORE U.S. Equity Fund 3,087,383 3,924,639 1,667,381/3/ 2,119,552 817,563/2/ 1,019,639/2/
CORE Large Cap Growth Fund/1/ 182,628 228,283 N/A N/A N/A N/A
CORE Small Cap Equity Fund/1/ 65,418 74,140 N/A N/A N/A N/A
CORE International Equity Fund/1/ 51,031 57,835 N/A N/A N/A N/A
Capital Growth Fund 10,913,224 10,913,224 8,697,265 8,697,265 9,335,745 9,335,745
Mid Cap Equity Fund 1,653,946 1,653,946 964,945 964,945 489,043 489,043
International Equity Fund 6,772,826 7,525,362 4,124,076/3/ 4,638,203 2,794,872/2/ 2,794,872/2/
Small Cap Value Fund 3,206,411 3,206,411 2,130,703 2,130,703 2,908,839 2,908,839
Japanese Equity Fund4 N/A N/A N/A N/A N/A N/A
International Small Cap Fund4 N/A N/A N/A N/A N/A N/A
Emerging Market Equity Fund/1/ 31,937 34,840 N/A N/A N/A N/A
Asia Growth Fund 1,874,193 2,179,299 2,221,857/3/ 2,583,555 1,563,6412 1,563,6412
Real Estate Securities Fund4 N/A N/A N/A N/A N/A N/A
</TABLE>
- -----------------------------------
1 The CORE Large Cap Growth, CORE Small Cap Equity, CORE International Equity
and Emerging Markets Equity Funds commenced operations on May 1, 1997, August
15, 1997, August 15, 1997 and December 15, 1997, respectively.
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%,
0.90% 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%, 0.90% and 0.86%, respectively, of the
CORE U.S. Equity, International Equity and Asia Growth Fund's average daily
net assets.
4 Not Operational.
Under the Management Agreement, each Adviser also: (i) supervises all non-
advisory operations of each Fund that it advises; (ii) provides personnel to
perform such executive, administrative and clerical services as are reasonably
necessary to provide effective administration of each Fund; (iii) arranges for
at each Fund's expense (a) the preparation of all required tax returns, (b) the
preparation and submission of reports to existing shareholders, (c) the periodic
updating of prospectuses and statements of additional information and (d) the
preparation of reports to be filed with the SEC and other regulatory
authorities; (iv) maintains each Fund's records; and (v) provides office space
and all necessary office equipment and services.
B-53
<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
B-54
<PAGE>
possible that Goldman Sachs and its affiliates and such other accounts will
achieve investment results which are substantially more or less favorable than
the results achieved by a Fund. Moreover, it is possible that a Fund will
sustain losses during periods in which Goldman Sachs and its affiliates achieve
significant profits on their trading for proprietary or other accounts. The
opposite result is also possible.
The investment activities of Goldman Sachs and its affiliates for their
proprietary accounts and accounts under their management may also limit the
investment opportunities for the Fund in certain emerging markets in which
limitations are imposed upon the aggregate amount of investment, in the
aggregate or individual issuers, by affiliated foreign investors.
An investment policy committee which may include partners of Goldman Sachs
and its affiliates may develop general policies regarding a Fund's activities
but will not be involved in the day-to-day management of such Fund. In such
instances, those individuals may, as a result, obtain information regarding the
Fund's proposed investment activities which is not generally available to the
public. In addition, by virtue of their affiliation with Goldman Sachs, any
such member of an investment policy committee will have direct or indirect
interests in the activities of Goldman Sachs and its affiliates in securities
and investments similar to those in which the Fund invests.
In addition, certain principals and certain of the employees of the
Advisers are also principals or employees of Goldman Sachs or their affiliated
entities. As a result, the performance by these principals and employees of
their obligations to such other entities may be a consideration of which
investors in the Funds should be aware.
Each Adviser may enter into transactions and invest in currencies or
instruments on behalf of a Fund in which customers of Goldman Sachs serve as the
counterparty, principal or issuer. In such cases, such party's interests in the
transaction will be adverse to the interests of a Fund, and such party may have
no incentive to assure that the Funds obtain the best possible prices or terms
in connection with the transactions. Goldman Sachs and its affiliates may also
create, write or issue derivative instruments for customers of Goldman Sachs or
its affiliates, the underlying securities or instruments of which may be those
in which a Fund invests or which 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,
B-55
<PAGE>
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 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 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 and Class C Shares (and in certain cases,
Class A Shares), of such Fund shares. No Class B Shares were outstanding during
the fiscal year ended January 31, 1996. No Class C Shares were outstanding
during the fiscal years ended January 31, 1996 and 1997.
Goldman Sachs retained the following commissions on sales of Class A, Class
B and Class C Shares during the following periods:
<TABLE>
<CAPTION>
Class A & B Class A&B Class A
------------------ ------------------ ---------------------
1998 1997 1997
================== ================== =====================
<S> <C> <C> <C>
Balanced Fund $387,000 $94,000 $28,000
Growth and Income Fund 2,405,000 555,000 771,000
CORE U.S. Equity Fund 566,000 380,000 108,000
CORE Large Cap Growth Fund/1/ 129,000 N/A N/A
CORE Small Cap Equity Fund/1/ 49,000 N/A N/A
CORE International Equity Fund/1/ 24,000 N/A N/A
Capital Growth Fund 743,000 323,000 523,000
Mid Cap Equity Fund 704,000 N/A N/A
</TABLE>
B-56
<PAGE>
<TABLE>
<CAPTION>
Class A & B Class A&B Class A
------------------ ------------------ ---------------------
1998 1997 1997
================== ================== =====================
<S> <C> <C> <C>
International Equity Fund 1,091,000 1,563,000 211,000
Small Cap Value Fund 662,000 219,000 202,000
Japanese Equity Fund/2/ N/A N/A N/A
International Small Cap Fund/2/ N/A N/A N/A
Emerging Market Equity Fund/1/ 107,000 N/A N/A
Asia Growth Fund 414,000 1,397,000 507,000
Real Estate Securities Fund/2/ N/A N/A N/A
</TABLE>
______________________________
1 The CORE Large Cap Growth, CORE Small Cap Equity, CORE International Equity,
and Emerging Markets Equity Funds commenced operations on May 1, 1997, August
15, 1997, August 15, 1997, and December 15, 1997, respectively.
2 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. For the last three fiscal years the amounts paid
to Goldman Sachs by each Fund then in existence performed were as follows:
B-57
<PAGE>
<TABLE>
<CAPTION>
Class A, B & C Class A & B Class A
-------------- ------------- ---------------
1998 1997 1996
===== ==== ====
<S> <C> <C> <C>
Balanced Fund $240,869 $148,576 $72,067
Growth and Income Fund 1,545,495 870,527 542,671
CORE U.S. Equity Fund 483,534 319,246 103,682
CORE Large Cap Growth Fund/1/ 107,944 N/A N/A
CORE Small Cap Equity Fund/1/ 62,625 N/A N/A
CORE International Equity Fund/1/ 36,474 N/A N/A
Capital Growth Fund 992,678 908,310 549,844
MidCap Equity Fund 142,558 N/A N/A
International Equity Fund 860,719 586,243 129,313
Small Cap Value Fund 595,479 511,883 254,292
Japanese Equity Fund/2/ N/A N/A N/A
International Small Cap Fund/2/ N/A N/A N/A
Emerging Markets Equity Fund/1/ 1,907 N/A N/A
Asia Growth Fund 370,233 385,114 192,097
Real Estate Securities Fund/2/ N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
Institutional Shares Service Shares
--------------------------------------- -----------------------------
1998 1997 1996 1998 1997
============== ============ ============= ================ =============
<S> <C> <C> <C> <C> <C>
Balanced Fund/1/ $ N/A $ N/A $ N/A $ N/A $ N/A
Growth and Income Fund 2,593 15 N/A 5,033 488
CORE U.S. Equity Fund/3/ 0 N/A 11,571 0 N/A
CORE Large Cap Growth Fund/1/ 49 N/A N/A 21 N/A
CORE Small Cap Equity Fund/1/ 0 N/A N/A 0 N/A
CORE International Equity Fund/1/ 0 N/A N/A 0 N/A
Capital Growth Fund/1/ 683 N/A N/A 0 N/A
Mid Cap Equity Fund/1/ 74,315 51,464 26,082 1 N/A
International Equity Fund/3/ 0 N/A N/A 0 N/A
Small Cap Value Fund/1/ 2,674 N/A N/A 0 N/A
Japanese Equity Fund/2/ N/A N/A N/A N/A N/A
International Small Cap Fund/2/ N/A N/A N/A N/A N/A
Emerging Markets Equity Fund/1/ 617 N/A N/A 0 N/A
Asia Growth Fund/3/ 0 N/A N/A 0 N/A
Real Estate Securities Fund/2/ N/A N/A N/A N/A N/A
</TABLE>
___________________________
1 The CORE Large Cap Growth, CORE Small Cap Equity, CORE International Equity
and Emerging Markets Equity Funds commenced operations on May 1, 1997, August
15, 1997, August 15, 1997, and December 15, 1997, respectively.
2 Not Operational.
3 Contractually set to $0.
The Trust's distribution and transfer agency agreements each provide that
Goldman Sachs
B-58
<PAGE>
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.
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
and service 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 or service plans applicable to a
particular class and transfer agency fees, all Fund expenses are borne on a non-
class specific basis.
The Advisers voluntarily have agreed to reduce or limit certain "Other
Expenses" (excluding management, distribution and authorized dealer service
fees, taxes, interest and brokerage fees and litigation, indemnification and
other extraordinary expenses (and transfer agency fees in the case of each Fund
other than Balanced, CORE Large Cap Growth, CORE Small Cap Equity, CORE
International Equity and Mid Cap Equity Funds) for the following Funds to the
extent such expenses exceed the following percentage of average daily net
assets:
Other
Expenses
--------
Balanced Fund 0.10%
Growth and Income Fund 0.11%
CORE U.S. Equity Fund 0.06%
CORE Large Cap Growth Fund 0.05%
CORE Small Cap Equity Fund 0.20%
CORE International Equity Fund 0.25%
Mid Cap Equity Fund 0.10%
International Equity Fund 0.20%
Japanese Equity Fund 0.10%
International Small Cap Fund 0.30%
Emerging Markets Equity Fund 0.16%
Asia Growth Fund 0.24%
B-59
<PAGE>
Real Estate Securities Fund 0.18%
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:
1998 1997 1996
==== ==== ====
Balanced Fund $420,659 $319,552 $192,405
Growth and Income Fund 0 0 0
CORE U.S. Equity Fund 63,253 104,833 110,581
CORE Large Cap Growth Fund/1/ 332,713 N/A N/A
CORE Small Cap Equity Fund/1/ 202,498 N/A N/A
CORE International Equity Fund/1/ 206,055 N/A N/A
Capital Growth Fund 0 N/A N/A
Mid Cap Equity Fund 264,378 72,441 85,515
International Equity Fund 0 144,265 N/A
Small Cap Value Fund 0 N/A N/A
Japanese Equity Fund/2/ N/A N/A N/A
International Small Cap Fund/2/ N/A N/A N/A
Emerging Markets Equity Fund/1/ 112,725 N/A N/A
Asia Growth Fund 125,828 50,407 0
Real Estate Securities Fund/2/ N/A N/A N/A
________________________________
1 The CORE Large Cap Growth, CORE Small Cap Equity, CORE International Equity,
Emerging Markets Equity Funds commenced operations on May 1, 1997, August 15,
1997, August 15, 1997, and December 15, 1997, respectively.
2 Not operational.
CUSTODIAN AND SUB-CUSTODIANS
============================
State Street, 1776 Heritage Drive, North Quincy, Massachusetts 02171, is
the custodian of the Trust's portfolio securities and cash. State Street also
maintains the Trust's accounting records. State Street may appoint domestic and
foreign sub-custodians from time to time to hold certain securities purchased by
the Trust and to hold cash for the Trust.
B-60
<PAGE>
INDEPENDENT PUBLIC ACCOUNTANTS
==============================
Arthur Andersen LLP, independent public accountants, 225 Franklin Street,
Boston, Massachusetts 02110, have been selected as auditors of the Trust. In
addition to audit services, Arthur Andersen LLP, prepares the Trust's federal
and state tax returns, and provides consultation and assistance on accounting,
internal control and related matters.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Advisers are responsible for decisions to buy and sell securities 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 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
B-61
<PAGE>
and appropriate assistance to the Advisers in the performance of their decision-
making responsibilities. Such services are used by the Advisers in connection
with all of their investment activities, and some of such services obtained in
connection with the execution of transactions for a Fund may be used in managing
other investment accounts. Conversely, brokers furnishing such services may be
selected for the execution of transactions of such other accounts, whose
aggregate assets are far larger than those of a Fund, and the services furnished
by such brokers may be used by the Advisers in providing management services for
the Trust.
In circumstances where two or more broker-dealers offer comparable prices
and execution capability, preference may be given to a broker-dealer which has
sold shares of the Fund as well as shares of other investment companies or
accounts managed by the Advisers. This policy does not imply a commitment to
execute all portfolio transactions through all broker-dealers that sell shares
of the Fund.
On occasions when an Adviser deems the purchase or sale of a security to be
in the best interest of a Fund as well as its other customers (including any
other fund or other investment company or advisory account for which such
Adviser acts as investment adviser or subadviser), the Adviser, to the extent
permitted by applicable laws and regulations, may aggregate the securities to be
sold or purchased for the Fund with those to be sold or purchased for such other
customers in order to obtain the best net price and most favorable execution
under the circumstances. In such event, allocation of the securities so
purchased or sold, as well as the expenses incurred in the transaction, will be
made by the applicable Adviser in the manner it considers to be equitable and
consistent with its fiduciary obligations to such Fund and such other customers.
In some instances, this procedure may adversely affect the price and size of the
position obtainable for a Fund.
Commission rates in the U.S. are established pursuant to negotiations with
the broker based on the quality and quantity of execution services provided by
the broker in the light of 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-62
<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 Paid Research
==== ======= ==== ========
<S> <C> <C> <C> <C>
Fiscal Year Ended
January 31, 1998:
Balanced Fund $111,054 $13,185(12%)1 $2,731,475,157(1%)2 N/A
Growth and Income Fund 1,550,312 190,001(12%)1 9,046,102,538(3%)2 N/A
CORE U.S. Equity Fund 944,895 0 (0%)1 1,996,000,522(0%)2 N/A
CORE Large Cap Growth Fund 54,360 288 (1%)1 200,813,608(0%)2 N/A
CORE Small Cap Equity Fund 59,517 (0%)1 159,674,227(0%)2 N/A
CORE International Equity Fund 43,120 0 (0%)1 142,395,942(0%)2 N/A
Capital Growth Fund 514,890 37,947 (7%)1 2,748,868,081(5%)2 N/A
Mid Cap Equity Fund 480,808 76,398(15%)1 2,584,258,044(2%)2 N/A
International Equity Fund 506,607 0 (0%)1 3,898,716,988(0%)2 N/A
Small Cap Value Fund 646,533 82,143(13%)1 5,686,763,232(1%)2 N/A
Japanese Equity Fund/3/ N/A N/A N/A N/A
International Small Cap Fund/3/ N/A N/A N/A N/A
Emerging Markets Equity Fund 59,999 6,230(10%)1 236,915,108(1%)2 N/A
Asia Growth Fund 814,656 2,885 (0%)1 2,160,632,195(1%)2 N/A
Real Estate Securities Fund N/A N/A N/A N/A
</TABLE>
- ----------------------------
1 Percentage of total commissions paid.
2 Percentage of total amount of transactions involving the payment of
commissions effected through affiliated persons.
3 Not operational.
B-63
<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 Paid 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
CORE Small Cap Equity Fund/3/ N/A N/A N/A N/A
CORE International Equity 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 Value Fund 758,205 36,087(5%)1 16,439,842(1%)2 0
Japanese Equity Fund/3/ N/A N/A N/A N/A
International Small Cap Fund/3/ N/A N/A N/A N/A
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
Real Estate Securities Fund/3/ N/A N/A N/A N/A
</TABLE>
- ------------------
1 Percentage of total commissions paid.
2 Percentage of total amount of transactions involving the payment of
commissions effected through affiliated persons.
3 Not operational.
B-64
<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 Paid 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 $0
Growth and Income Fund 841,605 71,218(8%)1 425,040,430(9%)2 0
CORE U.S. Equity Fund 121,424 0(0%)1 148,427,497(0%)2 N/A
CORE Large Cap Growth Fund/3/ N/A N/A N/A N/A
CORE Small Cap Equity Fund/3/ N/A N/A N/A N/A
CORE International Equity Fund/3/ N/A N/A N/A N/A
Capital Growth Fund 1,979,949 284,660(14%)1 1,034,755,196(11%)2 0
Mid Cap Equity Fund 315,212 40,935(13%)1 142,547,552(11%)2 0
International Equity Fund 1,260,992 13,629(1%)1 359,700,166(1%)2 0
Small Cap Value Fund 690,234 72,980(11%)1 170,616,044(6%)2 0
Japanese Equity Fund/3/ N/A N/A N/A N/A
International Small Cap Fund/3/ N/A N/A N/A N/A
Emerging Markets Equity Fund/3/ N/A N/A N/A N/A
Asia Growth Fund 1,676,525 3,778(0%)1 247,662,049(2%)2 0
Real Estate Securities Fund/3/ N/A N/A N/A N/A
</TABLE>
- ----------------------------
1 Percentage of total commissions paid.
2 Percentage of total amount of transactions involving the payment of
commissions effected through affiliated persons.
3 Not operational.
B-65
<PAGE>
During the fiscal year ended January 31, 1998, the Trust acquired and sold
securities of its regular broker-dealers. As of January 31, 1998, the Trust
held the following amounts of securities of its regular broker/dealers, as
defined in Rule 10b-1 under the Act, or their parents ($ in thousands):
<TABLE>
<CAPTION>
Fund Broker/Dealer Amount
- ---- ------------- -------
<S> <C> <C>
Balanced Fund Bear Stearns $ 7,534
Lehman Brothers 5,954
Nomura Securities 5,901
Salomon Smith Barney 2,511
Morgan Stanley 425
Growth and Income Morgan Stanley 51,948
Fund Bear Stearns 32,164
Lehman Brothers 25,420
Nomura Securites 25,195
Salomon Smith Barney 10,721
Capital Growth Fund State Street 13,026
Bear Stearns 9,494
Lehman Brothers 7,504
Nomura Securities 7,437
Salomon Smith Barney 3,165
Small Cap Value Bear Stearns 12,074
Fund Lehman Brothers 9,543
Nomura Securities 9,458
Salomon Smith Barney 4,025
International State Street 24,412
Equity Fund
Asia Growth Fund State Street 4,920
Mid Cap Equity Fund Bear Stearns 10,870
Lehman Brothers 8,591
Nomura Securities 8,515
Salomon Smith Barney 3,623
Emerging Markets State Street 5,727
Equity Fund
CORE U.S. Equity Morgan Stanley 6,707
Fund Lehman Brothers 4,434
Merrill Lynch 2,878
Bear Stearns 1,823
</TABLE>
B-66
<PAGE>
<TABLE>
<CAPTION>
Fund Broker/Dealer Amount
- ---- ------------- ------
<S> <C> <C>
Nomura Securities 1,428
Salomon Smith Barney 608
CORE Large Cap Merrill Lynch 1,578
Growth Fund Morgan Stanley 1,080
Lehman Brothers 929
Bear Stearns 722
Nomura Securities 566
Lehman Brothers 358
Salomon Smith Barney 241
CORE International State Street 2,391
Fund
CORE Small Cap Fund Bear Stearns 275
Lehman Brothers 217
Nomura Securities 216
Salomon Smith Barney 92
</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 attributed 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 (which is normally, but not always, 3:00 p.m. Chicago time or
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 Securities Dealers Automated
Quotations System ("NASDAQ") will be valued at the last sale price on the
exchange or system in which they are principally traded, on the valuation date.
If there is no sale on the valuation day, securities traded will be valued at
the mean between the closing bid and asked prices, or if closing bid and asked
prices are not available, at the exchange
B-67
<PAGE>
defined close price on the exchange or system in which such securities are
principally traded. If the relevant exchange or system has not closed by the
above-mentioned time for determining the Funds net asset value, the securities
will be valued at the mean between the bid and asked prices at the time the net
asset value is determined; (b) over-the-counter securities not quoted on NASDAQ
will be valued at the last sale price on the valuation day or, if no sale
occurs, at the mean between the last bid and asked price; (c) equity securities
for which no prices are obtained under section (a) or (b) including those for
which a pricing service supplies no exchange quotation or a quotation that is
believed by the portfolio manager/trader to be inaccurate, will be valued at
their fair value in accordance with procedures approved by the Board of
Trustees; (d) fixed income securities with a remaining maturity of 60 days or
more for which accurate market quotations are readily available will be valued
according to dealer-supplied bid quotations or bid quotations from a recognized
pricing service (e.g., Merrill Lynch, J.J. Kenny, Muller Data Corp., Bloomberg,
EJV, Reuters or Standard & Poor's); (e) fixed income securities for which
accurate market quotations are not readily available are valued by the
Investment Advisers based on valuation models that take into account spread and
daily yield changes on government securities in the appropriate market (i.e.,
matrix pricing); (f) debt securities with a remaining maturity of 60 days or
less are valued by the Investment Adviser at amortized cost, which the Trustees
have determined to approximate fair value; and (g) all other instruments,
including those for which a pricing service supplies no exchange quotation or a
quotation that is believed by the portfolio manager/trader to be inaccurate,
will be valued at fair value in accordance with the valuation procedures
approved by the Board of Trustees.
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 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 may
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.
B-68
<PAGE>
PERFORMANCE INFORMATION
A Fund may from time to time quote or otherwise use total return, yield
and/or distribution rate information in advertisements, shareholder reports or
sales literature. Average annual total return and yield are computed pursuant
to formulas specified by the SEC.
Yield is computed by dividing net investment income earned during a recent
thirty-day period by the product of the average daily number of shares
outstanding and entitled to receive dividends during the period and the maximum
public offering price per share on the last day of the relevant period. The
results are compounded on a bond equivalent (semi-annual) basis and then
annualized. Net investment income per share is equal to the dividends and
interest earned during the period, reduced by accrued expenses for the period.
The calculation of net investment income for these purposes may differ from the
net investment income determined for accounting purposes.
The distribution rate for a specified period is calculated by annualizing
distributions of net investment income for such period and dividing this amount
by the net asset value per share or maximum public offering price on the last
day of the period.
Average annual total return for a specified period is derived by
calculating the actual dollar amount of the investment return on a $1,000
investment made at the maximum public offering price at the beginning of the
period, and then calculating the annual compounded rate of return which would
produce that amount, assuming a redemption at the end of the period. This
calculation assumes a complete redemption of the investment. It also assumes
that all dividends and distributions are reinvested at net asset value on the
reinvestment dates during the period.
Year-by-year total return and cumulative total return for a specified
period are each derived by calculating the percentage rate required to make a
$1,000 investment (made at the maximum public offering price with all
distributions reinvested) at the beginning of such period equal to the actual
total value of such investment at the end of such period. The table set forth
below 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 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
B-69
<PAGE>
Times, Financial World, Forbes, Fortune, Money, Personal Investor, Sylvia
Porter's Personal Finance and The Wall Street Journal. The Trust may also
advertise information which has been provided to the NASD for publication in
regional and local newspapers. In addition, the Trust may from time to time
advertise a Fund's performance relative to certain indices and benchmark
investments, including: (a) the Lipper Analytical Services, Inc. Mutual Fund
Performance Analysis, Fixed Income Analysis and Mutual Fund Indices (which
measure total return and average current yield for the mutual fund industry and
rank mutual fund performance); (b) the CDA Mutual Fund Report published by CDA
Investment Technologies, Inc. (which analyzes price, risk and various measures
of return for the mutual fund industry); (c) the Consumer Price Index published
by the U.S. Bureau of Labor Statistics (which measures changes in the price of
goods and services); (d) Stocks, Bonds, Bills and Inflation published by
Ibbotson Associates (which provides historical performance figures for stocks,
government securities and inflation); (e) the Salomon Brothers' World Bond Index
(which measures the total return in U.S. dollar terms of government bonds,
Eurobonds and foreign bonds of ten countries, with all such bonds having a
minimum maturity of five years); (f) the Lehman Brothers Aggregate Bond Index or
its component indices; (g) the Standard & Poor's Bond Indices (which measure
yield and price of corporate, municipal and U.S. Government bonds); (h) the
J.P. Morgan Global Government Bond Index; (i) other taxable investments
including certificates of deposit (CDs), money market deposit accounts (MMDAs),
checking accounts, savings accounts, money market mutual funds and repurchase
agreements; (j) Donoghues' Money Fund Report (which provides industry averages
for 7-day annualized and compounded yields of taxable, tax-free and U.S.
Government money funds); (k) the Hambrecht & Quist Growth Stock Index; (l) the
NASDAQ OTC Composite Prime Return; (m) the Russell Midcap Index; (n) the Russell
2000 Index - Total Return; (o) Russell 1000 Growth Index-Total Return; (p) the
Value-Line Composite-Price Return; (q) the Wilshire 4500 Index; (r) the FT-
Actuaries Europe and Pacific Index; (s) historical investment data supplied by
the research departments of Goldman Sachs, Lehman Brothers, First Boston
Corporation, Morgan Stanley including the EAFE Indices, 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; (w) information produced by Micropal, Inc.; and (x) The
Toykyo Price Index. The composition of the investments in such indices and the
characteristics of such benchmark investments are not identical to, and in some
cases are very different from, those of the Fund's portfolio. These indices and
averages are generally unmanaged and the items included in the calculations of
such indices and averages may not be identical to the formulas used by a Fund to
calculate its performance figures.
Information used in advertisements and materials furnished to present and
prospective investors may include statements or illustrations relating to the
appropriateness of certain types of securities and/or mutual funds to meet
specific financial goals. Such information may address:
. cost associated with aging parents;
. funding a college education (including its actual and estimated cost);
B-70
<PAGE>
. health care expenses (including actual and projected expenses);
. long-term disabilities (including the availability of, and coverage
provided by, disability insurance);
. retirement (including the availability of social security benefits,
the tax treatment of such benefits and statistics and other
information relating to maintaining a particular standard of living
and outliving existing assets);
. asset allocation strategies and the benefits of diversifying among
asset classes;
. the benefits of international and emerging market investments;
. the effects of inflation on investing and saving;
. the benefits of establishing and maintaining a regular pattern of
investing and the benefits of dollar-cost averaging; and
. measures of portfolio risk, including but not limited to, alpha, beta
and standard deviation.
The Trust may from time to time use comparisons, graphs or charts in
advertisements to depict the following types of information:
. the performance of various types of securities (common stocks, small
company stocks, 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.
B-71
<PAGE>
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 Fund's 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 (based on
Class A expenses) and the Class A performance for any periods prior to
commencement of operations of a class of shares.
The Service Shares of the Balanced, Capital Growth, Small Cap Value,
Growth and Income, CORE U.S. Equity, CORE Large Cap Growth and International
Equity Funds commenced operations on August 15, 1997, August 15, 1997, August
15, 1997, March 16, 1996, June 7, 1996, May 1, 1997 and March 6, 1996,
respectively. The Service Shares of these Funds had no operating or performance
history prior thereto. However, in accordance with interpretive positions
expressed by the staff of the SEC, each of these Funds has adopted the
performance records of its respective Class A Shares from that class' inception
date (October 12, 1994, April 20, 1990, October 22, 1992, February 5, 1993, May
24, 1991, May 1, 1997 and December 1, 1992, respectively) to the inception dates
of Service Shares stated above. Quotations of performance data of these Funds
relating to this period include the adjusted performance record of the
applicable Class A Shares. The performance records of the applicable Class A
Shares reflect the expenses incurred by the Fund. These expenses include asset-
based charges (i.e., fees under Distribution and Authorized Dealer Service
Plans) imposed and other operating expenses. Total return quotations are
calculated pursuant to SEC-approved methodology.
B-72
<PAGE>
INTRODUCTION
VALUE OF $1,000 INVESTMENT
(AVERAGE ANNUAL TOTAL RETURN)
<TABLE>
<CAPTION>
Assuming no voluntary
waiver of fees and no
expense reimbursements
----------------------
Assumes maximum Assumes Assumes maximum Assumes
Applicable sales No sales Applicable sales No sales
Fund Class Time Period Charge** Charge Charge** Charge
- ---- ----- ----------- -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Balanced Fund A 10/12/94-1/31/98-Since inception 17.45% 19.48% 15.85% 17.85%
Balanced Fund A 2/1/97-1/31/98 - One year 11.10 17.54 10.48 16.90
Balanced Fund B 5/1/96-1/31/97 - Since inception 16.60 18.96 16.15 18.51
Balanced Fund B 2/1/97-1/31/98 - One year 11.30 16.71 10.95 16.36
Balanced Fund C 8/15/97-1/31/98 - Since inception* 1.47 2.49 1.33 2.35
Balanced Fund Institutional 8/15/97-1/31/98 - Since inception* N/A 2.93 N/A 2.68
Balanced Fund Service 10/12/94-1/31/98 - Since inception N/A 19.43 N/A 17.88
Balanced Funds Service 2/1/97-1/31/98 - One Year N/A 17.39 N/A 16.97
Growth and Income A 2/5/93-1/31/98 - Since inception 18.56 19.91 17.87 19.21
Growth and Income A 2/1/97-1/31/98 - One year 16.90 23.71 16.69 23.48
Growth and Income B 5/1/96-1/31/98 - Since inception 23.72 26.06 23.71 26.05
Growth and Income B 2/1/97-1/31/98 - One year 17.36 22.87 17.34 22.85
Growth and Income C 8/15/97-1/31/98 - Since inception* (0.50) 0.51 (0.56) 0.49
Growth and Income Institutional 6/3/96-1/31/98 - Since inception N/A 27.58 N/A 27.57
Growth and Income Institutional 2/1/97-1/31/98 - One year N/A 24.24 N/A 24.23
Growth and Income Service 2/5/93-1/31/98 - Since inception N/A 19.88 N/A 19.29
Growth and Income Service 2/1/97-1/31/98 - One year N/A 23.75 N/A 23.63
CORE U.S. Equity A 5/24/91-1/31/98 - Since inception 15.18 16.15 14.90 15.87
CORE U.S. Equity A 2/1/93-1/31/98 - Five year 18.20 19.54 17.94 19.28
CORE U.S. Equity A 2/1/97-1/31/98 - One year 18.07 24.96 17.85 24.72
CORE U.S. Equity B 5/1/96-1/31/98 - Since inception 22.49 24.71 22.31 24.53
CORE U.S. Equity B 2/1/97-1/31/98 - One year 18.81 24.28 18.61 24.08
CORE U.S. Equity C 8/15/97-1/31/98 - Since inception* 3.80 4.85 3.72 4.77
CORE U.S. Equity Institutional 6/15/95-1/31/98 - Since inception N/A 27.17 N/A 26.90
CORE U.S. Equity Institutional 2/1/97-1/31/98 - One year N/A 25.76 N/A 25.55
CORE U.S. Equity Service 5/24/91-1/31/98 - Since inception N/A 16.18 N/A 15.92
CORE U.S. Equity Service 2/1/93-1/31/98 - Five year N/A 19.59 N/A 19.32
CORE U.S. Equity Service 2/1/97-1/31/98 - One year N/A 25.11 N/A 25.03
CORE Large Cap Growth A 11/11/91-1/31/98 - Since inception 19.82 20.95 19.61 20.73
CORE Large Cap Growth A 2/1/93-1/31/98 - Five year 22.17 23.55 21.90 23.28
CORE Large Cap Growth A 2/1/97-1/31/98 - One year 19.70 26.57 18.39 25.19
CORE Large Cap Growth B 5/1/97-1/31/98 - Since inception* 18.09 19.20 23.26 22.15
</TABLE>
B-73
<PAGE>
<TABLE>
<CAPTION>
Assuming no voluntary
waiver of fees and no
expense reimbursements
----------------------
Assumes maximum Assumes Assumes maximum Assumes
Applicable sales No sales Applicable sales No sales
Fund Class Time Period Charge** Charge Charge** Charge
- ---- ----- ----------- -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
CORE Large Cap Growth C 8/15/97-1/31/98 - Since inception* 3.53% 4.56% 2.94% 3.97%
CORE Large Cap Growth Institutional 11/11/91-1/31/98 - Since inception N/A 20.96 N/A 20.78
CORE Large Cap Growth Institutional 2/1/93-1/31/98 - Five year N/A 23.57 N/A 23.34
CORE Large Cap Growth Institutional 2/1/97-1/31/98 - One year N/A 26.67 N/A 25.48
CORE Large Cap Growth Service 11/11/91-1/31/98 - Since inception N/A 20.91 N/A 20.73
CORE Large Cap Growth Service 2/1/93-1/31/98 Five year N/A 23.51 N/A 23.28
CORE Large Cap Growth Service 2/1/97-1/31/98 One year N/A 26.34 N/A 25.18
CORE Small Cap Equity A 8/15/97-1/31/98 - Since inception* 0.54 6.37 (0.70) 5.07
CORE Small Cap Equity B 8/15/97-1/31/98 - Since inception* 1.05 6.07 (0.03) 4.99
CORE Small Cap Equity C 8/15/97-1/31/98 - Since inception* 5.16 6.17 3.88 4.89
CORE Small Cap Equity Institutional 8/15/97-1/31/98 - Since inception* N/A 6.57 N/A 5.38
CORE Small Cap Equity Service 8/15/97-1/31/98 - Since inception* N/A 6.47 N/A 5.19
CORE International Equity A 8/15/97-1/31/98 - Since inception* (12.72) (7.66) (14.10) (9.11)
CORE International Equity B 8/15/97-1/31/98 - Since inception* (12.51) (7.90) (13.86) (9.25)
CORE International Equity C 8/15/97-1/31/98 - Since inception* (8.72) (7.80) (10.07) (9.15)
CORE International Equity Institutional 8/15/97-1/31/98 - Since inception* N/A (7.45) N/A (8.81)
CORE International Equity Service 8/15/97-1/31/98 - Since inception* N/A (7.70) N/A (9.12)
Capital Growth A 4/20/90-1/31/98 - Since inception 17.30 18.15 16.97 17.82
Capital Growth A 2/1/93-1/31/98 - Five year 17.63 18.97 17.38 18.71
Capital Growth A 2/1/97-1/31/98 - One year 22.61 29.71 22.31 29.40
Capital Growth B 5/1/96-1/31/98 - Since inception 25.22 27.73 25.21 27.72
Capital Growth B 2/1/97-1/31/98 - One year 22.86 28.73 22.84 28.71
Capital Growth C 8/15/97-1/31/98 - Since inception* 9.74 8.83 7.73 8.82
Capital Growth Institutional 8/15/97-1/31/98 - Since inception* N/A 9.31 N/A 9.28
Capital Growth Service 4/20/90-1/31/98 - Since inception N/A 18.16 N/A 17.85
Capital Growth Service 2/1/93-1/31/98 - Five year N/A 18.97 N/A 18.72
Capital Growth Service 2/1/97-1/31/98 - One year N/A 29.73 N/A 29.68
Mid Cap Equity A 8/15/97-1/31/98 - Since inception* (2.29) 3.42 (2.34) 3.36
Mid Cap Equity B 8/15/97-1/31/98 - Since inception* (1.99) 3.17 (2.04) 3.12
</TABLE>
B-74
<PAGE>
<TABLE>
<CAPTION>
Assuming no voluntary
waiver of fees and no
expense reimbursements
----------------------
Assumes maximum Assumes Assumes maximum Assumes
Applicable sales No sales Applicable sales No sales
Fund Class Time Period Charge** Charge Charge** Charge
- ---- ----- ----------- -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Mid Cap Equity C 8/15/97-1/31/98 - Since inception* 2.24 3.27 2.19 3.22
Mid Cap Equity Institutional 8/1/95-1/31/98 - Since inception N/A 25.25 N/A 25.13
Mid Cap Equity Institutional 2/1/97-1/31/98 - One year N/A 30.86 N/A 30.71
Mid Cap Equity Service 7/18/97-1/31/98 - Since inception* N/A 6.30 N/A 6.22
International Equity A 12/1/92-1/31/98 - Since inception 9.94 11.15 9.70 10.91
International Equity A 2/1/93-1/31/98 - Five year 10.02 11.27 9.85 11.11
International Equity A 2/1/97-1/31/98 - One year 5.03 11.12 4.90 10.98
International Equity B 5/1/96-1/31/98 - Since inception 5.18 7.55 5.07 7.44
International Equity B 2/1/97-1/31/98 - One year 5.11 10.51 5.01 10.41
International Equity C 8/15/97-1/31/98 - Since inception* 6.86 (5.92) (6.93) (5.99)
International Equity Institutional 2/7/96-1/31/98 - Since inception N/A 12.27 N/A 12.13
International Equity Institutional 2/1/97-1/31/98 - One year N/A 11.82 N/A 11.71
International Equity Service 12/1/92-1/31/98 - Since inception N/A 11.19 N/A 11.02
International Equity Service 2/1/93-1/31/98 Five year N/A 11.32 N/A 11.17
International Equity Service 2/1/97-1/31/98 One year N/A 11.37 N/A 11.25
Small Cap Value A 10/22/92-1/31/98 - Since inception 14.65 15.89 14.33 15.56
Small Cap Value A 2/1/93-1/31/98 - Five year 11.80 13.07 11.58 12.85
Small Cap Value A 2/1/97-1/31/98 - One year 19.21 26.17 18.96 25.90
Small Cap Value B 5/1/96-1/31/98 - Since inception 14.79 17.15 14.82 17.18
Small Cap Value B 2/1/97-1/31/98 - One year 19.80 25.29 0.15 25.31
Small Cap Value C 8/15/97-1/31/98 - Since inception* 4.49 5.55 4.58 5.64
Small Cap Value Institutional 8/15/97-1/31/98 - Since inception* N/A 6.08 N/A 6.08
Small Cap Value Service 10/22/92-1/31/98 - Since inception N/A 15.89 N/A 15.66
Small Cap Value Service 2/1/93-1/31/98 - Five year N/A 13.07 N/A 12.89
Small Cap Value Service 2/1/97-1/31/98 - One year N/A 26.17 N/A 26.43
Asia Growth A 7/8/94-1/31/98 - Since inception (14.31) (12.94) (14.55) (13.19)
Asia Growth A 2/1/97-1/31/98 - One year (51.33) (48.49) (51.45) (48.62)
Asia Growth B 5/1/96-1/31/98 - Since inception (35.51) (34.00) (35.60) (34.09)
Asia Growth B 2/1/97-1/31/98 - One year (51.27) (48.70) (51.38) (48.81)
Asia Growth C 8/15/97-1/31/98 - Since inception* (47.70) (47.17) (47.75) (47.22)
Asia Growth Institutional 2/2/96-1/31/98 - Since inception N/A N/A N/A N/A
</TABLE>
B-75
<PAGE>
<TABLE>
<CAPTION>
Assuming no voluntary
waiver of fees and no
expense reimbursements
----------------------
Assumes maximum Assumes Assumes maximum Assumes
Applicable sales No sales Applicable sales No sales
Fund Class Time Period Charge** Charge Charge** Charge
- ---- ----- ----------- -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Asia Growth Institutional 2/1/97-1/31/98 - One year N/A N/A N/A N/A
Emerging Markets Equity A 12/15/97-1/31/98 - Since inception* (8.41) (3.10) (8.91) (3.62)
Emerging Markets Equity B 12/15/97-1/31/98 - Since inception* (7.95) (3.10) (8.47) (3.62)
Emerging Markets Equity C 12/15/97-1/31/98 - Since inception* (3.97) (3.00) (4.49) (3.52)
Emerging Markets Equity Institutional 12/15/97-1/31/98 - Since inception* N/A (3.00) N/A (3.51)
Emerging Markets Equity Service 12/15/97-1/31/98 - Since inception* N/A (3.10) N/A (3.62)
</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.
** Total return reflects a maximum initial sales charge of 5.5% for Class A
Shares, the assumed deferred sales charge for Class B Shares (5% maximum
declining to 0% after six years) and the assumed deferred sales charge for Class
C Shares (1% if redeemed within 12 months of purchase).
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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, except the CORE International Equity, CORE Small Cap Equity,
CORE Large Cap Growth, Japanese Equity, International Small Cap, Emerging
Markets Equity and Real Estate Securities 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 Funds into five classes:
Institutional Shares, Service Shares, Class A Shares, Class B Shares and Class C
Shares.
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Each Institutional Share, Service Share, Class A Share, Class B Share and
Class C 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, Class B or Class C Shares
and transfer agency fees may be borne at different rates by different share
classes. 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 shareholder services. With limited
exceptions, 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 under a Plan 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.
Class C Shares of the Funds are sold subject to a contingent deferred sales
charge of up to 1.0% 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 C 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 C Shares. Class C 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
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assets attributable to Class C Shares.
It is possible that an institution or its affiliate may offer different
classes of shares (i.e., Institutional, Service, Class A Shares, Class B Shares
and Class C 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 are freely transferable and have no preemptive,
subscription or conversion rights.
As of April 3, 1998 State Street Bank & Trust Company as Trustee (GS Profit
Sharing Master Trust), P.O. Box 1992, Boston, MA 02105, was recordholder of
13.2% and Marine Midland Bank as Trustee (Mark IV Ind & Subs Employees
Retirement Income Fund) P.O. Box 1329, Attention: Mutual Fund Processing,
Buffalo, NY 14240, was recordholder of 6.0% of CORE U.S. Equity Fund's
outstanding shares; Fluor Corporation, Master Retirement Trust, 3353 Michelson
Drive, Irvine, CA 92698, was recordholder of 17.0%, Goldman Sachs CORE Large Cap
Fund, Omnibus A/C - Growth and Income Strategy, 4900 Sears Tower, Chicago, IL
60606, was recordholder of 8.7% and Goldman Sachs CORE Large Cap Growth Fund,
Omnibus A/C - Growth Strategy, 4900 Sears Tower, Chicago, IL 60606, was
recordholder of 7.7% of CORE Large Cap Growth Fund; Goldman Sachs CORE Small
Cap, Omnibus A/C Growth Strategy, 4900 Sears Tower, Chicago, IL 60606, was
recordholder of 10.9%, The Goldman Sachs Group LP, Seed Account, Attn: Karen
Yost, 85 Broad Street, New York, NY 10004, was recordholder of 10.9% and Goldman
Sachs CORE Small Cap Equity Fund, Omnibus A/C Growth & Income Strategy, 4900
Sears Tower, Chicago, IL 60606, was recordholder of 9.7% of CORE Small Cap
Equity Fund's outstanding shares; Goldman Sachs CORE International Equity Fund,
Omnibus A/C Growth & Income Strategy, 4900 Sears Tower, Chicago, IL 60606, was
recordholder of 29.1%, Goldman Sachs CORE International Equity Fund, Omnibus A/C
- - Growth Strategy, 4900 Sears Tower, Chicago, IL 60606, was recordholder of
23.1%, The Goldman Sachs Group LP, Seed Account, Attn: Karen Yost, 85 Broad
Street, New York, NY 10004, was recordholder of 11.7%, Goldman Sachs CORE
International Equity Fund, Omnibus A/C Aggressive Growth Strategy, 4900 Sears
Tower, Chicago, IL 60606, was recordholder of 9.6% and Goldman Sachs CORE
International Equity Fund, Omnibus A/C Income Strategy, 4900 Sears Tower,
Chicago, IL 60606, was recordholder of 5.7% of CORE International Equity Fund's
outstanding shares; State Street Bank and Trust Company as Trustee, (GS Profit
Sharing Master Trust), was recordholder of 59.9% of Mid Cap Equity Fund's
outstanding shares; Ralph Lauren 1997 CRUT, C/O Arnold Cohen, 111 W. 40th
Street, New York, NY 10018, was recordholder of 11.1%, B.J. McCloskey, T.D.
McCloskey, W.R. Jordan, R.L. Branstein as Trustees, McCloskey Trust U/A/D
8/10/72, P.O. Box
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<PAGE>
7846, Aspen, CO 81612, was recordholder of 9.8%, GTE Investment Management
Corporation, Attn: Robert Nunt, One Stamford Forum, Stamford, CT 06904, was
recordholder of 7.2%, Goldman Sachs Emerging Markets Equity Fund, Omnibus A/C
Growth & Income Strategy, 4900 Sears Tower, Chicago, IL 60606, was recordholder
of 5.9% and Goldman Sachs Emerging Markets Equity Fund, Omnibus A/C Growth
Strategy, 4900 Sears Tower, Chicago, IL 60606, was recordholder of 5.8% of
Emerging Markets Equity Fund's outstanding shares; State Street Bank and Trust
Company as Trustee, FBO Goldman Sachs Employee Pension Plan, Attn: Jennifer
Consigli, 200 Newport Avenue, North Quincy, MA 02170, was recordholder of 6.4%
of Asia Growth 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, employees 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
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<PAGE>
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, series or its respective
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 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 adversely affect the voting rights
of shareholder, (ii) that is required by law to be approved by shareholders;
(iii) that would amend the provisions of the Declaration of Trust regarding
amendments and supplements thereto; 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
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<PAGE>
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.
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. Real Estate Securities, Japanese
Equity and International Small Cap Funds each intend 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
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options, futures, and forward contracts) derived with respect to its business of
investing in such stock, securities or currencies (the "90% gross income test");
and (b) such Fund diversify its holdings so that, at the close of each quarter
of its taxable year, (i) at least 50% of the market value of such Fund's total
(gross) assets is comprised of cash, cash items, U.S. Government securities,
securities of other regulated investment companies and other securities limited
in respect of any one issuer to an amount not greater in value than 5% of the
value of such Fund's total assets and to not more than 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of its
total (gross) assets is invested in the securities of any one issuer (other than
U.S. Government securities and securities of other regulated investment
companies) or two or more issuers controlled by the Fund and engaged in the
same, similar or related trades or businesses. For purposes of the 90% gross
income test, income that a Fund earns from equity interests in certain entities
that are not treated as corporations (e.g., partnerships or trusts) for U.S. tax
purposes will generally have the same character for such Fund as in the hands of
such an entity; consequently, a Fund may be required to limit its equity
investments in such entities that earn fee income, rental income, or other
nonqualifying income. In addition, future Treasury regulations could provide
that qualifying income under the 90% gross income test will not include gains
from foreign currency transactions that are not directly related to a Fund's
principal business of investing in stock or securities or options and futures
with respect to stock or securities. Using foreign currency positions or
entering into foreign currency options, futures and forward or swap contracts
for purposes other than hedging currency risk with respect to securities in a
Fund's portfolio or anticipated to be acquired may not qualify as "directly-
related" under these tests.
If a Fund complies with such provisions, then in any taxable year in which
such Fund distributes, in compliance with the Code's timing and other
requirements, at least 90% of its "investment company taxable income" (which
includes dividends, taxable interest, taxable accrued original issue discount
and market discount income, income from securities lending, any net short-term
capital gain in excess of net long-term capital loss, certain net realized
foreign exchange gains and any other taxable income other than "net capital
gain," as defined below, and is reduced by deductible expenses), and at least
90% of the excess of its gross tax-exempt interest income (if any) over certain
disallowed deductions, such Fund (but not its shareholders) will be relieved of
federal income tax on any income of the Fund, including long-term capital gains,
distributed to shareholders. However, if a Fund retains any investment company
taxable income or "net capital gain" (the excess of net long-term capital gain
over net short-term capital loss), it will be subject to a tax at regular
corporate rates on the amount retained. If the Fund retains any net capital
gain, the Fund may designate the retained amount as undistributed capital gains
in a notice to its shareholders who, if subject to U.S. federal income tax on
long-term capital gains, (i) will be required to include in income for federal
income tax purposes, as long-term capital gain, their 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
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investment income, capital or the proceeds of securities sales by foreign
investors such as the CORE International Equity, International Equity,
International Small Cap, 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 $10,408,000
and $14,137,000 at October 31, 1997 of capital loss carry forwards expiring in
2002, 2003, 2004 and 2005, 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.
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. Application of certain requirements for
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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, CORE Large Cap Growth and CORE
Small Cap Equity 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 CORE International
Equity, International Equity, Japanese Equity, International Small Cap, 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 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.
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If the CORE International Equity, International Equity, Japanese Equity,
International Small Cap, 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 CORE International
Equity, International Equity, Japanese Equity, International Small Cap, 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 CORE International Equity, International Equity,
Japanese Equity, International Small Cap, 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 CORE International Equity, International Equity, Japanese
Equity, International Small Cap, 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
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<PAGE>
these adverse tax consequences, but such elections would require the Fund to
include each year 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.
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 corporate shareholders. 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 CORE
International Equity, International Equity, Japanese Equity, International Small
Cap, 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. Such long-term
capital gain will be 20% rate gain. Distributions, if any, that are in excess
of a
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<PAGE>
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 below. In general, the maximum long-term capital gain rate will be
20% (for gains on capital assets held more than one year). 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
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<PAGE>
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 CORE International Equity,
International Equity, Japanese Equity, International Small Cap, 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 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
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<PAGE>
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 1998 Annual Report of each of the Funds (except
Real Estate Securities, Japanese Equity and International Small Cap Funds), are
incorporated herein by reference into this Additional Statement and attached
hereto. No other part of the Annual or any Semi-Annual Report is incorporated
by reference herein.
OTHER INFORMATION
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 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.
As stated in the Prospectuses, the Trust may authorize Service
Organizations and other institutions that provide recordkeeping, reporting and
processing services to their customers to accept on the Trust's behalf purchase,
redemption and exchange orders placed by or on behalf of their customers and, if
approved by the Trust, to designate other intermediaries to accept such orders.
These institutions may receive payments from the Trust or Goldman Sachs for
their services. In some, but not all, cases these payments will be pursuant to
an Authorized Dealer Plan or Service Plan described in the Prospectuses and the
following sections. Certain Service Organizations or institutions may enter
into sub-transfer agency agreements with the Trust or Goldman Sachs with respect
to their services.
The Adviser, Distributor and/or their affiliates may pay, out of their own
assets, compensation to Authorized Dealers for the sale and distribution of
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
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<PAGE>
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' Shares; and payments for the sale
of Shares and/or the maintenance of Share 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 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 Prospectuses and this Additional Statement do not contain all the
information included in the Registration Statement filed with the SEC under the
1933 Act with respect to the securities offered by the Prospectuses. Certain
portions of the Registration Statement have been omitted from the Prospectuses
and this Additional Statement pursuant to the rules and regulations of the SEC.
The Registration Statement including the exhibits filed therewith may be
examined at the office of the SEC in Washington, D.C.
Statements contained in the Prospectuses or in this Additional Statement as
to the contents of any contract or other document referred to are not
necessarily complete, and, in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement of which the Prospectuses and this Additional Statement form a part,
each such statement being qualified in all respects by such reference.
DISTRIBUTION AND AUTHORIZED DEALER SERVICE PLANS
(CLASS A SHARES, CLASS B SHARES AND CLASS C SHARES ONLY)
CLASS A DISTRIBUTION PLAN. As described in the Prospectus, the Trust with
respect to Class A Shares of each Fund has adopted a distribution plan (the
"Class A Plan") pursuant to Rule 12b-1
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<PAGE>
under the Act. See "Distribution and Authorized Dealer Service Plans" in the
Prospectus.
The Class A Plan for each Fund was most recently approved on April 22, 1998 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 Plan,
cast in person at a meeting called for the purpose of approving the Class A
Plan. The compensation payable under the Class A Plan 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
Value Funds and to limit the amount of such fee to the following percentages of
average daily net asset attributable to Class A Shares of the following Funds:
Asia Growth Fund - 0.21%; CORE Small Cap Equity Fund - 0.05%; International
Equity Fund - 0.24%; and Growth and Income Fund - 0.09%. Goldman Sachs may
modify or discontinue such waiver 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."
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<PAGE>
For the fiscal years ended January 31, 1998, January 31, 1997 and January 31,
1996 the amounts paid to Goldman Sachs pursuant to its Class A Plan by each Fund
then in existence were as follows:
1998 1997 1996
---- ---- ----
Balanced Fund $ 0 $ 0 $ 10,103
Growth and Income Fund 723,634 139,025 191,414
CORE U.S. Equity Fund 720,025 363,264 264,159
CORE Large Cap Growth Fund/1/ 0 N/A N/A
CORE Small Cap Equity Fund/1/ 1,380 N/A N/A
CORE International Equity Fund/1/ 2,751 N/A N/A
Capital Growth Fund 0 0 770,488
Mid Cap Equity Fund/1/ 67,478 N/A N/A
International Equity Fund 1,416,253 900,274 231,028
Small Cap Value Fund 0 0 272,353
Japanese Equity Fund/2/ N/A N/A N/A
International Small Cap Fund/2/ N/A N/A N/A
Emerging Markets Equity Fund/1/ 3,381 N/A N/A
Asia Growth Fund 431,390 526,448 114,156
Real Estate Securities Fund/2/ N/A N/A N/A
- --------------------------------
1 The Class A Share class of the Mid Cap Equity, CORE Large Cap Growth, CORE
Small Cap Equity, CORE International Equity and Emerging Markets Equity Funds
commenced operations on August 15, 1997, May 1, 1997, August 15, 1997, August
15, 1997 and December 15, 1997, respectively.
2 Not Operational.
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<PAGE>
Had Goldman Sachs' voluntary limitations not been in effect the Funds would have
paid Goldman Sachs the following fees during the fiscal years ended January 31,
1998, January 31, 1997 and January 31, 1996 pursuant to their respective Class A
Plans:
1998 1997 1996
---------- ---------- ----------
Balanced Fund $ 301,397 $ 153,392 $ 84,350
Growth and Income Fund 2,324,970 1,252,257 986,255
CORE U.S. Equity Fund 771,451 432,457 389,883
CORE Large Cap Growth Fund/1/ 61,924 N/A N/A
CORE Small Cap Equity Fund/1/ 6,898 N/A N/A
CORE International Equity Fund/1/ 2,751 N/A N/A
Capital Growth Fund 2,678,370 2,171,462 3,104,424
Mid Cap Equity Fund/1/ 67,478 N/A N/A
International Equity Fund 1,632,745 1,071,755 929,746
Small Cap Value Fund 727,298 529,684 999,563
Japanese Equity Fund/2/ N/A N/A N/A
International Small Cap Fund/2/ N/A N/A N/A
Emerging Markets Equity Fund/1/ 3,381 N/A N/A
Asia Growth Fund 513,560 626,724 505,066
Real Estate Securities Fund/2/ N/A N/A N/A
- ------------------------------------
1 The Class A Share class of the Mid Cap Equity, CORE Large Cap Growth, CORE
Small Cap Equity, CORE International Equity and Emerging Markets Equity Funds
commenced operations on August 15, 1997, May 1, 1997, August 15, 1997, August
15, 1997 and December 15, 1997, respectively.
2 Not Operational.
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<PAGE>
During the fiscal year ended January 31, 1998, Goldman Sachs incurred the
following expenses in connection with distribution under the Class A Plan of
each applicable Fund with Class A Shares 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, 1998:
Balanced Fund/1/ $ N/A $ N/A $ N/A $ N/A $ N/A
Growth and Income Fund/1/ 80,177 2,763,000 1,137,000 164,000 235,000
CORE U.S. Equity Fund 41,621 546,000 260,000 29,000 69,000
CORE Large Cap Growth Fund N/A N/A N/A N/A N/A
CORE Small Cap Equity Fund 534 338,000 138,000 19,000 33,000
CORE International Equity Fund 0 294,000 126,000 16,000 22,000
Capital Growth Fund/1/ N/A N/A N/A N/A N/A
Mid Cap Equity 10,090 539,000 154,000 32,000 44,000
International Equity Fund/1/ 240,271 537,000 236,000 32,000 50,000
Japanese Equity Fund/2/ N/A N/A N/A N/A N/A
International Small Cap/2/ N/A N/A N/A N/A N/A
Small Cap Value Fund/1/ N/A N/A N/A N/A N/A
Asia Growth Fund/1/ 112,925 281,000 114,000 17,000 31,000
Emerging Market Equity Fund N/A N/A N/A N/A N/A
Real Estate Securities 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 Plan 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 expenses have been incurred after this date
for these Funds, no expenses are reflected above.
/2/ Not Operational.
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<PAGE>
The Class A Plan is a compensation plan which provides for the payment of a
specified fee without regard to the expenses actually incurred by Goldman Sachs.
If such fee exceeds Goldman Sachs' expenses, Goldman Sachs may realize a profit
from these arrangements. If the Class A Plan was terminated by the Trustees and
no successor plans were adopted, each Fund would cease to make payments to
Goldman Sachs under the Class A Plan and Goldman Sachs would be unable to
recover the amount of any of its unreimbursed distribution expenditures.
Under the Class A Plan, 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, 1999 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 PLAN. As described in the Prospectus, the Trust has
adopted on behalf of the Funds distribution plans (the "Class B Plan") 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 Plan was most recently approved for each Fund on April 22, 1998, 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 Plan,
cast in person at a meeting called for the purpose of approving the Class B
Plan.
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 Plan
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.
During the fiscal years ended January 31, 1998, January 31, 1997 and January 31,
1996 Goldman Sachs was paid the following fees under the Class B Plan of each
applicable Fund with Class B shares then in existence:
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<PAGE>
1998 1997 1996
---------- ------- ----
Balanced Fund $ 74,569 $ 3,861 N/A
Growth and Income Fund 1,117,813 28,075 N/A
CORE U.S. Equity Fund 265,025 36,508 N/A
CORE Large Cap Growth Fund/1/ 34,332 N/A N/A
CORE Small Cap Equity Fund/1/ 20,064 N/A N/A
CORE International Equity Fund/1/ 5,700 N/A N/A
Capital Growth Fund 127,395 7,632 N/A
Mid Cap Equity Fund/1/ 47,585 N/A N/A
International Equity Fund 314,578 44,148 N/A
Small Cap Value Fund 160,608 8,973 N/A
Japanese Equity Fund/2/ N/A N/A N/A
International Small Cap Fund/2/ N/A N/A N/A
Emerging Markets Equity Fund/1/ 38 N/A N/A
Asia Growth Fund 28,550 10,229 N/A
Real Estate Securities Fund/2/ N/A N/A N/A
- ---------------------------------
1 Class B Shares of the Mid Cap Equity, CORE Large Cap Growth, CORE Small Cap
Equity, CORE International Equity and Emerging Markets Equity Funds commenced
operations on August 15, 1997, May 1, 1997, August 15, 1997, August 15, 1997
and December 15, 1997, respectively.
2 Not Operational.
The Class B Plan is a compensation plan which provides for the payment of a
specified distribution fee without regard to the distribution expenses actually
incurred by Goldman Sachs. If the Class B Plan was terminated by the Trustees
and no successor plan was 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 Plan, 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 Plan and the purposes for which such services
were performed and expenditures were made.
The Class B Plans will remain in effect until May 1, 1999 and from year to year
thereafter, provided such continuance is approved annually by a majority vote of
the Trustees, including a majority of the non-interested Trustees. The 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
Plan must also be approved by the Trustees in the manner described above. With
respect to any Fund, the Class B Plan may be terminated at any time
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<PAGE>
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 Plan is 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 Plan will
benefit each Fund and their respective Class B shareholders.
CLASS C DISTRIBUTION PLAN. As described in the Prospectus, the Trust has
adopted on behalf of the Funds distribution plans (the "Class C Plan") pursuant
to Rule 12b-1 under the Act with respect to the Class C Shares. See
"Distribution and Authorized Dealer Service Plans" in the Prospectus.
The Class C Plan was most recently approved for each Fund on April 22, 1998, on
behalf of the Trust 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 C Plan, cast in person at a meeting called for the purpose of
approving the Class C Plan.
With respect to each Fund, the compensation payable under the Class C Plan is
equal to 0.75% per annum of the average daily net assets attributable to Class C
Shares of that Fund. 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 C Shares.
No fees were paid to Goldman Sachs under the Class C Plans during the fiscal
year ended January 31, 1997.
B-98
<PAGE>
During the fiscal year ended January 31, 1998, Goldman Sachs was paid the
following fees under the Class C Plan of each applicable Fund with Class C
shares then in existence:
<TABLE>
<CAPTION>
1998
-------
<S> <C>
Balanced $13,290
Growth and Income 57,542
CORE U.S. Equity Fund 14,614
CORE Large Cap Growth Fund 6,880
CORE Small Cap Equity Fund 4,038
CORE International Equity Fund 3,118
Capital Growth Fund 9,607
Mid Cap Equity Fund 10,495
International Equity Fund 7,485
Small Cap Value Fund 12,158
Japanese Equity Fund/1/ N/A
International Small Cap Fund/1/ N/A
Emerging Markets Fund 28
Asia Growth Fund 2,854
Real Estate Securities Fund/1/ N/A
</TABLE>
- -------------------------
/1/ Not Operational
The Class C Plan is a compensation plan which provides for the payment of a
specified distribution fee without regard to the distribution expenses actually
incurred by Goldman Sachs. If the Class C Plan was terminated by the Trustees
and no successor plan was 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 C Plan, 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 C Plan and the purposes for which such services
were performed and expenditures were made.
The Class C Plan will remain in effect until May 1, 1999 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. The Class C 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 C Shares of that Fund. All material amendments of the Class C
Plan must also be approved by the Trustees in the manner described above. With
respect to any Fund, the Class C 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 C
Shares of that Fund. So long as the Class C Plan is in
B-99
<PAGE>
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 C Plan will benefit each Fund and their respective Class C shareholders.
AUTHORIZED DEALER SERVICE PLANS. As described in the Prospectus, each Fund's
Class A, Class B and Class C Shares have adopted a non-Rule 12b-1 Authorized
Dealer Service Plan (each an "Authorized Dealer Plan") pursuant to which Goldman
Sachs and Authorized Dealers are compensated for the provision of personal and
account maintenance services. Each Authorized Dealer 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
Authorized Dealer Plan, at a meeting held on April 22, 1998. Each Fund's
Authorized Dealer Plan provides for the compensation for personal and account
maintenance services at an annual rate of up to 0.25% of the Fund's average
daily net assets attributable to Class A, Class B or Class C Shares.
For the fiscal year ended January 31, 1998, January 31, 1997 and the period June
1, 1995 (commencement of each Authorized Dealer 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. For the fiscal year ended
January 31, 1998 and the period May 1, 1996 (commencement of each Class B
Authorized Dealer 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 period ended January 31, 1998,
Authorized Dealer Service fees were paid with respect to each Fund's Class C
Shares which were then in operation at the foregoing rate.
For the fiscal years and periods indicated above, the amounts paid to Goldman
Sachs pursuant to the Funds' Class A Authorized Dealer Service Plan, Class B
Authorized Dealer Service Plan and Class C Authorized Dealer Plan were:
<TABLE>
<CAPTION>
Class A Class B Class C
----------------------------- --------------- ------------
1998 1997 1996 1998 1997 1998
==== ==== ==== ==== ==== ====
<S> <C> <C> <C> <C> <C> <C>
Balanced Fund $ 301,397 $ 153,392 $ 64,145 $ 24,856 $ 1,294 $ 4,430
Growth and Income Fund 2,324,970 1,252,257 603,426 372,604 9,358 19,181
CORE U.S. Equity Fund 771,451 432,457 182,881 88,342 12,169 4,871
CORE Large Cap Growth Fund/1/ 61,924 N/A N/A 11,444 N/A 2,293
CORE Small Cap Equity Fund/1/ 6,898 N/A N/A 6,688 N/A 1,346
CORE International Equity Fund/1/ 2,748 N/A N/A 1,900 N/A 1,040
Capital Growth Fund 2,678,370 2,171,462 1,563,448 42,465 2,854 3,202
Mid Cap Equity Fund 67,485 N/A N/A 15,862 N/A 3,499
International Equity Fund 1,632,745 1,071,755 470,027 104,859 14,733 2,496
Small Cap Value Fund 727,298 569,684 458,857 53,536 2,992 4,052
Japanese Equity Fund/2/ N/A N/A N/A N/A N/A N/A
International Small Cap Fund/2/ N/A N/A N/A N/A N/A N/A
Emerging Market Equity Fund/1/ 3,424 N/A N/A 13 N/A 10
Asia Growth Fund 513,560 626,724 276,754 9,517 3,410 951
Real Estate Securities Fund/2/ N/A N/A N/A N/A N/A N/A
</TABLE>
___________________
/1/ The CORE Large Cap Growth, CORE Small Equity, CORE International Equity and
Emerging Markets Equity Funds commenced operations on May 1, 1997, August 15,
1997, August 15, 1997 and December 15, 1997, respectively.
B-100
<PAGE>
/2/ Not Operational
The Authorized Dealer Plans of each Fund will remain in effect until May 1,
1999, and from year to year thereafter, provided that the continuance of each
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 Authorized Dealer Plans. All material amendments of the
Authorized Dealer Plans must also be approved by the Trustees in the manner
described above. The Authorized Dealer Plans may be terminated at any time as
to any share class 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 share class. The Trustees have determined that in
their judgment there is a reasonable likelihood that the Authorized Dealer Plans
will benefit the Funds and their shareholders.
OTHER INFORMATION REGARDING MAXIMUM SALES CHARGE, PURCHASES, REDEMPTIONS,
EXCHANGES AND DIVIDENDS
(CLASS A SHARES, CLASS B SHARES AND CLASS C SHARES ONLY)
MAXIMUM SALES CHARGES
- ---------------------
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, 1998 and
$10.00 for the Real Estate Securities, Japanese Equity and International Small
Cap Funds, the maximum offering price of each Fund's Class A shares would be as
follows:
<TABLE>
<CAPTION>
Maximum Offering
Net Asset Sales Price to
Value Charge Public
----- ------ -------
<S> <C> <C> <C>
Balanced Fund $20.29 5.5% $21.47
Growth and Income Fund 25.93 5.5% 27.44
CORE U.S. Equity Fund 26.59 5.5% 28.14
CORE Large Cap Growth Fund 11.97 5.5% 12.67
CORE Small Cap Equity Fund 10.59 5.5% 11.21
CORE International Equity Fund 9.22 5.5% 9.76
Capital Growth Fund 18.48 5.5% 19.56
Mid Cap Equity Fund 21.61 5.5% 22.87
International Equity Fund 19.85 5.5% 21.01
Small Cap Value Fund 24.05 5.5% 25.45
Japanese Equity Fund N/A 5.5% N/A
International Small Cap Fund N/A 5.5% N/A
Emerging Market Equity Fund 9.69 5.5% 10.25
Asia Growth Fund 8.38 5.5% 8.87
Real Estate Securities Fund N/A 5.5% N/A
</TABLE>
The following information supplements the information in the Prospectus under
the captions "How to
B-101
<PAGE>
Invest," "How to Sell Shares of the Funds" and "Dividends." Please see the
Prospectus for more complete information.
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 $50,000). 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 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 Private Client Services
account. 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
B-102
<PAGE>
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 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 to exchange automatically a specified dollar amount
of shares of a Fund into an identical account of another Fund 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 Fund
and its shares and consider its investment objective, policies and applicable
fees and expenses before electing an automatic exchange into that Goldman Sachs
Fund.
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
B-103
<PAGE>
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, Class B or Class C 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, Class B or Class C Shares. The CDSC
applicable to Class A, Class B or Class C 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-104
<PAGE>
SERVICE PLAN
(SERVICE SHARES ONLY)
The Funds have 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.
The Funds have adopted the 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.
B-105
<PAGE>
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 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 Plan or the related Service Agreements, most recently voted
to approve the Plan and related Service Agreements at a meeting called for the
purpose of voting on such Plan and Service Agreements on April 22, 1998. The
Plan and related Service Agreements will remain in effect until May 1, 1999 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
Plan 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 Plan is in
effect, the selection and nomination of those Trustees who are not interested
persons will be committed to the discretion of the non-interested Trustees. The
Trustees have 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 Plan and related Service
Agreements, the Board will consider their continued appropriateness and the
level of compensation provided therein.
B-106
<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 sometime in the
future.
BAA: Bonds which are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as well.
BA: 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
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over
____________________________
* THE RATING SYSTEMS DESCRIBED HEREIN ARE BELIEVED TO BE THE MOST RECENT RATING
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 TIMES 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.
1-A
<PAGE>
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.
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 which
may be in default, 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
believes possess the strongest investment attributes are designated by the
symbols Aa1, A1, Baa1, Ba1 and B1.
Moody's also provides credit ratings for commercial paper. These are
promissory obligations (1) not having an original maturity in excess of one
year, unless explicitly noted.
Description of Ratings of State and Municipal
Commercial Paper
---------------------------------------------
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually senior debt obligations which have an original maturity in
excess of nine months. Moody's three highest commercial paper rating categories
are as follows:
PRIME 1: Issuers rated Prime-1 (or supporting institutions) have a
superior ability for
2-A
<PAGE>
repayment of senior short-term debt obligations. Prime-1 repayment ability
will often be evidenced by many of the following characteristics:
- Leading market positions in well established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance on
debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
- Well established access to a range of financial markets and assured
sources of alternate liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, may be
more subject to variation. Capitalized characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
PRIME-3: Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The
effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate liquidity is
maintained.
STANDARD & POOR'S RATINGS GROUP
AAA: Bonds and debt rated AAA have the highest rating assigned by
Standard & Poor's. Capacity to meet the financial commitment on the obligation
is extremely strong.
AA: Bonds and debt rated AA have a very strong capacity to meet the
financial commitment on the obligation and differ from the higher rated issues
only in small degree.
A: Bonds and debt rated A have a strong capacity to meet the
financial commitment on the obligation although they are somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions than bonds in higher rated categories.
BBB: Bonds and debt rated BBB are regarded as having an adequate
capacity to meet the financial commitment on the obligation. Whereas they
normally exhibit adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity of the
obligor.
3-A
<PAGE>
BB, B, CCC, CC, C: Bonds and debt rated BB, B, CCC, CC and C are
regarded as having significant speculative characteristics with respect to the
capacity to meet the financial commitment on the obligation. BB indicates the
least degree of speculation and C the highest. While such bonds will likely
have some quality and protective characteristics, these are outweighed by large
uncertainties of major risk exposures to adverse conditions.
BB: Bonds and debt rated BB have less vulnerability to nonpayment
than other speculative issues. However, such securities face major ongoing
uncertainties or exposure to adverse business, financial, or economic conditions
which could lead to the obligor's inadequate capacity to meet the financial
commitment on the obligation.
B: Bonds and debt rated B are more vulnerable to non-payment but the
obligor currently has the capacity to meet its financial commitment on the
obligation. Adverse business, financial or economic conditions will likely
impair capacity or willingness to meet its financial commitment on the
obligation.
CCC: Bonds and debt rated CCC are currently vulnerable to non-
payment, and are dependent upon favorable business, financial, and economic
conditions to meet their financial commitment on the obligation. In the event
of adverse business, financial, or economic conditions, such securities are not
likely to have the capacity to meet their financial commitment on the
obligation.
CC: The rating CC is typically applied to bonds and debt that
are currently highly vulnerable to non-payment.
C: The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but debt service
payments on this obligation are continued.
D: Bonds and debt rated D are in payment default. The D rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The D rating
also will be used upon the filing of a bankruptcy petition if debt service
payments are jeopardized.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified
by the addition of a plus or minus sign to show relative standing within the
major rating categories.
R: This rating is attached to highlight derivative, hybrid, and
certain other obligations that Standard & Poor's believes may experience high
volatility or high variability in expected returns due to non-credit risks.
Examples of such obligations are: securities whose principal or interest return
is indexed to equities, commodities, or currencies, certain swaps and options;
and interest-only and principal-only mortgage securities. The absence of an "r"
symbol should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.
4-A
<PAGE>
STANDARD & POOR'S RATINGS GROUP
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt having an original maturity of no more
than 365 days. Standard & Poor's commercial paper rating categories are as
follows:
A-1: Obligations are rated in the highest category indicating that
the obligor's capacity to meet its financial commitment is strong. Within this
category, certain obligations are designated with a plus sign (+). This
indicates that the obligor's capacity to meet its financial commitment on these
obligations is extremely strong.
A-2: Obligations are somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations rated "A-
1". However, the obligor's capacity to meet its financial commitment on the
obligation is satisfactory.
A-3: Obligations exhibit adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
B-: Obligations are regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
C-: Obligations are currently vulnerable to nonpayment and are
dependent on favorable business, financial, and economic conditions for the
obligor to meet its financial obligation.
D-: Obligations are in payment default. The "D" rating category is
used when payments on an obligation are not made on the date due, even if the
applicable grace period has not expired, unless Standard & Poor's believes such
payments will be made during such grace period. The "D" rating will also be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.
FITCH IBCA, INC.
Bond Ratings
- ------------
The ratings represent Fitch's assessment of the issuer's ability to
meet the obligations of a specific debt issue or class of debt. The ratings
take into consideration special features of the issue, its relationship to other
obligations of the issuer, the current financial condition and operative
performance of the issuer and of any guarantor, as well as the political and
economic environment that might affect the issuer's future financial strength
and credit quality.
AAA: Bonds rated AAA are considered to be investment grade and
of the highest credit quality.
5-A
<PAGE>
The obligor has an exceptionally strong capacity for timely payment of financial
commitments, which is unlikely to be adversely affected by reasonably
foreseeable events.
AA: Bonds rated AA are considered to be investment grade and of very
high credit quality. These ratings denote a very low expectation of investment
risk and indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
A: Bonds rated A are considered to be investment grade and of high
credit quality. These ratings denote a low expectation of investment risk and
indicate strong capacity of timely payment of financial commitments.
BBB: Bonds rated BBB are considered to be investment grade and of
good credit quality. These ratings denote that there is currently a low
expectation of investment risk. The capacity for timely payment of financial
commitments is adequate, but adverse circumstances and in economic conditions
are more likely to impair this category.
BB: Bonds are considered to be speculative. These ratings indicate
that there is a possibility of credit risk developing, particularly as the
result of adverse economic changes over time; however, business or financial
alternatives may be available to allow financial commitments to be met.
Securities rated in this category are not investment grade.
B: Bonds are considered highly speculative. These ratings indicate
that significant credit risk is present, but a limited margin of safety remains.
Financial commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.
CCC: Bonds have certain identifiable characteristics that, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC: Bonds are minimally protected. Default in payment of
interest and/or principal seems probable over time.
C: Bonds are in imminent default in payment of interest or
principal.
DDD, DD, AND D: Bonds are in default on interest and/or principal
payments. Such bonds are extremely speculative and should be valued on the
basis of their ultimate recovery value in liquidation or reorganization of the
obligor. DDD represents the highest potential for recovery on these bonds, and
D represents the lowest potential for recovery.
PLUS (+) AND MINUS (-) signs are used with a rating symbol to indicate
the relative position of a credit within the rating category. The Fitch IBCA
ratings from and including "AA" to "B" may be modified by the addition of a plus
or minus sign.
6-A
<PAGE>
Investment Grade Short-Term Ratings
- -----------------------------------
Fitch IBCA's short-term ratings apply to debt obligations that have
time horizons of less than 12 months for most obligations or up to three years
for U.S. public finance securities.
F 1: Highest Credit Quality. Issues assigned this rating reflect the strongest
capacity for timely payment of financial commitments; may have an added
"+" to denote any exceptionally strong credit feature.
F 2: Good Credit Quality. Issues assigned this rating have a satisfactory
capacity for timely payment of financial commitments, but the margin of
safety is not as great as for issues assigned F 1 ratings.
F 3: Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result
in a reduction to non-investment grade.
B: Securities possess speculative credit quality. This designation indicates
minimal capacity for timely payment of financial commitments, plus
vulnerability to near-term adverse changes in financial and economic
conditions.
C: Securities possess high default risk. This designation indicates that the
capacity for meeting financial commitments is solely reliant upon a
sustained, favorable business and economic environment.
D: Default. Issues assigned this rating are in actual or imminent payment
default.
LOC: The symbol LOC indicates that the rating is based on a letter of credit
issued by a commercial bank.
DUFF & PHELPS
-------------
Long Term Debt and Preferred Stock
- ----------------------------------
AAA: Highest credit quality. The risk factors are negligible, being
only slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong.
Risk is modest but may vary slightly from time to time because of economic
conditions. However, risk factors are more variable and greater in periods of
economic stress.
A+, A, A-: Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
7-A
<PAGE>
BBB+, BBB, BBB-: Below average protection factors but still
considered sufficient for prudent investment. Considerable variability in risk
during economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet
obligations when due. Present or prospective financial protection factors
fluctuate according to industry conditions or company fortunes. Overall quality
may move up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that
obligations will not be met when due. Financial protection factors will
fluctuate widely according to economic cycles, industry conditions and/or
company fortunes. Potential exists for frequent changes in the rating within
this category or into a higher or lower rating grade.
CCC: Well below investment grade securities. Considerable
uncertainty exists as to timely payment of principal, interest or preferred
dividends. Protection factors are narrow and risk can be substantial with
unfavorable economic/industry conditions, and/or with unfavorable company
developments.
D: Defaulted debt obligation.
Commercial Paper/Certificates of Deposits
- -----------------------------------------
D-1+: Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or ready access to alternative sources of
funds, is clearly outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
D-1: Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are
minor.
D-1-: High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very
small.
D-2: Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors
are small.
D-3: Satisfactory liquidity and other protection factors qualify issues as
investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
D-4: Speculative investment characteristics. Liquidity is not sufficient to
insure against disruption in debt service. Operating factors and market
access may be subject to a high degree of variation.
D-5: Issuer failed to meet scheduled principal and/or interest payments.
8-A
<PAGE>
NOTES: Bonds which are unrated may expose the investor to risks with respect to
capacity to pay interest or repay principal which are similar to the
risks of lower-rated bonds. The Fund is dependent on the Investment
Adviser's judgment, analysis and experience in the evaluation of such
bonds.
Investors should note that the assignment of a rating to a bond by a
rating service may not reflect the effect of recent developments on the
issuer's ability to make interest and principal payments.
Description of Ratings of State and Municipal Notes
---------------------------------------------------
MOODY'S INVESTORS SERVICE, INC.
Moody's ratings for state and municipal short-term obligations will
be designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. Symbols used will be as follows:
MIG-1/VMIG-1: This designation denotes best quality enjoying strong
protection by established cash flows, superior liquidity support or demonstrated
broad based access to the market for refinancing.
MIG-2/VMIG-2: This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
MIG-3/VMIG-3: This designation denotes favorable quality. All
security elements are accounted for but there is lacking the undeniable strength
of the preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.
MIG-4/VMIG-4: This designation denotes adequate quality carrying
specific risk but having protection commonly regarded as required of an
investment security and not distinctly or predominantly speculative.
SG: This designation denotes speculative quality. Debt instruments
in this category lack margins of protection.
STANDARD & POOR'S RATINGS GROUP
A Standard and Poor's note rating reflects the liquidity concerns and
market access risks unique to notes. Notes due in three years or less will
likely receive a note rating.
Note rating symbols are as follows:
9-A
<PAGE>
SP-1: Strong capacity to pay principal and interest. Those issues determined to
possess very strong characteristics will be given a plus (+) designation.
SP-2: Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term of
the notes.
SP-3: Speculative capacity to pay principal and interest.
10-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.
GOLDMAN, SACHS & CO.'S INVESTMENT BANKING
AND SECURITIES ACTIVITIES
Goldman, Sachs & Co. is a leading global investment banking and
securities firm with a number of distinguishing characteristics.
Privately owned and ranked among Wall Street's best capitalized firms,
with partners' capital of approximately $6.1 billion as of November 28, 1997.
With thirty-seven offices around the world, Goldman Sachs employs over
11,000
B-1
<PAGE>
professionals focused on opportunities in major markets.
The number one underwriter of all international equity issuers from
(1993-1996).
A research budget of $200 million for 1997.
Premier lead manager of negotiated municipal bond offerings over the
past six years (1990-1996).*
The number one lead manager of U.S. common stock offerings for the
past eight years (1989-1996).
The number one lead manager for initial public offerings (IPOs)
worldwide (1989-1996).
______________________________
* SOURCE: SECURITIES DATA CORPORATION. COMMON STOCK RANKING EXCLUDES REITS,
====================================
INVESTMENT TRUSTS AND RIGHTS.
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 & Co. public (longest-standing client
relationship)
Dow Jones Industrial Average tops 100
1925 Goldman Sachs finances Warner Brothers, producer of the first talking
film
1956 Goldman Sachs co-manages Ford's public offering, the largest to date
1970 London office opens
1972 Dow Jones Industrial Average breaks 1000
1986 Goldman Sachs takes Microsoft public
1991 Provides advisory services for the largest privatization in the region
of the sale of Telefonos de Mexico
1995 Dow Jones Industrial Average breaks 5000
1996 Goldman Sachs takes Deutsche Telecom public
Dow Jones Industrial Average breaks 6000
1997 Dow Jones Industrial Average breaks 7000
Goldman Sachs increases assets under management by 100% over 1996
3-B
