<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(SM) LARGE CAP VALUE FUND
GOLDMAN SACHS CORE(SM) U.S. EQUITY FUND
GOLDMAN SACHS CORE(SM) LARGE CAP GROWTH FUND
GOLDMAN SACHS CORE(SM) SMALL CAP EQUITY FUND
GOLDMAN SACHS CORE(SM) INTERNATIONAL EQUITY FUND
GOLDMAN SACHS CAPITAL GROWTH FUND
GOLDMAN SACHS STRATEGIC GROWTH FUND
GOLDMAN SACHS GROWTH OPPORTUNITIES FUND
GOLDMAN SACHS MID CAP VALUE FUND
GOLDMAN SACHS SMALL CAP VALUE FUND
GOLDMAN SACHS LARGE CAP VALUE FUND
GOLDMAN SACHS INTERNATIONAL EQUITY FUND
GOLDMAN SACHS EUROPEAN EQUITY FUND
GOLDMAN SACHS JAPANESE EQUITY FUND
GOLDMAN SACHS INTERNATIONAL GROWTH OPPORTUNITIES FUND
(formerly named International Small Cap Fund)
GOLDMAN SACHS EMERGING MARKETS EQUITY FUND
GOLDMAN SACHS ASIA GROWTH FUND
GOLDMAN SACHS RESEARCH SELECT 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 Large Cap Value 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 Strategic Growth Fund, Goldman
Sachs Growth Opportunities Fund, Goldman Sachs Mid Cap Value Fund, Goldman Sachs
Small
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Cap Value Fund, Goldman Sachs Large Cap Value Fund, Goldman Sachs International
Equity Fund, Goldman Sachs European Equity Fund, Goldman Sachs Japanese Equity
Fund, Goldman Sachs International Growth Opportunities Fund (formerly
International Small Cap Fund), Goldman Sachs Emerging Markets Equity Fund,
Goldman Sachs Asia Growth Fund and Goldman Sachs Research Select Fund dated
December 29, 2000 (the "Prospectuses"), which may be obtained without charge
from Goldman, Sachs & Co. by calling the telephone number, or writing to one of
the addresses, listed below.
The audited financial statements and related report of
PricewaterhouseCoopers LLP, independent public accountants, for each Fund
contained in each Fund's 2000 annual report is incorporated herein by reference
in the section "Financial Statements." No other portions of the Fund's Annual
Report are incorporated by reference.
CORESM is a service mark of Goldman, Sachs & Co.
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TABLE OF CONTENTS Page
----
INTRODUCTION.................................................................B-5
INVESTMENT POLICIES..........................................................B-6
INVESTMENT RESTRICTIONS.....................................................B-51
MANAGEMENT..................................................................B-53
PORTFOLIO TRANSACTIONS AND BROKERAGE........................................B-82
NET ASSET VALUE.............................................................B-92
PERFORMANCE INFORMATION.....................................................B-94
SHARES OF THE TRUST........................................................B-107
TAXATION...................................................................B-113
FINANCIAL STATEMENTS.......................................................B-121
OTHER INFORMATION..........................................................B-121
DISTRIBUTION AND SERVICE PLANS.............................................B-123
OTHER INFORMATION REGARDING MAXIMUM SALES CHARGE,
PURCHASES, REDEMPTIONS, EXCHANGES AND DIVIDENDS.......................B-133
SERVICE PLAN...............................................................B-137
Appendix A (Description of Securities Ratings)...............................1-A
Appendix B (Business Principles of Goldman, Sachs & Co.).....................1-B
Appendix C (Statement of Intention and Escrow Agreement).....................1-C
The date of this Additional Statement is December 29, 2000.
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GOLDMAN SACHS FUNDS MANAGEMENT, L.P.
Investment Adviser to:
Goldman Sachs CORE U.S. Equity Fund
Goldman Sachs Capital Growth Fund
32 Old Slip
New York, New York 10005
GOLDMAN SACHS ASSET MANAGEMENT
Investment Adviser to:
Goldman Sachs Balanced Fund
Goldman Sachs Growth and Income Fund
Goldman Sachs CORE Large Cap Value Fund
Goldman Sachs CORE Large Cap Growth Fund
Goldman Sachs CORE Small Cap Equity Fund
Goldman Sachs CORE International Equity Fund
Goldman Sachs Strategic Growth Fund
Goldman Sachs Growth Opportunities Fund
Goldman Sachs Mid Cap Value Fund
Goldman Sachs Small Cap Value Fund
Goldman Sachs Large Cap Value Fund
Goldman Sachs Research Select Fund
32 Old Slip
New York, New York 10005
GOLDMAN, SACHS & CO.
Distributor
85 Broad Street
New York, New York 10004
GOLDMAN, SACHS & CO.
Transfer Agent
4900 Sears Tower
Chicago, Illinois 60606
GOLDMAN SACHS ASSET
MANAGEMENT INTERNATIONAL
Investment Adviser to:
Goldman Sachs International Equity Fund
Goldman Sachs European Equity Fund
Goldman Sachs Japanese Equity Fund
Goldman Sachs International Growth
Opportunities Fund (formerly named
International Small Cap Fund)
Goldman Sachs Emerging Markets Equity
Fund
Goldman Sachs Asia Growth Fund
Procession House
55 Ludgate Hill
London, England EC4M7JW
Toll free (in U.S.) . . . 800-621-2550
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<PAGE>
INTRODUCTION
Goldman Sachs Trust (the "Trust") is an open-end, management investment
company. The Trust is organized as a Delaware business trust, and is a successor
to a Massachusetts business trust that was combined with the Trust on April 30,
1997. 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 Large Cap Value
Fund ("CORE Large Cap Value 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
Capital Growth Fund ("Capital Growth Fund"), Goldman Sachs Strategic Growth Fund
("Strategic Growth Fund"), Goldman Sachs Growth Opportunities Fund ("Growth
Opportunities Fund"), Goldman Sachs Mid Cap Value Fund ("Mid Cap Value Fund")
(formerly known as "Mid Cap Equity Fund"), Goldman Sachs Small Cap Value Fund
("Small Cap Value Fund"), Goldman Sachs Large Cap Value Fund ("Large Cap Value
Fund"), Goldman Sachs International Equity Fund ("International Equity Fund"),
Goldman Sachs European Equity Fund ("European Equity Fund"), Goldman Sachs
Japanese Equity Fund ("Japanese Equity Fund"), Goldman Sachs International
Growth Opportunities Fund ("International Growth Opportunities Fund") (formerly
known as "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 Research Select Fund ("Research Select Fund")
(collectively referred to herein as the "Funds").
The Funds, except the European Equity, Japanese Equity, International
Growth Opportunities, CORE Large Cap Value, CORE Large Cap Growth, CORE
International Equity, Strategic Growth Fund, Growth Opportunities, CORE Small
Cap Equity, Large Cap Value and Research Select 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 unit of the Investment
Management Division of Goldman, Sachs & Co. ("Goldman Sachs"), serves as the
Investment Adviser to the Balanced, Growth and Income, CORE Large Cap Value,
CORE Large Cap Growth, CORE Small Cap Equity, Strategic Growth, Growth
Opportunities, CORE International Equity, Mid Cap Value, Small Cap Value, Large
Cap Value and Research Select Funds. Goldman Sachs Funds Management, L.P.
("GSFM"), an affiliate of Goldman Sachs, serves as the Investment Adviser to the
CORE U.S. Equity and Capital Growth Funds. Goldman Sachs Asset Management
International ("GSAMI"), a unit of the Investment Management Division of Goldman
Sachs, serves
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as the Investment Adviser to the International Equity, European Equity, Japanese
Equity, International Growth Opportunities, Emerging Markets Equity and Asia
Growth Funds. GSAM, GSFM and GSAMI are sometimes individually referred to as an
"Investment Adviser" and collectively herein as the "Investment Advisers." In
addition, 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 Prospectuses. See the
Prospectuses for a more complete description of the Funds' investment objective
and policies. There is no assurance that a Fund will achieve its objective.
Capitalized terms used but not defined herein have the same meaning as in the
Prospectuses.
INVESTMENT POLICIES
Each Fund has a distinct investment objective and policies. There can be no
assurance that a Fund's objective will be achieved. Each Fund is a diversified
open-end management company as defined in the Investment Company Act of 1940, as
amended (the "Act"). The investment objective and policies of each Fund, and the
associated risks of each Fund, are discussed in the Funds' prospectuses, which
should be read carefully before an investment is made. Additional information
about the Funds, their policies, and the investment instruments they may hold,
is provided below.
Each Fund's share price will fluctuate with market, economic and, to the
extent applicable, foreign exchange conditions, so that an investment in any of
the Funds may be worth more or less when redeemed than when purchased. None of
the Funds should be relied upon as a complete investment program.
General Information Regarding The Funds.
----------------------------------------
The Investment Adviser may purchase for the Funds common stocks, preferred
stocks, interests in real estate investment trusts, convertible debt
obligations, convertible preferred stocks, equity interests in trusts,
partnerships, joint ventures, limited liability companies and similar
enterprises, warrants and stock purchase rights ("equity securities"). The
Investment Adviser utilizes first-hand fundamental research, including visiting
company facilities to assess operations and to meet decision-makers, in choosing
a Fund's securities. The Investment Adviser may also use macro analysis of
numerous economic and valuation variables to anticipate changes in company
earnings and the overall investment climate. The Investment Adviser is able to
draw on the research and market expertise of the Goldman Sachs Global Investment
Research Department and other affiliates of the Investment Adviser, as well as
information provided by other securities dealers. Equity securities in a Fund's
portfolio, except the Research Select Fund, 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. Under
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<PAGE>
normal circumstances, the Research Select Fund will sell securities that have
been removed from the U.S. Select List.
Value Style Funds. The Growth and Income Fund, Mid Cap Value Fund, Small
Cap Value Fund, Large Cap Value Fund and a portion of the equity portion of
Balanced Fund are managed using a value oriented approach. (The equity portion
of the Balanced Fund utilizes a blend of value and growth investment styles. See
"Growth Style Funds" below). The Investment Adviser evaluates securities using
fundamental analysis and intends to purchase equity securities that are, in its
view, underpriced relative to a combination of such companies' long-term
earnings prospects, growth rate, free cash flow and/or dividend-paying ability.
Consideration will be given to the business quality of the issuer. Factors
positively affecting the Investment Adviser's view of that quality include the
competitiveness and degree of regulation in the markets in which the company
operates, the existence of a management team with a record of success, the
position of the company in the markets in which it operates, the level of the
company's financial leverage and the sustainable return on capital invested in
the business. The Funds may also purchase securities of companies that have
experienced difficulties and that, in the opinion of the Investment Adviser, are
available at attractive prices.
Growth Style Funds. The Capital Growth, Strategic Growth and Growth
Opportunities Funds and a portion of the equity portion of the Balanced Fund are
managed using a growth equity oriented approach. Equity securities for these
Funds are selected based on their prospects for above average growth. The
Investment Adviser will select securities of growth companies trading, in the
Investment Adviser's opinion, at a reasonable price relative to other
industries, competitors and historical price/earnings multiples. The Funds will
generally invest in companies whose earnings are believed to be in a relatively
strong growth trend, or, to a lesser extent, in companies in which significant
further growth is not anticipated but whose market value per share is thought to
be undervalued. In order to determine whether a security has favorable growth
prospects, the Investment Adviser ordinarily looks for one or more of the
following characteristics in relation to the security's prevailing price:
prospects for above average sales and earnings growth per share; high return on
invested capital; free cash flow generation; sound balance sheet, financial and
accounting policies, and overall financial strength; strong competitive
advantages; effective research, product development, and marketing; pricing
flexibility; strength of management; and general operating characteristics that
will enable the company to compete successfully in its marketplace.
Quantitative Style Funds. CORE U.S. Equity, CORE Large Cap Growth, CORE
Large Cap Value, CORE Small Cap Equity and CORE International Equity Funds (the
"CORE Equity Funds") are managed using both quantitative and fundamental
techniques. CORE is an acronym for "Computer-Optimized, Research-Enhanced,"
which reflects the CORE Funds' investment process. This investment process and
the proprietary multifactor model used to implement it are discussed below.
Investment Process. The Investment Adviser begins with a broad universe of
U.S. equity securities for CORE Large Cap Value, CORE U.S. Equity, CORE Large
Cap Growth, CORE
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<PAGE>
Small Cap Equity Funds (the "CORE U.S. Equity Funds"), and a broad universe of
foreign equity securities for CORE International Equity Fund. As described more
fully below, the Investment Adviser uses a proprietary multifactor model (the
"Multifactor Model") to forecast the returns of different markets, currencies
and individual securities. In the case of an equity security followed by the
Goldman Sachs Global Investment Research Department (the "Research Department"),
a rating is assigned based upon the Research Department's evaluation. In the
discretion of the Investment Adviser, ratings may also be assigned to equity
securities based on research ratings obtained from other industry sources.
In building a diversified portfolio for each CORE Equity Fund, the
Investment Adviser utilizes optimization techniques to seek to construct the
most efficient risk/return portfolio given each CORE Fund's benchmark. Each
portfolio is primarily composed of securities rated highest by the foregoing
investment process and has risk characteristics and industry weightings similar
to the relevant Fund's benchmark.
Multifactor Models. The Multifactor Models are rigorous computerized rating
systems for forecasting the returns of different equity markets, currencies and
individual equity securities according to fundamental investment
characteristics. The CORE U.S. Equity Funds use one Multifactor Model to
forecast the returns of securities held in each Fund's portfolio. The CORE
International Equity Fund uses multiple Multifactor Models to forecast returns.
Currently, the CORE International Equity Fund uses one model to forecast equity
market returns, one model to forecast currency returns and 22 separate models to
forecast individual equity security returns in 22 different countries. Despite
this variety, all Multifactor Models incorporate common variables covering
measures of value, price momentum, earnings momentum and stability (e.g.,
book/price ratio, earnings/price ratio, price momentum, price volatility,
consensus growth forecasts, earnings estimate revisions, earnings stability,
and, in the case of models for CORE International Equity Fund, currency momentum
and country political risk ratings). All of the factors used in the Multifactor
Models have been shown to significantly impact the performance of the
securities, currencies and markets they were designed to forecast.
The weightings assigned to the factors in the Multifactor Model used by the
CORE U.S. Equity Funds are derived using a statistical formulation that
considers each factor's historical performance in different market environments.
As such, the U.S. Multifactor Model is designed to evaluate each security using
only the factors that are statistically related to returns in the anticipated
market environment. Because they include many disparate factors, the Investment
Adviser believes that all the Multifactor Models are broader in scope and
provide a more thorough evaluation than most conventional quantitative models.
Securities and markets ranked highest by the relevant Multifactor Model do not
have one dominant investment characteristic; rather, they possess an attractive
combination of investment characteristics. By using a variety of relevant
factors to select securities, currencies or markets, the Investment Adviser
believes that the Fund will be better balanced and have more consistent
performance than an investment portfolio that uses only one or two factors to
select such investments.
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<PAGE>
The Investment Adviser will monitor, and may occasionally suggest and make
changes to, the method by which securities, currencies or markets are selected
for or weighted in a Fund. Such changes (which may be the result of changes in
the Multifactor Models or the method of applying the Multifactor Models) may
include: (i) evolutionary changes to the structure of the Multifactor Models
(e.g., the addition of new factors or a new means of weighting the factors);
(ii) changes in trading procedures (e.g., trading frequency or the manner in
which a Fund uses futures); or (iii) changes in the method by which securities,
currencies or markets are weighted in a Fund. Any such changes will preserve a
Fund's basic investment philosophy of combining qualitative and quantitative
methods of selecting securities using a disciplined investment process.
Research Department. In assigning ratings to equity securities, the
Research Department uses a four category rating system ranging from "recommended
for purchase" to "likely to under perform." The ratings reflect the analyst's
judgment as to the investment results of a specific security and incorporate
economic outlook, valuation, risk and a variety of other factors.
By employing both a quantitative (i.e., the Multifactor Models) and a
qualitative (i.e., research enhanced) method of selecting securities, each CORE
Equity Fund seeks to capitalize on the strengths of each discipline.
Other Information. Since normal settlement for equity securities is three
trading days (for certain international markets settlement may be longer), the
Funds will need to hold cash balances to satisfy shareholder redemption
requests. Such cash balances will normally range from 2% to 5% of a Fund's net
assets. CORE U.S. Equity Fund may enter into futures transactions only with
respect to the S&P 500TM Index and the CORE Large Cap Growth, CORE Large Cap
Value and CORE Small Cap Equity Funds may enter into futures transactions only
with respect to a representative index in order to keep a Fund's effective
equity exposure close to 100%. CORE International Equity Fund may purchase other
types of futures contracts. For example, if cash balances are equal to 5% of the
net assets, the Fund may enter into long futures contracts covering an amount
equal to 5% of the Fund's net assets. As cash balances fluctuate based on new
contributions or withdrawals, a Fund may enter into additional contracts or
close out existing positions.
Actively Managed International Funds. The International Equity, European
Equity, Japanese Equity, International Growth Opportunities, Emerging Markets
Equity and Asia Growth Funds are managed using an active international approach,
which utilizes a consistent process of stock selection undertaken by portfolio
management teams located within each of the major investment regions, including
Europe, Japan, Asia and the United States. In selecting securities, the
Investment Adviser uses a long-term, bottom-up strategy based on first-hand
fundamental research that is designed to give broad exposure to the available
opportunities while seeking to add return primarily through stock selection.
Equity securities for these Funds are evaluated based on three key factors--the
business, the management and the valuation. The Investment Adviser ordinarily
seeks securities that have, in the Investment Adviser's opinion, superior
earnings growth potential, sustainable franchise value with management attuned
to creating shareholder value and relatively
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<PAGE>
discounted valuations. In addition, the Investment Adviser uses a multi-factor
risk model which seeks to assure that deviations from the benchmark are
justifiable.
Additional Information About the Balanced Fund
----------------------------------------------
The investment objective of the Balanced Fund is to provide long-term
growth of capital and current income. The Fund seeks growth of capital primarily
through investments in equity securities (stocks). The Fund seeks to provide
current income through investment in fixed-income securities (bonds).
The 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. The Balanced Fund is designed for
relatively conservative investors who seek a combination of long-term capital
growth and current income in a single investment. The 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 the Balanced Fund's portfolio
seeks to provide high returns relative to a market benchmark, the Lehman
Brothers Aggregate Bond Index (the "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.
The Index currently includes U.S. Government Securities and fixed-rate,
publicly issued, U.S. dollar-denominated fixed income securities rated at least
BBB or Baa by a nationally recognized statistical ratings organization
("NRSRO"). The securities currently included in the Index have at least one year
remaining to maturity; have an outstanding principal amount of at least $100
million; and are issued by the following types of issuers, with each category
receiving a different weighting in the Index: U.S. Treasury; agencies,
authorities or instrumentalities of the U.S. Government; issuers of
mortgage-backed securities; utilities; industrial issuers; financial
institutions; foreign issuers; and issuers of asset-backed securities. The Index
is a trademark of Lehman Brothers. Inclusion of a security in the Index does not
imply an opinion by Lehman Brothers as to its attractiveness or appropriateness
for investment. Although Lehman Brothers obtains factual information used in
connection with the Index from sources which it considers reliable, Lehman
Brothers claims no responsibility for the accuracy, completeness or timeliness
or
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<PAGE>
such information and has no liability to any person for any loss arising from
results obtained from the use of the Index data.
GSAM seeks to manage fixed-income portfolio risk in a number of ways. These
include diversifying the fixed-income portion of the Balanced Fund's portfolio
among various types of fixed-income securities and utilizing sophisticated
quantitative models to understand how the fixed-income portion of the portfolio
will perform under a variety of market and economic scenarios. In addition, GSAM
uses extensive credit analysis to select and to monitor any investment-grade or
non-investment grade bonds that may be included in the Balanced Fund's
portfolio. In employing this and other investment strategies, the GSAM team has
access to extensive fundamental research and analysis available through Goldman
Sachs and a broad range of other sources.
A number of investment strategies will be used in selecting fixed-income
securities for the Fund's portfolio. GSAM's fixed-income investment philosophy
is to actively manage the portfolio within a risk-controlled framework. The
Investment Adviser de-emphasizes interest rate anticipation by monitoring the
duration of the portfolio within a narrow range of the Investment 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 the 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 NRSROs 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.
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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.
Additional Information About the International Equity Fund
----------------------------------------------------------
The International Equity Fund will seek to achieve its investment objective
by investing, under normal circumstances, substantially all, and at least 65% of
its total assets in equity securities of companies that are organized outside
the United States or whose securities are principally traded outside the United
States. 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
and Eastern Europe."
A Rigorous Process of Stock Selection. Using fundamental industry and
company research, GSAMI's equity team in London, Singapore and Tokyo seeks to
identify companies that may achieve superior long-term returns. Stocks are
carefully selected for the International Equity Fund's portfolio through a
three-stage investment process. Because the International Equity Fund expects to
be a long-term holder of stocks, the portfolio managers adjust the Fund's
portfolio only when expected returns fall below acceptable levels or when the
portfolio managers identify substantially more attractive investments.
Using the research of Goldman Sachs as well as information gathered from
other sources in Europe and the Asia-Pacific region, the Investment 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 Investment 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.
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GSAMI's currency team manages the foreign exchange risk embedded in foreign
equities by means of a currency overlay program. The program may be utilized to
protect the value of foreign investments in sustained periods of dollar
appreciation and to add returns by seeking to take advantage of foreign exchange
fluctuations.
The members of GSAMI's international equity team bring together years of
experience in analyzing and investing in companies in Europe and the
Asia-Pacific region. Their expertise spans a wide range of skills including
investment analysis, investment management, investment banking and business
consulting. GSAMI's worldwide staff of over 300 professionals includes portfolio
managers based in London, Singapore and Tokyo who bring firsthand knowledge of
their local markets and companies to every investment decision.
Corporate Debt Obligations
--------------------------
Each Fund may, under normal market conditions, invest in corporate debt
obligations, including obligations of industrial, utility and financial issuers.
CORE Large Cap Value, CORE U.S. Equity, CORE Large Cap Growth, CORE Small Cap
Equity, CORE International Equity and Research Select 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, Strategic Growth, Growth
Opportunities, Mid Cap Value, Small Cap Value, Large Cap Value, International
Equity, European Equity, Japanese Equity, International Growth Opportunities,
Emerging Markets Equity and Asia Growth Funds to dispose of a particular
security when necessary to meet their redemption requests or other liquidity
needs. Under adverse market or economic conditions, the secondary market for
junk bonds could contract further, independent of any specific adverse changes
in the condition of a particular issuer. As a result, the Investment 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.
B-13
<PAGE>
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, Strategic Growth, Growth Opportunities, Mid Cap
Value, Small Cap Value, Large Cap Value, International Equity, European Equity,
Japanese Equity, International Growth Opportunities, Emerging Markets Equity and
Asia Growth Funds may invest, the yields and prices of such securities may tend
to fluctuate more than those for higher rated securities. In the lower quality
segments of the fixed-income securities market, changes in perceptions of
issuers' creditworthiness tend to occur more frequently and in a more pronounced
manner than do changes in higher quality segments of the fixed-income securities
market, resulting in greater yield and price volatility.
Another factor which causes fluctuations in the prices of fixed-income
securities is the supply and demand for similarly rated securities. In addition,
the prices of fixed-income securities fluctuate in response to the general level
of interest rates. Fluctuations in the prices of portfolio securities subsequent
to their acquisition will not affect cash income from such securities but will
be reflected in a Fund's net asset value.
Medium to lower rated and comparable non-rated securities tend to offer
higher yields than higher rated securities with the same maturities because the
historical financial condition of the issuers of such securities may not have
been as strong as that of other issuers. Since medium to lower rated securities
generally involve greater risks of loss of income and principal than higher
rated securities, investors should consider carefully the relative risks
associated with investment in securities which carry medium to lower ratings and
in comparable unrated securities. In addition to the risk of default, there are
the related costs of recovery on defaulted issues. The Investment Adviser will
attempt to reduce these risks through portfolio diversification and by analysis
of each issuer and its ability to make timely payments of income and principal,
as well as broad economic trends and corporate developments.
The Investment Adviser employs its own credit research and analysis, which
includes a study of existing debt, capital structure, ability to service debt
and to pay dividends, the issuer's sensitivity to economic conditions, its
operating history and the current trend of earnings. The Investment Adviser
continually monitors the investments in a Fund's portfolio and evaluates whether
to dispose of or to retain non-investment grade and comparable unrated
securities whose credit ratings or credit quality may have changed.
U.S. Government Securities
--------------------------
Each 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. Each 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
B-14
<PAGE>
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.
Bank Obligations
----------------
Each 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.
Zero Coupon Bonds
-----------------
A Fund's investments in fixed-income securities may include zero coupon
bonds. Zero coupon bonds 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. A Fund
will accrue income on such investments for each taxable year which (net of
deductible expenses, if any) is distributable to shareholders and which, because
no cash is generally received at the time of accrual, may require the
liquidation of other portfolio securities to obtain sufficient cash to satisfy
the Fund's distribution obligations.
Variable and Floating Rate Securities
-------------------------------------
The interest rates payable on certain fixed-income securities in which 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.
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<PAGE>
Custodial Receipts
------------------
Each Fund, except the Research Select Fund, may invest in custodial
receipts in respect of securities issued or guaranteed as to principal and
interest by the U.S. Government, its agencies, instrumentalities, political
subdivisions or authorities. Such custodial receipts evidence ownership of
future interest payments, principal payments or both on certain notes or bonds
issued or guaranteed as to principal and interest by the U.S. Government, its
agencies, instrumentalities, political subdivisions or authorities. These
custodial receipts are known by various names, including "Treasury Receipts,"
"Treasury Investors Growth Receipts" ("TIGRs"), and "Certificates of Accrual on
Treasury Securities" ("CATs"). For certain securities law purposes, custodial
receipts are not considered U.S. Government securities.
Municipal Securities
--------------------
The Balanced Fund may invest in municipal securities. Municipal securities
consist of bonds, notes and other instruments issued by or on behalf of states,
territories and possessions of the United States (including the District of
Columbia) and their political subdivisions, agencies or instrumentalities, 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. The credit rating assigned to municipal securities may reflect the
existence of guarantees, letters of credit or other credit enhancement features
available to the issuers or holders of such municipal securities.
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 the CORE Large Cap Value,
CORE U.S. Equity, CORE Large Cap Growth, CORE Small Cap Equity, CORE
International Equity and Research Select Funds) may invest in mortgage-backed
securities. Each mortgage pool underlying
B-16
<PAGE>
mortgage-backed securities consists of mortgage loans evidenced by promissory
notes secured by first mortgages or first deeds of trust or other similar
security instruments creating a first lien on owner occupied and non-owner
occupied one-unit to four-unit residential properties, multifamily (i.e., five
or more) properties, agriculture properties, commercial properties and mixed use
properties (the "Mortgaged Properties"). The Mortgaged Properties may consist of
detached individual dwelling units, multifamily dwelling units, individual
condominiums, townhouses, duplexes, triplexes, fourplexes, row houses,
individual units in planned unit developments and other attached dwelling units.
The Mortgaged Properties may also include residential investment properties and
second homes.
The investment characteristics of adjustable and fixed rate mortgage-backed
securities differ from those of traditional fixed-income securities. The major
differences include the payment of interest and principal on mortgage-backed
securities on a more frequent (usually monthly) schedule, and the possibility
that principal may be prepaid at any time due to prepayments on the underlying
mortgage loans or other assets. These differences can result in significantly
greater price and yield volatility than is the case with traditional
fixed-income securities. As a result, if a Fund purchases mortgage-backed
securities at a premium, a faster than expected prepayment rate will reduce both
the market value and the yield to maturity from those which were anticipated. A
prepayment rate that is slower than expected will have the opposite effect of
increasing yield to maturity and market value. Conversely, if a Fund purchases
mortgage-backed securities at a discount, faster than expected prepayments will
increase, while slower than expected prepayments will reduce yield to maturity
and market values. To the extent that a Fund invests in mortgage-backed
securities, its Investment Adviser may seek to manage these potential risks by
investing in a variety of mortgage-backed securities and by using certain
hedging techniques.
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
B-17
<PAGE>
any guaranty, Ginnie Mae is authorized to borrow from the United States Treasury
in an unlimited amount.
Fannie Mae Certificates. Fannie Mae is a stockholder-owned corporation
chartered under an act of the United States Congress. Each Fannie Mae
Certificate is issued and guaranteed by Fannie Mae and represents an undivided
interest in a pool of mortgage loans (a "Pool") formed by Fannie Mae. Each Pool
consists of residential mortgage loans ("Mortgage Loans") either previously
owned by Fannie Mae or purchased by it in connection with the formation of the
Pool. The Mortgage Loans may be either conventional Mortgage Loans (i.e., not
insured or guaranteed by any U.S. Government agency) or Mortgage Loans that are
either insured by the Federal Housing Administration ("FHA") or guaranteed by
the Veterans Administration ("VA"). However, the Mortgage Loans in Fannie Mae
Pools are primarily conventional Mortgage Loans. The lenders originating and
servicing the Mortgage Loans are subject to certain eligibility requirements
established by Fannie Mae.
Fannie Mae has certain contractual responsibilities. With respect to each
Pool, Fannie Mae is obligated to distribute scheduled monthly installments of
principal and interest after Fannie Mae's servicing and guaranty fee, whether or
not received, to Certificate holders. Fannie Mae also is obligated to distribute
to holders of Certificates an amount equal to the full principal balance of any
foreclosed Mortgage Loan, whether or not such principal balance is actually
recovered. The obligations of Fannie Mae under its guaranty of the Fannie Mae
Certificates are obligations solely of Fannie Mae.
Freddie Mac Certificates. Freddie Mac is a publicly held U.S. Government
sponsored enterprise. The principal activity of Freddie Mac currently is the
purchase of first lien, conventional, residential mortgage loans and
participation interests in such mortgage loans and their resale in the form of
mortgage securities, primarily Freddie Mac Certificates. A Freddie Mac
Certificate represents a pro rata interest in a group of mortgage loans or
participation in mortgage loans (a "Freddie Mac Certificate group") purchased by
Freddie Mac.
Freddie Mac guarantees to each registered holder of a Freddie Mac
Certificate the timely payment of interest at the rate provided for by such
Freddie Mac Certificate (whether or not received on the underlying loans).
Freddie Mac also guarantees to each registered Certificate holder ultimate
collection of all principal of the related mortgage loans, without any offset or
deduction, but does not, generally, guarantee the timely payment of scheduled
principal. The obligations of Freddie Mac under its guaranty of Freddie Mac
Certificates are obligations solely of Freddie Mac.
The mortgage loans underlying the Freddie Mac 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
B-18
<PAGE>
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 the CORE Large Cap
Value, CORE U.S. Equity, CORE Large Cap Growth, CORE Small Cap Equity, CORE
International Equity and Research Select Funds) may invest in both government
guaranteed and privately issued mortgage pass-through securities ("Mortgage
Pass-Throughs"); that is, fixed or adjustable rate mortgage-backed securities
which provide for monthly payments that are a "pass-through" of the monthly
interest and principal payments (including any prepayments) made by the
individual borrowers on the pooled mortgage loans, net of any fees or other
amounts paid to any guarantor, administrator and/or servicer of the underlying
mortgage loans.
The following discussion describes only a few of the wide variety of
structures of Mortgage Pass-Throughs that are available or may be issued.
Description of Certificates. Mortgage Pass-Throughs may be issued in one or
more classes of senior certificates and one or more classes of subordinate
certificates. Each such class may bear a different pass-through rate. Generally,
each certificate will evidence the specified interest of the holder thereof in
the payments of principal or interest or both in respect of the mortgage pool
comprising part of the trust fund for such certificates.
Any class of certificates may also be divided into subclasses entitled to
varying amounts of principal and interest. If a REMIC election has been made,
certificates of such subclasses may be entitled to payments on the basis of a
stated principal balance and stated interest rate, and payments among different
subclasses may be made on a sequential, concurrent, pro rata or disproportionate
basis, or any combination thereof. The stated interest rate on any such subclass
of certificates may be a fixed rate or one which varies in direct or inverse
relationship to an objective interest index.
Generally, each registered holder of a certificate will be entitled to
receive its pro rata share of monthly distributions of all or a portion of
principal of the underlying mortgage loans or of interest on the principal
balances thereof, which accrues at the applicable mortgage pass-through rate, or
both. The difference between the mortgage interest rate and the related mortgage
pass-through rate (less the amount, if any, of retained yield) with respect to
each mortgage loan will generally be paid to the servicer as a servicing fee.
Since certain adjustable rate mortgage loans included in a mortgage pool may
provide for deferred interest (i.e., negative amortization), the amount of
interest actually paid by a mortgagor in any month may be less than the amount
of interest accrued on the outstanding principal balance of the related mortgage
loan during the relevant period at the applicable mortgage interest rate. In
such event, the amount of interest that is treated as deferred interest will be
added to the principal balance of the related mortgage loan and will be
distributed pro rata to certificate-holders as principal of such mortgage loan
--- ----
when paid by the mortgagor in subsequent monthly payments or at maturity.
Ratings. The ratings assigned by a rating organization to Mortgage
Pass-Throughs address the likelihood of the receipt of all distributions on the
underlying mortgage loans by the related
B-19
<PAGE>
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 may not address the remote possibility
that, in the event of the insolvency of the issuer of certificates where a
subordinated interest was retained, the issuance and sale of the senior
certificates may be recharacterized as a financing and, as a result of such
recharacterization, payments on such certificates may be affected.
Credit Enhancement. Credit support falls generally into two categories: (i)
liquidity protection and (ii) protection against losses resulting from default
by an obligor on the underlying assets. Liquidity protection refers to the
provision of advances, generally by the entity administering the pools of
mortgages, the provision of a reserve fund, or a combination thereof, to ensure,
subject to certain limitations, that scheduled payments on the underlying pool
are made in a timely fashion. Protection against losses resulting from default
ensures ultimate payment of the obligations on at least a portion of the assets
in the pool. Such credit support can be provided by, among other things, payment
guarantees, letters of credit, pool insurance, subordination, or any combination
thereof.
Subordination; Shifting of Interest; Reserve Fund. In order to achieve
ratings on one or more classes of Mortgage Pass-Throughs, one or more classes of
certificates may be subordinate certificates which provide that the rights of
the subordinate certificate-holders to receive any or a specified portion of
distributions with respect to the underlying mortgage loans may be subordinated
to the rights of the senior certificate-holders. If so structured, the
subordination feature may be enhanced by distributing to the senior
certificate-holders on certain distribution dates, as payment of principal, a
specified percentage (which generally declines over time) of all principal
payments received during the preceding prepayment period ("shifting interest
credit enhancement"). This will have the effect of accelerating the amortization
of the senior certificates while increasing the interest in the trust fund
evidenced by the subordinate certificates. Increasing the interest of the
subordinate certificates relative to that of the senior certificates is intended
to preserve the availability of the subordination provided by the subordinate
certificates. In addition, because the senior certificate-holders in a shifting
interest credit enhancement structure are entitled to receive a percentage of
principal prepayments which is greater than their proportionate interest in the
trust fund, the rate of principal prepayments on the mortgage loans will have an
even greater effect on the rate of principal payments and the amount of interest
payments on, and the yield to maturity of, the senior certificates.
In addition to providing for a preferential right of the senior
certificate-holders to receive current distributions from the mortgage pool, a
reserve fund may be established relating to such certificates (the "Reserve
Fund"). The Reserve Fund may be created with an initial cash deposit by the
originator or servicer and augmented by the retention of distributions otherwise
available to the
B-20
<PAGE>
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, letters of credit, a limited guaranty
or by such other methods as are acceptable to a rating agency. In certain
circumstances, such as where credit enhancement is provided by guarantees or a
letter of credit, the security is subject to credit risk because of its exposure
to an external credit enhancement provider.
Voluntary Advances. Generally, in the event of delinquencies in payments on
the mortgage loans underlying the Mortgage Pass-Throughs, the servicer agrees to
make advances of cash for the benefit of certificate-holders, but only to the
extent that it determines such voluntary advances will be recoverable from
future payments and collections on the mortgage loans or otherwise.
Optional Termination. Generally, the servicer may, at its option with
respect to any certificates, repurchase all of the underlying mortgage loans
remaining outstanding at such time if the aggregate outstanding principal
balance of such mortgage loans is less than a specified percentage (generally
5-10%) of the aggregate outstanding principal balance of the mortgage loans as
of the cut-off date specified with respect to such series.
Multiple Class Mortgage-Backed Securities and Collateralized Mortgage
Obligations. 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,
B-21
<PAGE>
commercial banks, insurance companies, investment banks and special purpose
subsidiaries of the foregoing. In general, CMOs are debt obligations of a legal
entity that are collateralized by, and multiple class mortgage-backed securities
represent direct ownership interests in, a pool of mortgage loans or
mortgage-backed securities the payments on which are used to make payments on
the CMOs or multiple class mortgage-backed securities.
Fannie Mae REMIC Certificates are issued and guaranteed as to timely
distribution of principal and interest by Fannie Mae. In addition, Fannie Mae
will be obligated to distribute the principal balance of each class of REMIC
Certificates in full, whether or not sufficient funds are otherwise available.
Freddie Mac guarantees the timely payment of interest on Freddie Mac REMIC
Certificates and also guarantees the payment of principal as payments are
required to be made on the underlying mortgage participation certificates
("PCs"). PCs represent undivided interests in specified level payment,
residential mortgages or participations therein purchased by Freddie Mac and
placed in a PC pool. With respect to principal payments on PCs, Freddie Mac
generally guarantees ultimate collection of all principal of the related
mortgage loans without offset or deduction. Freddie Mac also guarantees timely
payment of principal of certain PCs.
CMOs and guaranteed REMIC Certificates issued by Fannie Mae and Freddie Mac
are types of multiple class mortgage-backed securities. Investors may purchase
beneficial interests in REMICs, which are known as "regular" interests or
"residual" interests. The Funds do not intend to purchase residual interests in
REMICs. The REMIC Certificates represent beneficial ownership interests in a
REMIC trust, generally consisting of mortgage loans or Fannie Mae, Freddie Mac
or Ginnie Mae guaranteed mortgage-backed securities (the "Mortgage Assets"). The
obligations of Fannie Mae or Freddie Mac under their respective guaranty of the
REMIC Certificates are obligations solely of Fannie Mae or Freddie Mac,
respectively.
CMOs and REMIC Certificates are issued in multiple classes. Each class of
CMOs or REMIC Certificates, often referred to as a "tranche," is issued at a
specific adjustable or fixed interest rate and must be fully retired no later
than its final distribution date. Principal prepayments on the Mortgage Loans or
the Mortgage Assets underlying the CMOs or REMIC Certificates may cause some or
all of the classes of CMOs or REMIC Certificates to be retired substantially
earlier than their final distribution dates. Generally, interest is paid or
accrues on all classes of CMOs or REMIC Certificates on a monthly basis.
The principal of and interest on the Mortgage Assets may be allocated among
the several classes of CMOs or REMIC Certificates in various ways. In certain
structures (known as "sequential pay" CMOs or REMIC Certificates), payments of
principal, including any principal prepayments, on the Mortgage Assets generally
are applied to the classes of CMOs or REMIC Certificates in the order of their
respective final distribution dates. Thus, no payment of principal will be made
on any class of sequential pay CMOs or REMIC Certificates until all other
classes having an earlier final distribution date have been paid in full.
B-22
<PAGE>
Additional structures of CMOs and REMIC Certificates include, among others,
"parallel pay" CMOs and REMIC Certificates. Parallel pay CMOs or REMIC
Certificates are those which are structured to apply principal payments and
prepayments of the Mortgage Assets to two or more classes concurrently on a
proportionate or disproportionate basis. These simultaneous payments are taken
into account in calculating the final distribution date of each class.
A wide variety of REMIC Certificates may be issued in parallel pay or
sequential pay structures. These securities include accrual certificates (also
known as "Z-Bonds"), which only accrue interest at a specified rate until all
other certificates having an earlier final distribution date have been retired
and are converted thereafter to an interest-paying security, and planned
amortization class ("PAC") certificates, which are parallel pay REMIC
Certificates that generally require that specified amounts of principal be
applied on each payment date to one or more classes or REMIC Certificates (the
"PAC Certificates"), even though all other principal payments and prepayments of
the Mortgage Assets are then required to be applied to one or more other classes
of the PAC 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 Fund may invest in
stripped mortgage-backed securities ("SMBS"), which are derivative multiclass
mortgage securities. Although the market for such securities is increasingly
liquid, certain SMBS may not be readily marketable and will be considered
illiquid for purposes of the Fund's limitation on investments in illiquid
securities. The market value of the class consisting entirely of principal
payments generally is unusually volatile in response to changes in interest
rates. The yields on a class of SMBS that receives all or most of the interest
from Mortgage Assets are generally higher than prevailing market yields on other
mortgage-backed securities because their cash flow patterns are more volatile
and there is a greater risk that the initial investment will not be fully
recouped.
Inverse Floating Rate Securities
--------------------------------
The Balanced Fund may invest 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 a Fund's 15% limitation on investments in such
securities.
B-23
<PAGE>
Asset-Backed Securities
-----------------------
Each Fund (except the CORE Large Cap Value, CORE U.S. Equity, CORE Large
Cap Growth, CORE Small Cap Equity, CORE International Equity and Research Select
Funds) may invest in asset-backed securities. Asset-backed securities represent
participation in, or are secured by and payable from, assets such as motor
vehicle installment sales, installment loan contracts, leases of various types
of real and personal property, receivables from revolving credit (credit card)
agreements and other categories of receivables. Such assets are securitized
through the use of trusts and special purpose corporations. Payments or
distributions of principal and interest may be guaranteed up to certain amounts
and for a certain time period by a letter of credit or a pool insurance policy
issued by a financial institution unaffiliated with the trust or corporation, or
other credit enhancements may be present.
Like mortgage-backed securities, asset-backed securities are often subject
to more rapid repayment than their stated maturity date would indicate as a
result of the pass-through of prepayments of principal on the underlying loans.
A Fund's ability to maintain positions in such securities will be affected by
reductions in the principal amount of such securities resulting from
prepayments, and its ability to reinvest the returns of principal at comparable
yields is subject to generally prevailing interest rates at that time. To the
extent that a Fund invests in asset-backed securities, the values of such Fund's
portfolio securities will vary with changes in market interest rates generally
and the differentials in yields among various kinds of asset-backed securities.
Asset-backed securities present certain additional risks that are not
presented by mortgage-backed securities because asset-backed securities
generally do not have the benefit of a security interest in collateral that is
comparable to mortgage assets. Credit card receivables are generally unsecured
and the debtors on such receivables are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set-off certain amounts owed on the credit cards, thereby reducing the
balance due. Automobile receivables generally are secured, but by automobiles
rather than residential real property. Most issuers of automobile receivables
permit the loan servicers to retain possession of the underlying obligations. If
the servicer were to sell these obligations to another party, there is a risk
that the purchaser would acquire an interest superior to that of the holders of
the asset-backed securities. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of the automobile receivables may not have a
proper security interest in the underlying automobiles. Therefore, if the issuer
of an asset-backed security defaults on its payment obligations, there is the
possibility that, in some cases, a Fund will be unable to possess and sell the
underlying collateral and that the Fund's recoveries on repossessed collateral
may not be available to support payments on the securities.
Loan Participations
-------------------
The Balanced Fund may invest in loan participations. Such loans must be to
issuers in whose obligations 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.
B-24
<PAGE>
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. The CORE Large Cap Value, CORE Large Cap
Growth and CORE Small Cap Equity Funds may only enter into such transactions
with respect to a representative index. The CORE U.S. Equity Fund may enter into
futures transactions only with respect to the S&P 500 Index. The other Funds may
purchase and sell futures contracts based on various securities (such as U.S.
Government securities), securities indices, foreign currencies and other
financial instruments and indices. Each Fund will engage in futures and related
options transactions only for bona fide hedging purposes as defined below or for
purposes of seeking to increase total return to the extent permitted by
regulations of the Commodity Futures Trading Commission ("CFTC"). 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, with respect to certain funds,
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
B-25
<PAGE>
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 the CORE Large Cap
Value, CORE U.S. Equity, CORE Large Cap Growth, CORE Small Cap Equity and
Research Select Funds) can purchase and sell futures contracts on a specified
currency in order to seek to increase total return or to hedge against changes
in currency exchange rates. Each Fund (other than the CORE Large Cap Value, CORE
U.S. Equity, CORE Large Cap Growth, CORE Small Cap Equity and Research Select
Funds) can purchase futures contracts on foreign currency to establish the price
in U.S. dollars of a security quoted or denominated in such currency that such
Fund has acquired or expects to acquire. The Balanced Fund may also use futures
contracts to manage the term structure and duration of its fixed-income
securities holdings in accordance with that Fund's investment objectives and
policies.
Positions taken in the futures market are not normally held to maturity,
but are instead liquidated through offsetting transactions which may result in a
profit or a loss. While a Fund will usually liquidate futures contracts on
securities or currency in this manner, a Fund may instead make or take delivery
of the underlying securities or currency whenever it appears economically
advantageous for the Fund to do so. A clearing corporation associated with the
exchange on which futures are traded guarantees that, if still open, the sale or
purchase will be performed on the settlement date.
Hedging Strategies. Hedging, by use of futures contracts, seeks to
establish with more certainty than would otherwise be possible the effective
price, rate of return or currency exchange rate on portfolio securities or
securities that a Fund owns or proposes to acquire. A Fund may, for example,
take a "short" position in the futures market by selling futures contracts to
seek to hedge against an anticipated rise in interest rates or a decline in
market prices or (other than the CORE
B-26
<PAGE>
Large Cap Value, CORE U.S. Equity, the CORE Large Cap Growth, CORE Small Cap
Equity and Research Select Funds) foreign currency rates that would adversely
affect the dollar value of such Fund's portfolio securities. Similarly, each
Fund (other than the CORE Large Cap Value, CORE U.S. Equity, CORE Large Cap
Growth, CORE Small Cap Equity and Research Select 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 Investment 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 Investment 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 may be done, for example, when a Fund anticipates the
subsequent purchase of particular securities when it has the necessary cash, but
expects the prices or currency exchange rates then available in the applicable
market to be less favorable than prices or rates that are currently available.
Options on Futures Contracts. The acquisition of put and call options on
futures contracts will give a Fund the right (but not the obligation), for a
specified price, to sell or to purchase, respectively, the underlying futures
contract at any time during the option period. As the purchaser of an option on
a futures contract, a Fund obtains the benefit of the futures position if prices
move in a favorable direction but limits its risk of loss in the event of an
unfavorable price movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium
which may partially offset a decline in the value of a Fund's assets. By writing
a call option, a Fund becomes obligated, in exchange for the premium, to sell a
futures contract if the option is exercised, which may have a value higher than
the exercise price. Conversely, the writing of a put option on a futures
contract generates a premium, which may partially offset an increase in the
price of securities that a Fund intends to purchase. However, a Fund becomes
obligated (upon the exercise of the option) to purchase a futures contract if
the option is exercised, which may have a value lower than the exercise price.
Thus, the loss incurred by a Fund in writing options on futures is potentially
unlimited and may exceed the amount of the premium received. A Fund will incur
transaction costs in connection with the writing of options on futures.
B-27
<PAGE>
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option on the same financial
instrument. There is no guarantee that such closing transactions can be
effected. 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.
In addition to bona fide hedging, a CFTC regulation permits a Fund to
engage in other futures transactions if the aggregate initial margin and
premiums required to establish such positions in futures contracts and options
on futures do not exceed 5% of the net asset value of such Fund's portfolio,
after taking into account unrealized profits and losses on any such positions
and excluding the amount by which such options were in-the-money at the time of
purchase. A Fund will engage in transactions in futures contracts and related
options transactions only to the extent such transactions are consistent with
the requirements of the Internal Revenue Code of 1986 as amended (the "Code")
for maintaining its qualification as a regulated investment company for federal
income tax purposes.
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in certain cases, require the Fund to
segregate cash or liquid assets in an amount equal to the underlying value of
such contracts and options.
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. Thus,
unanticipated changes in interest rates, securities prices or currency exchange
rates may result in a poorer overall performance for a Fund than if it had not
entered into any futures contracts or options transactions. In the event of an
imperfect correlation between a futures position and a portfolio position which
is intended to be protected, the desired protection may not be obtained and a
Fund may be exposed to risk of loss.
Perfect correlation between a Fund's futures positions and portfolio
positions will be difficult to achieve because no futures contracts based on
individual equity or corporate fixed-income securities are currently available.
In addition, it is not possible for a Fund to hedge fully or perfectly against
currency fluctuations affecting the value of securities quoted or denominated in
foreign currencies because the value of such securities is likely to fluctuate
as a result of independent factors not related to currency fluctuations. The
profitability of a Fund's trading in futures depends upon the ability of the
Investment Adviser to analyze correctly the futures markets.
Options on Securities and Securities Indices
--------------------------------------------
Writing Covered Options. Each Fund may write (sell) covered call and put
options on any securities in which it may invest. 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
B-28
<PAGE>
time before the expiration date. All call options written by a Fund are covered,
which means that such Fund will own the securities subject to the option as long
as the option is outstanding or such Fund will use the other methods described
below. A Fund's purpose in writing covered call options is to realize greater
income than would be realized on portfolio securities transactions alone.
However, a Fund may forego the opportunity to profit from an increase in the
market price of the underlying security.
A put option written by a Fund would obligate such Fund to purchase
specified securities from the option holder at a specified price if the option
is exercised at any time before the expiration date. All put options written by
a Fund would be covered, which means that such Fund will segregate cash or
liquid assets with a value at least equal to the exercise price of the put
option or will use the other methods described below. The purpose of writing
such options is to generate additional income for the Fund. However, in return
for the option premium, each Fund accepts the risk that it may be required to
purchase the underlying securities at a price in excess of the securities'
market value at the time of purchase.
Call and put options written by a Fund will also be considered to be
covered to the extent that the Fund's liabilities under such options are wholly
or partially offset by its rights under call and put options purchased by the
Fund or by an offsetting forward contract which, by virtue of its exercise price
or otherwise, reduces a Fund's net exposure on its written option position.
A Fund may also write (sell) covered call and put options on any securities
index comprised 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 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.
A Fund may terminate its obligations under an exchange traded call or put
option by purchasing an option identical to the one it has written. Obligations
under over-the-counter options may be terminated only by entering into an
offsetting transaction with the counterparty to such option. Such purchases are
referred to as "closing purchase transactions."
Purchasing Options. Each Fund may purchase put and call options on any
securities in which it may invest or options on any securities index comprised
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.
B-29
<PAGE>
A Fund may purchase call options in anticipation of an increase in the
market value of securities of the type in which it may invest. The purchase of a
call option would entitle 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 may purchase put options in anticipation of a decline in the market
value of securities in its portfolio ("protective puts") or in securities in
which it may invest. The purchase of a put option would entitle a Fund, in
exchange for the premium paid, to sell specified securities at a specified price
during the option period. The purchase of protective puts is designed to offset
or hedge against a decline in the market value of a Fund's securities. Put
options may also be purchased by a Fund for the purpose of affirmatively
benefiting from a decline in the price of securities which it does not own. A
Fund would ordinarily realize a gain if, during the option period, the value of
the underlying securities decreased below the exercise price sufficiently to
more than cover the premium and transaction costs; otherwise such a Fund would
realize either no gain or a loss on the purchase of the put option. Gains and
losses on the purchase of protective put options would tend to be offset by
countervailing changes in the value of the underlying portfolio securities.
A Fund would purchase put and call options on securities indices for the
same purposes as it would purchase options on individual securities. For a
description of options on securities indices, see "Writing Covered Options"
above.
Yield Curve Options. The Balanced Fund may enter into options on the yield
"spread" or differential between two securities. Such transactions are referred
to as "yield curve" options. In contrast to other types of options, a yield
curve option is based on the difference between the yields of designated
securities, rather than the prices of the individual securities, and is settled
through cash payments. Accordingly, a yield curve option is profitable to the
holder if this differential widens (in the case of a call) or narrows (in the
case of a put), regardless of whether the yields of the underlying securities
increase or decrease.
The Balanced Fund may purchase or write yield curve options for the same
purposes as other options on securities. For example, the Fund may purchase a
call option on the yield spread between two securities if it owns one of the
securities and anticipates purchasing the other security and wants to hedge
against an adverse change in the yield spread between the two securities. The
Balanced Fund may also purchase or write yield curve options in an effort to
increase current income if, in the judgment of the Investment Adviser, the Fund
will be able to profit from movements in the spread between the yields of the
underlying securities. The trading of yield curve options is subject to all of
the risks associated with the trading of other types of options. In addition,
however, such options present risk of loss even if the yield of one of the
underlying securities remains constant, if the spread moves in a direction or to
an extent which was not anticipated.
B-30
<PAGE>
Yield curve options written by the Balanced Fund will be "covered." A call
(or put) option is covered if the Fund holds another call (or put) option on the
spread between the same two securities and segregates cash or liquid assets
sufficient to cover the Fund's net liability under the two options. Therefore,
the Fund's liability for such a covered option is generally limited to the
difference between the amount of such Fund's liability under the option written
by the Fund less the value of the option held by the Fund. Yield curve options
may also be covered in such other manner as may be in accordance with the
requirements of the counterparty with which the option is traded and applicable
laws and regulations. Yield curve options are traded over-the-counter, and
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.
A Fund may purchase and sell both options that are traded on U.S. and
foreign exchanges and options traded over-the-counter with broker-dealers who
make markets in these options. The ability to terminate over-the-counter options
is more limited than with exchange-traded options and may involve the risk that
broker-dealers participating in such transactions will not fulfill their
obligations.
Transactions by 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
B-31
<PAGE>
purchase may be affected by options written or purchased by other investment
advisory clients of the Investment Advisers. An exchange, board of trade or
other trading facility may order the liquidation of positions found to be in
excess of these limits, and it may impose certain other sanctions.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The use of options to seek to
increase total return involves the risk of loss if 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 a Fund's
investment portfolio, the Fund may incur losses that it would not otherwise
incur. The writing of options could increase a Fund's portfolio turnover rate
and, therefore, associated brokerage commissions or spreads.
Real Estate Investment Trusts
-----------------------------
Each Fund may invest in shares of REITs. REITs are pooled investment
vehicles which invest primarily in real estate or real estate related loans.
REITs are generally classified as equity REITs, mortgage REITs or a combination
of equity and mortgage REITs. Equity REITs invest the majority of their assets
directly in real property and derive income primarily from the collection of
rents. Equity REITs can also realize capital gains by selling properties that
have appreciated in value. Mortgage REITs invest the majority of their assets in
real estate mortgages and derive income from the collection of interest
payments. Like regulated investment companies such as the 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 Act. REITs (especially mortgage REITs) are also subject to
interest rate risks.
Warrants and Stock Purchase Rights
----------------------------------
Each Fund may invest in warrants or rights (in addition to 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
B-32
<PAGE>
deemed appropriate by the Investment Adviser for investment by the Fund. The
CORE Large Cap Value, CORE U.S. Equity, CORE Large Cap Growth, CORE Small Cap
Equity, CORE International Equity and Research Select 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
------------------
Each Fund may invest in securities of foreign issuers. The Balanced, Growth
and Income, Capital Growth, Strategic Growth, Growth Opportunities, Mid Cap
Value, Small Cap Value and Large Cap Value Funds may invest in the aggregate up
to 10%, 25%, 10%, 10%, 10%, 25%, 25% and 25%, respectively, of their total
assets in foreign securities. The CORE International Equity, International
Equity, European Equity, Japanese Equity, International Growth Opportunities,
Emerging Markets Equity and Asia Growth Fund will invest primarily in foreign
securities under normal circumstances. With respect to the CORE U.S. Equity,
CORE Large Cap Growth, CORE Large Cap Value, CORE Small Cap Equity and Research
Select Funds, equity securities of foreign issuers must be traded in the United
States.
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
Investment Adviser, to offer the potential for long-term growth of capital and
income, the opportunity to invest in foreign countries with economic policies or
business cycles different from those of the United States and the opportunity to
reduce fluctuations in portfolio value by taking advantage of foreign stock
markets that do not necessarily move in a manner parallel to U.S. markets.
Investing in foreign securities involves certain special risks, including
those discussed in the Funds' Prospectuses and 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, a 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. The Balanced, Growth and Income, CORE
International Equity, Capital Growth, Strategic Growth, Growth Opportunities,
Mid Cap Value, International Equity, Small Cap Value, Large Cap Value, European
Equity, Japanese Equity, International Growth Opportunities, Emerging Markets
Equity and Asia Growth Funds may be subject to currency exposure independent of
their securities positions. To the extent that a Fund is fully invested in
foreign securities while also maintaining currency positions, it may be exposed
to greater combined risk.
Currency exchange rates may fluctuate significantly over short periods of
time. They generally are determined by the forces of supply and demand in the
foreign exchange markets and the relative merits of investments in different
countries, actual or anticipated changes in interest rates and other complex
factors, as seen from an international perspective. Currency exchange rates
B-33
<PAGE>
also can be affected unpredictably by intervention by U.S. or foreign
governments or central banks or the failure to intervene or by currency controls
or political developments in the United States or abroad.
Since foreign issuers generally are not subject to uniform accounting,
auditing and financial reporting standards, practices and requirements
comparable to those applicable to U.S. companies, there may be less publicly
available information about a foreign company than about a U.S. company. Volume
and liquidity in most foreign securities markets are less than in the United
States and securities of many foreign companies are less liquid and more
volatile than securities of comparable U.S. companies. Fixed commissions on
foreign securities exchanges are generally higher than negotiated commissions on
U.S. exchanges, although each Fund endeavors to achieve the most favorable net
results on its portfolio transactions. There is generally less government
supervision and regulation of foreign securities exchanges, brokers, dealers and
listed and unlisted companies than in the United States.
Foreign markets also have different clearance and settlement procedures,
and in certain markets there have been times when settlements have been unable
to keep pace with the volume of securities transactions, making it difficult to
conduct such transactions. Such delays in settlement could result in temporary
periods when some of a Fund's assets are uninvested and no return is earned on
such assets. The inability of a Fund to make intended security purchases due to
settlement problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement
problems could result either in losses to the Fund due to subsequent declines in
value of the portfolio securities or, if the Fund has entered into a contract to
sell the securities, could result in possible liability to the purchaser. In
addition, with respect to certain foreign countries, there is the possibility of
expropriation or confiscatory taxation, political or social instability, or
diplomatic developments which could affect a Fund's investments in those
countries. Moreover, individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross national
product, rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments position.
Each Fund (except the Research Select Fund) may invest in foreign
securities which take the form of sponsored and unsponsored American Depositary
Receipts ("ADRs") and Global Depositary Receipts ("GDRs") and (except for CORE
Large Cap Value, CORE U.S. Equity, CORE Large Cap Growth, CORE Small Cap Equity
and Research Select Funds) may also invest in European Depositary Receipts
("EDRs") or other similar instruments representing securities of foreign issuers
(together, "Depositary 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.
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To the extent a Fund acquires Depositary Receipts through banks which do
not have a contractual relationship with the foreign issuer of the security
underlying the Depositary Receipts to issue and service such unsponsored
Depositary 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 Depositary Receipts does not eliminate all
the risks inherent in investing in securities of non-U.S. issuers. The market
value of Depositary Receipts is dependent upon the market value of the
underlying securities and fluctuations in the relative value of the currencies
in which the Depositary Receipts and the underlying securities are quoted.
However, by investing in Depositary Receipts, such as ADRs, that are quoted in
U.S. dollars, a Fund may avoid currency risks during the settlement period for
purchases and sales.
As described more fully below, each Fund (except the CORE Large Cap Value,
CORE U.S. Equity, CORE Large Cap Growth, CORE Small Cap Equity, Large Cap Value
and Research Select 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 have in the past failed
to recognize private property rights and have at times nationalized or
expropriated the assets of private companies. As a result, the risks described
above, including the risks of nationalization or expropriation of assets, may be
heightened. See "Investing in Emerging Markets, including Asia and Eastern
Europe," below.
Investing in Emerging Countries, including Asia and Eastern Europe. CORE
International Equity, International Equity, European Equity, Japanese Equity,
International Growth Opportunities, 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 country issuers, as well as the risks associated
with investments quoted or denominated in foreign currencies. The Balanced,
Growth and Income, Capital Growth, Strategic Growth, Growth Opportunities, Mid
Cap Value and Small Cap Value Funds may invest, to a lesser extent, in equity
and equity-related securities of foreign issuers, including emerging country
issuers.
The securities markets of emerging countries are less liquid and subject to
greater price volatility, and have 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.
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<PAGE>
Emerging country securities markets are typically marked by a high
concentration of market capitalization and trading volume in a small number of
issuers representing a limited number of industries, as well as a high
concentration of ownership of such securities by a limited number of investors.
The markets for securities in certain emerging countries are in the earliest
stages of their development. Even the markets for relatively widely traded
securities in emerging countries may not be able to absorb, without price
disruptions, a significant increase in trading volume or trades of a size
customarily undertaken by institutional investors in the securities markets of
developed countries. The limited size of many of these securities markets can
cause prices to be erratic for reasons apart from factors that affect the
soundness and competitiveness of the securities issuers. For example, prices may
be unduly influenced by traders who control large positions in these markets.
Additionally, market making and arbitrage activities are generally less
extensive in such markets, which may contribute to increased volatility and
reduced liquidity of such markets. The limited liquidity of emerging country
markets may also affect a Fund's ability to accurately value its portfolio
securities or to acquire or dispose of securities at the price and time it
wishes to do so or in order to meet redemption requests.
Transaction costs, including brokerage commissions or dealer mark-ups, in
emerging countries may be higher than in the United States and other developed
securities markets. In addition, existing laws and regulations are often
inconsistently applied. As legal systems in emerging countries develop, foreign
investors may be adversely affected by new or amended laws and regulations. In
circumstances where adequate laws exist, it may not be possible to obtain swift
and equitable enforcement of the law.
Foreign investment in the securities markets of certain emerging countries
is restricted or controlled to varying degrees. These restrictions may limit a
Fund's investment in certain emerging countries and may increase the expenses of
the Fund. Certain emerging countries require governmental approval prior to
investments by foreign persons or limit investment by foreign persons to only a
specified percentage of an issuer's outstanding securities or a specific class
of securities which may have less advantageous terms (including price) than
securities of the company available for purchase by nationals. In addition, the
repatriation of both investment income and capital from emerging countries may
be subject to restrictions which require governmental consents or prohibit
repatriation entirely for a period of time. Even where there is no outright
restriction on repatriation of capital, the mechanics of repatriation may affect
certain aspects of the operation of a Fund. A Fund may be required to establish
special custodial or other arrangements before investing in certain emerging
countries.
Emerging countries may be subject to a substantially greater degree of
economic, political and social instability and disruption than is the case in
the United States, Japan and most Western European countries. This instability
may result from, among other things, the following: (i) authoritarian
governments or military involvement in political and economic decision making,
including changes or attempted changes in governments through
extra-constitutional means; (ii) popular unrest associated with demands for
improved political, economic or social conditions; (iii) internal insurgencies;
(iv) hostile relations with neighboring countries; (v) ethnic, religious and
racial disaffection or conflict; and (vi) the absence of developed legal
structures governing foreign
B-36
<PAGE>
private investments and private property. Such economic, political and social
instability could disrupt the principal financial markets in which the Funds may
invest and adversely affect the value of the Funds' assets. A Fund's investments
can also be adversely affected by any increase in taxes or by political,
economic or diplomatic developments.
Certain Funds may seek investment opportunities within former "east bloc"
countries in Eastern Europe. Most Eastern European countries had a centrally
planned, socialist economy for a substantial period of time. The governments of
many Eastern European countries have more recently been implementing reforms
directed at political and economic liberalization, including efforts to
decentralize the economic decision-making process and move towards a market
economy. However, business entities in many Eastern European countries do not
have an extended history of operating in a market-oriented economy, and the
ultimate impact of Eastern European countries' attempts to move toward more
market-oriented economies is currently unclear. In addition, any change in the
leadership or policies of Eastern European countries may halt the expansion of
or reverse the liberalization of foreign investment policies now occurring and
adversely affect existing investment opportunities.
The economies of emerging countries may differ unfavorably from the U.S.
economy in such respects as growth of gross domestic product, rate of inflation,
capital reinvestment, resources, self-sufficiency and balance of payments. Many
emerging countries have experienced in the past, and continue to experience,
high rates of inflation. In certain countries inflation has at times accelerated
rapidly to hyperinflationary levels, creating a negative interest rate
environment and sharply eroding the value of outstanding financial assets in
those countries. Other emerging countries, on the other hand, have recently
experienced deflationary pressure and are in economic recessions. The economies
of many emerging countries are heavily dependent upon international trade and
are accordingly affected by protective trade barriers and the economic
conditions of their trading partners. In addition, the economies of some
emerging countries are vulnerable to weakness in world prices for their
commodity exports.
A Fund's income and, in some cases, capital gains from foreign stocks and
securities will be subject to applicable taxation in certain of the countries in
which it invests, and treaties between the U.S. and such countries may not be
available in some cases to reduce the otherwise applicable tax rates. See
"Taxation."
Foreign markets also have different clearance and settlement procedures,
and in certain markets there have been times when settlements have been unable
to keep pace with the volume of securities transactions, making it difficult to
conduct such transactions. Such delays in settlement could result in temporary
periods when a portion of the assets of a Fund remain 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.
B-37
<PAGE>
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 subsequently retreated sharply following a decline in
asset prices. Japan's economic growth in the 1990's has been substantially below
the levels of earlier decades. During this period, Japan's economy drifted
between modest growth and recession. Profits fell sharply, unemployment reached
a historical high and consumer confidence was low. The banking sector continues
to suffer from non-performing loans and the economy generally is subject to
deflationary pressures. Numerous discount-rate cuts since 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
calendar year 1998, Japan's gross national product contracted by 2.8%, its worse
performance in the post-war period.
In addition to the cyclical downturn, Japan is suffering through structural
adjustments. Like many European countries, Japan has experienced a deterioration
of its competitiveness. Factors contributing to this include high wages, a
strong currency and structural rigidities. Japan is reforming its political
process and deregulating its economy to address this situation. Among other
things, the Japanese labor market is moving from a system of lifetime company
employment in response to the need for increased labor mobility, and corporate
governance systems are being introduced to new accounting rules, decision-making
mechanisms and managerial incentives. However, these changes have resulted in
some 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 have left office
because of personal scandals. Should the political instability continue, efforts
to establish effective economic and fiscal policies may be hampered. Future
political developments may lead to changes in policy that might adversely affect
a Fund's investments.
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 the country is
only 50% self-sufficient in food production. Accordingly, Japan is highly
dependent on large imports of wheat, sorghum and soybeans. In addition, its
export 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 effect. The Japanese yen has fluctuated widely during recent periods. A
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<PAGE>
strong yen could be an impediment to strong continued exports and economic
recovery, because it makes Japanese goods sold in other countries more expensive
and reduces the value of foreign earnings repatriated to Japan. Because the
Japanese economy is so dependent on exports, any fall-off in exports may be seen
as a sign of economic weakness, which may adversely affect the market.
Geologically, Japan is located in a volatile area of the world, and has
historically been vulnerable to earthquakes, volcanoes and other natural
disasters. As demonstrated by the Kobe earthquake in January of 1995, in which
5,000 people were killed and billions of dollars of damage was sustained, these
natural disasters can be significant enough to affect the country's economy.
Forward Foreign Currency Exchange Contracts. The Growth and Income, CORE
Large Cap Value, CORE U.S. Equity, CORE Large Cap Growth, CORE Small Cap Equity,
Capital Growth, Strategic Growth, Growth Opportunities, Mid Cap Value, Small Cap
Value and Large Cap Value Funds may enter into forward foreign currency exchange
contracts for hedging purposes and to seek to protect against anticipated
changes in future foreign currency exchange rates. The Balanced, CORE
International Equity, International Equity, European Equity, Japanese Equity,
International Growth Opportunities, Emerging Markets Equity and Asia Growth
Funds may enter into forward foreign currency exchange contracts for hedging
purposes, to seek to protect against anticipated changes in future foreign
currency exchange rates 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.
B-39
<PAGE>
Additionally, when the Investment Adviser believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract to sell, for a fixed amount of U.S.
dollars, the amount of foreign currency approximating the value of some or all
of such Fund's portfolio securities quoted or denominated in such foreign
currency. The precise matching of the forward contract amounts and the value of
the securities involved will not generally be possible because the future value
of such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the
contract is entered into and the date it matures. Using forward contracts to
protect the value of a Fund's portfolio securities against a decline in the
value of a currency does not eliminate fluctuations in the underlying prices of
the securities. It simply establishes a rate of exchange, which a Fund can
achieve at some future point in time. The precise projection of short-term
currency market movements is not possible, and short-term hedging provides a
means of fixing the U.S. dollar value of only a portion of a Fund's foreign
assets.
The Balanced, CORE International Equity, International Equity, European
Equity, Japanese Equity, International Growth Opportunities, 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.
The Balanced, CORE International Equity, International Equity, European
Equity, Japanese Equity, International Growth Opportunities, 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. The segregated assets will be
marked-to-market on a daily basis. If the value of the segregated assets
declines, additional cash or liquid assets will be segregated on a daily basis
so that the value of the assets will equal the amount of a Fund's commitments
with respect to such contracts. Although the contracts are not presently
regulated by the CFTC, the CFTC may in the future assert authority to regulate
these contracts. If this happens, 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. Forward contracts are subject to the risk that the
counterparty to such contract will default on its obligations. Since a forward
foreign currency exchange contract is not guaranteed by an exchange or
clearinghouse, a
B-40
<PAGE>
default on the contract would deprive a Fund of unrealized profits, transaction
costs or the benefits of a currency hedge or force the Fund to cover its
purchase or sale commitments, if any, at the current market price. A Fund will
not enter into forward foreign currency exchange contracts, currency swaps or
other privately negotiated currency instruments unless the credit quality of the
unsecured senior debt or the claims-paying ability of the counterparty is
considered to be investment grade by the Investment Adviser. To the extent that
a substantial portion of a Fund's total assets, adjusted to reflect the Fund's
net position after giving effect to currency transactions, is denominated or
quoted in the currencies of foreign countries, the Fund will be more susceptible
to the risk of adverse economic and political developments within those
countries.
Writing and Purchasing Currency Call and Put Options. A Fund may, to the
extent that it invests in foreign securities, write and purchase put and call
options on foreign currencies for the purpose of protecting against declines in
the U.S. dollar value of foreign portfolio securities and against increases in
the U.S. dollar cost of foreign securities to be acquired. As with other kinds
of option transactions, however, the writing of an option on foreign currency
will constitute only a partial hedge, up to the amount of the premium received.
If and when 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.
Options on currency may be used for either hedging or cross-hedging
purposes, 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, or to seek to increase total return when the Investment Adviser
anticipates that the currency will appreciate or depreciate in value, but the
securities quoted or denominated in that currency do not present attractive
investment opportunities and are not included in the Fund's portfolio.
A call option written by a Fund obligates a Fund to sell a specified
currency to the holder of the option at a specified price if the option is
exercised at any time before the expiration date. A put option written by a Fund
would obligate a Fund to purchase a specified currency from the option holder at
a specified price if the option is exercised at any time before the expiration
date. The writing of currency options involves a risk that a Fund will, upon
exercise of the option, be required to sell currency subject to a call at a
price that is less than the currency's market value or be required to purchase
currency subject to a put at a price that exceeds the currency's market value.
For a description of how to cover written put and call options, see "Writing
Covered Options" above.
A Fund may terminate its obligations under a call or put option by
purchasing an option identical to the one it has written. Such purchases are
referred to as "closing purchase transactions." A Fund may enter into closing
sale transactions in order to realize gains or minimize losses on options
purchased by the Fund.
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<PAGE>
A Fund would normally purchase call options on foreign currency in
anticipation of an increase in the U.S. dollar value of currency in which
securities to be acquired by a Fund are quoted or denominated. The purchase of a
call option would entitle the Fund, in return for the premium paid, to purchase
specified currency at a specified price during the option period. A Fund would
ordinarily realize a gain if, during the option period, the value of such
currency exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise the Fund would realize either no gain or a loss on
the purchase of the call option.
A Fund would normally purchase put options in anticipation of a decline in
the U.S. dollar value of currency in which securities in its portfolio are
quoted or denominated ("protective puts"). The purchase of a put option would
entitle a Fund, in exchange for the premium paid, to sell specified currency at
a specified price during the option period. The purchase of protective puts is
designed merely to offset or hedge against a decline in the dollar value of a
Fund's portfolio securities due to currency exchange rate fluctuations. A Fund
would ordinarily realize a gain if, during the option period, the value of the
underlying currency decreased below the exercise price sufficiently to more than
cover the premium and transaction costs; otherwise the Fund would realize either
no gain or a loss on the purchase of the put option. Gains and losses on the
purchase of protective put options would tend to be offset by countervailing
changes in the value of underlying currency or portfolio securities.
In addition to using options for the hedging purposes described above, the
Funds may use options on currency to seek to increase total return. The 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, the Funds may forego the opportunity to profit from an increase in the
market value of the underlying currency. Also, when writing put options, the
Funds accept, in return for the option premium, the risk that they may be
required to purchase the underlying currency at a price in excess of the
currency's market value at the time of purchase.
Special Risks Associated with Options on Currency. An exchange-traded
options position may be closed out only on an options exchange, which provides a
secondary market for an option of the same series. Although a Fund will
generally purchase or write only those options for which there appears to be an
active secondary market, there is no assurance that a liquid secondary market on
an exchange will exist for any particular option, or at any particular time. For
some options no secondary market on an exchange may exist. In such event, it
might not be possible to effect closing transactions in particular options, with
the result that a Fund would have to exercise its options in order to realize
any profit and would incur transaction costs upon the sale of underlying
securities pursuant to the exercise of put options. If a Fund as a covered call
option writer is unable to effect a closing purchase transaction in a secondary
market, it will not be able to sell the underlying currency (or security quoted
or denominated in that currency) until the option expires or it delivers the
underlying currency upon exercise.
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<PAGE>
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, Credit Swaps, Index Swaps and Interest Rate
---------------------------------------------------------------------------
Swaps, Caps, Floors and Collars
-------------------------------
The Balanced, CORE International Equity, International Equity, European
Equity, Japanese Equity, International Growth Opportunities, Emerging Markets
Equity and Asia Growth Funds may enter into currency swaps for both hedging
purposes and to seek to increase total return. In addition, the Balanced Fund
may enter into mortgage, credit, index and interest rate swaps and other
interest rate swap arrangements such as rate caps, floors and collars, for
hedging purposes or to seek to increase total return. Currency swaps involve the
exchange by 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. Credit swaps involve the receipt of floating or fixed
rate payments in exchange for assuming potential credit losses of an underlying
security. Credit swaps give one party to a transaction the right to dispose of
or acquire an asset (or group of assets), or the right to receive or make a
payment for the other party, upon the occurrence of specified credit events. The
purchase of an interest rate cap entitles the purchaser, to the extent that a
specified index exceeds a predetermined interest rate, to receive payment of
interest on a notional principal amount from the party selling such interest
rate cap. The purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below a predetermined interest rate, to
receive payments of interest on a notional principal amount from the party
selling the interest rate floor. An interest rate collar is the combination of a
cap and a floor that preserves a certain return within a predetermined range of
interest rates.
A Fund will enter into interest rate, 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
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<PAGE>
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 Fund's potential
exposure in a transaction involving a swap or an interest rate floor, cap or
collar is covered by the segregation of cash or liquid assets or otherwise, the
Funds and the Investment 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 transactions involving swaps, caps, floors or
collars unless the unsecured commercial paper, senior debt or claims paying
ability of the other party thereto is considered to be investment grade by the
Investment Adviser.
The use of interest rate, mortgage, index, credit and currency swaps, as
well as interest rate caps, floors and collars, is a highly specialized activity
which involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. If an Investment 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
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.
Convertible Securities
----------------------
Each Fund may invest in convertible securities. Convertible securities
include corporate notes or preferred stock but are ordinarily long-term debt
obligation of the issuer convertible at a stated exchange rate into common stock
of the issuer. As with all debt securities, the market value of convertible
securities tends to decline as interest rates increase and, conversely, to
increase as interest rates decline. Convertible securities generally offer lower
interest or dividend yields than non-convertible securities of similar quality.
However, when the market price of the common stock underlying a convertible
security exceeds the conversion price, the price of the convertible security
tends to reflect the value of the underlying common stock. As the market price
of the underlying common stock declines, the convertible security tends to trade
increasingly on a yield basis, and thus may not depreciate to the same extent as
the underlying common stock. Convertible securities rank senior to common stocks
in an issuer's capital structure and consequently entail less risk than the
issuer's common stock. In evaluating a convertible security, the Investment
Adviser will give primary emphasis to the attractiveness of the underlying
common stock. Convertible debt securities are equity investments for purposes of
each Fund's investment policies.
B-44
<PAGE>
Preferred Securities
--------------------
Each Fund may invest in preferred securities. Unlike debt securities, the
obligations of an issuer of preferred stock, including dividend and other
payment obligations, may not typically be accelerated by the holders of
preferred stock on the occurrence of an event of default (such as a covenant
default or filing of a bankruptcy petition) or other non-compliance by the
issuer with the terms of the preferred stock. Often, however, on the occurrence
of any such event of default or non-compliance by the issuer, preferred
stockholders will be entitled to gain representation on the issuer's board of
directors or increase their existing board representation. In addition,
preferred stockholders may be granted voting rights with respect to certain
issues on the occurrence of any event of default.
Equity Swaps
------------
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. Equity swaps may also be used for hedging purposes or to seek to
increase total return. The counterparty to an equity swap contract will
typically be a bank, investment banking firm or broker/dealer. Equity swap
contracts may be structured in different ways. For example, a counterparty may
agree to pay the Fund the amount, if any, by which the notional amount of the
equity swap contract would have increased in value had it been invested in the
particular stocks (or an index of stocks), plus the dividends that would have
been received on those stocks. In these cases, the Fund may agree to pay to the
counterparty a floating rate of interest on the notional amount of the equity
swap contract plus the amount, if any, by which that notional amount would have
decreased in value had it been invested in such stocks. Therefore, the return to
the Fund on the equity swap contract should be the gain or loss on the notional
amount plus dividends on the stocks less the interest paid by the Fund on the
notional amount. In other cases, the counterparty and the Fund may each agree to
pay the other the difference between the relative investment performances that
would have been achieved if the notional amount of the equity swap contract had
been invested in different stocks (or indices of stocks).
A Fund will enter into equity swaps only on a net basis, which means that
the two payment streams are netted out, with the Fund receiving or paying, as
the case may be, only the net amount of the two payments. Payments may be made
at the conclusion of an equity swap contract or periodically during its term.
Equity swaps do not involve the delivery of securities or other underlying
assets. Accordingly, the risk of loss with respect to equity swaps is limited to
the net amount of payments that a Fund is contractually obligated to make. If
the other party to an equity swap defaults, a Fund's risk of loss consists of
the net amount of payments that such Fund is contractually entitled to receive,
if any. Inasmuch as these transactions are entered into for hedging purposes or
are offset by segregated cash or liquid assets to cover the Funds' potential
exposure, 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.
B-45
<PAGE>
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 Investment Adviser. A Fund's
ability to enter into certain swap transactions may be limited by tax
considerations.
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,
letters of credit or U.S. Government securities maintained on a current basis at
an amount at least equal to the market value of the securities loaned. A Fund
would be required to have the right to call a loan and obtain the securities
loaned at any time on five days' notice. For the duration of a loan, a Fund
would continue to receive the equivalent of the interest or dividends paid by
the issuer on the securities loaned and would also receive compensation from
investment of the collateral. A Fund would not have the right to vote any
securities having voting rights during the existence of the loan, but a Fund
would call the loan in anticipation of an important vote to be taken among
holders of the securities or the giving or withholding of their consent on a
material matter affecting the investment. As with other extensions of credit
there are risks of delay in recovering, or even loss of rights in, the
collateral should the borrower of the securities fail financially. However, the
loans would be made only to firms deemed by the Investment Adviser to be of good
standing, and when, in the judgment of the Investment Adviser, the consideration
which can be earned currently from securities loans of this type justifies the
attendant risk. If the Investment Adviser determines to make securities loans,
it is intended that the value of the securities loaned would not exceed
one-third of the value of the total assets of a Fund (including the loan
collateral).
Cash received as collateral for securities lending transactions may be
invested in other investment eligible securities. Investing the collateral
subjects it to market depreciation or appreciation, and the Fund is responsible
for any loss that may result from its investment of the borrowed collateral.
When-Issued Securities and Forward Commitments
----------------------------------------------
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 generally 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
B-46
<PAGE>
Fund's duration, the maturity of when-issued or forward commitment securities
will be calculated from the commitment date. A Fund is generally required to
segregate until three days prior to the settlement date, cash and liquid assets
in an amount sufficient to meet the purchase price unless the Fund's obligations
are otherwise covered. 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 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.
Other Investment Companies
--------------------------
A Fund reserves the right to invest up to 10% of its total assets in the
securities of all investment companies (including exchange-traded funds such as
SPDRs and iShares/(sm)/, as defined below) but may not acquire more than 3% of
the voting securities of any other investment company. Pursuant to an exemptive
order obtained from the SEC, the Funds may invest in money market funds for
which an Investment 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 (and other expenses) paid by
the Fund. However, to the extent that the Fund invests in a money market fund
for which an Investment Adviser or any of its affiliates acts as Investment
Adviser, the advisory and administration fees payable by the Fund to an
Investment Adviser will be reduced by an amount equal to the Fund's
proportionate share of the advisory and administration fees paid by such money
market fund to its Investment Adviser.
SPDRs are interests in a unit investment trust ("UIT") that may be obtained
from the UIT or purchased in the secondary market (SPDRs are listed on the
American Stock Exchange). The UIT was established to accumulate and hold a
portfolio of common stocks that is intended to track the price performance and
dividend yield of the S&P 500. The UIT is sponsored by a subsidiary of the AMEX.
SPDRs may be used for several reasons, including, but not limited to,
facilitating the handling of cash flows or trading or reducing transaction
costs. The price movement of SPDRs may not perfectly parallel the price activity
of the S&P 500. 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
B-47
<PAGE>
("Balancing Amount") designed to equalize the net asset value of the S&P Index
and the net asset value of a Portfolio Deposit.
SPDRs are not individually redeemable, except upon termination of the UIT.
To redeem, an investor 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, an investor
will receive Index Securities and cash identical to the Portfolio Deposit
required of an investor wishing to purchase a Creation Unit that day.
The price of SPDRs is derived from and based upon the securities held by
the UIT. Accordingly, the level of risk involved in the purchase or sale of a
SPDR is similar to the risk involved in the purchase or sale of traditional
common stock, with the exception that the pricing mechanism for SPDRs is based
on a basket of stocks. Disruptions in the markets for the securities underlying
SPDRs purchased or sold by the Funds could result in losses on SPDRs.
Each Fund (other than the CORE Large Cap Value, CORE U.S. Equity, CORE
Large Cap Growth, CORE Small Cap Equity and Research Select 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 may, subject to the limitations stated above, invest in iShares/(sm)/
(formerly called World Equity Benchmark Shares or "WEBS") and similar securities
that invest in securities included in foreign securities indices. iShares/(sm)/
are shares of an investment company that invests substantially all of its assets
in securities included in the MSCI indices for specified countries.
iShares/(sm)/ are listed on the AMEX and were initially offered to the public in
1996. The market prices of iShares/(sm)/ are expected to fluctuate in accordance
with both changes in the NAVs of their underlying indices and supply and demand
of iShares/(sm)/ on the AMEX. To date, iShares/(sm)/ have traded at relatively
modest discounts and premiums to the NAVs. However, iShares/(sm)/ have a limited
operating history and information is lacking regarding the actual performance
and trading liquidity of iShares/(sm)/ for extended periods or over complete
market cycles. In addition, there is no assurance that the requirements of the
AMEX necessary to maintain the listing of iShares/(sm)/ will continue to be met
or will remain unchanged. In the event substantial market or other disruptions
affecting iShares/(sm)/ should occur in the future, the liquidity and value of a
Fund's shares could also be substantially and adversely affected. If such
disruptions were to occur, a Fund could be required to reconsider the use of
iShares/(sm)/ as part of its investment strategy.
Repurchase Agreements
---------------------
Each Fund may enter into repurchase agreements with dealers in U.S.
Government securities and member banks of the Federal Reserve System which
furnish collateral at least equal in value or market price to the amount of
their repurchase obligation. CORE International Equity, International Equity,
Japanese Equity, European Equity, International Growth Opportunities, Emerging
Markets Equity, Asia Growth and Balanced Funds may also enter into repurchase
agreements involving certain foreign government securities. A repurchase
agreement is an arrangement under which a Fund purchases securities and the
seller agrees to repurchase the
B-48
<PAGE>
securities within a particular time and at a specified price. Custody of the
securities is maintained by a Fund's custodian (or subcustodian). The repurchase
price may be higher than the purchase price, the difference being income to a
Fund, or the purchase and repurchase prices may be the same, with interest at a
stated rate due to a Fund together with the repurchase price on repurchase. In
either case, the income to a Fund is unrelated to the interest rate on the
security subject to the repurchase agreement.
For purposes of the Act and generally for tax purposes, a repurchase
agreement is deemed to be a loan from a Fund to the seller of the security. For
other purposes, it is not always clear whether a court would consider the
security purchased by a Fund subject to a repurchase agreement as being owned by
a Fund or as being collateral for a loan by a Fund to the seller. In the event
of commencement of bankruptcy or insolvency proceedings with respect to the
seller of the security before repurchase of the security under a repurchase
agreement, a Fund may encounter delay and incur costs before being able to sell
the security. Such a delay may involve loss of interest or a decline in price of
the security. If the court characterizes the transaction as a loan and a Fund
has not perfected a security interest in the security, a Fund may be required to
return the security to the seller's estate and be treated as an unsecured
creditor of the seller. As an unsecured creditor, a Fund would be at risk of
losing some or all of the principal and interest involved in the transaction.
The Investment Adviser seeks to minimize the risk of loss from repurchase
agreements by analyzing the creditworthiness of the obligor, in this case the
seller of the security. Apart from the risk of bankruptcy or insolvency
proceedings, there is also the risk that the seller may fail to repurchase the
security. However, if the market value of the security subject to the repurchase
agreement becomes less than the repurchase price (including accrued interest), 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 Investment Advisers or their affiliates, may
transfer uninvested cash balances into a single joint account, the daily
aggregate balance of which will be invested in one or more repurchase
agreements.
Reverse Repurchase Agreements
-----------------------------
A Fund may borrow money by entering into transactions called reverse
repurchase agreements. Under these arrangements, the Fund will sell portfolio
securities to dealers in U.S. Government Securities or members of the Federal
Reserve System, with an agreement to repurchase the security on an agreed date,
price and interest payment. Reverse repurchase agreements involve the possible
risk that the value of portfolio securities the Fund relinquishes may decline
below the price the Fund must pay when the transaction closes. Borrowings may
magnify
B-49
<PAGE>
the potential for gain or loss on amounts invested resulting in an increase in
the speculative character of the Fund's outstanding shares.
When a Fund enters into a reverse repurchase agreement, it places in a
separate custodial account either liquid assets or other high-grade debt
securities that have a value equal to or greater than the repurchase price. The
account is then continuously monitored to make sure that an appropriate value is
maintained. Reverse repurchase agreements are considered to be borrowings under
the Act.
Short Sales
-----------
Short Sales "Against the Box." The Funds (other than the Core Equity Funds)
may engage in short sales against the box. In a short sale, the seller sells a
borrowed security and has a corresponding obligation to the lender to return the
identical security. The seller does not immediately deliver the securities sold
and is said to have a short position in those securities until delivery occurs.
While a short sale is made by selling a security the seller does not own, a
short sale is "against the box" to the extent that the seller contemporaneously
owns or has the right to obtain, at no added cost, securities identical to those
sold short. It may be entered into by a Fund, for example, to lock in a sales
price for a security the Fund does not wish to sell immediately. If a Fund sells
securities short against the box, it may protect itself from loss if the price
of the securities declines in the future, but will lose the opportunity to
profit on such securities if the price rises.
If a Fund effects a short sale of securities at a time when it has an
unrealized gain on the securities, it may be required to recognize that gain as
if it had actually sold the securities (as a "constructive sale") on the date it
effects the short sale. However, such constructive sale treatment may not apply
if the Fund closes out the short sale with securities other than the appreciated
securities held at the time of the short sale and if certain other conditions
are satisfied. Uncertainty regarding the tax consequences of effecting short
sales may limit the extent to which the Fund may effect short sales.
Mortgage Dollar Rolls
---------------------
When the Balanced Fund enters into a mortgage dollar roll, it will
segregate cash or liquid assets in an amount equal to the forward purchase price
until the settlement date.
Portfolio Turnover
------------------
Each Fund may engage in active short-term trading to benefit from yield
disparities among different issues of securities or among the markets for equity
securities, or for other reasons. It is anticipated that the portfolio turnover
rate of each Fund will vary from year to year.
B-50
<PAGE>
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. For purposes of the Act, "majority" means the lesser of (a) 67% or
more of the shares of the Trust or a Fund present at a meeting, if the holders
of more than 50% of the outstanding shares of the Trust or a Fund are present or
represented by proxy, or (b) more than 50% of the shares of the Trust or a Fund.
For purposes of the following limitations, any limitation which involves a
maximum percentage shall not be considered violated unless an excess over the
percentage occurs immediately after, and is caused by, an acquisition or
encumbrance of securities or assets of, or borrowings by, a Fund. With respect
to the Funds' fundamental investment restriction no. 3, asset coverage of at
least 300% (as defined in the Act), inclusive of any amounts borrowed, must be
maintained at all times.
A Fund may not:
(1) Make any investment inconsistent with the Fund's classification
as a diversified company under the Investment Company Act of
1940, as amended (the "Act"). This restriction does not, however,
apply to any Fund classified as a non-diversified company under
the Act.
(2) Invest 25% or more of its total assets in the securities of one
or more issuers conducting their principal business activities in
the same industry (excluding the U.S. Government or any of its
agencies or instrumentalities).
(3) Borrow money, except (a) the Fund may borrow from banks (as
defined in the Act) or through reverse repurchase agreements in
amounts up to 33-1/3% of its total assets (including the amount
borrowed), (b) the Fund may, to the extent permitted by
applicable law, borrow up to an additional 5% of its total assets
for temporary purposes, (c) the Fund may obtain such short-term
credits as may be necessary for the clearance of purchases and
sales of portfolio securities, (d) the Fund may purchase
securities on margin to the extent permitted by applicable law
and (e) the Fund may engage 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.
B-51
<PAGE>
(5) Underwrite securities issued by others, except to the extent that
the sale of portfolio securities by the Fund may be deemed to be
an underwriting.
(6) Purchase, hold or deal in real estate, although a Fund may
purchase and sell securities that are secured by real estate or
interests therein, securities of real estate investment trusts
and mortgage-related securities and may hold and sell real estate
acquired by a Fund as a result of the ownership of securities.
(7) Invest in commodities or commodity contracts, except that the
Fund may invest in currency and financial instruments and
contracts that are commodities or commodity contracts.
(8) Issue senior securities to the extent such issuance would violate
applicable law.
Each Fund may, notwithstanding any other fundamental investment restriction
or policy, invest some or all of its assets in a single open-end investment
company or series thereof with substantially the same investment objective,
restrictions and policies as the Fund.
In addition to the fundamental policies mentioned above, the Trustees have
adopted the following non-fundamental policies which can be changed or amended
by action of the Trustees without approval of shareholders.
A Fund may not:
(a) Invest in companies for the purpose of exercising control or
management.
(b) Invest more than 15% of the Fund's net assets in illiquid investments
including repurchase agreements with a notice or demand period of more
than seven days, securities which are not readily marketable and
restricted securities not eligible for resale pursuant to Rule 144A
under the Securities Act of 1933 (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-52
<PAGE>
MANAGEMENT
The Trustees are responsible for deciding matters of general policy and
reviewing the actions of the Investment Advisers, distributor and transfer
agent. The officers of the Trust conduct and supervise each Fund's daily
business operations.
Information pertaining to the Trustees and officers of the Trust is set
forth below. Trustees and officers deemed to be "interested persons" of the
Trust for purposes of the Act are indicated by an asterisk.
Name, Age Positions Principal Occupation(s)
and Address with Trust During Past 5 Years
----------- ---------- -----------------------
Ashok N. Bakhru, 58 Chairman Chairman of the Board and Trustee -
P.O. Box 143 & Trustee Goldman Sachs Variable Insurance
Lima, PA 19037 Trust (registered investment
company) (since October 1997);
President, ABN Associates (July
1994-March 1996 and November 1998 to
present); Executive Vice President -
Finance and Administration and Chief
Financial Officer, Coty Inc.
(manufacturer of fragrances and
cosmetics) (April 1996-November
1998); Senior Vice President of
Scott Paper Company (until June
1994); Director of Arkwright Mutual
Insurance Company (1984-1999);
Trustee of International House of
Philadelphia (1989-Present); Member
of Cornell University Council
(1992-Present); Trustee of the
Walnut Street Theater
(1992-Present); Director, Private
Equity Investors-III (since November
1998); and Trustee, Citizens
Scholarship Foundation of America
(since 1998).
B-53
<PAGE>
Name, Age Positions Principal Occupation(s)
and Address with Trust During Past 5 Years
----------- ---------- -----------------------
*David B. Ford, 55 Trustee Trustee - Goldman Sachs Variable
32 Old Slip Insurance Trust (registered
New York, NY 10005 investment company) (since October
1997); Director, Commodities Corp.
LLC (futures and commodities
traders) (since April 1997);
Managing Director, J. Aron & Company
(commodity dealer and risk
management adviser) (since November
1996); Managing Director, Goldman
Sachs & Co. Investment Banking
Division (since November 1996);
Chief Executive Officer and
Director, CIN Management (investment
adviser) (since August 1996); Chief
Executive Officer & Managing
Director and Director, Goldman Sachs
Asset Management International
(since November 1995 and December
1994, respectively); Co-Head,
Goldman Sachs Asset Management
(since November 1995); Co-Head and
Director, Goldman Sachs Funds
Management, L.P. (since November
1995 and December 1994,
respectively); and Chairman and
Director, Goldman Sachs Asset
Management Japan Limited (since
November 1994).
*Douglas C. Grip, 38 Trustee Trustee and President - Goldman
32 Old Slip & President Sachs Variable Insurance Trust
New York, NY 10005 (registered investment company)
(since October 1997); Trustee, Trust
for Credit Unions (registered
investment company) (since March
1998); Managing Director, Goldman
Sachs (since November 1997);
President, Goldman Sachs Funds Group
(since April 1996); and President,
MFS Retirement Services Inc., of
Massachusetts Financial Services
(prior thereto).
B-54
<PAGE>
Name, Age Positions Principal Occupation(s)
and Address with Trust During Past 5 Years
----------- ---------- -----------------------
Patrick T. Harker, 42 Trustee Trustee - Goldman Sachs Variable
Office of the Dean Insurance Trust (registered
The Wharton School investment company) (since August
University of Pennsylvania 2000); Dean and Reliance Professor
1000 SH-DH of Operations and Information
Philadelphia, PA 19104-6364 Management, The Wharton School,
University of Pennsylvania
Philadelphia, PA 19104-6364 (since
February 2000); Interim and Deputy
Dean, The Wharton School, University
of Pennsylvania (since July 1999);
Professor and Chairman of Department
of Operations and Information
Management, The Wharton School,
University of Pennsylvania (July
1997-August 2000); UPS
Transportation Professor for the
Private Sector, Professor of Systems
Engineering and Chairman of Systems
Engineering, School of Engineering
and Applied Science, University of
Pennsylvania (prior thereto).
B-55
<PAGE>
Name, Age Positions Principal Occupation(s)
and Address with Trust During Past 5 Years
----------- ---------- -----------------------
*John P. McNulty, 48 Trustee Trustee - Goldman Sachs Variable
32 Old Slip Insurance Trust (registered
New York, NY 10005 investment company) (since October
1997); Managing Director, Goldman
Sachs (since November 1996) and Head
of Investment Management Division
(since September 1999); General
Partner, J. Aron & Company
(commodity dealer and risk
management adviser) (since November
1995); Director and Co-Head, Goldman
Sachs Funds Management, L.P. (since
November 1995); Director, Goldman
Sachs Asset Management International
(since January 1996); Co-Head, GSAM
(November 1995 - September 1999);
Director, Global Capital Reinsurance
(insurance) (since 1989); Director,
Commodities Corp. LLC (since April
1997); and Limited Partner of
Goldman Sachs (1994 - November
1995).
B-56
<PAGE>
Name, Age Positions Principal Occupation(s)
and Address with Trust During Past 5 Years
----------- ---------- -----------------------
Mary P. McPherson, 65 Trustee Trustee - Goldman Sachs Variable
The Andrew W. Mellon Insurance Trust (registered
Foundation investment company) (since October
140 East 62nd Street 1997); Vice President, The Andrew W.
New York, NY 10021 Mellon Foundation (provider of
grants for conservation,
environmental and educational
purposes) (since October 1997);
President of Bryn Mawr College
(1978-1997); Director, Smith College
(since 1998); Director, Josiah Macy,
Jr. Foundation (health educational
programs) (since 1977); Director,
Philadelphia Contributionship
(insurance) (since 1985); Director
Emeritus, Amherst College
(1986-1998); Director, Dayton Hudson
Corporation (general retailing
merchandising) (1988-1997);
Director, The Spencer Foundation
(educational research) (since 1993);
member of PNC Advisory Board
(banking) (since 1993); and
Director, American School of
Classical Studies in Athens (since
1997).
*Alan A. Shuch, 51 Trustee Trustee - Goldman Sachs Variable
32 Old Slip Insurance Trust (registered
New York, NY 10005 investment company) (since October
1997); Advisory Director - GSAM
(since May 1999); Limited Partner,
Goldman Sachs (prior to May 1994);
Consultant to GSAM (since December
1994).
B-57
<PAGE>
Name, Age Positions Principal Occupation(s)
and Address with Trust During Past 5 Years
----------- ---------- -----------------------
William H. Springer, 71 Trustee Trustee - Goldman Sachs Variable
701 Morningside Drive Insurance Trust (registered
Lake Forest, IL 60045 investment company) (since October
1997); Director, The Walgreen Co. (a
retail drug store business) (April
1988 - January 2000); Director of
Baker, Fentress & Co. (a closed-end,
non-diversified management
investment company) (April 1992 -
present); and Chairman and Trustee,
Northern Institutional Funds and
Northern Funds (since April 1984 and
March 2000, respectively).
Richard P. Strubel, 61 Trustee Trustee - Goldman Sachs Variable
500 Lake Cook Road Insurance Trust (registered
Suite 150 investment company) (since October
Deerfield, IL 60015 1997); President and COO, Unext.com
(provider of educational services
via the internet) (since 1999);
Director, Gildan Activewear Inc.
(since February 1999); Director of
Kaynar Technologies Inc. (since
March 1997); Managing Director,
Tandem Partners, Inc. (1990-1999);
President and Chief Executive
Officer, Microdot, Inc. (a
diversified manufacturer of
fastening systems and connectors)
(January 1984 - October 1994);
Trustee, Northern Institutional
Funds and Northern Funds (since
December 1982 and March 2000,
respectively); and Director,
Cantilever Technologies, Inc. (since
1999).
*John M. Perlowski, 36 Treasurer Treasurer - Goldman Sachs Variable
32 Old Slip Insurance Trust (registered
New York, NY 10005 investment company) (since 1997);
Vice President, Goldman Sachs (since
July 1995); and Director/Fund
Accounting and Custody, Investors
Bank &Trust Company (November 1993
to July 1995).
B-58
<PAGE>
Name, Age Positions Principal Occupation(s)
and Address with Trust During Past 5 Years
----------- ---------- -----------------------
*James A. Fitzpatrick, 40 Vice President Vice President - Goldman Sachs
4900 Sears Tower Variable Insurance Trust
Chicago, IL 60606 (registered investment company)
(since October 1997); Managing
Director, Goldman Sachs (since
October 1999); Vice President,
Goldman Sachs (April
1997-December 1999); and Vice
President and General Manager,
First Data Corporation -
Investor Services Group (1994 to
1997).
*Jesse Cole, 37 Vice President Vice President - Goldman Sachs
4900 Sears Tower Variable Insurance Trust
Chicago, IL 60606 (registered investment company)
(since 1998); Vice President,
Goldman Sachs (since June 1998);
Vice President, AIM Management
Group, Inc. (investment adviser)
(April 1996-June 1998); and
Assistant Vice President, The
Northern Trust Company (June
1987-April 1996).
*Kerry K. Daniels, 37 Vice President Vice President--Goldman Sachs
4900 Sears Tower Variable Insurance Trust
Chicago, IL 60606 (registered investment company)
(since April 2000); and Manager,
Institutional Account
Administration - Shareholder
Services, Goldman Sachs (since
1986).
*Mary F. Hoppa, 36 Vice President Vice President--Goldman Sachs
4900 Sears Tower Variable Insurance Trust
Chicago, IL 60606 (registered investment company)
(since April 2000); Vice
President, Goldman Sachs (since
October 1999); and Senior Vice
President and Director of Mutual
Fund Operations, Strong Capital
Management (January
1987-September 1999).
B-59
<PAGE>
Name, Age Positions Principal Occupation(s)
and Address with Trust During Past 5 Years
----------- ---------- -----------------------
*Christopher Keller, 35 Vice President Vice President, Goldman Sachs
4900 Sears Tower Variable Insurance Trust
Chicago, IL 60606 (registered investment company)
(October 2000 - present); Vice
President, Goldman Sachs (April
1997-present); and Manager,
Andersen Consulting (August 1989
- April 1997).
*Philip V. Giuca, Jr., 38 Assistant Assistant Treasurer - Goldman
32 Old Slip Treasurer Sachs Variable Insurance Trust
New York, NY 10005 (registered investment company)
(since 1997); and Vice
President, Goldman Sachs (May
1992-Present).
*Peter Fortner, 42 Assistant Assistant Treasurer - Goldman
32 Old Slip Treasurer Sachs Variable Insurance Trust
New York, NY 10005 (registered investment company)
(since August 2000); Vice
President, Goldman Sachs (July
2000 - present); Associate,
Prudential Insurance Company of
America (November 1985 --June
2000); and Assistant Treasurer;
Certain closed-end Funds
administered by Prudential (1999
and 2000).
*Michael J. Richman, 40 Secretary Secretary - Goldman Sachs
1 Liberty Plaza Variable Insurance Trust
New York, NY 10004 (registered investment company)
(since 1997); Managing Director,
Goldman Sachs (since 2000);
General Counsel of the Funds
Group of GSAM (since December
1997); Associate General Counsel
of GSAM (February 1994 -
December 1997); Counsel to the
Funds Group, GSAM (June 1992 to
December 1997); Associate
General Counsel, Goldman Sachs
(since December 1998); Vice
President of Goldman Sachs
(since June 1992); and Assistant
General Counsel of Goldman Sachs
(June 1992 to December 1998).
B-60
<PAGE>
Name, Age Positions Principal Occupation(s)
and Address with Trust During Past 5 Years
----------- ---------- -----------------------
*Howard B. Surloff, 35 Assistant Assistant Secretary - Goldman
32 Old Slip Secretary Sachs Variable Insurance Trust
New York, NY 10005 (registered investment company)
(since 1997); Assistant General
Counsel, GSAM and General
Counsel to the U.S. Funds Group
(since December 1997); Assistant
General Counsel and Vice
President, Goldman Sachs (since
November 1993 and May 1994,
respectively); and Counsel to
the Funds Group, GSAM (November
1993 - December 1997).
*Valerie A. Zondorak, 35 Assistant Assistant Secretary - Goldman
32 Old Slip Secretary Sachs Variable Insurance Trust
New York, NY 10005 (registered investment company)
(since 1997); Assistant General
Counsel, GSAM and Assistant
General Counsel to the Funds
Group (since December 1997);
Vice President and Assistant
General Counsel, Goldman Sachs
(since March 1997); Counsel to
the Funds Group, GSAM (March
1997 - December 1997); and
Associate of Shereff, Friedman,
Hoffman & Goodman (September
1990 to February 1997).
*Deborah A. Farrell, 29 Assistant Assistant Secretary - Goldman
32 Old Slip Secretary Sachs Variable Insurance Trust
New York, NY 10005 (registered investment company)
(since 1997); Legal Products
Analyst, Goldman Sachs (since
December 1998); Legal Assistant
Goldman Sachs (January
1996-December 1998); Assistant
Secretary to the Funds Group
(1996 to present); and Executiv
Secretary, Goldman Sachs
(January 1994 - January 1996).
B-61
<PAGE>
Name, Age Positions Principal Occupation(s)
and Address with Trust During Past 5 Years
----------- ---------- -----------------------
*Kaysie P. Uniacke, 39 Assistant Assistant Secretary - Goldman
32 Old Slip Secretary Sachs Variable Insurance Trust
New York, NY 10005 (registered investment company)
(since 1997); Managing Director,
Goldman Sachs (since 1997); and
Vice President and Senior Fund
Manager, GSAM (1988 to 1997).
*Elizabeth D. Anderson, 31 Assistant Assistant Secretary - Goldman
32 Old Slip Secretary Sachs Variable Insurance Trust
New York, NY 10005 (registered investment company)
(since 1997); Vice President,
Goldman Sachs (since May 1997);
Fund Manager, GSAM (since April
1996); Junior Fund Manager, GSAM
(1995 - April 1996); and Funds
Trading Assistant, GSAM (1993 -
1995).
*Amy E. Belanger, 31 Assistant Assistant Secretary - Goldman
32 Old Slip Secretary Sachs Variable Insurance Trust
New York, NY 10005 (registered investment company)
(since 1999); Vice President,
Goldman Sachs (since June 1999);
Counsel, Goldman Sachs (since
1998); and Associate, Dechert
Price & Rhoads (September
1996-1998).
Each interested Trustee and officer holds comparable positions with
certain other companies of which Goldman Sachs, GSAM or an affiliate thereof is
the investment adviser, administrator and/or distributor. As of November 30,
2000, 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-62
<PAGE>
The following table sets forth certain information with respect to
the compensation of each Trustee of the Trust for the fiscal year ended August
31, 2000:
<TABLE>
<CAPTION>
Aggregate Pension or Retirement Benefits Total Compensation from Goldman
Compensation Accrued as Part of Funds' Sachs Trust and the Goldman Sachs
Name of Trustee from the Funds/2/ ------------------------- Fund complex (including
--------------- ----------------- Expenses the Funds)/3/
-------- -------------
<S> <C> <C> <C> <C>
Ashok N. Bakhru/1/ $31,780 $ - $105,750
David B. Ford 0 - 0
Douglas C. Grip 0 - 0
Patrick T. Harker/4/ 0 - 0
John P. McNulty 0 - 0
Mary P. McPherson 23,842 - 79,500
Alan A. Shuch 0 - 0
Jackson W. Smart/5/ 15,487 - 53,500
William H. Springer 23,207 - 77,500
Richard P. Strubel 23,842 - 79,500
</TABLE>
/1/ Includes compensation as Chairman of the Board of Trustees.
/2/ Reflects amount paid by the Funds during the fiscal year ended August 31,
2000.
/3/ The Goldman Sachs Fund complex consists of the Goldman Sachs Trust and
Goldman Sachs Variable Insurance Trust. Goldman Sachs Trust consisted of 54
mutual funds, including 23 equity funds, as of August 31, 2000. Goldman
Sachs Variable Insurance Trust consisted of 10 mutual funds as of August 31,
2000.
/4/ Mr. Harker was elected to the Board of Trustees on August 29, 2000.
/5/ No longer a trustee of the Trust.
B-63
<PAGE>
Class A Shares of the Funds may be sold at net asset value without payment
of any sales charge to Goldman Sachs, its affiliates or their respective
officers, partners, directors or employees (including rehired employees and
former partners), any partnership of which Goldman Sachs is a general partner,
any trustee or officer of the Trust and designated family members of any of the
above individuals. These and the Funds' other sales load waivers are due to the
nature of the investors and/or the reduced sales effort and expense that are
needed to obtain such investments.
The Trust, its Investment Advisers and principal underwriter have adopted
codes of ethics under Rule 17j-1 of the Act that permit personnel subject to
their particular codes of ethics to invest in securities, including securities
that may be purchased or held by the Funds.
Management Services
===================
As stated in the Funds' Prospectus, GSFM, 32 Old Slip, 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 the CORE U.S. Equity
and Capital Growth Funds. GSAM, 32 Old Slip, New York, New York, a unit of the
Investment Management Division of Goldman Sachs, serves as Investment Adviser to
the Balanced, Growth and Income, CORE Large Cap Value, CORE Large Cap Growth,
CORE Small Cap Equity, Strategic Growth, Growth Opportunities, CORE
International Equity, Mid Cap Value, Small Cap Value, Large Cap Value and
Research Select Funds. GSAMI, Procession House, 55 Ludgate Hill, London, England
EC4M 7JW, a unit of the Investment Management Division of Goldman Sachs, serves
as Investment Adviser to the International Equity, European Equity, Japanese
Equity, International Growth Opportunities, Emerging Markets Equity and Asia
Growth Funds. GSAMI is also an affiliate of Goldman Sachs. See "Service
Providers" in the Funds' Prospectus for a description of the applicable
Investment Adviser's duties to the Funds.
The Goldman Sachs Group, L.P. which controlled the Funds' Investment
Advisers, merged into The Goldman Sachs Group, Inc. as a result of an initial
public offering in 1999.
Founded in 1869, Goldman Sachs is among the oldest and largest investment
banking firms in the United States. Goldman Sachs is a leader in developing
portfolio strategies and in many fields of investing and financing,
participating in financial markets worldwide and serving individuals,
institutions, corporations and governments. Goldman Sachs is also among the
principal market sources for current and thorough information on companies,
industrial sectors, markets, economies and currencies, and trades and makes
markets in a wide range of equity and debt securities 24-hours a day. The firm
is headquartered in New York and has offices throughout the United States and in
Beijing, Frankfurt, George Town, Hong Kong, London, Madrid, Mexico City, Milan,
Montreal, Paris, Sao Paulo, Seoul, Shanghai, Singapore, Sydney, Taipei, Tokyo,
Toronto, Vancouver and Zurich. It has trading professionals throughout the
United States, as well as in London, Tokyo, Hong Kong and Singapore. The active
participation of Goldman Sachs in the world's financial markets enhances its
ability to identify attractive investments. Goldman Sachs has agreed to permit
the Funds to use the name "Goldman Sachs"
B-64
<PAGE>
or a derivative thereof as part of each Fund's name for as long as a Fund's
Management Agreement is in effect.
The Investment Advisers are able to draw on the substantial research and
market expertise of Goldman Sachs, whose investment research effort is one of
the largest in the industry. The Goldman Sachs Global Investment Research
Department covers approximately 2,200 companies, including approximately 1,000
U.S. corporations in 60 industries. The in-depth information and analyses
generated by Goldman Sachs' research analysts are available to the Investment
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 United States 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 Investment Advisers have access to Goldman
Sachs' economics research. The Economics Research Department based in London,
conducts economic, financial and currency markets research which analyzes
economic trends and interest and exchange rate movements worldwide. The
Economics Research Department tracks factors such as inflation and money supply
figures, balance of trade figures, economic growth, commodity prices, monetary
and fiscal policies, and political events that can influence interest rates and
currency trends. The success of Goldman Sachs' international research team has
brought wide recognition to its members. The team has earned top rankings in
various external surveys such as Extel, Institutional Investor and Reuters.
These rankings acknowledge the achievements of the firm's economists,
strategists and equity analysts.
In allocating assets among foreign countries and currencies for the Funds
which can invest in foreign securities (in particular, the CORE International
Equity, International Equity, International Growth Opportunities, Emerging
Markets Equity and Asia Growth Funds), the Investment 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 Investment Advisers will estimate the total returns from
each currency sector which are consistent with the average investor holding a
portfolio equal to the market capitalization of the financial assets among those
currency sectors. These estimated equilibrium returns are then combined with the
expectations of Goldman Sachs' research professionals to produce an optimal
currency and asset allocation for the level of risk suitable for a Fund given
its investment objectives and criteria.
The Management Agreements provide that GSAM, GSFM and GSAMI, in their
capacity as Investment Advisers, may render similar services to others as long
as the services under the Management Agreements are not impaired thereby. The
Research Select, Large Cap Value,
B-65
<PAGE>
Strategic Growth, Growth Opportunities, CORE Large Cap Value, European Equity,
Japanese Equity and International Growth Opportunities 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 26, 2000, October 26, 1999, April 28, 1999, April 28, 1999,
November 3, 1998, July 22, 1998, April 23, 1998 and April 23, 1998,
respectively. The CORE Small Cap Equity and CORE International 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 Agreements, 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 Agreements, on April 23, 1997 and
January 28, 1997, respectively. The Funds' Management Agreements (except with
respect to the Research Select Fund) were most recently approved by the
Trustees, including a majority of the Trustees who are not parties to the
Management Agreements or "interested persons" (as such term is defined in the
Act) of any party thereto (the "non-interested Trustees"), on April 25, 2000.
These arrangements were most recently approved by the shareholders of each Fund
(other than Research Select, Large Cap Value, Strategic Growth, Growth
Opportunities, CORE Large Cap Value, CORE Large Cap Growth, CORE Small Cap
Equity, CORE International Equity, Emerging Markets Equity, Japanese Equity,
International Growth Opportunities and European Equity Funds) on April 21, 1997.
The sole shareholder of the Research Select, Large Cap Value, Strategic Growth,
Growth Opportunities, CORE Large Cap Value, CORE Large Cap Growth, CORE Small
Cap Equity, CORE International Equity, Emerging Markets Equity, Japanese Equity,
International Growth Opportunities and European Equity Funds approved these
arrangements on June 14, 2000, October 26, 1999, April 28, 1999, April 28, 1999,
November 3, 1998, April 30, 1997, July 21, 1997, July 21, 1997, January 28,
1997, April 23, 1998, April 23, 1998 and July 22, 1998, respectively. Each
Management Agreement will remain in effect until June 30, 2001 and will continue
in effect with respect to the applicable Fund from year to year thereafter
provided such continuance is specifically approved at least annually by (a) the
vote of a majority of such Fund's outstanding voting securities or a majority of
the Trustees of the Trust, and (b) the vote of a majority of the non-interested
Trustees of the Trust, 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). Each Management Agreement is also terminable at any time
without penalty by the Trustees of the Trust or by vote of a majority of the
outstanding voting securities of the applicable Fund on 60 days' written notice
to the applicable Investment Adviser and by the Investment Adviser on 60 days'
written notice to the Trust.
B-66
<PAGE>
Pursuant to the Management Agreements the Investment Advisers are entitled
to receive the fees set forth below, payable monthly based on such Fund's
average daily net assets. In addition, as of the date of this Additional
Statement the Investment Advisers were voluntarily limiting their management
fees for certain funds to the annual rates also listed below:
Management Fee Management Fee
With Without
Fund Limitations Limitations
---- ----------- -----------
GSAM
Balanced Fund 0.65% 0.65%
Growth and Income Fund 0.70% 0.70%
CORE Large Cap Value Fund 0.60% 0.60%
CORE Large Cap Growth Fund 0.70% 0.75%
CORE Small Cap Equity Fund 0.85% 0.85%
Strategic Growth Fund 1.00% 1.00%
Growth Opportunities Fund 1.00% 1.00%
CORE International Equity Fund 0.85% 0.85%
Mid Cap Value Fund 0.75% 0.75%
Small Cap Value Fund 1.00% 1.00%
Large Cap Value Fund 0.75% 0.75%
Research Select Fund 1.00% 1.00%
GSFM
CORE U.S. Equity Fund 0.70% 0.75%
Capital Growth Fund 1.00% 1.00%
GSAMI
International Equity Fund 1.00% 1.00%
European Equity 1.00% 1.00%
Japanese Equity Fund 1.00% 1.00%
International Growth Opportunities Fund 1.20% 1.20%
Emerging Markets Equity Fund 1.20% 1.20%
Asia Growth Fund 1.00% 1.00%
B-67
<PAGE>
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 Agreements. The services required to
be performed for the Funds and the combined advisory (and subadvisory, in the
case of the International Equity Fund) and administration fees payable by the
Funds under the former advisory (and subadvisory, in the case of the
International Equity Fund) and administration agreements are identical to the
services and fees under the Management Agreements.
B-68
<PAGE>
For the fiscal year ended August 31, 2000, the fiscal period ended August
31, 1999 and the fiscal years ended January 31, 1999 and January 31, 1998 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 (with and without the fee limitations that were then
in effect):
<TABLE>
<CAPTION>
Fiscal year ended Fiscal period ended
================= ===================
August 31, August 31,
========== ==========
2000 1999
==== ====
==================================================================
With Fee Without Fee With Fee Without Fee
Limitations Limitations Limitations Limitations
=========== =========== =========== ===========
<S> <C> <C> <C> <C>
Balanced Fund $ 1,303,563 $ 1,303,563 $ 928,470 $ 928,470
Growth and Income Fund 6,580,727 6,580,727 5,645,766 5,645,766
CORE Large Cap Value Fund/1/ 1,743,960 1,743,960 869,263 869,263
CORE U.S. Equity Fund 9,260,137 9,921,575 4,865,259 5,212,778
CORE Large Cap Growth Fund/1/ 7,277,385 8,564,308 2,640,795 3,300,994
CORE Small Cap Equity Fund/1/ 1,322,879 1,322,879 689,175 689,175
CORE International Equity Fund/1/ 3,942,495 3,942,495 1,938,801 1,938,801
Capital Growth Fund 32,406,631 32,406,631 15,000,472 15,000,472
Strategic Growth Fund/1/, /2/ 774,259 774,259 29,606 29,606
Growth Opportunities Fund/1/, /2/ 1,102,761 1,102,761 23,911 23,911
Mid Cap Value Fund 1,673,380 1,673,380 1,332,432 1,332,432
Small Cap Value Fund 2,219,510 2,219,510 1,733,424 1,733,424
Large Cap Value/1/, /3/ 87,323 87,323 N/A N/A
International Equity Fund 15,633,003 15,633,003 6,475,659 6,475,659
European Equity Fund/1/ 1,253,575 1,253,575 451,498 451,498
Japanese Equity Fund/1/ 979,938 979,938 226,009 226,009
International Growth
Opportunities Fund/1/ 3,541,196 3,541,196 598,694 598,694
Emerging Markets Equity Fund/1/ 2,576,018 2,576,018 1,148,664 1,148,664
Asia Growth Fund 1,168,382 1,168,382 501,770 501,770
Research Select Fund/4/ 623,564 623,564 N/A N/A
<CAPTION>
Fiscal year ended Fiscal year ended
================= =================
January 31, January 31,
=========== ===========
1999 1998
==== ====
===================================================================
With Fee Without Fee With Fee Without Fee
Limitations Limitations Limitations Limitations
=========== =========== =========== ===========
<S> <C> <C> <C> <C>
Balanced Fund $ 1,609,311 $ 1,609,311 $ 870,444 $ 870,844
Growth and Income Fund 13,527,887 13,527,887 7,740,380 7,740,380
CORE Large Cap Value Fund/1/ 12,245 12,245 N/A N/A
CORE U.S. Equity Fund 5,691,415 6,647,941 3,087,383 3,924,639
CORE Large Cap Growth Fund/1/ 1,658,095 2,072,619 182,628 228,283
CORE Small Cap Equity Fund/1/ 730,302 769,013 65,418 74,140
CORE International Equity Fund/1/ 1,810,772 1,890,475 51,031 57,835
Capital Growth Fund 17,460,353 17,460,353 10,913,224 10,913,224
Strategic Growth Fund/1/, /2/ N/A N/A N/A N/A
Growth Opportunities Fund/1/, /2/ N/A N/A N/A N/A
Mid Cap Value Fund 2,953,154 2,953,154 1,653,946 1,653,946
Small Cap Value Fund 4,417,249 4,417,249 3,206,411 3,206,411
Large Cap Value/1/, /3/ N/A N/A N/A N/A
International Equity Fund 9,243,090 9,814,989 6,772,826 7,525,362
European Equity Fund/1/ 171,505 171,505 N/A N/A
Japanese Equity Fund/1/ 118,094 122,901 N/A N/A
International Growth
Opportunities Fund/1/ 280,977 287,765 N/A N/A
Emerging Markets Equity Fund/1/ 1,454,673 1,519,721 31,937 34,840
Asia Growth Fund 736,821 808,815 1,874,193 2,179,299
Research Select Fund/4/ N/A N/A N/A N/A
</TABLE>
----------------------------------
/1/ The CORE Large Cap Value, CORE Large Cap Growth, CORE Small Cap Equity, CORE
International Equity, Strategic Growth, Growth Opportunities, Large Cap
Value, European Equity, Japanese Equity, International Growth Opportunities
and Emerging Markets Equity Funds commenced operations on December 31, 1998,
May 1, 1997, August 15, 1997, August 15, 1997, May 24, 1999, May 24, 1999,
December 15, 1999, October 1, 1998, May 1, 1998, May 1, 1998 and December
15, 1997, respectively.
/2/ During the fiscal years ended January 31, 1999 and January 31, 1998, no
Shares of the Strategic Growth or Growth Opportunities Funds had been
offered.
/3/ During the fiscal period ended August 31, 1999 and the fiscal years ended
January 31, 1999 and January 31, 1998, no Shares of the Fund had been
offered.
/4/ The Research Select Fund commenced operations on June 19, 2000. During the
fiscal period ended August 31, 1999 and the fiscal years ended January 31,
1999 and January 31, 1998 no Shares of the Fund had been offered.
B-69
<PAGE>
Under its Management Agreement, each Investment Adviser also: (i)
supervises all non-advisory operations of each Fund that it advises; (ii)
provides personnel to perform such executive, administrative and clerical
services as are reasonably necessary to provide effective administration of each
Fund; (iii) arranges for at each Fund's expense: (a) the preparation of all
required tax returns, (b) the preparation and submission of reports to existing
shareholders, (c) the periodic updating of prospectuses and statements of
additional information and (d) the preparation of reports to be filed with the
SEC and other regulatory authorities; (iv) maintains each Fund's records; and
(v) provides office space and all necessary office equipment and services.
Activities of Goldman Sachs and Its Affiliates and Other Accounts Managed
by Goldman Sachs. The involvement of the Investment 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
Investment 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, 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 Investment 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 Investment
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 Investment Advisers and/or their
affiliates will not initiate or recommend certain types of transactions in
certain securities or instruments with respect to which the Investment Advisers
and/or their affiliates are performing services or when position limits have
been reached.
In connection with their management of the Funds, the Investment Advisers
may have access to certain fundamental analysis and proprietary technical models
developed by Goldman Sachs and other affiliates. The Investment Advisers will
not be under any obligation, however, to effect transactions on behalf of the
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
B-70
<PAGE>
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
Investment 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 Investment Advisers in managing the
Funds.
The results of each Fund's investment activities may differ significantly
from the results achieved by the Investment Advisers and their affiliates for
their proprietary accounts or accounts (including investment companies or
collective investment vehicles) managed or advised by them. It is possible that
Goldman Sachs and its affiliates and such other accounts will achieve investment
results which are substantially more or less favorable than the results achieved
by a Fund. Moreover, it is possible that a Fund will sustain losses during
periods in which Goldman Sachs and its affiliates achieve significant profits on
their trading for proprietary or other accounts. The opposite result is also
possible.
The investment activities of Goldman Sachs and its affiliates for their
proprietary accounts and accounts under their management may also limit the
investment opportunities for the Funds in certain emerging markets in which
limitations are imposed upon the aggregate amount of investment, in the
aggregate or individual issuers, by affiliated foreign investors.
An investment policy committee which may include partners of Goldman Sachs
and its affiliates may develop general policies regarding a Fund's activities
but will not be involved in the day-to-day management of such Fund. In such
instances, those individuals may, as a result, obtain information regarding the
Fund's proposed investment activities which is not generally available to the
public. In addition, by virtue of their affiliation with Goldman Sachs, any such
member of an investment policy committee will have direct or indirect interests
in the activities of Goldman Sachs and its affiliates in securities and
investments similar to those in which the Fund invests.
In addition, certain principals and certain of the employees of the
Investment Advisers are also principals or employees of Goldman Sachs or their
affiliated entities. As a result, the performance by these principals and
employees of their obligations to such other entities may be a consideration of
which investors in the Funds should be aware.
Each Investment Adviser may enter into transactions and invest in
currencies or instruments on behalf of a Fund in which customers of Goldman
Sachs serve as the counterparty, principal or issuer. In such cases, such
party's interests in the transaction will be adverse to the interests of 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 into transactions with other
clients of Goldman Sachs or its affiliates
B-71
<PAGE>
where such other clients have interests adverse to those of the Funds. At times,
these activities may cause departments of Goldman Sachs or its affiliates to
give advice to clients that may cause these clients to take actions adverse to
the interests of the client. To the extent affiliated transactions are
permitted, the Funds will deal with Goldman Sachs and its affiliates on an arms-
length basis.
Each Fund will be required to establish business relationships with its
counterparties based on the Fund's own credit standing. Neither Goldman Sachs
nor its affiliates will have any obligation to allow their credit to be used in
connection with a Fund's establishment of its business relationships, nor is it
expected that a Fund's counterparties will rely on the credit of Goldman Sachs
or any of its affiliates in evaluating the Fund's creditworthiness.
From time to time, Goldman Sachs or any of its affiliates may, but is not
required to, purchase and hold shares of a Fund in order to increase the assets
of the Fund. Increasing a Fund's assets may enhance investment flexibility and
diversification and may contribute to economies of scale that tend to reduce the
Fund's expense ratio. Goldman Sachs reserves the right to redeem at any time
some or all of the shares of a Fund acquired for its own account. A large
redemption of shares of a Fund by Goldman Sachs could significantly reduce the
asset size of the Fund, which might have an adverse effect on the Fund's
investment flexibility, portfolio diversification and expense ratio.
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 Investment 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, 85 Broad Street, New York, New York 10004, serves as the
exclusive distributor of shares of the Funds pursuant to a "best efforts"
arrangement as provided by a distribution agreement with the Trust on behalf of
each Fund. Shares of the Funds are offered and sold on a continuous basis by
Goldman Sachs, acting as agent. Pursuant to the distribution agreement, after
the Prospectuses and periodic reports have been prepared, set in type and mailed
to shareholders, Goldman Sachs will pay for the printing and distribution of
copies thereof used in connection with the offering to prospective investors.
Goldman Sachs will also pay for other supplementary sales literature and
advertising costs. Goldman Sachs may enter into sales agreements with certain
investment dealers and other financial service firms (the "Authorized Dealers")
to solicit subscriptions for Class A, Class B and Class C 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.
B-72
<PAGE>
Goldman Sachs retained approximately the following combined commissions on
sales of Class A, Class B and Class C Shares during the following periods:
<TABLE>
<CAPTION>
Fiscal year ended Fiscal period ended Fiscal year ended Fiscal year ended
================== ==================== ================= =================
August 31, August 31, January 31, January 31,
========== ========== =========== ===========
2000 1999 1999 1998
==== ==== ==== ====
<S> <C> <C> <C> <C>
Balanced Fund/1/ $ 22,000 $ 45,772 $ 328,147 $ 387,000
Growth and Income Fund/1/ 102,000 161,907 1,625,895 2,405,000
CORE Large Cap Value Fund/2/ 81,000 47,033 1,035 N/A
CORE U.S. Equity Fund/1/ 258,000 247,772 516,723 566,000
CORE Large Cap Growth Fund/3/ 334,000 209,999 360,931 129,000
CORE Small Cap Equity Fund/4/ 59,000 25,650 120,911 49,000
CORE International Equity Fund/4/ 54,000 20,943 93,771 24,000
Capital Growth Fund/1/ 1,947,000 964,994 1,625,245 743,000
Strategic Growth Fund/5/ 674,000 67,647 N/A N/A
Growth Opportunities Fund/5/ 1,218,000 88,874 N/A N/A
Mid Cap Value Fund/4/ 58,000 24,203 403,632 704,000
Small Cap Value Fund/1/ 49,000 58,547 595,864 662,000
Large Cap Value Fund/6/ 46,000 N/A N/A N/A
International Equity Fund/1/ 2,891,000 818,240 1,226,623 1,091,000
European Equity Fund/7/ 579,000 217,889 433,970 N/A
Japanese Equity Fund/7/ 497,000 13,174 5,020 N/A
International Growth
Opportunities Fund/7/ 2,168,000 301,000 267,136 N/A
Emerging Markets Equity Fund/8/ 149,000 67,356 495,353 107,000
Asia Growth Fund/1/ 92,000 106,223 133,988 414,000
Research Select Fund/9/ 951,000 N/A N/A N/A
</TABLE>
--------------------------------------------------------------------------------
/1/ Prior to August 15, 1997, the Balanced, Growth and Income, CORE U.S. Equity,
Capital Growth, International Equity, Small Cap Value and Asia Growth Funds had
not sold Class C Shares.
/2/ The CORE Large Cap Value Fund commenced operations on December 31, 1998.
/3/ Prior to May 1, 1997 May 1, 1997 and August 15, 1997, the CORE Large Cap
Growth Fund had not sold Class A, Class B and Class C Shares, respectively.
/4/ Prior to August 15, 1997, the CORE Small Cap Equity, CORE International
Equity and Mid Cap Value Funds had not sold Class A, Class B or Class C Shares.
/5/ The Strategic Growth and Growth Opportunities Funds commenced operations on
May 24, 1999.
/6/ The Large Cap Value Fund commenced operations on December 15, 1999. During
the fiscal period ended August 31, 1999 and the fiscal years ended January 31,
1999 and January 31, 1998, no Shares of the Fund had been offered.
/7/ Prior to October 1, 1998, May 1, 1998 and May 1, 1998, the European Equity,
Japanese Equity and International Growth Opportunities Funds had not sold Class
A, Class B or Class C Shares.
/8/ Prior to December 15, 1997, the Emerging Markets Equity Fund had not sold
Class A, Class B or Class C Shares.
/9/ The Research Select Fund commenced operations on June 19, 2000. During the
fiscal period ended August 31, 1999 and the fiscal years ended January 31, 1999
and January 31, 1998, no Shares of the Fund had been offered.
B-73
<PAGE>
Goldman Sachs, 4900 Sears Tower, Chicago, IL 60606 serves as the Trust's
transfer agent. Under its transfer agency agreement with the Trust, Goldman
Sachs has undertaken with the Trust to (i) record the issuance, transfer and
redemption of shares, (ii) provide purchase and redemption confirmations and
quarterly statements, as well as certain other statements, (iii) provide certain
information to the Trust's custodian and the relevant sub-custodian in
connection with redemptions, (iv) provide dividend crediting and certain
disbursing agent services, (v) maintain shareholder accounts, (vi) provide
certain state Blue Sky and other information, (vii) provide shareholders and
certain regulatory authorities with tax related information, (viii) respond to
shareholder inquiries, and (ix) render certain other miscellaneous services. For
its transfer agency services, Goldman Sachs is entitled to receive a transfer
agency fee equal, on an ongoing basis, to 0.04% of average daily net assets with
respect to each Fund's Institutional and Service Shares and 0.19% of average
daily net assets with respect to each Fund's Class A, Class B and Class C
Shares.
As compensation for the services rendered to the Trust by Goldman Sachs as
transfer agent and the assumption by Goldman Sachs of the expenses related
thereto, Goldman Sachs received fees for the fiscal year ended August 31, 2000,
the fiscal period ended August 31, 1999 and the fiscal years ended January 31,
1999 and January 31, 1998 from each Fund then in existence as follows under the
fee schedules then in effect:
<TABLE>
<CAPTION>
Class A, B and C Class A, B and C Class A, B and C
================= ================ ================
fiscal year ended fiscal period ended fiscal year ended
================= =================== =================
August 31, August 31, January 31,
========== ========== ===========
2000 1999 1999 1998
==== ==== ==== ====
<S> <C> <C> <C> <C>
Balanced Fund/1/ $ 376,307 $ 265,040 $ 415,314 $ 240,869
Growth and Income Fund/1/ 1,712,159 1,472,797 2,847,724 1,545,495
CORE Large Cap Value Fund/2/ 220,203 79,434 478 N/A
CORE U.S. Equity Fund/1/ 1,822,544 937,880 1,026,711 483,534
CORE Large Cap Growth Fund/3/ 1,537,502 507,346 297,884 107,944
CORE Small Cap Equity Fund/4/ 145,253 85,644 169,333 62,625
CORE International Equity Fund/4/ 294,670 135,685 107,285 36,474
Capital Growth Fund/1/ 5,422,979 2,686,091 2,429,326 992,678
Strategic Growth Fund/5/ 120,349 2,712 N/A N/A
Growth Opportunities Fund/5/ 181,112 1,830 N/A N/A
MidCap Value Fund/4/ 131,918 120,585 227,387 142,558
Small Cap Value Fund/1/ 376,069 308,496 686,997 595,479
Large Cap Value Fund/6/ 6,667 N/A N/A N/A
International Equity Fund/1/ 2,468,219 1,081,759 1,276,567 860,719
European Equity/7/ 223,685 74,587 25,506 N/A
Japanese Equity Fund/7/ 129,762 25,658 23,737 N/A
International Growth
Opportunities Fund/7/ 342,784 44,408 39,575 N/A
Emerging Markets Equity Fund/8/ 151,186 68,673 131,048 1,907
Asia Growth Fund/1/ 201,343 87,224 260,032 370,233
Research Select Fund/9/ 116,520 N/A N/A N/A
</TABLE>
-------------------------------------------------
/1/ Prior to August 15, 1997, the Balanced, Growth and Income, CORE U.S. Equity,
Capital Growth, International Equity, Small Cap Value and Asia Growth Funds had
not sold Class C Shares.
B-74
<PAGE>
/2/ The CORE Large Cap Value Fund commenced operations on December 31, 1998.
/3/ Prior to May 1, 1997, May 1, 1997 and August 15, 1997, the CORE Large Cap
Growth Fund had not sold Class A, Class B and Class C Shares, respectively.
/4/ Prior to August 15, 1997, the CORE Small Cap Equity, CORE International
Equity and Mid Cap Value Funds had not sold Class A, Class B or Class C Shares.
/5/ The Strategic Growth and Growth Opportunities Funds commenced operations on
May 24, 1999.
/6/ The Large Cap Value Fund commenced operation on December 15, 1999. During
the fiscal period ended August 31, 1999 and the fiscal years ended January 31,
1999 and January 31, 1998, no Shares of the Fund had been offered.
/7/ Prior to October 1, 1998, May 1, 1998 and May 1, 1998, the European Equity,
Japanese Equity and International Growth Opportunities Funds had not sold Class
A, Class B or Class C Shares.
/8/ Prior to December 15, 1997, Emerging Markets Equity Fund had not sold Class
A, Class B or Class C Shares.
/9/ The Research Select Fund commenced operations on June 19, 2000. During the
fiscal period ended August 31, 1999 and the fiscal years ended January 31, 1999
and January 31, 1998, no Shares of the Fund had been offered.
B-75
<PAGE>
<TABLE>
<CAPTION>
Institutional Shares
-----------------------------------------------------------
Fiscal year Fiscal period Fiscal year Fiscal year
=========== ============== =========== ===========
ended ended ended Ended
===== ====== ===== =====
August 31, August 31, January 31, January 31,
========== =========== =========== ===========
2000 1999 1999 1998
==== ==== ==== ====
<S> <C> <C> <C> <C>
Balanced Fund/1/ $ 991 $ 1,303 $ 10,146 $ N/A
Growth and Income Fund 12,023 9,957 65,822 2,593
CORE Large Cap Value Fund/2/ 69,901 41,227 716 N/A
CORE U.S. Equity Fund 140,635 77,800 47,585 0
CORE Large Cap Growth Fund/3/ 131,854 68,733 95,848 49
CORE Small Cap Equity Fund/4/ 31,648 14,387 99,495 0
CORE International Equity Fund/4/ 123,484 62,671 181,201 0
Capital Growth Fund/1/ 150,692 33,191 7,002 683
Strategic Growth Fund/5/ 5,633 613 N/A N/A
Growth Opportunities Fund/5/ 5,931 571 N/A N/A
Mid Cap Value Fund/4/ 61,403 45,624 189,538 74,315
Small Cap Value Fund/1/ 9,587 4,353 6,745 2,674
Large Cap Value Fund/6/ 3,253 N/A N/A N/A
International Equity Fund 104,063 30,437 15,221 0
European Equity 3,050 2,357 1,490 N/A
Japanese Equity Fund/7/ 11,878 3,738 33,786 N/A
International Growth
Opportunities Fund 45,874 10,606 40,115 N/A
Emerging Markets Equity Fund/8/ 54,038 23,830 32,313 617
Asia Growth Fund/1/ 4,347 1,708 406 0
Research Select Fund/9/ 411 N/A N/A N/A
<CAPTION>
Service Shares
----------------------------------------------------------------
Fiscal year Fiscal period Fiscal year Fiscal year
=========== ============= =========== ===========
ended ended ended ended
===== ===== ===== =====
August 31, August 31, January 31, January 31,
========== =========== =========== ===========
2000 1999 1999 1998
==== ==== ==== ====
<S> <C> <C> <C> <C>
Balanced Fund/1/ $ 6 $ 36 $ 246 $ N/A
Growth and Income Fund 3,563 2,595 4,575 5,033
CORE Large Cap Value Fund/2/ 5 1 0 N/A
CORE U.S. Equity Fund 4,822 2,767 1,735 0
CORE Large Cap Growth Fund/3/ 1,224 511 490 21
CORE Small Cap Equity Fund/4/ 28 14 31 0
CORE International Equity Fund/4/ 9 2 8 0
Capital Growth Fund/1/ 3,894 1,335 612 0
Strategic Growth Fund/5/ 1 1 N/A N/A
Growth Opportunities Fund/5/ 53 1 N/A N/A
Mid Cap Value Fund/4/ 72 53 60 1
Small Cap Value Fund/1/ 21 38 47 0
Large Cap Value Fund/6/ 0 N/A N/A N/A
International Equity Fund 1,632 851 596 0
European Equity 1 1 0 N/A
Japanese Equity Fund/7/ 0 1 5 N/A
International Growth
Opportunities Fund 1 1 4 N/A
Emerging Markets Equity Fund/8/ 1 1 44 0
Asia Growth Fund/1/ N/A N/A N/A N/A
Research Select Fund/9/ 1 N/A N/A N/A
</TABLE>
--------------------------------------------------------------------------------
/1/ Prior to August 15, 1997, the Balanced Fund had not sold Institutional
Shares or Service Shares; prior to August 15, 1997 neither Capital Growth Fund
nor Small Cap Value Fund had sold Institutional or Service Shares; and Asia
Growth Fund had not sold Service Shares as of August 31, 2000.
/2/ The CORE Large Cap Value Fund commenced operations on December 31, 1998.
/3/ Prior to May 1, 1997, the CORE Large Cap Growth Fund had not sold
Institutional or Service Shares.
/4/ Prior to August 15, 1997, the CORE Small Cap Equity and the CORE
International Equity Funds had not sold Institutional or Service Shares. The Mid
Cap Value Fund had not sold Service Shares prior to July 18, 1997.
B-76
<PAGE>
/5/ The Strategic Growth and Growth Opportunities Funds commenced operations on
May 24, 1999.
/6/ The Large Cap Value Fund commenced operations on December 15, 1999. During
the fiscal period ended August 31, 1999 and the fiscal years ended January 31,
1999 and January 31, 1998, no Shares of the Fund had been offered.
/7/ Prior to May 1, 1998, the Japanese Equity Fund had not sold Institutional or
Service Shares.
/8/ Prior to December 15, 1997, the Emerging Markets Equity Fund had not sold
Institutional or Service Shares.
/9/ The Research Select Fund commenced operations on June 19, 2000. During the
fiscal period ended August 31, 1999 and the fiscal years ended January 31, 1999
and January 31, 1998, no Shares of the Fund had been offered.
B-77
<PAGE>
The Trust's distribution and transfer agency agreements each provide that
Goldman Sachs may render similar services to others so long as the services
Goldman Sachs provides thereunder are not impaired thereby. Such agreements also
provide that the Trust will indemnify Goldman Sachs against certain liabilities.
Expenses
========
The Trust, on behalf of each Fund, is responsible for the payment of each
Fund's respective expenses. The expenses include, without limitation, the fees
payable to the Investment Advisers, service fees paid to institutions that have
agreed to provide account administration and personal account maintenance
services to their customers who are the beneficial owners of Service Shares
("Service Organizations"), the fees and expenses of 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 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 service plan or distribution and service
plans applicable to a particular class and transfer agency fees, all Fund
expenses are borne on a non-class specific basis.
The imposition of the Investment Adviser's fee, as well as other operating
expenses, will have the effect of reducing the total return to investors. From
time to time, the Investment Adviser may waive receipt of its fees and/or
voluntarily assume certain expenses of a Fund, which would have the effect of
lowering that Fund's overall expense ratio and increasing total return to
investors at the time such amounts are waived or assumed, as the case may be.
B-78
<PAGE>
The Investment Advisers voluntarily have agreed to reduce or limit certain
"Other Expenses" (excluding management fees, distribution and service fees,
transfer agency fees, service share fees, taxes, interest, brokerage, and
litigation, indemnification and other extraordinary expenses) for the following
Funds to the extent such expenses exceed the following percentage of average
daily net assets:
Other
Expenses
--------
Balanced Fund 0.06%
Growth and Income Fund 0.05%
CORE Large Cap Value Fund 0.06%
CORE U.S. Equity Fund 0.00%
CORE Large Cap Growth Fund 0.02%
CORE Small Cap Equity Fund 0.04%
CORE International Equity Fund 0.12%
Capital Growth Fund 0.00%
Strategic Growth Fund 0.00%
Growth Opportunities Fund 0.11%
Mid Cap Value Fund 0.10%
Small Cap Value Fund 0.06%
Large Cap Value Fund 0.06%
International Equity Fund 0.10%
European Equity Fund 0.10%
Japanese Equity Fund 0.11%
International Growth Opportunities Fund 0.16%
Emerging Markets Equity Fund 0.35%
Asia Growth Fund 0.16%
Research Select Fund 0.06%
Such reductions or limits, if any, are calculated monthly on a cumulative
basis and may be discontinued or modified by the applicable Investment 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 Investment Adviser's costs
of performing certain accounting services not being provided by a Fund's
Custodian.
B-79
<PAGE>
Reimbursement
=============
For the fiscal year ended August 31, 2000, the fiscal period ended August
31, 1999 and the fiscal years ended January 31, 1999 and January 31, 1998, the
amounts of certain "Other Expenses" of each Fund then in existence that were
reduced or otherwise limited were as follows under the expense limitations that
were then in effect:
<TABLE>
<CAPTION>
Fiscal year ended Fiscal period ended Fiscal year ended Fiscal year ended
================= =================== ================= =================
August 31, August 31, January 31, January 31,
========== ========== =========== ===========
2000 1999 1999 1998
==== ==== ==== ====
<S> <C> <C> <C> <C> <C>
Balanced Fund/1/ $341,990 $307,789 $481,945 $420,659
Growth and Income Fund/1/ 0 599,598 1,033,046 0
CORE Large Cap Value Fund/2/ 308,324 239,291 137,173 N/A
CORE U.S. Equity Fund/1/ 500,448 340,568 534,447 63,253
CORE Large Cap Growth Fund/3/ 429,700 323,807 483,322 332,713
CORE Small Cap Equity Fund/4/ 336,461 275,311 415,298 202,498
CORE International Equity Fund/4/ 431,231 223,253 806,303 206,055
Capital Growth Fund/1/ 809,733 457,262 933,189 0
Strategic Growth Fund/5/ 140,479 303,839 N/A N/A
Growth Opportunities Fund/5/ 90,220 303,862 N/A N/A
Mid Cap Value Fund/4/ 115,815 134,639 459,373 264,378
Small Cap Value Fund/1/ 145,110 191,783 556,422 0
Large Cap Value Fund/6/ 239,059 N/A N/A N/A
International Equity Fund/1/ 793,656 311,046 1,803,009 0
European Equity Fund/7/ 401,453 227,469 190,277 N/A
Japanese Equity Fund/7/ 352,950 208,419 263,545 N/A
International Growth
Opportunities Fund/7/ 500,956 183,234 361,922 N/A
Emerging Markets Equity Fund/8/ 386,666 355,841 696,214 112,725
Asia Growth Fund/1/ 522,149 211,592 519,489 125,828
Research Select Fund/9/ 343,483 N/A N/A N/A
</TABLE>
--------------------------------
/1/ Prior to August 15, 1997, Balanced, Growth and Income, CORE U.S. Equity,
Capital Growth, Small Cap Value, International Equity and Asia Growth Funds had
not sold Class C Shares. Prior to August 15, 1997, Balanced Fund had not sold
Institutional Shares or Service Shares; prior to August 15, 1997 neither Capital
Growth Fund nor Small Cap Value Fund had sold Institutional or Service Shares.
As of August 31, 2000, Asia Growth Fund had not sold Service Shares.
/2/ The CORE Large Cap Value Fund commenced operations on December 31, 1998.
/3/ Prior to May 1, 1997, May 1, 1997, August 15, 1997, May 1, 1997 and May 1,
1997 the CORE Large Cap Growth Fund had not sold Class A, Class B, Class C,
Institutional or Service Shares, respectively.
/4/ Prior to August 15, 1997, the CORE Small Cap Equity and CORE International
Equity Funds had not sold Class A, Class B, Class C, Institutional or Service
Shares. The Mid Cap Value Fund had not sold Class A, Class B or Class C Shares
prior to August 15, 1997 or Service Shares prior to July 18, 1997.
/5/ The Strategic Growth and Growth Opportunities Funds commenced operations on
May 24, 1999.
B-80
<PAGE>
/6/ The Large Cap Value Fund commenced operations on December 15, 1999. During
the fiscal period ended August 31, 1999 and the fiscal years ended January 31,
1999 and January 31, 1998, no Shares of the Fund had been offered.
/7/ Prior to October 1, 1998, May 1, 1998 and May 1, 1998, the European Equity,
Japanese Equity and International Growth Opportunities Funds had not sold Class
A, Class B, Class C, Institutional or Service Shares
/8/ Prior to December 15, 1997, the Emerging Markets Equity Fund had not sold
Class A, Class B, Class C, Institutional or Service Shares.
/9/ The Research Select Fund commenced operations on June 19, 2000. During the
fiscal period ended August 31, 1999 and the fiscal years ended January 31, 1999
and January 31, 1998, no Shares of the Fund had been offered.
Custodian and Sub-Custodians
============================
State Street, P.O. Box 1713, Boston, Massachusetts 02105, is the custodian
of the Trust's portfolio securities and cash. State Street also maintains the
Trust's accounting records. State Street may appoint domestic and foreign
sub-custodians from time to time to hold certain securities purchased by the
Trust and to hold cash for the Trust.
Independent Public Accountants
==============================
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, MA 02110,
currently serve as the independent auditors of the Funds for the fiscal year
ending August 31, 2001. In addition to audit services, PricewaterhouseCoopers
LLP prepares the Funds' federal and state tax returns, and provides consultation
and assistance on accounting, internal control and related matters. The
financial statements of the Funds for the fiscal years or periods ended on or
before August 31, 1999, and the data set forth under "Financial Highlights" in
the Prospectuses for the fiscal years or periods ended on or before August 31,
1999, were audited by Arthur Andersen LLP, the Funds' former auditors.
B-81
<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Investment 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 Investment
Advisers are generally required to give primary consideration to obtaining the
most favorable execution and net price available. This means that an Investment
Adviser will seek to execute each transaction at a price and commission, if any,
which provides the most favorable total cost or proceeds reasonably attainable
in the circumstances. As permitted by Section 28(e) of the Securities Exchange
Act of 1934, the Fund may pay a broker which provides brokerage and research
services to the Fund an amount of disclosed commission in excess of the
commission which another broker would have charged for effecting that
transaction. Such practice is subject to a good faith determination that such
commission is reasonable in light of the services provided and to such policies
as the Trustees may adopt from time to time. While the Investment 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 Investment Advisers will consider research and
investment services provided by brokers or dealers who effect or are parties to
portfolio transactions of a Fund, the Investment Advisers and their affiliates,
or their other clients. Such research and investment services are those which
brokerage houses customarily provide to institutional investors and include
research reports on particular industries and companies, economic surveys and
analyses, recommendations as to specific securities and other products or
services (e.g., quotation equipment and computer related costs and expenses),
advice concerning the value of securities, the advisability of investing in,
purchasing or selling securities, the availability of securities or the
purchasers or sellers of securities, furnishing analyses and reports concerning
issuers, industries, securities, economic factors and trends, portfolio strategy
and performance of accounts, effecting securities transactions and performing
functions incidental thereto (such as clearance and settlement) and providing
lawful and appropriate assistance to the Investment Advisers in the performance
of their decision-making responsibilities. Such services are used by the
Investment Advisers in connection with all of their investment activities, and
some of such services obtained in connection with the execution of transactions
for a Fund may be used in managing other investment accounts. Conversely,
brokers furnishing such services may be
B-82
<PAGE>
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 Investment Advisers in providing management
services for the Trust.
In circumstances where two or more broker-dealers offer comparable prices
and execution capability, preference may be given to a broker-dealer which has
sold shares of the Fund as well as shares of other investment companies or
accounts managed by the Investment 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 Investment 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 Investment Adviser acts as investment adviser or sub-investment
adviser), the Investment Adviser, to the extent permitted by applicable laws and
regulations, may aggregate the securities to be sold or purchased for the Fund
with those to be sold or purchased for such other customers in order to obtain
the best net price and most favorable execution under the circumstances. In such
event, allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the applicable Investment
Adviser in the manner it considers to be equitable and consistent with its
fiduciary obligations to such Fund and such other customers. In some instances,
this procedure may adversely affect the price and size of the position
obtainable for 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 Investment 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 customary. 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-83
<PAGE>
For the fiscal year ended August 31, 2000, the fiscal period ended August 31,
1999 and the fiscal years ended January 31, 1999 and January 31, 1998, each Fund
in existence paid brokerage commissions as follows. The amount of brokerage
commissions paid by a Fund may vary substantially from year to year because of
differences in shareholder purchase and redemption activity, portfolio turnover
rates and other factors.
<TABLE>
<CAPTION>
Total Total Brokerage
Brokerage Amount of Amount of Commissions
Total Commissions Transactions Transactions Paid
Brokerage Paid to on which Effected through to Brokers
Commissions Goldman Commissions Brokers Providing Providing
Paid Sachs/3/ Paid Research Research
==== ====== ==== ======== ========
Fiscal Year Ended August 31, 2000:
<S> <C> <C> <C> <C> <C>
Balanced Fund $225,078 $ 22,382 (10%)/1/ $ 278,759,419(2%)/2/ $39,749,706 $53,129
Growth and Income Fund 2,548,828 92,167 (4%)/1/ 1,928,628,857(3%)/2/ 353,591,864 539,897
CORE Large Cap Value Fund 220,521 2,313 (1%)/1/ 367,495,734(0%)/2/ N/A N/A
CORE U.S. Equity Fund 274,610 4,745 (2%)/1/ 1,165,434,658(0%)/2/ N/A N/A
CORE Large Cap Growth Fund 650,616 10,080 (2%)/1/ 1,437,599,713(2%)/2/ N/A N/A
CORE Small Cap Equity Fund 346,418 3,005 (1%)/1/ 408,582,900(0%)/2/ N/A N/A
CORE International Equity Fund 783,519 0 (0%)/1/ 863,663,682(0%)/2/ N/A N/A
Capital Growth Fund 2,174,111 106,000 (5%)/1/ 2,389,191,388(5%)/2/ 88,249,649 93,525
Strategic Growth Fund 119,428 1,320 (1%)/1/ 120,323,063(1%)/2/ 46,283,695 53,386
Growth Opportunities Fund 454,911 19,332 (4%)/1/ 375,704,821(3%)/2/ 0 0
Mid Cap Value Fund 990,569 13,482 (1%)/1/ 433,729,720(1%)/2/ 33,721,844 122,207
Small Cap Value Fund 1,115,498 20,301 (2%)/1/ 409,760,873(1%)/2/ 23,491,556 118,846
Large Cap Value Fund 56,300 1,311 (2%)/1/ 166,416,965(1%)/2/ 7,287,747 9,547
International Equity Fund 3,852,651 4,820 (0%)/1/ 2,600,820,566(0%)/2/ 72,477,531 156,634
European Equity Fund 385,163 248 (0%)/1/ 1,587,512,280(0%)/2/ 7,151,102 15,349
Japanese Equity Fund 223,078 8,545 (4%)/1/ 148,673,088(4%)/2/ N/A N/A
International Growth Opportunities Fund 1,450,541 3,000 (1%)/1/ 1,430,844,194(0%)/2/ 0 0
Emerging Markets Equity Fund 1,397,600 63,000 (5%)/1/ 502,044,995(10%)/2/ 6,243,818 21,157
Asia Growth Fund 1,665,389 85,293 (5%)/1/ 448,624,714(6%)/2/ 8,326,793 24,980
Research Select Fund 288,556 19,698 (3%)/1/ 522,030,491(4%)/2/ N/A N/A
</TABLE>
B-84
<PAGE>
------------------
/1/ Percentage of total commissions paid to Goldman Sachs.
/2/ Percentage of total amount of transactions involving the payment of
commissions effected through Goldman Sachs.
/3/ The figures in the table report brokerage commissions only from securities
transactions. For the year ended August 31, 2000, Goldman Sachs earned
approximately $26,000, $95,000, $5,400, $9,100, $10,000, $4,500, $401,000,
$106,000, $1,300, $19,300, $13,500, $20,300, $1,300, $101,000, $12,000,
$8,000, $3,000, $63,000, $92,000 and $20,000 of brokerage commissions from
portfolio transactions, including futures transactions, executed on behalf
of the Balanced, Growth and Income, CORE Large Cap Value, CORE U.S.
Equity, CORE Large Cap Growth, CORE Small Cap Equity, CORE International
Equity, Capital Growth, Strategic Growth, Growth Opportunities, Mid Cap
Value, Small Cap Value, Large Cap Value, International Equity, European
Equity, Japanese Equity, International Growth Opportunities, Emerging
Markets Equity, Asia Growth and Research Select Funds, respectively.
B-85
<PAGE>
<TABLE>
<CAPTION>
Total Total
Brokerage Amount of
Total Commissions Transactions
Brokerage Paid to on which
Commissions Affiliated Commissions
Paid Persons Paid
==== ======= ====
Fiscal Period August 31, 1999:
<S> <C> <C> <C>
Balanced Fund $ 199,123 $ 18,798 $ 137,175,861
Growth and Income Fund 2,361,135 139,095 1,954,788,960
CORE Large Cap Value Fund 240,567 1,839 332,291,465
CORE U.S. Equity Fund 481,746 5,296 731,549,511
CORE Large Cap Growth Fund 225,700 4,909 400,102,053
CORE Small Cap Equity Fund 83,581 693 60,482,834
CORE International Equity Fund 601,449 0 474,940,454
Capital Growth Fund 1,000,740 31,968 1,076,147,992
Strategic Growth Fund 23,988 0 21,715,180
Growth Opportunities Fund 26,193 0 18,065,858
Mid Cap Value Fund 691,991 34,185 408,033,649
Small Cap Value Fund 626,104 33,536 311,817,920
Large Cap Value Fund/1/ N/A N/A N/A
International Equity Fund 1,415,066 0 1,466,285,559
European Equity Fund 157,143 0 386,316,045
Japanese Equity Fund 83,541 3,043 193,418,576
International Growth Opportunities Fund 184,208 0 156,758,635
Emerging Markets Equity Fund 537,548 29,251 208,383,598
Asia Growth Fund 489,354 35,497 184,149,170
Research Select Fund/1/ N/A N/A N/A
</TABLE>
---------------------------
/1/ Not operational.
B-86
<PAGE>
<TABLE>
<CAPTION>
Total Total
Brokerage Amount of
Total Commissions Transactions
Brokerage Paid to on which
Commissions Affiliated Commissions
Paid Persons Paid
==== ======= ====
Fiscal Year Ended January 31, 1999:
<S> <C> <C> <C>
Balanced Fund $ 278,343 $ 24,859 $ 699,638,329
Growth and Income Fund 3,210,832 315,934 4,646,698,452
CORE Large Cap Value Fund 25,776 130 60,101,321
CORE U.S. Equity Fund 339,110 250,313 1,258,046,574
CORE Large Cap Growth Fund 230,692 50,914 698,188,311
CORE Small Cap Equity Fund 167,436 34,173 211,969,412
CORE International Equity Fund 583,909 0 908,196,568
Capital Growth Fund 1,022,092 0 1,454,154,897
Strategic Growth Fund/1/ N/A N/A N/A
Growth Opportunities Fund/1/ N/A N/A N/A
Mid Cap Value Fund 577,025 49,450 649,019,064
Small Cap Value Fund 759,195 14,218 716,225,444
Large Cap Value Fund/1/ N/A N/A N/A
International Equity Fund 1,148,992 0 1,608,739,812
European Equity Fund 139,120 0 72,621,844
Japanese Equity Fund 33,379 437 34,360,336
International Growth Opportunities Fund 89,276 0 86,891,167
Emerging Markets Equity Fund 590,262 51,073 472,328,927
Asia Growth Fund 320,855 19,653 148,887,187
Research Select Fund/1/ N/A N/A N/A
</TABLE>
--------------------------
/1/ Not operational.
B-87
<PAGE>
<TABLE>
<CAPTION>
Total Total
Brokerage Amount of
Total Commissions Transaction
Brokerage Paid to on which
Commissions Affiliated Commissions
Paid Persons Paid
==== ======= ====
Fiscal Year Ended January 31, 1998:
<S> <C> <C> <C>
Balanced Fund $ 111,054 $13,185 $2,731,475,157
Growth and Income Fund 1,550,312 190,001 9,046,102,538
CORE Large Cap Value Fund/1/ N/A N/A N/A
CORE U.S. Equity Fund 944,895 0 1,996,000,522
CORE Large Cap Growth Fund 54,360 288 200,813,608
CORE Small Cap Equity Fund 59,517 0 159,674,227
CORE International Equity Fund 43,120 0 142,395,942
Capital Growth Fund 514,890 37,947 2,748,868,081
Strategic Growth Fund/1/ N/A N/A N/A
Growth Opportunities Fund/1/ N/A N/A N/A
Mid Cap Value Fund 480,808 76,398 2,584,258,044
Small Cap Value Fund 646,533 82,143 5,686,763,232
Large Cap Value Fund/1/ N/A N/A N/A
International Equity Fund 506,607 0 3,898,716,988
European Equity Fund N/A N/A N/A
Japanese Equity Fund/1/ N/A N/A N/A
International Growth Opportunities Fund/1/ N/A N/A N/A
Emerging Markets Equity Fund 59,999 6,230 236,915,108
Asia Growth Fund 814,656 2,885 2,160,632,195
Research Select Fund/1/ N/A N/A N/A
</TABLE>
----------------------
/1/ Not operational.
B-88
<PAGE>
During the fiscal year ended August 31, 2000, the Funds acquired and sold
securities of their regular broker-dealers. As of August 31, 2000, the Funds
held the following amounts of securities of their regular broker-dealers, as
defined in Rule 10b-1 under the Act, or their parents ($ in thousands):
Fund Broker/Dealer Amount
---- ------------- ------
Balanced Fund UBS $ 859
Morgan Stanley Dean Witter 1,514
Merrill Lynch 2,121
Donaldson, Lufkin & Jenrette 1,073
JP Morgan 859
Growth and Income Donaldson, Lufkin & Jenrette $ 968
Fund Bear Stearns 291
JP Morgan 2,140
ABN AMRO 788
Chase Securities 436
Morgan Stanley Dean Witter 126,639
CORE Large Cap Value JP Morgan $3,912
Fund Lehman Brothers 1,421
Merrill Lynch 2,335
Morgan Stanley Dean Witter 6,291
ABN AMRO 315
Bear Stearns 116
Chase Securities 174
Donaldson, Lufkin & Jenrette 388
CORE U.S. Equity Morgan Stanley Dean Witter $ 726
Fund ABN AMRO 563
Bear Stearns 208
Chase Securities 311
Donaldson, Lufkin & Jenrette 692
CORE Large Cap Lehman Brothers $12,224
Growth Fund Merrill Lynch 9,411
Morgan Stanley Dean Witter 6,295
Bear Stearns 1,353
ABN AMRO 3,672
Chase Securities 2,030
Donaldson, Lufkin & Jenrette 4,510
B-89
<PAGE>
Fund Broker/Dealer Amount
---- ------------- ------
CORE Small Cap Donaldson, Lufkin & Jenrette $ 647
Equity Fund Bear Stearns 183
Chase Securities 274
Morgan Stanley Dean Witter 639
ABN AMRO 496
CORE International Prudential $ 645
Equity Fund State Street Bank 3,929
Capital Growth Fund Donaldson, Lufkin & Jenrette $ 33,558
Morgan Stanley Dean Witter 35,236
Strategic Growth Bear Stearns $ 150
Fund Donaldson, Lufkin & Jenrette 499
ABN AMRO 406
Chase Securities 225
Morgan Stanley Dean Witter 524
Growth Opportunities ABN AMRO $ 4,370
Fund Bear Stearns 1,610
Chase Securities 2,416
Donaldson, Lufkin & Jenrette 5,368
Morgan Stanley Dean Witter 5,636
Mid Cap Value Fund Lehman Brothers $ 551
Donaldson, Lufkin & Jenrette 2,858
Morgan Stanley Dean Witter 3,000
Small Cap Value ABN AMRO $ 2,320
Fund Donaldson, Lufkin & Jenrette 855
Chase Securities 1,283
Bear Stearns 2,850
Morgan Stanley Dean Witter 2,992
Large Cap Value JP Morgan $ 192
Fund Merrill Lynch 305
Morgan Stanley Dean Witter 1,018
ABN AMRO 406
Bear Stearns 149
Chase Securities 224
Donaldson, Lufkin & Jenrette 498
B-90
<PAGE>
Fund Broker/Dealer Amount
---- ------------- ------
International State Street $65,491
Equity Fund UBS AG 15,051
European Equity State Street Bank $13,243
Fund UBS AG 1,814
Japanese Equity N/A N/A
Fund
International Small State Street Bank $31,658
Cap Fund
Emerging Markets State Street Bank $ 1,832
Equity Fund
Research Select Fund Morgan Stanley Dean Witter $ 403
Donaldson, Lufkin & Jenrette 384
JP Morgan 307
UBS Warburg LLC 306
NET ASSET VALUE
Under the Act, the Trustees of the Trust 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 (normally, but not always, 4:00 p.m. New York time) on each
Business Day. The term "Business Day" means any day the New York Stock Exchange
is open for trading, which is Monday through Friday except for holidays. The New
York Stock Exchange is closed on the following holidays: New Year's Day, Martin
Luther King, Jr. Day, Washington's Birthday (observed), Good Friday, Memorial
Day (observed), Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
In the event that the New York Stock Exchange or the national securities
exchange on which stock options are traded adopt different trading hours on
either a permanent or temporary basis, the Trustees will reconsider the time at
which net asset value is computed. In addition, each Fund may compute its net
asset value as of any time permitted pursuant to any exemption, order or
statement of the SEC or its staff.
Portfolio securities of a Fund for which accurate market quotations are
available are valued as follows: (a) securities listed on any U.S. or foreign
stock exchange or on the National
B-91
<PAGE>
Association of Securities Dealers Automated Quotations System ("NASDAQ") will be
valued at the last sale price on the exchange or system in which they are
principally traded on the valuation date. If there is no sale on the valuation
day, securities traded will be valued at the closing bid price, or if a closing
bid price is not available, at either the exchange or system-defined close price
on the exchange or system in which such securities are principally traded. If
the relevant exchange or system has not closed by the above-mentioned time for
determining the Funds net asset value, the securities will be valued at the last
sale price, or if not available at the bid price at the time the net asset value
is determined; (b) over-the-counter securities not quoted on NASDAQ will be
valued at the last sale price on the valuation day or, if no sale occurs, at the
last bid price at the time net asset value is determined; (c) equity securities
for which no prices are obtained under section (a) or (b) including those for
which a pricing service supplies no exchange quotation or a quotation that is
believed by the portfolio manager/trader to be inaccurate, will be valued at
their fair value in accordance with procedures approved by the Board of
Trustees; (d) fixed-income securities with a remaining maturity of 60 days or
more for which accurate market quotations are readily available will normally be
valued according to 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.
The value of all assets and liabilities expressed in foreign currencies
will be converted into U.S. dollar values at current exchange rates of such
currencies against U.S. dollars last quoted by any major bank. If such
quotations are not available, the rate of exchange will be determined in good
faith by or under procedures established by the Board of Trustees.
Generally, trading in securities on European and Far Eastern securities
exchanges and on over-the-counter markets is substantially completed at various
times prior to the close of business on each Business Day in New York (i.e., a
day on which the New York Stock Exchange is open for trading). In addition,
European or Far Eastern securities trading generally or in a particular country
or countries may not take place on all Business Days in New York. Furthermore,
trading takes place in various foreign markets on days which are not Business
Days in New York and days on which the Funds' net asset values are not
calculated. Such calculation does not take place contemporaneously with the
determination of the prices of the majority of the portfolio securities used in
such calculation. The impact of events that occur after the publication of
market quotations used by a Fund to price its securities but before the close of
regular trading on the New York Stock Exchange will normally not be reflected in
a Fund's next determined NAV unless the Trust, in its discretion, makes an
adjustment in light of the nature and materiality of the event, its effect on
Fund operations and other relevant factors.
B-92
<PAGE>
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 expenses can otherwise be fairly
made.
PERFORMANCE INFORMATION
Each Fund may from time to time quote or otherwise use yield and total
return information in advertisements, shareholder reports or sales literature.
Average annual total return and yield are computed pursuant to formulas
specified by the SEC.
Thirty-day yield is derived by dividing net investment income per share
earned during the period by the maximum public offering price per share on the
last day of such 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.
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 applicable to the relevant
class 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.
B-93
<PAGE>
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 and
Class C Shares reflect deduction of the applicable contingent deferred sales
charge ("CDSC") imposed upon redemption of Class B and Class C Shares held for
the applicable period. Each 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, each Fund may furnish total return calculations based on investments
at various sales charge levels or at NAV. Any performance information which is
based on a Fund's NAV per Share would be reduced if any applicable sales charge
were taken into account. In addition to the above, each 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 Funds' performance quotations do not reflect any fees charged
by an Authorized Dealer, Service Organization or other financial intermediary to
its customer accounts in connection with investments in the Funds.
Each Fund's performance will fluctuate, unlike bank deposits or other
investments which pay a fixed yield for a stated period of time. Past
performance is not necessarily indicative of future return. Actual performance
will depend on such variables as portfolio quality, the type of portfolio
instruments acquired, portfolio expenses and other factors. Performance is one
basis investors may use to analyze a Fund as compared to other funds and other
investment vehicles. However, the performance of other funds and other
investment vehicles may not be comparable because of the foregoing variables,
and differences in the methods used in valuing their portfolio instruments,
computing net asset value and determining performance.
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, imoneynet.com Money Fund Report, Micropal,
Barron's, Business Week, Consumer's Digest, Consumer's Report, Investors
Business Daily, The New York Times, Kiplinger's Personal Finance Magazine,
Changing Times, Financial World, Forbes, Fortune, Money, Personal Investor,
Sylvia Porter's Personal Finance and The Wall Street Journal. The Trust may also
advertise information which has been provided to the NASD for publication in
regional and local newspapers. In addition, the Trust may from time to time
advertise a Fund's performance relative to certain indices and benchmark
investments, including: (a) the Lipper Analytical Services, Inc. Mutual Fund
Performance
B-94
<PAGE>
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) imoneynet.com Money Fund Report (which provides industry averages for 7-day
annualized and compounded yields of taxable, tax-free and U.S. Government money
funds); (k) the Hambrecht & Quist Growth Stock Index; (l) the NASDAQ OTC
Composite Prime Return; (m) the Russell Midcap Index; (n) the Russell 2000 Index
- Total Return; (o) the Russell 1000 Value Index; (p) the Russell 1000 Growth
Index-Total Return; (q) the Value-Line Composite-Price Return; (r) the Wilshire
4500 Index; (s) the FT-Actuaries Europe and Pacific Index; (t) historical
investment data supplied by the research departments of Goldman Sachs, Lehman
Brothers, First Boston Corporation, Morgan Stanley (including the EAFE Indices,
the Morgan Stanley World Index, the Morgan Stanley Capital International
Combined Asia ex Japan Free Index and the Morgan Stanley Capital International
Emerging Markets Free Index), Salomon Brothers, Merrill Lynch, Donaldson Lufkin
and Jenrette or other providers of such data; (u) CDA/Wiesenberger Investment
Companies Services or Wiesenberger Investment Companies Service; (v) The Goldman
Sachs Commodities Index; (w) information produced by Micropal, Inc.; (x) The
Tokyo Price Index and (y) the Russell 3000 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 a 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. The Goldman Sachs U.S. Select List may also be used to compare the
performance of the Research Select Fund.
Information used in advertisements and materials furnished to present and
prospective investors may include statements or illustrations relating to the
appropriateness of certain types of securities and/or mutual funds to meet
specific financial goals. Such information may address:
. cost associated with aging parents;
. funding a college education (including its actual and
estimated cost);
. health care expenses (including actual and projected
expenses);
B-95
<PAGE>
. 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 benefits of focusing on after-tax returns versus pre-tax
returns for taxable investors;
. 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 (for example, Morgan Stanley World Index, 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-96
<PAGE>
The Trust may publish a list of the securities in the U.S. Select List
from time to time and a discussion of the attributes of these securities and the
list. 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 commenced operations on May 1, 1997. The
performance information shown below for periods before that date is for a
predecessor separate account managed by the Investment Adviser which converted
into Class A Shares as of the commencement date. The performance record of the
separate account quoted by the Fund has been adjusted downward based on the
expenses applicable to Class A Shares (the class into which the separate account
transferred) to reflect the expenses that were expected to be incurred by the
Fund during its initial year of operation. These expenses include any sales
charges and asset-based charges (i.e., fees under Distribution and Service
Plans) imposed and other operating expenses. Total return quotations are
calculated pursuant to the methodology prescribed by the SEC for standardized
performance calculations. Prior to May 1, 1997, the separate account was a
separate investment advisory account under discretionary management by the
Investment 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 6, 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's inception
date (October 12, 1994, April 20, 1990, October 22, 1992, February 5, 1993, May
24, 1991, November 11, 1991 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 performance record of the applicable
Class A Shares (excluding the impact of any applicable front-end sales charge).
The performance records of the applicable Class A Shares reflect the expenses
incurred by the particular Fund's Class A Shares. These expenses include
asset-based charges (i.e., fees under Distribution and Service Plans) and other
operating expenses. Total return quotations are calculated pursuant to
SEC-approved methodology.
B-97
<PAGE>
INTRODUCTION
VALUE OF $1,000 INVESTMENT
(AVERAGE ANNUAL TOTAL RETURN)
<TABLE>
<CAPTION>
Assuming no voluntary
waiver of fees and no
expense reimbursements
----------------------
Assumes Assumes
Maximum maximum
Applicable Assumes Applicable Assumes
Sales no sales sales no sales
Fund Class Time Period Charge** Charge Charge** Charge
---- ----- ----------- -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Balanced Fund A 10/12/94-8/31/00 - Since inception 12.43% 13.52% 11.46% 12.54%
Balanced Fund A 9/1/95-8/31/00 - Five years 10.73% 11.99% 10.24% 11.49%
Balanced Fund A 9/1/99-8/31/00 - One year 5.82% 12.00% 5.63% 11.80%
Balanced Fund B 5/1/96-8/31/00 - Since inception 10.34% 10.76% 10.11% 10.53%
Balanced Fund B 9/1/99-8/31/00 - One year 5.87% 11.17% 5.67% 10.97%
Balanced Fund C 8/15/97-8/31/00 - Since inception 5.52% 5.52% 5.29% 5.29%
Balanced Fund C 9/1/99-8/31/00 - One year 10.17% 11.23% 9.97% 11.03%
Balanced Fund Institutional 8/15/97-8/31/00 - Since inception N/A 6.70% N/A 6.43%
Balanced Fund Institutional 9/1/99-8/31/00 - One year N/A 12.59% N/A 12.40%
Balanced Fund Service 10/12/94-8/31/00 - Since inception N/A 13.40% N/A 12.47%
Balanced Fund Service 9/1/95-8/31/00 - Five years N/A 11.85% N/A 11.41%
Balanced Fund Service 9/1/99-8/31/00 - One year N/A 11.89% N/A 11.70%
Growth and Income A 2/5/93-8/31/00 - Since inception 12.28% 13.12% 11.85% 12.69%
Growth and Income A 9/1/95-8/31/00 - Five years 10.71% 11.96% 10.60% 11.86%
Growth and Income A 9/1/99-8/31/00 - One year 0.61% 6.48% 0.62% 6.49%
Growth and Income B 5/1/96-8/31/00 - Since inception 9.61% 10.04% 9.61% 10.04%
Growth and Income B 9/1/99-8/31/00 - One year 0.42% 5.70% 0.43% 5.71%
Growth and Income C 8/15/97-8/31/00 - Since inception 0.42% 0.42% 0.42% 0.42%
Growth and Income C 9/1/99-8/31/00 - One year 4.61% 5.67% 4.61% 5.67%
Growth and Income Institutional 6/3/96-8/31/00 - Since inception N/A 11.05% N/A 11.05%
Growth and Income Institutional 9/1/99-8/31/00 - One year N/A 7.05% N/A 7.06%
Growth and Income Service 2/5/93-8/31/00 - Since inception N/A 13.08% N/A 12.71%
Growth and Income Service 9/1/95-8/31/00 - Five years N/A 11.89% N/A 11.89%
Growth and Income Service 9/1/99-8/31/00 - One year N/A 6.40% N/A 6.41%
CORE Large Cap Value A 12/31/98-8/31/00 - Since inception 2.82% 6.35% 2.32% 5.83%
CORE Large Cap Value A 9/1/99-8/31/00 - One year (1.04)% 4.68% (1.15)% 4.57%
CORE Large Cap Value B 12/31/98-8/31/00 - Since inception 3.16% 5.52% 2.65% 5.01%
CORE Large Cap Value B 9/1/99-8/31/00 - One year (1.12)% 3.96% (1.23)% 3.85%
CORE Large Cap Value C 12/31/98-8/31/00 - Since inception 5.56% 5.56% 5.05% 5.05%
CORE Large Cap Value C 9/1/99-8/31/00 - One year 2.96% 3.97% (2.85)% 3.86%
CORE Large Cap Value Institutional 12/31/98-8/31/00 - Since inception N/A 6.75% N/A 6.23%
CORE Large Cap Value Institutional 9/1/99-8/31/00 - One year N/A 5.20% N/A 5.09%
</TABLE>
B-98
<PAGE>
INTRODUCTION
VALUE OF $1,000 INVESTMENT
(AVERAGE ANNUAL TOTAL RETURN)
<TABLE>
<CAPTION>
Assuming no voluntary
waiver of fees and no
expense reimbursements
----------------------
Assumes Assumes
Maximum maximum
Applicable Assumes Applicable Assumes
Sales no sales sales no sales
Fund Class Time Period Charge** Charge Charge** Charge
---- ----- ----------- -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
CORE Large Cap Value Service 12/31/98-8/31/00 - Since inception N/A 6.24% N/A 5.72%
CORE Large Cap Value Service 9/1/99-8/31/00 - One year N/A 4.60% N/A 4.48%
CORE U.S. Equity A 5/24/91-8/31/00 - Since inception 16.22% 16.92% 16.00% 16.70%
CORE U.S. Equity A 9/1/95-8/31/00 - Five years 20.68% 22.05% 20.51% 21.88%
CORE U.S. Equity A 9/1/99-8/31/00 - One year 12.42% 18.96% 12.32% 18.86%
CORE U.S. Equity B 5/1/96-8/31/00 - Since inception 20.43% 20.75% 20.35% 20.67%
CORE U.S. Equity B 9/1/99-8/31/00 - One year 12.49% 18.03% 12.39% 17.93%
CORE U.S. Equity C 8/15/97-8/31/00 - Since inception 16.97% 16.97% 16.82% 16.82%
CORE U.S. Equity C 9/1/99-8/31/00 - One year 16.92% 18.03% 16.82% 17.93%
CORE U.S. Equity Institutional 6/15/95-8/31/00 - Since inception N/A 23.32% N/A 23.12%
CORE U.S. Equity Institutional 9/1/95-8/31/00 - Five years N/A 22.71% N/A 22.52%
CORE U.S. Equity Institutional 9/1/99-8/31/00 - One year N/A 19.41% N/A 19.31%
CORE U.S. Equity Service 5/24/91-8/31/00 - Since inception N/A 16.94% N/A 16.68%
CORE U.S. Equity Service 9/1/94-8/31/00 - Five years N/A 22.08% N/A 21.84%
CORE U.S. Equity Service 9/1/99-8/31/00 - One year N/A 18.83% N/A 18.73%
CORE Large Cap Growth A 11/11/91-8/31/00 - Since inception 22.23% 23.04% 21.97% 22.78%
CORE Large Cap Growth A 9/1/95-8/31/00 - Five years 26.98% 28.48% 26.50% 27.99%
CORE Large Cap Growth A 9/1/99-8/31/00 - One year 26.38% 33.73% 26.17% 33.51%
CORE Large Cap Growth B 5/1/97-8/31/00 - Since inception 27.80% 28.32% 27.20% 27.72%
CORE Large Cap Growth B 9/1/99-8/31/00 - One year 27.76% 32.78% 27.45% 32.56%
CORE Large Cap Growth C 8/15/97-8/31/00 - Since inception 24.49% 24.49% 24.13% 24.13%
CORE Large Cap Growth C 9/1/99-8/31/00 - One year 31.84% 32.84% 31.62% 32.62%
CORE Large Cap Growth Institutional 11/11/91-8/31/00 - Since inception N/A 23.19% N/A 22.88%
CORE Large Cap Growth Institutional 9/1/95-8/31/00 - Five years N/A 28.75% N/A 28.17%
CORE Large Cap Growth Institutional 9/1/99-8/31/00 - One year N/A 34.34% N/A 34.11%
CORE Large Cap Growth Service 11/11/91-8/31/00 - Since inception N/A 22.98% N/A 22.80%
CORE Large Cap Growth Service 9/1/95-8/31/00 - Five years N/A 28.35% N/A 28.02%
CORE Large Cap Growth Service 9/1/99-8/31/00 - One year N/A 33.64% N/A 33.42%
CORE Small Cap Equity A 8/15/97-8/31/00 - Since inception 6.90% 8.90% 6.08% 8.06%
CORE Small Cap Equity A 9/1/99-8/31/00 - One year 19.11% 26.10% 18.86% 25.83%
</TABLE>
B-99
<PAGE>
INTRODUCTION
VALUE OF $1,000 INVESTMENT
(AVERAGE ANNUAL TOTAL RETURN)
<TABLE>
<CAPTION>
Assuming no voluntary
waiver of fees and no
expense reimbursements
----------------------
Assumes Assumes
Maximum maximum
Applicable Assumes Applicable Assumes
Sales no sales sales no sales
Fund Class Time Period Charge** Charge Charge** Charge
---- ----- ----------- -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
CORE Small Cap Equity B 8/15/97-8/31/00 - Since inception 7.27% 8.11% 6.51% 7.35%
CORE Small Cap Equity B 9/1/99-8/31/00 - One year 20.17% 25.17% 20.61% 24.91%
CORE Small Cap Equity C 8/15/97-8/31/00 - Since inception 8.20% 8.20% 7.44% 7.44%
CORE Small Cap Equity C 9/1/99-8/31/00 - One year 24.35% 25.35% 24.08% 25.08%
CORE Small Cap Equity Institutional 8/15/97-8/31/00 - Since inception N/A 9.34% N/A 8.57%
CORE Small Cap Equity Institutional 9/1/99-8/31/00 - One Year N/A 26.60% N/A 26.33%
CORE Small Cap Equity Service 8/15/97-8/31/00 - Since inception N/A 8.81% N/A 8.01%
CORE Small Cap Equity Service 9/1/99-8/31/00 - One year N/A 25.45% N/A 25.66%
CORE International Equity A 8/15/97-8/31/00 - Since inception 3.22% 5.15% 2.51% 4.43%
CORE International Equity A 9/1/99-8/31/00 - One year 1.07% 6.92% 0.98% 6.83%
CORE International Equity B 8/15/97-8/31/00 - Since inception 3.76% 4.68% 3.10% 4.02%
CORE International Equity B 9/1/99-8/31/00 - One year 1.23% 6.36% 1.14% 6.27%
CORE International Equity C 8/15/97-8/31/00 - Since inception 4.71% 4.71% 4.05% 4.05%
CORE International Equity C 9/1/99-8/31/00 - One year 5.32% 6.34% 5.23% 6.25%
CORE International Equity Institutional 8/15/97-8/31/00 - Since inception N/A 5.85% N/A 5.18%
CORE International Equity Institutional 9/1/99-8/31/00 - One year N/A 7.62% N/A 7.53%
CORE International Equity Service 8/15/97-8/31/00 - Since inception N/A 5.34% N/A 4.65%
CORE International Equity Service 9/1/99-8/31/00 - One year N/A 7.05% N/A 6.96%
Capital Growth A 4/20/90-8/31/00 - Since inception 19.02% 19.67% 18.77% 19.42%
Capital Growth A 9/1/90-8/31/00 - Ten years 20.22% 20.91% 19.98% 20.67%
Capital Growth A 9/1/95-8/31/00 - Five years 23.06% 24.47% 22.92% 24.32%
Capital Growth A 9/1/99-8/31/00 - One year 18.80% 25.70% 18.77% 25.67%
Capital Growth B 5/1/96-8/31/00 - Since inception 24.84% 25.16% 24.91% 25.23%
Capital Growth B 9/1/99-8/31/00 - One year 19.32% 24.75% 19.29% 24.72%
Capital Growth C 8/15/97-8/31/00 - Since inception 22.91% 22.91% 22.87% 22.87%
Capital Growth C 9/1/99-8/31/99 - One year 23.66% 24.75% 23.63% 24.72%
Capital Growth Institutional 8/15/97-8/31/00 - Since inception N/A 24.25% N/A 24.22%
Capital Growth Institutional 9/1/99-8/31/00 - One year N/A 26.18% N/A 26.15%
Capital Growth Service 4/20/90-8/31/00 - Since inception N/A 19.64% N/A 19.40%
Capital Growth Service 9/1/90-8/31/00 - Ten years N/A 20.87% N/A 20.65%
Capital Growth Service 9/1/95-8/31/00 - Five years N/A 24.39% N/A 24.28%
Capital Growth Service 9/1/99-8/31/00 - One year N/A 25.53% N/A 25.50%
</TABLE>
B-100
<PAGE>
INTRODUCTION
VALUE OF $1,000 INVESTMENT
(AVERAGE ANNUAL TOTAL RETURN)
<TABLE>
<CAPTION>
Assuming no voluntary
waiver of fees and no
expense reimbursements
----------------------
Assumes Assumes
Maximum maximum
Applicable Assumes Applicable Assumes
Sales no sales sales no sales
Fund Class Time Period Charge** Charge Charge** Charge
---- ----- ----------- -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Strategic Growth A 5/24/99-8/31/00 - Since inception 14.10% 19.25% 11.44% 16.48%
Strategic Growth A 9/1/99-8/31/00 - One year 17.56% 24.46% 17.35% 24.23%
Strategic Growth B 5/24/99-8/31/00 - Since inception 15.35% 18.35% 12.60% 15.60%
Strategic Growth B 9/1/99-8/31/00 - One year 18.51% 23.51% 18.28% 23.28%
Strategic Growth C 5/24/99-8/31/00 - Since inception 18.50% 18.50% 15.75% 15.75%
Strategic Growth C 9/1/99-8/31/00 - One year 22.58% 23.58% 22.35% 23.35%
Strategic Growth Institutional 5/24/99-8/31/00 - Since inception N/A 19.71% N/A 16.93%
Strategic Growth Institutional 9/1/99-8/31/00 - One Year N/A 24.93% N/A 24.71%
Strategic Growth Service 5/24/99-8/31/00 - Since inception N/A 19.25% N/A 16.47%
Strategic Growth Service 9/1/99-8/31/00 - One year N/A 24.45% N/A 24.22%
Growth Opportunities A 5/24/99-8/31/00 - Since inception 63.56% 70.94% 58.96% 66.16%
Growth Opportunities A 9/1/99-8/31/00 - One year 84.96% 95.73% 84.72% 95.48%
Growth Opportunities B 5/24/99-8/31/00 - Since inception 67.84% 70.59% 63.09% 65.84%
Growth Opportunities B 9/1/99-8/31/00 - One year 89.18% 94.27% 88.93% 94.02%
Growth Opportunities C 5/24/99-8/31/00 - Since inception 69.66% 69.66% 64.91% 64.91%
Growth Opportunities C 9/1/99-8/31/00 - One year 93.42% 94.43% 93.17% 94.18%
Growth Opportunities Institutional 5/24/99-8/31/00 - Since inception N/A 71.58% N/A 66.78%
Growth Opportunities Institutional 9/1/99-8/31/00 - One year N/A 96.67% N/A 96.41%
Growth Opportunities Service 5/24/99-8/31/00 - Since inception N/A 70.58% N/A 65.80%
Growth Opportunities Service 9/1/99-8/31/00 - One year N/A 95.41% N/A 95.13%
Mid Cap Value A 8/15/97-8/31/00 - Since inception 1.19% 3.09% 1.12% 3.02%
Mid Cap Value A 9/1/99-8/31/00 - One year 2.73% 8.70% 2.69% 8.65%
Mid Cap Value B 8/15/97-8/31/00 - Since inception 1.40% 2.42% 1.02% 2.34%
Mid Cap Value B 9/1/99-8/31/00 - One year 3.01% 8.01% 2.96% 7.96%
Mid Cap Value C 8/15/97-8/31/00 - Since inception 2.41% 2.41% 2.34% 2.34%
Mid Cap Value C 9/1/99-8/31/00 - One year 6.84% 7.84% 6.79% 7.79%
Mid Cap Value Institutional 8/1/95-8/31/00 - Since inception N/A 13.26% N/A 13.17%
Mid Cap Value Institutional 9/1/95-8/31/00 - Five years N/A 13.18% N/A 13.09%
Mid Cap Value Institutional 9/1/99-8/31/00 - One year N/A 9.08% N/A 9.03%
Mid Cap Value Service 7/18/97-8/31/00 - Since inception N/A 3.84% N/A 3.76%
Mid Cap Value Service 9/1/99-8/31/00 - One year N/A 8.48% N/A 8.43%
</TABLE>
B-101
<PAGE>
INTRODUCTION
VALUE OF $1,000 INVESTMENT
(AVERAGE ANNUAL TOTAL RETURN)
<TABLE>
<CAPTION>
Assuming no voluntary
waiver of fees and no
expense reimbursements
----------------------
Assumes Assumes
Maximum maximum
Applicable Assumes Applicable Assumes
Sales no sales sales no sales
Fund Class Time Period Charge** Charge Charge** Charge
---- ----- ----------- -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Small Cap Value A 10/22/92-8/31/00 - Since inception 10.11% 10.91% 9.88% 10.68%
Small Cap Value A 9/1/95-8/31/00 - Five years 8.00% 9.23% 7.84% 9.07%
Small Cap Value A 9/1/99-8/31/00 - One year 10.79% 17.22% 10.71% 17.15%
Small Cap Value B 5/1/96-8/31/00 - Since inception 6.52% 6.98% 6.49% 6.95%
Small Cap Value B 9/1/99-8/31/00 - One year 11.24% 16.24% 11.17% 16.17%
Small Cap Value C 8/15/97-8/31/00 - Since inception 2.32% 2.32% 2.27% 2.27%
Small Cap Value C 9/1/99-8/31/00 - One year 15.34% 16.34% 15.26% 16.26%
Small Cap Value Institutional 8/15/97-8/31/00 - Since inception N/A 3.46% N/A 3.40%
Small Cap Value Institutional 9/1/99-8/31/00 - One year N/A 17.64% N/A 17.57%
Small Cap Value Service 10/22/92-8/31/00 - Since inception N/A 10.86% N/A 10.68%
Small Cap Value Service 9/1/95-8/31/00 - Five years N/A 9.15% N/A 9.08%
Small Cap Value Service 9/1/99-8/31/00 - One year N/A 17.05% N/A 16.98%
Large Cap Value A 12/15/99-8/31/00 - Since inception* (1.80)% 3.90% (3.21)% 2.41%
Large Cap Value B 12/15/99-8/31/00 - Since inception* (1.70)% 3.30% (3.18)% 1.82%
Large Cap Value C 12/15/99-8/31/00 - Since inception* 2.20% 3.20% 0.72% 1.72%
Large Cap Value Institutional 12/15/99-8/31/00 - Since inception* N/A 4.00% N/A 2.50%
Large Cap Value Service 12/15/99-8/31/00 - Since inception* N/A 3.80% N/A 2.27%
International Equity A 12/1/92-8/31/00 - Since inception 11.33% 12.14% 11.18% 11.99%
International Equity A 9/1/95-8/31/00 - Five years 13.08% 14.38% 13.00% 14.29%
International Equity A 9/1/99-8/31/00 - One year 8.36% 14.68% 8.31% 14.63%
International Equity B 5/1/96-8/31/00 - Since inception 10.68% 11.10% 10.69% 11.11%
International Equity B 9/1/99-8/31/00 - One year 8.59% 14.20% 8.54% 14.15%
International Equity C 8/15/97-8/31/00 - Since inception 9.18% 9.18% 9.11% 9.11%
International Equity C 9/1/99-8/31/00 - One year 13.16% 14.28% 13.11% 14.23%
International Equity Institutional 2/7/96-8/31/00 - Since inception N/A 13.73% N/A 13.64%
International Equity Institutional 9/1/99-8/31/00 - One year N/A 15.45% N/A 15.40%
International Equity Service 12/1/92-8/31/00 - Since inception N/A 12.23% N/A 12.09%
International Equity Service 9/1/95-8/31/00 - Five years N/A 14.52% N/A 14.44%
International Equity Service 9/1/99-8/31/00 - One year N/A 15.00% N/A 14.94%
European Equity A 10/1/98-8/31/00 - Since inception 18.15% 21.67% 17.54% 21.05%
</TABLE>
B-102
<PAGE>
INTRODUCTION
VALUE OF $1,000 INVESTMENT
(AVERAGE ANNUAL TOTAL RETURN)
<TABLE>
<CAPTION>
Assuming no voluntary
waiver of fees and no
expense reimbursements
----------------------
Assumes Assumes
Maximum maximum
Applicable Assumes Applicable Assumes
Sales no sales sales no sales
Fund Class Time Period Charge** Charge Charge** Charge
---- ----- ----------- -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
European Equity A 9/1/99-8/31/00 - One year 17.25% 24.04% 16.82% 23.58%
European Equity B 10/1/98-8/31/00 - Since inception 19.23% 21.09% 18.61% 20.47%
European Equity B 9/1/99-8/31/00 - One year 18.05% 23.32% 17.60% 22.87%
European Equity C 10/1/98-8/31/00 - Since inception 21.22% 21.22% 20.60% 20.60%
European Equity C 9/1/99-8/31/00 - One year 22.42% 23.48% 21.97% 23.03%
European Equity Institutional 10/1/98-8/31/00 - Since inception N/A 22.46% N/A 21.84%
European Equity Institutional 9/1/99-8/31/00 - One year N/A 24.85% N/A 24.40%
European Equity Service 10/1/98-8/31/00 - Since inception N/A 21.84% N/A 21.17%
European Equity Service 9/1/99-8/31/00 - One year N/A 24.28% N/A 23.81%
Japanese Equity Fund A 5/1/98-8/31/00 - Since inception 24.35% 27.38% 22.86% 25.86%
Japanese Equity Fund A 9/1/99-8/31/00 - One year 2.48% 8.47% 2.09% 8.06%
Japanese Equity Fund B 5/1/98-8/31/00 - Since inception 25.82% 26.87% 24.30% 25.35%
Japanese Equity Fund B 9/1/99-8/31/00 - One year 2.71% 8.12% 2.29% 7.70%
Japanese Equity Fund C 5/1/98-8/31/00 - Since inception 26.80% 26.80% 25.28% 25.28%
Japanese Equity Fund C 9/1/99-8/31/00 - One year 6.74% 7.82% 6.33% 7.41%
Japanese Equity Fund Institutional 5/1/98-8/31/00 - Since inception N/A 28.15% N/A 26.63%
Japanese Equity Fund Institutional 9/1/99-8/31/00 - One year N/A 9.14% N/A 8.72%
Japanese Equity Fund Service 5/1/98-8/31/00 - Since inception N/A 27.42% N/A 25.88%
Japanese Equity Fund Service 9/1/99-8/31/00 - One year N/A 8.65% N/A 8.23%
International Growth A 5/1/98-8/31/00 - Since inception 21.59% 24.56% 20.77% 23.72%
Opportunities
International Growth A 9/1/99-8/31/00 - One year 19.32% 26.26% 19.13% 26.06%
Opportunities
International Growth B 5/1/98-8/31/00 - Since inception 23.11% 24.11% 22.26% 23.26%
Opportunities
International Growth B 9/1/99-8/31/00 - One year 20.48% 25.66% 20.27% 25.45%
Opportunities
International Growth C 5/1/98-8/31/00 - Since inception 24.07% 24.07% 23.24% 23.24%
Opportunities
International Growth C 9/1/99-8/31/00 - One year 24.55% 25.58% 24.34% 25.37%
Opportunities
International Growth Institutional 5/1/98-8/31/00 - Since inception N/A 25.40% N/A 24.57%
</TABLE>
B-103
<PAGE>
INTRODUCTION
VALUE OF $1,000 INVESTMENT
(AVERAGE ANNUAL TOTAL RETURN)
<TABLE>
<CAPTION>
Assuming no voluntary
waiver of fees and no
expense reimbursements
----------------------
Assumes Assumes
Maximum maximum
Applicable Assumes Applicable Assumes
Sales no sales sales no sales
Fund Class Time Period Charge** Charge Charge** Charge
---- ----- ----------- -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Opportunities
International Growth Institutional 9/1/99-8/31/00 - One year N/A 27.12% N/A 26.91%
Opportunities
International Growth Service 5/1/98-8/31/00 - Since inception N/A 24.69% N/A 23.85%
Opportunities
International Growth Service 9/1/99-8/31/00 - One year N/A 26.57% N/A 26.36%
Opportunities
Emerging Markets Equity A 12/15/97-8/31/00 - Since inception 2.39% 4.54% 1.86% 4.00%
Emerging Markets Equity A 9/1/99-8/31/00 - One year 10.51% 16.95% 10.28% 16.71%
Emerging Markets Equity B 12/15/97-8/31/00 - Since inception 3.03% 4.11% 2.77% 3.85%
Emerging Markets Equity B 9/1/99-8/31/00 - One year 11.40% 16.40% 11.99% 16.99%
Emerging Markets Equity C 12/15/97-8/31/00 - Since inception 4.19% 4.19% 3.92% 3.92%
Emerging Markets Equity C 9/1/99-8/31/00 - One year 15.34% 16.34% 15.93% 16.93%
Emerging Markets Equity Institutional 12/15/97-8/31/00 - Since inception N/A 5.31% N/A 4.77%
Emerging Markets Equity Institutional 9/1/99-8/31/00 - One year N/A 17.61% N/A 17.36%
Emerging Markets Equity Service 12/15/97-8/31/00 - Since inception N/A 3.82% N/A 3.54%
Emerging Markets Equity Service 9/1/99-8/31/00 - One year N/A 17.46% N/A 17.18%
Asia Growth A 7/8/94-8/31/00 - Since inception (4.23)% (3.34)% (4.53)% (3.65)%
Asia Growth A 9/1/95-8/31/00 - Five years (6.33)% (5.26)% (6.60)% (5.54)%
Asia Growth A 9/1/99-8/31/00 - One year (4.78)% 0.72% (5.21)% 0.27%
Asia Growth B 5/1/96-8/31/00 - Since inception (10.44)% (10.02)% (10.66)% (10.24)%
Asia Growth B 9/1/99-8/31/00 - One year (4.82)% 0.18% (5.24)% (0.26)%
Asia Growth C 8/15/97-8/31/00 - Since inception (11.34)% (11.34)% (11.72)% (11.72)%
Asia Growth C 9/1/99-8/31/00 - One year (0.82)% 0.18% (1.25)% (0.26)%
Asia Growth Institutional 2/2/96-8/31/00 - Since inception N/A (7.64)% N/A (7.94)%
Asia Growth Institutional 9/1/99-8/31/00 - One year N/A 1.42% N/A 0.97%
Research Select A 6/19/00-8/31/00 - Since inception* 1.80% 7.70% 1.69% 7.59%
Research Select B 6/19/00-8/31/00 - Since inception* 2.60% 7.60% 2.49% 7.49%
Research Select C 6/19/00-8/31/00 - Since inception* 6.70% 7.70% 6.59% 7.59%
Research Select Institutional 6/19/00-8/31/00 - Since inception* N/A 7.80% N/A 7.67%
Research Select Service 6/19/00-8/31/00 - Since Inception* N/A 7.70% N/A 7.58%
</TABLE>
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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 a Fund. Such
advertisements or information may include symbols, headlines or other material
which highlight or summarize the information discussed in more detail in the
communication.
The Trust may from time to time summarize the substance of discussions
contained in shareholder reports in advertisements and publish the Investment
Adviser's views as to markets, the rationale for a Fund's investments and
discussions of 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 is 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 Value, CORE Large Cap Growth, Strategic Growth, Growth
Opportunities, Large Cap Value, European Equity, Japanese Equity, International
Growth Opportunities, Emerging Markets Equity and Research Select Funds, were
reorganized on April 30, 1997 from series of a Maryland corporation to part of
Goldman Sachs Trust, a Delaware business trust, established by a Declaration of
Trust dated January 28, 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. 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
each of the Funds into five classes: Institutional Shares, Service Shares, Class
A Shares, Class B Shares and Class C Shares.
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<PAGE>
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 Service
Plans are borne exclusively by Class A, Class B or Class C Shares and transfer
agency fees are 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 "Shareholder Guide" in the Prospectus and "Other
Information Regarding Maximum Sales Charge, Purchases, Redemptions, Exchanges
and Dividends" below.
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. (the "NASD") and certain other financial service firms
that have sales agreements with Goldman Sachs. Class A Shares bear the cost of
distribution and service fees at the aggregate rate of up to 0.25% of the
average daily net assets of such Class A Shares (0.50% with respect to the CORE
International Equity, International Equity, European Equity, Japanese Equity,
International Growth Opportunities, Emerging Markets and Asia Growth Funds).
With respect to Class A Shares, the Distributor at its discretion may use
compensation for distribution services paid under the Distribution and Services
Plan for personal and account maintenance services and expenses so long as such
total compensation under the Plan does not exceed the maximum cap on "service
fees" imposed by the NASD.
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
NASD 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 service
fees 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
NASD and certain other financial services firms
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<PAGE>
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 service fees at an annual rate of up to 0.25% of the average
daily net 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 November 30, 2000 the following entities owned of record or
beneficially more than 5% of the outstanding shares of the Balanced Fund: Class
A Shares, Edward Jones, 201 Progress Parkway, Maryland Heights, MD 63043-3009
(48%); and Class B Shares, Edward Jones, 201 Progress Parkway, Maryland Heights,
MD 63043-3009 (6%).
As of November 30, 2000 the following entity owned of record or
beneficially more than 5% of the outstanding shares of the Growth and Income
Fund: Class A Shares, Edward Jones, 201 Progress Parkway, Maryland Heights, MD
63043-3009 (45%).
As of November 30, 2000 the following entity owned of record or
beneficially more than 5% of the outstanding shares of the CORE Large Cap Value
Fund: Institutional Class, State Street Bank & Trust Co., Goldman Sachs Growth
Strategy, Omnibus a/c - Core Large Cap Value, P.O. Box 1713, Boston, MA
02105-1713 (20%).
As of November 30, 2000 the following entities owned of record or
beneficially more than 5% of the outstanding shares of the CORE U.S. Equity
Fund: Class A Shares, Edward Jones, 201 Progress Parkway, Maryland Heights, MD
63043-3009 (21%); and Institutional Class, State Street Bank & Trust, GS Profit
Sharing Master Trust, P. O. Box 1992, Boston, MA 02105 (11%).
As of November 30, 2000 the following entity owned of record or
beneficially more than 5% of the outstanding shares of the CORE Large Cap Growth
Fund: Class A Shares, Edward Jones, 201 Progress Parkway, Maryland Heights, MD
63043-3009 (9%).
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<PAGE>
As of November 30, 2000 the following entities owned of record or
beneficially more than 5% of the outstanding shares of the CORE Small Cap Equity
Fund: Institutional Class, State Street Bank & Trust Co., Goldman Sachs Growth &
Income Strategy, P.O. Box 1713, Boston, MA 02105-1713 (7%); State Street Bank &
Trust Co., Goldman Sachs Aggressive Growth, P.O. Box 1713, Boston, MA 02105-1713
(6%); and Goldman Sachs & Co., FBO Acct. #021017538, c/o Mutual Fund Ops., 85
Broad Street, New York, NY 10004-2456 (6%).
As of November 30, 2000 the following entity owned of record or
beneficially more than 5% of the outstanding shares of the CORE International
Equity Fund: Institutional Class, State Street Bank & Trust, FBO Goldman Sachs
Growth Strategy, P.O. Box 1713, Boston, MA 02105-1713 (20%).
As of November 30, 2000 the following entity owned of record or
beneficially more than 5% of the outstanding shares of the Capital Growth Fund:
Class A Shares, Edward Jones, 201 Progress Parkway, Maryland Heights, MD
63043-3009 (14%).
As of November 30, 2000 the following entities owned of record or
beneficially more than 5% of the outstanding shares of the Mid Cap Value Fund:
Class A Shares, Edward Jones, 201 Progress Parkway, Maryland Heights, MD
63043-3009 (5%); and Institutional Class, State Street Bank & Trust, GS Profit
Sharing Master Trust, P.O. Box 1992, Boston, MA 02105 (62%).
As of November 30, 2000 the following entity owned of record or
beneficially more than 5% of the outstanding shares of the International Equity
Fund: Class A Shares, Edward Jones, 201 Progress Parkway, Maryland Heights, MD
63043-3009 (13%).
As of November 30, 2000 the following entity owned of record or
beneficially more than 5% of the outstanding shares of the Small Cap Value Fund:
Class A Shares, Edward Jones, 201 Progress Parkway, Maryland Heights, MD
63043-3009 (28%).
As of November 30, 2000 the following entities owned of record or
beneficially more than 5% of the outstanding shares of the Emerging Markets
Equity Fund: Institutional Class, State Street Bank & Trust, FBO Goldman Sachs
Growth & Income, P.O. Box 1713, Boston, MA 02105-1713 (8%); University of Texas
Systems, Permanent University Fund, P.O. Box 2033, Austin, TX 78768-2033 (15%);
and Board of Regents of the University of Texas System, P.O. Box 2033, Austin,
TX 78768-2033 (6%).
As of November 30, 2000 the following entity owned of record or
beneficially more than 5% of the outstanding shares of the Asia Growth Fund:
Class A Shares, Edward Jones, 201 Progress Parkway, Maryland Heights, MD
63043-3009 (19%).
As of November 30, 2000 the following entities owned of record or
beneficially more than 5% of the outstanding shares of the Large Cap Value Fund:
Institutional Class, Edward Jones, 201 Progress Parkway, Maryland Heights, MD
63043-3009 (41%); and The Goldman Sachs Group LP, LCVI - Large Cap Value
Institutional, Attn: Danny TSUI, 85 Broad Street, Fl. 10, New York, NY
10004-2434 (30%).
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As of November 30, 2000 the following entity owned of record or
beneficially more than 5% of the outstanding shares of the Research Select Fund:
Class B Shares, Merrill Lynch Pierce Fenner & Smith, For the Sole Benefit of
It's Customers, Attn: Service Team, Sec #97PR8, Goldman Sachs Funds, 4800 Deer
Lake Drive East, 3rd Fl., Jacksonville, FL 32246-6484 (5%).
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. In
addition, Rule 18f-2 under the Act provides that any matter required to be
submitted by the provisions of the Act or applicable state law, or otherwise, to
the holders of the outstanding voting securities of an investment company such
as the Trust shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares of each class or
series affected by such matter. Rule 18f-2 further provides that a class or
series shall be deemed to be affected by a matter unless the interests of each
class or series in the matter are substantially identical or the matter does not
affect any interest of such class or series. However, Rule 18f-2 exempts the
selection of independent public accountants, the approval of principal
distribution contracts and the election of trustees from the separate voting
requirements of Rule 18f-2.
The Trust is not required to hold annual meetings of shareholders and does
not intend to hold such meetings. In the event that a meeting of shareholders is
held, each share of the Trust will be entitled, as determined by the Trustees
without the vote or consent of the shareholders, either to one vote for each
share or to one vote for each dollar of net asset value represented by such
shares on all matters presented to shareholders including the elections of
Trustees (this method of voting being referred to as "dollar based voting").
However, to the extent required by the Act or otherwise determined by the
Trustees, series and classes of the Trust will vote separately from each other.
Shareholders of the Trust do not have cumulative voting rights in the election
of Trustees. Meetings of shareholders of the Trust, or any series or class
thereof, may be called by the Trustees, certain officers or upon the written
request of holders of 10% or more of the shares entitled to vote at such
meetings. The Trustees will call a special meeting of shareholders for the
purpose of electing Trustees, if, at any time, less than a majority of Trustees
holding office at the time were elected by shareholders. The shareholders of the
Trust will have voting rights only with respect to the limited number of matters
specified in the 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 from such liability. The Trust,
acting on behalf of any affected series, must, upon request by such shareholder,
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<PAGE>
assume the defense of any claim made against such shareholder for any act or
obligation of the series and satisfy any judgment thereon from the assets of the
series.
The Declaration of Trust permits the termination of the Trust or of any
series or class of the Trust (i) by a majority of the affected shareholders at a
meeting of shareholders of the Trust, series or class; or (ii) by a majority of
the Trustees without shareholder approval if the Trustees determine that such
action is in the best interest of the Trust, 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 Declaration of Trust 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
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shareholder as a result of an obligation of the series. The Declaration of Trust
also provides that a series shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of the series and satisfy
any judgment thereon. In view of the above, the risk of personal liability of
shareholders of a Delaware business trust is remote.
In addition to the requirements under Delaware law, the Declaration of
Trust provides that shareholders of a series may bring a derivative action on
behalf of the series only if the following conditions are met: (a) shareholders
eligible to bring such derivative action under Delaware law who hold at least
10% of the outstanding shares of the series, or 10% of the outstanding shares of
the class to which such action relates, shall join in the request for the
Trustees to commence such action; and (b) the Trustees must be afforded a
reasonable amount of time to consider such shareholder request and to
investigate the basis of such claim. The Trustees will be entitled to retain
counsel or other advisers in considering the merits of the request and may
require an undertaking by the shareholders making such request to reimburse the
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
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Each Fund is a separate taxable entity. Each 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.
There are certain tax requirements that all Funds must follow in order to
avoid federal taxation. In its efforts to adhere to these requirements, the
Funds may have to limit their investment activities in some types of
instruments. Qualification as a regulated investment company under the Code
requires, among other things, that (a) a Fund derive at least 90% of its gross
income for its taxable year from dividends, interest, payments with respect to
securities loans and gains from the sale or other disposition of stocks or
securities or foreign currencies, or other income (including but not limited to
gains from options, futures, and forward contracts) derived with respect to its
business of investing in such stock, securities or currencies (the "90% gross
income test"); and (b) such Fund diversify its
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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 investment income, capital or the proceeds of securities sales
by foreign investors such as the CORE International Equity, International
Equity, European Equity, Japanese Equity, International Growth Opportunities,
Emerging Markets Equity or Asia Growth Funds and may therefore make it more
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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. Each Fund
anticipates that it will generally make timely distributions of income and
capital gains in compliance with these requirements so that they will generally
not be required to pay the excise tax. For federal income tax purposes, 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. At August 31, 2000 the following Funds had capital loss carry forwards
approximating the amount indicated for federal tax purposes, expiring in the
year indicated: Growth and Income Fund, $48,213,000 (expires 2008); Mid Cap
Value Fund, $19,761,198 (expires 2006-2008); Small Cap Value Fund, $42,959,499
(expires 2006-2008); and Asia Growth Fund, $71,481,000 (expires 2005-2007).
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
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
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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 the CORE Large Cap Value, CORE U.S. Equity, CORE
Large Cap Growth, CORE Small Cap Equity and Research Select 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 the CORE International Equity, International Equity,
European Equity, Japanese Equity, International Growth Opportunities, 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, European Equity,
Japanese Equity, International Growth Opportunities, 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 the CORE International
Equity, International Equity, European Equity, Japanese Equity, International
Growth Opportunities, 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 the CORE
International Equity, International Equity, European Equity, Japanese Equity,
International Growth Opportunities, 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, European
Equity, Japanese Equity, International Growth Opportunities, Emerging Markets
Equity or Asia Growth Funds file the election described above, its shareholders
will be notified of the amount of (i) each shareholder's pro rata share of
qualified foreign taxes paid by a Fund and (ii) the portion of Fund dividends
which represents income from each foreign country. The other Funds will not be
entitled to elect to pass foreign taxes and associated credits or deductions
through to their shareholders because they will not satisfy the 50% requirement
described above. If a Fund cannot or does not make this election, it may deduct
such taxes in computing the amount it is required to distribute.
If a Fund acquires stock (including, under proposed regulations, an option
to acquire stock such as is inherent in a convertible bond) in certain foreign
corporations that receive at least 75% of their annual gross income from passive
sources (such as interest, dividends, rents, royalties or capital gain) or hold
at least 50% of their assets in investments producing such passive income
("passive foreign investment companies"), the Fund could be subject to federal
income tax and additional interest charges on "excess distributions" received
from such companies or gain from the sale of stock in such companies, even if
all income or gain actually received by the Fund is timely distributed to its
shareholders. The Fund would not be able to pass through to its shareholders any
credit or deduction for such a tax. In some cases, elections may be available
that would ameliorate these adverse tax
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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 the CORE
International Equity, International Equity, European Equity, Japanese Equity,
International Growth Opportunities, 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 taxed at a maximum rate of 20%
(10% for those shareholders in the 15% tax bracket). In addition, any long-term
gain distributions related to assets held for more than five years and sold
after
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December 31, 2000 will be taxed at a maximum rate of 8% for those shareholders
in the 15% tax bracket. For taxpayers in higher tax brackets, the capital gains
tax rate will be reduced from 20% to 18% for long-term gain distributions
related to assets acquired after December 31, 2000 and held for more than five
years. Distributions, if any, that are in excess of a Fund's current and
accumulated earnings and profits will first reduce a shareholder's tax basis in
his shares and, after such basis is reduced to zero, will generally constitute
capital gains to a shareholder who holds his shares as capital assets.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions, and certain prohibited transactions is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their tax
advisers for more information.
Taxable U.S. Shareholders - Sale of Shares
==========================================
When a shareholder's shares are sold, redeemed or otherwise disposed of in
a transaction that is treated as a sale for tax purposes, the shareholder will
generally recognize gain or loss equal to the difference between the
shareholder's adjusted tax basis in the shares and the cash, or fair market
value of any property, received. (To aid in computing its tax basis, a
shareholder should generally retain its account statement for the period that it
held shares). If the shareholder holds the shares as a capital asset at the time
of sale, the character of the gain or loss should be capital, and treated as
long-term if the shareholder's holding period is more than one year, and
short-term otherwise. In general, the maximum long-term capital gain rate will
be 20% for capital gains on assets held more than one year (10% for those
shareholders in the 15% tax bracket). In addition, gains related to the sale of
shares held for more than five years and sold after December 31, 2000 will be
taxed at a maximum rate of 8% for those shareholders in the 15% tax bracket. For
shareholders in higher tax brackets, the capital gains tax rate will be reduced
from 20% to 18% for any shares acquired after December 31, 2000 (or
marked-to-market at the beginning of 2001) and held for more than five years.
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.
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Each Fund may be required to withhold, as "backup withholding," federal
income tax at a rate of 31% from dividends (including capital gain dividends)
and share redemption and exchange proceeds to individuals and other non-exempt
shareholders who fail to furnish such Fund with a correct taxpayer
identification number ("TIN") certified under penalties of perjury, or if the
Internal Revenue Service or a broker notifies the Fund that the payee is subject
to backup withholding as a result of failing to properly report interest or
dividend income to the Internal Revenue Service or that the TIN furnished by the
payee to the Fund is incorrect, or if (when required to do so) the payee fails
to certify under penalties of perjury that it is not subject to backup
withholding. A Fund may refuse to accept an application that does not contain
any required TIN or certification that the TIN provided is correct. If the
backup withholding provisions are applicable, any such dividends and proceeds,
whether paid in cash or reinvested in additional shares, will be reduced by the
amounts required to be withheld. Any amounts withheld may be credited against a
shareholder's U.S. federal income tax liability. If a shareholder does not have
a TIN, it should apply for one immediately by contacting its local office of the
Social Security Administration or the Internal Revenue Service (IRS). Backup
withholding could apply to payments relating to a shareholder's account while it
is waiting receipt of a TIN. Special rules apply for certain entities. For
example, for an account established under a Uniform Gifts or Transfer to Minors
Act, the TIN of the minor should be furnished.
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, European Equity, Japanese Equity, International Growth
Opportunities, 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
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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 the proper IRS Form W-8
(i.e., W-8 BEN, W-8 ECI, W-8 IMY or W-8 EXP) 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. Also, non-U.S. shareholders may be
subject to estate tax. Each shareholder who is not a U.S. person should consult
his or her tax adviser regarding the U.S. and non-U.S. tax consequences of
ownership of shares of and receipt of distributions from the Funds.
State and Local
===============
Each Fund may be subject to state or local taxes in jurisdictions in which
such Fund may be deemed to be doing business. In addition, in those states or
localities which have income tax laws, the treatment of such Fund and its
shareholders under such laws may differ from their treatment under federal
income tax laws, and investment in such Fund may have tax consequences for
shareholders different from those of a direct investment in such Fund's
portfolio securities. Shareholders should consult their own tax advisers
concerning these matters.
FINANCIAL STATEMENTS
The audited financial statements and related reports of
PricewaterhouseCoopers LLP, independent public accountants, contained in each
Fund's 2000 Annual Report are hereby incorporated by reference. The financial
statements in each Fund's Annual Report have been incorporated by reference in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing. The financial statements and financial highlights
included in each Fund's Annual Report for periods ending on or before August 31,
1999 were audited by Arthur Andersen LLP, the Funds' former independent
auditors. The report of Arthur Andersen LLP dated October 8, 1999 on the Funds'
financial statements included in each Fund's Annual Report to Shareholders for
the fiscal period ended August 31, 1999, is also incorporated herein by
reference. No other parts of any Annual Report are incorporated by reference
herein. A copy of the Annual Reports may be obtained without charge by writing
Goldman, Sachs & Co., 4900 Sears Tower, Chicago, Illinois 60606 or by calling
Goldman, Sachs & Co., at the telephone number on the back cover of each Fund's
prospectus.
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
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shareholder receives redemption proceeds in kind, the shareholder should expect
to incur transaction costs upon the disposition of the securities received in
the redemption.
The right of a shareholder to redeem shares and the date of payment by
each Fund may be suspended for more than seven days for any period during which
the New York Stock Exchange is closed, other than the customary weekends or
holidays, or when trading on such Exchange is restricted as determined by the
SEC; or during any emergency, as determined by the SEC, as a result of which it
is not reasonably practicable for such Fund to dispose of securities owned by it
or fairly to determine the value of its net assets; or for such other period as
the SEC may by order permit for the protection of shareholders of such Fund.
(The Trust may also suspend or postpone the recordation of the transfer or
shares upon the occurrence of any of the foregoing conditions).
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. Certain Service Organizations or institutions may enter into
sub-transfer agency agreements with the Trust or Goldman Sachs with respect to
their services.
The Investment Adviser, Distributor and/or their affiliates may pay, out
of their own assets, compensation to Authorized Dealers, Service Organizations
and other financial intermediaries ("Intermediaries") 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 Additional Statement for
distribution and shareholder servicing and processing, and would also be in
addition to the sales commissions payable to Intermediaries as set forth in the
Prospectus. These Additional Payments may take the form of "due diligence"
payments for an Intermediary'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 an Intermediary'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 Investment 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 Investment Adviser,
Distributor and their affiliates may be a fixed dollar amount, may be based on
the number of customer accounts maintained by an Intermediary, or may be based
on a percentage of the value of shares sold to, or held by, customers of the
Intermediary involved, and may be different for different Intermediaries.
Furthermore, the Investment Adviser, Distributor and/or their affiliates may, to
the extent permitted by applicable 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. The
Investment Adviser, Distributor and their affiliates may also pay for the travel
expenses, meals, lodging and entertainment of Intermediaries and
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their salespersons and guests in connection with educational, sales and
promotional programs subject to applicable NASD regulations.
In the interest of economy and convenience, the Trust does not issue
certificates representing the Funds' shares. Instead, the Transfer Agent
maintains a record of each shareholder's ownership. Each shareholder receives
confirmation of purchase and redemption orders from the Transfer Agent. Fund
shares and any dividends and distributions paid by the Funds are reflected in
account statements from the Transfer Agent.
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 SERVICE PLANS
(Class A Shares, Class B Shares and Class C Shares Only)
Distribution and Service Plans. As described in the Prospectuses, the
Trust has adopted, on behalf of Class A, Class B and Class C Shares of each
Fund, distribution and service plans (each a "Plan") pursuant to Rule 12b-1
under the Act. See "Shareholder Guide-Distribution and Service Fees" in the
Prospectus.
The Plans for each Fund (except the Research Select Fund) were most
recently approved on April 25, 2000 by a majority vote of the Trustees of the
Trust, including a majority of the non-interested Trustees of the Trust who have
no direct or indirect financial interest in the Plans, cast in person at a
meeting called for the purpose of approving the Plans. The Plans for the
Research Select Fund were initially approved on April 26, 2000.
The compensation for distribution services payable under a Plan may not
exceed 0.25%, 0.75% and 0.75%, per annum of a Fund's average daily net assets
attributable to Class A, Class B and Class C Shares respectively, of such Fund.
Under the Plans for Class A (CORE International Equity, International Equity,
European Equity, Japanese Equity, International Growth Opportunities, Emerging
Markets Equity and Asia Growth Funds only), Class B and Class C Shares, Goldman
Sachs is also entitled to received a separate fee for personal and account
maintenance services equal to an annual basis of 0.25% of each Fund's average
daily net assets attributable to Class A, Class B
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or Class C Shares. With respect to Class A Shares, the Distributor at its
discretion may use compensation for distribution services paid under the Plan
for personal and account maintenance services and expenses so long as such total
compensation under the Plan does not exceed the maximum cap on "service fees"
imposed by the NASD.
Each 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. The distribution fees received by Goldman Sachs under
the Plans and contingent deferred sales charge on Class A, Class B and Class C
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 A,
Class B and Class C Shares. To the extent such fees are not paid to such
dealers, Goldman Sachs may retain such fee as compensation for its services and
expenses of distributing the Funds' Class A, Class B and Class C Shares.
Under each Plan, Goldman Sachs, as distributor of each Fund's Class A,
Class B and Class C Shares, will provide to the Trustees of the Trust for their
review, and the Trustees of the Trust will review at least quarterly, a written
report of the services provided and amounts expended by Goldman Sachs under the
Plans and the purposes for which such services were performed and expenditures
were made.
The Plans will remain in effect until May 1, 2001 and from year to year
thereafter, provided that such continuance is approved annually by a majority
vote of the Trustees of the Trust, including a majority of the non-interested
Trustees of the Trust who have no direct or indirect financial interest in the
Plans. The Plans may not be amended to increase materially the amount of
distribution compensation without approval of a majority of the outstanding
Class A, Class B or Class C Shares of the affected Fund and share class. All
material amendments of a Plan must also be approved by the Trustees of the Trust
in the manner described above. 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 of the Trust or by vote of a majority of the Class A,
Class B or Class C Shares, respectively, of the affected Fund and share class.
If a Plan was terminated by the Trustees of the Trust and no successor plan was
adopted, the Fund would cease to make payments to Goldman Sachs under the Plan
and Goldman Sachs would be unable to recover the amount of any of its
unreimbursed expenditures. So long as a Plan is in effect, the selection and
nomination of non-interested Trustees of the Trust will be committed to the
discretion of the non-interested Trustees of the Trust. The Trustees of the
Trust have determined that in their judgment there is a reasonable likelihood
that the Plans will benefit the Funds and their Class A, Class B and Class C
Shareholders.
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<PAGE>
The following chart shows the: 1) distribution and service fees paid to Goldman
Sachs for the fiscal year ended August 31, 2000, the fiscal period ended August
31, 1999 and the fiscal year ended January 31, 1999, and 2) distribution fees
paid to Goldman Sachs for the fiscal year ended January 31, 1998 by each
applicable Fund then in existence pursuant to the Class A Plan:
<TABLE>
<CAPTION>
Fiscal year Fiscal period Fiscal year Fiscal year
ended ended ended ended
August 31, August 31, January 31, January 31,
2000 1999 1999 1998
==== ==== ==== ====
<S> <C> <C> <C> <C>
Balanced Fund $ 378,767 $ 268,705 $ 466,990 $ 0
Growth and Income Fund 1,705,073 1,432,452 4,004,764 723,634
CORE Large Cap Value Fund/1/ 222,782 88,576 579 N/A
CORE U.S. Equity Fund 1,644,698 901,485 1,963,368 720,025
CORE Large Cap Growth Fund/1/ 1,073,849 366,944 270,829 0
CORE Small Cap Equity Fund/1/ 134,001 84,036 81,416 1,380
CORE International Equity Fund/1/ 687,424 321,043 208,905 2,751
Capital Growth Fund 5,843,877 2,987,611 3,953,381 0
Strategic Growth Fund/1/ 114,555 2,430 N/A N/A
Growth Opportunities Fund/1/ 171,456 2,204 N/A N/A
Mid Cap Value Fund/1/ 99,049 93,442 449,380 67,478
Small Cap Value Fund 405,682 339,961 872,585 0
Large Cap Value Fund/1/ 6,978 N/A N/A N/A
International Equity Fund 6,009,343 2,622,519 4,032,788 1,416,253
European Equity Fund/1/ 569,252 192,446 66,759 N/A
Japanese Equity Fund/1/ 286,204 55,407 19,466 N/A
International Growth
Opportunities Fund/1/ 881,543 115,648 62,146 N/A
Emerging Markets Equity Fund/1/ 381,208 176,746 226,631 3,381
Asia Growth Fund 475,309 208,976 349,621 431,390
Research Select Fund/1/ 67,271 N/A N/A N/A
</TABLE>
----------
1. The Class A Share class of the CORE Large Cap Value, CORE Large Cap Growth,
CORE Small Cap Equity, CORE International Equity, Strategic Growth, Growth
Opportunities, Mid Cap Value, Large Cap Value, European Equity, Japanese Equity,
International Growth Opportunities, Emerging Markets Equity and Research Select
Funds commenced operations on December 31, 1998, May 1, 1997, August 15, 1997,
August 15, 1997, May 24, 1999, May 24, 1999, August 15, 1997, December 15, 1999,
October 1, 1998, May 1, 1998, May 1, 1998, December 15, 1997 and June 19, 2000,
respectively.
B-124
<PAGE>
The following chart shows the: 1) distribution and service fees that would
have been paid to Goldman Sachs for the fiscal year ended August 31, 2000, the
fiscal period ended August 31, 1999 and the fiscal year ended January 31, 1999,
and 2) distribution fees that would have been paid to Goldman Sachs for the
fiscal year ended January 31, 1998 by each applicable Fund then in existence
pursuant to the Class A Plan, without the voluntary limitations then in effect:
<TABLE>
<CAPTION>
Fiscal year Fiscal period Fiscal year Fiscal year
ended ended ended ended
August 31, August 31, January 31, January 31,
2000 1999 1999 1998
==== ==== ==== ====
<S> <C> <C> <C> <C>
Balanced Fund $378,767 $268,705 $ 823,738 $301,397
Growth and Income Fund 1,705,073 1,432,452 5,307,490 2,324,970
CORE Large Cap Value Fund/1/ 222,782 88,576 579 N/A
CORE U.S. Equity Fund 1,644,698 901,485 1,963,368 771,451
CORE Large Cap Growth Fund/1/ 1,073,849 366,944 405,481 61,924
CORE Small Cap Equity Fund/1/ 134,001 84,036 102,281 6,898
CORE International Equity Fund/1/ 687,424 321,043 208,905 2,751
Capital Growth Fund 5,843,877 2,987,611 6,150,756 2,678,370
Strategic Growth Fund/1/ 114,555 2,430 N/A N/A
Growth Opportunities Fund/1/ 171,456 2,204 N/A N/A
Mid Cap Value Fund/1/ 99,049 93,442 449,380 67,478
Small Cap Value Fund 405,682 339,961 1,655,658 727,298
Large Cap Value Fund/1/ 6,978 N/A N/A N/A
International Equity Fund 6,009,343 2,622,519 4,090,492 1,632,745
European Equity Fund/1/ 569,252 192,446 66,795 N/A
Japanese Equity Fund/1/ 286,204 55,407 19,466 N/A
International Growth
Opportunities Fund/1/ 881,543 115,648 62,146 N/A
Emerging Markets Equity Fund/1/ 381,208 176,746 226,631 3,381
Asia Growth Fund 475,309 208,976 368,632 513,560
Research Select Fund/1/ 67,271 N/A N/A N/A
</TABLE>
--------------------------------
1. The Class A Share class of the CORE Large Cap Value, CORE Large Cap Growth,
CORE Small Cap Equity, CORE International Equity, Strategic Growth, Growth
Opportunities, Mid Cap Value, Large Cap Value, European Equity, Japanese Equity,
International Growth Opportunities, Emerging Markets Equity and Research Select
Funds commenced operations on December 31, 1998, May 1, 1997, August 15, 1997,
August 15, 1997, May 24, 1999, May 24, 1999, August 15, 1997, December 15, 1999,
October 1, 1998, May 1, 1998, May 1, 1998, December 15, 1997 and June 19, 2000,
respectively.
B-125
<PAGE>
The following chart shows the: 1) distribution and service fees paid to
Goldman Sachs for the fiscal year ended August 31, 2000, the fiscal period ended
August 31, 1999 and the fiscal year ended January 31, 1999, and 2) distribution
fees paid to Goldman Sachs for the fiscal year ended January 31, 1998 by each
applicable Fund then in existence pursuant to the Class B Plan:
<TABLE>
<CAPTION>
Fiscal year Fiscal period Fiscal year Fiscal year
ended ended ended ended
August 31, August 31, January 31, January 31,
2000 1999 1999 1998
==== ==== ==== ====
<S> <C> <C> <C> <C>
Balanced Fund $369,057 $ 247,828 $ 372,044 $ 74,569
Growth and Income Fund 1,977,417 1,796,760 3,924,188 1,117,813
CORE Large Cap Value Fund/1/ 177,310 40,251 122 N/A
CORE U.S. Equity Fund 2,484,645 1,115,835 995,389 265,025
CORE Large Cap Growth Fund/1/ 2,642,305 858,809 449,058 34,332
CORE Small Cap Equity Fund/1/ 158,867 80,244 140,016 20,064
CORE International Equity Fund/1/ 113,403 47,034 54,688 5,700
Capital Growth Fund 4,009,512 1,739,629 1,193,755 127,395
Strategic Growth Fund/1/ 117,536 2,398 N/A N/A
Growth Opportunities Fund/1/ 164,373 598 N/A N/A
Mid Cap Value Fund/1/ 234,374 200,960 417,334 47,585
Small Cap Value Fund 285,873 220,759 494,223 160,608
Large Cap Value Fund/1/ 4,532 N/A N/A N/A
International Equity Fund 795,433 388,156 653,844 314,578
European Equity Fund/1/ 29,685 4,365 387 N/A
Japanese Equity Fund/1/ 61,667 15,230 5,736 N/A
International Growth
Opportunities Fund/1/ 17,389 1,354 1,566 N/A
Emerging Markets Equity Fund/1/ 18,920 4,255 3,075 38
Asia Growth Fund 81,059 32,196 43,192 28,550
Research Select Fund/1/ 237,495 N/A N/A N/A
</TABLE>
-------------------------------
/1/ The Class B Share class of the CORE Large Cap Value, CORE Large Cap Growth,
CORE Small Cap Equity, CORE International Equity, Strategic Growth, Growth
Opportunities, Mid Cap Value, Large Cap Value, European Equity, Japanese Equity,
International Growth Opportunities, Emerging Markets Equity and Research Select
Funds commenced operations on December 31, 1998, May 1, 1997, August 15, 1997,
August 15, 1997, May 24, 1999, May 24, 1999, August 15, 1997, December 15, 1999,
October 1, 1998, May 1, 1998, May 1, 1998, December 15, 1997 and June 19, 2000,
respectively.
B-126
<PAGE>
The following chart shows the: 1) distribution and service fees paid to
Goldman Sachs for the fiscal year ended August 31, 2000, the fiscal period ended
August 31, 1999 and the fiscal year ended January 31, 1999, and 2) distribution
fees paid to Goldman Sachs for the fiscal year ended January 31, 1998 by each
applicable Fund then in existence pursuant to the Class C Plan:
<TABLE>
<CAPTION>
Fiscal year Fiscal period Fiscal year Fiscal year
ended ended ended ended
August 31, August 31, January 31, January 31,
2000 1999 1999 1998
==== ==== ==== ====
<S> <C> <C> <C> <C>
Balanced Fund1 $96,430 $ 72,293 $142,821 $13,290
Growth and Income Fund/1/ 213,661 225,003 553,531 57,542
CORE Large Cap Value Fund/1/ 90,527 23,517 82 N/A
CORE U.S. Equity Fund/1/ 528,896 214,434 152,737 14,614
CORE Large Cap Growth Fund/1/ 1,154,416 343,654 156,368 6,880
CORE Small Cap Equity Fund/1/ 69,635 34,375 44,551 4,038
CORE International Equity Fund/1/ 62,639 25,018 27,157 3,118
Capital Growth Fund 1,156,975 447,252 262,717 9,607
Strategic Growth Fund/1/ 57,666 2,161 N/A N/A
Growth Opportunities Fund/1/ 103,041 224 N/A N/A
Mid Cap Value Fund/1/ 63,738 59,930 113,272 10,495
Small Cap Value Fund 70,710 43,062 8,298 12,158
Large Cap Value Fund/1/ 2,643 N/A N/A N/A
International Equity Fund 176,506 60,274 74,197 7,485
European Equity Fund/1/ 9,104 3,312 337 N/A
Japanese Equity Fund/1/ 48,884 9,001 1,390 N/A
International Growth
Opportunities Fund/1/ 23,655 1,082 725 N/A
Emerging Markets Equity Fund/1/ 14,388 3,702 2,250 28
Asia Growth Fund 28,023 8,922 9,090 2,854
Research Select Fund/1/ 106,700 N/A N/A N/A
</TABLE>
---------------------------
/1/ The Class C Share class of the Balanced, Growth and Income, CORE Large Cap
Value, CORE U.S. Equity, CORE Large Cap Growth, CORE Small Cap Equity, CORE
International Equity, Strategic Growth, Growth Opportunities, Mid Cap Value,
Large Cap Value, European Equity, Japanese Equity, International Growth
Opportunities, Emerging Markets Equity and Research Select Funds commenced
operations on August 15, 1997, August 15, 1997, December 31, 1998, August 15,
1997, August 15, 1997, August 15, 1997, August 15, 1997, May 24, 1999, May 24,
1999, August 15, 1997, December 15, 1999, October 1, 1998, May 1, 1998, May 1,
1998, December 15, 1997 and June 19, 2000, respectively.
B-127
<PAGE>
During the fiscal year ended August 31, 2000, 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/1/ Personnel Expenses Shareholders Advertising
------------- --------- -------- ------------ -----------
Fiscal Year Ended August 31, 2000:
<S> <C> <C> <C> <C> <C>
Balanced Fund $ 395,359 $ 220,056 $ 208,374 $13,544 $ 75,011
Growth and Income Fund 1,712,803 277,744 201,107 12,748 70,393
CORE Large Cap Value Fund 248,369 223,884 240,802 15,278 81,957
CORE U.S. Equity Fund 1,592,169 476,649 353,527 22,742 120,895
CORE Large Cap Growth Fund 1,048,984 395,493 366,879 23,294 128,689
CORE Small Cap Equity Fund 154,877 198,387 174,827 10,999 60,872
CORE International Equity Fund 322,651 309,279 305,275 18,443 108,566
Capital Growth Fund 5,282,250 2,604,758 1,428,650 83,621 506,510
Strategic Growth Fund 243,037 283,731 224,338 13,713 80,999
Growth Opportunities Fund 284,175 421,912 322,381 20,974 120,001
Mid Cap Value 116,373 136,552 124,615 7,889 43,879
Small Cap Value Fund 367,366 284,614 201,490 12,334 71,276
Large Cap Value 23,204 127,352 119,533 8,136 46,092
International Equity Fund 3,301,457 2,588,132 1,369,574 87,977 484,940
European Equity Fund 389,261 603,492 332,522 21,692 116,977
Japanese Equity Fund 288,113 376,675 272,609 18,070 94,409
International Growth Opportunities 793,277 1,045,721 719,946 42,615 260,214
Emerging Market Equity Fund 154,009 392,813 290,638 18,138 100,625
Asia Growth Fund 370,117 405,861 339,119 21,775 115,318
Research Select Fund 85,196 243,890 287,770 12,875 135,665
</TABLE>
---------------------------
/1/ Advance commissions paid to dealers of 1% on Class A Shares are considered
deferred assets which are amortized over a period of 1 year; amounts
presented above reflect amortization expense recorded during the period
presented.
B-128
<PAGE>
During the fiscal year ended August 31, 2000, Goldman Sachs incurred the
following expenses in connection with distribution under the Class B Plan of
each applicable Fund with Class B 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/1/ Personnel Expenses Shareholders Advertising
------------- --------- -------- ------------ -----------
Fiscal Year Ended August 31, 2000:
<S> <C> <C> <C> <C> <C>
Balanced Fund $ 846,506 $ 49,517 $ 50,000 $ 3,242 $ 18,075
Growth and Income Fund 8,243,415 49,290 52,910 3,406 18,326
CORE Large Cap Value Fund 178,300 41,860 45,719 2,927 15,979
CORE U.S. Equity Fund 2,283,969 107,328 118,008 7,651 40,475
CORE Large Cap Growth Fund 2,110,932 205,443 217,539 13,799 76,205
CORE Small Cap Equity Fund 306,306 46,111 49,084 3,034 17,338
CORE International Equity Fund 164,036 23,988 24,734 1,497 8,817
Capital Growth Fund 3,561,678 168,707 178,821 10,915 63,120
Strategic Growth Fund 159,195 59,475 62,702 3,951 21,737
Growth Opportunities Fund 441,788 84,706 93,671 4,873 35,241
Mid Cap Value 1,022,312 68,059 71,369 4,535 24,820
Small Cap Value Fund 1,106,190 30,128 31,853 2,073 11,299
Large Cap Value 11,709 16,663 16,369 943 6,488
International Equity Fund 1,147,354 67,635 72,662 4,713 25,281
European Equity Fund 38,753 6,403 6,524 2,194 2,413
Japanese Equity Fund 76,591 27,436 28,613 1,964 9,484
International Growth Opportunities 16,793 5,151 5,533 327 2,122
Emerging Market Equity Fund 32,177 5,584 6,227 2,154 2,283
Asia Growth Fund 204,656 25,804 27,161 1,742 9,177
Research Select Fund 174,271 208,006 251,418 11,036 117,330
</TABLE>
---------------------------
/1/ Advance commissions paid to dealers of 4% on Class B Shares are
considered deferred assets which are amortized over a period of 1 year;
amounts presented above reflect amortization expense recorded during
the period presented.
B-129
<PAGE>
During the fiscal year ended August 31, 2000, Goldman Sachs incurred the
following expenses in connection with distribution under the Class C Plan of
each applicable Fund with Class C 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/1/ Personnel Expenses Shareholders Advertising
------------- --------- -------- ------------ -----------
Fiscal Year Ended August 31, 2000:
<S> <C> <C> <C> <C> <C>
Balanced Fund $ 60,968 $10,921 $10,926 $ 724 $ 3,638
Growth and Income Fund 171,927 4,601 5,013 329 1,609
CORE Large Cap Value Fund 82,493 17,731 19,785 1,287 6,378
CORE U.S. Equity Fund 446,971 22,887 24,876 1,607 8,606
CORE Large Cap Growth Fund 1,031,770 79,323 83,016 5,309 27,649
CORE Small Cap Equity Fund 61,561 17,363 18,638 1,163 6,145
CORE International Equity Fund 57,545 11,361 11,680 706 3,925
Capital Growth Fund 952,905 48,083 38,735 2,382 12,377
Strategic Growth Fund 51,598 40,053 44,282 2,778 14,374
Growth Opportunities Fund 88,990 38,825 39,945 2,262 14,119
Mid Cap Value 57,927 16,293 17,051 8,459 5,453
Small Cap Value Fund 64,506 6,297 6,665 438 2,243
Large Cap Value 3,514 15,066 12,193 715 3,847
International Equity Fund 147,728 12,518 13,455 875 4,527
European Equity Fund 11,895 1,579 1,629 99 552
Japanese Equity Fund 45,471 20,189 21,106 1,493 6,556
International Growth Opportunities 20,664 6,255 6,236 370 2,163
Emerging Market Equity Fund 13,857 3,868 4,175 257 1,374
Asia Growth Fund 29,983 7,734 8,199 536 2,601
Research Select Fund 92,639 27,892 41,610 772 15,505
</TABLE>
---------------------------
/1/ Advance commissions paid to dealers of 1% on Class C Shares are considered
deferred assets which are amortized over a period of 1 year; amounts
presented above reflect amortization expense recorded during the period
presented.
B-130
<PAGE>
The foregoing tables and the information contained in the preceding
paragraph reflect amounts expended by Goldman Sachs, which amounts are in excess
of the compensation received by Goldman Sachs under the Plans. The payments
under the plans were used by Goldman Sachs to compensate it for the expenses
shown above on a pro-rata basis.
For the fiscal year ended January 31, 1998, Goldman Sachs received service
fees from the Funds pursuant to the Plans then in existence at the rate of 0.25%
of each Fund's average daily net assets attributable to Class A, Class B, or
Class C Shares, which totaled:
Class A Class B Class C
------- ------- -------
Balanced Fund/1/ $ 268,705 $ 61,957 $ 18,073
Growth and Income Fund/1/ 1,432,452 449,190 56,251
CORE Large Cap Value Fund/2/ 88,576 10,063 5,879
CORE U.S. Equity Fund/1/ 901,485 278,959 53,608
CORE Large Cap Growth Fund/3/ 366,944 214,702 85,913
CORE Small Cap Equity Fund/4/ 84,036 20,061 8,594
CORE International Equity Fund/4/ 160,522 11,759 6,254
Capital Growth Fund/1/ 2,987,610 434,907 111,813
Strategic Growth Fund/5/ N/A N/A N/A
Growth Opportunities Fund/5/ N/A N/A N/A
Mid Cap Value Fund/4/ 93,442 50,240 14,982
Small Cap Value Fund/1/ 339,961 55,190 10,766
Large Cap Value Fund/5/ N/A N/A N/A
International Equity Fund/1/ 1,311,260 97,039 15,069
European Equity Fund/6/ 96,223 1,091 828
Japanese Equity Fund/6/ 27,703 3,808 2,250
International Growth
Opportunities Fund/6/ 57,824 338 273
Emerging Market Equity Fund/7/ 88,373 1,064 926
Asia Growth Fund/1/ 104,488 8,049 2,230
Research Select Fund/5/ N/A N/A N/A
--------------------------------------------------------------------------------
/1/ Prior to August 15, 1997, the Balanced, Growth and Income, CORE U.S. Equity,
Capital Growth, International Equity, Small Cap Value, and Asia Growth Funds had
not sold Class C Shares, respectively.
/2/ The CORE Large Cap Value Fund commenced operations on December 31, 1998.
/3/ Prior to May 1, 1997, May 1, 1997 and August 15, 1997, the CORE Large Cap
Growth Fund had not sold Class A, Class B and Class C Shares, respectively.
/4/ Prior to August 15, 1997, the CORE Small Cap Equity, CORE International
Equity and Mid Cap Value Funds had not sold Class A, Class B or Class C Shares.
/5/ During the periods shown, no Shares of the Strategic Growth, Growth
Opportunities, Large Cap Value or Research Select Funds were offered.
/6/ Prior to October 1, 1998, May 1, 1998 and May 1, 1998, European Equity,
Japanese Equity and International Growth Opportunities Funds had not sold Class
A, Class B or Class C Shares.
/7/ Prior to December 15, 1997, the Emerging Markets Equity Fund had not sold
Class A, Class B or Class C Shares.
B-131
<PAGE>
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 August 31, 2000, 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 $21.42 5.5% $22.67
Growth and Income Fund 24.78 5.5% 26.22
CORE U.S. Equity Fund 36.77 5.5% 38.91
CORE Large Cap Value Fund 10.81 5.5% 11.44
CORE Large Cap Growth Fund 22.66 5.5% 23.98
CORE Small Cap Equity Fund 12.90 5.5% 13.65
CORE International Equity Fund 11.32 5.5% 11.98
Capital Growth Fund 28.95 5.5% 30.63
Strategic Growth Fund 12.52 5.5% 13.25
Growth Opportunities Fund 19.50 5.5% 20.63
Mid Cap Value Fund 19.88 5.5% 21.04
International Equity Fund 23.59 5.5% 24.96
Small Cap Value Fund 23.21 5.5% 24.56
Large Cap Value Fund 10.39 5.5% 10.99
European Equity Fund 13.82 5.5% 14.62
Japanese Equity Fund 15.77 5.5% 16.69
International Growth Opportunities Fund 16.12 5.5% 17.06
Emerging Market Equity Fund 10.83 5.5% 11.46
Asia Growth Fund 11.16 5.5% 11.80
Research Select Fund 10.77 5.5% 11.40
</TABLE>
The following information supplements the information in the Prospectus
under the captions "Shareholder Guide" and "Dividends." Please see the
Prospectus for more complete information.
B-132
<PAGE>
Other Purchase Information
--------------------------
If shares of a Fund are held in a "street name" account with an Authorized
Dealer, all recordkeeping, transaction processing and payments of distributions
relating to the beneficial owner's account will be performed by the Authorized
Dealer, and not by the Fund and its Transfer Agent. Since the Funds will have no
record of the beneficial owner's transactions, a beneficial owner should contact
the Authorized Dealer to purchase, redeem or exchange shares, to make changes in
or give instructions concerning the account or to obtain information about the
account. The transfer of shares in a "street name" account to an account with
another dealer or to an account directly with the Fund involves special
procedures and will require the beneficial owner to obtain historical purchase
information about the shares in the account from the Authorized Dealer.
Right of Accumulation (Class A)
-------------------------------
A Class A shareholder qualifies for cumulative quantity discounts if the
current purchase price of the new investment plus the shareholder's current
holdings of existing Class A Shares (acquired by purchase or exchange) of a Fund
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 $65,000 and purchases
additional Class A Shares of any Goldman Sachs Fund with a purchase price of
$45,000, the sales charge for the $45,000 purchase would be 3.75% (the rate
applicable to a single purchase of $100,000 or more). 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, (i) 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 all other Private
Client Services accounts, and (ii) shares of the Funds and any other Goldman
Sachs Fund purchased by an existing client of Goldman.com will be combined with
Class A Shares and other assets held in the client's Goldman.com 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
Fund's shares to eligible persons; and (ii) notification to the relevant Fund at
the time of purchase that the investor is eligible for this right of
accumulation. In addition, in connection with SIMPLE IRA accounts, cumulative
quantity discounts are available on a per plan basis if (i) your employee has
been assigned a cumulative discount number by Goldman Sachs, and (ii) your
account, alone or
B-133
<PAGE>
in combination with the accounts of other plan participants also invested in
Class A Shares of Goldman Sachs Funds, totals the requisite aggregate amount as
described in the Prospectus.
Statement of Intention (Class A)
--------------------------------
If a shareholder anticipates purchasing at least $50,000 of Class A Shares of a
Fund alone or in combination with Class A Shares of any other Goldman Sachs Fund
within a 13-month period, the shareholder may purchase shares of the Fund at a
reduced sales charge by submitting a Statement of Intention (the "Statement").
Shares purchased pursuant to a Statement will be eligible for the same sales
charge discount that would have been available if all of the purchases had been
made at the same time. The shareholder or his Authorized Dealer must inform
Goldman Sachs that the Statement is in effect each time shares are purchased.
There is no obligation to purchase the full amount of shares indicated in the
Statement. A shareholder may include the value of all Class A Shares on which a
sales charge has previously been paid as an "accumulation credit" toward the
completion of the Statement, but a price readjustment will be made only on Class
A Shares purchased within ninety (90) days before submitting the Statement. The
Statement authorizes the Transfer Agent to hold in escrow a sufficient number of
shares 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.
The provisions applicable to the Statement, and the terms of the related escrow
agreement, are set forth in Appendix C to this Additional Statement.
Cross-Reinvestment of Dividends and Distributions
-------------------------------------------------
Shareholders may receive dividends and distributions in additional shares of the
same class of a Fund or they may elect to receive them in cash or shares of the
same class of other Goldman Sachs Funds or ILA Service Shares of the Prime
Obligations Fund or the Tax-Exempt Diversified Fund, if they hold Class A Shares
of a Fund, or ILA, Class B or Class C Shares of the Prime Obligations Fund, if
they hold Class B or Class C Shares of a Fund (the "ILA Funds").
A Fund shareholder should obtain and read the prospectus relating to any other
Goldman Sachs Fund or ILA Fund and its shares and consider its investment
objective, policies and applicable fees before electing cross-reinvestment into
that Fund. 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 ILA Funds 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 Goldman Sachs Fund or
an account registered in a
B-134
<PAGE>
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.
Class C Exchanges
-----------------
As stated in the Prospectus, Goldman Sachs normally begins paying the annual
0.75% distribution fee on Class C Shares to Authorized Dealers after the shares
have been held for one year. When an Authorized Dealer enters into an
appropriate agreement with Goldman Sachs and stops receiving this payment on
Class C Shares that have been beneficially owned by the Authorized Dealer's
customers for at least ten years, those Class C Shares may be exchanged for
Class A Shares (which bear a lower distribution fee) of the same Fund at their
relative NAV without a sales charge in recognition of the reduced payment to the
Authorized Dealer.
Systematic Withdrawal Plan
--------------------------
A systematic withdrawal plan (the "Systematic Withdrawal Plan") is available to
shareholders of a Fund whose shares are worth at least $5,000. The Systematic
Withdrawal Plan provides for monthly payments to the participating shareholder
of any amount not less than $50.
Dividends and capital gain distributions on shares held under the Systematic
Withdrawal Plan are reinvested in additional full and fractional shares of the
applicable Fund at net asset value. The Transfer Agent acts as agent for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the systematic withdrawal payment. The Systematic Withdrawal Plan may
be terminated at any time. Goldman Sachs reserves the right to initiate a fee of
up to $5 per withdrawal, upon thirty (30) days written notice to the
shareholder. Withdrawal payments should not be considered to be dividends, yield
or income. If periodic withdrawals continuously exceed new purchases and
reinvested dividends and capital gains distributions, the shareholder's original
investment will be correspondingly reduced and ultimately exhausted. The
maintenance of a withdrawal plan concurrently with purchases of additional Class
A, 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 "Shareholder Guide" 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-135
<PAGE>
SERVICE PLAN
(Service Shares Only)
The Funds have adopted a service plan (the "Plan") with respect to its Service
Shares which authorizes the Funds 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; provided, however, that the fee paid for
personal and account maintenance services shall not exceed .25% of such average
daily net assets.
The amount of the service fees paid by each Fund then in existence to Service
Organizations pursuant to the Plan was as follows for the fiscal year ended
August 31, 2000, the fiscal period ended August 31, 1999 and the fiscal years
ended January 31, 1999 and January 31, 1998.
<TABLE>
<CAPTION>
Fiscal year Fiscal period Fiscal year Fiscal year
ended ended ended ended
August 31, August 31, January 31, January 31,
2000 1999 1999 1998
==== ==== ==== ====
<S> <C> <C> <C> <C>
Balanced Fund/1/ $ 78 $ 445 $ 1,402 $ 31
Growth and Income Fund 44,543 32,442 57,187 32,418
CORE Large Cap Value Fund/2/ 59 13 1 N/A
CORE U.S. Equity Fund 60,276 34,586 49,461 27,222
CORE Large Cap Growth Fund/3/ 15,306 6,385 2,992 257
CORE Small Cap Equity Fund/1/ 315 176 74 4
CORE International Equity Fund/1/ 119 20 53 3
</TABLE>
B-136
<PAGE>
<TABLE>
<CAPTION>
Fiscal year Fiscal period Fiscal year Fiscal year
ended ended ended ended
August 31, August 31, January 31, January 31,
2000 1999 1999 1998
==== ==== ==== ====
<S> <C> <C> <C> <C>
Capital Growth Fund/1/ 48,672 16,691 7,655 4
Strategic Growth Fund/4/ 8 2 N/A N/A
Growth Opportunities Fund/4/ 628 2 N/A N/A
Mid Cap Value Fund/5/ 904 656 685 12
Small Cap Value Fund/1/ 268 $ 471 $ 588 $ 4
Large Cap Value Fund/6/ 5 N/A N/A N/A
International Equity Fund 20,398 10,635 17,786 9,236
European Equity Fund/7/ 11 6 3 N/A
Japanese Equity Fund/7/ 14 6 6 N/A
International Growth
Opportunities Fund/7/ 11 5 6 N/A
Emerging Markets Equity Fund/8/ 2 4 7 1
Asia Growth Fund/9/ N/A N/A N/A N/A
Research Select Fund/10/ 8 N/A N/A N/A
</TABLE>
--------------------------
/1/ Prior to August 15, 1997, the Balanced, CORE Small Cap Equity, CORE
International Equity, Capital Growth and Small Cap Value Funds had not sold
Service Shares.
/2/ Prior to December 31, 1998, the CORE Large Cap Value Fund had not sold
Service Shares.
/3/ Prior to May 1, 1997, the CORE Large Cap Growth Fund had not sold Service
Shares.
/4/ Prior to May 24, 1999, the Strategic Growth and Growth Opportunities Fund
had not sold Service Shares.
/5/ Prior to July 18, 1997, the Mid Cap Value Fund had not sold Service Shares.
/6/ Prior to December 15, 1999, the Large Cap Value Fund had not sold Service
Shares.
/7/ Prior to October 1, 1998, May 1, 1998 and May 1, 1998, the European Equity,
Japanese Equity and International Growth Opportunities Funds, respectively, had
not sold Service Shares.
/8/ Prior to December 15, 1997, the Emerging Markets Fund had not sold Service
Shares.
/9/ During the periods shown, Service Shares of the Asia Growth Fund were not
sold.
/10/ Prior to June 19, 2000, the Research Select Fund had not offered Service
Shares.
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
B-137
<PAGE>
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.
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 their 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 with respect to each Fund
(except the Research Select Fund) at a meeting called for the purpose of voting
on such Plan and Service Agreements on April 25, 2000. The Plan and related
Service Agreements for the Research Select Fund were initially approved on April
26, 2000. The Plan and related Service Agreements will remain in effect until
May 1, 2001 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 affected Fund's outstanding Service Shares. 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 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 their judgment, there is a reasonable
likelihood that the Plan will benefit the Funds and the holders of Service
Shares of the Funds.
B-138
<PAGE>
Appendix A
Commercial Paper Ratings
------------------------
A Standard & Poor's commercial paper rating is a current opinion of the
creditworthiness of an obligor with respect to financial obligations having an
original maturity of no more than 365 days. The following summarizes the rating
categories used by Standard and Poor's for commercial paper:
"A-1" - Obligations are rated in the highest category indicating that the
obligor's capacity to meet its financial commitment on the obligation is strong.
Within this category, certain obligations are designated with a plus sign (+).
This indicates that the obligor's capacity to meet its financial commitment on
these obligations is extremely strong.
"A-2" - Obligations are somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in higher
rating categories. However, the obligor's capacity to meet its financial
commitment on the obligation is satisfactory.
"A-3" - Obligations exhibit adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
"B" - Obligations are regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
"C" - Obligations are currently vulnerable to nonpayment and are dependent
upon favorable business, financial, and economic conditions for the obligor to
meet its financial commitment on the obligation.
"D" - Obligations are in payment default. The "D" rating category is used
when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The "D" rating will be used
upon the filing of a bankruptcy petition or the taking of a similar action if
payments on an obligation are jeopardized.
Local Currency and Foreign Currency Risks
Country risk considerations are a standard part of Standard & Poor's analysis
for credit ratings on any issuer or issue. Currency of repayment is a key factor
in this analysis. An obligor's capacity to repay foreign obligations may be
lower than its capacity to repay obligations in its local currency due to the
sovereign government's own relatively lower capacity to repay external versus
domestic debt. These sovereign risk considerations are incorporated in the debt
ratings
1-A
<PAGE>
assigned to specific issues. Foreign currency issuer ratings are also
distinguished from local currency issuer ratings to identify those instances
where sovereign risks make them different for the same issuer.
Moody's commercial paper ratings are opinions of the ability of issuers to
honor senior financial obligations and contracts. These obligations have an
original maturity not exceeding one year, unless explicitly noted. The following
summarizes the rating categories used by Moody's for commercial paper:
"Prime-1" - Issuers (or supporting institutions) have a superior ability
for repayment of senior short-term debt obligations. Prime-1 repayment ability
will often be evidenced by many of the following characteristics: leading market
positions in well-established industries; high rates of return on funds
employed; conservative capitalization structure with moderate reliance on debt
and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternate liquidity.
"Prime-2" - Issuers (or supporting institutions) have a strong ability for
repayment of senior short-term debt obligations. This will normally be evidenced
by many of the characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
"Prime-3" - Issuers (or supporting institutions) have an acceptable
ability for repayment of senior short-term debt obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
"Not Prime" - Issuers do not fall within any of the Prime rating
categories.
Fitch, Inc. ("Fitch") short-term ratings apply to time horizons of less
than 12 months for most obligations, or up to three years for U.S. public
finance securities. The following summarizes the rating categories used by Fitch
for short-term obligations:
"F1" - Securities possess the highest credit quality. This designation
indicates the strongest capacity for timely payment of financial commitments and
may have an added "+" to denote any exceptionally strong credit feature.
"F2" - Securities possess good credit quality. This designation indicates
a satisfactory capacity for timely payment of financial commitments, but the
margin of safety is not as great as in the case of the higher ratings.
2-A
<PAGE>
"F3" - Securities possess fair credit quality. This designation indicates
that the capacity for timely payment of financial commitments is adequate;
however, near-term adverse changes could result in a reduction to non-investment
grade.
"B" - Securities possess speculative credit quality. This designation
indicates minimal capacity for timely payment of financial commitments, plus
vulnerability to near-term adverse changes in financial and economic conditions.
"C" - Securities possess high default risk. This designation indicates a
capacity for meeting financial commitments which is solely reliant upon a
sustained, favorable business and economic environment.
"D" - Securities are in actual or imminent payment default.
Corporate and Municipal Long-Term Debt Ratings
----------------------------------------------
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - An obligation rated "AAA" has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is extremely strong.
"AA" - An obligation rated "AA" differs from the highest rated obligations
only in small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
"A" - An obligation rated "A" is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
"BBB" - An obligation rated "BBB" exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
Obligations rated "BB," "B," "CCC," "CC" and "C" are regarded as having
significant speculative characteristics. "BB" indicates the least degree of
speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
"BB" - An obligation rated "BB" is less vulnerable to nonpayment than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to the obligor's inadequate capacity to meet its financial commitment on the
obligation.
3-A
<PAGE>
"B" - An obligation rated "B" is more vulnerable to nonpayment than
obligations rated "BB", but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
"CCC" - An obligation rated "CCC" is currently vulnerable to nonpayment,
and is dependent upon favorable business, financial and economic conditions for
the obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
"CC" - An obligation rated "CC" is currently highly vulnerable to
nonpayment.
"C" - An obligation rated "C" is currently highly vulnerable to
nonpayment. The "C" rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action taken, but payments on this obligation
are being continued.
"D" - An obligation rated "D" is in payment default. The "D" rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The "D"
rating also will be used upon the filing of a bankruptcy petition or the taking
of a similar action if payments on an obligation are jeopardized.
- PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
- "r" - The `r' highlights obligations that Standard & Poor's believes
have significant noncredit risks. Examples of such obligations are securities
with principal or interest return indexed to equities, commodities, or
currencies; certain swaps and options; and interest-only and principal-only
mortgage securities. The absence of an `r' symbol should not be taken as an
indication that an obligation will exhibit no volatility or variability in total
return.
- N.R. Indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular obligation as a matter of policy.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective
4-A
<PAGE>
elements are likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all standards. Together
with the "Aaa" group they comprise what are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in "Aaa" securities or fluctuation of protective elements may be
of greater amplitude or there may be other elements present which make the
long-term risk appear somewhat larger than the "Aaa" securities.
"A" - Bonds possess many favorable investment attributes and are to be
considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds are considered as medium-grade obligations, (i.e., they are
neither highly protected nor poorly secured). Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
"Ba" - Bonds 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 generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
"Caa " - Bonds 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 represent obligations which are speculative in a high degree.
Such issues are often in default or have other marked shortcomings.
"C" - Bonds are the lowest rated class of bonds, and issues so rated can
be regarded as having extremely poor prospects of ever attaining any real
investment standing.
Con. (...) - Bonds for which the security depends on the completion of
some act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. The parenthetical rating denotes probable credit stature upon
completion of construction or elimination of the basis of the condition.
5-A
<PAGE>
Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from "Aa" through "Caa". The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of its generic rating category.
The following summarizes long-term ratings used by Fitch:
"AAA" - Securities considered to be investment grade and of the highest
credit quality. These ratings denote the lowest expectation of credit risk and
are assigned only in case of exceptionally strong capacity for timely payment of
financial commitments. This capacity is highly unlikely to be adversely affected
by foreseeable events.
"AA" - Securities considered to be investment grade and of very high
credit quality. These ratings denote a very low expectation of credit risk and
indicate very strong capacity for timely payment of financial commitments. This
capacity is not significantly vulnerable to foreseeable events.
"A" - Securities considered to be investment grade and of high credit
quality. These ratings denote a low expectation of credit risk and indicate
strong capacity for timely payment of financial commitments. This capacity may,
nevertheless, be more vulnerable to changes in circumstances or in economic
conditions than is the case for higher ratings.
"BBB" - Securities considered to be investment grade and of good credit
quality. These ratings denote that there is currently a low expectation of
credit risk. The capacity for timely payment of financial commitments is
considered adequate, but adverse changes in circumstances and in economic
conditions are more likely to impair this capacity. This is the lowest
investment grade category.
"BB" - Securities considered to be speculative. These ratings indicate
that there is a possibility of credit risk developing, particularly as the
result of adverse economic change over time; however, business or financial
alternatives may be available to allow financial commitments to be met.
Securities rated in this category are not investment grade.
"B" - Securities are considered highly speculative. These ratings indicate
that significant credit risk is present, but a limited margin of safety remains.
Financial commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.
"CCC", "CC" and "C" - Securities have high default risk. Default is a real
possibility, and capacity for meeting financial commitments is solely reliant
upon sustained, favorable business or economic developments. "CC" ratings
indicate that default of some kind appears probable, and "C" ratings signal
imminent default.
6-A
<PAGE>
"DDD," "DD" and "D" - Securities are in default. The ratings of
obligations in this category are based on their prospects for achieving partial
or full recovery in a reorganization or liquidation of the obligor. While
expected recovery values are highly speculative and cannot be estimated with any
precision, the following serve as general guidelines. "DDD" obligations have the
highest potential for recovery, around 90%-100% of outstanding amounts and
accrued interest. "DD" indicates potential recoveries in the range of 50%-90%,
and "D" the lowest recovery potential, i.e., below 50%.
Entities rated in this category have defaulted on some or all of their
obligations. Entities rated "DDD" have the highest prospect for resumption of
performance or continued operation with or without a formal reorganization
process. Entities rated "DD" and "D" are generally undergoing a formal
reorganization or liquidation process; those rated "DD" are likely to satisfy a
higher portion of their outstanding obligations, while entities rated "D" have a
poor prospect for repaying all obligations.
- To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "CCC" and "F1" may be modified by the
addition of a plus (+) or minus (-) sign to denote relative standing within
these major rating categories.
- `NR' indicates that Fitch does not rate the issuer or issue in question.
- `Withdrawn': A rating is withdrawn when Fitch deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
- Rating Watch: Ratings are placed on Rating Watch to notify investors
that there is a reasonable probability of a rating change and the likely
direction of such change. These are designated as "Positive", indicating a
potential upgrade, "Negative", for a potential downgrade, or "Evolving", if
ratings may be raised, lowered or maintained. Rating Watch is typically resolved
over a relatively short period.
- A Rating Outlook indicates the direction a rating is likely to move over
a one to two-year period. Outlooks may be positive, stable or negative. A
positive or negative Rating Outlook does not imply a rating change is
inevitable. Similarly, companies whose outlooks are "stable" could be upgraded
or downgraded before an outlook moves to positive or negative if circumstances
warrant such an action. Occasionally, Fitch may be unable to identify the
fundamental trend. In these cases, the Rating Outlook may be described as
evolving.
7-A
<PAGE>
Municipal Note Ratings
----------------------
A Standard and Poor's note rating reflects the liquidity factors and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's for municipal notes:
"SP-1" - The issuers of these municipal notes exhibit a strong capacity to
pay principal and interest. Those issues determined to possess a very strong
capacity to pay debt service are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest, with some vulnerability to adverse
financial and economic changes over the term of the notes.
"SP-3" - The issuers of these municipal notes exhibit speculative capacity
to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term loans
are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - This designation denotes superior credit quality.
Excellent protection afforded by established cash flows, highly reliable
liquidity support or demonstrated broad-based access to the market for
refinancing.
"MIG-2"/"VMIG-2" - This designation denotes strong credit quality. Margins
of protection are ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - This designation denotes acceptable credit. Liquidity
and cash flow protection may be narrow and market access for refinancing is
likely to be less well established.
"SG" - This designation denotes speculative-grade credit quality. Debt
instruments in this category lack sufficient margins of protection.
8-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 is ever
diminished, the last is the most difficult to restore. We are dedicated to
complying fully with the letter and spirit of the laws, rules and ethical
principles that govern us. Our continued success depends upon unswerving
adherence to this standard.
We take great pride in the professional quality of our work. We have an
uncompromising determination to achieve excellence in everything we undertake.
Though we may be involved in a wide variety and heavy volume of activity, we
would, if it came to a choice, rather be best than biggest.
We stress creativity and imagination in everything we do. While
recognizing that the old way may still be the best way, we constantly strive to
find a better solution to a client's problems. We pride ourselves on having
pioneered many of the practices and techniques that have become standard in the
industry.
We make an unusual effort to identify and recruit the very best person for
every job. Although our activities are measured in billions of dollars, we
select our people one by one. In a service business, we know that without the
best people, we cannot be the best firm.
We offer our people the opportunity to move ahead more rapidly than is
possible at most other places. We have yet to find limits to the responsibility
that our best people are able to assume. Advancement depends solely on ability,
performance and contribution to the Firm's success, without regard to race,
color, religion, sex, age, national origin, disability, sexual orientation, or
any other impermissible criterion or circumstance.
We stress teamwork in everything we do. While individual creativity is
always encouraged, we have found that team effort often produces the best
results. We have no room for those who put their personal interests ahead of the
interests of the Firm and its clients.
The dedication of our people to the Firm and the intense effort they give
their jobs are greater than one finds in most other organizations. We think that
this is an important part of our success.
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Our profits are a key to our success. They replenish our capital and
attract and keep our best people. It is our practice to share our profits
generously with all who help create them. Profitability is crucial to our
future.
We consider our size an asset that we try hard to preserve. We want to be
big enough to undertake the largest project that any of our clients could
contemplate, yet small enough to maintain the loyalty, the intimacy and the
esprit de corps that we all treasure and that contribute greatly to our success.
We constantly strive to anticipate the rapidly changing needs of our
clients and to develop new services to meet those needs. We know that the world
of finance will not stand still and that complacency can lead to extinction.
We regularly receive confidential information as part of our normal client
relationships. To breach a confidence or to use confidential information
improperly or carelessly would be unthinkable.
Our business is highly competitive, and we aggressively seek to expand our
client relationships. However, we must always be fair competitors and must never
denigrate other firms.
Integrity and honesty are the heart of our business. We expect our people
to maintain high ethical standards in everything they do, both in their work for
the firm and in their personal lives.
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GOLDMAN, SACHS & CO.'S INVESTMENT BANKING AND SECURITIES ACTIVITIES
Goldman Sachs is a leading financial services firm traditionally known on
Wall Street and around the world for its institutional and private client
service.
With thirty-seven offices around the world Goldman Sachs employs over
11,000 professionals focused on opportunities in major markets.
The number one underwriter of all international equity issues from
1989-1997.
The number one lead manager of U.S. common stock offerings for the past
nine years (1989-1997).*
The number one lead manager for initial public offerings (IPOs) worldwide
(1989-1997).
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* Source: Securities Data Corporation. Common stock ranking excludes
===================================
REITs, Investment Trusts and Rights.
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GOLDMAN, SACHS & CO.'S HISTORY OF EXCELLENCE
1869 Marcus Goldman opens Goldman Sachs for business
1890 Dow Jones Industrial Average first published
1896 Goldman, Sachs & Co. joins New York Stock Exchange
1906 Goldman, Sachs & Co. takes Sears Roebuck & Co. public (at 93 years, the
firm's longest-standing client relationship)
Dow Jones Industrial Average tops 100
1925 Goldman, Sachs & Co. finances Warner Brothers, producer of the first
talking film
1956 Goldman, Sachs & Co. co-manages Ford's public offering, the largest to
date
1970 Goldman, Sachs & Co. opens London office
1972 Dow Jones Industrial Average breaks 1000
1986 Goldman, Sachs & Co. takes Microsoft public
1988 Goldman Sachs Asset Management is formally established
1991 Goldman, Sachs & Co. provides advisory services for the largest
privatization in the region of the sale of Telefonos de Mexico
1995 Goldman Sachs Asset Management introduces Global Tactical Asset
Allocation Program
Dow Jones Industrial Average breaks 5000
1996 Goldman, Sachs & Co. takes Deutsche Telekom public
Dow Jones Industrial Average breaks 6000
1997 Goldman Sachs Asset Management increases assets under management by 100%
over 1996
Dow Jones Industrial Average breaks 7000
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1998 Goldman Sachs Asset Management reaches $195.5 billion in assets under
management
Dow Jones Industrial Average breaks 9000
1999 Goldman Sachs becomes a public company
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APPENDIX C
Statement of Intention
(applicable only to Class A shares)
If a shareholder anticipates purchasing $50,000 or more of Class A
Shares of a 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 checking and filing the Statement of Intention in the Account
Application. Income dividends and capital gain distributions taken in additional
shares will not apply toward the completion of the Statement of Intention.
To ensure that the reduced price will be received on future purchases,
the investor must inform Goldman Sachs that the 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 will 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.
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, pursuant to the authority given by the
investor in the Account Application, 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.
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