<PAGE>
GOLDMAN SACHS
MID-CAP EQUITY FUND
A PORTFOLIO
OF THE GOLDMAN SACHS EQUITY PORTFOLIOS, INC.
Financial Statements
January 31, 1996
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Letter to Shareholders
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GOLDMAN SACHS MID-CAP EQUITY FUND
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DEAR SHAREHOLDERS:
We are pleased to have the opportunity to review the performance and discuss
the holdings of the Goldman Sachs Mid-Cap Equity Fund from its inception on
August 1, 1995 through January 31, 1996. In addition to reviewing the
portfolio's performance, we will also provide a brief overview of the economic
and investment environment.
OBJECTIVE AND INVESTMENT APPROACH
The Goldman Sachs Mid-Cap Equity Fund seeks long-term capital growth primarily
by investing at least 65% of its total assets in equities with market
capitalizations of between $500 million and $7 billion at the time of
investment. However, the fund currently intends to emphasize investments in
companies with market capitalizations of under $5 billion at the time of
investment. The fund's managers employ intensive fundamental research in
seeking to identify attractive businesses whose long-term earnings prospects,
cash flow and/or dividend-paying abilities are underpriced in the marketplace.
The fund's investment process includes interviewing company management, gauging
management's commitment to shareholders, and interviewing competitors,
suppliers, distributors and customers to determine the quality and durability of
the overall business and management's strategic plan.
LARGE-CAP STOCKS LED THE MARKET RALLY...
The U.S. stock market, fueled by a favorable combination of low inflation,
falling interest rates and earnings growth, continued its upward momentum during
the period under review. While still extremely impressive, the market's rise
was less steep from August through January than during the prior six months.
Large-capitalization stocks were the decisive market leaders during the
period, as investors favored the perceived stability of the very largest
consumer growth companies over merely large-cap and mid-cap stocks. For the six
months ended January 31, 1996, the Standard & Poor's 500 stock index rose 14.54%
compared with 9.42% for the Russell Midcap Index.
...AMID A SLOWDOWN IN ECONOMIC GROWTH
Economic growth slowed noticeably during the period due to a number of
factors, including a decline in consumer confidence and spending, which hurt
retail sales, and a buildup in inventories among retailers, wholesalers and
manufacturers. Manufacturing showed clear signs of contraction during the
period, with the national purchasing managers' composite index falling to its
lowest level in five years in January 1996. With inflation at bay and the
economy moderating, the U.S. Federal Reserve Board cut the Federal funds rate in
December 1995 and January 1996 by a total of 50 basis points, to 5.25% as of
January 31, 1996.
PERFORMANCE REVIEW:
GOOD PERFORMANCE DESPITE SECTOR WEAKNESS
From its inception on August 1, 1995 through January 31, 1996, the Goldman
Sachs Mid-Cap Equity Fund had a total return of 6.89% based on net asset value
compared with 9.42% for the fund's benchmark, the Russell Midcap Index, during
the same period.
The fund performed well during the period under review, but lagged its
benchmark partly due to its overweighting in specialty retailers and cyclically
oriented sectors. Another factor was the fund's underweighting in the
technology sector, which had achieved growth rates and returns on capital that
in our opinion were unsustainable in the long run.
Disappointing performers included specialty retailer MUSICLAND STORES CORP.
and capital equipment manufacturers HARNISCHFEGER INDUSTRIES, INC., KEYSTONE
INTERNATIONAL, INC. and TENNECO, INC. These holdings were sold when we pared
back the fund's exposure to economically sensitive areas. In the paper and
forest products sector, GEORGIA-PACIFIC CORP., STONE CONTAINER CORP. and
CHAMPION INTERNATIONAL CORP. came under pressure when the prices of paper and
pulp products fell due to declining demand and strong supply. The fund
continued to hold these positions because we believed that the industry
correction was overdone and they were attractively valued.
The fund's best performers during the period included TENET HEALTHCARE CORP.,
which posted strong earnings; VALASSIS COMMUNICATIONS, INC. (a publisher of
inserts and coupons for newspapers), which appreciated on investors' belief that
the drop in paper prices would boost the company's earnings prospects; and
insurance companies LINCOLN NATIONAL CORP. and PARTNERRE LTD., both of which
were undervalued when the fund purchased them. In addition, two of our
financial services
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1
<PAGE>
Letter to Shareholders
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GOLDMAN SACHS MID-CAP EQUITY FUND (continued)
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investments, CITICORP and PENNCORP FINANCIAL GROUP, INC., did
well and were both sold after hitting our target prices.
NEW ADDITIONS IN DIVERSE INDUSTRIES
During the period, we added investments that we believed offered stable
earnings growth and had the potential to do well regardless of the economic
environment. These included THIOKOL CORP. (manufacturer of defense products and
systems), GREENPOINT FINANCIAL CORP. (financial services), RELIASTAR FINANCIAL
CORP. (insurance) and ASHLAND INC. (oil). Another recent addition was GOODYEAR
TIRE & RUBBER CO., one of the world's three dominant tire companies, which
performed well despite rising raw material costs and a generally depressed auto
sector.
Toward the end of the period, the fund increased its holdings in the
technology sector after threats of potential overcapacity and pricing pressures
dampened investor enthusiasm and resulted in a price correction. The fund
purchased ARROW ELECTRONICS, INC. and AVNET INC., two of the world's largest
distributors of electronic products, which we believed were somewhat less
cyclically oriented than some other technology stocks.
TOP 10 PORTFOLIO HOLDINGS AS OF JANUARY 31, 1996
PERCENTAGE
OF TOTAL NET
COMPANY LINE OF BUSINESS ASSETS
- ------- ---------------- ------------
[S] [C] [C]
RJR Nabisco Holdings Tobacco and Food 3.2%
Corp. Products
Goodyear Tire & Tire and Rubber Products 3.2%
Rubber Co.
Georgia-Pacific Corp. Paper and Forest 3.0%
Products
Tenet Healthcare Hospital Management 2.9%
Corp. Services
Tosco Corp. Oil 2.6%
Stone Container Corp. Pulp and Paper Products 2.5%
Long Island Lighting Electric Utilities 2.5%
Co.
Valassis Publishing 2.5%
Communications, Inc.
Owens-Illinois, Inc. Metal and Glass 2.4%
Containers
Lincoln National Insurance 2.4%
Corp.
OUTLOOK
The pace of economic growth appears uncertain as of the end of the period, but
the accommodative stance of the Federal Reserve and the potential for additional
rate cuts should stimulate economic growth during the latter half of 1996, which
should prove beneficial to stocks. In the near term, however, the economically
sensitive sectors of the market may still produce negative surprises, but we
believe that in most cases these fears have already been discounted in the
market. We believe that the fund's current investments have strong fundamentals
and attractive valuations, and we expect to hold them until the market
recognizes their fair value. Going forward, we will continue to seek to identify
attractive businesses whose future earnings prospects are underpriced in the
marketplace.
Sincerely,
/s/ Mitchell E. Cantor
Mitchell E. Cantor
Portfolio Manager
/s/ Ronald E. Gutfleish
Ronald E. Gutfleish
Portfolio Manager
March 1, 1996
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2
<PAGE>
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GOLDMAN SACHS MID-CAP EQUITY FUND
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In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the period ended January 31, 1996. The
Goldman Sachs Mid-Cap Equity Fund's ("GS Mid-Cap") performance (on an initial
investment of $1,000,000) is compared with its benchmark--the Russell Midcap
Index ("Russell Midcap"). All performance data shown represents past
performance and should not be considered indicative of future performance which
will fluctuate as market conditions change. The investment return and principal
value of an investment will fluctuate with changes in market conditions so that
an investor's shares, when redeemed, may be worth more or less than their
original cost.
[GRAPH APPEARS HERE]
(dollars in thousands)
GS Mid-Cap Russell Midcap
---------- --------------
8/1/95 $1,000 $1,000
8/31/95 1,014 1,015
9/30/95 1,023 1,038
10/31/95 997 1,015
11/30/95 1,025 1,065
12/31/95 1,049 1,072
1/31/96 1,069 1,094
Cumulative Total
--------------------
Since Inception (a)
--------------------
GS Mid-Cap 6.89% (b)
--------------------------------
(a) Commenced operations August 1, 1995.
(b) An aggregate total return (not annualized) is shown instead of an average
annual total return since the Fund has not completed a full twelve months of
operations.
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3
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
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STATEMENT OF INVESTMENTS
January 31, 1996
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Shares Description Value
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COMMON STOCKS--97.0%
AEROSPACE/DEFENSE--7.1%
16,400 Lockheed Martin Corp. $ 1,236,150
35,900 McDonnell Douglas Corp. 3,195,100
40,800 Northrop Grumman Corp. 2,611,200
74,300 Thiokol Corp. 2,628,363
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9,670,813
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AUTO PARTS--ORIGINAL EQUIPMENT--2.4%
110,300 Lear Seating Corp.* 3,267,638
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CHEMICALS--PLASTICS--2.0%
96,900 Geon Co. 2,713,200
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COMPUTERS--1.4%
28,000 Gateway 2000, Inc.* 724,500
25,200 Komag, Inc.* 733,950
27,600 Read-Rite Corp.* 496,800
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1,955,250
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CONTAINERS--METAL AND GLASS--2.4%
233,100 Owens Illinois Corp.* 3,321,675
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ELECTRONICS--2.3%
22,000 Arrow Electronics, Inc.* 946,000
21,500 Avnet, Inc. 921,813
46,400 Integrated Device Technologies, Inc.* 609,000
21,000 Vishay Intertechnology, Inc.* 577,500
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3,054,313
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ELECTRONICS--SEMICONDUCTORS--0.5%
58,900 Alliance Semiconductor Corp.* 633,175
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FINANCIAL BANKS--3.2%
69,770 Fleet Financial Group, Inc. 2,790,800
53,300 PNC Bank Corp. 1,599,000
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4,389,800
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FOOD--WHOLESALE--4.3%
159,300 Fleming Companies, Inc. 3,026,700
89,100 Supervalue, Inc. 2,762,100
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5,788,800
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GROCERY PRODUCTS--1.8%
179,400 Chiquita Brands International, Inc. 2,444,325
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HOME BUILDERS--2.4%
5,300 Centex Corp. 170,925
119,300 Lennar Corp. 3,116,713
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3,287,638
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HOSPITAL MANAGEMENT--3.3%
50,600 Beverly Enterprises* 607,200
182,500 Tenet Healthcare Corp.* 3,900,937
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4,508,137
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HOUSEHOLD PRODUCTS--1.0%
87,400 Sunbeam Corp., Inc. 1,398,400
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INSURANCE--13.0%
49,800 Allmerica Financial Group 1,325,925
10,800 Cigna Corp. 1,281,150
81,680 Integon Corp. 1,725,490
62,600 Lincoln National Corp. 3,309,975
97,400 PartnerRe Holdings Ltd. 2,715,025
33,500 Reliastar Financial Corp. 1,578,688
73,100 Risk Capital Holdings, Inc.* 1,489,412
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68,000 The Paul Revere Corp. 1,547,000
45,600 US Life Corp. 1,464,900
49,000 Zenith National Insurance Corp. 1,151,500
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17,589,065
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MACHINE--DIVERSIFIED--0.9%
13,300 Lam Research Corp.* 568,575
11,400 Novellus Systems, Inc.* 607,050
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1,175,625
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Shares Description Value
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COMMON STOCKS (CONTINUED)
MARINE AND PLEASURE BOATS--3.8%
120,800 Brunswick Corp. $ 2,733,608
119,400 Outboard Marine Corp. 2,388,000
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METAL FABRICATE/HARDWARE--0.9%
33,250 Trinity Industries, Inc. 1,163,750
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METALS--MISCELLANEOUS--0.8%
51,300 Quanex Corp. 1,058,060
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OFFICE/BUSINESS EQUIPMENT--0.6%
12,700 Harris Corp. 795,338
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OIL AND GAS--DOMESTIC--4.6%
73,700 Ashland Inc. 2,708,475
85,300 Tosco Corp. 3,571,938
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6,280,413
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OIL AND GAS--INTERNATIONAL--1.0%
12,000 Mobil Corp. 1,329,000
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PAPER AND FOREST PRODUCTS--4.4%
44,000 Champion International Corp. 1,969,000
55,200 Georgia-Pacific Corp. 4,050,300
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6,019,300
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PUBLISHING--2.5%
197,200 Valassis Communications, Inc.* 3,327,750
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PULP AND PAPER PRODUCTS--2.5%
234,500 Stone Container Corp. 3,429,563
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RETAIL--DEPARTMENT STORES--1.3%
60,800 Dillard Department Stores, Inc. 1,763,200
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RETAIL--SPECIALTY APPAREL STORES--0.2%
77,200 Charming Shoppes Inc.* 212,920
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SAVINGS AND LOANS--2.5%
110,100 Greenpoint Financial Corp. 2,841,956
15,000 Standard Federal Bancorp. 611,250
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3,453,206
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SECURITY AND COMMODITY BROKERS--DEALERS
AND SERVICES--1.2%
62,000 Lehman Brothers Holdings, Inc. 1,588,750
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TECHNOLOGY--1.1%
55,000 Storage Technology Corp.* 1,457,500
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TIRE AND RUBBER PRODUCTS--3.2%
91,400 Goodyear Tire & Rubber Co. 4,375,775
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TOBACCO AND FOOD PRODUCTS--5.1%
135,100 RJR Nabisco Holding Corp. 4,390,750
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107,400 Universal Corp. 2,510,475
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6,901,225
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TRANSPORTATION--MARINE--1.0%
75,700 Kirby Corp.* 1,343,675
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TRUCKING--2.1%
123,800 Consolidated Freightways, Inc. 2,847,400
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UTILITIES--10.2%
186,100 Central Maine Power Co. 2,907,812
100,800 CMS Energy Corp. 3,137,400
78,900 Entergy Corp. 2,337,412
202,900 Long Island Lighting Co. 3,449,300
37,500 New York State Electric and Gas Corp. 951,562
119,300 Niagara Mohawk Power Corp.* 1,088,613
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13,872,099
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TOTAL COMMON STOCKS (Cost $124,371,597) $131,538,386
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The accompanying notes are an integral part of these financial statements.
4
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
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STATEMENT OF INVESTMENTS (continued)
January 31, 1996
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Principal
Amount Interest Rate Maturity Date Value
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REPURCHASE AGREEMENT--1.5%
Joint Repurchase Agreement Account
$2,000,000 5.96% 02/01/96 $ 2,000,000
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TOTAL REPURCHASE AGREEMENT
(Cost $2,000,000) $ 2,000,000
TOTAL INVESTMENTS (Cost $126,371,597)** $133,538,386
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FEDERAL INCOME TAX INFORMATION:
Gross unrealized gain for investments in which value exceeds cost $ 12,629,909
Gross unrealized loss for investments in which cost exceeds value (5,487,114)
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Net unrealized gain $ 7,142,795
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* Non-income producing security.
** The aggregate cost for federal income tax purposes is $126,395,591.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
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The accompanying notes are an integral part of these financial statements.
5
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
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STATEMENT OF ASSETS AND LIABILITIES
January 31, 1996
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ASSETS:
Investment in securities, at value $133,538,386
(identified cost $126,371,597)
Cash 78,301
Receivables:
Fund shares sold 1,809,926
Investment securities sold 367,710
Dividends and interest 142,103
Deferred organization expenses, net 77,269
Other assets 4,763
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TOTAL ASSETS 136,018,458
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LIABILITIES:
Payables:
Investment securities purchased 171,135
Investment advisory fees 67,043
Administration fees 17,190
Transfer agent fees 13,076
Accrued expenses and other liabilities 79,053
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TOTAL LIABILITIES 347,497
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NET ASSETS:
Paid-in capital 127,937,397
Accumulated undistributed net 102,562
investment income
Accumulated undistributed net realized 464,213
gain on investment and option
transactions
Net unrealized gain on investments 7,166,789
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NET ASSETS $135,670,961
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Total shares of beneficial interest 8,525,815
outstanding, $.001 par value
(50,000,000 shares authorized)
Net asset value, offering and $15.91
redemption price per share (net
assets/shares outstanding)
- ------------------------------------------------------
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The accompanying notes are an integral part of these financial statements.
6
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Goldman Sachs Mid-Cap Equity Fund
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STATEMENT OF OPERATIONS
For the Period Ended January 31, 1996 /(a)/
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INVESTMENT INCOME:
Dividends $1,430,514
Interest 212,589
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TOTAL INCOME 1,643,103
- ---------------------------------------------------------
EXPENSES:
Investment adviser fees 391,234
Administration fees 97,809
Professional fees 35,558
Registration fees 39,727
Custodian fees 29,070
Transfer agent fees 26,082
Amortization of deferred organization
expenses 8,653
Directors' fees 568
Other 11,362
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TOTAL EXPENSES 640,063
Less--Expenses reimbursable by GSAM (85,815)
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NET EXPENSES 554,248
- ---------------------------------------------------------
NET INVESTMENT INCOME 1,088,855
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REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENT AND OPTION TRANSACTIONS:
Net realized gain on investment
transactions 547,655
Net realized loss on options written (83,442)
Net change in unrealized gain on
investments 7,166,789
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NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $8,719,857
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/(a)/ For the period from August 1, 1995 (commencement of operations) to
January 31, 1996.
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The accompanying notes are an integral part of these financial statements.
7
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Goldman Sachs Mid-Cap Equity Fund
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STATEMENT OF CHANGES IN NET ASSETS
For the Period Ended January 31, 1996 /(a)/
- --------------------------------------------------------------------------------
FROM OPERATIONS:
Net investment income $ 1,088,855
Net realized gain on investment
transactions 547,655
Net realized loss on options written (83,442)
Net change in unrealized gain on investments 7,166,789
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Net increase in net assets resulting
from operations 8,719,857
- ------------------------------------------------------------------
DISTRIBUTION TO SHAREHOLDERS FROM:
Net investment income (986,293)
- ------------------------------------------------------------------
Total distributions to shareholders (986,293)
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FROM SHARE TRANSACTIONS: SHARES
- ------------------------------------------------------------------
Proceeds from sales of shares 9,029,858 135,730,361
Reinvestment of distributions 64,045 986,293
Cost of shares repurchased (568,088) (8,779,257)
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Net increase in net assets resulting
from share transactions 8,525,815 127,937,397
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TOTAL INCREASE 135,670,961
NET ASSETS:
Beginning of period --
- ------------------------------------------------------------------
End of period $135,670,961
- ------------------------------------------------------------------
Accumulated undistributed net
investment income $ 102,562
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/(a)/ For the period from August 1, 1995 (commencement of operations) to
January 31, 1996.
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The accompanying notes are an integral part of these financial statements.
8
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Goldman Sachs Mid-Cap Equity Fund
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FINANCIAL HIGHLIGHTS
Selected Data for a Share Outstanding Throughout the Period /(a)/
- --------------------------------------------------------------------------------
Net asset value, beginning of period $ 15.00
- ------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.13
Net realized and unrealized gain on
investments and options 0.90
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Total income from investment operations 1.03
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DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.12)
- ------------------------------------------------------
Total distributions to shareholders (0.12)
- ------------------------------------------------------
Net increase in net asset value 0.91
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Net asset value, end of period $ 15.91
- ------------------------------------------------------
Total return /(b)/ 6.89%/(d)/
Ratio of net expenses to average net
assets 0.85%/(c)/
Ratio of net investment income to
average net assets 1.67%/(c)/
Portfolio turnover rate 58.77%/(d)/
Net assets at end of period $135,670,961
Ratios assuming no expense limitations:
Ratio of expenses to average net
assets 0.98%/(c)/
Ratio of net investment income to
average net assets 1.54%/(c)/
- ------------------------------------------------------
/(a)/ For the period from August 1, 1995 (commencement of operations) to
January 31, 1996.
/(b)/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions and a complete
redemption of the investment at the net asset value at the end of the
period.
/(c)/ Annualized.
/(d)/ Not annualized.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
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NOTES TO FINANCIAL STATEMENTS
January 31, 1996
- --------------------------------------------------------------------------------
1. ORGANIZATION
Goldman Sachs Mid-Cap Equity Fund ("the Fund") is a separate diversified
portfolio of Goldman Sachs Equity Portfolios, Inc. (the "Company"). The Company
consists of eight funds and is a Maryland corporation registered under the
Investment Company Act of 1940, as amended, as an open-end, management
investment company. The Fund offers two classes of shares - Institutional
shares and Service shares.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting policies consistently
followed by the Fund which are in conformity with those generally accepted in
the investment company industry. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts.
A. Investment Valuation
- ------------------------
Investments in securities traded on a U.S. or foreign securities exchange or the
NASDAQ system are valued at their last sale or closing price on the principal
exchange on which they are traded or NASDAQ, on the valuation day; if no sale
occurs, securities traded on a U.S. exchange or NASDAQ are valued at the mean
between the closing bid and asked price, and securities traded on a foreign
exchange will be valued at the official bid price. Unlisted equity and debt
securities for which market quotations are available are valued at the mean
between the most recent bid and asked prices. Debt securities are valued at
prices supplied by an independent pricing service, which reflect broker/dealer-
supplied valuations and matrix pricing systems. Short-term debt obligations
maturing in sixty days or less are valued at amortized cost. Restricted
securities, and other securities for which quotations are not readily available,
are valued at fair value using methods approved by the Board of Directors of the
Company.
B. Securities Transactions and Investment Income
- -------------------------------------------------
Securities transactions are recorded on the trade date. Realized gains and
losses on sales of investments are calculated on the identified-cost basis.
Dividend income is recorded on the ex-dividend date. Dividends for which the
Fund has the choice to receive either cash or stock are recognized as investment
income in an amount equal to the cash dividend. This amount is also used as an
estimate of the fair value of the stock received. Interest income is determined
on a basis of interest accrued, premium amortized and discount earned.
C. Federal Taxes
- -----------------
It is the Fund's policy to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute
substantially all of its investment company taxable income and capital gains to
its shareholders. Accordingly, no federal tax provision is required. The
characterization of distributions to shareholders for financial reporting
purposes is determined in accordance with income tax rules. Therefore, the
source of a portfolio's distributions may be shown in the accompanying financial
statements as either from or in excess of net investment income or net realized
gain on investment transactions, or from capital, depending on the type of
book/tax differences that may exist.
D. Deferred Organization Expenses
- ----------------------------------
Organization-related costs are being amortized on a straight-line basis over a
period of five years.
E. Expenses
- ------------
Expenses incurred by the Company which do not specifically relate to an
individual fund of the Company are allocated to the funds based on each fund's
relative average net assets for the period.
F. Option Accounting Principles
- --------------------------------
When the Fund writes call or put options, an amount equal to the premium
received is recorded as an asset and as an equivalent liability. The amount of
the liability is subsequently marked-to-market to reflect the current market
value of the option written. When a written option expires on its stipulated
expiration date or the Fund enters into a closing purchase transaction, the Fund
realizes a gain or loss without regard to any unrealized gain or loss on the
underlying security, and the liability related to such option is extinguished.
When a written call option is exercised, the Fund realizes a gain or loss from
the sale of the underlying security, and the proceeds of the sale are increased
by the premium
- --------------------------------------------------------------------------------
10
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
January 31, 1996
- --------------------------------------------------------------------------------
originally received. When a written put option is exercised, the
amount of the premium originally received will reduce the cost of the security
which the Fund purchases upon exercise. There is a risk of loss from a change
in value of such options which may exceed the related premiums received.
Upon the purchase of a call option or a protective put option by the Fund, the
premium paid is recorded as an investment and subsequently marked-to-market to
reflect the current market value of the option. If an option which the Fund has
purchased expires on the stipulated expiration date, the Fund will realize a
loss in the amount of the cost of the option. If the Fund enters into a closing
sale transaction, the Fund will realize a gain or loss, depending on whether the
sale proceeds from the closing sale transaction are greater or less than the
cost of the option. If the Fund exercises a purchased put option, the Fund will
realize a gain or loss from the sale of the underlying security, and the
proceeds from such sale will be decreased by the premium originally paid. If
the Fund exercises a purchased call option, the cost of the security which the
Fund purchases upon exercise will be increased by the premium originally paid.
G. Futures Contracts
- ---------------------
The Fund may enter into financial futures contracts for hedging purposes or to
increase total return. Upon entering into a futures contract, the Fund is
required to deposit with a broker an amount of cash or securities equal to the
minimum "initial margin" requirement of the futures exchange on which the
contract is traded. Subsequent payments ("variation margin") are made or
received by the Fund each day, dependent on the daily fluctuations in the value
of the underlying index, and are recorded for financial reporting purposes as
unrealized gains or losses by the Fund. When entering into a closing
transaction, for book purposes, the Fund will realize a gain or loss equal to
the difference between the value of the futures contract to sell and the futures
contract to buy. Futures contracts are valued at the most recent settlement
price, unless such price does not reflect the fair market value of the contract,
in which case the position will be valued using methods approved by the Board of
Directors of the Company.
Certain risks may arise upon entering into futures contracts. The predominant
risk is that the changes in the value of the futures contract may not directly
correlate with changes in the value of the underlying securities. This risk may
decrease the effectiveness of the Fund's hedging strategies and may also result
in a loss to the Fund.
3. AGREEMENTS
Goldman Sachs Asset Management ("GSAM"), a separate operating division of
Goldman, Sachs & Co. ("Goldman Sachs"), acts as the Fund's investment adviser
pursuant to an Investment Advisory Agreement. Under the Investment Advisory
Agreement, GSAM, subject to the general supervision of the Company's Board of
Directors, manages the Fund's portfolio. As compensation for the services
rendered under the Advisory Agreement and the assumption of the expenses related
thereto, GSAM is entitled to a fee, computed daily and payable monthly, at an
annual rate equal to .60% of the Fund's average daily net assets.
GSAM also acts as the Fund's administrator pursuant to an Administration
Agreement. Under the Administration Agreement, GSAM administers the Fund's
business affairs, including providing facilities. As compensation for the
services rendered pursuant to the Administration Agreement, the Fund pays GSAM a
fee, computed daily and payable monthly, at an annual rate equal to .15% of the
Fund's average daily net assets.
Goldman Sachs has voluntarily agreed to reduce or limit certain "Other
Expenses" (excluding advisory, administration and transfer agent fees and
litigation, indemnification, taxes, interest, brokerage commissions and
extraordinary expenses) until further notice to the extent such expenses exceed
.06% of the average daily net assets of the Fund.
Goldman Sachs serves as the Distributor of shares of the Fund pursuant to a
distribution agreement and receives no fee. Goldman Sachs also serves as the
Transfer Agent of the Fund for a fee.
4. LINE OF CREDIT FACILITY
The Fund participates in a $100,000,000 uncommitted, unsecured revolving line of
credit facility. In addition, the Fund participates in a $50,000,000 committed,
unsecured revolving line of credit facility. Both facilities are to be used
solely for temporary or emergency purposes. Under the most restrictive
arrangement, the Fund must own securities having a market value in excess of
300% of the total bank borrowings. The interest rate on the borrowings is based
on the Federal Funds rate. The committed facility also requires a fee to be
paid based on
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11
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Goldman Sachs Mid-Cap Equity Fund
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NOTES TO FINANCIAL STATEMENTS (continued)
January 31, 1996
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the amount of the commitment which has not been utilized. During
the year ended January 31, 1996, the Fund did not have any borrowings under
these facilities.
5. PORTFOLIO SECURITIES TRANSACTIONS
Purchases and proceeds of sales or maturities of securities (excluding short-
term investments and options written) for the period August 1, 1995 to January
31, 1996 were $197,196,097 and $73,372,155, respectively.
For the period from August 1, 1995 to January 31, 1996, option transactions in
the Fund were as follows:
Call Options
---------------------------------------
Number of Contracts Premiums Received
Options Written
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Balance outstanding,
beginning of period -- $ --
Options written 1,100 178,750
Options repurchased (1,100) (178,750)
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Balance outstanding, end of period -- $ --
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Certain risks arise related to written call or put options from the possible
inability of counterparties to meet terms of their contracts.
For the period ended January 31, 1996, Goldman Sachs earned approximately
$41,000 of brokerage commissions from portfolio transactions executed on behalf
of the Fund.
6. REPURCHASE AGREEMENTS
During the term of a repurchase agreement, the value of the underlying
securities, including accrued interest, is required to equal or exceed the value
of the repurchase agreement. The underlying securities for all repurchase
agreements are held in safekeeping in the customer-only account of State Street
Bank & Trust Co., the Fund's custodian, or at sub-custodians. Goldman Sachs
monitors the market value of the underlying securities by pricing them daily.
7. JOINT REPURCHASE AGREEMENT ACCOUNT
The Fund, together with other registered investment companies having advisory
agreements with GSAM, transfer uninvested cash balances into joint accounts, the
daily aggregate balance of which is invested in one or more repurchase
agreements. The underlying securities for the repurchase agreements are U.S.
Treasury obligations. At January 31, 1996, the Fund had a .41% undivided
interest in the repurchase agreements in the following joint account which
equaled $2,000,000 in principal amount. At January 31, 1996, the repurchase
agreements held in this joint account, along with the corresponding underlying
securities (including the type of security, market value, interest rate and
maturity date) were as follows:
Principal Interest Maturity Amortized
Amount Rate Date Cost
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Lehman Government Securities, dated 1/31/96,
repurchase price $250,041,458 (U.S. Treasury
Notes: $254,879,914, 4.63%-8.88%,
2/15/96-8/15/02)
$250,000,000 5.97% 2/1/96 $250,000,000
Salomon Brothers, Inc., dated 1/31/96,
repurchase price $238,439,402 (U.S. Treasury
Interest-Only Strips: $151,540,101,
5/15/97-11/15/02; U.S. Treasury Principal-
Only Strips: $91,713,529, 8.13%-9.13%,
2/15/98-11/15/00)
238,400,000 5.95% 2/1/96 238,400,000
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TOTAL JOINT REPURCHASE AGREEMENT ACCOUNT $488,400,000
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8. OTHER MATTERS
On August 1, 1995, the Fund, in an interportfolio trade with the Goldman Sachs
Capital Growth Fund, purchased securities valued at approximately $105,460,000
related to shareholder exchanges into the Fund.
As of January 31, 1996, Goldman Sachs & Co. Employees Profit Sharing and
Retirement Plan was the beneficial owner of approximately 99% of the outstanding
shares of the Fund.
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12
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
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To the Shareholdes and Board of Directors of Goldman Sachs Mid-Cap Equity Fund:
We have audited the accompanying statement of assets and liabilities of
Goldman Sachs Mid-Cap Equity Fund, one of the portfolios constituting Goldman
Sachs Equity Portfolios, Inc., including the statement of investments, as of
January 31, 1996, and the related statement of operations and the statement of
changes in net assets and the financial highlights for the period presented.
These financial statements and the financial highlights are the responsibility
of the fund's management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
January 31, 1996 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements and the financial highlights
referred to above present fairly, in all material respects, the financial
position of Goldman Sachs Mid-Cap Equity Fund as of January 31, 1996, the
results of its operations and the changes in its net assets and the financial
highlights for the period presented, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 15, 1996
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13
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Goldman Sachs
1 New York Plaza
New York, NY 10004
BOARD OF DIRECTORS
Paul C. Nagel, Jr., Chairman
Ashok N. Bakhru
Marcia L. Beck
David B. Ford
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
OFFICERS
Marcia L. Beck, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
GOLDMAN SACHS
Investment Adviser, Administrator,
Distributor and Transfer Agent
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This Annual Report is authorized for distribution to prospective investors only
when preceded or accompanied by a Goldman Sachs Mid-Cap Equity Fund Prospectus
which contains facts concerning the Fund's objectives and policies, management,
expenses and other information.
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14
