<PAGE>
1933 Act Registration No. 33-33316
1940 Act Registration No. 811-6036
As filed with the Securities and Exchange Commission on April 30, 1996
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------
Form N-1A
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
Post-Effective Amendment No. 21 ( X )
and
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
Amendment No. 23 ( X )
(Check appropriate box or boxes)
------------
GOLDMAN SACHS EQUITY PORTFOLIOS, INC.
(Formerly GS Capital Growth Fund, Inc.)
(Exact name of registrant as specified in charter)
One New York Plaza
New York, New York 10004
(Address of principal executive offices)
Registrant's Telephone Number, including Area Code
212-902-0800
-------------
with a copy to:
Michael J. Richman Ernest V. Klein
Goldman Sachs Asset Management Hale and Dorr
85 Broad Street 60 State Street
New York, New York Boston, Massachusetts
10004 02109
(name and address of agent for service)
<PAGE>
It is proposed that this filing will become effective (check
appropriate box)
( X ) immediately upon filing pursuant to paragraph (b)
( ) on (date) pursuant to paragraph (b)
( ) 60 days after filing pursuant to paragraph (a)(i)
( ) on (date) pursuant to paragraph (a)(i)
( ) 75 days after filing pursuant to paragraph (a)(ii)
( ) on (date) pursuant to paragraph (a)(ii) of rule 485
Registrant has registered an unlimited number of its Shares under the Securities
Act of 1933 pursuant to Rule 24f-2. On March 27, 1996, Registrant filed a Rule
24f-2 notice for the fiscal year ended January 31, 1996.
<PAGE>
CROSS REFERENCE SHEET
(as required by Rule 495(a)*)
<TABLE>
<CAPTION>
N-1A Item No. Location
- ------------- --------
Part A Caption
- ------ -------
Goldman Sachs Balanced Fund, Goldman Sachs Select Equity Fund, Goldman Sachs
Growth and Income Fund, Goldman Sachs Capital Growth Fund, Goldman Sachs Small
Cap Fund, Goldman Sachs International Equity Fund and Goldman Sachs Asia Growth
Fund- Class A Shares
<S> <C> <C>
Item 1. Cover Page Cover Page
Item 2. Synopsis Fund Highlights; Fees and
Expenses
Item 3. Condensed Financial Financial Highlights
Information
Item 4. General Description Cover Page; Fund Highlights;
of Registrant Fees and Expenses;Investment
Objectives and Policies;
Special Investment Methods and
Risk Factors; Distribution and
Authorized Dealer Service Plan;
Reports to Shareholders;
Shares of the Company;
Additional Information
Item 5. Management of Fund Management
Item 6. Capital Stock and Dividends; Taxation; Shares of
Other Securities the Company; Additional
Information
Item 7. Purchase of Securities How to Invest; Net Asset
Being Offered Value; Additional Information
Item 8. Redemption or How to Sell Shares of the
Repurchase Funds; Additional Information
Item 9. Pending Legal Not Applicable
Proceedings
</TABLE>
Goldman Sachs Select Equity Fund, Goldman Sachs Growth and Income Fund, Goldman
Sachs Mid-Cap Equity Fund, Goldman Sachs International Equity Fund and Goldman
Sachs Asia Growth Fund - Institutional Shares
<TABLE>
<S> <C> <C>
Item 1. Cover Page Cover Page
Item 2. Synopsis Summary
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Item 3. Condensed Financial Financial Highlights
Information
Item 4. General Description Cover Page; Summary;
of Registrant Investment Objectives and
Policies; Special Investment
Methods and Risk Factors;
Reports to Shareholders;
Shares of the Company;
Additional Information
Item 5. Management of Fund Management
Item 6. Capital Stock and Dividends; Taxation; Shares of
Other Securities the Company; Additional
Information
Item 7. Purchase of Securities Purchase of
Being Offered Institutional Shares;
Net Asset Value;
Additional Information
Item 8. Redemption or Redemption of Institutional
Repurchase Shares; Additional Information
Item 9. Pending Legal Not Applicable
Proceedings
</TABLE>
Goldman Sachs Select Equity Fund, Goldman Sachs Growth and Income Fund, Goldman
Sachs Mid-Cap Equity Fund, Goldman Sachs International Equity Fund and Goldman
Sachs Asia Growth Fund - Service Shares
<TABLE>
<S> <C> <C>
Item 1. Cover Page Cover Page
Item 2. Synopsis Summary
Item 3. Condensed Financial Financial Highlights
Information
Item 4. General Description Cover Page; Summary;
of Registrant Investment Objectives and
Policies; Special Investment
Methods and Risk Factors;
Reports to Shareholders;
Shares of the Company; Service
Plan; Additional Information
Item 5. Management of Fund Management
Item 6. Capital Stock and Dividends; Taxation; Shares of
Other Securities the Company; Additional
Information
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Item 7. Purchase of Securities Purchase of Service
Being Offered Shares; Net Asset Value;
Additional Information
Item 8. Redemption or Redemption of Service
Repurchase Shares; Additional Information
Item 9. Pending Legal Not Applicable
Proceedings
</TABLE>
Part B
Goldman Sachs Balanced Fund, Goldman Sachs Select Equity Fund, Goldman Sachs
Growth and Income Fund, Goldman Sachs Capital Growth Fund, Goldman Sachs Small
Cap Fund, Goldman Sachs International Equity Fund and Goldman Sachs Asia Growth
Fund- Class A Shares
<TABLE>
<S> <C> <C>
Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information Introduction
and History
Item 13. Investment Objectives Investment Objective and
and Policies Policies; Investment
Restrictions
Item 14. Management of the Management
Registrant
Item 15. Control Persons and Not Applicable
Principal Holders of
Securities
Item 16. Investment Advisory and Management
Other Services
Item 17. Brokerage Allocation Portfolio Transactions
and Other Practices
Item 18. Capital Stock and Shares of the Company
Other Securities
Item 19. Purchase, Redemption Management; Net Asset of
and Pricing of Value; Other Information
Securities Being Regarding Purchases,
Offered Redemptions, Exchanges and
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Dividends
Item 20. Tax Status Taxation
Item 21. Underwriters Management -- Distributor and
Transfer Agent; Management --
Distribution Plan
Item 22. Calculation of Performance Information
Performance Data
Item 23. Financial Statements Financial Statements
</TABLE>
Goldman Sachs Select Equity Fund, Goldman Sachs Growth and Income Fund, Goldman
Sachs Mid-Cap Equity Fund, Goldman Sachs International Equity Fund and Goldman
Sachs Asia Growth Fund - Institutional Shares and Service Shares
<TABLE>
<S> <C> <C>
Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information Introduction
and History
Item 13. Investment Objectives Investment Objective and
and Policies Policies; Investment
Restrictions
Item 14. Management of the Management
Registrant
Item 15. Control Persons and Not Applicable
Principal Holders of
Securities
Item 16. Investment Advisory and Management
Other Services
Item 17. Brokerage Allocation Portfolio Transactions
and Other Practices
Item 18. Capital Stock and Shares of the Company
Other Securities
Item 19. Purchase, Redemption Management; Net Asset of
and Pricing of Value
Securities Being
Offered
Item 20. Tax Status Taxation
Item 21. Underwriters Management -- Distributor and
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Transfer Agent; Management --
Distribution Plan
Item 22. Calculation of Performance Information
Performance Data
Item 23. Financial Statements Not Applicable
</TABLE>
Part C
Information required to be included in Part C is set forth under the appropriate
Item, so numbered, in Part C to this Registration Statement.
*THIS POST-EFFECTIVE AMENDMENT IS BEING FILED SOLELY TO (i)UPDATE THE FINANCIAL
INFORMATION OF THE CLASS A AND CLASS B PROSPECTUS OF GOLDMAN SACHS BALANCED
FUND, GOLDMAN SACHS SELECT EQUITY FUND, GOLDMAN SACHS GROWTH AND INCOME FUND,
GOLDMAN SACHS CAPITAL GROWTH FUND, GOLDMAN SACHS SMALL CAP EQUITY FUND, GOLDMAN
SACHS INTERNATIONAL EQUITY FUND AND GOLDMAN SACHS ASIA GROWTH FUND; AND
(ii)UPDATE THE FINANCIAL INFORMATION OF THE INSTITUTIONAL AND SERVICE CLASS
PROSPECTUSES OF GOLDMAN SACHS SELECT EQUITY FUND, GOLDMAN SACHS GROWTH AND
INCOME FUND, GOLDMAN SACHS MID-CAP EQUITY FUND, GOLDMAN SACHS INTERNATIONAL
EQUITY FUND AND GOLDMAN SACHS ASIA GROWTH FUND.EACH OF THE FUNDS ARE AN EXISTING
SERIES OF GOLDMAN SACHS EQUITY PORTFOLIOS,INC.
<PAGE>
- --------------------------------------------------------------------------------
PROSPECTUS
May 1, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fund Highlights........................ 3
Fees and Expenses...................... 7
Financial Highlights................... 10
Investment Objectives and Policies..... 13
Description of Securities.............. 17
Investment Techniques.................. 22
Risk Factors........................... 25
Investment Restrictions................ 27
Portfolio Turnover..................... 27
Management............................. 28
Reports to Shareholders................ 32
How to Invest.......................... 32
Services Available to Shareholders..... 37
Distribution and Authorized Dealer
Service Plans......................... 40
How to Sell Shares of the Funds........ 41
Dividends.............................. 42
Net Asset Value........................ 43
Performance Information................ 43
Shares of the Company.................. 44
Taxation............................... 45
Additional Information................. 46
Appendix .............................. A-1
Account Application
</TABLE>
THE GOLDMAN SACHS
EQUITY PORTFOLIOS
CLASS A AND B SHARES
GOLDMAN SACHS BALANCED FUND
Seeks long-term capital growth and current income through investments in eq-
uity and fixed income securities.
GOLDMAN SACHS SELECT EQUITY FUND
Seeks total return through investments in equity securities consisting of
capital appreciation plus dividend income that, net of Fund expenses, exceeds
the total return realized on the Standard and Poor's Index of 500 Common
Stocks.
GOLDMAN SACHS GROWTH AND INCOME FUND
Seeks long-term growth of capital and growth of income through investments in
equity securities that are considered to have favorable prospects for capital
appreciation and/or dividend paying ability.
GOLDMAN SACHS CAPITAL GROWTH FUND
Seeks long-term growth of capital through investments in equity securities of
companies that are considered to have long-term capital appreciation poten-
tial.
GOLDMAN SACHS SMALL CAP EQUITY FUND
Seeks long-term capital growth through investments in equity securities of
companies with public stock market capitalizations of $1 billion or less at
the time of investment.
GOLDMAN SACHS INTERNATIONAL EQUITY FUND
Seeks long-term capital appreciation through investments in equity securities
of companies that are organized outside the U.S. or whose securities are
principally traded outside the U.S.
GOLDMAN SACHS ASIA GROWTH FUND
Seeks long-term capital appreciation through investments in equity securities
of companies related (in the manner described herein) to Asian countries.
(continued on next page)
----------
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR OTHER INSURED DEPOSITORY INSTITUTION, AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD
OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN A FUND INVOLVES INVESTMENT
RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<PAGE>
(cover continued)
A FUND'S INVESTMENTS IN SECURITIES OF FOREIGN ISSUERS AND FOREIGN CURRENCIES
ENTAIL CERTAIN RISKS NOT CUSTOMARILY ASSOCIATED WITH INVESTING IN U.S. DOLLAR-
DENOMINATED SECURITIES OF U.S. ISSUERS. IN PARTICULAR, THE SECURITIES MARKETS
OF ASIAN AND OTHER EMERGING MARKET COUNTRIES IN WHICH THE ASIA GROWTH AND
INTERNATIONAL EQUITY FUNDS INVEST ARE LESS LIQUID, SUBJECT TO GREATER PRICE
VOLATILITY, HAVE SMALLER MARKET CAPITALIZATIONS, HAVE LESS GOVERNMENT
REGULATION AND ARE NOT SUBJECT TO AS EXTENSIVE AND FREQUENT ACCOUNTING,
FINANCIAL AND OTHER REPORTING REQUIREMENTS AS THE SECURITIES MARKETS OF MORE
DEVELOPED COUNTRIES. THE FUNDS ARE INTENDED FOR INVESTORS WHO CAN ACCEPT THE
RISKS ASSOCIATED WITH SUCH INVESTMENTS AND MAY NOT BE SUITABLE FOR ALL
INVESTORS. SEE "DESCRIPTION OF SECURITIES."
Goldman Sachs Asset Management ("GSAM"), New York, New York, a separate
operating division of Goldman, Sachs & Co. ("Goldman Sachs"), serves as
investment adviser to the Balanced, Growth and Income, Small Cap Equity and
International Equity Funds. Goldman Sachs Funds Management, L.P. ("GSFM"), New
York, New York, an affiliate of Goldman Sachs, serves as investment adviser to
the Capital Growth and Select Equity Funds. Goldman Sachs Asset Management
International ("GSAMI"), London, England, an affiliate of Goldman Sachs,
serves as investment adviser to the Asia Growth Fund and subadviser to the
International Equity Fund. GSAM, GSFM and GSAMI are each referred to in this
Prospectus as the "Investment Adviser." GSAM serves as each Fund's
administrator and Goldman Sachs serves as each Fund's distributor and transfer
agent.
This Prospectus provides information about Goldman Sachs Equity Portfolios,
Inc. (the "Company") and the Funds that a prospective investor should
understand before investing. This Prospectus should be retained for future
reference. A Statement of Additional Information (the "Additional Statement"),
dated May 1, 1996, containing further information about the Company and the
Funds which may be of interest to investors, has been filed with the
Securities and Exchange Commission ("SEC") is incorporated herein by reference
in its entirety, and may be obtained without charge from Goldman Sachs by
calling the telephone number, or writing to one of the addresses, listed on
the back cover of this Prospectus.
<PAGE>
FUND HIGHLIGHTS
The following is intended to highlight certain information contained in
this Prospectus and is qualified in its entirety by the more detailed
information contained herein.
WHAT IS GOLDMAN SACHS EQUITY PORTFOLIOS, INC.?
Goldman Sachs Equity Portfolios, Inc. is an open-end management investment
company that offers its shares in several investment funds (mutual funds).
Each Fund pools the monies of investors by selling its shares to the public
and investing these monies in a portfolio of securities designed to achieve
that Fund's stated investment objectives.
WHAT ARE THE INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS?
Each Fund has distinct investment objectives and policies. There can be no
assurance that a Fund's objectives will be achieved. For a complete
description of each Fund's investment objectives and policies, see
"Investment Objectives and Policies," "Description of Securities" and
"Investment Techniques."
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
FUND NAME INVESTMENT OBJECTIVES INVESTMENT CRITERIA BENCHMARKS
------------- ------------------
------------------
--------------------
BALANCED FUND Long-term capital growth Between 45% and 65% of total The Lehman Aggregate
and current income. assets in equity securities Bond Index and the
and at least 25% in fixed Standard & Poor's Index
income senior securities. of 500 Common Stocks
(the "S&P 500 Index")
- ----------------------------------------------------------------------------------------------------
SELECT EQUITY Total return through At least 90% of total assets The S&P 500 Index
FUND investments in equity in equity securities. The
securities consisting of Fund's investments are
capital appreciation selected using
plus dividend income both fundamental research and
that, net of Fund a variety of quantitative
expenses, exceeds the techniques which seek to
total return realized on maximize the
the S&P 500 Index. Fund's reward to risk ratio.
- ----------------------------------------------------------------------------------------------------
GROWTH AND Long-term growth of At least 65% of total assets The S&P 500 Index
INCOME FUND capital and growth of in equity securities that the
income. Investment Adviser considers
to have favorable prospects
for capital appreciation
and/or dividend paying
ability.
- ----------------------------------------------------------------------------------------------------
CAPITAL GROWTH Long-term capital At least 65% of total assets The S&P 500 Index
FUND growth. in equity securities. The
Investment Adviser considers
long-term
capital appreciation potential
in selecting investments.
- ----------------------------------------------------------------------------------------------------
SMALL CAP Long-term capital At least 65% of total assets The Russell 2000
EQUITY FUND growth. in equity securities of
companies with public stock
market capitalizations of $1
billion or less at the time of
investment. The Fund currently
emphasizes investments
in companies with
public stock market
capitalizations
of $500 million or less at the
time of investment.
</TABLE>
(continued)
3
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
FUND NAME INVESTMENT OBJECTIVES INVESTMENT CRITERIA BENCHMARK
------------- ------------------
------------------
--------------------
INTERNATIONAL Long-term capital Substantially all, and The FT-Actuaries Europe
EQUITY FUND appreciation. at least 65%, of total and Pacific Index
assets in equity (unhedged)
securities of companies
organized outside
the United States or
whose securities are
principally traded
outside the United
States. The Fund may
invest in securities of
issuers located in
countries with emerging
economies or securities
markets and employ
certain currency
management techniques.
- --------------------------------------------------------------------------------------------
ASIA GROWTH Long-term capital Substantially all, and The (MSCI) Morgan
FUND appreciation. at least 65%, of total Stanley Capital
assets in equity International AC Asia
securities of companies Free ex Japan Index
in China, Hong (unhedged)
Kong, India, Indonesia,
Malaysia, Pakistan, the
Philippines,
Singapore, South Korea,
Sri Lanka, Taiwan and
Thailand. The Fund may
employ certain currency
management techniques.
</TABLE>
- --------------------------------------------------------------------------------
WHAT ARE THE RISK FACTORS AND SPECIAL CHARACTERISTICS THAT I SHOULD
CONSIDER BEFORE INVESTING?
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.
There can be no assurance that a Fund's investment objectives will be
achieved. See "Risk Factors."
Risk of Investments in Small to Medium Capitalization Companies. To the
extent that a Fund invests in the securities and related financial
instruments of small to medium sized market capitalization companies, a Fund
may be exposed to a higher degree of risk and price volatility because such
securities may lack sufficient market liquidity to enable the Fund to effect
sales at an advantageous time or without a substantial drop in price.
Foreign Risks. Investments in securities of foreign issuers and currencies
involve risks that are different from those associated with investment in
domestic securities. The risks of foreign investments and currencies include
changes in relative currency exchange rates, political and economic
developments, the imposition of exchange controls, confiscation and other
governmental restrictions. Generally, there is less availability of data on
foreign companies and securities markets as well as less regulation of
foreign stock exchanges, brokers and issuers. A Fund's investments in
emerging markets and countries involves greater risks than investments in
the developed countries of Western Europe, the U.S. and Japan. In addition,
because the International Equity and Asia Growth Funds invest primarily
outside the U.S., these Funds may involve greater risks, since the
securities markets of foreign countries are generally less liquid and
subject to greater price volatility. In particular, the securities markets
of the developing countries of Asia are marked by 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.
Other. A Fund's use of certain investment techniques, including
derivatives, forward contracts, options and futures will subject the Fund to
greater risk than funds that do not employ such techniques.
4
<PAGE>
WHO MANAGES THE FUNDS?
Goldman Sachs Asset Management acts as administrator to each Fund and
serves as the Investment Adviser to the Balanced, Growth and Income, Small
Cap Equity and International Equity Funds. Goldman Sachs Funds Management,
L.P. serves as Investment Adviser to the Capital Growth and Select Equity
Funds. Goldman Sachs Asset Management International serves as Investment
Adviser to the Asia Growth Fund and subadviser to the International Equity
Fund. As of March 27, 1996, the Investment Advisers, together with their
affiliates, acted as investment adviser, administrator or distributor for
assets in excess of $58 billion.
WHO DISTRIBUTES THE FUND'S SHARES?
Goldman Sachs acts as distributor of each Fund's shares.
WHAT IS THE MINIMUM INVESTMENT?
<TABLE>
<CAPTION>
MINIMUM
--------------------
INITIAL
PURCHASE ADDITIONAL
TYPE OF PURCHASE AMOUNT INVESTMENTS
---------------- -------- -----------
<S> <C> <C>
Regular Purchases........................................ $1,500 $50
Tax-Sheltered Retirement Plans........................... $ 250 $50
Automatic Investment Plan................................ $ 50 $50
</TABLE>
For further information, see "How to Invest--How to Buy Shares of the
Funds" on page 33.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Funds through Goldman Sachs and certain
investment dealers, including members of the National Association of
Securities Dealers, Inc. (the "NASD") and certain other financial service
firms that have sales agreements with Goldman Sachs ("Authorized Dealers").
See "How to Invest" on page 32.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Funds offer two classes of shares through this Prospectus which may be
purchased at the next determined net asset value ("NAV") plus a sales
charge, which, depending on the class of shares you choose for investment,
may be imposed either at the time of purchase (Class A shares) or on a
contingent deferred basis at the time of redemption (Class B shares). Direct
purchases of $1 million or more of Class A shares will be sold without an
initial sales charge and will be subject to a contingent deferred sales
charge at the time of certain redemptions.
<TABLE>
<CAPTION>
MAXIMUM FRONT MAXIMUM CONTINGENT
ALL FUNDS END SALES CHARGE DEFERRED SALES CHARGE
--------- ---------------- ---------------------
<S> <C> <C>
Class A.................. 5.5% (See above)
Class B.................. N/A 5% declining to 0% after six years
</TABLE>
Over time, the deferred sales charge and distribution fees attributable to
Class B shares will exceed the initial sales charge and the distribution
fees attributable to Class A shares. See "How to Invest--Alternative
Purchase Arrangements" on page 32.
5
<PAGE>
HOW DO I SELL MY SHARES?
You may redeem shares upon request on any Business Day, as defined under
"Additional Information," at the net asset value next determined after
receipt of such request in proper form, subject to any applicable contingent
deferred sales charge. See "How to Sell Shares of the Funds."
HOW DO I RECEIVE DIVIDENDS AND DISTRIBUTIONS?
<TABLE>
<CAPTION>
INVESTMENT INCOME DIVIDENDS
--------------------------- CAPITAL GAINS
FUND DECLARED AND PAID DISTRIBUTIONS
---- ----------------- -------------
<S> <C> <C>
Balanced............................ Quarterly Annually
Select Equity....................... Annually Annually
Growth and Income................... Quarterly Annually
Capital Growth...................... Annually Annually
Small Cap Equity.................... Annually Annually
International Equity................ Annually Annually
Asia Growth......................... Annually Annually
</TABLE>
You may receive dividends in additional shares of the same class of the
Fund in which you have invested or you may elect to receive cash, shares of
the same class of other mutual funds sponsored by Goldman Sachs (the
"Goldman Sachs Portfolios") or ILA Service Units of the Prime Obligations
Portfolio or the Tax-Exempt Diversified Portfolio of Goldman Sachs Money
Market Trust, if you hold Class A shares of a Fund, or ILA Class B Units of
the Prime Obligations Portfolio, if you hold Class B shares of a Fund (the
"ILA Portfolios"). For further information concerning dividends, see
"Dividends."
6
<PAGE>
FEES AND EXPENSES
<TABLE>
<CAPTION>
GROWTH SMALL
SELECT AND CAPITAL CAP
BALANCED EQUITY INCOME GROWTH EQUITY
FUND FUND FUND FUND FUND
------------------ ------------------ ------------------ ------------------ ------------------
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales
Charge Imposed
on Purchases... 5.5%/1/ none 5.5%/1/ none 5.5%/1/ none 5.5%/1/ none 5.5%/1/ none
Maximum Sales
Charge Imposed
on Reinvested
Dividends...... none none none none none none none none none none
Maximum Deferred
Sales Charge... none/1/ 5.0% none/1/ 5.0% none/1/ 5.0% none/1/ 5.0% none/1/ 5.0%
Redemption
Fees/2/........ none none none none none none none none none none
Exchange
Fees/2/........ none none none none none none none none none none
ANNUAL FUND OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fees
(including,
after
applicable
limitations,
advisory and
administration
fees).......... 0.65% 0.65% 0.59%/6/ 0.59%/6/ 0.70% 0.70% 1.00% 1.00% 1.00% 1.00%
Distribution
(Rule 12b-1)
Fees (after
applicable
limitations)... 0.00%/3/ 0.75% 0.21%/3/ 0.75% 0.00%/3/ 0.75% 0.00%/3/ 0.75% 0.00%/3/ 0.75%
Other Expenses:
Authorized
Dealer Service
Fees........... 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%
Other Expenses
(after
applicable
limitations)... 0.10%/4/ 0.10%/4/ 0.14%/6/ 0.14%/6/ 0.27%/6/ 0.27%/6/ 0.14% 0.14% 0.30% 0.30%
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
TOTAL FUND
OPERATING
EXPENSES (AFTER
FEE AND EXPENSE
LIMITATION)..... 1.00%/5/ 1.75%/5/ 1.19%/6/ 1.73%/6/ 1.22%/6/ 1.97%/6/ 1.39%/5/ 2.14%/5/ 1.55%/5/ 2.30%/5/
==== ==== ==== ==== ==== ==== ==== ==== ==== ====
<CAPTION>
INT'L ASIA
EQUITY GROWTH
FUND FUND
--------------------- ---------------------
CLASS A CLASS B CLASS A CLASS B
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales
Charge Imposed
on Purchases... 5.5%/1/ none 5.5%/1/ none
Maximum Sales
Charge Imposed
on Reinvested
Dividends...... none none none none
Maximum Deferred
Sales Charge... none/1/ 5.0% none/1/ 5.0%
Redemption
Fees/2/........ none none none none
Exchange
Fees/2/........ none none none none
ANNUAL FUND OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fees
(including,
after
applicable
limitations,
advisory and
administration
fees).......... 0.86%/6/ 0.86%/6/ 0.86%/6/ 0.86%/6/
Distribution
(Rule 12b-1)
Fees (after
applicable
limitations)... 0.21%/3/ 0.75% 0.21%/3/ 0.75%
Other Expenses:
Authorized
Dealer Service
Fees........... 0.25% 0.25% 0.25% 0.25%
Other Expenses
(after
applicable
limitations)... 0.36%/6/ 0.36%/6/ 0.34%/6/ 0.34%/6/
---------- ---------- ---------- ----------
TOTAL FUND
OPERATING
EXPENSES (AFTER
FEE AND EXPENSE
LIMITATION)..... 1.68%/6/ 2.22%/6/ 1.66%/6/ 2.20%/6/
========== ========== ========== ==========
</TABLE>
EXAMPLE
You would pay the following expenses on a hypothetical $1,000 investment
(including the maximum sales charge) assuming (i) a 5% annual return and (ii)
redemption at the end of each time period.
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Balanced Fund
Class A Shares................................ $65 $85 $107 $171
Class B Shares
--Assuming complete redemption at end of peri-
od........................................... 68 85 115 181
--Assuming no redemption...................... 18 55 95 181
Select Equity Fund
Class A Shares................................ 66 91 117 191
Class B Shares
--Assuming complete redemption at end of peri-
od........................................... 68 84 114 183
--Assuming no redemption...................... 18 54 94 183
Growth and Income Fund
Class A Shares................................ 67 92 118 195
Class B Shares
--Assuming complete redemption at end of peri-
od........................................... 70 92 126 203
--Assuming no redemption...................... 20 62 106 203
Capital Growth Fund
Class A Shares................................ 68 97 127 213
Class B Shares
--Assuming complete redemption at end of peri-
od........................................... 72 97 135 221
--Assuming no redemption...................... 22 67 115 221
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Small Cap Equity Fund
Class A Shares................................ 70 101 135 229
Class B Shares
--Assuming complete redemption at end of peri-
od........................................... 73 102 143 237
--Assuming no redemption...................... 23 72 123 237
International Equity Fund
Class A Shares................................ 71 105 141 243
Class B Shares
--Assuming complete redemption at end of peri-
od........................................... 73 99 139 234
--Assuming no redemption...................... 23 69 119 234
Asia Growth Fund
Class A Shares................................ 71 104 140 241
Class B Shares
--Assuming complete redemption at end of peri-
od........................................... 72 99 138 231
--Assuming no redemption...................... 22 69 118 231
</TABLE>
The hypothetical example assumes that a contingent deferred sales charge will
not apply to redemptions of Class A shares within the first 18 months. Class B
shares convert to Class A shares eight years after purchase; therefore, Class
A expenses are used in the hypothetical example after year eight.
- --------
/1As/a percentage of the offering price. No sales charge is imposed on
purchases of Class A shares by certain classes of investors. A contingent
deferred sales charge of 1.00% is imposed on certain redemptions of Class A
shares sold without an initial sales charge as part of an investment of $1
million or more. See "How to Invest--Offering Price."
/2A/transaction fee of $7.50 may be charged for redemption proceeds paid by
wire. In addition to free reinvestments of dividends and distributions in
shares of other Goldman Sachs Portfolios or units of the ILA Portfolios and
free automatic exchanges pursuant to the Automatic Exchange Program, six
free exchanges are permitted in each twelve month period. A fee of $12.50
may be charged for each subsequent exchange during such period. See "How to
Invest--Exchange Privilege."
/3Goldman/Sachs voluntarily has agreed to waive the entire distribution fee
attributable to Class A shares of the Balanced, Growth and Income, Capital
Growth and Small Cap Equity Funds. In addition, Goldman Sachs voluntarily
has agreed to waive a portion of the distribution fee attributable to Class
A shares of the Select Equity, International Equity and Asia Growth Funds.
Goldman Sachs has no current intention of modifying or discontinuing such
limitations but may do so in the future at its discretion. Without this
waiver, the distribution fees payable by these Funds would be 0.25% annually
of average daily net assets attributable to the Class A shares and the
Funds' Total Operating Expenses attributable to the Class A shares would be
correspondingly higher.
/4The/Investment Adviser has voluntarily agreed to reduce or limit certain
"Other Expenses" of the Balanced Fund (excluding advisory, administration,
distribution and authorized dealer service fees, taxes, interest and
brokerage fees and litigation, indemnification and other extraordinary
expenses) to the extent such expenses exceed 0.10% of the Fund's average
daily net assets. The Investment Adviser has no current intention of
modifying or discontinuing such limitation but may do so in the future at
its discretion.
/5Based/on estimated amounts for the current fiscal year. If Goldman Sachs and
the Investment Advisers had not agreed to the limits described above, the
"Other Expenses" and "Total Operating Expenses," respectively, of the
Balanced, Capital Growth and Small Cap Equity Funds would be (as a
percentage of average daily net assets): Balanced--0.75% and 1.90% in the
case of Class A shares and 0.75% and 2.40% in the case of Class B shares,
Capital Growth--0.14% and 1.64% in the case of Class A shares and 0.14% and
2.14% in the case of Class B shares, and Small Cap Equity--0.30% and 1.80%
in the case of Class A shares and 0.30% and 2.30% in the case of Class B
shares. The annual "Management Fees," "Distribution Fees," "Other Expenses"
and "Total Operating Expenses," respectively, incurred by the Class A shares
of these Funds during the fiscal year ended January 31, 1996 (expressed as a
percentage of average daily net assets after fee adjustments) were as
follows: Balanced--0.65%, 0.03%, 0.32% and 1.00%, Capital Growth--1.00%,
0.08%, 0.28% and 1.36% and Small Cap Equity--1.00%, 0.09%, 0.32% and 1.41%.
See "Management--Investment Advisers, Subadviser and Administrator" and
"Distribution and Authorized Dealer Service Plans."
/6Based/on estimated amounts for the current fiscal year. The Investment
Advisers and GSAM have voluntarily agreed to limit their advisory and
administration fees to the following, respectively, (as a percentage of
average daily net assets): Select Equity Fund--0.44% and 0.15%,
International Equity Fund--0.71% and 0.15% and Asia Growth Fund--0.71% and
0.15%. In addition, the Investment Advisers and GSAM have voluntarily agreed
to reduce or limit certain "Other Expenses" of the Select Equity, Growth and
Income, International Equity and Asia Growth Funds (excluding transfer
agency fees estimated to be 0.08%, 0.16%, 0.12% and 0.10%, respectively, of
average daily net assets, advisory, administration, distribution and
authorized dealer service fees, taxes, interest and brokerage fees and
litigation, indemnification and other extraordinary expenses) to 0.06%,
0.11%, 0.24% and 0.24%, respectively, of the Select Equity, Growth and
Income, International Equity and Asia Growth Fund's average daily net
assets. The Investment Advisers and
8
<PAGE>
GSAM have no current intention of modifying or discontinuing any of such
limitations but may do so in the future at their discretion. Without such
limitations, "Management Fees," "Other Expenses" and "Total Operating
Expenses" would be as follows: Select Equity--0.75%, 0.30% and 1.55% in the
case of Class A shares and 0.75%, 0.30% and 2.05% in the case of Class B
shares, Growth and Income--0.70%, 0.27% and 1.47% in the case of Class A
shares and 0.70%, 0.27% and 1.97% in the case of Class B shares,
International Equity--1.00%, 0.36% and 1.86% in the case of Class A shares
and 1.00%, 0.36% and 2.36% in the case of Class B shares and Asia Growth--
1.00%, 0.52% and 2.02% in the case of Class A shares and 1.00%, 0.52% and
2.52% in the case of Class B shares. The annual "Management Fees,"
"Distribution Fees," "Other Expenses" and "Total Operating Expenses,"
respectively, incurred by the Class A shares of these Funds during the fiscal
year ended January 31, 1996 (expressed as a percentage of average daily net
assets after fee adjustments) were as follows: Select Equity--0.60%, 0.19%,
0.46% and 1.25%, Growth and Income--0.70%, 0.06%, 0.44% and 1.20%,
International Equity--1.00%, 0.08%, 0.44% and 1.52% and Asia Growth--1.00%,
0.07%, 0.70% and 1.77%.
The information with respect to the Funds set forth in the foregoing table
and hypothetical example relates only to Class A and B shares. The Select
Equity, Growth and Income, International Equity and Asia Growth Funds, but not
the other Funds, also offer Institutional and Service Shares, which are
subject to different fees and expenses (which affect performance), have
different minimum investment requirements and are entitled to different
services than Class A shares and Class B shares. Information regarding
Institutional and Service Shares may be obtained from your sales
representative or from Goldman Sachs by calling the number on the back cover
page of this Prospectus. Because of the Distribution Plans, long-term
shareholders may pay more than the economic equivalent of the maximum front-
end sales charges permitted by the National Association of Securities Dealers,
Inc.'s rules regarding investment companies.
The purpose of the foregoing table is to assist investors in understanding
the various fees and expenses of a Fund that an investor will bear directly or
indirectly. The information on the fees and expenses included in the table and
hypothetical example above are based on estimated fees and expenses for the
current fiscal year and should not be considered as representative of past or
future expenses. Actual fees and expenses may be greater or less than those
indicated. Moreover, while the example assumes a 5% annual return, a Fund's
actual performance will vary and may result in an actual return greater or
less than 5%. See "Management--Investment Advisers, Subadviser and
Administrator."
9
<PAGE>
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
The following data with respect to a share (of the Class specified) of the
Funds outstanding during the period(s) indicated has been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their report
incorporated by reference into the Additional Statement from the Annual Report
to shareholders for the Funds for the year ended January 31, 1996 (the "Annual
Report"). This information should be read in conjunction with the financial
statements and related notes incorporated by reference and attached to the
Additional Statement. The Annual Report also contains performance information
and is available upon request and without charge by calling the telephone
number or writing to one of the addresses on the back cover of this
Prospectus.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INCOME (LOSS) FROM DISTRIBUTIONS TO
INVESTMENT OPERATIONS SHAREHOLDERS
------------------------------------ -------------------------------------
<CAPTION> NET REALIZED TOTAL FROM NET
AND UNREALIZED INCOME REALIZED RATIOS ASSUMING
NET ASSET GAIN (LOSS) ON (LOSS) GAIN ON TOTANO VOLUNTARY WAIVERL
VALUE, NET INVESTMENTS, FROM FROM NET INVESTMENT DISTRIBUTIONOF FEES ORS
BEGINNING INVESTMENT OPTIONS AND INVESTMENT INVESTMENT AND FUTURES TO EXPENSE LIMITATIONS
OF PERIOD INCOME FUTURES OPERATIONS INCOME TRANSACTIONS SHAREHOLDERS------------------
--------- ---------- -------------- ---------- ---------- ------------ -------------
RATIO OF
NET RATIO OF NET NET
INCREASE RATIO OF NET ASSETS INVESTMENT
(DECREASE) NET ASSET NET INVESTMENT AT END RATIO OF INCOME
IN NET VALUE, EXPENSES INCOME PORTFOLIO OF EXPENSES (LOSS)
ASSET END OF TOTAL TO AVERAGE TO AVERAGE TURNOVER PERIOD TO AVERAGE TO AVERAGE
VALUE PERIOD RETURN(A) NET ASSETS NET ASSETS RATE (IN 000'S) NET ASSETS NET ASSETS
---------- --------- ---------- ---------- ---------- ------------ ---------- ---------- ------------
BALANCED FUND
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED JANUARY 31,
1996--Class A
Shares.......... $14.22 $0.51 $3.43 $3.94 $(0.50) $(0.35) ($0.85)
FOR THE PERIOD OCTOBER 12, 1994(B) THROUGH JANUARY 31,
1995--Class A
Shares.......... 14.18 0.10 0.02 0.12 (0.08) -- (0.08)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED JANUARY 31,
1996--Class A
Shares.......... $3.09 $17.31 28.10% 1.00% 3.65% 197.10%(g) $50,928 1.90% 2.75%
FOR THE PERIOD OCTOBER 12, 1994(B) THROUGH JANUARY 31,
1995--Class A
Shares.......... 0.04 14.22 0.87(c) 1.00(d) 3.39(d) 14.71(c) 7,510 8.29(d) (3.90)(d)
SELECT EQUITY FUND
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED JANUARY 31,
1996--Class A
Shares.......... $14.61 $0.19 $5.43 $5.62 $(0.16) $(0.41) $(0.57)
1996--Institu-
tional Shares
(f)............. 16.97 0.16 3.23 3.39 (0.24) (0.41) (0.65)
1995--Class A
Shares.......... 15.93 0.20 (0.38) (0.18) (0.20) (0.94) (1.14)
1994--Class A
Shares.......... 15.46 0.17 2.08 2.25 (0.17) (1.61) (1.78)
1993--Class A
Shares.......... 15.05 0.22 0.41 0.63 (0.22) -- (0.22)
FOR THE PERIOD MAY 24, 1991(B) THROUGH JANUARY 31,
1992--Class A
Shares.......... 14.17 0.11 0.88 0.99 (0.11) -- (0.11)
FOR THE YEAR ENDED JANUARY 31,
1996--Class A
Shares.......... $5.05 $19.66 38.63% 1.25% 1.01% 39.35% $129,045 1.55% 0.71%
1996--Institu-
tional Shares
(f)............. 2.74 19.71 20.14(c) 0.65(d) 1.49(d) 39.35(c) 64,829 0.96(d) 1.18(d)
1995--Class A
Shares.......... (1.32) 14.61 (1.10) 1.38 1.33 56.18 94,968 1.63 1.08
1994--Class A
Shares.......... 0.47 15.93 15.12 1.42 0.92 87.73 92,769 1.67 0.67
1993--Class A
Shares.......... 0.41 15.46 4.30 1.28 1.30 144.93 117,757 1.53 1.05
FOR THE PERIOD MAY 24, 1991(B) THROUGH JANUARY 31,
1992--Class A
Shares.......... 0.88 15.05 7.01(c) 1.57(d) 1.24(d) 135.02(d) 11151,142 1.82(d) 0.99(d)
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
INCOME (LOSS) FROM DISTRIBUTIONS TO
INVESTMENT OPERATIONS SHAREHOLDERS
--------------------------------------------------------- -------------------------------------------------------
NET REALIZED TOTAL FROM NET
NET ASSET NET AND UNREALIZED INCOME (LOSS) REALIZED GAIN IN EXCESS TOTAL
VALUE, INVESTMENT GAIN (LOSS) ON FROM FROM NET ON INVESTMENTS OF NET DISTRIBUTION
BEGINNING INCOME INVESTMENTS, INVESTMENT INVESTMENT OPTIONS INVESTMENT TO
OF PERIOD (LOSS) OPTIONS AND FUTURES OPERATIONS INCOME AND FUTURES INCOME SHAREHOLDERS
--------- ---------- ------------------- ------------- ---------- -------------- ----------- ------------
GROWTH AND INCOME FUND
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED JANUARY 31,
1996--Class A
Shares......... $15.80 $0.33 $4.75 $ 5.08 $(0.30) $(0.60) $ -- $(0.90)
1995--Class A
Shares......... 15.79 0.20(e) 0.30(e) 0.50 (0.20) (0.33) (0.07) (0.60)
FOR THE PERIOD FEBRUARY 5, 1993(B) THROUGH JANUARY 31,
1994--Class A
Shares......... 14.18 0.15 1.68 1.83 (0.15) (0.06) (0.01) (0.22)
CAPITAL GROWTH FUND
- -----------------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED JANUARY 31,
1996--Class A
Shares......... $13.67 $0.12 $ 3.93 $ 4.05 $(0.12) $(2.69) $ -- $(2.81)
1995--Class A
Shares......... 15.96 0.03 (0.69) (0.66) (0.01) (1.62) -- (1.63)
1994--Class A
Shares......... 14.64 0.02 2.40 2.42 (0.01) (1.07) (0.02) (1.10)
1993--Class A
Shares......... 13.65 0.06 2.28 2.34 (0.07) (1.28) -- (1.35)
1992--Class A
Shares......... 11.10 0.28 2.90 3.18 (0.31) (0.32) -- (0.63)
FOR THE PERIOD APRIL 20, 1990(B) THROUGH JANUARY 31,
1991--Class A
Shares......... 11.34 0.34 (0.27) 0.07 (0.31) -- -- (0.31)
SMALL CAP EQUITY FUND
- -----------------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED JANUARY 31,
1996--Class A
Shares......... $16.14 $(0.23) $ 1.39 $ 1.16 $ -- $(0.01) $ -- $(0.01)
1995--Class A
Shares......... 20.67 (0.07) (3.53) (3.60) -- (0.69) (0.24) (0.93)
1994--Class A
Shares......... 16.68 (0.04) 5.03 4.99 -- (1.00) -- (1.00)
FOR THE PERIOD OCTOBER 22, 1992(B) THROUGH JANUARY 31,
1993--Class A
Shares......... 14.18 0.03 2.50 2.53 (0.03) -- -- (0.03)
<CAPTION>
RATIO ASSUMING
NO VOLUNTARY WAIVER
OF FEES
OR EXPENSE LIMITATIONS
--------------------------
RATIO OF
NET RATIO OF
NET RATIO OF INVESTMENT NET NET
INCREASE NET ASSET NET INCOME ASSETS AT RATIO OF INVESTMENT
ADDITIONAL (DECREASE) VALUE, EXPENSES TO (LOSS) TO PORTFOLIO END OF EXPENSES INCOME (LOSS)
PAID-IN IN NET END OF TOTAL AVERAGE NET AVERAGE TURNOVER PERIOD TO AVERAGE TO AVERAGE
CAPITAL ASSET VALUE PERIOD RETURN(A) ASSETS NET ASSETS RATE (IN 000S) NET ASSETS NET ASSETS
----------- ----------- --------- ----------- ----------- ----------- ----------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GROWTH AND INCOME FUND
- -----------------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED JANUARY 31,
1996--Class A
Shares......... $ -- $ 4.18 $19.98 32.45% 1.20% 1.67% 57.93% $436,757 1.45% 1.42%
1995--Class A
Shares......... 0.11(e) 0.01 15.80 3.97 1.25 1.28 71.80 193,772 1.58 0.95
FOR THE PERIOD FEBRUARY 5, 1993(B) THROUGH JANUARY 31,
1994--Class A
Shares......... -- 1.61 15.79 13.08(c) 1.25(d) 1.23(d) 102.23(c) 41,528 3.24(d) (0.76)(d)
CAPITAL GROWTH FUND
- -----------------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED JANUARY 31,
1996--Class A
Shares......... -- $ 1.24 $14.91 30.45% 1.36% 0.65% 63.90% $881,056 1.61% 0.40%
1995--Class A
Shares......... -- (2.29) 13.67 (4.38) 1.38 0.16 38.36 862,105 1.63 (0.09)
1994--Class A
Shares......... -- 1.32 15.96 16.89 1.38 0.13 36.12 833,682 1.63 (0.12)
1993--Class A
Shares......... -- 0.99 14.64 18.01 1.41 0.42 58.93 665,976 1.66 0.17
1992--Class A
Shares......... -- 2.55 13.65 29.31 1.53 2.09 48.93 500,307 1.78 1.84
FOR THE PERIOD APRIL 20, 1990(B) THROUGH JANUARY 31,
1991--Class A
Shares......... -- (0.24) 11.10 0.84(c) 1.27(c) 3.24(c) 33.63(c) 437,533 1.47(c) 3.04(c)
SMALL CAP EQUITY FUND
- -----------------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED JANUARY 31,
1996--Class A
Shares......... -- $ 1.15 $17.29 7.20% 1.41% (0.59)% 57.58% $204,994 1.66% (0.84)%
1995--Class A
Shares......... -- (4.53) 16.14 (17.53) 1.53 (0.53) 43.67 319,487 1.78 (0.78)
1994--Class A
Shares......... -- 3.99 20.67 30.13 1.60 (0.45) 56.81 261,074 1.85 (0.70)
FOR THE PERIOD OCTOBER 22, 1992(B) THROUGH JANUARY 31,
1993--Class A
Shares......... -- 2.50 16.68 17.86(c) 1.65(d) 0.62(d) 7.12(d) 59,339 2.70(d) (0.43)(d)
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
INCOME (LOSS) FROM INVESTMENT OPERATIONS DISTRIBUTIONS TO SHAREHOLDERS
----------------------------------------------- ----------------------------------------------------
NET REALIZED NET REALIZED
AND AND FROM NET
UNREALIZED UNREALIZED REALIZED
GAIN (LOSS) GAIN (LOSS) TOTAL GAIN GAIN ON
NET ASSET NET ON ON FOREIGN (LOSS) INVESTMENT, TOTAL
VALUE, INVESTMENT INVESTMENTS, CURRENCY FROM FROM NET OPTION AND IN EXCESS OF DISTRIBUTIONS
BEGINNING INCOME OPTIONS AND RELATED INVESTMENT INVESTMENT FUTURES NET INVESTMENT TO
OF PERIOD (LOSS) FUTURES TRANSACTIONS OPERATIONS INCOME TRANSACTIONS INCOME SHAREHOLDERS
--------- ---------- ------------ ------------ ---------- ---------- ------------ -------------- -------------
INTERNATIONAL EQUITY FUND
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED JANUARY 31,
- ------------------------------
1996--Class A
Shares.......... $14.52 $0.13 $ 2.58 $ 1.42 $ 4.13 $(0.58) $(0.87) -- $(1.45)
1995--Class A
Shares.......... 18.10 0.06 (3.04) (0.01) (2.99) -- (0.59) -- (0.59)
1994--Class A
Shares.......... 14.35 0.05 4.08 (0.38) 3.75 -- -- -- --
FOR THE PERIOD DECEMBER 1, 1992(B) THROUGH JANUARY 31,
- ------------------------------------------------------
1993--Class A
Shares.......... 14.18 (0.01) 0.29 (0.11) 0.17 -- -- -- --
<CAPTION>
ASIA GROWTH FUND
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED JANUARY 31,
- ------------------------------
1996--Class A
Shares.......... $13.31 $0.17 $3.44 $(0.12) $ 3.49 $(0.17) -- $(0.14) $(0.31)
FOR THE PERIOD JULY 8, 1994(B) THROUGH JANUARY 31,
- --------------------------------------------------
1995--Class A
Shares.......... 14.18 0.11 (0.89) 0.01 (0.77) (0.10) -- -- (0.10)
<CAPTION>
RATIOS
ASSUMING
NO
VOLUNTARY
WAIVER OF
FEES OR
EXPENSE
LIMITATION
----------
RATIO OF RATIO OF RATIO OF
NET NET NET RATIO OF NET
INCREASE NET EXPENSES INVESTMENT EXPENSES INVESTMENT
(DECREASE) ASSET TO INCOME NET ASSETS TO INCOME
IN NET VALUE, AVERAGE (LOSS) TO PORTFOLIO AT END OF AVERAGE (LOSS) TO
ASSET END OF TOTAL NET AVERAGE TURNOVER PERIOD (IN NET AVERAGE
VALUE PERIOD RETURN(a) ASSETS NET ASSETS RATE 000s) ASSETS NET ASSETS
---------- ------ --------- -------- ---------- --------- ---------- -------- ----------
INTERNATIONAL EQUITY FUND
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED JANUARY 31,
- ------------------------------
1996--Class A
Shares.......... $ 2.68 $17.20 28.68% 1.52% 0.26% 68.48% $330,860 1.77% 0.01%
1995--Class A
Shares.......... (3.58) 14.52 (16.65) 1.73 0.40 84.54 275,086 1.98 0.15
1994--Class A
Shares.......... .75 18.10 26.13 1.76 0.51 60.04 269,091 2.01 0.26
FOR THE PERIOD DECEMBER 1, 1992(B) THROUGH JANUARY 31,
- ------------------------------------------------------
1993--Class A
Shares.......... .17 14.35 1.23 (c) 1.80 (d) (0.42)(d) 0.00 66,063 2.58(d) (1.20)(d)
<CAPTION>
ASIA GROWTH FUND
- -------------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED JANUARY 31,
- ------------------------------
1996--Class A
Shares.......... $3.18 $16.49 26.49% 1.77% 1.05% 88.80% $205,539 2.02 0.80%
FOR THE PERIOD JULY 8, 1994(B) THROUGH JANUARY 31,
- --------------------------------------------------
1995--Class A
Shares.......... (0.87) 13.31 (5.46)(c) 1.90(d) 1.83(d) 36.08(c) 124,298 2.38(d) 1.35(d)
</TABLE>
- ----
(a) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no
sales charges. Total return would be reduced if a sales charge were taken
into account.
(b) Commencement of operations.
(c) Not annualized.
(d) Annualized.
(e) Calculated based on the average shares outstanding methodology.
(f) Institutional shares commenced operations on June 15, 1995.
(g) Includes the effect of mortgage dollar roll transactions.
12
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and principal investment policies of each Fund are
described below. Other investment practices and management techniques, which
involve certain risks are described under "Description of Securities," "Risk
Factors" and "Investment Techniques." There can be no assurance that a Fund's
investment objectives will be achieved.
Potential equity investments for each Fund (other than the Select Equity
Fund which evaluates securities using both fundamental research and a variety
of quantitative techniques as described below under "Select Equity Fund")
generally are evaluated using fundamental analysis, including criteria such as
earnings, cash flow, asset values and/or dividend-paying ability. In choosing
a Fund's securities, the Investment Adviser utilizes first-hand fundamental
research, including visiting company facilities to assess operations and meet
decision-makers. The Investment Advisers may also use a macro analysis of
numerous economic and valuation variables to determine and anticipate changes
in company earnings and the overall investment climate. Each Investment
Adviser is able to draw on the research and market expertise of the Goldman
Sachs Investment Research Department and other affiliates of the Investment
Adviser as well as information provided by other securities dealers.
The Investment Advisers intend to purchase common stocks, preferred stocks,
interests in real estate investment trusts, convertible debt obligations,
convertible preferred stocks, equity interests in trusts, partnerships, joint
ventures and similar enterprises, warrants and stock purchase rights of
companies ("equities securities") that are, in their view, underpriced
relative to a combination of such companies' long-term earnings prospects,
growth rate, free cash flow and/or dividend-paying ability. The Funds may also
purchase securities of companies that have experienced difficulties and that,
in the opinion of the Investment Advisers, are available at attractive prices.
Consideration will be given to the business quality of the issuer. Factors
positively affecting the Investment Advisers' 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
market 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.
Equity securities in a Fund's portfolio will generally be sold when the
Investment Advisers believe that the market price fully reflects or exceeds
the securities' fundamental valuation or when other more attractive
investments are identified.
BALANCED FUND
Objective. The Fund's investment objective is to provide investors with
long-term capital growth and current income. The Fund seeks capital
appreciation primarily through the equity component of its portfolio while
investing in fixed income securities primarily to provide income for regular
quarterly dividends.
Primary Investment Focus. The Fund invests, under normal circumstances,
between 45% and 65% of its total assets in equity securities. The Fund also
invests at least 25% of its total assets in fixed income senior securities and
the remainder of its assets in equity securities, other fixed income
securities and cash. The percentage of the portfolio invested in equity and
fixed income securities will vary from time to time as the Investment Adviser
evaluates their relative attractiveness based on market valuations, economic
growth and inflation prospects. This is subject to the Fund's intention to pay
regular quarterly dividends. The amount of quarterly dividends can also be
expected to fluctuate in accordance with factors such as prevailing interest
rates and the percentage of the Fund's assets invested in fixed-income
securities.
13
<PAGE>
Other. Although the Fund's equity investments consist primarily of publicly
traded U.S. securities, the Fund may invest up to 10% of its total assets in
the equity securities of foreign issuers, including issuers in countries with
emerging markets and economies, and equity securities quoted in a foreign
currency. A portion of the Fund's portfolio of equity securities may be
selected primarily to provide current income. Equity securities selected to
provide current income include interests in real estate investment trusts,
convertible securities, preferred stocks, utility stocks and interests in
limited partnerships.
The Fund's fixed income securities primarily include securities issued by
the U.S. Government, its agencies, instrumentalities or sponsored enterprises,
corporations or other entities, mortgage-backed and asset-backed securities,
municipal securities and custodial receipts. The Fund may also invest in debt
obligations (U.S. dollar and non-U.S. dollar denominated) issued or guaranteed
by one or more foreign governments or any of their political subdivisions,
agencies or instrumentalities and foreign corporations or other entities. Such
securities shall collectively be referred to herein as "fixed income
securities." The Fund's investments in fixed income securities that are issued
by foreign issuers, including issuers in countries with emerging markets may
not exceed 10% of the Fund's total assets.
SELECT EQUITY FUND
Objective. The Fund's investment objective is to provide investors with a
total return through investments in equity securities consisting of capital
appreciation plus dividend income that, net of Fund expenses, exceeds the
total return realized on the S&P 500 Index.
Primary Investment Focus. The Fund invests, under normal circumstances, at
least 90% of its total assets in equity securities. The Fund may invest in
equity securities of foreign issuers that are traded in the United States and
that comply with U.S. accounting standards. The Fund seeks to achieve its
investment objective by investing in a portfolio of equity securities selected
using both fundamental research and a variety of quantitative techniques which
seek to maximize the Fund's reward to risk ratio. The Fund's portfolio is
designed to have risk, capitalization and industry characteristics similar to
the S&P 500 Index. Select Equity Fund may only invest in fixed income
securities that are considered cash equivalents.
Investment Process. The Investment Adviser begins with a universe primarily
of large capitalization equity securities. The Investment Adviser uses a
proprietary multifactor model (the "Multifactor Model") to assign each equity
security a rating, and, if the security is followed by the Goldman Sachs
Investment Research Department (the "Research Department"), a second rating is
assigned based upon the Research Department's evaluation. In selecting
securities for the Fund, the Investment Adviser utilizes optimization models
to evaluate the ratings assigned by the Multifactor Model and the Research
Department to build a diversified portfolio. This portfolio is primarily
comprised of securities rated highest by the Investment Adviser's Multifactor
Model and research analysts and has risk characteristics and industry
weightings similar to the S&P 500 Index. Under normal conditions, the
securities of any one issuer may not exceed 5% of the Fund's total assets.
Multifactor Model. The Multifactor Model is a sophisticated computerized
rating system for valuing equity securities according to fundamental
investment characteristics. The factors used by the Multifactor Model
incorporate many variables studied by traditional fundamental analysis, and
cover measures of value, growth, momentum, risk (e.g., price/earnings ratio,
book/price ratio, growth forecasts, earnings estimate revisions, price
momentum, volatility and earnings stability). All of the factors used by the
Multifactor Model have been shown to significantly impact the performance of
equity securities. The weightings assigned to the factors are derived
14
<PAGE>
using a statistical formulation that considers each factor's historical
performance in different market environments. As such, the Multifactor Model
is designed to evaluate each security using only the factors that are
statistically related to returns in the anticipated market environment.
Because it includes many disparate factors, the Investment Adviser believes
that the Multifactor Model is broader in scope and provides a more thorough
evaluation than most conventional, value-oriented quantitative models. As a
result, the securities ranked highest by the Multifactor Model do not have one
dominant investment characteristic (such as a low price/earnings ratio);
rather, they possess an attractive combination of investment characteristics.
Research Department. In assigning ratings, the Research Department uses a
four category rating system ranging from "recommended for purchase" to "likely
to underperform." By employing both a quantitative (i.e., the Multifactor
Model) and a qualitative (i.e., the analyst's ratings) method of selecting
securities, the Fund seeks to capitalize on the strengths of each discipline.
GROWTH AND INCOME FUND
Objectives. The Growth and Income Fund's investment objectives are to
provide investors with long-term growth of capital and growth of income.
Primary Investment Focus. The Fund invests, under normal circumstances, at
least 65% of its total assets in equity securities that the Investment Adviser
considers to have favorable prospects for capital appreciation and/or
dividend-paying ability.
Other. The Fund may invest up to 35% of its total assets in fixed income
securities that, in the opinion of the Investment Adviser, offer the potential
to further the Fund's investment objectives. In addition, although the Fund
will invest primarily in publicly traded U.S. securities, it may invest up to
25% of its total assets in foreign securities, including securities of issuers
in countries with emerging markets and economies.
CAPITAL GROWTH FUND
Objective. The Fund's investment objective is to provide investors with
long-term growth of capital.
Primary Investment Focus. The Fund invests, under normal circumstances, at
least 65% of its total assets in equity securities. The Fund seeks to achieve
its investment objective by investing primarily in equity and fixed income
securities that are considered by the Investment Adviser to have long-term
capital appreciation potential.
Other. Up to 25% of the Fund's total assets may be invested in fixed income
securities that, in the opinion of the Investment Adviser, offer long-term
capital appreciation possibilities. In addition, although the Fund invests
primarily in publicly traded U.S. securities, it may invest up to 25% of its
total assets in foreign securities, including securities of issuers in
countries with emerging markets and economies.
SMALL CAP EQUITY FUND
Objective. The Fund's investment objective is to provide investors with
long-term capital growth.
Primary Investment Focus. The Fund invests, under normal circumstances, at
least 65% of its total assets in equity securities of companies with public
stock market capitalizations of $1 billion or less at the time of investment.
However, the Fund currently emphasizes investments in companies with public
stock market capitalizations of $500 million or less at the time of
investment. Under normal circumstances, the Fund's
15
<PAGE>
investment horizon for ownership of stocks will be two to three years.
Dividend income, if any, is an incidental consideration.
Small Capitalization Companies. The Fund will invest in companies which the
Investment Adviser believes are well managed niche businesses that have the
potential to achieve high or improving returns on capital and/or above average
sustainable growth. The Fund may invest in securities of small market
capitalization companies which may have experienced financial difficulties.
Investments may also be made in companies that are in the early stages of
their life and that the Investment Adviser believes have significant growth
potential. The Investment Adviser believes that the companies in which the
Fund may invest offer greater opportunity for growth of capital than larger,
more mature, better known companies. However, investments in such small market
capitalization companies involve special risks. See "Description of
Securities" and "Risk Factors."
Other. The Fund may invest up to 35% of its total assets in the equity
securities of companies with public stock market capitalizations in excess of
$1 billion and in fixed income securities. In addition, although the Fund will
invest primarily in publicly traded U.S. securities, it may invest up to 25%
of its total assets in foreign securities, including issuers in countries with
emerging markets and economies.
INTERNATIONAL EQUITY FUND
Objective. The Fund's investment objective is to provide investors with
long-term capital appreciation.
Primary Investment Focus. The Fund invests, 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. The Fund may allocate its
assets among countries as determined by the Investment Adviser from time to
time provided that the Fund's assets are invested in at least three foreign
countries. The Fund expects to invest a substantial portion of its assets in
the securities of companies located in the developed countries in Western
Europe and in Japan. However, the Fund may also invest in the securities of
issuers located in the following countries: Argentina, Australia, Bangladesh,
Brazil, Canada, Chile, China, Colombia, Czech Republic, Egypt, Hong Kong,
Hungary, India, Indonesia, Israel, Jamaica, Jordan, Kenya, Kuwait, Malaysia,
Mexico, Morocco, New Zealand, Nigeria, Pakistan, the Philippines, Poland, The
Republic of Slovakia, Singapore, South Korea, Sri Lanka, South Africa, Taiwan,
Thailand, Turkey, Venezuela and Zimbabwe. Many of the countries in which the
Fund may invest have emerging markets or economies which involve certain risks
as described below under "Risk Factors--Special Risks of Investments in the
Asian and Other Emerging Markets," which are not present in investments in
more developed countries.
Other. The Fund may employ certain currency techniques to seek to hedge
against currency exchange rate fluctuations or to seek to increase total
return. When used to seek to enhance return, these management techniques are
considered speculative. Such currency management techniques involve risks
different from those associated with investing solely in U.S. dollar-
denominated securities of U.S. issuers. To the extent that the Fund is fully
invested in foreign securities while also maintaining currency positions, it
may be exposed to greater combined risk. The Fund's net currency positions may
expose it to risks independent of its securities positions. See "Description
of Securities", "Investment Techniques" and "Risk Factors." Up to 35% of the
Fund's total assets may be invested in fixed income securities.
16
<PAGE>
ASIA GROWTH FUND
Objective. The Fund's investment objective is to provide investors with
long-term capital appreciation.
Primary Investment Focus. The Fund invests, under normal market
circumstances, substantially all, and at least 65%, of its total assets in
equity securities of companies that satisfy at least one of the following
criteria: (i) their securities are traded principally on stock exchanges in
one or more of the Asian countries, (ii) they derive 50% or more of their
total revenue from goods produced, sales made or services performed in one or
more of the Asian countries, (iii) they maintain 50% or more of their assets
in one or more of the Asian countries, or (iv) they are organized under the
laws of one of the Asian countries. The Fund seeks to achieve its objective by
investing primarily in equity securities of Asian companies which are
considered by the Investment Adviser to have long-term capital appreciation
potential. Many of the countries in which the Fund may invest have emerging
markets or economies which involve certain risks as described under "Risk
Factors--Special Risks of Investments in the Asian and Other Emerging
Markets," which are not present in investments in more developed countries.
The Fund may purchase equity securities of issuers that have not paid
dividends on a timely basis, securities of companies that have experienced
difficulties, and securities of companies without performance records.
Other. The Fund may employ certain currency management techniques to seek to
hedge against currency exchange rate fluctuations or to seek to increase total
return. When used to seek to enhance return, these management techniques are
considered speculative. Such currency management techniques involve risks
different from those associated with investing solely in U.S. dollar-
denominated securities of U.S. issuers. To the extent that the Fund is fully
invested in foreign securities while also maintaining currency positions, it
may be exposed to greater combined risk. The Fund's net currency positions may
expose it to risks independent of its securities positions. See "Description
of Securities," "Investment Techniques" and "Risk Factors."
The Fund may allocate its assets among the Asian countries as determined
from time to time by the Investment Adviser. For purposes of the Fund's
investment policies, Asian countries are China, Hong Kong, India, Indonesia,
Malaysia, Pakistan, the Philippines, Singapore, South Korea, Sri Lanka, Taiwan
and Thailand as well as any other country in the Asian region (other than
Japan) to the extent that foreign investors are permitted by applicable law to
make such investments. Allocation of the Fund's investments will depend upon
the relative attractiveness of the Asian markets and particular issuers.
Concentration of the Fund's assets in one or a few of the Asian countries and
Asian currencies will subject the Fund to greater risks than if the Fund's
assets were not geographically concentrated. See "Description of Securities--
Foreign Transactions." The Fund may invest up to 35% of its total assets in
equity securities of issuers in other countries, including Japan, and fixed
income securities.
DESCRIPTION OF SECURITIES
CONVERTIBLE SECURITIES
Each Fund may invest in convertible securities, including debt obligations
and preferred stock of the issuer convertible at a stated exchange rate into
common stock of the issuer. Convertible securities generally offer lower
interest or dividend yields than non-convertible securities of similar
quality. As with all fixed income securities, the market value of convertible
securities tends to decline as interest rates increase and, conversely, to
increase
17
<PAGE>
as interest rates decline. However, when the market price of the common stock
underlying a convertible security exceeds the conversion price, the
convertible security tends to reflect the market price of the underlying
common stock. As the market price of the underlying common stock declines, the
convertible security tends to trade increasingly on a yield basis, and thus
may not decline in price to the same extent as the underlying common stock.
Convertible securities rank senior to common stocks in an issuer's capital
structure and consequently entail less risk than the issuer's common stock. In
evaluating a convertible security, the Investment Adviser will give primary
emphasis to the attractiveness of the underlying common stock. The convertible
debt securities in which the Balanced Fund invests will be rated, at the time
of investment, B or better by Standard & Poor's Ratings Group ("Standard &
Poor's") or Moody's Investors Service, Inc. ("Moody's"), or if unrated by such
rating organizations, determined to be of comparable quality by the Investment
Adviser. The convertible securities, in which the Select Equity Fund invests,
are not subject to any minimum rating criteria. The convertible debt
securities in which the other Funds may invest are subject to the same rating
criteria as a Fund's investments in non-convertible debt securities.
Convertible debt securities are equity investments for purposes of each Fund's
investment policies.
FOREIGN INVESTMENTS
FOREIGN SECURITIES. Investments in foreign securities may offer potential
benefits that are not available from investments exclusively in U.S. dollar-
denominated domestic issues. Foreign countries may have economic policies or
business cycles different from those of the U.S. and markets for foreign
securities do not necessarily move in a manner parallel to U.S. markets.
Investing in the securities of foreign issuers involves risks that are not
typically associated with investing in U.S. dollar-denominated securities of
domestic issuers. Such investments may be affected by changes in currency
rates, changes in foreign or U.S. laws or restrictions applicable to such
investments and in exchange control regulations (e.g., currency blockage). A
decline in the exchange rate of the currency (i.e., weakening of the currency
against the U.S. dollar) in which a portfolio security is quoted or
denominated relative to the U.S. dollar would reduce the value of the
portfolio security. Commissions on transactions in foreign securities may be
higher than those for similar transactions on domestic stock markets. In
addition, clearance and settlement procedures may be different in foreign
countries and, in certain markets, such procedures have on occasion been
unable to keep pace with the volume of securities transactions, thus making it
difficult to conduct such transactions.
Foreign issuers are not generally subject to uniform accounting, auditing
and financial reporting standards comparable to those applicable to U.S.
issuers. There may be less publicly available information about a foreign
issuer than about a U.S. issuer. In addition, there is generally less
government regulation of foreign markets, companies and securities dealers
than in the U.S. Foreign securities markets may have substantially less volume
than U.S. securities markets and securities of many foreign issuers are less
liquid and more volatile than securities of comparable domestic issuers.
Furthermore, with respect to certain foreign countries, there is a possibility
of nationalization, expropriation or confiscatory taxation, imposition of
withholding taxes on dividend or interest payments, limitations on the removal
of funds or other assets of the Funds, political or social instability or
diplomatic developments which could affect investments in those countries.
INVESTMENTS IN ADRS, EDRS AND GDRS. Each Fund may invest in foreign
securities which take the form of sponsored and unsponsored American
Depository Receipts ("ADRs") and Global Depository Receipts ("GDRs"), and each
Fund, other than the Select Equity Fund, may also invest in European
Depository Receipts
18
<PAGE>
("EDRs") or other similar instruments representing securities of foreign
issuers (together,"Depository Receipts"). ADRs represent the right to receive
securities of foreign issuers deposited in a domestic bank or a correspondent
bank. Prices of ADRs are quoted in U.S. dollars and are traded in the United
States on exchanges or over-the-counter and are sponsored and issued by
domestic banks. EDRs and GDRs are receipts evidencing an arrangement with a
non-U.S. bank. EDRs and GDRs are not necessarily quoted in the same currency
as the underlying security. To the extent a Fund acquires Depository Receipts
through banks which do not have a contractual relationship with the foreign
issuer of the security underlying the Depository Receipts to issue and service
such Depository Receipts (unsponsored Depository Receipts), there may be an
increased possibility that the Fund would not become aware of and be able to
respond to corporate actions, such as stock splits or rights offerings
involving the foreign issuer, in a timely manner. In addition, the lack of
information may result in inefficiencies in the valuation of such instruments.
Investment in Depository Receipts does not eliminate all the risks inherent in
investing in securities of non-U.S. issuers. The market value of Depository
Receipts is dependent upon the market value of the underlying securities and
fluctuations in the relative value of the currencies in which the Depository
Receipt and the underlying securities are quoted. However, by investing in
Depository Receipts, such as ADRs, that are quoted in U.S. dollars, a Fund
will avoid currency risks during the settlement period for purchases and
sales.
FOREIGN CURRENCY TRANSACTIONS. Because investment in foreign issuers will
usually involve currencies of foreign countries, and because the International
Equity and Asia Growth Funds may have currency exposure independent of their
securities positions, the value of the assets of a Fund as measured in U.S.
dollars will be affected by changes in foreign currency exchange rates. A Fund
may, to the extent it invests in foreign securities, purchase or sell forward
foreign currency exchange contracts for hedging purposes and to seek to
protect against anticipated changes in future foreign currency exchange rates.
In addition, the International Equity and Asia Growth Funds may enter into
such contracts to seek to increase total return when the Investment Adviser
anticipates that the foreign currency will appreciate or depreciate in value,
but securities denominated or quoted in that currency do not present
attractive investment opportunities and are not held in the Fund's portfolio.
When entered into to seek to enhance return, forward foreign currency exchange
contracts are considered speculative. The International Equity and Asia Growth
Funds may also engage in cross-hedging by using forward contracts in a
currency different from that in which the hedged security is denominated or
quoted if the Investment Adviser determines that there is a pattern of
correlation between the two currencies. If a Fund enters into a forward
foreign currency exchange contract to buy foreign currency for any purpose or
the International Equity or Asia Growth Funds enter into forward foreign
currency exchange contracts to sell foreign currency to seek to increase total
return, the Fund will be required to place and maintain cash or liquid, high
grade debt securities in a segregated account with the Fund's custodian in an
amount equal to the value of the Fund's total assets committed to the
consummation of the forward contract. The Fund will incur costs in connection
with conversions between various currencies. A Fund may hold foreign currency
received in connection with investments in foreign securities when, in the
judgment of the Investment Adviser, it would be beneficial to convert such
currency into U.S. dollars at a later date, based on anticipated changes in
the relevant exchange rate.
Currency exchange rates may fluctuate significantly over short periods of
time causing, along with other factors, a Fund's net asset value to fluctuate.
Currency exchange rates generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of investments
in different countries, actual or anticipated changes in interest rates and
other complex factors, as seen from an international perspective. Currency
exchange rates also can be affected unpredictably by the intervention of U.S.
or foreign governments or central banks, or the failure to intervene, or by
currency controls or political developments in
19
<PAGE>
the United States or abroad. 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.
The market in forward foreign currency exchange contracts, currency swaps
and other privately negotiated currency instruments authorized for use by the
International Equity and Asia Growth Funds, offers less protection against
defaults by the other party to such instruments than is available for currency
instruments traded on an exchange. Such contracts are subject to the risk that
the counterparty to the contract will default on its obligations. Since these
contracts are not guaranteed by an exchange or clearinghouse, a default on the
contract would deprive the Fund of unrealized profits, transaction costs or
the benefits of a currency hedge or force the Fund to cover its purchase or
sale commitments, if any, at the current market price. 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.
In addition to investing in securities denominated or quoted in a foreign
currency, the International Equity and Asia Growth Funds may engage in a
variety of foreign currency management techniques. However, due to the limited
market for these instruments with respect to the currencies of certain Asian
countries, the Investment Adviser does not currently anticipate that a
significant portion of Asia Growth Fund's currency exposure will be covered by
such instruments. The opportunity for hedging currency exposure to other
emerging markets is also generally limited. For a discussion of such
instruments and the risks associated with their use, see "Investment Objective
and Policies" in the Additional Statement.
FIXED INCOME SECURITIES
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. A Fund may also invest in zero coupon U.S. Treasury
securities and in zero coupon securities issued by financial institutions,
which represent a proportionate interest in underlying U.S. Treasury
securities. A zero coupon security pays no interest to its holder during its
life and its value consists of the difference between its face value at
maturity and its cost. The market prices of zero coupon securities generally
are more volatile than the market prices of securities that pay interest
periodically. See "Taxation" in the Additional Statement.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. Each Fund (other than the
Select Equity Fund) may invest in mortgage-backed securities ("Mortgage-Backed
Securities"), which represent direct or indirect participations in, or are
collateralized by and payable from, mortgage loans secured by real property.
Each Fund (other than the Select Equity Fund) may also invest in asset-backed
securities ("Asset-Backed Securities"). The principal and interest payments on
Asset-Backed Securities are collateralized by pools of assets such as auto
loans, credit card receivables, leases, installment contracts and personal
property. Such asset pools are securitized through the use of special purpose
trusts or corporations. Principal and interest payments may be credit enhanced
by a letter of credit, a pool insurance policy or a senior/subordinated
structure.
The Balanced Fund may also invest in stripped Mortgage-Backed Securities
("SMBS") (including interest only and principal only securities), which are
derivative multiple class Mortgage-Backed Securities. SMBS are
20
<PAGE>
usually structured with two different classes: one that receives 100% of the
interest payments and the other that receives 100% of the principal payments
from a pool of mortgage loans. If the underlying mortgage loans experience
different than anticipated prepayments of principal, a Fund may fail to fully
recoup its initial investment in these securities. The market value of the
class consisting entirely of principal payments generally is unusually
volatile in response to changes in interest rates. The yields on a class of
SMBS that receives all or most of the interest from mortgage loans are
generally higher than prevailing market yields on other Mortgage-Backed
Securities because their cash flow patterns are more volatile and there is a
greater risk that the initial investment will not be fully recouped.
CORPORATE DEBT OBLIGATIONS. Each Fund may invest in corporate debt
obligations. Corporate debt obligations are subject to the risk of an issuer's
inability to meet principal and interest payments on the obligations.
BANK OBLIGATIONS. Each Fund may invest in U.S. dollar-denominated
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.
RATING CRITERIA. The debt securities in which the Balanced, Growth and
Income, International Equity and Asia Growth Funds may invest will, except as
noted below, be rated investment grade at the time of investment. Investment
grade debt securities are securities rated BBB or higher by Standard & Poor's
or Baa or higher by Moody's. A security will be deemed to have met a rating
requirement if it receives the minimum required rating from at least one such
rating organization even though it has been rated below the minimum rating by
one or more other rating organizations, or if unrated by such rating
organizations, determined by the Investment Adviser to be of comparable credit
quality. The Balanced Fund may invest up to 10% of its total assets in debt
securities that are rated BB or B by Standard & Poor's or Ba or B by Moody's
or, if unrated by such rating organizations, determined by the Investment
Adviser to be of comparable credit quality. The Capital Growth, Small Cap
Equity and Growth and Income Funds may invest up to 25%, 35% and 10%,
respectively, of their total assets in debt securities which are unrated or
rated in the lowest rating categories by Standard & Poor's or Moody's (i.e.,
BB or lower by Standard & Poor's or Ba or lower by Moody's), including
securities rated D by Moody's or Standard & Poor's. Fixed income securities
rated in the BBB or Baa category are considered medium-grade obligations with
speculative characteristics, and adverse economic conditions or changing
circumstances may weaken their issuers' capacity to pay interest and repay
principal. Also, to the extent that the rating assigned to a security in a
Fund's portfolio is downgraded by a rating organization, the market price and
liquidity of such security may be adversely affected. Fixed income securities
rated BB or Ba or below (or comparable unrated securities) are commonly
referred to as "junk bonds" and are considered predominantly speculative and
may be questionable as to principal and interest payments. In some cases, such
bonds may be highly speculative, have poor prospects for reaching investment
grade standing and be in default. As a result, investment in such bonds will
entail greater speculative risks than those associated with investment in
investment grade bonds. Also, to the extent that the rating assigned to a
security in a Fund's portfolio is downgraded by a rating organization, the
market price and liquidity of such security may be adversely affected. See
Appendix A to the Additional Statement for a description of the corporate bond
ratings assigned by Standard & Poor's and Moody's.
21
<PAGE>
REAL ESTATE INVESTMENT TRUSTS ("REITS")
Each Fund may invest in REITs, which are pooled investment vehicles that
invest primarily in either real estate or real estate related loans. The value
of a REIT is affected by changes in the value of the properties owned by the
REIT or securing mortgage loans held by the REIT. REITs are dependent upon
cash flow from its investments to repay financing costs and the ability of the
REIT's manager. REITs are also subject to risks generally associated with
investments in real estate. A Fund will indirectly bear its proportionate
share of any expenses, including management fees, paid by a REIT in which it
invests.
INVESTMENT TECHNIQUES
OPTIONS ON SECURITIES AND SECURITIES INDICES
Each Fund (other than the Select Equity Fund) may write (sell) covered call
and put options and purchase call and put options on any securities in which
it may invest or on any securities index composed of securities in which it
may invest. The writing and purchase of options is a highly specialized
activity which involves investment techniques and risks different from those
associated with ordinary portfolio securities transactions. The use of options
to seek to increase total return involves the risk of loss if the Investment
Adviser is incorrect in its expectation of fluctuations in securities prices
or interest rates. The successful use of options for hedging purposes also
depends in part on the ability of the Investment Adviser to manage future
price fluctuations and the degree of correlation between the options and
securities markets. If the Investment Adviser is incorrect in its expectation
of changes in securities prices or determination of the correlation between
the securities indices on which options are written and purchased and the
securities in a Fund's investment portfolio, the investment performance of the
Fund will be less favorable than it would have been in the absence of such
options transactions. The writing of options could significantly increase a
Fund's portfolio turnover rate and, therefore, associated brokerage
commissions or spreads.
OPTIONS ON FOREIGN CURRENCIES. A Fund may, to the extent it invests in
foreign securities, purchase and sell (write) call and put options on foreign
currencies for the purpose of protecting against declines in the U.S. dollar
value of foreign portfolio securities and anticipated dividends on such
securities and against increases in the U.S. dollar cost of foreign securities
to be acquired. In addition, the International Equity and Asia Growth Funds
may use options on currency to cross-hedge, which involves writing or
purchasing options on one currency to hedge against changes in exchange rates
for a different currency, if there is a pattern of correlation between the two
currencies. 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 an option that a Fund has written is
exercised, the Fund could be required to purchase or sell foreign currencies
at disadvantageous exchange rates, thereby incurring losses. The purchase of
an option on foreign currency may constitute an effective hedge against
exchange rate fluctuations; however, in the event of exchange rate movements
adverse to a Fund's position, the Fund may forfeit the entire amount of the
premium plus related transaction costs. In addition to purchasing put and call
options for hedging purposes, the International Equity and Asia Growth Funds
may purchase call or put options on currency 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 held in the
Fund's portfolio. When purchased or sold to seek to increase total return,
options on currencies are considered speculative. Options on foreign
currencies written or purchased by the Funds are traded on U.S. and foreign
exchanges or over-the-counter.
22
<PAGE>
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
To seek to increase total return or to hedge against changes in interest
rates, securities prices or currency exchange rates, a Fund may purchase and
sell various kinds of futures contracts, and purchase and write call and put
options on any of such futures contracts. Each Fund may also enter into
closing purchase and sale transactions with respect to any such contracts and
options. The futures contracts may be based on various securities (such as
U.S. Government securities), foreign currencies, securities indices and other
financial instruments and indices. The Select Equity Fund may enter into such
transactions only with respect to the S&P 500 Index. A Fund will engage in
futures and related options transactions only for bona fide hedging purposes
as defined in regulations of the Commodity Futures Trading Commission or to
seek to increase total return to the extent permitted by such regulations. A
Fund may not purchase or sell futures contracts or purchase or sell related
options to seek to increase total return, except for closing purchase or sale
transactions, if immediately thereafter the sum of the amount of initial
margin deposits and premiums paid on the Fund's outstanding positions in
futures and related options entered into for the purpose of seeking to
increase total return would exceed 5% of the market value of the Fund's net
assets. These transactions involve brokerage costs, require margin deposits
and, in the case of contracts and options obligating a Fund to purchase
securities or currencies, require the Fund to segregate and maintain cash or
liquid, high grade debt securities with a value equal to the amount of the
Fund's obligations.
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. See
"Investment Objectives and Policies--Futures Contracts and Options on Futures
Contracts" in the Additional Statement. Thus, while a Fund may benefit from
the use of futures and options on futures, unanticipated changes in interest
rates, securities prices or currency exchange rates may result in poorer
overall performance than if the Fund had not entered into any futures
contracts or options transactions. Because perfect correlation between a
futures position and portfolio position that is intended to be protected is
impossible to achieve, the desired protection may not be obtained and a Fund
may be exposed to risk of loss. The loss incurred by a Fund in entering into
futures contracts and in writing call options on futures is potentially
unlimited and may exceed the amount of the premium received. Futures markets
are highly volatile and the use of futures may increase the volatility of a
Fund's net asset value. The profitability of a Fund's trading in futures to
seek to increase total return depends upon the ability of the Investment
Adviser to correctly analyze the futures markets. In addition, because of the
low margin deposits normally required in futures trading, a relatively small
price movement in a futures contract may result in substantial losses to a
Fund. Further, futures contracts and options on futures may be illiquid, and
exchanges may limit fluctuations in futures contract prices during a single
day.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
Each Fund may purchase when-issued securities. When-issued transactions
arise when securities are purchased by a Fund with payment and delivery taking
place in the future in order to secure what is considered to be an
advantageous price and yield to the Fund at the time of entering into the
transaction. Each Fund may also purchase securities on a forward commitment
basis; that is, make contracts to purchase securities for a fixed price at a
future date beyond the customary 3-day settlement period. A Fund is required
to hold and maintain in a segregated account with the Fund's custodian until 3
days prior to the settlement date, cash or liquid, high grade debt securities
in an amount sufficient to meet the purchase price. Alternatively, each Fund
may enter into offsetting contracts for the forward sale of other securities
that it owns. The purchase of securities on a when-issued or forward
commitment basis involves a risk of loss if the value of the security to be
purchased declines prior to the settlement date. Although a Fund would
generally purchase securities on a when-issued or forward commitment basis
with the intention of acquiring securities for its portfolio, a Fund may
dispose of when-issued securities or forward commitments prior to settlement
if its Investment Adviser deems it appropriate to do so.
23
<PAGE>
ILLIQUID AND RESTRICTED SECURITIES
A Fund may not invest more than 10% of its total assets in securities that
are subject to restrictions on resale ("restricted securities") under the
Securities Act of 1933, as amended ("1933 Act"), including securities eligible
for resale in reliance on Rule 144A under the 1933 Act. In addition, a Fund
will not invest more than 15% of its net assets in illiquid investments, which
includes securities (both foreign and domestic) that are not readily
marketable, swap transactions, certain SMBS, repurchase agreements maturing in
more than seven days, time deposits with a notice or demand period of more
than seven days, certain over-the-counter options, and certain restricted
securities, unless it is determined, based upon the continuing review of the
trading markets for a specific restricted security, that such restricted
security is eligible for sale under Rule 144A and, therefore, is liquid. The
Board of Directors has adopted guidelines and delegated to the Investment
Adviser the daily function of determining and monitoring the liquidity of
restricted securities. The Board of Directors, however, retains oversight
focusing on factors such as valuation, liquidity and availability of
information and is ultimately responsible for each determination. Investing in
restricted securities eligible for resale pursuant to Rule 144A may decrease
the liquidity of a Fund's portfolio to the extent that qualified institutional
buyers become for a time uninterested in purchasing these restricted
securities. The purchase price and subsequent valuation of restricted and
illiquid securities normally reflect a discount, which may be significant,
from the market price of comparable securities for which a liquid market
exists.
REPURCHASE AGREEMENTS
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. The International Equity and Asia Growth Funds
may also enter into repurchase agreements involving certain foreign government
securities. If the other party or "seller" defaults, a Fund might suffer a
loss to the extent that the proceeds from the sale of the underlying
securities and other collateral held by the Fund in connection with the
related repurchase agreement are less than the repurchase price. In addition,
in the event of bankruptcy of the seller or failure of the seller to
repurchase the securities as agreed, a Fund could suffer losses, including
loss of interest on or principal of the security and costs associated with
delay and enforcement of the repurchase agreement. The Directors of the
Company have reviewed and approved certain counterparties whom they believe to
be creditworthy and have authorized the Funds to enter into repurchase
agreements with such counterparties. In addition, each Fund, together with
other registered investment companies having advisory agreements with an
Investment Adviser, may transfer uninvested cash balances into a single joint
account, the daily aggregate balance of which will be invested in one or more
repurchase agreements.
LENDING OF PORTFOLIO SECURITIES
Each Fund may seek to increase its income by lending portfolio securities.
Under present regulatory policies, such loans may be made to institutions,
such as certain broker-dealers, and are required to be secured continuously by
collateral in cash, cash equivalents, or U.S. Government securities maintained
on a current basis in an amount at least equal to the market value of the
securities loaned. Cash collateral may be invested in cash equivalents. If an
Investment Adviser determines to make securities loans, the value of the
securities loaned may not exceed 33 1/3% of the value of the total assets of a
Fund. See "Investment Restrictions" in the Additional Statement. A Fund may
experience a loss or delay in the recovery of its securities if the
institution with which it has engaged in a portfolio loan transaction breaches
its agreement with the Fund.
MORTGAGE DOLLAR ROLLS
The Balanced Fund may enter into mortgage "dollar rolls" in which the Fund
sells securities for delivery in the current month and simultaneously
contracts with the same counterparty to repurchase substantially similar
24
<PAGE>
(same type, coupon and maturity) securities on a specified future date. During
the roll period, the Fund loses the right to receive principal and interest
paid on the securities sold. However, the Fund may benefit from the interest
earned on the cash proceeds of the securities sold until the settlement date
of the forward purchase. The Fund will hold and maintain in a segregated
account until the settlement date cash or liquid, high grade debt securities
in an amount equal to the forward purchase price. The benefits derived from
the use of mortgage dollar rolls depend upon the Investment Adviser's ability
to manage mortgage prepayments. There is no assurance that mortgage dollar
rolls can be successfully employed. For financial reporting and tax purposes,
the Fund treats mortgage dollar rolls as two separate transactions; one
involving the purchase of a security and a separate transaction involving a
sale. The Fund does not currently intend to enter into mortgage dollar rolls
that are accounted for as a financing.
SHORT SALES AGAINST-THE-BOX
Each Fund (other than the Select Equity Fund) may make short sales of
securities or maintain a short position, provided that at all times when a
short position is open the Fund owns an equal amount of such securities or
securities convertible into or exchangeable, without payment of any further
consideration, for an equal amount of the securities of the same issuer as the
securities sold short (a short sale against-the-box). Not more than 25% of a
Fund's net assets (determined at the time of the short sale) may be subject to
such short sales. Short sales will be made primarily to defer realization of
gain or loss for federal tax purposes; a gain or loss in a Fund's long
position will be offset by a gain or loss in its short position.
TEMPORARY INVESTMENTS
Each Fund may, for temporary defensive purposes, invest 100% of its total
assets (except that the Select Equity Fund may only hold up to 35% of its
total assets) in U.S. Government securities, repurchase agreements
collateralized by U.S. Government securities, commercial paper rated at least
A-2 by Standard & Poor's or P-2 by Moody's, certificates of deposit, bankers'
acceptances, repurchase agreements, non-convertible preferred stocks, non-
convertible corporate bonds with a remaining maturity of less than one year
or, subject to certain tax restrictions, foreign currencies. When a Fund's
assets are invested in such instruments, the Fund may not be achieving its
investment objective.
MISCELLANEOUS TECHNIQUES
In addition to the techniques and investments described above, each Fund
may, with respect to no more than 5% of its net assets, engage in the
following techniques and investments (i) warrants and stock purchase rights,
(ii) currency swaps (Balanced, International Equity and Asia Growth Funds
only), mortgage swaps, index swaps and interest rate swaps, caps, floors and
collars (Balanced Fund only), (iii) structured securities, (iv) yield curve
options (Balanced Fund only), (v) other investment companies and (vi)
unseasoned companies. For more information see the Additional Statement.
RISK FACTORS
Risk of Investing in Small Capitalization Companies. Investing in the
securities of such companies involves greater risk and the possibility of
greater portfolio price volatility. Historically, small market capitalization
stocks and stocks of recently organized companies have been more volatile in
price than the larger market capitalization stocks included in the S&P 500
Index. Among the reasons for the greater price volatility of these small
company and unseasoned stocks are the less certain growth prospects of smaller
firms and the lower degree of liquidity in the markets for such stocks.
25
<PAGE>
Special Risks of Investments in the Asian and Other Emerging
Markets. Investing in the securities of issuers in emerging markets involves
risks in addition to those discussed above. The International Equity and Asia
Growth Funds may each invest without limit in the securities of issuers in
countries with emerging economies or securities markets. The Balanced, Growth
and Income, Capital Growth, and Small Cap Equity Funds may each invest up to
15% of their total assets in securities of issuers in countries with emerging
economies or securities markets. These emerging markets are generally located
in the Asia-Pacific region, Eastern Europe, Latin and South America and
Africa. A Fund's purchase and sale of portfolio securities in certain emerging
markets may be constrained by limitations as to daily changes in the prices of
listed securities, periodic trading or settlement volume and/or limitations on
aggregate holdings of foreign investors. Such limitations may be computed
based on the aggregate trading volume by or holdings of a Fund, the Investment
Adviser and its affiliates and their respective clients and other service
providers. A Fund may not be able to sell securities in circumstances where
price, trading or settlement volume limitations have been reached.
Foreign investment in the securities markets of certain emerging markets is
restricted or controlled to varying degrees which may limit investment in such
countries or increase the administrative costs of such investments. For
example, certain Asian countries require governmental approval prior to
investments by foreign persons or limit investment by foreign persons to only
a specified percentage of an issuer's outstanding securities or a specific
class of securities which may have less advantageous terms (including price)
than securities of the issuer available for purchase by nationals. In
addition, certain countries may restrict or prohibit investment opportunities
in issuers or industries deemed important to national interests. Such
restrictions may affect the market price, liquidity and rights of securities
that may be purchased by a Fund. Due to restrictions on direct investment in
equity securities in certain Asian countries, such as Taiwan, it is
anticipated that a Fund may invest in such countries only through other
investment funds in such countries. See "Other Investment Companies in the
Additional Statement." Furthermore, the repatriation of both investment income
and capital from several of the Asian countries is subject to restrictions
such as the need for certain governmental consents.
Many of the emerging markets may be subject to a greater degree of economic,
political and social instability than is the case in Western Europe, the
United States and Japan. Many of the emerging markets do not have fully
democratic governments. For example, some governments of emerging market
countries are authoritarian in nature or have been installed or removed as a
result of military coups, while governments in other emerging markets have
periodically used force to suppress civil dissent. Disparities of wealth, the
pace and success of democratization, and ethnic, religious and racial
disaffection, among other factors, have also led to social unrest, violence
and/or labor unrest in some of the Asian and other countries. The economies of
most of the emerging markets are heavily dependent upon international trade
and are accordingly affected by protective trade barriers and the economic
conditions of their trading partners, principally, the United States, Japan,
China and the European Union. In addition, the economies of some of the
emerging markets are vulnerable to weakness in world prices for their
commodity exports.
Settlement procedures in emerging markets are frequently less developed and
reliable than those in the United States and may involve a Fund's delivery of
securities before receipt of payment for their sale. In addition, significant
delays are common in certain markets in registering the transfer of
securities. Settlement or registration problems may make it more difficult for
a Fund to value its portfolio securities and could cause the Fund to miss
attractive investment opportunities, to have a portion of its assets
uninvested or to incur losses due to the failure of a counterparty to pay for
securities the Fund has delivered or the Fund's inability to complete its
contractual obligations.
26
<PAGE>
Currently, there is no market or only a limited market for many of the
management techniques and instruments with respect to the currencies and
securities markets of the emerging market countries. Consequently, there can
be no assurance that suitable instruments for hedging currency and market-
related risks will be available at the times when a Fund wishes to use them.
Risk of Investing in Fixed Income Securities. When interest rates decline,
the market value of fixed income securities tends to increase. Conversely,
when interest rates increase, the market value of fixed income securities
tends to decline. Volatility of a security's market value will differ
depending upon the security's duration, the issuer and the type of instrument.
Investments in fixed income securities are subject to the risk that the issuer
could default on its obligations and a Fund could sustain losses on such
investments. A default could impact both interest and principal payments.
Risks of Derivative Transactions. A Fund's transactions, if any, in options,
futures, options on futures, swap transactions, structured securities and
currency forward contracts involve certain risks, including a possible lack of
correlation between changes in the value of hedging instruments and the
portfolio assets being hedged, the potential illiquidity of the markets for
derivative instruments, the risks arising from the margin requirements and
related leverage factors associated with such transactions. The use of these
management techniques to seek to increase total return may be regarded as a
speculative practice and involves the risk of loss if the Investment Adviser
is incorrect in its expectation of fluctuations in securities prices, interest
rates or currency prices. A Fund's transactions in foreign currency, forward
foreign currency exchange contracts, options, futures contracts and certain
other derivative transactions may be limited by the requirements of the
Internal Revenue Code of 1986, as amended (the "Code"), for qualification as a
regulated investment company.
INVESTMENT RESTRICTIONS
Each Fund is subject to certain investment restrictions that are described
in detail under "Investment Restrictions" in the Additional Statement.
Fundamental investment restrictions of a Fund can not be changed without
approval of a majority of the outstanding shares of that Fund. All investment
objectives and policies not specifically designated as fundamental are non-
fundamental and may be changed without shareholder approval. The Capital
Growth Fund's investment objective is a fundamental policy. If there is a
change in a Fund's investment objectives, shareholders should consider whether
the Fund remains an appropriate investment in light of their then current
financial positions and needs.
PORTFOLIO TURNOVER
A high rate of portfolio turnover (100% or more) involves correspondingly
greater expenses which must be borne by a Fund and its shareholders and may
under certain circumstances make it more difficult for a Fund to qualify as a
regulated investment company under the Code. See "Financial Highlights" for a
statement of each Fund's historical portfolio turnover ratio. The portfolio
turnover rate is calculated by dividing the lesser of the dollar amount of
sales or purchases of portfolio securities by the average monthly value of a
Fund's portfolio securities, excluding securities having a maturity at the
date of purchase of one year or less. Notwithstanding the foregoing, the
Investment Adviser may, from time to time, make short-term investments when it
believes such investments are in the best interest of a Fund.
27
<PAGE>
MANAGEMENT
DIRECTORS AND OFFICERS
The Company's Board of Directors is responsible for deciding matters of
general policy and reviewing the actions of the Investment Advisers,
subadviser, administrator, distributor and transfer agent. The officers of the
Company conduct and supervise each Fund's daily business operations. The
Additional Statement contains information as to the identity of, and other
information about, the Directors and officers of the Company.
INVESTMENT ADVISERS, SUBADVISER AND ADMINISTRATOR
INVESTMENT ADVISERS AND SUBADVISER. Goldman Sachs Asset Management, One New
York Plaza, New York, New York 10004, a separate operating division of Goldman
Sachs, serves as the investment adviser to the Balanced, Growth and Income,
Small Cap Equity and International Equity Funds. Goldman Sachs registered as
an investment adviser in 1981. Goldman Sachs Funds Management, L.P., One New
York Plaza, New York, New York 10004, a Delaware limited partnership which is
an affiliate of Goldman Sachs, serves as the investment adviser to the Capital
Growth and Select Equity Funds. Goldman Sachs Funds Management, L.P.
registered as an investment adviser in 1990. Goldman Sachs Asset Management
International, 140 Fleet Street, London EC4A 2BJ, England, an affiliate of
Goldman Sachs, serves as the investment adviser to the Asia Growth Fund and
subadviser to the International Equity Fund. Goldman Sachs Asset Management
International became a member of the Investment Management Regulatory
Organisation Limited in 1990 and registered as an investment adviser in 1991.
Goldman Sachs Asset Management serves as administrator to each Fund. As of
March 27, 1996, GSAM, GSFM and GSAMI, together with their affiliates, acted as
investment adviser, administrator or distributor for assets in excess of $58
billion.
Under an Investment Advisory Agreement with each Fund, the applicable
Investment Adviser, and in the case of the International Equity Fund under a
Subadvisory Agreement, the subadviser, subject to the general supervision of
the Board of Directors, provides day-to-day advice as to the Fund's portfolio
transactions. Goldman Sachs has agreed to permit the Company to use the name
"Goldman Sachs" or a derivative thereof as part of each Fund's name for as
long as a Fund's Investment Advisory Agreement is in effect.
In performing its investment advisory services, each Investment Adviser,
while remaining ultimately responsible for the management of the Funds, may
rely upon the asset management division of its Singapore and Tokyo affiliates
for portfolio decisions and management with respect to certain portfolio
securities and is able to draw upon the research and expertise of its other
affiliate offices.
28
<PAGE>
FUND MANAGERS
<TABLE>
<CAPTION>
YEARS
PRIMARILY
NAME AND TITLE FUND RESPONSIBILITY RESPONSIBLE FIVE YEAR EMPLOYMENT HISTORY
-------------- ------------------- ----------- ----------------------------
<C> <C> <C> <S>
Jonathan A. Beinner Co-Portfolio Manager-- Since Mr. Beinner joined the
Vice President Balanced (Fixed Income) 1994 Investment Adviser in
1990.
- --------------------------------------------------------------------------------------
Mitchell E. Cantor Senior Portfolio Since Mr. Cantor joined the
Vice President Manager--Capital 1995 Investment Adviser in
Growth 1991.
Co-Portfolio Manager --
Balanced (Equity), 1994
Growth and Income 1993
- --------------------------------------------------------------------------------------
Paul D. Farrell Senior Portfolio Since Mr. Farrell joined the
Vice President Manager--Small Cap 1992 Investment Adviser in
Equity 1991.
- --------------------------------------------------------------------------------------
Ronald E. Gutfleish Co-Portfolio Manager-- Since Mr. Gutfleish joined the
Vice President Balanced (Equity), 1994 Investment Adviser in
Growth and Income 1993 1993. Prior to 1993, he
was a principal of
Sanford C. Bernstein &
Co. in its Investment
Management Research
Department.
- --------------------------------------------------------------------------------------
Roderick D. Jack Co-Portfolio Manager-- Since Mr. Jack joined the
Executive Director International Equity 1992 Investment Adviser in
1992. Prior to 1992, he
worked in the advisory
and financing group for
S.G. Warburg in London.
- --------------------------------------------------------------------------------------
Robert C. Jones Senior Portfolio Since Mr. Jones joined the
Vice President Manager--Select 1991 Investment Adviser in
Equity 1989.
- --------------------------------------------------------------------------------------
Marcel Jongen Co-Portfolio Manager-- Since Mr. Jongen joined the
Executive Director International Equity 1992 Investment Adviser in
1992. Prior to 1992, he
was head of equities at
Philips Pension Fund in
Eindhaven
- --------------------------------------------------------------------------------------
Richard C. Lucy Co-Portfolio Manager-- Since Mr. Lucy joined the
Vice President Balanced (Fixed Income) 1994 Investment Adviser in
1992. Prior to 1992, he
managed fixed income
assets at Brown Brothers
Harriman & Co.
- --------------------------------------------------------------------------------------
Shogo Maeda Co-Portfolio Manager-- Since Mr. Maeda joined the
Vice President International Equity 1994 Investment Adviser in
1994. Prior to 1994, he
worked at Nomura
Securities International
and for a period at
Manufacturers Hanover
Bank in New York
- --------------------------------------------------------------------------------------
Warwick M. Negus Senior Portfolio Since Mr. Negus joined the
Executive Director Manager--Asia 1994 Investment Adviser in
Growth 1994. Prior to 1994, he
Co-Portfolio Manager-- was a vice president of
International Equity 1994 Bankers Trust Australia
Ltd.
- --------------------------------------------------------------------------------------
Karma Wilson Portfolio Manager-- Since Ms. Wilson joined the
Vice President Asia Growth 1995 Investment Adviser in
1995. Prior to 1995, she
was an investment
analyst with Bankers
Trust Australia Ltd. and
prior to 1993 worked at
Arthur Andersen LLP.
</TABLE>
29
<PAGE>
It is the responsibility of the Investment Adviser to make investment
decisions for a Fund and to place the purchase and sale orders for the Fund's
portfolio transactions in U.S. and foreign securities and currency markets.
Such orders may be directed to any broker including, to the extent and in the
manner permitted by applicable law, Goldman Sachs or its affiliates.
As compensation for its services rendered and assumption of certain expenses
pursuant to separate Investment Advisory Agreements, GSAM is entitled to a fee
from the Balanced, Growth and Income, Small Cap Equity and International
Equity Funds, computed daily and payable monthly, at the annual rates of
0.50%, 0.55%, 0.75% and 0.25%, respectively, of average daily net assets;
however, GSAM is currently only imposing its advisory fee with respect to the
International Equity Fund at the annual rate of 0.23% of average daily net
assets. As compensation for its services rendered and assumption of certain
expenses pursuant to separate Investment Advisory Agreements, GSFM is entitled
to a fee from the Select Equity and Capital Growth Funds, computed daily and
payable monthly, at the annual rate of 0.50% and 0.75%, respectively of
average daily net assets; however, GSFM is currently only imposing its
advisory fee with respect to the Select Equity Fund at the annual rate of
0.44% of average daily net assets. As compensation for its services rendered
and assumption of certain expenses pursuant to Investment Advisory and
Subadvisory Agreements, GSAMI is entitled to a fee from the Asia Growth and
International Equity Funds, computed daily and payable monthly at the annual
rates of 0.75% and 0.50%, respectively, of average daily net assets; however,
GSAMI is currently only imposing its advisory fee with respect to the Asia
Growth Fund and its subadvisory fee with respect to International Equity Fund
at the annual rate of 0.71% and 0.48%, respectively, of average daily net
assets. The Investment Advisers may discontinue or modify such limitations in
the future at their discretion, although they have no current intention to do
so. For the fiscal year ended January 31, 1996, each Fund paid fees at the
foregoing contractual rates, except that the Select Equity Fund paid an
advisory fee equal to 0.43% of its average daily net assets. Without giving
effect to fee limitations, the aggregate management fees paid by the Capital
Growth, Small Cap Equity, International Equity and Asia Growth Funds are
higher than the fees paid by most funds but the Investment Advisers believe
such fees are comparable to management fees paid by funds with similar
investment strategies.
Each Investment Adviser has voluntarily agreed to reduce the fees payable to
it by a Fund (to the extent of its fees) by the amount (if any) that the
Fund's expenses would exceed the applicable expense limitations imposed by
state securities administrators. See "Management--Expenses" in the Additional
Statement. In addition, the Investment Adviser to the Balanced, Select Equity,
Growth and Income, International Equity and Asia Growth Funds has voluntarily
agreed to reduce or limit certain "Other Expenses" of such Funds (excluding
advisory, subadvisory, administration, distribution and authorized dealer
service fees, taxes, interest and brokerage fees and litigation,
indemnification and other extraordinary expenses, and in the case of Select
Equity, Growth and Income, International Equity and Asia Growth Funds,
transfer agency fees) to the extent such expenses exceed 0.10%, 0.06%, 0.11%,
0.24% and 0.24% per annum of such Funds' average daily net assets,
respectively. Such reductions or limits, if any, are calculated monthly on a
cumulative basis and may be discontinued or modified by the applicable
Investment Adviser in its discretion at any time.
ADMINISTRATOR. As administrator, pursuant to an Administration Agreement
with each Fund, GSAM provides personnel for supervisory, administrative, and
clerical functions; oversees the performance of administrative and
professional services to each Fund by others; provides office facilities; and
prepares, but does not pay for, reports to shareholders, the SEC and other
regulatory authorities. As compensation for the services rendered to the
Funds, GSAM is entitled to a fee from the Balanced and Growth and Income
Funds, computed daily and payable monthly, at an annual rate equal to 0.15% of
such Fund's average daily net assets and GSAM is entitled to a fee from each
other Fund, computed daily and payable monthly at an annual rate equal to
0.25% of
30
<PAGE>
each such Fund's average daily net assets; however, GSAM is currently only
imposing its administration fee with respect to the Select Equity,
International Equity and Asia Growth Funds at the annual rate of 0.15% of
average daily net assets. GSAM may discontinue or modify any such limitations
in the future at its discretion, although it has no current intention to do
so. For the period ended January 31, 1996, each Fund paid GSAM a fee for
administration services at the foregoing contractual rates, except that the
Select Equity Fund paid an administration fee equal to 0.18% of its average
daily net assets. GSAM has agreed to reduce its fees payable by a Fund (to the
extent of its fees) by the amount (if any) that a Fund's expenses exceed the
applicable expense limitations imposed by state securities administrators. See
"Management--Expenses" in the Additional Statement.
Goldman Sachs may from time to time, at its own expense, provide
compensation to certain Authorized Dealers for performing administrative
services to their customers. These services include maintaining account
records, processing orders to purchase, redeem and exchange Fund shares and
responding to certain customer inquiries. The amount of such compensation may
be up to 0.125% annually of the average daily net assets of the Balanced and
Select Equity Funds, 0.1375% annually of the average daily net assets of the
Growth and Income Fund and 0.1875% annually of the average daily net assets of
the Capital Growth, Small Cap Equity, International Equity and Asia Growth
Funds attributable to shares held by customers of such Authorized Dealers. In
addition, Goldman Sachs may from time to time, at its own expense, provide
compensation to certain Authorized Dealers who perform administrative services
with respect to depository institutions whose customers purchase shares of a
Fund. These services include responding to certain inquiries from and
providing written materials to depository institutions about a Fund;
furnishing advice about and assisting depository institutions in obtaining
from state regulatory agencies any rulings, exemptions or other authorizations
that may be required to conduct a mutual fund sales program; acting as liaison
between depository institutions and national regulatory organizations;
assisting with the preparation of sales material; and providing general
assistance and advice in establishing and maintaining mutual fund sales
programs on the premises of depository institutions. The amount of such
compensation may be up to 0.08% annually of the average net assets of a Fund's
shares attributable to purchases through, and held by the customers of, such
depository institutions. Such compensation does not represent an additional
expense to a Fund or its shareholders, since it will be paid from the assets
of Goldman Sachs or its affiliates.
ACTIVITIES OF GOLDMAN SACHS AND ITS AFFILIATES AND OTHER ACCOUNTS MANAGED BY
GOLDMAN SACHS. The involvement of the Investment Advisers, 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 a Fund or limit a Fund's investment activities. Goldman Sachs and
its affiliates engage in proprietary trading and advise accounts and funds
which have investment objectives similar to those of the Funds and/or which
engage in and compete for transactions in the same types of securities,
currencies and instruments as the Funds. Goldman Sachs and its affiliates will
not have any obligation to make available any information regarding their
proprietary activities or strategies, or the activities or strategies used for
other accounts managed by them, for the benefit of the management of the Funds
and in general it is not anticipated that the Investment Advisers will have
access to proprietary information for the purpose of managing a Fund. The
results of a Fund's investment activities, therefore, may differ from those of
Goldman Sachs and its affiliates and it is possible that a Fund could sustain
losses during periods in which Goldman Sachs and its affiliates and other
accounts and Funds achieve significant profits on their trading for
proprietary or other accounts. From time to time, a Fund's activities may be
limited because of regulatory restrictions applicable to Goldman Sachs and its
affiliates, and/or their internal policies designed to comply with such
restrictions. See "Management--Activities of Goldman Sachs and its Affiliates
and Other Accounts Managed by Goldman Sachs" in the Additional Statement for
further information.
31
<PAGE>
DISTRIBUTOR AND TRANSFER AGENT
Goldman Sachs, 85 Broad Street, New York, New York, serves as the exclusive
distributor of each Fund's shares. Shares may also be sold by Authorized
Dealers. Authorized Dealers include investment dealers that are members of the
NASD and certain other financial service firms. To become an Authorized
Dealer, a dealer or financial service firm must enter into a sales agreement
with Goldman Sachs. The minimum investment requirements, services, programs
and purchase and redemption options for shares purchased through a particular
Authorized Dealer may be different from those available to investors
purchasing through other Authorized Dealers.
Goldman Sachs, 4900 Sears Tower, Chicago, Illinois, also serves as each
Fund's transfer agent (the "Transfer Agent") and as such performs various
shareholder servicing functions. As compensation for the services rendered to
each Fund by Goldman Sachs (as Transfer Agent) and the assumption by Goldman
Sachs of the expenses related thereto, Goldman Sachs is entitled to receive a
fee from each Fund, with respect to Class A shares and Class B shares of
$12,000 per year plus $7.50 per account, together with out-of-pocket and
transaction-related expenses (including those out-of-pocket expenses payable
to servicing agents). Shareholders with inquiries regarding any Fund should
contact Goldman Sachs (as Transfer Agent) at the address or the telephone
number set forth on the back cover page of this Prospectus.
REPORTS TO SHAREHOLDERS
Shareholders will receive an annual report containing audited financial
statements and a semi-annual report. Each shareholder will also be provided
with a printed confirmation for each transaction in the shareholder's account
and an individual quarterly account statement. A year-to-date statement for
any account will be provided upon request made to Goldman Sachs. The Funds do
not generally provide sub-accounting services.
HOW TO INVEST
ALTERNATIVE PURCHASE ARRANGEMENTS
Each Fund continuously offers through this prospectus Class A and Class B
shares, as described more fully in "How to Buy Shares of the Funds." If you do
not specify in your instructions to the Funds which class of shares you wish
to purchase, the Funds will assume that your instructions apply to Class A
shares.
CLASS A SHARES. If you invest less than $1 million in Class A shares you
will pay an initial sales charge. Certain purchases may qualify for reduced
initial sales charges. If you invest $1 million or more in Class A shares of a
Fund, no sales charge will be imposed at the time of purchase, but you will
incur a deferred sales charge equal to 1.00% if you redeem your shares within
18 months of purchase. Class A shares are subject to distribution fees of up
to 0.25% (which currently is being waived in the case of Balanced, Growth and
Income, Capital Growth and Small Cap Equity Funds and limited to 0.21% for the
Select Equity, International Equity and Asia Growth Funds) and authorized
dealer service fees of up to 0.25%, respectively, of each Fund's average daily
net assets attributable to Class A shares.
32
<PAGE>
CLASS B SHARES. Class B shares are sold without an initial sales charge, but
are subject to a contingent deferred sales charge ("CDSC") of up to 5% if
redeemed within six years of purchase. Class B shares are subject to
distribution and authorized dealer service fees of up to 0.75% and 0.25%,
respectively, of each Fund's average daily net assets attributable to Class B
shares. See "Distribution and Authorized Dealer Service Plans." Your entire
investment in Class B shares is available to work for you from the time you
make your initial investment, but the distribution fee paid by Class B shares
will cause your Class B shares (until conversion to Class A shares) to have a
higher expense ratio and to pay lower dividends, to the extent dividends are
paid, than Class A shares. Class B shares will automatically convert to Class
A shares, based on their relative net asset values, eight years after the
initial purchase.
FACTORS TO CONSIDER IN CHOOSING CLASS A OR CLASS B SHARES. The decision as
to which class to purchase depends on the amount you invest, the intended
length of the investment and your personal situation. For example, if you are
making an investment of $50,000 or more that qualifies for a reduced sales
charge, you should consider purchasing Class A shares. A brief description of
when the initial sales charge may be reduced or eliminated is set forth below
under "Right of Accumulation" and "Statement of Intention." If you prefer not
to pay an initial sales charge on an investment, you might consider purchasing
Class B shares.
HOW TO BUY SHARES OF THE FUNDS--CLASS A AND CLASS B SHARES
You may purchase shares of the Funds through any Authorized Dealer
(including Goldman Sachs) or directly from a Fund, c/o National Financial Data
Services, Inc. ("NFDS"), P.O. Box 419711, Kansas City, MO 64141-6711 on any
Business Day (as defined under "Additional Information") at the net asset
value next determined after receipt of an order, plus, in the case of Class A
shares, any applicable sales charge. If, by the close of regular trading on
the New York Stock Exchange (currently 4:00 p.m. New York time), a purchase
order is received by a Fund, Goldman Sachs or an Authorized Dealer, the price
per share will be based on the net asset value computed on the day the
purchase order is received.
The minimum initial investment in each Fund is $1,500. An initial investment
minimum of $250 applies to purchases in connection with Individual Retirement
Account Plans. For purchases through the Automatic Investment Plan, the
minimum initial investment is $50. The minimum subsequent investment is $50.
These requirements may be waived at the discretion of the Company's officers.
You may pay for purchases of shares by check (except that a check drawn on a
foreign bank or a third party check will not be accepted), Federal Reserve
draft, Federal Funds wire, ACH transfer or bank wire. Purchases of shares by
check or Federal Reserve draft should be made payable as follows: (i) to an
investor's Authorized Dealer, if purchased through such Authorized Dealer, or
(ii) to Goldman Sachs Equity Portfolios, Inc.--(Name of Fund and Class of
shares) and sent to NFDS, P.O. Box 419711, Kansas City, MO 64141-6711. Federal
Funds wires, ACH transfers and bank wires should be sent to State Street Bank
and Trust Company ("State Street"). Payment must be received within three
Business Days after receipt of the purchase order. An investor's Authorized
Dealer is responsible for forwarding payment promptly to the Fund.
In order to make an initial investment in a Fund, an investor must establish
an account with the Fund by furnishing to the Fund, Goldman Sachs or the
investor's Authorized Dealer the information in the Account Application
attached to this Prospectus. The Fund may refuse to open an account for any
investor who fails to (1) provide a social security number or other taxpayer
identification number, or (2) certify that such number is correct (if required
to do so under applicable law).
33
<PAGE>
The Funds reserve the right to redeem shares of any shareholder whose
account balance is less than $50 as a result of earlier redemptions. Such
redemptions will not be implemented if the value of a shareholder's account
falls below the minimum account balance solely as a result of market
conditions. A Fund will give sixty (60) days' prior written notice to
shareholders whose shares are being redeemed to allow them to purchase
sufficient additional shares of the Fund to avoid such redemption. In
addition, the Funds and Goldman Sachs reserve the right to modify the minimum
investment, the manner in which shares are offered and the sales charge rates
applicable to future purchases of shares.
OFFERING PRICE--CLASS A SHARES
The offering price of Class A shares of each Fund is the next determined net
asset value per share plus a sales charge, if any, paid to Goldman Sachs at
the time of purchase of shares as shown in the following table:
<TABLE>
<CAPTION>
SALES CHARGE MAXIMUM DEALER
SALES CHARGE AS AS PERCENTAGE ALLOWANCE AS
AMOUNT OF PURCHASE PERCENTAGE OF OF NET AMOUNT PERCENTAGE OF
INCLUDING SALES CHARGE, IF ANY)( OFFERING PRICE INVESTED OFFERING PRICE
- -------------------------------- --------------- ------------- --------------
<S> <C> <C> <C>
Less than $50,000.............................. 5.50% 5.82% 5.00%
$50,000 up to (but less than) $100,000......... 4.75 4.99 4.00
$100,000 up to (but less than) $250,000........ 3.75 3.90 3.00
$250,000 up to (but less than) $500,000........ 2.75 2.83 2.25
$500,000 up to (but less than) $1 million...... 2.00 2.04 1.75
$1 million or more............................. 0.00* 0.00* **
</TABLE>
- --------
* No sales charge is payable at the time of purchase of Class A shares of $1
million or more, but a CDSC may be imposed in the event of certain
redemption transactions made within 18 months of purchase.
** Goldman Sachs pays a one-time commission to Authorized Dealers who initiate
or are responsible for purchases of $1 million or more of shares of the
Funds equal to 1.00% of the amount under $3 million, 0.50% of the next $2
million, and 0.25% thereafter.
Purchases of $1 million or more of Class A shares will be made at net asset
value with no initial sales charge, but if the shares are redeemed within 18
months after the end of the calendar month in which the purchase was made (the
contingent deferred sales charge period), a CDSC of 1.00% will be imposed. Any
applicable CDSC will be assessed on an amount equal to the lesser of the
current market value or the original purchase cost of the redeemed Class A
shares. Accordingly, no CDSC will be imposed on increases in account value
above the initial purchase price, including any dividends which have been
reinvested in additional Class A shares. In determining whether a CDSC applies
to a redemption, the calculation will be determined in a manner that results
in the lowest possible rate being charged. Therefore, it will be assumed that
the redemption is first made from any Class A shares in your account that are
not subject to the CDSC. The CDSC is waived on redemptions in certain
circumstances. See "Waiver or Reduction of Contingent Deferred Sales Charges"
below.
Class A shares of the Funds may be sold at net asset value without payment
of any sales charge to (a) Goldman Sachs, its affiliates or their respective
officers, partners, directors or employees (including retired employees and
former partners), any partnership of which Goldman Sachs is a general partner,
any Director or officer of the Company and designated family members of any of
the above individuals; (b) qualified retirement plans of Goldman Sachs; (c)
trustees or directors of investment companies for which Goldman Sachs or an
affiliate acts as sponsor; (d) any employee or registered representative of
any Authorized Dealer or their respective spouses and children; (e) banks,
trust companies or other types of depository institutions investing for
34
<PAGE>
their own account or investing for accounts for which they have investment
discretion; (f) banks, trust companies or other types of depository
institutions investing for accounts for which they do not have investment
discretion, provided they have entered into an agreement with GSAM specifying
aggregate minimums and certain operating policies and standards; (g) any
state, county or city, or any instrumentality, department, authority or agency
thereof, which is prohibited by applicable investment laws from paying a sales
charge or commission in connection with the purchase of shares of a Fund; (h)
pension and profit sharing plans, pension funds and other company-sponsored
benefit plans having either 200 eligible employees or at least $1,000,000
under management with GSAM and its affiliates; (i) shareholders whose purchase
is attributable to redemption proceeds (subject to appropriate documentation)
from a registered open-end management investment company not distributed or
managed by Goldman Sachs or its affiliates, if such redemption has occurred no
more than 60 days prior to the purchase of shares of the Funds and the
shareholder either (1) paid an initial sales charge or (2) was at some time
subject to a deferred sales charge with respect to the redemption proceeds;
(j) "wrap" accounts for the benefit of clients of broker-dealers, financial
institutions or financial planners, provided that they have entered into an
agreement with GSAM specifying aggregate minimums and certain operating
policies and standards; (k) registered investment advisers who have entered
into an agreement with GSAM specifying aggregate minimums and certain
operating policies and standards; and (l) accounts over which GSAM or its
advisory affiliates have investment discretion. Purchasers must certify
eligibility for an exemption on the Account Application and notify Goldman
Sachs if the shareholder is no longer eligible for an exemption. Exemptions
will be granted subject to confirmation of a purchaser's entitlement.
Investors purchasing shares of the Funds at net asset value without payment of
any initial sales charge may be charged a fee if they effect transactions in
shares through a broker or agent. In addition, under certain circumstances,
dividends and distributions from any of the Goldman Sachs Portfolios may be
reinvested in shares of each Fund at net asset value, as described under
"Cross-Reinvestment of Dividends and Distributions and Automatic Exchange
Program."
REINVESTMENT OF REDEMPTION PROCEEDS--CLASS A SHARES
A shareholder who redeems Class A shares of a Fund may reinvest at net asset
value any portion or all of his redemption proceeds (plus that amount
necessary to acquire a fractional share to round off his purchase to the
nearest full share) in Class A shares of a Fund or of any other Goldman Sachs
Portfolio. Shareholders should obtain and read the applicable prospectuses of
such other funds and consider their objectives, policies and applicable fees
before investing in any of such funds. This reinvestment privilege is subject
to the condition that the shares redeemed have been held for at least thirty
(30) days before the redemption and that the reinvestment is effected within
ninety (90) days after such redemption. If you paid a CDSC upon a redemption
and reinvest in Class A shares subject to the conditions set forth above, your
account will be credited with the amount of the CDSC previously charged, and
the reinvested shares will continue to be subject to a CDSC. The holding
period of the Class A shares acquired through reinvestment for purposes of
computing the CDSC payable upon a subsequent redemption will include the
holding period of the redeemed shares. Shares are sold to a reinvesting
shareholder at the net asset value next determined following timely receipt by
Goldman Sachs or an Authorized Dealer of a written purchase order indicating
that the shares are eligible for reinvestment at net asset value.
A reinvesting shareholder may realize a gain or loss for federal tax
purposes as a result of such redemption. If the redemption occurs within
ninety (90) days after the original purchase of the Class A shares, any sales
charge paid on the original purchase cannot be taken into account by a
shareholder reinvesting at net asset value pursuant to the reinvestment
privilege for purposes of determining gain or loss realized on the redemption,
but instead will be added to the tax basis of the Class A shares received in
the reinvestment. To the extent that any loss is realized and shares of the
same Fund are purchased within thirty (30) days before or after the
redemption,
35
<PAGE>
some or all of the loss may not be allowed as a deduction depending upon the
number of shares purchased. Shareholders should consult their own tax advisers
concerning the tax consequences of a reinvestment. Upon receipt of a written
request, the reinvestment privilege may be exercised once annually by a
shareholder, except that there is no such time limit as to the availability of
this privilege in connection with transactions the sole purpose of which is to
reinvest the proceeds at net asset value in a tax-sheltered retirement plan.
RIGHT OF ACCUMULATION--CLASS A SHARES
Class A purchasers may qualify for reduced sales charges when the current
market value of holdings (shares at current offering price), plus new
purchases, reaches $50,000 or more. Class A shares of the Goldman Sachs
Portfolios may be combined under the Right of Accumulation. See Additional
Statement for more information about the Right of Accumulation.
STATEMENT OF INTENTION--CLASS A SHARES
Purchases of $50,000 or more made over a 13-month period are eligible for
reduced sales charges. Class A shares of the Goldman Sachs Portfolios may be
combined under the Statement of Intention. See the Additional Statement for
more information about the Statement of Intention.
OFFERING PRICE--CLASS B SHARES
Investors may purchase Class B shares of the Funds at the next determined
net asset value without the imposition of an initial sales charge. However,
Class B shares redeemed within six years of purchase will be subject to a CDSC
at the rates shown in the table that follows. At redemption, the charge will
be assessed on the amount equal to the lesser of the current market value or
the original purchase cost of the shares being redeemed. No CDSC will be
imposed on increases in account value above the initial purchase price,
including shares derived from the reinvestment of dividends or capital gains
distributions.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of purchase until the time of redemption of Class B shares. For
the purpose of determining the number of years from the time of any purchase,
all payments during a month will be aggregated and deemed to have been made on
the first day of that month. In processing redemptions of Class B shares, the
Funds will first redeem shares not subject to any CDSC, and then shares held
longest during the eight-year period. As a result, a redeeming shareholder
will pay the lowest possible CDSC.
<TABLE>
<CAPTION>
CDSC AS A
PERCENTAGE OF
YEAR SINCE DOLLAR AMOUNT
PURCHASE SUBJECT TO CDSC
---------- ---------------
<S> <C>
First........................................................ 5.0%
Second....................................................... 4.0%
Third........................................................ 3.0%
Fourth....................................................... 3.0%
Fifth........................................................ 2.0%
Sixth........................................................ 1.0%
Seventh and thereafter....................................... none
</TABLE>
Proceeds from the CDSC are payable to the Distributor and may be used in
whole or part to defray the Distributor's expenses related to providing
distribution-related services to the Funds in connection with the sale
36
<PAGE>
of Class B shares, including the payment of compensation to Authorized
Dealers. A commission equal to 4.00% of the amount invested is paid to
Authorized Dealers.
Class B shares of a Fund will automatically convert into Class A shares of
the same Fund at the end of the calendar quarter that is eight years after the
purchase date, except as noted below. Class B shares of a Fund acquired by
exchange from Class B shares of another Fund will convert into Class A shares
of such Fund based on the date of the initial purchase. Class B shares
acquired through reinvestment of distributions will convert into Class A
shares based on the date of the initial purchase of the shares on which the
distribution was paid. The conversion of Class B shares to Class A shares is
subject to the continuing availability of a ruling from the Internal Revenue
Service, for which the Funds will apply, or an opinion of counsel that such
conversions will not constitute taxable events for Federal tax purposes. There
can be no assurance that such ruling or opinion will be available. The
conversion of Class B shares to Class A shares will not occur if such ruling
or opinion is not available and, therefore, Class B shares would continue to
be subject to higher expenses than Class A shares for an indeterminate period.
WAIVER OR REDUCTION OF CONTINGENT DEFERRED SALES CHARGE. The CDSC on Class B
shares and Class A shares that are subject to a CDSC may be waived or reduced
if the redemption results from the death or disability (as defined in Section
72 of the Code) of a shareholder if the redemption is made within one year of
such event. In addition, Class A and Class B shares subject to a Systematic
Withdrawal Plan may be redeemed without a CDSC. However, Goldman Sachs
reserves the right to limit such redemptions, on an annual basis, to 12% of
the value of your Class B shares and 10% of the value of your Class A shares.
SERVICES AVAILABLE TO SHAREHOLDERS
AUTOMATIC INVESTMENT PLAN
Systematic cash investments may be made through a shareholder's bank via the
Automated Clearing House Network or a shareholder's checking account via bank
draft each month. Required forms are available from Goldman Sachs or any
Authorized Dealer.
CROSS-REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS AND AUTOMATIC EXCHANGE
PROGRAM
A shareholder may elect to cross-reinvest dividends and capital gain
distributions paid by a Fund in shares of the same class or an equivalent
class of any other Goldman Sachs Portfolio or ILA Portfolio. See "Fund
Highlights." Shareholders may also elect to exchange automatically a specified
dollar amount of shares of a Fund for shares of the same class or an
equivalent class of any other Goldman Sachs Portfolio or ILA Portfolio. Shares
acquired through cross-reinvestment of dividends or the automatic exchange
program will be purchased at net asset value and will not be subject to any
initial or contingent deferred sales charge as a result of the cross-
reinvestment or exchange, but shares subject to a CDSC acquired under the
automatic exchange program may be subject to a CDSC at the time of redemption
from the Fund into which the exchange is made determined on the basis of the
date and value of the investor's initial purchase of the fund from which the
exchange (or any prior exchange) is made. Automatic exchanges are made monthly
on the fifteenth day of each month or the first Business Day thereafter. The
minimum dollar amount for automatic exchanges must be at least $50 per month.
Cross-reinvestments and automatic exchanges are subject to the following
conditions: (i) the value of the shareholder's account(s) in the fund which is
paying the dividend or from which the automatic exchange is being made must
37
<PAGE>
equal or exceed $10,000 and (ii) the value of the account in the acquired fund
must equal or exceed the acquired fund's minimum initial investment
requirement or the shareholder must elect to continue cross-reinvestment or
automatic exchanges until the value of acquired fund shares in the
shareholder's account equals or exceeds the acquired fund's minimum initial
investment requirement. A Fund shareholder may elect cross-reinvestment into
an identical account or an account registered in a different name or with a
different address, social security or other taxpayer identification number,
provided that the account in the acquired fund has been established,
appropriate signatures have been obtained and the minimum initial investment
requirement has been satisfied. A Fund shareholder should obtain and read the
prospectus of the Fund into which dividends are invested or automatic
exchanges are made.
TAX-SHELTERED RETIREMENT PLANS
The Funds offer their shares for purchase by retirement plans, including IRA
Plans for individuals and their non-employed spouses and defined contribution
plans such as 401(k) Salary Reduction Plans. Detailed information concerning
these plans and copies of the plans may be obtained from the Transfer Agent.
This information should be read carefully, and consultation with an attorney
or tax adviser may be advisable. The information sets forth the service fee
charged for retirement plans and describes the federal income tax consequences
of establishing a plan. Under all plans, dividends and distributions will be
automatically reinvested in additional shares of the same class of the Fund
or, if so directed by the shareholder, in cash or in shares of the same class
or an equivalent class of any other Goldman Sachs Portfolio or ILA Portfolio.
EXCHANGE PRIVILEGE
Shares of a Fund may be exchanged at net asset value without the imposition
of an initial or contingent deferred sales charge at the time of exchange for
shares of the same class or an equivalent class of any other Fund, Goldman
Sachs Portfolio or ILA Portfolio. A shareholder needs to obtain and read the
prospectus of the fund into which the exchange is made. The shares or units of
these other funds acquired by an exchange may later be exchanged for shares of
the same (or an equivalent class) of the original Fund at the next determined
net asset value without the imposition of an initial or contingent deferred
sales charge if the dollar amount in the Fund resulting from such exchanges is
below the shareholder's all-time highest dollar amount on which it has
previously paid the applicable sales charge. Shares or units of these other
funds purchased through dividends and/or capital gains reinvestment may be
exchanged for shares of the Funds without a sales charge. In addition to free
automatic exchanges pursuant to the Automatic Exchange Program, six free
exchanges are permitted in each twelve-month period. A fee of $12.50 may be
charged for each subsequent exchange during such period. The exchange
privilege may be modified or withdrawn at any time upon sixty (60) days'
notice to shareholders and is subject to certain limitations.
An exchange of shares subject to a CDSC will not be subject to the
applicable CDSC at the time of exchange. Shares subject to a CDSC acquired in
an exchange will be subject to the CDSC of the shares originally held. For
purposes of determining the amount of any applicable CDSC, the length of time
a shareholder had owned shares will be measured from the date the shareholder
acquired the original shares subject to a CDSC and will not be affected by any
subsequent exchange.
An exchange may be made by identifying the applicable Fund and class of
shares and either writing to Goldman Sachs, Attention: Goldman Sachs Equity
Portfolios, Inc., Shareholder Services, c/o NFDS, P.O. Box 419711, Kansas
City, MO 64141-6711 or, if previously elected in the Fund's Account
Application, by telephone at 800-526-7384 (8:00 a.m. to 3:00 p.m. Chicago
time). Certain procedures are employed to prevent unauthorized
38
<PAGE>
or fraudulent exchange requests as set forth under "How to Sell Shares of the
Funds." Under the telephone exchange privilege, shares may be exchanged among
accounts with different names, addresses and social security or other taxpayer
identification numbers only if the exchange request is in writing and is
received in accordance with the procedures set forth under "How to Sell Shares
of the Funds." In times of drastic economic or market changes the telephone
exchange privilege may be difficult to implement.
For federal income tax purposes, an exchange, including an automatic
exchange, is treated as a sale of the shares surrendered in the exchange, on
which an investor may realize a gain or loss, followed by a purchase of shares
or units received in the exchange. If such sale occurs within ninety (90) days
after the purchase of such shares, to the extent a sales charge that would
otherwise apply to the shares or units received in the exchange is not
imposed, the sales charge paid on such purchase of Class A shares cannot be
taken into account by the exchanging shareholder for purposes of determining
gain or loss realized on such sale for federal income tax purposes, but
instead will be added to the tax basis of the shares or units received in the
exchange. Shareholders should consult their own tax advisers concerning the
tax consequences of an exchange.
All exchanges which represent an initial investment in a Fund must satisfy
the minimum investment requirements of the Fund into which the shares are
being exchanged. Exchanges are available only in states where exchanges may
legally be made.
OTHER PURCHASE INFORMATION
If shares of a Fund are held in a "street name" account or were purchased
through an Authorized Dealer, shareholders should contact the Authorized
Dealer to purchase, redeem or exchange shares, to make changes in or give
instructions concerning the account or to obtain information about the
account. Authorized Dealers who receive a portion of the sales charge
applicable to the purchase of Class A or Class B shares will not be permitted
to impose any other fees on the shareholders in connection with the purchase
of such shares.
The Funds and Goldman Sachs each reserves the right to reject any specific
purchase order (including exchanges) or to restrict purchases or exchanges by
a particular purchaser (or group of related purchasers). The Funds or Goldman
Sachs may reject or restrict purchases or exchanges of shares by a particular
purchaser or group, for example, when a pattern of frequent purchases and
sales of shares of a Fund is evident, or if the purchase and sale or exchange
orders are, or a subsequent abrupt redemption might be, of a size that would
disrupt management of a Fund. Goldman Sachs reserves the right to limit the
participation in the Fund of its partners and employees.
In addition to concessions allowed to Authorized Dealers, Goldman Sachs may,
from time to time, assist Authorized Dealers by, among other things, providing
sales literature to and holding informational programs for the benefit of
Authorized Dealers' registered representatives. Authorized Dealers may limit
the participation of registered representatives in such informational programs
by means of sales incentive programs which may require the sale of minimum
dollar amounts of shares of the Goldman Sachs Portfolios. Goldman Sachs may
also provide additional promotional incentives to Authorized Dealers in
connection with sales of shares of the Goldman Sachs Portfolios. These
incentives may include payment for travel expenses, including lodging,
incurred in connection with trips taken by qualified registered
representatives and members of their families within or without the United
States. Incentive payments will be provided for out of the sales charge and
distribution fees or out of Goldman Sachs' other resources. Other than sales
charges and distribution fees, a Fund and its shareholders do not bear
distribution expenses. An Authorized Dealer receiving such incentives may be
deemed to be an
39
<PAGE>
underwriter under the 1933 Act. In some instances, such incentives may be made
available only to certain Authorized Dealers whose representatives have sold
or are expected to sell significant amounts of shares.
DISTRIBUTION AND AUTHORIZED DEALER SERVICE PLANS
DISTRIBUTION PLAN--CLASS A SHARES
The Company, on behalf of each Fund's Class A shares, has adopted a
Distribution Plan pursuant to Rule 12b-1 under the Investment Company Act of
1940, as amended (the "Act") (the "Class A Distribution Plan"). Under the
Class A Distribution Plan, Goldman Sachs is entitled to a quarterly fee from
each Fund for distribution services equal, on an annual basis, to 0.25% of a
Fund's average daily net assets attributable to Class A shares of such Fund.
Currently, Goldman Sachs has voluntarily agreed to waive the entire amount of
such fee for the Balanced, Growth and Income, Capital Growth and Small Cap
Equity Funds and to limit the amount of such fee to 0.21% of average daily net
assets attributable to Class A shares of Select Equity, International Equity
and Asia Growth Funds. Goldman Sachs has no current intention of modifying or
discontinuing such waiver, but may do so in the future at its discretion. The
average rate for the fiscal year ended January 31, 1996 paid by the Balanced,
Select Equity, Growth and Income, Capital Growth, Small Cap Equity,
International Equity and Asia Growth Funds to Goldman Sachs was 0.03%, 0.19%,
0.06%, 0.08%, 0.09%, 0.08% and 0.07%, respectively, with respect to each
Fund's Class A shares.
Goldman Sachs may use the distribution fee for its expenses of distributing
of Class A shares of the Funds. The types of expenses for which Goldman Sachs
may be compensated for distribution services under the Class A Distribution
Plan include compensation paid to and expenses incurred by Authorized Dealers,
Goldman Sachs and their respective officers, employees and sales
representatives, allocable overhead, telephone and travel expenses, the
printing of prospectuses for prospective shareholders, preparation and
distribution of sales literature, advertising of any type and all other
expenses incurred in connection with activities primarily intended to result
in the sale of Class A shares. If the fee received by Goldman Sachs pursuant
to the Class A Distribution Plan exceeds its expenses, Goldman Sachs may
realize a profit from these arrangements. The Class A Distribution Plan will
be reviewed and is subject to approval annually by the Board of Directors of
the Company. The aggregate compensation that may be received under the Class A
Distribution Plan for distribution services may not exceed the limitations
imposed by the NASD's Rules of Fair Practice.
DISTRIBUTION PLAN--CLASS B SHARES
The Company, on behalf of each Fund's Class B shares, has adopted a
Distribution Plan pursuant to Rule 12b-1 under the Act (the "Class B
Distribution Plan"). Under the Class B Distribution Plan, Goldman Sachs is
entitled to a quarterly fee from each Fund for distribution services equal, on
an annual basis, to 0.75% of a Fund's average daily net assets attributable to
Class B shares of such Fund.
Goldman Sachs may use the distribution fee for its expenses of distributing
Class B shares of the Funds. The types of expenses for which Goldman Sachs may
be compensated for distribution services under the Class B Distribution Plan
include compensation paid to and expenses incurred by Authorized Dealers,
Goldman Sachs and their respective officers, employees and sales
representatives, commissions paid to Authorized Dealers, allocable overhead,
telephone and travel expenses, the printing of prospectuses for prospective
shareholders, preparation and distribution of sales literature, advertising of
any type and all other expenses incurred in connection with activities
primarily intended to result in the sale of Class B shares. If the fee
received by Goldman Sachs pursuant to the
40
<PAGE>
Class B Distribution Plan exceeds its expenses, Goldman Sachs may realize a
profit from these arrangements. The Class B Distribution Plan will be reviewed
and is subject to approval annually by the Board of Directors of the Company.
The aggregate compensation that may be received under the Class B Distribution
Plan for distribution services may not exceed the limitations imposed by the
NASD's Rules of Fair Practice.
AUTHORIZED DEALER SERVICE PLANS
The Company on behalf of each Fund's Class A and Class B shares has adopted
non-Rule 12b-1 Authorized Dealer Service Plans (each a "Service Plan")
pursuant to which Goldman Sachs and Authorized Dealers are compensated for
providing personal and account maintenance services. Each Fund pays a fee
under its Class A or Class B Service Plan equal on an annual basis to 0.25% of
its average daily net assets attributable to Class A or Class B shares. The
fee for personal and account maintenance services paid pursuant to a Service
Plan may be used to make payments to Goldman Sachs, Authorized Dealers and
their officers, sales representatives and employees for responding to
inquiries of, and furnishing assistance to, shareholders regarding ownership
of their shares or their accounts or similar services not otherwise provided
on behalf of the Funds. The Service Plans will be reviewed and are subject to
approval annually by the Board of Directors. For the period June 1, 1995
through January 31, 1996, each Fund paid Authorized Dealer service fees at the
foregoing rate for each Funds' Class A shares.
HOW TO SELL SHARES OF THE FUNDS
Each Fund will redeem its shares upon request of a shareholder on any
Business Day at the net asset value next determined after the receipt of such
request in proper form, subject to any applicable contingent deferred sales
charge. See "Net Asset Value." Redemption proceeds will be mailed by check to
a shareholder within three (3) Business Days of receipt of a properly executed
request. If shares to be redeemed were recently purchased by check, a Fund may
delay transmittal of redemption proceeds until such time as it has assured
itself that good funds have been collected for the purchase of such shares.
This may take up to fifteen (15) days. Redemption requests may be made by
writing to or calling the Transfer Agent at the address or telephone number
set forth on the back cover page of this Prospectus or an Authorized Dealer.
A shareholder may request redemptions by telephone if the optional telephone
redemption privilege is elected on the Account Application. It may be
difficult to implement redemptions by telephone in times of drastic economic
or market changes. In an effort to prevent unauthorized or fraudulent
redemption and exchange requests by telephone, Goldman Sachs and NFDS each
employ reasonable procedures specified by the Company to confirm that such
instructions are genuine. Consequently, proceeds of telephone redemption
requests will be sent only to the shareholder's address of record or
authorized bank account designated in the Account Application and exchanges of
shares will be made only to an identical account. Telephone requests will also
be recorded. The Company may implement other procedures from time to time. If
reasonable procedures are not implemented, the Company may be liable for any
loss due to unauthorized or fraudulent transactions. In all other cases,
neither a Fund, the Company nor Goldman Sachs will be responsible for the
authenticity of instructions received by telephone. Proceeds of telephone
redemptions will be mailed to the shareholder's address of record or wired to
the authorized bank account indicated on the Account Application, unless the
shareholder provides written instructions (accompanied by a signature
guarantee) indicating another address.
41
<PAGE>
Written requests for redemptions must be signed by each shareholder with its
signature guaranteed by a bank, a securities broker or dealer, a credit union
having authority to issue signature guarantees, a savings and loan
association, a building and loan association, a cooperative bank, a federal
savings bank or association, a national securities exchange, a registered
securities association or a clearing agency, provided that such institution
satisfies the standards established by the Transfer Agent.
The Funds will also arrange for the proceeds of redemptions effected by any
means to be wired as Federal Funds to the bank account designated in the
shareholder's Account Application. Redemption proceeds will normally be wired
on the next Business Day in Federal Funds (for a total one Business Day delay)
following receipt of a properly executed wire transfer redemption request.
Wiring of redemption proceeds may be delayed one additional Business Day if
the Federal Reserve Bank is closed on the day redemption proceeds would
ordinarily be wired. A transaction fee of $7.50 may be charged for payments of
redemption proceeds by wire. In order to change the bank designated on the
Account Application to receive redemption proceeds, a written request must be
received by the Transfer Agent. This request must be signature guaranteed as
set forth above. Further documentation may be required for executors, trustees
or corporations. Once wire transfer instructions have been given by Goldman
Sachs or an Authorized Dealer, neither a Fund, the Company, Goldman Sachs nor
any Authorized Dealer assumes any further responsibility for the performance
of intermediaries or the shareholder's bank in the transfer process. If a
problem with such performance arises, the shareholder should deal directly
with such intermediaries or bank.
Additional documentation regarding a redemption by any means may be required
to effect a redemption when deemed appropriate by the Transfer Agent. The
request for such redemption will not be considered to have been received in
proper form until such additional documentation has been received.
SYSTEMATIC WITHDRAWAL PLAN
A shareholder may draw on shareholdings systematically via check or ACH in
any amount specified by the shareholder over $50. Checks are only available on
or about the 25th of each month. Each systematic withdrawal is a sale for tax
purposes. A minimum balance of $5,000 in shares of a Fund is required. The
maintenance of a withdrawal plan concurrently with purchases of additional
Class A or Class B shares would be disadvantageous because of the sales charge
imposed on your purchases of Class A shares or the imposition of a CDSC on
your redemptions of Class A and Class B shares. The CDSC applicable to Class A
and Class B shares redeemed under a systematic withdrawal plan may be waived.
See "How to Invest--Waiver or Reduction of Contingent Deferred Sales Charge."
See Additional Statement for more information about the Systematic Withdrawal
Plan.
DIVIDENDS
Each dividend from net investment income and capital gains distribution, if
any, declared by a Fund on its outstanding shares will, at the election of
each shareholder, be paid in (i) cash, (ii) additional shares of the same
class of the Fund or (iii) shares of the same or an equivalent class of any of
the Goldman Sachs Portfolios or units of the ILA Portfolios (the Prime
Obligations Portfolio only for Class B), as described under "Cross-
Reinvestment of Dividends and Distributions and Automatic Exchange Program."
This election should initially be made on a shareholder's Account Application
and may be changed upon written notice to Goldman Sachs at any time prior to
the record date for a particular dividend or distribution. If no election is
made, all dividends from net investment income and capital gain distributions
will be reinvested in the Fund.
42
<PAGE>
The election to reinvest dividends and distributions paid by a Fund in
additional shares or units of the Fund or any other Goldman Sachs Portfolio or
ILA Portfolio will not affect the tax treatment of such dividends and
distributions, which will be treated as received by the shareholder and then
used to purchase shares or units of the Fund, another Goldman Sachs Portfolio
or an ILA Portfolio.
Each Fund intends that all or substantially all of its net investment income
and net realized long-term and short-term capital gains, after reduction by
available capital losses, including any capital losses carried forward from
prior years, will be declared as dividends for each taxable year. The Balanced
and Growth and Income Funds will pay dividends from net investment income
quarterly. Each other Fund will pay dividends from net investment income at
least annually. All of the Funds will pay dividends from net realized long-
term and short-term capital gains, reduced by available capital losses, at
least annually. From time to time, a portion of any Fund's dividends may
constitute a return of capital.
At the time of an investor's purchase of shares of a Fund a portion of the
net asset value per share may be represented by undistributed income of the
Fund or realized or unrealized appreciation of the Fund's portfolio
securities. Therefore, subsequent distributions (or portions thereof) of
taxable income or realized appreciation on such shares may be taxable to the
investor even if the net asset value of the investor's shares is, as a result
of the distributions, reduced below the cost of such shares and the
distributions (or portions thereof) represent a return of a portion of the
purchase price.
NET ASSET VALUE
The net asset value per share of each class of a Fund is calculated by the
Fund's custodian as of the close of regular trading on the New York Stock
Exchange (normally 3:00 p.m. Chicago time, 4:00 p.m. New York time), on each
Business Day (as such term is defined under "Additional Information"). Net
asset value per share of each class is calculated by determining the net
assets attributable to each class and dividing by the number of outstanding
shares of that class. Portfolio securities are valued based on market
quotations or, if accurate quotations are not readily available, at fair value
as determined in good faith under procedures established by the Company's
Board of Directors.
PERFORMANCE INFORMATION
From time to time each Fund may publish average annual total return and the
Balanced and Growth and Income Funds may publish their yield and distribution
rates in advertisements and communications to shareholders or prospective
investors. Average annual total return is determined by computing the average
annual percentage change in value of $1,000 invested at the maximum public
offering price for specified periods ending with the most recent calendar
quarter, assuming reinvestment of all dividends and distributions at net asset
value. The total return calculation assumes a complete redemption of the
investment at the end of the relevant period. Total return calculations for
Class A shares reflect the effect of paying the maximum initial sales charge.
Investment at a lower sales charge would result in higher performance figures.
Total return calculations for Class
43
<PAGE>
B shares reflect deduction of the applicable CDSC imposed upon redemption of
Class B 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 net asset value. Any
performance data which is based on a Fund's net asset value 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 performance rankings and indices.
The Balanced and Growth and Income Funds compute their yield by dividing net
investment income earned during a recent thirty-day period by the product of
the average daily number of shares outstanding and entitled to receive
dividends during the period and the maximum offering price per share on the
last day of the relevant period. The results are compounded on a bond
equivalent (semi-annual) basis and then annualized. Net investment income per
share is equal to the dividends and interest earned during the period, reduced
by accrued expenses for the period. The calculation of net investment income
for these purposes may differ from the net investment income determined for
accounting purposes. The Balanced and Growth and Income Funds' quotations of
distribution rate are calculated by annualizing the most recent distribution
of net investment income for a monthly, quarterly or other relevant period and
dividing this amount by the net asset value per share on the last day of the
period for which the distribution rates are being calculated.
Each Fund's yield, total return and distribution rate will be calculated
separately for each class of shares in existence. Because each class of shares
may be subject to different expenses, the yield, total return and distribution
rate calculations with respect to each class of shares for the same period
will differ. The investment performance of the Class A and Class B shares will
be affected by the payment of a sales charge and distribution fees. See
"Shares of the Company" below.
The investment results of a Fund will fluctuate over time and any
presentation of investment results for any prior period should not be
considered a representation of what an investment may earn or what the Fund's
performance may be in any future period. In addition to information provided
in shareholder reports, the Funds may, in their discretion, from time to time,
make a list of their holdings available to investors upon request.
SHARES OF THE COMPANY
Each Fund is a series of the Company, which was incorporated under the laws
of the State of Maryland on September 27, 1989. The authorized capital stock
of the Company consists of 2,000,000,000 shares of common stock, par value of
$.001 per share. The Directors of the Company have authority under the
Company's Charter to create and classify shares of capital stock in separate
series, without further action by shareholders. Additional series may be added
in the future. The Directors also have authority to classify and reclassify
any series or portfolio of shares into one or more classes. The Select Equity,
Growth and Income, International Equity and Asia Growth Funds offer four
classes of shares: Institutional Shares, Service Shares and the shares offered
by this Prospectus which are designated as Class A shares or Class B shares.
The Balanced, Capital Growth and Small Cap Equity Funds offer Class A shares
and Class B shares.
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 Fund available for distribution to such shareholders. All
shares
44
<PAGE>
entitle their holders to one vote per share, are freely transferable and have
no preemptive, subscription or conversion rights.
Unless otherwise required by the Act, ordinarily it will not be necessary
for the Company to hold annual meetings of shareholders. As a result,
shareholders may not consider each year the election of Directors or the
appointment of independent accountants. However, pursuant to the Company's By-
Laws, the recordholders of at least 10% of the shares outstanding and entitled
to vote at a special meeting may require the Company to hold such special
meeting of shareholders for any purpose and recordholders may, under certain
circumstances as permitted by the Act, communicate with other shareholders in
connection with requiring a special meeting of shareholders. Shareholders of
the Company may remove a Director by the affirmative vote of a majority of the
Company's outstanding voting shares. The Board of Directors, however, will
call a special meeting of shareholders for the purpose of electing Directors
if, at any time, less than a majority of Directors holding office at the time
were elected by shareholders.
In the interest of economy and convenience, the Company 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.
TAXATION
FEDERAL TAXES
Each Fund is treated as a separate entity for tax purposes, has elected to
be treated as a regulated investment company and intends to continue to
qualify for such treatment for each taxable year under Subchapter M of the
Code. To qualify as such, a Fund must satisfy certain requirements relating to
the sources of its income, diversification of its assets and distribution of
its income to shareholders. As a regulated investment company, a Fund will not
be subject to federal income or excise tax on any net investment income and
net realized capital gains that are distributed to its shareholders in
accordance with certain timing requirements of the Code.
Dividends paid by a Fund from net investment income, certain net realized
foreign exchange gains, the excess of net short-term capital gain over net
long-term capital loss and original issue discount or market discount income
will be taxable to shareholders as ordinary income. Dividends paid by a Fund
from the excess of net long-term capital gain over net short-term capital loss
will be taxable as long-term capital gains regardless of how long the
shareholders have held their shares. These tax consequences will apply
regardless of whether distributions are received in cash or reinvested in
shares. A Fund's dividends that are paid to its corporate shareholders from
qualifying dividends such Fund receives from U.S. domestic corporations may be
eligible, in the hands of such corporate shareholders, for the corporate
dividends-received deduction, subject to certain holding period requirements
and debt financing limitations under the Code. Dividends paid by International
Equity Fund and Asia Growth Fund are not generally expected to qualify, in the
hands of corporate shareholders, for the corporate dividends-received
deduction, but a portion of each other Fund's dividends may generally so
45
<PAGE>
qualify. A Fund's investment in zero coupon securities may require the Fund to
sell certain of its portfolio securities to generate sufficient cash to
satisfy certain income distribution requirements. Certain distributions paid
by a Fund in January of a given year may be taxable to shareholders as if
received the prior December 31. Shareholders will be informed annually about
the amount and character of distributions received from the Funds for federal
income tax purposes.
Investors should consider the tax implications of buying shares immediately
prior to a distribution. Investors who purchase shares shortly before the
record date for a distribution will pay a per share price that includes the
value of the anticipated distribution and will be taxed on the distribution
even though the distribution represents a return of a portion of the purchase
price.
Redemptions and exchanges of shares are taxable events on which a
shareholder may recognize a gain or loss.
Individuals and certain other classes of shareholders may be subject to 31%
backup withholding of federal income tax on distributions, redemptions and
exchanges if they fail to furnish their correct taxpayer identification number
and certain certifications required by the Internal Revenue Service or if they
are otherwise subject to backup withholding. Individuals, corporations and
other shareholders that are not U.S. persons under the Code are subject to
different tax rules and may be subject to nonresident alien withholding at the
rate of 30% (or a lower rate provided by an applicable tax treaty) on amounts
treated as ordinary dividends from the Funds.
Each Fund may be subject to foreign withholding or other foreign taxes on
income or gain from certain foreign securities. The Funds do not anticipate
that they will elect to pass such foreign taxes through to their shareholders,
who therefore will generally not take such taxes into account on their own tax
returns. The Funds will generally deduct such taxes in determining the amounts
available for a distribution to shareholders.
OTHER TAXES
In addition to federal taxes, a shareholder may be subject to state, local
or foreign taxes on payments received from the Funds. A state income (and
possibly local income and/or intangible property) tax exemption is generally
available to the extent (if any) a Fund's distributions are derived from
interest on (or, in the case of intangibles taxes, the value of its assets is
attributable to) certain U.S. Government obligations, provided in some states
that certain thresholds for holdings of such obligations and/or reporting
requirements are satisfied. For a further discussion of certain tax
consequences of investing in shares of the Funds, see "Taxation" in the
Additional Statement. Shareholders are urged to consult their own tax advisers
regarding specific questions as to federal, state and local taxes as well as
to any foreign taxes.
ADDITIONAL INFORMATION
The term "a vote of the majority of the outstanding shares" of a Fund means
the vote of the lesser of (i) 67% or more of the shares present at a meeting,
if the holders of more than 50% of the outstanding shares of the Fund are
present or represented by proxy, or (ii) more than 50% of the outstanding
shares of the Fund.
As used in this Prospectus, the term "Business Day" means any day the New
York Stock Exchange is open for trading, which is Monday through Friday except
for holidays. The New York Stock Exchange is closed on the following holidays:
New Year's Day (observed), Presidents' Day (observed), Good Friday, Memorial
Day (observed), Independence Day, Labor Day, Thanksgiving Day and Christmas
Day.
46
<PAGE>
APPENDIX
STATEMENT OF INTENTION
(APPLICABLE ONLY TO CLASS A SHARES PURCHASED SUBJECT TO A SALES CHARGE)
If a shareholder anticipates purchasing $50,000 or more of Class A shares of
a Fund alone or in combination with Class A shares of another Fund or another
Goldman Sachs Portfolio within a 13-month period, the shareholder may obtain
shares of the Fund at the same reduced sales charge as though the total
quantity were invested in one lump sum by filing this Statement of Intention
incorporated by reference in the Account Application. Income dividends and
capital gain distributions taken in additional shares will apply toward the
completion of this Statement of Intention.
To ensure that the reduced price will be received on future purchases, the
investor must inform Goldman, Sachs & Co. that this Statement of Intention is
in effect each time shares are purchased. Subject to the conditions mentioned
below, each purchase will be made at the public offering price applicable to a
single transaction of the dollar amount specified on the Account Application.
The investor makes no commitment to purchase additional shares, but if his
purchases within 13 months plus the value of shares credited toward completion
do not total the sum specified, he will pay the increased amount of the sales
charge prescribed in the Escrow Agreement.
ESCROW AGREEMENT
Out of the initial purchase (or subsequent purchases if necessary) 5% of the
dollar amount specified on the Account Application shall be held in escrow by
the Transfer Agent in the form of shares registered in the investor's name.
All income dividends and capital gains distributions on escrowed shares will
be paid to the investor or to his order. When the minimum investment so
specified is completed (either prior to or by the end of the thirteenth
month), the shareholder will be notified and the escrowed shares will be
released. In signing the Account Application, the investor irrevocably
constitutes and appoints the Transfer Agent his attorney to surrender for
redemption any or all escrowed shares with full power of substitution in the
premises.
If the intended investment is not completed, the investor will be asked to
remit to Goldman, Sachs & Co. 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 & Co. pay such
difference in the sales charge, the Transfer Agent will redeem an appropriate
number of the escrowed shares in order to realize such difference. Shares
remaining after any such redemption will be released by the Transfer Agent.
A-1
<PAGE>
- --------------------------------------------------------------------------------
GOLDMAN SACHS ASSET
MANAGEMENT
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
GOLDMAN SACHS FUNDS
MANAGEMENT, L.P.
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
GOLDMAN SACHS ASSET
MANAGEMENT INTERNATIONAL
140 FLEET STREET
LONDON, ENGLAND EC4A 2BJ
GOLDMAN, SACHS & CO.
DISTRIBUTOR
85 BROAD STREET
NEW YORK, NEW YORK 10004
GOLDMAN, SACHS & CO.
TRANSFER AGENT
4900 SEARS TOWER
CHICAGO, ILLINOIS 60606
TOLL FREE (IN U.S.) . . . . . . . . 800-526-7384
EQI/250K/596
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE GOLDMAN SACHS
EQUITY PORTFOLIOS
CLASS A AND B SHARES
- --------------------------------------------------------------------------------
PROSPECTUS
[LOGO]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
PROSPECTUS
May 1, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fund Highlights........................ 3
Fees and Expenses...................... 6
Financial Highlights................... 8
Investment Objectives and Policies..... 11
Description of Securities.............. 14
Investment Techniques.................. 18
Risk Factors........................... 22
Investment Restrictions................ 23
Portfolio Turnover..................... 24
Management............................. 24
Net Asset Value........................ 27
Performance Information................ 28
Shares of the Company.................. 28
Taxation............................... 29
Additional Information................. 30
Reports to Shareholders................ 31
Dividends.............................. 31
Purchase of Institutional Shares....... 32
Exchange Privilege..................... 33
Redemption of Institutional Shares..... 34
Appendix .............................. A-1
Account Information Form
</TABLE>
THE GOLDMAN SACHS EQUITY PORTFOLIOS
INSTITUTIONAL SHARES
GOLDMAN SACHS SELECT EQUITY FUND
Seeks total return through investments
in equity securities consisting of capi-
tal appreciation plus dividend income
that, net of Fund expenses, exceeds the
total return realized on the Standard
and Poor's Index of 500 Common Stocks.
GOLDMAN SACHS GROWTH AND INCOME FUND
Seeks long-term growth of capital and
growth of income through investments in
equity securities that are considered to
have favorable prospects for capital ap-
preciation and/or dividend paying abili-
ty.
GOLDMAN SACHS MID-CAP EQUITY FUND
Seeks long-term capital growth primarily
through investments in equity securities
of companies with public stock market
capitalizations of between $500 million
and $7 billion at the time of invest-
ment.
GOLDMAN SACHS INTERNATIONAL EQUITY FUND
Seeks long-term capital appreciation
through investments in equity securities
of companies that are organized outside
the U.S. or whose securities are princi-
pally traded outside the U.S.
GOLDMAN SACHS ASIA GROWTH FUND
Seeks long-term capital appreciation
through investments in equity securities
of companies related (in the manner de-
scribed herein) to Asian countries.
----------
INSTITUTIONAL SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK OR OTHER INSURED DEPOSITORY INSTITUTION AND
ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN INSTITUTIONAL
SHARES OF THE FUNDS INVOLVES INVESTMENT RISKS INCLUDING POSSIBLE LOSS OF
PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<PAGE>
A FUND'S INVESTMENTS IN SECURITIES OF FOREIGN ISSUERS AND FOREIGN CURRENCIES
ENTAIL CERTAIN RISKS NOT CUSTOMARILY ASSOCIATED WITH INVESTING IN U.S. DOLLAR
DENOMINATED SECURITIES OF U.S. ISSUERS. IN PARTICULAR, THE SECURITIES MARKETS
OF ASIAN AND OTHER EMERGING MARKET COUNTRIES IN WHICH THE ASIA GROWTH AND
INTERNATIONAL EQUITY FUNDS INVEST ARE LESS LIQUID, SUBJECT TO GREATER PRICE
VOLATILITY, HAVE SMALLER MARKET CAPITALIZATIONS, HAVE LESS GOVERNMENT
REGULATION AND ARE NOT SUBJECT TO AS EXTENSIVE AND FREQUENT ACCOUNTING,
FINANCIAL AND OTHER REPORTING REQUIREMENTS AS THE SECURITIES MARKETS OF MORE
DEVELOPED COUNTRIES. THE FUNDS ARE INTENDED FOR INVESTORS WHO CAN ACCEPT THE
RISKS ASSOCIATED WITH SUCH INVESTMENTS AND MAY NOT BE SUITABLE FOR ALL
INVESTORS. SEE "DESCRIPTION OF SECURITIES."
Goldman Sachs Asset Management ("GSAM"), New York, New York, a separate
operating division of Goldman, Sachs & Co. ("Goldman Sachs"), serves as
investment adviser to the Growth and Income, Mid-Cap Equity and International
Equity Funds. Goldman Sachs Funds Management, L.P. ("GSFM"), New York, New
York, an affiliate of Goldman Sachs, serves as investment adviser to the
Select Equity Fund. Goldman Sachs Asset Management International ("GSAMI"),
London, England, an affiliate of Goldman Sachs, serves as investment adviser
to the Asia Growth Fund and subadviser to the International Equity Fund. GSAM,
GSFM and GSAMI are each referred to in this Prospectus as the "Investment
Adviser." GSAM serves as each Fund's administrator and Goldman Sachs serves as
each Fund's distributor and transfer agent.
This Prospectus provides information about the Company and the Funds that a
prospective investor should understand before investing. This Prospectus
should be retained for future reference. A Statement of Additional Information
(the "Additional Statement"), dated May 1, 1996, containing further
information about the Company and the Funds which may be of interest to
investors, has been filed with the Securities and Exchange Commission ("SEC"),
is incorporated herein by reference in its entirety, and may be obtained
without charge from Goldman Sachs by calling the telephone number, or writing
to one of the addresses, listed on the back cover of this Prospectus.
2
<PAGE>
FUND HIGHLIGHTS
The following is intended to highlight certain information contained in
this Prospectus and is qualified in its entirety by the more detailed
information contained herein.
WHAT IS GOLDMAN SACHS EQUITY PORTFOLIOS, INC.?
Goldman Sachs Equity Portfolios, Inc. is an open-end management
investment company that offers its shares in several investment funds
(mutual funds). Each Fund pools the monies of investors by selling its
shares to the public and investing these monies in a portfolio of
securities designed to achieve that Fund's stated investment objectives.
WHAT ARE THE INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS?
Each Fund has distinct investment objectives and policies. There can be
no assurance that a Fund's objectives will be achieved. For a complete
description of each Fund's investment objectives and policies, see
"Investment Objectives and Policies," "Description of Securities" and
"Investment Techniques."
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
FUND NAME INVESTMENT OBJECTIVES INVESTMENT CRITERIA BENCHMARK
------------------------ ----------------------- ---------------------
------------
SELECT EQUITY Total return through At least 90% of total The S&P 500 Index
FUND investments in equity assets in equity
securities consisting of securities. The Fund's
capital appreciation investments are
plus dividend income selected using
that, net of Fund both fundamental
expenses, exceeds the research and a variety
total return realized on of quantitative
the S&P 500 Index. techniques which seek
to maximize the
Fund's reward to risk
ratio.
- ----------------------------------------------------------------------------------------
GROWTH AND Long-term growth of At least 65% of total The S&P 500 Index
INCOME FUND capital and growth of assets in equity
income. securities that the
Investment Adviser
considers to have
favorable prospects for
capital appreciation
and/or dividend paying
ability.
- ----------------------------------------------------------------------------------------
MID-CAP EQUITY Long-term capital At least 65% of total The Russell Midcap
FUND growth. assets in Index
equity securities of
companies ("Mid-Cap
Companies") with public
stock market
capitalizations of
under $5 billion at the
time of investment.
</TABLE>
(continued)
3
<PAGE>
<TABLE>
<S> <C> <C> <C>
FUND NAME INVESTMENT OBJECTIVES INVESTMENT CRITERIA BENCHMARK
------------ ------------------
------------------
------------------
INTERNATIONAL Long-term capital Substantially all, and The FT-Actuaries Europe
EQUITY FUND appreciation. at least 65%, of total and Pacific Index
assets in equity (unhedged)
securities of companies
organized outside
the United States or
whose securities are
principally traded
outside the United
States. The Fund may
invest in securities of
issuers located in
countries with emerging
economies or securities
markets and employ
certain currency
management techniques.
- --------------------------------------------------------------------------------------------
ASIA GROWTH Long-term capital Substantially all, and The (MSCI) Morgan
FUND appreciation. at least 65%, of total Stanley Capital
assets in equity International AC Asia
securities of companies Free ex Japan Index
in China, Hong (unhedged)
Kong, India, Indonesia,
Malaysia, Pakistan, the
Philippines, Singapore,
South Korea, Sri Lanka,
Taiwan and Thailand.
The Fund may employ
certain currency
management techniques.
</TABLE>
- --------------------------------------------------------------------------------
WHAT ARE THE RISK FACTORS AND SPECIAL CHARACTERISTICS THAT I SHOULD CONSIDER
BEFORE INVESTING?
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. There can be no assurance that a Fund's investment objectives will
be achieved. See "Risk Factors."
Risk of Investments in Small to Medium Capitalization Companies. To the
extent that a Fund invests in the securities and related financial
instruments of small to medium sized market capitalization companies, a
Fund may be exposed to a higher degree of risk and price volatility because
such securities may lack sufficient market liquidity to enable the Fund to
effect sales at an advantageous time or without a substantial drop in
price.
Foreign Risks. Investments in securities of foreign issuers and
currencies involve risks that are different from those associated with
investment in domestic securities. The risks of foreign investments and
currencies include changes in relative currency exchange rates, political
and economic developments, the imposition of exchange controls,
confiscation and other governmental restrictions. Generally, there is less
availability of data on foreign companies and securities markets as well as
less regulation of foreign stock exchanges, brokers and issuers. A Fund's
investments in emerging markets and countries involves greater risks than
investments in the developed countries of Western Europe, the U.S. and
Japan. In addition, because the International Equity and Asia Growth Funds
invest primarily outside the U.S., these Funds may involve greater risks,
since the securities markets of foreign countries are generally less liquid
and subject to greater price volatility. In particular, the securities
markets of the developing countries of Asia are marked by 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.
Other. A Fund's use of certain investment techniques, including
derivatives, forward contracts, options and futures will subject the Fund
to greater risk than funds that do not employ such techniques.
4
<PAGE>
WHO MANAGES THE FUNDS?
Goldman Sachs Asset Management acts as administrator to each Fund and
serves as the Investment Adviser to the Growth and Income, Mid-Cap Equity
and International Equity Funds. Goldman Sachs Funds Management, L.P. serves
as Investment Adviser to the Select Equity Fund. Goldman Sachs Asset
Management International serves as Investment Adviser to the Asia Growth
Fund and subadviser to the International Equity Fund. As of March 27, 1996,
the Investment Advisers, together with their affiliates, acted as
investment adviser, administrator or distributor for assets in excess of
$58 billion.
WHO DISTRIBUTES THE FUND'S SHARES?
Goldman Sachs acts as distributor of each Fund's shares.
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $1,000,000 in Institutional Shares of
the Fund alone or in combination with Institutional Shares (or the
corresponding class) of any other mutual fund sponsored by Goldman Sachs
and designated as an eligible fund for this purpose.
HOW DO I PURCHASE INSTITUTIONAL SHARES?
You may purchase Institutional Shares of the Funds through Goldman Sachs.
Institutional Shares are purchased at the current net asset value without
any sales load. See "Purchase of Institutional Shares."
HOW DO I SELL MY INSTITUTIONAL SHARES?
You may redeem Institutional Shares upon request on any Business Day, as
defined under "Additional Information," at the net asset value next
determined after receipt of such request in proper form. See "Redemption of
Institutional Shares."
HOW DO I RECEIVE DIVIDENDS AND DISTRIBUTIONS?
<TABLE>
<CAPTION>
INVESTMENT INCOME DIVIDENDS
--------------------------- CAPITAL GAINS
FUND DECLARED AND PAID DISTRIBUTIONS
- ---- ----------------- -------------
<S> <C> <C>
Select Equity......................... Annually Annually
Growth and Income..................... Quarterly Annually
Mid-Cap Equity........................ Annually Annually
International Equity.................. Annually Annually
Asia Growth........................... Annually Annually
</TABLE>
You may receive dividends in additional shares of the same class of the
Fund in which you have invested or you may elect to receive cash, shares of
the same class of other mutual funds sponsored by Goldman Sachs or the
corresponding class of any portfolio of Goldman Sachs Money Market Trust.
For further information concerning dividends, see "Dividends."
5
<PAGE>
FEES AND EXPENSES
(INSTITUTIONAL SHARES)*
<TABLE>
<CAPTION>
GROWTH
SELECT AND MID-CAP INT'L ASIA
EQUITY INCOME EQUITY EQUITY GROWTH
FUND FUND FUND FUND FUND
------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on Purchases. None None None None None
Maximum Sales Charge Imposed on Reinvested
Dividends................................ None None None None None
Redemption Fees........................... None None None None None
Exchange Fees............................. None None None None None
ANNUAL FUND OPERATING EXPENSES: (as a
percentage of average daily net assets)
Management Fees (including, after
applicable limitations, advisory and
administration fees)**................... 0.59% 0.70% 0.75% 0.86% 0.86%
Distribution (Rule 12b-1) Fees............ None None None None None
Other Expenses (after expense
limitation)**............................ 0.06% 0.15% 0.10% 0.24% 0.24%
---- ---- ---- ---- ----
TOTAL FUND OPERATING EXPENSES (AFTER
EXPENSE LIMITATION)**................... 0.65% 0.85% 0.85% 1.10% 1.10%
==== ==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a hy-
pothetical $1,000 investment, assuming (1) a
5% annual return and (2) redemption at the
end of each time period:
Select Equity Fund............................ $ 7 $21 $36 $ 81
Growth and Income Fund........................ $ 9 $27 $47 $105
Mid-Cap Equity Fund........................... $ 9 $27 N/A N/A
International Equity Fund..................... $11 $35 $61 $134
Asia Growth Fund.............................. $11 $35 $61 $134
</TABLE>
- ---------------------
* The information set forth in the foregoing table and hypothetical example
relates only to Institutional Shares of the Funds. Each Fund also offers
Service Shares and, except for Mid-Cap Equity Fund, Class A and Class B
Shares, which are subject to different fees and expenses (which affect
performance), have different minimum investment requirements and are
entitled to different services. Information regarding Service, Class A and
Class B Shares may be obtained from an investor's sales representative or
from Goldman Sachs by calling the number on the back cover of this
Prospectus.
** Based on estimated amounts for the current fiscal year. The Investment
Advisers and GSAM have voluntarily agreed to limit their advisory and
administration fees to the following (as a percentage of average daily net
assets): Select Equity Fund--0.44% and 0.15%, International Equity Fund--
0.71% and 0.15% and Asia Growth Fund--0.71% and 0.15%. Without such
limitations, the Funds' advisory and administration fees would be: Select
Equity Fund--0.50% and 0.25%, International Equity Fund--0.75% and 0.25%
and Asia Growth Fund--0.75% and 0.25%. The Investment Advisers and GSAM
have also voluntarily agreed to reduce or limit certain "Other Expenses"
of the Funds (excluding transfer agency
6
<PAGE>
fees estimated to be 0.04% of average daily net assets (applicable to the
Growth and Income and Mid-Cap Equity Funds only), advisory and
administration fees and fees under service, distribution and authorized
dealer service plans, taxes, interest and brokerage and litigation,
indemnification and other extraordinary expenses) to 0.06%, 0.11%, 0.06%,
0.24% and 0.24%, respectively, of the Select Equity, Growth and Income,
Mid-Cap Equity, International Equity and Asia Growth Funds' average daily
net assets. The Investment Advisers and GSAM have no current intention of
modifying or discontinuing such limitations but may do so in the future at
their discretion. With regard to the Select Equity, International Equity
and Asia Growth Funds, Goldman Sachs does not impose transfer agency fees
pursuant to its contract with the Funds. If the Investment Advisers,
Goldman Sachs and GSAM did not agree to limit certain "Other Expenses" of
each Fund and to limit the fees of the Select Equity, International Equity
and Asia Growth Funds as described above, the "Other Expenses" and "Total
Operating Expenses" of the Institutional Shares of the Funds would be as
follows: Select Equity Fund--0.22% and 0.97%; Growth and Income Fund--0.11%
and 0.85%; Mid-Cap Equity Fund--0.19% and 0.98%; International Equity
Fund--0.24% and 1.24% and Asia Growth Fund--0.42% and 1.42%, respectively.
The purpose of the foregoing table is to assist investors in understanding
the various fees and expenses of a Fund that an investor in the Funds will
bear directly or indirectly. The costs and expenses included in the table and
hypothetical example above are based on estimated fees and expenses for the
current fiscal year and should not be considered as representative of past or
future expenses. Actual fees and expenses may be greater or less than those
indicated. Moreover, while the example assumes a 5% annual return, a Fund's
actual performance will vary and may result in an actual return greater or
less than 5%. See "Management--Investment Advisers, Subadviser and
Administrator."
7
<PAGE>
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
The following data with respect to a share (of the Class specified) of the
Funds outstanding during the period(s) indicated has been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their report
incorporated by reference into the Additional Statement from the Annual Report
to shareholders for the Funds for the year ended January 31, 1996 (the "Annual
Report"). This information should be read in conjunction with the financial
statements and related notes incorporated by reference and attached to the
Additional Statement. The Annual Report also contains performance information
and is available upon request and without charge by calling the telephone
number or writing to one of the addresses on the back cover of this
Prospectus.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INCOME (LOSS) FROM DISTRIBUTIONS TO
INVESTMENT OPERATIONS SHAREHOLDERS
------------------------------------- -------------------------------------------------------
NET REALIZED FROM NET
AND UNREALIZED TOTAL REALIZED
NET ASSET GAIN (LOSS) ON INCOME GAIN ON TOTAL
VALUE, NET INVESTMENTS, (LOSS) FROM FROM NET INVESTMENT DISTRIBUTIONS
BEGINNING INVESTMENT OPTIONS AND INVESTMENT INVESTMENT AND FUTURES TO
OF PERIOD INCOME FUTURES OPERATIONS INCOME TRANSACTIONS SHAREHOLDERS
--------- ---------- -------------- ----------- ---------- ------------ -------------
SELECT EQUITY FUND
- ---------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED JANUARY 31,
<S> <C> <C> <C> <C> <C> <C> <C>
1996--Class A
Shares.......... $14.61 $0.19 $5.43 $5.62 $(0.16) $(0.41) $(0.57)
1996--Institu-
tional Shares
(f)............. 16.97 0.16 3.23 3.39 (0.24) (0.41) (0.65)
1995--Class A
Shares.......... 15.93 0.20 (0.38) (0.18) (0.20) (0.94) (1.14)
1994--Class A
Shares.......... 15.46 0.17 2.08 2.25 (0.17) (1.61) (1.78)
1993--Class A
Shares.......... 15.05 0.22 0.41 0.63 (0.22) -- (0.22)
<CAPTION>
FOR THE PERIOD MAY 24, 1991(B) THROUGH JANUARY 31,
<S> <C> <C> <C> <C> <C> <C> <C>
1992--Class A
Shares.......... 14.17 0.11 0.88 0.99 (0.11) -- (0.11)
<CAPTION>
NET RATIO OF NET RATIO OF
INCREASE RATIO OF NET ASSETS NET
(DECREASE) NET ASSET NET INVESTMENT AT END RATIO OF INVESTMENT
IN NET VALUE, EXPENSES INCOME PORTFOLIO OF EXPENSES INCOME
ASSET END OF TOTAL TO AVERAGE TO AVERAGE TURNOVER PERIOD TO AVERAGE TO AVERAGE
VALUE PERIOD RETURN(A) NET ASSETS NET ASSETS RATE (IN 000'S) NET ASSETS NET ASSETS
---------- --------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
SELECTED EQUITY FUND
- ------------------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED JANUARY 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996--Class A
Shares.......... $5.05 $19.66 38.63% 1.25% 1.01% 39.35% $129,045 1.55% 0.71%
1996--Institu-
tional Shares
(f)............. 2.74 19.71 20.14(c) 0.65(d) 1.49(d) 39.35(c) 64,829 0.96(d) 1.18(d)
1995--Class A
Shares.......... (1.32) 14.61 (1.10) 1.38 1.33 56.18 94,968 1.63 1.08
1994--Class A
Shares.......... 0.47 15.93 15.12 1.42 0.92 87.73 92,769 1.67 0.67
1993--Class A
Shares.......... 0.41 15.46 4.30 1.28 1.30 144.93 117,757 1.53 1.05
<CAPTION>
FOR THE PERIOD MAY 24, 1991(B) THROUGH JANUARY 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1992--Class A
Shares.......... 0.88 15.05 7.01(c) 1.57(d) 1.24(d) 135.02(d) 151,142 1.82(d) 0.99(d)
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
INCOME (LOSS) FROM DISTRIBUTIONS TO
INVESTMENT OPERATIONS SHAREHOLDERS
------------------------------------ ----------------------------------------------------------
FROM NET
NET REALIZED TOTAL REALIZED
NET ASSET AND UNREALIZED INCOME GAIN ON IN EXCESS
VALUE, NET GAIN ON FROM FROM NET INVESTMENTS OF NET TOTAL
BEGINNING INVESTMENT INVESTMENTS INVESTMENT INVESTMENT AND OPTION INVESTMENT DISTRIBUTIONS TO
OF PERIOD INCOME AND OPTIONS OPERATIONS INCOME TRANSACTIONS INCOME SHAREHOLDERS
--------- ---------- -------------- ---------- ---------- ------------ ---------- ------------------
GROWTH AND INCOME FUND
- -----------------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED JANUARY 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996--Class A
Shares......... $15.80 $0.33 $4.75 $5.08 $(0.30) $(0.60) $ -- $(0.90)
1995--Class A
Shares......... 15.79 0.20(e) 0.30(e) 0.50 (0.20) (0.33) (0.07) (0.60)
<CAPTION>
FOR THE PERIOD FEBRUARY 5, 1993(b) THROUGH JANUARY 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1994--Class A
Shares......... 14.18 0.15 1.68 1.83 (0.15) (0.06) (0.01) (0.22)
<CAPTION>
MID-CAP EQUITY FUND
- -----------------------------------------------------------------------------------------------------------------------------------
FOR THE PERIOD AUGUST 1, 1995(b) THROUGH JANUARY 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996--Institu-
tional Shares.. $15.00 $0.13 $0.90 $1.03 $(0.12) -- -- $(0.12)
<CAPTION>
RATIOS ASSUMING
NO VOLUNTARY WAIVER
OF FEES
OR EXPENSE LIMITATIONS
----------------------
RATIO OF
NET
RATIO OF RATIO OF NET NET INVESTMENT
NET NET ASSET NET INVESTMENT ASSETS AT RATIO OF INCOME
ADDITIONAL INCREASE VALUE, EXPENSES TO INCOME TO PORTFOLIO END OF EXPENSES (LOSS)
PAID-IN IN NET END OF TOTAL AVERAGE NET AVERAGE NET TURNOVER PERIOD TO AVERAGE TO AVERAGE
CAPITAL ASSET VALUE PERIOD RETURN(a) ASSETS ASSETS RATE (IN 000S) NET ASSETS NET ASSETS
----------- ----------- --------- ----------- ------------ ------------ ---------- -------- ---------- ------------
FOR THE YEAR ENDED JANUARY 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996--Class A
Shares...... $ -- $ 4.18 $19.98 32.45% 1.20% 1.67% 57.93% $436,757 1.45% 1.42%
1995--Class A
Shares...... 0.11(e) 0.01 15.80 3.97 1.25 1.28 71.80 193,772 1.58 0.95
<CAPTION>
FOR THE PERIOD FEBRUARY 5, 1993(b) THROUGH JANUARY 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1994--Class A
Shares...... -- 1.61 15.79 13.08(c) 1.25(d) 1.23(d) 102.23(c) 41,528 3.24(d) (0.76)(d)
<CAPTION>
MID-CAP EQUITY FUND
- -----------------------------------------------------------------------------------------------------------------------------------
FOR THE PERIOD AUGUST 1, 1995(b) THROUGH JANUARY 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996--Institu-
tional Shares. -- $ 0.91 $15.91 6.89%(c) 0.85%(d) 1.67%(d) 58.77%(c) $135,671 0.98%(d) 1.54%(d)
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
INCOME (LOSS) FROM INVESTMENT OPERATIONS DISTRIBUTIONS TO SHAREHOLDERS
----------------------------------------------- ------------------------------------------------
NET REALIZED NET REALIZED
AND AND FROM NET
UNREALIZED UNREALIZED TOTAL REALIZED
GAIN (LOSS) GAIN (LOSS) INCOME GAIN ON
NET ASSET NET ON ON FOREIGN (LOSS) IN EXCESS INVESTMENT, TOTAL
VALUE, INVESTMENT INVESTMENTS, CURRENCY FROM FROM NET OF NET OPTION AND DISTRIBUTIONS
BEGINNING INCOME OPTIONS AND RELATED INVESTMENT INVESTMENT INVESTMENT FUTURES TO
OF PERIOD (LOSS) FUTURES TRANSACTIONS OPERATIONS INCOME INCOME TRANSACTIONS SHAREHOLDERS
--------- ---------- ------------ ------------ ---------- ---------- ---------- ------------ -------------
INTERNATIONAL EQUITY FUND
- ----------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED JANUARY 31,
- ------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996--Class A
Shares.......... $14.52 $0.13 $ 2.58 $ 1.42 $ 4.13 $(0.58) -- $(0.87) $(1.45)
1995--Class A
Shares.......... 18.10 0.06 (3.04) (0.01) (2.99) -- -- (0.59) (0.59)
1994--Class A
Shares.......... 14.35 0.05 4.08 (0.38) 3.75 -- -- -- --
<CAPTION>
FOR THE PERIOD DECEMBER 1, 1992(b) THROUGH JANUARY 31,
- ------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1993--Class A
Shares.......... 14.18 (0.01) 0.29 (0.11) 0.17 -- -- -- --
<CAPTION>
ASIA GROWTH FUND
- ----------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED JANUARY 31,
- ------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996--Class A
Shares.......... $13.31 $0.17 $3.44 $(0.12) $ 3.49 $(0.17) $(0.14) -- $(0.31)
<CAPTION>
FOR THE PERIOD JULY 8, 1994(b) THROUGH JANUARY 31,
- --------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995--Class A
Shares.......... 14.18 0.11 (0.89) 0.01 (0.77) (0.10) -- -- (0.10)
<CAPTION>
RATIOS ASSUMING NO
VOLUNTARY WAIVER OF
FEES OR EXPENSE
LIMITATIONS
---------------------
RATIO OF RATIO OF NET RATIO OF
NET NET NET ASSETS RATIO OF NET
INCREASE NET EXPENSES INVESTMENT AT END EXPENSES INVESTMENT
(DECREASE) ASSET TO INCOME OF TO INCOME
IN NET VALUE, AVERAGE (LOSS) TO PORTFOLIO PERIOD AVERAGE (LOSS) TO
ASSET END OF TOTAL NET AVERAGE TURNOVER (IN NET AVERAGE
VALUE PERIOD RETURN(a) ASSETS NET ASSETS RATE 000S) ASSETS NET ASSETS
---------- ------ --------- -------- ---------- --------- -------- -------- ----------
INTERNATIONAL EQUITY FUND
- ------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED JANUARY 31,
- ------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996--Class A
Shares.......... $ 2.68 $17.20 28.68% 1.52% 0.26% 68.48% $330,860 1.77% 0.10%
1995--Class A
Shares.......... (3.58) 14.52 (16.65) 1.73 0.40 84.54 275,086 1.98 0.15
1994--Class A
Shares.......... 3.75 18.10 26.13 1.76 0.51 60.04 269,091 2.01 0.26
<CAPTION>
FOR THE PERIOD DECEMBER 1, 1992(b) THROUGH JANUARY 31,
- ------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1993--Class A
Shares.......... 0.17 14.35 1.23 (c) 1.80 (d) (0.42)(d) 0.00 66,063 2.58(d) (1.20)(d)
<CAPTION>
ASIA GROWTH FUND
- ------------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED JANUARY 31,
- ------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996--Class A
Shares.......... $3.18 $16.49 26.49% 1.77% 1.05% 88.80% $205,539 2.02% 0.80%
<CAPTION>
FOR THE PERIOD JULY 8, 1994(b) THROUGH JANUARY 31,
- --------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995--Class A
Shares.......... (0.87) 13.31 (5.46)(c) 1.90(d) 1.83(d) 36.08(c) 124,298 2.38(d) 1.35(d)
</TABLE>
- -----------
(a) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no
sales charges. Total return would be reduced if a sales charge were taken
into account.
(b)Commencement of operations.
(c)Not annualized.
(d)Annualized.
(e)Calculated based on the average shares outstanding methodology.
(f)Institutional shares commenced operations on June 15, 1995.
10
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and principal investment policies of each Fund are
described below. Other investment practices and management techniques, which
involve certain risks are described under "Description of Securities," "Risk
Factors" and "Investment Techniques." There can be no assurance that a Fund's
investment objectives will be achieved.
Potential equity investments for each Fund (other than the Select Equity
Fund which evaluates securities using both fundamental research and a variety
of quantitative techniques as described below under "Select Equity Fund")
generally are evaluated using fundamental analysis, including criteria such as
earnings, cash flow, asset values and/or dividend-paying ability. In choosing
a Fund's securities, the Investment Advisers utilize first-hand fundamental
research, including visiting company facilities to assess operations and meet
decision-makers. The Investment Advisers may also use a macro analysis of
numerous economic and valuation variables to determine and anticipate changes
in company earnings and the overall investment climate. Each Investment
Adviser is able to draw on the research and market expertise of the Goldman
Sachs Investment Research Department and other affiliates of the Investment
Adviser as well as information provided by other securities dealers.
The Investment Advisers intend to purchase common stocks, preferred stocks,
interests in real estate investment trusts, convertible debt obligations,
convertible preferred stocks, equity interests in trusts, partnerships, joint
ventures and similar enterprises, warrants and stock purchase rights of
companies ("equities securities") that are, in their view, underpriced
relative to a combination of such companies' long-term earnings prospects,
growth rate, free cash flow and/or dividend-paying ability. The Funds may also
purchase securities of companies that have experienced difficulties and that,
in the opinion of the Investment Advisers, are available at attractive prices.
Consideration will be given to the business quality of the issuer. Factors
positively affecting the Investment Advisers' 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
market 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.
Equity securities in a Fund's portfolio will generally be sold when the
Investment Advisers believe that the market price fully reflects or exceeds
the securities' fundamental valuation or when other more attractive
investments are identified.
SELECT EQUITY FUND
Objective. The Fund's investment objective is to provide investors with a
total return through investments in equity securities consisting of capital
appreciation plus dividend income that, net of Fund expenses, exceeds the
total return realized on the S&P 500 Index.
Primary Investment Focus. The Fund invests, under normal circumstances, at
least 90% of its total assets in equity securities. The Fund may invest in
equity securities of foreign issuers that are traded in the United States and
that comply with U.S. accounting standards. The Fund seeks to achieve its
investment objective by investing in a portfolio of equity securities selected
using both fundamental research and a variety of quantitative techniques which
seek to maximize the Fund's reward to risk ratio. The Fund's portfolio is
designed to have risk, capitalization and industry characteristics similar to
the S&P 500 Index. Select Equity Fund may only invest in fixed income
securities that are considered cash equivalents.
11
<PAGE>
Investment Process. The Investment Adviser begins with a universe primarily
of large capitalization equity securities. The Investment Adviser uses a
proprietary multifactor model (the "Multifactor Model") to assign each equity
security a rating, and, if the security is followed by the Goldman Sachs
Investment Research Department (the "Research Department"), a second rating is
assigned based upon the Research Department's evaluation. In selecting
securities for the Fund, the Investment Adviser utilizes optimization models
to evaluate the ratings assigned by the Multifactor Model and the Research
Department to build a diversified portfolio. This portfolio is primarily
comprised of securities rated highest by the Investment Adviser's Multifactor
Model and research analysts and has risk characteristics and industry
weightings similar to the S&P 500 Index. Under normal conditions, the
securities of any one issuer may not exceed 5% of the Fund's total assets.
Multifactor Model. The Multifactor Model is a sophisticated computerized
rating system for valuing equity securities according to fundamental
investment characteristics. The factors used by the Multifactor Model
incorporate many variables studied by traditional fundamental analysis, and
cover measures of value, growth, momentum, risk (e.g., price/earnings ratio,
book/price ratio, growth forecasts, earnings estimate revisions, price
momentum, volatility and earnings stability). All of the factors used by the
Multifactor Model have been shown to significantly impact the performance of
equity securities. The weightings assigned to the factors are derived using a
statistical formulation that considers each factor's historical performance in
different market environments. As such, the Multifactor Model is designed to
evaluate each security using only the factors that are statistically related
to returns in the anticipated market environment. Because it includes many
disparate factors, the Investment Adviser believes that the Multifactor Model
is broader in scope and provides a more thorough evaluation than most
conventional, value-oriented quantitative models. As a result, the securities
ranked highest by the Multifactor Model do not have one dominant investment
characteristic (such as a low price/earnings ratio); rather, they possess an
attractive combination of investment characteristics.
Research Department. In assigning ratings, the Research Department uses a
four category rating system ranging from "recommended for purchase" to "likely
to underperform." By employing both a quantitative (i.e., the Multifactor
Model) and a qualitative (i.e., the analyst's ratings) method of selecting
securities, the Fund seeks to capitalize on the strengths of each discipline.
GROWTH AND INCOME FUND
Objectives. The Growth and Income Fund's investment objectives are to
provide investors with long-term growth of capital and growth of income.
Primary Investment Focus. The Fund invests, under normal circumstances, at
least 65% of its total assets in equity securities that the Investment Adviser
considers to have favorable prospects for capital appreciation and/or
dividend-paying ability.
Other. The Fund may invest up to 35% of its total assets in fixed income
securities that, in the opinion of the Investment Adviser, offer the potential
to further the Fund's investment objectives. In addition, although the Fund
will invest primarily in publicly traded U.S. securities, it may invest up to
25% of its total assets in foreign securities, including securities of issuers
in countries with emerging markets and economies.
MID-CAP EQUITY FUND
Objective. The Fund's investment objective is to provide investors with
long-term capital growth.
Primary Investment Focus. The Fund invests, under normal circumstances,
substantially all of its assets in equity securities and at least 65% of its
total assets in equity securities of Mid-Cap Companies with public stock
12
<PAGE>
market capitalizations (based upon shares available for trading on an
unrestricted basis) of between $500 million and $7 billion at the time of
investment. However, Mid-Cap Equity Fund currently intends to emphasize
investments in Mid-Cap Companies with public stock market capitalizations of
below $5 billion at the time of investment. Dividend income, if any, is an
incidental consideration.
Other. The Fund may invest up to 35% of its total assets in mortgage-backed,
asset-backed and fixed income securities. In addition, although the Fund will
invest primarily in publicly traded U.S. securities, it may invest up to 25%
of its total assets in foreign securities, including securities of issuers in
countries with emerging markets and economies.
INTERNATIONAL EQUITY FUND
Objective. The Fund's investment objective is to provide investors with
long-term capital appreciation.
Primary Investment Focus. The Fund invests, 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. The Fund may allocate its
assets among countries as determined by the Investment Adviser from time to
time provided that the Fund's assets are invested in at least three foreign
countries. The Fund expects to invest a substantial portion of its assets in
the securities of companies located in the developed countries in Western
Europe and in Japan. However, the Fund may also invest in the securities of
issuers located in the following countries: Argentina, Australia, Bangladesh,
Brazil, Canada, Chile, China, Colombia, Czech Republic, Egypt, Hong Kong,
Hungary, India, Indonesia, Israel, Jamaica, Jordan, Kenya, Kuwait, Malaysia,
Mexico, Morocco, New Zealand, Nigeria, Pakistan, the Philippines, Poland, The
Republic of Slovakia, Singapore, South Korea, Sri Lanka, South Africa, Taiwan,
Thailand, Turkey, Venezuela and Zimbabwe. Many of the countries in which the
Fund may invest have emerging markets or economies which involve certain risks
as described below under "Risk Factors--Special Risks of Investments in the
Asian and Other Emerging Markets," which are not present in investments in
more developed countries.
Other. The Fund may employ certain currency techniques to seek to hedge
against currency exchange rate fluctuations or to seek to increase total
return. When used to seek to enhance return, these management techniques are
considered speculative. Such currency management techniques involve risks
different from those associated with investing solely in U.S. dollar-
denominated securities of U.S. issuers. To the extent that the Fund is fully
invested in foreign securities while also maintaining currency positions, it
may be exposed to greater combined risk. The Fund's net currency positions may
expose it to risks independent of its securities positions. See "Description
of Securities," "Investment Techniques" and "Risk Factors." Up to 35% of the
Fund's total assets may be invested in fixed income securities.
ASIA GROWTH FUND
Objective. The Fund's investment objective is to provide investors with
long-term capital appreciation.
Primary Investment Focus. The Fund invests, under normal market
circumstances, substantially all, and at least 65%, of its total assets in
equity securities of companies that satisfy at least one of the following
criteria:
13
<PAGE>
(i) their securities are traded principally on stock exchanges in one or more
of the Asian countries, (ii) they derive 50% or more of their total revenue
from goods produced, sales made or services performed in one or more of the
Asian countries, (iii) they maintain 50% or more of their assets in one or
more of the Asian countries, or (iv) they are organized under the laws of one
of the Asian countries. The Fund seeks to achieve its objective by investing
primarily in equity securities of Asian companies which are considered by the
Investment Adviser to have long-term capital appreciation potential. Many of
the countries in which the Fund may invest have emerging markets or economies
which involve certain risks as described under "Risk Factors--Special Risks of
Investments in the Asian and Other Emerging Markets," which are not present in
investments in more developed countries. The Fund may purchase equity
securities of issuers that have not paid dividends on a timely basis,
securities of companies that have experienced difficulties, and securities of
companies without performance records.
Other. The Fund may employ certain currency management techniques to seek to
hedge against currency exchange rate fluctuations or to seek to increase total
return. When used to seek to enhance return, these management techniques are
considered speculative. Such currency management techniques involve risks
different from those associated with investing solely in U.S. dollar-
denominated securities of U.S. issuers. To the extent that the Fund is fully
invested in foreign securities while also maintaining currency positions, it
may be exposed to greater combined risk. The Fund's net currency positions may
expose it to risks independent of its securities positions. See "Description
of Securities," "Investment Techniques" and "Risk Factors."
The Fund may allocate its assets among the Asian countries as determined
from time to time by the Investment Adviser. For purposes of the Fund's
investment policies, Asian countries are China, Hong Kong, India, Indonesia,
Malaysia, Pakistan, the Philippines, Singapore, South Korea, Sri Lanka, Taiwan
and Thailand as well as any other country in the Asian region (other than
Japan) to the extent that foreign investors are permitted by applicable law to
make such investments. Allocation of the Fund's investments will depend upon
the relative attractiveness of the Asian markets and particular issuers.
Concentration of the Fund's assets in one or a few of the Asian countries and
Asian currencies will subject the Fund to greater risks than if the Fund's
assets were not geographically concentrated. See "Description of Securities--
Foreign Investments." The Fund may invest up to 35% of its total assets in
equity securities of issuers in other countries, including Japan, and fixed
income securities.
DESCRIPTION OF SECURITIES
CONVERTIBLE SECURITIES
Each Fund may invest in convertible securities, including debt obligations
and preferred stock of the issuer convertible at a stated exchange rate into
common stock of the issuer. Convertible securities generally offer lower
interest or dividend yields than non-convertible securities of similar
quality. As with all fixed income securities, the market value of convertible
securities tends to decline as interest rates increase and, conversely, to
increase as interest rates decline. However, when the market price of the
common stock underlying a convertible security exceeds the conversion price,
the convertible security tends to reflect the market price of the underlying
common stock. As the market price of the underlying common stock declines, the
convertible security tends to trade increasingly on a yield basis, and thus
may not decline in price to the same extent as the underlying common stock.
Convertible securities rank senior to common stocks in an issuer's capital
structure and consequently entail
14
<PAGE>
less risk than the issuer's common stock. In evaluating a convertible
security, the Investment Adviser will give primary emphasis to the
attractiveness of the underlying common stock. The convertible securities in
which the Select Equity Fund invests are not subject to any minimum rating
criteria. The convertible debt securities in which the other Funds may invest
are subject to the same rating criteria as a Fund's investments in non-
convertible debt securities. Convertible debt securities are equity
investments for purposes of each Fund's investment policies.
FOREIGN INVESTMENTS
FOREIGN SECURITIES. Investments in foreign securities may offer potential
benefits that are not available from investments exclusively in U.S. dollar-
denominated domestic issues. Foreign countries may have economic policies or
business cycles different from those of the U.S. and markets for foreign
securities do not necessarily move in a manner parallel to U.S. markets.
Investing in the securities of foreign issuers involves risks that are not
typically associated with investing in U.S. dollar-denominated securities of
domestic issuers. Such investments may be affected by changes in currency
rates, changes in foreign or U.S. laws or restrictions applicable to such
investments and in exchange control regulations (e.g., currency blockage). A
decline in the exchange rate of the currency (i.e., weakening of the currency
against the U.S. dollar) in which a portfolio security is quoted or
denominated relative to the U.S. dollar would reduce the value of the
portfolio security. Commissions on transactions in foreign securities may be
higher than those for similar transactions on domestic stock markets. In
addition, clearance and settlement procedures may be different in foreign
countries and, in certain markets, such procedures have on occasion been
unable to keep pace with the volume of securities transactions, thus making it
difficult to conduct such transactions.
Foreign issuers are not generally subject to uniform accounting, auditing
and financial reporting standards comparable to those applicable to U.S.
issuers. There may be less publicly available information about a foreign
issuer than about a U.S. issuer. In addition, there is generally less
government regulation of foreign markets, companies and securities dealers
than in the U.S. Foreign securities markets may have substantially less volume
than U.S. securities markets and securities of many foreign issuers are less
liquid and more volatile than securities of comparable domestic issuers.
Furthermore, with respect to certain foreign countries, there is a possibility
of nationalization, expropriation or confiscatory taxation, imposition of
withholding taxes on dividend or interest payments, limitations on the removal
of funds or other assets, political or social instability or diplomatic
developments which could affect investments in those countries.
INVESTMENTS IN ADRS, EDRS AND GDRS. Each Fund may invest in foreign
securities which take the form of sponsored and unsponsored American
Depository Receipts ("ADRs") and Global Depository Receipts ("GDRs") and each
Fund, other than Select Equity Fund, may also invest in European Depository
Receipts ("EDRs") or other similar instruments representing securities of
foreign issuers (together, "Depository Receipts"). ADRs represent the right to
receive securities of foreign issuers deposited in a domestic bank or a
correspondent bank. Prices of ADRs are quoted in U.S. dollars and are traded
in the United States on exchanges or over-the-counter and are sponsored and
issued by domestic banks. EDRs and GDRs are receipts evidencing an arrangement
with a non-U.S. bank. EDRs and GDRs are not necessarily quoted in the same
currency as the underlying security. To the extent a Fund acquires Depository
Receipts through banks which do not have a contractual relationship with the
foreign issuer of the security underlying the Depository Receipts to issue and
service such Depository Receipts (unsponsored Depository Receipts), there may
be an increased possibility that the Fund would not become aware of and be
able to respond to corporate actions, such as stock splits or rights
15
<PAGE>
offerings involving the foreign issuer, in a timely manner. In addition, the
lack of information may result in inefficiencies in the valuation of such
instruments. Investment in Depository Receipts does not eliminate all the
risks inherent in investing in securities of non-U.S. issuers. The market
value of Depository Receipts is dependent upon the market value of the
underlying securities and fluctuations in the relative value of the currencies
in which the Depository Receipt and the underlying securities are quoted.
However, by investing in Depository Receipts, such as ADRs, that are quoted in
U.S. dollars, a Fund will avoid currency risks during the settlement period
for purchases and sales.
FOREIGN CURRENCY TRANSACTIONS. Because investment in foreign issuers will
usually involve currencies of foreign countries, and because the International
Equity and Asia Growth Funds may have currency exposure independent of their
securities positions, the value of the assets of a Fund as measured in U.S.
dollars will be affected by changes in foreign currency exchange rates. A Fund
may, to the extent it invests in foreign securities, purchase or sell forward
foreign currency exchange contracts for hedging purposes and to seek to
protect against anticipated changes in future foreign currency exchange rates.
In addition, the International Equity and Asia Growth Funds may enter into
such contracts to seek to increase total return when the Investment Adviser
anticipates that the foreign currency will appreciate or depreciate in value,
but securities denominated or quoted in that currency do not present
attractive investment opportunities and are not held in the Fund's portfolio.
When entered into to seek to enhance return, forward foreign currency exchange
contracts are considered speculative. The International Equity and Asia Growth
Funds may also engage in cross-hedging by using forward contracts in a
currency different from that in which the hedged security is denominated or
quoted if the Investment Adviser determines that there is a pattern of
correlation between the two currencies. If a Fund enters into a forward
foreign currency exchange contract to buy foreign currency for any purpose or
the International Equity or Asia Growth Funds enter into forward foreign
currency exchange contracts to sell foreign currency to seek to increase total
return, the Fund will be required to place and maintain cash or liquid, high
grade debt securities in a segregated account with the Fund's custodian in an
amount equal to the value of the Fund's total assets committed to the
consummation of the forward contract. The Fund will incur costs in connection
with conversions between various currencies. A Fund may hold foreign currency
received in connection with investments in foreign securities when, in the
judgment of the Investment Adviser, it would be beneficial to convert such
currency into U.S. dollars at a later date, based on anticipated changes in
the relevant exchange rate.
Currency exchange rates may fluctuate significantly over short periods of
time causing, along with other factors, a Fund's net asset value to fluctuate.
Currency exchange rates generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of investments
in different countries, actual or anticipated changes in interest rates and
other complex factors, as seen from an international perspective. Currency
exchange rates also can be affected unpredictably by the intervention of U.S.
or foreign governments or central banks or the failure to intervene or by
currency controls or political developments in the U.S. or abroad. To the
extent that a substantial portion of 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.
The market in forward foreign currency exchange contracts, currency swaps
and other privately negotiated currency instruments authorized for use by the
International Equity and Asia Growth Funds, offer less protection against
defaults by the other party to such instruments than is available for currency
instruments traded on an exchange. Such contracts are subject to the risk that
the counterparty to the contract will default on its obligations. Since these
contracts are not guaranteed by an exchange or clearinghouse, a default on the
contract
16
<PAGE>
would deprive the Fund of unrealized profits, transaction costs or the
benefits of a currency hedge or force the Fund to cover its purchase or sale
commitments, if any, at the current market price. 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.
In addition to investing in securities denominated or quoted in a foreign
currency, the International Equity and Asia Growth Funds may engage in a
variety of foreign currency management techniques. However, due to the limited
market for these instruments with respect to the currencies of certain Asian
countries, the Investment Adviser does not currently anticipate that a
significant portion of Asia Growth Fund's currency exposure will be covered by
such instruments. The opportunity for hedging currency exposure to other
emerging markets is also generally limited. For a discussion of such
instruments and the risks associated with their use, see "Investment Objective
and Policies" in the Additional Statement.
FIXED INCOME SECURITIES
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. A Fund may also invest in zero coupon U.S. Treasury
securities and in zero coupon securities issued by financial institutions,
which represent a proportionate interest in underlying U.S. Treasury
securities. A zero coupon security pays no interest to its holder during its
life and its value consists of the difference between its face value at
maturity and its cost. The market prices of zero coupon securities generally
are more volatile than the market prices of securities that pay interest
periodically. See "Taxation" in the Additional Statement.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. Each Fund (other than the
Select Equity Fund) may invest in mortgage-backed securities ("Mortgage-Backed
Securities"), which represent direct or indirect participations in, or are
collateralized by and payable from, mortgage loans secured by real property.
Each Fund (other than the Select Equity Fund) may also invest in asset-backed
securities ("Asset-Backed Securities"). The principal and interest payments on
Asset-Backed Securities are collateralized by pools of assets such as auto
loans, credit card receivables, leases, installment contracts and personal
property. Such asset pools are securitized through the use of special purpose
trusts or corporations. Principal and interest payments may be credit enhanced
by a letter of credit, a pool insurance policy or a senior/subordinated
structure.
CORPORATE DEBT OBLIGATIONS. Each Fund may invest in corporate debt
obligations. Corporate debt obligations are subject to the risk of an issuer's
inability to meet principal and interest payments on the obligations.
BANK OBLIGATIONS. Each Fund may invest in U.S. dollar-denominated
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
17
<PAGE>
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.
RATING CRITERIA. The debt securities in which the Growth and Income, Mid-Cap
Equity, International Equity and Asia Growth Funds may invest will, except as
noted below, be rated investment grade at the time of investment. Investment
grade debt securities are securities rated BBB or higher by Standard & Poor's
Ratings Group ("Standard & Poor's") or Baa or higher by Moody's Investors
Service, Inc. ("Moody's"). A security will be deemed to have met a rating
requirement if it receives the minimum required rating from at least one such
rating organization even though it has been rated below the minimum rating by
one or more other rating organizations, or if unrated by such rating
organizations, determined by the Investment Adviser to be of comparable credit
quality. The Growth and Income Fund may invest up to 10% of its total assets in
debt securities which are unrated or rated in the lowest rating categories by
Standard & Poor's or Moody's (i.e., BB or lower by Standard & Poor's or Ba or
lower by Moody's), including securities rated D by Moody's or Standard &
Poor's. Mid-Cap Equity Fund may invest up to 10% of its total assets in below
investment grade debt securities rated B or higher by Standard & Poor's or B or
higher by Moody's. Fixed income securities rated in the BBB or Baa category are
considered medium-grade obligations with speculative characteristics, and
adverse economic conditions or changing circumstances may weaken their issuers'
capacity to pay interest and repay principal. Also, to the extent that the
rating assigned to a security in a Fund's portfolio is downgraded by a rating
organization, the market price and liquidity of such security may be adversely
affected. Fixed income securities rated BB or Ba or below (or comparable
unrated securities) are commonly referred to as "junk bonds," are considered
predominately speculative and may be questionable as to principal and interest
payments. In some cases, such bonds may be highly speculative, have poor
prospects for reaching investment grade standing and be in default. As a
result, investment in such bonds will entail greater speculative risks than
those associated with investment in investment grade bonds. Also, to the extent
that the rating assigned to a security in a Fund's portfolio is downgraded by a
rating organization, the market price and liquidity of such security may be
adversely affected. See Appendix A to the Additional Statement for a
description of the corporate bond ratings assigned by Standard & Poor's and
Moody's.
REAL ESTATE INVESTMENT TRUSTS ("REITS")
Each Fund may invest in REITs, which are pooled investment vehicles that
invest primarily in either real estate or real estate related loans. The value
of a REIT is affected by changes in the value of the properties owned by the
REIT or securing mortgage loans held by the REIT. REITs are dependant upon cash
flow from its investments to repay financing costs and the ability of the
REIT's manager. REITs are also subject to risks generally associated with
investments in real estate. A Fund will indirectly bear its proportionate share
of any expenses, including management fees, paid by a REIT in which it invests.
INVESTMENT TECHNIQUES
OPTIONS ON SECURITIES AND SECURITIES INDICES
Each Fund (other than the Select Equity Fund) may write (sell) covered call
and put options and purchase call and put options on any securities in which it
may invest or on any securities index composed of securities in which it may
invest. The writing and purchase of options is a highly specialized activity
which involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. The use of options to seek to
increase total return involves the risk of loss if the Investment Adviser is
incorrect
18
<PAGE>
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 investment performance of the Fund will be less
favorable than it would have been in the absence of such options transactions.
The writing of options could significantly increase a Fund's portfolio
turnover rate and, therefore, associated brokerage commissions or spreads.
OPTIONS ON FOREIGN CURRENCIES. A Fund may, to the extent it invests in
foreign securities, purchase and sell (write) call and put options on foreign
currencies for the purpose of protecting against declines in the U.S. dollar
value of foreign portfolio securities and anticipated dividends on such
securities and against increases in the U.S. dollar cost of foreign securities
to be acquired. In addition, the International Equity and Asia Growth Funds
may use options on currency to cross-hedge, which involves writing or
purchasing options on one currency to hedge against changes in exchange rates
for a different currency, if there is a pattern of correlation between the two
currencies. 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 an option that a Fund has written is
exercised, the Fund could be required to purchase or sell foreign currencies
at disadvantageous exchange rates, thereby incurring losses. The purchase of
an option on foreign currency may constitute an effective hedge against
exchange rate fluctuations; however, in the event of exchange rate movements
adverse to a Fund's position, the Fund may forfeit the entire amount of the
premium plus related transaction costs. In addition to purchasing call and put
options for hedging purposes, the International Equity and Asia Growth Funds
may purchase call or put options on currency 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 held in the
Fund's portfolio. When purchased or sold to seek to increase total return,
options on currencies are considered speculative. Options on foreign
currencies written or purchased by the Funds are traded on U.S. and foreign
exchanges or over-the-counter.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
To seek to increase total return or to hedge against changes in interest
rates, securities prices or currency exchange rates, a Fund may purchase and
sell various kinds of futures contracts, and purchase and write call and put
options on any of such futures contracts. Each Fund may also enter into
closing purchase and sale transactions with respect to any such contracts and
options. The futures contracts may be based on various securities (such as
U.S. Government securities), foreign currencies, securities indices and other
financial instruments and indices. The Select Equity Fund may enter into such
transactions only with respect to the S&P 500 Index. A Fund will engage in
futures and related options transactions only for bona fide hedging purposes
as defined in regulations of the Commodity Futures Trading Commission or to
seek to increase total return to the extent permitted by such regulations. A
Fund may not purchase or sell futures contracts or purchase or sell related
options to seek to increase total return, except for closing purchase or sale
transactions, if immediately thereafter the sum of the amount of initial
margin deposits and premiums paid on the Fund's outstanding positions in
futures and related options entered into for the purpose of seeking to
increase total return would exceed 5% of the market value of the Fund's net
assets. These transactions involve brokerage costs, require margin deposits
and, in the case of contracts and options obligating a Fund to purchase
securities or currencies, require the Fund to segregate and maintain cash or
liquid, high grade debt securities with a value equal to the amount of the
Fund's obligations.
19
<PAGE>
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. See
"Investment Objectives and Policies--Futures Contracts and Options on Future
Contracts" in the Additional Statement. Thus, while a Fund may benefit from
the use of futures and options on futures, unanticipated changes in interest
rates, securities prices or currency exchange rates may result in poorer
overall performance than if the Fund had not entered into any futures
contracts or options transactions. Because perfect correlation between a
futures position and portfolio position that is intended to be protected is
impossible to achieve, the desired protection may not be obtained and a Fund
may be exposed to risk of loss. The loss incurred by a Fund in entering into
futures contracts and in writing call options on futures is potentially
unlimited and may exceed the amount of the premium received. Futures markets
are highly volatile and the use of futures may increase the volatility of a
Fund's net asset value. The profitability of a Fund's trading in futures to
seek to increase total return depends upon the ability of the Investment
Adviser to correctly analyze the futures markets. In addition, because of the
low margin deposits normally required in futures trading, a relatively small
price movement in a futures contract may result in substantial losses to a
Fund. Further, futures contracts and options on futures may be illiquid, and
exchanges may limit fluctuations in futures contract prices during a single
day.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
Each Fund may purchase when-issued securities. When-issued transactions
arise when securities are purchased by a Fund with payment and delivery taking
place in the future in order to secure what is considered to be an
advantageous price and yield to the Fund at the time of entering into the
transaction. Each Fund may also purchase securities on a forward commitment
basis; that is, make contracts to purchase securities for a fixed price at a
future date beyond the customary 3-day settlement period. A Fund is required
to hold and maintain in a segregated account with the Fund's custodian until 3
days prior to the settlement date, cash or liquid, high grade debt securities
in an amount sufficient to meet the purchase price. Alternatively, each Fund
may enter into offsetting contracts for the forward sale of other securities
that it owns. The purchase of securities on a when-issued or forward
commitment basis involves a risk of loss if the value of the security to be
purchased declines prior to the settlement date. Although a Fund would
generally purchase securities on a when-issued or forward commitment basis
with the intention of acquiring securities for its portfolio, a Fund may
dispose of when-issued securities or forward commitments prior to settlement
if its Investment Adviser deems it appropriate to do so.
ILLIQUID AND RESTRICTED SECURITIES
A Fund may not invest more than 10% of its total assets in securities that
are subject to restrictions on resale ("restricted securities") under the
Securities Act of 1933, as amended ("1933 Act"), including securities eligible
for resale in reliance on Rule 144A under the 1933 Act. In addition, a Fund
will not invest more than 15% of its net assets in illiquid investments, which
includes securities (both foreign and domestic) that are not readily
marketable, swaps, repurchase agreements maturing in more than seven days,
time deposits with a notice or demand period of more than seven days, certain
over-the-counter options, and certain restricted securities, unless it is
determined, based upon the continuing review of the trading markets for the
specific restricted security, that such restricted security is eligible for
sale under Rule 144A and, therefore, is liquid. The Board of Directors has
adopted guidelines and delegated to the Investment Adviser the daily function
of determining and monitoring the liquidity of restricted securities. The
Board of Directors, however, retains oversight focusing on factors such as
valuation, liquidity and availability of information and is ultimately
responsible for each determination. Investing in restricted securities
eligible for resale pursuant to Rule 144A may decrease the liquidity of a
Fund's portfolio to the extent that qualified institutional buyers become for
a time uninterested in purchasing these restricted securities. The purchase
price and subsequent valuation of restricted and illiquid securities normally
reflect a discount, which may be significant, from the market price of
comparable securities for which a liquid market exists.
20
<PAGE>
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. The International Equity and Asia Growth Funds
may also enter into repurchase agreements involving certain foreign government
securities. If the other party or "seller" defaults, a Fund might suffer a
loss to the extent that the proceeds from the sale of the underlying
securities and other collateral held by the Fund in connection with the
related repurchase agreement are less than the repurchase price. In addition,
in the event of bankruptcy of the seller or failure of the seller to
repurchase the securities as agreed, a Fund could suffer losses, including
loss of interest on or principal of the security and costs associated with
delay and enforcement of the repurchase agreement. The Directors of the
Company have reviewed and approved certain counterparties whom they believe to
be creditworthy and have authorized the Funds to enter into repurchase
agreements with such counterparties. In addition, each Fund, together with
other registered investment companies having advisory agreements with an
Investment Adviser, may transfer uninvested cash balances into a single joint
account, the daily aggregate balance of which will be invested in one or more
repurchase agreements.
LENDING OF PORTFOLIO SECURITIES
Each Fund may also seek to increase its income by lending portfolio
securities. Under present regulatory policies, such loans may be made to
institutions, such as certain broker-dealers, and are required to be secured
continuously by collateral in cash, cash equivalents, or U.S. Government
securities maintained on a current basis in an amount at least equal to the
market value of the securities loaned. Cash collateral may be invested in cash
equivalents. If an Investment Adviser determines to make securities loans, the
value of the securities loaned may not exceed 33 1/3% of the value of the
total assets of a Fund. See "Investment Restrictions" in the Additional
Statement. A Fund may experience a loss or delay in the recovery of its
securities if the institution with which it has engaged in a portfolio loan
transaction breaches its agreement with the Fund.
SHORT SALES AGAINST-THE-BOX
Each Fund (other than the Select Equity Fund) may make short sales of
securities or maintain a short position, provided that at all times when a
short position is open the Fund owns an equal amount of such securities or
securities convertible into or exchangeable, without payment of any further
consideration, for an equal amount of the securities of the same issuer as the
securities sold short (a short sale against-the-box). Not more than 25% of a
Fund's net assets (determined at the time of the short sale) may be subject to
such short sales. Short sales will be made primarily to defer realization of
gain or loss for federal tax purposes; a gain or loss in a Fund's long
position will be offset by a gain or loss in its short position.
TEMPORARY INVESTMENTS
Each Fund may, for temporary defensive purposes, invest 100% of its total
assets (except that the Select Equity Fund may only hold up to 35% of its
total assets) in U.S. Government securities, repurchase agreements
collateralized by U.S. Government securities, commercial paper rated at least
A-2 by Standard & Poor's or P-2 by Moody's, certificates of deposit, bankers'
acceptances, repurchase agreements, non-convertible preferred stocks, non-
convertible corporate bonds with a remaining maturity of less than one year
or, subject to certain tax restrictions, foreign currencies. When a Fund's
assets are invested in such instruments, the Fund may not be achieving its
investment objective.
MISCELLANEOUS TECHNIQUES
In addition to the techniques and investments described above, each Fund
may, with respect to no more than 5% of its net assets, engage in the
following techniques and investments: (i) warrants and stock purchase rights,
(ii) currency swaps (International Equity and Asia Growth Funds only),
(iii) other investment companies and (iv) unseasoned companies. For more
information see the Additional Statement.
21
<PAGE>
RISK FACTORS
RISK OF INVESTING IN SMALL TO MEDIUM CAPITALIZATION COMPANIES. Investing in
the securities of such companies involves greater risk and the possibility of
greater portfolio price volatility. Historically, small to medium market
capitalization stocks and stocks of recently organized companies have been
more volatile in price than the larger market capitalization stocks included
in the S&P 500 Index. Among the reasons for the greater price volatility of
these small company and unseasoned stocks are the less certain growth
prospects of smaller firms and the lower degree of liquidity in the markets
for such stocks.
SPECIAL RISKS OF INVESTMENTS IN THE ASIAN AND OTHER EMERGING
MARKETS. Investing in the securities of issuers in emerging markets involves
risks in addition to those discussed above. The International Equity and Asia
Growth Funds may each invest without limit in the securities of issuers in
countries with emerging economies or securities markets. The Growth and Income
and Mid-Cap Equity Funds may each invest up to 15% of their total assets in
securities of issuers in countries with emerging economies or securities
markets. These emerging markets are generally located in the Asia-Pacific
region, Eastern Europe, Latin and South America and Africa. A Fund's purchase
and sale of portfolio securities in certain emerging markets may be
constrained by limitations as to daily changes in the prices of listed
securities, periodic trading or settlement volume and/or limitations on
aggregate holdings of foreign investors. Such limitations may be computed
based on the aggregate trading volume by or holdings of a Fund, the Investment
Adviser and its affiliates and their respective clients and other service
providers. A Fund may not be able to sell securities in circumstances where
price, trading or settlement volume limitations have been reached.
Foreign investment in the securities markets of certain emerging markets is
restricted or controlled to varying degrees which may limit investment in such
countries or increase the administrative costs of such investments. For
example, certain Asian countries require governmental approval prior to
investments by foreign persons or limit investment by foreign persons to only
a specified percentage of an issuer's outstanding securities or a specific
class of securities which may have less advantageous terms (including price)
than securities of the issuer available for purchase by nationals. In
addition, certain countries may restrict or prohibit investment opportunities
in issuers or industries deemed important to national interests. Such
restrictions may affect the market price, liquidity and rights of securities
that may be purchased by a Fund. Due to restrictions on direct investment in
equity securities in certain Asian countries, such as Taiwan, it is
anticipated that a Fund may invest in such countries only through other
investment funds in such countries. See "Other Investment Companies" in the
Additional Statement. Furthermore, the repatriation of both investment income
and capital from several of the Asian countries is subject to restrictions
such as the need for certain governmental consents.
Many of the emerging markets may be subject to a greater degree of economic,
political and social instability than is the case in Western Europe, the
United States and Japan. Many of the emerging markets do not have fully
democratic governments. For example, some governments of emerging market
countries are authoritarian in nature or have been installed or removed as a
result of military coups, while governments in other emerging markets have
periodically used force to suppress civil dissent. Disparities of wealth, the
pace and success of democratization, and ethnic, religious and racial
disaffection, among other factors, have also led to social unrest, violence
and/or labor unrest in some of the Asian and other countries. The economies of
most of the emerging markets are heavily dependent upon international trade
and are accordingly affected by protective trade barriers and the economic
conditions of their trading partners, principally, the United States, Japan,
China
22
<PAGE>
and the European Union. In addition, the economies of some of the emerging
markets are vulnerable to weakness in world prices for their commodity
exports.
Settlement procedures in emerging markets are frequently less developed and
reliable than those in the United States and may involve a Fund's delivery of
securities before receipt of payment for their sale. In addition, significant
delays are common in certain markets in registering the transfer of
securities. Settlement or registration problems may make it more difficult for
a Fund to value its portfolio securities and could cause the Fund to miss
attractive investment opportunities, to have a portion of its assets
uninvested or to incur losses due to the failure of a counterparty to pay for
securities the Fund has delivered or the Fund's inability to complete its
contractual obligations.
Currently, there is no market or only a limited market for many of the
management techniques and instruments with respect to the currencies and
securities markets of the emerging market countries. Consequently, there can
be no assurance that suitable instruments for hedging currency and market-
related risks will be available at the times when a Fund wishes to use them.
RISK OF INVESTING IN FIXED INCOME SECURITIES. When interest rates decline,
the market value of fixed income securities tends to increase. Conversely,
when interest rates increase, the market value of fixed income securities
tends to decline. Volatility of a security's market value will differ
depending upon the security's duration, the issuer and the type of instrument.
Investments in fixed income securities are subject to the risk that the issuer
could default on its obligations and a Fund could sustain losses on such
investments. A default could impact both interest and principal payments.
RISKS OF DERIVATIVE TRANSACTIONS. A Fund's transactions, if any, in options,
futures, options on futures, swap transactions and currency forward contracts
involve certain risks, including a possible lack of correlation between
changes in the value of hedging instruments and the portfolio assets being
hedged, the potential illiquidity of the markets for derivative instruments,
the risks arising from the margin requirements and related leverage factors
associated with such transactions. The use of these management techniques to
seek to increase total return may be regarded as a speculative practice and
involves the risk of loss if the Investment Adviser is incorrect in its
expectation of fluctuations in securities prices, interest rates or currency
prices. A Fund's transactions in foreign currency, forward foreign currency
exchange contracts, options, futures contracts and certain other derivative
transactions may be limited by the requirements of the Internal Revenue Code
of 1986, as amended (the "Code"), for qualification as a regulated investment
company.
INVESTMENT RESTRICTIONS
Each Fund is subject to certain investment restrictions that are described
in detail under "Investment Restrictions" in the Additional Statement.
Fundamental investment restrictions of a Fund can not be changed without
approval of a majority of the outstanding shares of that Fund. All investment
objectives and policies not specifically designated as fundamental are non-
fundamental and may be changed without shareholder approval. If there is a
change in a Fund's investment objectives, shareholders should consider whether
the Fund remains an appropriate investment in light of their then current
financial positions and needs.
23
<PAGE>
PORTFOLIO TURNOVER
A high rate of portfolio turnover (100% or more) involves correspondingly
greater expenses which must be borne by a Fund and its shareholders and may
under certain circumstances make it more difficult for a Fund to qualify as a
regulated investment company under the Code. See "Financial Highlights" for a
statement of each Fund's historical portfolio turnover ratio. The portfolio
turnover rate is calculated by dividing the lesser of the dollar amount of
sales or purchases of portfolio securities by the average monthly value of a
Fund's portfolio securities, excluding securities having a maturity at the
date of purchase of one year or less. Notwithstanding the foregoing, the
Investment Adviser may, from time to time, make short-term investments when it
believes such investments are in the best interest of a Fund.
MANAGEMENT
DIRECTORS AND OFFICERS
The Company's Board of Directors is responsible for deciding matters of
general policy and reviewing the actions of the Investment Advisers,
subadviser, administrator, distributor and transfer agent. The officers of the
Company conduct and supervise the Funds' daily business operations. The
Additional Statement contains information as to the identity of, and other
information about, the Directors and officers of the Company.
INVESTMENT ADVISERS, SUBADVISER AND ADMINISTRATOR
INVESTMENT ADVISERS AND SUBADVISER. Goldman Sachs Asset Management, One New
York Plaza, New York, New York 10004, a separate operating division of Goldman
Sachs, serves as the investment adviser to the Mid-Cap Equity, Growth and
Income and International Equity Funds. Goldman Sachs registered as an
investment adviser in 1981. Goldman Sachs Funds Management, L.P., One New York
Plaza, New York, New York 10004, a Delaware limited partnership which is an
affiliate of Goldman Sachs, serves as the investment adviser to the Select
Equity Fund. Goldman Sachs Funds Management, L.P. registered as an investment
adviser in 1990. Goldman Sachs Asset Management International, 140 Fleet
Street, London EC4A 2BJ, England, an affiliate of Goldman Sachs, serves as the
investment adviser to the Asia Growth Fund and subadviser to the International
Equity Fund. Goldman Sachs Asset Management International is regulated by the
Investment Management Regulatory Organisation Limited and registered as an
investment adviser in 1991. Goldman Sachs Asset Management serves as
administrator to each Fund. As of March 27, 1996, Goldman Sachs Asset
Management, Goldman Sachs Funds Management, L.P. and Goldman Sachs Asset
Management International, together with their affiliates, acted as investment
adviser, administrator or distributor for assets in excess of $58 billion.
Under an Investment Advisory Agreement with each Fund, the applicable
Investment Adviser, and in the case of the International Equity Fund under a
Subadvisory Agreement, the subadviser, subject to the general supervision of
the Board of Directors, provides day-to-day advice as to the Fund's portfolio
transactions. Goldman Sachs has agreed to permit the Company to use the name
"Goldman Sachs" or a derivative thereof as part of each Fund's name for as
long as a Fund's Investment Advisory Agreement is in effect.
In performing its investment advisory services, each Investment Adviser,
while remaining ultimately responsible for the management of the Funds, may
rely upon the asset management division of its Singapore and
24
<PAGE>
Tokyo affiliates for portfolio decisions and management with respect to
certain portfolio securities and is able to draw upon the research and
expertise of its other affiliate offices.
FUND MANAGERS
<TABLE>
<CAPTION>
YEARS
PRIMARILY
NAME AND TITLE FUND RESPONSIBILITY RESPONSIBLE FIVE YEAR EMPLOYMENT HISTORY
-------------- ------------------- ----------- ----------------------------
<C> <C> <C> <S>
Mitchell E. Cantor Co-Portfolio Manager-- Since Mr. Cantor joined the
Vice President Growth and Income, 1993 Investment Adviser in
Mid-Cap Equity 1995 1991.
- -----------------------------------------------------------------------------------------------------------------------------------
Ronald E. Gutfleish Co-Portfolio Manager-- Since Mr. Gutfleish joined the
Vice President Growth and Income, 1993 Investment Adviser in
Mid-Cap Equity 1995 1993. Prior to 1993, he
was a principal of
Sanford C. Bernstein &
Co. in its Investment
Management Research
Department.
- -----------------------------------------------------------------------------------------------------------------------------------
Roderick D. Jack Co-Portfolio Manager-- Since Mr. Jack joined the
Executive International Equity 1992 Investment Adviser in
Director 1992. Prior to 1992, he
worked in the advisory
and financing group for
S.G. Warburg in London.
- -----------------------------------------------------------------------------------------------------------------------------------
Robert C. Jones Senior Portfolio Since Mr. Jones joined the
Vice President Manager--Select 1991 Investment Adviser in
Equity 1989.
- -----------------------------------------------------------------------------------------------------------------------------------
Marcel Jongen Co-Portfolio Manager-- Since Mr. Jongen joined the
Executive International Equity 1992 Investment Adviser in
Director 1992. Prior to 1992, he
was head of equities at
Philips Pension Fund in
Eindhaven.
- -----------------------------------------------------------------------------------------------------------------------------------
Shogo Maeda Co-Portfolio Manager-- Since Mr. Maeda joined the
Vice President International Equity 1994 Investment Adviser in
1994. Prior to 1994, he
worked at Nomura
Securities International
and for a period at
Manufacturers Hanover
Bank in New York.
- -----------------------------------------------------------------------------------------------------------------------------------
Warwick M. Negus Senior Portfolio Since Mr. Negus joined the
Executive Manager--Asia 1994 Investment Adviser in
Director Growth 1994. Prior to 1994, he
Co-Portfolio Manager-- 1994 was a vice president of
International Equity Bankers Trust Australia
Ltd.
- -----------------------------------------------------------------------------------------------------------------------------------
Karma Wilson Portfolio Manager-- Since Ms. Wilson joined the
Vice President Asia Growth 1995 Investment Adviser in
1995. Prior to 1995, she
was an investment
analyst with Bankers
Trust Australia Ltd. and
prior to 1993 worked at
Arthur Andersen LLP.
</TABLE>
It is the responsibility of the Investment Adviser to make investment
decisions for a Fund and to place the purchase and sale orders for the Fund's
portfolio transactions in U.S. and foreign securities and currency markets.
25
<PAGE>
Such orders may be directed to any broker including, to the extent and in the
manner permitted by applicable law, Goldman Sachs or its affiliates.
As compensation for its services rendered and assumption of certain expenses
pursuant to separate Investment Advisory Agreements, GSAM is entitled to a fee
from the Growth and Income, Mid-Cap Equity and International Equity Funds,
computed daily and payable monthly, at the annual rates of 0.55%, 0.60% and
0.25%, respectively, of average daily net assets; however, GSAM is currently
only imposing its advisory fee with respect to the International Equity Fund
at the annual rate of 0.23% of average daily net assets. As compensation for
its services rendered and assumption of certain expenses pursuant to a
separate Investment Advisory Agreement, GSFM is entitled to a fee from the
Select Equity Fund, computed daily and payable monthly, at the annual rate of
0.50% of average daily net assets; however, GSFM is currently only imposing
its advisory fee with respect to the Select Equity Fund at the annual rate of
0.44% of average daily net assets. As compensation for its services rendered
and assumption of certain expenses pursuant to Investment Advisory and
Subadvisory Agreements, GSAMI is entitled to a fee from the Asia Growth and
International Equity Funds, computed daily and payable monthly at the annual
rates of 0.75% and 0.50%, respectively, of average daily net assets; however,
GSAMI is currently only imposing its advisory and subadvisory fees with
respect to the Asia Growth and International Equity Funds at the annual rate
of 0.71% and 0.48%, respectively, of average daily net assets. The Investment
Advisers may discontinue or modify such limitations in the future at their
discretion, although they have no current intention to do so. For the fiscal
period ended January 31, 1996, each Fund paid fees at the foregoing
contractual rates, except that the Select Equity Fund, paid an advisory fee
equal to 0.43% of its average daily net assets. Without giving effect to fee
limitations, the aggregate management fees paid by the International Equity
and Asia Growth Funds are higher than the fees paid by most funds but the
Investment Advisers believe such fees are comparable to management fees paid
by funds with similar investment strategies.
Each Investment Adviser has voluntarily agreed to reduce the fees payable to
it by a Fund (to the extent of its fees) by the amount (if any) that the
Fund's expenses would exceed the applicable expense limitations imposed by
state securities administrators. See "Management--Expenses" in the Additional
Statement. In addition, the Investment Adviser to the Select Equity, Growth
and Income, Mid-Cap Equity, International Equity and Asia Growth Funds has
voluntarily agreed to reduce or limit certain "Other Expenses" of such Funds
(excluding transfer agency fees applicable to the Growth and Income and Mid-
Cap Equity Funds, advisory, subadvisory administration fees and fees under
service, distribution and authorized dealer service plans, taxes, interest and
brokerage fees and litigation, indemnification and other extraordinary
expenses) to the extent such expenses exceed 0.06%, 0.11%, 0.06%, 0.24% and
0.24% per annum of such Funds' average daily net assets, respectively. Such
reductions or limits, if any, are calculated monthly on a cumulative basis and
may be discontinued or modified by the applicable Investment Adviser in its
discretion at any time.
ADMINISTRATOR. As administrator, pursuant to an Administration Agreement
with each Fund, GSAM provides personnel for supervisory, administrative, and
clerical functions; oversees the performance of administrative and
professional services to each Fund by others; provides office facilities; and
prepares, but does not pay for, reports to shareholders, the SEC and other
regulatory authorities. As compensation for the services rendered to the
Funds, GSAM is entitled to a fee from the Growth and Income and Mid-Cap Equity
Funds, computed daily and payable monthly, at an annual rate equal to 0.15% of
such Fund's average daily net assets. GSAM is entitled to a fee from each
other Fund, computed daily and payable monthly at an annual rate equal to
0.25% of each such Fund's average daily net assets. However, GSAM is currently
only imposing its administration fee with respect to Select Equity,
International Equity and Asia Growth Funds at the annual rate of 0.15% of
average daily net assets. GSAM may discontinue or modify any such limitation
in the future at its discretion, although it has no current intention to do
so. For the period ended January 31, 1996, each Fund paid
26
<PAGE>
GSAM a fee for administration services at the foregoing contractual rates,
except that the Select Equity Fund paid an administration fee equal to 0.18%
of its average daily net assets. GSAM has agreed to reduce its fees payable by
a Fund (to the extent of its fees) by the amount (if any) that a Fund's
expenses exceed the applicable expense limitations imposed by state securities
administrators. See "Management--Expenses" in the Additional Statement.
ACTIVITIES OF GOLDMAN SACHS AND ITS AFFILIATES AND OTHER ACCOUNTS MANAGED BY
GOLDMAN SACHS. The involvement of the Investment Advisers, 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 a Fund or limit a Fund's investment activities. Goldman Sachs and
its affiliates engage in proprietary trading and advise accounts and funds
which have investment objectives similar to those of the Funds and/or which
engage in and compete for transactions in the same type of securities,
currencies and instruments as the Funds. Goldman Sachs and its affiliates will
not have any obligation to make available any information regarding their
proprietary activities or strategies, or the activities or strategies used for
other accounts managed by them, for the benefit of the management of the Funds
and in general it is not anticipated that the Investment Advisers will have
access to proprietary information for the purpose of managing a Fund. The
results of a Fund's investment activities, therefore, may differ from those of
Goldman Sachs and its affiliates and it is possible that a Fund could sustain
losses during periods in which Goldman Sachs and its affiliates and other
accounts achieve significant profits on their trading for proprietary or other
accounts. From time to time, a Fund's activities may be limited because of
regulatory restrictions applicable to Goldman Sachs and its affiliates, and/or
their internal policies designed to comply with such restrictions. See
"Activities of Goldman Sachs and its Affiliates and Other Accounts Managed by
Goldman Sachs" in the Additional Statement for further information.
DISTRIBUTOR AND TRANSFER AGENT
Goldman Sachs, 85 Broad Street, New York, New York, serves as the exclusive
distributor of each Fund's shares. Goldman Sachs, 4900 Sears Tower, Chicago,
Illinois, also serves as each Fund's transfer agent (the "Transfer Agent") and
as such performs various shareholder servicing functions. Shareholders with
inquiries regarding a Fund should contact Goldman Sachs (as Transfer Agent) at
the address or the telephone number set forth on the back cover page of this
Prospectus. Goldman Sachs is not entitled to receive a fee from the Select
Equity, International Equity and Asia Growth Funds with respect to
Institutional or Service Shares. Goldman Sachs is entitled to receive a fee
from the Growth and Income and Mid-Cap Equity Funds equal to 0.04% of the
average daily net assets of the Institutional and Service Shares of such
Funds.
NET ASSET VALUE
The net asset value per share of each class of a Fund is calculated by the
Fund's custodian as of the close of regular trading on the New York Stock
Exchange (normally 3:00 p.m. Chicago time, 4:00 p.m. New York time), on each
Business Day (as such term is defined under "Additional Information"). Net
asset value per share of each class is calculated by determining the net
assets attributable to each class and dividing by the number of outstanding
shares of that class. Portfolio securities are valued based on market
quotations or, if accurate quotations are not readily available, at fair value
as determined in good faith under procedures established by the Company's
Board of Directors.
27
<PAGE>
PERFORMANCE INFORMATION
From time to time each Fund may publish average annual total return and the
Growth and Income Fund may publish its yield and distribution rates in
advertisements and communications to shareholders or prospective investors.
Average annual total return is determined by computing the average annual
percentage change in value of $1,000 invested at the maximum public offering
price for specified periods ending with the most recent calendar quarter,
assuming reinvestment of all dividends and distributions at net asset value.
The total return calculation assumes a complete redemption of the investment
at the end of the relevant 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 net asset value. Any
performance data which are based on the net asset value 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 performance rankings and indices.
The Growth and Income Fund computes its yield by dividing net investment
income earned during a recent thirty-day period by the product of the average
daily number of shares outstanding and entitled to receive dividends during
the period and the maximum offering price per share on the last day of the
relevant period. The results are compounded on a bond equivalent (semi-annual)
basis and then annualized. Net investment income per share is equal to the
dividends and interest earned during the period, reduced by accrued expenses
for the period. The calculation of net investment income for these purposes
may differ from the net investment income determined for accounting purposes.
The Growth and Income Fund's quotations of distribution rate are calculated by
annualizing the most recent distribution of net investment income for a
monthly, quarterly or other relevant period and dividing this amount by the
net asset value per share on the last day of the period for which the
distribution rates are being calculated.
Each Fund's total return, yield and distribution rate will be calculated
separately for each class of shares in existence. Because each class of shares
may be subject to different expenses, the total return, yield and distribution
rate calculations with respect to each class of shares for the same period
will differ.
The investment results of a Fund will fluctuate over time and any
presentation of investment results for any prior period should not be
considered a representation of what an investment may earn or what the Fund's
performance may be in any future period. In addition to information provided
in shareholder reports, the Funds may, in their discretion, from time to time
make a list of their holdings available to investors upon request.
SHARES OF THE COMPANY
Each Fund is a series of the Company, which was incorporated under the laws
of the State of Maryland on September 27, 1989. The authorized capital stock
of the Company consists of 2,000,000,000 shares of common stock, par value
$.001 per share. The Directors of the Company have authority under the
Company's Charter to create and classify shares of capital stock in separate
series, without further action by shareholders. Additional series may be added
in the future. The Directors also have authority to classify and reclassify
any series or portfolio of shares into one or more classes. The Select Equity,
Growth and Income, International Equity and Asia Growth Funds offer four
classes of shares: Institutional Shares, Service Shares, Class A Shares and
Class B Shares. The Mid-Cap Equity Fund offers two classes of shares:
Institutional Shares and Service Shares.
28
<PAGE>
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 Fund available for distribution to such shareholders. All
shares entitle their holders to one vote per share, are freely transferable
and have no preemptive, subscription or conversion rights.
As of April 15, 1996, State Street Bank and Trust Company as Trustee for
Goldman Sachs Profit Sharing Master Trust, attention: Louis Pereira, P.O. Box
1992, Boston, MA 02105-1992 was record holder of 98% of Mid-Cap Equity Fund's
outstanding shares.
Unless otherwise required by the Investment Company Act of 1940, as amended
(the "Act"), ordinarily it will not be necessary for the Company to hold
annual meetings of shareholders. As a result, Fund shareholders may not
consider each year the election of Directors or the appointment of independent
accountants. However, pursuant to the Company's By-Laws, the recordholders of
at least 10% of the shares outstanding and entitled to vote at a special
meeting may require the Company to hold such special meeting of shareholders
for any purpose and recordholders may, under certain circumstances as
permitted by the Act, communicate with other shareholders in connection with
requiring a special meeting of shareholders. Shareholders of the Company may
remove a Director by the affirmative vote of a majority of the Company's
outstanding voting shares. The Board of Directors, however, will call a
special meeting of shareholders for the purpose of electing Directors if, at
any time, less than a majority of Directors holding office at the time were
elected by shareholders.
In the interest of economy and convenience, the Company 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 Fund are reflected in
account statements from the Transfer Agent.
TAXATION
FEDERAL TAXES
Each Fund is treated as a separate entity for tax purposes. Each Fund has
elected or intends to elect to be treated as a regulated investment company
and intends to qualify for such treatment for each taxable year under
Subchapter M of the Code. To qualify as such, each Fund must satisfy certain
requirements relating to the sources of its income, diversification of its
assets and distribution of its income to shareholders. As a regulated
investment company, each Fund will not be subject to federal income or excise
tax on any net investment income and net realized capital gains that are
distributed to its shareholders in accordance with certain timing requirements
of the Code.
Dividends paid by a Fund from net investment income, certain net realized
foreign exchange gains, the excess of net short-term capital gain over net
long-term capital loss and original issue discount or market discount income
will be taxable to its shareholders as ordinary income. Dividends paid by a
Fund from the excess of net long-term capital gain over net short-term capital
loss will be taxable as long-term capital gains regardless of how long the
shareholders have held their shares. These tax consequences will apply
regardless of whether distributions are received in cash or reinvested in
shares. A Fund's dividends that are paid to its corporate shareholders and are
attributable to qualifying dividends such Fund receives from U.S. domestic
corporations may be eligible, in the hands of such corporate shareholders, for
the corporate dividends-received deduction, subject to certain holding period
requirements and debt financing limitations under the Code. Dividends paid by
International Equity Fund and Asia Growth Fund are not generally expected to
qualify, in the hands of corporate shareholders, for the corporate dividends-
received deduction, but a portion of each other Fund's dividends may
29
<PAGE>
generally so qualify. A Fund's investment in zero coupon securities may
require the Fund to sell certain of its portfolio securities to generate
sufficient cash to satisfy certain income distribution requirements. Certain
distributions paid by a Fund in January of a given year may be taxable to
shareholders as if received the prior December 31. Shareholders will be
informed annually about the amount and character of distributions received
from the Funds for federal income tax purposes.
Investors should consider the tax implications of buying shares immediately
prior to a distribution. Investors who purchase shares shortly before the
record date for a distribution will pay a per share price that includes the
value of the anticipated distribution and will be taxed on the distribution
even though the distribution represents a return of a portion of the purchase
price.
Redemptions and exchanges of shares are taxable events on which a
shareholder may recognize a gain or loss.
Individuals and certain other classes of shareholders may be subject to 31%
backup withholding of federal income tax on distributions, redemptions and
exchanges if they fail to furnish their correct taxpayer identification number
and certain certifications required by the Internal Revenue Service or if they
are otherwise subject to backup withholding. Individuals, corporations and
other shareholders that are not U.S. persons under the Code are subject to
different tax rules and may be subject to nonresident alien withholding at the
rate of 30% (or a lower rate provided by an applicable tax treaty) on amounts
treated as ordinary dividends from the Funds.
Each Fund may be subject to foreign withholding or other foreign taxes on
income or gain from certain foreign securities. The Funds do not anticipate
that they will elect to pass such foreign taxes through to their shareholders,
who therefore will generally not take such taxes into account on their own tax
returns. The Funds will generally deduct such taxes in determining the amounts
available for distribution to shareholders.
OTHER TAXES
In addition to federal taxes, a shareholder may be subject to state, local
or foreign taxes on payments received from the Funds. A state income (and
possibly local income and/or intangible property) tax exemption is generally
available to the extent (if any) a Fund's distributions are derived from
interest on (or, in the case of intangibles taxes, the value of its assets is
attributable to) certain U.S. Government obligations, provided in some states
that certain thresholds for holdings of such obligations and/or reporting
requirements are satisfied. For a further discussion of certain tax
consequences of investing in shares of the Funds, see "Taxation" in the
Additional Statement. Shareholders are urged to consult their own tax advisers
regarding specific questions as to federal, state and local taxes as well as
to any foreign taxes.
ADDITIONAL INFORMATION
The term "a vote of the majority of the outstanding shares" of a Fund means
the vote of the lesser of (i) 67% or more of the shares present at a meeting,
if the holders of more than 50% of the outstanding shares of the Fund are
present or represented by proxy, or (ii) more than 50% of the outstanding
shares of the Fund.
As used in this Prospectus, the term "Business Day" means any day the New
York Stock Exchange is open for trading, which is Monday through Friday except
for holidays. The New York Stock Exchange is closed on the following holidays:
New Year's Day (observed), Presidents' Day (observed), Good Friday, Memorial
Day (observed), Independence Day, Labor Day, Thanksgiving Day and Christmas
Day.
30
<PAGE>
REPORTS TO SHAREHOLDERS
Institutional Shareholders will receive an annual report containing audited
financial statements and a semi-annual report. Each Institutional Shareholder
will also be provided with a printed confirmation for each transaction in the
shareholder's account and an individual quarterly statement. A year-to-date
statement for any account will be provided upon request made to Goldman Sachs.
The Funds do not generally provide subaccounting services.
DIVIDENDS
Each dividend from net investment income and capital gain distributions, if
any, declared by a Fund on its outstanding Institutional Shares will, at the
election of each shareholder, be paid (i) in cash or (ii) in additional
Institutional Shares of such Fund. This election should initially be made on a
shareholder's Account Information Form and may be changed upon written notice
to Goldman Sachs at any time prior to the record date for a particular
dividend or distribution. If no election is made, all dividends from net
investment income and capital gain distributions will be reinvested in
Institutional Shares of the applicable Fund.
The election to reinvest dividends and distributions paid by a Fund in
additional Institutional Shares of the Fund will not affect the tax treatment
of such dividends and distributions, which will be treated as received by the
shareholder and then used to purchase Institutional Shares of a Fund.
Each Fund intends that all or substantially all its net investment income
and net realized long-term and short-term capital gains, after reduction by
available capital losses, including any capital losses carried forward from
prior years, will be declared as dividends for each taxable year. The Growth
and Income Fund will pay dividends from net investment income quarterly. Each
other Fund will pay dividends from net investment income at least annually.
All of the Funds will pay dividends from net realized long-term and short-term
capital gains, reduced by available capital losses, at least annually. From
time to time, a portion of a Fund's dividends may constitute a return of
capital.
At the time of an investor's purchase of shares of a Fund a portion of the
net asset value per share may be represented by undistributed income of the
Fund or realized or unrealized appreciation of the Fund's portfolio
securities. Therefore, subsequent distributions (or portions thereof) of
taxable income or realized appreciation on such shares may be taxable to the
investor even if the net asset value of the investor's shares is, as a result
of the distributions, reduced below the cost of such shares and the
distributions (or portions thereof) represent a return of a portion of the
purchase price.
31
<PAGE>
PURCHASE OF INSTITUTIONAL SHARES
Institutional Shares may be purchased on any Business Day through Goldman
Sachs at the net asset value per share next determined after receipt of an
order. No sales load will be charged. If, by the close of regular trading on
the New York Stock Exchange (currently 3:00 p.m. Chicago time, 4:00 p.m. New
York time), an order is received by Goldman Sachs, the price per share will be
the net asset value per share computed on the day the purchase order is
received. See "Net Asset Value." Purchases of Institutional Shares of the
Funds must be settled within three (3) Business Days of the receipt of a
complete purchase order. Payment of the proceeds of redemption of shares
purchased by check may be delayed for a period of time as described under
"Redemption of Institutional Shares."
Prior to making an initial investment in a Fund, an investor must open an
account with a Fund by furnishing necessary information to the Fund or Goldman
Sachs. An Account Information Form, a copy of which is attached to this
Prospectus, should be used to open such an account. Subsequent purchases may
be made in the manner set forth below.
PURCHASE PROCEDURES
Purchases of Institutional Shares may be made by placing an order with
Goldman Sachs at 800-621-2550 and either wiring Federal Funds to State Street
Bank and Trust Company ("State Street") or initiating an ACH transfer.
Purchases may also be made by check (except that a check drawn on a foreign
bank or a third party check will not be accepted) or Federal Reserve draft
made payable to "Goldman Sachs Equity Portfolios, Inc.--Name of Fund" and
should be directed to "Goldman Sachs Equity Portfolios, Inc.--Name of Fund,"
c/o National Financial Data Services, Inc. ("NFDS"), P.O. Box 419711, Kansas
City, MO 64141-6711.
The minimum initial investment is $1,000,000 in Institutional Shares of a
Fund alone or in combination with other assets under the management of GSAM
and its affiliates. Institutional Shares of the Fund are offered to (a) banks,
trust companies or other types of depository institutions investing for their
own account or on behalf of their clients; (b) pension and profit sharing
plans, pension funds and other company-sponsored benefit plans; (c) qualified
non-profit organizations, charitable trusts, foundations and endowments; (d)
any state, county, city or any instrumentality, department, authority or
agency thereof; (e) corporations and other for-profit business organizations
with assets of at least $100 million or publicly traded securities
outstanding; (f) "wrap" accounts for the benefit of clients of broker-dealers,
financial institutions or financial planners, provided that they have entered
into an agreement with GSAM specifying aggregate minimums and certain
operating policies and standards; (g) registered investment advisers who have
entered into an agreement with GSAM specifying aggregate minimums and certain
operating policies and standards; and (h) accounts over which GSAM or its
advisory affiliates have investment discretion. The minimum investment
requirement may be waived at the discretion of the Company's officers. No
minimum amount is required for subsequent investments.
OTHER PURCHASE INFORMATION
The Funds reserve the right to redeem the Institutional Shares of any
Institutional Shareholder whose account balance is less than $50 as a result
of earlier redemptions. Such redemptions will not be implemented if the value
of an Institutional Shareholder's account falls below the minimum account
balance solely as a result of market conditions. The Company will give sixty
(60) days' prior written notice to Institutional Shareholders
32
<PAGE>
whose Institutional Shares are being redeemed to allow them to purchase
sufficient additional Institutional Shares of a Fund to avoid such redemption.
Banks, trust companies or other institutions through which investors acquire
Institutional Shares may impose charges in connection with transactions in
Institutional Shares. Such institutions should be consulted for information
regarding such charges.
The Funds and Goldman Sachs each reserves the right to reject or restrict
any specific purchase order (including exchanges) by a particular purchaser
(or group of related purchasers). This may occur, for example, when a
purchaser's pattern of frequent purchases, sales or exchanges of Institutional
Shares of a Fund is evident, or if purchases, sales or exchanges are, or a
subsequent abrupt redemption might be, of a size that would disrupt management
of the Funds.
EXCHANGE PRIVILEGE
Institutional Shares of the Fund may be exchanged for (i) Institutional
Shares of any other mutual fund sponsored by Goldman Sachs and designated as
an eligible fund for this purpose and (ii) the corresponding class of any
portfolio of Goldman Sachs Money Market Trust at the net asset value next
determined either by writing to Goldman Sachs, Attention: Goldman Sachs Equity
Portfolios, Inc.--Name of Fund, c/o GSAM Shareholder Services, 4900 Sears
Tower, Chicago, Illinois 60606 or, if previously elected in the Fund's Account
Information Form, by telephone at 800-621-2550 (7:00 a.m. to 3:00 p.m. Chicago
time). A shareholder should obtain and read the prospectus relating to any
other fund and its shares or units and consider its investment objective,
policies and applicable fees before making an exchange. Under the telephone
exchange privilege, Institutional Shares may be exchanged among accounts with
different names, addresses and social security or other taxpayer
identification numbers only if the exchange request is in writing and is
received in accordance with the procedures set forth under "Redemptions of
Institutional Shares."
In an effort to prevent unauthorized or fraudulent exchanges by telephone,
Goldman Sachs employs reasonable procedures as set forth under "Redemption of
Institutional Shares" to confirm that such instructions are genuine. In times
of drastic economic or market changes the telephone exchange privilege may be
difficult to implement. For federal income tax purposes, an exchange is
treated as a sale of the Institutional Shares surrendered in the exchange on
which an investor may realize a gain or loss, followed by a purchase of
Institutional Shares, or the corresponding class of any portfolio of Goldman
Sachs Money Market Trust received in the exchange. Shareholders should consult
their own tax adviser concerning the tax consequences of an exchange.
Each exchange which represents an initial investment in a Fund must satisfy
the minimum investment requirements of the fund into which the Institutional
Shares are being exchanged, except that this requirement may be waived at the
discretion of the officers of the Fund. Exchanges are available only in states
where exchanges may legally be made. The exchange privilege may be modified or
withdrawn at any time on sixty (60) days' written notice to Institutional
Shareholders and is subject to certain limitations. See "Purchase of
Institutional Shares."
33
<PAGE>
REDEMPTION OF INSTITUTIONAL SHARES
The Funds will redeem their Institutional Shares upon request of an
Institutional Shareholder on any Business Day at the net asset value next
determined after the receipt by the Transfer Agent of such request in proper
form. See "Net Asset Value." If Institutional Shares to be redeemed were
recently purchased by check, a Fund may delay transmittal of redemption
proceeds until such time as it has assured itself that good funds have been
collected for the purchase of such Institutional Shares. This may take up to
fifteen (15) days. Redemption requests may be made by writing to or calling
the Transfer Agent at the address or telephone number set forth on the back
cover of this Prospectus. An Institutional Shareholder may request redemptions
by telephone if the optional telephone redemption privilege is elected on the
Account Information Form accompanying this Prospectus. It may be difficult to
implement redemptions by telephone in times of drastic economic or market
changes.
In an effort to prevent unauthorized or fraudulent redemption or exchange
requests by telephone, Goldman Sachs employs reasonable procedures specified
by the Company to confirm that such instructions are genuine. Among other
things, any redemption request that requires money to go to an account or
address other than that designated on the Account Information Form must be in
writing and signed by an authorized person designated on the Account
Information Form. Any such written request is also confirmed by telephone with
both the requesting party and the designated bank account to verify
instructions. Exchanges among accounts with different names, addresses and
social security or other taxpayer identification numbers must be in writing
and signed by an authorized person designated on the Account Information Form.
Other procedures may be implemented from time to time. If reasonable
procedures are not implemented, the Company may be liable for any loss due to
unauthorized or fraudulent transactions. In all other cases, neither the
Funds, the Company nor Goldman Sachs will be responsible for the authenticity
of redemption or exchange instructions received by telephone.
Written requests for redemptions must be signed by each Institutional
Shareholder whose signature has been guaranteed by a bank, a securities broker
or dealer, a credit union having authority to issue signature guarantees, a
savings and loan association, a building and loan association, a cooperative
bank, a federal savings bank or association, a national securities exchange, a
registered securities association or a clearing agency, provided that such
institution satisfies the standards established by the Transfer Agent.
The Funds will arrange for the proceeds of redemptions effected by any means
to be wired as Federal Funds to the bank account designated in the
Institutional Shareholder's Account Information Form or, if the shareholder
elects in writing, by check. Redemption proceeds paid by wire transfer will
normally be wired on the next Business Day in Federal Funds (for a total one-
day delay), but may be paid up to three (3) Business Days after receipt of a
properly executed redemption request. Wiring of redemption proceeds may be
delayed one additional Business Day if the Federal Reserve Bank is closed on
the day redemption proceeds would originally be wired. Redemption proceeds
paid by check will normally be mailed to the address of record within three
(3) Business Days of receipt of a properly executed redemption request. In
order to change the bank designated on the Account Information Form to receive
redemption proceeds, a written request must be received by the Transfer Agent.
This request must be signature guaranteed as set forth above. Further
documentation may be required for executors, trustees or corporations. Once
wire transfer instructions have been given by Goldman Sachs, neither the
Funds, the Company nor Goldman Sachs assumes any further responsibility for
the performance of intermediaries or the Institutional Shareholder's bank in
the transfer process. If a problem with such performance arises, the
Institutional Shareholder should deal directly with such intermediaries or
bank.
34
<PAGE>
Additional documentation regarding a redemption by any means may be required
to effect a redemption when deemed appropriate by Goldman Sachs. The request
for such redemption will not be considered to have been received in proper
form until such additional documentation has been received.
---------------------
35
<PAGE>
APPENDIX
GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON ACCOUNT INFORMATION FORM
You are required by law to provide the Fund with your correct Taxpayer
Identification Number (TIN), regardless of whether you file tax returns.
Failure to do so may subject you to penalties. Failure to provide your correct
TIN and to sign your name in the Certification section of the Account
Information Form could result in withholding of 31% by the Fund for the
federal backup withholding tax on distributions, redemptions, exchanges and
other payments relating to your account.
Any tax withheld may be credited against taxes owed on your federal income
tax return.
If you do not have a TIN, you should apply for one immediately by contacting
your local office of the Social Security Administration or the Internal
Revenue Service (IRS). Backup withholding could also apply to payments
relating to your account prior to the Fund's receipt of your TIN.
Special rules apply for certain entities. For example, for an account
established under a Uniform Gifts or Transfers to Minors Act, the TIN of the
minor should be furnished.
If you have been notified by the IRS that you are subject to backup
withholding because you failed to report all your interest and/or dividend
income on your tax return and you have not been notified by the IRS that such
withholding should cease, you must cross out item (2) in the Certification
section of the Account Information Form.
If you are an exempt recipient, you should furnish your TIN and certify your
exemption by signing the Certification section and writing "exempt" after your
signature. Exempt recipients include: corporations, tax-exempt pension plans
and IRA's, governmental agencies, financial institutions, registered
securities and commodities dealers and others.
If you are a nonresident alien or foreign entity, you must provide a
completed Form W-8 to the Fund in order to avoid backup withholding on certain
payments. Other payments to you may be subject to nonresident alien
withholding of up to 30%.
For further information regarding backup and nonresident alien withholding,
see Sections 3406, 1441 and 1442 of the Internal Revenue Code and consult your
tax adviser.
A-1
<PAGE>
[LOGO] Goldman Sachs
GOLDMAN SACHS PORTFOLIOS -- ACCOUNT INFORMATION FORM
This Account Information Form Should be Forwarded Promptly to
Goldman, Sachs & Co. No Redemption Can be Made Prior to Its Receipt
Send to: Goldman Sachs Portfolios Master No. ________________
4900 Sears Tower Fund Use Only
Chicago, IL 60606
1-800-621-2550 Date: _____________________
[_] GOLDMAN SACHS GLOBAL INCOME FUND
[_] GOLDMAN SACHS -- MONEY MARKET TRUST
[_] GOLDMAN SACHS SELECT EQUITY FUND
Fill in Portfolio(s):________________ [_] GOLDMAN SACHS GROWTH AND INCOME
FUND
[_] GS -- ADJUSTABLE RATE GOVERNMENT FUND
[_] GOLDMAN SACHS MID-CAP EQUITY
FUND
[_] GS -- SHORT-DURATION GOVERNMENT FUND
[_] GOLDMAN SACHS INTERNATIONAL
EQUITY FUND
[_] GS -- SHORT DURATION TAX-FREE FUND [_] GOLDMAN SACHS ASIA GROWTH FUND
[_] GS -- CORE FIXED INCOME FUND
[_] OTHER
Class of Shares:_____________________
A. ACCOUNT RECORD
- -------------------------------------------------------------------------------
- ------------------------------------- -------------------------------------
Name of Account Telephone Number
- ------------------------------------- U.S. Citizen or
Street or P.O. Box Resident? Yes [_] No [_]
- ------------------------------------- If no is checked, fill in country of
City State Zip tax residence:
- ------------------------------------- -------------------------------------
Attention
B. DIVIDENDS AND DISTRIBUTIONS -- Check appropriate box (see "Dividends" in
Prospectus)
- -------------------------------------------------------------------------------
Dividends (including net short-term capital gains) [_] Cash [_] Units/Shares
Net Long-Term Capital Gains Distributions [_] Cash [_] Units/Shares
Fill in Fund(s): ____________________
(If no box is checked, dividends and capital gains distributions will be
reinvested in the account.)
C. SOCIAL SECURITY NUMBER OR OTHER TAXPAYER IDENTIFICATION NUMBER
CERTIFICATION
- -------------------------------------------------------------------------------
Taxpayer Identification Number: ___________________________
Under penalties of perjury, I certify that (1) The number shown on this form
is my correct Taxpayer Identification Number (or I am waiting for a number to
be issued to me), and (2) I am not subject to backup withholding because I am
exempt from backup withholding or I have not been notified by the Internal
Revenue Service (IRS) that I am subject to backup withholding as a result of a
failure to report all interest or dividends, or the IRS has notified me that I
am no longer subject to backup withholding. See the "Guidelines for
Certification of Taxpayer Identification Number on Account Information Form,"
contained in the Appendix to the accompanying Prospectus.
SIGN ------------------------------ -------------------------------------
HERE Signature Name (print) and Title (if any)
------------------------------ -------------------------------------
Date
D. OPTIONAL TELEPHONE EXCHANGE (see "Exchange Privilege" in Prospectus)
- -------------------------------------------------------------------------------
[_] Goldman, Sachs & Co. is hereby authorized to accept and act upon telephone
instructions from the undersigned or any other person for the exchange of
shares/units of the Fund into any fund described in the accompanying
Prospectus. The undersigned understands and agrees that neither the
applicable Fund nor Goldman, Sachs & Co. will be liable for any loss,
expense, or cost arising out of any telephone request effected hereunder.
Continued on reverse side
<PAGE>
E. REDEMPTION PLANS -- check one box only (see "Redemption of Units/Shares" in
Prospectus)
- -------------------------------------------------------------------------------
[_] I authorize GOLDMAN, SACHS & CO. to honor telephone, telegraphic or other
instructions WITHOUT SIGNATURE GUARANTEE, from any person for the redemption
of shares/units for the above account provided that the proceeds are
transmitted to the following bank account(s) only. I understand any changes
to the following information must be made in writing to GOLDMAN, SACHS &
CO., must contain the appropriate number of signatures listed below and all
signatures MUST BE SIGNATURE GUARANTEED. Absent its own gross negligence,
neither the applicable Fund nor GOLDMAN, SACHS & CO. shall be liable for
such redemptions or for payments made to any unauthorized account.
[_] I have furnished GOLDMAN, SACHS & CO., WITH A SIGNATURE GUARANTEE (See
section G). I authorize GOLDMAN, SACHS & CO. to honor telephone,
telegraphic, or other instructions from any person for the redemption of
shares/units for the above account provided that the proceeds are
transmitted to the following bank account(s) only. Any changes to the
following information must be made in writing to GOLDMAN, SACHS & CO., (but
without signature guarantee) and contain the appropriate number of
signatures listed below. Absent its own gross negligence, neither the
applicable Fund nor GOLDMAN, SACHS & CO. shall be liable for such
redemptions or for payments made to any unauthorized account.
Please complete the following bank account information and place a line
through the unused portion.
Additional instructions may be added on separate pages, if necessary
Number of Bank Account Destinations completed in Section E of this form: [_]
1) ___________________________________ 3) ___________________________________
Bank Name Bank Routing No. Bank Name Bank Routing No.
------------------------------------ ------------------------------------
Street Address Street Address
------------------------------------ ------------------------------------
City State Zip City State Zip
------------------------------------ ------------------------------------
Account Name Account No. Account Name Account No.
2) ___________________________________ 4) __________________________________
Bank Name Bank Routing No. Bank Name Bank Routing No.
------------------------------------ ------------------------------------
Street Address Street Address
------------------------------------ ------------------------------------
City State Zip City State Zip
------------------------------------ ------------------------------------
Account Name Account No., Account Name Account No.,
[_] By Mail
F. SIGNATURE AUTHORIZATION
- -------------------------------------------------------------------------------
By the execution of this Account Information Form, the undersigned represents
and warrants that it has full right, power and authority to make the
investment applied for pursuant to this application and is acting for itself
or in some fiduciary capacity in making such investment, and the individual(s)
signing on behalf of the undersigned represent and warrant that they are duly
authorized to sign this application and to purchase and redeem Fund
units/shares on behalf of the undersigned. THE UNDERSIGNED AFFIRMS THAT IT HAS
RECEIVED AND REVIEWED A CURRENT FUND PROSPECTUS.
The undersigned understands that non-money market funds do not maintain a
constant net asset value and further that a constant net asset value in money
market funds is not guaranteed. As a result, the undersigned may experience a
loss of principal on its investments.
Number of Signatures required to make changes to this form: [_]
S I G N
HERE
------------------------------ -------------------------------------
Signature Name (print) and Title (if any)
Date
-------------------------------------
------------------------------ Date
Signature
-------------------------------------
------------------------------ Date
Signature
G. SIGNATURE GUARANTEE
- -------------------------------------------------------------------------------
- ------------------------------------- Affix Guarantee Stamp Here
Signature Guaranteed By
- -------------------------------------
Authorized Signature
<PAGE>
- --------------------------------------------------------------------------------
GOLDMAN SACHS ASSET
MANAGEMENT
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
GOLDMAN SACHS FUNDS
MANAGEMENT, L.P.
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
GOLDMAN SACHS ASSET
MANAGEMENT INTERNATIONAL
140 FLEET STREET
LONDON, ENGLAND EC4A 2BJ
GOLDMAN, SACHS & CO.
DISTRIBUTOR
85 BROAD STREET
NEW YORK, NEW YORK 10004
GOLDMAN, SACHS & CO.
TRANSFER AGENT
4900 SEARS TOWER
CHICAGO, ILLINOIS 60606
TOLL FREE (IN U.S.) . . . . . . . . 800-621-2550
EQ1IS/6.5K/596
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE GOLDMAN SACHS
EQUITY PORTFOLIOS
INSTITUTIONAL SHARES
- --------------------------------------------------------------------------------
PROSPECTUS
[LOGO] Goldman Sachs
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
PROSPECTUS
May 1, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fund Highlights........................ 3
Fees and Expenses...................... 6
Financial Highlights................... 8
Investment Objectives and Policies..... 11
Description of Securities.............. 14
Investment Techniques.................. 18
Risk Factors........................... 22
Investment Restrictions................ 23
Portfolio Turnover..................... 24
Management............................. 24
Net Asset Value........................ 27
Performance Information................ 28
Shares of the Company.................. 28
Taxation............................... 29
Additional Information................. 30
Additional Services.................... 31
Reports to Shareholders................ 31
Dividends.............................. 32
Purchase of Service Shares............. 32
Exchange Privilege..................... 33
Redemption of Service Shares........... 34
</TABLE>
THE GOLDMAN SACHS EQUITY PORTFOLIOS
SERVICE SHARES
GOLDMAN SACHS SELECT EQUITY FUND
Seeks total return through investments
in equity securities consisting of capi-
tal appreciation plus dividend income
that, net of Fund expenses, exceeds the
total return realized on the Standard
and Poor's Index of 500 Common Stocks.
GOLDMAN SACHS GROWTH AND INCOME FUND
Seeks long-term growth of capital and
growth of income through investments in
equity securities that are considered to
have favorable prospects for capital ap-
preciation and/or dividend paying abili-
ty.
GOLDMAN SACHS MID-CAP EQUITY FUND
Seeks long-term capital growth primarily
through investments in equity securities
of companies with public stock market
capitalizations of between $500 million
and $7 billion at the time of invest-
ment.
GOLDMAN SACHS INTERNATIONAL EQUITY FUND
Seeks long-term capital appreciation
through investments in equity securities
of companies that are organized outside
the U.S. or whose securities are princi-
pally traded outside the U.S.
GOLDMAN SACHS ASIA GROWTH FUND
Seeks long-term capital appreciation
through investments in equity securities
of companies related (in the manner de-
scribed herein) to Asian countries.
----------
SERVICE SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY, ANY BANK OR OTHER INSURED DEPOSITORY INSTITUTION AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD
OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN SERVICE SHARES OF THE FUNDS
INVOLVES INVESTMENT RISKS INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<PAGE>
A FUND'S INVESTMENTS IN SECURITIES OF FOREIGN ISSUERS AND FOREIGN CURRENCIES
ENTAIL CERTAIN RISKS NOT CUSTOMARILY ASSOCIATED WITH INVESTING IN U.S. DOLLAR-
DENOMINATED SECURITIES OF U.S. ISSUERS. IN PARTICULAR, THE SECURITIES MARKETS
OF ASIAN AND OTHER EMERGING MARKET COUNTRIES IN WHICH THE ASIA GROWTH AND
INTERNATIONAL EQUITY FUNDS INVEST ARE LESS LIQUID, SUBJECT TO GREATER PRICE
VOLATILITY, HAVE SMALLER MARKET CAPITALIZATIONS, HAVE LESS GOVERNMENT
REGULATION AND ARE NOT SUBJECT TO AS EXTENSIVE AND FREQUENT ACCOUNTING,
FINANCIAL AND OTHER REPORTING REQUIREMENTS AS THE SECURITIES MARKETS OF MORE
DEVELOPED COUNTRIES. THE FUNDS ARE INTENDED FOR INVESTORS WHO CAN ACCEPT THE
RISKS ASSOCIATED WITH SUCH INVESTMENTS AND MAY NOT BE SUITABLE FOR ALL
INVESTORS. SEE "DESCRIPTION OF SECURITIES."
Goldman Sachs Asset Management ("GSAM"), New York, New York, a separate
operating division of Goldman, Sachs & Co. ("Goldman Sachs"), serves as
investment adviser to the Growth and Income, Mid-Cap Equity and International
Equity Funds. Goldman Sachs Funds Management, L.P. ("GSFM"), New York, New
York, an affiliate of Goldman Sachs, serves as investment adviser to the
Select Equity Fund. Goldman Sachs Asset Management International ("GSAMI"),
London, England, an affiliate of Goldman Sachs, serves as investment adviser
to the Asia Growth Fund and subadviser to the International Equity Fund. GSAM,
GSFM and GSAMI are each referred to in this Prospectus as the "Investment
Adviser." GSAM serves as each Fund's administrator and Goldman Sachs serves as
each Fund's distributor and transfer agent.
This Prospectus provides information about the Company and the Funds that a
prospective investor should understand before investing. This Prospectus
should be retained for future reference. A Statement of Additional Information
(the "Additional Statement"), dated May 1, 1996, containing further
information about the Company and the Funds which may be of interest to
investors, has been filed with the Securities and Exchange Commission ("SEC"),
is incorporated herein by reference in its entirety, and may be obtained
without charge from institutions ("Service Organizations") that hold, directly
or through an agent, Service Shares for the benefit of their customers, or
Goldman Sachs by calling the telephone number, or writing to one of the
addresses, listed on the back cover of this Prospectus.
2
<PAGE>
FUND HIGHLIGHTS
The following is intended to highlight certain information contained in
this Prospectus and is qualified in its entirety by the more detailed
information contained herein.
WHAT IS GOLDMAN SACHS EQUITY PORTFOLIOS, INC.?
Goldman Sachs Equity Portfolios, Inc. is an open-end management
investment company that offers its shares in several investment funds
(mutual funds). Each Fund pools the monies of investors by selling its
shares to the public and investing these monies in a portfolio of
securities designed to achieve that Fund's stated investment objectives.
WHAT ARE THE INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS?
Each Fund has distinct investment objectives and policies. There can be
no assurance that a Fund's objectives will be achieved. For a complete
description of each Fund's investment objectives and policies, see
"Investment Objectives and Policies," "Description of Securities" and
"Investment Techniques."
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
FUND NAME INVESTMENT OBJECTIVES INVESTMENT CRITERIA BENCHMARK
- ---------------- ------------------------ ----------------------- ---------------------
SELECT EQUITY Total return through At least 90% of total The S&P 500 Index
FUND investments in equity assets in equity
securities consisting of securities. The Fund's
capital appreciation investments are
plus dividend income selected using
that, net of Fund both fundamental
expenses, exceeds the research and a variety
total return realized on of quantitative
the S&P 500 Index. techniques which seek
to maximize the
Fund's reward to risk
ratio.
- ----------------------------------------------------------------------------------------
GROWTH AND Long-term growth of At least 65% of total The S&P 500 Index
INCOME FUND capital and growth of assets in equity
income. securities that the
Investment Adviser
considers to have
favorable prospects for
capital appreciation
and/or dividend paying
ability.
- ----------------------------------------------------------------------------------------
MID-CAP EQUITY Long-term capital At least 65% of total The Russell Midcap
FUND growth. assets in Index
equity securities of
companies ("Mid-Cap
Companies") with public
stock market
capitalizations of
under $5 billion at the
time of investment.
</TABLE>
(continued)
3
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FUND NAME INVESTMENT OBJECTIVES INVESTMENT CRITERIA BENCHMARK
- --------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C>
INTERNATIONAL EQUITY Long-term capital Substantially all, and The FT-Actuaries
FUND appreciation. at least 65%, of total Europe and Pacific
assets in equity Index (unhedged)
securities
of companies organized
outside the United
States or whose
securities are
principally traded
outside the United
States. The Fund may
invest in securities
of issuers located in
countries with
emerging economies or
securities markets and
employ certain
currency management
techniques.
- ---------------------------------------------------------------------------------------------
ASIA GROWTH FUND Long-term capital Substantially all, and The (MSCI) Morgan
appreciation. at least 65%, of total Stanley Capital
assets in equity International AC Asia
securities Free ex Japan Index
of companies in China, (unhedged)
Hong Kong, India,
Indonesia, Malaysia,
Pakistan, the
Philippines,
Singapore, South
Korea, Sri Lanka,
Taiwan and Thailand.
The Fund may employ
certain currency
management techniques.
</TABLE>
- --------------------------------------------------------------------------------
WHAT ARE THE RISK FACTORS AND SPECIAL CHARACTERISTICS THAT I SHOULD
CONSIDER BEFORE INVESTING?
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. There can be no assurance that a Fund's investment objectives will
be achieved. See "Risk Factors."
Risk of Investments in Small to Medium Capitalization Companies. To the
extent that a Fund invests in the securities and related financial
instruments of small to medium sized market capitalization companies, a
Fund may be exposed to a higher degree of risk and price volatility because
such securities may lack sufficient market liquidity to enable the Fund to
effect sales at an advantageous time or without a substantial drop in
price.
Foreign Risks. Investments in securities of foreign issuers and
currencies involve risks that are different from those associated with
investment in domestic securities. The risks of foreign investments and
currencies include changes in relative currency exchange rates, political
and economic developments, the imposition of exchange controls,
confiscation and other governmental restrictions. Generally, there is less
availability of data on foreign companies and securities markets as well as
less regulation of foreign stock exchanges, brokers and issuers. A Fund's
investments in emerging markets and countries involves greater risks than
investments in the developed countries of Western Europe, the U.S. and
Japan. In addition, because the International Equity and Asia Growth Funds
invest primarily outside the U.S., these Funds may involve greater risks,
since the securities markets of foreign countries are generally less liquid
and subject to greater price volatility. In particular, the securities
markets of the developing countries of Asia are marked by 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.
Other. A Fund's use of certain investment techniques, including
derivatives, forward contracts, options and futures will subject the Fund
to greater risk than funds that do not employ such techniques.
4
<PAGE>
WHO MANAGES THE FUNDS?
Goldman Sachs Asset Management acts as administrator to each Fund and
serves as the Investment Adviser to the Growth and Income, Mid-Cap Equity
and International Equity Funds. Goldman Sachs Funds Management, L.P. serves
as Investment Adviser to the Select Equity Fund. Goldman Sachs Asset
Management International serves as Investment Adviser to the Asia Growth
Fund and subadviser to the International Equity Fund. As of March 27, 1996,
the Investment Advisers, together with their affiliates, acted as
investment adviser, administrator or distributor for assets in excess of
$58 billion.
WHO DISTRIBUTES THE FUND'S SHARES?
Goldman Sachs acts as distributor of each Fund's shares.
WHAT IS THE MINIMUM INVESTMENT?
The Funds do not have any minimum purchase or account requirements with
respect to Service Shares. A Service Organization may, however, impose a
minimum amount for initial and subsequent investments in Service Shares,
and may establish other requirements such as a minimum account balance.
HOW DO I PURCHASE SERVICE SHARES?
It is expected that all purchasers of Service Shares of a Fund will be
Service Organizations or their nominees. Customers of Service Organizations
may invest in Service Shares only through their Service Organizations.
Service Shares of a Fund are purchased by Service Organizations through
Goldman Sachs at the current net asset value without any sales load. See
"Purchase of Service Shares."
ADDITIONAL SERVICES. The Company, on behalf of the Funds, has adopted a
Service Plan with respect to the Service Shares which authorizes a Fund to
compensate Service Organizations for providing account administration and
shareholder liaison services to their customers who are the beneficial
owners of such Shares. The Company, on behalf of the Funds, will enter into
agreements with each Service Organization which will provide for
compensation to the Service Organization in an amount up to 0.50% (on an
annualized basis) of the average daily net assets of the Service Shares of
the Funds attributable to or held in the name of the Service Organization
for its customers. See "Additional Services."
HOW DO I SELL MY SERVICE SHARES?
You may redeem Service Shares upon request on any Business Day, as
defined under "Additional Information," at the net asset value next
determined after receipt of such request in proper form. See "Redemption of
Service Shares."
HOW DO I RECEIVE DIVIDENDS AND DISTRIBUTIONS?
<TABLE>
<CAPTION>
INVESTMENT INCOME DIVIDENDS
--------------------------- CAPITAL GAINS
FUND DECLARED AND PAID DISTRIBUTIONS
- ---- ----------------- -------------
<S> <C> <C>
Select Equity......................... Annually Annually
Growth and Income..................... Quarterly Annually
Mid-Cap Equity........................ Annually Annually
International Equity.................. Annually Annually
Asia Growth........................... Annually Annually
</TABLE>
Recordholders of Service Shares may receive dividends in additional
shares of the same class of the Fund in which you have invested or you may
elect to receive cash, shares of the same class of other mutual funds
sponsored by Goldman Sachs or the corresponding class of any portfolio of
Goldman Sachs Money Market Trust. For further information concerning
dividends, see "Dividends."
5
<PAGE>
FEES AND EXPENSES
(SERVICE SHARES)*
<TABLE>
<CAPTION>
GROWTH
SELECT AND MID-CAP INT'L ASIA
EQUITY INCOME EQUITY EQUITY GROWTH
FUND FUND FUND FUND FUND
------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on Purchases. None None None None None
Maximum Sales Charge Imposed on Reinvested
Dividends................................ None None None None None
Redemption Fees........................... None None None None None
Exchange Fees............................. None None None None None
ANNUAL FUND OPERATING EXPENSES: (as a
percentage of average daily net assets)
Management Fees (including, after
applicable limitations, advisory and
administration fees)**................... 0.59% 0.70% 0.75% 0.86% 0.86%
Service Fees***........................... 0.50% 0.50% 0.50% 0.50% 0.50%
Other Expenses (after expense limita-
tion)**.................................. 0.06% 0.15% 0.10% 0.24% 0.24%
---- ---- ---- ---- ----
TOTAL FUND OPERATING EXPENSES (AFTER
EXPENSE LIMITATION)**................... 1.15% 1.35% 1.35% 1.60% 1.60%
==== ==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a hy-
pothetical $1,000 investment, assuming (1) a
5% annual return and (2) redemption at the
end of each time period:
Select Equity Fund............................ $12 $37 $63 $140
Growth and Income Fund........................ $14 $43 $74 $162
Mid-Cap Equity Fund........................... $14 $43 N/A N/A
International Equity Fund..................... $16 $50 $87 $190
Asia Growth Fund.............................. $16 $50 $87 $190
</TABLE>
- ---------------------
* The information set forth in the foregoing table and hypothetical example
relates only to Service Shares of the Funds. Each Fund also offers
Institutional Shares and, except for Mid-Cap Equity Fund, Class A and
Class B Shares, which are subject to different fees and expenses (which
affect performance), have different minimum investment requirements and
are entitled to different services. Information regarding Institutional,
Class A and Class B Shares may be obtained from an investor's sales
representative or from Goldman Sachs by calling the number on the back of
this Prospectus.
** Based on estimated amounts for the current fiscal year. The Investment
Advisers and GSAM have also voluntarily agreed to limit their advisory and
administration fees to the following (as a percentage of average daily net
assets): Select Equity Fund--0.44% and 0.15%, International Equity Fund--
0.71% and 0.15% and Asia Growth Fund--0.71% and 0.15%. Without such
limitations, the Funds' advisory and administration fees would be: Select
Equity Fund--0.50% and 0.25%, International Equity Fund--0.75% and 0.25%
and Asia Growth Fund--0.75% and 0.25%. The Investment Advisers and GSAM
have voluntarily agreed to reduce or limit certain "Other Expenses" of the
Funds (excluding transfer agency fees estimated to be 0.04% of average
daily net assets (applicable to the Growth and Income and Mid-Cap
6
<PAGE>
Equity Funds only), advisory and administration fees and fees under
service, distribution and authorized dealer service plans, taxes, interest
and brokerage and litigation, indemnification and other extraordinary
expenses) to 0.06%, 0.11%, 0.06%, 0.24% and 0.24%, respectively, of the
Select Equity, Growth and Income, Mid-Cap Equity, International Equity and
Asia Growth Funds' average daily net assets. The Investment Advisers and
GSAM have no current intention of modifying or discontinuing
such limitations but may do so in the future at their discretion. With
regard to the Select Equity, International Equity and Asia Growth Funds,
Goldman Sachs does not impose transfer agency fees pursuant to its contract
with the Funds. If the Investment Advisers, Goldman Sachs and GSAM did not
agree to limit certain "Other Expenses" of each Fund and to limit the fees
of the Select Equity, International Equity and Asia Growth Funds as
described above, the "Other Expenses" and "Total Operating Expenses" of the
Service Shares of the Funds would be as follows: Select Equity Fund--0.22%
and 1.47%; Growth and Income Fund--0.11% and 1.35%; Mid-Cap Equity Fund--
0.19% and 1.48%; International Equity Fund--0.24% and 1.74% and Asia Growth
Fund--0.42% and 1.92%, respectively.
*** Service Organizations (other than broker-dealers) may charge other fees to
their customers who are beneficial owners of Service Shares in connection
with their customer accounts. Due to the service fees, a long-term
shareholder may pay more than the economic equivalent of the maximum
front-end sales charges permitted by the National Association of
Securities Dealers, Inc.'s rules regarding investment companies. See
"Additional Services."
The purpose of the foregoing table is to assist investors in understanding
the various costs and expenses of a Fund that an investor in the Funds will
bear directly or indirectly. The costs and expenses included in the table and
hypothetical example above are based upon estimated fees and expenses for the
current year and should not be considered as representative of future
expenses. Actual fees and expenses may be greater or less than those
indicated. Moreover, while the example assumes a 5% annual return, a Fund's
actual performance will vary and may result in an actual return greater or
less than 5%. See "Management--Investment Advisers, Subadviser and
Administrator" and "Additional Services."
7
<PAGE>
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
The following data with respect to a share (of the Class specified) of the
Funds outstanding during the period(s) indicated has been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their report
incorporated by reference into the Additional Statement from the Annual Report
to shareholders for the Funds for the year ended January 31, 1996 (the "Annual
Report"). This information should be read in conjunction with the financial
statements and related notes incorporated by reference and attached to the
Additional Statement. The Annual Report also contains performance information
and is available upon request and without charge by calling the telephone
number or writing to one of the addresses on the back cover of this
Prospectus.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INCOME (LOSS) FROM DISTRIBUTIONS TO
INVESTMENT OPERATIONS SHAREHOLDERS
------------------------------------- -------------------------------------------------------
NET REALIZED FROM NET
AND UNREALIZED TOTAL REALIZED
NET ASSET GAIN (LOSS) ON INCOME GAIN ON TOTAL
VALUE, NET INVESTMENTS, (LOSS) FROM FROM NET INVESTMENT DISTRIBUTIONS
BEGINNING INVESTMENT OPTIONS AND INVESTMENT INVESTMENT AND FUTURES TO
OF PERIOD INCOME FUTURES OPERATIONS INCOME TRANSACTIONS SHAREHOLDERS
--------- ---------- -------------- ----------- ---------- ------------ -------------
SELECT EQUITY FUND
- ---------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED JANUARY 31,
<S> <C> <C> <C> <C> <C> <C> <C>
1996--Class A
Shares.......... $14.61 $0.19 $5.43 $5.62 $(0.16) $(0.41) $(0.57)
1996--Institu-
tional Shares
(f)............. 16.97 0.16 3.23 3.39 (0.24) (0.41) (0.65)
1995--Class A
Shares.......... 15.93 0.20 (0.38) (0.18) (0.20) (0.94) (1.14)
1994--Class A
Shares.......... 15.46 0.17 2.08 2.25 (0.17) (1.61) (1.78)
1993--Class A
Shares.......... 15.05 0.22 0.41 0.63 (0.22) -- (0.22)
<CAPTION>
FOR THE PERIOD MAY 24, 1991(B) THROUGH JANUARY 31,
<S> <C> <C> <C> <C> <C> <C> <C>
1992--Class A
Shares.......... 14.17 0.11 0.88 0.99 (0.11) -- (0.11)
<CAPTION>
NET RATIO OF NET RATIO OF
INCREASE RATIO OF NET ASSETS NET
(DECREASE) NET ASSET NET INVESTMENT AT END RATIO OF INVESTMENT
IN NET VALUE, EXPENSES INCOME PORTFOLIO OF EXPENSES INCOME
ASSET END OF TOTAL TO AVERAGE TO AVERAGE TURNOVER PERIOD TO AVERAGE TO AVERAGE
VALUE PERIOD RETURN(A) NET ASSETS NET ASSETS RATE (IN 000'S) NET ASSETS NET ASSETS
---------- --------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
SELECTED EQUITY FUND
- ------------------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED JANUARY 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996--Class A
Shares.......... $5.05 $19.66 38.63% 1.25% 1.01% 39.35% $129,045 1.55% 0.71%
1996--Institu-
tional Shares
(f)............. 2.74 19.71 20.14(c) 0.65(d) 1.49(d) 39.35(c) 64,829 0.96(d) 1.18(d)
1995--Class A
Shares.......... (1.32) 14.61 (1.10) 1.38 1.33 56.18 94,968 1.63 1.08
1994--Class A
Shares.......... 0.47 15.93 15.12 1.42 0.92 87.73 92,769 1.67 0.67
1993--Class A
Shares.......... 0.41 15.46 4.30 1.28 1.30 144.93 117,757 1.53 1.05
<CAPTION>
FOR THE PERIOD MAY 24, 1991(B) THROUGH JANUARY 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1992--Class A
Shares.......... 0.88 15.05 7.01(c) 1.57(d) 1.24(d) 135.02(d) 151,142 1.82(d) 0.99(d)
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
INCOME (LOSS) FROM DISTRIBUTIONS TO
INVESTMENT OPERATIONS SHAREHOLDERS
------------------------------------ ----------------------------------------------------------
FROM NET
NET REALIZED TOTAL REALIZED
NET ASSET AND UNREALIZED INCOME GAIN ON IN EXCESS
VALUE, NET GAIN ON FROM FROM NET INVESTMENTS OF NET TOTAL
BEGINNING INVESTMENT INVESTMENTS INVESTMENT INVESTMENT AND OPTION INVESTMENT DISTRIBUTIONS TO
OF PERIOD INCOME AND OPTIONS OPERATIONS INCOME TRANSACTIONS INCOME SHAREHOLDERS
--------- ---------- -------------- ---------- ---------- ------------ ---------- ------------------
GROWTH AND INCOME FUND
- -----------------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED JANUARY 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996--Class A
Shares......... $15.80 $0.33 $4.75 $5.08 $(0.30) $(0.60) $ -- $(0.90)
1995--Class A
Shares......... 15.79 0.20(e) 0.30(e) 0.50 (0.20) (0.33) (0.07) (0.60)
<CAPTION>
FOR THE PERIOD FEBRUARY 5, 1993(b) THROUGH JANUARY 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1994--Class A
Shares......... 14.18 0.15 1.68 1.83 (0.15) (0.06) (0.01) (0.22)
<CAPTION>
MID-CAP EQUITY FUND
- -----------------------------------------------------------------------------------------------------------------------------------
FOR THE PERIOD AUGUST 1, 1995(b) THROUGH JANUARY 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996--Institu-
tional Shares.. $15.00 $0.13 $0.90 $1.03 $(0.12) -- -- $(0.12)
<CAPTION>
RATIOS ASSUMING
NO VOLUNTARY WAIVER
OF FEES
OR EXPENSE LIMITATIONS
----------------------
RATIO OF
NET
RATIO OF RATIO OF NET NET INVESTMENT
NET NET ASSET NET INVESTMENT ASSETS AT RATIO OF INCOME
ADDITIONAL INCREASE VALUE, EXPENSES TO INCOME TO PORTFOLIO END OF EXPENSES (LOSS)
PAID-IN IN NET END OF TOTAL AVERAGE NET AVERAGE NET TURNOVER PERIOD TO AVERAGE TO AVERAGE
CAPITAL ASSET VALUE PERIOD RETURN(a) ASSETS ASSETS RATE (IN 000S) NET ASSETS NET ASSETS
----------- ----------- --------- ----------- ------------ ------------ ---------- -------- ---------- ------------
FOR THE YEAR ENDED JANUARY 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996--Class A
Shares...... $ -- $ 4.18 $19.98 32.45% 1.20% 1.67% 57.93% $436,757 1.45% 1.42%
1995--Class A
Shares...... 0.11(e) 0.01 15.80 3.97 1.25 1.28 71.80 193,772 1.58 0.95
<CAPTION>
FOR THE PERIOD FEBRUARY 5, 1993(b) THROUGH JANUARY 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1994--Class A
Shares...... -- 1.61 15.79 13.08(c) 1.25(d) 1.23(d) 102.23(c) 41,528 3.24(d) (0.76)(d)
<CAPTION>
MID-CAP EQUITY FUND
- -----------------------------------------------------------------------------------------------------------------------------------
FOR THE PERIOD AUGUST 1, 1995(b) THROUGH JANUARY 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996--Institu-
tional Shares. -- $ 0.91 $15.91 6.89%(c) 0.85%(d) 1.67%(d) 58.77%(c) $135,671 0.98%(d) 1.54%(d)
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
INCOME (LOSS) FROM INVESTMENT OPERATIONS DISTRIBUTIONS TO SHAREHOLDERS
----------------------------------------------- ------------------------------------------------
NET REALIZED NET REALIZED
AND AND FROM NET
UNREALIZED UNREALIZED TOTAL REALIZED
GAIN (LOSS) GAIN (LOSS) INCOME GAIN ON
NET ASSET NET ON ON FOREIGN (LOSS) IN EXCESS INVESTMENT, TOTAL
VALUE, INVESTMENT INVESTMENTS, CURRENCY FROM FROM NET OF NET OPTION AND DISTRIBUTIONS
BEGINNING INCOME OPTIONS AND RELATED INVESTMENT INVESTMENT INVESTMENT FUTURES TO
OF PERIOD (LOSS) FUTURES TRANSACTIONS OPERATIONS INCOME INCOME TRANSACTIONS SHAREHOLDERS
--------- ---------- ------------ ------------ ---------- ---------- ---------- ------------ -------------
INTERNATIONAL EQUITY FUND
- ----------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED JANUARY 31,
- ------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996--Class A
Shares.......... $14.52 $0.13 $ 2.58 $ 1.42 $ 4.13 $(0.58) -- $(0.87) $(1.45)
1995--Class A
Shares.......... 18.10 0.06 (3.04) (0.01) (2.99) -- -- (0.59) (0.59)
1994--Class A
Shares.......... 14.35 0.05 4.08 (0.38) 3.75 -- -- -- --
<CAPTION>
FOR THE PERIOD DECEMBER 1, 1992(b) THROUGH JANUARY 31,
- ------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1993--Class A
Shares.......... 14.18 (0.01) 0.29 (0.11) 0.17 -- -- -- --
<CAPTION>
ASIA GROWTH FUND
- ----------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED JANUARY 31,
- ------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996--Class A
Shares.......... $13.31 $0.17 $3.44 $(0.12) $ 3.49 $(0.17) $(0.14) -- $(0.31)
<CAPTION>
FOR THE PERIOD JULY 8, 1994(b) THROUGH JANUARY 31,
- --------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995--Class A
Shares.......... 14.18 0.11 (0.89) 0.01 (0.77) (0.10) -- -- (0.10)
<CAPTION>
RATIOS ASSUMING NO
VOLUNTARY WAIVER OF
FEES OR EXPENSE
LIMITATIONS
---------------------
RATIO OF RATIO OF NET RATIO OF
NET NET NET ASSETS RATIO OF NET
INCREASE NET EXPENSES INVESTMENT AT END EXPENSES INVESTMENT
(DECREASE) ASSET TO INCOME OF TO INCOME
IN NET VALUE, AVERAGE (LOSS) TO PORTFOLIO PERIOD AVERAGE (LOSS) TO
ASSET END OF TOTAL NET AVERAGE TURNOVER (IN NET AVERAGE
VALUE PERIOD RETURN(a) ASSETS NET ASSETS RATE 000S) ASSETS NET ASSETS
---------- ------ --------- -------- ---------- --------- -------- -------- ----------
INTERNATIONAL EQUITY FUND
- ------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED JANUARY 31,
- ------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996--Class A
Shares.......... $ 2.68 $17.20 28.68% 1.52% 0.26% 68.48% $330,860 1.77% 0.10%
1995--Class A
Shares.......... (3.58) 14.52 (16.65) 1.73 0.40 84.54 275,086 1.98 0.15
1994--Class A
Shares.......... 3.75 18.10 26.13 1.76 0.51 60.04 269,091 2.01 0.26
<CAPTION>
FOR THE PERIOD DECEMBER 1, 1992(b) THROUGH JANUARY 31,
- ------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1993--Class A
Shares.......... 0.17 14.35 1.23 (c) 1.80 (d) (0.42)(d) 0.00 66,063 2.58(d) (1.20)(d)
<CAPTION>
ASIA GROWTH FUND
- ------------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED JANUARY 31,
- ------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996--Class A
Shares.......... $3.18 $16.49 26.49% 1.77% 1.05% 88.80% $205,539 2.02% 0.80%
<CAPTION>
FOR THE PERIOD JULY 8, 1994(b) THROUGH JANUARY 31,
- --------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995--Class A
Shares.......... (0.87) 13.31 (5.46)(c) 1.90(d) 1.83(d) 36.08(c) 124,298 2.38(d) 1.35(d)
</TABLE>
- -----------
(a) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no
sales charges. Total return would be reduced if a sales charge were taken
into account.
(b)Commencement of operations.
(c)Not annualized.
(d)Annualized.
(e)Calculated based on the average shares outstanding methodology.
(f)Institutional shares commenced operations on June 15, 1995.
10
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and principal investment policies of each Fund are
described below. Other investment practices and management techniques, which
involve certain risks are described under "Description of Securities," "Risk
Factors" and "Investment Techniques." There can be no assurance that a Fund's
investment objectives will be achieved.
Potential equity investments for each Fund (other than the Select Equity
Fund which evaluates securities using both fundamental research and a variety
of quantitative techniques as described below under "Select Equity Fund")
generally are evaluated using fundamental analysis, including criteria such as
earnings, cash flow, asset values and/or dividend-paying ability. In choosing
a Fund's securities, the Investment Advisers utilize first-hand fundamental
research, including visiting company facilities to assess operations and meet
decision-makers. The Investment Advisers may also use a macro analysis of
numerous economic and valuation variables to determine and anticipate changes
in company earnings and the overall investment climate. Each Investment
Adviser is able to draw on the research and market expertise of the Goldman
Sachs Investment Research Department and other affiliates of the Investment
Adviser as well as information provided by other securities dealers.
The Investment Advisers intend to purchase common stocks, preferred stocks,
interests in real estate investment trusts, convertible debt obligations,
convertible preferred stocks, equity interests in trusts, partnerships, joint
ventures and similar enterprises, warrants and stock purchase rights of
companies ("equities securities") that are, in their view, underpriced
relative to a combination of such companies' long-term earnings prospects,
growth rate, free cash flow and/or dividend-paying ability. The Funds may also
purchase securities of companies that have experienced difficulties and that,
in the opinion of the Investment Advisers, are available at attractive prices.
Consideration will be given to the business quality of the issuer. Factors
positively affecting the Investment Advisers' 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
market 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.
Equity securities in a Fund's portfolio will generally be sold when the
Investment Advisers believe that the market price fully reflects or exceeds
the securities' fundamental valuation or when other more attractive
investments are identified.
SELECT EQUITY FUND
Objective. The Fund's investment objective is to provide investors with a
total return through investments in equity securities consisting of capital
appreciation plus dividend income that, net of Fund expenses, exceeds the
total return realized on the S&P 500 Index.
Primary Investment Focus. The Fund invests, under normal circumstances, at
least 90% of its total assets in equity securities. The Fund may invest in
equity securities of foreign issuers that are traded in the United States and
that comply with U.S. accounting standards. The Fund seeks to achieve its
investment objective by investing in a portfolio of equity securities selected
using both fundamental research and a variety of quantitative techniques which
seek to maximize the Fund's reward to risk ratio. The Fund's portfolio is
designed to have risk, capitalization and industry characteristics similar to
the S&P 500 Index. Select Equity Fund may only invest in fixed income
securities that are considered cash equivalents.
11
<PAGE>
Investment Process. The Investment Adviser begins with a universe primarily
of large capitalization equity securities. The Investment Adviser uses a
proprietary multifactor model (the "Multifactor Model") to assign each equity
security a rating, and, if the security is followed by the Goldman Sachs
Investment Research Department (the "Research Department"), a second rating is
assigned based upon the Research Department's evaluation. In selecting
securities for the Fund, the Investment Adviser utilizes optimization models
to evaluate the ratings assigned by the Multifactor Model and the Research
Department to build a diversified portfolio. This portfolio is primarily
comprised of securities rated highest by the Investment Adviser's Multifactor
Model and research analysts and has risk characteristics and industry
weightings similar to the S&P 500 Index. Under normal conditions, the
securities of any one issuer may not exceed 5% of the Fund's total assets.
Multifactor Model. The Multifactor Model is a sophisticated computerized
rating system for valuing equity securities according to fundamental
investment characteristics. The factors used by the Multifactor Model
incorporate many variables studied by traditional fundamental analysis, and
cover measures of value, growth, momentum, risk (e.g., price/earnings ratio,
book/price ratio, growth forecasts, earnings estimate revisions, price
momentum, volatility and earnings stability). All of the factors used by the
Multifactor Model have been shown to significantly impact the performance of
equity securities. The weightings assigned to the factors are derived using a
statistical formulation that considers each factor's historical performance in
different market environments. As such, the Multifactor Model is designed to
evaluate each security using only the factors that are statistically related
to returns in the anticipated market environment. Because it includes many
disparate factors, the Investment Adviser believes that the Multifactor Model
is broader in scope and provides a more thorough evaluation than most
conventional, value-oriented quantitative models. As a result, the securities
ranked highest by the Multifactor Model do not have one dominant investment
characteristic (such as a low price/earnings ratio); rather, they possess an
attractive combination of investment characteristics.
Research Department. In assigning ratings, the Research Department uses a
four category rating system ranging from "recommended for purchase" to "likely
to underperform." By employing both a quantitative (i.e., the Multifactor
Model) and a qualitative (i.e., the analyst's ratings) method of selecting
securities, the Fund seeks to capitalize on the strengths of each discipline.
GROWTH AND INCOME FUND
Objectives. The Growth and Income Fund's investment objectives are to
provide investors with long-term growth of capital and growth of income.
Primary Investment Focus. The Fund invests, under normal circumstances, at
least 65% of its total assets in equity securities that the Investment Adviser
considers to have favorable prospects for capital appreciation and/or
dividend-paying ability.
Other. The Fund may invest up to 35% of its total assets in fixed income
securities that, in the opinion of the Investment Adviser, offer the potential
to further the Fund's investment objectives. In addition, although the Fund
will invest primarily in publicly traded U.S. securities, it may invest up to
25% of its total assets in foreign securities, including securities of issuers
in countries with emerging markets and economies.
MID-CAP EQUITY FUND
Objective. The Fund's investment objective is to provide investors with
long-term capital growth.
Primary Investment Focus. The Fund invests, under normal circumstances,
substantially all of its assets in equity securities and at least 65% of its
total assets in equity securities of Mid-Cap Companies with public stock
12
<PAGE>
market capitalizations (based upon shares available for trading on an
unrestricted basis) of between $500 million and $7 billion at the time of
investment. However, Mid-Cap Equity Fund currently intends to emphasize
investments in Mid-Cap Companies with public stock market capitalizations of
below $5 billion at the time of investment. Dividend income, if any, is an
incidental consideration.
Other. The Fund may invest up to 35% of its total assets in mortgage-backed,
asset-backed and fixed income securities. In addition, although the Fund will
invest primarily in publicly traded U.S. securities, it may invest up to 25%
of its total assets in foreign securities, including securities of issuers in
countries with emerging markets and economies.
INTERNATIONAL EQUITY FUND
Objective. The Fund's investment objective is to provide investors with
long-term capital appreciation.
Primary Investment Focus. The Fund invests, 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. The Fund may allocate its
assets among countries as determined by the Investment Adviser from time to
time provided that the Fund's assets are invested in at least three foreign
countries. The Fund expects to invest a substantial portion of its assets in
the securities of companies located in the developed countries in Western
Europe and in Japan. However, the Fund may also invest in the securities of
issuers located in the following countries: Argentina, Australia, Bangladesh,
Brazil, Canada, Chile, China, Colombia, Czech Republic, Egypt, Hong Kong,
Hungary, India, Indonesia, Israel, Jamaica, Jordan, Kenya, Kuwait, Malaysia,
Mexico, Morocco, New Zealand, Nigeria, Pakistan, the Philippines, Poland, The
Republic of Slovakia, Singapore, South Korea, Sri Lanka, South Africa, Taiwan,
Thailand, Turkey, Venezuela and Zimbabwe. Many of the countries in which the
Fund may invest have emerging markets or economies which involve certain risks
as described below under "Risk Factors--Special Risks of Investments in the
Asian and Other Emerging Markets," which are not present in investments in
more developed countries.
Other. The Fund may employ certain currency techniques to seek to hedge
against currency exchange rate fluctuations or to seek to increase total
return. When used to seek to enhance return, these management techniques are
considered speculative. Such currency management techniques involve risks
different from those associated with investing solely in U.S. dollar-
denominated securities of U.S. issuers. To the extent that the Fund is fully
invested in foreign securities while also maintaining currency positions, it
may be exposed to greater combined risk. The Fund's net currency positions may
expose it to risks independent of its securities positions. See "Description
of Securities," "Investment Techniques" and "Risk Factors." Up to 35% of the
Fund's total assets may be invested in fixed income securities.
ASIA GROWTH FUND
Objective. The Fund's investment objective is to provide investors with
long-term capital appreciation.
Primary Investment Focus. The Fund invests, under normal market
circumstances, substantially all, and at least 65%, of its total assets in
equity securities of companies that satisfy at least one of the following
criteria:
13
<PAGE>
(i) their securities are traded principally on stock exchanges in one or more
of the Asian countries, (ii) they derive 50% or more of their total revenue
from goods produced, sales made or services performed in one or more of the
Asian countries, (iii) they maintain 50% or more of their assets in one or
more of the Asian countries, or (iv) they are organized under the laws of one
of the Asian countries. The Fund seeks to achieve its objective by investing
primarily in equity securities of Asian companies which are considered by the
Investment Adviser to have long-term capital appreciation potential. Many of
the countries in which the Fund may invest have emerging markets or economies
which involve certain risks as described under "Risk Factors--Special Risks of
Investments in the Asian and Other Emerging Markets," which are not present in
investments in more developed countries. The Fund may purchase equity
securities of issuers that have not paid dividends on a timely basis,
securities of companies that have experienced difficulties, and securities of
companies without performance records.
Other. The Fund may employ certain currency management techniques to seek to
hedge against currency exchange rate fluctuations or to seek to increase total
return. When used to seek to enhance return, these management techniques are
considered speculative. Such currency management techniques involve risks
different from those associated with investing solely in U.S. dollar-
denominated securities of U.S. issuers. To the extent that the Fund is fully
invested in foreign securities while also maintaining currency positions, it
may be exposed to greater combined risk. The Fund's net currency positions may
expose it to risks independent of its securities positions. See "Description
of Securities," "Investment Techniques" and "Risk Factors."
The Fund may allocate its assets among the Asian countries as determined
from time to time by the Investment Adviser. For purposes of the Fund's
investment policies, Asian countries are China, Hong Kong, India, Indonesia,
Malaysia, Pakistan, the Philippines, Singapore, South Korea, Sri Lanka, Taiwan
and Thailand as well as any other country in the Asian region (other than
Japan) to the extent that foreign investors are permitted by applicable law to
make such investments. Allocation of the Fund's investments will depend upon
the relative attractiveness of the Asian markets and particular issuers.
Concentration of the Fund's assets in one or a few of the Asian countries and
Asian currencies will subject the Fund to greater risks than if the Fund's
assets were not geographically concentrated. See "Description of Securities--
Foreign Investments." The Fund may invest up to 35% of its total assets in
equity securities of issuers in other countries, including Japan, and fixed
income securities.
DESCRIPTION OF SECURITIES
CONVERTIBLE SECURITIES
Each Fund may invest in convertible securities, including debt obligations
and preferred stock of the issuer convertible at a stated exchange rate into
common stock of the issuer. Convertible securities generally offer lower
interest or dividend yields than non-convertible securities of similar
quality. As with all fixed income securities, the market value of convertible
securities tends to decline as interest rates increase and, conversely, to
increase as interest rates decline. However, when the market price of the
common stock underlying a convertible security exceeds the conversion price,
the convertible security tends to reflect the market price of the underlying
common stock. As the market price of the underlying common stock declines, the
convertible security tends to trade increasingly on a yield basis, and thus
may not decline in price to the same extent as the underlying common stock.
Convertible securities rank senior to common stocks in an issuer's capital
structure and consequently entail
14
<PAGE>
less risk than the issuer's common stock. In evaluating a convertible
security, the Investment Adviser will give primary emphasis to the
attractiveness of the underlying common stock. The convertible securities in
which the Select Equity Fund invests are not subject to any minimum rating
criteria. The convertible debt securities in which the other Funds may invest
are subject to the same rating criteria as a Fund's investments in non-
convertible debt securities. Convertible debt securities are equity
investments for purposes of each Fund's investment policies.
FOREIGN INVESTMENTS
FOREIGN SECURITIES. Investments in foreign securities may offer potential
benefits that are not available from investments exclusively in U.S. dollar-
denominated domestic issues. Foreign countries may have economic policies or
business cycles different from those of the U.S. and markets for foreign
securities do not necessarily move in a manner parallel to U.S. markets.
Investing in the securities of foreign issuers involves risks that are not
typically associated with investing in U.S. dollar-denominated securities of
domestic issuers. Such investments may be affected by changes in currency
rates, changes in foreign or U.S. laws or restrictions applicable to such
investments and in exchange control regulations (e.g., currency blockage). A
decline in the exchange rate of the currency (i.e., weakening of the currency
against the U.S. dollar) in which a portfolio security is quoted or
denominated relative to the U.S. dollar would reduce the value of the
portfolio security. Commissions on transactions in foreign securities may be
higher than those for similar transactions on domestic stock markets. In
addition, clearance and settlement procedures may be different in foreign
countries and, in certain markets, such procedures have on occasion been
unable to keep pace with the volume of securities transactions, thus making it
difficult to conduct such transactions.
Foreign issuers are not generally subject to uniform accounting, auditing
and financial reporting standards comparable to those applicable to U.S.
issuers. There may be less publicly available information about a foreign
issuer than about a U.S. issuer. In addition, there is generally less
government regulation of foreign markets, companies and securities dealers
than in the U.S. Foreign securities markets may have substantially less volume
than U.S. securities markets and securities of many foreign issuers are less
liquid and more volatile than securities of comparable domestic issuers.
Furthermore, with respect to certain foreign countries, there is a possibility
of nationalization, expropriation or confiscatory taxation, imposition of
withholding taxes on dividend or interest payments, limitations on the removal
of funds or other assets, political or social instability or diplomatic
developments which could affect investments in those countries.
INVESTMENTS IN ADRS, EDRS AND GDRS. Each Fund may invest in foreign
securities which take the form of sponsored and unsponsored American
Depository Receipts ("ADRs") and Global Depository Receipts ("GDRs") and each
Fund, other than Select Equity Fund, may also invest in European Depository
Receipts ("EDRs") or other similar instruments representing securities of
foreign issuers (together, "Depository Receipts"). ADRs represent the right to
receive securities of foreign issuers deposited in a domestic bank or a
correspondent bank. Prices of ADRs are quoted in U.S. dollars and are traded
in the United States on exchanges or over-the-counter and are sponsored and
issued by domestic banks. EDRs and GDRs are receipts evidencing an arrangement
with a non-U.S. bank. EDRs and GDRs are not necessarily quoted in the same
currency as the underlying security. To the extent a Fund acquires Depository
Receipts through banks which do not have a contractual relationship with the
foreign issuer of the security underlying the Depository Receipts to issue and
service such Depository Receipts (unsponsored Depository Receipts), there may
be an increased possibility that the Fund would not become aware of and be
able to respond to corporate actions, such as stock splits or rights
15
<PAGE>
offerings involving the foreign issuer, in a timely manner. In addition, the
lack of information may result in inefficiencies in the valuation of such
instruments. Investment in Depository Receipts does not eliminate all the
risks inherent in investing in securities of non-U.S. issuers. The market
value of Depository Receipts is dependent upon the market value of the
underlying securities and fluctuations in the relative value of the currencies
in which the Depository Receipt and the underlying securities are quoted.
However, by investing in Depository Receipts, such as ADRs, that are quoted in
U.S. dollars, a Fund will avoid currency risks during the settlement period
for purchases and sales.
FOREIGN CURRENCY TRANSACTIONS. Because investment in foreign issuers will
usually involve currencies of foreign countries, and because the International
Equity and Asia Growth Funds may have currency exposure independent of their
securities positions, the value of the assets of a Fund as measured in U.S.
dollars will be affected by changes in foreign currency exchange rates. A Fund
may, to the extent it invests in foreign securities, purchase or sell forward
foreign currency exchange contracts for hedging purposes and to seek to
protect against anticipated changes in future foreign currency exchange rates.
In addition, the International Equity and Asia Growth Funds may enter into
such contracts to seek to increase total return when the Investment Adviser
anticipates that the foreign currency will appreciate or depreciate in value,
but securities denominated or quoted in that currency do not present
attractive investment opportunities and are not held in the Fund's portfolio.
When entered into to seek to enhance return, forward foreign currency exchange
contracts are considered speculative. The International Equity and Asia Growth
Funds may also engage in cross-hedging by using forward contracts in a
currency different from that in which the hedged security is denominated or
quoted if the Investment Adviser determines that there is a pattern of
correlation between the two currencies. If a Fund enters into a forward
foreign currency exchange contract to buy foreign currency for any purpose or
the International Equity or Asia Growth Funds enter into forward foreign
currency exchange contracts to sell foreign currency to seek to increase total
return, the Fund will be required to place and maintain cash or liquid, high
grade debt securities in a segregated account with the Fund's custodian in an
amount equal to the value of the Fund's total assets committed to the
consummation of the forward contract. The Fund will incur costs in connection
with conversions between various currencies. A Fund may hold foreign currency
received in connection with investments in foreign securities when, in the
judgment of the Investment Adviser, it would be beneficial to convert such
currency into U.S. dollars at a later date, based on anticipated changes in
the relevant exchange rate.
Currency exchange rates may fluctuate significantly over short periods of
time causing, along with other factors, a Fund's net asset value to fluctuate.
Currency exchange rates generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of investments
in different countries, actual or anticipated changes in interest rates and
other complex factors, as seen from an international perspective. Currency
exchange rates also can be affected unpredictably by the intervention of U.S.
or foreign governments or central banks or the failure to intervene or by
currency controls or political developments in the U.S. or abroad. To the
extent that a substantial portion of 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.
The market in forward foreign currency exchange contracts, currency swaps
and other privately negotiated currency instruments authorized for use by the
International Equity and Asia Growth Funds, offer less protection against
defaults by the other party to such instruments than is available for currency
instruments traded on an exchange. Such contracts are subject to the risk that
the counterparty to the contract will default on its obligations. Since these
contracts are not guaranteed by an exchange or clearinghouse, a default on the
contract
16
<PAGE>
would deprive the Fund of unrealized profits, transaction costs or the
benefits of a currency hedge or force the Fund to cover its purchase or sale
commitments, if any, at the current market price. 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.
In addition to investing in securities denominated or quoted in a foreign
currency, the International Equity and Asia Growth Funds may engage in a
variety of foreign currency management techniques. However, due to the limited
market for these instruments with respect to the currencies of certain Asian
countries, the Investment Adviser does not currently anticipate that a
significant portion of Asia Growth Fund's currency exposure will be covered by
such instruments. The opportunity for hedging currency exposure to other
emerging markets is also generally limited. For a discussion of such
instruments and the risks associated with their use, see "Investment Objective
and Policies" in the Additional Statement.
FIXED INCOME SECURITIES
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. A Fund may also invest in zero coupon U.S. Treasury
securities and in zero coupon securities issued by financial institutions,
which represent a proportionate interest in underlying U.S. Treasury
securities. A zero coupon security pays no interest to its holder during its
life and its value consists of the difference between its face value at
maturity and its cost. The market prices of zero coupon securities generally
are more volatile than the market prices of securities that pay interest
periodically. See "Taxation" in the Additional Statement.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. Each Fund (other than the
Select Equity Fund) may invest in mortgage-backed securities ("Mortgage-Backed
Securities"), which represent direct or indirect participations in, or are
collateralized by and payable from, mortgage loans secured by real property.
Each Fund (other than the Select Equity Fund) may also invest in asset-backed
securities ("Asset-Backed Securities"). The principal and interest payments on
Asset-Backed Securities are collateralized by pools of assets such as auto
loans, credit card receivables, leases, installment contracts and personal
property. Such asset pools are securitized through the use of special purpose
trusts or corporations. Principal and interest payments may be credit enhanced
by a letter of credit, a pool insurance policy or a senior/subordinated
structure.
CORPORATE DEBT OBLIGATIONS. Each Fund may invest in corporate debt
obligations. Corporate debt obligations are subject to the risk of an issuer's
inability to meet principal and interest payments on the obligations.
BANK OBLIGATIONS. Each Fund may invest in U.S. dollar-denominated
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
17
<PAGE>
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.
RATING CRITERIA. The debt securities in which the Growth and Income, Mid-Cap
Equity, International Equity and Asia Growth Funds may invest will, except as
noted below, be rated investment grade at the time of investment. Investment
grade debt securities are securities rated BBB or higher by Standard & Poor's
Ratings Group ("Standard & Poor's") or Baa or higher by Moody's Investors
Service, Inc. ("Moody's"). A security will be deemed to have met a rating
requirement if it receives the minimum required rating from at least one such
rating organization even though it has been rated below the minimum rating by
one or more other rating organizations, or if unrated by such rating
organizations, determined by the Investment Adviser to be of comparable credit
quality. The Growth and Income Fund may invest up to 10% of its total assets in
debt securities which are unrated or rated in the lowest rating categories by
Standard & Poor's or Moody's (i.e., BB or lower by Standard & Poor's or Ba or
lower by Moody's), including securities rated D by Moody's or Standard &
Poor's. Mid-Cap Equity Fund may invest up to 10% of its total assets in below
investment grade debt securities rated B or higher by Standard & Poor's or B or
higher by Moody's. Fixed income securities rated in the BBB or Baa category are
considered medium-grade obligations with speculative characteristics, and
adverse economic conditions or changing circumstances may weaken their issuers'
capacity to pay interest and repay principal. Also, to the extent that the
rating assigned to a security in a Fund's portfolio is downgraded by a rating
organization, the market price and liquidity of such security may be adversely
affected. Fixed income securities rated BB or Ba or below (or comparable
unrated securities) are commonly referred to as "junk bonds," are considered
predominately speculative and may be questionable as to principal and interest
payments. In some cases, such bonds may be highly speculative, have poor
prospects for reaching investment grade standing and be in default. As a
result, investment in such bonds will entail greater speculative risks than
those associated with investment in investment grade bonds. Also, to the extent
that the rating assigned to a security in a Fund's portfolio is downgraded by a
rating organization, the market price and liquidity of such security may be
adversely affected. See Appendix A to the Additional Statement for a
description of the corporate bond ratings assigned by Standard & Poor's and
Moody's.
REAL ESTATE INVESTMENT TRUSTS ("REITS")
Each Fund may invest in REITs, which are pooled investment vehicles that
invest primarily in either real estate or real estate related loans. The value
of a REIT is affected by changes in the value of the properties owned by the
REIT or securing mortgage loans held by the REIT. REITs are dependant upon cash
flow from its investments to repay financing costs and the ability of the
REIT's manager. REITs are also subject to risks generally associated with
investments in real estate. A Fund will indirectly bear its proportionate share
of any expenses, including management fees, paid by a REIT in which it invests.
INVESTMENT TECHNIQUES
OPTIONS ON SECURITIES AND SECURITIES INDICES
Each Fund (other than the Select Equity Fund) may write (sell) covered call
and put options and purchase call and put options on any securities in which it
may invest or on any securities index composed of securities in which it may
invest. The writing and purchase of options is a highly specialized activity
which involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. The use of options to seek to
increase total return involves the risk of loss if the Investment Adviser is
incorrect
18
<PAGE>
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 investment performance of the Fund will be less
favorable than it would have been in the absence of such options transactions.
The writing of options could significantly increase a Fund's portfolio
turnover rate and, therefore, associated brokerage commissions or spreads.
OPTIONS ON FOREIGN CURRENCIES. A Fund may, to the extent it invests in
foreign securities, purchase and sell (write) call and put options on foreign
currencies for the purpose of protecting against declines in the U.S. dollar
value of foreign portfolio securities and anticipated dividends on such
securities and against increases in the U.S. dollar cost of foreign securities
to be acquired. In addition, the International Equity and Asia Growth Funds
may use options on currency to cross-hedge, which involves writing or
purchasing options on one currency to hedge against changes in exchange rates
for a different currency, if there is a pattern of correlation between the two
currencies. 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 an option that a Fund has written is
exercised, the Fund could be required to purchase or sell foreign currencies
at disadvantageous exchange rates, thereby incurring losses. The purchase of
an option on foreign currency may constitute an effective hedge against
exchange rate fluctuations; however, in the event of exchange rate movements
adverse to a Fund's position, the Fund may forfeit the entire amount of the
premium plus related transaction costs. In addition to purchasing call and put
options for hedging purposes, the International Equity and Asia Growth Funds
may purchase call or put options on currency 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 held in the
Fund's portfolio. When purchased or sold to seek to increase total return,
options on currencies are considered speculative. Options on foreign
currencies written or purchased by the Funds are traded on U.S. and foreign
exchanges or over-the-counter.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
To seek to increase total return or to hedge against changes in interest
rates, securities prices or currency exchange rates, a Fund may purchase and
sell various kinds of futures contracts, and purchase and write call and put
options on any of such futures contracts. Each Fund may also enter into
closing purchase and sale transactions with respect to any such contracts and
options. The futures contracts may be based on various securities (such as
U.S. Government securities), foreign currencies, securities indices and other
financial instruments and indices. The Select Equity Fund may enter into such
transactions only with respect to the S&P 500 Index. A Fund will engage in
futures and related options transactions only for bona fide hedging purposes
as defined in regulations of the Commodity Futures Trading Commission or to
seek to increase total return to the extent permitted by such regulations. A
Fund may not purchase or sell futures contracts or purchase or sell related
options to seek to increase total return, except for closing purchase or sale
transactions, if immediately thereafter the sum of the amount of initial
margin deposits and premiums paid on the Fund's outstanding positions in
futures and related options entered into for the purpose of seeking to
increase total return would exceed 5% of the market value of the Fund's net
assets. These transactions involve brokerage costs, require margin deposits
and, in the case of contracts and options obligating a Fund to purchase
securities or currencies, require the Fund to segregate and maintain cash or
liquid, high grade debt securities with a value equal to the amount of the
Fund's obligations.
19
<PAGE>
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. See
"Investment Objectives and Policies--Futures Contracts and Options on Future
Contracts" in the Additional Statement. Thus, while a Fund may benefit from
the use of futures and options on futures, unanticipated changes in interest
rates, securities prices or currency exchange rates may result in poorer
overall performance than if the Fund had not entered into any futures
contracts or options transactions. Because perfect correlation between a
futures position and portfolio position that is intended to be protected is
impossible to achieve, the desired protection may not be obtained and a Fund
may be exposed to risk of loss. The loss incurred by a Fund in entering into
futures contracts and in writing call options on futures is potentially
unlimited and may exceed the amount of the premium received. Futures markets
are highly volatile and the use of futures may increase the volatility of a
Fund's net asset value. The profitability of a Fund's trading in futures to
seek to increase total return depends upon the ability of the Investment
Adviser to correctly analyze the futures markets. In addition, because of the
low margin deposits normally required in futures trading, a relatively small
price movement in a futures contract may result in substantial losses to a
Fund. Further, futures contracts and options on futures may be illiquid, and
exchanges may limit fluctuations in futures contract prices during a single
day.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
Each Fund may purchase when-issued securities. When-issued transactions
arise when securities are purchased by a Fund with payment and delivery taking
place in the future in order to secure what is considered to be an
advantageous price and yield to the Fund at the time of entering into the
transaction. Each Fund may also purchase securities on a forward commitment
basis; that is, make contracts to purchase securities for a fixed price at a
future date beyond the customary 3-day settlement period. A Fund is required
to hold and maintain in a segregated account with the Fund's custodian until 3
days prior to the settlement date, cash or liquid, high grade debt securities
in an amount sufficient to meet the purchase price. Alternatively, each Fund
may enter into offsetting contracts for the forward sale of other securities
that it owns. The purchase of securities on a when-issued or forward
commitment basis involves a risk of loss if the value of the security to be
purchased declines prior to the settlement date. Although a Fund would
generally purchase securities on a when-issued or forward commitment basis
with the intention of acquiring securities for its portfolio, a Fund may
dispose of when-issued securities or forward commitments prior to settlement
if its Investment Adviser deems it appropriate to do so.
ILLIQUID AND RESTRICTED SECURITIES
A Fund may not invest more than 10% of its total assets in securities that
are subject to restrictions on resale ("restricted securities") under the
Securities Act of 1933, as amended ("1933 Act"), including securities eligible
for resale in reliance on Rule 144A under the 1933 Act. In addition, a Fund
will not invest more than 15% of its net assets in illiquid investments, which
includes securities (both foreign and domestic) that are not readily
marketable, swaps, repurchase agreements maturing in more than seven days,
time deposits with a notice or demand period of more than seven days, certain
over-the-counter options, and certain restricted securities, unless it is
determined, based upon the continuing review of the trading markets for the
specific restricted security, that such restricted security is eligible for
sale under Rule 144A and, therefore, is liquid. The Board of Directors has
adopted guidelines and delegated to the Investment Adviser the daily function
of determining and monitoring the liquidity of restricted securities. The
Board of Directors, however, retains oversight focusing on factors such as
valuation, liquidity and availability of information and is ultimately
responsible for each determination. Investing in restricted securities
eligible for resale pursuant to Rule 144A may decrease the liquidity of a
Fund's portfolio to the extent that qualified institutional buyers become for
a time uninterested in purchasing these restricted securities. The purchase
price and subsequent valuation of restricted and illiquid securities normally
reflect a discount, which may be significant, from the market price of
comparable securities for which a liquid market exists.
20
<PAGE>
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. The International Equity and Asia Growth Funds
may also enter into repurchase agreements involving certain foreign government
securities. If the other party or "seller" defaults, a Fund might suffer a
loss to the extent that the proceeds from the sale of the underlying
securities and other collateral held by the Fund in connection with the
related repurchase agreement are less than the repurchase price. In addition,
in the event of bankruptcy of the seller or failure of the seller to
repurchase the securities as agreed, a Fund could suffer losses, including
loss of interest on or principal of the security and costs associated with
delay and enforcement of the repurchase agreement. The Directors of the
Company have reviewed and approved certain counterparties whom they believe to
be creditworthy and have authorized the Funds to enter into repurchase
agreements with such counterparties. In addition, each Fund, together with
other registered investment companies having advisory agreements with an
Investment Adviser, may transfer uninvested cash balances into a single joint
account, the daily aggregate balance of which will be invested in one or more
repurchase agreements.
LENDING OF PORTFOLIO SECURITIES
Each Fund may also seek to increase its income by lending portfolio
securities. Under present regulatory policies, such loans may be made to
institutions, such as certain broker-dealers, and are required to be secured
continuously by collateral in cash, cash equivalents, or U.S. Government
securities maintained on a current basis in an amount at least equal to the
market value of the securities loaned. Cash collateral may be invested in cash
equivalents. If an Investment Adviser determines to make securities loans, the
value of the securities loaned may not exceed 33 1/3% of the value of the
total assets of a Fund. See "Investment Restrictions" in the Additional
Statement. A Fund may experience a loss or delay in the recovery of its
securities if the institution with which it has engaged in a portfolio loan
transaction breaches its agreement with the Fund.
SHORT SALES AGAINST-THE-BOX
Each Fund (other than the Select Equity Fund) may make short sales of
securities or maintain a short position, provided that at all times when a
short position is open the Fund owns an equal amount of such securities or
securities convertible into or exchangeable, without payment of any further
consideration, for an equal amount of the securities of the same issuer as the
securities sold short (a short sale against-the-box). Not more than 25% of a
Fund's net assets (determined at the time of the short sale) may be subject to
such short sales. Short sales will be made primarily to defer realization of
gain or loss for federal tax purposes; a gain or loss in a Fund's long
position will be offset by a gain or loss in its short position.
TEMPORARY INVESTMENTS
Each Fund may, for temporary defensive purposes, invest 100% of its total
assets (except that the Select Equity Fund may only hold up to 35% of its
total assets) in U.S. Government securities, repurchase agreements
collateralized by U.S. Government securities, commercial paper rated at least
A-2 by Standard & Poor's or P-2 by Moody's, certificates of deposit, bankers'
acceptances, repurchase agreements, non-convertible preferred stocks, non-
convertible corporate bonds with a remaining maturity of less than one year
or, subject to certain tax restrictions, foreign currencies. When a Fund's
assets are invested in such instruments, the Fund may not be achieving its
investment objective.
MISCELLANEOUS TECHNIQUES
In addition to the techniques and investments described above, each Fund
may, with respect to no more than 5% of its net assets, engage in the
following techniques and investments: (i) warrants and stock purchase rights,
(ii) currency swaps (International Equity and Asia Growth Funds only),
(iii) other investment companies and (iv) unseasoned companies. For more
information see the Additional Statement.
21
<PAGE>
RISK FACTORS
RISK OF INVESTING IN SMALL TO MEDIUM CAPITALIZATION COMPANIES. Investing in
the securities of such companies involves greater risk and the possibility of
greater portfolio price volatility. Historically, small to medium market
capitalization stocks and stocks of recently organized companies have been
more volatile in price than the larger market capitalization stocks included
in the S&P 500 Index. Among the reasons for the greater price volatility of
these small company and unseasoned stocks are the less certain growth
prospects of smaller firms and the lower degree of liquidity in the markets
for such stocks.
SPECIAL RISKS OF INVESTMENTS IN THE ASIAN AND OTHER EMERGING
MARKETS. Investing in the securities of issuers in emerging markets involves
risks in addition to those discussed above. The International Equity and Asia
Growth Funds may each invest without limit in the securities of issuers in
countries with emerging economies or securities markets. The Growth and Income
and Mid-Cap Equity Funds may each invest up to 15% of their total assets in
securities of issuers in countries with emerging economies or securities
markets. These emerging markets are generally located in the Asia-Pacific
region, Eastern Europe, Latin and South America and Africa. A Fund's purchase
and sale of portfolio securities in certain emerging markets may be
constrained by limitations as to daily changes in the prices of listed
securities, periodic trading or settlement volume and/or limitations on
aggregate holdings of foreign investors. Such limitations may be computed
based on the aggregate trading volume by or holdings of a Fund, the Investment
Adviser and its affiliates and their respective clients and other service
providers. A Fund may not be able to sell securities in circumstances where
price, trading or settlement volume limitations have been reached.
Foreign investment in the securities markets of certain emerging markets is
restricted or controlled to varying degrees which may limit investment in such
countries or increase the administrative costs of such investments. For
example, certain Asian countries require governmental approval prior to
investments by foreign persons or limit investment by foreign persons to only
a specified percentage of an issuer's outstanding securities or a specific
class of securities which may have less advantageous terms (including price)
than securities of the issuer available for purchase by nationals. In
addition, certain countries may restrict or prohibit investment opportunities
in issuers or industries deemed important to national interests. Such
restrictions may affect the market price, liquidity and rights of securities
that may be purchased by a Fund. Due to restrictions on direct investment in
equity securities in certain Asian countries, such as Taiwan, it is
anticipated that a Fund may invest in such countries only through other
investment funds in such countries. See "Other Investment Companies" in the
Additional Statement. Furthermore, the repatriation of both investment income
and capital from several of the Asian countries is subject to restrictions
such as the need for certain governmental consents.
Many of the emerging markets may be subject to a greater degree of economic,
political and social instability than is the case in Western Europe, the
United States and Japan. Many of the emerging markets do not have fully
democratic governments. For example, some governments of emerging market
countries are authoritarian in nature or have been installed or removed as a
result of military coups, while governments in other emerging markets have
periodically used force to suppress civil dissent. Disparities of wealth, the
pace and success of democratization, and ethnic, religious and racial
disaffection, among other factors, have also led to social unrest, violence
and/or labor unrest in some of the Asian and other countries. The economies of
most of the emerging markets are heavily dependent upon international trade
and are accordingly affected by protective trade barriers and the economic
conditions of their trading partners, principally, the United States, Japan,
China
22
<PAGE>
and the European Union. In addition, the economies of some of the emerging
markets are vulnerable to weakness in world prices for their commodity
exports.
Settlement procedures in emerging markets are frequently less developed and
reliable than those in the United States and may involve a Fund's delivery of
securities before receipt of payment for their sale. In addition, significant
delays are common in certain markets in registering the transfer of
securities. Settlement or registration problems may make it more difficult for
a Fund to value its portfolio securities and could cause the Fund to miss
attractive investment opportunities, to have a portion of its assets
uninvested or to incur losses due to the failure of a counterparty to pay for
securities the Fund has delivered or the Fund's inability to complete its
contractual obligations.
Currently, there is no market or only a limited market for many of the
management techniques and instruments with respect to the currencies and
securities markets of the emerging market countries. Consequently, there can
be no assurance that suitable instruments for hedging currency and market-
related risks will be available at the times when a Fund wishes to use them.
RISK OF INVESTING IN FIXED INCOME SECURITIES. When interest rates decline,
the market value of fixed income securities tends to increase. Conversely,
when interest rates increase, the market value of fixed income securities
tends to decline. Volatility of a security's market value will differ
depending upon the security's duration, the issuer and the type of instrument.
Investments in fixed income securities are subject to the risk that the issuer
could default on its obligations and a Fund could sustain losses on such
investments. A default could impact both interest and principal payments.
RISKS OF DERIVATIVE TRANSACTIONS. A Fund's transactions, if any, in options,
futures, options on futures, swap transactions and currency forward contracts
involve certain risks, including a possible lack of correlation between
changes in the value of hedging instruments and the portfolio assets being
hedged, the potential illiquidity of the markets for derivative instruments,
the risks arising from the margin requirements and related leverage factors
associated with such transactions. The use of these management techniques to
seek to increase total return may be regarded as a speculative practice and
involves the risk of loss if the Investment Adviser is incorrect in its
expectation of fluctuations in securities prices, interest rates or currency
prices. A Fund's transactions in foreign currency, forward foreign currency
exchange contracts, options, futures contracts and certain other derivative
transactions may be limited by the requirements of the Internal Revenue Code
of 1986, as amended (the "Code"), for qualification as a regulated investment
company.
INVESTMENT RESTRICTIONS
Each Fund is subject to certain investment restrictions that are described
in detail under "Investment Restrictions" in the Additional Statement.
Fundamental investment restrictions of a Fund can not be changed without
approval of a majority of the outstanding shares of that Fund. All investment
objectives and policies not specifically designated as fundamental are non-
fundamental and may be changed without shareholder approval. If there is a
change in a Fund's investment objectives, shareholders should consider whether
the Fund remains an appropriate investment in light of their then current
financial positions and needs.
23
<PAGE>
PORTFOLIO TURNOVER
A high rate of portfolio turnover (100% or more) involves correspondingly
greater expenses which must be borne by a Fund and its shareholders and may
under certain circumstances make it more difficult for a Fund to qualify as a
regulated investment company under the Code. See "Financial Highlights" for a
statement of each Fund's historical portfolio turnover ratio. The portfolio
turnover rate is calculated by dividing the lesser of the dollar amount of
sales or purchases of portfolio securities by the average monthly value of a
Fund's portfolio securities, excluding securities having a maturity at the
date of purchase of one year or less. Notwithstanding the foregoing, the
Investment Adviser may, from time to time, make short-term investments when it
believes such investments are in the best interest of a Fund.
MANAGEMENT
DIRECTORS AND OFFICERS
The Company's Board of Directors is responsible for deciding matters of
general policy and reviewing the actions of the Investment Advisers,
subadviser, administrator, distributor and transfer agent. The officers of the
Company conduct and supervise the Funds' daily business operations. The
Additional Statement contains information as to the identity of, and other
information about, the Directors and officers of the Company.
INVESTMENT ADVISERS, SUBADVISER AND ADMINISTRATOR
INVESTMENT ADVISERS AND SUBADVISER. Goldman Sachs Asset Management, One New
York Plaza, New York, New York 10004, a separate operating division of Goldman
Sachs, serves as the investment adviser to the Mid-Cap Equity, Growth and
Income and International Equity Funds. Goldman Sachs registered as an
investment adviser in 1981. Goldman Sachs Funds Management, L.P., One New York
Plaza, New York, New York 10004, a Delaware limited partnership which is an
affiliate of Goldman Sachs, serves as the investment adviser to the Select
Equity Fund. Goldman Sachs Funds Management, L.P. registered as an investment
adviser in 1990. Goldman Sachs Asset Management International, 140 Fleet
Street, London EC4A 2BJ, England, an affiliate of Goldman Sachs, serves as the
investment adviser to the Asia Growth Fund and subadviser to the International
Equity Fund. Goldman Sachs Asset Management International is regulated by the
Investment Management Regulatory Organisation Limited and registered as an
investment adviser in 1991. Goldman Sachs Asset Management serves as
administrator to each Fund. As of March 27, 1996, Goldman Sachs Asset
Management, Goldman Sachs Funds Management, L.P. and Goldman Sachs Asset
Management International, together with their affiliates, acted as investment
adviser, administrator or distributor for assets in excess of $58 billion.
Under an Investment Advisory Agreement with each Fund, the applicable
Investment Adviser, and in the case of the International Equity Fund under a
Subadvisory Agreement, the subadviser, subject to the general supervision of
the Board of Directors, provides day-to-day advice as to the Fund's portfolio
transactions. Goldman Sachs has agreed to permit the Company to use the name
"Goldman Sachs" or a derivative thereof as part of each Fund's name for as
long as a Fund's Investment Advisory Agreement is in effect.
In performing its investment advisory services, each Investment Adviser,
while remaining ultimately responsible for the management of the Funds, may
rely upon the asset management division of its Singapore and
24
<PAGE>
Tokyo affiliates for portfolio decisions and management with respect to
certain portfolio securities and is able to draw upon the research and
expertise of its other affiliate offices.
FUND MANAGERS
<TABLE>
<CAPTION>
YEARS
PRIMARILY
NAME AND TITLE FUND RESPONSIBILITY RESPONSIBLE FIVE YEAR EMPLOYMENT HISTORY
-------------- ------------------- ----------- ----------------------------
<C> <C> <C> <S>
Mitchell E. Cantor Co-Portfolio Manager-- Since Mr. Cantor joined the
Vice President Growth and Income, 1993 Investment Adviser in
Mid-Cap Equity 1995 1991.
- -----------------------------------------------------------------------------------------------------------------------------------
Ronald E. Gutfleish Co-Portfolio Manager-- Since Mr. Gutfleish joined the
Vice President Growth and Income, 1993 Investment Adviser in
Mid-Cap Equity 1995 1993. Prior to 1993, he
was a principal of
Sanford C. Bernstein &
Co. in its Investment
Management Research
Department.
- -----------------------------------------------------------------------------------------------------------------------------------
Roderick D. Jack Co-Portfolio Manager-- Since Mr. Jack joined the
Executive International Equity 1992 Investment Adviser in
Director 1992. Prior to 1992, he
worked in the advisory
and financing group for
S.G. Warburg in London.
- -----------------------------------------------------------------------------------------------------------------------------------
Robert C. Jones Senior Portfolio Since Mr. Jones joined the
Vice President Manager--Select 1991 Investment Adviser in
Equity 1989.
- -----------------------------------------------------------------------------------------------------------------------------------
Marcel Jongen Co-Portfolio Manager-- Since Mr. Jongen joined the
Executive International Equity 1992 Investment Adviser in
Director 1992. Prior to 1992, he
was head of equities at
Philips Pension Fund in
Eindhaven.
- -----------------------------------------------------------------------------------------------------------------------------------
Shogo Maeda Co-Portfolio Manager-- Since Mr. Maeda joined the
Vice President International Equity 1994 Investment Adviser in
1994. Prior to 1994, he
worked at Nomura
Securities International
and for a period at
Manufacturers Hanover
Bank in New York.
- -----------------------------------------------------------------------------------------------------------------------------------
Warwick M. Negus Senior Portfolio Since Mr. Negus joined the
Executive Manager--Asia 1994 Investment Adviser in
Director Growth 1994. Prior to 1994, he
Co-Portfolio Manager-- 1994 was a vice president of
International Equity Bankers Trust Australia
Ltd.
- -----------------------------------------------------------------------------------------------------------------------------------
Karma Wilson Portfolio Manager-- Since Ms. Wilson joined the
Vice President Asia Growth 1995 Investment Adviser in
1995. Prior to 1995, she
was an investment
analyst with Bankers
Trust Australia Ltd. and
prior to 1993 worked at
Arthur Andersen LLP.
</TABLE>
It is the responsibility of the Investment Adviser to make investment
decisions for a Fund and to place the purchase and sale orders for the Fund's
portfolio transactions in U.S. and foreign securities and currency markets.
25
<PAGE>
Such orders may be directed to any broker including, to the extent and in the
manner permitted by applicable law, Goldman Sachs or its affiliates.
As compensation for its services rendered and assumption of certain expenses
pursuant to separate Investment Advisory Agreements, GSAM is entitled to a fee
from the Growth and Income, Mid-Cap Equity and International Equity Funds,
computed daily and payable monthly, at the annual rates of 0.55%, 0.60% and
0.25%, respectively, of average daily net assets; however, GSAM is currently
only imposing its advisory fee with respect to the International Equity Fund
at the annual rate of 0.23% of average daily net assets. As compensation for
its services rendered and assumption of certain expenses pursuant to a
separate Investment Advisory Agreement, GSFM is entitled to a fee from the
Select Equity Fund, computed daily and payable monthly, at the annual rate of
0.50% of average daily net assets; however, GSFM is currently only imposing
its advisory fee with respect to the Select Equity Fund at the annual rate of
0.44% of average daily net assets. As compensation for its services rendered
and assumption of certain expenses pursuant to Investment Advisory and
Subadvisory Agreements, GSAMI is entitled to a fee from the Asia Growth and
International Equity Funds, computed daily and payable monthly at the annual
rates of 0.75% and 0.50%, respectively, of average daily net assets; however,
GSAMI is currently only imposing its advisory and subadvisory fees with
respect to the Asia Growth and International Equity Funds at the annual rate
of 0.71% and 0.48%, respectively, of average daily net assets. The Investment
Advisers may discontinue or modify such limitations in the future at their
discretion, although they have no current intention to do so. For the fiscal
period ended January 31, 1996, each Fund paid fees at the foregoing
contractual rates, except that the Select Equity Fund, paid an advisory fee
equal to 0.43% of its average daily net assets. Without giving effect to fee
limitations, the aggregate management fees paid by the International Equity
and Asia Growth Funds are higher than the fees paid by most funds but the
Investment Advisers believe such fees are comparable to management fees paid
by funds with similar investment strategies.
Each Investment Adviser has voluntarily agreed to reduce the fees payable to
it by a Fund (to the extent of its fees) by the amount (if any) that the
Fund's expenses would exceed the applicable expense limitations imposed by
state securities administrators. See "Management--Expenses" in the Additional
Statement. In addition, the Investment Adviser to the Select Equity, Growth
and Income, Mid-Cap Equity, International Equity and Asia Growth Funds has
voluntarily agreed to reduce or limit certain "Other Expenses" of such Funds
(excluding transfer agency fees applicable to the Growth and Income and Mid-
Cap Equity Funds, advisory, subadvisory administration fees and fees under
service, distribution and authorized dealer service plans, taxes, interest and
brokerage fees and litigation, indemnification and other extraordinary
expenses) to the extent such expenses exceed 0.06%, 0.11%, 0.06%, 0.24% and
0.24% per annum of such Funds' average daily net assets, respectively. Such
reductions or limits, if any, are calculated monthly on a cumulative basis and
may be discontinued or modified by the applicable Investment Adviser in its
discretion at any time.
ADMINISTRATOR. As administrator, pursuant to an Administration Agreement
with each Fund, GSAM provides personnel for supervisory, administrative, and
clerical functions; oversees the performance of administrative and
professional services to each Fund by others; provides office facilities; and
prepares, but does not pay for, reports to shareholders, the SEC and other
regulatory authorities. As compensation for the services rendered to the
Funds, GSAM is entitled to a fee from the Growth and Income and Mid-Cap Equity
Funds, computed daily and payable monthly, at an annual rate equal to 0.15% of
such Fund's average daily net assets. GSAM is entitled to a fee from each
other Fund, computed daily and payable monthly at an annual rate equal to
0.25% of each such Fund's average daily net assets. However, GSAM is currently
only imposing its administration fee with respect to Select Equity,
International Equity and Asia Growth Funds at the annual rate of 0.15% of
average daily net assets. GSAM may discontinue or modify any such limitation
in the future at its discretion, although it has no current intention to do
so. For the period ended January 31, 1996, each Fund paid
26
<PAGE>
GSAM a fee for administration services at the foregoing contractual rates,
except that the Select Equity Fund paid an administration fee equal to 0.18%
of its average daily net assets. GSAM has agreed to reduce its fees payable by
a Fund (to the extent of its fees) by the amount (if any) that a Fund's
expenses exceed the applicable expense limitations imposed by state securities
administrators. See "Management--Expenses" in the Additional Statement.
ACTIVITIES OF GOLDMAN SACHS AND ITS AFFILIATES AND OTHER ACCOUNTS MANAGED BY
GOLDMAN SACHS. The involvement of the Investment Advisers, 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 a Fund or limit a Fund's investment activities. Goldman Sachs and
its affiliates engage in proprietary trading and advise accounts and funds
which have investment objectives similar to those of the Funds and/or which
engage in and compete for transactions in the same type of securities,
currencies and instruments as the Funds. Goldman Sachs and its affiliates will
not have any obligation to make available any information regarding their
proprietary activities or strategies, or the activities or strategies used for
other accounts managed by them, for the benefit of the management of the Funds
and in general it is not anticipated that the Investment Advisers will have
access to proprietary information for the purpose of managing a Fund. The
results of a Fund's investment activities, therefore, may differ from those of
Goldman Sachs and its affiliates and it is possible that a Fund could sustain
losses during periods in which Goldman Sachs and its affiliates and other
accounts achieve significant profits on their trading for proprietary or other
accounts. From time to time, a Fund's activities may be limited because of
regulatory restrictions applicable to Goldman Sachs and its affiliates, and/or
their internal policies designed to comply with such restrictions. See
"Activities of Goldman Sachs and its Affiliates and Other Accounts Managed by
Goldman Sachs" in the Additional Statement for further information.
DISTRIBUTOR AND TRANSFER AGENT
Goldman Sachs, 85 Broad Street, New York, New York, serves as the exclusive
distributor of each Fund's shares. Goldman Sachs, 4900 Sears Tower, Chicago,
Illinois, also serves as each Fund's transfer agent (the "Transfer Agent") and
as such performs various shareholder servicing functions. Shareholders with
inquiries regarding a Fund should contact Goldman Sachs (as Transfer Agent) at
the address or the telephone number set forth on the back cover page of this
Prospectus. Goldman Sachs is not entitled to receive a fee from the Select
Equity, International Equity and Asia Growth Funds with respect to
Institutional or Service Shares. Goldman Sachs is entitled to receive a fee
from the Growth and Income and Mid-Cap Equity Funds equal to 0.04% of the
average daily net assets of the Institutional and Service Shares of such
Funds.
NET ASSET VALUE
The net asset value per share of each class of a Fund is calculated by the
Fund's custodian as of the close of regular trading on the New York Stock
Exchange (normally 3:00 p.m. Chicago time, 4:00 p.m. New York time), on each
Business Day (as such term is defined under "Additional Information"). Net
asset value per share of each class is calculated by determining the net
assets attributable to each class and dividing by the number of outstanding
shares of that class. Portfolio securities are valued based on market
quotations or, if accurate quotations are not readily available, at fair value
as determined in good faith under procedures established by the Company's
Board of Directors.
27
<PAGE>
PERFORMANCE INFORMATION
From time to time each Fund may publish average annual total return and the
Growth and Income Fund may publish its yield and distribution rates in
advertisements and communications to shareholders or prospective investors.
Average annual total return is determined by computing the average annual
percentage change in value of $1,000 invested at the maximum public offering
price for specified periods ending with the most recent calendar quarter,
assuming reinvestment of all dividends and distributions at net asset value.
The total return calculation assumes a complete redemption of the investment
at the end of the relevant 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 net asset value. Any
performance data which are based on the net asset value 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 performance rankings and indices.
The Growth and Income Fund computes its yield by dividing net investment
income earned during a recent thirty-day period by the product of the average
daily number of shares outstanding and entitled to receive dividends during
the period and the maximum offering price per share on the last day of the
relevant period. The results are compounded on a bond equivalent (semi-annual)
basis and then annualized. Net investment income per share is equal to the
dividends and interest earned during the period, reduced by accrued expenses
for the period. The calculation of net investment income for these purposes
may differ from the net investment income determined for accounting purposes.
The Growth and Income Fund's quotations of distribution rate are calculated by
annualizing the most recent distribution of net investment income for a
monthly, quarterly or other relevant period and dividing this amount by the
net asset value per share on the last day of the period for which the
distribution rates are being calculated.
Each Fund's total return, yield and distribution rate will be calculated
separately for each class of shares in existence. Because each class of shares
may be subject to different expenses, the total return, yield and distribution
rate calculations with respect to each class of shares for the same period
will differ.
The investment results of a Fund will fluctuate over time and any
presentation of investment results for any prior period should not be
considered a representation of what an investment may earn or what the Fund's
performance may be in any future period. In addition to information provided
in shareholder reports, the Funds may, in their discretion, from time to time
make a list of their holdings available to investors upon request.
SHARES OF THE COMPANY
Each Fund is a series of the Company, which was incorporated under the laws
of the State of Maryland on September 27, 1989. The authorized capital stock
of the Company consists of 2,000,000,000 shares of common stock, par value
$.001 per share. The Directors of the Company have authority under the
Company's Charter to create and classify shares of capital stock in separate
series, without further action by shareholders. Additional series may be added
in the future. The Directors also have authority to classify and reclassify
any series or portfolio of shares into one or more classes. The Select Equity,
Growth and Income, International Equity and Asia Growth Funds offer four
classes of shares: Institutional Shares, Service Shares, Class A Shares and
Class B Shares. The Mid-Cap Equity Fund offers two classes of shares:
Institutional Shares and Service Shares.
28
<PAGE>
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 Fund available for distribution to such shareholders. All
shares entitle their holders to one vote per share, are freely transferable
and have no preemptive, subscription or conversion rights.
As of April 15, 1996, State Street Bank and Trust Company as Trustee for
Goldman Sachs Profit Sharing Master Trust, attention: Louis Pereira, P.O. Box
1992, Boston, MA 02105-1992 was record holder of 98% of Mid-Cap Equity Fund's
outstanding shares.
Unless otherwise required by the Investment Company Act of 1940, as amended
(the "Act"), ordinarily it will not be necessary for the Company to hold
annual meetings of shareholders. As a result, Fund shareholders may not
consider each year the election of Directors or the appointment of independent
accountants. However, pursuant to the Company's By-Laws, the recordholders of
at least 10% of the shares outstanding and entitled to vote at a special
meeting may require the Company to hold such special meeting of shareholders
for any purpose and recordholders may, under certain circumstances as
permitted by the Act, communicate with other shareholders in connection with
requiring a special meeting of shareholders. Shareholders of the Company may
remove a Director by the affirmative vote of a majority of the Company's
outstanding voting shares. The Board of Directors, however, will call a
special meeting of shareholders for the purpose of electing Directors if, at
any time, less than a majority of Directors holding office at the time were
elected by shareholders.
In the interest of economy and convenience, the Company 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 Fund are reflected in
account statements from the Transfer Agent.
TAXATION
FEDERAL TAXES
Each Fund is treated as a separate entity for tax purposes. Each Fund has
elected or intends to elect to be treated as a regulated investment company
and intends to qualify for such treatment for each taxable year under
Subchapter M of the Code. To qualify as such, each Fund must satisfy certain
requirements relating to the sources of its income, diversification of its
assets and distribution of its income to shareholders. As a regulated
investment company, each Fund will not be subject to federal income or excise
tax on any net investment income and net realized capital gains that are
distributed to its shareholders in accordance with certain timing requirements
of the Code.
Dividends paid by a Fund from net investment income, certain net realized
foreign exchange gains, the excess of net short-term capital gain over net
long-term capital loss and original issue discount or market discount income
will be taxable to its shareholders as ordinary income. Dividends paid by a
Fund from the excess of net long-term capital gain over net short-term capital
loss will be taxable as long-term capital gains regardless of how long the
shareholders have held their shares. These tax consequences will apply
regardless of whether distributions are received in cash or reinvested in
shares. A Fund's dividends that are paid to its corporate shareholders and are
attributable to qualifying dividends such Fund receives from U.S. domestic
corporations may be eligible, in the hands of such corporate shareholders, for
the corporate dividends-received deduction, subject to certain holding period
requirements and debt financing limitations under the Code. Dividends paid by
International Equity Fund and Asia Growth Fund are not generally expected to
qualify, in the hands of corporate shareholders, for the corporate dividends-
received deduction, but a portion of each other Fund's dividends may
29
<PAGE>
generally so qualify. A Fund's investment in zero coupon securities may
require the Fund to sell certain of its portfolio securities to generate
sufficient cash to satisfy certain income distribution requirements. Certain
distributions paid by a Fund in January of a given year may be taxable to
shareholders as if received the prior December 31. Shareholders will be
informed annually about the amount and character of distributions received
from the Funds for federal income tax purposes.
Investors should consider the tax implications of buying shares immediately
prior to a distribution. Investors who purchase shares shortly before the
record date for a distribution will pay a per share price that includes the
value of the anticipated distribution and will be taxed on the distribution
even though the distribution represents a return of a portion of the purchase
price.
Redemptions and exchanges of shares are taxable events on which a
shareholder may recognize a gain or loss.
Individuals and certain other classes of shareholders may be subject to 31%
backup withholding of federal income tax on distributions, redemptions and
exchanges if they fail to furnish their correct taxpayer identification number
and certain certifications required by the Internal Revenue Service or if they
are otherwise subject to backup withholding. Individuals, corporations and
other shareholders that are not U.S. persons under the Code are subject to
different tax rules and may be subject to nonresident alien withholding at the
rate of 30% (or a lower rate provided by an applicable tax treaty) on amounts
treated as ordinary dividends from the Funds.
Each Fund may be subject to foreign withholding or other foreign taxes on
income or gain from certain foreign securities. The Funds do not anticipate
that they will elect to pass such foreign taxes through to their shareholders,
who therefore will generally not take such taxes into account on their own tax
returns. The Funds will generally deduct such taxes in determining the amounts
available for distribution to shareholders.
OTHER TAXES
In addition to federal taxes, a shareholder may be subject to state, local
or foreign taxes on payments received from the Funds. A state income (and
possibly local income and/or intangible property) tax exemption is generally
available to the extent (if any) a Fund's distributions are derived from
interest on (or, in the case of intangibles taxes, the value of its assets is
attributable to) certain U.S. Government obligations, provided in some states
that certain thresholds for holdings of such obligations and/or reporting
requirements are satisfied. For a further discussion of certain tax
consequences of investing in shares of the Funds, see "Taxation" in the
Additional Statement. Shareholders are urged to consult their own tax advisers
regarding specific questions as to federal, state and local taxes as well as
to any foreign taxes.
ADDITIONAL INFORMATION
The term "a vote of the majority of the outstanding shares" of a Fund means
the vote of the lesser of (i) 67% or more of the shares present at a meeting,
if the holders of more than 50% of the outstanding shares of the Fund are
present or represented by proxy, or (ii) more than 50% of the outstanding
shares of the Fund.
As used in this Prospectus, the term "Business Day" means any day the New
York Stock Exchange is open for trading, which is Monday through Friday except
for holidays. The New York Stock Exchange is closed on the following holidays:
New Year's Day (observed), Presidents' Day (observed), Good Friday, Memorial
Day (observed), Independence Day, Labor Day, Thanksgiving Day and Christmas
Day.
30
<PAGE>
ADDITIONAL SERVICES
The Company, on behalf of the Funds, has adopted a Service Plan with respect
to the Service Shares which authorizes a Fund to compensate Service Organiza-
tions for providing account administration and personal and account mainte-
nance services to their customers who are beneficial owners of such Shares.
The Company, on behalf of the Funds, enters into agreements with Service Orga-
nizations which purchase Service Shares on behalf of their customers ("Service
Agreements"). The Service Agreements provide for compensation to the Service
Organizations in an amount up to 0.50% (on an annualized basis) of the average
daily net assets of the Service Shares of the Fund attributable to or held in
the name of the Service Organization for its customers; provided, however,
that the fee paid for personal and account maintenance services shall not ex-
ceed 0.25% of such average daily net assets. The services provided by the
Service Organizations may include acting, directly or through an agent, as the
sole shareholder of record, maintaining account records for customers,
processing orders to purchase, redeem or exchange Service Shares for custom-
ers, responding to inquiries from prospective and existing shareholders and
assisting customers with investment procedures.
For the fiscal year ended January 31, 1996, no service shares of the Funds
were outstanding.
Holders of Service Shares of a Fund bear all expenses and fees paid to Serv-
ice Organizations for their services with respect to such Shares as well as
any other expenses which are directly attributable to such Shares.
Service Organizations (other than broker-dealers) may charge other fees to
their customers who are the beneficial owners of Service Shares in connection
with their customer accounts. These fees would be in addition to any amounts
received by the Service Organization under a Service Agreement and may affect
the return earned on an investment in a Fund. The Company, on behalf of the
Funds, accrues payments made pursuant to a Service Agreement daily. All inqui-
ries of beneficial owners of Service Shares should be directed to such owners'
Service Organization.
REPORTS TO SHAREHOLDERS
Recordholders of Service Shares of the Funds will receive an annual report
containing audited financial statements and a semi-annual report. Each
recordholder of Service Shares will also be provided with a printed confirma-
tion for each transaction in its account and a quarterly account statement. A
year-to-date statement for any account will be provided to a Service Organiza-
tion upon request made to Goldman Sachs.
Service Organizations will be responsible for providing services similar to
those described above to their customers who are the beneficial owners of such
Shares. For example, Service Organizations are responsible for providing each
customer exercising investment discretion with monthly statements with respect
to such customer's account in lieu of an immediate confirmation of each trans-
action.
31
<PAGE>
DIVIDENDS
Each dividend from net investment income and capital gain distributions, if
any, declared by a Fund on its outstanding Service Shares will, at the elec-
tion of each shareholder, be paid (i) in cash or (ii) in additional Service
Shares of such Fund. This election should initially be made on a shareholder's
Account Information Form and may be changed upon written notice to Goldman
Sachs at any time prior to the record date for a particular dividend or dis-
tribution. If no election is made, all dividends from net investment income
and capital gain distributions will be reinvested in Service Shares of the ap-
plicable Fund.
The election to reinvest dividends and distributions paid by a Fund in addi-
tional Service Shares of the Fund will not affect the tax treatment of such
dividends and distributions, which will be treated as received by the share-
holder and then used to purchase Service Shares of a Fund.
Each Fund intends that all or substantially all its net investment income
and net realized long-term and short-term capital gains, after reduction by
available capital losses, including any capital losses carried forward from
prior years, will be declared as dividends for each taxable year. The Growth
and Income Fund will pay dividends from net investment income quarterly. Each
other Fund will pay dividends from net investment income at least annually.
All of the Funds will pay dividends from net realized long-term and short-term
capital gains, reduced by available capital losses, at least annually. From
time to time, a portion of a Fund's dividends may constitute a return of
capital.
At the time of an investor's purchase of shares of a Fund a portion of the
net asset value per share may be represented by undistributed income of the
Fund or realized or unrealized appreciation of the Fund's portfolio securi-
ties. Therefore, subsequent distributions (or portions thereof) of taxable in-
come or realized appreciation on such shares may be taxable to the investor
even if the net asset value of the investor's shares is, as a result of the
distributions, reduced below the cost of such shares and the distributions (or
portions thereof) represent a return of a portion of the purchase price.
PURCHASE OF SERVICE SHARES
It is expected that all direct purchasers of Service Shares of the Funds
will be Service Organizations or their nominees. Customers of Service Organi-
zations may invest in Service Shares only through Service Organizations. Serv-
ice Shares may be purchased on any Business Day by a Service Organization
through Goldman Sachs at the net asset value per share next determined after
receipt of an order. No sales load will be charged. If, by the close of regu-
lar trading on the New York Stock Exchange (currently 3:00 p.m. Chicago time,
4:00 p.m. New York time), an order is received from a Service Organization by
Goldman Sachs, the price per share will be the net asset value per share com-
puted on the day the purchase order is received. See "Net Asset Value." Pur-
chases of Service Shares of the Fund must be settled within three (3) Business
Days of the receipt of a complete purchase order. Payment of the proceeds of
redemption of shares purchased by check may be delayed for a period of time as
described under "Redemption of Service Shares."
32
<PAGE>
The Service Organizations are responsible for the timely transmittal of
purchase orders to Goldman Sachs and payments to State Street. In order to
facilitate timely transmittal, the Service Organizations have established
times by which purchase orders and payments must be received by them.
PURCHASE PROCEDURES
Purchases of Service Shares may be made by a Service Organization placing an
order with Goldman Sachs at 800-621-2550 and either wiring Federal Funds to
State Street Bank and Trust Company ("State Street") or initiating an ACH
transfer. Purchases may also be made by a Service Organization by check (ex-
cept that a check drawn on a foreign bank or a third party check will not be
accepted) or Federal Reserve draft made payable to "Goldman Sachs Equity Port-
folios, Inc.--Name of Fund" and should be directed to "Goldman Sachs Equity
Portfolios, Inc.--Name of Fund," c/o National Financial Data Services, Inc.
("NFDS"), P.O. Box 419711, Kansas City, MO 64141-6711.
OTHER PURCHASE INFORMATION
The Funds do not have any minimum purchase or account requirements with
respect to Service Shares. A Service Organization may, however, impose a
minimum amount for initial and subsequent investments in Service Shares, and
may establish other requirements such as a minimum account balance. A Service
Organization may effect redemptions of noncomplying accounts, and may impose a
charge for any special services rendered to its customers. Customers should
contact their Service Organization for further information concerning such
requirements and charges.
The Funds reserve the right to redeem Service Shares of any Service Organi-
zation whose account balance is less than $50 as a result of earlier redemp-
tions. Such redemptions will not be implemented if the value of such share-
holder's account falls below the minimum account balance solely as a result of
market conditions. The Company will give sixty (60) days' prior written notice
to Service Organizations whose Service Shares are being redeemed to allow them
to purchase sufficient additional Service Shares to avoid such redemption.
The Funds and Goldman Sachs each reserves the right to reject any specific
purchase order (including exchanges) by a particular purchaser (or group of
related purchasers). This may occur, for example, when a purchaser's pattern
of frequent purchases, sales or exchanges of Service Shares of a Fund is evi-
dent, or if purchase, sales, or exchanges are, or a subsequent abrupt redemp-
tion might be, of a size that would disrupt management of the Funds.
EXCHANGE PRIVILEGE
Service Shares of the Funds may be exchanged by a Service Organization for
(i) Service Shares of any other mutual fund sponsored by Goldman Sachs and
designated as an eligible fund for this purpose and (ii) the corresponding
class of any portfolio of Goldman Sachs Money Market Trust at the net asset
value next determined either by writing to Goldman Sachs, Attention: Goldman
Sachs Equity Portfolios, Inc.-- Name of Fund, c/o GSAM Shareholder Services,
4900 Sears Tower, Chicago, Illinois 60606 or, if previously elected in the
Fund's Account Information Form, by telephone at 800-621-2550 (7:00 a.m. to
3:00 p.m. Chicago time). A
33
<PAGE>
shareholder should obtain and read the prospectus relating to any other fund
and its shares or units and consider its investment objective, policies and
applicable fees before making an exchange. Service Shares acquired by tele-
phone exchange must be registered in the same name(s) and have the same ad-
dress as Service Shares of the Fund for which the exchange is being made.
In an effort to prevent unauthorized or fraudulent exchanges by telephone,
Goldman Sachs employs reasonable procedures as set forth under "Redemption of
Service Shares" to confirm that such instructions are genuine. In times of
drastic economic or market changes the telephone exchange privilege may be
difficult to implement. For federal income tax purposes, an exchange is
treated as a sale of the Service Shares surrendered in the exchange, on which
an investor may realize a gain or loss, followed by a purchase of Service
Shares or the corresponding class of any portfolio of Goldman Sachs Money Mar-
ket Trust received in the exchange. Shareholders should consult their own tax
advisers concerning the tax consequences of an exchange. Exchanges are avail-
able only in states where exchanges may legally be made. The exchange privi-
lege may be modified or withdrawn at any time on sixty (60) days' written no-
tice to recordholders of Service Shares and is subject to certain limitations.
See "Purchase of Service Shares."
REDEMPTION OF SERVICE SHARES
The Funds will redeem their Service Shares upon request of the recordholder
of such Shares on any Business Day at the net asset value next determined af-
ter the receipt by the Transfer Agent of such request in proper form. See "Net
Asset Value." If Service Shares to be redeemed were recently purchased by
check, a Fund may delay transmittal of redemption proceeds until such time as
it has assured itself that good funds have been collected for the purchase of
such Service Shares. This may take up to fifteen (15) days. Redemption re-
quests may be made by writing to or calling the Transfer Agent at the address
or telephone number set forth on the back cover of this Prospectus. A Service
Organization may request redemptions by telephone if the optional telephone
redemption privilege is elected on the Account Information Form. It may be
difficult to implement redemptions by telephone in times of drastic economic
or market changes.
In an effort to prevent unauthorized or fraudulent redemption or exchange
requests by telephone, Goldman Sachs employs reasonable procedures specified
by the Company to confirm that such instructions are genuine. Among other
things, any redemption request that requires money to go to an account or
address other than that designated on the Account Information Form must be in
writing and signed by an authorized person designated on the Account
Information Form. Any such written request is also confirmed by telephone with
both the requesting party and the designated bank account to verify
instructions. Exchanges among accounts with different names, addresses and
social security or other taxpayer identification numbers must be in writing
and signed by an authorized person designated on the Account Information Form.
Other procedures may be implemented from time to time. If reasonable
procedures are not implemented, the Company may be liable for any loss due to
unauthorized or fraudulent transactions. In all other cases, neither the
Funds, the Company nor Goldman Sachs will be responsible for the authenticity
of redemption or exchange instructions received by telephone.
The Funds will arrange for the proceeds of redemptions effected by any means
to be wired to the recordholder of Service Shares, or if the recordholder
elects in writing, by check. Redemption proceeds paid by wire transfer will
normally be wired on the next Business Day in Federal Funds (for a total one-
day delay),
34
<PAGE>
but may be paid up to three (3) days after receipt of a properly executed
redemption request. Wiring of redemption proceeds may be delayed one
additional Business Day if the Federal Reserve Bank is closed on the day
redemption proceeds would ordinarily be wired. Redemption proceeds paid by
check will normally be mailed to the address of record within three (3)
Business Days of receipt of a properly executed redemption request. Once wire
transfer instructions have been given by Goldman Sachs, neither the Funds, the
Company nor Goldman Sachs assumes any further responsibility for the
performance of intermediaries or the customer's Service Organization in the
transfer process. If a problem with such performance arises, the customer
should deal directly with such intermediaries or Service Organizations.
Additional documentation regarding a redemption by any means may be required
to effect a redemption when deemed appropriate by the Transfer Agent. The
request for such redemption will not be considered to have been received in
proper form until such additional documentation has been submitted to the
Transfer Agent by the recordholder of Service Shares.
Service Organizations are responsible for the timely transmittal of
redemption requests by their customers to the Transfer Agent. In order to
facilitate timely transmittal of redemption requests, Service Organizations
have established times by which redemption requests must be received by them.
Additional documentation may be required when deemed appropriate by a Service
Organization.
---------------------
35
<PAGE>
- --------------------------------------------------------------------------------
GOLDMAN SACHS ASSET
MANAGEMENT
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
GOLDMAN SACHS FUNDS
MANAGEMENT, L.P.
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
GOLDMAN SACHS ASSET
MANAGEMENT INTERNATIONAL
140 FLEET STREET
LONDON, ENGLAND EC4A 2BJ
GOLDMAN, SACHS & CO.
DISTRIBUTOR
85 BROAD STREET
NEW YORK, NEW YORK 10004
GOLDMAN, SACHS & CO.
TRANSFER AGENT
4900 SEARS TOWER
CHICAGO, ILLINOIS 60606
TOLL FREE (IN U.S.) . . . . . . . . 800-621-2550
EQ1SS/4.5k/596
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE GOLDMAN SACHS
EQUITY PORTFOLIOS
SERVICE SHARES
- --------------------------------------------------------------------------------
PROSPECTUS
[LOGO]
Goldman
Sachs
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
CLASS A SHARES
CLASS B SHARES
GOLDMAN SACHS BALANCED FUND
GOLDMAN SACHS SELECT EQUITY FUND
GOLDMAN SACHS GROWTH AND INCOME FUND
GOLDMAN SACHS CAPITAL GROWTH FUND
GOLDMAN SACHS SMALL CAP EQUITY FUND
GOLDMAN SACHS INTERNATIONAL EQUITY FUND
GOLDMAN SACHS ASIA GROWTH FUND
(PORTFOLIOS OF GOLDMAN SACHS EQUITY PORTFOLIOS, INC.)
One New York Plaza
New York, New York 10004
This Statement of Additional Information (the "Additional Statement") is
not a Prospectus. This Additional Statement should be read in conjunction with
the prospectus for the Class A Shares and Class B Shares of Goldman Sachs
Balanced Fund, Goldman Sachs Select Equity Fund, Goldman Sachs Growth and Income
Fund, Goldman Sachs Capital Growth Fund, Goldman Sachs Small Cap Equity Fund,
Goldman Sachs International Equity Fund and Goldman Sachs Asia Growth Fund,
dated May 1, 1996 as amended and/or supplemented from time to time (the
"Prospectus"), which may be obtained without charge from Goldman, Sachs & Co. by
calling the telephone number, or writing to one of the addresses, listed below.
TABLE OF CONTENTS
Page
----
Introduction..............................................................B-3
Investment Policies.......................................................B-4
Investment Restrictions...................................................B-44
Management................................................................B-59
Distribution and Authorized Dealer Service Plans..........................B-72
Portfolio Transactions and Brokerage......................................B-80
Net Asset Value...........................................................B-86
Other Information Regarding Purchases, Redemptions,
Exchanges and Dividends..................................................B-88
Performance Information...................................................B-91
Shares of the Company.....................................................B-108
Taxation..................................................................B-111
Financial Statements......................................................B-120
Other Information.........................................................B-120
Appendix A:...............................................................1-A
Appendix B:...............................................................1-B
Appendix C:...............................................................1-C
The date of this Additional Statement is May 1, 1996.
<PAGE>
GOLDMAN SACHS FUNDS MANAGEMENT, L.P. GOLDMAN, SACHS & CO.
Adviser to Goldman Sachs Capital Distributor
Growth Fund and 85 Broad Street
Goldman Sachs Select Equity Fund New York, New York 10004
One New York Plaza
New York, New York 10004
GOLDMAN SACHS ASSET MANAGEMENT GOLDMAN SACHS ASSET
Administrator to all Funds and Adviser to MANAGEMENT INTERNATIONAL
Goldman Sachs Small Cap Equity Fund, Adviser to Goldman Sachs
Goldman Sachs International Equity Fund, Asia Growth Fund
Goldman Sachs Growth and Income Fund Subadviser to Goldman Sachs
and Goldman Sachs Balanced Fund International Equity Fund
One New York Plaza 140 Fleet Street
New York, New York 10004 London, England EC4A 2BJ
GOLDMAN, SACHS & CO.
Transfer Agent
4900 Sears Tower
Chicago, Illinois 60606
Toll free.......800-526-7384
B-2
<PAGE>
INTRODUCTION
Goldman Sachs Equity Portfolios, Inc. (the "Company") is an open-end,
management investment company currently offering eight series of shares,
including Goldman Sachs Balanced Fund ("Balanced Fund"), Goldman Sachs Select
Equity Fund ("Select Equity Fund"), Goldman Sachs Growth and Income Fund
("Growth and Income Fund"), Goldman Sachs Capital Growth Fund ("Capital Growth
Fund"), Goldman Sachs Small Cap Equity Fund ("Small Cap Fund"), Goldman Sachs
International Equity Fund ("International Fund") and Goldman Sachs Asia Growth
Fund ("Asia Growth Fund"). Balanced Fund, Growth and Income Fund, Select Equity
Fund, Capital Growth Fund, Small Cap Fund, International Fund and Asia Growth
Fund are sometimes referred to collectively herein as the "Funds."
The Company was organized under the laws of the State of Maryland on
September 27, 1989. The Company assumed its current name on May 14, 1991. The
Directors of the Company have authority under the Company'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 Directors have created the Funds, and
additional series may be added in the future from time to time. The Select
Equity, Growth and Income, International and Asia Growth Funds currently offer
four classes of shares: Class A Shares, Class B Shares, Institutional Shares and
Service Shares. The Balanced, Capital Growth and Small Cap Equity Funds
currently offer Class A and Class B Shares. See "Shares of the Company."
Goldman Sachs Funds Management, L.P., ("GSFM") an affiliate of Goldman,
Sachs & Co.("Goldman Sachs"), serves as investment adviser to Capital Growth
Fund and Select Equity Fund. Goldman Sachs Asset Management ("GSAM"), a separate
operating division of Goldman Sachs, serves as investment adviser to Balanced
Fund, Growth and Income Fund, Small Cap Fund and International Fund. Goldman
Sachs Asset Management International ("GSAMI"), an affiliate of Goldman Sachs,
serves as the investment adviser to Asia Growth Fund and subadviser to
International Fund. GSFM, GSAM and GSAMI are sometimes referred to collectively
herein as the "Advisers." In addition, GSAM serves as administrator of each
Fund. Goldman Sachs serves as each Fund's distributor and transfer agent. Each
Fund's custodian is State Street Bank and Trust Company ("State Street").
The following information relates to and supplements the description of
each Fund's investment policies contained in the Prospectus. See the Prospectus
for a fuller description of the Funds' investment objectives and policies. There
is no assurance that each Fund will achieve its objective.
B-3
<PAGE>
INVESTMENT POLICIES
Each Fund's share price will fluctuate with market, economic and, to the
extent applicable, foreign exchange conditions, so that an investment in any of
the Funds may be worth more or less when redeemed than when purchased. None of
the Funds should be relied upon as a complete investment program.
Investing in Asia
Asia Growth Fund is intended for long-term investors who can accept the
risks associated with investing primarily in equity and equity-related
securities of Asian Companies (as defined in the Prospectus) as well as the
risks associated with investments quoted or denominated in foreign currencies.
In addition, certain of Asia Growth Fund's potential investment and management
techniques entail special risks. There can be no assurance that Asia Growth Fund
will achieve its investment objective. See "Investment Objectives and Policies"
and "Risk Factors" in the Prospectus.
The pace of change in Asia over the last 10 years has been rapid.
Accelerating economic growth in the region has combined with capital market
development, high government expenditure, increasing consumer wealth and
taxation policies favoring company expansion. As a result, stock market returns
in many Asian countries have been relatively attractive. GSAMI believes that
Asia offers an attractive investment environment and that new opportunities will
continue to emerge in the years ahead. Asia Growth Fund concentrates on
companies that GSAMI believes are taking full advantage of the region's growth
and that have the potential for long-term capital appreciation. See "Risk
Factors" in the Prospectus.
Each of the securities markets of the Asian countries is less liquid and
subject to greater price volatility and has a smaller market capitalization than
the U.S. securities markets. Issuers and securities markets in such countries
are not subject to as extensive and frequent accounting, financial and other
reporting requirements or as comprehensive government regulations as are issuers
and securities markets in the U.S. Certain of the Asian securities markets are
marked by a high concentration of market capitalization and trading volume in a
small number of issuers representing a limited number of industries, as well as
a high concentration of ownership of such securities by a limited number of
investors. The limited liquidity of Asian markets may also affect Asia Growth
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.
Foreign investment in the securities markets of several of the Asian
countries is restricted or controlled to varying degrees. These restrictions may
limit Asia Growth Fund's investment in
B-4
<PAGE>
certain of the Asian countries and may increase the expenses of Asia Growth
Fund. Certain Asian countries require governmental approval prior to investments
by foreign persons or limit investment by foreign persons to only a specified
percentage of an issuer's outstanding securities or a specific class of
securities which may have less advantageous terms (including price) than
securities of the company available for purchase by nationals. In addition, the
repatriation of both investment income and capital from several of the Asian
countries is subject to restrictions such as the need for certain governmental
consents. Even where there is no outright restriction on repatriation of
capital, the mechanics of repatriation may affect certain aspects of the
operation of Asia Growth Fund.
Each of the Asian countries may be subject to a greater degree of
economic, political and social instability than is the case in the United
States, Japan and most Western European countries. Such instability may result
from, among other things, the following: (i) authoritarian governments or
military involvement in political and economic decision making, including
changes or attempted changes in governments through extra-constitutional means;
(ii) popular unrest associated with demands for improved political, economic or
social conditions; (iii) internal insurgencies; (iv) hostile relations with
neighboring countries; and (v) ethnic, religious and racial disaffection or
conflict. Such economic, political and social instability could disrupt the
principal financial markets in which Asia Growth Fund invests and adversely
affect the value of Asia Growth Fund's assets.
Asia Growth 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 Asia Growth Fund is uninvested and no
return is earned on such assets. The inability of Asia Growth Fund to make
intended security purchases or sales due to settlement problems could result
either in losses to Asia Growth Fund due to subsequent declines in value of the
portfolio securities or, if Asia Growth Fund has entered into a contract to sell
the securities, could result in possible liability to the purchaser.
International Fund
B-5
<PAGE>
International Fund will seek to achieve its investment objective by
investing primarily in equity and equity-related securities of issuers that are
organized outside the United States or whose securities are principally traded
outside the United States. Because research coverage outside the United States
is fragmented and relatively unsophisticated, many foreign companies that are
well-positioned to grow and prosper have not come to the attention of investors.
GSAM and GSAMI believe that the high historical returns and less efficient
pricing of foreign markets create favorable conditions for International Fund's
highly focused investment approach. For a description of the risks of the
International Equity Fund's investments in Asia, see "Investing in Asia."
A Rigorous Process of Stock Selection. Using fundamental industry and
company research, GSAM's and GSAMI's equity team in London, Singapore and Tokyo
seeks to identify companies that may achieve superior long-term returns. Stocks
are carefully selected for International Fund's portfolio through a three-stage
investment process. Because International Fund is a long-term holder of stocks,
the portfolio managers adjust International 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 portfolio managers seek
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 portfolio managers seek 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.
GSAM'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. See "Investment Policies" and "Advisory and
Administrative Services."
B-6
<PAGE>
The members of GSAM and GSAMI's international equity team bring together
years of experience in analyzing and investing in companies in Europe and the
Asia-Pacific region. Their expertise spans a wide range of skills including
investment analysis, investment management, investment banking and business
consulting. GSAM's worldwide staff of over 300 professionals includes portfolio
managers based in London, Singapore and Tokyo who bring firsthand knowledge of
their local markets and companies to every investment decision.
Balanced Fund
The investment objective of the Balanced Fund is to provide shareholders
with long-term capital growth and current income. The Balanced Fund seeks to
achieve its investment objective by investing in a balanced portfolio
diversified among both equity and fixed income securities.
Balanced Fund is intended to provide a foundation on which an investor
can build an investment portfolio or to serve as the core of an investment
program, depending on the investor's goals. Balanced Fund is designed for
relatively conservative investors who seek a combination of long-term capital
growth and current income in a single investment. Balanced Fund offers a
portfolio of equity and fixed income securities intended to provide less
volatility than a portfolio completely invested in equity securities and greater
diversification than a portfolio invested in only one asset class. Balanced Fund
may be appropriate for people who seek capital appreciation but are concerned
about the volatility typically associated with a fund that invests solely in
stocks and other equity securities.
Fixed Income Strategies Designed to Maximize Return and Manage
Risk
GSAM's approach to managing the fixed income portion of Balanced Fund's
portfolio seeks to provide high returns relative to a market benchmark, the
Lehman Brothers Aggregate Bond Index, while also providing high current income.
This approach emphasizes (1) sector allocation strategies which enable GSAM to
tactically overweight or underweight one sector of the fixed-income market
(i.e., mortgages, corporate bonds, U.S. Treasuries, non-dollar bonds, emerging
market debt) versus another; (2) individual security selection based on
identifying relative value (fixed income securities inexpensive relative to
others in their sector); and (3) to a lesser extent, strategies based on GSAM's
expectation of the direction of interest rates or the spread between short-term
and long-term interest rates such as yield curve strategy.
GSAM seeks to manage fixed income portfolio risk in a number of ways.
These include diversifying the fixed income portion of the Balanced Fund's
portfolio among various types of fixed income
B-7
<PAGE>
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 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 deemphasizes 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 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 - 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 - intended to enhance total returns in
two stages. Initially, these securities are expected to provide incremental
yield. Eventually, price appreciation should occur relative to alternative
securities as credit quality improves, the nationally recognized statistical
rating organizations upgrade credit ratings, and credit spreads narrow.
Securities from the third type of issuers - issuers with deteriorating credit
quality - will be avoided, since total returns are typically enhanced by
avoiding the widening of credit spreads and the consequent relative price
depreciation. Finally, total returns can be enhanced by focusing on securities
that are rated differently by different rating organizations. If the securities
are trading in line with the higher published quality rating while GSAM concurs
with the lower
B-8
<PAGE>
published quality rating, the securities would generally be sold and any
potential price deterioration avoided. On the other hand, if the securities are
trading in line with the lower published quality rating while the higher
published quality rating is considered more realistic, the securities may be
purchased in anticipation of the expected market reevaluation and relative price
appreciation.
Yield Curve Strategy. Yield curve strategy consists of overweighting or
underweighting different maturity sectors relative to a benchmark to take
advantage of the shape of the yield curve. Three alternative maturity sector
selections are available: a "barbell" strategy in which short and long maturity
sectors are overweighted while intermediate maturity sectors are underweighted;
a "bullet" strategy in which, conversely, short-and long-maturity sectors are
underweighted while intermediate-maturity sectors are overweighted; and a
"neutral yield curve" strategy in which the maturity distribution mirrors that
of a benchmark.
Select Equity Fund
Select Equity Fund's investment objective is to provide its shareholders
with a total return consisting of capital appreciation plus dividend income
that, net of fund expenses, exceeds the total return realized on the S&P 500
Index. Under normal circumstances, the Fund will invest at least 90% of its
total assets in equity securities.
The investment strategy of Select Equity Fund will be implemented to the
extent it is consistent with maintaining the Fund's qualification as a regulated
investment company under the Internal Revenue Code. The Fund's strategy may be
limited, in particular, by the requirement for such qualification that less than
30% of the Fund's annual gross income be derived from the sale or other
disposition of stocks or securities (including options and futures contracts)
held for less than three months.
Since normal settlement for equity securities is three trading days, the
Fund will need to hold cash balances to satisfy shareholder redemption requests.
Such cash balances will normally range from 2% to 5% of the Fund's net assets.
The Fund may purchase futures contracts on the S&P 500 Index in order to keep
the Fund's effective equity exposure close to 100%. For example, if cash
balances are equal to 10% of the net assets, the Fund may enter into long
futures contracts covering an amount equal to 10% of the Fund's net assets. As
cash balances fluctuate based on new contributions or withdrawals, the Fund may
enter into additional contracts or close out existing positions.
The Multifactor Model. The Multifactor Model is a sophisticated
computerized rating system for evaluating equity securities according to a
variety of investment characteristics (or
B-9
<PAGE>
factors). The factors used by the Multifactor Model incorporate many variables
studied by traditional fundamental analysts and cover measures of value, growth,
momentum, risk (e.g. price/earnings ratio, book/price ratio, growth forecasts,
earning estimate revisions, price momentum, volatility and earnings stability).
All of these factors have been shown to significantly impact the performance of
equity securities.
Because it includes many disparate factors, the Investment Adviser
believes that the Multifactor Model is broader in scope and provides a more
thorough evaluation than most conventional, value- oriented quantitative models.
As a result, the securities ranked highest by the Multifactor Model do not have
one dominant investment characteristic (such as a low price/earnings ratio);
rather, such securities possess many different investment characteristics. By
using a variety of relevant factors to select securities, the 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 securities.
The Investment Adviser will monitor, and may occasionally suggest and
make changes to, the method by which securities are selected for or weighted in
the Fund. Such changes (which may be the result of changes in the Multifactor
Model or the method of applying the Multifactor Model) may include: (i)
evolutionary changes to the structure of the Multifactor Model (e.g., the
addition of new factors or a new means of weighting the factors); (ii) changes
in trading procedures (e.g., trading frequency or the manner in which the Fund
uses futures on the S&P 500 Index); or (iii) changes in the method by which
securities are weighted in the Fund. Any such changes will preserve the Fund's
basic investment philosophy of combining qualitative and quantitative methods of
selecting securities using a disciplined investment process.
Corporate Debt Obligations
Each Fund may, under normal market conditions, invest in corporate debt
obligations, including obligations of industrial, utility and financial issuers.
Select Equity Fund 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
B-10
<PAGE>
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 Growth and Income Fund, Capital Growth Fund, Small Cap Fund and
Balanced Fund to dispose of a particular security when necessary to meet their
redemption requests or other liquidity needs. Under adverse market or economic
conditions, the secondary market for junk bonds could contract further,
independent of any specific adverse changes in the condition of a particular
issuer. As a result, the Advisers could find it difficult to sell these
securities or may be able to sell the securities only at prices lower than if
such securities were widely traded. Prices realized upon the sale of such lower
rated or unrated securities, under such circumstances, may be less than the
prices used in calculating a Fund's net asset value.
Since investors generally perceive that there are greater risks
associated with the medium to lower rated securities of the type in which
Capital Growth Fund, Small Cap Fund, Growth and Income Fund and Balanced Fund
may invest, the yields and prices of such securities may tend to fluctuate more
than those for higher rated securities. In the lower quality segments of the
fixed-income securities market, changes in perceptions of issuers'
creditworthiness tend to occur more frequently and in a more pronounced manner
than do changes in higher quality segments of the fixed-income securities
market, resulting in greater yield and price volatility.
Another factor which causes fluctuations in the prices of fixed-income
securities is the supply and demand for similarly rated securities. In addition,
the prices of fixed-income securities fluctuate in response to the general level
of interest rates. Fluctuations in the prices of portfolio securities subsequent
to their acquisition will not affect cash income from such securities but will
be reflected in a Fund's net asset value.
Medium to lower rated and comparable non-rated securities tend to offer
higher yields than higher rated securities with the same maturities because the
historical financial condition of the issuers of such securities may not have
been as strong as that of other issuers. Since medium to lower rated securities
generally involve greater risks of loss of income and principal than higher
rated securities, investors should consider carefully the relative risks
associated with investment in securities which carry medium to lower ratings and
in comparable unrated securities. In addition to the risk of default, there are
the related costs of recovery on defaulted issues. The Advisers will attempt to
reduce these risks
B-11
<PAGE>
through portfolio diversification and by analysis of each issuer and its ability
to make timely payments of income and principal, as well as broad economic
trends and corporate developments.
Zero Coupon Bonds
A Fund's investments in fixed income securities may include zero coupon
bonds, which are debt obligations issued or purchased at a significant discount
from face value. The discount approximates the total amount of interest the
bonds would have accrued and compounded over the period until maturity. Zero
coupon bonds do not require the periodic payment of interest. Such investments
benefit the issuer by mitigating its need for cash to meet debt service but also
require a higher rate of return to attract investors who are willing to defer
receipt of such cash. Such investments may experience greater volatility in
market value than debt obligations which provide for regular payments of
interest. In addition, if an issuer of zero coupon bonds held by a Fund
defaults, the Fund may obtain no return at all on its investment. Each Fund will
accrue income on such investments for tax and accounting purposes which is
distributable to shareholders and which, because no cash is received at the time
of accrual, may require the liquidation of other portfolio securities to satisfy
the Fund's distribution obligations. See "Taxation."
Variable and Floating Rate Securities
The interest rates payable on certain securities in which Balanced Fund
may invest are not fixed and may fluctuate based upon changes in market rates. A
variable rate obligation has an interest rate which is adjusted at predesignated
periods in response to changes in the market rate of interest on which the
interest rate is based. Variable and floating rate obligations are less
effective than fixed rate instruments at locking in a particular yield.
Nevertheless, such obligations may fluctuate in value in response to interest
rate changes if there is a delay between changes in market interest rates and
the interest reset date for the obligation.
Custodial Receipts
Each Fund may invest up to 5% of its net assets in custodial receipts in
respect of securities issued or guaranteed as to principal and interest by the
U.S. Government, its agencies, instrumentalities, political subdivisions or
authorities. Such custodial receipts evidence ownership of future interest
payments, principal payments or both on certain notes or bonds issued by the
U.S. Government, its agencies, instrumentalities, political subdivisions or
authorities. These custodial receipts are known by various names, including
"Treasury Receipts," "Treasury Investors Growth Receipts" ("TIGRs"), and
"Certificates of Accrual
B-12
<PAGE>
on Treasury Securities" ("CATs"). For certain securities law purposes, custodial
receipts are not considered U.S. Government securities.
Municipal Securities
Balanced Fund may invest up to 5% of its net assets in municipal
securities. Municipal securities consist of bonds, notes and other instruments
issued by or on behalf of states, territories and possessions of the United
States (including the District of Columbia) and their political subdivisions,
agencies or instrumentalities, the interest on which is exempt from regular
federal income tax. Municipal securities are often issued to obtain funds for
various public purposes. Municipal securities also include "private activity
bonds" or industrial development bonds, which are issued by or on behalf of
public authorities to obtain funds for privately operated facilities, such as
airports and waste disposal facilities, and, in some cases, commercial and
industrial facilities.
The yields and market values of municipal securities are determined
primarily by the general level of interest rates, the creditworthiness of the
issuers of municipal securities and economic and political conditions affecting
such issuers. Due to their tax exempt status, the yields and market prices of
municipal securities may be adversely affected by changes in tax rates and
policies, which may have less effect on the market for taxable fixed income
securities. Moreover, certain types of municipal securities, such as housing
revenue bonds, involve prepayment risks which could affect the yield on such
securities.
Investments in municipal securities are subject to the risk that the
issuer could default on its obligations. Such a default could result from the
inadequacy of the sources or revenues from which interest and principal payments
are to be made or the assets collateralizing such obligations. Revenue bonds,
including private activity bonds, are backed only by specific assets or revenue
sources and not by the full faith and credit of the governmental issuer.
Structured Securities
Balanced Fund may invest up to 5% of its net assets in structured notes,
bonds or debentures. The value of the principal of and/or interest on such
securities is determined by reference to changes in the value of specific
interest rates, commodities, indices or other financial indicators (the
"Reference") or the relative change in two or more References. The interest rate
or the principal amount payable upon maturity or redemption may be increased or
decreased depending upon changes in the applicable Reference. The terms of the
structured securities may provide that in certain circumstances no principal is
due at maturity and, therefore, may result in the loss of the Balanced Fund's
B-13
<PAGE>
investment. Structured securities may be positively or negatively indexed, so
that appreciation of the Reference may produce an increase or decrease in the
interest rate or value of the security at maturity. In addition, changes in
interest rates or the value of the security at maturity may be a multiple of
changes in the value of the Reference. Consequently, structured securities may
entail a greater degree of market risk than other types of fixed-income
securities. Structured securities may also be more volatile, less liquid and
more difficult to accurately price than less complex securities.
Mortgage-Backed Securities
General Characteristics. Each Fund (excluding Select Equity Fund) may
invest in mortgage-backed securities. Each mortgage pool underlying
mortgage-backed securities consists of mortgage loans evidenced by promissory
notes secured by first mortgages or first deeds of trust or other similar
security instruments creating a first lien on owner occupied and non-owner
occupied one-unit to four-unit residential properties, multifamily (i.e. five or
more) properties, agriculture properties, commercial properties and mixed use
properties (the "Mortgaged Properties"). The Mortgaged Proper- ties may consist
of detached individual dwelling units, multifamily dwelling units, individual
condominiums, townhouses, duplexes, triplexes, fourplexes, row houses,
individual units in planned unit developments and other attached dwelling units.
The Mortgaged Properties may also include residential investment properties and
second homes.
The investment characteristics of adjustable and fixed rate
mortgage-backed securities differ from those of traditional fixed income
securities. The major differences include the payment of interest and principal
on mortgage-backed securities on a more frequent (usually monthly) schedule, and
the possibility that principal may be prepaid at any time due to prepayments on
the underlying mortgage loans or other assets. These differences can result in
significantly greater price and yield volatility than is the case with
traditional fixed income securities. As a result, if a Fund purchases
mortgage-backed securities at a premium, a faster than expected prepayment rate
will reduce both the market value and the yield to maturity from those which
were anticipated. A prepayment rate that is slower than expected will have the
opposite effect of increasing yield to maturity and market value. Conversely, if
a Fund purchases mortgage-backed securities at a discount, faster than expected
prepayments will increase, while slower than expected prepayments will reduce
yield to maturity and market values. To the extent that a Fund invests in
mortgage- backed securities, the Advisers may seek to manage these potential
B-14
<PAGE>
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 enter- prises, such as the
Government National Mortgage Association ("Ginnie Mae"), the Federal National
Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage
Corporation ("Freddie Mac").
Ginnie Mae Certificates. Ginnie Mae is a wholly-owned corporate
instrumentality of the United States. Ginnie Mae is authorized to guarantee the
timely payment of the principal of and interest on certificates that are based
on and backed by a pool of mortgage loans insured by the Federal Housing
Administration ("FHA Loans"), or guaranteed by the Veterans Administration ("VA
Loans"), or by pools of other eligible mortgage loans. In order to meet its
obligations under any guaranty, Ginnie Mae is authorized to borrow from the
United States Treasury in an unlimited amount.
Fannie Mae Certificates. Fannie Mae is a stockholder-owned corporation
chartered under an act of the United States Congress. Each Fannie Mae
Certificate is issued and guaranteed by Fannie Mae and represents an undivided
interest in a pool of mortgage loans (a "Pool") formed by Fannie Mae. Each Pool
consists of residential mortgage loans ("Mortgage Loans") either previously
owned by Fannie Mae or purchased by it in connection with the formation of the
Pool. The Mortgage Loans may be either conventional Mortgage Loans (i.e., not
insured or guaranteed by any U.S. Government agency) or Mortgage Loans that are
either insured by the Federal Housing Administration ("FHA") or guaranteed by
the Veterans Administration ("VA"). However, the Mortgage Loans in Fannie Mae
Pools are primarily conventional Mortgage Loans. The lenders originating and
servicing the Mortgage Loans are subject to certain eligibility requirements
established by Fannie Mae.
Fannie Mae has certain contractual responsibilities. With respect to
each Pool, Fannie Mae is obligated to distribute scheduled monthly installments
of principal and interest after Fannie Mae's servicing and guaranty fee, whether
or not received, to Certificate holders. Fannie Mae also is obligated to
distribute
B-15
<PAGE>
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
participations in mortgage loans (a "Freddie Mac Certif- icate group") purchased
by Freddie Mac.
Freddie Mac guarantees to each registered holder of a Freddie Mac
Certificate the timely payment of interest at the rate provided for by such
Freddie Mac Certificate (whether or not received on the underlying loans).
Freddie Mac also guarantees to each registered Certificate holder ultimate
collection of all principal of the related mortgage loans, without any offset or
deduction, but does not, generally, guarantee the timely payment of scheduled
principal. The obligations of Freddie Mac under its guaranty of Freddie Mac
Certificates are obligations solely of Freddie Mac.
The mortgage loans underlying the Freddie Mac and Fannie Mae
Certificates consist of adjustable rate or fixed rate mortgage loans with
original terms to maturity of between five and thirty years. Substantially all
of these mortgage loans are secured by first liens on one-to-four-family
residential properties or multifamily projects. Each mortgage loan must meet the
applicable standards set forth in the law creating Freddie Mac or Fannie Mae. A
Freddie Mac Certificate group may include whole loans, participation interests
in whole loans and undivided interests in whole loans and participations
comprising another Freddie Mac Certificate group.
Mortgage Pass-Through Securities. Each Fund (other than Select Equity
Fund) may invest in both government guaranteed and privately issued mortgage
pass-through securities ("Mortgage Pass-Throughs"); that is, fixed or adjustable
rate mortgage-backed securities which provide for monthly payments that are a
"pass-through" of the monthly interest and principal payments (including any
prepayments) made by the individual borrowers on the pooled mortgage loans, net
of any fees or other amounts paid to any guarantor, administrator and/or
servicer of the underlying mortgage loans.
The following discussion describes only a few of the wide variety of
structures of Mortgage Pass-Throughs that are available or may be issued.
B-16
<PAGE>
Description of Certificates. Mortgage Pass-Throughs may be issued in one
or more classes of senior certificates and one or more classes of subordinate
certificates. Each such class may bear a different pass-through rate. Generally,
each certificate will evidence the specified interest of the holder thereof in
the payments of principal or interest or both in respect of the mortgage pool
comprising part of the trust fund for such certificates.
Any class of certificates may also be divided into subclasses entitled
to varying amounts of principal and interest. If a REMIC election has been made,
certificates of such subclasses may be entitled to payments on the basis of a
stated principal balance and stated interest rate, and payments among different
subclasses may be made on a sequential, concurrent, pro rata or disproportionate
basis, or any combination thereof. The stated interest rate on any such subclass
of certificates may be a fixed rate or one which varies in direct or inverse
relationship to an objective interest index.
Generally, each registered holder of a certificate will be entitled to
receive its pro rata share of monthly distributions of all or a portion of
principal of the underlying mortgage loans or of interest on the principal
balances thereof, which accrues at the applicable mortgage pass-through rate, or
both. The difference between the mortgage interest rate and the related mortgage
pass- through rate (less the amount, if any, of retained yield) with respect to
each mortgage loan will generally be paid to the servicer as a servicing fee.
Since certain adjustable rate mortgage loans included in a mortgage pool may
provide for deferred interest (i.e., negative amortization), the amount of
interest actually paid by a mortgagor in any month may be less than the amount
of interest accrued on the outstanding principal balance of the related mortgage
loan during the relevant period at the applicable mortgage interest rate. In
such event, the amount of interest that is treated as deferred interest will be
added to the principal balance of the related mortgage loan and will be
distributed pro rata to certificate-holders as principal of such mortgage loan
when paid by the mortgagor in subsequent monthly payments or at maturity.
Ratings. The ratings assigned by a rating organization to Mortgage
Pass-Throughs address the likelihood of the receipt of all distributions on the
underlying mortgage loans by the related certificate-holders under the
agreements pursuant to which such certificates are issued. A rating
organization's ratings take into consideration the credit quality of the related
mortgage pool, including any credit support providers, structural and legal
aspects associated with such certificates, and the extent to which the payment
stream on such mortgage pool is adequate to make payments required by such
certificates. A rating organization's ratings on such certificates do not,
however, constitute a
B-17
<PAGE>
statement regarding frequency of prepayments on the related mortgage loans. In
addition, the rating assigned by a rating organization to a certificate does not
address the remote possibility that, in the event of the insolvency of the
issuer of certificates where a subordinated interest was retained, the issuance
and sale of the senior certificates may be recharacterized as a financing and,
as a result of such recharacterization, payments on such certificates may be
affected.
Credit Enhancement. Credit support falls generally into two categories:
(i) liquidity protection and (ii) protection against losses resulting from
default by an obligor on the underlying assets. Liquidity protection refers to
the provision of advances, generally by the entity administering the pools of
mortgages, the provision of a reserve fund, or a combination thereof, to ensure,
subject to certain limitations, that scheduled payments on the underlying pool
are made in a timely fashion. Protection against losses resulting from default
ensures ultimate payment of the obligations on at least a portion of the assets
in the pool. Such credit support can be provided by among other things, payment
guarantees, letters of credit, pool insurance, subordination, or any combination
thereof.
Subordination; Shifting of Interest; Reserve Fund. In order to achieve
ratings on one or more classes of Mortgage Pass-Throughs, one or more classes of
certificates may be subordinate certificates which provide that the rights of
the subordinate certificate- holders to receive any or a specified portion of
distributions with respect to the underlying mortgage loans may be subordinated
to the rights of the senior certificate-holders. If so structured, the
subordination feature may be enhanced by distributing to the senior
certificate-holders on certain distribution dates, as payment of principal, a
specified percentage (which generally declines over time) of all principal
payments received during the preceding prepayment period ("shifting interest
credit enhancement"). This will have the effect of accelerating the amortization
of the senior certificates while increasing the interest in the trust fund
evidenced by the subordinate certificates. Increasing the interest of the
subordinate certificates relative to that of the senior certificates is intended
to preserve the availability of the subordination provided by the subordinate
certificates. In addition, because the senior certificate-holders in a shifting
interest credit enhancement structure are entitled to receive a percentage of
principal prepayments which is greater than their proportionate interest in the
trust fund, the rate of principal prepayments on the mortgage loans will have an
even greater effect on the rate of principal payments and the amount of interest
payments on, and the yield to maturity of, the senior certificates.
In addition to providing for a preferential right of the senior
certificate-holders to receive current distributions from the mortgage pool, a
reserve fund may be established relating to such
B-18
<PAGE>
certificates (the "Reserve Fund"). The Reserve Fund may be created with an
initial cash deposit by the originator or servicer and augmented by the
retention of distributions otherwise available to the subordinate
certificate-holders or by excess servicing fees until the Reserve Fund reaches a
specified amount.
The subordination feature, and any Reserve Fund, are intended to enhance
the likelihood of timely receipt by senior certificate- holders of the full
amount of scheduled monthly payments of principal and interest due them and will
protect the senior certificate-holders against certain losses; however, in
certain circumstances the Reserve Fund could be depleted and temporary
shortfalls could result. In the event the Reserve Fund is depleted before the
subordinated amount is reduced to zero, senior certificate-holders will
nevertheless have a preferential right to receive current distributions from the
mortgage pool to the extent of the then outstanding subordinated amount. Unless
otherwise specified, until the subordinated amount is reduced to zero, on any
distribution date any amount otherwise distributable to the subordinate
certificates or, to the extent specified, in the Reserve Fund will generally be
used to offset the amount of any losses realized with respect to the mortgage
loans ("Realized Losses"). Realized Losses remaining after application of such
amounts will generally be applied to reduce the ownership interest of the
subordinate certificates in the mortgage pool. If the subordinated amount has
been reduced to zero, Realized Losses generally will be allocated pro rata among
all certificate-holders in proportion to their respective outstanding interests
in the mortgage pool.
Alternative Credit Enhancement. As an alternative, or in addi- tion to
the credit enhancement afforded by subordination, credit enhancement for
Mortgage Pass-Throughs may be provided by mortgage insurance, hazard insurance,
by the deposit of cash, certificates of deposit, letters of credit, a limited
guaranty or by such other methods as are acceptable to a rating agency. In
certain circumstances, such as where credit enhancement is provided by
guarantees or a letter of credit, the security is subject to credit risk because
of its exposure to an external credit enhancement provider.
Voluntary Advances. Generally, in the event of delinquencies in payments
on the mortgage loans underlying the Mortgage Pass- Throughs, the servicer
agrees to make advances of cash for the benefit of certificate-holders, but only
to the extent that it determines such voluntary advances will be recoverable
from future payments and collections on the mortgage loans or otherwise.
Optional Termination. Generally, the servicer may, at its option with
respect to any certificates, repurchase all of the underlying mortgage loans
remaining outstanding at such time as the aggregate outstanding principal
balance of such mortgage loans is
B-19
<PAGE>
less than a specified percentage (generally 5-10%) of the aggregate outstanding
principal balance of the mortgage loans as of the cut- off date specified with
respect to such series.
Multiple Class Mortgage-Backed Securities and Collateralized Mortgage
Obligations. A Fund may invest in multiple class securities including
collateralized mortgage obligations ("CMOs") and REMIC Certificates. These
securities may be issued by U.S. Government agencies and instrumentalities such
as Fannie Mae or Freddie Mac or by trusts formed by private originators of, or
investors in, mortgage loans, including savings and loan associations, mortgage
bankers, commercial banks, insurance companies, investment banks and special
purpose subsidiaries of the foregoing. In general, CMOs are debt obligations of
a legal entity that are collateralized by, and multiple class mortgage-backed
securities represent direct ownership interests in, a pool of mortgage loans or
mortgage-backed securities the payments on which are used to make payments on
the CMOs or multiple class mortgage- backed securities.
Fannie Mae REMIC Certificates are issued and guaranteed as to timely
distribution of principal and interest by Fannie Mae. In addition, Fannie Mae
will be obligated to distribute the principal balance of each class of REMIC
Certificates in full, whether or not sufficient funds are otherwise available.
Freddie Mac guarantees the timely payment of interest on Freddie Mac
REMIC Certificates and also guarantees the payment of principal as payments are
required to be made on the underlying mortgage participation certificates
("PCs"). PCs represent undivided interests in specified level payment,
residential mortgages or 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
B-20
<PAGE>
"tranche," is issued at a specific adjustable or fixed interest rate and must be
fully retired no later than its final distribution date. Principal prepayments
on the Mortgage Loans or the Mortgage Assets underlying the CMOs or REMIC
Certificates may cause some or all of the classes of CMOs or REMIC Certificates
to be retired substantially earlier than their final distribution dates.
Generally, interest is paid or accrues on all classes of CMOs or REMIC
Certificates on a monthly basis.
The principal of and interest on the Mortgage Assets may be allocated
among the several classes of CMOs or REMIC Certificates in various ways. In
certain structures (known as "sequential pay" CMOs or REMIC Certificates),
payments of principal, including any principal prepayments, on the Mortgage
Assets generally are applied to the classes of CMOs or REMIC Certificates in the
order of their respective final distribution dates. Thus no payment of principal
will be made on any class of sequential pay CMOs or REMIC Certificates until all
other classes having an earlier final distribution date have been paid in full.
Additional structures of CMOs and REMIC Certificates include, among
others, "parallel pay" CMOs and REMIC Certificates. Parallel pay CMOs or REMIC
Certificates are those which are structured to apply principal payments and
prepayments of the Mortgage Assets to two or more classes concurrently on a
proportionate or disproportionate basis. These simultaneous payments are taken
into account in calculating the final distribution date of each class.
A wide variety of REMIC Certificates may be issued in parallel pay or
sequential pay structures. These securities include accrual certificates (also
known as "Z-Bonds"), which only accrue interest at a specified rate until all
other certificates having an earlier final distribution date have been retired
and are converted thereafter to an interest-paying security, and planned
amortization class ("PAC") certificates, which are parallel pay REMIC
Certificates that generally require that specified amounts of principal be
applied on each payment date to one or more classes or REMIC Certificates (the
"PAC Certificates"), even though all other principal payments and prepayments of
the Mortgage Assets are then required to be applied to one or more other classes
of the Certificates. The scheduled principal payments for the PAC Certificates
generally have the highest priority on each payment date after interest due has
been paid to all classes entitled to receive interest currently. Shortfalls, if
any, are added to the amount payable on the next payment date. The PAC
Certificate payment schedule is taken into account in calculating the final
distribution date of each class of PAC. In order to create PAC tranches, one or
more tranches generally must be created that absorb most of the volatility in
the underlying mortgage assets. These tranches tend to have market prices and
yields that are much more volatile than other PAC classes.
B-21
<PAGE>
Stripped Mortgage-Backed Securities. Balanced Fund may invest in
stripped mortgage-backed securities ("SMBS"), which are deriva- tive multiclass
mortgage securities. Although the market for such securities is increasingly
liquid, certain SMBS may not be readily marketable and will be considered
illiquid for purposes of the Fund's limitation on investments in illiquid
securities. The market value of the class consisting entirely of principal
payments generally is unusually volatile in response to changes in interest
rates. The yields on a class of SMBS that receives all or most of the interest
from Mortgage Assets are generally higher than prevailing market yields on other
mortgage-backed securities because their cash flow patterns are more volatile
and there is a greater risk that the initial investment will not be fully
recouped.
Inverse Floating Rate Securities
Balanced Fund may invest up to 5% of its net assets in leveraged inverse
floating rate debt instruments ("inverse floaters"). The interest rate on an
inverse floater resets in the opposite direction from the market rate of
interest to which the inverse floater is indexed . An inverse floater may be
considered to be leveraged to the extent that its interest rate varies by a
magnitude that exceeds the magnitude of the change in the index rate of
interest. The higher degree of leverage inherent in inverse floaters is
associated with greater volatility in their market values. Accordingly, the
duration of an inverse floater may exceed its stated final maturity. Certain
inverse floaters may be deemed to be illiquid securities for purposes of the
Fund's 15% limitation on investments in such securities.
Asset-Backed Securities
Asset-backed securities represent participations 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
B-22
<PAGE>
yields is subject to generally prevailing interest rates at that time. To the
extent that a Fund invests in asset-backed securities, the values of such Fund's
portfolio securities will vary with changes in market interest rates generally
and the differentials in yields among various kinds of asset-backed securities.
Asset-backed securities present certain additional risks that are not
presented by mortgage-backed securities because asset-backed securities
generally do not have the benefit of a security interest in collateral that is
comparable to mortgage assets. Credit card receivables are generally unsecured
and the debtors on such receivables are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set-off certain amounts owed on the credit cards, thereby reducing the
balance due. Automobile receivables generally are secured, but by automobiles
rather than residential real property. Most issuers of automobile receivables
permit the loan servicers to retain possession of the underlying obligations. If
the servicer were to sell these obligations to another party, there is a risk
that the purchaser would acquire an interest superior to that of the holders of
the asset-backed securities. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of the automobile receivables may not have a
proper security interest in the underlying automobiles. Therefore, there is the
possibility that, in some cases, recoveries on repossessed collateral may not be
available to support payments on these securities.
Futures Contracts and Options on Futures Contracts
Each Fund may purchase and sell futures contracts. Each Fund, other than
Select Equity Fund, may also purchase and write options on futures contracts.
Select Equity Fund may only purchase and sell futures contracts on 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, except for Select Equity Fund, 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"). All futures contracts entered into by a
Fund are traded on U.S. exchanges or boards of trade that are licensed and
regulated by the CFTC or on foreign exchanges.
Futures Contracts. A futures contract may generally be described as an
agreement between two parties to buy and sell particular financial instruments
for an agreed price during a designated month (or to deliver the final cash
settlement price, in the case of a contract relating to an index or otherwise
not
B-23
<PAGE>
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 Select Equity
Fund) can sell futures contracts on a specified currency to protect against a
decline in the value of such currency and its portfolio securities which are
quoted or denominated in such currency. Each Fund (other than Select Equity
Fund) can purchase futures contracts on foreign currency to establish the price
in U.S. dollars of a security quoted or denominated in such currency that such
Fund has acquired or expects to acquire.
Positions taken in the futures market are not normally held to maturity,
but are instead liquidated through offsetting transactions which may result in a
profit or a loss. While each Fund will usually liquidate futures contracts on
securities or currency in this manner, a Fund may instead make or take delivery
of the underlying securities or currency whenever it appears economically
advantageous for the Fund to do so. A clearing corporation associated with the
exchange on which futures are traded guarantees that, if still open, the sale or
purchase will be performed on the settlement date.
Hedging Strategies. Hedging, by use of futures contracts, seeks to
establish with more certainty than would otherwise be possible the effective
price, rate of return or currency exchange rate on portfolio securities or
securities that a Fund owns or proposes to acquire. A Fund may, for example,
take a "short" position in the futures market by selling futures contracts in
order to hedge against an anticipated rise in interest rates or a decline in
market prices or (other than Select Equity Fund) foreign currency rates that
would adversely affect the dollar value of such Fund's portfolio securities.
Such futures contracts may (except in the case of Select Equity Fund) include
contracts for the future delivery of securities held by the Fund or securities
with characteristics similar to those of the Fund's portfolio securities.
Similarly, each Fund (other than Select Equity Fund) may sell futures contracts
on a currency in which its portfolio securities are quoted or denominated or in
one currency to hedge against fluctuations in the value of securities quoted or
denominated in a different currency if there is an established historical
pattern of correlation between the two currencies. If, in the opinion of the
applicable Adviser, there is a sufficient degree of correlation between price
trends for a Fund's portfolio securities and futures contracts based on other
financial instruments, securities indices or other indices, a Fund may also
B-24
<PAGE>
enter into such futures contracts as part of its hedging strategy. Although
under some circumstances prices of securities in a Fund's portfolio may be more
or less volatile than prices of such futures contracts, the Advisers will
attempt to estimate the extent of this volatility difference based on historical
patterns and compensate for any such differential by having a Fund enter into a
greater or lesser number of futures contracts or by attempting to achieve only a
partial hedge against price changes affecting a Fund's securities portfolio.
When hedging of this character is successful, any depreciation in the value of
portfolio securities will be substantially offset by appreciation in the value
of the futures position. On the other hand, any unanticipated appreciation in
the value of a Fund's portfolio securities would be substantially offset by a
decline in the value of the futures position.
On other occasions, a Fund may take a "long" position by purchasing such
futures contracts. This would be done, for example, when a Fund anticipates the
subsequent purchase of particular securities when it has the necessary cash, but
expects the prices or currency exchange rates then available in the applicable
market to be less favorable than prices or rates that are currently available.
Options on Futures Contracts. The acquisition of put and call options on
futures contracts will give a Fund the right (but not the obligation), for a
specified price, to sell or to purchase, respectively, the underlying futures
contract at any time during the option period. As the purchaser of an option on
a futures contract, a Fund obtains the benefit of the futures position if prices
move in a favorable direction but limits its risk of loss in the event of an
unfavorable price movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium
which may partially offset a decline in the value of a Fund's assets. By writing
a call option, a Fund becomes obligated, in exchange for the premium, to sell a
futures contract if the option is exercised, which may have a value higher than
the exercise price. Conversely, the writing of a put option on a futures
contract generates a premium, which may partially offset an increase in the
price of securities that a Fund intends to purchase. However, a Fund becomes
obligated to purchase a futures contract if the option is exercised, which may
have a value lower than the exercise price. Thus, the loss incurred by a Fund in
writing options on futures is potentially unlimited and may exceed the amount of
the premium received. A Fund will incur transaction costs in connection with the
writing of options on futures.
The holder or writer of an option on a futures contract may terminate
its position by selling or purchasing an offsetting option on the same series.
There is no guarantee that such closing transactions can be effected. A Fund's
ability to establish and
B-25
<PAGE>
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
(except for Select Equity Fund) will engage in related options transactions only
for bona fide hedging as defined in the regulations of the CFTC or to seek to
increase total return to the extent permitted by such regulations. A Fund will
determine that the price fluctuations in the futures contracts and options on
futures used for hedging purposes are substantially related to price
fluctuations in securities held by the Fund or which it expects to purchase.
Except as stated below, each Fund's futures transactions will be entered into
for traditional hedging purposes -- i.e., futures contracts will be sold to
protect against a decline in the price of securities (or the currency in which
they are quoted or denominated) that the Fund owns, or futures contracts will be
purchased to protect the Fund against an increase in the price of securities (or
the currency in which they are quoted or denominated) it intends to purchase. As
evidence of this hedging intent, each Fund expects that on 75% or more of the
occasions on which it takes a long futures or option position (involving the
purchase of futures contracts), the Fund will have purchased, or will be in the
process of purchasing, equivalent amounts of related securities (or assets
quoted or denominated in the related currency) in the cash market at the time
when the futures or options position is closed out. However, in particular
cases, when it is economically advantageous for a Fund to do so, a long futures
position may be terminated or an option may expire without the corresponding
purchase of securities or other assets.
As an alternative to literal compliance with the bona fide hedging
definition, a CFTC regulation permits a Fund to elect to comply with a different
test. Under this test the aggregate initial margin and premiums required to
establish positions in futures contracts and options on futures to seek to
increase total return may not exceed 5% of the net asset value of such Fund's
portfolio, after taking into account unrealized profits and losses on any such
positions and excluding the amount by which such options were in- the-money at
the time of purchase. Each Fund will engage in transactions in futures contracts
and (except for Select Equity Fund) will engage in related options transactions
only to the extent such transactions are consistent with the requirements of the
Code for maintaining its qualification as a regulated investment company for
federal income tax purposes (see "Taxation").
Transactions in futures contracts and options on futures involve
brokerage costs, require margin deposits and, in the case of contracts and
options obligating a Fund to purchase securities or currencies, require the Fund
to segregate with its custodian cash or liquid, high grade debt securities in an
amount equal to the underlying value of such contracts and options.
B-26
<PAGE>
While transactions in futures contracts and options on futures may
reduce certain risks, such transactions themselves entail certain other risks.
Thus, unanticipated changes in interest rates, securities prices or currency
exchange rates may result in a poorer overall performance for a Fund than if it
had not entered into any futures contracts or options transactions. In the event
of an imperfect correlation between a futures position and a portfolio position
which is intended to be protected, the desired protection may not be obtained
and a Fund may be exposed to risk of loss.
Perfect correlation between a Fund's futures positions and portfolio
positions will be difficult to achieve because no futures contracts based on
individual equity or corporate fixed-income securities are currently available.
The only futures contracts available to hedge a Fund's portfolio are various
futures on U.S. Government securities, securities indices and foreign
currencies. In addition, it is not possible for a Fund to hedge fully or
perfectly against currency fluctuations affecting the value of securities quoted
or denominated in foreign currencies because the value of such securities is
likely to fluctuate as a result of independent factors not related to currency
fluctuations.
Options on Securities and Securities Indices
Writing Covered Options. Each Fund may write (sell) covered call and put
options on any securities in which it may invest, although Select Equity Fund
has no present intention of doing so. A call option written by a Fund obligates
such Fund to sell specified securities to the holder of the option at a
specified price if the option is exercised at any time before the expiration
date. All call options written by a Fund are covered, which means that such Fund
will own the securities subject to the option as long as the option is
outstanding or such Fund will use the other methods described below. A Fund's
purpose in writing covered call options is to realize greater income than would
be realized on portfolio securities transactions alone. However, a Fund may
forego the opportunity to profit from an increase in the market price of the
underlying security.
A put option written by a Fund would obligate such Fund to purchase
specified securities from the option holder at a specified price if the option
is exercised at any time before the expiration date. All put options written by
a Fund would be covered, which means that such Fund would have deposited with
its custodian cash or liquid, high grade debt securities with a value at least
equal to the exercise price of the put option. The purpose of writing such
options is to generate additional income for the Fund. However, in return for
the option premium, each Fund accepts the risk that it may be required to
purchase the underlying securities at a price in excess of the securities'
market value at the time of purchase.
B-27
<PAGE>
Call and put options written by a Fund will also be considered to be
covered to the extent that the Fund's liabilities under such options are wholly
or partially offset by its rights under call and put options purchased by the
Fund.
In addition, a written call option or put option may be covered by
maintaining cash or liquid, high grade debt securities (either of which may be
quoted or denominated in any currency) in a segregated account, by entering into
an offsetting forward contract and/or by purchasing an offsetting option which,
by virtue of its exercise price or otherwise, reduces a Fund's net exposure on
its written option position.
A Fund may also write (sell) covered call and put options on any
securities index composed of securities in which it may invest. Options on
securities indices are similar to options on securities, except that the
exercise of securities index options requires cash payments and does not involve
the actual purchase or sale of securities. In addition, securities index options
are designed to reflect price fluctuations in a group of securities or segment
of the securities market rather than price fluctuations in a single security.
A Fund may cover call options on a securities index by owning securities
whose price changes are expected to be similar to those of the underlying index,
or by having an absolute and immediate right to acquire such securities without
additional cash consideration (or for additional cash consideration held in a
segregated account by its custodian) upon conversion or exchange of other
securities in its portfolio. A Fund may cover call and put options on a
securities index by maintaining cash or liquid, high grade debt securities with
a value equal to the exercise price in a segregated account with its custodian.
A Fund may terminate its obligations under an exchange traded call or
put option by purchasing an option identical to the one it has written.
Obligations under over-the-counter options may be terminated only by entering
into an offsetting transaction with the counterparty to such option. Such
purchases are referred to as "closing purchase transactions."
Purchasing Options. Each Fund may purchase put and call options on any
securities in which it may invest or options on any securities index based on
securities in which it may invest although Select Equity Fund has no present
intention of doing so. A Fund would also be able to enter into closing sale
transactions in order to realize gains or minimize losses on options it had
purchased.
A Fund would normally purchase call options in anticipation of an
increase in the market value of securities of the type in which it may invest.
The purchase of a call option would entitle a Fund,
B-28
<PAGE>
in return for the premium paid, to purchase specified securities at a specified
price during the option period. A Fund would ordinarily realize a gain if,
during the option period, the value of such securities exceeded the sum of the
exercise price, the premium paid and transaction costs; otherwise such a Fund
would realize either no gain or a loss on the purchase of the call option.
A Fund would normally purchase put options in anticipation of a decline
in the market value of securities in its portfolio ("protective puts") or in
securities in which it may invest. The purchase of a put option would entitle a
Fund, in exchange for the premium paid, to sell specified securities at a
specified price during the option period. The purchase of protective puts is
designed to offset or hedge against a decline in the market value of a Fund's
securities. Put options may also be purchased by a Fund for the purpose of
affirmatively benefiting from a decline in the price of securities which it does
not own. A Fund would ordinarily realize a gain if, during the option period,
the value of the underlying securities decreased below the exercise price
sufficiently to more than cover the premium and transaction costs; otherwise
such a Fund would realize either no gain or a loss on the purchase of the put
option. Gains and losses on the purchase of protective put options would tend to
be offset by countervailing changes in the value of the underlying portfolio
securities.
A Fund would purchase put and call options on securities indices for the
same purposes as it would purchase options on individual securities. For a
description of options on securities indices, see "Writing Covered Options"
above.
Yield Curve Options. Balanced Fund, with respect to 5% of its net
assets, may enter into options on the yield "spread" or differential between two
securities. Such transactions are referred to as "yield curve" options. In
contrast to other types of options, a yield curve option is based on the
difference between the yields of designated securities, rather than the prices
of the individual securities, and is settled through cash payments. Accordingly,
a yield curve option is profitable to the holder if this differential widens (in
the case of a call) or narrows (in the case of a put), regardless of whether the
yields of the underlying securities increase or decrease.
Balanced Fund may purchase or write yield curve options for the same
purposes as other options on securities. For example, Balanced Fund may purchase
a call option on the yield spread between two securities if it owns one of the
securities and anticipates purchasing the other security and wants to hedge
against an adverse change in the yield spread between the two securities.
Balanced Fund may also purchase or write yield curve options in an effort to
increase its current income if, in the judgment of the Adviser, Balanced Fund
will be able to profit from
B-29
<PAGE>
movements in the spread between the yields of the underlying securities. The
trading of yield curve options is subject to all of the risks associated with
the trading of other types of options. In addition, however, such options
present risk of loss even if the yield of one of the underlying securities
remains constant, if the spread moves in a direction or to an extent which was
not anticipated.
Yield curve options written by the Balanced Fund will be "covered." A
call (or put) option is covered if the Balanced Fund holds another call (or put)
option on the spread between the same two securities and maintains in a
segregated account with its custodian cash or liquid, high grade debt securities
sufficient to cover the Balanced Fund's net liability under the two options.
Therefore, the Balanced Fund's liability for such a covered option is generally
limited to the difference between the amount of the Balanced Fund's liability
under the option written by the Balanced Fund less the value of the option held
by the Balanced Fund. Yield curve options may also be covered in such other
manner as may be in accordance with the requirements of the counterparty with
which the option is traded and applicable laws and regulations. Yield curve
options are traded over-the-counter, and because they have been only recently
introduced, established trading markets for these options have not yet
developed.
Risks Associated with Options Transactions. There is no assurance that a
liquid secondary market on an options exchange will exist for any particular
exchange-traded option or at any particular time. If a Fund is unable to effect
a closing purchase transaction with respect to covered options it has written,
the Fund will not be able to sell the underlying securities or dispose of assets
held in a segregated account until the options expire or are exercised.
Similarly, if a Fund is unable to effect a closing sale transaction with respect
to options it has purchased, it will have to exercise the options in order to
realize any profit and will incur transaction costs upon the purchase or sale of
underlying securities.
Reasons for the absence of a liquid secondary market on an exchange
include the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening or closing
transactions or both; (iii) trading halts, suspensions or other restrictions may
be imposed with respect to particular classes or series of options; (iv) unusual
or unforeseen circumstances may interrupt normal operations on an exchange; (v)
the facilities of an exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume; or (vi) one or more
exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or in
that class or series of options) would cease
B-30
<PAGE>
to exist, although outstanding options on that exchange that had been issued by
the Options Clearing Corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms.
Each Fund may purchase and sell both options that are traded on U.S. and
foreign exchanges and options traded over-the-counter with broker-dealers who
make markets in these options. The ability to terminate over-the-counter options
is more limited than with exchange-traded options and may involve the risk that
broker-dealers participating in such transactions will not fulfill their
obligations. Until such time as the staff of the Securities and Exchange
Commission ("SEC") changes its position, each Fund will treat purchased
over-the-counter options and all assets used to cover written over-the-counter
options as illiquid securities, except that with respect to options written with
primary dealers in U.S. Government securities pursuant to an agreement requiring
a closing purchase transaction at a formula price, the amount of illiquid
securities may be calculated with reference to the formula.
Transactions by each Fund in options on securities and indices will be
subject to limitations established by each of the exchanges, boards of trade or
other trading facilities governing the maximum number of options in each class
which may be written or purchased by a single investor or group of investors
acting in concert. Thus, the number of options which a Fund may write or
purchase may be affected by options written or purchased by other investment
advisory clients of the Advisers. An exchange, board of trade or other trading
facility may order the liquidation of positions found to be in excess of these
limits, and it may impose certain other sanctions.
The writing and purchase of options is a highly specialized activity
which involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. The successful use of
protective puts for hedging purposes depends in part on the Adviser's ability to
predict future price fluctuations and the degree of correlation between the
options and securities markets.
Real Estate Investment Trusts
Each Fund may invest in shares of REITs. REITs are pooled investment
vehicles which invest primarily in income producing real estate or real estate
related loans or interest. REITs are generally classified as equity REITs,
mortgage REITs or a combination of equity and mortgage REITs. Equity REITs
invest the majority of their assets directly in real property and derive income
primarily from the collection of rents. Equity REITs can also realize capital
gains by selling properties that have appreciated in value. Mortgage REITs
invest the majority of their
B-31
<PAGE>
assets in real estate mortgages and derive income from the collection of
interest payments. Like regulated investment companies such as the Funds, REITs
are not taxed on income distributed to shareholders provided they comply with
certain requirements under the Code. A Fund will indirectly bear its
proportionate share of any expenses paid by REITs in which it invests in
addition to the expenses paid by a Fund.
Investing in REITs involves certain unique risks. Equity REITs may be
affected by changes in the value of the underlying property owned by such REITs,
while mortgage REITs may be affected by the quality of any credit extended.
REITs are dependent upon management skills, are not diversified (except to the
extent the Code requires), and are subject to the risks of financing projects.
REITs are subject to heavy cash flow dependency, default by borrowers,
self-liquidation, and the possibilities of failing to qualify for the exemption
from tax for distributed income under the Code and failing to maintain their
exemptions from the Investment Company Act of 1940, as amended (the "Act").
REITs (especially mortgage REITs) are also subject to interest rate risks.
Warrants and Stock Purchase Rights
Each Fund may invest up to 5% of its total assets, calculated at the
time of purchase, in warrants or rights (other than those acquired in units or
attached to other securities) which entitle the holder to buy equity securities
at a specific price for a specific period of time. A Fund will invest in
warrants and rights only if such equity securities are deemed appropriate by the
Adviser for investment by the Fund. Select Equity Fund has no present intention
of acquiring warrants or rights. Each Fund will not invest more than 2% of its
total assets, calculated at the time of purchase, in warrants or rights which
are not listed on the New York or American Stock Exchanges. Warrants and rights
have no voting rights, receive no dividends and have no rights with respect to
the assets of the issuer.
Foreign Securities
Investments in foreign securities may offer potential benefits not
available from investments solely in U.S. dollar-denominated or quoted
securities of domestic issuers. Such benefits may include the opportunity to
invest in foreign issuers that appear, in the opinion of the applicable Adviser,
to offer better opportunity for long-term growth of capital and income than
investments in U.S. securities, the opportunity to invest in foreign countries
with economic policies or business cycles different from those of the United
States and the opportunity to reduce fluctuations in portfolio value by taking
advantage of foreign stock markets that do not necessarily move in a manner
parallel to U.S. markets.
B-32
<PAGE>
Investing in foreign securities involves certain special considerations,
including those set forth below, which are not typically associated with
investing in U.S. dollar-denominated or quoted securities of U.S. issuers.
Investments in foreign securities usually involve currencies of foreign
countries. Accordingly, any Fund that invests in foreign securities may be
affected favorably or unfavorably by changes in currency rates and in exchange
control regulations and may incur costs in connection with conversions between
various currencies. International Fund and Asia Growth Fund may be subject to
currency exposure independent of their securities positions.
Currency exchange rates may fluctuate significantly over short periods
of time. They generally are determined by the forces of supply and demand in the
foreign exchange markets and the relative merits of investments in different
countries, actual or anticipated changes in interest rates and other complex
factors, as seen from an international perspective. Currency exchange rates also
can be affected unpredictably by intervention by U.S. or foreign governments or
central banks or the failure to intervene or by currency controls or political
developments in the United States or abroad.
Since foreign issuers generally are not subject to uniform accounting,
auditing and financial reporting standards, practices and requirements
comparable to those applicable to U.S. companies, there may be less publicly
available information about a foreign company than about a U.S. company. Volume
and liquidity in most foreign securities markets are less than in the United
States and securities of many foreign companies are less liquid and more
volatile than securities of comparable U.S. companies. Fixed commissions on
foreign securities exchanges are generally higher than negotiated commissions on
U.S. exchanges, although each Fund endeavors to achieve the most favorable net
results on its portfolio transactions. There is generally less government
supervision and regulation of foreign securities exchanges, brokers, dealers and
listed and unlisted companies than in the United States.
Foreign markets also have different clearance and settlement procedures,
and in certain markets there have been times when settlements have been unable
to keep pace with the volume of securities transactions, making it difficult to
conduct such transactions. Such delays in settlement could result in temporary
periods when some of a Fund's assets are uninvested and no return is earned on
such assets. The inability of a Fund to make intended security purchases due to
settlement problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement
problems could result either in losses to the Fund due to subsequent declines in
value of the portfolio securities or, if the Fund has entered into a contract to
sell the securities, could result in possible liability
B-33
<PAGE>
to the purchaser. In addition, with respect to certain foreign countries, there
is the possibility of expropriation or confiscatory taxation, political or
social instability, or diplomatic developments which could affect a Fund's
investments in those countries. Moreover, individual foreign economies may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position.
Each Fund may invest in foreign securities which take the form of
sponsored and unsponsored American Depository Receipts ("ADRs") and Global
Depository Receipts ("GDRs") and (except for Select Equity Fund) may also invest
in European Depository Receipts ("EDRs") or other similar instruments
representing securities of foreign issuers (together, "Depository Receipts").
ADRs represent the right to receive securities of foreign issuers
deposited in a domestic bank or a correspondent bank. ADRs are traded on
domestic exchanges or in the U.S. over-the-counter market and, generally, are in
registered form. EDRs and GDRs are receipts evidencing an arrangement with a
non-U.S. bank similar to that for ADRs and are designed for use in the non-U.S.
securities markets. EDRs and GDRs are not necessarily quoted in the same
currency as the underlying security.
To the extent a Fund acquires Depository Receipts through banks which do
not have a contractual relationship with the foreign issuer of the security
underlying the Depository Receipts to issue and service such Depository Receipts
(unsponsored), there may be an increased possibility that the Fund would not
become aware of and be able to respond to corporate actions such as stock splits
or rights offerings involving the foreign issuer in a timely manner. In
addition, the lack of information may result in inefficiencies in the valuation
of such instruments.
International Fund, Asia Growth Fund, Capital Growth Fund, Small Cap
Fund, Growth and Income Fund and Balanced Fund may also invest in countries with
emerging economies or securities markets. Political and economic structures in
many of such countries may be undergoing significant evolution and rapid
development, and such countries may lack the social, political and economic
stability characteristic of more developed countries. Certain of such countries
may have in the past failed to recognize private property rights and have at
times nationalized or expropriated the assets of private companies. As a result,
the risks described above, including the risks of nationalization or
expropriation of assets, may be heightened. In addition, unanticipated political
or social developments may affect the value of a Fund's investments in those
countries and the availability to a Fund of additional investments in those
countries. The small size and inexperience of the securities markets in certain
of such countries and the limited
B-34
<PAGE>
volume of trading in securities in those countries may make a Fund's investments
in such countries illiquid and more volatile than investments in more developed
countries, and a Fund may be required to establish special custodial or other
arrangements before making certain investments in those countries. There may be
little financial or accounting information available with respect to issuers
located in certain of such countries, and it may be difficult as a result to
assess the value or prospects of an investment in such issuers.
A Fund (other than Select Equity Fund) may invest in securities of
issuers domiciled in a country other than the country in whose currency the
instrument is denominated or quoted. The Funds may also invest in securities
quoted or denominated in the European Currency Unit ("ECU"), which is a "basket"
consisting of specified amounts of the currencies of certain of the member
states of the European Community. The specific amounts of currencies comprising
the ECU may be adjusted by the Council of Ministers of the European Community
from time to time to reflect changes in relative values of the underlying
currencies. In addition, the Funds may invest in securities quoted or
denominated in other currency "baskets."
Forward Foreign Currency Exchange Contracts. Capital Growth Fund, Small
Cap Fund, Growth and Income Fund and Balanced Fund may enter into forward
foreign currency exchange contracts for hedging purposes. International Fund and
Asia Growth Fund may enter into forward foreign currency exchange contracts for
hedging purposes and to seek to increase total return. A forward foreign
currency exchange contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded in the interbank market conducted directly
between currency traders (usually large commercial banks) and their customers. A
forward contract generally has no deposit requirement, and no commissions are
generally charged at any stage for trades.
At the maturity of a forward contract a Fund may either accept or make
delivery of the currency specified in the contract or, at or prior to maturity,
enter into a closing transaction involving the purchase or sale of an offsetting
contract. Closing transactions with respect to forward contracts are usually
effected with the currency trader who is a party to the original forward
contract.
A Fund may enter into forward foreign currency exchange contracts in
several circumstances. First, when a Fund enters into a contract for the
purchase or sale of a security denominated or quoted in a foreign currency, or
when a Fund anticipates the receipt in a foreign currency of dividend or
interest payments on such a security which it holds, the Fund may desire to
"lock in" the U.S. dollar price of the security or the U.S. dollar equivalent
B-35
<PAGE>
of such dividend or interest payment, as the case may be. By entering into a
forward contract for the purchase or sale, for a fixed amount of dollars, of the
amount of foreign currency involved in the underlying transactions, the Fund
will attempt to protect itself against an adverse change in the relationship
between the U.S. dollar and the subject foreign currency during the period
between the date on which the security is purchased or sold, or on which the
dividend or interest payment is declared, and the date on which such payments
are made or received.
Additionally, when the Adviser believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract to sell, for a fixed amount of U.S.
dollars, the amount of foreign currency approximating the value of some or all
of such Fund's portfolio securities quoted or denominated in such foreign
currency. The precise matching of the forward contract amounts and the value of
the securities involved will not generally be possible because the future value
of such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the
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.
International Fund and Asia Growth Fund may engage in cross-hedging by
using forward contracts in one currency to hedge against fluctuations in the
value of securities quoted or denominated in a different currency if GSAM or
GSAMI determines that there is a pattern of correlation between the two
currencies. International Fund and Asia Growth Fund may also purchase and sell
forward contracts to seek to increase total return when GSAM or GSAMI
anticipates that the foreign currency will appreciate or depreciate in value,
but securities quoted or denominated in that currency do not present attractive
investment opportunities and are not held in the Fund's portfolio.
A Fund's custodian will place cash or liquid, high grade debt securities
into a segregated account of such Fund in an amount equal to the value of the
Fund's total assets committed to the consummation of forward foreign currency
exchange contracts requiring the Fund to purchase foreign currencies or, in the
case of International Fund and Asia Growth Fund, forward contracts entered into
to increase total return. If the value of the securities placed in the
segregated account declines, additional cash or securities will be placed in the
account on a daily basis so that the value of the account will equal the amount
of a Fund's
B-36
<PAGE>
commitments with respect to such contracts. The segregated account will be
marked-to-market on a daily basis. Although the contracts are not presently
regulated by the CFTC, the CFTC may in the future assert authority to regulate
these contracts. In such event, a Fund's ability to utilize forward foreign
currency exchange contracts may be restricted.
While a Fund will enter into forward contracts to reduce currency
exchange rate risks, transactions in such contracts involve certain other risks.
Thus, while the Fund may benefit from such transactions, unanticipated changes
in currency prices may result in a poorer overall performance for the Fund than
if it had not engaged in any such transactions. Moreover, there may be imperfect
correlation between a Fund's portfolio holdings of securities quoted or
denominated in a particular currency and forward contracts entered into by such
Fund. Such imperfect correlation may cause a Fund to sustain losses which will
prevent the Fund from achieving a complete hedge or expose the Fund to risk of
foreign exchange loss.
Markets for trading foreign forward currency contracts offer less
protection against defaults than is available when trading in currency
instruments on an exchange. Since a forward foreign currency exchange contract
is not guaranteed by an exchange or clearinghouse, a default on the contract
would deprive a Fund of unrealized profits or force the Fund to cover its
commitments for purchase or resale, if any, at the current market price.
Writing and Purchasing Currency Call and Put Options. International
Fund, Capital Growth Fund, Small Cap Fund, Growth and Income Fund, Asia Growth
Fund and Balanced Fund each may write covered put and call options and purchase
put and call options on foreign currencies for the purpose of protecting against
declines in the U.S. dollar value of portfolio securities and against increases
in the U.S. dollar cost of securities to be acquired. As with other kinds of
option transactions, however, the writing of an option on foreign currency will
constitute only a partial hedge, up to the amount of the premium received. If
and when a Fund seeks to close out an option, the Fund could be required to
purchase or sell foreign currencies at disadvantageous exchange rates, thereby
incurring losses. The purchase of an option on foreign currency may constitute
an effective hedge against exchange rate fluctuations; however, in the event of
exchange rate movements adverse to a Fund's position, the Fund may forfeit the
entire amount of the premium plus related transaction costs. Options on foreign
currencies to be written or purchased by a Fund will be traded on U.S. and
foreign exchanges or over-the-counter. International Fund and Asia Growth Fund
may use options on currency to cross-hedge, which involves writing or purchasing
options on one currency to hedge against changes in exchange rates for a
different currency with a pattern of correlation. In addition, International
Fund and Asia Growth Fund may purchase call options on currency to
B-37
<PAGE>
seek to increase total return when the Adviser anticipates that the currency
will appreciate in value, but the securities quoted or denominated in that
currency do not present attractive investment opportunities and are not included
in the Fund's portfolio.
A call option written by a Fund obligates a Fund to sell specified
currency to the holder of the option at a specified price if the option is
exercised at any time before the expiration date. A put option written by a Fund
would obligate a Fund to purchase specified currency from the option holder at a
specified price if the option is exercised at any time before the expiration
date. The writing of currency options involves a risk that a Fund will, upon
exercise of the option, be required to sell currency subject to a call at a
price that is less than the currency's market value or be required to purchase
currency subject to a put at a price that exceeds the currency's market value.
For a description of how to cover written put and call options, see "Written
Covered Options" above.
A Fund may terminate its obligations under a call or put option by
purchasing an option identical to the one it has written. Such purchases are
referred to as "closing purchase transactions." A Fund would also be able to
enter into closing sale transactions in order to realize gains or minimize
losses on options purchased by the Fund.
A Fund would normally purchase call options on foreign currency in
anticipation of an increase in the U.S. dollar value of currency in which
securities to be acquired by a Fund are quoted or denominated. The purchase of a
call option would entitle the Fund, in return for the premium paid, to purchase
specified currency at a specified price during the option period. A Fund would
ordinarily realize a gain if, during the option period, the value of such
currency exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise the Fund would realize either no gain or a loss on
the purchase of the call option.
A Fund would normally purchase put options in anticipation of a decline
in the U.S. dollar value of currency in which securities in its portfolio are
quoted or denominated ("protective puts"). The purchase of a put option would
entitle a Fund, in exchange for the premium paid, to sell specified currency at
a specified price during the option period. The purchase of protective puts is
designed merely to offset or hedge against a decline in the dollar value of a
Fund's portfolio securities due to currency exchange rate fluctuations. A Fund
would ordinarily realize a gain if, during the option period, the value of the
underlying currency decreased below the exercise price sufficiently to more than
cover the premium and transaction costs; otherwise the Fund would realize either
no gain or a loss on the purchase of the put option. Gains and losses on the
purchase of protective put options would tend to
B-38
<PAGE>
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,
International Fund and Asia Growth Fund may use options on currency to seek to
increase total return. International Fund and Asia Growth Fund may write (sell)
covered put and call options on any currency in order to realize greater income
than would be realized on portfolio securities transactions alone. However, in
writing covered call options for additional income, International Fund and Asia
Growth Fund may forego the opportunity to profit from an increase in the market
value of the underlying currency. Also, when writing put options, International
Fund and Asia Growth Fund 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.
International Fund and Asia Growth Fund would normally purchase call
options to seek to increase total return in anticipation of an increase in the
market value of a currency. International Fund and Asia Growth 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 International Fund and Asia Growth Fund would
realize either no gain or a loss on the purchase of the call option. Put options
may be purchased by either Fund for the purpose of benefiting from a decline in
the value of currencies which it does not own. International Fund and Asia
Growth 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 Funds would
realize either no gain or a loss on the purchase of the put option.
Special Risks Associated With Options on Currency. An exchange traded
options position may be closed out only on an options exchange which provides a
secondary market for an option of the same series. Although a Fund will
generally purchase or write only those options for which there appears to be an
active secondary market, there is no assurance that a liquid secondary market on
an exchange will exist for any particular option, or at any particular time. For
some options no secondary market on an exchange may exist. In such event, it
might not be possible to effect closing transactions in particular options, with
the result that a Fund would have to exercise its options in order to realize
any profit and would incur transaction costs upon the sale of underlying
securities pursuant to the exercise of put options. If a Fund as a covered call
option writer is unable to effect a closing purchase transaction in a secondary
market, it will not be able to sell the underlying currency (or security quoted
or denominated in that currency) until the option expires or it delivers the
underlying currency upon exercise.
B-39
<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, Index Swaps and Interest Rate Swaps, Caps,
Floors and Collars
The Balanced Fund may, with respect to 5% of its net assets, enter into
currency swaps for hedging purposes and the International Equity and Asia Growth
Funds may, with respect to 5% of their net assets, enter into currency swaps for
both hedging purposes and to seek to increase total return. In addition, the
Balanced Fund may, with respect to 5% of its net assets, enter into mortgage,
index and interest rate swaps and other interest rate swap arrangements such as
rate caps, floors and collars, for hedging purposes or to seek to increase total
return. Currency swaps involve the exchange by a Fund with another party of
their respective rights to make or receive payments in specified currencies.
Interest rate swaps involve the exchange by a Fund with another party of their
respective commitments to pay or receive interest, such as an exchange of fixed
rate payments for floating rate payments. Mortgage swaps are similar to interest
rate swaps in that they represent commitments to pay and receive interest. The
notional principal amount, however, is tied to a reference pool or pools of
mortgages. Index swaps involve the exchange by a Fund with another party of the
respective amounts payable with respect to a notional principal amount at
interest rates equal to two specified indices. The purchase of an interest rate
cap entitles the purchaser, to the extent that a specified index exceeds a
predetermined interest rate, to receive payment of interest on a notional
principal amount from the party selling such interest rate cap. The purchase of
an interest rate floor entitles the purchaser, to the extent that a specified
index falls below a predetermined interest rate, to receive payments of interest
on a notional principal amount from the party selling the interest rate floor.
An interest rate collar is the combination of a cap and a floor that preserves a
certain return within a predetermined range of interest rates.
B-40
<PAGE>
A Fund will enter into interest rate, mortgage and index swaps only on a
net basis, which means that the two payment streams are netted out, with the
Fund receiving or paying, as the case may be, only the net amount of the two
payments. Interest rate, index and mortgage swaps do not involve the delivery of
securities, other underlying assets or principal. Accordingly, the risk of loss
with respect to interest rate, index and mortgage swaps is limited to the net
amount of interest payments that the Fund is contractually obligated to make. If
the other party to an interest rate, index or mortgage swap defaults, the Fund's
risk of loss consists of the net amount of interest payments that the Fund is
contractually entitled to receive. In contrast, currency swaps usually involve
the delivery of a gross payment stream in one designated currency in exchange
for the gross payment stream in another designated currency. Therefore, the
entire payment stream under a currency swap is subject to the risk that the
other party to the swap will default on its contractual delivery obligations. To
the extent that the net amount payable under an interest rate, index or mortgage
swap and the entire amount of the payment stream payable by a Fund under a
currency swap or an interest rate floor, cap or collar is held in a segregated
account consisting of cash or liquid, high grade debt securities, 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 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.
The use of interest rate, mortgage, index and currency swaps, as well as
interest rate caps, floors and collars, is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If an 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 staff of
the SEC currently take the position that swaps, caps, floors and collars are
illiquid and thus subject to a Fund's 15% limitation on investments in illiquid
securities.
Lending of Portfolio Securities
Each Fund may lend portfolio securities. Under present regulatory
policies, such loans may be made to institutions such as brokers or dealers and
would be required to be secured continuously by collateral in cash, cash
equivalents or U.S. Government securi- ties 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
B-41
<PAGE>
loaned at any time on five days' notice. For the duration of a loan, a Fund
would continue to receive the equivalent of the interest or dividends paid by
the issuer on the securities loaned and would also receive compensation from
investment of the collateral. A Fund would not have the right to vote any
securities having voting rights during the existence of the loan, but a Fund
would call the loan in anticipation of an important vote to be taken among
holders of the securities or the giving or withholding of their consent on a
material matter affecting the investment. As with other extensions of credit
there are risks of delay in recovering, or even loss of rights in, the
collateral should the borrower of the securities fail financially. However, the
loans would be made only to firms deemed by the Advisers to be of good standing,
and when, in the judgment of the Advisers, the consideration which can be earned
currently from securities loans of this type justifies the attendant risk. If
the Advisers determine to make securities loans, it is intended that the value
of the securities loaned would not exceed one-third of the value of the total
assets of a Fund.
When-Issued Securities and Forward Commitments
Each Fund may purchase securities on a when-issued basis or purchase or
sell securities on a forward commitment basis. These transactions involve a
commitment by a Fund to purchase or sell securities at a future date. The price
of the underlying securities (usually expressed in terms of yield) and the date
when the securities will be delivered and paid for (the settlement date) are
fixed at the time the transaction is negotiated. When-issued purchases and
forward commitment transactions are negotiated directly with the other party,
and such commitments are not traded on exchanges. A Fund will purchase
securities on a when-issued basis or purchase or sell securities on a forward
commitment basis only with the intention of completing the transaction and
actually purchasing or selling the securities. If deemed advisable as a matter
of investment strategy, however, a Fund may dispose of or negotiate a commitment
after entering into it. A Fund may realize a capital gain or loss in connection
with these transactions. For purposes of determining a Fund's duration, the
maturity of when- issued or forward commitment securities will be calculated
from the commitment date. A Fund is required to hold and maintain in a
segregated account with the Fund's custodian until three days prior to the
settlement date, cash and liquid, high grade debt securities in an amount
sufficient to meet the purchase price. Alternatively, a Fund may enter into
offsetting contracts for the forward sale of other securities that it owns.
Securities purchased or sold on a when-issued or forward commitment basis
involve a risk of loss if the value of the security to be purchased declines
prior to the settlement date or if the value of the security to be sold
increases prior to the settlement date.
Investment in Unseasoned Companies
B-42
<PAGE>
Each Fund may invest up to 5% of its net assets, calculated at the time
of purchase, in companies (including predecessors) which have operated less than
three years, except that this limitation does not apply to debt securities which
have been rated investment grade or better by at least one nationally recognized
statistical rating organization. The securities of such companies may have
limited liquidity, which can result in their being priced higher or lower than
might otherwise be the case. In addition, investments in unseasoned companies
are more speculative and entail greater risk than do investments in companies
with an established operating record.
Other Investment Companies
A Fund reserves the right to invest up to 5% of its net assets in the
securities of other investment companies but may not acquire more than 3% of the
voting securities of any other investment company. Pursuant to an exemptive
order obtained from the SEC, the Funds may invest in money market funds for
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 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 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 the Investment Adviser.
Repurchase Agreements
Each Fund may enter into repurchase agreements with selected
broker-dealers, banks or other financial institutions. A repurchase agreement is
an arrangement under which a Fund purchases securities and the seller agrees to
repurchase the securities within a particular time and at a specified price.
Custody of the securities is maintained by a Fund's custodian. The repurchase
price may be higher than the purchase price, the difference being income to a
Fund, or the purchase and repurchase prices may be the same, with interest at a
stated rate due to a Fund together with the repurchase price on repurchase. In
either case, the income to a Fund is unrelated to the interest rate on the
security subject to the repurchase agreement.
For purposes of the Act and for tax purposes, a repurchase agreement is
deemed to be a loan from a Fund to the seller of the security. For other
purposes, it is not clear whether a court would consider the security purchased
by a Fund subject to a repurchase agreement as being owned by a Fund or as being
collateral for a loan by a Fund to the seller. In the event of
B-43
<PAGE>
commencement of bankruptcy or insolvency proceedings with respect to the seller
of the security before repurchase of the security under a repurchase agreement,
a Fund may encounter delay and incur costs before being able to sell the
security. Such a delay may involve loss of interest or a decline in price of the
security. If the court characterizes the transaction as a loan and a Fund has
not perfected a security interest in the security, a Fund may be required to
return the security to the seller's estate and be treated as an unsecured
creditor of the seller. As an unsecured creditor, a Fund would be at risk of
losing some or all of the principal and interest involved in the transaction.
As with any unsecured debt instrument purchased for a Fund, the Advisers
seek to minimize the risk of loss from repurchase agreements by analyzing the
creditworthiness of the obligor, in this case the seller of the security. Apart
from the risk of bankruptcy or insolvency proceedings, there is also the risk
that the seller may fail to repurchase the security. However, if the market
value of the security subject to the repurchase agreement becomes less than the
repurchase price (including accrued interest), a Fund will direct the seller of
the security to deliver additional securities so that the market value of all
securities subject to the repurchase agreement equals or exceeds the repurchase
price. Certain repurchase agreements which provide for settlement in more than
seven days can be liquidated before the nominal fixed term on seven days or less
notice. Such repurchase agreements will be regarded as liquid instruments.
In addition, a Fund, together with other registered investment companies
having advisory agreements with the Advisers or their affiliates, may transfer
uninvested cash balances into a single joint account, the daily aggregate
balance of which will be invested in one or more repurchase agreements.
INVESTMENT RESTRICTIONS
The following investment restrictions have been adopted by the Company
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 Capital Growth Fund
is fundamental and may not be changed without the affirmative approval of a
majority (as defined in the Act) of the outstanding voting securities of Capital
Growth Fund. The investment objective of each other Fund and all other
investment policies or practices of each Fund are considered by the Company not
to be fundamental and accordingly may be changed without shareholder approval.
See "Investment Objectives and Policies" in each Fund's Prospectus. For purposes
of the Act, "majority" means the lesser of (a) 67% or more of the
B-44
<PAGE>
shares of the Company or a Fund present at a meeting, if the holders of more
than 50% of the outstanding shares of the Company or a Fund are present or
represented by proxy, or (b) more than 50% of the shares of the Company 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 each Fund's fundamental investment restriction no. 1, asset coverage of at
least 300% (as defined in the Act), inclusive of any amounts borrowed, must be
maintained at all times.
Capital Growth Fund and Select Equity Fund
Each of Capital Growth Fund and Select Equity Fund may not:
1. Borrow money, except (a) for temporary or emergency purposes or for
clearance of transactions in amounts not exceeding 10% of the applicable Fund's
total assets (in the case of the Capital Growth Fund not including the amount
borrowed); while such borrowings exceed 5% of such Fund's assets, the Fund will
not make any additional investments; and (b) in connection with the redemption
of Fund shares, but only if after each such borrowing there is asset coverage of
at least 300% as defined in the Act. For purposes of this investment
restriction, short sales, the entry into currency transactions, options, futures
contracts, including those relating to indexes, options on futures contracts or
indexes and forward commitment transactions shall not constitute borrowing.
2. Purchase the securities of any one issuer, other than the United
States Government or any of its agencies or instrumentalities, if immediately
after such purchase more than 5% of the value of its total assets would be
invested in such issuer or that Fund would own more than 10% of the outstanding
voting securities of such issuer, except that (a) up to 25% of the value of the
Fund's total assets may be invested without regard to such 5% and 10%
limitations and (b) such 5% limitation shall not apply to repurchase agreements
collateralized by obligations of the United States Government, its agencies or
instrumentalities. (As a matter of non-fundamental policy, under normal
conditions, the securities of any one issuer may not exceed 5% of the Select
Equity Fund's net assets at the time of purchase.)
3. Invest more than 25% of the value of its total assets in the
securities of one or more issuers conducting their principal business activities
in the same industry. This limitation does not apply to investments or
obligations of the U.S. Government or any of its agencies or instrumentalities.
B-45
<PAGE>
4. Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings and to the extent related to the
deposit of assets in escrow in connection with the writing of covered put and
call options and the purchase of securities on a forward commitment or
delayed-delivery basis and collateral and initial or variation margin
arrangements with respect to currency transactions, options, futures contracts,
including those relating to indexes, and options on futures contracts or
indexes.
5. Purchase securities on margin, except for such short-term credits as
are necessary for the clearance of transactions, but a Fund may make margin
deposits in connection with transactions in currencies, options, futures and
options on futures.
6. Make short sales of securities, except short sales against-the-box,
or maintain a short position.
7. Underwrite any issue of securities issued by others, except to the
extent that the sale of portfolio securities by a Fund may be deemed to be
underwriting.
8. Purchase, hold or deal in real estate (including real estate limited
partnerships) or oil, gas or mineral leases, although a Fund may purchase and
sell securities that are secured by real estate or interests therein and may
purchase mortgage-related securities and may hold and sell real estate acquired
for a Fund as a result of the ownership of securities.
9. Invest in commodities except that a Fund may purchase and sell
futures contracts, including those relating to securities, currencies, indexes,
and options on futures contracts or indexes and currencies underlying or related
to any such future contracts, and purchase and sell currencies (and options
thereon) or securities on a forward commitment or delayed-delivery basis as
described in the Prospectus.
10. Lend any funds or other assets except through the purchase of all or
a portion of an issue of securities or obligations of the type in which it may
invest; however, a Fund may lend its portfolio securities in an amount not to
exceed 33-1/3% of the value of its total assets. Any loans of portfolio
securities will be made according to guidelines established by the Securities
and Exchange Commission and the Company's Board of Directors.
11. Issue any senior security (as such term is defined in Section 18(f)
of the Act) except as permitted in Investment Restriction Nos. 1, 4, 5 and 9.
In addition to the investment restrictions mentioned above, the
Directors of the Company have voluntarily adopted the following policies and
restrictions which are observed in the conduct of its
B-46
<PAGE>
affairs. These represent intentions of the Directors based upon current
circumstances. They differ from fundamental investment policies in that they may
be changed or amended by action of the Directors of the Company without prior
notice to or approval of shareholders. Accordingly, a Fund may not:
1. Purchase or retain the securities of any issuers if the officers,
directors or partners of the Company, its advisers or managers owning
beneficially more than one-half of 1% of the securities of such issuer, together
own beneficially more than 5% of such securities.
2. Purchase the securities of any issuer if by such purchase a Fund
would own more than 10% of the voting securities of such issuer.
3. Invest more than 10% of its total assets in the securities of other
investment companies or more than 5% of its total assets in the securities of
any one investment company, in each case calculated at the time of purchase, or
acquire more than 3% of the voting securities of any other investment company.
4. Write covered calls or put options with respect to more than 25% of
the value of its net assets, invest more than 25% of its net assets in puts,
calls, spreads or straddles, other than protective put options. The aggregate
value of premiums paid on all options held by a Fund at any time will not exceed
20% of the Fund's total net assets.
5. Invest (a) more than 15% of its net assets in illiquid investments,
including repurchase agreements maturing in more than seven days, securities
that are not readily marketable and restricted securities not eligible for
resale pursuant to Rule 144A under the Securities Act of 1933 (the "1933 Act");
or (b) more than 10% of its net assets in restricted securities (including those
eligible for resale under Rule 144A).
6. Invest in securities of companies having a record together with
predecessors, of less than three years of continuous operation, if more than 5%
of a Fund's total assets would be invested in such securities. This restriction
shall not apply to mortgage-backed securities, asset-basked securities or
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.
Small Cap Fund
Small Cap Fund may not:
(1) Borrow money, except (a) for temporary or emergency purposes or for
clearance of transactions in amounts not exceeding 10% of the Fund's total
assets, not including the amount borrowed;
B-47
<PAGE>
while such borrowings exceed 5% of the Fund's total assets, the Fund will not
make any additional investments; and (b) in connection with the redemption of
Fund shares, but only if after each such borrowing there is asset coverage of at
least 300% as defined in the Act. For purposes of this investment restriction,
short sales, the entry into currency transactions, options, futures contracts,
including those relating to indices, options on futures contracts or indices and
forward commitment transactions shall not constitute borrowing.
(2) Purchase the securities of any one issuer, other than the U.S.
Government or any of its agencies or instrumentalities, if immediately after
such purchase more than 5% of the value of its total assets would be invested in
such issuer or the Fund would own more than 10% of the outstanding voting
securities of such issuer, except that (a) up to 25% of the value of the Fund's
total assets may be invested without regard to such 5% and 10% limitations and
(b) such 5% limitation shall not apply to repurchase agreements collateralized
by obligations of the United States Government, its agencies or
instrumentalities.
(3) Invest more than 25% of the value of its total assets in the
securities of one or more issuers conducting their principal business activities
in the same industry. This limitation does not apply to investments or
obligations of the U.S. Government or any of its agencies or instrumentalities.
(4) Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings and to the extent related to the
deposit of assets in escrow in connection with the writing of covered put and
call options and the purchase of securities on a forward commitment or
delayed-delivery basis and collateral and initial or variation margin
arrangements with respect to currency transactions, options, futures contracts,
including those relating to indices, and options on futures contracts or
indices.
(5) Purchase securities on margin, except for such short-term credits as
are necessary for the clearance of transactions, but the Fund may make margin
deposits in connection with transactions in currencies, options, futures
contracts and options on futures.
(6) Make short sales of securities, except short sales against-the-box,
or maintain a short position.
(7) Underwrite any issue of securities issued by others, except to the
extent that the sale of portfolio securities by the Fund may be deemed to be
underwriting.
(8) Purchase, hold or deal in real estate (including real estate limited
partnerships) or oil, gas or mineral leases, although the Fund may purchase and
sell securities that are secured
B-48
<PAGE>
by real estate or interests therein and may purchase mortgage-related securities
and may hold and sell real estate acquired for the Fund as a result of the
ownership of securities.
(9) Invest in commodities except that the Fund may purchase and sell
futures contracts, including those relating to securities, currencies and
indices, and options on futures contracts, securities, currencies or indices,
and purchase and sell currencies or securities on a forward commitment or
delayed-delivery basis as described in the Prospectus.
(10) Lend any funds or other assets except through the purchase of all
or a portion of an issue of securities or obligations of the type in which it
may invest; however, the Fund may lend its portfolio securities in an amount not
to exceed 33-1/3% of the value of its total assets.
(11) Issue any senior security (as such term is defined in Section 18(f)
of the Act) except as permitted in Investment Restrictions 1, 4, 5 and 9.
In addition to the investment restrictions mentioned above, the
Directors of the Company have voluntarily adopted the following policies and
restrictions which are observed in the conduct of its affairs. These represent
intentions of the Directors based upon current circumstances. They differ from
fundamental investment restrictions in that they may be changed or amended by
action of the Directors of the Company without prior notice to or approval of
shareholders. Accordingly, the Fund may not:
1. Purchase the securities of any issuers if the officers, directors or
partners of the Company, its advisers or managers owning beneficially more than
one-half of 1% of the securities of such issuer, together own beneficially more
than 5% of such securities.
2. Invest more than 10% of its total assets in the securities of other
investment companies or more than 5% of its total assets in the securities of
any one investment company, in each case calculated at the time of purchase, or
acquire more than 3% of the voting securities of any other investment company.
3. Write covered calls or put options with respect to more than 25% of
the value of its net assets, invest more than 25% of its net assets in
protective put options or more than 5% of its total assets in puts, calls,
spreads or straddles, or any combination thereof other than protective put
options. The aggregate value of premiums paid on all options held by the Fund at
any time will not exceed 20% of the Fund's total net assets.
4. Invest (a) more than 15% or its net assets in illiquid investments,
including repurchase agreements maturing in more than
B-49
<PAGE>
seven days, securities that are not readily marketable and restricted securities
not eligible for resale pursuant to Rule 144A under the 1933 Act; or (b) more
than 10% of its net assets in restricted securities (including those eligible
for resale under Rule 144A).
5. Purchase the securities of any issuer if, as to 75% of the Fund's
assets at the time of purchase, more than 10% of the voting securities of such
issuer would be held by the Fund.
International Fund
International Fund may not:
(1) Borrow money, except from banks on a temporary basis, provided that
the Fund is required to maintain asset coverage of at least 300% for all
borrowings. For purposes of this investment restriction, short sales,
transactions in currency, forward contracts, swaps, options, futures contracts
and options on futures contracts, and forward commitment transactions shall not
constitute borrowing.
(2) Purchase the securities of any one issuer, other than the U.S.
Government or any of its agencies or instrumentalities, if immediately after
such purchase more than 5% of the value of its total assets would be invested in
such issuer or the Fund would own more than 10% of the outstanding voting
securities of such issuer, except that (a) up to 25% of the value of the Fund's
total assets may be invested without regard to such 5% and 10% limitations and
(b) such 5% limitation shall not apply to repurchase agreements collateralized
by obligations of the United States Government, its agencies or
instrumentalities.
(3) Invest more than 25% of the value of its total assets in the
securities of one or more issuers conducting their principal business activities
in the same industry. This limitation does not apply to investments in
obligations of the U.S. Government or any of its agencies, instrumentalities,
political subdivisions or authorities.
(4) Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings and to the extent related to the
deposit of assets in escrow in connection with the writing of covered put and
call options and the purchase of securities on a forward commitment or
delayed-delivery basis and collateral and initial or variation margin
arrangements with respect to currency transactions, options, futures contracts,
including those relating to indices, and options on futures contracts or
indices.
(5) Purchase securities on margin, except for such short-term credits as
are necessary for the clearance of transactions, but the
B-50
<PAGE>
Fund may make margin deposits in connection with transactions in currencies,
options, futures contracts and options on futures.
(6) Make short sales of securities, except short sales against-the-box,
or maintain a short position.
(7) Underwrite any issue of securities issued by others, except to the
extent that the sale of portfolio securities by the Fund may be deemed to be
underwriting.
(8) Purchase, hold or deal in real estate (including real estate limited
partnerships) or oil, gas or mineral leases, although the Fund may purchase and
sell securities that are secured by real estate or interests therein and may
purchase mortgage- related securities and may hold and sell real estate acquired
by the Fund as a result of the ownership of securities.
(9) Invest in commodities, except that the Fund may purchase and sell
futures contracts, including those relating to securities, currencies and
indices, and options on futures contracts, securities, currencies or indices,
and purchase and sell currencies or securities on a forward commitment or
delayed- delivery basis, as described in the Prospectus.
(10) Lend any funds or other assets except through the purchase of all
or a portion of an issue of securities or obligations of the type in which it
may invest; however, the Fund may lend portfolio securities in an amount not to
exceed 33-1/3% of the value of its total assets.
(11) Issue any senior security (as such term is defined in Section 18(f)
of the 1940 Act) except as permitted in Investment Restriction No. (1).
In addition to the investment restrictions mentioned above, the
Directors of the Company have voluntarily adopted the following policies and
restrictions which are observed in the conduct of its affairs. These represent
intentions of the Directors based upon current circumstances. They differ from
fundamental investment restrictions in that they may be changed or amended by
action of the Directors of the Company without prior notice to or approval of
shareholders. Accordingly, the Fund may not:
1. Purchase the securities of any issuer if the officers, directors or
partners of the Company, its advisers or managers owning beneficially more than
one-half of 1% of the securities of such issuer, together own beneficially more
than 5% of such securities.
2. Invest more than 10% of its total assets in the securities of other
investment companies or more than 5% of its total assets in the securities of
any one investment company, in each case
B-51
<PAGE>
calculated at the time of purchase, or acquire more than 3% of the voting
securities of any other investment company.
3. Write covered calls or put options with respect to more than 25% of
the value of its total assets or invest more than 5% of its total assets in
puts, calls, spreads or straddles, other than protective put options.
4. Invest (a) more than 15% of its net assets in illiquid investments,
including repurchase agreements maturing in more than seven days, securities
that are not readily marketable and restricted securities not eligible for
resale pursuant to Rule 144A under the 1933 Act; or (b) more than 10% of its net
assets in restricted securities (including those eligible for resale under Rule
144A).
5. Purchase the securities of any issuer if, as to 75% of the Fund's
assets at the time of purchase, more than 10% of the voting securities of such
issuer would be held by the Fund.
6. Purchase additional securities if the Fund's borrowings exceed 5% of
its total assets.
Asia Growth Fund
The Asia Growth Fund may not:
1. Borrow money, except (a) for temporary or emergency purposes or for
clearance of transactions in amounts not exceeding one-third of the Fund's total
assets, including the amount borrowed; (b) in connection with the redemption of
shares of such Fund or to finance failed settlements of portfolio trades without
immediately liquidating portfolio securities or other assets; and (c) in order
to fulfill commitments or plans to purchase additional securities pending the
anticipated sale of other portfolio securities or assets, but only if after each
such borrowing there is asset coverage of at least 300% as defined in the Act.
For purposes of this investment restriction, short sales, the entry into
currency transactions, options, futures contracts, including those relating to
indices, options on futures contracts or indices and forward commitment
transactions shall not constitute borrowing.
2. Purchase the securities of any one issuer, other than the U.S.
Government or any of its agencies or instrumentalities, if immediately after
such purchase more than 5% of the value of its total assets would be invested in
such issuer or the Fund would own more than 10% of the outstanding voting
securities of such issuer, except that (a) up to 25% of the value of the Fund's
total assets may be invested without regard to such 5% and 10% limitations and
(b) such 5% limitation shall not apply to repurchase agreements collateralized
by obligations of the United States Government, its agencies or
instrumentalities.
B-52
<PAGE>
3. Invest more than 25% of the value of its total assets in the
securities of one or more issuers conducting their principal business activities
in the same industry. This limitation does not apply to investments in
obligations of the U.S. Government or any of its agencies or instrumentalities.
4. Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings and to the extent related to the
deposit of assets in escrow in connection with the writing of covered put and
call options and the purchase of securities on a forward commitment or
delayed-delivery basis and collateral and initial or variation margin
arrangements with respect to currency transactions, options, futures contracts,
including those relating to indices, and options on futures contracts or
indices.
5. Purchase securities on margin, except for such short-term credits as
are necessary for the clearance of transactions, but the Fund may make margin
deposits in connection with transactions in currencies, options, futures
contracts and options on futures.
6. Make short sales of securities, except short sales against-the-box,
or maintain a short position.
7. Underwrite any issue of securities issued by others, except to the
extent that the sale of portfolio securities by the Fund may be deemed to be
underwriting.
8. Purchase, hold or deal in real estate (including real estate limited
partnerships) or oil, gas or mineral leases, although the Fund may purchase and
sell securities that are secured by real estate or interests therein and may
purchase mortgage-related securities and may hold and sell real estate acquired
for the Fund as a result of the ownership of securities.
9. Invest in commodities, except that the Fund may purchase and sell
futures contracts, including those relating to securities, currencies and
indices, and options on futures contracts, securities, currencies or indices,
and purchase and sell currencies or securities on a forward commitment or
delayed-delivery basis.
10. Lend any funds or other assets except through the purchase of all or
a portion of an issue of securities or obligations of the type in which it may
invest; however, the Fund may enter into repurchase agreements and may lend its
portfolio securities in an amount not to exceed 33-1/3% of the value of its
total assets.
11. Issue any senior security (as such term is defined in Section 18(f)
of the Act), except as permitted in fundamental investment restrictions 1, 4, 5
and 9.
B-53
<PAGE>
In addition to the investment restrictions mentioned above, the
Directors of the Company have voluntarily adopted the following policies and
restrictions which are observed in the conduct of the Fund's affairs. These
represent intentions of the Directors based upon current circumstances. They
differ from fundamental investment restrictions in that they may be changed or
amended by action of the Directors of the Company without prior notice to or
approval of shareholders.
Accordingly, the Fund may not:
1. Purchase the securities of any issuers if the officers, directors or
partners of the Company, its advisers or managers owning beneficially more than
one-half of 1% of the securities of such issuer, together own beneficially more
than 5% of such securities.
2. Invest more than 10% of its total assets in the securities of other
investment companies or more than 5% of its total assets in the securities of
any one investment company, in each case calculated at the time of purchase, or
acquire more than 3% of the voting securities of any other investment company.
3. Write covered calls or put options with respect to more than 25% of
the value of its net assets or invest more than 5% of its net assets in puts,
calls, spreads or straddles, other than protective put options. The aggregate
value of premiums paid on all options held by the Fund at any time will not
exceed 5% of the Fund's total assets.
4. Invest (a) more than 15% of its net assets in illiquid investments,
including repurchase agreements maturing in more than seven days, securities
that are not readily marketable and restricted securities not eligible for
resale pursuant to Rule 144A under the 1933 Act; or (b) more than 10% of its net
assets in restricted securities (including those eligible for resale under Rule
144A).
5. Purchase the securities of any issuer if, as to 75% of the Fund's
assets at the time of purchase, more than 10% of the voting securities of such
issuer would be held by the Fund.
6. Purchase additional securities if the Fund's borrowings exceed 5% of
its total assets.
Growth and Income Fund
Growth and Income Fund may not:
1. Borrow money, except from banks on a temporary basis in an aggregate
amount not exceeding 10% of the value of the Fund's total assets, provided that
the Fund is required to maintain asset coverage of at least 300% for all
borrowings. For purposes of this investment restriction, forward contracts,
swaps, options, futures
B-54
<PAGE>
contracts and options on futures contracts, and forward commitment transactions
shall not constitute borrowing.
2. Purchase the securities of any one issuer, other than the United
States Government or any of its agencies or instrumentalities, if immediately
after such purchase more than 5% of the value of its total assets would be
invested in such issuer or the Fund would own more than 10% of the outstanding
voting securities of such issuer, except that (a) up to 25% of the value of the
Fund's total assets may be invested without regard to such 5% and 10%
limitations and (b) such 5% limitation shall not apply to repurchase agreements
collateralized by obligations of the United States Government, its agencies or
instrumentalities.
3. Invest more than 25% of the value of its total assets in the
securities of one or more issuers conducting their principal business activities
in the same industry. This limitation does not apply to investments or
obligations of the U.S. Government or any of its agencies or instrumentalities.
4. Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings and to the extent related to the
deposit of assets in escrow in connection with the writing of covered put and
call options and the purchase of securities on a forward commitment or
delayed-delivery basis and collateral and initial or variation margin
arrangements with respect to currency transactions, options, futures contracts,
including those relating to indices, and options on futures contracts or
indices.
5. Purchase securities on margin, except for such short-term credits as
are necessary for the clearance of transactions, but the Fund may make margin
deposits in connection with transactions in currencies, options, futures
contracts and options on futures.
6. Make short sales of securities (except short sales against-the-box,
or maintain a short position).
7. Underwrite any issue of securities issued by others, except to the
extent that the sale of portfolio securities by the Fund may be deemed to be
underwriting.
8. Purchase, hold or deal in real estate (including real estate limited
partnerships) or oil, gas or mineral leases, although the Fund may purchase and
sell securities that are secured by real estate or interests therein, securities
of real estate investment trusts and mortgage-related securities and may hold
and sell real estate acquired for the Fund as a result of the ownership of
securities.
9. Invest in commodities except that the Fund may purchase and sell
futures contracts, including those relating to securities,
B-55
<PAGE>
currencies and indices, and options on futures contracts, securities, currencies
or indices, and purchase and sell currencies or securities on a forward
commitment or delayed delivery basis as described in the Prospectus.
10. Lend any funds or other assets except through the purchase of all or
a portion of an issue of securities or obligations of the type in which it may
invest; however, the Fund may lend its portfolio securities in an amount not to
exceed 33-1/3% of the value of its total assets.
11. Issue any senior security (as such term is defined in Section 18(f)
of the Act) except as permitted in Investment Restriction No. 1.
In addition to the investment restrictions mentioned above, the
Directors of the Company have voluntarily adopted the following policies and
restrictions which are observed in the conduct of its affairs. These represent
intentions of the Directors based upon current circumstances. They differ from
fundamental investment restrictions in that they may be changed or amended by
action of the Directors of the Company without prior notice to or approval of
shareholders. Accordingly, the Fund may not:
1. Purchase the securities of any issuers if the officers, directors or
partners of the Company, its investment advisers or managers owning beneficially
more than one-half of 1% of the securities of such issuer, together own
beneficially more than 5% of such securities.
2. Write covered calls or put options with respect to more than 25% of
the value of its net assets, invest more than 25% of its net assets in
protective put options or more than 5% of its total assets in puts, calls,
spreads or straddles, or any combination thereof other than protective put
options. The aggregate value of premiums paid on all options other than
protective put options, held by the Fund at any time will not exceed 5% of the
Fund's total net assets.
3. Invest (a) more than 15% of its net assets in illiquid investments,
including repurchase agreements maturing in more than seven days, securities
that are not readily marketable and restricted securities not eligible for
resale pursuant to Rule 144A under the 1933 Act; or (b) more than 10% of its net
assets in restricted securities (including those eligible for resale under Rule
144A).
4. Purchase additional securities while the Fund's borrowings exceed 5%
of its total assets.
B-56
<PAGE>
Balanced Fund
The Balanced Fund may not:
1. Borrow money, except (a) from banks for temporary or emergency
purposes or for clearance of transactions in amounts not exceeding one-third of
the Fund's total assets, including the amount borrowed; (b) in connection with
the redemption of shares of such Fund or to finance failed settlements of
portfolio trades without immediately liquidating portfolio securities or other
assets; (c) in order to fulfill commitments or plans to purchase additional
securities pending the anticipated sale of other portfolio securities or assets
and (d) transactions in mortgage dollar rolls which are accounted for as
financings, but only if after each such borrowing there is asset coverage of at
least 300% as defined in the Act. For purposes of this investment restriction,
short sales, currency transactions, forward contracts, currency, mortgage, index
and interest rate swaps, interest rate caps, floors and collars, options,
futures contracts, options on futures contracts or indices and forward
commitment transactions shall not constitute borrowing.
2. Purchase the securities of any one issuer, other than the U.S.
Government or any or its agencies or instrumentalities, if immediately after
such purchase more than 5% of the value of its total assets would be invested in
such issuer or the Fund would own more than 10% of the outstanding voting
securities of such issuer, except that (a) up to 25% of the value of the Fund's
total assets may be invested without regard to such 5% and 10% limitations and
(b) such 5% limitation shall not apply to repur- chase agreements collateralized
by obligations of the United States Government, its agencies or
instrumentalities.
3. Invest more than 25% of the value of its total assets in the
securities of one or more issuers conducting their principal business activities
in the same industry. This limitation does not apply to investments or
obligations of the U.S. Government or any of its agencies or instrumentalities.
4. Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings and to the extent related to the
deposit of assets in escrow in connection with the writing of covered put and
call options and the purchase of securities on a forward commitment or
delayed-delivery basis and collateral and initial or variation margin
arrangements with respect to currency transactions, options, futures contracts,
including those relating to indices, and options on futures contracts or
indices.
5. Purchase securities on margin, except for such short-term credits as
are necessary for the clearance of transactions, but the
B-57
<PAGE>
Fund may make margin deposits in connection with transactions in currencies,
options, futures and options on futures.
6. Make short sales of securities, except short sales against-the-box,
or maintain a short position.
7. Underwrite any issue of securities issued by others, except to the
extent that the sale of portfolio securities by the Fund may be deemed to be
underwriting.
8. Purchase, hold or deal in real estate (including real estate limited
partnerships) or oil, gas or mineral leases, although the Fund may purchase and
sell securities that are secured by real estate or interests therein and may
purchase mortgage-related securities and may hold and sell real estate acquired
for the Fund as a result of the ownership of securities.
9. Invest in commodities, except that the Fund may purchase and sell
futures contracts, including those relating to securities, currencies and
indices, and options on futures contracts, securities, currencies or indices,
and purchase and sell currencies or securities on a forward commitment or
delayed-delivery basis.
10. Lend any funds or other assets except through the purchase of all or
a portion of an issue of securities or obligations of the type in which it may
invest; however, the Fund may enter into repurchase agreements and may lend its
portfolio securities in an amount not to exceed 33-1/3% of the value of its
total assets.
11. Issue any senior security (as such term is defined in Section 18(f)
of the Act) except as permitted in Investment Restriction Nos. 1, 4, 5 and 9.
In addition to the investment restrictions mentioned above, the
Directors of the Company have voluntarily adopted the following policies and
restrictions which are observed in the conduct of its affairs. These represent
intentions of the Directors based upon current circumstances. They differ from
fundamental investment restrictions in that they may be changed or amended by
action of the Directors of the Company without prior notice to or approval of
shareholders. Accordingly, the Fund may not:
1. Purchase the securities of any issuers if the officers, directors or
partners of the Company, its advisers or managers owning beneficially more than
one-half of 1% of the securities of such issuer, together own beneficially more
than 5% of such securities.
2. Write covered calls or put options with respect to more than 25% of
the value of its net assets or invest more than 5% of its net assets in puts,
calls, spreads or straddles, other than protective put options. The aggregate
value of premiums paid on
B-58
<PAGE>
all options, other than protective puts, held by the Fund at any time will not
exceed 5% of the Fund's total net assets.
3. Invest (a) more than 15% of its net assets in illiquid investments,
including repurchase agreements maturing in more than seven days, securities
that are not readily marketable and restricted securities not eligible for
resale pursuant to Rule 144A under the 1933 Act; or (b) more than 10% of its net
assets in restricted securities (including those eligible for resale under Rule
144A).
4. Purchase additional securities if the Fund's borrowings exceed 5% of
its total assets.
5. Invest in securities of companies having a record together with
predecessors, of less than three years of continuous operation, if more than 5%
of a Fund's total assets would be invested in such securities. This restriction
shall not apply to mortgage-backed securities, asset-basked securities or
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.
For purposes of the foregoing limitations, with respect to each Fund any
limitation which involves a maximum percentage will not be 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.
MANAGEMENT
Information pertaining to the Board of Directors and officers of the
Company is set forth below. Directors and officers deemed to be "interested
persons" of the Company for purposes of the Act are indicated by an asterisk.
<TABLE>
<CAPTION>
Name and Age; Positions with Company; Principal
Address Occupation(s) During Past 5 Years
- -------- --------------------------------------
<S> <C>
Paul C. Nagel, Jr. 73; Chairman; Retired. Director and
19223 Riverside Dr. Chairman of the Finance and Audit
Tequesta, FL 33469 Committees, Great Atlantic & Pacific Tea
Co., Inc.; Director, United Conveyor
Construction.
Ashok N. Bakhru 53; Director; President, ABN Associates,
1235 Westlakes Dr. Inc. since June 1994. Retired, Senior
Drive, Suite 385 Vice President of Scott Paper Company;
Berwyn, PA 19312 Director of Arkwright Mutual Insurance
Company; Trustee of International House of
Philadelphia; Member of Cornell University
</TABLE>
B-59
<PAGE>
<TABLE>
<CAPTION>
Name and Age; Positions with Company; Principal
Address Occupation(s) During Past 5 Years
- -------- --------------------------------------
<S> <C>
Council; Trustee of the Walnut Street
Theatre.
*Douglas C. Grip 34; President and Director; Vice President,
One New York Plaza Goldman Sachs (since May 1996); formerly,
New York, NY 10004 President, MFS Retirement Services Inc., of
Massachusettts Financial Services (prior
thereto).
*David B. Ford 50; Director; General Partner, Goldman
One New Plaza Sachs, since 1986. Chairman and Chief
New York, NY 10004 Executive Officer of GSAM since December
1994.
*Alan A. Shuch 46; Director; Director and Vice President
One New York Plaza of Goldman Sachs Fund Management, Inc.
New York, NY 10004 (from April 1990 to November 1994);
President and Chief Operating Officer, GSAM
(from September 1988 to November 1994);
Limited Partner, Goldman Sachs (since
December 1994).
Jackson W. Smart, Jr. 65; Director; Chairman and Chief Executive
One Northfield Plaza Officer, MSP Communications Inc. (a company
Suite #218 engaged in radio broadcasting) (since
Northfield, IL November 1988); Director, Federal Express
60093 Corporation; Director, North American
Private Equity Group (a venture capital
fund).
William H. Springer 66; Director; Vice Chairman of Ameritech
701 Morningside Dr. (a telecommunications holding company;
Lake Forest, IL February 1987 to retirement in August
60045 1992); Vice Chairman, Chief Financial and
Administrative Officer, Ameritech (prior
thereto); Director, American Information
Technologies corporation; Director Walgreen
Co. (a retail drugstore business); Director
of Baker, Fentress & Co. (a closed-ended,
non-diversified management investment
company).
Richard P. Strubel 56; Director; Managing Director, Tandem
70 West Madison St. Partners, Inc. (since 1990); President
Suite 1400 and Chief Executive Officer, Microdot,
Chicago, IL 60602 Inc. (a diversified manufacturer of
fastening systems and connectors)
</TABLE>
B-60
<PAGE>
<TABLE>
<CAPTION>
Name and Age; Positions with Company; Principal
Address Occupation(s) During Past 5 Years
- -------- --------------------------------------
<S> <C>
(January 1984 to October 1994).
*Pauline Taylor 49; Vice President; Vice President of
4900 Sears Tower Goldman Sachs (since June 1992);
Chicago, IL 60606 Consultant (1989 to June 1992).
*John W. Mosior 57; Vice President; Vice President, Goldman
4900 Sears Tower Sachs, and Manager of Shareholder
Chicago, IL 60606 Services for GSAM Funds Group.
*Nancy L. Mucker 46; Vice President; Vice President, Goldman
4900 Sears Tower Sachs, and Manager of Shareholder
Chicago, IL 60606 Services for GSAM Funds Group.
*Scott M. Gilman 36; Treasurer; Director, Mutual Funds
One New York Plaza Administration, GSAM (since April 1994);
New York, NY 10004 Assistant Treasurer of Goldman Sachs Funds
Management, Inc. (since March 1993); Vice
President, Goldman Sachs (since March
1990); Assistant Treasurer of the Company
(April 1990 to October 1991).
*John M. Perlowski 31; Assistant Treasurer; Vice President,
One New York Plaza Goldman Sachs (since July 1995); Director,
New York, NY 10004 Investors Bank and Trust (November 1993 to
July 1995); Audit Manager of Arthur
Andersen LLP (prior thereto).
*Michael J. Richman 35; Secretary; Vice President and Assistant
85 Broad Street General Counsel of Goldman Sachs (since
New York, NY 10004 June 1992); Associate General Counsel to
the Funds Group, GSAM (since February
1994); Partner, Hale and Dorr (September
1991 to June 1992).
*Howard B. Surloff 30; Assistant Secretary; Vice President and
85 Broad Street Assistant General Counsel, Goldman Sachs
New York, NY 10004 (since May 1994 and November 1995,
respectively); Counsel to the Funds Group
of GSAM (since November 1993); Formerly
Associate of Shereff Friedman, Hoffman &
Goodman (prior thereto).
</TABLE>
B-61
<PAGE>
<TABLE>
<CAPTION>
Name and Age; Positions with Company; Principal
Address Occupation(s) During Past 5 Years
- -------- --------------------------------------
<S> <C>
*Steven E. Hartstein 32; Assistant Secretary; Legal Products
85 Broad Street Analyst, Goldman Sachs (June 1993 to
New York, NY 10004 present); Funds Compliance Officer,
Citibank Global Asset Management (August
1991 to June 1993).
*Deborah A. Robinson 24; Assistant Secretary; Administrative
85 Broad Street Assistant, Goldman Sachs since January 1994;
New York, NY 10004 formerly at Cleary, Gottlieb, Steen &
Hamilton.
</TABLE>
- -------------
* "Interested person" of the Company for purposes of the Act.
The Company's Directors and officers hold comparable positions with
certain other investment companies of which the Advisers or Goldman Sachs are
the investment adviser, administrator, and/or distributor. As of April 23, 1996,
the Directors and officers of the Company as a group owned less than 1% of the
outstanding shares of common stock of each of the Funds.
The following table sets forth certain information with respect to the
compensation of each Director of the Company for the one-year period ended
January 31, 1996:
<TABLE>
<CAPTION>
Pension or Total
Retirement Compensation
Aggregate Benefits from Goldman Sachs
Compensation Accrued as Mutual Funds
from the Part of Company's (including
Name of Trustee Company Expenses the Company)*
- --------------- ------- -------- -------------
<S> <C> <C> <C>
Paul C. Nagel, Jr. $12,630 $0 $101,000
Ashok N. Bakhru 7,630 0 61,000
Marcia L. Beck 0 0 0
David B. Ford 0 0 0
Alan A. Shuch 0 0 0
Jackson W. Smart 7,630 0 61,000
William H. Springer 7,630 0 61,000
Richard P. Strubel 7,630 0 61,000
</TABLE>
- --------------
* The Goldman Sachs Mutual Funds consisted of 29 mutual funds, including the
eight series of the Company, on January 31, 1996.
B-62
<PAGE>
Advisory and Administrative Services
As stated in the Funds' Prospectus, GSFM, One New York Plaza, New York,
New York, a Delaware limited partnership and an affiliate of Goldman Sachs, 85
Broad Street, New York, New York, serves as investment adviser to Capital Growth
Fund and Select Equity Fund. GSAM, One New York Plaza, New York, New York, a
separate operating division of Goldman Sachs, serves as investment adviser to
Small Cap Fund, International Fund, Balanced Fund and Growth and Income Fund.
GSAMI, 140 Fleet Street, London, England, EC4A 2BJ acts as the Investment
Adviser and Subadviser to Asia Growth Fund and International Fund, respectively.
GSAM serves as administrator to each Fund pursuant to an administration
agreement. See "Management" in the Funds' Prospectus for a description of the
applicable Adviser's duties as investment adviser or subadviser and GSAM's
duties as administrator to the Funds.
Founded in 1869, Goldman Sachs is among the oldest and largest
investment banking firms in the United States. Goldman Sachs is a leader in
developing portfolio strategies and in many fields of investing and financing,
participating in financial markets worldwide and serving individuals,
institutions, corporations and governments. Goldman Sachs is also among the
principal market sources for current and thorough information on companies,
industrial sectors, markets, economies and currencies, and trades and makes
markets in a wide range of equity and debt securities 24-hours a day. The firm
is headquartered in New York and has offices throughout the U.S. and in Beijing,
Frankfurt, George Town, Hong Kong, London, Madrid, Mexico City, Milan, Montreal,
Osaka, Paris, Sao Paulo, Seoul, Shanghai, Singapore, Sydney, Taipei, Tokyo,
Toronto, Vancouver and Zurich. It has trading professionals throughout the
United States, as well as in London, Tokyo, Hong Kong and Singapore. The active
participation of Goldman Sachs in the world's financial markets enhances its
ability to identify attractive investments.
The Advisers are able to draw on the substantial research and market
expertise of Goldman Sachs whose investment research effort is one of the
largest in the industry. With an annual equity research budget approaching $160
million, Goldman Sachs' Investment Research Department covers approximately
1,700 companies, including approximately 1,000 U.S. corporations in 60
industries. The in- depth information and analyses generated by Goldman Sachs'
research analysts are available to the Advisers. For more than a decade, Goldman
Sachs has been among the top-ranked firms in Institutional Investor's annual
"All-America Research Team" survey. In addition, many of Goldman Sachs'
economists, securities analysts, portfolio strategists and credit analysts have
consistently been highly ranked in respected industry surveys conducted in the
U.S. and abroad. Goldman Sachs is also among the leading investment firms using
quantitative analytics (now used by
B-63
<PAGE>
a growing number of investors) to structure and evaluate portfolios.
In managing the portfolios of Funds, GSAM and GSAMI 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 movement worldwide. The
Economics Research Department tracks factors such as inflation and money supply
figures, balance of trade figures, economic growth, commodity prices, monetary
and fiscal policies, and political events that can influence interest rates and
currency trends. The success of Goldman Sachs' international research team has
brought wide recognition to its members. The team has earned top rankings in the
Institutional Investor's annual "All British Research Team Survey" in the
following categories: Economics (U.K.) 1986-1993; Economics/International
1989-1993; and Currency Forecasting 1986-1993. In addition, the team has also
earned top rankings in the annual "Extel Financial Survey" of U.K. investment
managers in the following categories: U.K. Economy 1989-1995; International
Economies 1986, 1988-1995; and Currency Movements 1986-1993.
In allocating assets in International Fund's portfolio among various
currencies, GSAM and GSAMI 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, GSAM and
GSAMI will estimate the total returns from each currency sector which are
consistent with the average investor holding a portfolio equal to the market
capitalization of the financial assets among those currency sectors. These
estimated equilibrium returns are then combined with the expectations of Goldman
Sachs' research professionals to produce an optimal currency and asset
allocation for the level of risk suitable for the International Fund's
investment objective and criteria.
Each Fund's investment advisory agreement and administration agreement
and International Fund's subadvisory agreement provides that the Adviser and
GSAM, respectively, may render similar services to others as long as the
services provided by the Adviser and GSAM thereunder are not impaired thereby.
The Funds' advisory agreements were most recently approved by the
Directors of the Company, including a majority of the Directors of the Company
who are not parties to the investment advisory agreement or "interested persons"
(as such term is defined in the Act) of any party thereto (the "non-interested
Directors"), on April 24, 1996. These arrangements were most recently approved
by the shareholders of Capital Growth Fund and Select Equity Fund, at
shareholders' meetings held on November 27, 1991 and by the sole initial
shareholder of each of Small Cap Fund, International Fund,
B-64
<PAGE>
Growth and Income Fund, Asia Growth Fund and Balanced Fund on September 16,
1992, October 23, 1992, January 29, 1993, June 1, 1994 and October 4, 1994,
respectively. Each Fund's agreement will remain in effect until June 30, 1997
and from year to year thereafter provided such continuance is specifically
approved at least annually by (a) the vote of a majority of the outstanding
voting securities of such Fund or a majority of the Directors of the Company,
and (b) the vote of a majority of the non-interested Directors of the Company,
cast in person at a meeting called for the purpose of voting on such approval.
Each advisory agreement will terminate automatically if assigned (as defined in
the Act) and is terminable at any time without penalty by the Directors of the
Company or by vote of a majority of the outstanding voting securities of the
affected Fund on 60 days' written notice to the Adviser and by the Adviser on 60
days' written notice to the Company.
Pursuant to the advisory agreements for Small Cap Fund, International
Fund, Growth and Income Fund and Balanced Fund, GSAM is entitled to receive a
fee payable monthly by such Funds equal on an annual basis to 0.75%, 0.25%,
0.55% and 0.50%, respectively, of such Funds' average daily net assets. GSAM
voluntarily has agreed to limit its advisory fee with respect to International
Fund to an annual rate equal to 0.23% of International Fund's average daily net
assets.
Pursuant to the advisory agreements for Capital Growth Fund and Select
Equity Fund, GSFM is entitled to receive a fee payable monthly by such Funds
equal on an annual basis to 0.75% and 0.50%, respectively, of such Fund's
average daily net assets. GSFM voluntarily has agreed to limit its advisory fee
with respect to Select Equity Fund to an annual rate equal to 0.44% of Select
Equity Fund's average daily net assets.
Pursuant to a separate Subadvisory Agreement with GSAMI, the
International Fund pays GSAMI a monthly subadvisory fee equal on an annual basis
to 0.50% of such Fund's average daily net assets. GSAMI voluntarily has agreed
to limit its subadvisory fee with respect to International Fund to an annual
rate equal to 0.48% of International Fund's average daily net assets. The fee
paid by International Fund to GSAMI is in addition to the fee it pays to GSAM
for advisory services.
Pursuant to Asia Growth Fund's advisory agreement, GSAMI is entitled to
receive a fee payable monthly by the Fund equal on an annual basis to 0.75% of
the Fund's average daily net assets. GSAMI voluntarily has agreed to limit its
advisory fee with respect to Asia Growth Fund to an annual rate equal to 0.71%
of Asia Growth Fund's average daily net assets.
B-65
<PAGE>
GSAM, GSFM and GSAMI may discontinue or modify the above limitations in
the future at their discretion, although they have no current intention to do
so.
For the last three fiscal years the amounts of the investment advisory
fees incurred by each Fund then in existence were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balanced Fund/1/ $ 148,493 $ 6,814 $ N/A
Select Equity Fund/4/ 578,721 462,255(2) 475,941(2)
Growth and Income Fund 1,748,649 621,416 100,926
Capital Growth Fund 7,001,809 6,543,621 5,469,962
Small Cap Fund 2,181,629 2,539,424 941,891
International Fund/2/ 698,718 796,627 331,134
Asia Growth Fund/2,3/ 1,172,731 414,813 N/A
</TABLE>
- ----------------------------
1 Commenced operations on October 12, 1994.
2 Does not give effect to the agreement (which was not in effect during such
fiscal years) by GSFM, GSAM and GSAMI to limit advisory fees to 0.44%,
0.23% and 0.71%, respectively of Select Equity, International and Asia
Growth Fund's average daily net assets.
3 Commenced operations on July 8, 1994.
4 Gives effect to the agreement (which was in effect as of June 15, 1995) by
GSFM to limit advisory fees to 0.44% of the Select Equity Fund's average
daily net assets. For the fiscal year ended January 31, 1996, had
limitations not been in effect, Select Equity Fund would have paid $679,759
in investment advisory fees.
For the fiscal years ended January 31, 1994, 1995 and 1996,
International Fund paid GSAMI subadvisory fees of $662,267, $1,593,255 and
$1,397,436 (which does not include the effect of the waiver to 0.48 of 1% which
is currently in effect), respectively.
Pursuant to the administration agreements, GSAM's administrative
responsibilities include, subject to the general supervision of the Directors of
the Company, (a) providing supervision of all aspects of the Company's
non-investment operations (the parties giving due recognition to the fact that
certain of such operations are performed by others pursuant to agreements with
each Fund), (b) providing the Company, to the extent not provided pursuant to
its custodian and transfer agency
B-66
<PAGE>
agreements or agreements with other institutions, with personnel to perform such
executive, administrative and clerical services as are reasonably necessary to
provide effective administration of the Company, (c) arranging, to the extent
not provided pursuant to such agreements, for the preparation, at the Company's
expense, of its tax returns, reports to shareholders, periodic updating of the
prospectuses and reports filed with the SEC and other regulatory authorities,
(d) providing the Company, to the extent not provided pursuant to such
agreements, with adequate office space and certain related office equipment and
services, and (e) maintaining all of the Company's records other than those
maintained pursuant to such agreements.
GSAM is entitled to receive a fee from the Balanced and Growth and
Income Funds, computed daily and payable monthly, at an annual rate equal to
0.15% of the Fund's average daily net assets and GSAM is entitled to a fee from
each other Fund, computed daily and payable monthly at an annual rate equal to
0.25% of each such Fund's average daily net assets; however, GSAM voluntarily
has agreed to limit its administration fee with respect to Select Equity,
International and Asia Growth Funds to an annual rate equal to 0.15% of such
Funds' average daily net assets. Although it has no current intention to do so,
GSAM may modify or discontinue such limitation in the future at its discretion.
For the last three fiscal years the amounts of the administration fees
paid by each Fund then in existence were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balanced Fund/1/ $ 44,548 $ 2,044 $ N/A
Select Equity Fund/4/ 238,842 231,128(2) 237,970(2)
Growth and Income Fund 476,904 169,477 27,525
Capital Growth Fund 2,333,936 2,181,207 1,823,321
Small Cap Fund 727,210 846,475 313,964
International Fund/2/ 698,718 796,627 331,134
Asia Growth Fund/2,3/ 390,910 138,271 N/A
</TABLE>
- -----------------------------
1 Commenced operations on October 12, 1994.
2 Does not give effect to the agreement (which was not in effect during such
fiscal years) by GSAM to limit Select Equity, International and Asia Growth
Fund's administration fee to 0.15% of the Fund's average daily net assets.
3 Commenced operations on July 8, 1994.
4 Gives effect to the agreement (which was in effect as of June 15, 1995) by
GSAM to limit administration fees to 0.15% of the Select Equity Fund's
average daily net assets. For the fiscal year ended January 31, 1996, had
limitations not been in effect, Select Equity Fund would have paid $339,880
in administration fees.
B-67
<PAGE>
Activities of Goldman Sachs and Its Affiliates and Other Accounts
Managed by Goldman Sachs. The involvement of the Advisers and Goldman Sachs and
their affiliates in the management of, or their interest in, other accounts and
other activities of Goldman Sachs may present conflicts of interest with respect
to the Funds or impede their investment activities.
Goldman Sachs and its affiliates, including, without limitation, the
Advisers and their advisory affiliates, have proprietary interests in, and may
manage or advise with respect to, accounts or funds (including separate accounts
and other funds and collective investment vehicles) which have investment
objectives similar to those of the Funds and/or which engage in transactions in
the same types of securities, currencies and instruments as the Funds. Goldman
Sachs and its affiliates are major participants in the global currency,
equities, swap and fixed income markets, in each case both on a proprietary
basis and for the accounts of customers. As such, Goldman Sachs and its
affiliates are actively engaged in transactions in the same securities,
currencies and instruments in which the Funds invest. Such activities could
affect the prices and availability of the securities, currencies and instruments
in which the Funds will invest, which could have an adverse impact on each
Fund's performance. Such transactions, particularly in respect of proprietary
accounts or customer accounts other than those included in the Advisers' and
their advisory affiliates' asset management activities, will be executed
independently of the Funds' transactions and thus at prices or rates that may be
more or less favorable. When the Advisers and their advisory affiliates seek to
purchase or sell the same assets for their managed accounts, including the
Funds, the assets actually purchased or sold may be allocated among the accounts
on a basis determined in its good faith discretion to be equitable. In some
cases, this system may adversely affect the size or the price of the assets
purchased or sold for the Funds.
From time to time, the Funds' activities may be restricted because of
regulatory restrictions applicable to Goldman Sachs and its affiliates, and/or
their internal policies designed to comply with such restrictions. As a result,
there may be periods, for example, when the Advisers and/or their affiliates
will not initiate or recommend certain types of transactions in certain
securities or instruments with respect to which the Advisers and/or their
affiliates are performing services or when position limits have been reached.
In connection with their management of the Funds, the Advisers may have
access to certain fundamental analysis and proprietary technical models
developed by Goldman Sachs and other affiliates. The Advisers will not be under
any obligation, however, to effect transactions on behalf of the Funds in
accordance with such analysis and models. In addition, neither Goldman Sachs nor
any of its affiliates will have any obligation to make available any
B-68
<PAGE>
information regarding their proprietary activities or strategies, or the
activities or strategies used for other accounts managed by them, for the
benefit of the management of the Funds and it is not anticipated that the
Advisers will have access to such information for the purpose of managing the
Funds. The proprietary activities or portfolio strategies of Goldman Sachs and
its affiliates or the activities or strategies used for accounts managed by them
or other customer accounts could conflict with the transactions and strategies
employed by the Advisers in managing the Funds.
The results of each Fund's investment activities may differ
significantly from the results achieved by the Advisers and their affiliates for
their proprietary accounts or accounts (including investment companies or
collective investment vehicles) managed or advised by them. It is possible that
Goldman Sachs and its affiliates and such other accounts will achieve investment
results which are substantially more or less favorable than the results achieved
by a Fund. Moreover, it is possible that a Fund will sustain losses during
periods in which Goldman Sachs and its affiliates achieve significant profits on
their trading for proprietary or other accounts. The opposite result is also
possible.
The investment activities of Goldman Sachs and its affiliates for their
proprietary accounts and accounts under their management may also limit the
investment opportunities for the Fund in certain emerging markets in which
limitations are imposed upon the aggregate amount of investment, in the
aggregate or individual issuers, by affiliated foreign investors.
An investment policy committee which may include partners of Goldman
Sachs and its affiliates may develop general policies regarding a Fund's
activities, but will not be involved in the day- to-day management of such Fund.
In such instances, those individuals may, as a result, obtain information
regarding the Fund's proposed investment activities which is not generally
available to the public. In addition, by virtue of their affiliation with
Goldman Sachs, any such member of an investment policy committee will have
direct or indirect interests in the activities of Goldman Sachs and its
affiliates in securities and investments similar to those in which the Fund
invests.
In addition, certain principals and certain of the employees of the
Advisers are also principals or employees of Goldman Sachs or their affiliated
entities. As a result, the performance by these principals and employees of
their obligations to such other entities may be a consideration of which
investors in the Funds should be aware.
Each Adviser may enter into transactions and invest in currencies or
instruments on behalf of a Fund in which customers of Goldman Sachs serve as the
counterparty, principal or issuer. In
B-69
<PAGE>
such cases, such party's interests in the transaction will be adverse to the
interests of a Fund, and such party may have no incentive to assure that the
Funds obtain the best possible prices or terms in connection with the
transactions. Goldman Sachs and its affiliates may also create, write or issue
derivative instruments for customers of Goldman Sachs or its affiliates, the
underlying securities or instruments of which may be those in which a Fund
invests or which may be based on the performance of a Fund. The Funds may,
subject to applicable law, purchase investments which are the subject of an
underwriting or other distribution by Goldman Sachs or its affiliates and may
also enter transactions with other clients of Goldman Sachs or its affiliates
where such other clients have interests adverse to those of the Funds. To the
extent affiliated transactions are permitted, the Funds will deal with Goldman
Sachs and its affiliates on an arms-length basis.
Each Fund will be required to establish business relationships with its
counterparties based on the Fund's own credit standing. Neither Goldman Sachs
nor its affiliates will have any obligation to allow their credit to be used in
connection with a Fund's establishment of its business relationships, nor is it
expected that a Fund's counterparties will rely on the credit of Goldman Sachs
or any of its affiliates in evaluating the Fund's creditworthiness.
From time to time, Goldman Sachs or any of its affiliates may, but is
not required to, purchase and hold shares of a Fund in order to increase the
assets of the Fund. Increasing a Fund's assets may enhance investment
flexibility and diversification and may contribute to economies of scale that
tend to reduce the Fund's expense ratio. Goldman Sachs reserves the right to
redeem at any time some or all of the shares of a Fund acquired for its own
account. A large redemption of shares of a Fund by Goldman Sachs could
significantly reduce the asset size of the Fund, which might have an adverse
effect on the Fund's investment flexibility, portfolio diversification and
expense ratio. Goldman Sachs will consider the effect of redemptions on a Fund
and other shareholders in deciding whether to redeem its shares.
It is possible that a Fund's holdings will include securities of
entities for which Goldman Sachs performs investment banking services as well as
securities of entities in which Goldman Sachs makes a market. From time to time,
Goldman Sachs' activities may limit the Funds' flexibility in purchases and
sales of securities. When Goldman Sachs is engaged in an underwriting or other
distribution of securities of an entity, the Advisers may be prohibited from
purchasing or recommending the purchase of certain securities of that entity for
the Funds.
Distributor and Transfer Agent
B-70
<PAGE>
Goldman Sachs serves as the exclusive distributor of shares of the
Funds pursuant to a "best efforts" arrangement as provided by a distribution
agreement with the Company dated February 1, 1993, as amended as of January 30,
1996. Pursuant to the distribution agreement, after the Prospectus and periodic
reports have been prepared, set in type and mailed to shareholders, Goldman
Sachs will pay for the printing and distribution of copies thereof used in
connection with the offering to prospective investors. Goldman Sachs will also
pay for other supplementary sales literature and advertising costs. Goldman
Sachs may enter into sales agreements with certain investment dealers and other
financial service firms (the "Authorized Dealers") to solicit subscriptions for
Class A and Class B Shares of the Funds. Goldman Sachs receives a portion of the
sales charge imposed on the sale, in the case of Class A Shares, or redemption
in the case of Class B Shares, of such Fund shares. No Class B Shares were
outstanding during the fiscal years ended January 31, 1994, 1995 and 1996.
Goldman Sachs retained the following commissions on sales of Class A
Shares during the following periods:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balanced Fund/1/ $ 28,000 $ 14,000 $ N/A
Select Equity Fund 108,000 58,000 37,000
Growth and Income Fund 771,000 361,000 59,000
Capital Growth Fund 523,000 815,000 859,000
Small Cap Fund 202,000 868,000 1,035,000
International Fund 211,000 660,000 1,121,000
Asia Growth Fund/2/ 507,000 829,000 N/A
</TABLE>
- -----------------------------
1 Commenced operations on October 12, 1994.
2 Commenced operations on July 8, 1994.
Goldman Sachs serves as the Company's transfer agent. Under its
transfer agency agreement with the Company, Goldman Sachs has undertaken with
the Company to (i) record the issuance, transfer and redemption of shares, (ii)
provide confirmations of purchases and redemptions, and quarterly statements, as
well as certain other statements, (iii) provide certain information to the
Company's custodian and the relevant sub-custodian in connection with
redemptions, (iv) provide dividend crediting and certain disbursing agent
services, (v) maintain shareholder accounts, (vi) provide certain state Blue Sky
and other information, (vii) provide shareholders and certain regulatory
authorities with tax related information, (viii) respond to shareholder
inquiries, and (ix) render certain other miscellaneous services. As compensation
for the services rendered to the Company by Goldman Sachs as transfer agent and
the assumption by Goldman Sachs of the expenses
B-71
<PAGE>
related thereto, Goldman Sachs is entitled to receive a fee with respect to each
Fund with respect to Class A Shares and Class B Shares equal to $12,000 per year
plus $7.50 per account, together with out-of-pocket and transaction-related
expenses (including those out-of-pocket expenses payable to servicing agents).
For the last three fiscal years the amounts paid to Goldman Sachs by
each Fund's Class A shares then in existence for transfer agency services
performed were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balanced Fund/1/ $ 72,067 $ 20,000 N/A
Select Equity Fund 103,682 151,230 111,104
Growth and Income Fund 524,671 262,158 74,053
Capital Growth Fund 549,844 694,014 498,169
Small Cap Fund 254,292 600,618 142,256
International Fund 129,313 481,169 150,203
Asia Growth Fund/2/ 192,097 120,000 N/A
</TABLE>
- -------------------------
1 Commenced operations on October 12, 1994.
2 Commenced operations on July 8, 1994.
The Company'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 Company will indemnify Goldman Sachs against certain
liabilities.
DISTRIBUTION AND AUTHORIZED DEALER SERVICE PLANS
Class A Distribution Plans. As described in the Prospectus, the Company
with respect to Class A Shares of each Fund has adopted a distribution plan (the
"Class A Plans") pursuant to Rule 12b-1 under the Act. See "Distribution and
Authorized Dealer Service Plan" in the Prospectus.
The Class A Plans were most recently approved on April 24, 1996 by a
majority vote of Directors of the Company, including a majority of the
non-interested Directors of the Company who have no direct or indirect financial
interest in the Class A Plans, cast in person at a meeting called for the
purpose of approving the Class A Plans. The compensation payable under the Class
A Plans may not exceed 0.25% per annum of each Fund's average daily net assets.
B-72
<PAGE>
Currently, Goldman Sachs has voluntarily agreed to waive the entire
amount of such fee for the Balanced, Growth and Income, Capital Growth and Small
Cap Equity Funds and to limit the amount of such fee to 0.21% of average daily
net assets attributable to Class A Shares of Select Equity, International and
Asia Growth Funds. Goldman Sachs has no current intention of modifying or
discontinuing its fee waiver for the other Funds but may do so in the future at
its discretion.
Each Class A Plan was amended effective June 1, 1995 to reduce the fee
payable under the Plan from 0.50% of average daily net assets attributable to
Class A Shares. At the time of such amendment the Board of Directors approved
the Authorized Dealer Service Plan pursuant to which personal and account
maintenance services are provided. See "Management --Authorized Dealer Service
Plans."
For the fiscal year ended January 31, 1996 the amounts paid to Goldman
Sachs pursuant to its Class A Plan by each Fund then in existence were as
follows:
<TABLE>
<CAPTION>
1996
----
<S> <C>
Balanced Fund $ 10,103
Select Equity Fund 264,159
Growth and Income Fund 191,414
Capital Growth Fund 770,488
Small Cap Fund 272,353
International Fund 231,028
Asia Growth Fund 114,156
</TABLE>
Prior to June 1, 1995, Goldman Sachs limited its fees under each Fund's
Distribution Plan to 0.25% of the Fund's average daily net assets. After June 1,
1995, Goldman Sachs waived the entire amount of such fees for the Balanced,
Growth and Income, Capital Growth and Small Cap Equity Funds. Had Goldman Sachs'
voluntary limitations not been in effect, Balanced Fund, Select Equity Fund,
Growth and Income Fund, Capital Growth Fund, Small Cap Fund, International Fund
and Asia Growth Fund would have paid Goldman Sachs $84,350, $349,883, $986,255,
$3,104,424, $999,563, $929,746 and $505,066, respectively during the fiscal year
ended 1996 pursuant to their respective Distribution Plans.
B-73
<PAGE>
During the fiscal year ended January 31, 1996, Goldman Sachs incurred
the following expenses in connection with distribution and personal and account
maintenance services under the Class A Plan of each Fund then in existence:
<TABLE>
<CAPTION>
Compensation Printing and Preparation
and Expenses Allocable Mailing of and
of the Overhead, Prospectuses Distribution
Distributor Telephone to Other of Sales
Compensation & Its Sales and Travel Than Current Literature and
To Dealers Personnel Expenses Shareholders Advertising
---------- --------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Fiscal Year Ended
January 31, 1996:
Balanced Fund(A) $ -0- $ 27,476 $ 29,000 $ 2,131 $ 6,965
Select
Equity Fund 29,468 349,542 399,167 44,063 67,171
Growth and
Income Fund(A) 165,066 298,366 294,000 1,570 51,965
Capital
Growth Fund(A) 253,302 497,073 236,000 1,570 76,258
Small Cap
Equity Fund(A) 102,626 355,041 200,000 14,248 55,361
International
Equity Fund(A) 81,314 254,107 106,000 1,570 40,566
Asia Growth Fund(A) -0- 133,548 94,000 14,135 38,981
</TABLE>
The table above reflects amounts expended by Goldman Sachs, which amounts are in
excess of the compensation received by Goldman Sachs under the Class A Plans.
The payments under the Class A Plans were used by Goldman Sachs to compensate it
for the expenses shown above on a pro-rata basis.
(A) Expenses reflected above for these funds were incurred through 5/31/95; at
this point expenses incurred exceeded any revenues earned. From June 1,
1995 through January 31, 1996 Goldman Sachs did not impose the 0.25% 12b-1
fee; therefore, additional expenses incurred have not been reflected since
revenue was not earned after the period presented.
B-74
<PAGE>
The Plans are compensation plans which provide for the payment of a
specified fee without regard to the expenses actually incurred by Goldman Sachs.
If such fee exceeds its expenses, Goldman Sachs may realize a profit from these
arrangements. If the Plans were terminated by the Directors of the Company and
no successor plans were adopted, each Fund would cease to make payments to
Goldman Sachs under the Distribution Plans and Goldman Sachs would be unable to
recover the amount of any of its unreimbursed distribution expenditures.
Under the Plans, Goldman Sachs, as distributor of each Fund's Class A
shares, will provide to the Directors of the Company for their review, and the
Directors of the Company 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 Class A Plans will remain in effect until June 1, 1997 and from
year to year thereafter, provided that such continuance is approved annually by
a majority vote of the Directors of the Company, including a majority of the
non-interested Directors of the Company who have no direct or indirect financial
interest in the Class A Plan. A Class A Plan may not be amended to increase
materially the amount to be spent for the services described therein as to a
Fund without approval of a majority of the outstanding voting securities of the
affected Fund. All material amendments of the Class A Plan must also be approved
by the Directors of the Company in the manner described above. A Class A Plan
may be terminated at any time as to any Fund without payment of any penalty by a
vote of a majority of the non-interested Directors of the Company or by vote of
a majority of the Class A Shares of the applicable Fund. So long as the Class A
Plan is in effect, the selection and nomination of non-interested Directors of
the Company shall be committed to the discretion of the non- interested
Directors. The Directors of the Company have determined that in their judgment
there is a reasonable likelihood that the Distribution Plan will benefit the
Funds and their Class A shareholders.
The Plans for Capital Growth Fund and Select Equity Fund were most
recently approved by shareholders at a meeting held on November 27, 1991. The
Plans for each of Small Cap Fund, International Fund, Growth and Income Fund,
Asia Growth Fund and Balanced Fund were approved by its sole initial shareholder
on September 16, 1992, October 23, 1992, January 29, 1993, June 1, 1994 and
October 4, 1994, respectively.
Class B Distribution Plans. As described in the Prospectus, the Company
has adopted on behalf of the Funds' distribution plans (the "Class B Plans")
pursuant to Rule 12b-1 under the Act
B-75
<PAGE>
with respect to the Class B shares. See "Distribution and Authorized Dealer
Service Plans" in the Prospectus.
The Class B Plans were most recently approved on April 26, 1996 on
behalf of the Company by a majority vote of the Company's Board of Directors,
including a majority of the non-interested Directors who have no direct or
indirect financial interest in the Class B Plans, cast in person at a meeting
called for the purpose of approving the Class B Plans. The Class B Plans were
approved by the sole initial shareholders of the Class B Shares of the Funds on
January 30, 1996.
With respect to each Fund, the compensation payable under the Class B
Plans is equal to 0.75% per annum of the average daily net assets attributable
to Class B Shares of that Fund. The fees received by Goldman Sachs under the
Class B Plans and contingent deferred sales charge on Class B Shares may be sold
by Goldman Sachs as distributor to entities which provide financing for payments
to Authorized Dealers in respect of sales of Class B Shares. To the extent such
fee is not paid to such dealers, Goldman Sachs may retain such fee as
compensation for its services and expenses of distributing the Funds' Class B
Shares. If such fee exceeds its expenses, Goldman Sachs may realize a profit
from these arrangements.
No fees were paid to Goldman Sachs under the Class B Plans during the
fiscal year ended January 31, 1996.
The Class B Plans are compensation plans which provide for the payment
of a specified distribution fee without regard to the distribution expenses
actually incurred by Goldman Sachs. If the Class B Plans were terminated by the
Company's Board of Directors and no successor plan were adopted, the Funds would
cease to make distribution payments to Goldman Sachs and Goldman Sachs would be
unable to recover the amount of any of its unreimbursed distribution
expenditures.
Under the Class B Plans, Goldman Sachs, as distributor of the Funds'
shares, will provide to the Board of Directors for its review, and the Board
will review at least quarterly, a written report of the services provided and
amounts expended by Goldman Sachs under the Class B Plans and the purposes for
which such services were performed and expenditures were made.
The Class B Plans will remain in effect until June 1, 1997 and from
year to year, provided such continuance is approved annually by a majority vote
of the Board of Directors, including a majority of the non-interested Directors.
A Class B Plan may not be amended to increase materially the amount to be spent
for the services described therein as to any Fund without approval of a majority
of the outstanding Class B Shares of that Fund. All material amendments of the
Class B Plan must also be approved by the Board
B-76
<PAGE>
of Directors of the Company in the manner described above. With respect to any
Fund, a Class B Plan may be terminated at any time without payment of any
penalty by a vote of the majority of the non-interested Directors or by vote of
a majority of the outstanding voting securities of the Class B Shares of that
Fund. So long as a Class B Plan is in effect, the selection and nomination of
non-interested Directors shall be committed to the discretion of the
non-interested Directors. The Directors have determined that in their judgment
there is a reasonable likelihood that the Class B Plans will benefit each Fund
and their respective Class B shareholders.
Authorized Dealer Service Plans. As described in the prospectus, each
Fund's Class A and Class B Shares has adopted a non-Rule 12b-1 Authorized Dealer
Service Plan (each a "Service Plan") pursuant to which Goldman Sachs and
Authorized Dealers are compensated for the provision of personal and account
maintenance services. Each Service Plan has been approved by the Board of
Directors, including a majority of the non-interested Directors who have no
direct or indirect financial interest in the Service Plan, at a meeting held on
April 24, 1996. Each Fund's Service Plan provides for the compensation for
personal and account maintenance services at an annual rate of up to 0.25% of
the Fund's average daily net assets attributable to Class A or Class B shares.
For the period June 1, 1995 (commencement of each Service Plan) through
January 31, 1996, each Fund paid Authorized Dealer Service fees at the foregoing
rate for each Fund's Class A shares. During the fiscal year ended January 31,
1996, no Authorized Dealer Service fees were paid with respect to any Fund's
Class B shares.
For the period June 1, 1995 through the fiscal year ended January 31,
1996, the amounts paid to Goldman Sachs pursuant to its Class A Authorized
Dealer Service Plan was:
<TABLE>
<CAPTION>
1996
----
<S> <C>
Balanced Fund $ 64,145
Select Equity Fund 182,881
Growth and Income Fund 603,426
Capital Growth Fund 1,563,448
Small Cap Fund 454,857
International Fund 470,027
Asia Growth Fund 276,754
</TABLE>
The Service Plans will remain in effect until June 1, 1997 and from
year to year thereafter, provided that the continuance of each service plan is
approved annually by a majority vote of the Directors of the Company, including
a majority of the non-interested Directors who have no direct or indirect
financial interest in the Service Plans. All material amendments of the Service
Plans must also be approved by the Directors of the Company
B-77
<PAGE>
in the manner described above. The Service Plans may be terminated at any time
as to any Fund without payment of any penalty by a vote of a majority of the
non-interested Directors of the Company or by vote of a majority of the
outstanding voting securities of the affected Fund. The Directors of the Company
have determined that in their judgment there is a reasonable likelihood that the
Service Plans will benefit the Funds and their shareholders.
Expenses
Except as set forth in the Prospectus under "Management," the Company
is responsible for the payment of its expenses. The expenses include, without
limitation, the fees payable to the Advisers, the fees payable to GSAM, the fees
and expenses payable to the Company's custodian and subcustodians, transfer
agent fees, brokerage fees and commissions, filing fees for the registration or
qualification of the Company's shares under federal or state securities laws,
expenses of the organization of the Company, fees and expenses incurred by the
Company 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 Company 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 Company), 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 Company's
shareholders and regulatory authorities, any expenses assumed by a Fund pursuant
to its distribution, authorized dealer service and administration plans,
compensation and expenses of its "non-interested" Directors and extraordinary
expenses, if any, incurred by the Company. Except for fees under any
distribution, authorized dealer service, administration or service plans
applicable to a particular class and transfer agency fees, all Fund expenses are
borne on a non-class specific basis.
The Adviser has voluntarily agreed to reduce or limit certain "Other
Expenses" of the Balanced, Select Equity, Growth and Income, International and
Asia Growth Funds (excluding advisory, administration, distribution and
authorized dealer service fees, any class-specific transfer agency fees, taxes,
interest and brokerage fees and litigation, indemnification and other
extraordinary expenses) to the extent such expenses exceed 0.10% of the average
daily net assets of Balanced Fund, 0.06% of the average net assets of Select
Equity Fund, 0.11% of the average daily net assets of Growth and Income Fund,
0.24% of the average daily net assets of International Fund and 0.24% of the
average daily net assets of Asia Growth Fund. Such reductions or limits, if any,
are calculated monthly on a cumulative basis and, although it has no
B-78
<PAGE>
current intention to do so, may be discontinued or modified by the Adviser at
its discretion at any time.
Fees and expenses of legal counsel, registering shares of a Fund,
holding meetings and communicating with shareholders may include an allocable
portion of the cost of maintaining an internal legal and compliance department.
Each Fund may also bear an allocable portion of the applicable Adviser's costs
of performing certain accounting services not being provided by a Fund's
Custodian.
For the last three fiscal years the amounts of certain "Other Expenses"
of each Fund then in existence that were reduced or otherwise limited were as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Select Equity Fund $110,581 N/A N/A
Balanced Fund/1/ 192,405 $ 95,906 N/A
Growth and Income Fund 0 106,725 $319,899
Small Cap Fund N/A N/A 0
International Fund N/A N/A 0
Asia Growth Fund/2/ 0 135,905 N/A
</TABLE>
- ------------------------------
1 Commenced operations on October 12, 1994.
2 Commenced operations on July 8, 1994.
Each Adviser has voluntarily agreed to reduce the fees payable to it by
a Fund (to the extent of its fees) by an amount (if any) that the Fund's
expenses would exceed the expense limitations applicable to such Fund imposed by
states securities administrators, as such limitations may be lowered or raised
from time to time. These expense limitations apply to the advisory and
administration fees paid by each Fund and the subadvisory fees paid by
International Fund, but do not apply to taxes, interest, brokerage, fees and
distribution, authorized dealer service and administration fees and, where
permitted, extraordinary expenses such as for litigation. The Advisers will
reduce their respective fees by the amount of such excess in amounts
proportionate to such investment advisory, administration and subadvisory fees.
Currently, the most restrictive expense limitation of state securities
commissions of which the Company is aware is 2-1/2% of a Fund's average daily
net assets up to $30 million, 2% of the next $70 million of such assets and
1-1/2% of such assets in excess of $100 million.
Custodian and Sub-Custodians
State Street, P.O. Box 1713, Boston, Massachusetts 02105, is the
custodian of the Company's portfolio securities and cash.
B-79
<PAGE>
State Street also maintains the Company's accounting records. State Street may
appoint sub-custodians from time to time to hold certain securities purchased by
the Company and to hold cash for the Company.
Independent Public Accountants
Arthur Andersen LLP, independent public accountants, One International
Place, Boston, Massachusetts 02110, have been selected as auditors of the
Company. In addition to audit services, Arthur Andersen LLP prepares the
Company's federal and state tax returns, and provides consultation and
assistance on accounting, internal control and related matters.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Advisers are responsible for decisions to buy and sell securities
for the Funds, the selection of brokers and dealers to effect the transactions
and the negotiation of brokerage commissions, if any. Purchases and sales of
securities on a securities exchange are effected through brokers who charge a
commission for their services. Orders may be directed to any broker including,
to the extent and in the manner permitted by applicable law, Goldman Sachs.
In the over-the-counter market, securities are generally traded on a
"net" basis with dealers acting as principal for their own accounts without a
stated commission, although the price of a security usually includes a profit to
the dealer. In underwritten offerings, securities are purchased at a fixed price
which includes an amount of compensation to the underwriter, generally referred
to as the underwriter's concession or discount. On occasion, certain money
market instruments may be purchased directly from an issuer, in which case no
commissions or discounts are paid. A Fund will not deal with Goldman Sachs in
any transaction in which Goldman Sachs acts as principal.
In placing orders for portfolio securities of a Fund, the Advisers are
generally required to give primary consideration to obtaining the most favorable
price and efficient execution under the circumstances. This means that an
Adviser will seek to execute each transaction at a price and commission, if any,
which provide the most favorable total cost or proceeds reasonably attainable in
the circumstances. While the Advisers generally seek reasonably competitive
spreads or commissions, a Fund will not necessarily be paying the lowest spread
or commission available. Within the framework of this policy, the Advisers will
consider research and investment services provided by brokers or dealers who
effect or are parties to portfolio transactions of a Fund, the Advisers and
their affiliates, or their other clients. Such research and investment services
are those which brokerage houses customarily
B-80
<PAGE>
provide to institutional investors and include statistical and economic data and
research reports on particular companies and industries. Such services are used
by the Advisers in connection with all of their investment activities, and some
of such services obtained in connection with the execution of transactions for a
Fund may be used in managing other investment accounts. Conversely, brokers
furnishing such services may be selected for the execution of transactions of
such other accounts, whose aggregate assets are far larger than those of a Fund,
and the services furnished by such brokers may be used by the Advisers in
providing investment advisory services for the Company.
On occasions when an Adviser deems the purchase or sale of a security
to be in the best interest of a Fund as well as its other customers (including
any other fund or other investment company or advisory account for which such
Adviser acts as investment adviser or subadviser), the Adviser, to the extent
permitted by applicable laws and regulations, may aggregate the securities to be
sold or purchased for the Fund with those to be sold or purchased for such other
customers in order to obtain the best net price and most favorable execution
under the circumstances. In such event, allocation of the securities so
purchased or sold, as well as the expenses incurred in the transaction, will be
made by the applicable Adviser in the manner it considers to be equitable and
consistent with its fiduciary obligations to such Fund and such other customers.
In some instances, this procedure may adversely affect the price and size of the
position obtainable for a Fund.
Commission rates in the U.S. are established pursuant to negotiations
with the broker based on the quality and quantity of execution services provided
by the broker in the light of generally prevailing rates. The allocation of
orders among brokers and the commission rates paid are reviewed periodically by
the Directors of the Company.
Subject to the above considerations, the Advisers may use Goldman Sachs
as a broker for a Fund. In order for Goldman Sachs to effect any portfolio
transactions for each Fund, the commissions, fees or other remuneration received
by Goldman Sachs must be reasonable and fair compared to the commissions, fees
or other remuneration paid to other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time. This standard would
allow Goldman Sachs to receive no more than the remuneration which would be
expected to be received by an unaffiliated broker in a commensurate arm's-length
transaction. Furthermore, the Directors of the Company, including a majority of
the Directors who are not "interested" Directors, 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
B-81
<PAGE>
transactions with Goldman Sachs are also subject to such fiduciary standards as
may be imposed upon Goldman Sachs by applicable law.
In addition, Goldman Sachs, as a member firm of the New York Stock
Exchange may effect exchange transactions and receive compensation therefor if
expressly so authorized in a written contract with the Company. The Company, on
behalf of each Fund, has entered into such a contract with Goldman Sachs.
Goldman Sachs will provide the Company at least annually with a statement
setting forth the total amount of all compensation retained by Goldman Sachs in
connection with effecting transactions for the accounts of the Funds. The
Directors of the Company will review and approve all the Funds' portfolio
transactions with Goldman Sachs and the compensation received by Goldman Sachs
in connection therewith. The Company, of course, will effect its portfolio
transactions in a manner consistent with all applicable laws.
B-82
<PAGE>
For the past three fiscal years, each Fund in existence paid brokerage
commissions as follows:
<TABLE>
<CAPTION>
Total Total Brokerage
Brokerage Amount of Commissions
Total Commissions Transaction Paid
Brokerage Paid to on which to Brokers
Commissions Affiliated Commissions Providing
Paid Persons Paid Research
---- ------- ---- --------
<S> <C> <C> <C> <C>
Fiscal Year Ended
January 31, 1996:
Balanced Fund(1) $ 56,860 $ 7,391(13%)(2) $ 29,697,202(13%)(3) 0
Select Equity Fund 121,424 0(0%)(2) 148,427,497(0%)(3) 0
Growth and Income
Fund 841,605 71,218(8%)(2) 425,040,430(9%)(3) 0
Capital Growth Fund 1,979,949 284,660(14%)(2) 1,034,755,196(11%)(3) 0
Small Cap Fund 690,234 72,980(11%)(2) 170,616,044(6%)(3) 0
International Fund 1,260,992 13,629(1%)(2) 359,700,166(1%)(3) 0
Asia Growth Fund(4) 1,676,525 3,778(0%)(2) 247,662,049(2%)(3) 0
</TABLE>
B-83
<PAGE>
<TABLE>
<CAPTION>
Total Total Brokerage
Brokerage Amount of Commissions
Total Commissions Transaction Paid
Brokerage Paid to on which to Brokers
Commissions Affiliated Commissions Providing
Paid Persons Paid Research
---- ------- ---- --------
<S> <C> <C> <C> <C>
Fiscal Year Ended
January 31, 1995:
Balanced Fund(1) $ 9,652 $ 1,522(16%)2 $ 7,216,224(10%)3 0
Select Equity Fund 119,192 0(0%)2 99,616,396(0%)3 0
Growth and Income
Fund 637,080 77,404(12%)2 468,165,610(7%)3 0
Capital Growth Fund 1,427,413 273,076(19%)2 786,135,073(13%)3 0
Small Cap Fund 555,667 23,137(4%)2 392,235,715(2%)3 0
International Fund 1,799,525 0(0%)2 546,364,113(0%)3 0
Asia Growth Fund(4) 1,002,148 67,754(7%)2 171,880,775(2%)3 0
</TABLE>
B-84
<PAGE>
<TABLE>
<CAPTION>
Total Total Brokerage
Brokerage Amount of Commissions
Total Commissions Transaction Paid
Brokerage Paid to on which to Brokers
Commissions Affiliated Commissions Providing
Paid Persons Paid Research
---- ------- ---- --------
<S> <C> <C> <C> <C>
Fiscal Year Ended
January 31, 1994:
Select Equity Fund $ 187,041 $ 3,857(2%)(2) $306,043,566(1%)(3) -0-
Growth and
Income Fund(5) 2,974,075 274,704(9%)(2) 74,091,306(27%)(3) -0-
Capital Growth Fund 1,448,921 225,448(16%)(2) 652,557,899(12%)(3) -0-
Small Cap
Fund 448,145 27,826(6%)(2) 520,543,798(1%)(3) -0-
International
Fund 765,594 -0-(0%)(2) 202,360,486(0%)(3) -0-
</TABLE>
- ----------------------------
1 Balanced Fund commenced operations on October 12, 1994.
2 Percentage of total commissions paid.
3 Percentage of total amount of transactions involving the payment of
commissions effected through affiliated persons.
4 Asia Growth Fund commenced operations on July 8, 1994.
5 Growth and Income Fund commenced operations on February 5, 1993.
6 Small Cap Fund commenced operations on October 22, 1992.
7 International Fund commenced operations on December 1, 1992.
B-85
<PAGE>
During the fiscal year ended January 31, 1996, the Company acquired and sold
securities of its regular broker-dealers: Donaldson, Lufkin and Jenrette, Smith
Barney, Daiwa Securities, Swiss Bank Corp., Merrill Lynch, Nomura Securities
International, J.P. Morgan, Salomon Brothers, Morgan Stanley, Lehman Brothers
and Chemical Securities. As of January 31, 1996, the Company held the following
amounts of securities of its regular broker/dealers, as defined in Rule 10b-1
under the Act, or their parents ($ in thousands): Capital Growth Fund owned
securities issued by Salomon Brothers and Lehman Brothers in the amounts of
$10,241 and $25,291, respectively. The Select Equity Fund owned securities
issued by Chemical Securities, Salomon Brothers, Lehman Brothers and Morgan
Stanley in the amounts of $2,131, $3,332, $3,468 and $933, respectively. The
Growth and Income Fund owned securities issued by Salomon Brothers and Lehman
Brothers, in the amounts of $13,426 and $18,994, respectively. The Balanced Fund
owned securities issued by Salomon Brothers and Lehman Brothers in the amounts
of $3,430, and $3,906, respectively.
NET ASSET VALUE
Under the Act, the Directors of the Company are responsible for
determining in good faith the fair value of securities of each Fund. In
accordance with procedures adopted by the Directors of the Company, the net
value per share of each class of each Fund is calculated by determining the
value of the net assets attributable to each class of that Fund and dividing by
the number of outstanding shares of that class. All securities are valued as of
the close of regular trading on the New York Stock Exchange (normally 4:00 p.m.
New York time) on each Business Day (as defined in the Prospectus).
In the event that the New York Stock Exchange or the national
securities exchange on which stock options are traded adopt different trading
hours on either a permanent or temporary basis, the Directors of the Company
will reconsider the time at which net asset value is computed. In addition, each
Fund may compute its net asset value as of any time permitted pursuant to any
exemption, order or statement of the SEC or its staff.
Portfolio securities of the Fund for which accurate market quotations
are available are valued as follows: (a) securities listed on any U.S. or
foreign stock exchange or on the Nasdaq National Market ("NASDAQ") will be
valued at the last sale price on the exchange or system in which they are
principally traded, on the valuation date. If there is no sale on the valuation
day, securities traded principally: (i) on a U.S. exchange or NASDAQ will be
valued at the mean between the closing bid and asked prices; and (ii) on a
foreign exchange will be valued at the last sale price (also referred to as the
close price). The last sale
B-86
<PAGE>
price for securities traded principally on a foreign exchange will be determined
as of the close of the London Stock Exchange or, for securities traded on
exchanges located in the Asia Pacific region, noon London time; (b)
over-the-counter securities not quoted on NASDAQ will be valued at the last sale
price on the valuation day or, if no sale occurs, at the mean between the last
bid and asked price; (c) exchange traded options and futures contracts will be
valued at the last sale price in the market where such contracts are principally
traded; (d) forward foreign currency exchange contracts will be valued using a
pricing service (such as Reuters), then calculating the mean between the last
bid and asked quotations supplied by certain independent dealers in such
contracts; (e) debt securities, other than money market instruments, will be
valued on the basis of dealer-supplied quotations or by using a pricing service
approved by the Board of Directors if such prices are believed by the Adviser to
accurately represent market value; money market instruments, which are defined
as those debt securities with a remaining maturity of 60 days or less, will be
valued at amortized cost; (f) overnight repurchase agreements will be valued at
cost and term repurchase agreements will be valued at the average of bid
quotations obtained daily from at least two recognized dealers; (g) OTC and
exchange traded options will be valued by an independent unaffiliated broker
identified by the portfolio manager/trader and contacted by the custodian bank;
and (h) all other securities, including those for which a pricing service
supplies no quotation or a quotation that is believed by the portfolio
manager/trader to be inaccurate, will be valued at fair value in accordance with
procedures established by the Board of Directors of the Company.
Generally, trading in securities on European and Far Eastern securities
exchanges and on over-the-counter markets is substantially completed at various
times prior to the close of business on each Business Day in New York (i.e., a
day on which the New York Stock Exchange is open for trading). In addition,
European or Far Eastern securities trading generally or in a particular country
or countries may not take place on all business days in New York. Furthermore,
trading takes place in various foreign markets on days which are not Business
Days in New York and days on which the Funds' net asset values are not
calculated. Such calculation does not take place contemporaneously with the
determination of the prices of the majority of the portfolio securities used in
such calculation. Events affecting the values of portfolio securities that occur
between the time their prices are determined and the close of regular trading on
the New York Stock Exchange will not be reflected in a Fund's calculation of net
asset values unless the Directors deem that the particular event would
materially affect net asset value, in which case an adjustment will be made.
The proceeds received by each Fund and each other series of the Company
(as defined herein under "Shares of the Company")
B-87
<PAGE>
established by the Directors of the Company 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 Company. Expenses of the Company with respect to
the Funds and the other series of the Company are generally allocated in
proportion to the net asset values of the respective Funds or series except
where allocations of direct expenses can otherwise be fairly made.
OTHER INFORMATION REGARDING PURCHASES, REDEMPTIONS,
EXCHANGES AND DIVIDENDS
The following information supplements the information in the Prospectus
under the captions "How to Invest," "How to Sell Shares of the Funds" and
"Dividends." Please see the Prospectus for more complete information.
Other Purchase Information
If shares of a Fund are held in a "street name" account with an
Authorized Dealer, all recordkeeping, transaction processing and payments of
distributions relating to the beneficial owner's account will be performed by
the Authorized Dealer, and not by the Fund and its Transfer Agent. Since the
Funds will have no record of the beneficial owner's transactions, a beneficial
owner should contact the Authorized Dealer to purchase, redeem or exchange
shares, to make changes in or give instructions concerning the account or to
obtain information about the account. The transfer of shares in a "street name"
account to an account with another dealer or to an account directly with the
Fund involves special procedures and will require the beneficial owner to obtain
historical purchase information about the shares in the account from the
Authorized Dealer.
Right of Accumulation (Class A)
A Class A shareholder qualifies for cumulative quantity discounts if
the current purchase price of the new investment plus the shareholder's current
holdings of existing Class A shares (acquired by purchase or exchange) of the
Funds and Class A shares of any other Goldman Sachs Portfolio (as defined in the
Prospectus) total the requisite amount for receiving a discount. For example, if
a shareholder owns shares with a current market value of $35,000 and purchases
additional Class A shares of any Fund with a purchase price of $25,000, the
sales charge for the $25,000 purchase would be 4.75% (the rate applicable to a
single purchase of more than $60,000). Class A shares purchased without the
imposition of a sales charge may not be aggregated with Class A shares purchased
B-88
<PAGE>
subject to a sales charge. Class A shares of the Funds and any other Goldman
Sachs Portfolio purchased (i) by an individual, his spouse and his minor
children, and (ii) by a trustee, guardian or other fiduciary of a single trust
estate or a single fiduciary account, will be combined for the purpose of
determining whether a purchase will qualify for such right of accumulation and,
if qualifying, the applicable sales charge level. For purposes of applying the
right of accumulation, shares of the Funds and any other Goldman Sachs Portfolio
purchased by an existing client of the Private Client Services Division of
Goldman Sachs will be combined with Class A shares held by any other account
over which such client or the client's spouse exercises investment or voting
power. In addition, Class A shares of the Funds and Class A shares of any other
Goldman Sachs Portfolio purchased by partners, directors, officers or employees
of the same business organization or by groups of individuals represented by and
investing on the recommendation of the same accounting firm or other similar
organization (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 or firm's agreement to cooperate in the offering of the Funds'
shares to eligible persons; and (ii) notification to the Funds at the time of
purchase that the investor is eligible for this right of accumulation.
Statement of Intention (Class A)
If a shareholder anticipates purchasing at least $50,000 of Class A
shares of a Fund alone or in combination with Class A shares of any other
Goldman Sachs Portfolio 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.
B-89
<PAGE>
Cross-Reinvestment of Dividends and Distributions
A Fund shareholder should obtain and read the prospectus relating to
any other Fund, Goldman Sachs Portfolio or ILA Portfolio (as defined in the
Prospectus) and its shares or units and consider its investment objective,
policies and applicable fees before electing cross-reinvestment into that Fund
or Portfolio. The election to cross-reinvest dividends and capital gain
distributions will not affect the tax treatment of such dividends and
distributions, which will be treated as received by the shareholder and then
used to purchase shares of the acquired fund. Such reinvestment of dividends and
distributions in shares of other Goldman Sachs Portfolios or in units of ILA
Portfolios is available only in states where such reinvestment may legally be
made.
Automatic Exchange Program
A Fund shareholder may elect cross-reinvestment into an identical
account or an account registered in a different name or with a different
address, social security or other taxpayer identification number, provided that
the account in the acquired fund has been established, appropriate signatures
have been obtained and the minimum initial investment requirement has been
satisfied. A Fund shareholder should obtain and read the prospectus relating to
any other Goldman Sachs Portfolio and its shares and consider its investment
objective, policies and applicable fees and expenses before electing an
automatic exchange into that Goldman Sachs Portfolio.
Systematic Withdrawal Plan
A systematic withdrawal plan (the "Systematic Withdrawal Plan") is
available to shareholders of a Fund whose shares are worth at least $5,000. The
Systematic Withdrawal Plan provides for monthly payments to the participating
shareholder of any amount not less than $50.
Dividends and capital gain distributions on shares held under the
Systematic Withdrawal Plan are reinvested in additional full and fractional
shares of the applicable Fund at net asset value. The Transfer Agent acts as
agent for the shareholder in redeeming sufficient full and fractional shares to
provide the amount of the systematic withdrawal payment. The Systematic
Withdrawal Plan may be terminated at any time. Goldman Sachs reserves the right
to initiate a fee of up to $5 per withdrawal, upon thirty (30) days written
notice to the shareholder. Withdrawal payments should not be considered to be
dividends, yield or income. If periodic withdrawals continuously exceed new
purchases and reinvested dividends and capital gains distributions, the
shareholder's original investment will be correspondingly reduced and ultimately
exhausted. The maintenance of a withdrawal plan concurrently
B-90
<PAGE>
with purchases of additional Class A or Class B shares would be disadvantageous
because of the sales charge imposed on purchases of Class A shares or the
imposition of a CDSC on redemptions of Class A and Class B shares. The CDSC
applicable to Class B shares redeemed under a systematic withdrawal plan may be
waived. See "How to Invest -- Waiver or Reduction of Continent Deferred Sales
Charge" in the Prospectus. In addition, each withdrawal constitutes a redemption
of shares, and any gain or loss realized must be reported for federal and state
income tax purposes. A shareholder should consult his or her own tax adviser
with regard to the tax consequences of participating in the Systematic
Withdrawal Plan. For further information or to request a Systematic Withdrawal
Plan, please write or call the Transfer Agent.
Dividends
Net loss, if any, from certain foreign currency transactions or
instruments that is otherwise taken into account in calculating net investment
income or net realized capital gains for accounting purposes may not be taken
into account in determining the amount of dividends to be declared and paid,
with the result that a portion of a Fund's dividends may be treated as a return
of capital, nontaxable to the extent of a shareholder's tax basis in his shares.
In determining amounts of capital gains to be distributed, capital losses,
including any available capital loss carryovers from prior years, will be offset
against capital gains realized during the current year.
PERFORMANCE INFORMATION
A Fund may from time to time quote or otherwise use total return, yield
and/or distribution rate information in advertisements, shareholder reports or
sales literature. Average annual total return and yield are computed pursuant to
formulas specified by the SEC.
Yield is computed by dividing net investment income earned: during a
recent thirty-day period by the product of the average daily number of shares
outstanding and entitled to receive dividends during the period and the maximum
public offering price per share on the last day of the relevant period. The
results are compounded on a bond equivalent (semi-annual) basis and then
annualized. Net investment income per share is equal to the dividends and
interest earned during the period, reduced by accrued expenses for the period.
The calculation of net investment income for these purposes may differ from the
net investment income determined for accounting purposes.
The distribution rate for a specified period is calculated by
annualizing distributions of net investment income for such period
B-91
<PAGE>
and dividing this amount by the net asset value per share or maximum public
offering price on the last day of the period.
Average annual total return for a specified period is derived by
calculating the actual dollar amount of the investment return on a $1,000
investment made at the maximum public offering price at the beginning of the
period, and then calculating the annual compounded rate of return which would
produce that amount, assuming a redemption at the end of the period. This
calculation assumes a complete redemption of the investment. It also assumes
that all dividends and distributions are reinvested at net asset value on the
reinvestment dates during the period.
Year-by-year total return and cumulative total return for a specified
period are each derived by calculating the percentage rate required to make a
$1,000 investment (made at the maximum public offering price with all
distributions reinvested) at the beginning of such period equal to the actual
total value of such investment at the end of such period. The following table
indicates the total return (capital changes plus reinvestment of all
distributions) on a hypothetical investment of $1,000 in a Fund for the periods
indicated.
Occasionally statistics may be used to specify Fund volatility or risk.
Measures of volatility or risk are generally used to compare a Fund's net asset
value or performance relative to a market index. One measure of volatility is
beta. Beta is the volatility of a fund relative to the total market. A beta of
more than 1.00 indicates volatility greater than the market, and a beta of less
than 1.00 indicates volatility less than the market. Another measure of
volatility or risk is standard deviation. Standard deviation is used 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 Company may publish an indication of a Fund's past
performance as measured by independent sources such as (but not limited to)
Lipper Analytical Services, Inc., Morningstar Mutual Funds, Weisenberger
Investment Companies Service, Donoghue's Money Fund Report, Micropal, Barron's,
Business Week, Changing Times, Financial World, Forbes, Fortune, Money, Personal
Investor, Sylvia Porter's Personal Finance and The Wall Street Journal. The
Company may also advertise information which has been provided to the NASD for
publication in regional and local newspapers. In addition, the Company may from
time to time advertise a Fund's performance relative to certain indices and
benchmark investments, including: (a) the Lipper Analytical Services, Inc.
Mutual Fund Performance Analysis, Fixed Income Analysis and Mutual Fund Indices
(which measure total return and average current yield for the mutual fund
industry and rank mutual fund performance); (b) the CDA Mutual Fund Report
published by CDA Investment Technologies, Inc.
B-92
<PAGE>
(which analyzes price, risk and various measures of return for the mutual fund
industry); (c) the Consumer Price Index published by the U.S. Bureau of Labor
Statistics (which measures changes in the price of goods and services); (d)
Stocks, Bonds, Bills and Inflation published by Ibbotson Associates (which
provides historical performance figures for stocks, government securities and
inflation); (e) the Salomon Brothers' World Bond Index (which measures the total
return in U.S. dollar terms of government bonds, Eurobonds and foreign bonds of
ten countries, with all such bonds having a minimum maturity of five years); (f)
the Lehman Brothers Aggregate Bond Index or its component indices; (g) the
Standard & Poor's Bond Indices (which measure yield and price of corporate,
municipal and U.S. Government bonds); (h) the J.P. Morgan Global Government Bond
Index; (i) other taxable investments including certificates of deposit (CDs),
money market deposit accounts (MMDAs), checking accounts, savings accounts,
money market mutual funds and repurchase agreements; (j) Donoghues' Money Fund
Report (which provides industry averages for 7-day annualized and compounded
yields of taxable, tax-free and U.S. Government money funds); (k) the Hambrecht
& Quist Growth Stock Index; (l) the NASDAQ OTC Composite Prime Return; (m) the
Russell Midcap Index; (n) the Russell 2000 Index - Total Return; (o) the
Value-Line Composite-Price Return; (p) the Wilshire 4500 Index; (q) the FT-
Actuaries Europe and Pacific Index, and (r) historical investment data supplied
by the research departments of Goldman Sachs, Lehman Brothers, First Boston
Corporation, Morgan Stanley including (EAFE), and the Morgan Stanley Capital
International Combined Asia ex Japan Free Index, Salomon Brothers, Merrill
Lynch, Donaldson Lufkin and Jenrette or other providers of such data and (s) the
FT- Actuaries Europe and Pacific Index. The composition of the investments in
such indices and the characteristics of such benchmark investments are not
identical to, and in some cases are very different from, those of the Fund's
portfolio. These indices and averages are generally unmanaged and the items
included in the calculations of such indices and averages may not be identical
to the formulas used by a Fund to calculate its performance figures.
B-93
<PAGE>
<TABLE>
<CAPTION>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
Investment Investment Average
Fund Date Period Annual
- ---- ---- ------ ------
<S> <C> <C> <C>
Capital ended
Growth 4/20/90* 1/31/96
Fund--
Class A Shares
- -Assumes 5.5% 13.86%
sales charge
- -Assumes no 14.98%
sales charge
one year
ended
2/1/95 1/31/96
- -Assumes 5.5%
sales charge 23.24%
- -Assumes no
sales charge 30.45%
2/1/91 five years
ended
1/31/96
- -Assumes 5.5%
sales charge 16.01%
- -Assumes no
sales charge 17.34%
</TABLE>
B-94
<PAGE>
<TABLE>
<CAPTION>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
Investment Investment Average
Fund Date Period Annual
- ---- ---- ------ ------
<S> <C> <C> <C>
Select ended
Equity 5/24/91* 1/31/96
Fund--
Class A Shares
- -Assumes 5.5% 11.47%
sales charge
- -Assumes no 12.82%
sales charge
one year
ended
2/1/95 1/31/96
- -Assumes 5.5%
sales charge 31.01%
- -Assumes no
sales charge 38.63%
Select Equity
Fund--
Institutional 6/15/95*
Shares ended
1/31/96
- -Assumes 5.5%
sales charge N/A
- -Assumes no
sales charge 20.14%
</TABLE>
B-95
<PAGE>
<TABLE>
<CAPTION>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
Investment Investment Average
Fund Date Period Annual
- ---- ---- ------ ------
<S> <C> <C> <C>
Small ended
Cap Fund-- 10/22/92* 1/31/96
Fund--
Class A Shares
- -Assumes 5.5% 7.85%
sales charge
- -Assumes no 9.73%
sales charge
one year
ended
2/1/95 1/31/96
- -Assumes 5.5%
sales charge 1.30%
- -Assumes no
sales charge 7.20%
</TABLE>
B-96
<PAGE>
<TABLE>
<CAPTION>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
Investment Investment Average
Fund Date Period Annual
- ---- ---- ------ ------
<S> <C> <C> <C>
International
Fund-- ended
Class A Shares 12/1/92* 1/31/96
- -Assumes 5.5% 8.48%
sales charge
- -Assumes no 10.43%
sales charge
one year
ended
2/1/95 1/31/96
- -Assumes 5.5%
sales charge 21.56%
- -Assumes no
sales charge 28.68%
</TABLE>
B-97
<PAGE>
<TABLE>
<CAPTION>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
Investment Investment Average
Fund Date Period Annual
- ---- ---- ------ ------
<S> <C> <C> <C>
Growth
and Income ended
Fund-- 12/1/92* 1/31/96
Class A Shares
- -Assumes 5.5% 13.80%
sales charge
- -Assumes no 15.97%
sales charge
one year
ended
2/1/95 1/31/96
- -Assumes 5.5%
sales charge 25.17%
- -Assumes no
sales charge 32.45%
</TABLE>
B-98
<PAGE>
<TABLE>
<CAPTION>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
Investment Investment Average
Fund Date Period Annual
- ---- ---- ------ ------
<S> <C> <C> <C>
Asia Growth ended
Fund-- 7/8/94* 1/31/96
Class A Shares
- -Assumes 5.5% 8.11%
sales charge
- -Assumes no 12.09%
sales charge
one year
ended
2/1/95 1/31/96
- -Assumes 5.5%
sales charge 19.58%
- -Assumes no
sales charge 26.49%
</TABLE>
B-99
<PAGE>
<TABLE>
<CAPTION>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
Investment Investment Average
Fund Date Period Annual
- ---- ---- ------ ------
<S> <C> <C> <C>
Balanced ended
Fund-- 10/12/94* 1/31/96
Class A Shares
- -Assumes 5.5% 16.52%
sales charge
- -Assumes no 21.67%
sales charge
one year
ended
2/1/95 1/31/96
- -Assumes 5.5%
sales charge 21.04%
- -Assumes no
sales charge 28.10%
</TABLE>
B-100
<PAGE>
<TABLE>
<CAPTION>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
ASSUMING NO VOLUNTARY WAIVER OF FEES AND NO EXPENSE REIMBURSEMENTS
Investment Investment Average
Fund Date Period Annual
- ---- ---- ------ ------
<S> <C> <C> <C>
Capital ended
Growth
Fund 4/20/90* 1/31/96
- -Assumes 5.5% 13.53%
sales charge
- -Assumes no 14.64%
sales charge
one year
ended
2/1/95 1/31/96
- -Assumes 5.5%
sales charge 22.94%
- -Assumes no
sales charge 30.14%
five years
ended
2/1/91 1/31/96
- -Assumes 5.5%
sales charge 15.72%
- -Assumes no
sales charge 17.04%
</TABLE>
B-101
<PAGE>
<TABLE>
<CAPTION>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
ASSUMING NO VOLUNTARY WAIVER OF FEES AND NO EXPENSE REIMBURSEMENTS
Investment Investment Average
Fund Date Period Annual
- ---- ---- ------ ------
<S> <C> <C> <C>
Select ended
Equity Fund 5/24/91* 1/31/96
- -Assumes 5.5% 11.19%
sales charge
- -Assumes no 12.53%
sales charge
one year
ended
2/1/95 1/31/96
- -Assumes 5.5%
sales charge 30.62%
- -Assumes no
sales charge 38.22%
Select Equity
Fund--
Institutional ended
Shares 6/15/95 1/31/96
- -Assumes 5.5%
sales charge N/A
- -Assumes no
sales charge 19.91%**
</TABLE>
B-102
<PAGE>
<TABLE>
<CAPTION>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
ASSUMING NO VOLUNTARY WAIVER OF FEES AND NO EXPENSE REIMBURSEMENTS
Investment Investment Average
Fund Date Period Annual
- ---- ---- ------ ------
<S> <C> <C> <C>
Small
Cap Fund 10/22/92* ended
1/31/96
- -Assumes 5.5%
sales charge 7.52%
- -Assumes no
sales charge 9.39%
one year
ended
2/1/95 1/31/96
- -Assumes 5.5%
sales charge 1.05%
- -Assumes no
sales charge 6.94%
</TABLE>
B-103
<PAGE>
<TABLE>
<CAPTION>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
ASSUMING NO VOLUNTARY WAIVER OF FEES AND NO EXPENSE REIMBURSEMENTS
Investment Investment Average
Fund Date Period Annual
- ---- ---- ------ ------
<S> <C> <C> <C>
International
Fund 2/1/92* ended
1/31/96
- -Assumes 5.5%
sales charge 8.21%
- -Assumes no
sales charge 10.16%
one year
ended
2/1/95 1/31/96
- -Assumes 5.5%
sales charge 21.33%
- -Assumes no
sales charge 28.43%
</TABLE>
B-104
<PAGE>
<TABLE>
<CAPTION>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
ASSUMING NO VOLUNTARY WAIVER OF FEES AND NO EXPENSE REIMBURSEMENTS
Investment Investment Average
Fund Date Period Annual
- ---- ---- ------ ------
<S> <C> <C> <C>
Growth
and Income ended
Fund 2/5/94* 1/31/96
- -Assumes 5.5%
sales charge 12.84%
- -Assumes no
sales charge 15.00%
2/1/95 one year
ended
1/31/96
- -Assumes 5.5%
sales charge 24.88%
- -Assumes no
sales charge 32.15%
</TABLE>
B-105
<PAGE>
<TABLE>
<CAPTION>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
ASSUMING NO VOLUNTARY WAIVER OF FEES AND NO EXPENSE REIMBURSEMENTS
Investment Investment Average
Fund Date Period Annual
- ---- ---- ------ ------
<S> <C> <C> <C>
Asia Growth ended
Fund 7/8/94* 1/31/96
- -Assumes 5.5%
sales charge 7.70%
- -Assumes no
sales charge 11.66%
one year
ended
2/1/95 1/31/96
- -Assumes 5.5%
sales charge 19.21%
- -Assumes no
sales charge 26.10%
</TABLE>
B-106
<PAGE>
<TABLE>
<CAPTION>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
ASSUMING NO VOLUNTARY WAIVER OF FEES AND NO EXPENSE REIMBURSEMENTS
Investment Investment Average
Fund Date Period Annual
- ---- ---- ------ ------
<S> <C> <C> <C>
Balanced ended
Fund 10/12/94* 1/31/96
- -Assumes 5.5%
sales charge 13.67%
- -Assumes no
sales charge 18.72%
one year
ended
2/1/95 1/31/96
- -Assumes 5.5%
sales charge 19.86%
- -Assumes no
sales charge 26.86%
</TABLE>
- ------------------
* Commencement of Operations
** An aggregate total return (not annualized) is shown instead of an average
annual total return since the Institutional Class has not completed a full
twelve months of operations.
B-107
<PAGE>
From time to time, advertisements or information may include a discussion of
certain attributes or benefits to be derived by an investment in the Fund. Such
advertisements or information may include symbols, headlines or other material
which highlight or summarize the information discussed in more detail in the
communication.
The Company may from time to time summarize the substance of
discussions contained in shareholder reports in advertisements and publish the
adviser's views as to markets, the rationale for a Fund's investments and
discussions of a Fund's current asset allocation.
In addition, from time to time, advertisements or information may
include a discussion of asset allocation models developed by GSAM and/or its
affiliates, certain attributes or benefits to be derived from asset allocation
strategies and the Goldman Sachs mutual funds that may be offered as investment
options for the strategic asset allocations. Such advertisements and information
may also include GSAM's current economic outlook and domestic and international
market views to suggest periodic tactical modifications to current asset
allocation strategies. Such advertisements and information may include other
materials which highlight or summarize the services provided in support of an
asset allocation program.
A Fund's performance data will be based on historical results and will
not be intended to indicate future performance. A Fund's total return and yield
will vary based on market conditions, portfolio expenses, portfolio investments
and other factors. The value of a Fund's shares will fluctuate and an investor's
shares may be worth more or less than their original cost upon redemption. The
Company may also, at its discretion, from time to time make a list of a Fund's
holdings available to investors upon request.
Total return will be calculated separately for each class of shares in
existence. Because each class of shares may be subject to different expenses,
total return with respect to each class of shares of a Fund will differ.
SHARES OF THE COMPANY
The Funds are series of the Company, which is a Maryland corporation
authorized to issue 2,000,000,000 shares of common stock. The Company assumed
its present name in May 1991. Prior thereto, the name of the Company was Goldman
Sachs Capital Growth Fund, Inc. Each Fund then in existence commenced "doing
business" under the name used herein in February 1994. As specified in the
Company's Charter, the names of the funds are Goldman Sachs Balanced Fund, GS
Select Equity Fund, GS Growth and Income Fund, GS Capital Growth Fund, GS Small
Cap Equity Fund, GS International
B-108
<PAGE>
Equity Fund, Goldman Sachs Asia Growth Fund and Goldman Sachs Mid- Cap Equity
Fund. The Directors of the Company have authority under the Company's Charter to
create and classify shares of capital stock in separate series without further
action by shareholders. As of the date of this Additional Statement, the
Directors of the Company have authorized shares of eight series, seven of which
are described in this Additional Statement. Additional series may be added in
the future.
The Act requires that where more than one class or series of shares
exists, each class or series must be preferred over all other classes or series
in respect of assets specifically allocated to such class or series.
The Directors 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 Directors have classified the shares of the Mid-Cap Equity Fund
into two classes: Institutional and Service Shares. Select Equity, Growth and
Income, International Equity and the Asia Growth Funds have been classified into
four classes: Institutional Shares, Service Shares, Class A Shares and Class B
Shares. Each other series of the Company has Class A Shares and Class B Shares
outstanding.
Each Institutional Share, Service Share, Class A Share and Class B
Share of a Fund represents a proportionate interest in the assets belonging to
the Fund. All expenses of a Fund are borne at the same rate by each class of
shares, except that fees under Service Plans are borne exclusively by Service
Shares, fees under Distribution and Authorized Dealer Service Plans are borne
exclusively by Class A Shares or Class B Shares and transfer agency fees are
borne at different rates by Class A Shares or Class B Shares than Institutional
and Service Shares. The Directors 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.
Currently, shares of a class may only be exchanged for shares of the same or an
equivalent class of another fund. See "Exchange Privilege" in the Prospectus.
Institutional Shares may be purchased at net asset value without a
sales charge for accounts in the name of an investor or institution that is not
compensated by a Fund for services provided to the institution's customers.
Service Shares may be purchased at net asset value without a sales
charge for accounts held in the name of an institution that, directly or
indirectly, provides certain account administration services to its customers,
including maintenance of account records and processing orders to purchase,
redeem and
B-109
<PAGE>
exchange Service Shares. Service Shares bear the cost of account administration
fees at the annual rate of up to 0.50% of the average daily net assets of the
Fund attributable to Service Shares.
Class A Shares are sold, with an initial sales charge of up to 5.5%,
through brokers and dealers who are members of the National Association of
Securities Dealers, Inc. and certain other financial service firms that have
sales agreements with Goldman Sachs. Class A Shares bear the cost of
distribution (Rule 12b-1) fees at the aggregate rate of up to 0.25% of the
average daily net assets of such Class A Shares. Except for Select Equity,
International and Asia Growth Funds, Goldman Sachs has voluntarily agreed to
waive its entire distribution fee. Goldman Sachs has no current intention of
modifying or discontinuing such limitation but may do so in the future at its
discretion. Class A Shares also bear the cost of an Authorized Dealer Service
Plan at an annual rate of up to 0.25% of the average daily net assets
attributable to Class A Shares.
Class B Shares of the Funds are sold subject to a contingent deferred
sales charge of up to 5.0% through brokers and dealers who are members of the
National Association of Securities Dealers Inc. and certain other financial
services firms that have sales arrangements with Goldman Sachs. Class B Shares
bear the cost of distribution (Rule 12b-1) fees at the aggregate rate of up to
0.75% of the average daily net assets attributable to Class B Shares. Class B
Shares also bear the cost of an Authorized Dealer Service Plan at an annual rate
of up to 0.25% of the average daily net assets attributable to Class B Shares.
It is possible that an institution or its affiliate may offer different
classes of shares (i.e., Institutional, Service, Class A Shares and Class B
Shares) to its customers and thus receive different compensation with respect to
different classes of shares of each Fund. Dividends paid by each Fund, if any
with respect to each class of shares will be calculated in the same manner, at
the same time on the same day and will be the same amount, except for
differences caused by the differences in expenses discussed above. Similarly,
the net asset value per share may differ depending upon the class of shares
purchased.
Certain aspects of the shares may be altered, after advance notice to
shareholders if it is deemed necessary in order to satisfy certain tax
regulatory requirements.
When issued, shares are fully paid and non-assessable. In the event of
liquidation, shareholders are entitled to share pro rata in the net assets of
the relevant Fund available for distribution to such shareholders. All shares
entitle their holders to one vote per share, are freely transferable and have no
preemptive, subscription or conversion rights.
B-110
<PAGE>
As of April 15, 1996, Marine Midland Bank as Trustee for Mark IV Inc. &
Subs Employees Retirement Income Fund, attention: Mutual Fund Processing, P.O.
Box 1329, Buffalo, New York 14240-1329 and Frontier Trust Co. Inc. Trustee FBO
Dade County Public Schools, attention: Agnes R. McMurray, Fringe Benefits
Management Co., 1720 S. Gadsden St., Tallahassee, Florida 32301-5547 were record
holders of 7.9% and 8% of Select Equity Fund's and Balanced Fund's outstanding
shares, respectively.
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 Company shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares of each class or
series affected by such matter. Rule 18f-2 further provides that a class or
series shall be deemed to be affected by a matter unless the interests of each
class or series in the matter are substantially identical or the matter does not
affect any interest of such class or series. However, Rule 18f-2 exempts the
selection of independent public accountants, the approval of principal
distribution contracts and the election of directors from the separate voting
requirements of Rule 18f-2.
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 Company. This summary does not
address special tax rules applicable to certain classes of investors, such as
tax-exempt entities, insurance companies and financial institutions. Each
prospective shareholder is urged to consult his own tax adviser with respect to
the specific federal, state, local and foreign tax consequences of investing in
each Fund. The summary is based on the laws in effect on the date of this
Additional Statement, which are subject to change.
General
Each Fund is a separate taxable entity, has elected to be treated and
intends to continue to qualify for each taxable year as a regulated investment
company under Subchapter M of the Code.
Qualification as a regulated investment company under the Code
requires, among other things, that (a) a Fund derive at least 90% of its annual
gross income 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,
B-111
<PAGE>
and forward contracts) derived with respect to its business of investing in such
stock, securities or currencies (the "90% gross income test"); (b) such Fund
derive less than 30% of its annual gross income from the sale or other
disposition of any of the following which was held for less than three months:
(i) stock or securities; (ii) options, futures or forward contracts (other than
options, futures or forward contracts on foreign currencies); and (iii) foreign
currencies and foreign currency options, futures and forward contracts that are
not directly related to the Fund's principal business of investing in stocks or
securities or options and futures with respect to stocks or securities (the
"short-short test"); and (c) such Fund diversify its holdings so that, at the
end of each quarter of its taxable year, (i) at least 50% of the market value of
such Fund's total (gross) assets is comprised of cash, cash items, U.S.
Government securities, securities of other regulated investment companies and
other securities limited in respect of any one issuer to an amount not greater
in value than 5% of the value of such Fund's total assets and to not more than
10% of the outstanding voting securities of such issuer, and (ii) not more than
25% of the value of its total (gross) assets is invested in the securities of
any one issuer (other than U.S. Government securities and securities of other
regulated investment companies) or two or more issuers controlled by the Fund
and engaged in the same, similar or related trades or businesses. Gains from the
sale or other disposition of foreign currencies (or options, futures or forward
contracts on foreign currencies) that are not directly related to a Fund's
principal business of investing in stock or securities or options and futures
with respect to stock or securities will be treated as gains from the sale of
investments held less than three months under the short-short test (even though
characterized as ordinary income for some purposes) if such currencies or
instruments were held for less than three months. For purposes of the 90% gross
income test, income that a Fund earns from equity interests in certain entities
that are not treated as corporations (e.g., partnerships or trusts) for U.S. tax
purposes will generally have the same character for such Fund as in the hands of
such an entity; consequently, a Fund may be required to limit its equity
investments in such entities that earn fee income, rental income, or other
nonqualifying income. In addition, future Treasury regulations could provide
that qualifying income under the 90% gross income test will not include gains
from foreign currency transactions that are not directly related to a Fund's
principal business of investing in stock or securities or options and futures
with respect to stock or securities. Using foreign currency positions or
entering into foreign currency options, futures and forward or swap contracts
for 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
B-112
<PAGE>
timing 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 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 at least annually to
its shareholders all or substantially all of its investment company taxable
income and net capital gain. 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 Asia Growth Fund
or International Fund and may therefore make it more difficult for such a Fund
to satisfy the distribution requirements described above, as well as the excise
tax distribution requirements described below. However, each Fund generally
expects to be able to obtain sufficient cash to satisfy such requirements from
new investors, the sale of securities or other sources. If for any taxable year
a Fund fails to distribute at least 90% of its investment company taxable income
or otherwise 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
B-113
<PAGE>
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 treated as distributed by the Fund and are
taxable to such shareholders as if received on December 31 of the year declared.
The Funds anticipate that they will generally make timely distributions of
income and capital gains in compliance with these requirements so that they will
generally not be required to pay the excise tax. For federal income tax
purposes, each Fund is permitted to carry forward a net capital loss in any year
to offset its own capital gains, if any, during the eight years following the
year of the loss. Asia Growth Fund had approximately $184,000 and $5,623,000 at
October 31, 1995 (the Fund's tax year end) of capital loss carryforward expiring
in 2002 and 2003, respectively, for federal tax purposes. The Small Cap Equity
Fund had approximately $2,438,000 of capital loss carryforward at January 31,
1996 (the Fund's tax year end) expiring in 2004. These amounts are available to
be carried forward to offset future capital gains to the extent permitted by
applicable laws or 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. The short-short test described above may limit a
Fund's ability to use options, forward contracts, and futures transactions as
well as its ability to
B-114
<PAGE>
engage in short sales. Moreover, application of certain requirements for
qualification as a regulated investment company and/or these tax rules to
certain investment practices, such as dollar rolls, or certain derivatives such
as interest rate swaps, floors, caps and collars and currency, mortgage or index
swaps may be unclear in some respects, and a Fund may therefore be required to
limit its participation in such transactions. Certain tax elections may be
available to a Fund to mitigate some of the unfavorable consequences described
in this paragraph.
Section 988 of the Code contains special tax rules applicable to
certain foreign currency transactions and instruments that may affect the
amount, timing and character of income, gain or loss recognized by a Fund. Under
these rules, foreign exchange gain or loss realized with respect to foreign
currencies and certain futures and options thereon, foreign currency-denominated
debt instruments, foreign currency forward contracts, and foreign
currency-denominated payables and receivables will generally be treated as
ordinary income or loss, although in some cases elections may be available that
would alter this treatment.
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 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. In order 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 Select Equity Fund) 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 Asia Growth Fund and International Fund, 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 will be required to (i)
include in ordinary gross income (in addition to taxable distributions 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.
B-115
<PAGE>
If the Asia Growth and International Funds make this election, their
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 the Asia Growth and International Funds, 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 Asia Growth Fund or
International Fund, 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 Asia Growth Fund and International Fund 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 Asia Growth Fund or International Fund
files the election described above, its shareholders will be notified of the
amount of (i) each shareholder's pro rata share of qualified foreign taxes paid
by a Fund and (ii) the portion of Fund dividends which represents income from
each foreign country. The other Funds will not be entitled to elect to pass
foreign taxes and associated credits or deductions through to their shareholders
because they will not satisfy the 50% requirement described above. If a Fund
cannot or does not make this election, it may deduct such taxes in computing its
investment company taxable income.
If a Fund acquires stock in certain non-U.S. corporations that receive
at least 75% of their annual gross income from passive sources (such as
interest, dividends, rentals, royalties or capital gains) 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
B-116
<PAGE>
such companies or gain from the sale of stock in such companies, even if all
income or gain actually received by the Fund is timely distributed to its
shareholders. The Fund would not be able to pass through to its shareholders any
credit or deduction for such a tax. In some cases, elections may be available
that would ameliorate these adverse tax consequences, but such elections would
require the Fund to include certain amounts as income or gain (subject to the
distribution requirements described above) without a concurrent receipt of cash.
Each Fund may limit and/or manage its holdings in passive foreign investment
companies to minimize its tax liability or maximize its return from these
investments.
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
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 will be
eligible, subject to certain holding period and debt-financing restrictions, for
the 70% dividends received deduction for corporations. 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 Asia
Growth Fund or International Fund 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
B-117
<PAGE>
Code, reduce such shareholder's tax basis in its shares of a Fund. Capital gain
dividends (i.e., dividends from net capital gain) if designated as such in a
written notice to shareholders mailed not later than 60 days after a Fund's
taxable year closes, will be taxed to shareholders as long-term capital gain
regardless of how long shares have been held by shareholders, but are not
eligible for the dividends received deduction for corporations. Distributions,
if any, that are in excess of a Fund's current and accumulated earnings and
profits will first reduce a shareholder's tax basis in his shares and, after
such basis is reduced to zero, will 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, the shareholder will generally recognize gain or loss equal to the
difference between the shareholder's adjusted tax basis in the shares and the
cash, or fair market value of any property, received. Assuming the shareholder
holds the shares as a capital asset at the time of such sale or other
disposition, such gain or loss should be capital in character, and long-term if
the shareholder has a tax holding period for the shares of more than one year,
otherwise (except as described in the next sentence) short-term. If, however, 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 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.
B-118
<PAGE>
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. Any amounts withheld may be credited against a shareholder's U.S.
federal income tax liability.
Non-U.S. Shareholders
Shareholders who, as to the United States, 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.
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
the 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. withholding tax on deemed
income resulting from any election by Asia Growth Fund or International Fund 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 gain realized by a non-U.S. shareholder upon a sale or
redemption of shares of a Fund will not be subject to U.S.
federal income or withholding tax unless the gain is effectively
connected with the shareholder's trade or business in the U.S.,
or in the case of a shareholder who is a nonresident alien
individual, the shareholder is present in the U.S. for 183 days
or more during the taxable year and certain other conditions are
met. Non-U.S. investors should consult their tax advisers about
the applicability of U.S. federal income or withholding taxes to
certain distributions received by them.
B-119
<PAGE>
Non-U.S. persons who fail to furnish a Fund with an IRS Form W-8 or an
acceptable substitute may be subject to backup withholding at the rate of 31% on
capital gain dividends and the proceeds of redemptions and exchanges. Each
shareholder who is not a U.S. person should consult his or her tax adviser
regarding the U.S. and non-U.S. tax consequences of ownership of shares of and
receipt of distributions from the Funds.
State and Local
Each Fund may be subject to state or local taxes in jurisdictions in
which such Fund may be deemed to be doing business. In addition, in those states
or localities which have income tax laws, the treatment of such Fund and its
shareholders under such laws may differ from their treatment under federal
income tax laws, and investment in such Fund may have different tax consequences
for shareholders than would direct investment in such Fund's portfolio
securities. Shareholders should consult their own tax advisers concerning these
matters.
FINANCIAL STATEMENTS
The audited financial statements and related Reports of Independent
Public Accountants, contained in the 1996 Annual Report of each of the Funds,
are incorporated herein by reference into this Additional Statement and attached
hereto.
OTHER INFORMATION
Class A Shares of each Fund are sold at a maximum sales charge of 5.5%.
Using the initial offering price per share, as of January 31, 1996, 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 $17.31 $1.01 $18.32
Select Equity Fund 19.66 1.14 20.80
Growth and Income Fund 19.98 1.16 21.14
Capital Growth Fund 14.91 0.87 15.78
Small Cap Fund 17.29 1.01 18.30
International Fund 17.20 1.00 18.20
Asia Growth Fund 16.49 0.96 17.45
</TABLE>
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,
B-120
<PAGE>
reserves the right to pay redemptions exceeding $250,000 or 1% of the net asset
value of the Fund at the time of redemption by a distribution in kind of
securities (instead of cash) from such Fund. The securities distributed in kind
would be readily marketable and would be valued for this purpose using the same
method employed in calculating the Fund's net asset value per share. See "Net
Asset Value." If a shareholder receives redemption proceeds in kind, the
shareholder should expect to incur transaction costs upon the disposition of the
securities received in the redemption.
The right of a shareholder to redeem shares and the date of payment by
each Fund may be suspended for more than seven days for any period during which
the New York Stock Exchange is closed, other than the customary weekends or
holidays, or when trading on such Exchange is restricted as determined by the
SEC; or during any emergency, as determined by the SEC, as a result of which it
is not reasonably practicable for such Fund to dispose of securities owned by it
or fairly to determine the value of its net assets; or for such other period as
the SEC may by order permit for the protection of shareholders of such Fund.
The Prospectus and this Additional Statement do not contain all the
information included in the Registration Statement filed with the SEC under the
1933 Act with respect to the securities offered by the Prospectus. Certain
portions of the Registration Statement have been omitted from the Prospectus and
this Additional Statement pursuant to the rules and regulations of the SEC. The
Registration Statement including the exhibits filed therewith may be examined at
the office of the SEC in Washington, D.C.
Statements contained in the Prospectus or in this Additional Statement
as to the contents of any contract or other document referred to are not
necessarily complete, and, in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement of which the Prospectus and this Additional Statement form a part,
each such statement being qualified in all respects by such reference.
B-121
<PAGE>
Appendix A
DESCRIPTION OF BOND RATINGS*
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities .
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
- --------------------------------------------------------------------------------
* The rating system described herein are believed to be the most recent ratings
systems available from Moody's Investors Service, Inc. and Standard and Poor's
Ratings Group at the date of this Additional Statement for the securities
listed. Ratings are generally given to securities at the time of issuance. While
the rating agencies may from time to time revise such ratings, they undertake no
obligation to do so, and the ratings indicated do not necessarily represent
ratings which will be given to these securities on the date of the Fund's fiscal
year end.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often
1-A
<PAGE>
the protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca: Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Unrated: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies
that are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or
issuer.
4. The issue was privately placed, in which case the ratin g is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances
arise, the effects of which preclude satisfactory analysis; if there is no
longer available reasonable up-to-date data to permit a judgment to be formed;
if a bond is called for redemption; or for other reasons.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believe possess the strongest investment attributes are designated by the
symbols Aa1, A1, Baa1, Ba1 and B1.
2-A
<PAGE>
STANDARD & POOR'S RATINGS GROUP
AAA: Bonds rated AAA have the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA: Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the higher rated issues only in small degree.
A: Bonds rated A have a very strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than in higher rated categories.
BB, B, CCC, CC, C: Bonds rated BB, B, CCC, CC and C are regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. While such
bonds will likely have some quality and protective characteristics, these are
outweighed by large uncertainties of major risk exposures to adverse conditions
. BB is the highest rating within the speculative grade category.
D: Bonds rated D are in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period.
Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
Unrated: Indicates that no public 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 type of obligation as a matter of policy.
3-A
<PAGE>
Appendix B
The Company may from time to time use comparisons, graphs or charts in
advertisements to depict the following types of information:
o 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;
o the dollar and non-dollar based returns of various market indices
(i.e., Morgan Stanley Capital International EAFE Index,
FT-Actuaries Europe & Pacific Index and the Standard & Poor's
Index of 500 Common Stocks) over varying periods of time;
o total stock market capitalizations of specific countries and
regions on a global basis;
o performance of securities markets of specific countries and
regions; and
o value of a dollar amount invested in a particular market or type
of security over different periods of time.
In addition, the Company 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.
1-B
<PAGE>
Appendix C
BUSINESS PRINCIPLES OF GOLDMAN, SACHS & CO.
Goldman Sachs is noted for its Business Principles, which guide all of
the firm's activities and serve as the basis for its distinguished reputation
among investors worldwide.
Our client's interests always come first. Our experience shows that if
we serve our clients well, our own success will follow.
Our assets are our people, capital and reputation. If any of these
assets diminish, reputation is the most difficult to restore. We are dedicated
to complying fully with the letter and spirit of the laws, rules and ethical
principles that govern us. Our continued success depends upon unswerving
adherence to this standard.
We take great pride in the professional quality of our work. We have an
uncompromising determination to achieve excellence in everything we undertake.
Though we may be involved in a wide variety and heavy volume of activity, we
would, if it came to a choice, rather be best than biggest.
We stress creativity and imagination in everything we do. While
recognizing that the old way may still be the best way, we constantly strive to
find a better solution to a client's problems. We pride ourselves on having
pioneered many of the practices and techniques that have become standard in the
industry.
We stress teamwork in everything we do . While individual creativity is
always encouraged, we have found that team effort often produces the best
results. We have no room for those who put their personal interests ahead of the
interests of the firm and its clients.
Integrity and honesty are the heart of our business. We expect our
people to maintain high ethical standards in everything they do, both in their
work for the firm and in their personal lives.
1-C
<PAGE>
GOLDMAN, SACHS & CO.'S INVESTMENT BANKING AND SECURITIES
ACTIVITIES
Goldman, Sachs & Co. is a leading global investment banking and
securities firm with a number of distinguishing characteristics.
. Privately owned and ranked among Wall Street's best capitalized
firms, with assets exceeding $70 billion and partners capital and subordinated
liabilities of over $4.9 billion as of November 24, 1995.
. With thirty-three offices around the world, Goldman Sachs employs
over 8,000 professionals focused on opportunities in major markets.
. An equity research budget of $126 million for 1996.
. The number one lead manager of U.S. common stock offerings for the
past six years (1989-1994) with 18% of the total dollar volume.*
* Source: Securities Data Corporation. Ranking excludes REITs,
Trusts, Rights and closed-end Fund offerings
2-C
<PAGE>
GOLDMAN, SACHS & CO.'S HISTORY OF EXCELLENCE
1865 End of Civil War
1869 Marcus Goldman opens Goldman Sachs
1890 Dow Jones Industrial Average first published
1896 Goldman Sachs joins New York Stock Exchange
1906 Goldman Sachs takes Sears Roebuck public (oldest
ongoing client)
Dow Jones Industrial Average tops 100
1925 Goldman Sachs finances Warner Brothers, producer of
the first talking film
1956 Goldman Sachs co-manages Ford's public offering, the
largest to date
1970 London office opens
1972 Dow Jones Industrial Average breaks 1000
1986 Goldman Sachs takes Microsoft public
1990 Provides advisory services for the largest privatization
in the region of the sale of Telefonos de Mexico
1992 Dow Jones Industrial Average breaks 3000
1993 Goldman Sachs is lead manager in taking Allstate
public, largest equity offering to date ($2.4 billion)
1995 Dow Jones Industrial Average breaks 4000
3-C
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders
- --------------------------------------------------------------------------------
Dear Shareholders:
We are pleased to have the opportunity to review the performance and
discuss the holdings of the Goldman Sachs Equity Portfolios for the 12-month
period ended January 31, 1996. It was an exceptional year for U.S. equities and
a good year in European markets. In this very favorable environment, most of
the Goldman Sachs Equity Portfolios achieved strong total returns.
The U.S. Stock Market Climbed to New Heights...
The U.S. stock market soared during the period under review, rising 38.67%
(as measured by the total return of the Standard & Poor's 500 stock index) for
the 12 months ended January 31, 1996. The Dow Jones Industrial Average hit the
4000 mark in February and the 5000 mark in November. During the year, large-
capitalization stocks (as measured by the S&P 500) outperformed the Russell 2000
index of small-capitalization stocks by nearly 9%. Technology stocks fueled the
market during the first half of the year, ceding leadership to financial and
consumer growth stocks by year-end.
The stock market maintained its upward momentum every month excluding
October due to a favorable combination of low inflation, falling interest rates
and moderate economic growth. The other major market driver was that many large
U.S. companies posted corporate earnings growth that exceeded expectations.
This was partly due to a weakened dollar, which made American exports more
competitive. The possibility of a lower capital gains tax, which would be a
long-term boost to stocks, also helped to fuel the rally.
...Amid a Slowdown in Economic Growth
Economic growth slowed noticeably during the period, with annualized real
Gross Domestic Product (GDP) rising 1.7% and 0.7% in the first and second
quarters, respectively, well below the robust levels of the prior year. Though
revised third-quarter GDP rebounded to 3.2%, this increase was partly attributed
to increased federal government spending in anticipation of the budget debate.
Real GDP for the fourth quarter was 0.9% (annualized), an indication of the
economy's sluggish growth.
The economic slowdown was the result of a number of factors, including a
decline in consumer confidence and spending, which hurt retail sales and
culminated in an extremely weak Christmas season and a buildup in inventories
among retailers, wholesalers and manufacturers. In addition, a number of
temporary factors, including a sharp contraction in nondefense government
spending and a strike at Boeing aircraft, had a major impact on GDP in the
fourth quarter. Finally, harsh winter storms disrupted business activity in
December 1995 and January 1996 and also contributed to the slowdown.
The Fed Tightened at the Beginning of the Period, Then Reversed Course
The U.S. Federal Reserve Board raised the Federal funds rate (the rates
banks charge one another for overnight borrowing) by 50 basis points to 6.00% in
February 1995. This increase was the last in the Fed's tightening cycle, which
included seven rate hikes from February 1994 through February 1995, a total
increase of
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Table of Contents
<S> <C> <C> <C>
Introduction/Market Overview 1 Goldman Sachs International Equity Fund 27
Goldman Sachs Balanced Fund 4 Goldman Sachs Asia Growth Fund 32
Goldman Sachs Select Equity Fund 12 Financial Statements 50
Goldman Sachs Growth and Income Fund 15 Notes to Financial Statements 58
Goldman Sachs Capital Growth Fund 19 Financial Highlights 67
Goldman Sachs Small Cap Equity Fund 23
- -----------------------------------------------------------------------------------------------
</TABLE>
1
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders (continued)
- --------------------------------------------------------------------------------
300 basis points. With inflation at bay and the economy moderating, the Fed
reversed course and cut the Federal funds rate 25 basis points in July. Two
additional 25 basis point cuts followed in December 1995 and January 1996,
bringing the Federal funds rate to 5.25% as of January 31, 1996.
Outlook for 1996:
Potential for Accelerating Growth in the Second Half
Economic growth is estimated to be approximately 1.0% for the first quarter
of 1996. Some economists believe a return to stronger growth is possible by
late spring. An anticipated pickup in economic growth in Japan and Mexico would
also bode well for U.S. exports and a further narrowing of the trade deficit.
If these general trends continue, they are likely to translate into slower
corporate earnings growth during the first half of the year, with improvement
expected in the second half.
The Dollar Strengthened After Falling to Historic Lows
The U.S. dollar weakened significantly against the Deutsche mark and
Japanese yen, hitting new postwar lows in April 1995, then recovering during the
summer and early fall. The dollar's rebound was primarily due to the resolution
of the U.S.-Japan trade dispute, Japan's stimulative monetary policy, and the
intervention of U.S. and foreign central banks in its support. Currency
volatility subsided as the dollar continued to strengthen against both the yen
and the Deutsche mark through the second half of the period. By the end of
January, the dollar had risen by approximately 32% against the yen (a two-year
high) and by approximately 10% against the Deutsche mark from its April low.
The International Market Environment:
Europe Generally Strong, While Japan and Asia Were Weaker
Despite generally positive performance, international stock markets
typically lagged the U.S. during the past 12 months, with the Japanese market
particularly weak in the first half of the period.
. Europe. Europe's economic recovery slowed during the past 12 months, in
part because monetary policy had been prematurely tightened in anticipation of
higher growth and short-term interest rates remained high during the first half
of the year. Still, most European stock markets did well during the period under
review, returning over 24% (as measured by the Financial Times-Actuaries Europe
Index designated in local currency). Stock markets in Switzerland, Sweden,
Denmark and the U.K. turned in strong performances, while markets in Italy and
France lagged, plagued by political and budgetary problems. On a positive note,
the Italian and French stock markets ended the period showing improvement.
. Japan. For the 12 months ended January 31, 1996, the Japanese TOPIX Index
achieved an 11% gain (in local currency). The Japanese stock market faltered
during the first half of the period under review, reflecting Japan's stagnating
economy, deflationary environment, weakened banking system and the aftermath of
the Kobe earthquake. In addition, the yen traded at historically high levels
versus the dollar, which thwarted exports and impacted GDP growth. From July
through the end of the period, however, Japanese stocks rallied, more than
recouping their losses from earlier in the year. The rebound was largely
attributed to a reversal in the factors that caused the previous decline: the
yen fell, the government took action to resolve the domestic banking crisis and
a fiscal stimulus policy raised expectations for an eventual pickup in growth
and a stronger stock market in 1996.
. Asia. During the first 10 months of the period, the performance of the
Asian markets was generally disappointing due to a variety of factors, including
profit shortfalls, economic overheating, balance of payments problems and
inflationary pressures. The Hong Kong market, a marked exception, rose over 20%
during the period. In addition, surging U.S. stocks contributed to a lack of
investor interest and low volumes throughout the region. Asian markets generally
declined during the third
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
quarter due to the rising U.S. dollar, which drained liquidity from the area.
However, from late November through the end of the period, the Asian markets
rebounded and cash inflows into the region rose considerably.
The U.S. stock market has continued to surge to record levels during the
first two months of 1996, fueled by strong cash inflows from individuals,
portfolio managers and foreign investors. However, history rarely repeats
itself, and while no one can predict the market with certainty, it is unlikely
that this year will match 1995's spectacular run. Realistic expectations and a
long-term investment horizon are essential for equity investors. We appreciate
your confidence in the Goldman Sachs Equity Portfolios and we look forward to
continuing to serve your investment needs.
Sincerely,
/s/ David B. Ford /s/ John P. McNulty
David B. Ford John P. McNulty
Co-Head, Co-Head,
Goldman Sachs Goldman Sachs
Asset Management Asset Management
March 1, 1996
- --------------------------------------------------------------------------------
3
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Balanced Fund
- --------------------------------------------------------------------------------
Objective and Investment Approach
The Goldman Sachs Balanced Fund seeks to provide investors with a
combination of long-term growth of capital and current income by investing in a
diversified portfolio that includes both equity and fixed income securities.
Under normal market conditions, the fund is expected to maintain an asset mix of
approximately 50% to 70% in equity securities, with the remainder (at minimum
25%) in fixed income securities. The fund's portfolio management team will
review the fund's asset mix on a regular basis and adjust it to reflect changes
in the economic environment.
Stocks are selected using a value style, identifying those judged to be
inexpensive relative to their expected long-term earnings and ability to pay
dividends. We also consider the degree to which a company's management is
committed to increasing value for shareholders.
In the fixed income portion of the portfolio, we actively manage the
portfolio within a risk-controlled framework. We de-emphasize interest rate
anticipation by monitoring the portfolio's duration to keep it within a narrow
range of a target, and instead focus on seeking to add value through sector
selection, security selection and yield curve strategies.
Performance Review:
Successful Equity and Fixed Income Selections
For the 12-month period ended January 31, 1996, the Goldman Sachs Balanced
Fund achieved a total return of 28.10% based on net asset value, outperforming
its peers in the Lipper balanced fund category, which returned an average of
25.96% during the same period. The fund ranked in the top quartile (59th among
237 funds) in the category based on total return for the 12-month period ended
January 31, 1996, according to Lipper Analytical Services, Inc. (Please note
that Lipper rankings do not take sales charges into account and that past
performance is not a guarantee of future results.)
. Equities: The fund's positive performance during the period can be
attributed to successful investments in a variety of sectors, including
defense/aerospace, tobacco and insurance. Top-performing holdings included
McDonnell Douglas Corp., Northrop Grumman Corp. and Lockheed-Martin Corp., which
we believe all benefited from the market's positive reaction to their sizable
cash flows; Philip Morris Companies, Inc., which achieved strong earnings growth
and increased market share; and Travelers Group, Inc., which rose partly due to
the announcement of its acquisition of Aetna's property and casualty business.
The fund's largest equity position, Goodyear Tire & Rubber Co., also achieved
good operating results, despite rising raw material costs and a generally
lackluster auto sector.
As the economy slowed, the portfolio's cyclically oriented holdings were
among its weaker performers during the period. These included its investments in
paper and forest products companies such as Stone Container Corp. and Georgia-
Pacific Corp., which came under pressure in the latter half of the year due to
rising inventories and declining demand. Ford Motor Co. also announced
disappointing results, as the automobile sector felt the impact of slower
consumer spending.
. Fixed Income: The fund's fixed income holdings generally performed well
during the period, with asset-backed securities and government agency debt
turning in the strongest relative performance due to our successful security
selection. In contrast, the mortgage-backed security sector came under pressure
due to rising prepayment risk in the declining interest rate environment and did
not meet our return expectations.
Portfolio Composition: Increased Emphasis on Large-
Cap Stocks and Fixed Income Diversification
In the spring of 1995, we shifted to a more favorable view of equities, as
we believed that prospects for future economic growth outweighed concerns
regarding high stock market valuation levels. As of January 31, 1996, the fund's
asset mix based on net assets was 53% in equities, 40% in fixed income
investments and the remainder in cash equivalents.
. Equities: During the course of the year, the fund added a number of large-
capitalization stocks that we
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
believed offered both more stable earnings growth and favorable valuations.
These included Allstate Corp. (insurance), Columbia/HCA Healthcare Corp. (health
care facilities) and NationsBank Corp. (commercial bank), as well as
substantially increased positions in Anheuser-Busch Companies, Inc. (the largest
U.S. brewer), Sears, Roebuck & Co. (retailer) and Texaco, Inc. (oil and gas).
These holdings performed well as investors shifted their attention to larger
companies that they perceived were less economically sensitive.
As of January 31, the fund's weighted average market capitalization was
approximately $12.6 billion compared with $31.7 billion for the S&P 500 stock
index.
<TABLE>
<CAPTION>
Top 10 Equity Holdings as of January 31, 1996
Percentage
of Total
Company Line of Business Net Assets
<S> <C> <C>
Goodyear Tire & Rubber Co. Tire and Rubber Products 1.8%
Ford Motor Co. Automotive Products 1.7%
McDonnell Douglas Corp. Aerospace/Defense 1.6%
Georgia-Pacific Corp. Paper and Forest Products 1.6%
NationsBank Corp. Commercial Bank 1.5%
Philip Morris Companies, Inc. Tobacco and Food Products 1.4%
Long Island Lighting Co. Electric Utilities 1.4%
J.C. Penney Company, Inc. Department Stores 1.4%
Texaco, Inc. International Integrated Oil 1.4%
Stone Container Corp. Pulp and Paper Products 1.3%
</TABLE>
. Fixed Income: As fund assets increased during the period, we diversified
the portfolio's fixed income investments. As of January 31, the fund's largest
fixed income position was in corporate bonds (13.2%), which was overweighted
compared with the Lehman Brothers Aggregate Bond Index. The fund favored the
corporate sector because we believed it offered incremental yield and the
opportunity for us to exploit potential pricing inefficiencies. The asset-backed
securities sector (4.9%) was also significantly overweighted compared with the
Index because of its high credit quality and incremental yield over U.S.
Treasuries. However, the fund underweighted mortgage-backed securities (10.0%),
which worked in the fund's favor when the sector underperformed during the
period. The fund used U.S. Treasuries, a 6.6% position, to manage the fund's
interest rate risk to match that of the Index. In addition, the fund held a
position in emerging market debt (3.1%), which included higher credit, short-
duration bonds that we believed to be attractively priced. The remainder of the
fixed income holdings was in government agency debt (1.9%) and cash equivalents
(13.8%).
Outlook
Despite near-term uncertainty, we anticipate that the Federal Reserve's
accommodative monetary policy and interest rate cuts will lead to improving
corporate profits and a stronger economy in the second half of the year.
Therefore, we continue to be cautiously optimistic regarding equities. We
believe that a number of our holdings have long-term earnings power that is
significantly unrecognized by the market, but will potentially benefit from an
eventual investor rotation out of well-known growth stocks into other sectors.
In the fixed income markets, we believe that the mortgage-backed sector
appears to have less downside risk than it did a year ago, with pessimistic
prepayment assumptions already largely reflected in security prices. We have a
positive view of the corporate and asset-backed securities sectors, which should
benefit from strong investor demand and favorable fundamentals.
In the near term, our overall asset allocation outlook favors stocks and is
slightly less bullish on bonds. Our view on equities is encouraged by the
prospects for improving economic growth later in the year, which would spur
corporate profits.
/s/ Mitchell E. Cantor /s/ Ronald E. Gutfleish
Mitchell E. Cantor Ronald E. Gutfleish
Portfolio Managers, Equities
/s/ Jonathan A. Beinner /s/ Theodore T. Sotir
Jonathan A. Beinner Theodore T. Sotir
Portfolio Managers, Fixed Income
March 1, 1996
- --------------------------------------------------------------------------------
5
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Balanced Fund
January 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange
Commission, the following data is supplied for the periods ended January
31, 1996. The performance for the Goldman Sachs Balanced Fund ("GS
Balanced") (assuming both the maximum sales charge of 5.50% and no sales
charge), is compared with its benchmarks--a combination of the Standard
and Poor's 500 Index (weighted at 60%) and the Lehman Brothers Aggregate
Bond Index (weighted at 40%) ("S&P 500/LBABI") /(b)/, the S&P 500 and
LBABI individually. 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.
HYPOTHETICAL $10,000 INVESTMENT
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Balanced
- --------
(GS Balanced (GS Balanced
w/Sales Change) no Sales change) S&P 500/LBABI LBABI S&P 500
---------------- ----------------- ------------- ----- -------
10/12/94(a) $ 9,450 $10,000 $10,000 $10,000 $10,000
1/31/95 $ 9,532 $10,087 $10,206 $10,233 $10,184
1/31/96 $12,211 $12,922 $13,228 $11,966 $14,123
</TABLE>
------------------------------------
Average Annual Total Return
------------------------------------
One Year Since Inception /(a)/
- --------------------------------------------------------------------------------
GS Balanced, excluding sales charge 28.10% 21.67%
- --------------------------------------------------------------------------------
GS Balanced, including sales charge 21.04% 16.52%
- --------------------------------------------------------------------------------
/(a)/ Commenced operations October 12, 1994.
/(b)/ Please note: Going forward, we will be providing the total return of the
S&P 500 stock index and the Lehman Brothers Aggregate Bond Index as
benchmarks against which the Goldman Sachs Balanced Fund may be compared.
Typically, the Fund's returns are likely to fall between these two
indices. After this period, the blended return of 60% weighting of the
S&P 500 and 40% of the Lehman Aggregate will be eliminated because the
static blend does not necessarily reflect the allocation of the fund at
all points in time. By prospectus, the fund has the flexibility to invest
from 50% to 70% of its assets in equities with the remainder in fixed
income securities, which means that the exact percentage of equities and
fixed income investments can and does fluctuate.
- --------------------------------------------------------------------------------
6
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Balanced Fund
January 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value
<C> <S> <C>
- --------------------------------------------------------------------------------
Common Stocks--53.3%
Aerospace/Defense--4.4%
6,404 Lockheed Martin Corp. $ 482,702
8,100 Loral Corp. 374,625
9,000 McDonnell Douglas Corp. 801,000
9,500 Northrop Grumman Corp. 608,000
- --------------------------------------------------------------------------------
2,266,327
- --------------------------------------------------------------------------------
Auto Parts-Original Equipment--0.7%
11,900 Lear Seating Corp.* 352,537
- --------------------------------------------------------------------------------
Automotive Products--2.3%
29,400 Ford Motor Co. 870,975
5,700 General Motors Corp. 299,963
- --------------------------------------------------------------------------------
1,170,938
- --------------------------------------------------------------------------------
Beverages-Alcoholic--1.2%
8,600 Anheuser Busch Companies, Inc. 597,700
- --------------------------------------------------------------------------------
Cable/Television Communications--1.2%
28,700 Tele-Communications, Inc.* 606,287
- --------------------------------------------------------------------------------
Chemicals-Plastics--0.9%
16,400 Geon Co. 459,200
- --------------------------------------------------------------------------------
Commercial Banks--3.1%
6,700 BankAmerica Corp. 451,413
9,368 Fleet Financial Group, Inc. 374,719
10,700 NationsBank Corp. 747,663
- --------------------------------------------------------------------------------
1,573,795
- --------------------------------------------------------------------------------
Drugs--0.1%
1,500 Thiokol Corp. 53,063
- --------------------------------------------------------------------------------
Electronics-Semiconductors--0.6%
5,900 Intel Corp. 325,882
- --------------------------------------------------------------------------------
Environmental Control--0.2%
4,300 Browning Ferris Industries, Inc. 126,850
- --------------------------------------------------------------------------------
Financial Services--1.3%
9,200 Allmerica Financial Corp. 244,950
8,500 Reliastar Financial Corp. 400,563
- --------------------------------------------------------------------------------
645,513
- --------------------------------------------------------------------------------
Food-Wholesale--1.7%
19,900 Fleming Companies, Inc. 378,100
15,300 Supervalu, Inc. 474,300
- --------------------------------------------------------------------------------
852,400
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------
Shares Description Value
- --------------------------------------------------------------------------------
<C> <S> <C>
Common Stocks (continued)
Grocery Products--1.2%
43,600 Chiquita Brands International, Inc. $ 594,050
- --------------------------------------------------------------------------------
Home Builders--0.9%
3,800 Centex Corp. 122,550
13,300 Lennar Corp. 347,463
- --------------------------------------------------------------------------------
470,013
- --------------------------------------------------------------------------------
Hospital Management and Services--1.7%
8,600 Beverly Enterprises, Inc.* 103,200
5,800 Columbia/HCA Healthcare 322,625
20,400 Tenet Healthcare Corp.* 436,050
- --------------------------------------------------------------------------------
861,875
- --------------------------------------------------------------------------------
Household Products--0.5%
16,600 Sunbeam Corp. 265,600
- --------------------------------------------------------------------------------
Insurance--3.9%
6,600 Allstate Corp. 287,925
2,600 CIGNA Corp. 308,425
10,200 Lincoln National Corp. 539,325
12,500 PartnerRe Holdings, Ltd. 348,438
4,700 Travelers Group, Inc. 309,025
5,700 US Life Corp. 183,113
- --------------------------------------------------------------------------------
1,976,251
- --------------------------------------------------------------------------------
Marine and Pleasure Boats--1.7%
22,900 Brunswick Corp. 518,113
18,200 Outboard Marine Corp. 364,000
- --------------------------------------------------------------------------------
882,113
- --------------------------------------------------------------------------------
Oil & Gas-Domestic--2.8%
16,200 Ashland Inc. 595,350
2,200 Atlantic Richfield Co. 249,975
13,700 Tosco Corp. 573,687
- --------------------------------------------------------------------------------
1,419,012
- --------------------------------------------------------------------------------
Oil & Gas-International--2.9%
2,300 Mobil Corp. 254,725
3,800 Royal Dutch Petroleum ADR 528,200
8,600 Texaco, Inc. 695,525
- --------------------------------------------------------------------------------
1,478,450
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Balanced Fund (continued)
January 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value
<C> <S> <C>
- --------------------------------------------------------------------------------
Common Stocks (continued)
Packaging & Container--1.2%
42,900 Owens Illinois Corp.* $ 611,325
- --------------------------------------------------------------------------------
Paper and Forest Products--3.6%
7,900 Champion International Corp. 353,525
10,900 Georgia-Pacific Corp. 799,788
46,200 Stone Container Corp. 675,675
- --------------------------------------------------------------------------------
1,828,988
- --------------------------------------------------------------------------------
Print & Publishing--0.4%
12,700 Valassis Communications, Inc.* 214,313
- --------------------------------------------------------------------------------
Retail-Department Stores--2.8%
14,700 J.C. Penney, Inc.* 720,300
5,500 Melville Corp. 156,750
13,900 Sears Roebuck & Co. 576,850
- --------------------------------------------------------------------------------
1,453,900
- --------------------------------------------------------------------------------
Savings and Loans--0.7%
8,000 GP Financial Corp. 206,500
3,800 Standard Federal Bancorp. 154,850
- --------------------------------------------------------------------------------
361,350
- --------------------------------------------------------------------------------
Security and Commodity Brokers--0.5%
4,400 Dean Witter Discover Co. 238,150
- --------------------------------------------------------------------------------
Security and Commodity Brokers, Dealers and Services--0.7%
13,100 Lehman Brothers Holdings, Inc. 335,688
- --------------------------------------------------------------------------------
Technology--1.2%
6,500 Compaq Computer Corp.* 306,313
10,700 Storage Technology Corp.* 283,550
- --------------------------------------------------------------------------------
589,863
- --------------------------------------------------------------------------------
Tire and Rubber Products--1.8%
19,300 Goodyear Tire & Rubber Co. 923,988
- --------------------------------------------------------------------------------
Tobacco and Food Products--3.1%
7,900 Philip Morris Companies, Inc. 734,700
17,700 RJR Nabisco Holdings Corp. 575,250
11,900 Universal Corp. 278,163
- --------------------------------------------------------------------------------
1,588,113
- --------------------------------------------------------------------------------
Transportation-Air--0.5%
3,700 AMR Corp.* 281,200
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares Description Value
<C> <S> <C>
- --------------------------------------------------------------------------------
Common Stocks (continued)
Trucking--1.0%
21,100 Consolidated Freightways, Inc. $ 485,300
- --------------------------------------------------------------------------------
Utility--2.5%
7,700 CMS Energy Corp. 239,663
9,700 Entergy Corp. 287,363
43,000 Long Island Lighting Co. 731,000
- --------------------------------------------------------------------------------
1,258,026
- --------------------------------------------------------------------------------
Total Common Stocks
(Cost $24,025,787) $27,148,060
- --------------------------------------------------------------------------------
Preferred Stocks--0.0%
Tobacco--0.0%
3,400 RJR Nabisco Holdings Corp. $ 22,525
Convertible Preferred, 6.50%
- --------------------------------------------------------------------------------
Total Preferred Stocks
(Cost $23,869) $ 22,525
- --------------------------------------------------------------------------------
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset Backed Securities--4.9%
Case Equipment Loan Trust, Series 1995-A, Class A
$ 124,074 7.30% 03/15/02 $ 127,067
Chemical Bank Master Credit Card Trust, Series 1995-2, Class A
140,000 6.23 06/15/03 143,986
Chevy Chase Auto Receivables, Series 1995-2, Class A
116,807 5.80 06/15/02 117,447
Ford Credit Grantor Trust, Series 1994-B, Class A
61,469 7.30 10/15/99 62,893
General Motors Acceptance Corp. Grantor Trust, Series 1994,
Class A
71,063 6.30 06/15/99 71,696
General Motors Acceptance Corp. Grantor Trust, Series 1995-A,
Class A
141,610 7.15 03/15/00 144,368
Navistar Financial Trust, Series 1995-A, Class A2
234,966 6.55 11/20/01 238,683
Navistar Financial Trust, Series 1995-B, Class A3
120,000 6.05 04/15/02 121,537
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity Value
Amount Rate Date
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
Asset Backed Securities (continued)
Olympic Automobile Receivables Trust, Series 1993-D, Class A
$ 254,519 4.65% 07/15/00 $ 252,363
Premier Auto Trust, Series 1994-1, Class A3
144,299 4.75 02/02/00 143,457
Sears Credit Card Master Trust, Series 1995-2, Class A
700,000 8.10 06/15/04 763,434
Sears Credit Card Master Trust, Series 1995-3, Class A
70,000 7.00 10/15/04 73,872
Standard Credit Card Master Trust, Series 1994-4, Class A
110,000 8.25 11/07/03 122,993
Standard Credit Card Master Trust, Series 1995-3, Class A
100,000 7.85 02/07/02 108,281
- --------------------------------------------------------------------------------
Total Asset Backed Securities
(Cost $2,446,098) $2,492,077
- --------------------------------------------------------------------------------
Corporate Bonds--13.2%
Finance Bonds--5.4%
BankAmerica Corp.
$ 500,000 7.75% 07/15/02 $ 545,590
Capital One Bank
250,000 8.13 02/27/98 261,923
200,000 8.33 02/10/97 205,346
CCP Insurance, Inc.
125,000 10.50 12/15/04 139,054
Comdisco Inc.
325,000 9.75 01/15/97 337,529
Continental Bank
100,000 12.50 04/01/01 129,300
Countrywide Funding Corp.
100,000 6.08 07/14/99 101,039
Fleet Mortgage Group, Inc.
250,000 6.50 06/15/00 256,332
Golden West Financial Corp.
200,000 10.25 12/01/00 235,094
Signet Banking Corp.
500,000 9.63 06/01/99 553,800
- --------------------------------------------------------------------------------
Total Finance Bonds
(Cost $2,726,609) $ 2,765,007
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Principal Interest Maturity Value
Amount Rate Date
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
Corporate Bonds (continued)
Industrial Bonds--6.4%
Auburn Hills Trust
$ 90,000 12.00% 05/01/20 $ 140,384
Blockbuster Entertainment
50,000 6.63 02/15/98 50,758
Cablevision Industries Corp.
150,000 10.75 01/30/02 163,875
Chrysler Financial Corp.
250,000 5.71 01/12/98 251,217
Coastal Corp.
100,000 9.75 08/01/03 119,918
Ford Capital Corp.
275,000 9.38 01/01/98 294,981
Ford Motor Credit Co.
40,000 8.38 01/15/00 43,594
General Motors Acceptance Corp.
200,000 7.50 11/04/97 207,086
170,000 7.12 05/10/00 178,736
News America Holdings, Inc.
150,000 9.13 10/15/99 166,585
100,000 7.50 03/01/00 105,674
Oryx Energy Co.
275,000 9.30 05/01/96 276,985
95,000 9.50 11/01/99 102,617
RJR Nabisco, Inc.
50,000 8.62 12/01/02 52,977
135,000 8.00 07/15/01 139,019
Tele-Communications, Inc.
125,000 9.65 10/01/03 142,255
50,000 9.88 04/01/98 54,140
Tenneco, Inc.
260,000 10.00 08/01/98 286,772
Time Warner, Inc.
200,000 7.45 02/01/98 206,224
125,000 7.98 08/15/04 132,224
Tosco Corp.
110,000 7.00 07/15/00 111,650
- --------------------------------------------------------------------------------
Total Industrial Bonds
(Cost $3,166,925) $3,227,671
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------------------
Corporate Bonds (continued)
<S> <C> <C> <C> <C>
Utility Bonds--0.7%
Arkla Inc.
$ 250,000 9.20% 12/18/97 $ 262,792
Central Maine Power Co.
100,000 7.38 01/01/99 103,582
- --------------------------------------------------------------------------------
Total Utility Bonds
(Cost $364,119) $ 366,374
- --------------------------------------------------------------------------------
Yankee Bonds--0.7%
Province of Quebec
$ 200,000 13.25% 09/15/14 $ 255,170
State of Israel
95,000 6.38 12/15/05 95,368
- --------------------------------------------------------------------------------
Total Yankee Bonds
(Cost $347,479) $ 350,538
- --------------------------------------------------------------------------------
Total Corporate Bonds
(Cost $6,605,132) $ 6,709,590
- --------------------------------------------------------------------------------
Emerging Market Debt--3.1%
Asia Pulp and Paper International Finance Co.
$ 60,000 10.25% 10/01/00 $ 59,980
Banco Nacional de Colombia
50,000 10.82 05/31/96 50,277
40,000 10.55 06/23/97 40,590
Bancoldex
90,000 8.62 06/02/00 94,441
Bancponce Financial Corp./(a)/
240,000 7.56 05/13/96 234,172
Corp. Andina de Fomento
200,000 7.25 04/30/98 203,088
Empresa Col Petroleos
300,000 7.25 07/08/98 30,150
Financiera Energy Nacional
30,000 6.63 12/13/96 30,030
Government of Poland
80,000 7.75 07/13/00 83,000
Mexico United Global
50,000 9.75 02/06/01 50,117
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Emerging Market Debt (continued)
Pemex
$ 250,000 6.13% 06/15/96 $ 247,743
PT Indah Kiat
10,000 8.88 11/01/00 9,584
Republic of Argentina
200,000 2.36 09/01/97 197,750
70,000 8.63 04/04/98 69,469
Republic of Colombia
160,000 9.25 02/15/00 163,724
YPF Sociedad Anonima
29,177 7.50 10/26/02 29,837
- --------------------------------------------------------------------------------
Total Emerging Market Debt
(Cost $1,578,200) $ 1,593,952
- --------------------------------------------------------------------------------
Government Agency Obligations--1.9%
Federal Home Loan Mortgage Corp.
$ 20,000 8.20% 01/16/98 $ 20,580
Federal National Mortgage Association/(b)/
520,000 8.50 02/01/05 572,244
130,000 7.70 08/10/04 137,776
Government Backed Trust (Turkey)
119,595 9.40 11/15/96 121,667
Resolution Funding Corp. Principal-Only Stripped Securities/(a)/
280,000 6.52 10/15/20 57,529
300,000 6.49 01/15/21 60,948
- --------------------------------------------------------------------------------
Total Government Agency Obligations
(Cost $943,746) $ 970,744
- --------------------------------------------------------------------------------
Mortgage Backed Obligations--10.0%
Federal Home Loan Mortgage Corp.
$ 1,000,000 7.50% TBA-30 year/(c)/ $ 1,026,875
1,000,000 6.50 TBA-30 year/(c)/ 991,250
Federal National Mortgage Association
1,000,000 8.00 TBA-30 year/(c)/ 1,036,562
1,000,000 6.00 TBA-15 year/(c)/ 990,703
Government National Mortgage Association
966,557 9.00 10/15/17 1,033,914
- --------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $5,051,041) $ 5,079,304
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Obligations--6.6%
United States Treasury Bonds
$ 470,000 12.00%/(b)/ 08/15/13 $ 722,113
220,000 8.75 08/15/20 293,047
30,000 8.00 11/15/21 37,261
United States Treasury Notes
450,000 7.38 11/15/97 468,279
780,000 7.25/(b)/ 08/15/04 867,508
United States Treasury Principal-Only Stripped Securities/(a)/
980,000 5.72 11/15/04 595,810
1,850,000 6.38 08/15/20 395,715
- --------------------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $3,209,300) $ 3,379,733
- --------------------------------------------------------------------------------
Repurchase Agreement--13.8%
Joint Repurchase Agreement Account
$ 7,000,000 5.96% 02/01/96 $ 7,000,000
- --------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $7,000,000) $ 7,000,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $50,883,173)/(d)/ $54,395,985
- --------------------------------------------------------------------------------
Futures contracts open at January 31, 1996 are as follows:
Number of
Contracts Settlement Unrealized
Type Long/(e)/ Month Gain
- ----------------------------------- --------------- ------------ ------------
2-Year U.S. Treasury Notes 2 March 1996 $ 4,031
10-Year U.S. Treasury Notes 3 March 1996 1,188
20-Year U.S. Treasury Bond 10 March 1996 9,375
S&P 500 Stock Index 5 March 1996 61,125
- --------------------------------------------------------------------------------
$75,719
- --------------------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $ 3,986,101
Gross unrealized loss for investments in which
cost exceeds value (474,622)
- --------------------------------------------------------------------------------
Net unrealized gain $ 3,511,479
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
*Non-income producing security.
/(a)/The interest rate disclosed for these securitites represents effective
yields to maturity.
/(b)/Portions of these securities are being segregated as collateral for
futures contracts, TBA (To Be Assigned) securities and/or mortgage dollar
rolls.
/(c)/TBA (To Be Assigned) securities are purchased on a forward commitment
basis with an approximate (generally + / -2.5%) principal amount and no
definite maturity date. The actual principal amount and maturity date will
be determined upon settlement when the specific mortgage pools are
assigned.
/(d)/The aggregate cost for federal income tax purposes is $50,884,506.
/(e)/Each 2-Year Treasury Note contract represents $200,000 in notional par
value. Each 10-Year U.S. Treasury Note contract and 20-Year U.S. Treasury
Bond contract represents $100,000 in notional par value. Each S&P 500
Stock Index represents $50,000 in notional par value. The total net
notional amount and net market value are $1,950,000 and $3,569,906,
respectively. The determination of notional amounts does not consider
market risk factors and therefore notional amounts as presented here are
indicative only of volume of activity and not a measure of market risk.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
11
<PAGE>
Objective and Investment Approach
The Goldman Sachs Select Equity Fund is designed to provide investors with
a broadly diversified portfolio that can be used as a core holding on which to
build an investment program. The fund seeks to provide investors with a total
return (consisting of capital appreciation and dividend income) that, net of
expenses, exceeds the total return of the S&P 500 stock index. The fund's
mandate is to remain fully invested with industry diversification,
capitalization and risk characteristics similar to the S&P 500. Therefore, the
fund's relative performance compared with the index comes almost exclusively
from stock selection within sectors. We believe the fund offers investors an
attractive combination of value and growth, without assuming more risk than the
broad market.
The fund employs a disciplined approach that combines fundamental
investment research provided by Goldman, Sachs & Co.'s Investment Research
Department with quantitative analysis generated by Goldman Sachs Asset
Management's proprietary model. Our model forecasts a stock's return using many
different criteria including valuation measures, growth expectations, earnings
momentum and risk. It also analyzes the impact of current economic conditions on
different types of stocks. Those stocks ranked highly by both our quantitative
model and the Goldman Sachs Investment Research Department are selected for the
fund's portfolio.
Performance Review:
Strong Performance Due to Successful Stock Selection
We are pleased to report that the fund performed well during the period
under review, reflecting an outstanding year for U.S. equities in general and
large-capitalization stocks in particular. For the 12 months ended January 31,
1996, the Goldman Sachs Select Equity Fund Class A shares had a total return of
38.63% based on net asset value, nearly identical to the 38.67% total return for
the S&P 500 stock index, its benchmark.
From their inception on June 15, 1995 through January 31, 1996, the fund's
Institutional shares returned 20.14% compared with 20.29% for the S&P 500 during
the same period.
Given the strong market conditions, matching the market's performance meant
the fund did better than most of its peers. The fund's Class A shares ranked in
the top quartile in the growth fund category for both the 12-month period (120th
out of 580 funds) and the three-year period (66th out of 350 funds) ended
January 31, 1996, based on total return according to Lipper Analytical Services,
Inc. (Please note that Lipper rankings do not take sales charges into account
and that past performance is not a guarantee of future results. Institutional
shares were not ranked for either of these periods because they were in
existence less than 12 months.)
The fund's strong performance during the past year can be attributed to
successful stock selection, which reflects a combination of the Goldman, Sachs &
Co. Investment Research Department's qualitative stock research and Goldman
Sachs Asset Management's proprietary quantitative analysis. In keeping with the
fund's investment philosophy, this combination of qualitative and quantitative
techniques seeks to take advantage of the unique and complementary benefits of
each discipline. Another factor that contributed to the fund's positive
performance was the extent to which the fund closely mirrored the market
valuations and sector weightings of the S&P 500 during a period when large-cap
stocks significantly outperformed small-cap stocks.
A more detailed picture shows that the fund outperformed the benchmark
during the second and third quarters of 1995 when some of the key factors
favored by our model -- value (stocks with low price/earnings ratios), growth
(stocks with rising earnings estimates) and stability (large stocks with
predictable earnings) -- all worked well. During the fourth quarter, investors
focused almost exclusively on large, defensive stocks (i.e., utilities, consumer
nondurables) and responded indifferently to most other fundamental factors. Even
stocks with attractive valuations and rising earnings estimates did not fare
particularly well as the market expressed skepticism
12
<PAGE>
- --------------------------------------------------------------------------------
that earnings could continue to advance in the weakening economy.
During the period, the fund attracted a healthy stream of cash inflows that
were invested as quickly as feasible. In this positive cash flow environment,
the fund had a higher cash position than usual (on average, 3% to 4% of assets).
However, even this small cash position proved to be a drag on performance in the
sharply rising market.
Portfolio Composition:
Broad Diversification Across Industries and Sectors
As of January 31, 1996, the fund was invested in 124 stocks, which were
well diversified by industry and sector. While its sector weightings were
generally in line with the S&P 500, the fund was slightly overweighted in
finance and basic industry and slightly underweighted in the capital spending,
health and retail sectors. The slight over- and underweightings were the result
of the fund's stock selection process and were not due to our opinions of
specific sectors.
A number of the fund's valuation characteristics continued to be more
favorable than the benchmark. For example, as of January 31, 1996, the fund had
a lower price/earnings ratio based on 1996 estimated earnings than the S&P 500
(14.3x versus 15.5x), a lower price/book ratio (2.9x versus 3.0x) and better
long-term growth characteristics (13.0% versus 12.1%) based on consensus
estimates for five-year growth.
The fund's best performing stocks during the period included large-
capitalization companies in widely diverse industries, such as Philip Morris
Companies, Inc. (tobacco and food products), Sears, Roebuck & Co. (retailing),
Federal National Mortgage Association (mortgage finance), Monsanto Co.
(chemicals), Allstate Corp. (insurance), IBM (computers) and Intel Corp.
(microprocessors).
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Top 10 Portfolio Holdings as of January 31, 1996
Percentage Percentage
of Total of S&P 500
Company Line of Business Net Assets Index
<S> <C> <C> <C>
Philip Morris Tobacco and Food 2.7% 1.6%
Companies, Inc. Products
AT&T Corp. Telecommunications 2.5% 2.2%
Pepsico, Inc. Beverages and Food 2.3% 1.0%
Unicom Corp. Utility 2.2% 0.2%
Schering Plough Corp. Pharmaceuticals 2.0% 0.4%
Royal Dutch Petroleum Oil and Gas 1.9% 1.6%
NationsBank Corp. Commercial Bank 1.9% 0.4%
Dow Chemical Co. Diversified Chemicals 1.9% 0.4%
General Electric Co. Electrical Equipment 1.8% 2.7%
IBM Computers 1.7% 1.3%
------ ------
Total 20.9% 11.8%
- --------------------------------------------------------------------------------
Sector Breakout as of January 31, 1996
Percentage of Percentage of S&P
Industry Sectors Portfolio 500 Index
Finance 17.6% 14.2%
Consumer Nondurables 12.2% 12.9%
Health 9.1% 10.3%
Energy 8.4% 7.9%
Basic Industry 8.2% 7.6%
Technology 7.1% 8.2%
Telecommunications 6.8% 8.1%
Electric/Gas 5.4% 4.4%
Consumer Services 4.9% 5.6%
Cash 3.7% 0.0%
Capital Spending 3.3% 5.8%
Miscellaneous 3.2% 4.5%
Consumer Durables 3.1% 3.2%
Aerospace 2.9% 2.0%
Retail 2.2% 3.9%
Transportation 1.9% 1.4%
- --------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Select Equity Fund (continued)
- --------------------------------------------------------------------------------
Outlook
Given last year's strong market performance, high levels of bullish
sentiment and low market dividend yields, our quantitative model currently
favors larger stocks with predictable earnings, stocks with low price/earnings
multiples, and stocks with positive earnings estimate revisions and price
momentum. The model is currently avoiding stocks with overly optimistic year-
over-year growth expectations. Though low-risk, defensive issues led the market
at the end of the period, such issues are not currently a dominant theme in our
portfolio. According to our analysis, the balance between stock and bond market
returns last year does not suggest that the stock market is ahead of its
fundamentals.
/s/ Robert C. Jones
Robert C. Jones
Portfolio Manager
March 1, 1996
- --------------------------------------------------------------------------------
14
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Select Equity Fund
January 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended January 31, 1996. The
performance for the Goldman Sachs Select Equity Fund ("GS Select Equity")
(assuming both the maximum sales charge of 5.50% and no sales charge for the
Class A shares and at net asset value for the Institutional shares), is compared
with its benchmark--the Standard & Poor's 500 Index ("S&P 500"). 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.
HYPOTHETICAL $10,000 INVESTMENT
Class A
GS Select Equity GS Select Equity
(w/sales charge) (no sales charge) S&P 500
- --------------------------------------------------------------------------------
5/24/91(a) $ 9,450 $10,000 $10,000
1/31/92 $10,112 $10,701 $11,092
1/31/93 $10,548 $11,162 $12,266
1/31/94 $12,144 $12,851 $13,846
1/31/95 $12,009 $12,708 $13,919
1/31/96 $16,654 $17,617 $19,306
Institutional class
1/31/96 N/A $12,014 $12,029
<TABLE>
<CAPTION>
Average Annual Total Return
-----------------------------------------------
One Year Since Inception (a)
- --------------------------------------------------------------------------------
<S> <C> <C>
GS Select Equity-Class A,
excluding sales charge 38.63% 12.82%
- --------------------------------------------------------------------------------
GS Select Equity-Class A,
including sales charge 31.01% 11.47%
- --------------------------------------------------------------------------------
GS Select Equity,
Institutional Class N/A 20.14%(b)
- --------------------------------------------------------------------------------
</TABLE>
(a) The Class A shares commenced operations May 24, 1991 and the Institutional
shares commenced operations June 15, 1995.
(b) An aggregate total return (not annualized) is shown instead of an average
annual total return since the Institutional Class has not completed a full
twelve months of operations.
- --------------------------------------------------------------------------------
15
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Select Equity Fund
January 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value
<C> <S> <C>
- --------------------------------------------------------------------------------
Common Stocks--95.5%
Aerospace/Defense--2.7%
6,700 McDonnell Douglas Corp. $ 596,300
41,900 Rockwell International Corp. 2,456,388
21,800 United Technologies Corp. 2,237,225
- --------------------------------------------------------------------------------
5,289,913
- --------------------------------------------------------------------------------
Auto Parts-Original Equipment--0.5%
31,100 Masland Corp. 431,513
14,200 Varity Corp.* 525,400
- --------------------------------------------------------------------------------
956,913
- --------------------------------------------------------------------------------
Automotive Products--1.6%
58,100 General Motors Corp. 3,057,513
- --------------------------------------------------------------------------------
Basic Materials and Natural
Resources--0.6%
27,200 Alco Standard Corp. 1,067,600
- --------------------------------------------------------------------------------
Beverages-Alcoholic--0.4%
10,800 Anheuser Busch Companies, Inc. 750,600
- --------------------------------------------------------------------------------
Beverages-Soft Drinks--2.7%
10,700 Coca Cola Co. 806,513
74,800 PepsiCo, Inc. 4,459,950
- --------------------------------------------------------------------------------
5,266,463
- --------------------------------------------------------------------------------
Biotechnology--0.4%
13,600 Amgen, Inc.* 817,700
- --------------------------------------------------------------------------------
Broadcast Media--1.3%
19,100 Capital Cities/ABC Inc. 2,456,738
- --------------------------------------------------------------------------------
Building Materials--0.4%
14,200 Armstrong World Industries, Inc. 834,250
- --------------------------------------------------------------------------------
Cable/Television Communications--0.3%
29,000 Tele-Communications, Inc.* 612,625
- --------------------------------------------------------------------------------
Chemicals--5.3%
48,800 Dow Chemicals Co. 3,635,600
11,600 Du Pont E I De Nemours 891,750
22,000 Monsanto Co. 2,865,500
11,600 Morton International, Inc. 429,200
59,800 Norsk Hydro ADR 2,444,325
- --------------------------------------------------------------------------------
10,266,375
- --------------------------------------------------------------------------------
Commercial Banks--6.0%
30,500 Banc One Corp. 1,155,188
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares Description Value
<C> <S> <C>
- --------------------------------------------------------------------------------
Common Stocks (continued)
Commercial Banks (continued)
46,400 BankAmerica Corp. $ 3,126,200
44,200 Corestates Financial Corp. 1,768,000
9,300 First Interstate Bancorp. 1,434,525
11,000 MBNA Corp. 448,250
52,300 NationsBank Corp. 3,654,463
- --------------------------------------------------------------------------------
11,586,626
- --------------------------------------------------------------------------------
Commercial Services--0.5%
25,800 Interim Services Inc.* 961,050
- --------------------------------------------------------------------------------
Communications--1.2%
83,800 Airtouch Communications* 2,367,350
- --------------------------------------------------------------------------------
Computer Software and Services--2.8%
15,400 Cisco Systems, Inc.* 1,282,050
6,500 First Data Corp. 459,875
30,700 Microsoft Corp.* 2,839,750
16,400 Oracle Corp.* 783,100
- --------------------------------------------------------------------------------
5,364,775
- --------------------------------------------------------------------------------
Computers--1.7%
29,800 International Business Machines 3,240,750
- --------------------------------------------------------------------------------
Electrical Equipment--1.8%
45,800 General Electric Co. 3,515,150
- --------------------------------------------------------------------------------
Electronics--0.7%
11,100 Boston Scientific Corp.* 568,875
8,500 Emerson Electric Co. 711,875
- --------------------------------------------------------------------------------
1,280,750
- --------------------------------------------------------------------------------
Electronics-Instrumentation--1.0%
21,900 Hewlett Packard Co. 1,856,025
- --------------------------------------------------------------------------------
Electronics-Semiconductors--2.4%
31,600 Intel Corp. 1,745,406
14,100 Micron Technology Inc. 482,925
23,000 Motorola Inc. 1,236,250
25,300 Texas Instruments Inc. 1,176,450
- --------------------------------------------------------------------------------
4,641,031
- --------------------------------------------------------------------------------
Engineering & Construction--0.8%
21,700 Fluor Corp. 1,453,900
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
16
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Shares Description Value
<C> <S> <C>
- --------------------------------------------------------------------------------
Common Stocks (continued)
Entertainment--1.5%
46,700 The Walt Disney Co. $3,000,475
- --------------------------------------------------------------------------------
Financial Services--1.8%
50,700 Federal National Mortgage Association 1,749,150
8,600 Household International, Inc. 557,925
16,400 MGIC Investment Corp. 1,057,800
2,500 Transamerica Corp. 190,313
- --------------------------------------------------------------------------------
3,555,188
- --------------------------------------------------------------------------------
Food Products--1.9%
37,600 Conagra Inc. 1,724,900
10,800 CPC International, Inc. 785,700
33,200 Sara Lee Corp. 1,120,500
- --------------------------------------------------------------------------------
3,631,100
- --------------------------------------------------------------------------------
Grocery Products--1.2%
55,200 IBP, Inc. 1,469,700
11,500 Kellogg Co. 881,188
- --------------------------------------------------------------------------------
2,350,888
- --------------------------------------------------------------------------------
Health and Medical Services--0.4%
13,300 United Healthcare Corp. 836,238
- --------------------------------------------------------------------------------
Hospital Management and Services--0.7%
22,700 Columbia/HCA Healthcare 1,262,688
- --------------------------------------------------------------------------------
Household Products--1.4%
33,400 Procter & Gamble Co. 2,805,600
- --------------------------------------------------------------------------------
Insurance--5.9%
25,956 Allstate Corp. 1,132,331
29,100 American General Corp. 1,098,525
32,850 American International Group, Inc. 3,182,344
15,600 CMAC Investment Corp. 897,000
17,500 Exel Insurance Ltd. 1,203,125
43,300 Protective Life Corp. 1,504,675
27,700 Safeco Corp. 993,738
21,200 Travelers Group, Inc. 1,393,900
- --------------------------------------------------------------------------------
11,405,638
- --------------------------------------------------------------------------------
Machine-Diversified--0.9%
16,800 Applied Materials, Inc.* 621,600
<CAPTION>
- --------------------------------------------------------------------------------
Shares Description Value
<C> <S> <C>
- --------------------------------------------------------------------------------
Common Stocks (continued)
Machine-Diversified (continued)
13,800 Black & Decker Corp. $ 467,475
15,400 Dover Corp. 702,625
- --------------------------------------------------------------------------------
1,791,700
- --------------------------------------------------------------------------------
Machinery and Equipment--0.6%
18,600 Caterpillar, Inc. 1,197,375
- --------------------------------------------------------------------------------
Medical/Biotechnology--0.5%
15,800 Medtronic Inc. 902,575
- --------------------------------------------------------------------------------
Metals-Diversified--0.3%
18,700 Asarco Inc. 593,725
- --------------------------------------------------------------------------------
Miscellaneous Manufacturer--1.2%
37,800 Allied Signal, Inc. 1,885,275
6,700 Eastman Kodak Co. 491,613
- --------------------------------------------------------------------------------
2,376,888
- --------------------------------------------------------------------------------
Money Center Banks--1.8%
31,800 Chemical Banking Corp. 2,130,600
19,500 Citicorp 1,440,563
- --------------------------------------------------------------------------------
3,571,163
- --------------------------------------------------------------------------------
Office & Business Equipment--0.7%
22,000 Harris, Corp. 1,377,750
- --------------------------------------------------------------------------------
Oil & Gas Exploration--0.8%
18,500 Baker Hughes, Inc. 478,688
20,000 Repsol S.A. ADR 697,500
20,800 Union Texas Petroleum Holdings, Inc. 379,600
- --------------------------------------------------------------------------------
1,555,788
- --------------------------------------------------------------------------------
Oil & Gas-Domestic--1.1%
21,500 Enron Corp. 795,500
22,900 Panhandle Eastern Corp. 661,238
19,200 Phillips Petroleum Co. 626,400
- --------------------------------------------------------------------------------
2,083,138
- --------------------------------------------------------------------------------
Oil & Gas-International--6.4%
25,600 Amoco Corp. 1,801,600
34,300 Exxon Corp. 2,752,575
17,700 Mobil Corp. 1,960,275
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
17
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Shares Description Value
<C> <S> <C>
- --------------------------------------------------------------------------------
Common Stocks (continued)
Oil & Gas-International (continued)
26,600 Royal Dutch Petroleum ADR $ 3,697,400
27,500 Texaco, Inc. 2,224,063
- --------------------------------------------------------------------------------
12,435,913
- --------------------------------------------------------------------------------
Oil-Domestic Integrated--1.7%
19,500 Coastal Corp. 738,563
13,800 Kerr McGee Corp. 872,850
13,700 Tenneco, Inc. 707,263
22,200 Williams Companies, Inc. 1,046,175
- --------------------------------------------------------------------------------
3,364,851
- --------------------------------------------------------------------------------
Packaging & Container--1.1%
39,300 Avery Dennison Corp. 2,097,638
- --------------------------------------------------------------------------------
Paper and Forest Products--0.5%
11,900 Caraustar Industries, Inc. 232,050
14,200 Mead Corp. 784,550
- --------------------------------------------------------------------------------
1,016,600
- --------------------------------------------------------------------------------
Personal Loans--0.4%
16,700 Beneficial Corp. 816,213
- --------------------------------------------------------------------------------
Pharmaceuticals--6.9%
29,900 Abbott Labs 1,263,275
19,600 Bristol-Myers Squibb 1,734,600
18,600 Eli Lilly & Co. 1,069,500
17,600 Johnson & Johnson 1,689,600
28,700 Merck & Co. 2,016,175
23,600 Pfizer, Inc. 1,622,500
72,500 Schering Plough Corp. 3,924,063
- --------------------------------------------------------------------------------
13,319,713
- --------------------------------------------------------------------------------
Retail-Department Stores--2.1%
18,800 Gap, Inc. 885,950
15,800 Harcourt General, Inc. 616,200
28,000 Sears Roebuck & Co. 1,162,000
71,500 Wal Mart Stores, Inc. 1,456,813
- --------------------------------------------------------------------------------
4,120,963
- --------------------------------------------------------------------------------
Retail-Food Chains--0.9%
70,600 Safeway, Inc.* 1,800,300
- --------------------------------------------------------------------------------
Retail-Specialty Apparel Stores--0.2%
22,600 The Limited, Inc. 378,550
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares Description Value
<C> <S> <C>
- --------------------------------------------------------------------------------
Common Stocks (continued)
Security and Commodity Brokers--1.1%
21,000 Dean Witter Discover Co. $ 1,136,625
19,600 Morgan Stanley Group, Inc. 933,450
- --------------------------------------------------------------------------------
2,070,075
- --------------------------------------------------------------------------------
Shoes--0.3%
8,600 Nike Inc. Class B 599,850
- --------------------------------------------------------------------------------
Technology--0.4%
17,400 Compaq Computer Corp.* 819,975
- --------------------------------------------------------------------------------
Telecommunications--5.7%
48,900 Ameritech Corp. 2,940,113
71,800 AT&T Corp. 4,801,625
27,000 GTE Corp. 1,242,000
49,600 Sprint Corp. 2,139,000
- --------------------------------------------------------------------------------
11,122,738
- --------------------------------------------------------------------------------
Tires & Rubber--0.6%
16,000 BF Goodrich Co. 1,178,000
- --------------------------------------------------------------------------------
Tobacco and Food Products--2.7%
55,600 Philip Morris Companies, Inc. 5,170,800
- --------------------------------------------------------------------------------
Toys--0.6%
33,606 Mattel, Inc. 1,083,780
- --------------------------------------------------------------------------------
Transportation--1.9%
12,800 Conrail, Inc. 905,600
5,400 Delta Air Lines, Inc. 369,225
25,100 Federal Express Corp.* 1,910,738
7,600 Union Pacific Corp. 506,350
- --------------------------------------------------------------------------------
3,691,913
- --------------------------------------------------------------------------------
Utility--4.2%
41,000 Empresa Nacional De Electric ADR 2,255,000
19,200 General Public Utilities Corp. 652,800
57,700 Public Service Company of New Mexico* 1,031,388
127,100 Unicom Corp. 4,273,738
- --------------------------------------------------------------------------------
8,212,926
- --------------------------------------------------------------------------------
Total Common Stocks
(Cost $143,543,010) $185,242,812
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal
Amount Description Value
- --------------------------------------------------------------------------------
<S> <C> <C>
- --------------------------------------------------------------------------------
U.S. Treasury Obligation--0.2%
$ 375,000 United States Treasury Bill(a)
4.87%, 02/08/96 $ 374,645
- --------------------------------------------------------------------------------
Total U.S. Treasury Obligation
(Cost $374,645) $ 374,645
- --------------------------------------------------------------------------------
Repurchase Agreement--3.5%
$6,800,000 Joint Repurchase Agreement Account
5.96%, 02/01/96 $ 6,800,000
- --------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $6,800,000) $ 6,800,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $150,717,655)(b) $192,417,457
- --------------------------------------------------------------------------------
Futures contracts open at January 31, 1996 are as follows:
Number of
Contracts Settlement Unrealized
Type Long(c) Month Gain
- ----------------------- ------------ ------------ ------------
S&P 500 Stock Index 5 March 1996 $24,625
- --------------------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for investments in
which value exceeds cost $42,882,569
Gross unrealized loss for investments in
which cost exceeds value (1,183,987)
Net unrealized gain $41,698,582
- --------------------------------------------------------------------------------
</TABLE>
*Non-income producing security.
(a)A portion of this security is being segregated for futures margin
requirements.
(b)The aggregate cost for federal income tax purposes is $150,718,875.
(c)Each S&P 500 Stock Index represents $50,000 in notional par value. The total
net notional amount and net market value are $250,000 and $1,594,875,
respectively. The determination of notional amounts does not consider market
risk facors and therefore notional amounts as presented here are indicative
only of volume of activity and not a measure of market risk.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Growth and Income Fund
- --------------------------------------------------------------------------------
Objective and Investment Approach
The Goldman Sachs Growth and Income Fund seeks long-term growth of capital
and growth of income primarily through investments in a diversified portfolio of
common stocks and other equity securities. The fund is managed with a value
style, which means we focus on companies whose stocks we believe are inexpensive
relative to their expected long-term earnings power and their ability to pay
dividends. Investments may include well-known companies that are temporarily out
of favor due to cyclical economic conditions or are experiencing near-term
difficulties the portfolio managers judge to be temporary in nature. In-depth
fundamental research of a company's financial structure, its competitive
position in the market and its management's commitment to increasing shareholder
value are all critical parts of the fund's investment approach.
Performance Review: Defense and Financial Stocks Were Among the Top Performers
For the 12-month period ended January 31, 1996, the Goldman Sachs Growth
and Income Fund had a total return of 32.45% based on net asset value compared
with a total return of 38.67% for the S&P 500 stock index, the fund's benchmark.
The fund has increased its regular quarterly dividend during the period to $0.07
per share.
The fund provided solid returns for the year due to successful stock
selection in a variety of sectors. Top performers during the period included two
stocks in the defense sector, McDonnell Douglas Corp. and Northrop Grumman
Corp., both of which benefited from their ability to generate significant cash
flows and expand margins; Tenet Healthcare Corp., which rose when the market
responded favorably to its strong earnings growth; and Philip Morris Companies,
Inc., which continued to generate high earnings growth and increased market
share. Goodyear Tire & Rubber Co., one of the three largest tire manufacturers
in the world and the fund's largest holding by year-end, also enjoyed solid
earnings growth despite general softness in auto sales and the rapidly rising
cost of rubber during the period.
Many of the fund's investments in the financial sector performed very well
and were subsequently sold when they hit or exceeded our target prices. These
included Bear Stearns Cos. Inc., Citicorp, Chemical Bank Corp., Federal National
Mortgage Association, Student Loan Marketing Association and Union Bank of San
Francisco. The fund continued to hold Travelers Group, Inc., a diversified
financial services company, which saw its share price rise significantly due in
part to the announcement of its acquisition of Aetna's property and casualty
business.
Although the fund was underweighted in the technology sector, it benefited
from several technology investments it did hold. Advanced Micro Devices, Inc.
and Dell Computer Corp. appreciated sharply and were subsequently sold, while we
continue to hold Compaq Computer Corp. because we believe its valuation levels
were still attractive as of the end of the period. We added Intel Corp. at what
we believed to be an attractive price after the semiconductor sector declined in
the latter half of the period. This company has a dominant market share in
microprocessors, the heart of personal computers.
Weaker Economy Favors Large Caps, Hurts Cyclicals
Factors that impacted the fund's performance relative to the benchmark
during the period were the outperformance of large growth stocks over value
stocks during the latter part of the year and the resulting underperformance of
some of the fund's value-oriented cyclical holdings. As of January 31, 1996, the
fund's weighted average market capitalization was $12.6 billion compared with
$31.7 billion for the S&P 500.
More specifically, the fund's cyclically oriented investments, such as Ford
Motor Co., came under pressure during the period as sales slowed due to investor
uncertainty stemming from the weakening economy. The paper sector, in which the
fund was overweighted compared with the benchmark, was particularly hard hit
when declining demand resulted in an inventory buildup and price discounting.
The fund had trimmed its positions in Stone Container Corp., Champion
- --------------------------------------------------------------------------------
20
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
International Corp. and Georgia-Pacific Corp. earlier in the year when paper
stocks were strong, and continued to hold these investments when their prices
fell, on the expectation that the paper sector would rebound.
Increased Investments in Energy and Retailing Stocks
The fund deployed some of the cash generated from its sales in the
financial sector into energy and retail stocks, two sectors in which it has had
little previous exposure. The fund added to its holdings in several oil
companies that have been restructured to become more efficient producers
(Atlantic Richfield Co. and Texaco, Inc.) and initiated a new position in
Ashland Inc. We also took advantage of the past year's slowdown in retailing to
add several well-known retailing companies at attractive prices. These included
J.C. Penney Company, Inc., a high-quality, low-cost merchandiser; Melville
Corp., which announced the sale of Marshall's; and Sears, Roebuck & Co., which
has spun off its financial services holdings to concentrate on its core retail
business.
Top 10 Portfolio Holdings as of January 31, 1996 *
Percentage
of Total
Company Line of Business Net Assets
Goodyear Tire & Rubber Co. Tire and Rubber Products 3.2%
Ford Motor Co. Automotive Products 3.0%
Georgia-Pacific Corp. Paper and Forest Products 2.8%
McDonnell Douglas Corp. Aerospace/Defense 2.7%
NationsBank Corp. Commercial Bank 2.6%
Long Island Lighting Co. Electric Utilities 2.5%
Philip Morris Companies, Inc. Tobacco and Food Products 2.5%
J.C. Penney Company, Inc. Department Stores 2.5%
Stone Container Corp. Pulp and Paper Products 2.4%
Texaco, Inc. International Integrated Oil 2.2%
* Percentages shown are of common stock positions.
- --------------------------------------------------------------------------------
Outlook
Investor uncertainty concerning the economy's health has resulted in a
rotation out of economically sensitive issues and into more defensive stocks
with larger market capitalizations and stable growth characteristics. We believe
that this phenomenon should reverse at some point, which will potentially
benefit some of our smaller, more cyclical holdings whose long-term earnings
streams are now available at what we believe are attractive prices. Our outlook
for 1996 is cautiously optimistic despite our concerns regarding the slowdown in
economic growth. We intend to continue researching attractive investment
opportunities that are consistent with the fund's management style, avoiding
areas where valuation levels appear excessively high.
/s/ Mitchell E. Cantor
Mitchell E. Cantor
Portfolio Manager
/s/ Ronald E. Gutfleish
Ronald E. Gutfleish
Portfolio Manager
March 1, 1996
- --------------------------------------------------------------------------------
21
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Growth and Income Fund
January 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended January 31, 1996. The
performance for the Goldman Sachs Growth and Income Fund ("GS G & I") (assuming
both the maximum sales charge of 5.50% and no sales charge), is compared with
its benchmark--the Standard & Poor's 500 Index ("S&P 500"). 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.
HYPOTHETICAL $10,000 INVESTMENT
GS Growth & Income GS Growth & Income
(w/sales charge) (no sales charge) S&P 500
- --------------------------------------------------------------------------------
2/5/93(a) $ 9,450 $10,000 $10,000
1/31/94 $10,686 $11,308 $11,073
1/31/95 $11,110 $11,757 $11,132
1/31/96 $14,716 $15,573 15,436
Average Annual Total Return
---------------------------------------------
One Year Since Inception (a)
- --------------------------------------------------------------------------------
GS G&I,
excluding sales charge 32.45% 15.97%
- --------------------------------------------------------------------------------
GS G&I,
including sales charge 25.17% 13.80%
- --------------------------------------------------------------------------------
(a) Commenced operations February 5, 1993.
- --------------------------------------------------------------------------------
22
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Growth and Income Fund (continued)
January 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Shares Description Value
<S> <C> <C>
- --------------------------------------------------------------------------------
Common Stocks--92.6%
Aerospace/Defense--7.7%
96,715 Lockheed Martin Corp. $ 7,289,893
121,100 Loral Corp. 5,600,875
134,000 McDonnell Douglas Corp. 11,926,000
140,800 Northrop Grumman Corp. 9,011,200
- --------------------------------------------------------------------------------
33,827,968
- --------------------------------------------------------------------------------
Auto Parts-Original Equipment--1.3%
187,400 Lear Seating Corp.* 5,551,725
- --------------------------------------------------------------------------------
Automotive Products--4.0%
440,200 Ford Motor Co. 13,040,925
84,500 General Motors Corp. 4,446,813
- --------------------------------------------------------------------------------
17,487,738
- --------------------------------------------------------------------------------
Beverages-Alcoholic--2.1%
130,000 Anheuser Busch Companies, Inc. 9,035,000
- --------------------------------------------------------------------------------
Cable/Television Communications--2.1%
429,700 Tele-Communications, Inc.* 9,077,413
- --------------------------------------------------------------------------------
Chemicals-Plastics--1.6%
245,500 Geon Co. 6,874,000
- --------------------------------------------------------------------------------
Commercial Banks--5.1%
103,700 BankAmerica Corp. 6,986,788
95,465 Fleet Financial Group, Inc. 3,818,600
163,300 NationsBank Corp. 11,410,587
- --------------------------------------------------------------------------------
22,215,975
- --------------------------------------------------------------------------------
Electronics-Semiconductors--1.1%
88,400 Intel Corp. 4,882,719
- --------------------------------------------------------------------------------
Environmental Control--0.4%
63,600 Browning Ferris Industries, Inc. 1,876,200
- --------------------------------------------------------------------------------
Food-Wholesale--3.0%
302,100 Fleming Companies, Inc. 5,739,900
240,600 Supervalu, Inc. 7,458,600
- --------------------------------------------------------------------------------
13,198,500
- --------------------------------------------------------------------------------
Grocery Products--1.9%
596,800 Chiquita Brands International, Inc. 8,131,400
- --------------------------------------------------------------------------------
Home Builders--1.4%
46,800 Centex Corp. 1,509,300
180,100 Lennar Corp. 4,705,112
- --------------------------------------------------------------------------------
6,214,412
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares Description Value
<S> <C> <C>
- --------------------------------------------------------------------------------
Common Stocks (continued)
Hospital Management and Services--3.4%
129,600 Beverly Enterprises, Inc.* $ 1,555,200
88,600 Columbia/HCA Healthcare 4,928,375
387,200 Tenet Healthcare Corp.* 8,276,400
- --------------------------------------------------------------------------------
14,759,975
- --------------------------------------------------------------------------------
Household Products--1.7%
82,400 National Presto Industrials, Inc. 3,605,000
250,700 Sunbeam Corp. 4,011,200
- --------------------------------------------------------------------------------
7,616,200
- --------------------------------------------------------------------------------
Insurance--6.9%
98,300 Allstate Corp. 4,288,337
39,100 CIGNA Corp. 4,638,237
24,400 Integon Corp. 515,450
166,200 Lincoln National Corp. 8,787,825
237,200 PartnerRe Holdings, Ltd. 6,611,950
71,000 Travelers Group, Inc. 4,668,250
20,100 US Life Corp. 645,712
- --------------------------------------------------------------------------------
30,155,761
- --------------------------------------------------------------------------------
Marine and Pleasure Boats--3.1%
386,100 Brunswick Corp. 8,735,512
239,400 Outboard Marine Corp. 4,788,000
- --------------------------------------------------------------------------------
13,523,512
- --------------------------------------------------------------------------------
Metals-Miscellaneous--0.5%
103,200 Quanex Corp. 2,128,500
- --------------------------------------------------------------------------------
Oil & Gas-Domestic--4.6%
232,800 Ashland Inc. 8,555,400
38,600 Atlantic Richfield Co. 4,385,925
167,900 Tosco Corp. 7,030,812
- --------------------------------------------------------------------------------
19,972,137
- --------------------------------------------------------------------------------
Oil & Gas-International--5.0%
36,200 Mobil Corp. 4,009,150
58,900 Royal Dutch Petroleum ADR 8,187,100
118,800 Texaco, Inc. 9,607,950
- --------------------------------------------------------------------------------
21,804,200
- --------------------------------------------------------------------------------
Packaging & Container--2.0%
604,300 Owens Illinois Corp.* 8,611,275
- --------------------------------------------------------------------------------
Paper and Forest Products--6.4%
118,600 Champion International Corp. 5,307,350
166,300 Georgia-Pacific Corp. 12,202,262
704,600 Stone Container Corp. 10,304,775
- --------------------------------------------------------------------------------
27,814,387
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Growth and Income Fund (continued)
January 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Shares Description Value
<S> <C> <C>
- --------------------------------------------------------------------------------
Common Stocks (continued)
Print & Publishing--1.4%
359,700 Valassis Communications, Inc.* $ 6,069,938
- --------------------------------------------------------------------------------
Retail-Department Stores--5.0%
220,000 J.C. Penney, Inc. 10,780,000
88,100 Melville Corp. 2,510,850
207,700 Sears Roebuck & Co. 8,619,550
- --------------------------------------------------------------------------------
21,910,400
- --------------------------------------------------------------------------------
Savings and Loans--1.9%
207,200 GP Financial Corp. 5,348,350
76,600 Standard Federal Bancorp. 3,121,450
- --------------------------------------------------------------------------------
8,469,800
- --------------------------------------------------------------------------------
Security and Commodity Brokers, Dealers and Services--1.1%
195,900 Lehman Brothers Holdings, Inc. 5,019,938
- --------------------------------------------------------------------------------
Technology--2.1%
111,900 Compaq Computer Corp.* 5,273,288
153,800 Storage Technology Corp.* 4,075,700
- --------------------------------------------------------------------------------
9,348,988
- --------------------------------------------------------------------------------
Tire and Rubber Products--3.2%
287,500 Goodyear Tire & Rubber Co. 13,764,063
- --------------------------------------------------------------------------------
Tobacco and Food Products--5.4%
116,900 Philip Morris Companies, Inc. 10,871,700
263,680 RJR Nabisco Holdings Corp. 8,569,600
176,800 Universal Corp. 4,132,700
- --------------------------------------------------------------------------------
23,574,000
- --------------------------------------------------------------------------------
Transportation-Air--1.0%
54,600 AMR Corp.* 4,149,600
- --------------------------------------------------------------------------------
Trucking--1.8%
348,000 Consolidated Freightways, Inc. 8,004,000
- --------------------------------------------------------------------------------
Utility--4.4%
131,800 CMS Energy Corp. 4,102,275
144,300 Entergy Corp. 4,274,887
641,400 Long Island Lighting Co. 10,903,800
- --------------------------------------------------------------------------------
19,280,962
- --------------------------------------------------------------------------------
Total Common Stocks
(Cost $346,638,724) $404,350,686
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares Description Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Preferred Stocks--0.9%
Grocery Products--0.4%
44,600 Chiquita Brands International, Inc.
Convertible Preferred, 2.88% $ 1,995,850
- --------------------------------------------------------------------------------
Tobacco and Food Products--0.4%
287,100 RJR Nabisco Holdings Corp.
Convertible Preferred, 6.50% 1,902,038
- --------------------------------------------------------------------------------
Total Preferred Stocks
(Cost $3,843,410) $ 3,897,888
- --------------------------------------------------------------------------------
Principal
Amount Description Value
- --------------------------------------------------------------------------------
Repurchase Agreement--6.3%
- --------------------------------------------------------------------------------
$27,400,000 Joint Repurchase Agreement
Account
5.96%, 02/01/96 $ 27,400,000
- --------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $27,400,000) $ 27,400,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $377,882,134)(a) $ 435,648,574
- --------------------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $ 64,178,911
Gross unrealized loss for investments in which
cost exceeds value (6,439,893)
- --------------------------------------------------------------------------------
Net unrealized gain $ 57,739,018
- --------------------------------------------------------------------------------
</TABLE>
*Non-income producing security.
(a)The aggregate cost for federal income tax purposes is $377,909,556.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Capital Growth Fund
- --------------------------------------------------------------------------------
Objective and Investment Approach
The Goldman Sachs Capital Growth Fund seeks long-term growth of capital
primarily through investments in a portfolio of medium- and large-capitalization
stocks. We use extensive fundamental research to identify companies that we
believe to be either unrecognized or significantly undervalued in the
marketplace, either because the company's business is not well understood or
because it is experiencing what are judged to be temporary difficulties. Our
analysis focuses on such factors as a company's long-term growth potential, its
competitive position in its industry, the extent to which the general economic
environment might affect its business and how committed its management is to
producing value for shareholders. Because this investment approach requires the
patience to hold a stock until the market recognizes its true value, it is best
suited for investors with a long-term investment horizon. The fund's weighted
average market capitalization was approximately $15.2 billion as of January 31,
1996 compared with $31.7 billion for the S&P 500 stock index.
Performance Review: Strong Absolute Results, Despite Weakness in Cyclical and
Retail Sectors
For the 12 months ended January 31, 1996, the Goldman Sachs Capital Growth
Fund had a total return of 30.45% based on net asset value compared with a total
return of 38.67% for the fund's benchmark, the S&P 500 stock index.
The fund's returns during the period were high by absolute and historical
standards, reflecting successful stock selection in diverse industries. The
fund's investments in the financial sector produced some of the strongest
performers during the period, including Federal National Mortgage Association
and two of our longer term holdings, Citicorp and Penncorp Financial Group,
Inc., both of which appreciated significantly and were sold after hitting our
target prices. Another long-term holding that did very well was Millipore
Corp., which manufactures filters for use in many commercial and high technology
markets. During the period, we added Pall Corp., another major filtration
producer with a specialization in filtration for the health care industry, as we
believe there is a growing recognition of a crisis in the safety of the world
blood supply. Though the automotive sector was generally weak during the second
half of the year, Lear Seating Corp., an auto seat manufacturer, was a notable
exception and contributed to the fund's positive performance.
During the period, the market favored large, growth stocks, while the fund
was heavily invested in value-oriented cyclical stocks in the capital equipment
and paper and forest products sectors. These industries were all impacted by the
slowing economy, particularly during the fourth quarter of 1995. Holdings that
came under pressure included capital equipment manufacturers Tenneco, Inc. and
Keystone International, Inc., which were subsequently liquidated. The fund's
investments in the paper and forest products sector (Champion International
Corp., Georgia-Pacific Corp. and Stone Container Corp.) also fared poorly due to
price discounting in the latter half of the period as demand for paper and pulp
products declined amid healthy supply. The fund sold Champion International but
continued to hold its other investments in the sector in the belief that the
correction was overdone and they were attractively valued.
We have dramatically modified our investment strategy in the retailing
sector, shifting the fund's concentration from specialty retailers such as
AnnTaylor Stores, Inc. and Charming Shoppes, Inc., which fared poorly in the
disappointing retailing environment, to higher quality retailing franchises,
such as Wal-Mart Stores, Inc., J.C. Penney Company, Inc. and Dillard Department
Stores, Inc.
New Additions Added Diversification
We deployed the cash resulting from our mid-period sales into investments
that we believed had the potential to do well regardless of the economic
environment. These included financial services companies such as First USA, Inc.
(credit cards) and NationsBank Corp. (commercial
- --------------------------------------------------------------------------------
25
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Capital Growth Fund (continued)
- --------------------------------------------------------------------------------
bank); media and telecommunication companies such as Knight-Ridder, Inc.
(newspaper publishing) and AT&T Corp.; and energy-related companies such as Long
Island Lighting Co. (an electric and gas utility serving Long Island, N.Y.) and
Texaco, Inc. (oil and gas).
Another recent investment was Goodyear Tire & Rubber Co., one of the
world's three dominant tire companies, which performed well despite rapidly
rising raw material costs during the period. The fund bought Perkin-Elmer Corp.,
a health care equipment manufacturer, which has benefited from management's
increased focus on cost reduction, and provides a way to participate in
potential biotechnology sector growth at an attractive earnings multiple. When
the technology sector became more reasonably priced following a sell-off in the
second half of the period, the fund added Intel Corp., Compaq Computer Corp. and
Silicon Valley Group, Inc.
<TABLE>
<CAPTION>
Top 10 Portfolio Holdings as of January 31, 1996
Percentage
of Total
Company Line of Business Net Assets
<S> <C> <C>
Georgia-Pacific Corp. Paper and Forest Products 3.4%
Ford Motor Co. Automotive Products 3.2%
NationsBank Corp. Commercial Bank 3.1%
Northrop Grumman Corp. Aerospace/Defense 2.9%
Tele-Communications, Inc. Cable Television System 2.8%
Valassis Communications, Inc. Publishing 2.7%
Dillard Department Stores, Inc. Department Stores 2.7%
Philip Morris Companies, Inc. Tobacco and Food Products 2.7%
Texaco, Inc. International Integrated Oil 2.6%
First Brands Corp. Household Products 2.6%
</TABLE>
Outlook
The equity market appears to be caught in a tug of war between moderate
overvaluation and a likely reacceleration of the economy during the second half
of 1996. The accommodative stance of the Federal Reserve to date should help to
stimulate economic growth later in 1996, which would be beneficial for corporate
profits and ultimately for common stocks. As of this writing, however, the
profit picture is still uneven and the economically sensitive parts of the
market may be vulnerable to additional negative surprises. Despite the overall
economic uncertainty, we believe many of our remaining cyclical holdings have
strong fundamentals and attractive valuations, and we expect to hold them until
the market recognizes their fair value. As noted, we have diversified the
portfolio to include holdings that should withstand a slower economy in the near
term. Going forward, we will continue to emphasize selection of individual
stocks that we believe offer long-term growth potential.
/s/ Mitchell E. Cantor
Mitchell E. Cantor
Portfolio Manager
/s/ Paul D. Farrell
Paul D. Farrell
Portfolio Manager
March 1, 1996
- --------------------------------------------------------------------------------
26
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Capital Growth Fund
January 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended January 31, 1996. The
performance for the Goldman Sachs Capital Growth Fund ("GS Cap Growth")
(assuming both the maximum sales charge of 5.50% and no sales charge), is
compared with its benchmark--the Standard & Poor's 500 Index ("S&P 500"). 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.
HYPOTHETICAL $10,000 INVESTMENT
GS GS
Cap Growth Cap Growth
(w/sales charge) (no sales charges) S&P 500
---------------- ------------------ -------
4/20/90(a) $ 9,450 $10,000 $10,000
1/31/91 $ 9,529 $10,084 $10,552
1/31/92 $12,322 $13,040 $12,946
1/31/93 $14,542 $15,388 $14,316
1/31/94 $16,998 $17,987 $16,160
1/31/95 $16,254 $17,200 $16,246
1/31/96 $21,203 $22,437 $22,528
<TABLE>
<CAPTION>
--------------------------------------------------
Average Annual Total Return
--------------------------------------------------
One Year Five Year Since Inception/a/
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------
GS Cap Growth, excluding sales charge 30.45% 17.34% 14.98%
- -----------------------------------------------------------------------------------------
GS Cap Growth, including sales charge 23.24% 16.01% 13.86%
- -----------------------------------------------------------------------------------------
</TABLE>
/a/ Commenced operations April 20, 1990.
- -------------------------------------------------------------------------------
27
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Growth and Income Fund (continued)
January 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Shares Description Value
<S> <C> <C>
- --------------------------------------------------------------------------------
Common Stocks--96.2%
Aerospace/Defense--4.8%
188,400 McDonnell Douglas Corp. $16,767,600
394,900 Northrop Grumman Corp. 25,273,600
- --------------------------------------------------------------------------------
42,041,200
- --------------------------------------------------------------------------------
Auto Parts-Original Equipment--1.3%
391,900 Lear Seating Corp.* 11,610,037
- --------------------------------------------------------------------------------
Automotive Products--3.2%
948,800 Ford Motor Co. 28,108,200
- --------------------------------------------------------------------------------
Cable/Television Communications--2.8%
1,165,800 Tele-Communications, Inc.* 24,627,525
- --------------------------------------------------------------------------------
Chemicals-Plastics--2.2%
700,400 Geon Co. 19,611,200
- --------------------------------------------------------------------------------
Commercial Banks--5.8%
218,700 BankAmerica Corp. 14,734,913
231,900 MBNA Corp. 9,449,925
390,400 NationsBank Corp. 27,279,200
- --------------------------------------------------------------------------------
51,464,038
- --------------------------------------------------------------------------------
Cosmetics--0.9%
155,000 Tambrands, Inc. 7,614,375
- --------------------------------------------------------------------------------
Electronics--3.3%
216,200 Perkin-Elmer Corp. 10,215,450
704,400 Silicon Valley Group, Inc.* 18,402,450
- --------------------------------------------------------------------------------
28,617,900
- --------------------------------------------------------------------------------
Electronics-Semiconductors--2.6%
346,200 Intel Corp. 19,122,141
214,500 National Semiconductor Corp.* 3,700,125
- --------------------------------------------------------------------------------
22,822,266
- --------------------------------------------------------------------------------
Financial Services--4.0%
382,000 Federal National Mortgage Association 13,179,000
430,900 First U.S.A., Inc. 22,460,663
- --------------------------------------------------------------------------------
35,639,663
- --------------------------------------------------------------------------------
Grocery Products--0.8%
494,100 Chiquita Brands International, Inc. 6,732,113
- --------------------------------------------------------------------------------
Hardware and Tools--1.1%
220,800 Snap-on Tools, Inc. $ 9,687,600
- --------------------------------------------------------------------------------
Hospital Management and Services--5.4%
337,400 Beverly Enterprises, Inc.* 4,048,800
268,900 Columbia/HCA Healthcare 14,957,563
1,021,400 Tenet Healthcare Corp.* 21,832,425
142,300 US Healthcare, Inc.* 6,901,550
- --------------------------------------------------------------------------------
47,740,338
- --------------------------------------------------------------------------------
Household Products--2.6%
465,700 First Brands Corp. 22,993,937
- --------------------------------------------------------------------------------
Insurance--4.8%
540,250 Integon Corp. 11,412,781
218,600 Lincoln National Corp. 11,558,475
703,800 PartnerRe Holdings, Ltd. 19,618,425
- --------------------------------------------------------------------------------
42,589,681
- --------------------------------------------------------------------------------
Manufacturing-Diversified Industrial--1.0%
271,000 Harnischfeger Industries, Inc. 9,180,125
- --------------------------------------------------------------------------------
Manufacturing-Miscellaneous--5.9%
551,200 Fisher Scientific International, Inc. 19,429,800
310,300 Millipore Corp. 13,265,325
724,700 Pall Corp. 19,566,900
- --------------------------------------------------------------------------------
52,262,025
- --------------------------------------------------------------------------------
Metal Fabricate/Hardware--0.9%
238,650 Trinity Industries, Inc. 8,352,750
- --------------------------------------------------------------------------------
Metals-Miscellaneous--0.6%
241,100 Quanex Corp. 4,972,687
- --------------------------------------------------------------------------------
Oil & Gas-International--6.1%
68,700 Amoco Corp. 4,834,763
88,400 Chevron Corp. 4,585,750
68,500 Exxon Corp. 5,497,125
90,900 Mobil Corp. 10,067,175
41,200 Royal Dutch Petroleum ADR 5,726,800
284,800 Texaco, Inc. 23,033,200
- --------------------------------------------------------------------------------
53,744,813
- --------------------------------------------------------------------------------
Packaging & Container--1.0%
605,700 Owens Illinois Corp.* 8,631,225
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
<TABLE>
<CAPTION>
Shares Description Value
- --------------------------------------------------------------------------------
Common Stocks (continued)
<S> <C> <C>
Paper and Forest Products--5.3%
410,900 Georgia-Pacific Corp. $ 30,149,787
1,145,900 Stone Container Corp. 16,758,787
- --------------------------------------------------------------------------------
46,908,574
- --------------------------------------------------------------------------------
Print & Publishing--3.7%
130,900 Knight Ridder, Inc. 8,688,488
1,416,500 Valassis Communications, Inc.* 23,903,437
- --------------------------------------------------------------------------------
32,591,925
- --------------------------------------------------------------------------------
Retail-Department Stores--6.6%
829,900 Dillard Department Stores, Inc. 24,067,100
198,100 J.C. Penney, Inc. 9,706,900
920,900 Service Merchandise Co., Inc.* 4,374,275
963,000 Wal Mart Stores, Inc. 19,621,125
- --------------------------------------------------------------------------------
57,769,400
- --------------------------------------------------------------------------------
Retail-Specialty--2.0%
1,827,500 Charming Shoppes, Inc.* 5,025,625
818,500 Musicland Stores Corp.* 1,943,937
576,600 TJX Companies, Inc. 10,883,325
- --------------------------------------------------------------------------------
17,852,887
- --------------------------------------------------------------------------------
Security and Commodity Brokers, Dealers and Services--1.7%
571,000 Lehman Brothers Holdings, Inc. 14,631,875
- --------------------------------------------------------------------------------
Technology--1.7%
323,700 Compaq Computer Corp.* 15,254,363
- --------------------------------------------------------------------------------
Telecommunications--2.1%
278,200 AT&T Corp. 18,604,625
- --------------------------------------------------------------------------------
Tire and Rubber Products--1.7%
314,900 Goodyear Tire & Rubber Co. 15,075,837
- --------------------------------------------------------------------------------
Tobacco and Food Products--4.7%
254,900 Philip Morris Companies, Inc. 23,705,700
776,100 Universal Corp. 18,141,338
- --------------------------------------------------------------------------------
41,847,038
- --------------------------------------------------------------------------------
Transportation-Air--2.3%
260,400 AMR Corp.* 19,790,400
- --------------------------------------------------------------------------------
Transportation-Marine--0.4%
178,500 Kirby Corp.* 3,168,375
- --------------------------------------------------------------------------------
Trucking--1.6%
620,200 Consolidated Freightways, Inc. $14,264,600
- --------------------------------------------------------------------------------
Utility--1.3%
669,400 Long Island Lighting Co. 11,379,800
- --------------------------------------------------------------------------------
Total Common Stocks
(Cost $740,857,992) $848,183,397
================================================================================
Principal
Amount Description Value
================================================================================
Repurchase Agreement--2.4%
$20,900,000 Joint Repurchase Agreement Account
5.96%, 02/01/96 $ 20,900,000
- --------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $20,900,000) $ 20,900,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $761,757,992)(a) $869,083,397
- --------------------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for investments in
which value exceeds cost $135,542,409
Gross unrealized loss for investments in
which cost exceeds value (29,033,799)
- --------------------------------------------------------------------------------
Net unrealized gain $106,508,610
================================================================================
</TABLE>
*Non-income producing security.
(a)The aggregate cost for federal income tax purposes is $762,574,787.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Small Cap Equity Fund
- --------------------------------------------------------------------------------
Objective and Investment Approach
The Goldman Sachs Small Cap Equity Fund's objective is long-term capital
appreciation, primarily through investments in equity securities of U.S.
companies with market capitalizations of $1 billion or less. The fund is
managed using a "business value" approach to investing, which means we look for
attractive companies with high or improving returns on capital that we believe
can achieve solid, sustainable growth, as well as generate free cash after
investing for future growth. This approach differs markedly from many pure
growth small-cap funds that invest in companies with high multiples solely on
the basis of rapid, but frequently unsustainable, growth rates. Using our own
rigorous fundamental research, which includes meeting with a company's
management and interviewing a company's competitors, customers and suppliers, we
build the fund's portfolio one stock at a time.
Disappointing Retailers and Others Impacted Performance
Small-cap stock performance significantly lagged large-cap stocks during the
period under review, with much of the gap occurring in the latter half of the
year. In part, small-cap stocks underperformed due to the correction in
technology stocks during the second half of the period. More significantly,
small-cap stocks lost momentum when concern regarding slowing economic growth
caused many investors to shift their focus to large-cap consumer growth stocks,
which were perceived to be more stable in an economic downturn.
During the 12 months ended January 31, 1996, the Goldman Sachs Small Cap
Equity Fund had a total return of 7.20% based on net asset value compared with
30.06% for the Russell 2000, the fund's benchmark.
The fund underperformed the benchmark primarily due to the disappointing
results of a number of its holdings, particularly in the specialty retailing
sector. For example, Charming Shoppes, Inc. (retailer of women's apparel), Ernst
Home Center, Inc. (home improvement stores) and Shoe Carnival, Inc. (shoe
retailer) all saw price declines. The fund liquidated these positions, some
during the period and some soon after the period ended, due to their
deteriorating fundamentals. However, we continued to hold other retailers, such
as J. Baker, Inc. (specialty apparel and discount shoes), which in our opinion
have attractive long-term potential.
Some of the fund's nonretailing positions were also disappointing, such as
Foamex International, Inc. (foam products), which failed to capitalize on its
market position, and Physicians Clinical Laboratory, Inc. (clinical lab
testing), whose fundamentals began to deteriorate rapidly in a difficult
environment. Both investments were sold during the period.
Strategic Shifts Resulted in Greater Balance Across Sectors
During the latter half of the period, we widened our search for attractive
investments to give the portfolio a more balanced representation of value across
industry sectors. As a result, the fund's weightings reflect additional
investments in specialty insurance and technology-related companies and reduced
investments in retailing stocks. Financial holdings that performed well
included Horace Mann Educators Co. (property, casualty and life insurance for
the educator market), Western National Corp. (annuity product marketer) and
Insignia Financial Group, Inc. (real estate management).
During the period, the portfolio's overall liquidity increased. The
portfolio's weighted average market capitalization was approximately $343
million as of January 31, 1996, up from approximately $210 million a year ago.
Diverse Sectors Contributed Good Results
A number of the portfolio's longer term holdings did particularly well
during the period and were sold after they reached our target prices. USA Mobile
Communications Holdings (a Midwest-based provider of paging services) rose due
to a tender offer from Arch Communications. TJX Companies, Inc. (off-priced
women's apparel and accessories) sold its
- --------------------------------------------------------------------------------
30
<PAGE>
- --------------------------------------------------------------------------------
underperforming "Hit or Miss" chain and acquired Marshall's, the nation's second
largest chain in off-priced apparel. Sonic Corp. (drive-in restaurants),
Authentic Fitness Corp. (owner's of Speedo sports apparel) and Holophane Corp.
(lighting fixtures) all experienced solid price appreciation as investors
reacted to continued strong earnings gains.
Strong performers that the fund continued to hold at the end of the period
included DIMAC Corp., a direct marketer of database management services, which
saw its share price more than double during the period as it continued to grow,
and eventually agreed to be acquired by Heritage Media at a very attractive
price; North American Watch Corp., owner of the Movado, Concord and Esquire
watch brands, which appreciated on earnings gains and greater investor
awareness; and Figgie International, Inc., an industrial conglomerate, which
achieved improving earnings resulting from restructuring and the sale of its
less profitable, noncore businesses. Technology-related investments that
performed well included one of the fund's long-term holdings and currently its
largest position, Black Box Corp., a catalog marketer of data communication and
networking products, which has high profit margins, a strong balance sheet and a
reputation for quality and service, and Intersolv, Inc., a producer of software
development tools.
Recent Additions
We added a number of positions that produced good results. For example,
Amphenol Corp. (coaxial cable and connector manufacturer) rebounded on the
expectation that telecom legislation would be passed by Congress, Buckeye
Cellulose Corp. (manufacturer and marketer of specialty papers and fibers)
climbed approximately 30% as investors discovered its earnings potential, and
Trump Hotels & Casino Resorts, Inc. (hotels and casinos) appreciated
considerably when investors recognized its ability to generate strong cash
flows.
<TABLE>
<CAPTION>
Top 10 Portfolio Holdings as of January 31, 1996
Company Line of Business Percentage of
Total Net
Assets
<S> <C> <C>
Black Box Corp. Catalog Marketer of Communications and Networking Products 7.3%
North American Watch Corp. Luxury and Affordable Watches 6.6%
Landstar Systems, Inc. Trucking 5.3%
Hollinger International, Inc. Publishing/Newspapers 4.6%
Trump Hotels & Casino Resorts, Inc. Hotels and Casinos 4.4%
DIMAC Corp. Direct Marketing/ Database Management 4.1%
Quantum Restaurant Group, Inc. Restaurants 3.8%
Morningstar Group, Inc. Specialty Food Products 3.8%
The Paul Revere Corp. Insurance 3.6%
Brookstone, Inc. Specialty Retailer 3.4%
</TABLE>
Outlook
Going forward, the fund will stress investments that offer growth at a
reasonable price, emphasizing companies that possess both strong value
characteristics and the growth potential necessary for long-term success. In
general, we believe small-cap stocks are inexpensive relative to their larger
counterparts.
We appreciate your support in what has been a difficult period for the fund.
We believe that our strategic adjustments have improved the fund's ability to
uncover attractive investment opportunities and will serve it well in the
future.
/s/ Paul D. Farrell
Paul D. Farrell
Portfolio Manager
March 1, 1996
- --------------------------------------------------------------------------------
31
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Small Cap Equity Fund
January 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended January 31, 1996. The
performance for the Goldman Sachs Small Cap Equity Fund ("GS Small Cap")
(assuming both the maximum sales charge of 5.50% and no sales charge), is
compared with its benchmarks--the Standard & Poor's 500 Index ("S&P 500") and
the Russell 2000 Index ("Russell 2000"). 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.
HYPOTHETICAL $10,000 INVESTMENT
GS GS
Small Cap Small Cap
(w/sales charge) (no sales charge) S&P 500 Russell 2000
- --------------------------------------------------------------------------------
10/22/92(a) $ 9,450 $10,000 $10,000 $10,000
- --------------------------------------------------------------------------------
1/31/93 $11,138 $11,786 $10,655 $11,733
- --------------------------------------------------------------------------------
1/31/94 $14,494 $15,337 $12,027 $13,914
- --------------------------------------------------------------------------------
1/31/95 $11,953 $12,649 $12,091 $13,078
- --------------------------------------------------------------------------------
1/31/96 $12,813 $13,559 $16,768 $17,010
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
-----------------------------------------
Average Annual Total Return
-----------------------------------------
One Year Since Inception /(a)/
<S> <C> <C>
- --------------------------------------------------------------------------------
GS Small Cap,excluding sales charge 7.20% 9.73%
- --------------------------------------------------------------------------------
GS Small Cap,including sales charge 1.30% 7.85%
- --------------------------------------------------------------------------------
</TABLE>
/(a)/ Commenced operations October 22, 1992.
- --------------------------------------------------------------------------------
32
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Small Cap Equity Fund
January 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Shares Description Value
<S> <C> <C>
- --------------------------------------------------------------------------------
Common Stocks--97.1%
Advertising--4.1%
301,800 DIMAC Corp.* $ 8,337,225
- --------------------------------------------------------------------------------
Broadcast Media--0.1%
8,200 U.S. Satellite Broadcast* 221,400
- --------------------------------------------------------------------------------
Broadcasting--1.3%
206,800 International Family Entertainment, Class B* 2,714,250
- --------------------------------------------------------------------------------
Building Materials--2.1%
412,800 Congoleum Corp.* 4,231,200
- --------------------------------------------------------------------------------
Commercial Services--11.3%
1,284,982 Automated Security Holdings PLC ADR* 1,124,359
863,302 Black Box Corp.* 14,891,958
984,100 International Post Ltd.* 4,059,413
539,200 Opinion Research Corp.* 3,167,800
- --------------------------------------------------------------------------------
23,243,530
- --------------------------------------------------------------------------------
Communication-Equipment--1.0%
112,200 IPC Information Systems, Inc.* 2,131,800
- --------------------------------------------------------------------------------
Computer Software and Services--1.4%
279,600 Intersolv, Inc.* 2,900,850
- --------------------------------------------------------------------------------
Electrical Equipment--1.0%
66,000 UCAR International, Inc.* 2,054,250
- --------------------------------------------------------------------------------
Electronics--4.4%
271,800 Amphenol Corp.* 5,741,775
421,400 Nimbus CD International, Inc.* 3,213,175
- --------------------------------------------------------------------------------
8,954,950
- --------------------------------------------------------------------------------
Food Processing--3.8%
936,500 Morningstar Group, Inc.* 7,726,125
- --------------------------------------------------------------------------------
Food Products--0.6%
151,200 Alpine Lace Brands, Inc.* 1,200,150
- --------------------------------------------------------------------------------
Hospital Management and Services--0.3%
55,100 Sterling Healthcare Group, Inc.* 688,750
- --------------------------------------------------------------------------------
Hotels and Casinos--4.4%
414,900 Trump Hotels & Casino Resorts, Inc.* 9,024,075
- --------------------------------------------------------------------------------
Household Products--3.2%
780,900 American Safety Razor Co.* 6,540,037
- --------------------------------------------------------------------------------
Insurance--11.5%
169,900 Horace Mann Educators Co. $ 5,627,937
200,100 John Alden Financial Corp. 4,152,075
155,500 Risk Capital Holdings, Inc.* 3,168,313
325,700 The Paul Revere Corp. 7,409,675
200,200 Western National Corp. 3,278,275
- --------------------------------------------------------------------------------
23,636,275
- --------------------------------------------------------------------------------
Jewelry--6.6%
721,700 North American Watch Corp. 13,441,663
- --------------------------------------------------------------------------------
Manufacturing-Diversified Industrial--3.0%
395,600 Figgie International, Inc. Class A* 4,401,050
162,100 Figgie International, Inc. Class B* 1,823,625
- --------------------------------------------------------------------------------
6,224,675
- --------------------------------------------------------------------------------
Oil & Gas-Domestic--0.9%
216,200 Total Petroleum of North America Ltd. 1,905,263
- --------------------------------------------------------------------------------
Packaging & Container--2.1%
320,400 Shorewood Packaging Corp.* 4,245,300
- --------------------------------------------------------------------------------
Paper and Forest Products--1.4%
123,400 Buckeye Cellulose Corp.* 2,899,900
- --------------------------------------------------------------------------------
Print & Publishing--4.6%
941,800 Hollinger International, Inc. 9,418,000
- --------------------------------------------------------------------------------
Real Estate--2.5%
262,300 Insignia Financial Group, Inc.* 5,114,850
- --------------------------------------------------------------------------------
Restaurants--6.5%
250,300 IHOP Corp.* 5,444,025
646,200 Quantum Restaurant Group, Inc.* 7,835,175
- --------------------------------------------------------------------------------
13,279,200
- --------------------------------------------------------------------------------
Retail-Specialty--12.0%
1,061,500 Brookstone, Inc.* 7,032,438
357,300 Finlay Enterprises, Inc.* 3,930,300
961,700 J. Baker, Inc. 4,387,756
1,005,700 Levitz Furniture, Inc.* 4,148,513
1,233,340 Musicland Stores Corp.* 2,929,183
335,400 Supercuts, Inc.* 2,054,325
- --------------------------------------------------------------------------------
24,482,515
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
33
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Small Cap Equity Fund (continued)
January 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Shares Description Value
<S> <C> <C>
- --------------------------------------------------------------------------------
Common Stocks (continued)
Savings and Loans--0.3%
26,100 GP Financial Corp. $ 673,706
- --------------------------------------------------------------------------------
Trucking--5.3%
435,300 Landstar Systems, Inc.* 10,882,500
- --------------------------------------------------------------------------------
Utilities--1.4%
186,400 Central Maine Power Co. 2,912,500
- --------------------------------------------------------------------------------
Total Common Stocks
(Cost $217,180,660) $199,084,939
================================================================================
Warrants--0.0%
Home Builders and Land Development--0.0%
58,800 Miles Homes, Inc.* $ 29,400
- --------------------------------------------------------------------------------
Total Warrants
(Cost $43,650) $ 29,400
Principal
Amount Description Value
================================================================================
Corporate Bonds--0.2%
- --------------------------------------------------------------------------------
$500,000 J. Baker, Inc.,
7.0%, 06/01/02 $ 300,000
- --------------------------------------------------------------------------------
Total Corporate Bonds
(Cost $498,083) $ 300,000
================================================================================
Total Investments
(Cost $217,722,393)(a) $199,414,339
================================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in
which value exceeds cost $ 32,280,290
Gross unrealized loss for investments in
which cost exceeds value (50,964,644)
- --------------------------------------------------------------------------------
Net unrealized loss $(18,684,354)
================================================================================
</TABLE>
*Non-income producing security.
(a)The aggregate cost for federal income tax purposes is $218,098,693.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
34
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs International Equity Fund
- --------------------------------------------------------------------------------
Objective and Investment Approach
The Goldman Sachs International Equity Fund seeks long-term capital
appreciation by investing in equity securities of companies organized or traded
outside the U.S. that we believe have the potential to appreciate over the long
term. The fund focuses on selecting attractively valued companies with strong,
competitive positions in industries expected to grow. The fund's portfolio
managers are based in London, Tokyo and Singapore and their knowledge of local
markets plays an important role in uncovering investment opportunities. While
the fund does not allocate assets across specific countries based on top-down
economic or market forecasts, the portfolio managers strive to manage risk by
remaining diversified by country and industry sector and by closely monitoring
economic and political events in countries in which the fund does invest.
Performance Review: Substantial Outperformance Reflects Successful Stock
Selection in All Regions
For the 12 months ended January 31, 1996, the Goldman Sachs International
Equity Fund had a total return of 28.68% based on net asset value compared with
a return of 15.37% for the fund's benchmark, the Financial Times-Actuaries
Europe & Pacific Index ("EuroPac") unhedged. EuroPac is a capitalization-
weighted composite of approximately 1,500 stocks from companies based in Europe
and the Asia-Pacific region that is calculated on a monthly basis.
The fund's substantial outperformance of the EuroPac Index during the period
was mainly due to successful stock selection.
With regard to currency, the fund's neutral position is unhedged, although
it occasionally engages in hedging strategies. From May through October, the
fund successfully hedged a portion of its yen exposure, which worked in its
favor when the yen began to depreciate against the dollar. As of January 31,
approximately 25% of the fund's yen and European currency exposure was hedged to
the U.S. dollar.
The fund did extremely well compared with its peers. Based on total return,
the fund placed in the top 2% of international equity funds (ranking fourth out
of 259) tracked by Lipper Analytical Services, Inc. for the 12-month period
ended January 31, 1996. (Please note that Lipper rankings do not take sales
charges into account and that past performance is not a guarantee of future
results.)
Portfolio Composition:
Diversification Across Countries and Industries
As of January 31, 1996, approximately 92% of the fund's net assets were
invested in common stocks and 8% in cash equivalents. The fund was widely
diversified with positions in 48 companies based in 18 countries, with its five
largest country exposures in Japan (34.4%), the U.K. (8.5%), Sweden (5.9%),
Germany (5.7%) and the Netherlands (5.6%).
. Europe. As of January 31, 43.5% of the portfolio was invested in European
stocks, nearly in line with the Index. Though slower than expected economic
growth led to somewhat disappointing corporate profits and earnings downgrades
for many companies throughout the year, most European equity markets did
reasonably well. A number of the fund's long-term European holdings were
outstanding performers. These included Fresenius (Germany), a major producer of
kidney dialysis equipment, which rose due to strong sales and profit growth
resulting from its cost cutting and expanding market share; Hoganas (Sweden), a
leading manufacturer of metal powder, which benefited from positive earnings
results and increased broker coverage; Randstad Holdings (Netherlands), a
temporary help organization, which experienced strong growth in temporary
employment volumes and earnings upgrades; and Securitas (Sweden), the largest
security services company in Europe, which was driven by good underlying growth
in the security services business. In addition, several of the fund's newer
European investments also achieved good results, such as Adidas (Germany), the
European market leader in athletic shoes and sports apparel;
- --------------------------------------------------------------------------------
35
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs International Equity Fund (continued)
- --------------------------------------------------------------------------------
Electrocomponents (U.K.), one of the leading catalog providers of electronic
components and other equipment to businesses in the U.K. and Europe; and Bank of
Ireland, the country's largest and most profitable bank.
. Japan. As our expectations for the Japanese economy improved, we have
increased the fund's Japanese holdings from approximately 30% a year ago to
34.4% as of January 31, though still underweighted compared with the Index
(43.0%). Our holdings included a number of attractive opportunities that
performed well during the year, focusing particularly on companies actively
engaged in reducing their costs. For example, Hoya Corporation (the world's
leading manufacturer of optical glass) has restructured its business to focus on
growth areas and has moved the bulk of its manufacturing to Thailand, and
Mitsubishi Heavy Industries (the country's largest heavy machinery maker)
benefited from cost reductions and increased procurement of raw materials from
outside Japan.
The fund added several new Japanese holdings during the past 12 months,
including Kyocera, a leading global manufacturer of ceramic and electronic
components; Chiyoda, a large shoe and toy manufacturer that is in the process of
restructuring to reduce costs; and Tostem Corp., a producer of aluminum building
materials used in residential housing, which is positioned to benefit from the
revival of the Japanese housing market. During the period, the fund did not
invest in any Japanese banks because we believed that the sector was still at
risk due to its potential liabilities.
. Asia-Pacific. The fund was overweighted in Asia (outside Japan) compared
with the Index (13.7% versus 10.3%), with 4.9% of the fund invested in Hong
Kong, the region's strongest performer. In general, we focused on larger and
more liquid Asian companies, a number of which outperformed the region's
generally lackluster results (outside of Hong Kong) during much of the period.
One of the fund's most successful Asian holdings during the period was Korea
Mobile Telecommunications, the dominant provider of cellular telecommunications
and pagers in Korea, which experienced strong subscriber growth. There were a
number of Asian additions to the fund, including Hong Kong-based HSBC Holdings,
one of the largest and best capitalized banking organizations in the world, and
Bangkok Bank, generally considered to be the highest quality and leading bank in
Thailand.
<TABLE>
<CAPTION>
Top 10 Portfolio Holdings as of January 31, 1996
Company Country Line of Business Percentage of Total Net Assets
<S> <C> <C> <C>
Fresenius Germany Health Care 3.3%
Mitsubishi Heavy Industries Japan Heavy Machinery Manufacturer 3.1%
Mitsui Marine & Fire Japan Insurance 2.9%
Mitsubishi Electric CP Japan Electrical Equipment 2.8%
Hoya Corporation Japan Optical Glass Manufacturing 2.6%
Korea Mobile Telecommunications Korea Telecommunications 2.5%
Banco Popular Spain Bank 2.5%
Santen Pharmaceutical Co. Japan Ophthalmic Pharmaceuticals 2.4%
Tostem Corp. Japan Aluminum Building Materials 2.4%
Bangkok Bank Thailand Bank 2.4%
</TABLE>
Outlook
We are generally positive on the outlook for international equity markets in
1996, though our views vary by region. Europe is still struggling with below-
par economic growth, which is currently leading to earnings downgrades in many
markets. However, interest rate cuts, reasonable valuations and improving
growth for the second half of 1996 should ensure fair, though not spectacular,
returns.
In Japan, we believe the combination of a weaker yen and fiscal stimulus
will succeed in lifting economic growth and corporate earnings after two years
of disappointments. With returns on equity at historically very low levels in
Japan, and with many companies' profits being highly sensitive to even small
improvements
- --------------------------------------------------------------------------------
36
<PAGE>
- --------------------------------------------------------------------------------
in sales, we think the earnings growth outlook will be positive for the equity
market.
Asian markets closed the period with a strong December and January amid
evidence of renewed interest from U.S. and other foreign investors and improved
liquidity. Our outlook for the Asian markets is positive over the long term, as
they continue to offer attractive long-term growth potential.
In closing, we are pleased this has been a very good year for the fund and
we look forward to being a part of your investment program for many years to
come.
/s/ Roderick D. Jack
Roderick D. Jack
Portfolio Manager, London
/s/ Marcel Jongen
Marcel Jongen
Portfolio Manager, London
/s/ Shogo Maeda
Shogo Maeda
Portfolio Manager, Tokyo
/s/ Warwick M. Negus
Warwick M. Negus
Portfolio Manager, Singapore
March 1, 1996
- --------------------------------------------------------------------------------
37
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs International Equity Fund
January 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended January 31, 1996. The
performance for the Goldman Sachs International Equity Fund ("GS Int'l Equity")
(assuming both the maximum sales charge of 5.50% and no sales charge), is
compared with its benchmarks--the Financial Times-Actuaries World Euro-Pacific
Index hedged and unhedged into U.S. dollars ("FT Euro-Pac (Combined)")/(b)/ and
the Financial Times-Actuaries World Euro-Pacific Index Unhedged ("FT Euro-Pac
(Unhedged)") (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.
HYPOTHETICAL $10,000 INVESTMENT
INT'L
GS Int'l Equity GS Int'l Equity FT Euro-Pac FT Euro-Pac
(w/sales charge) (no sales charge) (combined)(b) (unhedged)
---------------- ----------------- ------------- -----------
12/1/92 $ 9,450 $10,000 $10,000 $10,000
1/31/93 $ 9,566 $10,123 $10,063 $10,055
1/31/94 $12,066 $12,768 $13,498 $14,399
1/31/95 $10,058 $10,643 $12,119 $13,902
1/31/96 $12,942 $13,695 $13,983 $16,039
<TABLE>
<CAPTION>
------------------------------------
Average Annual Total Return
------------------------------------
One Year Since Inception /(a)/
- --------------------------------------------------------------------------------
<S> <C> <C>
GS Int'l Equity,excluding sales charge 28.68% 10.43%
- --------------------------------------------------------------------------------
GS Int'l Equity,including sales charge 21.56% 8.48%
- --------------------------------------------------------------------------------
</TABLE>
/(a)/ Commenced operations December 1, 1992.
/(b)/ Beginning on September 1, 1994, the Fund began using the unhedged FT
Euro-Pac as its benchmark (prior thereto, the Fund used the hedged FT Euro-
Pac). The combined FT Euro-Pac represents the hedged FT Euro-Pac
performance up to August 31, 1994 and the unhedged FT Euro-Pac performance
from September 1, 1994 through January 31, 1996.
- --------------------------------------------------------------------------------
38
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs International Equity Fund
January 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Shares Description Value
- --------------------------------------------------------------------------------
Common Stocks--92.3%
Australian Dollar--2.2%
<C> <S> <C>
1,147,000 Boral Limited (Building Materials) $ 2,887,361
819,955 Woodside Petroleum (Oil & Gas) 4,335,801
- --------------------------------------------------------------------------------
7,223,162
- --------------------------------------------------------------------------------
Austrian Schilling--2.0%
105,400 Oester Elektrizita (Utility) 6,786,034
- --------------------------------------------------------------------------------
Belgian Franc--1.8%
20,342 Colruyt SA (Food-Retailer) 5,976,294
- --------------------------------------------------------------------------------
British Pound Sterling--8.5%
939,039 British Airport Authority
(Airport Operator) 6,868,594
1,373,378 Electrocomponents (Wholesale Trade) 7,119,067
1,455,700 Rentokil Group (Business Services) 7,655,790
537,000 Siebe (Electrical Equipment Manufacturer) 6,431,502
- --------------------------------------------------------------------------------
28,074,953
- --------------------------------------------------------------------------------
Danish Krone--1.8%
111,200 TeleDanmark AS (Telecommunications) 6,137,568
- --------------------------------------------------------------------------------
Deutschemark--5.7%
135,900 Adidas AG (Sportswear) 7,763,581
121,510 Fresenius AG (Health Care) 10,979,573
- --------------------------------------------------------------------------------
18,743,154
- --------------------------------------------------------------------------------
French Franc--3.7%
17,056 Comptoirs Modernes (Retail) 5,859,505
163,630 Seita (Tobacco) 6,294,078
- --------------------------------------------------------------------------------
12,153,583
- --------------------------------------------------------------------------------
Hong Kong Dollar--4.9%
392,000 HSBC Holdings (Commercial Bank) 6,489,227
745,000 Hutchison Whampoa (Conglomerates) 4,841,604
500,000 Sun Hung Kai Properties (Real Estate) 4,752,852
- --------------------------------------------------------------------------------
16,083,683
- --------------------------------------------------------------------------------
Common Stocks (continued)
Irish Pound--2.1%
982,014 Bank of Ireland (Commercial Bank) $ 7,056,111
- --------------------------------------------------------------------------------
Japanese Yen--34.4%
155,600 Chiyoda Co. (Retail) 3,578,349
70,000 Circle K Japan (Retail-Convenience) 3,029,821
260,000 Hoya Corp. (Optical Glass Manufacturer) 8,507,058
214,000 Inaba Denkisangyo (Industrial) 5,001,402
108,000 Kyocera Corp. (Electronics) 7,663,083
317,000 Max Co. (Office Equipment Manufacturer) 6,312,144
209,000 Mirai Industry Co. (Electrical Equipment Manufacturer) 5,119,005
1,284,000 Mitsubishi Electric CP (Electrical Equipment) 9,302,608
1,288,000 Mitsubishi Heavy Industries (Aerospace/Defense) 10,222,604
1,300,000 Mitsui Marine & Fire (Insurance) 9,576,517
371,000 Santen Pharmaceutical Co. (Pharmaceuticals) 8,011,686
49,700 Sanyo Shinpan Financial (Financial) 3,749,453
228,000 Shimachu Co. (Retail-Furniture) 7,097,691
316,000 Taikisha Ltd. (Capital Goods) 5,346,920
81,000 TDK Corp. (Electronics) 4,035,991
342,000 Terumo Corp. (Health Care) 3,325,044
243,000 Tostem Corp. (Building Materials) 7,996,261
154,800 York Benimaru Co. (Food-Retailer) 5,889,838
- --------------------------------------------------------------------------------
113,765,475
- --------------------------------------------------------------------------------
Netherlands Guilder--5.6%
121,500 Philips Electronic Companies (Electrical Equipment) 4,846,590
149,180 Randstad Holdings (Temporary Help Services) 6,845,582
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
39
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs International Equity Fund (continued)
January 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Shares Description Value
- --------------------------------------------------------------------------------
Common Stocks (continued)
Netherlands Guilder (continued)
<C> <S> <C>
69,165 Wolters Kluwer (Publishing) $ 6,783,323
- --------------------------------------------------------------------------------
18,475,495
- --------------------------------------------------------------------------------
Singapore Dollar--1.5%
668,000 Singapore Land (Real Estate) 5,093,139
- --------------------------------------------------------------------------------
South Korean Won--2.5%
7,000 Korea Mobile Telecommunications
(Telecommunications) 8,263,610
- --------------------------------------------------------------------------------
Spanish Peseta--4.8%
45,725 Banco Popular (Commercial Bank) 8,185,362
223,535 Repsol SA (Oil & Gas-Production and Distribution) 7,771,411
- --------------------------------------------------------------------------------
15,956,773
- --------------------------------------------------------------------------------
Swedish Krona--5.9%
359,300 Ericsson Telecommunications (Communications) 7,221,322
253,440 Hoganas AG (Metals-Products) 6,420,543
135,490 Securitas (Commercial Services) 5,870,265
- --------------------------------------------------------------------------------
19,512,130
- --------------------------------------------------------------------------------
Swiss Franc--1.9%
3,831 Cie Financiere Richemont AG
(Consumer Goods-Luxury Products) 6,381,314
- --------------------------------------------------------------------------------
Thai Baht--3.0%
572,300 Bangkok Bank (Commercial Bank) 7,995,036
434,000 Electricity Generating (Utilities) 1,847,760
- --------------------------------------------------------------------------------
9,842,796
- --------------------------------------------------------------------------------
Total Common Stocks
(Cost $258,243,666) $305,525,274
- --------------------------------------------------------------------------------
Short-Term Obligation--8.6%
28,410,029 State Street Bank & Trust Euro-
Time Deposit, 5.75%, 02/01/96 $28,410,029
- --------------------------------------------------------------------------------
Total Short-Term Obligation
(Cost $28,410,029) $28,410,029
- --------------------------------------------------------------------------------
Total Investments
(Cost $286,653,695)(a) $333,935,303
- --------------------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for investments in
which value exceeds cost $52,228,920
Gross unrealized loss for investments in
which cost exceeds value (5,123,064)
--------------------------------------------------------------------------------
Net unrealized gain $47,105,856
- ---------------------------------------------------------------------------------
</TABLE>
(a)The aggregate cost for federal income tax purposes is $286,655,735.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
The accompanying notes are an integral part of these financial statements.
40
<PAGE>
- --------------------------------------------------------------------------------
- -------------------------------------------------- -----------------------------
Common Stock Industry Concentrations
- --------------------------------------------------
Commercial Banks 9.0%
Telecommunications 4.4%
Health Care 4.3%
Electrical Equipment 4.3%
Food-Retailer 3.6%
Electronics 3.5%
Electrical Equipment Manufacturer 3.5%
Building Materials 3.3%
Aerospace/Defense 3.1%
Real Estate 3.0%
Insurance 2.9%
Retail 2.9%
Optical Glass Manufacturer 2.6%
Pharmaceuticals 2.4%
Oil & Gas-Production and Distribution 2.3%
Sportswear 2.3%
Business Services 2.3%
Communications 2.2%
Wholesale Trade 2.2%
Retail-Furniture 2.1%
Airport Operator 2.1%
Temporary Help Services 2.1%
Utility 2.0%
Publishing 2.0%
Metal Products 1.9%
Consumer Goods-Luxury Products 1.9%
Office Equipment Manufacturer 1.9%
Tobacco 1.9%
Commercial Services 1.8%
Capital Goods 1.6%
Industrial 1.5%
Conglomerates 1.5%
Oil & Gas 1.3%
Financial 1.1%
Retail-Convenience 0.9%
Utilities 0.6%
- --------------------------------------------------
Total Common Stocks 92.3%
==================================================
- ----------------------------------- ---------------------------------------
The accompanying notes are an intergral part of these financial statements.
41
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Asia Growth Fund
- ----------------------------------- -------------------------------------------
Objective and Investment Approach
The Goldman Sachs Asia Growth Fund seeks long-term capital appreciation by
investing in a limited number of carefully selected companies located in 12
Asian markets, including China, Hong Kong, India, Indonesia, Malaysia, Pakistan,
the Philippines, Singapore, South Korea, Sri Lanka, Taiwan and Thailand.
We utilize extensive fundamental research in our search for well-managed
companies whose stock prices are, in our opinion, undervalued in the
marketplace. Because many companies in the Asian region are growing at
relatively rapid rates, we consider a company's return on capital, its price-to-
book value and the predictability of its earnings stream as among the best
measures of its intrinsic value. A strong market position and a skilled
management team dedicated to maximizing shareholder returns are also important
to us. Our investment process includes face-to-face meetings with senior
management as well as frequent contact with a company's customers, suppliers and
competitors.
While our primary focus is on stock selection, we seek to carefully manage
risk by diversifying the fund's portfolio in terms of countries, industry
sectors and size of capitalization. We are also mindful of making certain the
market for a particular stock is relatively liquid, so we can easily sell a
position if our opinion changes. From time to time, we may choose to
significantly overweight or underweight our holdings in a country compared with
our benchmark, if we believe there is a compelling reason to do so. Finally, we
closely monitor the potential impact of political and economic events in the
region on particular companies and adjust the portfolio accordingly.
Market Overview:
A Year of Volatility and a Strong Finish
Asian stock markets experienced high volatility and generally low volumes
for most of the period under review, despite relatively stable economic
fundamentals for most of the region. Corporate earnings, while respectable, were
lower than expected for a number of companies and operating margins were under
pressure. The period was marked by several powerful stock market rallies during
February and May, followed by weakness during much of the second half of 1995 as
the strengthening U.S. dollar drained liquidity from Asian markets. Economic
growth accelerated during the third quarter of the year, an outcome not widely
anticipated, and consequently, interest rates in some Asian countries increased.
During most of the period under review, Hong Kong provided the region's
strongest and most consistent returns, up over 20%.
During the first half of the reporting period, regional political turmoil
in India, a change of government in Thailand, an accelerating current account
deficit in Malaysia and a series of natural disasters in the Philippines took a
toll in their respective markets. In general, the region was considerably more
stable during the second half.
For much of the period under review, Asian markets experienced low volumes
due to muted investor interest resulting from the powerful performance of the
U.S. equity market and solid returns in parts of Europe, which kept many foreign
investors focused closer to home. Another contributing factor: investors were
concerned that the devaluation of the Mexican peso might have a spillover effect
on other emerging markets. The tide turned for Asian markets in late November,
when the flow of foreign investments began to gradually increase in anticipation
that the U.S. Federal Reserve would cut interest rates in December. The period
ended on a much more positive note when renewed interest and significantly
higher volumes from foreign investors contributed to a rally in December and
January.
Performance Review: Successful Stock Selection and Country Weightings Prevailed
During the 12-month period ended January 31, 1996, the Goldman Sachs Asia
Growth Fund earned a total return of 26.49% based on net asset value compared
with a total return of 22.65% for its benchmark, the Morgan Stanley Capital
International Combined Asia (ex Japan) Index.
42
<PAGE>
The fund outperformed the benchmark due to several factors.
. Successful stock selection was the primary reason for outperformance. A
number of the portfolio's holdings in a variety of countries did very well
during the period, with some doing considerably better than their markets. For
example, Mulia Industrindo (Indonesia) appreciated significantly, benefiting
from its expanded capacity and its position as one of the lowest cost providers
to the construction industry. In addition, Korea Mobile Telecommunications, the
sole provider of cellular services and a major force in the Korean paging
market, increased substantially despite the fact that the Korean stock market
was down by approximately 20%. The story was similar in India, the region's
worst performing market in 1995 (down 23%), where several of the fund's holdings
prospered. These included Tata Engineering & Locomotive, a manufacturer of
commercial vehicles, which enjoyed continued earnings growth in the rapidly
expanding Indian auto market, and Larsen & Toubro Ltd., an engineering company.
Industrial Finance Corporation (Thailand), established over 30 years ago by the
Thai government to promote and develop private business in the country, has
developed into a major finance company specializing in providing financing for
emerging companies.
. During most of the period, the portfolio was overweighted in Hong Kong
compared with the Index, as we correctly anticipated the market was cheap and
would rebound. A number of the fund's investments outperformed the strong Hong
Kong market. They included HSBC Holdings (Hong Kong), one of the top 15 banks in
the world in terms of assets, which saw its earnings and loan volumes grow as
loan quality also improved; Sun Hung Kai Properties (Hong Kong), a property
company that benefited as property prices stabilized and as substantial hidden
value in its additional large tract of farmland emerged that was previously
undisclosed; and Hutchison Whampoa (Hong Kong), a conglomerate, which enjoyed
excellent performance due to its successful property launches and involvement in
other new major development projects, its continued strength in port and port-
related services, as well as better than expected growth of its Orange Telecom
Network U.K. subsidiary.
. Finally, the fund's low cash position (1%) in October enabled it to fully
participate in the year-end rally in Asian markets, with positive returns
realized in December 1995 and January 1996.
There were some disappointments as well. We sold Rashid Hussain Berhad, a
Malaysian securities company, which failed to meet our expectations in the
declining Malaysian market, and Kim Hin Industry (Malaysia), a leading producer
of floor and tile products in Malaysia, which saw its profits decline due to an
overly ambitious expansion plan and a price war resulting from increased
competition. We also liquidated the fund's position in Astra International
(Indonesia), which sells Japanese cars in Indonesia, when the company suffered
from the appreciation of the Japanese yen relative to the Indonesian rupiah.
Portfolio Composition
As of January 31, 1996, 96.4% of the fund's net assets were invested in
equity positions and the remainder was in cash equivalents. By country, the
fund's five heaviest concentrations were in Hong Kong (34.0%), Indonesia
(12.0%), Thailand (11.7%), Malaysia (11.0%) and Singapore (10.0%). As of January
31, the portfolio's weightings were in line with the Index in Hong Kong,
overweighted in Indonesia and the Philippines, and underweighted in Singapore,
Malaysia and Thailand.
New Holdings Added During the Period
During the second half of the portfolio's fiscal year, we added several new
positions, including HKR International, Ltd., a small property company with
sites in Discovery Bay on Lantau Island (a self-contained community of 10,000
residents catering to a "quality lifestyle"), and ACP Industries, a Malaysian
infrastructure company.
43
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Asia Growth Fund (continued)
- ---------------------------------- ---------------------------------------------
<TABLE>
<CAPTION>
Percentage
Top 10 Portfolio Holdings as of January 31, 1996 of Total
Company Country Line of Business Net Assets
<S> <C> <C> <C>
Sun Hung Kai Properties Hong Kong Property 5.6%
Mulia Industrindo Indonesia Manufacturing 4.6%
Swire Pacific Hong Kong Conglomerate 4.6%
Industrial Finance Corporation Thailand Banking and Finance 4.6%
Hutchison Whampoa Hong Kong Conglomerate 4.5%
HSBC Holdings Hong Kong Banking and Finance 4.3%
JCG Holdings Hong Kong Banking and Finance 3.8%
HKR International, Ltd. Hong Kong Property 3.6%
Metropolitan Bank & Trust Philippines Banking and Finance 3.3%
Straits Steamship Land Singapore Property 3.0%
</TABLE>
Stocks Sold on Strength
We sold several stocks that had reached our target prices, including a good
portion of our holdings in Consolidated Electric Power of Asia (Hong Kong),
which builds and operates power stations, based on our evaluation that further
appreciation was unlikely for several years. We also sold Indostat, the major
domestic telephone service provider in Indonesia, at a profit in advance of the
company's privatization in late 1995.
Investment Outlook: Optimistic for 1996
We are optimistic about the region's prospects for 1996 due to a number of
factors, including our expectation that the year will bring relative economic
prosperity and the fact that valuations in Asia are low after nearly two years
of consolidations. Therefore, we have kept the fund's cash weighting low, opting
to remain nearly fully invested. In the coming months, we will be looking for
opportunities to increase the portfolio's exposure in some of the smaller Asian
markets, including Thailand, Indonesia, the Philippines and Malaysia. In
addition, we expect the Korean market to begin to benefit from extensive capital
spending programs undertaken in 1994. During the first half of 1996, India and
Taiwan will be holding major elections, and we will be particularly vigilant in
monitoring political developments as they unfold. In general, however, we are
currently quite positive on India, where valuations are cheap and where we
anticipate a more stable and accommodating business environment during the
second half of the year. Finally, we still see growth potential in Hong Kong,
which should be a major beneficiary once China eases its austerity program in
1996. In terms of stock selection, we will continue to focus on undervalued
companies with above-average long-term growth potential.
We appreciate your support, particularly during this volatile year. We
remain convinced that over the long term, Asian markets offer attractive growth
potential for investors prepared to stay the course.
/s/ Warwick M. Negus
Warwick M. Negus
Portfolio Manager, Singapore
March 1, 1996
44
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Asia Growth Fund
January 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended January 31, 1996. The
performance for the Goldman Sachs Asia Growth Fund ("GS Asia") (assuming both
the maximum sales charge of 5.50% and no sales charge), is compared with its
benchmark--the Morgan Stanley Capital International Combined Asia (ex Japan)
Index ("MSCI Combined Asia-ex Japan"). 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.
HYPOTHETICAL $10,000 INVESTMENT
GS Asia GS Asia MSCI Combined
(w/sales charge) (no sales charge) Asia-ex Japan
---------------- ----------------- --------------
7/8/94(a) $ 9,450 $10,000 $10,000
1/31/95 $ 8,934 $ 9,454 $ 9,074
1/31/96 $11,300 $11,958 $11,129
<TABLE>
<CAPTION>
-------------------------------
Average Annual Total Return
-------------------------------
One Year Since Inception (a)
- ---------------------------------------------------------------
<S> <C> <C>
GS Asia,
excluding sales charge 26.49% 12.09%
- ---------------------------------------------------------------
GS Asia,
including sales charge 19.58% 8.11%
- ---------------------------------------------------------------
</TABLE>
(a) Commenced operations July 8, 1994.
- --------------------------------------------------------------------------------
45
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Asia Growth Fund (continued)
January 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value
- -------------------------------------------------------------
Common Stocks--95.1%
Hong Kong Dollar--33.9%
<S> <C> <C>
441,000 Dao Heng Bank
(Banking) $ 1,904,943
6,584,400 HKR International Ltd.
(Real Estate) 7,323,380
1,624,000 Hong Kong Electric
(Utility) 5,513,308
1,253,824 Hong Kong Land Holdings
(Real Estate) 2,846,180
3,117,000 Hopewell Holdings
(Construction) 2,096,221
537,000 HSBC Holdings
(Commercial Bank) 8,889,579
1,431,000 Hutchison Whampoa
(Conglomerate) 9,299,779
8,265,666 JCG Holdings Ltd.
(Financial Services) 7,857,097
6,169,400 San Miguel Brewery Ltd.
(Breweries) 2,972,118
1,217,000 Sun Hung Kai Properties
(Real Estate) 11,568,441
1,089,000 Swire Pacific
(Conglomerate) 9,506,673
- -------------------------------------------------------------
69,777,719
- -------------------------------------------------------------
Indian Rupee--6.6%
43,750 Hindustan Lever
(Consumer Goods) 770,893
225,400 Larsen & Toubro Ltd. GDR
(Construction) 3,797,990
188,750 Mahindra & Mahindra GDR
(Automotive Products) 1,426,950
116,600 Ranbaxy Laboratories Ltd. GDS
(Pharmaceuticals) 2,769,250
374,400 Tata Engineering & Locomotive
Company Ltd. GDR
(Autos and Trucks) 4,801,680
- -------------------------------------------------------------
13,566,763
- -------------------------------------------------------------
Common Stocks (continued)
Indonesian Rupiah--12.0%
1,617,500 Bank Bali
(Commercial Bank) $ 4,093,150
1,183,625 Indofoods Sukses Makmur
(Food Processing) 6,196,989
948,500 Jaya Real Property (Real Estate) 2,803,703
6,023,371 Mulia Industrindo
(Manufacturing-Diversified
Industrial) 9,460,792
70,000 Perusahaan Persero PT Telekom
ADR (Telecommunications) 2,152,500
- -------------------------------------------------------------
24,707,134
- -------------------------------------------------------------
Malaysian Ringgit--11.0%
759,000 ACP Industries
(Construction) 3,052,954
1,041,000 Commerce Asset Holdings
(Financial Services) 5,569,454
1,617,000 Leader Universal Holdings
(Construction) 3,757,234
1,312,000 Road Builder Berhad
(Construction) 4,867,419
994,000 UTD Engineers Berhad
(Construction) 5,270,356
- -------------------------------------------------------------
22,517,417
- -------------------------------------------------------------
Philippine Peso--5.1%
326,764 Metropolitan Bank & Trust
(Commercial Bank) 6,801,863
172,000 Philippines Commercial
International Bank
(Commercial Bank) 1,757,314
450,000 Pilippino Telephone
(Telecommunications) 515,622
369,000 San Miguel Corp.
(Food and Beverages) 1,395,272
- -------------------------------------------------------------
10,470,071
- -------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
46
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Asia Growth Fund (continued)
January 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value
- -------------------------------------------------------------
Common Stocks (continued)
Singapore Dollar--10.0%
732,100 Far East Levingston Shipbuilding
(Marine) $ 3,945,449
823,500 Overseas Union Bank Ltd.
(Financial Services) 6,381,472
532,000 Singapore Land (Real Estate) 4,047,622
1,745,000 Straits Steamship Land
(Real Estate) 6,207,996
- -------------------------------------------------------------
20,582,539
- -------------------------------------------------------------
South Korean Won--4.8%
146,000 Korea Electric Power Corp. ADR
(Utility) 3,686,500
5,320 Korea Mobile Telecommunications
Corp. (Telecommunications) 6,280,344
- -------------------------------------------------------------
9,966,844
- -------------------------------------------------------------
Thai Baht--11.7%
830,000 Bangkok Metropolitan Bank PLC
(Commercial Bank) 990,825
3,802,300 Bangkok Metropolitan Bank PLC
(Commercial Bank) 4,501,539
366,434 Industrial Finance Corp.
(Financial Services) 2,480,684
1,818,566 Industrial Finance Corp.
(Financial Services) 7,033,128
360,800 Kiatnakin Finance & Securities
(Financial Services) 1,288,571
424,000 National Finance & Securities
(Financial Services) 2,978,374
3,067,000 Siam Panich Leasing
(Financial Services) 4,780,841
- -------------------------------------------------------------
24,053,962
- -------------------------------------------------------------
Total Common Stocks
(Cost $169,147,199) $195,642,449
=============================================================
Preferred Stocks--1.0%
Philippine Peso--1.0%
56,600 Philippine Long Distance Telephone
Convertible Preferred, 5.75%
(Telecommunications) $ 2,009,300
- -------------------------------------------------------------
Total Preferred Stocks
(Cost $2,413,594) $ 2,009,300
=============================================================
Warrants--0.3%
107,000 Tata Engineering & Locomotive
Company GDR, (Autos and Trucks) $ 428,000
353,750 Straits Steamship Land
(Real Estate) 199,366
- -------------------------------------------------------------
Total Warrants
(Cost $552,814) $ 627,366
=============================================================
<CAPTION>
Principal
Amount Description Value
- -------------------------------------------------------------
<S> <C> <C>
Corporate Bonds--0.6%
$697,000 Kiatnakin Finance & Securities
Convertible, 4.00%, 11/30/03 $ 561,085
1,012,000 UTD Engineers Berhad Convertible,
4.00%, 05/22/99 573,046
- -------------------------------------------------------------
Total Corporate Bonds
(Cost $1,129,751) $ 1,134,131
=============================================================
Short-Term Obligation--7.1%
$14,591,112 State Street Bank & Trust Euro-
Time Deposit, 5.75%, 02/01/96 $ 14,591,112
- -------------------------------------------------------------
Total Short-Term Obligation
(Cost $14,591,112) $ 14,591,112
=============================================================
Total Investments
(Cost $187,834,470)(a) $214,004,358
=============================================================
Federal Income Tax Information:
Gross unrealized gain for investments in
which value exceeds cost $31,429,020
Gross unrealized loss for investments in
which cost exceeds value (5,694,618)
=============================================================
Net unrealized gain $ 25,734,402
=============================================================
</TABLE>
(a) The aggregate cost for federal income tax purposes is $187,858,691.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
47
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Asia Growth Fund (continued)
January 31, 1996
- --------------------------------------------------------------------------------
Common and Preferred Stock Industry Concentrations
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Financial Services 18.6%
Real Estate 16.9%
Construction 15.7%
Commercial Banks 13.2%
Telecommunications 5.3%
Manufacturing-Diversified Industrial 4.6%
Conglomerates 4.5%
Utility 4.5%
Food Processing 3.0%
Autos and Trucks 2.3%
Marine 1.9%
Breweries 1.5%
Pharmaceuticals 1.4%
Banking 0.9%
Automotive Products 0.7%
Food and Beverages 0.7%
Consumer Goods 0.4%
- --------------------------------------------------------------------------------
Total Common and Preferred Stocks 96.1%
================================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
48
<PAGE>
- --------------------------------------------------------------------------------
[This Page Intentionally Left Blank]
- --------------------------------------------------------------------------------
49
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities
January 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Goldman Sachs Goldman Sachs
Balanced Select Equity
Fund Fund
=================================================
<S> <C> <C>
Assets:
Investments in securities, at value (identified cost $50,883,173,
$150,717,655, $377,882,134, $761,757,992, $217,722,393,
$286,653,695 and $187,834,470, respectively) $54,395,985 $192,417,457
Cash 155,627 60,282
Receivables:
Investment securities sold 4,098,640 --
Forward foreign currency exchange contracts -- --
Fund shares sold 396,592 1,841,527
Dividends and interest 322,781 236,279
Deferred organization expenses, net 49,641 9,549
Other assets 26,017 64,472
- --------------------------------------------------------------------------------------------------------------------------
Total assets 59,445,283 194,629,566
- --------------------------------------------------------------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased 8,378,513 --
Due to bank -- --
Forward foreign currency exchange contracts -- --
Fund shares repurchased 20,396 492,617
Investment advisory fees 20,749 61,772
Administration fees 6,225 23,203
Distribution fees -- 25,458
Authorized dealer service fees 9,534 25,458
Transfer agent fees 25,883 56,565
Accrued expenses and other liabilities 55,976 70,724
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities 8,517,276 755,088
- --------------------------------------------------------------------------------------------------------------------------
Net Assets:
Paid-in capital 46,460,904 150,294,287
Accumulated undistributed (distributions in excess of) net investment income 125,304 86,854
Accumulated undistributed (distributions in excess of) net realized gain
(loss) on investment, option and futures transactions 753,268 1,768,910
Accumulated net realized foreign currency gain (loss) -- --
Net unrealized gain (loss) on investments, options and futures 3,588,531 41,724,427
Net unrealized loss on translation of assets and liabilities denominated in
foreign currencies -- --
- --------------------------------------------------------------------------------------------------------------------------
Net assets $50,928,007 $193,874,478
==========================================================================================================================
<CAPTION>
Class A Institutional/(a)/
----------- -------------
<S> <C> <C> <C>
Total shares of beneficial interest outstanding, $.001 par value
(100,000,000 shares authorized) 2,942,730 6,564,725 3,288,416
Net asset value and redemption price per share (net assets/shares
outstanding) $17.31 $19.66 $19.71
==========================================================================================================================
Maximum public offering price per share (NAV x 1.0582) $18.32 $20.80 $19.71/(b)/
==========================================================================================================================
</TABLE>
/(a)/The Goldman Sachs Select Equity Fund Institutional share class has
authorized shares of 50,000,000.
/(b)/The Goldman Sachs Select Equity Fund's Institutional shares maximum public
offering price per share is equivalent to the net asset value per share.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
50
<PAGE>
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities
January 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Goldman Sachs Goldman Sachs Goldman Sachs Goldman Sachs Goldman Sachs
Growth & Income Capital Growth Small Cap Equity International Equity Asia Growth
Fund Fund Fund Fund Fund
==================================================================================================
<S> <C> <C> <C> <C>
$435,648,574 $869,083,397 $199,414,339 $333,935,303 $214,004,358
82,485 27,024 -- 182,861 11,863
955,652 23,702,991 12,808,125 -- --
-- -- -- 1,919,496 36,208
1,386,015 1,232,985 332,693 2,051,144 2,570,690
402,372 1,100,563 80,241 183,905 99,941
38,485 -- 32,209 32,176 108,824
6,084 17,997 28,808 7,070 4,867
-------------------------------------------------------------------------------------------------
438,519,667 895,164,957 212,696,415 338,311,955 216,836,751
-------------------------------------------------------------------------------------------------
697,884 11,743,752 4,693,500 5,414,722 10,296,828
-- -- 1,563,117 -- --
-- -- -- 1,107,534 --
536,701 1,146,702 925,354 227,748 134,631
195,665 550,420 141,082 200,976 118,365
53,364 183,473 47,026 66,992 39,455
-- -- -- -- --
82,015 183,473 47,026 66,992 39,455
170,213 219,769 137,292 98,941 70,593
27,253 81,304 148,045 268,229 598,715
- -------------------------------------------------------------------------------------------------
1,763,095 14,108,893 7,702,442 7,452,134 11,298,042
- -------------------------------------------------------------------------------------------------
372,028,608 720,502,376 232,791,537 291,784,579 189,238,989
56,087 607,360 -- 227,683 (1,630,536)
6,905,437 52,620,923 (9,489,510) (7,972,571) (8,214,084)
-- -- -- (1,270,483) 348,762
57,766,440 107,325,405 (18,308,054) 52,254,492 27,191,260
-- -- -- (4,163,879) (1,395,682)
- -------------------------------------------------------------------------------------------------
$436,756,572 $881,056,064 $204,993,973 $330,859,821 $205,538,709
=================================================================================================
21,855,325 59,109,753 11,854,872 19,241,121 12,467,716
$19.98 $14.91 $17.29 $17.20 $16.49
=================================================================================================
$21.14 $15.78 $18.30 $18.20 $17.45
=================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
51
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Statements of Operations
For the Year Ended January 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Goldman Sachs Goldman Sachs
Balanced Select Equity
Fund Fund
================================
<S> <C> <C>
Investment income:
Dividends, net/(a)/ $ 404,637 $ 2,755,279
Interest 975,995 288,579
- --------------------------------------------------------------------------------------------------------------------------------
Total income 1,380,632 3,043,858
- --------------------------------------------------------------------------------------------------------------------------------
Expenses:
Investment advisory fees/(b)/ 148,493 679,759
Administration fees/(b)/ 44,548 339,880
Distribution fees/(c)/ 84,350 349,883
Authorized dealer service fees 64,145 182,881
Custodian fees 67,250 54,871
Transfer agent fees/(d)/ 72,067 115,253
Professional fees 58,620 58,601
Amortization of deferred organization expenses 13,431 30,846
Director fees 382 7,042
Other 10,353 105,063
- --------------------------------------------------------------------------------------------------------------------------------
Total expenses 563,639 1,924,079
Less--expenses reimbursable and fees waived by Goldman Sachs (266,652) (398,381)
- --------------------------------------------------------------------------------------------------------------------------------
Net expenses 296,987 1,525,698
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 1,083,645 1,518,160
- --------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment, option, futures and foreign currency
transactions:
Net realized gain (loss) from:
Investment transactions 1,697,147 4,964,974
Options transactions -- --
Futures transactions 18,740 (277,031)
Foreign currency related transactions -- --
Net change in unrealized gain (loss) on:
Investments 3,442,701 37,043,884
Options -- --
Futures 75,719 24,625
Translation of assets and liabilities denominated in foreign currencies -- --
- --------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investment, option, futures and foreign currency
transactions 5,234,307 41,756,452
- --------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $6,317,952 $43,274,612
================================================================================================================================
</TABLE>
/(a)/For the Balanced, Select Equity, Growth and Income, Capital Growth, Small
Cap Equity, International Equity and Asia Growth Funds, foreign taxes
withheld were $800, $38,480, $12,059, $14,511, $17,604, $521,564 and
$174,079, respectively.
/(b)/For the Select Equity Fund, the Advisor and Administrator both waived fees
of $101,038, respectively.
/(c)/For the year ended January 31, 1996, the distributor waived fees of
$74,247, $85,724, $794,841, $2,333,936, $727,210, $698,718 and $390,910 for
the Balanced, Select Equity, Growth and Income, Capital Growth, Small Cap
Equity, International Equity and Asia Growth Funds, respectively.
/(d)/For the Select Equity Fund, Class A shares and Institutional shares
incurred $103,682 and $11,571, respectively, of Transfer Agency fees.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
52
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Goldman Sachs Goldman Sachs Goldman Sachs Goldman Sachs Goldman Sachs
Growth & Income Capital Growth Small Cap Equity International Equity Asia Growth
Fund Fund Fund Fund Fund
=======================================================================================================
<S> <C> <C> <C> <C>
$ 7,890,451 $ 13,689,007 $ 958,805 $ 4,473,190 $ 3,748,089
1,227,990 5,032,176 1,428,163 491,270 665,670
- -------------------------------------------------------------------------------------------------------
9,118,441 18,721,183 2,386,968 4,964,460 4,413,759
- -------------------------------------------------------------------------------------------------------
1,748,649 7,001,809 2,181,629 2,096,154 1,172,731
476,904 2,333,936 727,210 698,718 390,910
986,255 3,104,424 999,563 929,746 505,066
603,426 1,563,448 454,857 470,027 276,754
61,543 124,521 47,141 463,834 353,745
524,671 549,844 254,292 129,313 192,097
48,019 93,674 57,827 80,117 83,293
19,112 13,155 18,690 17,555 31,625
6,066 32,591 3,149 2,739 2,857
130,712 205,183 87,579 49,606 152,109
- -------------------------------------------------------------------------------------------------------
4,605,357 15,022,585 4,831,937 4,937,809 3,161,187
(794,841) (2,333,936) (727,210) (698,718) (390,910)
- -------------------------------------------------------------------------------------------------------
3,810,516 12,688,649 4,104,727 4,239,091 2,770,277
- -------------------------------------------------------------------------------------------------------
5,307,925 6,032,534 (1,717,759) 725,369 1,643,482
- -------------------------------------------------------------------------------------------------------
18,738,323 188,770,202 (5,099,047) (417,744) (5,262,344)
76,997 20,437 65,448 (8,340,192) (225,907)
-- -- -- -- (278,144)
-- -- -- 21,213,851 416,433
58,158,436 53,559,848 30,594,034 62,221,183 42,480,420
(76,997) -- -- 7,613,807 --
-- -- -- -- --
-- -- -- (12,612,130) (1,710,833)
- -------------------------------------------------------------------------------------------------------
76,896,759 242,350,487 25,560,435 69,678,775 35,419,625
- -------------------------------------------------------------------------------------------------------
$82,204,684 $248,383,021 $23,842,676 $70,404,144 $37,063,107
=======================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
53
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended January 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Goldman Sachs Goldman Sachs
Balanced Select Equity
Fund Fund
==========================================
<S> <C> <C>
From operations:
Net investment income (loss) $ 1,083,645 $ 1,518,160
Net realized gain (loss) on investment, option and futures transactions 1,715,887 4,687,943
Net realized gain on foreign currency related transactions -- --
Net change in unrealized gain on investments, options and futures 3,518,420 37,068,509
Net change in unrealized loss on translation of assets and liabilities
denominated in foreign currencies -- --
- ------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 6,317,952 43,274,612
- ------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
From net investment income (991,655) (1,610,216)
In excess of net investment income -- --
From net realized gain on investment, option and futures transactions (962,754) (3,527,188)
- ------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (1,954,409) (5,137,404)
- ------------------------------------------------------------------------------------------------------------------------------
From share transactions:
Net proceeds from sales of shares 41,736,040 102,149,318
Reinvestment of dividends and distributions 1,802,563 4,880,575
Cost of shares repurchased (4,483,707) (46,260,132)
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from share transactions 39,054,896 60,769,761
- ------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) 43,418,439 98,906,969
Net assets:
Beginning of year 7,509,568 94,967,509
==============================================================================================================================
End of year $50,928,007 $193,874,478
==============================================================================================================================
Accumulated undistributed (distributions in excess of) net investment income $ 125,304 $ 86,854
==============================================================================================================================
Summary of share transactions:
<CAPTION>
Class A Institutional
----------- -------------
<S> <C> <C> <C>
Shares sold 2,578,356 2,479,285 3,220,915
Reinvestment of dividends and distributions 108,023 161,481 97,993
Shares repurchased (271,753) (2,578,247) (30,492)
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding 2,414,626 62,519 3,288,416
==============================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
54
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Goldman Sachs Goldman Sachs Goldman Sachs Goldman Sachs Goldman Sachs
Growth & Income Capital Growth Small Cap Equity International Equity Asia Growth
Fund Fund Fund Fund Fund
=======================================================================================================
<S> <C> <C> <C> <C>
$ 5,307,925 $ 6,032,534 $ (1,717,759) $ 725,369 $ 1,643,482
18,815,320 188,790,639 (5,033,599) (8,757,936) (5,766,395)
-- -- -- 21,213,851 416,433
58,081,439 53,559,848 30,594,034 69,834,990 42,480,420
-- -- -- (12,612,130) (1,710,833)
- -------------------------------------------------------------------------------------------------------
82,204,684 248,383,021 23,842,676 70,404,144 37,063,107
- -------------------------------------------------------------------------------------------------------
(5,300,032) (6,289,354) -- (9,491,864) (1,787,451)
-- -- -- -- (1,657,672)
(11,998,907) (139,713,660) (161,357) (14,089,155) --
- -------------------------------------------------------------------------------------------------------
(17,298,939) (146,003,014) (161,357) (23,581,019) (3,445,123)
- -------------------------------------------------------------------------------------------------------
199,623,973 144,529,476 56,891,181 85,900,104 88,560,430
16,219,024 131,979,456 149,801 21,651,092 2,951,847
(37,764,413) (359,937,680) (195,215,538) (98,600,969) (43,889,831)
- -------------------------------------------------------------------------------------------------------
178,078,584 (83,428,748) (138,174,556) 8,950,227 47,622,446
- -------------------------------------------------------------------------------------------------------
242,984,329 18,951,259 (114,493,237) 55,773,352 81,240,430
193,772,243 862,104,805 319,487,210 275,086,469 124,298,279
=======================================================================================================
$436,756,572 $881,056,064 $204,993,973 $330,859,821 $205,538,709
=======================================================================================================
$ 56,087 $ 607,360 $ -- $ 227,683 $ (1,630,536)
=======================================================================================================
10,766,604 9,130,715 3,285,739 5,082,572 5,830,049
848,870 9,145,811 8,585 1,286,112 197,978
(2,027,335) (22,215,374) (11,228,873) (6,067,690) (2,898,305)
- -------------------------------------------------------------------------------------------------------
9,588,139 (3,938,848) (7,934,549) 300,994 3,129,722
=======================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
55
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended January 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Goldman Sachs Goldman Sachs
Balanced Select Equity
Fund/(a)/ Fund (Class A)
=================================
<S> <C> <C>
From operations:
Net investment income (loss) $ 46,198 $ 1,229,019
Net realized gain (loss) on investment, option and futures transactions 135 3,907,236
Net realized loss on foreign currency related transactions -- --
Net change in unrealized gain (loss) on investments, options and futures 70,111 (6,127,762)
Net change in unrealized gain on translation of assets and liabilities
denominated in foreign currencies -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations 116,444 (991,507)
- ---------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
From net investment income (31,952) (1,194,733)
In excess of net investment income -- --
From net realized gain on investment, option and futures transactions -- (5,666,531)
In excess of net realized gains -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (31,952) (6,861,264)
- ---------------------------------------------------------------------------------------------------------------------------------
From share transactions:
Net proceeds from sales of shares 7,557,294 22,943,423
Reinvestment of dividends and distributions 29,834 6,328,837
Cost of shares repurchased (162,052) (19,220,744)
- ---------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from share transactions 7,425,076 10,051,516
- ---------------------------------------------------------------------------------------------------------------------------------
Additional paid-in-capital -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total increase 7,509,568 2,198,745
Net assets:
Beginning of year -- 92,768,764
- ---------------------------------------------------------------------------------------------------------------------------------
End of year $7,509,568 $ 94,967,509
=================================================================================================================================
Accumulated undistributed (distributions in excess of) net investment income $ 20,283 $ 148,064
=================================================================================================================================
Summary of share transactions:
Shares sold 537,644 1,499,807
Reinvestment of dividends and distributions 2,141 430,647
Shares repurchased (11,681) (1,250,288)
- ---------------------------------------------------------------------------------------------------------------------------------
Net increase in shares outstanding 528,104 680,166
=================================================================================================================================
</TABLE>
/(a)/For the period from October 12, 1994 (commencement of operations) to
January 31, 1995.
/(b)/For the period from July 8, 1994 (commencement of operations) to
January 31, 1995.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
56
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Goldman Sachs Goldman Sachs Goldman Sachs Goldman Sachs Goldman Sachs
Growth & Income Capital Growth Small Cap Equity International Equity Asia Growth
Fund Fund Fund Fund Fund/(b)/
=======================================================================================================
<S> <C> <C> <C> <C>
$ 1,435,147 $ 1,436,995 $ (1,802,810) $ 1,275,871 $ 1,009,860
3,170,626 56,963,691 10,050,260 (787,439) (2,447,689)
-- -- -- (15,347,388) (72,160)
(2,594,309) (98,546,227) (74,013,642) (56,248,493) (15,289,160)
-- -- -- 15,093,970 315,151
- -------------------------------------------------------------------------------------------------------
2,011,464 (40,145,541) (65,766,192) (56,013,479) (16,483,998)
- -------------------------------------------------------------------------------------------------------
(1,435,147) (647,525) -- -- (883,487)
(750,732) -- -- -- --
(3,710,152) (94,255,733) (13,272,809) (11,299,568) --
-- -- (4,550,015) -- --
- -------------------------------------------------------------------------------------------------------
(5,896,031) (94,903,258) (17,822,824) (11,299,568) (883,487)
- -------------------------------------------------------------------------------------------------------
179,853,719 220,153,475 198,396,818 145,195,062 148,278,779
5,475,966 85,073,760 16,371,394 9,972,049 793,314
(29,980,986) (141,755,523) (72,766,153) (81,858,604) (7,406,329)
- -------------------------------------------------------------------------------------------------------
155,348,699 163,471,712 142,002,059 73,308,507 141,665,764
- -------------------------------------------------------------------------------------------------------
779,879 -- -- -- --
- -------------------------------------------------------------------------------------------------------
152,244,011 28,422,913 58,413,043 5,995,460 124,298,279
41,528,232 833,681,892 261,074,167 269,091,009 --
- -------------------------------------------------------------------------------------------------------
$193,772,243 $862,104,805 $319,487,210 $275,086,469 $124,298,279
=======================================================================================================
$ 29,482 $ 851,025 -- $ (423,846) $ 143,969
=======================================================================================================
11,178,610 14,260,854 10,110,654 8,468,691 9,803,931
355,278 5,913,973 971,295 655,625 52,995
(1,896,509) (9,348,284) (3,925,959) (5,047,356) (518,932)
- -------------------------------------------------------------------------------------------------------
9,637,379 10,826,543 7,155,990 4,076,960 9,337,994
=======================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
57
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements
January 31, 1996
- --------------------------------------------------------------------------------
1. Organization
Goldman Sachs Equity Portfolios, Inc. (the "Company") is a Maryland corporation
registered under the Investment Company Act of 1940, as amended, as an open-end,
diversified management investment company. Included in this report are the
financial statements for the Goldman Sachs Balanced Fund ("Balanced Fund"),
Goldman Sachs Select Equity Fund ("Select Equity Fund"), Goldman Sachs Growth
and Income Fund ("Growth and Income Fund"), Goldman Sachs Capital Growth Fund
("Capital Growth Fund"), Goldman Sachs Small Cap Equity Fund ("Small Cap Equity
Fund"), Goldman Sachs International Equity Fund ("International Equity Fund")
and Goldman Sachs Asia Growth Fund ("Asia Growth Fund"), collectively, "the
Funds." As of January 31, 1996, the Select Equity Fund offers two classes of
shares - Class A and Institutional shares.
2. Significant Accounting Policies
The following is a summary of the significant accounting policies consistently
followed by the Company 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
Funds have the choice to receive either cash or stock are recognized as
investment income in an amount equal to the cash dividend. This amount is also
used as an estimate of the fair value of the stock received. Interest income is
determined on the basis of interest accrued, premium amortized and discount
earned. The Balanced Fund does not amortize premiums. In addition, net
realized capital gains on securities in certain countries gives rise to capital
gains taxes. It is the Funds' policy to accrue for estimated capital gains taxes
on certain foreign securities held by the Funds.
C. Mortgage Dollar Rolls
- -------------------------
The Balanced Fund may enter into mortgage "dollar rolls" in which the Fund sells
securities in the current month for delivery and simultaneously contracts with
the same counterparty to repurchase similar (same type, coupon and maturity) but
not identical securities on a specified future date. The Fund loses the right
to receive principal and interest paid on the securities sold. However, the
Fund benefits to the extent of any price received for the securities sold and
the lower forward price for the future purchase (often referred to as the
"drop") or fee income plus the interest earned on the cash proceeds of the
securities sold until the settlement date of the forward purchase. The Fund
will hold and maintain in a segregated account, until the settlement date, cash
or liquid, high grade debt securities in an amount equal to
- --------------------------------------------------------------------------------
58
<PAGE>
- --------------------------------------------------------------------------------
the forward purchase price. For financial reporting and tax reporting purposes,
the Fund treats mortgage dollar rolls as two separate transactions; one
involving the purchase of a security and a separate transaction involving a
sale.
D. Foreign Currency Translations
- ---------------------------------
The books and records of the Company are maintained in U.S. dollars. Amounts
denominated in foreign currencies are translated into U.S. dollars on the
following basis:
(i) investment valuations, other assets and liabilities initially expressed in
foreign currencies are converted each business day into U.S. dollars based on
current exchange rates; (ii) purchases and sales of foreign investments, income
and expenses are converted into U.S. dollars based on currency exchange rates
prevailing on the respective dates of such transactions.
Net realized and unrealized gain (loss) on foreign currency transactions will
represent: (i) foreign exchange gains and losses from the sale and holdings of
foreign currencies and investments; (ii) gains and losses between trade date and
settlement date on investment securities transactions and forward exchange
contracts; and (iii) gains and losses from the difference between amounts of
dividends and interest recorded and the amounts actually received.
E. Forward Foreign Currency Exchange Contracts
- -----------------------------------------------
Certain of the Funds are authorized to enter into forward foreign currency
exchange contracts for the purchase of a specific foreign currency at a fixed
price on a future date as a hedge or cross-hedge against either specific
transactions or portfolio positions. The International Equity and Asia Growth
Funds may enter into such contracts to seek to increase total return. The
aggregate principal amounts of the contracts for which delivery is anticipated
are reflected in the Funds' accounts, while the aggregate principal amounts are
reflected net in the accompanying Statements of Assets and Liabilities. All
commitments are "marked-to-market" daily at the applicable translation rates and
any resulting unrealized gains or losses are recorded in the funds' financial
statements. The Funds record realized gains or losses at the time the forward
contract is offset by entry into a closing transaction or extinguished by
delivery of the currency. Risks may arise upon entering these contracts from
the potential inability of counterparties to meet the terms of their contracts
and from unanticipated movements in the value of a foreign currency relative to
the U.S. dollar.
F. Federal Taxes
- -----------------
It is the Funds' policy to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute each year
substantially all of their investment company taxable income and capital gains
to their shareholders. Accordingly, no federal tax provisions are required.
The characterization of distributions to shareholders for financial reporting
purposes is determined in accordance with income tax rules. Therefore, the
source of the Funds' distributions may be shown in the accompanying financial
statements as either from or in excess of net investment income or net realized
gain on investment transactions, or from capital, depending on the type of
book/tax differences that may exist as well as timing differences associated
with having different book and tax year ends.
Asia Growth Fund had approximately $184,000 and $5,623,000 at October 31, 1995
(the Fund's tax year end) of capital loss carryforward expiring in 2002 and
2003, respectively, for federal tax purposes. The Small Cap Equity Fund had
approximately $2,438,000 of capital loss carryforward at January 31, 1996 (the
Fund's tax year end) expiring in 2004. These amounts are available to be
carried forward to offset future capital gains to the extent permitted by
applicable laws or regulations.
G. Deferred Organization Expenses
- ----------------------------------
Organization-related costs are being amortized on a straight-line basis over a
period of five years.
- --------------------------------------------------------------------------------
59
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
January 31, 1996
- --------------------------------------------------------------------------------
H. 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.
For the Select Equity Fund, shareholders of Class A shares bear all expenses
and fees relating to the distribution and authorized dealer service plans as
well as other expenses which are directly attributable to such shares. The Class
A and Institutional shareholders separately bear their respective class-specific
transfer agency fees.
I. Option Accounting Principles
- --------------------------------
When certain of the Funds write call or put options, an amount equal to the
premium received is recorded as an asset and as an equivalent liability. The
amount of the liability is subsequently marked-to-market to reflect the current
market value of the option written. When a written option expires on its
stipulated expiration date or the funds enter into a closing purchase
transaction, the funds realize a gain or loss without regard to any unrealized
gain or loss on the underlying security, and the liability related to such
option is extinguished. When a written call option is exercised, the funds
realize a gain or loss from the sale of the underlying security, and the
proceeds of the sale are increased by the premium originally received. When a
written put option is exercised, the amount of the premium originally received
will reduce the cost of the security which the funds purchase upon exercise.
There is a risk of loss from a change in value of such options which may exceed
the related premiums received.
Upon the purchase of a call option or a protective put option by the Funds
the premium paid is recorded as an investment and subsequently marked-to-market
to reflect the current market value of the option. If an option which the Funds
have purchased expires on the stipulated expiration date, the funds will realize
a loss in the amount of the cost of the option. If the funds enter into a
closing sale transaction, the funds will realize a gain or loss, depending on
whether the sale proceeds from the closing sale transaction are greater or less
than the cost of the option. If the Funds exercise a purchased put option, the
funds will realize a gain or loss from the sale of the underlying security, and
the proceeds from such sale will be decreased by the premium originally paid. If
the Funds exercise a purchased call option, the cost of the security which the
funds purchase upon exercise will be increased by the premium originally paid.
J. Futures Contracts
- ---------------------
The Funds may enter into futures transactions in order to hedge against changes
in interest rates, securities prices or currency exchange rates or to seek to
increase total return. The Select Equity Fund may enter into such transactions
only with respect to the S&P 500 Index. A Fund will engage in futures
transactions only for bona fide hedging purposes as defined in regulations of
the CFTC or (except with respect to transactions by the Balanced, Growth and
Income, Select Equity, Capital Growth and Small Cap Equity Funds, in futures on
foreign currencies) to seek to increase total return to the extent permitted by
such regulations. The use of futures contracts involve, to varying degrees,
elements of market risk which may exceed the amounts recognized in the
Statements of Assets and Liabilities.
Upon entering into a futures contract, the Funds are required to deposit with
a broker an amount of cash or securities equal to the minimum "initial margin"
requirement of the futures exchange on which the contract is traded. Subsequent
payments ("variation margin") are made or received by the Funds each day,
dependent on the daily fluctuations in the value of the contract, and are
recorded for financial reporting purposes as unrealized gains or losses by the
Funds. When entering into a closing transaction, for book purposes, the Funds
will realize a gain or loss equal to the difference between the value of the
futures contract to sell and the futures contract to buy. Futures contracts are
valued at the most recent price, unless such price does not reflect the fair
market value of the contract, in which case the position will be valued
- --------------------------------------------------------------------------------
60
<PAGE>
- --------------------------------------------------------------------------------
using methods approved by the Board of Directors of the Company.
Certain risks may arise upon entering into futures contracts. The predominant
risk is that the changes in the value of the futures contract may not directly
correlate with changes in the value of the underlying securities. This risk may
decrease the effectiveness of the Funds' hedging strategies and may also result
in a loss to the Funds.
3. Agreements
- --------------
Goldman Sachs Asset Management ("GSAM"), a separate operating division of
Goldman, Sachs & Co. ("Goldman Sachs"), acts as investment adviser to the
Balanced, Growth and Income, Small Cap Equity and International Equity Funds;
Goldman Sachs Funds Management, L.P. ("GSFM"), an affiliate of Goldman Sachs,
acts as investment adviser to the Select Equity and Capital Growth Funds; and
Goldman Sachs Asset Management International ("GSAM International") acts as
investment adviser to the Asia Growth Fund. GSAM International also acts as
subadviser to the International Equity Fund. Under the Investment Advisory and
Subadvisory Agreements, GSAM, GSFM and GSAM International, subject to the
general supervision of the Company's Board of Directors, manage the Company's
portfolios. With regard to the Asia Growth Fund, GSAM International relies on
its Singapore affiliate, Goldman Sachs (Singapore) Limited, for portfolio
decisions and management. As compensation for the services rendered under the
Investment Advisory Agreements and the assumption of the expenses related
thereto, GSAM is entitled to a fee, computed daily and payable monthly, at an
annual rate equal to .50%, .55%, .75% and .25% of the average daily net assets
of the Balanced, Growth and Income, Small Cap Equity and International Equity
Funds, respectively. GSFM is entitled to a fee of .50% and .75% of the average
daily net assets of the Select Equity and Capital Growth Funds, respectively.
For the year ended January 31, 1996, for the Select Equity Fund, GSFM waived a
portion of its advisory fee. GSFM may discontinue or modify such limitation in
the future at its discretion. GSAM International is entitled to an advisory fee
for the Asia Growth Fund and a subadvisory fee for the International Equity Fund
of .75% and .50% of the average daily net assets for those funds, respectively.
GSAM also acts as the Funds' administrator pursuant to Administration
Agreements. Under these Administration Agreements, GSAM administers the Funds'
business affairs, including providing facilities. As compensation for the
services rendered pursuant to the Administration Agreements, GSAM is entitled to
a fee of .15% of the average daily net assets of the Balanced and Growth and
Income Funds, and .25% of the average daily net assets of the Select Equity,
Capital Growth, Small Cap Equity, International Equity and Asia Growth Funds.
For the year ended January 31, 1996, for the Select Equity Fund, GSAM waived a
portion of its administration fee. GSAM may discontinue or modify such
limitation in the future at its discretion.
Goldman Sachs has voluntarily agreed to reduce or limit certain "Other
Expenses" for the Balanced, Select Equity, Growth and Income and Asia Growth
Funds (excluding advisory, administration, distribution and authorized dealer
service fees and litigation, indemnification, taxes, interest, brokerage
commissions and extraordinary expenses and with respect to the Select Equity
Fund, transfer agent fees) until further notice to the extent such expenses
exceed .10%, .06%, .30% and .65% of the average daily net assets of the funds,
respectively. The amount reimbursable to the Select Equity Fund at January 31,
1996 was approximately $33,000 and is reflected in "Other Assets" in the
accompanying Statements of Assets and Liabilities.
Goldman Sachs serves as the Distributor of shares of the Funds pursuant to
Distribution Agreements. Goldman Sachs may receive a portion of the sales load
imposed on the sale of fund shares and has advised the Company that it retained
approximately $28,000, $108,000, $771,000, $523,000, $202,000, $211,000 and
$507,000 during the year ended January 31, 1996 for the Balanced, Select Equity
Class A, Growth and Income, Capital Growth,
- --------------------------------------------------------------------------------
61
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
January 31, 1996
- --------------------------------------------------------------------------------
Small Cap Equity, International Equity and Asia Growth Funds, respectively.
The Company, on behalf of each Fund, has adopted a Distribution Plan (the
"Distribution Plan") pursuant to Rule 12b-1. Under the Distribution Plan,
Goldman Sachs is entitled to a quarterly fee from each Fund for distribution
services equal, on an annual basis, to .25% of a Fund's average daily net assets
(or, in the case of Select Equity Fund, the average daily net assets
attributable to Class A shares). For the year ended January 31, 1996, Goldman
Sachs has voluntarily agreed to waive a portion of such fee for each Fund.
Effective June 1, 1995, each Fund's Distribution Plan was amended to reduce the
contractual fee from .50% to .25% of average daily net assets and to eliminate
the provision of certain services under the Distribution Plan which are
currently provided under the Authorized Dealer Service Plan.
Effective June 1, 1995, the Company, on behalf of each Fund, adopted an
Authorized Dealer Service Plan (the "Service Plan") pursuant to which Goldman
Sachs and Authorized Dealers are compensated for providing personal and account
maintenance services. Each Fund pays a fee under its Service Plan equal to an
annual basis of .25% of its average daily net assets (or, in the case of Select
Equity Fund, the average daily net assets attributable to Class A shares).
Goldman Sachs also serves as the Transfer Agent of the Funds for a fee.
4. Portfolio Securities Transactions
Purchases and proceeds of sales or maturities of securities (excluding short-
term investments, futures and options written) for the year ended January 31,
1996, were as follows:
<TABLE>
<CAPTION>
Fund Purchases Sales or Maturities
- ---- -------------- -------------------
<S> <C> <C>
Balanced $ 89,305,633 $ 54,456,475
Select Equity 102,720,929 51,983,979
Growth and Income 320,155,385 172,612,731
Capital Growth 542,809,663 749,703,704
Small Cap Equity 159,198,180 291,510,540
International Equity 185,822,152 209,935,006
Asia Growth 183,192,199 130,716,523
</TABLE>
Included in the above amounts were purchases and proceeds of sales or
maturities of governmental securities (excluding short-term investment and
options) for the Balanced Fund in the amounts of $47,737,263 and $41,994,556,
respectively.
For the year ended January 31, 1996, written option transactions in the
Growth and Income Fund were as follows:
<TABLE>
<CAPTION>
Call Options
------------------------------------------
Number of Premiums
Options Written Contracts Received
- -------------------------------------------------------------------------------
<S> <C> <C>
Balance outstanding,
beginning of year 200 $ 76,997
Options written -- --
Options expired (200) (76,997)
Options exercised -- --
- -------------------------------------------------------------------------------
Balance outstanding,
end of year -- $ --
- -------------------------------------------------------------------------------
</TABLE>
For the year ended January 31, 1996, written option transactions in the
Capital Growth Fund were as follow:
<TABLE>
<CAPTION>
Call Options
------------------------------------------
Number of Premiums
Options Written Contracts Received
- -------------------------------------------------------------------------------
<S> <C> <C>
Balance outstanding,
beginning of year -- $ --
Options written 8,850 1,758,487
Options expired (2,626) (752,364)
Options repurchased (6,224) (1,006,123)
- -------------------------------------------------------------------------------
Balance outstanding,
end of year -- $ --
- -------------------------------------------------------------------------------
</TABLE>
For the year ended January 31, 1996, written option transactions in the Small
Cap Equity Fund were as follows:
<TABLE>
<CAPTION>
Call Options
------------------------------------------
Number of Premiums
Options Written Contracts Received
- -------------------------------------------------------------------------------
<S> <C> <C>
Balance outstanding,
beginning of year -- $
Options written 900 65,448
Options expired (900) (65,448)
Options exercised -- --
- -------------------------------------------------------------------------------
Balance outstanding,
end of year -- $
- -------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
62
<PAGE>
- --------------------------------------------------------------------------------
For the year ended January 31, 1996, purchased option transactions in the
International Equity Fund were as follows:
<TABLE>
<CAPTION>
Call Options Purchased Cost
- --------------------------------------------------------------------------------
<S> <C>
Balance outstanding, beginning of year $ 8,340,192
Options purchased --
Options expired (8,340,192)
Options sold $ --
- --------------------------------------------------------------------------------
Value at end of year $ --
================================================================================
</TABLE>
For the year ended January 31, 1996, written and purchased option
transactions in the Asia Growth Fund were as follows:
<TABLE>
<CAPTION>
Put Options
--------------------------------
Number of Premiums
Options Written Contracts Received
- --------------------------------------------------------------------------------
<S> <C> <C>
Balance outstanding, beginning of year 12,700 $ 180,767
Options written -- --
Options expired (12,700) (180,767)
Options exercised -- --
- --------------------------------------------------------------------------------
Balance outstanding, end of year -- $ --
================================================================================
</TABLE>
Call Options Purchased Cost
- --------------------------------------------------------------------------------
Balance outstanding, beginning of year $ --
Options purchased 495,606
Options expired --
Options sold (495,606)
- --------------------------------------------------------------------------------
Value at end of year $ --
================================================================================
Certain risks arise related to call and put options from the possible
inability of counterparties to meet terms of their contracts.
At January 31, 1996, the International Equity Fund had the following
outstanding forward foreign currency exchange contracts:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Foreign Currency Value on Unrealized
Sale Contracts Settlement Date Current Value Gain (Loss)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Belgian Franc
expiring 9/9/96 $ 5,263,357 $ 5,310,094 $ (46,737)
Deutschemark
expiring 3/4/96 30,900,000 30,492,745 407,255
Hong Kong Dollar
expiring 2/7/96 13,737,848 13,742,301 (4,453)
Japanese Yen
expiring 4/17/96 30,840,446 30,278,095 562,351
British Pound Sterling
expiring 2/12/96 12,440,309 12,190,130 250,179
expiring 4/4/96 3,796,394 3,741,279 55,115
Swedish Krona
expiring 2/7/96 12,852,992 12,389,934 463,058
- --------------------------------------------------------------------------------
Total Foreign Currency
Sale Contracts $109,831,346 $108,144,578 $1,686,768
================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
Foreign Currency Value on Unrealized
Purchase Contracts Settlement Date Current Value Gain (Loss)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Deutschemark
expiring 2/7/96 $ 12,762,995 $ 12,155,628 $ (607,367)
expiring 4/4/96 3,703,390 3,587,995 (115,395)
expiring 9/9/96 5,262,483 5,289,903 27,420
British Pound Sterling
expiring 2/1/96 1,257,254 1,261,225 3,971
Japanese Yen
expiring 2/1/96 198,390 198,909 519
Singapore Dollar
expiring 2/2/96 359,737 359,737 0
Thailand Baht
expiring 2/2/96 205,650 205,569 (81)
- --------------------------------------------------------------------------------
Total Foreign Currency
Purchase Contracts $ 23,749,899 $ 23,058,966 $ (690,933)
================================================================================
</TABLE>
At January 31, 1996, the Asia Growth Fund had the following outstanding
forward foreign currency exchange contract:
- --------------------------------------------------------------------------------
63
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
January 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Foreign Currency Value on Unrealized
Sale Contract Settlement Date Current Value Gain
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Malaysian Ringgit
expiring 4/22/96 $ 9,320,000 $ 9,283,792 $ 36,208
- --------------------------------------------------------------------------------
</TABLE>
The contractual amounts of forward foreign currency exchange contracts do
not necessarily represent the amounts potentially subject to risk. The
measurement of the risks associated with these instruments is meaningful only
when all related and offsetting transactions are considered. At January 31,
1996, the International Equity and Asia Growth Funds had sufficient cash and
securities to cover any commitments under these contracts.
The International Equity Fund has recorded a "Receivable for forward foreign
currency exchange contracts" and "Payable for forward foreign currency exchange
contracts" resulting from open and closed but not settled forward foreign
currency exchange contracts of $1,919,496 and $1,107,534, respectively, in the
accompanying Statements of Assets and Liabilities. Included in these amounts are
$149,628 and $333,501, respectively, related to forward contracts closed but not
settled as of January 31, 1996. The Asia Growth Fund has recorded a "Receivable
for forward foreign currency exchange contracts" resulting from the open forward
foreign currency exchange contract of $36,208 in the accompanying Statements of
Assets and Liabilities.
For the year ended January 31, 1996, Goldman Sachs earned approximately
$7,000, $71,000, $285,000, $73,000, $14,000 and $49,000 of brokerage commissions
from portfolio transactions executed on behalf of the Balanced, Growth and
Income, Capital Growth, Small Cap Equity, International Equity and Asia Growth
Funds, respectively.
5. Line of Credit Facility
The Funds participate in a $100,000,000 uncommitted, unsecured revolving line of
credit facility. In addition, the Funds, except the Select Equity Fund,
participate in a $50,000,000 committed, unsecured revolving line of credit
facility. Both facilities are to be used solely for temporary or emergency
purposes. Under the most restrictive arrangement, each Fund must own securities
having a market value in excess of 300% of the total bank borrowings. The
interest rate on the borrowings is based on the Federal Funds rate. The
committed facility also requires a fee to be paid based on the amount of the
commitment which has not been utilized. During the year ended January 31, 1996,
the Funds did not have any borrowings under these facilities.
6. Certain Reclassifications
In accordance with Statement of Position 93-2, the Balanced, Select Equity,
Growth and Income, Capital Growth, International Equity and Asia Growth Funds
have reclassified $13,031, $30,846, $18,712, $13,155, $17,555 and $31,625,
respectively, from paid-in capital to accumulated undistributed net investment
income. Additionally, the Small Cap Equity Fund has reclassified $1,717,759 from
paid-in capital to accumulated net investment loss and $255,461 from paid in
capital to accumulated undistributed net realized loss. The International Equity
Fund has reclassified $9,400,469 from accumulated net realized foreign currency
loss to undistributed net investment income and $25,370,939 from undistributed
net realized loss. The Asia Growth Fund has reclassified $4,489 from
undistributed net investment income to accumulated net realized foreign currency
gain. These reclassifications have no impact on the net asset value of the Funds
and are designed to present the Funds' capital accounts on a tax basis.
7. 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 Company's
- --------------------------------------------------------------------------------
64
<PAGE>
- --------------------------------------------------------------------------------
custodian, or at sub-custodians. Goldman Sachs monitors the market value of the
underlying securities by pricing them daily.
8. Joint Repurchase Agreement Account
The Funds, together with other registered investment companies having advisory
agreements with GSAM or GSFM, transfer uninvested cash balances into joint
accounts, the daily aggregate balance of which is invested in one or more
repurchase agreements. The underlying securities for the repurchase agreements
are U.S. Treasury and agency obligations. At January 31, 1996, the Balanced,
Select Equity, Growth and Income and Capital Growth Funds had a 1.43%, 1.39%,
5.61%, and 4.28%, respectively, undivided interest in the repurchase agreements
in the following joint account which equaled $7,000,000, $6,800,000, $27,400,000
and $20,900,000, respectively, 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:
<TABLE>
<CAPTION>
Principal Interest Maturity Amortized
Amount Rate Date Cost
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Lehman Government Securities, dated 01/31/96, repurchase price $250,041,458
(U.S. Treasury Notes: $254,879,914, 4.63%-8.88%,
02/15/96-08/15/02)
$250,000,000 5.97% 02/01/96 $ 250,000,000
Salomon Brothers, Inc., dated 01/31/96, repurchase price
$238,439,402 (U.S. Treasury Interest-Only Strips: $151,540,101,
05/15/97-11/15/02; U.S. Treasury Principal-Only Strips:
$91,713,529, 8.13%-9.13%, 02/15/98-11/15/00)
238,400,000 5.95% 02/01/96 238,400,000
- --------------------------------------------------------------------------------
Total Joint Repurchase Agreement Account $488,400,000
================================================================================
</TABLE>
9. Transactions With Affiliated Companies
A Fund is considered to be invested in an affiliated company if that Fund owns
greater than five percent of the outstanding voting securities of such company.
Transactions during the year with companies which are considered affiliates of
Small Cap Equity as of January 31, 1996 are as follows (dollar amounts in
thousands):
<TABLE>
<CAPTION>
Purchase Sales Dividend Market
Affiliate Name Cost Proceeds Income Value
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
American Safety Razor Co. $ 267 $ 1,918 $ -- $ 6,540
J. Baker, Inc. 3,565 -- 53 4,388
Black Box Corp. 569 1,115 -- 14,892
Brookstone, Inc. 287 379 -- 7,032
Congoleum Corp. 6,405 1,468 -- 4,231
Finlay Enterprises, Inc. 5,108 110 -- 3,930
Hollinger International Inc. 457 1,105 96 9,418
International Post Ltd. 135 157 -- 4,059
Morningstar Group, Inc. 359 5,551 -- 7,726
North American Watch Corp. 502 2,719 70 13,442
Opinion Research Corp. -- -- -- 3,168
Quantum Restaurant Group, Inc. 290 1,393 -- 7,835
- ----------------------------------------------------------------------------------------------------
Totals $17,944 $ 15,915 $ 219 $ 86,661
=====================================================================================================
</TABLE>
10. Summary of Share Transactions
Share activity for the year ended January 31, 1996 is as follows:
<TABLE>
<CAPTION>
Select Equity Fund Class A Institutional
================================================================================
<S> <C> <C>
Shares sold $ 44,569,920 $ 57,579,397
Reinvestments of dividends
and distributions 3,032,597 1,847,978
Shares repurchased (45,692,944) (567,188)
-----------------------------------------
1,909,573 58,860,187
-----------------------------------------
Distributions from:
Net investment income 925,006 685,210
Net realized gain 2,363,976 1,163,212
-----------------------------------------
3,288,982 1,848,422
-----------------------------------------
</TABLE>
11. Other Matters
On August 1, 1995, the Capital Growth Fund, in an interportfolio trade,
transferred securities valued at approximately $105,460,000 to the Goldman Sachs
Mid-Cap Equity Fund related to shareholder exchanges into such fund.
- --------------------------------------------------------------------------------
65
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from Distributions to
investment operations shareholders
------------------------------------------ ------------------------------------------
Net realized From
and unrealized net realized
Net asset gain on Total Income From gain on
value, Net investments, from net investment Total
beginning investment options and investment investment and futures distributions to
of period income futures operations income transactions shareholders
===================================================================================================
BALANCED FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended January 31,
- ------------------------------
1996............................. $14.22 $0.51 $3.43 $3.94 ($0.50) ($0.35) ($0.85)
For the Period Ended January 31,
- --------------------------------
1995 /(c)/....................... 14.18 0.10 0.02 0.12 (0.08) -- (0.08)
<CAPTION>
Ratio of Ratio of net Net
Net asset net investment assets at
Net increase value, expenses to income to Portfolio end of
in net end of Total average net average net turnover period
asset value period return/(a)/ assets assets rate (in 000s)
========================================================================================
BALANCED FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended January 31,
- ------------------------------
1996...................................... $3.09 $17.31 28.10% 1.00% 3.65% 197.10%/(a)/ $50,928
For the Period Ended January 31,
- --------------------------------
1995 /(c)/................................ 0.04 14.22 0.87/(b)/ 1.00/(d)/ 3.39/(d)/ 14.71/(b)/ 7,510
<CAPTION>
Ratio assuming no
voluntary waiver of fees
or expense limitations
------------------------------
Ratio of net
Ratio of investment
expenses income (loss)
to average to average
net assets net assets
==============================
- ----------------------------------------------------------------
<S> <C> <C>
For the Year Ended January 31,%
- ------------------------------
1996............................. 1.90% 2.75%
For the Period Ended January 31,
- --------------------------------
1995 /(c)/....................... 8.29/(d)/ (3.90)/(d)/
- ---------------------------------------
</TABLE>
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no sales
charges. Total return would be reduced if a sales charge were taken into
account.
/(b)/Not annualized.
/(c)/For the period from October 12, 1994 (commencement of operations) to
January 31, 1995.
/(d)/Annualized.
/(e)/Includes the effect of mortgage dollar roll transactions.
- --------------------------------------------------------------------------------
The accompanying notes are an intergral part of these financial statements.
66
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from Distributions to
investment operations shareholders
------------------------------------------ ------------------------------------------
Net realized From
and unrealized net realized
Net asset gain (loss) on Total Income From gain on
value, Net investments, (loss) from net investment Total
beginning investment options and investment investment and futures distributions to
of period income futures operations income transactions shareholders
===================================================================================================
SELECT EQUITY FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended January 31,
- ------------------------------
1996-Class A Shares.............. $14.61 $0.19 $5.43 $5.62 ($0.16) ($0.41) ($0.57)
1996-Institutional Shares/(d)/... 16.97 0.16 3.23 3.39 (0.24) (0.41) (0.65)
1995-Class A Shares.............. 15.93 0.20 (0.38) (0.18) (0.20) (0.94) (1.14)
1994-Class A Shares.............. 15.46 0.17 2.08 2.25 (0.17) (1.61) (1.78)
1993-Class A Sahres.............. 15.05 0.22 0.41 0.63 (0.22) -- (0.22)
For the Period Ended January 31,
- --------------------------------
1992-Class A Shares/(e)/......... 14.17 0.11 0.88 0.99 (0.11) -- (0.11)
<CAPTION>
Ratio of Ratio of net Net
Net increase Net asset net investment assets at
(decrease) value, expenses to Income to Portfolio end of
in net end of Total average net average net turnover period
asset value period return/(a)/ assets assets rate (in 000s)
========================================================================================
SELECT EQUITY FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended January 31,
- ------------------------------
1996-Class A Shares........................... $5.05 $19.66 38.63% 1.25% 1.01% 39.35% $129,045
1996-Institutional Shares/(d)/................ 2.74 19.71 20.14/(b)/ 0.65/(e)/ 1.49/(c)/ 39.35/(b)/ 64,829
1995-Class A Shares........................... (1.32) 14.61 (1.10) 1.38 1.33 56.18 94,968
1994-Class A Shares........................... 0.47 15.93 15.12 1.42 0.92 87.73 92,769
1993-Class A Shares........................... 0.41 15.46 4.30 1.28 1.30 144.93 117,757
For the Period Ended January 31,
- --------------------------------
1992-Class A Shares/(e)/....................... 0.88 15.05 7.01/(b)/ 1.57/(c)/ 1.24/(c)/ 135.02/(c)/ 151,142
<CAPTION>
Ratio assuming no
voluntary waiver of fees
or expense limitations
------------------------------
Ratio of net
Ratio of investment
expenses income
to average to average
net assets net assets
==============================
- ----------------------------------------------------------------
<S> <C> <C>
For the Year Ended January 31,
- ------------------------------
1996-Class A Shares............. 1.55% 0.71%
1996-Institutional Shares/(d)/.. 0.96/(c)/ 1.18/(c)/
1995-Class A Shares............. 1.63 1.08
1994-Class A Shares............. 1.67 0.67
1993-Class A Shares............. 1.53 1.05
For the Period Ended January 31,
- --------------------------------
1992-Class A Shares/(e)/......... 1.82/(c)/ 0.99/(c)/
- ---------------------------------------
</TABLE>
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no sales
charges. Total return would be reduced if a sales charge were taken into
account.
/(b)/Not annualized.
/(c)/Annualized.
/(d)/Institutional shares commenced operations on June 15, 1995.
/(e)/For the period from May 24, 1991 (commencement of operations) to January
31, 1992.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
67
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from Distributions to
investment operations shareholders
------------------------------------------ ------------------------------------------
From
Net realized Total net realized
Net asset and unrealized income From gain on In excess
value, Net gain on from net investment of net
beginning investment investments, investment investment and option investment
of period income and options operations income transactions income
===================================================================================================
GROWTH AND INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended January 31,
- ------------------------------
1996............................. $15.80 $0.33 $4.75 $5.08 $(0.30) $(0.60) $ --
1995............................. 15.79 0.20/(b)/ 0.30/(b)/ 0.50 (0.20) (0.33) (0.07)
For the Period Ended January 31,
- --------------------------------
1994 /(c)/....................... 14.18 0.15 1.68 1.83 (0.15) (0.06) (0.01)
<CAPTION>
Ratio of Ratio of net
Net asset net investment
Total Additional Net increase value, expenses to income to Portfolio
distributions to paid-in in net end of Total average net average net turnover
shareholders capital asset value period return/(a)/ assets assets rate
==========================================================================================================
GROWTH AND INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended January 31,
- ------------------------------
1996.......................... $(0.90) $ -- $4.18 $19.98 32.45% 1.20% 1.67% 57.93%
1995.......................... (0.60) 0.11/(b)/ 0.01 15.80 3.97 1.25 1.28 71.80
For the Period Ended January 31,
- --------------------------------
1994 /(c)/.................... (0.22) -- 1.61 15.79 13.08/(d)/ 1.25/(e)/ 1.23(e) 102.23/(d)/
<CAPTION>
Ratio assuming no
voluntary waiver of fees
or expense limitations
------------------------------
Net Ratio of net
assets at Ratio of investment
end of expenses income (loss)
period to average to average
(in 000s) net assets net assets
===========================================
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
For the Year Ended January 31,
- ------------------------------
1996............................. $436,757 1.45% 1.42%
1995............................. 193,772 1.58 0.95
For the Period Ended January 31,
- --------------------------------
1994 /(c)/....................... 41,528 3.24/(e)/ (0.76)/(e)/
- ----------------------------------
</TABLE>
/(a)/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no
sales charges. Total return would be reduced if a sales charge were taken
into account.
/(b)/ Calculated based on the average shares outstanding methodology.
/(c)/ For the period from February 5, 1993 (commencement of operations) to
January 31, 1994.
/(d)/ Not annualized.
/(e)/ Annualized.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
68
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment
operations Distributions to shareholders
---------------------------------------------- -------------------------------------------
Net realized
and unrealized From net
Net asset gain (loss) on Total income From realized gain In excess
value, Net investments, (loss) from net on investments, of net
beginning investment options and investment investment options investment
of period income futures operations income and futures income
===================================================================================================
CAPITAL GROWTH FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended January 31,
- ------------------------------
1996............................. $13.67 $0.12 $3.93 $4.05 ($0.12) ($2.69) $ --
1995............................. 15.96 0.03 (0.69) (0.66) (0.01) (1.62) --
1994............................. 14.64 0.02 2.40 2.42 (0.01) (1.07) (0.02)
1993............................. 13.65 0.06 2.28 2.34 (0.07) (1.28) --
1992............................. 11.10 0.28 2.90 3.18 (0.31) (0.32) --
For the Period Ended January 31,
- --------------------------------
1991/(b)/........................ 11.34 0.34 (0.27) 0.07 (0.31) -- --
<CAPTION>
Ratio of Ratio of net Net
Net increase Net asset net investment assets at
Total (decrease) value, expenses to Income to Portfolio end of
distributions in net end of Total average net average net turnover period
in shareholders asset value period return/(a)/ assets assets rate (in 000s)
=========================================================================================================
CAPITAL GROWTH FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended January 31,
- ------------------------------
1996.......................... $(2.81) $1.24 $14.91 30.45% 1.36% 0.65% 63.90% $881,056
1995.......................... (1.63) (2.29) 13.67 (4.38) 1.38 0.16 38.36 862,105
1994.......................... (1.10) 1.32 15.96 16.89 1.38 0.13 36.12 883,682
1993.......................... (1.35) 0.99 14.64 18.01 1.41 0.42 58.93 665,976
1992.......................... (0.63) 2.55 13.65 29.31 1.53 2.09 48.93 500,307
For the Period Ended January 31,
- --------------------------------
1991.......................... (0.31) (0.24) 11.10 0.84/(c)/ 1.27/(c)/ 3.24/(c)/ 35.63/(c)/ 437,533
<CAPTION>
Ratios assuming no
voluntary waiver of fees
------------------------------
Ratio of net
Ratio of investment
expenses income (loss)
to average to average
net assets net assets
==============================
- ----------------------------------------------------------------
<S> <C> <C>
For the Year Ended January 31,
- ------------------------------
1996............................ 1.61% 0.40%
1995............................ 1.63 (0.09)
1994............................ 1.63 (0.12)
1993............................ 1.66 0.17
1992............................ 1.78 1.84
For the Period Ended January 31,
- --------------------------------
1991/(b)/........................ 1.47/(c)/ 3.04/(c)/
- ---------------------------------------
</TABLE>
(a) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no sales
charges. Total return would be reduced if a sales charge were taken into
account.
(b) For the period from April 20, 1990 (commencement of operations) to January
31, 1991.
(c) Not annualized.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
69
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from Distributions to
investment operations shareholders
------------------------------------------ ------------------------------------------
In excess of
Net realized From net realized
and unrealized realized gain gains on
Net asset gain (loss) on Total Income From on investment, investment,
value, Net investments, (loss) from net option option and
beginning investment options and investment investment and futures futures
of period income (loss) futures operations income transactions transactions
===================================================================================================
SMALL CAP EQUITY FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended January 31,
- ------------------------------
1996 ........................... $16.14 ($0.23) $ 1.39 $ 1.16 $ -- $(0.01) $ --
1995 ........................... 20.67 (0.07) (3.53) (3.60) -- (0.69) (0.24)
1994 ........................... 16.68 (0.04) 5.03 4.99 -- (1.00) --
For the Period Ended January 31,
- --------------------------------
1993/(b)/ ...................... 14.18 0.03 2.50 2.53 (0.03) -- --
<CAPTION>
Ratio of Ratio of net Net
Net increase Net asset net investment assets at
Total (decrease) value, expenses to income to Portfolio end of
distributions in net end of Total average net average net turnover period
to shareholders asset value period return/(a)/ assets assets rate (in 000s)
=========================================================================================================
SMALL CAP EQUITY FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended January 31,
- ------------------------------
1996 ........................... $(0.01) $ 1.15 $17.29 7.20% 1.41% (0.59)% 57.58% $204,994
1995 ........................... (0.93) (4.53) 16.14 (17.53) 1.53 (0.53) 43.67 319,487
1994 ........................... (1.00) 3.99 20.67 30.13 1.60 (0.45) 56.81 261,074
For the Period Ended January 31,
- --------------------------------
1993/(b)/ ...................... (0.03) 2.50 16.68 17.86/(c)/ 1.65/(d)/ 0.62/(d)/ 7.12/(d)/ 59,339
<CAPTION>
Ratios assuming no
voluntary waiver of fees
or expense limitations
------------------------------
Ratio of net
Ratio of investment
expenses loss
to average to average
net assets net assets
==============================
- ----------------------------------------------------------------
<S> <C> <C>
For the Year Ended January 31,
- ------------------------------
1996 ........................... 1.66% (0.84)%
1995 ........................... 1.78 (0.78)
1994 ........................... 1.85 (0.70)
For the Period Ended January 31,
- --------------------------------
1993/(b)/ ...................... 2.70/(d)/ (0.43)/(d)/
- ---------------------------------------
</TABLE>
(a) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no sales
charges. Total return would be reduced if a sales charge were taken into
account.
(b) For the period from October 22, 1992 (commencement of operations) to January
31, 1993.
(c) Not annualized.
(d) Annualized.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
70
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from
investment operations
-------------------------------------------------------------------- --------------
Net Net
realized realized
and unrealized and unrealized Total
Net asset gain (loss) on loss on foreign income From
value, Net investments, currency (loss) from net
beginning investment otions related investment investment
of period income (loss) and futures transactions operations income
====================================================================================================================================
INTERNATIONAL EQUITY FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
1996........................ $14.52 $ 0.13 $ 2.58 $ 1.42 $ 4.13 $(0.58)
1995........................ 18.10 0.06 (3.04) (0.01) (2.99) --
1994........................ 14.35 0.05 4.08 (0.38) 3.75 --
For the Period Ended January 31,
- --------------------------------
1993/(b)/................... 14.18 (0.01) 0.29 (0.11) 0.17 --
- ----------------------
Distributions to
shareholders
------------------------------------
From net
realized
gain on Net Ratio of
investment, Increase Net asset net
option and Total (decrease) value, expenses to
futures distributions to in net asset end of Total average net
transactions shareholders value period return/(2)/ assets
====================================================================================================================================
INTERNATIONAL EQUITY FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Year Ended January 31,
- ------------------------------
1996........................ $(0.87) $(1.45) $ 2.68 $17.20 28.68% 1.52%
1995........................ (0.59) (0.59) (3.58) 14.52 (16.65) 1.73
1994........................ -- -- 3.75 18.10 26.13 1.76
For the Period Ended January 31,
- --------------------------------
1993/(b)/................... -- -- 0.17 14.35 1.23/(c)/ 1.80/(d)/
- -----------------------
Ratios assuming no
voluntary waiver of fees
or expense limitations
-------------------------------
Ratio of net Ratio of
investment net investment
income Ratio of income
(loss) to Portfolio Net assets at expenses (loss)
average net turnover end of period to average to average
assets rate (in 000s) net assets net assets
====================================================================================================================================
INTERNATIONAL EQUITY FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the Year Ended January 31,
- ------------------------------
1996........................ 0.26% 68.48% $330,860 1.77% 0.01%
1995........................ 0.40 84.54 275,086 1.98 0.15
1994........................ 0.51 60.04 269,091 2.01 0.26
For the Period Ended January 31,
- --------------------------------
1993/(b)/................... (0.42)/(d)/ 0.00 66,063 2.58/(d)/ (1.20)/(d)/
- ----------------
</TABLE>
(a)Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of the
investment at the net asset value at the end of the period and no sales
charges. Total return would be reduced if a sales charge were taken into
account.
(b)For the period from December 1, 1992 (commencement of operations) to January
31, 1993.
(c)Not annualized.
(d)Annualized.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
71
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) Distributions to
from investment operations shareholders
--------------------------------------------------- ------------------------------------
Net
realized and
unrealized
Net gain (loss) Total In
asset Net on foreign gain (loss) From excess Total
value, Net unrealized currency from net of net distributions
beginning investent gain(loss) on related investment investment investment to
of period income investments transactions operations income income shareholders
==================================================================================================
ASIA GROWTH FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended January 31,
- -------------------------------
1996................................ $13.31 $0.17 $3.44 $(0.12) $3.49 $(0.17) $(0.14) $(0.31)
For the Period Ended January 31,
- --------------------------------
1995/(b)/........................... 14.18 0.11 (0.89) 0.01 (0.77) (0.10) -- (0.10)
<CAPTION>
Ratios assuming no
voluntary waiver of fees
or expense limitations
-------------------------
Ratio Ratio
Net Ratio of net of net
increase Net of net investment Net Ratio of investment
(decrease) asset expenses to income to assets at expenses income to
in net value, average average Portfolio end of to average average
asset end of Total net net turnover period net net
value period return/(a)/ assets assets rate (in 000s) assets assets
====================================================================================================
ASIA GROWTH FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended January 31,
- -------------------------------
1996............................... $3.18 $16.49 26.49% 1.77% 1.05% 88.80% $205,539 2.02% 0.80%
For the Period Ended January 31,
- ---------------------------------
1995/(b)/..........................(0.87) 13.31 (5.46)/(c)/ 1.90/(d)/ 1.83/(d)/ 36.08/(c)/ 124,298 2.38/(d)/ 1.35/(d)/
- ------------------------------
</TABLE>
(a)Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of the
investment at the net asset value at the end of the period and no sales
charges. Total return would be reduced if a sales charge were taken into
account.
(b)For the period from July 8, 1994 (commencement of operations) to January 31,
1995.
(c)Not annualized.
(d)Annualized.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
72
<PAGE>
- --------------------------------------------------------------------------------
Report of Independent Accountants
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of the
Goldman Sachs Equity Portfolios, Inc.:
We have audited the accompanying statements of assets and liabilities of the
Goldman Sachs Equity Portfolios, Inc., (a Maryland Corporation) comprising the
Balanced Fund, Select Equity Fund, Growth and Income Fund, Capital Growth Fund,
Small Cap Equity Fund, International Equity Fund and Asia Growth Fund including
the statements of investments, as of January 31, 1996, and the related
statements of operations, the statements of changes in net assets and the
financial highlights for each of the periods presented. These financial
statements and the financial highlights are the responsibility of the Funds'
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
January 31, 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 audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and the financial highlights
referred to above present fairly, in all material respects, the financial
position of each of the respective portfolios constituting Goldman Sachs Equity
Portfolios, Inc. as of January 31, 1996, the results of their operations and the
changes in their net assets and the financial highlights for the periods
presented, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
March 15, 1996
73
<PAGE>
[This Page Intentionally Left Blank]
74
<PAGE>
- --------------------------------------------------------------------------------
This Annual Report is authorized for distribution to prospective investors only
when preceded or accompanied by a Goldman Sachs Equity Portfolios, Inc.
Prospectus which contains facts concerning the Fund's objectives and policies,
management, expenses and other information.
- --------------------------------------------------------------------------------
75
<PAGE>
Goldman Sachs
One New York Plaza
New York, NY 10004
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
The Goldman Sachs
Equity Portfolios
Annual Report
January 31, 1996
Goldman Sachs Balanced Fund
Goldman Sachs Select Equity Fund
Goldman Sachs Growth and Income Fund
Goldman Sachs Capital Growth Fund
Goldman Sachs Small Cap Equity Fund
Goldman Sachs International Equity Fund
Goldman Sachs Asia Growth Fund
[LOGO OF GOLDMAN SACHS APPEARS HERE]
76
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
GOLDMAN SACHS SELECT EQUITY FUND
GOLDMAN SACHS GROWTH AND INCOME FUND
GOLDMAN SACHS MID-CAP EQUITY FUND
GOLDMAN SACHS INTERNATIONAL EQUITY FUND
GOLDMAN SACHS ASIA GROWTH FUND
Institutional Shares
(Portfolios of Goldman Sachs Equity Portfolios, Inc.)
One New York Plaza
New York, New York 10004
This Statement of Additional Information (the "Additional Statement")
is not a Prospectus. This Additional Statement should be read in conjunction
with the Prospectus for the Institutional Shares of Goldman Sachs Select Equity
Fund, Goldman Sachs Growth and Income Fund, Goldman Sachs Mid-Cap Equity Fund,
Goldman Sachs International Equity Fund and Goldman Sachs Asia Growth Fund,
dated May 1, 1996, as amended and/or supplemented from time to time (the
"Prospectus"), which may be obtained without charge from Goldman, Sachs & Co. at
the telephone number, or writing to one of the addresses, listed below.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Introduction............................................................ B-3
Investment Policies..................................................... B-4
Investment Restrictions................................................. B-22
Management.............................................................. B-31
Portfolio Transactions and Brokerage.................................... B-43
Net Asset Value......................................................... B-46
Performance Information................................................. B-47
Taxation................................................................ B-56
Financial Statements.................................................... B-62
Shares of the Company................................................... B-62
Other Information....................................................... B-64
Appendix A:............................................................. 1-A
Appendix B:............................................................. 1-B
Appendix C:............................................................. 1-C
</TABLE>
The date of this Additional Statement is May 1, 1996.
<PAGE>
GOLDMAN, SACHS & CO. GOLDMAN SACHS FUNDS
Distributor MANAGEMENT, L.P.
85 Broad Street Investment Adviser to
New York, New York 10004 Goldman Sachs Select Equity Fund
One New York Plaza
GOLDMAN, SACHS & CO. New York, New York 10004
Transfer Agent
4900 Sears Tower GOLDMAN SACHS ASSET MANAGEMENT
Chicago, Illinois 60606 Administrator to all Funds and
Investment Adviser to Goldman
GOLDMAN SACHS ASSET Sachs Growth and Income Fund,
MANAGEMENT INTERNATIONAL Goldman Sachs Mid-Cap Equity Fund,
Investment Adviser to Goldman Sachs and Goldman Sachs International
Asia Growth Fund and Subadviser to Equity Fund
Goldman Sachs International Equity Fund One New York Plaza
140 Fleet Street New York, New York 10004
London, England EC4A 2BJ
Toll free (in U.S.).......800-621-2550
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
GOLDMAN SACHS SELECT EQUITY FUND
GOLDMAN SACHS GROWTH AND INCOME FUND
GOLDMAN SACHS MID-CAP EQUITY FUND
GOLDMAN SACHS INTERNATIONAL EQUITY FUND
GOLDMAN SACHS ASIA GROWTH FUND
Service Shares
(Portfolios of Goldman Sachs Equity Portfolios, Inc.)
One New York Plaza
New York, New York 10004
This Statement of Additional Information (the "Additional Statement") is not a
Prospectus. This Additional Statement should be read in conjunction with the
Prospectus for the Service Shares of Goldman Sachs Select Equity Fund, Goldman
Sachs Growth and Income Fund, Goldman Sachs Mid-Cap Equity Fund, Goldman Sachs
International Equity Fund and Goldman Sachs Asia Growth Fund, dated May 1, 1996,
as amended and/or supplemented from time to time (the "Prospectus"), which may
be obtained without charge from institutions ("Service Organizations") that hold
Service Shares for the benefit of their customers, Goldman, Sachs & Co. at the
telephone number, or writing to one of the addresses, listed below.
TABLE OF CONTENTS
Page
----
Introduction.......................................................... B-3
Investment Policies................................................... B-4
Investment Restrictions............................................... B-22
Management............................................................ B-31
Portfolio Transactions and Brokerage.................................. B-43
Net Asset Value....................................................... B-46
Taxation.............................................................. B-47
Performance Information............................................... B-56
Financial Statements.................................................. B-62
Shares of the Company................................................. B-62
Other Information..................................................... B-64
Service Plan.......................................................... B-66
Appendix A:........................................................... 1-A
Appendix B:........................................................... 1-B
Appendix C:........................................................... 1-C
The date of this Additional Statement is May 1, 1996.
<PAGE>
GOLDMAN, SACHS & CO. GOLDMAN SACHS FUNDS
Distributor MANAGEMENT, L.P.
85 Broad Street Investment Adviser to
New York, New York 10004 Goldman Sachs Select Equity Fund
One New York Plaza
GOLDMAN, SACHS & CO. New York, New York 10004
Transfer Agent
4900 Sears Tower GOLDMAN SACHS ASSET MANAGEMENT
Chicago, Illinois 60606 Administrator to all Funds and
Investment Adviser to Goldman
GOLDMAN SACHS ASSET Sachs Growth and Income Fund,
MANAGEMENT INTERNATIONAL Goldman Sachs Mid-Cap Equity Fund,
Investment Adviser to Goldman Sachs and Goldman Sachs International
Asia Growth Fund and Subadviser to Equity Fund
Goldman Sachs International Equity Fund One New York Plaza
140 Fleet Street New York, New York 10004
London, England EC4A 2BJ
Toll free (in U.S.).......800-621-2550
<PAGE>
INTRODUCTION
Goldman Sachs Equity Portfolios, Inc. (the "Company") is an open-end,
management investment company currently offering eight series of shares,
including Goldman Sachs Select Equity Fund ("Select Equity Fund"), Goldman Sachs
Growth and Income Fund ("Growth and Income Fund"), Goldman Sachs Mid-Cap Equity
Fund ("Mid-Cap Equity Fund"), Goldman Sachs International Equity Fund
("International Fund") and Goldman Sachs Asia Growth Fund ("Asia Growth
Fund")(individually, a "Fund," or collectively, the "Funds").
The Company was organized under the laws of the State of Maryland on
September 27, 1989. The Company assumed its current name on May 14, 1991. The
Directors of the Company have authority under the Company'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 Directors have created the Funds and three
additional series, and additional series may be added in the future from time to
time. Select Equity Fund, Growth and Income Fund, International Fund and Asia
Growth Fund currently offer four classes of shares: Institutional Shares,
Service Shares, Class A Shares and Class B Shares. Mid-Cap Equity Fund currently
offers two classes of shares: Institutional Shares and Service Shares. See
"Shares of the Company."
Goldman Sachs Funds Management, L.P. ("GSFM"), an affiliate of Goldman,
Sachs & Co. ("Goldman Sachs"), serves as investment adviser to Select Equity
Fund and Goldman Sachs Asset Management ("GSAM"), a separate operating division
of Goldman Sachs, serves as investment adviser to Growth and Income Fund,
Mid-Cap Equity Fund and International Fund. Goldman Sachs Asset Management
International ("GSAMI"), an affiliate of Goldman Sachs, serves as the investment
adviser to Asia Growth Fund and subadviser to International Fund. GSFM, GSAM and
GSAMI are each sometimes referred to individually as an "Investment Adviser" and
collectively, as the "Investment Advisers." In addition, GSAM serves as the
administrator to each Fund. Goldman Sachs serves as each Fund's distributor and
transfer agent. Each Fund's custodian is State Street Bank and Trust Company
("State Street").
The following information relates to and supplements the description of
each Fund's investment policies contained in the Prospectus. See the Prospectus
for a fuller description of the Funds' investment objectives and policies. There
is no assurance that each Fund will achieve its objective.
The Goldman Sachs Mutual Funds Group ("MFG") offers banks, corporate
cash managers, investment advisers and other institutional investors a family of
professionally-managed mutual and money market funds, including fixed income and
equity funds, and a range of related services. MFG is part of GSAM, a separate
operating division of Goldman Sachs. All products are designed to provide
clients with the benefit of the expertise of GSAM and its affiliates in security
selection, asset allocation, portfolio construction and day-to-day management.
The hallmark of MFG is personalized service, which reflects the
priority that Goldman Sachs places on serving client interests. As MFG clients,
shareholders will be assigned an Account Administrator ("AA"), who is ready to
help shareholders with questions concerning their accounts. During business
hours, shareholders can call their AA through a toll-free number to place
purchase or redemption orders or obtain portfolio and account information. The
AA can also answer inquiries about rates of return, portfolio composition and
holdings and guide shareholders through operational details. An MFG client can
also utilize SMARTSM personal computer software system which allows holders to
purchase and redeem shares and also obtain portfolio and account information
directly.
B-3
<PAGE>
Investment Policies
Each Fund's share price will fluctuate with market, economic and, to
the extent applicable, foreign exchange conditions, so that an investment in any
of the Funds may be worth more or less when redeemed than when purchased. None
of the Funds should be relied upon as a complete investment program.
Investing in Asia
Asia Growth Fund is intended for long-term investors who can accept the
risks associated with investing primarily in equity and equity-related
securities of Asian Companies (as defined in the Prospectus) as well as the
risks associated with investments quoted or denominated in foreign currencies.
In addition, certain of Asia Growth Fund's potential investment and management
techniques entail special risks. There can be no assurance that Asia Growth Fund
will achieve its investment objective. See "Investment Objectives and Policies"
and "Risk Factors" in the Prospectus.
The pace of change in Asia over the last 10 years has been rapid.
Accelerating economic growth in the region has combined with capital market
development, high government expenditure, increasing consumer wealth and
taxation policies favoring company expansion. As a result, stock market returns
in many Asian countries have been relatively attractive. GSAMI believes that
Asia offers an attractive investment environment and that new opportunities will
continue to emerge in the years ahead. Asia Growth Fund concentrates on
companies that GSAMI believes are taking full advantage of the region's growth
and that have the potential for long-term capital appreciation. See "Risk
Factors" in the Prospectus.
Each of the securities markets of the Asian countries is less liquid
and subject to greater price volatility and has a smaller market capitalization
than the U.S. securities markets. Issuers and securities markets in such
countries are not subject to as extensive and frequent accounting, financial and
other reporting requirements or as comprehensive government regulations as are
issuers and securities markets in the U.S. Certain of the Asian securities
markets are marked by a high concentration of market capitalization and trading
volume in a small number of issuers representing a limited number of industries,
as well as a high concentration of ownership of such securities by a limited
number of investors. The limited liquidity of Asian markets may also affect Asia
Growth 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.
Foreign investment in the securities markets of several of the Asian
countries is restricted or controlled to varying degrees. These restrictions may
limit Asia Growth Fund's investment in certain of the Asian countries and may
increase the expenses of Asia Growth Fund. Certain Asian countries require
governmental approval prior to investments by foreign persons or limit
investment by foreign persons to only a specified percentage of an issuer's
outstanding securities or a specific class of securities which may have less
advantageous terms (including price) than securities of the company available
for purchase by nationals. In addition, the repatriation of both investment
income and capital from several of the Asian countries is subject to
restrictions such as the need for certain governmental consents. Even where
there is no outright restriction on repatriation of capital, the mechanics of
repatriation may affect certain aspects of the operation of Asia Growth Fund.
Each of the Asian countries may be subject to a greater degree of
economic, political and social instability than is the case in the United
States, Japan and most Western European countries. Such instability may result
from, among other things, the following: (i) authoritarian governments or
military involvement in political and economic decision making, including
changes or attempted changes in
B-4
<PAGE>
governments through extra-constitutional means; (ii) popular unrest associated
with demands for improved political, economic or social conditions; (iii)
internal insurgencies; (iv) hostile relations with neighboring countries; and
(v) ethnic, religious and racial disaffection or conflict. Such economic,
political and social instability could disrupt the principal financial markets
in which Asia Growth Fund invests and adversely affect the value of Asia Growth
Fund's assets.
Asia Growth 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 Asia Growth Fund is
uninvested and no return is earned on such assets. The inability of Asia Growth
Fund to make intended security purchases or sales due to settlement problems
could result either in losses to Asia Growth Fund due to subsequent declines in
value of the portfolio securities or, if Asia Growth Fund has entered into a
contract to sell the securities, could result in possible liability to the
purchaser.
International Fund
International Fund will seek to achieve its investment objective by
investing primarily in equity and equity-related securities of issuers that are
organized outside the United States or whose securities are principally traded
outside the United States. Because research coverage outside the United States
is fragmented and relatively unsophisticated, many foreign companies that are
well-positioned to grow and prosper have not come to the attention of investors.
GSAM and GSAMI believe that the high historical returns and less efficient
pricing of foreign markets create favorable conditions for International Fund's
highly focused investment approach. For a description of the risks of the
International Equity Fund's investments in Asia, see "Investing in Asia."
A Rigorous Process of Stock Selection. Using fundamental industry and
company research, GSAM's and GSAMI's equity team in London, Singapore and Tokyo
seeks to identify companies that may achieve superior long-term returns. Stocks
are carefully selected for International Fund's portfolio through a three-stage
investment process. Because International Fund is a long-term holder of stocks,
the portfolio managers adjust International 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 portfolio managers
seek 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 portfolio managers seek 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
B-5
<PAGE>
the existing business and reinvesting the capital generated at high rates of
return. Management should always act in the interests of the owners and seek to
maximize returns to all stockholders.
GSAM'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. See "Investment Policies" and "Advisory and
Administrative Services."
The members of GSAM and GSAMI's international equity team bring
together years of experience in analyzing and investing in companies in Europe
and the Asia-Pacific region. Their expertise spans a wide range of skills
including investment analysis, investment management, investment banking and
business consulting. GSAM's worldwide staff of over 300 professionals includes
portfolio managers based in London, Singapore and Tokyo who bring firsthand
knowledge of their local markets and companies to every investment decision.
Select Equity Fund
Select Equity Fund's investment objective is to provide its
shareholders with a total return consisting of capital appreciation plus
dividend income that, net of Fund expenses, exceeds the total return realized on
the S&P 500 Index. Under normal circumstances, the Fund will invest at least 90%
of its total assets in equity securities.
The investment strategy of Select Equity Fund will be implemented to
the extent it is consistent with maintaining the Fund's qualification as a
regulated investment company under the Internal Revenue Code. The Fund's
strategy may be limited, in particular, by the requirement for such
qualification that less than 30% of the Fund's annual gross income be derived
from the sale or other disposition of stocks or securities (including options
and futures contracts) held for less than three months.
Since normal settlement for equity securities is three trading days,
the Fund will need to hold cash balances to satisfy shareholder redemption
requests. Such cash balances will normally range from 2% to 5% of the Fund's net
assets. The Fund may purchase futures contracts on the S&P 500 Index in order to
keep the Fund's effective equity exposure close to 100%. For example, if cash
balances are equal to 10% of the net assets, the Fund may enter into long
futures contracts covering an amount equal to 10% of the Fund's net assets. As
cash balances fluctuate based on new contributions or withdrawals, the Fund may
enter into additional contracts or close out existing positions.
The Multifactor Model. The Multifactor Model is a sophisticated
computerized rating system for evaluating equity securities according to a
variety of investment characteristics (or factors). The factors used by the
Multifactor Model incorporate many variables studied by traditional fundamental
analysts and cover measures of value, growth, momentum, risk (e.g.,
price/earnings ratio, book/price ratio, growth forecasts, earning estimate
revisions, price momentum, volatility and earnings stability). All of these
factors have been shown to significantly impact the performance of equity
securities.
Because it includes many disparate factors, the Investment Adviser
believes that the Multifactor Model is broader in scope and provides a more
thorough evaluation than most conventional, value-oriented quantitative models.
As a result, the securities ranked highest by the Multifactor Model do not have
one dominant investment characteristic (such as a low price/earnings ratio);
rather, such securities possess many different investment characteristics. By
using a variety of relevant factors to select securities, the 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 securities.
B-6
<PAGE>
The Investment Adviser will monitor, and may occasionally suggest and
make changes to, the method by which securities are selected for or weighted in
the Fund. Such changes (which may be the result of changes in the nature of the
Multifactor Model or the method of applying the Multifactor Model) may include:
(i) evolutionary changes to the structure of the Multifactor Model (e.g., the
addition of new factors or a new means of weighting the factors); (ii) changes
in trading procedures (e.g., trading frequency or the manner in which the Fund
uses futures on the S&P 500 Index); or (iii) changes in the method by which
securities are weighted in the Fund. Any such changes will preserve the Fund's
basic investment philosophy of combining qualitative and quantitative methods of
selecting securities using a disciplined investment process.
Corporate Debt Obligations
Each Fund may, under normal market conditions, invest in corporate debt
obligations, including obligations of industrial, utility and financial issuers.
Select Equity Fund 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 bonds 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 the Growth and Income and Mid-Cap Equity Funds to dispose of a
particular security when necessary to meet its redemption requests or other
liquidity needs. Under adverse market or economic conditions, the secondary
market for junk bonds could contract further, independent of any specific
adverse changes in the condition of a particular issuer. As a result, the
Investment Advisers could find it more 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 these circumstances, may be less than the prices used in
calculating a Fund's net asset value.
Since investors generally perceive that there are greater risks
associated with the medium to lower rated securities of the type in which the
Growth and Income and Mid-Cap Equity 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.
B-7
<PAGE>
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 Advisers will
attempt to reduce these risks through portfolio diversification and by analysis
of each issuer and its ability to make timely payments of income and principal,
as well as broad economic trends in corporate developments.
Zero Coupon Bonds
A Fund's investments in fixed income securities may include zero coupon
bonds, which are debt obligations issued or purchased at a significant discount
from face value. The discount approximates the total amount of interest the
bonds would have accrued and compounded over the period until maturity. Zero
coupon bonds do not require the periodic payment of interest. Such investments
benefit the issuer by mitigating its need for cash to meet debt service, but
also require a higher rate of return to attract investors who are willing to
defer receipt of such cash. Such investments may experience greater volatility
in market value than debt obligations which provide for regular payments of
interest. In addition, if an issuer of zero coupon bonds held by a Fund
defaults, the Fund may obtain no return at all on its investment. Each Fund will
accrue income on such investments for tax and accounting purposes which is
distributable to shareholders and which, because no cash is received at the time
of accrual, may require the liquidation of other portfolio securities to satisfy
a Fund's distribution obligations. See "Taxation."
Custodial Receipts
Each Fund may invest up to 5% of its net assets in custodial receipts
in respect of securities issued or guaranteed as to principal and interest by
the U.S. Government, its agencies, instrumentalities, political subdivisions or
authorities. Such custodial receipts evidence ownership of future interest
payments, principal payments or both on certain notes or bonds issued by the
U.S. Government, its agencies, instrumentalities, political subdivisions or
authorities. These custodial receipts are known by various names, including
"Treasury Receipts," "Treasury Investors Growth Receipts" ("TIGRs") and
"Certificates of Accrual on Treasury Securities" ("CATs"). For certain
securities law purposes, custodial receipts are not considered U.S. Government
securities.
Mortgage-Backed and Asset-Backed Securities
Mortgage-backed securities represent direct or indirect participation
in, or are collateralized by and payable from, mortgage loans secured by real
property. 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.
Mortgage-backed and 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 which may
increase the volatility of such investments relative to similarly rated debt
securities. A Fund's ability to maintain positions in such securities will be
affected by reductions in the
B-8
<PAGE>
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 mortgage-backed and 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 U.S. Government
securities and other mortgage-backed and 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 owned on the credit cards, thereby reducing the
balance due. Automobile receivables generally are secured, but by automobiles
rather than residential real property. Most issuers of automobile receivables
permit the loan servicers to retain possession of the underlying obligations. If
the servicer were to sell these obligations to another party, there is a risk
that the purchaser would acquire an interest superior to that of the holders of
the asset-backed securities. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of the automobile receivables may not have a
proper security interest in the underlying automobiles. Therefore, there is the
possibility that, in some cases, recoveries on repossessed collateral may not be
available to support payments on these securities.
Futures Contracts and Options on Futures Contracts
Each Fund may purchase and sell futures contracts. Each Fund, other
than Select Equity Fund, may also purchase and write options on futures
contracts. Select Equity Fund may only purchase and sell futures contracts on
the S&P 500 Index. The other Funds may purchase and sell futures contracts based
upon 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, except for Select Equity Fund, related options
transactions, only for bona fide hedging purposes as defined below or (except
with respect to transactions by Growth and Income, Mid-Cap Equity and Select
Equity Funds in futures on foreign currencies) for purposes of seeking to
increase total return to the extent permitted by regulations of the Commodity
Futures Trading Commission ("CFTC"). All futures contracts entered into by a
Fund are traded on U.S. exchanges or boards of trade that are licensed and
regulated by the CFTC or on certain foreign exchanges.
Futures Contracts. A futures contract may generally be described as an
agreement between two parties to buy and sell particular financial instruments
for an agreed price during a designated month (or to deliver the final cash
settlement price, in the case of a contract relating to an index or otherwise
not calling for physical delivery at the end of trading in the contract).
When interest rates are rising or securities prices are falling, a Fund
can seek, through the sale of futures contracts, to offset a decline in the
value of its current portfolio securities. When interest 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
Select Equity Fund) can sell futures contracts on a specified currency to
protect against a decline in the value of such currency and its portfolio
securities which are quoted or denominated in such currency. Each Fund (other
than Select Equity Fund) can purchase futures contracts on foreign currency to
establish the price in U.S. dollars of a security quoted or denominated in such
currency that the Fund has acquired or expects to acquire.
B-9
<PAGE>
Positions taken in the futures markets are not normally held to
maturity, but are instead liquidated through offsetting transactions which may
result in a profit or a loss. While each Fund will usually liquidate futures
contracts on securities or currency in this manner, a Fund may instead make or
take delivery of the underlying securities or currency whenever it appears
economically advantageous for the Fund to do so. A clearing corporation
associated with the exchange on which futures are traded guarantees that, if
still open, the sale or purchase will be performed on the settlement date.
Hedging Strategies. Hedging, by use of futures contracts, seeks to
establish with more certainty than would otherwise be possible the effective
price, rate of return or currency exchange rate on portfolio securities and
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 in
order to hedge against an anticipated rise in interest rates or a decline in
market prices or (with the exception of Select Equity Fund) foreign currency
rates that would adversely affect the dollar value of such Fund's portfolio
securities. Such futures contracts may (except in the case of Select Equity
Fund) include contracts for the future delivery of securities held by the Fund
or securities with characteristics similar to those of the Fund's portfolio
securities. Similarly, each Fund (other than Select Equity Fund) may sell
futures contracts on a particular currency in which its portfolio securities are
quoted or denominated or in one currency 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 such Fund's securities portfolio. When hedging of this character is
successful, any depreciation in the value of portfolio securities will be
substantially offset by appreciation in the value of the futures position. On
the other hand, any unanticipated appreciation in the value of a Fund's
portfolio securities would be substantially offset by a decline in the value of
the futures position.
On other occasions, a Fund may take a "long" position by purchasing
such futures contracts. This would be done, for example, when the Fund
anticipates the subsequent purchase of particular securities when it has the
necessary cash, but expects the prices or currency exchange rates then available
in the applicable market to be less favorable than prices or rates that are
currently available.
Options on Futures Contracts. The acquisition of put and call options
on futures contracts will give a Fund the right (but not the obligation), for a
specified price, to sell or to purchase, respectively, the underlying futures
contract at any time during the option period. As the purchaser of an option on
a futures contract, a Fund obtains the benefit of the futures position if prices
move in a favorable direction but limits its risk of loss in the event of an
unfavorable price movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium
which may partially offset a decline in the value of a Fund's assets. By writing
a call option, a Fund becomes obligated, in exchange for the premium, to sell a
futures contract (if the option is exercised), which may have a value higher
than the exercise price. Conversely, the writing of a put option on a futures
contract generates a premium which may partially offset an increase in the price
of securities that a Fund intends to purchase. However, a Fund becomes obligated
to purchase a futures contract (upon exercise of the option) which may have a
value lower than the exercise price. Thus, the loss incurred by a Fund in
writing options on futures is
B-10
<PAGE>
potentially unlimited and may exceed the amount of the premium received. A Fund
will incur transaction costs in connection with the writing of options on
futures.
The holder or writer of an option on a futures contract may terminate
its position by selling or purchasing an offsetting option on the same series.
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
(except for Select Equity Fund) will engage in related options transactions only
for bona fide hedging as defined in the regulations of the CFTC or to seek to
increase total return to the extent permitted by such regulations. A Fund will
determine that the price fluctuations in the futures contracts and options on
futures used for hedging purposes are substantially related to price
fluctuations in securities held by the Fund or which it expects to purchase.
Except as stated below, each Fund's futures transactions will be entered into
for traditional hedging purposes -- i.e., futures contracts will be sold to
protect against a decline in the price of securities (or the currency in which
they are denominated) that the Fund owns, or futures contracts will be purchased
to protect the Fund against an increase in the price of securities (or the
currency in which they are quoted or denominated) it intends to purchase. As
evidence of this hedging intent, each Fund expects that on 75% or more of the
occasions on which it takes a long futures or option position (involving the
purchase of futures contracts), the Fund will have purchased, or will be in the
process of purchasing, equivalent amounts of related securities (or assets
denominated or quoted in the related currency) in the cash market at the time
when the futures or options position is closed out. However, in particular
cases, when it is economically advantageous for a Fund to do so, a long futures
position may be terminated or an option may expire without the corresponding
purchase of securities or other assets.
As an alternative to literal compliance with the bona fide hedging
definition, a CFTC regulation permits a Fund to elect to comply with a different
test. Under this test the aggregate initial margin and premiums required to
establish positions in futures contracts and options on futures to seek to
increase total return may not exceed 5% of the net asset value of such Fund's
portfolio, after taking into account unrealized profits and losses on any such
positions and excluding the amount by which such options were in-the-money at
the time of purchase. Each Fund will engage in transactions in futures contracts
and (except for Select Equity Fund) will engage in related options transactions
only to the extent such transactions are consistent with the requirements of the
Code for maintaining its qualification as a regulated investment company for
federal income tax purposes. See "Taxation."
Transactions in futures contracts and options on futures involve
brokerage costs, require margin deposits and, in the case of contracts and
options obligating a Fund to purchase securities or currencies, require the Fund
to segregate with its custodian cash or liquid, high grade debt securities 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 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.
B-11
<PAGE>
Perfect correlation between a Fund's futures positions and portfolio
positions may be difficult to achieve because no futures contracts based on
individual equity or corporate fixed-income securities are currently available.
The only futures contracts available to hedge a Fund's portfolio are various
futures on U.S. Government securities, securities indices and foreign
currencies. In addition, it is not possible for a Fund to hedge fully or
perfectly against currency fluctuations affecting the value of securities quoted
or denominated in foreign currencies because the value of such securities is
likely to fluctuate as a result of independent factors not related to currency
fluctuations.
Options on Securities and Securities Indices
Writing Covered Options. Each Fund may write (sell) covered call and
put options on any securities in which it may invest, although Select Equity
Fund has no present intention of doing so. A call option written by a Fund
obligates such Fund to sell specified securities to the holder of the option at
a specified price if the option is exercised at any time before the expiration
date. All call options written by a Fund are covered, which means that such Fund
will own the securities subject to the option as long as the option is
outstanding or such Fund will use the other methods described below. A Fund's
purpose in writing covered call options is to realize greater income than would
be realized on portfolio securities transactions alone. However, a Fund may
forego the opportunity to profit from an increase in the market price of the
underlying security.
A put option written by a Fund would obligate such Fund to purchase
specified securities from the option holder at a specified price if the option
is exercised at any time before the expiration date. All put options written by
a Fund would be covered, which means that the Fund would have deposited with its
custodian cash or liquid, high grade debt securities with a value at least equal
to the exercise price of the put option. The purpose of writing such options is
to generate additional income for a Fund. However, in return for the option
premium, each Fund accepts the risk that it may be required to purchase the
underlying securities at a price in excess of the securities' market value at
the time of purchase.
Call and put options written by a Fund will also be considered to be
covered to the extent that the Fund's liabilities under such options are wholly
or partially offset by its rights under call and put options purchased by the
Fund.
In addition, a written call option or put option may be covered by
maintaining cash or liquid, high grade debt securities (either of which may be
quoted or denominated in any currency) in a segregated account, by entering into
an offsetting forward contract and/or by purchasing an offsetting option or any
other option which, by virtue of its exercise price or otherwise, reduces a
Fund's net exposure on its written option position.
A Fund may also write (sell) covered call and put options on any
securities index composed of securities in which it may invest. Options on
securities indices are similar to options on securities, except that the
exercise of securities index options requires cash payments and does not involve
the actual purchase or sale of securities. In addition, securities index options
are designed to reflect price fluctuations in a group of securities or segment
of the securities market rather than price fluctuations in a single security.
A Fund may cover call options on a securities index by owning
securities whose price changes are expected to be similar to those of the
underlying index, or by having an absolute and immediate right to acquire such
securities without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion or
exchange of other securities in its portfolio. A Fund may cover call and put
options on a securities index by maintaining cash or liquid, high grade debt
securities with a value equal to the exercise price in a segregated account with
its custodian.
B-12
<PAGE>
A Fund may terminate its obligations under an exchange traded call or
put option by purchasing an option identical to the one it has written.
Obligations under over-the-counter options may be terminated only by entering
into an offsetting transaction with the counter party 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 based on
securities in which it may invest, although Select Equity Fund has no present
intention of doing so. A Fund would also be able to enter into closing sale
transactions in order to realize gains or minimize losses on options it has
purchased.
A Fund would normally purchase call options in anticipation of an
increase in the market value of securities of the type in which it may invest.
The purchase of a call option would entitle a Fund, in return for the premium
paid, to purchase specified securities at a specified price during the option
period. A Fund would ordinarily realize a gain if, during the option period, the
value of such securities exceeded the sum of the exercise price, the premium
paid and transaction costs; otherwise such a Fund would realize either no gain
or a loss on the purchase of the call option.
A Fund would normally purchase put options in anticipation of a decline
in the market value of securities in its portfolio ("protective puts") or in
securities in which it may invest. The purchase of a put option would entitle a
Fund, in exchange for the premium paid, to sell specified securities at a
specified price during the option period. The purchase of protective puts is
designed to offset or hedge against a decline in the market value of a Fund's
securities. Put options may also be purchased by a Fund for the purpose of
affirmatively benefiting from a decline in the price of securities which it does
not own. A Fund would ordinarily realize a gain if, during the option period,
the value of the underlying securities decreased below the exercise price
sufficiently to more than cover the premium and transaction costs; otherwise
such a Fund would realize either no gain or a loss on the purchase of the put
option. Gains and losses on the purchase of protective put options would tend to
be offset by countervailing changes in the value of the underlying portfolio
securities.
A Fund would purchase put and call options on securities indices for
the same purposes as it would purchase options on individual securities. For a
description of options on securities indices, see "Writing Covered Options"
above.
Risks Associated with Options Transactions. There is no assurance that
a liquid secondary market on an options exchange will exist for any particular
exchange-traded option or at any particular time. If a Fund is unable to effect
a closing purchase transaction with respect to covered options it has written,
the Fund will not be able to sell the underlying securities or dispose of assets
held in a segregated account until the options expire or are exercised.
Similarly, if a Fund is unable to effect a closing sale transaction with respect
to options it has purchased, it will have to exercise the options in order to
realize any profit and will incur transaction costs upon the purchase or sale of
underlying securities.
Reasons for the absence of a liquid secondary market on an exchange
include the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening or closing
transactions or both; (iii) trading halts, suspensions or other restrictions may
be imposed with respect to particular classes or series of options; (iv) unusual
or unforeseen circumstances may interrupt normal operations on an exchange; (v)
the facilities of an exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume; or (vi) one or more
exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the
B-13
<PAGE>
secondary market on that exchange (or in that class or series of options) would
cease to exist, although outstanding options on that exchange, if any, that had
been issued by the Options Clearing Corporation as a result of trades on that
exchange would continue to be exercisable in accordance with their terms.
Each Fund may purchase and sell both options that are traded on U.S.
and foreign exchanges and options traded over-the-counter with broker-dealers
who make markets in these options. The ability to terminate over-the-counter
options is more limited than with exchange-traded options and may involve the
risk that broker-dealers participating in such transactions will not fulfill
their obligations. Until such time as the staff of the Securities and Exchange
Commission (the "SEC") changes its position, each Fund will treat purchased
over-the-counter options and all assets used to cover written over-the-counter
options as illiquid securities, except that with respect to options written with
primary dealers in U.S. Government securities pursuant to an agreement requiring
a closing purchase transaction at a formula price, the amount of illiquid
securities may be calculated with reference to the formula.
Transactions by each Fund in options on securities and indices will be
subject to limitations established by each of the exchanges, boards of trade or
other trading facilities governing the maximum number of options in each class
which may be written or purchased by a single investor or group of investors
acting in concert. Thus, the number of options which a Fund may write or
purchase may be affected by options written or purchased by other investment
advisory clients of the Investment Advisers. An exchange, board of trade or
other trading facility may order the liquidations of positions found to be in
excess of these limits, and it may impose certain other sanctions.
The writing and purchase of options is a highly specialized activity
which involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. The successful use of
protective puts for hedging purposes depends in part on an Investment Adviser's
ability to predict future price fluctuations and the degree of correlation
between the options and securities markets.
Warrants and Stock Purchase Rights
Each Fund may invest up to 5% of its total assets, calculated at the
time of purchase, in warrants or rights (other than those acquired in units or
attached to other securities) which entitle the holder to buy equity securities
at a specific price for a specific period of time. A Fund will invest in
warrants and rights only if such equity securities are deemed appropriate by an
Investment Adviser for investment by the Fund. Select Equity Fund has no present
intention of acquiring warrants or rights. No Fund will invest more than 2% of
its total assets, calculated at the time of purchase, in warrants or rights
which are not listed on the New York or American Stock Exchanges. Warrants and
rights have no voting rights, receive no dividends and have no rights with
respect to the assets of the issuer.
Real Estate Investment Trusts ("REITs")
Each Fund may invest in shares of REITs. REITs are pooled investment
vehicles which invest primarily in income producing real estate or real estate
related loans or interest. REITs are generally classified as equity REITs,
mortgage REITs or a combination of equity and mortgage REITs. Equity REITs
invest the majority of their assets directly in real property and derive income
primarily from the collection of rents. Equity REITs can also realize capital
gains by selling properties that have appreciated in value. Mortgage REITs
invest the majority of their assets in real estate mortgages and derive income
from the collection of interest payments. Like regulated investment companies
such as the Funds, REITs are not taxed on income distributed to shareholders
provided they comply with certain requirements under the Code. A Fund will
indirectly bear its proportionate share of any expenses paid by REITs in which
it invests in addition to the expenses paid by the Fund.
B-14
<PAGE>
Investing in REITs involves certain unique risks. Equity REITs may be
affected by changes in the value of the underlying property owned by such REITs,
while mortgage REITs may be affected by the quality of any credit extended.
REITs are dependent upon management skills, are not diversified (except to the
extent the Code requires), and are subject to the risks of financing projects.
REITs are subject to heavy cash flow dependency, default by borrowers,
self-liquidation, and the possibilities of failing to qualify for the exemption
from tax for distributed income under the Code and failing to maintain their
exemptions from the Investment Company Act of 1940, as amended (the "Act").
REITs (especially mortgage REITs) are also subject to interest rate risks.
Foreign Securities
Investments in foreign securities may offer potential benefits not
available from investments solely in U.S. dollar-denominated or quoted
securities of domestic issuers. Such benefits may include the opportunity to
invest in foreign issuers that appear, in the opinion of the applicable
Investment Adviser, to offer better opportunity for long-term growth of capital
and income than investments in U.S. securities, the opportunity to invest in
foreign countries with economic policies or business cycles different from those
of the United States and the opportunity to reduce fluctuations in portfolio
value by taking advantage of foreign stock markets that do not necessarily move
in a manner parallel to U.S. markets.
Investing in foreign securities involves certain special
considerations, including those set forth below, which are not typically
associated with investing in U.S. dollar-denominated or quoted securities of
U.S. issuers. Investments in foreign securities usually involve currencies of
foreign countries. Accordingly, any Fund that invests in foreign securities may
be affected favorably or unfavorably by changes in currency rates and in
exchange control regulations and may incur costs in connection with conversions
between various currencies. International Fund and Asia Growth Fund may be
subject to currency exposure independent of their securities positions.
Currency exchange rates may fluctuate significantly over short periods
of time. They generally are determined by the forces of supply and demand in the
foreign exchange markets and the relative merits of investments in different
countries, actual or anticipated changes in interest rates and other complex
factors, as seen from an international perspective. Currency exchange rates also
can be affected unpredictably by intervention by U.S. or foreign governments or
central banks or the failure to intervene or by currency controls or political
developments in the United States or abroad.
Since foreign issuers are generally 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
B-15
<PAGE>
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
the Fund's investments in those countries. Moreover, individual foreign
economies may differ favorably or unfavorably from the U.S. economy in such
respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position.
Each Fund may invest in foreign securities which take the form of
sponsored and unsponsored American Depository Receipts ("ADRs") and Global
Depository Receipts ("GDRs") and (except for Select Equity Fund) may also invest
in European Depository Receipts ("EDRs") or other similar instruments
representing securities of foreign issuers (together, "Depository Receipts").
ADRs represent the right to receive securities of foreign issuers
deposited in a domestic bank or a correspondent bank. ADRs are traded on
domestic exchanges or in the U.S. over-the-counter market and, generally, are in
registered form. EDRs and GDRs are receipts evidencing an arrangement with a
non-U.S. bank similar to that for ADRs and are designed for use in the non-U.S.
securities markets. EDRs and GDRs are not necessarily quoted in the same
currency as the underlying security.
To the extent a Fund acquires Depository Receipts through banks which
do not have a contractual relationship with the foreign issuer of the security
underlying the Depository Receipts to issue and service such Depository Receipts
(unsponsored), there may be an increased possibility that the Fund would not
become aware of and be able to respond to corporate actions such as stock splits
or rights offerings involving the foreign issuer in a timely manner. In
addition, the lack of information may result in inefficiencies in the valuation
of such instruments.
Each Fund (other than Select Equity Fund) may also invest in countries
with emerging economies or securities markets. Political and economic structures
in many of such countries may be undergoing significant evolution and rapid
development, and such countries may lack the social, political and economic
stability characteristic of more developed countries. Certain of such countries
may have in the past failed to recognize private property rights and have at
times nationalized or expropriated the assets of private companies. As a result,
the risks described above, including the risks of nationalization or
expropriation of assets, may be heightened. In addition, unanticipated political
or social developments may affect the values of a Fund's investments in those
countries and the availability to such Fund of additional investments in those
countries. The small size and inexperience of the securities markets in certain
of such countries and the limited volume of trading in securities in those
countries may make a Fund's investments in such countries illiquid and more
volatile than investments in more developed countries, and such Fund may be
required to establish special custodial or other arrangements before making
certain investments in those countries. There may be little financial or
accounting information available with respect to issuers located in certain of
such countries, and it may be difficult as a result to assess the value or
prospects of an investment in such issuers.
A Fund (other than Select Equity Fund) may invest in securities of
issuers domiciled in a country other than the country in whose currency the
instrument is denominated or quoted. The Funds may also invest in securities
quoted or denominated in the European Currency Unit ("ECU"), which is a "basket"
consisting of specified amounts of the currencies of certain of the member
states of the European Community. The specific amounts of currencies comprising
the ECU may be adjusted by the Council of Ministers of the European Community
from time to time to reflect changes in relative values of the
B-16
<PAGE>
underlying currencies. In addition, the Funds may invest in securities quoted or
denominated in other currency "baskets".
Forward Foreign Currency Exchange Contracts. The Growth and Income and
Mid-Cap Equity Funds may enter into forward foreign currency exchange contracts
for hedging purposes. International Fund and Asia Growth Fund may enter into
forward foreign currency exchange contracts for hedging purposes and to seek to
increase total return. A forward foreign currency exchange contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. These contracts are traded
in the interbank market conducted directly between currency traders (usually
large commercial banks) and their customers. A forward contract generally has no
deposit requirement, and no commissions are generally charged at any stage for
trades.
At the maturity of a forward contract, a Fund may either accept or make
delivery of the currency specified in the contract or, at or prior to maturity,
enter into a closing purchase transaction involving the purchase or sale of an
offsetting contract. Closing transactions with respect to forward contracts are
usually effected with the currency trader who is a party to the original forward
contract.
A Fund may enter into forward foreign currency exchange contracts in
several circumstances. First, when a Fund enters into a contract for the
purchase or sale of a security denominated or quoted in a foreign currency, or
when a Fund anticipates the receipt in a foreign currency of dividend or
interest payments on such a security which it holds, the Fund may desire to
"lock in" the U.S. dollar price of the security or the U.S. dollar equivalent of
such dividend or interest payment, as the case may be. By entering into a
forward contract for the purchase or sale, for a fixed amount of dollars, of the
amount of foreign currency involved in the underlying transactions, the Fund
will attempt to protect itself against an adverse change in the relationship
between the U.S. dollar and the subject foreign currency during the period
between the date on which the security is purchased or sold, or on which the
dividend or interest payment is declared, and the date on which such payments
are made or received.
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 a 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.
International Fund and Asia Growth Fund may engage in cross-hedging by
using forward contracts in one currency to hedge against fluctuations in the
value of securities quoted or denominated in a different currency if GSAM or
GSAMI determines that there is a pattern of correlation between the two
currencies. International Fund and Asia Growth Fund may also purchase and sell
forward contracts to seek to increase total return when GSAM or GSAMI
anticipates that the foreign currency will appreciate or depreciate in value,
but securities quoted or denominated in that currency do not present attractive
investment opportunities and are not held in the Fund's portfolio.
B-17
<PAGE>
A Fund's custodian will place cash or liquid, high grade debt
securities into a segregated account of such Fund in an amount equal to the
value of the Fund's total assets committed to the consummation of forward
foreign currency exchange contracts requiring the Fund to purchase foreign
currencies or, in the case of International or Asia Growth Fund, forward
contracts entered into to increase total return. If the value of the securities
placed in the segregated account declines, additional cash or securities will be
placed in the account on a daily basis so that the value of the account will
equal the amount of a Fund's commitments with respect to such contracts. The
segregated account will be marked-to-market on a daily basis. Although the
contracts are not presently regulated by the CFTC, the CFTC may in the future
assert authority to regulate these contracts. In such event, a Fund's ability to
utilize forward foreign currency exchange contracts may be restricted.
While a Fund will enter into forward contracts to reduce currency
exchange rate risks, transactions in such contracts involve certain other risks.
Thus, while the Fund may benefit from such transactions, unanticipated changes
in currency prices may result in a poorer overall performance for the Fund than
if it had not engaged in any such transactions. Moreover, there may be imperfect
correlation between a Fund's portfolio holdings of securities quoted or
denominated in a particular currency and forward contracts entered into by such
Fund. Such imperfect correlation may cause the Fund to sustain losses which will
prevent the Fund from achieving a complete hedge or expose the Fund to risk of
foreign exchange loss.
Markets for trading foreign forward currency contracts offer less
protection against defaults than is available when trading in currency
instruments on an exchange. Since a forward foreign currency exchange contract
is not guaranteed by an exchange or clearinghouse, a default on the contract
would deprive a Fund of unrealized profits or force the Fund to cover its
commitments for purchase or resale, if any, at the current market price.
Writing and Purchasing Currency Call and Put Options. Each Fund (other
than Select Equity Fund) may write (sell) covered put and call options and
purchase put and call options on foreign currencies for the purpose of
protecting against declines in the U.S. dollar value of portfolio securities and
against increases in the U.S. dollar cost of securities to be acquired. As with
other kinds of option transactions, however, the writing of an option on foreign
currency will constitute only a partial hedge, up to the amount of the premium
received. If and when a Fund seeks to close out an option, the Fund could be
required to purchase or sell foreign currencies at disadvantageous exchange
rates, thereby incurring losses . The purchase of an option on foreign currency
may constitute an effective hedge against exchange rate fluctuations; however,
in the event of exchange rate movements adverse to a Fund's position, the Fund
may forfeit the entire amount of the premium plus related transaction costs.
Options on foreign currencies to be written or purchased by a Fund will be
traded on U.S. and foreign exchanges or over-the-counter.
International Fund and Asia Growth Fund may use options on currency to
cross-hedge, which involves writing or purchasing options on one currency to
hedge against changes in exchange rates for a different currency with a pattern
of correlation. In addition, International Fund and Asia Growth Fund may
purchase call options on currency to seek to increase total return when the
Adviser anticipates that the currency will appreciate in value, but the
securities quoted or denominated in that currency do not present attractive
investment opportunities and are not included in the Fund's portfolio.
A call option written by a Fund obligates such Fund to sell specified
currency to the holder of the option at a specified price if the option is
exercised at any time before the expiration date. A put option written by a Fund
would obligate such Fund to purchase specified currency from the option holder
at a specified price if the option is exercised at any time before the
expiration date. The writing of currency options involves a risk that a Fund
will, upon exercise of the option, be required to sell currency subject to a
call at a price that is less than the currency's market value or be required to
purchase currency subject to a put at a price that exceeds the currency's market
value.
B-18
<PAGE>
A Fund may terminate its obligations under an exchange traded call or
put option by purchasing an option identical to the one it has written. Such
purchases are referred to as "closing purchase transactions." A Fund would also
be able to enter into closing sale transactions in order to realize gains or
minimize losses on options purchased by the Fund.
A Fund would normally purchase call options on foreign currency in
anticipation of an increase in the U.S. dollar value of currency in which
securities to be acquired by such 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 portfolio securities.
In addition to using options for the hedging purposes described above,
International Fund and Asia Growth Fund may use options on currency to seek to
increase total return. International Fund and Asia Growth Fund may write (sell)
covered put and call options on any currency in order to realize greater income
than would be realized on portfolio securities transactions alone. However, in
writing covered call options for additional income, International Fund and Asia
Growth Fund may forego the opportunity to profit from an increase in the market
value of the underlying currency. Also, when writing put options, International
Fund and Asia Growth Fund 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.
International Fund and Asia Growth Fund would normally purchase call
options to seek to increase total return in anticipation of an increase in the
market value of a currency. International Fund and Asia Growth 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 International Fund and Asia Growth Fund would
realize either no gain or a loss on the purchase of the call option. Put options
may be purchased by either Fund for the purpose of benefiting from a decline in
the value of currencies which it does not own. International Fund and Asia
Growth 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 Funds would
realize either no gain or a loss on the purchase of the put option.
Special Risks Associated With Options on Currency. An exchange traded
options position may be closed out only on an options exchange which provides a
secondary market for an option of the same series. Although a Fund will
generally purchase or write only those options for which there appears to be an
active secondary market, there is no assurance that a liquid secondary market on
an exchange will
B-19
<PAGE>
exist for any particular option, or at any particular time. For some options no
secondary market on an exchange may exist. In such event, it might not be
possible to effect closing transactions in particular options, with the result
that a Fund would have to exercise its options in order to realize any profit
and would incur transaction costs upon the sale of underlying securities
pursuant to the exercise of put options. If a Fund as a covered call option
writer is unable to effect a closing purchase transaction in a secondary market,
it will not be able to sell the underlying currency (or security quoted or
denominated in that currency) until the option expires or it delivers the
underlying currency upon exercise.
There is no assurance that higher than anticipated trading activity or
other unforeseen events might not, at times, render certain of the facilities of
the Options Clearing Corporation inadequate, and thereby result in the
institution by an exchange of special procedures which may interfere with the
timely execution of customers' orders.
A Fund may purchase and write over-the-counter options to the extent
consistent with its limitation on investments in illiquid securities. Trading in
over-the-counter options is subject to the risk that the other party will be
unable or unwilling to close out options purchased or written by a Fund.
The amount of the premiums which a Fund may pay or receive may be
adversely affected as new or existing institutions, including other investment
companies, engage in or increase their option purchasing and writing activities.
Currency Swaps
The International Fund and Asia Growth Fund may, with respect to 5% of
their net assets, enter into currency swaps for hedging purposes and to seek to
increase total return. Inasmuch as swaps are entered into for good faith hedging
purposes or are offset by a segregated account as described below, the Advisers
believe that swaps do not constitute senior securities as defined in the Act,
and, accordingly, will not treat them as being subject to a Fund's borrowing
restrictions. An amount of cash or liquid, high grade debt securities having an
aggregate net asset value at least equal to the entire amount of the payment
stream payable by the Fund will be maintained in a segregated account by the
Fund's custodian.
A Fund will not enter into any currency swap unless the credit quality
of the unsecured senior debt or the claims-paying ability of the other party
thereto is considered to be investment grade by the Adviser. If there is a
default by the other party to such a transaction, the Fund will have contractual
remedies pursuant to the agreements related to the transaction. The swap market
has grown substantially in recent years with a large number of banks and
investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid in comparison with the markets for other similar instruments
which are traded in the interbank market. However, the staff of the SEC takes
the position that currency swaps are illiquid investments that are subject to
each Fund's 15% limitation on such investments.
Lending of Portfolio Securities
Each Fund may lend portfolio securities. Under present regulatory
policies, such loans may be made to institutions such as brokers or dealers and
would be required to be secured continuously by collateral in cash, cash
equivalents or U.S. Government securities maintained on a current basis at an
amount at least equal to the market value of the securities loaned. A Fund would
be required to have the right to call a loan and obtain the securities loaned at
any time on five days' notice. For the duration of a loan, a Fund would continue
to receive the equivalent of the interest or dividends paid by the issuer on the
securities loaned and would also receive compensation from investment of 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
B-20
<PAGE>
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 an 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 an
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.
When-Issued Securities and Forward Commitments
Each Fund may purchase securities on a when-issued basis or purchase or
sell securities on a forward commitment basis. These transactions involve a
commitment by a Fund to purchase or sell securities at a future date. The price
of the underlying securities (usually expressed in terms of yield) and the date
when the securities will be delivered and paid for (the settlement date) are
fixed at the time the transaction is negotiated. When-issued purchases and
forward commitment transactions are negotiated directly with the other party,
and such commitments are not traded on exchanges. A Fund will purchase
securities on a when-issued basis or purchase or sell securities on a forward
commitment basis only with the intention of completing the transaction and
actually purchasing or selling the securities. If deemed advisable as a matter
of investment strategy, however, a Fund may dispose of or negotiate a commitment
after entering into it. A Fund may realize a capital gain or loss in connection
with these transactions. For purposes of determining a Fund's average duration,
the maturity of when-issued or forward commitment securities will be calculated
from the commitment date. A Fund is required to hold and maintain in a
segregated account with the Fund's custodian until three days prior to the
settlement date, cash and liquid, high grade debt securities in an amount
sufficient to meet the purchase price. Alternatively, a Fund may enter into
offsetting contracts for the forward sale of other securities that it owns.
Securities purchased or sold on a when-issued or forward commitment basis
involve a risk of loss if the value of the security to be purchased declines
prior to the settlement date or if the value of the security to be sold
increases prior to the settlement date.
Investment in Unseasoned Companies
Each Fund may invest up to 5% of its net assets, calculated at the time
of purchase, in companies (including predecessors) which have operated less than
three years, except that this limitation does not apply to debt securities which
have been rated investment grade or better by at least one nationally recognized
statistical rating organization. The securities of such companies may have
limited liquidity, which can result in their being priced higher or lower than
might otherwise be the case. In addition, investments in unseasoned companies
are more speculative and entail greater risk than do investments in companies
with an established operating record.
Other Investment Companies
A Fund reserves the right to invest up to 5% of its net assets in the
securities of other investment companies but may not acquire more than 3% of the
voting securities of any other investment company. Pursuant to an exemptive
order obtained from the SEC, the Funds may invest in money market funds for
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 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 adviser, the advisory and
administration fees payable by the Fund to an Investment Adviser will
B-21
<PAGE>
be reduced by an amount equal to the Fund's proportionate share of the advisory
and administration fees paid by such money market fund to the Investment
Adviser.
Repurchase Agreements
Each Fund may enter into repurchase agreements with selected
broker-dealers, banks or other financial institutions. A repurchase agreement is
an arrangement under which a Fund purchases securities and the seller agrees to
repurchase the securities within a particular time and at a specified price.
Custody of the securities is maintained by the Fund's custodian. The repurchase
price may be higher than the purchase price, the difference being income to a
Fund, or the purchase and repurchase prices may be the same, with interest at a
stated rate due to a Fund together with the repurchase price on repurchase. In
either case, the income to a Fund is unrelated to the interest rate on the
security subject to the repurchase agreement.
For purposes of the Act and, generally, for tax purposes, a repurchase
agreement is deemed to be a loan from a Fund to the seller of the security. For
other purposes, it is not clear whether a court would consider the security
purchased by a Fund subject to a repurchase agreement as being owned by the Fund
or as being collateral for a loan by the Fund to the seller. In the event of
commencement of bankruptcy or insolvency proceedings with respect to the seller
of the security before repurchase of the security under a repurchase agreement,
a Fund may encounter delay and incur costs before being able to sell the
security. Such a delay may involve loss of interest or a decline in price of the
security. If the court characterizes the transaction as a loan and a Fund has
not perfected a security interest in the security, a Fund may be required to
return the security to the seller's estate and be treated as an unsecured
creditor of the seller. As an unsecured creditor, a Fund would be at risk of
losing some or all of the principal and interest involved in the transaction.
As with any unsecured debt instrument purchased for a Fund, the
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.
INVESTMENT RESTRICTIONS
The following investment restrictions have been adopted by the Company
with respect to each Fund 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 Company not to be fundamental and accordingly may be changed
without shareholder approval. See "Investment Objectives and Policies" in the
Prospectus. For purposes of the Act, "majority" means the lesser of (a) 67% or
more of the shares of the Company or a Fund present at a meeting, if the holders
of more than 50% of the outstanding shares of the Company or a Fund are present
or represented by
B-22
<PAGE>
proxy, or (b) more than 50% of the shares of the Company 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 each Fund's fundamental
investment restriction no. 1, asset coverage of at least 300% (as defined in the
Act), inclusive of any amounts borrowed, must be maintained at all times.
Select Equity Fund
Select Equity Fund may not:
1. Borrow money, except (a) for temporary or emergency purposes or for
clearance of transactions in amounts not exceeding 10% of the Fund's total
assets; while such borrowings exceed 5% of such Fund's assets, the Fund will not
make any additional investments; and (b) in connection with the redemption of
Fund shares, but only if after each such borrowing there is asset coverage of at
least 300% as defined in the Act. For purposes of this investment restriction,
short sales, the entry into currency transactions, options, futures contracts,
including those relating to indexes, options on futures contracts or indexes and
forward commitment transactions shall not constitute borrowing.
2. Purchase the securities of any one issuer, other than the United
States Government or any of its agencies or instrumentalities, if immediately
after such purchase more than 5% of the value of its total assets would be
invested in such issuer or the Fund would own more than 10% of the outstanding
voting securities of such issuer, except that (a) up to 25% of the value of the
Fund's total assets may be invested without regard to such 5% and 10%
limitations and (b) such 5% limitation shall not apply to repurchase agreements
collateralized by obligations of the United States Government, its agencies or
instrumentalities. (As a matter of non-fundamental policy, under normal
conditions, the securities of any one issuer may not exceed 5% of Select Equity
Fund's net assets at the time of purchase.)
3. Invest more than 25% of the value of its total assets in the
securities of one or more issuers conducting their principal business activities
in the same industry. This limitation does not apply to investments or
obligations of the U.S. Government or any of its agencies or instrumentalities.
4. Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings and to the extent related to the
deposit of assets in escrow in connection with the writing of covered put and
call options and the purchase of securities on a forward commitment or
delayed-delivery basis and collateral and initial or variation margin
arrangements with respect to currency transactions, options, futures contracts,
including those relating to indexes, and options on futures contracts or
indexes.
5. Purchase securities on margin, except for such short-term credits as
are necessary for the clearance of transactions, but the Fund may make margin
deposits in connection with transactions in currencies, options, futures and
options on futures.
6. Make short sales of securities, except short sales against-the-box,
or maintain a short position.
7. Underwrite any issue of securities issued by others, except to the
extent that the sale of portfolio securities by the Fund may be deemed to be
underwriting.
8. Purchase, hold or deal in real estate (including real estate limited
partnerships) or oil, gas or mineral leases, although the Fund may purchase and
sell securities that are secured by real estate or
B-23
<PAGE>
interests therein and may purchase mortgage-related securities and may hold and
sell real estate acquired for the Fund as a result of the ownership of
securities.
9. Invest in commodities except that the Fund may purchase and sell
futures contracts, including those relating to securities, currencies, indexes,
and options on futures contracts or indexes and currencies underlying or related
to any such future contracts, and purchase and sell currencies (and options
thereon) or securities on a forward commitment or delayed-delivery basis as
described in the Prospectuses.
10. Lend any funds or other assets except through the purchase of all
or a portion of an issue of securities or obligations of the type in which it
may invest; however, the Fund may lend its portfolio securities in an amount not
to exceed 33-1/3% of the value of its total assets. Any loans of portfolio
securities will be made according to guidelines established by the SEC and the
Company's Board of Directors.
11. Issue any senior security (as such term is defined in Section 18(f)
of the Act) except as permitted in Investment Restriction Nos. 1, 4, 5 and 9.
In addition to the investment restrictions mentioned above, the
Directors of the Company have voluntarily adopted the following policies and
restrictions which are observed in the conduct of its affairs. These represent
intentions of the Directors based upon current circumstances. They differ from
fundamental investment policies in that they may be changed or amended by action
of the Directors of the Company without prior notice to or approval of
shareholders. Accordingly, Select Equity Fund may not:
1. Purchase or retain the securities of any issuers if the officers,
directors or partners of the Company, its advisers or managers owning
beneficially more than one-half of 1% of the securities of such issuer, together
own beneficially more than 5% of such securities.
2. Purchase the securities of any issuer if by such purchase the Fund
would own more than 10% of the voting securities of such issuer.
3. Invest more than 10% of its total assets in the securities of other
investment companies or more than 5% of its total assets in the securities of
any one investment company, in each case calculated at the time of purchase, or
acquire more than 3% of the voting securities of any other investment company.
4. Write covered calls or put options with respect to more than 25% of
the value of its net assets, invest more than 25% of its net assets in puts,
calls, spreads or straddles, other than protective put options. The aggregate
value of premiums paid on all options held by Select Equity Fund at any time
will not exceed 20% of the Fund's total net assets.
5. Invest (a) more than 15% of its net assets in illiquid investments,
including repurchase agreements maturing in more than seven days, securities
that are not readily marketable and restricted securities not eligible for
resale pursuant to Rule 144A under the Securities Act of 1933 (the "1933 Act");
or (b) more than 10% of its net assets in restricted securities (including those
eligible for resale under Rule 144A).
6. Invest in securities of companies having a record together with
predecessors, of less than three years of continuous operation, if more than 5%
of a Fund's total assets would be invested in such securities. This restriction
shall not apply to mortgage-backed securities, asset-backed securities or
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.
Growth and Income Fund
B-24
<PAGE>
Growth and Income Fund may not:
1. Borrow money, except from banks on a temporary basis in an aggregate
amount not exceeding 10% of the value of the Fund's total assets, provided that
the Fund is required to maintain asset coverage of at least 300% for all
borrowings. For purposes of this investment restriction, forward contracts,
swaps, options, futures contracts and options on futures contracts, and forward
commitment transactions shall not constitute borrowing.
2. Purchase the securities of any one issuer, other than the United
States Government or any of its agencies or instrumentalities, if immediately
after such purchase more than 5% of the value of its total assets would be
invested in such issuer or the Fund would own more than 10% of the outstanding
voting securities of such issuer, except that (a) up to 25% of the value of the
Fund's total assets may be invested without regard to such 5% and 10%
limitations and (b) such 5% limitation shall not apply to repurchase agreements
collateralized by obligations of the United States Government, its agencies or
instrumentalities.
3. Invest more than 25% of the value of its total assets in the
securities of one or more issuers conducting their principal business activities
in the same industry. This limitation does not apply to investments or
obligations of the U.S. Government or any of its agencies or instrumentalities.
4. Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings and to the extent related to the
deposit of assets in escrow in connection with the writing of covered put and
call options and the purchase of securities on a forward commitment or
delayed-delivery basis and collateral and initial or variation margin
arrangements with respect to currency transactions, options, futures contracts,
including those relating to indices, and options on futures contracts or
indices.
5. Purchase securities on margin, except for such short-term credits as
are necessary for the clearance of transactions, but the Fund may make margin
deposits in connection with transactions in currencies, options, futures
contracts and options on futures.
6. Make short sales of securities (except short sales against-the-box,
or maintain a short position).
7. Underwrite any issue of securities issued by others, except to the
extent that the sale of portfolio securities by the Fund may be deemed to be
underwriting.
8. Purchase, hold or deal in real estate (including real estate limited
partnerships) or oil, gas or mineral leases, although the Fund may purchase and
sell securities that are secured by real estate or interests therein, securities
of real estate investment trusts and mortgage-related securities and may hold
and sell real estate acquired for the Fund as a result of the ownership of
securities.
9. Invest in commodities except that the Fund may purchase and sell
futures contracts, including those relating to securities, currencies and
indices, and options on futures contracts, securities, currencies or indices,
and purchase and sell currencies or securities on a forward commitment or
delayed delivery basis as described in the Prospectus.
10. Lend any funds or other assets except through the purchase of all
or a portion of an issue of securities or obligations of the type in which it
may invest; however, the Fund may lend its portfolio securities in an amount not
to exceed 33-1/3% of the value of its total assets.
11. Issue any senior security (as such term is defined in Section 18(f)
of the Act) except as permitted in Investment Restriction No. 1.
B-25
<PAGE>
In addition to the investment restrictions mentioned above, the
Directors of the Company have voluntarily adopted the following policies and
restrictions which are observed in the conduct of its affairs. These represent
intentions of the Directors based upon current circumstances. They differ from
fundamental investment restrictions in that they may be changed or amended by
action of the Directors of the Company without prior notice to or approval of
shareholders. Accordingly, the Fund may not:
1. Purchase the securities of any issuers if the officers, directors or
partners of the Company, its investment advisers or managers owning beneficially
more than one-half of 1% of the securities of such issuer, together own
beneficially more than 5% of such securities.
2. Write covered calls or put options with respect to more than 25% of
the value of its net assets, invest more than 25% of its net assets in
protective put options or more than 5% of its total assets in puts, calls,
spreads or straddles, or any combination thereof other than protective put
options. The aggregate value of premiums paid on all options other than
protective put options, held by the Fund at any time will not exceed 5% of the
Fund's total net assets.
3. Invest (a) more than 15% of its net assets in illiquid investments,
including repurchase agreements maturing in more than seven days, securities
that are not readily marketable and restricted securities not eligible for
resale pursuant to Rule 144A under the 1933 Act; or (b) more than 10% of its net
assets in restricted securities (including those eligible for resale under Rule
144A).
4. Purchase additional securities while the Fund's borrowings exceed 5%
of its total assets.
Mid-Cap Equity Fund
Mid-Cap Equity Fund may not:
1. Borrow money, except (a) for temporary or emergency purposes or for
clearance of transactions in amounts not exceeding one-third of the value of the
Fund's total assets, including the amount borrowed; (b) in connection with the
redemption of shares of such Fund or to finance failed settlements of portfolio
trades without immediately liquidating portfolio securities or other assets; and
(c) in order to fulfill commitments or plans to purchase additional securities
pending the anticipated sale of other portfolio securities or assets and (d)
transactions in mortgage dollar rolls which are accounted for as financings, but
only if after each such borrowing there is asset coverage of at least 300% as
defined in the Act. For purposes of this investment restriction, short sales,
currency transactions, forward contracts, currency, mortgage, index and interest
rate swaps, interest rate caps, floors and collars, options, futures contracts,
options on futures contracts or indices and forward commitment transactions
shall not constitute borrowing.
2. Purchase the securities of any one issuer, other than the U.S.
Government or any of its agencies or instrumentalities, if immediately after
such purchase more than 5% of the value of its total assets would be invested in
such issuer or the Fund would own more than 10% of the outstanding voting
securities of such issuer, except that (a) up to 25% of the value of the Fund's
total assets may be invested without regard to such 5% and 10% limitations and
(b) such 5% limitation shall not apply to repurchase agreements collateralized
by obligations of the United States Government, its agencies or
instrumentalities.
3. Invest more than 25% of the value of its total assets in the
securities of one or more issuers conducting their principal business activities
in the same industry. This limitation does not apply to investments or
obligations of the U.S. Government or any of its agencies or instrumentalities.
B-26
<PAGE>
4. Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings and to the extent related to the
deposit of assets in escrow in connection with the writing of covered put and
call options and the purchase of securities on a forward commitment or
delayed-delivery basis and collateral and initial or variation margin
arrangements with respect to currency transactions, options, futures contracts,
including those relating to indices, and options on futures contracts or
indices.
5. Purchase securities on margin, except for such short-term credits as
are necessary for the clearance of transactions, but the Fund may make margin
deposits in connection with transactions in currencies, options, futures
contracts and options on futures.
6. Make short sales of securities, except short sales against-the-box,
or maintain a short position.
7. Underwrite any issue of securities issued by others, except to the
extent that the sale of portfolio securities by the Fund may be deemed to be
underwriting.
8. Purchase, hold or deal in real estate (including real estate limited
partnerships) or oil, gas or mineral leases, although the Fund may purchase and
sell securities that are secured by real estate or interests therein and may
purchase mortgage-related securities and may hold and sell real estate acquired
for the Fund as a result of the ownership of securities.
9. Invest in commodities, except that the Fund may purchase and sell
futures contracts, including those relating to securities, currencies and
indices, and options on futures contracts, securities, currencies or indices,
and purchase and sell currencies or securities on a forward commitment or
delayed-delivery basis.
10. Lend any funds or other assets except through the purchase of all
or a portion of an issue of securities or obligations of the type in which it
may invest; however, the Fund may enter into repurchase agreements and may lend
its portfolio securities in an amount not to exceed 33-1/3% of the value of its
total assets.
11. Issue any senior security (as such term is defined in Section 18(f)
of the Act) except as permitted in fundamental investment restrictions 1, 4, 5
and 9.
In addition to the investment restrictions mentioned above, the
Directors of the Company have voluntarily adopted the following policies and
restrictions which are observed in the conduct of its affairs. These represent
intentions of the Directors based upon current circumstances. They differ from
fundamental investment restrictions in that they may be changed or amended by
action of the Directors of the Company without prior notice to or approval of
shareholders. Accordingly, the Fund may not:
1. Purchase the securities of any issuers if the officers, directors or
partners of the Company, its advisers or managers owning beneficially more than
one-half of 1% of the securities of such issuer, together own beneficially more
than 5% of such securities.
2. Write covered calls or put options with respect to more than 25% of
the value of its net assets or invest more than 5% of its net assets in puts,
calls, spreads or straddles, other than protective put options. The aggregate
value of premiums paid on all options, other than protective puts, held by the
Fund at any time will not exceed 5% of the Fund's total net assets.
3. Invest (a) more than 15% of its net assets in illiquid investments,
including repurchase agreements maturing in more than seven days, securities
that are not readily marketable and restricted
B-27
<PAGE>
securities not eligible for resale pursuant to Rule 144A under the Securities
Act of 1933 (the "1933 Act"); or (b) more than 10% of its net assets in
restricted securities (including those eligible for resale under Rule 144A).
4. Purchase additional securities if the Fund's borrowings exceed 5% of
its assets.
5. Purchase securities of other investment companies except (a)
purchases which are part of a plan of merger, consolidation, reorganization, or
acquisition, and (b) other purchases of the securities of investment companies
only if the purchases are of open-ended, no-load funds, are conditioned on the
waiver of management fees and further, if immediately thereafter (i) not more
than 3% of the total outstanding voting stock of such company is owned by the
Fund, (ii) not more than 5% of the Fund's total assets, taken at market value,
would be invested in such securities, (iii) the Fund, together with other
investment companies having the same investment adviser and companies controlled
by such companies, owns not more than 10% of the total outstanding stock of any
one investment company.
6. Invest in securities of companies having a record together with
predecessors, of less than three years of continuous operation, if more than 5%
of a Fund's total assets would be invested in such securities. This restriction
shall not apply to mortgage-backed securities, asset-backed securities or
obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
International Fund
International Fund may not:
(1) Borrow money, except from banks on a temporary basis, provided that
the Fund is required to maintain asset coverage of at least 300% for all
borrowings. For purposes of this investment restriction, short sales,
transactions in currency, forward contracts, swaps, options, futures contracts
and options on futures contracts, and forward commitment transactions shall not
constitute borrowing.
(2) Purchase the securities of any one issuer, other than the U.S.
Government or any of its agencies or instrumentalities, if immediately after
such purchase more than 5% of the value of its total assets would be invested in
such issuer or the Fund would own more than 10% of the outstanding voting
securities of such issuer, except that (a) up to 25% of the value of the Fund's
total assets may be invested without regard to such 5% and 10% limitations and
(b) such 5% limitation shall not apply to repurchase agreements collateralized
by obligations of the United States Government, its agencies or
instrumentalities.
(3) Invest more than 25% of the value of its total assets in the
securities of one or more issuers conducting their principal business activities
in the same industry. This limitation does not apply to investments in
obligations of the U.S. Government or any of its agencies, instrumentalities,
political subdivisions or authorities.
(4) Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings and to the extent related to the
deposit of assets in escrow in connection with the writing of covered put and
call options and the purchase of securities on a forward commitment or delayed-
delivery basis and collateral and initial or variation margin arrangements with
respect to currency transactions, options, futures contracts, including those
relating to indices, and options on futures contracts or indices.
(5) Purchase securities on margin, except for such short-term credits
as are necessary for the clearance of transactions, but the Fund may make margin
deposits in connection with transactions in currencies, options, futures
contracts and options on futures.
B-28
<PAGE>
(6) Make short sales of securities, except short sales against-the-box,
or maintain a short position.
(7) Underwrite any issue of securities issued by others, except to the
extent that the sale of portfolio securities by the Fund may be deemed to be
underwriting.
(8) Purchase, hold or deal in real estate (including real estate
limited partnerships) or oil, gas or mineral leases, although the Fund may
purchase and sell securities that are secured by real estate or interests
therein and may purchase mortgage-related securities and may hold and sell real
estate acquired by the Fund as a result of the ownership of securities.
(9) Invest in commodities, except that the Fund may purchase and sell
futures contracts, including those relating to securities, currencies and
indices, and options on futures contracts, securities, currencies or indices,
and purchase and sell currencies or securities on a forward commitment or
delayed- delivery basis, as described in the Prospectus.
(10) Lend any funds or other assets except through the purchase of all
or a portion of an issue of securities or obligations of the type in which it
may invest; however, the Fund may lend portfolio securities in an amount not to
exceed 33-1/3% of the value of its total assets.
(11) Issue any senior security (as such term is defined in Section
18(f) of the 1940 Act) except as permitted in Investment Restriction No. (1).
In addition to the investment restrictions mentioned above, the
Directors of the Company have voluntarily adopted the following policies and
restrictions which are observed in the conduct of its affairs. These represent
intentions of the Directors based upon current circumstances. They differ from
fundamental investment restrictions in that they may be changed or amended by
action of the Directors of the Company without prior notice to or approval of
shareholders. Accordingly, the Fund may not:
1. Purchase the securities of any issuer if the officers, directors or
partners of the Company, its advisers or managers owning beneficially more than
one-half of 1% of the securities of such issuer, together own beneficially more
than 5% of such securities.
2. Invest more than 10% of its total assets in the securities of other
investment companies or more than 5% of its total assets in the securities of
any one investment company, in each case calculated at the time of purchase, or
acquire more than 3% of the voting securities of any other investment company.
3. Write covered calls or put options with respect to more than 25% of
the value of its total assets or invest more than 5% of its total assets in
puts, calls, spreads or straddles, other than protective put options.
4. Invest (a) more than 15% of its net assets in illiquid investments,
including repurchase agreements maturing in more than seven days, securities
that are not readily marketable and restricted securities not eligible for
resale pursuant to Rule 144A under the 1933 Act; or (b) more than 10% of its net
assets in restricted securities (including those eligible for resale under Rule
144A).
5. Purchase the securities of any issuer if, as to 75% of the Fund's
assets at the time of purchase, more than 10% of the voting securities of such
issuer would be held by the Fund.
B-29
<PAGE>
6. Purchase additional securities if the Fund's borrowings exceed 5% of
its total assets.
Asia Growth Fund
The Asia Growth Fund may not:
1. Borrow money, except (a) for temporary or emergency purposes or for
clearance of transactions in amounts not exceeding one-third of the Fund's total
assets, including the amount borrowed; (b) in connection with the redemption of
shares of such Fund or to finance failed settlements of portfolio trades without
immediately liquidating portfolio securities or other assets; and (c) in order
to fulfill commitments or plans to purchase additional securities pending the
anticipated sale of other portfolio securities or assets, but only if after each
such borrowing there is asset coverage of at least 300% as defined in the Act.
For purposes of this investment restriction, short sales, the entry into
currency transactions, options, futures contracts, including those relating to
indices, options on futures contracts or indices and forward commitment
transactions shall not constitute borrowing.
2. Purchase the securities of any one issuer, other than the U.S.
Government or any of its agencies or instrumentalities, if immediately after
such purchase more than 5% of the value of its total assets would be invested in
such issuer or the Fund would own more than 10% of the outstanding voting
securities of such issuer, except that (a) up to 25% of the value of the Fund's
total assets may be invested without regard to such 5% and 10% limitations and
(b) such 5% limitation shall not apply to repurchase agreements collateralized
by obligations of the United States Government, its agencies or
instrumentalities.
3. Invest more than 25% of the value of its total assets in the
securities of one or more issuers conducting their principal business activities
in the same industry. This limitation does not apply to investments in
obligations of the U.S. Government or any of its agencies or instrumentalities.
4. Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings and to the extent related to the
deposit of assets in escrow in connection with the writing of covered put and
call options and the purchase of securities on a forward commitment or
delayed-delivery basis and collateral and initial or variation margin
arrangements with respect to currency transactions, options, futures contracts,
including those relating to indices, and options on futures contracts or
indices.
5. Purchase securities on margin, except for such short-term credits as
are necessary for the clearance of transactions, but the Fund may make margin
deposits in connection with transactions in currencies, options, futures
contracts and options on futures.
6. Make short sales of securities, except short sales against-the-box,
or maintain a short position.
7. Underwrite any issue of securities issued by others, except to the
extent that the sale of portfolio securities by the Fund may be deemed to be
underwriting.
8. Purchase, hold or deal in real estate (including real estate limited
partnerships) or oil, gas or mineral leases, although the Fund may purchase and
sell securities that are secured by real estate or interests therein and may
purchase mortgage-related securities and may hold and sell real estate acquired
for the Fund as a result of the ownership of securities.
B-30
<PAGE>
9. Invest in commodities, except that the Fund may purchase and sell
futures contracts, including those relating to securities, currencies and
indices, and options on futures contracts, securities, currencies or indices,
and purchase and sell currencies or securities on a forward commitment or
delayed-delivery basis.
10. Lend any funds or other assets except through the purchase of all
or a portion of an issue of securities or obligations of the type in which it
may invest; however, the Fund may enter into repurchase agreements and may lend
its portfolio securities in an amount not to exceed 33-1/3% of the value of its
total assets.
11. Issue any senior security (as such term is defined in Section 18(f)
of the Act), except as permitted in fundamental investment restrictions 1, 4, 5
and 9.
In addition to the investment restrictions mentioned above, the
Directors of the Company have voluntarily adopted the following policies and
restrictions which are observed in the conduct of the Fund's affairs. These
represent intentions of the Directors based upon current circumstances. They
differ from fundamental investment restrictions in that they may be changed or
amended by action of the Directors of the Company without prior notice to or
approval of shareholders. Accordingly, the Fund may not:
1. Purchase the securities of any issuers if the officers, directors or
partners of the Company, its advisers or managers owning beneficially more than
one-half of 1% of the securities of such issuer, together own beneficially more
than 5% of such securities.
2. Invest more than 10% of its total assets in the securities of other
investment companies or more than 5% of its total assets in the securities of
any one investment company, in each case calculated at the time of purchase, or
acquire more than 3% of the voting securities of any other investment company.
3. Write covered calls or put options with respect to more than 25% of
the value of its net assets or invest more than 5% of its net assets in puts,
calls, spreads or straddles, other than protective put options. The aggregate
value of premiums paid on all options held by the Fund at any time will not
exceed 5% of the Fund's total assets.
4. Invest (a) more than 15% of its net assets in illiquid investments,
including repurchase agreements maturing in more than seven days, securities
that are not readily marketable and restricted securities not eligible for
resale pursuant to Rule 144A under the 1933 Act; or (b) more than 10% of its net
assets in restricted securities (including those eligible for resale under Rule
144A).
5. Purchase the securities of any issuer if, as to 75% of the Fund's
assets at the time of purchase, more than 10% of the voting securities of such
issuer would be held by the Fund.
6. Purchase additional securities if the Fund's borrowings exceed 5% of
its total assets.
MANAGEMENT
B-31
<PAGE>
Information pertaining to the Board of Directors and officers of the
Company is set forth below. Directors and officers deemed to be "interested
persons" of the Company for purposes of the Act are indicated by an asterisk.
<TABLE>
<CAPTION>
Name and Age; Positions with Company; Principal
Address Occupation(s) During Past 5 Years
- -------- --------------------------------------
<S> <C>
Paul C. Nagel, Jr. 73; Chairman; Retired. Director and Chairman of the Finance and Audit
19223 Riverside Dr. Committees, Great Atlantic & Pacific Tea Co., Inc.: Director, United
Tequesta, FL 33469 Conveyor Construction.
Ashok N. Bakhru 53; Director; President, ABN Associates, Inc. since June 1994. Retired,
1235 Westlakes Drive Senior Vice President of Scott Paper Company; Director of Arkwright
Suite 385 Mutual Insurance Company; Trustee of International House of
Berwyn, PA 19312 Philadelphia; Member of Cornell University Council; Trustee of the
Walnut Street Theatre.
*David B. Ford 50; Director; General Partner, Goldman Sachs, since 1986. Chairman
One New Plaza and Chief Executive Officer of GSAM since December, 1994.
New York, NY 10004
*Douglas C. Grip 34; President and Director; Vice President, Goldman Sachs
One New York Plaza (since May 1996); formerly, President, MFS Retirement
New York, NY 10004 Services Inc., of Massachusetts Financial Services (prior
thereto).
*Alan A. Shuch 46; Director; Director and Vice President of Goldman Sachs Fund
One New York Plaza Management, Inc. (from April 1990 to November 1994); President
New York, NY 1004 and Chief Operating Officer, GSAM (from September 1988 to November
1994); Limited Partner, Goldman Sachs (since December 1994).
Jackson W. Smart 65; Director; Chairman and Chief Executive Officer, MSP
One Northfield Plaza Communications Inc. (a company engaged in radio broadcasting)
Suite #218 (since November 1988); Director, Federal Express Corporation;
North Northfield, IL Director, American Private Equity Group (a venture capital fund).
60093
William H. Springer 66; Director; Vice Chairman of Ameritech (a telecommunications holding
701 Morningside Dr. company; (February 1987 to retirement in August 1992); Vice Chairman,
Lake Forest, IL Chief Financial and Administrative Officer, Ameritech (prior thereto);
60045 Director, American Information Technologies corporation; Director
Walgreen Co. (a retail drugstore business); Director of Baker, Fentress &
Co. (a closed-ended, non-diversified management investment company).
Richard P. Strubel 56; Director; Managing Director, Tandem Partners, Inc. (since 1990);
70 West Madison St. President and Chief Executive Officer, Microdot, Inc.
Suite 1400 (a diversified manufacturer of fastening systems and connectors)
Chicago, IL 60602 (January 1984 to October 1994).
</TABLE>
B-32
<PAGE>
<TABLE>
<CAPTION>
Name and Age; Positions with Company; Principal
Address Occupation(s) During Past 5 Years
- -------- --------------------------------------
<S> <C>
*Pauline Taylor 49; Vice President; Vice President of Goldman Sachs (since June 1992);
4900 Sears Tower Consultant (1989 to June 1992)
Chicago, IL 60606
*John W. Mosior 57; Vice President; Vice President, Goldman Sachs, and Manager of
4900 Sears Tower Shareholder Services for GSAM Funds Group.
Chicago, IL 60606
*Nancy L. Mucker 46; Vice President; Vice President, Goldman Sachs, and Manager of
4900 Sears Tower Shareholder Services for GSAM Funds Group.
Chicago, IL 60606
*Scott M. Gilman 36; Treasurer; Director, Mutual Funds Administration, GSAM (since April
One New York Plaza 1994); Assistant Treasurer of Goldman Sachs Funds Management,
New York, NY 10004 Inc. (since March 1993); Vice President, Goldman Sachs (since March
1990); Assistant Treasurer of the Company (April 1990 to October 1991);
formerly Manager, Arthur Andersen LLP (prior to March 1990).
*John M. Perlowski 31; Assistant Treasurer; Vice President, Goldman Sachs (since
One New York Plaza July 1995); Director, Investors Bank and Trust (November 1993
New York, NY 10004 to July 1995); Audit Manager of Arthur Andersen LLP (prior
thereto).
*Michael J. Richman 35; Secretary; Vice President and Assistant General Counsel of Goldman
85 Broad Street Sachs (since June 1992); Associate General Counsel to the Funds
New York, NY 10004 Group, GSAM (since February 1994); Partner, Hale and Dorr
(September 1991 to June 1992);
Attorney-at-law, Gaston & Snow (September
1985 to September 1991).
*Howard B. Surloff 30; Assistant Secretary; Vice President and Assistant General Counsel, 85
Broad Street Goldman Sachs (since May 1994 and November 1995, respectively);
New York, NY 10004 Counsel to the Funds Group of GSAM (since November 1993); Associate
of Shereff Friedman, Hoffman & Goodman (prior thereto).
*Steven E. Hartstein 32; Assistant Secretary; Legal Products Analyst, Goldman Sachs
85 Broad Street (June 1993 to present); Funds Compliance Officer, Citibank
New York, NY 10004 Global Asset Management (August 1991 to June 1993); Legal Assistant,
Brown & Wood (prior thereto).
*Deborah A. Robinson 24; Assistant Secretary; Administrative Assistant, Goldman Sachs
85 Broad Street since January 1994. Formerly at Cleary, Gottlieb, Steen & Hamilton.
New York, NY 10004
</TABLE>
B-33
<PAGE>
- -------------
* "Interested person" of the Company for purposes of the Act.
The Company's Directors and officers hold comparable positions with
certain other investment companies of which the Investment Advisers, Goldman
Sachs or an affiliate thereof is the investment adviser, administrator, and/or
distributor. As of April 23, 1996, the Directors and officers of the Company as
a group owned less than 1% of the outstanding shares of common stock of the
Funds.
The following table sets forth certain information with respect to the
compensation of each Director of the Company for the one-year period ended
January 31, 1996:
<TABLE>
<CAPTION>
Total
Pension of Compensation
Retirement from Goldman
Benefits Sachs Mutual
Aggregate Accrued as Funds
Compensation Part of (including
Name of Trustee from the Company Company's Expenses the Company)
- --------------- ---------------- ------------------ ------------
<S> <C> <C> <C>
Paul C. Nagel, Jr. $12,630 -0- $101,000
Ashok Bakhru 7,630 -0- 61,000
Marcia L. Beck -0- -0- -0-
David B. Ford -0- -0- -0-
Alan A. Shuch -0- -0- -0-
Jackson W. Smart, Jr. 7,630 -0- 61,000
William H. Springer 7,630 -0- 61,000
Richard D. Strubel 7,630 -0- 61,000
</TABLE>
* The Goldman Sachs Mutual Funds consisted of 29 mutual funds, including the
eight series of the Company, on January 31, 1996.
Investment Adviser, Subadviser and Administrator
As stated in the Funds' Prospectus, GSFM, One New York Plaza, New York, New
York, a Delaware limited partnership and an affiliate of Goldman Sachs, 85 Broad
Street, New York, New York, serves as investment adviser to Select Equity Fund.
GSAM, One New York Plaza, New York, New York, a separate operating division of
Goldman Sachs, serves as investment adviser to Growth and Income, Mid- Cap
Equity and International Funds and GSAMI, 140 Fleet Street, London, England,
EC4A 2BJ acts as the investment adviser and subadviser to Asia Growth Fund and
International Fund, respectively. As a company with unlimited liability under
the laws of England, GSAMI is regulated by the Investment Management Regulatory
Organization Limited, a United Kingdom self-regulatory organization, in the
conduct of its investment advisory business. GSAM serves as administrator to
each Fund pursuant to an administration agreement. See "Management" in the
Funds' Prospectus for a description of the applicable Investment Adviser's
duties as investment adviser or subadviser and GSAM's duties as administrator to
the Funds.
Founded in 1869, Goldman Sachs is among the oldest and largest investment
banking firms in the United States. Goldman Sachs is a leader in developing
portfolio strategies and in many fields of investing and financing,
participating in financial markets worldwide and serving individuals,
institutions, corporations
B-34
<PAGE>
and governments. Goldman Sachs is 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, Osaka, Paris, Sao Paulo, Seoul,
Shanghai, Singapore, Sydney, Taipei, Tokyo, Toronto, Vancouver and Zurich. It
has trading professionals throughout the United States, as well as in London,
Tokyo, Hong Kong and Singapore. The active participation of Goldman Sachs in the
world's financial markets enhances its ability to identify attractive
investments.
The 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. With an annual equity research budget approaching $160
million, Goldman Sachs' Investment Research Department covers approximately
1,700 companies, including approximately 1,000 U.S. corporations in 60
industries. The in-depth information and analyses generated by Goldman Sachs'
research analysts are available to the 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 U.S. and abroad. Goldman Sachs is also among the leading
investment firms using quantitative analytics (now used by a growing number of
investors) to structure and evaluate portfolios.
In managing the portfolios of Funds, GSAM and GSAMI 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 movement worldwide. The
Economics Research Department tracks factors such as inflation and money supply
figures, balance of trade figures, economic growth, commodity prices, monetary
and fiscal policies, and political events that can influence interest rates and
currency trends. The success of Goldman Sachs' international research team has
brought wide recognition to its members. The team has earned top rankings in the
Institutional Investor's annual "All British Research Team Survey" in the
following categories: Economics (U.K.) 1986-1993; Economics/International
1989-1993; and Currency Forecasting 1986-1993. In addition, the team has also
earned top rankings in the annual "Extel Financial Survey" of U.K. investment
managers in the following categories: U.K. Economy 1989-1995; International
Economies 1986, 1988-1995; and Currency Movements 1986-1993.
In allocating assets in International Fund's portfolio among various
currencies, GSAM and GSAMI 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, GSAM and
GSAMI will estimate the total returns from each currency sector which are
consistent with the average investor holding a portfolio equal to the market
capitalization of the financial assets among those currency sectors. These
estimated equilibrium returns are then combined with the expectations of Goldman
Sachs' research professionals to produce an optimal currency and asset
allocation for the level of risk suitable for the International Fund's
investment objective and criteria.
Each Fund's investment advisory agreement and administration agreement
and International Fund's subadvisory agreement provides that the Investment
Adviser and GSAM, respectively, may render similar services to others so long as
the services provided by the Investment Adviser and GSAM thereunder are not
impaired thereby.
B-35
<PAGE>
The investment advisory agreement with respect to each Fund was most
recently approved by the Directors of the Company, including a majority of the
Directors of the Company who are not parties to the investment advisory
agreement or "interested persons" (as such term is defined in the Act) of any
party thereto (the "non-interested Directors"), on April 24, 1996. These
arrangements were most recently approved by the shareholders of Select Equity
Fund, at a shareholder meeting held on November 27, 1991 and by the sole initial
shareholder of each of International Fund, Growth and Income Fund, Asia Growth
Fund and Mid-Cap Equity Fund on October 23, 1992, January 29, 1993, June 1, 1994
and July 28, 1995, respectively. Each Fund's agreement will remain in effect
until June 30, 1997 and from year to year thereafter provided such continuance
is specifically approved at least annually by (a) the vote of a majority of the
outstanding voting securities of such Fund or a majority of the Directors of the
Company, and (b) the vote of a majority of the non-interested Directors of the
Company, cast in person at a meeting called for the purpose of voting on such
approval. Each advisory agreement will terminate automatically if assigned (as
defined in the Act) and is terminable at any time without penalty by the
Directors of the Company or by vote of a majority of the outstanding voting
securities of the affected Fund on 60 days' written notice to the Adviser and by
the Adviser on 60 days' written notice to the Company.
Pursuant to the advisory agreement for International Fund, Growth and
Income Fund and Mid-Cap Equity Fund, GSAM is entitled to receive a fee payable
monthly by such Funds equal on an annual basis to 0.25%, 0.55% and 0.60%,
respectively, of such Funds' average daily net assets. GSAM voluntarily has
agreed to limit its advisory fee with respect to International Fund to an annual
rate equal to 0.23% of International Fund's average daily net assets.
Pursuant to the advisory agreement for Select Equity Fund, GSFM is
entitled to receive a fee payable monthly by such Fund equal on an annual basis
to 0.50% of the Fund's average daily net assets. GSFM voluntarily has agreed to
limit its advisory fee with respect to Select Equity Fund to an annual rate
equal to 0.44% of Select Equity Fund's average daily net assets.
Pursuant to a separate Subadvisory Agreement with GSAMI, the
International Fund pays GSAMI a monthly subadvisory fee equal on an annual basis
to 0.50% of such Fund's average daily net assets. GSAMI voluntarily has agreed
to limit its subadvisory fee with respect to International Fund to an annual
rate equal to 0.48% of International Fund's average daily net assets. The fee
paid by International Fund to GSAMI is in addition to the fee it pays to GSAM
for advisory services.
Pursuant to Asia Growth Fund's advisory agreement, GSAMI is entitled to
receive a fee payable monthly by the Fund equal on an annual basis to 0.75% of
the Fund's average daily net assets. GSAMI voluntarily has agreed to limit its
advisory fee with respect to Asia Growth Fund to an annual rate equal to 0.71%
of Asia Growth Fund's average daily net assets.
GSAM, GSFM and GSAMI may discontinue or modify the above limitations in
the future, at their discretion, although they have no current intention to do
so.
For the last three fiscal years the amounts of the investment advisory
fees incurred by each Fund then in existence were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Select Equity Fund4 $ 578,721 $462,255(1) $475,941(1)
Growth and Income Fund 1,748,649 621,416 100,926
Mid-Cap Equity Fund3 391,234 N/A N/A
International Fund1 698,718 796,627 331,134
</TABLE>
B-36
<PAGE>
<TABLE>
<S> <C> <C> <C>
Asia Growth Fund1,2 1,172,731 414,813 N/A
</TABLE>
- ---------------------------
1 Does not give effect to the agreement (which was not in effect during such
fiscal years) by the Investment Advisers to limit advisory fees to 0.44%,
0.23% and 0.71% of Select Equity Fund's, International Fund's and Asia
Growth Fund's average daily net assets.
2 Commenced operations on July 8, 1994.
3 Commenced operations on August 1, 1995.
4 Gives effect to the agreement (which was in effect as of June 15,1995) by
GSFM to limit advisory fees to 0.44% of the Select Equity Fund's average
daily net assets. For the fiscal year ended January 31, 1996, had
limitations not been in effect, Select Equity Fund would have paid $679,759
in investment advisory fees.
For the fiscal years ended January 31, 1994, 1995 and 1996,
International Fund paid GSAMI subadvisory fees of $662,267, $1,593,255 and
$1,397,436 (which does not include the effect of the waiver to 0.48 of 1%, which
is currently in effect), respectively.
Pursuant to the administration agreements, GSAM's administrative
responsibilities include, subject to the general supervision of the Directors of
the Company, (a) providing supervision of all aspects of the Company's
non-investment operations (the parties giving due recognition to the fact that
certain of such operations are performed by others pursuant to agreements with
each Fund), (b) providing the Company, to the extent not provided pursuant to
its custodian and transfer agency agreements or agreements with other
institutions, with personnel to perform such executive, administrative and
clerical services as are reasonably necessary to provide effective
administration of the Company, (c) arranging, to the extent not provided
pursuant to such agreements, for the preparation, at the Company's expense, of
its tax returns, reports to shareholders, periodic updating of the Prospectuses
and reports filed with the SEC and other regulatory authorities, (d) providing
the Company, to the extent not provided pursuant to such agreements, with
adequate office space and certain related office equipment and services, and (e)
maintaining all of the Company's records other than those maintained pursuant to
such agreements.
GSAM is entitled to receive a fee from the Growth and Income and
Mid-Cap Equity Funds, computed daily and payable monthly, at an annual rate
equal to 0.15% of the Fund's average daily net assets and GSAM is entitled to a
fee from each other Fund, computed daily and payable monthly at an annual rate
equal to 0.25% of each such Fund's average daily net assets; however, GSAM
voluntarily has agreed to limit its administration fee with respect to Select
Equity, International and Asia Growth Funds to an annual rate equal to 0.15% of
such Funds' average daily net assets. Although it has no current intention to do
so, GSAM may modify or discontinue such limitation in the future at its
discretion.
For the last three fiscal years the amounts of the administration fees
paid by each Fund then in existence were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Select Equity Fund $238,842(4) $231,128(1) $237,970(1)
Growth and Income Fund 476,904 169,477 27,525
Mid-Cap Equity Fund3 97,809 N/A N/A
International Fund1 698,718 796,627 331,134
Asia Growth Fund1, 2 390,910 138,271 N/A
</TABLE>
B-37
<PAGE>
- -----------------------------
1 Does not give effect to the agreement (which was not in effect during such
fiscal years) by GSAM to limit Select Equity, International and Asia Growth
Fund's administration fee to 0.15% of the Fund's average daily net assets.
2 Commenced operations on July 8, 1994.
3 Commenced operations on August 1, 1995.
4 Gives effect to the agreement (which was in effect as of June 15, 1995) by
GSAM to limit administration fees to 0.15% of the Select Equity Fund's
average daily net assets. For the fiscal year ended January 31, 1996, had
limitations not been in effect, Select Equity Fund would have paid $339,880
in administration fees.
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 interests in, other
accounts and other activities of Goldman Sachs may present conflicts of interest
with respect to the Funds or impede the Funds' 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 on a proprietary
basis and for the accounts of customers. As such, Goldman Sachs and its
affiliates are actively engaged in transactions in the same securities,
currencies and instruments in which the Funds invest. Such activities could
affect the prices and availability of the securities, currencies and instruments
in which the Funds will invest, which could have an adverse impact on the Funds'
performance. Such transactions, particularly in respect to 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 the good faith discretion of such
entities 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 the
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, J. Aron and other affiliates. An
Investment Adviser will not be under any obligation, however, to effect
transactions on behalf of a Fund in accordance with such analysis and models. In
addition, neither Goldman Sachs nor any of its affiliates will have any
obligation to make available any information regarding their proprietary
activities or strategies, or the activities or strategies used for other
accounts managed by them, for the benefit of the management of the 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
B-38
<PAGE>
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 a Fund's investment activities may differ significantly
from the results achieved by an Investment Adviser and its affiliates for their
proprietary accounts or accounts (including investment companies or collective
investment vehicles) managed or advised by them. It is possible that Goldman
Sachs and its affiliates and such other accounts will achieve investment results
which are substantially more or less favorable than the results achieved by a
Fund. Moreover, it is possible that a Fund will sustain losses during periods in
which Goldman Sachs and its affiliates achieve significant profits on their
trading for proprietary or other accounts. The opposite result is also possible.
The investment activities of Goldman Sachs and its affiliates for
their proprietary accounts and accounts under their management may also limit
the investment opportunities for the Fund in certain emerging markets in which
limitations are imposed upon the aggregate amount of investment, in the
aggregate or individual issuers, by affiliated foreign investors.
An investment policy committee which may include partners of Goldman
Sachs and its affiliates may develop general policies regarding a Fund's
activities, but will not be involved in the day-to-day management of such Fund.
In such instances, those individuals may, as a result, obtain information
regarding a 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, currencies and investments similar to those in which a
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 other 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 not have an incentive to assure that a Fund obtains the
best possible prices or terms in connection with the transactions. Goldman Sachs
and its affiliates may also create, write or issue derivative instruments for
customers of Goldman Sachs or its affiliates, the underlying securities,
currencies or instruments of which may be those in which a Fund invests or which
may be based on the performance of the 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 where such
other clients have interests adverse to those of the Funds. To the extent that
affiliate transactions are permitted, the Funds will deal with Goldman Sachs and
its affiliates on an arm's-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.
B-39
<PAGE>
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 such 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 Fund shares acquired for its own account.
A large redemption of Fund shares by Goldman Sachs could significantly reduce
the asset size of a Fund, which might have an adverse effect on the Fund's
investment flexibility, portfolio diversification and expense ratio. Goldman
Sachs will consider the effect of redemptions on a Fund and other shareholders
in deciding whether to redeem its shares.
It is possible that a Fund's holdings will include securities of
entities for which Goldman Sachs performs investment banking services as well as
securities of entities in which Goldman Sachs makes a market. From time to time,
Goldman Sachs' activities may limit the Funds' flexibility in purchases and
sales of securities. When Goldman Sachs is engaged in an underwriting or other
distribution of securities of an entity, the 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 serves as the exclusive distributor of shares of the
Funds pursuant to a "best efforts" arrangement as provided by a distribution
agreement with the Company dated February 1, 1993, as amended as of January 30,
1996. Pursuant to the distribution agreement, after the Prospectus and periodic
reports have been prepared, set in type and mailed to shareholders, Goldman
Sachs will pay for the printing and distribution of copies thereof used in
connection with the offering to prospective investors. Goldman Sachs will also
pay for other supplementary sales literature and advertising costs.
Goldman Sachs serves as the Company's transfer agent. Under its
transfer agency agreement with the Company, Goldman Sachs has undertaken with
the Company to (i) record the issuance, transfer and redemption of shares, (ii)
provide confirmations of purchases and redemptions, and quarterly statements, as
well as certain other statements, (iii) provide certain information to the
Company'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. Goldman Sachs is
not entitled to receive a fee from the Select Equity, International Equity and
Asia Growth Funds with respect to the Institutional and Service Shares of such
Funds. As compensation for the services rendered to the Company by Goldman Sachs
as transfer agent and the assumption by Goldman Sachs of the expenses related
thereto, Goldman Sachs is entitled to receive a fee with respect to the
Institutional and Service Shares of the Growth and Income and Mid-Cap Equity
Funds equal to 0.04% of the net assets of each Fund attributable to such classes
of shares. Transfer agency fees paid by a Fund with respect to a particular
class are allocated to the shares of such class.
For the last three fiscal years the amounts paid to Goldman Sachs by
each Fund's Institutional Class then in existence for transfer agency services
performed were as follows:
<TABLE>
<CAPTION>
1996
----
<S> <C>
Select Equity Fund1 $11,571
Growth and Income Fund3 N/A
Mid-Cap Equity Fund2 26,082
International Fund3 N/A
</TABLE>
B-40
<PAGE>
<TABLE>
<S> <C>
Asia Growth Fund3 N/A
</TABLE>
- ---------------------------
1 The Institutional Class commenced operations on June 15, 1995.
2 Commenced operations on August 1, 1995.
3 Institutional classes were not in existence for the fiscal year ended
January 31, 1996.
The Company'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 Company will indemnify Goldman Sachs against certain
liabilities.
Expenses
Except as set forth in the Prospectus under "Management," the Company
is responsible for the payment of its expenses. The expenses borne by a Fund
include, without limitation, the fees payable to the Investment Advisers, the
fees payable to GSAM, the fees and expenses of the Fund's custodian and
subcustodians, transfer agency fees, brokerage fees and commissions, filing fees
for the registration or qualification of the Company's shares under federal or
state securities laws, expenses of the organization of the Company, the fees and
expenses incurred by the Company 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 Company
for violation of any law, legal, tax 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 Company), 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 a
Fund's shareholders and regulatory authorities, any expenses assumed by a Fund
pursuant to a distribution, authorized dealer service plan or service plan
compensation and expenses of the Company's "non-interested" Directors and
extraordinary expenses, if any, incurred by the Company. Except for fees under
any distribution, authorized dealer service, administration or service plans
applicable to a particular class and transfer agency fees, all Fund expenses are
borne on a non-class specific basis.
Each Investment Adviser has voluntarily agreed to reduce or limit
certain "Other Expenses" of the Funds (excluding transfer agency fees estimated
to be 0.04% of average daily net assets (applicable to the Growth and Income and
Mid-Cap Equity Funds only), advisory and administration fees and fees under
service, distribution and authorized dealer service plans, taxes, interest,
brokerage fees and litigation, indemnification and other extraordinary expenses)
to the extent such expenses exceed 0.06%, 0.11%, 0.06%, 0.24% and 0.24% per
annum of the average daily net assets, respectively, of the Select Equity,
Growth and Income, Mid-Cap Equity, International and Asia Growth Funds. Such
limits are calculated monthly and, although it has no current intention to do
so, may be discontinued or modified by the Investment Adviser at 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
the Funds' custodian.
B-41
<PAGE>
For the last three fiscal years the amounts of certain "Other Expenses"
of each Fund then in existence that were reduced or otherwise limited were as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Select Equity Fund $110,581 N/A N/A
Growth and Income Fund 0 106,725 319,899
Mid-Cap Equity Fund1 85,815 N/A N/A
International Fund N/A N/A 0
Asia Growth Fund2 0 135,905 N/A
</TABLE>
- ----------------------------------
1 Commenced operations on August 1, 1995.
2 Commenced operations on July 8, 1994.
Each Investment Adviser has voluntarily agreed to reduce the fees
payable to it by a Fund (to the extent of its fees) by an amount (if any) that
the Fund's expenses would exceed the expense limitations applicable to such Fund
imposed by states securities administrators, as such limitations may be lowered
or raised from time to time. These expense limitations apply to the advisory and
administration fees paid by each Fund and the subadvisory fees paid by
International Fund, but do not apply to taxes, interest, brokerage fees and
distribution, authorized dealer and service fees and, where permitted,
extraordinary expenses such as for litigation. The Advisers will reduce their
respective fees by the amount of such excess in amounts proportionate to such
investment advisory, administration and subadvisory fees.
Currently, the most restrictive expense limitation of state securities
commissions of which the Company is aware is 2-1/2% of a Fund's average daily
net assets up to $30 million, 2% of the next $70 million of such assets and
1-1/2% of such assets in excess of $100 million.
Custodian and Sub-Custodians
State Street, P.O. Box 1713, Boston, Massachusetts 02105, is the
custodian of the Company's portfolio securities and cash. State Street also
maintains the Company's accounting records. State Street may appoint
sub-custodians from time to time to hold certain securities purchased by the
Company and to hold cash for the Company.
Independent Public Accountants
Arthur Andersen LLP, independent public accountants, One International
Place, Boston, Massachusetts 02110, have been selected as auditors of the
Company. In addition to audit services, Arthur Andersen LLP prepares the
Company's federal and state tax returns, and provides consultation and
assistance on accounting, internal control and related matters.
B-42
<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. A Fund will not deal with Goldman Sachs in
any transaction in which Goldman Sachs acts as principal.
In placing orders for portfolio securities of a Fund, the Investment
Advisers are generally required to give primary consideration to obtaining the
most favorable price and efficient execution under the circumstances. This means
that an Investment Adviser will generally seek to execute each transaction at a
price and commission, if any, which provide the most favorable total cost or
proceeds reasonably attainable in the circumstances. 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
statistical and economic data and research reports on particular companies and
industries. 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
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 investment
advisory services for the Company.
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 or an affiliate acts as investment adviser or
subadviser), the Investment Adviser, to the extent permitted by applicable laws
and regulations, may aggregate the securities to be sold or purchased for a 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 and whether the broker
provides research and investment services. The allocation of orders among
brokers and the commission rates paid are reviewed periodically by the Directors
of the Company.
B-43
<PAGE>
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 fair compared to
the commissions, fees or other remuneration paid to other brokers in connection
with comparable transactions involving similar securities being purchased or
sold on a securities exchange during a comparable period of time. This standard
would allow Goldman Sachs to receive no more than the remuneration which would
be expected to be received by an unaffiliated broker in a commensurate
arm's-length transaction. Furthermore, the Directors of the Company, including a
majority of the Directors who are not "interested" Directors, 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.
In addition, Goldman Sachs, as a member firm of the New York Stock
Exchange, may effect exchange transactions and receive compensation therefor if
expressly so authorized in a written contract with the Company. The Company on
behalf of each Fund has entered into such a contract with Goldman Sachs. Goldman
Sachs will provide the Company at least annually with a statement setting forth
the total amount of all compensation retained by Goldman Sachs in connection
with effecting transactions for the accounts of the Funds. The Directors of the
Company will review and approve all the Fund's portfolio transactions with
Goldman Sachs and the compensation received by Goldman Sachs in connection
therewith. The Company, of course, will effect its portfolio transactions in a
manner consistent with all applicable laws.
B-44
<PAGE>
For the past three fiscal years, each Fund in existence paid brokerage
commissions as follows:
<TABLE>
<CAPTION>
Total Total Brokerage
Brokerage Amount of Commissions
Total Commissions Transaction Paid
Brokerage Paid to on which to Brokers
Commissions Affiliated Commissions Providing
Paid Persons Paid Research
---- ------- ---- --------
Fiscal Year Ended:
January 31, 1996
<S> <C> <C> <C> <C>
Select Equity Fund $121,424 $ 0(0%)(2) $148,427,497(0%)(3) -0-
Growth and Income Fund 841,605 71,218(8%)(2) 425,040,430(9%)(3) -0-
Mid-Cap Equity Fund(3) 315,212 40,935(13%)(1) 142,547,552(11%)(2) -0-
International Fund 1,260,992 13,629(1%)(2) 359,700,166(1%)(3) -0-
Asia Growth Fund 1,676,525 3,778(0%)(2) 247,662,049(2%)(3) -0-
January 31, 1995
Select Equity Fund $119,192 $ 0 (0%)(1) $99,616,396(0%)(2) -0-
Growth and Income Fund 637,080 77,404(12%)(1) 468,165,610(7%)(2) -0-
International Fund 1,799,525 0(0%)(1) 546,364,113(0%)(2) -0-
Asia Growth Fund(4) 1,002,148 67,754(7%)(1) 171,880,775(2%)(2) -0-
January 31, 1994
Select Equity Fund $ 187,041 $ 3,857(2%)(1) $306,043,566(1%)(2) -0-
Growth and Income Fund(5) 2,974,075 274,704(9%)(1) 74,091,306(27%)(2) -0-
International Fund(6) 765,594 0(0%)(1) 202,360,486(0%)(2) -0-
- ----------
</TABLE>
(1) Percentage of total commissions paid.
(2) Percentage of total amount of transactions involving the payment of
commissions effected through affiliated persons.
(3) Mid-Cap Equity Fund commenced operations on August 1, 1995.
(4) Asia Growth Fund commenced operations on July 8, 1994.
(5) Growth and Income Fund commenced operations on February 5, 1993.
(6) International Fund commenced operations on December 1, 1992.
B-45
<PAGE>
During the fiscal year ended January 31, 1996, the Company acquired and
sold securities of its regular broker-dealers: Donaldson, Lufkin and Jenrette,
Smith Barney, Daiwa Securities, Swiss Bank Corp., Merrill Lynch, Nomura
Securities International, J.P. Morgan, Salomon Brothers, Morgan Stanley, Lehman
Brothers and Chemical Securities. As of January 31, 1996, the Company held the
following amounts of securities of its regular broker/dealers, as defined in
Rule 10b-1 under the Act, or their parents ($ in thousands): Capital Growth Fund
owned securities issued by Salomon Brothers and Lehman Brothers in the amounts
of $10,241 and $25,291, respectively. The Select Equity Fund owned securities
issued by Chemical Securities, Salomon Brothers, Lehman Brothers and Morgan
Stanley in the amounts of $2,131, $3,332, $3,468 and $933, respectively. The
Growth and Income Fund owned securities issued by Salomon Brothers and Lehman
Brothers in the amounts of $13,426 and $18,994, respectively. The Balanced Fund
owned securities issued by Salomon Brothers and Lehman Brothers in the amounts
of $3,430 and $3,906, respectively.
NET ASSET VALUE
Under the Act, the Directors of the Company are responsible for determining
in good faith the fair value of securities of each Fund. In accordance with
procedures adopted by the Directors of the Company, the net asset value per
share of each class of each Fund is calculated by determining the value of the
net assets attributable to each class of that Fund (assets, including securities
at value, minus liabilities) divided by the number of shares outstanding of that
class. All securities are valued as of the close of regular trading on the New
York Stock Exchange (normally 4:00 p.m. New York time) on each Business Day (as
defined in the Prospectus).
In the event that the New York Stock Exchange or the national securities
exchange on which stock options are traded adopt different trading hours on
either a permanent or temporary basis, the Directors of the Company 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 Nasdaq National Market ("NASDAQ") will be valued at the
last sale price on the exchange or system in which they are principally traded,
on the valuation date. If there is no sale on the valuation day, securities
traded principally: (i) on a U.S. exchange or NASDAQ will be valued at the mean
between the closing bid and asked prices; and (ii) on a foreign exchange will be
valued at the last sale price (also referred to as the close price). The last
sale price for securities traded principally on a foreign exchange will be
determined as of the close of the London Stock Exchange or, for securities
traded on exchanges located in the Asia Pacific region, noon London time; (b)
over-the-counter securities not quoted on NASDAQ will be valued at the last sale
price on the valuation day or, if no sale occurs, at the mean between the last
bid and asked price; (c) exchange traded options and futures contracts will be
valued at the last sale price in the market where such contracts are principally
traded; (d) forward foreign currency exchange contracts will be valued using a
pricing service (such as Reuters), then calculating the mean between the last
bid and asked quotations supplied by certain independent dealers in such
contracts; (e) debt securities, other than money market instruments, will be
valued on the basis of dealer-supplied quotation or by using a pricing service
approved by the Board of Directors if such prices are believed by the Investment
Advisers to accurately represent market value. Money market instruments, which
are defined as those debt securities with a remaining maturity of 60 days or
less, will be valued at amortized costs; (f) overnight repurchase agreements
will be valued at cost and term repurchase agreements will be valued at the
average of bid quotations obtained daily from at least two recognized dealers;
(g) OTC options will be valued by an independent unaffiliated broker identified
by the portfolio manager/trader and contacted by the custodian bank; and (h) all
other securities, including those for which a pricing service supplies no
quotation or a quotation that is believed
B-46
<PAGE>
by the portfolio manager/trader to be inaccurate, will be valued at fair value
in accordance with procedures established by the Board of Directors of the
Company.
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 value is not calculated.
Such calculation does not take place contemporaneously with the determination of
the prices of the majority of the portfolio securities used in such calculation.
Events affecting the values of portfolio securities that occur between the time
their prices are determined and the close of regular trading on the New York
Stock Exchange will not be reflected in the Funds' calculation of net asset
value unless the Directors deem that the particular event would materially
affect net asset value, in which case an adjustment may be made.
The proceeds received by each Fund and each other series of the Company (as
defined herein under "Shares of the Company") established by the Directors of
the Company for each 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 series 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 Company. Expenses of the Company with respect to the Funds and the other
series of the Company are generally allocated in proportion to the net asset
values of the respective Fund or series except where allocations of direct
expenses can otherwise be fairly made.
PERFORMANCE INFORMATION
A Fund may from time to time quote or otherwise use total return, yield
and/or distribution rate information in advertisements, shareholder reports or
sales literature. Average annual total returns and yield are computed pursuant
to formulas specified by the SEC.
Yield is computed by dividing net investment income earned: during a recent
thirty-day period by the product of the average daily number of shares
outstanding and entitled to receive dividends during the period and the maximum
public offering price per share on the last day of the relevant period. The
results are compounded on a bond equivalent (semi-annual) basis and then
annualized. Net investment income per share is equal to the dividends and
interest earned during the period, reduced by accrued expenses for the period.
The calculation of net investment income for these purposes may differ from the
net investment income determined for accounting purposes.
The distribution rate for a specified period is calculated by annualizing
distributions of net investment income for such period and dividing this amount
by the net asset value per share or maximum public offering price on the last
day of the period.
Average annual total return for a specified period is derived by
calculating the actual dollar amount of the investment return on a $1,000
investment made at the maximum public offering price (net asset value in the
case of Institutional and Service Shares) 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
B-47
<PAGE>
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 (net asset value in
the case of Institutional and Service Shares) with all distributions reinvested
at the beginning of such period equal to the actual total value of such
investment at the end of such period. The following tables indicate the total
return (capital changes plus reinvestment of all distributions on a hypothetical
investment of $1,000 in the Funds) for the periods indicated.
Occasionally statistics may be used to specify Fund volatility or risk.
Measures of volatility or risk are generally used to compare a Fund's net asset
value or performance relative to a market index. One measure of volatility is
beta. Beta is the volatility of a fund relative to the total market. A beta of
more than 1.00 indicates volatility greater than the market, and a beta of less
than 1.00 indicates volatility less than the market. Another measure of
volatility or risk is standard deviation. Standard deviation is used to measure
variability of net asset value or total return around an average, over a
specified period of time. The premise is that greater volatility connotes
greater risk undertaken in achieving performance.
From time to time, the Company may publish an indication of a Fund's past
performance as measured by independent sources such as (but not limited to)
Lipper Analytical Services, Inc., Morningstar Mutual Funds, Weisenberger
Investment Companies Service, Donoghue's Money Fund Report, Micropal, Barron's,
Business Week, Changing Times, Financial World, Forbes, Fortune, Money, Personal
Investor, Sylvia Porter's Personal Finance and The Wall Street Journal. The
Company may also advertise information which has been provided to the NASD for
publication in regional and local newspapers. In addition, the Company may from
time to time advertise a Fund's performance relative to certain indices and
benchmark investments, including: (a) the Lipper Analytical Services, Inc.
Mutual Fund Performance Analysis, Fixed Income Analysis and Mutual Fund Indices
(which measure total return and average current yield for the mutual fund
industry and rank mutual fund performance); (b) the CDA Mutual Fund Report
published by CDA Investment Technologies, Inc. (which analyzes price, risk and
various measures of return for the mutual fund industry); (c) the Consumer Price
Index published by the U.S. Bureau of Labor Statistics (which measures changes
in the price of goods and services); (d) Stocks, Bonds, Bills and Inflation
published by Ibbotson Associates (which provides historical performance figures
for stocks, government securities and inflation); (e) the Salomon Brothers'
World Bond Index (which measure 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 account (MMDAs), checking accounts, saving accounts, money market mutual
funds and repurchase agreements; (j) Donoghues' Money Fund Report (which
provides industry averages for 7-day annualized and compounded yields of
taxable, tax-free and U.S. Government money funds); (k) the Hambrecht & Quist
Growth Stock Index; (l) the NASDAQ OTC Composite Prime Return; (m) the Russell
Midcap Index; (n) the Russell 2000 Index Total Return; (o) the Value-Line
Composite-Price Return; (p) the Wilshire 4500 Index; (q) the FT-Actuaries Europe
and Pacific Index; (r) historical investment data supplied by the research
departments of Goldman Sachs, Lehman Brothers, First Boston Corporation, Morgan
Stanley (including EAFE), and the Morgan Stanley Capital International combined
Asia ex Japan Free Index, Salomon Brothers, Merrill Lynch, Donaldson Lufkin and
Jenrette or other providers of such data; and (s) the FT-Actuaries Europe and
Pacific 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
B-48
<PAGE>
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.
B-49
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Investment Investment Average
Fund Date Period Annual
- ---- ---- ------ ------
<S> <C> <C> <C>
Select 5/24/91* ended
Equity Fund 1/31/96
Class A Shares
-Assumes 5.5% sales charge 11.47%
-Assumes no sales charge
2/1/95 one year 12.82%
ended
1/31/96
-Assumes 5.5% sales charge 31.01%
-Assumes no sales charge 38.63%
Select Equity Fund-
Institutional Shares 6/15/95 ended
1/31/96
-Assumes 5.5% sales charge N/A
-Assumes no sales charge 20.14%**
</TABLE>
B-50
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Investment Investment Average
Fund Date Period Annual
- ---- ---- ------ ------
<S> <C> <C> <C>
Growth
and Income 2/5/93* ended
Fund Class A Shares 1/31/96
- -Assumes 5.5% sales charge 13.80%
- -Assumes no sales charge 15.97%
2/1/95 one year
ended
1/31/96
- -Assumes 5.5% sales charge 25.17%
- -Assumes no sales charge 32.45%
International
Fund 12/1/92* ended
Class A Shares 1/31/96
- -Assumes 5.5% sales charge 8.48%
10.43%
- -Assumes no sales charge
one year
ended
2/1/95 1/31/96
- -Assumes 5.5% sales charge 21.56%
- -Assumes no sales charge 28.68%
</TABLE>
B-51
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Investment Investment Average
Fund Date Period Annual
- ---- ---- ------ ------
<S> <C> <C> <C>
Asia Growth ended
Fund 7/8/94* 1/31/96
Class A Shares
- -Assumes 5.5% sales charge 8.11%
- -Assumes no sales charge 12.09%
one year
ended
2/1/95 1/31/96
- -Assumes 5.5% sales charge 19.58%
- -Assumes no sales charge 26.49%
Mid-Cap Equity ended
Fund-Institutional 8/1/95* 1/31/96
Shares
- -Assumes 5.5% sales charge N/A
6.89%**
- -Assumes no sales charge
</TABLE>
B-52
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
ASSUMING NO VOLUNTARY WAIVER OF FEES AND NO EXPENSE REIMBURSEMENTS
<TABLE>
<CAPTION>
Investment Investment Average
Fund Date Period Annual
- ---- ---- ------ ------
<S> <C> <C> <C>
Select 5/24/91* ended
Equity Fund 1/31/96
-Assumes 5.5% sales charge 11.19%
-Assumes no sales charge 12.53%
2/1/95 one year
ended
1/31/96
-Assumes 5.5% sales charge 30.62%
-Assumes no sales charge 38.22%
Select Equity Fund- 6/15/95 ended
Institutional Shares 1/31/96
-Assumes 5.5% sales charge N/A
-Assumes no sales charge 19.91%**
</TABLE>
B-53
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
ASSUMING NO VOLUNTARY WAIVER OF FEES AND NO EXPENSE REIMBURSEMENTS
<TABLE>
<CAPTION>
Investment Investment Average
Fund Date Period Annual
- ---- ---- ------ ------
<S> <C> <C> <C>
Growth
and Income 2/5/93* ended
Fund 1/31/96
- -Assumes 5.5% sales charge 12.84%
- -Assumes no sales charge 15.00%
2/1/95 one year
ended
1/31/96
- -Assumes 5.5% sales charge 24.88%
- -Assumes no sales charge 32.15%
International
Fund 12/1/92* ended
1/31/96
- -Assumes 5.5% sales charge 8.21%
- -Assumes no sales charge 10.16%
one year
ended
2/1/95 1/31/96
- -Assumes 5.5% sales charge 21.33%
- -Assumes no sales charge 28.43%
</TABLE>
B-54
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
ASSUMING NO VOLUNTARY WAIVER OF FEES AND NO EXPENSE REIMBURSEMENTS
<TABLE>
<CAPTION>
Investment Investment Average
Fund Date Period Annual
- ---- ---- ------ ------
<S> <C> <C> <C>
Asia Growth ended
Fund 7/8/94* 1/31/96
- -Assumes 5.5% sales charge 7.70%
- -Assumes no sales charge 11.66%
one year
ended
2/1/95 1/31/96
- -Assumes 5.5% sales charge 19.21%
- -Assumes no sales charge 26.10%
Mid-Cap Equity ended
Fund-Institutional 8/1/95* 1/31/96
Shares
- -Assumes 5.5% sales charge N/A
- -Assumes no sales charge 6.82%**
</TABLE>
- ----------
* Commencement of Operations
** An aggregate total return (not annualized) is shown instead of an average
annual total return since the Institutional Class has not completed a full
twelve months of operations.
B-55
<PAGE>
From time to time, advertisements or information may include a discussion
of certain attributes or benefits to be derived from 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 Company 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 also 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 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 Company
may also, at its discretion, from time to time make a list of a Fund's holdings
available to investors upon request.
Total return will be calculated separately for each class of shares in
existence. Because each class of shares may be subject to different expenses,
total return calculations with respect to each class of shares of a Fund for the
same period will differ.
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 Company. The summary does not
address special tax rules applicable to certain classes of investors, such as
tax-exempt entities, insurance companies and financial institutions. Each
prospective shareholder is urged to consult his own tax adviser with respect to
the specific federal, state, local and foreign tax consequences of investing in
each Fund. The summary is based on the laws in effect on the date of this
Additional Statement, which are subject to change.
General
Each Fund is a separate taxable entity and has elected or intends to elect
to be treated, and intends to qualify for each taxable year, as a regulated
investment company under Subchapter M of the Code.
Qualification as a regulated investment company under the Code requires,
among other things, that (a) a Fund derive at least 90% of its annual gross
income from dividends, interest, payments with respect to securities loans and
gains from the sale or other disposition of stocks or securities or foreign
currencies, or other income (including but not limited to gains from options,
futures, and forward contracts) derived with respect to its business of
investing in such stock, securities or currencies (the "90% gross income test");
(b) such Fund derive less than 30% of its annual gross income from the sale or
other disposition of any of the following which was held for less than three
months: (i) stock or securities;
B-56
<PAGE>
(ii) options, futures or forward contracts (other than options, futures or
forward contracts on foreign currencies); and (iii) foreign currencies and
foreign currency options, futures and forward contracts that are not directly
related to the Fund's principal business of investing in stocks or securities or
options and futures with respect to stocks or securities (the "short-short
test"); and (c) such Fund diversify its holdings so that, at the close of each
quarter of its taxable year, (i) at least 50% of the market value of such Fund's
total (gross) assets is comprised of cash, cash items, U.S. Government
securities, securities of other regulated investment companies and other
securities limited in respect of any one issuer to an amount not greater in
value than 5% of the value of such Fund's total assets and to not more than 10%
of the outstanding voting securities of such issuer, and (ii) not more than 25%
of the value of its total (gross) assets is invested in the securities of any
one issuer (other than U.S. Government Securities and securities of other
regulated investment companies) or two or more issuers controlled by the Fund
and engaged in the same, similar or related trades or businesses. Gains from the
sale or other disposition of foreign currencies (or options, futures or forward
contracts on foreign currencies) that are not directly related to a Fund's
principal business of investing in stock or securities or options and futures
with respect to stock or securities will be treated as gains from the sale of
investments held less than three months under the short-short test (even though
characterized as ordinary income for some purposes) if such currencies or
instruments were held for less than three months. For purposes of the 90% gross
income test, income that a Fund earns from equity interests in certain entities
that are not treated as corporations (e.g. partnerships or trusts) for U.S. tax
purposes will generally have the same character for such Fund as in the hands of
such an entity; consequently, a Fund may be required to limit its equity
investments in such entities that earn fee income, rental income or other
nonqualifying income. In addition, future Treasury 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 accordance with the Code's timing 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 and 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 at least annually to
its shareholders all or substantially all of its investment company taxable
income and net capital gain. Exchange control or other foreign laws, regulations
or practices may restrict repatriation of investment
B-57
<PAGE>
income, capital or the proceeds of securities sales by foreign investors such as
the Asia Growth Fund or International Fund and may therefore make it more
difficult for such a Fund to satisfy the distribution requirements described
above, as well as the excise tax distribution requirements described below.
However, each Fund generally expects to be able to obtain sufficient cash to
satisfy such requirements from new investors, the sale of securities or other
sources. If for any taxable year a Fund fails to distribute at least 90% of its
investment company taxable income or otherwise 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 did not pay
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 treated
as if they were paid by the Fund and received by such shareholders on December
31 of the year declared. The Funds anticipate that they will generally make
timely distributions of income and capital gains in compliance with these
requirements so that they will generally not be required to pay the excise tax.
For federal income tax purposes, each Fund is permitted to carry forward a
net capital loss in any year to offset its own net capital gains, if any, during
the eight years following the year of the loss. Asia Growth Fund had
approximately $184,000 an $5,623,000 at October 31, 1995 (the Fund's tax year
end) of capital loss carryforward expiring in 2002 and 2003, respectively, for
federal tax purposes. These amounts are available to be carried forward to
offset future capital gains to the extent permitted by applicable laws or
regulations.
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 applicable 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, a 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 the
applicable Fund's distributions to shareholders.The short-short test described
above may limit a Fund's ability to use options, futures and forward
transactions as well as its ability to engage in short sales. Moreover,
application of certain requirements for qualification as a regulated investment
company and/or these tax rules to certain derivatives such as interest rate or
currency 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.
B-58
<PAGE>
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.
A Fund's investments in zero coupon securities or other securities
bearing original issue discount or, if the Fund elects to include market
discount in income currently, market discount, will generally cause it to
realize income prior to the receipt of cash payments with respect to these
securities. The mark to market rules applicable to certain options, futures and
forward contracts, as described above, may also require that income or gain be
recognized without a concurrent receipt of cash. In order 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 Select Equity Fund) anticipates that it will be
subject to foreign taxes on its income (possibly including, in some cases,
capital gains) from certain 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 Asia Growth Fund and International Fund, 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 applicable Fund may file an election with the Internal
Revenue Service pursuant to which shareholders of the Fund would be required to
(i) include in ordinary gross income (in addition to taxable dividends actually
received) their pro rata shares of foreign income taxes paid by the Fund that
are treated as income taxes under U.S. tax regulations (which excludes, for
example, stamp taxes, securities transaction taxes, and similar taxes) even
though not actually received by such shareholders, and (ii) treat such
respective pro rata portions as foreign income taxes paid by them.
If the Asia Growth and International Funds make this election, which is not
currently anticipated, their 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 the Asia Growth and
International Funds, 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 Asia Growth Fund or
International Fund, 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 Asia Growth Fund and International Fund 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 Funds.
B-59
<PAGE>
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 Asia Growth Fund or International Fund files the election
described above, its shareholders will be notified of the amount of (i) each
shareholder's pro rata share of qualified foreign taxes paid by a Fund and (ii)
the portion of Fund dividends which represents income from each foreign country.
The other Funds will not be entitled to elect to pass foreign taxes and
associated credits or deductions through to their shareholders because they will
not satisfy the 50% requirement described above. If a Fund cannot or does not
make this election, it may deduct such taxes in computing its investment company
taxable income.
If a Fund acquires stock in certain non-U.S. 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 such 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. Certain elections may, if available, ameliorate these
adverse tax consequences, but any such election would require the Fund to
recognize taxable income or gain without the 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
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 will be eligible,
subject to certain holding period and debt-financing restrictions, for the 70%
dividends received deduction for corporations. 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 Asia Growth Fund or
International Fund 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
B-60
<PAGE>
regardless of how long shares have been held by shareholders, but are not
eligible for the dividends received deduction for corporations. Distributions,
if any, that are in excess of a Fund's current and accumulated earnings and
profits, as computed for federal income tax purposes, will first reduce a
shareholder's tax basis in his or her shares and, after such basis is reduced to
zero, will constitute capital gains to a shareholder who holds his or her shares
as capital assets.
All distributions, whether received in shares or in cash, as well as
redemptions and exchanges, must be reported by each shareholder who is required
to file a U.S. federal income tax return.
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.
U.S. Shareholders - Sale of Shares
When a shareholder's shares are sold, redeemed or otherwise disposed of,
the shareholder will generally recognize gain or loss equal to the difference
between the shareholder's adjusted tax basis in the shares and the cash, or fair
market value of any property, received. Assuming the shareholder holds the
shares as a capital asset at the time of such sale or other disposition, such
gain or loss should be capital in character, and long-term if the shareholder
has a tax holding period for the shares of more than one year, otherwise (except
as described in the next sentence) short-term. If, however, 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. 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.
Backup Withholding
Each Fund will be required to report to the Internal Revenue Service all
distributions, as well as gross proceeds from the redemption or exchange of Fund
shares, except in the case of certain exempt recipients, i.e., corporations and
certain other investors distributions to which are exempt from the information
reporting provisions of the Code. Under the backup withholding provisions of
Code Section 3406 and applicable Treasury regulations, all such reportable
distributions and proceeds may be subject to backup withholding of federal
income tax at the rate of 31% in the case of nonexempt shareholders who fail to
furnish the Funds with their correct taxpayer identification number and with
certain certifications required by the Internal Revenue Service or if the
Internal Revenue Service or a broker notifies the Funds that the number
furnished by the shareholder is incorrect or that the shareholder is subject to
backup withholding as a result of failure to report interest or dividend income.
A Fund may refuse to accept an application that does not contain any required
taxpayer identification number or certification that the number provided is
correct. If the backup withholding provisions are applicable, any such
distributions and proceeds, whether taken in cash or reinvested in 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. Investors
should consult their tax advisers about the applicability of the backup
withholding provisions.
B-61
<PAGE>
Non-U.S. Shareholders
The foregoing discussion relates solely to U.S. federal income tax law as
it applies to "U.S. persons" (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trust or estates) subject to tax under such law.
Dividends of investment company taxable income distributed by a Fund to a
shareholder who is not a U.S. person will be subject to U.S. withholding tax at
the rate of 30% (or a lower rate provided by an applicable tax treaty) unless
the dividends are effectively connected with a U.S. trade or business of the
shareholder, in which 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
the 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 U.S. or, in the case of a shareholder who is a nonresident alien
individual, the shareholder is present in the U.S. for 183 days or more during
the taxable year and certain other conditions are met. Non-U.S. shareholders of
Asia Growth Fund or International Fund may also be subject to U.S. withholding
tax on deemed income resulting from any election by such a Fund 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 gain realized by a shareholder who is not a U.S. person upon a sale or
redemption of shares of a Fund will not be subject to U.S. federal income or
withholding tax unless the gain is effectively connected with the shareholder's
trade or business in the U.S., or in the case of a shareholder who is a
nonresident alien individual, the shareholder is present in the U.S. for 183
days or more during the taxable year and certain other conditions are met.
Non-U.S. persons who fail to furnish a Fund with an IRS Form W-8 or acceptable
substitute may be subject to backup withholding at the rate of 31% on capital
gain dividends and the proceeds of redemptions and exchanges. Investors who are
not U.S. persons should consult their tax advisers about the U.S. and non-U.S.
tax consequences of ownership of shares of, and receipt of distributions from, a
Fund.
State and Local Taxes
Each Fund may be subject to state or local taxes in jurisdictions in which
such Fund may be deemed to be doing business. In addition, in those states or
localities which have income tax laws, the treatment of such Fund and its
shareholders under such laws may differ from their treatment under federal
income tax laws, and investment in such Fund may have tax consequences for
shareholders different from those of a direct investment in such Fund's
portfolio securities. Shareholders should consult their own tax advisers
concerning these matters.
FINANCIAL STATEMENTS
The audited financial statements and related Reports of Independent Public
Accountants, contained in the 1996 Annual Report of each of the Funds, are
incorporated herein by reference into this Additional Statement and attached
hereto.
SHARES OF THE COMPANY
The Funds are series of the Company, which is a Maryland corporation
authorized to issue 2,000,000,000 shares of common stock. The Company assumed
its present name in May 1991. Prior thereto, the name of the Company was Goldman
Sachs Capital Growth Fund, Inc. Each Fund then in existence commenced "doing
business" under the name used herein in February 1994. As specified in
B-62
<PAGE>
the Company's charter, the name of the Funds are GS Select Equity Fund, GS
Growth and Income Fund, GS International Equity Fund, Goldman Sachs Asia Growth
Fund and Goldman Sachs Mid-Cap Equity Fund. The Directors of the Company have
authority under the Company's charter to create and classify shares of capital
stock in separate series without further action by shareholders. As of the date
of this Additional Statement, the Directors of the Company have authorized
shares of eight series, five of which are discussed in this Additional
Statement. Additional series may be added in the future.
The Act requires that where more than one class or series of shares exists,
each class or series must be preferred over all other classes or series in
respect of assets specifically allocated to such class or series.
The Directors 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 Directors have classified the following shares of the Mid-Cap
Equity Fund into two classes: Institutional and Service Shares. Select Equity,
Growth and Income, International Equity and the Asia Growth Funds have been
classified into four classes: Institutional Shares, Service Shares, Class A
Shares and Class B Shares. As of January 31, 1996, there were no Service Shares
of any Fund outstanding. Each other series of the Company has Class A Shares and
Class B Shares outstanding.
Each Institutional Share, Service Share, Class A Share and Class B Share of
a Fund represents a proportionate interest in the assets belonging to the Fund.
All expenses of a Fund are borne at the same rate by each class of shares,
except that fees under Service Plans are borne exclusively by Service Shares,
fees under Distribution and Authorized Dealer Service Plans are borne
exclusively by Class A Shares or Class B Shares and transfer agency fees are
borne at different rates by Class A Shares or Class B Shares than Institutional
and Service Shares. The Directors 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 is entitled to different shareholder services.
Currently, shares of a class may be exchanged only for shares of the same or an
equivalent class of another fund. See "Exchange Privileges" in the Prospectus.
Institutional Shares may be purchased at net asset value without a sales
charge for accounts in the name of an investor or institution that is not
compensated by a Fund for services provided to the Institution's customers.
Institutional Shares may pay a transfer agency fee equal to a percentage of the
average daily net assets of a Fund attributable to such class.
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 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. Service Shares may pay a transfer agency
fee equal to a percentage of the average daily net assets of a Fund attributable
to Service Shares.
Class A Shares are sold, with an initial sales charge of up to 5.5%,
through brokers and dealers who are members of the National Association of
Securities Dealers, Inc. and certain other financial service firms that have
sales agreements with Goldman Sachs. Class A Shares bear the cost of
distribution (Rule 12b-1) fees at the aggregate rate of up to 0.25% of the
average daily net assets of such Class A Shares. Except for the Select Equity,
International and Asia Growth Funds, Goldman Sachs has agreed not
B-63
<PAGE>
to impose any distribution fee. Goldman Sachs has no current intention of
modifying or discontinuing such limitation but may do so in the future at its
discretion. Class A Shares also bear the cost of an Authorized Dealer Service
Plan at an annual rate of up to 0.25% of the average daily net assets
attributable to Class A Shares. Class A Shares pay a transfer agency fee equal
to $12,000 per year plus $7.50 per account together with out-of-pocket and
transaction related expenses.
Class B Shares of the Funds are sold subject to a contingent deferred sales
charge of up to 5.0% through brokers and dealers who are members of the National
Association of Securities Dealers Inc. and certain other financial services
firms that have sales arrangements with Goldman Sachs. Class B Shares bear the
cost of distribution (Rule 12b-1) fees at the aggregate rate of up to 0.75% of
the average daily net assets attributable to Class B Shares. Class B Shares also
bear the cost of an Authorized Dealer Service Plan at an annual rate of up to
0.25% of the average daily net assets attributable to Class B Shares.
It is possible that an institution or its affiliate may offer different
classes of shares (i.e., Institutional, Service, Class A Shares and Class B
Shares) to its customers and thus receive different compensation with respect to
different classes of shares of each Fund. Dividends paid by each Fund, if any
with respect to each class of shares will be calculated in the same manner, at
the same time on the same day and will be the same amount, except for
differences caused by the differences in expenses discussed above. Similarly,
the net asset value per share may differ depending upon the class of shares
purchased.
Certain aspects of the shares may be altered, after advance notice to
shareholders if it is deemed necessary in order to satisfy certain tax
regulatory requirements.
When issued, shares are fully paid and non-assessable. In the event of
liquidation, shareholders are entitled to share pro rata in the net assets of
the relevant Fund available for distribution to such shareholders. All shares
entitle their holders to one vote per share, are freely transferable and have no
preemptive, subscription or conversion rights.
As of April 15, 1996, Marine Midland Bank as Trustee for Mark IV Inc. &
Subs Employees Retirement Income Fund, attention: Mutual Fund Processing, P.O.
Box 1329, Buffalo, New York 14240- 1329 was a record holder of 7.9% of Select
Equity Fund's outstanding shares.
Rule 18f-2 under the Act provides that any matter required to be submitted
by the provisions of the Act, applicable state law or otherwise to the holders
of the outstanding voting securities of an investment company such as the
Company shall not be deemed to have been effectively acted upon unless approved
by the holders of a majority of the outstanding shares of each class or series
affected by such matter. Rule 18f-2 further provides that a class or series
shall be deemed to be affected by a matter unless the interests of each class or
series in the matter are substantially identical or the matter does not affect
any interest of such class or series. However, Rule 18f-2 exempts the selection
of independent public accountants, the approval of principal distribution
contracts and the election of directors from the separate voting requirements of
Rule 18f-2.
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
B-64
<PAGE>
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 the Fund.
The Prospectus and this Additional Statement do not contain all the
information included in the Registration Statement filed with the SEC under the
1933 Act with respect to the securities offered by the Prospectus. Certain
portions of the Registration Statement have been omitted from the Prospectus and
this Additional Statement pursuant to the rules and regulations of the SEC. The
Registration Statement including the exhibits filed therewith may be examined at
the office of the SEC in Washington, D.C.
Statements contained in the Prospectus or in this Additional Statement as
to the contents of any contract or other document referred to are not
necessarily complete, and, in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement of which the Prospectus and this Additional Statement form a part,
each such statement being qualified in all respects by such reference.
B-65
<PAGE>
SERVICE PLANS
Each Fund has adopted a service plan (the "Plan") with respect to its Service
Shares which authorizes it to compensate Service Organizations for providing
certain administration services and personal and account maintenance services to
their customers who are or may become beneficial owners of such Shares. Pursuant
to the Plan, each Fund enters into agreements with Service Organizations which
purchase Service Shares of the Fund on behalf of their customers ("Service
Agreements"). Under such Service Agreements the Service Organizations may
perform some or all of the following services: (a) act, directly or through an
agent, as the sole shareholder of record and nominee for all customers, (b)
maintain account records for each customer who beneficially owns Service Shares
of a Fund. (c) answer questions and handle correspondence from customers
regarding their accounts, (d) process customer orders to purchase, redeem and
exchange Service Shares of a Fund, and handle the transmission of funds
representing the customers' purchase price or redemption proceeds, (e) issue
confirmations for transactions in shares by customers, (f) provide facilities to
answer questions from prospective and existing investors about Service Shares of
a Fund, (g) receive and answer investor correspondence, including requests for
prospectuses and statements of additional information, (h) display and make
prospectuses available on the Service Organization's premises, (i) assist
customers in completing application forms, selecting dividend and other account
options and opening custody accounts with the Service Organization and (j) act
as liaison between customers and a Fund, including obtaining information from
the Fund, working with the Fund to correct errors and resolve problems and
providing statistical and other information to a Fund. As compensation for such
services, each Fund will pay each Service Organization a service fee in an
amount up to 0.50% (on an annualized basis) of the average daily net assets of
the Service Shares of such Fund attributable to or held in the name of such
Service Organization.
Each Fund has adopted its Plan pursuant to Rule 12b-1 under the Act in order to
avoid any possibility that payments to the Service Organizations pursuant to the
Service Agreements might violate the Act. Rule 12b-1, which was adopted by the
SEC under the Act, regulates the circumstances under which an investment company
or series thereof may bear expenses associated with the distribution of its
shares. In particular, such an investment company or series thereof cannot
engage directly or indirectly in financing any activity which is primarily
intended to result in the sale of shares issued by the company unless it has
adopted a plan pursuant to, and complies with the other requirements of, such
Rule. The company believes that fees paid for the services provided in the Plan
and described above are not expenses incurred primarily for effecting the
distribution of Service Shares. However, should such payments be deemed by a
court or the SEC to be distribution expenses, such payments would be duly
authorized by the Plan.
The Glass-Steagall Act prohibits all entities which receive deposits from
engaging to any extent in the business of issuing, underwriting, selling or
distributing securities, although institutions such as national banks are
permitted to purchase and sell securities upon the order and for the account of
their customers. In addition, under some state securities laws, banks and other
financial institutions purchasing Service Shares on behalf of their customers
may be required to register as dealers. Should future legislative or
administrative action or judicial or administrative decisions or interpretations
prohibit or restrict the activities of one or more of the Service Organizations
in connection with a Fund, such Service Organizations might be required to alter
materially or discontinue the services performed under their Service Agreements.
If one or more of the Service Organizations were restricted from effecting
purchases or sales of Service Shares automatically pursuant to pre-authorized
instructions, for example, effecting such transactions on a manual basis might
affect the size and/or growth of a Fund. Any such alteration or discontinuance
of services could require the Board of Directors to consider changing a Fund's
method of operations or providing alternative means of offering Service Shares
of the Fund to customers of such Service Organizations, in which case the
operation of such Fund, its size and/or its growth might be significantly
altered. It is not anticipated, however, that any
B-66
<PAGE>
alternation of a Fund's operations would have any effect on the net asset value
per share or result in financial losses to any shareholder.
Conflict of interest restrictions (including the Employee Retirement Income
Security Act of 1974) may apply to a Service Organization's receipt of
compensation paid by a Fund in connection with the investment of fiduciary
assets in Service Shares of a Fund. Service Organizations, including banks
regulated by the Comptroller of the Currency, the Federal Reserve Board or the
Federal Deposit Insurance Corporation, and investment advisers and other money
managers subject to the jurisdiction of the SEC, the Department of Labor or
state securities commissions, are urged to consult legal advisers before
investing fiduciary assets in Service Shares of a Fund. In addition, under some
state securities laws, banks and other financial institutions purchasing Service
Shares on behalf of their customers may be required to register as dealers.
The Board of Directors, including a majority of the Directors who are not
interested persons of the Company and who have no direct or indirect financial
interest in the operation of the Plans or the related Service Agreements, voted
to approve each Plan and related Service Agreements at a meeting called for the
purpose of voting on such Plans and Service Agreements on January 31, 1996. Each
Plan will be approved by the sole shareholder of Service Shares of each Fund, on
January 31, 1996. The Plans and Service Agreements will remain in effect until
June 30, 1997 and will continue in effect thereafter only if such continuance is
specifically approved annually by a vote of the Board of Directors in the manner
described above. The Plans may not be amended to increase materially the amount
to be spent for the services described therein without approval of the Service
Shareholders of the affected Fund and all material amendments of the Plan must
also be approved by the Board of Directors in the manner described above. The
Plan may be terminated at any time by a majority of the Board of Directors as
described above or by a vote of a majority of the outstanding Service Shares of
the affected Fund. The Service Agreements may be terminated at any time, without
payment of any penalty, by vote of a majority of the Board of Directors as
described above or by a vote of a majority of the outstanding Service Shares of
the affected Fund on not more than sixty (60) days' written notice to any other
party to the Service Agreements. The Service Agreements will terminate
automatically if assigned. So long as the Plans are in effect, the selection and
nomination of those Directors who are not interested persons will be committed
to the discretion of the Company's Nominating Committee, which consists of all
of the non-interested members of the Board of Directors. The Board of Directors
has determined that, in its judgment, there is a reasonable likelihood that the
Plans will benefit the Funds and the holders of Service Shares of the Funds. In
the Board of Directors' quarterly review of the Plans and Service Agreements,
the Board will consider their continued appropriateness and the level of
compensation provided therein.
B-67
<PAGE>
Appendix A
DESCRIPTION OF BOND RATINGS1
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
- --------
1 The rating systems described herein are believed to be the most recent ratings
systems available from Moody's Investors Service, Inc. and Standard & Poor's
Ratings Group at the date of this Additional Statement for the securities
listed. Ratings are generally given to securities at the time of issuance. While
the rating agencies may from time to time revise such ratings, they undertake no
obligation to do so, and the ratings indicated do not necessarily represent
ratings which will be given to these securities on the date of the Fund's fiscal
year end.
1-A
<PAGE>
Ca: Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Unrated: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies
that are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or
issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believe
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1 and B1.
STANDARD & POOR'S RATINGS GROUP
AAA: Bonds rated AAA have the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the higher rated issues only in small degree.
A: Bonds rated A have a very strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB: Bonds rated BBB are regarding as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than in higher rated categories.
BB, B, CCC, CC, C: Bonds rated BB, B, CCC, CC and C are regarded, on
balance, as predominately speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. While such
bonds will likely have some quality and protective characteristics, these are
outweighed by large uncertainties of major risk exposures to adverse conditions.
BB is the highest rating within the speculative grade category.
2-A
<PAGE>
D: Bonds rated D are in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period.
Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Unrated: Indicates that no public 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 type of obligation as a matter of policy.
3-A
<PAGE>
Appendix B
BUSINESS PRINCIPLES OF GOLDMAN, SACHS & CO.
Goldman Sachs is noted for its Business Principles, which guide all of
the firm's activities and serve as the basis for its distinguished reputation
among investors worldwide.
Our client's interests always come first. Our experience shows that if
we serve our clients well, our own success will follow.
Our assets are our people, capital and reputation. If any of these
assets diminish, reputation is the most difficult to restore. We are dedicated
to complying fully with the letter and spirit of the laws, rules and ethical
principles that govern us. Our continued success depends upon unswerving
adherence to this standard.
We take great pride in the professional quality of our work. We have an
uncompromising determination to achieve excellence in everything we undertake.
Though we may be involved in a wide variety and heavy volume of activity, we
would, if it came to a choice, rather be best than biggest.
We stress creativity and imagination in everything we do. While
recognizing that the old way may still be the best way, we constantly strive to
find a better solution to a client's problems. We pride ourselves on having
pioneered many of the practices and techniques that have become standard in the
industry.
We stress teamwork in everything we do . While individual creativity is
always encouraged, we have found that team effort often produces the best
results. We have no room for those who put their personal interests ahead of the
interests of the firm and its clients.
Integrity and honesty are the heart of our business. We expect our
people to maintain high ethical standards in everything they do, both in their
work for the firm and in their personal lives.
1-B
<PAGE>
GOLDMAN, SACHS & CO.'S INVESTMENT BANKING AND SECURITIES ACTIVITIES
Goldman, Sachs & Co. is a leading global investment banking and
securities firm with a number of distinguishing characteristics.
. Privately owned and ranked among Wall Street's best capitalized
firms, with assets exceeding $70 billion and partners capital and subordinated
liabilities of over $4.9 billion as of November 24, 1995.
. With thirty-one offices around the world, Goldman Sachs employs over
8,000 professionals focused on opportunities in major markets.
. An equity research budget of $126 million for 1996.
. The number one lead manager of U.S. common stock offerings for the
past six years (1989-1994) with 18% of the total dollar volume.*
* Source: Securities Data Corporation. Ranking excludes REITs, Trusts, Rights
and closed-end Fund offerings
2-B
<PAGE>
GOLDMAN, SACHS & CO.'S HISTORY OF EXCELLENCE
1865 End of Civil War
1869 Marcus Goldman opens Goldman Sachs
1890 Dow Jones Industrial Average first published
1896 Goldman Sachs joins New York Stock Exchange
1906 Goldman Sachs takes Sears Roebuck public (oldest ongoing client)
Dow Jones Industrial Average tops 100
1925 Goldman Sachs finances Warner Brothers, producer of the first talking
film
1956 Goldman Sachs co-manages Ford's public offering, the largest to date
1970 London office opens.
1972 Dow Jones Industrial Average breaks 1000
1986 Goldman Sachs takes Microsoft public
1990 Provides advisory services for the largest privatization in the region
of the sale
of Telefonos de Mexico
1992 Dow Jones Industrial Average breaks 3000
1993 Goldman Sachs is lead manager in taking Allstate public, largest equity
offering to date ($2.4 billion)
1995 Dow Jones Industrial Average breaks 4000
3-B
<PAGE>
Appendix C
The Company may from time to time use comparisons, graphs or charts in
advertisements to depict the following types of information:
o 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;
o the dollar and non-dollar based returns of various market
indices (i.e., Morgan Stanley Capital International EAFE
Index, FT-Actuaries Europe & Pacific Index and the Standard
& Poor's Index of 500 Common Stocks) over varying periods of
time;
o total stock market capitalizations of specific countries and
regions on a global basis;
o performance of securities markets of specific countries and
regions; and
o value of a dollar amount invested in a particular market or
type of security over different periods of time.
In addition, the Company 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.
1-C
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders
- --------------------------------------------------------------------------------
Dear Shareholders:
We are pleased to have the opportunity to review the performance and
discuss the holdings of the Goldman Sachs Equity Portfolios for the 12-month
period ended January 31, 1996. It was an exceptional year for U.S. equities and
a good year in European markets. In this very favorable environment, most of
the Goldman Sachs Equity Portfolios achieved strong total returns.
The U.S. Stock Market Climbed to New Heights...
The U.S. stock market soared during the period under review, rising 38.67%
(as measured by the total return of the Standard & Poor's 500 stock index) for
the 12 months ended January 31, 1996. The Dow Jones Industrial Average hit the
4000 mark in February and the 5000 mark in November. During the year, large-
capitalization stocks (as measured by the S&P 500) outperformed the Russell 2000
index of small-capitalization stocks by nearly 9%. Technology stocks fueled the
market during the first half of the year, ceding leadership to financial and
consumer growth stocks by year-end.
The stock market maintained its upward momentum every month excluding
October due to a favorable combination of low inflation, falling interest rates
and moderate economic growth. The other major market driver was that many large
U.S. companies posted corporate earnings growth that exceeded expectations.
This was partly due to a weakened dollar, which made American exports more
competitive. The possibility of a lower capital gains tax, which would be a
long-term boost to stocks, also helped to fuel the rally.
...Amid a Slowdown in Economic Growth
Economic growth slowed noticeably during the period, with annualized real
Gross Domestic Product (GDP) rising 1.7% and 0.7% in the first and second
quarters, respectively, well below the robust levels of the prior year. Though
revised third-quarter GDP rebounded to 3.2%, this increase was partly attributed
to increased federal government spending in anticipation of the budget debate.
Real GDP for the fourth quarter was 0.9% (annualized), an indication of the
economy's sluggish growth.
The economic slowdown was the result of a number of factors, including a
decline in consumer confidence and spending, which hurt retail sales and
culminated in an extremely weak Christmas season and a buildup in inventories
among retailers, wholesalers and manufacturers. In addition, a number of
temporary factors, including a sharp contraction in nondefense government
spending and a strike at Boeing aircraft, had a major impact on GDP in the
fourth quarter. Finally, harsh winter storms disrupted business activity in
December 1995 and January 1996 and also contributed to the slowdown.
The Fed Tightened at the Beginning of the Period, Then Reversed Course
The U.S. Federal Reserve Board raised the Federal funds rate (the rates
banks charge one another for overnight borrowing) by 50 basis points to 6.00% in
February 1995. This increase was the last in the Fed's tightening cycle, which
included seven rate hikes from February 1994 through February 1995, a total
increase of
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Table of Contents
<S> <C> <C> <C>
Introduction/Market Overview 1 Goldman Sachs International Equity Fund 27
Goldman Sachs Balanced Fund 4 Goldman Sachs Asia Growth Fund 32
Goldman Sachs Select Equity Fund 12 Financial Statements 50
Goldman Sachs Growth and Income Fund 15 Notes to Financial Statements 58
Goldman Sachs Capital Growth Fund 19 Financial Highlights 67
Goldman Sachs Small Cap Equity Fund 23
- -----------------------------------------------------------------------------------------------
</TABLE>
1
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders (continued)
- --------------------------------------------------------------------------------
300 basis points. With inflation at bay and the economy moderating, the Fed
reversed course and cut the Federal funds rate 25 basis points in July. Two
additional 25 basis point cuts followed in December 1995 and January 1996,
bringing the Federal funds rate to 5.25% as of January 31, 1996.
Outlook for 1996:
Potential for Accelerating Growth in the Second Half
Economic growth is estimated to be approximately 1.0% for the first quarter
of 1996. Some economists believe a return to stronger growth is possible by
late spring. An anticipated pickup in economic growth in Japan and Mexico would
also bode well for U.S. exports and a further narrowing of the trade deficit.
If these general trends continue, they are likely to translate into slower
corporate earnings growth during the first half of the year, with improvement
expected in the second half.
The Dollar Strengthened After Falling to Historic Lows
The U.S. dollar weakened significantly against the Deutsche mark and
Japanese yen, hitting new postwar lows in April 1995, then recovering during the
summer and early fall. The dollar's rebound was primarily due to the resolution
of the U.S.-Japan trade dispute, Japan's stimulative monetary policy, and the
intervention of U.S. and foreign central banks in its support. Currency
volatility subsided as the dollar continued to strengthen against both the yen
and the Deutsche mark through the second half of the period. By the end of
January, the dollar had risen by approximately 32% against the yen (a two-year
high) and by approximately 10% against the Deutsche mark from its April low.
The International Market Environment:
Europe Generally Strong, While Japan and Asia Were Weaker
Despite generally positive performance, international stock markets
typically lagged the U.S. during the past 12 months, with the Japanese market
particularly weak in the first half of the period.
. Europe. Europe's economic recovery slowed during the past 12 months, in
part because monetary policy had been prematurely tightened in anticipation of
higher growth and short-term interest rates remained high during the first half
of the year. Still, most European stock markets did well during the period under
review, returning over 24% (as measured by the Financial Times-Actuaries Europe
Index designated in local currency). Stock markets in Switzerland, Sweden,
Denmark and the U.K. turned in strong performances, while markets in Italy and
France lagged, plagued by political and budgetary problems. On a positive note,
the Italian and French stock markets ended the period showing improvement.
. Japan. For the 12 months ended January 31, 1996, the Japanese TOPIX Index
achieved an 11% gain (in local currency). The Japanese stock market faltered
during the first half of the period under review, reflecting Japan's stagnating
economy, deflationary environment, weakened banking system and the aftermath of
the Kobe earthquake. In addition, the yen traded at historically high levels
versus the dollar, which thwarted exports and impacted GDP growth. From July
through the end of the period, however, Japanese stocks rallied, more than
recouping their losses from earlier in the year. The rebound was largely
attributed to a reversal in the factors that caused the previous decline: the
yen fell, the government took action to resolve the domestic banking crisis and
a fiscal stimulus policy raised expectations for an eventual pickup in growth
and a stronger stock market in 1996.
. Asia. During the first 10 months of the period, the performance of the
Asian markets was generally disappointing due to a variety of factors, including
profit shortfalls, economic overheating, balance of payments problems and
inflationary pressures. The Hong Kong market, a marked exception, rose over 20%
during the period. In addition, surging U.S. stocks contributed to a lack of
investor interest and low volumes throughout the region. Asian markets generally
declined during the third
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
quarter due to the rising U.S. dollar, which drained liquidity from the area.
However, from late November through the end of the period, the Asian markets
rebounded and cash inflows into the region rose considerably.
The U.S. stock market has continued to surge to record levels during the
first two months of 1996, fueled by strong cash inflows from individuals,
portfolio managers and foreign investors. However, history rarely repeats
itself, and while no one can predict the market with certainty, it is unlikely
that this year will match 1995's spectacular run. Realistic expectations and a
long-term investment horizon are essential for equity investors. We appreciate
your confidence in the Goldman Sachs Equity Portfolios and we look forward to
continuing to serve your investment needs.
Sincerely,
/s/ David B. Ford /s/ John P. McNulty
David B. Ford John P. McNulty
Co-Head, Co-Head,
Goldman Sachs Goldman Sachs
Asset Management Asset Management
March 1, 1996
- --------------------------------------------------------------------------------
3
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Balanced Fund
- --------------------------------------------------------------------------------
Objective and Investment Approach
The Goldman Sachs Balanced Fund seeks to provide investors with a
combination of long-term growth of capital and current income by investing in a
diversified portfolio that includes both equity and fixed income securities.
Under normal market conditions, the fund is expected to maintain an asset mix of
approximately 50% to 70% in equity securities, with the remainder (at minimum
25%) in fixed income securities. The fund's portfolio management team will
review the fund's asset mix on a regular basis and adjust it to reflect changes
in the economic environment.
Stocks are selected using a value style, identifying those judged to be
inexpensive relative to their expected long-term earnings and ability to pay
dividends. We also consider the degree to which a company's management is
committed to increasing value for shareholders.
In the fixed income portion of the portfolio, we actively manage the
portfolio within a risk-controlled framework. We de-emphasize interest rate
anticipation by monitoring the portfolio's duration to keep it within a narrow
range of a target, and instead focus on seeking to add value through sector
selection, security selection and yield curve strategies.
Performance Review:
Successful Equity and Fixed Income Selections
For the 12-month period ended January 31, 1996, the Goldman Sachs Balanced
Fund achieved a total return of 28.10% based on net asset value, outperforming
its peers in the Lipper balanced fund category, which returned an average of
25.96% during the same period. The fund ranked in the top quartile (59th among
237 funds) in the category based on total return for the 12-month period ended
January 31, 1996, according to Lipper Analytical Services, Inc. (Please note
that Lipper rankings do not take sales charges into account and that past
performance is not a guarantee of future results.)
. Equities: The fund's positive performance during the period can be
attributed to successful investments in a variety of sectors, including
defense/aerospace, tobacco and insurance. Top-performing holdings included
McDonnell Douglas Corp., Northrop Grumman Corp. and Lockheed-Martin Corp., which
we believe all benefited from the market's positive reaction to their sizable
cash flows; Philip Morris Companies, Inc., which achieved strong earnings growth
and increased market share; and Travelers Group, Inc., which rose partly due to
the announcement of its acquisition of Aetna's property and casualty business.
The fund's largest equity position, Goodyear Tire & Rubber Co., also achieved
good operating results, despite rising raw material costs and a generally
lackluster auto sector.
As the economy slowed, the portfolio's cyclically oriented holdings were
among its weaker performers during the period. These included its investments in
paper and forest products companies such as Stone Container Corp. and Georgia-
Pacific Corp., which came under pressure in the latter half of the year due to
rising inventories and declining demand. Ford Motor Co. also announced
disappointing results, as the automobile sector felt the impact of slower
consumer spending.
. Fixed Income: The fund's fixed income holdings generally performed well
during the period, with asset-backed securities and government agency debt
turning in the strongest relative performance due to our successful security
selection. In contrast, the mortgage-backed security sector came under pressure
due to rising prepayment risk in the declining interest rate environment and did
not meet our return expectations.
Portfolio Composition: Increased Emphasis on Large-
Cap Stocks and Fixed Income Diversification
In the spring of 1995, we shifted to a more favorable view of equities, as
we believed that prospects for future economic growth outweighed concerns
regarding high stock market valuation levels. As of January 31, 1996, the fund's
asset mix based on net assets was 53% in equities, 40% in fixed income
investments and the remainder in cash equivalents.
. Equities: During the course of the year, the fund added a number of large-
capitalization stocks that we
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
believed offered both more stable earnings growth and favorable valuations.
These included Allstate Corp. (insurance), Columbia/HCA Healthcare Corp. (health
care facilities) and NationsBank Corp. (commercial bank), as well as
substantially increased positions in Anheuser-Busch Companies, Inc. (the largest
U.S. brewer), Sears, Roebuck & Co. (retailer) and Texaco, Inc. (oil and gas).
These holdings performed well as investors shifted their attention to larger
companies that they perceived were less economically sensitive.
As of January 31, the fund's weighted average market capitalization was
approximately $12.6 billion compared with $31.7 billion for the S&P 500 stock
index.
<TABLE>
<CAPTION>
Top 10 Equity Holdings as of January 31, 1996
Percentage
of Total
Company Line of Business Net Assets
<S> <C> <C>
Goodyear Tire & Rubber Co. Tire and Rubber Products 1.8%
Ford Motor Co. Automotive Products 1.7%
McDonnell Douglas Corp. Aerospace/Defense 1.6%
Georgia-Pacific Corp. Paper and Forest Products 1.6%
NationsBank Corp. Commercial Bank 1.5%
Philip Morris Companies, Inc. Tobacco and Food Products 1.4%
Long Island Lighting Co. Electric Utilities 1.4%
J.C. Penney Company, Inc. Department Stores 1.4%
Texaco, Inc. International Integrated Oil 1.4%
Stone Container Corp. Pulp and Paper Products 1.3%
</TABLE>
. Fixed Income: As fund assets increased during the period, we diversified
the portfolio's fixed income investments. As of January 31, the fund's largest
fixed income position was in corporate bonds (13.2%), which was overweighted
compared with the Lehman Brothers Aggregate Bond Index. The fund favored the
corporate sector because we believed it offered incremental yield and the
opportunity for us to exploit potential pricing inefficiencies. The asset-backed
securities sector (4.9%) was also significantly overweighted compared with the
Index because of its high credit quality and incremental yield over U.S.
Treasuries. However, the fund underweighted mortgage-backed securities (10.0%),
which worked in the fund's favor when the sector underperformed during the
period. The fund used U.S. Treasuries, a 6.6% position, to manage the fund's
interest rate risk to match that of the Index. In addition, the fund held a
position in emerging market debt (3.1%), which included higher credit, short-
duration bonds that we believed to be attractively priced. The remainder of the
fixed income holdings was in government agency debt (1.9%) and cash equivalents
(13.8%).
Outlook
Despite near-term uncertainty, we anticipate that the Federal Reserve's
accommodative monetary policy and interest rate cuts will lead to improving
corporate profits and a stronger economy in the second half of the year.
Therefore, we continue to be cautiously optimistic regarding equities. We
believe that a number of our holdings have long-term earnings power that is
significantly unrecognized by the market, but will potentially benefit from an
eventual investor rotation out of well-known growth stocks into other sectors.
In the fixed income markets, we believe that the mortgage-backed sector
appears to have less downside risk than it did a year ago, with pessimistic
prepayment assumptions already largely reflected in security prices. We have a
positive view of the corporate and asset-backed securities sectors, which should
benefit from strong investor demand and favorable fundamentals.
In the near term, our overall asset allocation outlook favors stocks and is
slightly less bullish on bonds. Our view on equities is encouraged by the
prospects for improving economic growth later in the year, which would spur
corporate profits.
/s/ Mitchell E. Cantor /s/ Ronald E. Gutfleish
Mitchell E. Cantor Ronald E. Gutfleish
Portfolio Managers, Equities
/s/ Jonathan A. Beinner /s/ Theodore T. Sotir
Jonathan A. Beinner Theodore T. Sotir
Portfolio Managers, Fixed Income
March 1, 1996
- --------------------------------------------------------------------------------
5
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Balanced Fund
January 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange
Commission, the following data is supplied for the periods ended January
31, 1996. The performance for the Goldman Sachs Balanced Fund ("GS
Balanced") (assuming both the maximum sales charge of 5.50% and no sales
charge), is compared with its benchmarks--a combination of the Standard
and Poor's 500 Index (weighted at 60%) and the Lehman Brothers Aggregate
Bond Index (weighted at 40%) ("S&P 500/LBABI") /(b)/, the S&P 500 and
LBABI individually. 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.
HYPOTHETICAL $10,000 INVESTMENT
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Balanced
- --------
(GS Balanced (GS Balanced
w/Sales Change) no Sales change) S&P 500/LBABI LBABI S&P 500
---------------- ----------------- ------------- ----- -------
10/12/94(a) $ 9,450 $10,000 $10,000 $10,000 $10,000
1/31/95 $ 9,532 $10,087 $10,206 $10,233 $10,184
1/31/96 $12,211 $12,922 $13,228 $11,966 $14,123
</TABLE>
------------------------------------
Average Annual Total Return
------------------------------------
One Year Since Inception /(a)/
- --------------------------------------------------------------------------------
GS Balanced, excluding sales charge 28.10% 21.67%
- --------------------------------------------------------------------------------
GS Balanced, including sales charge 21.04% 16.52%
- --------------------------------------------------------------------------------
/(a)/ Commenced operations October 12, 1994.
/(b)/ Please note: Going forward, we will be providing the total return of the
S&P 500 stock index and the Lehman Brothers Aggregate Bond Index as
benchmarks against which the Goldman Sachs Balanced Fund may be compared.
Typically, the Fund's returns are likely to fall between these two
indices. After this period, the blended return of 60% weighting of the
S&P 500 and 40% of the Lehman Aggregate will be eliminated because the
static blend does not necessarily reflect the allocation of the fund at
all points in time. By prospectus, the fund has the flexibility to invest
from 50% to 70% of its assets in equities with the remainder in fixed
income securities, which means that the exact percentage of equities and
fixed income investments can and does fluctuate.
- --------------------------------------------------------------------------------
6
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Balanced Fund
January 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value
<C> <S> <C>
- --------------------------------------------------------------------------------
Common Stocks--53.3%
Aerospace/Defense--4.4%
6,404 Lockheed Martin Corp. $ 482,702
8,100 Loral Corp. 374,625
9,000 McDonnell Douglas Corp. 801,000
9,500 Northrop Grumman Corp. 608,000
- --------------------------------------------------------------------------------
2,266,327
- --------------------------------------------------------------------------------
Auto Parts-Original Equipment--0.7%
11,900 Lear Seating Corp.* 352,537
- --------------------------------------------------------------------------------
Automotive Products--2.3%
29,400 Ford Motor Co. 870,975
5,700 General Motors Corp. 299,963
- --------------------------------------------------------------------------------
1,170,938
- --------------------------------------------------------------------------------
Beverages-Alcoholic--1.2%
8,600 Anheuser Busch Companies, Inc. 597,700
- --------------------------------------------------------------------------------
Cable/Television Communications--1.2%
28,700 Tele-Communications, Inc.* 606,287
- --------------------------------------------------------------------------------
Chemicals-Plastics--0.9%
16,400 Geon Co. 459,200
- --------------------------------------------------------------------------------
Commercial Banks--3.1%
6,700 BankAmerica Corp. 451,413
9,368 Fleet Financial Group, Inc. 374,719
10,700 NationsBank Corp. 747,663
- --------------------------------------------------------------------------------
1,573,795
- --------------------------------------------------------------------------------
Drugs--0.1%
1,500 Thiokol Corp. 53,063
- --------------------------------------------------------------------------------
Electronics-Semiconductors--0.6%
5,900 Intel Corp. 325,882
- --------------------------------------------------------------------------------
Environmental Control--0.2%
4,300 Browning Ferris Industries, Inc. 126,850
- --------------------------------------------------------------------------------
Financial Services--1.3%
9,200 Allmerica Financial Corp. 244,950
8,500 Reliastar Financial Corp. 400,563
- --------------------------------------------------------------------------------
645,513
- --------------------------------------------------------------------------------
Food-Wholesale--1.7%
19,900 Fleming Companies, Inc. 378,100
15,300 Supervalu, Inc. 474,300
- --------------------------------------------------------------------------------
852,400
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------
Shares Description Value
- --------------------------------------------------------------------------------
<C> <S> <C>
Common Stocks (continued)
Grocery Products--1.2%
43,600 Chiquita Brands International, Inc. $ 594,050
- --------------------------------------------------------------------------------
Home Builders--0.9%
3,800 Centex Corp. 122,550
13,300 Lennar Corp. 347,463
- --------------------------------------------------------------------------------
470,013
- --------------------------------------------------------------------------------
Hospital Management and Services--1.7%
8,600 Beverly Enterprises, Inc.* 103,200
5,800 Columbia/HCA Healthcare 322,625
20,400 Tenet Healthcare Corp.* 436,050
- --------------------------------------------------------------------------------
861,875
- --------------------------------------------------------------------------------
Household Products--0.5%
16,600 Sunbeam Corp. 265,600
- --------------------------------------------------------------------------------
Insurance--3.9%
6,600 Allstate Corp. 287,925
2,600 CIGNA Corp. 308,425
10,200 Lincoln National Corp. 539,325
12,500 PartnerRe Holdings, Ltd. 348,438
4,700 Travelers Group, Inc. 309,025
5,700 US Life Corp. 183,113
- --------------------------------------------------------------------------------
1,976,251
- --------------------------------------------------------------------------------
Marine and Pleasure Boats--1.7%
22,900 Brunswick Corp. 518,113
18,200 Outboard Marine Corp. 364,000
- --------------------------------------------------------------------------------
882,113
- --------------------------------------------------------------------------------
Oil & Gas-Domestic--2.8%
16,200 Ashland Inc. 595,350
2,200 Atlantic Richfield Co. 249,975
13,700 Tosco Corp. 573,687
- --------------------------------------------------------------------------------
1,419,012
- --------------------------------------------------------------------------------
Oil & Gas-International--2.9%
2,300 Mobil Corp. 254,725
3,800 Royal Dutch Petroleum ADR 528,200
8,600 Texaco, Inc. 695,525
- --------------------------------------------------------------------------------
1,478,450
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Balanced Fund (continued)
January 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value
<C> <S> <C>
- --------------------------------------------------------------------------------
Common Stocks (continued)
Packaging & Container--1.2%
42,900 Owens Illinois Corp.* $ 611,325
- --------------------------------------------------------------------------------
Paper and Forest Products--3.6%
7,900 Champion International Corp. 353,525
10,900 Georgia-Pacific Corp. 799,788
46,200 Stone Container Corp. 675,675
- --------------------------------------------------------------------------------
1,828,988
- --------------------------------------------------------------------------------
Print & Publishing--0.4%
12,700 Valassis Communications, Inc.* 214,313
- --------------------------------------------------------------------------------
Retail-Department Stores--2.8%
14,700 J.C. Penney, Inc.* 720,300
5,500 Melville Corp. 156,750
13,900 Sears Roebuck & Co. 576,850
- --------------------------------------------------------------------------------
1,453,900
- --------------------------------------------------------------------------------
Savings and Loans--0.7%
8,000 GP Financial Corp. 206,500
3,800 Standard Federal Bancorp. 154,850
- --------------------------------------------------------------------------------
361,350
- --------------------------------------------------------------------------------
Security and Commodity Brokers--0.5%
4,400 Dean Witter Discover Co. 238,150
- --------------------------------------------------------------------------------
Security and Commodity Brokers, Dealers and Services--0.7%
13,100 Lehman Brothers Holdings, Inc. 335,688
- --------------------------------------------------------------------------------
Technology--1.2%
6,500 Compaq Computer Corp.* 306,313
10,700 Storage Technology Corp.* 283,550
- --------------------------------------------------------------------------------
589,863
- --------------------------------------------------------------------------------
Tire and Rubber Products--1.8%
19,300 Goodyear Tire & Rubber Co. 923,988
- --------------------------------------------------------------------------------
Tobacco and Food Products--3.1%
7,900 Philip Morris Companies, Inc. 734,700
17,700 RJR Nabisco Holdings Corp. 575,250
11,900 Universal Corp. 278,163
- --------------------------------------------------------------------------------
1,588,113
- --------------------------------------------------------------------------------
Transportation-Air--0.5%
3,700 AMR Corp.* 281,200
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares Description Value
<C> <S> <C>
- --------------------------------------------------------------------------------
Common Stocks (continued)
Trucking--1.0%
21,100 Consolidated Freightways, Inc. $ 485,300
- --------------------------------------------------------------------------------
Utility--2.5%
7,700 CMS Energy Corp. 239,663
9,700 Entergy Corp. 287,363
43,000 Long Island Lighting Co. 731,000
- --------------------------------------------------------------------------------
1,258,026
- --------------------------------------------------------------------------------
Total Common Stocks
(Cost $24,025,787) $27,148,060
- --------------------------------------------------------------------------------
Preferred Stocks--0.0%
Tobacco--0.0%
3,400 RJR Nabisco Holdings Corp. $ 22,525
Convertible Preferred, 6.50%
- --------------------------------------------------------------------------------
Total Preferred Stocks
(Cost $23,869) $ 22,525
- --------------------------------------------------------------------------------
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset Backed Securities--4.9%
Case Equipment Loan Trust, Series 1995-A, Class A
$ 124,074 7.30% 03/15/02 $ 127,067
Chemical Bank Master Credit Card Trust, Series 1995-2, Class A
140,000 6.23 06/15/03 143,986
Chevy Chase Auto Receivables, Series 1995-2, Class A
116,807 5.80 06/15/02 117,447
Ford Credit Grantor Trust, Series 1994-B, Class A
61,469 7.30 10/15/99 62,893
General Motors Acceptance Corp. Grantor Trust, Series 1994,
Class A
71,063 6.30 06/15/99 71,696
General Motors Acceptance Corp. Grantor Trust, Series 1995-A,
Class A
141,610 7.15 03/15/00 144,368
Navistar Financial Trust, Series 1995-A, Class A2
234,966 6.55 11/20/01 238,683
Navistar Financial Trust, Series 1995-B, Class A3
120,000 6.05 04/15/02 121,537
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity Value
Amount Rate Date
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
Asset Backed Securities (continued)
Olympic Automobile Receivables Trust, Series 1993-D, Class A
$ 254,519 4.65% 07/15/00 $ 252,363
Premier Auto Trust, Series 1994-1, Class A3
144,299 4.75 02/02/00 143,457
Sears Credit Card Master Trust, Series 1995-2, Class A
700,000 8.10 06/15/04 763,434
Sears Credit Card Master Trust, Series 1995-3, Class A
70,000 7.00 10/15/04 73,872
Standard Credit Card Master Trust, Series 1994-4, Class A
110,000 8.25 11/07/03 122,993
Standard Credit Card Master Trust, Series 1995-3, Class A
100,000 7.85 02/07/02 108,281
- --------------------------------------------------------------------------------
Total Asset Backed Securities
(Cost $2,446,098) $2,492,077
- --------------------------------------------------------------------------------
Corporate Bonds--13.2%
Finance Bonds--5.4%
BankAmerica Corp.
$ 500,000 7.75% 07/15/02 $ 545,590
Capital One Bank
250,000 8.13 02/27/98 261,923
200,000 8.33 02/10/97 205,346
CCP Insurance, Inc.
125,000 10.50 12/15/04 139,054
Comdisco Inc.
325,000 9.75 01/15/97 337,529
Continental Bank
100,000 12.50 04/01/01 129,300
Countrywide Funding Corp.
100,000 6.08 07/14/99 101,039
Fleet Mortgage Group, Inc.
250,000 6.50 06/15/00 256,332
Golden West Financial Corp.
200,000 10.25 12/01/00 235,094
Signet Banking Corp.
500,000 9.63 06/01/99 553,800
- --------------------------------------------------------------------------------
Total Finance Bonds
(Cost $2,726,609) $ 2,765,007
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Principal Interest Maturity Value
Amount Rate Date
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
Corporate Bonds (continued)
Industrial Bonds--6.4%
Auburn Hills Trust
$ 90,000 12.00% 05/01/20 $ 140,384
Blockbuster Entertainment
50,000 6.63 02/15/98 50,758
Cablevision Industries Corp.
150,000 10.75 01/30/02 163,875
Chrysler Financial Corp.
250,000 5.71 01/12/98 251,217
Coastal Corp.
100,000 9.75 08/01/03 119,918
Ford Capital Corp.
275,000 9.38 01/01/98 294,981
Ford Motor Credit Co.
40,000 8.38 01/15/00 43,594
General Motors Acceptance Corp.
200,000 7.50 11/04/97 207,086
170,000 7.12 05/10/00 178,736
News America Holdings, Inc.
150,000 9.13 10/15/99 166,585
100,000 7.50 03/01/00 105,674
Oryx Energy Co.
275,000 9.30 05/01/96 276,985
95,000 9.50 11/01/99 102,617
RJR Nabisco, Inc.
50,000 8.62 12/01/02 52,977
135,000 8.00 07/15/01 139,019
Tele-Communications, Inc.
125,000 9.65 10/01/03 142,255
50,000 9.88 04/01/98 54,140
Tenneco, Inc.
260,000 10.00 08/01/98 286,772
Time Warner, Inc.
200,000 7.45 02/01/98 206,224
125,000 7.98 08/15/04 132,224
Tosco Corp.
110,000 7.00 07/15/00 111,650
- --------------------------------------------------------------------------------
Total Industrial Bonds
(Cost $3,166,925) $3,227,671
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------------------
Corporate Bonds (continued)
<S> <C> <C> <C> <C>
Utility Bonds--0.7%
Arkla Inc.
$ 250,000 9.20% 12/18/97 $ 262,792
Central Maine Power Co.
100,000 7.38 01/01/99 103,582
- --------------------------------------------------------------------------------
Total Utility Bonds
(Cost $364,119) $ 366,374
- --------------------------------------------------------------------------------
Yankee Bonds--0.7%
Province of Quebec
$ 200,000 13.25% 09/15/14 $ 255,170
State of Israel
95,000 6.38 12/15/05 95,368
- --------------------------------------------------------------------------------
Total Yankee Bonds
(Cost $347,479) $ 350,538
- --------------------------------------------------------------------------------
Total Corporate Bonds
(Cost $6,605,132) $ 6,709,590
- --------------------------------------------------------------------------------
Emerging Market Debt--3.1%
Asia Pulp and Paper International Finance Co.
$ 60,000 10.25% 10/01/00 $ 59,980
Banco Nacional de Colombia
50,000 10.82 05/31/96 50,277
40,000 10.55 06/23/97 40,590
Bancoldex
90,000 8.62 06/02/00 94,441
Bancponce Financial Corp./(a)/
240,000 7.56 05/13/96 234,172
Corp. Andina de Fomento
200,000 7.25 04/30/98 203,088
Empresa Col Petroleos
300,000 7.25 07/08/98 30,150
Financiera Energy Nacional
30,000 6.63 12/13/96 30,030
Government of Poland
80,000 7.75 07/13/00 83,000
Mexico United Global
50,000 9.75 02/06/01 50,117
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Emerging Market Debt (continued)
Pemex
$ 250,000 6.13% 06/15/96 $ 247,743
PT Indah Kiat
10,000 8.88 11/01/00 9,584
Republic of Argentina
200,000 2.36 09/01/97 197,750
70,000 8.63 04/04/98 69,469
Republic of Colombia
160,000 9.25 02/15/00 163,724
YPF Sociedad Anonima
29,177 7.50 10/26/02 29,837
- --------------------------------------------------------------------------------
Total Emerging Market Debt
(Cost $1,578,200) $ 1,593,952
- --------------------------------------------------------------------------------
Government Agency Obligations--1.9%
Federal Home Loan Mortgage Corp.
$ 20,000 8.20% 01/16/98 $ 20,580
Federal National Mortgage Association/(b)/
520,000 8.50 02/01/05 572,244
130,000 7.70 08/10/04 137,776
Government Backed Trust (Turkey)
119,595 9.40 11/15/96 121,667
Resolution Funding Corp. Principal-Only Stripped Securities/(a)/
280,000 6.52 10/15/20 57,529
300,000 6.49 01/15/21 60,948
- --------------------------------------------------------------------------------
Total Government Agency Obligations
(Cost $943,746) $ 970,744
- --------------------------------------------------------------------------------
Mortgage Backed Obligations--10.0%
Federal Home Loan Mortgage Corp.
$ 1,000,000 7.50% TBA-30 year/(c)/ $ 1,026,875
1,000,000 6.50 TBA-30 year/(c)/ 991,250
Federal National Mortgage Association
1,000,000 8.00 TBA-30 year/(c)/ 1,036,562
1,000,000 6.00 TBA-15 year/(c)/ 990,703
Government National Mortgage Association
966,557 9.00 10/15/17 1,033,914
- --------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $5,051,041) $ 5,079,304
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Obligations--6.6%
United States Treasury Bonds
$ 470,000 12.00%/(b)/ 08/15/13 $ 722,113
220,000 8.75 08/15/20 293,047
30,000 8.00 11/15/21 37,261
United States Treasury Notes
450,000 7.38 11/15/97 468,279
780,000 7.25/(b)/ 08/15/04 867,508
United States Treasury Principal-Only Stripped Securities/(a)/
980,000 5.72 11/15/04 595,810
1,850,000 6.38 08/15/20 395,715
- --------------------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $3,209,300) $ 3,379,733
- --------------------------------------------------------------------------------
Repurchase Agreement--13.8%
Joint Repurchase Agreement Account
$ 7,000,000 5.96% 02/01/96 $ 7,000,000
- --------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $7,000,000) $ 7,000,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $50,883,173)/(d)/ $54,395,985
- --------------------------------------------------------------------------------
Futures contracts open at January 31, 1996 are as follows:
Number of
Contracts Settlement Unrealized
Type Long/(e)/ Month Gain
- ----------------------------------- --------------- ------------ ------------
2-Year U.S. Treasury Notes 2 March 1996 $ 4,031
10-Year U.S. Treasury Notes 3 March 1996 1,188
20-Year U.S. Treasury Bond 10 March 1996 9,375
S&P 500 Stock Index 5 March 1996 61,125
- --------------------------------------------------------------------------------
$75,719
- --------------------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $ 3,986,101
Gross unrealized loss for investments in which
cost exceeds value (474,622)
- --------------------------------------------------------------------------------
Net unrealized gain $ 3,511,479
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
*Non-income producing security.
/(a)/The interest rate disclosed for these securitites represents effective
yields to maturity.
/(b)/Portions of these securities are being segregated as collateral for
futures contracts, TBA (To Be Assigned) securities and/or mortgage dollar
rolls.
/(c)/TBA (To Be Assigned) securities are purchased on a forward commitment
basis with an approximate (generally + / -2.5%) principal amount and no
definite maturity date. The actual principal amount and maturity date will
be determined upon settlement when the specific mortgage pools are
assigned.
/(d)/The aggregate cost for federal income tax purposes is $50,884,506.
/(e)/Each 2-Year Treasury Note contract represents $200,000 in notional par
value. Each 10-Year U.S. Treasury Note contract and 20-Year U.S. Treasury
Bond contract represents $100,000 in notional par value. Each S&P 500
Stock Index represents $50,000 in notional par value. The total net
notional amount and net market value are $1,950,000 and $3,569,906,
respectively. The determination of notional amounts does not consider
market risk factors and therefore notional amounts as presented here are
indicative only of volume of activity and not a measure of market risk.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
11
<PAGE>
Objective and Investment Approach
The Goldman Sachs Select Equity Fund is designed to provide investors with
a broadly diversified portfolio that can be used as a core holding on which to
build an investment program. The fund seeks to provide investors with a total
return (consisting of capital appreciation and dividend income) that, net of
expenses, exceeds the total return of the S&P 500 stock index. The fund's
mandate is to remain fully invested with industry diversification,
capitalization and risk characteristics similar to the S&P 500. Therefore, the
fund's relative performance compared with the index comes almost exclusively
from stock selection within sectors. We believe the fund offers investors an
attractive combination of value and growth, without assuming more risk than the
broad market.
The fund employs a disciplined approach that combines fundamental
investment research provided by Goldman, Sachs & Co.'s Investment Research
Department with quantitative analysis generated by Goldman Sachs Asset
Management's proprietary model. Our model forecasts a stock's return using many
different criteria including valuation measures, growth expectations, earnings
momentum and risk. It also analyzes the impact of current economic conditions on
different types of stocks. Those stocks ranked highly by both our quantitative
model and the Goldman Sachs Investment Research Department are selected for the
fund's portfolio.
Performance Review:
Strong Performance Due to Successful Stock Selection
We are pleased to report that the fund performed well during the period
under review, reflecting an outstanding year for U.S. equities in general and
large-capitalization stocks in particular. For the 12 months ended January 31,
1996, the Goldman Sachs Select Equity Fund Class A shares had a total return of
38.63% based on net asset value, nearly identical to the 38.67% total return for
the S&P 500 stock index, its benchmark.
From their inception on June 15, 1995 through January 31, 1996, the fund's
Institutional shares returned 20.14% compared with 20.29% for the S&P 500 during
the same period.
Given the strong market conditions, matching the market's performance meant
the fund did better than most of its peers. The fund's Class A shares ranked in
the top quartile in the growth fund category for both the 12-month period (120th
out of 580 funds) and the three-year period (66th out of 350 funds) ended
January 31, 1996, based on total return according to Lipper Analytical Services,
Inc. (Please note that Lipper rankings do not take sales charges into account
and that past performance is not a guarantee of future results. Institutional
shares were not ranked for either of these periods because they were in
existence less than 12 months.)
The fund's strong performance during the past year can be attributed to
successful stock selection, which reflects a combination of the Goldman, Sachs &
Co. Investment Research Department's qualitative stock research and Goldman
Sachs Asset Management's proprietary quantitative analysis. In keeping with the
fund's investment philosophy, this combination of qualitative and quantitative
techniques seeks to take advantage of the unique and complementary benefits of
each discipline. Another factor that contributed to the fund's positive
performance was the extent to which the fund closely mirrored the market
valuations and sector weightings of the S&P 500 during a period when large-cap
stocks significantly outperformed small-cap stocks.
A more detailed picture shows that the fund outperformed the benchmark
during the second and third quarters of 1995 when some of the key factors
favored by our model -- value (stocks with low price/earnings ratios), growth
(stocks with rising earnings estimates) and stability (large stocks with
predictable earnings) -- all worked well. During the fourth quarter, investors
focused almost exclusively on large, defensive stocks (i.e., utilities, consumer
nondurables) and responded indifferently to most other fundamental factors. Even
stocks with attractive valuations and rising earnings estimates did not fare
particularly well as the market expressed skepticism
12
<PAGE>
- --------------------------------------------------------------------------------
that earnings could continue to advance in the weakening economy.
During the period, the fund attracted a healthy stream of cash inflows that
were invested as quickly as feasible. In this positive cash flow environment,
the fund had a higher cash position than usual (on average, 3% to 4% of assets).
However, even this small cash position proved to be a drag on performance in the
sharply rising market.
Portfolio Composition:
Broad Diversification Across Industries and Sectors
As of January 31, 1996, the fund was invested in 124 stocks, which were
well diversified by industry and sector. While its sector weightings were
generally in line with the S&P 500, the fund was slightly overweighted in
finance and basic industry and slightly underweighted in the capital spending,
health and retail sectors. The slight over- and underweightings were the result
of the fund's stock selection process and were not due to our opinions of
specific sectors.
A number of the fund's valuation characteristics continued to be more
favorable than the benchmark. For example, as of January 31, 1996, the fund had
a lower price/earnings ratio based on 1996 estimated earnings than the S&P 500
(14.3x versus 15.5x), a lower price/book ratio (2.9x versus 3.0x) and better
long-term growth characteristics (13.0% versus 12.1%) based on consensus
estimates for five-year growth.
The fund's best performing stocks during the period included large-
capitalization companies in widely diverse industries, such as Philip Morris
Companies, Inc. (tobacco and food products), Sears, Roebuck & Co. (retailing),
Federal National Mortgage Association (mortgage finance), Monsanto Co.
(chemicals), Allstate Corp. (insurance), IBM (computers) and Intel Corp.
(microprocessors).
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Top 10 Portfolio Holdings as of January 31, 1996
Percentage Percentage
of Total of S&P 500
Company Line of Business Net Assets Index
<S> <C> <C> <C>
Philip Morris Tobacco and Food 2.7% 1.6%
Companies, Inc. Products
AT&T Corp. Telecommunications 2.5% 2.2%
Pepsico, Inc. Beverages and Food 2.3% 1.0%
Unicom Corp. Utility 2.2% 0.2%
Schering Plough Corp. Pharmaceuticals 2.0% 0.4%
Royal Dutch Petroleum Oil and Gas 1.9% 1.6%
NationsBank Corp. Commercial Bank 1.9% 0.4%
Dow Chemical Co. Diversified Chemicals 1.9% 0.4%
General Electric Co. Electrical Equipment 1.8% 2.7%
IBM Computers 1.7% 1.3%
------ ------
Total 20.9% 11.8%
- --------------------------------------------------------------------------------
Sector Breakout as of January 31, 1996
Percentage of Percentage of S&P
Industry Sectors Portfolio 500 Index
Finance 17.6% 14.2%
Consumer Nondurables 12.2% 12.9%
Health 9.1% 10.3%
Energy 8.4% 7.9%
Basic Industry 8.2% 7.6%
Technology 7.1% 8.2%
Telecommunications 6.8% 8.1%
Electric/Gas 5.4% 4.4%
Consumer Services 4.9% 5.6%
Cash 3.7% 0.0%
Capital Spending 3.3% 5.8%
Miscellaneous 3.2% 4.5%
Consumer Durables 3.1% 3.2%
Aerospace 2.9% 2.0%
Retail 2.2% 3.9%
Transportation 1.9% 1.4%
- --------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Select Equity Fund (continued)
- --------------------------------------------------------------------------------
Outlook
Given last year's strong market performance, high levels of bullish
sentiment and low market dividend yields, our quantitative model currently
favors larger stocks with predictable earnings, stocks with low price/earnings
multiples, and stocks with positive earnings estimate revisions and price
momentum. The model is currently avoiding stocks with overly optimistic year-
over-year growth expectations. Though low-risk, defensive issues led the market
at the end of the period, such issues are not currently a dominant theme in our
portfolio. According to our analysis, the balance between stock and bond market
returns last year does not suggest that the stock market is ahead of its
fundamentals.
/s/ Robert C. Jones
Robert C. Jones
Portfolio Manager
March 1, 1996
- --------------------------------------------------------------------------------
14
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Select Equity Fund
January 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended January 31, 1996. The
performance for the Goldman Sachs Select Equity Fund ("GS Select Equity")
(assuming both the maximum sales charge of 5.50% and no sales charge for the
Class A shares and at net asset value for the Institutional shares), is compared
with its benchmark--the Standard & Poor's 500 Index ("S&P 500"). 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.
HYPOTHETICAL $10,000 INVESTMENT
Class A
GS Select Equity GS Select Equity
(w/sales charge) (no sales charge) S&P 500
- --------------------------------------------------------------------------------
5/24/91(a) $ 9,450 $10,000 $10,000
1/31/92 $10,112 $10,701 $11,092
1/31/93 $10,548 $11,162 $12,266
1/31/94 $12,144 $12,851 $13,846
1/31/95 $12,009 $12,708 $13,919
1/31/96 $16,654 $17,617 $19,306
Institutional class
1/31/96 N/A $12,014 $12,029
<TABLE>
<CAPTION>
Average Annual Total Return
-----------------------------------------------
One Year Since Inception (a)
- --------------------------------------------------------------------------------
<S> <C> <C>
GS Select Equity-Class A,
excluding sales charge 38.63% 12.82%
- --------------------------------------------------------------------------------
GS Select Equity-Class A,
including sales charge 31.01% 11.47%
- --------------------------------------------------------------------------------
GS Select Equity,
Institutional Class N/A 20.14%(b)
- --------------------------------------------------------------------------------
</TABLE>
(a) The Class A shares commenced operations May 24, 1991 and the Institutional
shares commenced operations June 15, 1995.
(b) An aggregate total return (not annualized) is shown instead of an average
annual total return since the Institutional Class has not completed a full
twelve months of operations.
- --------------------------------------------------------------------------------
15
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Select Equity Fund
January 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value
<C> <S> <C>
- --------------------------------------------------------------------------------
Common Stocks--95.5%
Aerospace/Defense--2.7%
6,700 McDonnell Douglas Corp. $ 596,300
41,900 Rockwell International Corp. 2,456,388
21,800 United Technologies Corp. 2,237,225
- --------------------------------------------------------------------------------
5,289,913
- --------------------------------------------------------------------------------
Auto Parts-Original Equipment--0.5%
31,100 Masland Corp. 431,513
14,200 Varity Corp.* 525,400
- --------------------------------------------------------------------------------
956,913
- --------------------------------------------------------------------------------
Automotive Products--1.6%
58,100 General Motors Corp. 3,057,513
- --------------------------------------------------------------------------------
Basic Materials and Natural
Resources--0.6%
27,200 Alco Standard Corp. 1,067,600
- --------------------------------------------------------------------------------
Beverages-Alcoholic--0.4%
10,800 Anheuser Busch Companies, Inc. 750,600
- --------------------------------------------------------------------------------
Beverages-Soft Drinks--2.7%
10,700 Coca Cola Co. 806,513
74,800 PepsiCo, Inc. 4,459,950
- --------------------------------------------------------------------------------
5,266,463
- --------------------------------------------------------------------------------
Biotechnology--0.4%
13,600 Amgen, Inc.* 817,700
- --------------------------------------------------------------------------------
Broadcast Media--1.3%
19,100 Capital Cities/ABC Inc. 2,456,738
- --------------------------------------------------------------------------------
Building Materials--0.4%
14,200 Armstrong World Industries, Inc. 834,250
- --------------------------------------------------------------------------------
Cable/Television Communications--0.3%
29,000 Tele-Communications, Inc.* 612,625
- --------------------------------------------------------------------------------
Chemicals--5.3%
48,800 Dow Chemicals Co. 3,635,600
11,600 Du Pont E I De Nemours 891,750
22,000 Monsanto Co. 2,865,500
11,600 Morton International, Inc. 429,200
59,800 Norsk Hydro ADR 2,444,325
- --------------------------------------------------------------------------------
10,266,375
- --------------------------------------------------------------------------------
Commercial Banks--6.0%
30,500 Banc One Corp. 1,155,188
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares Description Value
<C> <S> <C>
- --------------------------------------------------------------------------------
Common Stocks (continued)
Commercial Banks (continued)
46,400 BankAmerica Corp. $ 3,126,200
44,200 Corestates Financial Corp. 1,768,000
9,300 First Interstate Bancorp. 1,434,525
11,000 MBNA Corp. 448,250
52,300 NationsBank Corp. 3,654,463
- --------------------------------------------------------------------------------
11,586,626
- --------------------------------------------------------------------------------
Commercial Services--0.5%
25,800 Interim Services Inc.* 961,050
- --------------------------------------------------------------------------------
Communications--1.2%
83,800 Airtouch Communications* 2,367,350
- --------------------------------------------------------------------------------
Computer Software and Services--2.8%
15,400 Cisco Systems, Inc.* 1,282,050
6,500 First Data Corp. 459,875
30,700 Microsoft Corp.* 2,839,750
16,400 Oracle Corp.* 783,100
- --------------------------------------------------------------------------------
5,364,775
- --------------------------------------------------------------------------------
Computers--1.7%
29,800 International Business Machines 3,240,750
- --------------------------------------------------------------------------------
Electrical Equipment--1.8%
45,800 General Electric Co. 3,515,150
- --------------------------------------------------------------------------------
Electronics--0.7%
11,100 Boston Scientific Corp.* 568,875
8,500 Emerson Electric Co. 711,875
- --------------------------------------------------------------------------------
1,280,750
- --------------------------------------------------------------------------------
Electronics-Instrumentation--1.0%
21,900 Hewlett Packard Co. 1,856,025
- --------------------------------------------------------------------------------
Electronics-Semiconductors--2.4%
31,600 Intel Corp. 1,745,406
14,100 Micron Technology Inc. 482,925
23,000 Motorola Inc. 1,236,250
25,300 Texas Instruments Inc. 1,176,450
- --------------------------------------------------------------------------------
4,641,031
- --------------------------------------------------------------------------------
Engineering & Construction--0.8%
21,700 Fluor Corp. 1,453,900
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
16
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Shares Description Value
<C> <S> <C>
- --------------------------------------------------------------------------------
Common Stocks (continued)
Entertainment--1.5%
46,700 The Walt Disney Co. $3,000,475
- --------------------------------------------------------------------------------
Financial Services--1.8%
50,700 Federal National Mortgage Association 1,749,150
8,600 Household International, Inc. 557,925
16,400 MGIC Investment Corp. 1,057,800
2,500 Transamerica Corp. 190,313
- --------------------------------------------------------------------------------
3,555,188
- --------------------------------------------------------------------------------
Food Products--1.9%
37,600 Conagra Inc. 1,724,900
10,800 CPC International, Inc. 785,700
33,200 Sara Lee Corp. 1,120,500
- --------------------------------------------------------------------------------
3,631,100
- --------------------------------------------------------------------------------
Grocery Products--1.2%
55,200 IBP, Inc. 1,469,700
11,500 Kellogg Co. 881,188
- --------------------------------------------------------------------------------
2,350,888
- --------------------------------------------------------------------------------
Health and Medical Services--0.4%
13,300 United Healthcare Corp. 836,238
- --------------------------------------------------------------------------------
Hospital Management and Services--0.7%
22,700 Columbia/HCA Healthcare 1,262,688
- --------------------------------------------------------------------------------
Household Products--1.4%
33,400 Procter & Gamble Co. 2,805,600
- --------------------------------------------------------------------------------
Insurance--5.9%
25,956 Allstate Corp. 1,132,331
29,100 American General Corp. 1,098,525
32,850 American International Group, Inc. 3,182,344
15,600 CMAC Investment Corp. 897,000
17,500 Exel Insurance Ltd. 1,203,125
43,300 Protective Life Corp. 1,504,675
27,700 Safeco Corp. 993,738
21,200 Travelers Group, Inc. 1,393,900
- --------------------------------------------------------------------------------
11,405,638
- --------------------------------------------------------------------------------
Machine-Diversified--0.9%
16,800 Applied Materials, Inc.* 621,600
<CAPTION>
- --------------------------------------------------------------------------------
Shares Description Value
<C> <S> <C>
- --------------------------------------------------------------------------------
Common Stocks (continued)
Machine-Diversified (continued)
13,800 Black & Decker Corp. $ 467,475
15,400 Dover Corp. 702,625
- --------------------------------------------------------------------------------
1,791,700
- --------------------------------------------------------------------------------
Machinery and Equipment--0.6%
18,600 Caterpillar, Inc. 1,197,375
- --------------------------------------------------------------------------------
Medical/Biotechnology--0.5%
15,800 Medtronic Inc. 902,575
- --------------------------------------------------------------------------------
Metals-Diversified--0.3%
18,700 Asarco Inc. 593,725
- --------------------------------------------------------------------------------
Miscellaneous Manufacturer--1.2%
37,800 Allied Signal, Inc. 1,885,275
6,700 Eastman Kodak Co. 491,613
- --------------------------------------------------------------------------------
2,376,888
- --------------------------------------------------------------------------------
Money Center Banks--1.8%
31,800 Chemical Banking Corp. 2,130,600
19,500 Citicorp 1,440,563
- --------------------------------------------------------------------------------
3,571,163
- --------------------------------------------------------------------------------
Office & Business Equipment--0.7%
22,000 Harris, Corp. 1,377,750
- --------------------------------------------------------------------------------
Oil & Gas Exploration--0.8%
18,500 Baker Hughes, Inc. 478,688
20,000 Repsol S.A. ADR 697,500
20,800 Union Texas Petroleum Holdings, Inc. 379,600
- --------------------------------------------------------------------------------
1,555,788
- --------------------------------------------------------------------------------
Oil & Gas-Domestic--1.1%
21,500 Enron Corp. 795,500
22,900 Panhandle Eastern Corp. 661,238
19,200 Phillips Petroleum Co. 626,400
- --------------------------------------------------------------------------------
2,083,138
- --------------------------------------------------------------------------------
Oil & Gas-International--6.4%
25,600 Amoco Corp. 1,801,600
34,300 Exxon Corp. 2,752,575
17,700 Mobil Corp. 1,960,275
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
17
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Shares Description Value
<C> <S> <C>
- --------------------------------------------------------------------------------
Common Stocks (continued)
Oil & Gas-International (continued)
26,600 Royal Dutch Petroleum ADR $ 3,697,400
27,500 Texaco, Inc. 2,224,063
- --------------------------------------------------------------------------------
12,435,913
- --------------------------------------------------------------------------------
Oil-Domestic Integrated--1.7%
19,500 Coastal Corp. 738,563
13,800 Kerr McGee Corp. 872,850
13,700 Tenneco, Inc. 707,263
22,200 Williams Companies, Inc. 1,046,175
- --------------------------------------------------------------------------------
3,364,851
- --------------------------------------------------------------------------------
Packaging & Container--1.1%
39,300 Avery Dennison Corp. 2,097,638
- --------------------------------------------------------------------------------
Paper and Forest Products--0.5%
11,900 Caraustar Industries, Inc. 232,050
14,200 Mead Corp. 784,550
- --------------------------------------------------------------------------------
1,016,600
- --------------------------------------------------------------------------------
Personal Loans--0.4%
16,700 Beneficial Corp. 816,213
- --------------------------------------------------------------------------------
Pharmaceuticals--6.9%
29,900 Abbott Labs 1,263,275
19,600 Bristol-Myers Squibb 1,734,600
18,600 Eli Lilly & Co. 1,069,500
17,600 Johnson & Johnson 1,689,600
28,700 Merck & Co. 2,016,175
23,600 Pfizer, Inc. 1,622,500
72,500 Schering Plough Corp. 3,924,063
- --------------------------------------------------------------------------------
13,319,713
- --------------------------------------------------------------------------------
Retail-Department Stores--2.1%
18,800 Gap, Inc. 885,950
15,800 Harcourt General, Inc. 616,200
28,000 Sears Roebuck & Co. 1,162,000
71,500 Wal Mart Stores, Inc. 1,456,813
- --------------------------------------------------------------------------------
4,120,963
- --------------------------------------------------------------------------------
Retail-Food Chains--0.9%
70,600 Safeway, Inc.* 1,800,300
- --------------------------------------------------------------------------------
Retail-Specialty Apparel Stores--0.2%
22,600 The Limited, Inc. 378,550
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares Description Value
<C> <S> <C>
- --------------------------------------------------------------------------------
Common Stocks (continued)
Security and Commodity Brokers--1.1%
21,000 Dean Witter Discover Co. $ 1,136,625
19,600 Morgan Stanley Group, Inc. 933,450
- --------------------------------------------------------------------------------
2,070,075
- --------------------------------------------------------------------------------
Shoes--0.3%
8,600 Nike Inc. Class B 599,850
- --------------------------------------------------------------------------------
Technology--0.4%
17,400 Compaq Computer Corp.* 819,975
- --------------------------------------------------------------------------------
Telecommunications--5.7%
48,900 Ameritech Corp. 2,940,113
71,800 AT&T Corp. 4,801,625
27,000 GTE Corp. 1,242,000
49,600 Sprint Corp. 2,139,000
- --------------------------------------------------------------------------------
11,122,738
- --------------------------------------------------------------------------------
Tires & Rubber--0.6%
16,000 BF Goodrich Co. 1,178,000
- --------------------------------------------------------------------------------
Tobacco and Food Products--2.7%
55,600 Philip Morris Companies, Inc. 5,170,800
- --------------------------------------------------------------------------------
Toys--0.6%
33,606 Mattel, Inc. 1,083,780
- --------------------------------------------------------------------------------
Transportation--1.9%
12,800 Conrail, Inc. 905,600
5,400 Delta Air Lines, Inc. 369,225
25,100 Federal Express Corp.* 1,910,738
7,600 Union Pacific Corp. 506,350
- --------------------------------------------------------------------------------
3,691,913
- --------------------------------------------------------------------------------
Utility--4.2%
41,000 Empresa Nacional De Electric ADR 2,255,000
19,200 General Public Utilities Corp. 652,800
57,700 Public Service Company of New Mexico* 1,031,388
127,100 Unicom Corp. 4,273,738
- --------------------------------------------------------------------------------
8,212,926
- --------------------------------------------------------------------------------
Total Common Stocks
(Cost $143,543,010) $185,242,812
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal
Amount Description Value
- --------------------------------------------------------------------------------
<S> <C> <C>
- --------------------------------------------------------------------------------
U.S. Treasury Obligation--0.2%
$ 375,000 United States Treasury Bill(a)
4.87%, 02/08/96 $ 374,645
- --------------------------------------------------------------------------------
Total U.S. Treasury Obligation
(Cost $374,645) $ 374,645
- --------------------------------------------------------------------------------
Repurchase Agreement--3.5%
$6,800,000 Joint Repurchase Agreement Account
5.96%, 02/01/96 $ 6,800,000
- --------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $6,800,000) $ 6,800,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $150,717,655)(b) $192,417,457
- --------------------------------------------------------------------------------
Futures contracts open at January 31, 1996 are as follows:
Number of
Contracts Settlement Unrealized
Type Long(c) Month Gain
- ----------------------- ------------ ------------ ------------
S&P 500 Stock Index 5 March 1996 $24,625
- --------------------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for investments in
which value exceeds cost $42,882,569
Gross unrealized loss for investments in
which cost exceeds value (1,183,987)
Net unrealized gain $41,698,582
- --------------------------------------------------------------------------------
</TABLE>
*Non-income producing security.
(a)A portion of this security is being segregated for futures margin
requirements.
(b)The aggregate cost for federal income tax purposes is $150,718,875.
(c)Each S&P 500 Stock Index represents $50,000 in notional par value. The total
net notional amount and net market value are $250,000 and $1,594,875,
respectively. The determination of notional amounts does not consider market
risk facors and therefore notional amounts as presented here are indicative
only of volume of activity and not a measure of market risk.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Growth and Income Fund
- --------------------------------------------------------------------------------
Objective and Investment Approach
The Goldman Sachs Growth and Income Fund seeks long-term growth of capital
and growth of income primarily through investments in a diversified portfolio of
common stocks and other equity securities. The fund is managed with a value
style, which means we focus on companies whose stocks we believe are inexpensive
relative to their expected long-term earnings power and their ability to pay
dividends. Investments may include well-known companies that are temporarily out
of favor due to cyclical economic conditions or are experiencing near-term
difficulties the portfolio managers judge to be temporary in nature. In-depth
fundamental research of a company's financial structure, its competitive
position in the market and its management's commitment to increasing shareholder
value are all critical parts of the fund's investment approach.
Performance Review: Defense and Financial Stocks Were Among the Top Performers
For the 12-month period ended January 31, 1996, the Goldman Sachs Growth
and Income Fund had a total return of 32.45% based on net asset value compared
with a total return of 38.67% for the S&P 500 stock index, the fund's benchmark.
The fund has increased its regular quarterly dividend during the period to $0.07
per share.
The fund provided solid returns for the year due to successful stock
selection in a variety of sectors. Top performers during the period included two
stocks in the defense sector, McDonnell Douglas Corp. and Northrop Grumman
Corp., both of which benefited from their ability to generate significant cash
flows and expand margins; Tenet Healthcare Corp., which rose when the market
responded favorably to its strong earnings growth; and Philip Morris Companies,
Inc., which continued to generate high earnings growth and increased market
share. Goodyear Tire & Rubber Co., one of the three largest tire manufacturers
in the world and the fund's largest holding by year-end, also enjoyed solid
earnings growth despite general softness in auto sales and the rapidly rising
cost of rubber during the period.
Many of the fund's investments in the financial sector performed very well
and were subsequently sold when they hit or exceeded our target prices. These
included Bear Stearns Cos. Inc., Citicorp, Chemical Bank Corp., Federal National
Mortgage Association, Student Loan Marketing Association and Union Bank of San
Francisco. The fund continued to hold Travelers Group, Inc., a diversified
financial services company, which saw its share price rise significantly due in
part to the announcement of its acquisition of Aetna's property and casualty
business.
Although the fund was underweighted in the technology sector, it benefited
from several technology investments it did hold. Advanced Micro Devices, Inc.
and Dell Computer Corp. appreciated sharply and were subsequently sold, while we
continue to hold Compaq Computer Corp. because we believe its valuation levels
were still attractive as of the end of the period. We added Intel Corp. at what
we believed to be an attractive price after the semiconductor sector declined in
the latter half of the period. This company has a dominant market share in
microprocessors, the heart of personal computers.
Weaker Economy Favors Large Caps, Hurts Cyclicals
Factors that impacted the fund's performance relative to the benchmark
during the period were the outperformance of large growth stocks over value
stocks during the latter part of the year and the resulting underperformance of
some of the fund's value-oriented cyclical holdings. As of January 31, 1996, the
fund's weighted average market capitalization was $12.6 billion compared with
$31.7 billion for the S&P 500.
More specifically, the fund's cyclically oriented investments, such as Ford
Motor Co., came under pressure during the period as sales slowed due to investor
uncertainty stemming from the weakening economy. The paper sector, in which the
fund was overweighted compared with the benchmark, was particularly hard hit
when declining demand resulted in an inventory buildup and price discounting.
The fund had trimmed its positions in Stone Container Corp., Champion
- --------------------------------------------------------------------------------
20
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
International Corp. and Georgia-Pacific Corp. earlier in the year when paper
stocks were strong, and continued to hold these investments when their prices
fell, on the expectation that the paper sector would rebound.
Increased Investments in Energy and Retailing Stocks
The fund deployed some of the cash generated from its sales in the
financial sector into energy and retail stocks, two sectors in which it has had
little previous exposure. The fund added to its holdings in several oil
companies that have been restructured to become more efficient producers
(Atlantic Richfield Co. and Texaco, Inc.) and initiated a new position in
Ashland Inc. We also took advantage of the past year's slowdown in retailing to
add several well-known retailing companies at attractive prices. These included
J.C. Penney Company, Inc., a high-quality, low-cost merchandiser; Melville
Corp., which announced the sale of Marshall's; and Sears, Roebuck & Co., which
has spun off its financial services holdings to concentrate on its core retail
business.
Top 10 Portfolio Holdings as of January 31, 1996 *
Percentage
of Total
Company Line of Business Net Assets
Goodyear Tire & Rubber Co. Tire and Rubber Products 3.2%
Ford Motor Co. Automotive Products 3.0%
Georgia-Pacific Corp. Paper and Forest Products 2.8%
McDonnell Douglas Corp. Aerospace/Defense 2.7%
NationsBank Corp. Commercial Bank 2.6%
Long Island Lighting Co. Electric Utilities 2.5%
Philip Morris Companies, Inc. Tobacco and Food Products 2.5%
J.C. Penney Company, Inc. Department Stores 2.5%
Stone Container Corp. Pulp and Paper Products 2.4%
Texaco, Inc. International Integrated Oil 2.2%
* Percentages shown are of common stock positions.
- --------------------------------------------------------------------------------
Outlook
Investor uncertainty concerning the economy's health has resulted in a
rotation out of economically sensitive issues and into more defensive stocks
with larger market capitalizations and stable growth characteristics. We believe
that this phenomenon should reverse at some point, which will potentially
benefit some of our smaller, more cyclical holdings whose long-term earnings
streams are now available at what we believe are attractive prices. Our outlook
for 1996 is cautiously optimistic despite our concerns regarding the slowdown in
economic growth. We intend to continue researching attractive investment
opportunities that are consistent with the fund's management style, avoiding
areas where valuation levels appear excessively high.
/s/ Mitchell E. Cantor
Mitchell E. Cantor
Portfolio Manager
/s/ Ronald E. Gutfleish
Ronald E. Gutfleish
Portfolio Manager
March 1, 1996
- --------------------------------------------------------------------------------
21
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Growth and Income Fund
January 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended January 31, 1996. The
performance for the Goldman Sachs Growth and Income Fund ("GS G & I") (assuming
both the maximum sales charge of 5.50% and no sales charge), is compared with
its benchmark--the Standard & Poor's 500 Index ("S&P 500"). 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.
HYPOTHETICAL $10,000 INVESTMENT
GS Growth & Income GS Growth & Income
(w/sales charge) (no sales charge) S&P 500
- --------------------------------------------------------------------------------
2/5/93(a) $ 9,450 $10,000 $10,000
1/31/94 $10,686 $11,308 $11,073
1/31/95 $11,110 $11,757 $11,132
1/31/96 $14,716 $15,573 15,436
Average Annual Total Return
---------------------------------------------
One Year Since Inception (a)
- --------------------------------------------------------------------------------
GS G&I,
excluding sales charge 32.45% 15.97%
- --------------------------------------------------------------------------------
GS G&I,
including sales charge 25.17% 13.80%
- --------------------------------------------------------------------------------
(a) Commenced operations February 5, 1993.
- --------------------------------------------------------------------------------
22
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Growth and Income Fund (continued)
January 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Shares Description Value
<S> <C> <C>
- --------------------------------------------------------------------------------
Common Stocks--92.6%
Aerospace/Defense--7.7%
96,715 Lockheed Martin Corp. $ 7,289,893
121,100 Loral Corp. 5,600,875
134,000 McDonnell Douglas Corp. 11,926,000
140,800 Northrop Grumman Corp. 9,011,200
- --------------------------------------------------------------------------------
33,827,968
- --------------------------------------------------------------------------------
Auto Parts-Original Equipment--1.3%
187,400 Lear Seating Corp.* 5,551,725
- --------------------------------------------------------------------------------
Automotive Products--4.0%
440,200 Ford Motor Co. 13,040,925
84,500 General Motors Corp. 4,446,813
- --------------------------------------------------------------------------------
17,487,738
- --------------------------------------------------------------------------------
Beverages-Alcoholic--2.1%
130,000 Anheuser Busch Companies, Inc. 9,035,000
- --------------------------------------------------------------------------------
Cable/Television Communications--2.1%
429,700 Tele-Communications, Inc.* 9,077,413
- --------------------------------------------------------------------------------
Chemicals-Plastics--1.6%
245,500 Geon Co. 6,874,000
- --------------------------------------------------------------------------------
Commercial Banks--5.1%
103,700 BankAmerica Corp. 6,986,788
95,465 Fleet Financial Group, Inc. 3,818,600
163,300 NationsBank Corp. 11,410,587
- --------------------------------------------------------------------------------
22,215,975
- --------------------------------------------------------------------------------
Electronics-Semiconductors--1.1%
88,400 Intel Corp. 4,882,719
- --------------------------------------------------------------------------------
Environmental Control--0.4%
63,600 Browning Ferris Industries, Inc. 1,876,200
- --------------------------------------------------------------------------------
Food-Wholesale--3.0%
302,100 Fleming Companies, Inc. 5,739,900
240,600 Supervalu, Inc. 7,458,600
- --------------------------------------------------------------------------------
13,198,500
- --------------------------------------------------------------------------------
Grocery Products--1.9%
596,800 Chiquita Brands International, Inc. 8,131,400
- --------------------------------------------------------------------------------
Home Builders--1.4%
46,800 Centex Corp. 1,509,300
180,100 Lennar Corp. 4,705,112
- --------------------------------------------------------------------------------
6,214,412
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares Description Value
<S> <C> <C>
- --------------------------------------------------------------------------------
Common Stocks (continued)
Hospital Management and Services--3.4%
129,600 Beverly Enterprises, Inc.* $ 1,555,200
88,600 Columbia/HCA Healthcare 4,928,375
387,200 Tenet Healthcare Corp.* 8,276,400
- --------------------------------------------------------------------------------
14,759,975
- --------------------------------------------------------------------------------
Household Products--1.7%
82,400 National Presto Industrials, Inc. 3,605,000
250,700 Sunbeam Corp. 4,011,200
- --------------------------------------------------------------------------------
7,616,200
- --------------------------------------------------------------------------------
Insurance--6.9%
98,300 Allstate Corp. 4,288,337
39,100 CIGNA Corp. 4,638,237
24,400 Integon Corp. 515,450
166,200 Lincoln National Corp. 8,787,825
237,200 PartnerRe Holdings, Ltd. 6,611,950
71,000 Travelers Group, Inc. 4,668,250
20,100 US Life Corp. 645,712
- --------------------------------------------------------------------------------
30,155,761
- --------------------------------------------------------------------------------
Marine and Pleasure Boats--3.1%
386,100 Brunswick Corp. 8,735,512
239,400 Outboard Marine Corp. 4,788,000
- --------------------------------------------------------------------------------
13,523,512
- --------------------------------------------------------------------------------
Metals-Miscellaneous--0.5%
103,200 Quanex Corp. 2,128,500
- --------------------------------------------------------------------------------
Oil & Gas-Domestic--4.6%
232,800 Ashland Inc. 8,555,400
38,600 Atlantic Richfield Co. 4,385,925
167,900 Tosco Corp. 7,030,812
- --------------------------------------------------------------------------------
19,972,137
- --------------------------------------------------------------------------------
Oil & Gas-International--5.0%
36,200 Mobil Corp. 4,009,150
58,900 Royal Dutch Petroleum ADR 8,187,100
118,800 Texaco, Inc. 9,607,950
- --------------------------------------------------------------------------------
21,804,200
- --------------------------------------------------------------------------------
Packaging & Container--2.0%
604,300 Owens Illinois Corp.* 8,611,275
- --------------------------------------------------------------------------------
Paper and Forest Products--6.4%
118,600 Champion International Corp. 5,307,350
166,300 Georgia-Pacific Corp. 12,202,262
704,600 Stone Container Corp. 10,304,775
- --------------------------------------------------------------------------------
27,814,387
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Growth and Income Fund (continued)
January 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Shares Description Value
<S> <C> <C>
- --------------------------------------------------------------------------------
Common Stocks (continued)
Print & Publishing--1.4%
359,700 Valassis Communications, Inc.* $ 6,069,938
- --------------------------------------------------------------------------------
Retail-Department Stores--5.0%
220,000 J.C. Penney, Inc. 10,780,000
88,100 Melville Corp. 2,510,850
207,700 Sears Roebuck & Co. 8,619,550
- --------------------------------------------------------------------------------
21,910,400
- --------------------------------------------------------------------------------
Savings and Loans--1.9%
207,200 GP Financial Corp. 5,348,350
76,600 Standard Federal Bancorp. 3,121,450
- --------------------------------------------------------------------------------
8,469,800
- --------------------------------------------------------------------------------
Security and Commodity Brokers, Dealers and Services--1.1%
195,900 Lehman Brothers Holdings, Inc. 5,019,938
- --------------------------------------------------------------------------------
Technology--2.1%
111,900 Compaq Computer Corp.* 5,273,288
153,800 Storage Technology Corp.* 4,075,700
- --------------------------------------------------------------------------------
9,348,988
- --------------------------------------------------------------------------------
Tire and Rubber Products--3.2%
287,500 Goodyear Tire & Rubber Co. 13,764,063
- --------------------------------------------------------------------------------
Tobacco and Food Products--5.4%
116,900 Philip Morris Companies, Inc. 10,871,700
263,680 RJR Nabisco Holdings Corp. 8,569,600
176,800 Universal Corp. 4,132,700
- --------------------------------------------------------------------------------
23,574,000
- --------------------------------------------------------------------------------
Transportation-Air--1.0%
54,600 AMR Corp.* 4,149,600
- --------------------------------------------------------------------------------
Trucking--1.8%
348,000 Consolidated Freightways, Inc. 8,004,000
- --------------------------------------------------------------------------------
Utility--4.4%
131,800 CMS Energy Corp. 4,102,275
144,300 Entergy Corp. 4,274,887
641,400 Long Island Lighting Co. 10,903,800
- --------------------------------------------------------------------------------
19,280,962
- --------------------------------------------------------------------------------
Total Common Stocks
(Cost $346,638,724) $404,350,686
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares Description Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Preferred Stocks--0.9%
Grocery Products--0.4%
44,600 Chiquita Brands International, Inc.
Convertible Preferred, 2.88% $ 1,995,850
- --------------------------------------------------------------------------------
Tobacco and Food Products--0.4%
287,100 RJR Nabisco Holdings Corp.
Convertible Preferred, 6.50% 1,902,038
- --------------------------------------------------------------------------------
Total Preferred Stocks
(Cost $3,843,410) $ 3,897,888
- --------------------------------------------------------------------------------
Principal
Amount Description Value
- --------------------------------------------------------------------------------
Repurchase Agreement--6.3%
- --------------------------------------------------------------------------------
$27,400,000 Joint Repurchase Agreement
Account
5.96%, 02/01/96 $ 27,400,000
- --------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $27,400,000) $ 27,400,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $377,882,134)(a) $ 435,648,574
- --------------------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $ 64,178,911
Gross unrealized loss for investments in which
cost exceeds value (6,439,893)
- --------------------------------------------------------------------------------
Net unrealized gain $ 57,739,018
- --------------------------------------------------------------------------------
</TABLE>
*Non-income producing security.
(a)The aggregate cost for federal income tax purposes is $377,909,556.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Capital Growth Fund
- --------------------------------------------------------------------------------
Objective and Investment Approach
The Goldman Sachs Capital Growth Fund seeks long-term growth of capital
primarily through investments in a portfolio of medium- and large-capitalization
stocks. We use extensive fundamental research to identify companies that we
believe to be either unrecognized or significantly undervalued in the
marketplace, either because the company's business is not well understood or
because it is experiencing what are judged to be temporary difficulties. Our
analysis focuses on such factors as a company's long-term growth potential, its
competitive position in its industry, the extent to which the general economic
environment might affect its business and how committed its management is to
producing value for shareholders. Because this investment approach requires the
patience to hold a stock until the market recognizes its true value, it is best
suited for investors with a long-term investment horizon. The fund's weighted
average market capitalization was approximately $15.2 billion as of January 31,
1996 compared with $31.7 billion for the S&P 500 stock index.
Performance Review: Strong Absolute Results, Despite Weakness in Cyclical and
Retail Sectors
For the 12 months ended January 31, 1996, the Goldman Sachs Capital Growth
Fund had a total return of 30.45% based on net asset value compared with a total
return of 38.67% for the fund's benchmark, the S&P 500 stock index.
The fund's returns during the period were high by absolute and historical
standards, reflecting successful stock selection in diverse industries. The
fund's investments in the financial sector produced some of the strongest
performers during the period, including Federal National Mortgage Association
and two of our longer term holdings, Citicorp and Penncorp Financial Group,
Inc., both of which appreciated significantly and were sold after hitting our
target prices. Another long-term holding that did very well was Millipore
Corp., which manufactures filters for use in many commercial and high technology
markets. During the period, we added Pall Corp., another major filtration
producer with a specialization in filtration for the health care industry, as we
believe there is a growing recognition of a crisis in the safety of the world
blood supply. Though the automotive sector was generally weak during the second
half of the year, Lear Seating Corp., an auto seat manufacturer, was a notable
exception and contributed to the fund's positive performance.
During the period, the market favored large, growth stocks, while the fund
was heavily invested in value-oriented cyclical stocks in the capital equipment
and paper and forest products sectors. These industries were all impacted by the
slowing economy, particularly during the fourth quarter of 1995. Holdings that
came under pressure included capital equipment manufacturers Tenneco, Inc. and
Keystone International, Inc., which were subsequently liquidated. The fund's
investments in the paper and forest products sector (Champion International
Corp., Georgia-Pacific Corp. and Stone Container Corp.) also fared poorly due to
price discounting in the latter half of the period as demand for paper and pulp
products declined amid healthy supply. The fund sold Champion International but
continued to hold its other investments in the sector in the belief that the
correction was overdone and they were attractively valued.
We have dramatically modified our investment strategy in the retailing
sector, shifting the fund's concentration from specialty retailers such as
AnnTaylor Stores, Inc. and Charming Shoppes, Inc., which fared poorly in the
disappointing retailing environment, to higher quality retailing franchises,
such as Wal-Mart Stores, Inc., J.C. Penney Company, Inc. and Dillard Department
Stores, Inc.
New Additions Added Diversification
We deployed the cash resulting from our mid-period sales into investments
that we believed had the potential to do well regardless of the economic
environment. These included financial services companies such as First USA, Inc.
(credit cards) and NationsBank Corp. (commercial
- --------------------------------------------------------------------------------
25
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Capital Growth Fund (continued)
- --------------------------------------------------------------------------------
bank); media and telecommunication companies such as Knight-Ridder, Inc.
(newspaper publishing) and AT&T Corp.; and energy-related companies such as Long
Island Lighting Co. (an electric and gas utility serving Long Island, N.Y.) and
Texaco, Inc. (oil and gas).
Another recent investment was Goodyear Tire & Rubber Co., one of the
world's three dominant tire companies, which performed well despite rapidly
rising raw material costs during the period. The fund bought Perkin-Elmer Corp.,
a health care equipment manufacturer, which has benefited from management's
increased focus on cost reduction, and provides a way to participate in
potential biotechnology sector growth at an attractive earnings multiple. When
the technology sector became more reasonably priced following a sell-off in the
second half of the period, the fund added Intel Corp., Compaq Computer Corp. and
Silicon Valley Group, Inc.
<TABLE>
<CAPTION>
Top 10 Portfolio Holdings as of January 31, 1996
Percentage
of Total
Company Line of Business Net Assets
<S> <C> <C>
Georgia-Pacific Corp. Paper and Forest Products 3.4%
Ford Motor Co. Automotive Products 3.2%
NationsBank Corp. Commercial Bank 3.1%
Northrop Grumman Corp. Aerospace/Defense 2.9%
Tele-Communications, Inc. Cable Television System 2.8%
Valassis Communications, Inc. Publishing 2.7%
Dillard Department Stores, Inc. Department Stores 2.7%
Philip Morris Companies, Inc. Tobacco and Food Products 2.7%
Texaco, Inc. International Integrated Oil 2.6%
First Brands Corp. Household Products 2.6%
</TABLE>
Outlook
The equity market appears to be caught in a tug of war between moderate
overvaluation and a likely reacceleration of the economy during the second half
of 1996. The accommodative stance of the Federal Reserve to date should help to
stimulate economic growth later in 1996, which would be beneficial for corporate
profits and ultimately for common stocks. As of this writing, however, the
profit picture is still uneven and the economically sensitive parts of the
market may be vulnerable to additional negative surprises. Despite the overall
economic uncertainty, we believe many of our remaining cyclical holdings have
strong fundamentals and attractive valuations, and we expect to hold them until
the market recognizes their fair value. As noted, we have diversified the
portfolio to include holdings that should withstand a slower economy in the near
term. Going forward, we will continue to emphasize selection of individual
stocks that we believe offer long-term growth potential.
/s/ Mitchell E. Cantor
Mitchell E. Cantor
Portfolio Manager
/s/ Paul D. Farrell
Paul D. Farrell
Portfolio Manager
March 1, 1996
- --------------------------------------------------------------------------------
26
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Capital Growth Fund
January 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended January 31, 1996. The
performance for the Goldman Sachs Capital Growth Fund ("GS Cap Growth")
(assuming both the maximum sales charge of 5.50% and no sales charge), is
compared with its benchmark--the Standard & Poor's 500 Index ("S&P 500"). 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.
HYPOTHETICAL $10,000 INVESTMENT
GS GS
Cap Growth Cap Growth
(w/sales charge) (no sales charges) S&P 500
---------------- ------------------ -------
4/20/90(a) $ 9,450 $10,000 $10,000
1/31/91 $ 9,529 $10,084 $10,552
1/31/92 $12,322 $13,040 $12,946
1/31/93 $14,542 $15,388 $14,316
1/31/94 $16,998 $17,987 $16,160
1/31/95 $16,254 $17,200 $16,246
1/31/96 $21,203 $22,437 $22,528
<TABLE>
<CAPTION>
--------------------------------------------------
Average Annual Total Return
--------------------------------------------------
One Year Five Year Since Inception/a/
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------
GS Cap Growth, excluding sales charge 30.45% 17.34% 14.98%
- -----------------------------------------------------------------------------------------
GS Cap Growth, including sales charge 23.24% 16.01% 13.86%
- -----------------------------------------------------------------------------------------
</TABLE>
/a/ Commenced operations April 20, 1990.
- -------------------------------------------------------------------------------
27
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Growth and Income Fund (continued)
January 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Shares Description Value
<S> <C> <C>
- --------------------------------------------------------------------------------
Common Stocks--96.2%
Aerospace/Defense--4.8%
188,400 McDonnell Douglas Corp. $16,767,600
394,900 Northrop Grumman Corp. 25,273,600
- --------------------------------------------------------------------------------
42,041,200
- --------------------------------------------------------------------------------
Auto Parts-Original Equipment--1.3%
391,900 Lear Seating Corp.* 11,610,037
- --------------------------------------------------------------------------------
Automotive Products--3.2%
948,800 Ford Motor Co. 28,108,200
- --------------------------------------------------------------------------------
Cable/Television Communications--2.8%
1,165,800 Tele-Communications, Inc.* 24,627,525
- --------------------------------------------------------------------------------
Chemicals-Plastics--2.2%
700,400 Geon Co. 19,611,200
- --------------------------------------------------------------------------------
Commercial Banks--5.8%
218,700 BankAmerica Corp. 14,734,913
231,900 MBNA Corp. 9,449,925
390,400 NationsBank Corp. 27,279,200
- --------------------------------------------------------------------------------
51,464,038
- --------------------------------------------------------------------------------
Cosmetics--0.9%
155,000 Tambrands, Inc. 7,614,375
- --------------------------------------------------------------------------------
Electronics--3.3%
216,200 Perkin-Elmer Corp. 10,215,450
704,400 Silicon Valley Group, Inc.* 18,402,450
- --------------------------------------------------------------------------------
28,617,900
- --------------------------------------------------------------------------------
Electronics-Semiconductors--2.6%
346,200 Intel Corp. 19,122,141
214,500 National Semiconductor Corp.* 3,700,125
- --------------------------------------------------------------------------------
22,822,266
- --------------------------------------------------------------------------------
Financial Services--4.0%
382,000 Federal National Mortgage Association 13,179,000
430,900 First U.S.A., Inc. 22,460,663
- --------------------------------------------------------------------------------
35,639,663
- --------------------------------------------------------------------------------
Grocery Products--0.8%
494,100 Chiquita Brands International, Inc. 6,732,113
- --------------------------------------------------------------------------------
Hardware and Tools--1.1%
220,800 Snap-on Tools, Inc. $ 9,687,600
- --------------------------------------------------------------------------------
Hospital Management and Services--5.4%
337,400 Beverly Enterprises, Inc.* 4,048,800
268,900 Columbia/HCA Healthcare 14,957,563
1,021,400 Tenet Healthcare Corp.* 21,832,425
142,300 US Healthcare, Inc.* 6,901,550
- --------------------------------------------------------------------------------
47,740,338
- --------------------------------------------------------------------------------
Household Products--2.6%
465,700 First Brands Corp. 22,993,937
- --------------------------------------------------------------------------------
Insurance--4.8%
540,250 Integon Corp. 11,412,781
218,600 Lincoln National Corp. 11,558,475
703,800 PartnerRe Holdings, Ltd. 19,618,425
- --------------------------------------------------------------------------------
42,589,681
- --------------------------------------------------------------------------------
Manufacturing-Diversified Industrial--1.0%
271,000 Harnischfeger Industries, Inc. 9,180,125
- --------------------------------------------------------------------------------
Manufacturing-Miscellaneous--5.9%
551,200 Fisher Scientific International, Inc. 19,429,800
310,300 Millipore Corp. 13,265,325
724,700 Pall Corp. 19,566,900
- --------------------------------------------------------------------------------
52,262,025
- --------------------------------------------------------------------------------
Metal Fabricate/Hardware--0.9%
238,650 Trinity Industries, Inc. 8,352,750
- --------------------------------------------------------------------------------
Metals-Miscellaneous--0.6%
241,100 Quanex Corp. 4,972,687
- --------------------------------------------------------------------------------
Oil & Gas-International--6.1%
68,700 Amoco Corp. 4,834,763
88,400 Chevron Corp. 4,585,750
68,500 Exxon Corp. 5,497,125
90,900 Mobil Corp. 10,067,175
41,200 Royal Dutch Petroleum ADR 5,726,800
284,800 Texaco, Inc. 23,033,200
- --------------------------------------------------------------------------------
53,744,813
- --------------------------------------------------------------------------------
Packaging & Container--1.0%
605,700 Owens Illinois Corp.* 8,631,225
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
<TABLE>
<CAPTION>
Shares Description Value
- --------------------------------------------------------------------------------
Common Stocks (continued)
<S> <C> <C>
Paper and Forest Products--5.3%
410,900 Georgia-Pacific Corp. $ 30,149,787
1,145,900 Stone Container Corp. 16,758,787
- --------------------------------------------------------------------------------
46,908,574
- --------------------------------------------------------------------------------
Print & Publishing--3.7%
130,900 Knight Ridder, Inc. 8,688,488
1,416,500 Valassis Communications, Inc.* 23,903,437
- --------------------------------------------------------------------------------
32,591,925
- --------------------------------------------------------------------------------
Retail-Department Stores--6.6%
829,900 Dillard Department Stores, Inc. 24,067,100
198,100 J.C. Penney, Inc. 9,706,900
920,900 Service Merchandise Co., Inc.* 4,374,275
963,000 Wal Mart Stores, Inc. 19,621,125
- --------------------------------------------------------------------------------
57,769,400
- --------------------------------------------------------------------------------
Retail-Specialty--2.0%
1,827,500 Charming Shoppes, Inc.* 5,025,625
818,500 Musicland Stores Corp.* 1,943,937
576,600 TJX Companies, Inc. 10,883,325
- --------------------------------------------------------------------------------
17,852,887
- --------------------------------------------------------------------------------
Security and Commodity Brokers, Dealers and Services--1.7%
571,000 Lehman Brothers Holdings, Inc. 14,631,875
- --------------------------------------------------------------------------------
Technology--1.7%
323,700 Compaq Computer Corp.* 15,254,363
- --------------------------------------------------------------------------------
Telecommunications--2.1%
278,200 AT&T Corp. 18,604,625
- --------------------------------------------------------------------------------
Tire and Rubber Products--1.7%
314,900 Goodyear Tire & Rubber Co. 15,075,837
- --------------------------------------------------------------------------------
Tobacco and Food Products--4.7%
254,900 Philip Morris Companies, Inc. 23,705,700
776,100 Universal Corp. 18,141,338
- --------------------------------------------------------------------------------
41,847,038
- --------------------------------------------------------------------------------
Transportation-Air--2.3%
260,400 AMR Corp.* 19,790,400
- --------------------------------------------------------------------------------
Transportation-Marine--0.4%
178,500 Kirby Corp.* 3,168,375
- --------------------------------------------------------------------------------
Trucking--1.6%
620,200 Consolidated Freightways, Inc. $14,264,600
- --------------------------------------------------------------------------------
Utility--1.3%
669,400 Long Island Lighting Co. 11,379,800
- --------------------------------------------------------------------------------
Total Common Stocks
(Cost $740,857,992) $848,183,397
================================================================================
Principal
Amount Description Value
================================================================================
Repurchase Agreement--2.4%
$20,900,000 Joint Repurchase Agreement Account
5.96%, 02/01/96 $ 20,900,000
- --------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $20,900,000) $ 20,900,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $761,757,992)(a) $869,083,397
- --------------------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for investments in
which value exceeds cost $135,542,409
Gross unrealized loss for investments in
which cost exceeds value (29,033,799)
- --------------------------------------------------------------------------------
Net unrealized gain $106,508,610
================================================================================
</TABLE>
*Non-income producing security.
(a)The aggregate cost for federal income tax purposes is $762,574,787.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Small Cap Equity Fund
- --------------------------------------------------------------------------------
Objective and Investment Approach
The Goldman Sachs Small Cap Equity Fund's objective is long-term capital
appreciation, primarily through investments in equity securities of U.S.
companies with market capitalizations of $1 billion or less. The fund is
managed using a "business value" approach to investing, which means we look for
attractive companies with high or improving returns on capital that we believe
can achieve solid, sustainable growth, as well as generate free cash after
investing for future growth. This approach differs markedly from many pure
growth small-cap funds that invest in companies with high multiples solely on
the basis of rapid, but frequently unsustainable, growth rates. Using our own
rigorous fundamental research, which includes meeting with a company's
management and interviewing a company's competitors, customers and suppliers, we
build the fund's portfolio one stock at a time.
Disappointing Retailers and Others Impacted Performance
Small-cap stock performance significantly lagged large-cap stocks during the
period under review, with much of the gap occurring in the latter half of the
year. In part, small-cap stocks underperformed due to the correction in
technology stocks during the second half of the period. More significantly,
small-cap stocks lost momentum when concern regarding slowing economic growth
caused many investors to shift their focus to large-cap consumer growth stocks,
which were perceived to be more stable in an economic downturn.
During the 12 months ended January 31, 1996, the Goldman Sachs Small Cap
Equity Fund had a total return of 7.20% based on net asset value compared with
30.06% for the Russell 2000, the fund's benchmark.
The fund underperformed the benchmark primarily due to the disappointing
results of a number of its holdings, particularly in the specialty retailing
sector. For example, Charming Shoppes, Inc. (retailer of women's apparel), Ernst
Home Center, Inc. (home improvement stores) and Shoe Carnival, Inc. (shoe
retailer) all saw price declines. The fund liquidated these positions, some
during the period and some soon after the period ended, due to their
deteriorating fundamentals. However, we continued to hold other retailers, such
as J. Baker, Inc. (specialty apparel and discount shoes), which in our opinion
have attractive long-term potential.
Some of the fund's nonretailing positions were also disappointing, such as
Foamex International, Inc. (foam products), which failed to capitalize on its
market position, and Physicians Clinical Laboratory, Inc. (clinical lab
testing), whose fundamentals began to deteriorate rapidly in a difficult
environment. Both investments were sold during the period.
Strategic Shifts Resulted in Greater Balance Across Sectors
During the latter half of the period, we widened our search for attractive
investments to give the portfolio a more balanced representation of value across
industry sectors. As a result, the fund's weightings reflect additional
investments in specialty insurance and technology-related companies and reduced
investments in retailing stocks. Financial holdings that performed well
included Horace Mann Educators Co. (property, casualty and life insurance for
the educator market), Western National Corp. (annuity product marketer) and
Insignia Financial Group, Inc. (real estate management).
During the period, the portfolio's overall liquidity increased. The
portfolio's weighted average market capitalization was approximately $343
million as of January 31, 1996, up from approximately $210 million a year ago.
Diverse Sectors Contributed Good Results
A number of the portfolio's longer term holdings did particularly well
during the period and were sold after they reached our target prices. USA Mobile
Communications Holdings (a Midwest-based provider of paging services) rose due
to a tender offer from Arch Communications. TJX Companies, Inc. (off-priced
women's apparel and accessories) sold its
- --------------------------------------------------------------------------------
30
<PAGE>
- --------------------------------------------------------------------------------
underperforming "Hit or Miss" chain and acquired Marshall's, the nation's second
largest chain in off-priced apparel. Sonic Corp. (drive-in restaurants),
Authentic Fitness Corp. (owner's of Speedo sports apparel) and Holophane Corp.
(lighting fixtures) all experienced solid price appreciation as investors
reacted to continued strong earnings gains.
Strong performers that the fund continued to hold at the end of the period
included DIMAC Corp., a direct marketer of database management services, which
saw its share price more than double during the period as it continued to grow,
and eventually agreed to be acquired by Heritage Media at a very attractive
price; North American Watch Corp., owner of the Movado, Concord and Esquire
watch brands, which appreciated on earnings gains and greater investor
awareness; and Figgie International, Inc., an industrial conglomerate, which
achieved improving earnings resulting from restructuring and the sale of its
less profitable, noncore businesses. Technology-related investments that
performed well included one of the fund's long-term holdings and currently its
largest position, Black Box Corp., a catalog marketer of data communication and
networking products, which has high profit margins, a strong balance sheet and a
reputation for quality and service, and Intersolv, Inc., a producer of software
development tools.
Recent Additions
We added a number of positions that produced good results. For example,
Amphenol Corp. (coaxial cable and connector manufacturer) rebounded on the
expectation that telecom legislation would be passed by Congress, Buckeye
Cellulose Corp. (manufacturer and marketer of specialty papers and fibers)
climbed approximately 30% as investors discovered its earnings potential, and
Trump Hotels & Casino Resorts, Inc. (hotels and casinos) appreciated
considerably when investors recognized its ability to generate strong cash
flows.
<TABLE>
<CAPTION>
Top 10 Portfolio Holdings as of January 31, 1996
Company Line of Business Percentage of
Total Net
Assets
<S> <C> <C>
Black Box Corp. Catalog Marketer of Communications and Networking Products 7.3%
North American Watch Corp. Luxury and Affordable Watches 6.6%
Landstar Systems, Inc. Trucking 5.3%
Hollinger International, Inc. Publishing/Newspapers 4.6%
Trump Hotels & Casino Resorts, Inc. Hotels and Casinos 4.4%
DIMAC Corp. Direct Marketing/ Database Management 4.1%
Quantum Restaurant Group, Inc. Restaurants 3.8%
Morningstar Group, Inc. Specialty Food Products 3.8%
The Paul Revere Corp. Insurance 3.6%
Brookstone, Inc. Specialty Retailer 3.4%
</TABLE>
Outlook
Going forward, the fund will stress investments that offer growth at a
reasonable price, emphasizing companies that possess both strong value
characteristics and the growth potential necessary for long-term success. In
general, we believe small-cap stocks are inexpensive relative to their larger
counterparts.
We appreciate your support in what has been a difficult period for the fund.
We believe that our strategic adjustments have improved the fund's ability to
uncover attractive investment opportunities and will serve it well in the
future.
/s/ Paul D. Farrell
Paul D. Farrell
Portfolio Manager
March 1, 1996
- --------------------------------------------------------------------------------
31
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Small Cap Equity Fund
January 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended January 31, 1996. The
performance for the Goldman Sachs Small Cap Equity Fund ("GS Small Cap")
(assuming both the maximum sales charge of 5.50% and no sales charge), is
compared with its benchmarks--the Standard & Poor's 500 Index ("S&P 500") and
the Russell 2000 Index ("Russell 2000"). 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.
HYPOTHETICAL $10,000 INVESTMENT
GS GS
Small Cap Small Cap
(w/sales charge) (no sales charge) S&P 500 Russell 2000
- --------------------------------------------------------------------------------
10/22/92(a) $ 9,450 $10,000 $10,000 $10,000
- --------------------------------------------------------------------------------
1/31/93 $11,138 $11,786 $10,655 $11,733
- --------------------------------------------------------------------------------
1/31/94 $14,494 $15,337 $12,027 $13,914
- --------------------------------------------------------------------------------
1/31/95 $11,953 $12,649 $12,091 $13,078
- --------------------------------------------------------------------------------
1/31/96 $12,813 $13,559 $16,768 $17,010
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
-----------------------------------------
Average Annual Total Return
-----------------------------------------
One Year Since Inception /(a)/
<S> <C> <C>
- --------------------------------------------------------------------------------
GS Small Cap,excluding sales charge 7.20% 9.73%
- --------------------------------------------------------------------------------
GS Small Cap,including sales charge 1.30% 7.85%
- --------------------------------------------------------------------------------
</TABLE>
/(a)/ Commenced operations October 22, 1992.
- --------------------------------------------------------------------------------
32
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Small Cap Equity Fund
January 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Shares Description Value
<S> <C> <C>
- --------------------------------------------------------------------------------
Common Stocks--97.1%
Advertising--4.1%
301,800 DIMAC Corp.* $ 8,337,225
- --------------------------------------------------------------------------------
Broadcast Media--0.1%
8,200 U.S. Satellite Broadcast* 221,400
- --------------------------------------------------------------------------------
Broadcasting--1.3%
206,800 International Family Entertainment, Class B* 2,714,250
- --------------------------------------------------------------------------------
Building Materials--2.1%
412,800 Congoleum Corp.* 4,231,200
- --------------------------------------------------------------------------------
Commercial Services--11.3%
1,284,982 Automated Security Holdings PLC ADR* 1,124,359
863,302 Black Box Corp.* 14,891,958
984,100 International Post Ltd.* 4,059,413
539,200 Opinion Research Corp.* 3,167,800
- --------------------------------------------------------------------------------
23,243,530
- --------------------------------------------------------------------------------
Communication-Equipment--1.0%
112,200 IPC Information Systems, Inc.* 2,131,800
- --------------------------------------------------------------------------------
Computer Software and Services--1.4%
279,600 Intersolv, Inc.* 2,900,850
- --------------------------------------------------------------------------------
Electrical Equipment--1.0%
66,000 UCAR International, Inc.* 2,054,250
- --------------------------------------------------------------------------------
Electronics--4.4%
271,800 Amphenol Corp.* 5,741,775
421,400 Nimbus CD International, Inc.* 3,213,175
- --------------------------------------------------------------------------------
8,954,950
- --------------------------------------------------------------------------------
Food Processing--3.8%
936,500 Morningstar Group, Inc.* 7,726,125
- --------------------------------------------------------------------------------
Food Products--0.6%
151,200 Alpine Lace Brands, Inc.* 1,200,150
- --------------------------------------------------------------------------------
Hospital Management and Services--0.3%
55,100 Sterling Healthcare Group, Inc.* 688,750
- --------------------------------------------------------------------------------
Hotels and Casinos--4.4%
414,900 Trump Hotels & Casino Resorts, Inc.* 9,024,075
- --------------------------------------------------------------------------------
Household Products--3.2%
780,900 American Safety Razor Co.* 6,540,037
- --------------------------------------------------------------------------------
Insurance--11.5%
169,900 Horace Mann Educators Co. $ 5,627,937
200,100 John Alden Financial Corp. 4,152,075
155,500 Risk Capital Holdings, Inc.* 3,168,313
325,700 The Paul Revere Corp. 7,409,675
200,200 Western National Corp. 3,278,275
- --------------------------------------------------------------------------------
23,636,275
- --------------------------------------------------------------------------------
Jewelry--6.6%
721,700 North American Watch Corp. 13,441,663
- --------------------------------------------------------------------------------
Manufacturing-Diversified Industrial--3.0%
395,600 Figgie International, Inc. Class A* 4,401,050
162,100 Figgie International, Inc. Class B* 1,823,625
- --------------------------------------------------------------------------------
6,224,675
- --------------------------------------------------------------------------------
Oil & Gas-Domestic--0.9%
216,200 Total Petroleum of North America Ltd. 1,905,263
- --------------------------------------------------------------------------------
Packaging & Container--2.1%
320,400 Shorewood Packaging Corp.* 4,245,300
- --------------------------------------------------------------------------------
Paper and Forest Products--1.4%
123,400 Buckeye Cellulose Corp.* 2,899,900
- --------------------------------------------------------------------------------
Print & Publishing--4.6%
941,800 Hollinger International, Inc. 9,418,000
- --------------------------------------------------------------------------------
Real Estate--2.5%
262,300 Insignia Financial Group, Inc.* 5,114,850
- --------------------------------------------------------------------------------
Restaurants--6.5%
250,300 IHOP Corp.* 5,444,025
646,200 Quantum Restaurant Group, Inc.* 7,835,175
- --------------------------------------------------------------------------------
13,279,200
- --------------------------------------------------------------------------------
Retail-Specialty--12.0%
1,061,500 Brookstone, Inc.* 7,032,438
357,300 Finlay Enterprises, Inc.* 3,930,300
961,700 J. Baker, Inc. 4,387,756
1,005,700 Levitz Furniture, Inc.* 4,148,513
1,233,340 Musicland Stores Corp.* 2,929,183
335,400 Supercuts, Inc.* 2,054,325
- --------------------------------------------------------------------------------
24,482,515
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
33
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Small Cap Equity Fund (continued)
January 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Shares Description Value
<S> <C> <C>
- --------------------------------------------------------------------------------
Common Stocks (continued)
Savings and Loans--0.3%
26,100 GP Financial Corp. $ 673,706
- --------------------------------------------------------------------------------
Trucking--5.3%
435,300 Landstar Systems, Inc.* 10,882,500
- --------------------------------------------------------------------------------
Utilities--1.4%
186,400 Central Maine Power Co. 2,912,500
- --------------------------------------------------------------------------------
Total Common Stocks
(Cost $217,180,660) $199,084,939
================================================================================
Warrants--0.0%
Home Builders and Land Development--0.0%
58,800 Miles Homes, Inc.* $ 29,400
- --------------------------------------------------------------------------------
Total Warrants
(Cost $43,650) $ 29,400
Principal
Amount Description Value
================================================================================
Corporate Bonds--0.2%
- --------------------------------------------------------------------------------
$500,000 J. Baker, Inc.,
7.0%, 06/01/02 $ 300,000
- --------------------------------------------------------------------------------
Total Corporate Bonds
(Cost $498,083) $ 300,000
================================================================================
Total Investments
(Cost $217,722,393)(a) $199,414,339
================================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in
which value exceeds cost $ 32,280,290
Gross unrealized loss for investments in
which cost exceeds value (50,964,644)
- --------------------------------------------------------------------------------
Net unrealized loss $(18,684,354)
================================================================================
</TABLE>
*Non-income producing security.
(a)The aggregate cost for federal income tax purposes is $218,098,693.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
34
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs International Equity Fund
- --------------------------------------------------------------------------------
Objective and Investment Approach
The Goldman Sachs International Equity Fund seeks long-term capital
appreciation by investing in equity securities of companies organized or traded
outside the U.S. that we believe have the potential to appreciate over the long
term. The fund focuses on selecting attractively valued companies with strong,
competitive positions in industries expected to grow. The fund's portfolio
managers are based in London, Tokyo and Singapore and their knowledge of local
markets plays an important role in uncovering investment opportunities. While
the fund does not allocate assets across specific countries based on top-down
economic or market forecasts, the portfolio managers strive to manage risk by
remaining diversified by country and industry sector and by closely monitoring
economic and political events in countries in which the fund does invest.
Performance Review: Substantial Outperformance Reflects Successful Stock
Selection in All Regions
For the 12 months ended January 31, 1996, the Goldman Sachs International
Equity Fund had a total return of 28.68% based on net asset value compared with
a return of 15.37% for the fund's benchmark, the Financial Times-Actuaries
Europe & Pacific Index ("EuroPac") unhedged. EuroPac is a capitalization-
weighted composite of approximately 1,500 stocks from companies based in Europe
and the Asia-Pacific region that is calculated on a monthly basis.
The fund's substantial outperformance of the EuroPac Index during the period
was mainly due to successful stock selection.
With regard to currency, the fund's neutral position is unhedged, although
it occasionally engages in hedging strategies. From May through October, the
fund successfully hedged a portion of its yen exposure, which worked in its
favor when the yen began to depreciate against the dollar. As of January 31,
approximately 25% of the fund's yen and European currency exposure was hedged to
the U.S. dollar.
The fund did extremely well compared with its peers. Based on total return,
the fund placed in the top 2% of international equity funds (ranking fourth out
of 259) tracked by Lipper Analytical Services, Inc. for the 12-month period
ended January 31, 1996. (Please note that Lipper rankings do not take sales
charges into account and that past performance is not a guarantee of future
results.)
Portfolio Composition:
Diversification Across Countries and Industries
As of January 31, 1996, approximately 92% of the fund's net assets were
invested in common stocks and 8% in cash equivalents. The fund was widely
diversified with positions in 48 companies based in 18 countries, with its five
largest country exposures in Japan (34.4%), the U.K. (8.5%), Sweden (5.9%),
Germany (5.7%) and the Netherlands (5.6%).
. Europe. As of January 31, 43.5% of the portfolio was invested in European
stocks, nearly in line with the Index. Though slower than expected economic
growth led to somewhat disappointing corporate profits and earnings downgrades
for many companies throughout the year, most European equity markets did
reasonably well. A number of the fund's long-term European holdings were
outstanding performers. These included Fresenius (Germany), a major producer of
kidney dialysis equipment, which rose due to strong sales and profit growth
resulting from its cost cutting and expanding market share; Hoganas (Sweden), a
leading manufacturer of metal powder, which benefited from positive earnings
results and increased broker coverage; Randstad Holdings (Netherlands), a
temporary help organization, which experienced strong growth in temporary
employment volumes and earnings upgrades; and Securitas (Sweden), the largest
security services company in Europe, which was driven by good underlying growth
in the security services business. In addition, several of the fund's newer
European investments also achieved good results, such as Adidas (Germany), the
European market leader in athletic shoes and sports apparel;
- --------------------------------------------------------------------------------
35
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs International Equity Fund (continued)
- --------------------------------------------------------------------------------
Electrocomponents (U.K.), one of the leading catalog providers of electronic
components and other equipment to businesses in the U.K. and Europe; and Bank of
Ireland, the country's largest and most profitable bank.
. Japan. As our expectations for the Japanese economy improved, we have
increased the fund's Japanese holdings from approximately 30% a year ago to
34.4% as of January 31, though still underweighted compared with the Index
(43.0%). Our holdings included a number of attractive opportunities that
performed well during the year, focusing particularly on companies actively
engaged in reducing their costs. For example, Hoya Corporation (the world's
leading manufacturer of optical glass) has restructured its business to focus on
growth areas and has moved the bulk of its manufacturing to Thailand, and
Mitsubishi Heavy Industries (the country's largest heavy machinery maker)
benefited from cost reductions and increased procurement of raw materials from
outside Japan.
The fund added several new Japanese holdings during the past 12 months,
including Kyocera, a leading global manufacturer of ceramic and electronic
components; Chiyoda, a large shoe and toy manufacturer that is in the process of
restructuring to reduce costs; and Tostem Corp., a producer of aluminum building
materials used in residential housing, which is positioned to benefit from the
revival of the Japanese housing market. During the period, the fund did not
invest in any Japanese banks because we believed that the sector was still at
risk due to its potential liabilities.
. Asia-Pacific. The fund was overweighted in Asia (outside Japan) compared
with the Index (13.7% versus 10.3%), with 4.9% of the fund invested in Hong
Kong, the region's strongest performer. In general, we focused on larger and
more liquid Asian companies, a number of which outperformed the region's
generally lackluster results (outside of Hong Kong) during much of the period.
One of the fund's most successful Asian holdings during the period was Korea
Mobile Telecommunications, the dominant provider of cellular telecommunications
and pagers in Korea, which experienced strong subscriber growth. There were a
number of Asian additions to the fund, including Hong Kong-based HSBC Holdings,
one of the largest and best capitalized banking organizations in the world, and
Bangkok Bank, generally considered to be the highest quality and leading bank in
Thailand.
<TABLE>
<CAPTION>
Top 10 Portfolio Holdings as of January 31, 1996
Company Country Line of Business Percentage of Total Net Assets
<S> <C> <C> <C>
Fresenius Germany Health Care 3.3%
Mitsubishi Heavy Industries Japan Heavy Machinery Manufacturer 3.1%
Mitsui Marine & Fire Japan Insurance 2.9%
Mitsubishi Electric CP Japan Electrical Equipment 2.8%
Hoya Corporation Japan Optical Glass Manufacturing 2.6%
Korea Mobile Telecommunications Korea Telecommunications 2.5%
Banco Popular Spain Bank 2.5%
Santen Pharmaceutical Co. Japan Ophthalmic Pharmaceuticals 2.4%
Tostem Corp. Japan Aluminum Building Materials 2.4%
Bangkok Bank Thailand Bank 2.4%
</TABLE>
Outlook
We are generally positive on the outlook for international equity markets in
1996, though our views vary by region. Europe is still struggling with below-
par economic growth, which is currently leading to earnings downgrades in many
markets. However, interest rate cuts, reasonable valuations and improving
growth for the second half of 1996 should ensure fair, though not spectacular,
returns.
In Japan, we believe the combination of a weaker yen and fiscal stimulus
will succeed in lifting economic growth and corporate earnings after two years
of disappointments. With returns on equity at historically very low levels in
Japan, and with many companies' profits being highly sensitive to even small
improvements
- --------------------------------------------------------------------------------
36
<PAGE>
- --------------------------------------------------------------------------------
in sales, we think the earnings growth outlook will be positive for the equity
market.
Asian markets closed the period with a strong December and January amid
evidence of renewed interest from U.S. and other foreign investors and improved
liquidity. Our outlook for the Asian markets is positive over the long term, as
they continue to offer attractive long-term growth potential.
In closing, we are pleased this has been a very good year for the fund and
we look forward to being a part of your investment program for many years to
come.
/s/ Roderick D. Jack
Roderick D. Jack
Portfolio Manager, London
/s/ Marcel Jongen
Marcel Jongen
Portfolio Manager, London
/s/ Shogo Maeda
Shogo Maeda
Portfolio Manager, Tokyo
/s/ Warwick M. Negus
Warwick M. Negus
Portfolio Manager, Singapore
March 1, 1996
- --------------------------------------------------------------------------------
37
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs International Equity Fund
January 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended January 31, 1996. The
performance for the Goldman Sachs International Equity Fund ("GS Int'l Equity")
(assuming both the maximum sales charge of 5.50% and no sales charge), is
compared with its benchmarks--the Financial Times-Actuaries World Euro-Pacific
Index hedged and unhedged into U.S. dollars ("FT Euro-Pac (Combined)")/(b)/ and
the Financial Times-Actuaries World Euro-Pacific Index Unhedged ("FT Euro-Pac
(Unhedged)") (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.
HYPOTHETICAL $10,000 INVESTMENT
INT'L
GS Int'l Equity GS Int'l Equity FT Euro-Pac FT Euro-Pac
(w/sales charge) (no sales charge) (combined)(b) (unhedged)
---------------- ----------------- ------------- -----------
12/1/92 $ 9,450 $10,000 $10,000 $10,000
1/31/93 $ 9,566 $10,123 $10,063 $10,055
1/31/94 $12,066 $12,768 $13,498 $14,399
1/31/95 $10,058 $10,643 $12,119 $13,902
1/31/96 $12,942 $13,695 $13,983 $16,039
<TABLE>
<CAPTION>
------------------------------------
Average Annual Total Return
------------------------------------
One Year Since Inception /(a)/
- --------------------------------------------------------------------------------
<S> <C> <C>
GS Int'l Equity,excluding sales charge 28.68% 10.43%
- --------------------------------------------------------------------------------
GS Int'l Equity,including sales charge 21.56% 8.48%
- --------------------------------------------------------------------------------
</TABLE>
/(a)/ Commenced operations December 1, 1992.
/(b)/ Beginning on September 1, 1994, the Fund began using the unhedged FT
Euro-Pac as its benchmark (prior thereto, the Fund used the hedged FT Euro-
Pac). The combined FT Euro-Pac represents the hedged FT Euro-Pac
performance up to August 31, 1994 and the unhedged FT Euro-Pac performance
from September 1, 1994 through January 31, 1996.
- --------------------------------------------------------------------------------
38
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs International Equity Fund
January 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Shares Description Value
- --------------------------------------------------------------------------------
Common Stocks--92.3%
Australian Dollar--2.2%
<C> <S> <C>
1,147,000 Boral Limited (Building Materials) $ 2,887,361
819,955 Woodside Petroleum (Oil & Gas) 4,335,801
- --------------------------------------------------------------------------------
7,223,162
- --------------------------------------------------------------------------------
Austrian Schilling--2.0%
105,400 Oester Elektrizita (Utility) 6,786,034
- --------------------------------------------------------------------------------
Belgian Franc--1.8%
20,342 Colruyt SA (Food-Retailer) 5,976,294
- --------------------------------------------------------------------------------
British Pound Sterling--8.5%
939,039 British Airport Authority
(Airport Operator) 6,868,594
1,373,378 Electrocomponents (Wholesale Trade) 7,119,067
1,455,700 Rentokil Group (Business Services) 7,655,790
537,000 Siebe (Electrical Equipment Manufacturer) 6,431,502
- --------------------------------------------------------------------------------
28,074,953
- --------------------------------------------------------------------------------
Danish Krone--1.8%
111,200 TeleDanmark AS (Telecommunications) 6,137,568
- --------------------------------------------------------------------------------
Deutschemark--5.7%
135,900 Adidas AG (Sportswear) 7,763,581
121,510 Fresenius AG (Health Care) 10,979,573
- --------------------------------------------------------------------------------
18,743,154
- --------------------------------------------------------------------------------
French Franc--3.7%
17,056 Comptoirs Modernes (Retail) 5,859,505
163,630 Seita (Tobacco) 6,294,078
- --------------------------------------------------------------------------------
12,153,583
- --------------------------------------------------------------------------------
Hong Kong Dollar--4.9%
392,000 HSBC Holdings (Commercial Bank) 6,489,227
745,000 Hutchison Whampoa (Conglomerates) 4,841,604
500,000 Sun Hung Kai Properties (Real Estate) 4,752,852
- --------------------------------------------------------------------------------
16,083,683
- --------------------------------------------------------------------------------
Common Stocks (continued)
Irish Pound--2.1%
982,014 Bank of Ireland (Commercial Bank) $ 7,056,111
- --------------------------------------------------------------------------------
Japanese Yen--34.4%
155,600 Chiyoda Co. (Retail) 3,578,349
70,000 Circle K Japan (Retail-Convenience) 3,029,821
260,000 Hoya Corp. (Optical Glass Manufacturer) 8,507,058
214,000 Inaba Denkisangyo (Industrial) 5,001,402
108,000 Kyocera Corp. (Electronics) 7,663,083
317,000 Max Co. (Office Equipment Manufacturer) 6,312,144
209,000 Mirai Industry Co. (Electrical Equipment Manufacturer) 5,119,005
1,284,000 Mitsubishi Electric CP (Electrical Equipment) 9,302,608
1,288,000 Mitsubishi Heavy Industries (Aerospace/Defense) 10,222,604
1,300,000 Mitsui Marine & Fire (Insurance) 9,576,517
371,000 Santen Pharmaceutical Co. (Pharmaceuticals) 8,011,686
49,700 Sanyo Shinpan Financial (Financial) 3,749,453
228,000 Shimachu Co. (Retail-Furniture) 7,097,691
316,000 Taikisha Ltd. (Capital Goods) 5,346,920
81,000 TDK Corp. (Electronics) 4,035,991
342,000 Terumo Corp. (Health Care) 3,325,044
243,000 Tostem Corp. (Building Materials) 7,996,261
154,800 York Benimaru Co. (Food-Retailer) 5,889,838
- --------------------------------------------------------------------------------
113,765,475
- --------------------------------------------------------------------------------
Netherlands Guilder--5.6%
121,500 Philips Electronic Companies (Electrical Equipment) 4,846,590
149,180 Randstad Holdings (Temporary Help Services) 6,845,582
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
39
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs International Equity Fund (continued)
January 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Shares Description Value
- --------------------------------------------------------------------------------
Common Stocks (continued)
Netherlands Guilder (continued)
<C> <S> <C>
69,165 Wolters Kluwer (Publishing) $ 6,783,323
- --------------------------------------------------------------------------------
18,475,495
- --------------------------------------------------------------------------------
Singapore Dollar--1.5%
668,000 Singapore Land (Real Estate) 5,093,139
- --------------------------------------------------------------------------------
South Korean Won--2.5%
7,000 Korea Mobile Telecommunications
(Telecommunications) 8,263,610
- --------------------------------------------------------------------------------
Spanish Peseta--4.8%
45,725 Banco Popular (Commercial Bank) 8,185,362
223,535 Repsol SA (Oil & Gas-Production and Distribution) 7,771,411
- --------------------------------------------------------------------------------
15,956,773
- --------------------------------------------------------------------------------
Swedish Krona--5.9%
359,300 Ericsson Telecommunications (Communications) 7,221,322
253,440 Hoganas AG (Metals-Products) 6,420,543
135,490 Securitas (Commercial Services) 5,870,265
- --------------------------------------------------------------------------------
19,512,130
- --------------------------------------------------------------------------------
Swiss Franc--1.9%
3,831 Cie Financiere Richemont AG
(Consumer Goods-Luxury Products) 6,381,314
- --------------------------------------------------------------------------------
Thai Baht--3.0%
572,300 Bangkok Bank (Commercial Bank) 7,995,036
434,000 Electricity Generating (Utilities) 1,847,760
- --------------------------------------------------------------------------------
9,842,796
- --------------------------------------------------------------------------------
Total Common Stocks
(Cost $258,243,666) $305,525,274
- --------------------------------------------------------------------------------
Short-Term Obligation--8.6%
28,410,029 State Street Bank & Trust Euro-
Time Deposit, 5.75%, 02/01/96 $28,410,029
- --------------------------------------------------------------------------------
Total Short-Term Obligation
(Cost $28,410,029) $28,410,029
- --------------------------------------------------------------------------------
Total Investments
(Cost $286,653,695)(a) $333,935,303
- --------------------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for investments in
which value exceeds cost $52,228,920
Gross unrealized loss for investments in
which cost exceeds value (5,123,064)
--------------------------------------------------------------------------------
Net unrealized gain $47,105,856
- ---------------------------------------------------------------------------------
</TABLE>
(a)The aggregate cost for federal income tax purposes is $286,655,735.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
The accompanying notes are an integral part of these financial statements.
40
<PAGE>
- --------------------------------------------------------------------------------
- -------------------------------------------------- -----------------------------
Common Stock Industry Concentrations
- --------------------------------------------------
Commercial Banks 9.0%
Telecommunications 4.4%
Health Care 4.3%
Electrical Equipment 4.3%
Food-Retailer 3.6%
Electronics 3.5%
Electrical Equipment Manufacturer 3.5%
Building Materials 3.3%
Aerospace/Defense 3.1%
Real Estate 3.0%
Insurance 2.9%
Retail 2.9%
Optical Glass Manufacturer 2.6%
Pharmaceuticals 2.4%
Oil & Gas-Production and Distribution 2.3%
Sportswear 2.3%
Business Services 2.3%
Communications 2.2%
Wholesale Trade 2.2%
Retail-Furniture 2.1%
Airport Operator 2.1%
Temporary Help Services 2.1%
Utility 2.0%
Publishing 2.0%
Metal Products 1.9%
Consumer Goods-Luxury Products 1.9%
Office Equipment Manufacturer 1.9%
Tobacco 1.9%
Commercial Services 1.8%
Capital Goods 1.6%
Industrial 1.5%
Conglomerates 1.5%
Oil & Gas 1.3%
Financial 1.1%
Retail-Convenience 0.9%
Utilities 0.6%
- --------------------------------------------------
Total Common Stocks 92.3%
==================================================
- ----------------------------------- ---------------------------------------
The accompanying notes are an intergral part of these financial statements.
41
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Asia Growth Fund
- ----------------------------------- -------------------------------------------
Objective and Investment Approach
The Goldman Sachs Asia Growth Fund seeks long-term capital appreciation by
investing in a limited number of carefully selected companies located in 12
Asian markets, including China, Hong Kong, India, Indonesia, Malaysia, Pakistan,
the Philippines, Singapore, South Korea, Sri Lanka, Taiwan and Thailand.
We utilize extensive fundamental research in our search for well-managed
companies whose stock prices are, in our opinion, undervalued in the
marketplace. Because many companies in the Asian region are growing at
relatively rapid rates, we consider a company's return on capital, its price-to-
book value and the predictability of its earnings stream as among the best
measures of its intrinsic value. A strong market position and a skilled
management team dedicated to maximizing shareholder returns are also important
to us. Our investment process includes face-to-face meetings with senior
management as well as frequent contact with a company's customers, suppliers and
competitors.
While our primary focus is on stock selection, we seek to carefully manage
risk by diversifying the fund's portfolio in terms of countries, industry
sectors and size of capitalization. We are also mindful of making certain the
market for a particular stock is relatively liquid, so we can easily sell a
position if our opinion changes. From time to time, we may choose to
significantly overweight or underweight our holdings in a country compared with
our benchmark, if we believe there is a compelling reason to do so. Finally, we
closely monitor the potential impact of political and economic events in the
region on particular companies and adjust the portfolio accordingly.
Market Overview:
A Year of Volatility and a Strong Finish
Asian stock markets experienced high volatility and generally low volumes
for most of the period under review, despite relatively stable economic
fundamentals for most of the region. Corporate earnings, while respectable, were
lower than expected for a number of companies and operating margins were under
pressure. The period was marked by several powerful stock market rallies during
February and May, followed by weakness during much of the second half of 1995 as
the strengthening U.S. dollar drained liquidity from Asian markets. Economic
growth accelerated during the third quarter of the year, an outcome not widely
anticipated, and consequently, interest rates in some Asian countries increased.
During most of the period under review, Hong Kong provided the region's
strongest and most consistent returns, up over 20%.
During the first half of the reporting period, regional political turmoil
in India, a change of government in Thailand, an accelerating current account
deficit in Malaysia and a series of natural disasters in the Philippines took a
toll in their respective markets. In general, the region was considerably more
stable during the second half.
For much of the period under review, Asian markets experienced low volumes
due to muted investor interest resulting from the powerful performance of the
U.S. equity market and solid returns in parts of Europe, which kept many foreign
investors focused closer to home. Another contributing factor: investors were
concerned that the devaluation of the Mexican peso might have a spillover effect
on other emerging markets. The tide turned for Asian markets in late November,
when the flow of foreign investments began to gradually increase in anticipation
that the U.S. Federal Reserve would cut interest rates in December. The period
ended on a much more positive note when renewed interest and significantly
higher volumes from foreign investors contributed to a rally in December and
January.
Performance Review: Successful Stock Selection and Country Weightings Prevailed
During the 12-month period ended January 31, 1996, the Goldman Sachs Asia
Growth Fund earned a total return of 26.49% based on net asset value compared
with a total return of 22.65% for its benchmark, the Morgan Stanley Capital
International Combined Asia (ex Japan) Index.
42
<PAGE>
The fund outperformed the benchmark due to several factors.
. Successful stock selection was the primary reason for outperformance. A
number of the portfolio's holdings in a variety of countries did very well
during the period, with some doing considerably better than their markets. For
example, Mulia Industrindo (Indonesia) appreciated significantly, benefiting
from its expanded capacity and its position as one of the lowest cost providers
to the construction industry. In addition, Korea Mobile Telecommunications, the
sole provider of cellular services and a major force in the Korean paging
market, increased substantially despite the fact that the Korean stock market
was down by approximately 20%. The story was similar in India, the region's
worst performing market in 1995 (down 23%), where several of the fund's holdings
prospered. These included Tata Engineering & Locomotive, a manufacturer of
commercial vehicles, which enjoyed continued earnings growth in the rapidly
expanding Indian auto market, and Larsen & Toubro Ltd., an engineering company.
Industrial Finance Corporation (Thailand), established over 30 years ago by the
Thai government to promote and develop private business in the country, has
developed into a major finance company specializing in providing financing for
emerging companies.
. During most of the period, the portfolio was overweighted in Hong Kong
compared with the Index, as we correctly anticipated the market was cheap and
would rebound. A number of the fund's investments outperformed the strong Hong
Kong market. They included HSBC Holdings (Hong Kong), one of the top 15 banks in
the world in terms of assets, which saw its earnings and loan volumes grow as
loan quality also improved; Sun Hung Kai Properties (Hong Kong), a property
company that benefited as property prices stabilized and as substantial hidden
value in its additional large tract of farmland emerged that was previously
undisclosed; and Hutchison Whampoa (Hong Kong), a conglomerate, which enjoyed
excellent performance due to its successful property launches and involvement in
other new major development projects, its continued strength in port and port-
related services, as well as better than expected growth of its Orange Telecom
Network U.K. subsidiary.
. Finally, the fund's low cash position (1%) in October enabled it to fully
participate in the year-end rally in Asian markets, with positive returns
realized in December 1995 and January 1996.
There were some disappointments as well. We sold Rashid Hussain Berhad, a
Malaysian securities company, which failed to meet our expectations in the
declining Malaysian market, and Kim Hin Industry (Malaysia), a leading producer
of floor and tile products in Malaysia, which saw its profits decline due to an
overly ambitious expansion plan and a price war resulting from increased
competition. We also liquidated the fund's position in Astra International
(Indonesia), which sells Japanese cars in Indonesia, when the company suffered
from the appreciation of the Japanese yen relative to the Indonesian rupiah.
Portfolio Composition
As of January 31, 1996, 96.4% of the fund's net assets were invested in
equity positions and the remainder was in cash equivalents. By country, the
fund's five heaviest concentrations were in Hong Kong (34.0%), Indonesia
(12.0%), Thailand (11.7%), Malaysia (11.0%) and Singapore (10.0%). As of January
31, the portfolio's weightings were in line with the Index in Hong Kong,
overweighted in Indonesia and the Philippines, and underweighted in Singapore,
Malaysia and Thailand.
New Holdings Added During the Period
During the second half of the portfolio's fiscal year, we added several new
positions, including HKR International, Ltd., a small property company with
sites in Discovery Bay on Lantau Island (a self-contained community of 10,000
residents catering to a "quality lifestyle"), and ACP Industries, a Malaysian
infrastructure company.
43
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Asia Growth Fund (continued)
- ---------------------------------- ---------------------------------------------
<TABLE>
<CAPTION>
Percentage
Top 10 Portfolio Holdings as of January 31, 1996 of Total
Company Country Line of Business Net Assets
<S> <C> <C> <C>
Sun Hung Kai Properties Hong Kong Property 5.6%
Mulia Industrindo Indonesia Manufacturing 4.6%
Swire Pacific Hong Kong Conglomerate 4.6%
Industrial Finance Corporation Thailand Banking and Finance 4.6%
Hutchison Whampoa Hong Kong Conglomerate 4.5%
HSBC Holdings Hong Kong Banking and Finance 4.3%
JCG Holdings Hong Kong Banking and Finance 3.8%
HKR International, Ltd. Hong Kong Property 3.6%
Metropolitan Bank & Trust Philippines Banking and Finance 3.3%
Straits Steamship Land Singapore Property 3.0%
</TABLE>
Stocks Sold on Strength
We sold several stocks that had reached our target prices, including a good
portion of our holdings in Consolidated Electric Power of Asia (Hong Kong),
which builds and operates power stations, based on our evaluation that further
appreciation was unlikely for several years. We also sold Indostat, the major
domestic telephone service provider in Indonesia, at a profit in advance of the
company's privatization in late 1995.
Investment Outlook: Optimistic for 1996
We are optimistic about the region's prospects for 1996 due to a number of
factors, including our expectation that the year will bring relative economic
prosperity and the fact that valuations in Asia are low after nearly two years
of consolidations. Therefore, we have kept the fund's cash weighting low, opting
to remain nearly fully invested. In the coming months, we will be looking for
opportunities to increase the portfolio's exposure in some of the smaller Asian
markets, including Thailand, Indonesia, the Philippines and Malaysia. In
addition, we expect the Korean market to begin to benefit from extensive capital
spending programs undertaken in 1994. During the first half of 1996, India and
Taiwan will be holding major elections, and we will be particularly vigilant in
monitoring political developments as they unfold. In general, however, we are
currently quite positive on India, where valuations are cheap and where we
anticipate a more stable and accommodating business environment during the
second half of the year. Finally, we still see growth potential in Hong Kong,
which should be a major beneficiary once China eases its austerity program in
1996. In terms of stock selection, we will continue to focus on undervalued
companies with above-average long-term growth potential.
We appreciate your support, particularly during this volatile year. We
remain convinced that over the long term, Asian markets offer attractive growth
potential for investors prepared to stay the course.
/s/ Warwick M. Negus
Warwick M. Negus
Portfolio Manager, Singapore
March 1, 1996
44
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Asia Growth Fund
January 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended January 31, 1996. The
performance for the Goldman Sachs Asia Growth Fund ("GS Asia") (assuming both
the maximum sales charge of 5.50% and no sales charge), is compared with its
benchmark--the Morgan Stanley Capital International Combined Asia (ex Japan)
Index ("MSCI Combined Asia-ex Japan"). 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.
HYPOTHETICAL $10,000 INVESTMENT
GS Asia GS Asia MSCI Combined
(w/sales charge) (no sales charge) Asia-ex Japan
---------------- ----------------- --------------
7/8/94(a) $ 9,450 $10,000 $10,000
1/31/95 $ 8,934 $ 9,454 $ 9,074
1/31/96 $11,300 $11,958 $11,129
<TABLE>
<CAPTION>
-------------------------------
Average Annual Total Return
-------------------------------
One Year Since Inception (a)
- ---------------------------------------------------------------
<S> <C> <C>
GS Asia,
excluding sales charge 26.49% 12.09%
- ---------------------------------------------------------------
GS Asia,
including sales charge 19.58% 8.11%
- ---------------------------------------------------------------
</TABLE>
(a) Commenced operations July 8, 1994.
- --------------------------------------------------------------------------------
45
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Asia Growth Fund (continued)
January 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value
- -------------------------------------------------------------
Common Stocks--95.1%
Hong Kong Dollar--33.9%
<S> <C> <C>
441,000 Dao Heng Bank
(Banking) $ 1,904,943
6,584,400 HKR International Ltd.
(Real Estate) 7,323,380
1,624,000 Hong Kong Electric
(Utility) 5,513,308
1,253,824 Hong Kong Land Holdings
(Real Estate) 2,846,180
3,117,000 Hopewell Holdings
(Construction) 2,096,221
537,000 HSBC Holdings
(Commercial Bank) 8,889,579
1,431,000 Hutchison Whampoa
(Conglomerate) 9,299,779
8,265,666 JCG Holdings Ltd.
(Financial Services) 7,857,097
6,169,400 San Miguel Brewery Ltd.
(Breweries) 2,972,118
1,217,000 Sun Hung Kai Properties
(Real Estate) 11,568,441
1,089,000 Swire Pacific
(Conglomerate) 9,506,673
- -------------------------------------------------------------
69,777,719
- -------------------------------------------------------------
Indian Rupee--6.6%
43,750 Hindustan Lever
(Consumer Goods) 770,893
225,400 Larsen & Toubro Ltd. GDR
(Construction) 3,797,990
188,750 Mahindra & Mahindra GDR
(Automotive Products) 1,426,950
116,600 Ranbaxy Laboratories Ltd. GDS
(Pharmaceuticals) 2,769,250
374,400 Tata Engineering & Locomotive
Company Ltd. GDR
(Autos and Trucks) 4,801,680
- -------------------------------------------------------------
13,566,763
- -------------------------------------------------------------
Common Stocks (continued)
Indonesian Rupiah--12.0%
1,617,500 Bank Bali
(Commercial Bank) $ 4,093,150
1,183,625 Indofoods Sukses Makmur
(Food Processing) 6,196,989
948,500 Jaya Real Property (Real Estate) 2,803,703
6,023,371 Mulia Industrindo
(Manufacturing-Diversified
Industrial) 9,460,792
70,000 Perusahaan Persero PT Telekom
ADR (Telecommunications) 2,152,500
- -------------------------------------------------------------
24,707,134
- -------------------------------------------------------------
Malaysian Ringgit--11.0%
759,000 ACP Industries
(Construction) 3,052,954
1,041,000 Commerce Asset Holdings
(Financial Services) 5,569,454
1,617,000 Leader Universal Holdings
(Construction) 3,757,234
1,312,000 Road Builder Berhad
(Construction) 4,867,419
994,000 UTD Engineers Berhad
(Construction) 5,270,356
- -------------------------------------------------------------
22,517,417
- -------------------------------------------------------------
Philippine Peso--5.1%
326,764 Metropolitan Bank & Trust
(Commercial Bank) 6,801,863
172,000 Philippines Commercial
International Bank
(Commercial Bank) 1,757,314
450,000 Pilippino Telephone
(Telecommunications) 515,622
369,000 San Miguel Corp.
(Food and Beverages) 1,395,272
- -------------------------------------------------------------
10,470,071
- -------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
46
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Asia Growth Fund (continued)
January 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value
- -------------------------------------------------------------
Common Stocks (continued)
Singapore Dollar--10.0%
732,100 Far East Levingston Shipbuilding
(Marine) $ 3,945,449
823,500 Overseas Union Bank Ltd.
(Financial Services) 6,381,472
532,000 Singapore Land (Real Estate) 4,047,622
1,745,000 Straits Steamship Land
(Real Estate) 6,207,996
- -------------------------------------------------------------
20,582,539
- -------------------------------------------------------------
South Korean Won--4.8%
146,000 Korea Electric Power Corp. ADR
(Utility) 3,686,500
5,320 Korea Mobile Telecommunications
Corp. (Telecommunications) 6,280,344
- -------------------------------------------------------------
9,966,844
- -------------------------------------------------------------
Thai Baht--11.7%
830,000 Bangkok Metropolitan Bank PLC
(Commercial Bank) 990,825
3,802,300 Bangkok Metropolitan Bank PLC
(Commercial Bank) 4,501,539
366,434 Industrial Finance Corp.
(Financial Services) 2,480,684
1,818,566 Industrial Finance Corp.
(Financial Services) 7,033,128
360,800 Kiatnakin Finance & Securities
(Financial Services) 1,288,571
424,000 National Finance & Securities
(Financial Services) 2,978,374
3,067,000 Siam Panich Leasing
(Financial Services) 4,780,841
- -------------------------------------------------------------
24,053,962
- -------------------------------------------------------------
Total Common Stocks
(Cost $169,147,199) $195,642,449
=============================================================
Preferred Stocks--1.0%
Philippine Peso--1.0%
56,600 Philippine Long Distance Telephone
Convertible Preferred, 5.75%
(Telecommunications) $ 2,009,300
- -------------------------------------------------------------
Total Preferred Stocks
(Cost $2,413,594) $ 2,009,300
=============================================================
Warrants--0.3%
107,000 Tata Engineering & Locomotive
Company GDR, (Autos and Trucks) $ 428,000
353,750 Straits Steamship Land
(Real Estate) 199,366
- -------------------------------------------------------------
Total Warrants
(Cost $552,814) $ 627,366
=============================================================
<CAPTION>
Principal
Amount Description Value
- -------------------------------------------------------------
<S> <C> <C>
Corporate Bonds--0.6%
$697,000 Kiatnakin Finance & Securities
Convertible, 4.00%, 11/30/03 $ 561,085
1,012,000 UTD Engineers Berhad Convertible,
4.00%, 05/22/99 573,046
- -------------------------------------------------------------
Total Corporate Bonds
(Cost $1,129,751) $ 1,134,131
=============================================================
Short-Term Obligation--7.1%
$14,591,112 State Street Bank & Trust Euro-
Time Deposit, 5.75%, 02/01/96 $ 14,591,112
- -------------------------------------------------------------
Total Short-Term Obligation
(Cost $14,591,112) $ 14,591,112
=============================================================
Total Investments
(Cost $187,834,470)(a) $214,004,358
=============================================================
Federal Income Tax Information:
Gross unrealized gain for investments in
which value exceeds cost $31,429,020
Gross unrealized loss for investments in
which cost exceeds value (5,694,618)
=============================================================
Net unrealized gain $ 25,734,402
=============================================================
</TABLE>
(a) The aggregate cost for federal income tax purposes is $187,858,691.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
47
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Asia Growth Fund (continued)
January 31, 1996
- --------------------------------------------------------------------------------
Common and Preferred Stock Industry Concentrations
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Financial Services 18.6%
Real Estate 16.9%
Construction 15.7%
Commercial Banks 13.2%
Telecommunications 5.3%
Manufacturing-Diversified Industrial 4.6%
Conglomerates 4.5%
Utility 4.5%
Food Processing 3.0%
Autos and Trucks 2.3%
Marine 1.9%
Breweries 1.5%
Pharmaceuticals 1.4%
Banking 0.9%
Automotive Products 0.7%
Food and Beverages 0.7%
Consumer Goods 0.4%
- --------------------------------------------------------------------------------
Total Common and Preferred Stocks 96.1%
================================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
48
<PAGE>
- --------------------------------------------------------------------------------
[This Page Intentionally Left Blank]
- --------------------------------------------------------------------------------
49
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities
January 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Goldman Sachs Goldman Sachs
Balanced Select Equity
Fund Fund
=================================================
<S> <C> <C>
Assets:
Investments in securities, at value (identified cost $50,883,173,
$150,717,655, $377,882,134, $761,757,992, $217,722,393,
$286,653,695 and $187,834,470, respectively) $54,395,985 $192,417,457
Cash 155,627 60,282
Receivables:
Investment securities sold 4,098,640 --
Forward foreign currency exchange contracts -- --
Fund shares sold 396,592 1,841,527
Dividends and interest 322,781 236,279
Deferred organization expenses, net 49,641 9,549
Other assets 26,017 64,472
- --------------------------------------------------------------------------------------------------------------------------
Total assets 59,445,283 194,629,566
- --------------------------------------------------------------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased 8,378,513 --
Due to bank -- --
Forward foreign currency exchange contracts -- --
Fund shares repurchased 20,396 492,617
Investment advisory fees 20,749 61,772
Administration fees 6,225 23,203
Distribution fees -- 25,458
Authorized dealer service fees 9,534 25,458
Transfer agent fees 25,883 56,565
Accrued expenses and other liabilities 55,976 70,724
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities 8,517,276 755,088
- --------------------------------------------------------------------------------------------------------------------------
Net Assets:
Paid-in capital 46,460,904 150,294,287
Accumulated undistributed (distributions in excess of) net investment income 125,304 86,854
Accumulated undistributed (distributions in excess of) net realized gain
(loss) on investment, option and futures transactions 753,268 1,768,910
Accumulated net realized foreign currency gain (loss) -- --
Net unrealized gain (loss) on investments, options and futures 3,588,531 41,724,427
Net unrealized loss on translation of assets and liabilities denominated in
foreign currencies -- --
- --------------------------------------------------------------------------------------------------------------------------
Net assets $50,928,007 $193,874,478
==========================================================================================================================
<CAPTION>
Class A Institutional/(a)/
----------- -------------
<S> <C> <C> <C>
Total shares of beneficial interest outstanding, $.001 par value
(100,000,000 shares authorized) 2,942,730 6,564,725 3,288,416
Net asset value and redemption price per share (net assets/shares
outstanding) $17.31 $19.66 $19.71
==========================================================================================================================
Maximum public offering price per share (NAV x 1.0582) $18.32 $20.80 $19.71/(b)/
==========================================================================================================================
</TABLE>
/(a)/The Goldman Sachs Select Equity Fund Institutional share class has
authorized shares of 50,000,000.
/(b)/The Goldman Sachs Select Equity Fund's Institutional shares maximum public
offering price per share is equivalent to the net asset value per share.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
50
<PAGE>
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities
January 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Goldman Sachs Goldman Sachs Goldman Sachs Goldman Sachs Goldman Sachs
Growth & Income Capital Growth Small Cap Equity International Equity Asia Growth
Fund Fund Fund Fund Fund
==================================================================================================
<S> <C> <C> <C> <C>
$435,648,574 $869,083,397 $199,414,339 $333,935,303 $214,004,358
82,485 27,024 -- 182,861 11,863
955,652 23,702,991 12,808,125 -- --
-- -- -- 1,919,496 36,208
1,386,015 1,232,985 332,693 2,051,144 2,570,690
402,372 1,100,563 80,241 183,905 99,941
38,485 -- 32,209 32,176 108,824
6,084 17,997 28,808 7,070 4,867
-------------------------------------------------------------------------------------------------
438,519,667 895,164,957 212,696,415 338,311,955 216,836,751
-------------------------------------------------------------------------------------------------
697,884 11,743,752 4,693,500 5,414,722 10,296,828
-- -- 1,563,117 -- --
-- -- -- 1,107,534 --
536,701 1,146,702 925,354 227,748 134,631
195,665 550,420 141,082 200,976 118,365
53,364 183,473 47,026 66,992 39,455
-- -- -- -- --
82,015 183,473 47,026 66,992 39,455
170,213 219,769 137,292 98,941 70,593
27,253 81,304 148,045 268,229 598,715
- -------------------------------------------------------------------------------------------------
1,763,095 14,108,893 7,702,442 7,452,134 11,298,042
- -------------------------------------------------------------------------------------------------
372,028,608 720,502,376 232,791,537 291,784,579 189,238,989
56,087 607,360 -- 227,683 (1,630,536)
6,905,437 52,620,923 (9,489,510) (7,972,571) (8,214,084)
-- -- -- (1,270,483) 348,762
57,766,440 107,325,405 (18,308,054) 52,254,492 27,191,260
-- -- -- (4,163,879) (1,395,682)
- -------------------------------------------------------------------------------------------------
$436,756,572 $881,056,064 $204,993,973 $330,859,821 $205,538,709
=================================================================================================
21,855,325 59,109,753 11,854,872 19,241,121 12,467,716
$19.98 $14.91 $17.29 $17.20 $16.49
=================================================================================================
$21.14 $15.78 $18.30 $18.20 $17.45
=================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
51
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Statements of Operations
For the Year Ended January 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Goldman Sachs Goldman Sachs
Balanced Select Equity
Fund Fund
================================
<S> <C> <C>
Investment income:
Dividends, net/(a)/ $ 404,637 $ 2,755,279
Interest 975,995 288,579
- --------------------------------------------------------------------------------------------------------------------------------
Total income 1,380,632 3,043,858
- --------------------------------------------------------------------------------------------------------------------------------
Expenses:
Investment advisory fees/(b)/ 148,493 679,759
Administration fees/(b)/ 44,548 339,880
Distribution fees/(c)/ 84,350 349,883
Authorized dealer service fees 64,145 182,881
Custodian fees 67,250 54,871
Transfer agent fees/(d)/ 72,067 115,253
Professional fees 58,620 58,601
Amortization of deferred organization expenses 13,431 30,846
Director fees 382 7,042
Other 10,353 105,063
- --------------------------------------------------------------------------------------------------------------------------------
Total expenses 563,639 1,924,079
Less--expenses reimbursable and fees waived by Goldman Sachs (266,652) (398,381)
- --------------------------------------------------------------------------------------------------------------------------------
Net expenses 296,987 1,525,698
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 1,083,645 1,518,160
- --------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment, option, futures and foreign currency
transactions:
Net realized gain (loss) from:
Investment transactions 1,697,147 4,964,974
Options transactions -- --
Futures transactions 18,740 (277,031)
Foreign currency related transactions -- --
Net change in unrealized gain (loss) on:
Investments 3,442,701 37,043,884
Options -- --
Futures 75,719 24,625
Translation of assets and liabilities denominated in foreign currencies -- --
- --------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investment, option, futures and foreign currency
transactions 5,234,307 41,756,452
- --------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $6,317,952 $43,274,612
================================================================================================================================
</TABLE>
/(a)/For the Balanced, Select Equity, Growth and Income, Capital Growth, Small
Cap Equity, International Equity and Asia Growth Funds, foreign taxes
withheld were $800, $38,480, $12,059, $14,511, $17,604, $521,564 and
$174,079, respectively.
/(b)/For the Select Equity Fund, the Advisor and Administrator both waived fees
of $101,038, respectively.
/(c)/For the year ended January 31, 1996, the distributor waived fees of
$74,247, $85,724, $794,841, $2,333,936, $727,210, $698,718 and $390,910 for
the Balanced, Select Equity, Growth and Income, Capital Growth, Small Cap
Equity, International Equity and Asia Growth Funds, respectively.
/(d)/For the Select Equity Fund, Class A shares and Institutional shares
incurred $103,682 and $11,571, respectively, of Transfer Agency fees.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
52
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Goldman Sachs Goldman Sachs Goldman Sachs Goldman Sachs Goldman Sachs
Growth & Income Capital Growth Small Cap Equity International Equity Asia Growth
Fund Fund Fund Fund Fund
=======================================================================================================
<S> <C> <C> <C> <C>
$ 7,890,451 $ 13,689,007 $ 958,805 $ 4,473,190 $ 3,748,089
1,227,990 5,032,176 1,428,163 491,270 665,670
- -------------------------------------------------------------------------------------------------------
9,118,441 18,721,183 2,386,968 4,964,460 4,413,759
- -------------------------------------------------------------------------------------------------------
1,748,649 7,001,809 2,181,629 2,096,154 1,172,731
476,904 2,333,936 727,210 698,718 390,910
986,255 3,104,424 999,563 929,746 505,066
603,426 1,563,448 454,857 470,027 276,754
61,543 124,521 47,141 463,834 353,745
524,671 549,844 254,292 129,313 192,097
48,019 93,674 57,827 80,117 83,293
19,112 13,155 18,690 17,555 31,625
6,066 32,591 3,149 2,739 2,857
130,712 205,183 87,579 49,606 152,109
- -------------------------------------------------------------------------------------------------------
4,605,357 15,022,585 4,831,937 4,937,809 3,161,187
(794,841) (2,333,936) (727,210) (698,718) (390,910)
- -------------------------------------------------------------------------------------------------------
3,810,516 12,688,649 4,104,727 4,239,091 2,770,277
- -------------------------------------------------------------------------------------------------------
5,307,925 6,032,534 (1,717,759) 725,369 1,643,482
- -------------------------------------------------------------------------------------------------------
18,738,323 188,770,202 (5,099,047) (417,744) (5,262,344)
76,997 20,437 65,448 (8,340,192) (225,907)
-- -- -- -- (278,144)
-- -- -- 21,213,851 416,433
58,158,436 53,559,848 30,594,034 62,221,183 42,480,420
(76,997) -- -- 7,613,807 --
-- -- -- -- --
-- -- -- (12,612,130) (1,710,833)
- -------------------------------------------------------------------------------------------------------
76,896,759 242,350,487 25,560,435 69,678,775 35,419,625
- -------------------------------------------------------------------------------------------------------
$82,204,684 $248,383,021 $23,842,676 $70,404,144 $37,063,107
=======================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
53
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended January 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Goldman Sachs Goldman Sachs
Balanced Select Equity
Fund Fund
==========================================
<S> <C> <C>
From operations:
Net investment income (loss) $ 1,083,645 $ 1,518,160
Net realized gain (loss) on investment, option and futures transactions 1,715,887 4,687,943
Net realized gain on foreign currency related transactions -- --
Net change in unrealized gain on investments, options and futures 3,518,420 37,068,509
Net change in unrealized loss on translation of assets and liabilities
denominated in foreign currencies -- --
- ------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 6,317,952 43,274,612
- ------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
From net investment income (991,655) (1,610,216)
In excess of net investment income -- --
From net realized gain on investment, option and futures transactions (962,754) (3,527,188)
- ------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (1,954,409) (5,137,404)
- ------------------------------------------------------------------------------------------------------------------------------
From share transactions:
Net proceeds from sales of shares 41,736,040 102,149,318
Reinvestment of dividends and distributions 1,802,563 4,880,575
Cost of shares repurchased (4,483,707) (46,260,132)
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from share transactions 39,054,896 60,769,761
- ------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) 43,418,439 98,906,969
Net assets:
Beginning of year 7,509,568 94,967,509
==============================================================================================================================
End of year $50,928,007 $193,874,478
==============================================================================================================================
Accumulated undistributed (distributions in excess of) net investment income $ 125,304 $ 86,854
==============================================================================================================================
Summary of share transactions:
<CAPTION>
Class A Institutional
----------- -------------
<S> <C> <C> <C>
Shares sold 2,578,356 2,479,285 3,220,915
Reinvestment of dividends and distributions 108,023 161,481 97,993
Shares repurchased (271,753) (2,578,247) (30,492)
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding 2,414,626 62,519 3,288,416
==============================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
54
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Goldman Sachs Goldman Sachs Goldman Sachs Goldman Sachs Goldman Sachs
Growth & Income Capital Growth Small Cap Equity International Equity Asia Growth
Fund Fund Fund Fund Fund
=======================================================================================================
<S> <C> <C> <C> <C>
$ 5,307,925 $ 6,032,534 $ (1,717,759) $ 725,369 $ 1,643,482
18,815,320 188,790,639 (5,033,599) (8,757,936) (5,766,395)
-- -- -- 21,213,851 416,433
58,081,439 53,559,848 30,594,034 69,834,990 42,480,420
-- -- -- (12,612,130) (1,710,833)
- -------------------------------------------------------------------------------------------------------
82,204,684 248,383,021 23,842,676 70,404,144 37,063,107
- -------------------------------------------------------------------------------------------------------
(5,300,032) (6,289,354) -- (9,491,864) (1,787,451)
-- -- -- -- (1,657,672)
(11,998,907) (139,713,660) (161,357) (14,089,155) --
- -------------------------------------------------------------------------------------------------------
(17,298,939) (146,003,014) (161,357) (23,581,019) (3,445,123)
- -------------------------------------------------------------------------------------------------------
199,623,973 144,529,476 56,891,181 85,900,104 88,560,430
16,219,024 131,979,456 149,801 21,651,092 2,951,847
(37,764,413) (359,937,680) (195,215,538) (98,600,969) (43,889,831)
- -------------------------------------------------------------------------------------------------------
178,078,584 (83,428,748) (138,174,556) 8,950,227 47,622,446
- -------------------------------------------------------------------------------------------------------
242,984,329 18,951,259 (114,493,237) 55,773,352 81,240,430
193,772,243 862,104,805 319,487,210 275,086,469 124,298,279
=======================================================================================================
$436,756,572 $881,056,064 $204,993,973 $330,859,821 $205,538,709
=======================================================================================================
$ 56,087 $ 607,360 $ -- $ 227,683 $ (1,630,536)
=======================================================================================================
10,766,604 9,130,715 3,285,739 5,082,572 5,830,049
848,870 9,145,811 8,585 1,286,112 197,978
(2,027,335) (22,215,374) (11,228,873) (6,067,690) (2,898,305)
- -------------------------------------------------------------------------------------------------------
9,588,139 (3,938,848) (7,934,549) 300,994 3,129,722
=======================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
55
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended January 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Goldman Sachs Goldman Sachs
Balanced Select Equity
Fund/(a)/ Fund (Class A)
=================================
<S> <C> <C>
From operations:
Net investment income (loss) $ 46,198 $ 1,229,019
Net realized gain (loss) on investment, option and futures transactions 135 3,907,236
Net realized loss on foreign currency related transactions -- --
Net change in unrealized gain (loss) on investments, options and futures 70,111 (6,127,762)
Net change in unrealized gain on translation of assets and liabilities
denominated in foreign currencies -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations 116,444 (991,507)
- ---------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
From net investment income (31,952) (1,194,733)
In excess of net investment income -- --
From net realized gain on investment, option and futures transactions -- (5,666,531)
In excess of net realized gains -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (31,952) (6,861,264)
- ---------------------------------------------------------------------------------------------------------------------------------
From share transactions:
Net proceeds from sales of shares 7,557,294 22,943,423
Reinvestment of dividends and distributions 29,834 6,328,837
Cost of shares repurchased (162,052) (19,220,744)
- ---------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from share transactions 7,425,076 10,051,516
- ---------------------------------------------------------------------------------------------------------------------------------
Additional paid-in-capital -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total increase 7,509,568 2,198,745
Net assets:
Beginning of year -- 92,768,764
- ---------------------------------------------------------------------------------------------------------------------------------
End of year $7,509,568 $ 94,967,509
=================================================================================================================================
Accumulated undistributed (distributions in excess of) net investment income $ 20,283 $ 148,064
=================================================================================================================================
Summary of share transactions:
Shares sold 537,644 1,499,807
Reinvestment of dividends and distributions 2,141 430,647
Shares repurchased (11,681) (1,250,288)
- ---------------------------------------------------------------------------------------------------------------------------------
Net increase in shares outstanding 528,104 680,166
=================================================================================================================================
</TABLE>
/(a)/For the period from October 12, 1994 (commencement of operations) to
January 31, 1995.
/(b)/For the period from July 8, 1994 (commencement of operations) to
January 31, 1995.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
56
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Goldman Sachs Goldman Sachs Goldman Sachs Goldman Sachs Goldman Sachs
Growth & Income Capital Growth Small Cap Equity International Equity Asia Growth
Fund Fund Fund Fund Fund/(b)/
=======================================================================================================
<S> <C> <C> <C> <C>
$ 1,435,147 $ 1,436,995 $ (1,802,810) $ 1,275,871 $ 1,009,860
3,170,626 56,963,691 10,050,260 (787,439) (2,447,689)
-- -- -- (15,347,388) (72,160)
(2,594,309) (98,546,227) (74,013,642) (56,248,493) (15,289,160)
-- -- -- 15,093,970 315,151
- -------------------------------------------------------------------------------------------------------
2,011,464 (40,145,541) (65,766,192) (56,013,479) (16,483,998)
- -------------------------------------------------------------------------------------------------------
(1,435,147) (647,525) -- -- (883,487)
(750,732) -- -- -- --
(3,710,152) (94,255,733) (13,272,809) (11,299,568) --
-- -- (4,550,015) -- --
- -------------------------------------------------------------------------------------------------------
(5,896,031) (94,903,258) (17,822,824) (11,299,568) (883,487)
- -------------------------------------------------------------------------------------------------------
179,853,719 220,153,475 198,396,818 145,195,062 148,278,779
5,475,966 85,073,760 16,371,394 9,972,049 793,314
(29,980,986) (141,755,523) (72,766,153) (81,858,604) (7,406,329)
- -------------------------------------------------------------------------------------------------------
155,348,699 163,471,712 142,002,059 73,308,507 141,665,764
- -------------------------------------------------------------------------------------------------------
779,879 -- -- -- --
- -------------------------------------------------------------------------------------------------------
152,244,011 28,422,913 58,413,043 5,995,460 124,298,279
41,528,232 833,681,892 261,074,167 269,091,009 --
- -------------------------------------------------------------------------------------------------------
$193,772,243 $862,104,805 $319,487,210 $275,086,469 $124,298,279
=======================================================================================================
$ 29,482 $ 851,025 -- $ (423,846) $ 143,969
=======================================================================================================
11,178,610 14,260,854 10,110,654 8,468,691 9,803,931
355,278 5,913,973 971,295 655,625 52,995
(1,896,509) (9,348,284) (3,925,959) (5,047,356) (518,932)
- -------------------------------------------------------------------------------------------------------
9,637,379 10,826,543 7,155,990 4,076,960 9,337,994
=======================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
57
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements
January 31, 1996
- --------------------------------------------------------------------------------
1. Organization
Goldman Sachs Equity Portfolios, Inc. (the "Company") is a Maryland corporation
registered under the Investment Company Act of 1940, as amended, as an open-end,
diversified management investment company. Included in this report are the
financial statements for the Goldman Sachs Balanced Fund ("Balanced Fund"),
Goldman Sachs Select Equity Fund ("Select Equity Fund"), Goldman Sachs Growth
and Income Fund ("Growth and Income Fund"), Goldman Sachs Capital Growth Fund
("Capital Growth Fund"), Goldman Sachs Small Cap Equity Fund ("Small Cap Equity
Fund"), Goldman Sachs International Equity Fund ("International Equity Fund")
and Goldman Sachs Asia Growth Fund ("Asia Growth Fund"), collectively, "the
Funds." As of January 31, 1996, the Select Equity Fund offers two classes of
shares - Class A and Institutional shares.
2. Significant Accounting Policies
The following is a summary of the significant accounting policies consistently
followed by the Company 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
Funds have the choice to receive either cash or stock are recognized as
investment income in an amount equal to the cash dividend. This amount is also
used as an estimate of the fair value of the stock received. Interest income is
determined on the basis of interest accrued, premium amortized and discount
earned. The Balanced Fund does not amortize premiums. In addition, net
realized capital gains on securities in certain countries gives rise to capital
gains taxes. It is the Funds' policy to accrue for estimated capital gains taxes
on certain foreign securities held by the Funds.
C. Mortgage Dollar Rolls
- -------------------------
The Balanced Fund may enter into mortgage "dollar rolls" in which the Fund sells
securities in the current month for delivery and simultaneously contracts with
the same counterparty to repurchase similar (same type, coupon and maturity) but
not identical securities on a specified future date. The Fund loses the right
to receive principal and interest paid on the securities sold. However, the
Fund benefits to the extent of any price received for the securities sold and
the lower forward price for the future purchase (often referred to as the
"drop") or fee income plus the interest earned on the cash proceeds of the
securities sold until the settlement date of the forward purchase. The Fund
will hold and maintain in a segregated account, until the settlement date, cash
or liquid, high grade debt securities in an amount equal to
- --------------------------------------------------------------------------------
58
<PAGE>
- --------------------------------------------------------------------------------
the forward purchase price. For financial reporting and tax reporting purposes,
the Fund treats mortgage dollar rolls as two separate transactions; one
involving the purchase of a security and a separate transaction involving a
sale.
D. Foreign Currency Translations
- ---------------------------------
The books and records of the Company are maintained in U.S. dollars. Amounts
denominated in foreign currencies are translated into U.S. dollars on the
following basis:
(i) investment valuations, other assets and liabilities initially expressed in
foreign currencies are converted each business day into U.S. dollars based on
current exchange rates; (ii) purchases and sales of foreign investments, income
and expenses are converted into U.S. dollars based on currency exchange rates
prevailing on the respective dates of such transactions.
Net realized and unrealized gain (loss) on foreign currency transactions will
represent: (i) foreign exchange gains and losses from the sale and holdings of
foreign currencies and investments; (ii) gains and losses between trade date and
settlement date on investment securities transactions and forward exchange
contracts; and (iii) gains and losses from the difference between amounts of
dividends and interest recorded and the amounts actually received.
E. Forward Foreign Currency Exchange Contracts
- -----------------------------------------------
Certain of the Funds are authorized to enter into forward foreign currency
exchange contracts for the purchase of a specific foreign currency at a fixed
price on a future date as a hedge or cross-hedge against either specific
transactions or portfolio positions. The International Equity and Asia Growth
Funds may enter into such contracts to seek to increase total return. The
aggregate principal amounts of the contracts for which delivery is anticipated
are reflected in the Funds' accounts, while the aggregate principal amounts are
reflected net in the accompanying Statements of Assets and Liabilities. All
commitments are "marked-to-market" daily at the applicable translation rates and
any resulting unrealized gains or losses are recorded in the funds' financial
statements. The Funds record realized gains or losses at the time the forward
contract is offset by entry into a closing transaction or extinguished by
delivery of the currency. Risks may arise upon entering these contracts from
the potential inability of counterparties to meet the terms of their contracts
and from unanticipated movements in the value of a foreign currency relative to
the U.S. dollar.
F. Federal Taxes
- -----------------
It is the Funds' policy to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute each year
substantially all of their investment company taxable income and capital gains
to their shareholders. Accordingly, no federal tax provisions are required.
The characterization of distributions to shareholders for financial reporting
purposes is determined in accordance with income tax rules. Therefore, the
source of the Funds' distributions may be shown in the accompanying financial
statements as either from or in excess of net investment income or net realized
gain on investment transactions, or from capital, depending on the type of
book/tax differences that may exist as well as timing differences associated
with having different book and tax year ends.
Asia Growth Fund had approximately $184,000 and $5,623,000 at October 31, 1995
(the Fund's tax year end) of capital loss carryforward expiring in 2002 and
2003, respectively, for federal tax purposes. The Small Cap Equity Fund had
approximately $2,438,000 of capital loss carryforward at January 31, 1996 (the
Fund's tax year end) expiring in 2004. These amounts are available to be
carried forward to offset future capital gains to the extent permitted by
applicable laws or regulations.
G. Deferred Organization Expenses
- ----------------------------------
Organization-related costs are being amortized on a straight-line basis over a
period of five years.
- --------------------------------------------------------------------------------
59
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
January 31, 1996
- --------------------------------------------------------------------------------
H. 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.
For the Select Equity Fund, shareholders of Class A shares bear all expenses
and fees relating to the distribution and authorized dealer service plans as
well as other expenses which are directly attributable to such shares. The Class
A and Institutional shareholders separately bear their respective class-specific
transfer agency fees.
I. Option Accounting Principles
- --------------------------------
When certain of the Funds write call or put options, an amount equal to the
premium received is recorded as an asset and as an equivalent liability. The
amount of the liability is subsequently marked-to-market to reflect the current
market value of the option written. When a written option expires on its
stipulated expiration date or the funds enter into a closing purchase
transaction, the funds realize a gain or loss without regard to any unrealized
gain or loss on the underlying security, and the liability related to such
option is extinguished. When a written call option is exercised, the funds
realize a gain or loss from the sale of the underlying security, and the
proceeds of the sale are increased by the premium originally received. When a
written put option is exercised, the amount of the premium originally received
will reduce the cost of the security which the funds purchase upon exercise.
There is a risk of loss from a change in value of such options which may exceed
the related premiums received.
Upon the purchase of a call option or a protective put option by the Funds
the premium paid is recorded as an investment and subsequently marked-to-market
to reflect the current market value of the option. If an option which the Funds
have purchased expires on the stipulated expiration date, the funds will realize
a loss in the amount of the cost of the option. If the funds enter into a
closing sale transaction, the funds will realize a gain or loss, depending on
whether the sale proceeds from the closing sale transaction are greater or less
than the cost of the option. If the Funds exercise a purchased put option, the
funds will realize a gain or loss from the sale of the underlying security, and
the proceeds from such sale will be decreased by the premium originally paid. If
the Funds exercise a purchased call option, the cost of the security which the
funds purchase upon exercise will be increased by the premium originally paid.
J. Futures Contracts
- ---------------------
The Funds may enter into futures transactions in order to hedge against changes
in interest rates, securities prices or currency exchange rates or to seek to
increase total return. The Select Equity Fund may enter into such transactions
only with respect to the S&P 500 Index. A Fund will engage in futures
transactions only for bona fide hedging purposes as defined in regulations of
the CFTC or (except with respect to transactions by the Balanced, Growth and
Income, Select Equity, Capital Growth and Small Cap Equity Funds, in futures on
foreign currencies) to seek to increase total return to the extent permitted by
such regulations. The use of futures contracts involve, to varying degrees,
elements of market risk which may exceed the amounts recognized in the
Statements of Assets and Liabilities.
Upon entering into a futures contract, the Funds are required to deposit with
a broker an amount of cash or securities equal to the minimum "initial margin"
requirement of the futures exchange on which the contract is traded. Subsequent
payments ("variation margin") are made or received by the Funds each day,
dependent on the daily fluctuations in the value of the contract, and are
recorded for financial reporting purposes as unrealized gains or losses by the
Funds. When entering into a closing transaction, for book purposes, the Funds
will realize a gain or loss equal to the difference between the value of the
futures contract to sell and the futures contract to buy. Futures contracts are
valued at the most recent price, unless such price does not reflect the fair
market value of the contract, in which case the position will be valued
- --------------------------------------------------------------------------------
60
<PAGE>
- --------------------------------------------------------------------------------
using methods approved by the Board of Directors of the Company.
Certain risks may arise upon entering into futures contracts. The predominant
risk is that the changes in the value of the futures contract may not directly
correlate with changes in the value of the underlying securities. This risk may
decrease the effectiveness of the Funds' hedging strategies and may also result
in a loss to the Funds.
3. Agreements
- --------------
Goldman Sachs Asset Management ("GSAM"), a separate operating division of
Goldman, Sachs & Co. ("Goldman Sachs"), acts as investment adviser to the
Balanced, Growth and Income, Small Cap Equity and International Equity Funds;
Goldman Sachs Funds Management, L.P. ("GSFM"), an affiliate of Goldman Sachs,
acts as investment adviser to the Select Equity and Capital Growth Funds; and
Goldman Sachs Asset Management International ("GSAM International") acts as
investment adviser to the Asia Growth Fund. GSAM International also acts as
subadviser to the International Equity Fund. Under the Investment Advisory and
Subadvisory Agreements, GSAM, GSFM and GSAM International, subject to the
general supervision of the Company's Board of Directors, manage the Company's
portfolios. With regard to the Asia Growth Fund, GSAM International relies on
its Singapore affiliate, Goldman Sachs (Singapore) Limited, for portfolio
decisions and management. As compensation for the services rendered under the
Investment Advisory Agreements and the assumption of the expenses related
thereto, GSAM is entitled to a fee, computed daily and payable monthly, at an
annual rate equal to .50%, .55%, .75% and .25% of the average daily net assets
of the Balanced, Growth and Income, Small Cap Equity and International Equity
Funds, respectively. GSFM is entitled to a fee of .50% and .75% of the average
daily net assets of the Select Equity and Capital Growth Funds, respectively.
For the year ended January 31, 1996, for the Select Equity Fund, GSFM waived a
portion of its advisory fee. GSFM may discontinue or modify such limitation in
the future at its discretion. GSAM International is entitled to an advisory fee
for the Asia Growth Fund and a subadvisory fee for the International Equity Fund
of .75% and .50% of the average daily net assets for those funds, respectively.
GSAM also acts as the Funds' administrator pursuant to Administration
Agreements. Under these Administration Agreements, GSAM administers the Funds'
business affairs, including providing facilities. As compensation for the
services rendered pursuant to the Administration Agreements, GSAM is entitled to
a fee of .15% of the average daily net assets of the Balanced and Growth and
Income Funds, and .25% of the average daily net assets of the Select Equity,
Capital Growth, Small Cap Equity, International Equity and Asia Growth Funds.
For the year ended January 31, 1996, for the Select Equity Fund, GSAM waived a
portion of its administration fee. GSAM may discontinue or modify such
limitation in the future at its discretion.
Goldman Sachs has voluntarily agreed to reduce or limit certain "Other
Expenses" for the Balanced, Select Equity, Growth and Income and Asia Growth
Funds (excluding advisory, administration, distribution and authorized dealer
service fees and litigation, indemnification, taxes, interest, brokerage
commissions and extraordinary expenses and with respect to the Select Equity
Fund, transfer agent fees) until further notice to the extent such expenses
exceed .10%, .06%, .30% and .65% of the average daily net assets of the funds,
respectively. The amount reimbursable to the Select Equity Fund at January 31,
1996 was approximately $33,000 and is reflected in "Other Assets" in the
accompanying Statements of Assets and Liabilities.
Goldman Sachs serves as the Distributor of shares of the Funds pursuant to
Distribution Agreements. Goldman Sachs may receive a portion of the sales load
imposed on the sale of fund shares and has advised the Company that it retained
approximately $28,000, $108,000, $771,000, $523,000, $202,000, $211,000 and
$507,000 during the year ended January 31, 1996 for the Balanced, Select Equity
Class A, Growth and Income, Capital Growth,
- --------------------------------------------------------------------------------
61
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
January 31, 1996
- --------------------------------------------------------------------------------
Small Cap Equity, International Equity and Asia Growth Funds, respectively.
The Company, on behalf of each Fund, has adopted a Distribution Plan (the
"Distribution Plan") pursuant to Rule 12b-1. Under the Distribution Plan,
Goldman Sachs is entitled to a quarterly fee from each Fund for distribution
services equal, on an annual basis, to .25% of a Fund's average daily net assets
(or, in the case of Select Equity Fund, the average daily net assets
attributable to Class A shares). For the year ended January 31, 1996, Goldman
Sachs has voluntarily agreed to waive a portion of such fee for each Fund.
Effective June 1, 1995, each Fund's Distribution Plan was amended to reduce the
contractual fee from .50% to .25% of average daily net assets and to eliminate
the provision of certain services under the Distribution Plan which are
currently provided under the Authorized Dealer Service Plan.
Effective June 1, 1995, the Company, on behalf of each Fund, adopted an
Authorized Dealer Service Plan (the "Service Plan") pursuant to which Goldman
Sachs and Authorized Dealers are compensated for providing personal and account
maintenance services. Each Fund pays a fee under its Service Plan equal to an
annual basis of .25% of its average daily net assets (or, in the case of Select
Equity Fund, the average daily net assets attributable to Class A shares).
Goldman Sachs also serves as the Transfer Agent of the Funds for a fee.
4. Portfolio Securities Transactions
Purchases and proceeds of sales or maturities of securities (excluding short-
term investments, futures and options written) for the year ended January 31,
1996, were as follows:
<TABLE>
<CAPTION>
Fund Purchases Sales or Maturities
- ---- -------------- -------------------
<S> <C> <C>
Balanced $ 89,305,633 $ 54,456,475
Select Equity 102,720,929 51,983,979
Growth and Income 320,155,385 172,612,731
Capital Growth 542,809,663 749,703,704
Small Cap Equity 159,198,180 291,510,540
International Equity 185,822,152 209,935,006
Asia Growth 183,192,199 130,716,523
</TABLE>
Included in the above amounts were purchases and proceeds of sales or
maturities of governmental securities (excluding short-term investment and
options) for the Balanced Fund in the amounts of $47,737,263 and $41,994,556,
respectively.
For the year ended January 31, 1996, written option transactions in the
Growth and Income Fund were as follows:
<TABLE>
<CAPTION>
Call Options
------------------------------------------
Number of Premiums
Options Written Contracts Received
- -------------------------------------------------------------------------------
<S> <C> <C>
Balance outstanding,
beginning of year 200 $ 76,997
Options written -- --
Options expired (200) (76,997)
Options exercised -- --
- -------------------------------------------------------------------------------
Balance outstanding,
end of year -- $ --
- -------------------------------------------------------------------------------
</TABLE>
For the year ended January 31, 1996, written option transactions in the
Capital Growth Fund were as follow:
<TABLE>
<CAPTION>
Call Options
------------------------------------------
Number of Premiums
Options Written Contracts Received
- -------------------------------------------------------------------------------
<S> <C> <C>
Balance outstanding,
beginning of year -- $ --
Options written 8,850 1,758,487
Options expired (2,626) (752,364)
Options repurchased (6,224) (1,006,123)
- -------------------------------------------------------------------------------
Balance outstanding,
end of year -- $ --
- -------------------------------------------------------------------------------
</TABLE>
For the year ended January 31, 1996, written option transactions in the Small
Cap Equity Fund were as follows:
<TABLE>
<CAPTION>
Call Options
------------------------------------------
Number of Premiums
Options Written Contracts Received
- -------------------------------------------------------------------------------
<S> <C> <C>
Balance outstanding,
beginning of year -- $
Options written 900 65,448
Options expired (900) (65,448)
Options exercised -- --
- -------------------------------------------------------------------------------
Balance outstanding,
end of year -- $
- -------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
62
<PAGE>
- --------------------------------------------------------------------------------
For the year ended January 31, 1996, purchased option transactions in the
International Equity Fund were as follows:
<TABLE>
<CAPTION>
Call Options Purchased Cost
- --------------------------------------------------------------------------------
<S> <C>
Balance outstanding, beginning of year $ 8,340,192
Options purchased --
Options expired (8,340,192)
Options sold $ --
- --------------------------------------------------------------------------------
Value at end of year $ --
================================================================================
</TABLE>
For the year ended January 31, 1996, written and purchased option
transactions in the Asia Growth Fund were as follows:
<TABLE>
<CAPTION>
Put Options
--------------------------------
Number of Premiums
Options Written Contracts Received
- --------------------------------------------------------------------------------
<S> <C> <C>
Balance outstanding, beginning of year 12,700 $ 180,767
Options written -- --
Options expired (12,700) (180,767)
Options exercised -- --
- --------------------------------------------------------------------------------
Balance outstanding, end of year -- $ --
================================================================================
</TABLE>
Call Options Purchased Cost
- --------------------------------------------------------------------------------
Balance outstanding, beginning of year $ --
Options purchased 495,606
Options expired --
Options sold (495,606)
- --------------------------------------------------------------------------------
Value at end of year $ --
================================================================================
Certain risks arise related to call and put options from the possible
inability of counterparties to meet terms of their contracts.
At January 31, 1996, the International Equity Fund had the following
outstanding forward foreign currency exchange contracts:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Foreign Currency Value on Unrealized
Sale Contracts Settlement Date Current Value Gain (Loss)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Belgian Franc
expiring 9/9/96 $ 5,263,357 $ 5,310,094 $ (46,737)
Deutschemark
expiring 3/4/96 30,900,000 30,492,745 407,255
Hong Kong Dollar
expiring 2/7/96 13,737,848 13,742,301 (4,453)
Japanese Yen
expiring 4/17/96 30,840,446 30,278,095 562,351
British Pound Sterling
expiring 2/12/96 12,440,309 12,190,130 250,179
expiring 4/4/96 3,796,394 3,741,279 55,115
Swedish Krona
expiring 2/7/96 12,852,992 12,389,934 463,058
- --------------------------------------------------------------------------------
Total Foreign Currency
Sale Contracts $109,831,346 $108,144,578 $1,686,768
================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
Foreign Currency Value on Unrealized
Purchase Contracts Settlement Date Current Value Gain (Loss)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Deutschemark
expiring 2/7/96 $ 12,762,995 $ 12,155,628 $ (607,367)
expiring 4/4/96 3,703,390 3,587,995 (115,395)
expiring 9/9/96 5,262,483 5,289,903 27,420
British Pound Sterling
expiring 2/1/96 1,257,254 1,261,225 3,971
Japanese Yen
expiring 2/1/96 198,390 198,909 519
Singapore Dollar
expiring 2/2/96 359,737 359,737 0
Thailand Baht
expiring 2/2/96 205,650 205,569 (81)
- --------------------------------------------------------------------------------
Total Foreign Currency
Purchase Contracts $ 23,749,899 $ 23,058,966 $ (690,933)
================================================================================
</TABLE>
At January 31, 1996, the Asia Growth Fund had the following outstanding
forward foreign currency exchange contract:
- --------------------------------------------------------------------------------
63
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
January 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Foreign Currency Value on Unrealized
Sale Contract Settlement Date Current Value Gain
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Malaysian Ringgit
expiring 4/22/96 $ 9,320,000 $ 9,283,792 $ 36,208
- --------------------------------------------------------------------------------
</TABLE>
The contractual amounts of forward foreign currency exchange contracts do
not necessarily represent the amounts potentially subject to risk. The
measurement of the risks associated with these instruments is meaningful only
when all related and offsetting transactions are considered. At January 31,
1996, the International Equity and Asia Growth Funds had sufficient cash and
securities to cover any commitments under these contracts.
The International Equity Fund has recorded a "Receivable for forward foreign
currency exchange contracts" and "Payable for forward foreign currency exchange
contracts" resulting from open and closed but not settled forward foreign
currency exchange contracts of $1,919,496 and $1,107,534, respectively, in the
accompanying Statements of Assets and Liabilities. Included in these amounts are
$149,628 and $333,501, respectively, related to forward contracts closed but not
settled as of January 31, 1996. The Asia Growth Fund has recorded a "Receivable
for forward foreign currency exchange contracts" resulting from the open forward
foreign currency exchange contract of $36,208 in the accompanying Statements of
Assets and Liabilities.
For the year ended January 31, 1996, Goldman Sachs earned approximately
$7,000, $71,000, $285,000, $73,000, $14,000 and $49,000 of brokerage commissions
from portfolio transactions executed on behalf of the Balanced, Growth and
Income, Capital Growth, Small Cap Equity, International Equity and Asia Growth
Funds, respectively.
5. Line of Credit Facility
The Funds participate in a $100,000,000 uncommitted, unsecured revolving line of
credit facility. In addition, the Funds, except the Select Equity Fund,
participate in a $50,000,000 committed, unsecured revolving line of credit
facility. Both facilities are to be used solely for temporary or emergency
purposes. Under the most restrictive arrangement, each Fund must own securities
having a market value in excess of 300% of the total bank borrowings. The
interest rate on the borrowings is based on the Federal Funds rate. The
committed facility also requires a fee to be paid based on the amount of the
commitment which has not been utilized. During the year ended January 31, 1996,
the Funds did not have any borrowings under these facilities.
6. Certain Reclassifications
In accordance with Statement of Position 93-2, the Balanced, Select Equity,
Growth and Income, Capital Growth, International Equity and Asia Growth Funds
have reclassified $13,031, $30,846, $18,712, $13,155, $17,555 and $31,625,
respectively, from paid-in capital to accumulated undistributed net investment
income. Additionally, the Small Cap Equity Fund has reclassified $1,717,759 from
paid-in capital to accumulated net investment loss and $255,461 from paid in
capital to accumulated undistributed net realized loss. The International Equity
Fund has reclassified $9,400,469 from accumulated net realized foreign currency
loss to undistributed net investment income and $25,370,939 from undistributed
net realized loss. The Asia Growth Fund has reclassified $4,489 from
undistributed net investment income to accumulated net realized foreign currency
gain. These reclassifications have no impact on the net asset value of the Funds
and are designed to present the Funds' capital accounts on a tax basis.
7. 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 Company's
- --------------------------------------------------------------------------------
64
<PAGE>
- --------------------------------------------------------------------------------
custodian, or at sub-custodians. Goldman Sachs monitors the market value of the
underlying securities by pricing them daily.
8. Joint Repurchase Agreement Account
The Funds, together with other registered investment companies having advisory
agreements with GSAM or GSFM, transfer uninvested cash balances into joint
accounts, the daily aggregate balance of which is invested in one or more
repurchase agreements. The underlying securities for the repurchase agreements
are U.S. Treasury and agency obligations. At January 31, 1996, the Balanced,
Select Equity, Growth and Income and Capital Growth Funds had a 1.43%, 1.39%,
5.61%, and 4.28%, respectively, undivided interest in the repurchase agreements
in the following joint account which equaled $7,000,000, $6,800,000, $27,400,000
and $20,900,000, respectively, 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:
<TABLE>
<CAPTION>
Principal Interest Maturity Amortized
Amount Rate Date Cost
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Lehman Government Securities, dated 01/31/96, repurchase price $250,041,458
(U.S. Treasury Notes: $254,879,914, 4.63%-8.88%,
02/15/96-08/15/02)
$250,000,000 5.97% 02/01/96 $ 250,000,000
Salomon Brothers, Inc., dated 01/31/96, repurchase price
$238,439,402 (U.S. Treasury Interest-Only Strips: $151,540,101,
05/15/97-11/15/02; U.S. Treasury Principal-Only Strips:
$91,713,529, 8.13%-9.13%, 02/15/98-11/15/00)
238,400,000 5.95% 02/01/96 238,400,000
- --------------------------------------------------------------------------------
Total Joint Repurchase Agreement Account $488,400,000
================================================================================
</TABLE>
9. Transactions With Affiliated Companies
A Fund is considered to be invested in an affiliated company if that Fund owns
greater than five percent of the outstanding voting securities of such company.
Transactions during the year with companies which are considered affiliates of
Small Cap Equity as of January 31, 1996 are as follows (dollar amounts in
thousands):
<TABLE>
<CAPTION>
Purchase Sales Dividend Market
Affiliate Name Cost Proceeds Income Value
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
American Safety Razor Co. $ 267 $ 1,918 $ -- $ 6,540
J. Baker, Inc. 3,565 -- 53 4,388
Black Box Corp. 569 1,115 -- 14,892
Brookstone, Inc. 287 379 -- 7,032
Congoleum Corp. 6,405 1,468 -- 4,231
Finlay Enterprises, Inc. 5,108 110 -- 3,930
Hollinger International Inc. 457 1,105 96 9,418
International Post Ltd. 135 157 -- 4,059
Morningstar Group, Inc. 359 5,551 -- 7,726
North American Watch Corp. 502 2,719 70 13,442
Opinion Research Corp. -- -- -- 3,168
Quantum Restaurant Group, Inc. 290 1,393 -- 7,835
- ----------------------------------------------------------------------------------------------------
Totals $17,944 $ 15,915 $ 219 $ 86,661
=====================================================================================================
</TABLE>
10. Summary of Share Transactions
Share activity for the year ended January 31, 1996 is as follows:
<TABLE>
<CAPTION>
Select Equity Fund Class A Institutional
================================================================================
<S> <C> <C>
Shares sold $ 44,569,920 $ 57,579,397
Reinvestments of dividends
and distributions 3,032,597 1,847,978
Shares repurchased (45,692,944) (567,188)
-----------------------------------------
1,909,573 58,860,187
-----------------------------------------
Distributions from:
Net investment income 925,006 685,210
Net realized gain 2,363,976 1,163,212
-----------------------------------------
3,288,982 1,848,422
-----------------------------------------
</TABLE>
11. Other Matters
On August 1, 1995, the Capital Growth Fund, in an interportfolio trade,
transferred securities valued at approximately $105,460,000 to the Goldman Sachs
Mid-Cap Equity Fund related to shareholder exchanges into such fund.
- --------------------------------------------------------------------------------
65
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from Distributions to
investment operations shareholders
------------------------------------------ ------------------------------------------
Net realized From
and unrealized net realized
Net asset gain on Total Income From gain on
value, Net investments, from net investment Total
beginning investment options and investment investment and futures distributions to
of period income futures operations income transactions shareholders
===================================================================================================
BALANCED FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended January 31,
- ------------------------------
1996............................. $14.22 $0.51 $3.43 $3.94 ($0.50) ($0.35) ($0.85)
For the Period Ended January 31,
- --------------------------------
1995 /(c)/....................... 14.18 0.10 0.02 0.12 (0.08) -- (0.08)
<CAPTION>
Ratio of Ratio of net Net
Net asset net investment assets at
Net increase value, expenses to income to Portfolio end of
in net end of Total average net average net turnover period
asset value period return/(a)/ assets assets rate (in 000s)
========================================================================================
BALANCED FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended January 31,
- ------------------------------
1996...................................... $3.09 $17.31 28.10% 1.00% 3.65% 197.10%/(a)/ $50,928
For the Period Ended January 31,
- --------------------------------
1995 /(c)/................................ 0.04 14.22 0.87/(b)/ 1.00/(d)/ 3.39/(d)/ 14.71/(b)/ 7,510
<CAPTION>
Ratio assuming no
voluntary waiver of fees
or expense limitations
------------------------------
Ratio of net
Ratio of investment
expenses income (loss)
to average to average
net assets net assets
==============================
- ----------------------------------------------------------------
<S> <C> <C>
For the Year Ended January 31,%
- ------------------------------
1996............................. 1.90% 2.75%
For the Period Ended January 31,
- --------------------------------
1995 /(c)/....................... 8.29/(d)/ (3.90)/(d)/
- ---------------------------------------
</TABLE>
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no sales
charges. Total return would be reduced if a sales charge were taken into
account.
/(b)/Not annualized.
/(c)/For the period from October 12, 1994 (commencement of operations) to
January 31, 1995.
/(d)/Annualized.
/(e)/Includes the effect of mortgage dollar roll transactions.
- --------------------------------------------------------------------------------
The accompanying notes are an intergral part of these financial statements.
66
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from Distributions to
investment operations shareholders
------------------------------------------ ------------------------------------------
Net realized From
and unrealized net realized
Net asset gain (loss) on Total Income From gain on
value, Net investments, (loss) from net investment Total
beginning investment options and investment investment and futures distributions to
of period income futures operations income transactions shareholders
===================================================================================================
SELECT EQUITY FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended January 31,
- ------------------------------
1996-Class A Shares.............. $14.61 $0.19 $5.43 $5.62 ($0.16) ($0.41) ($0.57)
1996-Institutional Shares/(d)/... 16.97 0.16 3.23 3.39 (0.24) (0.41) (0.65)
1995-Class A Shares.............. 15.93 0.20 (0.38) (0.18) (0.20) (0.94) (1.14)
1994-Class A Shares.............. 15.46 0.17 2.08 2.25 (0.17) (1.61) (1.78)
1993-Class A Sahres.............. 15.05 0.22 0.41 0.63 (0.22) -- (0.22)
For the Period Ended January 31,
- --------------------------------
1992-Class A Shares/(e)/......... 14.17 0.11 0.88 0.99 (0.11) -- (0.11)
<CAPTION>
Ratio of Ratio of net Net
Net increase Net asset net investment assets at
(decrease) value, expenses to Income to Portfolio end of
in net end of Total average net average net turnover period
asset value period return/(a)/ assets assets rate (in 000s)
========================================================================================
SELECT EQUITY FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended January 31,
- ------------------------------
1996-Class A Shares........................... $5.05 $19.66 38.63% 1.25% 1.01% 39.35% $129,045
1996-Institutional Shares/(d)/................ 2.74 19.71 20.14/(b)/ 0.65/(e)/ 1.49/(c)/ 39.35/(b)/ 64,829
1995-Class A Shares........................... (1.32) 14.61 (1.10) 1.38 1.33 56.18 94,968
1994-Class A Shares........................... 0.47 15.93 15.12 1.42 0.92 87.73 92,769
1993-Class A Shares........................... 0.41 15.46 4.30 1.28 1.30 144.93 117,757
For the Period Ended January 31,
- --------------------------------
1992-Class A Shares/(e)/....................... 0.88 15.05 7.01/(b)/ 1.57/(c)/ 1.24/(c)/ 135.02/(c)/ 151,142
<CAPTION>
Ratio assuming no
voluntary waiver of fees
or expense limitations
------------------------------
Ratio of net
Ratio of investment
expenses income
to average to average
net assets net assets
==============================
- ----------------------------------------------------------------
<S> <C> <C>
For the Year Ended January 31,
- ------------------------------
1996-Class A Shares............. 1.55% 0.71%
1996-Institutional Shares/(d)/.. 0.96/(c)/ 1.18/(c)/
1995-Class A Shares............. 1.63 1.08
1994-Class A Shares............. 1.67 0.67
1993-Class A Shares............. 1.53 1.05
For the Period Ended January 31,
- --------------------------------
1992-Class A Shares/(e)/......... 1.82/(c)/ 0.99/(c)/
- ---------------------------------------
</TABLE>
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no sales
charges. Total return would be reduced if a sales charge were taken into
account.
/(b)/Not annualized.
/(c)/Annualized.
/(d)/Institutional shares commenced operations on June 15, 1995.
/(e)/For the period from May 24, 1991 (commencement of operations) to January
31, 1992.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
67
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from Distributions to
investment operations shareholders
------------------------------------------ ------------------------------------------
From
Net realized Total net realized
Net asset and unrealized income From gain on In excess
value, Net gain on from net investment of net
beginning investment investments, investment investment and option investment
of period income and options operations income transactions income
===================================================================================================
GROWTH AND INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended January 31,
- ------------------------------
1996............................. $15.80 $0.33 $4.75 $5.08 $(0.30) $(0.60) $ --
1995............................. 15.79 0.20/(b)/ 0.30/(b)/ 0.50 (0.20) (0.33) (0.07)
For the Period Ended January 31,
- --------------------------------
1994 /(c)/....................... 14.18 0.15 1.68 1.83 (0.15) (0.06) (0.01)
<CAPTION>
Ratio of Ratio of net
Net asset net investment
Total Additional Net increase value, expenses to income to Portfolio
distributions to paid-in in net end of Total average net average net turnover
shareholders capital asset value period return/(a)/ assets assets rate
==========================================================================================================
GROWTH AND INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended January 31,
- ------------------------------
1996.......................... $(0.90) $ -- $4.18 $19.98 32.45% 1.20% 1.67% 57.93%
1995.......................... (0.60) 0.11/(b)/ 0.01 15.80 3.97 1.25 1.28 71.80
For the Period Ended January 31,
- --------------------------------
1994 /(c)/.................... (0.22) -- 1.61 15.79 13.08/(d)/ 1.25/(e)/ 1.23(e) 102.23/(d)/
<CAPTION>
Ratio assuming no
voluntary waiver of fees
or expense limitations
------------------------------
Net Ratio of net
assets at Ratio of investment
end of expenses income (loss)
period to average to average
(in 000s) net assets net assets
===========================================
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
For the Year Ended January 31,
- ------------------------------
1996............................. $436,757 1.45% 1.42%
1995............................. 193,772 1.58 0.95
For the Period Ended January 31,
- --------------------------------
1994 /(c)/....................... 41,528 3.24/(e)/ (0.76)/(e)/
- ----------------------------------
</TABLE>
/(a)/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no
sales charges. Total return would be reduced if a sales charge were taken
into account.
/(b)/ Calculated based on the average shares outstanding methodology.
/(c)/ For the period from February 5, 1993 (commencement of operations) to
January 31, 1994.
/(d)/ Not annualized.
/(e)/ Annualized.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
68
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment
operations Distributions to shareholders
---------------------------------------------- -------------------------------------------
Net realized
and unrealized From net
Net asset gain (loss) on Total income From realized gain In excess
value, Net investments, (loss) from net on investments, of net
beginning investment options and investment investment options investment
of period income futures operations income and futures income
===================================================================================================
CAPITAL GROWTH FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended January 31,
- ------------------------------
1996............................. $13.67 $0.12 $3.93 $4.05 ($0.12) ($2.69) $ --
1995............................. 15.96 0.03 (0.69) (0.66) (0.01) (1.62) --
1994............................. 14.64 0.02 2.40 2.42 (0.01) (1.07) (0.02)
1993............................. 13.65 0.06 2.28 2.34 (0.07) (1.28) --
1992............................. 11.10 0.28 2.90 3.18 (0.31) (0.32) --
For the Period Ended January 31,
- --------------------------------
1991/(b)/........................ 11.34 0.34 (0.27) 0.07 (0.31) -- --
<CAPTION>
Ratio of Ratio of net Net
Net increase Net asset net investment assets at
Total (decrease) value, expenses to Income to Portfolio end of
distributions in net end of Total average net average net turnover period
in shareholders asset value period return/(a)/ assets assets rate (in 000s)
=========================================================================================================
CAPITAL GROWTH FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended January 31,
- ------------------------------
1996.......................... $(2.81) $1.24 $14.91 30.45% 1.36% 0.65% 63.90% $881,056
1995.......................... (1.63) (2.29) 13.67 (4.38) 1.38 0.16 38.36 862,105
1994.......................... (1.10) 1.32 15.96 16.89 1.38 0.13 36.12 883,682
1993.......................... (1.35) 0.99 14.64 18.01 1.41 0.42 58.93 665,976
1992.......................... (0.63) 2.55 13.65 29.31 1.53 2.09 48.93 500,307
For the Period Ended January 31,
- --------------------------------
1991.......................... (0.31) (0.24) 11.10 0.84/(c)/ 1.27/(c)/ 3.24/(c)/ 35.63/(c)/ 437,533
<CAPTION>
Ratios assuming no
voluntary waiver of fees
------------------------------
Ratio of net
Ratio of investment
expenses income (loss)
to average to average
net assets net assets
==============================
- ----------------------------------------------------------------
<S> <C> <C>
For the Year Ended January 31,
- ------------------------------
1996............................ 1.61% 0.40%
1995............................ 1.63 (0.09)
1994............................ 1.63 (0.12)
1993............................ 1.66 0.17
1992............................ 1.78 1.84
For the Period Ended January 31,
- --------------------------------
1991/(b)/........................ 1.47/(c)/ 3.04/(c)/
- ---------------------------------------
</TABLE>
(a) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no sales
charges. Total return would be reduced if a sales charge were taken into
account.
(b) For the period from April 20, 1990 (commencement of operations) to January
31, 1991.
(c) Not annualized.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
69
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from Distributions to
investment operations shareholders
------------------------------------------ ------------------------------------------
In excess of
Net realized From net realized
and unrealized realized gain gains on
Net asset gain (loss) on Total Income From on investment, investment,
value, Net investments, (loss) from net option option and
beginning investment options and investment investment and futures futures
of period income (loss) futures operations income transactions transactions
===================================================================================================
SMALL CAP EQUITY FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended January 31,
- ------------------------------
1996 ........................... $16.14 ($0.23) $ 1.39 $ 1.16 $ -- $(0.01) $ --
1995 ........................... 20.67 (0.07) (3.53) (3.60) -- (0.69) (0.24)
1994 ........................... 16.68 (0.04) 5.03 4.99 -- (1.00) --
For the Period Ended January 31,
- --------------------------------
1993/(b)/ ...................... 14.18 0.03 2.50 2.53 (0.03) -- --
<CAPTION>
Ratio of Ratio of net Net
Net increase Net asset net investment assets at
Total (decrease) value, expenses to income to Portfolio end of
distributions in net end of Total average net average net turnover period
to shareholders asset value period return/(a)/ assets assets rate (in 000s)
=========================================================================================================
SMALL CAP EQUITY FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended January 31,
- ------------------------------
1996 ........................... $(0.01) $ 1.15 $17.29 7.20% 1.41% (0.59)% 57.58% $204,994
1995 ........................... (0.93) (4.53) 16.14 (17.53) 1.53 (0.53) 43.67 319,487
1994 ........................... (1.00) 3.99 20.67 30.13 1.60 (0.45) 56.81 261,074
For the Period Ended January 31,
- --------------------------------
1993/(b)/ ...................... (0.03) 2.50 16.68 17.86/(c)/ 1.65/(d)/ 0.62/(d)/ 7.12/(d)/ 59,339
<CAPTION>
Ratios assuming no
voluntary waiver of fees
or expense limitations
------------------------------
Ratio of net
Ratio of investment
expenses loss
to average to average
net assets net assets
==============================
- ----------------------------------------------------------------
<S> <C> <C>
For the Year Ended January 31,
- ------------------------------
1996 ........................... 1.66% (0.84)%
1995 ........................... 1.78 (0.78)
1994 ........................... 1.85 (0.70)
For the Period Ended January 31,
- --------------------------------
1993/(b)/ ...................... 2.70/(d)/ (0.43)/(d)/
- ---------------------------------------
</TABLE>
(a) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no sales
charges. Total return would be reduced if a sales charge were taken into
account.
(b) For the period from October 22, 1992 (commencement of operations) to January
31, 1993.
(c) Not annualized.
(d) Annualized.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
70
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from
investment operations
-------------------------------------------------------------------- --------------
Net Net
realized realized
and unrealized and unrealized Total
Net asset gain (loss) on loss on foreign income From
value, Net investments, currency (loss) from net
beginning investment otions related investment investment
of period income (loss) and futures transactions operations income
====================================================================================================================================
INTERNATIONAL EQUITY FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended January 31,
- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
1996........................ $14.52 $ 0.13 $ 2.58 $ 1.42 $ 4.13 $(0.58)
1995........................ 18.10 0.06 (3.04) (0.01) (2.99) --
1994........................ 14.35 0.05 4.08 (0.38) 3.75 --
For the Period Ended January 31,
- --------------------------------
1993/(b)/................... 14.18 (0.01) 0.29 (0.11) 0.17 --
- ----------------------
Distributions to
shareholders
------------------------------------
From net
realized
gain on Net Ratio of
investment, Increase Net asset net
option and Total (decrease) value, expenses to
futures distributions to in net asset end of Total average net
transactions shareholders value period return/(2)/ assets
====================================================================================================================================
INTERNATIONAL EQUITY FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Year Ended January 31,
- ------------------------------
1996........................ $(0.87) $(1.45) $ 2.68 $17.20 28.68% 1.52%
1995........................ (0.59) (0.59) (3.58) 14.52 (16.65) 1.73
1994........................ -- -- 3.75 18.10 26.13 1.76
For the Period Ended January 31,
- --------------------------------
1993/(b)/................... -- -- 0.17 14.35 1.23/(c)/ 1.80/(d)/
- -----------------------
Ratios assuming no
voluntary waiver of fees
or expense limitations
-------------------------------
Ratio of net Ratio of
investment net investment
income Ratio of income
(loss) to Portfolio Net assets at expenses (loss)
average net turnover end of period to average to average
assets rate (in 000s) net assets net assets
====================================================================================================================================
INTERNATIONAL EQUITY FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the Year Ended January 31,
- ------------------------------
1996........................ 0.26% 68.48% $330,860 1.77% 0.01%
1995........................ 0.40 84.54 275,086 1.98 0.15
1994........................ 0.51 60.04 269,091 2.01 0.26
For the Period Ended January 31,
- --------------------------------
1993/(b)/................... (0.42)/(d)/ 0.00 66,063 2.58/(d)/ (1.20)/(d)/
- ----------------
</TABLE>
(a)Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of the
investment at the net asset value at the end of the period and no sales
charges. Total return would be reduced if a sales charge were taken into
account.
(b)For the period from December 1, 1992 (commencement of operations) to January
31, 1993.
(c)Not annualized.
(d)Annualized.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
71
<PAGE>
Goldman Sachs Equity Portfolios, Inc.
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) Distributions to
from investment operations shareholders
--------------------------------------------------- ------------------------------------
Net
realized and
unrealized
Net gain (loss) Total In
asset Net on foreign gain (loss) From excess Total
value, Net unrealized currency from net of net distributions
beginning investent gain(loss) on related investment investment investment to
of period income investments transactions operations income income shareholders
==================================================================================================
ASIA GROWTH FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended January 31,
- -------------------------------
1996................................ $13.31 $0.17 $3.44 $(0.12) $3.49 $(0.17) $(0.14) $(0.31)
For the Period Ended January 31,
- --------------------------------
1995/(b)/........................... 14.18 0.11 (0.89) 0.01 (0.77) (0.10) -- (0.10)
<CAPTION>
Ratios assuming no
voluntary waiver of fees
or expense limitations
-------------------------
Ratio Ratio
Net Ratio of net of net
increase Net of net investment Net Ratio of investment
(decrease) asset expenses to income to assets at expenses income to
in net value, average average Portfolio end of to average average
asset end of Total net net turnover period net net
value period return/(a)/ assets assets rate (in 000s) assets assets
====================================================================================================
ASIA GROWTH FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended January 31,
- -------------------------------
1996............................... $3.18 $16.49 26.49% 1.77% 1.05% 88.80% $205,539 2.02% 0.80%
For the Period Ended January 31,
- ---------------------------------
1995/(b)/..........................(0.87) 13.31 (5.46)/(c)/ 1.90/(d)/ 1.83/(d)/ 36.08/(c)/ 124,298 2.38/(d)/ 1.35/(d)/
- ------------------------------
</TABLE>
(a)Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of the
investment at the net asset value at the end of the period and no sales
charges. Total return would be reduced if a sales charge were taken into
account.
(b)For the period from July 8, 1994 (commencement of operations) to January 31,
1995.
(c)Not annualized.
(d)Annualized.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
72
<PAGE>
- --------------------------------------------------------------------------------
Report of Independent Accountants
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of the
Goldman Sachs Equity Portfolios, Inc.:
We have audited the accompanying statements of assets and liabilities of the
Goldman Sachs Equity Portfolios, Inc., (a Maryland Corporation) comprising the
Balanced Fund, Select Equity Fund, Growth and Income Fund, Capital Growth Fund,
Small Cap Equity Fund, International Equity Fund and Asia Growth Fund including
the statements of investments, as of January 31, 1996, and the related
statements of operations, the statements of changes in net assets and the
financial highlights for each of the periods presented. These financial
statements and the financial highlights are the responsibility of the Funds'
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
January 31, 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 audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and the financial highlights
referred to above present fairly, in all material respects, the financial
position of each of the respective portfolios constituting Goldman Sachs Equity
Portfolios, Inc. as of January 31, 1996, the results of their operations and the
changes in their net assets and the financial highlights for the periods
presented, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
March 15, 1996
73
<PAGE>
[This Page Intentionally Left Blank]
74
<PAGE>
- --------------------------------------------------------------------------------
This Annual Report is authorized for distribution to prospective investors only
when preceded or accompanied by a Goldman Sachs Equity Portfolios, Inc.
Prospectus which contains facts concerning the Fund's objectives and policies,
management, expenses and other information.
- --------------------------------------------------------------------------------
75
<PAGE>
Goldman Sachs
One New York Plaza
New York, NY 10004
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
The Goldman Sachs
Equity Portfolios
Annual Report
January 31, 1996
Goldman Sachs Balanced Fund
Goldman Sachs Select Equity Fund
Goldman Sachs Growth and Income Fund
Goldman Sachs Capital Growth Fund
Goldman Sachs Small Cap Equity Fund
Goldman Sachs International Equity Fund
Goldman Sachs Asia Growth Fund
[LOGO OF GOLDMAN SACHS APPEARS HERE]
76
<PAGE>
GOLDMAN SACHS
MID-CAP EQUITY FUND
A PORTFOLIO
OF THE GOLDMAN SACHS EQUITY PORTFOLIOS, INC.
Financial Statements
January 31, 1996
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GOLDMAN SACHS MID-CAP EQUITY FUND
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
1
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GOLDMAN SACHS MID-CAP EQUITY FUND (continued)
- --------------------------------------------------------------------------------
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
- ------- ---------------- ------------
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
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
GOLDMAN SACHS MID-CAP EQUITY FUND
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
3
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
- --------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS
January 31, 1996
- --------------------------------------------------------------------------------
Shares Description Value
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
9,670,813
- --------------------------------------------------------------------------------
AUTO PARTS--ORIGINAL EQUIPMENT--2.4%
110,300 Lear Seating Corp.* 3,267,638
- --------------------------------------------------------------------------------
CHEMICALS--PLASTICS--2.0%
96,900 Geon Co. 2,713,200
- --------------------------------------------------------------------------------
COMPUTERS--1.4%
28,000 Gateway 2000, Inc.* 724,500
25,200 Komag, Inc.* 733,950
27,600 Read-Rite Corp.* 496,800
- --------------------------------------------------------------------------------
1,955,250
- --------------------------------------------------------------------------------
CONTAINERS--METAL AND GLASS--2.4%
233,100 Owens Illinois Corp.* 3,321,675
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
3,054,313
- --------------------------------------------------------------------------------
ELECTRONICS--SEMICONDUCTORS--0.5%
58,900 Alliance Semiconductor Corp.* 633,175
- --------------------------------------------------------------------------------
FINANCIAL BANKS--3.2%
69,770 Fleet Financial Group, Inc. 2,790,800
53,300 PNC Bank Corp. 1,599,000
- --------------------------------------------------------------------------------
4,389,800
- --------------------------------------------------------------------------------
FOOD--WHOLESALE--4.3%
159,300 Fleming Companies, Inc. 3,026,700
89,100 Supervalue, Inc. 2,762,100
- --------------------------------------------------------------------------------
5,788,800
- --------------------------------------------------------------------------------
GROCERY PRODUCTS--1.8%
179,400 Chiquita Brands International, Inc. 2,444,325
- --------------------------------------------------------------------------------
HOME BUILDERS--2.4%
5,300 Centex Corp. 170,925
119,300 Lennar Corp. 3,116,713
- --------------------------------------------------------------------------------
3,287,638
- --------------------------------------------------------------------------------
HOSPITAL MANAGEMENT--3.3%
50,600 Beverly Enterprises* 607,200
182,500 Tenet Healthcare Corp.* 3,900,937
- --------------------------------------------------------------------------------
4,508,137
- --------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS--1.0%
87,400 Sunbeam Corp., Inc. 1,398,400
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
17,589,065
- --------------------------------------------------------------------------------
MACHINE--DIVERSIFIED--0.9%
13,300 Lam Research Corp.* 568,575
11,400 Novellus Systems, Inc.* 607,050
- --------------------------------------------------------------------------------
1,175,625
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares Description Value
- --------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
MARINE AND PLEASURE BOATS--3.8%
120,800 Brunswick Corp. $ 2,733,608
119,400 Outboard Marine Corp. 2,388,000
- --------------------------------------------------------------------------------
METAL FABRICATE/HARDWARE--0.9%
33,250 Trinity Industries, Inc. 1,163,750
- --------------------------------------------------------------------------------
METALS--MISCELLANEOUS--0.8%
51,300 Quanex Corp. 1,058,060
- --------------------------------------------------------------------------------
OFFICE/BUSINESS EQUIPMENT--0.6%
12,700 Harris Corp. 795,338
- --------------------------------------------------------------------------------
OIL AND GAS--DOMESTIC--4.6%
73,700 Ashland Inc. 2,708,475
85,300 Tosco Corp. 3,571,938
- --------------------------------------------------------------------------------
6,280,413
- --------------------------------------------------------------------------------
OIL AND GAS--INTERNATIONAL--1.0%
12,000 Mobil Corp. 1,329,000
- --------------------------------------------------------------------------------
PAPER AND FOREST PRODUCTS--4.4%
44,000 Champion International Corp. 1,969,000
55,200 Georgia-Pacific Corp. 4,050,300
- --------------------------------------------------------------------------------
6,019,300
- --------------------------------------------------------------------------------
PUBLISHING--2.5%
197,200 Valassis Communications, Inc.* 3,327,750
- --------------------------------------------------------------------------------
PULP AND PAPER PRODUCTS--2.5%
234,500 Stone Container Corp. 3,429,563
- --------------------------------------------------------------------------------
RETAIL--DEPARTMENT STORES--1.3%
60,800 Dillard Department Stores, Inc. 1,763,200
- --------------------------------------------------------------------------------
RETAIL--SPECIALTY APPAREL STORES--0.2%
77,200 Charming Shoppes Inc.* 212,920
- --------------------------------------------------------------------------------
SAVINGS AND LOANS--2.5%
110,100 Greenpoint Financial Corp. 2,841,956
15,000 Standard Federal Bancorp. 611,250
- --------------------------------------------------------------------------------
3,453,206
- --------------------------------------------------------------------------------
SECURITY AND COMMODITY BROKERS--DEALERS
AND SERVICES--1.2%
62,000 Lehman Brothers Holdings, Inc. 1,588,750
- --------------------------------------------------------------------------------
TECHNOLOGY--1.1%
55,000 Storage Technology Corp.* 1,457,500
- --------------------------------------------------------------------------------
TIRE AND RUBBER PRODUCTS--3.2%
91,400 Goodyear Tire & Rubber Co. 4,375,775
- --------------------------------------------------------------------------------
TOBACCO AND FOOD PRODUCTS--5.1%
135,100 RJR Nabisco Holding Corp. 4,390,750
- --------------------------------------------------------------------------------
107,400 Universal Corp. 2,510,475
- --------------------------------------------------------------------------------
6,901,225
- --------------------------------------------------------------------------------
TRANSPORTATION--MARINE--1.0%
75,700 Kirby Corp.* 1,343,675
- --------------------------------------------------------------------------------
TRUCKING--2.1%
123,800 Consolidated Freightways, Inc. 2,847,400
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
13,872,099
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS (Cost $124,371,597) $131,538,386
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
- --------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS (continued)
January 31, 1996
- --------------------------------------------------------------------------------
Principal
Amount Interest Rate Maturity Date Value
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENT--1.5%
Joint Repurchase Agreement Account
$2,000,000 5.96% 02/01/96 $ 2,000,000
- --------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENT
(Cost $2,000,000) $ 2,000,000
TOTAL INVESTMENTS (Cost $126,371,597)** $133,538,386
- --------------------------------------------------------------------------------
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)
- --------------------------------------------------------------------------------
Net unrealized gain $ 7,142,795
- --------------------------------------------------------------------------------
* 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.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
January 31, 1996
- --------------------------------------------------------------------------------
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
- ------------------------------------------------------
TOTAL ASSETS 136,018,458
- ------------------------------------------------------
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
- ------------------------------------------------------
TOTAL LIABILITIES 347,497
- ------------------------------------------------------
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
- ------------------------------------------------------
NET ASSETS $135,670,961
- ------------------------------------------------------
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)
- ------------------------------------------------------
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
For the Period Ended January 31, 1996 /(a)/
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $1,430,514
Interest 212,589
- ---------------------------------------------------------
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
- ---------------------------------------------------------
TOTAL EXPENSES 640,063
Less--Expenses reimbursable by GSAM (85,815)
- ---------------------------------------------------------
NET EXPENSES 554,248
- ---------------------------------------------------------
NET INVESTMENT INCOME 1,088,855
- ---------------------------------------------------------
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
- ---------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $8,719,857
- ---------------------------------------------------------
/(a)/ For the period from August 1, 1995 (commencement of operations) to
January 31, 1996.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
- --------------------------------------------------------------------------------
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
- ------------------------------------------------------------------
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)
- ------------------------------------------------------------------
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)
- ------------------------------------------------------------------
Net increase in net assets resulting
from share transactions 8,525,815 127,937,397
- ------------------------------------------------------------------
TOTAL INCREASE 135,670,961
NET ASSETS:
Beginning of period --
- ------------------------------------------------------------------
End of period $135,670,961
- ------------------------------------------------------------------
Accumulated undistributed net
investment income $ 102,562
- ------------------------------------------------------------------
/(a)/ For the period from August 1, 1995 (commencement of operations) to
January 31, 1996.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
- --------------------------------------------------------------------------------
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
- ------------------------------------------------------
Total income from investment operations 1.03
- ------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.12)
- ------------------------------------------------------
Total distributions to shareholders (0.12)
- ------------------------------------------------------
Net increase in net asset value 0.91
- ------------------------------------------------------
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
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
11
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
January 31, 1996
- --------------------------------------------------------------------------------
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
- ---------------------------------------------------------------------
Balance outstanding,
beginning of period -- $ --
Options written 1,100 178,750
Options repurchased (1,100) (178,750)
- ---------------------------------------------------------------------
Balance outstanding, end of period -- $ --
- ---------------------------------------------------------------------
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
- ----------------------------------------------------------------------------
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
- ----------------------------------------------------------------------------
TOTAL JOINT REPURCHASE AGREEMENT ACCOUNT $488,400,000
- ----------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
12
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
13
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
14
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
(a) Financial Statements
Included in Goldman Sachs Capital Growth Fund, Goldman Sachs Select
Equity Fund, Goldman Sachs International Equity Fund, Goldman Sachs Small Cap
Equity Fund, Goldman Sachs Asia Growth Fund, Goldman Sachs Balanced Fund, and
Goldman Sachs Growth and Income Fund and Goldman Sachs Mid-Cap Equity Fund
Prospectus:
Financial Highlights - Selected Data for Shares Outstanding
From Commencement of Operations (April 20, 1990) through
January 31, 1991 and for the five years ended January 31, 1996
for Goldman Sachs Capital Growth Fund.
Financial Highlights - Selected Data for Shares Outstanding From
Commencement of Operations (May 24, 1991) through January 31, 1992 and for the
four years ended January 31, 1996 for Goldman Sachs Select Equity Fund.
Financial Highlights - Selected Data for Shares Outstanding From
Commencement of Operations (October 22, 1992) to January 31, 1993 and for the
three years ended January 31, 1996 for Goldman Sachs Small Cap Equity Fund.
Financial Highlights - Selected Data for Shares Outstanding
From Commencement of Operations (December 1, 1992) to January
31, 1993 and for the three years ended January 31, 1996 for
Goldman Sachs International Equity Fund.
Financial Highlights - Selected data for Shares Outstanding from
Commencement of Operations (February 5, 1993) through January 31, 1994 for the
two years ended January 31, 1996 for Goldman Sachs Growth and Income Fund.
Financial Highlights - Selected data for a Share Outstanding
from Commencement of Operations (July 8, 1994) through January
1, 1995 and for the one year ended January 31, 1996 for
Goldman Sachs Asia Growth Fund.
Financial Highlights - Selected data for a Share Outstanding from
Commencement of Operations (October 12,
-1-
<PAGE>
1994) through January 1, 1995 and for the one year ended January 31, 1996 for
Goldman Sachs Balanced Fund.
Financial Highlights - Selected data for a Share Outstanding from
Commencement of Operations (August 1, 1995) through January 31, 1996 for Goldman
Sachs Mid-Cap Equity Fund.
Incorporated by Reference into the Additional Statement:
Report of Independent Public Accountants.
Statement of Investments as of January 31, 1996 for Goldman Sachs
Capital Growth Fund, Goldman Sachs Select Equity Fund, Goldman Sachs Small Cap
Equity Fund, Goldman Sachs International Equity Fund, Goldman Sachs Growth and
Income Fund, Goldman Sachs Asia Growth Fund, Goldman Sachs Balanced Fund and
Goldman Sachs Mid-Cap Equity Fund.
Statement of Assets and Liabilities as of January 31, 1996 for Goldman
Sachs Capital Growth Fund, Goldman Sachs Select Equity Fund, Goldman Sachs Small
Cap Equity Fund, Goldman Sachs International Equity Fund, Goldman Sachs Growth
and Income Fund, Goldman Sachs Asia Growth Fund, Goldman Sachs Balanced Fund and
Goldman Sachs Mid-Cap Equity Fund.
Statement of Operations for the year ended January 31, 1996 for Goldman
Sachs Capital Growth Fund, Goldman Sachs Select Equity Fund, Goldman Sachs Small
Cap Equity Fund, Goldman Sachs International Equity Fund, Goldman Sachs Growth
and Income Fund, Goldman Sachs Asia Growth Fund and Goldman Sachs Balanced Fund.
Statement of Operations from Commencement of Operations (August 1,
1995) to January 31, 1996 for Goldman Sachs Mid-Cap Equity Fund.
Statement of Changes in Net Assets for the years ended January 31, 1995
and January 31, 1996 for Goldman Sachs Capital Growth Fund, Goldman Sachs Select
Equity Fund, Goldman Sachs Small Cap Equity Fund, Goldman Sachs International
Equity Fund, and Goldman Sachs Growth and Income Fund.
Statement of Changes in Net Assets for the period ended January 31,
1995 and for the one year ended January 31, 1996 for Goldman Sachs Asia Growth
Fund and Goldman Sachs Balanced Fund.
Statement of Changes in Net Assets for the period ended January
31, 1996 for Goldman Sachs Mid-Cap Equity Fund.
-2-
<PAGE>
Financial Highlights for the period from Commencement of Operations
(April 20, 1990) to January 31, 1991 and for the five years ended January 31,
1996 for Goldman Sachs Capital Growth Fund.
Financial Highlights for the period from Commencement of Operations
(May 24, 1991) to January 31, 1992 and for the four years ended January 31, 1996
for Goldman Sachs Select Equity Fund.
Financial Highlights for the period from Commencement of Operations
(October 22, 1992) to January 31, 1993 and for the three years ended January 31,
1996 for Goldman Sachs Small Cap Equity Fund.
Financial Highlights for the period from Commencement of Operations
(December 1, 1992) to January 31, 1993 and for the three years ended January6
31, 1996 for Goldman Sachs International Equity Fund.
Financial Highlights for the period from Commencement of Operations
(February 3, 1993) to January 31, 1994 and for the two years ended January 31,
1996 for Goldman Sachs Growth and Income Fund.
Financial Highlights for the period from Commencement of
Operations (July 8, 1994) to January 31, 1995 and for the one
year ended January 31, 1996 for Goldman Sachs Asia Growth
Fund.
Financial Highlights for the period from Commencement of
Operations (October 12, 1994) to January 31, 1995 and for the
one year ended January 31, 1996 for Goldman Sachs Balanced
Fund.
Financial Highlights for the period from Commencement of
Operations (August 1, 1995) to January 31, 1996 for Goldman
Sachs Mid-Cap Equity Fund.
(b) Exhibits
The following exhibits are incorporated herein by reference to
Registrant's Registration Statement on Form N-1A as initially filed on
October 5, 1989 (Reference A), to Pre-Effective Amendment No. 3 to
such Registration Statement filed on April 6, 1990 (Reference B), to
Post-Effective Amendment No. 1 to such Registration Statement filed on
September 28, 1990 (Reference C), to Post-Effective Amendment No. 4 to
such Registration Statement filed on October 22, 1991 (Reference D), to
Post-Effective Amendment No. 7 to such Registration Statement filed on
July 31, 1992 (Reference E), to Post-Effective Amendment No. 8 to such
Registration Statement filed on December 1, 1992 (Reference F), to
Post-Effective Amendment No. 9 to such Registration
-3-
<PAGE>
Statement filed on April 1, 1993 (Reference G), to Post- Effective
Amendment No. 10 to such Registration Statement filed on July 30, 1993
(Reference H), to Post-Effective Amendment No. 11 to such Registration
Statement filed on March 31, 1994 (Reference I), to Post-Effective
Amendment No. 12 to such Registration Statement filed on May 26, 1994
(Reference J), to Post-Effective Amendment No. 13 to such Registration
Statement filed on August 4, 1994 (Reference K), to Post-Effective
Amendment No. 14 to such Registration Statement filed on November 30,
1995 (Reference L), Post-Effective Amendment No. 16 to such
Registration Statement filed on March 31, 1995 (Reference M), Post-
Effective Amendment No. 17 to such Registration Statement filed on May
31, 1995 (Reference N) and Post-Effective Amendment No. 20 to such
Registration Statement filed on March 1, 1996 (Reference O):
1.(a) Articles of Incorporation of the Registrant.
(Reference A)
1.(c) Form of Articles Supplementary. (Reference E)
1.(d) Form of Articles Supplementary. (Reference F)
1.(e) Form of Articles Supplementary for Goldman Sachs.
(Reference I)
1(f). Articles Supplementary for Goldman Sachs
Balanced Fund. (Reference L)
2. Bylaws of the Registrant. (Reference A)
2.(b) Form of Articles of Amendment. (Reference D)
3. Not applicable.
4. Not applicable.
5.(a) Investment Advisory Agreement between Registrant
on behalf of Goldman Sachs Capital Growth Fund
and Goldman Sachs Asset Management (Reference O).
5.(b) Administration Agreement between Registrant on
behalf of Goldman Sachs Capital Growth Fund and
Goldman Sachs Asset Management (Reference O).
5.(c) Investment Advisory Agreement between Registrant
on behalf of Goldman Sachs Select Equity Fund and
Goldman Sachs Asset Management (Reference O).
5.(d) Administration Agreement between Registrant on
behalf of Goldman Sachs Select Equity Fund and
Goldman Sachs Asset Management (Reference O).
-4-
<PAGE>
5.(e) Investment Advisory Agreement between Registrant
on behalf of Goldman Sachs Small Cap Equity Fund
and Goldman Sachs Asset Management (Reference
O).
5.(f) Administration Agreement between Registrant on
behalf of Goldman Sachs Small Cap Equity Fund and
Goldman Sachs Asset Management (Reference O).
5.(g) Investment Advisory Agreement between Registrant
on behalf of Goldman Sachs International Equity
Fund and Goldman Sachs Asset Management
(Reference O).
5.(h) Investment Subadvisory Agreement by and among the
Registrant on behalf of Goldman Sachs International
Equity Fund and Goldman Sachs Asset Management and
Goldman Sachs Asset Management International
(Reference O).
5.(i) Administration Agreement between Registrant on
behalf of Goldman Sachs International Equity Fund
and Goldman Sachs Asset Management (Reference
O).
5.(j) Investment Advisory Agreement between the
Registrant on behalf of Goldman Sachs Growth and
Income Fund and Goldman Sachs Asset Management
(Reference O).
5.(k) Administration Agreement between Registrant on
behalf of Goldman Sachs Growth and Income Fund
and Goldman Sachs Asset Management (Reference O).
5.(l) Investment Advisory Agreement between the
Registrant on behalf of Goldman Sachs Asia Growth
Fund and Goldman Sachs Asset Management
International (Reference O).
5.(m) Administration Agreement between Registrant on
behalf of Goldman Sachs Asia Growth Fund and
Goldman Sachs Asset Management (Reference O).
5.(n). Investment Advisory Agreement between the
Registrant on behalf of Goldman Sachs Balanced
Fund and Goldman Sachs Asset Management
(Reference O).
5(o). Administration Agreement between Registrant on
behalf of Goldman Sachs Balanced Fund and Goldman
Sachs Asset Management (Reference O).
5(p). Administration Agreement between Registrant on
behalf of Goldman Sachs Mid-Cap Equity Fund and
Goldman Sachs Asset Management (Reference O).
-5-
<PAGE>
5(q). Investment Advisory Agreement between Registrant
on behalf of Goldman Sachs Mid-Cap Equity Fund
and Goldman Sachs Asset Management (Reference O).
6.(a) Distribution Agreement between Registrant on
behalf of Goldman Sachs Capital Growth Fund,
Goldman Sachs Select Equity Fund, Goldman Sachs
Small Cap Equity Fund, Goldman Sachs
International Equity Fund, Goldman Sachs Growth and
Income Fund and Goldman, Sachs & Co. (Reference G)
6.(b) Form of Dealer Agreement between Goldman, Sachs &
Co. and any Authorized Dealer. (Reference G)
6(c). Amended Distribution Agreement between Registrant
and Goldman, Sachs & Co. (Reference K).
7. Not applicable.
8. Custodian Agreement between Registrant and State
Street Bank and Trust Company. (Reference C)
8.(a) Custodian Fee Schedule between Registrant on
behalf of Goldman Sachs Small Cap Equity Fund and
State Street Bank & Trust Company. (Reference
G)
8.(b) Custodian Fee Schedule between Registrant on
behalf of Goldman Sachs International Equity Fund
and State Street Bank & Trust Company.
(Reference G)
9. Transfer Agency Agreement between Registrant and
Goldman, Sachs & Co. (Reference C)
10. Not applicable.
12. Not applicable.
13. Form of Subscription Agreement. (Reference B)
14. Not applicable.
15.(a) Distribution Plan pursuant to Rule 12b-1 of
Goldman Sachs Capital Growth Fund. (Reference C)
15.(b) Distribution Plan pursuant to Rule 12b-1 of
Goldman Sachs Select Equity Fund. (Reference
G)
15.(c) Distribution Plan pursuant to Rule 12b-1 of
Goldman Sachs Small Cap Equity Fund. (Reference
G)
15.(d) Distribution Plan pursuant to Rule 12b-1 of
Goldman Sachs International Equity Fund.
(Reference G)
-6-
<PAGE>
15.(e) Distribution Plan pursuant to Rule 12b-1 of
Goldman Sachs Growth and Income Fund. (Reference
G)
15.(f) Form of Distribution Plan pursuant to Rule 12b-1
of Goldman Sachs Asia Growth Fund. (Reference I)
15(g). Distribution Plan pursuant to Rule 12b-1 of
Goldman Sachs Balanced Fund. (Reference L)
15(h). Amended and Restated Plan of Distribution
Pursuant to Rule 12b-1 of the Registrant (Reference N)
15(i). Authorized Dealer Service Plan of the Registrant
(Reference N)
15(j). Administration Plan on behalf of Goldman Sachs
Mid-Cap Equity Fund and Goldman Sachs Select Equity
Fund (Reference N)
16. Schedule of Computation of Registrant's
performance data. (Reference L)
18. Form of Plan entered into by Registrant pursuant
to Rule 18f-3. (Reference M)
19. Powers of Attorney from Messrs. Paul C. Nagel,
Jr.,Marcia L. Beck, , Ashok N. Bakhru, David B.
Ford, Robert P. Mayo, Alan A. Shuch, Jackson W.
Smart, Jr., William H. Springer, Richard P.
Strubel, Scott M. Gilman and Michael J.Richman.
(Reference L)
The following exhibits are filed herewith electronically pursuant to EDGAR
rules:
11(a). Consent of Arthur Andersen LLP.
27. Financial Data Schedule.
Item 25. Persons Controlled by or Under Common Control with Registrant.
Not applicable.
-7-
<PAGE>
Item 26. Number of Holders of Securities (as of April 16, 1996).
<TABLE>
<CAPTION>
Number of
Title of Class Record Holders
-------------- --------------
<S> <C>
Goldman Sachs Capital Growth Fund Shares
Class A 31,190
Goldman Sachs Select Equity Fund Shares
Class A 7,726
Institutional Class 15
Goldman Sachs Small Cap Equity Fund Shares
Class A 16,351
Goldman Sachs International Equity Fund Shares
Class A 17,578
Institutional Class 7
Goldman Sachs Growth and Income Fund Shares
Class A 28,341
Institutional Class 1
Service Class 2
Goldman Sachs Asia Growth Fund Shares
Class A 11,161
Institutional Class 3
Service Class 1
Goldman Sachs Balanced Fund Shares
Class A 2,832
Goldman Sachs Mid-Cap Equity Fund
Institutional Shares 7
Service Shares 1
</TABLE>
Item 27. Indemnification.
Article VII of the Registrant's Bylaws provides for indemnification of the
Registrant's directors and officers under certain circumstances.
Section 9 of the Distribution Agreement between the Registrant
and Goldman, Sachs & Co. provides for indemnification of
Goldman, Sachs & Co. under certain circumstances.
Insofar as indemnification by the Registrant for liabilities arising under the
Securities Act of 1933, as amended (the "1933 Act"), may be permitted to
trustees, officers and controlling persons of the Registrant pursuant to the
foregoing provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the 1933 Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted against the
Registrant by such trustee, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been
-8-
<PAGE>
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the 1933 Act and will be governed by final adjudication of such
issue.
Item 28. Business and Other Connections of Investment Adviser.
The business and other connections of the officers and general partners who have
direct responsibility for the asset management division of Goldman, Sachs & Co.
are listed on the Uniform Application for Investment Adviser Registration ("Form
ADV") of Goldman, Sachs & Co. (No. 801-16048), Goldman Sachs Funds Management,
L.P. (No. 801-37591), and Goldman Sachs Asset Management International (No.
801-38157), as applicable. These Form ADV's are currently on file with the
Securities and Exchange Commission, the texts of which are hereby incorporated
by reference.
Item 29. Principal Underwriters.
(a) Goldman, Sachs & Co., or an affiliate or a division
thereof, currently serves as investment adviser and distributor of
the units of Goldman Sachs Money Market Trust and Trust for
Credit Unions and for shares of Financial Square Trust,
Goldman Sachs Trust and Goldman Sachs Equity Portfolios,
Inc. Goldman, Sachs & Co., or a division thereof,
currently serves as administrator and distributor of the units of
The Benchmark Funds.
(b) Set forth below is certain information pertaining to the
general partners of Goldman, Sachs & Co., Registrant's
principal underwriter. Each of the following persons is a
general partner of Goldman, Sachs & Co. and, except for
Messrs. Ford and Shuch, does not hold a position with
Registrant. Messrs. Ford and Shuch are Directors of
Registrant.
Name and Principal Name and Principal
Business Address Business Address
---------------- ----------------
Jon S. Corzine, Chairman (1)(2) Robert F. Cummings, Jr. (2)
Henry M. Paulson, Jr., Chairman (1)(2) Angelo De Caro (2)
Roy J. Zuckerberg (5) Steven G. Einhorn (5)
David M. Silfen (5) David B. Ford (2)
Richard M. Hayden (7) David M. Leuschen (2)
Robert J. Hurst (2) Michael R. Lynch (2)
Howard C. Katz (2) Michael D. McCarthy (2)
Peter K. Barker (9) Donald C. Opatrny, Jr. (2)
Eric S. Dobkin (5) Thomas E. Tuft (5)
Willard J. Overlock, Jr. (2) Robert J. Katz (1)(2)
Jonathan L. Cohen (2) Michael P. Mortara (2)
Frederic B. Garonzik (7) Lloyd C. Blankfein (2)
Kevin W. Kennedy (2) John P. Curtin, Jr. (2)
William C. Landreth (8) Gavyn Davies (7)
Daniel M. Neidich (2) Dexter D. Earle (5)
Edward Spiegel (5) John Ehara (10)
-9-
<PAGE>
J. Christopher Flowers (2) J. David Rogers (5)
Gary Gensler (2) Joseph Sassoon (7)
Charles T. Harris, III (2) Peter Savitz (7)(2)
Thomas J. Healey (2) Charles B. Seelig, Jr. (2)
Stephen Hendel (2) Ralph F. Severson (11)
Robert E. Higgins (2) Gene T. Sykes (9)
Ernest S. Liu (5) Gary A. Syman (10)
Eff W. Martin (11) Leslie C. Tortora (2)
Charles B. Mayer, Jr. (2) John L. Townsend, III (2)
Michael J. O'Brien (7) Lee G. Vance (7)
Mark Schwartz (2) David A. Viniar (2)
Stephen M. Semlitz (2) John S. Weinberg (2)
Robert K. Steel (5) Peter A. Weinberg (2)
John A. Thain (2)(7) Laurence M. Weiss (2)
John L. Thornton (7) George W. Wellde, Jr. (10)
Bracebridge H. Young, Jr. (7) Jaime E. Yordan (2)(16)
Joseph R. Zimmel (2) Sharmin Mossavar-Rahmani (5)
Barry L. Zubrow (2) Hideo Ishihara (10)
Gary L. Zwerling (2) Paul M. Achleitner (14)
Jon R. Aisbitt (7) Armen A. Avanessians (2)
Andrew M. Alper (2) Joel S. Beckman (2)
William J. Buckley (5) David W. Blood (7)
Frank L. Coulson, Jr. (2) Zachariah Cobrinik (10)
Connie Duckworth (8) Gary D. Cohn (7)
Richard A. Friedman (2) Christopher A. Cole (2)
Alan R. Gillespie (7) Henry Cornell (13)
Joseph H. Gleberman (2) Robert V. Delaney (2)
Jacob D. Goldfield (2) Joseph Della Rosa (5)
Steven M. Heller (2) J. Michael Evans (7)
Ann F. Kaplan (2) Lawton W. Fitt (5)
Robert S. Kaplan (2) Joseph D. Gatto (2)
Peter D. Kiernan, III (2) Peter C. Gerhard (2)
John P. McNulty (5) Nomi P. Ghez (5)
T. Willem Mesdag (14) David T. Hamamoto (2)
Gaetano J. Muzio (11) Walter H. Haydock (2)(15)
Robin Neustein (2) David L. Henle (5)
Timothy J. O'Neill (2) Francis J. Ingrassia (2)
Scott M. Pinkus (2) Scott B. Kapnick (7)
John J. Powers (2) Kevin M. Kelly (2)
Stephen D. Quinn (2) John C. Kleinert (2)
Arthur J. Reimers, III (7) Jonathan L. Kolatch (2)
James P. Riley, Jr. (2) Peter S. Kraus (2)
Richard A. Sapp (7) Robert Litterman (2)
Donald F. Textor (5) Jonathan M. Lopatin (2)
Thomas B. Walker, III (2) Thomas J. Macirowski (2)
Patrick J. Ward (7) Peter G. Mallinson (13)
Jeffrey M. Weingarten (7) Oki Matsumoto (10)
Jon Winkelried (2) E. Scott Mead (7)
Richard E. Witten (2) Eric M. Mindich (5)
Gregory K. Palm (2)(7) Steven T. Mnuchin (2)
Carlos A. Cordeiro (7) Thomas K. Montag (2)
John O. Downing (5) Edward A. Mule (2)
Mark Evans (13) Kipp M. Nelson (7)
Michael D. Fascitelli (2) Christopher K. Norton (2)
Sylvain M. Hefes (7) Robert J. O'Shea (2)
Reuben Jeffrey, III (7) Wiet H. Pot (7)
Lawrence H. Linden (2) Jack L. Salzman (5)
Jun Makihara (10) Eric S. Schwartz (5)
Masanori Mochida (10) Michael F. Schwerin (2)
Robert B. Morris III (11)(7) Richard S. Sharp (7)
Philip D. Murphy (14) Richard G. Sherlund (5)
Suzanne M. Nora Johnson (9) Michael S. Sherwood (7)
Terence M. O'Toole (2) Cody J. Smith (2)
Carl G.E. Palmstierna (7) Daniel W. Stanton (5)
Michael G. Rantz (7) Esta E. Stecher (2)
-10-
<PAGE>
Frederic E. Steck (2)
Byron D. Trott (8)
Barry S. Volpert (2)
Peter S. Wheeler (13)
Anthony G. Williams (7)
Gary W. Williams (5)
Tracy R. Wolstencroft (4)
Danny O. Yee (13)
Michael J. Zamkow (2)
Mark A. Zurack (5)
Jim O'Neill (2)
Peter D. Sutherland (7)
- --------------
(1) Management Committee
(2) 85 Broad Street, New York, NY 10004
(3) Mellon Bank Center, 1735 Market Street, 26th Floor,
Philadelphia, PA 19103
(4) 100 Crescent Court, Suite 1000, Dallas, TX 75201
(5) One New York Plaza, New York, NY 10004
(6) 1000 Louisiana Street, Suite 550, Houston, TX 77002
(7) Peterborough Court, 133 Fleet Street, London EC4A 2BB,
England
(8) 4900 Sears Tower, Chicago, IL 60606
(9) 333 South Grand Avenue, Suite 1900, Los Angeles, CA 90071 (10) ARK Mori
Bldg.,10th Floor, 12-32 Akasaka, 1-chome, Minato-ku, Tokyo 107, Japan
(11) 555 California Street, 45th Floor, San Francisco, CA 94104
(12) Exchange Place, 53 State Street, 13th Floor, Boston, MA 02109
(13) Asia Pacific Finance Tower, 35th Floor, Citibank Plaza, 3
Garden Road, Hong Kong
(14) Finanz GmbH, MesseTurm, 60308 Frankfurt am Main, Germany
(15) Munsterhof 4, 8022, Zurich, Switzerland
(16) Casa de Bolsa, S.A. de C.V. Av. de las Palmas 405, Piso 18. Lomas de
Chapultepec Mexico 11000, D.F.
(c) Not applicable.
Item 30. Location of Accounts and Records.
The Articles of Incorporation, Bylaws and minute book of the Registrant are in
the physical possession of Goldman Sachs Asset Management, One New York Plaza,
New York, New York 10004. All other accounts, books and other documents required
to be maintained under Section 31(a) of the Investment Company Act of 1940 and
the Rules promulgated hereunder are in the physical possession of State Street
Bank and Trust Company, P.O. Box 1713, Boston, Massachusetts 02105, except
transfer agency records which are maintained by Goldman, Sachs & Co., 4900 Sears
Tower, Chicago, Illinois 60606.
-11-
<PAGE>
Item 31. Management Services.
The Custodian Agreement between State Street Bank and Trust Company and
Registrant provides for State Street Bank and Trust Company to act as custodian
and to maintain certain accounting records for Registrant. Remuneration is based
upon the Fund's average net assets and on the number of portfolio transactions.
Item 32. Undertakings.
(a) Registrant undertakes to comply with Section 16(c) of the
Investment Company Act of 1940, as amended, which relates to
the assistance to be rendered to shareholders by the Directors
of the Registrant in calling a meeting of shareholders for the
purpose of voting upon the question of the removal of a
Director.
(b) The Annual Report also contains performance information and is
available to any recipient of the Prospectus upon request and
without charge by writing to Goldman, Sachs & Co., 4900 Sears
Tower, Chicago, Illinois 60606.
-12-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that is meets all the requirements
for effectiveness of this Post- Effective Amendment No. 21 pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Post-Effective
Amendment No. 21 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City and State of New York on the
30th day of April, 1996.
GOLDMAN SACHS EQUITY PORTFOLIOS, INC.
/s/ Michael J. Richman
---------------------------------
Michael J. Richman, Secretary
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the date indicated.
Name Title Date
- ---- ----- ----
/s/Paul C. Nagel, Jr.*
- -------------------------------
Paul C. Nagel, Jr. Director April 30, 1996
/s/Marcia L. Beck*
- -------------------------------
Marcia L. Beck President April 30, 1996
and Director
of the Company
/s/Scott M. Gilman*
- -------------------------------
Scott M. Gilman Treasurer April 30, 1996
and Principal
Financial and
Accounting Officer
/s/Ashok N. Bakhru*
- -------------------------------
Ashok N. Bakhru Director April 30, 1996
/s/David B. Ford*
- -------------------------------
David B. Ford Director April 30, 1996
-13-
<PAGE>
/s/Alan A. Shuch* Director April 30, 1996
- -------------------------------
Alan A. Shuch
/s/Jackson W. Smart, Jr.*
- -------------------------------
Jackson W. Smart, Jr. Director April 30, 1996
/s/William H. Springer*
- -------------------------------
William H. Springer Director April 30, 1996
/s/Richard P. Strubel*
- -------------------------------
Richard P. Strube Director April 30, 1996
*By: Michael J. Richman
- -------------------------------
Michael J. Richman
Attorney-in-fact
-14-
<PAGE>
Exhibit Index
The following exhibits are filed as part of this Post-Effective
Amendment No. 21 to the Registration Statement:
11. (a) Consent of Arthur Andersen LLP.
27. Financial Data Schedule
-15-
<PAGE>
EXHIBIT 99.11(a)
ARTHUR ANDERSEN LLP
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our report dated March 15, 1996 for
Goldman Sachs Equity Portfolios, Inc. and to all references to our firm included
in or made a part of Post-Effective amendment No. 21 and Amendment No. 23 to
registration statement File Nos. 33-33316 and 811-6036, respectively.
/s/ Arthur Andersen LLP
Boston, Massachusetts
April 29, 1996
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GOLDMAN
SACHS EQUITY PORTFOLIOS, INC.'S ANNUAL REPORT DATED JANUARY 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 01
<NAME> GOLDMAN SACHS CAPITAL GROWTH FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-START> FEB-01-1995
<PERIOD-END> JAN-31-1996
<INVESTMENTS-AT-COST> 761,757,992
<INVESTMENTS-AT-VALUE> 869,083,397
<RECEIVABLES> 26,036,539
<ASSETS-OTHER> 45,021
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 895,164,957
<PAYABLE-FOR-SECURITIES> 11,743,752
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,365,141
<TOTAL-LIABILITIES> 14,108,893
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 720,502,376
<SHARES-COMMON-STOCK> 59,109,753
<SHARES-COMMON-PRIOR> 63,048,601
<ACCUMULATED-NII-CURRENT> 607,360
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 52,620,923
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 107,325,405
<NET-ASSETS> 881,056,064
<DIVIDEND-INCOME> 13,689,007
<INTEREST-INCOME> 5,032,176
<OTHER-INCOME> 0
<EXPENSES-NET> (12,688,649)
<NET-INVESTMENT-INCOME> 6,032,534
<REALIZED-GAINS-CURRENT> 188,790,639
<APPREC-INCREASE-CURRENT> 53,559,848
<NET-CHANGE-FROM-OPS> 248,383,021
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (6,289,354)
<DISTRIBUTIONS-OF-GAINS> (139,713,660)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 9,130,715
<NUMBER-OF-SHARES-REDEEMED> (22,215,374)
<SHARES-REINVESTED> 9,145,811
<NET-CHANGE-IN-ASSETS> 18,951,259
<ACCUMULATED-NII-PRIOR> 851,025
<ACCUMULATED-GAINS-PRIOR> 3,543,944
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 7,001,809
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 15,022,585
<AVERAGE-NET-ASSETS> 933,573,704
<PER-SHARE-NAV-BEGIN> 13.67
<PER-SHARE-NII> .12
<PER-SHARE-GAIN-APPREC> 3.93
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (2.81)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.91
<EXPENSE-RATIO> 1.36
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GOLDMAN
SACHS EQUITY PORTFOLIOS, INC.'S ANNUAL REPORT DATED JANUARY 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 021
<NAME> GOLDMAN SACHS SELECT EQUITY FUND-A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-START> FEB-01-1995
<PERIOD-END> JAN-31-1996
<INVESTMENTS-AT-COST> 150,717,655
<INVESTMENTS-AT-VALUE> 192,417,457
<RECEIVABLES> 2,077,806
<ASSETS-OTHER> 64,472
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 194,629,566
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 755,088
<TOTAL-LIABILITIES> 755,088
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 150,294,287
<SHARES-COMMON-STOCK> 6,564,725
<SHARES-COMMON-PRIOR> 6,502,206
<ACCUMULATED-NII-CURRENT> 86,854
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,768,910
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 41,724,427
<NET-ASSETS> 193,874,478
<DIVIDEND-INCOME> 2,755,279
<INTEREST-INCOME> 288,579
<OTHER-INCOME> 0
<EXPENSES-NET> 1,525,698
<NET-INVESTMENT-INCOME> 1,518,160
<REALIZED-GAINS-CURRENT> 4,687,943
<APPREC-INCREASE-CURRENT> 37,068,509
<NET-CHANGE-FROM-OPS> 43,274,612
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (925,006)
<DISTRIBUTIONS-OF-GAINS> (2,363,976)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,479,285
<NUMBER-OF-SHARES-REDEEMED> (2,578,247)
<SHARES-REINVESTED> 161,481
<NET-CHANGE-IN-ASSETS> 98,906,969
<ACCUMULATED-NII-PRIOR> 148,064
<ACCUMULATED-GAINS-PRIOR> 608,155
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 679,759
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,924,079
<AVERAGE-NET-ASSETS> 106,627,600
<PER-SHARE-NAV-BEGIN> 14.61
<PER-SHARE-NII> .19
<PER-SHARE-GAIN-APPREC> 5.43
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (.57)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 19.66
<EXPENSE-RATIO> 1.25
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GOLDMAN
SACHS EQUITY PORTFOLIOS, INC.'S ANNUAL REPORT DATED JANUARY 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 022
<NAME> GOLDMAN SACHS SELECT EQUITY FUND-B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-START> FEB-01-1995
<PERIOD-END> JAN-31-1996
<INVESTMENTS-AT-COST> 150,717,655
<INVESTMENTS-AT-VALUE> 192,417,457
<RECEIVABLES> 2,077,806
<ASSETS-OTHER> 64,472
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 194,629,566
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 755,088
<TOTAL-LIABILITIES> 755,088
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 150,294,287
<SHARES-COMMON-STOCK> 3,288,416
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 86,854
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,768,910
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 41,724,427
<NET-ASSETS> 193,874,478
<DIVIDEND-INCOME> 2,755,279
<INTEREST-INCOME> 288,579
<OTHER-INCOME> 0
<EXPENSES-NET> 1,525,698
<NET-INVESTMENT-INCOME> 1,518,160
<REALIZED-GAINS-CURRENT> 4,687,943
<APPREC-INCREASE-CURRENT> 37,068,509
<NET-CHANGE-FROM-OPS> 43,274,612
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (685,210)
<DISTRIBUTIONS-OF-GAINS> (1,163,212)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,220,915
<NUMBER-OF-SHARES-REDEEMED> (30,492)
<SHARES-REINVESTED> 97,993
<NET-CHANGE-IN-ASSETS> 98,906,969
<ACCUMULATED-NII-PRIOR> 148,064
<ACCUMULATED-GAINS-PRIOR> 608,155
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 679,759
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,924,079
<AVERAGE-NET-ASSETS> 44,686,278
<PER-SHARE-NAV-BEGIN> 16.97
<PER-SHARE-NII> .16
<PER-SHARE-GAIN-APPREC> 3.23
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (.65)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 19.71
<EXPENSE-RATIO> .65
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GOLDMAN
SACHS EQUITY PORTFOLIOS, INC.'S ANNUAL REPORT DATED JANUARY 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 03
<NAME> GOLDMAN SACHS SMALL CAP EQUITY FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-START> FEB-01-1995
<PERIOD-END> JAN-31-1996
<INVESTMENTS-AT-COST> 217,722,393
<INVESTMENTS-AT-VALUE> 199,414,339
<RECEIVABLES> 13,221,059
<ASSETS-OTHER> 61,017
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 212,696,415
<PAYABLE-FOR-SECURITIES> 4,693,500
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,008,942
<TOTAL-LIABILITIES> 7,702,442
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 232,791,537
<SHARES-COMMON-STOCK> 11,854,872
<SHARES-COMMON-PRIOR> 19,789,421
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (9,489,510)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (18,308,054)
<NET-ASSETS> 204,993,973
<DIVIDEND-INCOME> 958,805
<INTEREST-INCOME> 1,428,163
<OTHER-INCOME> 0
<EXPENSES-NET> (4,104,727)
<NET-INVESTMENT-INCOME> (1,717,759)
<REALIZED-GAINS-CURRENT> (5,033,599)
<APPREC-INCREASE-CURRENT> 30,594,034
<NET-CHANGE-FROM-OPS> 23,842,676
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (161,357)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,285,739
<NUMBER-OF-SHARES-REDEEMED> (11,228,873)
<SHARES-REINVESTED> 8,585
<NET-CHANGE-IN-ASSETS> (114,493,237)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (4,550,015)
<GROSS-ADVISORY-FEES> 2,181,629
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4,831,937
<AVERAGE-NET-ASSETS> 290,883,922
<PER-SHARE-NAV-BEGIN> 16.14
<PER-SHARE-NII> (.23)
<PER-SHARE-GAIN-APPREC> 1.39
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (.01)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 17.29
<EXPENSE-RATIO> 1.41
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GOLDMAN
SACHS EQUITY PORTFOLIOS, INC.'S ANNUAL REPORT DATED JANUARY 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 04
<NAME> GOLDMAN SACHS INTERNATIONAL EQUITY FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-START> FEB-01-1995
<PERIOD-END> JAN-31-1996
<INVESTMENTS-AT-COST> 286,653,695
<INVESTMENTS-AT-VALUE> 333,935,303
<RECEIVABLES> 4,154,545
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 338,311,955
<PAYABLE-FOR-SECURITIES> 5,414,722
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,037,412
<TOTAL-LIABILITIES> 7,452,134
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 291,784,579
<SHARES-COMMON-STOCK> 19,241,121
<SHARES-COMMON-PRIOR> 18,940,127
<ACCUMULATED-NII-CURRENT> 227,683
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (9,243,054)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 48,090,613
<NET-ASSETS> 330,859,821
<DIVIDEND-INCOME> 4,473,190
<INTEREST-INCOME> 491,270
<OTHER-INCOME> 0
<EXPENSES-NET> 4,239,091
<NET-INVESTMENT-INCOME> 725,369
<REALIZED-GAINS-CURRENT> 12,455,915
<APPREC-INCREASE-CURRENT> 57,222,860
<NET-CHANGE-FROM-OPS> 70,404,144
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (9,491,864)
<DISTRIBUTIONS-OF-GAINS> (14,089,155)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,082,572
<NUMBER-OF-SHARES-REDEEMED> (6,067,690)
<SHARES-REINVESTED> 1,286,112
<NET-CHANGE-IN-ASSETS> 55,773,352
<ACCUMULATED-NII-PRIOR> (423,846)
<ACCUMULATED-GAINS-PRIOR> (10,496,419)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,096,154
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4,937,809
<AVERAGE-NET-ASSETS> 279,487,166
<PER-SHARE-NAV-BEGIN> 14.52
<PER-SHARE-NII> .13
<PER-SHARE-GAIN-APPREC> 4.00
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (1.45)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 17.20
<EXPENSE-RATIO> 1.52
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GOLDMAN
SACHS EQUITY PORTFOLIOS, INC.'S ANNUAL REPORT DATED JANUARY 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 05
<NAME> GOLDMAN SACHS GROWTH AND INCOME FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-START> FEB-01-1995
<PERIOD-END> JAN-31-1996
<INVESTMENTS-AT-COST> 377,882,134
<INVESTMENTS-AT-VALUE> 435,648,574
<RECEIVABLES> 2,744,039
<ASSETS-OTHER> 127,054
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 438,519,667
<PAYABLE-FOR-SECURITIES> 697,884
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,065,211
<TOTAL-LIABILITIES> 1,763,095
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 372,028,608
<SHARES-COMMON-STOCK> 21,855,325
<SHARES-COMMON-PRIOR> 12,267,186
<ACCUMULATED-NII-CURRENT> 56,087
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 6,905,437
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 57,766,440
<NET-ASSETS> 436,756,572
<DIVIDEND-INCOME> 7,890,451
<INTEREST-INCOME> 1,227,990
<OTHER-INCOME> 0
<EXPENSES-NET> 3,810,516
<NET-INVESTMENT-INCOME> 5,307,925
<REALIZED-GAINS-CURRENT> 18,815,320
<APPREC-INCREASE-CURRENT> 58,081,439
<NET-CHANGE-FROM-OPS> 82,204,684
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (5,300,032)
<DISTRIBUTIONS-OF-GAINS> (11,998,907)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 10,766,604
<NUMBER-OF-SHARES-REDEEMED> (2,027,335)
<SHARES-REINVESTED> 848,870
<NET-CHANGE-IN-ASSETS> 242,984,329
<ACCUMULATED-NII-PRIOR> 29,482
<ACCUMULATED-GAINS-PRIOR> 89,092
<OVERDISTRIB-NII-PRIOR> (750,732)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,748,649
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4,605,357
<AVERAGE-NET-ASSETS> 317,936,193
<PER-SHARE-NAV-BEGIN> 15.80
<PER-SHARE-NII> .33
<PER-SHARE-GAIN-APPREC> 4.75
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (.90)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 19.98
<EXPENSE-RATIO> 1.20
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GOLDMAN
SACHS EQUITY PORTFOLIOS, INC.'S ANNUAL REPORT DATED JANUARY 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 06
<NAME> GOLDMAN SACHS ASIA GROWTH FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-START> FEB-01-1995
<PERIOD-END> JAN-31-1996
<INVESTMENTS-AT-COST> 187,834,470
<INVESTMENTS-AT-VALUE> 214,004,358
<RECEIVABLES> 2,706,839
<ASSETS-OTHER> 125,554
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 216,836,751
<PAYABLE-FOR-SECURITIES> 10,296,828
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,001,214
<TOTAL-LIABILITIES> 11,298,042
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 189,238,989
<SHARES-COMMON-STOCK> 12,467,716
<SHARES-COMMON-PRIOR> 9,337,994
<ACCUMULATED-NII-CURRENT> (1,630,536)
<OVERDISTRIBUTION-NII> (1,801,641)
<ACCUMULATED-NET-GAINS> (8,214,084)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 25,795,578
<NET-ASSETS> 205,538,709
<DIVIDEND-INCOME> 3,748,089
<INTEREST-INCOME> 665,670
<OTHER-INCOME> 0
<EXPENSES-NET> 2,770,277
<NET-INVESTMENT-INCOME> 1,643,482
<REALIZED-GAINS-CURRENT> (5,349,962)
<APPREC-INCREASE-CURRENT> 40,769,587
<NET-CHANGE-FROM-OPS> 37,063,107
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,643,482)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,830,049
<NUMBER-OF-SHARES-REDEEMED> (2,898,305)
<SHARES-REINVESTED> 197,978
<NET-CHANGE-IN-ASSETS> 205,538,709
<ACCUMULATED-NII-PRIOR> 143,969
<ACCUMULATED-GAINS-PRIOR> (2,447,689)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,172,731
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,161,187
<AVERAGE-NET-ASSETS> 156,363,769
<PER-SHARE-NAV-BEGIN> 13.31
<PER-SHARE-NII> .17
<PER-SHARE-GAIN-APPREC> 3.32
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (.31)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.49
<EXPENSE-RATIO> 1.77
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GOLDMAN
SACHS EQUITY PORTFOLIOS, INC.'S ANNUAL REPORT DATED JANUARY 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 07
<NAME> GOLDMAN SACHS BALANCED FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-START> FEB-01-1995
<PERIOD-END> JAN-31-1996
<INVESTMENTS-AT-COST> 50,883,173
<INVESTMENTS-AT-VALUE> 54,395,985
<RECEIVABLES> 4,818,013
<ASSETS-OTHER> 231,285
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 59,445,283
<PAYABLE-FOR-SECURITIES> 8,378,513
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 138,763
<TOTAL-LIABILITIES> 8,517,276
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 46,460,904
<SHARES-COMMON-STOCK> 2,942,730
<SHARES-COMMON-PRIOR> 528,104
<ACCUMULATED-NII-CURRENT> 125,304
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 753,268
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3,588,531
<NET-ASSETS> 50,928,007
<DIVIDEND-INCOME> 404,637
<INTEREST-INCOME> 975,995
<OTHER-INCOME> 0
<EXPENSES-NET> (296,987)
<NET-INVESTMENT-INCOME> 1,083,645
<REALIZED-GAINS-CURRENT> 1,715,887
<APPREC-INCREASE-CURRENT> 3,518,420
<NET-CHANGE-FROM-OPS> 6,317,952
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (991,655)
<DISTRIBUTIONS-OF-GAINS> (962,754)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,578,356
<NUMBER-OF-SHARES-REDEEMED> (271,753)
<SHARES-REINVESTED> 108,023
<NET-CHANGE-IN-ASSETS> 43,418,439
<ACCUMULATED-NII-PRIOR> 20,283
<ACCUMULATED-GAINS-PRIOR> 135
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 148,493
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 563,639
<AVERAGE-NET-ASSETS> 29,698,678
<PER-SHARE-NAV-BEGIN> 14.22
<PER-SHARE-NII> .51
<PER-SHARE-GAIN-APPREC> 3.43
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (.85)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 17.31
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GOLDMAN
SACHS EQUITY PORTFOLIOS, INC.'S ANNUAL REPORT DATED JANUARY 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 08
<NAME> GOLDMAN SACHS MID-CAP EQUITY FUND
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-START> AUG-01-1995
<PERIOD-END> JAN-31-1996
<INVESTMENTS-AT-COST> 126,371,597
<INVESTMENTS-AT-VALUE> 133,538,386
<RECEIVABLES> 2,319,739
<ASSETS-OTHER> 160,333
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 136,018,458
<PAYABLE-FOR-SECURITIES> 171,135
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 176,362
<TOTAL-LIABILITIES> 347,497
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 127,937,397
<SHARES-COMMON-STOCK> 8,525,815
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 102,562
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 464,213
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 7,166,789
<NET-ASSETS> 135,670,961
<DIVIDEND-INCOME> 1,430,514
<INTEREST-INCOME> 212,589
<OTHER-INCOME> 0
<EXPENSES-NET> 554,248
<NET-INVESTMENT-INCOME> 1,088,855
<REALIZED-GAINS-CURRENT> 547,655
<APPREC-INCREASE-CURRENT> 7,166,789
<NET-CHANGE-FROM-OPS> 8,719,857
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (986,293)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 9,029,858
<NUMBER-OF-SHARES-REDEEMED> (568,088)
<SHARES-REINVESTED> 64,045
<NET-CHANGE-IN-ASSETS> 135,670,961
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 391,234
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 640,063
<AVERAGE-NET-ASSETS> 129,348,197
<PER-SHARE-NAV-BEGIN> 15.00
<PER-SHARE-NII> .13
<PER-SHARE-GAIN-APPREC> .90
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (.12)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.91
<EXPENSE-RATIO> .85
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
