<PAGE>
GOLDMAN SACHS
MID-CAP EQUITY FUND
A PORTFOLIO
OF THE GOLDMAN SACHS EQUITY PORTFOLIOS, INC.
Financial Statements
Annual Report
January 31, 1997
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GOLDMAN SACHS MID-CAP EQUITY FUND
- --------------------------------------------------------------------------------
DEAR SHAREHOLDERS:
We are pleased to have the opportunity to discuss the performance and holdings
of the Goldman Sachs Mid-Cap Equity Fund for the 12 months ended January 31,
1997. The U.S. equity market rewarded investors with excellent returns once
again in 1996, with the Goldman Sachs Mid-Cap Equity Fund outperforming its
benchmark by a wide margin during the period under review. To help put the
fund's performance in perspective, we will also provide a brief overview of the
economic and investment environment.
OBJECTIVE AND INVESTMENT APPROACH
The Goldman Sachs Mid-Cap Equity Fund seeks long-term capital growth primarily
by investing at least 65% of its total assets in equities with market
capitalizations of between $500 million and $7 billion at the time of
investment. However, the fund currently intends to emphasize investments in
companies with market capitalizations of under $5 billion at the time of
investment. The fund is managed with a value style, which means we focus on
companies whose stocks we believe are inexpensive relative to their expected
long-term earnings growth and their asset value. Investments may include well-
known companies that are temporarily out of favor due to cyclical economic
conditions or are experiencing near-term difficulties the portfolio managers
judge to be temporary in nature. In-depth fundamental research of a company's
financial structure, its competitive position in the market and its management's
commitment to increasing shareholder value are all critical parts of the fund's
investment approach. Though we are not sector investors, we closely monitor the
fund's sector and industry exposures compared with the benchmark in an effort to
avoid unintentional over- or underweightings.
MID-CAPS PERFORMED WELL, BUT LAGGED LARGE-CAPS
The U.S. stock market surged to record levels during the period under review,
rising an impressive 26.3% (as measured by the Standard & Poor's 500 stock
index). After a run-up from January through mid-February, market volatility
notably increased, as investor sentiment vacillated between two contradictory
concerns. With some economic news, investors feared that the economy was growing
too quickly, making higher inflation a possibility, while other news caused them
to worry that the economy was slowing, putting earnings at risk. In May,
investors briefly overcame their fears and sent the market higher, but their
concerns quickly reemerged and caused the market to settle into another choppy
trading range that culminated in a sharp sell-off in July. However, stock
prices rebounded throughout the second half of the period, as investors became
more confident that the environment of low inflation, moderate economic growth
and healthy corporate earnings would persist. Though small-cap stocks led the
market during the first half of the year, the post-July rally was dominated by a
handful of large-cap, growth companies.
During the period, the mid-cap sector of the stock market recorded a total
return of 20.9% (as measured by the Russell Midcap index), lagging its larger
peers but slightly outperforming small-cap stocks, which rose 19.0% (as measured
by the Russell 2000 index). The divergence between the performance of the
different stock capitalizations was primarily a reflection of investors "flight
to quality" in the uncertain market, with investors favoring large-cap growth
companies that were highly liquid.
1
<PAGE>
Letter to Shareholders
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GOLDMAN SACHS MID-CAP EQUITY FUND (cont'd)
- --------------------------------------------------------------------------------
ECONOMIC GROWTH REBOUNDED AFTER A WEAK START, THEN MODERATED
When the period began, lackluster consumer spending, harsh winter weather and
the General Motors strike restrained economic growth. Despite these adverse
conditions, the economy advanced faster than expected, with first-quarter real
GDP growth reported at 2.0% (annualized). Momentum accelerated even more
dramatically during the second quarter, as industrial activity, automobile sales
and home sales all showed significant improvement. As a result, second-quarter
GDP rose a robust 4.7% (annualized), its highest rate in two years.
The economy's torrid growth cooled markedly during the third quarter, with
annualized real GDP slowing to 2.1%, largely due to lackluster consumer spending
and a widening U.S. trade deficit. This slowdown proved to be temporary,
however, as a wide range of economic reports pointed toward renewed strength
from October through December. Fourth-quarter real GDP growth was revised to
3.9% (annualized), reflecting a narrowing trade deficit, rising consumer
spending and accelerating manufacturing activity. In January 1997, the economic
data suggested that the economy's advance was continuing. Despite firm growth,
underlying inflation remained surprisingly mild. For all of 1996, consumer
prices rose only 2.9%.
The U.S. Federal Reserve cut the Federal funds rate by 25 basis points in
January 1996, just prior to the start of the period. Though stronger than
expected growth shifted investor expectations from further Federal Reserve
interest rate cuts to potential tightening, the Fed then left rates unchanged.
As of January 31, 1997, the Federal funds rate remained at 5.25%.
PERFORMANCE REVIEW: STRONG OUTPERFORMANCE, LED BY OUR TECHNOLOGY, FINANCIAL AND
ENERGY STOCKS
For the 12-month period ended January 31, 1997, the Goldman Sachs Mid-Cap
Equity Fund had a total return of 25.63% based on net asset value, significantly
outperforming the 20.90% total return of the fund's benchmark, the Russell
Midcap Index. We are also pleased to note that the fund fared very well
compared with its peers. For the 12-month period ended January 31, 1997, the
fund ranked within the top 20% of the Lipper mid-cap fund category (30th of
157), according to Lipper Analytical Services, Inc. (Please note that Lipper
rankings do not take sales charges into account and that past performance is not
a guarantee of future results.)
The fund's strong results came primarily during the second half of the period,
and can be attributed to successful stock selection. The best performing stocks
came from a wide range of sectors, with technology, financial and energy-related
investments performing particularly well. In addition, the fund benefited from
several of its positions in consumer nondurables, a sector that had been
underweighted early in the period and subsequently increased.
The fund's top performers included a number of manufacturers of computer-
related components. For example, we took advantage of the slump in technology
stocks in early 1996 by establishing a position in TERADYNE, INC., a
manufacturer of semiconductor testing equipment, at an extremely inexpensive
price. The stock then rebounded much faster than we anticipated in advance of
the turnaround of the semiconductor cycle. Other successful holdings in the
sector were the best performing initial public offering of 1996, CYMER, INC., a
producer of excimer lasers used to etch semiconductors, and SEAGATE TECHNOLOGY,
INC., the world's largest independent disk-drive maker. Seagate Technology
spent much of the past year
2
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GOLDMAN SACHS MID-CAP EQUITY FUND (cont'd)
- --------------------------------------------------------------------------------
integrating its acquisition of Conner Peripherals, Inc., which gave it a
dominant market share and made it the most vertically integrated hard disk-drive
manufacturer. By the end of the period, we sold the fund's position in Cymer and
reduced Teradyne and Seagate Technology as they appreciated and became less
undervalued.
In the financial sector, several of our bank and insurance holdings performed
extremely well. Bank stocks included GREENPOINT FINANCIAL CORP., which reported
strong demand for its "no-documentation" and "low-documentation" mortgages;
REPUBLIC BANK OF NEW YORK CORP., which achieved an earnings improvement due to
better than expected revenues and non-interest expense control; and STANDARD FED
BANCORPORATION, a Michigan-based thrift that is in the process of being
acquired, which we sold after it reached our target price. In the insurance
industry, OLD REPUBLIC INTERNATIONAL CORP. enhanced shareholder value in a slow
premium growth environment by improving its capital management, which included a
stock buyback program; USLIFE CORP. surged amid takeover speculation, and
ALLMERICA FINANCIAL CORP. announced a restructuring that would combine its four
units.
The fund also benefited from several of its energy and consumer nondurable
investments. TOSCO CORP., an oil refiner and distributor, continued to
consolidate its market position through an ambitious acquisition strategy, and
LONG ISLAND LIGHTING CO., a New York-based utility, agreed to be acquired by
Brooklyn Union Gas Co. at a very attractive price. In the consumer nondurable
sector, SUNBEAM CORP., a leading consumer products company, surged due to the
aggressive restructuring program initiated by its new CEO; and FRUIT OF THE
LOOM, INC. performed well due to increased investor recognition of its ability
to improve future cash flow.
DIFFICULT INDUSTRY CONDITIONS IMPACTED SEVERAL HOLDINGS
Fund holdings that did not fulfill our expectations included several companies
that were affected by difficult industry conditions. These included GEON CORP.,
VISHAY INTERTECHNOLOGY, INC. and STONE CONTAINER CORP., which all suffered when
their respective businesses -- chemicals, electronic capacitors, and pulp and
paper products -- came under pressure due to increased competition and
overcapacity. Another disappointment was CENTRAL MAINE POWER CO., which was
impacted by continuing uncertainty in the regulatory environment for electric
utilities. We believe that the market has overreacted to the short-term
problems facing these companies and the fund continued to hold them as of the
end of the period.
NEW INVESTMENTS ADDED DIVERSIFICATION
After many holdings performed extremely well and were sold upon reaching our
price targets, we initiated several new investments that we determined were very
undervalued. These included two stocks that were among the fund's 10 largest
positions as of the end of the period under review: INTERNATIONAL MULTIFOODS
CORP. and UNICOM CORP. International Multifoods Corp., a distributor of
specialty foods, has a relatively low valuation, a high degree of operating
leverage and new management that is expected to improve profitability,
particularly in its vending distribution business. Unicom Corp., an electric
utility that operates 12 nuclear units at six sites, generates excess capital
and, unlike many other electric utilities, has no utility power purchase
problems. We established a position after its stock price declined due to a
mandated increase in spending on operations and maintenance, an issue that
management believes will not impair the company's long-term prospects.
We established a major position in PERRIGO CO., the largest manufacturer of
store-brand health and
3
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GOLDMAN SACHS MID-CAP EQUITY FUND (cont'd)
- --------------------------------------------------------------------------------
beauty aids, over-the-counter pharmaceuticals and nutritional products. We
expect Perrigo to benefit from stricter cost controls as well as its "over-the-
counter switch" business, where it produces drugs that are equivalent to brand-
name products after the original drug patents expire. These products are a
significant new source of revenues because they command higher margins and have
higher unit growth. Another new position was IMATION CORP., a spin-off of 3M
Co., which manufactures products for data storage, printing and publishing,
medical imaging and photography. Imation has a strong balance sheet and is using
the cash flow generated by its older businesses to develop new products such as
high-capacity disks.
We significantly increased the fund's existing position in THIOKOL CORP., a
defense/aerospace company that has a debt-free balance sheet, trades at a very
low earnings multiple and is reducing its dependence on the federal government.
As part of this strategy, Thiokol formed a joint venture to manufacture
components for commercial aircraft, which will enable it to benefit from an
expected upturn in the aircraft cycle.
<TABLE>
<CAPTION>
TOP 10 EQUITY HOLDINGS AS OF JANUARY 31, 1997
COMPANY LINE OF BUSINESS PERCENTAGE OF TOTAL NET ASSETS
<S> <C> <C>
Thiokol Corp. Defense/Aerospace 3.0%
Shopko Stores, Inc. Discount Retailer 2.5%
Goodyear Tire & Rubber Co. Tire and Rubber Products 2.5%
Republic Bank of New York Corp. Bank 2.5%
Long Island Lighting Co. Electric Utilities 2.5%
International Multi-foods Corp. Food Distributor 2.4%
Avnet, Inc. Electronic Components Distributor 2.4%
USLife Corporation Insurance 2.4%
Unicom Corp. Utility 2.4%
Owens-Illinois, Inc. Packaging 2.4%
</TABLE>
OUTLOOK
As of this writing, we believe the stock market, in general, is somewhat
overvalued. Though we still expect the market to achieve positive results in
1997, its returns are unlikely to match the strong returns of 1995 or 1996.
Despite the expensive market, the fund's current holdings are attractively
valued and we expect them to continue to perform well. We intend to continue to
utilize extensive fundamental research to identify attractive, undervalued
stocks with solid long-term prospects.
Sincerely,
/s/ Eileen A. Aptman
Eileen A. Aptman
Portfolio Manager
/s/ Ronald E. Gutfleish
Ronald E. Gutfleish
Portfolio Manager
U.S. Active Equity Value
March 3, 1997
4
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GOLDMAN SACHS MID-CAP EQUITY FUND
- --------------------------------------------------------------------------------
The following graph shows the value, as of January 31, 1997, of a $1,000,000
investment made on the inception date of the Fund. For comparative purposes,
the performance of the Fund's benchmark (the Russell Midcap Index ("Russell
Midcap")) is shown for the appropriate time periods. All performance data shown
represents past performance and should not be considered indicative of future
performance which will fluctuate with changes in market conditions. These
performance fluctuations will cause an investor's shares, when redeemed, to be
worth more or less than their original cost.
(dollars in thousands)
[LINE GRAPH APPEARS HERE]
GS MIDCAP RUSSELL MIDCAP
8/1/95 $1,000 $1,000
1/31/96 $1,069 $1,094
1/31/97 $1,344 $1,523
<TABLE>
<CAPTION>
Average Annual Total Return
-----------------------------------
One Year Since Inception
(a)
-----------------------------------
<S> <C> <C>
Institutional 25.63% 21.65%
Shares
</TABLE>
(a) Institutional shares commenced operations on August 1, 1995.
5
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
- --------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS
January 31, 1997
<TABLE>
<CAPTION>
Shares Description Value
- -------------------------------------------------------------
<S> <C> <C>
Common Stocks--96.5%
Airlines--2.0%
102,400 Continental Airlines, $ 2,867,200
Inc.*
- -------------------------------------------------------------
APPLIANCE MANUFACTURER--1.8%
95,300 Sunbeam Corp., Inc. 2,644,575
- -------------------------------------------------------------
AUTO--ORIGINAL EQUIPMENT MANUFACTURER--0.7%
48,500 Exide Corp. 1,091,250
- -------------------------------------------------------------
BANKS--4.1%
27,600 Greenpoint Financial Corp. 1,504,200
40,700 Republic Bank of New York 3,607,038
Corp.
14,800 Unionbancal Corp. 791,800
5,903,038
- -------------------------------------------------------------
CHEMICALS--COMMODITY--1.2%
94,600 Geon Co. 1,773,750
- -------------------------------------------------------------
COMPUTERS AND PERIPHERALS--3.2%
124,300 Decisionone Corp. 2,175,250
48,000 Seagate Technology, Inc.* 2,472,000
4,647,250
- -------------------------------------------------------------
CONSUMER STAPLES--1.8%
56,135 Block Drug Company, Inc. 2,638,345
- -------------------------------------------------------------
DEFENSE--3.0%
76,600 Thiokol Corp. 4,289,600
DEPARTMENT STORES--2.5%
228,000 Shopko Stores, Inc. 3,619,500
- -------------------------------------------------------------
ELECTRIC UTILITIES--8.6%
242,100 Central Maine Power Co. 2,693,362
38,500 CMS Energy Corp. 1,289,750
158,100 Long Island Lighting Co. 3,596,775
147,500 Niagara Mohawk Power 1,493,437
Corp.*
145,900 Unicom Corp. 3,446,888
12,520,212
- -------------------------------------------------------------
FOOD--4.1%
161,900 Chiquita Brands 2,367,788
International, Inc.
197,000 International Multifoods 3,546,000
Corp.
5,913,788
- -------------------------------------------------------------
FOREST PRODUCTS--2.7%
31,000 Georgia-Pacific Corp. 2,282,375
130,000 Stone Container Corp. 1,755,000
4,037,375
- -------------------------------------------------------------
HEALTHCARE MANAGEMENT--4.8%
57,800 Health Systems 1,495,575
International, Inc.*
104,900 Horizon CMS Healthcare 1,442,375
Corp.
126,400 Tenet Healthcare Corp.* 3,412,800
33,000 Trigon Healthcare Inc. 585,750
6,936,500
- -------------------------------------------------------------
HOME BUILDERS--3.1%
46,000 Centex Corp. 1,794,000
104,600 Lennar Corp. 2,784,975
4,578,975
- -------------------------------------------------------------
INSURANCE--LIFE--3.8%
36,900 Reliastar Financial Corp. 2,047,950
84,700 US Life Corp. 3,472,700
5,520,650
- -------------------------------------------------------------
<CAPTION>
Shares Description Value
- -------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
INSURANCE--PROPERTY AND CASUALTY--3.8%
90,100 Allmerica Financial Group $ 3,299,912
84,300 American States Financial 2,223,413
Corp.*
5,523,325
- -------------------------------------------------------------
INSURANCE BROKERS--1.5%
80,900 Old Republic 2,174,187
International
Corp.
- -------------------------------------------------------------
INVESTMENT BROKERS AND MANAGERS--1.0%
44,300 Lehman Brothers Holdings, 1,400,987
Inc.
- -------------------------------------------------------------
LOGISTICS/TRUCKING--1.9%
106,800 Consolidated Freightways, 2,710,050
Inc.
- -------------------------------------------------------------
LEISURE--2.1%
115,300 Royal Caribbean Cruise 3,041,038
Lines
- -------------------------------------------------------------
MACHINERY--0.9%
22,400 Tecumseh Products, Inc. 1,293,600
MEDIA--1.2%
76,200 Carmike Cinemas 1,809,750
- -------------------------------------------------------------
MEDICAL--2.5%
68,800 Owens and Minor, Inc. 705,200
272,700 Perrigo Co. 2,897,438
3,602,638
- -------------------------------------------------------------
OIL REFINING AND MARKETING--5.5%
59,400 Ashland Inc. 2,561,625
34,600 Tosco Corp. 3,062,100
71,700 Valero Energy Corp. 2,419,875
8,043,600
- -------------------------------------------------------------
PACKAGING--2.4%
144,000 Owens-Illinois Inc.* 3,420,000
- -------------------------------------------------------------
RECREATIONAL PRODUCTS--1.7%
149,300 Outboard Marine Corp. 2,482,112
RESTAURANTS--1.8%
369,800 Darden Restaurants 2,681,050
- -------------------------------------------------------------
SEMICONDUCTORS AND ELECTRONICS--7.8%
56,600 Avnet, Inc. 3,502,125
98,000 Imation Corp. 2,854,250
69,200 Silicon Valley Group, 1,859,750
Inc.*
124,250 Vishay Intertechnology, 2,997,531
Inc.*
11,213,656
- -------------------------------------------------------------
SOFTWARE--1.4%
62,900 Autodesk, Inc. 1,989,213
- -------------------------------------------------------------
STEEL--1.8%
63,600 AK Steel Holding Corp. 2,559,900
- -------------------------------------------------------------
SUPERMARKETS--1.9%
168,800 Fleming Companies, Inc. 2,721,900
TECHNOLOGY CAPITAL GOODS--1.9%
91,700 Teradyne, Inc.* 2,831,238
- -------------------------------------------------------------
TEXTILES--4.1%
141,100 Angelica Corp. 2,698,537
82,300 Fruit of the Loom, Inc.* 3,302,287
6,000,824
- -------------------------------------------------------------
TIRE AND OTHER RELATED
RUBBER PRODUCTS--2.5%
66,200 Goodyear Tire & Rubber Co. 3,607,900
- -------------------------------------------------------------
TOBACCO--1.4%
67,000 Universal Corp. 2,077,000
- -------------------------------------------------------------
TOTAL COMMON STOCKS (Cost $118,250,113) $ 140,165,976
- -------------------------------------------------------------
</TABLE>
6
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
- --------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS (continued)
January 31, 1997
<TABLE>
<CAPTION>
Principal Amount
Interest Rate Maturity Date Value
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
REPURCHASE AGREEMENT--2.8%
Joint Repurchase Agreement Account
$4,100,000 5.63% 02/03/97 $ 4,100,000
- -----------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENT
(Cost $4,100,000) $ 4,100,000
TOTAL INVESTMENTS (COST $122,350,113)** $144,265,976
- -----------------------------------------------------------------------------------
FEDERAL INCOME TAX INFORMATION:
Gross unrealized gain for investments in which value exceeds cost
$ 27,053,378
Gross unrealized loss for investments in which cost exceeds value
(5,196,819)
- -----------------------------------------------------------------------------------
Net unrealized gain $ 21,856,559
- -----------------------------------------------------------------------------------
</TABLE>
* Non-income producing security.
** The aggregate cost for federal income tax purposes is $122,409,417.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
7
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
January 31, 1997
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Investment in securities, at value (identified cost $144,265,976
$122,350,113)
Cash 31,121
Receivables:
Fund shares sold 87,576
Investment securities sold 4,552,534
Dividends and interest 56,999
Deferred organization expenses, net 60,056
Other assets 10,218
TOTAL ASSETS 149,064,480
LIABILITIES:
Payables:
Investment securities purchased 3,687,585
Investment advisory fees 71,762
Administration fees 18,370
Transfer agent fees 4,807
Accrued expenses and other liabilities 28,626
TOTAL LIABILITIES 3,811,150
NET ASSETS:
Paid-in capital 115,859,949
Distributions in excess of net investment income (25,142)
Accumulated undistributed net realized gain on investment and 7,502,660
option transactions
Net unrealized gain on investments 21,915,863
NET ASSETS $145,253,330
Total shares of beneficial interest outstanding, $.001 par 7,755,774
value (50,000,000 shares authorized)
Net asset value, offering and redemption price per share (net $18.73
assets/shares outstanding)
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
Goldman Sachs Mid-Cap Fund
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
For the Year Ended January 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INVESTMENT INCOME:
<S> <C>
Dividends $ 2,631,906
Interest 188,358
TOTAL INCOME 2,820,264
- -----------------------------------------------------
EXPENSES:
Investment adviser fees 771,956
Administration fees 192,989
Professional fees 68,906
Transfer agent fees 51,464
Custodian fees 29,506
Amortization of deferred organization 17,213
expenses
Directors' fees 2,234
Other 31,778
- -----------------------------------------------------
TOTAL EXPENSES $1,166,046
Less Expenses reimbursable by Goldman (72,441)
Sachs
NET EXPENSES 1,093,605
NET INVESTMENT INCOME 1,726,659
- -----------------------------------------------------
REALIZED AND UNREALIZED GAIN ON
INVESTMENT AND OPTION TRANSACTIONS:
Net realized gain on investment 13,627,039
transactions
Net realized gain on options written 40,466
Net change in unrealized gain on 14,749,074
investments
- -----------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON 28,416,579
INVESTMENT AND OPTION TRANSACTIONS
- -----------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING $30,143,238
FROM OPERATIONS
- -----------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Selected Data for a Share Outstanding throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED PERIOD ENDED
JANUARY 31, 1997 JANUARY 31, 1996 (A)
---------------------------- ---------------------------
<S> <C> <C> <C> <C>
FROM OPERATIONS:
Net investment income $ 1,726,659 $ 1,088,855
Net realized gain on investment 13,627,039 547,655
transactions
Net realized gain (loss) on options 40,466 (83,442)
written
Net change in unrealized gain on 14,749,074 7,166,789
investments
- ------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting
from operations 30,143,238 8,719,857
- ------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (1,837,675) (986,293)
In excess of net investment income (25,142) ---
From net realized gains (6,629,058) ---
Total distributions to shareholders (8,491,875) (986,293)
- ------------------------------------------------------------------------------------------------------------
FROM SHARE TRANSACTIONS: SHARES SHARES
- ------------------------------------------------------------------------------------------------------------
Proceeds from sales of shares 227,071 3,933,239 9,029,858 135,730,361
Reinvestment of dividends and 483,747 8,489,760 64,045 986,293
distributions
Cost of shares repurchased (1,480,859) (24,491,993) (568,088) (8,779,257)
Net increase (decrease) in net assets
resulting from share transactions (770,041) (12,068,994) 8,525,815 127,937,397
- ------------------------------------------------------------------------------------------------------------
TOTAL INCREASE 9,582,369 135,670,961
NET ASSETS:
Beginning of period 135,670,961 ---
End of period $145,253,330 $135,670,961
- ------------------------------------------------------------------------------------------------------------
Accumulated undistributed
(distributions in excess of) net $ (25,142) $ 102,562
investment income
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(a) For the period from August 1, 1995 (commencement of operations) to January
31, 1996.
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED PERIOD ENDED
JANUARY 31, 1997 JANUARY 31, 1996 (a)
------------------------------------------------------
<S> <C> <C>
Net asset value, beginning of period $ 15.91 $ 15.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.24 0.13
Net realized and unrealized gain on investments 3.77 0.90
and options
- ------------------------------------------------------------------------------------------------------------
Total income (loss) from investment operations 4.01 1.03
- ------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.24) (0.12)
- ------------------------------------------------------------------------------------------------------------
In excess of net investment income (0.02) --
Net realized gain on investments and option (0.93) --
transactions
- ------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (1.19) (0.12)
- ------------------------------------------------------------------------------------------------------------
Net increase in net asset value 2.82 0.91
- ------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 18.73 $ 15.91
Total return /(b)/ 25.63% 6.89% /(d)/
Portfolio turnover rate 74.03% 58.77% /(d)/
Average commission rate /(e)/ $ 0.0547 --
Net assets at end of period $145,253,330 $135,670,961
Ratio of net expenses to average net assets /(c)/ 0.85% 0.85%
Ratio of net investment income to average net assets /(c)/ 1.35% 1.67%
Ratios assuming no expense limitations:
Ratio of expenses to average net assets /(c)/ 0.91% 0.98%
Ratio of net investment income to average net assets /(c)/ 1.29% 1.54%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ For the period from August 1, 1995 (commencement of operations) to January
31, 1996.
/(b)/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions and a complete redemption
of the investment at the net asset value at the end of the period.
/(c)/ Annualized.
/(d)/ Not annualized.
/(e)/ For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged. This rate may vary due to various types
of transactions and number of security trades executed.
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
January 31, 1997
- --------------------------------------------------------------------------------
1. ORGANIZATION
Goldman Sachs Mid-Cap Equity Fund ("the Fund") is a separate diversified
portfolio of Goldman SachsEquity Portfolios, Inc. (the "Company"). The Company
consists of eight funds and is a Marylandcorporation registered under the
Investment Company Act of 1940, as amended, as an open-end,management investment
company. The Fund offers two classes of shares - Institutional shares
andService shares. No Service shares were outstanding as of January 31, 1997.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significantaccounting policies consistently
followed by the Fund. The preparation of financial statements inconformity with
generally accepted accounting principles requires management to make
estimatesand assumptions that may affect the reported amounts.
A. Investment Valuation
- -- --------------------
Investments in securities traded on a U.S. or foreignsecurities exchange or the
NASDAQ system are valued daily at their last sale or closing price on
theprincipal exchange on which they are traded or NASDAQ. If no sale occurs,
securities traded on aU.S. exchange or NASDAQ are valued at the mean between the
closing bid and asked price, andsecurities traded on a foreign exchange will be
valued at the official bid price. Unlisted equity anddebt securities for which
market quotations are available are valued at the mean between the mostrecent
bid and asked prices. Debt securities are valued at prices supplied by an
independent pricingservice, which reflect broker/dealer-supplied valuations and
matrix pricing systems. Short-termdebt obligations maturing in sixty days or
less are valued at amortized cost. Restricted securities, andother securities
for which quotations are not readily available, are valued at fair value using
methodsapproved by the Board of Directors of the Company.
B. Securities Transactions and Investment Income
- -- ---------------------------------------------
Securities transactions are recorded on the tradedate. Realized gains and
losses on sales of investments are calculated on the identified-costbasis.
Dividend income is recorded on the ex-dividend date. Dividends for which the
Fund hasthe choice to receive either cash or stock are recognized as investment
income in an amountequal to the cash dividend. This amount is also used as an
estimate of the fair value of the stockreceived. Interest income is determined
on a basis of interest accrued, premium amortized anddiscount earned.
C. Federal Taxes
- -- -------------
It is the Fund's policy to comply with the requirements of the Internal Revenue
Codeapplicable to regulated investment companies and to distribute substantially
all of its investmentcompany taxable income and capital gains to its
shareholders. Accordingly, no federal tax provisionis required. The
characterization of distributions to shareholders for financial reporting
purposes isdetermined in accordance with income tax rules. Therefore, the source
of a portfolio's distributionsmay be shown in the accompanying financial
statements as either from or in excess of netinvestment income or net realized
gain on investment transactions, or from capital, dependingon the type of
book/tax differences that may exist.
D. Deferred Organization Expenses
- -- ------------------------------
Organization-related costs are being amortized on a straight-line basis over a
period of five years.
12
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
January 31, 1997
- --------------------------------------------------------------------------------
E. Expenses
- -- --------
Expenses incurred by the Company which do notspecifically relate to an
individual fund of the Company are allocated to the funds based on eachfund's
relative average net assets for the period.
F. Option Accounting Principles
- -- ----------------------------
When the Fund writes call or put options, an amount equal to the premium
received is recordedas an asset and as an equivalent liability. The amount of
the liability is subsequently marked-to-market to reflect the current market
value of the option written. When a written option expires onits stipulated
expiration date or the Fund enters into a closing purchase transaction, the Fund
realizes again or loss without regard to any unrealized gain or loss on the
underlying security, and the liabilityrelated to such option is extinguished.
When a written call option is exercised, the Fund realizes again or loss from
the sale of the underlying security, and the proceeds of the sale are
increasedby the premium originally received. When a written put option is
exercised, the amount of thepremium originally received will reduce the cost of
the security which the Fund purchases uponexercise. There is a risk of loss
from a change in value of such options which may exceed the relatedpremiums
received.
Upon the purchase of a call option or aprotective put option by the Fund, the
premium paid is recorded as an investment and subsequentlymarked-to-market to
reflect the current market value of the option. If an option which the Fundhas
purchased expires on the stipulated expiration date, the Fund will realize a
loss in the amount ofthe cost of the option. If the Fund enters into a closing
sale transaction, the Fund will realize a gainor loss, depending on whether the
sale proceeds from the closing sale transaction are greater or lessthan the cost
of the option. If the Fund exercises a purchased put option, the Fund will
realize a gainor loss from the sale of the underlying security, and the proceeds
from such sale will be decreased bythe premium originally paid. If the Fund
exercises a purchased call option, the cost of the securitywhich the Fund
purchases upon exercise will be increased by the premium originally paid.
G. Futures Contracts
- -- -----------------
The Fund may enter into financial futures contracts for hedging purposes or to
increase total return. Upon entering into a futures contract, the Fund is
required to deposit with a broker an amount of cashor securities equal to the
minimum "initial margin" requirement of the futures exchange on which
thecontract is traded. Subsequent payments ("variation margin") are made or
received by theFund each day, dependent on the daily fluctuations in the value
of the underlying index, and arerecorded for financial reporting purposes as
unrealized gains or losses by the Fund. Whenentering into a closing
transaction, for book purposes, the Fund will realize a gain or loss equalto the
difference between the value of the futures contract to sell and the futures
contract to buy. Futures contracts are valued at the most recent settlement
price, unless such price does not reflectthe fair market value of the contract,
in which case the position will be valued using methods approvedby the Board of
Directors of the Company.
Certain risks may arise upon entering intofutures contracts. The predominant
risk is that the changes in the value of the futures contract may notdirectly
correlate with changes in the value of the underlying securities. This risk may
decrease theeffectiveness of the Fund's hedging strategies and may also result
in a loss to the Fund.
13
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
January 31, 1997
- --------------------------------------------------------------------------------
3. AGREEMENTS
Goldman Sachs Asset Management ("GSAM"), aseparate operating division of
Goldman, Sachs & Co. ("Goldman Sachs"), acts as the Fund'sinvestment adviser
pursuant to an Investment Advisory Agreement. Under the InvestmentAdvisory
Agreement, GSAM, subject to the general supervision of the Company's Board of
Directors,manages the Fund's portfolio. As compensation for the services
rendered under the AdvisoryAgreement and the assumption of the expenses related
thereto, GSAM is entitled to a fee,computed daily and payable monthly, at an
annual rate equal to .60% of the Fund's average daily netassets.
GSAM also acts as the Fund's administratorpursuant to an Administration
Agreement. Under the Administration Agreement, GSAM administersthe Fund's
business affairs, including providing facilities. As compensation for the
servicesrendered pursuant to the Administration Agreement, the Fund pays GSAM a
fee, computeddaily and payable monthly, at an annual rate equal to .15% of the
Fund's average daily net assets.
Goldman Sachs has voluntarily agreed to reduce or limit certain "Other
Expenses" (excludingadvisory, administration, service plan and transfer agent
fees and litigation, indemnification, taxes,interest, brokerage commissions and
extraordinary expenses) until further notice to the extent suchexpenses exceed
.06% of the average daily net assets of the Fund. For the year ended January
31,1997, these expense reimbursements amounted to $72,441 and Goldman Sachs owed
the Fund $8,717at year end.
Goldman Sachs serves as the Distributor ofshares of the Fund pursuant to a
distribution agreement and receives no fee. Goldman Sachsalso serves as the
Transfer Agent of the Fund for a fee.
4. LINE OF CREDIT FACILITY
The Fund participates in a $250,000,000 uncommitted, unsecured revolving line of
creditfacility. In addition, the Fund participates in a $50,000,000 committed,
unsecured revolving lineof credit facility. Both facilities are to be used
solely for temporary or emergency purposes. Under the most restrictive
arrangement, the Fund must own securities having a market value inexcess of 300%
of the total bank borrowings. The interest rate on the borrowings is based on
theFederal Funds rate. The committed facility also requires a fee to be paid
based on the amount of thecommitment which has not been utilized. During the
year ended January 31, 1997, the Fund did nothave any borrowings under these
facilities.
5. PORTFOLIO SECURITIES TRANSACTIONS
Purchases and proceeds of sales or maturities ofsecurities (excluding short-term
investments and options) for the year ended January 31, 1997 were$92,601,511 and
$112,186,001, respectively.
For the year ended January 31, 1997, optiontransactions in the Fund were as
follows:
<TABLE>
<CAPTION>
Put Options written Contracts Premium Received
- ----------------------------------------------------
<S> <C> <C>
Balance outstanding,
beginning of period -- $ --
Options written 240 40,466
Options expired (240) (40,466)
- ----------------------------------------------------
Balance outstanding,
end of period -- $ 0
- ----------------------------------------------------
</TABLE>
Certain risks arise related to written call or put options from the possible
inability of counterpartiesto meet terms of their contracts.
For the year ended January 31, 1997, GoldmanSachs earned approximately $22,000
of brokerage commissions from portfolio transactions executedon behalf of the
Fund.
14
<PAGE>
Goldman Sachs Mid-Cap Equity Fund
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
January 31, 1997
- --------------------------------------------------------------------------------
6. REPURCHASE AGREEMENTS
During the term of a repurchase agreement, thevalue of the underlying
securities, including accrued interest, is required to equal or exceed thevalue
of the repurchase agreement. The underlying securities for all repurchase
agreements are held insafekeeping at the Fund's custodian.
7. JOINT REPURCHASE AGREEMENT ACCOUNT
The Fund, together with other registered investment companies having advisory
agreements withGSAM, transfer uninvested cash balances into joint accounts, the
daily aggregate balance of which isinvested in one or more repurchase
agreements. The underlying securities for the repurchaseagreements are U.S.
Treasury obligations. At January 31, 1997, the Fund had an undividedinterest
in the repurchase agreements in the following joint account which equaled
$4,100,000in principal amount. At January 31, 1997, the repurchase agreements
held in this joint account,along with the corresponding underlying securities
(including the type of security, market value,interest rate and maturity date)
were as follows:
<TABLE>
<CAPTION>
Principal Interest Maturity Amortized
Amount Rate Date Cost
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Bear Stearns Securities, dated 01/31/97, repurchase price
$800,375,333 (GNMA: $26,604,837, 7.50%, 10/15/26; FNMA:
$720,411,516, 5.50% - 8.00%, 02/01/09 -09/01/26; FHLMC:
77,372,676, 6.0% -$ 8.0%, 04/01/98 - 07/01/26)
$800,000,000 5.63% 02/03/97 $ 800,000,000
Nomura Securities, dated 01/31/97, repurchase price
$100,047,083 (GNMA: $102,007,864, 5.5% - 10.25%
01/15/20 - 01/20/27)
100,000,000 5.65 02/03/97 100,000,000
Lehman Government Securities, dated 01/31/97, repurchase
price $201,894,173 (U.S. Treasury Notes: $191,656,654,
6.375%, 01/15/00-08/15/02; U.S. Treasury Stripped
Securities: $14,095,535 05/15/02 - 11/15/03)
201,800,000 5.60 02/03/97 201,800,000
TOTAL JOINT REPURCHASE AGREEMENT ACCOUNT $1,101,800,000
- --------------------------------------------------------------------------------
</TABLE>
8. CERTAIN RECLASSIFICATIONS
In accordance with Statement of Position 93-2, theMid-Cap Equity Fund has
reclassified $8,454 from paid-in capital to distributions in excess of
netinvestment income. These reclassifications have no impact on the net asset
value of the Fund and isdesigned to present the Fund's capital accounts on a tax
basis.
9. OTHER MATTERS
As of January 31, 1997, The Goldman, Sachs & Co. Employees Profit Sharing and
Retirement IncomePlan was the beneficial owner of approximately 98% of the
outstanding shares of the Fund.
15
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of GoldmanSachs Mid-Cap Equity Fund:
We have audited the accompanying statement ofassets and liabilities of Goldman
Sachs Mid-Cap Equity Fund, one of the portfolios constituting Goldman Sachs
Equity Portfolios, Inc., including the statement of investments, as of January
31, 1997, and the relatedstatement of operations and the statement of changes in
net assets and the financial highlights for the periodspresented. These
financial statements and the financial highlights are the responsibility of the
fund's management. Our responsibility is to express an opinion on these
financial statements and the financial highlightsbased on our audits.
We conducted our audits in accordance withgenerally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtainreasonable assurance about whether the financial statements and the
financial highlights are free ofmaterial misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts anddisclosures in
the financial statements. Our procedures included confirmation of securities
owned as of January 31, 1997 by correspondence with the custodian and brokers.
An audit also includes assessing the accountingprinciples used and significant
estimates made by management, as well as evaluating the overall
financialstatement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements and the financial highlights referred
to above present fairly, in allmaterial respects, the financial position of
Goldman Sachs Mid-Cap Equity Fund as of January 31, 1997, theresults of its
operations and the changes in its net assets and the financial highlights for
the periods presented, inconformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 15, 1997
16
<PAGE>
Goldman Sachs
1 New York Plaza
New York, NY 10004
DIRECTORS
Ashok N. Bakhru, Chairman
David B. Ford
Douglas C. Grip
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
OFFICERS
Douglas C. Grip, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
GOLDMAN SACHS
Investment Adviser, Administrator,
Distributor and Transfer Agent
17
