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GOLDMAN SACHS MONEY MARKET TRUST
GOLDMAN SACHS--INSTITUTIONAL LIQUID ASSETS
4900 Sears Tower
Chicago, Illinois 60606
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STATEMENT OF ADDITIONAL INFORMATION -- MAY 1, 1996
ILA UNITS
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Goldman Sachs Money Market Trust (the "Trust") is a no-load, open-end
management investment company (or mutual fund) which includes the Goldman Sachs-
- -Institutional Liquid Assets portfolios. This Statement of Additional
Information relates solely to the offering of ILA Units of:
Prime Obligations Portfolio;
Money Market Portfolio;
Treasury Obligations Portfolio;
Treasury Instruments Portfolio;
Government Portfolio;
Federal Portfolio;
Tax-Exempt Diversified Portfolio;
Tax-Exempt California Portfolio; and
Tax-Exempt New York Portfolio (individually, a "Portfolio" and collectively
the "Portfolios").
Goldman Sachs Asset Management ("GSAM" or the "Adviser"), a separate
operating division of Goldman, Sachs & Co. ("Goldman Sachs"), serves as the
Portfolios' investment adviser. Goldman Sachs serves as distributor and
transfer agent to the Portfolios.
The Goldman Sachs Mutual Funds Group ("MFG") offers banks, corporate cash
managers, investment advisers and other institutional investors a family of
professionally-managed mutual funds, including money market, fixed income and
equity funds, and a range of related services. MFG is part of GSAM. 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 clients' interests. As Goldman Sachs
clients, unitholders will be assigned an Account Administrator ("AA"), who is
ready to help unitholders with questions concerning their accounts. During
business hours, unitholders can call their AA through a toll-free number to
place purchase or redemption orders or to obtain Portfolio and account
information. The AA can also answer inquiries about rates of return and
portfolio composition/ holdings, and guide unitholders through operational
details. A Goldman Sachs client can also utilize the SMART/SM/ personal
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computer software system which allows unitholders to purchase and redeem units
and also obtain Portfolio and account information directly.
This Statement of Additional Information is not a prospectus and
should be read in conjunction with the Prospectus relating to ILA Units dated
May 1, 1996, as amended and supplemented from time to time, a copy of which may
be obtained without charge by calling Goldman, Sachs & Co. at 800-621-2550 or by
writing Goldman, Sachs & Co., 4900 Sears Tower, Chicago, Illinois 60606.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page in
Statement of
Additional
Information
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Investment Policies and Practices
of the Portfolios.................... 4
Investment Limitations................. 42
Trustees and Officers.................. 46
The Adviser, Distributor and Transfer
Agent.................................. 52
Portfolio Transactions................. 56
Net Asset Value........................ 58
Redemptions............................ 60
Calculation of Yield Quotations........ 61
Tax Information........................ 64
Organization and Capitalization........ 71
Custodian and Subcustodian............. 75
Independent Accountants................ 75
Financial Statements................... 75
Appendix A (Description of Securities
Ratings)............................. A-1
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INVESTMENT POLICIES AND PRACTICES
OF THE PORTFOLIOS
The following discussion elaborates on the description of each
Portfolios' investment policies and practices contained in the Prospectus:
U.S. GOVERNMENT SECURITIES
Each Portfolio may invest in separately traded principal and interest
components of securities issued or guaranteed by the U.S. Treasury. The
principal and interest components of selected securities are traded
independently under the Separate Trading of Registered Interest and Principal of
Securities program ("STRIPS"). Under the STRIPS program, the principal and
interest components are individually numbered and separately issued by the U.S.
Treasury at the request of depository financial institutions, which then trade
the component parts independently.
CUSTODIAL RECEIPTS
Each Portfolio (other than Treasury Obligations Portfolio, Treasury
Instruments Portfolio, Federal Portfolio and Government Portfolio) may also
acquire custodial receipts that evidence ownership of future interest payments,
principal payments or both on certain U.S. Government notes or bonds. Such
notes and bonds are held in custody by a bank on behalf of the owners. These
custodial receipts are known by various names, including "Treasury Receipts,"
"Treasury Investors Growth Receipts" ("TIGR's"), and "Certificates of Accrual on
Treasury Securities" ("CATS"). Although custodial receipts are not considered
U.S. Government Securities for certain securities law purposes, they are
indirectly issued or guaranteed as to principal and interest by the U.S.
Government, its agencies, authorities or instrumentalities.
BANK AND CORPORATE OBLIGATIONS
Commercial paper represents short-term unsecured promissory notes
issued in bearer form by banks or bank holding companies, corporations, and
finance companies. The commercial paper purchased by the Portfolios consists of
direct U.S. dollar denominated obligations of domestic or, in the case of Money
Market Portfolio, foreign issuers. Bank obligations in which the Portfolios may
invest include certificates of deposit, bankers' acceptances, fixed time
deposits and bank notes. Certificates of deposit are negotiable certificates
issued against funds deposited in a commercial bank for a definite period of
time and earning a specified return.
Bankers' acceptances are negotiable drafts or bills of exchange,
normally drawn by an importer or exporter to pay for specific merchandise, which
are "accepted" by a bank, meaning, in effect, that the bank unconditionally
agrees to pay the face
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value of the instrument on maturity. Fixed time deposits are bank obligations
payable at a stated maturity date and bearing interest at a fixed rate. Fixed
time deposits may be withdrawn on demand by the investor, but may be subject to
early withdrawal penalties which vary depending upon market conditions and the
remaining maturity of the obligation. There are no contractual restrictions on
the right to transfer a beneficial interest in a fixed time deposit to a third
party, although there is no market for such deposits. Bank notes and bankers
acceptances rank junior to domestic deposit liabilities of the bank and pari
passu with other senior, unsecured obligations of the bank. Bank notes are not
insured by the Federal Deposit Insurance Corporation or any other insurer.
Deposit notes are insured by the Federal Deposit Insurance Corporation only to
the extent of $100,000 per depositor per bank.
The Prime Obligations Portfolio and Money Market Portfolio may invest
in short-term funding agreements. A funding agreement is a contract between an
issuer and a purchaser that obligates the issuer to pay a guaranteed rate of
interest on a principal sum deposited by the purchaser. Funding agreements will
also guarantee the return of principal and may guarantee a stream of payments
over time. A funding agreement has a fixed maturity date and may have either a
fixed rate or variable interest rate that is based on an index and guaranteed
for a set time period. Because there is no secondary market for these
investments, any such funding agreement purchased by a Portfolio will be
regarded as illiquid.
REPURCHASE AGREEMENTS
Each Portfolio (other than the Treasury Instruments Portfolio) may
only enter into repurchase agreements with primary dealers in U.S. Government
Securities. A repurchase agreement is an arrangement under which the purchaser
(i.e., the Portfolio) purchases a U.S. Government security or other high quality
short-term debt obligation (the "Obligation") and the seller agrees, at the time
of sale, to repurchase the Obligation at a specified time and price.
Custody of the Obligation will be maintained by the Portfolios'
custodian or subcustodian. The repurchase price may be higher than the purchase
price, the difference being income to the Portfolio, or the purchase and
repurchase prices may be the same, with interest at a stated rate due to the
Portfolio together with the repurchase price on repurchase. In either case, the
income to the Portfolio is unrelated to the interest rate on the Obligation
subject to the repurchase agreement.
Repurchase agreements pose certain risks for all entities, including
the Portfolios, that utilize them. Such risks are not unique to the Portfolios
but are inherent in repurchase agreements. The portfolios seek to minimize such
risks by, among others, the means indicated below, but because of the inherent
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legal uncertainties involved in repurchase agreements, such risks cannot be
eliminated.
For purposes of the Investment Company Act of 1940, as amended (the
"Investment Company Act"), and for federal income tax purposes, a repurchase
agreement is deemed to be a loan from the Portfolio to the seller of the
Obligation. It is not clear whether for other purposes a court would consider
the Obligation purchased by the Portfolio subject to a repurchase agreement as
being owned by the Portfolio or as being collateral for a loan by the Portfolio
to the seller.
If in the event of bankruptcy or insolvency proceedings against the
seller of the Obligation, a court holds that the Portfolio does not have a
perfected security interest in the Obligation, the Portfolio may be required to
return the Obligation to the seller's estate and be treated as an unsecured
creditor of the seller. As an unsecured creditor, a Portfolio would be at risk
of losing some or all of the principal and income involved in the transaction.
To minimize this risk, the Portfolios utilize custodians and subcustodians that
the Adviser believes follow customary securities industry practice with respect
to repurchase agreements, and the Adviser analyzes the creditworthiness of the
obligor, in this case the seller of the Obligation. But because of the legal
uncertainties, this risk, like others associated with repurchase agreements,
cannot be eliminated.
Also, in the event of commencement of bankruptcy or insolvency
proceedings with respect to the seller of the Obligation before repurchase of
the Obligation under a repurchase agreement, the Portfolio 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 Obligation.
Apart from risks associated with 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 Obligation subject to the repurchase
agreement becomes less than the repurchase price (including accrued interest),
the Portfolio will direct the seller of the Obligation 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 mature 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, the Portfolio (other than the Treasury Instruments
Portfolio), together with other registered investment companies having advisory
agreements with the Adviser or any of its affiliates, may transfer uninvested
cash balances into a single joint account, the daily aggregate balance of which
will be invested in one or more repurchase agreements.
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FOREIGN SECURITIES
The Money Market Portfolio may invest in foreign securities and in
certificates of deposit, bankers' acceptances and fixed time deposits and other
obligations issued by major foreign banks, foreign branches of U.S. banks, U.S.
branches of foreign banks and foreign branches of foreign banks. Investments
can include fixed time deposits in Cayman Island branches of such banks. The
Tax-Exempt Diversified, Tax-Exempt California and Tax-Exempt New York Portfolios
may also invest in municipal instruments backed by letters of credit issued by
certain of such banks. Under current Securities and Exchange Commission ("SEC")
rules relating to the use of the amortized cost method of portfolio securities
valuation, the Money Market Portfolio is restricted to purchasing U.S. dollar
denominated securities, but it is not otherwise precluded from purchasing
securities of foreign issuers.
Investments in foreign securities and bank obligations may involve
considerations different from investments in domestic securities due to limited
publicly available information; non-uniform accounting standards; the possible
imposition of withholding or confiscatory taxes; the possible adoption of
foreign governmental restrictions affecting the payment of principal and
interest; expropriation; or other adverse political or economic developments.
In addition, it may be more difficult to obtain and enforce a judgment against a
foreign issuer or a foreign branch of a domestic bank.
ASSET-BACKED AND RECEIVABLES-BACKED SECURITIES
The Prime Obligations and Money Market Portfolios may invest in asset-
backed and receivables-backed securities. Asset-backed and receivables-backed
securities represent participations in, or are secured by and payable from,
pools of assets such as motor vehicle installment sale contracts, installment
loan contracts, leases of various types of real and personal property,
receivables from revolving credit (credit card) agreements, corporate
receivables and other categories of receivables. Such asset pools are
securitized through the use of privately-formed trusts or special purpose
vehicles. 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 or other credit
enhancements may be present. The value of a Portfolio's investments in asset-
backed and receivables-backed securities may be adversely affected by prepayment
of the underlying obligations. In addition, the risk of prepayment may cause
the value of these investments to be more volatile than a Portfolio's other
investments.
Through the use of trusts and special purpose corporations, various
types of assets, including automobile loans, computer leases, trade receivables
and credit card receivables, are being securitized in pass-through structures
similar to the mortgage
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pass-through structures. Consistent with their respective investment objectives
and policies, the Portfolios may invest in these and other types of asset-backed
securities that may be developed in the future. This Statement of Additional
Information will be amended or supplemented as necessary to reflect the Prime
Obligations and Money Market Portfolios' intention to invest in asset-backed
securities with characteristics that are materially different from the
securities described in the preceding paragraph. However, the Portfolios will
generally not invest in an asset-backed security if the income received with
respect to its investment constitutes rental income or other income not treated
as qualifying income under the 90% test described in "Tax Information" below.
In general, the collateral supporting these securities is of shorter maturity
than mortgage loans and is less likely to experience substantial prepayments in
response to interest rate fluctuations.
As set forth below, several types of asset-backed and receivables-
backed securities have already been offered to investors, including for example,
Certificates for Automobile Receivables/sm/ ("CARS/sm/") and interests in pools
of credit card receivables. CARS/sm/ represent undivided fractional interests
in a trust ("CAR Trust") whose assets consist of a pool of motor vehicle retail
installment sales contracts and security interests in the vehicles securing the
contracts. Payments of principal and interest on CARS/sm/ are passed through
monthly to certificate holders, and are guaranteed up to certain amounts and for
a certain time period by a letter of credit issued by a financial institution
unaffiliated with the trustee or originator of the CAR Trust. An investor's
return on CARS/sm/ may be affected by early prepayment of principal on the
underlying vehicle sales contracts. If the letter of credit is exhausted, the
CAR Trust may be prevented from realizing the full amount due on a sales
contract because of state law requirements and restrictions relating to
foreclosure sales of vehicles and the obtaining of deficiency judgments
following such sales or because of depreciation, damage or loss of a vehicle,
the application of federal and state bankruptcy and insolvency laws, or other
factors. As a result, certificate holders may experience delays in payments or
losses if the letter of credit is exhausted.
Asset-backed securities present certain risks that are not presented
by mortgage-backed securities. Primarily, these securities may not have the
benefit of any security interest in the related assets. Credit card receivables
are generally unsecured and the debtors 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. There is the possibility that recoveries on
repossessed collateral may not, in some cases, be available to support payments
on these securities.
Asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets
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to make payments, the securities may contain elements of credit support which
fall into two categories: (i) liquidity protection, and (ii) protection against
losses resulting from ultimate default by an obligor or servicer. Liquidity
protection refers to the provision of advances, generally by the entity
administering the pool of assets, to ensure that the receipt of payments on the
losses results from payment of the insurance obligations on at least a portion
of the assets in the pool. This protection may be provided through guarantees,
policies or letters of credit obtained by the issuer or sponsor from third
parties, through various means of structuring the transactions or through a
combination of such approaches. The degree of credit support provided for each
issue is generally based on historical information reflecting the level of
credit risk associated with the underlying assets. Delinquency or loss in
excess of that anticipated or failure of the credit support could adversely
affect the value of or return on an investment in such a security.
The availability of asset-backed securities may be affected by
legislative or regulatory developments. It is possible that such developments
could require the Prime Obligations and Money Market Portfolios to dispose of
any then existing holdings of such securities.
FORWARD COMMITMENTS AND WHEN-ISSUED SECURITIES
Each Portfolio may purchase securities on a when-issued basis or
purchase or sell securities on a forward commitment basis. These transactions
involve a commitment by the Portfolio 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, but may
be traded over-the-counter.
A Portfolio 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
Portfolio may dispose of or negotiate a commitment after entering into it. A
Portfolio also may sell securities it has committed to purchase before those
securities are delivered to the Portfolio on the settlement date. The Portfolio
may realize a capital gain or loss in connection with these transactions,
distributions from which would be taxable to its unitholders. For purposes of
determining a Portfolio's average dollar weighted maturity, the maturity of
when-issued or forward commitment securities will be calculated from the
commitment date.
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When a Portfolio purchases securities on a when-issued or forward
commitment basis, the Portfolio's custodian or subcustodian will maintain in a
segregated account cash or liquid, high quality debt securities having a value
(determined daily) at least equal to the amount of the Portfolio's purchase
commitments. In the case of a forward commitment to sell portfolio securities
subject to such commitment, the custodian or subcustodian will hold the
portfolio securities in a segregated account while the commitment is
outstanding. These procedures are designed to ensure that the Portfolio will
maintain sufficient assets at all times to cover its obligations under when-
issued purchases and forward commitments.
VARIABLE AMOUNT MASTER DEMAND NOTES
Each Portfolio (other than the Treasury Obligations and Treasury
Instruments Portfolios) may purchase variable amount master demand notes. These
obligations permit the investment of fluctuating amounts at varying rates of
interest pursuant to direct arrangements between a Portfolio, as lender, and the
borrower. Variable amount master demand notes are direct lending arrangements
between the lender and borrower and are not generally transferable, nor are they
ordinarily rated. A Portfolio may invest in them only if the Adviser believes
that the notes are of comparable quality to the other obligations in which that
Portfolio may invest.
VARIABLE RATE AND FLOATING RATE DEMAND INSTRUMENTS
Each Portfolio (other than the Treasury Obligations and Treasury
Instruments Portfolios) may purchase variable and floating rate demand
instruments that are tax exempt municipal obligations or other debt securities
that possess a floating or variable interest rate adjustment formula. These
instruments permit a Portfolio to demand payment of the principal balance plus
unpaid accrued interest upon a specified number of days' notice to the issuer or
its agent. The demand feature may be backed by a bank letter of credit or
guarantee issued with respect to such instrument.
The terms of the variable or floating rate demand instruments that a
Portfolio may purchase provide that interest rates are adjustable at intervals
ranging from daily up to six months, and the adjustments are based upon current
market levels, the prime rate of a bank or other appropriate interest rate
adjustment index as provided in the respective instruments. Some of these
instruments are payable on demand on a daily basis or on not more than seven
days' notice. Others, such as instruments with quarterly or semiannual
interest rate adjustments, may be put back to the issuer on designated days on
not more than thirty days' notice. Still others are automatically called by the
issuer unless the Portfolio instructs otherwise. The Trust, on behalf of the
Portfolios, intends to exercise the demand only (1) upon a default under the
terms of the debt security, (2) as needed to provide liquidity to a Portfolio,
(3) to maintain the
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respective quality standards of a Portfolio's investment portfolio, or (4) to
attain a more optimal portfolio structure. A Portfolio will determine the
variable or floating rate demand instruments that it will purchase in accordance
with procedures approved by the Trustees to minimize credit risks. Accordingly,
any variable or floating rate demand instrument must satisfy the Portfolio's
credit criteria with respect to both its long-term and short-term ratings,
except that where credit support is provided, a Portfolio may rely solely on
short-term ratings of the variable or floating rate demand instrument, i.e., the
right to sell. To be eligible for purchase by a Portfolio, a variable or
floating rate demand instrument which is unrated must have high quality
characteristics similar to other obligations in which the Portfolio may invest.
The Adviser may determine that an unrated variable or floating rate demand
instrument meets a Portfolio's quality criteria by reason of being backed by a
letter of credit or guarantee issued by a bank that meets the quality criteria
for the Portfolio. Thus, either the credit of the issuer of the obligation or
the guarantor bank or both will meet the quality standards of the Portfolio.
The maturity of the variable or floating rate demand instruments held
by a Portfolio will ordinarily be deemed to be the longer of (1) the notice
period required before the Portfolio is entitled to receive payment of the
principal amount of the instrument or (2) the period remaining until the
instrument's next interest rate adjustment. The acquisition of variable or
floating rate demand notes for a Portfolio must also meet the requirements of
rules issued by the SEC applicable to the use of the amortized cost method of
securities valuation. The Portfolios will also consider the liquidity of the
market for variable and floating rate instruments, and in the event that such
instruments are illiquid, the Portfolios' investments in such instruments will
be subject to the limitation on illiquid investments.
A Portfolio (other than Treasury Obligations Portfolio, Treasury
Instruments Portfolio, Government Portfolio and Federal Portfolio) may invest in
participation interests in variable or floating rate tax-exempt obligations held
by financial institutions (usually commercial banks). Such participation
interests provide the Portfolio with a specific undivided interest (up to 100%)
in the underlying obligation and the right to demand payment of its proportional
interest in the unpaid principal balance plus accrued interest from the
financial institution upon a specific number of day's notice. In addition, the
participation interest generally is backed by an irrevocable letter of credit or
guarantee from the institution. The financial institution usually is entitled
to a fee for servicing the obligation and providing the letter of credit.
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RESTRICTED AND OTHER ILLIQUID SECURITIES
A Portfolio may purchase securities that are not registered
("restricted securities") under the Securities Act of 1933 (the "1933 Act"),
including restricted securities that can be offered and sold to "qualified
institutional buyers" under Rule 144A under the 1933 Act. However, a Portfolio
will not invest more than 10% of the value of its net assets in securities which
are illiquid, which includes fixed time deposits and repurchase agreements
maturing in more than seven days that cannot be traded on a secondary market and
restricted securities, unless, in the case of restricted securities, the
Trust's Board of Trustees determines, based upon a continuing review of the
trading markets for the specific restricted security, that such restricted
securities are liquid. The Board of Trustees may adopt guidelines and delegate
to the Adviser the daily function of determining and monitoring liquidity of
restricted securities. The Board, however, will retain sufficient oversight and
be ultimately responsible for the determinations. Since it is not possible to
predict with assurance that the market for securities eligible for resale under
Rule 144A will continue to be liquid, the Board will carefully monitor each
Portfolio's investments in these securities, focusing on such important factors,
among others, as valuation, liquidity and availability of information. This
investment practice could have the effect of increasing the level of illiquidity
in a Portfolio to the extent that qualified institutional buyers become for a
time uninterested in purchasing these restricted securities.
MUNICIPAL OBLIGATIONS
The Prime Obligations, Money Market, Tax-Exempt Diversified, Tax-
Exempt California and Tax-Exempt New York Portfolios may invest in municipal
obligations. Municipal obligations are issued by or on behalf of states,
territories and possessions of the United States and their political
subdivisions, agencies, authorities and instrumentalities and the District of
Columbia to obtain funds for various public purposes. The interest on most of
these obligations is generally exempt from regular federal income tax. The two
principal classifications of municipal obligations are "notes" and "bonds".
Notes. Municipal notes are generally used to provide for short-term
capital needs and generally have maturities of one year or less. Municipal
notes include tax anticipation notes, revenue anticipation notes, bond
anticipation notes, tax and revenue anticipation notes, construction loan notes,
tax-exempt commercial paper and certain receipts for municipal obligations.
Tax anticipation notes are sold to finance working capital needs of
municipalities. They are generally payable from specific tax revenues expected
to be received at a future date. They are frequently general obligations of the
issuer, secured by the taxing power for payment of principal and interest.
Revenue anticipation notes are issued in expectation of receipt of other
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types of revenue such as federal or state aid. Tax anticipation notes and
revenue anticipation notes are generally issued in anticipation of various
seasonal revenues such as income, sales, use, and business taxes. Bond
anticipation notes are sold to provide interim financing in anticipation of
long-term financing in the market. In most cases, these monies provide for the
repayment of the notes. Tax-exempt commercial paper consists of short-term
unsecured promissory notes issued by a state or local government or an authority
or agency thereof. The Portfolios which invest in municipal obligations may
also acquire securities in the form of custodial receipts which evidence
ownership of future interest payments, principal payments or both on certain
state and local governmental and authority obligations when, in the opinion of
bond counsel, interest payments with respect to such custodial receipts are
excluded from gross income for federal income tax purposes, and in the case of
the Tax-Exempt California and Tax-Exempt New York Portfolios, exempt from
California and New York (city and state) personal income taxes, respectively.
Such obligations are held in custody by a bank on behalf of the holders of the
receipts. These custodial receipts are known by various names, including
"Municipal Receipts" ("MRs") and "Municipal Certificates of Accrual on Tax-
Exempt Securities" ("M-CATS"). There are a number of other types of notes
issued for different purposes and secured differently from those described
above.
Bonds. Municipal bonds, which generally meet longer term capital
needs and have maturities of more than one year when issued, have two principal
classifications, "general obligation" bonds and "revenue" bonds.
General obligation bonds are issued by entities such as states,
counties, cities, towns and regional districts and are used to fund a wide range
of public projects including the construction or improvement of schools,
highways and roads, water and sewer systems and a variety of other public
purposes. The basic security of general obligation bonds is the issuer's
pledge of its faith, credit, and taxing power for the payment of principal and
interest. The taxes that can be levied for the payment of debt service may be
limited or unlimited as to rate or amount or special assessments.
Revenue bonds have been issued to fund a wide variety of capital
projects including: electric, gas, water and sewer systems; highways, bridges
and tunnels; port and airport facilities; colleges and universities; and
hospitals. The principal security for a revenue bond is generally the net
revenues derived from a particular facility or group of facilities or, in some
cases, from the proceeds of a special excise or other specific revenue source.
Although the principal security behind these bonds varies widely, many provide
additional security in the form of a debt service reserve fund whose monies may
also be used to make principal and interest payments on the issuer's
obligations. Housing finance authorities have a wide range of security
including partially or
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fully insured, rent subsidized and/or collateralized mortgages, and/or the net
revenues from housing or other public projects. In addition to a debt service
reserve fund, some authorities provide further security in the form of a state's
ability (without obligation) to make up deficiencies in the debt service reserve
fund. Lease rental revenue bonds issued by a state or local authority for
capital projects are secured by annual lease rental payments from the state or
locality to the authority sufficient to cover debt service on the authority's
obligations.
Private activity bonds (a term that includes certain types of bonds
the proceeds of which are used to a specified extent for the benefit of persons
other than governmental units), although nominally issued by municipal
authorities, are generally not secured by the taxing power of the municipality
but are secured by the revenues of the authority derived from payments by the
industrial user. The Tax-Exempt Diversified Portfolio and the Tax-Exempt
California Portfolio do not intend to invest in private activity bonds if the
interest from such bonds would be an item of tax preference to unitholders under
the federal alternative minimum tax.
Municipal bonds with a series of maturity dates are called serial
bonds. The serial bonds which the Portfolios may purchase are limited to short-
term serial bonds---those with original or remaining maturities of thirteen
months or less. The Portfolios may purchase long-term bonds provided that they
have a remaining maturity of thirteen months or less or, in the case of bonds
called for redemption, the date on which the redemption payment must be made is
within thirteen months. The Portfolios may also purchase long-term bonds
(sometimes referred to as "Put Bonds"), which are subject to a Portfolio's
commitment to put the bond back to the issuer at par at a designated time within
thirteen months and the issuer's commitment to so purchase the bond at such
price and time.
The Portfolios which invest in municipal obligations may invest in
tender option bonds. A tender option bond is a municipal obligation (generally
held pursuant to a custodian arrangement) having a relatively long maturity and
bearing interest at a fixed rate substantially higher than prevailing short-term
tax-exempt rates. The bond is typically issued in conjunction with the
agreement of a third party, such as a bank, broker-dealer or other financial
institutions, pursuant to which such institution grants the security holder the
option, at periodic intervals, to tender its securities to the institution and
receive the face value thereof. As consideration for providing the option, the
financial institution receives periodic fees equal to the difference between the
bond's fixed coupon rate and the rate, as determined by a remarketing or similar
agent at or near the commencement of such period, that would cause the bond,
coupled with the tender option, to trade at par on the date of such
determination. Thus, after payment of this fee, the security holder effectively
holds a demand obligation that bears interest at the prevailing short-term, tax-
exempt rate. However,
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an institution will not be obligated to accept tendered bonds in the event of
certain defaults by, or a significant downgrading in the credit rating assigned
to, the issuer of the bond.
The tender option will be taken into consideration in determining the
maturity of tender option bonds and the average portfolio maturity of a
Portfolio. The liquidity of a tender option bond is a function of the credit
quality of both the bond issuer and the financial institution providing
liquidity. Consequently, tender option bonds are deemed to be liquid unless, in
the opinion of the Adviser, the credit quality of the bond issuer and the
financial institution is deemed, in light of the relevant Portfolio's credit
quality requirements, to be inadequate.
Although the Tax-Exempt Diversified, Tax-Exempt California and Tax-
Exempt New York Portfolios intend to invest in tender option bonds the interest
on which will, in the opinion of counsel for the issuer and sponsor or counsel
selected by the Adviser, be excluded from gross income for federal income tax
purposes, there is no assurance that the Internal Revenue Service will agree
with such counsel's opinion in any particular case. Consequently, there is a
risk that a Portfolio will not be considered the owner of such tender option
bonds and thus will not be entitled to treat such interest as exempt from such
tax. A similar risk exists for certain other investments subject to puts or
similar rights. Additionally, the federal income tax treatment of certain other
aspects of these investments, including the proper tax treatment of tender
options and the associated fees, in relation to various regulated investment
company tax provisions is unclear. The Tax-Exempt Diversified, Tax-Exempt
California and Tax-Exempt New York Portfolios intend to manage their respective
portfolios in a manner designed to eliminate or minimize any adverse impact from
the tax rules applicable to these investments.
In addition to general obligation bonds, revenue bonds and serial
bonds, there are a variety of hybrid and special types of municipal obligations
as well as numerous differences in the security of municipal obligations both
within and between the two principal classifications above.
The Tax-Exempt Diversified, Tax-Exempt California and Tax-Exempt New
York Portfolios may purchase municipal instruments that are backed by letters of
credit issued by foreign banks that have a branch, agency or subsidiary in the
United States. Such letters of credit, like other obligations of foreign banks,
may involve credit risks in addition to those of domestic obligations, including
risks relating to future political and economic developments, nationalization,
foreign governmental restrictions such as exchange controls and difficulties in
obtaining or enforcing a judgment against a foreign bank (including branches).
For the purpose of investment restrictions of the Portfolios, the
identification of the "issuer" of municipal
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obligations that are not general obligation bonds is made by the Adviser on the
basis of the characteristics of the obligation as described above, the most
significant of which is the source of funds for the payment of principal of and
interest on such obligations.
An entire issue of municipal obligations may be purchased by one or a
small number of institutional investors such as one of the Portfolios. Thus,
the issue may not be said to be publicly offered. Unlike securities which must
be registered under the Securities Act of 1933 prior to offer and sale, unless
an exemption from such registration is available, municipal obligations which
are not publicly offered may nevertheless be readily marketable. A secondary
market exists for municipal obligations which were not publicly offered
initially.
Municipal obligations purchased for a Portfolio are subject to the
policy on holdings of securities which are not readily marketable contained in
the Portfolio's Prospectus. The Adviser determines whether a municipal
obligation is liquid based on whether it may be sold in a reasonable time
consistent with the customs of the municipal markets (usually seven days) at a
price (or interest rate) which accurately reflects its value. The Adviser
believes that the quality standards applicable to each Portfolio's investments
enhance liquidity. In addition, stand-by commitments and demand obligations
also enhance liquidity.
Yields on municipal obligations depend on a variety of factors,
including money market conditions, municipal bond market conditions, the size of
a particular offering, the maturity of the obligation and the quality of the
issue. High quality municipal obligations tend to have a lower yield than lower
rated obligations. Municipal obligations are subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the Federal Bankruptcy Code, and laws, if any, which may be
enacted by Congress or state legislatures extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations or municipalities to levy taxes. There is also the
possibility that as a result of litigation or other conditions the power or
ability of any one or more issuers to pay when due principal of and interest on
its or their municipal obligations may be materially affected.
INVESTING IN CALIFORNIA
The financial condition of the State of California ("California"), its
public authorities and local governments could affect the market values and
marketability of, and therefore the net asset value per unit and the interest
income of, the Tax-Exempt California Portfolio, or result in the default of
existing obligations, including obligations which may be held by the Tax-Exempt
California Portfolio. The following section provides only a brief summary of
the complex factors affecting the financial condition of California, and is
based on
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information obtained from California, as publicly available prior to the date of
this Statement of Additional Information. The information contained in such
publicly available documents has not been independently verified. It should be
noted that the creditworthiness of obligations issued by local issuers may be
unrelated to the creditworthiness of California, and that there is no obligation
on the part of California to make payment on such local obligations in the event
of default in the absence of a specific guarantee or pledge provided by
California.
During the early 1990's, California experienced significant financial
difficulties, which reduced its credit standing, but the State's finances have
improved since 1995. The ratings of certain related debt of other issuers for
which California has an outstanding lease purchase, guarantee or other
contractual obligation (such as for state-insured hospital bonds) are generally
linked directly to California's rating. Should the financial condition of
California deteriorate again, its credit ratings could be further reduced, and
the market value and marketability of all outstanding notes and bonds issued by
California, its public authorities or local governments could be adversely
affected.
Economic Factors. California's economy is the largest among the 50
----------------
states (accounting for almost 13% of the nation's output of goods and services)
and one of the largest in the world. California's population of more than 32
million represents over 12% of the total United States population and grew by
27% in the 1980s. While California's substantial population growth during the
1980's stimulated local economic growth and diversification and sustained a real
estate boom between 1984 and 1990, it has increased strains on California's
limited water resources and demands for government services and may impede
future economic growth. Population growth slowed since 1991 even while
substantial immigration has continued, due to a significant increase in
outmigration by California residents. Generally, the household incomes of new
residents have been substantially lower (and their education and welfare
utilization higher) than those of departing households, which may have a major
long-term socioeconomic and fiscal impact. However, with the California economy
improving, the recent net outmigration within the Continental U.S. is expected
to decrease or be reversed.
From mid-1990 to late 1993, California's economy suffered its worst
recession since the 1930s, with over 700,000 jobs. The largest job losses have
been in Southern California, led by declines in the aerospace and construction
industries. Most of the losses were related to cuts in lost federal defense
spending.
Since the start of 1994, the California economy has shown signs of
steady recovery and growth. The State Department of Finance reports net job
growth, particularly in construction and related manufacturing, wholesale and
retail trade, electronics, exports, transportation, recreation and services.
This growth
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has offset the continuing but slowing job losses in the aerospace industry and
restructuring of the finance and utility sectors. Prerecession job levels are
expected to be reached in 1996. Unemployment in California is down
substantially in 1994 from its 10% peak in January, 1994, but still remains
higher than the national average rate.
Orange County. On December 6, 1994, Orange County, California (the
-------------
"County"), together with its pooled investment funds (the "Pooled Funds") filed
for protection under chapter 9 of the federal Bankruptcy Code, after reports
that the Pooled Funds had suffered significant market losses in their
investments causing a liquidity crisis for the Pooled Funds and the County.
More than 180 other public entities, most but not all located in the County,
were also depositors in the Pooled Funds. The County estimated the Pooled
Funds' loss at about $1.8 billion, or 22% of its initial deposits of around $7.5
billion.
Many of the entities which kept money in the Pools (Pool
Participants), including the County, faced cash flow difficulties, suffered
ratings adjustments, and implemented cuts in personnel and programs. Some
obligations of the County and certain other Pool participants had technical
defaults, or were rescheduled. The Bankruptcy Court has approved a settlement
agreement between the County and most of the other Pool participants which
provided about 80% (90% in the case of school districts) return of cash
invested, with the balance to be repaid over time, including from potential
recoveries in lawsuits. The County has implemented a financial recovery plan
which includes significant personnel cuts, and refinancing of current debts
using new funds transferred to the County from certain other local governments
pursuant to special legislation adopted in late 1995.
The State of California has no existing obligation with respect to any
outstanding obligations or securities of the County or any of the other
participating entities. However, the State may be obligated to ensure that
school districts have sufficient funds to operate or to maintain certain county
administered state programs. As of January 1, 1996, no school districts which
were Pool participants had become insolvent.
Constitutional and Statutory Limitations on Taxes and Appropriations
- --------------------------------------------------------------------
Limitations on Taxes. Certain California Instruments may be
--------------------
obligations of issuers which rely in whole or in part, directly or indirectly,
on ad valorem property taxes as a source of revenue. The taxing power of
California local governments and districts is limited by Article XIIIA of the
California constitution, also known as "Proposition 13." Briefly, Article XIIIA
limits to 1% of full cash value the rate of ad valorem property taxes on real
property and generally restricts the reassessment of property to 2% per year,
except upon new construction or change of ownership (subject to a number of
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exemptions). Taxing entities may, however, raise ad valorem taxes above the 1%
limit to pay debt service on voter-approved bonded indebtedness.
Under Article XIIIA, the basic 1% ad valorem tax levy is applied
against the assessed value of property as of the owner's date of acquisition (or
as of March 1, 1975, if acquired earlier), subject to certain adjustments. This
system has resulted in widely varying amounts of tax on similarly situated
properties. Several lawsuits have been filed challenging the acquisition-based
assessment system of Proposition 13, and on June 18, 1992 the U.S. Supreme Court
announced a decision upholding Proposition 13.
Article XIIIA prohibits local governments from raising revenues
through ad valorem property taxes above the 1% limit; it also requires voters of
any governmental unit to give two-thirds approval to levy any "special tax".
Court decisions, however, allowed non-voter approved levy of "general taxes"
which were not dedicated to a specific use. In response to these decisions, the
voters of the State in 1986 adopted an initiative statute which imposed
significant new limits on the ability of local entities to raise or levy
general taxes, except by receiving majority local voter approval. Significant
elements of this initiative, "Proposition 62", have been overturned in recent
court cases. An initiative proposed to re-enact the provisions of Proposition
62 as a constitutional amendment was defeated by the voters in November 1990,
but such a proposal may be renewed in the future.
Appropriation Limits. The State and its local governments are
--------------------
subject to an annual "appropriations limit" imposed by Article XIIIB of the
California Constitution, enacted by the voters in 1979 and significantly amended
by Propositions 98 and 111 in 1988 and 1990, respectively. Article XIIIB
prohibits the State or any covered local government from spending
"appropriations subject to limitation" in excess of the appropriations limit
imposed. "Appropriations subject to limitation" are authorizations to spend
"proceeds of taxes," which consist of tax revenues and certain other funds,
including proceeds from regulatory licenses, user charges or other fees, to the
extent that such proceeds exceed the cost of providing the product or service,
but "proceeds of taxes" excludes most State subventions to local governments.
No limit is imposed on appropriations of funds which are not "proceeds of
taxes," such as reasonable user charges or fees, and certain other non-tax
funds, including bond proceeds.
Among the expenditures not included in the Article XIIIB
appropriations limit are (1) the debt service cost of bonds issued or authorized
prior to January 1, 1979, or subsequently authorized by the voters, (2)
appropriations arising from certain emergencies declared by the Governor, (3)
appropriations for certain capital outlay projects, (4) appropriations by the
State of post 1989 increases in gasoline taxes and vehicle weight fees, and (5)
appropriations made in certain cases of emergency.
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The appropriations limit for each year is adjusted annually to reflect
changes in cost of living and population and any transfer of service
responsibilities between governmental units. The definitions for such
adjustments were liberalized in 1990 to follow more closely growth in the
State's economy.
"Excess" revenues are measured over a two year cycle. Local
governments must return any excess to taxpayers by rate reductions. The State
must refund 50% paid to schools and community colleges. With more liberal
annual adjustment factors since 1988, and depressed revenues since 1990 because
of the recession, few governments, including the State, are currently operating
near their spending limits, but this condition may change over time. Local
governments may by voter approval exceed their spending limits for up to four
years.
A 1986 initiative statute, called "Proposition 62," imposed additional
limits on local governments, by requiring either majority or 2/3 voter approval
for any increases in "general taxes" or "special taxes," respectively (other
than property taxes, which are unchangeable). Court decisions had struck down
most of Proposition 62 and many local governments, especially cities, had
enacted or raised local "general taxes" without voter approval. In September,
1995, the California Supreme Court overruled the prior cases, and upheld the
constitutionality of Proposition 62. Many aspects of this decision remain
unclear (such as its impact on charter (home rule) cities, and whether it will
have retroactive effect), but its future effect will be to further limit the
fiscal flexibility of many local governments.
Because of the complex nature of Articles XIIIA and XIIIB of the
California Constitution, the ambiguities and possible inconsistencies of their
terms, and the impossibility of predicting future appropriations or changes in
population and cost of living, and the probability of continuing legal
challenges, it is not currently possible to determine fully the impact of
Article XIIIA or Article XIIIB on California Instruments. It is not presently
possible to predict the outcome of any pending litigation with respect to the
ultimate scope, impact or constitutionality of either Article XIIIA or Article
XIIIB, or the impact of any such determinations upon State agencies or local
governments, or upon their ability to pay debt service or their obligations.
Future initiatives or legislative changes in laws or the California Constitution
may also affect the ability of the State or local issuers to repay their
obligations.
State Debt. Under the California Constitution, debt service on
----------
outstanding general obligation bonds is the second charge to the General Fund
after support of the public school system and public institutions of higher
education. Total outstanding general obligation bonds and lease purchase debt
of California increased from $9.4 billion at June 30, 1987 to $23.8 billion at
February 1, 1996. In FY1994-95, debt service on general obligation bonds and
lease purchase debt was approximately 5.3%
20
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of General Fund revenues. State voters approved $5.0 billion of new bond
authorizations on the March 26, 1996 ballot, and additional bonds are expected
to be placed on the November 5, 1996 ballot.
Recent Financial Results. The principal sources of General Fund
------------------------
revenues in 1994-1995 were the California personal income tax (43% of total
revenues), the sales tax (34%), bank and corporation taxes (13%), and the gross
premium tax on insurance (3%). California maintains a Special Fund for Economic
Uncertainties, derived from General Fund revenues, as a reserve to meet cash
needs of the General Fund.
General. Throughout the 1980s, California state spending increased
-------
rapidly as California's population and economy also grew rapidly, including
increased spending for many assistance programs to local governments, which were
constrained by Proposition 13 and other laws. The largest state program is
assistance to local public school districts. In 1988, an initiative
(Proposition 98) was enacted which (subject to suspension by a two-thirds vote
of the Legislature and the Governor) guarantees local school districts and
community college districts a minimum share of California General Fund revenues
(currently about 35%).
Since the start of 1990-91 Fiscal Year, California has faced adverse
economic, fiscal and budget conditions. The economic recession seriously
affected California's tax revenues. It also caused increased expenditures for
health and welfare programs. California is also facing a structural imbalance
in its budget with the largest programs supported by the General Fund
(education, health, welfare and corrections) growing at rates higher than the
growth rates for the principal revenue sources of the General Fund. These
structural concerns will be exacerbated in coming years by the expected need to
substantially increase capital and operating funds for corrections as a result
of a "Three Strikes" law enacted in 1994.
Recent Budgets. As a result of these factors, among others, from the
--------------
late 1980's until 1992-93, the State had a period of nearly chronic budget
imbalance, with expenditures exceeding revenues in four out of six years, and
the State accumulated and sustained a budget deficit in the budget reserve, the
SFEU approaching $2.8 billion at its peak at June 30, 1993. Starting in the
1990-91 Fiscal Year and for each year thereafter, each budget required
multibillion dollar actions to bring projected revenues and expenditures into
balance and to close large "budget gaps" which were identified. The Legislature
and Governor eventually agreed on a number of different steps to produce Budget
Acts in the Years 1991-92 to 1994-95, including:
. significant cuts in health and welfare program expenditures;
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. transfers of program responsibilities and some funding sources from
the State to local governments, coupled with some reduction in mandates on local
government;
. transfer of about $3.6 billion in annual local property tax
revenues from cities, counties, redevelopment agencies and some other districts
to local school districts, thereby reducing state funding for schools;
. reduction in growth of support for higher education programs,
coupled with increases in student fees;
. revenue increases (particularly in the 1991-92 Fiscal Year budget),
most of which were for a short duration;
. increased reliance on aid from the federal government to offset the
costs of incarcerating, educating and providing health and welfare services to
undocumented aliens (although these efforts have produced much less federal aid
than the State Administration had requested); and
. various one-time adjustment and accounting changes.
Despite these budget actions, the effects of the recession led to
large unanticipated deficits in the SFEU, as compared to projected positive
balances. By the start of the 1993-94 Fiscal Year, the accumulated deficit was
so large (almost $2.8 billion) that it was impractical to budget to retire it in
one year, so as two-year program was implemented, using the issuance of revenue
anticipation warrants to carry a portion of the deficit over the end of the
fiscal year. When the economy failed to recover sufficiently in 1993-94, a
second two-year plan was implemented in 1994-95, to carry the final retirement
of the deficit into 1995-96.
The combination of stringent budget actions cutting State
expenditures, and the turnaround of the economy by late 1993, finally led to the
restoration of positive financial results. While General Fund revenues and
expenditures were essentially equal in FY 1992-93 (following two years of excess
expenditures over revenues), the General Fund had positive operating results in
FY 1993-94 and 1994-95, which have reduced the accumulated budget deficit to
around $600 million as of June 30, 1995. The 1996-97 Governor's Budget projects
complete elimination of the deficit by June 30, 1996.
A consequence of the accumulated budget deficits in the early 1990's,
together with other factors such as disbursement of funds to local school
districts "borrowed" from future fiscal years and hence not shown in the annual
budget, was to significantly reduce the State's cash resources available to pay
its ongoing obligations. When the Legislature and the Governor failed to adopt
a budget for the 1992-93 Fiscal Year by July 1, 1992, which would have allowed
the State to carry out its normal annual cash flow borrowing to replenish its
cash reserves, the
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State Controller was forced to issue approximately $3.8 billion of registered
warrants ("IOUs") over a 2-month period to pay a variety of obligations
representing prior years' or continuing appropriations, and mandates from court
orders. Available funds were used to make constitutionally-mandated payments,
such as debt service on bonds and warrants.
The State's cash shortfalls also required the State Controller to
issue revenue anticipation warrants maturing in the following fiscal year in
order to pay the State's continuing obligations. The State was forced to rely
increasingly on external debt markets to meet its cash needs, as a succession of
notes and warrants (both forms of short-term cash flow financing) were issued in
the period from June 1992 to July 1994, often needed to pay previously-maturing
notes or warrants. These borrowings were used also in part to spread out the
repayment of the accumulated budget deficit over the end of the fiscal year.
The State issued $7.0 billion of short-term debt in July 1994 to meet
its cash flow needs and to finance the deferral of part of its accumulated
deficit to the 1995-96 fiscal year. In order to assure repayment of $4.0
billion of this borrowing which matures on April 25, 1996, the State enacted
legislation (the "Trigger Law") which could have led to automatic, across-the-
board budget cuts in General Fund expenditures if cash flow projections made at
certain times deteriorated from estimates made in July 1994 when the borrwings
were made. However, the State's improved finances as a result of the economic
recovery have made such action unnecessary.
Current Budget. For the first time in four years, the State entered
--------------
the 1995-96 fiscal year with strengthening revenues based on an improving
economy. The major feature of the Governor's proposed Budget, a 15% phased cut
in personal income and business taxes, was rejected by the Legislature.
The 1995-96 Budget Act was signed by the Governor on August 3, 1995,
34 days after the start of the fiscal year. The Budget Act projected General
Fund revenues and transfers of $44.1 billion, a 3.5 percent increase from the
prior years. Expenditures were budgeted at $43.4 billion, a 4 percent increase.
The Department of Finance's most recent projections are that, after repaying the
last of the carryover budget deficit, there would be a positive balance of about
$50 million in the budget reserve, the Special Fund for Economic Uncertainties,
at June 30, 1996.
The Department of Finance projected cash flow borrowings in the 1995-
96 Fiscal Year would be the smallest in many years, comprising $2.0 billion of
notes issued in April, 1996, and maturing on June 28, 1996. With full payment
of $4 billion of revenue anticipation warrants on April 25, 1996, the Department
predicts no further need for borrowing over the end of the fiscal year.
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The principal features of the 1995-96 Budget Act, in addition to those
noted above, were additional cuts in health and welfare expenditures (some of
which are subject to approvals or waivers by the federal government); assumed
further federal aid for illegal immigrant costs; and an increase in per-pupil
funding for public schools and community colleges, the first such significant
increase in four years.
The Governor's Proposed Budget for the 1996-97 Fiscal Year (the
Governor's Budget), released on January 10, 1996, updated financial projections
for the current year. Although improved economic conditions will result in
substantially larger revenues, these will be offset by greater expenditures,
with no significant change in the projected year-end fund balance.
The Governor's Budget proposes General Fund spending in 1996-97 of
$45.2 billion, with revenues of $45.6 billion, leaving a budget reserve in the
SFEU of about $400 million. The Governor has again proposed a three-year phased
15% reduction of personal income and corporate tax rates. The Governor's Budget
also assumed implementation of certain previously-approved cuts in health and
welfare costs, adoption of further cuts in welfare payments, the adoption of
federal welfare reform, and receipt of new federal aid for illegal immigrant
costs. As of April, 1996, many of these federal actions had not taken place,
leaving the the Governor's Budget plan with larger expenditures than
anticipated, which will have to be addressed in the final budget action. The
Governor's Budget proposed increased expenditures for K-12 school aid, higher
education, and corrections. The Governor's Budget projected annual cash flow
borrowing of about $3.2 billion.
Bond Ratings. State general obligation bond ratings were reduced in
------------
July, 1994 to "A1" by Moody's Investors Services, Inc. ("Moody's") and "A" by
Standard & Poor's Ratings Group ("S&P"). Both of these ratings were reduced
from "AAA" levels which California held until late 1991. There can be no
assurance that such ratings will be maintained in the future. It should be
noted that the creditworthiness of obligations issued by local California
issuers may be unrelated to the creditworthiness of obligations issued by the
State of California, and that there is no obligation on the part of California
to make payment on such obligations in the event of default.
Legal Proceedings. California is involved in certain legal
------------------
proceedings (described in California's recent financial statements) that, if
decided against California, may require California to make significant future
expenditures or may substantially impair revenues. Trial courts have recently
entered tentative decisions or injunctions which would overturn several parts of
the state's recent budget compromises. The matters covered by these lawsuits
include a deferral of payments by California to the Public Employees Retirement
System, reductions in welfare payments and the use of certain cigarette tax
funds for health costs. All of these cases are subject to
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further proceedings and appeals, and if California eventually loses, the final
remedies may not have to be implemented in one year.
Obligations of Other Issuers
----------------------------
Other Issuers of California Instruments. There are a number of state
---------------------------------------
agencies, instrumentalities and political subdivisions of the State of
California that issue municipal obligations, some of which may be conduit
revenue obligations payable from payments from private borrowers. These
entities are subject to various economic risks and uncertainties, and the credit
quality of the securities issued by them may vary considerably from the credit
quality of obligations backed by the full faith and credit of the State of
California.
State Assistance. Property tax revenues received by local governments
----------------
declined more than 50% following passage of Proposition 13. Subsequently, the
California Legislature enacted measures to provide for the redistribution of
California's General Fund surplus to local agencies, the reallocation of certain
state revenues to local agencies and the assumption of certain governmental
functions by the State of California to assist municipal issuers to raise
revenues. Through 1990-91, local assistance (including public schools)
accounted for around 75% of General Fund spending. To reduce California General
Fund support for school districts, the 1992-93 and 1993-94 Budget Acts caused
local governments to transfer a total of $3.9 billion of property tax revenues
to school districts, representing loss of all the post-Proposition 13 "bailout"
aid. The largest share of these transfers came from counties, and the balance
from cities, special districts and redevelopment agencies. In order to make up
part of this shortfall, the Legislature proposed, and voters approved in 1993,
dedicating 0.5% of the sales tax to counties and cities for public safety
purposes. In addition, the Legislature has changed laws to relieve local
governments of certain mandates, allowing them to reduce costs.
To the extent that California should be constrained by its Article
XIIIB appropriations limit, or its obligation to conform to Proposition 98, or
other fiscal considerations, the absolute level, or the rate of growth, of state
assistance to local governments may continue to be reduced. Any such reductions
in state aid could compound the serious fiscal constraints already experienced
by many local governments, particularly counties. At least one rural county
(Butte) publicly announced that it might enter bankruptcy proceedings in August
1990, although such plans were put off after the Governor approved legislation
to provide additional funds for the county. Other counties have also indicated
that their budgetary condition is extremely grave. At the start of the 1995-96
fiscal year, Los Angeles County, the largest in the State, faced a nominal $1.2
billion gap in its $12 billion budget, half of which was in the County health
care system. The gaps were closed only with significant cuts in services and
personnel, particularly in the health care system,
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federal aid, and transfer of some funds from other local governments to the
County pursuant to special legislation. The County's debt was downgraded by
Moody's and S&P in the summer of 1995.
Assessment Bonds. California Instruments which are assessment bonds
----------------
may be adversely affected by a general decline in real estate values or a
slowdown in real estate sales activity. In many cases, such bonds are secured
by land which is undeveloped at the time of issuance but anticipated to be
developed within a few years after issuance. In the event of such reduction or
slowdown, such development may not occur or may be delayed, thereby increasing
the risk of a default on the bonds. Because the special assessments or taxes
securing these bonds are not the personal liability of the owners of the
property assessed, the lien on the property is the only security for the bonds.
Moreover, in most cases the issuer of these bonds is not required to make
payments on the bonds in the event of delinquency in the payment of assessments
or taxes, except from amounts, if any, in a reserve fund established for the
bonds.
California Long-Term Lease Obligations. Certain California long-term
--------------------------------------
lease obligations, though typically payable from the general fund of the
municipality, are subject to "abatement" in the event the facility being leased
is unavailable for beneficial use and occupancy by the municipality during the
term of the lease. Abatement is not a default, and there may be no remedies
available to the holders of the certificates evidencing the lease obligation in
the event abatement occurs. The most common cases of abatement are failure to
complete construction of the facility before the end of the period during which
lease payments have been capitalized and uninsured casualty losses to the
facility (e.g. due to earthquake). In the event abatement occurs with respect
to a lease obligation, lease payments may be interrupted (if all available
insurance proceeds and reserves are exhausted) and the certificates may not be
paid when due.
Several years ago the Richmond Unified School District (the
"District") entered into a lease transaction in which certain existing
properties of the District were sold and leased back in order to obtain funds to
cover operating deficits. Following a fiscal crisis in which the District's
finances were taken over by a state receiver (including a brief period under
bankruptcy court protection), the District failed to make rental payments on
this lease, resulting in a lawsuit by the Trustee for the Certificate of
Participation holders, in which the State of California was a named defendant
(on the grounds that it controlled the District's finances). One of the
defenses raised in answer to this lawsuit was the invalidity of the District's
lease. The trial court upheld the validity of the lease, and the case was
subsequently settled. Any ultimate judgment in any future case against the
position taken by the Trustee may have adverse implications for lease
transactions of a similar nature by other California entities.
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Other Considerations
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The repayment of industrial development securities secured by real
property may be affected by California laws limiting foreclosure rights of
creditors. Securities backed by health care and hospital revenues may be
affected by changes in state regulations governing cost reimbursements to health
care providers under Medi-Cal (the State's Medicaid program), including risks
related to the policy of awarding exclusive contracts to certain hospitals.
Limitations on ad valorem property taxes may particularly affect "tax
allocation" bonds issued by California redevelopment agencies. Such bonds are
secured solely by the increase in assessed valuation of a redevelopment project
area after the start of redevelopment activity. In the event that assessed
values in the redevelopment project decline (e.g. because of major natural
disaster such as an earthquake), the tax increment revenue may be insufficient
to make principal and interest payments on these bonds. Both Moody's and S&P
suspended ratings on California tax allocation bonds after the enactment of
Articles XIIIA and XIIIB, and only resumed such ratings on a selective basis.
Proposition 87, approved by California voters in 1988, requires that
all revenues produced by a tax rate increase go directly to the taxing entity
which increased such tax rate to repay that entity's general obligation
indebtedness. As a result, redevelopment agencies (which typically are the
issuers of tax allocation securities) no longer receive an increase in tax
increment when taxes on property in the project area are increased to repay
voter-approved bonded indebtedness.
The effect of these various constitutional and statutory changes upon
the ability of California municipal securities issuers to pay interest and
principal on their obligations remains unclear. Furthermore, other measures
affecting the taxing or spending authority of California or its political
subdivisions may be approved or enacted in the future. Legislation has been or
may be introduced which would modify existing taxes or other revenue raising
measures or which either would further limit or, alternatively, would increase
the abilities of state and local governments to impose new taxes or increase
existing taxes. It is not presently possible to predict the extent to which any
such legislation will be enacted. Nor is it presently possible to determine the
impact of any such legislation on California Instruments in which the California
Portfolio may invest, future allocations of state revenues to local governments
or the abilities of state or local governments to pay the interest on, or repay
the principal of, such California Instruments.
Substantially all of California is within an active geologic region
subject to major seismic activity. Northern California in 1989 and Southern
California in 1994 experienced major
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earthquakes causing billions of dollars in damages. The federal government
provided more than $13 billion in aid for both earthquakes, and neither event is
expected to have any long-term negative economic impact. Any security in the
California Portfolio could be affected by an interruption of revenues because of
damaged facilities, or, consequently, income tax deductions for casualty losses
or property tax assessment reductions. Compensatory financial assistance could
be constrained by the inability of (i) an issuer to have obtained earthquake
insurance coverage at reasonable rates; (ii) an insurer to perform on its
contracts of insurance in the event of widespread losses; or (iii) the federal
or state government to appropriate sufficient funds within their respective
budget limitations.
INVESTING IN NEW YORK
- ---------------------
Some of the significant financial considerations relating to the Tax-
Exempt New York Portfolio's investment in New York Instruments are summarized
below. This summary information is not intended to be a complete description
and is principally derived from official statements relating to issues of New
York Instruments that were available prior to the date of this Statement of
Additional Information. The accuracy and completeness of the information
contained in those official statements have not been independently verified.
State Economy. New York is the third most populous state in the
-------------
nation and has a relatively high level of personal wealth. The State's economy
is diverse with a comparatively large share of the nation's finance, insurance,
transportation, communications and services employment, and a very small share
of the nation's farming and mining activity. The State has a declining
proportion of its workforce engaged in manufacturing, and an increasing
proportion engaged in service industries. New York City (the "City"), which is
the most populous city in the State and nation and is the center of the nation's
largest metropolitan area, accounts for a large portion of the State's
population and personal income.
The State has historically been one of the wealthiest states in the
nation. For decades, however, the State has grown more slowly than the nation
as a whole, gradually eroding its relative economic position. The recession has
been more severe in the State, owing to a significant retrenchment in the
financial services industry, cutbacks in defense spending, and an overbuilt real
estate market. There can be no assurance that the State economy will not
experience worse-than-predicted results in the 1995-96 fiscal year, with
corresponding material and adverse effects on the State's projections of
receipts and disbursements.
The unemployment rate in the State dipped below the national rate in
the second half of 1981 and remained lower until 1991. It stood at 6.9% in
1994. The total employment growth rate in the State has been below the national
average since 1984 and is
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expected to slow to less than 0.5% in 1995. State per capita personal income
remains above the national average. State per capita income for 1994 was
estimated at $25,999, which was 19.2% above the 1994 estimated national average
of $21,809. During the past ten years, total personal income in the State rose
slightly faster than the national average only in 1986 through 1989.
State Budget. The State Constitution requires the governor (the
------------
"Governor") to submit to the State legislature (the "Legislature") a balanced
executive budget which contains a complete plan of expenditures for the ensuing
fiscal year and all moneys and revenues estimated to be available therefor,
accompanied by bills containing all proposed appropriations or reappropriations
and any new or modified revenue measures to be enacted in connection with the
executive budget. The entire plan constitutes the proposed State financial plan
for that fiscal year. The Governor is required to submit to the Legislature
quarterly budget updates which include a revised cash-basis state financial
plan, and an explanation of any changes from the previous state financial plan.
The State's budget for the 1995-96 fiscal year was enacted by the
Legislature on June 7, 1995, more than two months after the start of the fiscal
year. Prior to adoption of the budget, the Legislature enacted appropriations
for disbursements considered to be necessary for State operations and other
purposes, including all necessary appropriations for debt service. The State
financial plan for the 1995-96 fiscal year was formulated on June 20, 1995 and
was based upon the State's budget as enacted by the Legislature and signed into
law by the Governor (the "1995-96 State Financial Plan").
The 1995-96 State Financial Plan was the first to be enacted in the
administration of the Governor, who assumed office on January 1. It was the
first budget in over half a century which proposed and, as enacted, projected an
absolute year-over-year decline in disbursements in the General Fund, the
State's principal operating fund. Spending for State operations was projected
to drop even more sharply, by 4.6%. Nominal spending from all State spending
sources (i.e., excluding Federal aid) was proposed to increase by only 2.5% from
----
the prior fiscal year, in contrast to the prior decade when such spending growth
averaged more than 6.0% annually.
The 1995-96 State Financial Plan included actions that will have an
effect on the budget outlook for State fiscal year 1996-97 and beyond. The
Division of the Budget estimated that the 1995-96 State Financial Plan contained
actions that provide nonrecurring resources or savings totaling approximately
$900 million while the State comptroller (the "Comptroller") believed that such
amount exceeded $1 billion. In addition to this use of nonrecurring resources,
the 1995-96 State Financial Plan reflected actions that will directly affect the
State's 1996-97 fiscal year baseline receipts and disbursements. The three-year
plan to reduce State personal income taxes will decrease State tax receipts by
an
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estimated $1.7 billion in State fiscal year 1996-97 in addition to the amount of
reduction in State fiscal year 1995-96. Further significant reductions in the
personal income tax are scheduled for the 1997-98 State fiscal year. Other tax
reductions enacted in 1994 and 1995 are estimated to cause an additional
reduction in receipts of over $500 million in 1996-97, as compared to the level
of receipts in 1995-96. Similarly, many actions taken to reduce disbursements
in the State's 1995-96 fiscal year are expected to provide greater reductions in
the State's fiscal year 1996-97. These include actions to reduce the State
workforce, reduce Medicaid and welfare expenditures and slow community mental
hygiene program development.
The State issued the first of the three required quarterly updates
(the "First Quarter Update") to the 1995-96 State Financial Plan on July 28,
1995. The First Quarter Update projected continued balance in the State's 1995-
96 State Financial Plan. Actual cash receipts and disbursements during the
first quarter of the fiscal year were impacted by the late adoption of the
budget, and fell somewhat short of original monthly cashflow estimates. Receipt
variances were mainly related to timing issues rather than changes in the
forecast. Disbursement variances were also ascribed to timing factors.
On October 2, 1995, the State Comptroller released a report on the
State's financial condition. The report identified several risks to the 1995-96
State Financial Plan and also estimated a potential imbalance in receipts and
disbursements in the 1996-97 fiscal year of at least $2.7 billion and in the
1997-98 fiscal year of at least $3.9 billion. The Governor is required to
submit a balanced budget to the State Legislature and has indicated that he will
close any potential imbalance primarily through General Fund expenditure
reductions and without increases in taxes or deferrals of scheduled tax
reductions.
The State issued its second quarterly update to the 1995-96 State
Financial Plan on October 26, 1995. The Mid-Year Update projected continued
balance in the 1995-96 State Financial Plan, with estimated receipts reduced by
a net $71 million and estimated disbursements reduced by a net $30 million as
compared to the First Quarter Update. The resulting General Fund balance
decreased from $213 million in the First Quarter Update to $172 million in the
Mid-Year Update, reflecting the use of $41 million from the contingency reserve
fund for payments of litigation and disallowance expenses.
The Division of the Budget revised the cash-basis 1995-96 State
Financial Plan on December 15, 1995, in conjunction with the release of the
Executive Budget for the 1996-97 fiscal year (the December Update and together
with the First Quarter Update and the Mid-Year Update, the Financial Plan
Updates). These projections show continued balance in the State's 1995-96
Financial Plan, with estimated receipts reduced by a net $73 million and
estimated disbursements reduced by a net $73 million as compared to the Mid-Year
Update. Reductions in receipts reflect delays in estimated
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receipts from the sale of State assets, and other revisions based upon operating
results through November 1995. Disbursement estimates were reduced to reflect
lower-than-expected spending through November, savings from debt refundings, and
other items which more than offset projected increases in disbursements for
school aid and tuition assistance. The resulting General Fund balance of $172
million was unchanged from the Mid-Year Update.
The Governor presented his 1996-97 Executive Budget to the Legislature
on December 15, 1995, one month before the legal deadline. There can be no
assurance that the Legislature will enact the Executive Budget into law or that
the projections set forth in the Executive Budget will not differ materially and
adversely from actual results.
The Governor's Executive Budget projected balance on a cash basis in
the General Fund. It reflected a continuing strategy of substantially reduced
State spending, including programming restructurings, reductions in social
welfare spending, and efficiency and productivity initiatives. In his 1996-97
Executive Budget, the Governor indicated that the 1996-97 General Fund financial
plan (based on current law governing spending and revenues) would have been out
of balance by almost $3.9 billion as a result of the underlying disparity
between receipts and disbursements caused by anticipated spending demands, the
effect of current and prior-year tax changes, and the use of one-time revenues
to fund recurring spending in the 1995-96 State Financial Plan. The Executive
Budget proposes to close this gap primarily through a series of spending
reductions and cost containment measures.
To make progress toward addressing recurring budgetary imbalances, the
1996-97 Executive Budget proposes significant actions to align recurring
receipts and disbursements in future fiscal years. The Governor has proposed
closing the 1996-97 fiscal year imbalance primarily through General Fund
expenditure reductions and without increases in taxes or deferrals of scheduled
tax reductions. However, there can be no assurance that the Legislature will
enact the Governor's proposals or that the State's actions will be sufficient to
preserve budgetary balance or to align recurring receipts and disbursements in
future fiscal years. The 1996-97 Executive Budget includes action that will
have an effect on the budget outlook for the State fiscal year 1997-98 and
beyond. The net impact of these and other factors is expected to produce a
potential imbalance in receipts and disbursements in State fiscal year 1997-98,
which the Governor proposes to close with further spending reductions. The
Executive Budget contains projections of a potential imbalance in the 1997-98
fiscal year of $1.4 billion and in the 1998-99 fiscal year of $2.5 billion,
assuming implementation of the 1996-97 Executive Budget recommendations.
The 1995-96 State Financial Plan and the Financial Plan Updates were
based on a number of assumptions and projections. Because it is not possible to
predict accurately the occurrence of
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<PAGE>
all factors that may affect the 1995-96 State Financial Plan or the Financial
Plan Updates, actual results could differ materially and adversely from
projections made at the outset of a fiscal year. There can be no assurance that
the State will not face substantial potential budget gaps in future years
resulting from a significant disparity between tax revenues projected from a
lower recurring receipts base and the spending required to maintain State
programs at current levels. To address any potential budgetary imbalance, the
State may need to take significant actions to align recurring receipts and
disbursements in future fiscal years.
A significant risk to the 1995-96 State Financial Plan projections
arise from tax legislation under consideration by Congress and the President.
Congressionally-adopted retroactive changes to federal tax treatment of capital
gains would flow through automatically to the State personal income tax. Such
changes, if ultimately enacted, could produce revenue losses in both the 1995-96
fiscal year and the 1996-97 fiscal year.
Recent Financial Results. The General Fund is the principal
------------------------
operating fund of the State and is used to account for all financial
transactions, except those required to be accounted for in another fund. It is
the State's largest fund and receives almost all State taxes and other resources
not dedicated to particular purposes.
The State reported a General Fund operating deficit of $1.426 billion
for the 1994-95 fiscal year, as compared to an operating surplus of $914 million
for the prior fiscal year. The 1994-95 fiscal year deficit was caused by
several factors, including the use of $1.026 billion of the 1993-94 cash-based
surplus to fund operating expenses in 1994-95 and the adoption of changes in
accounting methodologies by the State Comptroller. These factors were offset by
net proceeds of $315 million in bonds issued by the Local Government Assistance
Corporation. The General Fund is projected to be balanced on a cash basis for
the 1995-96 fiscal year.
Total revenues for 1994-95 were $31.455 billion. Revenues decreased
by $173 million over the prior fiscal year, a decrease of less than one percent.
Total expenditures for 1994-95 totaled $33.079 billion, an increase of $2.083
billion, or 6.7 percent over the prior fiscal year.
The State's financial position on a GAAP (generally accepted
accounting principles) basis as of March 31, 1995 showed an accumulated deficit
in its combined governmental funds of $1.666 billion, reflecting liabilities of
$14.778 billion and assets of $13.112 billion.
Debt Limits and Outstanding Debt. There are a number of methods by
--------------------------------
which the State of New York may incur debt. Under the State Constitution, the
State may not, with limited exceptions for emergencies, undertake long-term
general obligation borrowing
32
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(i.e., borrowing for more than one year) unless the borrowing is authorized in a
----
specific amount for a single work or purpose by the Legislature and approved by
the voters. There is no limitation on the amount of long-term general
obligation debt that may be so authorized and subsequently incurred by the
State.
The State may undertake short-term borrowings without voter approval
(i) in anticipation of the receipt of taxes and revenues, by issuing tax and
revenue anticipation notes, and (ii) in anticipation of the receipt of proceeds
from the sale of duly authorized but unissued general obligation bonds, by
issuing bond anticipation notes. The State may also, pursuant to specific
constitutional authorization, directly guarantee certain obligations of the
State of New York's authorities and public benefit corporations ("Authorities").
Payments of debt service on New York State general obligation and New York
State-guaranteed bonds and notes are legally enforceable obligations of the
State of New York.
The State employs additional long-term financing mechanisms, lease-
purchase and contractual-obligation financings, which involve obligations of
public authorities or municipalities that are State-supported but are not
general obligations of the State. Under these financing arrangements, certain
public authorities and municipalities have issued obligations to finance the
construction and rehabilitation of facilities or the acquisition and
rehabilitation of equipment, and expect to meet their debt service requirements
through the receipt of rental or other contractual payments made by the State.
Although these financing arrangements involve a contractual agreement by the
State to make payments to a public authority, municipality or other entity, the
State's obligation to make such payments is generally expressly made subject to
appropriation by the Legislature and the actual availability of money to the
State for making the payments. The State has also entered into a contractual-
obligation financing arrangement with the Local Government Assistance
Corporation ("LGAC") in an effort to restructure the way the State makes certain
local aid payments.
In 1990, as part of a State fiscal reform program, legislation was
enacted creating LGAC, a public benefit corporation empowered to issue long-term
obligations to fund certain payments to local governments traditionally funded
through New York State's annual seasonal borrowing. The legislation empowered
LGAC to issue its bonds and notes in an amount not in excess of $4.7 billion
(exclusive of certain refunding bonds) plus certain other amounts. Over a
period of years, the issuance of these long-term obligations, which are to be
amortized over no more than 30 years, was expected to eliminate the need for
continued short-term seasonal borrowing. The legislation also dedicated
revenues equal to one-quarter of the four cent State sales and use tax to pay
debt service on these bonds. The legislation also imposed a cap on the annual
seasonal borrowing of the State at $4.7 billion, less net proceeds of bonds
issued by LGAC and bonds issued to provide for capitalized interest, except
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in cases where the Governor and the legislative leaders have certified the need
for additional borrowing and provided a schedule for reducing it to the cap. If
borrowing above the cap is thus permitted in any fiscal year, it is required by
law to be reduced to the cap by the fourth fiscal year after the limit was first
exceeded. As of June 1995, LGAC had issued bonds to provide net proceeds of
$4.7 billion, completing the program. The impact of LGAC's borrowing is that
the State is able to meet its cash flow needs in the first quarter of the fiscal
year without relying on short-term seasonal borrowings. The 1995-96 State
Financial Plan includes no spring borrowing nor did the 1994-95 State Financial
Plan, which was the first time in 35 years there was no short-term seasonal
borrowing.
In June 1994, the Legislature passed a proposed constitutional
amendment that would significantly change the long-term financing practices of
the State and its public authorities. The proposed amendment would permit the
State, within a formula-based cap, to issue revenue bonds, which would be debt
of the State secured solely by a pledge of certain State tax receipts (including
those allocated to State funds dedicated for transportation purposes), and not
by the full faith and credit of the State. In addition, the proposed amendment
would (i) permit multiple purpose general obligation bond proposals to be
proposed on the same ballot, (ii) require that State debt be incurred only for
capital projects included in a multi-year capital financing plan, and (iii)
prohibit, after its effective date, lease-purchase and contractual-obligation
financing mechanisms for State facilities.
Before the approved constitutional amendment can be presented to the
voters for their consideration, it must be passed by a separately elected
legislature. The amendment must therefore be passed by the newly elected
Legislature in 1995 prior to presentation to the voters in November 1995. The
amendment was passed by the Senate in June 1995, and the Assembly is expected to
pass the amendment shortly. If approved by the voters, the amendment would
become effective January 1, 1996.
On January 13, 1992, S&P reduced its ratings on the State's general
obligation bonds from A to A- and, in addition, reduced its ratings on the
State's moral obligation, lease purchase, guaranteed and contractual obligation
debt. S&P also continued its negative rating outlook assessment on State
general obligation debt. On April 26, 1993, S&P revised the rating outlook
assessment to stable. On February 14, 1994, S&P raised its outlook to positive
and, on February 28, 1994, confirmed its A-rating. On January 6, 1992, Moody's
reduced its ratings on outstanding limited-liability State lease purchase and
contractual obligations from A to Baa1. On February 28, 1994, Moody's
reconfirmed its A rating on the State's general obligation long-term
indebtedness.
The State anticipates that its capital programs will be financed, in
part, by State and public authorities borrowings in
34
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1995-96. The State expects to issue $248 million in general obligation bonds
(including $170 million for purposes of redeeming outstanding bond anticipation
notes) and $186 million in general obligation commercial paper. The Legislature
has also authorized the issuance of up to $33 million in certificates of
participation during the State's 1995-96 fiscal year for equipment purchases and
$14 million for capital purposes. These projections are subject to change if
circumstances require.
Principal and interest payments on general obligation bonds and
interest payments on bond anticipation notes and on tax and revenue anticipation
notes were $793.3 million for the 1994-95 fiscal year, and are estimated to be
$774.4 million for the 1995-96 fiscal year. These figures do not include
interest payable on State General Obligation Refunding Bonds issued in July 1992
("Refunding Bonds") to the extent that such interest was paid from an escrow
fund established with the proceeds of such Refunding Bonds. Principal and
interest payments on fixed rate and variable rate bonds issued by LGAC were
$239.4 million for the 1994-95 fiscal year, and are estimated to be $328.2
million for 1995-96. State lease-purchase rental and contractual obligation
payments for 1994-95, including State installment payments relating to
certificates of participation, were $1.607 billion and are estimated to be
$1.641 billion in 1995-96.
New York State has never defaulted on any of its general obligation
indebtedness or its obligations under lease-purchase or contractual-obligation
financing arrangements and has never been called upon to make any direct
payments pursuant to its guarantees.
Litigation. Certain litigation pending against New York State or
----------
its officers or employees could have a substantial or long-term adverse effect
on New York State finances. Among the more significant of these cases are those
that involve (1) the validity of agreements and treaties by which various Indian
tribes transferred title to New York State of certain land in central and
upstate New York; (2) certain aspects of New York State's Medicaid policies,
including its rates, regulations and procedures; (3) action against New York
State and New York City officials alleging inadequate shelter allowances to
maintain proper housing; (4) challenges to the practice of reimbursing certain
Office of Mental Health patient care expenses from the client's Social Security
benefits; (5) alleged responsibility of New York State officials to assist in
remedying racial segregation in the City of Yonkers; (6) challenges by
commercial insurers, employee welfare benefit plans, and health maintenance
organizations to the imposition of 13%, 11% and 9% surcharges on inpatient
hospital bills; (7) challenges to certain aspects of petroleum business taxes;
(8) action alleging damages resulting from the failure by the State's Department
of Environmental Conservation to timely provide certain data; (9) a challenge to
the constitutionality of the treatment of certain moneys held in a Supplemental
Reserve Fund; and (10) a challenge to the constitutionality of a State lottery
game.
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Several actions challenging the constitutionality of legislation
enacted during the 1990 legislative session which changed actuarial funding
methods for determining state and local contributions to state employee
retirement systems have been decided against the State. As a result, the
Comptroller has developed a plan to restore the State's retirement systems to
prior funding levels. Such funding is expected to exceed prior levels by $30
million in fiscal 1994-95, $63 million in fiscal 1995-96, $116 million in fiscal
1996-97, $193 million in fiscal 1997-98, peaking at $241 million in fiscal 1998-
99. Beginning in fiscal 2001-02, State contributions required under the
Comptroller's plan are projected to be less than that required under the prior
funding method. As a result of the United States Supreme Court decision in the
case of State of Delaware v. State of New York, on January 21, 1994, the State
----------------- -----------------
entered into a settlement agreement with various parties. Pursuant to all
agreements executed in connection with the action, the State is required to make
aggregate payments of $351.4 million, of which $90.3 million have been made.
Annual payments to the various parties will continue through the State's 2002-03
fiscal year in amounts which will not exceed $48.4 million in any fiscal year
subsequent to the State's 1994-95 fiscal year.
The legal proceedings noted above involve State finances, State
programs and miscellaneous tort, real property and contract claims in which the
State is a defendant and the monetary damages sought are substantial. These
proceedings could affect adversely the financial condition of the State.
Adverse developments in these proceedings or the initiation of new proceedings
could affect the ability of the State to maintain a balanced 1995-96 State
Financial Plan. An adverse decision in any of these proceedings could exceed
the amount of the 1995-96 State Financial Plan reserve for the payment of
judgments and, therefore, could affect the ability of the State to maintain a
balanced 1995-96 State Financial Plan. In its audited financial statements for
the fiscal year ended March 31, 1995, the State reported its estimated liability
for awarded and anticipated unfavorable judgments to be $676 million.
Although other litigation is pending against New York State, except as
described above, no current litigation involves New York State's authority, as a
matter of law, to contract indebtedness, issue its obligations, or pay such
indebtedness when it matures, or affects New York State's power or ability, as a
matter of law, to impose or collect significant amounts of taxes and revenues.
Authorities. The fiscal stability of New York State is related, in
-----------
part, to the fiscal stability of its Authorities, which generally have
responsibility for financing, constructing and operating revenue-producing
public benefit facilities. Authorities are not subject to the constitutional
restrictions on the incurrence of debt which apply to the State itself, and may
issue bonds and notes within the amounts of, and as otherwise restricted by,
their legislative authorization. The State's access to the public credit
markets could be impaired, and the
36
<PAGE>
market price of its outstanding debt may be materially and adversely affected,
if any of the Authorities were to default on their respective obligations,
particularly with respect to debt that are State-supported or State-related. As
of September 30, 1994, date of the latest data available, there were 18
Authorities that had outstanding debt of $100 million or more. The aggregate
outstanding debt, including refunding bonds, of these 18 Authorities was $70.3
billion. As of March 31, 1995, aggregate public authority debt outstanding as
State-supported debt was $27.9 billion and as State-related debt was $36.1
billion.
Authorities are generally supported by revenues generated by the
projects financed or operated, such as fares, user fees on bridges, highway
tolls and rentals for dormitory rooms and housing. In recent years, however,
New York State has provided financial assistance through appropriations, in some
cases of a recurring nature, to certain of the 18 Authorities for operating and
other expenses and, in fulfillment of its commitments on moral obligation
indebtedness or otherwise, for debt service. This operating assistance is
expected to continue to be required in future years. In addition, certain
statutory arrangements provide for State local assistance payments otherwise
payable to localities to be made under certain circumstances to certain
Authorities. The State has no obligation to provide additional assistance to
localities whose local assistance payments have been paid to Authorities under
these arrangements. However, in the event that such local assistance payments
are so diverted, the affected localities could seek additional State funds.
New York City and Other Localities. The fiscal health of the State
----------------------------------
of New York may also be impacted by the fiscal health of its localities,
particularly the City of New York, which has required and continues to require
significant financial assistance from New York State. The City depends on State
aid both to enable the City to balance its budget and to meet its cash
requirements. The City has achieved balanced operating results for each of its
fiscal years since 1981 as reported in accordance with the then-applicable GAAP.
In 1975, New York City suffered a fiscal crisis that impaired the
borrowing ability of both the City and New York State. In that year the City
lost access to public credit markets. The City was not able to sell short-term
notes to the public again until 1979.
In 1975, S&P suspended its A rating of City bonds. This suspension
remained in effect until March 1981, at which time the City received an
investment grade rating of BBB from S&P. On July 2, 1985, S&P revised its
rating of City bonds upward to BBB+ and on November 19, 1987, to A-. On July 2,
1993, S&P reconfirmed its A- rating of City bonds, continued its negative rating
outlook assessment and stated that maintenance of such rating depended upon the
City's making further progress towards reducing budget gaps in the outlying
years. Moody's ratings of City bonds were revised in November 1981 from B (in
effect since 1977) to Ba1, in
37
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November 1983 to Baa, in December 1985 to Baa1, in May 1988 to A and again in
February 1991 to Baa1. On July 10, 1995, S&P downgraded its rating on the
City's $23 billion of outstanding general obligation bonds to "BBB+" from "A-",
citing to the City's chronic structural budget problems and weak economic
outlook. S&P stated that New York City's reliance on one-time revenue measures
to close annual budget gaps, a dependence on unrealized labor savings, overly
optimistic estimates of revenues and state and federal aid and the City's
continued high debt levels also contributed to its decision to lower the rating.
New York City is heavily dependent on New York State and federal
assistance to cover insufficiencies in its revenues. There can be no assurance
that in the future federal and State assistance will enable the City to make up
its budget deficits. To help alleviate the City's financial difficulties, the
Legislature created the Municipal Assistance Corporation ("MAC") in 1975. MAC
is authorized to issue bonds and notes payable from certain stock transfer tax
revenues, from the City's portion of the State sales tax derived in the City
and, subject to certain prior claims, from State per capita aid otherwise
payable by the State to the City. Failure by the State to continue the
imposition of such taxes, the reduction of the rate of such taxes to rates less
than those in effect on July 2, 1975, failure by the State to pay such aid
revenues and the reduction of such aid revenues below a specified level are
included among the events of default in the resolutions authorizing MAC's long-
term debt. The occurrence of an event of default may result in the acceleration
of the maturity of all or a portion of MAC's debt. MAC bonds and notes
constitute general obligations of MAC and do not constitute an enforceable
obligation or debt of either the State or the City. As of June 30, 1995, MAC
had outstanding an aggregate of approximately $4.882 billion of its bonds. MAC
is authorized to issue bonds and notes to refunds its outstanding bonds and
notes and to fund certain reserves, without limitation as to principal amount,
and to finance certain capital commitments to certain authorities in the event
the City fails to provide such financing.
Since 1975, the City's financial condition has been subject to
oversight and review by the New York State Financial Control Board (the "Control
Board") and since 1978 the City's financial statements have been audited by
independent accounting firms. To be eligible for guarantees and assistance, the
City is required during a "control period" to submit annually for Control Board
approval, and when a control period is not in effect for Control Board review, a
financial plan for the next four fiscal years covering the City and certain
agencies showing balanced budgets determined in accordance with GAAP. New York
State also established the Office of the State Deputy Comptroller for New York
City ("OSDC") to assist the Control Board in exercising its powers and
responsibilities. On June 30, 1986, the City satisfied the statutory
requirements for termination of the control period. This means that the Control
Board's powers of approval are suspended, but the Board continues to have
oversight responsibilities.
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<PAGE>
From time to time, the Control Board staff, OSDC, the City comptroller
and others issue reports and make public statements regarding the City's
financial condition, commenting on, among other matters, the City's financial
plans, projected revenues and expenditures and actions by the City to eliminate
projected operating deficits. Some of these reports and statements have warned
that the City may have underestimated certain expenditures and overestimated
certain revenues and have suggested that the City may not have adequately
provided for future contingencies. Certain of these reports have analyzed the
City's future economic and social conditions and have questioned whether the
City has the capacity to generate sufficient revenues in the future to meet the
costs of its expenditure increases and to provide necessary services.
The City submitted to the Control Board on July 21, 1995 a fourth
quarter modification to the City's financial plan for the 1995 fiscal year (the
"1995 Modification"), which projects a balanced budget in accordance with GAAP
for the 1995 fiscal year, after taking into account a discretionary transfer of
$75 million. On July 11, 1995, the City submitted to the Control Board the
Financial Plan for the 1996 through 1999 fiscal years (the "1996-1999 Financial
Plan").
The 1996-1999 Financial Plan projected revenues and expenditures for
the 1996 fiscal year balanced in accordance with GAAP. The projections for the
1996 fiscal year reflected proposed actions to close a previously projected gap
of approximately $3.1 billion for the 1996 fiscal year. The proposed actions in
the 1996-1999 Financial Plan for the 1996 fiscal year included (i) a reduction
in spending of $400 million, primarily affecting public assistance and Medicaid
payment to the City; (ii) expenditure reductions in agencies, totaling $1.2
billion; (iii) transitional labor savings, totaling $600 million; and (iv) the
phase-in of the increased annual pension funding cost due to revisions resulting
from an actuarial audit of the City's pension systems, which would reduce such
costs in the 1996 fiscal year.
The proposed agency spending reductions included the reduction of City
personnel through attrition, government efficiency initiatives, procurement
initiatives and labor productivity initiatives. The substantial agency
expenditure reductions proposed in the 1996-1999 Financial Plan may be difficult
to implement, and the 1996-1999 Financial Plan is subject to the ability of the
City to implement proposed reductions in City personnel and other cost reduction
initiatives. In addition, certain initiatives are subject to negotiation with
the City's municipal unions, and various actions, including proposed anticipated
State aid totaling $50 million are subject to approval by the Governor and the
Legislature.
The 1996-1999 Financial Plan also set forth projections for the 1997
through 1999 fiscal years and outlined a proposed gap-closing program to
eliminate projected gaps of $888 million, $1.5 billion and $1.4 billion for the
1997, 1998 and 1999 fiscal years,
39
<PAGE>
respectively, after successful implementation of the $3.1 billion gap-closing
program for the 1996 fiscal year. These actions, a substantial number of which
were not specified in detail, include additional agency spending reductions,
reduction in entitlements, government procurement initiatives, revenue
initiatives and the availability of the general reserve.
Contracts with all of the City's municipal unions either expired in
the 1995 fiscal year or will expire in the 1996 fiscal years. The 1996-1999
Financial Plan provided no additional wage increases for City employees after
the 1995 fiscal year. Each 1% wage increase for all union contracts commencing
in the 1995 or 1996 fiscal year would cost the City an additional $141 million
for the 1996 fiscal year and $161 million each year thereafter above the amounts
provided for in the 1996-1999 Financial Plan.
Although the City has balanced its budget since 1981, estimates of the
City's revenues and expenditures, which are based on numerous assumptions, are
subject to various uncertainties. If expected federal or State aid is not
forthcoming, if unforeseen developments in the economy significantly reduce
revenues derived from economically sensitive taxes or necessitate increased
expenditures for public assistance, if the City should negotiate wage increases
for its employees greater than the amounts provided for in the City's financial
plan or if other uncertainties materialize that reduce expected revenues or
increase projected expenditures, then, to avoid operating deficits, the City may
be required to implement additional actions, including increases in taxes and
reductions in essential City services. The City might also seek additional
assistance from New York State.
The City requires certain amounts of financing for seasonal and
capital spending purposes. The City's current monthly cash flow forecast for
the 1996 fiscal year shows a need of $2.4 billion of seasonal financing for the
1996 fiscal year. Seasonal financing requirements for the 1995 fiscal year
increased to $2.2 billion from $1.75 billion and $1.4 billion in the 1994 and
1993 fiscal years, respectively.
Certain localities, in addition to the City, could have financial
problems leading to requests for additional New York State assistance. The
potential impact on the State of such requests by localities was not included in
the projections of the State's receipts and disbursements in the State's 1995-96
fiscal year.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers")
resulted in the creation of the Financial Control Board for the City of Yonkers
(the "Yonkers Board") by New York State in 1984. The Yonkers Board is charged
with oversight of the fiscal affairs of Yonkers. Future actions taken by the
Governor or the Legislature to assist Yonkers could result in allocation of New
York State resources in amounts that cannot yet be determined.
40
<PAGE>
Municipalities and school districts have engaged in substantial short-
term and long-term borrowings. In 1993, the total indebtedness of all
localities in New York State other than New York City was approximately $17.7
billion. A small portion (approximately $105 million) of that indebtedness
represented borrowing to finance budgetary deficits and was issued pursuant to
enabling New York State legislation. State law requires the comptroller to
review and make recommendations concerning the budgets of those local government
units other than New York City authorized by State law to issue debt to finance
deficits during the period that such deficit financing is outstanding. Fifteen
localities had outstanding indebtedness for deficit financing at the close of
their fiscal year ending in 1993.
From time to time, federal expenditure reductions could reduce, or in
some cases eliminate, federal funding of some local programs and accordingly
might impose substantial increased expenditure requirements on affected
localities. If New York State, New York City or any of the Authorities were to
suffer serious financial difficulties jeopardizing their respective access to
the public credit markets, the marketability of notes and bonds issued by
localities within New York State could be adversely affected. Localities also
face anticipated and potential problems resulting from certain pending
litigation, judicial decisions and long-range economic trends. Long-range
potential problems of declining urban population, increasing expenditures and
other economic trends could adversely affect localities and require increasing
New York State assistance in the future.
STANDBY COMMITMENTS
In order to enhance the liquidity, stability or quality of municipal
obligations, the Prime Obligations, Money Market, Tax-Exempt Diversified, Tax-
Exempt California and Tax-Exempt New York Portfolios each may acquire the right
to sell a security to another party at a guaranteed price and date. Such a
right to resell may be referred to as a put, demand feature or "standby
commitment", depending on its characteristics. The aggregate price which a
Portfolio pays for securities with standby commitments may be higher than the
price which otherwise would be paid for the securities. Standby commitments may
not be available or may not be available on satisfactory terms.
Standby commitments may involve letters of credit issued by domestic
or foreign banks supporting the other party's ability to purchase the security
from the Portfolio. The right to sell may be exercisable on demand or at
specified intervals, and may form part of a security or be acquired separately
by the Portfolio. In considering whether a security meets a Portfolio's quality
standards, the Adviser will look to the creditworthiness of the party providing
the Portfolio with the right to sell as well as the quality of the security
itself.
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<PAGE>
The Portfolios value municipal obligations which are subject to
standby commitments at amortized cost. The exercise price of the standby
commitments is expected to approximate such amortized cost. No value is
assigned to the standby commitments for purposes of determining a Portfolio's
net asset value. Since the value of a standby commitment is dependent on the
ability of the standby commitment writer to meet its obligation to repurchase,
the policy of each Portfolio that may enter into standby commitment transactions
is to enter into such transactions only with banks, brokers or dealers which
represent a minimal risk of default. The duration of standby commitments will
not be a factor in determining the weighted average maturity of a Portfolio.
Management of the Trust understands that the Internal Revenue Service
has issued a favorable revenue ruling to the effect that, under specified
circumstances, a registered investment company will be the owner of tax-exempt
municipal obligations acquired subject to a put option. Institutional Tax-
Exempt Assets, the predecessor company of which Tax-Exempt Diversified Portfolio
and Tax-Exempt California Portfolio were series, has received a ruling from the
Internal Revenue Service to the effect that it is considered the owner of the
municipal obligations subject to standby commitments so that the interest on
such instruments will be tax-exempt income to it. The Internal Revenue Service
has subsequently announced that it will not ordinarily issue advance ruling
letters as to the identity of the true owner of property in cases involving the
sale of securities or participation interests therein if the purchaser has the
right to cause the security, or the participation interest therein, to be
purchased by either the seller or a third party. Each of the Tax-Exempt
Diversified, Tax-Exempt California and Tax-Exempt New York Portfolios intends to
take the position that it is the owner of any municipal obligations acquired
subject to a standby commitment or acquired or held with certain other types of
put rights and that its distributions of tax-exempt interest earned with respect
to such municipal obligations will be tax-exempt for its unitholders. There is
no assurance that standby commitments will be available to a Portfolio nor has
any Portfolio assumed that such commitments will continue to be available under
all market conditions.
INVESTMENT LIMITATIONS
The following restrictions may not be changed with respect to any
Portfolio without the approval of the majority of outstanding voting securities
of that Portfolio (which, under the Investment Company Act and the rules
thereunder and as used in the Prospectus and this Statement of Additional
Information, means the lesser of (1) 67% of the units of that Portfolio present
at a meeting if the holders of more than 50% of the outstanding units of that
Portfolio are present in person or by proxy, or (2) more than 50% of the
outstanding units of that Portfolio). Investment restrictions that involve a
maximum percentage of securities or assets shall not be considered to be
violated unless an excess over the percentage occurs immediately after, and is
caused by, an
42
<PAGE>
acquisition or encumbrance of securities or assets of, or borrowings by or on
behalf of, a Portfolio, with the exception of borrowings permitted by Investment
Restriction (4).
Accordingly, the Trust may not, on behalf of any Portfolio:
(1) purchase for any one Portfolio the securities of any one issuer,
other than obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities, if immediately after such purchase, more
than 5% of the value of such Portfolio's total assets would be invested in
such issuer, except that (a) up to 25% of the value of its total assets may
be invested without regard to such 5% limitation, and (b) such 5%
limitation shall not apply to repurchase agreements collateralized by
obligations of the U.S. Government, its agencies or instrumentalities.
This restriction does not, however, apply to any Portfolio classified as a
non-diversified company under the Investment Company Act;
(2) purchase securities if such purchase would cause more than 25% in
the aggregate of the market value of the total assets of a Portfolio to be
invested in the securities of one or more issuers having their principal
business activities in the same industry, provided that there is no
limitation with respect to, and each Portfolio reserves freedom of action,
when otherwise consistent with its investment policies, to concentrate its
investments in obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities, obligations (other than commercial paper)
issued or guaranteed by U.S. banks and U.S. branches of foreign banks and
repurchase agreements and securities loans collateralized by such U.S.
Government obligations or such bank obligations. (For the purposes of this
restriction, state and municipal governments and their agencies and
authorities are not deemed to be industries, and telephone companies are
considered to be a separate industry from water, gas or electric utilities,
personal credit finance companies and business credit finance companies are
deemed to be separate industries and wholly owned finance companies are
considered to be in the industry of their parents if their activities are
primarily related to financing the activities of their parents).
Notwithstanding the foregoing, the Money Market Portfolio will invest more
than 25% of the value of its total assets in bank obligations (whether
foreign or domestic) except that if adverse economic conditions prevail in
the banking industry the Money Market Portfolio may, for defensive
purposes, temporarily invest less than 25% of the value of its total assets
in bank obligations;
(3) make loans, except (a) through the purchase of debt obligations
in accordance with each Portfolio's investment objective and policies, (b)
through repurchase
43
<PAGE>
agreements with banks, brokers, dealers and other financial institutions,
and (c) loans of securities;
(4) borrow money, except (a) as a temporary measure, and then only in
amounts not exceeding 5% of the value of the applicable Portfolio's total
assets or (b) from banks, provided that immediately after any such
borrowing all borrowings of the applicable Portfolio do not exceed one-
third of such Portfolio's total assets. No purchases of securities will be
made if such borrowings exceed 5% of the value of the applicable
Portfolio's assets. The exceptions to this restriction are not for
investment leverage purposes but are solely for extraordinary or emergency
purposes or to facilitate management of the Portfolios by enabling the
Trust to meet redemption requests when the liquidation of portfolio
instruments is deemed to be disadvantageous or not possible. If due to
market fluctuations or other reasons the total assets of a Portfolio fall
below 300% of its borrowings, the Trust will promptly reduce the borrowings
of such Portfolio in accordance with the Investment Company Act;
(5) mortgage, pledge or hypothecate any assets except to secure
permitted borrowings;
(6) purchase or sell real estate (excluding securities secured by
real estate or interests therein), securities issued by real estate
investment trusts, commodities, commodity contracts or oil or gas or other
mineral exploration or development programs;
(7) invest in companies for the purposes of exercising control or
management;
(8) act as an underwriter of securities, (except as the Trust may be
deemed to be an underwriter under the Securities Act of 1933 in connection
with the purchase and sale of portfolio instruments in accordance with a
Portfolio's investment objective and portfolio management policies),
purchase securities on margin (except for delayed delivery or when issued
transactions or such short-term credits as are necessary for the clearance
of transactions), make short sales of securities or maintain a short
position or invest in or write puts, calls or combinations thereof (except
that the Trust may, on behalf of a Portfolio, acquire puts in connection
with the acquisition of a debt instrument); and
(9) purchase for any one Portfolio the securities of any issuer if
such purchase would cause more than 10% of the voting securities of such
issuer to be held by a Portfolio, except that up to 25% of the value of its
total assets may be invested without regard to this 10% limitation. This
restriction does not, however, apply to any Portfolio classified as a
nondiversified company under the Investment Company Act.
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<PAGE>
In addition, as a non-fundamental policy, the Portfolios may not:
Purchase, hold or deal in real estate (including real estate limited
partnerships) or oil, gas or mineral leases, although a Portfolio 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 a Portfolio as a result of the ownership of securities; and
Issue senior securities, except as appropriate to evidence indebtedness
that a Portfolio is permitted to incur and except for units of existing or
additional series of the Trust.
Pursuant to SEC Rule 2a-7, the Prime Obligations, Government, Treasury
Obligations, Money Market, Federal and Treasury Instruments Portfolios may not
invest more than 5% of their total assets in the securities of any one issuer
(except U.S. Government securities or repurchase agreements collateralized by
such securities). A Portfolio may, however, invest more than 5% of its total
assets in the First Tier Securities of a single issuer for a period of up to
three business days after the purchase thereof, although such Portfolio may not
make more than one such investment at any time. Each Portfolio, other than the
Tax-Exempt Diversified Portfolio, Tax-Exempt California Portfolio and Tax-Exempt
New York Portfolio (the "Tax-Exempt Portfolios"), may only purchase "First Tier
Securities" as defined below. Securities which are rated in the highest short-
term rating category by at least two Nationally Recognized Statistical Rating
Organizations ("NRSROs") are "First Tier Securities". Securities rated in the
top two short-term rating categories by at least two major rating agencies, or
if only one NRSRO has assigned a rating, by that NRSRO, but which are not First
Tier Securities are "Second Tier Securities." Pursuant to SEC Rule 2a-7 the
foregoing operating policies are not applicable to the Tax-Exempt Portfolios.
Immediately after the acquisition of any put by the Prime Obligations, Money
Market, Treasury Obligations, Treasury Instruments, Government or Federal
Portfolio, not more than 5% of such Portfolio's total assets may be invested in
securities issued by or subject to puts from the same issuer. However, this
limitation will not apply to the issuer of unconditional puts if the Portfolio
does not have more than 10% of its total assets invested in securities issued by
or subject to unconditional puts from such issuer. NRSROs include S&P, Moody's,
Fitch Investors Services, Inc., Duff and Phelps, Inc., IBCA Limited and its
affiliate IBCA Inc., and Thomson BankWatch, Inc. For a description of their
rating categories, see Appendix A.
Pursuant to SEC Rule 2a-7, immediately after the acquisition of any put by
a Tax-Exempt Portfolio, not more than 5% of the Portfolio's total assets may be
invested in securities issued by or subject to puts from the same issuer.
However, this limitation applies only with respect to 75% of each Tax-Exempt
Portfolio's total assets. In addition, this limitation will not apply to the
issuer of unconditional puts if the Portfolio does not have more
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<PAGE>
than 10% of its total assets invested in securities issued by or subject to
unconditional puts from such issuer. Each Tax-Exempt Portfolio will operate in
accordance with this operating policy which complies with SEC Rule 2a-7.
"Value" for the purposes of all investment restrictions shall mean the
value used in determining a Portfolio's net asset value. "U.S. Government
securities" shall mean securities issued or guaranteed by the U.S. Government or
any of its agencies, authorities or instrumentalities.
TRUSTEES AND OFFICERS
Information pertaining to the Trustees and officers of the Trust is set
forth below. Trustees and officers deemed to be "interested persons" of the
Trust for purposes of the Investment Company Act are indicated by an asterisk.
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<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ---------------------- ----------- ---------------------------
<S> <C> <C>
Paul C. Nagel,Jr.,73 Chairman Retired. Director and
19223 Riverside Dr. and Trustee Chairman of the Finance
Tequesta, FL 33469 and Audit Committees,
Great Atlantic & Pacific
Tea Co., Inc.; Director,
United Conveyor
Corporation.
Ashok N. Bakhru, 53 Trustee Executive Vice President-
1235 Westlakes Drive Finance & Administration &
Suite 385 Chief Financial Officer,
Berwyn, PA 19312 Coty, Inc. (since April
1996); President, ABN
Associates(since June
1994) Retired. Senior Vice
President of Scott Paper
Company; Director of
Arkwright-Mutual Insurance
Company; Trustee of
International House of
Philadelphia; Member of
Cornell University
Council; Trustee of the
Walnut Street Theater.
*David B. Ford, 50 Trustee General Partner, Goldman
One New York Plaza Sachs, since 1986;
New York, NY 10004 Chairman and Chief
Executive Officer, Goldman
Sachs Asset Management
(since December 1994).
*Alan A. Shuch, 46 Trustee Director and Vice
One New York Plaza President of Goldman Sachs
New York, NY 10004 Funds Management, Inc.
(from April 1990 to
November 1994); President
and Chief Operating
Officer, GSAM (from
September 1988 to November
1994); Limited Partner,
Goldman Sachs (since
December 1994).
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ------------------------ ---------- ---------------------------
<S> <C> <C>
Jackson W. Smart, 65 Trustee Chairman and Chief
One Northfield Plaza Executive Officer, MSP
#218 Communications, Inc. (a
Chicago, IL 60093 company engaged in radio
broadcasting since
November 1988). Director,
Federal Express
Corporation and North
American Private Equity
Group (a venture capital
fund).
William H. Springer,66 Trustee Vice Chairman of Ameritech
701 Morningside Drive (a telecommunications
Lake Forest, IL 60045 holding company; February
1987 to retirement in
August 1992); Vice
Chairman, Chief Financial
and Administrative
Officer, prior thereto;
Director, American
Information Technologies
Corporation; Director,
Walgreen Co. (a retail
drug store business); and
Baker, Fentress & Co. (a
closed-end, non-
diversified management
investment company) (April
1992 to present).
Richard P. Strubel,56 Trustee Managing Director, Tandem
70 West Madison St. Partners, Inc. (since
Suite 1400 1990); President and Chief
Chicago, IL 60602 Executive Officer,
Microdot, Inc. (a
diversified manufacturer
of fastening systems and
connectors) (January 1984
to October 1994).
*Douglas Grip, 34 President Vice President, Goldman
One New York Plaza Sachs (since May 1996);
New York, NY 10004 formerly, President, MFS
Retirement Services Inc.,
of Massachusetts Financial
Services (prior thereto).
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ------------------------ ---------- ---------------------------
<S> <C> <C>
*Scott Gilman, 36 Treasurer Director, Mutual Funds
One New York Plaza Administration, Goldman
New York, NY 10004 Sachs Asset Management
(since April 1994);
Assistant Treasurer,
Goldman Sachs Fund
Management, Inc. (since
March 1993); Vice
President, Goldman Sachs
(since March 1990);
Assistant Treasurer of the
Trust (April 1990 to
October 1991).
*John M. Perlowski, 31 Assistant Vice President, Goldman
One New York Plaza Treasurer Sachs (since July 1995);
New York, NY 10004 Director, Investors Bank
and Trust (November 1993
to July 1995); Audit
Manager of Arthur Andersen
LLP (prior thereto).
*Pauline Taylor, 49 Vice Vice President of Goldman
4900 Sears Tower President Sachs (since June 1992);
Chicago, IL 60606 Consultant (1989 to June
1992).
*John W. Mosior, 57 Vice Vice President, Goldman
4900 Sears Tower President Sachs and Manager of
Chicago, IL 60606 Shareholder Services for
GSAM Funds Group.
*Nancy L. Mucker, 46 Vice Vice President, Goldman
4900 Sears Tower President Sachs and Manager of
Chicago, IL 60606 Shareholder Services for
GSAM Funds Group.
*Michael J. Richman,35 Secretary Vice President and
85 Broad Street Assistant General Counsel
New York, NY 10004 of Goldman Sachs (since
June 1992); Associate
General Counsel, Goldman
Sachs Asset Management,
Counsel to the Funds
Group, GSAM (since June
1992); Partner, Hale and
Dorr (September 1991 to
June 1992).
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ------------------------ ---------- ---------------------------
<S> <C> <C>
*Howard B. Surloff, 30 Assistant Vice President and
85 Broad Street Secretary Assistant General Counsel,
New York, NY 10004 Goldman Sachs(since
November 1993 and May
1994, respectively);
Counsel to the Funds
Group, Goldman Sachs Asset
Management (since November
1993); Associate of
Shereff Friedman, Hoffman
& Goodman (prior thereto).
*Steven E. Assistant Legal Products Analyst,
Hartstein, 32 Secretary Goldman Sachs (June 1993
85 Broad Street to present); Funds
New York, NY 10004 Compliance Officer,
Citibank Global Asset
Management (August 1991 to
June 1993); Legal
Assistant, Brown & Wood
(prior thereto).
*Deborah Robinson,24 Assistant Administrative Assistant,
85 Broad Street Secretary Goldman Sachs since
New York, NY 10004 January 1994. Formerly at
Cleary, Gottlieb, Steen
and Hamilton.
*Kaysie P. Uniacke, 35 Assistant Vice President and
One New York Plaza Secretary Portfolio Manager, Goldman
New York, NY 10004 Sachs Asset Management
(since 1988).
*Elizabeth D. Assistant Funds Trading Assistant,
Alexander, 26 Secretary Goldman Sachs Asset
One New York Plaza Management (since 1993);
New York, NY 10004 Formerly Compliance
Analyst, Prudential
Insurance (1991-1993).
</TABLE>
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<PAGE>
Each interested Trustee and officer holds comparable positions with certain
other investment companies of which Goldman Sachs, GSAM or an affiliate thereof
is the investment adviser, administrator and/or distributor. As of April 26,
1996, the Trustees and officers of the Trust as a group owned less than 1% of
the outstanding units of beneficial interest of each of the Portfolios.
The Trust pays each of its Trustees, other than those who are "interested
persons" of Goldman Sachs a fee for each Trustee meeting attended and an annual
fee. Such Trustees are also reimbursed for travel expenses incurred in
connection with attending such meetings.
The following table sets forth certain information with respect to the
compensation of each Trustee of the Trust for the one-year ended December 31,
1995:
<TABLE>
<CAPTION>
Pension or Total
Retirement Compensation
Benefits from Goldman
Aggregate Accrued as Sachs Mutual
Compensation Part of Funds
from the Trust's (including
Name of Trustee Trust Expenses the Trust)*
- --------------- ------------- ----------- ------------
<S> <C> <C> <C>
Paul C. Nagel, Jr. $73,478 $0 $101,000
Ashok N. Bakhru $44,378 $0 $ 61,000
Marcia L. Beck $0 $0 $0
David B. Ford $0 $0 $0
Alan A. Shuch $0 $0 $0
Jackson W. Smart $44,378 $0 $ 61,000
William H. Springer $44,378 $0 $ 61,000
Richard P. Strubel $44,378 $0 $ 61,000
</TABLE>
______________
* The Goldman Sachs Mutual Funds consisted of 29 mutual funds, including
the fourteen series of the Trust, on December 31, 1995.
51
<PAGE>
THE ADVISER, DISTRIBUTOR AND
TRANSFER AGENT
THE ADVISER
GSAM, a separate operating division of Goldman Sachs, acts as the
investment adviser to the Portfolios. Under the Advisory Agreement between
Goldman Sachs on behalf of GSAM and the Trust on behalf of the Portfolios, GSAM,
subject to the supervision of the Board of Trustees of the Trust and in
conformity with the stated policies of each Portfolio, acts as investment
adviser and directs the investments of the Portfolios. In addition, GSAM
administers the Portfolios' business affairs and, in connection therewith,
furnishes the Trust with office facilities and (to the extent not provided by
the Trust's custodian, transfer agent, or other organizations) clerical
recordkeeping and bookkeeping services and maintains the financial and account
records required to be maintained by the Trust. As compensation for these
services and for assuming expenses related thereto, the Trust pays GSAM a fee,
computed daily and paid monthly at an annual rate of .35% of each Portfolio's
average daily net assets. GSAM has agreed to reduce or otherwise limit the
daily expenses (excluding fees paid to Service Organizations, taxes, interest,
brokerage and litigation, indemnification and other extraordinary expenses) of
each Portfolio, on an annualized basis, to .43% of the average daily net assets
of that Portfolio. The amount of such reductions or limits, if any, will be
calculated monthly and will be based on the cumulative difference between a
Portfolio's estimated annualized expense ratio and the expense limit for that
Portfolio. This amount shall be reduced by any prior payments related to the
current fiscal year. GSAM has also voluntarily agreed not to impose all or a
portion of its advisory fee and/or to reduce or otherwise limit the Money
Market, Federal, Treasury Instruments, Tax-Exempt Diversified and Tax-Exempt New
York Portfolio's annual total operating expenses to (excluding fees of Service
Organizations).36%, .26%, .21%, .31% and .32% respectively, of average daily net
assets and for each other Portfolio to .41% of average daily net assets.
The Trust, on behalf of each Portfolio, is responsible for all expenses
other than those expressly borne by GSAM under the Portfolios' Advisory
Agreement. The expenses borne by Units of each Portfolio include, without
limitation, the fees payable to GSAM, the fees and expenses of the Trust's
custodian, fees and expenses of the Trust's transfer agent, filing fees for the
registration or qualification of Units under federal or state securities laws,
expenses of the organization of the Trust, taxes (including income and excise
taxes, if any), interest, costs of liability insurance, fidelity bonds,
indemnification or contribution, any costs, expenses or losses arising out of
any liability of, or claim for damages or other relief asserted against, the
Trust for violation of any law, legal and auditing and tax fees and expenses
(including the cost of legal and certain accounting services rendered by
employees of Goldman Sachs with
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<PAGE>
respect to the Trust), expenses of preparing and setting in type prospectuses,
statements of additional information, proxy material, reports and notices, the
printing and distribution of the same to Unitholders and regulatory authorities,
compensation and expenses of its "non-interested" Trustees, and extraordinary
expenses incurred by the Trust. In the event that the expenses of a Portfolio
(including the fees payable to GSAM, but excluding interest, taxes, brokerage
commissions, litigation and indemnification expenses and other extraordinary
expenses) for any fiscal year exceed the limits set by certain state securities
administrators, GSAM will reduce its fee payable on behalf of such Portfolio by
the amount of such excess but only to the extent of the Portfolio's fee.
Repayment of any excess amounts will be made on a monthly basis. The most
restrictive expense limitation currently applicable to each Portfolio is 2.5% of
the first $30 million of a Portfolio's average annual net assets, 2.0% of the
next $70 million of such assets and 1.5% of such assets in excess of $100
million.
The Advisory Agreement entered into on behalf of the Portfolios was most
recently approved by the Board of Trustees, including the"non-interested"
Trustees, on April 24, 1996 and by the unitholders of each Portfolio (other than
the Treasury Instruments and Tax-Exempt New York Portfolios) on April 19, 1990
and by the unitholders of the Treasury Instruments and Tax-Exempt New York
Portfolios on June 3, 1991. The Advisory Agreement will remain in effect until
June 30, 1997, and will continue in effect thereafter only if such continuance
is specifically approved at least annually by the Trustees or by a vote of a
majority of the outstanding voting securities of the particular Portfolio, as
defined in the Investment Company Act, and, in either case, by a majority of
"non-interested" Trustees.
Goldman Sachs has authorized any of its directors, partners, officers and
employees who has been elected or appointed as a Trustee or officer of the Trust
to serve in the capacities in which he or she has been elected and appointed.
For the fiscal years ended December 31, 1995, December 31, 1994 and
December 31, 1993 the amount of the advisory fee incurred by each Portfolio was
as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- -----------
<S> <C> <C> <C>
Prime Obligations Portfolio $6,728,074 $9,135,344 $12,107,954
Money Market Portfolio 2,618,275 2,663,551 3,410,598
Treasury Obligations Portfolio 3,206,490 3,545,307 5,517,465
Treasury Instruments Portfolio 1,079,236 687,965 598,770
Government Portfolio 3,259,056 4,804,362 7,724,294
Federal Portfolio 4,543,196 3,396,214 3,577,126
Tax-Exempt Diversified Portfolio 3,795,451 4,372,766 4,263,251
Tax-Exempt California Portfolio 1,030,447 867,058 659,860
Tax-Exempt New York Portfolio 234,853 150,735 41,076
</TABLE>
53
<PAGE>
GSAM agreed not to impose its fees in full during the year ended
December 31, 1995 with respect to Money Market, Treasury Instruments, Federal,
Tax-Exempt Diversified and Tax-Exempt New York Portfolios. Had the fees been
imposed in full an additional $436,325 $1,438,992, $3,407,655, $1,518,129 and
$109,464 would have been incurred for the Money Market, Treasury Instruments,
Federal, Tax-Exempt Diversified and Tax-Exempt New York Portfolios,
respectively. In addition, GSAM assumed certain expenses related to the
operations of each Portfolio during various periods of 1995 to the extent such
expenses would have caused each Portfolio's total expenses to exceed, on an
annualized basis, certain contractual or voluntary expense limitations. Had
these expenses not been assumed, $347,317, $ 135,715, $203,882, $223,652,
$276,785, $302,153, $239,829, $19,625 and $32,403 in additional expenses would
have been incurred by the Prime Obligations, Money Market, Treasury Obligations,
Treasury Instruments, Government, Federal, Tax-Exempt Diversified, Tax-Exempt
California and Tax-Exempt New York Portfolios, respectively, during the year.
GSAM agreed not to impose its fees in full during the year ended
December 31, 1994 with respect to Money Market, Treasury Instruments, Federal,
Tax-Exempt Diversified and Tax-Exempt New York Portfolios. Had the fees been
imposed in full an additional $443,925, $917,292, $2,547,168, $1,749,116 and
$123,050 would have been incurred for the Money Market, Treasury Instruments,
Federal, Tax-Exempt Diversified and Tax-Exempt New York Portfolios,
respectively. In addition, GSAM assumed certain expenses related to the
operations of each Portfolio during various periods of 1994 to the extent such
expenses would have caused each Portfolio's total expenses to exceed, on an
annualized basis, certain contractual or voluntary expense limitations. Had
these expenses not been assumed, $635,085, $301,326, $371,456, $150,525,
$526,310, $326,417, $217,296, $34,612 and $51,675 in additional expenses would
have been incurred by the Prime Obligations, Money Market, Treasury Obligations,
Treasury Instruments, Government, Federal, Tax-Exempt Diversified, Tax-Exempt
California and Tax-Exempt New York Portfolios, respectively, during the year.
GSAM agreed not to impose its fees in full during the year ended
December 31, 1993 with respect to the Money Market, Treasury Instruments,
Federal, Tax-Exempt Diversified and Tax-Exempt New York Portfolios. Had the
fees been imposed during these periods, an additional $568,433, $798,360,
$2,682,845, $1,705,300 and $102,690 would have been incurred for the Money
Market, Treasury Instruments, Federal, Tax-Exempt Diversified and Tax-Exempt New
York Portfolios, respectively, during such periods. In addition, GSAM assumed
certain expenses related to the operations of the Prime Obligations, Money
Market, Treasury Obligations, Treasury Instruments, Government, Federal, Tax-
Exempt Diversified, Tax-Exempt California and Tax-Exempt New York Portfolios
during the year ended December 31, 1993 to the extent such expenses would have
caused the corresponding Portfolio's total expenses to exceed, on an annualized
basis,
54
<PAGE>
certain contractual or voluntary expense limitations. Had these expenses not
been assumed, $760,000, $329,526, $454,978, $146,001, $627,735, $341,978,
$178,810, $64,435, and $71,563 in additional expenses would have been incurred
by the Prime Obligations, Money Market, Treasury Obligations, Treasury
Instruments, Government, Federal, Tax-Exempt Diversified, Tax-Exempt California
and Tax-Exempt New York Portfolios, respectively, during the year.
Each Portfolio may use any name derived from the name "Goldman Sachs"
only so long as the Advisory Agreement remains in effect. The Advisory
Agreement also provides that it shall terminate automatically if assigned and
that it may be terminated with respect to any particular Portfolio without
penalty by vote of a majority of the Trustees or a majority of the outstanding
voting securities of that Portfolio on 60 days' written notice to GSAM or by
GSAM without penalty at any time on 90 days' written notice to the Trust.
In managing the Tax-Exempt Diversified Portfolio, the Tax-Exempt
California Portfolio and the Tax-Exempt New York Portfolio, GSAM will draw upon
the extensive research generated by Goldman Sachs' Municipal Credit Group. The
Credit Group's research team continually reviews current information regarding
the issuers of municipal and other tax-exempt securities, with particular focus
on long-term creditworthiness, short-term liquidity, debt service costs,
liability structures, and administrative and economic characteristics.
THE DISTRIBUTOR AND TRANSFER AGENT
Goldman Sachs acts as principal underwriter and distributor of each
Portfolio's units. The Distribution Agreement between Goldman Sachs and the
Trust was most recently approved by the Trustees on April 24, 1996. Goldman
Sachs also serves as the Portfolios' transfer agent. Goldman Sachs provides
customary transfer agency services to the Portfolios, including the handling of
unitholder communications, the processing of unitholder transactions, the
maintenance of unitholder account records, payment of dividends and
distributions and related functions. For these services, Goldman Sachs receives
.04% (on an annualized basis) of the average daily net assets with respect to
each Portfolio (other than the Prime Obligations Portfolio). With respect to
the Prime Obligations Portfolio, Goldman Sachs is entitled to receive a fee from
the Portfolio equal to the classes proportionate share of the total transfer
agency fees borne by the Portfolio, which are equal to $12,000 per year plus
$7.50 per account, together with out-of-pocket expenses (including those out of
pocket expenses payable to servicing agents) applicable to ILA Class B Units and
.04% of the average daily net assets of the other classes of the Prime
Obligations Portfolio. Goldman Sachs may from time to time agree that the fee
it would otherwise be entitled to receive under its transfer agency agreement
will be reduced.
55
<PAGE>
For the fiscal year ended December 31, 1995, the Prime Obligations,
Money Market, Treasury Obligations, Treasury Instruments, Government, Federal,
Tax-Exempt Diversified, Tax-Exempt California and Tax-Exempt New York
Portfolios incurred transfer agency fees of $768,923, $349,060, $366,456,
$287,798, $372,463, $908,708, $607,252, $117,765 and $39,298, respectively.
For the fiscal year ended December 31, 1994, the Prime Obligations,
Money Market, Treasury Obligations, Treasury Instruments, Government, Federal,
Tax-Exempt Diversified, Tax-Exempt California and Tax-Exempt New York
Portfolios incurred transfer agency fees of $1,044,039, $355,140, $405,178,
$183,457, $549,070, $679,243, $699,643, $99,092 and $32,139, respectively.
For the fiscal year ended December 31, 1993, the Prime Obligations,
Money Market, Treasury Obligations, Treasury Instruments, Government, Federal,
Tax-Exempt Diversified, Tax-Exempt California and Tax-Exempt New York
Portfolios incurred transfer agency fees of $1,383,766, $454,746, $630,568,
$159,672, $882,777, $715,422, $682,119, $75,412 and $16,431, respectively.
Goldman Sachs is one of the largest international investment banking
firms in the United States. Founded in 1869, Goldman Sachs is a major
investment banking and brokerage firm providing a broad range of financing and
investment services both in the United States and abroad. As of November 30,
1995, Goldman Sachs and its consolidated subsidiaries had assets of
approximately $70.7 billion and partners' capital of $1.9 billion. Goldman
Sachs became registered as an investment adviser in 1981. As of March 27, 1996,
Goldman Sachs, together with its affiliates, acted as investment adviser,
administrator or distributor for approximately $58 billion in total assets.
PORTFOLIO TRANSACTIONS
GSAM places the portfolio transactions of the Portfolios and of all
other accounts managed by GSAM for execution with many firms. GSAM uses its
best efforts to obtain execution of portfolio transactions at prices which are
advantageous to each Portfolio and at reasonable competitive spreads or (when a
disclosed commission is being charged) at reasonably competitive commission
rates. In seeking such execution, GSAM will use its best judgment in evaluating
the terms of a transaction, and will give consideration to various relevant
factors, including without limitation the size and type of the transaction, the
nature and character of the market for the security, the confidentiality, speed
and certainty of effective execution required for the transaction, the general
execution and operational capabilities of the broker-dealer, the general
execution and operational capabilities of the firm, the reputation, reliability,
experience and financial condition of the firm, the value and quality of the
services rendered by the firm in this and other transactions, and the
reasonableness of the spread or commission, if any. Securities purchased and
sold by the Portfolios are generally traded in the over-the-counter market on a
net basis (i.e.,
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<PAGE>
without commission) through broker-dealers and banks acting for their own
account rather than as brokers, or otherwise involve transactions directly with
the issuer of such securities.
Goldman Sachs is active as an investor, dealer and/or underwriter in
many types of municipal and money market instruments. Its activities in this
regard could have some effect on the markets for those instruments which the
Portfolios buy, hold or sell. An order has been granted by the SEC under the
Investment Company Act which permits the Portfolios to deal with Goldman Sachs
in transactions in certain taxable securities in which Goldman Sachs acts as
principal. As a result, the Portfolios may trade with Goldman Sachs as
principal subject to the terms and conditions of such exemption.
Under the Investment Company Act, the Portfolios are prohibited from
purchasing any instrument of which Goldman Sachs is a principal underwriter
during the existence of an underwriting or selling syndicate relating to such
instrument, absent an exemptive order (the order referred to in the preceding
paragraph will not apply to such purchases) or the adoption of and compliance
with certain procedures under such Act. The Trust has adopted procedures which
establish, among other things, certain limitations on the amount of debt
securities that may be purchased in any single offering and on the amount of the
Trust's assets that may be invested in any single offering. Accordingly, in
view of Goldman Sachs' active role in the underwriting of debt securities, a
Portfolio's ability to purchase debt securities in the primary market may from
time to time be limited.
In certain instances there may be securities which are suitable for
more than one Portfolio as well as for one or more of the other clients of GSAM.
Investment decisions for each Portfolio and for GSAM's other clients are made
with a view to achieving their respective investment objectives. It may develop
that a particular security is bought or sold for only one client even though it
might be held by, or bought or sold for, other clients. Likewise, a particular
security may be bought for one or more clients when one or more other clients
are selling that same security. Some simultaneous transactions are inevitable
when several clients receive investment advice from the same investment adviser,
particularly when the same security is suitable for the investment objectives of
more than one client. When two or more clients are simultaneously engaged in
the purchase or sale of the same security, the securities are allocated among
clients in a manner believed to be equitable to each. It is recognized that in
some cases this system could have a detrimental effect on the price or volume of
the security in a particular transaction as far as a Portfolio is concerned.
Each Fund believes that over time its ability to participate in volume
transactions will produce better executions for the Portfolios.
During the fiscal year ended December 31, 1995, the Trust acquired and
sold securities of its regular broker/dealers: Lehman Brothers Inc., Bear
Stearns, Salomon Brothers, Inc., CS
57
<PAGE>
First Boston Corp., Merrill Lynch & Co., Inc., Daiwa Securities, Morgan Stanley
& Co., Inc., Smith Barney, Barclays, and Swiss Bank. As of December 31, 1995,
the Prime Obligations Portfolio held the following amounts of securities of its
regular broker/dealers; as defined in Rule 10b-1 under the Investment Company
Act, or their parents ($ in thousands): Lehman Brothers Inc. ($25,000), Bear
Stearns ($75,580), Merrill Lynch & Co., Inc. ($39,355), Morgan Stanley & Co.,
Inc. ($141,050) and Smith Barney ($31,260).
As of December 31, 1995, the Money Market Portfolio held the following
amounts of securities of its regular broker/dealers; as defined in Rule 10b-1
under, or their parents ($ in thousands): Lehman Brothers, Inc. ($15,000), Bear
Stearns ($18,450), Merrill Lynch & Co., Inc. ($19,630), Morgan Stanley & Co.,
Inc. ($43,450), Swiss Bank ($27,306) and Smith Barney ($22,140).
As of December 31, 1995, the Treasury Obligations Portfolio held the
following amounts of securities of its regular broker/dealers; as defined in
Rule 10b-1, or their parents ($ in thousands): Bear Stearns ($87,950), CS First
Boston Corp. ($35,000), Merrill Lynch & Co., Inc. ($35,000), Daiwa Securities
($35,000) and Morgan Stanley & Co., Inc. ($87,950), Smith Barney ($105,540) and
Swiss Bank ($130,166).
As of December 31, 1995, the Government Portfolio held the following
amounts of securities of its regular broker/dealers; as defined in Rule 10b-1,
or their parents ($ in thousands): Lehman Brothers, Inc. ($30,000), CS First
Boston Corp. ($30,000) and Daiwa Securities ($25,000), Salomon Brothers, Inc.
($25,000) and Smith Barney ($68,200).
NET ASSET VALUE
The net asset value per unit of each Portfolio is determined by the
Portfolios' custodian 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. A Business
Day means any day on which the New York Stock Exchange is open, except for days
on which Chicago, Boston or New York banks are closed for local holidays. Such
holidays include: New Year's Day, Martin Luther King Day, President's Day, Good
Friday, Memorial Day, the Fourth of July, Labor Day, Columbus Day, Veteran's
Day, Thanksgiving Day and Christmas Day.
Each Portfolio's securities are valued using the amortized cost method
of valuation in an effort to maintain a constant net asset value of $ 1.00 per
unit, which the Board of Trustees has determined to be in the best interest of
the Portfolios and their unitholders. This method involves valuing a security
at cost on the date of acquisition and thereafter assuming a constant accretion
of a discount or amortization of a premium to maturity, regardless of the impact
of fluctuating interest rates on the market value of the instrument. While this
method provides
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<PAGE>
certainty in valuation, it may result in periods during which value, as
determined by amortized cost, is higher or lower than the price a Portfolio
would receive if it sold the instrument. During such periods, the yield to an
investor in a Portfolio may differ somewhat from that obtained in a similar
investment company which uses available market quotations to value all of its
portfolio securities. During periods of declining interest rates, the quoted
yield on units of a Portfolio may tend to be higher than a like computation made
by a fund with identical investments utilizing a method of valuation based upon
market prices and estimates of market prices for all of its portfolio
instruments. Thus, if the use of amortized cost by a Portfolio resulted in a
lower aggregate portfolio value on a particular day, a prospective investor in
the Portfolio would be able to obtain a somewhat higher yield if he or she
purchased units of the Portfolio on that day, than would result from investment
in a fund utilizing solely market values, and existing investors in the
Portfolio would receive less investment income. The converse would apply in a
period of rising interest rates.
The Trustees have established procedures designed to stabilize, to the
extent reasonably possible, each Portfolio's price per unit as computed for the
purpose of sales and redemptions at $1.00. Such procedures include review of
each Portfolio by the Trustees, at such intervals as they deem appropriate, to
determine whether the Portfolio's net asset value calculated by using available
market quotations (or an appropriate substitute which reflects market
conditions) deviates from $1.00 per unit based on amortized cost, as well as
review of methods used to calculate the deviation. If such deviation exceeds
1/2 of 1%, the Trustees will promptly consider what action, if any, will be
initiated. In the event the Trustees determine that a deviation exists which
may result in material dilution or other unfair results to investors or existing
unitholders, they will take such corrective action as they regard to be
necessary and appropriate, including the sale of portfolio instruments prior to
maturity to realize capital gains or losses or to shorten average portfolio
maturity; withholding part or all of dividends or payment of distributions from
capital or capital gains; redemptions of units in kind; or establishing a net
asset value per unit by using available market quotations or equivalents. In
addition, in order to stabilize the net asset value per unit at $1.00 the
Trustees have the authority (1) to reduce or increase the number of units
outstanding on a pro rata basis, and (2) to offset each unitholder's pro rata
portion of the deviation between the net asset value per unit and $1.00 from the
unitholder's accrued dividend account or from future dividends. Each Portfolio
may hold cash for the purpose of stabilizing its net asset value per unit.
Holdings of cash, on which no return is earned, would tend to lower the yield on
such Portfolio's units.
In order to continue to use the amortized cost method of valuation
each Portfolio's investments, including repurchase agreements, must be U.S.
dollar-denominated instruments which the
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<PAGE>
Trustees determine present minimal credit risks and which are at the time of
acquisition rated by the requisite number of nationally recognized statistical
rating organizations in one of the two highest short-term rating categories or,
in the case of any instrument that is not so rated, of comparable quality as
determined by GSAM and confirmed by the Board of Trustees. Also, each Portfolio
must maintain a dollar-weighted average portfolio maturity (not more than 90
days) appropriate to its objective of maintaining a stable net asset value of
$1.00 per unit and, not purchase any instrument with a remaining maturity of
more than thirteen months. However, a Portfolio may also, consistent with the
provisions of the above-mentioned rule, invest in securities with a maturity of
more than thirteen months, if (i) the security is a variable or floating
security with certain demand and interest rate reset features and (ii) the
security, except in the case of a Tax-Exempt Portfolio, is a First Tier
security.
The proceeds received by each Portfolio for each issue or sale of its
units, 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 Portfolio and constitute the underlying assets of that Portfolio. The
underlying assets of each Portfolio will be segregated on the books of account,
and will be charged with the liabilities in respect to such Portfolio and with a
share of the general liabilities of the Trust. Expenses with respect to the
Portfolios are to be allocated in proportion to the net asset values of the
respective Portfolios except where allocations of direct expenses can otherwise
be fairly made. In addition, within each Portfolio, ILA Units, ILA
Administration Units, ILA Service Units and ILA Class B Units (Prime Obligations
Portfolio only) will be subject to different expense structures (see
"Organization and Capitalization").
REDEMPTIONS
The Trust may suspend the right of redemption of units of a Portfolio
and may postpone payment for any period: (i) during which the New York Stock
Exchange is closed other than customary weekend and holiday closings or during
which trading on the New York Stock Exchange is restricted, (ii) when the SEC
determines that a state of emergency exists which may make payment or transfer
not reasonably practicable, (iii) as the SEC may by order permit for the
protection of the unitholders of the Trust or (iv) at any other time when the
Trust may, under applicable laws and regulations, suspend payment on the
redemption of the Portfolio's units.
The Trust agrees to redeem units of each Portfolio solely in cash up
to the lesser of $250,000 or 1% of the net asset value of the Portfolio during
any 90-day period for any one unitholder. The Trust reserves the right to pay
other redemptions, either total or partial, by a distribution in kind of
securities (instead of cash) from the applicable Portfolio's portfolio. The
securities distributed in such a distribution would be valued at
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<PAGE>
the same value as that assigned to them in calculating the net asset value of
the units being redeemed. If a unitholder receives a distribution in kind, he
or she should expect to incur transaction costs when he or she converts the
securities to cash.
CALCULATION OF YIELD QUOTATIONS
Each Portfolio's yield quotations are calculated by a standard method
prescribed by the rules of the SEC. Under this method, the yield quotation is
based on a hypothetical account having a balance of exactly one unit at the
beginning of a seven-day period.
Yield, effective yield and tax-equivalent yield are calculated
separately for each class of units of a Portfolio. Each type of unit is subject
to different fees and expenses and may have differing yields for the same
period.
The yield quotation is computed as follows: the net change, exclusive
of capital changes (i.e., realized gains and losses from the sale of securities
and unrealized appreciation and depreciation), in the value of a hypothetical
pre-existing account having a balance of one unit at the beginning of the base
period is determined by dividing the net change in account value by the value of
the account at the beginning of the base period. This base period return is
then multiplied by 365/7 (366/7 in the event of a leap year) with the resulting
yield figure carried to the nearest 100th of 1%. Such yield quotation shall
take into account all fees that are charged to a Portfolio.
Each Portfolio also may advertise a quotation of effective yield for a
7-calendar day period. Effective yield is computed by compounding the
unannualized base period return determined as in the preceding paragraph by
adding 1 to that return, raising the sum to the 365/7 (366/7 in the event of a
leap year) power and subtracting one from the result, according to the following
formula:
Effective Yield = [(base period return + 1) (365/7) ] - 1
The Tax-Exempt Diversified, Tax-Exempt California, Tax-Exempt New
York, Federal and Treasury Instruments Portfolios may also advertise a tax-
equivalent yield which is computed by dividing that portion of a Portfolio's
yield (as computed above) which is tax-exempt by one minus a stated income tax
rate and adding the quotient to that portion, if any, of the yield of the
Portfolio that is not tax-exempt.
Unlike bank deposits or other investments which pay a fixed yield or
return for a stated period of time, the return for a Portfolio will fluctuate
from time to time and does not provide a basis for determining future returns.
Return is a function of portfolio quality, composition, maturity and market
conditions as well as of the expenses allocated to each Portfolio. The return
of a Portfolio may not be comparable to other investment
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<PAGE>
alternatives because of differences in the foregoing variables and differences
in the methods used to value portfolio securities, compute expenses and
calculate return.
ILA Class B Units are a new class of units which have not yet
commenced operation. The yield, effective yield and tax-equivalent yield of
each Portfolio with respect to ILA Units, ILA Administration Units and ILA
Service Units for the seven-day period ended December 31, 1995 were as follows:
<TABLE>
<CAPTION>
Tax-
Effective Equivalent
Yield Yield Yield
------ ---------- -----------
<S> <C> <C> <C>
Prime Obligations Portfolio:
ILA Units 5.39% 5.54% N/A
ILA Administration Units 5.24 5.38 N/A
ILA Service Units 4.99 5.12 N/A
ILA Class B Units N/A N/A N/A
Money Market Portfolio:
ILA Units 5.45 5.60 N/A
ILA Administration Units 5.30 5.44 N/A
ILA Service Units 5.05 5.18 N/A
Treasury Obligations Portfolio:
ILA Units 5.35 5.50 N/A
ILA Administration Units 5.20 5.34 N/A
ILA Service Units 4.95 5.07 N/A
Treasury Instruments Portfolio:
ILA Units 5.13 5.26 N/A
ILA Administration Units 4.98 5.10 N/A
ILA Service Units 4.73 4.84 N/A
Government Portfolio:
ILA Units 5.42 5.57 N/A
ILA Administration Units 5.27 5.41 N/A
ILA Service Units 5.02 5.15 N/A
Federal Portfolio:
ILA Units 5.46 5.61 N/A
ILA Administration Units 5.31 5.45 N/A
ILA Service Units 5.06 5.19 N/A
Tax-Exempt Diversified Portfolio:
ILA Units 4.18 4.27 6.92%
ILA Administration Units 4.03 4.11 6.67
ILA Service Units 3.78 3.85 6.26
Tax-Exempt California Portfolio:
ILA Units 4.48 4.58 8.34
ILA Administration Units 4.33 4.43 8.06
ILA Service Units** 4.08 4.16 7.59
Tax-Exempt New York Portfolio*
ILA Units 4.22 4.31 7.57
ILA Administration Units 4.07 4.16 7.30
ILA Service Units** 3.82 3.90 6.85
- -------------------------
</TABLE>
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<PAGE>
* 7.95%, 7.67% and 7.20% for the ILA Units, ILA Administration Units and ILA
Service Units, respectively, when taking New York City taxes into account.
** Assuming such Units had been outstanding and are subject to maximum
administration or service fees.
The information set forth in the foregoing table reflects certain fee
reductions and expense limitations. See "The Adviser." In the absence of such
fee reductions and expense limitations, the yield of each Portfolio with respect
to ILA Units, ILA Administration Units and ILA Service Units for the same period
would have been as follows:
<TABLE>
<CAPTION>
Tax-
Effective Equivalent
Yield Yield Yield
------ ---------- -----------
<S> <C> <C> <C>
Prime Obligations Portfolio
ILA Units 5.37% 5.51% N/A
ILA Administration Units 5.22 5.36 N/A
ILA Service Units 4.97 5.09 N/A
ILA Class B Units N/A N/A N/A
Money Market Portfolio
ILA Units 5.38 5.53 N/A
ILA Administration Units 5.23 5.37 N/A
ILA Service Units 4.98 5.11 N/A
Treasury Obligations Portfolio
ILA Units 5.33 5.47 N/A
ILA Administration Units 5.18 5.32 N/A
ILA Service Units 4.93 5.05 N/A
Treasury Instruments Portfolio
ILA Units 4.90 5.02 N/A
ILA Administration Units 4.75 4.87 N/A
ILA Service Units 4.50 4.60 N/A
Government Portfolio
ILA Units 5.38 5.53 N/A
ILA Administration Units 5.23 5.37 N/A
ILA Service Units 4.98 5.11 N/A
Federal Portfolio
ILA Units 5.30 5.44 N/A
ILA Administration Units 5.15 5.29 N/A
ILA Service Units 4.90 5.02 N/A
Tax-Exempt Diversified Portfolio
ILA Units 4.07 4.15 6.73%
ILA Administration Units 3.92 3.99 6.48
ILA Service Units 3.67 3.73 6.07
Tax-Exempt California Portfolio
ILA Units 4.48 4.58 8.34
ILA Administration Units 4.32 4.41 8.03
ILA Service Units** 4.08 4.16 7.59
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C>
Tax-Exempt New York Portfolio*
ILA Units 4.11 4.19 7.36
ILA Administration Units 3.96 4.04 7.09
ILA Service Units** 3.71 3.78 6.65
</TABLE>
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* 7.74%, 7.45% and 6.98% for the ILA Units, ILA Administration Units and ILA
Service Units, respectively, when taking New York City taxes into account.
** Assuming such Units had been outstanding and are subject to maximum
administration or service fees.
The quotations of tax-equivalent yield set forth above for the seven-day
period ended December 31, 1995 are based on a federal marginal tax rate of
39.6%.
With respect to the Tax-Exempt California Portfolio, a California State
personal income tax rate of 11.0% is being assumed in addition to the 39.6%
federal tax rate, for a combined tax rate of 46.2%. With respect to the Tax-
Exempt New York Portfolio, the tax equivalent yields are being shown under two
scenarios. The first scenario assumes a federal marginal tax rate of 39.6% and
a New York State personal income tax rate of 7.594%, for a combined tax rate of
44.2%. The second scenario assumes a New York City personal income tax rate of
4.46% in addition to the above federal and New York, State tax rates, for a
combined tax rate of 46.9%. The combined tax rates assume full deductibility of
state and, if applicable, city taxes in computing federal tax liability.
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 material
which highlight or summarize the services provided in support of an asset
allocation program.
From time to time any Portfolio may publish an indication of its past
performance as measured by independent sources such as Lipper Analytical
Services, Incorporated, Weisenberger Investment Companies Service, Donoghue's
Money Fund Report, Barron's, Business Week, Changing Times, Financial World,
Forbes, Money, Personal Investor, Sylvia Porter's Personal Finance, and The Wall
Street Journal.
TAX INFORMATION
Each Portfolio has qualified and has elected or intends to qualify and elect
to be treated and to qualify as a separate regulated investment company under
Subchapter M of the Internal
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Revenue Code of 1986, as amended, (the "Code"). Such qualification does not
involve supervision of management or investment practices or policies by any
governmental agency or bureau.
In order to qualify as a regulated investment company, each Portfolio must,
among other things, (a) 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 stock or securities or certain other
investments (the "90% Test"); (b) derive less than 30% of its annual gross
income from the sale or other disposition of stock or securities or certain
other investments held less than three months; and (c) diversify its holdings
so that, at the end of each quarter of its taxable year, (i) at least 50% of the
market value of the Portfolio's total gross assets is represented by cash and
cash items (including receivables), 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 the
Portfolio's total assets and 10% of the outstanding voting securities of such
issuer, and (ii) not more than 25% of the value of the Portfolio's total assets
is invested in the securities (other than U.S. Government securities and
securities of other regulated investment companies) of any one issuer or two or
more issuers controlled by the Portfolio and engaged in the same, similar or
related trades or businesses. For purposes of these requirements, participation
interests will be treated as securities, and the issuer will be identified on
the basis of market risk and credit risk associated with any particular
interest. Certain payments received with respect to such interests, such as
commitment fees and certain facility fees, may not be treated as income
qualifying under the 90% test.
Each Portfolio, as a regulated investment company, will not be subject to
federal income tax on any of its net investment income and net realized capital
gains that are distributed to unitholders with respect to any taxable year in
accordance with the Code's timing requirements, provided that the Portfolio
distributes at least 90% of its investment company taxable income (generally all
of its net taxable income other than "net capital gain," which is the excess of
net long-term capital gain over net short-term capital loss) for such year and,
in the case of any Portfolio that earns tax-exempt interest, at least 90% of the
excess of the tax-exempt interest it earns over certain disallowed deductions.
A Portfolio will be subject to federal income tax at regular corporate rates on
any investment company taxable income or net capital gain that it does not
distribute for a taxable year. In order to avoid a non-deductible 4% federal
excise tax, each Portfolio 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
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excess of capital gains over capital losses for the previous year that were not
distributed in such year and on which the Portfolio paid no federal income tax.
Dividends paid by a Portfolio from taxable net investment income (including
income attributable to accrued market discount and a portion of the discount on
certain stripped tax-exempt obligations and their coupons) and the excess of net
short-term capital gain over net long-term capital loss will be treated as
ordinary income in the hands of unitholders. Such distributions will not
qualify for the corporate dividends-received deduction. Dividends paid a
Portfolio from the excess of net long-term capital gain over net short-term
capital loss are taxable to unitholders as long-term capital gain, regardless of
the length of time the units of a Portfolio have been held by such unitholders,
and also will not qualify for the corporate dividends-received deduction. A
Portfolio's net realized capital gains for a taxable year are computed by taking
into account realized capital losses, including any capital loss carryforward of
that Portfolio.
Distributions paid by the Tax-Exempt Diversified, Tax-Exempt California and
Tax-Exempt New York Portfolios from tax-exempt interest received by them and
properly designated as "exempt-interest dividends" will generally be exempt from
regular federal income tax, provided that at least 50% of the value of the
applicable Portfolio's total assets at the close of each quarter of its taxable
year consists of tax-exempt obligations, i.e., obligations described in Section
- -
103(a) of the Code (not including units of other regulated investment companies
that may pay exempt-interest dividends, because such units are not treated as
tax-exempt obligations for this purpose). Distributions paid by the other
Portfolios from any tax-exempt interest they may receive will not be tax-exempt,
because they will not satisfy the 50% requirement described in the preceding
sentence. A portion of any tax-exempt distributions attributable to interest on
certain "private activity bonds," if any, received by a Portfolio may constitute
tax preference items and may give rise to, or increase liability under, the
alternative minimum tax for particular unitholders. In addition, tax-exempt
distributions of the Portfolios may be considered in computing the "adjusted
current earnings" preference item of their corporate unitholders in determining
the corporate alternative minimum tax and the corporate environmental tax. To
the extent that the Tax-Exempt Diversified, Tax-Exempt California and Tax-Exempt
New York Portfolios invest in certain short-term instruments, including
repurchase agreements, the interest on which is not exempt from Federal income
tax, any distributions of income from such investments will be taxable to
unitholders as ordinary income. All or substantially all of any interest on
indebtedness incurred directly or indirectly to purchase or carry units of the
Portfolio will generally not be deductible. The availability of tax-exempt
obligations and the value of the Portfolios may be affected by restrictive tax
legislation enacted in recent years.
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In purchasing municipal obligations, the Tax-Exempt Diversified, Tax-Exempt
California and Tax-Exempt New York Portfolios rely on opinions of nationally-
recognized bond counsel for each issue as to the excludability of interest on
such obligations from gross income for federal income tax purposes and, where
applicable, the tax-exempt nature of such interest under the personal income tax
laws of a particular state. These Portfolios do not undertake independent
investigations concerning the tax-exempt status of such obligations, nor do they
guarantee or represent that bond counsels' opinions are correct.
Distributions of net investment income and net realized capital gains will be
taxable as described above, whether received in units or in cash. Unitholders
electing to receive distributions in the form of additional units will have a
cost basis in each unit so received equal to the amount of cash they would have
received had they elected to receive cash.
Certain Portfolios may be subject to foreign withholding taxes or other
foreign taxes with respect to their investments in certain securities of foreign
entities. These taxes may be reduced under the terms of applicable U.S. income
tax treaties in some cases, and each Portfolio intends to satisfy any procedural
requirements to qualify for benefits under these treaties. Although no
Portfolio anticipates that more than 50% of the value of its total assets at the
close of a taxable year will be composed of securities of foreign corporations,
if the 50% requirement were satisfied, a Portfolio could make an election under
Code Section 853 to permit its unitholders to claim a credit or deduction on
their federal income tax returns for their pro rata portion of qualified taxes
paid by that Portfolio in foreign countries. In the event such an election is
made, unitholders will be required to include their pro rata share of such taxes
in gross income and will be entitled to claim a foreign tax credit or deduction
with respect to such taxes, subject to certain limitations under the Code.
Unitholders who are precluded from taking such credits or deductions will
nevertheless be taxed on their pro rata share of the foreign taxes included in
their gross income, unless they are otherwise exempt from federal income tax.
Each Portfolio will be required to report to the Internal Revenue Service all
taxable distributions, except in the case of certain exempt unitholders. Under
the backup withholding provisions of Code Section 3406, all such distributions
may be subject to withholding of federal income tax at the rate of 31% in the
case of nonexempt unitholders who fail to furnish the Portfolio with their
taxpayer identification number and with certain certifications required by the
Internal Revenue Service or if the Internal Revenue Service or a broker notifies
a Portfolio that the number furnished by the unitholder is incorrect or that the
unitholder is subject to backup withholding as a result of failure to report
interest or dividend income. However, any taxable distributions from the Tax-
Exempt Diversified, Tax-Exempt California and Tax-Exempt New York
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Portfolios will not be subject to backup withholding if the Portfolio reasonably
estimates that at least 95% of its distributions will be exempt-interest
dividends. The Portfolios may refuse to accept an application that does not
contain any required taxpayer identification number or certification that the
number provided is correct or that the investor is an exempt recipient. If the
withholding provisions are applicable, any such distributions, whether taken in
cash or reinvested in units, will be reduced by the amounts required to be
withheld. Investors may wish to consult their tax advisers about the
applicability of the backup withholding provisions.
Redemptions and exchanges of units will generally not result in taxable gain
or loss, but a loss may be recognized to the extent a CDSC is imposed on the
redemption or exchange of ILA Class B Units.
All distributions (including exempt-interest dividends) whether received in
units or cash, must be reported by each unitholder on the unitholder's federal
income tax return. The Portfolios will inform unitholders of the federal income
tax status of their distributions after the end of each calendar year,
including, in the case of the Tax-Exempt Diversified, Tax-Exempt California and
Tax-Exempt New York Portfolios, the amounts that qualify as exempt-interest
dividends and any portions of such amounts that constitute tax preference items
under the federal alternative minimum tax. Unitholders who receive exempt-
interest dividends and have not held their units of the applicable Portfolio for
its entire taxable year may have designated as tax-exempt or as a tax preference
item a percentage of their distributions which is not exactly equal to a
proportionate share of the amount of tax-exempt interest or tax preference
income earned during the period of their investment in such Portfolio. Each
unitholder should consult his or her own tax advisor to determine the tax
consequences of an investment in a Portfolio in the unitholder's own state and
locality.
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. Unitholders should consult their tax advisers for more
information.
The foregoing discussion relates solely to U.S. federal income tax law as it
applies to U.S. persons (i.e., U.S. citizens and residents and U.S. domestic
corporations, partnerships, trusts and estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies and financial
institutions. Each unitholder 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
units of a Portfolio, including the possibility that such a unitholder may be
subject to a U.S. withholding tax at a rate of
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30% (or at a lower rate under an applicable U.S. income tax treaty) on certain
distributions from a Portfolio and, if a current IRS Form W-8 or acceptable
substitute is not on file with the Portfolio, may be subject to backup
withholding on certain payments.
STATE AND LOCAL
The Portfolios may be subject to state or local taxes in jurisdictions in
which the Portfolios may be deemed to be doing business. In addition, in those
states or localities which have income tax laws, the treatment of the Trust and
its unitholders under such laws may differ from their treatment under Federal
income tax laws, and investment in the Portfolios may have tax consequences for
unitholders, different from those of a direct investment in the Portfolios
securities. Unitholders should consult their own tax advisers concerning these
matters. For example, in such states or localities it may be appropriate for
unitholders to review with their tax advisers the state income and, if
applicable, intangibles tax consequences of investments by the Portfolios in
securities issued by the particular state or the U.S. Government or its various
agencies or instrumentalities, because many states exempt from personal income
tax distributions by regulated investment companies from interest on obligations
of the particular state or on direct U.S. Government obligations and/or exempt
from intangibles tax the value of the units of such companies attributable to
such obligations, subject to certain state-specific requirements and/or
limitations. See also the discussion below of these applicable provisions in
California and New York.
Assuming that each Portfolio qualifies as a regulated investment company for
federal income tax purposes, each Portfolio, as a series of a Massachusetts
business trust, will not be subject to any income, franchise or corporate excise
tax in Massachusetts. Provided that they qualify as regulated investment
companies and incur no federal income tax liability, the Portfolios may still be
subject to New York State and City minimum taxes, which are small in amount.
California State Taxation. The following discussion of California tax law
assumes that the Tax-Exempt California Portfolio will be qualified as a
regulated investment company under Subchapter M of the Code and will be
qualified thereunder to pay exempt-interest dividends. The Tax-Exempt
California Portfolio intends to qualify for each taxable year under California
law to pay "exempt interest dividends" which will be exempt from the California
personal income tax.
Individual unitholders of the Tax-Exempt California Portfolio who reside in
California will not be subject to California personal income tax on
distributions received from the Portfolio to the extent such distributions are
exempt-interest dividends attributable to interest on obligations the interest
on which is exempt from California personal income tax provided that
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the Portfolio satisfies the requirement of California law that at least 50% of
its assets at the close of each quarter of its taxable year be invested in such
obligations and properly designates such exempt-interest dividends under
California Law. Distributions from the Tax-Exempt California Portfolio which are
attributable to sources other than those described in the second preceding
sentence will generally be taxable to such unitholders as ordinary income.
Moreover, California legislation which incorporates Subchapter M of the Code
provides that capital gain dividends may be treated as long-term capital gains.
Such gains are currently subject to personal income tax at ordinary income tax
rates. Capital gains that are retained by the Portfolio will be taxed to that
Portfolio, and California residents will receive no California personal income
tax credit for such tax. Distributions other than exempt-interest dividends are
includable in income subject to the California alternative minimum tax.
Distributions from investment income and long-term and short-term capital
gains will generally not be excluded from taxable income in determining
California corporate franchise taxes for corporate unitholders and will be
treated as ordinary dividend income for such purposes. In addition, such
distributions may be includable in income subject to the alternative minimum
tax.
Interest on indebtedness incurred or continued by unitholders to purchase or
carry units of the Tax-Exempt California Portfolio will not be deductible for
California personal income tax purposes.
In addition, any loss realized by a unitholder of the Tax-Exempt California
Portfolio upon the sale of units held for six months or less may be disallowed
to the extent of any exempt-interest dividends received with respect to such
units. Moreover, any loss realized upon the redemption of units within six
months from the date of purchase of such units and following receipt of a long-
term capital gains distribution will be treated as long-term capital loss to the
extent of such long-term capital gains distribution. Finally, any loss realized
upon the redemption of units within thirty days before or after the acquisition
of other units of the same Portfolio may be disallowed under the "wash sale"
rules.
New York City and State Taxation. Individual unitholders who are residents of
New York State will be able to exclude for New York State income tax purposes
that portion of the exempt-interest dividends properly designated as such from
the Tax-Exempt New York Portfolio which is derived from interest on obligations
of New York State and its political subdivisions and of Puerto Rico, the U.S.
Virgin Islands and Guam. Exempt-interest dividends may be properly designated
as such only if, as anticipated, at least 50% of the value of the assets of the
Portfolio are invested at the close of each quarter of its taxable year in
obligations of issuers the interest on which is excluded from gross income for
federal income tax purposes.
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Individual unitholders who are residents of New York City will also be able to
exclude such income for New York City income tax purposes. Interest on
indebtedness incurred or continued by a shareholder to purchase or carry shares
of the Tax-Exempt New York Portfolio is not deductible for New York State or New
York City personal income tax purposes.
Long-term capital gains, if any, that are distributed by the Tax-Exempt New
York Portfolio and are properly designated as capital gain dividends will be
treated as capital gains for New York State and City income tax purposes in the
hands of New York State and New York City residents
Unitholders should consult their tax advisers about the application of the
provisions of tax law described in this Statement of Additional Information in
light of their particular tax situations.
This discussion of the tax treatment of the Portfolio and its unitholders is
based on the tax laws in effect as of the date of this Statement of Additional
Information.
ORGANIZATION AND CAPITALIZATION
The Trust is a Massachusetts business trust established under the laws of The
Commonwealth of Massachusetts by a Declaration of Trust dated December 6, 1978.
The Tax-Exempt Diversified Portfolio and Tax-Exempt California Portfolio are the
successors to separate series of Goldman Sachs Institutional Tax-Exempt Assets
which was formed pursuant to a Declaration of Trust on March 23, 1982. Each of
these Portfolios became a series of the Trust pursuant to a reorganization which
occurred on April 30, 1990. On December 13, 1990 the Trustees authorized the
establishment of the Treasury Instruments and Tax-Exempt New York Portfolios.
Each unitholder is deemed to have expressly assented and agreed to the terms
of the Declaration of Trust and is deemed to be party thereto. The authorized
capital of the Trust consists of an unlimited number of units of beneficial
interest. The Trustees have authority under the Declaration of Trust to create
and classify units of beneficial interest in separate series without further
action by unitholders. The Declaration of Trust further authorizes the Trustees
to classify or reclassify any series or portfolio of units into one or more
classes. The Trustees have authorized the issuance of three classes of units of
each of the portfolios: ILA Units, ILA Administration Units and ILA Service
Units. In addition, the Trustees have authorized a fourth class of units, ILA
Class B Units with respect to the Prime Obligations Portfolio.
Each ILA Unit, ILA Administration Unit, ILA Service Unit and ILA Class B Unit
of a Portfolio represents an equal proportionate interest in the assets
belonging to that Portfolio. It is contemplated that most units (other than ILA
Class B Units) will
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be held in accounts of which the record owner is a bank or other institution
acting, directly or through an agent, as nominee for its customers who are the
beneficial owners of the units or another organization designated by such bank
or institution. ILA Class B Units generally are only issued upon exchange from
Class B Shares of other Funds of the Goldman Sachs Portfolios. ILA Units may be
purchased for accounts held in the name of an investor or institution that is
not compensated by the Trust for services provided to the institution's
investors. ILA Administration Units may be purchased for accounts held in the
name of an investor or an institution that provides certain account
administration services to its customers, including maintenance of account
records and processing orders to purchase, redeem and exchange ILA
Administration Units. ILA Administration Units of each Portfolio bear the cost
of administration fees at the annual rate of up to .15 of 1% of the average
daily net assets of such Units. ILA Service Units may be purchased for accounts
held in the name of an institution that provides certain account administration
and unitholder liaison services to its customers, including maintenance of
account records, processing orders to purchase, redeem and exchange ILA Service
Units, responding to customer inquiries and assisting customers with investment
procedures. ILA Service Units bear the cost of service fees at the annual rate
of up to .40 of 1% of the average daily net assets of such Units. ILA Class B
Units 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. ILA Class B Units of the Prime
Obligations Portfolio 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
ILA Class B Units. ILA Class B Units of the Prime Obligations Portfolio 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 of the Prime Obligations Portfolio
attributable to ILA Class B Units.
It is possible that an institution or its affiliate may offer different
classes of units to its customers and thus receive different compensation with
respect to different classes of units of the same Portfolio. In the event a
Portfolio is distributed by salespersons or any other persons, they may receive
different compensation with respect to different classes of units of the
Portfolio. ILA Administration Units, ILA Service Units and ILA Class B Units
each have certain exclusive voting rights on matters relating to their
respective plans. Units of each class may be exchanged only for Units of the
same class in another Portfolio or, in the case of the Prime Obligations
Portfolio, shares of the corresponding class of certain other mutual funds
sponsored by Goldman Sachs. Except as described above, the four classes of
units are identical. Certain aspects of the Units may be altered, after advance
notice to unitholders, if it is deemed necessary in order to satisfy certain tax
regulatory requirements.
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Each ILA Unit, ILA Administration Unit, ILA Service Unit and ILA Class B Unit
of a Portfolio is entitled to one vote per unit; however, separate votes will be
taken by each Portfolio or class (or by more than one Portfolio or class voting
as a single class if similarly affected) on matters affecting only that
individual Portfolio or class (or those affected Portfolios or classes) or as
otherwise required by law. Fractional units are entitled to proportionate
fractional votes. Units are freely transferable and have no preemptive,
subscription or conversion rights. All units issued and outstanding are fully
paid and nonassessable by the Trust. The Declaration of Trust provides for
unitholder voting only for the election or removal of one or more Trustees, if a
meeting is called for that purpose, and for certain other designated matters.
The Trust does not generally hold annual or other meetings of unitholders. The
units of the Portfolios have non-cumulative voting rights, which means that the
holders of more than 50% of the units voting for the election of Trustees can
elect 100% of the Trustees if they choose to do so, and, in such event, the
holders of the remaining less than 50% of the units voting for the election of
Trustees will not be able to elect any person or persons to the Board of
Trustees. Each Trustee serves until the next meeting of unitholders, if any,
called for the purpose of electing or reelecting such Trustee or successor to
such Trustee, and until the election and qualification of such successor, if
any, or until such Trustee sooner dies, resigns, retires or is removed by the
unitholders or two-thirds of the Trustees.
As of April 22, 1996, the only holders of record of 5% or more of the
outstanding units of the Prime Obligations Portfolio were GS Capital Partners,
L.P., 85 Broad Street, New York, NY 10004 (10.09%); Harris Trust & Savings Bank,
200 West Monroe, Chicago, Il 60690 (7.44%); and Duquesne Capital Management,
Inc., 2579 Washington Road, Pittsburgh, PA 15241 (8.04%).
As of April 22, 1996, the only holders of record of 5% or more of the
outstanding units of the Money Market Portfolio were Mackay Shields Financial
Corp., 9 West 57th Street, New York, NY 10019 (6.29%); Stone Street & Bridge
Street Funds, c/o Goldman, Sachs & Co., 85 Broad Street, New York, NY 10004
(6.72%); and Bank of New York, 48 Wall Street, New York, NY 10286 (14.35%).
As of April 22, 1996, the only holders of record of 5% or more of the
outstanding units of the Treasury Obligations Portfolio were Bank of New York,
Hare & Co., One Wall Street, New York, NY 10286 (9.86%); First National Bank of
Omaha, P.O. Box 3128, Omaha, NE 68103 (11.52%); Firstar Bank Madison, N.A.,
FIRMAD & Co., P.O. Box 7900, Madison, WI 53707-7900 (6.17%); National City Bank
Kentucky, 4100 West 150th Street, Cleveland, OH 44135 (5.03%); and Bank One Ohio
Trust Company, Strafe & Co., 235 W. Schrock Rd., Westerville, OH 43081-2874
(11.30%).
As of April 22, 1996, the only holders of record of 5% or more of the
outstanding units of the Treasury Instruments Portfolio were Harris Trust &
Savings Bank, 200 West Monroe,
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Chicago, IL 60690 (6.81%); Bank of New York (NCD), One Wall Street, New York, NY
10286 (22.00%); and Emerald Partners, 237 Park Avenue, New York, NY 10017
(5.14%).
As of April 22, 1996, the only holders of record of 5% or more of the
outstanding units of the Government Portfolio were Comerica Bank, Calhoun & Co.,
P.O. Box 55-519, Detroit, MI 80808 (12.17%); State Street Bank & Trust Company,
P.O. Box 1992, Boston, MA 02101 (10.18%); and First Interstate Bank of
California 26610 Agoura Road, Calabasas, CA 91302 (9.39%).
As of April 22, 1996, the only holders of record of 5% or more of the
outstanding units of the Tax-Exempt New York Portfolio were Shames Trust
Accounts, 57 Holly Place, Briarcliff, NY 10510-2107 (12.09%); Bank of New York,
48 Wall Street, New York, NY 10286 (25.92%); and George Weissman, 120 Park
Avenue, New York, NY 10017 (5.18%).
As of April 22, 1996, the only holder of record of 5% or more of the
outstanding units of the Federal Portfolio was the Bank of New York, 48 Wall
Street, New York, NY 10286 (8.19%).
As of April 22, 1996, the only holder of record of 5% of more of the
outstanding units of the Tax-Exempt Diversified Portfolio was Mercantile Bank of
St. Louis, P.O. Box 387, St. Louis, MO 63101 (5.42%)
UNITHOLDER AND TRUSTEE LIABILITY
The Trust is an entity of the type commonly known as a "Massachusetts business
trust," which is the form in which many mutual funds are organized. Under
Massachusetts law, unitholders of such a trust may, under certain circumstances,
be held personally liable as partners for the obligations of the trust. The
Declaration of Trust contains an express disclaimer of unitholder liability for
acts or obligations of the Trust. Notice of such disclaimer will normally be
given in each agreement, obligation or instrument entered into or executed by
the Trust or the Trustees. The Declaration of Trust provides for
indemnification by the relevant Portfolio for any loss suffered by a unitholder
as a result of an obligation of the Portfolio. The Declaration of Trust also
provides that the Trust shall, upon request, assume the defense of any claim
made against any unitholder for any act or obligation of the Trust and satisfy
any judgment thereon. Thus, the risk of a unitholder incurring financial loss
on account of unitholder liability is limited to circumstances in which a
Portfolio is unable to meet its obligations. The Trustees believe that, in view
of the above, the risk of personal liability of unitholders is not material.
The Declaration of Trust provides that the Trustees of the Trust shall not be
liable for any action taken by them in good faith, and that they shall be fully
protected in relying in good faith upon the records of the Trust and upon
reports made to the Trust by persons selected in good faith by the Trustees as
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qualified to make such reports. The Declaration of Trust further provides that
the Trustees will not be liable for errors of judgment or mistakes of fact or
law. The Declaration of Trust provides that the Trust will indemnify Trustees
and officers of the Trust against liabilities and expenses reasonably incurred
in connection with litigation in which they may be involved because of their
positions with the Trust, unless it is determined in the manner provided in the
Declaration of Trust that they have not acted in good faith in the reasonable
belief that, in the case of conduct in their official capacity with the Trust,
such conduct was in the best interests of the Trust and, in all other cases,
that the conduct was at least not opposed to the best interests of the Trust
(and in the case of any criminal proceeding, they had no reasonable cause to
believe that the conduct was unlawful). However, nothing in the Declaration of
Trust or the By-Laws protects or indemnifies Trustees or officers against any
liability to which they would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of their office.
CUSTODIAN AND SUBCUSTODIAN
State Street Bank and Trust Company ("State Street") has been retained to act
as custodian of the Portfolios' assets. In that capacity, State Street
maintains the accounting records and calculates the daily net asset value per
unit of the Portfolios. Its mailing address is P.O. Box 1713, Boston, MA 02105.
State Street has appointed The Northern Trust Company, 50 South LaSalle Street,
Chicago, Illinois 60675 as subcustodian to hold cash and certain securities
purchased by the Trust.
INDEPENDENT ACCOUNTANTS
Arthur Andersen LLP, independent public accountants, One International Place,
Boston, MA 02110, have been selected as auditors of the Trust. In addition to
audit services, Arthur Andersen LLP prepares the Trust's federal and state tax
returns, and provides consultation and assistance on accounting, internal
control and related matters.
FINANCIAL STATEMENTS
The Financial Statements of the Portfolios, including the Statements of
Investments as of December 31, 1995, the Statements of Assets and Liabilities as
of December 31, 1995, the related Statements of Operations for the period then
ended, the Statements of Changes in Net Assets and the Financial Highlights for
the periods presented, the Notes to the Financial Statements, and the Report of
Independent Public Accountants, all of which are included in the 1995 Annual
Report to the unitholders, are attached hereto and incorporated by reference
into this Statement of Additional Information.
75
<PAGE>
APPENDIX A
DESCRIPTION OF SECURITIES RATINGS /1/
MOODY'S INVESTORS SERVICE, INC.
Bond Ratings
- ------------
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than with Aaa
securities.
Moody's applies numerical modifiers, 1, 2, and 3 in the Aa category. The
modifier 1 indicates that the obligation ranks in the higher end of the Aa
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of the Aa category.
Short-Term Ratings
- ------------------
P-1: Issuers have a superior ability for repayment of senior short-term
debt obligations. Prime-1 or P-1 repayment ability will normally be evidenced by
many of the following characteristics:
. Leading market positions in well established industries.
. High rates of return on funds employed.
. Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
. Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
. Well established access to a range of financial markets and assured
sources of alternate liquidity.
<PAGE>
P-2: Issuers have a strong ability for repayment of senior short-term debt
obligations. This will normally be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and coverage ratios, while
sound, will be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
State and Municipal Obligations
- -------------------------------
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade or (MIG). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower and short-term cyclical elements are
critical in short-term ratings, while other factors of major importance in bond
risk, long-term secular trends for example, may be less important over the short
run. Symbols used will be as follows:
MIG 1 -- This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broadbased access to the market for refinancing.
MIG 2 -- This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
A short-term rating may also be assigned on an issue having a demand
feature. Such ratings will be designated as VMIG to reflect such
characteristics as payment upon periodic demand rather than fixed maturity dates
and payment relying on external liquidity. Additionally, investors should be
alert to the fact that the source of payment may be limited to the external
liquidity with no or limited legal recourse to the issuer in the event the
demand is not met VMIG-1, and VMIG-2 ratings carry the same definitions as MIG-
1, and MIG-2, respectively.
STANDARD & POOR'S RATINGS GROUP
Bond Ratings
- ------------
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in a small degree.
PLUS (+) OR MINUS (-): The AA rating may be modified by the addition of a
plus or minus sign to show relative standing within the AA category.
<PAGE>
Short-Term Ratings
- ------------------
A-1: S&P's Commercial Paper ratings are current assessments of the
likelihood of timely payment of debt considered short-term in the relevant
market. The A-1 designation is the highest category and indicates that the
degree of safety regarding timely payment is strong. Those issues determined to
possess extremely strong safety characteristics are denoted with a plus ( + )
sign designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
MUNICIPAL NOTES
An S&P note rating reflects the liquidity concerns and market access risks
unique to notes. Notes due in 3 years or less will likely receive a note
rating. Notes maturing beyond 3 years will most likely receive a long-term debt
rating. The following criteria will be used in making that assessment.
. Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).
. Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1 -- Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics will be
given a plus (+) designation.
SP-2 -- Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term of the
notes.
SP-3 -- Speculative capacity to pay principal and interest.
S&P assigns "dual" ratings to all debt issues that have a put option or
demand feature as part of their structure.
The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating addresses only the demand feature. The
long-term debt rating symbols are used for bonds to denote the long-term
maturity and the commercial paper rating symbols for the put option (for
example, "AAA/A-1+"). With short-term demand debt, S&P's note rating symbols
are used with the commercial paper rating symbols (for example, "SP-1+/A-1+").
<PAGE>
DUFF & PHELPS, INC.
Bond Ratings
- ------------
AAA: Long-term fixed income securities which are rated AAA are judged to
be of the highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA: Long-term fixed income securities which are rated AA are judged to be
of high credit quality. Protection factors are strong. Risk is modest but may
vary slightly from time to time because of economic conditions.
Duff & Phelps applies modifiers, AA+ and AA- in the AA category for long-
term fixed income securities. The modifier AA+ indicates that the security
ranks in the higher end of the AA category: the modifier AA indicates a mid-
range ranking; and the modifier AA- indicates that the issue ranks in the lower
end of the AA category.
Short-Term Ratings
- ------------------
D-1: Commercial paper and certificates of deposit rated Duff 1 are
considered to have a very high certainty of timely payment. Liquidity factors
are excellent and are supported by strong fundamental protection factors. Risk
factors are minor.
D-2: Commercial paper and certificates of deposit rated Duff 2 are
considered to have a good certainty of timely payment. Liquidity factors and
company fundamentals are considered sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good and risk
factors are small.
Duff & Phelps applies a plus and minus rating scale, D-1+ , D-1 and D-1- in
the Duff 1 top grade category for commercial paper and certificates of deposit.
The rating D-1+ indicates that the security has the highest certainty of timely
payment, short-term liquidity is clearly outstanding and safety is just below
risk-free U.S. Treasury short-term obligations; the rating D-1 indicates a very
high certainty of timely payment, liquidity factors are excellent and risk
factors are minimal; and the rating D-1- indicates a high certainty of timely
payment, liquidity factors are strong and risk factors are very small.
FITCH INVESTORS SERVICE CORP.
AAA: Bonds which are rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
its obligations, which is unlikely to be affected by reasonably foreseeable
events.
<PAGE>
AA: Bonds which are rated AA are considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated F-1+.
Fitch applies plus (" + ") and minus (" - ") modifiers in the AA category to
indicate the relative position of a credit within the rating category.
Eligible Fitch ratings for short-term debt obligations payable on demand or with
original maturities of up to three years, including commercial paper,
certificates of deposit, medium-term notes, and municipal and investment notes
may be rated F-1 or F-2.
F-1: Short-term debt obligations rated F-1 are considered to be of very
strong credit quality. Those issues determined to possess exceptionally strong
credit quality and having the strongest degree of assurance for timely payment
will be denoted with a plus ("+") sign designation.
F-2: Short-term debt obligations rated F-2 are considered to be of good
credit quality. Issues assigned this rating have a satisfactory degree of
assurance for timely payment, but the margin of safety is not as great as for
issues assigned F-1+ and F-1 ratings.
IBCA LIMITED AND IBCA INC.
A1: Short-term obligations rated A1 are supported by a very strong
capacity for timely repayment. A plus ("+") sign is added to those issues
determined to possess the highest capacity for timely payment.
A2: Short-term obligations rated A2 are supported by a strong capacity for
timely repayment, although such capacity may be susceptible to adverse changes
in business, economic or financial conditions.
THOMSON BANKWATCH, INC.
AAA: The highest category; indicates a superior ability to repay principal
and interest on a timely basis.
AA: The second highest category; indicates a superior ability to repay
principal and interest on a timely basis with limited incremental risk
versus issues rated in the highest category.
Ratings in the AA Long-Term Debt category may include a plus (+) or minus (-)
designation which indicates where within the respective category the issue is
placed.
<PAGE>
The TBW Short-Term Ratings apply only to unsecured instruments that have a
maturity of one year or less.
The TBW Short-Term Ratings specifically assess the likelihood of an untimely
payment of principal and interest.
TBW-1: The highest category; indicates a very high degree of likelihood
that principal and interest will be paid on a timely basis.
TBW-2: The second highest category; while the degree of safety regarding
timely repayment of principal and interest is strong, the relative degree of
safety is not as high as for issues rated "TBW-1".
/1/ The ratings indicated herein are believed to be the most recent ratings
available at the date of this Statement of Additional Information 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 Portfolios' taxable year end.
<PAGE>
GOLDMAN SACHS MONEY MARKET TRUST
GOLDMAN SACHS--INSTITUTIONAL LIQUID ASSETS
4900 Sears Tower
Chicago, Illinois 60606
______________________________________________________________________________
STATEMENT OF ADDITIONAL INFORMATION -- MAY 1, 1996
ILA ADMINISTRATION UNITS
______________________________________________________________________________
Goldman Sachs Money Market Trust (the "Trust") is a no-load, open-end management
investment company (or mutual fund) which includes the Goldman Sachs -
Institutional Liquid Assets portfolios. This Statement of Additional
Information relates solely to the offering of ILA Administration Units of:
Prime Obligations Portfolio;
Money Market Portfolio;
Treasury Obligations Portfolio;
Treasury Instruments Portfolio;
Government Portfolio;
Federal Portfolio;
Tax-Exempt Diversified Portfolio;
Tax-Exempt California Portfolio; and
Tax-Exempt New York Portfolio (individually, a "Portfolio" and collectively the
"Portfolios").
Goldman Sachs Asset Management ("GSAM" or the "Adviser"), a separate operating
division of Goldman, Sachs & Co. ("Goldman Sachs"), serves as the Portfolios'
investment adviser. Goldman Sachs serves as distributor and transfer agent to
the Portfolios.
The Goldman Sachs Mutual Funds Group ("MFG") offers banks, corporate cash
managers, investment advisers and other institutional investors a family of
professionally-managed mutual funds, including money market, fixed income and
equity funds, and a range of related services. MFG is part of GSAM. 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 clients' interests. As Goldman Sachs clients,
Service Organizations, as defined below, will be assigned an Account
Administrator ("AA"), who is ready to help with questions concerning their
accounts. During business hours, Service Organizations can call their AA
through a toll-free number to place purchase or redemption orders or to obtain
Portfolio account information. The AA can also answer inquiries about rates of
return and portfolio composition/
<PAGE>
holdings, and guide Service Organizations through operational details. A
Goldman Sachs client can also utilize the SMART/SM/ personal computer software
system which allows Service Organizations to purchase and redeem units and also
obtain Portfolio and account information directly.
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the Prospectus relating to ILA Administration Units dated
May 1, 1996, as amended and supplemented from time to time. A copy of the
Prospectus may be obtained without charge from institutions ("Service
Organizations") that hold, directly or through an agent, ILA Administration
Units for the benefit of their customers, or by calling Goldman, Sachs & Co. at
800-621-2550 or by writing Goldman, Sachs & Co., 4900 Sears Tower, Chicago,
Illinois 60606.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page in
Statement of
Additional
Information
------------
<S> <C>
Investment Policies and
Practices of the Portfolios...... 4
Investment Limitations........... 42
Trustees and Officers............ 46
The Adviser, Distributor and
Transfer Agent................... 52
Portfolio Transactions........... 56
Net Asset Value.................. 58
Redemptions...................... 60
Calculation of Yield Quotations.. 61
Tax Information.................. 64
Organization and Capitalization.. 71
Custodian and Subcustodian....... 75
Independent Accountants.......... 75
Financial Statements............. 75
Administration Plan.............. 76
Appendix A (Description of
Securities Ratings).............. A-1
</TABLE>
3
<PAGE>
ADMINISTRATION PLAN
The Trust, on behalf of each Portfolio, has adopted an administration plan
(the "Plan") with respect to the ILA Administration Units which authorizes the
Portfolios to compensate Service Organizations for providing certain account
administration services to their customers who are beneficial owners of such
units. Pursuant to the Plan, the Trust, on behalf of each Portfolio, enters into
agreements with Service Organizations which purchase ILA Administration Units on
behalf of their customers ("Service Agreements"). Under such Service
Agreements, the Service Organizations; (a) act, directly or through an agent, as
the sole unitholder of record and nominee for all customers, (b) maintain
account records for each customer who beneficially owns ILA Administration
Units, (c) answer questions and handle correspondence from customers regarding
their accounts, (d) process customer orders to purchase, redeem and exchange ILA
Administration Units, and handle the transmission of funds representing the
customers' purchase price or redemption proceeds, and (e) issue confirmations
for transactions in units by customers. As compensation for such services, the
Trust on behalf of each Portfolio pays each Service Organization an
administration fee in an amount up to .15% (on an annualized basis) of the
average daily net assets of the ILA Administration Units of each Portfolio
attributable to or held in the name of such Service Organization for its
customers.
For the fiscal years ended December 31, 1995, December 31, 1994 and
December 31, 1993, with respect to each Portfolio, the amount of the
administration fees paid by each Portfolio then in existence to Service
Organizations was as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Prime Obligations
Portfolio $141,500 $262,293 $481,856
Money Market Portfolio 223,420 265,715 291,313
Treasury Obligations
Portfolio 165,430 175,368 239,897
Treasury Instruments
Portfolio 110,355 57,915 29,363
Government Portfolio 94,196 206,144 523,347
Federal Portfolio 713,846 491,089 435,170
Tax-Exempt Diversified
Portfolio 103,673 146,224 157,632
Tax-Exempt California
Portfolio 600 1,938 1,129
Tax-Exempt New York
Portfolio 27,783 26,576 16,619
</TABLE>
4
<PAGE>
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 the Trust in connection with the investment of fiduciary
funds in ILA Administration Units. 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 Securities and Exchange Commission,
the Department of Labor or State Securities Commissions, are urged to consult
legal advisers before investing fiduciary assets in ILA Administration Units.
In addition, under some state securities laws, banks and other financial
institutions purchasing ILA Administration Units on behalf of their customers
may be required to register as dealers.
The Plans were approved by the respective holders of ILA Administration
Units of each Portfolio on June 3, 1991. The Trustees of the Trust, including a
majority of the Trustees who are not interested persons of the Trust and who
have no direct or indirect financial interest in the operation of such Plans or
the related Service Agreements, most recently voted to approve the Plans and
Service Agreements at a meeting called for the purpose of voting on such Plan
and Service Agreements on April 24, 1996. They will remain in effect until
April 30, 1997 and continue in effect thereafter only if such continuance is
specifically approved annually by a vote of the Trustees in the manner described
above. A Plan may not be amended to increase materially the amount to be spent
for the services described therein without approval of the ILA Administration
unitholders of the affected Portfolio, and all material amendments of the Plan
must also be approved by the Trustees in the manner described above. A Plan may
be terminated at any time by a majority of the Trustees as described above or by
vote of a majority of the outstanding ILA Administration Units of the affected
Portfolio. The Service Agreements may be terminated at any time, without
payment of any penalty, by vote of a majority of the Trustees as described above
or by a vote of a majority of the outstanding ILA Administration Units of the
affected Portfolio on not more than 60 days' written notice to any other party
to the Service Agreements. The Service Agreements shall terminate automatically
if assigned. So long as the Plans are in effect, the selection and nomination
of those Trustees who are not interested persons shall be committed to the
discretion of the Trust's Nominating Committee, which consists of all of the
non-interested members of the Board of Trustees. The Trustees have determined
that, in their judgment, there is a reasonable likelihood that the Plans will
benefit the Portfolios and holders of ILA Administration Units of such
Portfolios. In the Trustees' quarterly review of the Plans and Service
Agreements, they will consider their continued appropriateness and the level of
compensation provided therein.
5
<PAGE>
GOLDMAN SACHS MONEY MARKET TRUST
GOLDMAN SACHS--INSTITUTIONAL LIQUID ASSETS
4900 Sears Tower
Chicago, Illinois 60606
_______________________________________________________________________________
STATEMENT OF ADDITIONAL INFORMATION -- MAY 1, 1996
ILA SERVICE UNITS
ILA CLASS B UNITS
_______________________________________________________________________________
Goldman Sachs Money Market Trust(the "Trust") is an open-end management
investment company (or mutual fund) which includes the Goldman Sachs -
Institutional Liquid Assets portfolios. This Statement of Additional
Information relates solely to the offering of ILA Class B Units of Prime
Obligations Portfolio and ILA Service Units of:
Prime Obligations Portfolio;
Money Market Portfolio;
Treasury Obligations Portfolio;
Treasury Instruments Portfolio;
Government Portfolio;
Federal Portfolio;
Tax-Exempt Diversified Portfolio;
Tax-Exempt California Portfolio; and
Tax-Exempt New York Portfolio (individually, a "Portfolio" and collectively the
"Portfolios").
Goldman Sachs Asset Management ("GSAM" or the "Adviser"), a separate operating
division of Goldman, Sachs & Co. ("Goldman Sachs"), serves as the Portfolios'
investment adviser. Goldman Sachs serves as distributor and transfer agent to
the Portfolios.
The Goldman Sachs Mutual Funds Group ("MFG") offers banks, corporate cash
managers, investment advisers and other institutional investors a family of
professionally-managed mutual funds, including money market, fixed income and
equity funds, and a range of related services. MFG is part of GSAM. 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 clients' interests. As Goldman Sachs clients,
Service Organizations, as defined below, will be assigned an Account
Administrator ("AA"), who is ready to help with questions concerning their
accounts. During business hours, Service Organizations can call their AA
through a toll-free number to place purchase or redemption orders or to obtain
Portfolio and account information. The AA can also answer
<PAGE>
inquiries about rates of return and portfolio composition/ holdings, and guide
Service Organizations through operational details. A Goldman Sachs client can
also utilize the SMART/SM/ personal computer software system which allows
Service Organizations to purchase and redeem units and also obtain Portfolio and
account information directly.
This Statement of Additional Information is not a prospectus and should be read
in conjunction with each Prospectus relating to the ILA Service Units and ILA
Class B Units each dated May 1, 1996, as amended and supplemented from time to
time. A copy of each Prospectus may be obtained without charge from
institutions ("Service Organizations") that hold, directly or through an agent,
ILA Service Units for the benefit of their customers, or with respect to ILA
Class B Units by calling Goldman, Sachs & Co. at 800-621-2550 or by writing
Goldman, Sachs & Co., 4900 Sears Tower, Chicago, Illinois 60606.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page in
Statement of
Additional
Information
------------
<S> <C>
Investment Policies and
Practices of the Portfolios...... 4
Investment Limitations........... 42
Trustees and Officers............ 46
The Adviser, Distributor and
Transfer Agent................... 52
Portfolio Transactions........... 56
Net Asset Value.................. 58
Redemptions...................... 60
Calculation of Yield Quotations.. 61
Tax Information.................. 64
Organization and Capitalization.. 71
Custodian and Subcustodian....... 75
Independent Accountants.......... 75
Financial Statements............. 75
Service and Distribution Plans... 76
Appendix A (Description of
Securities Ratings).............. A-1
</TABLE>
3
<PAGE>
SERVICE PLAN
(ILA Service Units Only)
The Trust, on behalf of each Portfolio, has adopted a service plan (the
"Plan") with respect to the ILA Service Units which authorizes the Portfolios to
compensate Service Organizations for providing certain account administration
and personal account maintenance services to their customers who are or may
become beneficial owners of such units. Pursuant to the Plan, the Trust, on
behalf of each Portfolio, enters into agreements with Service Organizations
which purchase ILA Service Units on behalf of their customers ("Service
Agreements"). Under such Service Agreements the Service Organizations may: (a)
act, directly or through an agent, as the sole unitholder of record and nominee
for all customers, (b) maintain account records for each customer who
beneficially owns ILA Service Units, (c) answer questions and handle
correspondence from customers regarding their accounts, (d) process customer
orders to purchase, redeem and exchange ILA Service Units, and handle the
transmission of funds representing the customers' purchase price or redemption
proceeds, (e) issue confirmations for transactions in units by customers, (f)
provide facilities to answer questions from prospective and existing investors
about ILA Service Units, (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 the Trust, including
obtaining information from the Trust, working with the Trust to correct errors
and resolve problems and providing statistical and other information to the
Trust. As compensation for such services, the Trust on behalf of each Portfolio
pays each Service Organization a service fee in an amount up to .40% (on an
annualized basis) of the average daily net assets of the ILA Service Units of
each Portfolio attributable to or held in the name of such Service Organization
for its customers; provided, however, that the fee paid for personal and account
maintenance services shall not exceed .25% of such average daily net
assets.
For the fiscal years ended December 31, 1995, December 31, 1994 and
December 31, 1993, with respect to each Portfolio, the amount of the service
fees paid by each Portfolio then in existence to Service Organizations was as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Prime Obligations
Portfolio $937,733 $630,669 $310,319
Money Market Portfolio 102,642 82,267 65,208
</TABLE>
4
<PAGE>
<TABLE>
<S> <C> <C> <C>
Treasury Obligations
Portfolio 478,419 435,536 661,315
Treasury Instruments
Portfolio 316,188 187,470 136,555
Government Portfolio 430,114 603,447 335,570
Federal Portfolio 254,508 34,415 3,395
Tax-Exempt Diversified
Portfolio 220,790 187,137 135,248
Tax-Exempt California
Portfolio -- -- 16
Tax-Exempt New York
Portfolio/(1)/ -- -- --
</TABLE>
- ------------------------------------------------------
/(1)/ ILA Service Unit activity has not commenced operations.
The Trust has adopted each Plan pursuant to Rule 12b-l under the Investment
Company Act in order to avoid any possibility that payments to the Service
Organizations pursuant to the Service Agreements might violate the Investment
Company Act. Rule 12b-l, which was adopted by the Securities and Exchange
Commission under the Investment Company Act, regulates the circumstances under
which an investment company such as the Trust may bear expenses associated with
the distribution of its securities. In particular, such an investment company
cannot engage directly or indirectly in financing any activity which is
primarily intended to result in the sale of securities issued by the company
unless it has adopted a plan pursuant to, and complies with the other
requirements of, such Rule. The Trust believes that fees paid for the services
provided in the Plan and described above are not expenses incurred primarily for
effecting the distribution of ILA Service Units. However, should such payments
be deemed by a court or the Securities and Exchange Commission 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. 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 the
Trust, 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
5
<PAGE>
purchases or sales of ILA Service Units automatically pursuant to pre-authorized
instructions, for example, effecting such transactions on a manual basis might
affect the size and/or growth of the Portfolios. In addition, state securities
laws on this issue may differ from the interpretations of federal law expressed
herein and banks and other financial institutions purchasing ILA Service Units
on behalf of their customers may be required to register as dealers pursuant to
state law. Any such alteration or discontinuance of services could require the
Trustees of the Trust to consider changing the Trust's method of operations or
providing alternative means of offering ILA Service Units to customers of such
Service Organizations, in which case the operation of the Trust, its size and/or
its growth might be significantly altered. It is not anticipated, however, that
any alteration of the Trust's operations would have any effect on the net asset
value per unit or result in financial losses to any unitholder.
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 the Trust in connection with the investment of fiduciary
funds in ILA Service Units. 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 Securities and Exchange Commission, the
Department of Labor or State Securities Commissions, are urged to consult legal
advisers before investing fiduciary assets in ILA Service Units.
The Plans were approved by the respective holders of ILA Service Units of
each Portfolio (other than the Tax-Exempt California and Tax-Exempt New York
Portfolios) on June 3, 1991. The Trustees of the Trust, including a majority of
the Trustees who are not interested persons of the Trust and who have no direct
or indirect financial interest in the operation of such Plans or the related
Service Agreements, most recently voted to approve the Plans and Service
Agreements at a meeting called for the purpose of voting on such Plan and
Service Agreements on April 24, 1996. They will remain in effect until April
30, 1997 and will continue in effect thereafter only if such continuance is
specifically approved annually by a vote of the Trustees in the manner described
above. A Plan may not be amended to increase materially the amount to be spent
for the services described therein without approval of the ILA Service
unitholders of the affected Portfolio, and all material amendments of a Plan
must also be approved by the Trustees in the manner described above. A Plan may
be terminated at any time by a majority of the Trustees as described above or by
vote of a majority of the outstanding ILA Service Units of the affected
Portfolio. The Service Agreements may be terminated at any time, without
payment of any penalty, by vote of a majority of the Trustees as
6
<PAGE>
described above or by a vote of a majority of the outstanding ILA Service Units
of the affected Portfolio on not more than 60 days' written notice to any other
party to the Service Agreements. The Service Agreements shall terminate
automatically if assigned. So long as the Plans are in effect, the selection
and nomination of those Trustees who are not interested persons shall be
determined by the discretion of the Trust's Nominating Committee, which consists
of all of the non-interested members of the Board of Trustees. The Trustees
have determined that, in their judgment, there is a reasonable likelihood that
the Plans will benefit the Portfolios and holders of ILA Service Units of such
Portfolios. In the Trustees' quarterly review of the Plans and Service
Agreements, they will consider their continued appropriateness and the level of
compensation provided therein.
DISTRIBUTION AND AUTHORIZED DEALER SERVICE PLANS (ILA CLASS B UNITS ONLY)
AUTHORIZED DEALER SERVICE PLAN
==============================
As described in the prospectus, the Prime Obligations Portfolio with
respect to its ILA Class B Units has adopted a non-Rule 12b-1 Authorized Dealer
Service Plan (an "Authorized Dealer Service Plan") pursuant to which Goldman
Sachs and Authorized Dealers are compensated for the provision of personal and
account maintenance services. The Authorized Dealer Service Plan has been most
recently approved by the Board of Trustees, including a majority of the non-
interested Trustees who have no direct or indirect financial interest in the
Authorized Dealer Service Plan, at a meeting held on April 24, 1996. With
respect to its ILA Class B Units, the Prime Obligations Portfolio's Authorized
Dealer Service Plan provides for the compensation for personal and account
maintenance services at an annual rate of up to 0.25% of the Portfolio's average
daily net assets attributable to ILA Class B Units.
The Authorized Dealer Service Plan 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 Trustees of the Trust,
including a majority of the non-interested Trustees who have no direct or
indirect financial interest in the Authorized Dealer Service Plan. All material
amendments of the Authorized Dealer Service Plan must also be approved by the
Trustees of the Trust in the manner described above. The Authorized Dealer
Service Plan may be terminated at any time as to the Prime Obligations Portfolio
without payment of any penalty by a vote of a majority of the non-interested
Trustees of the Trust or by vote of a majority of the outstanding voting
securities of the Prime Obligations Portfolio. The Trustees of the Trust have
determined that in their judgment there is a reasonable likelihood that the
7
<PAGE>
Authorized Dealer Service Plan will benefit the Prime Obligations Portfolio and
its ILA Class B Unitholders.
CLASS B DISTRIBUTION PLAN. As described in the Prospectus, the Trust has
adopted, on behalf of the Prime Obligations Portfolio, a distribution plan (the
"Class B Plan") pursuant to Rule 12b-1 under the Investment Company Act with
respect to ILA Class B Units. See "Distribution and Authorized Dealer Service
Plans" in the Prospectus.
The Class B Plan was most recently approved on April 24, 1996 on behalf of
the Trust by a majority vote of the Trust's Board of Trustees, including a
majority of the Trustees who are not interested persons of the Trust and have no
direct or indirect financial interest in the Class B Plan, cast in person at a
meeting called for the purpose of approving the Class B Plan. The Class B Plan
was approved by the sole initial unitholder of the Class B Units of the Prime
Obligations Portfolio on January 30, 1996.
With respect to the Prime Obligations Portfolio, the compensation payable
under the Class B Plan is equal to 0.75% per annum of the average daily net
assets attributable to ILA Class B Units of that Portfolio. The fees received
by Goldman Sachs under the Class B Plan and contingent deferred sales charge on
ILA Class B Units may be sold by Goldman Sachs as distributor to entities which
provide financing for payments to Authorized Dealers in respect of sales of ILA
Class B Units. 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 Prime Obligations Portfolio's ILA Class B Units. If such fee
exceeds its expenses, Goldman Sachs may realize a profit from these
arrangements.
The Class B Plan is a compensation plan which provides for the payment of a
specified distribution fee without regard to the distribution expenses actually
incurred by Goldman Sachs. If the Class B Plan were terminated by the Trust's
Board of Trustees and no successor plan were adopted, the Prime Obligations
Portfolio would cease to make distribution payments to Goldman Sachs and Goldman
Sachs would be unable to recover the amount of any of its unreimbursed
distribution expenditures.
Under the Class B Plan, Goldman Sachs, as distributor of the Portfolio's ILA
Class B Units, will provide to the Board of Trustees for its review, and the
Board will review at least quarterly, a written report of the services provided
and amounts expended by Goldman Sachs under the Class B Plan and the purposes
for which such services were performed and expenditures were made.
8
<PAGE>
The Class B Plan will remain in effect with respect to the Prime Obligations
Portfolio from year to year, provided such continuance is approved annually by a
majority vote of the Board of Trustees, including a majority of the non-
interested Trustees. A Class B Plan may not be amended to increase materially
the amount to be spent for the services described therein as to the Prime
Obligations Portfolio without approval of a majority of the outstanding ILA
Class B Unitholders of that Portfolio. All material amendments of the Class B
Plan must also be approved by the Board of Trustees of the Trust in the manner
described above. With respect to the Prime Obligations Portfolio, 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 Trustees or by vote of a majority of the
outstanding voting securities of the ILA Class B Units of that Portfolio. So
long as a Class B Plan is in effect, the selection and nomination of non-
interested Trustees shall be committed to the discretion of the non-interested
Trustees. The Trustees have determined that in their judgment there is a
reasonable likelihood that the Class B Plan will benefit the Prime Obligations
Portfolio and its respective ILA Class B Unitholders.
9
<PAGE>
GOLDMAN SACHS MONEY MARKET TRUST
FINANCIAL SQUARE FUNDS
4900 Sears Tower, Chicago, Illinois 60606
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION - MAY 1, 1996.
FST SHARES
- --------------------------------------------------------------------------------
Goldman Sachs Money Market Trust (the "Trust") is a no-load, open-end,
diversified, management investment company (or mutual fund) which includes the
Financial Square Funds. This Statement of Additional Information relates solely
to the offering of FST Shares of Financial Square Prime Obligations Fund ("Prime
Obligations Fund"), Financial Square Money Market Plus Fund ("Plus Fund"),
Financial Square Money Market Fund ("Money Market Fund"), Financial Square
Treasury Obligations Fund ("Treasury Obligations Fund"), Financial Square
Government Fund ("Government Fund"), Financial Square Tax-Free Money Market Fund
("Tax-Free Fund") and Financial Square Municipal Money Market Fund ("Municipal
Fund") (individually, a "Fund" and collectively the "Funds").
Goldman Sachs Asset Management ("GSAM" or the "Adviser"), a separate operating
division of Goldman, Sachs & Co. ("Goldman Sachs"), serves as the Funds'
investment adviser and administrator. Goldman Sachs serves as the Funds'
distributor and transfer agent.
The Goldman Sachs Mutual Funds Group ("MFG") offers banks, corporate cash
managers, investment advisers and other institutional investors a family of
professionally-managed mutual funds, including money market, fixed income and
equity funds, and a range of related services. MFG is part of GSAM. 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 clients' interests. As Goldman Sachs 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 Fund and account information. The AA
can also answer inquiries about rates of return and portfolio
composition/holdings, and guide shareholders through operational details. A
Goldman Sachs client can also utilize the SMART/SM/ personal computer software
system which
<PAGE>
allows shareholders to purchase or redeem shares and also obtain Fund and
account information directly.
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the Prospectus relating to FST Shares dated May 1, 1996, a
copy of which may be obtained without charge by calling Goldman Sachs at 800-
621-2550 or by writing Goldman Sachs, 4900 Sears Tower, Chicago, Illinois 60606.
2
<PAGE>
TABLE OF CONTENTS
Page in
Statement of
Additional
Information
-------------
<TABLE>
<CAPTION>
Investment Policies and Practices
<S> <C>
of the Funds 4
Investment Limitations 17
Trustees and Officers 21
The Adviser, Administrator,
Distributor and Transfer Agent 26
Portfolio Transactions 30
Net Asset Value 32
Redemptions 34
Calculation of Yield Quotations 35
Tax Information 38
Organization and Capitalization 43
Custodian and Subcustodian 49
Independent Accountants 49
Financial Statements 49
Appendix A (Description of Securities
Ratings) A-1
</TABLE>
3
<PAGE>
INVESTMENT POLICIES AND PRACTICES OF THE FUNDS
The following discussion elaborates on the description of each Fund's investment
policies and practices contained in the Prospectus:
U.S. GOVERNMENT SECURITIES
- --------------------------
Each Fund may invest in separately traded principal and interest components of
securities issued or guaranteed by the U.S. Treasury. The principal and
interest components of selected securities are traded independently under the
Separate Trading of Registered Interest and Principal of Securities program
("STRIPS"). Under the STRIPS program, the principal and interest components are
individually numbered and separately issued by the U.S. Treasury at the request
of depository financial institutions, which then trade the component parts
independently.
CUSTODIAL RECEIPTS
- ------------------
Each Fund (other than Treasury Obligations Fund and Government Fund) may also
acquire custodial receipts that evidence ownership of future interest payments,
principal payments or both on certain U.S. Government notes or bonds. Such
notes and bonds are held in custody by a bank on behalf of the owners. These
custodial receipts are known by various names, including "Treasury Receipts,"
"Treasury Investors Growth Receipts" ("TIGR's"), and "Certificates of Accrual on
Treasury Securities" ("CATS"). Although custodial receipts are not considered
U.S. Government securities for certain securities law purposes, they are
indirectly issued or guaranteed as to principal and interest by the U.S.
Government, its agencies, authorities or instrumentalities.
BANK AND CORPORATE OBLIGATIONS
- ------------------------------
Each Fund (other than Treasury Obligations Fund and Government Fund) may invest
in commercial paper. Commercial paper represents short-term unsecured
promissory notes issued in bearer form by banks or bank holding companies,
corporations, and finance companies. The commercial paper purchased by the
Funds consists of direct U.S. dollar denominated obligations of domestic, or in
the case of the Money Market and Plus Funds, foreign issuers. Bank obligations
in which the Funds may invest include certificates of deposit, bankers'
acceptances, fixed time deposits and bank notes. Certificates of deposit are
negotiable certificates issued against funds deposited in a commercial bank for
a definite period of time and earning a specified return.
Bankers' acceptances are negotiable drafts or bills of exchange, normally drawn
by an importer or exporter to pay for specific merchandise, which are "accepted"
by a bank, meaning, in effect, that the bank unconditionally agrees to pay the
face value of the instrument on maturity. Fixed time deposits are bank
obligations
4
<PAGE>
payable at a stated maturity date and bearing interest at a fixed rate. Fixed
time deposits may be withdrawn on demand by the investor, but may be subject to
early withdrawal penalties which vary depending upon market conditions and the
remaining maturity of the obligation. There are no contractual restrictions on
the right to transfer a beneficial interest in a fixed time deposit to a third
party, although there is no market for such deposits. Bank notes and bankers'
acceptances rank junior to domestic deposit liabilities of the bank and pari
passu with other senior, unsecured obligations of the bank. Bank notes are not
insured by the Federal Deposit Insurance Corporation or any other insurer.
Deposit notes are insured by the Federal Deposit Insurance Corporation only to
the extent of $100,000 per depositor per bank.
Prime Obligations Fund, Plus Fund and Money Market Fund may invest in short-term
funding agreements. A funding agreement is a contract between an issuer and a
purchaser that obligates the issuer to pay a guaranteed rate of interest on a
principal sum deposited by the purchaser. Funding agreements will also
guarantee the return of principal and may guarantee a stream of payments over
time. A funding agreement has a fixed maturity date and may have either a fixed
rate or variable interest rate that is based on an index and guaranteed for a
set time period. Because there is no secondary market for these investments,
any such funding agreement purchased by a Fund will be regarded as illiquid.
REPURCHASE AGREEMENTS
- ---------------------
Each Fund may only enter into repurchase agreements with primary dealers in U.S.
Government Securities. A repurchase agreement is an arrangement under which the
purchaser (i.e., the Fund) purchases a U.S. Government security or other high
quality short-term debt obligation (the "Obligation") and the seller agrees, at
the time of sale, to repurchase the Obligation at a specified time and price.
Custody of the Obligation will be maintained by the Funds' custodian or
subcustodian. The repurchase price may be higher than the purchase price, the
difference being income to the Fund, or the purchase and repurchase prices may
be the same, with interest at a stated rate due to the Fund together with the
repurchase price on repurchase. In either case, the income to a Fund is
unrelated to the interest rate on the Obligation subject to the repurchase
agreement.
Repurchase agreements pose certain risks for all entities, including the Funds,
that utilize them. Such risks are not unique to the Funds but are inherent in
repurchase agreements. The Funds seek to minimize such risks by, among others,
the means indicated below, but because of the inherent legal uncertainties
involved in repurchase agreements, such risks cannot be eliminated.
5
<PAGE>
For purposes of the Investment Company Act of 1940, as amended (the "Investment
Company Act"), and, generally for tax purposes, a repurchase agreement is deemed
to be a loan from a Fund to the seller of the Obligation. It is not clear
whether for other purposes a court would consider the Obligation purchased by a
Fund subject to a repurchase agreement as being owned by a Fund or as being
collateral for a loan by the Fund to the seller.
If, in the event of bankruptcy or insolvency proceedings against the seller of
the Obligation, a court holds that a Fund does not have a perfected security
interest in the Obligation, a Fund may be required to return the Obligation 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 income involved in the transaction. To minimize this risk, the
Funds utilize custodians and subcustodians that the Adviser believes follow
customary securities industry practice with respect to repurchase agreements,
and the Adviser analyzes the creditworthiness of the obligor, in this case the
seller of the Obligation. But because of the legal uncertainties, this risk,
like others associated with repurchase agreements, cannot be eliminated.
Also, in the event of commencement of bankruptcy or insolvency proceedings with
respect to the seller of the Obligation before repurchase of the Obligation
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 the price of the Obligation.
Apart from risks associated with 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 Obligation subject to the repurchase agreement becomes
less than the repurchase price (including accrued interest), the Fund will
direct the seller of the Obligation 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 mature 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, the Funds, together with other registered investment companies
having advisory agreements with the Adviser or any of its affiliates, may
transfer uninvested cash balances into a single joint account, the daily
aggregate balance of which will be invested in one or more repurchase
agreements.
6
<PAGE>
FOREIGN SECURITIES
- ------------------
Money Market Fund and Plus Fund may invest in foreign securities and in
certificates of deposit, bankers' acceptances and fixed time deposits and other
obligations issued by major foreign banks, foreign branches of U.S. banks, U.S.
branches of foreign banks and foreign branches of foreign banks. Investments
can include fixed time deposits in Cayman Island branches of such banks. Tax-
Free Fund and Municipal Fund may also invest in municipal instruments backed by
letters of credit issued by certain of such banks. Under current Securities and
Exchange Commission ("SEC") rules relating to the use of the amortized cost
method of portfolio securities valuation, Money Market Fund and Plus Fund are
restricted to purchasing U.S. dollar denominated securities, but they are not
otherwise precluded from purchasing securities of foreign issuers.
Investments in foreign securities and bank obligations may involve
considerations different from investments in domestic securities due to limited
publicly available information; non-uniform accounting standards; the possible
imposition of withholding or confiscatory taxes; the possible adoption of
foreign governmental restrictions affecting the payment of principal and
interest; expropriation; or other adverse political or economic developments.
In addition, it may be more difficult to obtain and enforce a judgment against a
foreign issuer or a foreign branch of a domestic bank.
ASSET-BACKED AND RECEIVABLES-BACKED SECURITIES
- ----------------------------------------------
Each of Prime Obligations Fund, Money Market Fund and Plus Fund may invest in
asset-backed and receivables-backed securities. Asset-backed and receivables-
backed securities represent participations in, or are secured by and payable
from, pools of assets such as motor vehicle installment sale contracts,
installment loan contracts, leases of various types of real and personal
property, receivables from revolving credit (credit card) agreements, corporate
securities and other categories of receivables. Such asset pools are
securitized through the use of privately-formed trusts or special purpose
vehicles. 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, or other credit
enhancements may be present. The value of a Fund's investments in asset-backed
and receivables-backed securities may be adversely affected by prepayment of the
underlying obligations. In addition, the risk of prepayment may cause the value
of these investments to be more volatile than a Fund's other investments.
Through the use of trusts and special purpose corporations, various types of
assets, including automobile loans, computer leases, trade receivables and
credit card receivables, are being securitized in pass-through structures
similar to the mortgage
7
<PAGE>
pass-through structures. Consistent with their respective investment objective
and policies, the Funds may invest in these and other types of asset-backed
securities that may be developed in the future. This Statement of Additional
Information will be amended or supplemented as necessary to reflect the Prime
Obligations, Money Market and Plus Funds' intention to invet in asset-backed
securities with characteristics that are materially different from the
securities described in the preceding paragraph. However, the Funds will
generally not invest in an asset-backed security if the income received with
respect to such investment constitutes rental income or other income not treated
as qualifying income under the 90% test described in "Tax Information" below. In
general, the collateral supporting these securities is of shorter maturity than
mortgage loans and is less likely to experience substantial prepayments in
response to interest rate fluctuations.
As set forth above, several types of asset-backed and receivables-backed
securities have already been offered to investors, including, for example,
Certificates for Automobile Receivables/sm/ ("CARS/sm/") and interests in pools
of credit card receivables. CARS/sm/ represent undivided fractional interests
in a trust ("CAR Trust") whose assets consist of a pool of motor vehicle retail
installment sales contracts and security interests in the vehicles securing the
contracts. Payments of principal and interest on CARS/sm/ are passed through
monthly to certificate holders, and are guaranteed up to certain amounts and for
a certain time period by a letter of credit issued by a financial institution
unaffiliated with the trustee or originator of the CAR Trust. An investor's
return on CARS/sm/ may be affected by early prepayment of principal on the
underlying vehicle sales contracts. If the letter of credit is exhausted, the
CAR Trust may be prevented from realizing the full amount due on a sales
contract because of state law requirements and restrictions relating to
foreclosure sales of vehicles and the obtaining of deficiency judgments
following such sales or because of depreciation, damage or loss of a vehicle,
the application of federal and state bankruptcy and insolvency laws, or other
factors. As a result, certificate holders may experience delays in payments or
losses if the letter of credit is exhausted.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the
benefit of any security interest in the related assets. Credit card receivables
are generally unsecured and the debtors 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. There is the possibility that recoveries on
repossessed collateral may not, in some cases, be available to support payments
on these securities.
Asset-backed securities are often backed by a pool of assets representing the
obligations of a number of different parties.
8
<PAGE>
To lessen the effect of failures by obligors on underlying assets to make
payments, the securities may contain elements of credit support which fall into
two categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor or servicer. Liquidity protection
refers to the provision of advances, generally by the entity administering the
pool of assets, to ensure that the receipt of payments on the losses results
from payment of the insurance obligations on at least a portion of the assets in
the pool. This protection may be provided through guarantees, policies or
letters of credit obtained by the issuer or sponsor from third parties, through
various means of structuring the transactions or through a combination of such
approaches. The degree of credit support provided for each issue is generally
based on historical information reflecting the level of credit risk associated
with the underlying assets. Delinquency or loss in excess of that anticipated or
failure of the credit support could adversely affect the value of or return on
an investment in such a security.
The availability of asset-backed securities may be affected by legislative or
regulatory developments. It is possible that such developments could require
Prime Obligations, Money Market or Plus Fund to dispose of any of their
respective existing holdings of such securities.
FORWARD COMMITMENTS AND WHEN-ISSUED SECURITIES
- ----------------------------------------------
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 the 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, but may be traded over-the-
counter.
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
renegotiate a commitment after entering into it. A Fund also may sell
securities it has committed to purchase before those securities are delivered to
the Fund on the settlement date. The Fund may realize a capital gain or loss in
connection with these transactions distributions from which would be taxable to
its shareholders. For purposes of determining the Fund's average dollar weighted
maturity, the maturity of when-issued or forward commitment securities will be
calculated from the commitment date.
When a Fund purchases securities on a when-issued or forward commitment basis,
the Fund's custodian or subcustodian will
9
<PAGE>
maintain in a segregated account cash or liquid high quality debt securities
having a value (determined daily) at least equal to the amount of the Fund's
purchase commitments. In the case of a forward commitment to sell portfolio
securities subject to such commitment, the custodian or subcustodian will hold
the portfolio securities in a segregated account while the commitment is
outstanding. These procedures are designed to ensure that the Fund will maintain
sufficient assets at all times to cover its obligations under when-issued
purchases and forward commitments.
VARIABLE AMOUNT MASTER DEMAND NOTES
- -----------------------------------
Each Fund (other than Treasury Obligations Fund) may purchase variable amount
master demand notes. These obligations permit the investment of fluctuating
amounts at varying rates of interest pursuant to direct arrangements between a
Fund, as lender, and the borrower. Variable amount master demand notes are
direct lending arrangements between the lender and borrower and are not
generally transferable nor are they ordinarily rated. A Fund may invest in them
only if the Adviser believes that the notes are of comparable quality to the
other obligations in which the Fund may invest.
VARIABLE RATE AND FLOATING RATE DEMAND INSTRUMENTS
- --------------------------------------------------
Each Fund (other than Treasury Obligations Fund) may purchase variable and
floating rate demand instruments that are tax exempt municipal obligations or
other debt securities that possess a floating or variable interest rate
adjustment formula. These instruments permit a Fund to demand payment of the
principal balance plus unpaid accrued interest upon a specified number of days'
notice to the issuer or its agent. The demand feature may be backed by a bank
letter of credit or guarantee issued with respect to such instrument.
The terms of the variable or floating rate demand instruments that a Fund may
purchase provide that interest rates are adjustable at intervals ranging from
daily up to six months, and the adjustments are based upon current market
levels, the prime rate of a bank or other appropriate interest rate adjustment
index as provided in the respective instruments. Some of these instruments are
payable on demand on a daily basis or on not more than seven days' notice.
Others, such as instruments with quarterly or semiannual interest rate
adjustments, may be put back to the issuer on designated days on not more than
thirty days' notice. Still others are automatically called by the issuer unless
a Fund instructs otherwise. The Trust, on behalf of a Fund, intends to exercise
the demand only (1) upon a default under the terms of the debt security, (2) as
needed to provide liquidity to a Fund, (3) to maintain the respective quality
standards of a Fund's investment portfolio, or (4) to attain a more optimal
portfolio structure. A Fund will determine the variable or floating rate demand
instruments that it will purchase in accordance with procedures approved by the
Trustees to minimize credit risks.
10
<PAGE>
Accordingly, any variable or floating rate demand instrument must satisfy a
Fund's credit criteria with respect to both its long-term and short-term
ratings, except that where credit support is provided, a Fund may rely solely
upon the short-term rating of the variable or floating rate demand instrument,
i.e., the right to sell. To be eligible for purchase of a Fund, a variable or
floating rate demand instrument which is unrated must have quality
characteristics similar to those of other obligations in which the Fund may
invest. The Adviser may determine that an unrated variable or floating rate
demand instrument meets a Fund's quality criteria by reason of being backed by a
letter of credit or guarantee issued by a bank that meets the quality criteria
for a Fund. Thus, either the credit of the issuer of the obligation or the
guarantor bank or both will meet the quality standards of the Fund.
The maturity of the variable or floating rate demand instruments held by a Fund
will ordinarily be deemed to be the longer of (1) the notice period required
before the Fund is entitled to receive payment of the principal amount of the
instrument or (2) the period remaining until the instrument's next interest
rate adjustment. The acquisition of variable or floating rate demand notes for
a Fund must also meet the requirements of rules issued by the SEC applicable to
the use of the amortized cost method of securities valuation. The Funds will
also consider the liquidity of the market for variable and floating rate
instruments and in the event that such instruments are illiquid, the Funds'
investments in such instruments will be subject to the limitation on illiquid
securities.
Each Fund (other than Treasury Obligations Fund and Government Fund) may invest
in participation interests in variable or floating rate tax-exempt obligations
held by financial institutions (usually commercial banks). Such participation
interests provide a Fund with a specific undivided interest (up to 100%) in the
underlying obligation and the right to demand payment of its proportional
interest in the unpaid principal balance plus accrued interest from the
financial institution upon a specific number of days' notice. In addition, the
participation interest generally is backed by an irrevocable letter of credit or
guarantee from the institution. The financial institution usually is entitled
to a fee for servicing the obligation and providing the letter of credit.
RESTRICTED AND OTHER ILLIQUID SECURITIES
----------------------------------------
A Fund may purchase securities that are not registered ("restricted
securities") under the Securities Act of 1933, as amended ("1933 Act"),
including restricted securities offered and sold to "qualified institutional
buyers" under Rule 144A under the 1933 Act. However, a Fund will not invest
more than 10% of the value of its net assets in securities which are illiquid,
which includes fixed time deposits and repurchase agreements maturing in more
than seven days that cannot be traded on a
11
<PAGE>
secondary market and restricted securities, unless, in the case of restricted
securities, the Board of Trustees determines, based upon a continuing review of
the trading markets for the specific restricted security, that such restricted
securities are liquid. The Board of Trustees may adopt guidelines and delegate
to the Adviser the daily function of determining and monitoring liquidity of
restricted securities. The Board of Trustees, however, will retain sufficient
oversight and be ultimately responsible for the determinations. Since it is not
possible to predict with assurance that the market for securities eligible for
resale under Rule 144A will continue to be liquid, the Board of Trustees will
carefully monitor each Fund's investments in these securities, focusing on such
important factors, among others, as valuation, liquidity and availability of
information. This investment practice could have the effect of increasing the
level of illiquidity in a Fund to the extent that qualified institutional buyers
become for a time uninterested in purchasing these restricted securities.
MUNICIPAL OBLIGATIONS
- ---------------------
Prime Obligations Fund, Plus Fund, Money Market Fund, Tax-Free Fund and
Municipal Fund may invest in municipal obligations. Municipal obligations are
issued by or on behalf of states, territories and possessions of the United
States and their political subdivisions, agencies, authorities and
instrumentalities and the District of Columbia to obtain funds for various
public purposes. The interest on most of these obligations is generally exempt
from regular federal income tax. The two principal classifications of
municipal obligations are "notes" and "bonds."
Notes. Municipal notes are generally used to provide for short-term capital
needs and generally have maturities of one year or less. Municipal notes
include tax anticipation notes, revenue anticipation notes, bond anticipation
notes, tax and revenue anticipation notes, construction loan notes, tax-exempt
commercial paper and certain receipts for municipal obligations.
Tax anticipation notes are sold to finance working capital needs of
municipalities. They are generally payable from specific tax revenues expected
to be received at a future date. They are frequently general obligations of the
issuer, secured by the taxing power for payment of principal and interest.
Revenue anticipation notes are issued in expectation of receipt of other types
of revenue such as federal or state aid. Tax anticipation notes and revenue
anticipation notes are generally issued in anticipation of various seasonal
revenues such as income, sales, use, and business taxes. Bond anticipation notes
are sold to provide interim financing in anticipation of long-term financing in
the market. In most cases, these monies provide for the repayment of the notes.
Tax-exempt commercial paper consists of short-term unsecured promissory notes
issued by a state or local government or an authority or agency thereof. The
Funds which
12
<PAGE>
invest in municipal obligations may also acquire securities in the form of
custodial receipts which evidence ownership of future interest payments,
principal payments or both on certain state and local governmental and authority
obligations where, in the opinion of bond counsel, interest payments with
respect to such custodial receipts are excluded from gross income for federal
income tax purposes. Such obligations are held in custody by a bank on behalf of
the holders of the receipts. These custodial receipts are known by various
names, including "Municipal Receipts" ("MRs") and "Municipal Certificates of
Accrual on Tax-Exempt Securities" ("M-CATS"). There are a number of other types
of notes issued for different purposes and secured differently from those
described above.
Bonds. Municipal bonds, which generally meet longer term capital needs and have
maturities of more than one year when issued, have two principal
classifications, "general obligation" bonds and "revenue" bonds.
General obligation bonds are issued by entities such as states, counties,
cities, towns and regional districts and are used to fund a wide range of public
projects including the construction or improvement of schools, highways and
roads, water and sewer systems and a variety of other public purposes. The
basic security of general obligation bonds is the issuer's pledge of its faith,
credit and taxing power for the payment of principal and interest. The taxes
that can be levied for the payment of debt service may be limited or unlimited
as to rate or amount or special assessments.
Revenue bonds have been issued to fund a wide variety of capital projects
including: electric, gas, water and sewer systems; highways, bridges and
tunnels; port and airport facilities; colleges and universities; and hospitals.
The principal security for a revenue bond is generally the net revenues derived
from a particular facility or group of facilities or, in some cases, from the
proceeds of a special excise or other specific revenue source. Although the
principal security behind these bonds varies widely, many provide additional
security in the form of a debt service reserve fund whose monies may also be
used to make principal and interest payments on the issuer's obligations.
Housing finance authorities have a wide range of security including partially or
fully insured, rent subsidized and/or collateralized mortgages, and/or the net
revenues from housing or other public projects. In addition to a debt service
reserve fund, some authorities provide further security in the form of a
state's ability (without obligation) to make up deficiencies in the debt service
reserve fund. Lease rental revenue bonds issued by a state or local authority
for capital projects are secured by annual lease rental payments from the state
or locality to the authority sufficient to cover debt service on the authority's
obligations.
13
<PAGE>
Private activity bonds (a term that includes certain types of bonds, the
proceeds of which are used to a specified extent for the benefit of persons
other than governmental units), although nominally issued by municipal
authorities, are generally not secured by the taxing power of the municipality
but are secured by the revenues of the authority derived from payments by the
industrial user. Tax-Free Fund does not intend to invest in private activity
bonds if the interest from such bonds would be an item of tax preference to
shareholders under the federal alternative minimum tax.
Municipal bonds with a series of maturity dates are called serial bonds. The
serial bonds which the Funds may purchase are limited to short-term serial
bonds--those with original or remaining maturities of thirteen months or less.
The Funds may purchase long-term bonds provided that they have a remaining
maturity of thirteen months or less or, in the case of bonds called for
redemption, the date on which the redemption payment must be made is within
thirteen months. The Funds may also purchase long-term bonds (sometimes
referred to as "Put Bonds"), which are subject to a Fund's commitment to put the
bond back to the issuer at par at a designated time within thirteen months and
the issuer's commitment to so purchase the bond at such price and time.
The Funds which invest in municipal obligations may invest in tender option
bonds. A tender option bond is a municipal obligation (generally held pursuant
to a custodial arrangement) having a relatively long maturity and bearing
interest at a fixed rate substantially higher than prevailing short-term tax-
exempt rates. The bond is typically issued in conjunction with the agreement of
a third party, such as a bank, broker-dealer or other financial institution,
pursuant to which such institution grants the security holders the option, at
periodic intervals, to tender their securities to the institution and receive
the face value thereof. As consideration for providing the option, the
financial institution receives periodic fees equal to the difference between the
bond's fixed coupon rate and the rate, as determined by a remarketing or similar
agent at or near the commencement of such period, that would cause the bond,
coupled with the tender option, to trade at par on the date of such
determination. Thus, after payment of this fee, the security holder effectively
holds a demand obligation that bears interest at the prevailing short-term tax-
exempt rate. However, an institution will not be obligated to accept tendered
bonds in the event of certain defaults by, or a significant downgrading in the
credit rating assigned to, the issuer of the bond.
The tender option will be taken into consideration in determining the maturity
of tender option bonds and the average portfolio maturity of each Fund. The
liquidity of a tender option bond is a function of the credit quality of both
the bond issuer and the financial institution providing liquidity.
Consequently, tender option bonds are deemed to be liquid unless, in the opinion
of the Adviser, the credit quality of the bond issuer and the
14
<PAGE>
financial institution is deemed, in light of the relevant Fund's credit quality
requirements, to be inadequate.
Although Tax-Free Fund and Municipal Fund intend to invest in tender option
bonds the interest on which will, in the opinion of counsel for the issuer and
sponsor or counsel selected by the Adviser, be excluded from gross income for
federal income tax purposes, there is no assurance that the Internal Revenue
Service will agree with such counsel's opinion in any particular case.
Consequently, there is a risk that a Fund will not be considered the owner of
such tender option bonds and thus will not be entitled to treat such interest
as exempt from such tax. A similar risk exists for certain other investments
subject to puts or similar rights. Additionally, the federal income tax
treatment of certain other aspects of these investments, including the proper
tax treatment of tender options and the associated fees, in relation to various
regulated investment company tax provisions is unclear. Tax-Free Fund and
Municipal Fund intend to manage their respective portfolios in a manner designed
to eliminate or minimize any adverse impact from the tax rules applicable to
these investments.
In addition to general obligation bonds, revenue bonds and serial bonds, there
are a variety of hybrid and special types of municipal obligations as well as
numerous differences in the security of municipal obligations both within and
between the two principal classifications above.
Tax-Free Fund and Municipal Fund may purchase municipal instruments that are
backed by letters of credit issued by foreign banks that have a branch, agency
or subsidiary in the United States. Such letters of credit, like other
obligations of foreign banks, may involve credit risks in addition to those of
domestic obligations, including risks relating to future political and economic
developments, nationalization, foreign governmental restrictions such as
exchange controls and difficulties in obtaining or enforcing a judgment against
a foreign bank (including branches).
For the purpose of the Funds' investment restrictions, the identification of
the "issuer" of municipal obligations that are not general obligation bonds is
made by the Adviser on the basis of the characteristics of the obligation as
described above, the most significant of which is the source of funds for the
payment of principal of and interest on such obligations.
An entire issue of municipal obligations may be purchased by one or a small
number of institutional investors such as a Fund. Thus, the issue may not be
said to be publicly offered. Unlike securities which must be registered under
the 1933 Act prior to offer and sale, unless an exemption from such registration
is available, municipal obligations which are not publicly offered may
nevertheless be readily marketable. A secondary market may
15
<PAGE>
exist for municipal obligations which were not publicly offered initially.
Municipal obligations purchased for a Fund are subject to the policy on holdings
of securities which are not readily marketable contained in the Fund's
Prospectus. The Adviser determines whether a municipal obligation is liquid
based on whether it may be sold in a reasonable time consistent with the customs
of the municipal markets (usually seven days) at a price (or interest rate)
which accurately reflects its value. The Adviser believes that the quality
standards applicable to each Fund's investments enhance liquidity. In addition,
standby commitments and demand obligations also enhance liquidity.
Yields on municipal obligations depend on a variety of factors, including money
market conditions, municipal bond market conditions, the size of a particular
offering, the maturity of the obligation and the quality of the issue. High
quality municipal obligations tend to have a lower yield than lower rated
obligations. Municipal obligations are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors, such
as the Federal Bankruptcy Code, and laws, if any, which may be enacted by
Congress or state legislatures extending the time for payment of principal or
interest, or both, or imposing other constraints upon enforcement of such
obligations or municipalities to levy taxes. There is also the possibility that
as a result of litigation or other conditions the power or ability of any one or
more issuers to pay when due principal of and interest on its or their municipal
obligations may be materially affected.
STANDBY COMMITMENTS
- -------------------
In order to enhance the liquidity, stability or quality of municipal
obligations, Prime Obligations Fund, Plus Fund, Money Market Fund, Tax-Free Fund
and Municipal Fund may each acquire the right to sell a security to another
party at a guaranteed price and date. Such a right to resell may be referred to
as a put, demand feature or "standby commitment", depending on its
characteristics. The aggregate price which a Fund pays for securities with
standby commitments may be higher than the price which otherwise would be paid
for the securities. Standby commitments may not be available or may not be
available on satisfactory terms.
Standby commitments may involve letters of credit issued by domestic or foreign
banks supporting the other party's ability to purchase the security from the
Fund. The right to sell may be exercisable on demand or at specific intervals,
and may form part of a security or be acquired separately by the Fund. In
considering whether a security meets a Fund's quality standards, the Adviser
will look to the creditworthiness of the party providing the Fund with the right
to sell as well as the quality of the security itself.
16
<PAGE>
Tax-Free Fund and Municipal Fund each value municipal obligations which are
subject to standby commitments at amortized cost. The exercise price of the
standby commitments is expected to approximate such amortized cost. No value is
assigned to the standby commitments for purposes of determining the Fund's net
asset value. Since the value of a standby commitment is dependent on the
ability of the standby commitment writer to meet its obligation to repurchase,
the policy of each Fund that may enter into such transactions is to enter into
such transactions only with banks, brokers or dealers which represent a minimal
risk of default. The duration of standby commitments will not be a factor in
determining the weighted average maturity of a Fund.
Management of the Trust understands that the Internal Revenue Service has issued
a favorable revenue ruling to the effect that, under specified circumstances, a
registered investment company will be the owner of tax-exempt municipal
obligations acquired subject to a put option. The Internal Revenue Service has
also issued private letter rulings to certain taxpayers (which do not serve as
precedent for other taxpayers, and which are applicable only to the taxpayer
requesting the ruling and which have, on occasion, been reversed by the Internal
Revenue Service) to the effect that they are considered the owners of the
municipal obligations subject to standby commitments so that the interest on
such instruments will be tax-exempt income to them. The Internal Revenue
Service has subsequently announced that it will not ordinarily issue advance
letter rulings as to the identity of the true owner of property in cases
involving the sale of securities or participation interests therein if the
purchaser has the right to cause the security, or the participation interest
therein, to be purchased by either the seller or a third party. The Tax-Free
Fund and Municipal Fund each intends to take the position that it is the owner
of any municipal obligations acquired subject to a standby commitment or
acquired or held with certain other types of put rights and that its
distribution of tax-exempt interest earned with respect to such municipal
obligations will be tax-exempt for its shareholders. There is no assurance that
standby commitments will be available to these Funds and neither Fund has
assumed that such commitments will be available under all market conditions.
INVESTMENT LIMITATIONS
The following restrictions may not be changed with respect to any Fund without
the approval of the majority of outstanding voting securities of that Fund
(which, under the Investment Company Act and the rules thereunder and as used in
the Prospectus and this Statement of Additional Information, means the lesser of
(1) 67% of the shares of that Fund present at a meeting if the holders of more
than 50% of the outstanding shares of that Fund are present in person or by
proxy, or (2) more than 50% of the outstanding shares of that Fund). Investment
restrictions that involve a
17
<PAGE>
maximum percentage of securities or assets shall not be considered to 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 or on behalf of, a Fund, with the exception of borrowings
permitted by Investment Restriction (3).
Accordingly, a Fund may not:
(1) with respect to 75% of its total assets taken at market value, invest more
than 5% of the value of the total assets of that Fund in the securities of any
one issuer, except U.S. Government securities and repurchase agreements
collateralized by U.S. Government securities. This restriction does not,
however, apply to any Fund classified as a non-diversified company under the
Investment Company Act;
(2) with respect to 75% of its total assets taken at market value, purchase the
securities of any one issuer if, as a result of such purchase, that Fund would
hold more than 10% of the outstanding voting securities of that issuer. This
restriction does not, however, apply to any Fund classified as a non-
diversified company under the Investment Company Act;
(3) borrow money, except from banks on a temporary basis for extraordinary or
emergency purposes, provided that a Fund is required to maintain asset coverage
of 300% for all borrowings and that no purchases of securities will be made if
such borrowings exceed 5% of the value of the Fund's assets. This restriction
does not apply to cash collateral received as a result of portfolio securities
lending;
(4) mortgage, pledge or hypothecate its assets except to secure permitted
borrowings;
(5) act as underwriter of the securities issued by others, except to the extent
that the purchase of securities in accordance with a Fund's investment objective
and policies directly from the issuer thereof and the later disposition thereof
may be deemed to be underwriting;
(6) purchase securities if such purchase would cause more than 25% in the
aggregate of the market value of the total assets of a Fund to be invested in
the securities of one or more issuers having their principal business activities
in the same industry, provided that there is no limitation with respect to, and
each Fund reserves freedom of action, when otherwise consistent with its
investment policies to, concentrate its investments in, U.S. Government
securities, obligations (other than commercial paper) issued or guaranteed by
U.S. banks, and U.S. branches of foreign banks and repurchase agreements and
securities loans collateralized by U.S. Government securities or such bank
obligations, in the case of the Funds other than the Money Market Fund and Plus
Fund, and obligations (other than commercial paper) issued by
18
<PAGE>
U.S. banks and U.S. branches of U.S. or foreign banks and repurchase agreements
and securities loans collateralized by U.S. Government securities or such bank
obligations, in the case of the Money Market Fund and Plus Fund. (For the
purposes of this restriction, state and municipal governments and their agencies
and authorities are not deemed to be industries, and telephone companies are
considered to be a separate industry from water, gas or electric utilities,
personal credit finance companies and business credit finance companies are
deemed to be separate industries and wholly-owned finance companies are
considered to be in the industry of their parents if their activities are
primarily related to financing the activities of their parents. Such
concentration may be effected when the Adviser determines that risk adjusted
returns in such industries are considered favorable relative to other
industries.) Notwithstanding the foregoing, each of Money Market Fund and Plus
Fund will invest more than 25% of the value of its total assets in bank
obligations (whether foreign or domestic) except that if adverse economic
conditions prevail in the banking industry each of Money Market Fund and Plus
Fund Fund may, for defensive purposes, temporarily invest less than 25% of the
value of its total assets in bank obligations;
(7) issue senior securities, except as appropriate to evidence indebtedness
that a Fund is permitted to incur and except for shares of existing or
additional series of the Trust;
(8) purchase or sell real estate (excluding securities secured by real estate
or interests therein), interests in oil, gas or mineral leases, commodities or
commodities contracts. The Trust reserves the freedom to hold and to sell real
estate acquired for any Fund as a result of the ownership of securities;
(9) make loans to other persons, except loans of portfolio securities and
except to the extent that the purchase of debt obligations and entry into
repurchase agreements in accordance with such Fund's investment objective and
policies may be deemed to be loans;
(10) purchase securities on margin (except for delayed delivery or when-issued
transactions or such short-term credits as are necessary for the clearance of
transactions), make short sales of securities, maintain a short position, or
invest in or write puts, calls or combinations thereof (except that a Fund may
acquire puts in connection with the acquisition of a debt instrument);
(11) invest in other companies for the purpose of exercising control or
management.
In addition to the fundamental policies mentioned above, the Board of Trustees
of the Trust has adopted the following non-fundamental policy which may be
changed or amended by action of the Board of Trustees without approval of
shareholders.
19
<PAGE>
Accordingly, the Trust may not, on behalf of any Fund, invest in repurchase
agreements maturing in more than seven days and securities which are not
readily marketable if, as a result thereof, more than 10% of the net assets of a
Fund (taken at market value) would be invested in such investments.
The staff of the SEC has taken the position that fixed time deposits maturing in
more than seven days that cannot be traded on a secondary market are illiquid
and not readily marketable. Until such time (if any) as this position changes,
the Trust, on behalf of the Funds, will include such investments in the 10%
limit on unmarketable securities. Restricted securities (including commercial
paper issued pursuant to Section 4(2) of the 1933 Act) which the Board of
Trustees has determined are liquid will not be deemed to be unmarketable for
purposes of this restriction.
Pursuant to SEC Rule 2a-7, a Fund (other than Tax-Free Fund and Municipal Fund)
may not invest more than 5% of its total assets in the securities of any one
issuer (except U.S. Government securities or repurchase agreements
collateralized by such securities). A Fund may, however, invest more than 5%
of its total assets in the First Tier Securities of a single issuer for a period
of up to three business days after the purchase thereof, although such Fund may
not make more than one such investment at any time. Each Fund, other than the
Tax-Free Fund and Municipal Fund, may only purchase "First Tier Securities" as
defined below. Securities which are rated in the highest short-term rating
category by at least two Nationally Recognized Statistical Rating Organizations
("NRSROs"), or if only one NRSRO has assigned a rating by that NRSRO, are "First
Tier Securities". Securities rated in the top two short-term rating categories
by at least two NRSROs, or if only one NRSRO has assigned a rating, by that
NRSRO, but which are not First Tier Securities, are "Second Tier Securities".
Pursuant to SEC Rule 2a-7 the foregoing operating policies are not applicable to
Tax-Free Fund and Municipal Fund. Immediately after the acquisition of any put
by a Fund (other than Tax-Free Fund and Municipal Fund), not more than 5% of
such Fund's total assets may be invested in securities issued by or subject to
puts from the same issuer. However, this limitation will not apply to the
issuer of unconditional puts if the Fund does not have more than 10% of its
total assets invested in securities issued by or subject to unconditional puts
from such issuer. "NRSROs" include Standard & Poor's Ratings Group, Moody's
Investors Service, Inc., Duff & Phelps, Inc., Fitch Investors Service, Inc.,
IBCA Limited and its affiliate IBCA Inc., and Thomson BankWatch, Inc. For a
description of their rating categories, see Appendix A.
Pursuant to SEC Rule 2a-7, immediately after the acquisition of any put by Tax-
Free Fund and Municipal Fund, not more than 5% of the Fund's total assets may be
invested in securities issued by or subject to puts from the same issuer.
However, this limitation applies only with respect to 75% of each such Fund's
total
20
<PAGE>
assets. In addition, this limitation will not apply to the issuer of
unconditional puts if the Fund does not have more than 10% of its total assets
invested in securities issued by or subject to unconditional puts from such
issuer. Tax-Free and Municipal Fund each will operate in accordance with this
operating policy which complies with SEC Rule 2a-7.
"Value" for the purposes of all investment restrictions shall mean the value
used in determining a Fund's net asset value. "U.S. Government securities"
shall mean securities issued or guaranteed by the U.S. Government or any of its
agencies, authorities or instrumentalities.
TRUSTEES AND OFFICERS
Information pertaining to the Board of Trustees and officers of the Trust is set
forth below. Trustees and officers deemed to be "interested persons" of the
Trust for purposes of the Investment Company Act are indicated by an asterisk.
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ------------------------------------------------------------- ----------------------------- ------------------------------
<S> <C> <C>
Paul C. Nagel, Jr., 73 Chairman Retired. Director and
19223 Riverside Dr. and Trustee Chairman of the Finance
Tequesta, FL 33469 and Audit Committees, Great
Atlantic & Pacific Tea Co.,
Inc.,; Director, United
Conveyor Corporation.
Ashok N. Bakhru, 53 Trustee Executive Vice President -
1235 Westlakes Drive Finance and Administration
and Senior Suite 385 Chief Financial Officer, Coty
Berwyn, PA 19312 Inc. (since April 1996);
President, ABN Associates
(since June 1994) Retired.
Vice President of Scott Paper
Company; Director of Arkwright
Mutual Insurance Company;
Trustee of International
House of Philadelphia; Member
of Cornell University Council;
Trustee of the Walnut Street
Theater.
*David B. Ford, 50 Trustee General Partner, Goldman
One New York Plaza Sachs, (since 1986); Chair-
New York, NY 10004 man and Chief Executive Of-
ficer, Goldman Sachs Asset
Management (since December
1994).
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- --------------------------- ---------------------------- -----------------------
<S> <C> <C>
*Alan A. Shuch, 46 Trustee Director and Vice President of
One New York Plaza Goldman Sachs Funds Management
New York, NY 10004 Inc. (from April 1990 to
November 1994); President and
Chief Operating Officer, GSAM
(from September 1988 to Novem-
ber 1994); Limited Partner,
Goldman Sachs (since December
1994).
Jackson W. Smart, 65 Trustee Chairman and Chief Executive
One Northfield Plaza Officer, MSP Communications
#218 Inc.(a company engaged in
Northfield, IL 60093 radio broadcasting) (since
November 1988) and Consultant,
Thomas Industries, Inc. (a
manufacturer of lighting
fixtures, home decorations and
hardware items) (August 1987
to November 1988);
William H. Springer, 66 Trustee Vice Chairman of Ameritech
701 Morningside Drive (a telecommunications holding
Lake Forest, IL 60045 company; February 1987 to re-
tirement in August 1993) and
Vice Chairman, Chief Financial
and Administrative Officer,
prior thereto; Director Ameri-
can Information Technologies
Corporation; Director,
Walgreen Co. (a retai drug
store business); Director of
Baker, Fentress & Co. (a
closed-end, non-diversified
management investment company)
(April 1992 to present).
Richard P. Strubel, 56 Trustee Managing Director, Tandem
70 West Madison St. Partners, Inc. (since 1990);
Suite 1400 President and Chief Executive
Chicago, IL 60602 Officer, Microdot, Inc.
(a diversified manufacturer
of fastening systems and
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
connectors) (January 1984 to
October 1994).
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------------------------- ---------- -----------------------------
<S> <C> <C>
*Douglas C. Grip, 34 President Vice President, Goldman Sachs
One New York Plaza (since May 1996); formerly,
New York, NY 10004 President, MFS Retirement
Services Inc., of Massachu-
setts Financial Services
(prior thereto).
*Scott M. Gilman, 36 Treasurer Director, Mutual Funds Admin-
One New York Plaza istration, Goldman Sachs Asset
New York, NY Management (since April 1994);
10004 Assistant Treasurer, Goldman
Sachs Funds Management, Inc.
(since March 1993); Vice Pre-
sident, Goldman Sachs (since
March 1990); Assistant
Treasurer of the Trust (April
1990 to October 1991).
*John M. Perlowski, 31 Assistant Vice President, Goldman Sachs
One New York Plaza Treasurer (since July 1995); Director,
New York, NY Investors Bank and Trust,
10004 November 1993 to July 1995);
Audit Manager of Arthur
Andersen LLP (prior thereto).
*Pauline Taylor, 49 Vice Vice President of Goldman
4900 Sears Tower President Sachs (since June 1992);
Chicago, IL Consultant (1989 to June
60606 1992);
*John W. Mosior, 57 Vice Vice President, Goldman Sachs
4900 Sears Tower President and Manager of Shareholder
Chicago, IL Services for GSAM Funds Group.
60606
*Nancy L. Mucker, 46 Vice Vice President, Goldman Sachs
4900 Sears Tower President and Manager of Shareholder
Chicago, IL Services for GSAM Funds Group.
60606
*Michael J. Richman, 35 Secretary Vice President and Assistant
85 Broad Street General Counsel of Goldman
New York, NY Sachs (since June 1992);
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
10004 Associate General Counsel,
Goldman Sachs Asset Manage-
ment, Counsel to the Funds
Group, GSAM (since June 1992);
Partner, Hale and Dorr
(September 1991 to June 1992).
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- --------------------------- --------------------------------------- ------------------------------
<S> <C> <C>
*Howard B. Surloff, 30 Assistant Vice President and Assistant
85 Broad Street Secretary General Counsel, Goldman Sachs
New York, NY 10004 (since November 1993 and May
1994, respectively); Counsel
to the Funds Group, Goldman
Sachs Asset Management (since
November 1993); Associate of
Shereff Friedman,Hoffman &
Goodman (prior thereto).
*Steven E. Hartstein, 32 Assistant Legal Products Analyst,
85 Broad Street Secretary Goldman Sachs (June 1993 to
New York, NY 10004 present); Funds Compliance
Officer, Citibank Global Asset
Management (August 1991 to
June 1993); Legal Assistant,
Brown & Wood (prior thereto).
*Deborah Robinson, 24 Assistant Administrative Assistant,
85 Broad Street Secretary Goldman Sachs since
New York, NY 10004 January 1994. Formerly at
Cleary Gottlieb, Steen and
Hamilton.
*Kaysie P. Uniacke, 35 Assistant Vice President and Portfolio
One New York Plaza Secretary Manager, Goldman Sachs Asset
New York, NY 10004 Management (since 1988).
*Elizabeth D.
Alexander, 26 Assistant Fund Trading Assistant,
One New York Plaza Secretary Goldman Sachs Asset
New York, NY 10004 Management (since 1993). Com-
pliance Analyst, Prudential
Insurance (1991-1993).
</TABLE>
Each interested Trustee and officer holds comparable positions with certain
other investment companies of which Goldman Sachs, GSAM or an affiliate thereof
is the investment adviser, administrator and/or distributor. As of April 26,
1996, the Trustees and officers of the Trust as a group owned less than 1% of
the outstanding shares of beneficial interest of each Fund (other than Municipal
Funds and Plus Fund). As of April 26, 1996,
24
<PAGE>
Municipal Fund and Plus Fund had not commenced operations and no shares of such
Fund had been sold.
The Trust pays each Trustee, other than those who are "interested persons" of
Goldman Sachs, a fee for each Trustee meeting attended and an annual fee. Such
Trustees are also reimbursed for travel expenses incurred in connection with
attending such meetings.
25
<PAGE>
The following table sets forth certain information with respect to the
compensation of each Trustee of the Trust for the fiscal period ended December
31, 1995:
<TABLE>
<CAPTION>
Pension or Total
Retirement Compensation
Benefits from Goldman Sachs
Aggregate Accrued as Mutual Funds
Compensation Part of (including the
Name of Trustee from the Trust Trust's Expenses Trust)*
- --------------------- ------------------ ---------------- --------
<S> <C> <C> <C>
Paul C. Nagel, Jr. $73,478 $0 $101,000
Ashok N. Bakhru $44,378 $0 $ 61,000
Marcia L. Beck $0 $0 $--
David B. Ford $0 $0 $--
Alan A. Shuch $0 $0 $--
Jackson W. Smart $44,378 $0 $ 61,000
William H. Springer $44,378 $0 $ 61,000
Richard P. Strubel $44,378 $0 $ 61,000
</TABLE>
______________
* The Goldman Sachs Mutual Funds consisted of 29 mutual funds, including the
fourteen series of the Trust, on December 31, 1995.
26
<PAGE>
THE ADVISER, ADMINISTRATOR, DISTRIBUTOR AND TRANSFER AGENT
THE ADVISER AND ADMINISTRATOR
- -----------------------------
GSAM, a separate operating division of Goldman Sachs, acts as the investment
adviser and administrator of each Fund. As such, GSAM is responsible for the
management of each Fund's assets in accordance with such Fund's investment
objective and policies.
Under each of the separate Investment Advisory Agreements between GSAM and the
Trust on behalf of each Fund, GSAM, subject to the supervision of the Board of
Trustees and in conformity with the stated policies of each Fund, manages the
Fund's portfolio and directs the investments of the Fund. For these services,
GSAM is entitled to a monthly fee at an annual rate equal to .075% of each
Fund's average daily net assets. As of December 31, 1995, the Trust's fiscal
year end, Municipal Fund and Plus Fund had not commenced operations.
Each Fund is responsible for all of its expenses other than those expressly
borne by GSAM under the Investment Advisory Agreement. The expenses borne by
shares of each Fund include the Fund's investment advisory fee, account
administration fees, expenses of issuing reports to shareholders, custodian
fees, taxes, its proportionate share of legal fees, SEC insurance fees, blue sky
fees, auditing and tax return preparation fees, taxes, Trustees' fees, insurance
expenses and trade association dues. In the event that the expenses of a Fund
(including the fees payable to GSAM, but excluding interest, taxes, brokerage
commissions, litigation and indemnification expenses and other extraordinary
expenses) for any fiscal year exceed the limits set by certain state securities
administrators, GSAM will reduce its fee payable on behalf of that Fund by the
amount of such excess but only to the extent of the Fund's fee. Repayment of any
excess amounts will be made on a monthly basis. The most restrictive expense
limitation currently applicable to each Fund is 2.5% of the first $30 million of
the Fund's average annual net assets, 2.0% of the next $70 million of such
assets, and 1.5% of such assets in excess of $100 million.
For the fiscal years ended December 31, 1995, December 31, 1994 and January 31,
1994 the amount of the advisory fee incurred by each Fund then in existence was
as follows:
<TABLE>
<CAPTION>
Dec. 1995 Dec. 1994 Jan. 1994
--------- --------- ---------
<S> <C> <C> <C>
Prime Obligations Fund 1,692,924 695,689/(5)/
- -0-
Money Market Fund/(1)/ 211,326 64,294 --
Money Market Plus/(4)/ -0- -0- -0-
Treasury Obligations Fund 565,477 225,733/(5)/ -0-
Government Fund/(2)/ 263,804 50,687/(5)/ -0-
Tax Free Money Market Fund/(3)/ 25,151 -0- -0-
Municipal Money Market Fund/(4)/ -0- -0- -0-
</TABLE>
27
<PAGE>
- ------------------------------------------
/(1)/ Commenced operations May 18, 1994.
/(2)/ Commenced operations April 6, 1993.
/(3)/ Commenced operations July 19, 1994.
/(4)/ Had not commenced operations.
/(5)/ The Information presented for the period ended December 31, 1994 reflects
eleven months of operations.
GSAM has agreed that it will not impose a portion of its advisory fee referred
to above, pursuant to applicable contracts. Had such fees been imposed during
the fiscal year ended December 31, 1995 with respect to Prime Obligations Fund,
Treasury Obligations Fund, Money Market Fund, Government Fund and Tax Free Fund
advisory fees of $3,173,924, $1,747,326, $1,059,477, $493,804 and $270,151,
respectively, would have been incurred by these Funds during such period.
GSAM has agreed that it will not impose a portion of its advisory fee referred
to above, pursuant to applicable contracts. Had such fees been imposed during
the eleven month period ended December 31, 1994 with respect to Prime
Obligations Fund, Treasury Obligations Fund, and Government Fund, advisory fees
of $1,609,383, $554,447 and $128,944, respectively, would have been incurred by
these Funds during such period. Had the advisory fee been imposed during the
period from May 18, 1994 (commencement of operations) and July 19, 1994
(commencement of operations) through December 31, 1994, for Money Market Fund
and Tax-Free Fund, respectively, advisory fees of $482,154 and $53,176,
respectively, would have been incurred by these Funds during such periods.
Had the advisory fee been imposed during the eleven months ended January 31,
1994 with respect to the Prime Obligations Fund and Treasury Obligations Fund
and during the period from April 6, 1993 (commencement of operations) to January
31, 1994 for the Government Fund, advisory fees of $561,534, $1,016,441 and
$21,401, respectively, would have been incurred by these Funds during such
periods.
The Investment Advisory Agreement for each Fund, other than Plus Fund, was most
recently approved by the Board of Trustees, including the "non-interested"
Trustees, on April 24, 1996. The Investment Advisory Agreement for Plus Fund was
initially approved by the Board of Trustees, including the "non-interested"
Trustees, on October 24, 1995. Each Investment Advisory Agreement will remain in
effect until June 30, 1997 and will continue in effect thereafter only if such
continuance is specifically approved at least annually by a majority of the
Board of Trustees
or by a vote of a majority of the outstanding voting
securities of each Fund (as defined in the Investment Company Act) and, in
either case, by a majority of "non-interested" Trustees.
In connection with the foregoing services, GSAM bears the following expenses:
(a) the salaries and expenses of all personnel of
28
<PAGE>
the Trust, except the fees and expenses of "non-interested" Trustees; and (b)
office rent and the expenses of providing investment advisory, research and
statistical facilities and related clerical expenses. Goldman Sachs has
authorized any of its directors, partners, officers and employees who have been
elected or appointed as a Trustee or officer of the Trust to serve in the
capacities in which he or she has been elected or appointed.
Except for the expenses to be paid by GSAM as indicated above, the Trust, on
behalf of each Fund, is responsible under the Investment Advisory Agreements for
the payment of all other expenses related to each Fund's operations. The
expenses borne by each Fund include: (a) the fees payable to GSAM, (b) the
Fund's allocable share of fees and expenses of "non-interested" Trustees, (c)
the fees and expenses of the Funds' custodian, including the cost of pricing the
shares of the Fund, (d) the charges and expenses of the Funds' legal counsel and
independent accountants, (e) brokers' commissions and any issue or transfer
taxes chargeable to the Trust, on behalf of each Fund, in connection with its
securities transactions, (f) the fees of any trade association of which the Fund
is a member or, in the event the Trust is a member, the Fund's proportionate
share of such fees, (g) the cost of share certificates, if any, (h) the Fund's
allocable share of the organizational expenses of the Trust and the fees and
expenses involved in registering and maintaining registration of the Trust and
of its shares with the SEC and registering the Trust as a broker or dealer and
qualifying its shares under state securities laws, including the preparation and
printing of the Trust's registration statements and prospectuses for such
purposes, (i) the Fund's allocable share of communication expenses with respect
to investor services and all expenses of shareholders' and Trustees' meetings
and preparing, printing and mailing prospectuses and reports to shareholders,
(j) litigation and indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of the Fund's business, and (k) all taxes and
business fees payable by the Fund to federal, state or other governmental
agencies. Fees and expenses of legal counsel, registering shares, holding
meetings and communicating with shareholders include an allocable portion of the
cost of maintaining an internal legal and compliance department. Each Fund will
also bear an allocable portion of GSAM's costs of performing certain accounting
services not being provided by the Funds' custodian.
For the fiscal period ended December 31, 1995, GSAM assumed certain expenses
related to the operations of the Funds because such expenses would have caused
the Funds' total expenses to exceed certain voluntary expense limitations. Had
these expenses not been assumed, an additional $382,318, $420,234, $280,395,
$197,008, and $83,376 in expenses would have been incurred by Prime Obligations
Fund, Money Market Fund, Treasury Obligations Fund, Government Fund and Tax-Free
Fund, respectively, for the relevant periods.
29
<PAGE>
For the period from April 6, 1993 (commencement of operations) to January 31,
1994, GSAM assumed certain expenses related to the operations of Government Fund
because such expenses would have caused the Fund's total expenses, on an
annualized basis, to exceed certain voluntary expense limitations with respect
to such Fund. Had these expenses not been assumed, an additional $98,125 in
expenses would have been incurred by the Fund for such period. No expenses were
assumed by GSAM for the eleven month period ended January 31, 1994 for Prime
Obligations Fund or Treasury Obligations Fund.
The Investment Advisory Agreements provide that GSAM shall not be liable to a
Fund for any error of judgment by GSAM or for any loss sustained by the Fund
except in the case of GSAM's willful misfeasance, bad faith, gross negligence or
reckless disregard of duty. Each Fund may use any name derived from the name
"Goldman Sachs" only as long as its Investment Advisory Agreement remains in
effect. Each Investment Advisory Agreement also provides that it shall terminate
automatically if assigned and that it may be terminated without penalty by vote
of a majority of the outstanding voting securities of the Fund or by either
party upon sixty (60) days' written notice.
Under the Trust's Administration Agreement with GSAM, GSAM administers each
Fund's business affairs subject to the supervision of the Board of Trustees and,
in connection therewith, furnishes each Fund with office facilities, bears all
fees and costs of the services furnished by the transfer agent to the Fund and
is responsible for ordinary clerical, recordkeeping and bookkeeping functions,
to the extent not provided pursuant to the Funds' custodian and advisory
agreements; preparation and filing of documents required to comply with federal
and state securities laws; supervising the activities of the Funds' custodian
and transfer agent; providing assistance in connection with meetings of the
Board of Trustees and shareholders; and other administrative services necessary
to conduct the Trust's business. GSAM will receive account administration fees
from the Fund as described in the Prospectus.
For the fiscal years ended January 31, 1994, December 31, 1994 and December 31,
1995, the amounts of account administration fees paid to GSAM by the Funds then
in existence were as follows:
<TABLE>
<CAPTION>
Dec. 1995 Dec. 1994 Jan. 1994
--------- --------- ---------
<S> <C> <C> <C>
-
Prime Obligations Fund $5,501,468 $2,789,597/(5)/ $1,761,831
Money Market Fund/(1)/ 3,024,701 835,827 -
Money Market Plus Fund -- -- --
Treasury Obligations Fund 1,836,426 961,040/(5)/ 973,325
Government Fund/(2)/ 855,927 193,154/(5)/ 11,124
Tax-Free Fund/(3)/ 434,262 35,436 -
Municipal Fund/(4)/ -- -- -
</TABLE>
30
<PAGE>
_______________
(1) Commenced operations May 18, 1994.
(2) Commenced operations April 6, 1993.
(3) Commenced operations July 19, 1994.
(4) Has not commenced operations.
(5) The information presented for the period ended December 31, 1994 reflects
eleven months of operations.
Had fee reductions not been in effect, Government Fund would have paid account
administration fees of $37,095 and $223,500 for the period from April 6, 1993
(commencement of operations) to January 31, 1994 and for the eleven months ended
December 31, 1994, respectively, and Tax-Free Fund would have paid account
administration fees of $92,169 for the period from July 19, 1994 (commencement
of operations) to December 31, 1994. The Money Market and Tax-Free Funds would
have paid account administration fees of $3,028,701 and $468,262, respectively,
for the period February 1, 1995 to January 31, 1996.
THE DISTRIBUTOR AND TRANSFER AGENT
---------------------------------
Goldman Sachs serves as the distributor of shares of each Fund pursuant to a
Distribution Agreement with the Trust which was most recently approved by the
Board of Trustees on April 26, 1996. Goldman Sachs also serves as the transfer
agent of each Fund. Goldman Sachs provides customary transfer agency services to
the record holders of the Funds, including the handling of shareholder
communications, the processing of shareholder transactions, the maintenance of
shareholder account records, payment of dividends and distributions and related
functions.
Goldman Sachs is one of the largest international investment banking and
brokerage firms in the United States. Founded in 1869, Goldman Sachs is a leader
in financing and investing services both in the United States and abroad. As of
November 25, 1995, Goldman Sachs and its consolidated subsidiaries had assets of
approximately $70.0 billion and partners, capital of $1.9 billion. Goldman Sachs
became registered as an investment adviser in 1981. As of March 27, 1996,
Goldman Sachs, together with its affiliates, acted as investment adviser,
administrator or distributor for approximately $58 billion in total assets.
PORTFOLIO TRANSACTIONS
GSAM places the portfolio transactions of the Funds and of all other accounts
managed by GSAM for execution with many firms. GSAM uses its best efforts to
obtain execution of portfolio transactions at prices which are advantageous to
each Fund and at reasonably competitive spreads or (when a disclosed commission
is being charged) at reasonably competitive commission rates. In seeking such
execution, GSAM will use its best judgment in evaluating the terms of a
transaction, and will give consider-
31
<PAGE>
ation to various relevant factors, including without limitation the size and
type of the transaction, the nature and character of the market for the
security, the confidentiality, speed and certainty of effective execution
required for the transaction, the general execution and operational capabilities
of the broker-dealer, the general execution and operational capabilities of the
firm, the reputation, reliability, experience and financial condition of the
firm, the value and quality of the services rendered by the firm in this and
other transactions, and the reasonableness of the spread or commission, if any.
Securities purchased and sold by the Funds are generally traded in the over-the-
counter market on a net basis (i.e., without commission) through broker-dealers
and banks acting for their own account rather than as brokers, or otherwise
involve transactions directly with the issuer of such securities.
Goldman Sachs is active as an investor, dealer and/or underwriter in many types
of municipal and money market instruments. Its activities in this regard could
have some effect on the markets for those instruments which the Funds buy, hold
or sell. An order has been granted by the SEC under the Investment Company Act
which permits the Funds to deal with Goldman Sachs in transactions in certain
taxable securities in which Goldman Sachs acts as principal. As a result, the
Funds may trade with Goldman Sachs as principal subject to the terms and
conditions of such exemption.
Under the Investment Company Act, the Funds are prohibited from purchasing any
instrument of which Goldman Sachs is a principal underwriter during the
existence of an underwriting or selling syndicate relating to such instrument,
absent an exemptive order (the order referred to in the preceding paragraph will
not apply to such purchases) or the adoption of and compliance with certain
procedures under such Act. The Trust has adopted procedures which establish,
among other things, certain limitations on the amount of debt securities that
may be purchased in any single offering and on the amount of the Trust's assets
that may be invested in any single offering. Accordingly, in view of Goldman
Sachs' active role in the underwriting of debt securities, a Fund's ability to
purchase debt securities in the primary market may from time to time be limited.
In certain instances there may be securities which are suitable for a Fund's
portfolio as well as for that of another fund of the Trust or one or more of the
other clients of GSAM. Investment decisions for each Fund and for GSAM's other
clients are made with a view to achieving their respective investment
objectives. It may develop that a particular security is bought or sold for only
one client even though it might be held by, or bought or sold for, other
clients. Likewise, a particular security may be bought for one or more clients
when one or more other clients are selling that same security. Some simultaneous
transactions are inevitable when several clients receive investment advice from
the same investment adviser, particularly when the same security
32
<PAGE>
is suitable for the investment objectives of more than one client. When two or
more clients are simultaneously engaged in the purchase or sale of the same
security, the securities are allocated among clients in a manner believed to be
equitable to each. It is recognized that in some cases this system could have a
detrimental effect on the price or volume of the security in a particular
transaction as far as a Fund is concerned. Each Fund believes that over time its
ability to participate in volume transactions will produce better executions for
the Funds.
During the fiscal year ended December 31, 1995, the Trust acquired and sold
securities of its regular broker-dealers: Lehman Brothers, Bear Stearns, Salomon
Brothers, Inc., CS First Boston Corp., Merrill Lynch & Co., Inc., Daiwa
Securities, Morgan Stanley & Co., Inc., Smith Barney, Barclays and Swiss Bank.
As of December 31, 1995, each Fund held the following amounts of securities of
its regular broker/dealers as defined in Rule 10b-1 under the Investment Company
Act, or their parents ($ in thousands); Prime Obligations Fund - Bear Stearns
($165,090), Swiss Bank Corp. ($24,420), Merrill Lynch & Co., Inc. ($58,890),
Smith Barney ($19,800),Morgan Stanley & Co., Inc. ($66,500); Government Fund -
Lehman Brothers ($30,000), Bear Stearns ($40,200), CS First Boston Corp.
($30,000), Daiwa Securities ($30,000), Morgan Stanley & Co. ($40,200), Salomon
Brothers, Inc. ($30,000), Smith Barney ($73,240), Swiss Bank Corp. ($59,496);
Treasury Obligations Fund - Swiss Bank Corp. ($289,340), Bear Stearns
($195,500), CS First Boston Corp. ($75,000), Merrill Lynch & Co., Inc.
($75,000), Daiwa Securities ($75,000), Morgan Stanley & Co., Inc. ($195,500),
Smith Barney Inc. ($234,600); and Money Market Fund - Smith Barney, Inc.
($52,560), Bear Stearns ($43,800), Swiss Bank Corp. ($64,824), Merrill Lynch &
Co., Inc. ($49,075), Morgan Stanley & Co., Inc. ($93,800).
NET ASSET VALUE
The net asset value per share of each Fund (except for Government Fund) is
determined by the Funds' custodian as of the close of regular trading on the New
York Stock Exchange (normally 4:00 p.m. New York time) (in the case of the
Government Fund, net asset value is determined at 5:00 p.m. New York time) on
each Business Day. A Business Day means any day on which the New York Stock
Exchange is open, except for days on which banks in Chicago, Boston or New York
are closed on local holidays. Such holidays include: New Year's Day, Martin
Luther King Day, Presidents' Day, Good Friday, Memorial Day, the Fourth of July,
Labor Day, Columbus Day, Veteran's Day, Thanksgiving Day and Christmas Day.
Each Fund's portfolio securities are valued using the amortized cost method of
valuation in an effort to maintain a constant net asset value of $1.00 per
share, which the Board of Trustees has determined to be in the best interests of
each Fund and its shareholders. This method involves valuing a security at cost
on
33
<PAGE>
the date of acquisition and thereafter assuming a constant accretion of a
discount or amortization of a premium to maturity, regardless of the impact of
fluctuating interest rates on the market value of the instrument. While this
method provides certainty in valuation, it may result in periods during which
value, as determined by amortized cost, is higher or lower than the price a Fund
would receive if it sold the instrument. During such periods, the yield to an
investor in a Fund may differ somewhat from that obtained in a similar
investment company which uses available market quotations to value all of its
portfolio securities. During periods of declining interest rates, the quoted
yield on shares of the Funds may tend to be higher than a like computation made
by a fund with identical investments utilizing a method of valuation based upon
market prices and estimates of market prices for all of its portfolio
instruments. Thus, if the use of amortized cost by a Fund resulted in a lower
aggregate portfolio value on a particular day, a prospective investor in the
Fund would be able to obtain a somewhat higher yield if he or she purchased
shares of the Fund on that day, than would result from investment in a fund
utilizing solely market values, and existing investors in the Fund would receive
less investment income. The converse would apply in a period of rising interest
rates.
The Board of Trustees has established procedures designed to stabilize, to the
extent reasonably possible, each Fund's price per share as computed for the
purpose of sales and redemptions at $1.00. Such procedures include review of
each Fund's portfolio by the Board of Trustees, at such intervals as it deems
appropriate, to determine whether such Fund's net asset value calculated by
using available market quotations (or an appropriate substitute which reflects
market conditions) deviates from $1.00 per share based on amortized cost, as
well as review of the methods used to calculate the deviation. If such deviation
exceeds 1/2 of 1%, the Board of Trustees will promptly consider what action, if
any, will be initiated. In the event the Board of Trustees determines that a
deviation exists which may result in material dilution or other unfair results
to investors or existing shareholders, it will take such corrective action as it
regards to be necessary and appropriate, including the sale of portfolio
instruments prior to maturity to realize capital gains or losses or to shorten
average portfolio maturity; withholding part or all of dividends or payment of
distributions from capital or capital gains; redemptions of shares in kind; or
establishing a net asset value per share by using available market quotations or
equivalents. In addition, in order to stabilize the net asset value per share at
$1.00 the Board of Trustees has the authority (1) to reduce or increase the
number of shares outstanding on a pro rata basis, and (2) to offset each
shareholder's pro rata portion of the deviation between the net asset value per
share and $1.00 from the shareholder's accrued dividend account or from future
dividends. Each Fund may hold cash for the purpose of stabilizing its net asset
value per share. Holdings of cash, on which no
34
<PAGE>
return is earned, would tend to lower the yield on such Fund's shares.
In order to continue to use the amortized cost method of valuation each Fund's
investments, including repurchase agreements, must be U.S. dollar-denominated
instruments which the Board of Trustees determines present minimal credit risks
and which are at the time of acquisition rated by the requisite number of NRSROs
in one of the two highest short-term rating categories or, in the case of any
instrument that is not so rated, of comparable quality as determined by GSAM and
confirmed by the Board of Trustees. Also, each Fund must maintain a dollar-
weighted average portfolio maturity (not more than ninety (90) days) appropriate
to its objective of maintaining a stable net asset value of $1.00 per share and
may not purchase any instrument with a remaining maturity of more than thirteen
(13) months. However, a Fund may also, consistent with the provisions of the
above-mentioned rule, invest in securities with a stated maturity of more than
thirteen (13) months, if (i) the security is a floating or variable rate
security with certain demand and interest rate reset features and (ii) the
security, except in the case of Tax-Free Fund and Municipal Fund, is a First
Tier Security.
The proceeds received by each Fund 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
Fund and constitute the underlying assets of that Fund. The underlying assets of
each Fund will be segregated on the books of account, and will be charged with
the liabilities in respect to that Fund and with a share of the general
liabilities of the Trust. Expenses are allocated in proportion to the net asset
values of the respective Funds except where allocations of direct expenses can
otherwise be fairly made. In addition, within each Fund, FST Shares, FST
Administration Shares, FST Service Shares and FST Preferred Shares (if any) will
be subject to different expense structures (see "Organization and
Capitalization").
REDEMPTIONS
The Trust may suspend the right of redemption of shares of a Fund and may
postpone payment for any period: (i) during which the New York Stock Exchange is
closed for regular trading other than customary weekend and holiday closings or
during which trading on the New York Stock Exchange is restricted, (ii) when the
SEC determines that a state of emergency exists which may make payment or
transfer not reasonably practicable, (iii) as the SEC may by order permit for
the protection of the shareholders of the Trust or (iv) at any other time when
the Trust may, under applicable laws and regulations, suspend payment on the
redemption of the Fund's shares.
35
<PAGE>
The Trust agrees to redeem shares of each Fund 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. The Trust reserves the right to pay other redemptions,
either total or partial, by a distribution in kind of securities (instead of
cash) from a Fund's portfolio. The securities distributed in such a distribution
would be valued at the same value as that assigned to them in calculating the
net asset value of the shares being redeemed. If a shareholder receives a
distribution in kind, he or she should expect to incur transaction costs when he
or she converts the securities to cash.
CALCULATION OF YIELD QUOTATIONS
Each Fund's yield quotations are calculated in accordance with a standard method
prescribed by the rules of the SEC. Under this method, the yield quotation is
based on a hypothetical account having a balance of exactly one share at the
beginning of a seven-day period.
Yield, effective yield and tax equivalent yield are calculated separately for
each class of a Fund's shares. Each class of Share is subject to different fees
and expenses and, consequently, may have differing yields for the same period.
The yield quotation is computed as follows: the net change, exclusive of capital
changes (i.e., realized gains and losses from the sale of securities and
unrealized appreciation and depreciation), in the value of a hypothetical pre-
existing account having a balance of one share at the beginning of the base
period is determined by dividing the net change in value by the value of the
account at the beginning of the base period. This base period return is then
multiplied by 365/7 (366/7 in the event of a leap year) with the resulting yield
figure carried to the nearest 100th of 1%. Such yield quotation shall take into
account all fees that are charged to a Fund.
Each Fund also may advertise a quotation of effective yield for a seven (7)
calendar day period. Effective yield is computed by compounding the unannualized
base period return determined as in the preceding paragraph by adding one (1) to
that return, raising the sum to the 365/7 power (366/7 in the event of a leap
year) and subtracting one from the result, according to the following formula:
Effective Yield=[(base period return + 1) (365/7)] - 1.
Tax-Free Fund and Municipal Fund may each also advertise a tax-equivalent yield
which is computed by dividing that portion of a Fund's yield (as computed above)
which is tax-exempt by one minus a stated income tax rate and adding the
quotient to that portion, if any, of the yield of the Fund that is not tax-
exempt.
36
<PAGE>
Unlike bank deposits or other investments which pay a fixed yield or return for
a stated period of time, the return for a Fund will fluctuate from time to time
and does not provide a basis for determining future returns. Return is a
function of portfolio quality, composition, maturity and market conditions as
well as the expenses allocated to a Fund. The return of each Fund may not be
comparable to other investment alternatives because of differences in the
foregoing variables and differences in the methods used to value portfolio
securities, compute expenses and calculate return.
The yield, effective yield and tax-equivalent yield of each Fund, except for
the Municipal Fund and Plus Fund (which has not commenced operations)with
respect to FST Shares, FST Administration Shares and FST Service Shares for the
seven-day period ended December 31, 1995 were as follows no FST Preferred Shares
were outstanding during such period:
<TABLE>
<CAPTION>
Effective Tax-Equivalent
Yield Yield Yield
----- --------- ---------------
<S> <C> <C> <C>
Prime Obligations Fund:
FST Shares 5.65 5.81 N/A
FST Administration Shares 5.40 5.55 N/A
FST Service Shares 5.15 5.29 N/A
Money Market Fund:
FST Shares 5.71 5.88 N/A
FST Administration Shares 5.46 5.61 N/A
FST Service Shares 5.21 5.35 N/A
Treasury Obligations Fund:
FST Shares 5.58 5.74 N/A
FST Administration Shares 5.33 5.47 N/A
FST Service Shares 5.08 5.21 N/A
Government Fund:
FST Shares 5.65 5.81 N/A
FST Administration Shares 5.40 5.55 N/A
FST Service Shares 5.15 5.29 N/A
Tax-Free Fund:
FST Shares 4.35 4.44 7.20%
FST Administration Shares 4.10 4.18 6.79%
FST Service Shares 3.85 3.92 6.37%
</TABLE>
The quotations of tax-equivalent yield set forth above for the seven-day period
ended December 31, 1995 are based on a federal marginal tax rate of 39.6%.
The information set forth in the foregoing table reflects certain fee reductions
voluntarily agreed to by the Adviser. See "The Adviser, Administrator,
Distributor and Transfer Agent." In the absence of such fee reductions, the
yield, effective yield and the tax-equivalent yield of each Fund (other than the
Municipal and Plus Funds) for the same period would have been as follows:
37
<PAGE>
<TABLE>
<CAPTION>
Effective Tax-Equivalent
Yield Yield Yield
----- --------- ---------------
<S> <C> <C> <C>
Prime Obligations Fund:
FST Shares 5.61 5.76 N/A
FST Administration Shares 5.36 5.50 N/A
FST Service Shares 5.11 5.24 N/A
Money Market Fund:
FST Shares 5.63 5.79 N/A
FST Administration Shares 5.38 5.53 N/A
FST Service Shares 5.13 5.26 N/A
Treasury Obligations Fund:
FST Shares 5.53 5.69 N/A
FST Administration Shares 5.28 5.42 N/A
FST Service Shares 5.03 5.16 N/A
Government Fund:
FST Shares 5.60 5.76 N/A
FST Administration Shares 5.35 5.49 N/A
FST Service Shares 5.10 5.23 N/A
Tax-Free Fund:
FST Shares 4.27 4.36 7.07%
FST Administration Shares 4.02 4.10 6.66%
FST Service Shares 3.77 3.84 6.25%
</TABLE>
From time to time the Funds may publish an indication of their past performance
as measured by independent sources such as Lipper Analytical Services,
Incorporated, Weisenberger Investment Companies Service, Donoghue's Money Fund
Report, Barron's, Business Week, Changing Times, Financial World, Forbes, Money,
Personal Investor, Sylvia Porter's Personal Finance, and The Wall Street
Journal.
From time to time, advertisements or information may include a discussion of
asset allocation models developed or recommended by GSAM and/or its affiliates,
certain attributes of or potential benefits to be derived from these asset
allocation strategies and the Goldman Sachs mutual funds that may form part of
such an asset allocation strategy. Such advertisements and information may also
include a discussion of GSAM's economic outlook and domestic and international
market views and recommend periodic tactical modifications to asset allocation
strategies. Such advertisements and information may also highlight or summarize
the services that GSAM and/or its affiliates provide in support of an asset
allocation program.
TAX INFORMATION
Each Fund has qualified and has elected or intends to qualify and elect to be
treated as a separate regulated investment company under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"). Such qualification does
not involve supervision of management or investment practices or policies by any
governmental agency or bureau.
38
<PAGE>
In order to qualify as a regulated investment company, each Fund must, among
other things, (a) 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 stock or securities or certain other investments (the "90%
test"); (b) derive less than 30% of its annual gross income from the sale or
other disposition of stock, securities or certain other investments held less
than three months; and (c) diversify its holdings so that, at the end of each
quarter of its taxable year, (i) at least 50% of the market value of the Fund's
total (gross) assets is represented by cash and cash items (including
receivables), 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 the Fund's total
assets and 10% of the outstanding voting securities of such issuer, and (ii) not
more than 25% of the value of the Fund's total assets is invested in the
securities (other than U.S. Government securities and securities of other
regulated investment companies) of any one issuer or two or more issuers
controlled by the Fund and engaged in the same, similar or related trades or
businesses. For purposes of these requirements, participation interests will be
treated as securities, and the issuer will be identified on the basis of the
market risk and credit risk associated with any particular interest. Certain
payments received with respect to such interests, such as commitment fees and
certain facility fees, may not be treated as income qualifying under the 90%
test.
Each Fund, as a regulated investment company, will not be subject to federal
income tax on any of its net investment income and net realized capital gains
that are distributed to shareholders with respect to any taxable year in
accordance with the Code's timing requirements, provided that the Fund
distributes at least 90% of its investment company taxable income (generally all
of its net taxable income other than "net capital gain," which is the excess of
net long-term capital gain over net short-term capital loss) for such year, and
in the case of any Fund that earns tax-exempt interest, at least 90% of the
excess of the tax-exempt interest it earns over certain disallowed deductions. A
Fund will be subject to federal income tax at regular corporate rates on any
investment company taxable income or net capital gain that it does not
distribute for a taxable year. In order to avoid a nondeductible 4% federal
excise tax, a 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 in
such year and on which the Fund paid no federal income tax.
Dividends paid by a Fund from taxable net investment income (including income
attributable to accrued market discount and a
39
<PAGE>
portion of the discount on certain stripped tax-exempt obligations and their
coupons) and the excess of net short-term capital gain over net long-term
capital loss will be treated as ordinary income in the hands of shareholders.
Such distributions will not qualify for the corporate dividends-received
deduction. Distributions paid by a Fund from the excess of net long-term capital
gain over net short-term capital loss are taxable to shareholders as long-term
capital gain, regardless of the length of time the shares of a Fund have been
held by such shareholders, and also will not qualify for the corporate dividend
received deduction. A Fund's net realized capital gains for a taxable year are
computed by taking into account any capital loss carryforward of that Fund.
Distributions paid by Tax-Free Fund or Municipal Fund from tax-exempt interest
received by it and properly designated as "exempt-interest dividends" will
generally be exempt from regular federal income tax, provided that at least 50%
of the value of the applicable Fund's total assets at the close of each quarter
of its taxable year consists of tax-exempt obligations, i.e., obligations
described in Section 103(a) of the Code (not including shares of other regulated
investment companies that may pay exempt-interest dividends, because such shares
are not treated as tax-exempt obligations for this purpose). Distributions paid
by the other Funds from any tax-exempt interest they may receive will not be
tax-exempt, because they will not satisfy the 50% requirement described in the
preceding sentence. A portion of any tax-exempt distributions attributable to
interest on certain "private activity bonds", if any, received by a Fund may
constitute tax preference items and may give rise to, or increase liability
under, the alternative minimum tax for particular shareholders. In addition tax-
exempt distributions of a Fund may be considered in computing the "adjusted
current earnings" preference item of its corporate shareholders in determining
the corporate alternative minimum tax and the corporate environmental tax. To
the extent that a Fund invests in certain short-term instruments, including
repurchase agreements, the interest on which is not exempt from federal income
tax, any distributions of income from such investments will be taxable to
shareholders as ordinary income. All or substantially all of any interest on
indebtedness incurred directly or indirectly to purchase or carry shares of Tax-
Free Fund or Municipal Fund will generally not be deductible. The availability
of tax-exempt obligations and the value of these Funds may be affected by
restrictive tax legislation enacted in recent years.
In purchasing municipal obligations, Tax-Free Fund and Municipal Fund each
relies on opinions of nationally-recognized bond counsel for each issue as to
the excludability of interest on such obligations from gross income for federal
income tax purposes. Each Fund does not undertake independent investigations
concerning the tax-exempt status of such obligations, nor does it guarantee or
represent that bond counsels' opinions are correct.
40
<PAGE>
Distributions of net investment income and net realized capital gains will be
taxable as described above, whether received in shares or in cash. Shareholders
electing to receive distributions in the form of additional shares will have a
cost basis in each share so received equal to the amount of cash they would have
received had they elected to receive cash.
Money Market Fund and/or Plus Fund may be subject to foreign withholding or
other foreign taxes with respect to its investments in certain securities of
foreign entities. These taxes may be reduced under the terms of applicable U.S.
income tax treaties in some cases, and the applicable Fund intends to satisfy
any procedural requirements to qualify for benefits under these treaties.
Although neither Fund anticipates that more than 50% of the value of its total
assets at the close of a taxable year will be composed of securities of foreign
corporations, if the 50% requirement were satisfied by either Fund, that Fund
could make an election under Code Section 853 to permit its shareholders to
claim a credit or deduction on their federal income tax returns for their pro
rata portion of qualified taxes paid by the Fund in foreign countries. In the
event such an election is made, shareholders will be required to include their
pro rata share of such taxes in gross income and will be entitled to claim a
foreign tax credit or deduction with respect to such taxes, subject to certain
limitations under the Code. Shareholders who are precluded from taking such
credits or deductions will nevertheless be taxed on their pro rata share of the
foreign taxes included in their gross income, unless they are otherwise exempt
from federal income tax.
Each Fund will be required to report to the Internal Revenue Service all taxable
distributions, except in the case of certain exempt shareholders. Under the
backup withholding provisions of Code Section 3406, all such distributions may
be subject to withholding of federal income tax at the rate of 31% in the case
of nonexempt shareholders who fail to furnish the Fund with their taxpayer
identification number or with certain certifications required by the Internal
Revenue Service or if the Internal Revenue Service or a broker notifies a Fund
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. However, any taxable distributions from Tax-Free
Fund or Municipal Fund will not be subject to backup withholding if the Fund
reasonably estimates that at least 95% of its distributions will be exempt
interest dividends. Each Fund may refuse to accept an application that does not
contain any required taxpayer identification number or certification that the
number provided is correct or that the investor is an exempt recipient. If the
withholding provisions are applicable, any such distributions, whether taken in
cash or reinvested in shares, will be reduced by the amounts required to be
withheld. Investors may wish to consult their tax advisors about the
applicability of the backup withholding provisions.
41
<PAGE>
All distributions (including exempt-interest dividends) whether received in
shares or cash, must be reported by each shareholder on the shareholder's
federal income tax return. The Funds will inform shareholders of the federal
income tax status of their distributions after the end of each calendar year,
including, in the case of the Tax-Free Fund and the Municipal Fund, the amounts
that qualify as exempt-interest dividends and any portions of such amounts that
constitute tax preference items under the federal alternative minimum tax.
Shareholders who received exempt-interest dividends and have not held their
shares of the applicable Fund for its entire taxable year may have designated as
tax-exempt or as a tax preference item a percentage of their distributions which
is not exactly equal to a proportionate share of the amount of tax-exempt
interest or tax preference income earned during the period of their investment
in such Fund. Each shareholder should consult his or her own tax advisor to
determine the tax consequences of an investment in the Fund in the shareholder's
own state and locality.
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.
Assuming that each Fund qualifies as a regulated investment company for federal
income tax purposes, each Fund, as a series of a Massachusetts business trust,
will not be subject to any income, franchise or corporate excise tax in
Massachusetts.
The foregoing discussion relates solely to U.S. federal income tax law as it
applies to U.S. persons (i.e., U.S. citizens and residents and U.S. domestic
corporations, partnerships, trusts and estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies and financial
institutions. 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 a Fund, including the possibility that such a shareholder may be
subject to a U.S. nonresident alien withholding tax at a rate of 30% (or at a
lower rate under an applicable U.S. income tax treaty) on certain distributions
from a Fund or to backup withholding on certain payments if a current IRS Form
W-8 or acceptable substitute is not on file with the Funds.
The Funds may be subject to state or local taxes in jurisdictions in which the
Funds may be deemed to be doing business. In addition, in those states or
localities which have income tax laws, the treatment of the Trust and its
shareholders under such laws may differ from their treatment under federal
income tax laws, and investment in the Funds may have tax consequences for
shareholders different from those of a direct investment in the
42
<PAGE>
Funds' securities. Shareholders should consult their own tax advisers concerning
these matters. For example, in such states or localities it may be appropriate
for shareholders to review with their tax advisers the state income and, if
applicable, intangibles tax consequences of investments by the Funds in
securities issued by the particular state or the U.S. Government or its various
agencies or instrumentalities, because many states exempt from personal income
tax distributions by regulated investment companies from interest on obligations
of the particular state or on direct U.S. Government obligations and/or exempt
from intangibles tax the value of the shares of such companies attributable to
such obligations, subject to certain state-specific requirements and/or
limitations.
This discussion of the tax treatment of the Funds and their shareholders is
based on the tax laws in effect as of the date of this Statement of Additional
Information, which are subject to change either prospectively or retroactively.
ORGANIZATION AND CAPITALIZATION
The Trust is a Massachusetts business trust established under the laws of The
Commonwealth of Massachusetts by a Declaration of Trust dated December 6, 1978.
Effective December 27, 1994, Prime Obligations Fund, Money Market Fund, Treasury
Obligations Fund, Government Fund, Tax-Free Fund and Municipal Fund were
reorganized, and each such Fund became a separate series of the Trust, a
business trust organized under the laws of the Commonwealth of Massachusetts on
December 6, 1978. Prior to the reorganization, each Fund (other than Plus Fund)
had been a separate series of Financial Square Trust ("FST"), which was also a
Massachusetts business trust. Except for the fact that the Funds are now series
of the Trust, shares of each Fund represent the same interest in such Fund's
assets, are of the same class, are subject to the same terms and conditions,
fees and expenses and confer the same rights as when each Fund was a series of
FST. Plus Fund was organized as a series of the Trust in October, 1995.
Each shareholder is deemed to have expressly assented and agreed to the terms of
the Declaration of Trust and is deemed to be party thereto. The authorized
capital of the Trust consists of an unlimited number of shares of beneficial
interest. The Board of Trustees has authority under the Declaration of Trust to
create and classify shares of beneficial interest in separate series or funds of
the Trust without further action by shareholders. The Declaration of Trust
further authorizes the Board of Trustees to classify or reclassify any series or
portfolio of shares into one or more classes. The Board of Trustees has
authorized the issuance of up to four classes of shares of each of the Funds:
FST Shares, FST Service Shares, FST Administration Shares and FST Preferred
Shares.
43
<PAGE>
Each FST Share, FST Administration Share, FST Service Share and FST Preferred
Share of a Fund represents an equal proportionate interest in the assets
belonging to such Fund. It is contemplated that most shares will be held in the
accounts of which the record owner is a bank or other institution acting,
directly or through an agent, as nominee for its customers who are the
beneficial owners of the shares or another organization designated by such bank
or institution. FST Shares may be purchased for accounts held in the name of an
investor or institution that is not compensated by the Fund for services
provided to the institution's investors. FST Administration Shares may be
purchased for accounts held in the name of an institution that provides certain
account administration services to its customers, including maintenance of
account records and processing orders to purchase, redeem and exchange FST
Administration Shares. FST Administration Shares of a Fund bear the cost of
administration fees at the annual rate of up to .25 of 1% of the average daily
net assets of such Shares. FST Preferred Shares may be purchased for accounts
held in the name of an institution that provides certain account administration
services to its customers, including acting directly or through an agent, as the
sole shareholder of record, maintain account records of its customers and
processing orders to purchase, redeem and exchange FST Preferred Shares. FST
Preferred Shares of a Fund bear the cost of preferred administration fees at an
annual rate of up to 0.10% of the average daily net assets of such shares. FST
Service Shares may be purchased for accounts held in the name of an institution
that provides certain account administration and shareholder liaison services to
its customers, including maintenance of account records, processing orders to
purchase, redeem and exchange FST Service Shares, responding to customer
inquiries and assisting customers with investment procedures. FST Service Shares
of a Fund bear the cost of service fees at the annual rate of up to .50 of 1% of
the average daily net assets of such Shares.
It is possible that an institution or its affiliates may offer different classes
of shares to its customers and thus receive different compensation with respect
to different classes of shares of a Fund. In the event a Fund is distributed by
sales persons or any other persons, they may receive different compensation with
respect to different classes of shares of a Fund. FST Administration Shares, FST
Preferred Shares and FST Service Shares each have certain exclusive voting
rights on matters relating to their respective plans. Shares of each class may
be exchanged only for shares of the same class in another Fund. Except as
described above, the four classes of shares are identical. 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.
Each FST Share, FST Service Share, FST Administration Share and FST Preferred
Share of a Fund is entitled to one vote per share; however, separate votes will
be taken by the Fund or class (or by
44
<PAGE>
more than one fund of the Trust or class voting as a single class if similarly
affected) on matters affecting only the Fund or class (or those affected funds
of the Trust or classes) or as otherwise required by law. Shares are freely
transferable and have no preemptive, subscription or conversion rights. All
shares issued and outstanding are fully paid and non-assessable. The Declaration
of Trust provides for shareholder voting only for the election or removal of one
or more Trustees, if a meeting is called for that purpose, and for certain other
designated matters. The Trust does not generally hold annual or other meetings
of shareholders. The shares of the Trust have non-cumulative voting rights,
which means that the holders of more than 50% of the shares voting for the
election of Trustees can elect 100% of the Trustees if they choose to do so,
and, in such event, the holders of the remaining less than 50% of the shares
voting for the election of Trustees will not be able to elect any person or
persons to the Board of Trustees. Each Trustee serves until the next meeting of
shareholders, if any, called for the purpose of electing or reelecting such
Trustee or successor to such Trustee, and until the election and qualification
of such successor, if any, or until such Trustee sooner dies, resigns, retires
or is removed by the shareholders or two-thirds of the Trustees.
As of the date of this Statement of Additional Information, no shares of
Municipal Fund and Plus Fund were outstanding.
As of April 22, 1996, the entities noted below may have owned beneficially 5% or
more of the outstanding shares of Prime Obligations Fund: Commerce Bank of
Kansas City, PO Box 248, Kansas City, MO 64141 (8.32%), Citicorp Trust NA as
Custodian, 140 Royal Palm Way, Palm Beach, FL 33480 (6.65%), University of Texas
Systems, 201 W. 7th Street, Austin, TX (12.05%) and United Healthcare, 180 E.
5th St., St. Paul, MN 55101 (5.95%). As of April 22, 1996, the entities noted
below may have owned beneficially 5% or more of the outstanding shares of Money
Market Fund; Loral Corporation, 600 Third Avenue, New York, NY 10016 (9.19%),
Harris Trust & Savings Bank, 200 W. Monroe St., Chicago, IL 60606 (6.10%) and
Citicorp Trust NA as Custodian, 140 Royal Palm Way, Palm Beach, FL 33480
(5.36%). As of April 22, 1996, the entities noted below may have owned
beneficially 5% or more of the outstanding shares of Treasury Obligations Fund:
Commerce Bank of Kansas City, NA, PO Box 248, Kansas City, MO 64141 (10.98%),
Commerce Bank, Charleston, NA, NB of C & Co., One Commerce Square, Charleston,
WV 25301 (6.27%), Associated Bank, P.O. Box 1007, Neehah, WI (6.59%),
Amalgamated Bank of Chicago, One West Monroe Street, Chicago, IL 60603 (9.07%),
and State Street, P.O. Box 1992, Boston, MA 02101 (15.26%). As of April 22,
1996, the entities noted below may have owned beneficially 5% or more of the
outstanding shares of Government Fund: Chicago Trust Company, 171 N. Clark St.,
Chicago, IL 60601 (12.06%), Commerce Bank of Kansas City, NA, P.O. Box 248,
Kansas City, MO 64141 (6.41%), First Citizens Bank & Trust Co., 2917 Highwoods
Blvd., Raleigh, NC 27604 (6.14%), Manufacturers Hanover Trust & Co., 270 Park
Avenue, New York, NY 10017 (6.55%), MFS Communications Co., Inc.,
45
<PAGE>
3555 Farnam St., Omaha, NE 68131 (5.55%)and AMBAC Capital Management Inc., 300
Nyala Farms Road, Westport, CT 06880 (14.73%). As of April 22, 1996, the
entities noted below may have owned beneficially 5% or more of the outstanding
shares of Tax-Free Fund: CKS Group, Inc., 10441 Bandley Dr., Cupertino, CA 95014
(7.28%), Associated Bank, P.O. Box 1007, Neehah, WI (5.36%), Commerce Bank of
Kansas City, PO Box 2530, Concord, NH 03302 (17.99%) and Summit Bank, 39
Beechwood Dr., Summit, NJ (10.13%).
SHAREHOLDER AND TRUSTEE LIABILITY
--------------------------------
The Trust is an entity of the type commonly known as a "Massachusetts business
trust", which is the form in which many mutual funds are organized. Under
Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
Trust. The Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Trust. Notice of such disclaimer will
normally be given in each agreement, obligation or instrument entered into or
executed by the Trust or the Trustees. The Declaration of Trust provides for
indemnification by the relevant fund of the Trust (including each Fund) for any
loss suffered by a shareholder as a result of an obligation of such fund. The
Declaration of Trust also provides that the Trust shall, upon request, assume
the defense of any claim made against any shareholder for any act or obligation
of the Trust and satisfy any judgment thereon. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which a Fund is unable to meet its obligations. The Trustees
believe that, in view of the above, the risk of personal liability of
shareholders is not material.
The Declaration of Trust provides that the Trustees of the Trust shall not be
liable for any action taken by them in good faith, and that they shall be fully
protected in relying in good faith upon the records of the Trust and upon
reports made to the Trust by persons selected in good faith by the Trustees as
qualified to make such reports. The Declaration of Trust further provides that
the Board of Trustees will not be liable for errors of judgment or mistakes of
fact or law. The Declaration of Trust provides that the Trust will indemnify the
Trustees and officers of the Trust against liabilities and expenses reasonably
incurred in connection with litigation in which they may be involved because of
their positions with the Trust, unless it is determined in the manner provided
in the Declaration of Trust that they have not acted in good faith in the
reasonable belief that, in the case of conduct in their official capacity with
the Trust, such conduct was in the best interests of the Trust, and in all other
cases, that the conduct was at least not opposed to the best interests of the
Trust (and in the case of any criminal proceeding, they had no reasonable cause
to believe that the conduct was unlawful). However, nothing in the Declaration
of Trust or the By-Laws protects or indemnifies a Trustee or officer against any
liability to which they would otherwise be subject by
46
<PAGE>
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of their office.
CUSTODIAN AND SUBCUSTODIAN
State Street Bank and Trust Company ("State Street") has been retained to act as
custodian of the Funds' assets and, in that capacity, maintains the accounting
records and calculates the daily net asset value per share of each Fund. Its
mailing address is P.O. Box 1713, Boston, MA 02105. State Street has appointed
The Northern Trust Company, 50 South LaSalle Street, Chicago, Illinois 60675 as
subcustodian to hold cash and certain securities purchased by the Funds.
INDEPENDENT ACCOUNTANTS
Arthur Andersen LLP, independent public accounts, One International Place, 100
Oliver Street, Boston, Massachusetts 02110, have been selected as auditors of
the Trust. In addition to audit services, Arthur Andersen LLP prepares each
Fund's federal and state tax returns, and provides consultation and assistance
on accounting, internal control and related matters.
FINANCIAL STATEMENTS
The Financial Statements of the Funds then in existence and conducting
investment operations, including the Statements of Investments as of December
31, 1995 the Statements of Assets and Liabilities as of December 31, 1995, the
related Statements of Operations for the period then ended, the Statements of
Changes in Net Assets and the Financial Highlights for the periods presented,
the Notes to the Financial Statements, and the Report of Independent Public
Accountants, all of which are included in the December 31, 1995 Annual Report to
the shareholders, are attached hereto and incorporated by reference into this
Statement of Additional Information.
47
<PAGE>
APPENDIX A
DESCRIPTION OF SECURITIES RATINGS*
MOODY'S INVESTORS SERVICE, INC.
Bond Ratings
- ------------
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than with Aaa securities.
Moody's applies numerical modifiers, 1, 2, and 3 in the Aa category. The
modifier 1 indicates that the obligation ranks in the higher end of the Aa
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of the Aa category.
- -------------------------------------------------------------------------------
* The ratings indicated herein are believed to be the most recent ratings
available at the date of this Statement of Additional Information 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 Portfolios' taxable year end.
A-1
<PAGE>
Short-Term Ratings
- ------------------
P-1: Issuers have a superior ability for repayment of senior short-term
promissory obligations. Prime-1 or P-1 repayment ability will normally be
evidenced by many of the following characteristics:
. Leading market positions in well established industries.
. High rates of return on funds employed.
. Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
. Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
. Well established access to a range of financial markets and assured sources
of alternate liquidity.
P-2: Issuers have a strong ability for repayment of senior short-term debt
obligations. This will normally be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and coverage ratios, while
sound, will be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
State and Municipal Obligations
- ------------------------------
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade or (MIG). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors affecting
the liquidity of the borrower and short-term cyclical elements are critical in
short-term ratings, while other factors of major importance in bond risk, long-
term secular trends for example, may be less important over the short run.
Symbols used will be as follows:
MIG 1 -- This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broadbased access to the market for refinancing.
MIG 2 -- This designation denotes high quality. Margins of protection are ample
although not so large as in the preceding group.
A short-term rating may also be assigned on an issue having a demand feature.
Such ratings will be designated as VMIG to reflect such characteristics as
payment upon periodic demand rather than fixed maturity dates and payment
relying on external
A-2
<PAGE>
liquidity. Additionally, investors should be alert to the fact that the source
of payment may be limited to the external liquidity with no or limited legal
recourse to the issuer in the event the demand is not met VMIG-1, and VMIG-2
ratings carry the same definitions as MIG-1, and MIG-2, respectively.
STANDARD & POOR'S RATINGS GROUP
Bond Ratings
- ------------
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the highest rated issues only in small degree.
PLUS (+) OR MINUS (-): The AA rating may be modified by the addition of a plus
or minus sign to show relative standing within the AA category.
Short-Term Ratings
- ------------------
A-1: Standard & Poor's Commercial Paper ratings are current assessments of the
likelihood of timely payment of debt considered short-term in the relevant
market. The A-1 designation is the highest category and indicates that the
degree of safety regarding timely payment is strong. Those issues determined to
possess extremely strong safety characteristics are denoted with a plus ( + )
sign designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
Municipal Notes
- ---------------
A Standard & Poor's note rating reflects the liquidity concerns and market
access risks unique to notes. Notes due in 3 years or less will likely receive a
note rating. Notes maturing beyond 3 years will most likely receive a long-term
debt rating. The following criteria will be used in making that assessment.
A-3
<PAGE>
. Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).
. Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1 -- Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be given a
plus (+) designation.
SP-2 -- Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term of the
notes.
Standard & Poor's assigns "dual" ratings to all debt issues that have a put
option or demand feature as part of their structure.
The first rating addresses the likelihood of repayment of principal and interest
as due, and the second rating addresses only the demand feature. The long-term
debt rating symbols are used for bonds to denote the long-term maturity and the
commercial paper rating symbols for the put option (for example, "AAA/A-1+").
With short-term demand debt, S&P's note rating symbols are used with the
commercial paper rating symbols (for example, "SP-1+/A-1+").
DUFF & PHELPS, INC.
Bond Ratings
- ------------
AAA: Long-term fixed income securities which are rated AAA are judged to be of
the highest credit quality. The risk factors are negligible, being only slightly
more than for risk-free U.S. Treasury debt.
AA: Long-term fixed income securities which are rated AA are judged to be of
high credit quality. Protection factors are strong. Risk is modest but may vary
slightly from time to time because of economic conditions.
Duff & Phelps applies modifiers, AA+ and AA- in the AA category for long-term
fixed securities. The modifier AA+ indicates that the security ranks in the
higher end of the AA category: the modifier AA indicates a mid-range ranking;
and the modifier AA-indicates that the issue ranks in the lower end of the AA
category.
A-4
<PAGE>
Short-Term Ratings
- ------------------
D-1: Commercial paper and certificates of deposit rated Duff 1 are considered to
have a very high certainty of timely payment. Liquidity factors are considered
excellent and are supported by strong fundamental protection factors. Risk
factors are minor.
D-2: Commercial paper and certificates of deposit rated Duff 2 are considered to
have a good certainty of timely payment. Liquidity factors and company
fundamentals are considered sound. Although ongoing funding needs may enlarge
total financing requirements, access to capital markets is good and risk factors
are small.
Duff & Phelps applies a plus and minus rating scale, D-1+, D-1 and D-1- in the
Duff 1 top grade category for commercial paper and certificates of deposit. The
rating D-1+ indicates that the security has the highest certainty of timely
payment, short-term liquidity is clearly outstanding and safety is just below
risk-free U.S. Treasury short-term obligations; the rating D-1 indicates a very
high certainty of timely payment, liquidity factors are excellent and risk
factors are minimal; and the rating D-1- indicates a high certainty of timely
payment, liquidity factors are strong and risk factors are very small.
FITCH INVESTORS SERVICE CORP.
AAA: Bonds which are rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
its obligations, which is unlikely to be affected by reasonably foreseeable
events.
AA: Bonds which are rated AA are considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated "F-1+".
Fitch applies plus (" + ") and minus (" - ") modifiers in the AA category to
indicate the relative position of a credit within the rating category. The
modifier AA+ indicates that the security ranks at the higher end of the AA
category than a security rated AA or AA- .
Eligible Fitch ratings for short-term debt obligations payable on demand or with
original maturities of up to three years, includ-
A-5
<PAGE>
ing commercial paper, certificates of deposit, medium-term notes, and municipal
and investment notes may be rated F-1 or F-2.
F-1: Short-term debt obligations rated F-1 are considered to be of very strong
credit quality. Those issues determined to possess exceptionally strong credit
quality and having the strongest degree of assurance for timely payment will be
denoted with a plus ("+") sign designation.
F-2: Short-term debt obligations rated F-2 are considered to be of good credit
quality. Issues assigned this rating have a satisfactory degree of assurance for
timely payment, but the margin of safety is not as great as for issues assigned
F-1+ and F-1 ratings.
IBCA LIMITED AND IBCA INC.
A1: Short-term obligations rated A1 are supported by a very strong capacity for
timely repayment. A plus ("+") sign is added to those issues determined to
possess the highest capacity for timely payment.
A2: Short-term obligations rated A2 are supported by a strong capacity for
timely repayment, although such capacity may be susceptible to adverse changes
in business, economic or financial conditions.
THOMSON BANKWATCH, INC.
AAA: The highest category; indicates a superior ability to repay principal and
interest on a timely basis is very high.
AA:The second highest category; indicates a superior ability to repay principal
and interest on a timely basis with limited incremental risk versus issues rated
in the highest category.
Ratings in the AA Long-Term Debt category may include a plus (+) or minus (-)
designation which indicates where within the respective category the issue is
placed.
The TBW Short-Term Ratings apply only to unsecured instruments that have a
maturity of one year or less.
The TBW Short-Term Ratings specifically assess the likelihood of an untimely
payment of principal and interest.
TBW-1: The highest category; indicates a very high degree of likelihood that
principal and interest will be paid on a timely basis.
TBW-2: The second highest category; while the degree of safety regarding timely
repayment of principal and interest is strong, the relative degree of safety is
not as high as for issues rated "TBW-1".
A-6
<PAGE>
GOLDMAN SACHS MONEY MARKET TRUST
FINANCIAL SQUARE FUNDS
4900 Sears Tower, Chicago, Illinois 60606
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION - MAY 1, 1996
FST ADMINISTRATION SHARES
- --------------------------------------------------------------------------------
Goldman Sachs Money Market Trust (the "Trust") is a no-load, open-end,
management investment company (or mutual fund) which includes the Financial
Square Funds. This Statement of Additional Information relates solely to the
offering of FST Administration Shares of Financial Square Prime Obligations Fund
("Prime Obligations Fund"), Financial Square Money Market Plus Fund ("Plus
Fund"), Financial Square Money Market Fund ("Money Market Fund"), Financial
Square Treasury Obligations Fund ("Treasury Obligations Fund"), Financial Square
Government Fund ("Government Fund"), Financial Square Tax-Free Money Market Fund
("Tax-Free Fund") and Financial Square Municipal Money Market Fund ("Municipal
Fund")(individually, a "Fund" and collectively the "Funds").
Goldman Sachs Asset Management ("GSAM" or the "Adviser"), a separate operating
division of Goldman, Sachs & Co. ("Goldman Sachs"), serves as the Funds'
investment adviser and administrator. Goldman Sachs serves as the Funds'
distributor and transfer agent.
The Goldman Sachs Mutual Funds Group ("MFG") offers banks, corporate cash
managers, investment advisers and other institutional investors a family of
professionally-managed mutual funds, including money market, fixed income and
equity funds, and a range of related services. MFG is part of GSAM. 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 clients' interests. As Goldman Sachs clients,
shareholders will be assigned an Account Administrator ("AA"), who is ready to
help shareholders with questions concerning their accounts. During business
hours, service organizations can call their AA through a toll-free number to
place purchase or redemption orders or obtain Fund and account information. The
AA can also answer inquiries about rates of return and portfolio composition and
holdings, and guide service organizations through operational details. A
Goldman Sachs client can also utilize the SMART/SM/ personal computer software
system which allows shareholders to purchase or redeem shares and also obtain
Fund and account information directly.
<PAGE>
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the Prospectuses relating to FST Administration Shares dated
May 1, 1996, a copy of which may be obtained without charge from institutions
("Service Organizations") that hold, directly or through an agent, FST
Administration Shares for the benefit of their customers, or by calling Goldman
Sachs at 800-621-2550 or by writing Goldman Sachs, 4900 Sears Tower, Chicago,
Illinois 60606.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page in
Statement of
Additional
Information
------------
<S> <C>
Investment Policies and Practices of the Funds.. 4
Investment Limitations.......................... 17
Trustees and Officers........................... 21
The Adviser, Administrator, Distributor
and Transfer Agent............................ 26
Portfolio Transactions.......................... 30
Net Asset Value................................. 32
Redemptions..................................... 34
Calculation of Yield Quotations................. 35
Tax Information................................. 38
Organization and Capitalization................. 43
Custodian and Subcustodian...................... 49
Independent Accountants......................... 49
Financial Statements............................ 49
Administration Plan............................. 50
Appendix A (Description of Securities Ratings).. A-1
</TABLE>
3
<PAGE>
ADMINISTRATION PLAN
The Trust, on behalf of each Fund, has adopted an administration plan
(the "Plan") with respect to the FST Administration Shares which authorizes the
Funds to compensate Service Organizations for providing certain account
administration services to their customers who are beneficial owners of such
shares. Pursuant to the Plan, the Trust, on behalf of each Fund, will enter
into agreements with Service Organizations which purchase FST Administration
Shares on behalf of their customers ("Service Agreements"). Under such Service
Agreements the Service Organizations may: (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 FST Administration
Shares, (c) answer questions and handle correspondence from customers regarding
their accounts, (d) process customer orders to purchase, redeem and exchange FST
Administration Shares, and handle the transmission of funds representing the
customers' purchase price or redemption proceeds, and (e) issue confirmations
for transactions in shares by customers. As compensation for such services,
each Fund will pay each Service Organization an administration fee in an amount
up to .25% (on an annualized basis) of the average daily net assets of the FST
Administration Shares of such Fund attributable to or held in the name of such
Service Organization.
For the fiscal year ended December 31, 1995, the eleven months ended
December 31, 1994, and the fiscal year ended January 31, 1994 with respect to
each Fund, the amount of administration fees paid by each Fund then in existence
to Service Organizations was as follows:
<TABLE>
<CAPTION>
Dec. 1995 Dec. 1994 Jan. 1994
--------- --------- ---------
<S> <C> <C> <C>
Prime Obligations Fund/(1)(7)/..... $318,346 $139,235 $109,983
Money Market Fund/(2)/ 283,241 78,743 -
Treasury Obligations Fund/(3)(7)/ 457,071 79,171 16,665
Government Fund/(4)(7)/ 131,629 83,036 6,394
Tax Free Fund/(5)/................. 32,166 1,800 -
Municipal Fund/(6)/................ - - -
- ---------------
</TABLE>
(1) FST Administration Share activity commenced November 2, 1992.
(2) FST Administration Share activity commenced May 20, 1994.
(3) FST Administration Share activity commenced January 21, 1993.
(4) FST Administration Share activity commenced September 1, 1993.
(5) FST Administration Share activity commenced August 1, 1994.
(6) Has not commenced operations.
(7) The information presented for the period ended December 31, 1994 reflects
the eleven months of operations.
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 the Trust in connection with the investment of fiduciary
funds in FST Administration Shares. Service Organizations, including banks
regulated by the Comptroller of the Currency, the Federal Reserve Board or the
Federal Deposit Insurance Corporation, and investment advis-
47
<PAGE>
ers 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 FST Administration Shares. In
addition, under some state securities laws, banks and other financial
institutions purchasing FST Administration Shares on behalf of their customers
may be required to register as dealers.
The Plan was approved on December 27, 1994 by Financial Square Trust
as the sole shareholder of FST Administration Shares of each Fund, other than
Plus Fund. The Board of Trustees, including a majority of the Trustees who are
not interested persons of the Trust and who have no direct or indirect financial
interest in the operation of such Plan or the related Service Agreements, most
recently voted to approve the Plan and Service Agreements for each Fund at a
meeting called for the purpose of voting on such Plan and Service Agreements on
April 24, 1996. The Trustees initially voted to approve the Plan as to Plus
Fund at a meeting held on October 24, 1995. The Plan and Service Agreements
will remain in effect until April 30, 1997 and will continue in effect
thereafter only if such continuance is specifically approved annually by a vote
of the Board of Trustees in the manner described above.
The Plan may not be amended to increase materially the amount to be
spent for the services described therein without approval of the FST
Administration Shareholders of each Fund, and all material amendments of the
Plan must also be approved by the Board of Trustees in the manner described
above. The Plan may be terminated at any time by a majority of the Board of
Trustees as described above or by vote of a majority of the outstanding FST
Administration Shares of each Fund. The Service Agreements may be terminated at
any time, without payment of any penalty, by vote of a majority of the Board of
Trustees as described above or by a vote of a majority of the outstanding FST
Administration Shares of each Fund on not more than sixty (60) days' written
notice to any other party to the Service Agreements. The Service Agreements
shall terminate automatically if assigned. As long as the Plan is in effect,
the selection and nomination of those Trustees who are not interested persons
shall be committed to the discretion of the Trust's Nominating Committee, which
consists of all of the non-interested members of the Board of Trustees. The
Board of Trustees has determined that, in its judgment, there is a reasonable
likelihood that the Plan will benefit each Fund and holders of FST
Administration Shares of such Fund. In the Board of Trustees' quarterly review
of the Plan and Service Agreements, the Board will consider their continued
appropriateness and the level of compensation provided therein.
48
<PAGE>
GOLDMAN SACHS MONEY MARKET TRUST FINANCIAL SQUARE FUNDS
4900 Sears Tower, Chicago, Illinois 60606
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION - MAY 1, 1996.
FST PREFERRED SHARES
- --------------------------------------------------------------------------------
Goldman Sachs Money Market Trust (the "Trust") is a no-load, open-end,
management investment company (or mutual fund) which includes the Financial
Square Funds. This Statement of Additional Information relates solely to the
offering of FST Preferred Shares of Financial Square Prime Obligations Fund
(Prime Obligations Fund), Financial Square Money Market Fund (Money Market
Fund), Financial Square Treasury Obligations Fund (Treasury Obligations Fund),
Financial Square Government Fund (Government Fund), Financial Square Tax Free
Money Market Fund (Tax Free Fund), Financial Square Money Market Plus Fund
("Plus Fund")and Financial Square Municipal Money Market Fund (Municipal
Fund)(individually, a "Fund" and collectively the "Funds").
Goldman Sachs Asset Management ("GSAM" or the "Adviser"), a separate
operating division of Goldman, Sachs & Co. ("Goldman Sachs"), serves as the
Funds' investment adviser and administrator. Goldman Sachs serves as the Funds'
distributor and transfer agent.
The Goldman Sachs Mutual Funds Group ("MFG") offers banks, corporate cash
managers, investment advisers and other institutional investors a family of
professionally-managed mutual funds, including money market, fixed income and
equity funds, and a range of related services. MFG is part of GSAM. 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 clients' interests. As Goldman Sachs
clients, shareholders will be assigned an Account Administrator ("AA"), who is
ready to help shareholders with questions concerning their accounts. During
business hours, service organizations can call their AA through a toll-free
number to place purchase or redemption orders or obtain Fund and account
information. The AA can also answer inquiries about rates of return and
portfolio composition and holdings, and guide service organizations through
operational details. A Goldman Sachs client can also utilize the SMART/SM/
personal computer software system which allows shareholders to purchase or
redeem shares and also obtain Fund and account information directly.
<PAGE>
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Prospectus relating to FST Preferred Shares dated
May 1, 1996, a copy of which may be obtained without charge from institutions
("Service Organizations") that hold, directly or through an agent, FST Preferred
Shares for the benefit of their customers, or by calling Goldman Sachs at 800-
621-2550 or by writing Goldman Sachs, 4900 Sears Tower, Chicago, Illinois 60606.
2
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page in
Statement of
Additional
Information
------------
<S> <C>
Investment Policies and Practices of the
Funds....................................... 4
Investment Limitations........................... 17
Trustees and Officers............................ 21
The Adviser, Administrator, Distributor
and Transfer Agent.......................... 26
Portfolio Transactions........................... 30
Net Asset Value.................................. 32
Redemptions...................................... 34
Calculation of Yield Quotations.................. 35
Tax Information.................................. 38
Organization and Capitalization.................. 43
Custodian and Subcustodian....................... 49
Independent Accountants.......................... 49
Financial Statements............................. 49
Preferred Administration Plan.................... 50
Appendix A (Description of Securities
Ratings).................................... A-1
</TABLE>
3
<PAGE>
PREFERRED ADMINISTRATION PLAN
The Trust, on behalf of the Funds, has adopted a preferred administration
plan (the "Plan") with respect to the FST Preferred Shares which authorizes the
Funds to compensate Service Organizations for providing certain account
administration services to their customers who are beneficial owners of such
shares. Pursuant to the Plan, the Trust, on behalf of the Fund, will enter into
agreements with Service Organizations which purchase FST Preferred Shares on
behalf of their customers ("Service Agreements"). Under such Service
Agreements the Service Organizations may: (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 FST Preferred Shares,
(c) process customer orders to purchase, redeem and exchange FST Preferred
Shares, and handle the transmission of funds representing the customers'
purchase price or redemption proceeds. As compensation for such services, the
Trust, on behalf of the Funds, will pay each Service Organization a service fee
in an amount up to .10% (on an annualized basis) of the average daily net
assets of the FST Preferred Shares of the Fund attributable to or held in the
name of such Service Organization.
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 the Trust in connection with the investment of fiduciary
funds in FST Preferred Shares. 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 FST Preferred Shares. In addition, under some state
securities laws, banks and other financial institutions purchasing FST Preferred
Shares on behalf of their customers may be required to register as dealers.
The Plan was approved on May 1, 1996 by the sole shareholder of FST
Preferred Shares of the Fund. The Board of Trustees, including a majority of
the Trustees who are not interested persons of the Trust and who have no direct
or indirect financial interest in the operation of such Plan or the related
Service Agreements, initially voted to approve the Plan and Service Agreements
at a meeting called for the purpose of voting on such Plan and Service
Agreements on April 24, 1996. The Plan and Service Agreements will remain in
effect until April 30, 1997 and will continue in effect thereafter only if such
continuance is specifically approved annually by a vote of the Board of Trustees
in the manner described above. The Plan may not be amended to increase
materially the amount to be spent for the services
47
<PAGE>
described therein without approval of the FST Preferred Shareholders of the
Funds, and all material amendments of the Plan must also be approved by the
Board of Trustees in the manner described above. The Plan may be terminated at
any time by a majority of the Board of Trustees as described above or by vote of
a majority of the outstanding FST Preferred Shares of the Funds. The Service
Agreements may be terminated at any time, without payment of any penalty, by
vote of a majority of the Board of Trustees as described above or by a vote of a
majority of the outstanding FST Preferred Shares of the Funds on not more than
sixty (60) days' written notice to any other party to the Service Agreements.
The Service Agreements shall terminate automatically if assigned. As long as the
Plan is in effect, the selection and nomination of those Trustees who are not
interested persons shall be committed to the discretion of the Trust's
Nominating Committee, which consists of all of the non-interested members of the
Board of Trustees. The Board of Trustees has determined that, in its judgment,
there is a reasonable likelihood that the Plan will benefit the Funds and
holders of FST Preferred Shares of the Funds. In the Board of Trustees'
quarterly review of the Plan and Service Agreements, the Board will consider
their continued appropriateness and the level of compensation provided therein.
48
<PAGE>
GOLDMAN SACHS MONEY MARKET TRUST
FINANCIAL SQUARE FUNDS
4900 Sears Tower, Chicago, Illinois 60606
- ----------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION - MAY 1, 1996.
FST SERVICE SHARES
- ----------------------------------------------------------------
Goldman Sachs Money Market Trust (the "Trust") is a no-load, open-end,
management investment company (or mutual fund) which includes the Financial
Square Funds. This Statement of Additional Information relates solely to the
offering of FST Service Shares of Financial Square Prime Obligations Fund
("Prime Obligations Fund"), Financial Square Money Market Plus Fund ("Plus
Fund"), Financial Square Money Market Fund ("Money Market Fund"), Financial
Square Treasury Obligations Fund ("Treasury Obligations Fund"), Financial Square
Government Fund ("Government Fund"), Financial Square Tax-Free Money Market Fund
("Tax-Free Fund") and Financial Square Municipal Money Market Fund ("Municipal
Fund")(individually, a "Fund" and collectively the "Funds").
Goldman Sachs Asset Management ("GSAM" or the "Adviser"), a separate operating
division of Goldman, Sachs & Co. ("Goldman Sachs"), serves as the Funds'
investment adviser and administrator. Goldman Sachs serves as the Funds'
distributor and transfer agent.
The Goldman Sachs Mutual Funds Group ("MFG") offers banks, corporate cash
managers, investment advisers and other institutional investors a family of
professionally-managed mutual funds, including money market, fixed income and
equity funds, and a range of related services. MFG is part of GSAM. 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 clients' interests. As Goldman Sachs clients,
shareholders will be assigned an Account Administrator ("AA"), who is ready to
help shareholders with questions concerning their accounts. During business
hours, service organizations can call their AA through a toll-free number to
place purchase or redemption orders or obtain Fund and account information. The
AA can also answer inquiries about rates of return and portfolio composition and
holdings, and guide service organizations through operational details. A
Goldman Sachs client can also utilize the SMART/SM/ personal computer software
system which allows shareholders to purchase or redeem shares and also obtain
Fund and account information directly.
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the Prospectuses relating to
<PAGE>
FST Service Shares dated May 1, 1996, a copy of which may be obtained without
charge from institutions ("Service Organizations") that hold, directly or
through an agent, FST Service Shares for the benefit of their customers, or by
calling Goldman Sachs at 800-621-2550 or by writing Goldman Sachs, 4900 Sears
Tower, Chicago, Illinois 60606.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page in
Statement of
Additional
Information
------------
<S> <C>
Investment Policies and Practices of the
Funds................................ 4
Investment Limitations.................... 17
Trustees and Officers..................... 21
The Adviser, Administrator, Distributor
and Transfer Agent................... 26
Portfolio Transactions.................... 30
Net Asset Value........................... 32
Redemptions............................... 34
Calculation of Yield Quotations........... 35
Tax Information........................... 37
Organization and Capitalization........... 43
Custodian and Subcustodian................ 49
Independent Accountants................... 49
Financial Statements...................... 49
Service Plan.............................. 50
Appendix A (Description of Securities
Ratings)............................. A-1
</TABLE>
3
<PAGE>
SERVICE PLAN
The Trust, on behalf of each Fund, has adopted a service plan (the "Plan") with
respect to the FST Service Shares which authorizes the Funds to compensate
Service Organizations for providing certain account administration and personal
and account maintenance services to their customers who are beneficial owners of
such shares. Pursuant to the Plan, the Trust, on behalf of each Fund, will
enter into agreements with Service Organizations which purchase FST Service
Shares on behalf of their customers ("Service Agreements"). Under such Service
Agreements the Service Organizations may: (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 FST Service Shares, (c)
answer questions and handle correspondence from customers regarding their
accounts, (d) process customer orders to purchase, redeem and exchange FST
Service Shares, 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 FST Service Shares, (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 the Funds, including obtaining information from the Funds,
working with the Funds to correct errors and resolve problems and providing
statistical and other information to the Funds. As compensation for such
services, the Trust, on behalf of each Fund, will pay each Service Organization
a service fee in an amount up to .50% (on an annualized basis) of the average
daily net assets of the FST Service Shares of each Fund attributable to or held
in the name of such Service Organization for its customers; provided, however,
that the fee paid for personal and account maintenance services shall not exceed
.25% of such average daily net assets.
For the fiscal year ended December 31, 1995, the eleven months ended
December 31,1994, and the fiscal year ended January 31, 1994 with respect to
each Fund, the amount of service fees paid by each Fund then in existence to
Service Organizations was as follows:
<TABLE>
<CAPTION>
Dec. 1995 Dec. 1994 Jan. 1994
--------- --------- ---------
<S> <C> <C> <C>
Prime Obligations Fund/(1)(7)/ $299,892 $115,595 $100,676
Money Market/(2)/ 8,447 - -
Treasury Obligations Fund/(3)(7)/ 584,861 168,982 20,914
Government Fund/(4)(7)/ 39,940 - -
Tax-Free Fund/(5)/ 70,179 1,199 -
Municipal Fund/(6)/ - - -
</TABLE>
47
<PAGE>
_______________
(1) FST Service Share activity commenced January 8, 1992.
(2) Has not commenced operations.
(3) FST Service Share activity commenced October 15, 1991.
(4) Has not commenced operations.
(5) FST Service Share activity commenced September 23, 1994.
(6) Has not commenced operations.
(7) The information presented for the period ended December 31, 1994 reflects
eleven months of operations.
The Trust has adopted the Plan pursuant to Rule 12b-1 under the Investment
Company Act in order to avoid any possibility that payments to the Service
Organizations pursuant to the Service Agreements might violate the Investment
Company Act. Rule 12b-1, which was adopted by the SEC under the Investment
Company Act, regulates the circumstances under which an investment company or
series thereof may bear expenses associated with the distribution of its shares.
In particular, such an investment company or series thereof cannot engage
directly or indirectly in financing any activity which is primarily intended to
result in the sale of shares issued by the company unless it has adopted a plan
pursuant to, and complies with the other requirements of, such Rule. The Trust
believes that fees paid for the services provided in the Plan and described
above are not expenses incurred primarily for effecting the distribution of FST
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, state securities laws on this issue may differ
from the interpretations of federal law expressed herein and banks and other
financial institutions purchasing FST Service Shares on behalf of their
customers may be required to register as dealers pursuant to state law. 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 the Funds, 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 FST Service
Shares automatically pursuant to pre-authorized instructions, for example,
effecting such transactions on a manual basis might affect the size and/or
growth of a Fund. Any such alteration or discontinuance of services could
require the Board of Trustees to consider changing the Funds' method of
operations or providing alternative means of offering FST Service Shares to
customers of
48
<PAGE>
such Service Organizations, in which case the operation of a Fund, its size
and/or its growth might be significantly altered. It is not anticipated,
however, that any alteration of the Funds' 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 the Trust in connection with the investment of fiduciary
funds in FST Service Shares. 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 FST Service Shares.
The Plan was approved on December 27, 1994 by Financial Square Trust as the sole
shareholder of FST Service Shares of each Fund, other than Plus Fund. The Board
of Trustees, including a majority of the Trustees who are not interested persons
of the Trust and who have no direct or indirect financial interest in the
operation of such Plan or the related Service Agreements, most recently voted to
approve the Plan and Service Agreements for each Fund at a meeting called for
the purpose of voting on such Plan and Service Agreements on April 24, 1996.
The Trustees initially voted to approve the Plan as to Plus Fund at a meeting
held on October 24, 1995. The Plan and Service Agreements will remain in effect
until April 30, 1997 and will continue in effect thereafter only if such
continuance is specifically approved annually by a vote of the Board of Trustees
in the manner described above.
The Plan may not be amended to increase materially the amount to be spent for
the services described therein without approval of the FST Service Shareholders
of each Fund, and all material amendments of the Plan must also be approved by
the Board of Trustees in the manner described above. The Plan may be terminated
at any time by a majority of the Board of Trustees as described above or by vote
of a majority of the outstanding FST Service Shares of each Fund. The Service
Agreements may be terminated at any time, without payment of any penalty, by
vote of a majority of the Board of Trustees as described above or by a vote of a
majority of the outstanding FST Service Shares of each Fund on not more than
sixty (60) days' written notice to any other party to the Service Agreements.
The Service Agreements shall terminate automatically if assigned. As long as
the Plan is in effect, the selection and nomination of those Trustees who are
not interested persons shall be committed to the discretion of the Trust's
Nominating Committee, which consists of all of the non-interested members of the
Board of Trustees. The Board of
49
<PAGE>
Trustees has determined that, in its judgment, there is a reasonable likelihood
that the Plan will benefit each Fund and holders of FST Service Shares of such
Fund. In the Board of Trustees' quarterly review of the Plan and Service
Agreements, the Board will consider their continued appropriateness and the
level of compensation provided therein.
50
<PAGE>
- --------------------------------------------------------------------------------
ILA Unitholder Letter/Annual Report
- --------------------------------------------------------------------------------
Dear Unitholders:
We welcome this opportunity to provide you with a summary of the trends and
key events that affected the economy and the Goldman Sachs Institutional Liquid
Assets (ILA) Portfolios in 1995. It has been a positive year for ILA in which
the Portfolios did well compared with their respective IBC/Donoghue benchmarks
while adhering to their conservative investment guidelines.
1995 in Review:
The Fed Changed Direction as the Economy Slowed
As 1995 began, the economy still showed some residual strength, which
prompted the Federal Reserve to increase the Federal funds rate by 50 basis
points to 6.00% last February in what was to be the last of seven rate hikes in
its tightening cycle. Subsequently, after it became clear that the economy had
slowed significantly, with annualized real Gross Domestic Product (GDP) rising
only modestly by 1.7% and 0.7% in the first and second quarters, the Fed
reversed course and lowered rates by 25 basis points in July. Though real GDP
rebounded to 3.2% in the third quarter, some of the increase was attributed to
an acceleration in government spending in anticipation of the budget debate.
With inflation at bay, the Fed eased again in December, bringing the Federal
funds rate to 5.50% by year end.
Historical Yield Curve (LIBOR)
<TABLE>
<CAPTION>
Historical Yield Curve (LIBOR)
Label A B
- -------------------------------------------------
<S> <C> <C> <C>
Label 12/31/95 12/31/94
- -------------------------------------------------
1. Overnight 5.88 5.64
- -------------------------------------------------
2. 1 5.75 6
- -------------------------------------------------
3. 2 5.69 6.25
- -------------------------------------------------
4. 3 5.63 6.5
- -------------------------------------------------
5. 4 5.63 6.69
- -------------------------------------------------
6. 5 5.56 6.81
- -------------------------------------------------
7. 6 5.56 7
- -------------------------------------------------
8. 9 5.44 7.38
- -------------------------------------------------
9. 12 5.44 7.75
- -------------------------------------------------
</TABLE>
Source: Goldman Sachs Fixed Income database, reflecting the London Interbank
Offered Rate (LIBOR).
Although the targeted Federal funds rate begun and ended the year at 5.50%, the
slope of the LIBOR yield curve shifted dramatically during 1995 as the expected
direction of interest rates changed from increasing to declining. By year end,
the curve was inverted and had shifted significantly downward.
Responsive and Agile Strategy Contributed to
Continued Strong Performance
Taxable Sector. Structuring money market portfolios successfully during 1995,
when the Fed shifted policy from tightening to easing, required strict attention
to risk management, as well as to a detailed analysis of market fundamentals and
technicals. Analyzing the implied forward rates and determining the extent to
which the market had priced in too much or too little easing, and then adjusting
the portfolio's weighted average maturities and structures, were equally
important to our strategy. We also kept a vigilant eye on fiscal policy, as the
"start-and-stop" nature of the balanced budget debate and the subsequent
government shutdowns had an impact on the market.
During the second quarter of 1995, we extended the weighted average
maturities of the Financial Square Funds, which caused them to be well
positioned for the Fed's rate decrease in July. Some signs of a modest
resurgence in growth became evident in late summer, and we correctly anticipated
that the Fed would remain on hold until a budget package was passed or growth
showed signs of slowing further. Between late November and mid-December, we
again extended the Funds' weighted average maturities, given our concern about
slowing growth. That extension proved to be the correct move when the Fed eased
for the second time in late December.
Tax-Exempt Sector. Discussions of a flat tax, decreasing short-term municipal
issuance and the change in direction of short-term interest rates made for an
interesting year in tax-exempt money market funds. During 1995, total assets in
tax-exempt money market funds increased by approximately 8%, while supply
decreased by 7.5%. Consequently, short-term tax-exempt securities traded at
approximately 69% of their Treasury counterparts, as compared with 71% in 1994,
which means that, on average, tax-exempts were more expensive in 1995 than in
1994. All of these factors increased the importance of active portfolio
management to achieve competitive performance.
- --------------------------------------------------------------------------------
1
<PAGE>
- --------------------------------------------------------------------------------
ILA Unitholder Letter/Annual Report (continued)
- --------------------------------------------------------------------------------
By varying the ILA Tax-Exempt Portfolios' exposure to variable rate demand
notes (VRDNs) and tax-exempt commercial paper as supply technicals warranted, we
were able to add incremental yield to the Portfolios. In addition, the
Portfolios' performance benefited from extending and maintaining a longer
weighted average maturity for much of the year.
Summary for ILA Portfolios Institutional Units* as of December 31, 1995
<TABLE>
<CAPTION>
Institutional SEC 7-Day SEC 7-Day 30-Day Weighted
Liquid Assets Current Effective Average Average
Portfolios Yield Yield Yield Maturity
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Prime Obligations 5.38% 5.53% 5.42% 60
- -----------------------------------------------------------------------------------
Money Market 5.45% 5.60% 5.47% 68
- -----------------------------------------------------------------------------------
Treasury Obligations 5.28% 5.42% 5.43% 36
- -----------------------------------------------------------------------------------
Government 5.36% 5.50% 5.43% 40
- -----------------------------------------------------------------------------------
Federal 5.46% 5.60% 5.47% 48
- -----------------------------------------------------------------------------------
Treasury Instruments 5.16% 5.29% 5.29% 60
- -----------------------------------------------------------------------------------
Tax-Exempt Diversified 4.14% 4.22% 3.75% 42
- -----------------------------------------------------------------------------------
Tax-Exempt California 4.45% 4.55% 4.00% 47
- -----------------------------------------------------------------------------------
Tax-Exempt New York 4.15% 4.24% 3.65% 36
===================================================================================
</TABLE>
* ILA offers three separate classes of units (Institutional, Administration and
Service), each of which is subject to different fees and expenses that affect
performance and entitle unitholders to different services. The Administration
units and the Service units offer financial institutions the opportunity to
receive a fee for providing administrative support services. The Administration
units pay an additional 0.15% plus 0.10% from the adviser for a total of 0.25%.
The Service units pay an additional 0.40% plus 0.10% from the adviser for a
total of 0.50%. More complete information, including management fees and
expenses, is included in the Portfolios' prospectus or may be obtained by
calling the Goldman Sachs Institutional Funds at 1-800-621-2550.
Domestic Credit Stronger in 1995
Domestic credit quality strengthened in 1995, thanks to an improving
economy, lower interest rates and corporate productivity gains. Positive credit
trends were particularly notable in the capital-intensive industries. Retailers
did not fare as well, as reluctant consumers worried about slower disposable
income growth, job reductions, a higher debt load and uncertainty about the
health of the economy. The rejuvenated U.S. banking industry continued its trend
toward regional and national banking, largely through mergers and acquisitions.
This equity-financed consolidation is positive for the creditworthiness and
efficiency of the U.S. banking system. Merger activity was also prominent in
other industries, supported by higher stock prices and lower interest rates. The
majority of companies used stock, rather than cash, to pay for their
acquisitions, keeping leverage down. Spin-offs and split-ups counterbalanced the
heavy merger activity as some organizations tried to focus more sharply on their
core businesses.
In the tax-exempt arena, the most notable phenomenon was the increase in
short-term paper that came to the market with credit enhancements (i.e., letters
of credit or insurance) as a result of lingering concerns surrounding the Orange
County, California bankruptcy. In addition, improved disclosure from municipal
issuers, spurred by heightened due diligence, made it easier to distinguish
between weak and strong credits.
A Mixed Credit Picture Abroad
Credit quality trends abroad were mixed, with weakness most notable in
financial institutions in France and Japan. Europe's economic recovery slowed
significantly during 1995, causing the Bundesbank to lower short-term interest
rates by year end and other European countries to follow suit. Asset quality
problems persisted for Japanese financial institutions, with continued
uncertainty regarding the methods and timing of a resolution. Credit quality for
the nonfinancial sectors was much more balanced. The Japanese economy has
recently begun to show signs of resuscitation, spurred by the government's
stimulative fiscal policy, a weaker yen (which should help to revive exports),
and corporate cost-cutting and restructuring.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Our outlook for global credit quality for 1996 is cautiously optimistic,
although we remain concerned about consumer indebtedness and reluctance to spend
as well as the timing for recovery of the Japanese banking system.
The Goldman Sachs Credit Department, which includes 74 credit professionals
based in London, Tokyo, Frankfurt and Toronto as well as New York, will continue
to be vigilant in monitoring these and other global developments. Consistent
with the trends outlined previously, new names added to the approved list for
the Portfolios have been primarily U.S. banks and industrial companies, in
contrast to a short while ago when foreign banks dominated our approved names.
Outlook and Strategies for 1996
Fourth-quarter 1995 GDP is estimated to be approximately 1.0%, reflecting
the longer-than-expected government shutdown and very weak Christmas sales.
Economic growth is expected to slow to an anemic 0.5% for the first quarter of
1996, and therefore we believe the Fed is likely to lower short-term interest
rates by another 25 to 50 basis points by midyear before the economy begins to
accelerate again during the second half of the year.
As a result, the ILA Portfolios expect to continue to be managed with
longer average life targets and laddered structures to take advantage of our
near-term expectations of lower rates.
In closing, we thank you for your support. As in the past, we will continue
to look for additional ways to improve our services while seeking to provide you
with competitive performance. We welcome your suggestions and questions, and
look forward to another strong year in 1996.
/s/ Kaysie P. Uniacke
Kaysie P. Uniacke
Portfolio Manager
February 1, 1996
- --------------------------------------------------------------------------------
3
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
ILA Prime Obligations Portfolio
December 31, 1995
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
================================================================================
<S> <C> <C> <C>
Commercial Paper and Corporate Obligations--64.2%
Bank Holding Companies
Bankamerica Corp.
$ 10,000,000 5.56% 04/30/96 $ 9,814,667
Bankers Trust New York Corp.
40,000,000 5.69 02/09/96 39,753,433
Chase Manhattan Corp.
50,000,000 5.57 03/12/96 49,450,736
Corestates Capital Corp.
20,000,000 5.58/(a)/ 04/30/96 19,628,000
10,000,000 5.50 05/13/96 9,796,806
NationsBank Corp.
10,000,000 5.51 04/29/96 9,817,864
10,000,000 5.50 05/13/96 9,796,806
Norwest Corp.
25,000,000 5.75/(a)/ 10/28/96 25,000,000
Business Credit Institutions
General Electric Capital Corp.
20,000,000 5.50 04/18/96 19,670,000
Business Services
International Lease Finance Corp.
35,000,000 5.60 01/29/96 34,847,556
Drugs
Lilly (Eli) & Co.
10,000,000 5.57 04/16/96 9,835,994
Farm Machinery
John Deere Capital Corp.
15,000,000 5.58 04/19/96 14,746,575
Food Products
CPC International Inc.
25,000,000 5.59 04/03/96 24,638,979
15,000,000 5.57 04/22/96 14,740,066
10,000,000 5.42 05/10/96 9,804,278
Life Insurance
Commonwealth Life Insurance Co.
55,000,000 6.03/(a)/ 09/06/96 55,000,000
Pacific Mutual Life Insurance Co.
25,000,000 5.92/(a)/ 03/01/96 25,000,000
Motor Vehicles and Equipment
Ford Motor Credit Corp.
50,000,000 5.51 05/03/96 49,058,708
Personal Credit Institutions
American Express Credit Corp.
$ 25,000,000 5.60% 04/19/96 24,576,111
15,000,000 5.41 05/31/96 14,659,621
Associates Corp. of North America
50,000,000 5.64 02/28/96 49,545,667
Receivable/Asset Financings
Beta Finance Inc.
18,800,000 5.45 05/17/96 18,410,083
Dakota Certificates of Standard Credit Card
Master Trust
25,000,000 5.72 02/09/96 24,845,083
Mckenna Triangle National Corp.
25,000,000 5.57 03/15/96 24,713,764
New Center Asset Trust
50,000,000 5.60 03/15/96 49,424,444
Savings and Loans
World Savings And Loan Association
5,000,000 5.94/(a)/ 12/13/96 5,003,234
Security and Commodity Brokers, Dealers and Services
Bear Stearns Companies, Inc.
50,000,000 5.64 03/01/96 49,530,000
Cargill Financial Services Corp.
25,000,000 5.57 04/17/96 24,586,118
5,000,000 5.58 04/19/96 4,915,525
10,000,000 5.60 04/23/96 9,824,222
10,000,000 5.37 06/03/96 9,770,283
JP Morgan Securities, Inc.
40,000,000 5.94/(b)/ 06/28/96 40,000,000
Merrill Lynch & Co., Inc.
20,000,000 5.62 03/29/96 19,725,244
20,000,000 5.55 04/30/96 19,630,000
Morgan Stanley Group Inc.
40,000,000 5.53/(b)/ 09/03/96 40,000,000
Specialty Cleaners
Colgate Palmolive
10,000,000 5.58 04/15/96 9,837,250
Telecommunications
Ameritech Corporation
47,000,000 5.50 03/22/96 46,418,375
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
- --------------------------------------------------------------------------------
ILA Prime Obligations Portfolio (continued)
December 31, 1995
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
================================================================================
<S> <C> <C> <C>
Commercial Paper and Corporate Obligations (continued)
Telecommunications (continued)
AT&T Corp.
$ 20,000,000 5.52% 03/01/96 $ 19,816,000
30,000,000 5.54 03/28/96 29,598,350
Southwestern Bell Capital Corp.
32,000,000 5.57 04/22/96 31,445,476
- --------------------------------------------------------------------------------
Total Commercial Paper and Corporate
Obligations $996,675,318
- --------------------------------------------------------------------------------
Bank Notes--18.6%
American Express Centurion Bank
$ 10,000,000 5.94%/a/ 04/17/96 $ 10,000,269
Bank of America Illinois
4,000,000 5.70 06/18/96 3,998,388
Boatmen's Bank, Southern Missouri
10,000,000 5.92/a/ 06/12/96 10,000,476
Boatmen's First National Bank, Kansas City
20,000,000 5.73/a/ 02/14/96 19,999,759
FCC National Bank
25,000,000 5.74 03/11/96 25,000,000
15,000,000 5.73 04/23/96 15,000,000
First National Bank of Maryland
25,000,000 5.75 05/01/96 25,000,000
25,000,000 5.92/a/ 10/02/96 24,994,365
First Union National Bank of North Carolina
15,000,000 5.76 02/02/96 15,000,000
Household Bank FSB
50,000,000 5.92/a/ 08/02/96 50,000,000
NationsBank of Texas, N.A.
20,000,000 5.65 05/03/96 20,000,000
NBD Bank of Detroit, N.A.
14,000,000 5.65 05/03/96 13,999,794
Seattle First National Bank
10,000,000 5.83/a/ 11/08/96 9,992,418
Southtrust Bank of Alabama, N.A.
20,000,000 5.92/a/ 10/02/96 19,993,989
25,000,000 5.69/a/ 10/04/96 24,992,554
- --------------------------------------------------------------------------------
Total Bank Notes $287,972,012
- --------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
================================================================================
<S> <C> <C> <C>
Bankers' Acceptances--1.6%
First Union National Bank of North Carolina
$20,000,000 5.57% 04/15/96 $19,675,083
5,000,000 5.57 04/17/96 4,917,224
- --------------------------------------------------------------------------------
Total Bankers' Acceptances $24,592,307
- --------------------------------------------------------------------------------
Certificates of Deposit--1.6%
Natwest Bank, Delaware
$ 25,000,000 5.70% 03/12/96 $25,000,000
- --------------------------------------------------------------------------------
Total Certificates of Deposit $25,000,000
- --------------------------------------------------------------------------------
Repurchase Agreements--14.3%
Lehman Government Securities, Inc., dated 12/12/95, repurchase price
$25,353,125 (FHLMC:$19,717,134, 6.00%-9.00%, 07/01/06-05/01/09;
FNMA:$6,153,113, 7.64%, 05/01/19)
$ 25,000,000 5.65% 03/11/96 $ 25,000,000
Morgan Stanley & Co., Inc., dated 12/12/95, repurchase price
$76,055,625 (FHLMC:$62,309,985, 6.00%, 11/01/98-12/01/98;
FNMA:$15,684,906, 8.00%-8.50%, 09/01/23-04/01/25)
75,000,000 5.63 03/11/96 75,000,000
Joint Repurchase Agreement Account
122,100,000 5.94 01/02/96 122,100,000
- --------------------------------------------------------------------------------
Total Repurchase Agreements $222,100,000
- --------------------------------------------------------------------------------
Total Investments $1,556,339,637/c/
================================================================================
</TABLE>
/a/Variable rate security-base index is one of the following:
U.S. Treasury Bill
One or three month LIBOR
One month commercial paper
Federal Funds
Prime lending rate
/b/Variable rate master note-base index is LIBOR.
/c/The amount stated also represents aggregate cost for federal
income tax purposes.
The percentages shown for each investment category reflect 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>
Statement of Investments
- --------------------------------------------------------------------------------
ILA Money Market Portfolio
December 31, 1995
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
================================================================================
<S> <C> <C> <C>
Commercial Paper and Corporate Obligations--32.7%
Bank Holding Companies
Bankers Trust New York Corp.
$ 20,000,000 5.69% 02/09/96 $ 19,876,717
Business Credit Institutions
General Electric Capital Corp.
5,000,000 5.57 04/15/96 4,918,771
15,000,000 5.50 04/18/96 14,752,500
Electric Companies
Enel Commercial Paper, Inc.
9,692,000 5.64 04/25/96 9,517,382
9,865,000 5.52 05/09/96 9,669,870
Foreign Banks
BBL North America, Inc.
10,000,000 5.63 04/18/96 9,831,250
Generale Bank, Inc.
5,000,000 5.61 04/24/96 4,911,175
IMI Funding Corp., USA
20,000,000 5.47 06/03/96 19,532,011
Internationale Nederlanden Funding Corp.
15,000,000 5.58 04/12/96 14,762,850
Royal Bank of Canada
18,000,000 5.59 04/22/96 17,686,960
5,000,000 5.46 05/08/96 4,902,933
Svenska Handelsbanken, Inc.
5,000,000 5.60 04/17/96 4,916,778
Toronto Dominion Holdings, U.S.A.
20,000,000 5.60 04/22/96 19,651,556
Life Insurance
Commonwealth Life Insurance Co.
25,000,000 6.03/a/ 09/06/96 25,000,000
Receivable/Asset Financings
New Center Asset Trust
25,000,000 5.60 03/15/96 24,712,222
Security and Commodity Brokers, Dealers and Services
Merrill Lynch & Co., Inc.
20,000,000 5.55 04/30/96 19,630,000
Telecommunications
AT&T Corp.
25,000,000 5.52 03/01/96 24,770,000
- --------------------------------------------------------------------------------
Total Commercial Paper and Corporate Obligations $249,042,975
================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
================================================================================
<S> <C> <C> <C>
Bank Notes--20.1%
American Express Centurion Bank
$ 7,700,000 5.94%/a/ 04/17/96 $ 7,700,207
Boatmen's Bank, Southern Missouri
5,000,000 5.92/a/ 06/12/96 5,000,238
Boatmen's First National Bank, Kansas City
15,000,000 5.73/a/ 02/14/96 14,999,819
Colorado National Bank
25,000,000 5.91/a/ 06/03/96 25,000,000
FCC National Bank
25,000,000 5.67 03/18/96 25,000,000
First Union National Bank of North Carolina
20,000,000 5.76 02/02/96 20,000,000
NationsBank of Texas, N.A.
20,000,000 5.65 05/03/96 20,000,000
PNC Bank, N.A.
20,000,000 5.65/a/ 09/30/96 19,988,150
Seattle First National Bank
15,000,000 5.83/a/ 11/08/96 14,988,627
- --------------------------------------------------------------------------------
Total Bank Notes $152,677,041
- --------------------------------------------------------------------------------
Bankers' Acceptances--0.6%
NationsBank of Texas, N.A.
$ 5,000,000 5.50% 05/28/96 $ 4,886,944
- --------------------------------------------------------------------------------
Total Bankers' Acceptances $ 4,886,944
- --------------------------------------------------------------------------------
Certificates of Deposit - Foreign Eurodollar--9.9%
Bayerische Hypotheken, Germany
$ 15,000,000 5.65% 05/16/96 $ 15,001,266
Deutsche Bank, London
20,000,000 5.73 04/23/96 20,000,610
Dresdner Bank, London
5,000,000 5.74 04/22/96 5,000,151
Generale Bank, London
10,000,000 5.76 04/23/96 10,000,458
Landesbank Hessen-Thueringen Girozentrale, London
20,000,000 5.73 04/23/96 19,997,448
Mitsubishi Bank Ltd., London
5,000,000 5.83 03/08/96 5,000,140
- --------------------------------------------------------------------------------
Total Certificates of Deposit - Foreign Eurodollar $ 75,000,073
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements
6
<PAGE>
- --------------------------------------------------------------------------------
ILA Money Market Portfolio (continued)
December 31, 1995
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
================================================================================
<S> <C> <C> <C>
Certificates of Deposit - Yankeedollar--8.5%
Industrial Bank of Japan Ltd., New York
$ 10,000,000 6.03% 02/23/96 $10,001,353
Mitsubishi Bank Ltd., New York
25,000,000 5.94 03/04/96 25,001,683
Sanwa Bank Ltd., New York
25,000,000 5.79 03/12/96 25,000,486
5,000,000 5.71 06/14/96 5,000,223
- --------------------------------------------------------------------------------
Total Certificates of Deposit - Yankeedollar $65,003,745
- --------------------------------------------------------------------------------
Sovereign Credit--8.0%
Kingdom of Sweden
$ 20,000,000 5.59% 04/22/96 $19,652,178
New South Wales Treasury Corp.
25,000,000 5.57 02/09/96 24,849,146
Province of Quebec
10,000,000 5.52 05/01/96 9,814,467
7,000,000 5.50 05/14/96 6,856,694
- --------------------------------------------------------------------------------
Total Sovereign Credit $61,172,485
- --------------------------------------------------------------------------------
Taxable Municipal Notes--3.8%
Florida Housing Finance Authority
$ 29,200,000 5.86%/a/ 01/07/96 $29,200,000
- --------------------------------------------------------------------------------
Total Taxable Municipal Notes $29,200,000
- --------------------------------------------------------------------------------
Repurchase Agreements--16.6%
Lehman Government Securities, Inc., dated 12/12/95, repurchase price
$15,211,875 (FHLMC:$15,532,410, 6.00%-7.50%, 05/01/09-12/01/25)
$ 15,000,000 5.65% 03/11/96 $ 15,000,000
Morgan Stanley & Co., Inc., dated 12/12/95, repurchase price
$25,351,875 (FNMA:$25,835,553, 7.00%-8.00%, 06/01/24-04/01/25)
25,000,000 5.63 03/11/96 25,000,000
Joint Repurchase Agreement Account
86,300,000 5.94 01/02/96 86,300,000
- --------------------------------------------------------------------------------
Total Repurchase Agreements $126,300,000
- --------------------------------------------------------------------------------
Total Investments $763,283,263/b/
================================================================================
</TABLE>
/a/ Variable rate security-base index is one of the following:
U.S. Treasury Bill
One or three month LIBOR
One month commercial paper
Federal Funds
Prime lending rate
/b/ The amount stated also represents aggregate cost for federal
income tax purposes.
The percentages shown for each investment category reflect 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.
7
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
ILA Government Portfolio
December 31, 1995
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
================================================================================
<S> <C> <C> <C>
U.S. Government Agency Obligations--41.6%
Federal Farm Credit Bank
$ 45,000,000 5.54% 02/09/96 $44,732,850
17,000,000 5.62/a/ 05/09/96 16,997,693
Federal Home Loan Mortgage Corp.
25,000,000 5.75/a/ 06/03/96 24,977,523
Federal National Mortgage Association
15,000,000 5.61 01/18/96 14,960,263
67,260,000 5.46 04/23/96 66,107,276
25,000,000 5.47 04/30/96 24,544,167
15,000,000 5.64 10/02/96 14,994,245
10,000,000 5.68 10/07/96 9,999,072
25,000,000 5.90/a/ 11/15/96 24,984,365
50,000,000 5.76/a/ 12/16/96 49,958,194
- --------------------------------------------------------------------------------
Total U.S. Government Agency Obligations $292,255,648
- --------------------------------------------------------------------------------
U.S. Treasury Obligations--1.4%
United States Treasury Notes
$ 10,000,000 6.00% 07/01/96 $10,015,909
- --------------------------------------------------------------------------------
Total U.S. Treasury Obligations $10,015,909
- --------------------------------------------------------------------------------
Repurchase Agreements--57.3%
CS First Boston Corp., dated 12/05/95, repurchase price $30,425,250
(FNMA:$30,972,121, 6.39%-7.04%, 06/01/29-08/01/34)
$ 30,000,000 5.67% 03/04/96 $ 30,000,000
Daiwa Securities, dated 12/29/95, repurchase price $25,016,389 (U.S.
Treasury Notes:$22,749,771, 4.63%-7.75%, 02/29/96-08/15/02;
U.S.Treasury Bills:$3,250,622, 05/02/96-06/27/96)
25,000,000 5.90 01/02/96 25,000,000
Lehman Government Securities, Inc., dated 12/12/95, repurchase price
$30,423,750 (FHLMC:$14,770,650, 6.00%, 05/01/09;
FNMA:$16,318,398, 7.00%-8.00%, 03/01/07-08/01/23)
30,000,000 5.65 03/11/96 30,000,000
Nomura Securities International Inc., dated 12/29/95, repurchase price
$100,071,111 (FHLMC:$27,479,660, 7.00%-8.00%, 08/01/25-09/01/25;
FNMA:$75,672,915, 6.50%-7.00%, 03/01/24-12/01/25)
100,000,000 6.40 01/02/96 100,000,000
Salomon Brothers Inc., dated 12/29/95, repurchase price $25,016,528
(U.S. Treasury Stripped Securities:$5,202,481, 11/15/97-05/15/02;
FHLB:$20,733,873, 6.30%, 08/24/05)
25,000,000 5.95 01/02/96 25,000,000
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
================================================================================
<S> <C> <C> <C>
Repurchase Agreements (continued)
Smith Barney Inc., dated 12/28/95, repurchase price $25,076,000
(FNMA:$25,964,803, 6.50%-7.00%, 01/01/11-01/01/26)
$ 25,000,000 5.76% 01/16/96 $ 25,000,000
Joint Repurchase Agreement Account
168,400,000 5.94 01/02/96 168,400,000
- --------------------------------------------------------------------------------
Total Repurchase Agreements $403,400,000
- --------------------------------------------------------------------------------
Total Investments $705,671,557/b/
================================================================================
</TABLE>
/a/Variable rate security--base index is one of the following:
Federal Funds
Prime lending rate
One month LIBOR
/b/The amount stated also represents aggregate cost for federal
income tax purposes.
The percentages shown for each investment category reflect 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.
8
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
ILA Treasury Obligations Portfolio
December 31, 1995
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
================================================================================
<S> <C> <C> <C>
U.S. Treasury Obligations--18.0%
United States Treasury Bills
$ 35,000,000 5.28% 05/23/96 $ 34,265,933
30,000,000 5.32 05/30/96 29,335,000
95,000,000 5.23 07/25/96 92,156,914
United States Treasury Notes
10,000,000 6.13 07/31/96 10,030,199
- --------------------------------------------------------------------------------
Total U.S. Treasury Obligations $165,788,046
- --------------------------------------------------------------------------------
Repurchase Agreements--82.4%
Bankers Trust Securities Corp., dated 12/29/95, repurchase price
$35,022,556 (U.S.Treasury Note:$35,675,451, 6.25%, 05/31/00)
$ 35,000,000 5.80% 01/02/96 $35,000,000
Chase Manhattan Securities, dated 12/29/95, repurchase price
$35,022,556 (U.S.Treasury Notes: $35,703,985, 7.50%,
12/31/96-01/31/97)
35,000,000 5.80 01/02/96 35,000,000
CS First Boston Corp., dated 12/29/95, repurchase price
$35,022,556 (U.S. Treasury Bill:$35,174,093, 10/17/96)
35,000,000 5.80 01/02/96 35,000,000
Daiwa Securities, dated 12/29/95, repurchase price $35,022,944
(U.S. Treasury Notes:$30,890,152, 5.75%-8.88%, 10/31/97-05/15/00;
U.S. Treasury Bills: $4,110,454, 03/07/96-06/27/96)
35,000,000 5.90 01/02/96 35,000,000
Goldman, Sachs & Co., dated 12/29/95, repurchase price $35,022,750
(U.S. Treasury Note: $35,700,336, 5.63%, 11/30/00)
35,000,000 5.85 01/02/96 35,000,000
JP Morgan Securities, Inc., dated 12/29/95, repurchase price
$35,023,333 (U.S.Treasury Note:$35,715,364, 7.75%, 01/31/00)
35,000,000 6.00 01/02/96 35,000,000
Merrill Lynch Government Securities, Inc., dated 12/29/95,
repurchase price $35,022,361 (U.S. Treasury Stripped
Securities:$35,700,630, 05/15/05-08/15/05)
35,000,000 5.75 01/02/96 35,000,000
Nomura Securities, dated 12/29/95, repurchase price $35,023,333
(U.S. Treasury Notes:$35,711,239, 5.63%, 06/30/97)
35,000,000 6.00 01/02/96 35,000,000
Sanwa Securities, dated 12/29/95, repurchase price $35,022,750
(U.S. Treasury Notes:$35,712,510, 5.88%-6.50%, 07/31/97-08/15/97)
35,000,000 5.85 01/02/96 35,000,000
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
================================================================================
<S> <C> <C> <C>
Repurchase Agreements (continued)
UBS Securities Inc., dated 12/29/95, repurchase price $35,022,750 (U.S.
Treasury Notes:$35,745,910, 5.13%-6.50%, 09/30/96-12/31/98)
$ 35,000,000 5.85% 01/02/96 $ 35,000,000
Joint Repurchase Agreement Account
411,600,000 5.94 01/02/96 411,600,000
- --------------------------------------------------------------------------------
Total Repurchase Agreements $761,600,000
- --------------------------------------------------------------------------------
Total Investments $927,388,046/(a)/
- --------------------------------------------------------------------------------
</TABLE>
/(a)/The amount stated also represents aggregate cost for federal
income tax purposes.
The percentages shown for each investment category reflect 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.
9
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
ILA Treasury Instruments Portfolio
December 31, 1995
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
================================================================================
<S> <C> <C> <C>
U.S. Treasury Obligations--99.2%
United States Treasury Bills
$ 4,600,000 5.25% 01/11/96 $ 4,593,298
8,900,000 5.30 01/11/96 8,886,897
85,000,000 5.30 01/11/96 84,874,979
94,800,000 5.34 01/11/96 94,659,512
3,500,000 4.29 02/08/96 3,484,169
75,000,000 5.38 02/15/96 74,496,094
65,000,000 4.96 05/02/96 63,908,524
United States Treasury Notes
56,469,000 9.25 01/16/96 56,545,443
33,000,000 4.00 01/31/96 32,966,044
25,000,000 4.63 02/15/96 24,989,238
25,000,000 7.88 02/15/96 25,084,303
70,724,000 4.63 02/29/96 70,650,656
50,000,000 7.50 02/29/96 50,178,775
100,000,000 9.38 04/15/96 101,140,159
75,000,000 7.63 04/30/96 75,526,002
- --------------------------------------------------------------------------------
Total U.S. Treasury Obligations $771,984,093
- --------------------------------------------------------------------------------
Total Investments $771,984,093/(a)/
- --------------------------------------------------------------------------------
</TABLE>
/(a)/The amount stated also represents aggregate cost for federal
income tax purposes.
The percentages shown for each investment category reflect 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.
10
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
ILA Federal Portfolio
December 31, 1995
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
================================================================================
<S> <C> <C> <C>
U.S. Government Agency Obligations--102.5%
Federal Farm Credit Bank
$ 25,000,000 5.46% 01/26/96 $ 24,905,208
24,000,000 5.83/a/ 01/26/96 23,998,459
8,900,000 5.55 02/01/96 8,857,465
125,000,000 5.71/b/ 02/01/96 125,000,000
15,000,000 5.40 02/05/96 14,921,250
15,000,000 5.54 02/05/96 14,919,208
20,000,000 5.54 02/09/96 19,879,967
10,600,000 5.38 02/21/96 10,519,210
24,000,000 5.70/a/ 03/21/96 23,999,180
12,000,000 5.32 03/22/96 11,856,360
50,000,000 5.62/a/ 05/09/96 49,993,213
15,000,000 5.34 05/23/96 14,681,825
30,000,000 5.33 05/28/96 29,342,633
200,000,000 5.85/a/ 09/26/96 199,872,115
85,000,000 5.85/a/ 10/10/96 84,931,536
45,000,000 5.84/a/ 11/08/96 44,957,351
50,000,000 5.60/a/ 11/27/96 49,954,643
Federal Home Loan Bank
3,500,000 5.63 01/03/96 3,498,905
50,000,000 5.53 01/11/96 49,923,194
49,635,000 5.59 01/17/96 49,511,685
50,000,000 5.48 01/18/96 49,870,611
50,000,000 5.48 01/23/96 49,832,556
50,000,000 5.53 01/29/96 49,784,944
99,495,000 5.59 01/30/96 99,046,969
33,500,000 5.56 02/01/96 33,339,609
2,400,000 5.45 02/02/96 2,388,373
57,000,000 5.56 02/02/96 56,718,293
30,000,000 5.52 02/08/96 29,825,200
25,000,000 5.54 02/08/96 24,853,806
80,000,000 5.55 02/13/96 79,469,667
63,185,000 5.53 02/20/96 62,699,704
34,500,000 5.51 02/22/96 34,225,418
75,000,000 5.53 02/28/96 74,331,792
16,415,000 5.35 03/01/96 16,268,633
5,300,000 5.52 03/01/96 5,251,240
34,300,000 5.30 03/20/96 33,901,072
11,950,000 5.32 03/20/96 11,810,490
21,300,000 5.43 03/29/96 21,017,278
40,000,000 5.40 04/09/96 39,406,000
41,155,000 5.47 04/15/96 40,498,406
- --------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
================================================================================
<S> <C> <C> <C>
U.S. Government Agency Obligations (continued)
Federal Home Loan Bank (continued)
$51,710,000 5.46% 04/22/96 $50,831,620
32,975,000 5.45 04/25/96 32,400,388
38,000,000 5.45 04/30/96 37,309,667
35,000,000 5.45 05/02/96 34,353,569
39,495,000 5.34 05/29/96 38,622,095
45,000,000 5.70/a/ 08/05/96 44,960,246
100,000,000 5.59/a/ 09/25/96 99,953,847
50,000,000 5.50/a/ 01/03/97 49,953,785
Tennessee Valley Authority
27,100,000 5.59 01/08/96 27,070,544
50,000,000 5.59 01/10/96 49,930,125
80,000,000 5.62 01/22/96 79,737,733
80,000,000 5.62 01/23/96 79,725,245
40,000,000 5.55 02/02/96 39,802,667
25,000,000 5.55 02/06/96 24,861,250
50,000,000 5.55 02/09/96 49,699,375
- --------------------------------------------------------------------------------
Total U.S. Government Agency Obligations $2,409,275,624
- --------------------------------------------------------------------------------
Total Investments $2,409,275,624/c/
- --------------------------------------------------------------------------------
</TABLE>
/a/Variable rate security--base index is one of the following:
U.S. Treasury Bill
One or three month LIBOR
Federal Funds
Prime lending rate
/b/Variable rate master note--base index is Federal Funds.
/c/The amount stated also represents aggregate cost for federal
income tax purposes.
The percentages shown for each investment category reflect 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.
11
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
ILA Tax-Exempt Diversified Portfolio
December 31, 1995
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
================================================================================
<S> <C> <C> <C>
Alabama--6.2%
City of Birmingham, AL Medical Clinic VRDN(A-1+)
$ 7,400,000 6.10% 01/01/96 $ 7,400,000
Columbia, AL IDB PCRB 1995 Series B VRDN (Alabama
Power Company)(A-1/MIG1)
18,300,000 6.00 01/01/96 18,300,000
Columbia, AL IDB PCRB Series 1995 E VRDN (Alabama
Power Company)(A-1/MIG1)
9,400,000 5.90 01/01/96 9,400,000
Gadsden City, AL IDB Series 1994 for Alabama
Power VRDN(A-1/MIG1)
5,750,000 6.00 01/01/96 5,750,000
Homewood, AL VRDN for Samford University (Dai-Ichi
Kangyo LOC)(MIG1)/(b)/
10,000,000 5.25 01/07/96 10,000,000
Jefferson County, AL MF Hsg. for Hickory Knolls Project
VRDN (Amsouth Bank LOC)(P-1)
4,165,000 5.20 01/07/96 4,165,000
Jefferson County, AL Sewer and Water RB (Bayerische
Landesbank Girozentrale LOC)(A-1+/P-1)/(b)/
19,300,000 5.20 01/07/96 19,300,000
Mobile County, AL IDA PCR for M+T Chemicals VRDN
(Bankers Trust LOC)(Aa2)
3,000,000 5.12 01/07/96 3,000,000
Mobile, AL IDA PCRB for Alabama Power Co.
VRDN(A-1/MIG1)
2,100,000 6.00 01/01/96 2,100,000
Mobile, AL IDA PCRB for Alabama Power Series 1993 A
VRDN(A-1/MIG1)
8,600,000 5.00 01/07/96 8,600,000
Parrish, AL IDA PCRB for Alabama Power
VRDN(A-1/MIG1)
1,650,000 6.00 01/01/96 1,650,000
- --------------------------------------------------------------------------------
$ 89,665,000
- --------------------------------------------------------------------------------
Alaska--0.4%
City of Valdez, AK Marine RB 1994 Series B
VRDN(AAA/MIG1)
$ 5,000,000 5.90% 01/01/96 $ 5,000,000
- --------------------------------------------------------------------------------
Arizona--0.8%
Salt River Project Agricultural and Power District CP(A-1+/P-1)
$10,800,000 3.80% 01/29/96 $ 10,800,000
- --------------------------------------------------------------------------------
Arkansas--0.7%
Crossett, AR PCRB for Georgia Pacific Corp. VRDN
(Trust Company Bank LOC)(Aa3)
$ 9,500,000 5.15% 01/07/96 $ 9,500,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
================================================================================
<S> <C> <C> <C>
California--7.1%
California School Cash Reserves Authority Series A(SP1+/MIG1)
$ 5,000,000 4.75% 07/03/96 $ 5,024,213
City of Fremont MF Hsg. VRDN Series 1985 D-Creekside
Village Apartment Project (Fuji Bank LOC)(MIG1)
4,000,000 5.55 01/07/96 4,000,000
Los Angeles County TRANS (Bank of America/Credit Suisse/
Morgan Guaranty Trust Co./Swiss Bank Corp./UBS/
Westdeutsche Landesbank Girozentrale LOC)(SP-1/MIG1)
47,190,000 4.50 07/01/96 47,345,859
Los Angeles County, VRDN MF Hsg. for Valencia Village
Series 1994 C (Industrial Bank of Japan LOC)(A-1+)
5,800,000 5.35 01/07/96 5,800,000
State of California RAWS Series C (Bank of America/Banque
Nationale de Paris/Bank of Nova Scotia/Chemical/CIBC/
Citibank/Morgan Guaranty Trust Co./Credit Suisse/National
Westminster Bank/Societe General/Swiss Bank Corp./
Sumitomo Bank Ltd./Toronto Dominion Bank /Westdeutsche
Landesbank Girozentrale LOC)(A-1/MIG1)
40,000,000 5.75 04/25/96 40,130,304
- --------------------------------------------------------------------------------
$102,300,376
- --------------------------------------------------------------------------------
Colorado--0.3%
Colorado Student Obligation Bond Authority Series 1990 C
VRDN (Fuji Bank LOC)(MIG1)
$ 4,900,000 5.35% 01/07/96 $ 4,900,000
- --------------------------------------------------------------------------------
Connecticut--1.0%
State of Connecticut GO VRDN Economic Recovery Notes Series B
(A-1+/MIG1)
$ 600,000 5.10% 01/07/96 $ 600,000
State of Connecticut Series 1993 Unemployment RB VRDN
(Mitsubishi Bank LOC)(A-1+/MIG1)/(b)/
14,410,000 5.40 01/07/96 14,410,000
- --------------------------------------------------------------------------------
$ 15,010,000
- --------------------------------------------------------------------------------
District of Columbia--0.9%
District of Columbia VRDN ACES-Series 1988 B-E
Georgetown University(A-1+/MIG1)
$ 1,500,000 5.65% 01/07/96 $ 1,500,000
3,875,000 5.65 01/07/96 3,875,000
1,100,000 5.65 01/07/96 1,100,000
HFA MF Hsg. for Mclean Gardens South Apartments VRDN
(Sumitomo Bank LOC)(MIG1)
7,000,000 5.30 01/07/96 7,000,000
- --------------------------------------------------------------------------------
$ 13,475,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
ILA Tax-Exempt Diversified Portfolio (continued)
December 31, 1995
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
================================================================================
<S> <C> <C> <C>
Florida--3.8%
Brevard County, FL IDA for Lockheed Space Company Project
VRDN (Bankers Trust LOC)(Aa2)
$ 4,000,000 5.25% 01/07/96 $ 4,000,000
City of Jacksonville, FL CP Notes Series A(A-1/P-1)
3,000,000 3.55 02/07/96 3,000,000
Florida Local Government Pooled CP Notes (First Union
National Bank of Florida LOC)(A-1+/P-1)
5,000,000 3.75 01/30/96 5,000,000
2,145,000 3.75 01/31/96 2,145,000
13,352,735 3.65 02/13/96 13,352,735
Orange County, FL Health Facilities Authority CP (MBIA)(A-1/MIG1)
1,500,000 3.55 01/26/96 1,500,000
1,500,000 3.50 01/31/96 1,500,000
10,000,000 3.65 01/31/96 10,000,000
1,200,000 3.55 02/07/96 1,200,000
Putnam County Development Authority for Seminole Electric H-1
VRDN (CFC)(A-1/MIG1) /(b)/
13,050,000 4.65 01/07/96 13,050,000
- --------------------------------------------------------------------------------
$ 54,747,735
- --------------------------------------------------------------------------------
Georgia--15.5%
Albany Dougherty, GA PCRB for Philip Morris Company
VRDN(A-1/P-1)
$ 8,400,000 5.15% 01/07/96 $ 8,400,000
Albany Dougherty, GA PCRB Series 1991 for Georgia Power Co.
VRDN(A-1/P-1)
2,120,000 5.15 01/07/96 2,120,000
Burke County, GA PCR for Georgia Power Co. VRDN(A-1+/MIG1)
32,985,000 6.00 01/01/96/(b)/ 32,985,000
8,800,000 6.10 01/01/96 8,800,000
12,425,000 5.15 01/07/96 12,425,000
Burke County, GA PCRB for Georgia Power Company Vogtle
Project VRDN(A-1/MIG1)
1,300,000 6.00 01/01/96 1,300,000
Cobb County, GA Institute of Nuclear Power Operations Inc.
for Georgia Power Co. VRDN(Aa3)
4,590,000 5.15 01/07/96 4,590,000
Cobb County, GA Power Operations Inc. VRDN (Trust
Company Bank)(AA-)
2,330,000 5.15 01/07/96 2,330,000
Columbus, GA Hospital Authority for St.
Francis Hospital Project Series 1994 VRDN (Trust
Company Bank LOC)(MIG1)/(b)/
7,750,000 5.15 01/07/96 7,750,000
- --------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
================================================================================
<S> <C> <C> <C>
Georgia (continued)
Dekalb County GA, IDA for Siemens Energy and Automation Inc.
VRDN(P-1)
$ 3,750,000 5.20% 01/07/96 $ 3,750,000
Fulco, GA Hospital Authority for Piedmont Hospital VRDN
(Trust Company Bank LOC)(A-1+)/(a)/
5,815,000 5.15 01/07/96 5,815,000
Henry County, GA IDA PCRB for Georgia Pacific Corp. VRDN
(Trust Company Bank LOC)(Aa3)
4,000,000 5.15 01/07/96 4,000,000
Monroe County, GA for Georgia Power Co. VRDN(A-1/MIG1)
2,400,000 6.00 01/01/96 2,400,000
Municipal Electric Authority of Georgia 1994 Series E
(A-1/MIG1)
13,000,000 3.80 01/03/96 13,000,000
20,000,000 5.15 01/03/96 20,000,000
Municipal Electric Authority of Georgia Short Term BANS
CP(A-1+/P-1)
12,000,000 3.85 01/03/96 12,000,000
10,000,000 5.25 01/03/96 10,000,000
8,000,000 3.80 01/10/96 8,000,000
4,000,000 3.85 01/10/96 4,000,000
7,830,000 4.05 01/10/96 7,830,000
13,920,000 4.55 01/10/96 13,920,000
19,150,000 4.00 01/18/96 19,150,000
Municipal Electric Authority of Georgia Short Term BANS CP
Series 1994 C (A-1/MIG1)
7,000,000 3.80 01/03/96 7,000,000
Municipal Electric Authority of Georgia Subordinate General
Resolution Series C (A-1+/P-1)
2,900,000 3.80 01/10/96 2,900,000
4,200,000 4.90 03/04/96 4,204,421
Savannah, GA Economic Development Authority PCR for
Savannah Electric & Power VRDN(A-1/MIG1)
4,085,000 5.15 01/07/96 4,085,000
- --------------------------------------------------------------------------------
$222,754,421
- --------------------------------------------------------------------------------
Hawaii--0.2%
Hawaii Housing Finance and Development Authority VRDN
(Federal Home Loan Bank)(A-1+)
$ 2,200,000 5.15% 01/07/96 $ 2,200,000
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
ILA Tax-Exempt Diversified Portfolio (continued)
December 31, 1995
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
================================================================================
<S> <C> <C> <C>
Illinois--5.5%
Belleville, IL IDA for Weyerhaeuser Company Series 1993
VRDN(A-1)
$ 1,800,000 5.20% 01/07/96 $ 1,800,000
Illinois Health Facilities Authority Series 1993 Resurrection
Healthcare System VRDN(A-1/MIG1)
19,100,000 6.10 01/01/96 19,100,000
13,200,000 5.20 01/07/96 13,200,000
Illinois Health Facilities Authority VRDN Series 1985 C and D
Revolving Fund Pooled Finance Program (First National
Bank of Chicago LOC)(A-1/MIG1)
20,800,000 5.20 01/07/96 20,800,000
Illinois Health Facility Authority VRDN for Elmhurst
Memorial Hospital(MIG1)
7,710,000 6.50 01/01/96 7,710,000
Joliet Regional Port Authority for Exxon Corp. VRDN(A-1+/P-1)
3,300,000 5.90 01/01/96 3,300,000
Sauget Village of IL PCRB VRDN Series 1993(P-1)
9,335,000 5.10 01/07/96 9,335,000
Springfield, IL for Springfield Memorial Hospital VRDN
(Kredietbank LOC)(MIG-1)
4,130,000 5.60 01/07/96 4,130,000
- --------------------------------------------------------------------------------
$ 79,375,000
- --------------------------------------------------------------------------------
Indiana--3.6%
Fort Wayne Parkview Memorial Hospital VRDN
Series 1985 B,C & D (Fuji Bank LOC)(MIG-1)
$ 7,655,000 5.60% 01/07/96 $ 7,655,000
12,500,000 5.60 01/07/96(a) 12,500,000
Gary, IN CP Notes for U.S. Steel Corp. (Norinchukin Bank LOC)
(A-1+/P-1)
20,000,000 4.05 01/31/96 20,000,000
Indiana Health Facility for Methodist Hospital VRDN
(A-1+/MIG1)/(a)/
6,000,000 5.15 01/07/96 6,000,000
Indiana Hospital Equipment Financing Authority VRDN
Series 1985 A (MBIA)(A-1/MIG1)
1,175,000 5.60 01/07/96 1,175,000
Schereville Economic Development VRDN Series 1983 Avery
International Corp. Project (Bankers Trust LOC)(Aa2)
4,000,000 5.13 01/07/96 4,000,000
- --------------------------------------------------------------------------------
$ 51,330,000
- --------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
================================================================================
<S> <C> <C> <C>
Iowa--1.5%
Louisa County, IA PCRB for Midwest Power Systems
VRDN(A-1/MIG1)/(b)/
$ 15,000,000 5.25% 01/07/96 $ 15,000,000
Muscatine County, IA for Monsanto Corp. VRDN(P-1)
1,000,000 5.15 01/07/96 1,000,000
Salix, IA PCRB for Midwest Power Systems Inc. VRDN
(A-1/MIG-1)/(a)/
5,000,000 5.05 01/07/96 5,000,000
- --------------------------------------------------------------------------------
$ 21,000,000
- --------------------------------------------------------------------------------
Kentucky--2.1%
City of Calvert, KY Air Products and Chemicals Inc. Project
VRDN(A-1)
$ 1,000,000 5.15% 01/07/96 $ 1,000,000
Mason County, KY Variable/Fixed Rate PCRB Pooled for East
Kentucky Power Facility VRDN (CFC)(A-1+/Aa3)
28,650,000 4.65 01/07/96 28,650,000
- --------------------------------------------------------------------------------
$29,650,000
- --------------------------------------------------------------------------------
Louisiana--0.4%
Parish of Iberville, LA Air Products and Chemicals Inc. Project
VRDN(A-1)
$ 6,200,000 5.15% 01/07/96 $ 6,200,000
- --------------------------------------------------------------------------------
Maryland--0.4%
City of Frederick, MD GO Bond VRDN (Fuji Bank LOC)(A-1/MIG1)
$ 5,200,000 5.25% 01/07/96 $ 5,200,000
- --------------------------------------------------------------------------------
Massachusetts--3.3%
Massachusetts GO Bonds(SP-1/MIG1)
$35,000,000 4.25% 06/12/96 $ 35,089,650
Massachusetts State Health and Education Facility Authority
RB, Capital Asset Program Series G-1 (MBIA)(A-1+)/(a)/
13,000,000 5.15 01/07/96 13,000,000
- --------------------------------------------------------------------------------
$ 48,089,650
- --------------------------------------------------------------------------------
Michigan--1.2%
Becker, MI for Northern State Power CP Notes(A-1+/P-1)
$ 6,700,000 3.80% 01/30/96 $ 6,700,000
Michigan Job Development Authority for Mazda Motor
Manufacturing VRDN (Sumitomo Bank Ltd., LOC)(MIG1)
11,100,000 5.25 01/07/96 11,100,000
- --------------------------------------------------------------------------------
$ 17,800,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
14
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
ILA Tax-Exempt Diversified Portfolio (continued)
December 31, 1995
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
================================================================================
<S> <C> <C> <C>
Minnesota--0.5%
White Bear Lake, MN IDA for Weyerhaeuser Company
Series 1993 VRDN(A-1)
$ 6,800,000 5.20% 01/07/96 $ 6,800,000
- --------------------------------------------------------------------------------
Missouri--0.6%
Kansas City Cloversett IDA MF Hsg. RB Series 1988 VRDN
(Boatmen's Bank of Kansas City LOC)(A-1+)
$ 8,790,000 5.50% 01/07/96 $ 8,790,000
- --------------------------------------------------------------------------------
Montana--1.2%
City of Forsyth, Rosebud County, MT PCR Series 1988 for
Pacificorp (Industrial Bank of Japan LOC)(A-1/P-1)
$ 8,000,000 4.00% 01/12/96 $ 8,000,000
8,000,000 3.70 01/11/96 8,000,000
Montana State Board of Investments VRDN Payroll Tax
Bonds(A/MIG1)
1,000,000 5.25 01/07/96 1,000,000
- --------------------------------------------------------------------------------
$ 17,000,000
- --------------------------------------------------------------------------------
Nebraska--0.3%
Lancaster County, NE IDA for AS Mid-America Project
VRDN (Heller Financial GTD)(A-1)
$ 4,200,000 5.30% 01/07/96 $ 4,200,000
- --------------------------------------------------------------------------------
Nevada--0.1%
Clark County for Nevada Airport System VRDN (MBIA)
(A-1+/MIG1)/(a)/
$ 1,000,000 5.15% 01/07/96 $ 1,000,000
- --------------------------------------------------------------------------------
New York--11.2%
Greatneck North Water Authority, NY Water System RB
Series 1993 A VRDN (FGIC)(A-1+/MIG1)
$ 1,500,000 4.90% 01/07/96 $ 1,500,000
New York City GO Bonds VRDN (FGIC)(A-1+/MIG1)
19,350,000 5.00 01/01/96 19,350,000
New York City GO Bonds VRDN (Union Bank of Switzerland
LOC)(A-1/MIG-1)
3,800,000 5.00 01/01/96 3,800,000
18,800,000 5.05 01/01/96 18,800,000
New York City RANS (SP1+/MIG1)
83,010,000 4.50 04/11/96 83,156,491
New York City RANS Series B (CIBC/Chemical Bank/
Citibank/Commerz Bank/Morgan Guaranty Trust Co./
Union Bank of Switzerland LOC)(SP1+/MIG1)
14,900,000 4.75 06/28/96 14,973,013
- --------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
================================================================================
<S> <C> <C> <C>
New York (continued)
New York City Water Finance Authority Water & Sewer
System RB (FGIC)(AAA/MIG1)
$ 8,200,000 5.50% 01/01/96 $ 8,200,000
New York State Local Government Series G VRDN
(National Westminster Bank LOC)(A-1+/MIG1)
1,800,000 4.90 01/07/96 1,800,000
New York State Triborough Bridge and Tunnel Authority
VRDN (FGIC)(A-1+/MIG1)(a)
10,000,000 4.90 01/01/96 10,000,000
- --------------------------------------------------------------------------------
$161,579,504
- --------------------------------------------------------------------------------
North Carolina--4.4%
North Carolina Eastern Municipal Power Agency TECP
(Industrial Bank of Japan LOC)(A-1+/P-1)
$ 5,000,000 3.65% 02/13/96 $ 5,000,000
2,718,000 3.80 02/21/96 2,718,000
Rockingham County, NC IDA PCRB for Philip Morris
Company VRDN(A-1/P-1)
3,960,000 5.15 01/07/96 3,960,000
Wake County, NC PCR for Carolina Power & Light
(Fuji Bank LOC)(A-1/P-1)
1,100,000 4.05 01/17/96 1,100,000
4,300,000 3.75 01/30/96 4,300,000
15,900,000 3.80 02/07/96 15,900,000
1,800,000 3.85 02/14/96 1,800,000
25,000,000 3.75 03/07/96 25,000,000
4,000,000 3.75 03/08/96 4,000,000
- --------------------------------------------------------------------------------
$ 63,778,000
- --------------------------------------------------------------------------------
Ohio--1.2%
City of Columbus, OH Electric System Series 1984 VRDN
(Dai Ichi Kangyo Bank Ltd., NY LOC)(MIG1)
$11,480,000 3.90% 01/01/96 $ 11,480,000
Cleveland-Cuyahoga County Port Authority, OH Rock & Roll
Hall of Fame VRDN (Credit Local de France LOC)(A-1+)
6,000,000 5.15 01/07/96 6,000,000
- --------------------------------------------------------------------------------
$17,480,000
- --------------------------------------------------------------------------------
Oklahoma--1.8%
Tulsa, OK IDA for St. Johns Medical Center Series 1987 B
VRDN(A-1+/MIG1)
$12,775,000 5.13% 01/07/96 $ 12,775,000
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
15
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
ILA Tax-Exempt Diversified Portfolio (continued)
December 31, 1995
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
================================================================================
<S> <C> <C> <C>
Oklahoma (continued)
Tulsa, OK IDA for University of Tulsa Project VRDN
(Fuji Bank LOC)(MIG1)
$13,100,000 5.25% 01/07/96 $ 13,100,000
- --------------------------------------------------------------------------------
$ 25,875,000
- --------------------------------------------------------------------------------
Oregon--1.7%
Lane County, OR PCRB Series 1994 Weyerhaeuser Company
VRDN(A-1)
$ 6,500,000 5.20% 01/07/96 $ 6,500,000
Portland, OR for Columbia Grain Inc. Project VRDN
(Fuji Bank/Bank of Tokyo LOC)(MIG1)
17,650,000 5.25 01/07/96 17,650,000
- --------------------------------------------------------------------------------
$ 24,150,000
- --------------------------------------------------------------------------------
Pennsylvania--3.5%
Allegheny County, PA IDA PCRB Series 1985 for U.S. Steel
Corp. (Norinchukin Bank LOC)(A-1+/P-1)
$16,600,000 3.90% 01/22/96 $ 16,600,000
20,200,000 3.80 01/23/96 20,200,000
13,200,000 4.05 01/30/96 13,200,000
- --------------------------------------------------------------------------------
$ 50,000,000
- --------------------------------------------------------------------------------
Puerto Rico--0.0%
Puerto Rico Government Development Bank VRDN(A-1/MIG1)
$ 700,000 4.50% 01/07/96 $ 700,000
- --------------------------------------------------------------------------------
South Carolina--1.1%
York County Floating/Fixed Rate PCRB Pooled Series 1984-North
Carolina Electric Membership Corp. VRDN (CFC)(A-1+/P-1)
$11,500,000 4.65% 01/07/96 $ 11,500,000
York County, SC for Duke Power Co.(A-1+/MIG1)
5,000,000 3.55 01/30/96 5,000,000
- --------------------------------------------------------------------------------
$ 16,500,000
- --------------------------------------------------------------------------------
Texas--13.2%
Belton, TX IDRB for H.E. Butt Grocery Project VRDN
(Texas Commerce Bank LOC)(P-1)
$ 4,600,000 5.35% 01/07/96 $ 4,600,000
Brazos River Authority IDA VRDN for Monsanto Company(P-1)
10,200,000 5.10 01/07/96 10,200,000
Brazos River Authority PCR Series 1994 for Monsanto Company(P-1)
6,100,000 5.10 01/07/96 6,100,000
City of Houston, TX CP Notes Series A(A-1+/P-1)
6,000,000 3.75 02/28/96 6,000,000
- --------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
================================================================================
<S> <C> <C> <C>
Texas (continued)
Gulf Coast Waste Disposal Authority PCRB for Amoco Corp.
(A-1+/MIG1)
$ 3,850,000 5.90% 01/01/96 $ 3,850,000
Gulf Coast Waste Disposal Authority PCRB for Monsanto
Company VRDN(A-1/P-1)
7,925,000 5.10 01/07/96 7,925,000
Lower Colorado River Authority CP Program(A-1+/P-1)
4,400,000 3.80 02/14/96 4,400,000
10,000,000 3.75 03/29/96 10,000,000
Nueces River IDA PCRB UPDATE Series 1984-San Miguel
Electric (CFC)(A-1+/MIG1)
25,700,000 3.80 01/10/96 25,700,000
25,000,000 3.80 01/11/96 25,000,000
San Antonio, TX Electric & Gas Systems CP Notes Series A
(A-1+/P-1)
12,800,000 3.45 02/07/96 12,800,000
State of Texas TRANS CP Notes(A-1+/P-1)
15,000,000 3.70 03/15/96 15,000,000
12,000,000 3.65 08/20/96 12,000,000
State of Texas TRANS Series A(SP1+/MIG1)
33,000,000 4.75 08/30/96 33,211,775
Texas A&M University Board of Regents Series B(A-1+/MIG1)
3,600,000 3.55 02/07/96 3,600,000
3,200,000 3.75 02/07/96 3,200,000
Texas Public Finance Authority Tax-Exempt CP Revenue Notes
Series B (A-1+/P-1)
7,200,000 3.75 02/07/96 7,200,000
- --------------------------------------------------------------------------------
$190,786,775
- --------------------------------------------------------------------------------
Utah--0.2%
Carbon County, UT PCRB Series 1994 VRDN for Pacificorp.
(AMBAC)(A-1/MIG1)
$ 3,365,000 5.90% 01/01/96 $ 3,365,000
- --------------------------------------------------------------------------------
Virginia--4.3%
IDA Chesapeake PCRB Series 1985 for Virginia Electric & Power
Co.(A-1/P-1)
$22,000,000 3.50% 02/09/96 $ 22,000,000
IDA of Louisa PCRB Series 1984-Virginia Electric & Power Co.
Project(A-1/P-1)
4,000,000 4.35 01/16/96 4,000,000
2,500,000 4.35 01/17/96 2,500,000
4,000,000 3.75 01/24/96 4,000,000
4,000,000 3.90 01/25/96 4,000,000
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
16
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
ILA Tax-Exempt Diversified Portfolio (continued)
December 31, 1995
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
==================================================================================
<S> <C> <C> <C>
Virginia (continued)
IDA of Louisa PCRB Series 1984-Virginia Electric & Power Co.
Project(A-1/P-1) (continued)
$ 4,000,000 3.65% 01/30/96 $ 4,000,000
4,000,000 3.75 01/31/96 4,000,000
4,000,000 3.75 02/21/96 4,000,000
4,000,000 3.80 02/26/96 4,000,000
1,500,000 3.75 02/27/96 1,500,000
IDA of Louisa PCRB Series 1987-Virginia Electric & Power Co.
Project(A-1/P-1)
1,300,000 3.50 02/09/96 1,300,000
Roanoke, VA IDA Hospital RB for Roanoke Memorial Hospital
Project A VRDN(A-1+)
400,000 5.10 01/07/96 400,000
Spotsylvania, VA IDA for Carlisle Corporation (Trust Company
Bank LOC)(Aa3)
6,500,000 5.15 01/07/96 6,500,000
- ----------------------------------------------------------------------------------
$ 62,200,000
- ----------------------------------------------------------------------------------
Washington--2.5%
Port of Grays Harbor, WA IDA for Weyerhaeuser Project
Series 1992 VRDN(A-1)
$ 6,850,000 5.20% 01/07/96 $ 6,850,000
Union Gap City IDA for Weyerhaeuser Project Series 1992
VRDN(A-1)
1,600,000 5.20 01/07/96 1,600,000
Washington Public Power Supply Project Electric RB VRDN
(Industrial Bank of Japan LOC)(A-1/MIG1)
27,885,000 5.35 01/07/96 27,885,000
- ----------------------------------------------------------------------------------
$ 36,335,000
- ----------------------------------------------------------------------------------
Wyoming--1.3%
Kemmerer, WY PCRB Series 1984 for Exxon Project VRDN(A-1+)
$ 4,600,000 5.90% 01/01/96 $ 4,600,000
Pacificorp for Sweetwater County PCRB Series 1990 A VRDN
(Credit Suisse LOC)(MIG)
9,000,000 5.25 01/07/96/(a)/ 9,000,000
1,200,000 5.25 01/07/96 1,200,000
4,335,000 3.75 01/30/96 4,335,000
- ----------------------------------------------------------------------------------
$ 19,135,000
- ----------------------------------------------------------------------------------
Total Investments $1,498,671,461/(c)/
==================================================================================
</TABLE>
- --------------------------------------------------------------------------------
================================================================================
/(a)/ When-issued securities.
/(b)/ Portions of these securities are being segregated for when-issued
securities.
/(c)/ The amount stated also represents aggregate cost for federal income tax
purposes.
Interest rates represent either the stated coupon rate, annualized yield on date
of purchase for discounted notes, or, for floating rate securities, the current
reset rate, which is based upon current interest rate indices.
Maturity dates represent either the stated date on the security, the next
interest reset date for floating rate securities, or the prerefunded date for
those types of securities.
The percentages shown for each investment category reflect 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.
17
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
ILA Tax-Exempt California Portfolio
December 31, 1995
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
================================================================================
<S> <C> <C> <C>
California--92.1%
Anaheim City, CA Electric RANS Tax Exempt CP Notes(A-1+/P-1)
$ 4,300,000 3.65% 03/15/96 $ 4,300,000
California Health Facility Finance Authority RB Series 1990 A
VRDN (Rabobank Nederland LOC)(A-1+/MIG1)
8,400,000 4.95 01/07/96 8,400,000
California PCRB for Pacific Gas & Electric (Banque Nationale
de Paris LOC)(A-1/P-1)
6,000,000 3.40 02/09/96 6,000,000
California School Cash Reserve Program Authority TRANS
Series A (MBIA)(SP-1+/MIG1)
5,000,000 4.75 07/03/96 5,024,213
California School Cash Reserve Program Authority TRANS
Series B (MBIA)(SP-1+/MIG1)
4,000,000 4.50 12/20/96 4,026,070
California State Department Water Resources CP Notes Series 1
(A-1+/P-1)
9,500,000 3.55 01/25/96 9,500,000
California State Kaiser Foundations Hospital VRDN(A-1+/MIG1)
5,000,000 4.90 01/07/96 5,000,000
California Statewide Communities Development Authority for Irvine
Apartment Communities RB Subordinate Series A-3 VRDN(A-1+)
32,900,000 4.90 01/07/96 32,900,000
City of Fremont MF Hsg. VRDN Series 1985 D-Creekside Village
Apartment Project (Fuji Bank LOC)(MIG1)
8,100,000 5.55 01/07/96 8,100,000
City of Irwindale IDRB Series 1984 Toys-R-Us VRDN (Bankers
Trust LOC)(Aa2)
2,000,000 5.13 01/07/96 2,000,000
City of Los Angeles, VRDN MF Hsg. Museum Terrace-84H
(Bank of America LOC)(MIG1)
3,500,000 4.55 01/07/96 3,500,000
City of Newport Beach Floating/Fixed Rate Health Facilities
Memorial Hospital Facility VRDN(A-1/MIG1)
7,130,000 5.90 01/01/96 7,130,000
City of San Diego, CA MF Hsg. for Lacima Apartments VRDN
(Citibank LOC)(MIG1)
13,630,000 4.80 01/07/96 13,630,000
City of San Diego, CA MF Hsg. for Nobel Court Apartment
VRDN (Citibank LOC)(MIG1)
8,160,000 4.80 01/07/96 8,160,000
Contra Costa, CA MF Hsg. for Lakeshore Apartments VRDN
(FNMA)(A-1+)
4,800,000 5.00 01/07/96 4,800,000
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
================================================================================
<S> <C> <C> <C>
California (continued)
East Bay Municipal Utility District California Water and Waste
(A-1+/P-1)
$ 7,150,000 3.60% 02/13/96 $ 7,150,000
Huntington Beach City Monthly MF Hsg. VRDN Series 1985 A
(Bank of America LOC)(MIG1)
7,600,000 4.00 01/01/96 7,600,000
Los Angeles, California Transportation CP Notes (ABN AMRO
Bank/Bank of California/Banque Nationale de Paris/
CIBC/National Westminster Bank LOC)(A-1+/P-1)
9,400,000 3.70 03/07/96 9,400,000
Los Angeles County Metro Transportation Authority (MBIA)
(A-1+/MIG1)
4,595,000 5.00 01/07/96 4,595,000
Los Angeles County Metro Transportation Authority VRDN
(MBIA)(MIG1)
10,000,000 5.00 04/25/96 10,037,682
Los Angeles County MF Hsg. for Canyon Country Villas VRDN
(Industrial Bank of Japan LOC)(MIG1)
16,000,000 5.35 01/07/96 16,000,000
Los Angeles County, CA TRANS (Bank of America/Credit
Suisse/Morgan Guaranty Trust Co./Swiss Bank Corp./
UBS/Westdeutsche Landesbank Girozentrale LOC)(SP-1/MIG1)
18,460,000 4.50 07/01/96 18,520,281
Los Angeles County, VRDN MF Hsg. for Valencia Village
Series 1994 C (Industrial Bank of Japan LOC)(A-1+)
14,100,000 5.35 01/07/96 14,100,000
Orange County Seaside Meadows VRDN (Fuji Bank LOC)
(A-1/MIG1)
24,000,000 5.80 01/07/96 24,000,000
Pomona Public Financing Authority VRDN (Sumitomo Bank
Ltd., LOC)(SP-1+)
2,200,000 5.25 01/07/96 2,200,000
Porterville Union High School District, Tulare City School
District, Tulare Joint Union High School District VRDN COP
(Bank of California LOC)(MIG1)
5,000,000 5.45 01/07/96 5,000,000
Sacramento County 1990 COP Admin-Center Courthouse Project
VRDN (Union Bank of Switzerland LOC)(A-1+/MIG1)
500,000 4.75 01/07/96 500,000
San Bernadino County VRDN-Woodview Apartments Series 1985
(Bank of America LOC)(MIG1)
1,200,000 5.00 01/07/96 1,200,000
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
18
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
ILA Tax-Exempt California Portfolio (continued)
December 31, 1995
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
================================================================================
<S> <C> <C> <C>
California (continued)
San Diego County, CA MF Hsg. for Country Hills VRDN
(FNMA)(A-1+)
$10,400,000 5.00% 01/07/96 $ 10,400,000
San Diego Lus Mer Masa VRDN (Bank of America LOC)(MIG1)
4,900,000 5.00 01/07/96 4,900,000
San Diego Regional Transportation Commission 2nd Senior
Sales Tax RB 1992 Series A (FGIC)(AAA/Aaa)
7,700,000 4.00 04/01/96 7,710,829
San Diego, CA IDR Series 1995 B for San Diego Gas and Electric
(A-1/MIG1)
2,700,000 3.60 01/30/96 2,700,000
1,000,000 3.70 01/19/96 1,000,000
San Leandro California MF Hsg. VRDN Series 1985 B- Haas
Avenue Apartments (Bank of America LOC)(MIG1)
3,900,000 4.80 01/07/96 3,900,000
Southern California Public Power Authority VRDN
(Swiss Bank LOC)(A-1+/MIG1)
13,000,000 4.75 01/07/96 13,000,000
State of California RAWS Series C (Bank of America/Banque
Nationale de Paris/Bank of Nova Scotia/Chemical Bank/
CIBC/Citibank/Morgan Guaranty Trust Co./Credit Suisse/
National Westminster Bank/Societe General/Swiss Bank
Corp./Sumitomo Bank Ltd./Toronto Dominion Bank/
Westdeutsche Landesbank Girozentrale LOC)(SP-1/MIG1)
30,190,000 5.75 04/25/96 30,311,082
Ventura County, CA for Triurfo Sanitation District VRDN
(Banque Nationale de Paris LOC)(A-1+)
2,500,000 5.15 01/07/96 2,500,000
- --------------------------------------------------------------------------------
$319,195,157
- --------------------------------------------------------------------------------
Puerto Rico--7.4%
Puerto Rico Government Development Bank CP Notes(A-1+)
$ 4,000,000 3.70% 01/23/96 $ 4,000,000
10,000,000 3.35 02/08/96 10,000,000
11,700,000 3.65 03/08/96 11,700,000
- --------------------------------------------------------------------------------
$ 25,700,000
- --------------------------------------------------------------------------------
Total Investments $344,895,157/(a)/
================================================================================
</TABLE>
- --------------------------------------------------------------------------------
================================================================================
/(a)/The amount stated also represents aggregate cost for federal
income tax purposes.
.
Interest rates represent either the stated coupon rate, annualized yield on date
of purchase for discounted notes, or, for floating rate securities, the current
reset rate, which is based upon current interest rate indices.
Maturity dates represent either the stated date on the security, the next
interest reset date for floating rate securities, or the prerefunded date for
those types of securities.
The percentages shown for each investment category reflect 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>
Statement of Investments
- --------------------------------------------------------------------------------
ILA Tax-Exempt New York Portfolio
December 31, 1995
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
================================================================================
<S> <C> <C> <C>
New York--94.9%
City of Yonkers IDA Series 1991 Civic Facility VRDN
(Industrial Bank of Japan LOC)(MIG1)
$5,600,000 5.30% 01/07/96 $ 5,600,000
IDA Civic Facility RB, Cold Spring Harbor Labs Series 1989
VRDN (Morgan Guaranty Trust Co.)(A-1+)
2,200,000 6.00 01/01/96 2,200,000
Metropolitan Transportation Authority Commuter Facility
VRDN Series 1991 (Morgan Guaranty & Trust Co./Mitsubishi
Bank/Bank of Tokyo LOC)(A-1+/MIG1)
3,400,000 5.00 01/07/96 3,400,000
Nassau County RANS (SP-1)
3,500,000 4.25 03/15/96 3,503,450
Nassau County, GO Refunding Bond Import Series 1993 H
(MBIA)(AAA/Aaa)
1,585,000 3.80 06/15/96 1,586,052
New York City GO Bonds VRDN (Dai Ichi Kangyo Bank Ltd.,
New York LOC)(A-1/MIG1)
3,700,000 5.05 01/01/96 3,700,000
New York City GO Bonds VRDN (Norinchunkin Bank LOC)
(A-1+/MIG1)
1,700,000 5.05 01/01/96 1,700,000
New York City Housing Development Corp. MF Hsg. for York
Avenue Development VRDN (Chemical Bank LOC) (AMT)(A-1)
2,000,000 5.00 01/07/96 2,000,000
New York City IDA for Columbia Grammar Prep School VRDN
(Chemical Bank LOC)(A-1+)
2,500,000 4.90 01/07/96 2,500,000
New York City IDA-Civic Facility RB, 1989 National Audubon
Society, Inc. VRDN (Swiss Bank Corp. LOC)(A-1+)
4,000,000 5.90 01/01/96 4,000,000
New York City Muncipal Water and Sewer Finance Authority
VRDN (FGIC)(AAA/MIG1)
2,600,000 5.50 01/01/96 2,600,000
New York City Municipal Water Finance Authority
(Credit Suisse LOC)(A-1+/P-1)
2,300,000 3.75 01/26/96 2,300,000
3,000,000 3.75 01/30/96 3,000,000
New York City RANS (SP-1+/MIG1)
5,000,000 4.50 04/11/96 5,009,401
New York City Trust for Cultural Resources American Museum
of Natural History Adjustable Rate TRB VRDN(MIG1)
3,200,000 4.90 01/07/96 3,200,000
New York Medicare Facility for Childrens Hospital of Buffalo
VRDN (Barclays Bank LOC)(MIG1)
2,100,000 5.00 01/07/96 2,100,000
New York State CP Series Q(A-1/P-1)
5,900,000 3.75 01/16/96 5,900,000
3,000,000 3.75 01/23/96 3,000,000
New York State Dormitory Authority RB, Series 1990 B
Cornell University VRDN(A-1+/MIG1)
4,300,000 5.90 01/01/96 4,300,000
New York State Energy and Research Development Authority
for Long Island Lighting Co. (Deutsche Bank LOC)(MIG1)
2,000,000 4.70 03/01/96 2,000,000
New York State Energy Research & Development Authority
for Long Island Lighting Co. VRDN (Toronto Dominion
Bank LOC) (AMT)(MIG1)
3,000,000 5.00 01/07/96 3,000,000
New York State Energy Research & Development Authority
PCRB Rochester Series 1984 G and E (P-1)
2,100,000 3.55 01/01/96 2,100,000
New York State Energy Research and Development Authority
PCRB Series A & B- Central Hudson Gas & Electric VRDN
(Deutsche Bank LOC)(Aa2)
1,300,000 4.90 01/07/96 1,300,000
New York State Local Government Series B (Bank of Nova
Scotia LOC)(A-1+/MIG1)
6,800,000 4.95 01/07/96 6,800,000
New York State Local Government Series C (Landesbank
Hessen-Thueringen Girozentrale LOC)(A-1+/MIG1)
1,400,000 4.85 01/07/96 1,400,000
New York State Local Government Series G (National
Westminster Bank LOC)(A-1+/MIG1)
2,200,000 4.90 01/07/96 2,200,000
New York State PCR for Rockland County VRDN (AMBAC)
(A-1+/MIG1)
4,300,000 4.90 01/07/96 4,300,000
New York State Research & Development PCRB Series D
for New York State Electric and Gas (United Bank of
Switzerland LOC)(A-1+/MIG1)
6,000,000 6.00 01/01/96 6,000,000
New York State Rochester Gas and Electric (Credit Suisse LOC)
(A-1+/P-1)
1,500,000 3.75 11/15/96 1,500,000
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
- --------------------------------------------------------------------------------
ILA Tax-Exempt New York Portfolio (continued)
December 31, 1995
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
=====================================================================================
<S> <C> <C> <C>
New York (continued)
New York State Triborough Bridge & Tunnel Authority VRDN
(FGIC)(A-1+/MIG1)
$ 3,500,000 4.90% 01/07/96 $ 3,500,000
Northport - East Northport USD TANS(MIG1)
4,000,000 4.13 06/28/96 4,009,907
Port Authority of New York/New Jersey CP Notes(A-1+/P-1)
3,120,000 3.45 01/19/96 3,120,000
Syracuse University IDA VRDN (JP Morgan LOC)(A-1+/MIG1)
4,200,000 5.90 01/01/96 4,200,000
Water Authority of Greatneck North Series 1993 A VRDN (FGIC)
(A-1+/MIG1)
4,300,000 4.90 01/07/96 4,300,000
- -------------------------------------------------------------------------------------
$111,328,810
- -------------------------------------------------------------------------------------
Puerto Rico--2.0%
Puerto Rico Government Development Bank-Adjustable Refunding
Bonds, Series 1985 VRDN (Credit Suisse LOC)(A-1/MIG1)
$ 300,000 4.50% 01/07/96 $ 300,000
Puerto Rico Industrial Medical and Environmental PCR for Schering
Plough Corp.(Morgan Guaranty Trust Co. LOC)(AAA)
2,000,000 3.80 12/01/96 2,003,554
- -------------------------------------------------------------------------------------
$ 2,303,554
- -------------------------------------------------------------------------------------
Total Investments $113,632,364/(a)/
=====================================================================================
</TABLE>
/(a)/ The amount stated also represents aggregate cost for federal income tax
purposes.
Interest rates represent either the stated coupon rate, annualized yield on the
date of purchase for discounted notes, or, for floating rate securities, the
current reset rate, which is based upon current interest rate indices.
Maturity dates represent either the stated date on the security, the next
interest reset date for floating rate securities, or the prerefunded date for
those types of securities.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
================================================================================
Tax-Exempt Investment Abbreviations:
ACES -- Adjustable Convertible Extendible Securities
AMBAC -- Insured by American Municipal Bond Assurance Corp.
CFC -- Unconditionally guaranteed by CFC, Cooperative Finance Corp.
COP -- Certificate of Participation
CP -- Commercial Paper
FGIC -- Insured by Financial Guaranty Insurance Co.
FNMA -- Federal National Mortgage Association
GO -- General Obligation
IDA -- Industrial Development Authority
IDB -- Industrial Development Bond
IDRB -- Industrial Development Revenue Bond
LOC -- Letter of Credit
MBIA -- Insured by Municipal Bond Investors Assurance
MF Hsg. -- Multi-Family Housing
PCRB -- Pollution Control Revenue Bond
RANS -- Revenue Anticipation Notes
RAWS -- Revenue Anticipation Warrants
RB -- Revenue Bond
TANS -- Tax Anticipation Notes
TECP -- Tax-Exempt Commercial Paper
TRANS -- Tax Revenue Anticipation Notes
TRB -- Tender Revenue Bond
UPDATE -- Unit Priced Daily Adjustable Tax-Exempt Security
VRDN -- Variable Rate Demand Note
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities
December 31, 1995
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ILA ILA
Prime Money ILA
Obligations Market Government
Portfolio Portfolio Portfolio
==========================================
<S> <C> <C> <C>
Assets:
Investments in securities, at value
based on amortized cost $1,556,339,637 $763,283,263 $705,671,557
Interest receivable 3,843,438 2,565,683 1,642,125
Cash 55,506 -- 128,156
Other assets 213,546 36,409 108,888
- --------------------------------------------------------------------------------
Total assets 1,560,452,127 765,885,355 707,550,726
- --------------------------------------------------------------------------------
Liabilities:
Payable for investment securities
purchased -- -- --
Dividends payable 8,141,681 3,861,327 3,675,312
Accrued expenses and other
liabilities 808,691 366,682 437,322
- --------------------------------------------------------------------------------
Total liabilities 8,950,372 4,228,009 4,112,634
- --------------------------------------------------------------------------------
Net Assets:
Paid in capital 1,551,501,755 761,657,346 703,383,325
Accumulated undistributed net
investment income -- -- --
Accumulated undistributed net
realized gain (loss) on investment
transactions -- -- 54,767
- --------------------------------------------------------------------------------
Net assets $1,551,501,755 $761,657,346 $703,438,092
================================================================================
Net asset value, offering and
redemption price per unit
(net assets/units outstanding) $1.00 $1.00 $1.00
================================================================================
Units Outstanding:
ILA units 1,261,208,998 574,155,473 570,436,734
ILA Administration units 63,055,307 164,422,265 47,558,211
ILA Service units 227,237,450 23,079,608 85,388,380
- --------------------------------------------------------------------------------
Total units of beneficial interest
outstanding, $.001 par value
(unlimited number of units
authorized) 1,551,501,755 761,657,346 703,383,325
================================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
22
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
ILA ILA ILA ILA ILA
Treasury Treasury ILA Tax-Exempt Tax-Exempt Tax-Exempt
Obligations Instruments Federal Diversified California New York
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
===========================================================================================
<S> <C> <C> <C> <C> <C>
$927,388,046 $771,984,093 $2,409,275,624 $1,498,671,461 $344,895,157 $113,632,364
630,997 9,483,381 3,598,134 9,669,063 2,858,050 648,680
14,721 120,860 55,710 238,690 280,992 3,316,255
157,830 75,801 161,760 56,974 19,205 14,775
- -------------------------------------------------------------------------------------------
928,191,594 781,664,135 2,413,091,228 1,508,636,188 348,053,404 117,612,074
- -------------------------------------------------------------------------------------------
-- -- 49,953,785 62,318,171 -- --
4,192,668 3,196,332 10,955,690 4,850,149 1,152,288 314,065
455,293 206,703 753,597 463,293 112,365 37,404
- -------------------------------------------------------------------------------------------
4,647,961 3,403,035 61,663,072 67,631,613 1,264,653 351,469
- -------------------------------------------------------------------------------------------
923,540,771 778,255,461 2,351,492,512 1,440,873,355 346,808,291 117,260,951
-- -- -- 362,642 10,495 1,634
2,862 5,639 (64,356) (231,422) (30,035) (1,980)
- -------------------------------------------------------------------------------------------
$923,543,633 $778,261,100 $2,351,428,156 $1,441,004,575 $346,788,751 $117,260,605
===========================================================================================
$1.00 $1.00 $1.00 $1.00 $1.00 $1.00
===========================================================================================
711,102,137 586,288,862 1,731,957,820 1,342,653,546 346,747,223 90,535,967
92,720,120 68,708,601 516,957,788 48,773,081 61,068 26,724,984
119,718,514 123,257,998 102,576,904 49,643,320 -- --
- -------------------------------------------------------------------------------------------
923,540,771 778,255,461 2,351,492,512 1,441,069,947 346,808,291 117,260,951
===========================================================================================
</TABLE>
23
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
Statements of Operations
For the Year Ended December 31, 1995
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
ILA ILA
Prime Money ILA
Obligations Market Government
Portfolio Portfolio Portfolio
===================================================
<S> <C> <C> <C>
Investment income:
Interest income $ 116,500,483 $ 52,928,559 $ 56,149,303
- -------------------------------------------------------------------------------------------------
Expenses:
Investment adviser fees 6,728,074 3,054,275 3,259,056
Transfer agent fees 768,923 349,060 372,463
Custodian fees 434,548 224,320 245,304
Professional fees 65,417 27,474 22,956
Trustees' fees 50,898 20,711 28,187
Other 136,837 20,311 143,725
- -------------------------------------------------------------------------------------------------
Total expenses 8,184,697 3,696,151 4,071,691
Less--Expenses reimbursable and fees
waived by GSAM (347,317) (572,040) (276,785)
- -------------------------------------------------------------------------------------------------
Net expenses 7,837,380 3,124,111 3,794,906
Administration unit fees 141,500 223,420 94,196
Service unit fees 937,733 102,642 430,114
- -------------------------------------------------------------------------------------------------
Net expenses and unit fees 8,916,613 3,450,173 4,319,216
- -------------------------------------------------------------------------------------------------
Net investment income 107,583,870 49,478,386 51,830,087
- -------------------------------------------------------------------------------------------------
Net realized gain(loss) on investment
transactions 14,828 23,170 168,758
- -------------------------------------------------------------------------------------------------
Net increase in net assets resulting
from operations $ 107,598,698 $ 49,501,556 $ 51,998,845
=================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
ILA ILA ILA ILA ILA
Treasury Treasury ILA Tax-Exempt Tax-Exempt Tax-Exempt
Obligations Instruments Federal Diversified California New York
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
===========================================================================================
<S> <C> <C> <C> <C> <C>
$54,265,539 $40,952,372 $134,819,866 $ 60,135,598 $11,495,659 $ 3,673,507
- -------------------------------------------------------------------------------------------
3,206,490 2,518,236 7,951,196 5,313,451 1,030,447 343,853
366,456 287,798 908,708 607,252 117,765 39,298
225,987 160,385 392,725 114,042 55,743 28,579
21,510 21,812 65,698 36,287 12,288 2,079
20,055 10,770 38,951 27,183 5,457 1,990
102,078 161,548 212,442 333,097 85 17,235
- -------------------------------------------------------------------------------------------
3,942,576 3,160,549 9,569,720 6,431,312 1,221,785 433,034
(203,882) (1,662,644) (3,709,808) (1,757,958) (19,625) (141,867)
- -------------------------------------------------------------------------------------------
3,738,694 1,497,905 5,859,912 4,673,354 1,202,160 291,167
165,430 110,355 713,846 103,673 600 27,783
478,419 316,188 254,508 220,790 -- --
- -------------------------------------------------------------------------------------------
4,382,543 1,924,448 6,828,266 4,997,817 1,202,760 318,950
- -------------------------------------------------------------------------------------------
49,882,996 39,027,924 127,991,600 55,137,781 10,292,899 3,354,557
- -------------------------------------------------------------------------------------------
634,764 426,028 (11,971) (38,116) (4,501) --
- -------------------------------------------------------------------------------------------
$50,517,760 $39,453,952 $127,979,629 $ 55,099,665 $10,288,398 $ 3,354,557
===========================================================================================
</TABLE>
25
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended December 31, 1995
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
ILA ILA
Prime Money ILA
Obligations Market Government
Portfolio Portfolio Portfolio
====================================================
<S> <C> <C> <C>
From Operations:
Net investment income $ 107,583,870 $ 49,478,386 $ 51,830,087
Net realized gain (loss) on investment
transactions 14,828 23,170 168,758
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting
from operations 107,598,698 49,501,556 51,998,845
- --------------------------------------------------------------------------------------------------
Distributions to Unitholders from:
Net investment income
ILA units (90,145,210) (39,853,826) (42,814,965)
ILA Administration units (5,198,674) (8,266,526) (3,434,653)
ILA Service units (12,239,986) (1,358,034) (5,580,469)
Net realized gain on investment transactions
ILA units (12,607) (18,166) (138,212)
ILA Administration units (741) (4,378) (12,197)
ILA Service units (1,480) (626) (17,502)
- --------------------------------------------------------------------------------------------------
Total distributions to unitholders (107,598,698) (49,501,556) (51,997,998)
- --------------------------------------------------------------------------------------------------
From unit transactions (at $1.00 per unit):
Proceeds from sales of units 12,338,624,975 6,865,371,082 6,147,457,376
Reinvestment of dividends and distributions 46,658,797 34,033,174 18,869,484
Cost of units repurchased (13,117,315,317) (6,864,945,994) (6,596,822,965)
- --------------------------------------------------------------------------------------------------
Increase (decrease) in net assets
resulting from unit transactions (732,031,545) 34,458,262 (430,496,105)
- --------------------------------------------------------------------------------------------------
Total increase (decrease) (732,031,545) 34,458,262 (430,495,258)
Net Assets:
Beginning of year 2,283,533,300 727,199,084 1,133,933,350
- --------------------------------------------------------------------------------------------------
End of year $ 1,551,501,755 $ 761,657,346 $ 703,438,092
==================================================================================================
Accumulated undistributed net
investment income -- -- --
==================================================================================================
Summary of unit transactions (at $1.00
per unit):
ILA Units:
Units sold 10,673,706,881 5,167,984,860 5,286,093,615
Reinvestment of dividends and distributions 43,663,215 30,173,260 14,307,877
Units repurchased (11,419,966,319) (5,183,472,607) (5,611,448,715)
- --------------------------------------------------------------------------------------------------
(702,596,223) 14,685,513 (311,047,223)
- --------------------------------------------------------------------------------------------------
ILA Administration Units:
Units sold 801,545,537 1,503,847,493 385,128,154
Reinvestment of dividends and distributions 1,574,573 3,545,805 410,476
Units repurchased (889,335,631) (1,488,837,741) (433,455,523)
- --------------------------------------------------------------------------------------------------
(86,215,521) 18,555,557 (47,916,893)
- --------------------------------------------------------------------------------------------------
ILA Service Units:
Units sold 863,372,557 193,538,729 476,235,607
Reinvestment of dividends and distributions 1,421,009 314,109 4,151,131
Units repurchased (808,013,367) (192,635,646) (551,918,727)
- --------------------------------------------------------------------------------------------------
56,780,199 1,217,192 (71,531,989)
- --------------------------------------------------------------------------------------------------
Net increase (decrease) in units (732,031,545) 34,458,262 (430,496,105)
==================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
ILA ILA ILA ILA ILA
Treasury Treasury ILA Tax-Exempt Tax-Exempt Tax-Exempt
Obligations Instruments Federal Diversified California New York
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
=========================================================================================================
<S> <C> <C> <C> <C> <C>
$ 49,882,996 $ 39,027,924 $ 127,991,600 $ 55,137,781 $ 10,292,899 $ 3,354,557
634,764 426,028 (11,971) (38,116) (4,501) --
- ---------------------------------------------------------------------------------------------------------
50,517,760 39,453,952 127,979,629 55,099,665 10,288,398 3,354,557
- ---------------------------------------------------------------------------------------------------------
(37,834,730) (31,147,754) (98,487,540) (50,915,901) (10,279,510) (2,746,431)
(5,921,841) (3,930,340) (26,181,728) (2,430,414) (13,389) (608,126)
(6,116,634) (3,949,830) (3,322,332) (1,791,466) -- --
(474,791) (338,176) -- -- -- --
(76,052) (43,832) -- -- -- --
(81,059) (43,878) -- -- -- --
- ---------------------------------------------------------------------------------------------------------
(50,505,107) (39,453,810) (127,991,600) (55,137,781) (10,292,899) (3,354,557)
- ---------------------------------------------------------------------------------------------------------
5,295,765,985 4,545,981,787 12,879,366,733 9,669,281,502 2,111,844,558 637,393,901
14,985,214 18,329,605 59,359,416 35,116,542 9,384,940 3,009,869
(5,307,633,793) (4,472,240,590) (12,558,288,438) (9,832,589,904) (2,002,625,120) (646,630,502)
- ---------------------------------------------------------------------------------------------------------
3,117,406 92,070,802 380,437,711 (128,191,860) 118,604,378 (6,226,732)
- ---------------------------------------------------------------------------------------------------------
3,130,059 92,070,944 380,425,740 (128,229,976) 118,599,877 (6,226,732)
920,413,574 686,190,156 1,971,002,416 1,569,234,551 228,188,874 123,487,337
- ---------------------------------------------------------------------------------------------------------
$ 923,543,633 $ 778,261,100 $ 2,351,428,156 $ 1,441,004,575 $ 346,788,751 $ 117,260,605
=========================================================================================================
-- -- -- $ 362,642 $ 10,495 $ 1,634
=========================================================================================================
4,098,618,029 3,716,958,431 9,845,256,084 9,311,743,687 2,111,311,145 412,445,304
12,443,257 17,215,281 53,443,869 34,419,501 9,375,255 2,397,973
(4,113,675,854) (3,695,227,116) (9,792,323,613) (9,438,508,967) (2,001,353,653) (408,825,174)
- ---------------------------------------------------------------------------------------------------------
(2,614,568) 38,946,596 106,376,340 (92,345,779) 119,332,747 6,018,103
- ---------------------------------------------------------------------------------------------------------
852,080,094 450,755,034 2,431,546,258 230,975,117 533,413 224,948,597
2,541,957 1,065,347 5,373,341 522,467 9,685 611,896
(859,607,724) (447,499,474) (2,249,895,904) (280,499,429) (1,271,467) (237,805,328)
- ---------------------------------------------------------------------------------------------------------
(4,985,673) 4,320,907 187,023,695 (49,001,845) (728,369) (12,244,835)
- ---------------------------------------------------------------------------------------------------------
345,067,862 378,268,322 602,564,391 126,562,698 -- --
-- 48,977 542,206 174,574 -- --
(334,350,215) (329,514,000) (516,068,921) (113,581,508) -- --
- ---------------------------------------------------------------------------------------------------------
10,717,647 48,803,299 87,037,676 13,155,764 -- --
- ---------------------------------------------------------------------------------------------------------
3,117,406 92,070,802 380,437,711 (128,191,860) 118,604,378 (6,226,732)
- ---------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended December 31, 1994
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
ILA ILA
Prime Money ILA
Obligations Market Government
Portfolio Portfolio Portfolio
====================================================
<S> <C> <C> <C>
From Operations:
Net investment income $ 102,000,915 $ 35,271,209 $ 51,191,147
Net realized gain (loss) on investment
transactions 22,898 1,379 210,100
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting
from operations 102,023,813 35,272,588 51,401,247
- --------------------------------------------------------------------------------------------------
Distributions to Unitholders:
From net investment income
ILA units (89,611,120) (27,629,787) (40,943,467)
ILA Administration units (6,633,576) (6,900,562) (4,966,425)
ILA Service units (5,756,219) (740,860) (5,281,255)
In excess of net investment income
ILA units -- -- --
ILA Administration units -- -- --
ILA Service units -- -- --
From net realized gain on investment transactions
ILA units (20,115) (1,085) (226,026)
ILA Administration units (1,605) (260) (29,098)
ILA Service units (1,178) (34) (26,399)
- --------------------------------------------------------------------------------------------------
Total distributions to unitholders (102,023,813) (35,272,588) (51,472,670)
- --------------------------------------------------------------------------------------------------
From unit transactions (at $1.00 per unit):
Proceeds from sale of units 18,942,358,212 8,134,683,883 9,152,798,250
Reinvestment of dividends and distributions 43,235,395 21,934,470 15,739,748
Cost of units repurchased (19,362,066,753) (8,290,641,120) (9,613,028,411)
- --------------------------------------------------------------------------------------------------
Increase (decrease) in net assets
resulting from unit transactions (376,473,146) (134,022,767) (444,490,413)
- --------------------------------------------------------------------------------------------------
Total increase (decrease) (376,473,146) (134,022,767) (444,561,836)
Net Assets:
Beginning of year 2,660,006,446 861,221,851 1,578,495,186
- --------------------------------------------------------------------------------------------------
End of year $ 2,283,533,300 $ 727,199,084 $ 1,133,933,350
==================================================================================================
Accumulated undistributed (distributions
in excess of) net investment income -- -- --
==================================================================================================
Summary of unit transactions:
ILA Units:
Units sold 17,069,145,403 6,527,992,495 7,241,535,390
Reinvestment of dividends and distributions 40,475,407 20,052,124 11,995,781
Units repurchased (17,478,545,420) (6,688,177,414) (7,687,338,826)
- --------------------------------------------------------------------------------------------------
(368,924,610) (140,132,795) (433,807,655)
- --------------------------------------------------------------------------------------------------
ILA Administration Units:
Units sold 1,310,578,974 1,437,965,563 941,022,566
Reinvestment of dividends and distributions 2,533,724 1,716,679 584,943
Units repurchased (1,353,310,306) (1,444,274,909) (1,007,963,198)
- --------------------------------------------------------------------------------------------------
(40,197,608) (4,592,667) (66,355,689)
- --------------------------------------------------------------------------------------------------
ILA Service Units:
Units sold 562,633,835 168,725,825 970,240,294
Reinvestment of dividends and distributions 226,264 165,667 3,159,024
Units repurchased (530,211,027) (158,188,797) (917,726,387)
- --------------------------------------------------------------------------------------------------
32,649,072 10,702,695 55,672,931
- --------------------------------------------------------------------------------------------------
Net increase (decrease) in units (376,473,146) (134,022,767) (444,490,413)
==================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
ILA ILA ILA ILA ILA
Treasury Treasury ILA Tax-Exempt Tax-Exempt Tax-Exempt
Obligations Instruments Federal Diversified California New York
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
========================================================================================================
<S> <C> <C> <C> <C> <C>
$ 37,665,016 $ 18,067,220 $ 68,529,060 $ 45,851,945 $ 6,189,541 $ 2,024,157
16,928 33,799 (16,697) 48,154 16,702 --
- --------------------------------------------------------------------------------------------------------
37,681,944 18,101,019 68,512,363 45,900,099 6,206,243 2,024,157
- --------------------------------------------------------------------------------------------------------
(29,686,671) (14,791,986) (55,476,234) (42,382,812) (6,159,244) (1,586,734)
(4,280,505) (1,534,410) (12,715,593) (2,438,862) (30,117) (437,423)
(3,697,840) (1,740,824) (337,233) (1,029,042) -- --
(9,054) -- -- -- -- --
(737) -- -- -- -- --
-- -- -- -- -- --
(30,901) (49,308) -- -- -- --
(2,517) (3,439) -- -- -- --
-- (4,089) -- -- -- --
- --------------------------------------------------------------------------------------------------------
(37,708,225) (18,124,056) (68,529,060) (45,850,716) (6,189,361) (2,024,157)
- --------------------------------------------------------------------------------------------------------
5,310,839,810 3,123,698,015 9,899,967,810 11,289,202,553 1,460,150,550 537,712,309
11,653,368 7,630,093 26,961,558 22,770,526 5,494,692 1,403,300
(5,678,451,559) (2,962,092,645) (9,750,028,739) (11,657,332,806) (1,468,737,443) (484,301,741)
- --------------------------------------------------------------------------------------------------------
(355,958,381) 169,235,463 176,900,629 (345,359,727) (3,092,201) 54,813,868
- --------------------------------------------------------------------------------------------------------
(355,984,662) 169,212,426 176,883,932 (345,310,344) (3,075,319) 54,813,868
1,276,398,236 516,977,730 1,794,118,484 1,914,544,895 231,264,193 68,673,469
- --------------------------------------------------------------------------------------------------------
$ 920,413,574 $ 686,190,156 $ 1,971,002,416 $ 1,569,234,551 $ 228,188,874 $ 123,487,337
========================================================================================================
$(9,791) -- -- $ 362,642 $ 10,495 $ 1,634
========================================================================================================
4,145,495,977 2,604,056,684 8,598,427,526 10,834,591,814 1,457,109,899 358,860,803
10,734,731 7,228,126 26,683,021 22,155,772 5,473,342 1,010,558
(4,411,963,120) (2,520,326,417) (8,429,822,187) (11,191,304,544) (1,465,039,917) (323,722,255)
- --------------------------------------------------------------------------------------------------------
(255,732,412) 90,958,393 195,288,360 (334,556,958) (2,456,676) 36,149,106
- --------------------------------------------------------------------------------------------------------
835,736,562 285,580,424 1,172,289,474 369,065,934 3,040,641 178,851,506
918,637 399,805 278,537 562,006 21,350 392,742
(860,345,269) (248,144,894) (1,205,069,467) (371,749,391) (3,697,498) (160,579,486)
- --------------------------------------------------------------------------------------------------------
(23,690,070) 37,835,335 (32,501,456) (2,121,451) (635,507) 18,664,762
- --------------------------------------------------------------------------------------------------------
329,607,271 234,060,907 129,250,810 85,544,805 10 --
-- 2,162 -- 52,748 -- --
(406,143,170) (193,621,334) (115,137,085) (94,278,871) (28) --
- --------------------------------------------------------------------------------------------------------
(76,535,899) 40,441,735 14,113,725 (8,681,318) (18) --
- --------------------------------------------------------------------------------------------------------
(355,958,381) 169,235,463 176,900,629 (345,359,727) (3,092,201) 54,813,868
========================================================================================================
</TABLE>
29
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
Notes to Financial Statements
December 31, 1995
1. Organization
Goldman Sachs Money Market Trust (the "Trust"), a business trust organized under
the laws of the Commonwealth of Massachusetts on December 6, 1978, includes the
Goldman Sachs--Institutional Liquid Assets Portfolios ("ILA"). The Trust is
registered under the Investment Company Act of 1940 (as amended) as an open-end
management investment company. ILA consists of nine portfolios: Prime
Obligations, Money Market, Government, Treasury Obligations, Treasury
Instruments, Federal, Tax-Exempt Diversified, Tax-Exempt California and Tax-
Exempt New York. All of the portfolios are diversified except for the Tax-
Exempt California and Tax-Exempt New York Portfolios. ILA offers three classes
of units for each of its portfolios: ILA units, ILA Administration units and ILA
Service units. The investment objective of the Funds is to maximize current
income to the extent consistent with the preservation of capital and maintenance
of liquidity.
2. Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Institutional Liquid Assets Portfolios which are in conformity
with those generally accepted in the investment company industry. The
preparation of these financial statements, in accordance with generally accepted
accounting principles, incorporates estimates made by management in determining
the reported amounts of assets, liabilities, revenues and expenses of the Funds.
A. Investment Valuation--
- --------------------------
ILA uses the amortized-cost method for valuing portfolio securities which
approximates market value. Under this method, all investments purchased at a
discount or premium are valued by amortizing the difference between the original
purchase price and maturity value of the issue over the period to maturity.
B. Interest Income--
- ---------------------
Interest income is determined on the basis of interest accrued, premium
amortized and discount earned.
C. Federal Taxes--
- -------------------
It is each portfolio's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute each
year substantially all of its investment company taxable and tax-exempt income
to its unitholders. Accordingly, no federal tax provisions are required.
The characterization of distributions to unitholders for financial
reporting purposes is determined in accordance with income tax rules. Therefore,
the source of the Portfolios' 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 paid-in capital, depending on
the type of book/tax differences that may exist.
At December 31, 1995, the following portfolios had capital loss carryforwards
for U.S. Federal tax purposes of approximately:
<TABLE>
<CAPTION>
Years of
Portfolio Amount Expiration
--------- ------ ----------
<S> <C> <C>
Federal $ 68,000 2000 to 2003
Tax-Exempt Diversified 231,000 1997 to 2003
Tax-Exempt California 30,000 1999 to 2003
Tax-Exempt New York 2,000 1999
</TABLE>
These amounts are available to be carried forward to offset future capital gains
to the extent permitted by applicable laws or regulations.
D. Deferred Organization Expenses--
- ------------------------------------
Organization-related costs are being amortized on a straight-line basis over a
period of five years.
Included in "Other Assets" in the accompanying Statements of Assets and
Liabilities is approximately $1,500 and $1,600 for the Treasury Instruments
Portfolio and the Tax-Exempt New York Portfolio, respectively, related to the
unamortized organization costs for each portfolio at December 31, 1995.
30
<PAGE>
- --------------------------------------------------------------------------------
E. Expenses--
- --------------
Expenses incurred by ILA which do not specifically relate to an individual
portfolio of ILA are allocated to the portfolios based on each portfolio's
relative average net assets for the period.
Unitholders of ILA Administration and ILA Service units bear all expenses
and fees paid to service organizations for their services with respect to such
units as well as other expenses (subject to expense limitations) which are
directly attributable to such units.
3. Agreements
Goldman Sachs Asset Management ("GSAM"), a separate operating division of
Goldman, Sachs & Co. ("Goldman Sachs"), acts as investment adviser under an
Advisory Agreement. Under the Advisory Agreement, GSAM, subject to general
supervision of the Trust's Board of Trustees, manages the portfolios and
provides for the administration of ILA's other affairs. 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 .35% of each portfolio's average daily net
assets. As of December 31, 1995 and until further notice, GSAM has agreed to
waive .05%, .20%, .15%, .10% and .09% of its advisory fees for the Money Market,
Treasury Instruments, Federal, Tax-Exempt Diversified and Tax-Exempt New York
Portfolios, respectively. For the year ended December 31, 1995, the advisory
fees waived amounted to approximately $436,000, $1,439,000, $3,408,000,
$1,518,000 and $109,000 for the Money Market, Treasury Instruments, Federal,
Tax-Exempt Diversified and Tax-Exempt New York Portfolios, respectively.
Goldman Sachs also serves as ILA's transfer agent under a Transfer Agency
Agreement for a fee. In addition, Goldman Sachs acts as ILA's distributor under
a Distribution Agreement for which it receives no compensation. At December 31,
1995, payment of approximately $2,516,000 was due Goldman Sachs for their
services as investment adviser and transfer agent; such amounts are included in
"Accrued expenses and other liabilities" in the accompanying Statements of
Assets and Liabilities.
GSAM has agreed that if the sum of a portfolio's expenses (including the
advisory fee, but excluding interest, taxes, brokerage commissions, litigation
and indemnification expenses, administration and service plan fees and other
extraordinary expenses) exceeds on an annualized basis .41% of such portfolio's
net assets, the portfolio will be reimbursed in the amount of such excess
monthly. Prior to March 15, 1995, the expense limitation referred to above was
.40%.
In addition, GSAM has voluntarily agreed to reimburse the Money Market,
Treasury Instruments, Federal, Tax-Exempt Diversified and Tax-Exempt New York
Portfolios to the extent that each portfolio's expenses, as defined above,
exceed .36%, .21%, .26%, .31% and .32%, respectively, of the average net assets
per annum. At December 31, 1995, the amounts due from GSAM were approximately
$92,000, $34,000 $32,000, $74,000, $132,000, $32,000, $11,000 and $12,000 for
the Prime Obligations, Money Market, Treasury Obligations, Treasury Instruments,
Federal, Tax-Exempt Diversified, Tax-Exempt California and Tax-Exempt New York
Portfolios, respectively. These amounts are included in "Other assets" in the
accompanying Statements of Assets and Liabilities. GSAM has also waived advisory
fees and reimbursed varying levels of expenses for certain portfolios in prior
periods.
4. Administration and Service Plans
ILA has adopted Administration and Service Plans. These plans allow for ILA
Administration units and ILA Service units, respectively, to compensate service
organizations for providing varying levels of account administration and
unitholder liaison services to their customers who are beneficial owners of such
units. The Administration and Service Plans provide for compensation to the
service organizations in an amount up to .15% and .40% (on an annualized basis),
respectively, of the average daily net asset value of the respective units.
31
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
December 31, 1995
- --------------------------------------------------------------------------------
5. Line of Credit Facility
The Portfolios participate in a $100,000,000 uncommitted, unsecured revolving
line of credit facility to be used solely for temporary or emergency purposes.
Under the most restrictive arrangement, each Portfolio 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. During
fiscal year 1995, the Portfolios did not have any borrowings under this
facility.
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., ILA's custodian, at the Federal Reserve Bank of Boston or at
subcustodians. GSAM monitors the market value of the underlying securities by
pricing them daily.
7. Joint Repurchase Agreement Accounts
The ILA Portfolios, together with other registered investment companies having
advisory agreements with GSAM, transfer uninvested cash balances into joint
accounts, the daily aggregate balances of which are invested in repurchase
agreements. The underlying securities for the repurchase agreements are U.S.
Treasury obligations.
As of December 31, 1995, the Prime Obligations, Money Market, Government
and Treasury Obligations Portfolios had, respectively, a 5.2%, 3.7%, 7.2% and
17.6% undivided interest in the repurchase agreements in the following joint
account which equaled $122,100,000, $86,300,000, $168,400,000 and $411,600,000
in principal amount, respectively. As of December 31, 1995, the repurchase
agreements 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>
Repurchase Agreements
Bear Stearns Companies, Inc., dated 12/29/95, repurchase price
$500,325,000 (U.S. Treasury Bills: $511,267,175, 05/15/98-08/15/02)
$500,000,000 5.85% 01/02/96 $ 500,000,000
Morgan Stanley & Co., dated 12/29/95, repurchase price $500,348,333
(U.S. Treasury Bills: $510,213,707, 06/20/96-12/12/96)
500,000,000 6.27 01/02/96 500,000,000
Smith Barney, Inc., dated 12/29/95, repurchase price $100,062,222
(U.S. Treasury Stripped Securities: $102,000,086, 08/15/96-08/15/05)
100,000,000 5.60 01/02/96 100,000,000
Smith Barney, Inc., dated 12/29/95, repurchase price $500,325,556
(U.S. Treasury Notes: $452,845,339, 5.50%-8.88%, 11/30/96-09/30/00;
U.S. Treasury Stripped Securities: $57,154,783, 05/15/97-05/15/05)
500,000,000 5.86 01/02/96 500,000,000
Swiss Bank Corp., dated 12/29/95, repurchase price $740,483,445
(U.S. Treasury Notes: $651,461,859, 4.38%-8.88%, 08/31/96-11/15/01;
U.S. Treasury Stripped Securities: $82,825,172, 02/15/02-08/15/02;
U.S. Treasury Bills: $20,818,558, 02/29/96-11/14/96)
740,000,000 5.88 01/02/96 740,000,000
- --------------------------------------------------------------------------------
Total Joint Repurchase Agreement Account $2,340,000,000
================================================================================
</TABLE>
8. Certain Reclassifications
In accordance with Statement of Position 93-2, the Tax-Exempt Diversified Fund
has reclassified $196,592 from accumulated undistributed net realized loss to
paid-in capital. This reclassification has no impact on the net asset value of
the Fund and is designed to present the Fund's capital accounts on a tax basis.
9. Other Matters
Pursuant to an SEC exemptive order, each taxable Portfolio may enter into
certain principal transactions, including repurchase agreements, with Goldman,
Sachs & Co., or its affiliate, Goldman Sachs Money Markets L.P. subject to
certain limitations which include the following: 25% of eligible security
transactions, as defined, and 10% of repurchase agreement transactions.
32
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Selected Data for a Unit Outstanding Throughout Each Period
Prime Obligations Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
---------------------------------
Net
Net asset realized Total Net asset
value at Net gain on Income from value at
beginning investment investment investment Distributions end of
of period income transactions operations to unitholders period
-------------------------------------------------------------------------------
For the Years Ended December 31,
- ------------------
<S> <C> <C> <C> <C> <C> <C>
1995-ILA units........... $1.00 $0.0566 $ -- $0.0566 $(0.0566) $1.00
1995-ILA
Administration units.... 1.00 0.0551 -- 0.0551 (0.0551) 1.00
1995-ILA Service
units................... 1.00 0.0522 -- 0.0522 (0.0522) 1.00
1994-ILA units........... 1.00 0.0394 -- 0.0394 (0.0394) 1.00
1994-ILA
Administration units.... 1.00 0.0379 -- 0.0379 (0.0379) 1.00
1994-ILA Service
units................... 1.00 0.0365 -- 0.0365 (0.0365) 1.00
1993-ILA units........... 1.00 0.0291 0.0002 0.0293 (0.0293) 1.00
1993-ILA
Administration units.... 1.00 0.0275 0.0003 0.0278 (0.0278) 1.00
1993-ILA Service
units................... 1.00 0.0250 0.0001 0.0251 (0.0252) 1.00
1992-ILA units........... 1.00 0.0364 0.0010 0.0374 (0.0374) 1.00
1992-ILA
Administration units.... 1.00 0.0339 0.0010 0.0349 (0.0349) 1.00
1992-ILA Service
units................... 1.00 0.0311 0.0010 0.0321 (0.0320) 1.00
1991-ILA units........... 1.00 0.0591 0.0003 0.0594 (0.0594) 1.00
1991-ILA
Administration units.... 1.00 0.0568 0.0003 0.0571 (0.0571) 1.00
1991-ILA Service
units................... 1.00 0.0558 0.0003 0.0561 (0.0561) 1.00
1990-ILA units........... 1.00 0.0793 -- 0.0793 (0.0793) 1.00
1990-ILA
Administration
units/(b)/.............. 1.00 0.0438 -- 0.0438 (0.0438) 1.00
1990-ILA Service
units/(b)/.............. 1.00 0.0425 -- 0.0425 (0.0425) 1.00
1989-ILA units........... 1.00 0.0890 -- 0.0890 (0.0890) 1.00
1988-ILA units........... 1.00 0.0714 -- 0.0714 (0.0714) 1.00
1987-ILA units........... 1.00 0.0634 -- 0.0634 (0.0634) 1.00
1986-ILA units........... 1.00 0.0644 0.0001 0.0645 (0.0645) 1.00
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations/(d)/
-------------------------
Ratio of net Net Ratio
Ratio of net investment assets at Ratio of net of net
expenses to income to end of expenses to expenses to
Total average net average net period average net average
return/(a)/ assets assets (in 000s) assets net assets
--------------------------------------------------------------------------------
For the Years Ended December 31,
- ------------------
<S> <C> <C> <C> <C> <C> <C>
1995-ILA units........... 5.79% 0.41% 5.66% $1,261,251 0.43% 5.64%
1995-ILA
Administration units.... 5.63 0.56 5.51 63,018 0.58 5.49
1995-ILA Service
units................... 5.37 0.81 5.22 227,233 0.83 5.20
1994-ILA units........... 4.07 0.40 3.94 1,963,846 0.42 3.92
1994-ILA
Administration units.... 3.91 0.55 3.79 149,234 0.57 3.77
1994-ILA Service
units................... 3.66 0.80 3.65 170,453 0.82 3.63
1993-ILA units........... 2.97 0.40 2.91 2,332,771 0.42 2.89
1993-ILA
Administration units.... 2.82 0.55 2.75 189,431 0.57 2.73
1993-ILA Service
units................... 2.56 0.80 2.50 137,804 0.82 2.48
1992-ILA units........... 3.75 0.40 3.64 3,444,591 0.42 3.62
1992-ILA
Administration units.... 3.60 0.55 3.39 257,321 0.57 3.37
1992-ILA Service
units................... 3.34 0.80 3.11 22,044 0.82 3.09
1991-ILA units........... 6.10 0.40 5.91 3,531,736 0.42 5.89
1991-ILA
Administration units.... 5.94 0.55 5.68 198,417 0.57 5.66
1991-ILA Service
units................... 5.68 0.80 5.58 18,789 0.82 5.56
1990-ILA units........... 8.21 0.38 7.93 2,833,541 0.38 7.93
1990-ILA
Administration
units/(b)/.............. 7.81/(c)/ 0.55/(c)/ 7.62/(c)/ 209,272 0.55/(c)/ 7.62/(c)/
1990-ILA Service
units/(b)/.............. 7.56/(c)/ 0.80/(c)/ 7.25/(c)/ 19,039 0.80/(c)/ 7.25/(c)/
1989-ILA units........... 9.27 0.40 8.90 3,761,964 0.40 8.90
1988-ILA units........... 7.48 0.40 7.14 3,799,628 0.40 7.14
1987-ILA units........... 6.50 0.40 6.34 5,814,280 0.40 6.34
1986-ILA units........... 6.67 0.40 6.44 4,654,076 0.40 6.44
</TABLE>
- ----------------
/(a)/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/ ILA Administration and Service unit activity commenced during June of
1990.
/(c)/ Annualized.
/(d)/ Prior year ratios have been restated in order to conform with current year
presentation.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements
33
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Money Market Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
------------------------------------------
Net
Net asset realized Total Net asset
value at Net gain on income from value at
For the Years beginning investment investment investment Distributions end of
Ended December 31, of period income transactions operations to unitholders period
- ------------------ -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1995-ILA units........... $1.00 $0.0571 $ -- $0.0571 ($0.0571) $1.00
1995-ILA
Administration units.... 1.00 0.0555 -- 0.0555 (0.0555) 1.00
1995-ILA Service
units................... 1.00 0.0529 -- 0.0529 (0.0529) 1.00
1994-ILA units........... 1.00 0.0401 -- 0.0401 (0.0401) 1.00
1994-ILA
Administration units.... 1.00 0.0388 -- 0.0388 (0.0388) 1.00
1994-ILA Service
units................... 1.00 0.0364 -- 0.0364 (0.0364) 1.00
1993-ILA units........... 1.00 0.0296 0.0003 0.0299 (0.0299) 1.00
1993-ILA
Administration units.... 1.00 0.0281 0.0003 0.0284 (0.0284) 1.00
1993-ILA Service
units................... 1.00 0.0257 0.0002 0.0259 (0.0259) 1.00
1992-ILA units........... 1.00 0.0368 0.0004 0.0372 (0.0372) 1.00
1992-ILA
Administration units.... 1.00 0.0356 0.0004 0.0360 (0.0360) 1.00
1992-ILA Service
units................... 1.00 0.0358 0.0006 0.0364 (0.0364) 1.00
1991-ILA units........... 1.00 0.0591 0.0004 0.0595 (0.0595) 1.00
1991-ILA
Administration units.... 1.00 0.0574 0.0004 0.0578 (0.0578) 1.00
1991-ILA Service
units................... 1.00 0.0547 0.0004 0.0551 (0.0551) 1.00
1990-ILA units........... 1.00 0.0793 0.0001 0.0794 (0.0794) 1.00
1990-ILA
Administration
units/(c)/.............. 1.00 0.0424 0.0001 0.0425 (0.0425) 1.00
1990-ILA Service
units/(c)/.............. 1.00 0.0438 -- 0.0438 (0.0438) 1.00
1989-ILA units........... 1.00 0.0885 0.0001 0.0886 (0.0886) 1.00
1988-ILA units........... 1.00 0.0751 -- 0.0751 (0.0751) 1.00
For the Period December 2, 1987 (commencement of operations) through December 31,
- ----------------------------------------------------------------------------------
1987-ILA units........... 1.00 0.0063 -- 0.0063 (0.0063) 1.00
Ratios assuming no
waiver of fees and no
expense limitations/(d)/
-------------------------
Ratio of net Net Ratio
Ratio of net investment assets at Ratio of net of net
expenses to income to end of expenses to expenses
For the Years Total average net average net period average net to average
Ended December 31, return/(a)/ assets assets (in 000s) assets net assets
- ------------------ -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1995-ILA units........... 5.85% 0.36% 5.71% $ 574,155 0.42% 5.65%
1995-ILA
Administration units.... 5.69 0.51 5.55 164,422 0.57 5.49
1995-ILA Service
units................... 5.43 0.76 5.29 23,080 0.82 5.23
1994-ILA units........... 4.13 0.35 4.01 559,470 0.43 3.93
1994-ILA
Administration units.... 3.98 0.50 3.88 145,867 0.58 3.80
1994-ILA Service
units................... 3.72 0.75 3.61 21,862 0.83 3.53
1993-ILA units........... 3.03 0.35 2.96 699,604 0.43 2.88
1993-ILA
Administration units.... 2.88 0.50 2.81 150,452 0.58 2.73
1993-ILA Service
units................... 2.62 0.75 2.57 11,166 0.83 2.49
1992-ILA units........... 3.76 0.35 3.68 884,571 0.43 3.60
1992-ILA
Administration units.... 3.61 0.50 3.56 187,445 0.58 3.48
1992-ILA Service
units................... 3.35 0.75 3.58 15,114 0.83 3.50
1991-ILA units........... 6.12 0.35 5.91 1,153,191 0.42 5.84
1991-ILA
Administration units.... 5.96 0.50 5.74 210,330 0.57 5.67
1991-ILA Service
units................... 5.70 0.75 5.47 56,586 0.82 5.40
1990-ILA units........... 8.24 0.35 7.93 924,141 0.40 7.88
1990-ILA
Administration
units/(c)/.............. 7.86/(b)/ 0.50/(b)/ 7.63/(b)/ 204,477 0.55/(b)/ 7.58/(b)/
1990-ILA Service
units/(c)/.............. 7.61/(b)/ 0.75/(b)/ 7.46/(b)/ 38,128 0.80/(b)/ 7.41/(b)/
1989-ILA units........... 9.31 0.35 8.85 1,295,389 0.40 8.80
1988-ILA units........... 7.66 0.27 7.51 701,105 0.40 7.38
For the Period December 2, 1987 (commencement of operations) through December 31,
- ----------------------------------------------------------------------------------
1987-ILA units 7.38/(b)/ 0.15/(b)/ 7.62/(b)/ 183,633 0.40/(b)/ 7.37/(b)/
</TABLE>
- ----------------
/(a)/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/ Annualized.
/(c)/ ILA Administration and Service unit activity commenced during June of
1990.
/(d)/ Prior year ratios have been restated in order to conform with current year
presentation.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
34
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Government Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
------------------------------------------
Net
Net asset realized Total Net asset
value at Net gain on income from value at
For the Years beginning investment investment investment Distributions end of
Ended December 31, of period income transactions operations to unitholders period
- ------------------ -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1995-ILA units........... $1.00 $0.0562 $0.0002 $0.0564 $(0.0564) $1.00
1995-ILA
Administration units.... 1.00 0.0549 0.0002 0.0551 (0.0551) 1.00
1995-ILA Service
units................... 1.00 0.0519 0.0002 0.0521 (0.0521) 1.00
1994-ILA units........... 1.00 0.0378 0.0002 0.0380 (0.0380) 1.00
1994-ILA
Administration units.... 1.00 0.0362 0.0002 0.0364 (0.0364) 1.00
1994-ILA Service
units................... 1.00 0.0350 0.0002 0.0352 (0.0352) 1.00
1993-ILA units........... 1.00 0.0282 0.0008 0.0290 (0.0291) 1.00
1993-ILA
Administration units.... 1.00 0.0267 0.0008 0.0275 (0.0276) 1.00
1993-ILA Service
units................... 1.00 0.0242 0.0006 0.0248 (0.0250) 1.00
1992-ILA units........... 1.00 0.0338 0.0027 0.0365 (0.0364) 1.00
1992-ILA
Administration units.... 1.00 0.0325 0.0027 0.0352 (0.0351) 1.00
1992-ILA Service
units................... 1.00 0.0309 0.0030 0.0339 (0.0336) 1.00
1991-ILA units........... 1.00 0.0567 0.0011 0.0578 (0.0578) 1.00
1991-ILA
Administration units.... 1.00 0.0545 0.0011 0.0556 (0.0556) 1.00
1991-ILA Service
units................... 1.00 0.0522 0.0011 0.0533 (0.0533) 1.00
1990-ILA units........... 1.00 0.0779 0.0003 0.0782 (0.0782) 1.00
1990-ILA
Administration
units/(b)/.............. 1.00 0.0439 0.0004 0.0443 (0.0443) 1.00
1990-ILA Service
units/(b)/.............. 1.00 0.0359 0.0002 0.0361 (0.0363) 1.00
1989-ILA units........... 1.00 0.0877 0.0001 0.0878 (0.0878) 1.00
1988-ILA units........... 1.00 0.0716 0.0002 0.0718 (0.0718) 1.00
1987-ILA units........... 1.00 0.0622 0.0001 0.0623 (0.0624) 1.00
1986-ILA units........... 1.00 0.0629 0.0011 0.0640 (0.0641) 1.00
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations/(d)/
--------------------------
Ratio of net Net Ratio
Ratio of net investment assets at Ratio of net of net
expenses to income to end of expenses to expenses
For the Years Total average net average net period average net to average
Ended December 31, return/(a)/ assets assets (in 000s) assets net assets
- ------------------ -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1995-ILA units........... 5.77% 0.41% 5.62% $ 570,469 0.43% 5.60%
1995-ILA
Administration units.... 5.62 0.56 5.49 47,558 0.58 5.47
1995-ILA Service
units................... 5.35 0.81 5.19 85,401 0.83 5.17
1994-ILA units........... 3.94 0.40 3.78 881,520 0.44 3.74
1994-ILA
Administration units.... 3.79 0.55 3.62 95,483 0.59 3.58
1994-ILA Service
units................... 3.53 0.80 3.50 156,930 0.84 3.46
1993-ILA units........... 2.94 0.40 2.82 1,315,378 0.43 2.79
1993-ILA
Administration units.... 2.79 0.55 2.67 161,845 0.58 2.64
1993-ILA Service
units................... 2.53 0.80 2.42 101,272 0.83 2.39
1992-ILA units........... 3.70 0.40 3.38 1,785,472 0.42 3.36
1992-ILA
Administration units.... 3.55 0.55 3.25 461,542 0.57 3.23
1992-ILA Service
units................... 3.29 0.80 3.09 56,389 0.82 3.07
1991-ILA units........... 5.91 0.40 5.67 2,103,627 0.43 5.64
1991-ILA
Administration units.... 5.75 0.55 5.45 464,060 0.58 5.42
1991-ILA Service
units................... 5.49 0.80 5.22 200,176 0.83 5.19
1990-ILA units........... 8.11 0.39 7.79 2,203,756 0.39 7.79
1990-ILA
Administration
units/(b)/.............. 7.74/(c)/ 0.55/(c)/ 7.49/(c)/ 296,313 0.55/(c)/ 7.49/(c)/
1990-ILA Service
units/(b)/.............. 7.42/(c)/ 0.80/(c)/ 7.15/(c)/ 132,888 0.80/(c)/ 7.15/(c)/
1989-ILA units........... 9.15 0.40 8.77 2,268,330 0.40 8.77
1988-ILA units........... 7.42 0.40 7.16 2,197,796 0.40 7.16
1987-ILA units........... 6.43 0.40 6.22 2,243,870 0.40 6.22
1986-ILA units........... 6.65 0.40 6.29 2,401,140 0.40 6.29
</TABLE>
- ----------------
/(a)/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/ ILA Administration and Service unit activity commenced during June and
July of 1990.
/(c)/ Annualized.
/(d)/ Prior year ratios have been restated in order to conform with current year
presentation.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
35
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Treasury Obligations Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
----------------------------------------
Net
Net asset realized Total Net asset
value at Net gain on Income from value at
For the Years beginning investment investment investment Distributions end of
Ended December 31, of period income transactions operations to unitholders period
- ------------------ -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1995-ILA units........... $1.00 $0.0551 $0.0007 $0.0558 $(0.0558) $1.00
1995-ILA
Administration units.... 1.00 0.0537 0.0007 0.0544 (0.0544) 1.00
1995-ILA Service
units................... 1.00 0.0511 0.0007 0.0518 (0.0518) 1.00
1994-ILA units........... 1.00 0.0377 -- 0.0377 (0.0377) 1.00
1994-ILA
Administration units.... 1.00 0.0368 -- 0.0368 (0.0368) 1.00
1994-ILA Service
units................... 1.00 0.0340 -- 0.0340 (0.0340) 1.00
1993-ILA units........... 1.00 0.0279 0.0006 0.0285 (0.0286) 1.00
1993-ILA
Administration units.... 1.00 0.0264 0.0006 0.0270 (0.0270) 1.00
1993-ILA Service
units................... 1.00 0.0239 0.0006 0.0245 (0.0246) 1.00
1992-ILA units........... 1.00 0.0339 0.0025 0.0364 (0.0362) 1.00
1992-ILA
Administration units.... 1.00 0.0320 0.0023 0.0343 (0.0343) 1.00
1992-ILA Service
units................... 1.00 0.0294 0.0024 0.0318 (0.0318) 1.00
1991-ILA units........... 1.00 0.0557 0.0018 0.0575 (0.0575) 1.00
1991-ILA
Administration units.... 1.00 0.0540 0.0018 0.0558 (0.0558) 1.00
1991-ILA Service
units................... 1.00 0.0515 0.0018 0.0533 (0.0533) 1.00
1990-ILA units........... 1.00 0.0772 0.0002 0.0774 (0.0774) 1.00
1990-ILA
Administration
units/(b)/............... 1.00 0.0413 0.0002 0.0415 (0.0415) 1.00
1990-ILA Service
units/(b)/.............. 1.00 0.0417 0.0003 0.0420 (0.0421) 1.00
1989-ILA units........... 1.00 0.0864 0.0005 0.0869 (0.0869) 1.00
1988-ILA units........... 1.00 0.0704 0.0004 0.0708 (0.0708) 1.00
1987-ILA units........... 1.00 0.0617 0.0002 0.0619 (0.0619) 1.00
1986-ILA units........... 1.00 0.0625 0.0012 0.0637 (0.0637) 1.00
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations/(d)/
--------------------------
Ratio of net Net Ratio
Ratio of net investment assets at Ratio of net of net
expenses to income to end of expenses to expenses
For the Years Total average net average net period average net to average
Ended December 31, return/(a)/ assets assets (in 000s) assets net assets
- ------------------ -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1995-ILA units........... 5.73% 0.41% 5.51% $ 711,209 0.43% 5.49%
1995-ILA
Administration units.... 5.57 0.56 5.37 92,643 0.58 5.35
1995-ILA Service
units................... 5.31 0.81 5.11 119,692 0.83 5.09
1994-ILA units........... 3.91 0.40 3.77 713,816 0.44 3.73
1994-ILA
Administration units.... 3.75 0.55 3.68 97,626 0.59 3.64
1994-ILA Service
units................... 3.49 0.80 3.39 108,972 0.84 3.35
1993-ILA units........... 2.89 0.40 2.79 969,565 0.43 2.76
1993-ILA
Administration units.... 2.74 0.55 2.64 121,327 0.58 2.61
1993-ILA Service
units................... 2.48 0.80 2.39 185,506 0.83 2.36
1992-ILA units........... 3.65 0.40 3.39 1,328,036 0.43 3.36
1992-ILA
Administration units.... 3.49 0.55 3.20 152,804 0.58 3.17
1992-ILA Service
units................... 3.23 0.80 2.94 183,208 0.83 2.91
1991-ILA units........... 5.90 0.40 5.57 1,709,321 0.43 5.54
1991-ILA
Administration units.... 5.74 0.55 5.40 146,795 0.58 5.37
1991-ILA Service
units................... 5.48 0.80 5.15 154,419 0.83 5.12
1990-ILA units........... 8.05 0.39 7.72 1,816,991 0.39 7.72
1990-ILA
Administration
units/(b)/.............. 7.67/(c)/ 0.55/(c)/ 7.42/(c)/ 132,088 0.55/(c)/ 7.42/(c)/
1990-ILA Service
units/(b)/.............. 7.42/(c)/ 0.80/(c)/ 7.11/(c)/ 148,323 0.80/(c)/ 7.11/(c)/
1989-ILA units........... 9.06 0.40 8.64 1,769,974 0.40 8.64
1988-ILA units........... 7.30 0.40 7.04 1,657,215 0.40 7.04
1987-ILA units........... 6.32 0.40 6.17 1,693,767 0.40 6.17
1986-ILA units........... 6.63 0.40 6.25 1,625,331 0.40 6.25
</TABLE>
- ----------------
/(a)/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/ ILA Administration and Service unit activity commenced during June and
July of 1990, respectively.
/(c)/ Annualized.
/(d)/ Prior year ratios have been restated in order to conform with current year
presentation.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
36
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Treasury Instruments Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
------------------------------------------
Net
Net asset realized Total Net asset
value at Net gain on income from value at
For the Years beginning investment investment investment Distributions end of
Ended December 31, of period income transactions operations to unitholders period
- ------------------ -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1995-ILA units........... $1.00 $0.0550 $0.0006 $0.0556 $(0.0556) $1.00
1995-ILA
Administration units.... 1.00 0.0534 0.0007 0.0541 (0.0540) 1.00
1995-ILA Service
units................... 1.00 0.0500 0.0005 0.0505 (0.0505) 1.00
1994-ILA units........... 1.00 0.0397 0.0001 0.0398 (0.0398) 1.00
1994-ILA
Administration units.... 1.00 0.0397 0.0001 0.0398 (0.0398) 1.00
1994-ILA Service
units................... 1.00 0.0371 0.0001 0.0372 (0.0372) 1.00
1993-ILA units........... 1.00 0.0288 0.0006 0.0294 (0.0294) 1.00
1993-ILA
Administration units.... 1.00 0.0273 0.0006 0.0279 (0.0279) 1.00
1993-ILA Service
units................... 1.00 0.0248 0.0006 0.0254 (0.0254) 1.00
1992-ILA units........... 1.00 0.0338 0.0012 0.0350 (0.0350) 1.00
1992-ILA
Administration units.... 1.00 0.0326 0.0012 0.0338 (0.0338) 1.00
1992-ILA Service
units................... 1.00 0.0275 0.0011 0.0286 (0.0286) 1.00
For the Period January 30 ,1991 (commencement of operations) through December 31,
- ---------------------------------------------------------------------------------
1991-ILA units........... 1.00 0.0486 0.0013 0.0499 (0.0499) 1.00
1991-ILA
Administration
units/(c)/............... 1.00 0.0210 0.0010 0.0220 (0.0220) 1.00
1991-ILA Service
units/(d)/.............. 1.00 0.0473 0.0009 0.0482 (0.0482) 1.00
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations/(d)/
--------------------------
Ratio of net Net Ratio
Ratio of net investment assets at Ratio of net of net
expenses to income to end of expenses to expenses
For the Years Total average net average net period average net to average
Ended December 31, return/(a)/ assets assets (in 000s) assets net assets
- ------------------ -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1995-ILA units........... 5.70% 0.21% 5.50% $586,294 0.44% 5.27%
1995-ILA
Administration units.... 5.54 0.36 5.34 68,713 0.59 5.11
1995-ILA Service
units................... 5.28 0.61 5.00 123,254 0.84 4.77
1994-ILA units........... 4.01 0.20 3.96 547,351 0.43 3.73
1994-ILA
Administration units.... 3.85 0.35 3.97 64,388 0.58 3.74
1994-ILA Service
units................... 3.59 0.60 3.72 74,451 0.83 3.49
1993-ILA units........... 2.98 0.20 2.88 456,411 0.44 2.64
1993-ILA
Administration units.... 2.83 0.35 2.73 26,553 0.59 2.49
1993-ILA Service
units................... 2.57 0.60 2.48 34,014 0.84 2.24
1992-ILA units........... 3.54 0.18 3.38 422,506 0.45 3.11
1992-ILA
Administration units.... 3.38 0.33 3.26 6,915 0.60 2.99
1992-ILA Service
units................... 3.13 0.58 2.75 29,522 0.85 2.48
For the Period January 30, 1991 (commencement of operations) through December 31,
- ---------------------------------------------------------------------------------
1991-ILA units........... 5.75/(b)/ 0.10/(b)/ 5.28/(b)/ 424,436 0.45/(b)/ 4.93/(b)/
1991-ILA
Administration
units/(c)/.............. 5.21/(b)/ 0.25/(b)/ 4.77/(b)/ 17,649 0.60/(b)/ 4.42/(b)/
1991-ILA Service
units/(d)/.............. 5.33/(b)/ 0.50/(b)/ 5.13/(b)/ 9,430 0.85/(b)/ 4.78/(b)/
</TABLE>
- ----------------
/(a)/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/ Annualized.
/(c)/ ILA Administration and Service unit activity commenced during July and
January of 1991, respectively.
/(d)/ Prior year ratios have been restated in order to conform with current year
presentation.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
37
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Federal Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
------------------------------------
Net
Net asset realized Total Net asset
value at Net gain on income from value at
For the Years beginning investment investment investment Distributions end of
Ended December 31, of period income transactions operations to unitholders period
- ------------------ -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1995-ILA units........... $1.00 $0.0569 -- $0.0569 $(0.0569) $1.00
1995-ILA
Administration units.... 1.00 0.0550 -- 0.0550 (0.0550) 1.00
1995-ILA Service
units................... 1.00 0.0522 -- 0.0522 (0.0522) 1.00
1994-ILA units........... 1.00 0.0407 -- 0.0407 (0.0407) 1.00
1994-ILA
Administration units.... 1.00 0.0388 -- 0.0388 (0.0388) 1.00
1994-ILA Service
units................... 1.00 0.0392 -- 0.0392 (0.0392) 1.00
1993-ILA units........... 1.00 0.0296 -- 0.0296 (0.0296) 1.00
1993-ILA
Administration units.... 1.00 0.0281 -- 0.0281 (0.0281) 1.00
1993-ILA Service
units/(c)/.............. 1.00 0.0157 -- 0.0157 (0.0157) 1.00
1992-ILA units........... 1.00 0.0358 -- 0.0358 (0.0358) 1.00
1992-ILA
Administration units.... 1.00 0.0340 -- 0.0340 (0.0340) 1.00
1991-ILA units........... 1.00 0.0576 -- 0.0576 (0.0576) 1.00
1991-ILA
Administration units.... 1.00 0.0542 -- 0.0542 (0.0542) 1.00
1991-ILA Service
units/(c)/.............. 1.00 0.0196 -- 0.0196 (0.0196) 1.00
1990-ILA units........... 1.00 0.0772 -- 0.0772 (0.0772) 1.00
1990-ILA
Administration
units/(d)/.............. 1.00 0.0205 -- 0.0205 (0.0205) 1.00
For the Period May 22, 1989 (commencement of operations) through December 31,
- -----------------------------------------------------------------------------
1989-ILA units........... 1.00 0.0516 - 0.0516 (0.0516) 1.00
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations/(d)/
--------------------------
Ratio of net Net Ratio
Ratio of net investment assets at Ratio of net of net
expenses to income to end of expenses to expenses
Total average net average net period average net to average
For the Years return/(a)/ assets assets (in 000s) assets net assets
Ended December 31, -------------------------------------------------------------------------------
- ------------------
<S> <C> <C> <C> <C> <C> <C>
1995-ILA units........... 5.83% 0.26% 5.69% $1,731,935 0.42% 5.53%
1995-ILA
Administration units.... 5.67 0.41 5.50 516,917 0.57 5.34
1995-ILA Service
units................... 5.41 0.66 5.22 102,576 0.82 5.06
1994-ILA units........... 4.11 0.25 4.07 1,625,567 0.42 3.90
1994-ILA
Administration units.... 3.95 0.40 3.88 329,896 0.57 3.71
1994-ILA Service
units................... 3.69 0.65 3.92 15,539 0.82 3.75
1993-ILA units........... 3.00 0.25 2.96 1,430,292 0.42 2.79
1993-ILA
Administration units.... 2.84 0.40 2.81 362,401 0.57 2.64
1993-ILA Service
units/(c)/.............. 2.56/(b)/ 0.65/(b)/ 2.54/(b)/ 1,425 0.82/(b)/ 2.37/(b)/
1992-ILA units........... 3.61 0.25 3.58 1,600,989 0.42 3.41
1992-ILA
Administration units.... 3.46 0.40 3.40 312,792 0.57 3.23
1991-ILA units........... 5.94 0.25 5.76 1,656,232 0.42 5.59
1991-ILA
Administration units.... 5.78 0.40 5.42 291,810 0.57 5.25
1991-ILA Service
units/(c)/.............. 5.55/(b)/ 0.65/(b)/ 5.56/(b)/ -- 0.82/(b)/ 5.39/(b)/
1990-ILA units........... 8.06 0.25 7.72 1,368,765 0.40 7.57
1990-ILA
Administration
units/(d)/.............. 7.39/(b)/ 0.40/(b)/ 7.25/(b)/ 90,748 0.55/(b)/ 7.10/(b)/
For the Period May 22, 1989 (commencement of operations) through December 31,
- -----------------------------------------------------------------------------
1989-ILA units........... 7.62/(b)/ 0.19/(b)/ 8.41/(b)/ 455,230 0.40/(b)/ 8.20/(b)/
</TABLE>
- ----------------
/(a)/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/ Annualized.
/(c)/ ILA Service unit activity commenced during April of 1991; no shares were
outstanding during the period from August 7, 1991 through May 15, 1993.
/(d)/ ILA Administration and Service unit activity commenced during September of
1990.
/(e)/ Prior year ratios have been restated in order to conform with current year
presentation.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
38
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Tax-Exempt Diversified Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
---------------------------------------
Net
Net asset realized Total Net asset
value at Net (gain)loss on income from value at
For the Years beginning investment investment investment Distributions end of
Ended December 31, of period income transactions operations to unitholders period
- ------------------ -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1995-ILA units........... $1.00 $0.0365 $ -- $0.0365 $(0.0365) $1.00
1995-ILA
Administration units.... 1.00 0.0351 -- 0.0351 (0.0352) 1.00
1995-ILA Service
units................... 1.00 0.0324 -- 0.0324 (0.0325) 1.00
1994-ILA units........... 1.00 0.0264 -- 0.0264 (0.0264) 1.00
1994-ILA
Administration units.... 1.00 0.0250 -- 0.0250 (0.0250) 1.00
1994-ILA Service
units................... 1.00 0.0220 -- 0.0220 (0.0220) 1.00
1993-ILA units........... 1.00 0.0222 -- 0.0222 (0.0222) 1.00
1993-ILA
Administration units.... 1.00 0.0207 -- 0.0207 (0.0207) 1.00
1993-ILA Service
units................... 1.00 0.0183 -- 0.0183 (0.0183) 1.00
1992-ILA units........... 1.00 0.0277 -- 0.0277 (0.0277) 1.00
1992-ILA
Administration units.... 1.00 0.0266 -- 0.0266 (0.0266) 1.00
1992-ILA Service
units................... 1.00 0.0243 -- 0.0243 (0.0243) 1.00
1991-ILA units........... 1.00 0.0424 -- 0.0424 (0.0424) 1.00
1991-ILA
Administration units.... 1.00 0.0406 -- 0.0406 (0.0406) 1.00
1991-ILA Service
units................... 1.00 0.0386 -- 0.0386 (0.0386) 1.00
1990-ILA units........... 1.00 0.0550 (0.0001) 0.0549 (0.0549) 1.00
1990-ILA
Administration
units/(c)/.............. 1.00 0.0301 -- 0.0301 (0.0300) 1.00
1990-ILA Service
units/(c)/.............. 1.00 0.0259 -- 0.0259 (0.0259) 1.00
1989-ILA units........... 1.00 0.0591 (0.0001) 0.0590 (0.0590) 1.00
1988-ILA units........... 1.00 0.0487 0.0003 0.0490 (0.0490) 1.00
1987-ILA units........... 1.00 0.0413 (0.0003) 0.0410 (0.0410) 1.00
1986-ILA units........... 1.00 0.0426 -- 0.0426 (0.0426) 1.00
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations/(d)/
--------------------------
Ratio of net Net Ratio
Ratio of net investment assets at Ratio of net of net
expenses to income to end of expenses to expenses
Total average net average net period average net to average
For the Years return/(a)/ assets assets (in 000s) assets net assets
Ended December 31, -------------------------------------------------------------------------------
- ------------------
<S> <C> <C> <C> <C> <C> <C>
1995-ILA units........... 3.72% 0.31% 3.65% $1,342,585 0.42% 3.54%
1995-ILA
Administration units.... 3.57 0.46 3.51 48,773 0.57 3.40
1995-ILA Service
units................... 3.31 0.71 3.24 49,647 0.82 3.13
1994-ILA units........... 2.71 0.30 2.64 1,434,965 0.41 2.53
1994-ILA
Administration units.... 2.55 0.45 2.50 97,778 0.56 2.39
1994-ILA Service
units................... 2.30 0.70 2.20 36,492 0.81 2.09
1993-ILA units........... 2.25 0.30 2.22 1,769,477 0.41 2.11
1993-ILA
Administration units.... 2.09 0.45 2.08 99,896 0.56 1.97
1993-ILA Service
units................... 1.84 0.70 1.83 45,172 0.81 1.72
1992-ILA units........... 2.82 0.30 2.77 1,333,925 0.42 2.65
1992-ILA
Administration units.... 2.67 0.45 2.66 50,225 0.57 2.54
1992-ILA Service
units................... 2.41 0.70 2.43 29,534 0.82 2.31
1991-ILA units........... 4.33 0.32 4.24 1,044,986 0.42 4.14
1991-ILA
Administration units.... 4.17 0.47 4.06 37,567 0.57 3.96
1991-ILA Service
units................... 3.91 0.72 3.86 52,399 0.82 3.76
1990-ILA units........... 5.64 0.40 5.50 603,895 0.40 5.50
1990-ILA
Administration
units/(c)/.............. 5.43/(b)/ 0.55/(b)/ 5.40/(b)/ 42,498 0.55/(b)/ 5.40/(b)/
1990-ILA Service
units/(c)/.............. 5.17/(b)/ 0.80/(b)/ 5.16/(b)/ 56,810 0.80/(b)/ 5.16/(b)/
1989-ILA units........... 6.07 0.40 5.91 688,556 0.40 5.91
1988-ILA units........... 5.03 0.40 4.87 907,782 0.40 4.87
1987-ILA units........... 4.23 0.40 4.13 965,714 0.40 4.13
1986-ILA units........... 4.45 0.40 4.26 1,492,752 0.40 4.26
</TABLE>
- ----------------
/(a)/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/ Annualized.
/(c)/ ILA Administration and Service unit activity commenced during June and
July of 1990, respectively.
/(d)/ Prior year ratios have been restated in order to conform with current year
presentation.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
39
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Tax-Exempt California Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
---------------------------------------
Net
Net asset realized Total Net asset
value at Net (loss) on income from value at
For the Years beginning investment investment investment Distributions end of
Ended December 31, of period income transactions operations to unitholders period
- ------------------ -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1995-ILA units........... $1.00 $0.0349 $ -- $0.0349 $(0.0350) $1.00
1995-ILA
Administration units.... 1.00 0.0332 -- 0.0332 (0.0332) 1.00
1994-ILA units........... 1.00 0.0250 -- 0.0250 (0.0250) 1.00
1994-ILA
Administration units.... 1.00 0.0233 -- 0.0233 (0.0233) 1.00
1993-ILA units........... 1.00 0.0206 -- 0.0206 (0.0206) 1.00
1993-ILA
Administration units.... 1.00 0.0191 -- 0.0191 (0.0191) 1.00
1993-ILA Service
units................... 1.00 0.0166 -- 0.0166 (0.0166) 1.00
1992-ILA units........... 1.00 0.0256 (0.0001) 0.0255 (0.0256) 1.00
1992-ILA
Administration units.... 1.00 0.0235 (0.0002) 0.0233 (0.0235) 1.00
1992-ILA Service
units/(c)/.............. 1.00 0.0081 -- 0.0081 (0.0081) 1.00
1991-ILA units........... 1.00 0.0388 -- 0.0388 (0.0388) 1.00
1991-ILA
Administration units.... 1.00 0.0376 -- 0.0376 (0.0376) 1.00
1990-ILA units........... 1.00 0.0511 (0.0001) 0.0510 (0.0511) 1.00
1990-ILA
Administration
units/(c)/.............. 1.00 0.0042 -- 0.0042 (0.0042) 1.00
1989-ILA units........... 1.00 0.0573 (0.0001) 0.0572 (0.0572) 1.00
For the Period October 3, 1988 (commencement of operations) through December 31,
- --------------------------------------------------------------------------------
1988-ILA units........... 1.00 0.0139 -- 0.0139 (0.0139) 1.00
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations/(d)/
-------------------------
Ratio of net Net Ratio
Ratio of net investment assets at Ratio of net of net
expenses to income to end of expenses to expenses
For the Years Total average net average net period average net to average
Ended December 31, return/(a)/ assets assets (in 000s) assets net assets
- ------------------ -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1995-ILA units........... 3.55% 0.41% 3.49% $346,728 0.41% 3.49%
1995-ILA
Administration units.... 3.40 0.56 3.32 61 0.56 3.32
1994-ILA units........... 2.53 0.40 2.50 227,399 0.41 2.49
1994-ILA
Administration units.... 2.37 0.55 2.33 790 0.56 2.32
1993-ILA units........... 2.09 0.40 2.06 229,839 0.44 2.02
1993-ILA
Administration units.... 1.93 0.55 1.91 1,425 0.59 1.87
1993-ILA Service
units................... 1.68 0.76 1.66 -- 0.84 1.54
1992-ILA units........... 2.62 0.40 2.56 161,868 0.47 2.49
1992-ILA
Administration units.... 2.47 0.55 2.35 31 0.62 2.28
1992-ILA Service
units/(c)/.............. 1.99/(b)/ 0.80/(b)/ 2.03/(b)/ 3 0.87/(b)/ 1.96/(b)/
1991-ILA units........... 3.92 0.40 3.88 102,494 0.47 3.81
1991-ILA
Administration units.... 3.80 0.55 3.76 13 0.62/(b)/ 3.69
1990-ILA units........... 5.24 0.40 5.11 106,972 0.40 5.11
1990-ILA
Administration
units/(c)/.............. 5.14/(b)/ 0.55/(b)/ 5.33/(b)/ 68 0.55/(b)/ 5.33/(b)/
1989-ILA units........... 5.93 0.40 5.73 112,463 0.40 5.73
For the Period October 3, 1988 (commencement of operations) through December 31,
- ---------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1988-ILA units........... 5.81/(b)/ 0.24/(b)/ 5.74/(b)/ 41,028 0.38/(b)/ 5.60/(b)/
</TABLE>
- ----------------
/(a)/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/ Annualized.
/(c)/ ILA Administration and Service unit activity commenced during December of
1990 and August of 1992, respectively. No service shares were outstanding
for the years ended December 31, 1994 and December 31, 1995.
/(d)/ Prior year ratios have been restated in order to conform with current
presentation.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
40
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Tax-Exempt New York Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
---------------------------------------
Net
Net asset realized Total Net asset
value at Net (loss) on income from value at
For the Years beginning investment investment investment Distributions end of
Ended December 31, of period income transactions operations to unitholders period
- ------------------ -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1995-ILA units........... $1.00 $0.0344 $ -- $0.0344 $(0.0344) $1.00
1995-ILA
Administration units.... 1.00 0.0328 -- 0.0328 (0.0328) 1.00
1994-ILA units........... 1.00 0.0262 -- 0.0262 (0.0262) 1.00
1994-ILA
Administration units.... 1.00 0.0247 -- 0.0247 (0.0247) 1.00
1993-ILA units........... 1.00 0.0221 -- 0.0221 (0.0221) 1.00
1993-ILA
Administration units.... 1.00 0.0205 -- 0.0205 (0.0205) 1.00
1992-ILA units........... 1.00 0.0265 -- 0.0265 (0.0265) 1.00
1992-ILA
Administration units.... 1.00 0.0253 -- 0.0253 (0.0253) 1.00
For the Period February 15, 1991 (commencement of operations) through December 31,
- ------------------------------------------------------------------------------------
1991-ILA units........... 1.00 0.0347 (0.0002) 0.0345 (0.0347) 1.00
1991-ILA
Administration
units/(c)/.............. 1.00 0.0330 -- 0.0330 (0.0330) 1.00
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations/(d)/
--------------------------
Ratio of net Net Ratio
Ratio of net investment assets at Ratio of net of net
expenses to income to end of expenses to expenses
For the Years Total average net average net period average net to average
Ended December 31, return/(a)/ assets assets (in 000s) assets net assets
- ------------------ -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1995-ILA units........... 3.51% 0.30% 3.44% $90,537 0.44% 3.30%
1995-ILA
Administration units.... 3.35 0.45 3.28 26,724 0.59 3.14
1994-ILA units........... 2.56 0.24 2.62 84,517 0.47 2.39
1994-ILA
Administration units.... 2.41 0.39 2.47 38,970 0.62 2.24
1993-ILA units........... 2.21 0.10 2.21 48,367 0.51 1.80
1993-ILA
Administration units.... 2.05 0.25 2.05 20,306 0.66 1.64
1992-ILA units........... 2.71 0.10 2.65 16,844 0.57 2.18
1992-ILA
Administration units.... 2.55 0.25 2.53 14,641 0.72 2.06
For the Period
February 15, 1991 (commencement of operations) through December 31,
- ---------------------------------------------------------------------
1991-ILA units........... 4.02/(b)/ 0.10/(b)/ 3.96/(b)/ 11,070 0.76/(b)/ 3.30/(b)/
1991-ILA
Administration
units/(c)/.............. 3.87/(b)/ 0.25/(b)/ 3.90/(b)/ 19,189 0.91/(b)/ 3.24/(b)/
</TABLE>
- ----------------
/(a)/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/ Annualized.
/(c)/ ILA Administration and Service unit activity commenced during February of
1991.
/(d)/ Prior year ratios have been restated in order to conform with current year
presentation.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
41
<PAGE>
- --------------------------------------------------------------------------------
Report of Independent Public Accountants
- --------------------------------------------------------------------------------
To the Unitholders and Board of Trustees of Goldman Sachs Money Market Trust--
Institutional Liquid Assets:
We have audited the accompanying statements of assets and liabilities of
Goldman Sachs Money Market Trust--Institutional Liquid Assets (a Massachusetts
business trust comprising the Prime Obligations, Money Market, Government,
Treasury Obligations, Treasury Instruments, Federal, Tax-Exempt Diversified,
Tax-Exempt California and Tax-Exempt New York Portfolios), including the
statements of investments as of December 31, 1995, and the related statements of
operations for the year then ended, the statements of changes in net assets and
the financial highlights for 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
December 31, 1995 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 Money
Market Trust--Institutional Liquid Assets as of December 31, 1995, the results
of their operations for the year then ended, 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
February 9, 1996
42
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
This Annual Report is authorized for distribution to prospective investors only
when preceded or accompanied by a Goldman Sachs Money Market Trust--
Institutional Liquid Assets Portfolios' Prospectus which contains facts
concerning each Fund's objectives and policies, management, expenses and other
information.
- --------------------------------------------------------------------------------
43
<PAGE>
Goldman Sachs
1 New York Plaza
New York, NY 10004
TRUSTEES
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
ila/ANN/1295
- --------------------------------------------------------------------------------
GOLDMAN SACHS
MONEY MARKET TRUST
INSTITUTIONAL
LIQUID ASSETS
- ------------------
Annual Report
December 31, 1995
Prime Obligations Portfolio
Money Market Portfolio
Government Portfolio
Treasury Obligations Portfolio
Treasury Instruments Portfolio
Federal Portfolio
Tax-Exempt Diversified Portfolio
Tax-Exempt California Portfolio
Tax-Exempt New York Portfolio
[LOGO OF GOLDMAN SACHS APPEARS HERE]
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders
- --------------------------------------------------------------------------------
Dear Shareholders:
We welcome this opportunity to provide you with a summary of the trends and
key events that affected the economy and the Goldman Sachs Money Market Trust/
Financial Square Funds in 1995. It has been an eventful and positive year for
the Financial Square family. The Funds continued to outperform their respective
IBC/Donoghue averages during the period, and assets increased significantly to
more than $9.1 billion as of December 31, 1995.
1995 In Review:
The Fed Changed Direction as the Economy Slowed
As 1995 began, the economy still showed some residual strength, which
prompted the Federal Reserve to increase the Federal funds rate by 50 basis
points to 6.00% last February in what was to be the last of seven rate hikes in
its tightening cycle. Subsequently, after it became clear that the economy had
slowed significantly, with annualized real Gross Domestic Product (GDP) rising
only modestly by 1.7% and 0.7% in the first and second quarters, the Fed
reversed course and lowered rates by 25 basis points in July. Though real GDP
rebounded to 3.2% in the third quarter, some of the increase was attributed to
an acceleration in government spending in anticipation of the budget debate.
With inflation at bay, the Fed eased again in December, bringing the Federal
funds rate to 5.50% by year end.
<TABLE>
<CAPTION>
Historical Yield Curve (LIBOR)
Label A B
- -------------------------------------------------
<S> <C> <C> <C>
Label 12/31/95 12/31/94
- -------------------------------------------------
1. Overnight 5.88 5.64
- -------------------------------------------------
2. 1 5.75 6
- -------------------------------------------------
3. 2 5.69 6.25
- -------------------------------------------------
4. 3 5.63 6.5
- -------------------------------------------------
5. 4 5.63 6.69
- -------------------------------------------------
6. 5 5.56 6.81
- -------------------------------------------------
7. 6 5.56 7
- -------------------------------------------------
8. 9 5.44 7.38
- -------------------------------------------------
9. 12 5.44 7.75
- -------------------------------------------------
</TABLE>
Source: Goldman Sachs Fixed Income database, reflecting the London Interbank
Offered Rate (LIBOR).
Although the targeted Federal funds rate begun and ended the year at 5.50%, the
slope of the LIBOR yield curve shifted dramatically during 1995 as the expected
direction of interest rates changed from increasing to declining. By year end,
the curve was inverted and had shifted significantly downward.
Responsive and Agile Strategy Contributed to
Continued Strong Performance
Taxable Sector. Structuring money market portfolios successfully during 1995,
when the Fed shifted policy from tightening to easing, required strict attention
to risk management, as well as to a detailed analysis of market fundamentals and
technicals. Analyzing the implied forward rates and determining the extent to
which the market had priced in too much or too little easing, and then adjusting
the portfolio's weighted average maturities and structures, were equally
important to our strategy. We also kept a vigilant eye on fiscal policy, as the
"start-and-stop" nature of the balanced budget debate and the subsequent
government shutdowns had an impact on the market.
During the second quarter of 1995, we extended the weighted average
maturities of the Financial Square Funds, which caused them to be well
positioned for the Fed's rate decrease in July. Some signs of a modest
resurgence in growth became evident in late summer, and we correctly anticipated
that the Fed would remain on hold until a budget package was passed or growth
showed signs of slowing further. Between late November and mid-December, we
again extended the Funds' weighted average maturities, given our concern about
slowing growth. That extension proved to be the correct move when the Fed eased
for the second time in late December.
Tax-Exempt Sector. Discussions of a flat tax, decreasing short-term municipal
issuance and the change in direction of short-term interest rates made for an
interesting year in tax-exempt money market funds. During 1995, total assets in
tax-exempt money market funds increased by approximately 8%, while supply
decreased by 7.5%. Consequently, short-term tax-exempt securities traded at
approximately 69% of their Treasury counterparts, as compared with 71% in 1994,
which means that, on average, tax-exempts were more expensive in 1995 than in
1994. All of these factors increased the importance of active portfolio
management to achieve competitive performance.
- --------------------------------------------------------------------------------
1
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders (continued)
- --------------------------------------------------------------------------------
By varying the Financial Square Tax-Free Money Market Fund's exposure to
variable rate demand notes (VRDNs) and tax-exempt commercial paper as supply
technicals warranted, we were able to add incremental yield to the portfolio. In
addition, the Fund's performance benefited from extending and maintaining a
longer weighted average maturity for much of the year.
<TABLE>
<CAPTION>
Summary for Financial Square Funds Institutional Shares* as of
12/31/95
SEC 7-Day SEC 7-Day 30-Day Weighted
Financial Square Current Effective Average Average
Funds Yield Yield Yield Maturity
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Prime Obligations
Fund 5.65% 5.81% 5.66% 65 days
- --------------------------------------------------------------------------
Money Market Fund 5.70% 5.87% 5.73% 58 days
- --------------------------------------------------------------------------
Treasury Obligations
Fund 5.51% 5.66% 5.64% 35 days
- --------------------------------------------------------------------------
Government Fund 5.59% 5.75% 5.64% 36 days
- --------------------------------------------------------------------------
Tax-Free Money
Market Fund 4.31% 4.41% 3.92% 47 days
==========================================================================
</TABLE>
*Financial Square Funds offer three separate classes of shares (Institutional,
Administration and Service), each of which is subject to different fees and
expenses that affect performance and entitle shareholders to different services.
The Administration shares and the Service shares offer financial institutions
the opportunity to receive a fee for providing administrative support services.
The Administration shares pay an additional 0.25%, and the Service shares pay an
additional 0.50%. More complete information, including management fees and
expenses, is included in the Funds' prospectus, or can be obtained by calling
Goldman Sachs Institutional Funds at 1-800-621-2550.
Domestic Credit Stronger in 1995
Domestic credit quality strengthened in 1995, thanks to an improving economy,
lower interest rates and corporate productivity gains. Positive credit trends
were particularly notable in the capital-intensive industries. Retailers did not
fare as well as reluctant consumers worried about slower disposable income
growth, job reductions, a higher debt load and uncertainty about the health of
the economy. The rejuvenated U.S. banking industry continued its trend toward
regional and national banking, largely through mergers and acquisitions. This
equity-financed consolidation is positive for the creditworthiness and
efficiency of the U.S. banking system. Merger activity was also prominent in
other industries, supported by higher stock prices and lower interest rates. The
majority of companies used stock, rather than cash, to pay for their
acquisitions, keeping leverage down. Spin-offs and split-ups counterbalanced the
heavy merger activity as some organizations tried to focus more sharply on their
core businesses.
In the tax-exempt arena, the most notable phenomenon was the increase in
short-term paper that came to the market with credit enhancements (i.e., letters
of credit or insurance) as a result of lingering concerns surrounding the Orange
County, California bankruptcy. In addition, improved disclosure from municipal
issuers, spurred by heightened due diligence, made it easier to distinguish
between weak and strong credits.
A Mixed Credit Picture Abroad
Credit quality trends abroad were mixed, with weakness most notable in
financial institutions in France and Japan. In Europe, economic recovery slowed
significantly during 1995, causing the Bundesbank to lower short-term interest
rates by year end and other European countries to follow suit. Asset quality
problems persisted for Japanese financial institutions, with continued
uncertainty regarding the methods and timing of a resolution. Credit quality for
the nonfinancial sectors was much more balanced. The Japanese economy has
recently begun to show signs of resuscitation, spurred by the government's
stimulative fiscal policy, a weaker yen (which should help to revive exports),
and corporate cost-cutting and restructuring.
Our outlook for global credit quality for 1996 is cautiously optimistic,
although we remain concerned about consumer indebtedness and reluctance to spend
as well as the timing for recovery of the Japanese banking system.
The Goldman Sachs Credit Department, which includes 74 credit professionals
based in London, Tokyo,
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
Frankfurt and Toronto as well as New York, will continue to be vigilant in
monitoring these and other global developments. Consistent with the trends
outlined previously, new names added to the approved list for the Funds have
been primarily U.S. banks and industrial companies, in contrast to a short while
ago when foreign banks dominated our approved names.
Outlook and Strategies for 1996
Fourth-quarter 1995 GDP is estimated to be approximately 1.0%, reflecting the
longer-than-expected government shutdown and very weak Christmas sales. Economic
growth is expected to slow to an anemic 0.5% for the first quarter of 1996, and
therefore we believe the Fed is likely to lower short-term interest rates by
another 25 to 50 basis points by midyear before the economy begins to accelerate
again during the second half of the year.
As a result, the Financial Square Funds will continue to be managed with
longer average life targets and laddered structures to take advantage of our
near-term expectations of lower rates.
Extended Trading Hours Improve Service Further
During 1995, Goldman Sachs Asset Management extended the trading hours for
the Financial Square Tax-Free Money Market Fund. Purchases are now accepted
until 2:00 p.m. EST and redemptions may be made until 1:00 p.m. EST. In
addition, the Financial Square Government Fund now accepts redemptions, as well
as purchases, until 5:00 p.m. EST.
New Listings for Financial Square Funds
We are pleased to note that starting on February 1, 1996, Financial Square
Funds will be listed on Bloomberg and can be accessed by keying in "GSAM - GO".
In addition, the Funds are now also listed under "Financial Square" in
IBC/Donoghue's Money Fund Report(R) for your convenience.
Another Triple-A Rating
In 1995, the Financial Square Government Fund was rated AAA by Standard &
Poor's Rating Group. The Financial Square Treasury Obligations Fund is also
rated triple-A by both S&P and Moody's Investors Service, Inc.
In closing, we thank you for your support and for making 1995 a year of
record assets for the Financial Square Funds. As in the past, we will continue
to look for additional ways to improve our services, while seeking to provide
you with competitive performance. We welcome your suggestions and questions, and
look forward to another strong year in 1996.
/s/ Kaysie P. Uniacke
Kaysie P. Uniacke
Portfolio Manager
February 1, 1996
- --------------------------------------------------------------------------------
3
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Financial Square Prime Obligations Fund
December 31, 1995
- --------------------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Commercial Paper and Corporate Obligations-55.5%
Bank Holding Companies
BankAmerica Corp.
$ 40,000,000 5.56% 04/30/96 $ 39,258,667
Bankers Trust New York Corp.
150,000,000 5.69 02/09/96 149,075,376
Chase Manhattan Corp.
25,000,000 5.57 03/12/96 24,725,368
Corestates Capital Corp.
15,000,000 5.50(a) 05/13/96 14,695,208
NationsBank Corp.
20,000,000 5.51 04/29/96 19,635,728
25,000,000 5.50 05/13/96 24,492,014
Norwest Corp.
75,000,000 5.75(a) 10/28/96 75,000,000
Business Credit Institutions
CIT Group Holdings, Inc.
50,000,000 5.70 02/12/96 49,667,500
General Electric Capital Corp.
45,000,000 5.57 04/15/96 44,268,937
50,000,000 5.60 04/22/96 49,128,889
Business Services
International Lease Finance Corp.
25,000,000 5.50 05/03/96 24,530,208
Drugs
Lilly (Eli) & Co.
15,000,000 5.57 04/16/96 14,753,992
Smithkline Beecham Corp.
15,000,000 5.81(a) 03/11/96 15,003,987
Farm Machinery
John Deere Capital Corp.
35,000,000 5.58 04/19/96 34,408,675
25,000,000 5.57 04/26/96 24,551,305
Food Products
CPC International Inc.
50,000,000 5.59 04/03/96 49,277,958
13,300,000 5.57 04/10/96 13,094,219
25,000,000 5.55 04/16/96 24,591,458
20,000,000 5.57 04/22/96 19,653,422
22,000,000 5.50 05/07/96 21,573,139
Life Insurance
Commonwealth Life Insurance Co.
20,000,000 6.03%(a) 09/06/96 $ 20,000,000
Pacific Mutual Life Insurance
Co.
25,000,000 5.92(a) 03/01/96 25,000,000
Motor Vehicles and Equipment
Ford Motor Credit Co.
75,000,000 5.51 05/03/96 73,588,062
Personal Credit Institutions
American Express Credit Corp.
75,000,000 5.60 04/19/96 73,728,333
Beneficial Corp.
25,000,000 5.89(a) 11/15/96 24,991,455
Transamerica Finance Corp.
15,000,000 5.55 02/20/96 14,884,375
20,000,000 5.55 04/11/96 19,688,583
Receivable/Asset Financings
Dakota Certificates of Standard Credit Card Master Trust
40,000,000 5.72 02/09/96 39,752,133
30,051,000 5.70 02/16/96 29,832,129
25,000,000 5.70 02/20/96 24,802,083
10,000,000 5.67 02/27/96 9,910,225
Falcon Asset Securitization
Corp.
15,425,000 5.60 04/26/96 15,146,664
New Center Asset Trust
150,000,000 5.60 03/15/96 148,273,333
Savings and Loans
World Savings And Loan
Association
38,000,000 5.81(a) 03/14/96 37,999,243
20,000,000 5.94(a) 12/13/96 20,012,934
Security and Commodity
Brokers, Dealers and Services
Bear Stearns Companies, Inc.
150,000,000 5.64 03/01/96 148,590,000
Cargill Financial Services Corp.
25,000,000 5.59 04/16/96 24,588,514
25,000,000 5.60 04/16/96 24,587,777
50,000,000 5.57 04/17/96 49,171,493
20,000,000 5.58 04/19/96 19,662,100
15,000,000 5.60 04/23/96 14,736,333
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Financial Square Prime Obligations Fund (continued)
December 31, 1995
- --------------------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Commercial Paper and Corporate Obligations
(continued)
Security and Commodity Brokers, Dealers and
Services (continued)
JP Morgan Securities, Inc.
$ 40,000,000 5.94%(b) 06/28/96 $ 40,000,000
Merrill Lynch & Co., Inc.
60,000,000 5.55 04/30/96 58,890,000
Specialty Cleaners
Colgate Palmolive
20,000,000 5.58 04/15/96 19,674,500
40,000,000 5.59 04/17/96 39,335,411
33,000,000 5.50 05/01/96 32,389,958
20,000,000 5.50 05/08/96 19,608,889
Telecommunications
AT&T Corp.
80,000,000 5.52 03/01/96 79,264,000
70,000,000 5.54 03/28/96 69,062,816
- --------------------------------------------------------------------------------
Total Commercial Paper and Corporate
Obligations $1,948,557,393
- --------------------------------------------------------------------------------
Bank Notes--37.9%
American Express Centurion Bank
$20,000,000 5.94/(a)/ 04/17/96 20,000,539
15,000,000 5.75/(a)/ 04/24/96 15,000,000
Boatmen's First National Bank, Kansas City
40,000,000 5.73/(a)/ 02/14/96 39,999,518
Boatmen's First National Bank, Southern Missouri
25,000,000 5.92/(a)/ 06/12/96 25,001,191
Colorado National Bank
25,000,000 5.91/(a)/ 06/03/96 25,000,000
FCC National Bank
75,000,000 5.74 03/11/96 75,000,000
25,000,000 5.67 03/18/96 25,000,000
50,000,000 5.73 04/23/96 50,000,000
First Bank FSB
30,000,000 5.91/(a)/ 05/15/96 29,999,690
First Bank N. A., Minneapolis
75,000,000 5.91/(a)/ 06/03/96 75,000,000
First National Bank of Maryland
25,000,000 5.75 05/01/96 25,000,000
50,000,000 5.92/(a)/ 10/02/96 49,988,730
50,000,000 5.92/(a)/ 11/01/96 49,987,500
First of America Bank N.A., Illinois
25,000,000 5.78 03/12/96 25,000,000
First of America Bank N.A., Michigan
23,500,000 6.10 02/12/96 23,506,184
23,500,000 6.26 03/08/96 23,516,370
First Union National Bank of North Carolina
135,000,000 5.76 02/02/96 135,000,000
Household Bank FSB
75,000,000 5.74 03/04/96 75,000,000
75,000,000 5.86/(a)/ 11/06/96 74,963,060
Huntington National Bank
19,125,000 5.69/(a)/ 01/12/96 19,124,719
M&I Madison Bank
25,000,000 5.81/(a)/ 07/29/96 25,008,782
10,500,000 6.00/(a)/ 09/09/96 10,504,414
NationsBank of Texas, N.A.
50,000,000 5.65 05/03/96 50,000,000
NBD Bank NA Detroit
35,000,000 5.65 05/03/96 34,999,484
Old Kent Bank & Trust Co.
30,000,000 5.94/(a)/ 01/17/96 29,999,737
PNC Bank, N.A.
30,000,000 5.89/(a)/ 08/16/96 29,995,137
75,000,000 5.89/(a)/ 09/13/96 74,984,796
Seattle First National Bank
50,000,000 5.83/(a)/ 11/08/96 49,962,089
Southtrust Bank of Alabama, N.A.
40,000,000 5.75/(a)/ 03/25/96 40,000,000
50,000,000 5.73/(a)/ 08/26/96 50,000,000
30,000,000 5.92/(a)/ 10/02/96 29,990,984
25,000,000 5.69/(a)/ 10/04/96 24,992,554
- --------------------------------------------------------------------------------
Total Bank Notes $1,331,525,478
- --------------------------------------------------------------------------------
Bankers' Acceptances--0.6%
Corestates Bank, N.A.
$10,000,000 5.58% 04/23/96 $ 9,824,850
NationsBank of Georgia, N.A.
10,000,000 5.58 04/23/96 9,824,850
- --------------------------------------------------------------------------------
Total Bankers' Acceptances $ 19,649,700
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
- --------------------------------------------------------------------------------
Financial Square Prime Obligations Fund (continued)
December 31, 1995
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Other-1.4%
Morgan Guaranty Trust of New York/SMM
Trust 1995-K
$50,000,000 5.96%/(a)/ 06/14/96 $ 50,000,000
- --------------------------------------------------------------------------------
Total Other $ 50,000,000
- --------------------------------------------------------------------------------
Certificates of Deposit-2.6%
Natwest Bank, Delaware
$50,000,000 5.70% 03/12/96 $ 50,000,000
Natwest Bank, U.S.A.
40,000,000 5.75 03/11/96 40,000,000
- --------------------------------------------------------------------------------
Total Certificates of Deposit $ 90,000,000
- --------------------------------------------------------------------------------
Repurchase Agreement-2.2%
Joint Repurchase Agreement Account
$76,300,000 5.94% 01/02/96 $ 76,300,000
- --------------------------------------------------------------------------------
Total Repurchase Agreement $ 76,300,000
- --------------------------------------------------------------------------------
Total Investments $3,516,032,571/(c)/
- --------------------------------------------------------------------------------
</TABLE>
/(a)/Variable rate security-base Index is one of the following:
U.S. Treasury Bill
One or three month LIBOR
One month commercial paper
Federal Funds
Prime lending rate
/(b)/Variable rate master note-base Index is LIBOR.
/(c)/The amount stated also represents aggregate cost for federal income tax
purposes.
The percentages 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.
6
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Financial Square Money Market Fund
December 31, 1995
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Commercial Paper and Corporate Obligations-38.6%
Beverages
Grand Metropolitan Investment Corp.
$ 25,000,000 6.18%/(a)/ 07/22/96 $ 25,057,512
Mortgage Brokers
Nationwide Building Society
24,400,000 5.66 03/14/96 24,119,956
50,000,000 5.57 05/03/96 49,048,458
Business Credit Institutions
General Electric Capital Corp.
25,000,000 5.57 04/15/96 24,593,854
Electric Companies
Enel Commercial Paper, Inc.
25,000,000 5.64 04/25/96 24,549,583
10,000,000 5.52 05/09/96 9,802,200
Financial Services
Whirlpool Financial Corp.
25,000,000 5.68 03/01/96 24,763,333
Foreign Banks
BBL North America Inc.
25,000,000 5.63 04/18/96 24,578,125
BBV Finance, Delaware
18,000,000 5.59 01/19/96 17,949,690
Generale Bank, Inc.
15,000,000 5.61 04/24/96 14,733,525
Internationale Nederlanden Funding Corp.
50,000,000 5.58 04/12/96 49,209,500
Royal Bank of Canada
30,000,000 5.59 04/22/96 29,478,267
Svenska Handelsbanken, Inc.
20,000,000 5.60 04/17/96 19,667,111
Swedbank, Inc.
50,000,000 5.62 01/17/96 49,875,111
Toronto Dominion Holdings, U.S.A.
50,000,000 5.60 04/22/96 49,128,889
Life Insurance
Sunamerica Life Insurance Co.
50,000,000 5.87/(a)/ 11/03/96 50,000,000
Motor Vehicles and Equipment
American Honda Finance Corp.
25,000,000 5.98/(a)/ 05/03/96 24,995,942
General Motor Acceptance Corp.
14,086,800 6.19%/(a)/ 01/12/96 14,087,607
35,000,000 5.63 04/26/96 34,365,061
Personal Credit Institutions
Beneficial Corp.
25,000,000 5.89/(a)/ 11/15/96 24,991,455
Receivable/Asset Financings
Emprise One Corp.
50,000,000 5.80/(a)/ 12/23/96 50,000,000
New Center Asset Trust
25,000,000 5.60 03/15/96 24,712,222
Savings and Loans
World Savings and Loan Association
30,000,000 5.81/(a)/ 03/14/96 29,999,403
Security and Commodity Brokers, Dealers and Services
JP Morgan Securities, Inc.
40,000,000 5.94/(b)/ 06/28/96 40,000,000
Merrill Lynch & Co., Inc.
50,000,000 5.55 04/30/96 49,075,000
Telecommunications
AT&T Corp.
75,000,000 5.52 03/01/96 74,310,000
- --------------------------------------------------------------------------------
Total Commercial Paper and Corporate
Obligations $ 853,091,804
- --------------------------------------------------------------------------------
Bank Notes-17.4%
American Express Centurion Bank
$ 10,000,000 5.94%/(a)/ 04/17/96 $ 10,000,269
10,000,000 5.75/(a)/ 04/24/96 10,000,000
25,000,000 5.75/(a)/ 04/26/96 25,000,000
Boatmen's First National Bank, Kansas City
25,000,000 5.73/(a)/ 02/14/96 24,999,698
20,000,000 5.92/(a)/ 06/12/96 20,000,953
Colorado National Bank
50,000,000 5.91/(a)/ 06/03/96 50,000,000
First Bank N. A., Minneapolis
25,000,000 5.91/(a)/ 06/03/96 25,000,000
First National Bank of Boston
30,000,000 5.73/(a)/ 04/08/96 29,999,199
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an Integral part of these financial statements.
7
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Financial Square Money Market Fund (continued)
December 31, 1995
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Bank Notes (continued)
First National Bank of Boston (continued)
$ 45,000,000 5.75%/(a)/ 06/05/96 $ 45,000,000
Old Kent Bank & Trust Co.
20,000,000 5.94/(a)/ 01/17/96 19,999,825
PNC Bank, N.A.
25,000,000 5.93/(a)/ 03/14/96 25,000,000
30,000,000 5.89/(a)/ 08/16/96 29,995,137
25,000,000 5.89/(a)/ 09/13/96 24,994,932
20,000,000 5.65/(a)/ 09/30/96 19,988,150
Seattle First National Bank
25,000,000 5.83/(a)/ 11/08/96 24,981,045
- --------------------------------------------------------------------------------
Total Bank Notes $ 384,959,208
- --------------------------------------------------------------------------------
Certificates of Deposit - Foreign Eurodollar-9.7%
Dai Ichi Kangyo Bank, London
$ 40,000,000 5.97% 03/04/96 $ 40,000,690
Deutsche Bank, London
80,000,000 5.73 04/23/96 80,002,440
Dresdner Bank, London
10,000,000 5.74 04/22/96 10,000,302
Generale Bank, London
10,000,000 5.76 04/23/96 10,000,458
Mitsubishi Bank Ltd., London
45,000,000 5.86 01/31/96 45,000,728
30,000,000 6.04 04/12/96 30,000,825
- --------------------------------------------------------------------------------
Total Certificates of Deposit - Foreign
Eurodollar $ 215,005,443
- --------------------------------------------------------------------------------
Certificates of Deposit - Yankeedollar-12.7%
Dai Ichi Kangyo Bank, New York
$ 35,000,000 6.23% 02/05/96 $ 35,002,874
Fuji Bank, New York
50,000,000 6.16 02/06/96 50,000,933
Industrial Bank of Japan Ltd., New York
15,000,000 6.17 02/05/96 15,000,469
75,000,000 6.03 02/23/96 75,010,150
Mitsubishi Bank Ltd., New York
15,000,000 5.71 06/14/96 15,000,668
Sanwa Bank Ltd., New York
50,000,000 5.98 02/29/96 50,004,451
15,000,000 6.17 04/03/96 15,004,921
25,000,000 5.71 06/14/96 25,001,114
- --------------------------------------------------------------------------------
Total Certificates of Deposit - Yankeedollar $ 280,025,580
- --------------------------------------------------------------------------------
Other-22%
Morgan Guaranty Trust of New York/SMM Trust 1995-K
$ 50,000,000 5.96%/(a)/ 06/14/96 $ 50,000,000
- --------------------------------------------------------------------------------
Total Other $ 50,000,000
- --------------------------------------------------------------------------------
Sovereign Credit-1O.3%
Canadian Wheat Board
$ 45,000,000 5.57% 04/19/96 $ 44,241,088
Kingdom of Sweden
50,000,000 5.59 02/09/96 49,697,208
50,000,000 5.59 04/22/96 49,130,444
Province of Quebec
45,500,000 5.52 O5/01/96 44,655,823
20,000,000 5.50 05/14/96 19,590,556
20,000,000 5.50 05/15/96 19,587,500
- --------------------------------------------------------------------------------
Total Sovereign Credit $ 226,902,619
- --------------------------------------------------------------------------------
Repurchase Agreement-9.3%
Joint Repurchase Agreement Account
$205,000,000 5.94% 01/02/96 $ 205,000,000
- --------------------------------------------------------------------------------
Total Repurchase Agreement $ 205,000,000
- --------------------------------------------------------------------------------
Total Investments $2,214,984,654/(c)/
================================================================================
</TABLE>
/(a)/Variable rate security-base Index is one of the following:
U.S. Treasury Bill
One or three month LIBOR
One month commercial paper
Federal Funds
Prime lending rate
/(b)/Variable rate master note-base Index is LIBOR.
/(c)/The amount stated also represents aggregate cost for federal income tax
purposes.
The percentages shown for each investment category reflect 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.
8
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Financial Square Treasury Obligations Fund
December 31, 1995
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury Obligations-17.5%
United States Treasury Bills
$100,000,000 5.28% 05/23/96 $ 97,902,667
50,000,000 5.32 05/30/96 48,891,667
165,000,000 5.23 07/25/96 160,062,008
United States Treasury Notes
45,000,000 6.13 07/31/96 45,135,893
- --------------------------------------------------------------------------------
Total U.S. Treasury Obligations $ 351,992,235
- --------------------------------------------------------------------------------
Repurchase Agreements-82.8%
Bankers Trust Securities, Inc., dated 12/29/95, repurchase price $75,048,333
(U.S. Treasury Note: $76,474,013, 6.125%, 05/15/98)
$ 75,000,000 5.80% 01/02/96 $ 75,000,000
Chase Manhattan Securities, dated 12/29/95, repurchase price
$75,048,333 U.S. Treasury Notes: $75,759,083, 5.625%-8.50%,
11/15/96-08/15/02; U.S. Treasury Bond: $742,164,
13.375%,08/15/01)
75,000,000 5.80 01/02/96 75,000,000
CS First Boston Corp., dated 12/29/95, repurchase price $75,048,333
(U.S. Treasury Bill: $75,180,300, 05/02/96)
75,000,000 5.80 01/02/96 75,000,000
Daiwa Securities, dated 12/29/95, repurchase price $75,049,167 (U.S. Treasury
Notes: $16,801,879, 5.625%-6.875%, 09/30/96-11/30/97; U.S. Treasury Bills:
$59,699,050, 01/25/96-09/19/96)
75,000,000 5.90 01/02/96 75,000,000
Goldman, Sachs & Co., dated 12/29/95, repurchase price $75,048,750 (U.S.
Treasury Note: $76,500,972, 5.88%, 08/15/98)
75,000,000 5.85 01/02/96 75,000,000
JP Morgan Securities, Inc., dated 12/29/95, repurchase price
$75,050,000 (U.S. Treasury: $76,555,971, 7.50%-7.75%, 10/31/99-11/30/99)
75,000,000 6.00 01/02/96 75,000,000
Merrill Lynch Government Securities, Inc., dated 12/29/95, repurchase Price
$75,047,917 (U.S. Treasury Stripped Securities: $76,500,159, 02/15/96-11/15/00)
75,000,000 5.75 01/02/96 75,000,000
Nomura Securities, dated 12/29/95, repurchase price $75,050,000 (U.S. Treasury
Notes: $76,531,287, 6.25%-8.50%, 08/31/96-05/15/97)
75,000,000 6.00 01/02/96 75,000,000
Sanwa Securities, dated 12/29/95, repurchase price $75,048,750 (U.S. Treasury
Notes: $28,722,942, 5.125%-7.50%, 03/31/96-09/30/00; U.S. Treasury Bill:
$47,775,291, 11/14/96)
$ 75,000,000 5.85% 01/02/96 $ 75,000,000
UBS Securities, Inc., dated 12/29/95, repurchase price $75,048,750 (U.S.
Treasury Note: $76,464,302, 7.75%, 11/30/99)
75,000,000 5.85 01/02/96 75,000,000
Joint Repurchase Agreement Account
915,000,000 5.94 01/02/96 915,000,000
- --------------------------------------------------------------------------------
Total Repurchase Agreements $1,665,000,000
================================================================================
Total Investments $2,016,99,235(a)
================================================================================
</TABLE>
/(a)/The amount stated also represents aggregate cost for federal income tax
purposes.
The percentages shown for each investment category reflect 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.
9
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Financial Square Government Fund
December 31, 1995
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Government Agency Obligations-47.5%
Federal Farm Credit Bank
$ 5,000,000 5.48% 02/09/96 $ 4,970,317
Federal Home Loan Bank
20,000,000 5.51 02/01/96 19,905,106
Federal Home Loan Mortgage Corp.
28,000,000 5.75/(a)/ 06/03/96 27,974,825
Federal National Mortgage Association
19,000,000 5.61 01/18/96 18,949,666
47,000,000 5.50 02/09/96 46,719,958
25,000,000 5.47 04/30/96 24,544,167
35,000,000 5.65/(a)/ 06/20/96 34,990,434
50,000,000 5.79/(a)/ 08/16/96 49,980,107
25,000,000 5.48/(a)/ 09/03/96 24,993,223
25,000,000 5.64 10/02/96 24,990,409
10,000,000 5.68 10/07/96 9,999,072
50,000,000 5.90/(a)/ 11/15/96 49,968,730
50,000,000 5.76/(a)/ 12/16/96 49,958,195
Tennessee Valley Authority
11,305,000 7.63 09/16/96 11,454,089
- --------------------------------------------------------------------------------
Total U.S. Government Agency Obligations $399,398,298
- --------------------------------------------------------------------------------
U.S. Treasury Obligations-1.2%
United States Treasury Notes
$ 10,000,000 6.00% 07/01/96 $ 10,015,909
- --------------------------------------------------------------------------------
Total U.S. Treasury Obligations $ 10,015,909
- --------------------------------------------------------------------------------
Repurchase Agreements-51.5%
C.S. First Boston Corporation, dated 12/05/95, repurchase price $30,420,525
(FNMA: $31,686,063, 7.31%, 01/01/35)
$ 30,000,000 5.67% 03/04/96 $ 30,000,000
Daiwa Securities, dated 12/29/95, repurchase price $30,019,667 (U.S. Treasury
Notes: $26,810,371, 4.38%-9.00%, 11/15/96-09/30/98; U.S. Treasury Bill:
$3,190,014, 06/27/96)
30,000,000 5.90 01/02/96 30,000,000
Lehman Government Securities Inc., dated 12/12/95, repurchase price $30,419,042
(FNMA: $17,247,208, 7.00%-9.00%, 07/01/08-06/01/25; FHLMC: $13,802,908, 6.00%,
05/01/09)
30,000,000 5.65 03/11/96 30,000,000
Nomura Securities International Inc., dated 12/29/95, repurchase price
$100,071,111 (FHLMC: $49,299,417, 6.50%-8.00%, 07/01/08-10/01/25; FNMA:
$53,927,805, 6.50%-8.00%, 01/01/09-09/01/24)
100,000,000 6.40 01/02/96 100,000,000
Salomon Brothers, Inc., dated 12/29/95, repurchase price $30,019,833 (Federal
Home Loan Bank: $31,258,524, 6.30%, 08/24/05)
30,000,000 5.95 01/02/96 30,000,000
Smith Barney Inc., dated 12/28/95, repurchase price $25,076,000 (FHLMC:
$13,342,601, 7.50%, 01/01/26; FNMA: $12,512,763, 6.50%-8.00%, 01/01/26)
25,000,000 5.76 01/16/96 25,000,000
Joint Repurchase Agreement Account
188,200,000 5.94 01/02/96 188,200,000
- --------------------------------------------------------------------------------
Total Repurchase Agreements $433,200,000
- --------------------------------------------------------------------------------
Total Investments $842,614,207/(b)/
================================================================================
</TABLE>
/(a)/Variable rate security-base Index is one of the following:
Federal Funds
Prime lending rate
One month LIBOR
/(b)/The amount stated also represents aggregate cost for federal income tax
purposes.
The percentages shown for each investment category reflect 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.
10
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Financial Square Tax-Free Money Market Fund
December 31, 1995
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Alabama-8.0%
IDB of the Town of Columbia, Al PCRB Series 1995 B
VRDN (Alabama Power Company) (A-1/MIG1)
$17,700,000 6.00% 01/01/96 $ 17,700,000
Jefferson County, AL MF Hsg. for Hickory Knolls
Project VRDN (Amsouth Bank LOC) (P-1)
9,200,000 5.20 01/07/96 9,200,000
Parrish, AL IDA PCRB for Alabama Power VRDN (A-1/MIG1)
12,000,000 6.00 01/01/96 12,000,000
- --------------------------------------------------------------------------------
$ 38,900,000
- --------------------------------------------------------------------------------
Arizona-0.3%
City of Phoenix IDA MF Hsg. for Del Mar Terrace
Apartments VRDN (Bank of America LOC) (MIG-1)
$ 1,300,000 5.15% 01/07/96 $ 1,300,000
- --------------------------------------------------------------------------------
Arkansas-0.9%
Crossett, AR PCRB for Georgia Pacific Corp. VRDN (Trust
Company Bank LOC)(Aa3)
$ 4,500,000 5.15% 01/07/96 $ 4,500,000
- --------------------------------------------------------------------------------
California-10.0%
California School Cash Reserve Program Authority TRANS
Series A(SP-1+/MIG-1)
$ 2,000,000 4.75% 07/03/96 $ 2,009,685
California School Cash Reserve Program Authority TRANS
Series B (MBIA)(SP-1+/(MIG1)
6,000,000 4.50 12/20/96 6,039,105
City of Fremont MF Hsg. VRDN Series 1985 D-Creekside
Village Apartment Project (Fuji Bank LOC)(MIG1)
1,300,000 5.55 01/07/96 1,300,000
Los Angeles County, CA TRANS (Bank of America/Credit
Suisse/Morgan Guaranty Trust Co./Swiss Bank Corp./UBS/
Westdeutsche Landesbank Girozentrale LOC)(SP-1/MIG-1)
15,000,000 4.50 07/01/96 15,042,709
Los Angeles Housing Authority MF Hsg. VRDN for Canyon Country
Villas (Industrial Bank of Japan LOC) (A-1 /MIG-1)
3,000,000 5.35 01/07/96 3,000,000
State of California RAWS Series C (Bank of America /Banque
Nationale de Paris/Bank of Nova Scotia/Chemical/CIBC/
Citibank/Morgan Guaranty Trust Co./Credit Suisse/
National Westminster Bank/Societe General/Swiss Bank
Corp./Sumitomo Bank Ltd./Toronto Dominion Bank/
Westdeutsche Landesbank Girozentrale LOC) (A-1/MIG1)
21,550,000 5.75 04/25/96 21,646,920
- --------------------------------------------------------------------------------
$ 49,038,419
- --------------------------------------------------------------------------------
District of Columbia-1.3%
District of Columbia VRDN ACES-Series 1988 B-E
Georgetown University(A-1+/MIG1)
$ 6,100,000 5.65% 01/07/96 $ 6,100,000
- --------------------------------------------------------------------------------
Florida-5.1%
Dade County, FL Water & Sewer Series 1994 VRDN (FGIC)
(A-1+/MIG-1)
$ 700,000 4.90% 01/07/96 $ 700,000
Florida Local Government Finance Commission Pooled CP Note
Series A (First Union National Bank of Florida LOC)(A-1+/P-1)
15,000,000 3.65 02/13/96 15,000,000
Putnam County Development Authority for Seminole Electric H-1 VRDN
(CFC)(A-1/MIG1)
9,300,000 4.65 01/07/96 9,300,000
- --------------------------------------------------------------------------------
$ 25,000,000
- --------------------------------------------------------------------------------
Georgia-8.8%
Albany Dougherty, GA PCRB for Philip Morris Company
VRDN(A-1/P-1)
$ 1,600,000 5.15% 01/07/96 $ 1,600,000
Burke County, GA PCRB for Georgia Power Co. VRDN
(A-1/MIG1)
4,900,000 5.50 01/01/96 4,900,000
17,300,000 6.00 01/01/96 17,300,000
Municipal Electric Authority of Georgia 1994 Series E
(A-1/MIG1)
5,450,000 5.15 01/03/96 5,450,000
Municipal Electric Authority of Georgia Short Term BANS
CP(A-1+/P-1)
3,685,000 3.80 01/10/96 3,685,000
7,500,000 4.00 01/18/96 7,500,000
Municipal Electric Authority of Georgia Subordinate General
Resolution Series C (A-1+/P1)
2,600,000 4.90 03/04/96 2,602,207
- --------------------------------------------------------------------------------
$ 43,037,207
- --------------------------------------------------------------------------------
Hawaii-0.8%
Hawaii Housing Finance and Development Authority VRDN (Federal Home Loan
Bank LOC)(A-1+)
$ 4,000,000 5.15% 01/07/96 $ 4,000,000
- -------------------------------------------------------------------------------
Illinois-10.0%
Illinois Health Facilities Authority Series 1993 Resurrection
Healthcare System VRDN (First National Bank of Chicago LOC)(MIG1)
$ 9,000,000 5.60% 01/07/96 $ 9,000,000
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Financial Square Tax-Free Money Market Fund (continued)
December 31, 1995
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Illinois (continued)
Illinois Health Facilities Authority VRDN
Series 1985 C and D-
Revolving Fund Pooled Finance Program
(First National
Bank of Chicago LOC)(A-1/MIG-1) (b)
$ 9,700,000 5.20% 01/07/96 $ 9,700,000
Illinois Health Facility Authority VRDN Series 1985 for
Healthcorp Affiliates Project (Fuji Bank LOC)(MIG1)
8,200,000 6.25 01/07/96 8,200,000
Illinois State RANS(SP-1+/MIG-1)
14,000,000 4.50 06/10/96 14,050,909
Sauget Village of IL PCRB VRDN Series 1993(P-1)
7,900,000 5.10 01/07/96 7,900,000
- --------------------------------------------------------------------------------
$ 48,850,909
- --------------------------------------------------------------------------------
Indiana--3.5%
Indiana Hospital Equipment Financing Authority VRDN
Series 1985 A (MBIA)(A-1/MIG-1)
$ 4,525,000 5.60% 01/07/96 $ 4,525,000
Warrick County PCRB Series 1992 VRDN Aluminum Company
of America(A-1)
12,475,000 5.10 01/07/96 12,475,000
- --------------------------------------------------------------------------------
$ 17,000,000
- --------------------------------------------------------------------------------
Iowa--2.5%
Louisa County, IA PCRB for Midwest Power Systems VRDN(A-1/MIG1)
$ 5,000,000 5.25% 01/07/96 $ 5,000,000
Muscatine County, IA for Monsanto Corp.(P-1)
7,200,000 5.15 01/07/96 7,200,000
- --------------------------------------------------------------------------------
$ 12,200,000
- --------------------------------------------------------------------------------
Kentucky--0.6%
City of Calvert, KY Air Products and Chemicals Inc. Project
VRDN (A-1) (a)
$ 3,000,000 5.15% 01/07/96 $ 3,000,000
- --------------------------------------------------------------------------------
Louisiana--1.8%
Ascension Parish, LA PCRB Series 1993 for Shell Oil Co.(A-1+)
$ 4,700,000 6.00% 01/01/96 $ 4,700,000
Louisiana State Adj. Ref. Series A Tender GO Refunding Bonds
(Credit Local de France LOC)(A-1/MIG-1)
1,000,000 3.70 03/07/96 1,000,000
Plaquemines Port, Harbor and Terminal District Series A-D
(Teco Energy)(A-1+/P-1)
2,000,000 3.80 02/08/96 2,000,000
1,000,000 3.75 03/11/96 1,000,000
- --------------------------------------------------------------------------------
$ 8,700,000
- --------------------------------------------------------------------------------
Maryland--1.1%
Anne Arundel Baltimore Gas & Electric Co. Series 1985(A-1/MIG-1)
$ 5,380,000 3.80% 03/08/96 $ 5,380,000
- --------------------------------------------------------------------------------
Michigan--0.3%
Michigan Job Development Authority for Mazda Motor
Manufacturing VRDN (Sumitomo Bank Ltd LOC)(MIG-1)
$ 1,400,000 5.25% 01/07/96 $ 1,400,000
- --------------------------------------------------------------------------------
Minnesota--2.0%
Minnesota State Higher Education Facility for Carleton College
Series 3-12 VRDN(MIG-1)
$ 6,000,000 5.00% 01/07/96 $ 6,000,000
Port Authority of the City of St. Paul Minnesota, VRDN IDA
for Weyerhaeuser Project(A-1)
4,000,000 5.60 01/07/96 4,000,000
- --------------------------------------------------------------------------------
$ 10,000,000
- --------------------------------------------------------------------------------
Mississippi--0.2%
Grenada County, MS Refunding RB VRDN for Georgia Pacific
Corporation Project (Sumitomo Bank Ltd. LOC)(A-1)
$ 1,000,000 5.15% 01/07/96 $ 1,000,000
- --------------------------------------------------------------------------------
Missouri--0.6%
Missouri Health and Higher Educational Facility Authority
VRDN Washington University Facility(A-1+/MIG-1)
$ 1,500,000 5.00% 01/07/96 $ 1,500,000
Monsanto Corporation State Environmental Improvement and
Energy Resources Authority, Missouri (Monsanto)(P-1)
1,500,000 5.05 01/07/96 1,500,000
- --------------------------------------------------------------------------------
$ 3,000,000
- --------------------------------------------------------------------------------
Montana--2.8%
City of Forsyth, Rosebud County PCRB Series 1988 for Pacificorp
(Industrial Bank of Japan LOC)(A-1/P-1)
$ 10,000,000 4.00% 01/12/96 $ 10,000,000
Montana State Board of Investments VRDN Payroll Tax Bonds(A/MIG1)
3,800,000 5.25 01/07/96 3,800,000
- --------------------------------------------------------------------------------
$ 13,800,000
- --------------------------------------------------------------------------------
New Hampshire--2.0%
New Hampshire Business Finance Authority PCRB 1990 Series B
for New England Power(A-1/MIG-1)
$ 10,000,000 3.65% 02/29/96 $ 10,000,000
- --------------------------------------------------------------------------------
New York--11.2%
Greatneck North Water Authority, NY Water System RB Series A
VRDN (FGIC)(A-1+/MIG-1)
$ 600,000 4.90% 01/07/96 $ 600,000
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements
12
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL SQUARE TAX-FREE MONEY MARKET FUND (continued)
December 31, 1995
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
New York (continued)
New York City GO Bonds Series A(SP-1+/MIG-1)
$ 8,200,000 4.50% 02/15/96 $ 8,208,698
New York City GO Bonds VRDN (Union Bank of Switzerland
LOC)(A-1+/MIG-1)
4,000,000 5.00 01/01/96 4,000,000
New York City RANS(SP1+/MIG1)
29,990,000 4.50 04/11/96 30,041,979
New York City TANS Series A(SP-1+/MIG-1)
5,000,000 4.50 02/15/96 5,003,848
New York State Energy Research and Development Authority
for Long Island Lighting Co. (Deutsche Bank LOC)(MIG-1)
6,000,000 4.70 03/01/96 6,010,242
New York State PCR for Rockland County VRDN (AMBAC)
(A-1+/MIG1)
700,000 4.90 01/07/96 700,000
- --------------------------------------------------------------------------------
$ 54,564,767
- --------------------------------------------------------------------------------
North Carolina--8.0%
North Carolina Eastern Municipal Power Agency TECP (Morgan Guaranty Trust
Co./United Bank of Switzerland LOC)(A-1+)
$ 2,650,000 3.70% 03/11/96 $ 2,650,000
Rockingham County, NC IDA PCRB for Philip Morris
Company VRDN(A-1/P-1)
7,700,000 5.15 01/07/96 7,700,000
Wake County, NC PCRB for Carolina Power & Light
(Fuji Bank LOC)(A-1/P-1)
3,800,000 3.90 01/22/96 3,800,000
15,070,000 4.00 01/25/96 15,070,000
10,000,000 3.75 03/11/96 10,000,000
- --------------------------------------------------------------------------------
$ 39,220,000
- --------------------------------------------------------------------------------
Ohio--0.8%
City of Columbus, OH Electric System Series 1984 VRDN (Dai Ichi
Kangyo Bank Ltd. NY LOC)(MIG1)
$ 4,000,000 3.90% 01/01/96 $ 4,000,000
- --------------------------------------------------------------------------------
Oregon--2.6%
Portland, OR for Columbia Grain Inc. Project VRDN (Fuji Bank/
Bank of Tokyo LOC)(MIG1)
$ 9,450,000 5.25% 01/07/96 $ 9,450,000
State of Oregon Veterans Welfare Bonds, Series 73 H VRDN
(Bank of Tokyo LOC)(A-1+/MIG-1)
3,400,000 5.25 01/07/96 3,400,000
- --------------------------------------------------------------------------------
$ 12,850,000
- --------------------------------------------------------------------------------
Pennsylvania --3.0%
Allegheny County, PA IDA PCR Series 1985 for U.S. Steel Corp.
(Norinchukin Bank LOC)(A-1+/P-1)
$ 1,000,000 3.80% 01/23/96 $ 1,000,000
13,600,000 4.05 01/30/96 13,600,000
- --------------------------------------------------------------------------------
$ 14,600,000
- --------------------------------------------------------------------------------
South Carolina--1.2%
York County Floating/Fixed Rate PCRB Pooled Series 1984-North
Carolina Electric Membership Corp. VRDN (CFC)(A-1+/MIG-1)
$ 5,900,000 4.65% 01/07/96 $ 5,900,000
- --------------------------------------------------------------------------------
Tennessee--0.5%
IDB Blount County, TN PCRB for Aluminum Company Project
VRDN(A-1)
$ 2,450,000 5.10% 01/07/96 $ 2,450,000
- --------------------------------------------------------------------------------
Texas--3.6%
San Antonio, TX Water System CP Notes Series 1992(A-1+/P-1)
$ 3,500,000 3.80% 01/25/96 $ 3,500,000
State of Texas TRANS CP Notes(A-1+/P-1)
6,000,000 3.65 08/20/96 6,000,000
State of Texas TRANS Series
A(SP1+/MIG1)
8,000,000 4.75 08/30/96 8,049,364
- --------------------------------------------------------------------------------
$ 17,549,364
- --------------------------------------------------------------------------------
Virginia--4.3%
IDA of Louisa PCRB Series 1984-Virginia Electric & Power
Company Project(A-1/P-1)
$ 4,000,000 3.75% 01/23/96 $ 4,000,000
2,000,000 3.85 01/26/96 2,000,000
3,500,000 3.75 01/29/96 3,500,000
3,910,000 3.75 02/22/96 3,910,000
2,500,000 3.75 02/27/96 2,500,000
3,700,000 3.80 02/29/96 3,700,000
IDA of Louisa PCRB Series 1987-Virginia Electric & Power
Company Project(A-1/P-1)
1,300,000 3.80 03/08/96 1,300,000
- --------------------------------------------------------------------------------
$ 20,910,000
- --------------------------------------------------------------------------------
Washington--2.3%
Pierce County, WA Economic Development Corp. for Sea Land
Project (Deutsche Bank LOC)(P-1)
$ 4,340,000 3.90% 11/01/96 $ 4,340,000
Washington Healthcare Facilities for Fred Hutchinson Cancer
Research Center VRDN (Morgan Guaranty Trust Co. LOC)(MIG-1)
2,595,000 6.00 01/01/96 2,595,000
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
Statement of Investments
Financial Square Tax-Free Money Market Fund (continued)
December 31, 1995
<TABLE>
- --------------------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Washington (continued)
Washington Public Power Supply System Electric RB VRDN
(Industrial Bank of Japan LOC)(A-1/MIG-1)
$4,300,000 5.35% 01/07/96 $ 4,300,000
- --------------------------------------------------------------------------------
$ 11,235,000
- --------------------------------------------------------------------------------
Wisconsin--1.2%
Milwaukee, WI IDRB Multi-Modal Series 1994 for Pharmacia
Biotech Inc. (P-1)
$ 6,000,000 5.30% 01/07/96 $ 6,000,000
- --------------------------------------------------------------------------------
Total Investments $495,485,666/(b)/
================================================================================
</TABLE>
/(a)/ When-issued security.
/(b)/ The amount stated also represents aggregate cost for federal
income tax purposes.
/(c)/ A portion of this security is being segregated for a when-issued
security.
Interest rates represent either the stated coupon rate, annualized yield on
date of purchase for discounted notes, or, for floating rate securities, the
current reset rate, which is based upon current interest rate indices.
Maturity dates represent either the stated date on the security, the next
interest reset date for floating rate securities, or the prerefunded date for
those types of securities.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Investment Abbreviations:
ACES - Adjustable Convertible Extendible Securities
AMBAC - Insured by American Municipal Bond Assurance Corp.
BANS - Bond Anticipation Notes
CFC - Unconditionally guaranteed by CFC, Cooperative Finance Corp.
CP - Commercial Paper
FGIC - Insured by Financial Guaranty Insurance Co.
GO - General Obligation
IDA - Industrial Development Authority
IDB - Industrial Development Bond
IDRB - Industrial Development Revenue Bond
LOC - Letter of Credit
MBIA - Insured by Municipal Bond Investors Assurance
MF Hsg. - Multi-Family Housing
PCRB - Pollution Control Revenue Bond
RANS - Revenue Anticipation Notes
RAWS - Revenue Anticipation Warrants
RB - Revenue Bond
TANS - Tax Anticipation Notes
TECP - Tax-Exempt Commercial Paper
TRANS - Tax Revenue Anticipation Notes
VRDN - Variable Rate Demand Note
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements
14
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities
December 31, 1995
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Prime Treasury Tax-Free
Obligations Money Market Obligations Government Money Market
Fund Fund Fund Fund Fund
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets:
Investments in securities, at value based on
amortized cost $3,516,032,571 $2,214,984,654 $2,016,992,235 $842,614,207 $495,485,666
Interest receivable 12,233,857 8,834,865 1,972,651 2,418,424 3,596,525
Cash -- -- 57,440 12,245 1,240,479
Deferred organization expenses, net -- 30,539 -- -- 55,288
Other assets 267,605 237,770 137,226 69,932 7,394
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets 3,528,534,033 2,224,087,828 2,019,159,552 845,114,808 500,385,352
- ---------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Payable for investment securities purchased -- -- -- -- 9,450,844
Dividends payable 18,756,247 11,920,285 8,684,329 4,103,220 1,660,266
Due to bank 188,639 831,506 -- --
Accrued expenses and other liabilities 625,669 507,642 457,200 233,408 108,326
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities 19,570,555 13,259,433 9,141,529 4,336,628 11,219,436
- ---------------------------------------------------------------------------------------------------------------------------------
Net Assets:
Paid in capital 3,508,929,339 2,210,828,395 2,010,013,221 840,778,180 489,172,780
Accumulated undistributed net realized gain
(loss) on investments 34,139 -- 4,802 -- (6,864)
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets $3,508,963,478 $2,210,828,395 $2,010,018,023 $840,778,180 $489,165,916
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, offering and redemption price per
share (net assets/shares outstanding) $1.00 $1.00 $1.00 $1.00 $1.00
- ---------------------------------------------------------------------------------------------------------------------------------
Shares Outstanding:
FST shares 3,295,754,553 2,069,197,101 1,587,700,297 743,885,207 448,374,479
FST Administration shares 147,895,914 137,412,396 283,193,438 82,384,825 20,938,507
FST Service shares 65,278,872 4,218,898 139,119,486 14,508,148 19,859,794
- ---------------------------------------------------------------------------------------------------------------------------------
Total shares of beneficial interest
outstanding, $0.01 par value (unlimited
number of shares authorized) 3,508,929,339 2,210,828,395 2,010,013,221 840,778,180 489,172,780
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
15
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- --------------------------------------------------------------------------------
Statements of Operations
For the Year Ended December 31, 1995
<TABLE>
<CAPTION>
Prime Treasury Tax-Free
Obligations Money Market Obligations Government Money Market
Fund Fund Fund Fund Fund
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment income:
Interest income $255,432,495 $140,722,215 $83,406,052 $39,399,088 $14,217,700
- -------------------------------------------------------------------------------------------------------------------
Expenses:
Investment adviser fees 3,173,924 1,747,326 1,059,477 493,804 270,151
Account administration fees 5,501,468 3,028,701 1,836,426 855,927 468,262
Custodian fees 447,105 334,209 148,199 114,525 37,743
Registration fees 151,016 221,794 168,347 106,936 48,923
Trustee fees 58,993 13,692 9,382 4,320 2,475
Amortization of deferred organization expenses 1,850 9,048 3,171 -- 15,595
Other 146,379 72,977 92,135 36,621 11,682
- -------------------------------------------------------------------------------------------------------------------
Total expenses 9,480,735 5,427,747 3,317,137 1,612,133 854,831
Less--Expenses reimbursable and fees waived
by GSAM (1,863,318) (1,960,234) (774,395) (427,008) (362,376)
- -------------------------------------------------------------------------------------------------------------------
Net expenses 7,617,417 3,467,513 2,542,742 1,185,125 492,455
Administration share fees 318,346 283,241 457,071 131,629 32,166
Service share fees 299,892 8,447 584,861 39,940 70,179
- -------------------------------------------------------------------------------------------------------------------
Net expenses and share fees 8,235,655 3,759,201 3,584,674 1,356,694 594,800
- -------------------------------------------------------------------------------------------------------------------
Net investment income 247,196,840 136,963,014 79,821,378 38,042,394 13,622,900
- -------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investment
transactions 95,511 7,374 781,869 65,308 (6,864)
- -------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from
operations $247,292,351 $136,970,388 $80,603,247 $38,107,702 $13,616,036
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
16
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended December 31, 1995
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Prime Treasury
Obligations Money Market Obligations
Fund Fund Fund
==================================================
<S> <C> <C> <C>
From Operations:
Net investment income $ 247,196,840 $ 136,963,014 $ 79,821,378
Net realized gain (loss) on investment
transactions 95,511 7,374 781,869
- -------------------------------------------------------------------------------------------------------
Net increase in net assets resulting
from operations 247,292,351 136,970,388 80,603,247
- -------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income
FST shares (236,894,656) (130,522,374) (63,729,881)
FST Administration shares (7,108,569) (6,351,769) (9,995,927)
FST Service shares (3,193,615) (88,871) (6,095,570)
Net realized gain on investment transactions
FST shares (55,079) (9,474) (612,499)
FST Administration shares (4,463) (504) (99,062)
FST Service shares (1,830) -- (62,143)
- -------------------------------------------------------------------------------------------------------
Total distributions to shareholders (247,258,212) (136,972,992) (80,595,082)
- -------------------------------------------------------------------------------------------------------
From share transactions (at $1.00 per share):
Proceeds from sales of shares 35,913,627,249 33,159,975,346 12,055,344,504
Reinvestment of dividends and
distributions 88,104,801 69,894 471 14,492,584
Cost of shares repurchased (35,375,137,049) (31,948,570,256) (11,181,309,002)
- -------------------------------------------------------------------------------------------------------
Net increase in net assets resulting
from share transactions 626,595,001 1,281,299,561 888,528,086
- -------------------------------------------------------------------------------------------------------
Total increase 626,629,140 1,281,296,957 888,536,251
Net Assets:
Beginning of year 2,882,334,338 929,531,438 1,121,481,772
- -------------------------------------------------------------------------------------------------------
End of year $ 3,508,963,478 $ 2,210,828,395 $ 2,010,018,023
=======================================================================================================
Summary of Share Transactions (at $1.00 per share):
FST Shares:
Shares sold 34,469,057,699 31,539,337,948 8,859,672,375
Reinvestment of dividends and
distributions 85,898,572 66,409,325 11,189,134
Shares repurchased (34,034,050,903) (30,399,518,678) (8,241,356,158)
- -------------------------------------------------------------------------------------------------------
520,905,368 1,206,228,595 629,505,351
- -------------------------------------------------------------------------------------------------------
FST Administration shares:
Shares sold 721,501,944 1,608,362,145 1,309,118,844
Reinvestment of dividends and
distributions 761,953 3,443,404 845,389
Shares repurchased (640,480,667) (1,540,953,451) (1,108,896,222)
- -------------------------------------------------------------------------------------------------------
81,783,230 70,852,068 201,068,011
- -------------------------------------------------------------------------------------------------------
FST Service shares:
Shares sold 723,067,606 12,275,253 1,886,553,285
Reinvestment of dividends and
distributions 1,444,276 41,742 2,458,061
Shares repurchased (700,605,479) (8,098,097) (1,831,056,622)
- -------------------------------------------------------------------------------------------------------
23,906,403 4,218,898 57,954,724
- -------------------------------------------------------------------------------------------------------
Net increase in shares 626,595,001 1,281,299,561 888,528,086
=======================================================================================================
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Tax-Free
Government Money Market
Fund Fund
================================
<S> <C> <C>
From Operations:
Net investment income $ 38,042,394 $ 13,622,900
Net realized gain (loss) on investment
transactions 65,308 (6,864)
- -------------------------------------------------------------------------------------
Net increase in net assets resulti
from operations 38,107,702 13,616,036
- -------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income
FST shares (34,713,840) (12,702,550)
FST Administration shares (2,917,098) (455,025)
FST Service shares (411,456) (465,325)
Net realized gain on investment transactions
FST shares (59,324) --
FST Administration shares (5,878) --
FST Service shares (106) --
- -------------------------------------------------------------------------------------
Total distributions to shareholder (38,107,702) (13,622,900)
- -------------------------------------------------------------------------------------
From share transactions (at $1.00 per share):
Proceeds from sales of shares 8,904,113,596 3,459,116,162
Reinvestment of dividends and
distributions 15,345,902 3,954,598
Cost of shares repurchased (8,391,284,391) (3,161,776,879)
- -------------------------------------------------------------------------------------
Net increase in net assets result
from share transactions 528,175,107 301,293,881
- -------------------------------------------------------------------------------------
Total increase 528,175,107 301,287,017
Net Assets:
Beginning of year 312,603,073 187,878,899
- -------------------------------------------------------------------------------------
End of year 840,778,180 $ 489,165,916
=====================================================================================
Summary of Share Transactions (at $1.00 per share):
FST Shares:
Shares sold 8,279,786,329 3,135,487,639
Reinvestment of dividends and
distributions 14,336,357 3,262,842
Shares repurchased (7,808,586,957) (2,873,945,734)
- -------------------------------------------------------------------------------------
485,535,729 264,804,747
- -------------------------------------------------------------------------------------
FST Administration shares:
Shares sold 331,435,289 110,334,205
Reinvestment of dividends and
distributions 785,525 320,945
Shares repurchased (304,089,584) (91,758,941)
- -------------------------------------------------------------------------------------
28,131,230 18,896,209
- -------------------------------------------------------------------------------------
FST Service shares:
Shares sold 292,891,978 213,294,318
Reinvestment of dividends and
distributions 224,020 370,811
Shares repurchased (278,607,850) (196,072,204)
- -------------------------------------------------------------------------------------
14,508,148 17,592,925
- -------------------------------------------------------------------------------------
Net increase in shares 528,175,107 301,293,881
=====================================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
17
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Periods Ended December 31, 1994
<TABLE>
<CAPTION>
Prime Money Market Treasury Government
Obligations Fund/(a)/ Fund/(b)/ Obligations Fund/(a)/ Fund/(a)/
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
From operations:
Net investment income $ 93,745,718 $ 31,366,990 $ 30,473,221 $ 7,980,145
Net realized gain (loss) on investment
transactions 4,990 5,671 (79,393) 3,678
- ------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting
from operations 93,750,708 31,372,661 30,393,828 7,983,823
- ------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income
FST shares (90,514,074) (29,849,508) (27,649,397) (6,434,384)
FST Administration shares (2,319,934) (1,517,482) (1,338,481) (1,545,761)
FST Service shares (919,709) -- (1,485,343) --
Net realized gain on investment transactions
FST shares (82,819) (3,002) (6,131) (3,010)
FST Administration shares (13,759) (65) (161) (668)
FST Service shares (814) -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (93,851,109) (31,370,057) (30,479,513) (7,983,823)
- ------------------------------------------------------------------------------------------------------------------------
From share transactions (at $1.00 per share):
Proceeds from sale of shares 22,898,595,340 12,775,307,681 4,616,966,952 2,128,561,581
Reinvestment of dividends and
distributions 23,668,421 9,676,488 2,940,080 2,146,045
Cost of shares repurchased (21,920,493,388) (11,855,455,335) (4,370,900,948) (1,876,927,328)
- ------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting
from share transactions 1,001,770,373 929,528,834 249,006,084 253,780,298
- -------------------------------------------------------------------------------------------------------------------------
Total increase 1,001,669,972 929,531,438 248,920,399 253,780,298
Net Assets:
Beginning of period 1,880,664,366 -- 872,561,373 58,822,775
- ------------------------------------------------------------------------------------------------------------------------
End of period $ 2,882,334,338 $ 929,531,438 $ 1,121,481,772 $ 312,603,073
- ------------------------------------------------------------------------------------------------------------------------
Summary of share transactions: (at $1.00 per share):
FST shares:
Shares sold 22,560,410,624 12,311,243,995 4,110,849,675 1,927,187,116
Reinvestment of dividends and
distributions 23,317,361 8,626,882 2,581,039 1,684,083
Shares repurchased (21,640,191,346) (11,456,902,371) (3,967,576,749) (1,715,218,895)
- ------------------------------------------------------------------------------------------------------------------------
943,536,639 862,968,506 145,853,965 213,652,304
- ------------------------------------------------------------------------------------------------------------------------
FST Administration shares:
Shares sold 212,782,227 464,063,686 194,485,191 201,374,465
Reinvestment of dividends and
distributions 117,315 1,049,606 299,486 461,962
Shares repurchased (182,036,935) (398,552,964) (137,143,496) (161,708,433)
- ------------------------------------------------------------------------------------------------------------------------
30,862,607 66,560,328 57,641,181 40,127,994
- ------------------------------------------------------------------------------------------------------------------------
FST Service shares:
Shares sold 125,402,489 -- 311,632,086 --
Reinvestment of dividends and
distributions 233,745 -- 59,555 --
Shares repurchased (98,265,107) -- (266,180,703) --
- ------------------------------------------------------------------------------------------------------------------------
27,371,127 -- 45,510,938 --
- ------------------------------------------------------------------------------------------------------------------------
Net increase in shares 1,001,770,373 929,528,834 249,006,084 253,780,298
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ---------------------------------------------------------------------
Tax-Free Money
Market Fund/(b)/
----------------
<S> <C>
Net investment income $ 2,421,177
Net realized gain (loss) on invesment
transactions --
- -------------------------------------------------------------------
Net increase in net assets resulting
from operations 2,421,177
- -------------------------------------------------------------------
Distributions to shareholders from:
Net investment income
FST shares (2,389,827)
FST Administration shares (23,394)
FST Service shares (7,956)
Net realized gain on investment transactions
FST shares --
FST Administration shares --
FST Service shares --
- -------------------------------------------------------------------
Total distributions to shareholders (2,421,177)
- -------------------------------------------------------------------
From share transactions (at $1.00 per share):
Proceeds from sale of shares 742,552,184
Reinvestment of dividends and
distributions 395,745
Cost of shares repurchased (555,069,030)
- -------------------------------------------------------------------
Net increase in net assets resulting
from share transactions 187,878,899
- -------------------------------------------------------------------
Total increase 187,878,899
Net Assets:
Beginning of period --
- -------------------------------------------------------------------
End of period $ 187,878,899
- -------------------------------------------------------------------
Summary of share transactions: (a $1.00 per share):
FST shares:
Shares sold 732,710,640
Reinvestment of dividends and
distributions 380,335
Shares repurchased (549,521,243)
- -------------------------------------------------------------------
183,569,732
- -------------------------------------------------------------------
FST Administration shares:
Shares sold 6,207,387
Reinvestment of dividends and
distributions 11,734
Shares repurchased (4,176,823)
- -------------------------------------------------------------------
2,042,298
- -------------------------------------------------------------------
FST Service shares:
Shares sold 3,634,157
Reinvestment of dividends and
distributions 3,676
Shares repurchased (1,370,964)
- -------------------------------------------------------------------
2,266,869
- -------------------------------------------------------------------
Net increase in shares 187,878,899
- -------------------------------------------------------------------
</TABLE>
/(a)/The information presented above reflects eleven months of operations due to
a change in fiscal year end. This change was caused by the reorganization
of the funds as a series of Goldman Sachs Money Market Trust.
/(b)/The Money Market and Tax-Free Money Market Funds commenced operations on
May 18, 1994 and July 19, 1994, respectively.
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
18
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements
December 31, 1995
- --------------------------------------------------------------------------------
1. Organization
Goldman Sachs Money Market Trust (the "Trust"), a business trust organized under
the laws of the Commonwealth of Massachusetts on December 6, 1978, includes the
Financial Square Funds, collectively "the Funds" or individually a "Fund". The
Trust is registered under the Investment Company Act of 1940, as amended, as an
open-end management investment company. Financial Square consists of six
diversified funds: Prime Obligations, Money Market, Treasury Obligations,
Government, Tax-Free Money Market and Municipal Money Market (inactive). The
Financial Square Funds offer three classes of shares: FST shares, FST
Administration shares and FST Service shares. The investment objective of the
Funds is to maximize current income to the extent consistent with the
preservation of capital and maintenance of liquidity.
2. Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Financial Square Funds which are in conformity with those
generally accepted in the investment company industry. The preparation of these
financial statements, in accordance with generally accepted accounting
principles, incorporates estimates made by management in determining the
reported amounts of assets, liabilities, revenues and expenses of the Funds.
A. Investment Valuation--
- -------------------------
Each Fund uses the amortized-cost method for valuing portfolio securities which
approximates market value. Under this method, all investments purchased at a
discount or premium are valued by amortizing the difference between the original
purchase price and maturity value of the issue over the period to maturity.
B. Interest Income--
- --------------------
Interest income is determined on the basis of interest accrued, premium
amortized and discount earned.
C. Federal Taxes--
- ------------------
It is each Fund's policy to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute each year
substantially all investment company taxable and tax-exempt income to
shareholders. Accordingly, no federal tax provisions are required.
The characterization of distributions to shareholders for financial reporting
purposes is determined in accordance with federal 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 paid-in capital, depending on
the type of book/tax differences that may exist.
At December 31, 1995, the Tax-Free Money Market Fund had approximately $6,900
of capital loss carryforward for U.S. Federal tax purposes. This capital loss
carryforward expires in the year 2003.
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 Funds that do not specifically relate to an individual
fund are allocated to the Funds based on each Fund's relative average net assets
of the Trust for the period.
Shareholders of FST Administration and FST Service shares bear all expenses
and fees paid to service organizations for their services with respect to such
shares as well as other expenses (subject to expense limitations) that are
directly attributable to such shares.
3. Agreements
Goldman Sachs Asset Management ("GSAM"), a separate operating division of
Goldman, Sachs & Co. ("Goldman Sachs"), serves as investment adviser pursuant to
an Investment Advisory Agreement. Under the Investment Advisory Agreement, GSAM,
subject to general supervision of the Trust's Board of Trustees, manages the
- --------------------------------------------------------------------------------
19
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
December 31, 1995
- --------------------------------------------------------------------------------
portfolios of the Funds. As compensation for the services rendered under the
Investment 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 .075% of each Fund's average daily net assets. During the
year ended December 31, 1995, GSAM voluntarily agreed to waive a portion of the
advisory fees amounting to approximately $1,481,000, $1,536,000, $494,000,
$230,000 and $245,000 for the Prime Obligations, Money Market, Treasury
Obligations, Government and Tax-Free Money Market Funds, respectively. At
December 31, 1995, the advisory fees due GSAM were approximately $134,000,
$21,000, $62,000, $29,000 and $4,000 for the Prime Obligations, Money Market,
Treasury Obligations, Government and Tax-Free Money Market Funds, respectively.
These amounts are included in "Accrued expenses and other liabilities" in the
accompanying Statements of Assets and Liabilities.
Until further notice, GSAM has voluntarily agreed to limit certain of each of
the Fund's expenses (excluding advisory fees, account administration fees,
service organization fees, taxes, interest, brokerage commissions and
extraordinary expenses) to the extent that such expenses exceed .01% per annum
of that Fund's average daily net assets. At December 31, 1995, the amounts due
from GSAM were approximately $107,000, $96,000, $67,000 and $7,000 for the Money
Market, Treasury Obligations, Government and Tax-Free Money Market Funds,
respectively; such amounts are included in "Other assets" in the accompanying
Statements of Assets and Liabilities.
GSAM also serves as administrator pursuant to an Administration Agreement.
Under the Administration Agreement, GSAM administers each Fund's business
affairs, including providing facilities. As compensation for the services
rendered under the Administration Agreement, GSAM is entitled to a fee, computed
daily and payable monthly, at an annual rate equal to .13% of each Fund's
average daily net assets. During the year ended December 31, 1995, GSAM
voluntarily agreed to waive a portion of the account administration fees
incurred by the Money Market and Tax-Free Money Market Funds amounting to
approximately $4,000 and $34,000, respectively. At December 31, 1995, the
account administration fees due GSAM were approximately $434,000, $275,000,
$203,000, $95,000 and $56,000 for the Prime Obligations, Money Market, Treasury
Obligations, Government and Tax-Free Money Market Funds, respectively. These
amounts are included in "Accrued expenses and other liabilities" in the
accompanying Statements of Assets and Liabilities.
Goldman Sachs serves as the Distributor of shares of the Funds pursuant to a
Distribution Agreement and receives no fee. Goldman Sachs also serves as
transfer agent.
4. Administration and Service Plans
The Funds have adopted Administration and Service Plans. These plans allow for
Administration shares and Service shares, respectively, to compensate service
organizations for providing varying levels of account administration and
shareholder liaison services to their customers who are beneficial owners of
such shares. The Administration and Service Plans provide for compensation to
the service organizations in an amount up to .25% and .50% (on an annualized
basis), respectively, of the average daily net asset value of the respective
shares.
5. Line of Credit Facility
The Funds participate in a $100,000,000 uncommitted, unsecured revolving line of
credit facility 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. During fiscal year 1995, the
Funds did not have any borrowings under this facility.
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 Funds' custodian, or at subcustodians. GSAM monitors the
market value of the underlying securities by pricing them daily.
- --------------------------------------------------------------------------------
20
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
7. Joint Repurchase Agreement Accounts
The Funds, together with other registered investment companies having advisory
agreements with GSAM, transfer uninvested cash balances into joint accounts, the
daily aggregate balances of which are invested in one or more repurchase
agreements. The underlying securities for the repurchase agreements are U.S.
Treasury obligations.
At December 31, 1995, the Prime Obligations, Money Market, Treasury
Obligations and Government Funds had, respectively, a 3.3%, 8.8%, 39.1% and 8.0%
undivided interest in the repurchase agreements in the following joint account,
which equaled $76,300,000, $205,000,000, $915,000,000 and $188,200,000 in
principal amount, respectively. At December 31, 1995, the repurchase agreements
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>
Repurchase Agreements
Bear Steams Companies, inc., dated 12/29/95, repurchase price
$500,325,000 (U.S.Treasury Bills: $511,267,175, 05/15/98-08/15/02)
$500,000,000 5.85% 01/02/96 $ 500,000,000
Morgan Stanley & Co., dated 12/29/95, repurchase price $500,348,333
(U.S.Treasury Bills: $510,213,707, 06/20/96-12/12/96)
500,000,000 6.27 01/02/96 500,000,000
Smith Barney, Inc., dated 12/29/95, repurchase price $100,062,222
(U.S. Treasury Stripped Securities: $102,000,086, 08/15/96-08/15/05)
100,000,000 5.60 01/02/96 100,000,000
Smith Barney, Inc., dated 12/29/95, repurchase price $500,325,556
(U.S. Treasury Notes: $452,845,339, 5.50%-8.88%, 11/30/96-09/30/00;
U.S. Treasury Stripped Securities: $57,154,783, 05/15/97-05/15/05)
500,000,000 5.86 01/02/96 500,000,000
Swiss Bank Corp., dated 12/29/95, repurchase price $740,483,445
(U.S. Treasury Notes: $651,461,859, 4.38%-8.88%, 08/31/96-11/15/01;
U.S. Treasury Stripped Securities: $82,825,172, 02/15/02-08/15/02;
U.S. Treasury Bills: $20,818,558, 02/29/96-11/14/96)
740,000,000 5.88 01/02/96 740,000,000
- ----------------------------------------------------------------------
Total Joint Repurchase Agreement Amount $2,340,000,000
======================================================================
</TABLE>
8. Other Matters
Pursuant to an SEC exemptive order, each taxable Fund may enter into certain
principal transactions, including repurchase agreements, with Goldman, Sachs &
Co., or its affiliate, Goldman Sachs Money Markets L.P. subject to certain
limitations as follows: 25% of eligible security transactions, as defined, and
10% of repurchase agreement transactions.
Effective December 28, 1994, the Funds were reorganized and became a series of
the Trust. Prior to the reorganization, each Fund was a series of Financial
Square Trust ("FST"), which was also a Massachusetts business trust. Except for
the fact that the Funds are now a series of the Trust, all shares of each
individual Fund represent the same interest in each Fund's assets, are of the
same class, are subject to the same terms and conditions, fees and expenses and
confer the same rights as when they were a series of FST.
- -------------------------------------------------------------------------------
21
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- --------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
Prime Obligations Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
=====================================
Net realized Total Net Ratio of
Net asset gain income asset net
value at Net on from Distributions value at expenses
beginning investment investment investment to end of Total to average
of period income transactions operations shareholders period return/(a)/ net assets
=====================================================================================================
For the Year Ended
December 31,
=====================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995-FST shares.......... $1.00 $0.0586 $ -- $ 0.0586 $(0.0586) $1.00 6.02% 0.18%
1995-FST Administration
shares.................. 1.00 0.0559 -- 0.0559 (0.0559) 1.00 5.75 0.43
1995-FST Service shares.. 1.00 0.0533 -- 0.0533 (0.0533) 1.00 5.49 0.68
For the Period Ended
December 31,
====================
1994-FST shares /(c)/.... 1.00 0.0401 -- 0.0401 (0.0401) 1.00 4.38/(b)/ 0.18/(b)/
1994-FST Administration
shares /(c)/............ 1.00 0.0383 -- 0.0383 (0.0383) 1.00 4.12/(b)/ 0.43/(b)/
1994-FST Service shares/(c)/ 1.00 0.0364 -- 0.0364 (0.0364) 1.00 3.86/(b)/ 0.68/(b)/
For the Years Ended
January 31,
===================
1994-FST shares.......... 1.00 0.0311 0.0002 0.0313 (0.0313) 1.00 3.18 0.17
1994-FST Administration
shares.................. 1.00 0.0286 0.0002 0.0288 (0.0288) 1.00 2.92 0.42
1994-FST Service shares.. 1.00 0.0261 0.0002 0.0263 (0.0263) 1.00 2.66 0.67
1993-FST shares.......... 1.00 0.0360 0.0007 0.0367 (0.0367) 1.00 3.75 0.18
1993-FST Administration
shares /(d)/............ 1.00 0.0068 0.0001 0.0069 (0.0069) 1.00 3.02/(b)/ 0.44/(b)/
1993-FST Service shares.. 1.00 0.0301 0.0007 0.0308 (0.0308) 1.00 3.23 0.68
1992-FST shares.......... 1.00 0.0572 0.0002 0.0574 (0.0574) 1.00 5.99 0.18
1992-FST Service shares/(d)/ 1.00 0.0027 -- 0.0027 (0.0027) 1.00 4.10/(b)/ 0.66/(b)/
For the Period March 8,
1990 /(e)/ through
January 31,
======================
1991-FST shares........ 1.00 0.0727 -- 0.0727 (0.0727) 1.00 8.27/(b)/ 0.18/(b)/
Ratios assuming no waiver
of fees and no expenses
limitations
==============================
Ratio of
net Net Ratio of net
investment assets Ratio of investment
income to at end expenses to income to
average net of period average net average
assets (in 000s) assets net assets
===========================================================
For the Year Ended
December 31,
====================
<S> <C> <C> <C> <C>
1995-FST shares.......... 5.86% $3,295,791 0.22% 5.82%
1995-FST Administration
shares.................. 5.59 147,894 0.47 5.55
1995-FST Service shares.. 5.33 65,278 0.72 5.29
For the Period Ended
December 31,
====================
1994-FST shares /(c)/.... 4.38/(b)/ 2,774,849 0.24/(b)/ 4.32/(b)/
1994-FST Administration
shares /(c)/............ 4.18/(b)/ 66,113 0.49/(b)/ 4.12/(b)/
1994-FST Service shares/(c)/ 3.98/(b)/ 41,372 0.74/(b)/ 3.92/(b)/
For the Years Ended
January 31,
===================
1994-FST shares.......... 3.11 1,831,413 0.25 3.03
1994-FST Administration
shares.................. 2.86 35,250 0.50 2.78
1994-FST Service shares.. 2.61 14,001 0.75 2.53
1993-FST shares.......... 3.60 813,126 0.25 3.53
1993-FST Administration
shares /(d)/............ 2.96/(b)/ 1,124 0.52/(b)/ 2.88/(b)/
1993-FST Service shares.. 3.01 336 0.75 2.94
1992-FST shares.......... 5.72 917,073 0.27 5.63
1992-FST Service shares/(d)/ 4.10/(b)/ 118 0.74/(b)/ 4.02/(b)/
For the Period March 8,
1990 /(e)/ through
January 31,
======================
1991-FST shares........ 8.04/(b)/ 578,495 0.28/(b)/ 7.94/(b)/
</TABLE>
=================
/(a)/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/ Annualized
/(c)/ The information presented reflects eleven months of operations due to a
change in fiscal year end. This change was caused by the reorganization of
the funds as a series of Goldman Sachs Money Market Trust.
/(d)/ FST Administration and FST Service share activity commenced during
November of 1992 and January of 1992, respectively.
/(e)/ Commencement of operations.
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
22
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
Money Market Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
---------------------------------
Net Total
Net asset realized income Net asset Ratio of net
value at Net gain on from Distributions value at expenses to
beginning investment investment investment to end of Total average net
of period income transactions operations shareholders period return/(a)/ assets
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended
December 31,
- ------------------
1995-FST shares......... $1.00 $0.0589 -- $0.0589 $(0.0589) $1.00 6.07% 0.15%
1995-FST Administration
shares................. 1.00 0.0561 -- 0.0561 (0.0561) 1.00 5.80 0.40
1995-FST Service
shares/(c)/............ 1.00 0.0231 -- 0.0231 (0.0231) 1.00 5.41/(b)/ 0.65/(b)/
For the Period Ended
December 31,
- --------------------
1994-FST shares/(c)/.... 1.00 0.0305 -- 0.0305 (0.0305) 1.00 4.91/(b)/ 0.11/(b)/
1994-FST Administration
shares/(c)/............ 1.00 0.0298 -- 0.0298 (0.0298) 1.00 4.65/(b)/ 0.36/(b)/
<CAPTION>
Ratios assuming no waiver
of fees and no expense
limitations
------------------------
Ratio
Ratio of net Net of net
investment assets Ratio of investment
income to at end expenses to income
average of period average net to average
net assets (in 000s) assets net assets
-------------------------------------------------------------
<S> <C> <C> <C> <C>
For the Year Ended
December 31,
- ------------------
1995-FST shares......... 5.89% $2,069,197 0.23% 5.81%
1995-FST Administration
shares................. 5.61 137,412 0.48 5.53
1995-FST Service
shares/(c)/............ 4.93/b/ 4,219 0.73/(b)/ 4.85/(b)/
For the Period Ended
December 31,
- --------------------
1994-FST shares/(c)/.... 4.88/(b)/ 862,971 0.25/(b)/ 4.74/(b)/
1994-FST Administration
shares/(c)/............ 4.82/(b)/ 66,560 0.50/(b)/ 4.68/(b)/
- --------------
</TABLE>
/(a)/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/ Annualized.
/(c)/ FST, FST Administration and FST Service share activity commenced on May
18, 1994, May 20, 1994 and July 14, 1995, respectively.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
23
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
Treasury Obligations Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
---------------------------------------
Net realized Total Net asset
Net asset gain (loss) income value Ratio of net
value at Net on from Distributions at expenses to
beginning investment investment investment to end of Total average
of period income transactions operations shareholders period return/(a)/ net assets
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended
December 31,
- ------------------
1995-FST shares. ....... $1.00 $0.0573 $ 0.0005 $0.0578 $(0.0578) $1.00 5.96% 0.18%
1995-FST Administration
shares................. 1.00 0.0547 0.0005 0.0552 (0.0552) 1.00 5.69 0.43
1995-FST Service shares. 1.00 0.0521 0.0005 0.0526 (0.0526) 1.00 5.43 0.68
For the Period Ended
December 31,
- --------------------
1994-FST shares/(c)/... 1.00 0.0379 (0.0001) 0.0378 (0.0378) 1.00 4.23/(b)/ 0.18/(b)/
1994-FST Administration
shares/(c)/............ 1.00 0.0388 (0.0001) 0.0387 (0.0387) 1.00 3.97/(b)/ 0.43/(b)/
1994-FST Service
shares/(c)/............. 1.00 0.0349 (0.0001) 0.0348 (0.0348) 1.00 3.71/(b)/ 0.68/(b)/
For the Years Ended
January 31,
- -------------------
1994-FST shares......... 1.00 0.0301 0.0007 0.0308 (0.0307) 1.00 3.11 0.17
1994-FST Administration
shares................. 1.00 0.0276 0.0006 0.0282 (0.0281) 1.00 2.85 0.42
1994-FST Service shares. 1.00 0.0251 0.0008 0.0259 (0.0256) 1.00 2.60 0.67
1993-FST shares......... 1.00 0.0342 0.0012 0.0354 (0.0355) 1.00 3.69 0.18
1993-FST Administration
shares/(d)/........... 1.00 0.0009 -- 0.0009 (0.0009) 1.00 2.83/(b)/ 0.43/(b)/
1993-FST Service shares. 1.00 0.0296 0.0016 0.0312 (0.0309) 1.00 3.17 0.68
1992-FST shares......... 1.00 0.0549 0.0015 0.0564 (0.0561) 1.00 5.84 0.18
1992-FST Service
shares/(d)/ 1.00 0.0113 0.0006 0.0119 (0.0116) 1.00 4.47/(b)/ 0.68/(b)/
For the Period April 24, 1990/(e)/
through January 31,
- --------------------------------------------
1991-FST shares......... 1.00 0.0600 0.0006 0.0606 (0.0605) 1.00 8.06/(b)/ 0.21/(b)/
</TABLE>
<TABLE>
<CAPTION>
Ratios assuming no waiver
of fees and no expense
limitations
---------------------------
Ratio Ratio
of net Net Ratio of of net
investment assets expenses investment
income to at end to income to
average of period average average
net assets (in 000s) net assets net assets
----------------------------------------------------------
<S> <C> <C> <C> <C>
For the Year Ended
December 31,
- ------------------
1995-FST shares......... 5.73% $1,587,715 0.23% 5.68%
1995-FST Administration
shares................. 5.47 283,186 0.48 5.42
1995-FST Service shares. 5.21 139,117 0.73 5.16
For the Period Ended
December 31,
- --------------------
1994-FST shares/(c)/.... 4.13/(b)/ 958,196 0.25/(b)/ 4.06/(b)/
1994-FST Administration
shares/(c)/............ 4.24/(b)/ 82,124 0.50/(b)/ 4.17/(b)/
1994-FST Service
shares/(c)/............. 3.82/(b)/ 81,162 0.75/(b)/ 3.75/(b)/
For the Years Ended
January 31,
- -------------------
1994-FST shares......... 3.01 812,420 0.24 2.94
1994-FST Administration
shares................. 2.76 24,485 0.49 2.69
1994-FST Service shares. 2.51 35,656 0.74 2.44
1993-FST shares......... 3.42 776,181 0.26 3.34
1993-FST Administration
shares/(d)/........... 2.83/(b)/ 1 0.51/(b)/ 2.75/(b)/
1993-FST Service shares. 2.96 5,155 0.76 2.88
1992-FST shares......... 5.49 413,171 0.28 5.39
1992-FST Service
shares/(d)/............. 3.77/(b)/ 3,634 0.78/(b)/ 3.67/(b)/
<CAPTION>
For the Period April 24,1990/(e)/ through
January 31,
- --------------------------------------------
1991-FST shares......... 7.74/(b)/ 229,988 0.34/(b)/ 7.61/(b)/
</TABLE>
- ----------------
/(a)/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/ Annualized
/(c)/ The information presented reflects eleven months of operations due to a
change in fiscal year end. This change was caused by the reorganization
of the funds as a series of Goldman Sachs Money Market Trust.
/(d)/ FST Administration and FST Sevice share activity commenced during January
of 1993 and October of 1991, respectively.
/(e)/ Commencement of operations.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
Government Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
---------------------------------
Net asset Net realized Total Net asset
value at Net gain income from Distributions value at
beginning investment on investment investment to end Total
of period income transactions operations shareholders of period return/(a)/
-------------------------------------------------------------------------------------------
For the Year Ended December 31,
- -------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1995-FST shares........................ $1.00 $0.0581 $0.0001 $0.0582 $(0.0582) $1.00 6.00%
1995-FST Administration shares......... 1.00 0.0554 0.0001 0.0555 (0.0555) 1.00 5.74
1995-FST Service shares/(c)/........... 1.00 0.0320 -- 0.0320 (0.0320) 1.00 5.40/(b)/
<CAPTION>
For the Period Ended December 31,
- ---------------------------------
1994-FST shares/(d)/................... 1.00 0.0424 -- 0.0424 (0.0424) 1.00 4.36/(b)/
1994-FST Administration shares/(d)/.... 1.00 0.0426 -- 0.0426 (0.0426) 1.00 4.10/(b)/
<CAPTION>
For the Period Ended January 31,
- --------------------------------
1993-FST shares/(c)/................... 1.00 0.0256 0.0001 0.0257 (0.0257) 1.00 3.14/(b)/
1993-FST Administration shares/(c)/.... 1.00 0.0120 0.0001 0.0121 (0.0121) 1.00 2.87/(b)/
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
---------------------
Ratio of net Net Ratio of net
Ratio of net investment assets at Ratio of investment
expenses to income to end expenses to income to
average net average net of period average net average net
assets assets (in 000s) assets assets
--------------------------------------------------------------------
For the Year Ended December 31,
- -------------------------------
<S> <C> <C> <C> <C> <C>
1995-FST shares........................ 0.18% 5.81% $743,884 0.24% 5.75%
1995-FST Administration shares......... 0.43 5.54 82,386 0.49 5.48
1995-FST Service shares/(c)/........... 0.68/(b)/ 5.08/(b)/ 14,508 0.74/(b)/ 5.02/(b)/
<CAPTION>
For the Period Ended December 31,
- ---------------------------------
1994-FST shares/(d)/................... 0.15/(b)/ 4.64/(b)/ 258,350 0.25/(b)/ 4.54/(b)/
1994-FST Administration shares/(d)/.... 0.40/(b)/ 4.67/(b)/ 54,253 0.50/(b)/ 4.57/(b)/
<CAPTION>
For the Period Ended January 31,
- --------------------------------
1993-FST shares/(c)/................... 0.08/(b)/ 3.10/(b)/ 44,697 0.59/(b)/ 2.59/(b)/
1993-FST Administration shares/(c)/.... 0.35/(b)/ 2.85/(b)/ 14,126 0.76/(b)/ 2.44/(b)/
</TABLE>
- -------------
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/Annualized.
/(c)/FST share, FST Administration share and FST Service share activity
commenced on April 6, 1993, September 1, 1993 and May 16, 1995,
respectively.
/(d)/The information presented reflects eleven months of operations due to a
change in fiscal year end. This change was caused by the reorganization of
the funds as a series of Goldman Sachs Money Market Trust.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
Tax-Free Money Market Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
---------------------------------
Net asset Net realized Total Net asset
value at Net gain income from Distributions value at
beginning investment on investment investment to end Total
of period income transactions operations shareholders of period return/(a)/
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended December 31,
- -------------------------------
1995-FST shares $1.00 $0.0381 -- $0.0381 $(0.0381) $1.00 3.89%
1995-FST Administration shares 1.00 0.0354 -- 0.0354 (0.0354) 1.00 3.63
1995-FST Service shares 1.00 0.0332 -- 0.0332 (0.0332) 1.00 3.38
For the Period Ended December 31,
- ---------------------------------
1994-FST shares/(c)/ 1.00 0.0156 -- 0.0156 (0.0156) 1.00 3.41/(b)/
1994-FST Administration shares/(c)/ 1.00 0.0136 -- 0.0136 (0.0136) 1.00 3.19/(b)/
1994-FST Service shares/(c)/ 1.00 0.0091 -- 0.0091 (0.0091) 1.00 3.11/(b)/
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
---------------------
Ratio of net Net Ratio of net
Ratio of net investment assets at Ratio of investment
expenses to income to end expenses to income to
average net average net of period average net average net
assets assets (in 000s) assets assets
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the Year Ended December 31,
- -------------------------------
1995-FST shares 0.14% 3.81% $448,367 0.24% 3.71%
1995-FST Administration shares 0.39 3.54 20,939 0.49 3.44
1995-FST Service shares 0.64 3.32 19,860 0.74 3.22
For the Period Ended December 31,
- ---------------------------------
1994-FST shares/(c)/ 0.07/(b)/ 3.42/(b)/ 183,570 0.31/(b)/ 3.18/(b)/
1994-FST Administration shares/(c)/ 0.32/(b)/ 3.25/(b)/ 2,042 0.56/(b)/ 3.01/(b)/
1994-FST Service shares/(c)/ 0.57/(b)/ 3.32/(b)/ 2,267 0.81/(b)/ 3.08/(b)/
</TABLE>
- ---------------
(a)/Assumes investment at the net asset value at The beginning of the period,
reinvestment of all distributions and a complete redemption of The
investment at The net asset value at the end of the period.
(b)/Annualized.
(a)/FST share, FST Administration share and FST Service share activity commenced
on July 19, 1994, August 1, 1994 and September 23, 1994, respectively.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
- --------------------------------------------------------------------------------
Report of Independent Public Accountants
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of the Goldman Sachs Money Market
Trust--Financial Square Funds:
We have audited the accompanying statements of assets and liabilities of the
Goldman Sachs Money Market Trust--Financial Square Funds (a Massachusetts
business trust comprising the Prime Obligations, Money Market, Treasury
Obligations, Government and Tax-Free Money Market Funds), including the
statements of investments, as of December 31, 1995, 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
December 31, 1995 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 Money Market
Trust--Financial Square Funds as of December 31, 1995, 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
February 9, 1996
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27
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29
<PAGE>
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This Annual Report is authorized for distribution to prospective investors only
when preceded or accompanied by a Goldman Sachs Money Market Trust--Financial
Square Funds Prospectus which contains facts concerning each Fund's objectives
and policies, management, expenses and other information.
- --------------------------------------------------------------------------------
30
