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PART B
STATEMENT OF ADDITIONAL INFORMATION
THE BENCHMARK FUNDS
4900 SEARS TOWER
CHICAGO, ILLINOIS 60606
U.S. GOVERNMENT SECURITIES PORTFOLIO
SHORT-INTERMEDIATE BOND PORTFOLIO
U.S. TREASURY INDEX PORTFOLIO
BOND PORTFOLIO
INTERMEDIATE BOND PORTFOLIO
INTERNATIONAL BOND PORTFOLIO
This Statement of Additional Information (the "Additional Statement") dated July
31, 1997 is not a prospectus. This Additional Statement should be read in
conjunction with the Prospectus for the U.S. Government Securities, Short-
Intermediate Bond, U.S. Treasury Index, Bond, Intermediate Bond and
International Bond Portfolios (the "Portfolios") of The Benchmark Funds (the
"Prospectus") dated July 31, 1997. Copies of the Prospectus may be obtained
without charge by calling Goldman, Sachs & Co. ("Goldman Sachs") toll-free at
1-800-621-2550 (outside Illinois) or by writing to the address stated above.
Capitalized terms not otherwise defined have the same meaning as in the
Prospectus.
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INDEX
Page
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ADDITIONAL INVESTMENT INFORMATION B-3
Investment Objectives and Policies B-3
Investment Restrictions Applicable to the
U.S. Government Securities, Short-Intermediate
Bond, U.S. Treasury Index, Bond, Intermediate
Bond and International Bond Portfolios B-18
ADDITIONAL TRUST INFORMATION B-21
Trustees and Officers B-21
Investment Adviser, Transfer Agent and Custodian B-28
Administrator and Distributor B-35
Unitholder Servicing Plan B-38
Counsel and Auditors B-40
In-Kind Purchases B-40
PERFORMANCE INFORMATION B-41
TAXES B-49
General B-49
Taxation of Certain Financial Instruments B-51
Foreign Investors B-53
Conclusion B-54
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DESCRIPTION OF UNITS B-54
OTHER INFORMATION B-58
FINANCIAL STATEMENTS B-59
APPENDIX A (Description of Bond Ratings) 1-A
APPENDIX B (Futures Contracts) 1-B
No person has been authorized to give any information or to make any
representations not contained in this Additional Statement or in the Prospectus
in connection with the offering made by the Prospectus and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Trust or its distributor. The Prospectus does not constitute
an offering by the Trust or by the distributor in any jurisdiction in which such
offering may not lawfully be made.
UNITS OF THE TRUST ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED,
ENDORSED OR OTHERWISE SUPPORTED BY, THE NORTHERN TRUST COMPANY, ITS PARENT
COMPANY OR ITS AFFILIATES, AND ARE NOT FEDERALLY INSURED OR GUARANTEED BY THE
U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENT IN THE PORTFOLIOS INVOLVES
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
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ADDITIONAL INVESTMENT INFORMATION
INVESTMENT OBJECTIVES AND POLICIES
The following supplements the investment objectives and policies of the U.S.
Government Securities, Short-Intermediate Bond, U.S. Treasury Index, Bond,
Intermediate Bond and International Bond Portfolios of The Benchmark Funds (the
"Trust") as set forth in the Prospectus.
U.S. Government Obligations. Examples of other types of U.S. Government
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obligations that may be acquired by the Portfolios include U.S. Treasury Bills,
Treasury Notes and Treasury Bonds and the obligations of Federal Home Loan
Banks, Federal Farm Credit Banks, Federal Land Banks, the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, General Services Administration, Student
Loan Marketing Association, Central Bank for Cooperatives, Federal Home Loan
Mortgage Corporation, Federal Intermediate Credit Banks, and the Maritime
Administration.
Supranational Bank Obligations. Each Portfolio (other than the U.S. Treasury
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Index Portfolio) may invest in obligations of supranational banks.
Supranational banks are international banking institutions designed or supported
by national governments to promote economic reconstruction, development or trade
between nations (e.g., the World Bank). Obligations of supranational banks may
be supported by appropriated but unpaid commitments of their member countries
and there is no assurance that these commitments will be undertaken or met in
the future.
Stripped Securities. The Treasury Department has facilitated transfers of
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ownership of zero coupon securities by accounting separately for the beneficial
ownership of particular interest coupon and principal payments on Treasury
securities through the Federal Reserve book-entry record-keeping system. The
Federal Reserve program as established by the Treasury Department is known as
"STRIPS" or "Separate Trading of Registered Interest and Principal of
Securities." Each Portfolio may purchase securities registered in the STRIPS
program. Under the STRIPS program, a Portfolio will be able to have its
beneficial ownership of zero coupon securities recorded directly in the book-
entry record-keeping system in lieu of having to hold certificates or other
evidences of ownership of the underlying U.S. Treasury securities.
In addition, each Portfolio (other than the U.S. Treasury Index Portfolio) may
acquire U.S. Government obligations and their unmatured interest coupons that
have been separated ("stripped") by their holder, typically a custodian bank or
investment brokerage firm. Having separated the interest coupons from the
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underlying principal of the U.S. Government obligations, the holder will resell
the stripped securities in custodial receipt programs with a number of different
names, including "Treasury Income Growth Receipts" ("TIGRs") and "Certificate of
Accrual on Treasury Securities" ("CATS"). The stripped coupons are sold
separately from the underlying principal, which is usually sold at a deep
discount because the buyer receives only the right to receive a future fixed
payment on the security and does not receive any rights to periodic interest
(cash) payments. The underlying U.S. Treasury bonds and notes themselves are
held in book-entry form at the Federal Reserve Bank or, in the case of bearer
securities (i.e., unregistered securities which are ostensibly owned by the
bearer or holder), in trust on behalf of the owners. Counsel to the
underwriters of these certificates or other evidences of ownership of U.S.
Treasury securities have stated that, in their opinion, purchasers of the
stripped securities most likely will be deemed the beneficial holders of the
underlying U.S. Government obligations for Federal tax purposes. The Trust is
not aware of any binding legislative, judicial or administrative authority on
this issue.
To the extent consistent with its investment objectives, each Portfolio may
purchase stripped mortgage-backed securities ("SMBS"). SMBS are usually
structured with two or more classes that receive different proportions of the
interest and principal distributions from a pool of mortgage-backed obligations.
A common type of SMBS will have one class receiving all of the interest, while
the other class receives all of the principal. However, in some instances, one
class will receive some of the interest and most of the principal while the
other class will receive most of the interest and the remainder of the
principal. If the underlying obligations experience greater than anticipated
prepayments of principal, the Portfolio may fail to fully recoup its initial
investment in these securities. The market value of the class consisting
entirely of principal payments generally is extremely volatile in response to
changes in interest rates. The yields on a class of SMBS that receives all or
most of the interest are generally higher than prevailing market yields on other
mortgage-backed obligations because their cash flow patterns are also volatile
and there is a risk that the initial investment will not be fully recouped.
SMBS issued by the U.S. Government (or a U.S. Government agency or
instrumentality) may be considered liquid under guidelines established by the
Trust's Board of Trustees if they can be disposed of promptly in the ordinary
course of business at a value reasonably close to that used in the calculation
of the net asset value per unit.
Asset-Backed Securities. The U.S. Government Securities Portfolio may purchase
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securities that are secured or backed by mortgages and issued by an agency of
the U.S. Government, and the Short-Intermediate Bond, Bond, Intermediate Bond
and International Bond Portfolios may purchase asset-backed
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securities, which are securities backed by mortgages, installment contracts,
credit card receivables or other assets. Asset-backed securities represent
interests in "pools" of assets in which payments of both interest and principal
on the securities are made monthly, thus in effect "passing through" monthly
payments made by the individual borrowers on the assets that underlie the
securities, net of any fees paid to the issuer or guarantor of the securities.
The average life of asset-backed securities varies with the maturities of the
underlying instruments, and the average life of a mortgage-backed instrument, in
particular, is likely to be substantially less than the original maturity of the
mortgage pools underlying the securities as a result of mortgage prepayments.
For this and other reasons, an asset-backed security's stated maturity may be
shortened, and the security's total return may be difficult to predict
precisely. Asset-backed securities acquired by a Portfolio may include
collateralized mortgage obligations ("CMOs") issued by private companies.
There are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue mortgage-related securities
and among the securities that they issue. Mortgage-related securities
guaranteed by the Government National Mortgage Association ("GNMA") include GNMA
Mortgage Pass-Through Certificates (also known as "Ginnie Maes") which are
guaranteed as to the timely payment of principal and interest by GNMA and such
guarantee is backed by the full faith and credit of the United States. GNMA is
a wholly-owned U.S. Government corporation within the Department of Housing and
Urban Development. GNMA certificates also are supported by the authority of
GNMA to borrow funds from the U.S. Treasury to make payments under its
guarantee. Mortgage-backed securities issued by the Federal National Mortgage
Association ("FNMA") include FNMA Guaranteed Mortgage Pass-Through Certificates
(also known as "Fannie Maes") which are solely the obligations of the FNMA and
are not backed by or entitled to the full faith and credit of the United States,
but are supported by the right of the issuer to borrow from the U.S. Treasury.
FNMA is a government-sponsored organization owned entirely by private
stockholders. Fannie Maes are guaranteed as to timely payment of the principal
and interest by FNMA. Mortgage-related securities issued by the Federal Home
Loan Mortgage Corporation ("FHLMC") include FHLMC Mortgage Participation
Certificates (also known as "Freddie Macs" or "PCs"). FHLMC is a corporate
instrumentality of the United States, created pursuant to an Act of Congress,
which is owned entirely by Federal Home Loan Banks. Freddie Macs are not
guaranteed by the United States or by any Federal Home Loan Banks and do not
constitute a debt or obligation of the United States or of any Federal Home Loan
Bank. Freddie Macs entitle the holder to timely payment of interest, which is
guaranteed by the FHLMC. FHLMC guarantees either ultimate collection or timely
payment of all principal payments on the underlying mortgage loans. When FHLMC
does not guarantee timely payment of
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principal, FHLMC may remit the amount due on account of its guarantee of
ultimate payment of principal at any time after default on an underlying
mortgage, but in no event later than one year after it becomes payable.
Non-mortgage asset-backed securities involve certain risks that are not
presented by mortgage-backed securities. Primarily, these securities do not
have the benefit of the same security interest in the underlying collateral.
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 have given debtors the right to set off certain amounts owed on the credit
cards, thereby reducing the balance due. Most issuers of automobile receivables
permit the servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
related automobile receivables. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of the automobile receivables may not have an
effective security interest in all of the obligations backing such receivables.
Therefore, there is a possibility that recoveries on repossessed collateral may
not, in some cases, be able to support payments on these securities.
Foreign Securities. Unanticipated political or social developments may affect
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the value of a Portfolio's investments in emerging market countries and the
availability to the Portfolio of additional investments in those countries. The
small size and inexperience of the securities markets in certain of such
countries and the limited volume of trading in securities in those countries may
make the Portfolio's investments in such countries illiquid and more volatile
than investments in Japan or most Western European countries, and the Portfolio
may be required to establish special custodial or other arrangements before
making certain investments in those countries. There may be little financial or
accounting information available with respect to issuers located in certain of
such countries, and it may be difficult as a result to assess the value or
prospects of an investment in such issuers.
Investors should understand that the expense ratio of the International Bond
Portfolio can be expected to be higher than those of funds investing in domestic
securities. The costs attributable to investing abroad are usually higher for
several reasons, such as the higher cost of investment research, higher cost of
custody of foreign securities, higher commissions paid on comparable
transactions on foreign markets and additional costs arising from delays in
settlements of transactions involving foreign securities.
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Foreign Currency Transactions. In order to protect against a possible loss on
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investments resulting from a decline or appreciation in the value of a
particular foreign currency against the U.S. dollar or another foreign currency
or for other reasons, the Short-Intermediate Bond, Bond, Intermediate Bond and
International Bond Portfolios are authorized to enter into forward currency
exchange contracts. These contracts involve an obligation to purchase or sell a
specified currency at a future date at a price set at the time of the contract.
Forward currency contracts do not eliminate fluctuations in the values of
portfolio securities but rather allow a Portfolio to establish a rate of
exchange for a future point in time.
When entering into a contract for the purchase or sale of a security, a
Portfolio may enter into a forward foreign currency exchange contract for the
amount of the purchase or sale price to protect against variations, between the
date the security is purchased or sold and the date on which payment is made or
received, in the value of the foreign currency relative to the U.S. dollar or
other foreign currency.
When Northern anticipates that a particular foreign currency may decline
substantially relative to the U.S. dollar or other leading currencies, in order
to reduce risk, a Portfolio may enter into a forward contract to sell, for a
fixed amount, the amount of foreign currency approximating the value of some or
all of the Portfolio's securities denominated in such foreign currency.
Similarly, when the obligations held by a Portfolio create a short position in a
foreign currency, the Portfolio may enter into a forward contract to buy, for a
fixed amount, an amount of foreign currency approximating the short position.
With respect to any forward foreign currency contract, it will not generally be
possible to match precisely the amount covered by that contract and the value of
the securities involved due to the changes in the values of such securities
resulting from market movements between the date the forward contract is entered
into and the date it matures. In addition, while forward contracts may offer
protection from losses resulting from declines or appreciation in the value of a
particular foreign currency, they also limit potential gains which might result
from changes in the value of such currency. A Portfolio may also incur costs in
connection with forward foreign currency exchange contracts and conversions of
foreign currencies and U.S. dollars.
In addition, with respect to the International Bond Portfolio, Northern may
purchase or sell forward foreign currency exchange contracts to seek to increase
total return.
A separate account consisting of liquid assets equal to the amount of a
Portfolio's assets that could be required to consummate forward contracts will
be established with the
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Portfolios' custodian except to the extent the contracts are otherwise
"covered." For the purpose of determining the adequacy of the securities in the
account, the deposited securities will be valued at market or fair value. If
the market or fair value of such securities declines, additional liquid
securities will be placed in the account daily so that the value of the account
will equal the amount of such commitments by the Portfolio. A forward contract
to sell a foreign currency is "covered" if a Portfolio owns the currency (or
securities denominated in the currency) underlying the contract, or holds a
forward contract (or call option) permitting the Portfolio to buy the same
currency at a price that is (i) no higher than the Portfolio's price to sell the
currency or (ii) greater than the Portfolio's price to sell the currency
provided the difference is maintained by the Portfolio in liquid assets in a
segregated account with its custodian. A forward contract to buy a foreign
currency is "covered" if a Portfolio holds a forward contract (or call option)
permitting the Portfolio to sell the same currency at a price that is (i) as
high as or higher than the Portfolio's price to buy the currency or (ii) lower
than the Portfolio's price to buy the currency provided the difference in
maintained by the Portfolio in liquid assets in a segregated account with its
custodian.
Interest Rate Swaps, Floors and Caps and Currency Swaps. The Portfolios (other
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than the U.S. Treasury Index Portfolio) may enter into interest rate swaps,
floors and caps for hedging purposes and not for speculation. Interest rate
swaps involve the exchange by a Portfolio with another party of their respective
commitments to pay or receive interest, such as an exchange of fixed rate
payments for floating rate payments. A Portfolio will typically use interest
rate swaps to preserve a return on a particular investment or portion of its
portfolio or to shorten the effective duration of its portfolio investments. The
purchase of an interest rate floor or cap entitles the purchaser to receive
payments of interest on a notional principal amount from the seller, to the
extent the specified index falls below (floor) or exceeds (cap) a predetermined
interest rate. The Portfolios will only enter into interest rate swaps or
interest rate floor or cap transactions on a net basis, i.e. the two payment
streams are netted out, with a Portfolio receiving or paying, as the case may
be, only the net amount of the two payments.
The International Bond Portfolio may enter into currency swaps, which involve
the exchange of the rights of the Portfolio and another party to make or receive
payments in specified currencies. Currency swaps usually involve the delivery
of the entire principal value of one designated currency in exchange for the
other designated currency.
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Inasmuch as interest rate and currency swaps are entered into for good faith
hedging purposes, the Trust and Northern believe that such transactions do not
constitute senior securities as defined in the 1940 Act and, accordingly, will
not treat them as being subject to the Portfolio's borrowing restrictions. The
net amount of the excess, if any, of a Portfolio's obligations over its
entitlements with respect to interest rate or currency swaps will be accrued on
a daily basis and an amount of liquid assets having an aggregate net asset value
at least equal to such accrued excess will be maintained in a segregated account
by the Portfolio's custodian.
The Portfolios will not enter into an interest rate or currency swap or interest
rate floor or cap transaction unless the unsecured commercial paper, senior debt
or the claims-paying ability of the other party thereto is rated either A or A-1
or better by S&P, Duff or Fitch, or A or P-1 or better by Moody's. If there is
a default by the other party to such transaction, the Portfolios will have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid in comparison with markets for other similar instruments which
are traded in the interbank market.
Options. Each Portfolio may buy put options and call options and write covered
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call and secured put options. Such options may relate to particular securities,
financial instruments, foreign currencies, foreign or domestic securities
indices or (in the case of the International Bond Portfolio) the yield
differential between two securities ("yield curve options") and may or may not
be listed on a domestic or foreign securities exchange (an "Exchange") or issued
by the Options Clearing Corporation. Options trading is a highly specialized
activity which entails greater than ordinary investment risk. Options on
particular securities may be more volatile than the underlying instruments and,
therefore, on a percentage basis, an investment in options may be subject to
greater fluctuation than an investment in the underlying instruments themselves.
The Portfolios will write call options only if they are "covered." In the case
of a call option on a security or currency, the option is "covered" if a
Portfolio owns the security or currency underlying the call or has an absolute
and immediate right to acquire that security or currency without additional cash
consideration (or, if additional cash consideration is required, liquid assets
in such amount are held in a segregated account by its custodian) upon
conversion or exchange of other securities or instruments held by it. For a
call option on an index, the option is covered if a Portfolio
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maintains with its custodian, a portfolio of securities substantially
replicating the movement of the index, or liquid assets equal to the contract
value. A call option is also covered if a Portfolio holds a call on the same
security, currency or index as the call written where the exercise price of the
call held is (i) equal to or less than the exercise price of the call written,
or (ii) greater than the exercise price of the call written provided the
difference is maintained by the Portfolio in liquid assets in a segregated
account with its custodian. The Portfolios will write put options only if they
are "secured" by liquid assets maintained in a segregated account by the
Portfolios' custodian in an amount not less than the exercise price of the
option at all times during the option period.
With respect to yield curve options, a call (or put) option is covered if the
International Bond Portfolio holds another call (or put) option on the spread
between the same two securities and maintains in a segregated account with its
custodian liquid assets sufficient to cover the Portfolio's net liability under
the two options. Therefore, the Portfolio's liability for such a covered option
is generally limited to the difference between the amount of the Portfolio's
liability under the option written by the Portfolio less the value of the option
held by the Portfolio. Yield curve options may also be covered in such other
manner as may be in accordance with the requirements of the counterparty with
which the option is traded and applicable laws and regulations. Yield curve
options are traded over-the-counter, and because they have been only recently
introduced, established trading markets for these securities have not yet
developed.
A Portfolio's obligation to sell a security or currency subject to a covered
call option written by it, or to purchase a security or currency subject to a
secured put option written by it, may be terminated prior to the expiration date
of the option by the Portfolio's execution of a closing purchase transaction,
which is effected by purchasing on an exchange an option of the same series
(i.e., same underlying security or currency, exercise price and expiration date)
as the option previously written. Such a purchase does not result in the
ownership of an option. A closing purchase transaction will ordinarily be
effected to realize a profit on an outstanding option, to prevent an underlying
security or currency from being called, to permit the sale of the underlying
security or currency or to permit the writing of a new option containing
different terms on such underlying security. The cost of such a liquidation
purchase plus transaction costs may be greater than the premium received upon
the original option, in which event the Portfolio will have incurred a loss in
the transaction. There is no assurance that a liquid secondary market will
exist for any particular option. An option writer, unable to effect a closing
purchase transaction, will not be able to sell the underlying security or
currency (in
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the case of a covered call option) or liquidate the segregated account (in the
case of a secured put option) until the option expires or the optioned security
or currency is delivered upon exercise with the result that the writer in such
circumstances will be subject to the risk of market decline or appreciation in
the security or currency during such period.
When a Portfolio purchases an option, the premium paid by it is recorded as an
asset of the Portfolio. When the Portfolio writes an option, an amount equal to
the net premium (the premium less the commission) received by the Portfolio is
included in the liability section of the Portfolio's statement of assets and
liabilities as a deferred credit. The amount of this asset or deferred credit
will be subsequently marked-to-market to reflect the current value of the option
purchased or written. The current value of the traded option is the last sale
price or, in the absence of a sale, the current bid price. If an option
purchased by the Portfolio expires unexercised the Portfolio realizes a loss
equal to the premium paid. If the Portfolio enters into a closing sale
transaction on an option purchased by it, the Portfolio will realize a gain if
the premium received by the Portfolio on the closing transaction is more than
the premium paid to purchase the option, or a loss if it is less. If an option
written by the Portfolio expires on the stipulated expiration date or if the
Portfolio enters into a closing purchase transaction, it will realize a gain (or
loss if the cost of a closing purchase transaction exceeds the net premium
received when the option is sold) and the deferred credit related to such option
will be eliminated. If an option written by the Portfolio is exercised, the
proceeds of the sale will be increased by the net premium originally received
and the Portfolio will realize a gain or loss.
There are several risks associated with transactions in certain options. For
example, there are significant differences between the securities and options
markets that could result in an imperfect correlation between these markets,
causing a given transaction not to achieve its objectives. In addition, a
liquid secondary market for particular options, whether traded over-the-counter
or on an Exchange may be absent for reasons which include the following: there
may be insufficient trading interest in certain options; restrictions may be
imposed by an Exchange on opening transactions or closing transactions or both;
trading halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of options or underlying securities or currencies;
unusual or unforeseen circumstances may interrupt normal operations on an
Exchange; the facilities of an Exchange or the Options Clearing Corporation may
not at all times be adequate to handle current trading value; or one or more
Exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which
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event the secondary market on that Exchange (or in that class or series of
options) would cease to exist, although outstanding options that had been issued
by the Options Clearing Corporation as a result of trades on that Exchange would
continue to be exercisable in accordance with their terms.
Futures Contracts and Related Options. Each Portfolio may invest in futures
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contracts and interest rate futures contracts and may purchase and sell call and
put options on futures contracts for hedging purposes, for speculative purposes
(to seek to increase total return), or for liquidity management purposes. For a
detailed description of futures contracts and related options, see Appendix B to
this Additional Statement.
Securities Lending. Collateral for loans of portfolio securities made by a
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Portfolio may consist of cash, securities issued or guaranteed by the U.S.
Government or its agencies or irrevocable bank letters of credit (or any
combination thereof). The borrower of securities will be required to maintain
the market value of the collateral at not less than the market value of the
loaned securities, and such value will be monitored on a daily basis. When a
Portfolio lends its securities, it continues to receive dividends and/or
interest on the securities loaned and may simultaneously earn interest on the
investment of the cash collateral which will be invested in readily marketable,
high quality, short-term obligations. Although voting rights, or rights to
consent, attendant to securities on loan pass to the borrower, such loans will
be called so that the securities may be voted by a Portfolio if a material event
affecting the investment is to occur.
Forward Commitments, When-Issued Securities and Delayed Delivery Transactions.
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When a Portfolio purchases securities on a when-issued, delayed delivery or
forward commitment basis, the Portfolio's custodian (or subcustodian) will
maintain in a segregated account liquid assets 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, the custodian or
subcustodian will hold the portfolio securities themselves 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, forward commitments and delayed
delivery transactions.
As described in the Prospectus, the U.S. Government Securities, Short-
Intermediate Bond and Bond Portfolios may dispose of or negotiate a when-issued
or forward commitment after entering into it in connection with pair-off
transactions. A Portfolio will normally realize a capital gain or loss in
connection with these transactions. For purposes of determining a Portfolio's
average dollar-weighted maturity, the maturity of when-issued or forward
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commitment securities will be calculated from the commitment date.
Commercial Paper, Bankers' Acceptances, Certificates of Deposit, Time Deposits
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and Bank Notes. Commercial paper represents short-term unsecured promissory
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notes issued in bearer form by banks or bank holding companies, corporations and
finance companies. 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 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 that
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. Bank notes rank
junior to deposit liabilities of banks and pari passu with other senior,
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unsecured obligations of the bank. Some states have "depositor preference" laws
that give depositors of their state chartered banks priority over holders of
bank notes and other general creditors. In addition, the U.S. Congress has
adopted legislation which creates a Federal "depositor preference" law providing
the claims of certain creditors of an insured depository institution (including
its depositors) with priority over the claims of that institution's unsecured
creditors (including holders of its notes), in the event of that institution's
insolvency or other resolution. Bank notes are classified as "other borrowings"
on a bank's balance sheet, while deposit notes and certificates of deposit are
classified as deposits. 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 to the extent of $100,000 per depositor.
A Portfolio may invest a portion of its assets in the obligations of foreign
banks and foreign branches of domestic banks. Such obligations include
Eurodollar Certificates of Deposit ("ECDs") which are U.S. dollar-denominated
certificates of deposit issued by offices of foreign and domestic banks located
outside the United States; Eurodollar Time Deposits ("ETDs") which are U.S.
dollar-denominated deposits in a foreign branch of a U.S. bank or a foreign
bank; Canadian Time Deposits ("CTDs") which are essentially the same as ETDs
except they are issued by Canadian offices of major Canadian banks; Schedule Bs,
which are obligations issued by Canadian branches of foreign or domestic banks;
Yankee Certificates of Deposit ("Yankee CDs") which are U.S. dollar-denominated
certificates of deposit issued by a U.S.
B-13
<PAGE>
branch of a foreign bank and held in the United States; and Yankee Bankers'
Acceptances ("Yankee BAs") which are U.S. dollar-denominated bankers'
acceptances issued by a U.S. branch of a foreign bank and held in the United
States.
Variable and Floating Rate Instruments. With respect to the variable and
- --------------------------------------
floating rate instruments that may be acquired by the Portfolios, Northern will
consider the earning power, cash flows and other liquidity ratios of the issuers
and guarantors of such instruments and, if the instruments are subject to demand
features, will continuously monitor their financial status and ability to meet
payment on demand. Where necessary to ensure that a variable or floating rate
instrument meets the Portfolios' quality requirements, the issuer's obligation
to pay the principal of the instrument will be backed by an unconditional bank
letter or line of credit, guarantee or commitment to lend.
Pair-Off Transactions. Subject to the requirements of the 1940 Act, each
- ---------------------
Portfolio (other than the U.S. Treasury Index, International Bond and
Intermediate Bond Portfolios) may engage in pair-off transactions involving
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. In a pair-off transaction Northern will commit to purchase or
sell a security. Then, prior to the settlement date, Northern will "pair-off"
the purchase or sale with a matching sale or purchase of the same security that
settles prior to, or on, the original settlement date. Profits or losses on the
pair-off transaction are settled by a Portfolio's paying or receiving the
difference between the purchase and sale prices from the counterparty in the
transaction (which will be a bank, broker-dealer or other financial institution
determined to be creditworthy by Northern).
A pair-off transaction that involves an initial sale by a Portfolio of a
security that it does not own (or does not have the right to obtain at no added
cost) will be considered a short sale of the security. Until the sale is paired-
off as described above, the Portfolio will maintain on a daily basis a
segregated account containing liquid assets at such a level that (a) the amount
deposited in the segregated account will equal the current value of the security
sold short and (b) the amount deposited in the segregated account will not be
less than the market value of the security at the time it was sold short.
Similarly, a segregated account will be maintained for a pair-off transaction
that involves an initial purchase by a Portfolio of a security on a forward
commitment or when-issued basis as described more fully in this Additional
Statement.
A Portfolio will not enter into a pair-off transaction that involves either a
short sale or a forward commitment or when-issued purchase if, after effect is
given to the sale or
B-14
<PAGE>
purchase,the total market value of all open pair-off transactions would exceed
25% of the value of the Portfolio's net assets.
Although pair-off transactions represent a strategy that may be used by Northern
in attempting to earn additional income for the Portfolios resulting form short-
term price movements in the securities markets, the transactions may result in
losses instead. In addition, pair-off transactions may produce higher than
normal portfolio turnover which may result in increased transaction costs to a
Portfolio and gains from the sale of securities deemed to have been held for
less than three months. Such gains must not exceed 30% of a Portfolio's gross
income in a taxable year in order for the Portfolio to qualify as a regulated
investment company under the Internal Revenue Code of 1986.
Investment Companies. To the extent required by the 1940 Act and the
- --------------------
regulations and orders of the SEC thereunder, each Portfolio currently intends
to limit its investments in securities issued by other investment companies so
that, as determined immediately after a purchase of such securities is made, not
more than 3% of the total outstanding stock of any one investment company will
be owned by a Portfolio, the Trust as a whole and their affiliated persons (as
defined in the 1940 Act). An investment company whose securities are purchased
by a Portfolio or the Trust is not obligated to redeem such securities in an
amount exceeding 1% of the investment company's total outstanding securities
during any period of less than 30 days. Therefore, such securities that exceed
this amount may be illiquid. Notwithstanding the foregoing, a Portfolio may
adhere to more restrictive limitations with respect to its investments in
securities issued by other investment companies if required by the SEC or deemed
to be in the best interests of the Trust and will comply with any fundamental
investment restriction that may otherwise be applicable to such investments. To
the extent required by the 1940 Act, each Portfolio expects to vote the shares
of other investment companies that are held by it in the same proportion as the
vote of all other holders of such securities.
Repurchase Agreements. Each Portfolio may enter into repurchase agreements with
- ---------------------
financial institutions, such as banks and broker-dealers, as are deemed
creditworthy by Northern under guidelines approved by the Trust's Board of
Trustees. The repurchase price under the repurchase agreements will generally
equal the price paid by a Portfolio plus interest negotiated on the basis of
current short-term rates (which may be more or less than the rate on the
securities underlying the repurchase agreement). Securities subject to
repurchase agreements will be held by the Trust's custodian (or subcustodian),
in the Federal Reserve/Treasury book-entry system or by another authorized
securities depository. Repurchase agreements are considered to be loans by a
Portfolio under the 1940 Act.
B-15
<PAGE>
Reverse Repurchase Agreements. Each Portfolio may borrow funds for temporary or
- -----------------------------
emergency purposes by selling portfolio securities to financial institutions
such as banks and broker/dealers and agreeing to repurchase them at a mutually
specified date and price ("reverse repurchase agreements"). Reverse repurchase
agreements involve the risk that the market value of the securities sold by a
Portfolio may decline below the repurchase price. The Portfolios will pay
interest on amounts obtained pursuant to a reverse repurchase agreement. While
reverse repurchase agreements are outstanding, a Portfolio will maintain in a
segregated account liquid assets in an amount at least equal to the market value
of the securities, plus accrued interest, subject to the agreement. Reverse
repurchase agreements are considered to be borrowings by a Portfolio under the
1940 Act.
Risks Related to Lower-Rated Securities. While any investment carries some
- ---------------------------------------
risk, certain risks associated with lower-rated securities are different than
those for investment-grade securities. The risk of loss through default is
greater because lower-rated securities are usually unsecured and are often
subordinate to an issuer's other obligations. Additionally, the issuers of
these securities frequently have high debt levels and are thus more sensitive to
difficult economic conditions, individual corporate developments and rising
interest rates. Consequently, the market price of these securities may be quite
volatile and may result in wider fluctuations of a Portfolio's net asset value
per unit.
There remains some uncertainty about the performance level of the market for
lower-rated securities under adverse market and economic environments. An
economic downturn or increase in interest rates could have a negative impact on
both the markets for lower-rated securities (resulting in a greater number of
bond defaults) and the value of lower-rated securities held in a portfolio of
investments.
The economy and interest rates can affect lower-rated securities differently
than other securities. For example, the prices of lower-rated securities are
more sensitive to adverse economic changes or individual corporate developments
than are the prices of higher-rated investments. In addition, during an
economic downturn or period in which interest rates are rising significantly,
highly leveraged issuers may experience financial difficulties, which, in turn,
would adversely affect their ability to service their principal and interest
payment obligations, meet projected business goals and obtain additional
financing.
If an issuer of a security defaults, a Portfolio may incur additional expenses
to seek recovery. In addition, periods of economic uncertainty would likely
result in increased volatility
B-16
<PAGE>
for the market prices of lower-rated securities as well as a Portfolio's net
asset value. In general, both the prices and yields of lower-rated securities
will fluctuate.
In certain circumstances it may be difficult to determine a security's fair
value due to a lack of reliable objective information. Such instances occur
where there is not an established secondary market for the security or the
security is lightly traded. As a result, a Portfolio's valuation of a security
and the price it is actually able to obtain when it sells the security could
differ.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the value and liquidity of lower-rated securities held by
a Portfolio, especially in a thinly traded market. Illiquid or restricted
securities held by the Portfolio may involve special registration
responsibilities, liabilities and costs, and could involve other liquidity and
valuation difficulties.
The rating assigned by a rating agency evaluates the safety of a lower-rated
security's principal and interest payments, but does not address market value
risk. Because the ratings of the rating agencies may not always reflect current
conditions and events, in addition to using recognized rating agencies and other
sources, Northern performs its own analysis of the issuers whose lower-rated
securities the Portfolios hold. Because of this, the Portfolios' performance
may depend more on Northern's own credit analysis than in the case of mutual
funds investing in higher-rated securities.
In selecting lower-rated securities, Northern considers factors such as those
relating to the creditworthiness of issuers, the ratings and performance of the
securities, the protections afforded the securities and the diversity of a
Portfolio's investment portfolio. Northern monitors the issuers of lower-rated
securities held by a Portfolio for their ability to make required principal and
interest payments, as well as in an effort to control the liquidity of the
Portfolio so that it can meet redemption requests.
Yields and Ratings. The yields on certain obligations, including the
- ------------------
instruments in which the Portfolios may invest, are dependent on a variety of
factors, including general market conditions, conditions in the particular
market for the obligation, financial condition of the issuer, size of the
offering, maturity of the obligation and ratings of the issue. The ratings of
S&P, Moody's, Duff, Fitch and TBW represent their respective opinions as to the
quality of the obligations they undertake to rate. Ratings, however, are
general and are not absolute standards of quality. Consequently, obligations
with the same rating, maturity and interest rate may have different market
prices.
B-17
<PAGE>
Subject to the limitations stated in the Prospectus, if a Portfolio security
undergoes a rating revision, a Portfolio may continue to hold the security if
Northern determines that retention is warranted.
Calculation of Portfolio Turnover Rate. The portfolio turnover rate for the
- --------------------------------------
Portfolios is calculated by dividing the lesser of purchases or sales of
portfolio investments for the reporting period by the monthly average value of
the portfolio investments owned during the reporting period. The calculation
excludes all securities, including options, whose maturities or expiration dates
at the time of acquisition are one year or less. Portfolio turnover may vary
greatly from year to year as well as within a particular year, and may be
affected by cash requirements for redemption of units and by requirements which
enable the Portfolios to receive favorable tax treatment.
INVESTMENT RESTRICTIONS APPLICABLE TO THE U.S. GOVERNMENT SECURITIES, SHORT-
INTERMEDIATE BOND, U.S. TREASURY INDEX, BOND, INTERMEDIATE BOND AND
INTERNATIONAL BOND PORTFOLIOS
The U.S. Government Securities, Short-Intermediate Bond, U.S. Treasury Index,
Bond, Intermediate Bond and International Bond Portfolios are subject to the
fundamental investment restrictions enumerated below which may be changed with
respect to these particular Portfolios only by a vote of the holders of a
majority of a Portfolio's outstanding units.
No Portfolio may:
(1) Make loans, except (a) through the purchase of debt obligations in
accordance with the Portfolio's investment objective and policies, (b) through
repurchase agreements with banks, brokers, dealers and other financial
institutions, and (c) loans of securities.
(2) Mortgage, pledge or hypothecate any assets (other than pursuant to reverse
repurchase agreements) except to secure permitted borrowings.
(3) Purchase or sell real estate, but this restriction shall not prevent a
Portfolio from investing directly or indirectly in portfolio instruments secured
by real estate or interests therein or acquiring securities of real estate
investment trusts or other issuers that deal in real estate.
(4) Purchase or sell commodities or commodity contracts or oil or gas or other
mineral exploration or development programs, except that each Portfolio may, to
the extent appropriate to its investment policies, purchase securities of
companies engaging in whole or in part in such activities, enter into futures
contracts
B-18
<PAGE>
and related options, and enter into forward currency contracts in accordance
with its investment objective and policies.
(5) Invest in companies for the purpose of exercising control.
(6) Act as underwriter of securities, except as a Portfolio 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 its investment
objective and portfolio management policies.
(7) Write puts, calls or combinations thereof, except for transactions in
options on securities, financial instruments, currencies and indices of
securities (and in the case of the International Bond Portfolio, yield curve
options); futures contracts; options on futures contracts; forward currency
contracts; short sales of securities against the box; interest rate swaps (and
in the case of the International Bond Portfolio, currency swaps); and pair-off
transactions (except in the case of the International Bond Portfolio).
(8) Purchase the securities of any issuer if such purchase would cause more
than 10% of the voting securities of such issuer to be held by the Portfolio,
except that up to 25% of the value of its total assets may be invested without
regard to this 10% limitation; provided that this restriction does not apply to
the International Bond Portfolio or Intermediate Bond Portfolio.
(9) Purchase securities (other than obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities) 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. For the purposes of this
restriction, as to utility companies, the gas, electric, water and telephone
businesses are considered separate industries; 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 industries of their
parents if their activities are primarily related to financing the activities of
their parents.
(10) Borrow money (other than pursuant to reverse repurchase agreements),
except (a) as a temporary measure, and then only in amounts not exceeding 5% of
the value of the Portfolio's total assets or (b) from banks, provided that
immediately after any such borrowing all borrowings of the Portfolio do not
exceed one-third of the Portfolio's total assets. No purchases of securities
will be made if borrowings subject to this restriction exceed 5% of the value of
the Portfolio's assets. The exceptions in (a) and (b) to this
B-19
<PAGE>
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 1940 Act.
IN ADDITION, THE U.S. GOVERNMENT SECURITIES, SHORT-INTERMEDIATE BOND, U.S.
TREASURY INDEX AND BOND PORTFOLIOS MAY NOT:
(11) Purchase 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 the total assets of each Portfolio may be invested in any
securities without regard to this 5% limitation; and (b) with respect to each
Portfolio, such 5% limitation shall not apply to repurchase agreements
collateralized by obligations of the U.S. Government, its agencies or
instrumentalities.
In applying Restriction No. 11 above, a security is considered to be issued by
the entity, or entities, whose assets and revenues back the security. A
guarantee of a security is not deemed to be a security issued by the guarantor
when the value of all securities issued and guaranteed by the guarantor, and
owned by the Portfolio, does not exceed 10% of the value of the Portfolio's
total assets.
IN ADDITION, WITH RESPECT TO THE INTERMEDIATE BOND PORTFOLIO:
(12) The Portfolio may not make any investment inconsistent with the
Portfolio's classification as a diversified investment company under the 1940
Act.
(13) Notwithstanding any of the Trust's other fundamental investment
restrictions (including, without limitation, those restrictions relating to
issuer diversification, industry concentration and control), the Intermediate
Bond Portfolio may (a) purchase securities of other investment companies to the
full extent permitted under Section 12 of the 1940 Act (or any successor
provision thereto) or under any regulation or order of the Securities and
Exchange Commission; and (b)invest all or substantially all of its assets in a
single open-end investment company or series thereof with substantially the same
investment objective, policies and fundamental restrictions as the Portfolio.
B-20
<PAGE>
Except to the extent otherwise provided in Investment Restriction (9) for the
purpose of such restriction, in determining industry classification the Trust
intends to use the industry classification titles in the Standard Industrial
Classification Manual (except that the International Bond Portfolio will use the
Morgan Stanley Capital International industry classification titles).
Securities held in escrow or separate accounts in connection with a Portfolio's
investment practices described in this Additional Statement and in the
Prospectus are not deemed to be mortgaged, pledged or hypothecated for purposes
of the foregoing Investment Restrictions.
In addition, as a matter of fundamental policy, the International Bond Portfolio
will not issue senior securities except as stated in the Prospectus or this
Additional Statement.
As a non-fundamental investment restriction, the International Bond Portfolio
may not, at the end of any tax quarter, hold more than 10% of the outstanding
voting securities of any one issuer, except that up to 50% of the total value of
the assets of the Portfolio may be invested in any securities without regard to
this 10% limitation so long as no more than 25% of the total value of its assets
is invested in the securities of any one issuer (except the U.S. Government).
As a non-fundamental investment restriction that can be changed without
unitholder approval, the International Bond Portfolio may not, at the end of any
tax quarter, invest more than 5% of the total value of its assets in the
securities of any one issuer (except U.S. Government securities), except that up
to 50% of the total value of the Portfolio's assets may be invested in any
securities without regard to this 5% limitation so long as no more than 25% of
the total value of its assets is invested in the securities of any one issuer
(except U.S. Government securities).
Any restriction which involves a maximum percentage will not be considered
violated unless an excess over the percentage occurs immediately after, and is
caused by, an acquisition or encumbrance of securities or assets of, or
borrowings by, a Portfolio.
ADDITIONAL TRUST INFORMATION
TRUSTEES AND OFFICERS
Information pertaining to the Trustees and officers of the Trust is set forth
below.
B-21
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
<S> <C> <C>
William H. Springer, 68 Chairman Vice Chairman of Ameritech
701 Morningside Drive and (a telecommunications holding
Lake Forest, IL 60045 Trustee company), February 1987 to re-
tirement in August 1992; Vice
Chairman, Chief Financial and
Administrative Officer of
Ameritech prior to 1987; Director,
Walgreen Co. (a re tail drug store
business); and Director of Baker,
Fentress & Co. (a closed-end, non-diver-
sified management investment company) from
April 1992 to present; Trustee, Goldman Sachs
Trust from 1989 to present.
Edward J. Condon, Jr., 57 Trustee Chairman of The Paradigm
227 West Monroe Street advisor) since July 1993; Vice President
Chicago, IL 60606 and Treasurer of Sears, Roebuck and Co. (a retail
corporation) from February 1989 to July 1993;
within the last five years he has served as a
Director of: Sears Roebuck Acceptance Corp.;
Discover Credit Corp.; Sears Receivables Financing
Group, Inc.; Sears Credit Corp.; and Sears
Overseas Finance N.V.; Member of the Board of
Managers of The Liberty Hampshire Company, LLC;
Vice Chairman and Director of Energenics, LLC;
Director of University Eldercare, Inc.; Director
of the Girl Scouts of Chicago; and Trustee of Domi-
nican University.
John W. English, 64 Trustee Private Investor; Vice Pres-
50-H New England Avenue ident and Chief Investment
P.O. Box 640 Officer of The Ford Foundation
Summit, NJ 07902-0640. (a charitable trust) from 1981 until 1993;
Trustee: The China Fund, Inc.; Retail Property
Trust; Sierra Trust; American Red Cross in Greater
</TABLE>
B-22
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -----------------------------------------------
<S> <C> <C>
New York; Mote Marine Laboratory; and United
Board for Christian Higher Education in Asia.
Director: University of Iowa Foundation;
Blanton-Peale Institutes of Religion and Health;
Community Foundation of Sarasota County; Duke
Management Company; and John Ringling Centre
Foundation.
James J. Gavin, Jr., 75 Trustee Vice Chairman from January 1985 to August 1987 and Senior
161 Thorntree Lane Vice President-Finance and Chief Financial
Winnetka, Illinois 60093 Officer from 1975 to January 1985 of Borg-Warner
Corporation (a diversified manufacturing company also
engaged in providing financial and protective services);
Director of Service Corporation International (a funeral
service/cemetery company) since September 1986 and Huntco.,
Inc. (a major intermediate steel processor) since June
1993.
Frederick T. Kelsey, 70 Trustee Consultant to Goldman Sachs from December 1985 through
738 York Court February 1988; Director of Goldman Sachs
Northbrook, IL 60062 Funds Group and Vice President of Goldman Sachs
from May 1981 until his retirement in November
1985; President and Treasurer of the Trust and
other investment companies affiliated with Goldman
Sachs through August 1985; President from 1983 to
1985, and Trustee from 1983 to 1984, The
Centerland Funds and its successor, The Pilot
Funds; Trustee, various management investment
companies affiliated with Zurich Kemper
Investments.
</TABLE>
B-23
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- ---------------------------------------
<S> <C> <C>
Richard P. Strubel, 57 Trustee Managing Director, Tandem
70 West Madison St Partners, Inc. (a privately
Suite 1400 held management services firm)
Chicago, IL 60602 since 1990; President and Chief Executive
Officer, Microdot, Inc. (a privately held
manufacturing firm) from 1984 to 1994; Trustee,
Goldman Sachs Trust from 1987 to present;
Director of Kaynar Technologies, Inc. (a leading
manufacturer of aircraft fasteners); Trustee of
the University of Chicago; Director of Children's
Memorial Medical Center.
Nancy L. Mucker, 47 Vice Vice President, Goldman Sachs
4900 Sears Tower President (since April 1985); Manager,
Chicago, IL 60606 Shareholder Servicing of GSAM
(since November 1989).
John W. Mosior, 58 Vice Vice President, Goldman Sachs;
4900 Sears Tower President Manager, Shareholder Servicing of GSAM (since
Chicago, IL 60606 November 1989).
Scott M. Gilman, 37 Treasurer Director, Mutual Funds Administration of GSAM
One New York Plaza (since April 1994); Assistant Treasurer of Goldman
New York, NY 10004 Sachs Management, Inc. (since March 1993); Vice
President, Goldman Sachs (since March 1990).
John Perlowski, 32 Assistant Vice President, Goldman Sachs
One New York Plaza Treasurer (since July 1995); Director,
New York, NY 10004 Investors Bank and Trust Company (November 1993 to
July 1995); Audit Manager of Arthur Anderson, LLP
(prior thereto).
Michael J. Richman, 36 Secretary Associate General Counsel of GSAM (since February
85 Broad Street 1994); Vice President and Assistant General
New York, NY 10004 Counsel of Goldman Sachs (since June 1992); Coun-
sel to the Funds Group, GSAM (since June 1992);
Partner of
</TABLE>
B-24
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
<S> <C> <C>
Hale and Dorr from September
1991 to June 1992.
Howard B. Surloff, 32 Assistant Vice President and Assistant
85 Broad Street Secretary General Counsel of Goldman
Sachs New York, NY 10004 (since November 1993 and May
1994, respectively); Counsel
to the Funds Group, GSAM
(since November 1993); Asso-
ciate of Shereff Friedman,
Hoffman & Goodman, LLP prior
thereto.
Valerie A. Zondorak, 31 Assistant Vice President of Goldman Sachs (since March 1997);
85 Broad Street Secretary Counsel to the Funds Group, GSAM (since March 1997);
New York, NY 10004 Associate of Shereff Friedman, Hoffman & Goodman, LLP
(prior thereto).
Steven E. Hartstein, 33 Assistant Legal Products Analyst, Goldman Sachs (since June
85 Broad Street Secretary 1993); Funds Compliance Officer, Citibank Global Asset
New York, NY 10004 Management (August 1991 to June 1993).
Deborah A. Farrell, 26 Assistant Legal Assistant, Goldman Sachs (since January 1994);
85 Broad Street Secretary Formerly at Cleary, Gottlieb, Steen & Hamilton.
New York, NY 10004
</TABLE>
Certain of the Trustees and officers and the organizations with which they are
associated have had in the past, and may have in the future, transactions with
Northern, Goldman Sachs and their respective affiliates. The Trust has been
advised by such Trustees and officers that all such transactions have been and
are expected to be in the ordinary course of business and the terms of such
transactions, including all loans and loan commit ments by such persons, have
been and are expected to be substan tially the same as the prevailing terms for
comparable transac tions for other customers. Messrs. Springer, Kelsey,
Strubel, Mosior, Gilman, Richman, Surloff and Hartstein and Mmes. Farrell,
Mucker, and Zondorak hold similar positions with one or more investment
companies that are advised by Goldman Sachs. As a result of the
responsibilities assumed by Northern under its Advisory Agreement, Transfer
Agency Agreement and Custodian Agreement and Foreign Custody Agreement with the
Trust and by
B-25
<PAGE>
Goldman Sachs under its Administration Agreement and Distribution Agreement with
the Trust, the Trust itself requires no employees.
Each 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.
Each Trustee earns a quarterly retainer of $6,250 and the Chairman of the Board
earns a quarterly retainer of $9,375. Each Trustee, including the Chairman of
the Board, earns an additional fee of $1,500 for each meeting attended, plus
reimbursement of expenses incurred as a Trustee.
In addition, the Trustees established an Audit Committee consisting of three
members including a Chairman of the Committee. Each member earns a fee of
$1,500 for each meeting attended and the Chairman earns a quarterly retainer of
$1,250.
Each Trustee will hold office for an indefinite term until the earliest of (1)
the next meeting of Unitholders if any, called for the purpose of considering
the election or re-election of such Trustee and until the election and
qualification of his or her successor, if any, elected at such meeting; (2) the
date a Trustee resigns or retires, or a Trustee is removed by the Board of
Trustees or Unitholders, in accordance with the Trust's Agreement and
Declaration of Trust; or (3) in accordance with the current resolutions of the
Board of Trustees (which may be changed without Unitholder vote), on the last
day of the fiscal year of the Trust in which he or she attains the age of 72
years (or, in the case of Mr. Gavin, until November 30, 1997).
The Trust's officers do not receive fees from the Trust for services in such
capacities, although Goldman Sachs, of which they are also officers, receives
fees from the Trust for administrative services.
B-26
<PAGE>
The following table sets forth certain information with respect to the
compensation of each Trustee of the Trust for the one-year period ended November
30, 1996:
<TABLE>
<CAPTION>
Pension or
Retirement Total Compensation
Aggregate Benefits from Registrant and
Compensation Part of Fund Complex Paid to
Name of Trustee from Registrant Trust's Expenses Trustees
- ------------------- --------------- ----------------- -----------------------
<S> <C> <C> <C>
William H. Springer $45,000 $0 $45,000
Edward J. Condon, Jr. $32,500 $0 $32,500
John W. English $31,000 $0 $31,000
James J. Gavin $35,000 $0 $35,500
William B. Jordan* $ 2,083 $0 $2,083
Frederick T. Kelsey $35,500 $5,325** $40,825
Richard P. Strubel $40,500 $0 $40,500
</TABLE>
* Retired as of December 31, 1995.
** Interest from deferred compensation.
B-27
<PAGE>
INVESTMENT ADVISER, TRANSFER AGENT AND CUSTODIAN
Northern is one of the nation's leading providers of trust and investment
management services. As of June 30, 1997, Northern had approximately $149
billion in assets under management for clients including public and private
retirement funds, endowments, foundations, trusts, corporations, other
investment companies and individuals. Northern is one of the strongest banking
organizations in the United States. Northern believes it has built its
organization by serving clients with integrity, a commitment to quality, and
personal attention. Its stated mission with respect to all its financial
products and services is to achieve unrivaled client satisfaction. With respect
to such clients, the Trust is designed to assist (i) defined contribution plan
sponsors and their employees by offering a range of diverse investment options
to help comply with 404(c) regulation and may also provide educational material
to their employees, (ii) employers who provide post-retirement Employees'
Beneficiary Associations ("VEBA") and require investments that respond to the
impact of federal regulations, (iii) insurance companies with the day-to-day
management of uninvested cash balances as well as with longer-term investment
needs, and (iv) charitable and not-for-profit organizations, such as endowments
and foundations, demanding investment management solutions that balance the
requirement for sufficient current income to meet operating expenses and the
need for capital appreciation to meet future investment objectives.
Subject to the general supervision of the Board of Trustees, Northern makes
decisions with respect to and places orders for all purchases and sales of
portfolio securities for each Portfolio. Northern's Advisory Agreement with the
Trust provides that in selecting brokers or dealers to place orders for
transactions Northern shall attempt to obtain best net price and execution. In
assessing the best overall terms available for any transaction, Northern is to
consider all factors it deems relevant, including the breadth of the market in
the security, the price of the security, the financial condition and execution
capability of the broker or dealer, and the reasonableness of the commission, if
any, both for the specific transaction and on a continuing basis. In evaluating
the best overall terms available and in selecting the broker or dealer to
execute a particular transaction, Northern may consider the brokerage and
research services provided to the Portfolios and/or other accounts over which
Northern or an affiliate of Northern exercises investment discretion. These
brokerage and research services may include industry and company analyses,
portfolio services, quantitative data, market information systems and economic
and political consulting and analytical services. Transactions on U.S. stock
exchanges involve the payment of negotiated brokerage commissions. On exchanges
on which commissions are negotiated, the cost of transactions may vary among
different brokers.
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<PAGE>
Transactions on foreign securities exchanges involve payment for brokerage
commissions which are generally fixed. Over-the-counter issues, including
corporate debt and government securities, are normally traded on a "net" basis
(i.e., without commission) through dealers, or otherwise involve transactions
directly with the issuer of an instrument. With respect to over-the-counter
transactions, Northern will normally deal directly with dealers who make a
market in the instruments involved except in those circumstances where more
favorable prices and execution are available elsewhere. The cost of foreign and
domestic securities purchased from underwriters includes an underwriting
commission or concession, and the prices at which securities are purchased from
and sold to dealers include a dealer's mark-up or mark-down.
The Portfolios may participate, if and when practicable, in bidding for the
purchase of portfolio securities directly from an issuer in order to take
advantage of the lower purchase price available to members of a bidding group.
The Portfolios will engage in this practice, however, only when Northern
believes such practice to be in the Portfolios' interests.
Northern's investment advisory duties for the Trust are carried out through its
Trust Department. On occasions when Northern deems the purchase or sale of a
security to be in the best interests of a Portfolio as well as other fiduciary
or agency accounts managed by it (including any other Portfolio, investment
company or account for which Northern acts as adviser), the Agreement provides
that Northern, to the extent permitted by applicable laws and regulations, may
aggregate the securities to be sold or purchased for such Portfolio with those
to be sold or purchased for such other accounts in order to obtain the best net
price and execution. In such event, allocation of the securities so purchased
or sold, as well as the expenses incurred in the transaction, will be made by
Northern in the manner it considers to be most equitable and consistent with its
fiduciary obligations to the Portfolio and other accounts involved. In some
instances, this procedure may adversely affect the size of the position
obtainable for a Portfolio or the amount of the securities that are able to be
sold for a Portfolio. To the extent that the execution and price available from
more than one broker or dealer are believed to be comparable, the Agreement
permits Northern, at its discretion but subject to applicable law, to select the
executing broker or dealer on the basis of Northern's opinion of the reliability
and quality of such broker or dealer.
The Advisory Agreement provides that Northern may render similar services to
others so long as its services under such Agreement are not impaired thereby.
The Advisory Agreement also provides that the Trust will indemnify Northern
against certain liabilities (including liabilities under the Federal securities
B-29
<PAGE>
laws relating to untrue statements or omissions of material fact and actions
that are in accordance with the terms of the Agreement) or, in lieu thereof,
contribute to resulting losses.
Under its Transfer Agency Agreement with the Trust, with respect to units held
by Institutions, Northern has undertaken to perform some or all of the following
services: (1) establish and maintain an omnibus account in the name of each
Institution; (2) process purchase orders and redemption requests from an
Institution, furnish confirmations and disburse redemption proceeds; (3) act as
the income disbursing agent of the Trust; (4) answer inquiries from
Institutions; (5) provide periodic statements of account to each Institution;
(6) process and record the issuance and redemption of units in accordance with
instructions from the Trust or its administrator; (7) if required by law,
prepare and forward to Institutions unitholder communications (such as proxy
statements and proxies, annual and semi-annual financial statements, and
dividend, distribution and tax notices); (8) preserve all records; and (9)
furnish necessary office space, facilities and personnel. Under the Transfer
Agency Agreement, with respect to units held by investors, Northern has also
undertaken to perform some or all of the following services: (1) establish and
maintain separate accounts in the name of the investors; (2) process purchase
orders and redemption requests, and furnish confirmations in accordance with
applicable law; (3) disburse redemption proceeds; (4) process and record the
issuance and redemption of units in accordance with instructions from the Trust
or its administrator; (5) act as income disbursing agent of the Trust in
accordance with the terms of the Prospectus and instructions from the Trust or
its administrator; (6) provide periodic statements of account; (7) answer
inquiries (including requests for Prospectuses and Additional Statements, and
assistance in the completion of new account applications) from investors and
respond to all requests for information regarding the Trust (such as current
price, recent performance, and yield data) and questions relating to accounts of
investors (such as possible errors in statements, and transactions); (8) respond
to and seek to resolve all complaints of investors with respect to the Trust or
their accounts; (9) furnish proxy statements and proxies, annual and semi-annual
financial statements, and dividend, distribution and tax notices to investors;
(10) furnish the Trust all pertinent Blue Sky information; (11) perform all
required tax withholding; (12) preserve records; and (13) furnish necessary
office space, facilities and personnel. Northern may appoint one or more sub-
transfer agents in the performance of its services.
As compensation for the services rendered by Northern under the Transfer Agency
Agreement and the assumption by Northern of related expenses, Northern is
entitled to a fee from the Trust, payable monthly, at an annual rate of .01%,
.05%, .10% and .15%
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<PAGE>
of the average daily net asset value of the Class A, B, C and D units,
respectively, in the Portfolios.
Under its Custodian Agreement (and in the case of the International Bond
Portfolio its Foreign Custody Agreement) with the Trust, Northern (1) holds each
Portfolio's cash and securities, (2) maintains such cash and securities in
separate accounts in the name of the Portfolio, (3) makes receipts and
disbursements of funds on behalf of the Portfolio, (4) receives, delivers and
releases securities on behalf of the Portfolio, (5) collects and receives all
income, principal and other payments in respect of the Portfolio's investments
held by Northern under the Agreement, and (6) maintains the accounting records
of the Trust. Northern may employ one or more subcustodians, provided that
Northern shall have no more responsibility or liability to the Trust on account
of any action or omission of any subcustodian so employed than such subcustodian
has to Northern and that the responsibility or liability of the subcustodian to
Northern shall conform to the resolution of the Trustees of the Trust
authorizing the appointment of the particular subcustodian (or, in the case of
foreign securities, to the terms of any agreement entered into between Northern
and such subcustodian to which such resolution relates). In addition, the
Trust's custodial arrangements provide, with respect to foreign securities, that
Northern shall not be: (i) responsible for the solvency of any subcustodian
appointed by it with reasonable care; (ii) responsible for any act, omission,
default or for the solvency of any eligible foreign securities depository; or
(iii) liable for any loss, damage, cost, expense, liability or claim resulting
from nationalization, expropriation, currency restrictions, or acts of war or
terrorism or any loss where the subcustodian has otherwise exercised reasonable
care. Northern may also appoint agents to carry out such of the provisions of
the Custodian Agreement and the Foreign Custody Agreement as Northern may from
time to time direct, provided that the appointment of an agent shall not relieve
Northern of any of its responsibilities under either Agreement. Northern has
entered into agreements with financial institutions and depositories located in
foreign countries with respect to the custody of the Portfolios' foreign
securities.
As compensation for the services rendered to the Trust by Northern as custodian
to the U.S. Government Securities, Short-Intermediate Bond, U.S. Treasury Index,
Bond and Intermediate Bond Portfolios, and the assumption by Northern of
certain related expenses, Northern is entitled to payment from the Trust as
follows: (i) $18,000 annually for each Portfolio, plus (ii) 1/100th of 1%
annually of each Portfolio's average daily net assets to the extent they exceed
$100 million, plus (iii) a fixed dollar fee for each trade in portfolio
securities, plus (iv) a fixed dollar fee for each time that Northern as
Custodian receives or transmits funds via wire, plus (v) reimbursement of
B-31
<PAGE>
expenses incurred by Northern as custodian for telephone, postage, courier fees,
office supplies and duplicating. The fees referred to in clauses (iii) and (iv)
are subject to annual upward adjustments based on increases in the Consumer
Price Index for All Urban Consumers, provided that Northern may permanently or
temporarily waive all or any portion of any upward adjustment.
As compensation for the services rendered to the Trust under the Foreign Custody
Agreement with respect to the International Bond Portfolio, and the assumption
by Northern of certain related expenses, Northern is entitled to payment from
the Trust as follows: (i) $35,000 annually for the International Bond
Portfolio, plus (ii) 9/100th of 1% annually of the Portfolio's average daily net
assets, plus (iii) reimbursement for fees incurred by Northern as foreign
Custodian for telephone, postage, courier fees, office supplies and duplicating.
Unless sooner terminated, the Advisory Agreement, Custodian Agreement (or in the
case of the International Bond Portfolio the Foreign Custody Agreement) and
Transfer Agency Agreement between Northern and the Trust will continue in effect
with respect to a particular Portfolio until April 30, 1998 and thereafter for
successive 12-month periods, provided that the continuance is approved at least
annually (1) by the vote of a majority of the Trustees who are not parties to
the agreement or "interested persons" (as such term is defined in the 1940 Act)
of any party thereto, cast in person at a meeting called for the purpose of
voting on such approval and (2) by the Trustees or by the vote of a majority of
the outstanding units of such Portfolio (as defined below under "Other
Information"). Each agreement is terminable at any time without penalty by the
Trust (by specified Trustee or unitholder action) on 60 days' written notice to
Northern and by Northern on 60 days' written notice to the Trust.
For the fiscal periods ended November 30 as indicated, the amount of the
Advisory Fee incurred by each Portfolio (after fee waivers) was as follows:
1996 1995 1994
------- ------- --------
U.S. Government Securities
Portfolio (1) 219,457 77,685 67,880
Short-Intermediate Bond
Portfolio (2) 421,548 305,155 260,009
U.S. Treasury Index Portfolio (2) 26,172 49,400 83,790
Bond Portfolio (2) 830,217 663,400 608,504
International Bond Portfolio (3) 224,098 224,564 $122,985
- --------------
(1) Commenced investment operations on April 5, 1993.
(2) Commenced investment operations on January 11, 1993.
(3) Commenced investment operations on March 28, 1994.
For the same fiscal periods ended November 30 as indicated.
Northern waived additional advisory fees as follows:
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<PAGE>
1996 1995 1994
---- ---- ----
U.S. Government Securities
Portfolio (1) 307,297 108,759 95,031
Short-Intermediate Bond
Portfolio (2) 589,702 427,217 364,019
U.S. Treasury Index Portfolio (2) 43,719 82,333 139,653
Bond Portfolio (2) 1,162,601 928,746 851,339
International Bond Portfolio (3) 63,958 64,150 34,908
- --------
(1) Commenced investment operations on April 5, 1993.
(2) Commenced investment operations on January 11, 1993.
(3) Commenced investment operations on March 28, 1994.
For the fiscal periods ended November 30 as indicated, the amount of the
Transfer Agency Fee incurred by each Portfolio was as follows:
1996 1995 1994
---- ---- ----
U.S. Government Securities
Portfolio (1) 12,058 3,163 2,980
Short-Intermediate Bond
Portfolio (2) 16,929 12,216 10,000
U.S. Treasury Index Portfolio (2) 2,414 3,366 6,173
Bond Portfolio (2) 39,420 28,014 24,006
International Bond Portfolio (3) 3,220 3,209 2,000
- ---------
(1) Commenced investment operations on April 5, 1993.
(2) Commenced investment operations on January 11, 1993.
(3) Commenced investment operations on March 28, 1994.
For the fiscal periods ended November 30 as indicated, the amount of the
Custodian Fee (and, in the case of the International Bond Portfolio, the Foreign
Custodian Fee) incurred by each Portfolio was as follows:
1996 1995 1994
---- ---- -----
U.S. Government Securities
Portfolio (1) 19,709 23,744 24,000
Short-Intermediate Bond
Portfolio (2) 28,060 24,834 22,343
U.S. Treasury Index Portfolio (2) 20,242 22,734 23,070
Bond Portfolio (2) 46,249 35,344 36,609
International Bond Portfolio (3) 67,555 46,838 25,000
- --------
(1) Commenced investment operations on April 5, 1993.
(2) Commenced investment operations on January 11, 1993.
(3) Commenced investment operations on March 28, 1994.
Banking laws and regulations currently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing, controlling or
distributing the shares of a
B-33
<PAGE>
registered open-end investment company continuously engaged in the issuance of
its shares, but such banking laws and regulations do not prohibit such a holding
company or affiliate or banks generally from acting as investment adviser,
transfer agent or custodian to such an investment company, or from purchasing
shares of such a company as agent for and upon the order of customers. Northern
believes that it may perform the services contemplated by its agreements with
the Trust without violation of such banking laws or regulations, which are
applicable to it. It should be noted, however, that future changes in either
Federal or state statutes and regulations relating to the permissible activities
of banks and their subsidiaries or affiliates, as well as future judicial or
administrative decisions or interpretations of current and future statutes and
regulations, could prevent Northern from continuing to perform such services for
the Trust.
Should future legislative, judicial or administrative action prohibit or
restrict the activities of Northern in connection with the provision of services
on behalf of the Trust, the Trust might be required to alter materially or
discontinue its arrangements with Northern and change its method of operations.
It is not anticipated, however, that any change in the Trust's method of
operations would affect the net asset value per unit of any Portfolio or result
in a financial loss to any unitholder. Moreover, if current restrictions
preventing a bank from legally sponsoring, organizing, controlling or
distributing units of an open-end investment company were relaxed, the Trust
expects that Northern would consider the possibility of offering to perform some
or all of the services now provided by Goldman Sachs. It is not possible, of
course, to predict whether or in what form such restrictions might be relaxed or
the terms upon which Northern might offer to provide services for consideration
by the Trustees.
Goldman Sachs is also an active investor, dealer and/or underwriter in many
types of stocks, bonds and other instruments. Its activities in this regard
could have some effect on the market for those instruments which the Portfolios
acquire, hold or sell.
In the Advisory Agreement, Northern agrees that the name "The Benchmark" may be
used in connection with the Trust's business on a royalty-free basis. Northern
has reserved to itself the right to grant the non-exclusive right to use the
name "The Benchmark" to any other person. The Advisory Agreement provides that
at such time as the Agreement is no longer in effect, the Trust will cease using
the name "The Benchmark." (This undertaking by the Trust may be subject to
certain legal limitations.)
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<PAGE>
PORTFOLIO TRANSACTIONS
To the extent that a Portfolio effects brokerage transactions with Goldman Sachs
or any broker-dealer affiliated directly or indirectly with Northern, such
transactions, including the frequency thereof, the receipt of any commissions
payable in connection therewith, and the selection of the affiliated broker-
dealer effecting such transactions, will be fair and reasonable to the
unitholders of the Portfolio. For the past three fiscal years, none of the
Portfolios paid brokerage commissions.
During the fiscal year ended November 30, 1996, the Short-Intermediate Bond
Portfolio acquired and sold securities of Salomon Brothers, Inc. and Donaldson,
Lufkin & Jenrette Securities, Inc. each a regular broker/dealer. At November 30,
1996, the Short-Intermediate Bond Portfolio owned the following amounts of
securities of its regular broker/dealers, as defined in Rule 10b-1 under the
1940 Act, or their parents: Salomon Brothers, Inc., with an approximate
aggregate value of $4,982,000 and Donaldson, Lufkin & Jenrette Securities, Inc.,
with an approximate aggregate market value of $8,826,000.
During the fiscal year ended November 30, 1996, the Bond Portfolio acquired and
sold securities of Salomon Brothers, Inc. and Donaldson, Lufkin & Jenrette
Securities, Inc., each a regular broker/dealer. At November 30, 1996, the Bond
Portfolio owned the following amounts of securities of its regular
broker/dealers, as defined in Rule 10b-1 under the 1940 Act, or their parents:
Salomon Brothers, Inc., with an approximate aggregate market value of $9,515,000
and Donaldson, Lufkin & Jenrette Securities, Inc., with an approximate aggregate
market value of $7,450,000.
ADMINISTRATOR AND DISTRIBUTOR
Under its Administration Agreement with the Trust, Goldman Sachs, subject to the
general supervision of the Trust's Board of Trustees, acts as the Trust's
Administrator. In this capacity, Goldman Sachs (1) provides supervision of
certain aspects of the Trust's non-investment advisory operations (the parties
giving recognition to the fact that certain of such operations are performed by
Northern pursuant to the Trust's agreements with Northern), (2) provides the
Trust, to the extent not provided pursuant to such agreements, with such
personnel as are reasonably necessary for the conduct of the Trust's affairs,
(3) arranges, to the extent not provided pursuant to such agreements, for the
preparation at the Trust's expense of its tax returns, reports to unitholders,
periodic updating of the Prospectus issued by the Trust, and reports filed with
the SEC and other regulatory authorities (including qualification under state
securities or Blue Sky laws of the Trust's units), and (4) provides the Trust,
to the extent not provided pursuant to such
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<PAGE>
agreements, with adequate office space and equipment and certain related
services in Chicago.
For the fiscal periods ended November 30 as indicated, Goldman Sachs received
fees under the Administration Agreement (after fee waivers) in the amount of:
1996 1995 1994
------- ------- -------
U.S. Government Securities
Portfolio (1) 87,782 31,074 27,152
Short-Intermediate Bond
Portfolio (2) 168,616 122,062 104,003
U.S. Treasury Index Portfolio (2) 17,448 32,933 55,859
Bond Portfolio (2) 332,084 265,356 243,234
International Bond Portfolio (3) 32,014 32,075 17,569
- --------
(1) Commenced investment operations on April 5, 1993.
(2) Commenced investment operations on January 11, 1993.
(3) Commenced investment operations on March 28, 1994.
For the fiscal periods ended November 30 as indicated and prior to May 1, 1997,
Goldman Sachs voluntarily agreed to waive a portion of its Administration Fee
for each Portfolio then in existence resulting in an effective fee of .10% of
the average daily net assets for each Portfolio. The effect of these waivers by
Goldman Sachs was to reduce Administration Fees by the following amounts:
1996 1995 1994
------- -------- --------
U.S. Government Securities
Portfolio (1) 131,975 $ 46,611 $ 40,727
Short-Intermediate Bond
Portfolio (2) 185,161 161,031 162,000
U.S. Treasury Index Portfolio (2) 26,353 49,400 83,790
Bond Portfolio (2) 243,306 232,678 221,000
International Bond Portfolio (3) 48,221 48,112 26,180
(1) Commenced investment operations on April 5, 1993.
(2) Commenced investment operations on January 11, 1993.
(3) Commenced investment operations on March 28, 1994.
In addition, pursuant to an undertaking that commenced August 1, 1992, Goldman
Sachs has agreed that, if its administration fees (less expense reimbursements
paid by Goldman Sachs to the Trust and less certain marketing expenses paid by
Goldman Sachs) exceed a specified amount ($1 million for the Trust's first
twelve investment portfolios plus $50,000 for each additional portfolio) during
the current fiscal year, Goldman Sachs will waive a portion of its
administration fees during the following fiscal year. This undertaking may be
terminated by Goldman Sachs at any
B-36
<PAGE>
time without the consent of the Trust or the unitholders. There have been no
waivers pursuant to this agreement during the last three fiscal periods.
Goldman Sachs has agreed for the current fiscal year to reimburse each Portfolio
for all expenses (including fees payable to Goldman Sachs as administrator, but
excluding the fees payable to Northern for its duties as investment adviser or
transfer agent, servicing fees and extraordinary expenses) which exceed on an
annualized basis .25% of the International Bond Portfolio's average daily net
assets and .10% of each other Portfolio's average daily net assets. Prior to
May 1, 1997, this undertaking was voluntary with respect to the Portfolios. As
of May 1, 1997, this undertaking is contractual with respect to all Portfolios.
The effect of these reimbursements by Goldman Sachs for the fiscal periods ended
November 30 as indicated, were to reduce the expenses of each Portfolio by:
1996 1995 1994
------- ------- -------
U.S. Government Securities
Portfolio (1) 68,799 72,798 67,523
Short-Intermediate Bond
Portfolio (2) 97,056 87,069 82,935
U.S. Treasury Index Portfolio (2) 67,218 76,730 72,034
Bond Portfolio (2) 142,673 112,995 156,721
International Bond Portfolio (3) 87,159 52,493 30,840
________
(1) Commenced investment operations on April 5, 1993.
(2) Commenced investment operations on January 11, 1993.
(3) Commenced investment operations on March 28, 1994.
Unless sooner terminated the Administration Agreement will continue in effect
with respect to a particular Portfolio until April 30, 1998, and thereafter for
successive 12-month periods, provided that the agreement is approved annually
(1) by the vote of a majority of the Trustees who are not parties to the
agreement or "interested persons" (as such term is defined by the 1940 Act) of
any party thereto, cast in person at a meeting called for the purpose of voting
on such approval, and (2) by the Trustees or by the vote of a majority of the
outstanding units of such Portfolio (as defined below under "Other
Information"). The Administration Agreement is terminable at any time without
penalty by the Trust (upon specified Trustee or unitholder action) on 60 days'
written notice to Goldman Sachs and by Goldman Sachs on 60 days' written notice
to the Trust.
The Trust has entered into a Distribution Agreement under which Goldman Sachs,
as agent, sells units of each Portfolio on a continuous basis. Goldman Sachs
pays the cost of printing and distributing prospectuses to persons who are not
unitholders of
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<PAGE>
the Trust (excluding preparation and typesetting expenses) and of certain other
distribution efforts. No compensation is payable by the Trust to Goldman Sachs
for such distribution services.
The Administration Agreement and the Distribution Agreement provide that Goldman
Sachs may render similar services to others so long as its services under such
Agreements are not impaired thereby. The Administration Agreement provides that
the Trust will indemnify Goldman Sachs against certain liabilities (including
liabilities under the Federal securities laws relating to untrue statements or
omissions of material fact and actions that are in accordance with the terms of
the Administration Agreement and Distribution Agreement) or, in lieu thereof,
contribute to resulting losses.
UNITHOLDER SERVICING PLAN
As stated in the Portfolios' Prospectus, Institutions may enter into Servicing
Agreements with the Trust under which they provide (or arrange to have provided)
support services to their Customers or other investors who beneficially own such
units in consideration of the Portfolios' payment of not more than .10%, .15%
and .25% (on an annualized basis) of the average daily net asset value of the
Class B, C and D units, respectively, of the U.S. Government Securities, Short-
Intermediate Bond, U.S. Treasury Index, Bond, Intermediate Bond and
International Bond Portfolios beneficially owned by such Customers or investors.
For the fiscal periods ended November 30 as indicated, the aggregate amount of
the Unitholder Service Fee incurred by each class of each Portfolio then in
existence was as follows:
1996 1995 1994
--------- ------- --------
U.S. Government Securities Portfolio
Class B N/A N/A N/A
Class C (6) $5,040.82 N/A N/A
Class D (1) 451.87 $97.59 $3.47
Short-Intermediate Bond Portfolio
Class B N/A N/A N/A
Class C N/A N/A N/A
Class D (2) 126.73 16.96 0.30
U.S. Treasury Index Portfolio
Class B N/A N/A N/A
Class C N/A N/A N/A
Class D (3) 1,198.29 129.80 0.03
Bond Portfolio
Class B N/A N/A N/A
Class C(4) 6,685.99 2,292.16 N/A
Class D (2) 396.78 180.56 3.70
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<PAGE>
1996 1995 1994
----- ---- ----
International Bond Portfolio
Class B N/A N/A N/A
Class C N/A N/A N/A
Class D (5) 29.96 0.48 N/A
(1) Class D Units were issued on September 15, 1994.
(2) Class D Units were issued on September 14, 1994.
(3) Class D Units were issued on November 16, 1994.
(4) Class C Units were issued on July 3, 1995.
(5) Class D Units were issued on November 20, 1995.
(6) Class C Units were issued on December 29, 1995.
Services provided by or arranged to be provided by Institutions under their
Servicing Agreements may include: (1) establishing and maintaining separate
account records of Customers or other investors; (2) providing Customers or
other investors with a service that invests their assets in units of certain
classes pursuant to specific or pre-authorized instructions, and assistance with
new account applications; (3) aggregating and processing purchase and redemption
requests for units of certain classes from Customers or other investors, and
placing purchase and redemption orders with the Transfer Agent; (4) issuing,
confirmations to Customers or other investors in accordance with applicable law;
(5) arranging for the timely transmission of funds representing the net purchase
price or redemption proceeds; (6) processing dividend payments on behalf of
Customers or other investors; (7) providing information periodically to
Customers or other investors showing their positions in units; (8) responding to
Customer or other investor inquiries (including requests for prospectuses), and
complaints relating to the services performed by the Institutions; (9) acting as
liaison with respect to all inquiries and complaints from Customers and other
investors relating to errors committed by the Trust or its agents, and other
matters pertaining to the Trust; (10) providing or arranging for another person
to provide subaccounting with respect to units of certain classes beneficially
owned by Customers or other investors; (11) if required by law, forwarding
unitholder communications from the Trust (such as proxy statements and proxies,
unitholder reports, annual and semi-annual financial statements and dividend,
distribution and tax notices) to Customers and other investors; (12) providing
such office space, facilities and personnel as may be required to perform its
services under the Servicing Agreements; (13) maintaining appropriate management
reporting and statistical information; (14) paying expenses related to the
preparation of educational and other explanatory materials in connection with
the development of investor services; (15) developing and monitoring investment
programs; and (16) providing such other similar services as the Trust may
reasonably request to the extent the Institutions are permitted to do so under
applicable statutes, rules and regulations.
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<PAGE>
The Trust's agreements with Institutions are governed by a Plan (called the
"Unitholder Servicing Plan") which has been adopted by the Board of Trustees.
Pursuant to the Unitholder Servicing Plan, the Board of Trustees will review, at
least quarterly, a written report of the amounts expended under the Trust's
agreements with Institutions and the purposes for which the expenditures were
made. In addition, the arrangements with Institutions must be approved annually
by a majority of the Board of Trustees, including a majority of the Trustees who
are not "interested persons" of the Trust, as defined in the 1940 Act, and have
no direct or indirect financial interest in such arrangements.
The Board of Trustees has approved the arrangements with Institutions based on
information provided by the Trust's service contractors that there is a
reasonable likelihood that the arrangements will benefit the Portfolios and
their unitholders by affording the Portfolios greater flexibility in connection
with the servicing of the accounts of the beneficial owners of their units in an
efficient manner.
COUNSEL AND AUDITORS
Drinker Biddle & Reath LLP, with offices at 1345 Chestnut Street, Suite 1100,
Philadelphia, Pennsylvania 19107, serve as counsel to the Trust.
Ernst & Young LLP, independent auditors, 233 S. Wacker Drive, Chicago,
Illinois 60606-6301, have been selected as auditors of the Trust. In addition
to audit services, Ernst & Young LLP reviews the Trust's Federal and state tax
returns, and provides consultation and assistance on accounting, internal
control and related matters.
IN-KIND PURCHASES
Payment for units of a Portfolio may, in the discretion of Northern, be made in
the form of securities that are permissible investments for the Portfolio as
described in the Prospectus. For further information about this form of
payment, contact Northern. In connection with an in-kind securities payment, a
Portfolio will require, among other things, that the securities be valued on the
day of purchase in accordance with the pricing methods used by the Portfolio and
that the Portfolio receive satisfactory assurances that it will have good and
marketable title to the securities received by it; that the securities be in
proper form for transfer to the Portfolio; and that adequate information be
provided concerning the basis and other tax matters relating to the securities.
B-40
<PAGE>
PERFORMANCE INFORMATION
Each Portfolio that advertises an "average annual total return" for a class of
units computes such return by determining the average annual compounded rate of
return during specified periods that equates the initial amount invested to the
ending redeemable value of such investment according to the following formula:
T=(ERV)
--- 1/ to the nth power - 1
P
Where: T = average annual total return;
ERV = ending redeemable value at the end of the applicable period
(or fractional portion thereof) of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10 year (or
other) period;
P = hypothetical initial payment of $1,000; and
n = period covered by the computation, expressed in years.
Each Portfolio that advertises an "aggregate total return" for a class of units
computes such return by determining the aggregate compounded rates of return
during specified periods that likewise equate the initial amount invested to the
ending redeemable value of such investment. The formula for calculating
aggregate total return is as follows:
T=[(ERV)] - 1
---
P
The calculations are made assuming that (1) all dividends and capital gain
distributions are reinvested on the reinvestment dates at the price per unit
existing on the reinvestment date and (2) all recurring fees charged to all
unitholder accounts are included. The ending redeemable value (variable "ERV"
in the formula) is determined by assuming complete redemption of the
hypothetical investment after deduction of all nonrecurring charges at the end
of the measuring period.
The average annual total returns and aggregate total returns shown below for the
Short-Intermediate Bond, U.S. Treasury Index and Bond Portfolios include, for
periods prior to the
B-41
<PAGE>
commencement of the Portfolios' operations, the performance of a predecessor
collective fund adjusted to reflect the higher estimated fees and expenses
applicable to such Portfolios' Class A Units at the time of their inception.
Although all such predecessor collective funds were managed by Northern for the
periods stated in a manner and pursuant to investment objectives that were
equivalent in all material respects to the management and investment objectives
of the corresponding Portfolios, such predecessor collective funds were not
registered under the 1940 Act and were not subject to certain investment
restrictions imposed by the 1940 Act. If they had been registered under the 1940
Act, performance might have been adversely affected. The average annual total
returns and aggregate total returns shown for the Portfolios for their Class C
and/or Class D Units also include, for the periods prior to the inception of
such classes, the performance of the Portfolios' Class A Units. Because the fees
and expenses of Class C and Class D Units are, respectively, 0.24% and 0.39%
higher than those of Class A Units, actual performance for periods prior to the
inception of Class C and Class D Units would have been lower if such higher fees
and expenses had been taken into account.
Following commencement of operations of the Portfolios, Goldman Sachs reimbursed
expenses to the Portfolios and voluntarily agreed to reduce a portion of its
administration fee for each Portfolio pursuant to the undertaking described
above under "Additional Trust Information - Administrator and Distributor" and
"-Investment Adviser, Transfer Agent and Custodian," and Northern waived a
portion of its investment advisory fees with respect to the Portfolios. The
average annual total returns and aggregate total returns of each Portfolio with
respect to Class A, Class C and Class D Units, as applicable, are shown below
with and without such fee waivers and expense reimbursements.
B-42
<PAGE>
FOR PERIODS ENDED NOVEMBER 30, 1996
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AGGREGATE TOTAL RETURNS
1 Year 5 Year 10 Year Since 1 Year 5 Year 10 Year Since
Inception Inception
-----------------------------------------------------------------------------------
BOND/1/
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS A
with fee waivers and
expense reimbursements 5.57% 8.93% 9.08% - 5.57% 53.38% 138.39% -
w/o fee waivers and
expense reimbursements 5.07 8.39 8.55 - 5.07 49.60 127.04 -
CLASS C
with fee waivers and
expense reimbursements 5.33 8.86 9.04 - 5.33 52.89 137.64 -
w/o fee waivers and
expense reimbursements 4.83 8.32 8.51 - 4.83 49.12 126.30 -
CLASS D
with fee waivers and
expense reimbursements 5.17 8.75 8.98 - 5.17 52.04 136.30 -
w/o fee waivers and
expense reimbursements 4.67 8.21 8.45 - 4.67 48.33 125.12 -
SHORT-INTERMEDIATE BOND/ 2/
CLASS A
with fee waivers and
expense reimbursements 5.68 6.41 7.11 - 5.68 36.41 98.79 -
w/o fee waivers and
expense reimbursements 5.13 5.80 6.52 - 5.13 32.59 88.02 -
CLASS D
with fee waivers and
expense reimbursements 5.22 6.20 7.01 - 5.22 35.21 97.03 -
w/o fee waivers and
expense reimbursements 4.67 5.60 6.41 - 4.67 31.32 86.21 -
</TABLE>
B-43
<PAGE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AGGREGATE TOTAL RETURNS
1 Year 5 Year 10 Year Since 1 Year 5 Year 10 Year Since
Inception Inception
----------------------------------------------------------------------------------------
U.S. TREASURY INDEX/3/
CLASS A
<S> <C> <C> <C> <C> <C> <C> <C> <C>
with fee waivers and
expense reimbursements 5.10% 7.56% - 8.06% 5.10% 43.97% - 115.87%
w/o fee waivers and
expense reimbursements 4.29 6.89 - 7.39 4.29 39.53 - 102.97
CLASS D
with fee waivers and
expense reimbursements 4.72 7.39 - 7.98 4.72 42.84 - 114.17
w/o fee waivers and
expense reimbursements 3.91 6.72 - 7.30 3.91 38.43 - 101.26
U.S. GOVERNMENT SECURITIES/4/
CLASS A
with fee waivers and
expense reimbursements 5.15 - - 5.04 5.15 - - 19.73
w/o fee waivers and
expense reimbursements 4.54 - - 4.31 4.54 - - 16.71
CLASS C
with fee waivers and
expense reimbursements 4.93 - - 4.98 4.91 - - 19.46
w/o fee waivers and
expense reimbursements 4.29 - - 4.26 4.29 - - 16.51
CLASS D
with fee waivers and
expense reimbursements 4.77 - - 4.77 4.77 - - 18.58
w/o fee waivers and
expense reimbursements 4.17 - - 4.04 4.17 - - 15.60
</TABLE>
B-44
<PAGE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AGGREGATE TOTAL RETURNS
1 Year 5 Year 10 Year Since 1 Year 5 Year 10 Year Since
Inception Inception
------------------------------------------------------------------------------------
INTERNATIONAL BOND/5/
CLASS A
<S> <C> <C> <C> <C> <C> <C> <C> <C>
with fee waivers and
expense reimbursements 9.47 - - 11.72 9.47 - - 34.61
w/o fee waivers and
expense reimbursements 8.80 - - 11.10 8.80 - - 32.63
CLASS D
with fee waivers and
expense reimbursements 9.04 - - 11.55 9.04 - - 34.09
w/o fee waivers and
expense reimbursements 8.37 - - 10.94 8.37 - - 32.10
- ----------------------
</TABLE>
1. For Class A, C and D Units, performance data prior to January 11, 1993
(commencement of Portfolio) is that of a predecessor collective fund. For
Class C and D Units, performance data from January 11, 1993 to July 3, 1995
(commencement of Class C Units) and September 14, 1994 (commencement of
Class D Units), respectively, is that of Class A Units. Because the fees
and expenses of Class C and Class D Units are .24% and .39%, respectively,
higher than those of Class A Units, actual performance would have been
lower had such fees and expenses been taken into account. The predecessor
collective fund has been managed in a manner and pursuant to investment
objectives equivalent in all material respects to the management and
investment objective of the Portfolio for the periods shown. The
performance data of the predecessor collective fund is adjusted to reflect
the higher fees and expenses applicable to Class A Units at the time of
their inception.
2. For Class A and D Units, performance data prior to January 11, 1993
(commencement of Portfolio) is that of a predecessor collective fund. For
Class D Units, performance data from January 11, 1993 to September 14, 1994
(commencement of Class D Units) is that of Class A Units. Because the fees
and expenses of Class D Units are .39% higher than those of Class A Units,
actual performance would have been lower had such higher fees and expenses
been taken into account. The predecessor collective fund has been managed
in a manner and pursuant to investment objectives equivalent in all
material respects to the management and investment objective of the
Portfolio for the periods shown. The performance data of the predecessor
collective fund is adjusted to reflect the higher fees and expenses
applicable to Class A Units at the time of their inception.
B-45
<PAGE>
3. For Class A and D Units, performance data prior to January 11, 1993
(commencement of Portfolio) is that of a predecessor collective fund. For
Class D Units, performance data from January 11, 1993 to November 16, 1994
(commencement of Class D Units) is that of Class A Units. Because the fees
and expenses of Class D Units are .39% higher than those of Class A Units,
actual performance would have been lower had such higher fees and expenses
been taken into account. Performance data of the predecessor collective
fund is shown from January 1, 1987, the date from which the predecessor
fund has been managed in a manner and pursuant to investment objectives
equivalent in all material respects to the management and investment
objective of the Portfolio. The performance data of the predecessor
collective fund is adjusted to reflect the higher fees and expenses
applicable to Class A Units at the time of their inception.
4. For Class C and D Units, performance data prior to December 29, 1995
(commencement of Class C Units), and September 15, 1994 (commencement of
Class D Units), respectively, is that of Class A Units. Class A Units
commenced operations April 5, 1993. Because fees and expenses of Class C
and D Units are .24% and .39%, respectively, higher than those of Class A
Units, actual performance would have been lower had such higher fees and
expenses been taken into account.
5. For Class D Units, performance data prior to November 20, 1995
(commencement of Class D Units) is that of Class A Units. Class A Units
commenced operations on March 28, 1994. Because the fees and expenses of
Class D Units are .39% higher than those of Class A Units, actual
performance would have been lower had such higher fees and expenses been
taken into account.
B-46
<PAGE>
The Portfolios' 30-day (or one month) standard yield described in the Prospectus
is calculated for each class of the Portfolios in accordance with the method
prescribed by the SEC for mutual funds:
Yield = 2[(a-b + 1)to the 6th power - 1]
---
cd
Where: a = dividends and interest earned by a Portfolio during
the period;
b = expenses accrued for the period (net of reimbursements);
c = average daily number of units outstanding during the period
entitled to receive dividends; and
d = net asset value per unit on the last day of the period.
For the 30 day period ended November 30, 1996, the annualized yields for the
Class A, Class B, Class C and Class D units of the Portfolios were as follows:
30-Day Yield
------------
U.S. Government Securities
Portfolio
Class A 5.56%
Class B N/A
Class C 5.32
Class D 5.17
Short-Intermediate Bond
Portfolio
Class A 6.08
Class B N/A
Class C N/A
Class D 4.94
U.S. Treasury Index Portfolio
Class A 5.95
Class B N/A
Class C N/A
Class D 5.56
Bond Portfolio
Class A 5.83
Class B N/A
Class C 5.58
Class D 5.45
B-47
<PAGE>
30-Day Yield
--------------
International Bond Portfolio
Class A 4.78%
Class B N/A
Class C N/A
Class D 4.42
The information set forth in the foregoing table reflects certain fee reductions
and expense limitations. See "Investment Adviser, Transfer Agent and Custodian"
and "Administrator and Distributor" under "Additional Trust Information." In
the absence of such fee reductions and expense limitations, the annualized 30-
day yields of each Portfolio with respect to Class A, Class B, Class C and Class
D units would have been as follows:
30-Day Yield
------------
U.S. Government Securities
Portfolio
Class A 4.97
Class B N/A
Class C 4.73
Class D 4.51
Short-Intermediate Bond Portfolio
Class A 5.55
Class B N/A
Class C N/A
Class D 4.41
U.S. Treasury Index Portfolio
Class A 5.19
Class B N/A
Class C N/A
Class D 4.80
Bond Portfolio
Class A 5.37
Class B N/A
Class C 5.12
Class D 4.99
International Bond Portfolio
Class A 4.25
Class B N/A
Class C N/A
Class D 3.89
The performance of any investment is generally a function of portfolio quality
and maturity, type of investment and operating expenses.
Because of the different Servicing Fees and transfer agency fees payable with
respect to Class A, B, C and D units in a Portfolio, performance quotations for
units of Class B, C and D of the
B-48
<PAGE>
Portfolio will be lower than the quotations for Class A units of the Portfolio,
which will not bear any fees for unitholder support services and will bear
minimal transfer agency fees.
TAXES
The following summarizes certain additional tax considerations generally
affecting the Portfolios and their unitholders that are not described in the
Portfolios' Prospectuses. No attempt is made to present a detailed explanation
of the tax treatment of the Portfolios or their unitholders, and the discussion
here and in the applicable Prospectus is not intended as a substitute for
careful tax planning. Potential investors should consult their tax advisers
with specific reference to their own tax situations.
GENERAL
Each Portfolio will elect to be taxed separately as a regulated investment
company under Part I of Subchapter M of Subtitle A, Chapter 1 of the Internal
Revenue Code of 1986, as amended (the "Code"). As a regulated investment
company, each Portfolio generally is exempt from Federal income tax on its net
investment income and realized capital gains which it distributes to
unitholders, provided that it distributes an amount equal to at least 90% of its
investment company taxable income (net investment income and the excess of net
short-term capital gain over net long-term capital loss), if any, for the year
(the "Distribution Requirement") and satisfies certain other requirements of the
Code that are described below.
In addition to satisfying the Distribution Requirement, each Portfolio must
derive with respect to a taxable year at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans and gains
from the sale or other disposition of stock or securities or foreign currencies,
or from other income derived with respect to its business of investing in such
stock, securities, or currencies (the "Income Requirement") and derive less than
30% of its gross income from the sale or other disposition of securities and
certain other investments held for less than three months (the "Short-Short
Test"). Interest (including original issue discount and "accrued market
discount") received by a Portfolio at maturity or on disposition of a security
held for less than three months will not be treated as gross income from the
sale or other disposition of such security within the meaning of this
requirement. However any other income which is attributable to realized market
appreciation will be treated as gross income from the sale or other disposition
of securities for this purpose.
In addition to the foregoing requirements, at the close of each quarter of its
taxable year, at least 50% of the value of each
B-49
<PAGE>
Portfolio's assets must consist of cash and cash items, U.S. Government
securities, securities of other regulated investment companies, and securities
of other issuers (as to which a Portfolio has not invested more than 5% of the
value of its total assets in securities of such issuer and as to which a
Portfolio does not hold more than 10% of the outstanding voting securities of
such issuer) and no more than 25% of the value of each Portfolio's total assets
may be invested in the securities of any one issuer (other than U.S. Government
securities and securities of other regulated investment companies), or in two or
more issuers which such Portfolio controls and which are engaged in the same or
similar trades or businesses.
Each Portfolio intends to distribute to unitholders any excess of net long-term
capital gain over net short-term capital loss ("net capital gain") for each
taxable year. Such gain is distributed as a capital gain dividend and is
taxable to unitholders as long-term capital gain, regardless of the length of
time the unitholder has held the units, whether such gain was recognized by the
Portfolio prior to the date on which a unitholder acquired units of the
Portfolio and whether the distribution was paid in cash or reinvested in units.
In addition, investors should be aware that any loss realized upon the sale,
exchange or redemption of units held for six months or less will be treated as a
long-term capital loss to the extent of the capital gain dividends the
unitholder has received with respect to such units. It is not expected that any
distributions will qualify for the dividends received deduction for
corporations.
Ordinary income of individuals is taxable at a maximum marginal rate of 39.6%,
but because of limitations on itemized deductions otherwise allowable and the
phase-out of personal exemptions, the maximum effective marginal rate of tax for
some taxpayers may be higher. An individual's long-term capital gains are
taxable at a maximum nominal rate of 28%. Capital gains and ordinary income of
corporate taxpayers are both taxed at a nominal maximum rate of 35%.
If for any taxable year any Portfolio does not qualify as a regulated investment
company, all of its taxable income will be subject to tax at regular corporate
rates without any deduction for distributions to unitholders. In such event,
all distributions (whether or not derived from exempt-interest income) would be
taxable as ordinary income, to the extent of such Portfolio's current and
accumulated earnings and profits and would be eligible for the dividends
received deduction in the case of corporate unitholders.
Unitholders will be advised annually as to the Federal income tax consequences
of distributions made by the Portfolios each year.
B-50
<PAGE>
The Code imposes a non-deductible 4% excise tax on regulated investment
companies that fail to currently distribute an amount equal to specified
percentages of their ordinary taxable income and capital gain net income (excess
of capital gains over capital losses). Each Portfolio intends to make
sufficient distributions or deemed distributions of its ordinary taxable income
and capital gain net income each calendar year to avoid liability for this
excise tax.
The Trust will be required in certain cases to withhold and remit to the United
States Treasury 31% of taxable dividends or 31% of gross sale proceeds paid to
any unitholder (i) who has provided either an incorrect tax identification
number or no number at all, (ii) who is subject to backup withholding by the
Internal Revenue Service for failure to report the receipt of taxable interest
or dividend income properly, or (iii) who has failed to certify to the Trust to
do so, that he is not subject to backup withholding or that he is an "exempt
recipient."
As of the date of this Additional Statement, new Federal tax legislation -- the
Taxpayer Relief Act of 1997 (the "TRA") -- has been passed by the House of
Representatives and the Senate, and is expected to be signed by the President.
The TRA, if enacted as expected, will repeal the Short-Short Test (effective for
each Fund's next fiscal year) and will change applicable rates and holding
period rules for capital gains.
TAXATION OF CERTAIN FINANCIAL INSTRUMENTS
Special rules govern the Federal income tax treatment of financial instruments
that may be held by the Portfolios. These rules may have a particular impact on
the amount of income or gain that a Portfolio must distribute to its respective
unitholders to comply with the Distribution Requirement, on the income or gain
qualifying under the Income Requirement and on its ability to comply with the
Short-Short Test described above.
Generally, futures contracts, options on futures contracts and certain foreign
currency contracts held by a Portfolio (collectively, the "Instruments") at the
close of its taxable year are treated for Federal income tax purposes as sold
for their fair market value on the last business day of such year, a process
known as "mark-to-market." Forty percent of any gain or loss resulting from such
constructive sales will be treated as short-term capital gain or loss and 60% of
such gain or loss will be treated as long-term capital gain or loss without
regard to the period a Portfolio has held the Instruments ("the 40%-60% rule").
The amount of any capital gain or loss actually realized by a Portfolio in a
subsequent sale or other disposition of those Instruments is adjusted to reflect
any capital gain or loss taken into account by the Portfolio in a prior year as
a result of the constructive sale of the Instruments. Losses with respect to
B-51
<PAGE>
futures contracts to sell related options and certain foreign currency
contracts, which are regarded as parts of a "mixed straddle" because their
values fluctuate inversely to the values of specific securities held by the
Portfolios, are subject to certain loss deferral rules which limit the amount of
loss currently deductible on either part of the straddle to the amount thereof
which exceeds the unrecognized gain (if any) with respect to the other part of
the straddle, and to certain wash sales regulations. Under short sales rules,
which are also applicable, the holding period of the securities forming part of
the straddle will (if they have not been held for the long-term holding period)
be deemed not to begin prior to termination of the straddle. With respect to
certain Instruments, deductions for interest and carrying charges may not be
allowed. Notwithstanding the rules described above, with respect to futures
contracts which are part of a "mixed straddle" to sell related options and
certain foreign currency contracts which are properly identified as such, a
Portfolio may make an election which will exempt (in whole or in part) those
identified futures contracts, options and foreign currency contracts from the
rules of Section 1256 of the Code including "the 40%-60% rule" and the mark-to-
market on gains and losses being treated for Federal income tax purposes as sold
on the last business day of each Portfolio's taxable year, but gains and losses
will be subject to such short sales, wash sales and loss deferral rules and the
requirement to capitalize interest and carrying charges. Under Temporary
Regulations, each Portfolio would be allowed (in lieu of the foregoing) to elect
either (1) to offset gains or losses from portions which are part of a mixed
straddle by separately identifying each mixed straddle to which such treatment
applies, or (2) to establish a mixed straddle account for which gains and losses
would be recognized and offset on a periodic basis during the taxable year.
Under either election, "the 40%-60% rule" will apply to the net gain or loss
attributable to the Instruments, but in the case of a mixed straddle account
election, not more than 50% of any net gain may be treated as long-term and no
more than 40% of any net loss may be treated as short-term.
A foreign currency contract must meet the following conditions in order to be
subject to the mark-to-market rules described above: (1) the contract must
require delivery of a foreign currency of a type in which regulated futures
contracts are traded or upon which the settlement value of the contract depends;
(2) the contract must be entered into at arm's length at a price determined by
reference to the price in the interbank market; and (3) the contract must be
traded in the interbank market. The Treasury Department has broad authority to
issue regulations under the provisions respecting foreign currency contracts.
As of the date of this Additional Statement, the Treasury Department has not
issued any such regulations. Other foreign currency contracts entered into by a
Portfolio may result in the creation of one or more straddles for Federal income
tax purposes, in
B-52
<PAGE>
which case certain loss deferral, short sales, and wash sales rules and the
requirement to capitalize interest and carrying charges may apply.
Some of the non-U.S. dollar denominated investments that the Portfolios may
make, such as foreign debt securities and foreign currency contracts, may be
subject to provisions of the Code which govern the Federal income tax treatment
of certain transactions denominated in terms of a currency other than the U.S.
dollar or determined by reference to the value of one or more currencies other
than the U.S. dollar. The types of transactions covered by these provisions
include the following: (1) the acquisition of, or becoming the obligor under, a
bond or other debt instrument (including, to the extent provided in Treasury
regulations, preferred stock); (2) the accruing of certain trade receivables and
payables; and (3) the entering into or acquisition of any forward contract,
futures contract, option and similar financial instrument. The disposition of a
currency other than the U.S. dollar by a U.S. taxpayer also is treated as a
transaction subject to the special currency rules. However, regulated futures
contracts and nonequity options are generally not subject to the special
currency rules if they are or would be treated as sold for their fair market
value at year-end under the mark-to-market rules, unless an election is made to
have such currency rules apply. With respect to transactions covered by the
special rules, foreign currency gain or loss is calculated separately from any
gain or loss on the underlying transaction and is normally taxable as ordinary
gain or loss. A taxpayer may elect to treat as capital gain or loss foreign
currency gain or loss arising from certain identified forward contracts, futures
contracts and options that are capital assets in the hands of the taxpayer and
which are not part of a straddle. In accordance with Treasury regulations,
certain transactions that are part of a "Section 988 hedging transaction" (as
defined in the Code and Treasury regulations) may be integrated and treated as a
single transaction or otherwise treated consistently for purposes of the Code.
"Section 988 hedging transactions" are not subject to the mark-to-market or loss
deferral rules under the Code. Gain or loss attributable to the foreign
currency component of transactions engaged in by the Portfolios which are not
subject to the special currency rules (such as foreign equity investments other
than certain preferred stocks) is treated as capital gain or loss and is not
segregated from the gain or loss on the underlying transaction.
FOREIGN INVESTORS
Foreign unitholders generally will be subject to U.S. withholding tax at a rate
of 30% (or a lower treaty rate, if applicable) on distributions by a Portfolio
of net interest income, other ordinary income, and the excess, if any, of net
short-term capital gain over net long-term capital loss for the
B-53
<PAGE>
year. For this purpose, foreign unitholders include individuals other than U.S.
citizens, residents and certain nonresident aliens, and foreign corporations,
partnerships, trusts and estates. A foreign unitholder generally will not be
subject to U.S. income or withholding tax in respect of proceeds from or gain
on the redemption of units or in respect of capital gain dividends, provided
such unitholder submits a statement, signed under penalties of perjury,
attesting to such unitholder's exempt status. Different tax consequences apply
to a foreign unitholder engaged in a U.S. trade or business. Foreign
unitholders should consult their tax advisers regarding the U.S. and foreign
tax consequences of investing in a Portfolio.
CONCLUSION
The foregoing discussion is based on Federal tax laws and regulations which are
in effect on the date of this Additional Statement. Such laws and regulations
may be changed by legislative or administrative action. No attempt is made to
present a detailed explanation of the tax treatment of the Portfolio or its
unitholders, and the discussion here and in the Prospectus is not intended as a
substitute for careful tax planning. Unitholders are advised to consult their
tax advisers with specific reference to their own tax situation, including the
application of state and local taxes.
Although each Portfolio expects to qualify as a "regulated investment company"
and to be relieved of all or substantially all Federal income taxes, depending
upon the extent of its activities in states and localities in which its offices
are maintained, in which its agents or independent contractors are located or in
which it is otherwise deemed to be conducting business, each Portfolio may be
subject to the tax laws of such states or localities.
DESCRIPTION OF UNITS
The Trust Agreement permits the Trust's Board of Trustees to issue an unlimited
number of full and fractional units of beneficial interest of one or more
separate series representing interests in one or more investment portfolios.
The Trust may hereafter create series in addition to the Trust's seventeen
existing series, which represent interests in the Trust's seventeen respective
portfolios, six of which are described in this Additional Statement. The Trust
Agreement further permits the Board of Trustees to classify or reclassify any
unissued units into additional series or subseries within a series. Pursuant to
such authority, the Trustees have authorized the issuance of an unlimited number
of units of beneficial interest in four separate subseries (sometimes referred
to as "classes") of units in each of its non-money market portfolios: Class A,
B,
B-54
<PAGE>
C and D units. Under the terms of the Trust Agreement, each unit of each
Portfolio is without par value, represents an equal proportionate interest in
the particular Portfolio with each other unit of its class in the same Portfolio
and is entitled to such dividends and distributions out of the income belonging
to the Portfolio as are declared by the Trustees. Upon any liquidation of a
Portfolio, unitholders of each class of a Portfolio are entitled to share pro
rata in the net assets belonging to that class available for distribution.
Units do not have any preemptive or conversion rights. The right of redemption
is described under "Investing-Redemption of Units" in the Prospectus. In
addition, pursuant to the terms of the 1940 Act, the right of a unitholder to
redeem units and the date of payment by a Portfolio may be suspended for more
than seven days (a) for any period during which the New York Stock Exchange is
closed, other than the customary weekends or holidays, or trading in the markets
the Portfolio normally utilizes is closed or is restricted as determined by the
SEC, (b) during any emergency, as determined by the SEC, as a result of which it
is not reasonably practicable for the Portfolio to dispose of instruments owned
by it or fairly to determine the value of its net assets, or (c) for such other
period as the SEC may by order permit for the protection of the unitholders of
the Portfolio. The Trust may also suspend or postpone the recordation of the
transfer of its units upon the occurrence of any of the foregoing conditions.
In addition, units of each Portfolio are redeemable at the unilateral option of
the Trust if the Trustees determine in their sole discretion that failure to so
redeem may have material adverse consequences to the unitholders of the
Portfolio. Units when issued as described in the Prospectus are validly issued,
fully paid and nonassessable, except as stated below.
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 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 that Portfolio and with a share of the
general liabilities of the Trust. Expenses with respect to the Portfolios are
normally allocated in proportion to the net asset value of the respective
Portfolios except where allocations of direct expenses can otherwise be fairly
made.
Rule 18f-2 under the 1940 Act provides that any matter required by the
provisions of the 1940 Act or applicable state law, or otherwise, to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Trust shall not be deemed to have been effectively acted
upon unless approved by the holders of a majority of the outstanding units of
each investment portfolio affected by such matter. Rule 18f-2
B-55
<PAGE>
further provides that an investment portfolio shall be deemed to be affected by
a matter unless the interests of each investment portfolio in the matter are
substantially identical or the matter does not affect any interest of the
investment portfolio. Under the Rule, the approval of an investment advisory
agreement or any change in a fundamental investment policy would be effectively
acted upon with respect to an investment portfolio only if approved by a
majority of the outstanding units of such investment portfolio. However, the
Rule also provides that the ratification of the appointment of independent
accountants, the approval of principal underwriting contracts and the election
of Trustees may be effectively acted upon by unitholders of the Trust voting
together in the aggregate without regard to a particular investment portfolio.
In addition, unitholders of each of the classes in a particular investment
portfolio have equal voting rights except that only units of a particular class
of an investment portfolio will be entitled to vote on matters submitted to a
vote of unitholders (if any) relating to unitholder servicing expenses and
transfer agency fees that are payable by that class.
As a general matter, the Trust does not hold annual or other meetings of
unitholders. This is because the Trust Agreement 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. Each Trustee serves
until the next meeting of unitholders, if any, called for the purpose of
considering the election or reelection of such Trustee or of a successor to such
Trustee, and until the election and qualification of his successor, if any,
elected at such meeting, or until such Trustee sooner dies, resigns, retires or
is removed by the unitholders or two-thirds of the Trustees.
Under Massachusetts law, there is a possibility that unitholders of a business
trust could, under certain circumstances, be held personally liable as partners
for the obligations of the Trust. The Trust Agreement contains an express
disclaimer of unitholder (as well as Trustee and officer) liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given in
each contract, undertaking or instrument entered into or executed by the Trust
or the Trustees. The Trust Agreement provides for indemnification out of Trust
property of any unitholder charged or held personally liable for the obligations
or liabilities of the Trust solely by reason of being or having been a
unitholder of the Trust and not because of such unitholder's acts or omissions
or for some other reason. The Trust Agreement also provides that the Trust
shall, upon proper and timely request, assume the defense of any charge made
against any unitholder as such for any obligation or liability of the Trust and
satisfy any judgment thereon. Thus, the risk of a unitholder incurring
financial loss on account of unitholder
B-56
<PAGE>
liability is limited to circumstances in which the Trust itself would be unable
to meet its obligations.
The Trust Agreement provides that each Trustee of the Trust will be liable for
his own wilful misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of the office of Trustee ("disabling
conduct"), and for nothing else, and will not be liable for errors of judgment
or mistakes of fact or law. The Trust Agreement provides further that the Trust
will indemnify Trustees and officers of the Trust against liabilities and
expenses incurred in connection with litigation and other proceedings in which
they may be involved (or with which they may be threatened) by reason of their
positions with the Trust, except that no Trustee or officer will be indemnified
against any liability to the Trust or its unitholders to which he would
otherwise be subject by reason of disabling conduct.
As of May 1, 1997 substantially all of the Portfolios' outstanding units were
held of record by Northern for the benefit of its customers and the customers of
its affiliates and correspondent banks that have invested in the Portfolios. As
of the same date, the Trust's Trustees and officers owned beneficially less than
1% of the outstanding units of each Portfolio. Northern has advised the Trust
that the following persons (whose mailing address is: c/o The Northern Trust
Company, 50 South LaSalle, Chicago, IL 60675) beneficially owned five percent or
more of the outstanding units of the following Portfolios as of May 1, 1997:
Number Percentage
of Units of Units
-------- -----------
International Bond Portfolio
The Northern Trust Company Pension 833,589 59.40%
Plan
Doe Run Resources Corporation 174,923 12.46%
Retirement Plan
Peoples State Bank, St. Joseph, 108,324 7.73%
Michigan
U.S. Treasury Index Portfolio
Case Hourly Employee Pension Plan 612,173 40.51%
Liberty Healthcare System Inc. 208,861 13.82%
Pension Plan
Purina Mills Inc. Master Retirement 144,409 9.56%
Trust
B-57
<PAGE>
Short Intermediate Bond Portfolio
Union Texas Petroleum Holdings Master 412,247 5.44%
Pension Trust
Midcon Corp. Master Welfare Benefit 402,743 5.31%
Taxable Funds Account
Rexene Corporation Savings Retirement 402,934 5.31%
Plan
U.A. Local 398 Health & Welfare Trust 383,048 5.05%
Bond Fund Portfolio
The Northern Trust Company Pension 1,657,265 7.29%
Plan
Americlean Systems Inc. Salaried 1,314,731 5.78%
Pension Plan
The Northern Trust Company Thrift 1,307,885 5.75%
Incentive Plan
Phycor, Inc. Savings and Profit 2,298,333 10.11%
Sharing Plan
U.S. Government Securities Portfolio
Schlumberger Limited Master Profit 2,260,451 46.10%
Sharing Trust
Electrical Insurance Trust 637,426 10.96%
Supplemental Unemployment Benefit
Fund
Schlumberger Limited Master Pension 413,266 8.43%
Trust
Sheet Metal Workers Local 265 Health 375,829 7.66%
& Welfare Plan
OTHER INFORMATION
The Prospectus and this Additional Statement do not contain all the information
included in the Registration Statement filed with the SEC under the Securities
Act of 1933 with respect to the securities offered by the Trust's Prospectus.
Certain portions of the Registration Statement have been omitted from the
Prospectus and this Additional Statement pursuant to the rules and regulations
of the SEC. The Registration Statement including the exhibits filed therewith
may be examined at the office of the SEC in Washington, D.C.
Each Portfolio is responsible for the payment of its expenses. Such expenses
include, without limitation, the fees and expenses payable to Northern and
Goldman Sachs, brokerage fees and commissions, fees for the registration or
qualification of Portfolio units under Federal or state securities laws,
expenses of the organization of the Portfolio, taxes, interest, costs of
liability insurance, fidelity bonds, indemnification or contribution, any costs,
expenses or losses arising out of any
B-58
<PAGE>
liability of, or claim for damages or other relief asserted against, the Trust
for violation of any law, legal, tax and auditing fees and expenses, Servicing
Fees, expenses of preparing and printing prospectuses, statements of additional
information, proxy materials, reports and notices and the printing and
distributing of the same to the Trust's unitholders and regulatory authorities,
compensation and expenses of its Trustees, expenses of industry organizations
such as the Investment Company Institute, miscellaneous expenses and
extraordinary expenses incurred by the Trust.
The term "majority of the outstanding units" of either the Trust or a particular
Portfolio means, with respect to the approval of an investment advisory
agreement or a change in a fundamental investment policy, the vote of the lesser
of (i) 67% or more of the units of the Trust or such Portfolio present at a
meeting, if the holders of more than 50% of the outstanding units of the Trust
or such Portfolio are present or represented by proxy, or (ii) more than 50% of
the outstanding units of the Trust or such Portfolio.
STATEMENTS CONTAINED IN THE PROSPECTUS OR IN THIS ADDITIONAL STATEMENT AS TO THE
CONTENTS OF ANY CONTRACT OR OTHER DOCUMENTS REFERRED TO ARE NOT NECESSARILY
COMPLETE, AND IN EACH INSTANCE REFERENCE IS MADE TO THE COPY OF SUCH CONTRACT OR
OTHER DOCUMENT FILED AS AN EXHIBIT TO THE REGISTRATION STATEMENT OF WHICH THE
PROSPECTUS AND THIS ADDITIONAL STATEMENT FORM A PART, EACH SUCH STATEMENT BEING
QUALIFIED IN ALL RESPECTS BY SUCH REFERENCE.
FINANCIAL STATEMENTS
The audited financial statements and related report of Ernst & Young LLP,
independent auditors, for the Short Duration Portfolio/1/, U.S. Treasury Index
Portfolio, U.S. Government Securities Portfolio, Short Intermediate Bond
Portfolio, Bond Portfolio and International Bond Portfolio contained in the
Annual Report for the fiscal year ended November 30, 1996 are hereby
incorporated herein by reference. No other parts of the Annual Report,
including without limitation "Management's Discussion of Portfolio Performance,"
are incorporated by reference herein. Copies of the Annual Report may be
obtained by writing to Goldman, Sachs & Co., Funds Group, 4900 Sears Tower,
Chicago, Illinois 60606, or by calling Goldman, Sachs toll-free at 800-621-2550.
- -----------------------
/1/ The Short Duration Portfolio was terminated as of June 30, 1997.
B-59
<PAGE>
The Benchmark Funds
Fixed Income Portfolios
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION OF PORTFOLIO PERFORMANCE
THE BENCHMARK BOND PORTFOLIO
Yields on securities with two- to 30-year maturities remained relatively
stable, moving only 0.20% to 0.30% higher from the beginning of the fiscal year
to the end. Nevertheless, the interest rate environment during the fiscal year
was volatile, as investors tried to anticipate Federal Reserve activity. Two-
year securities traversed a 1.64% range, and the 30-year Treasury moved in a
1.24% range. The Fed, however, remained on hold after adjusting policy on
January 31, 1996. In this uncertain interest rate environment, investors
continued to reach for yield in their search for incremental return. As a
result, the corporate and mortgage sectors outperformed Treasuries, with the
best performance coming from lower-quality issues.
Before fees, the portfolio provided a marginally higher return than its
benchmark index. The portfolio's interest rate posture was neutral to its
index, which neither added nor detracted from performance. The portfolio's
outperformance was generated through overweightings in non-Treasury sectors
and, in particular, through exposure to surplus notes and perpetual floating
rate notes.
Moving into 1997, we continue to hold a normal interest rate posture. The
current inflation rate continues to make yields attractive from an historical
real yield perspective, though the tight labor market gives us pause. If
meaningful progress is made toward balancing the budget and entitlement reform,
we may become more constructive on the market. While corporate spreads remain
tight by historical standards, we continue to find opportunity to add value and
remain overweighted in the corporate and mortgage sectors.
Mark Wirth, Portfolio Manager
COMPARISON OF CHANGE IN VALUE OF
$10,000 INVESTMENT IN BENCHMARK BOND
PORTFOLIO VS. THE LEHMAN BROTHERS
GOVERNMENT/CORPORATE BOND INDEX
[PERFORMANCE GRAPH APPEARS HERE]
Bond Portfolio Lehman Brothers Government/Corporate Bond Index
-------------- -----------------------------------------------
1/11/93 $10,000 $10,000
11/30/93 $11,060 $11,052
11/30/94 $10,613 $10,641
11/30/95 $12,900 $12,587
11/30/96 $13,619 $13,291
Past performance is not predictive of future performance.
<TABLE>
<CAPTION>
Lehman Brothers
Average Annual Total Returns Government/
For Periods Ended Class A Corporate
November 30, 1996: Units Bond Index
- ---------------------------------------------------------------------------------------
<S> <C> <C>
One Year: 5.57% 5.59%
- ---------------------------------------------------------------------------------------
Since Commencement on 1/11/93: 8.26% 7.58%
- ---------------------------------------------------------------------------------------
</TABLE>
[PERFORMANCE GRAPH APPEARS HERE]
Bond Portfolio Lehman Brothers Government/Corporate Bond Index
-------------- -----------------------------------------------
7/3/95 $10,000 $10,000
11/30/95 $10,608 $10,499
11/30/96 $11,174 $11,086
Past performance is not predictive of future performance.
<TABLE>
<CAPTION>
Lehman Brothers
Average Annual Total Returns Government/
For Periods Ended Class C Corporate
November 30, 1996: Units Bond Index
- -----------------------------------------------------------------------------------------
<S> <C> <C>
One Year: 5.33% 5.59%
- -----------------------------------------------------------------------------------------
Since Commencement on 7/3/95: 8.17% 7.55%
- -----------------------------------------------------------------------------------------
</TABLE>
[PERFORMANCE GRAPH APPEARS HERE]
Bond Portfolio Lehman Brothers Government/Corporate Bond Index
-------------- -----------------------------------------------
9/14/94 $10,000 $10,000
11/30/94 $ 9,906 $ 9,891
11/30/95 $11,992 $11,700
11/30/96 $12,612 $12,354
Past performance is not predictive of future performance.
<TABLE>
<CAPTION>
Lehman Brothers
Average Annual Total Returns Government/
For Periods Ended Class D Corporate
November 30, 1996: Units Bond Index
- ---------------------------------------------------------------------------------------
<S> <C> <C>
One Year: 5.17% 5.59%
- ---------------------------------------------------------------------------------------
Since Commencement on 9/14/94: 11.05% 10.02%
- ---------------------------------------------------------------------------------------
</TABLE>
Units of The Benchmark Funds are not bank deposits or obligations of, or
guaranteed, endorsed or otherwise supported by The Northern Trust Company, its
parent company or its affiliates, and are not federally insured or guaranteed
by the U.S. Government, Federal Deposit Insurance Corporation, Federal Reserve
Board, or any other governmental agency. Investment in the portfolios involves
investment risks, including possible loss of principal amount invested.
<PAGE>
The Benchmark Funds
Fixed Income Portfolios
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION OF PORTFOLIO PERFORMANCE
THE BENCHMARK INTERNATIONAL BOND PORTFOLIO
Total return performance of most non-U.S. bond markets was excellent for the
fiscal year ended November 30, 1996. Economic growth in these countries turned
out to be slower than expected and, as a result, monetary policy remained loose
during the year. In addition inflation was cooperative as it actually declined
in many markets.
The portfolio significantly outperformed its benchmark during the period, due
primarily to its 10% underweighting in the Japanese bond and currency markets.
Of the non-U.S. bond markets, Japan performed the worst during the year, and
the yen fell nearly 11% in value versus the U.S. dollar.
Whenever the dollar increases in value versus other currencies, such as the
yen, the portfolio's nominal return is likely to suffer. However, because the
portfolio was significantly underweighted in Japan throughout the year, we were
able to avoid some of the currency effects caused by the stronger dollar and
weaker yen.
In addition to underweighting the Japanese market, another strategy that
contributed to the portfolio's relative performance was overweighting the
Canadian and Australian markets, both of which performed exceptionally well
compared to other countries.
We recently reduced the portfolio's underweight in Japan and its overweight
in U.S. dollars. Even though the yen may continue to fall further, going
forward, we don't believe it's prudent to take as strong a stand as we did over
the past 12 months. From an overall interest rate sensitivity standpoint, the
portfolio is positioned near neutral versus its benchmark.
Mike Lannan, Portfolio Manager
COMPARISON OF CHANGE IN VALUE
OF $10,000 INVESTMENT IN BENCHMARK INTERNATIONAL BOND PORTFOLIO VS. THE J.P.
MORGAN NON-U.S. GOVERNMENT BOND INDEX
[PERFORMANCE GRAPH APPEARS HERE]
International Bond Portfolio J.P. Morgan Non-U.S. Government Bond Index
---------------------------- ------------------------------------------
3/28/94 $10,000 $10,000
11/30/94 $10,403 $10,521
11/30/95 $12,296 $12,589
11/30/96 $13,461 $13,487
Past performance is not predictive of future performance.
<TABLE>
<CAPTION>
J.P.
Morgan
Average Annual Total Returns Non-U.S.
For Periods Ended Class A Government
November 30, 1996: Units Bond Index
<S> <C> <C>
One Year: 9.47% 7.13%
- -------------------------------------------------------------------------------------------
Since Commencement on 3/28/94: 11.72% 11.80%
</TABLE>
[PERFORMANCE GRAPH APPEARS HERE]
International Bond J.P. Morgan Non-U.S. Government Bond Index
---------------------------- ------------------------------------------
11/20/95 $10,000 $10,000
11/30/95 $ 9,970 $ 9,912
11/30/96 $10,871 $10,619
Past performance is not predictive of future performance.
<TABLE>
<CAPTION>
J.P.
Morgan
Average Annual Total Returns Non-U.S.
For Periods Ended Class D Government
November 30, 1996: Units Bond Index
<S> <C> <C>
One Year: 9.04% 7.13%
- ------------------------------------------------------------------------------------------
Since Commencement on 11/20/95: 8.45% 6.02%
</TABLE>
2
<PAGE>
- --------------------------------------------------------------------------------
THE BENCHMARK SHORT DURATION PORTFOLIO
The portfolio's composition did not change much during the fiscal year ended
November 30, 1996. We continued to invest primarily in asset-backed and other
floating-rate securities, two-year Treasuries and commercial notes. We tended
to favor securities from the bank and finance sectors, as they offered the most
attractive yields without sacrificing quality.
Compared to the three-month LIBOR Index and the 90-day Treasury Bill Index,
the portfolio performed relatively poorly from February through April. However,
during the final three months of the fiscal year, the portfolio recovered
nicely, with its yield surpassing both indices.
The portfolio's duration was approximately 100 days at the beginning of the
fiscal year, peaked at approximately 160 days in June and decreased to
approximately 80 days by year end, reflecting the more defensive nature of the
portfolio.
With the economy continuing to show some strength, future Federal Reserve
actions are uncertain. As such, we expect to maintain a more defensive
position. We feel that the portfolio remains an attractive alternative to money
market funds for those who want to keep their investments in a short-term
strategy for more than three to six months.
Jerry Pearson, Portfolio Manager
COMPARISON OF CHANGE IN VALUE OF
$10,000 INVESTMENT IN BENCHMARK
SHORT DURATION PORTFOLIO, THE LEHMAN
BROTHERS SHORT (1-3) INVESTMENT
GRADE DEBT INDEX AND THE 3 MONTH
LIBOR INDEX
[PERFORMANCE GRAPH APPEARS HERE]
Short Duration Lehman Brothers Short
Portfolio (1-3) Inv't. Grade Debt Index 3 Month LIBOR Index
-------------- ----------------------------- -------------------
6/2/93 $10,000 $10,000 $10,000
11/30/93 $10,173 $10,294 $10,157
11/30/94 $10,543 $10,422 $10,561
11/30/95 $11,191 $11,608 $11,193
11/30/96 $11,801 $12,362 $11,840
Past performance is not predictive of future performance.
<TABLE>
<CAPTION>
Average Annual Total Returns
For Periods Ended Class A Lehman 3 Month
November 30, 1996: Units Brothers LIBOR
<S> <C> <C> <C>
One Year: 5.45% 6.49% 5.60%
- -------------------------------------------------------------------------------------------
Since Commencement on 6/2/93: 4.84% 6.24% 4.94%
</TABLE>
3
<PAGE>
The Benchmark Funds
Fixed Income Portfolios
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION OF PORTFOLIO PERFORMANCE
THE BENCHMARK SHORT-INTERMEDIATE BOND PORTFOLIO
Yields on securities with two- to five-year maturities remained relatively
stable, moving only 0.20% to 0.30% higher from the beginning of the fiscal year
to the end. Nevertheless, the interest rate environment during the fiscal year
was volatile, as investors tried to anticipate Federal Reserve activity. Two-
year securities traversed a 1.64% range, while five-year securities moved in a
1.72% range. The Fed, however, remained on hold after adjusting policy on
January 31, 1996. In this uncertain interest rate environment, investors
continued to reach for yield in their search for incremental return. As a
result, the corporate and mortgage sectors outperformed Treasuries, with the
best performance coming from lower-quality issues.
Before fees, the portfolio provided a marginally higher return than its
benchmark index. The portfolio's interest rate posture was neutral to its
index, which neither added nor detracted from performance. The portfolio's
outperformance was generated through overweightings in non-Treasury sectors.
Moving into 1997, we continue to hold a normal interest rate posture. The
current inflation rate continues to make yields attractive from an historical
real yield perspective, though the tight labor market gives us pause. If
meaningful progress is made toward balancing the budget and entitlement reform,
we may become more constructive on the market. While corporate spreads remain
tight by historical standards, we continue to find opportunity to add value and
remain overweighted in the corporate and mortgage sectors.
Mark Wirth, Portfolio Manager
COMPARISON OF CHANGE IN VALUE OF
$10,000 INVESTMENT IN BENCHMARK
SHORT-INTERMEDIATE BOND PORTFOLIO VS.
THE MERRILL LYNCH 1-5
CORPORATE/GOVERNMENT INDEX
[PERFORMANCE GRAPH APPEARS HERE]
Short-Intermediate Merrill Lynch 1-5
Bond Portfolio Corporate/Government Index
------------------ --------------------------
1/11/93 $10,000 $10,000
11/30/93 $10,590 $10,641
11/30/94 $10,679 $10,596
11/30/95 $11,916 $11,893
11/30/96 $12,592 $12,582
Past performance is not predictive of future performance.
<TABLE>
<CAPTION>
Merrill Lynch
Average Annual Total Returns 1-5 Corporate/
For Periods Ended Class A Government
November 30, 1996: Units Bond Index
<S> <C> <C>
One Year: 5.68% 5.79%
- ------------------------------------------------------------------------------------------
Since Commencement on 1/11/93: 6.10% 6.08%
</TABLE>
[PERFORMANCE GRAPH APPEARS HERE]
Short-Intermediate Merrill Lynch 1-5
Bond Portfolio Corporate/Government Index
------------------ --------------------------
9/14/94 $10,000 $10,000
11/30/94 $ 9,970 $ 9,928
11/30/95 $11,076 $11,143
11/30/96 $11,654 $11,788
Past performance is not predictive of future performance.
<TABLE>
<CAPTION>
Merrill Lynch
Average Annual Total Returns 1-5 Corporate/
For Periods Ended Class D Government
November 30, 1996: Units Bond Index
<S> <C> <C>
One Year: 5.22% 5.79%
- ------------------------------------------------------------------------------------------
Since Commencement on 9/14/94: 7.16% 7.72%
</TABLE>
4
<PAGE>
- --------------------------------------------------------------------------------
THE BENCHMARK U.S. GOVERNMENT SECURITIES PORTFOLIO
A static snapshot of the fiscal year would show short-term government bond
yields rising 0.25% higher during the year, on average. By most measures, this
movement would be considered modest. Nevertheless, this seeming stability does
not serve as an accurate portrayal of the volatility experienced. Two-year
Treasury bonds, for example, traded in a 1.75% range--from 4.75% to 6.50%--
during the fiscal year. Investors moved the market in this sideways fashion
based on ever-changing views of the future economic environment and its impact
on future interest rates. In general, the Federal Reserve was quiet during the
year, as it has not adjusted short-term rates since January 31, 1996.
As we have maintained since April 1996 (when two-year Treasury rates moved
above 6.00%), the current benign inflation outlook makes short-term interest
rates attractive from a "real" return standpoint for long-term investors. Thus,
the portfolio has been in a normal interest rate posture with respect to short-
term government bonds throughout the year, and it has correspondingly earned
market-type returns.
With the portfolio limited to investing in U.S. Treasury, government agency
and government agency mortgage-backed securities, we continually monitor the
agency/Treasury relative value trade-off. While government agency securities do
not typically compensate investors for the liquidity foregone relative to
Treasuries, we have found opportunities in mortgage securities to add
incremental yield with only a minimal level of call risk.
Steve Schafer, Portfolio Manager
COMPARISON OF CHANGE IN VALUE OF
$10,000 INVESTMENT IN BENCHMARK
U.S. GOVERNMENT SECURITIES PORTFOLIO
VS. THE MERRILL LYNCH 1-5 GOVERNMENT
INDEX
[PERFORMANCE GRAPH APPEARS HERE]
U.S. Government Merrill Lynch 1-5
Securities Portfolio Government Index
-------------------- ------------------
4/5/93 $10,000 $10,000
11/30/93 $10,300 $10,346
11/30/94 $10,241 $10,295
11/30/95 $11,386 $11,538
11/30/96 $11,972 $12,192
Past performance is not predictive of future performance.
<TABLE>
<CAPTION>
Average Annual Total Returns Merrill Lynch
For Periods Ended Class A 1-5 Government
November 30, 1996: Units Index
<S> <C> <C>
One Year: 5.15% 5.67%
- ------------------------------------------------------------------------------------------
Since Commencement on 4/5/93: 5.04% 5.57%
</TABLE>
[PERFORMANCE GRAPH APPEARS HERE]
U.S. Government Merrill Lynch 1-5
Securities Portfolio Government Index
-------------------- ------------------
12/29/95 $10,000 $10,000
11/30/96 $10,405 $10,476
Past performance is not predictive of future performance.
<TABLE>
<CAPTION>
Average Annual Total Returns** Merrill Lynch
For Period Ended Class C 1-5 Government
November 30, 1996: Units Index
<S> <C> <C>
Since Commencement on 12/29/95: 4.05% 4.76%
</TABLE>
[PERFORMANCE GRAPH APPEARS HERE]
U.S. Government Merrill Lynch 1-5
Securities Portfolio Government Index
-------------------- ------------------
9/15/94 $10,000 $10,000
11/30/94 $ 9,910 $ 9,913
11/30/95 $10,966 $11,110
11/30/96 $11,490 $11,740
Past performance is not predictive of future performance.
<TABLE>
<CAPTION>
Average Annual Total Returns Merrill Lynch
For Periods Ended Class D 1-5 Government
November 30, 1996: Units Index
<S> <C> <C>
One Year: 4.77% 5.67%
- ------------------------------------------------------------------------------------------
Since Commencement on 9/15/94: 6.48% 7.53%
</TABLE>
**Average Annual Total Returns are not annualized for periods less than one
year.
5
<PAGE>
The Benchmark Funds
Fixed Income Portfolios
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION OF PORTFOLIO PERFORMANCE
THE BENCHMARK U.S. TREASURY INDEX PORTFOLIO
On average, Treasury yields remained relatively stable from the beginning of
the fiscal year to the end. In between, however, there was significant short-
term volatility, as the ever-changing views on where the economy was headed and
what impact that would have on future interest rates caused yields to go up and
down.
Yields on two-year Treasury bonds, for example, moved in a 1.75% range, while
yields on the 30-year Treasury bond moved in a 1.24% range during the year.
As it is designed to do, the U.S. Treasury Index Portfolio performed in line
with the Lehman Brothers U.S. Treasury Bond Index during the period from
December 1, 1995, to November 30, 1996. We will continue to invest in
securities represented by the Index in our effort to provide returns that
closely approximate those of the Index.
Richard Steck, Portfolio Manager
COMPARISON OF CHANGE IN VALUE
OF $10,000 INVESTMENT IN BENCHMARK U.S. TREASURY INDEX PORTFOLIO VS. THE LEHMAN
BROTHERS U.S. TREASURY BOND INDEX
[PERFORMANCE GRAPH APPEARS HERE]
U.S. Treasury Lehman Brothers U.S.
Index Portfolio Treasury Bond Index
--------------- --------------------
1/11/93 $10,000 $10,000
11/30/93 $10,994 $11,019
11/30/94 $10,576 $10,625
11/30/95 $12,369 $12,473
11/30/96 $13,000 $13,127
Past preformance is not predictive of future performance.
<TABLE>
<CAPTION>
Average Annual Total Returns Lehman Brothers
For Periods Ended Class A U.S. Treasury
November 30, 1996: Units Bond Index
<S> <C> <C>
One Year: 5.10% 5.24%
- ----------------------------------------------------------------------------------------
Since Commencement on 1/11/93: 6.97% 7.24%
</TABLE>
[PERFORMANCE GRAPH APPEARS HERE]
U.S. Treasury Lehman Brothers U.S.
Index Portfolio Treasury Bond Index
--------------- -------------------
11/16/94 $10,000 $10,000
11/30/94 $10,037 $10,069
11/30/95 $11,687 $11,821
11/30/96 $12,239 $12,441
Past preformance is not predictive of future performance.
<TABLE>
<CAPTION>
Average Annual Total Returns Lehman Brothers
For Periods Ended Class D U.S. Treasury
November 30, 1996: Units Bond Index
<S> <C> <C>
One Year: 4.72% 5.24%
- -----------------------------------------------------------------------------------------
Since Commencement on 11/16/94: 10.40% 11.29%
</TABLE>
6
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
7
<PAGE>
The Benchmark Funds
Fixed Income Portfolios
- --------------------------------------------------------------------------------
STATEMENTS OF INVESTMENTS
November 30, 1996
(All amounts in thousands)
<TABLE>
<CAPTION>
Description
- -----------------------------------------------
Principal Maturity
Amount Rate Date Value
- -----------------------------------------------
BOND PORTFOLIO
<C> <C> <S> <C>
ASSET-BACKED SECURITIES--0.2%
AUTOMOTIVE--0.2%
General Motors
Acceptance Corp.
Class A, Series:
1993-B
$ 827 4.000% 09/15/98 $ 819
HOME EQUITY LOANS--0.0%
U.S. Home Equity
Loan, Series: 1991-2
116 8.500 04/15/21 117
- -----------------------------------------------
TOTAL ASSET-BACKED SECURITIES
(Cost $941) $ 936
- -----------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS--
12.3%
Countrywide Funding
Corp.
Class A4, Series:
1993-1
$13,567 5.321% 10/25/23 $ 12,244
Delta Funding Corp.,
Interest Only
Stripped Security,
Class A-4, Series:
1991-1*
-- -- 01/01/06 202
Donaldson, Lufkin &
Jenrette, Inc.
Mortgage Acceptance
Corp.,
Series 1994-Q8,
Class 2A1
5,752 7.250 05/25/24 5,752
Donaldson, Lufkin &
Jenrette, Inc.
Mortgage Acceptance
Corp.,
Adjustable Rate,
Interest Only
Stripped Security,
Series 1995-QE9*
-- -- 11/25/25 1,698
GE Capital Mortgage
Services Inc.
Class A-23, Series:
1994-10
13,850 6.500 03/25/24 12,160
PaineWebber Mortgage
Acceptance Corp.
Class A15, Series:
1993-9
7,919 7.000 10/25/23 7,848
Prudential Home
Mortgage Securities,
Adjustable Rate,
Interest Only
Stripped Security
Class A-17,
Series: 1993-36*
-- -- 10/25/23 2,972
Class A-18,
Series: 1994-8*
-- -- 03/25/24 1,123
</TABLE>
<TABLE>
<CAPTION>
Description
- -------------------------------------------------------
Principal Maturity
Amount Rate Date Value
- -------------------------------------------------------
<C> <C> <S> <C> <C> <C> <C> <C>
Residential
Funding Mortgage
Securities,
Adjustable Rate,
Interest Only
Stripped Security
Class A-14,
Series: 1993-S22*
$ -- --% 06/25/23 $ 2,140
- -------------------------------------------------------
TOTAL COLLATERALIZED
MORTGAGE OBLIGATIONS (Cost
$46,317) $ 46,139
- -------------------------------------------------------
CORPORATE BONDS--10.9%
BROKERAGE SERVICES--2.5%
Salomon Brothers,
Inc.
$ 9,450 8.000% 03/28/97 $ 9,515
FINANCIAL--1.4%
General Motors
Acceptance Corp.
4,285 8.875 06/01/00 5,119
INSURANCE SERVICES--1.8%
Lumberman's
Mutual Casualty
Co.
6,000 9.150 07/01/26 6,717
RETAIL--2.1%
Penney (J.C.) &
Co., Inc.
7,700 6.900 08/15/03 7,939
SANITARY SERVICES--3.1%
WMX Technologies
11,000 7.100 08/01/03 11,604
- -------------------------------------------------------
TOTAL CORPORATE BONDS (Cost
$38,843) $ 40,894
- -------------------------------------------------------
U.S. GOVERNMENT AGENCIES--
21.9%
COLLATERALIZED MORTGAGE OBLIGA-
TIONS--15.7%
FEDERAL HOME LOAN MORTGAGE
CORP. MULTICLASS
INTEREST ONLY STRIPPED SE-
CURITY*--0.0%
Class 1392-S,
Series: 1392
$ -- --% 09/15/18 $ 37
FEDERAL HOME LOAN MORTGAGE
CORP. MULTICLASS
PRINCIPAL ONLY STRIPPED
SECURITIES*--4.2%
Class B, Series:
G011
$ 912 -- 04/25/23 632
Class D, Series:
1571
13,511 -- 08/15/23 8,525
Class PD, Series:
1750-C
10,054 -- 03/15/24 6,550
--------
15,707
</TABLE>
See accompanying notes to financial statements.
8
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Description
- ----------------------------------------
Principal Maturity
Amount Rate Date Value
- ----------------------------------------
<C> <C> <S> <C>
FEDERAL NATIONAL MORTGAGE ASSOCIATION
REMIC TRUST--5.8%
Class 3-D, Series:
1990-3
$ 953 8.500% 07/25/18 $ 966
Class A, Series:
1996-M4
8,947 7.750 03/17/17 9,216
Class G, Series:
1992-73
7,500 7.500 04/25/21 7,660
Class SA, Series:
1991-127
660 12.661 09/25/98 671
Class SB, Series:
1994-59
6,364 2.880 03/25/24 3,304
--------
21,817
FEDERAL NATIONAL MORTGAGE
ASSOCIATION REMIC TRUST
INTEREST ONLY STRIPPED SE-
CURITY*--0.2%
Class S, Series:
G-12
-- -- 05/25/21 705
FEDERAL NATIONAL MORTGAGE
ASSOCIATION REMIC TRUST
PRINCIPAL ONLY STRIPPED SE-
CURITIES*--5.5%
Class B, Series:
1993-161
$ 4,732 -- 10/25/18 4,504
Class D, Series:
1993-132
1,947 -- 10/25/22 1,082
Class EA, Series:
1993-205
3,150 -- 09/25/23 2,165
Class G, Series:
1994-9
1,999 -- 11/25/23 1,870
Class L, Series:
1993-184
7,585 -- 09/25/23 4,982
Class PR, Series:
1996-14
9,000 -- 01/25/24 6,019
--------
20,622
MORTGAGE-BACKED SECURITIES--
6.2%
FEDERAL HOME LOAN MORTGAGE CORP.--
0.0%
1 6.500 06/01/04 1
GOVERNMENT NATIONAL MORTGAGE ASSOCIA-
TION--6.2%
7,615 8.000 11/15/26 7,852
Series: 2026
8,802 8.000 08/15/26 9,072
5,940 8.000 09/15/26 6,122
--------
23,046
- ----------------------------------------
TOTAL U.S. GOVERNMENT AGEN-
CIES
(Cost $76,677) $ 81,935
- ----------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Description
- -------------------------------------------
Principal Maturity
Amount Rate Date Value
- -------------------------------------------
<C> <C> <S> <C> <C>
U.S. GOVERNMENT OBLIGATIONS--43.6%
U.S. TREASURY NOTES--41.4%
$12,310 6.750% 02/28/97 $ 12,352
25,000 5.875 10/31/98 25,125
13,600 6.750 05/31/99 13,942
38,745 6.875 08/31/99 39,901
14,000 7.750 01/31/00 14,807
8,450 5.750 08/15/03 8,363
37,000 7.500 02/15/05 40,486
--------
154,976
U.S. TREASURY BOND--2.2%
7,635 7.125 02/15/23 8,239
- -------------------------------------------
TOTAL U.S. GOVERNMENT OBLI-
GATIONS
(Cost $160,865) $163,215
- -------------------------------------------
FLOATING RATE BANK NOTES--
6.0%
Lloyds Bank PLC
$11,450 6.063% 12/13/96 $ 10,138
National
Westminster Bank
13,800 5.625 02/28/97 12,101
- -------------------------------------------
TOTAL FLOATING RATE BANK
NOTES
(Cost $21,480) $ 22,239
- -------------------------------------------
SHORT-TERM INVESTMENT--4.2%
Berliner Handels und
Frankfurter,
Grand Cayman
$15,853 5.688% 12/02/96 $ 15,853
- -------------------------------------------
TOTAL SHORT-TERM INVESTMENT
(Cost $15,853) $ 15,853
- -------------------------------------------
TOTAL INVESTMENTS--99.1%
(Cost $360,976) $371,211
- -------------------------------------------
Other assets, less
liabilities--0.9% 3,201
- -------------------------------------------
NET ASSETS--100.0% $374,412
- -------------------------------------------
- -------------------------------------------
</TABLE>
*At November 30, 1996, effective yields on these securities ranged from
approximately 5.00% to 15.00%. Refer to notes to statements of investments for
a discussion of stripped securities.
See accompanying notes to financial statements.
9
<PAGE>
The Benchmark Funds
Fixed Income Portfolios
- --------------------------------------------------------------------------------
STATEMENTS OF INVESTMENTS
November 30, 1996
(All amounts in thousands)
<TABLE>
<CAPTION>
Description
- ------------------------------------------------------
Local Currency Maturity
Principal Amount Rate Date Value
- ------------------------------------------------------
INTERNATIONAL BOND PORTFOLIO
<C> <C> <S> <C>
DEBT OBLIGATIONS--93.8%
AUSTRALIAN DOLLAR--4.3%
Commonwealth of
Australia
1,580 10.000% 10/15/02 $ 1,471
BELGIAN FRANC--1.9%
Kingdom of Belgium
18,275 7.500 07/29/08 641
BRITISH POUND STERLING--15.0%
Abbey National PLC
825 6.000 08/10/99 1,352
Lloyds Bank PLC
800 7.375 03/11/04 1,302
Treasury of United
Kingdom
1,420 8.000 06/10/03 2,490
-------
5,144
CANADIAN DOLLAR--8.4%
Dominion of Canada
1,075 7.500 12/01/03 880
Province of Ontario
1,050 7.250 09/27/05 826
Province of Quebec
1,325 10.250 10/15/01 1,187
-------
2,893
DANISH KRONE--5.5%
Kingdom of Denmark
10,100 8.000 03/15/06 1,872
FRENCH FRANC--8.9%
Electricite de
France
6,200 8.600 04/09/04 1,416
Republic of France
3,000 8.500 03/12/97 582
4,600 8.250 02/27/04 1,041
-------
3,039
GERMAN MARK--13.6%
Federal Republic of
Germany
1,795 6.250 01/04/24 1,117
LKB Global Bond
1,500 6.000 05/10/99 1,023
</TABLE>
<TABLE>
<CAPTION>
Description
- ----------------------------------------------
Local Currency Maturity
Principal Amount Rate Date Value
- ----------------------------------------------
<C> <C> <S> <C>
Republic of Austria
1,670 8.000% 01/30/02 $ 1,230
Republic of Finland
1,920 5.500 02/09/01 1,289
-------
4,659
ITALIAN LIRA--8.2%
Republic of Italy
4,000,000 8.500 04/01/04 2,808
JAPANESE YEN--13.5%
Asian Development
Bank
90,000 5.000 02/05/03 926
European Bank for
Reconstruction and
Development
95,000 5.875 11/26/99 953
International Bank
for
Reconstruction and
Development
100,000 4.500 03/20/03 1,010
Japan Development
Bank
160,000 6.500 09/20/01 1,721
-------
4,610
NETHERLANDS GUILDER--3.3%
Kingdom of the
Netherlands
1,675 8.500 03/15/01 1,118
SPANISH PESETA--4.1%
Kingdom of Spain
35,000 11.450 08/30/98 294
120,000 11.300 01/15/02 1,120
-------
1,414
SWEDISH KRONA--3.8%
Kingdom of Sweden
7,400 10.250 05/05/03 1,317
UNITED STATES DOLLAR--3.3%
U.S. Treasury Note
1,000 7.875 11/15/04 1,117
- ----------------------------------------------
TOTAL DEBT OBLIGATIONS
(Cost $29,495) $32,103
- ----------------------------------------------
</TABLE>
See accompanying notes to financial statements.
10
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Description
- -----------------------------------------------------------
Local Currency Maturity
Principal Amount Rate Date Value
- -----------------------------------------------------------
INTERNATIONAL BOND PORTFOLIO--CONTINUED
<C> <C> <S> <C>
SHORT-TERM INVESTMENT--2.6%
UNITED STATES DOLLAR
Berliner Handels und
Frankfurter,
Grand Cayman
$ 895 5.688% 12/02/96 $ 895
- -----------------------------------------------------------
TOTAL SHORT-TERM INVESTMENT (Cost
$895) $ 895
- -----------------------------------------------------------
TOTAL INVESTMENTS--96.4%
(Cost $30,390) $32,998
- -----------------------------------------------------------
Other assets, less liabilities--
3.6% 1,237
- -----------------------------------------------------------
NET ASSETS--100.0% $34,235
- -----------------------------------------------------------
- -----------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
11
<PAGE>
The Benchmark Funds
Fixed Income Portfolios
- --------------------------------------------------------------------------------
STATEMENTS OF INVESTMENTS
November 30, 1996
(All amounts in thousands)
<TABLE>
<CAPTION>
Description
- ------------------------------------------------------
Principal Maturity
Amount Rate Date Value
- ------------------------------------------------------
<C> <C> <S> <C> <C> <C> <C> <C>
SHORT DURATION PORTFOLIO
ASSET-BACKED SECURITY--5.6%
Household Consumer
Loan Trust
Series: 96-2A
$ 2,324 5.545% 08/15/06 $ 2,324
- ------------------------------------------------------
TOTAL ASSET-BACKED SECURITY
(Cost $2,324) $ 2,324
- ------------------------------------------------------
FLOATING RATE NOTES--15.5%
Beneficial Corp.
$ 2,500 5.570% 11/04/99 $ 2,489
Household Finance
Co.
2,500 5.681 11/01/01 2,495
USL Capital Corp.
Series D
1,500 5.705 04/19/99 1,497
- ------------------------------------------------------
TOTAL FLOATING RATE NOTES
(Cost $6,499) $ 6,481
- ------------------------------------------------------
U.S. GOVERNMENT OBLIGATION--6.0%
U.S. Treasury Note
$ 2,500 5.733% 11/15/99 $ 2,512
- ------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATION
(Cost $2,511) $ 2,512
- ------------------------------------------------------
COMMERCIAL PAPER--35.6%
ASSET-BACKED SECURITIES--13.5%
Ascot Capital
Corp.
$ 1,000 5.391% 02/10/97 $ 989
Cooperative
Association of
Tractor Dealers
500 5.376 12/10/96 499
Corporate
Receivables Corp.
400 5.317 12/09/96 399
Gotham Funding
Corp.
1,000 5.444 02/05/97 990
Old Line Funding
785 5.373 12/12/96 784
Strategic Asset
Funding Corp.
1,000 5.476 01/31/97 991
Wood Street
Funding Corp.
1,000 5.371 12/10/96 999
-------
5,651
COMMUNICATIONS--2.3%
NYNEX Corp.
1,000 5.375 12/16/96 998
</TABLE>
<TABLE>
<CAPTION>
Description
- --------------------------------------------------
Principal Maturity
Amount Rate Date Value
- --------------------------------------------------
<C> <C> <S> <C> <C> <C> <C>
FOOD AND KINDRED PRODUCTS--
4.8%
Coca-Cola
Enterprises Inc.
$ 1,000 5.466% 12/05/96 $ 999
Thames Asset
Global
Securitization No.
1, Inc.
1,000 5.427 02/18/97 988
-------
1,987
HOLDING AND OTHER INVESTMENT
OFFICES--4.2%
CSW Credit, Inc.
900 5.309 12/04/96 899
400 5.314 12/10/96 399
Enterprise Funding
Corp.
466 5.354 12/13/96 465
-------
1,763
INSURANCE CARRIERS--4.8%
John Hancock
Capital Corp.
2,000 5.291 12/10/96 1,997
MISCELLANEOUS RETAIL--1.0%
Mont Blanc Capital
423 5.366 12/04/96 423
NONDEPOSITORY BUSINESS
CREDIT INSTITUTIONS--2.6%
PHH Corp.
1,000 5.327 12/16/96 999
Transamerica Corp.
100 5.261 12/05/96 100
-------
1,099
TRANSPORTATION--2.4%
General Motors
Acceptance Corp.
1,000 5.747 03/11/97 984
- --------------------------------------------------
TOTAL COMMERCIAL PAPER
(Cost $14,902) $14,902
- --------------------------------------------------
SHORT-TERM INVESTMENTS--15.6%
Federal Home Loan
Mortgage
Association
$ 4,525 5.703% 12/02/96 $ 4,524
Norinchukin Bank
1,000 5.340 12/06/96 1,000
Swiss Bank
1,000 5.520 12/18/96 1,000
- --------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $6,524) $ 6,524
- --------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
12
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Description
- --------------------------------------------------------------------
Principal Maturity
Amount Rate Date Value
- --------------------------------------------------------------------
<C> <C> <S> <C>
REPURCHASE AGREEMENTS--23.9%
Bear Stearns & Co., Inc., Dated 11/29/96,
Repurchase Price $10,005
(U.S. Government Securities Colld.)
$10,000 5.680% 12/02/96 $10,000
Donaldson Lufkin & Jenrette Securities, Inc.,
Dated 11/29/96, Repurchase Price $3
(U.S. Government Securities Colld.)
3 5.920% 12/02/96 3
- --------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS
(Cost $10,003) $10,003
- --------------------------------------------------------------------
TOTAL INVESTMENTS--102.2%
(Cost $42,763) $42,746
- --------------------------------------------------------------------
Liabilities, less other assets--(2.2)% (933)
- --------------------------------------------------------------------
NET ASSETS--100.0% $41,813
- --------------------------------------------------------------------
- --------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
13
<PAGE>
The Benchmark Funds
Fixed Income Portfolios
- --------------------------------------------------------------------------------
STATEMENTS OF INVESTMENTS
November 30, 1996
(All amounts in thousands)
<TABLE>
<CAPTION>
Description
- --------------------------------------------------------
Principal Maturity
Amount Rate Date Value
- --------------------------------------------------------
SHORT-INTERMEDIATE BOND PORTFOLIO
ASSET-BACKED SECURITIES--8.2%
AUTOMOTIVE--8.2%
<C> <C> <S> <C>
Olympic Automobile
Receivables Trust
$4,000 5.950% 11/15/99 $4,017
2,627 7.875 07/15/01 2,693
Olympic Automobile
Receivables Trust,
Interest Only
Stripped Security*
-- -- 01/15/99 1,703
Premier Auto Trust
2,222 4.750 02/02/00 2,209
Western Financial
Automobile Loan
Trust
507 4.700 01/01/98 507
1,505 7.100 01/01/00 1,526
- --------------------------------------------------------
TOTAL ASSET-BACKED SECURI-
TIES
(Cost $12,880) $12,655
- --------------------------------------------------------
COLLATERALIZED MORTGAGE
OBLIGATION--1.6%
Donaldson, Lufkin
& Jenrette, Inc.
Mortgage
Acceptance Corp.,
Series 1994-Q8,
Class 2A1
$2,473 7.250% 05/25/24 $ 2,473
- --------------------------------------------------------
TOTAL COLLATERALIZED MORT-
GAGE
OBLIGATION (Cost $2,429) $ 2,473
- --------------------------------------------------------
CORPORATE OBLIGATIONS--9.7%
BROKERAGE SERVICES--7.4%
Donaldson Lufkin &
Jenrette, Inc.
Medium Term Note
$6,500 5.625% 02/15/16 $ 6,353
Salomon Brothers,
Inc. Medium Term
Notes
3,000 5.500 01/31/98 2,987
2,000 5.700 02/11/98 1,995
-------
11,335
FINANCIAL--2.3%
Greyhound
Financial Corp.
3,590 8.250 03/11/97 3,613
- --------------------------------------------------------
TOTAL CORPORATE OBLIGATIONS
(Cost $15,075) $14,948
- --------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Description
- ---------------------------------------
Principal Maturity
Amount Rate Date Value
- ---------------------------------------
<C> <C> <S> <C>
U.S. GOVERNMENT AGENCIES--
9.2%
COLLATERALIZED MORTGAGE OBLIGATIONS
FEDERAL HOME LOAN MORTGAGE
ASSOCIATION
REMIC TRUST PRINCIPAL ON-
LY*--3.3%
Class
BA, Series: 1571
$ 5,472 -- % 04/15/19 $ 5,098
FEDERAL NATIONAL MORTGAGE
ASSOCIATION
REMIC TRUST--4.0%
Class
A, Series: 1996-M4
5,965 7.750 03/17/17 6,144
FEDERAL NATIONAL MORTGAGE
ASSOCIATION
REMIC TRUST PRINCIPAL ON-
LY*--1.9%
Class B, Series:
1993-161
1,183 -- 10/25/18 1,126
Class G, Series:
1994-9
1,999 -- 11/25/23 1,870
--------
2,996
- ---------------------------------------
TOTAL U.S. GOVERNMENT AGEN-
CIES
(Cost $12,738) $ 14,238
- ---------------------------------------
U.S. GOVERNMENT OBLIGA-
TIONS--67.1%
U.S. TREASURY NOTES--67.1%
$ 5,000 5.375% 11/30/97 $ 4,996
7,000 5.625 01/31/98 7,010
12,000 5.125 03/31/98 11,942
8,000 5.375 05/31/98 7,983
2,000 5.125 11/30/98 1,982
26,600 6.750 05/31/99 27,269
13,675 6.875 08/31/99 14,083
18,000 7.750 01/31/00 19,038
4,000 5.500 12/31/00 3,958
4,890 6.625 06/30/01 5,046
- ---------------------------------------
TOTAL U.S. GOVERNMENT OBLI-
GATIONS
(Cost $102,332) $103,307
- ---------------------------------------
SHORT-TERM INVESTMENT--2.3%
Berliner Handels
und Frankfurter,
Grand Cayman
$ 3,537 5.688% 12/02/96 $ 3,537
- ---------------------------------------
TOTAL SHORT-TERM INVESTMENT
(Cost $3,537) $ 3,537
- ---------------------------------------
TOTAL INVESTMENTS--98.1%
(Cost $148,991) $151,158
- ---------------------------------------
Other assets, less other
liabilities--1.9% 2,860
- ---------------------------------------
NET ASSETS--100.0% $154,018
- ---------------------------------------
- ---------------------------------------
</TABLE>
*At November 30, 1996, the effective yields on these securities ranged from
approximately 5.00% to 7.00%. Refer to notes to statements of investments for a
discussion of stripped securities.
See accompanying notes to financial statements.
14
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Description
- ----------------------------------------------
Principal Maturity
Amount Rate Date Value
- ----------------------------------------------
U.S. GOVERNMENT SECURITIES PORTFOLIO
U.S. GOVERNMENT AGENCIES--25.0%
COLLATERALIZED MORTGAGE OBLIGATIONS--15.0%
FEDERAL HOME LOAN MORTGAGE CORPORATION--0.8%
<C> <C> <S> <C>
Class F, Series:
1520
$ 750 5.650% 09/15/04 $ 745
FEDERAL NATIONAL MORTGAGE ASSOCIATION--14.2%
Class A, Series:
1996-M4
3,977 7.750 03/17/17 4,096
Class E, Series:
1992-200
1,000 6.250 06/25/17 1,000
Class EZ, Series:
1993-133
3,626 5.850 02/25/17 3,574
Class PD, Series:
1993-085
4,700 5.500 07/25/03 4,678
Class 14-F,
Series: 1988-14
297 9.200 12/25/17 308
-------
13,656
MORTGAGE-BACKED SECURITIES--7.9%
FEDERAL HOME LOAN MORTGAGE CORPORATION--0.6%
594 7.599 11/01/24 605
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION--7.3%
6,632 8.000 08/15/26 6,835
179 8.000 11/15/26 184
-------
7,019
AGENCY OBLIGATIONS--2.1%
FEDERAL HOME LOAN MORTGAGE CORPORATION--0.5%
500 7.130 06/30/05 505
TENNESSEE VALLEY AUTHORITY NOTE--1.6%
1,500 6.235 07/15/45 1,524
-------
2,029
- ----------------------------------------------
TOTAL U.S. GOVERNMENT AGEN-
CIES
(Cost $23,881) $24,054
- ----------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Description
- ------------------------------------------------------
Principal Maturity
Amount Rate Date Value
- ------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS--72.3%
U.S. TREASURY NOTES
<C> <C> <S> <C>
$15,000 6.750% 02/28/97 $15,051
18,000 5.500 11/15/98 17,966
7,500 6.750 05/31/99 7,689
15,000 7.750 01/31/00 15,865
12,000 6.125 07/31/00 12,141
715 6.625 06/30/01 738
- ------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Cost $69,274) $69,450
- ------------------------------------------------------
SHORT TERM INVESTMENT--1.3%
Federal Home Loan Bank
Discount Note
$ 1,225 5.700% 12/02/96 $ 1,225
- ------------------------------------------------------
TOTAL SHORT TERM INVESTMENT
(Cost $1,225) $ 1,225
- ------------------------------------------------------
TOTAL INVESTMENTS--98.6%
(Cost $94,380) $94,729
- ------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
Other assets, less liabilities--1.4% 1,382
- ------------------------------------------------------------------------------
NET ASSETS--100.0% $96,111
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
15
<PAGE>
The Benchmark Funds
Fixed Income Portfolios
- --------------------------------------------------------------------------------
STATEMENTS OF INVESTMENTS
November 30, 1996
(All amounts in thousands)
<TABLE>
<CAPTION>
Description
- ------------------------------------
Principal Maturity
Amount Rate Date Value
- ------------------------------------
U.S. TREASURY INDEX PORTFOLIO
<C> <C> <S> <C>
U.S. GOVERNMENT OBLIGA-
TIONS--97.4%
U.S. TREASURY NOTES--63.7%
$1,500 5.500% 07/31/97 $ 1,502
1,115 9.250 08/15/98 1,181
6,100 5.000 01/31/99 6,024
1,400 5.500 02/28/99 1,396
2,350 7.875 11/15/99 2,487
2,900 6.375 01/15/00 2,954
1,700 6.250 02/15/03 1,730
-------
17,274
U.S. TREASURY BONDS--32.0%
435 13.875 05/15/11 673
660 14.000 11/15/11 1,040
490 13.250 05/15/14 781
1,000 7.250 05/15/16 1,089
900 8.125 05/15/21 1,078
1,100 6.250 08/15/23 1,067
2,800 6.875 08/15/25 2,954
-------
8,682
U.S. TREASURY INTEREST ONLY
STRIPPED SECURITY*--1.7%
475 -- 08/15/97 458
- ------------------------------------
TOTAL U.S. GOVERNMENT OB-
LIGATIONS
(Cost $25,857) $26,414
- ------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Description
- ------------------------------------
Principal Maturity
Amount Rate Date Value
- ------------------------------------
<C> <C> <S> <C>
SHORT TERM INVESTMENT--1.1%
Federal Home
Loan Bank
Discount Note
$ 310 5.700% 12/02/96 $ 310
- ------------------------------------
TOTAL SHORT TERM INVEST-
MENT
(Cost $310) $ 310
- ------------------------------------
TOTAL INVESTMENTS--98.5%
(Cost $26,167) $26,724
- ------------------------------------
Other assets, less liabil-
ities--1.5% 397
- ------------------------------------
NET ASSETS--100.0% $27,121
- ------------------------------------
- ------------------------------------
</TABLE>
*The effective yield on this Interest Only Stripped Security was 5.44% at
November 30, 1996. Refer to notes to statements of investments for a discussion
of stripped securities.
See accompanying notes to financial statements.
16
<PAGE>
The Benchmark Funds
Fixed Income Portfolios
- -------------------------------------------------------------------------------
NOTES TO STATEMENTS OF INVESTMENTS
November 30, 1996
- --The percentage shown for each investment category reflects the value of
investments in that category as a percentage of net assets.
- --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.
- --Stripped securities represent the right to receive either future interest
payments (interest only stripped securities) or principal payments (principal
only stripped securities). The value of variable rate interest only stripped
securities varies directly with changes in interest rates, while the value of
fixed rate interest only stripped securities and the value of principal only
stripped securities varies inversely with changes in interest rates.
17
<PAGE>
The Benchmark Funds
Fixed Income Portfolios
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES
November 30, 1996
(All amounts in thousands, except net asset value per unit)
<TABLE>
<CAPTION>
Short- U.S. U.S.
International Short Intermediate Government Treasury
Bond Bond Duration Bond Securities Index
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments in securi-
ties, at cost $360,976 $30,390 $32,760 $148,991 $94,380 $26,167
Repurchase agreements,
at cost -- -- 10,003 -- -- --
- ----------------------------------------------------------------------------------------------
Investments in securi-
ties, at value $371,211 $32,998 $32,743 $151,158 $94,729 $26,724
Repurchase agreements,
at value -- -- 10,003 -- -- --
Cash 196 141 -- 1,301 7 6
Receivables:
Interest 5,134 1,078 74 1,589 1,387 381
Foreign tax reclaims -- 17 -- -- -- --
Fund units sold 3 -- -- 36 -- --
Administrator 11 5 14 8 6 6
Deferred organization
costs, net 15 37 29 15 18 15
Other assets -- 2 2 -- -- --
- ----------------------------------------------------------------------------------------------
TOTAL ASSETS 376,570 34,278 42,865 154,107 96,147 27,132
- ----------------------------------------------------------------------------------------------
LIABILITIES:
Payable for:
Fund units redeemed 2,027 -- 1,000 30 -- --
Distributions to
unitholders -- -- 25 -- -- --
Accrued expenses:
Advisory fees 76 20 7 32 20 3
Administration fees 30 3 11 13 8 2
Custodian fees 4 5 4 2 2 2
Transfer agent fees 4 -- -- 1 1 --
Other liabilities 17 15 5 11 5 4
- ----------------------------------------------------------------------------------------------
TOTAL LIABILITIES 2,158 43 1,052 89 36 11
- ----------------------------------------------------------------------------------------------
NET ASSETS $374,412 $34,235 $41,813 $154,018 $96,111 $27,121
- ----------------------------------------------------------------------------------------------
ANALYSIS OF NET ASSETS:
Paid-in capital $366,616 $31,072 $42,377 $151,156 $95,994 $27,538
Accumulated undistrib-
uted net investment in-
come -- 31 35 45 75 25
Accumulated net realized
gain (loss) on
investments (2,439) 529 (582) 650 (307) (999)
Net unrealized apprecia-
tion (depreciation) on
investments 10,235 2,608 (17) 2,167 349 557
Net unrealized loss on
translation of other
assets and liabilities
denominated in foreign
currencies -- (5) -- -- -- --
- ----------------------------------------------------------------------------------------------
NET ASSETS $374,412 $34,235 $41,813 $154,018 $96,111 $27,121
- ----------------------------------------------------------------------------------------------
Total units outstanding
(no par value), unlim-
ited units authorized
Class A 17,661 1,543 4,187 7,423 4,602 1,276
Class C 353 -- -- -- 176 --
Class D 11 2 -- 17 11 41
- ----------------------------------------------------------------------------------------------
Net asset value, offer-
ing and redemption price
per unit
Class A $ 20.77 $ 22.16 $ 9.99 $ 20.70 $ 20.07 $ 20.60
Class C $ 20.78 -- -- -- $ 20.06 --
Class D $ 20.76 $ 22.14 -- $ 20.66 $ 20.03 $ 20.57
- ----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
18
<PAGE>
The Benchmark Funds
Fixed Income Portfolios
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
For the Year Ended November 30, 1996
(All amounts in thousands)
<TABLE>
<CAPTION>
Short- U.S. U.S.
International Short Intermediate Government Treasury
Bond Bond Duration Bond Securities Index
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME: $22,432 $2,199(a) $2,692 $10,435 $4,897 $1,082
- ---------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees 1,993 288 194 1,011 527 70
Administration fees 575 80 121 353 220 44
Custodian fees 46 67 32 28 20 20
Transfer agent fees 38 3 -- 17 12 2
Registration fees 33 42 8 25 22 20
Professional fees 19 5 6 11 4 4
Trustee fees 12 2 2 7 2 2
Amortization of deferred
organization costs, net 14 17 20 14 13 13
Unitholder Servicing
Fees 7 -- -- -- 5 1
Other 19 2 12 12 8 8
- ---------------------------------------------------------------------------------------------
TOTAL EXPENSES 2,756 506 395 1,478 833 184
Less voluntary waivers
of:
Investment advisory
fees (1,163) (64) (121) (590) (307) (44)
Administration fees (243) (48) -- (184) (132) (26)
Less: Expenses reimburs-
able by Administrator (143) (87) (153) (97) (69) (67)
- ---------------------------------------------------------------------------------------------
Net expenses 1,207 307 121 607 325 47
- ---------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 21,225 1,892 2,571 9,828 4,572 1,035
Net realized gains
(losses) on:
Investment transactions 2,094 1,011 29 392 (58) 91
Foreign currency trans-
actions -- (35) -- -- -- --
Net change in unrealized
appreciation
(depreciation) on in-
vestments (3,905) 20 -- (1,308) (201) (239)
Net change in unrealized
gains on translation of
other assets and lia-
bilities denominated in
foreign currencies -- 6 -- -- -- --
- ---------------------------------------------------------------------------------------------
NET INCREASE IN NET AS-
SETS RESULTING FROM
OPERATIONS $19,414 $2,894 $2,600 $ 8,912 $4,313 $ 887
- ---------------------------------------------------------------------------------------------
</TABLE>
(a) Net of $49 in non-reclaimable foreign withholding taxes.
See accompanying notes to financial statements.
19
<PAGE>
The Benchmark Funds
Fixed Income Portfolios
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
For the Years Ended November 30, 1996 and 1995
(All amounts in thousands)
<TABLE>
<CAPTION>
Bond International
Portfolio Bond Portfolio
------------------ ----------------
1996 1995 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS:
Net investment income $ 21,225 $ 15,744 $ 1,892 $ 1,898
Net realized gains (losses) on invest-
ments and foreign currency transactions 2,094 1,622 976 731
Net change in unrealized appreciation
(depreciation) on investments (3,905) 34,676 20 2,711
Net change in unrealized gains (losses)
on translations of other assets and li-
abilities denominated in foreign cur-
rencies -- -- 6 (11)
- --------------------------------------------------------------------------------
Net increase in net assets resulting from
operations 19,414 52,042 2,894 5,329
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO CLASS A UNITHOLDERS
FROM:
Net investment income (20,213) (15,211) (2,300) (2,605)
Return of capital (556) (347) -- --
- --------------------------------------------------------------------------------
Total distributions to Class A
unitholders (20,769) (15,558) (2,300) (2,605)
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO CLASS C UNITHOLDERS
FROM:
Net investment income (264) (82) -- --
Return of capital (7) (2) -- --
- --------------------------------------------------------------------------------
Total distributions to Class C
unitholders (271) (84) -- --
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO CLASS D UNITHOLDERS
FROM:
Net investment income (8) (4) (1) --
Return of capital (1) -- -- --
- --------------------------------------------------------------------------------
Total distributions to Class D
unitholders (9) (4) (1) --
- --------------------------------------------------------------------------------
CLASS A UNIT TRANSACTIONS:
Proceeds from the sale of units 143,593 65,433 5,918 6,142
Reinvested distributions 18,565 13,688 1,747 2,073
Cost of units redeemed (79,885) (86,462) (6,747) (5,213)
- --------------------------------------------------------------------------------
Net increase (decrease) in net assets re-
sulting from Class A unit transactions 82,273 (7,341) 918 3,002
- --------------------------------------------------------------------------------
CLASS C UNIT TRANSACTIONS:
Proceeds from the sale of units 4,311 4,059 -- --
Reinvested distributions 271 84 -- --
Cost of units redeemed (1,032) (574) -- --
- --------------------------------------------------------------------------------
Net increase in net assets resulting from
Class C unit transactions 3,550 3,569 -- --
- --------------------------------------------------------------------------------
CLASS D UNIT TRANSACTIONS:
Proceeds from the sale of units 127 100 41 9
Reinvested distributions 9 4 1 --
Cost of units redeemed (37) (9) -- --
- --------------------------------------------------------------------------------
Net increase in net assets resulting from
Class D unit transactions 99 95 42 9
- --------------------------------------------------------------------------------
Net increase (decrease) 84,287 32,719 1,553 5,735
Net assets--beginning of year 290,125 257,406 32,682 26,947
- --------------------------------------------------------------------------------
NET ASSETS--END OF YEAR $374,412 $290,125 $34,235 $32,682
- --------------------------------------------------------------------------------
UNDISTRIBUTED NET INVESTMENT INCOME: $ -- $ -- $ 31 $ 36
- --------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
20
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Short-
Short Duration Intermediate U.S. Government U.S. Treasury
Portfolio Bond Portfolio Securities Portfolio Index Portfolio
- ----------------- ------------------ ---------------------- ----------------
1996 1995 1996 1995 1996 1995 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 2,571 $ 4,196 $ 9,828 $ 6,272 $ 4,572 $ 1,688 $ 1,035 $ 1,675
29 (41) 392 735 (58) 60 91 823
-- 161 (1,308) 6,055 (201) 1,548 (239) 3,234
-- -- -- -- -- -- -- --
- --------------------------------------------------------------------------------
2,600 4,316 8,912 13,062 4,313 3,296 887 5,732
- --------------------------------------------------------------------------------
(2,571) (4,196) (9,596) (6,177) (4,393) (1,644) (1,005) (1,700)
-- -- -- -- -- -- -- --
- --------------------------------------------------------------------------------
(2,571) (4,196) (9,596) (6,177) (4,393) (1,644) (1,005) (1,700)
- --------------------------------------------------------------------------------
-- -- -- -- (159) -- -- --
-- -- -- -- -- -- -- --
- --------------------------------------------------------------------------------
-- -- -- -- (159) -- -- --
- --------------------------------------------------------------------------------
-- -- (3) (1) (9) (2) (26) (4)
-- -- -- -- -- -- -- --
- --------------------------------------------------------------------------------
-- -- (3) (1) (9) (2) (26) (4)
- --------------------------------------------------------------------------------
64,087 48,728 69,730 84,233 104,606 58,790 13,176 14,609
2,425 3,722 8,697 5,697 4,198 1,508 746 1,392
(70,201) (96,900) (82,742) (34,345) (72,555) (30,910) (5,169) (39,656)
- --------------------------------------------------------------------------------
(3,689) (44,450) (4,315) 55,585 36,249 29,388 8,753 (23,655)
- --------------------------------------------------------------------------------
-- -- -- -- 4,695 -- -- --
-- -- -- -- 159 -- -- --
-- -- -- -- (1,298) -- -- --
- --------------------------------------------------------------------------------
-- -- -- -- 3,556 -- -- --
- --------------------------------------------------------------------------------
-- -- 328 12 210 55 592 281
-- -- 3 -- 8 2 26 4
-- -- (2) -- (60) (5) (66) (3)
- --------------------------------------------------------------------------------
-- -- 329 12 158 52 552 282
- --------------------------------------------------------------------------------
(3,660) (44,330) (4,673) 62,481 39,715 31,090 9,161 (19,345)
45,473 89,803 158,691 96,210 56,396 25,306 17,960 37,305
- --------------------------------------------------------------------------------
$41,813 $45,473 $154,018 $158,691 $ 96,111 $ 56,396 $27,121 $17,960
- --------------------------------------------------------------------------------
$ 35 $ 35 $ 45 $ 206 $ 75 $ 75 $ 25 $ 21
- --------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
The Benchmark Funds
Fixed Income Portfolios
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
For the Years Ended November 30,
<TABLE>
<CAPTION>
Bond Portfolio
------------------------------------------------------------------------------------
Class A Class C Class D
--------------------------------------- ---------------- --------------------------
1996 1995 1994 1993 (a) 1996 1995 (b) 1996 1995 1994 (c)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGIN-
NING OF PERIOD $ 20.96 $ 18.29 $ 20.70 $ 20.00 $20.96 $20.21 $ 20.94 $ 18.29 $18.74
Income (loss) from in-
vestment operations:
Net investment income 1.29 1.17 1.42 1.42 1.25 0.47 1.22 1.08 0.28
Net realized and
unrealized gain (loss)
on investments (0.19) 2.66 (2.21) 0.66 (0.18) 0.74 (0.18) 2.66 (0.45)
- ---------------------------------------------------------------------------------------------------------------
Total income (loss) from
investment
operations 1.10 3.83 (0.79) 2.08 1.07 1.21 1.04 3.74 (0.17)
- ---------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO
UNITHOLDERS FROM:
Net investment income (1.26) (1.14) (1.46) (1.38) (1.22) (0.45) (1.19) (1.09) (0.28)
Net realized gain on
investments -- -- (0.15) -- -- -- -- -- --
Return of capital (.03) (0.02) (0.01) -- (.03) (0.01) (.03) -- --
- ---------------------------------------------------------------------------------------------------------------
Total distributions to
unitholders (1.29) (1.16) (1.62) (1.38) (1.25) (0.46) (1.22) (1.09) (0.28)
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) (0.19) 2.67 (2.41) 0.70 (0.18) 0.75 (0.18) 2.65 (0.45)
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD $ 20.77 $ 20.96 $ 18.29 $ 20.70 $20.78 $20.96 $ 20.76 $ 20.94 $18.29
- ---------------------------------------------------------------------------------------------------------------
Total return (d) 5.57% 21.55% (4.04)% 10.60% 5.33% 6.08% 5.17% 21.06% (0.94)%
Ratio to average net as-
sets of (e):
Expenses, net of waiv-
ers and
reimbursements 0.36% 0.36% 0.36% 0.36% 0.60% 0.60% 0.75% 0.75% 0.75%
Expenses, before waiv-
ers and
reimbursements 0.84% 0.84% 0.87% 0.92% 1.08% 1.08% 1.23% 1.23% 1.26%
Net investment income,
net of waivers and re-
imbursements 6.39% 5.94% 7.31% 7.84% 6.09% 5.59% 5.99% 5.48% 6.31%
Net investment income,
before waivers and re-
imbursements 5.91% 5.46% 6.80% 7.28% 5.61% 5.11% 5.51% 5.00% 5.80%
Portfolio turnover rate 101.38% 74.19% 103.09% 89.06% 101.38% 74.19% 101.38% 74.19% 103.09%
Net assets at end of pe-
riod (in
thousands) $366,850 $286,301 $257,391 $245,112 $7,342 $3,704 $ 220 $ 120 $ 15
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Commenced investment operations on January 11, 1993.
(b) Class C units were issued on July 3, 1995.
(c) Class D units were issued on September 14, 1994.
(d) Assumes investment at net asset value at the beginning of the period,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at the net asset value at the end of the period. Total
return is not annualized for periods less than one year.
(e) Annualized for periods less than a full year.
See accompanying notes to financial statements.
22
<PAGE>
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
International Bond Portfolio Short Duration Portfolio
-------------------------------------------- -------------------------------------
Class A Class D Class A
-------------------------- ---------------- -------------------------------------
1996 1995 1994 (a) 1996 1995 (b) 1996 1995 1994 1993 (c)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGIN-
NING OF PERIOD $ 21.74 $ 19.93 $ 20.00 $21.74 $22.17 $ 9.99 $ 9.97 $ 10.03 $ 10.00
Income (loss) from
investment operations:
Net investment income 1.54 1.26 0.79 1.37 0.02 0.53 0.59 0.40 0.14
Net realized and
unrealized gain (loss)
on investments and
foreign currency
transactions 0.43 2.28 0.01 0.51 (0.08) -- 0.01 (0.05) 0.03
- --------------------------------------------------------------------------------------------------------------
Total income (loss) from
investment operations 1.97 3.54 0.80 1.88 (0.06) 0.53 0.60 0.35 0.17
- --------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO
UNITHOLDERS FROM:
Net investment income
(d) (1.55) (1.73) (0.87) (1.48) (0.37) (0.53) (0.58) (0.40) (0.14)
Net realized gain on
investments
transactions -- -- -- -- -- -- -- (0.01) --
- --------------------------------------------------------------------------------------------------------------
Total distributions to
unitholders (1.55) (1.73) (0.87) (1.48) (0.37) (0.53) (0.58) (0.41) (0.14)
- --------------------------------------------------------------------------------------------------------------
Net increase (decrease) 0.42 1.81 (0.07) 0.40 (0.43) -- 0.02 (0.06) 0.03
- --------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD $ 22.16 $ 21.74 $ 19.93 $22.14 $21.74 $ 9.99 $ 9.99 $ 9.97 $ 10.03
- --------------------------------------------------------------------------------------------------------------
Total return (e) 9.47% 18.20% 4.03% 9.04% (0.30)% 5.45% 6.14% 3.64% 1.73%
Ratio to average net as-
sets of (f):
Expenses, net of
waivers and
reimbursements 0.96% 0.96% 0.96% 1.35% 1.35% 0.25% 0.25% 0.25% 0.32%
Expenses, before
waivers and
reimbursements 1.58% 1.47% 1.49% 1.97% 1.86% 0.81% 0.80% 0.77% 0.50%
Net investment income,
net of waivers and
reimbursements 5.91% 5.92% 5.93% 5.67% 3.26% 5.30% 5.80% 3.93% 3.00%
Net investment income,
before waivers and re-
imbursements 5.29% 5.41% 5.40% 5.05% 2.75% 4.74% 5.25% 3.41% 2.82%
Portfolio turnover rate 33.89% 54.46% 88.65% 33.89% 54.46% 828.58% 1,272.21% 1,364.00% 434.32%
Net assets at end of
period (in thousands) $34,183 $32,673 $26,947 $ 52 $ 9 $41,813 $ 45,473 $ 89,803 $186,765
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Commenced investment operations on March 28, 1994.
(b) Class D units were issued on November 20, 1995.
(c) Commenced investment operations on June 2, 1993.
(d) For the International Bond Portfolio, distributions to unitholders from
net investment income include amounts relating to foreign currency
transactions which are treated as ordinary income for Federal income tax
purposes.
(e) Assumes investment at net asset value at the beginning of the period,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at the net asset value at the end of the period. Total
return is not annualized for periods less than one year.
(f) Annualized for periods less than a full year.
See accompanying notes to financial statements.
23
<PAGE>
The Benchmark Funds
Fixed Income Portfolios
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
For the Years Ended November 30,
<TABLE>
<CAPTION>
Short-Intermediate Bond Portfolio
---------------------------------------------------------------
Class A Class D
------------------------------------- ------------------------
1996 1995 1994 1993 (a) 1996 1995 1994 (b)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGIN-
NING OF PERIOD $ 20.73 $ 19.53 $ 20.33 $ 20.00 $20.71 $19.53 $19.82
Income (loss) from in-
vestment operations:
Net investment income 1.14 1.02 0.97 0.85 1.07 0.94 0.23
Net realized and
unrealized gain (loss)
on investments (0.01) 1.19 (0.80) 0.31 (0.02) 1.18 (0.29)
- ------------------------------------------------------------------------------------------
Total income (loss) from
investment operations 1.13 2.21 0.17 1.16 1.05 2.12 (0.06)
- ------------------------------------------------------------------------------------------
DISTRIBUTIONS TO
UNITHOLDERS FROM:
Net investment income (1.16) (1.01) (0.97) (0.83) (1.10) (0.94) (0.23)
- ------------------------------------------------------------------------------------------
Total distributions to
unitholders (1.16) (1.01) (0.97) (0.83) (1.10) (0.94) (0.23)
- ------------------------------------------------------------------------------------------
Net increase (decrease) (0.03) 1.20 (0.80) 0.33 (0.05) 1.18 (0.29)
- ------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD $ 20.70 $ 20.73 $ 19.53 $ 20.33 $20.66 $20.71 $19.53
- ------------------------------------------------------------------------------------------
Total return (c) 5.68% 11.58% 0.84% 5.90% 5.22% 11.09% (0.30)%
Ratio to average net as-
sets of (d):
Expenses, net of waiv-
ers and reimbursements 0.36% 0.36% 0.36% 0.36% 0.75% 0.75% 0.75%
Expenses, before waiv-
ers and reimbursements 0.88% 0.91% 0.95% 1.00% 1.27% 1.30% 1.34%
Net investment income,
net of waivers and re-
imbursements 5.83% 5.14% 4.84% 4.79% 4.96% 4.85% 4.42%
Net investment income,
before waivers and re-
imbursements 5.31% 4.59% 4.25% 4.15% 4.44% 4.30% 3.83%
Portfolio turnover rate 47.68% 54.68% 48.67% 19.48% 47.68% 54.68% 48.67%
Net assets at end of pe-
riod (in thousands) $153,675 $158,678 $96,209 $107,550 $ 343 $ 13 $ 1
- ------------------------------------------------------------------------------------------
</TABLE>
(a) Commenced investment operations on January 11, 1993.
(b) Class D units were issued on September 14, 1994.
(c) Assumes investment at net asset value at the beginning of the period,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at the net asset value at the end of the period. Total
return is not annualized for periods less than one year.
(d) Annualized for periods less than a full year.
See accompanying notes to financial statements.
24
<PAGE>
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S. Government Securities Portfolio
-------------------------------------------------------------------------
Class A Class C Class D
----------------------------------- -------- --------------------------
1996 1995 1994 1993 (a) 1996 (b) 1996 1995 1994 (c)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGIN-
NING OF PERIOD $ 20.08 $ 19.05 $ 20.07 $ 20.00 $ 20.13 $ 20.04 $ 19.05 $19.43
Income (loss) from in-
vestment operations:
Net investment income 1.02 1.05 0.91 0.55 0.91 0.96 0.96 0.22
Net realized and
unrealized gain (loss)
on investments (0.01) 1.02 (1.02) 0.05 (0.12) (0.03) 1.00 (0.38)
- ----------------------------------------------------------------------------------------------------
Total income (loss) from
investment operations 1.01 2.07 (0.11) 0.60 0.79 0.93 1.96 (0.16)
- ----------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO
UNITHOLDERS FROM:
Net investment income (1.02) (1.04) (0.91) (0.53) (0.86) (0.94) (0.97) (0.22)
- ----------------------------------------------------------------------------------------------------
Total distributions to
unitholders (1.02) (1.04) (0.91) (0.53) (0.86) (0.94) (0.97) (0.22)
- ----------------------------------------------------------------------------------------------------
Net increase (decrease) (0.01) 1.03 (1.02) 0.07 (0.07) (0.01) 0.99 (0.38)
- ----------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD $ 20.07 $ 20.08 $ 19.05 $ 20.07 $ 20.06 $ 20.03 $ 20.04 $19.05
- ----------------------------------------------------------------------------------------------------
Total return (d) 5.15% 11.18% (0.57)% 3.00% 4.05% 4.77% 10.66% (0.90)%
Ratio to average net as-
sets of (e):
Expenses, net of waiv-
ers and reimbursements 0.36% 0.36% 0.36% 0.43% 0.60% 0.75% 0.75% 0.75%
Expenses, before waiv-
ers and reimbursements 0.94% 1.09% 1.12% 1.18% 1.18% 1.33% 1.48% 1.51%
Net investment income,
net of waivers and
reimbursements 5.22% 5.43% 4.62% 4.18% 4.97% 4.83% 5.08% 4.65%
Net investment income,
before waivers and
reimbursements 4.64% 4.70% 3.86% 3.43% 4.39% 4.25% 4.35% 3.89%
Portfolio turnover rate 119.75% 141.14% 45.55% 20.59% 119.75% 119.75% 141.14% 45.55%
Net assets at end of pe-
riod (in thousands) $92,351 $56,329 $25,293 $32,479 $ 3,535 $ 225 $ 67 $ 13
- ----------------------------------------------------------------------------------------------------
</TABLE>
(a) Commenced investment operations on April 5, 1993.
(b) Class C units were issued on December 29, 1995.
(c) Class D units were issued on September 15, 1994.
(d) Assumes investment at net asset value at the beginning of the period,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at the net asset value at the end of the period. Total
return is not annualized for periods less than one year.
(e) Annualized for periods less than a full year.
See accompanying notes to financial statements.
25
<PAGE>
The Benchmark Funds
Fixed Income Portfolios
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
For the Years Ended November 30,
<TABLE>
<CAPTION>
U.S. Treasury Index Portfolio
------------------------------------------------------------
Class A Class D
----------------------------------- -----------------------
1996 1995 1994 1993(a) 1996 1995 1994(b)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGIN-
NING OF PERIOD $ 20.78 $ 18.77 $ 21.05 $ 20.00 $20.75 $18.77 $18.80
Income (loss) from in-
vestment operations:
Net investment income 1.19 1.11 1.15 0.95 1.17 1.00 0.09
Net realized and
unrealized gain (loss)
on investments (0.18) 2.01 (1.93) 1.02 (0.24) 2.03 (0.03)
- --------------------------------------------------------------------------------------
Total income (loss) from
investment operations 1.01 3.12 (0.78) 1.97 0.93 3.03 0.06
- --------------------------------------------------------------------------------------
DISTRIBUTIONS TO
UNITHOLDERS FROM:
Net investment income (1.19) (1.11) (1.14) (0.92) (1.11) (1.05) (0.09)
Net realized gain on
investments -- -- (0.36) -- -- -- --
- --------------------------------------------------------------------------------------
Total distributions to
unitholders (1.19) (1.11) (1.50) (0.92) (1.11) (1.05) (0.09)
- --------------------------------------------------------------------------------------
Net increase (decrease) (0.18) 2.01 (2.28) 1.05 (0.18) 1.98 (0.03)
- --------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD $ 20.60 $ 20.78 $ 18.77 $ 21.05 $20.57 $20.75 $18.77
- --------------------------------------------------------------------------------------
Total return (c) 5.10% 16.95% (3.80)% 9.94% 4.72% 16.43% 0.37%
Ratio to average net as-
sets of (d):
Expenses, net of waiv-
ers and reimbursements 0.26% 0.26% 0.26% 0.26% 0.65% 0.65% 0.65%
Expenses, before waiv-
ers and reimbursements 1.04% 0.89% 0.79% 0.83% 1.43% 1.28% 1.18%
Net investment income,
net of waivers and re-
imbursements 5.93% 5.09% 5.60% 5.11% 5.57% 5.41% 6.05%
Net investment income,
before waivers and re-
imbursements 5.15% 4.46% 5.07% 4.54% 4.79% 4.78% 5.52%
Portfolio turnover rate 42.49% 80.36% 52.80% 77.75% 42.49% 80.36% 52.80%
Net assets at end of pe-
riod (in thousands) $26,273 $17,674 $37,305 $71,456 $ 848 $ 286 $ --
- --------------------------------------------------------------------------------------
</TABLE>
(a) Commenced investment operations on January 11, 1993.
(b) Class D units were issued on November 16, 1994.
(c) Assumes investment at net asset value at the beginning of the period,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at the net asset value at the end of the period. Total
return is not annualized for periods less than one year.
(d) Annualized for periods less than a full year.
See accompanying notes to financial statements.
26
<PAGE>
The Benchmark Funds
Fixed Income Portfolios
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
November 30, 1996
1. ORGANIZATION
The Benchmark Funds (the "Trust") is a Massachusetts business trust registered
under the Investment Company Act of 1940 (as amended) as an open-end
management investment company. The Trust includes sixteen portfolios, each
with its own investment objective. The Northern Trust Company ("Northern")
acts as the Trust's investment adviser, transfer agent, and custodian.
Goldman, Sachs & Co. ("Goldman Sachs") acts as the Trust's administrator and
distributor. Presented herein are the financial statements of the fixed income
portfolios (the "Portfolios").
The Bond, International Bond, Short-Intermediate Bond, U.S. Government
Securities, and U.S. Treasury Index Portfolios may issue four separate unit
classes: Class A, B, C and D. Each class is distinguished by the level of
administrative support and transfer agent service provided. As of November 30,
1996, Class A, Class C and Class D units are outstanding for certain
portfolios.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Portfolios in the preparation of their financial statements.
These policies are in conformity with generally accepted accounting principles
("GAAP"). The presentation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates and assumptions.
(a) Investment Valuation
Investments held by a portfolio are valued at the last quoted sale price on
the exchange on which such securities are primarily traded, or if any
securities are not traded on a valuation date, at the last quoted bid price.
Securities which are traded in the over-the-counter markets are valued at the
last quoted bid price. Any securities, including restricted securities, for
which current quotations are not readily available are valued at fair value as
determined in good faith by Northern under the supervision of the Board of
Trustees ("Board"). Short-term investments are valued at amortized cost which
Northern has determined, pursuant to Board authorization, approximates market
value.
(b) Repurchase Agreements
During the term of a repurchase agreement, the market value of the underlying
collateral, including accrued interest, is required to exceed the market value
of the repurchase agreement. The underlying collateral for all repurchase
agreements is held in a customer-only account of Northern, as custodian for
the Trust, at the Federal Reserve Bank of Chicago.
(c) Foreign Currency Translations
Values of investments denominated in foreign currencies are converted into
U.S. dollars using the spot market rate of exchange at the time of valuation.
Cost of purchases and proceeds from sales of investments and interest income
are translated into U.S. dollars using the spot market rate of exchange
prevailing on the respective dates of such transactions.
The gains or losses on investments resulting from changes in foreign exchange
rates are included with net realized and unrealized gain (loss) on
investments.
(d) Investment Transactions and Investment Income
Investment transactions are recorded on the trade date. Realized gains and
losses on investment transactions are calculated on the identified-cost basis.
Interest income is recorded on the accrual basis and includes amortization of
discounts and premiums.
(e) Forward Foreign Currency Exchange Contracts
The International Bond Portfolio is authorized to enter into forward foreign
currency exchange contracts for the
27
<PAGE>
The Benchmark Funds
Fixed Income Portfolios
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS--CONTINUED
November 30, 1996
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
purchase or sale of a specific foreign currency at a fixed price on a future
date as a hedge or cross-hedge against either specific transactions or
portfolio positions. In addition, the International Bond Portfolio may enter
into foreign currency contracts for speculative purposes. The objective of the
Portfolio's foreign currency hedging transactions is to reduce the risk that
the U.S. dollar value of the Portfolio's foreign currency denominated
securities will decline in value due to changes in foreign currency exchange
rates. All forward foreign currency contracts are "marked-to-market" daily at
the applicable translation rates and any resulting unrealized gains or losses
are recorded in the financial statements. The portfolio records realized gains
or losses when the forward contract is offset by entry into a closing
transaction or extinguished by delivery of the currency. Risks may arise upon
entering into these contracts from the potential inability of counterparties
to meet the terms of their contracts and from unanticipated movements in the
value of a foreign currency relative to the U.S. dollar.
The contractual amounts of forward foreign currency exchange contracts do not
necessarily represent the amounts potentially subject to risk. The measurement
of the risks associated with these instruments is meaningful only when all
related and offsetting transactions are considered.
(f) 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 taxable income and capital gains to its
unitholders. Therefore, no provision is made for federal taxes.
At November 30, 1996, the Trust's most recent tax year end, the portfolios
had approximately the following amounts of capital loss carryforwards for U.S.
federal tax purposes:
<TABLE>
<CAPTION>
Amount Year(s) of Expiration
- ----------------------------------------------------------------
(in thousands)
<S> <C> <C>
Bond $1,398 2002 to 2003
Short Duration 581 2002 to 2003
U.S. Government Securities 168 2001 to 2003
U.S. Treasury Index 979 2002
</TABLE>
- -------------------------------------------------------------------------------
These amounts are available to be carried forward to offset future capital
gains to the extent permitted by applicable laws or regulations.
(g) Deferred Organization Costs
Organization related costs are being amortized on a straight-line basis over
five years.
(h) Expenses
Expenses arising in connection with a specific portfolio are allocated to that
portfolio. Certain expenses arising in connection with a class of units are
allocated to that class of units. Expenses incurred which do not specifically
relate to an individual portfolio are allocated among the portfolios based on
each portfolio's relative net assets.
(i) Distributions
Dividends from net investment income are declared and paid as follows:
<TABLE>
<CAPTION>
Declared Paid
- -----------------------------------------------
<S> <C> <C>
Bond Monthly Monthly
International Bond Quarterly Quarterly
Short Duration Daily Monthly
Short-Intermediate Bond Monthly Monthly
U.S. Government Securities Monthly Monthly
U.S. Treasury Index Monthly Monthly
- -----------------------------------------------
</TABLE>
Each portfolio's net realized capital gains are distributed at least
annually.
28
<PAGE>
- -------------------------------------------------------------------------------
Income dividends and capital gains distributions are determined in accordance
with income tax regulations. Such amounts may differ from income and capital
gains recorded in accordance with generally accepted accounting principles.
Distributions of short-term and long-term capital gains were declared and
paid December 24, 1996 to unitholders of record on December 23, 1996, as
follows:
<TABLE>
<CAPTION>
Short-Term Long-Term
Capital Capital
Gain Gain Total
- -----------------------------------------------------
<S> <C> <C> <C>
International Bond $0.0872 $0.2491 $0.3363
Short-Intermediate Bond 0.0123 0.0426 0.0549
- -----------------------------------------------------
</TABLE>
(j) Reclassifications
At November 30, 1996, the Bond Portfolio reclassified approximately $740,000
from accumulated net realized loss on investment transactions to undistributed
net investment income. The International Bond Portfolio reclassified
approximately $439,000 from accumulated net realized gain (loss) on investment
transactions, and $35,000 from net realized loss on foreign currency
transactions, to accumulated undistributed net investment income. The Short-
Intermediate Bond Portfolio reclassified approximately $390,000 from
accumulated net realized gain (loss) on investment transactions to
undistributed net investment income, and the U.S. Government Securities
Portfolio reclassified approximately $11,000 from accumulated net realized
gain (loss) on investment transactions to undistributed net investment income.
These reclassifications had no impact on the net asset value of the Portfolios
and are designed to present the Portfolios' capital accounts on a tax basis.
3. ADVISORY, TRANSFER AGENCY AND CUSTODIAN AGREEMENTS
The Trust has an investment advisory agreement with Northern whereby each
portfolio pays Northern a fee, computed daily and payable monthly, based on a
specified percentage of its average daily net assets. For the current fiscal
year, Northern voluntarily agreed to waive a portion of the advisory fees as
shown on the accompanying Statements of Operations. The annual advisory fees
and waiver rates, expressed as a percentage of average daily net assets for
the year ended November 30, 1996, are as follows:
<TABLE>
<CAPTION>
Net
Advisory Less: Advisory
Fee Waiver Fee
- ----------------------------------------------------
<S> <C> <C> <C>
Bond .60% .35% .25%
International Bond .90 .20 .70
Short Duration .40 .25 .15
Short-Intermediate Bond .60 .35 .25
U.S. Government Securities .60 .35 .25
U.S. Treasury Index .40 .25 .15
- ----------------------------------------------------
</TABLE>
As compensation for the services rendered as transfer agent, including the
assumption by Northern of the expenses related thereto, Northern receives a
fee, computed daily and payable monthly, at an annual rate of .01%, .05%,
.10%, and .15% of the average daily net asset value of the outstanding Class
A, B, C and D units, respectively, for the Bond, International Bond, Short-
Intermediate Bond, U.S. Government Securities and U.S. Treasury Index
Portfolios.
As compensation for the services rendered as custodian for the portfolios,
and for the services rendered as transfer agent for the Short Duration
Portfolio, including the assumption by Northern of the expenses related
thereto, Northern receives compensation based on a pre-determined schedule of
charges approved by the Board.
4. ADMINISTRATION AND DISTRIBUTION AGREEMENTS
The Trust has an administration agreement with Goldman Sachs whereby each
portfolio pays the Administrator a fee, computed daily and payable monthly,
based on the average net assets of each portfolio at the rates set forth
below:
29
<PAGE>
The Benchmark Funds
Fixed Income Portfolios
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS--CONTINUED
November 30, 1996
<TABLE>
<CAPTION>
Average net assets Rate
- ---------------------------------------
<S> <C>
For the first $100,000,000 .250%
For the next $200,000,000 .150
For the next $450,000,000 .075
For net assets over $750,000,000 .050
- ---------------------------------------
</TABLE>
For the current fiscal year, Goldman Sachs voluntarily agreed to limit
administration fees to .10% of average daily net assets for the Bond,
International Bond, Short-Intermediate Bond, U.S. Government Securities and
U.S. Treasury Index Portfolios. In addition, Goldman Sachs agreed to waive a
portion of its administrative fees should overall administration fees earned
during the preceding year exceed certain specified levels. No waiver was
required under this agreement during the year ended November 30, 1996.
Furthermore, Goldman Sachs has agreed to reimburse each portfolio for certain
expenses in the event that such expenses, as defined, exceed on an annualized
basis .10% of the average daily net assets for the Bond, Short-Intermediate
Bond, Short Duration, U.S. Government Securities and U.S. Treasury Index
Portfolios and .25% of the average daily net assets for the International Bond
Portfolio.
The administration fees waived and expenses reimbursed during the year ended
November 30, 1996, are shown on the accompanying Statements of Operations.
Goldman Sachs receives no compensation under the distribution agreement.
5. UNITHOLDER SERVICING PLAN
The Trust has adopted a Unitholder Servicing Plan pursuant to which the Trust
may enter into agreements with institutions or other financial intermediaries
under which they will render certain unitholder administrative support
services for their customers or other investors who beneficially own Class B,
C and D units. As compensation under the Unitholder Servicing Plan, the
institution or other financial intermediary receives a fee at an annual rate
of up to .10%, .15% and .25% of the average daily net asset value of the
outstanding Class B, C and D units, respectively.
6. INVESTMENT TRANSACTIONS
Investment transactions for the year ended November 30, 1996 (excluding short-
term investments) were as follows:
<TABLE>
<CAPTION>
Proceeds
from sales Proceeds
and from sales
Purchases maturities and
of U.S. Purchases of U.S. maturities
Government of other Government of other
Obligations securities Obligations securities
- ------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Bond $299,522 $95,138 $230,507 $62,706
International Bond -- 10,260 -- 10,601
Short Duration 49,240 36,941 51,720 38,111
Short-Intermediate Bond 62,699 12,135 62,188 13,881
U.S.Government Securities 136,302 -- 95,525 --
U.S. Treasury Index 16,514 -- 7,346 --
- ------------------------------------------------------------------------
</TABLE>
As of November 30, 1996, the composition of unrealized appreciation
(depreciation) of investment securities (including the effects of foreign
currency translation) based on the aggregate cost of investments for federal
income tax purposes were as follows:
<TABLE>
<CAPTION>
Cost for
Federal
Net Income
Appreciation Tax
Appreciation Depreciation (Depreciation) Purposes
- -----------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Bond $12,054 $2,860 $9,194 $362,017
International Bond 2,935 327 2,608 30,390
Short Duration 2 19 (17) 42,763
Short-Intermediate Bond 2,687 520 2,167 148,991
U.S. Government Securities 655 433 222 94,507
U.S. Treasury Index 571 14 557 26,167
- -----------------------------------------------------------------------------
</TABLE>
30
<PAGE>
- -------------------------------------------------------------------------------
7. BANK LOANS
The Trust maintains a $5,000,000 revolving bank credit line and a $15,000,000
conditional revolving credit line for liquidity and other purposes. Borrowings
under this arrangement bear interest at 1% above the Fed Funds rate and are
secured by pledged securities equal to or exceeding 120% of the outstanding
balance.
Interest expense for the year ended November 30, 1996 was approximately
$1,000 for the International Bond Portfolio. This amount is included in other
expenses on the Statements of Operations.
As of November 30, 1996, there were no outstanding borrowings.
8. UNIT TRANSACTIONS
Transactions in Class A units for the year ended November 30, 1996 were as
follows:
<TABLE>
<CAPTION>
Net
Reinvested increase
Sales distributions Redemptions (decrease)
- ----------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Bond 7,010 910 3,920 4,000
International Bond 272 81 313 40
Short Duration 6,424 243 7,034 (367)
Short-Intermediate Bond 3,372 424 4,028 (232)
U.S. Government Securities 5,223 211 3,637 1,797
U.S. Treasury
Index 642 37 254 425
- ----------------------------------------------------------------------
</TABLE>
Transactions in Class A units for the year ended November 30, 1995 were as
follows:
<TABLE>
<CAPTION>
Net
Reinvested increase
Sales distributions Redemptions (decrease)
- ----------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Bond 3,353 696 4,459 (410)
International Bond 297 97 243 151
Short Duration 4,868 388 9,707 (4,451)
Short-Intermediate Bond 4,158 285 1,714 2,729
U.S. Government Securities 2,965 77 1,564 1,478
U.S. Treasury
Index 748 70 1,953 (1,135)
- ----------------------------------------------------------------------
</TABLE>
Transactions in Class C units for the year ended November 30, 1996 were as
follows:
<TABLE>
<CAPTION>
Reinvested Net
Sales distributions Redemptions increase
- -------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Bond 214 13 51 176
U.S.Government Securities 234 8 66 176
- -------------------------------------------------------------------
</TABLE>
Transactions in Class C units for the period ended November 30, 1995 were as
follows:
<TABLE>
<CAPTION>
Reinvested Net
Sales distributions Redemptions increase
- ----------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Bond 201 4 28 177
- ----------------------------------------------
</TABLE>
Transactions in Class D units for the year ended November 30, 1996 were as
follows:
<TABLE>
<CAPTION>
Reinvested Net
Sales distributions Redemptions increase
- --------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Bond 6 -- 1 5
International Bond 1 -- -- 1
Short-Intermediate Bond 16 -- -- 16
U.S. Government Securities 10 1 3 8
U.S. Treasury Index 29 1 3 27
- --------------------------------------------------------------------
</TABLE>
Transactions in Class D units for the period ended November 30, 1995 were as
follows:
<TABLE>
<CAPTION>
Reinvested Net
Sales distributions Redemptions increase
- ---------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Bond 5 -- -- 5
International Bond 1 -- -- 1
U.S. Government Securities 3 -- 1 2
U.S. Treasury Index 13 -- -- 13
- ---------------------------------------------------------------------
</TABLE>
31
<PAGE>
The Benchmark Funds
Fixed Income Portfolios
- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
To the Unitholders and Trustees of
The Benchmark Funds
Fixed Income Portfolios
We have audited the accompanying statements of assets and liabilities,
including the statements of investments, of the Bond, International Bond,
Short Duration, Short-Intermediate Bond, U.S. Government Securities and U.S.
Treasury Index Portfolios, comprising the Fixed Income Portfolios of The
Benchmark Funds, as of November 30, 1996, and the related statements of
operations for the year then ended and changes in net assets for each of the
two years in the period then ended and financial highlights for the periods
indicated therein. These financial statements and financial highlights are the
responsibility of the Funds' management. Our responsibility is to express an
opinion on these financial statements and 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
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 the
investments owned at November 30, 1996 by physical examination of the
securities held by the custodian and by correspondence with outside
depositories 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 financial highlights referred to
above present fairly, in all material respects, the financial position of the
Bond, International Bond, Short Duration, Short-Intermediate Bond, U.S.
Government Securities and U.S. Treasury Index Portfolios, comprising the Fixed
Income Portfolios of The Benchmark Funds, at November 30, 1996, the results of
their operations for the year then ended and the changes in their net assets
for each of the two years in the period then ended and financial highlights
for the periods indicated therein, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Chicago, Illinois
January 21, 1997
32
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
33
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
34
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
THE BENCHMARK FUNDS
Investment Adviser, Transfer Agent and Custodian
The Northern Trust Company
50 S. LaSalle Street
Chicago, IL 60675
Administrator and Distributor
Goldman, Sachs & Co.
4900 Sears Tower
Chicago, IL 60606
Trustees
William H. Springer, Chairman
Edward J. Condon, Jr.
John W. English
James J. Gavin, Jr.
Frederick T. Kelsey
Richard P. Strubel
Officers
Paul W. Klug, Jr., President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
Independent Auditors
Ernst & Young LLP
233 S. Wacker Dr.
Chicago, IL 60606
Legal Counsel
Drinker Biddle & Reath
1345 Chestnut Street
Philadelphia, PA 19107
This Annual Report is
authorized for distribution to
prospective investors only
when preceded or accompanied
by a Prospectus which contains
facts concerning the
objectives and policies,
management, expenses and other
information.
The
Benchmark
Funds
Fixed
Income
Portfolios
Annual Report
November 30, 1996
<PAGE>
APPENDIX A
DESCRIPTION OF BOND RATINGS
The following summarizes the highest six ratings used by Standard & Poor's
Ratings Group, Inc., a division of McGraw Hill ("S&P") for corporate and
municipal debt:
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 AAA issues only in a small degree.
A-Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher
rated categories.
BBB-Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for those in
higher rated categories.
BB and B-Debt rated BB and B is regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal
in accordance with the terms of the obligation. Debt rated BB has less
near-term vulnerability to default than other speculative issues.
However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. Debt
rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The B rating
category is also used for debt subordinated to senior debt that is
assigned an actual or implied BB or BB- rating.
To provide more detailed indications of credit quality, the ratings AA and lower
may be modified by the addition of a plus or minus sign to show relative
standing within these major rating categories.
1-A
<PAGE>
S&P may attach the rating "r" to highlight derivative, hybrid and certain other
obligations that S&P believes may experience high volatility or high variability
in expected returns due to non-credit risks.
The following summarizes the highest six ratings used by Moody's Investors
Service, Inc. ("Moody's") for corporate and municipal long-term debt:
Aaa-Bonds that are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa-Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.
A-Bonds that are rated A possess many favorable investment attributes
and are to be considered as upper medium-grade obligations. Factors
giving security to principal and interest are considered adequate but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa-Bonds that are rated Baa are considered medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
Ba and B-Bonds that possess one of these ratings provide questionable
protection of interest and principal. Ba indicates some speculative
elements. B indicates a general lack of characteristics of desirable
investment.
The foregoing ratings for corporate and municipal long-term debt are sometimes
presented in parenthesis preceded with a "con", indicating the bonds are rated
conditionally. Such parenthetical
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rating denotes the probable credit stature upon completion of construction or
elimination of the basis of the condition. The notation (P) when applied to
forward delivery bonds indicates that the rating is provisional pending delivery
of the bonds. The rating may be revised prior to delivery if changes occur in
the legal documents or the underlying credit quality of the bonds.
The following summarizes the highest six ratings used by Duff & Phelps Credit
Rating Co. ("D&P") for corporate and municipal long-term debt:
AAA-Debt rated AAA is of the highest credit quality. The risk factors
are considered to be negligible, being only slightly more than for risk-
free U.S. Treasury debt.
AA-Debt rated AA is of high credit quality. Protection factors are
strong. Risk is modest but may vary slightly from time to time because
of economic conditions.
A-Bonds that are rated A have protection factors which are average but
adequate. However risk factors are more variable and greater in periods
of economic stress.
BBB-Bonds that are rated BBB have below average protection factors but
such protection factors are still considered sufficient for prudent
investment. Considerable variability in risk during economic cycles.
BB and B-Bonds that are rated BB or B are below investment grade. Bonds
rated BB are deemed likely to meet obligations when due. Bonds rated B
possess the risk that the obligations will not be met when due.
To provide more detailed indications of credit quality, the ratings AA and lower
may be modified by the addition of a plus or minus sign to show relative
standing within these major categories.
The following summarizes the highest six ratings used by Fitch Investors
Service, Inc. ("Fitch") for corporate and municipal bonds:
AAA-Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA-Bonds 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 related in the "AAA" and
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"AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated "F-
1+."
A-Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is considered
to be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB-Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on
these bonds, and therefore, impair timely payment. The likelihood that
the ratings of these bonds will fall below investment grade is higher
than for bonds with higher ratings.
BB and B-Bonds considered to be speculative investments with respect to
the timely payment of principal and interest in accordance with the
terms of the obligation.
To provide more detailed indications of credit quality, the Fitch ratings "AA"
and lower may be modified by the addition of a plus (+) or minus (-) sign to
show relative standing within these major rating categories.
DESCRIPTION OF MUNICIPAL NOTE RATINGS
The following summarizes the two highest ratings by S&P for short-term municipal
notes:
SP-1-Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics are
given a "plus" (+) designation.
SP-2-Satisfactory capacity to pay principal and interest.
The following summarizes the two highest ratings used by Moody's for short-term
municipal notes and variable rate demand obligations:
MIG-1/VMIG-1. Obligations bearing these designations are of the best
quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
MIG-2/VMIG-2. Obligations bearing these designations are of high quality
with margins of protection ample although not as large as in the
preceding group.
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The two highest rating categories of D&P for short-term debt are D 1 and D 2.
D&P employs three designations, D 1+, D 1 and D 1-, within the highest rating
category. D 1+ indicates highest certainty of timely payment. Short-term
liquidity, including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations. D 1 indicates very high certainty of timely
payment. Liquidity factors are excellent and supported by good fundamental
protection factors. Risk factors are minor. D 1- indicates high certainty of
timely payment. Liquidity factors are strong and supported by good fundamental
protection factors. Risk factors are very small. D 2 indicates good certainty
of timely payment. Liquidity factors and company fundamentals are sound.
Although ongoing funding needs may enlarge total financing requirements, access
to capital markets is good. Risk factors are small.
D&P uses the fixed-income ratings described above under "Description of Bond
Ratings" for tax-exempt notes and other short-term obligations. Fitch uses the
short-term ratings described below under "Description of Commercial Paper
Ratings" for municipal notes.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
Commercial paper rated A-1 by S&P indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted in A-1+. Capacity for timely payment on
commercial paper rated A-2 is satisfactory but the relative degree of safety is
not as high as for issues designated A-1.
The rating Prime-1 is the highest commercial paper rating assigned by Moody's.
Issuers or related supporting institutions rated Prime-1 are considered to have
a superior capacity for repayment of short-term promissory obligations. Issuers
or related supporting institutions rated Prime-2 are considered to have strong
capacity for repayment of short-term promissory 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.
The following summarizes the highest ratings used by Fitch for short-term
obligations:
F-1+ securities possess very strong credit quality. Issues assigned this
rating are regarded as having the strongest degree of assurance for
timely payment.
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F-1 securities possess exceptionally strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only
slightly less in degree than issues rated F-1+.
F-2 securities possess 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 the F-1+ and F-1 categories.
D&P uses the short-term ratings described above under "Description of Note
Ratings" for commercial paper.
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APPENDIX B
As stated in their Prospectus, the Portfolios may enter into futures
transactions and options thereon. Such transactions are described more fully in
this Appendix.
I. INTEREST RATE FUTURES CONTRACTS
Use of Interest Rate Futures Contracts. Bond prices are established in
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both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within three business days after the trade. In the
futures market, only a contract is made to purchase or sell a bond in the future
for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, a Portfolio could use interest rate
futures contracts as a defense, or hedge, against anticipated interest rate
changes. As described below, this could include the use of futures contract
sales to protect against expected increases in interest rates and the use of
futures contract purchases to offset the impact of interest rate declines.
A Portfolio presently could accomplish a similar result to that which it
hopes to achieve through the use of futures contracts by selling bonds with long
maturities and investing in bonds with short maturities when interest rates are
expected to increase, or conversely, selling short-term bonds and investing in
long-term bonds when interest rates are expected to decline. However, because
of the liquidity that is often available in the futures market, the protection
is more likely to be achieved, perhaps at a lower cost and without changing the
rate of interest being earned by a Portfolio, through using futures contracts.
Interest rate futures contracts can also be used by a Portfolio for
nonhedging (speculative) purposes to increase total return.
Description of Interest Rate Futures Contracts. An interest rate futures
----------------------------------------------
contract sale would create an obligation by a Portfolio, as seller, to deliver
the specific type of financial instrument called for in the contract at a
specific future time for a specified price. A futures contract purchase would
create an obligation by a Portfolio, as purchaser, to take delivery of the
specific type of financial instrument at a specific future time at a specific
price. The specific securities delivered or taken, respectively, at settlement
date, would not be determined until at or near that date. The determination
would be in
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accordance with the rules of the exchange on which the futures contract sale or
purchase was made.
Although interest rate futures contracts by their terms call for actual
delivery or acceptance of securities, in most cases the contracts are closed out
before a settlement date without the making or taking of delivery of securities.
Closing out a futures contract sale is effected by a Portfolio's entering into a
futures contract purchase for the same aggregate amount of the specific type of
financial instrument and the same delivery date. If the price of a sale exceeds
the price of the offsetting purchase, a Portfolio is immediately paid the
difference and thus realizes a gain. If the offsetting purchase price exceeds
the sale price, a Portfolio pays the difference and realizes a loss. Similarly,
the closing out of a futures contract purchase is effected by a Portfolio
entering into a futures contract sale. If the offsetting sale price exceeds the
purchase price, a Portfolio realizes a gain, and if the purchase price exceeds
the offsetting sale price, a Portfolio realizes a loss.
Interest rate futures contracts are traded in an auction environment on the
floors of several exchanges--principally, the Chicago Board of Trade, the
Chicago Mercantile Exchange and the -New York Futures Exchange. A Portfolio
would deal only in standardized contracts on recognized exchanges. Each
exchange guarantees performance under contract provisions through a clearing
corporation, a nonprofit organization managed by the exchange membership.
A public market now exists in futures contracts covering various financial
instruments including long-term United States Treasury Bonds and Notes;
Government National Mortgage Association (GNMA) modified pass-through mortgage
backed securities; three-month United States Treasury Bills; and ninety-day
commercial paper. A Portfolio may trade in any interest rate futures contracts
for which there exists a public market, including, without limitation, the
foregoing instruments.
II. INDEX FUTURES CONTRACTS
GENERAL. A bond index assigns relative values to the bonds included in the
index which fluctuates with changes in the market values of the bonds included.
A Portfolio may sell index futures contracts in order to offset a decrease
in market value of its portfolio securities that might otherwise result from a
market decline. A Portfolio may do so either to hedge the value of its
portfolio as a whole, or to protect against declines, occurring prior to sales
of securities, in the value of the securities to be sold. Conversely, a
Portfolio may purchase index futures contracts in anticipation of purchases of
securities. A long futures position
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may be terminated without a corresponding purchase of securities.
In addition, a Portfolio may utilize index futures contracts in
anticipation of changes in the composition of its portfolio holdings. For
example, in the event that a Portfolio expects to narrow the range of industry
groups represented in its holdings it may, prior to making purchases of the
actual securities, establish a long futures position based on a more restricted
index, such as an index comprised of securities of a particular industry group.
A Portfolio may also sell futures contracts in connection with this strategy, in
order to protect against the possibility that the value of the securities to be
sold as part of the restructuring of the portfolio will decline prior to the
time of sale.
Index futures contracts may also be used by a Portfolio for non-hedging
(speculative) purposes, to increase total return.
III. FUTURES CONTRACTS ON FOREIGN CURRENCIES (INTERNATIONAL BOND PORTFOLIO)
A futures contract on foreign currency creates a binding obligation on one
party to deliver, and a corresponding obligation on another party to accept
delivery of, a stated quantity of foreign currency, for an amount fixed in U.S.
dollars. Foreign currency futures may be used by a Portfolio for hedging
purposes in anticipation of fluctuations in exchange rates between the U.S.
dollars and other currencies arising from multinational transactions.
The International Bond Portfolio may also use futures contracts on foreign
currencies for non-hedging (speculative) purposes to increase total return.
IV. MARGIN PAYMENTS
Unlike purchases, or sales of portfolio securities, no price is paid or
received by a Portfolio upon the purchase or sale of a futures contract.
Initially, the Portfolio will be required to deposit with the broker or in a
segregated account with the Custodian or a sub-custodian an amount of liquid
assets, known as initial margin, based on the value of the contract. The nature
of initial margin in futures transactions is different from that of margin in
security transactions in that futures contract margin does not involve the
borrowing of funds by the customer to finance the transactions. Rather, the
initial margin is in the nature of a performance bond or good faith deposit on
the contract which is returned to the Portfolio upon termination of the futures
contract assuming all contractual obligations have been satisfied. Subsequent
payments, called variation margin, to and from the broker, will be made on a
daily basis as the price of the underlying instruments fluctuates making the
long and
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short positions in the futures contract more or less valuable, a process known
as marking-to-the-market. For example, when a particular Portfolio has
purchased a futures contract and the price of the contract has risen in response
to a rise in the underlying instruments, that position will have increased in
value and the Portfolio will be entitled to receive from the broker a variation
margin payment equal to that increase in value. Conversely, where the Portfolio
has purchased a futures contract and the price of the future contract has
declined in response to a decrease in the underlying instruments, the position
would be less valuable and the Portfolio would be required to make a variation
margin payment to the broker. At any time prior to expiration of the futures
contract, the Portfolio's adviser may elect to close the position by taking an
opposite position, subject to the availability of a secondary market, which will
operate to terminate the Portfolio's position in the futures contract. A final
determination of variation margin is then made, additional cash is required to
be paid by or released to the Portfolio, and the Portfolio realizes a loss or
gain.
V. RISKS OF TRANSACTIONS IN FUTURES CONTRACTS
There are several risks in connection with the use of futures by the
Portfolios. In connection with the use of futures for hedging purposes, one
risk arises because of the imperfect correlation between movements in the price
of the futures and movements in the price of the instruments which are the
subject of the hedge. The price of the future may move more than or less than
the price of the instruments being hedged. If the price of the futures moves
less than the price of the instruments which are the subject of the hedge, the
hedge will not be fully effective but, if the price of the instruments being
hedged has moved in an unfavorable direction, the Portfolio would be in a better
position than if it had not hedged at all. If the price of the instruments
being hedged has moved in a favorable direction, this advantage will be
partially offset by the loss on the futures. If the price of the futures moves
more than the price of the hedged instruments, the Portfolio involved will
experience either a loss or gain on the futures which will not be completely
offset by movements in the price of the instruments which are the subject of the
hedge. To compensate for the imperfect correlation of movements in the price of
instruments being hedged and movements in the price of futures contracts, the
Portfolio may buy or sell futures contracts in a greater dollar amount than the
dollar amount of instruments being hedged if the volatility over a particular
time period of the prices of such instruments has been greater than the
volatility over such time period of the futures, or if otherwise deemed to be
appropriate by Northern. Conversely, the Portfolios may buy or sell fewer
futures contracts if the volatility over a particular time period of the prices
of the instruments being hedged is less than the
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volatility over such time period of the futures contract being used, or if
otherwise deemed to be appropriate by Northern. It is also possible that, where
a Portfolio had sold futures to hedge its portfolio against a decline in the
market, the market may advance and the value of instruments held in the
Portfolio may decline. If this occurred, the Portfolio would lose money on the
futures and also experience a decline in value in its portfolio securities.
Where futures are purchased to hedge against a possible increase in the price
of securities before a Portfolio is able to invest its cash (or cash
equivalents) in an orderly fashion, it is possible that the market may decline
instead; if the Portfolio then concludes not to invest its cash at that time
because of concern as to possible further market decline or for other reasons,
the Portfolio will realize a loss on the futures contract that is not offset by
a reduction in the price of the instruments that were to be purchased.
In addition to the possibility that there may be an imperfect correlation, or
no correlation at all, between movements in the futures and the instruments
being hedged, the price of futures may not correlate perfectly with movement in
the cash market due to certain market distortions. Rather than meeting
additional margin deposit requirements, investors may close futures contracts
through off-setting transactions which could distort the normal relationship
between the cash and futures markets. Second, with respect to financial futures
contracts, the liquidity of the futures market depends on participants entering
into off-setting transactions rather than making or taking delivery. To the
extent participants decide to make or take delivery, liquidity in the futures
market could be reduced thus producing distortions. Third, from the point of
view of speculators, the deposit requirements in the futures market are less
onerous than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may also cause temporary
price distortions. Due to the possibility of price distortion in the futures
market, and because of the imperfect correlation between the movements in the
cash market and movements in the price of futures, a correct forecast of general
market trends or interest rate movements by Northern may still not result in a
successful hedging transaction over a short time frame.
Positions in futures may be closed out only on an exchange or board of trade
which provides a secondary market for such futures. Although the Portfolios
intend to purchase or sell futures only on exchanges or boards of trade where
there appear to be active secondary markets, there is no assurance that a liquid
secondary market on any exchange or board of trade will exist for any particular
contract or at any particular time. In such event, it may not be possible to
close a futures investment
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position, and in the event of adverse price movements, the Portfolios would
continue to be required to make daily cash payments of variation margin.
However, in the event futures contracts have been used to hedge portfolio
securities, such securities will generally not be sold until the futures
contract can be terminated. In such circumstances, an increase in the price of
the securities, if any, may partially or completely offset losses on the futures
contract. However, as described above, there is no guarantee that the price of
the securities will in fact correlate with the price movements in the futures
contract and thus provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary market in a
futures contract may be adversely affected by "daily price fluctuation limits"
established by commodity exchanges which limit the amount of fluctuation in a
futures contract price during a single trading day. Once the daily limit has
been reached in the contract, no trades may be entered into at a price beyond
the limit, thus preventing the liquidation of open futures positions. The
trading of futures contracts is also subject to the risk of trading halts,
suspensions, exchange or clearing house equipment failures, government
intervention, insolvency of a brokerage firm or clearing house or other
disruptions of normal activity, which could at times make it difficult or
impossible to liquidate existing positions or to recover excess variation margin
payments.
Successful use of futures by the Portfolios is also subject to Northern's
ability to predict correctly movements in the direction of the market. For
example, if a particular Portfolio has hedged against the possibility of a
decline in the market adversely affecting securities held by it and securities
prices increase instead, the Portfolio will lose part or all of the benefit to
the increased value of its securities which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such situations, if
the Portfolio has insufficient cash, it may have to sell securities to meet
daily variation margin requirements. Such sales of securities may be, but will
not necessarily be, at increased prices which reflect the rising market. The
Portfolios may have to sell securities at a time when they may be
disadvantageous to do so.
Futures purchased or sold by the International Bond Portfolio (and related
options) may be traded in foreign instruments. Participation in foreign futures
and foreign options transactions involves the execution and clearing of trades
on or subject to the rules of a foreign board of trade. Neither the National
Futures Association nor any domestic exchange regulates activities of any
foreign boards of trade, including the execution, delivery and clearing of
transactions, or has the power to compel enforcement of the rules of a foreign
board of trade or any applicable foreign law. This is true even
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if the exchange is formally linked to a domestic market so that a position taken
on the market may be liquidated by a transaction on another market. Moreover,
such laws or regulations will vary depending on the foreign country in which the
foreign futures or foreign options transaction occurs. For these reasons,
customers who trade foreign futures of foreign options contracts may not be
afforded certain of the protective measures provided by the Commodity Exchange
Act, the Commodity Futures Trading Commission's ("CFTC") regulations and the
rules of the National Futures Association and any domestic exchange, including
the right to use reparations proceedings before the CFTC and arbitration
proceedings provided by the National Futures Association or any domestic futures
exchange. In particular, the investments of the International Bond Portfolio's
in foreign futures or foreign options transactions may not be provided the same
protections in respect of transactions on United States futures exchanges. In
addition, the price of any foreign futures or foreign options contract and,
therefore the potential profit and loss thereon may be affected by any variance
in the foreign exchange rate between the time an order is placed and the time it
is liquidated, offset or exercised.
VI. OPTIONS ON FUTURES CONTRACTS
The Portfolios may purchase and write options on the futures contracts
described above. A futures option gives the holder, in return for the premium
paid, the right to buy (call) from or sell (put) to the writer of the option a
futures contract at a specified price at any time during the period of the
option. Upon exercise, the writer of the option is obligated to pay the
difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract, the holder, or writer,
of an option has the right to terminate its position prior to the scheduled
expiration of the option by selling, or purchasing an option of the same series,
at which time the person entering into the closing transaction will realize a
gain or loss. A Portfolio will be required to deposit initial margin and
variation margin with respect to put and call options on futures contracts
written by it pursuant to brokers' requirements similar to those described
above. Net option premiums received will be included as initial margin
deposits.
Investments in futures options involve some of the same considerations that
are involved in connection with investments in futures contracts (for example,
the existence of a liquid secondary market). See "Risks of Transactions in
Futures Contracts" above. In addition, the purchase or sale of an option also
entails the risk that changes in the value of the underlying futures contract
will not correspond to changes in the value of the option purchased. Depending
on the pricing of the option compared to either the futures contract upon which
it is based, or upon the price of any underlying instruments, an option may or
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may not be less risky than ownership of the futures contract or such
instruments. In general, the market prices of options can be expected to be
more volatile than the market prices on the underlying futures contract.
Compared to the purchase or sale of futures contracts, however, the purchase of
call or put options on futures contracts may, unlike futures contracts where the
risk of loss is potentially unlimited, frequently involve less potential risk to
the Portfolio because the maximum amount at risk is the premium paid for the
options (plus transaction costs). The writing of an option on a futures
contract involves risks similar to those risks relating to the sale of futures
contracts.
VII. OTHER MATTERS
Accounting for futures contracts will be in accordance with generally accepted
accounting principles.
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