<PAGE>
GOLDMAN SACHS TRUST
GS ADJUSTABLE RATE GOVERNMENT AGENCY FUND
GS SHORT-TERM GOVERNMENT AGENCY FUND
GS SHORT DURATION TAX-FREE FUND
GS CORE FIXED INCOME FUND
DATED MARCH 1, 1995
___________________
SUPPLEMENT DATED MARCH 29, 1995 TO THE ABOVE STATEMENT OF ADDITIONAL INFORMATION
- INSTITUTIONAL SHARES, ADMINISTRATION SHARES AND SERVICE SHARES
For the GS Core Fixed Income Fund Only: The following will be added after the
second full paragraph on page B-42 of the Statement of Additional Information:
The Core Fund may also invest in countries with emerging economies or
securities markets, including but not limited to certain countries in Asia and
Latin America, provided that no more than 5% of the Core Fund's total assets may
be invested in securities of such issuers.
Political and economic structures in many of such countries may be
undergoing significant evolution and rapid development, and such countries may
lack the social, political and economic stability characteristic of more
developed countries. Certain of such countries may have in the past failed to
recognize private property rights and have at times nationalized or expropriated
the assets of private companies. As a result, the risks described in this
Additional Statement regarding investment in foreign securities, including the
risks of nationalization or expropriation of assets, may be heightened. In
addition, unanticipated political or social developments may affect the value of
the Core Fund's investment 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 Core Fund's investments in
such countries illiquid and more volatile than investments in more developed
countries, and the Core Fund may be required to establish special custodial or
other arrangements before making certain investments in those countries. There
may be little financial or accounting information available with respect to
issuers located in certain of such countries, and it may be difficult as a
result to assess the value or prospects of an investment in such issuers.
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
INSTITUTIONAL SHARES
GS ADJUSTABLE RATE GOVERNMENT AGENCY FUND
GS SHORT-TERM GOVERNMENT AGENCY FUND
GS SHORT DURATION TAX-FREE FUND
GS CORE FIXED INCOME FUND
(EACH A PORTFOLIO OF GOLDMAN SACHS TRUST)
Goldman Sachs Trust
4900 Sears Tower
Chicago, Illinois 60606
This Statement of Additional Information (the "Additional Statement") is
not a prospectus. This Additional Statement should be read in conjunction with
the prospectuses for the Institutional Shares of each of GS Adjustable Rate
Government Agency Fund, GS Short-Term Government Agency Fund, GS Short Duration
Tax-Free Fund and GS Core Fixed Income, each dated March 1, 1995, as amended
and/or supplemented from time to time (each a "Prospectus"), which may be
obtained without charge from Goldman, Sachs & Co. by calling the telephone
number, or writing to one of the addresses, listed below.
TABLE OF CONTENTS
<TABLE>
<S> <C>
Introduction ............................................... B-3
Investment Objective and Policies .......................... B-7
Other Investments and Practices ............................ B-12
Investment Restrictions .................................... B-47
Management ................................................. B-57
Portfolio Transactions ..................................... B-71
Shares of the Trust ........................................ B-72
Net Asset Value ............................................ B-76
Taxation ................................................... B-76
Performance Information .................................... B-87
Other Information .......................................... B-95
Financial Statements ....................................... B-96
Appendix A ................................................. 1-A
Appendix B ................................................. 1-B
Appendix C ................................................. 1-C
Appendix D ................................................. 1-D
Appendix E ................................................. 1-E
</TABLE>
The date of this Additional Statement is March 1, 1995.
<PAGE>
GOLDMAN SACHS ASSET MANAGEMENT GOLDMAN, SACHS & CO.
ADVISER TO GS SHORT DURATION DISTRIBUTOR
TAX-FREE FUND AND GS CORE FIXED 85 BROAD STREET
INCOME FUND NEW YORK, NEW YORK
10004
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
GOLDMAN SACHS FUNDS GOLDMAN, SACHS & CO.
MANAGEMENT, L.P. TRANSFER AGENT
ADVISER TO GS ADJUSTABLE RATE 4900 SEARS TOWER
GOVERNMENT AGENCY FUND CHICAGO, ILLINOIS 60606
AND GS SHORT-TERM
GOVERNMENT AGENCY FUND
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
TOLL FREE .......800-621-2550
B-2
<PAGE>
INTRODUCTION
Goldman Sachs Trust (the "Trust") was organized under the laws of The
Commonwealth of Massachusetts on September 24, 1987 as a Massachusetts business
trust. The Trust assumed its current name on March 22, 1991. The Trustees of the
Trust have authority under the Declaration of Trust to create and classify
shares into separate series and to classify and reclassify any series of shares
into one or more classes without further action by shareholders. Pursuant
thereto, the Trustees have created GS Adjustable Rate Government Agency Fund
("Adjustable Rate Fund"), GS Short-Term Government Agency Fund ("Short-Term
Fund"), GS Short Duration Tax-Free Fund ("Short Duration Fund"), and GS Core
Fixed Income Fund ("Core Fund"). Adjustable Rate Fund, Short-Term Fund, Short
Duration Fund and Core Fund are each sometimes referred to herein as a "Fund"
and collectively as the "Funds." Short-Term Fund, Short Duration Fund and Core
Fund are each authorized to issue three classes of shares. These classes are:
Institutional Shares, Administration Shares and Service Shares. Adjustable Rate
Fund is authorized to issue four classes of shares. These classes are:
Institutional Shares, Administration Shares, Service Shares and Class A Shares.
Goldman Sachs Asset Management ("GSAM"), a separate operating division
of Goldman, Sachs & Co. ("Goldman Sachs"), serves as the investment adviser to
Short Duration Fund and Core Fund. Goldman Sachs Funds Management, L.P.
("FMLP"), an affiliate of Goldman Sachs, serves as the investment adviser to
Adjustable Rate Fund and Short-Term Fund. GSAM and FMLP are each sometimes
referred to herein as the "Adviser" and collectively herein as the "Advisers."
In addition, Goldman Sachs serves as each Fund's distributor and transfer agent.
Each Fund's custodian is State Street Bank and Trust Company.
The Goldman Sachs Mutual Funds Group ("IMG") offers banks, corporate cash
managers, investment advisers and other institutional investors a family of
professionally-managed mutual and money market funds, including fixed income and
equity funds, and a range of related services. IMG is part of GSAM, a separate
operating division of Goldman Sachs. All products are designed to provide
clients with the benefit of the expertise of GSAM and its affiliates in security
selection, asset allocation, portfolio construction and day-to-day management.
The hallmark of IMG is personalized service, which reflects the priority
that Goldman Sachs places on serving client interests. As IMG clients,
shareholders will be assigned an Account Administrator ("AA"), who is ready to
help shareholders with questions concerning their accounts. During business
hours, shareholders can call their AA through a toll-free number to place
purchase or redemption orders or obtain portfolio and account information. The
AA can also answer inquiries about rates of
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return, portfolio composition and holdings and guide shareholders through
operational details. An IMG client can also utilize SMART/sm/ personal computer
software system which allows holders to purchase and redeem shares and also
obtain portfolio and account information directly.
Because each Fund's shares may be redeemed upon request of a shareholder on
any business day at net asset value, the Funds offer greater liquidity than many
competing investments, such as certificates of deposit and direct investments in
certain securities in which the respective Fund may invest.
The following information relates to and supplements the description of
each Fund's investment policies contained in their respective Prospectuses. See
each Fund's Prospectus for a fuller description of the Fund's investment
objective and policies. Investing in the Funds entails certain risks and there
is no assurance that a Fund will achieve its objective.
ADJUSTABLE RATE FUND AND SHORT-TERM FUND
Adjustable Rate Fund and Short-Term Fund are both designed for investors
who seek a high level of high current income, relative stability of principal
and the highest credit quality of U.S. Government agency guaranteed securities,
without incurring the administrative and accounting burdens involved in direct
investment. Such investors also prefer experienced professional management and
administration, and liquidity.
Market and economic conditions may affect the investments of Adjustable
Rate Fund and Short-Term Fund differently than the investments normally
purchased by such investors. Relative to U.S. Treasury and non-fluctuating
money market instruments, the market value of adjustable rate mortgage
securities in which Adjustable Rate Fund will invest and in which Short-Term
Fund may invest may be adversely affected by sharp increases in market interest
rates. Conversely, sharp decreases in market interest rates may result in less
capital appreciation for adjustable rate mortgage securities in relation to U.S.
Treasury and money market investments.
HIGH CURRENT INCOME. Adjustable Rate Fund and Short-Term Fund seek a
-------------------
higher current yield than a money market fund, since they can invest in longer-
term, higher yielding securities, and may utilize certain investment techniques
not available to a money market fund. Similarly, the Adjustable Rate Fund and
Short-Term Fund seek a higher yield than that offered by bank certificates of
deposit and money market accounts. However, the Adjustable Rate Fund and Short-
Term Fund do not maintain a constant net asset value per share and are subject
to greater fluctuations in the value of their shares than a money market fund.
Unlike bank certificates of deposit and money market accounts, investments in
shares of the Funds are not insured or guaranteed by any government agency. Each
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of the Adjustable Rate Fund and Short-Term Fund seeks to provide such high
current income without sacrificing credit quality.
RELATIVE LOW VOLATILITY OF PRINCIPAL. Adjustable Rate Fund seeks to
-------------------------------------
minimize net asset value fluctuations by investing primarily in adjustable rate
mortgage-backed securities, maintaining a maximum duration equal to that of a
two-year U.S. Treasury security and a target duration equal to that of a six-
month to one-year U.S. Treasury security, and utilizing certain active
management techniques to hedge interest rate risk. Short-Term Fund seeks to
minimize net asset value fluctuations by utilizing certain interest rate hedging
techniques and by maintaining an option-adjusted duration of not more than a 3-
year U.S. Treasury security (although) its actual option-adjusted duration is
expected to equal that of a 2-year U.S. Treasury security. There is no
assurance that these strategies for the Adjustable Rate Fund and Short-Term Fund
will always be successful. Each Fund's net asset value per share will fluctuate
more than that of a money market fund.
PROFESSIONAL MANAGEMENT AND ADMINISTRATION. Investors who invest in
-------------------------------------------
securities of the Government National Mortgage Association and other mortgage-
backed securities may prefer professional management and administration of their
mortgage-backed securities portfolios because a well-diversified portfolio of
such securities emphasizing minimal fluctuation of net asset value requires
significant active management as well as significant accounting and
administrative resources.
SHORT DURATION FUND
Short Duration Fund is not a money market fund. It is designed for
investors who seek the tax benefits associated with investing in municipal
securities and who are able to accept greater risk with the possibility of
higher returns than investors in municipal money market funds. While municipal
money market funds almost always maintain a constant net asset value, they must
meet stringent high quality credit standards, their portfolios must be broadly
diversified and their portfolio securities must have remaining maturities of 397
days or less. An example of an "eligible" investment for the Short Duration
Fund is auction rate municipal securities, which generally have higher yields
than money market municipal securities, but which typically are not eligible
investments for municipal money market funds.
In addition, unlike a municipal money market fund, the Short Duration
Fund's increased investment flexibility permits its portfolio to be more easily
adjusted to reflect the shape of the current yield curve as well as to respond
to anticipated developments that might affect the shape of the yield curve.
Investors who wish to invest in municipal securities may find
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<PAGE>
that a mutual fund structure offers some important advantages when compared to
investing in individual municipal securities, including:
. The ratings given to municipal securities by the rating
organizations are difficult to evaluate. For example, some
municipal securities with relatively low credit ratings have yields
comparable to municipal securities with much higher ratings. The
credit research professionals at Goldman Sachs closely follow
market events and are well positioned to judge current and expected
credit conditions of municipal issuers;
. Because of the relative inefficiency of the secondary market in
municipal securities, the value of an individual municipal security
is often difficult to determine. As such, investors may obtain a
wide range of different prices when asking for quotes from
different dealers. In addition, a dealer may have a large
inventory of a particular issue that it wants to reduce. Obtaining
the best overall prices can require extensive negotiation, which is
a function performed by the portfolio manager; and
. Industry and geographical diversification are important
considerations for municipal investors. Short Duration Fund is
designed to provide this diversification.
CORE FUND
Core Fund is designed for investors seeking a total return consisting
of both income and capital appreciation that exceeds the total return of the
Lehman Brothers Aggregate Bond Index, without incurring the administrative and
accounting burdens involved in direct investment. Such investors also prefer
liquidity, experienced professional management and administration, a
sophisticated investment process, and the convenience of a mutual fund
structure. Core Fund may be appropriate as part of a balanced investment
strategy consisting of stocks, bonds and cash or as a complement to positions in
other types of fixed income investments.
Core Fund's overall returns are generally likely to move in the
opposite direction from interest rates. Therefore, when interest rates decline,
Core Fund's return is likely to increase. Conversely, when interest rates
increase, Core Fund's return is likely to decline. However, the Adviser
believes that, given the flexibility of managers to invest in a diversified
portfolio of securities, Core Fund's return is not likely to decline as quickly
as that of other fixed income funds with a comparable average portfolio
duration. In exchange for accepting a higher degree of potential share price
fluctuation, investors have the opportunity
B-6
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to achieve a higher return from Core Fund than from shorter term investments.
A SOPHISTICATED INVESTMENT PROCESS. Core Fund's interest rate risk,
----------------------------------
including overall market exposure and the spread risk of particular sectors and
securities, will be controlled through active portfolio management techniques.
Core Fund's investment process starts with a review of trends for the overall
economy as well as for different sectors of the fixed income securities markets.
Goldman Sachs' portfolio managers then analyze yield spreads, implied volatility
and the shape of the yield curve. In planning Core Fund's portfolio investment
strategies, the Adviser is able to draw upon the economic and fixed income
research resources of Goldman Sachs. The Adviser will use a sophisticated
analytical process including Goldman Sachs' proprietary mortgage prepayment
model and option-adjusted spread model to assist in structuring and maintaining
Core Fund's investment portfolio. In determining Core Fund's investment
strategy and making market timing decisions, the Adviser will have access to
input from Goldman Sachs' economists, fixed income analysts and mortgage
quantitative specialists.
EXPERIENCED MANAGEMENT. Successfully creating and managing a diversified
----------------------
portfolio of securities requires professionals with extensive experience.
Goldman Sachs' highly skilled portfolio management team brings together many
years of experience in the analysis, valuation and trading of U.S. and foreign
fixed income securities.
INVESTMENT OBJECTIVES AND POLICIES
ADJUSTABLE RATE FUND
The investment objective of Adjustable Rate Fund is a high level of
current income, consistent with low volatility of principal. Adjustable Rate
Fund will seek to achieve its objective through investment in securities issued
or guaranteed by the U.S. Government, its agencies or instrumentalities. Under
normal circumstances, at least 65% of Adjustable Rate Fund's total assets will
consist of adjustable rate mortgage pass-through securities and other mortgage
securities with periodic interest rate resets, which are issued or guaranteed by
such U.S. Government entities. The primary issuers or guarantors of such
securities currently include the Federal National Mortgage Association ("Fannie
Mae"), the Federal Home Loan Mortgage Corporation ("Freddie Mac") and the
Government National Mortgage Association ("Ginnie Mae"), although Adjustable
Rate Fund may invest in securities issued or guaranteed by other agencies or
instrumentalities in the future. Adjustable Rate Fund may also invest in other
mortgage-backed securities, and other obligations issued or guaranteed by the
U.S. Government, its agencies and instrumentalities, as well as repurchase
agreements collateralized by such securities. Adjustable Rate Fund may, for
B-7
<PAGE>
temporary defensive purposes, hold or invest more than 35% of its total assets
in cash, U.S. Treasury securities or high quality money market instruments,
including commercial paper, bankers' acceptances, repurchase agreements or other
debt obligations with a remaining maturity of one year or less. Adjustable Rate
Fund may employ certain active management techniques, including the use of
futures (including options on futures), mortgage and interest rate swaps and
interest rate floors, caps and collars. Adjustable Rate Fund's investments in
mortgage pass-through securities and other securities representing an interest
in or collateralized by adjustable and fixed-rate mortgage loans ("Mortgage-
Backed Securities") entail certain risks. There is no assurance that Adjustable
Rate Fund will achieve its objective.
SHORT-TERM FUND
The investment objective of Short-Term Fund is to achieve a high level
of current income. Secondarily, Short-Term Fund may, in seeking current income,
also consider the potential for capital gains. Short-Term Fund pursues its
objectives through investment in securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities and repurchase agreements
pertaining thereto. These securities may include Mortgage-Backed Securities.
There is no assurance that these objectives of Short-Term Fund will be achieved.
SHORT DURATION FUND
Short Duration Fund's investment objective is to provide investors with a
high level of current income, consistent with relatively low volatility of
principal, that is exempt from regular federal income tax. Short Duration Fund
will seek to achieve its objective primarily through investments in fixed income
securities ("Tax Free Securities") issued by or on behalf of states, territories
and possessions of the United States (including the District of Columbia) and
their political subdivisions, agencies and instrumentalities, the interest on
which is exempt from regular federal income tax and is not a tax preference item
under the federal alternative minimum tax. In addition, Tax-Free Securities
include participation interests in such securities the interest on which is, in
the opinion of counsel, exempt from such taxes.
Under normal market conditions, Short Duration Fund will invest at
least 80% of its net assets in Tax-Free Securities. Although it does not expect
to do so, Short Duration Fund may invest up to 20% of its net assets in private
activity bonds. Interest on certain private activity bonds may, when
distributed by Short Duration Fund, increase the liability, if any, of certain
investors for the federal alternative minimum tax. Private activity bonds and
Tax-Free Securities are referred to herein as "Municipal Securities."
B-8
<PAGE>
Short Duration Fund's investments in Municipal Securities will at the
time of investment be rated at least A by Standard & Poor's Ratings Group
("Standard & Poor's") or Moody's Investors Service, Inc. ("Moody's") or their
equivalent ratings or, if unrated by such rating organizations, determined by
the Adviser to be of comparable credit quality. The credit rating assigned to
Municipal Securities by these rating agencies or by the Adviser may reflect the
existence of guarantees, letters of credit or other credit enhancement features
available to the issuers or holders of such Municipal Securities.
Although Short Duration Fund is not expected to do so, Short Duration
Fund may invest as much as 20% of its net assets in taxable investments which
are obligations issued or guaranteed by the U.S. Government, its agencies and
instrumentalities and repurchase agreements collateralized by U.S. Government
securities ("Taxable Investments"). Short Duration Fund may invest more than
20% of its net assets in Taxable Investments for temporary defensive purposes
when, in the judgment of the Adviser, market conditions warrant. Except for
such temporary investments, at no time will Short Duration Fund's investments in
private activity bonds and Taxable Investments exceed, in the aggregate, 20% of
Short Duration Fund's net assets.
Short Duration Fund will maintain an average weighted portfolio
duration of two to three years. The individual Municipal Securities in which
the Short Duration Fund investments will have effective maturities of five years
or less. The terms "duration" and "effective maturity" are defined in Short
Duration Fund's Prospectus under "Investment Objective and Policies." There can
be no assurance that Short Duration Fund will achieve its investment objective.
CORE FUND
Core Fund's investment objective is to provide investors with a total
return consisting of capital appreciation and income that exceeds the total
return of the Lehman Brothers Aggregate Bond Index (the "Index"). There can be
no assurance that Core Fund will achieve its investment objective.
Core Fund will seek to achieve its objective by investing, under normal
market conditions, primarily in fixed income securities, including securities
issued or guaranteed by the U.S. Government or its agencies, authorities,
instrumentalities or sponsored enterprises, corporate securities, Mortgage-
Backed Securities, and asset-backed securities. The Adviser will determine
periodically the weighting of such securities based upon the Adviser's
expectation for changes in interest rates, market conditions, the credit quality
of individual issuers and other factors it deems relevant. The Adviser will have
access to the research of, and proprietary technical models developed by,
Goldman
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Sachs and will apply quantitative and qualitative analysis in determining the
appropriate allocations among issuers and types of securities.
The fixed income securities in which Core Fund invests will, at the
time of investment, be rated at least BBB by Standard & Poor's, Baa by Moody's
or BBB by Fitch Investors Service, Inc. ("Fitch") or their respective equivalent
ratings or, if unrated by such rating organizations, determined by the Adviser
to be of comparable credit quality. A security will be deemed to have met this
requirement if it receives the minimum required rating from at least one of such
rating organizations even though it has been rated below the minimum rating by
one or more other rating organizations.
Core Fund will maintain, under normal market conditions, an average
portfolio duration within a range equal to the duration of the Index plus or
minus one year. The Adviser may, however, decrease Core Fund's average
portfolio duration without limit if the Adviser believes that a shorter duration
is warranted by the outlook for interest rates or market conditions. There is
no limitation as to Core Fund's maximum weighted average portfolio maturity or
the maximum stated maturity with respect to individual securities. During the
past ten years, the average duration of the Index has generally varied between
4.2 and 5.4 years.
The fixed income securities in which Core Fund may invest include
obligations of foreign issuers and obligations denominated in U.S. dollars or
foreign currencies. The non-dollar denominated fixed income securities in which
Core Fund may invest will, at the time of investment, be rated at least AA by
Standard & Poor's, Aa by Moody's or AA by Fitch or, if unrated by such rating
organizations, determined by the Adviser to be of comparable credit quality.
Core Fund's investments in fixed income securities may also include Short-Term
Investments (as defined below), convertible securities, custody receipts and
municipal securities.
It is expected that Core Fund will employ certain interest rate
management techniques. These techniques will be used both to hedge the interest
rate risks associated with Core Fund's portfolio securities and to seek to
increase total return. Such techniques include options on securities, futures
contracts, options on futures contracts, interest rate and mortgage swaps,
interest rate caps, floors and collars, forward commitments, lending portfolio
securities, repurchase agreements and mortgage dollar rolls. Core Fund may also
engage in certain currency management techniques, including futures and options
on currencies, forward foreign currency exchange contracts and currency swaps,
but only for hedging purposes.
The Adviser will utilize a variety of investment strategies to seek to
achieve Core Fund's investment objective, while complying
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with Core Fund's duration and credit quality requirements. Three of these
strategies are described below.
MARKET SECTOR SELECTION. Market sector selection is the underweighting or
-----------------------
overweighting of one or more market sectors (i.e., U.S. Treasuries, U.S.
Government agencies, corporate securities, Mortgage-Backed Securities and asset-
backed securities). The Adviser may decide to overweight or underweight a given
market sector or subsector (e.g., within the corporate sector, industrials,
financial issuers and utilities) based on, among other things, expectations of
future yield spreads between different sectors or subsectors. As an example,
when the Adviser expects spreads between yields for corporates and U.S.
Treasuries to narrow, the Adviser may overweight corporates relative to U.S.
Treasuries to take advantage of expected price appreciation. As of January 31,
1995, the weighting of sectors included in the Index was as follows: U.S.
Treasury securities -- 47%; Mortgage-Backed Securities -- 29%; Corporate
securities -- 16%; U.S. Government agencies -- 7% and Asset-Backed securities --
1%.
YIELD CURVE STRATEGY. Yield curve strategy consists of overweighting
--------------------
or underweighting different maturity sectors relative to a benchmark to take
advantage of the shape of the yield curve. Three alternative maturity sector
selections are available: a "barbell" strategy in which short and long maturity
sectors are overweighted while intermediate maturity sectors are underweighted
which may be used when the Adviser expects the yield curve to flatten; a
"bullet" strategy in which, conversely, short- and long-maturity sectors are
underweighted while intermediate-maturity sectors are overweighted when the
Adviser expects the yield curve either to steepen or to flatten less than
implied by forward rates; and a "neutral yield curve" strategy in which the
maturity distribution mirrors that of a benchmark.
ISSUER SELECTION. Issuer selection is the purchase and sale of
----------------
corporate securities based on a corporation's current and expected credit
standing (within the constraints imposed by the Fund's minimum credit quality
requirements). This strategy focuses on four types of investment grade
corporate issuers. Selection of securities from the first type of issuers --
those with low but stable credit -- enhances total returns by providing
incremental yield. Selecting securities from the second type of issuers --those
with low and intermediate but improving credit quality --enhances total returns
in two stages. Initially, these securities provide incremental yield.
Eventually, price appreciation occurs relative to alternative securities as
credit quality improves, the nationally recognized statistical rating
organizations upgrade credit ratings, and credit spreads narrow. Securities
from the third type of issuers -- issuers with deteriorating credit quality --
will be avoided, since total returns are enhanced by avoiding the widening of
credit spreads and the consequent relative price depreciation. Finally, total
returns can be enhanced by focusing
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on securities that are rated differently by different rating organizations. If
the securities are trading in line with the higher published quality rating
while the Adviser concurs with the lower published quality rating, the
securities would generally be sold and any potential price deterioration
avoided. On the other hand, if the securities are trading in line with the
lower published quality rating while the higher published quality rating is
considered more realistic, the securities may be purchased in anticipation of
the expected market reevaluation and relative price appreciation.
OTHER INVESTMENTS AND PRACTICES
OBLIGATIONS OF THE UNITED STATES, ITS AGENCIES AND INSTRUMENTALITIES
Each Fund may invest in U.S. Government securities, which are obligations
issued or guaranteed by the U.S. Government and its agencies, authorities or
instrumentalities. Some U.S. Government securities (such as Treasury bills,
notes and bonds, which differ only in their interest rates, maturities and times
of issuance) are supported by the full faith and credit of the United States of
America. Others, such as obligations issued or guaranteed by U.S. Government
agencies, authorities or instrumentalities, are supported either by (a) the full
faith and credit of the U.S. Government (such as securities of the Small
Business Administration), (b) the right of the issuer to borrow from the
Treasury (such as securities of Federal Home Loan Banks), (c) the discretionary
authority of the U.S. Government to purchase the agency's obligations (such as
securities of Fannie Mae) or (d) only the credit of the issuer (such as
securities of the Financing Corporation). The U.S. Government is under no legal
obligation, in general, to purchase the obligations of its agencies, authorities
and instrumentalities. No assurance can be given that the U.S. Government will
provide financial support to the U.S. Government agencies, authorities or
instrumentalities in the future.
Securities guaranteed as to principal and interest by the U.S. Government
and its agencies, authorities or instrumentalities are deemed to include (a)
securities for which the payment of principal and interest is backed by a
guaranty of the U.S. Government or its agencies, authorities or
instrumentalities and (b) participations in loans made to foreign governments or
their agencies that are so guaranteed. The secondary market for certain of these
participations is limited. Such participations may therefore be regarded as
illiquid.
The Funds may also invest in separately traded principal and interest
components of securities guaranteed or issued by the U.S. Treasury if such
components are traded independently under the separate trading of registered
interest and principal of securities
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program ("STRIPS").
CUSTODIAL RECEIPTS
The Funds may each acquire custodial receipts in respect of U.S. Government
securities. Such custodial receipts evidence ownership of future interest
payments, principal payments or both on certain notes or bonds. These custodial
receipts are known by various names, including "Treasury Receipts," "Treasury
Investors Growth Receipts" ("TIGRs"), and "Certificates of Accrual on Treasury
Securities" ("CATS"). For certain securities law purposes, custodial receipts
are not considered U.S. Government securities.
MORTGAGE LOANS AND MORTGAGE-BACKED SECURITIES
Adjustable Rate Fund, Short-Term Fund and Core Fund invest in mortgage
loans and Mortgage-Backed Securities.
GENERAL CHARACTERISTICS. Each mortgage pool underlying Mortgage-
-----------------------
Backed Securities consists of mortgage loans evidenced by promissory notes
secured by first mortgages or first deeds of trust or other similar security
instruments creating a first lien on owner occupied and non-owner occupied one-
unit to four-unit residential properties, multi-family (i.e., five or more)
properties, agriculture properties, commercial properties and mixed use
properties (the "Mortgaged Properties"). The Mortgaged Properties may consist
of detached individual dwelling units, multi-family dwelling units, individual
condominiums, townhouses, duplexes, triplexes, fourplexes, row houses,
individual units in planned unit developments and other attached dwelling units.
The Mortgage Properties may also include residential investment properties and
second homes.
The investment characteristics of adjustable and fixed rate Mortgage-
Backed Securities differ from those of traditional fixed income securities. The
major differences include the payment of interest and principal on Mortgage-
Backed Securities on a more frequent (usually monthly) schedule, and the
possibility that principal may be prepaid at any time due to prepayments on the
underlying mortgage loans or other assets. These differences can result in
significantly greater price and yield volatility than is the case with
traditional fixed income securities. As a result, if a Fund purchases Mortgage-
Backed Securities at a premium, a faster than expected prepayment rate will
reduce both the market value and the yield to maturity from those which were
anticipated. A prepayment rate that is slower than expected will have the
opposite effect of increasing yield to maturity and market value. Conversely,
if a Fund purchases Mortgage-Backed Securities at a discount, faster than
expected prepayments will increase, while slower than expected prepayments will
reduce, yield to maturity and
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<PAGE>
market values. To the extent that the Funds invest in Mortgage-Backed
Securities, the Advisers will seek to manage these potential risks by investing
in a variety of Mortgage-Backed Securities and by using certain hedging
techniques.
ADJUSTABLE RATE MORTGAGE LOANS ("ARMS"). ARMs generally provide for a
---------------------------------------
fixed initial mortgage interest rate for a specified period of time.
Thereafter, the interest rates (the "Mortgage Interest Rates") may be subject to
periodic adjustment based on changes in the applicable index rate (the "Index
Rate"). The adjusted rate would be equal to the Index Rate plus a fixed
percentage spread over the Index Rate established for each ARM at the time of
its origination.
Adjustable interest rates can cause payment increases that some mortgagors
may find difficult to make. However, certain ARMs may provide that the Mortgage
Interest Rate may not be adjusted to a rate above an applicable lifetime maximum
rate or below an applicable lifetime minimum rate for such ARM. Certain ARMs may
also be subject to limitations on the maximum amount by which the Mortgage
Interest Rate may adjust for any single adjustment period (the "Maximum
Adjustment"). Other ARMs ("Negatively Amortizing ARMs") may provide instead or
as well for limitations on changes in the monthly payment on such ARMs.
Limitations on monthly payments can result in monthly payments which are greater
or less than the amount necessary to amortize a Negatively Amortizing ARM by its
maturity at the Mortgage Interest Rate in effect in any particular month. In the
event that a monthly payment is not sufficient to pay the interest accruing on a
Negatively Amortizing ARM, any such excess interest is added to the principal
balance of the loan, causing negative amortization, and will be repaid through
future monthly payments. It may take borrowers under Negatively Amortizing ARMs
longer periods of time to build up equity and may increase the likelihood of
default by such borrowers. In the event that a monthly payment exceeds the sum
of the interest accrued at the applicable Mortgage Interest Rate and the
principal payment which would have been necessary to amortize the outstanding
principal balance over the remaining term of the loan, the excess (or
"accelerated amortization") further reduces the principal balance of the ARM.
Negatively Amortizing ARMs do not provide for the extension of their original
maturity to accommodate changes in their Mortgage Interest Rate. As a result,
unless there is a periodic recalculation of the payment amount (which there
generally is), the final payment may be substantially larger than the other
payments. These limitations on periodic increases in interest rates and on
changes in monthly payments protect borrowers from unlimited interest rate and
payment increases.
There are two main categories of indices which provide the basis for
rate adjustments on ARMs: those based on U.S. Treasury securities and those
derived from a calculated measure, such as a
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<PAGE>
cost of funds index or a moving average of mortgage rates. Commonly utilized
indices include the one-year, three-year and five-year constant maturity
Treasury rates, the three-month Treasury bill rate, the 180-day Treasury bill
rate, rates on longer-term Treasury securities, the 11th District Federal Home
Loan Bank Cost of Funds, the National Median Cost of Funds, the one-month,
three-month, six-month or one year London Interbank Offered Rate, the prime
rate of a specific bank or commercial paper rates. Some indices, such as the
one-year constant maturity Treasury rate, closely mirror changes in market
interest rate levels. Others, such as the 11th District Federal Home Loan Bank
Cost of Funds index, tend to lag behind changes in market rate levels and tend
to be somewhat less volatile. The degree of volatility in the market value of
each Fund's portfolio and therefore in the net asset value of the Adjustable
Rate Fund and Short-Term Fund's shares will be a function of the length of the
interest rate reset periods and the degree of volatility in the applicable
indices.
ADJUSTABLE RATE MORTGAGE-BACKED SECURITIES MARKET. The market for
-------------------------------------------------
U.S. Government agency adjustable rate Mortgage-Backed Securities has developed
rapidly in recent years, with over $217.9 billion in such securities now issued.
ARMs have accounted for a major portion of mortgage originations since federally
chartered thrifts were permitted to originate them in 1981. The growth of the
market for U.S. Government agency adjustable rate Mortgage-Backed Securities is
the result of this increasing popularity of ARMs, new investment products and
research.
GOVERNMENT GUARANTEED MORTGAGE-BACKED SECURITIES. There are several
------------------------------------------------
types of guaranteed Mortgage-Backed Securities currently available, including
guaranteed mortgage pass-through certificates and multiple class securities,
which include guaranteed Real Estate Mortgage Investment Conduit Certificates
("REMIC Certificates"), other collateralized mortgage obligations and stripped
Mortgage-Backed Securities. Adjustable Rate Fund, Short-Term Fund and Core Fund
are permitted to invest in other types of Mortgage-Backed Securities that may be
available in the future to the extent consistent with their respective
investment policies and objectives.
GUARANTEED MORTGAGE PASS-THROUGH SECURITIES
GINNIE MAE CERTIFICATES. The Government National Mortgage Association
-----------------------
("Ginnie Mae") is a wholly-owned corporate instrumentality of the United States.
Ginnie Mae is authorized to guarantee the timely payment of the principal of and
interest on certificates that are based on and backed by a pool of mortgage
loans insured by the Federal Housing Administration ("FHA Loans"), or guaranteed
by the Veterans Administration ("VA Loans"), or by pools of other eligible
mortgage loans. In order to meet its obligations under any guaranty, Ginnie Mae
is authorized to borrow
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from the U.S. Treasury in an unlimited amount.
FANNIE MAE CERTIFICATES. The Federal National Mortgage Association
-----------------------
("Fannie Mae") is a stockholder-owned corporation chartered under an act of the
U.S. Congress. Each Fannie Mae Certificate is issued and guaranteed by Fannie
Mae and represents an undivided interest in a pool of mortgage loans (a "Pool")
formed by Fannie Mae. Each Pool consists of residential mortgage loans
("Mortgage Loans") either previously owned by Fannie Mae or purchased by it in
connection with the formation of the Pool. The Mortgage Loans may be either
conventional Mortgage Loans (i.e., not insured or guaranteed by any U.S.
Government agency) or Mortgage Loans that are either insured by the Federal
Housing Administration ("FHA") or guaranteed by the Veterans Administration
("VA"). However, the Mortgage Loans in Fannie Mae Pools are primarily
conventional Mortgage Loans. The lenders originating and servicing the Mortgage
Loans are subject to certain eligibility requirements established by Fannie Mae.
Fannie Mae has certain contractual responsibilities. With respect to
each Pool, Fannie Mae is obligated to distribute scheduled monthly installments
of principal and interest after Fannie Mae's servicing and guaranty fee, whether
or not received, to Certificate holders. Fannie Mae also is obligated to
distribute to holders of Certificates an amount equal to the full principal
balance of any foreclosed Mortgage Loan, whether or not such principal balance
is actually recovered. The obligations of Fannie Mae under its guaranty of the
Fannie Mae Certificates are obligations solely of Fannie Mae.
FREDDIE MAC CERTIFICATES. The Federal Home Loan Corporation ("Freddie
------------------------
Mac") is a publicly held U.S. Government sponsored enterprise. The principal
activity of Freddie Mac currently is the purchase of first lien, conventional,
residential mortgage loans and participation interests in such mortgage loans
and their resale in the form of mortgage securities, primarily Freddie Mac
Certificates. A Freddie Mac Certificate represents a pro rata interest in a
group of mortgage loans or participations in mortgage loans (a "Freddie Mac
Certificate group") purchased by Freddie Mac.
Freddie Mac guarantees to each registered holder of a Freddie Mac
Certificate the timely payment of interest at the rate provided for by such
Freddie Mac Certificate (whether or not received on the underlying loans).
Freddie Mac also guarantees to each registered Certificate holder ultimate
collection of all principal of the related mortgage loans, without any offset or
deduction, but does not, generally, guarantee the timely payment of scheduled
principal. The obligations of Freddie Mac under its guaranty of Freddie Mac
Certificates are obligations solely of Freddie Mac.
The mortgage loans underlying the Freddie Mac and Fannie Mae Certificates
consist of adjustable rate or fixed rate mortgage
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<PAGE>
loans with original terms to maturity of between five and thirty years.
Substantially all of these mortgage loans are secured by first liens on one- to
four-family residential properties or multi-family projects. Each mortgage
loans must meet the applicable standards set forth in the law creating Freddie
Mac or Fannie Mae. A Freddie Mac Certificate group may include whole loans,
participation interests in whole loans, undivided interests in whole loans and
participations comprising another Freddie Mac Certificate group.
CONVENTIONAL MORTGAGE LOANS. The conventional mortgage loans underlying
---------------------------
the Freddie Mac and Fannie Mae Certificates will consist of adjustable rate or
fixed rate mortgage loans with original terms to maturity of between five and
thirty years. Substantially all of these mortgage loans are secured by first
liens on one- to four-family residential properties or multi-family projects.
Each mortgage loan must meet the applicable standards set forth in the law
creating Freddie Mac or Fannie Mae. A Freddie Mac Certificate group may include
whole loans, participation interests in whole loans, undivided interests on
whole loans and participations comprising another Freddie Mac Certificate group.
MORTGAGE PASS-THROUGH SECURITIES. Adjustable Rate Fund, Short-Term
--------------------------------
Fund and Core Fund may invest in government guaranteed mortgage pass-through
securities ("Mortgage Pass-Throughs"), that are fixed or adjustable rate
mortgage-backed securities which provide for monthly payments that are a "pass-
through" of the monthly interest and principal payments (including any
prepayments) made by the individual borrowers on the pooled mortgage loans, net
of any fees or other amounts paid to any guarantor, administrator and/or
servicer of the underlying mortgage loans. Core Fund may also invest in
privately issued Mortgage Pass-Throughs.
The following discussion describes only a few of the wide variety of
structures of Mortgage Pass-Throughs that are available or may be issued.
DESCRIPTION OF CERTIFICATES. Mortgage Pass-Throughs may be issued in
---------------------------
one or more classes of senior certificates and one or more classes of
subordinate certificates. Each such class may bear a different pass-through
rate. Generally, each certificate will evidence the specified interest of the
holder thereof in the payments of principal or interest or both in respect of
the mortgage pool comprising part of the trust fund for such certificates.
Any class of certificates may also be divided into subclasses entitled
to varying amounts of principal and interest. If a REMIC election has been
made, certificates of such subclasses may be entitled to payments on the basis
of a stated principal balance and stated interest rate, and payments among
different subclasses may be made on a sequential, concurrent, pro rata or
--- ----
disproportionate
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<PAGE>
basis, or any combination thereof. The stated interest rate on any such
subclass of certificates may be a fixed rate or one which varies in direct or
inverse relationship to an objective interest index.
Generally, each registered holder of a certificate will be entitled to
receive its pro rata share of monthly distributions of all or a portion of
--- ----
principal of the underlying mortgage loans or of interest on the principal
balances thereof, which accrues at the applicable mortgage pass-through rate, or
both. The difference between the mortgage interest rate and the related
mortgage pass-through rate (less the amount, if any, of retained yield) with
respect to each mortgage loan will generally be paid to the servicer as a
servicing fee. Since certain adjustable rate mortgage loans included in a
mortgage pool may provide for deferred interest (i.e., negative amortization),
the amount of interest actually paid by a mortgagor in any month may be less
than the amount of interest accrued on the outstanding principal balance of the
related mortgage loan during the relevant period at the applicable mortgage
interest rate. In such event, the amount of interest that is treated as
deferred interest will be added to the principal balance of the related mortgage
loan and will be distributed pro rata to certificate-holders as principal of
--- ----
such mortgage loan when paid by the mortgagor in subsequent monthly payments or
at maturity.
PRIVATELY ISSUED MORTGAGE-BACKED SECURITIES
RATINGS. The ratings assigned by a rating organization to Mortgage
-------
Pass-Throughs address the likelihood of the receipt of all distributions on the
underlying mortgage loans by the related certificate-holders under the
agreements pursuant to which such certificates are issued. A rating
organization's ratings take into consideration the credit quality of the related
mortgage pool, including any credit support providers, structural and legal
aspects associated with such certificates, and the extent to which the payment
stream on such mortgage pool is adequate to make payments required by such
certificates. A rating organization's ratings on such certificates do not,
however, constitute a statement regarding frequency of prepayments on the
related mortgage loans. In addition, the rating assigned by a rating
organization to a certificate does not address the remote possibility that, in
the event of the insolvency of the issuer of certificates where a subordinated
interest was retained, the issuance and sale of the senior certificates may be
recharacterized as a financing and, as a result of such recharacterization,
payments on such certificates may be affected.
CREDIT ENHANCEMENT. Credit support falls generally into two categories:
------------------
(i) liquidity protection and (ii) protection against losses resulting from
default by an obligor on the underlying assets. Liquidity protection refers to
the provision of advances,
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<PAGE>
generally by the entity administering the pools of mortgages, the provision of a
reserve fund, or a combination thereof, to ensure, subject to certain
limitations, that scheduled payments on the underlying pool are made in a timely
fashion. Protection against losses resulting from default ensures ultimate
payment of the obligations on at least a portion of the assets in the pool.
Such credit support can be provided by among other things, payment guarantees,
letters of credit, pool insurance, subordination, or any combination thereof.
SUBORDINATION; SHIFTING OF INTEREST; RESERVE FUND. In order to
-------------------------------------------------
achieve ratings on one or more classes of Mortgage Pass-Throughs, one or more
classes of certificates may be subordinate certificates which provide that the
rights of the subordinate certificate-holders to receive any or a specified
portion of distributions with respect to the underlying mortgage loans may be
subordinated to the rights of the senior certificate-holders. If so structured,
the subordination feature may be enhanced by distributing to the senior
certificate-holders on certain distribution dates, as payment of principal, a
specified percentage (which generally declines over time) of all principal
payments received during the preceding prepayment period ("shifting interest
credit enhancement"). This will have the effect of accelerating the
amortization of the senior certificates while increasing the interest in the
trust fund evidenced by the subordinate certificates. Increasing the interest
of the subordinate certificates relative to that of the senior certificates is
intended to preserve the availability of the subordination provided by the
subordinate certificates. In addition, because the senior certificate-holders
in a shifting interest credit enhancement structure are entitled to receive a
percentage of principal prepayments which is greater than their proportionate
interest in the trust fund, the rate of principal prepayments on the mortgage
loans will have an even greater effect on the rate of principal payments and the
amount of interest payments on, and the yield to maturity of, the senior
certificates.
In addition to providing for a preferential right of the senior
certificate-holders to receive current distributions from the mortgage pool, a
reserve fund may be established relating to such certificates (the "Reserve
Fund"). The Reserve Fund may be created with an initial cash deposit by the
originator or servicer and augmented by the retention of distributions otherwise
available to the subordinate certificate-holders or by excess servicing fees
until the Reserve Fund reaches a specified amount.
The subordination feature, and any Reserve Fund, are intended to enhance
the likelihood of timely receipt by senior certificate-holders of the full
amount of scheduled monthly payments of principal and interest due them and will
protect the senior certificate-holders against certain losses; however, in
certain circumstances the Reserve Fund could be depleted and
B-19
<PAGE>
temporary shortfalls could result. In the event the Reserve Fund is depleted
before the subordinated amount is reduced to zero, senior certificate-holders
will nevertheless have a preferential right to receive current distributions
from the mortgage pool to the extent of the then outstanding subordinated
amount. Unless otherwise specified, until the subordinated amount is reduced to
zero, on any distribution date any amount otherwise distributable to the
subordinate certificates or, to the extent specified, in the Reserve Fund will
generally be used to offset the amount of any losses realized with respect to
the mortgage loans ("Realized Losses"). Realized Losses remaining after
application of such amounts will generally be applied to reduce the ownership
interest of the subordinate certificates in the mortgage pool. If the
subordinated amount has been reduced to zero, Realized Losses generally will be
allocated pro rata among all certificate-holders in proportion to their
--- ----
respective outstanding interests in the mortgage pool.
ALTERNATIVE CREDIT ENHANCEMENT. As an alternative, or in addition to
------------------------------
the credit enhancement afforded by subordination, credit enhancement for
Mortgage Pass-Throughs may be provided by mortgage insurance, hazard insurance,
by the deposit of cash, certificates of deposit, letters of credit, a limited
guaranty or by such other methods as are acceptable to a rating agency. In
certain circumstances, such as where credit enhancement is provided by
guarantees or a letter of credit, the security is subject to credit risk because
of its exposure to an external credit enhancement provider.
VOLUNTARY ADVANCES. Generally, in the event of delinquencies in
------------------
payments on the mortgage loans underlying the Mortgage Pass-Throughs, the
servicer agrees to make advances of cash for the benefit of certificate-holders,
but only to the extent that it determines such voluntary advances will be
recoverable from future payments and collections on the mortgage loans or
otherwise.
OPTIONAL TERMINATION. Generally, the servicer may, at its option with
--------------------
respect to any certificates, repurchase all of the underlying mortgage loans
remaining outstanding at such time as the aggregate outstanding principal
balance of such mortgage loans is less than a specified percentage (generally 5-
10%) of the aggregate outstanding principal balance of the mortgage loans as of
the cut-off date specified with respect to such series.
MULTIPLE CLASS MORTGAGE-BACKED SECURITIES AND COLLATERALIZED MORTGAGE
---------------------------------------------------------------------
OBLIGATIONS. Adjustable Rate Fund, Short-Term Fund and Core Fund may invest in
-----------
multiple class securities including collateralized mortgage obligations ("CMOs")
and REMIC Certificates issued by U.S. Government agencies and instrumentalities
such as Fannie Mae or, in the case of Core Fund, Freddie Mac or by trusts formed
by private originators of, or investors in, mortgage loans, including savings
and loan associations, mortgage bankers,
B-20
<PAGE>
commercial banks, insurance companies, investment banks and special purpose
subsidiaries of the foregoing. In general, CMOs are debt obligations of a legal
entity that are collateralized by, and multiple class mortgage-backed securities
represent direct ownership interests in, a pool of mortgage loans or mortgage-
backed securities the payments on which are used to make payments on the CMOs or
multiple class mortgage-backed securities.
Fannie Mae REMIC Certificates are issued and guaranteed as to timely
distribution of principal and interest by Fannie Mae. In addition, Fannie Mae
will be obligated to distribute the principal balance of each class of REMIC
Certificates in full, whether or not sufficient funds are otherwise available.
Freddie Mac guarantees the timely payment of interest on Freddie Mac
REMIC Certificates and also guarantees the payment of principal as payments are
required to be made on the underlying mortgage participation certificates
("PCs"). PCs represent undivided interests in specified level payment,
residential mortgages or participations therein purchased by Freddie Mac and
placed in a PC pool. With respect to principal payments on PCs, Freddie Mac
generally guarantees ultimate collection of all principal of the related
mortgage loans without offset or deduction. Freddie Mac also guarantees timely
payment of principal of certain PCs.
CMOs and guaranteed REMIC Certificates issued by Fannie Mae and Freddie Mac
are types of multiple class mortgage-backed securities. Investors may purchase
beneficial interests in REMICs, which are known as "regular" interests or
"residual" interests. The Funds do not intend to purchase residual interests in
REMICs. The REMIC Certificates represent beneficial ownership interests in a
REMIC trust, generally consisting of mortgage loans or Fannie Mae, Freddie Mac
or Ginnie Mae guaranteed mortgage-backed securities (the "Mortgage Assets"). The
obligations of Fannie Mae or Freddie Mac under their respective guaranty of the
REMIC Certificates are obligations solely of Fannie Mae or Freddie Mac,
respectively.
CMOs and REMIC Certificates are issued in multiple classes. Each class of
CMOs or REMIC Certificates, often referred to as a "tranche," is issued at a
specific adjustable or fixed interest rate and must be fully retired no later
than its final distribution date. Principal prepayments on the Mortgage Loans or
the Mortgage Assets underlying the CMOs or REMIC Certificates may cause some or
all of the classes of CMOs or REMIC Certificates to be retired substantially
earlier than their final scheduled distribution dates. Generally, interest is
paid or accrues on all classes of CMOs or REMIC Certificates on a monthly basis.
The principal of and interest on the Mortgage Assets may be allocated among
the several classes of CMOs or REMIC Certificates
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<PAGE>
in various ways. In certain structures (known as "sequential pay" CMOs or REMIC
Certificates), payments of principal, including any principal prepayments, on
the Mortgage Assets generally are applied to the classes of CMOs or REMIC
Certificates in the order of their respective final distribution dates. Thus no
payment of principal will be made on any class of sequential pay CMOs or REMIC
Certificates until all other classes having an earlier final distribution date
have been paid in full.
Additional structures of CMOs and REMIC Certificates include, among others,
"parallel pay" CMOs and REMIC Certificates. Parallel pay CMOs or REMIC
Certificates are those which are structured to apply principal payments and
prepayments of the Mortgage Assets to two or more classes concurrently on a
proportionate or disproportionate basis. These simultaneous payments are taken
into account in calculating the final distribution date of each class.
A wide variety of REMIC Certificates may be issued in parallel pay or
sequential pay structures. These securities include accrual certificates (also
known as "Z-Bonds"), which only accrue interest at a specified rate until all
other certificates having an earlier final distribution date have been retired
and are converted thereafter to an interest-paying security, and planned
amortization class ("PAC") certificates, which are parallel pay REMIC
Certificates that generally require that specified amounts of principal be
applied on each payment date to one or more classes of REMIC Certificates (the
"PAC Certificates"), even though all other principal payments and prepayments of
the Mortgage Assets are then required to be applied to one or more other classes
of the Certificates. The scheduled principal payments for the PAC Certificates
generally have the highest priority on each payment date after interest due has
been paid to all classes entitled to receive interest currently. Shortfalls, if
any, are added to the amount payable on the next payment date. The PAC
Certificate payment schedule is taken into account in calculating the final
distribution date of each class of PAC. In order to create PAC tranches, one or
more tranches generally must be created that absorb most of the volatility in
the underlying mortgage assets. These tranches tend to have market prices and
yields that are much more volatile than other PAC classes.
STRIPPED MORTGAGE-BACKED SECURITIES. Adjustable Rate Fund, Short-Term
-----------------------------------
Fund and Core Fund may invest in stripped Mortgage-Backed Securities ("SMBS"),
which are derivative multi-class mortgage securities, issued or guaranteed by
the U.S. Government, its agencies or instrumentalities. Core Fund may also
invest in privately-issued SMBS. Although the market for such securities is
increasingly liquid, privately issued SMBS may not be readily marketable and
will be considered illiquid for purposes of Core Fund's limitation on
investments in illiquid securities. The market value of the class consisting
entirely of principal payments generally is unusually volatile in response to
changes in interest
B-22
<PAGE>
rates. The yields on a class of SMBS that receives all or most of the interest
from Mortgage Assets are generally higher than prevailing market yields on other
mortgage-backed securities because their cash flow patterns are more volatile
and there is a greater risk that the initial investment will not be fully
recouped.
LEGAL CONSIDERATIONS OF MORTGAGE LOANS. The following is a discussion
--------------------------------------
of certain legal regulatory aspects of all mortgage loans including the
adjustable and fixed rate mortgage loans expected to underlie the Mortgage-
Backed Securities in which Adjustable Rate Fund, Short-Term Fund and Core Fund
may invest. These regulations may impair the ability of a mortgage lender to
enforce its rights under the mortgage documents. These regulations may
adversely affect the Funds' investments in Mortgage-Backed Securities (including
those issued or guaranteed by the U.S. Government, its agencies or
instrumentalities) by delaying the Funds' receipt of payments derived from
principal or interest on mortgage loans affected by such regulations.
1. Foreclosure. A foreclosure of a defaulted mortgage loan may be delayed due
-----------
to compliance with statutory notice or service of process provisions,
difficulties in locating necessary parties or legal challenges to the
mortgagee's right to foreclose. Depending upon market conditions, the
ultimate proceeds of the sale of foreclosed property may not equal the
amounts owed on the Mortgage-Backed Securities.
Furthermore, courts in some cases have imposed general equitable principles
upon foreclosure generally designed to relieve the borrower from the legal
effect of default and have required lenders to undertake affirmative and
expensive actions to determine the causes for the default and the
likelihood of loan reinstatement.
2. Rights of Redemption. In some states, after foreclosure of a mortgage loan,
--------------------
the borrower and foreclosed junior lienors are given a statutory period in
which to redeem the property, which right may diminish the mortgagee's
ability to sell the property.
3. Legislative Limitations. In addition to anti-deficiency and related
-----------------------
legislation, numerous other federal and state statutory provisions,
including the federal bankruptcy laws and state laws affording relief to
debtors, may interfere with or affect the ability of a secured mortgage
lender to enforce its security interest. For example, a bankruptcy court
may grant the debtor a reasonable time to cure a default on a mortgage
loan, including a payment default. The court in certain instances may also
reduce the monthly payments due under such mortgage loan, change the rate
of interest, reduce the principal balance of the loan to the then-current
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<PAGE>
appraised value of the related mortgaged property, alter the mortgage loan
repayment schedule and grant priority of certain liens over the lien of the
mortgage loan. If a court relieves a borrower's obligation to repay amounts
otherwise due on a mortgage loan, the mortgage loan servicer will not be
required to advance such amounts, and any loss may be borne by the holders
of securities backed by such loans. In addition, numerous federal and state
consumer protection laws impose penalties for failure to comply with
specific requirements in connection with origination and servicing of
mortgage loans.
4. "Due-on-Sale" Provisions. Fixed-rate mortgage loans may contain a so-called
------------------------
"due-on-sale" clause permitting acceleration of the maturity of the
mortgage loan if the borrower transfers the property. The Garn-St. Germain
Depository Institutions Act of 1982 sets forth nine specific instances in
which no mortgage lender covered by that Act may exercise a "due-on-sale"
clause upon a transfer of property. The inability to enforce a "due-on-
sale" clause or the lack of such a clause in mortgage loan documents may
result in a mortgage loan being assumed by a purchaser of the property that
bears an interest rate below the current market rate.
5. Usury Laws. Some states prohibit charging interest on mortgage loans in
----------
excess of statutory limits. If such limits are exceeded, substantial
penalties may be incurred and, in some cases, enforceability of the
obligation to pay principal and interest may be affected.
ASSET-BACKED SECURITIES
Core Fund may invest in asset-backed securities. Such securities are often
subject to more rapid repayment than their stated maturity date would indicate
as a result of the pass-through of prepayments of principal on the underlying
loans. During periods of declining interest rates, prepayment of loans
underlying asset-backed securities can be expected to accelerate. Accordingly,
Core Fund's ability to maintain positions in such securities will be affected by
reductions in the principal amount of such securities resulting from
prepayments, and its ability to reinvest the returns of principal at comparable
yields is subject to generally prevailing interest rates at that time.
Credit card receivables are generally unsecured and the debtors on such
receivables are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set-off
certain amounts owed on the credit cards, thereby reducing the balance due.
Automobile receivables generally are secured, but by automobiles rather than
residential real property. Most issuers of automobile receivables permit the
loan servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to
B-24
<PAGE>
another party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the asset-backed securities. In addition,
because of the large number of vehicles involved in a typical issuance and
technical requirements under state laws, the trustee for the holders of the
automobile receivables may not have a proper security interest in the underlying
automobiles. Therefore, there is the possibility that, in some cases,
recoveries on repossessed collateral may not be available to support payments on
these securities.
ZERO COUPON, DEFERRED INTEREST AND CAPITAL APPRECIATION BONDS
Each Fund may invest in zero coupon bonds and Short Duration and Core Fund
may invest in deferred interest and capital appreciation bonds. Zero coupon,
deferred interest and capital appreciation bonds are debt securities issued or
sold at a discount from their face value and which do not entitle the holder to
any periodic payment of interest prior to maturity or a specified date. The
original issue discount varies depending on the time remaining until maturity or
cash payment date, prevailing interest rates, the liquidity of the security and
the perceived credit quality of the issuer. These securities also may take the
form of debt securities that have been stripped of their unmatured interest
coupons, the coupons themselves or receipts or certificates representing
interests in such stripped debt obligations or coupons. The market prices of
zero coupon, deferred interest and capital appreciation bonds generally are more
volatile than the market prices of interest bearing securities and are likely to
respond to a greater degree to changes in interest rates than interest bearing
securities having similar maturities and credit quality.
Zero coupon, deferred interest and capital appreciation securities involve
the additional risk that, unlike securities that periodically pay interest to
maturity, a Fund will realize no cash until a specified future payment date
unless a portion of such securities is sold and, if the issuer of such
securities defaults, a Fund may obtain no return at all on its investment. In
addition, even though such securities do not provide for the payment of current
interest in cash, the Funds are nonetheless required to accrue income on such
investments and may be required to distribute such amounts at least annually.
Because no cash is received at the time of the accrual, a Fund may be required
to liquidate other portfolio securities to satisfy federal tax distribution
requirements applicable to the Fund. See "Taxation."
VARIABLE AND FLOATING RATE SECURITIES
The interest rates payable on certain securities in which the Funds may
invest are not fixed and may fluctuate based upon changes in market rates. A
variable rate obligation has an interest rate which is adjusted at predesignated
periods in response to changes
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<PAGE>
in the market rate of interest on which the interest rate is based. Variable
and floating rate obligations are less effective than fixed rate instruments at
locking in a particular yield. Nevertheless, such obligations may fluctuate in
value in response to interest rate changes if there is a delay between changes
in market interest rates and the interest reset date for the obligation.
CORPORATE DEBT OBLIGATIONS
Core Fund may invest in corporate debt obligations, including obligations
of industrial, utility and financial issuers. Corporate debt obligations are
subject to the risk of an issuer's inability to meeting principal and interest
payments on the obligations and may also be subject to price volatility due to
such factors as market interest rates, market perception of the creditworthiness
of the issuer and general market liquidity.
BANK OBLIGATIONS
To the extent permitted by their respective investment policies, Adjustable
Rate Fund, Short-Term Fund and Core Fund may each invest in United States dollar
denominated obligations issued or guaranteed by United States banks. Bank
obligations, including without limitation time deposits, bankers' acceptances
and certificates of deposit, may be general obligations of the parent bank or
may be obligations only of the issuing branch pursuant to the terms of the
specific obligations or government regulation.
Banks are subject to extensive but different governmental regulations which
may limit both the amount and types of loans which may be made and interest
rates which may be charged. In addition, the profitability of the banking
industry is largely dependent upon the availability and cost of funds for the
purpose of financing lending operations under prevailing money market
conditions. General economic conditions as well as exposure to credit losses
arising from possible financial difficulties of borrowers play an important part
in the operations of this industry.
MUNICIPAL SECURITIES
Core Fund and Short Duration Fund may invest in Municipal Securities.
Municipal Securities consist of bonds, notes and other instruments issued by or
on behalf of states, territories and possessions of the United states (including
the District of Columbia) and their political subdivisions, agencies or
instrumentalities, the interest on which is exempt from regular federal income
tax (i.e., excluded from gross income for federal income tax purposes but not
necessarily exempt from the federal alternative minimum tax or from the personal
income taxes of any state). In addition, Municipal Securities include
participation
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<PAGE>
interests in such securities the interest on which is, in the opinion of bond
counsel for the issuers or counsel selected by the Adviser, excluded from gross
income for federal income tax purposes. The definition of Municipal Securities
includes other types of securities that currently exist or may be developed in
the future and that pay, or will pay, in the opinion of such counsel, interest
that is excluded from gross income for federal income tax purposes, provided
that investing in such securities is consistent with each of the Fund's
investment objective and policies. Each Fund will reflect any such changes in
its definition of Municipal Securities in its Prospectus. Municipal Securities
are often issued to obtain funds for various public purposes including refunding
outstanding obligations, obtaining funds for general operating expenses, and
obtaining funds to lend to other public institutions and facilities. Municipal
Securities also include certain "private activity bonds" or industrial
development bonds, which are issued by or on behalf of public authorities to
obtain funds for privately operated facilities, such as airports and waste
disposal facilities, and in some cases commercial and industrial facilities.
The two principal classifications of Municipal Securities are "general
obligations" and "revenue obligations." General obligations are secured by the
issuer's pledge of its full faith and credit for the payment of principal and
interest, although the characteristics and enforcement of general obligations
may vary according to the law applicable to the particular issuer. Revenue
obligations, which include, but are not limited to, private activity bonds,
resource recovery bonds, certificates of participation and certain municipal
notes, are not backed by the credit and taxing authority of the issuer, and are
payable solely from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise or other
specific revenue source. Nevertheless, the obligations of the issuer of a
revenue obligation may be backed by a letter of credit, guarantee or insurance.
General obligations and revenue obligations may be issued in a variety of forms,
including commercial paper, fixed, variable and floating rate securities, tender
option bonds, auction rate bonds and zero coupon bonds, deferred interest bonds
and capital appreciation bonds.
In addition to general obligations and revenue obligations, there is a
variety of hybrid and special types of Municipal Securities. There are also
numerous differences in the security of Municipal Securities both within and
between these two principal classifications.
For the purpose of applying a Fund's investment restrictions, the
identification of the issuer of a Municipal Security which is not a general
obligation is made by the Adviser based on the characteristics of the Municipal
Security, the most important of which is the source of funds for the payment of
principal and
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interest on such securities.
An entire issue of Municipal Securities may be purchased by one or a small
number of institutional investors such as Short Duration Fund and Core Fund.
Thus, the issue may not be said to be publicly offered. Unlike some securities
that are not publicly offered, a secondary market exists for many Municipal
Securities that were not publicly offered initially and such securities can be
readily marketable.
The obligations of the issuer to pay the principal of and interest on a
Municipal Security are subject to the provisions of bankruptcy, insolvency and
other laws affecting the rights and remedies of creditors, such as the Federal
Bankruptcy Act, and laws, if any, that may be enacted by Congress or state
legislatures extending the time for payment of principal or interest or imposing
other constraints upon the enforcement of such obligations. There is also the
possibility that, as a result of litigation or other conditions, the power or
ability of the issuer to pay when due principal of or interest on a Municipal
Security may be materially affected.
The yields and market values of Municipal Securities are determined
primarily by the general level of interest rates, the creditworthiness of the
issuers of Municipal Securities and economic and political conditions affecting
such issuers. Due to their tax exempt status, the yields and market prices of
Municipal Securities may be adversely affected by changes in tax rates and
policies, which may have less effect on the market for taxable fixed income
securities. Moreover, certain types of Municipal Securities, such as housing
revenue bonds, involve prepayment risks which could effect the yield on such
securities.
Investments in Municipal Securities are subject to the risk that the issuer
could default on its obligations. Such a default could result from the
inadequacy of the sources or revenues from which interest and principal payments
are to be made or the assets collateralizing such obligations. Revenue bonds,
including private activity bonds, are backed only by specific assets or revenue
sources and not by the full faith and credit of the governmental issuer.
PRIVATE ACTIVITY BONDS. Short Duration Fund and Core Fund may each invest
----------------------
certain types of Municipal Securities, generally referred to as industrial
development bonds (and referred to under current tax law as private activity
bonds), which are issued by or on behalf of public authorities to obtain funds
to provide privately operated housing facilities, airport, mass transit or port
facilities, sewage disposal, solid waste disposal or hazardous waste treatment
or disposal facilities and certain local facilities for water supply, gas or
electricity. Other types of industrial development bonds, the proceeds of which
are used for the
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construction, equipment, repair or improvement of privately operated industrial
or commercial facilities, may constitute Municipal Securities, although the
current federal tax laws place substantial limitations on the size of such
issues. Short Duration Fund's distributions of its interest income from private
activity bonds may subject certain investors to the federal alternative minimum
tax whereas Core Fund's distributions of any tax-exempt interest it receives
from any source will be taxable for regular federal income tax purposes.
INSURANCE. Short Duration Fund may invest in "insured" tax-exempt
---------
Municipal Securities. Insured Municipal Securities are those for which
scheduled payments of interest and principal are guaranteed by a private
(nongovernmental) insurance company. The insurance only entitles Short Duration
Fund to receive the face or par value of the securities held by Short Duration
Fund. The insurance does not guarantee the market value of the Municipal
Securities or the value of the shares of Short Duration Fund.
Short Duration Fund may utilize new issue or secondary market insurance. A
new issue insurance policy is purchased by a bond issuer who wishes to increase
the credit rating of a security. By paying a premium and meeting the insurer's
underwriting standards, the bond issuer is able to obtain a high credit rating
(usually, Aaa from Moody's or AAA from Standard & Poor's) for the issued
security. Such insurance is likely to increase the purchase price and resale
value of the security. New issue insurance policies are non-cancellable and
continue in force as long as the bonds are outstanding.
A secondary market insurance policy is purchased by an investor (such as
Short Duration Fund) subsequent to a bond's original issuance and generally
insures a particular bond for the remainder of its term. Short Duration Fund
may purchase bonds which have already been insured under a secondary market
insurance policy by a prior investor, or Short Duration Fund may itself purchase
such a policy from insurers for bonds which are currently uninsured.
An insured Municipal Security acquired by Short Duration Fund will
typically be covered by only one of the above types of policies. All of the
insurance policies used by Short Duration Fund will be obtained only from
insurance companies rated, at the time of purchase, Aaa by Moody's or AAA by
Standard & Poor's.
AUCTION RATE SECURITIES. Short Duration Fund may invest in auction rate
-----------------------
securities. Auction rate securities consist of auction rate Municipal
Securities and auction rate preferred securities issued by closed-end investment
companies that invest primarily in Municipal Securities (collectively, "auction
rate securities"). Short Duration Fund does not currently intend to invest in
auction rate preferred securities. Provided that the
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auction mechanism is successful, auction rate securities usually permit the
holder to sell the securities in an auction at par value at specified intervals.
The dividend is reset by "Dutch" auction in which bids are made by broker-
dealers and other institutions for a certain amount of securities at a specified
minimum yield. The dividend rate set by the auction is the lowest interest or
dividend rate that covers all securities offered for sale. While this process
is designed to permit auction rate securities to be traded at par value, there
is some risk that an auction will fail due to insufficient demand for the
securities.
Dividends on auction rate preferred securities issued by a closed-end fund
may be designated as exempt from federal income tax to the extent they are
attributable to exempt income earned by the fund on the securities in its
portfolio and distributed to holders of the preferred securities, provided that
the preferred securities are treated as equity securities for federal income tax
purposes and the closed-end fund complies with certain tests under the Code.
For purposes of complying with the 20% limitation on Short Duration Fund's
investments in Taxable Investments, auction rate preferred securities will be
treated as Taxable Investments unless substantially all of the dividends on such
securities are expected to be exempt from regular federal income taxes.
Short Duration Fund's investments in auction rate securities of closed-end
funds are subject to the limitations prescribed by the Act, and certain state
securities regulations. These limitations include a prohibition against
acquiring more than 3% of the voting securities of any other investment company,
and investing more than 5% of the Fund's assets in securities of any one
investment company or more than 10% of its assets in securities of all
investment companies. The Fund will indirectly bear its proportionate share of
any management and other fees paid by such closed-end funds in addition to the
advisory fees payable directly by the Fund.
STANDBY COMMITMENTS. In order to enhance the liquidity of Municipal
-------------------
Securities, Short Duration Fund may acquire the right to sell a security to
another party at a guaranteed price and date. Such a right to resell may be
referred to as a "standby commitment" or liquidity put, depending on its
characteristics. The aggregate price which the Fund pays for securities with
standby commitments may be higher than the price which otherwise would be paid
for the securities. Standby commitments may not be available or may not be
available on satisfactory terms.
Standby commitments may involve letters of credit issued by domestic or
foreign banks supporting the other party's ability to purchase the security from
Short Duration Fund. The right to sell may be exercisable on demand or at
specified intervals, and may form part of a security or be acquired separately
by Short Duration Fund. In considering whether a security meets Short Duration
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Fund's quality standards, the Fund will look to the creditworthiness of the
party providing the Fund with the right to sell as well as the quality of the
security itself.
Short Duration Fund values Municipal Securities which are subject to
standby commitments at amortized cost. The exercise price of the standby
commitments is expected to approximate such amortized cost. No value is
assigned to the standby commitments for purposes of determining Short Duration
Fund's net asset value. The cost of a standby commitment is carried as
unrealized depreciation from the time of purchase until it is exercised or
expires. Since the value of a standby commitment is dependent on the ability of
the standby commitment writer to meet its obligation to repurchase, Short
Duration Fund's policy is to enter into standby commitment transactions only
with banks, brokers or dealers which present a minimal risk of default.
Management of the Trust understands that the Internal Revenue Service (the
"Service") has issued a favorable revenue ruling to the effect that, under
specified circumstances, a registered investment company will be the owner of
tax-exempt municipal obligations acquired subject to a put option. The Service
has subsequently announced that it will not ordinarily issue advance ruling
letters as to the identity of the true owner of property in cases involving the
sale of securities or participation interests therein if the purchaser has the
right to cause the security, or the participation interest therein, to be
purchased by either the seller or a third party. Short Duration Fund intends to
take the position that it is the owner of any Municipal Securities acquired
subject to a standby commitment or acquired or held with certain other types of
put rights and that tax-exempt interest earned with respect to such Municipal
Securities will be tax-exempt in its hands. There is no assurance that standby
commitments will be available to Short Duration Fund nor has the Fund assumed
that such commitments would continue to be available under all market
conditions.
INTEREST RATE SWAPS, MORTGAGE SWAPS, CURRENCY SWAPS AND INTEREST RATE CAPS,
FLOORS AND COLLARS
Each Fund may enter into interest rate swaps, caps, floors and collars. In
addition, Core Fund, Adjustable Rate Fund and Short-Term Fund may enter into
mortgage swaps and Core Fund may also enter into currency swaps. A Fund will
typically use interest rate and mortgage swaps to preserve a return or spread on
a particular investment or portion of its portfolio, to protect against any
increase in the price of securities the Fund anticipates purchasing at a future
date, or to shorten the effective duration of its portfolio securities. Core
Fund may also enter into swap transactions to seek to increase total return.
Interest rate swaps involve the exchange by a Fund with another party of their
respective commitments to pay or receive interest,
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<PAGE>
such as, an exchange of fixed rate payments for floating rate payments.
Mortgage swaps are similar to interest rate swaps in that they represent
commitments to pay and receive interest. The notional principal amount,
however, is tied to a reference pool or pools of mortgages. Currency swaps
involve the exchange of the parties' respective rights to make or receive
payments in specified currencies. The purchase of an interest rate cap entitles
the purchaser, to the extent that a specified index exceeds a predetermined
interest rate, to receive payment of interest on a notional principal amount
from the party selling such interest rate cap. The purchase of an interest rate
floor entitles the purchaser, to the extent that a specified index falls below a
predetermined interest rate, to receive payments of interest on a notional
principal amount from the party selling the interest rate floor. An interest
rate collar is the combination of a cap and a floor that preserves a certain
return within a predetermined range of interest rates. Since interest rate,
mortgage and currency swaps and interest rate caps, floors and collars are
individually negotiated, each Fund expects to achieve an acceptable degree of
correlation between its portfolio investments and its swap positions.
A Fund will enter into interest rate and mortgage swaps only on a net
basis, which means that the two payment streams are netted out, with the Fund
receiving or paying, as the case may be, only the net amount of the two
payments. Interest rate and mortgage swaps do not involve the delivery of
securities, other underlying assets or principal. Accordingly, the risk of loss
with respect to interest rate and mortgage swaps is limited to the net amount of
payments that a Fund is contractually obligated to make. If the other party to
an interest rate swap defaults, a Fund's risk of loss consists of the net amount
of payments that such Fund is contractually entitled to receive, if any. In
contrast, currency swaps usually involve the delivery of the entire principal
amount of one designated currency in exchange for the other designated currency.
Therefore, the entire principal value of a currency swap is subject to the risk
that the other party to the swap will default on its contractual delivery
obligations. To the extent that the net amount of an interest rate or mortgage
swap is held in a segregated account, consisting of cash or liquid, high grade
debt securities, the Funds and the Advisers believe that swaps do not constitute
senior securities under the Investment Company Act of 1940, as amended (the
"Act") and, accordingly, will not treat them as being subject to each Fund's
borrowing restriction.
The Funds will not enter into any swap transactions unless the unsecured
commercial paper, senior debt or claims paying ability of the other party is
rated either AA or A-1 or better by Standard & Poors or Aa or P-1 or better by
Moody's or their equivalent ratings, or if unrated by such rating organizations,
determined to be of comparable quality by the applicable Adviser. The swap
market has grown substantially in recent years with a large number
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<PAGE>
of banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. As a result, the swap market has
become relatively liquid in comparison with the markets for other similar
instruments which are traded in the interbank market. The staff of the
Securities and Exchange Commission (the "SEC") currently takes the position that
swaps, caps, floors and collars are illiquid for purposes of each Fund's 15%
limitation on illiquid investments.
OPTIONS ON SECURITIES AND SECURITIES INDICES
WRITING COVERED OPTIONS. Short Duration Fund and Core Fund may write
-----------------------
(sell) covered call and put options on any securities in which they may invest
or on any securities index based on securities in which they may invest. A call
option written by a Fund obligates the Fund to sell specified securities to the
holder of the option at a specified price if the option is exercised at any time
before the expiration date. All call options written by a Fund are covered,
which means that the Fund will own the securities subject to the option so long
as the option is outstanding or use the other methods described below. The
purpose of a Fund in writing covered call options is to realize greater income
than would be realized in portfolio securities transactions alone. However, in
writing covered call options for additional income, a Fund may forego the
opportunity to profit from an increase in the market price of the underlying
security.
A put option written by a Fund obligates the Fund to purchase specified
securities from the option holder at a specified price if the option is
exercised at any time before the expiration date. All put options written by a
Fund are covered, which means that the Fund would have deposited with its
custodian cash or liquid, high-grade debt securities with a value at least equal
to the exercise price of the put option. The purpose of writing such options is
to generate additional income. However, in return for the option premium, the
Fund accepts the risk that it will be required to purchase the underlying
securities at a price in excess of the securities' market value at the time of
purchase.
In addition, a written call option or put option may be covered by
maintaining cash or liquid, high-grade debt securities in a segregated account,
by entering into an offsetting forward commitment and/or by purchasing an
offsetting option or any other option which, by virtue of its exercise price or
otherwise, reduces the Fund's net exposure on its written option position.
Short Duration Fund and Core Fund may also write (sell) covered call and
put options on any securities index composed of securities in which they may
invest. Options on securities indices are similar to options on securities,
except that the exercise of securities index options requires cash settlement
payments and does not involve the actual purchase or sale of securities. In
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<PAGE>
addition, securities index options are designed to reflect price fluctuations in
a group of securities or segment of the securities market rather than price
fluctuations in a single security.
The Funds may cover call options on a securities index by owning securities
whose price changes are expected to be similar to those of the underlying index
or by having an absolute and immediate right to acquire such securities without
additional cash consideration (or for additional cash consideration held in a
segregated account by their respective custodian) upon conversion or exchange of
other securities in its portfolio. The Funds may also cover call and put
options on a securities index by maintaining cash or liquid, high-grade debt
securities with a value equal to the exercise price in a segregated account with
their custodian or by using the other methods described above.
A Fund may terminate its obligations under an exchange traded call or put
option by purchasing an option identical to the one it has written. Obligations
under over-the-counter options may be terminated only by entering into an
offsetting transaction with the counterparty to such option. Such purchases
are referred to as "closing purchase transactions."
PURCHASING OPTIONS. Short Duration Fund and Core Fund may also purchase
------------------
put and call options on any securities in which they may invest or on any
securities index based on securities in which they may invest, and each such
Fund may enter into closing sale transactions in order to realize gains or
minimize losses on options it had purchased.
A Fund would normally purchase call options in anticipation of an increase,
or put options in anticipation of a decrease, in the market value of securities
of the type in which it may invest. The purchase of a call option would entitle
a Fund, in return for the premium paid, to purchase specified securities at a
specified price during the option period. A Fund would ordinarily realize a
gain if, during the option period, the value of such securities exceeded the sum
of the exercise price, the premium paid and transaction costs; otherwise the
Fund would realize a loss on the purchase of the call option. The purchase of a
put option would entitle a Fund, in exchange for the premium paid, to sell
specified securities at a specified price during the option period. A Fund
would ordinarily realize a gain if, during the option period, the value of the
underlying securities decreased below the exercise price sufficiently to cover
the premium and transaction costs; otherwise the Fund would realize a loss on
the purchase of the put option. Gains and losses on the purchase of put options
may be offset by countervailing changes in the value of the underlying portfolio
securities.
A Fund may purchase put and call options on securities indices for the same
purposes as it may purchase options on securities.
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<PAGE>
Options on securities indices are similar to options on securities, except that
the exercise of securities index options requires cash payments and does not
involve the actual purchase or sale of securities. In addition, securities
index options are designed to reflect price fluctuations in a group of
securities or segment of the securities market rather than price fluctuations in
a single security.
CURRENCY OPTIONS. Core Fund may write covered put and call options and
----------------
purchase put and call options on foreign currencies for the purpose of
protecting against declines in the dollar value of portfolio securities and
against increases in the dollar cost of securities to be acquired. Core Fund
may use options on currency to cross-hedge, which involves writing or purchasing
options on one currency to hedge against changes in exchange rates for a
different currency with a pattern of correlation.
A call option written by Core Fund obligates it to sell specified currency
to the holder of the option at a specified price if the option is exercised at
any time before the expiration date. A put option written by Core Fund
obligates it to purchase specified currency from the option holder at a
specified price if the option is exercised at any time before the expiration
date. The writing of currency options involves a risk that Core Fund will, upon
exercise of the option, be required to sell currency subject to a call at a
price that is less than the currency's market value or be required to purchase
currency subject to a put at a price that exceeds the currency's market value.
Core Fund may terminate its obligations under a call or put option it has
written by purchasing an option identical to the one it has written. Such
purchases are referred to as "closing purchase transactions." Core Fund would
also be able to enter into closing sale transactions in order to realize gains
or minimize losses on purchased options.
Core Fund would normally purchase call options in anticipation of an
increase in the dollar value of currency in which securities to be acquired by
Core Fund are denominated or quoted. The purchase of a call option would entitle
Core Fund, in return for the premium paid, to purchase specified currency at a
specified price during the option period. Core Fund would ordinarily realize a
gain if, during the option period, the value of such currency exceeded the sum
of the exercise price, the premium paid and transaction costs; otherwise Core
Fund would realize either no gain or a loss on the purchase of the call option.
Core Fund would normally purchase put options in anticipation of a decline
in the dollar value of currency in which securities in its portfolio are
denominated or quoted ("protective puts"). The purchase of a put option would
entitle Core Fund, in exchange for the premium paid, to sell specified currency
at a specified price
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<PAGE>
during the option period. The purchase of protective puts is designed merely to
offset or hedge against a decline in the dollar value of Core Fund's portfolio
securities due to currency exchange rate fluctuations. Core Fund would
ordinarily realize a gain if, during the option period, the value of the
underlying currency decreased below the exercise price sufficiently to more than
cover the premium and transaction costs; otherwise Core Fund would realize
either no gain or a loss on the purchase of the put option. Gains and losses on
the purchase of protective put options would tend to be offset by countervailing
changes in the value of underlying currency.
YIELD CURVE OPTIONS. Core Fund may enter into options on the yield
-------------------
"spread," or yield differential between two securities. Such transactions are
referred to as "yield curve" options. In contrast to other types of options, a
yield curve option is based on the difference between the yields of designated
securities, rather than the prices of the individual securities, and is settled
through cash payments. Accordingly, a yield curve option is profitable to the
holder if this differential widens (in the case of a call) or narrows (in the
case of a put), regardless of whether the yields of the underlying securities
increase or decrease.
Core Fund may purchase or write yield curve options for the same purposes
as other options on securities. For example, Core Fund may purchase a call
option on the yield spread between two securities if it owns one of the
securities and anticipates purchasing the other security and wants to hedge
against an adverse change in the yield spread between the two securities. Core
Fund may also purchase or write yield curve options in an effort to increase its
current income if, in the judgment of the Adviser, Core Fund will be able to
profit from movements in the spread between the yields of the underlying
securities. The trading of yield curve options is subject to all of the risks
associated with the trading of other types of options. In addition, however,
such options present a risk of loss even if the yield of one of the underlying
securities remains constant, if the spread moves in a direction or to an extent
which was not anticipated.
Yield curve options written by Core Fund will be "covered." A call (or put)
option is covered if Core Fund holds another call (or put) option on the spread
between the same two securities and maintains in a segregated account with its
custodian cash or liquid, high-grade debt securities sufficient to cover Core
Fund's net liability under the two options. Therefore, Core Fund's liability for
such a covered option is generally limited to the difference between the amount
of Core Fund's liability under the option written by Core Fund less the value of
the option held by Core Fund. Yield curve options may also be covered in such
other manner as may be in accordance with the requirements of the counterparty
with which the option is traded and applicable laws and regulations. Yield curve
options are traded over-the-counter,
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<PAGE>
and because they have been only recently introduced, established trading markets
for these options have not yet developed.
RISKS ASSOCIATED WITH OPTIONS TRANSACTIONS. There is no assurance that a
------------------------------------------
liquid secondary market on an options exchange will exist for any particular
exchange-traded option or at any particular time. If a Fund is unable to effect
a closing purchase transaction with respect to covered options it has written,
the Fund will not be able to sell the underlying securities or dispose of assets
held in a segregated account until the options expire or are exercised.
Similarly, if a Fund is unable to effect a closing sale transaction with respect
to options it has purchased, it would have to exercise the options in order to
realize any profit and will incur transaction costs upon the purchase or sale of
underlying securities.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation may not at all times be adequate to handle current trading
volume; or (vi) one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of options
(or a particular class or series of options), in which event the secondary
market on that exchange (or in that class or series of options) would cease to
exist although outstanding options on that exchange that had been issued by the
Options Clearing Corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms.
Short Duration Fund and Core Fund may purchase and sell both options that
are traded on exchanges and options traded over-the-counter with broker-dealers
who make markets in these options. The ability to terminate over-the-counter
options is more limited than with exchange-traded options and may involve the
risk that broker-dealers participating in such transactions will not fulfill
their obligations. Until such time as the staff of the SEC changes its
position, the Funds will treat purchased over-the-counter options and all assets
used to cover written over-the-counter options as illiquid securities, except
that with respect to options written with primary dealers in U.S. Government
securities pursuant to an agreement requiring a closing purchase transaction at
a formula price, the amount of illiquid securities may be calculated with
reference to a formula approved by the SEC.
Transactions by the Funds in options on securities and indices will be
subject to limitations established by each of the
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<PAGE>
exchanges, boards of trade or other trading facilities governing the maximum
number of options in each class which may be written or purchased by a single
investor or group of investors acting in concert. Thus, the number of options
which a Fund may write or purchase may be affected by options written or
purchased by the other Funds and other investment advisory clients of the
Advisers. An exchange, board of trade or other trading facility may order the
liquidation of positions found to be in excess of these limits, and it may
impose certain other sanctions.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of options for
hedging purposes depends in part on the applicable Adviser's ability to predict
future price fluctuations and the degree of correlation between the options and
securities markets.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
Adjustable Rate Fund, Core Fund and Short Duration Fund may purchase and
sell futures contracts and options on futures contracts on financial instruments
and, with respect to Core Fund, currencies. Each Fund will engage in futures
and related options transactions only for bona fide hedging purposes as defined
below or, except for futures on currencies purchased or sold by Core Fund, for
purposes of seeking to increase total return to the extent permitted by the
regulations of the Commodity Futures Trading Commission ("CFTC"). All futures
contracts entered into by the Fund are traded on U.S. exchanges or boards of
trade that are licensed and regulated by the CFTC.
FUTURES CONTRACTS. A futures contract may generally be described as an
-----------------
agreement between two parties to buy and sell particular financial instruments
for an agreed price during a designated month (or to deliver the final cash
settlement price, in the case of a contract relating to an index or otherwise
not calling for physical delivery at the end of trading in the contract).
When interest rates are rising or securities prices are falling, a Fund can
seek to offset a decline in the value of its current portfolio securities
through the sale of futures contracts. When interest rates are falling or
securities prices are rising, a Fund, through the purchase of futures contracts,
can attempt to secure better rates or prices than might later be available in
the market when it effects anticipated purchases. Core Fund can seek to offset
anticipated changes in the value of a currency in which its portfolio
securities, or securities that it intends to purchase, are denominated by
purchasing and selling futures contracts on such currencies.
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Positions taken in the futures markets are not normally held to maturity
but are instead liquidated through offsetting transactions which may result in a
profit or a loss. While futures contracts on securities will usually be
liquidated in this manner, a Fund may instead make, or take, delivery of the
underlying securities whenever it appears economically advantageous to do so. A
clearing corporation associated with the exchange on which futures on
securities are traded guarantees that, if still open, the sale or purchase will
be performed on the settlement date.
HEDGING STRATEGIES. Hedging, by use of futures contracts, seeks to
------------------
establish with more certainty than would otherwise be possible the effective
price and rate of return on securities that a Fund owns or proposes to acquire.
A Fund may, for example, take a "short" position in the futures market by
selling futures contracts in order to hedge against an anticipated rise in
interest rates or a decline in market prices that would adversely affect the
value of the Fund's portfolio securities. Such futures contracts may include
contracts for the future delivery of securities held by a Fund or securities
with characteristics similar to those of a Fund's portfolio securities.
Similarly, Core Fund may sell futures contracts on currencies in which its
portfolio securities are denominated or in one currency to hedge against
fluctuations in the value of securities denominated in a different currency if
there is an established historical pattern of correlation between the two
currencies. If, in the opinion of the Adviser, there is a sufficient degree of
correlation between price trends for a Fund's portfolio securities and futures
contracts based on other financial instruments, securities indices or other
indices, the Fund may also enter into such futures contracts as part of its
hedging strategy. Although under some circumstances prices of securities in a
Fund's portfolio may be more or less volatile than prices of such futures
contracts, the Adviser will attempt to estimate the extent of this volatility
difference based on historical patterns and compensate for any such differential
by having the Fund enter into a greater or lesser number of futures contracts or
by attempting to achieve only a partial hedge against price changes affecting
the Fund's securities portfolio. When hedging of this character is successful,
any depreciation in the value of portfolio securities will be substantially
offset by appreciation in the value of the futures position. On the other hand,
any unanticipated appreciation in the value of a Fund's portfolio securities
would be substantially offset by a decline in the value of the futures position.
On other occasions, a Fund may take a "long" position by purchasing futures
contracts. This would be done, for example, when a Fund anticipates the
subsequent purchase of particular securities when it has the necessary cash, but
expects the prices then available in the applicable market to be less favorable
than prices that are currently available.
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OPTIONS ON FUTURES CONTRACTS. The acquisition of put and call options on
----------------------------
futures contracts will give a Fund the right (but not the obligation) for a
specified price to sell or to purchase, respectively, the underlying futures
contract at any time during the option period. As the purchaser of an option on
a futures contract, a Fund obtains the benefit of the futures position if prices
move in a favorable direction but limits its risk of loss in the event of an
unfavorable price movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium
which may partially offset a decline in the value of a Fund's assets. By
writing a call option, a Fund becomes obligated, in exchange for the premium, to
sell a futures contract if the option is exercised, which may have a value
higher than the exercise price. Conversely, the writing of a put option on a
futures contract generates a premium which may partially offset an increase in
the price of securities that a Fund intends to purchase. However, the Fund
becomes obligated to purchase a futures contract if the option is exercised,
which may have a value lower than the exercise price. Thus, the loss incurred
by a Fund in writing options on futures is potentially unlimited and may exceed
the amount of the premium received. Funds will incur transaction costs in
connection with the writing of options on futures.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option on the same series.
There is no guarantee that such closing transactions can be effected. A Fund's
ability to establish and close out positions on such options will be subject to
the development and maintenance of a liquid market.
OTHER CONSIDERATIONS. Adjustable Rate Fund, Core Fund and Short Duration
--------------------
Fund will engage in futures and related options transactions only for bona fide
hedging or, except for purchases or sales by Core Fund of futures on currencies,
to seek to increase total return as permitted by CFTC regulations. Each Fund
will determine that the price fluctuations in the futures contracts and options
on futures used for hedging purposes are substantially related to price
fluctuations in securities held by the Fund or securities or instruments which
it expects to purchase. Except as stated below, each Fund's futures
transactions will be entered into for traditional hedging purposes -- i.e.,
futures contracts will be sold to protect against a decline in the price of
securities that a Fund owns or futures contracts will be purchased to protect a
Fund against an increase in the price of securities that it intends to purchase.
As evidence of this hedging intent, each Fund expects that on 75% or more of the
occasions on which it takes a long futures or option position (involving the
purchase of futures contracts), the Fund will have purchased, or will be in the
process of purchasing, equivalent amounts of related securities in the cash
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market at the time when the futures or option position is closed out. However,
in particular cases, when it is economically advantageous for a Fund to do so, a
long futures position may be terminated or an option may expire without the
corresponding purchase of securities or other assets.
As an alternative to compliance with the bona fide hedging definition, a
CFTC regulation permits the Funds to elect to comply with a different test under
which the aggregate initial margin and premiums required to establish positions
to seek to increase total return in futures contracts and options on futures
will not exceed 5% of the net asset value of a Fund's portfolio, after taking
into account unrealized profits and losses on any such positions and excluding
the amount by which such options were in-the-money at the time of purchase. The
Funds will engage in transactions in futures contracts and related options only
to the extent such transactions are consistent with the requirements of the
Code, for maintaining their qualifications as regulated investment companies for
federal income tax purposes. See "Taxation."
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating a Fund to purchase securities or currency, may require the Fund to
establish with the custodian a segregated account consisting of cash or liquid,
high-grade debt securities in an amount equal to the underlying value of such
contracts and options.
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. Thus,
unanticipated changes in interest rates or securities prices may result in a
poorer overall performance for a Fund than if it had not entered into any
futures contracts or options transactions.
Perfect correlation between a Fund's futures positions and hedged portfolio
positions may be difficult to achieve because the only futures contracts
available to hedge the Fund's portfolio are, in the case of Core Fund, various
currency futures and futures on U.S. Government securities and securities
indices and, in the case of the Core Fund and Short Duration Fund, a municipal
bond index. In the event of an imperfect correlation between a futures position
and portfolio position which is intended to be protected, the desired protection
may not be obtained and a Fund may be exposed to risk of loss.
FOREIGN INVESTMENTS
Core Fund may invest in securities of foreign issuers and up to 25% of the
Fund's assets may be invested in fixed income securities denominated in a
currency other than U.S. dollars. Investing in the securities of foreign issuers
involves certain
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special considerations, including those set forth below, which are not typically
associated with investing in U.S. issuers. Since investments in the securities
of foreign issuers may involve currencies of foreign countries, and since Core
Fund may temporarily hold funds in bank deposits in foreign currencies during
completion of investment programs, Core Fund may be affected favorably or
unfavorably by changes in currency rates and in exchange control regulations and
may incur costs in connection with conversions between various currencies.
Since foreign companies are not subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to U.S. companies, there may be less publicly available information
about a foreign company than about a U.S. company. Most foreign bond markets
are less liquid than fixed income markets in the United States and securities of
many foreign companies are less liquid and more volatile than securities of
comparable U.S. companies. Fixed commissions on foreign securities exchanges
are generally higher than negotiated commissions on U.S. exchanges, although
Core Fund endeavors to achieve the most favorable net results on its portfolio
transactions. There is generally less government supervision and regulation of
securities exchanges, brokers, dealers and listed companies than in the United
States.
Foreign markets also have different clearance and settlement procedures,
and in certain markets there have been times when settlements have been unable
to keep pace with the volume of securities transactions, making it difficult to
conduct such transactions. Such delays in settlement could result in temporary
periods when a portion of the assets of Core Fund is uninvested and no return is
earned thereon. The inability of Core Fund to make intended security purchases
due to settlement problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement
problems could result either in losses to Core Fund due to subsequent declines
in value of the portfolio securities, or, if Core Fund has entered into a
contract to sell the securities, could result in possible liability to the
purchaser. In addition, with respect to certain foreign countries, there is the
possibility of expropriation or confiscatory taxation, political or social
instability, or diplomatic developments which could adversely affect Core Fund's
investments in those countries. Moreover, individual foreign economies may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross national product, rate of inflation, capital reinvestment, resources
self-sufficiency and balance of payments position.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Core Fund may enter into forward
foreign currency exchange contracts for hedging purposes. A forward foreign
currency exchange contract involves an obligation to purchase or sell a specific
currency at a future
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date, which may be any fixed number of days from the date of the contract agreed
upon by the parties, at a price set at the time of the contract. These contracts
are traded in the interbank market conducted directly between currency traders
(usually large commercial banks) and their customers. A forward contract
generally has no deposit requirement, and no commissions are generally charged
at any stage for trades.
At the maturity of a forward contract, Core Fund may either accept or make
delivery of the currency specified in the contract or, at or prior to maturity,
enter into a closing purchase transaction involving the purchase or sale of an
offsetting contract. Closing purchase transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract.
Core Fund may enter into forward foreign currency exchange contracts in
several circumstances. First, when Core Fund enters into a contract for the
purchase or sale of a security denominated in a foreign currency, or when Core
Fund anticipates the receipt in a foreign currency of a dividend or interest
payments on such a security which it holds, Core Fund may desire to "lock in"
the U.S. dollar price of the security or the U.S. dollar equivalent of such
dividend or interest payment, as the case may be. By entering into a forward
contract for the purchase or sale, for a fixed amount of dollars, of the amount
of foreign currency involved in the underlying transactions, Core Fund will
attempt to protect itself against an adverse change in the relationship between
the U.S. dollar and the subject foreign currency during the period between the
date on which the security is purchased or sold, or on which the dividend or
interest payment is declared, and the date on which such payments are made or
received.
Additionally, when management of Core Fund believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract to sell, for a fixed amount of
dollars, the amount of foreign currency approximating the value of some or all
of Core Fund's portfolio securities denominated in such foreign currency. The
precise matching of the forward contract amounts and the value of the securities
involved will not generally be possible because the future value of such
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the
contract is entered into and the date it matures. Using forward contracts to
protect the value of Core Fund's portfolio securities against a decline in the
value of a currency does not eliminate fluctuations in the underlying prices of
the securities. It simply establishes a rate of exchange which Core Fund can
achieve at some future point in time. The precise projection of short-term
currency market movements is not possible, and short-term hedging provides a
means of fixing the dollar value of only a portion of the Core Fund's
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foreign assets.
Core Fund may engage in cross-hedging by using forward contracts in one
currency to hedge against fluctuations in the value of securities denominated in
a different currency if the Adviser determines that there is a pattern of
correlation between the two currencies.
Core Fund's custodian will place cash or liquid, high-grade debt securities
into a segregated account of Core Fund in an amount equal to the value of Core
Fund's total assets committed to the consummation of forward foreign currency
exchange contracts requiring Core Fund to purchase foreign currencies. The
segregated account will be marked to market on a daily basis. Thus, if the value
of the securities placed in the segregated account declines, additional cash or
securities will be placed in the account on a daily basis so that the value of
the account will equal the amount of Core Fund's commitments with respect to
such contracts.
While Core Fund will enter into forward contracts to reduce currency
exchange rate risks, transactions in such contracts involve certain other risks.
Thus, while Core Fund may benefit from such transactions, unanticipated changes
in currency prices may result in a poorer overall performance for Core Fund than
if it had not engaged in any such transactions. Moreover, there may be
imperfect correlation between Core Fund's portfolio holdings of securities
denominated in a particular currency and forward contracts entered into by Core
Fund. Such imperfect correlation may cause Core Fund to sustain losses which
will prevent Core Fund from achieving a complete hedge or expose Core Fund to
risk of foreign exchange loss.
LENDING OF PORTFOLIO SECURITIES
Each Fund may lend portfolio securities. Under present regulatory policies,
such loans may be made to institutions, such as brokers or dealers and would be
required to be secured continuously by collateral in cash, cash equivalents or
U.S. Government securities maintained on a current basis at an amount at least
equal to the market value of the securities loaned. A Fund has the right to call
a loan and obtain the securities loaned at any time on five days' notice. For
the duration of a loan, a Fund continues to receive the equivalent of the
interest or dividends paid by the issuer on the securities loaned and also
receives compensation from investment of the collateral. A Fund would not have
the right to vote any securities having voting rights during the existence of
the loan, but the Fund would call the loan in anticipation of an important vote
to be taken among holders of the securities or the giving or withholding of
their consent on a material matter affecting the investment. As with other
extensions of credit there are risks of delay in recovering, or even loss of
rights in, the collateral should the borrower of
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the securities fail financially. However, the loans are made only to firms
deemed by the applicable Adviser to be of good standing, and when, in the
judgment of the applicable Adviser, the consideration which can be earned
currently from securities loans of this type justifies the attendant risk. If an
Adviser determines to make securities loans, the value of the securities loaned
will not exceed one-third of the value of the total assets of each Fund.
RESTRICTED AND ILLIQUID SECURITIES
Each Fund may purchase securities that are not registered or offered in an
exempt non-public offering ("Restricted Securities") under the Securities Act of
1933, as amended ("1933 Act"), including securities eligible for resale to
"qualified institutional buyers" pursuant to Rule 144A under the 1933 Act.
However, a Fund will not invest more than 15% of its assets in illiquid
investments, which includes repurchase agreements maturing in more than seven
days, interest rate, currency and mortgage swaps, interest rate caps, floors and
collars, certain SMBS, municipal leases, certain over-the-counter options,
securities that are not readily marketable and Restricted Securities, unless the
Board of Trustees determines, based upon a continuing review of the trading
markets for the specific restricted securities, that such restricted securities
are liquid. The Trustees have adopted guidelines and delegated to the Advisers
the daily function of determining and monitoring the liquidity of Restricted
Securities. The Board of Trustees, however, will retain sufficient oversight
and be ultimately responsible for the determinations. Since it is not possible
to predict with assurance exactly how this market for Restricted Securities sold
and offered under Rule 144A will develop, the Trustees will carefully monitor
the Funds' investments in these securities, focusing on such important factors,
among others, as valuation, liquidity and availability of information. This
investment practice could have the effect of increasing the level of illiquidity
in the Funds to the extent that qualified institutional buyers become for a time
uninterested in purchasing these Restricted Securities.
The purchase price and subsequent valuation of restricted securities
normally reflect a discount from the price at which such securities trade when
they are not restricted, since the restriction makes them less liquid. The
amount of the discount from the prevailing market price is expected to vary
depending upon the type of security, the character of the issuer, the party who
will bear the expenses of registering the restricted securities and prevailing
supply and demand conditions.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES
Each Fund may purchase securities on a when-issued basis or purchase or
sell securities on a forward commitment basis. These transactions involve a
commitment by a Fund to purchase or sell
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securities at a future date. The price of the underlying securities (usually
expressed in terms of yield) and the date when the securities will be delivered
and paid for (the settlement date) are fixed at the time the transaction is
negotiated. When-issued purchases and forward commitment transactions are
negotiated directly with the other party, and such commitments are not traded on
exchanges. The Funds will purchase securities on a when-issued basis or purchase
or sell securities on a forward commitment basis only with the intention of
completing the transaction and actually purchasing or selling the securities. If
deemed advisable as a matter of investment strategy, however, the Funds may
dispose of or negotiate a commitment after entering into it. A Fund also may
sell securities it has committed to purchase before those securities are
delivered to the Fund on the settlement date. The Funds may realize a capital
gain or loss in connection with these transactions. For purposes of determining
each Fund's average duration, the maturity of when-issued or forward commitment
securities will be calculated from the commitment date. Each Fund is required to
hold and maintain in a segregated account with the Fund's custodian until the
settlement date, cash or liquid, high grade debt securities in an amount
sufficient to meet the purchase price. Alternatively, each Fund may enter into
offsetting contracts for the forward sale of other securities that it owns.
Securities purchased or sold on a when-issued or forward commitment basis
involve a risk of loss if the value of the security to be purchased declines
prior to the settlement date or if the value of the security to be sold
increases prior to the settlement date.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with selected broker-
dealers, banks or other financial institutions. A repurchase agreement is an
arrangement under which a Fund purchases securities and the seller agrees to
repurchase the securities within a particular time and at a specified price.
Custody of the securities will be maintained by each Fund's custodian. The
repurchase price may be higher than the purchase price, the difference being
income to a Fund, or the purchase and repurchase prices may be the same, with
interest at a stated rate due to a Fund together with the repurchase price on
repurchase. In either case, the income to a Fund is unrelated to the interest
rate on the security subject to the repurchase agreement.
For purposes of the Act and for federal income tax purposes, a repurchase
agreement is deemed to be a loan from a Fund to the seller of the security. For
other purposes, it is not clear whether a court would consider the security
purchased by a Fund subject to a repurchase agreement as being owned by the Fund
or as being collateral for a loan by the Fund to the seller. In the event of
commencement of bankruptcy or insolvency proceedings with respect to the seller
of the security before repurchase of the security under a repurchase agreement,
a Fund may encounter delay
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and incur costs before being able to sell the security. Such a delay may involve
loss of interest or a decline in price of the security. If the court
characterizes the transaction as a loan and a Fund has not perfected a security
interest in the security, the Fund may be required to return the security to the
seller's estate and be treated as an unsecured creditor of the seller. As an
unsecured creditor, a Fund would be at risk of losing some or all of the
principal and interest involved in the transaction.
As with any unsecured debt instrument purchased for each Fund, the
applicable Adviser seeks to minimize the risk of loss from repurchase agreements
by analyzing the creditworthiness of the obligor, in this case the seller of the
security. Apart from the risk of bankruptcy or insolvency proceedings, there is
also the risk that the seller may fail to repurchase the security. However, if
the market value of the security subject to the repurchase agreement becomes
less than the repurchase price (including accrued interest), each Fund will
direct the seller of the security to deliver additional securities so that the
market value of all securities subject to the repurchase agreement equals or
exceeds the repurchase price. Certain repurchase agreements which provide for
settlement in more than seven days can be liquidated before the nominal fixed
term on seven days or less notice. Such repurchase agreements will be regarded
as liquid instruments.
In addition, the Funds, together with other registered investment companies
having advisory agreements with the Advisers or their affiliates, may transfer
uninvested cash balances into a single joint account, the daily aggregate
balance of which will be invested in one or more repurchase agreements.
INVESTMENT RESTRICTIONS
The Trust has adopted the following investment restrictions on behalf of
the Funds, none of which may be changed without the approval of the holders of a
majority of the outstanding voting securities of the applicable Fund. The
investment objective of each Fund and all other investment policies or practices
of the Funds, except for Short Duration Fund's policy to invest under normal
market conditions 80% of its net assets in Tax-Free Securities, are considered
by the Trust not to be fundamental and accordingly may be changed without
shareholder approval. See "INVESTMENT OBJECTIVE AND POLICIES" in the
Prospectuses. As defined in the Act, "a majority of the outstanding voting
securities" of a Fund means the vote (a) of 67% or more of the shares of the
Fund present at a meeting, if the holders of more than 50% of the outstanding
shares of the Fund are present or represented by proxy or (b) more than 50% of
the outstanding shares of the Fund, whichever is less.
For the purposes of the limitations (except for the 300% asset
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coverage requirement with respect to borrowings), any limitation which involves
a maximum percentage shall not be considered violated unless an excess over the
percentage occurs immediately after, and is caused by, an acquisition or
encumbrance of securities or assets of, or borrowings by, a Fund.
ADJUSTABLE RATE FUND MAY NOT:
(1) Purchase 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 Fund's total assets would be
invested in such issuer, except that (a) up to 25% of the value of the Fund's
total assets may be invested without regard to such 5% limitation, and (b) such
5% limitation shall not apply to repurchase agreements collateralized by
obligations of the U.S. Government, its agencies or instrumentalities.
(2) Borrow money, except as a temporary measure for extraordinary or
emergency purposes, provided that the Fund is required to maintain asset
coverage of at least 300% for all borrowings. For purposes of this investment
restriction, short sales, swap transactions, options, futures contracts and
options on futures contracts, and forward commitment transactions shall not
constitute borrowings.
(3) Invest more than 25% of the value of its total assets in the
securities of one or more issuers conducting their principal business activities
in the same industry. This limitation does not apply to investments in
obligations of the U.S. Government or any of its agencies or instrumentalities.
(4) Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings and to the extent related to the
segregation of assets in connection with the writing of covered put and call
options, swap transactions, the purchase of securities on a forward commitment
or delayed delivery basis and collateral and initial or variation margin
arrangements with respect to options, futures contracts and options on futures
contracts.
(5) Purchase securities on margin, except for such short-term credits as
are necessary for the clearance of transactions, but the Fund may make margin
deposits in connection with transactions in options, futures and options on
futures.
(6) Make short sales of securities, except short sales against-the-box, or
maintain a short position.
(7) Underwrite any issue of securities issued by others, except to the
extent that the sale of portfolio securities by the Fund may be deemed to be
underwriting.
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(8) Purchase, hold or deal in real estate, including limited partnership
interests, or oil and gas interests, although the Fund may purchase and sell
securities that are secured by real estate or interests therein and may purchase
mortgage-related securities and may hold and sell real estate acquired by the
Fund as a result of the ownership of securities.
(9) Invest in commodities or commodity futures contracts, except that the
Fund may (a) purchase and sell futures contracts, including those relating to
securities and indices, and options on any such futures contracts, and (b)
purchase and sell securities on a forward commitment or delayed delivery basis.
(10) Lend any funds or other assets except through repurchase agreements or
the purchase of all or a portion of an issue of securities or obligations of the
type in which it may invest; however, the Fund may lend portfolio securities in
an amount not to exceed one third of the value of its total assets.
(11) Issue any senior security (as such term is defined in Section 18(f) of
the 1940 Act) except as permitted in Investment Restriction Nos. (2), (5), (6)
and (10).
In addition to the investment restrictions mentioned above, the Trustees of
the Trust have voluntarily adopted the following policies and restrictions on
behalf of Adjustable Rate Fund which are observed in the conduct of its affairs.
These represent intentions of the Trustees based upon current circumstances.
They differ from fundamental investment restrictions in that they may be changed
or amended by action of the Trustees of the Trust without prior notice to or
approval of shareholders. Accordingly, Adjustable Rate Fund may not:
(a) invest more than 10% of its assets in securities of other investment
companies;
(b) purchase warrants of any issuer, except on a limited basis, if, as a
result, more than 2% of the value of its total assets would be invested in
warrants which are not listed on the New York Stock Exchange and more than 5% of
the value of its total assets would be invested in warrants, whether or not so
listed, such warrants in each case to be valued at the lesser of cost or market,
but assigning no value to warrants acquired by the Fund in shares or attached to
debt securities;
(c) purchase (i) securities of any issuer with a record of less than three
years' continuous operation, including predecessors, except U.S. Government
securities and securities guaranteed by any foreign government or its agencies
or instrumentalities, or (ii) common or preferred stocks that are not
readily marketable, if such purchase would cause the investment of the Fund in
all such securities to exceed 5% of the value of the
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total assets of the Fund; or
(d) purchase puts, calls, straddles, spreads and any combination thereof
if the value of the Fund's aggregate investment in such securities exceeds 5% of
its total assets.
SHORT-TERM FUND MAY NOT:
(1) Purchase the securities of issuers conducting their principal business
activity in the same industry if immediately after such purchase the value of
the Fund's investments in such industry would exceed 25% of the value of its
total assets, provided that (a), as to utility companies, the gas, electric,
water and telephone businesses will be considered separate industries, (b) all
finance companies as a group will not be considered a single industry, (c)
industry determinations with respect to Securitized Assets will be based on the
type of assets backing the security, and (d) there is no limitation with respect
to or arising out of investments in obligations issued or guaranteed by the U.S.
Government, its agencies and instrumentalities, repurchase agreements or loans
by the Fund of securities collateralized by such obligations or by cash. With
respect to both clauses (c) and (d), Securitized Assets which are issued or
guaranteed by the U.S. Government, its agencies or instrumentalities or backed
directly or indirectly by obligations so issued or guaranteed will be treated as
being within clause (d).
(2) Purchase the securities of any one issuer if, immediately after such
purchase, more than 5% of the value of the Fund's total assets would be invested
in such issuer, except that (a) up to 25% of the value of its total assets may
be invested without regard to such 5% limitation, and (b) such 5% limitation
shall not apply to securities which are issued or guaranteed by the U.S.
Government, its agencies or instrumentalities or backed directly or indirectly
by obligations so issued or guaranteed (including repurchase agreements
collateralized by obligations so issued or guaranteed).
(3) Make loans, except through (a) the purchase of debt obligations or
pass-through instruments in accordance with the Fund's investment objective and
policies, (b) repurchase agreements with banks, brokers, dealers and other
financial institutions; and (c) loans of securities.
(4) Borrow money, except (a) as a temporary measure, and then only in
amounts not exceeding 5% of the value of the Fund's net assets or (b) from
banks, provided that immediately after any such borrowing all borrowings of the
Fund do not exceed one-third of its net assets (excluding borrowings). The
exceptions to this restriction are not for investment leverage purposes but are
solely for extraordinary or emergency purposes or to facilitate management
of the Fund by enabling the Fund to meet redemption requests when the
liquidation of portfolio instruments is deemed to be
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disadvantageous or not possible. While the Fund has borrowings outstanding in
excess of 5% of the value of its net assets, it will not make any purchases of
portfolio instruments. If, due to market fluctuations or other reasons, the net
assets of the Fund fall below 300% of its borrowings, the Fund will promptly
reduce its borrowings in accordance with the Act. To do this, the Fund may have
to sell a portion of its investments at a time when it may be disadvantageous to
do so. For purposes of this restriction, neither the arrangements referred to in
restriction (5) below nor the purchase or sale of futures or related options
shall be regarded as involving the borrowing of money.
(5) Mortgage, pledge or hypothecate any assets except to secure permitted
borrowings. For purposes of this restriction, collateral arrangements with
respect to the writing of options, interest rate futures contracts, options on
futures contracts, and collateral arrangements with respect to initial and
variation margin are not deemed to be a mortgage, pledge or hypothecation of
assets.
(6) Purchase or sell real estate, but this restriction shall not prevent
the Fund from investing directly or indirectly in portfolio instruments secured
by real estate or interests therein or issued by companies which invest in real
estate or interests therein.
(7) Purchase or sell commodities or commodity contracts, except that the
Fund may purchase and sell interest rate futures contracts and related options,
or purchase or sell interests in oil, gas or other mineral exploration or
development programs.
(8) Purchase any voting securities or invest in companies for the purpose
of exercising control or management.
(9) Act as an underwriter of securities.
(10) Purchase any security on margin (except for delayed delivery or when-
issued transactions or such short-term credits as are necessary for the
clearance of transactions). The payment or deposit by the Fund of initial or
variation margin in connection with interest rate futures contracts or related
option transactions is not considered the purchase of a security on margin.
(11) Make short sales of securities or maintain a short position unless (a)
at all times when a short position is open the Fund owns an equal amount of such
securities or securities convertible into or exchangeable, without payment of
any further consideration, for securities of the same issue as, and equal in
amount to, the securities sold short or (b) for the purpose of hedging the
Fund's exposure to an actual or anticipated market decline in the value of its
investments.
B-51
<PAGE>
(12) Write, purchase or sell puts, calls or combinations thereof, except
that the Fund may purchase puts and write, purchase and sell call options with
respect to portfolio securities and with respect to interest rate futures
contracts.
For purposes of Short-Term Fund's investment restriction no. 1 above,
"Securitized Assets" denotes securities representing interests in pools of
assets.
Although it has the authority to do so, Short-Term Fund does not currently
intend to purchase or sell options with respect to portfolio securities,
purchase or sell interest rate futures contracts and related options, or
purchase or sell interests in oil, gas or other mineral exploration or
development programs.
SHORT DURATION FUND MAY NOT:
1. Purchase securities of any one issuer, other than obligations issued
or guaranteed by the U.S. Government or any of its agencies, authorities or
instrumentalities, if immediately after such purchase, more than 5% of the
Fund's total assets would be invested in such issuer or the Fund would hold more
than 10% of any class of the outstanding voting securities of such issuer,
except that (a) up to 25% of the Fund's total assets may be invested without
regard to such limitations and (b) such limitations shall not apply to
repurchase agreements collateralized by obligations of the U.S. Government or
any of its agencies, authorities or instrumentalities.
2. Invest more than 25% of the value of its total assets in the
securities of one or more issuers conducting their principal business activities
in the same industry. (For the purposes of this restriction, state and
municipal governments and their agencies and instrumentalities are not deemed to
be industries; telephone companies are considered to be a separate industry from
water, gas or electric utilities; personal credit finance companies and business
credit finance companies are deemed to be separate industries; and wholly owned
finance companies are considered to be in the industry of their parents if their
activities are primarily related to financing the activities of their parents).
This limitation does not apply to investments or obligations of, or to municipal
securities which have been pre-refunded by the use of obligations of, the U.S.
Government or any of its agencies or instrumentalities.
3. Borrow money, except: (a) from banks for temporary or short-term
purposes or for the clearance of transactions in amounts not exceeding one-third
of the Fund's total assets, not including the amount borrowed; (b) in connection
with the redemption of Fund shares or to finance failed settlements of portfolio
trades without immediately liquidating portfolio securities or other assets; and
(c) in order to fulfill commitments or plans to purchase additional
B-52
<PAGE>
securities pending the anticipated sale of other portfolio securities or assets,
but only if after each such borrowing there is asset coverage of at least 300%
as defined in the Act. For purposes of this investment restriction, short sales,
futures contracts, options on futures contracts, securities or indices and
forward commitment transactions shall not constitute borrowing.
4. Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings and to the extent related to the
deposit of assets in escrow in connection with the writing of covered put and
call options and the purchase of securities on a forward commitment or delayed-
delivery basis and collateral and initial or variation margin arrangements with
respect to futures contracts and options on futures contracts, securities or
indices.
5. Purchase securities on margin, except for such short-term credits as
are necessary for the clearance of transactions, but the Fund may make margin
deposits in connection with transactions in options, futures and options on
futures.
6. Make short sales of securities, except short sales against-the-box, or
maintain a short position.
7. Underwrite any issue of securities issued by others, except to the
extent that the sale of portfolio securities by the Fund may be deemed to be
underwriting.
8. Purchase, hold or deal in real estate (including real estate limited
partnerships) or oil, gas or mineral leases, although the Fund may purchase and
sell securities that are secured by real estate or interests therein and may
purchase mortgage-related securities and may hold and sell real estate acquired
by the Fund as a result of the ownership of securities.
9. Invest in commodities, except that the Fund may purchase and sell
futures contracts, including those relating to securities or indices, and
options on futures contracts and purchase and sell securities on a forward
commitment or delayed-delivery basis.
10. Lend any funds or other assets except through the purchase of all or a
portion of an issue of securities or obligations of the type in which it may
invest; however, the Fund may lend its portfolio securities in an amount not to
exceed 33-1/3% of the value of its total assets. Any loans of portfolio
securities will be made in accordance with guidelines established by the SEC and
the Trust's Board of Trustees.
11. Issue any senior security (as such term is defined in Section 18(f) of
the Act) except as permitted in Investment Restriction Nos. 3, 4, 9 and 10 and
except for any class or series of its shares of beneficial interest.
B-53
<PAGE>
In addition to the investment restrictions mentioned above, the Trustees of
the Trust have voluntarily adopted the following policies and restrictions on
behalf of short Duration Fund which are observed in the conduct of its affairs.
These represent intentions of the Trustees based upon current circumstances.
They differ from fundamental investment restrictions in that they may be changed
or amended by action of the Trustees of the Trust without prior notice to or
approval of shareholders. Accordingly, Short Duration Fund may not:
(a) Purchase or retain the securities of any issuers if the officers,
directors, partners or Trustees of the Trust, its investment adviser or manager
owning beneficially more than one-half of 1% of the securities of such issuer,
together own beneficially more than 5% of such securities.
(b) Invest more than 10% of its total assets, calculated at the time of
purchase, in the securities of other investment companies, invest more than 5%
of its total assets in the securities of any one investment company or acquire
more than 3% of the voting securities of any other investment company; or
purchase the securities of closed-end investment companies, except in the open
market where no commission or profit to a sponsor or dealer results from the
purchase, other than customary brokerage fees.
(c) Write covered calls or put options with respect to more than 25% of
the value of its total assets or invest more than 5% of its total assets in
puts, calls, spreads or straddles, other than protective put options. The
aggregate value of premiums paid on all options, other than protective puts,
held by the Fund at any time will not exceed 5% of its total assets.
(d) Invest (a) more than 15% of the Fund's net assets in illiquid
investments, including repurchase agreements maturing in more than seven days,
securities that are not readily marketable and restricted securities not
eligible for resale pursuant to Rule 144A under the 1933 Act; or (b) more than
15% of its net assets in restricted securities (including those eligible for
resale under Rule 144A).
(e) Purchase additional securities while the Fund's borrowings exceed 5%
of its total assets.
(f) Invest more than 5% of the Fund's total assets in the securities of
issuers which, together with predecessors, have a record of less than three
years of continuous operation.
Short Duration Fund may invest 25% or more of the value of its total assets
in Municipal Securities which are related in such a way that an economic,
business or political development or change affecting one Municipal Security
would also affect the other Municipal Securities. Short Duration Fund may so
invest in
B-54
<PAGE>
(a) Municipal Securities the interest on which is paid solely from revenues of
similar projects such as hospitals, electric utility systems, multi-family
housing, nursing homes, commercial facilities (including hotels), steel
companies or life care facilities, (b) Municipal Securities whose issuers are in
the same state, or (c) industrial development obligations.
For the purpose of applying Short Duration Fund's investment restrictions,
the identification of the issuer of a Municipal Security that is not a general
obligation is made by the Adviser based on the characteristics of the Municipal
Security, the most important of which is the source of funds for the payment of
principal and interest on such securities.
CORE FUND MAY NOT:
1. Purchase securities of any one issuer, other than obligations issued
or guaranteed by the U.S. Government or any of its agencies, authorities or
instrumentalities, if immediately after such purchase, more than 5% of the
Fund's total assets would be invested in such issuer or the Fund would hold more
than 10% of any class of the outstanding voting securities of such issuer,
except that (a) up to 25% of the Fund's total assets may be invested without
regard to such limitations and (b) such limitations shall not apply to
repurchase agreements collateralized by obligations of the U.S. Government or
any of its agencies, authorities or instrumentalities.
2. Invest more than 25% of the value of its total assets in the
securities of one or more issuers conducting their principal business activities
in the same industry. This limitation does not apply to investments or
obligations of the U.S. Government or any of its agencies or instrumentalities.
3. Borrow money, except: (a) from banks for temporary or short-term
purposes or for the clearance of transactions in amounts not exceeding one-third
of the Fund's total assets, not including the amount borrowed; (b) in connection
with the redemption of Fund shares or to finance failed settlements of portfolio
trades without immediately liquidating portfolio securities or other assets; (c)
in order to fulfill commitments or plans to purchase additional securities
pending the anticipated sale of other portfolio securities or assets, and (d)
transactions in mortgage dollar rolls which are accounted for as financings, but
only if after each such borrowing there is asset coverage of at least 300% as
defined in the Act. For purposes of this investment restriction, short sales,
mortgage dollar rolls that are not accounted for as financings, options,
transactions in currencies, forward contracts, currency, mortgage and interest
rate swaps (to the extent a segregated account has been established
collateralizing the Fund's swap obligations), interest rate caps and floors,
futures contracts, options on futures contracts and forward commitment
B-55
<PAGE>
transactions shall not constitute borrowing.
4. Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings and to the extent related to the
deposit of assets in escrow in connection with the writing of covered put and
call options and the purchase of securities on a forward commitment or delayed-
delivery basis and collateral and initial or variation margin arrangements with
respect to forward currency contracts, futures contracts and options on futures
contracts, securities or indices.
5. Purchase securities on margin, except for such short-term credits as
are necessary for the clearance of transactions, but the Fund may make margin
deposits in connection with transactions in options, futures contracts and
options on futures contracts.
6. Make short sales of securities, except short sales against-the-box, or
maintain a short position.
7. Underwrite any issue of securities issued by others, except to the
extent that the sale of portfolio securities by the Fund may be deemed to be
underwriting.
8. Purchase, hold or deal in real estate (including real estate limited
partnerships) or oil, gas or mineral leases, although the Fund may purchase and
sell securities that are secured by real estate or interests therein, may
purchase mortgage-related securities and may hold and sell real estate acquired
by the Fund as a result of the ownership of securities.
9. Invest in commodities, except that the Fund may purchase and sell
futures contracts, including those relating to securities, currencies or
indices, and options on futures contracts or currencies and purchase and sell
securities or currencies on a forward commitment or delayed-delivery basis.
10. Lend any funds or other assets except through repurchase agreements or
the purchase of all or a portion of an issue of securities or obligations of the
type in which it may invest; however, the Fund may lend its portfolio securities
in an amount not to exceed 33-1/3% of the value of its total assets.
11. Issue any senior security (as such term is defined in Section 18(f) of
the Act) except as permitted in Investment Restriction No. 3 and except for any
class or series of its shares of beneficial interest.
In addition to the investment restrictions mentioned above, the Trustees of
the Trust have voluntarily adopted the following policies and restrictions on
behalf of Core Fund which are observed in the conduct of its affairs. These
represent intentions of the Trustees based upon current circumstances. They
differ from
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<PAGE>
fundamental investment restrictions in that they may be changed or amended by
action of the Trustees of the Trust without prior notice to or approval of
shareholders. Accordingly, Core Fund may not:
(a) Purchase or retain the securities of any issuers if the officers,
directors, partners or Trustees of the Trust, its investment adviser or manager
owning beneficially more than one-half of 1% of the securities of such issuer,
together own beneficially more than 5% of such securities.
(b) Write covered calls or put options with respect to more than 25% of
the value of its total assets or invest more than 5% of its total assets in
puts, calls, spreads or straddles, other than protective put options. The
aggregate value of premiums paid on all options, other than protective puts,
held by the Fund at any time will not exceed 5% of the Fund's total assets.
(c) Invest (a) more than 15% of the Fund's net assets in illiquid
investments, including repurchase agreements maturing in more than seven days,
securities which are not readily marketable and restricted securities not
eligible for resale pursuant to Rule 144A under the 1933 Act; or (b) more than
15% of its net assets in restricted securities (including those eligible for
resale pursuant to Rule 144A that the Trustees have determined to be liquid).
(d) Purchase additional securities while the Fund's borrowings exceed
(excluding covered mortgage dollar rolls) 5% of its total assets.
(e) Invest more than 5% of the Fund's total assets in the securities of
issuers which, together with predecessors, have a record of less than three
years of continuous operation.
MANAGEMENT
TRUSTEES AND OFFICERS
---------------------
Information pertaining to the Trustees and officers of the Trust is set
forth below together with their respective positions and a brief statement of
their principal occupations during the past five years. Trustees deemed to be
"interested persons" of the Trust for purposes of the Act are indicated by an
asterisk.
Paul C. Nagel, Jr., Age 72, 19223 Riverside Drive, Tequesta, Florida 33469.
Chairman of the Board of Trustees. Retired, Director and Chairman of the
---------------------------------
Finance and Audit Committees, Great Atlantic & Pacific Tea Co., Inc.; Director,
United Conveyor
B-57
<PAGE>
Corporation.
Ashok N. Bakhru, Age 52, 1235 Westlakes Drive, Suite 385, Berwyn, PA 19312.
Trustee. President, ABN Associates, Inc., since June 1994. Retired, Senior Vice
-------
President, Scott Paper Company; Director, Arkwright Mutual Insurance Company;
Trustee, International House of Philadelphia; Member of Cornell University
Council; Trustee of Walnut Street Theater.
Marcia L. Beck,* Age 39, One New York Plaza, New York, New York 10004. President
---------
and Trustee. Director, Institutional Funds Group of GSAM since September 1992;
-----------
Vice President and Senior Portfolio Manager, GSAM from June 1988 to Present.
David B. Ford,* Age 49, One New York Plaza, New York, New York 10004. Trustee.
-------
General Partner, Goldman Sachs, since 1986; Chairman and Chief Executive
Officer, GSAM since December 1994.
Alan A. Shuch,* Age 45, One New York Plaza, New York, New York 10004. Trustee.
-------
Director and Vice President, Goldman Sachs Funds Management, Inc. from April
1990 to November 1994; President and Chief Operating Officer, GSAM from
September 1988 to November 1994; (overseeing GSAM's fixed income investment
management activities and financial, accounting, administrative and systems
functions). Limited Partner, Goldman Sachs since December 1994.
Jackson W. Smart, Jr., Age 64, One Northfield Plaza, #218, Northfield,
Illinois 60093. Trustee. Chairman and Chief Executive Officer, MSP
-------
Communications Inc. (a company engaged in radio broadcasting) since November
1988; Consultant, Thomas Industries, Inc. (a manufacturer of lighting fixtures,
home decorations and hardware items) from August 1987 to November 1988 and
Chairman and member of the Executive Committee prior thereto; Director, Federal
Express Corporation; and North American Private Equity Group (a venture capital
fund).
William H. Springer, Age 65, 701 Morningside Drive, Lake Forest, Illinois 60045.
Trustee. Vice Chairman, Ameritech (a telecommunications holding company)
-------
February 1987 to retirement in 1992 and Vice Chairman, Chief Financial and
Administrative Officer of Ameritech prior thereto; Director, Walgreen Co. (a
retail drugstore business); and Baker, Fentress & Co. (a closed-ended non-
diversified management investment company).
Richard P. Strubel, Age 55, 70 West Madison Street, Suite 1400, Chicago,
Illinois 60602. Trustee. Managing Director, Tandem Partners, Inc. (since
-------
1990); President and Chief Executive Officer, Microdot, Inc. (a diversified
manufacturer of fastening systems and connectors) since January 1984 to October
1994;
B-58
<PAGE>
Pauline Taylor,* Age 48, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs since June 1992; Consultant since 1989
---------
to June 1992; Senior Vice President, Fidelity Investments prior to 1989.
Nancy L. Mucker,* Age 45, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs; Co-Manager, Shareholder Services for
---------
GSAM.
John W. Mosior,* Age 56, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs; Co-Manager, Shareholder Services for
---------
GSAM.
Scott M. Gilman,* Age 35, One New York Plaza, New York, New York 10004.
Treasurer. Director, Mutual Funds Administration, GSAM since April 1994.
---------
Assistant Treasurer of Goldman Sachs Funds Management, Inc. since March 1993.
Vice President, Goldman Sachs since March, 1990; Assistant Treasurer of the
Trust from April 1990 until October 1991; Manager, Arthur Andersen LLP prior
thereto.
Michael J. Richman,* Age 34, 85 Broad Street, New York, New York 10004.
Secretary. Vice President and Assistant General Counsel, Goldman Sachs since
---------
June 1992; Associate General Counsel, GSAM, Counsel to the Funds Group of GSAM,
since June 1992; Partner, Hale and Dorr prior thereto.
Howard B. Surloff,* Age 29, 85 Broad Street, New York, New York 10004. Assistant
---------
Secretary. Vice President and Counsel, Goldman Sachs since November 1993 and
---------
May 1994, respectively; Counsel to the Funds Group, GSAM since November 1993;
formerly Associate of Shereff, Friedman, Hoffman & Goodman.
Steven E. Hartstein*, Age 31, 85 Broad Street, New York, New York 10004.
Assistant Secretary. Legal Products Analyst, Goldman Sachs (June 1993 to
-------------------
present); Funds Compliance Officer, Citibank Global Asset Management (August
1991 to June 1993); Legal Assistant, Brown & Wood (prior thereto).
Gail M. Shanley*, Age 26, 85 Broad Street, New York, New York 10004. Assistant
---------
Secretary. Legal Product Analyst, Goldman Sachs since June 1994. Formerly Blue
---------
Sky Legal Assistant at Smith Barney Shearson.
The Trustees and officers of the Trust hold comparable positions with
certain other investment companies of which Goldman Sachs, GSAM or FMLP is the
investment adviser, administrator and/or distributor. As of November 30, 1994,
the Trustees and officers as a group owned less than 1% of the outstanding
shares of beneficial interest of each Fund.
B-59
<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 October
31, 1994:
<TABLE>
<CAPTION>
Total
Pension or Compensation
Aggregate Retirement from Goldman
Compensation Benefits Accrued Sachs Mutual
from the as of Part of Funds (including
Name of Trustees Trust Trust's Expenses the Trust)*
---------------- ------------ ---------------- ----------------
<S> <C> <C> <C>
Paul C. Nagel, Jr. $17,426 $ 0 $101,000
Ashok N. Bakhru $10,523 $ 0 $ 61,000
Marcia L. Beck $ 0 $ 0 $ 0
David B. Ford $ 0 $ 0 $ 0
Robert P. Mayo $10,523 $ 0 $61,000
Alan Shuch $ 0 $ 0 $ 0
Jackson W. Smart $10,523 $ 0 $61,000
William H. Springer $10,523 $ 0 $61,000
Richard P. Strubel $10,523 $ 0 $61,000
</TABLE>
* The Goldman Sachs Mutual Funds consisted of 32 mutual funds, including the
eleven series of the Trust, on October 31, 1994.
B-60
<PAGE>
INVESTMENT ADVISERS
-------------------
FMLP, One New York Plaza, New York, New York 10004, serves as the
investment adviser to Adjustable Rate Fund and Short-Term Fund pursuant to
separate investment advisory agreements. FMLP, a Delaware limited partnership,
is an affiliate of Goldman Sachs, 85 Broad Street, New York, New York 10004.
GSAM, One New York Plaza, New York, New York 10004, a separate operating
division of Goldman Sachs, serves as the investment adviser to Short Duration
Fund and Core Fund pursuant to separate investment advisory agreements. See
"MANAGEMENT -- Investment Adviser" in each Fund's Prospectus for a description
of the applicable Adviser's duties as investment adviser.
Founded in 1869, Goldman Sachs is among the oldest and largest investment
banking firms in the United States. Goldman Sachs is a leader in developing
strategies and in many fields of investing and financing, participating in
financial markets worldwide and serving individuals, institutions, corporations
and governments. Goldman Sachs is among the principal market sources for current
and thorough information on companies, industrial sectors, markets, economies
and currencies, and trades and makes markets in a wide range of equity and debt
securities 24 hours a day. The firm is headquartered in New York and has offices
throughout the United States and in Beijing, Frankfurt, George Town, Hong Kong,
London, Madrid, Milan, Montreal, Osaka, Paris, Seoul, Shanghai, Singapore,
Sydney, Taipei, Tokyo, Toronto, Vancouver and Zurich. It has trading
professionals throughout the United States, as well as in London, Tokyo, Hong
Kong and Singapore. The active participation of Goldman Sachs in the world's
financial markets enhances its ability to identify attractive investments.
The Advisers are able to draw on the substantial research and market
expertise of Goldman Sachs, whose investment research effort is one of the
largest in the industry. With an annual equity research budget approaching $120
million, Goldman Sachs' Investment Research Department covers approximately
1,700 companies, including approximately 1,000 U.S. corporations in 60
industries. The in-depth information and analyses generated by Goldman Sachs'
research analysts are available to the Advisers.
For more than a decade, Goldman Sachs has been among the top-ranked firms
in Institutional Investor's annual "All-America Research Team" survey. In
addition, many of Goldman Sachs' economists, securities analysts, portfolio
strategists and credit analysts have consistently been highly ranked in
respected industry surveys conducted in the U.S. and abroad. Goldman Sachs is
also among the leading investment firms using quantitative analytics (now used
by a growing number of investors) to structure and evaluate portfolios. For
example, Goldman Sachs' options evaluation model analyzes each security's term,
coupon and call option, providing an overall analysis of the security's value
B-61
<PAGE>
relative to its interest risk.
In planning Short Duration Fund's strategies, Short Duration Fund's
portfolio managers also evaluate and monitor individual issues by using
analytical techniques that have traditionally been applied to corporate bonds
and mortgage-backed securities. In particular, the Adviser's embedded option
valuation model provides a picture of an individual security's relative value
and the portfolio's overall interest rate risk. By constantly reviewing the
positions of securities with the portfolio, the Adviser looks for opportunities
to enhance Short Duration Fund's yields by fine-tuning the portfolio, using
quantitative tools designed for municipal portfolio management. The Adviser,
which currently manages approximately $3 billion in tax-free securities, has
assembled an experienced team of professionals for selection of Short Duration
Fund's portfolio securities. The Adviser manages money for some of the world's
largest institutional investors.
In structuring Adjustable Rate Fund's and Short-Term Fund's respective
securities portfolio, the Adviser will review the existing overall economic and
mortgage market trends. The Adviser will then study yield spreads, the implied
volatility and the shape of the yield curve. The Adviser will then apply this
analysis to a list of eligible securities that meet the respective Fund's
investment guidelines. With respect to Adjustable Rate Fund, this analysis is
used to plan a two-part portfolio, which will consist of a "core" portfolio of
ARMs and a "relative value" portfolio of other mortgage assets that can enhance
portfolio returns and lower risk (such as investments CMO floating rate tranches
and interest only stripped Mortgage-Backed Securities). The Mortgage-backed
securities team manages approximately $5.2 billion in assets.
With respect to Adjustable Rate Fund, Short-Term Fund and Core Fund, the
applicable Adviser expects to utilize Goldman Sachs' sophisticated option-
adjusted analytics to help make strategic asset allocations within the markets
for U.S. Government, Mortgage-Backed and other securities and to employ this
technology periodically to re-evaluate the Funds' investments as market
conditions change. Goldman Sachs has also developed a prepayment model designed
to estimate mortgage prepayments and cash flows under different interest rate
scenarios. Because a Mortgage-Backed Security incorporates the borrower's right
to prepay the mortgage, the Advisers use a sophisticated option-adjusted spread
(OAS) model to measure expected returns. A security's OAS is a function of the
level and shape of the yield curve, volatility and the applicable Adviser's
expectation of how a change in interest rates will affect prepayment levels.
Since the OAS model assumes a relationship between prepayments and interest
rates, the Advisers consider it a better way to measure a security's expected
return and absolute and relative values than yield to maturity. In using OAS
technology, the Advisers will first evaluate the absolute level of a security's
OAS considering its liquidity and its interest rate, volatility and
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<PAGE>
prepayment sensitivity. The Advisers will then analyze its value relative to
alternative investments and to its own investments. The Advisers will also
measure a security's interest rate risk by computing an option adjusted duration
(OAD). The Advisers believe a security's OAD is a better measurement of its
price sensitivity than cash flow duration, which systematically misstates
portfolio duration. The Advisers also evaluate returns for different mortgage
market sectors and evaluate the credit risk of individual securities. This
sophisticated technical analysis allows the Advisers to develop portfolio and
trading strategies using mortgage-backed securities that are believed to be
superior investments on a risk-adjusted basis and which provide the flexibility
to meet the respective Fund's duration targets and cash flow pattern
requirements.
Because the OAS is adjusted for the differing characteristics of the
underlying securities, the OAS of different Mortgage-Backed Securities can be
compared directly as an indication of their relative value in the market. The
Advisers also expect to use OAS-based pricing methods to calculate projected
security returns under different, discrete interest rate scenarios, and Goldman
Sachs' proprietary prepayment model to generate yield estimates under these
scenarios. The OAS, scenario returns, expected returns, and yields of securities
in the mortgage market can be combined and analyzed in an optimal risk-return
matching framework.
The Advisers will use OAS analytics to choose what they believe is an
appropriate portfolio of investments for Adjustable Rate Fund, Short-Term Fund
and Core Fund from a universe of eligible investments. In connection with
initial portfolio selections, in addition to using OAS analytics as an aid to
meeting each Fund's particular composition and performance targets, the Advisers
will also take into account important market criteria like the available supply
and relative liquidity of various mortgage securities in structuring the
portfolio.
The Advisers also expect to use OAS analytics to evaluate the mortgage
market on an ongoing basis. Changes in the relative value of various Mortgage-
Backed Securities could suggest tactical trading opportunities for the Funds.
The Advisers will have access to both current market analysis as well as
historical information on the relative value relationships among different
Mortgage-Backed Securities. Current market analysis and historical information
is available in the Goldman Sachs database for most actively traded Mortgage-
Backed Securities.
Goldman Sachs has agreed to provide the Advisers, on a non-exclusive basis,
use of its mortgage prepayment model, OAS model and any other proprietary
services which it now has or may develop, to the extent such services are made
available to other similar customers. Use of these services by the Advisers with
respect to a Fund does not preclude Goldman Sachs from providing these
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<PAGE>
services to third parties or using such services as a basis for trading for its
own account or the account of others. Provision of services to the Advisers
will in no way impinge on the ability of Goldman Sachs to trade for its own
account or to execute trades for the account of others, nor will Goldman Sachs
be obligated to provide the Advisers with all information regarding investment
opportunities or trading strategies that may come to Goldman Sachs' attention.
Furthermore, the Advisers will use the services of other banking and brokerage
firms in addition to Goldman Sachs. The involvement of Goldman Sachs, its
affiliates (including the Advisers), partners and officers, in the investment
activities and business operations of each Fund may present certain potential
conflicts of interest, as described in each Fund's Prospectus under "MANAGEMENT
-- Investment Adviser" and "Activities of Goldman Sachs and its Affiliates and
Other Accounts Managed by Goldman Sachs" in this Additional Statement.
Each Fund's advisory agreement (the "Advisory Agreements") was most
recently approved by the Trustees of the Trust, including a majority of the
Trustees of the Trust who are not parties to such agreements or "interested
persons" (as such term is defined in the Act) of any party thereto (the "non-
interested Trustees"), on April 26, 1994. The applicable Fund's Advisory
Agreement was approved by the shareholders of Adjustable Rate Fund on October
30, 1991, the shareholders of Short-Term Fund on March 27, 1989, the sole
initial shareholder of Short Duration Fund on September 25, 1992 and the sole
initial shareholder of Core Fund on October 29, 1993. Each Advisory Agreement
will remain in effect until June 30, 1995 and will continue in effect with
respect to the applicable Fund from year to year thereafter provided such
continuance is specifically approved at least annually by (a) the vote of a
majority of the outstanding voting securities of such Fund or a majority of the
Trustees of the Trust, and (b) the vote of a majority of the non-interested
Trustees of the Trust, cast in person at a meeting called for the purpose of
voting on such approval.
The Advisory Agreements provide that GSAM and FMLP, in their capacity as
Advisers, may each render similar services to others so long as the services
under the Advisory Agreements are not impaired thereby. Pursuant to the Advisory
Agreements with Adjustable Rate Fund and Short-Term Fund, respectively, FMLP is
entitled to receive a fee payable monthly by Adjustable Rate Fund equal on an
annual basis to .40 of 1% and by Short-Term Fund equal on an annual basis to .50
of 1% of such Funds' respective average daily net assets. FMLP has voluntarily
agreed to reduce such fee by an amount equal to 0.10% annually of such net
assets. Pursuant to the Advisory Agreements with Core Fund and Short Duration
Fund, respectively, GSAM receives a monthly fee payable by each of Short
Duration Fund and Core Fund equal on an annual basis to .40 of 1% of each such
Fund's average daily net assets. The applicable Adviser has agreed voluntarily
to reduce or otherwise limit for the current fiscal
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year certain other expenses of Core Fund, Adjustable Rate Fund, Short-Term Fund
and Short Duration Fund to the extent that such other expenses (excluding
advisory fees, fees paid to Service Organizations (as defined below), taxes,
interest, brokerage, and litigation, indemnification and other extraordinary
expenses) would exceed 0.05% per annum of each such Fund's average daily net
assets. Such reduction or limits, if any, are calculated monthly on a
cumulative basis and may be discontinued or modified by the applicable Adviser
at its discretion at any time.
For the fiscal years ended October 31, 1994, 1993 and 1992, the amounts of
the investment advisory fees incurred by each Fund then in existence were as
follows:
<TABLE>
<CAPTION>
1994 1993 1992
----------------------------------------
<S> <C> <C> <C>
Adjustable Rate Fund* $6,798,185 $9,498,008 $4,799,416
Short-Term Fund** 1,063,867 1,311,347 1,009,499
Short Duration Fund*** 468,868 243,069 0
Core Fund**** 56,255 NA NA
</TABLE>
_________________________
* Had expense limitations not been in effect, Adjustable Rate Fund would
have paid advisory fees of $6,798,185, $9,498,008 and $5,148,731,
respectively, for such periods. In addition, the expenses of Adjustable
Rate Fund were reduced or otherwise limited in the amounts of $442,880,
$731,102, and $1,284,951, respectively, by the Adviser for such periods.
** Had expense limitations not been in effect, Short-Term Fund would have
paid advisory fees of $1,329,834, $1,639,184 and $1,250,089, respectively,
for such periods. In addition, the expenses of Short-Term Fund were
reduced or otherwise limited in the amounts of $115,389, $139,186 and
$342,116, respectively, by the Adviser for such periods.
*** Short Duration Fund commenced operations October 1, 1992. Had expense
limitations not been in effect, Short Duration Fund would have paid
advisory fees of $468,868, $272,283 and $4,388, respectively, for such
periods. In addition, the expenses of Short Duration Fund were reduced or
otherwise limited in the amount of $192,696, $412,548 and $24,469,
respectively, by the Adviser for such periods.
**** Core Fund commenced operations January 5, 1994. For the period
January 5, 1994 to October 31, 1994, if expense limitation had not been in
effect, Core Fund would have paid an advisory fee of $56,255. In
addition, the expenses of Core Fund were reduced or otherwise limited in
the amount of $141,815 for such period.
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Each Advisory Agreement terminates automatically if assigned (as defined in
the Act) and is terminable at any time without penalty by the Trustees of the
Trust or by vote of a majority of the outstanding voting securities of the
applicable Fund on 60 days' written notice to the applicable Adviser and by the
applicable Adviser on 60 days' written notice to the Trust.
As stated in the Prospectuses, each Fund is responsible for the payment of
all expenses other than those assumed by its Adviser. However, each Adviser has
agreed that if, in any fiscal year, the sum of a Fund's expenses otherwise
payable (including the fee payable to the Adviser, but excluding taxes,
interest, brokerage and, where permitted, extraordinary expenses such as for
litigation) would exceed the expense limitations applicable to a Fund imposed by
state securities administrators, as such limitations may be lowered or raised
from time to time, it will reduce its fee or make other arrangements to limit
Fund expenses to the extent required by such expense limitations. The most
restrictive expense limitation imposed by state securities administrators
provides that annual expenses (as defined) may not exceed 2 1/2% of the first
$30 million of the average value of each Fund's net assets, plus 2% of the next
$70 million of such assets, plus 1 1/2% of such assets in excess of $100
million.
Each Adviser performs administrative services for the applicable Funds
under the Advisory Agreements which include, subject to the general supervision
of the Trustees of the Trust, (a) providing supervision of all aspects of the
Funds' non-investment operations (other than certain operations performed by
others pursuant to agreements with the Funds), (b) providing the Funds, to the
extent not provided pursuant to such agreements, the agreement with the Trust's
custodian, transfer and dividend disbursing agent or agreements with other
institutions, with personnel to perform such executive, administrative and
clerical services as are reasonably necessary to provide effective
administration of the Funds, (c) arranging, to the extent not provided pursuant
to such agreements, for the preparation, at the Funds' expense, of each Fund's
tax returns, reports to shareholders, periodic updating of the Funds'
prospectuses and statements of additional information, and reports filed with
the SEC and other regulatory authorities, (d) providing the Funds, to the extent
not provided pursuant to such agreements, with adequate office space and certain
related office equipment and services, and (e) maintaining all of the Funds'
records other than those maintained pursuant to such agreements.
ACTIVITIES OF GOLDMAN SACHS AND ITS AFFILIATES AND OTHER ACCOUNTS MANAGED
-------------------------------------------------------------------------
BY GOLDMAN SACHS. The involvement of the Advisers and Goldman Sachs and their
----------------
affiliates, in the management of, or their interest in, other accounts and other
activities of Goldman Sachs may present conflicts of interest with respect to
the Funds or impede their investment activities.
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<PAGE>
Goldman Sachs and its affiliates, including, without limitation, the
Advisers and their advisory affiliates, have proprietary interests in, and may
manage or advise with respect to, accounts or funds (including separate accounts
and other funds and collective investment vehicles) which have investment
objectives similar to those of the Funds and/or which engage in transactions in
the same types of securities and instruments as the Funds. Goldman Sachs and
its affiliates are major participants in the fixed income markets, in each case
on a proprietary basis and for the accounts of customers. As such, Goldman
Sachs and its affiliates are actively engaged in transactions in the same
securities and instruments in which the Funds invest. Such activities could
affect the prices and availability of the securities and instruments in which
the Funds will invest, which could have an adverse impact on each Fund's
performance. Such transactions, particularly in respect of proprietary accounts
or customer accounts other than those included in the Advisers' and their
advisory affiliates' asset management activities, will be executed independently
of the Funds' transactions and thus at prices or rates that may be more or less
favorable. When the Advisers and their advisory affiliates seek to purchase or
sell the same assets for their managed accounts, including the Funds, the assets
actually purchased or sold may be allocated among the accounts on a basis
determined in its good faith discretion to be equitable. In some cases, this
system may adversely affect the size or the price of the assets purchased or
sold for the Funds.
From time to time, the Funds' activities may be restricted because of
regulatory restrictions applicable to Goldman Sachs and its affiliates, and/or
their internal policies designed to comply with such restrictions. As a result,
there may be periods, for example, when the Advisers will not initiate or
recommend certain types of transactions in certain securities or instruments
with respect to which the Advisers and/or their affiliates are performing
services or when position limits have been reached.
In connection with their management of applicable Funds, the Advisers may
have access to certain fundamental analysis and proprietary technical models
developed by Goldman Sachs and other affiliates. The Advisers will not be under
any obligation, however, to effect transactions on behalf of the Funds in
accordance with such analysis and models. In addition, neither Goldman Sachs
nor any of its affiliates will have any obligation to make available any
information regarding their proprietary activities or strategies, or the
activities or strategies used for other accounts managed by them, for the
benefit of the management of the Funds and it is not anticipated that the
Advisers will have access to such information for the purpose of managing the
Funds. The proprietary activities or portfolio strategies of Goldman Sachs and
its affiliates or the activities or strategies used for accounts managed by them
or other customer accounts could conflict with the transactions and strategies
employed by the Advisers in
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<PAGE>
managing the Funds.
The results of each Fund's investment activities may differ significantly
from the results achieved by the Advisers and their affiliates for their
proprietary accounts or accounts (including investment companies or collective
investment vehicles) managed or advised by them. It is possible that Goldman
Sachs and its affiliates and such other accounts will achieve investment results
which are substantially more or less favorable than the results achieved by a
Fund. Moreover, it is possible that a Fund will sustain losses during periods
in which Goldman Sachs and its affiliates achieve significant profits on their
trading for proprietary or other accounts. The opposite result is also
possible.
An investment policy committee which may include partners of Goldman Sachs
and its affiliates may develop general policies regarding a Fund's activities,
but will not be involved in the day-to-day management of such Fund. In such
instances, those individuals may, as a result, obtain information regarding the
Fund's proposed investment activities which is not generally available to the
public. In addition, by virtue of their affiliation with Goldman Sachs, any
such member of an investment policy committee will have direct or indirect
interests in the activities of Goldman Sachs and its affiliates in securities
and investments similar to those in which the Fund invests.
In addition, certain principals and certain of the employees of the
Advisers are also principals or employees of Goldman Sachs or their affiliated
entities. As a result, the performance by these principals and employees of
their obligations to such other entities may be a consideration of which
investors in the Funds should be aware.
Each Adviser may enter into transactions and invest in instruments on
behalf of the applicable Funds in which customers of Goldman Sachs serve as the
counterparty, principal or issuer. In such cases, such party's interests in the
transaction will be adverse to the interests of the Funds, and such party may
have no incentive to assure that the Funds obtain the best possible prices or
terms in connection with the transactions. Goldman Sachs and its affiliates may
also create, write or issue derivative instruments for customers of Goldman
Sachs or its affiliates, the underlying securities or instruments of which may
be those in which the Funds invest or which may be based on the performance of a
Fund. The Funds may, subject to applicable law, purchase investments which are
the subject of an underwriting or other distribution by Goldman Sachs or its
affiliates and may also enter into transactions with other clients of Goldman
Sachs or its affiliates where such other clients have interests adverse to those
of the Funds. To the extent affiliated transactions are permitted, the Funds
will deal with Goldman Sachs and its affiliates on an
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arm's-length basis.
Each Fund will be required to establish business relationships with its
counterparties based on the Fund's own credit standing. Neither Goldman Sachs
nor its affiliates will have any obligation to allow their credit to be used in
connection with a Fund's establishment of its business relationships, nor is it
expected that a Fund's counterparties will rely on the credit of Goldman Sachs
or any of its affiliates in evaluating the Fund's creditworthiness.
From time to time, Goldman Sachs or any of its affiliates may, but is not
required to, purchase and hold shares of a Fund in order to increase the assets
of the Fund. Increasing a Fund's assets may enhance investment flexibility and
diversification and may contribute to economies of scale that tend to reduce the
Fund's expense ratio. Goldman Sachs reserves the right to redeem at any time
some or all of the shares of a Fund acquired for its own account. A large
redemption of shares of a Fund by Goldman Sachs could significantly reduce the
asset size of the Fund, which might have an adverse effect on the Fund's
investment flexibility, portfolio diversification and expense ratio. Goldman
Sachs will consider the effect of redemptions on a Fund and other shareholders
in deciding whether to redeem its shares.
It is possible that a Fund's holdings will include securities of entities
for which Goldman Sachs performs investment banking services as well as
securities of entities in which Goldman Sachs makes a market. From time to
time, Goldman Sachs' activities may limit the Funds' flexibility in purchases
and sales of securities. When Goldman Sachs is engaged in an underwriting or
other distribution of securities of an entity, the Advisers may be prohibited
from purchasing or recommending the purchase of certain securities of that
entity for the Funds.
DISTRIBUTOR AND TRANSFER AGENT
------------------------------
Goldman Sachs serves as the distributor of shares of the Funds pursuant to
a "best efforts" arrangement as provided by a distribution agreement with the
Trust dated February 1, 1993. Pursuant to the distribution agreement, after the
Funds' Prospectuses and periodic reports have been prepared, set in type and
mailed to shareholders, Goldman Sachs will pay for the printing and distribution
of copies thereof used in connection with the offering to prospective investors.
Goldman Sachs will also pay for other supplementary sales literature and
advertising costs.
Goldman Sachs serves as the Trust's transfer and dividend disbursing agent.
Under its transfer agency agreement with the Trust, Goldman Sachs has undertaken
with the Trust with respect to each Fund to (i) record the issuance, transfer
and redemption of shares, (ii) provide confirmations of purchases and
redemptions,
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<PAGE>
and quarterly statements, as well as certain other statements, (iii) provide
certain information to the Trust's custodian and the relevant subcustodian in
connection with redemptions, (iv) provide dividend crediting and certain
disbursing agent services, (v) maintain shareholder accounts, (vi) provide
certain state Blue Sky and other information, (vii) provide shareholders and
certain regulatory authorities with tax-related information, (viii) respond to
shareholder inquiries, and (ix) render certain other miscellaneous services.
As compensation for the services rendered to the Trust by Goldman Sachs as
transfer and dividend disbursing agent and the assumption by Goldman Sachs of
the expenses related thereto, Goldman Sachs is entitled to receive a fee with
respect to each Fund equal to .04% (on an annualized basis) of the average daily
net assets of the Fund.
For the fiscal years ended October 31, 1994, 1993 and 1992, the amounts of
transfer agency fees incurred by each Fund then in existence were as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------------------------------------
<S> <C> <C> <C>
Adjustable Rate Fund $679,819 $949,645 $514,811
Short-Term Fund 0 0 0
Short Duration Fund* 46,887 27,248 439
Core Fund** 5,637 N/A N/A
</TABLE>
-------------------------
* Short Duration Fund commenced operations on October 1, 1992.
** Core Fund commenced operations on January 5, 1994.
The foregoing distribution and transfer agency agreements each provide that
Goldman Sachs may render similar services to others so long as the services each
provides thereunder to the Funds are not impaired thereby. Each such agreement
also provides that the Trust will indemnify Goldman Sachs against certain
liabilities.
EXPENSES
--------
Except as set forth in the prospectuses under "MANAGEMENT --Investment
Adviser," the Trust, on behalf of each Fund, is responsible for the payment of
each Fund's respective expenses. The expenses borne by Institutional,
Administration and Service Shares of each Fund and Class A Shares of Adjustable
Rate Fund include, without limitation, the fees payable to GSAM or FMLP, as the
case may be, and Goldman Sachs, the fees and expenses of the Trust's custodian,
transfer agent fees, brokerage fees and commissions, filing fees for the
registration or qualification of the Trust's shares under federal or state
securities laws, expenses
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<PAGE>
of the organization of the Trust, fees and expenses incurred by the Trust in
connection with membership in investment company organizations, taxes, interest,
costs of liability insurance, fidelity bonds or indemnification, any costs,
expenses or losses arising out of any liability of, or claim for damages or
other relief asserted against, the Trust for violation of any law, legal, tax
and auditing fees and expenses (including the cost of legal and certain
accounting services rendered by employees of Goldman Sachs, or its affiliates,
with respect to the Trust), expenses of preparing and setting in type
Prospectuses, Additional Statements, proxy material, reports and notices and the
printing and distributing of the same to the Trust's shareholders and regulatory
authorities, any administration or service fees paid to Service Organizations,
distribution expenses paid to Goldman Sachs (Class A Shares of Adjustable Rate
Fund only), any compensation and expenses of its "non-interested" Trustees and
extraordinary expenses, if any, incurred by the Trust. Except for any
administration or service fees of each Fund paid to Service Organizations and
distribution fees of Class A Shares of ARGA Fund, all Fund expenses are borne on
a non-class specific basis.
Fees and expenses of legal counsel, registering shares of each Fund,
holding meetings and communicating with shareholders may include an allocable
portion of the cost of maintaining an internal legal and compliance department.
Each Fund may also bear an allocable portion of the costs incurred by GSAM or
FMLP, as the case may be, in performing certain accounting services not being
provided by the Trust's custodian.
CUSTODIAN AND SUB-CUSTODIANS
----------------------------
State Street Bank and Trust Company ("State Street"), P.O. Box 1713,
Boston, Massachusetts 02105, is the custodian of the Trust's portfolio
securities and cash. State Street also maintains the Trust's accounting records.
State Street may appoint sub-custodians from time to time to hold certain
securities purchased by the Trust and to hold cash for the Trust.
INDEPENDENT PUBLIC ACCOUNTANTS
------------------------------
Arthur Andersen LLP, independent public accountants, One International
Place, 100 Oliver Street, Boston, Massachusetts 02110, have been selected as
auditors of the Trust. In addition to audit services, Arthur Andersen LLP
prepares the Trust's federal and state tax returns, and provides consultation
and assistance on accounting, internal control and related matters.
PORTFOLIO TRANSACTIONS
The portfolio transactions for the Funds are generally effected at a net
price without a broker's commission (i.e., a
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<PAGE>
dealer is dealing with a Fund as principal and receives compensation equal to
the spread between the dealer's cost for a given security and the resale price
of such security). In connection with portfolio transactions, the Advisory
Agreements provide that the Advisers shall attempt to obtain the best net price
and the most favorable execution. The Advisory Agreements provide that, on
occasions when the Advisers deem the purchase or sale of a security to be in the
best interests of a Fund as well as its other customers (including any other
fund or other investment company or advisory account for which the Advisers or
an affiliate act as investment adviser), each Fund, to the extent permitted by
applicable laws and regulations, may aggregate the securities to be sold or
purchased for each Fund with those to be sold or purchased for such other
customers in order to obtain the best net price and most favorable 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 Adviser in the manner it
considers to be most equitable and consistent with its fiduciary obligations to
the applicable Fund and such other customers. In some instances, this procedure
may adversely affect the size and price of the position obtainable for a Fund.
To the extent that the execution and price offered by more than one dealer are
comparable, the Advisory Agreements permit each Adviser, in its discretion, to
purchase and sell portfolio securities to and from dealers who provide the Trust
with brokerage or research services.
For the fiscal years ended October 31, 1994, 1993 and 1992, the Funds then
in existence paid no brokerage commissions.
During the fiscal year ended October 31, 1994, the Funds acquired and sold
securities of their regular broker-dealers: Nomura Securities International,
Chemical Securities, J.P. Morgan & Co., Inc., UBS Philips Securities, Inc.,
Lehman Brothers, Inc., Nikko Securities, Inc., Morgan Stanley & Co., Smith
Barney, Shearson, Bankers Trust Company and Salomon Brothers, Inc. At October
31, 1994, Adjustable Rate Fund and Short Duration Fund held no securities of
their regular broker-dealers. As of the same date, Short-Term Fund and Core Fund
held the following amounts of securities of their regular broker-dealers, as
defined in Rule 10b-1 under the 1940 Act, or their parents ($ in thousands):
Short Term Fund: Salomon Brothers, Inc. ($17,840) and Lehman Brothers, Inc.
($14,520); Core Fund: Salomon Brothers, Inc. ($160) and Lehman Brothers, Inc.
($130).
SHARES OF THE TRUST
The Trust's Agreement and Declaration of Trust dated September 24, 1987, as
amended (the "Trust Agreement"), permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest of one or more
separate series, provided each share has a par value of $.001 per share,
represents an equal
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<PAGE>
proportionate interest in that series with each other share of the same class
and is entitled to such dividends out of the income belonging to such series as
are declared by the Trustees.
The Trustees have authority under the Trust Agreement to create and
classify shares of beneficial interest in separate series of the Trust without
further action by shareholders. As of the date of this Additional Statement, the
Trustees have authorized shares of the Funds and three other series. The Trust
Agreement further authorizes the Trustees of the Trust to classify or reclassify
any series or portfolio of shares into one or more classes. Pursuant thereto,
the Board of Trustees has authorized the issuance of three classes of shares of
Short-Term Fund, Short Duration Fund and Core Fund: Institutional Shares,
Administration Shares and Service Shares. Also pursuant thereto, the Board of
Trustees has authorized the issuance of four classes of shares of Adjustable
Rate Fund: Institutional Shares, Administration Shares, Service Shares and Class
A Shares. As of October 31, 1994, no Service Shares of the Adjustable Rate Fund
and Short-Term Fund were outstanding; no Administration or Service Shares of
Core Fund were outstanding; and no Class A Shares of Adjustable Rate Fund were
outstanding.
Each Institutional Share, Administration Share, Service Share and Class A
Share (Adjustable Rate Fund only) of a Fund represents an equal proportionate
interest in the assets belonging to the Fund. All Fund expenses are based on a
percentage of a Fund's aggregate average net assets, except that the respective
account administration and service fees and, with respect to Adjustable Rate
Fund, distribution fees relating to a particular class will be borne exclusively
by that class. It is contemplated that most Administration Shares and Service
Shares will be held in accounts of which the record owner is a bank or other
institution acting, directly or through an agent, as nominee for its customers
who are the beneficial owners of the shares or another organization designated
by such bank or institution. Administration Shares and Service Shares will each
be marketed only to such investors, at net asset value with no sales load.
Institutional Shares may be purchased for accounts in the name of an investor or
institution that is not compensated by a Fund for services provided to the
institution's customers. Administration Shares may be purchased for accounts
held in the name of an institution that provides certain account administration
services to its customers, including maintenance of account records and
processing orders to purchase, redeem and exchange Administration Shares.
Administration Shares bear the cost of account administration fees at the annual
rate of up to 0.25% of the average daily net assets of such Administration
Shares. Service Shares may be purchased for accounts held in the name of an
institution that provides certain account administration and shareholder liaison
services to its customers, including maintenance of account records and
processing orders to purchase, redeem or exchange Service Shares, responding to
customer inquiries
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<PAGE>
and assisting customers with investment procedures. Service Shares bear the
cost of service fees at the annual rate of up to 0.50 of 1% of the average daily
net assets of such Service Shares. (Institutions that provide services to
holders of Administration Shares or Service Shares are referred to in this
Additional Statement as "Service Organizations"). Class A Shares of Adjustable
Rate Fund are sold, with an initial sales charge of up to 1.50% through brokers
and dealers who are members of the National Association of Securities Dealers,
Inc. and certain other financial service firms that have sales agreements with
Goldman Sachs. Class A Shares of ARGA Fund bear the cost of distribution and
service (Rule 12b-1) fees at the aggregate rate of up to 0.50% of the average
daily net assets of such Class A Shares. Currently, Goldman Sachs has
voluntarily agreed to limit the amount of such fee to 0.25% of average daily net
assets attributable to Class A Shares. Goldman Sachs may discontinue or modify
such limitations at any time.
It is possible that an institution or its affiliate may offer different
classes of shares (i.e., Institutional, Administration, Service and, for
Adjustable Rate Fund, Class A Shares) to its customers and thus receive
different compensation with respect to different classes of shares of each Fund.
Administration Shares, Service Shares and, for Adjustable Rate Fund, Class A
Shares may each have certain exclusive voting rights on matters relating to
their respective plans. Shares of each class may be exchanged only for shares
of the same class in another fund and certain money market funds sponsored by
Goldman Sachs. Dividends paid by each Fund, if any, with respect to each class
of shares will be calculated in the same manner, at the same time on the same
day and will be in the same amount, except for differences caused by the fact
that the respective account administration, service and distribution (Class A
Shares of Adjustable Rate Fund only) fees relating to a particular class will be
borne exclusively by that class. Similarly, the net asset value per share may
differ depending upon the class of shares purchased.
Certain aspects of the shares may be altered, after advance notice to
shareholders, if it is deemed necessary in order to satisfy certain tax
regulatory requirements.
When issued, each Fund's shares are fully paid and non-assessable by the
Trust. In the event of liquidation of a Fund, shareholders of that Fund are
entitled to share pro rata in the net assets of that Fund available for
distribution to such shareholders. All shares entitle their holders to one vote
per share, are freely transferable and have no preemptive, subscription or
conversion rights.
As of February 17, 1995, the following entities and persons
beneficially owned 5% or more of the outstanding shares of the following Funds:
Adjustable Rate Fund - First Security Bank of
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<PAGE>
Idaho, FBO: Idaho Housing Agency, P. O. Box 30007, Salt Lake City, UT 84130
(5.34%); St. Treasurer/Nebr. Invest. Council, Attn: Gayle Ducker, Fundex
Corporation, Attn: Mitsuru Hashimoto, 1875 South Grant Street, Suite 740, San
Mateo, CA 94402-2670 (8.24%); Short-Term Fund - West Virginia University
Foundation, Attn: Marie Amoyt, 3168 Collins Ferry Road, P. O. Box 4533,
Morgantown, WV 26504-4533 (5.56%); Scott Accounts, P. O. Box 8048,
Charlottesville, VA 22906-8048 (7.16%); Central Carolina Bank & Trust Co., Attn:
Norwood Thomas, Jr., P. O. Box 931, Durham, NC 27702 (8.34%); City of Oakland,
Attn: Gary Breaux, 475 14th Street, 10th Fl., Oakland, CA 94612 (9.32%) and
Richfield Bank & Trust Co., Attn: Judith Ferguson, 6625 Lyndale Ave., South
Richfield, MN 55423 (11.30%); Short Duration Fund - G-K-G Inc., Attn: Bernard
Gassin, 166 Oak Knoll Terrace, Highland Park, IL 60035 (5.05); Westport Bank &
Trust, Attn: Arnold Levine, P. O. Box 5177, Westport, CT 06881 (6.09%); Donald
R. Grant, 85 Broad Street, New York, NY 10004(8.55%); and MGIC, Attn: James
McGinnis, P. O. Box 297, Milwaukee, WI 53201 (28.85%).
SHAREHOLDER AND TRUSTEE LIABILITY
Under Massachusetts law, there is a remote possibility that shareholders of
a business trust could, under certain circumstances, be held personally liable
as partners for the obligations of such trust. The Trust Agreement contains an
express disclaimer of shareholder liability for acts or obligations of the Trust
and requires that notice of such disclaimer be given in each agreement,
obligation or instrument entered into or executed by the Trust or the Trustees.
The Trust Agreement provides for indemnification out of Trust property of any
shareholder charged or held personally liable for obligations or liabilities of
the Trust solely by reason of being or having been a shareholder of the Trust
and not because of such shareholder'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 shareholder as
such for any obligation or liability of the Trust and satisfy any judgment
thereon. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the Trust itself
would be unable to meet its obligations.
Rule 18f-2 under the Act provides that any matter required to be submitted
by the provisions of the Act, applicable state law or otherwise to the holders
of the outstanding voting securities of an investment company (such as the
Trust) shall not be deemed to have been effectively acted upon unless approved
by the holders of a majority of the outstanding shares of each class or series
affected by such matter. Rule 18f-2 further provides that a class or series
shall be deemed to be affected by a matter unless the interests of each class or
series in the matter are substantially identical or the matter does not affect
any interest of such class or series. However, Rule 18f-2 exempts the selection
of independent public
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<PAGE>
accountants, the approval of principal distribution contracts and the election
of Trustees from the separate voting requirements of Rule 18f-2.
NET ASSET VALUE
Under the Act, the Trustees of the Trust are responsible for determining in
good faith the fair value of securities of the Funds. In accordance with
procedures adopted by the Trustees of the Trust, the net asset value per share
of each class of each Fund is calculated by determining the value of the the net
assets attributable to each class of that Fund and dividing by the number of
outstanding shares of that class. All securities are valued as of the close of
regular trading on the New York Stock Exchange (normally 4:00 p.m. New York
time) on each Business Day (as defined in each Fund's prospectus).
Portfolio securities for which accurate market quotations are readily
available will be valued on the basis of quotations provided by dealers in such
securities or furnished by a pricing service. Portfolio securities for which
accurate market quotations are not readily available and other assets will be
valued at fair value using methods determined in good faith by the Adviser under
the supervision of the Trustees and may include yield equivalents or a pricing
matrix.
TAXATION
The following is a summary of the principal U.S. federal income, and
certain state and local, tax considerations regarding the purchase, ownership
and disposition of shares in the Funds. This summary does not address special
tax rules applicable to certain classes of investors, such as tax-exempt
entities, insurance companies and financial institutions. Each prospective
shareholder is urged to consult his own tax adviser with respect to the specific
federal, state, local and foreign tax consequences of investing in the Funds.
This summary is based on the laws in effect on the date of this Additional
Statement, which are subject to change.
GENERAL
-------
Each series of the Trust, including each Fund, is a separate taxable
entity. Each Fund has qualified and elected to be treated and intends to
continue to qualify for each taxable year as a regulated investment company
under Subchapter M of the Code.
Qualification as a regulated investment company under the Code requires,
among other things, that (a) a Fund derive at least 90% of its annual gross
income (including tax-exempt interest) from dividends, interest, payments with
respect to securities loans and
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gains from the sale or other disposition of stocks or securities, or foreign
currencies or other income (including but not limited to gains from options,
futures and forward contracts) derived with respect to its business of investing
in such stock, securities or currencies (the "90% gross income test"); (b) a
Fund derive less than 30% of its annual gross income from the sale or other
disposition of any of the following which was held for less than three months:
(i) stock or securities, (ii) options, futures or forward contracts (other than
options, futures or forward contracts on foreign currencies) and (iii) foreign
currencies and foreign currency options, futures and forward contracts that are
not directly related to the Fund's principal business of investing in stocks or
securities or options and futures with respect to such stocks or securities (the
"short-short test"); and (c) a Fund diversify its holdings so that, at the close
of each quarter of its taxable year, (i) at least 50% of the market value of its
total (gross) assets is comprised of cash, cash items, United States Government
securities, securities of other regulated investment companies and other
securities limited in respect of any one issuer to an amount not greater in
value than 5% of the value of the Fund's total assets and to not more than 10%
of the outstanding voting securities of such issuer, and (ii) not more than 25%
of the value of its total assets is invested in the securities of any one issuer
(other than United States Government securities and securities of other
regulated investment companies) or two or more issuers controlled by the Fund
and engaged in the same, similar or related trades or businesses. Gains from
the sale or other disposition of foreign currencies (or options, futures or
forward contracts on foreign currencies) that are not directly related to Core
Fund's principal business of investing in stock or securities or options and
futures with respect to stock or securities will be treated as gains from the
sale of investments held for less than three months under the short-short test
(even though characterized as ordinary income for some purposes) if such
currencies or instruments were held for less than three months. In addition,
future Treasury regulations could expect to provide that qualifying income under
the 90% gross income test will not include gains from foreign currency
transactions that are not directly related to Core Fund's principal business of
investing in stock or securities or options and futures with respect to stock or
securities. Using foreign currency positions or entering into foreign currency
options, futures and forward contracts for purposes other than hedging currency
risk with respect to securities in Core Fund's portfolio or anticipated to be
acquired may not qualify as "directly related" under these tests.
As a regulated investment company, a Fund will not be subject to U.S.
federal income tax on the portion of its income and capital gains that it
distributes to its shareholders in any taxable year for which it distributes, in
compliance with the Code's timing requirements, at least 90% of its "investment
company taxable income" (which includes dividends, taxable interest, taxable
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original issue discount income, market discount income, income from securities
lending, net short-term capital gain in excess of net long-term capital loss,
and any other taxable income other than "net capital gain" as defined below and
is reduced by deductible expenses) and at least 90% of the excess of its gross
tax-exempt interest income over certain disallowed deductions ("net tax-exempt
interest"). A Fund may retain for investment its "net capital gain" (which
consists of the excess of its net long-term capital gain over its net short-term
capital loss). However, if a Fund retains any investment company taxable income
or net capital gain, it will be subject to tax at regular corporate rates on the
amount retained. If a Fund retains any net capital gain, the Fund may designate
the retained amount as undistributed net capital gain in a notice to its
shareholders who, if subject to U.S. federal income tax on long-term capital
gains, (i) will be required to include in income for federal income tax
purposes, as long-term capital gain, their shares of such undistributed amount,
and (ii) will be entitled to credit their proportionate shares of the tax paid
by the Fund against their U.S. federal income tax liabilities, if any, and to
claim refunds to the extent the credit exceeds such liabilities. For U.S.
federal income tax purposes, the tax basis of shares owned by a shareholder of
the Fund will be increased by an amount equal under current law to 65% of the
amount of undistributed net capital gain included in the shareholder's gross
income. Each Fund intends to distribute at least annually to its shareholders
all or substantially all of its investment company taxable income (if any), net
capital gain and any net tax-exempt interest. If for any taxable year a Fund
does not qualify as a regulated investment company, it will be taxed on all of
its investment company taxable income and net capital gain at corporate rates,
its net tax-exempt interest may be subject to the alternative minimum tax, and
its distributions to shareholders will be taxable as ordinary dividends to the
extent of its current and accumulated earnings and profits.
For federal income tax purposes, each Fund is permitted to carry forward a
net capital loss in any year to offset its own net capital gains, if any, during
the eight years following the year of the loss. At October 31, 1994, the
Adjustable Rate Fund had approximately $9,950,000 of capital loss carryforwards,
which expires as follows: $2,220,000 in 2000 and $7,730,000 in 2001. At
October 31, 1994, the Core Fund had approximately $458,000 of capital loss
carryforwards, which expires in 2002. At October 31, 1994, the Short-Term Fund
and Short Duration Fund had no captial loss carryforwards.
In order to avoid a 4% federal excise tax, each Fund must distribute or be
deemed to have distributed by December 31 of each calendar year at least 98% of
its taxable ordinary income for such year, at least 98% of the excess of its
realized capital gains over its realized capital losses (generally computed on
the basis of the one-year period ending on October 31 of such year) and 100% of
any
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taxable ordinary income and the excess of realized capital gains over realized
capital losses for the prior year that was not distributed during such year and
on which the Fund did not pay federal income tax. The Funds anticipate that
they will generally make timely distributions of income and capital gains in
compliance with these requirements so that they will generally not be required
to pay the excise tax.
For federal income tax purposes, dividends declared by a Fund in October,
November or December as of a record date in such a month which are actually paid
in January of the following year will be treated as if they were paid by the
Fund and received by shareholders on December 31 of the year declared.
Short Duration Fund may purchase Municipal Securities together with the
right to resell the securities to the seller at an agreed upon price or yield
within a specified period prior to the maturity date of the securities. Such a
right to resell is commonly known as a "put" and is also referred to as a
"standby commitment." Short Duration Fund may pay for a standby commitment
either separately, in cash, or in the form of a higher price for the securities
which are acquired subject to the standby commitment, thus increasing the cost
of securities and reducing the yield otherwise available. Additionally, the
Short Duration Fund may purchase beneficial interests in Municipal Securities
held by trusts, custodial arrangements or partnerships and/or combined with
third-party puts and other types of features such as interest rate swaps; those
investments may require the Fund to pay "tender fees" or other fees for the
various features provided.
The Internal Revenue Service (the "Service") has issued a regulated ruling
to the effect that, under specified circumstances, a registered investment
company will be the owner of tax-exempt municipal obligations acquired subject
to a put option. The Service has also issued private letter rulings to certain
taxpayers (which do not serve as precedent for other taxpayers) to the effect
that tax-exempt interest received by a regulated investment company with respect
to such obligations will be tax-exempt in the hands of the company and may be
distributed to its shareholders as exempt-interest dividends. The Service has
subsequently announced that it will not ordinarily issue advance rulings letters
as to the identity of the true owner of property in cases involving the sale of
securities or participation interests therein if the purchaser has the right to
cause the security, or the participation of interest therein, to be purchased by
either the seller or a third party. Short Duration Fund intends to take the
position that it is the owner of any municipal obligations acquired subject to a
standby commitment or other third party put and that tax-exempt interest earned
with respect to such municipal obligations will be tax-exempt in its hands.
There is no assurance that the Service will agree with such position in any
particular case. Additionally, the federal income tax treatment of certain
other
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aspects of these investments, including the treatment of tender fees paid by the
Short Duration Fund, in relation to various regulated investment company tax
provisions is unclear. However, the Adviser intends to manage the Short
Duration Fund's portfolio in a manner designed to minimize any adverse impact
from the tax rules applicable to these investments.
Gains and losses on the sale, lapse, or other termination of options and
futures contracts, options thereon and certain forward contracts (except certain
foreign currency options, forward contracts and futures contracts) will
generally be treated as capital gain and losses. Certain of the futures
contracts, forward contracts and options held by a Fund will be required to be
"marked-to-market" for federal income tax purposes, that is, treated as having
been sold at their fair market value on the last day of the Fund's taxable year.
Any gain or loss recognized on actual or deemed sales of these futures contracts
or options will (except for certain foreign currency options, forward contracts,
and futures contracts) be treated as 60% long-term capital gain or loss and 40%
short-term capital gain or loss. As a result of certain hedging transactions
entered into by a Fund, the Fund may be required to defer the recognition of
losses on futures contracts and options or underlying securities foreign
currencies to the extent of any unrecognized gains or related positions held by
the Fund and the characterization of gains or losses as long-term or short-term
may be changed. The short-short test described above may limit each Fund's
ability to use options, futures and forward transactions as well as its ability
to engage in short sales. The tax provisions described above applicable to
options, futures and forward contracts may affect the amount, timing and
character of a Fund's distributions to shareholders. Certain tax elections may
be available to the Funds to mitigate some of the unfavorable consequences
described in this paragraph.
Section 988 of the Code contains special tax rules applicable to certain
foreign currency transactions that may affect the amount, timing and character
of income, gain or loss recognized by Core Fund. Under these rules, foreign
exchange gain or loss realized by Core Fund with respect to foreign currencies
and certain futures and options thereon, foreign currency-denominated debt
instruments, foreign currency forward contracts, and foreign currency-
denominated payables and receivables will generally be treated as ordinary
income or loss, although in some cases elections may be available that would
alter this treatment. If a net foreign exchange loss treated as ordinary loss
under Section 988 of the Code were to exceed Core Fund's investment company
taxable income (computed without regard to such loss) for a taxable year, the
resulting loss would not be deductible by Core Fund or its shareholders in
future years. Net loss, if any, from certain foreign currency transactions or
instruments could exceed net investment income otherwise calculated for
accounting purposes with the result being either no dividends being paid or a
portion
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of Core Fund's dividends being treated as a return of capital for tax purposes,
nontaxable to the extent of a shareholder's tax basis in his shares and, once
such basis is exhausted, generally giving rise to capital gains.
Core Fund may be subject to foreign taxes on its income (possibly
including, in some cases, capital gains) from foreign securities. Tax
conventions between certain countries and the U.S. may reduce or eliminate such
taxes. Because more than 50% of Core Fund's total assets at the close of any
taxable year will generally not consist of stock or securities of foreign
corporations, Core Fund will generally not qualify to file an election with the
Internal Revenue Service pursuant to which shareholders of Core Fund would be
required to (i) include in ordinary gross income (in addition to taxable
dividends actually received) their pro rata shares of foreign income taxes paid
by Core Fund even though not actually received, and (ii) treat such respective
pro rata portions as foreign income taxes paid by them. Core Fund will, however,
be entitled to deduct such taxes in computing its investment company taxable
income.
If Core Fund acquires stock in certain non-U.S. corporations that receive
at least 75% of their annual gross income from passive sources (such as
interest, dividends, rents, royalties or capital gain) or hold at least 50% of
their assets in investments producing such passive income ("passive foreign
investment companies") Core Fund could be subject to federal income tax and
additional interest charges on "excess distributions" received from such
companies or gain from the sale of such stock in such companies, even if all
income or gain actually received by Core Fund is timely distributed to its
shareholders. Core Fund would not be able to pass through to its shareholders
any credit or deduction for such a tax. Certain elections may, if available,
ameliorate these adverse tax consequences, but any such election would require
Core Fund to recognize taxable income or gain without the concurrent receipt of
cash. Core Fund may limit and/or manage its holdings in passive foreign
investment companies to minimize its tax liability or maximize its return from
these investments.
A Fund's investment in zero coupon securities, deferred interest securities
or other securities bearing original issue discount or, if a Fund elects to
include market discount in income currently, market discount, as well as any
"mark-to-market" gain from options and futures contracts, as described below
will generally cause it to realize income or gain prior to the receipt of cash
payments with respect to these securities or contracts. In order to distribute
this income or gain, maintain its qualification as a regulated investment
company and avoid federal income or excise taxes, a Fund may be required to
liquidate portfolio securities that it might otherwise have continued to hold.
The federal income tax rules applicable to mortgage dollar
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rolls and interest rate and currency swaps, floors, caps and collars are unclear
in certain respects, and a Fund may also be required to account for these
instruments under tax rules in a manner that, under certain circumstances, may
limit its transactions in these instruments.
TAXABLE U.S. SHAREHOLDERS -- DISTRIBUTIONS
SHORT DURATION FUND. Short Duration Fund expects to qualify to pay "exempt-
interest dividends," as defined in the Code. To qualify to pay exempt-interest
dividends, Short Duration Fund must, at the close of each quarter of its taxable
year, have at least 50% of the value of its total assets invested in tax-exempt
Municipal Securities. In purchasing Municipal Securities, Short Duration Fund
intends to rely on opinions of nationally recognized bond counsel for each issue
as to the excludability of interest on such obligations from gross income for
federal income tax purposes. Short Duration Fund will not undertake independent
investigations concerning the tax-exempt status of such obligations, nor does it
guarantee or represent that bond counsels' opinions are correct. Bond counsels'
opinions will generally be based in part upon covenants by the issuers and
related parties regarding continuing compliance with federal tax requirements.
Tax laws enacted during the last decade not only had the effect of limiting the
purposes for which tax-exempt bonds could be issued and reducing the supply of
such bonds, but also increased the number and complexity of requirements that
must be satisfied on a continuing basis in order for bonds to be and remain tax-
exempt. If the issuer of a bond or a user of a bond-financed facility fails to
comply with such requirements at any time, interest on the bond could become
taxable, retroactive to the date the obligation was issued. In that event, a
portion of the Short Duration Fund's distributions attributable to interest the
Short Duration Fund received on such bond for the current year and for prior
years could be characterized or recharacterized as taxable income. The
availability of tax-exempt obligations and the value of Short Duration Fund's
portfolio may be affected by restrictive federal income tax legislation enacted
in recent years or by similar, future legislation. If Short Duration Fund
satisfies the applicable requirements, dividends paid by the Fund which are
attributable to tax exempt interest on Municipal Securities and designated by
Short Duration Fund as exempt-interest dividends in a written notice mailed to
its shareholders within sixty days after the close of its taxable year may be
treated by shareholders for all purposes as items of interest excludable from
their gross income under Section 103(a) of the Code. Exempt-interest dividends
Short Duration Fund receives from other regulated investment companies,
including exempt-interest dividends on auction rate preferred securities of such
companies held by Short Duration Fund, are treated as interest on Municipal
Securities and may be distributed by Short Duration Fund as exempt-interest
dividends. The recipient of tax-exempt income is required to report such
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income on his federal income tax return. However, a shareholder is advised to
consult his tax adviser with respect to whether exempt-interest dividends retain
the exclusion under Section 103(a) if such shareholder would be treated as a
"substantial user" under Section 147(a)(1) with respect to some or all of the
tax-exempt obligations held by Short Duration Fund. The Code provides that
interest on indebtedness incurred or continued to purchase or carry shares of
Short Duration Fund is not deductible to the extent attributable to exempt-
interest dividends.
Although all or a substantial portion of the dividends paid by Short
Duration Fund may be excluded by shareholders of Short Duration Fund from their
gross income for federal income tax purposes, Short Duration Fund may purchase
specified private activity bonds, the interest from which may be a preference
item for purposes of the federal alternative minimum tax (both individual and
corporate). All exempt-interest dividends from Short Duration Fund, whether or
not attributable to private activity bond interest, may increase the "adjusted
current earnings" preference item for purposes of the corporate alternative
minimum tax, to the extent not already included in alternative minimum taxable
income as income attributable to private activity bonds, and will be taken into
account in determining the extent to which a shareholder's Social Security or
certain railroad retirement benefits are taxable.
ALL FUNDS. Distributions of investment company taxable income, as defined
above, are taxable to shareholders who are subject to tax as ordinary income
whether paid in cash or reinvested in additional shares. Taxable distributions
include distributions from any Fund, including Short Duration Fund, that are
attributable to (i) taxable income, including but not limited to dividends,
taxable bond interest, recognized market discount income, original issue
discount income accrued with respect to taxable bonds, income from repurchase
agreements, income from securities lending, income from dollar rolls, income
from interest rate or currency swaps, caps, floors and collars, and a portion of
the discount from certain stripped tax-exempt obligations or their investments
(including from the disposition of rights to when-issued securities prior to
issuance) or from options, futures or certain forward contracts. Any portion of
such taxable distributions that is attributable to a Fund's net capital gain, as
defined above, may be designated by the Fund as a "capital gain dividend,"
taxable to shareholders as long-term capital gain whether received in cash or
additional shares and regardless of the length of time their shares of a Fund
have been held.
It is expected that distributions made by the Funds will ordinarily not
qualify for the dividends-received deduction for corporations because qualifying
distributions may be made only from a Fund's dividend income that it receives
from stock in U.S. domestic corporations. The Funds do not intend to purchase
stock
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of domestic corporations other than limited investments in investment companies,
distributions from which may in rare cases qualify as dividends for this
purpose. The dividends-received deduction, if available, is reduced to the
extent the shares with respect to which the dividends are received are treated
as debt-financed under the federal income tax law and is eliminated if the
shares are deemed to have been held for less than a minimum period, generally 46
days. Receipt of certain distributions qualifying for the deduction may result
in reduction of the tax basis of the corporate shareholder's shares and may give
rise to or increase its liability for federal corporate alternative minimum tax.
Distributions in excess of a Fund's current and accumulated earnings and
profits, as computed for federal income tax purposes, will first reduce a
shareholder's basis in his shares and, after the shareholder's basis is reduced
to zero, will generally constitute capital gains to a shareholder who holds his
shares as capital assets. Amounts that are not allowable as a deduction in
computing taxable income, including expenses associated with earning tax-exempt
interest income, do not reduce current earnings and profits for these purposes.
Consequently, the portion, if any, of Short Duration Fund's distributions from
gross tax-exempt interest income that exceeds its net tax-exempt interest would
be taxable as ordinary income to the extent of such disallowed deductions even
though such excess portion may represent an economic return of capital.
Shareholders receiving a distribution in the form of newly issued shares
will be treated for U.S. federal income tax purposes as receiving a distribution
in an amount equal to the amount of cash that they would have received had they
elected to receive cash and will have a cost basis in the shares received equal
to such amount.
TAXABLE U.S. SHAREHOLDERS -- SALE OF SHARES
When a shareholder's shares are sold, redeemed or otherwise disposed of,
the shareholder will generally recognize gain or loss equal to the difference
between the shareholder's adjusted tax basis in the shares and the cash, or fair
market value of any property, received. Assuming the shareholder holds the
shares as a capital asset at the time of such sale or other disposition, such
gain or loss should be capital in character, and long-term if the shareholder
has a tax holding period for the shares of more than one year, otherwise short-
term. All or a portion of a sales charge paid in purchasing Class A shares of
Adjustable Rate Fund cannot be taken into account for purposes of determining
gain or loss on the redemption or exchange of such shares within 90 days after
their purchase to the extent shares of that Fund or another fund are
subsequently acquired without payment of a sales charge pursuant to the
reinvestment or exchange privilege. Any disregarded portion of such charge will
result in an increase in the shareholder's tax
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basis in the shares subsequently acquired. If a shareholder received a capital
gain dividend with respect to shares and such shares have a tax holding period
of six months or less at the time of the sale or redemption, then any loss the
shareholder realizes on the sale or redemption will be treated as a long-term
capital loss to the extent of such capital gain dividend. Also, any losses
realized by shareholders who dispose of shares of Short Duration Fund with a tax
holding period of six months or less are disallowed to the extent of any exempt-
interest dividends received with respect to such shares. Additionally, any loss
realized on a sale or redemption of shares of a Fund may be disallowed under
"wash sale" rules to the extent the shares disposed of are replaced within a
period of 61 days beginning 30 days before and ending 30 days after the shares
are disposed of, such as pursuant to a dividend reinvestment in shares of the
Fund. If disallowed, the loss will be reflected in an adjustment to the basis
of the shares acquired.
After the close of each calendar year, Short Duration Fund will inform
shareholders of the federal income tax status of its dividends and distributions
for such year, including the portion of such dividends that qualifies as tax-
exempt and the portion, if any, that should be treated as a tax preference item
for purposes of the federal alternative minimum tax. Shareholders who have not
held shares of Short Duration Fund for its full taxable year may have designated
as tax-exempt or as a tax preference item a percentage of distributions which
is not equal to the actual amount of tax-exempt income or tax preference item
income earned by Short Duration Fund during the period of their investment in
Short Duration Fund.
All distributions whether received in shares or in cash, as well as
redemptions and exchanges, must be reported by each shareholder who is required
to file a U.S. Federal income tax return.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions, and certain prohibited transactions is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their tax
advisers for more information.
BACKUP WITHHOLDING
Each Fund will be required to report to the Service all taxable
distributions, as well as gross proceeds from the redemption or exchange of Fund
shares, except in the case of certain exempt recipients, i.e., corporations and
certain other investors distributions to which are exempt from the information
reporting provisions of the Code. Under the backup withholding provisions of
Code Section 3406 and applicable Treasury
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regulations, all such reportable distributions and proceeds may be subject to
backup withholding of federal income tax at the rate of 31% in the case of non-
exempt shareholders who fail to furnish the Funds with their correct taxpayer
identification number and with certain required certifications or if the
Internal Revenue Service or a broker notifies the Funds that the number
furnished by the shareholder is incorrect or that the shareholder is subject to
backup withholding as a result of failure to report interest or dividend income.
However, any taxable distributions from Short Duration Fund will not be subject
to backup withholding if such Fund reasonably estimates that at least 95% of its
distributions will be exempt-interest dividends. A Fund may refuse to accept an
application that does not contain any required taxpayer identification number or
certification that the number provided is correct. If the backup withholding
provisions are applicable, any such distributions and proceeds, whether taken in
cash or reinvested in shares, will be reduced by the amounts required to be
withheld. Any amounts withheld may be credited against a shareholder's U.S.
federal income tax liability. Investors should consult their tax advisers about
the applicability of the backup withholding provisions.
NON-U.S. SHAREHOLDERS
The foregoing discussion relates solely to U.S. federal income tax law as
it applies to "U.S. persons" (i.e., U.S. citizens and residents and U.S.
domestic corporations, partnerships, trusts and estates) subject to tax under
such law. Dividends of investment company taxable income distributed by a Fund
to a shareholder who is not a U.S. person will be subject to U.S. withholding
tax at the rate of 30% (or a lower rate provided by an applicable tax treaty)
unless the dividends are effectively connected with a U.S. trade or business of
the shareholder, in which case the dividends will be subject to tax on a net
income basis at the graduated rates applicable to U.S. individuals or domestic
corporations. Distributions of net capital gain, including amounts retained by a
Fund which are designated as undistributed capital gains, to a shareholder who
is not a U.S. person will not be subject to U.S. income or withholding tax
unless the distributions are effectively connected with the shareholder's trade
or business in the United States or, in the case of a shareholder who is a
nonresident alien individual, the shareholder is present in the United States
for 183 days or more during the taxable year and certain other conditions are
met.
Any gain realized by a shareholder who is not a U.S. person upon a sale or
redemption of shares of a Fund will not be subject to U.S. federal income or
withholding tax unless the gain is effectively connected with the shareholder's
trade or business in the United States, or in the case of a shareholder who is a
nonresident alien individual, the shareholder is present in the United States
for 183 days or more during the taxable year and
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certain other conditions are met.
Non-U.S. persons who fail to furnish a Fund with an IRS Form W-8 or
acceptable substitute may be subject to backup withholding at the rate of 31% on
capital gain dividends and the proceeds of redemptions and exchanges. Each
shareholder who is not a U.S. person should consult his or her tax adviser
regarding the U.S. and non-U.S. tax consequences of ownership of shares of and
receipt of distributions from a Fund.
STATE AND LOCAL TAXES
A Fund may be subject to state or local taxes in certain jurisdictions in
which the Fund may be deemed to be doing business. In addition, in those states
or localities which have income tax laws, the treatment of a Fund and its
shareholders under such laws may differ from their treatment under federal
income tax laws, and investment in a Fund may have tax consequences for
shareholders different from those of a direct investment in such Fund's
portfolio securities. Shareholders should consult their own tax advisers
concerning these matters.
PERFORMANCE INFORMATION
Each Fund may from time to time quote or otherwise use yield and total
return information in advertisements, shareholder reports or sales literature.
Thirty-day yield and average annual total return values are computed pursuant to
formulas specified by the SEC. Each Fund may also from time to time quote
distribution rates in reports to shareholders and in sales literature.
Thirty-day yield is derived by dividing net investment income per share
earned during the period by the maximum public offering price (i.e., net asset
value) per share on the last day of such period. Yield is then annualized by
assuming that yield is realized each month for twelve months and is reinvested
every six months. Net investment income per share is equal to the dividends and
interest earned during the period, reduced by accrued expenses for the period.
The calculation of net investment income for these purposes may differ from the
net investment income determined for accounting purposes.
Tax equivalent yield represents the yield an investor would have to earn to
equal, after taxes, Short Duration Fund's tax-free yield. Tax equivalent yield
is calculated by dividing Short Duration Fund's tax-exempt yield by one minus a
stated federal and/or state tax rate.
Distribution rate for a specified period is calculated by annualizing
distributions of net investment income for such period and dividing this amount
by the net asset value per share on the
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last day of the period.
Average annual total return for a specified period is derived by
calculating the actual dollar amount of the investment return on a $1,000
investment made at the maximum public offering price (i.e., net asset value) at
the beginning of the period, and then calculating the annual compounded rate of
return which would produce that amount, assuming a redemption at the end of the
period. This calculation assumes a complete redemption of the investment. It
also assumes that all dividends and distributions are reinvested at net asset
value on the reinvestment dates during the period.
Year-by-year total return and cumulative total return for a specified
period are each derived by calculating the percentage rate required to make a
$1,000 investment (made at the net asset value per share with all distributions
reinvested) at the beginning of such period equal to the actual total value of
such investment at the end of such period.
The following table presents thirty-day yield, tax equivalent yield (Short
Duration Fund only), distribution rate and average annual total return (capital
plus reinvestment of all distributions) for the periods indicated.
Thirty-day yield, tax equivalent yield (Short Duration Fund only),
distribution rate and average annual total return are calculated separately for
each class of shares in existence of each Fund. Each class of shares of each
Fund is subject to different fees and expenses and may have different returns
for the same period. There were no Service Shares of the Adjustable Rate Fund,
Short-Term Fund and Core Fund, no Class A Shares of Adjustable Rate Fund and no
Administration Shares of Core Fund outstanding during the periods presented
below. Accordingly, the following charts represent historical performance data
for the Institutional and Administration Shares of each Fund and for the Service
Shares of Short Duration Fund only.
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<TABLE>
<CAPTION>
YIELD
Investment Pro-Forma
Fund Period Yield Yield/1/
---- ---------- ----- -----
<S> <C> <C> <C>
30-Days
ended
10/31/94
Adjustable Rate Fund
Institutional Shares 5.14% 5.08%
Administration Shares 4.89% 4.83%
Service Shares/2/ N/A N/A
Class A Shares/2/ N/A N/A
Short-Term Fund
Institutional Shares 5.76% 5.68%
Administration Shares 5.51% 5.43%
Service Shares/3/ N/A N/A
Short Duration Fund
Institutional Shares 5.03% 4.81%
Administration Shares 4.78% 4.56%
Service Shares/4/ 4.53% 4.31%
Core Fund
Institutional Shares 6.96% 6.24%
Administration Shares/5/ N/A N/A
Service Shares/5/ N/A N/A
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION RATE
Pro-Forma
Investment Distribution Distribution
Fund Period Rate Rate/1/
---- ---------- ------------ ----
<S> <C> <C> <C>
30-Days
ended
10/31/94
Adjustable Rate Fund
Institutional Shares 5.51% 5.46%
Administration Shares 5.26% 5.21%
Service Shares/2/ N/A N/A
Class A Shares/2/ N/A N/A
Short-Term Fund
Institutional Shares 5.98% 5.90%
Administration Shares 5.73% 5.65%
Service Shares/3/ N/A N/A
</TABLE>
B-89
<PAGE>
<TABLE>
<CAPTION>
Pro-Forma
Investment Distribution Distribution
Fund Period Rate Rate/1/
---- ---------- ------------ ----
<S> <C> <C> <C>
30-Days
ended
10/31/94
Short Duration Fund
Institutional Shares 4.65% 4.43%
Administration Shares 4.40% 4.18%
Service Shares/4/ 4.15% 3.93%
Core Fund
Institutional Shares 7.01% 6.30%
Administration Shares/5/ N/A N/A
Service Shares/5/ N/A N/A
</TABLE>
TAX-EQUIVALENT YIELD/6/
<TABLE>
<CAPTION>
Pro-Forma
Investment Tax-Equivalent Tax-Equivalent
Fund Period Rate Yield
---- ----------- -------------- --------------
<S> <C> <C> <C>
30-Days
ended
10/31/94
Short Duration
Institutional Shares 8.32% 7.96%
Administration Shares 7.91% 7.55%
Service Shares/4/ 7.50% 7.13%
</TABLE>
_______________________________
1 Yield, tax equivalent yield and distribution rate if the applicable Adviser
had not voluntarily agreed to maintain expenses at a specified level.
2 There were no Service Shares or Class A Shares of Adjustable Rate Fund
outstanding during the periods indicated.
3 There were no Service Shares of Short-Term Fund outstanding during the
periods indicated.
4 Service Share activity of Short Duration Fund commenced on September 20,
1994.
5 There were no Administration Shares or Service Shares of Core Fund
outstanding during the periods indicated.
6 The tax-equivalent rate of Short Duration Fund is computed based on the
39.6% federal income tax rate.
The above tables should not be considered a representation of future
performance.
B-90
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Investment Investment Amount
Fund Date Period Invested
---- ---------- ---------- --------
<S> <C> <C> <C>
Adjustable Rate Fund
Institutional Shares 7/17/91/1a/ ended 10/31/94 $1,000
11/1/93 one year ended
10/31/94 $1,000
Administration Shares 4/15/93/1b/ ended 10/31/94 $1,000
11/1/93 one year ended
10/31/94 $1,000
Service Shares/1c/
Class A Shares/1c/
Short-Term Fund
Institutional Shares 8/15/88/2a/ ended 10/31/94 $1,000
11/1/93 one year ended
10/31/94 $1,000
11/1/89 five years
ended 10/31/94 $1,000
Administration Shares 4/15/93/2b/ ended 10/31/94 $1,000
11/1/93 one year ended
10/31/94 $1,000
Service Shares/2a/
</TABLE>
<TABLE>
<CAPTION>
Ending Redeemable
Value of
Investment at
Fund Period End Cumulative Average Annual
---- ------------------------ ---------- --------------
With Fee Without Fee With Fee Without Fee With Fee Without Fee
Reductions Reductions Reductions Reductions Reductions Reductions
and/or and/or and/or and/or and/or and/or
Expense Expense Expense Expense Expense Expense
Limitations Limitations Limitations Limitations Limitations Limitations
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Adjustable Rate Fund
Institutional Shares $1153.41 $1145.71 15.34% 14.57% 4.43% 4.21%
$1018.84 $1018.52 1.88% 1.85% 1.88% 1.85%
Administration Shares $1036.69 $1036.10 3.67% 3.61% 2.36% 2.32%
$1016.30 $1016.01 1.63% 1.60% 1.63% 1.60%
Service Shares/1c/ N/A N/A N/A N/A N/A N/A
Class A Shares/1c/ N/A N/A N/A N/A N/A N/A
Short-Term Fund
Institutional Shares $1527.02 $1496.73 52.70% 49.67% 7.05% 6.70%
$1009.94 $1008.43 .99% .84% .99% .84%
$1359.93 $1345.51 35.99% 34.55% 6.34% 6.09%
Administration Shares $1024.91 $1020.31 2.49% 2.03% 1.60% .65%
$1007.32 $1004.08 .73% .41% .73% .41%
Service Shares/2a/ N/A N/A N/A N/A N/A N/A
</TABLE>
B-91
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Investment Investment Amount
Fund Date Period Invested
---- ---------- ---------- --------
<S> <C> <C> <C>
Short Duration Fund
Institutional Shares 10/31/92/3a/ ended 10/31/94 $1,000
11/1/93 one year ended
10/31/94 $1,000
Administration Shares 5/20/93/3b/ ended 10/31/94 $1,000
11/1/93 one year ended
10/31/94 $1,000
Service Shares 9/20/94/3c/ ended 10/31/94 $1,000
Core Fund
Institutional Shares 1/15/94/4a/ 10/31/94 $1,000
Administration Shares/4b/
Service Shares/4b/
Ending Redeemable
Value of
Investment at
Fund Period End Cumulative Average Annual
---- ----------------- ---------- --------------
With Fee Without Fee With Fee Without Fee With Fee Without Fee
Reductions Reductions Reductions Reductions Reductions Reductions
and/or and/or and/or and/or and/or and/or
Expense Expense Expense Expense Expense Expense
Limitations Limitations Limitations Limitations Limitations Limitations
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Short Duration Fund
Institutional Shares $1068.55 $1053.98 6.85% 5.40% 3.23% 2.55%
$1001.72 $1000.03 .17% 0% .17% 0%
Administration Shares $1021.74 $1016.80 2.17% 1.68% 1.49% 1.15%
$ 998.93 $ 994.63 -.11% -.54% -.11% -.54%
Service Shares $ 996.80 $ 996.61 -.32% -.34% -2.74% -2.91%
Core Fund
Institutional Shares $ 969.96 $ 954.99 -3.00% -4.50% -3.64% -5.45%
Administration Shares/4b/ N/A N/A N/A N/A N/A N/A
Service Shares/4b/ N/A N/A N/A N/A N/A N/A
</TABLE>
_____________________________________
1a Institutional Shares of Adjustable Rate Fund commenced operations on July
17, 1991.
1b Administration Shares of Adjustable Rate Fund commenced operations on April
15, 1993.
1c No Service Shares or Class A Shares of Adjustable Rate Fund were outstanding
during the periods indicated.
2a Institutional Shares of Short-Term Fund commenced operations on August 15,
1988.
2b Administration Shares of Short-Term Fund commenced operations on April 15,
1993.
2c No Service Shares of Short-Term Fund were outstanding during the periods
indicated.
3a Institutional Shares of Short Duration commenced operations on October 1,
1992.
3b Administration Shares of Short Duration commenced operations on May 20,
1993.
3c Service Shares of Short Duration commenced operations on September 20, 1994.
4a Institutional Shares of Core Fund commenced operations on January 5, 1994.
4b No Administration Shares or Service Shares of Core Fund were outstanding
during periods indicated.
The above table should not be considered a representation of future
performance.
B-92
<PAGE>
Occasionally statistics may be used to specify a Fund's volatility or risk.
Measures of volatility or risk are generally used to compare a Fund's net asset
value or performance relative to a market index. One measure of volatility is
beta. Beta is the volatility of a fund relative to the total market. A beta of
more than 1.00 indicates volatility greater than the market, and a beta of less
than 1.00 indicates volatility less than the market. Another measure of
volatility or risk is standard deviation. Standard deviation is used to measure
variability of net asset value or total return around an average, over a
specified period of time. The premise is that greater volatility connotes
greater risk undertaken in achieving performance.
Each Fund may from time to time advertise comparative performance as
measured by various independent sources, including, but not limited to, Lipper
------
Analytical Services, Inc., Barron's, The Wall Street Journal, Weisenberger
------------------------- -------- ----------------------- ------------
Investment Companies Service, Business Week, Changing Times, Financial World,
---------------------------- ------------- -------------- ---------------
Forbes, Fortune, Morningstar Mutual Funds and Money.
------ ------- ------------------------ -----
In addition, Adjustable Rate Fund and Short-Term Fund may from time to time
advertise their performance relative to certain indices and benchmark
investments, including: (a) the Shearson Lehman Government/Corporate (Total)
Index, (b) Shearson Lehman Government Index, (c) Merrill Lynch 1-3 Year Treasury
Index, (d) Merrill Lynch 2-Year Treasury Curve Index, (e) the Salomon Brothers
Treasury Yield Curve Rate of Return Index, (f) the Payden & Rygel 2 Year
Treasury Note Index, (g) 1 through 3 year U.S. Treasury Notes, (h) constant
maturity U.S. Treasury yield indices, (i) the Consumer Price Index, (j) the
London Interbank Offered Rate, (k) other taxable investments such as
certificates of deposit, money market deposit accounts, checking accounts,
savings accounts, money market mutual funds, repurchase agreements, commercial
paper and (l) historical data concerning the performance of adjustable and
fixed-rate mortgage loans.
Short Duration Fund may from time to time advertise its performance
relative to certain indices, any components of such indices and benchmark
investments, including but not limited to: (a) the Lipper Analytical Services,
Inc. Mutual Fund Performance Analysis, Fixed Income Analysis and Mutual Fund
Indices (which measure total return and average current yield for the mutual
fund industry and rank mutual fund performance); (b) the Lehman Brothers
Municipal Bond Indices; (c) the Merrill Lynch Municipal Bond Institutional Total
Rate of Return Indices; (d) Bond Buyer Indices; (e) IBC/Donoghue's Money Fund
Averages_/Institutional Only Tax Free; and constant maturity U.S. Treasury yield
indices.
Core Fund may from time to time advertise its performance relative to
certain indices and benchmark investments, including: (a) the Lipper Analytical
Services, Inc. Mutual Fund Performance Analysis, Fixed Income Analysis and
Mutual Fund Indices (which
B-93
<PAGE>
measure total return and average current yield for the mutual fund industry and
rank mutual fund performance); (b) the CDA Mutual Fund Report published by CDA
Investment Technologies, Inc. (which analyzes price, risk and various measures
of return for the mutual fund industry); (c) the Consumer Price Index published
by the U.S. Bureau of Labor Statistics (which measures changes in the price of
goods and services); (d) Stocks, Bonds, Bills and Inflation published by
Ibbotson Associates (which provides historical performance figures for stocks,
government securities and inflation); (e) the Salomon Brothers' World Bond Index
(which measures the total return in U.S. dollar terms of government bonds,
Eurobonds and foreign bonds of ten countries, with all such bonds having a
minimum maturity of five years); (f) the Lehman Brothers Aggregate Bond Index
or its component indices; (g) the Standard & Poor's Bond Indices (which measure
yield and price of corporate, municipal and U.S. Government bonds); (h) the J.P.
Morgan Global Government Bond Index; (i) other taxable investments including
certificates of deposit (CDs), money market deposit accounts (MMDAs), checking
accounts, savings accounts, money market mutual funds and repurchase agreements;
(j) historical investment data supplied by the research departments of Goldman
Sachs, Lehman Brothers Inc., First Boston Corporation, Morgan Stanley & Co.
Incorporated, Salomon Brothers, Inc., Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Donaldson Lufkin and Jenrette Securities Corporation; and (k)
Donoghue's Money Fund Report (which provides industry averages for 7-day
annualized and compounded yields of taxable, tax-free and U.S. Government money
funds).
The composition of the investments in such indices and the characteristics
of such benchmark investments are not identical to, and in some cases are very
different from, those of each Fund's portfolio. These indices and averages are
generally unmanaged and the items included in the calculations of such indices
and averages may not be identical to the formulas used by a Fund to calculate
its performance figures.
From time to time advertisements or communications to shareholders may
summarize the substance of information contained in shareholder reports
(including the investment composition of a Fund), as well as the views of
Goldman Sachs as to current market, economic, trade and interest rate trends,
legislative, regulatory and monetary developments, investment strategies and
regulated matters believed to be of relevance to a Fund.
The Trust may from time to time summarize the substance of discussions
contained in shareholder reports in advertisements and publish the Advisers'
views as to markets, the rationale for each applicable Fund's investments and
discussions of each applicable Fund's current asset allocation.
In addition, advertisements or shareholder communications may include a
discussion of certain attributes or benefits to be
B-94
<PAGE>
derived by an investment in a Fund. Such advertisements or information may
include symbols, headlines or other material which highlight or summarize the
information discussed in more detail therein.
Performance data is based on historical results and is not intended to
indicate future performance. Total return, thirty-day yield, tax equivalent
yield and distribution rate will vary based on changes in market conditions,
portfolio expenses, portfolio investments and other factors. The value of a
Fund's shares will fluctuate and an investor's shares may be worth more or less
than their original cost upon redemption. The Trust may also, at its
discretion, from time to time make a list of a Fund's holdings available to
investors upon request.
OTHER INFORMATION
The Trust assumed its current name on March 22, 1991. Prior thereto, the
Trust's name was "Goldman Sachs -- Short-Intermediate Government Fund." Short-
Term Fund assumed its current name in May 1991. Prior thereto, Short-Term Fund's
name was "GS Short-Intermediate Government Fund." Goldman Sachs licensed the
name "Goldman Sachs" and derivatives thereof to the Trust (and Fund) on a
royalty-free basis and Goldman Sachs has reserved to itself the right to grant
the non-exclusive right to use the name "Goldman Sachs" to any other person. At
such time as the Advisory Agreement for a Fund is no longer in effect, the Trust
on behalf of that Fund has agreed that such Fund will (to the extent it lawfully
can) cease using the name "Goldman Sachs."
A Fund will redeem shares solely in cash up to the lesser of $250,000 or 1%
of its net asset value of each Fund during any 90-day period for any one
shareholder. Each Fund, however, reserves the right to pay redemptions
exceeding $250,000 or 1% of the net asset value of each respective Fund at the
time of redemption by a distribution in kind of securities (instead of cash)
from such Fund. The securities distributed in kind would be readily marketable
and would be valued for this purpose using the same method employed in
calculating each Fund's net asset value per share. See "Net Asset Value." If a
shareholder receives redemption proceeds in kind, the shareholder should expect
to incur transaction costs upon the disposition of the securities received in
the redemption.
The right of a shareholder to redeem shares and the date of payment by a
Fund may be suspended for more than seven days for any period during which the
New York Stock Exchange is closed, other than the customary weekends or
holidays, or when trading on such Exchange is restricted as determined by the
SEC; or during any emergency, as determined by the SEC, as a result of which it
is not reasonably practicable for a Fund to dispose of securities owned by it or
fairly to determine the value of its net assets; or for such
B-95
<PAGE>
other period as the SEC may by order permit for the protection of shareholders
of a Fund.
The Prospectuses and this Additional Statement do not contain all the
information included in the Registration Statement filed with the SEC under the
1933 Act with respect to the securities offered by the Prospectuses. Certain
portions of the Registration Statement have been omitted from the Prospectuses
and this Additional Statement pursuant to the rules and regulations of the SEC.
The Registration Statement including the exhibits filed therewith may be
examined at the office of the SEC in Washington, D.C.
Statements contained in the Prospectuses or in this Additional Statement as
to the contents of any contract or other document referred to are not
necessarily complete, and, in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement of which the Prospectuses and this Additional Statement form a part,
each such statement being qualified in all respects by such reference.
Although each Fund is offering only its own shares, since the Funds use a
combined Additional Statement, it is possible that one Fund might become liable
for a misstatement or omission in this Additional Statement regarding another
Fund. The Trustees for each Fund have considered this factor in approving the
use of a combined Additional Statement.
FINANCIAL STATEMENTS
The audited financial statements and related report of Arthur Andersen LLP,
independent public accounts, for each Fund contained in each Fund's 1994 Annual
Report are hereby incorporated by reference and attached hereto. A copy of the
annual reports may be obtained without charge by writing Goldman, Sachs & Co.,
4900 Sears Tower, Chicago, Illinois 60606 or by calling Goldman, Sachs & Co., at
the telephone number on the inside cover of each Fund's Prospectus.
B-96
<PAGE>
ADJUSTABLE RATE FUND
APPENDIX A
This Appendix provides certain information concerning the performance of
various types of securities over specified periods of time. However, the
characteristics of these securities are not identical to, and may be very
different from, those of the Fund's portfolio. The items included in these
performance figures may not be identical to those in the formulas used by the
Fund to calculate its performance figures. This information does not reflect
the Fund's actual portfolio composition or the fees or expenses associated with
an investment in the Fund. Past performance is not an indication of future
performance.
AVERAGE MONTHLY YIELDS
OF MONEY MARKET FUNDS IN IBC/DONOGHUE'S
MONEY FUND AVERAGE/TM//ALL TAXABLE INDEX
This table provides certain information concerning the average performance
of money market funds (other than tax-free money funds) tracked by Donoghue's
Money Fund Report for the periods indicated.
<TABLE>
<CAPTION>
DONOGHUE'S
YEAR AND ALL TAXABLE INDEX*
MONTH AVERAGE MONTHLY YIELD(%)
-------- ------------------------
YEAR 1988
---------
<S> <C>
JAN 6.50
FEB 6.17
MAR 6.05
APR 6.10
MAY 6.26
JUN 6.54
JUL 6.81
AUG 7.14
SEP 7.42
OCT 7.51
NOV 7.66
DEC 8.08
AVERAGE FOR 1988 6.86
YEAR 1989
---------
<S> <C>
JAN 8.36
FEB 8.49
MAR 8.92
APR 9.16
MAY 9.14
JUN 8.93
JUL 8.65
</TABLE>
1-A
<PAGE>
<TABLE>
<S> <C>
AUG 8.32
SEP 8.26
OCT 8.19
NOV 8.00
DEC 7.93
AVERAGE FOR 1989 8.53
YEAR 1990
---------
<S> <C>
JAN 7.75
FEB 7.65
MAR 7.66
APR 7.68
MAY 7.68
JUN 7.67
JUL 7.62
AUG 7.50
SEP 7.47
OCT 7.45
NOV 7.33
DEC 7.23
AVERAGE FOR 1990 7.56
YEAR 1991
---------
<S> <C>
JAN 6.89
FEB 6.41
MAR 6.09
APR 5.84
MAY 5.58
JUNE 5.49
JULY 5.47
AUG 5.36
SEP 5.21
OCT 5.03
NOV 4.78
DEC 4.58
AVERAGE FOR 1991 5.56
YEAR 1992
---------
<S> <C>
JAN 4.13
FEB 3.81
MAR 3.73
APR 3.65
MAY 3.51
JUNE 3.44
JULY 3.24
AUG 3.06
SEP 2.92
OCT 2.79
NOV 2.75
DEC 2.84
AVERAGE FOR 1992 3.32
</TABLE>
2-A
<PAGE>
<TABLE>
<CAPTION>
YEAR 1993
---------
<S> <C>
JAN 2.81
FEB 2.72
MAR 2.68
APR 2.65
MAY 2.60
JUNE 2.63
JULY 2.64
AUG 2.65
SEP 2.66
OCT 2.65
NOV 2.67
DEC 2.72
AVERAGE FOR 1993 2.67
YEAR 1994
---------
<S> <C>
JAN 2.92
FEB 2.99
MAR 3.09
APR 3.28
MAY 3.59
JUN 3.83
JUL 3.99
AUG 4.18
SEP 4.48
OCT 4.54
NOV 4.84
DEC 5.24
AVERAGE FOR 1994 3.91
</TABLE>
*IBC/Donoghue's Money Fund Average/TM// All Taxable Index, as reported in
the IBC/Donoghue's Money Fund Report(R). The IBC/Donoghue's Money Fund
Average/TM/ data is computed net of fees.
3-A
<PAGE>
APPENDIX A
This Appendix provides certain information concerning the performance of
various types of securities over specified periods of time. However, the
characteristics of these securities are not identical to, and may be very
different from, those of the Fund's portfolio. The items included in these
performance figures may not be identical to those in the formulas used by the
Fund to calculate its performance figures. This information does not reflect
the Fund's actual portfolio composition or the fees or expenses associated with
an investment in the Fund. Past performance is not an indication of future
performance.
PRICES AND YIELDS OF
CERTAIN U.S. TREASURY SECURITIES
AND
A FEDERAL HOME LOAN MORTGAGE CORPORATION
ONE-YEAR CONSTANT MATURITY TREASURY
ADJUSTABLE RATE MORTGAGE CERTIFICATE
The following table compares the Prices of a one-year and Yields of a
six-month on-the-run U.S. Treasury security and, a Federal Home Loan Mortgage
Corporation one-year constant maturity Treasury adjustable rate mortgage
certificate during the periods indicated. An "on-the-run" U.S. Treasury
security is a recently issued current coupon security quoted as representing the
most current and liquid security in its maturity category. A Federal Home Loan
Mortgage Corporation adjustable rate mortgage certificate is a type of mortgage
security eligible for investment by the Fund. Other securities in which the
Fund may invest may not have the same yield or volatility characteristics as
these securities. This data is based on the end of period values and for the
yield column, does not include any fees./1/
<TABLE>
<CAPTION>
ONE-YEAR ONE-YEAR ONE-YEAR ONE-YEAR
ON-THE-RUN ON-THE-RUN CMT ADJUSTABLE CMT ADJUSTABLE
U.S. TREAURY U.S. TREASURY RATE MORTGAGE RATE MORTGAGE
DATE SECURITY SECURITY CERTIFICATE CERTIFICATE
------------------------------------------------------------------------------------------------------
YIELD PRICE PRICE PRICE
<S> <C> <C> <C> <C>
31 JAN 89 9.114 100.00 100.00 10.564
28 FEB 89 9.336 99.784 99.795 10.826
31 MAR 89 9.656 99.474 99.363 11.376
30 APR 89 9.441 99.682 99.370 11.361
31 MAY 89 9.044 100.065 99.796 10.814
3O JUN 89 8.491 100.605 100.298 10.171
31 JUL 89 7.948 101.139 100.684 9.678
</TABLE>
____________________________________
/1/ Historically, ARMs and PACs have offered yields that are higher than
those available from U.S. Treasury securities with comparable maturities.
4-A
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
31 AUG 89 8.227 100.864 100.441 9.987
30 SEP 89 8.255 100.836 100.474 9.945
31 OCT 89 8.034 101.054 100.705 9.654
30 NOV 89 7.793 101.292 101.007 9.273
31 DEC 89 7.749 101.334 101.098 9.159
31 JAN 90 7.951 101.135 100.906 9.401
28 FEB 90 8.155 100.933 100.785 9.555
31 MAR 90 8.395 100.696 100.645 9.735
30 APR 90 8.437 100.654 100.546 9.857
31 MAY 90 8.347 100.742 100.769 9.577
30 JUN 90 8.114 100.944 100.963 9.334
31 JUL 90 7.972 101.114 101.083 9.182
31 AUG 90 7.809 101.275 101.115 9.139
30 SEP 90 7.8 101.283 101.137 9.11
31 OCT 90 7.583 101.498 101.229 8.993
30 NOV 90 7.33 101.750 101.348 8.84
31 DEC 90 7.066 102.013 101.606 8.516
31 JAN 91 6.646 102.434 102.015 8.006
28 FEB 91 6.268 102.815 102.302 7.684
31 MAR 91 6.375 102.706 102.265 7.695
30 APR 91 6.21 102.873 102.406 7.52
31 MAY 91 6.098 102.986 102.554 7.338
30 JUN 91 6.332 102.750 102.414 7.512
31 JUL 91 6.285 102.798 102.535 7.365
31 AUG 91 5.754 103.337 102.940 6.864
30 SEP 91 5.554 103.540 103.152 6.604
31 OCT 91 5.305 103.795 103.289 6.435
30 NOV 91 4.863 104.248 103.617 6.033
31 DEC 91 4.341 104.789 104.221 5.301
31 JAN 92 4.111 105.028 104.461 5.011
28 FEB 92 4.246 104.888 104.357 5.136
31 MAR 92 4.603 104.515 104.044 5.513
30 APR 92 4.263 104.869 104.392 5.093
31 MAY 92 4.161 104.976 104.619 4.821
30 JUN 92 4.141 104.995 104.669 4.761
31 JUL 92 3.572 105.591 105.135 4.202
31 AUG 92 3.445 105.753 105.256 4.085
30 SEP 92 3.154 106.053 105.419 3.884
31 OCT 92 3.267 105.933 105.231 4.107
30 NOV 92 3.643 105.278 105.818 4.553
31 DEC 92 3.678 105.428 106.008 4.548
31 JAN 93 3.462 105.618 105.988 4.542
28 FEB 93 3.36 105.768 106.378 4.2
31 MAR 93 3.3 106.213 106.893 4.07
30 APR 93 3.212 105.836 106.416 4.082
31 MAY 93 3.344 105.573 106.223 4.114
30 JUN 93 3.507 105.638 106.008 4.227
31 JUL 93 3.439 105.548 106.198 4.239
31 AUG 93 3.415 105.468 106.468 4.195
30 SEP 93 3.327 105.863 106.503 4.137
31 OCT 93 3.362 105.648 106.288 4.182
30 NOV 93 3.541 105.548 106.208 4.381
31 DEC 93 3.575 105.448 106.148 4.325
31 JAN 94 3.38 96.883 103.20 4.54
28 FEB 94 3.83 96.484 102.30 5.11
31 MAR 94 4.30 96.021 102.07 5.60
30 APR 94 4.83 95.076 101.07 6.46
31 MAY 94 5.08 94.849 100.30 6.77
30 JUN 94 5.20 94.757 100.21 6.97
31 JUL 94 5.04 95.352 100.21 6.90
</TABLE>
5-A
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
31 AUG 94 5.25 94.794 100.25 7.00
30 SEP 94 5.62 94.494 100.01 7.60
31 OCT 94 5.81 94.324 99.25 7.81
30 NOV 94 6.47 93.71 98.30 8.59
31 DEC 94 6.73 93.55 98.30 8.80
</TABLE>
6-A
<PAGE>
APPENDIX B
GLOSSARY
MORTGAGE-BACKED SECURITIES
GUARANTEED MORTGAGE PASS-THROUGHS:
Securities which represent participation interests in pools of residential
mortgage loans originated by United States governmental or private lenders and
guaranteed by the United States government or one of its agencies or
instrumentalities.
* Ginnie Mae Certificates are guaranteed by the full
faith and credit of the United States government
for timely payment of principal and interest on
the certificates.
* Fannie Mae Certificates are guaranteed by FNMA, a
federally chartered and privately-owned
corporation for full and timely payment of
principal and interest on the certificates.
* Freddie Mac Certificates are guaranteed by FHLMC,
a corporate instrumentality of the United States
government, for timely payment of interest and the
ultimate collection of all principal of the
related mortgage loans.
ALL GUARANTEED MORTGAGE PASS-THROUGHS ARE CONSIDERED TO BE OF THE SAME OR HIGHER
CREDIT QUALITY AS PRIVATELY-ISSUED SECURITIES RATED AAA.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"):
Multiclass securities that are issued by the United States government and
are collateralized by mortgage loans or mortgage pass-throughs. Typically, CMOs
are collateralized by Ginnie Mae, Fannie Mae or Freddie Mac Certificates but
also may be collateralized by other mortgage assets such as whole loans or
private mortgage pass-throughs.
* Payments of principal and interest on collateral
of mortgage assets and any reinvestment income
thereon, provide the funds to pay debt service on
the CMOs.
ALL CMOS INCLUDED AS ASSETS OF THE FUND WILL BE ISSUED BY FANNIE MAE OR FREDDIE
MAC.
1-B
<PAGE>
FANNIE MAE OR FREDDIE MAC.
STRIPPED MORTGAGE-BACKED SECURITIES ("SMBS"):
Securities which are usually structured with two classes that receive
different proportions of interest and principal distributions on a pool of
mortgage assets. A typical SMBS will have one class receiving some of the
interest and most of the principal, while the other class will receive most of
the interest and the remaining principal. In the most extreme case, one class
will receive all of the interest (the interest only class) while the other class
will receive all of the principal (the principal only class).
ALL SMBS INCLUDED AS ASSETS OF THE FUND WILL BE ISSUED BY FANNIE MAE OR FREDDIE
MAC.
CMO RESIDUALS:
CMO Residuals, other than REMIC Residuals, are essentially (i) the spread
between the higher interest rates on the mortgage collateral (e.g., Freddie Mac
Certificates) and the lower interest rates on the CMO classes and to a lesser
extent, (ii) the reinvestment income earned by investing the monthly mortgage
cash flows between CMO payment dates.
ALL CMO RESIDUALS INCLUDED AS ASSETS OF THE FUND WILL BE ISSUED BY FANNIE MAE OR
FREDDIE MAC.
2-B
<PAGE>
SHORT DURATION FUND
APPENDIX C
This Appendix provides certain information concerning the performance of
various types of securities over specified periods of time. However, the
characteristics of these securities are not identical to, and may be very
different from, those of the Fund's portfolio. The items included in these
performance figures may not be identical to those in the formulas used by the
Fund to calculate its performance figures. This information does not reflect the
Fund's actual portfolio composition or the fees or expenses associated with an
investment in the Fund. Past performance is not an indication of future
performance.
Average Yield
-------------
This table provides certain information concerning the monthly average
yield of certain tax-exempt money market funds, net of fees, compared to the
month-end yield of a 3-year constant maturity general obligation municipal bond,
exclusive of fees.
<TABLE>
<CAPTION>
IBC/Donoghue Municipal
MoneY Market Fund
Obligation Yields (Tax-Exempt/ 3-year General
Month/Year Institution Only) Municipal Bond (%)**
---------- ------------------ -----------------------
<S> <C> <C>
Dec. 1984 5.67 6.52
Jan. 1985 5.58 6.34
Feb. 1985 5.03 6.48
Mar. 1985 4.84 6.54
Apr. 1985 4.84 6.26
May 1985 4.96 6.06
June 1985 4.72 5.90
July 1985 4.32 5.88
Aug. 1985 4.54 6.19
Sep. 1985 4.72 6.30
Oct. 1985 4.63 6.10
Nov. 1985 4.57 5.74
Dec. 1985 5.39 5.98
Jan. 1986 5.78 6.00
Feb. 1986 5.19 5.54
Mar. 1986 4.65 5.39
Apr. 1986 4.52 5.20
May 1986 4.32 5.26
Jun. 1986 3.99 5.40
Jul. 1986 3.89 5.32
Aug. 1986 4.27 5.22
</TABLE>
1-C
<PAGE>
<TABLE>
<S> <C> <C>
Sep. 1986 4.04 5.06
Oct. 1986 3.59 4.87
Nov. 1986 3.50 4.42
Dec. 1986 3.87 4.49
Jan. 1987 4.02 4.37
Feb. 1987 3.76 4.26
Mar. 1987 3.68 4.27
Apr. 1987 4.35 5.02
May 1987 4.63 5.52
Jun. 1987 3.94 5.23
Jul. 1987 3.81 5.15
Aug. 1987 3.95 5.16
Sep. 1987 4.25 5.75
Oct. 1987 4.67 6.32
Nov. 1987 4.67 5.74
Dec. 1987 4.85 5.72
Jan. 1988 4.67 5.63
Feb. 1988 4.37 5.33
Mar. 1988 4.31 5.35
Apr. 1988 4.30 5.45
May 1988 4.55 5.66
Jun. 1988 4.60 5.76
Jul. 1988 4.78 5.80
Aug. 1988 5.17 5.96
Sep. 1988 5.16 6.02
Oct. 1988 5.29 5.99
Nov. 1988 5.31 6.09
Dec. 1988 5.82 6.31
Jan. 1989 5.65 6.35
Feb. 1989 5.79 6.45
Mar. 1989 6.37 6.83
Apr. 1989 6.48 6.83
May 1989 6.55 6.56
Jun. 1989 6.12 6.32
Jul. 1989 5.81 6.08
Aug. 1989 5.72 6.02
Sep. 1989 5.73 6.14
Oct. 1989 5.75 6.11
Nov. 1989 5.68 6.06
Dec. 1989 5.88 5.94
Jan. 1990 5.48 6.01
Feb. 1990 5.26 6.03
Mar. 1990 5.46 6.16
Apr. 1990 5.76 6.38
May 1990 5.70 6.34
Jun. 1990 5.49 6.18
Jul. 1990 5.31 6.10
Aug. 1990 5.35 6.20
Sep. 1990 5.72 6.27
Oct. 1990 5.62 6.15
Nov. 1990 5.35 5.82
Dec. 1990 5.94 6.62
</TABLE>
2-C
<PAGE>
<TABLE>
<S> <C> <C>
Jan. 1991 4.96 5.63
Feb. 1991 4.35 5.28
Mar. 1991 4.46 5.48
Apr. 1991 4.40 5.42
May 1991 4.24 5.29
Jun. 1991 3.93 5.47
Jul. 1991 3.91 5.43
Aug. 1991 4.26 5.17
Sep. 1991 4.51 5.15
Oct. 1991 4.13 5.04
Nov. 1991 3.94 4.94
Dec. 1991 4.17 4.51
Jan. 1992 3.17 4.12
Feb. 1992 2.88 4.44
Mar. 1992 2.91 4.77
Apr. 1992 3.17 4.73
May 1992 3.25 4.66
Jun. 1992 2.70 4.46
Jul. 1992 2.34 4.09
Aug. 1992 2.44 4.00
Sep. 1992 2.77 4.01
Oct. 1992 2.51 3.89
Nov. 1992 2.41 4.10
Dec. 1992 2.60 4.05
Jan. 1993 2.23 4.05
Feb. 1993 2.11 3.50
Mar. 1993 2.08 3.75
Apr. 1993 2.17 3.70
May 1993 2.27 3.75
Jun. 1993 2.05 3.70
Jul. 1993 2.00 3.80
Aug. 1993 2.23 3.85
Sep. 1993 2.27 3.35
Oct. 1993 2.27 3.35
Nov. 1993 2.19 3.52
Dec. 1993 2.16 3.35
Jan. 1994 2.00 3.45
Feb. 1994 2.12 3.90
Mar. 1994 2.06 4.31
Apr. 1994 2.04 4.42
May 1994 2.55 4.37
Jun. 1994 2.39 4.46
Jul. 1994 2.38 4.32
Aug. 1994 2.60 4.34
Sep. 1994 2.27 4.55
Oct. 1994 2.68 4.73
Nov. 1994 2.96 5.25
Dec. 1994 3.42 5.34
</TABLE>
3-C
<PAGE>
_________________
*IBC/Donoghue's Money Fund Average/Tax-Exempt/Institutional Only
Index, as reported in the IBC/Donoghue's Money Market Fund
Report(R).
**Goldman, Sachs & Co.
4-C
<PAGE>
Monthly Prices
---------------
The following chart depicts the price volatility (100 base) of a 3-year
constant maturity municipal security compared to the price volatility of a 30-
year constant maturity municipal security.*
<TABLE>
<CAPTION>
3-Year 30-Year
Month/Year Municipal Security Municipal Security
---------- ------------------ ------------------
<S> <C> <C>
Dec. 1984 100.00 100.00
Jan. 1985 100.45 106.94
Feb. 1985 100.08 106.10
Mar. 1985 99.91 105.50
Apr. 1985 100.63 107.55
May 1985 101.16 112.61
Jun. 1985 101.59 114.61
Jul. 1985 101.64 113.93
Aug. 1985 100.79 110.83
Sep. 1985 100.49 107.68
Oct. 1985 101.04 109.67
Nov. 1985 101.98 118.25
Dec. 1985 101.32 119.43
Jan. 1986 101.28 124.47
Feb. 1986 102.92 134.63
Mar. 1986 102.92 141.45
Apr. 1986 103.42 137.64
May 1986 103.26 129.91
Jun. 1986 102.87 125.90
Jul. 1986 103.08 131.12
Aug. 1986 103.34 136.70
Sep. 1986 103.80 137.52
Oct. 1986 104.30 138.24
Nov. 1986 105.57 142.87
Dec. 1986 105.37 141.07
Jan. 1987 105.71 148.26
Feb. 1987 106.01 147.44
Mar. 1987 105.99 146.91
Apr. 1987 103.85 130.75
May 1987 102.48 123.76
Jun. 1987 103.25 127.52
Jul. 1987 103.47 127.45
Aug. 1987 103.44 126.28
Sep. 1987 101.83 118.02
Oct. 1987 100.29 113.29
Nov. 1987 101.83 123.37
Dec. 1987 101.88 124.02
Jan. 1988 102.11 127.61
Feb. 1988 102.93 129.47
Mar. 1988 102.87 126.28
Apr. 1988 102.57 124.57
</TABLE>
5-C
<PAGE>
<TABLE>
<S> <C> <C>
May 1988 102.00 124.30
Jun. 1988 101.72 125.17
Jul. 1988 101.61 125.76
Aug. 1988 101.17 124.95
Sep. 1988 101.01 126.79
Oct. 1988 101.09 130.26
Nov. 1988 100.80 130.64
Dec. 1988 100.21 128.10
Jan. 1989 100.12 132.05
Feb. 1989 99.83 130.38
Mar. 1989 98.83 127.80
Apr. 1989 98.84 129.71
May 1989 99.52 133.54
Jun. 1989 100.15 137.69
Jul. 1989 100.76 139.34
Aug. 1989 100.92 136.40
Sep. 1989 100.59 133.75
Oct. 1989 100.66 134.23
Nov. 1989 100.78 135.47
Dec. 1989 101.10 137.86
Jan. 1990 100.91 136.19
Feb. 1990 100.85 133.98
Mar. 1990 100.49 132.31
Apr. 1990 99.90 131.02
May 1990 100.00 132.12
Jun. 1990 100.43 134.25
Jul. 1990 100.63 134.39
Aug. 1990 100.37 132.01
Sep. 1990 100.18 130.67
Oct. 1990 100.46 130.00
Nov. 1990 101.33 135.10
Dec. 1990 101.88 137.33
Jan. 1991 101.84 136.99
Feb. 1991 102.80 140.82
Mar. 1991 102.23 136.96
Apr. 1991 102.39 138.11
May 1991 102.75 138.52
Jun. 1991 102.25 136.14
Jul. 1991 102.35 136.64
Aug. 1991 103.07 139.57
Sep. 1991 103.10 142.02
Oct. 1991 103.41 144.98
Nov. 1991 103.69 144.50
Dec. 1991 104.87 143.92
Jan. 1992 105.99 146.62
Feb. 1992 105.06 142.20
Mar. 1992 104.13 142.15
Apr. 1992 104.23 143.22
May 1992 104.44 144.56
Jun. 1992 105.00 146.61
Jul. 1992 106.04 153.93
Aug. 1992 106.03 153.77
</TABLE>
6-C
<PAGE>
<TABLE>
<S> <C> <C>
Sep. 1992 106.27 152.28
Oct. 1992 106.61 149.43
Nov. 1992 106.00 149.91
Dec. 1992 106.14 151.95
Jan. 1993 106.14 151.95
Feb. 1993 107.74 166.43
Mar. 1993 107.00 159.33
Apr. 1993 107.15 161.61
May. 1993 107.00 162.77
Jun. 1993 107.14 163.34
Jul. 1993 106.84 163.92
Aug. 1993 106.69 171.29
Sep. 1993 108.16 175.20
Oct. 1993 108.16 175.20
Nov. 1993 107.65 170.22
Dec. 1993 108.16 172.52
Jan. 1994 107.62 149.26
Feb. 1994 106.80 146.58
Mar. 1994 105.30 136.25
Apr. 1994 104.52 130.68
May 1994 104.24 130.71
Jun. 1994 104.81 132.08
Jul. 1994 104.38 129.67
Aug. 1994 104.54 130.93
Sep. 1994 104.30 129.12
Oct. 1994 103.89 125.38
Nov. 1994 102.39 118.32
Dec. 1994 102.14 121.81
Jan. 1995 102.30 124.65
</TABLE>
_________________
*Goldman, Sachs & Co.
7-C
<PAGE>
Appendix D
CORE FUND
DESCRIPTION OF BOND RATINGS/1/
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time.
____________________________
/1/
The rating systems described herein are believed to be the most recent
ratings systems available from Moody's Investors Service, Inc. and Standard &
Poor's Ratings Group at the date of this Additional Statement for the securities
listed. Ratings are generally given to securities at the time of issuance. While
the rating agencies may from time to time revise such ratings, they undertake no
obligation to do so, and the ratings indicated no not necessarily represent
ratings which will be given to these securities on the date of the Fund's fiscal
year end.
1-D
<PAGE>
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
STANDARD & POOR'S RATINGS GROUP
AAA: Bonds rated AAA have the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong. AA:
Bonds rated AA have a very strong capacity to pay interest and repay principal
and differ from the higher rated issues only in small degree.
A: Bonds rated A have a very strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than in higher rated categories.
FITCH INVESTORS SERVICE, CORP.
Bond Ratings
------------
The ratings represent Fitch's assessment of the issuer's ability to meet
the obligations of a specific debt issue or class of debt. The ratings take into
consideration special features of the issue, its relationship to other
obligations of the issuer, the current financial condition and operative
performance of the issuer and of any guarantor, as well as the political and
economic environment that might affect the issuer's future financial strength
and credit quality.
AAA: Bonds rated AAA are 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 rated AA are considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated AAA. Because bonds rated in
the AAA and AA categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated F-1+.
A: Bonds rated A are considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay
2-D
<PAGE>
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 rated BBB are 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.
Plus (+) and minus (-) signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus and minus signs,
however, are not used in the AAA Category covering 12-36 months.
3-D
<PAGE>
CORE FUND
APPENDIX E
----------
This Appendix provides certain information concerning the performance
of various types of securities over specified periods of time. However, the
characteristics of these securities are not identical to, and may be very
different from, those of the Fund's portfolio. The items included in these
performance figures may not be identical to those in the formulas used by the
Fund to calculate its performance figures. This information does not reflect
the Fund's actual portfolio composition or the fees or expenses associated with
an investment in the Fund. Past performance is not an indication of future
performance.
Source: Lehman Brothers and Stocks, Bonds, Bills and Inflation 1992 Yearbook
(and 1993 updates), Ibbotson Associates, Inc. The indices and securities in
this chart reflect neither the fund's actual portfolio composition nor the fees
and expenses associated with investing in the fund. The S&P 500 is an unmanaged
index of 500 of the largest U.S. companies. Unlike the S&P 500 and Lehman
Index, Treasury bills are backed by the full faith and credit of the U.S.
government and are less volatile than equity or fixed income investments.
Because the fund can hold securities other than those in the Lehman Index, its
returns may be more volatile. Past performance is no guarantee of future
performance. Market and economic conditions, such as rapidly rising or falling
interest rates, may affect fixed income securities differently from Treasury
bills. Relative to Treasury bills, the market value of fixed income securities
may be adversely affected by sharp increases in market interest rates.
1-E
<PAGE>
ANNUAL VOLATILITY OF MONTHLY TOTAL RETURN
-----------------------------------------
<TABLE>
<CAPTION>
S&P 500 LEHMAN AGGR. 6-MO. T. BILL
YEAR TOTAL RETURN INDEX TOTAL RETURN
---- ------------ ------------ -------------
<S> <C> <C> <C>
1983 3.48 0.17 0.602
2.6 2.87 0.787
3.65 0.26 0.397
7.58 2.79 1.021
-0.52 -1.31 0.445
3.82 0.11 0.682
-3.13 -2.36 0.604
1.7 0.7 0.862
1.36 3.3 1.169
-1.34 0.36 0.826
2.33 1.14 0.664
-0.61 0.19 0.816
1984 -0.65 2.06 0.879
-3.28 -0.51 0.623
1.71 -1.12 0.641
0.69 -0.2 0.813
-5.34 -3.11 0.718
2.21 1.28 1.046
-1.43 4.5 0.933
11.25 1.69 0.996
0.02 2.37 1.048
0.26 4.24 1.438
-1.01 1.79 1.148
2.53 1.46 0.697
1985 7.68 2.28 0.746
1.37 -2.04 0.478
0.18 2.04 0.902
-0.32 2.07 1.01
6.15 5.23 1.127
1.59 1.06 0.692
-0.26 -0.35 0.499
-0.61 1.88 0.755
-3.21 0.6 0.637
4.47 2.1 0.579
7.160005 2.4 0.665
4.670001 3.06 0.713
1986 0.44 0.56 0.69
7.61 3.94 0.568
5.54 3.1 0.868
-1.24 0.53 0.628
5.49 -1.91 0.474
1.66 2.62 0.667
-5.69 0.89 0.635
7.48 2.48 0.794
-8.22 -0.99 0.396
5.56 1.44 0.569
</TABLE>
2-E
<PAGE>
<TABLE>
<S> <C> <C> <C>
2.56 1.4 0.396
-2.64 0.37 0.387
1987 13.43 1.41 0.547
4.13 0.69 0.49
2.72 -0.45 0.374
-0.88 -2.74 0.484
1.03 -0.39 0.517
4.99 1.38 0.64
4.98 -0.08 0.42
3.85 -0.53 0.476
-2.2 -2.13 0.306
-21.52 3.56 1.09
-8.19 0.8 0.507
7.38 1.36 0.582
1988 4.27 3.52 0.673
4.7 1.19 0.658
-3.02 -0.94 0.484
1.08 -0.54 0.421
0.78 -0.67 0.442
4.64 2.41 0.633
-0.4 -0.53 0.447
-3.31 0.26 0.55
4.24 2.27 0.684
2.73 1.88 0.689
-1.42 -1.22 0.455
1.81 0.11 0.583
1989 7.23 1.44 0.729
-2.49 -0.72 0.563
2.36 0.43 0.695
5.16 2.09 0.923
4.02 2.63 0.858
-0.54 3.04 0.954
8.98 2.13 0.832
1.93 -1.48 0.522
-0.39 0.51 0.616
-2.33 2.46 0.889
2.08 0.95 0.722
2.36 0.27 0.617
1990 -6.71 -1.19 0.659
1.29 0.32 0.596
2.63 0.07 0.632
-2.47 -0.92 0.651
9.75 2.96 0.805
-0.7 1.61 0.71
-0.32 1.38 0.805
-9.03 -1.34 0.626
-4.92 0.83 0.659
-0.37 1.27 0.744
6.44 2.15 0.627
2.74 1.56 0.861
</TABLE>
3-E
<PAGE>
<TABLE>
<S> <C> <C> <C>
1991 4.42 1.24 0.7
7.16 0.85 0.538
2.38 0.69 0.586
0.28 1.08 0.645
4.28 0.58 0.483
-4.57 -0.05 0.447
4.68 1.39 0.587
2.35 2.16 0.603
-1.64 2.03 0.57
1.34 1.11 0.564
-4.04 0.92 0.593
11.43 2.97 0.638
1992 -1.86 -1.36 0.34
1.28 0.65 0.292
-1.96 -0.56 0.306
2.909998 0.72 0.509
0.540067 1.89 0.38
-1.45397 1.38 0.399
4.030009 2.04 0.494
-2.02 1.01 0.316
1.149647 1.19 0.445
0.360365 -1.33 0.097
3.369855 0.02 0.212
1.310072 1.59 0.404
1993 0.730015 1.92 0.372
1.349953 1.75 0.257
2.149928 0.42 0.299
-2.45 0.7 0.266
2.7 0.13 0.161
0.33 1.81 0.302
1994 3.35 1.35 0.330
-2.70 -1.74 0.092
-4.35 -2.47 0.243
1.30 -0.80 0.161
1.63 -0.01 0.274
-2.47 -0.22 0.444
3.31 1.99 0.423
4.07 0.12 0.389
-2.44 -1.47 0.282
2.25 -0.09 0.452
-3.64 -0.22 0.297
1.48 0.69 0.430
</TABLE>
4-E
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
ADMINISTRATION SHARES
GS ADJUSTABLE RATE GOVERNMENT AGENCY FUND
GS SHORT-TERM GOVERNMENT AGENCY FUND
GS SHORT DURATION TAX-FREE FUND
GS CORE FIXED INCOME FUND
(EACH A PORTFOLIO OF GOLDMAN SACHS TRUST)
Goldman Sachs Trust
4900 Sears Tower
Chicago, Illinois 60606
This Statement of Additional Information (the "Additional Statement") is
not a prospectus. This Additional Statement should be read in conjunction with
the prospectuses for the Administration Shares of each of GS Adjustable Rate
Government Agency Fund, GS Short-Term Government Agency Fund, GS Short Duration
Tax-Free Fund and GS Core Fixed Income, each dated March 1, 1995, as amended
and/or supplemented from time to time (each a "Prospectus"), which may be
obtained without charge from institutions ("Service Organizations") that hold
Administration Shares for the benefit of their customers, or from Goldman, Sachs
& Co. by calling the telephone number, or writing to one of the addresses,
listed below.
<TABLE>
TABLE OF CONTENTS
<S> <C>
Introduction...................................................... B-3
Investment Objective and Policies................................. B-7
Investment Restrictions........................................... B-12
Management........................................................ B-47
Portfolio Transactions............................................ B-57
Shares of the Trust............................................... B-71
Net Asset Value................................................... B-72
Taxation.......................................................... B-76
Performance Information........................................... B-76
Other Information................................................. B-95
Financial Statements.............................................. B-96
Administration Plan............................................... B-97
Appendix A........................................................ 1-A
Appendix B........................................................ 1-B
Appendix C........................................................ 1-C
Appendix D........................................................ 1-D
Appendix E........................................................ 1-E
</TABLE>
The date of this Additional Statement is March 1, 1995.
<PAGE>
GOLDMAN SACHS ASSET MANAGEMENT GOLDMAN, SACHS & CO.
ADVISER TO GS SHORT DURATION DISTRIBUTOR
TAX-FREE FUND AND GS CORE FIXED 85 BROAD STREET
INCOME FUND NEW YORK, NEW YORK 10004
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
GOLDMAN SACHS FUNDS GOLDMAN, SACHS & CO.
MANAGEMENT, L.P. TRANSFER AGENT
ADVISER TO GS ADJUSTABLE RATE 4900 SEARS TOWER
GOVERNMENT AGENCY FUND CHICAGO, ILLINOIS 60606
AND GS SHORT-TERM
GOVERNMENT AGENCY FUND
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
TOLL FREE .......800-621-2550
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INTRODUCTION
Goldman Sachs Trust (the "Trust") was organized under the laws of The
Commonwealth of Massachusetts on September 24, 1987 as a Massachusetts business
trust. The Trust assumed its current name on March 22, 1991. The Trustees of the
Trust have authority under the Declaration of Trust to create and classify
shares into separate series and to classify and reclassify any series of shares
into one or more classes without further action by shareholders. Pursuant
thereto, the Trustees have created GS Adjustable Rate Government Agency Fund
("Adjustable Rate Fund"), GS Short-Term Government Agency Fund ("Short-Term
Fund"), GS Short Duration Tax-Free Fund ("Short Duration Fund"), and GS Core
Fixed Income Fund ("Core Fund"). Adjustable Rate Fund, Short-Term Fund, Short
Duration Fund and Core Fund are each sometimes referred to herein as a "Fund"
and collectively as the "Funds." Short-Term Fund, Short Duration Fund and Core
Fund are each authorized to issue three classes of shares. These classes are:
Institutional Shares, Administration Shares and Service Shares. Adjustable Rate
Fund is authorized to issue four classes of shares. These classes are:
Institutional Shares, Administration Shares, Service Shares and Class A Shares.
Goldman Sachs Asset Management ("GSAM"), a separate operating division of
Goldman, Sachs & Co. ("Goldman Sachs"), serves as the investment adviser to
Short Duration Fund and Core Fund. Goldman Sachs Funds Management, L.P.
("FMLP"), an affiliate of Goldman Sachs, serves as the investment adviser to
Adjustable Rate Fund and Short-Term Fund. GSAM and FMLP are each sometimes
referred to herein as the "Adviser" and collectively herein as the "Advisers."
In addition, Goldman Sachs serves as each Fund's distributor and transfer agent.
Each Fund's custodian is State Street Bank and Trust Company.
The Goldman Sachs Mutual Funds Group ("IMG") offers banks, corporate cash
managers, investment advisers and other institutional investors a family of
professionally-managed mutual and money market funds, including fixed income and
equity funds, and a range of related services. IMG is part of GSAM, a separate
operating division of Goldman Sachs. All products are designed to provide
clients with the benefit of the expertise of GSAM and its affiliates in security
selection, asset allocation, portfolio construction and day-to-day management.
The hallmark of IMG is personalized service, which reflects the priority
that Goldman Sachs places on serving client interests. As IMG clients,
shareholders will be assigned an Account Administrator ("AA"), who is ready to
help shareholders with questions concerning their accounts. During business
hours, shareholders can call their AA through a toll-free number to place
purchase or redemption orders or obtain portfolio and account information. The
AA can also answer inquiries about rates of
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return, portfolio composition and holdings and guide shareholders through
operational details. An IMG client can also utilize SMART/sm/ personal computer
software system which allows holders to purchase and redeem shares and also
obtain portfolio and account information directly.
Because each Fund's shares may be redeemed upon request of a shareholder on
any business day at net asset value, the Funds offer greater liquidity than many
competing investments, such as certificates of deposit and direct investments in
certain securities in which the respective Fund may invest.
The following information relates to and supplements the description of
each Fund's investment policies contained in their respective Prospectuses. See
each Fund's Prospectus for a fuller description of the Fund's investment
objective and policies. Investing in the Funds entails certain risks and there
is no assurance that a Fund will achieve its objective.
ADJUSTABLE RATE FUND AND SHORT-TERM FUND
Adjustable Rate Fund and Short-Term Fund are both designed for investors
who seek a high level of high current income, relative stability of principal
and the highest credit quality of U.S. Government agency guaranteed securities,
without incurring the administrative and accounting burdens involved in direct
investment. Such investors also prefer experienced professional management and
administration, and liquidity.
Market and economic conditions may affect the investments of Adjustable
Rate Fund and Short-Term Fund differently than the investments normally
purchased by such investors. Relative to U.S. Treasury and non-fluctuating money
market instruments, the market value of adjustable rate mortgage securities in
which Adjustable Rate Fund will invest and in which Short-Term Fund may invest
may be adversely affected by sharp increases in market interest rates.
Conversely, sharp decreases in market interest rates may result in less capital
appreciation for adjustable rate mortgage securities in relation to U.S.
Treasury and money market investments.
HIGH CURRENT INCOME. Adjustable Rate Fund and Short-Term Fund seek a
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higher current yield than a money market fund, since they can invest in longer-
term, higher yielding securities, and may utilize certain investment techniques
not available to a money market fund. Similarly, the Adjustable Rate Fund and
Short-Term Fund seek a higher yield than that offered by bank certificates of
deposit and money market accounts. However, the Adjustable Rate Fund and Short-
Term Fund do not maintain a constant net asset value per share and are subject
to greater fluctuations in the value of their shares than a money market fund.
Unlike bank certificates of deposit and money market accounts, investments in
shares of the Funds are not insured or guaranteed by any government agency. Each
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of the Adjustable Rate Fund and Short-Term Fund seeks to provide such high
current income without sacrificing credit quality.
RELATIVE LOW VOLATILITY OF PRINCIPAL. Adjustable Rate Fund seeks to
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minimize net asset value fluctuations by investing primarily in adjustable rate
mortgage-backed securities, maintaining a maximum duration equal to that of a
two-year U.S. Treasury security and a target duration equal to that of a six-
month to one-year U.S. Treasury security, and utilizing certain active
management techniques to hedge interest rate risk. Short-Term Fund seeks to
minimize net asset value fluctuations by utilizing certain interest rate hedging
techniques and by maintaining an option-adjusted duration of not more than a 3-
year U.S. Treasury security (although) its actual option-adjusted duration is
expected to equal that of a 2-year U.S. Treasury security. There is no assurance
that these strategies for the Adjustable Rate Fund and Short-Term Fund will
always be successful. Each Fund's net asset value per share will fluctuate more
than that of a money market fund.
PROFESSIONAL MANAGEMENT AND ADMINISTRATION. Investors who invest in
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securities of the Government National Mortgage Association and other mortgage-
backed securities may prefer professional management and administration of their
mortgage-backed securities portfolios because a well-diversified portfolio of
such securities emphasizing minimal fluctuation of net asset value requires
significant active management as well as significant accounting and
administrative resources.
SHORT DURATION FUND
Short Duration Fund is not a money market fund. It is designed for
investors who seek the tax benefits associated with investing in municipal
securities and who are able to accept greater risk with the possibility of
higher returns than investors in municipal money market funds. While municipal
money market funds almost always maintain a constant net asset value, they must
meet stringent high quality credit standards, their portfolios must be broadly
diversified and their portfolio securities must have remaining maturities of 397
days or less. An example of an "eligible" investment for the Short Duration Fund
is auction rate municipal securities, which generally have higher yields than
money market municipal securities, but which typically are not eligible
investments for municipal money market funds.
In addition, unlike a municipal money market fund, the Short Duration
Fund's increased investment flexibility permits its portfolio to be more easily
adjusted to reflect the shape of the current yield curve as well as to respond
to anticipated developments that might affect the shape of the yield curve.
Investors who wish to invest in municipal securities may find
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that a mutual fund structure offers some important advantages when compared to
investing in individual municipal securities, including:
. The ratings given to municipal securities by the rating
organizations are difficult to evaluate. For example, some
municipal securities with relatively low credit ratings have yields
comparable to municipal securities with much higher ratings. The
credit research professionals at Goldman Sachs closely follow
market events and are well positioned to judge current and expected
credit conditions of municipal issuers;
. Because of the relative inefficiency of the secondary market in
municipal securities, the value of an individual municipal security
is often difficult to determine. As such, investors may obtain a
wide range of different prices when asking for quotes from
different dealers. In addition, a dealer may have a large
inventory of a particular issue that it wants to reduce. Obtaining
the best overall prices can require extensive negotiation, which is
a function performed by the portfolio manager; and
. Industry and geographical diversification are important
considerations for municipal investors. Short Duration Fund is
designed to provide this diversification.
CORE FUND
Core Fund is designed for investors seeking a total return consisting of
both income and capital appreciation that exceeds the total return of the Lehman
Brothers Aggregate Bond Index, without incurring the administrative and
accounting burdens involved in direct investment. Such investors also prefer
liquidity, experienced professional management and administration, a
sophisticated investment process, and the convenience of a mutual fund
structure. Core Fund may be appropriate as part of a balanced investment
strategy consisting of stocks, bonds and cash or as a complement to positions in
other types of fixed income investments.
Core Fund's overall returns are generally likely to move in the opposite
direction from interest rates. Therefore, when interest rates decline, Core
Fund's return is likely to increase. Conversely, when interest rates increase,
Core Fund's return is likely to decline. However, the Adviser believes that,
given the flexibility of managers to invest in a diversified portfolio of
securities, Core Fund's return is not likely to decline as quickly as that of
other fixed income funds with a comparable average portfolio duration. In
exchange for accepting a higher degree of potential share price fluctuation,
investors have the opportunity
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to achieve a higher return from Core Fund than from shorter term investments.
A SOPHISTICATED INVESTMENT PROCESS. Core Fund's interest rate risk,
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including overall market exposure and the spread risk of particular sectors and
securities, will be controlled through active portfolio management techniques.
Core Fund's investment process starts with a review of trends for the overall
economy as well as for different sectors of the fixed income securities markets.
Goldman Sachs' portfolio managers then analyze yield spreads, implied volatility
and the shape of the yield curve. In planning Core Fund's portfolio investment
strategies, the Adviser is able to draw upon the economic and fixed income
research resources of Goldman Sachs. The Adviser will use a sophisticated
analytical process including Goldman Sachs' proprietary mortgage prepayment
model and option-adjusted spread model to assist in structuring and maintaining
Core Fund's investment portfolio. In determining Core Fund's investment strategy
and making market timing decisions, the Adviser will have access to input from
Goldman Sachs' economists, fixed income analysts and mortgage quantitative
specialists.
EXPERIENCED MANAGEMENT. Successfully creating and managing a diversified
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portfolio of securities requires professionals with extensive experience.
Goldman Sachs' highly skilled portfolio management team brings together many
years of experience in the analysis, valuation and trading of U.S. and foreign
fixed income securities.
INVESTMENT OBJECTIVES AND POLICIES
ADJUSTABLE RATE FUND
The investment objective of Adjustable Rate Fund is a high level of current
income, consistent with low volatility of principal. Adjustable Rate Fund will
seek to achieve its objective through investment in securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities. Under
normal circumstances, at least 65% of Adjustable Rate Fund's total assets will
consist of adjustable rate mortgage pass-through securities and other mortgage
securities with periodic interest rate resets, which are issued or guaranteed by
such U.S. Government entities. The primary issuers or guarantors of such
securities currently include the Federal National Mortgage Association ("Fannie
Mae"), the Federal Home Loan Mortgage Corporation ("Freddie Mac") and the
Government National Mortgage Association ("Ginnie Mae"), although Adjustable
Rate Fund may invest in securities issued or guaranteed by other agencies or
instrumentalities in the future. Adjustable Rate Fund may also invest in other
mortgage-backed securities, and other obligations issued or guaranteed by the
U.S. Government, its agencies and instrumentalities, as well as repurchase
agreements collateralized by such securities. Adjustable Rate Fund may, for
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temporary defensive purposes, hold or invest more than 35% of its total assets
in cash, U.S. Treasury securities or high quality money market instruments,
including commercial paper, bankers' acceptances, repurchase agreements or other
debt obligations with a remaining maturity of one year or less. Adjustable Rate
Fund may employ certain active management techniques, including the use of
futures (including options on futures), mortgage and interest rate swaps and
interest rate floors, caps and collars. Adjustable Rate Fund's investments in
mortgage pass-through securities and other securities representing an interest
in or collateralized by adjustable and fixed-rate mortgage loans ("Mortgage-
Backed Securities") entail certain risks. There is no assurance that Adjustable
Rate Fund will achieve its objective.
SHORT-TERM FUND
The investment objective of Short-Term Fund is to achieve a high level of
current income. Secondarily, Short-Term Fund may, in seeking current income,
also consider the potential for capital gains. Short-Term Fund pursues its
objectives through investment in securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities and repurchase agreements
pertaining thereto. These securities may include Mortgage-Backed Securities.
There is no assurance that these objectives of Short-Term Fund will be achieved.
SHORT DURATION FUND
Short Duration Fund's investment objective is to provide investors with a
high level of current income, consistent with relatively low volatility of
principal, that is exempt from regular federal income tax. Short Duration Fund
will seek to achieve its objective primarily through investments in fixed income
securities ("Tax Free Securities") issued by or on behalf of states, territories
and possessions of the United States (including the District of Columbia) and
their political subdivisions, agencies and instrumentalities, the interest on
which is exempt from regular federal income tax and is not a tax preference item
under the federal alternative minimum tax. In addition, Tax-Free Securities
include participation interests in such securities the interest on which is, in
the opinion of counsel, exempt from such taxes.
Under normal market conditions, Short Duration Fund will invest at least
80% of its net assets in Tax-Free Securities. Although it does not expect to do
so, Short Duration Fund may invest up to 20% of its net assets in private
activity bonds. Interest on certain private activity bonds may, when distributed
by Short Duration Fund, increase the liability, if any, of certain investors for
the federal alternative minimum tax. Private activity bonds and Tax-Free
Securities are referred to herein as "Municipal Securities."
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Short Duration Fund's investments in Municipal Securities will at the time
of investment be rated at least A by Standard & Poor's Ratings Group ("Standard
& Poor's") or Moody's Investors Service, Inc. ("Moody's") or their equivalent
ratings or, if unrated by such rating organizations, determined by the Adviser
to be of comparable credit quality. The credit rating assigned to Municipal
Securities by these rating agencies or by the Adviser may reflect the existence
of guarantees, letters of credit or other credit enhancement features available
to the issuers or holders of such Municipal Securities.
Although Short Duration Fund is not expected to do so, Short Duration Fund
may invest as much as 20% of its net assets in taxable investments which are
obligations issued or guaranteed by the U.S. Government, its agencies and
instrumentalities and repurchase agreements collateralized by U.S. Government
securities ("Taxable Investments"). Short Duration Fund may invest more than 20%
of its net assets in Taxable Investments for temporary defensive purposes when,
in the judgment of the Adviser, market conditions warrant. Except for such
temporary investments, at no time will Short Duration Fund's investments in
private activity bonds and Taxable Investments exceed, in the aggregate, 20% of
Short Duration Fund's net assets.
Short Duration Fund will maintain an average weighted portfolio duration of
two to three years. The individual Municipal Securities in which the Short
Duration Fund investments will have effective maturities of five years or less.
The terms "duration" and "effective maturity" are defined in Short Duration
Fund's Prospectus under "Investment Objective and Policies." There can be no
assurance that Short Duration Fund will achieve its investment objective.
CORE FUND
Core Fund's investment objective is to provide investors with a total
return consisting of capital appreciation and income that exceeds the total
return of the Lehman Brothers Aggregate Bond Index (the "Index"). There can be
no assurance that Core Fund will achieve its investment objective.
Core Fund will seek to achieve its objective by investing, under normal
market conditions, primarily in fixed income securities, including securities
issued or guaranteed by the U.S. Government or its agencies, authorities,
instrumentalities or sponsored enterprises, corporate securities, Mortgage-
Backed Securities, and asset-backed securities. The Adviser will determine
periodically the weighting of such securities based upon the Adviser's
expectation for changes in interest rates, market conditions, the credit quality
of individual issuers and other factors it deems relevant. The Adviser will have
access to the research of, and proprietary technical models developed by,
Goldman
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Sachs and will apply quantitative and qualitative analysis in determining the
appropriate allocations among issuers and types of securities.
The fixed income securities in which Core Fund invests will, at the time of
investment, be rated at least BBB by Standard & Poor's, Baa by Moody's or BBB by
Fitch Investors Service, Inc. ("Fitch") or their respective equivalent ratings
or, if unrated by such rating organizations, determined by the Adviser to be of
comparable credit quality. A security will be deemed to have met this
requirement if it receives the minimum required rating from at least one of such
rating organizations even though it has been rated below the minimum rating by
one or more other rating organizations.
Core Fund will maintain, under normal market conditions, an average
portfolio duration within a range equal to the duration of the Index plus or
minus one year. The Adviser may, however, decrease Core Fund's average portfolio
duration without limit if the Adviser believes that a shorter duration is
warranted by the outlook for interest rates or market conditions. There is no
limitation as to Core Fund's maximum weighted average portfolio maturity or the
maximum stated maturity with respect to individual securities. During the past
ten years, the average duration of the Index has generally varied between 4.2
and 5.4 years.
The fixed income securities in which Core Fund may invest include
obligations of foreign issuers and obligations denominated in U.S. dollars or
foreign currencies. The non-dollar denominated fixed income securities in which
Core Fund may invest will, at the time of investment, be rated at least AA by
Standard & Poor's, Aa by Moody's or AA by Fitch or, if unrated by such rating
organizations, determined by the Adviser to be of comparable credit quality.
Core Fund's investments in fixed income securities may also include Short-Term
Investments (as defined below), convertible securities, custody receipts and
municipal securities.
It is expected that Core Fund will employ certain interest rate management
techniques. These techniques will be used both to hedge the interest rate risks
associated with Core Fund's portfolio securities and to seek to increase total
return. Such techniques include options on securities, futures contracts,
options on futures contracts, interest rate and mortgage swaps, interest rate
caps, floors and collars, forward commitments, lending portfolio securities,
repurchase agreements and mortgage dollar rolls. Core Fund may also engage in
certain currency management techniques, including futures and options on
currencies, forward foreign currency exchange contracts and currency swaps, but
only for hedging purposes.
The Adviser will utilize a variety of investment strategies to seek to
achieve Core Fund's investment objective, while complying
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with Core Fund's duration and credit quality requirements. Three of these
strategies are described below.
MARKET SECTOR SELECTION. Market sector selection is the underweighting
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or overweighting of one or more market sectors (i.e., U.S. Treasuries, U.S.
Government agencies, corporate securities, Mortgage-Backed Securities and asset-
backed securities). The Adviser may decide to overweight or underweight a given
market sector or subsector (e.g., within the corporate sector, industrials,
financial issuers and utilities) based on, among other things, expectations of
future yield spreads between different sectors or subsectors. As an example,
when the Adviser expects spreads between yields for corporates and U.S.
Treasuries to narrow, the Adviser may overweight corporates relative to U.S.
Treasuries to take advantage of expected price appreciation. As of January 31,
1995, the weighting of sectors included in the Index was as follows: U.S.
Treasury securities -- 47%; Mortgage-Backed Securities --29%; Corporate
securities -- 16%; U.S. Government agencies -- 7% and Asset-Backed securities --
1%.
YIELD CURVE STRATEGY. Yield curve strategy consists of overweighting
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or underweighting different maturity sectors relative to a benchmark to take
advantage of the shape of the yield curve. Three alternative maturity sector
selections are available: a "barbell" strategy in which short and long maturity
sectors are overweighted while intermediate maturity sectors are underweighted
which may be used when the Adviser expects the yield curve to flatten; a
"bullet" strategy in which, conversely, short- and long-maturity sectors are
underweighted while intermediate-maturity sectors are overweighted when the
Adviser expects the yield curve either to steepen or to flatten less than
implied by forward rates; and a "neutral yield curve" strategy in which the
maturity distribution mirrors that of a benchmark.
ISSUER SELECTION. Issuer selection is the purchase and sale of
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corporate securities based on a corporation's current and expected credit
standing (within the constraints imposed by the Fund's minimum credit quality
requirements). This strategy focuses on four types of investment grade corporate
issuers. Selection of securities from the first type of issuers --those with low
but stable credit -- enhances total returns by providing incremental yield.
Selecting securities from the second type of issuers --those with low and
intermediate but improving credit quality --enhances total returns in two
stages. Initially, these securities provide incremental yield. Eventually, price
appreciation occurs relative to alternative securities as credit quality
improves, the nationally recognized statistical rating organizations upgrade
credit ratings, and credit spreads narrow. Securities from the third type of
issuers -- issuers with deteriorating credit quality --will be avoided, since
total returns are enhanced by avoiding the widening of credit spreads and the
consequent relative price depreciation. Finally, total returns can be enhanced
by focusing
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on securities that are rated differently by different rating organizations. If
the securities are trading in line with the higher published quality rating
while the Adviser concurs with the lower published quality rating, the
securities would generally be sold and any potential price deterioration
avoided. On the other hand, if the securities are trading in line with the lower
published quality rating while the higher published quality rating is considered
more realistic, the securities may be purchased in anticipation of the expected
market reevaluation and relative price appreciation.
OTHER INVESTMENTS AND PRACTICES
OBLIGATIONS OF THE UNITED STATES, ITS AGENCIES AND INSTRUMENTALITIES
Each Fund may invest in U.S. Government securities, which are obligations
issued or guaranteed by the U.S. Government and its agencies, authorities or
instrumentalities. Some U.S. Government securities (such as Treasury bills,
notes and bonds, which differ only in their interest rates, maturities and times
of issuance) are supported by the full faith and credit of the United States of
America. Others, such as obligations issued or guaranteed by U.S. Government
agencies, authorities or instrumentalities, are supported either by (a) the full
faith and credit of the U.S. Government (such as securities of the Small
Business Administration), (b) the right of the issuer to borrow from the
Treasury (such as securities of Federal Home Loan Banks), (c) the discretionary
authority of the U.S. Government to purchase the agency's obligations (such as
securities of Fannie Mae) or (d) only the credit of the issuer (such as
securities of the Financing Corporation). The U.S. Government is under no legal
obligation, in general, to purchase the obligations of its agencies, authorities
and instrumentalities. No assurance can be given that the U.S. Government will
provide financial support to the U.S. Government agencies, authorities or
instrumentalities in the future.
Securities guaranteed as to principal and interest by the U.S. Government
and its agencies, authorities or instrumentalities are deemed to include (a)
securities for which the payment of principal and interest is backed by a
guaranty of the U.S. Government or its agencies, authorities or
instrumentalities and (b) participations in loans made to foreign governments or
their agencies that are so guaranteed. The secondary market for certain of these
participations is limited. Such participations may therefore be regarded as
illiquid.
The Funds may also invest in separately traded principal and interest
components of securities guaranteed or issued by the U.S. Treasury if such
components are traded independently under the separate trading of registered
interest and principal of securities
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program ("STRIPS").
CUSTODIAL RECEIPTS
The Funds may each acquire custodial receipts in respect of U.S. Government
securities. Such custodial receipts evidence ownership of future interest
payments, principal payments or both on certain notes or bonds. These custodial
receipts are known by various names, including "Treasury Receipts," "Treasury
Investors Growth Receipts" ("TIGRs"), and "Certificates of Accrual on Treasury
Securities" ("CATS"). For certain securities law purposes, custodial receipts
are not considered U.S. Government securities.
MORTGAGE LOANS AND MORTGAGE-BACKED SECURITIES
Adjustable Rate Fund, Short-Term Fund and Core Fund invest in mortgage
loans and Mortgage-Backed Securities.
GENERAL CHARACTERISTICS. Each mortgage pool underlying Mortgage-Backed
-----------------------
Securities consists of mortgage loans evidenced by promissory notes secured by
first mortgages or first deeds of trust or other similar security instruments
creating a first lien on owner occupied and non-owner occupied one-unit to four-
unit residential properties, multi-family (i.e., five or more) properties,
agriculture properties, commercial properties and mixed use properties (the
"Mortgaged Properties"). The Mortgaged Properties may consist of detached
individual dwelling units, multi-family dwelling units, individual condominiums,
townhouses, duplexes, triplexes, fourplexes, row houses, individual units in
planned unit developments and other attached dwelling units. The Mortgage
Properties may also include residential investment properties and second homes.
The investment characteristics of adjustable and fixed rate Mortgage-Backed
Securities differ from those of traditional fixed income securities. The major
differences include the payment of interest and principal on Mortgage-Backed
Securities on a more frequent (usually monthly) schedule, and the possibility
that principal may be prepaid at any time due to prepayments on the underlying
mortgage loans or other assets. These differences can result in significantly
greater price and yield volatility than is the case with traditional fixed
income securities. As a result, if a Fund purchases Mortgage-Backed Securities
at a premium, a faster than expected prepayment rate will reduce both the market
value and the yield to maturity from those which were anticipated. A prepayment
rate that is slower than expected will have the opposite effect of increasing
yield to maturity and market value. Conversely, if a Fund purchases Mortgage-
Backed Securities at a discount, faster than expected prepayments will increase,
while slower than expected prepayments will reduce, yield to maturity and
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market values. To the extent that the Funds invest in Mortgage-Backed
Securities, the Advisers will seek to manage these potential risks by investing
in a variety of Mortgage-Backed Securities and by using certain hedging
techniques.
ADJUSTABLE RATE MORTGAGE LOANS ("ARMS"). ARMs generally provide for a
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fixed initial mortgage interest rate for a specified period of time. Thereafter,
the interest rates (the "Mortgage Interest Rates") may be subject to periodic
adjustment based on changes in the applicable index rate (the "Index Rate"). The
adjusted rate would be equal to the Index Rate plus a fixed percentage spread
over the Index Rate established for each ARM at the time of its origination.
Adjustable interest rates can cause payment increases that some
mortgagors may find difficult to make. However, certain ARMs may provide that
the Mortgage Interest Rate may not be adjusted to a rate above an applicable
lifetime maximum rate or below an applicable lifetime minimum rate for such ARM.
Certain ARMs may also be subject to limitations on the maximum amount by which
the Mortgage Interest Rate may adjust for any single adjustment period (the
"Maximum Adjustment"). Other ARMs ("Negatively Amortizing ARMs") may provide
instead or as well for limitations on changes in the monthly payment on such
ARMs. Limitations on monthly payments can result in monthly payments which are
greater or less than the amount necessary to amortize a Negatively Amortizing
ARM by its maturity at the Mortgage Interest Rate in effect in any particular
month. In the event that a monthly payment is not sufficient to pay the
interest accruing on a Negatively Amortizing ARM, any such excess interest is
added to the principal balance of the loan, causing negative amortization, and
will be repaid through future monthly payments. It may take borrowers under
Negatively Amortizing ARMs longer periods of time to build up equity and may
increase the likelihood of default by such borrowers. In the event that a
monthly payment exceeds the sum of the interest accrued at the applicable
Mortgage Interest Rate and the principal payment which would have been necessary
to amortize the outstanding principal balance over the remaining term of the
loan, the excess (or "accelerated amortization") further reduces the principal
balance of the ARM. Negatively Amortizing ARMs do not provide for the extension
of their original maturity to accommodate changes in their Mortgage Interest
Rate. As a result, unless there is a periodic recalculation of the payment
amount (which there generally is), the final payment may be substantially larger
than the other payments. These limitations on periodic increases in interest
rates and on changes in monthly payments protect borrowers from unlimited
interest rate and payment increases.
There are two main categories of indices which provide the basis for
rate adjustments on ARMs: those based on U.S. Treasury securities and those
derived from a calculated measure, such as a
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cost of funds index or a moving average of mortgage rates. Commonly utilized
indices include the one-year, three-year and five-year constant maturity
Treasury rates, the three-month Treasury bill rate, the 180-day Treasury bill
rate, rates on longer-term Treasury securities, the 11th District Federal Home
Loan Bank Cost of Funds, the National Median Cost of Funds, the one-month,
three-month, six-month or one year London Interbank Offered Rate, the prime
rate of a specific bank or commercial paper rates. Some indices, such as the
one-year constant maturity Treasury rate, closely mirror changes in market
interest rate levels. Others, such as the 11th District Federal Home Loan Bank
Cost of Funds index, tend to lag behind changes in market rate levels and tend
to be somewhat less volatile. The degree of volatility in the market value of
each Fund's portfolio and therefore in the net asset value of the Adjustable
Rate Fund and Short-Term Fund's shares will be a function of the length of the
interest rate reset periods and the degree of volatility in the applicable
indices.
ADJUSTABLE RATE MORTGAGE-BACKED SECURITIES MARKET. The market for U.S.
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Government agency adjustable rate Mortgage-Backed Securities has developed
rapidly in recent years, with over $217.9 billion in such securities now issued.
ARMs have accounted for a major portion of mortgage originations since federally
chartered thrifts were permitted to originate them in 1981. The growth of the
market for U.S. Government agency adjustable rate Mortgage-Backed Securities is
the result of this increasing popularity of ARMs, new investment products and
research.
GOVERNMENT GUARANTEED MORTGAGE-BACKED SECURITIES. There are several types
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of guaranteed Mortgage-Backed Securities currently available, including
guaranteed mortgage pass-through certificates and multiple class securities,
which include guaranteed Real Estate Mortgage Investment Conduit Certificates
("REMIC Certificates"), other collateralized mortgage obligations and stripped
Mortgage-Backed Securities. Adjustable Rate Fund, Short-Term Fund and Core Fund
are permitted to invest in other types of Mortgage-Backed Securities that may be
available in the future to the extent consistent with their respective
investment policies and objectives.
GUARANTEED MORTGAGE PASS-THROUGH SECURITIES
GINNIE MAE CERTIFICATES. The Government National Mortgage Association
-----------------------
("Ginnie Mae") is a wholly-owned corporate instrumentality of the United States.
Ginnie Mae is authorized to guarantee the timely payment of the principal of and
interest on certificates that are based on and backed by a pool of mortgage
loans insured by the Federal Housing Administration ("FHA Loans"), or guaranteed
by the Veterans Administration ("VA Loans"), or by pools of other eligible
mortgage loans. In order to meet its obligations under any guaranty, Ginnie Mae
is authorized to borrow
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from the U.S. Treasury in an unlimited amount.
FANNIE MAE CERTIFICATES. The Federal National Mortgage Association
-----------------------
("Fannie Mae") is a stockholder-owned corporation chartered under an act of the
U.S. Congress. Each Fannie Mae Certificate is issued and guaranteed by Fannie
Mae and represents an undivided interest in a pool of mortgage loans (a "Pool")
formed by Fannie Mae. Each Pool consists of residential mortgage loans
("Mortgage Loans") either previously owned by Fannie Mae or purchased by it in
connection with the formation of the Pool. The Mortgage Loans may be either
conventional Mortgage Loans (i.e., not insured or guaranteed by any U.S.
Government agency) or Mortgage Loans that are either insured by the Federal
Housing Administration ("FHA") or guaranteed by the Veterans Administration
("VA"). However, the Mortgage Loans in Fannie Mae Pools are primarily
conventional Mortgage Loans. The lenders originating and servicing the Mortgage
Loans are subject to certain eligibility requirements established by Fannie Mae.
Fannie Mae has certain contractual responsibilities. With respect to each
Pool, Fannie Mae is obligated to distribute scheduled monthly installments of
principal and interest after Fannie Mae's servicing and guaranty fee, whether or
not received, to Certificate holders. Fannie Mae also is obligated to distribute
to holders of Certificates an amount equal to the full principal balance of any
foreclosed Mortgage Loan, whether or not such principal balance is actually
recovered. The obligations of Fannie Mae under its guaranty of the Fannie Mae
Certificates are obligations solely of Fannie Mae.
FREDDIE MAC CERTIFICATES. The Federal Home Loan Corporation ("Freddie
------------------------
Mac") is a publicly held U.S. Government sponsored enterprise. The principal
activity of Freddie Mac currently is the purchase of first lien, conventional,
residential mortgage loans and participation interests in such mortgage loans
and their resale in the form of mortgage securities, primarily Freddie Mac
Certificates. A Freddie Mac Certificate represents a pro rata interest in a
group of mortgage loans or participations in mortgage loans (a "Freddie Mac
Certificate group") purchased by Freddie Mac.
Freddie Mac guarantees to each registered holder of a Freddie Mac
Certificate the timely payment of interest at the rate provided for by such
Freddie Mac Certificate (whether or not received on the underlying loans).
Freddie Mac also guarantees to each registered Certificate holder ultimate
collection of all principal of the related mortgage loans, without any offset or
deduction, but does not, generally, guarantee the timely payment of scheduled
principal. The obligations of Freddie Mac under its guaranty of Freddie Mac
Certificates are obligations solely of Freddie Mac.
The mortgage loans underlying the Freddie Mac and Fannie Mae Certificates
consist of adjustable rate or fixed rate mortgage
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loans with original terms to maturity of between five and thirty years.
Substantially all of these mortgage loans are secured by first liens on one- to
four-family residential properties or multi-family projects. Each mortgage loans
must meet the applicable standards set forth in the law creating Freddie Mac or
Fannie Mae. A Freddie Mac Certificate group may include whole loans,
participation interests in whole loans, undivided interests in whole loans and
participations comprising another Freddie Mac Certificate group.
CONVENTIONAL MORTGAGE LOANS. The conventional mortgage loans underlying
---------------------------
the Freddie Mac and Fannie Mae Certificates will consist of adjustable rate or
fixed rate mortgage loans with original terms to maturity of between five and
thirty years. Substantially all of these mortgage loans are secured by first
liens on one- to four-family residential properties or multi-family projects.
Each mortgage loan must meet the applicable standards set forth in the law
creating Freddie Mac or Fannie Mae. A Freddie Mac Certificate group may include
whole loans, participation interests in whole loans, undivided interests on
whole loans and participations comprising another Freddie Mac Certificate group.
MORTGAGE PASS-THROUGH SECURITIES. Adjustable Rate Fund, Short-Term Fund
--------------------------------
and Core Fund may invest in government guaranteed mortgage pass-through
securities ("Mortgage Pass-Throughs"), that are fixed or adjustable rate
mortgage-backed securities which provide for monthly payments that are a "pass-
through" of the monthly interest and principal payments (including any
prepayments) made by the individual borrowers on the pooled mortgage loans, net
of any fees or other amounts paid to any guarantor, administrator and/or
servicer of the underlying mortgage loans. Core Fund may also invest in
privately issued Mortgage Pass-Throughs.
The following discussion describes only a few of the wide variety of
structures of Mortgage Pass-Throughs that are available or may be issued.
DESCRIPTION OF CERTIFICATES. Mortgage Pass-Throughs may be issued in one
---------------------------
or more classes of senior certificates and one or more classes of subordinate
certificates. Each such class may bear a different pass-through rate. Generally,
each certificate will evidence the specified interest of the holder thereof in
the payments of principal or interest or both in respect of the mortgage pool
comprising part of the trust fund for such certificates.
Any class of certificates may also be divided into subclasses entitled
to varying amounts of principal and interest. If a REMIC election has been
made, certificates of such subclasses may be entitled to payments on the basis
of a stated principal balance and stated interest rate, and payments among
different subclasses may be made on a sequential, concurrent, pro rata or
--- ----
disproportionate
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<PAGE>
basis, or any combination thereof. The stated interest rate on any such subclass
of certificates may be a fixed rate or one which varies in direct or inverse
relationship to an objective interest index.
Generally, each registered holder of a certificate will be entitled to
receive its pro rata share of monthly distributions of all or a portion of
--- ----
principal of the underlying mortgage loans or of interest on the principal
balances thereof, which accrues at the applicable mortgage pass-through rate, or
both. The difference between the mortgage interest rate and the related mortgage
pass-through rate (less the amount, if any, of retained yield) with respect to
each mortgage loan will generally be paid to the servicer as a servicing fee.
Since certain adjustable rate mortgage loans included in a mortgage pool may
provide for deferred interest (i.e., negative amortization), the amount of
interest actually paid by a mortgagor in any month may be less than the amount
of interest accrued on the outstanding principal balance of the related mortgage
loan during the relevant period at the applicable mortgage interest rate. In
such event, the amount of interest that is treated as deferred interest will be
added to the principal balance of the related mortgage loan and will be
distributed pro rata to certificate-holders as principal of such mortgage loan
--- ----
when paid by the mortgagor in subsequent monthly payments or at maturity.
PRIVATELY ISSUED MORTGAGE-BACKED SECURITIES
RATINGS. The ratings assigned by a rating organization to Mortgage
-------
Pass-Throughs address the likelihood of the receipt of all distributions on the
underlying mortgage loans by the related certificate-holders under the
agreements pursuant to which such certificates are issued. A rating
organization's ratings take into consideration the credit quality of the related
mortgage pool, including any credit support providers, structural and legal
aspects associated with such certificates, and the extent to which the payment
stream on such mortgage pool is adequate to make payments required by such
certificates. A rating organization's ratings on such certificates do not,
however, constitute a statement regarding frequency of prepayments on the
related mortgage loans. In addition, the rating assigned by a rating
organization to a certificate does not address the remote possibility that, in
the event of the insolvency of the issuer of certificates where a subordinated
interest was retained, the issuance and sale of the senior certificates may be
recharacterized as a financing and, as a result of such recharacterization,
payments on such certificates may be affected.
CREDIT ENHANCEMENT. Credit support falls generally into two categories:
------------------
(i) liquidity protection and (ii) protection against losses resulting from
default by an obligor on the underlying assets. Liquidity protection refers to
the provision of advances,
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generally by the entity administering the pools of mortgages, the provision of a
reserve fund, or a combination thereof, to ensure, subject to certain
limitations, that scheduled payments on the underlying pool are made in a timely
fashion. Protection against losses resulting from default ensures ultimate
payment of the obligations on at least a portion of the assets in the pool. Such
credit support can be provided by among other things, payment guarantees,
letters of credit, pool insurance, subordination, or any combination thereof.
SUBORDINATION; SHIFTING OF INTEREST; RESERVE FUND. In order to achieve
-------------------------------------------------
ratings on one or more classes of Mortgage Pass-Throughs, one or more classes of
certificates may be subordinate certificates which provide that the rights of
the subordinate certificate-holders to receive any or a specified portion of
distributions with respect to the underlying mortgage loans may be subordinated
to the rights of the senior certificate-holders. If so structured, the
subordination feature may be enhanced by distributing to the senior certificate-
holders on certain distribution dates, as payment of principal, a specified
percentage (which generally declines over time) of all principal payments
received during the preceding prepayment period ("shifting interest credit
enhancement"). This will have the effect of accelerating the amortization of the
senior certificates while increasing the interest in the trust fund evidenced by
the subordinate certificates. Increasing the interest of the subordinate
certificates relative to that of the senior certificates is intended to preserve
the availability of the subordination provided by the subordinate certificates.
In addition, because the senior certificate-holders in a shifting interest
credit enhancement structure are entitled to receive a percentage of principal
prepayments which is greater than their proportionate interest in the trust
fund, the rate of principal prepayments on the mortgage loans will have an even
greater effect on the rate of principal payments and the amount of interest
payments on, and the yield to maturity of, the senior certificates.
In addition to providing for a preferential right of the senior certificate
-holders to receive current distributions from the mortgage pool, a reserve fund
may be established relating to such certificates (the "Reserve Fund"). The
Reserve Fund may be created with an initial cash deposit by the originator or
servicer and augmented by the retention of distributions otherwise available to
the subordinate certificate-holders or by excess servicing fees until the
Reserve Fund reaches a specified amount.
The subordination feature, and any Reserve Fund, are intended to enhance
the likelihood of timely receipt by senior certificate-holders of the full
amount of scheduled monthly payments of principal and interest due them and will
protect the senior certificate-holders against certain losses; however, in
certain circumstances the Reserve Fund could be depleted and
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<PAGE>
temporary shortfalls could result. In the event the Reserve Fund is depleted
before the subordinated amount is reduced to zero, senior certificate-holders
will nevertheless have a preferential right to receive current distributions
from the mortgage pool to the extent of the then outstanding subordinated
amount. Unless otherwise specified, until the subordinated amount is reduced to
zero, on any distribution date any amount otherwise distributable to the
subordinate certificates or, to the extent specified, in the Reserve Fund will
generally be used to offset the amount of any losses realized with respect to
the mortgage loans ("Realized Losses"). Realized Losses remaining after
application of such amounts will generally be applied to reduce the ownership
interest of the subordinate certificates in the mortgage pool. If the
subordinated amount has been reduced to zero, Realized Losses generally will be
allocated pro rata among all certificate-holders in proportion to their
--- ----
respective outstanding interests in the mortgage pool.
ALTERNATIVE CREDIT ENHANCEMENT. As an alternative, or in addition to the
------------------------------
credit enhancement afforded by subordination, credit enhancement for Mortgage
Pass-Throughs may be provided by mortgage insurance, hazard insurance, by the
deposit of cash, certificates of deposit, letters of credit, a limited guaranty
or by such other methods as are acceptable to a rating agency. In certain
circumstances, such as where credit enhancement is provided by guarantees or a
letter of credit, the security is subject to credit risk because of its exposure
to an external credit enhancement provider.
VOLUNTARY ADVANCES. Generally, in the event of delinquencies in payments
------------------
on the mortgage loans underlying the Mortgage Pass-Throughs, the servicer agrees
to make advances of cash for the benefit of certificate-holders, but only to the
extent that it determines such voluntary advances will be recoverable from
future payments and collections on the mortgage loans or otherwise.
OPTIONAL TERMINATION. Generally, the servicer may, at its option with
--------------------
respect to any certificates, repurchase all of the underlying mortgage loans
remaining outstanding at such time as the aggregate outstanding principal
balance of such mortgage loans is less than a specified percentage (generally 5-
10%) of the aggregate outstanding principal balance of the mortgage loans as of
the cut-off date specified with respect to such series.
MULTIPLE CLASS MORTGAGE-BACKED SECURITIES AND COLLATERALIZED MORTGAGE
---------------------------------------------------------------------
OBLIGATIONS. Adjustable Rate Fund, Short-Term Fund and Core Fund may invest in
-----------
multiple class securities including collateralized mortgage obligations ("CMOs")
and REMIC Certificates issued by U.S. Government agencies and instrumentalities
such as Fannie Mae or, in the case of Core Fund, Freddie Mac or by trusts formed
by private originators of, or investors in, mortgage loans, including savings
and loan associations, mortgage bankers,
B-20
<PAGE>
commercial banks, insurance companies, investment banks and special purpose
subsidiaries of the foregoing. In general, CMOs are debt obligations of a legal
entity that are collateralized by, and multiple class mortgage-backed securities
represent direct ownership interests in, a pool of mortgage loans or mortgage-
backed securities the payments on which are used to make payments on the CMOs or
multiple class mortgage-backed securities.
Fannie Mae REMIC Certificates are issued and guaranteed as to timely
distribution of principal and interest by Fannie Mae. In addition, Fannie Mae
will be obligated to distribute the principal balance of each class of REMIC
Certificates in full, whether or not sufficient funds are otherwise available.
Freddie Mac guarantees the timely payment of interest on Freddie Mac REMIC
Certificates and also guarantees the payment of principal as payments are
required to be made on the underlying mortgage participation certificates
("PCs"). PCs represent undivided interests in specified level payment,
residential mortgages or participations therein purchased by Freddie Mac and
placed in a PC pool. With respect to principal payments on PCs, Freddie Mac
generally guarantees ultimate collection of all principal of the related
mortgage loans without offset or deduction. Freddie Mac also guarantees timely
payment of principal of certain PCs.
CMOs and guaranteed REMIC Certificates issued by Fannie Mae and Freddie Mac
are types of multiple class mortgage-backed securities. Investors may purchase
beneficial interests in REMICs, which are known as "regular" interests or
"residual" interests. The Funds do not intend to purchase residual interests in
REMICs. The REMIC Certificates represent beneficial ownership interests in a
REMIC trust, generally consisting of mortgage loans or Fannie Mae, Freddie Mac
or Ginnie Mae guaranteed mortgage-backed securities (the "Mortgage Assets"). The
obligations of Fannie Mae or Freddie Mac under their respective guaranty of the
REMIC Certificates are obligations solely of Fannie Mae or Freddie Mac,
respectively.
CMOs and REMIC Certificates are issued in multiple classes. Each class of
CMOs or REMIC Certificates, often referred to as a "tranche," is issued at a
specific adjustable or fixed interest rate and must be fully retired no later
than its final distribution date. Principal prepayments on the Mortgage Loans or
the Mortgage Assets underlying the CMOs or REMIC Certificates may cause some or
all of the classes of CMOs or REMIC Certificates to be retired substantially
earlier than their final scheduled distribution dates. Generally, interest is
paid or accrues on all classes of CMOs or REMIC Certificates on a monthly basis.
The principal of and interest on the Mortgage Assets may be allocated among
the several classes of CMOs or REMIC Certificates
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<PAGE>
in various ways. In certain structures (known as "sequential pay" CMOs or REMIC
Certificates), payments of principal, including any principal prepayments, on
the Mortgage Assets generally are applied to the classes of CMOs or REMIC
Certificates in the order of their respective final distribution dates. Thus no
payment of principal will be made on any class of sequential pay CMOs or REMIC
Certificates until all other classes having an earlier final distribution date
have been paid in full.
Additional structures of CMOs and REMIC Certificates include, among others,
"parallel pay" CMOs and REMIC Certificates. Parallel pay CMOs or REMIC
Certificates are those which are structured to apply principal payments and
prepayments of the Mortgage Assets to two or more classes concurrently on a
proportionate or disproportionate basis. These simultaneous payments are taken
into account in calculating the final distribution date of each class.
A wide variety of REMIC Certificates may be issued in parallel pay or
sequential pay structures. These securities include accrual certificates (also
known as "Z-Bonds"), which only accrue interest at a specified rate until all
other certificates having an earlier final distribution date have been retired
and are converted thereafter to an interest-paying security, and planned
amortization class ("PAC") certificates, which are parallel pay REMIC
Certificates that generally require that specified amounts of principal be
applied on each payment date to one or more classes of REMIC Certificates (the
"PAC Certificates"), even though all other principal payments and prepayments of
the Mortgage Assets are then required to be applied to one or more other classes
of the Certificates. The scheduled principal payments for the PAC Certificates
generally have the highest priority on each payment date after interest due has
been paid to all classes entitled to receive interest currently. Shortfalls, if
any, are added to the amount payable on the next payment date. The PAC
Certificate payment schedule is taken into account in calculating the final
distribution date of each class of PAC. In order to create PAC tranches, one or
more tranches generally must be created that absorb most of the volatility in
the underlying mortgage assets. These tranches tend to have market prices and
yields that are much more volatile than other PAC classes.
STRIPPED MORTGAGE-BACKED SECURITIES. Adjustable Rate Fund, Short-Term Fund
-----------------------------------
and Core Fund may invest in stripped Mortgage-Backed Securities ("SMBS"), which
are derivative multi-class mortgage securities, issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. Core Fund may also invest in
privately-issued SMBS. Although the market for such securities is increasingly
liquid, privately issued SMBS may not be readily marketable and will be
considered illiquid for purposes of Core Fund's limitation on investments in
illiquid securities. The market value of the class consisting entirely of
principal payments generally is unusually volatile in response to changes in
interest
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<PAGE>
rates. The yields on a class of SMBS that receives all or most of the interest
from Mortgage Assets are generally higher than prevailing market yields on other
mortgage-backed securities because their cash flow patterns are more volatile
and there is a greater risk that the initial investment will not be fully
recouped.
LEGAL CONSIDERATIONS OF MORTGAGE LOANS. The following is a discussion of
--------------------------------------
certain legal regulatory aspects of all mortgage loans including the adjustable
and fixed rate mortgage loans expected to underlie the Mortgage-Backed
Securities in which Adjustable Rate Fund, Short-Term Fund and Core Fund may
invest. These regulations may impair the ability of a mortgage lender to enforce
its rights under the mortgage documents. These regulations may adversely affect
the Funds' investments in Mortgage-Backed Securities (including those issued or
guaranteed by the U.S. Government, its agencies or instrumentalities) by
delaying the Funds' receipt of payments derived from principal or interest on
mortgage loans affected by such regulations.
1. Foreclosure. A foreclosure of a defaulted mortgage loan may be delayed due
-----------
to compliance with statutory notice or service of process provisions,
difficulties in locating necessary parties or legal challenges to the
mortgagee's right to foreclose. Depending upon market conditions, the
ultimate proceeds of the sale of foreclosed property may not equal the
amounts owed on the Mortgage-Backed Securities.
Furthermore, courts in some cases have imposed general equitable principles
upon foreclosure generally designed to relieve the borrower from the legal
effect of default and have required lenders to undertake affirmative and
expensive actions to determine the causes for the default and the
likelihood of loan reinstatement.
2. Rights of Redemption. In some states, after foreclosure of a mortgage
--------------------
loan, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the property, which right may diminish the
mortgagee's ability to sell the property.
3. Legislative Limitations. In addition to anti-deficiency and related
-----------------------
legislation, numerous other federal and state statutory provisions,
including the federal bankruptcy laws and state laws affording relief to
debtors, may interfere with or affect the ability of a secured mortgage
lender to enforce its security interest. For example, a bankruptcy court
may grant the debtor a reasonable time to cure a default on a mortgage
loan, including a payment default. The court in certain instances may also
reduce the monthly payments due under such mortgage loan, change the rate
of interest, reduce the principal balance of the loan to the then-current
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<PAGE>
appraised value of the related mortgaged property, alter the mortgage loan
repayment schedule and grant priority of certain liens over the lien of the
mortgage loan. If a court relieves a borrower's obligation to repay
amounts otherwise due on a mortgage loan, the mortgage loan servicer will
not be required to advance such amounts, and any loss may be borne by the
holders of securities backed by such loans. In addition, numerous federal
and state consumer protection laws impose penalties for failure to comply
with specific requirements in connection with origination and servicing of
mortgage loans.
4. "Due-on-Sale" Provisions. Fixed-rate mortgage loans may contain a so-
------------------------
called "due-on-sale" clause permitting acceleration of the maturity of the
mortgage loan if the borrower transfers the property. The Garn-St. Germain
Depository Institutions Act of 1982 sets forth nine specific instances in
which no mortgage lender covered by that Act may exercise a "due-on-sale"
clause upon a transfer of property. The inability to enforce a "due-on-
sale" clause or the lack of such a clause in mortgage loan documents may
result in a mortgage loan being assumed by a purchaser of the property that
bears an interest rate below the current market rate.
5. Usury Laws. Some states prohibit charging interest on mortgage loans in
----------
excess of statutory limits. If such limits are exceeded, substantial
penalties may be incurred and, in some cases, enforceability of the
obligation to pay principal and interest may be affected.
ASSET-BACKED SECURITIES
Core Fund may invest in asset-backed securities. Such securities are often
subject to more rapid repayment than their stated maturity date would indicate
as a result of the pass-through of prepayments of principal on the underlying
loans. During periods of declining interest rates, prepayment of loans
underlying asset-backed securities can be expected to accelerate. Accordingly,
Core Fund's ability to maintain positions in such securities will be affected by
reductions in the principal amount of such securities resulting from
prepayments, and its ability to reinvest the returns of principal at comparable
yields is subject to generally prevailing interest rates at that time.
Credit card receivables are generally unsecured and the debtors on such
receivables are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set-off
certain amounts owed on the credit cards, thereby reducing the balance due.
Automobile receivables generally are secured, but by automobiles rather than
residential real property. Most issuers of automobile receivables permit the
loan servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to
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<PAGE>
another party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the asset-backed securities. In addition,
because of the large number of vehicles involved in a typical issuance and
technical requirements under state laws, the trustee for the holders of the
automobile receivables may not have a proper security interest in the underlying
automobiles. Therefore, there is the possibility that, in some cases, recoveries
on repossessed collateral may not be available to support payments on these
securities.
ZERO COUPON, DEFERRED INTEREST AND CAPITAL APPRECIATION BONDS
Each Fund may invest in zero coupon bonds and Short Duration and Core Fund
may invest in deferred interest and capital appreciation bonds. Zero coupon,
deferred interest and capital appreciation bonds are debt securities issued or
sold at a discount from their face value and which do not entitle the holder to
any periodic payment of interest prior to maturity or a specified date. The
original issue discount varies depending on the time remaining until maturity or
cash payment date, prevailing interest rates, the liquidity of the security and
the perceived credit quality of the issuer. These securities also may take the
form of debt securities that have been stripped of their unmatured interest
coupons, the coupons themselves or receipts or certificates representing
interests in such stripped debt obligations or coupons. The market prices of
zero coupon, deferred interest and capital appreciation bonds generally are more
volatile than the market prices of interest bearing securities and are likely to
respond to a greater degree to changes in interest rates than interest bearing
securities having similar maturities and credit quality.
Zero coupon, deferred interest and capital appreciation securities involve
the additional risk that, unlike securities that periodically pay interest to
maturity, a Fund will realize no cash until a specified future payment date
unless a portion of such securities is sold and, if the issuer of such
securities defaults, a Fund may obtain no return at all on its investment. In
addition, even though such securities do not provide for the payment of current
interest in cash, the Funds are nonetheless required to accrue income on such
investments and may be required to distribute such amounts at least annually.
Because no cash is received at the time of the accrual, a Fund may be required
to liquidate other portfolio securities to satisfy federal tax distribution
requirements applicable to the Fund. See "Taxation."
VARIABLE AND FLOATING RATE SECURITIES
The interest rates payable on certain securities in which the Funds may
invest are not fixed and may fluctuate based upon changes in market rates. A
variable rate obligation has an interest rate which is adjusted at predesignated
periods in response to changes
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<PAGE>
in the market rate of interest on which the interest rate is based. Variable
and floating rate obligations are less effective than fixed rate instruments at
locking in a particular yield. Nevertheless, such obligations may fluctuate in
value in response to interest rate changes if there is a delay between changes
in market interest rates and the interest reset date for the obligation.
CORPORATE DEBT OBLIGATIONS
Core Fund may invest in corporate debt obligations, including obligations
of industrial, utility and financial issuers. Corporate debt obligations are
subject to the risk of an issuer's inability to meeting principal and interest
payments on the obligations and may also be subject to price volatility due to
such factors as market interest rates, market perception of the creditworthiness
of the issuer and general market liquidity.
BANK OBLIGATIONS
To the extent permitted by their respective investment policies, Adjustable
Rate Fund, Short-Term Fund and Core Fund may each invest in United States dollar
denominated obligations issued or guaranteed by United States banks. Bank
obligations, including without limitation time deposits, bankers' acceptances
and certificates of deposit, may be general obligations of the parent bank or
may be obligations only of the issuing branch pursuant to the terms of the
specific obligations or government regulation.
Banks are subject to extensive but different governmental regulations which
may limit both the amount and types of loans which may be made and interest
rates which may be charged. In addition, the profitability of the banking
industry is largely dependent upon the availability and cost of funds for the
purpose of financing lending operations under prevailing money market
conditions. General economic conditions as well as exposure to credit losses
arising from possible financial difficulties of borrowers play an important part
in the operations of this industry.
MUNICIPAL SECURITIES
Core Fund and Short Duration Fund may invest in Municipal Securities.
Municipal Securities consist of bonds, notes and other instruments issued by or
on behalf of states, territories and possessions of the United states (including
the District of Columbia) and their political subdivisions, agencies or
instrumentalities, the interest on which is exempt from regular federal income
tax (i.e., excluded from gross income for federal income tax purposes but not
necessarily exempt from the federal alternative minimum tax or from the personal
income taxes of any state). In addition, Municipal Securities include
participation
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<PAGE>
interests in such securities the interest on which is, in the opinion of bond
counsel for the issuers or counsel selected by the Adviser, excluded from gross
income for federal income tax purposes. The definition of Municipal Securities
includes other types of securities that currently exist or may be developed in
the future and that pay, or will pay, in the opinion of such counsel, interest
that is excluded from gross income for federal income tax purposes, provided
that investing in such securities is consistent with each of the Fund's
investment objective and policies. Each Fund will reflect any such changes in
its definition of Municipal Securities in its Prospectus. Municipal Securities
are often issued to obtain funds for various public purposes including refunding
outstanding obligations, obtaining funds for general operating expenses, and
obtaining funds to lend to other public institutions and facilities. Municipal
Securities also include certain "private activity bonds" or industrial
development bonds, which are issued by or on behalf of public authorities to
obtain funds for privately operated facilities, such as airports and waste
disposal facilities, and in some cases commercial and industrial facilities.
The two principal classifications of Municipal Securities are "general
obligations" and "revenue obligations." General obligations are secured by the
issuer's pledge of its full faith and credit for the payment of principal and
interest, although the characteristics and enforcement of general obligations
may vary according to the law applicable to the particular issuer. Revenue
obligations, which include, but are not limited to, private activity bonds,
resource recovery bonds, certificates of participation and certain municipal
notes, are not backed by the credit and taxing authority of the issuer, and are
payable solely from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise or other
specific revenue source. Nevertheless, the obligations of the issuer of a
revenue obligation may be backed by a letter of credit, guarantee or insurance.
General obligations and revenue obligations may be issued in a variety of forms,
including commercial paper, fixed, variable and floating rate securities, tender
option bonds, auction rate bonds and zero coupon bonds, deferred interest bonds
and capital appreciation bonds.
In addition to general obligations and revenue obligations, there is a
variety of hybrid and special types of Municipal Securities. There are also
numerous differences in the security of Municipal Securities both within and
between these two principal classifications.
For the purpose of applying a Fund's investment restrictions, the
identification of the issuer of a Municipal Security which is not a general
obligation is made by the Adviser based on the characteristics of the Municipal
Security, the most important of which is the source of funds for the payment of
principal and
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<PAGE>
interest on such securities.
An entire issue of Municipal Securities may be purchased by one or a small
number of institutional investors such as Short Duration Fund and Core Fund.
Thus, the issue may not be said to be publicly offered. Unlike some securities
that are not publicly offered, a secondary market exists for many Municipal
Securities that were not publicly offered initially and such securities can be
readily marketable.
The obligations of the issuer to pay the principal of and interest on a
Municipal Security are subject to the provisions of bankruptcy, insolvency and
other laws affecting the rights and remedies of creditors, such as the Federal
Bankruptcy Act, and laws, if any, that may be enacted by Congress or state
legislatures extending the time for payment of principal or interest or imposing
other constraints upon the enforcement of such obligations. There is also the
possibility that, as a result of litigation or other conditions, the power or
ability of the issuer to pay when due principal of or interest on a Municipal
Security may be materially affected.
The yields and market values of Municipal Securities are determined
primarily by the general level of interest rates, the creditworthiness of the
issuers of Municipal Securities and economic and political conditions affecting
such issuers. Due to their tax exempt status, the yields and market prices of
Municipal Securities may be adversely affected by changes in tax rates and
policies, which may have less effect on the market for taxable fixed income
securities. Moreover, certain types of Municipal Securities, such as housing
revenue bonds, involve prepayment risks which could effect the yield on such
securities.
Investments in Municipal Securities are subject to the risk that the issuer
could default on its obligations. Such a default could result from the
inadequacy of the sources or revenues from which interest and principal payments
are to be made or the assets collateralizing such obligations. Revenue bonds,
including private activity bonds, are backed only by specific assets or revenue
sources and not by the full faith and credit of the governmental issuer.
PRIVATE ACTIVITY BONDS. Short Duration Fund and Core Fund may each invest
----------------------
certain types of Municipal Securities, generally referred to as industrial
development bonds (and referred to under current tax law as private activity
bonds), which are issued by or on behalf of public authorities to obtain funds
to provide privately operated housing facilities, airport, mass transit or port
facilities, sewage disposal, solid waste disposal or hazardous waste treatment
or disposal facilities and certain local facilities for water supply, gas or
electricity. Other types of industrial development bonds, the proceeds of which
are used for the
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construction, equipment, repair or improvement of privately operated industrial
or commercial facilities, may constitute Municipal Securities, although the
current federal tax laws place substantial limitations on the size of such
issues. Short Duration Fund's distributions of its interest income from private
activity bonds may subject certain investors to the federal alternative minimum
tax whereas Core Fund's distributions of any tax-exempt interest it receives
from any source will be taxable for regular federal income tax purposes.
INSURANCE. Short Duration Fund may invest in "insured" tax-exempt
---------
Municipal Securities. Insured Municipal Securities are those for which
scheduled payments of interest and principal are guaranteed by a private
(nongovernmental) insurance company. The insurance only entitles Short Duration
Fund to receive the face or par value of the securities held by Short Duration
Fund. The insurance does not guarantee the market value of the Municipal
Securities or the value of the shares of Short Duration Fund.
Short Duration Fund may utilize new issue or secondary market insurance. A
new issue insurance policy is purchased by a bond issuer who wishes to increase
the credit rating of a security. By paying a premium and meeting the insurer's
underwriting standards, the bond issuer is able to obtain a high credit rating
(usually, Aaa from Moody's or AAA from Standard & Poor's) for the issued
security. Such insurance is likely to increase the purchase price and resale
value of the security. New issue insurance policies are non-cancellable and
continue in force as long as the bonds are outstanding.
A secondary market insurance policy is purchased by an investor (such as
Short Duration Fund) subsequent to a bond's original issuance and generally
insures a particular bond for the remainder of its term. Short Duration Fund
may purchase bonds which have already been insured under a secondary market
insurance policy by a prior investor, or Short Duration Fund may itself purchase
such a policy from insurers for bonds which are currently uninsured.
An insured Municipal Security acquired by Short Duration Fund will
typically be covered by only one of the above types of policies. All of the
insurance policies used by Short Duration Fund will be obtained only from
insurance companies rated, at the time of purchase, Aaa by Moody's or AAA by
Standard & Poor's.
AUCTION RATE SECURITIES. Short Duration Fund may invest in auction rate
-----------------------
securities. Auction rate securities consist of auction rate Municipal
Securities and auction rate preferred securities issued by closed-end investment
companies that invest primarily in Municipal Securities (collectively, "auction
rate securities"). Short Duration Fund does not currently intend to invest in
auction rate preferred securities. Provided that the
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<PAGE>
auction mechanism is successful, auction rate securities usually permit the
holder to sell the securities in an auction at par value at specified intervals.
The dividend is reset by "Dutch" auction in which bids are made by broker-
dealers and other institutions for a certain amount of securities at a specified
minimum yield. The dividend rate set by the auction is the lowest interest or
dividend rate that covers all securities offered for sale. While this process
is designed to permit auction rate securities to be traded at par value, there
is some risk that an auction will fail due to insufficient demand for the
securities.
Dividends on auction rate preferred securities issued by a closed-end fund
may be designated as exempt from federal income tax to the extent they are
attributable to exempt income earned by the fund on the securities in its
portfolio and distributed to holders of the preferred securities, provided that
the preferred securities are treated as equity securities for federal income tax
purposes and the closed-end fund complies with certain tests under the Code.
For purposes of complying with the 20% limitation on Short Duration Fund's
investments in Taxable Investments, auction rate preferred securities will be
treated as Taxable Investments unless substantially all of the dividends on such
securities are expected to be exempt from regular federal income taxes.
Short Duration Fund's investments in auction rate securities of closed-end
funds are subject to the limitations prescribed by the Act, and certain state
securities regulations. These limitations include a prohibition against
acquiring more than 3% of the voting securities of any other investment company,
and investing more than 5% of the Fund's assets in securities of any one
investment company or more than 10% of its assets in securities of all
investment companies. The Fund will indirectly bear its proportionate share of
any management and other fees paid by such closed-end funds in addition to the
advisory fees payable directly by the Fund.
STANDBY COMMITMENTS. In order to enhance the liquidity of Municipal
-------------------
Securities, Short Duration Fund may acquire the right to sell a security to
another party at a guaranteed price and date. Such a right to resell may be
referred to as a "standby commitment" or liquidity put, depending on its
characteristics. The aggregate price which the Fund pays for securities with
standby commitments may be higher than the price which otherwise would be paid
for the securities. Standby commitments may not be available or may not be
available on satisfactory terms.
Standby commitments may involve letters of credit issued by domestic or
foreign banks supporting the other party's ability to purchase the security from
Short Duration Fund. The right to sell may be exercisable on demand or at
specified intervals, and may form part of a security or be acquired separately
by Short Duration Fund. In considering whether a security meets Short Duration
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Fund's quality standards, the Fund will look to the creditworthiness of the
party providing the Fund with the right to sell as well as the quality of the
security itself.
Short Duration Fund values Municipal Securities which are subject to
standby commitments at amortized cost. The exercise price of the standby
commitments is expected to approximate such amortized cost. No value is assigned
to the standby commitments for purposes of determining Short Duration Fund's net
asset value. The cost of a standby commitment is carried as unrealized
depreciation from the time of purchase until it is exercised or expires. Since
the value of a standby commitment is dependent on the ability of the standby
commitment writer to meet its obligation to repurchase, Short Duration Fund's
policy is to enter into standby commitment transactions only with banks, brokers
or dealers which present a minimal risk of default.
Management of the Trust understands that the Internal Revenue Service (the
"Service") has issued a favorable revenue ruling to the effect that, under
specified circumstances, a registered investment company will be the owner of
tax-exempt municipal obligations acquired subject to a put option. The Service
has subsequently announced that it will not ordinarily issue advance ruling
letters as to the identity of the true owner of property in cases involving the
sale of securities or participation interests therein if the purchaser has the
right to cause the security, or the participation interest therein, to be
purchased by either the seller or a third party. Short Duration Fund intends to
take the position that it is the owner of any Municipal Securities acquired
subject to a standby commitment or acquired or held with certain other types of
put rights and that tax-exempt interest earned with respect to such Municipal
Securities will be tax-exempt in its hands. There is no assurance that standby
commitments will be available to Short Duration Fund nor has the Fund assumed
that such commitments would continue to be available under all market
conditions.
INTEREST RATE SWAPS, MORTGAGE SWAPS, CURRENCY SWAPS AND INTEREST RATE CAPS,
FLOORS AND COLLARS
Each Fund may enter into interest rate swaps, caps, floors and collars. In
addition, Core Fund, Adjustable Rate Fund and Short-Term Fund may enter into
mortgage swaps and Core Fund may also enter into currency swaps. A Fund will
typically use interest rate and mortgage swaps to preserve a return or spread on
a particular investment or portion of its portfolio, to protect against any
increase in the price of securities the Fund anticipates purchasing at a future
date, or to shorten the effective duration of its portfolio securities. Core
Fund may also enter into swap transactions to seek to increase total return.
Interest rate swaps involve the exchange by a Fund with another party of their
respective commitments to pay or receive interest,
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<PAGE>
such as, an exchange of fixed rate payments for floating rate payments. Mortgage
swaps are similar to interest rate swaps in that they represent commitments to
pay and receive interest. The notional principal amount, however, is tied to a
reference pool or pools of mortgages. Currency swaps involve the exchange of the
parties' respective rights to make or receive payments in specified currencies.
The purchase of an interest rate cap entitles the purchaser, to the extent that
a specified index exceeds a predetermined interest rate, to receive payment of
interest on a notional principal amount from the party selling such interest
rate cap. The purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below a predetermined interest rate, to
receive payments of interest on a notional principal amount from the party
selling the interest rate floor. An interest rate collar is the combination of a
cap and a floor that preserves a certain return within a predetermined range of
interest rates. Since interest rate, mortgage and currency swaps and interest
rate caps, floors and collars are individually negotiated, each Fund expects to
achieve an acceptable degree of correlation between its portfolio investments
and its swap positions.
A Fund will enter into interest rate and mortgage swaps only on a net
basis, which means that the two payment streams are netted out, with the Fund
receiving or paying, as the case may be, only the net amount of the two
payments. Interest rate and mortgage swaps do not involve the delivery of
securities, other underlying assets or principal. Accordingly, the risk of loss
with respect to interest rate and mortgage swaps is limited to the net amount of
payments that a Fund is contractually obligated to make. If the other party to
an interest rate swap defaults, a Fund's risk of loss consists of the net amount
of payments that such Fund is contractually entitled to receive, if any. In
contrast, currency swaps usually involve the delivery of the entire principal
amount of one designated currency in exchange for the other designated currency.
Therefore, the entire principal value of a currency swap is subject to the risk
that the other party to the swap will default on its contractual delivery
obligations. To the extent that the net amount of an interest rate or mortgage
swap is held in a segregated account, consisting of cash or liquid, high grade
debt securities, the Funds and the Advisers believe that swaps do not constitute
senior securities under the Investment Company Act of 1940, as amended (the
"Act") and, accordingly, will not treat them as being subject to each Fund's
borrowing restriction.
The Funds will not enter into any swap transactions unless the unsecured
commercial paper, senior debt or claims paying ability of the other party is
rated either AA or A-1 or better by Standard & Poors or Aa or P-1 or better by
Moody's or their equivalent ratings, or if unrated by such rating organizations,
determined to be of comparable quality by the applicable Adviser. The swap
market has grown substantially in recent years with a large number
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<PAGE>
of banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. As a result, the swap market has
become relatively liquid in comparison with the markets for other similar
instruments which are traded in the interbank market. The staff of the
Securities and Exchange Commission (the "SEC") currently takes the position that
swaps, caps, floors and collars are illiquid for purposes of each Fund's 15%
limitation on illiquid investments.
OPTIONS ON SECURITIES AND SECURITIES INDICES
WRITING COVERED OPTIONS. Short Duration Fund and Core Fund may write
-----------------------
(sell) covered call and put options on any securities in which they may invest
or on any securities index based on securities in which they may invest. A call
option written by a Fund obligates the Fund to sell specified securities to the
holder of the option at a specified price if the option is exercised at any time
before the expiration date. All call options written by a Fund are covered,
which means that the Fund will own the securities subject to the option so long
as the option is outstanding or use the other methods described below. The
purpose of a Fund in writing covered call options is to realize greater income
than would be realized in portfolio securities transactions alone. However, in
writing covered call options for additional income, a Fund may forego the
opportunity to profit from an increase in the market price of the underlying
security.
A put option written by a Fund obligates the Fund to purchase specified
securities from the option holder at a specified price if the option is
exercised at any time before the expiration date. All put options written by a
Fund are covered, which means that the Fund would have deposited with its
custodian cash or liquid, high-grade debt securities with a value at least equal
to the exercise price of the put option. The purpose of writing such options is
to generate additional income. However, in return for the option premium, the
Fund accepts the risk that it will be required to purchase the underlying
securities at a price in excess of the securities' market value at the time of
purchase.
In addition, a written call option or put option may be covered by
maintaining cash or liquid, high-grade debt securities in a segregated account,
by entering into an offsetting forward commitment and/or by purchasing an
offsetting option or any other option which, by virtue of its exercise price or
otherwise, reduces the Fund's net exposure on its written option position.
Short Duration Fund and Core Fund may also write (sell) covered call and
put options on any securities index composed of securities in which they may
invest. Options on securities indices are similar to options on securities,
except that the exercise of securities index options requires cash settlement
payments and does not involve the actual purchase or sale of securities. In
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<PAGE>
addition, securities index options are designed to reflect price fluctuations in
a group of securities or segment of the securities market rather than price
fluctuations in a single security.
The Funds may cover call options on a securities index by owning securities
whose price changes are expected to be similar to those of the underlying index
or by having an absolute and immediate right to acquire such securities without
additional cash consideration (or for additional cash consideration held in a
segregated account by their respective custodian) upon conversion or exchange of
other securities in its portfolio. The Funds may also cover call and put options
on a securities index by maintaining cash or liquid, high-grade debt securities
with a value equal to the exercise price in a segregated account with their
custodian or by using the other methods described above.
A Fund may terminate its obligations under an exchange traded call or put
option by purchasing an option identical to the one it has written. Obligations
under over-the-counter options may be terminated only by entering into an
offsetting transaction with the counterparty to such option. Such purchases
are referred to as "closing purchase transactions."
PURCHASING OPTIONS. Short Duration Fund and Core Fund may also purchase
------------------
put and call options on any securities in which they may invest or on any
securities index based on securities in which they may invest, and each such
Fund may enter into closing sale transactions in order to realize gains or
minimize losses on options it had purchased.
A Fund would normally purchase call options in anticipation of an increase,
or put options in anticipation of a decrease, in the market value of securities
of the type in which it may invest. The purchase of a call option would entitle
a Fund, in return for the premium paid, to purchase specified securities at a
specified price during the option period. A Fund would ordinarily realize a gain
if, during the option period, the value of such securities exceeded the sum of
the exercise price, the premium paid and transaction costs; otherwise the Fund
would realize a loss on the purchase of the call option. The purchase of a put
option would entitle a Fund, in exchange for the premium paid, to sell specified
securities at a specified price during the option period. A Fund would
ordinarily realize a gain if, during the option period, the value of the
underlying securities decreased below the exercise price sufficiently to cover
the premium and transaction costs; otherwise the Fund would realize a loss on
the purchase of the put option. Gains and losses on the purchase of put options
may be offset by countervailing changes in the value of the underlying portfolio
securities.
A Fund may purchase put and call options on securities indices for the same
purposes as it may purchase options on securities.
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<PAGE>
Options on securities indices are similar to options on securities, except that
the exercise of securities index options requires cash payments and does not
involve the actual purchase or sale of securities. In addition, securities index
options are designed to reflect price fluctuations in a group of securities or
segment of the securities market rather than price fluctuations in a single
security.
CURRENCY OPTIONS. Core Fund may write covered put and call options and
----------------
purchase put and call options on foreign currencies for the purpose of
protecting against declines in the dollar value of portfolio securities and
against increases in the dollar cost of securities to be acquired. Core Fund
may use options on currency to cross-hedge, which involves writing or purchasing
options on one currency to hedge against changes in exchange rates for a
different currency with a pattern of correlation.
A call option written by Core Fund obligates it to sell specified currency
to the holder of the option at a specified price if the option is exercised at
any time before the expiration date. A put option written by Core Fund
obligates it to purchase specified currency from the option holder at a
specified price if the option is exercised at any time before the expiration
date. The writing of currency options involves a risk that Core Fund will, upon
exercise of the option, be required to sell currency subject to a call at a
price that is less than the currency's market value or be required to purchase
currency subject to a put at a price that exceeds the currency's market value.
Core Fund may terminate its obligations under a call or put option it has
written by purchasing an option identical to the one it has written. Such
purchases are referred to as "closing purchase transactions." Core Fund would
also be able to enter into closing sale transactions in order to realize gains
or minimize losses on purchased options.
Core Fund would normally purchase call options in anticipation of an
increase in the dollar value of currency in which securities to be acquired by
Core Fund are denominated or quoted. The purchase of a call option would entitle
Core Fund, in return for the premium paid, to purchase specified currency at a
specified price during the option period. Core Fund would ordinarily realize a
gain if, during the option period, the value of such currency exceeded the sum
of the exercise price, the premium paid and transaction costs; otherwise Core
Fund would realize either no gain or a loss on the purchase of the call option.
Core Fund would normally purchase put options in anticipation of a decline
in the dollar value of currency in which securities in its portfolio are
denominated or quoted ("protective puts"). The purchase of a put option would
entitle Core Fund, in exchange for the premium paid, to sell specified currency
at a specified price
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<PAGE>
during the option period. The purchase of protective puts is designed merely to
offset or hedge against a decline in the dollar value of Core Fund's portfolio
securities due to currency exchange rate fluctuations. Core Fund would
ordinarily realize a gain if, during the option period, the value of the
underlying currency decreased below the exercise price sufficiently to more than
cover the premium and transaction costs; otherwise Core Fund would realize
either no gain or a loss on the purchase of the put option. Gains and losses on
the purchase of protective put options would tend to be offset by countervailing
changes in the value of underlying currency.
YIELD CURVE OPTIONS. Core Fund may enter into options on the yield
-------------------
"spread," or yield differential between two securities. Such transactions are
referred to as "yield curve" options. In contrast to other types of options, a
yield curve option is based on the difference between the yields of designated
securities, rather than the prices of the individual securities, and is settled
through cash payments. Accordingly, a yield curve option is profitable to the
holder if this differential widens (in the case of a call) or narrows (in the
case of a put), regardless of whether the yields of the underlying securities
increase or decrease.
Core Fund may purchase or write yield curve options for the same purposes
as other options on securities. For example, Core Fund may purchase a call
option on the yield spread between two securities if it owns one of the
securities and anticipates purchasing the other security and wants to hedge
against an adverse change in the yield spread between the two securities. Core
Fund may also purchase or write yield curve options in an effort to increase its
current income if, in the judgment of the Adviser, Core Fund will be able to
profit from movements in the spread between the yields of the underlying
securities. The trading of yield curve options is subject to all of the risks
associated with the trading of other types of options. In addition, however,
such options present a risk of loss even if the yield of one of the underlying
securities remains constant, if the spread moves in a direction or to an extent
which was not anticipated.
Yield curve options written by Core Fund will be "covered." A call (or
put) option is covered if Core Fund holds another call (or put) option on the
spread between the same two securities and maintains in a segregated account
with its custodian cash or liquid, high-grade debt securities sufficient to
cover Core Fund's net liability under the two options. Therefore, Core Fund's
liability for such a covered option is generally limited to the difference
between the amount of Core Fund's liability under the option written by Core
Fund less the value of the option held by Core Fund. Yield curve options may
also be covered in such other manner as may be in accordance with the
requirements of the counterparty with which the option is traded and applicable
laws and regulations. Yield curve options are traded over-the-counter,
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<PAGE>
and because they have been only recently introduced, established trading markets
for these options have not yet developed.
RISKS ASSOCIATED WITH OPTIONS TRANSACTIONS. There is no assurance that a
------------------------------------------
liquid secondary market on an options exchange will exist for any particular
exchange-traded option or at any particular time. If a Fund is unable to effect
a closing purchase transaction with respect to covered options it has written,
the Fund will not be able to sell the underlying securities or dispose of assets
held in a segregated account until the options expire or are exercised.
Similarly, if a Fund is unable to effect a closing sale transaction with respect
to options it has purchased, it would have to exercise the options in order to
realize any profit and will incur transaction costs upon the purchase or sale of
underlying securities.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation may not at all times be adequate to handle current trading
volume; or (vi) one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of options
(or a particular class or series of options), in which event the secondary
market on that exchange (or in that class or series of options) would cease to
exist although outstanding options on that exchange that had been issued by the
Options Clearing Corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms.
Short Duration Fund and Core Fund may purchase and sell both options that
are traded on exchanges and options traded over-the-counter with broker-dealers
who make markets in these options. The ability to terminate over-the-counter
options is more limited than with exchange-traded options and may involve the
risk that broker-dealers participating in such transactions will not fulfill
their obligations. Until such time as the staff of the SEC changes its
position, the Funds will treat purchased over-the-counter options and all assets
used to cover written over-the-counter options as illiquid securities, except
that with respect to options written with primary dealers in U.S. Government
securities pursuant to an agreement requiring a closing purchase transaction at
a formula price, the amount of illiquid securities may be calculated with
reference to a formula approved by the SEC.
Transactions by the Funds in options on securities and indices will be
subject to limitations established by each of the
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<PAGE>
exchanges, boards of trade or other trading facilities governing the maximum
number of options in each class which may be written or purchased by a single
investor or group of investors acting in concert. Thus, the number of options
which a Fund may write or purchase may be affected by options written or
purchased by the other Funds and other investment advisory clients of the
Advisers. An exchange, board of trade or other trading facility may order the
liquidation of positions found to be in excess of these limits, and it may
impose certain other sanctions.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of options for
hedging purposes depends in part on the applicable Adviser's ability to predict
future price fluctuations and the degree of correlation between the options and
securities markets.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
Adjustable Rate Fund, Core Fund and Short Duration Fund may purchase and
sell futures contracts and options on futures contracts on financial instruments
and, with respect to Core Fund, currencies. Each Fund will engage in futures and
related options transactions only for bona fide hedging purposes as defined
below or, except for futures on currencies purchased or sold by Core Fund, for
purposes of seeking to increase total return to the extent permitted by the
regulations of the Commodity Futures Trading Commission ("CFTC"). All futures
contracts entered into by the Fund are traded on U.S. exchanges or boards of
trade that are licensed and regulated by the CFTC.
FUTURES CONTRACTS. A futures contract may generally be described as an
-----------------
agreement between two parties to buy and sell particular financial instruments
for an agreed price during a designated month (or to deliver the final cash
settlement price, in the case of a contract relating to an index or otherwise
not calling for physical delivery at the end of trading in the contract).
When interest rates are rising or securities prices are falling, a Fund can
seek to offset a decline in the value of its current portfolio securities
through the sale of futures contracts. When interest rates are falling or
securities prices are rising, a Fund, through the purchase of futures contracts,
can attempt to secure better rates or prices than might later be available in
the market when it effects anticipated purchases. Core Fund can seek to offset
anticipated changes in the value of a currency in which its portfolio
securities, or securities that it intends to purchase, are denominated by
purchasing and selling futures contracts on such currencies.
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<PAGE>
Positions taken in the futures markets are not normally held to maturity
but are instead liquidated through offsetting transactions which may result in a
profit or a loss. While futures contracts on securities will usually be
liquidated in this manner, a Fund may instead make, or take, delivery of the
underlying securities whenever it appears economically advantageous to do so. A
clearing corporation associated with the exchange on which futures on
securities are traded guarantees that, if still open, the sale or purchase will
be performed on the settlement date.
HEDGING STRATEGIES. Hedging, by use of futures contracts, seeks to
------------------
establish with more certainty than would otherwise be possible the effective
price and rate of return on securities that a Fund owns or proposes to acquire.
A Fund may, for example, take a "short" position in the futures market by
selling futures contracts in order to hedge against an anticipated rise in
interest rates or a decline in market prices that would adversely affect the
value of the Fund's portfolio securities. Such futures contracts may include
contracts for the future delivery of securities held by a Fund or securities
with characteristics similar to those of a Fund's portfolio securities.
Similarly, Core Fund may sell futures contracts on currencies in which its
portfolio securities are denominated or in one currency to hedge against
fluctuations in the value of securities denominated in a different currency if
there is an established historical pattern of correlation between the two
currencies. If, in the opinion of the Adviser, there is a sufficient degree of
correlation between price trends for a Fund's portfolio securities and futures
contracts based on other financial instruments, securities indices or other
indices, the Fund may also enter into such futures contracts as part of its
hedging strategy. Although under some circumstances prices of securities in a
Fund's portfolio may be more or less volatile than prices of such futures
contracts, the Adviser will attempt to estimate the extent of this volatility
difference based on historical patterns and compensate for any such differential
by having the Fund enter into a greater or lesser number of futures contracts or
by attempting to achieve only a partial hedge against price changes affecting
the Fund's securities portfolio. When hedging of this character is successful,
any depreciation in the value of portfolio securities will be substantially
offset by appreciation in the value of the futures position. On the other hand,
any unanticipated appreciation in the value of a Fund's portfolio securities
would be substantially offset by a decline in the value of the futures position.
On other occasions, a Fund may take a "long" position by purchasing futures
contracts. This would be done, for example, when a Fund anticipates the
subsequent purchase of particular securities when it has the necessary cash, but
expects the prices then available in the applicable market to be less favorable
than prices that are currently available.
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<PAGE>
OPTIONS ON FUTURES CONTRACTS. The acquisition of put and call options on
----------------------------
futures contracts will give a Fund the right (but not the obligation) for a
specified price to sell or to purchase, respectively, the underlying futures
contract at any time during the option period. As the purchaser of an option on
a futures contract, a Fund obtains the benefit of the futures position if prices
move in a favorable direction but limits its risk of loss in the event of an
unfavorable price movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium
which may partially offset a decline in the value of a Fund's assets. By
writing a call option, a Fund becomes obligated, in exchange for the premium, to
sell a futures contract if the option is exercised, which may have a value
higher than the exercise price. Conversely, the writing of a put option on a
futures contract generates a premium which may partially offset an increase in
the price of securities that a Fund intends to purchase. However, the Fund
becomes obligated to purchase a futures contract if the option is exercised,
which may have a value lower than the exercise price. Thus, the loss incurred
by a Fund in writing options on futures is potentially unlimited and may exceed
the amount of the premium received. Funds will incur transaction costs in
connection with the writing of options on futures.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option on the same series.
There is no guarantee that such closing transactions can be effected. A Fund's
ability to establish and close out positions on such options will be subject to
the development and maintenance of a liquid market.
OTHER CONSIDERATIONS. Adjustable Rate Fund, Core Fund and Short Duration
--------------------
Fund will engage in futures and related options transactions only for bona fide
hedging or, except for purchases or sales by Core Fund of futures on currencies,
to seek to increase total return as permitted by CFTC regulations. Each Fund
will determine that the price fluctuations in the futures contracts and options
on futures used for hedging purposes are substantially related to price
fluctuations in securities held by the Fund or securities or instruments which
it expects to purchase. Except as stated below, each Fund's futures
transactions will be entered into for traditional hedging purposes -- i.e.,
futures contracts will be sold to protect against a decline in the price of
securities that a Fund owns or futures contracts will be purchased to protect a
Fund against an increase in the price of securities that it intends to purchase.
As evidence of this hedging intent, each Fund expects that on 75% or more of the
occasions on which it takes a long futures or option position (involving the
purchase of futures contracts), the Fund will have purchased, or will be in the
process of purchasing, equivalent amounts of related securities in the cash
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market at the time when the futures or option position is closed out. However,
in particular cases, when it is economically advantageous for a Fund to do so, a
long futures position may be terminated or an option may expire without the
corresponding purchase of securities or other assets.
As an alternative to compliance with the bona fide hedging definition, a
CFTC regulation permits the Funds to elect to comply with a different test under
which the aggregate initial margin and premiums required to establish positions
to seek to increase total return in futures contracts and options on futures
will not exceed 5% of the net asset value of a Fund's portfolio, after taking
into account unrealized profits and losses on any such positions and excluding
the amount by which such options were in-the-money at the time of purchase. The
Funds will engage in transactions in futures contracts and related options only
to the extent such transactions are consistent with the requirements of the
Code, for maintaining their qualifications as regulated investment companies for
federal income tax purposes. See "Taxation."
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating a Fund to purchase securities or currency, may require the Fund to
establish with the custodian a segregated account consisting of cash or liquid,
high-grade debt securities in an amount equal to the underlying value of such
contracts and options.
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. Thus,
unanticipated changes in interest rates or securities prices may result in a
poorer overall performance for a Fund than if it had not entered into any
futures contracts or options transactions.
Perfect correlation between a Fund's futures positions and hedged portfolio
positions may be difficult to achieve because the only futures contracts
available to hedge the Fund's portfolio are, in the case of Core Fund, various
currency futures and futures on U.S. Government securities and securities
indices and, in the case of the Core Fund and Short Duration Fund, a municipal
bond index. In the event of an imperfect correlation between a futures position
and portfolio position which is intended to be protected, the desired protection
may not be obtained and a Fund may be exposed to risk of loss.
FOREIGN INVESTMENTS
Core Fund may invest in securities of foreign issuers and up to 25% of the
Fund's assets may be invested in fixed income securities denominated in a
currency other than U.S. dollars. Investing in the securities of foreign issuers
involves certain
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special considerations, including those set forth below, which are not typically
associated with investing in U.S. issuers. Since investments in the securities
of foreign issuers may involve currencies of foreign countries, and since Core
Fund may temporarily hold funds in bank deposits in foreign currencies during
completion of investment programs, Core Fund may be affected favorably or
unfavorably by changes in currency rates and in exchange control regulations and
may incur costs in connection with conversions between various currencies.
Since foreign companies are not subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to U.S. companies, there may be less publicly available information
about a foreign company than about a U.S. company. Most foreign bond markets
are less liquid than fixed income markets in the United States and securities of
many foreign companies are less liquid and more volatile than securities of
comparable U.S. companies. Fixed commissions on foreign securities exchanges
are generally higher than negotiated commissions on U.S. exchanges, although
Core Fund endeavors to achieve the most favorable net results on its portfolio
transactions. There is generally less government supervision and regulation of
securities exchanges, brokers, dealers and listed companies than in the United
States.
Foreign markets also have different clearance and settlement procedures,
and in certain markets there have been times when settlements have been unable
to keep pace with the volume of securities transactions, making it difficult to
conduct such transactions. Such delays in settlement could result in temporary
periods when a portion of the assets of Core Fund is uninvested and no return is
earned thereon. The inability of Core Fund to make intended security purchases
due to settlement problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement
problems could result either in losses to Core Fund due to subsequent declines
in value of the portfolio securities, or, if Core Fund has entered into a
contract to sell the securities, could result in possible liability to the
purchaser. In addition, with respect to certain foreign countries, there is the
possibility of expropriation or confiscatory taxation, political or social
instability, or diplomatic developments which could adversely affect Core Fund's
investments in those countries. Moreover, individual foreign economies may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross national product, rate of inflation, capital reinvestment, resources
self-sufficiency and balance of payments position.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Core Fund may enter into forward
foreign currency exchange contracts for hedging purposes. A forward foreign
currency exchange contract involves an obligation to purchase or sell a specific
currency at a future
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date, which may be any fixed number of days from the date of the contract agreed
upon by the parties, at a price set at the time of the contract. These
contracts are traded in the interbank market conducted directly between currency
traders (usually large commercial banks) and their customers. A forward
contract generally has no deposit requirement, and no commissions are generally
charged at any stage for trades.
At the maturity of a forward contract, Core Fund may either accept or make
delivery of the currency specified in the contract or, at or prior to maturity,
enter into a closing purchase transaction involving the purchase or sale of an
offsetting contract. Closing purchase transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract.
Core Fund may enter into forward foreign currency exchange contracts in
several circumstances. First, when Core Fund enters into a contract for the
purchase or sale of a security denominated in a foreign currency, or when Core
Fund anticipates the receipt in a foreign currency of a dividend or interest
payments on such a security which it holds, Core Fund may desire to "lock in"
the U.S. dollar price of the security or the U.S. dollar equivalent of such
dividend or interest payment, as the case may be. By entering into a forward
contract for the purchase or sale, for a fixed amount of dollars, of the amount
of foreign currency involved in the underlying transactions, Core Fund will
attempt to protect itself against an adverse change in the relationship between
the U.S. dollar and the subject foreign currency during the period between the
date on which the security is purchased or sold, or on which the dividend or
interest payment is declared, and the date on which such payments are made or
received.
Additionally, when management of Core Fund believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract to sell, for a fixed amount of
dollars, the amount of foreign currency approximating the value of some or all
of Core Fund's portfolio securities denominated in such foreign currency. The
precise matching of the forward contract amounts and the value of the securities
involved will not generally be possible because the future value of such
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the
contract is entered into and the date it matures. Using forward contracts to
protect the value of Core Fund's portfolio securities against a decline in the
value of a currency does not eliminate fluctuations in the underlying prices of
the securities. It simply establishes a rate of exchange which Core Fund can
achieve at some future point in time. The precise projection of short-term
currency market movements is not possible, and short-term hedging provides a
means of fixing the dollar value of only a portion of the Core Fund's
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foreign assets.
Core Fund may engage in cross-hedging by using forward contracts in one
currency to hedge against fluctuations in the value of securities denominated in
a different currency if the Adviser determines that there is a pattern of
correlation between the two currencies.
Core Fund's custodian will place cash or liquid, high-grade debt securities
into a segregated account of Core Fund in an amount equal to the value of Core
Fund's total assets committed to the consummation of forward foreign currency
exchange contracts requiring Core Fund to purchase foreign currencies. The
segregated account will be marked to market on a daily basis. Thus, if the value
of the securities placed in the segregated account declines, additional cash or
securities will be placed in the account on a daily basis so that the value of
the account will equal the amount of Core Fund's commitments with respect to
such contracts.
While Core Fund will enter into forward contracts to reduce currency
exchange rate risks, transactions in such contracts involve certain other risks.
Thus, while Core Fund may benefit from such transactions, unanticipated changes
in currency prices may result in a poorer overall performance for Core Fund than
if it had not engaged in any such transactions. Moreover, there may be
imperfect correlation between Core Fund's portfolio holdings of securities
denominated in a particular currency and forward contracts entered into by Core
Fund. Such imperfect correlation may cause Core Fund to sustain losses which
will prevent Core Fund from achieving a complete hedge or expose Core Fund to
risk of foreign exchange loss.
LENDING OF PORTFOLIO SECURITIES
Each Fund may lend portfolio securities. Under present regulatory
policies, such loans may be made to institutions, such as brokers or dealers and
would be required to be secured continuously by collateral in cash, cash
equivalents or U.S. Government securities maintained on a current basis at an
amount at least equal to the market value of the securities loaned. A Fund has
the right to call a loan and obtain the securities loaned at any time on five
days' notice. For the duration of a loan, a Fund continues to receive the
equivalent of the interest or dividends paid by the issuer on the securities
loaned and also receives compensation from investment of the collateral. A Fund
would not have the right to vote any securities having voting rights during the
existence of the loan, but the Fund would call the loan in anticipation of an
important vote to be taken among holders of the securities or the giving or
withholding of their consent on a material matter affecting the investment. As
with other extensions of credit there are risks of delay in recovering, or even
loss of rights in, the collateral should the borrower of
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the securities fail financially. However, the loans are made only to firms
deemed by the applicable Adviser to be of good standing, and when, in the
judgment of the applicable Adviser, the consideration which can be earned
currently from securities loans of this type justifies the attendant risk. If an
Adviser determines to make securities loans, the value of the securities loaned
will not exceed one-third of the value of the total assets of each Fund.
RESTRICTED AND ILLIQUID SECURITIES
Each Fund may purchase securities that are not registered or offered in an
exempt non-public offering ("Restricted Securities") under the Securities Act of
1933, as amended ("1933 Act"), including securities eligible for resale to
"qualified institutional buyers" pursuant to Rule 144A under the 1933 Act.
However, a Fund will not invest more than 15% of its assets in illiquid
investments, which includes repurchase agreements maturing in more than seven
days, interest rate, currency and mortgage swaps, interest rate caps, floors and
collars, certain SMBS, municipal leases, certain over-the-counter options,
securities that are not readily marketable and Restricted Securities, unless the
Board of Trustees determines, based upon a continuing review of the trading
markets for the specific restricted securities, that such restricted securities
are liquid. The Trustees have adopted guidelines and delegated to the Advisers
the daily function of determining and monitoring the liquidity of Restricted
Securities. The Board of Trustees, however, will retain sufficient oversight
and be ultimately responsible for the determinations. Since it is not possible
to predict with assurance exactly how this market for Restricted Securities sold
and offered under Rule 144A will develop, the Trustees will carefully monitor
the Funds' investments in these securities, focusing on such important factors,
among others, as valuation, liquidity and availability of information. This
investment practice could have the effect of increasing the level of illiquidity
in the Funds to the extent that qualified institutional buyers become for a time
uninterested in purchasing these Restricted Securities.
The purchase price and subsequent valuation of restricted securities
normally reflect a discount from the price at which such securities trade when
they are not restricted, since the restriction makes them less liquid. The
amount of the discount from the prevailing market price is expected to vary
depending upon the type of security, the character of the issuer, the party who
will bear the expenses of registering the restricted securities and prevailing
supply and demand conditions.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES
Each Fund may purchase securities on a when-issued basis or purchase or
sell securities on a forward commitment basis. These transactions involve a
commitment by a Fund to purchase or sell
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securities at a future date. The price of the underlying securities (usually
expressed in terms of yield) and the date when the securities will be delivered
and paid for (the settlement date) are fixed at the time the transaction is
negotiated. When-issued purchases and forward commitment transactions are
negotiated directly with the other party, and such commitments are not traded on
exchanges. The Funds will purchase securities on a when-issued basis or
purchase or sell securities on a forward commitment basis only with the
intention of completing the transaction and actually purchasing or selling the
securities. If deemed advisable as a matter of investment strategy, however,
the Funds may dispose of or negotiate a commitment after entering into it. A
Fund also may sell securities it has committed to purchase before those
securities are delivered to the Fund on the settlement date. The Funds may
realize a capital gain or loss in connection with these transactions. For
purposes of determining each Fund's average duration, the maturity of when-
issued or forward commitment securities will be calculated from the commitment
date. Each Fund is required to hold and maintain in a segregated account with
the Fund's custodian until the settlement date, cash or liquid, high grade debt
securities in an amount sufficient to meet the purchase price. Alternatively,
each Fund may enter into offsetting contracts for the forward sale of other
securities that it owns. Securities purchased or sold on a when-issued or
forward commitment basis involve a risk of loss if the value of the security to
be purchased declines prior to the settlement date or if the value of the
security to be sold increases prior to the settlement date.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with selected broker-
dealers, banks or other financial institutions. A repurchase agreement is an
arrangement under which a Fund purchases securities and the seller agrees to
repurchase the securities within a particular time and at a specified price.
Custody of the securities will be maintained by each Fund's custodian. The
repurchase price may be higher than the purchase price, the difference being
income to a Fund, or the purchase and repurchase prices may be the same, with
interest at a stated rate due to a Fund together with the repurchase price on
repurchase. In either case, the income to a Fund is unrelated to the interest
rate on the security subject to the repurchase agreement.
For purposes of the Act and for federal income tax purposes, a repurchase
agreement is deemed to be a loan from a Fund to the seller of the security. For
other purposes, it is not clear whether a court would consider the security
purchased by a Fund subject to a repurchase agreement as being owned by the Fund
or as being collateral for a loan by the Fund to the seller. In the event of
commencement of bankruptcy or insolvency proceedings with respect to the seller
of the security before repurchase of the security under a repurchase agreement,
a Fund may encounter delay
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and incur costs before being able to sell the security. Such a delay may
involve loss of interest or a decline in price of the security. If the court
characterizes the transaction as a loan and a Fund has not perfected a security
interest in the security, the Fund may be required to return the security to the
seller's estate and be treated as an unsecured creditor of the seller. As an
unsecured creditor, a Fund would be at risk of losing some or all of the
principal and interest involved in the transaction.
As with any unsecured debt instrument purchased for each Fund, the
applicable Adviser seeks to minimize the risk of loss from repurchase agreements
by analyzing the creditworthiness of the obligor, in this case the seller of the
security. Apart from the risk of bankruptcy or insolvency proceedings, there is
also the risk that the seller may fail to repurchase the security. However, if
the market value of the security subject to the repurchase agreement becomes
less than the repurchase price (including accrued interest), each Fund will
direct the seller of the security to deliver additional securities so that the
market value of all securities subject to the repurchase agreement equals or
exceeds the repurchase price. Certain repurchase agreements which provide for
settlement in more than seven days can be liquidated before the nominal fixed
term on seven days or less notice. Such repurchase agreements will be regarded
as liquid instruments.
In addition, the Funds, together with other registered investment companies
having advisory agreements with the Advisers or their affiliates, may transfer
uninvested cash balances into a single joint account, the daily aggregate
balance of which will be invested in one or more repurchase agreements.
INVESTMENT RESTRICTIONS
The Trust has adopted the following investment restrictions on behalf of
the Funds, none of which may be changed without the approval of the holders of a
majority of the outstanding voting securities of the applicable Fund. The
investment objective of each Fund and all other investment policies or practices
of the Funds, except for Short Duration Fund's policy to invest under normal
market conditions 80% of its net assets in Tax-Free Securities, are considered
by the Trust not to be fundamental and accordingly may be changed without
shareholder approval. See "INVESTMENT OBJECTIVE AND POLICIES" in the
Prospectuses. As defined in the Act, "a majority of the outstanding voting
securities" of a Fund means the vote (a) of 67% or more of the shares of the
Fund present at a meeting, if the holders of more than 50% of the outstanding
shares of the Fund are present or represented by proxy or (b) more than 50% of
the outstanding shares of the Fund, whichever is less.
For the purposes of the limitations (except for the 300% asset
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coverage requirement with respect to borrowings), any limitation which involves
a maximum percentage shall not be considered violated unless an excess over the
percentage occurs immediately after, and is caused by, an acquisition or
encumbrance of securities or assets of, or borrowings by, a Fund.
ADJUSTABLE RATE FUND MAY NOT:
(1) Purchase 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 Fund's total assets would be
invested in such issuer, except that (a) up to 25% of the value of the Fund's
total assets may be invested without regard to such 5% limitation, and (b) such
5% limitation shall not apply to repurchase agreements collateralized by
obligations of the U.S. Government, its agencies or instrumentalities.
(2) Borrow money, except as a temporary measure for extraordinary or
emergency purposes, provided that the Fund is required to maintain asset
coverage of at least 300% for all borrowings. For purposes of this investment
restriction, short sales, swap transactions, options, futures contracts and
options on futures contracts, and forward commitment transactions shall not
constitute borrowings.
(3) Invest more than 25% of the value of its total assets in the
securities of one or more issuers conducting their principal business activities
in the same industry. This limitation does not apply to investments in
obligations of the U.S. Government or any of its agencies or instrumentalities.
(4) Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings and to the extent related to the
segregation of assets in connection with the writing of covered put and call
options, swap transactions, the purchase of securities on a forward commitment
or delayed delivery basis and collateral and initial or variation margin
arrangements with respect to options, futures contracts and options on futures
contracts.
(5) Purchase securities on margin, except for such short-term credits as
are necessary for the clearance of transactions, but the Fund may make margin
deposits in connection with transactions in options, futures and options on
futures.
(6) Make short sales of securities, except short sales against-the-box, or
maintain a short position.
(7) Underwrite any issue of securities issued by others, except to the
extent that the sale of portfolio securities by the Fund may be deemed to be
underwriting.
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(8) Purchase, hold or deal in real estate, including limited partnership
interests, or oil and gas interests, although the Fund may purchase and sell
securities that are secured by real estate or interests therein and may purchase
mortgage-related securities and may hold and sell real estate acquired by the
Fund as a result of the ownership of securities.
(9) Invest in commodities or commodity futures contracts, except that the
Fund may (a) purchase and sell futures contracts, including those relating to
securities and indices, and options on any such futures contracts, and (b)
purchase and sell securities on a forward commitment or delayed delivery basis.
(10) Lend any funds or other assets except through repurchase agreements
or the purchase of all or a portion of an issue of securities or obligations of
the type in which it may invest; however, the Fund may lend portfolio securities
in an amount not to exceed one third of the value of its total assets.
(11) Issue any senior security (as such term is defined in Section 18(f)
of the 1940 Act) except as permitted in Investment Restriction Nos. (2), (5),
(6) and (10).
In addition to the investment restrictions mentioned above, the Trustees of
the Trust have voluntarily adopted the following policies and restrictions on
behalf of Adjustable Rate Fund which are observed in the conduct of its affairs.
These represent intentions of the Trustees based upon current circumstances.
They differ from fundamental investment restrictions in that they may be changed
or amended by action of the Trustees of the Trust without prior notice to or
approval of shareholders. Accordingly, Adjustable Rate Fund may not:
(a) invest more than 10% of its assets in securities of other investment
companies;
(b) purchase warrants of any issuer, except on a limited basis, if, as a
result, more than 2% of the value of its total assets would be invested in
warrants which are not listed on the New York Stock Exchange and more than 5% of
the value of its total assets would be invested in warrants, whether or not so
listed, such warrants in each case to be valued at the lesser of cost or market,
but assigning no value to warrants acquired by the Fund in shares or attached to
debt securities;
(c) purchase (i) securities of any issuer with a record of less than three
years' continuous operation, including predecessors, except U.S. Government
securities and securities guaranteed by any foreign government or its agencies
or instrumentalities, or (ii) common or preferred stocks that are not readily
marketable, if such purchase would cause the investment of the Fund in all such
securities to exceed 5% of the value of the
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total assets of the Fund; or
(d) purchase puts, calls, straddles, spreads and any combination thereof
if the value of the Fund's aggregate investment in such securities exceeds 5% of
its total assets.
SHORT-TERM FUND MAY NOT:
(1) Purchase the securities of issuers conducting their principal business
activity in the same industry if immediately after such purchase the value of
the Fund's investments in such industry would exceed 25% of the value of its
total assets, provided that (a), as to utility companies, the gas, electric,
water and telephone businesses will be considered separate industries, (b) all
finance companies as a group will not be considered a single industry, (c)
industry determinations with respect to Securitized Assets will be based on the
type of assets backing the security, and (d) there is no limitation with respect
to or arising out of investments in obligations issued or guaranteed by the U.S.
Government, its agencies and instrumentalities, repurchase agreements or loans
by the Fund of securities collateralized by such obligations or by cash. With
respect to both clauses (c) and (d), Securitized Assets which are issued or
guaranteed by the U.S. Government, its agencies or instrumentalities or backed
directly or indirectly by obligations so issued or guaranteed will be treated as
being within clause (d).
(2) Purchase the securities of any one issuer if, immediately after such
purchase, more than 5% of the value of the Fund's total assets would be invested
in such issuer, except that (a) up to 25% of the value of its total assets may
be invested without regard to such 5% limitation, and (b) such 5% limitation
shall not apply to securities which are issued or guaranteed by the U.S.
Government, its agencies or instrumentalities or backed directly or indirectly
by obligations so issued or guaranteed (including repurchase agreements
collateralized by obligations so issued or guaranteed).
(3) Make loans, except through (a) the purchase of debt obligations or
pass-through instruments in accordance with the Fund's investment objective and
policies, (b) repurchase agreements with banks, brokers, dealers and other
financial institutions; and (c) loans of securities.
(4) Borrow money, except (a) as a temporary measure, and then only in
amounts not exceeding 5% of the value of the Fund's net assets or (b) from
banks, provided that immediately after any such borrowing all borrowings of the
Fund do not exceed one-third of its net assets (excluding borrowings). The
exceptions to this restriction are not for investment leverage purposes but are
solely for extraordinary or emergency purposes or to facilitate management of
the Fund by enabling the Fund to meet redemption requests when the liquidation
of portfolio instruments is deemed to be
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disadvantageous or not possible. While the Fund has borrowings outstanding in
excess of 5% of the value of its net assets, it will not make any purchases of
portfolio instruments. If, due to market fluctuations or other reasons, the net
assets of the Fund fall below 300% of its borrowings, the Fund will promptly
reduce its borrowings in accordance with the Act. To do this, the Fund may have
to sell a portion of its investments at a time when it may be disadvantageous to
do so. For purposes of this restriction, neither the arrangements referred to
in restriction (5) below nor the purchase or sale of futures or related options
shall be regarded as involving the borrowing of money.
(5) Mortgage, pledge or hypothecate any assets except to secure permitted
borrowings. For purposes of this restriction, collateral arrangements with
respect to the writing of options, interest rate futures contracts, options on
futures contracts, and collateral arrangements with respect to initial and
variation margin are not deemed to be a mortgage, pledge or hypothecation of
assets.
(6) Purchase or sell real estate, but this restriction shall not prevent
the Fund from investing directly or indirectly in portfolio instruments secured
by real estate or interests therein or issued by companies which invest in real
estate or interests therein.
(7) Purchase or sell commodities or commodity contracts, except that the
Fund may purchase and sell interest rate futures contracts and related options,
or purchase or sell interests in oil, gas or other mineral exploration or
development programs.
(8) Purchase any voting securities or invest in companies for the purpose
of exercising control or management.
(9) Act as an underwriter of securities.
(10) Purchase any security on margin (except for delayed delivery or when-
issued transactions or such short-term credits as are necessary for the
clearance of transactions). The payment or deposit by the Fund of initial or
variation margin in connection with interest rate futures contracts or related
option transactions is not considered the purchase of a security on margin.
(11) Make short sales of securities or maintain a short position unless (a)
at all times when a short position is open the Fund owns an equal amount of such
securities or securities convertible into or exchangeable, without payment of
any further consideration, for securities of the same issue as, and equal in
amount to, the securities sold short or (b) for the purpose of hedging the
Fund's exposure to an actual or anticipated market decline in the value of its
investments.
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(12) Write, purchase or sell puts, calls or combinations thereof, except
that the Fund may purchase puts and write, purchase and sell call options with
respect to portfolio securities and with respect to interest rate futures
contracts.
For purposes of Short-Term Fund's investment restriction no. 1 above,
"Securitized Assets" denotes securities representing interests in pools of
assets.
Although it has the authority to do so, Short-Term Fund does not currently
intend to purchase or sell options with respect to portfolio securities,
purchase or sell interest rate futures contracts and related options, or
purchase or sell interests in oil, gas or other mineral exploration or
development programs.
SHORT DURATION FUND MAY NOT:
1. Purchase securities of any one issuer, other than obligations issued
or guaranteed by the U.S. Government or any of its agencies, authorities or
instrumentalities, if immediately after such purchase, more than 5% of the
Fund's total assets would be invested in such issuer or the Fund would hold more
than 10% of any class of the outstanding voting securities of such issuer,
except that (a) up to 25% of the Fund's total assets may be invested without
regard to such limitations and (b) such limitations shall not apply to
repurchase agreements collateralized by obligations of the U.S. Government or
any of its agencies, authorities or instrumentalities.
2. Invest more than 25% of the value of its total assets in the
securities of one or more issuers conducting their principal business activities
in the same industry. (For the purposes of this restriction, state and
municipal governments and their agencies and instrumentalities are not deemed to
be industries; telephone companies are considered to be a separate industry from
water, gas or electric utilities; personal credit finance companies and business
credit finance companies are deemed to be separate industries; and wholly owned
finance companies are considered to be in the industry of their parents if their
activities are primarily related to financing the activities of their parents).
This limitation does not apply to investments or obligations of, or to municipal
securities which have been pre-refunded by the use of obligations of, the U.S.
Government or any of its agencies or instrumentalities.
3. Borrow money, except: (a) from banks for temporary or short-term
purposes or for the clearance of transactions in amounts not exceeding one-third
of the Fund's total assets, not including the amount borrowed; (b) in connection
with the redemption of Fund shares or to finance failed settlements of portfolio
trades without immediately liquidating portfolio securities or other assets; and
(c) in order to fulfill commitments or plans to purchase additional
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securities pending the anticipated sale of other portfolio securities or assets,
but only if after each such borrowing there is asset coverage of at least 300%
as defined in the Act. For purposes of this investment restriction, short
sales, futures contracts, options on futures contracts, securities or indices
and forward commitment transactions shall not constitute borrowing.
4. Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings and to the extent related to the
deposit of assets in escrow in connection with the writing of covered put and
call options and the purchase of securities on a forward commitment or delayed-
delivery basis and collateral and initial or variation margin arrangements with
respect to futures contracts and options on futures contracts, securities or
indices.
5. Purchase securities on margin, except for such short-term credits as
are necessary for the clearance of transactions, but the Fund may make margin
deposits in connection with transactions in options, futures and options on
futures.
6. Make short sales of securities, except short sales against-the-box, or
maintain a short position.
7. Underwrite any issue of securities issued by others, except to the
extent that the sale of portfolio securities by the Fund may be deemed to be
underwriting.
8. Purchase, hold or deal in real estate (including real estate limited
partnerships) or oil, gas or mineral leases, although the Fund may purchase and
sell securities that are secured by real estate or interests therein and may
purchase mortgage-related securities and may hold and sell real estate acquired
by the Fund as a result of the ownership of securities.
9. Invest in commodities, except that the Fund may purchase and sell
futures contracts, including those relating to securities or indices, and
options on futures contracts and purchase and sell securities on a forward
commitment or delayed-delivery basis.
10. Lend any funds or other assets except through the purchase of all or a
portion of an issue of securities or obligations of the type in which it may
invest; however, the Fund may lend its portfolio securities in an amount not to
exceed 33-1/3% of the value of its total assets. Any loans of portfolio
securities will be made in accordance with guidelines established by the SEC and
the Trust's Board of Trustees.
11. Issue any senior security (as such term is defined in Section 18(f) of
the Act) except as permitted in Investment Restriction Nos. 3, 4, 9 and 10 and
except for any class or series of its shares of beneficial interest.
B-53
<PAGE>
In addition to the investment restrictions mentioned above, the Trustees of
the Trust have voluntarily adopted the following policies and restrictions on
behalf of short Duration Fund which are observed in the conduct of its affairs.
These represent intentions of the Trustees based upon current circumstances.
They differ from fundamental investment restrictions in that they may be changed
or amended by action of the Trustees of the Trust without prior notice to or
approval of shareholders. Accordingly, Short Duration Fund may not:
(a) Purchase or retain the securities of any issuers if the officers,
directors, partners or Trustees of the Trust, its investment adviser or manager
owning beneficially more than one-half of 1% of the securities of such issuer,
together own beneficially more than 5% of such securities.
(b) Invest more than 10% of its total assets, calculated at the time of
purchase, in the securities of other investment companies, invest more than 5%
of its total assets in the securities of any one investment company or acquire
more than 3% of the voting securities of any other investment company; or
purchase the securities of closed-end investment companies, except in the open
market where no commission or profit to a sponsor or dealer results from the
purchase, other than customary brokerage fees.
(c) Write covered calls or put options with respect to more than 25% of
the value of its total assets or invest more than 5% of its total assets in
puts, calls, spreads or straddles, other than protective put options. The
aggregate value of premiums paid on all options, other than protective puts,
held by the Fund at any time will not exceed 5% of its total assets.
(d) Invest (a) more than 15% of the Fund's net assets in illiquid
investments, including repurchase agreements maturing in more than seven days,
securities that are not readily marketable and restricted securities not
eligible for resale pursuant to Rule 144A under the 1933 Act; or (b) more than
15% of its net assets in restricted securities (including those eligible for
resale under Rule 144A).
(e) Purchase additional securities while the Fund's borrowings exceed 5%
of its total assets.
(f) Invest more than 5% of the Fund's total assets in the securities of
issuers which, together with predecessors, have a record of less than three
years of continuous operation.
Short Duration Fund may invest 25% or more of the value of its total assets
in Municipal Securities which are related in such a way that an economic,
business or political development or change affecting one Municipal Security
would also affect the other Municipal Securities. Short Duration Fund may so
invest in
B-54
<PAGE>
(a) Municipal Securities the interest on which is paid solely from revenues of
similar projects such as hospitals, electric utility systems, multi-family
housing, nursing homes, commercial facilities (including hotels), steel
companies or life care facilities, (b) Municipal Securities whose issuers are in
the same state, or (c) industrial development obligations.
For the purpose of applying Short Duration Fund's investment restrictions,
the identification of the issuer of a Municipal Security that is not a general
obligation is made by the Adviser based on the characteristics of the Municipal
Security, the most important of which is the source of funds for the payment of
principal and interest on such securities.
CORE FUND MAY NOT:
1. Purchase securities of any one issuer, other than obligations issued
or guaranteed by the U.S. Government or any of its agencies, authorities or
instrumentalities, if immediately after such purchase, more than 5% of the
Fund's total assets would be invested in such issuer or the Fund would hold more
than 10% of any class of the outstanding voting securities of such issuer,
except that (a) up to 25% of the Fund's total assets may be invested without
regard to such limitations and (b) such limitations shall not apply to
repurchase agreements collateralized by obligations of the U.S. Government or
any of its agencies, authorities or instrumentalities.
2. Invest more than 25% of the value of its total assets in the
securities of one or more issuers conducting their principal business activities
in the same industry. This limitation does not apply to investments or
obligations of the U.S. Government or any of its agencies or instrumentalities.
3. Borrow money, except: (a) from banks for temporary or short-term
purposes or for the clearance of transactions in amounts not exceeding one-third
of the Fund's total assets, not including the amount borrowed; (b) in connection
with the redemption of Fund shares or to finance failed settlements of portfolio
trades without immediately liquidating portfolio securities or other assets; (c)
in order to fulfill commitments or plans to purchase additional securities
pending the anticipated sale of other portfolio securities or assets, and (d)
transactions in mortgage dollar rolls which are accounted for as financings, but
only if after each such borrowing there is asset coverage of at least 300% as
defined in the Act. For purposes of this investment restriction, short sales,
mortgage dollar rolls that are not accounted for as financings, options,
transactions in currencies, forward contracts, currency, mortgage and interest
rate swaps (to the extent a segregated account has been established
collateralizing the Fund's swap obligations), interest rate caps and floors,
futures contracts, options on futures contracts and forward commitment
B-55
<PAGE>
transactions shall not constitute borrowing.
4. Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings and to the extent related to the
deposit of assets in escrow in connection with the writing of covered put and
call options and the purchase of securities on a forward commitment or delayed-
delivery basis and collateral and initial or variation margin arrangements with
respect to forward currency contracts, futures contracts and options on futures
contracts, securities or indices.
5. Purchase securities on margin, except for such short-term credits as
are necessary for the clearance of transactions, but the Fund may make margin
deposits in connection with transactions in options, futures contracts and
options on futures contracts.
6. Make short sales of securities, except short sales against-the-box, or
maintain a short position.
7. Underwrite any issue of securities issued by others, except to the
extent that the sale of portfolio securities by the Fund may be deemed to be
underwriting.
8. Purchase, hold or deal in real estate (including real estate limited
partnerships) or oil, gas or mineral leases, although the Fund may purchase and
sell securities that are secured by real estate or interests therein, may
purchase mortgage-related securities and may hold and sell real estate acquired
by the Fund as a result of the ownership of securities.
9. Invest in commodities, except that the Fund may purchase and sell
futures contracts, including those relating to securities, currencies or
indices, and options on futures contracts or currencies and purchase and sell
securities or currencies on a forward commitment or delayed-delivery basis.
10. Lend any funds or other assets except through repurchase agreements or
the purchase of all or a portion of an issue of securities or obligations of the
type in which it may invest; however, the Fund may lend its portfolio securities
in an amount not to exceed 33-1/3% of the value of its total assets.
11. Issue any senior security (as such term is defined in Section 18(f) of
the Act) except as permitted in Investment Restriction No. 3 and except for any
class or series of its shares of beneficial interest.
In addition to the investment restrictions mentioned above, the Trustees of
the Trust have voluntarily adopted the following policies and restrictions on
behalf of Core Fund which are observed in the conduct of its affairs. These
represent intentions of the Trustees based upon current circumstances. They
differ from
B-56
<PAGE>
fundamental investment restrictions in that they may be changed or amended by
action of the Trustees of the Trust without prior notice to or approval of
shareholders. Accordingly, Core Fund may not:
(a) Purchase or retain the securities of any issuers if the officers,
directors, partners or Trustees of the Trust, its investment adviser or manager
owning beneficially more than one-half of 1% of the securities of such issuer,
together own beneficially more than 5% of such securities.
(b) Write covered calls or put options with respect to more than 25% of
the value of its total assets or invest more than 5% of its total assets in
puts, calls, spreads or straddles, other than protective put options. The
aggregate value of premiums paid on all options, other than protective puts,
held by the Fund at any time will not exceed 5% of the Fund's total assets.
(c) Invest (a) more than 15% of the Fund's net assets in illiquid
investments, including repurchase agreements maturing in more than seven days,
securities which are not readily marketable and restricted securities not
eligible for resale pursuant to Rule 144A under the 1933 Act; or (b) more than
15% of its net assets in restricted securities (including those eligible for
resale pursuant to Rule 144A that the Trustees have determined to be liquid).
(d) Purchase additional securities while the Fund's borrowings exceed
(excluding covered mortgage dollar rolls) 5% of its total assets.
(e) Invest more than 5% of the Fund's total assets in the securities of
issuers which, together with predecessors, have a record of less than three
years of continuous operation.
MANAGEMENT
TRUSTEES AND OFFICERS
---------------------
Information pertaining to the Trustees and officers of the Trust is set
forth below together with their respective positions and a brief statement of
their principal occupations during the past five years. Trustees deemed to be
"interested persons" of the Trust for purposes of the Act are indicated by an
asterisk.
Paul C. Nagel, Jr., Age 72, 19223 Riverside Drive, Tequesta, Florida 33469.
Chairman of the Board of Trustees. Retired, Director and Chairman of the
---------------------------------
Finance and Audit Committees, Great Atlantic & Pacific Tea Co., Inc.; Director,
United Conveyor
B-57
<PAGE>
Corporation.
Ashok N. Bakhru, Age 52, 1235 Westlakes Drive, Suite 385, Berwyn, PA 19312.
Trustee. President, ABN Associates, Inc., since June 1994. Retired, Senior Vice
-------
President, Scott Paper Company; Director, Arkwright Mutual Insurance Company;
Trustee, International House of Philadelphia; Member of Cornell University
Council; Trustee of Walnut Street Theater.
Marcia L. Beck,* Age 39, One New York Plaza, New York, New York 10004. President
---------
and Trustee. Director, Institutional Funds Group of GSAM since September 1992;
-----------
Vice President and Senior Portfolio Manager, GSAM from June 1988 to Present.
David B. Ford,* Age 49, One New York Plaza, New York, New York 10004. Trustee.
-------
General Partner, Goldman Sachs, since 1986; Chairman and Chief Executive
Officer, GSAM since December 1994.
Alan A. Shuch,* Age 45, One New York Plaza, New York, New York 10004. Trustee.
-------
Director and Vice President, Goldman Sachs Funds Management, Inc. from April
1990 to November 1994; President and Chief Operating Officer, GSAM from
September 1988 to November 1994; (overseeing GSAM's fixed income investment
management activities and financial, accounting, administrative and systems
functions). Limited Partner, Goldman Sachs since December 1994.
Jackson W. Smart, Jr., Age 64, One Northfield Plaza, #218, Northfield,
Illinois 60093. Trustee. Chairman and Chief Executive Officer, MSP
-------
Communications Inc. (a company engaged in radio broadcasting) since November
1988; Consultant, Thomas Industries, Inc. (a manufacturer of lighting fixtures,
home decorations and hardware items) from August 1987 to November 1988 and
Chairman and member of the Executive Committee prior thereto; Director, Federal
Express Corporation; and North American Private Equity Group (a venture capital
fund).
William H. Springer, Age 65, 701 Morningside Drive, Lake Forest, Illinois 60045.
Trustee. Vice Chairman, Ameritech (a telecommunications holding company)
-------
February 1987 to retirement in 1992 and Vice Chairman, Chief Financial and
Administrative Officer of Ameritech prior thereto; Director, Walgreen Co. (a
retail drugstore business); and Baker, Fentress & Co. (a closed-ended non-
diversified management investment company).
Richard P. Strubel, Age 55, 70 West Madison Street, Suite 1400, Chicago,
Illinois 60602. Trustee. Managing Director, Tandem Partners, Inc. (since
-------
1990); President and Chief Executive Officer, Microdot, Inc. (a diversified
manufacturer of fastening systems and connectors) since January 1984 to October
1994;
B-58
<PAGE>
Pauline Taylor,* Age 48, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs since June 1992; Consultant since 1989
---------
to June 1992; Senior Vice President, Fidelity Investments prior to 1989.
Nancy L. Mucker,* Age 45, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs; Co-Manager, Shareholder Services for
---------
GSAM.
John W. Mosior,* Age 56, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs; Co-Manager, Shareholder Services for
---------
GSAM.
Scott M. Gilman,* Age 35, One New York Plaza, New York, New York 10004.
Treasurer. Director, Mutual Funds Administration, GSAM since April 1994.
---------
Assistant Treasurer of Goldman Sachs Funds Management, Inc. since March 1993.
Vice President, Goldman Sachs since March, 1990; Assistant Treasurer of the
Trust from April 1990 until October 1991; Manager, Arthur Andersen LLP prior
thereto.
Michael J. Richman,* Age 34, 85 Broad Street, New York, New York 10004.
Secretary. Vice President and Assistant General Counsel, Goldman Sachs since
---------
June 1992; Associate General Counsel, GSAM, Counsel to the Funds Group of GSAM,
since June 1992; Partner, Hale and Dorr prior thereto.
Howard B. Surloff,* Age 29, 85 Broad Street, New York, New York 10004. Assistant
---------
Secretary. Vice President and Counsel, Goldman Sachs since November 1993 and
---------
May 1994, respectively; Counsel to the Funds Group, GSAM since November 1993;
formerly Associate of Shereff, Friedman, Hoffman & Goodman.
Steven E. Hartstein*, Age 31, 85 Broad Street, New York, New York 10004.
Assistant Secretary. Legal Products Analyst, Goldman Sachs (June 1993 to
-------------------
present); Funds Compliance Officer, Citibank Global Asset Management (August
1991 to June 1993); Legal Assistant, Brown & Wood (prior thereto).
Gail M. Shanley*, Age 26, 85 Broad Street, New York, New York 10004. Assistant
---------
Secretary. Legal Product Analyst, Goldman Sachs since June 1994. Formerly Blue
---------
Sky Legal Assistant at Smith Barney Shearson.
The Trustees and officers of the Trust hold comparable positions with
certain other investment companies of which Goldman Sachs, GSAM or FMLP is the
investment adviser, administrator and/or distributor. As of November 30, 1994,
the Trustees and officers as a group owned less than 1% of the outstanding
shares of beneficial interest of each Fund.
B-59
<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 October
31, 1994:
<TABLE>
<CAPTION>
Total
Pension or Compensation
Aggregate Retirement from Goldman
Compensation Benefits Accrued Sachs Mutual
from the as of Part of Funds (including
Name of Trustees Trust Trust's Expenses the Trust)*
--------------------- ------------ ---------------- ----------------
<S> <C> <C> <C>
Paul C. Nagel, Jr. $17,426 $ 0 $101,000
Ashok N. Bakhru $10,523 $ 0 $ 61,000
Marcia L. Beck $ 0 $ 0 $ 0
David B. Ford $ 0 $ 0 $ 0
Robert P. Mayo $10,523 $ 0 $61,000
Alan Shuch $ 0 $ 0 $ 0
Jackson W. Smart $10,523 $ 0 $61,000
William H. Springer $10,523 $ 0 $61,000
Richard P. Strubel $10,523 $ 0 $61,000
</TABLE>
* The Goldman Sachs Mutual Funds consisted of 32 mutual funds, including the
eleven series of the Trust, on October 31, 1994.
B-60
<PAGE>
INVESTMENT ADVISERS
-------------------
FMLP, One New York Plaza, New York, New York 10004, serves as the
investment adviser to Adjustable Rate Fund and Short-Term Fund pursuant to
separate investment advisory agreements. FMLP, a Delaware limited partnership,
is an affiliate of Goldman Sachs, 85 Broad Street, New York, New York 10004.
GSAM, One New York Plaza, New York, New York 10004, a separate operating
division of Goldman Sachs, serves as the investment adviser to Short Duration
Fund and Core Fund pursuant to separate investment advisory agreements. See
"MANAGEMENT -- Investment Adviser" in each Fund's Prospectus for a description
of the applicable Adviser's duties as investment adviser.
Founded in 1869, Goldman Sachs is among the oldest and largest investment
banking firms in the United States. Goldman Sachs is a leader in developing
strategies and in many fields of investing and financing, participating in
financial markets worldwide and serving individuals, institutions, corporations
and governments. Goldman Sachs is among the principal market sources for current
and thorough information on companies, industrial sectors, markets, economies
and currencies, and trades and makes markets in a wide range of equity and debt
securities 24 hours a day. The firm is headquartered in New York and has offices
throughout the United States and in Beijing, Frankfurt, George Town, Hong Kong,
London, Madrid, Milan, Montreal, Osaka, Paris, Seoul, Shanghai, Singapore,
Sydney, Taipei, Tokyo, Toronto, Vancouver and Zurich. It has trading
professionals throughout the United States, as well as in London, Tokyo, Hong
Kong and Singapore. The active participation of Goldman Sachs in the world's
financial markets enhances its ability to identify attractive investments.
The Advisers are able to draw on the substantial research and market
expertise of Goldman Sachs, whose investment research effort is one of the
largest in the industry. With an annual equity research budget approaching
$120 million, Goldman Sachs' Investment Research Department covers approximately
1,700 companies, including approximately 1,000 U.S. corporations in 60
industries. The in-depth information and analyses generated by Goldman Sachs'
research analysts are available to the Advisers.
For more than a decade, Goldman Sachs has been among the top-ranked firms
in Institutional Investor's annual "All-America Research Team" survey. In
addition, many of Goldman Sachs' economists, securities analysts, portfolio
strategists and credit analysts have consistently been highly ranked in
respected industry surveys conducted in the U.S. and abroad. Goldman Sachs is
also among the leading investment firms using quantitative analytics (now used
by a growing number of investors) to structure and evaluate portfolios. For
example, Goldman Sachs' options evaluation model analyzes each security's term,
coupon and call option, providing an overall analysis of the security's value
B-61
<PAGE>
relative to its interest risk.
In planning Short Duration Fund's strategies, Short Duration Fund's
portfolio managers also evaluate and monitor individual issues by using
analytical techniques that have traditionally been applied to corporate bonds
and mortgage-backed securities. In particular, the Adviser's embedded option
valuation model provides a picture of an individual security's relative value
and the portfolio's overall interest rate risk. By constantly reviewing the
positions of securities with the portfolio, the Adviser looks for opportunities
to enhance Short Duration Fund's yields by fine-tuning the portfolio, using
quantitative tools designed for municipal portfolio management. The Adviser,
which currently manages approximately $3 billion in tax-free securities, has
assembled an experienced team of professionals for selection of Short Duration
Fund's portfolio securities. The Adviser manages money for some of the world's
largest institutional investors.
In structuring Adjustable Rate Fund's and Short-Term Fund's respective
securities portfolio, the Adviser will review the existing overall economic and
mortgage market trends. The Adviser will then study yield spreads, the implied
volatility and the shape of the yield curve. The Adviser will then apply this
analysis to a list of eligible securities that meet the respective Fund's
investment guidelines. With respect to Adjustable Rate Fund, this analysis is
used to plan a two-part portfolio, which will consist of a "core" portfolio of
ARMs and a "relative value" portfolio of other mortgage assets that can enhance
portfolio returns and lower risk (such as investments CMO floating rate tranches
and interest only stripped Mortgage-Backed Securities). The Mortgage-backed
securities team manages approximately $5.2 billion in assets.
With respect to Adjustable Rate Fund, Short-Term Fund and Core Fund, the
applicable Adviser expects to utilize Goldman Sachs' sophisticated option-
adjusted analytics to help make strategic asset allocations within the markets
for U.S. Government, Mortgage-Backed and other securities and to employ this
technology periodically to re-evaluate the Funds' investments as market
conditions change. Goldman Sachs has also developed a prepayment model designed
to estimate mortgage prepayments and cash flows under different interest rate
scenarios. Because a Mortgage-Backed Security incorporates the borrower's right
to prepay the mortgage, the Advisers use a sophisticated option-adjusted spread
(OAS) model to measure expected returns. A security's OAS is a function of the
level and shape of the yield curve, volatility and the applicable Adviser's
expectation of how a change in interest rates will affect prepayment levels.
Since the OAS model assumes a relationship between prepayments and interest
rates, the Advisers consider it a better way to measure a security's expected
return and absolute and relative values than yield to maturity. In using OAS
technology, the Advisers will first evaluate the absolute level of a security's
OAS considering its liquidity and its interest rate, volatility and
B-62
<PAGE>
prepayment sensitivity. The Advisers will then analyze its value relative to
alternative investments and to its own investments. The Advisers will also
measure a security's interest rate risk by computing an option adjusted duration
(OAD). The Advisers believe a security's OAD is a better measurement of its
price sensitivity than cash flow duration, which systematically misstates
portfolio duration. The Advisers also evaluate returns for different mortgage
market sectors and evaluate the credit risk of individual securities. This
sophisticated technical analysis allows the Advisers to develop portfolio and
trading strategies using mortgage-backed securities that are believed to be
superior investments on a risk-adjusted basis and which provide the flexibility
to meet the respective Fund's duration targets and cash flow pattern
requirements.
Because the OAS is adjusted for the differing characteristics of the
underlying securities, the OAS of different Mortgage-Backed Securities can be
compared directly as an indication of their relative value in the market. The
Advisers also expect to use OAS-based pricing methods to calculate projected
security returns under different, discrete interest rate scenarios, and Goldman
Sachs' proprietary prepayment model to generate yield estimates under these
scenarios. The OAS, scenario returns, expected returns, and yields of
securities in the mortgage market can be combined and analyzed in an optimal
risk-return matching framework.
The Advisers will use OAS analytics to choose what they believe is an
appropriate portfolio of investments for Adjustable Rate Fund, Short-Term Fund
and Core Fund from a universe of eligible investments. In connection with
initial portfolio selections, in addition to using OAS analytics as an aid to
meeting each Fund's particular composition and performance targets, the Advisers
will also take into account important market criteria like the available supply
and relative liquidity of various mortgage securities in structuring the
portfolio.
The Advisers also expect to use OAS analytics to evaluate the mortgage
market on an ongoing basis. Changes in the relative value of various Mortgage-
Backed Securities could suggest tactical trading opportunities for the Funds.
The Advisers will have access to both current market analysis as well as
historical information on the relative value relationships among different
Mortgage-Backed Securities. Current market analysis and historical information
is available in the Goldman Sachs database for most actively traded Mortgage-
Backed Securities.
Goldman Sachs has agreed to provide the Advisers, on a non-exclusive
basis, use of its mortgage prepayment model, OAS model and any other proprietary
services which it now has or may develop, to the extent such services are made
available to other similar customers. Use of these services by the Advisers
with respect to a Fund does not preclude Goldman Sachs from providing these
B-63
<PAGE>
services to third parties or using such services as a basis for trading for its
own account or the account of others. Provision of services to the Advisers
will in no way impinge on the ability of Goldman Sachs to trade for its own
account or to execute trades for the account of others, nor will Goldman Sachs
be obligated to provide the Advisers with all information regarding investment
opportunities or trading strategies that may come to Goldman Sachs' attention.
Furthermore, the Advisers will use the services of other banking and brokerage
firms in addition to Goldman Sachs. The involvement of Goldman Sachs, its
affiliates (including the Advisers), partners and officers, in the investment
activities and business operations of each Fund may present certain potential
conflicts of interest, as described in each Fund's Prospectus under "MANAGEMENT
-- Investment Adviser" and "Activities of Goldman Sachs and its Affiliates and
Other Accounts Managed by Goldman Sachs" in this Additional Statement.
Each Fund's advisory agreement (the "Advisory Agreements") was most
recently approved by the Trustees of the Trust, including a majority of the
Trustees of the Trust who are not parties to such agreements or "interested
persons" (as such term is defined in the Act) of any party thereto (the "non-
interested Trustees"), on April 26, 1994. The applicable Fund's Advisory
Agreement was approved by the shareholders of Adjustable Rate Fund on October
30, 1991, the shareholders of Short-Term Fund on March 27, 1989, the sole
initial shareholder of Short Duration Fund on September 25, 1992 and the sole
initial shareholder of Core Fund on October 29, 1993. Each Advisory Agreement
will remain in effect until June 30, 1995 and will continue in effect with
respect to the applicable Fund from year to year thereafter provided such
continuance is specifically approved at least annually by (a) the vote of a
majority of the outstanding voting securities of such Fund or a majority of the
Trustees of the Trust, and (b) the vote of a majority of the non-interested
Trustees of the Trust, cast in person at a meeting called for the purpose of
voting on such approval.
The Advisory Agreements provide that GSAM and FMLP, in their capacity as
Advisers, may each render similar services to others so long as the services
under the Advisory Agreements are not impaired thereby. Pursuant to the Advisory
Agreements with Adjustable Rate Fund and Short-Term Fund, respectively, FMLP is
entitled to receive a fee payable monthly by Adjustable Rate Fund equal on an
annual basis to .40 of 1% and by Short-Term Fund equal on an annual basis to .50
of 1% of such Funds' respective average daily net assets. FMLP has voluntarily
agreed to reduce such fee by an amount equal to 0.10% annually of such net
assets. Pursuant to the Advisory Agreements with Core Fund and Short Duration
Fund, respectively, GSAM receives a monthly fee payable by each of Short
Duration Fund and Core Fund equal on an annual basis to .40 of 1% of each such
Fund's average daily net assets. The applicable Adviser has agreed voluntarily
to reduce or otherwise limit for the current fiscal
B-64
<PAGE>
year certain other expenses of Core Fund, Adjustable Rate Fund, Short-Term Fund
and Short Duration Fund to the extent that such other expenses (excluding
advisory fees, fees paid to Service Organizations (as defined below), taxes,
interest, brokerage, and litigation, indemnification and other extraordinary
expenses) would exceed 0.05% per annum of each such Fund's average daily net
assets. Such reduction or limits, if any, are calculated monthly on a
cumulative basis and may be discontinued or modified by the applicable Adviser
at its discretion at any time.
For the fiscal years ended October 31, 1994, 1993 and 1992, the amounts of
the investment advisory fees incurred by each Fund then in existence were as
follows:
<TABLE>
<CAPTION>
1994 1993 1992
---------------------------------------
<S> <C> <C> <C>
Adjustable Rate Fund* $6,798,185 $9,498,008 $4,799,416
Short-Term Fund** 1,063,867 1,311,347 1,009,499
Short Duration Fund*** 468,868 243,069 0
Core Fund**** 56,255 NA NA
</TABLE>
_______________________
* Had expense limitations not been in effect, Adjustable Rate Fund would
have paid advisory fees of $6,798,185, $9,498,008 and $5,148,731,
respectively, for such periods. In addition, the expenses of Adjustable
Rate Fund were reduced or otherwise limited in the amounts of $442,880,
$731,102, and $1,284,951, respectively, by the Adviser for such periods.
** Had expense limitations not been in effect, Short-Term Fund would have
paid advisory fees of $1,329,834, $1,639,184 and $1,250,089, respectively,
for such periods. In addition, the expenses of Short-Term Fund were
reduced or otherwise limited in the amounts of $115,389, $139,186 and
$342,116, respectively, by the Adviser for such periods.
*** Short Duration Fund commenced operations October 1, 1992. Had expense
limitations not been in effect, Short Duration Fund would have paid
advisory fees of $468,868, $272,283 and $4,388, respectively, for such
periods. In addition, the expenses of Short Duration Fund were reduced or
otherwise limited in the amount of $192,696, $412,548 and $24,469,
respectively, by the Adviser for such periods.
**** Core Fund commenced operations January 5, 1994. For the period
January 5, 1994 to October 31, 1994, if expense limitation had not been in
effect, Core Fund would have paid an advisory fee of $56,255. In
addition, the expenses of Core Fund were reduced or otherwise limited in
the amount of $141,815 for such period.
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<PAGE>
Each Advisory Agreement terminates automatically if assigned (as defined in
the Act) and is terminable at any time without penalty by the Trustees of the
Trust or by vote of a majority of the outstanding voting securities of the
applicable Fund on 60 days' written notice to the applicable Adviser and by the
applicable Adviser on 60 days' written notice to the Trust.
As stated in the Prospectuses, each Fund is responsible for the payment of
all expenses other than those assumed by its Adviser. However, each Adviser has
agreed that if, in any fiscal year, the sum of a Fund's expenses otherwise
payable (including the fee payable to the Adviser, but excluding taxes,
interest, brokerage and, where permitted, extraordinary expenses such as for
litigation) would exceed the expense limitations applicable to a Fund imposed by
state securities administrators, as such limitations may be lowered or raised
from time to time, it will reduce its fee or make other arrangements to limit
Fund expenses to the extent required by such expense limitations. The most
restrictive expense limitation imposed by state securities administrators
provides that annual expenses (as defined) may not exceed 2 1/2% of the first
$30 million of the average value of each Fund's net assets, plus 2% of the next
$70 million of such assets, plus 1 1/2% of such assets in excess of $100
million.
Each Adviser performs administrative services for the applicable Funds
under the Advisory Agreements which include, subject to the general supervision
of the Trustees of the Trust, (a) providing supervision of all aspects of the
Funds' non-investment operations (other than certain operations performed by
others pursuant to agreements with the Funds), (b) providing the Funds, to the
extent not provided pursuant to such agreements, the agreement with the Trust's
custodian, transfer and dividend disbursing agent or agreements with other
institutions, with personnel to perform such executive, administrative and
clerical services as are reasonably necessary to provide effective
administration of the Funds, (c) arranging, to the extent not provided pursuant
to such agreements, for the preparation, at the Funds' expense, of each Fund's
tax returns, reports to shareholders, periodic updating of the Funds'
prospectuses and statements of additional information, and reports filed with
the SEC and other regulatory authorities, (d) providing the Funds, to the extent
not provided pursuant to such agreements, with adequate office space and certain
related office equipment and services, and (e) maintaining all of the Funds'
records other than those maintained pursuant to such agreements.
ACTIVITIES OF GOLDMAN SACHS AND ITS AFFILIATES AND OTHER ACCOUNTS MANAGED
-------------------------------------------------------------------------
BY GOLDMAN SACHS. The involvement of the Advisers and Goldman Sachs and their
----------------
affiliates, in the management of, or their interest in, other accounts and other
activities of Goldman Sachs may present conflicts of interest with respect to
the Funds or impede their investment activities.
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Goldman Sachs and its affiliates, including, without limitation, the
Advisers and their advisory affiliates, have proprietary interests in, and may
manage or advise with respect to, accounts or funds (including separate accounts
and other funds and collective investment vehicles) which have investment
objectives similar to those of the Funds and/or which engage in transactions in
the same types of securities and instruments as the Funds. Goldman Sachs and
its affiliates are major participants in the fixed income markets, in each case
on a proprietary basis and for the accounts of customers. As such, Goldman
Sachs and its affiliates are actively engaged in transactions in the same
securities and instruments in which the Funds invest. Such activities could
affect the prices and availability of the securities and instruments in which
the Funds will invest, which could have an adverse impact on each Fund's
performance. Such transactions, particularly in respect of proprietary accounts
or customer accounts other than those included in the Advisers' and their
advisory affiliates' asset management activities, will be executed independently
of the Funds' transactions and thus at prices or rates that may be more or less
favorable. When the Advisers and their advisory affiliates seek to purchase or
sell the same assets for their managed accounts, including the Funds, the assets
actually purchased or sold may be allocated among the accounts on a basis
determined in its good faith discretion to be equitable. In some cases, this
system may adversely affect the size or the price of the assets purchased or
sold for the Funds.
From time to time, the Funds' activities may be restricted because of
regulatory restrictions applicable to Goldman Sachs and its affiliates, and/or
their internal policies designed to comply with such restrictions. As a result,
there may be periods, for example, when the Advisers will not initiate or
recommend certain types of transactions in certain securities or instruments
with respect to which the Advisers and/or their affiliates are performing
services or when position limits have been reached.
In connection with their management of applicable Funds, the Advisers may
have access to certain fundamental analysis and proprietary technical models
developed by Goldman Sachs and other affiliates. The Advisers will not be under
any obligation, however, to effect transactions on behalf of the Funds in
accordance with such analysis and models. In addition, neither Goldman Sachs
nor any of its affiliates will have any obligation to make available any
information regarding their proprietary activities or strategies, or the
activities or strategies used for other accounts managed by them, for the
benefit of the management of the Funds and it is not anticipated that the
Advisers will have access to such information for the purpose of managing the
Funds. The proprietary activities or portfolio strategies of Goldman Sachs and
its affiliates or the activities or strategies used for accounts managed by them
or other customer accounts could conflict with the transactions and strategies
employed by the Advisers in
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managing the Funds.
The results of each Fund's investment activities may differ significantly
from the results achieved by the Advisers and their affiliates for their
proprietary accounts or accounts (including investment companies or collective
investment vehicles) managed or advised by them. It is possible that Goldman
Sachs and its affiliates and such other accounts will achieve investment results
which are substantially more or less favorable than the results achieved by a
Fund. Moreover, it is possible that a Fund will sustain losses during periods
in which Goldman Sachs and its affiliates achieve significant profits on their
trading for proprietary or other accounts. The opposite result is also
possible.
An investment policy committee which may include partners of Goldman Sachs
and its affiliates may develop general policies regarding a Fund's activities,
but will not be involved in the day-to-day management of such Fund. In such
instances, those individuals may, as a result, obtain information regarding the
Fund's proposed investment activities which is not generally available to the
public. In addition, by virtue of their affiliation with Goldman Sachs, any
such member of an investment policy committee will have direct or indirect
interests in the activities of Goldman Sachs and its affiliates in securities
and investments similar to those in which the Fund invests.
In addition, certain principals and certain of the employees of the
Advisers are also principals or employees of Goldman Sachs or their affiliated
entities. As a result, the performance by these principals and employees of
their obligations to such other entities may be a consideration of which
investors in the Funds should be aware.
Each Adviser may enter into transactions and invest in instruments on
behalf of the applicable Funds in which customers of Goldman Sachs serve as the
counterparty, principal or issuer. In such cases, such party's interests in the
transaction will be adverse to the interests of the Funds, and such party may
have no incentive to assure that the Funds obtain the best possible prices or
terms in connection with the transactions. Goldman Sachs and its affiliates may
also create, write or issue derivative instruments for customers of Goldman
Sachs or its affiliates, the underlying securities or instruments of which may
be those in which the Funds invest or which may be based on the performance of a
Fund. The Funds may, subject to applicable law, purchase investments which are
the subject of an underwriting or other distribution by Goldman Sachs or its
affiliates and may also enter into transactions with other clients of Goldman
Sachs or its affiliates where such other clients have interests adverse to those
of the Funds. To the extent affiliated transactions are permitted, the Funds
will deal with Goldman Sachs and its affiliates on an
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arm's-length basis.
Each Fund will be required to establish business relationships with its
counterparties based on the Fund's own credit standing. Neither Goldman Sachs
nor its affiliates will have any obligation to allow their credit to be used in
connection with a Fund's establishment of its business relationships, nor is it
expected that a Fund's counterparties will rely on the credit of Goldman Sachs
or any of its affiliates in evaluating the Fund's creditworthiness.
From time to time, Goldman Sachs or any of its affiliates may, but is not
required to, purchase and hold shares of a Fund in order to increase the assets
of the Fund. Increasing a Fund's assets may enhance investment flexibility and
diversification and may contribute to economies of scale that tend to reduce the
Fund's expense ratio. Goldman Sachs reserves the right to redeem at any time
some or all of the shares of a Fund acquired for its own account. A large
redemption of shares of a Fund by Goldman Sachs could significantly reduce the
asset size of the Fund, which might have an adverse effect on the Fund's
investment flexibility, portfolio diversification and expense ratio. Goldman
Sachs will consider the effect of redemptions on a Fund and other shareholders
in deciding whether to redeem its shares.
It is possible that a Fund's holdings will include securities of entities
for which Goldman Sachs performs investment banking services as well as
securities of entities in which Goldman Sachs makes a market. From time to
time, Goldman Sachs' activities may limit the Funds' flexibility in purchases
and sales of securities. When Goldman Sachs is engaged in an underwriting or
other distribution of securities of an entity, the Advisers may be prohibited
from purchasing or recommending the purchase of certain securities of that
entity for the Funds.
DISTRIBUTOR AND TRANSFER AGENT
------------------------------
Goldman Sachs serves as the distributor of shares of the Funds pursuant to
a "best efforts" arrangement as provided by a distribution agreement with the
Trust dated February 1, 1993. Pursuant to the distribution agreement, after the
Funds' Prospectuses and periodic reports have been prepared, set in type and
mailed to shareholders, Goldman Sachs will pay for the printing and distribution
of copies thereof used in connection with the offering to prospective investors.
Goldman Sachs will also pay for other supplementary sales literature and
advertising costs.
Goldman Sachs serves as the Trust's transfer and dividend disbursing agent.
Under its transfer agency agreement with the Trust, Goldman Sachs has undertaken
with the Trust with respect to each Fund to (i) record the issuance, transfer
and redemption of shares, (ii) provide confirmations of purchases and
redemptions,
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and quarterly statements, as well as certain other statements, (iii) provide
certain information to the Trust's custodian and the relevant subcustodian in
connection with redemptions, (iv) provide dividend crediting and certain
disbursing agent services, (v) maintain shareholder accounts, (vi) provide
certain state Blue Sky and other information, (vii) provide shareholders and
certain regulatory authorities with tax-related information, (viii) respond to
shareholder inquiries, and (ix) render certain other miscellaneous services.
As compensation for the services rendered to the Trust by Goldman Sachs as
transfer and dividend disbursing agent and the assumption by Goldman Sachs of
the expenses related thereto, Goldman Sachs is entitled to receive a fee with
respect to each Fund equal to .04% (on an annualized basis) of the average daily
net assets of the Fund.
For the fiscal years ended October 31, 1994, 1993 and 1992, the amounts of
transfer agency fees incurred by each Fund then in existence were as follows:
<TABLE>
<CAPTION>
1994 1993 1992
-------------------------------------
<S> <C> <C> <C>
Adjustable Rate Fund $679,819 $949,645 $514,811
Short-Term Fund 0 0 0
Short Duration Fund* 46,887 27,248 439
Core Fund** 5,637 N/A N/A
</TABLE>
________________________
* Short Duration Fund commenced operations on October 1, 1992.
** Core Fund commenced operations on January 5, 1994.
The foregoing distribution and transfer agency agreements each provide that
Goldman Sachs may render similar services to others so long as the services each
provides thereunder to the Funds are not impaired thereby. Each such agreement
also provides that the Trust will indemnify Goldman Sachs against certain
liabilities.
EXPENSES
--------
Except as set forth in the prospectuses under "MANAGEMENT --Investment
Adviser," the Trust, on behalf of each Fund, is responsible for the payment of
each Fund's respective expenses. The expenses borne by Institutional,
Administration and Service Shares of each Fund and Class A Shares of Adjustable
Rate Fund include, without limitation, the fees payable to GSAM or FMLP, as the
case may be, and Goldman Sachs, the fees and expenses of the Trust's custodian,
transfer agent fees, brokerage fees and commissions, filing fees for the
registration or qualification of the Trust's shares under federal or state
securities laws, expenses
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of the organization of the Trust, fees and expenses incurred by the Trust in
connection with membership in investment company organizations, taxes, interest,
costs of liability insurance, fidelity bonds or indemnification, any costs,
expenses or losses arising out of any liability of, or claim for damages or
other relief asserted against, the Trust for violation of any law, legal, tax
and auditing fees and expenses (including the cost of legal and certain
accounting services rendered by employees of Goldman Sachs, or its affiliates,
with respect to the Trust), expenses of preparing and setting in type
Prospectuses, Additional Statements, proxy material, reports and notices and the
printing and distributing of the same to the Trust's shareholders and regulatory
authorities, any administration or service fees paid to Service Organizations,
distribution expenses paid to Goldman Sachs (Class A Shares of Adjustable Rate
Fund only), any compensation and expenses of its "non-interested" Trustees and
extraordinary expenses, if any, incurred by the Trust. Except for any
administration or service fees of each Fund paid to Service Organizations and
distribution fees of Class A Shares of ARGA Fund, all Fund expenses are borne on
a non-class specific basis.
Fees and expenses of legal counsel, registering shares of each Fund,
holding meetings and communicating with shareholders may include an allocable
portion of the cost of maintaining an internal legal and compliance department.
Each Fund may also bear an allocable portion of the costs incurred by GSAM or
FMLP, as the case may be, in performing certain accounting services not being
provided by the Trust's custodian.
CUSTODIAN AND SUB-CUSTODIANS
----------------------------
State Street Bank and Trust Company ("State Street"), P.O. Box 1713,
Boston, Massachusetts 02105, is the custodian of the Trust's portfolio
securities and cash. State Street also maintains the Trust's accounting records.
State Street may appoint sub-custodians from time to time to hold certain
securities purchased by the Trust and to hold cash for the Trust.
INDEPENDENT PUBLIC ACCOUNTANTS
------------------------------
Arthur Andersen LLP, independent public accountants, One International
Place, 100 Oliver Street, Boston, Massachusetts 02110, have been selected as
auditors of the Trust. In addition to audit services, Arthur Andersen LLP
prepares the Trust's federal and state tax returns, and provides consultation
and assistance on accounting, internal control and related matters.
PORTFOLIO TRANSACTIONS
The portfolio transactions for the Funds are generally effected at a net
price without a broker's commission (i.e., a
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dealer is dealing with a Fund as principal and receives compensation equal to
the spread between the dealer's cost for a given security and the resale price
of such security). In connection with portfolio transactions, the Advisory
Agreements provide that the Advisers shall attempt to obtain the best net price
and the most favorable execution. The Advisory Agreements provide that, on
occasions when the Advisers deem the purchase or sale of a security to be in the
best interests of a Fund as well as its other customers (including any other
fund or other investment company or advisory account for which the Advisers or
an affiliate act as investment adviser), each Fund, to the extent permitted by
applicable laws and regulations, may aggregate the securities to be sold or
purchased for each Fund with those to be sold or purchased for such other
customers in order to obtain the best net price and most favorable 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 Adviser in the manner it
considers to be most equitable and consistent with its fiduciary obligations to
the applicable Fund and such other customers. In some instances, this procedure
may adversely affect the size and price of the position obtainable for a Fund.
To the extent that the execution and price offered by more than one dealer are
comparable, the Advisory Agreements permit each Adviser, in its discretion, to
purchase and sell portfolio securities to and from dealers who provide the Trust
with brokerage or research services.
For the fiscal years ended October 31, 1994, 1993 and 1992, the Funds then
in existence paid no brokerage commissions.
During the fiscal year ended October 31, 1994, the Funds acquired and sold
securities of their regular broker-dealers: Nomura Securities International,
Chemical Securities, J.P. Morgan & Co., Inc., UBS Philips Securities, Inc.,
Lehman Brothers, Inc., Nikko Securities, Inc., Morgan Stanley & Co., Smith
Barney, Shearson, Bankers Trust Company and Salomon Brothers, Inc. At October
31, 1994, Adjustable Rate Fund and Short Duration Fund held no securities of
their regular broker-dealers. As of the same date, Short-Term Fund and Core Fund
held the following amounts of securities of their regular broker-dealers, as
defined in Rule 10b-1 under the 1940 Act, or their parents ($ in thousands):
Short Term Fund: Salomon Brothers, Inc. ($17,840) and Lehman Brothers, Inc.
($14,520); Core Fund: Salomon Brothers, Inc. ($160) and Lehman Brothers, Inc.
($130).
SHARES OF THE TRUST
The Trust's Agreement and Declaration of Trust dated September 24, 1987, as
amended (the "Trust Agreement"), permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest of one or more
separate series, provided each share has a par value of $.001 per share,
represents an equal
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proportionate interest in that series with each other share of the same class
and is entitled to such dividends out of the income belonging to such series as
are declared by the Trustees.
The Trustees have authority under the Trust Agreement to create and
classify shares of beneficial interest in separate series of the Trust without
further action by shareholders. As of the date of this Additional Statement, the
Trustees have authorized shares of the Funds and three other series. The Trust
Agreement further authorizes the Trustees of the Trust to classify or reclassify
any series or portfolio of shares into one or more classes. Pursuant thereto,
the Board of Trustees has authorized the issuance of three classes of shares of
Short-Term Fund, Short Duration Fund and Core Fund: Institutional Shares,
Administration Shares and Service Shares. Also pursuant thereto, the Board of
Trustees has authorized the issuance of four classes of shares of Adjustable
Rate Fund: Institutional Shares, Administration Shares, Service Shares and Class
A Shares. As of October 31, 1994, no Service Shares of the Adjustable Rate Fund
and Short-Term Fund were outstanding; no Administration or Service Shares of
Core Fund were outstanding; and no Class A Shares of Adjustable Rate Fund were
outstanding.
Each Institutional Share, Administration Share, Service Share and Class A
Share (Adjustable Rate Fund only) of a Fund represents an equal proportionate
interest in the assets belonging to the Fund. All Fund expenses are based on a
percentage of a Fund's aggregate average net assets, except that the respective
account administration and service fees and, with respect to Adjustable Rate
Fund, distribution fees relating to a particular class will be borne exclusively
by that class. It is contemplated that most Administration Shares and Service
Shares will be held in accounts of which the record owner is a bank or other
institution acting, directly or through an agent, as nominee for its customers
who are the beneficial owners of the shares or another organization designated
by such bank or institution. Administration Shares and Service Shares will each
be marketed only to such investors, at net asset value with no sales load.
Institutional Shares may be purchased for accounts in the name of an investor or
institution that is not compensated by a Fund for services provided to the
institution's customers. Administration Shares may be purchased for accounts
held in the name of an institution that provides certain account administration
services to its customers, including maintenance of account records and
processing orders to purchase, redeem and exchange Administration Shares.
Administration Shares bear the cost of account administration fees at the annual
rate of up to 0.25% of the average daily net assets of such Administration
Shares. Service Shares may be purchased for accounts held in the name of an
institution that provides certain account administration and shareholder liaison
services to its customers, including maintenance of account records and
processing orders to purchase, redeem or exchange Service Shares, responding to
customer inquiries
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and assisting customers with investment procedures. Service Shares bear the
cost of service fees at the annual rate of up to 0.50 of 1% of the average daily
net assets of such Service Shares. (Institutions that provide services to
holders of Administration Shares or Service Shares are referred to in this
Additional Statement as "Service Organizations"). Class A Shares of Adjustable
Rate Fund are sold, with an initial sales charge of up to 1.50% through brokers
and dealers who are members of the National Association of Securities Dealers,
Inc. and certain other financial service firms that have sales agreements with
Goldman Sachs. Class A Shares of ARGA Fund bear the cost of distribution and
service (Rule 12b-1) fees at the aggregate rate of up to 0.50% of the average
daily net assets of such Class A Shares. Currently, Goldman Sachs has
voluntarily agreed to limit the amount of such fee to 0.25% of average daily net
assets attributable to Class A Shares. Goldman Sachs may discontinue or modify
such limitations at any time.
It is possible that an institution or its affiliate may offer different
classes of shares (i.e., Institutional, Administration, Service and, for
Adjustable Rate Fund, Class A Shares) to its customers and thus receive
different compensation with respect to different classes of shares of each Fund.
Administration Shares, Service Shares and, for Adjustable Rate Fund, Class A
Shares may each have certain exclusive voting rights on matters relating to
their respective plans. Shares of each class may be exchanged only for shares
of the same class in another fund and certain money market funds sponsored by
Goldman Sachs. Dividends paid by each Fund, if any, with respect to each class
of shares will be calculated in the same manner, at the same time on the same
day and will be in the same amount, except for differences caused by the fact
that the respective account administration, service and distribution (Class A
Shares of Adjustable Rate Fund only) fees relating to a particular class will be
borne exclusively by that class. Similarly, the net asset value per share may
differ depending upon the class of shares purchased.
Certain aspects of the shares may be altered, after advance notice to
shareholders, if it is deemed necessary in order to satisfy certain tax
regulatory requirements.
When issued, each Fund's shares are fully paid and non-assessable by the
Trust. In the event of liquidation of a Fund, shareholders of that Fund are
entitled to share pro rata in the net assets of that Fund available for
distribution to such shareholders. All shares entitle their holders to one vote
per share, are freely transferable and have no preemptive, subscription or
conversion rights.
As of February 17, 1995, the following entities and persons
beneficially owned 5% or more of the outstanding shares of the following Funds:
Adjustable Rate Fund - First Security Bank of
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Idaho, FBO: Idaho Housing Agency, P. O. Box 30007, Salt Lake City, UT 84130
(5.34%); St. Treasurer/Nebr. Invest. Council, Attn: Gayle Ducker, Fundex
Corporation, Attn: Mitsuru Hashimoto, 1875 South Grant Street, Suite 740, San
Mateo, CA 94402-2670 (8.24%); Short-Term Fund - West Virginia University
Foundation, Attn: Marie Amoyt, 3168 Collins Ferry Road, P. O. Box 4533,
Morgantown, WV 26504-4533 (5.56%); Scott Accounts, P. O. Box 8048,
Charlottesville, VA 22906-8048 (7.16%); Central Carolina Bank & Trust Co., Attn:
Norwood Thomas, Jr., P. O. Box 931, Durham, NC 27702 (8.34%); City of Oakland,
Attn: Gary Breaux, 475 14th Street, 10th Fl., Oakland, CA 94612 (9.32%) and
Richfield Bank & Trust Co., Attn: Judith Ferguson, 6625 Lyndale Ave., South
Richfield, MN 55423 (11.30%); Short Duration Fund - G-K-G Inc., Attn: Bernard
Gassin, 166 Oak Knoll Terrace, Highland Park, IL 60035 (5.05); Westport Bank &
Trust, Attn: Arnold Levine, P. O. Box 5177, Westport, CT 06881 (6.09%); Donald
R. Grant, 85 Broad Street, New York, NY 10004(8.55%); and MGIC, Attn: James
McGinnis, P. O. Box 297, Milwaukee, WI 53201 (28.85%).
SHAREHOLDER AND TRUSTEE LIABILITY
Under Massachusetts law, there is a remote possibility that shareholders of
a business trust could, under certain circumstances, be held personally liable
as partners for the obligations of such trust. The Trust Agreement contains an
express disclaimer of shareholder liability for acts or obligations of the Trust
and requires that notice of such disclaimer be given in each agreement,
obligation or instrument entered into or executed by the Trust or the Trustees.
The Trust Agreement provides for indemnification out of Trust property of any
shareholder charged or held personally liable for obligations or liabilities of
the Trust solely by reason of being or having been a shareholder of the Trust
and not because of such shareholder'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 shareholder as
such for any obligation or liability of the Trust and satisfy any judgment
thereon. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the Trust itself
would be unable to meet its obligations.
Rule 18f-2 under the Act provides that any matter required to be submitted
by the provisions of the Act, applicable state law or otherwise to the holders
of the outstanding voting securities of an investment company (such as the
Trust) shall not be deemed to have been effectively acted upon unless approved
by the holders of a majority of the outstanding shares of each class or series
affected by such matter. Rule 18f-2 further provides that a class or series
shall be deemed to be affected by a matter unless the interests of each class or
series in the matter are substantially identical or the matter does not affect
any interest of such class or series. However, Rule 18f-2 exempts the selection
of independent public
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accountants, the approval of principal distribution contracts and the election
of Trustees from the separate voting requirements of Rule 18f-2.
NET ASSET VALUE
Under the Act, the Trustees of the Trust are responsible for determining in
good faith the fair value of securities of the Funds. In accordance with
procedures adopted by the Trustees of the Trust, the net asset value per share
of each class of each Fund is calculated by determining the value of the the net
assets attributable to each class of that Fund and dividing by the number of
outstanding shares of that class. All securities are valued as of the close of
regular trading on the New York Stock Exchange (normally 4:00 p.m. New York
time) on each Business Day (as defined in each Fund's prospectus).
Portfolio securities for which accurate market quotations are readily
available will be valued on the basis of quotations provided by dealers in such
securities or furnished by a pricing service. Portfolio securities for which
accurate market quotations are not readily available and other assets will be
valued at fair value using methods determined in good faith by the Adviser under
the supervision of the Trustees and may include yield equivalents or a pricing
matrix.
TAXATION
The following is a summary of the principal U.S. federal income, and
certain state and local, tax considerations regarding the purchase, ownership
and disposition of shares in the Funds. This summary does not address special
tax rules applicable to certain classes of investors, such as tax-exempt
entities, insurance companies and financial institutions. Each prospective
shareholder is urged to consult his own tax adviser with respect to the specific
federal, state, local and foreign tax consequences of investing in the Funds.
This summary is based on the laws in effect on the date of this Additional
Statement, which are subject to change.
GENERAL
-------
Each series of the Trust, including each Fund, is a separate taxable
entity. Each Fund has qualified and elected to be treated and intends to
continue to qualify for each taxable year as a regulated investment company
under Subchapter M of the Code.
Qualification as a regulated investment company under the Code requires,
among other things, that (a) a Fund derive at least 90% of its annual gross
income (including tax-exempt interest) from dividends, interest, payments with
respect to securities loans and
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gains from the sale or other disposition of stocks or securities, or foreign
currencies or other income (including but not limited to gains from options,
futures and forward contracts) derived with respect to its business of investing
in such stock, securities or currencies (the "90% gross income test"); (b) a
Fund derive less than 30% of its annual gross income from the sale or other
disposition of any of the following which was held for less than three months:
(i) stock or securities, (ii) options, futures or forward contracts (other than
options, futures or forward contracts on foreign currencies) and (iii) foreign
currencies and foreign currency options, futures and forward contracts that are
not directly related to the Fund's principal business of investing in stocks or
securities or options and futures with respect to such stocks or securities (the
"short-short test"); and (c) a Fund diversify its holdings so that, at the close
of each quarter of its taxable year, (i) at least 50% of the market value of its
total (gross) assets is comprised of cash, cash items, United States Government
securities, securities of other regulated investment companies and other
securities limited in respect of any one issuer to an amount not greater in
value than 5% of the value of the Fund's total assets and to not more than 10%
of the outstanding voting securities of such issuer, and (ii) not more than 25%
of the value of its total assets is invested in the securities of any one issuer
(other than United States Government securities and securities of other
regulated investment companies) or two or more issuers controlled by the Fund
and engaged in the same, similar or related trades or businesses. Gains from
the sale or other disposition of foreign currencies (or options, futures or
forward contracts on foreign currencies) that are not directly related to Core
Fund's principal business of investing in stock or securities or options and
futures with respect to stock or securities will be treated as gains from the
sale of investments held for less than three months under the short-short test
(even though characterized as ordinary income for some purposes) if such
currencies or instruments were held for less than three months. In addition,
future Treasury regulations could expect to provide that qualifying income under
the 90% gross income test will not include gains from foreign currency
transactions that are not directly related to Core Fund's principal business of
investing in stock or securities or options and futures with respect to stock or
securities. Using foreign currency positions or entering into foreign currency
options, futures and forward contracts for purposes other than hedging currency
risk with respect to securities in Core Fund's portfolio or anticipated to be
acquired may not qualify as "directly related" under these tests.
As a regulated investment company, a Fund will not be subject to U.S.
federal income tax on the portion of its income and capital gains that it
distributes to its shareholders in any taxable year for which it distributes, in
compliance with the Code's timing requirements, at least 90% of its "investment
company taxable income" (which includes dividends, taxable interest, taxable
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original issue discount income, market discount income, income from securities
lending, net short-term capital gain in excess of net long-term capital loss,
and any other taxable income other than "net capital gain" as defined below and
is reduced by deductible expenses) and at least 90% of the excess of its gross
tax-exempt interest income over certain disallowed deductions ("net tax-exempt
interest"). A Fund may retain for investment its "net capital gain" (which
consists of the excess of its net long-term capital gain over its net short-term
capital loss). However, if a Fund retains any investment company taxable income
or net capital gain, it will be subject to tax at regular corporate rates on the
amount retained. If a Fund retains any net capital gain, the Fund may designate
the retained amount as undistributed net capital gain in a notice to its
shareholders who, if subject to U.S. federal income tax on long-term capital
gains, (i) will be required to include in income for federal income tax
purposes, as long-term capital gain, their shares of such undistributed amount,
and (ii) will be entitled to credit their proportionate shares of the tax paid
by the Fund against their U.S. federal income tax liabilities, if any, and to
claim refunds to the extent the credit exceeds such liabilities. For U.S.
federal income tax purposes, the tax basis of shares owned by a shareholder of
the Fund will be increased by an amount equal under current law to 65% of the
amount of undistributed net capital gain included in the shareholder's gross
income. Each Fund intends to distribute at least annually to its shareholders
all or substantially all of its investment company taxable income (if any), net
capital gain and any net tax-exempt interest. If for any taxable year a Fund
does not qualify as a regulated investment company, it will be taxed on all of
its investment company taxable income and net capital gain at corporate rates,
its net tax-exempt interest may be subject to the alternative minimum tax, and
its distributions to shareholders will be taxable as ordinary dividends to the
extent of its current and accumulated earnings and profits.
For federal income tax purposes, each Fund is permitted to carry forward a
net capital loss in any year to offset its own net capital gains, if any, during
the eight years following the year of the loss. At October 31, 1994, the
Adjustable Rate Fund had approximately $9,950,000 of capital loss carryforwards,
which expires as follows: $2,220,000 in 2000 and $7,730,000 in 2001. At
October 31, 1994, the Core Fund had approximately $458,000 of capital loss
carryforwards, which expires in 2002. At October 31, 1994, the Short-Term Fund
and Short Duration Fund had no captial loss carryforwards.
In order to avoid a 4% federal excise tax, each Fund must distribute or be
deemed to have distributed by December 31 of each calendar year at least 98% of
its taxable ordinary income for such year, at least 98% of the excess of its
realized capital gains over its realized capital losses (generally computed on
the basis of the one-year period ending on October 31 of such year) and 100% of
any
B-78
<PAGE>
taxable ordinary income and the excess of realized capital gains over realized
capital losses for the prior year that was not distributed during such year and
on which the Fund did not pay federal income tax. The Funds anticipate that
they will generally make timely distributions of income and capital gains in
compliance with these requirements so that they will generally not be required
to pay the excise tax.
For federal income tax purposes, dividends declared by a Fund in October,
November or December as of a record date in such a month which are actually paid
in January of the following year will be treated as if they were paid by the
Fund and received by shareholders on December 31 of the year declared.
Short Duration Fund may purchase Municipal Securities together with the
right to resell the securities to the seller at an agreed upon price or yield
within a specified period prior to the maturity date of the securities. Such a
right to resell is commonly known as a "put" and is also referred to as a
"standby commitment." Short Duration Fund may pay for a standby commitment
either separately, in cash, or in the form of a higher price for the securities
which are acquired subject to the standby commitment, thus increasing the cost
of securities and reducing the yield otherwise available. Additionally, the
Short Duration Fund may purchase beneficial interests in Municipal Securities
held by trusts, custodial arrangements or partnerships and/or combined with
third-party puts and other types of features such as interest rate swaps; those
investments may require the Fund to pay "tender fees" or other fees for the
various features provided.
The Internal Revenue Service (the "Service") has issued a regulated ruling
to the effect that, under specified circumstances, a registered investment
company will be the owner of tax-exempt municipal obligations acquired subject
to a put option. The Service has also issued private letter rulings to certain
taxpayers (which do not serve as precedent for other taxpayers) to the effect
that tax-exempt interest received by a regulated investment company with respect
to such obligations will be tax-exempt in the hands of the company and may be
distributed to its shareholders as exempt-interest dividends. The Service has
subsequently announced that it will not ordinarily issue advance rulings letters
as to the identity of the true owner of property in cases involving the sale of
securities or participation interests therein if the purchaser has the right to
cause the security, or the participation of interest therein, to be purchased by
either the seller or a third party. Short Duration Fund intends to take the
position that it is the owner of any municipal obligations acquired subject to a
standby commitment or other third party put and that tax-exempt interest earned
with respect to such municipal obligations will be tax-exempt in its hands.
There is no assurance that the Service will agree with such position in any
particular case. Additionally, the federal income tax treatment of certain
other
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<PAGE>
aspects of these investments, including the treatment of tender fees paid by the
Short Duration Fund, in relation to various regulated investment company tax
provisions is unclear. However, the Adviser intends to manage the Short
Duration Fund's portfolio in a manner designed to minimize any adverse impact
from the tax rules applicable to these investments.
Gains and losses on the sale, lapse, or other termination of options and
futures contracts, options thereon and certain forward contracts (except certain
foreign currency options, forward contracts and futures contracts) will
generally be treated as capital gain and losses. Certain of the futures
contracts, forward contracts and options held by a Fund will be required to be
"marked-to-market" for federal income tax purposes, that is, treated as having
been sold at their fair market value on the last day of the Fund's taxable year.
Any gain or loss recognized on actual or deemed sales of these futures contracts
or options will (except for certain foreign currency options, forward contracts,
and futures contracts) be treated as 60% long-term capital gain or loss and 40%
short-term capital gain or loss. As a result of certain hedging transactions
entered into by a Fund, the Fund may be required to defer the recognition of
losses on futures contracts and options or underlying securities foreign
currencies to the extent of any unrecognized gains or related positions held by
the Fund and the characterization of gains or losses as long-term or short-term
may be changed. The short-short test described above may limit each Fund's
ability to use options, futures and forward transactions as well as its ability
to engage in short sales. The tax provisions described above applicable to
options, futures and forward contracts may affect the amount, timing and
character of a Fund's distributions to shareholders. Certain tax elections may
be available to the Funds to mitigate some of the unfavorable consequences
described in this paragraph.
Section 988 of the Code contains special tax rules applicable to certain
foreign currency transactions that may affect the amount, timing and character
of income, gain or loss recognized by Core Fund. Under these rules, foreign
exchange gain or loss realized by Core Fund with respect to foreign currencies
and certain futures and options thereon, foreign currency-denominated debt
instruments, foreign currency forward contracts, and foreign currency-
denominated payables and receivables will generally be treated as ordinary
income or loss, although in some cases elections may be available that would
alter this treatment. If a net foreign exchange loss treated as ordinary loss
under Section 988 of the Code were to exceed Core Fund's investment company
taxable income (computed without regard to such loss) for a taxable year, the
resulting loss would not be deductible by Core Fund or its shareholders in
future years. Net loss, if any, from certain foreign currency transactions or
instruments could exceed net investment income otherwise calculated for
accounting purposes with the result being either no dividends being paid or a
portion
B-80
<PAGE>
of Core Fund's dividends being treated as a return of capital for tax purposes,
nontaxable to the extent of a shareholder's tax basis in his shares and, once
such basis is exhausted, generally giving rise to capital gains.
Core Fund may be subject to foreign taxes on its income (possibly
including, in some cases, capital gains) from foreign securities. Tax
conventions between certain countries and the U.S. may reduce or eliminate such
taxes. Because more than 50% of Core Fund's total assets at the close of any
taxable year will generally not consist of stock or securities of foreign
corporations, Core Fund will generally not qualify to file an election with the
Internal Revenue Service pursuant to which shareholders of Core Fund would be
required to (i) include in ordinary gross income (in addition to taxable
dividends actually received) their pro rata shares of foreign income taxes paid
by Core Fund even though not actually received, and (ii) treat such respective
pro rata portions as foreign income taxes paid by them. Core Fund will, however,
be entitled to deduct such taxes in computing its investment company taxable
income.
If Core Fund acquires stock in certain non-U.S. corporations that receive
at least 75% of their annual gross income from passive sources (such as
interest, dividends, rents, royalties or capital gain) or hold at least 50% of
their assets in investments producing such passive income ("passive foreign
investment companies") Core Fund could be subject to federal income tax and
additional interest charges on "excess distributions" received from such
companies or gain from the sale of such stock in such companies, even if all
income or gain actually received by Core Fund is timely distributed to its
shareholders. Core Fund would not be able to pass through to its shareholders
any credit or deduction for such a tax. Certain elections may, if available,
ameliorate these adverse tax consequences, but any such election would require
Core Fund to recognize taxable income or gain without the concurrent receipt of
cash. Core Fund may limit and/or manage its holdings in passive foreign
investment companies to minimize its tax liability or maximize its return from
these investments.
A Fund's investment in zero coupon securities, deferred interest securities
or other securities bearing original issue discount or, if a Fund elects to
include market discount in income currently, market discount, as well as any
"mark-to-market" gain from options and futures contracts, as described below
will generally cause it to realize income or gain prior to the receipt of cash
payments with respect to these securities or contracts. In order to distribute
this income or gain, maintain its qualification as a regulated investment
company and avoid federal income or excise taxes, a Fund may be required to
liquidate portfolio securities that it might otherwise have continued to hold.
The federal income tax rules applicable to mortgage dollar
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<PAGE>
rolls and interest rate and currency swaps, floors, caps and collars are unclear
in certain respects, and a Fund may also be required to account for these
instruments under tax rules in a manner that, under certain circumstances, may
limit its transactions in these instruments.
TAXABLE U.S. SHAREHOLDERS -- DISTRIBUTIONS
SHORT DURATION FUND. Short Duration Fund expects to qualify to pay
"exempt-interest dividends," as defined in the Code. To qualify to pay exempt-
interest dividends, Short Duration Fund must, at the close of each quarter of
its taxable year, have at least 50% of the value of its total assets invested in
tax-exempt Municipal Securities. In purchasing Municipal Securities, Short
Duration Fund intends to rely on opinions of nationally recognized bond counsel
for each issue as to the excludability of interest on such obligations from
gross income for federal income tax purposes. Short Duration Fund will not
undertake independent investigations concerning the tax-exempt status of such
obligations, nor does it guarantee or represent that bond counsels' opinions are
correct. Bond counsels' opinions will generally be based in part upon covenants
by the issuers and related parties regarding continuing compliance with federal
tax requirements. Tax laws enacted during the last decade not only had the
effect of limiting the purposes for which tax-exempt bonds could be issued and
reducing the supply of such bonds, but also increased the number and complexity
of requirements that must be satisfied on a continuing basis in order for bonds
to be and remain tax-exempt. If the issuer of a bond or a user of a bond-
financed facility fails to comply with such requirements at any time, interest
on the bond could become taxable, retroactive to the date the obligation was
issued. In that event, a portion of the Short Duration Fund's distributions
attributable to interest the Short Duration Fund received on such bond for the
current year and for prior years could be characterized or recharacterized as
taxable income. The availability of tax-exempt obligations and the value of
Short Duration Fund's portfolio may be affected by restrictive federal income
tax legislation enacted in recent years or by similar, future legislation. If
Short Duration Fund satisfies the applicable requirements, dividends paid by the
Fund which are attributable to tax exempt interest on Municipal Securities and
designated by Short Duration Fund as exempt-interest dividends in a written
notice mailed to its shareholders within sixty days after the close of its
taxable year may be treated by shareholders for all purposes as items of
interest excludable from their gross income under Section 103(a) of the Code.
Exempt-interest dividends Short Duration Fund receives from other regulated
investment companies, including exempt-interest dividends on auction rate
preferred securities of such companies held by Short Duration Fund, are treated
as interest on Municipal Securities and may be distributed by Short Duration
Fund as exempt-interest dividends. The recipient of tax-exempt income is
required to report such
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income on his federal income tax return. However, a shareholder is advised to
consult his tax adviser with respect to whether exempt-interest dividends retain
the exclusion under Section 103(a) if such shareholder would be treated as a
"substantial user" under Section 147(a)(1) with respect to some or all of the
tax-exempt obligations held by Short Duration Fund. The Code provides that
interest on indebtedness incurred or continued to purchase or carry shares of
Short Duration Fund is not deductible to the extent attributable to exempt-
interest dividends.
Although all or a substantial portion of the dividends paid by Short
Duration Fund may be excluded by shareholders of Short Duration Fund from their
gross income for federal income tax purposes, Short Duration Fund may purchase
specified private activity bonds, the interest from which may be a preference
item for purposes of the federal alternative minimum tax (both individual and
corporate). All exempt-interest dividends from Short Duration Fund, whether or
not attributable to private activity bond interest, may increase the "adjusted
current earnings" preference item for purposes of the corporate alternative
minimum tax, to the extent not already included in alternative minimum taxable
income as income attributable to private activity bonds, and will be taken into
account in determining the extent to which a shareholder's Social Security or
certain railroad retirement benefits are taxable.
ALL FUNDS. Distributions of investment company taxable income, as defined
above, are taxable to shareholders who are subject to tax as ordinary income
whether paid in cash or reinvested in additional shares. Taxable distributions
include distributions from any Fund, including Short Duration Fund, that are
attributable to (i) taxable income, including but not limited to dividends,
taxable bond interest, recognized market discount income, original issue
discount income accrued with respect to taxable bonds, income from repurchase
agreements, income from securities lending, income from dollar rolls, income
from interest rate or currency swaps, caps, floors and collars, and a portion of
the discount from certain stripped tax-exempt obligations or their investments
(including from the disposition of rights to when-issued securities prior to
issuance) or from options, futures or certain forward contracts. Any portion of
such taxable distributions that is attributable to a Fund's net capital gain, as
defined above, may be designated by the Fund as a "capital gain dividend,"
taxable to shareholders as long-term capital gain whether received in cash or
additional shares and regardless of the length of time their shares of a Fund
have been held.
It is expected that distributions made by the Funds will ordinarily not
qualify for the dividends-received deduction for corporations because qualifying
distributions may be made only from a Fund's dividend income that it receives
from stock in U.S. domestic corporations. The Funds do not intend to purchase
stock
B-83
<PAGE>
of domestic corporations other than limited investments in investment companies,
distributions from which may in rare cases qualify as dividends for this
purpose. The dividends-received deduction, if available, is reduced to the
extent the shares with respect to which the dividends are received are treated
as debt-financed under the federal income tax law and is eliminated if the
shares are deemed to have been held for less than a minimum period, generally 46
days. Receipt of certain distributions qualifying for the deduction may result
in reduction of the tax basis of the corporate shareholder's shares and may give
rise to or increase its liability for federal corporate alternative minimum tax.
Distributions in excess of a Fund's current and accumulated earnings and
profits, as computed for federal income tax purposes, will first reduce a
shareholder's basis in his shares and, after the shareholder's basis is reduced
to zero, will generally constitute capital gains to a shareholder who holds his
shares as capital assets. Amounts that are not allowable as a deduction in
computing taxable income, including expenses associated with earning tax-exempt
interest income, do not reduce current earnings and profits for these purposes.
Consequently, the portion, if any, of Short Duration Fund's distributions from
gross tax-exempt interest income that exceeds its net tax-exempt interest would
be taxable as ordinary income to the extent of such disallowed deductions even
though such excess portion may represent an economic return of capital.
Shareholders receiving a distribution in the form of newly issued shares
will be treated for U.S. federal income tax purposes as receiving a distribution
in an amount equal to the amount of cash that they would have received had they
elected to receive cash and will have a cost basis in the shares received equal
to such amount.
TAXABLE U.S. SHAREHOLDERS -- SALE OF SHARES
When a shareholder's shares are sold, redeemed or otherwise disposed of,
the shareholder will generally recognize gain or loss equal to the difference
between the shareholder's adjusted tax basis in the shares and the cash, or fair
market value of any property, received. Assuming the shareholder holds the
shares as a capital asset at the time of such sale or other disposition, such
gain or loss should be capital in character, and long-term if the shareholder
has a tax holding period for the shares of more than one year, otherwise short-
term. All or a portion of a sales charge paid in purchasing Class A shares of
Adjustable Rate Fund cannot be taken into account for purposes of determining
gain or loss on the redemption or exchange of such shares within 90 days after
their purchase to the extent shares of that Fund or another fund are
subsequently acquired without payment of a sales charge pursuant to the
reinvestment or exchange privilege. Any disregarded portion of such charge will
result in an increase in the shareholder's tax
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<PAGE>
basis in the shares subsequently acquired. If a shareholder received a capital
gain dividend with respect to shares and such shares have a tax holding period
of six months or less at the time of the sale or redemption, then any loss the
shareholder realizes on the sale or redemption will be treated as a long-term
capital loss to the extent of such capital gain dividend. Also, any losses
realized by shareholders who dispose of shares of Short Duration Fund with a tax
holding period of six months or less are disallowed to the extent of any exempt-
interest dividends received with respect to such shares. Additionally, any loss
realized on a sale or redemption of shares of a Fund may be disallowed under
"wash sale" rules to the extent the shares disposed of are replaced within a
period of 61 days beginning 30 days before and ending 30 days after the shares
are disposed of, such as pursuant to a dividend reinvestment in shares of the
Fund. If disallowed, the loss will be reflected in an adjustment to the basis
of the shares acquired.
After the close of each calendar year, Short Duration Fund will inform
shareholders of the federal income tax status of its dividends and distributions
for such year, including the portion of such dividends that qualifies as tax-
exempt and the portion, if any, that should be treated as a tax preference item
for purposes of the federal alternative minimum tax. Shareholders who have not
held shares of Short Duration Fund for its full taxable year may have designated
as tax-exempt or as a tax preference item a percentage of distributions which
is not equal to the actual amount of tax-exempt income or tax preference item
income earned by Short Duration Fund during the period of their investment in
Short Duration Fund.
All distributions whether received in shares or in cash, as well as
redemptions and exchanges, must be reported by each shareholder who is required
to file a U.S. Federal income tax return.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions, and certain prohibited transactions is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their tax
advisers for more information.
BACKUP WITHHOLDING
Each Fund will be required to report to the Service all taxable
distributions, as well as gross proceeds from the redemption or exchange of Fund
shares, except in the case of certain exempt recipients, i.e., corporations and
certain other investors distributions to which are exempt from the information
reporting provisions of the Code. Under the backup withholding provisions of
Code Section 3406 and applicable Treasury
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<PAGE>
regulations, all such reportable distributions and proceeds may be subject to
backup withholding of federal income tax at the rate of 31% in the case of non-
exempt shareholders who fail to furnish the Funds with their correct taxpayer
identification number and with certain required certifications or if the
Internal Revenue Service or a broker notifies the Funds that the number
furnished by the shareholder is incorrect or that the shareholder is subject to
backup withholding as a result of failure to report interest or dividend income.
However, any taxable distributions from Short Duration Fund will not be subject
to backup withholding if such Fund reasonably estimates that at least 95% of its
distributions will be exempt-interest dividends. A Fund may refuse to accept an
application that does not contain any required taxpayer identification number or
certification that the number provided is correct. If the backup withholding
provisions are applicable, any such distributions and proceeds, whether taken in
cash or reinvested in shares, will be reduced by the amounts required to be
withheld. Any amounts withheld may be credited against a shareholder's U.S.
federal income tax liability. Investors should consult their tax advisers about
the applicability of the backup withholding provisions.
NON-U.S. SHAREHOLDERS
The foregoing discussion relates solely to U.S. federal income tax law as
it applies to "U.S. persons" (i.e., U.S. citizens and residents and U.S.
domestic corporations, partnerships, trusts and estates) subject to tax under
such law. Dividends of investment company taxable income distributed by a Fund
to a shareholder who is not a U.S. person will be subject to U.S. withholding
tax at the rate of 30% (or a lower rate provided by an applicable tax treaty)
unless the dividends are effectively connected with a U.S. trade or business of
the shareholder, in which case the dividends will be subject to tax on a net
income basis at the graduated rates applicable to U.S. individuals or domestic
corporations. Distributions of net capital gain, including amounts retained by a
Fund which are designated as undistributed capital gains, to a shareholder who
is not a U.S. person will not be subject to U.S. income or withholding tax
unless the distributions are effectively connected with the shareholder's trade
or business in the United States or, in the case of a shareholder who is a
nonresident alien individual, the shareholder is present in the United States
for 183 days or more during the taxable year and certain other conditions are
met.
Any gain realized by a shareholder who is not a U.S. person upon a sale or
redemption of shares of a Fund will not be subject to U.S. federal income or
withholding tax unless the gain is effectively connected with the shareholder's
trade or business in the United States, or in the case of a shareholder who is a
nonresident alien individual, the shareholder is present in the United States
for 183 days or more during the taxable year and
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certain other conditions are met.
Non-U.S. persons who fail to furnish a Fund with an IRS Form W-8 or
acceptable substitute may be subject to backup withholding at the rate of 31% on
capital gain dividends and the proceeds of redemptions and exchanges. Each
shareholder who is not a U.S. person should consult his or her tax adviser
regarding the U.S. and non-U.S. tax consequences of ownership of shares of and
receipt of distributions from a Fund.
STATE AND LOCAL TAXES
A Fund may be subject to state or local taxes in certain jurisdictions in
which the Fund may be deemed to be doing business. In addition, in those states
or localities which have income tax laws, the treatment of a Fund and its
shareholders under such laws may differ from their treatment under federal
income tax laws, and investment in a Fund may have tax consequences for
shareholders different from those of a direct investment in such Fund's
portfolio securities. Shareholders should consult their own tax advisers
concerning these matters.
PERFORMANCE INFORMATION
Each Fund may from time to time quote or otherwise use yield and total
return information in advertisements, shareholder reports or sales literature.
Thirty-day yield and average annual total return values are computed pursuant to
formulas specified by the SEC. Each Fund may also from time to time quote
distribution rates in reports to shareholders and in sales literature.
Thirty-day yield is derived by dividing net investment income per share
earned during the period by the maximum public offering price (i.e., net asset
value) per share on the last day of such period. Yield is then annualized by
assuming that yield is realized each month for twelve months and is reinvested
every six months. Net investment income per share is equal to the dividends and
interest earned during the period, reduced by accrued expenses for the period.
The calculation of net investment income for these purposes may differ from the
net investment income determined for accounting purposes.
Tax equivalent yield represents the yield an investor would have to earn to
equal, after taxes, Short Duration Fund's tax-free yield. Tax equivalent yield
is calculated by dividing Short Duration Fund's tax-exempt yield by one minus a
stated federal and/or state tax rate.
Distribution rate for a specified period is calculated by annualizing
distributions of net investment income for such period and dividing this amount
by the net asset value per share on the
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last day of the period.
Average annual total return for a specified period is derived by
calculating the actual dollar amount of the investment return on a $1,000
investment made at the maximum public offering price (i.e., net asset value) at
the beginning of the period, and then calculating the annual compounded rate of
return which would produce that amount, assuming a redemption at the end of the
period. This calculation assumes a complete redemption of the investment. It
also assumes that all dividends and distributions are reinvested at net asset
value on the reinvestment dates during the period.
Year-by-year total return and cumulative total return for a specified
period are each derived by calculating the percentage rate required to make a
$1,000 investment (made at the net asset value per share with all distributions
reinvested) at the beginning of such period equal to the actual total value of
such investment at the end of such period.
The following table presents thirty-day yield, tax equivalent yield (Short
Duration Fund only), distribution rate and average annual total return (capital
plus reinvestment of all distributions) for the periods indicated.
Thirty-day yield, tax equivalent yield (Short Duration Fund only),
distribution rate and average annual total return are calculated separately for
each class of shares in existence of each Fund. Each class of shares of each
Fund is subject to different fees and expenses and may have different returns
for the same period. There were no Service Shares of the Adjustable Rate Fund,
Short-Term Fund and Core Fund, no Class A Shares of Adjustable Rate Fund and no
Administration Shares of Core Fund outstanding during the periods presented
below. Accordingly, the following charts represent historical performance data
for the Institutional and Administration Shares of each Fund and for the Service
Shares of Short Duration Fund only.
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<PAGE>
YIELD
<TABLE>
<CAPTION>
Investment Pro-Forma
Fund Period Yield Yield/1/
---- ---------- ----- -----
<S> <C> <C> <C>
30-Days
ended
10/31/94
Adjustable Rate Fund
Institutional Shares 5.14% 5.08%
Administration Shares 4.89% 4.83%
Service Shares/2/ N/A N/A
Class A Shares/2/ N/A N/A
Short-Term Fund
Institutional Shares 5.76% 5.68%
Administration Shares 5.51% 5.43%
Service Shares/3/ N/A N/A
Short Duration Fund
Institutional Shares 5.03% 4.81%
Administration Shares 4.78% 4.56%
Service Shares/4/ 4.53% 4.31%
Core Fund
Institutional Shares 6.96% 6.24%
Administration Shares/5/ N/A N/A
Service Shares/5/ N/A N/A
</TABLE>
DISTRIBUTION RATE
<TABLE>
<CAPTION>
Pro-Forma
Investment Distribution Distribution
Fund Period Rate Rate/1/
---- ---------- ------------ ----
<S> <C> <C> <C>
30-Days
ended
10/31/94
Adjustable Rate Fund
Institutional Shares 5.51% 5.46%
Administration Shares 5.26% 5.21%
Service Shares/2/ N/A N/A
Class A Shares/2/ N/A N/A
Short-Term Fund
Institutional Shares 5.98% 5.90%
Administration Shares 5.73% 5.65%
Service Shares/3/ N/A N/A
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Pro-Forma
Investment Distribution Distribution
Fund Period Rate Rate/1/
---- ---------- ------------ ----
<S> <C> <C> <C>
30-Days
ended
10/31/94
Short Duration Fund
Institutional Shares 4.65% 4.43%
Administration Shares 4.40% 4.18%
Service Shares/4/ 4.15% 3.93%
Core Fund
Institutional Shares 7.01% 6.30%
Administration Shares/5/ N/A N/A
Service Shares/5/ N/A N/A
</TABLE>
TAX-EQUIVALENT YIELD/6/
<TABLE>
<CAPTION>
Pro-Forma
Investment Tax-Equivalent Tax-Equivalent
Fund Period Rate Yield
---- ---------- ------------ ------------
<S> <C> <C> <C>
30-Days
ended
10/31/94
Short Duration
Institutional Shares 8.32% 7.96%
Administration Shares 7.91% 7.55%
Service Shares/4/ 7.50% 7.13%
</TABLE>
______________________________
1 Yield, tax equivalent yield and distribution rate if the applicable Adviser
had not voluntarily agreed to maintain expenses at a specified level.
2 There were no Service Shares or Class A Shares of Adjustable Rate Fund
outstanding during the periods indicated.
3 There were no Service Shares of Short-Term Fund outstanding during the
periods indicated.
4 Service Share activity of Short Duration Fund commenced on September 20,
1994.
5 There were no Administration Shares or Service Shares of Core Fund
outstanding during the periods indicated.
6 The tax-equivalent rate of Short Duration Fund is computed based on the
39.6% federal income tax rate.
The above tables should not be considered a representation of future
performance.
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<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Ending Redeemable
Value of
Investment Investment Amount Investment at
Fund Date Period Invested Period End
---- ---------- ---------- -------- -----------------------
<S> <C> <C> <C> <C> <C>
With Fee Without Fee
Reductions Reductions
and/or and/or
Expense Expense
Limitations Limitations
----------- -----------
Adjustable Rate Fund
Institutional Shares 7/17/91/1a/ ended 10/31/94 $1,000 $1153.41 $1145.71
11/1/93 one year ended
10/31/94 $1,000 $1018.84 $1018.52
Administration Shares 4/15/93/1b/ ended 10/31/94 $1,000 $1036.69 $1036.10
11/1/93 one year ended
10/31/94 $1,000 $1016.30 $1016.01
Service Shares/1c/ N/A N/A
Class A Shares/1c/ N/A N/A
Short-Term Fund
Institutional Shares 8/15/88/2a/ ended 10/31/94 $1,000 $1527.02 $1496.73
11/1/93 one year ended
10/31/94 $1,000 $1009.94 $1008.43
11/1/89 five years
ended 10/31/94 $1,000 $1359.93 $1345.51
Administration Shares 4/15/93/2b/ ended 10/31/94 $1,000 $1024.91 $1020.31
11/1/93 one year ended
10/31/94 $1,000 $1007.32 $1004.08
Service Shares/2a/ N/A N/A
Cumulative Average Annual
---------- --------------
With Fee Without Fee With Fee Without Fee
Reductions Reduction Reductions Reduction
and/or and/or and/or and/or
Expense Expense Expense Expense
Limitations Limitations Limitations Limitations
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Adjustable Rate Fund
Institutional Shares 15.34% 14.57% 4.43% 4.21%
Administration Shares 1.88% 1.85% 1.88% 1.85%
3.67% 3.61% 2.36% 2.32%
Service Shares/1c/
Class A Shares/1c/ 1.63% 1.60% 1.63% 1.60%
N/A N/A N/A N/A
N/A N/A N/A N/A
Short-Term Fund
Institutional Shares 52.70% 49.67% 7.05% 6.70%
.99% .84% .99% .84%
Administration Shares 35.99% 34.55% 6.34% 6.09%
2.49% 2.03% 1.60% .65%
Service Shares/2a/ .73% .41% .73% .41%
N/A N/A N/A N/A
</TABLE>
B-91
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Ending Redeemable
Value of
Investment Investment Amount Investment at
Fund Date Period Invested Period End Cumulative Average Annual
---- ------------- ------------ -------- ------------ ------------ --------------
With Fee Without Fee With Fee Without Fee With Fee Without Fee
Reductions Reductions Reductions Reductions Reductions Reductions
and/or and/or and/or and/or and/or and/or
Expense Expense Expense Expense Expense Expense
Limitations Limitations Limitations Limitations Limitations Limitations
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Short Duration Fund
Institutional Shares 10/31/92/3a/ ended 10/31/94 $1,000 $1068.55 $1053.98 6.85% 5.40% 3.23% 2.55%
11/1/93 one year ended
10/31/94 $1,000 $1001.72 $1000.03 .17% 0% .17% 0%
Administration Shares 5/20/93/3b/ ended 10/31/94 $1,000 $1021.74 $1016.80 2.17% 1.68% 1.49% 1.15%
11/1/93 one year ended
10/31/94 $1,000 $ 998.93 $ 994.63 -.11% -.54% -.11% -.54%
Service Shares 9/20/94/3c/ ended 10/31/94 $1,000 $ 996.80 $ 996.61 -.32% -.34% -2.74% -2.91%
Core Fund
Institutional Shares 1/15/94/4a/ 10/31/94 $1,000 $ 969.96 $ 954.99 -3.00% -4.50% -3.64% -5.45%
Administration Shares/4b/ N/A N/A N/A N/A N/A N/A
Service Shares/4b/ N/A N/A N/A N/A N/A N/A
</TABLE>
_________________________
1a Institutional Shares of Adjustable Rate Fund commenced operations on July
17, 1991.
1b Administration Shares of Adjustable Rate Fund commenced operations on April
15, 1993.
1c No Service Shares or Class A Shares of Adjustable Rate Fund were
outstanding during the periods indicated.
2a Institutional Shares of Short-Term Fund commenced operations on August 15,
1988.
2b Administration Shares of Short-Term Fund commenced operations on April 15,
1993.
2c No Service Shares of Short-Term Fund were outstanding during the periods
indicated.
3a Institutional Shares of Short Duration commenced operations on October 1,
1992.
3b Administration Shares of Short Duration commenced operations on May 20,
1993.
3c Service Shares of Short Duration commenced operations on September 20,
1994.
4a Institutional Shares of Core Fund commenced operations on January 5, 1994.
4b No Administration Shares or Service Shares of Core Fund were outstanding
during periods indicated.
The above table should not be considered a representation of future
performance.
B-92
<PAGE>
Occasionally statistics may be used to specify a Fund's volatility or risk.
Measures of volatility or risk are generally used to compare a Fund's net asset
value or performance relative to a market index. One measure of volatility is
beta. Beta is the volatility of a fund relative to the total market. A beta of
more than 1.00 indicates volatility greater than the market, and a beta of less
than 1.00 indicates volatility less than the market. Another measure of
volatility or risk is standard deviation. Standard deviation is used to measure
variability of net asset value or total return around an average, over a
specified period of time. The premise is that greater volatility connotes
greater risk undertaken in achieving performance.
Each Fund may from time to time advertise comparative performance as
measured by various independent sources, including, but not limited to, Lipper
------
Analytical Services, Inc., Barron's, The Wall Street Journal, Weisenberger
------------------------- -------- ----------------------- ------------
Investment Companies Service, Business Week, Changing Times, Financial World,
---------------------------- ------------- -------------- ---------------
Forbes, Fortune, Morningstar Mutual Funds and Money.
------ ------- ------------------------ -----
In addition, Adjustable Rate Fund and Short-Term Fund may from time to time
advertise their performance relative to certain indices and benchmark
investments, including: (a) the Shearson Lehman Government/Corporate (Total)
Index, (b) Shearson Lehman Government Index, (c) Merrill Lynch 1-3 Year Treasury
Index, (d) Merrill Lynch 2-Year Treasury Curve Index, (e) the Salomon Brothers
Treasury Yield Curve Rate of Return Index, (f) the Payden & Rygel 2 Year
Treasury Note Index, (g) 1 through 3 year U.S. Treasury Notes, (h) constant
maturity U.S. Treasury yield indices, (i) the Consumer Price Index, (j) the
London Interbank Offered Rate, (k) other taxable investments such as
certificates of deposit, money market deposit accounts, checking accounts,
savings accounts, money market mutual funds, repurchase agreements, commercial
paper and (l) historical data concerning the performance of adjustable and
fixed-rate mortgage loans.
Short Duration Fund may from time to time advertise its performance
relative to certain indices, any components of such indices and benchmark
investments, including but not limited to: (a) the Lipper Analytical Services,
Inc. Mutual Fund Performance Analysis, Fixed Income Analysis and Mutual Fund
Indices (which measure total return and average current yield for the mutual
fund industry and rank mutual fund performance); (b) the Lehman Brothers
Municipal Bond Indices; (c) the Merrill Lynch Municipal Bond Institutional Total
Rate of Return Indices; (d) Bond Buyer Indices; (e) IBC/Donoghue's Money Fund
Averages_/Institutional Only Tax Free; and constant maturity U.S. Treasury yield
indices.
Core Fund may from time to time advertise its performance relative to
certain indices and benchmark investments, including: (a) the Lipper Analytical
Services, Inc. Mutual Fund Performance Analysis, Fixed Income Analysis and
Mutual Fund Indices (which
B-93
<PAGE>
measure total return and average current yield for the mutual fund industry and
rank mutual fund performance); (b) the CDA Mutual Fund Report published by CDA
Investment Technologies, Inc. (which analyzes price, risk and various measures
of return for the mutual fund industry); (c) the Consumer Price Index published
by the U.S. Bureau of Labor Statistics (which measures changes in the price of
goods and services); (d) Stocks, Bonds, Bills and Inflation published by
Ibbotson Associates (which provides historical performance figures for stocks,
government securities and inflation); (e) the Salomon Brothers' World Bond Index
(which measures the total return in U.S. dollar terms of government bonds,
Eurobonds and foreign bonds of ten countries, with all such bonds having a
minimum maturity of five years); (f) the Lehman Brothers Aggregate Bond Index
or its component indices; (g) the Standard & Poor's Bond Indices (which measure
yield and price of corporate, municipal and U.S. Government bonds); (h) the J.P.
Morgan Global Government Bond Index; (i) other taxable investments including
certificates of deposit (CDs), money market deposit accounts (MMDAs), checking
accounts, savings accounts, money market mutual funds and repurchase agreements;
(j) historical investment data supplied by the research departments of Goldman
Sachs, Lehman Brothers Inc., First Boston Corporation, Morgan Stanley & Co.
Incorporated, Salomon Brothers, Inc., Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Donaldson Lufkin and Jenrette Securities Corporation; and (k)
Donoghue's Money Fund Report (which provides industry averages for 7-day
annualized and compounded yields of taxable, tax-free and U.S. Government money
funds).
The composition of the investments in such indices and the characteristics
of such benchmark investments are not identical to, and in some cases are very
different from, those of each Fund's portfolio. These indices and averages are
generally unmanaged and the items included in the calculations of such indices
and averages may not be identical to the formulas used by a Fund to calculate
its performance figures.
From time to time advertisements or communications to shareholders may
summarize the substance of information contained in shareholder reports
(including the investment composition of a Fund), as well as the views of
Goldman Sachs as to current market, economic, trade and interest rate trends,
legislative, regulatory and monetary developments, investment strategies and
regulated matters believed to be of relevance to a Fund.
The Trust may from time to time summarize the substance of discussions
contained in shareholder reports in advertisements and publish the Advisers'
views as to markets, the rationale for each applicable Fund's investments and
discussions of each applicable Fund's current asset allocation.
In addition, advertisements or shareholder communications may include a
discussion of certain attributes or benefits to be
B-94
<PAGE>
derived by an investment in a Fund. Such advertisements or information may
include symbols, headlines or other material which highlight or summarize the
information discussed in more detail therein.
Performance data is based on historical results and is not intended to
indicate future performance. Total return, thirty-day yield, tax equivalent
yield and distribution rate will vary based on changes in market conditions,
portfolio expenses, portfolio investments and other factors. The value of a
Fund's shares will fluctuate and an investor's shares may be worth more or less
than their original cost upon redemption. The Trust may also, at its
discretion, from time to time make a list of a Fund's holdings available to
investors upon request.
OTHER INFORMATION
The Trust assumed its current name on March 22, 1991. Prior thereto, the
Trust's name was "Goldman Sachs -- Short-Intermediate Government Fund." Short-
Term Fund assumed its current name in May 1991. Prior thereto, Short-Term Fund's
name was "GS Short-Intermediate Government Fund." Goldman Sachs licensed the
name "Goldman Sachs" and derivatives thereof to the Trust (and Fund) on a
royalty-free basis and Goldman Sachs has reserved to itself the right to grant
the non-exclusive right to use the name "Goldman Sachs" to any other person. At
such time as the Advisory Agreement for a Fund is no longer in effect, the Trust
on behalf of that Fund has agreed that such Fund will (to the extent it lawfully
can) cease using the name "Goldman Sachs."
A Fund will redeem shares solely in cash up to the lesser of $250,000 or 1%
of its net asset value of each Fund during any 90-day period for any one
shareholder. Each Fund, however, reserves the right to pay redemptions
exceeding $250,000 or 1% of the net asset value of each respective Fund at the
time of redemption by a distribution in kind of securities (instead of cash)
from such Fund. The securities distributed in kind would be readily marketable
and would be valued for this purpose using the same method employed in
calculating each Fund's net asset value per share. See "Net Asset Value." If a
shareholder receives redemption proceeds in kind, the shareholder should expect
to incur transaction costs upon the disposition of the securities received in
the redemption.
The right of a shareholder to redeem shares and the date of payment by a
Fund may be suspended for more than seven days for any period during which the
New York Stock Exchange is closed, other than the customary weekends or
holidays, or when trading on such Exchange is restricted as determined by the
SEC; or during any emergency, as determined by the SEC, as a result of which it
is not reasonably practicable for a Fund to dispose of securities owned by it or
fairly to determine the value of its net assets; or for such
B-95
<PAGE>
other period as the SEC may by order permit for the protection of shareholders
of a Fund.
The Prospectuses and this Additional Statement do not contain all the
information included in the Registration Statement filed with the SEC under the
1933 Act with respect to the securities offered by the Prospectuses. Certain
portions of the Registration Statement have been omitted from the Prospectuses
and this Additional Statement pursuant to the rules and regulations of the SEC.
The Registration Statement including the exhibits filed therewith may be
examined at the office of the SEC in Washington, D.C.
Statements contained in the Prospectuses or in this Additional Statement as
to the contents of any contract or other document referred to are not
necessarily complete, and, in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement of which the Prospectuses and this Additional Statement form a part,
each such statement being qualified in all respects by such reference.
Although each Fund is offering only its own shares, since the Funds use a
combined Additional Statement, it is possible that one Fund might become liable
for a misstatement or omission in this Additional Statement regarding another
Fund. The Trustees for each Fund have considered this factor in approving the
use of a combined Additional Statement.
FINANCIAL STATEMENTS
The audited financial statements and related report of Arthur Andersen LLP,
independent public accounts, for each Fund contained in each Fund's 1994 Annual
Report are hereby incorporated by reference and attached hereto. A copy of the
annual reports may be obtained without charge by writing Goldman, Sachs & Co.,
4900 Sears Tower, Chicago, Illinois 60606 or by calling Goldman, Sachs & Co., at
the telephone number on the inside cover of each Fund's Prospectus.
B-96
<PAGE>
ADMINISTRATION PLAN
Each Fund has adopted an administration plan (the "Plan") with respect to
its Administration Shares which authorizes it to compensate Service
Organizations for providing certain account administration services to their
customers who are beneficial owners of such Shares. Pursuant to the Plans, a
Fund enters into agreements with Service Organizations which purchase
Administration Shares on behalf of their customers ("Service Agreements").
Under such Service Agreements the Service Organizations may perform some or all
of the following services: (a) act, directly or through an agent, as the sole
shareholder of record and nominee for all customers, (b) maintain account
records for each customer who beneficially owns Administration Shares of a Fund,
(c) answer questions and handle correspondence from customers regarding their
accounts, (d) process customer orders to purchase, redeem and exchange
Administration Shares of a Fund and handle the transmission of funds
representing the customers' purchase price or redemption proceeds, and (e) issue
confirmations for transactions in shares by customers. As compensation for such
services, a Fund will pay each Service Organization an account administration
fee in an amount up to 0.25% (on an annualized basis) of the average daily net
assets of the Administration Shares of such Fund attributable to or held in the
name of such Service Organization. For the fiscal year ended October 31, 1994,
administration fees of $17,648, $13,825 and $28,422 were accrued by Adjustable
Rate Fund, Short Duration Fund and Short-Term Fund, respectively. No
Administration Shares of Core Fund were outstanding at October 31, 1994. For
the fiscal year ended October 31, 1993, Administration fees of $14,814, $464 and
$15,264 were accrued by Adjustable Rate Fund, Short Duration Fund and Short-Term
Fund, respectively.
Conflict of interest restrictions (including the Employee Retirement Income
Security Act of 1974) may apply to a Service Organization's receipt of
compensation paid by a Fund in connection with the investment of fiduciary
assets in Administration Shares of a Fund. Service Organizations, including
banks regulated by the Comptroller of the Currency, the Federal Reserve Board or
the Federal Deposit Insurance Corporation, and investment advisers and other
money managers subject to the jurisdiction of the SEC, the Department of Labor
or state securities commissions, are urged to consult legal advisers before
investing fiduciary assets in Administration Shares of a Fund. In addition,
under some state securities laws, banks and other financial institutions
purchasing Administration Shares on behalf of their customers may be required to
register as dealers.
The Plans with respect to Adjustable Rate Fund, Short Duration Fund, Short-
Term Fund and Core Fund were approved by The Goldman Sachs Group, L.P., as the
sole shareholder of
B-97
<PAGE>
Administration Shares of each Fund. The Board of Trustees, including a majority
of the Trustees who are not interested persons of the Trust and who have no
direct or indirect financial interest in the operation of the Plans or the
related Service Agreements, most recently voted to approve each Plans and
Service Agreements at a meeting called for the purpose of voting on such Plans
and Service Agreements on April 26, 1994. The Plans and Service Agreements will
remain in effect until June 30, 1995 and will continue in effect thereafter only
if such continuance is specifically approved annually by a vote of the Board of
Trustees in the manner described above. No Plan may be amended to increase
materially the amount to be spent for the services described therein without
approval of the Administration Shareholders of the applicable Fund and all
material amendments of the Plans must also be approved by the Board of Trustees
in the manner described above. Each Plan may be terminated at any time by a
majority of the Board of Trustees as described above or by vote of a majority of
the outstanding Administration Shares of the applicable Fund. The Service
Agreements may be terminated at any time, without payment of any penalty, by a
vote of a majority of the Board of Trustees as described above or by a vote of a
majority of the outstanding Administration Shares of the applicable Fund on not
more than sixty (60) days' written notice to any other party to the Service
Agreements. The Service Agreements will terminate automatically if assigned.
So long as the Plans are in effect, the selection and nomination of those
Trustees who are not interested persons will be committed to the discretion of
the Trust's Nominating Committee, which consists of all of the non-interested
members of the Board of Trustees. The Board of Trustees has determined that, in
its judgment, there is a reasonable likelihood that each Fund's Plan will
benefit such Fund and the holders of its Administration Shares. In the Board of
Trustees' quarterly review of the Plans and Service Agreements, the Board will
consider continued appropriateness and the level of compensation provided
therein.
B-98
<PAGE>
ADJUSTABLE RATE FUND
APPENDIX A
This Appendix provides certain information concerning the performance of
various types of securities over specified periods of time. However, the
characteristics of these securities are not identical to, and may be very
different from, those of the Fund's portfolio. The items included in these
performance figures may not be identical to those in the formulas used by the
Fund to calculate its performance figures. This information does not reflect
the Fund's actual portfolio composition or the fees or expenses associated with
an investment in the Fund. Past performance is not an indication of future
performance.
AVERAGE MONTHLY YIELDS
OF MONEY MARKET FUNDS IN IBC/DONOGHUE'S
MONEY FUND AVERAGE/TM//ALL TAXABLE INDEX
This table provides certain information concerning the average
performance of money market funds (other than tax-free money funds) tracked by
Donoghue's Money Fund Report for the periods indicated.
<TABLE>
<CAPTION>
DONOGHUE'S
YEAR AND ALL TAXABLE INDEX*
MONTH AVERAGE MONTHLY YIELD(%)
-------- ------------------------
YEAR 1988
---------
<S> <C>
JAN 6.50
FEB 6.17
MAR 6.05
APR 6.10
MAY 6.26
JUN 6.54
JUL 6.81
AUG 7.14
SEP 7.42
OCT 7.51
NOV 7.66
DEC 8.08
AVERAGE FOR 1988 6.86
YEAR 1989
---------
JAN 8.36
FEB 8.49
MAR 8.92
APR 9.16
MAY 9.14
JUN 8.93
JUL 8.65
</TABLE>
1-A
<PAGE>
<TABLE>
<S> <C>
AUG 8.32
SEP 8.26
OCT 8.19
NOV 8.00
DEC 7.93
AVERAGE FOR 1989 8.53
YEAR 1990
---------
JAN 7.75
FEB 7.65
MAR 7.66
APR 7.68
MAY 7.68
JUN 7.67
JUL 7.62
AUG 7.50
SEP 7.47
OCT 7.45
NOV 7.33
DEC 7.23
AVERAGE FOR 1990 7.56
YEAR 1991
---------
JAN 6.89
FEB 6.41
MAR 6.09
APR 5.84
MAY 5.58
JUNE 5.49
JULY 5.47
AUG 5.36
SEP 5.21
OCT 5.03
NOV 4.78
DEC 4.58
AVERAGE FOR 1991 5.56
YEAR 1992
---------
JAN 4.13
FEB 3.81
MAR 3.73
APR 3.65
MAY 3.51
JUNE 3.44
JULY 3.24
AUG 3.06
SEP 2.92
OCT 2.79
NOV 2.75
DEC 2.84
AVERAGE FOR 1992 3.32
</TABLE>
2-A
<PAGE>
<TABLE>
<CAPTION>
YEAR 1993
---------
<S> <C>
JAN 2.81
FEB 2.72
MAR 2.68
APR 2.65
MAY 2.60
JUNE 2.63
JULY 2.64
AUG 2.65
SEP 2.66
OCT 2.65
NOV 2.67
DEC 2.72
AVERAGE FOR 1993 2.67
YEAR 1994
---------
JAN 2.92
FEB 2.99
MAR 3.09
APR 3.28
MAY 3.59
JUN 3.83
JUL 3.99
AUG 4.18
SEP 4.48
OCT 4.54
NOV 4.84
DEC 5.24
AVERAGE FOR 1994 3.91
</TABLE>
*IBC/Donoghue's Money Fund Average(TM)/ All Taxable Index, as reported in
the IBC/Donoghue's Money Fund Report(R). The IBC/Donoghue's Money Fund
Average(TM) data is computed net of fees.
3-A
<PAGE>
APPENDIX A
This Appendix provides certain information concerning the performance of
various types of securities over specified periods of time. However, the
characteristics of these securities are not identical to, and may be very
different from, those of the Fund's portfolio. The items included in these
performance figures may not be identical to those in the formulas used by the
Fund to calculate its performance figures. This information does not reflect the
Fund's actual portfolio composition or the fees or expenses associated with an
investment in the Fund. Past performance is not an indication of future
performance.
PRICES AND YIELDS OF
CERTAIN U.S. TREASURY SECURITIES
AND
A FEDERAL HOME LOAN MORTGAGE CORPORATION
ONE-YEAR CONSTANT MATURITY TREASURY
ADJUSTABLE RATE MORTGAGE CERTIFICATE
The following table compares the Prices of a one-year and Yields of a
six-month on-the-run U.S. Treasury security and, a Federal Home Loan Mortgage
Corporation one-year constant maturity Treasury adjustable rate mortgage
certificate during the periods indicated. An "on-the-run" U.S. Treasury
security is a recently issued current coupon security quoted as representing the
most current and liquid security in its maturity category. A Federal Home Loan
Mortgage Corporation adjustable rate mortgage certificate is a type of mortgage
security eligible for investment by the Fund. Other securities in which the
Fund may invest may not have the same yield or volatility characteristics as
these securities. This data is based on the end of period values and for the
yield column, does not include any fees./1/
<TABLE>
<CAPTION>
ONE-YEAR ONE-YEAR ONE-YEAR ONE-YEAR
ON-THE-RUN ON-THE-RUN CMT ADJUSTABLE CMT ADJUSTABLE
U.S. TREAURY U.S. TREASURY RATE MORTGAGE RATE MORTGAGE
DATE SECURITY SECURITY CERTIFICATE CERTIFICATE
--------------------------------------------------------------------------------
YIELD PRICE PRICE PRICE
<S> <C> <C> <C> <C>
31 JAN 89 9.114 100.00 100.00 10.564
28 FEB 89 9.336 99.784 99.795 10.826
31 MAR 89 9.656 99.474 99.363 11.376
30 APR 89 9.441 99.682 99.370 11.361
31 MAY 89 9.044 100.065 99.796 10.814
3O JUN 89 8.491 100.605 100.298 10.171
31 JUL 89 7.948 101.139 100.684 9.678
</TABLE>
______________________
/1/ Historically, ARMs and PACs have offered yields that are higher than
those available from U.S. Treasury securities with comparable maturities.
4-A
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
31 AUG 89 8.227 100.864 100.441 9.987
30 SEP 89 8.255 100.836 100.474 9.945
31 OCT 89 8.034 101.054 100.705 9.654
30 NOV 89 7.793 101.292 101.007 9.273
31 DEC 89 7.749 101.334 101.098 9.159
31 JAN 90 7.951 101.135 100.906 9.401
28 FEB 90 8.155 100.933 100.785 9.555
31 MAR 90 8.395 100.696 100.645 9.735
30 APR 90 8.437 100.654 100.546 9.857
31 MAY 90 8.347 100.742 100.769 9.577
30 JUN 90 8.114 100.944 100.963 9.334
31 JUL 90 7.972 101.114 101.083 9.182
31 AUG 90 7.809 101.275 101.115 9.139
30 SEP 90 7.8 101.283 101.137 9.11
31 OCT 90 7.583 101.498 101.229 8.993
30 NOV 90 7.33 101.750 101.348 8.84
31 DEC 90 7.066 102.013 101.606 8.516
31 JAN 91 6.646 102.434 102.015 8.006
28 FEB 91 6.268 102.815 102.302 7.684
31 MAR 91 6.375 102.706 102.265 7.695
30 APR 91 6.21 102.873 102.406 7.52
31 MAY 91 6.098 102.986 102.554 7.338
30 JUN 91 6.332 102.750 102.414 7.512
31 JUL 91 6.285 102.798 102.535 7.365
31 AUG 91 5.754 103.337 102.940 6.864
30 SEP 91 5.554 103.540 103.152 6.604
31 OCT 91 5.305 103.795 103.289 6.435
30 NOV 91 4.863 104.248 103.617 6.033
31 DEC 91 4.341 104.789 104.221 5.301
31 JAN 92 4.111 105.028 104.461 5.011
28 FEB 92 4.246 104.888 104.357 5.136
31 MAR 92 4.603 104.515 104.044 5.513
30 APR 92 4.263 104.869 104.392 5.093
31 MAY 92 4.161 104.976 104.619 4.821
30 JUN 92 4.141 104.995 104.669 4.761
31 JUL 92 3.572 105.591 105.135 4.202
31 AUG 92 3.445 105.753 105.256 4.085
30 SEP 92 3.154 106.053 105.419 3.884
31 OCT 92 3.267 105.933 105.231 4.107
30 NOV 92 3.643 105.278 105.818 4.553
31 DEC 92 3.678 105.428 106.008 4.548
31 JAN 93 3.462 105.618 105.988 4.542
28 FEB 93 3.36 105.768 106.378 4.2
31 MAR 93 3.3 106.213 106.893 4.07
30 APR 93 3.212 105.836 106.416 4.082
31 MAY 93 3.344 105.573 106.223 4.114
30 JUN 93 3.507 105.638 106.008 4.227
31 JUL 93 3.439 105.548 106.198 4.239
31 AUG 93 3.415 105.468 106.468 4.195
30 SEP 93 3.327 105.863 106.503 4.137
31 OCT 93 3.362 105.648 106.288 4.182
30 NOV 93 3.541 105.548 106.208 4.381
31 DEC 93 3.575 105.448 106.148 4.325
31 JAN 94 3.38 96.883 103.20 4.54
28 FEB 94 3.83 96.484 102.30 5.11
31 MAR 94 4.30 96.021 102.07 5.60
30 APR 94 4.83 95.076 101.07 6.46
31 MAY 94 5.08 94.849 100.30 6.77
30 JUN 94 5.20 94.757 100.21 6.97
31 JUL 94 5.04 95.352 100.21 6.90
</TABLE>
5-A
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
31 AUG 94 5.25 94.794 100.25 7.00
30 SEP 94 5.62 94.494 100.01 7.60
31 OCT 94 5.81 94.324 99.25 7.81
30 NOV 94 6.47 93.71 98.30 8.59
31 DEC 94 6.73 93.55 98.30 8.80
</TABLE>
6-A
<PAGE>
APPENDIX B
GLOSSARY
MORTGAGE-BACKED SECURITIES
GUARANTEED MORTGAGE PASS-THROUGHS:
Securities which represent participation interests in pools of
residential mortgage loans originated by United States governmental or private
lenders and guaranteed by the United States government or one of its agencies or
instrumentalities.
* Ginnie Mae Certificates are guaranteed by the full faith and credit of
the United States government for timely payment of principal and
interest on the certificates.
* Fannie Mae Certificates are guaranteed by FNMA, a federally chartered
and privately-owned corporation for full and timely payment of
principal and interest on the certificates.
* Freddie Mac Certificates are guaranteed by FHLMC, a corporate
instrumentality of the United States government, for timely payment of
interest and the ultimate collection of all principal of the related
mortgage loans.
ALL GUARANTEED MORTGAGE PASS-THROUGHS ARE CONSIDERED TO BE OF THE SAME OR HIGHER
CREDIT QUALITY AS PRIVATELY-ISSUED SECURITIES RATED AAA.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"):
Multiclass securities that are issued by the United States government and
are collateralized by mortgage loans or mortgage pass-throughs. Typically, CMOs
are collateralized by Ginnie Mae, Fannie Mae or Freddie Mac Certificates but
also may be collateralized by other mortgage assets such as whole loans or
private mortgage pass-throughs.
* Payments of principal and interest on collateral of mortgage assets
and any reinvestment income thereon, provide the funds to pay debt
service on the CMOs.
ALL CMOS INCLUDED AS ASSETS OF THE FUND WILL BE ISSUED BY
1-B
<PAGE>
FANNIE MAE OR FREDDIE MAC.
STRIPPED MORTGAGE-BACKED SECURITIES ("SMBS"):
Securities which are usually structured with two classes that receive
different proportions of interest and principal distributions on a pool of
mortgage assets. A typical SMBS will have one class receiving some of the
interest and most of the principal, while the other class will receive most of
the interest and the remaining principal. In the most extreme case, one class
will receive all of the interest (the interest only class) while the other class
will receive all of the principal (the principal only class).
ALL SMBS INCLUDED AS ASSETS OF THE FUND WILL BE ISSUED BY FANNIE MAE OR FREDDIE
MAC.
CMO RESIDUALS:
CMO Residuals, other than REMIC Residuals, are essentially (i) the spread
between the higher interest rates on the mortgage collateral (e.g., Freddie Mac
Certificates) and the lower interest rates on the CMO classes and to a lesser
extent, (ii) the reinvestment income earned by investing the monthly mortgage
cash flows between CMO payment dates.
ALL CMO RESIDUALS INCLUDED AS ASSETS OF THE FUND WILL BE ISSUED BY FANNIE MAE OR
FREDDIE MAC.
2-B
<PAGE>
SHORT DURATION FUND
APPENDIX C
This Appendix provides certain information concerning the performance
of various types of securities over specified periods of time. However, the
characteristics of these securities are not identical to, and may be very
different from, those of the Fund's portfolio. The items included in these
performance figures may not be identical to those in the formulas used by the
Fund to calculate its performance figures. This information does not reflect the
Fund's actual portfolio composition or the fees or expenses associated with an
investment in the Fund. Past performance is not an indication of future
performance.
Average Yield
-------------
This table provides certain information concerning the monthly average
yield of certain tax-exempt money market funds, net of fees, compared to the
month-end yield of a 3-year constant maturity general obligation municipal bond,
exclusive of fees.
<TABLE>
<CAPTION>
IBC/Donoghue Municipal
MoneY Market Fund
Obligation Yields (Tax-Exempt/ 3-year General
Month/Year Institution Only) Municipal Bond (%)**
---------- ------------------ ------------------------
<S> <C> <C>
Dec. 1984 5.67 6.52
Jan. 1985 5.58 6.34
Feb. 1985 5.03 6.48
Mar. 1985 4.84 6.54
Apr. 1985 4.84 6.26
May 1985 4.96 6.06
June 1985 4.72 5.90
July 1985 4.32 5.88
Aug. 1985 4.54 6.19
Sep. 1985 4.72 6.30
Oct. 1985 4.63 6.10
Nov. 1985 4.57 5.74
Dec. 1985 5.39 5.98
Jan. 1986 5.78 6.00
Feb. 1986 5.19 5.54
Mar. 1986 4.65 5.39
Apr. 1986 4.52 5.20
May 1986 4.32 5.26
Jun. 1986 3.99 5.40
Jul. 1986 3.89 5.32
Aug. 1986 4.27 5.22
</TABLE>
1-C
<PAGE>
<TABLE>
<S> <C> <C>
Sep. 1986 4.04 5.06
Oct. 1986 3.59 4.87
Nov. 1986 3.50 4.42
Dec. 1986 3.87 4.49
Jan. 1987 4.02 4.37
Feb. 1987 3.76 4.26
Mar. 1987 3.68 4.27
Apr. 1987 4.35 5.02
May 1987 4.63 5.52
Jun. 1987 3.94 5.23
Jul. 1987 3.81 5.15
Aug. 1987 3.95 5.16
Sep. 1987 4.25 5.75
Oct. 1987 4.67 6.32
Nov. 1987 4.67 5.74
Dec. 1987 4.85 5.72
Jan. 1988 4.67 5.63
Feb. 1988 4.37 5.33
Mar. 1988 4.31 5.35
Apr. 1988 4.30 5.45
May 1988 4.55 5.66
Jun. 1988 4.60 5.76
Jul. 1988 4.78 5.80
Aug. 1988 5.17 5.96
Sep. 1988 5.16 6.02
Oct. 1988 5.29 5.99
Nov. 1988 5.31 6.09
Dec. 1988 5.82 6.31
Jan. 1989 5.65 6.35
Feb. 1989 5.79 6.45
Mar. 1989 6.37 6.83
Apr. 1989 6.48 6.83
May 1989 6.55 6.56
Jun. 1989 6.12 6.32
Jul. 1989 5.81 6.08
Aug. 1989 5.72 6.02
Sep. 1989 5.73 6.14
Oct. 1989 5.75 6.11
Nov. 1989 5.68 6.06
Dec. 1989 5.88 5.94
Jan. 1990 5.48 6.01
Feb. 1990 5.26 6.03
Mar. 1990 5.46 6.16
Apr. 1990 5.76 6.38
May 1990 5.70 6.34
Jun. 1990 5.49 6.18
Jul. 1990 5.31 6.10
Aug. 1990 5.35 6.20
Sep. 1990 5.72 6.27
Oct. 1990 5.62 6.15
Nov. 1990 5.35 5.82
Dec. 1990 5.94 6.62
</TABLE>
2-C
<PAGE>
<TABLE>
<S> <C> <C>
Jan. 1991 4.96 5.63
Feb. 1991 4.35 5.28
Mar. 1991 4.46 5.48
Apr. 1991 4.40 5.42
May 1991 4.24 5.29
Jun. 1991 3.93 5.47
Jul. 1991 3.91 5.43
Aug. 1991 4.26 5.17
Sep. 1991 4.51 5.15
Oct. 1991 4.13 5.04
Nov. 1991 3.94 4.94
Dec. 1991 4.17 4.51
Jan. 1992 3.17 4.12
Feb. 1992 2.88 4.44
Mar. 1992 2.91 4.77
Apr. 1992 3.17 4.73
May 1992 3.25 4.66
Jun. 1992 2.70 4.46
Jul. 1992 2.34 4.09
Aug. 1992 2.44 4.00
Sep. 1992 2.77 4.01
Oct. 1992 2.51 3.89
Nov. 1992 2.41 4.10
Dec. 1992 2.60 4.05
Jan. 1993 2.23 4.05
Feb. 1993 2.11 3.50
Mar. 1993 2.08 3.75
Apr. 1993 2.17 3.70
May 1993 2.27 3.75
Jun. 1993 2.05 3.70
Jul. 1993 2.00 3.80
Aug. 1993 2.23 3.85
Sep. 1993 2.27 3.35
Oct. 1993 2.27 3.35
Nov. 1993 2.19 3.52
Dec. 1993 2.16 3.35
Jan. 1994 2.00 3.45
Feb. 1994 2.12 3.90
Mar. 1994 2.06 4.31
Apr. 1994 2.04 4.42
May 1994 2.55 4.37
Jun. 1994 2.39 4.46
Jul. 1994 2.38 4.32
Aug. 1994 2.60 4.34
Sep. 1994 2.27 4.55
Oct. 1994 2.68 4.73
Nov. 1994 2.96 5.25
Dec. 1994 3.42 5.34
</TABLE>
3-C
<PAGE>
_________________
*IBC/Donoghue's Money Fund Average/Tax-Exempt/Institutional Only
Index, as reported in the IBC/Donoghue's Money Market Fund
Report(R).
**Goldman, Sachs & Co.
4-C
<PAGE>
Monthly Prices
---------------
The following chart depicts the price volatility (100 base) of a 3-year
constant maturity municipal security compared to the price volatility of a 30-
year constant maturity municipal security.*
<TABLE>
<CAPTION>
3-Year 30-Year
Month/Year Municipal Security Municipal Security
------------ ------------------ ------------------
<S> <C> <C>
Dec. 1984 100.00 100.00
Jan. 1985 100.45 106.94
Feb. 1985 100.08 106.10
Mar. 1985 99.91 105.50
Apr. 1985 100.63 107.55
May 1985 101.16 112.61
Jun. 1985 101.59 114.61
Jul. 1985 101.64 113.93
Aug. 1985 100.79 110.83
Sep. 1985 100.49 107.68
Oct. 1985 101.04 109.67
Nov. 1985 101.98 118.25
Dec. 1985 101.32 119.43
Jan. 1986 101.28 124.47
Feb. 1986 102.92 134.63
Mar. 1986 102.92 141.45
Apr. 1986 103.42 137.64
May 1986 103.26 129.91
Jun. 1986 102.87 125.90
Jul. 1986 103.08 131.12
Aug. 1986 103.34 136.70
Sep. 1986 103.80 137.52
Oct. 1986 104.30 138.24
Nov. 1986 105.57 142.87
Dec. 1986 105.37 141.07
Jan. 1987 105.71 148.26
Feb. 1987 106.01 147.44
Mar. 1987 105.99 146.91
Apr. 1987 103.85 130.75
May 1987 102.48 123.76
Jun. 1987 103.25 127.52
Jul. 1987 103.47 127.45
Aug. 1987 103.44 126.28
Sep. 1987 101.83 118.02
Oct. 1987 100.29 113.29
Nov. 1987 101.83 123.37
Dec. 1987 101.88 124.02
Jan. 1988 102.11 127.61
Feb. 1988 102.93 129.47
Mar. 1988 102.87 126.28
Apr. 1988 102.57 124.57
</TABLE>
5-C
<PAGE>
<TABLE>
<S> <C> <C>
May 1988 102.00 124.30
Jun. 1988 101.72 125.17
Jul. 1988 101.61 125.76
Aug. 1988 101.17 124.95
Sep. 1988 101.01 126.79
Oct. 1988 101.09 130.26
Nov. 1988 100.80 130.64
Dec. 1988 100.21 128.10
Jan. 1989 100.12 132.05
Feb. 1989 99.83 130.38
Mar. 1989 98.83 127.80
Apr. 1989 98.84 129.71
May 1989 99.52 133.54
Jun. 1989 100.15 137.69
Jul. 1989 100.76 139.34
Aug. 1989 100.92 136.40
Sep. 1989 100.59 133.75
Oct. 1989 100.66 134.23
Nov. 1989 100.78 135.47
Dec. 1989 101.10 137.86
Jan. 1990 100.91 136.19
Feb. 1990 100.85 133.98
Mar. 1990 100.49 132.31
Apr. 1990 99.90 131.02
May 1990 100.00 132.12
Jun. 1990 100.43 134.25
Jul. 1990 100.63 134.39
Aug. 1990 100.37 132.01
Sep. 1990 100.18 130.67
Oct. 1990 100.46 130.00
Nov. 1990 101.33 135.10
Dec. 1990 101.88 137.33
Jan. 1991 101.84 136.99
Feb. 1991 102.80 140.82
Mar. 1991 102.23 136.96
Apr. 1991 102.39 138.11
May 1991 102.75 138.52
Jun. 1991 102.25 136.14
Jul. 1991 102.35 136.64
Aug. 1991 103.07 139.57
Sep. 1991 103.10 142.02
Oct. 1991 103.41 144.98
Nov. 1991 103.69 144.50
Dec. 1991 104.87 143.92
Jan. 1992 105.99 146.62
Feb. 1992 105.06 142.20
Mar. 1992 104.13 142.15
Apr. 1992 104.23 143.22
May 1992 104.44 144.56
Jun. 1992 105.00 146.61
Jul. 1992 106.04 153.93
Aug. 1992 106.03 153.77
</TABLE>
6-C
<PAGE>
<TABLE>
<S> <C> <C>
Sep. 1992 106.27 152.28
Oct. 1992 106.61 149.43
Nov. 1992 106.00 149.91
Dec. 1992 106.14 151.95
Jan. 1993 106.14 151.95
Feb. 1993 107.74 166.43
Mar. 1993 107.00 159.33
Apr. 1993 107.15 161.61
May. 1993 107.00 162.77
Jun. 1993 107.14 163.34
Jul. 1993 106.84 163.92
Aug. 1993 106.69 171.29
Sep. 1993 108.16 175.20
Oct. 1993 108.16 175.20
Nov. 1993 107.65 170.22
Dec. 1993 108.16 172.52
Jan. 1994 107.62 149.26
Feb. 1994 106.80 146.58
Mar. 1994 105.30 136.25
Apr. 1994 104.52 130.68
May 1994 104.24 130.71
Jun. 1994 104.81 132.08
Jul. 1994 104.38 129.67
Aug. 1994 104.54 130.93
Sep. 1994 104.30 129.12
Oct. 1994 103.89 125.38
Nov. 1994 102.39 118.32
Dec. 1994 102.14 121.81
Jan. 1995 102.30 124.65
</TABLE>
_______________________
*Goldman, Sachs & Co.
7-C
<PAGE>
Appendix D
CORE FUND
DESCRIPTION OF BOND RATINGS/1/
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time .
_______________________
1
The rating systems described herein are believed to be the most recent
ratings systems available from Moody's Investors Service, Inc. and Standard &
Poor's Ratings Group at the date of this Additional Statement for the securities
listed. Ratings are generally given to securities at the time of issuance. While
the rating agencies may from time to time revise such ratings, they undertake no
obligation to do so, and the ratings indicated no not necessarily represent
ratings which will be given to these securities on the date of the Fund's fiscal
year end.
1-D
<PAGE>
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
STANDARD & POOR'S RATINGS GROUP
AAA: Bonds rated AAA have the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA: Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the higher rated issues only in small degree.
A: Bonds rated A have a very strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than in higher rated categories.
FITCH INVESTORS SERVICE, CORP.
Bond Ratings
------------
The ratings represent Fitch's assessment of the issuer's ability to
meet the obligations of a specific debt issue or class of debt. The ratings
take into consideration special features of the issue, its relationship to other
obligations of the issuer, the current financial condition and operative
performance of the issuer and of any guarantor, as well as the political and
economic environment that might affect the issuer's future financial strength
and credit quality.
AAA: Bonds rated AAA are 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 rated AA are considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated F-1+.
A: Bonds rated A are considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay
2-D
<PAGE>
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 rated BBB are 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.
Plus (+) and minus (-) signs are used with a rating symbol to indicate
the relative position of a credit within the rating category. Plus and minus
signs, however, are not used in the AAA Category covering 12-36 months.
3-D
<PAGE>
CORE FUND
APPENDIX E
----------
This Appendix provides certain information concerning the performance
of various types of securities over specified periods of time. However, the
characteristics of these securities are not identical to, and may be very
different from, those of the Fund's portfolio. The items included in these
performance figures may not be identical to those in the formulas used by the
Fund to calculate its performance figures. This information does not reflect
the Fund's actual portfolio composition or the fees or expenses associated with
an investment in the Fund. Past performance is not an indication of future
performance.
Source: Lehman Brothers and Stocks, Bonds, Bills and Inflation 1992 Yearbook
(and 1993 updates), Ibbotson Associates, Inc. The indices and securities in
this chart reflect neither the fund's actual portfolio composition nor the fees
and expenses associated with investing in the fund. The S&P 500 is an unmanaged
index of 500 of the largest U.S. companies. Unlike the S&P 500 and Lehman
Index, Treasury bills are backed by the full faith and credit of the U.S.
government and are less volatile than equity or fixed income investments.
Because the fund can hold securities other than those in the Lehman Index, its
returns may be more volatile. Past performance is no guarantee of future
performance. Market and economic conditions, such as rapidly rising or falling
interest rates, may affect fixed income securities differently from Treasury
bills. Relative to Treasury bills, the market value of fixed income securities
may be adversely affected by sharp increases in market interest rates.
1-E
<PAGE>
ANNUAL VOLATILITY OF MONTHLY TOTAL RETURN
-----------------------------------------
<TABLE>
<CAPTION>
S&P 500 LEHMAN AGGR. 6-MO. T. BILL
YEAR TOTAL RETURN INDEX TOTAL RETURN
------ ------------ ----------- -------------
<S> <C> <C> <C>
1983 3.48 0.17 0.602
2.6 2.87 0.787
3.65 0.26 0.397
7.58 2.79 1.021
-0.52 -1.31 0.445
3.82 0.11 0.682
-3.13 -2.36 0.604
1.7 0.7 0.862
1.36 3.3 1.169
-1.34 0.36 0.826
2.33 1.14 0.664
-0.61 0.19 0.816
1984 -0.65 2.06 0.879
-3.28 -0.51 0.623
1.71 -1.12 0.641
0.69 -0.2 0.813
-5.34 -3.11 0.718
2.21 1.28 1.046
-1.43 4.5 0.933
11.25 1.69 0.996
0.02 2.37 1.048
0.26 4.24 1.438
-1.01 1.79 1.148
2.53 1.46 0.697
1985 7.68 2.28 0.746
1.37 -2.04 0.478
0.18 2.04 0.902
-0.32 2.07 1.01
6.15 5.23 1.127
1.59 1.06 0.692
-0.26 -0.35 0.499
-0.61 1.88 0.755
-3.21 0.6 0.637
4.47 2.1 0.579
7.160005 2.4 0.665
4.670001 3.06 0.713
1986 0.44 0.56 0.69
7.61 3.94 0.568
5.54 3.1 0.868
-1.24 0.53 0.628
5.49 -1.91 0.474
1.66 2.62 0.667
-5.69 0.89 0.635
7.48 2.48 0.794
-8.22 -0.99 0.396
5.56 1.44 0.569
</TABLE>
2-E
<PAGE>
<TABLE>
<S> <C> <C> <C>
2.56 1.4 0.396
-2.64 0.37 0.387
1987 13.43 1.41 0.547
4.13 0.69 0.49
2.72 -0.45 0.374
-0.88 -2.74 0.484
1.03 -0.39 0.517
4.99 1.38 0.64
4.98 -0.08 0.42
3.85 -0.53 0.476
-2.2 -2.13 0.306
-21.52 3.56 1.09
-8.19 0.8 0.507
7.38 1.36 0.582
1988 4.27 3.52 0.673
4.7 1.19 0.658
-3.02 -0.94 0.484
1.08 -0.54 0.421
0.78 -0.67 0.442
4.64 2.41 0.633
-0.4 -0.53 0.447
-3.31 0.26 0.55
4.24 2.27 0.684
2.73 1.88 0.689
-1.42 -1.22 0.455
1.81 0.11 0.583
1989 7.23 1.44 0.729
-2.49 -0.72 0.563
2.36 0.43 0.695
5.16 2.09 0.923
4.02 2.63 0.858
-0.54 3.04 0.954
8.98 2.13 0.832
1.93 -1.48 0.522
-0.39 0.51 0.616
-2.33 2.46 0.889
2.08 0.95 0.722
2.36 0.27 0.617
1990 -6.71 -1.19 0.659
1.29 0.32 0.596
2.63 0.07 0.632
-2.47 -0.92 0.651
9.75 2.96 0.805
-0.7 1.61 0.71
-0.32 1.38 0.805
-9.03 -1.34 0.626
-4.92 0.83 0.659
-0.37 1.27 0.744
6.44 2.15 0.627
2.74 1.56 0.861
</TABLE>
3-E
<PAGE>
<TABLE>
<S> <C> <C> <C>
1991 4.42 1.24 0.7
7.16 0.85 0.538
2.38 0.69 0.586
0.28 1.08 0.645
4.28 0.58 0.483
-4.57 -0.05 0.447
4.68 1.39 0.587
2.35 2.16 0.603
-1.64 2.03 0.57
1.34 1.11 0.564
-4.04 0.92 0.593
11.43 2.97 0.638
1992 -1.86 -1.36 0.34
1.28 0.65 0.292
-1.96 -0.56 0.306
2.909998 0.72 0.509
0.540067 1.89 0.38
-1.45397 1.38 0.399
4.030009 2.04 0.494
-2.02 1.01 0.316
1.149647 1.19 0.445
0.360365 -1.33 0.097
3.369855 0.02 0.212
1.310072 1.59 0.404
1993 0.730015 1.92 0.372
1.349953 1.75 0.257
2.149928 0.42 0.299
-2.45 0.7 0.266
2.7 0.13 0.161
0.33 1.81 0.302
1994 3.35 1.35 0.330
-2.70 -1.74 0.092
-4.35 -2.47 0.243
1.30 -0.80 0.161
1.63 -0.01 0.274
-2.47 -0.22 0.444
3.31 1.99 0.423
4.07 0.12 0.389
-2.44 -1.47 0.282
2.25 -0.09 0.452
-3.64 -0.22 0.297
1.48 0.69 0.430
</TABLE>
4-E
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
SERVICE SHARES
GS ADJUSTABLE RATE GOVERNMENT AGENCY FUND
GS SHORT-TERM GOVERNMENT AGENCY FUND
GS SHORT DURATION TAX-FREE FUND
GS CORE FIXED INCOME FUND
(EACH A PORTFOLIO OF GOLDMAN SACHS TRUST)
Goldman Sachs Trust
4900 Sears Tower
Chicago, Illinois 60606
This Statement of Additional Information (the "Additional Statement") is
not a prospectus. This Additional Statement should be read in conjunction with
the prospectuses for the Service Shares of each of GS Adjustable Rate Government
Agency Fund, GS Short-Term Government Agency Fund, GS Short Duration Tax-Free
Fund and GS Core Fixed Income, each dated March 1, 1995, as amended and/or
supplemented from time to time (each a "Prospectus"), which may be obtained
without charge from institutions ("Service Organizations") that hold Service
Shares for the benefit of their customers, or by calling Goldman, Sachs & Co. at
the telephone number, or writing to one of the addresses, listed below .
TABLE OF CONTENTS
<TABLE>
<S> <C>
Introduction.......................................................... B-3
Investment Objective and Policies..................................... B-7
Investment Restrictions............................................... B-12
Management............................................................ B-47
Portfolio Transactions................................................ B-57
Shares of the Trust................................................... B-71
Net Asset Value....................................................... B-72
Taxation.............................................................. B-76
Performance Information............................................... B-76
Other Information..................................................... B-95
Financial Statements.................................................. B-96
Service Plan.......................................................... B-97
Appendix A............................................................ 1-A
Appendix B............................................................ 1-B
Appendix C............................................................ 1-C
Appendix D............................................................ 1-D
Appendix E............................................................ 1-E
</TABLE>
The date of this Additional Statement is March 1, 1995.
<PAGE>
GOLDMAN SACHS ASSET MANAGEMENT GOLDMAN, SACHS & CO.
ADVISER TO GS SHORT DURATION DISTRIBUTOR
TAX-FREE FUND AND GS CORE FIXED 85 BROAD STREET
INCOME FUND NEW YORK, NEW YORK 10004
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
GOLDMAN SACHS FUNDS GOLDMAN, SACHS & CO.
MANAGEMENT, L.P. TRANSFER AGENT
ADVISER TO GS ADJUSTABLE RATE 4900 SEARS TOWER
GOVERNMENT AGENCY FUND CHICAGO, ILLINOIS 60606
AND GS SHORT-TERM
GOVERNMENT AGENCY FUND
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
TOLL FREE .......800-621-2550
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INTRODUCTION
Goldman Sachs Trust (the "Trust") was organized under the laws of The
Commonwealth of Massachusetts on September 24, 1987 as a Massachusetts business
trust. The Trust assumed its current name on March 22, 1991. The Trustees of the
Trust have authority under the Declaration of Trust to create and classify
shares into separate series and to classify and reclassify any series of shares
into one or more classes without further action by shareholders. Pursuant
thereto, the Trustees have created GS Adjustable Rate Government Agency Fund
("Adjustable Rate Fund"), GS Short-Term Government Agency Fund ("Short-Term
Fund"), GS Short Duration Tax-Free Fund ("Short Duration Fund"), and GS Core
Fixed Income Fund ("Core Fund"). Adjustable Rate Fund, Short-Term Fund, Short
Duration Fund and Core Fund are each sometimes referred to herein as a "Fund"
and collectively as the "Funds." Short-Term Fund, Short Duration Fund and Core
Fund are each authorized to issue three classes of shares. These classes are:
Institutional Shares, Administration Shares and Service Shares. Adjustable Rate
Fund is authorized to issue four classes of shares. These classes are:
Institutional Shares, Administration Shares, Service Shares and Class A Shares.
Goldman Sachs Asset Management ("GSAM"), a separate operating division of
Goldman, Sachs & Co. ("Goldman Sachs"), serves as the investment adviser to
Short Duration Fund and Core Fund. Goldman Sachs Funds Management, L.P.
("FMLP"), an affiliate of Goldman Sachs, serves as the investment adviser to
Adjustable Rate Fund and Short-Term Fund. GSAM and FMLP are each sometimes
referred to herein as the "Adviser" and collectively herein as the "Advisers."
In addition, Goldman Sachs serves as each Fund's distributor and transfer agent.
Each Fund's custodian is State Street Bank and Trust Company.
The Goldman Sachs Mutual Funds Group ("IMG") offers banks, corporate cash
managers, investment advisers and other institutional investors a family of
professionally-managed mutual and money market funds, including fixed income and
equity funds, and a range of related services. IMG is part of GSAM, a separate
operating division of Goldman Sachs. All products are designed to provide
clients with the benefit of the expertise of GSAM and its affiliates in security
selection, asset allocation, portfolio construction and day-to-day management.
The hallmark of IMG is personalized service, which reflects the priority
that Goldman Sachs places on serving client interests. As IMG clients,
shareholders will be assigned an Account Administrator ("AA"), who is ready to
help shareholders with questions concerning their accounts. During business
hours, shareholders can call their AA through a toll-free number to place
purchase or redemption orders or obtain portfolio and account information. The
AA can also answer inquiries about rates of
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return, portfolio composition and holdings and guide shareholders through
operational details. An IMG client can also utilize SMART (sm) personal computer
software system which allows holders to purchase and redeem shares and also
obtain portfolio and account information directly.
Because each Fund's shares may be redeemed upon request of a shareholder on
any business day at net asset value, the Funds offer greater liquidity than many
competing investments, such as certificates of deposit and direct investments in
certain securities in which the respective Fund may invest.
The following information relates to and supplements the description of
each Fund's investment policies contained in their respective Prospectuses. See
each Fund's Prospectus for a fuller description of the Fund's investment
objective and policies. Investing in the Funds entails certain risks and there
is no assurance that a Fund will achieve its objective.
ADJUSTABLE RATE FUND AND SHORT-TERM FUND
Adjustable Rate Fund and Short-Term Fund are both designed for investors
who seek a high level of high current income, relative stability of principal
and the highest credit quality of U.S. Government agency guaranteed securities,
without incurring the administrative and accounting burdens involved in direct
investment. Such investors also prefer experienced professional management and
administration, and liquidity.
Market and economic conditions may affect the investments of Adjustable
Rate Fund and Short-Term Fund differently than the investments normally
purchased by such investors. Relative to U.S. Treasury and non-fluctuating money
market instruments, the market value of adjustable rate mortgage securities in
which Adjustable Rate Fund will invest and in which Short-Term Fund may invest
may be adversely affected by sharp increases in market interest rates.
Conversely, sharp decreases in market interest rates may result in less capital
appreciation for adjustable rate mortgage securities in relation to U.S.
Treasury and money market investments.
HIGH CURRENT INCOME. Adjustable Rate Fund and Short-Term Fund seek a
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higher current yield than a money market fund, since they can invest in longer-
term, higher yielding securities, and may utilize certain investment techniques
not available to a money market fund. Similarly, the Adjustable Rate Fund and
Short-Term Fund seek a higher yield than that offered by bank certificates of
deposit and money market accounts. However, the Adjustable Rate Fund and Short-
Term Fund do not maintain a constant net asset value per share and are subject
to greater fluctuations in the value of their shares than a money market fund.
Unlike bank certificates of deposit and money market accounts, investments in
shares of the Funds are not insured or guaranteed by any government agency. Each
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of the Adjustable Rate Fund and Short-Term Fund seeks to provide such high
current income without sacrificing credit quality.
RELATIVE LOW VOLATILITY OF PRINCIPAL. Adjustable Rate Fund seeks to
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minimize net asset value fluctuations by investing primarily in adjustable rate
mortgage-backed securities, maintaining a maximum duration equal to that of a
two-year U.S. Treasury security and a target duration equal to that of a six-
month to one-year U.S. Treasury security, and utilizing certain active
management techniques to hedge interest rate risk. Short-Term Fund seeks to
minimize net asset value fluctuations by utilizing certain interest rate hedging
techniques and by maintaining an option-adjusted duration of not more than a 3-
year U.S. Treasury security (although) its actual option-adjusted duration is
expected to equal that of a 2-year U.S. Treasury security. There is no
assurance that these strategies for the Adjustable Rate Fund and Short-Term Fund
will always be successful. Each Fund's net asset value per share will fluctuate
more than that of a money market fund.
PROFESSIONAL MANAGEMENT AND ADMINISTRATION. Investors who invest in
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securities of the Government National Mortgage Association and other mortgage-
backed securities may prefer professional management and administration of their
mortgage-backed securities portfolios because a well-diversified portfolio of
such securities emphasizing minimal fluctuation of net asset value requires
significant active management as well as significant accounting and
administrative resources.
SHORT DURATION FUND
Short Duration Fund is not a money market fund. It is designed for
investors who seek the tax benefits associated with investing in municipal
securities and who are able to accept greater risk with the possibility of
higher returns than investors in municipal money market funds. While municipal
money market funds almost always maintain a constant net asset value, they must
meet stringent high quality credit standards, their portfolios must be broadly
diversified and their portfolio securities must have remaining maturities of 397
days or less. An example of an "eligible" investment for the Short Duration
Fund is auction rate municipal securities, which generally have higher yields
than money market municipal securities, but which typically are not eligible
investments for municipal money market funds.
In addition, unlike a municipal money market fund, the Short Duration
Fund's increased investment flexibility permits its portfolio to be more easily
adjusted to reflect the shape of the current yield curve as well as to respond
to anticipated developments that might affect the shape of the yield curve.
Investors who wish to invest in municipal securities may find
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that a mutual fund structure offers some important advantages when compared to
investing in individual municipal securities, including:
. The ratings given to municipal securities by the rating
organizations are difficult to evaluate. For example, some
municipal securities with relatively low credit ratings have yields
comparable to municipal securities with much higher ratings. The
credit research professionals at Goldman Sachs closely follow
market events and are well positioned to judge current and expected
credit conditions of municipal issuers;
. Because of the relative inefficiency of the secondary market in
municipal securities, the value of an individual municipal security
is often difficult to determine. As such, investors may obtain a
wide range of different prices when asking for quotes from
different dealers. In addition, a dealer may have a large
inventory of a particular issue that it wants to reduce. Obtaining
the best overall prices can require extensive negotiation, which is
a function performed by the portfolio manager; and
. Industry and geographical diversification are important
considerations for municipal investors. Short Duration Fund is
designed to provide this diversification.
CORE FUND
Core Fund is designed for investors seeking a total return consisting
of both income and capital appreciation that exceeds the total return of the
Lehman Brothers Aggregate Bond Index, without incurring the administrative and
accounting burdens involved in direct investment. Such investors also prefer
liquidity, experienced professional management and administration, a
sophisticated investment process, and the convenience of a mutual fund
structure. Core Fund may be appropriate as part of a balanced investment
strategy consisting of stocks, bonds and cash or as a complement to positions in
other types of fixed income investments.
Core Fund's overall returns are generally likely to move in the
opposite direction from interest rates. Therefore, when interest rates decline,
Core Fund's return is likely to increase. Conversely, when interest rates
increase, Core Fund's return is likely to decline. However, the Adviser believes
that, given the flexibility of managers to invest in a diversified portfolio of
securities, Core Fund's return is not likely to decline as quickly as that of
other fixed income funds with a comparable average portfolio duration. In
exchange for accepting a higher degree of potential share price fluctuation,
investors have the opportunity
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to achieve a higher return from Core Fund than from shorter term investments.
A SOPHISTICATED INVESTMENT PROCESS. Core Fund's interest rate risk,
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including overall market exposure and the spread risk of particular sectors and
securities, will be controlled through active portfolio management techniques.
Core Fund's investment process starts with a review of trends for the overall
economy as well as for different sectors of the fixed income securities markets.
Goldman Sachs' portfolio managers then analyze yield spreads, implied volatility
and the shape of the yield curve. In planning Core Fund's portfolio investment
strategies, the Adviser is able to draw upon the economic and fixed income
research resources of Goldman Sachs. The Adviser will use a sophisticated
analytical process including Goldman Sachs' proprietary mortgage prepayment
model and option-adjusted spread model to assist in structuring and maintaining
Core Fund's investment portfolio. In determining Core Fund's investment
strategy and making market timing decisions, the Adviser will have access to
input from Goldman Sachs' economists, fixed income analysts and mortgage
quantitative specialists.
EXPERIENCED MANAGEMENT. Successfully creating and managing a
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diversified portfolio of securities requires professionals with extensive
experience. Goldman Sachs' highly skilled portfolio management team brings
together many years of experience in the analysis, valuation and trading of U.S.
and foreign fixed income securities.
INVESTMENT OBJECTIVES AND POLICIES
ADJUSTABLE RATE FUND
The investment objective of Adjustable Rate Fund is a high level of current
income, consistent with low volatility of principal. Adjustable Rate Fund will
seek to achieve its objective through investment in securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities. Under
normal circumstances, at least 65% of Adjustable Rate Fund's total assets will
consist of adjustable rate mortgage pass-through securities and other mortgage
securities with periodic interest rate resets, which are issued or guaranteed by
such U.S. Government entities. The primary issuers or guarantors of such
securities currently include the Federal National Mortgage Association ("Fannie
Mae"), the Federal Home Loan Mortgage Corporation ("Freddie Mac") and the
Government National Mortgage Association ("Ginnie Mae"), although Adjustable
Rate Fund may invest in securities issued or guaranteed by other agencies or
instrumentalities in the future. Adjustable Rate Fund may also invest in other
mortgage-backed securities, and other obligations issued or guaranteed by the
U.S. Government, its agencies and instrumentalities, as well as repurchase
agreements collateralized by such securities. Adjustable Rate Fund may, for
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temporary defensive purposes, hold or invest more than 35% of its total assets
in cash, U.S. Treasury securities or high quality money market instruments,
including commercial paper, bankers' acceptances, repurchase agreements or other
debt obligations with a remaining maturity of one year or less. Adjustable Rate
Fund may employ certain active management techniques, including the use of
futures (including options on futures), mortgage and interest rate swaps and
interest rate floors, caps and collars. Adjustable Rate Fund's investments in
mortgage pass-through securities and other securities representing an interest
in or collateralized by adjustable and fixed-rate mortgage loans ("Mortgage-
Backed Securities") entail certain risks. There is no assurance that Adjustable
Rate Fund will achieve its objective.
SHORT-TERM FUND
The investment objective of Short-Term Fund is to achieve a high level of
current income. Secondarily, Short-Term Fund may, in seeking current income,
also consider the potential for capital gains. Short-Term Fund pursues its
objectives through investment in securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities and repurchase agreements
pertaining thereto. These securities may include Mortgage-Backed Securities.
There is no assurance that these objectives of Short-Term Fund will be achieved.
SHORT DURATION FUND
Short Duration Fund's investment objective is to provide investors with a
high level of current income, consistent with relatively low volatility of
principal, that is exempt from regular federal income tax. Short Duration Fund
will seek to achieve its objective primarily through investments in fixed income
securities ("Tax Free Securities") issued by or on behalf of states, territories
and possessions of the United States (including the District of Columbia) and
their political subdivisions, agencies and instrumentalities, the interest on
which is exempt from regular federal income tax and is not a tax preference item
under the federal alternative minimum tax. In addition, Tax-Free Securities
include participation interests in such securities the interest on which is, in
the opinion of counsel, exempt from such taxes.
Under normal market conditions, Short Duration Fund will invest at least
80% of its net assets in Tax-Free Securities. Although it does not expect to do
so, Short Duration Fund may invest up to 20% of its net assets in private
activity bonds. Interest on certain private activity bonds may, when distributed
by Short Duration Fund, increase the liability, if any, of certain investors for
the federal alternative minimum tax. Private activity bonds and Tax-Free
Securities are referred to herein as "Municipal Securities."
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Short Duration Fund's investments in Municipal Securities will at the time
of investment be rated at least A by Standard & Poor's Ratings Group ("Standard
& Poor's") or Moody's Investors Service, Inc. ("Moody's") or their equivalent
ratings or, if unrated by such rating organizations, determined by the Adviser
to be of comparable credit quality. The credit rating assigned to Municipal
Securities by these rating agencies or by the Adviser may reflect the existence
of guarantees, letters of credit or other credit enhancement features available
to the issuers or holders of such Municipal Securities.
Although Short Duration Fund is not expected to do so, Short Duration Fund
may invest as much as 20% of its net assets in taxable investments which are
obligations issued or guaranteed by the U.S. Government, its agencies and
instrumentalities and repurchase agreements collateralized by U.S. Government
securities ("Taxable Investments"). Short Duration Fund may invest more than 20%
of its net assets in Taxable Investments for temporary defensive purposes when,
in the judgment of the Adviser, market conditions warrant. Except for such
temporary investments, at no time will Short Duration Fund's investments in
private activity bonds and Taxable Investments exceed, in the aggregate, 20% of
Short Duration Fund's net assets.
Short Duration Fund will maintain an average weighted portfolio duration of
two to three years. The individual Municipal Securities in which the Short
Duration Fund investments will have effective maturities of five years or less.
The terms "duration" and "effective maturity" are defined in Short Duration
Fund's Prospectus under "Investment Objective and Policies." There can be no
assurance that Short Duration Fund will achieve its investment objective.
CORE FUND
Core Fund's investment objective is to provide investors with a total
return consisting of capital appreciation and income that exceeds the total
return of the Lehman Brothers Aggregate Bond Index (the "Index"). There can be
no assurance that Core Fund will achieve its investment objective.
Core Fund will seek to achieve its objective by investing, under normal
market conditions, primarily in fixed income securities, including securities
issued or guaranteed by the U.S. Government or its agencies, authorities,
instrumentalities or sponsored enterprises, corporate securities, Mortgage-
Backed Securities, and asset-backed securities. The Adviser will determine
periodically the weighting of such securities based upon the Adviser's
expectation for changes in interest rates, market conditions, the credit quality
of individual issuers and other factors it deems relevant. The Adviser will have
access to the research of, and proprietary technical models developed by,
Goldman
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Sachs and will apply quantitative and qualitative analysis in determining the
appropriate allocations among issuers and types of securities.
The fixed income securities in which Core Fund invests will, at the time of
investment, be rated at least BBB by Standard & Poor's, Baa by Moody's or BBB by
Fitch Investors Service, Inc. ("Fitch") or their respective equivalent ratings
or, if unrated by such rating organizations, determined by the Adviser to be of
comparable credit quality. A security will be deemed to have met this
requirement if it receives the minimum required rating from at least one of such
rating organizations even though it has been rated below the minimum rating by
one or more other rating organizations.
Core Fund will maintain, under normal market conditions, an average
portfolio duration within a range equal to the duration of the Index plus or
minus one year. The Adviser may, however, decrease Core Fund's average portfolio
duration without limit if the Adviser believes that a shorter duration is
warranted by the outlook for interest rates or market conditions. There is no
limitation as to Core Fund's maximum weighted average portfolio maturity or the
maximum stated maturity with respect to individual securities. During the past
ten years, the average duration of the Index has generally varied between 4.2
and 5.4 years.
The fixed income securities in which Core Fund may invest include
obligations of foreign issuers and obligations denominated in U.S. dollars or
foreign currencies. The non-dollar denominated fixed income securities in which
Core Fund may invest will, at the time of investment, be rated at least AA by
Standard & Poor's, Aa by Moody's or AA by Fitch or, if unrated by such rating
organizations, determined by the Adviser to be of comparable credit quality.
Core Fund's investments in fixed income securities may also include Short-Term
Investments (as defined below), convertible securities, custody receipts and
municipal securities.
It is expected that Core Fund will employ certain interest rate management
techniques. These techniques will be used both to hedge the interest rate risks
associated with Core Fund's portfolio securities and to seek to increase total
return. Such techniques include options on securities, futures contracts,
options on futures contracts, interest rate and mortgage swaps, interest rate
caps, floors and collars, forward commitments, lending portfolio securities,
repurchase agreements and mortgage dollar rolls. Core Fund may also engage in
certain currency management techniques, including futures and options on
currencies, forward foreign currency exchange contracts and currency swaps, but
only for hedging purposes.
The Adviser will utilize a variety of investment strategies to seek to
achieve Core Fund's investment objective, while complying
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with Core Fund's duration and credit quality requirements. Three of these
strategies are described below.
MARKET SECTOR SELECTION. Market sector selection is the underweighting or
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overweighting of one or more market sectors (i.e., U.S. Treasuries, U.S.
Government agencies, corporate securities, Mortgage-Backed Securities and asset-
backed securities). The Adviser may decide to overweight or underweight a given
market sector or subsector (e.g., within the corporate sector, industrials,
financial issuers and utilities) based on, among other things, expectations of
future yield spreads between different sectors or subsectors. As an example,
when the Adviser expects spreads between yields for corporates and U.S.
Treasuries to narrow, the Adviser may overweight corporates relative to U.S.
Treasuries to take advantage of expected price appreciation. As of January 31,
1995, the weighting of sectors included in the Index was as follows: U.S.
Treasury securities -- 47%; Mortgage-Backed Securities -- 29%; Corporate
securities -- 16%; U.S. Government agencies -- 7% and Asset-Backed securities
-- 1%.
YIELD CURVE STRATEGY. Yield curve strategy consists of overweighting or
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underweighting different maturity sectors relative to a benchmark to take
advantage of the shape of the yield curve. Three alternative maturity sector
selections are available: a "barbell" strategy in which short and long maturity
sectors are overweighted while intermediate maturity sectors are underweighted
which may be used when the Adviser expects the yield curve to flatten; a
"bullet" strategy in which, conversely, short- and long-maturity sectors are
underweighted while intermediate-maturity sectors are overweighted when the
Adviser expects the yield curve either to steepen or to flatten less than
implied by forward rates; and a "neutral yield curve" strategy in which the
maturity distribution mirrors that of a benchmark.
ISSUER SELECTION. Issuer selection is the purchase and sale of
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corporate securities based on a corporation's current and expected credit
standing (within the constraints imposed by the Fund's minimum credit quality
requirements). This strategy focuses on four types of investment grade
corporate issuers. Selection of securities from the first type of issuers --
those with low but stable credit -- enhances total returns by providing
incremental yield. Selecting securities from the second type of issuers --those
with low and intermediate but improving credit quality --enhances total returns
in two stages. Initially, these securities provide incremental yield.
Eventually, price appreciation occurs relative to alternative securities as
credit quality improves, the nationally recognized statistical rating
organizations upgrade credit ratings, and credit spreads narrow. Securities
from the third type of issuers -- issuers with deteriorating credit quality --
will be avoided, since total returns are enhanced by avoiding the widening of
credit spreads and the consequent relative price depreciation. Finally, total
returns can be enhanced by focusing
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on securities that are rated differently by different rating organizations. If
the securities are trading in line with the higher published quality rating
while the Adviser concurs with the lower published quality rating, the
securities would generally be sold and any potential price deterioration
avoided. On the other hand, if the securities are trading in line with the
lower published quality rating while the higher published quality rating is
considered more realistic, the securities may be purchased in anticipation of
the expected market reevaluation and relative price appreciation.
OTHER INVESTMENTS AND PRACTICES
OBLIGATIONS OF THE UNITED STATES, ITS AGENCIES AND
INSTRUMENTALITIES
Each Fund may invest in U.S. Government securities, which are obligations
issued or guaranteed by the U.S. Government and its agencies, authorities or
instrumentalities. Some U.S. Government securities (such as Treasury bills,
notes and bonds, which differ only in their interest rates, maturities and times
of issuance) are supported by the full faith and credit of the United States of
America. Others, such as obligations issued or guaranteed by U.S. Government
agencies, authorities or instrumentalities, are supported either by (a) the full
faith and credit of the U.S. Government (such as securities of the Small
Business Administration), (b) the right of the issuer to borrow from the
Treasury (such as securities of Federal Home Loan Banks), (c) the discretionary
authority of the U.S. Government to purchase the agency's obligations (such as
securities of Fannie Mae) or (d) only the credit of the issuer (such as
securities of the Financing Corporation). The U.S. Government is under no legal
obligation, in general, to purchase the obligations of its agencies, authorities
and instrumentalities. No assurance can be given that the U.S. Government will
provide financial support to the U.S. Government agencies, authorities or
instrumentalities in the future.
Securities guaranteed as to principal and interest by the U.S. Government
and its agencies, authorities or instrumentalities are deemed to include (a)
securities for which the payment of principal and interest is backed by a
guaranty of the U.S. Government or its agencies, authorities or
instrumentalities and (b) participations in loans made to foreign governments or
their agencies that are so guaranteed. The secondary market for certain of these
participations is limited. Such participations may therefore be regarded as
illiquid.
The Funds may also invest in separately traded principal and interest
components of securities guaranteed or issued by the U.S. Treasury if such
components are traded independently under the separate trading of registered
interest and principal of securities
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program ("STRIPS").
CUSTODIAL RECEIPTS
The Funds may each acquire custodial receipts in respect of U.S. Government
securities. Such custodial receipts evidence ownership of future interest
payments, principal payments or both on certain notes or bonds. These custodial
receipts are known by various names, including "Treasury Receipts," "Treasury
Investors Growth Receipts" ("TIGRs"), and "Certificates of Accrual on Treasury
Securities" ("CATS"). For certain securities law purposes, custodial receipts
are not considered U.S. Government securities.
MORTGAGE LOANS AND MORTGAGE-BACKED SECURITIES
Adjustable Rate Fund, Short-Term Fund and Core Fund invest in mortgage
loans and Mortgage-Backed Securities.
GENERAL CHARACTERISTICS. Each mortgage pool underlying Mortgage-Backed
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Securities consists of mortgage loans evidenced by promissory notes secured by
first mortgages or first deeds of trust or other similar security instruments
creating a first lien on owner occupied and non-owner occupied one-unit to four-
unit residential properties, multi-family (i.e., five or more) properties,
agriculture properties, commercial properties and mixed use properties (the
"Mortgaged Properties"). The Mortgaged Properties may consist of detached
individual dwelling units, multi-family dwelling units, individual condominiums,
townhouses, duplexes, triplexes, fourplexes, row houses, individual units in
planned unit developments and other attached dwelling units. The Mortgage
Properties may also include residential investment properties and second homes.
The investment characteristics of adjustable and fixed rate Mortgage-Backed
Securities differ from those of traditional fixed income securities. The major
differences include the payment of interest and principal on Mortgage-Backed
Securities on a more frequent (usually monthly) schedule, and the possibility
that principal may be prepaid at any time due to prepayments on the underlying
mortgage loans or other assets. These differences can result in significantly
greater price and yield volatility than is the case with traditional fixed
income securities. As a result, if a Fund purchases Mortgage-Backed Securities
at a premium, a faster than expected prepayment rate will reduce both the market
value and the yield to maturity from those which were anticipated. A prepayment
rate that is slower than expected will have the opposite effect of increasing
yield to maturity and market value. Conversely, if a Fund purchases Mortgage-
Backed Securities at a discount, faster than expected prepayments will increase,
while slower than expected prepayments will reduce, yield to maturity and
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market values. To the extent that the Funds invest in Mortgage-Backed
Securities, the Advisers will seek to manage these potential risks by investing
in a variety of Mortgage-Backed Securities and by using certain hedging
techniques.
ADJUSTABLE RATE MORTGAGE LOANS ("ARMS"). ARMs generally provide for a
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fixed initial mortgage interest rate for a specified period of time.
Thereafter, the interest rates (the "Mortgage Interest Rates") may be subject to
periodic adjustment based on changes in the applicable index rate (the "Index
Rate"). The adjusted rate would be equal to the Index Rate plus a fixed
percentage spread over the Index Rate established for each ARM at the time of
its origination.
Adjustable interest rates can cause payment increases that some mortgagors
may find difficult to make. However, certain ARMs may provide that the Mortgage
Interest Rate may not be adjusted to a rate above an applicable lifetime maximum
rate or below an applicable lifetime minimum rate for such ARM. Certain ARMs may
also be subject to limitations on the maximum amount by which the Mortgage
Interest Rate may adjust for any single adjustment period (the "Maximum
Adjustment"). Other ARMs ("Negatively Amortizing ARMs") may provide instead or
as well for limitations on changes in the monthly payment on such ARMs.
Limitations on monthly payments can result in monthly payments which are greater
or less than the amount necessary to amortize a Negatively Amortizing ARM by its
maturity at the Mortgage Interest Rate in effect in any particular month. In the
event that a monthly payment is not sufficient to pay the interest accruing on a
Negatively Amortizing ARM, any such excess interest is added to the principal
balance of the loan, causing negative amortization, and will be repaid through
future monthly payments. It may take borrowers under Negatively Amortizing ARMs
longer periods of time to build up equity and may increase the likelihood of
default by such borrowers. In the event that a monthly payment exceeds the sum
of the interest accrued at the applicable Mortgage Interest Rate and the
principal payment which would have been necessary to amortize the outstanding
principal balance over the remaining term of the loan, the excess (or
"accelerated amortization") further reduces the principal balance of the ARM.
Negatively Amortizing ARMs do not provide for the extension of their original
maturity to accommodate changes in their Mortgage Interest Rate. As a result,
unless there is a periodic recalculation of the payment amount (which there
generally is), the final payment may be substantially larger than the other
payments. These limitations on periodic increases in interest rates and on
changes in monthly payments protect borrowers from unlimited interest rate and
payment increases.
There are two main categories of indices which provide the basis for rate
adjustments on ARMs: those based on U.S. Treasury securities and those derived
from a calculated measure, such as a
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cost of funds index or a moving average of mortgage rates. Commonly utilized
indices include the one-year, three-year and five-year constant maturity
Treasury rates, the three-month Treasury bill rate, the 180-day Treasury bill
rate, rates on longer-term Treasury securities, the 11th District Federal Home
Loan Bank Cost of Funds, the National Median Cost of Funds, the one-month,
three-month, six-month or one year London Interbank Offered Rate, the prime
rate of a specific bank or commercial paper rates. Some indices, such as the
one-year constant maturity Treasury rate, closely mirror changes in market
interest rate levels. Others, such as the 11th District Federal Home Loan Bank
Cost of Funds index, tend to lag behind changes in market rate levels and tend
to be somewhat less volatile. The degree of volatility in the market value of
each Fund's portfolio and therefore in the net asset value of the Adjustable
Rate Fund and Short-Term Fund's shares will be a function of the length of the
interest rate reset periods and the degree of volatility in the applicable
indices.
ADJUSTABLE RATE MORTGAGE-BACKED SECURITIES MARKET. The market for U.S.
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Government agency adjustable rate Mortgage-Backed Securities has developed
rapidly in recent years, with over $217.9 billion in such securities now issued.
ARMs have accounted for a major portion of mortgage originations since federally
chartered thrifts were permitted to originate them in 1981. The growth of the
market for U.S. Government agency adjustable rate Mortgage-Backed Securities is
the result of this increasing popularity of ARMs, new investment products and
research.
GOVERNMENT GUARANTEED MORTGAGE-BACKED SECURITIES. There are several types
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of guaranteed Mortgage-Backed Securities currently available, including
guaranteed mortgage pass-through certificates and multiple class securities,
which include guaranteed Real Estate Mortgage Investment Conduit Certificates
("REMIC Certificates"), other collateralized mortgage obligations and stripped
Mortgage-Backed Securities. Adjustable Rate Fund, Short-Term Fund and Core Fund
are permitted to invest in other types of Mortgage-Backed Securities that may be
available in the future to the extent consistent with their respective
investment policies and objectives.
GUARANTEED MORTGAGE PASS-THROUGH SECURITIES
GINNIE MAE CERTIFICATES. The Government National Mortgage Association
-----------------------
("Ginnie Mae") is a wholly-owned corporate instrumentality of the United States.
Ginnie Mae is authorized to guarantee the timely payment of the principal of and
interest on certificates that are based on and backed by a pool of mortgage
loans insured by the Federal Housing Administration ("FHA Loans"), or guaranteed
by the Veterans Administration ("VA Loans"), or by pools of other eligible
mortgage loans. In order to meet its obligations under any guaranty, Ginnie Mae
is authorized to borrow
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from the U.S. Treasury in an unlimited amount.
FANNIE MAE CERTIFICATES. The Federal National Mortgage Association
-----------------------
("Fannie Mae") is a stockholder-owned corporation chartered under an act of the
U.S. Congress. Each Fannie Mae Certificate is issued and guaranteed by Fannie
Mae and represents an undivided interest in a pool of mortgage loans (a "Pool")
formed by Fannie Mae. Each Pool consists of residential mortgage loans
("Mortgage Loans") either previously owned by Fannie Mae or purchased by it in
connection with the formation of the Pool. The Mortgage Loans may be either
conventional Mortgage Loans (i.e., not insured or guaranteed by any U.S.
Government agency) or Mortgage Loans that are either insured by the Federal
Housing Administration ("FHA") or guaranteed by the Veterans Administration
("VA"). However, the Mortgage Loans in Fannie Mae Pools are primarily
conventional Mortgage Loans. The lenders originating and servicing the Mortgage
Loans are subject to certain eligibility requirements established by Fannie Mae.
Fannie Mae has certain contractual responsibilities. With respect to each
Pool, Fannie Mae is obligated to distribute scheduled monthly installments of
principal and interest after Fannie Mae's servicing and guaranty fee, whether or
not received, to Certificate holders. Fannie Mae also is obligated to distribute
to holders of Certificates an amount equal to the full principal balance of any
foreclosed Mortgage Loan, whether or not such principal balance is actually
recovered. The obligations of Fannie Mae under its guaranty of the Fannie Mae
Certificates are obligations solely of Fannie Mae.
FREDDIE MAC CERTIFICATES. The Federal Home Loan Corporation ("Freddie
------------------------
Mac") is a publicly held U.S. Government sponsored enterprise. The principal
activity of Freddie Mac currently is the purchase of first lien, conventional,
residential mortgage loans and participation interests in such mortgage loans
and their resale in the form of mortgage securities, primarily Freddie Mac
Certificates. A Freddie Mac Certificate represents a pro rata interest in a
group of mortgage loans or participations in mortgage loans (a "Freddie Mac
Certificate group") purchased by Freddie Mac.
Freddie Mac guarantees to each registered holder of a Freddie Mac
Certificate the timely payment of interest at the rate provided for by such
Freddie Mac Certificate (whether or not received on the underlying loans).
Freddie Mac also guarantees to each registered Certificate holder ultimate
collection of all principal of the related mortgage loans, without any offset or
deduction, but does not, generally, guarantee the timely payment of scheduled
principal. The obligations of Freddie Mac under its guaranty of Freddie Mac
Certificates are obligations solely of Freddie Mac.
The mortgage loans underlying the Freddie Mac and Fannie Mae Certificates
consist of adjustable rate or fixed rate mortgage
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<PAGE>
loans with original terms to maturity of between five and thirty years.
Substantially all of these mortgage loans are secured by first liens on one- to
four-family residential properties or multi-family projects. Each mortgage
loans must meet the applicable standards set forth in the law creating Freddie
Mac or Fannie Mae. A Freddie Mac Certificate group may include whole loans,
participation interests in whole loans, undivided interests in whole loans and
participations comprising another Freddie Mac Certificate group.
CONVENTIONAL MORTGAGE LOANS. The conventional mortgage loans underlying
---------------------------
the Freddie Mac and Fannie Mae Certificates will consist of adjustable rate or
fixed rate mortgage loans with original terms to maturity of between five and
thirty years. Substantially all of these mortgage loans are secured by first
liens on one- to four-family residential properties or multi-family projects.
Each mortgage loan must meet the applicable standards set forth in the law
creating Freddie Mac or Fannie Mae. A Freddie Mac Certificate group may include
whole loans, participation interests in whole loans, undivided interests on
whole loans and participations comprising another Freddie Mac Certificate group.
MORTGAGE PASS-THROUGH SECURITIES. Adjustable Rate Fund, Short-Term Fund
--------------------------------
and Core Fund may invest in government guaranteed mortgage pass-through
securities ("Mortgage Pass-Throughs"), that are fixed or adjustable rate
mortgage-backed securities which provide for monthly payments that are a "pass-
through" of the monthly interest and principal payments (including any
prepayments) made by the individual borrowers on the pooled mortgage loans, net
of any fees or other amounts paid to any guarantor, administrator and/or
servicer of the underlying mortgage loans. Core Fund may also invest in
privately issued Mortgage Pass-Throughs.
The following discussion describes only a few of the wide variety of
structures of Mortgage Pass-Throughs that are available or may be issued.
DESCRIPTION OF CERTIFICATES. Mortgage Pass-Throughs may be issued in one
---------------------------
or more classes of senior certificates and one or more classes of subordinate
certificates. Each such class may bear a different pass-through rate. Generally,
each certificate will evidence the specified interest of the holder thereof in
the payments of principal or interest or both in respect of the mortgage pool
comprising part of the trust fund for such certificates.
Any class of certificates may also be divided into subclasses entitled
to varying amounts of principal and interest. If a REMIC election has been
made, certificates of such subclasses may be entitled to payments on the basis
of a stated principal balance and stated interest rate, and payments among
different subclasses may be made on a sequential, concurrent, pro rata or
--- ----
disproportionate
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<PAGE>
basis, or any combination thereof. The stated interest rate on any such
subclass of certificates may be a fixed rate or one which varies in direct or
inverse relationship to an objective interest index.
Generally, each registered holder of a certificate will be entitled to
receive its pro rata share of monthly distributions of all or a portion of
--- ----
principal of the underlying mortgage loans or of interest on the principal
balances thereof, which accrues at the applicable mortgage pass-through rate, or
both. The difference between the mortgage interest rate and the related
mortgage pass-through rate (less the amount, if any, of retained yield) with
respect to each mortgage loan will generally be paid to the servicer as a
servicing fee. Since certain adjustable rate mortgage loans included in a
mortgage pool may provide for deferred interest (i.e., negative amortization),
the amount of interest actually paid by a mortgagor in any month may be less
than the amount of interest accrued on the outstanding principal balance of the
related mortgage loan during the relevant period at the applicable mortgage
interest rate. In such event, the amount of interest that is treated as
deferred interest will be added to the principal balance of the related mortgage
loan and will be distributed pro rata to certificate-holders as principal of
--- ----
such mortgage loan when paid by the mortgagor in subsequent monthly payments or
at maturity.
PRIVATELY ISSUED MORTGAGE-BACKED SECURITIES
RATINGS. The ratings assigned by a rating organization to Mortgage
-------
Pass-Throughs address the likelihood of the receipt of all distributions on the
underlying mortgage loans by the related certificate-holders under the
agreements pursuant to which such certificates are issued. A rating
organization's ratings take into consideration the credit quality of the related
mortgage pool, including any credit support providers, structural and legal
aspects associated with such certificates, and the extent to which the payment
stream on such mortgage pool is adequate to make payments required by such
certificates. A rating organization's ratings on such certificates do not,
however, constitute a statement regarding frequency of prepayments on the
related mortgage loans. In addition, the rating assigned by a rating
organization to a certificate does not address the remote possibility that, in
the event of the insolvency of the issuer of certificates where a subordinated
interest was retained, the issuance and sale of the senior certificates may be
recharacterized as a financing and, as a result of such recharacterization,
payments on such certificates may be affected.
CREDIT ENHANCEMENT. Credit support falls generally into two categories:
------------------
(i) liquidity protection and (ii) protection against losses resulting from
default by an obligor on the underlying assets. Liquidity protection refers to
the provision of advances,
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<PAGE>
generally by the entity administering the pools of mortgages, the provision of a
reserve fund, or a combination thereof, to ensure, subject to certain
limitations, that scheduled payments on the underlying pool are made in a timely
fashion. Protection against losses resulting from default ensures ultimate
payment of the obligations on at least a portion of the assets in the pool.
Such credit support can be provided by among other things, payment guarantees,
letters of credit, pool insurance, subordination, or any combination thereof.
SUBORDINATION; SHIFTING OF INTEREST; RESERVE FUND. In order to achieve
-------------------------------------------------
ratings on one or more classes of Mortgage Pass-Throughs, one or more classes of
certificates may be subordinate certificates which provide that the rights of
the subordinate certificate-holders to receive any or a specified portion of
distributions with respect to the underlying mortgage loans may be subordinated
to the rights of the senior certificate-holders. If so structured, the
subordination feature may be enhanced by distributing to the senior certificate-
holders on certain distribution dates, as payment of principal, a specified
percentage (which generally declines over time) of all principal payments
received during the preceding prepayment period ("shifting interest credit
enhancement"). This will have the effect of accelerating the amortization of the
senior certificates while increasing the interest in the trust fund evidenced by
the subordinate certificates. Increasing the interest of the subordinate
certificates relative to that of the senior certificates is intended to preserve
the availability of the subordination provided by the subordinate certificates.
In addition, because the senior certificate-holders in a shifting interest
credit enhancement structure are entitled to receive a percentage of principal
prepayments which is greater than their proportionate interest in the trust
fund, the rate of principal prepayments on the mortgage loans will have an even
greater effect on the rate of principal payments and the amount of interest
payments on, and the yield to maturity of, the senior certificates.
In addition to providing for a preferential right of the senior certificat-
holders to receive current distributions from the mortgage pool, a reserve fund
may be established relating to such certificates (the "Reserve Fund"). The
Reserve Fund may be created with an initial cash deposit by the originator or
servicer and augmented by the retention of distributions otherwise available to
the subordinate certificate-holders or by excess servicing fees until the
Reserve Fund reaches a specified amount.
The subordination feature, and any Reserve Fund, are intended to enhance
the likelihood of timely receipt by senior certificate-holders of the full
amount of scheduled monthly payments of principal and interest due them and will
protect the senior certificate-holders against certain losses; however, in
certain circumstances the Reserve Fund could be depleted and
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<PAGE>
temporary shortfalls could result. In the event the Reserve Fund is depleted
before the subordinated amount is reduced to zero, senior certificate-holders
will nevertheless have a preferential right to receive current distributions
from the mortgage pool to the extent of the then outstanding subordinated
amount. Unless otherwise specified, until the subordinated amount is reduced to
zero, on any distribution date any amount otherwise distributable to the
subordinate certificates or, to the extent specified, in the Reserve Fund will
generally be used to offset the amount of any losses realized with respect to
the mortgage loans ("Realized Losses"). Realized Losses remaining after
application of such amounts will generally be applied to reduce the ownership
interest of the subordinate certificates in the mortgage pool. If the
subordinated amount has been reduced to zero, Realized Losses generally will be
allocated pro rata among all certificate-holders in proportion to their
--- ----
respective outstanding interests in the mortgage pool.
ALTERNATIVE CREDIT ENHANCEMENT. As an alternative, or in addition to the
------------------------------
credit enhancement afforded by subordination, credit enhancement for Mortgage
Pass-Throughs may be provided by mortgage insurance, hazard insurance, by the
deposit of cash, certificates of deposit, letters of credit, a limited guaranty
or by such other methods as are acceptable to a rating agency. In certain
circumstances, such as where credit enhancement is provided by guarantees or a
letter of credit, the security is subject to credit risk because of its exposure
to an external credit enhancement provider.
VOLUNTARY ADVANCES. Generally, in the event of delinquencies in payments
------------------
on the mortgage loans underlying the Mortgage Pass-Throughs, the servicer agrees
to make advances of cash for the benefit of certificate-holders, but only to the
extent that it determines such voluntary advances will be recoverable from
future payments and collections on the mortgage loans or otherwise.
OPTIONAL TERMINATION. Generally, the servicer may, at its option with
--------------------
respect to any certificates, repurchase all of the underlying mortgage loans
remaining outstanding at such time as the aggregate outstanding principal
balance of such mortgage loans is less than a specified percentage (generally 5-
10%) of the aggregate outstanding principal balance of the mortgage loans as of
the cut-off date specified with respect to such series.
MULTIPLE CLASS MORTGAGE-BACKED SECURITIES AND COLLATERALIZED MORTGAGE
---------------------------------------------------------------------
OBLIGATIONS. Adjustable Rate Fund, Short-Term Fund and Core Fund may invest in
-----------
multiple class securities including collateralized mortgage obligations ("CMOs")
and REMIC Certificates issued by U.S. Government agencies and instrumentalities
such as Fannie Mae or, in the case of Core Fund, Freddie Mac or by trusts formed
by private originators of, or investors in, mortgage loans, including savings
and loan associations, mortgage bankers,
B-20
<PAGE>
commercial banks, insurance companies, investment banks and special purpose
subsidiaries of the foregoing. In general, CMOs are debt obligations of a legal
entity that are collateralized by, and multiple class mortgage-backed securities
represent direct ownership interests in, a pool of mortgage loans or mortgage-
backed securities the payments on which are used to make payments on the CMOs or
multiple class mortgage-backed securities.
Fannie Mae REMIC Certificates are issued and guaranteed as to timely
distribution of principal and interest by Fannie Mae. In addition, Fannie Mae
will be obligated to distribute the principal balance of each class of REMIC
Certificates in full, whether or not sufficient funds are otherwise available.
Freddie Mac guarantees the timely payment of interest on Freddie Mac REMIC
Certificates and also guarantees the payment of principal as payments are
required to be made on the underlying mortgage participation certificates
("PCs"). PCs represent undivided interests in specified level payment,
residential mortgages or participations therein purchased by Freddie Mac and
placed in a PC pool. With respect to principal payments on PCs, Freddie Mac
generally guarantees ultimate collection of all principal of the related
mortgage loans without offset or deduction. Freddie Mac also guarantees timely
payment of principal of certain PCs.
CMOs and guaranteed REMIC Certificates issued by Fannie Mae and Freddie Mac
are types of multiple class mortgage-backed securities. Investors may purchase
beneficial interests in REMICs, which are known as "regular" interests or
"residual" interests. The Funds do not intend to purchase residual interests in
REMICs. The REMIC Certificates represent beneficial ownership interests in a
REMIC trust, generally consisting of mortgage loans or Fannie Mae, Freddie Mac
or Ginnie Mae guaranteed mortgage-backed securities (the "Mortgage Assets"). The
obligations of Fannie Mae or Freddie Mac under their respective guaranty of the
REMIC Certificates are obligations solely of Fannie Mae or Freddie Mac,
respectively.
CMOs and REMIC Certificates are issued in multiple classes. Each class of
CMOs or REMIC Certificates, often referred to as a "tranche," is issued at a
specific adjustable or fixed interest rate and must be fully retired no later
than its final distribution date. Principal prepayments on the Mortgage Loans or
the Mortgage Assets underlying the CMOs or REMIC Certificates may cause some or
all of the classes of CMOs or REMIC Certificates to be retired substantially
earlier than their final scheduled distribution dates. Generally, interest is
paid or accrues on all classes of CMOs or REMIC Certificates on a monthly basis.
The principal of and interest on the Mortgage Assets may be allocated among
the several classes of CMOs or REMIC Certificates
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<PAGE>
in various ways. In certain structures (known as "sequential pay" CMOs or REMIC
Certificates), payments of principal, including any principal prepayments, on
the Mortgage Assets generally are applied to the classes of CMOs or REMIC
Certificates in the order of their respective final distribution dates. Thus no
payment of principal will be made on any class of sequential pay CMOs or REMIC
Certificates until all other classes having an earlier final distribution date
have been paid in full.
Additional structures of CMOs and REMIC Certificates include, among others,
"parallel pay" CMOs and REMIC Certificates. Parallel pay CMOs or REMIC
Certificates are those which are structured to apply principal payments and
prepayments of the Mortgage Assets to two or more classes concurrently on a
proportionate or disproportionate basis. These simultaneous payments are taken
into account in calculating the final distribution date of each class.
A wide variety of REMIC Certificates may be issued in parallel pay or
sequential pay structures. These securities include accrual certificates (also
known as "Z-Bonds"), which only accrue interest at a specified rate until all
other certificates having an earlier final distribution date have been retired
and are converted thereafter to an interest-paying security, and planned
amortization class ("PAC") certificates, which are parallel pay REMIC
Certificates that generally require that specified amounts of principal be
applied on each payment date to one or more classes of REMIC Certificates (the
"PAC Certificates"), even though all other principal payments and prepayments of
the Mortgage Assets are then required to be applied to one or more other classes
of the Certificates. The scheduled principal payments for the PAC Certificates
generally have the highest priority on each payment date after interest due has
been paid to all classes entitled to receive interest currently. Shortfalls, if
any, are added to the amount payable on the next payment date. The PAC
Certificate payment schedule is taken into account in calculating the final
distribution date of each class of PAC. In order to create PAC tranches, one or
more tranches generally must be created that absorb most of the volatility in
the underlying mortgage assets. These tranches tend to have market prices and
yields that are much more volatile than other PAC classes.
STRIPPED MORTGAGE-BACKED SECURITIES. Adjustable Rate Fund, Short-Term
-----------------------------------
Fund and Core Fund may invest in stripped Mortgage-Backed Securities ("SMBS"),
which are derivative multi-class mortgage securities, issued or guaranteed by
the U.S. Government, its agencies or instrumentalities. Core Fund may also
invest in privately-issued SMBS. Although the market for such securities is
increasingly liquid, privately issued SMBS may not be readily marketable and
will be considered illiquid for purposes of Core Fund's limitation on
investments in illiquid securities. The market value of the class consisting
entirely of principal payments generally is unusually volatile in response to
changes in interest
B-22
<PAGE>
rates. The yields on a class of SMBS that receives all or most of the interest
from Mortgage Assets are generally higher than prevailing market yields on other
mortgage-backed securities because their cash flow patterns are more volatile
and there is a greater risk that the initial investment will not be fully
recouped.
LEGAL CONSIDERATIONS OF MORTGAGE LOANS. The following is a discussion of
--------------------------------------
certain legal regulatory aspects of all mortgage loans including the adjustable
and fixed rate mortgage loans expected to underlie the Mortgage-Backed
Securities in which Adjustable Rate Fund, Short-Term Fund and Core Fund may
invest. These regulations may impair the ability of a mortgage lender to enforce
its rights under the mortgage documents. These regulations may adversely affect
the Funds' investments in Mortgage-Backed Securities (including those issued or
guaranteed by the U.S. Government, its agencies or instrumentalities) by
delaying the Funds' receipt of payments derived from principal or interest on
mortgage loans affected by such regulations.
1. Foreclosure. A foreclosure of a defaulted mortgage loan may be delayed due
-----------
to compliance with statutory notice or service of process provisions,
difficulties in locating necessary parties or legal challenges to the
mortgagee's right to foreclose. Depending upon market conditions, the
ultimate proceeds of the sale of foreclosed property may not equal the
amounts owed on the Mortgage-Backed Securities.
Furthermore, courts in some cases have imposed general equitable principles
upon foreclosure generally designed to relieve the borrower from the legal
effect of default and have required lenders to undertake affirmative and
expensive actions to determine the causes for the default and the
likelihood of loan reinstatement.
2. Rights of Redemption. In some states, after foreclosure of a mortgage
--------------------
loan, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the property, which right may diminish the
mortgagee's ability to sell the property.
3. Legislative Limitations. In addition to anti-deficiency and related
-----------------------
legislation, numerous other federal and state statutory provisions,
including the federal bankruptcy laws and state laws affording relief to
debtors, may interfere with or affect the ability of a secured mortgage
lender to enforce its security interest. For example, a bankruptcy court
may grant the debtor a reasonable time to cure a default on a mortgage
loan, including a payment default. The court in certain instances may also
reduce the monthly payments due under such mortgage loan, change the rate
of interest, reduce the principal balance of the loan to the then-current
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<PAGE>
appraised value of the related mortgaged property, alter the mortgage loan
repayment schedule and grant priority of certain liens over the lien of the
mortgage loan. If a court relieves a borrower's obligation to repay
amounts otherwise due on a mortgage loan, the mortgage loan servicer will
not be required to advance such amounts, and any loss may be borne by the
holders of securities backed by such loans. In addition, numerous federal
and state consumer protection laws impose penalties for failure to comply
with specific requirements in connection with origination and servicing of
mortgage loans.
4. "Due-on-Sale" Provisions. Fixed-rate mortgage loans may contain a so-
------------------------
called "due-on-sale" clause permitting acceleration of the maturity of the
mortgage loan if the borrower transfers the property. The Garn-St. Germain
Depository Institutions Act of 1982 sets forth nine specific instances in
which no mortgage lender covered by that Act may exercise a "due-on-sale"
clause upon a transfer of property. The inability to enforce a "due-on-
sale" clause or the lack of such a clause in mortgage loan documents may
result in a mortgage loan being assumed by a purchaser of the property that
bears an interest rate below the current market rate.
5. Usury Laws. Some states prohibit charging interest on mortgage loans in
----------
excess of statutory limits. If such limits are exceeded, substantial
penalties may be incurred and, in some cases, enforceability of the
obligation to pay principal and interest may be affected.
ASSET-BACKED SECURITIES
Core Fund may invest in asset-backed securities. Such securities are often
subject to more rapid repayment than their stated maturity date would indicate
as a result of the pass-through of prepayments of principal on the underlying
loans. During periods of declining interest rates, prepayment of loans
underlying asset-backed securities can be expected to accelerate. Accordingly,
Core Fund's ability to maintain positions in such securities will be affected by
reductions in the principal amount of such securities resulting from
prepayments, and its ability to reinvest the returns of principal at comparable
yields is subject to generally prevailing interest rates at that time.
Credit card receivables are generally unsecured and the debtors on such
receivables are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set-off
certain amounts owed on the credit cards, thereby reducing the balance due.
Automobile receivables generally are secured, but by automobiles rather than
residential real property. Most issuers of automobile receivables permit the
loan servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to
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<PAGE>
another party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the asset-backed securities. In addition,
because of the large number of vehicles involved in a typical issuance and
technical requirements under state laws, the trustee for the holders of the
automobile receivables may not have a proper security interest in the underlying
automobiles. Therefore, there is the possibility that, in some cases,
recoveries on repossessed collateral may not be available to support payments on
these securities.
ZERO COUPON, DEFERRED INTEREST AND CAPITAL APPRECIATION BONDS
Each Fund may invest in zero coupon bonds and Short Duration and Core Fund
may invest in deferred interest and capital appreciation bonds. Zero coupon,
deferred interest and capital appreciation bonds are debt securities issued or
sold at a discount from their face value and which do not entitle the holder to
any periodic payment of interest prior to maturity or a specified date. The
original issue discount varies depending on the time remaining until maturity or
cash payment date, prevailing interest rates, the liquidity of the security and
the perceived credit quality of the issuer. These securities also may take the
form of debt securities that have been stripped of their unmatured interest
coupons, the coupons themselves or receipts or certificates representing
interests in such stripped debt obligations or coupons. The market prices of
zero coupon, deferred interest and capital appreciation bonds generally are more
volatile than the market prices of interest bearing securities and are likely to
respond to a greater degree to changes in interest rates than interest bearing
securities having similar maturities and credit quality.
Zero coupon, deferred interest and capital appreciation securities involve
the additional risk that, unlike securities that periodically pay interest to
maturity, a Fund will realize no cash until a specified future payment date
unless a portion of such securities is sold and, if the issuer of such
securities defaults, a Fund may obtain no return at all on its investment. In
addition, even though such securities do not provide for the payment of current
interest in cash, the Funds are nonetheless required to accrue income on such
investments and may be required to distribute such amounts at least annually.
Because no cash is received at the time of the accrual, a Fund may be required
to liquidate other portfolio securities to satisfy federal tax distribution
requirements applicable to the Fund. See "Taxation."
VARIABLE AND FLOATING RATE SECURITIES
The interest rates payable on certain securities in which the Funds may
invest are not fixed and may fluctuate based upon changes in market rates. A
variable rate obligation has an interest rate which is adjusted at predesignated
periods in response to changes
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<PAGE>
in the market rate of interest on which the interest rate is based. Variable
and floating rate obligations are less effective than fixed rate instruments at
locking in a particular yield. Nevertheless, such obligations may fluctuate in
value in response to interest rate changes if there is a delay between changes
in market interest rates and the interest reset date for the obligation.
CORPORATE DEBT OBLIGATIONS
Core Fund may invest in corporate debt obligations, including obligations
of industrial, utility and financial issuers. Corporate debt obligations are
subject to the risk of an issuer's inability to meeting principal and interest
payments on the obligations and may also be subject to price volatility due to
such factors as market interest rates, market perception of the creditworthiness
of the issuer and general market liquidity.
BANK OBLIGATIONS
To the extent permitted by their respective investment policies, Adjustable
Rate Fund, Short-Term Fund and Core Fund may each invest in United States dollar
denominated obligations issued or guaranteed by United States banks. Bank
obligations, including without limitation time deposits, bankers' acceptances
and certificates of deposit, may be general obligations of the parent bank or
may be obligations only of the issuing branch pursuant to the terms of the
specific obligations or government regulation.
Banks are subject to extensive but different governmental regulations which
may limit both the amount and types of loans which may be made and interest
rates which may be charged. In addition, the profitability of the banking
industry is largely dependent upon the availability and cost of funds for the
purpose of financing lending operations under prevailing money market
conditions. General economic conditions as well as exposure to credit losses
arising from possible financial difficulties of borrowers play an important part
in the operations of this industry.
MUNICIPAL SECURITIES
Core Fund and Short Duration Fund may invest in Municipal Securities.
Municipal Securities consist of bonds, notes and other instruments issued by or
on behalf of states, territories and possessions of the United states (including
the District of Columbia) and their political subdivisions, agencies or
instrumentalities, the interest on which is exempt from regular federal income
tax (i.e., excluded from gross income for federal income tax purposes but not
necessarily exempt from the federal alternative minimum tax or from the personal
income taxes of any state). In addition, Municipal Securities include
participation
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<PAGE>
interests in such securities the interest on which is, in the opinion of bond
counsel for the issuers or counsel selected by the Adviser, excluded from gross
income for federal income tax purposes. The definition of Municipal Securities
includes other types of securities that currently exist or may be developed in
the future and that pay, or will pay, in the opinion of such counsel, interest
that is excluded from gross income for federal income tax purposes, provided
that investing in such securities is consistent with each of the Fund's
investment objective and policies. Each Fund will reflect any such changes in
its definition of Municipal Securities in its Prospectus. Municipal Securities
are often issued to obtain funds for various public purposes including refunding
outstanding obligations, obtaining funds for general operating expenses, and
obtaining funds to lend to other public institutions and facilities. Municipal
Securities also include certain "private activity bonds" or industrial
development bonds, which are issued by or on behalf of public authorities to
obtain funds for privately operated facilities, such as airports and waste
disposal facilities, and in some cases commercial and industrial facilities.
The two principal classifications of Municipal Securities are "general
obligations" and "revenue obligations." General obligations are secured by the
issuer's pledge of its full faith and credit for the payment of principal and
interest, although the characteristics and enforcement of general obligations
may vary according to the law applicable to the particular issuer. Revenue
obligations, which include, but are not limited to, private activity bonds,
resource recovery bonds, certificates of participation and certain municipal
notes, are not backed by the credit and taxing authority of the issuer, and are
payable solely from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise or other
specific revenue source. Nevertheless, the obligations of the issuer of a
revenue obligation may be backed by a letter of credit, guarantee or insurance.
General obligations and revenue obligations may be issued in a variety of forms,
including commercial paper, fixed, variable and floating rate securities, tender
option bonds, auction rate bonds and zero coupon bonds, deferred interest bonds
and capital appreciation bonds.
In addition to general obligations and revenue obligations, there is a
variety of hybrid and special types of Municipal Securities. There are also
numerous differences in the security of Municipal Securities both within and
between these two principal classifications.
For the purpose of applying a Fund's investment restrictions, the
identification of the issuer of a Municipal Security which is not a general
obligation is made by the Adviser based on the characteristics of the Municipal
Security, the most important of which is the source of funds for the payment of
principal and
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<PAGE>
interest on such securities.
An entire issue of Municipal Securities may be purchased by one or a small
number of institutional investors such as Short Duration Fund and Core Fund.
Thus, the issue may not be said to be publicly offered. Unlike some securities
that are not publicly offered, a secondary market exists for many Municipal
Securities that were not publicly offered initially and such securities can be
readily marketable.
The obligations of the issuer to pay the principal of and interest on a
Municipal Security are subject to the provisions of bankruptcy, insolvency and
other laws affecting the rights and remedies of creditors, such as the Federal
Bankruptcy Act, and laws, if any, that may be enacted by Congress or state
legislatures extending the time for payment of principal or interest or imposing
other constraints upon the enforcement of such obligations. There is also the
possibility that, as a result of litigation or other conditions, the power or
ability of the issuer to pay when due principal of or interest on a Municipal
Security may be materially affected.
The yields and market values of Municipal Securities are determined
primarily by the general level of interest rates, the creditworthiness of the
issuers of Municipal Securities and economic and political conditions affecting
such issuers. Due to their tax exempt status, the yields and market prices of
Municipal Securities may be adversely affected by changes in tax rates and
policies, which may have less effect on the market for taxable fixed income
securities. Moreover, certain types of Municipal Securities, such as housing
revenue bonds, involve prepayment risks which could effect the yield on such
securities.
Investments in Municipal Securities are subject to the risk that the issuer
could default on its obligations. Such a default could result from the
inadequacy of the sources or revenues from which interest and principal payments
are to be made or the assets collateralizing such obligations. Revenue bonds,
including private activity bonds, are backed only by specific assets or revenue
sources and not by the full faith and credit of the governmental issuer.
PRIVATE ACTIVITY BONDS. Short Duration Fund and Core Fund may each invest
----------------------
certain types of Municipal Securities, generally referred to as industrial
development bonds (and referred to under current tax law as private activity
bonds), which are issued by or on behalf of public authorities to obtain funds
to provide privately operated housing facilities, airport, mass transit or port
facilities, sewage disposal, solid waste disposal or hazardous waste treatment
or disposal facilities and certain local facilities for water supply, gas or
electricity. Other types of industrial development bonds, the proceeds of which
are used for the
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construction, equipment, repair or improvement of privately operated industrial
or commercial facilities, may constitute Municipal Securities, although the
current federal tax laws place substantial limitations on the size of such
issues. Short Duration Fund's distributions of its interest income from private
activity bonds may subject certain investors to the federal alternative minimum
tax whereas Core Fund's distributions of any tax-exempt interest it receives
from any source will be taxable for regular federal income tax purposes.
INSURANCE. Short Duration Fund may invest in "insured" tax-exempt
---------
Municipal Securities. Insured Municipal Securities are those for which
scheduled payments of interest and principal are guaranteed by a private
(nongovernmental) insurance company. The insurance only entitles Short Duration
Fund to receive the face or par value of the securities held by Short Duration
Fund. The insurance does not guarantee the market value of the Municipal
Securities or the value of the shares of Short Duration Fund.
Short Duration Fund may utilize new issue or secondary market insurance. A
new issue insurance policy is purchased by a bond issuer who wishes to increase
the credit rating of a security. By paying a premium and meeting the insurer's
underwriting standards, the bond issuer is able to obtain a high credit rating
(usually, Aaa from Moody's or AAA from Standard & Poor's) for the issued
security. Such insurance is likely to increase the purchase price and resale
value of the security. New issue insurance policies are non-cancellable and
continue in force as long as the bonds are outstanding.
A secondary market insurance policy is purchased by an investor (such as
Short Duration Fund) subsequent to a bond's original issuance and generally
insures a particular bond for the remainder of its term. Short Duration Fund
may purchase bonds which have already been insured under a secondary market
insurance policy by a prior investor, or Short Duration Fund may itself purchase
such a policy from insurers for bonds which are currently uninsured.
An insured Municipal Security acquired by Short Duration Fund will
typically be covered by only one of the above types of policies. All of the
insurance policies used by Short Duration Fund will be obtained only from
insurance companies rated, at the time of purchase, Aaa by Moody's or AAA by
Standard & Poor's.
AUCTION RATE SECURITIES. Short Duration Fund may invest in auction rate
-----------------------
securities. Auction rate securities consist of auction rate Municipal
Securities and auction rate preferred securities issued by closed-end investment
companies that invest primarily in Municipal Securities (collectively, "auction
rate securities"). Short Duration Fund does not currently intend to invest in
auction rate preferred securities. Provided that the
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<PAGE>
auction mechanism is successful, auction rate securities usually permit the
holder to sell the securities in an auction at par value at specified intervals.
The dividend is reset by "Dutch" auction in which bids are made by broker-
dealers and other institutions for a certain amount of securities at a specified
minimum yield. The dividend rate set by the auction is the lowest interest or
dividend rate that covers all securities offered for sale. While this process
is designed to permit auction rate securities to be traded at par value, there
is some risk that an auction will fail due to insufficient demand for the
securities.
Dividends on auction rate preferred securities issued by a closed-end fund
may be designated as exempt from federal income tax to the extent they are
attributable to exempt income earned by the fund on the securities in its
portfolio and distributed to holders of the preferred securities, provided that
the preferred securities are treated as equity securities for federal income tax
purposes and the closed-end fund complies with certain tests under the Code.
For purposes of complying with the 20% limitation on Short Duration Fund's
investments in Taxable Investments, auction rate preferred securities will be
treated as Taxable Investments unless substantially all of the dividends on such
securities are expected to be exempt from regular federal income taxes.
Short Duration Fund's investments in auction rate securities of closed-end
funds are subject to the limitations prescribed by the Act, and certain state
securities regulations. These limitations include a prohibition against
acquiring more than 3% of the voting securities of any other investment company,
and investing more than 5% of the Fund's assets in securities of any one
investment company or more than 10% of its assets in securities of all
investment companies. The Fund will indirectly bear its proportionate share of
any management and other fees paid by such closed-end funds in addition to the
advisory fees payable directly by the Fund.
STANDBY COMMITMENTS. In order to enhance the liquidity of Municipal
-------------------
Securities, Short Duration Fund may acquire the right to sell a security to
another party at a guaranteed price and date. Such a right to resell may be
referred to as a "standby commitment" or liquidity put, depending on its
characteristics. The aggregate price which the Fund pays for securities with
standby commitments may be higher than the price which otherwise would be paid
for the securities. Standby commitments may not be available or may not be
available on satisfactory terms.
Standby commitments may involve letters of credit issued by domestic or
foreign banks supporting the other party's ability to purchase the security from
Short Duration Fund. The right to sell may be exercisable on demand or at
specified intervals, and may form part of a security or be acquired separately
by Short Duration Fund. In considering whether a security meets Short Duration
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Fund's quality standards, the Fund will look to the creditworthiness of the
party providing the Fund with the right to sell as well as the quality of the
security itself.
Short Duration Fund values Municipal Securities which are subject to
standby commitments at amortized cost. The exercise price of the standby
commitments is expected to approximate such amortized cost. No value is
assigned to the standby commitments for purposes of determining Short Duration
Fund's net asset value. The cost of a standby commitment is carried as
unrealized depreciation from the time of purchase until it is exercised or
expires. Since the value of a standby commitment is dependent on the ability of
the standby commitment writer to meet its obligation to repurchase, Short
Duration Fund's policy is to enter into standby commitment transactions only
with banks, brokers or dealers which present a minimal risk of default.
Management of the Trust understands that the Internal Revenue Service (the
"Service") has issued a favorable revenue ruling to the effect that, under
specified circumstances, a registered investment company will be the owner of
tax-exempt municipal obligations acquired subject to a put option. The Service
has subsequently announced that it will not ordinarily issue advance ruling
letters as to the identity of the true owner of property in cases involving the
sale of securities or participation interests therein if the purchaser has the
right to cause the security, or the participation interest therein, to be
purchased by either the seller or a third party. Short Duration Fund intends to
take the position that it is the owner of any Municipal Securities acquired
subject to a standby commitment or acquired or held with certain other types of
put rights and that tax-exempt interest earned with respect to such Municipal
Securities will be tax-exempt in its hands. There is no assurance that standby
commitments will be available to Short Duration Fund nor has the Fund assumed
that such commitments would continue to be available under all market
conditions.
INTEREST RATE SWAPS, MORTGAGE SWAPS, CURRENCY SWAPS AND INTEREST RATE CAPS,
FLOORS AND COLLARS
Each Fund may enter into interest rate swaps, caps, floors and collars. In
addition, Core Fund, Adjustable Rate Fund and Short-Term Fund may enter into
mortgage swaps and Core Fund may also enter into currency swaps. A Fund will
typically use interest rate and mortgage swaps to preserve a return or spread on
a particular investment or portion of its portfolio, to protect against any
increase in the price of securities the Fund anticipates purchasing at a future
date, or to shorten the effective duration of its portfolio securities. Core
Fund may also enter into swap transactions to seek to increase total return.
Interest rate swaps involve the exchange by a Fund with another party of their
respective commitments to pay or receive interest,
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<PAGE>
such as, an exchange of fixed rate payments for floating rate payments.
Mortgage swaps are similar to interest rate swaps in that they represent
commitments to pay and receive interest. The notional principal amount,
however, is tied to a reference pool or pools of mortgages. Currency swaps
involve the exchange of the parties' respective rights to make or receive
payments in specified currencies. The purchase of an interest rate cap entitles
the purchaser, to the extent that a specified index exceeds a predetermined
interest rate, to receive payment of interest on a notional principal amount
from the party selling such interest rate cap. The purchase of an interest rate
floor entitles the purchaser, to the extent that a specified index falls below a
predetermined interest rate, to receive payments of interest on a notional
principal amount from the party selling the interest rate floor. An interest
rate collar is the combination of a cap and a floor that preserves a certain
return within a predetermined range of interest rates. Since interest rate,
mortgage and currency swaps and interest rate caps, floors and collars are
individually negotiated, each Fund expects to achieve an acceptable degree of
correlation between its portfolio investments and its swap positions.
A Fund will enter into interest rate and mortgage swaps only on a net
basis, which means that the two payment streams are netted out, with the Fund
receiving or paying, as the case may be, only the net amount of the two
payments. Interest rate and mortgage swaps do not involve the delivery of
securities, other underlying assets or principal. Accordingly, the risk of loss
with respect to interest rate and mortgage swaps is limited to the net amount of
payments that a Fund is contractually obligated to make. If the other party to
an interest rate swap defaults, a Fund's risk of loss consists of the net amount
of payments that such Fund is contractually entitled to receive, if any. In
contrast, currency swaps usually involve the delivery of the entire principal
amount of one designated currency in exchange for the other designated currency.
Therefore, the entire principal value of a currency swap is subject to the risk
that the other party to the swap will default on its contractual delivery
obligations. To the extent that the net amount of an interest rate or mortgage
swap is held in a segregated account, consisting of cash or liquid, high grade
debt securities, the Funds and the Advisers believe that swaps do not constitute
senior securities under the Investment Company Act of 1940, as amended (the
"Act") and, accordingly, will not treat them as being subject to each Fund's
borrowing restriction.
The Funds will not enter into any swap transactions unless the unsecured
commercial paper, senior debt or claims paying ability of the other party is
rated either AA or A-1 or better by Standard & Poors or Aa or P-1 or better by
Moody's or their equivalent ratings, or if unrated by such rating organizations,
determined to be of comparable quality by the applicable Adviser. The swap
market has grown substantially in recent years with a large number
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<PAGE>
of banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. As a result, the swap market has
become relatively liquid in comparison with the markets for other similar
instruments which are traded in the interbank market. The staff of the
Securities and Exchange Commission (the "SEC") currently takes the position that
swaps, caps, floors and collars are illiquid for purposes of each Fund's 15%
limitation on illiquid investments.
OPTIONS ON SECURITIES AND SECURITIES INDICES
WRITING COVERED OPTIONS. Short Duration Fund and Core Fund may write
-----------------------
(sell) covered call and put options on any securities in which they may invest
or on any securities index based on securities in which they may invest. A call
option written by a Fund obligates the Fund to sell specified securities to the
holder of the option at a specified price if the option is exercised at any time
before the expiration date. All call options written by a Fund are covered,
which means that the Fund will own the securities subject to the option so long
as the option is outstanding or use the other methods described below. The
purpose of a Fund in writing covered call options is to realize greater income
than would be realized in portfolio securities transactions alone. However, in
writing covered call options for additional income, a Fund may forego the
opportunity to profit from an increase in the market price of the underlying
security.
A put option written by a Fund obligates the Fund to purchase specified
securities from the option holder at a specified price if the option is
exercised at any time before the expiration date. All put options written by a
Fund are covered, which means that the Fund would have deposited with its
custodian cash or liquid, high-grade debt securities with a value at least equal
to the exercise price of the put option. The purpose of writing such options is
to generate additional income. However, in return for the option premium, the
Fund accepts the risk that it will be required to purchase the underlying
securities at a price in excess of the securities' market value at the time of
purchase.
In addition, a written call option or put option may be covered by
maintaining cash or liquid, high-grade debt securities in a segregated account,
by entering into an offsetting forward commitment and/or by purchasing an
offsetting option or any other option which, by virtue of its exercise price or
otherwise, reduces the Fund's net exposure on its written option position.
Short Duration Fund and Core Fund may also write (sell) covered call and
put options on any securities index composed of securities in which they may
invest. Options on securities indices are similar to options on securities,
except that the exercise of securities index options requires cash settlement
payments and does not involve the actual purchase or sale of securities. In
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<PAGE>
addition, securities index options are designed to reflect price fluctuations in
a group of securities or segment of the securities market rather than price
fluctuations in a single security.
The Funds may cover call options on a securities index by owning securities
whose price changes are expected to be similar to those of the underlying index
or by having an absolute and immediate right to acquire such securities without
additional cash consideration (or for additional cash consideration held in a
segregated account by their respective custodian) upon conversion or exchange of
other securities in its portfolio. The Funds may also cover call and put
options on a securities index by maintaining cash or liquid, high-grade debt
securities with a value equal to the exercise price in a segregated account with
their custodian or by using the other methods described above.
A Fund may terminate its obligations under an exchange traded call or put
option by purchasing an option identical to the one it has written. Obligations
under over-the-counter options may be terminated only by entering into an
offsetting transaction with the counterparty to such option. Such purchases
are referred to as "closing purchase transactions."
PURCHASING OPTIONS. Short Duration Fund and Core Fund may also purchase
------------------
put and call options on any securities in which they may invest or on any
securities index based on securities in which they may invest, and each such
Fund may enter into closing sale transactions in order to realize gains or
minimize losses on options it had purchased.
A Fund would normally purchase call options in anticipation of an increase,
or put options in anticipation of a decrease, in the market value of securities
of the type in which it may invest. The purchase of a call option would entitle
a Fund, in return for the premium paid, to purchase specified securities at a
specified price during the option period. A Fund would ordinarily realize a
gain if, during the option period, the value of such securities exceeded the sum
of the exercise price, the premium paid and transaction costs; otherwise the
Fund would realize a loss on the purchase of the call option. The purchase of a
put option would entitle a Fund, in exchange for the premium paid, to sell
specified securities at a specified price during the option period. A Fund
would ordinarily realize a gain if, during the option period, the value of the
underlying securities decreased below the exercise price sufficiently to cover
the premium and transaction costs; otherwise the Fund would realize a loss on
the purchase of the put option. Gains and losses on the purchase of put options
may be offset by countervailing changes in the value of the underlying portfolio
securities.
A Fund may purchase put and call options on securities indices for the same
purposes as it may purchase options on securities.
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<PAGE>
Options on securities indices are similar to options on securities, except that
the exercise of securities index options requires cash payments and does not
involve the actual purchase or sale of securities. In addition, securities
index options are designed to reflect price fluctuations in a group of
securities or segment of the securities market rather than price fluctuations in
a single security.
CURRENCY OPTIONS. Core Fund may write covered put and call options and
----------------
purchase put and call options on foreign currencies for the purpose of
protecting against declines in the dollar value of portfolio securities and
against increases in the dollar cost of securities to be acquired. Core Fund
may use options on currency to cross-hedge, which involves writing or purchasing
options on one currency to hedge against changes in exchange rates for a
different currency with a pattern of correlation.
A call option written by Core Fund obligates it to sell specified currency
to the holder of the option at a specified price if the option is exercised at
any time before the expiration date. A put option written by Core Fund
obligates it to purchase specified currency from the option holder at a
specified price if the option is exercised at any time before the expiration
date. The writing of currency options involves a risk that Core Fund will, upon
exercise of the option, be required to sell currency subject to a call at a
price that is less than the currency's market value or be required to purchase
currency subject to a put at a price that exceeds the currency's market value.
Core Fund may terminate its obligations under a call or put option it has
written by purchasing an option identical to the one it has written. Such
purchases are referred to as "closing purchase transactions." Core Fund would
also be able to enter into closing sale transactions in order to realize gains
or minimize losses on purchased options.
Core Fund would normally purchase call options in anticipation of an
increase in the dollar value of currency in which securities to be acquired by
Core Fund are denominated or quoted. The purchase of a call option would entitle
Core Fund, in return for the premium paid, to purchase specified currency at a
specified price during the option period. Core Fund would ordinarily realize a
gain if, during the option period, the value of such currency exceeded the sum
of the exercise price, the premium paid and transaction costs; otherwise Core
Fund would realize either no gain or a loss on the purchase of the call option.
Core Fund would normally purchase put options in anticipation of a decline
in the dollar value of currency in which securities in its portfolio are
denominated or quoted ("protective puts"). The purchase of a put option would
entitle Core Fund, in exchange for the premium paid, to sell specified currency
at a specified price
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<PAGE>
during the option period. The purchase of protective puts is designed merely to
offset or hedge against a decline in the dollar value of Core Fund's portfolio
securities due to currency exchange rate fluctuations. Core Fund would
ordinarily realize a gain if, during the option period, the value of the
underlying currency decreased below the exercise price sufficiently to more than
cover the premium and transaction costs; otherwise Core Fund would realize
either no gain or a loss on the purchase of the put option. Gains and losses on
the purchase of protective put options would tend to be offset by countervailing
changes in the value of underlying currency.
YIELD CURVE OPTIONS. Core Fund may enter into options on the yield
"spread," or yield differential between two securities. Such transactions are
referred to as "yield curve" options. In contrast to other types of options, a
yield curve option is based on the difference between the yields of designated
securities, rather than the prices of the individual securities, and is settled
through cash payments. Accordingly, a yield curve option is profitable to the
holder if this differential widens (in the case of a call) or narrows (in the
case of a put), regardless of whether the yields of the underlying securities
increase or decrease.
Core Fund may purchase or write yield curve options for the same purposes
as other options on securities. For example, Core Fund may purchase a call
option on the yield spread between two securities if it owns one of the
securities and anticipates purchasing the other security and wants to hedge
against an adverse change in the yield spread between the two securities. Core
Fund may also purchase or write yield curve options in an effort to increase its
current income if, in the judgment of the Adviser, Core Fund will be able to
profit from movements in the spread between the yields of the underlying
securities. The trading of yield curve options is subject to all of the risks
associated with the trading of other types of options. In addition, however,
such options present a risk of loss even if the yield of one of the underlying
securities remains constant, if the spread moves in a direction or to an extent
which was not anticipated.
Yield curve options written by Core Fund will be "covered." A call (or
put) option is covered if Core Fund holds another call (or put) option on the
spread between the same two securities and maintains in a segregated account
with its custodian cash or liquid, high-grade debt securities sufficient to
cover Core Fund's net liability under the two options. Therefore, Core Fund's
liability for such a covered option is generally limited to the difference
between the amount of Core Fund's liability under the option written by Core
Fund less the value of the option held by Core Fund. Yield curve options may
also be covered in such other manner as may be in accordance with the
requirements of the counterparty with which the option is traded and applicable
laws and regulations. Yield curve options are traded over-the-counter,
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<PAGE>
and because they have been only recently introduced, established trading markets
for these options have not yet developed.
RISKS ASSOCIATED WITH OPTIONS TRANSACTIONS. There is no assurance that a
------------------------------------------
liquid secondary market on an options exchange will exist for any particular
exchange-traded option or at any particular time. If a Fund is unable to effect
a closing purchase transaction with respect to covered options it has written,
the Fund will not be able to sell the underlying securities or dispose of assets
held in a segregated account until the options expire or are exercised.
Similarly, if a Fund is unable to effect a closing sale transaction with respect
to options it has purchased, it would have to exercise the options in order to
realize any profit and will incur transaction costs upon the purchase or sale of
underlying securities.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation may not at all times be adequate to handle current trading
volume; or (vi) one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of options
(or a particular class or series of options), in which event the secondary
market on that exchange (or in that class or series of options) would cease to
exist although outstanding options on that exchange that had been issued by the
Options Clearing Corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms.
Short Duration Fund and Core Fund may purchase and sell both options that
are traded on exchanges and options traded over-the-counter with broker-dealers
who make markets in these options. The ability to terminate over-the-counter
options is more limited than with exchange-traded options and may involve the
risk that broker-dealers participating in such transactions will not fulfill
their obligations. Until such time as the staff of the SEC changes its
position, the Funds will treat purchased over-the-counter options and all assets
used to cover written over-the-counter options as illiquid securities, except
that with respect to options written with primary dealers in U.S. Government
securities pursuant to an agreement requiring a closing purchase transaction at
a formula price, the amount of illiquid securities may be calculated with
reference to a formula approved by the SEC.
Transactions by the Funds in options on securities and indices will be
subject to limitations established by each of the
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<PAGE>
exchanges, boards of trade or other trading facilities governing the maximum
number of options in each class which may be written or purchased by a single
investor or group of investors acting in concert. Thus, the number of options
which a Fund may write or purchase may be affected by options written or
purchased by the other Funds and other investment advisory clients of the
Advisers. An exchange, board of trade or other trading facility may order the
liquidation of positions found to be in excess of these limits, and it may
impose certain other sanctions.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of options for
hedging purposes depends in part on the applicable Adviser's ability to predict
future price fluctuations and the degree of correlation between the options and
securities markets.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
Adjustable Rate Fund, Core Fund and Short Duration Fund may purchase and
sell futures contracts and options on futures contracts on financial instruments
and, with respect to Core Fund, currencies. Each Fund will engage in futures
and related options transactions only for bona fide hedging purposes as defined
below or, except for futures on currencies purchased or sold by Core Fund, for
purposes of seeking to increase total return to the extent permitted by the
regulations of the Commodity Futures Trading Commission ("CFTC"). All futures
contracts entered into by the Fund are traded on U.S. exchanges or boards of
trade that are licensed and regulated by the CFTC.
FUTURES CONTRACTS. A futures contract may generally be described as an
-----------------
agreement between two parties to buy and sell particular financial instruments
for an agreed price during a designated month (or to deliver the final cash
settlement price, in the case of a contract relating to an index or otherwise
not calling for physical delivery at the end of trading in the contract).
When interest rates are rising or securities prices are falling, a Fund can
seek to offset a decline in the value of its current portfolio securities
through the sale of futures contracts. When interest rates are falling or
securities prices are rising, a Fund, through the purchase of futures contracts,
can attempt to secure better rates or prices than might later be available in
the market when it effects anticipated purchases. Core Fund can seek to offset
anticipated changes in the value of a currency in which its portfolio
securities, or securities that it intends to purchase, are denominated by
purchasing and selling futures contracts on such currencies.
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<PAGE>
Positions taken in the futures markets are not normally held to maturity
but are instead liquidated through offsetting transactions which may result in a
profit or a loss. While futures contracts on securities will usually be
liquidated in this manner, a Fund may instead make, or take, delivery of the
underlying securities whenever it appears economically advantageous to do so. A
clearing corporation associated with the exchange on which futures on
securities are traded guarantees that, if still open, the sale or purchase will
be performed on the settlement date.
HEDGING STRATEGIES. Hedging, by use of futures contracts, seeks to
------------------
establish with more certainty than would otherwise be possible the effective
price and rate of return on securities that a Fund owns or proposes to acquire.
A Fund may, for example, take a "short" position in the futures market by
selling futures contracts in order to hedge against an anticipated rise in
interest rates or a decline in market prices that would adversely affect the
value of the Fund's portfolio securities. Such futures contracts may include
contracts for the future delivery of securities held by a Fund or securities
with characteristics similar to those of a Fund's portfolio securities.
Similarly, Core Fund may sell futures contracts on currencies in which its
portfolio securities are denominated or in one currency to hedge against
fluctuations in the value of securities denominated in a different currency if
there is an established historical pattern of correlation between the two
currencies. If, in the opinion of the Adviser, there is a sufficient degree of
correlation between price trends for a Fund's portfolio securities and futures
contracts based on other financial instruments, securities indices or other
indices, the Fund may also enter into such futures contracts as part of its
hedging strategy. Although under some circumstances prices of securities in a
Fund's portfolio may be more or less volatile than prices of such futures
contracts, the Adviser will attempt to estimate the extent of this volatility
difference based on historical patterns and compensate for any such differential
by having the Fund enter into a greater or lesser number of futures contracts or
by attempting to achieve only a partial hedge against price changes affecting
the Fund's securities portfolio. When hedging of this character is successful,
any depreciation in the value of portfolio securities will be substantially
offset by appreciation in the value of the futures position. On the other hand,
any unanticipated appreciation in the value of a Fund's portfolio securities
would be substantially offset by a decline in the value of the futures position.
On other occasions, a Fund may take a "long" position by purchasing futures
contracts. This would be done, for example, when a Fund anticipates the
subsequent purchase of particular securities when it has the necessary cash, but
expects the prices then available in the applicable market to be less favorable
than prices that are currently available.
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<PAGE>
OPTIONS ON FUTURES CONTRACTS. The acquisition of put and call options on
----------------------------
futures contracts will give a Fund the right (but not the obligation) for a
specified price to sell or to purchase, respectively, the underlying futures
contract at any time during the option period. As the purchaser of an option on
a futures contract, a Fund obtains the benefit of the futures position if prices
move in a favorable direction but limits its risk of loss in the event of an
unfavorable price movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium
which may partially offset a decline in the value of a Fund's assets. By
writing a call option, a Fund becomes obligated, in exchange for the premium, to
sell a futures contract if the option is exercised, which may have a value
higher than the exercise price. Conversely, the writing of a put option on a
futures contract generates a premium which may partially offset an increase in
the price of securities that a Fund intends to purchase. However, the Fund
becomes obligated to purchase a futures contract if the option is exercised,
which may have a value lower than the exercise price. Thus, the loss incurred
by a Fund in writing options on futures is potentially unlimited and may exceed
the amount of the premium received. Funds will incur transaction costs in
connection with the writing of options on futures.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option on the same series.
There is no guarantee that such closing transactions can be effected. A Fund's
ability to establish and close out positions on such options will be subject to
the development and maintenance of a liquid market.
OTHER CONSIDERATIONS. Adjustable Rate Fund, Core Fund and Short Duration
--------------------
Fund will engage in futures and related options transactions only for bona fide
hedging or, except for purchases or sales by Core Fund of futures on currencies,
to seek to increase total return as permitted by CFTC regulations. Each Fund
will determine that the price fluctuations in the futures contracts and options
on futures used for hedging purposes are substantially related to price
fluctuations in securities held by the Fund or securities or instruments which
it expects to purchase. Except as stated below, each Fund's futures
transactions will be entered into for traditional hedging purposes -- i.e.,
futures contracts will be sold to protect against a decline in the price of
securities that a Fund owns or futures contracts will be purchased to protect a
Fund against an increase in the price of securities that it intends to purchase.
As evidence of this hedging intent, each Fund expects that on 75% or more of the
occasions on which it takes a long futures or option position (involving the
purchase of futures contracts), the Fund will have purchased, or will be in the
process of purchasing, equivalent amounts of related securities in the cash
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market at the time when the futures or option position is closed out. However,
in particular cases, when it is economically advantageous for a Fund to do so, a
long futures position may be terminated or an option may expire without the
corresponding purchase of securities or other assets.
As an alternative to compliance with the bona fide hedging definition, a
CFTC regulation permits the Funds to elect to comply with a different test under
which the aggregate initial margin and premiums required to establish positions
to seek to increase total return in futures contracts and options on futures
will not exceed 5% of the net asset value of a Fund's portfolio, after taking
into account unrealized profits and losses on any such positions and excluding
the amount by which such options were in-the-money at the time of purchase. The
Funds will engage in transactions in futures contracts and related options only
to the extent such transactions are consistent with the requirements of the
Code, for maintaining their qualifications as regulated investment companies for
federal income tax purposes. See "Taxation."
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating a Fund to purchase securities or currency, may require the Fund to
establish with the custodian a segregated account consisting of cash or liquid,
high-grade debt securities in an amount equal to the underlying value of such
contracts and options.
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. Thus,
unanticipated changes in interest rates or securities prices may result in a
poorer overall performance for a Fund than if it had not entered into any
futures contracts or options transactions.
Perfect correlation between a Fund's futures positions and hedged portfolio
positions may be difficult to achieve because the only futures contracts
available to hedge the Fund's portfolio are, in the case of Core Fund, various
currency futures and futures on U.S. Government securities and securities
indices and, in the case of the Core Fund and Short Duration Fund, a municipal
bond index. In the event of an imperfect correlation between a futures position
and portfolio position which is intended to be protected, the desired protection
may not be obtained and a Fund may be exposed to risk of loss.
FOREIGN INVESTMENTS
Core Fund may invest in securities of foreign issuers and up to 25% of the
Fund's assets may be invested in fixed income securities denominated in a
currency other than U.S. dollars. Investing in the securities of foreign issuers
involves certain
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special considerations, including those set forth below, which are not typically
associated with investing in U.S. issuers. Since investments in the securities
of foreign issuers may involve currencies of foreign countries, and since Core
Fund may temporarily hold funds in bank deposits in foreign currencies during
completion of investment programs, Core Fund may be affected favorably or
unfavorably by changes in currency rates and in exchange control regulations and
may incur costs in connection with conversions between various currencies.
Since foreign companies are not subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to U.S. companies, there may be less publicly available information
about a foreign company than about a U.S. company. Most foreign bond markets
are less liquid than fixed income markets in the United States and securities of
many foreign companies are less liquid and more volatile than securities of
comparable U.S. companies. Fixed commissions on foreign securities exchanges
are generally higher than negotiated commissions on U.S. exchanges, although
Core Fund endeavors to achieve the most favorable net results on its portfolio
transactions. There is generally less government supervision and regulation of
securities exchanges, brokers, dealers and listed companies than in the United
States.
Foreign markets also have different clearance and settlement procedures,
and in certain markets there have been times when settlements have been unable
to keep pace with the volume of securities transactions, making it difficult to
conduct such transactions. Such delays in settlement could result in temporary
periods when a portion of the assets of Core Fund is uninvested and no return is
earned thereon. The inability of Core Fund to make intended security purchases
due to settlement problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement
problems could result either in losses to Core Fund due to subsequent declines
in value of the portfolio securities, or, if Core Fund has entered into a
contract to sell the securities, could result in possible liability to the
purchaser. In addition, with respect to certain foreign countries, there is the
possibility of expropriation or confiscatory taxation, political or social
instability, or diplomatic developments which could adversely affect Core Fund's
investments in those countries. Moreover, individual foreign economies may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross national product, rate of inflation, capital reinvestment, resources
self-sufficiency and balance of payments position.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Core Fund may enter into forward
foreign currency exchange contracts for hedging purposes. A forward foreign
currency exchange contract involves an obligation to purchase or sell a specific
currency at a future
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date, which may be any fixed number of days from the date of the contract agreed
upon by the parties, at a price set at the time of the contract. These
contracts are traded in the interbank market conducted directly between currency
traders (usually large commercial banks) and their customers. A forward
contract generally has no deposit requirement, and no commissions are generally
charged at any stage for trades.
At the maturity of a forward contract, Core Fund may either accept or make
delivery of the currency specified in the contract or, at or prior to maturity,
enter into a closing purchase transaction involving the purchase or sale of an
offsetting contract. Closing purchase transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract.
Core Fund may enter into forward foreign currency exchange contracts in
several circumstances. First, when Core Fund enters into a contract for the
purchase or sale of a security denominated in a foreign currency, or when Core
Fund anticipates the receipt in a foreign currency of a dividend or interest
payments on such a security which it holds, Core Fund may desire to "lock in"
the U.S. dollar price of the security or the U.S. dollar equivalent of such
dividend or interest payment, as the case may be. By entering into a forward
contract for the purchase or sale, for a fixed amount of dollars, of the amount
of foreign currency involved in the underlying transactions, Core Fund will
attempt to protect itself against an adverse change in the relationship between
the U.S. dollar and the subject foreign currency during the period between the
date on which the security is purchased or sold, or on which the dividend or
interest payment is declared, and the date on which such payments are made or
received.
Additionally, when management of Core Fund believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract to sell, for a fixed amount of
dollars, the amount of foreign currency approximating the value of some or all
of Core Fund's portfolio securities denominated in such foreign currency. The
precise matching of the forward contract amounts and the value of the securities
involved will not generally be possible because the future value of such
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the
contract is entered into and the date it matures. Using forward contracts to
protect the value of Core Fund's portfolio securities against a decline in the
value of a currency does not eliminate fluctuations in the underlying prices of
the securities. It simply establishes a rate of exchange which Core Fund can
achieve at some future point in time. The precise projection of short-term
currency market movements is not possible, and short-term hedging provides a
means of fixing the dollar value of only a portion of the Core Fund's
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foreign assets.
Core Fund may engage in cross-hedging by using forward contracts in one
currency to hedge against fluctuations in the value of securities denominated in
a different currency if the Adviser determines that there is a pattern of
correlation between the two currencies.
Core Fund's custodian will place cash or liquid, high-grade debt securities
into a segregated account of Core Fund in an amount equal to the value of Core
Fund's total assets committed to the consummation of forward foreign currency
exchange contracts requiring Core Fund to purchase foreign currencies. The
segregated account will be marked to market on a daily basis. Thus, if the value
of the securities placed in the segregated account declines, additional cash or
securities will be placed in the account on a daily basis so that the value of
the account will equal the amount of Core Fund's commitments with respect to
such contracts.
While Core Fund will enter into forward contracts to reduce currency
exchange rate risks, transactions in such contracts involve certain other risks.
Thus, while Core Fund may benefit from such transactions, unanticipated changes
in currency prices may result in a poorer overall performance for Core Fund than
if it had not engaged in any such transactions. Moreover, there may be
imperfect correlation between Core Fund's portfolio holdings of securities
denominated in a particular currency and forward contracts entered into by Core
Fund. Such imperfect correlation may cause Core Fund to sustain losses which
will prevent Core Fund from achieving a complete hedge or expose Core Fund to
risk of foreign exchange loss.
LENDING OF PORTFOLIO SECURITIES
Each Fund may lend portfolio securities. Under present regulatory
policies, such loans may be made to institutions, such as brokers or dealers and
would be required to be secured continuously by collateral in cash, cash
equivalents or U.S. Government securities maintained on a current basis at an
amount at least equal to the market value of the securities loaned. A Fund has
the right to call a loan and obtain the securities loaned at any time on five
days' notice. For the duration of a loan, a Fund continues to receive the
equivalent of the interest or dividends paid by the issuer on the securities
loaned and also receives compensation from investment of the collateral. A Fund
would not have the right to vote any securities having voting rights during the
existence of the loan, but the Fund would call the loan in anticipation of an
important vote to be taken among holders of the securities or the giving or
withholding of their consent on a material matter affecting the investment. As
with other extensions of credit there are risks of delay in recovering, or even
loss of rights in, the collateral should the borrower of
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the securities fail financially. However, the loans are made only to firms
deemed by the applicable Adviser to be of good standing, and when, in the
judgment of the applicable Adviser, the consideration which can be earned
currently from securities loans of this type justifies the attendant risk. If an
Adviser determines to make securities loans, the value of the securities loaned
will not exceed one-third of the value of the total assets of each Fund.
RESTRICTED AND ILLIQUID SECURITIES
Each Fund may purchase securities that are not registered or offered in an
exempt non-public offering ("Restricted Securities") under the Securities Act of
1933, as amended ("1933 Act"), including securities eligible for resale to
"qualified institutional buyers" pursuant to Rule 144A under the 1933 Act.
However, a Fund will not invest more than 15% of its assets in illiquid
investments, which includes repurchase agreements maturing in more than seven
days, interest rate, currency and mortgage swaps, interest rate caps, floors and
collars, certain SMBS, municipal leases, certain over-the-counter options,
securities that are not readily marketable and Restricted Securities, unless the
Board of Trustees determines, based upon a continuing review of the trading
markets for the specific restricted securities, that such restricted securities
are liquid. The Trustees have adopted guidelines and delegated to the Advisers
the daily function of determining and monitoring the liquidity of Restricted
Securities. The Board of Trustees, however, will retain sufficient oversight
and be ultimately responsible for the determinations. Since it is not possible
to predict with assurance exactly how this market for Restricted Securities sold
and offered under Rule 144A will develop, the Trustees will carefully monitor
the Funds' investments in these securities, focusing on such important factors,
among others, as valuation, liquidity and availability of information. This
investment practice could have the effect of increasing the level of illiquidity
in the Funds to the extent that qualified institutional buyers become for a time
uninterested in purchasing these Restricted Securities.
The purchase price and subsequent valuation of restricted securities
normally reflect a discount from the price at which such securities trade when
they are not restricted, since the restriction makes them less liquid. The
amount of the discount from the prevailing market price is expected to vary
depending upon the type of security, the character of the issuer, the party who
will bear the expenses of registering the restricted securities and prevailing
supply and demand conditions.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES
Each Fund may purchase securities on a when-issued basis or purchase or
sell securities on a forward commitment basis. These transactions involve a
commitment by a Fund to purchase or sell
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securities at a future date. The price of the underlying securities (usually
expressed in terms of yield) and the date when the securities will be delivered
and paid for (the settlement date) are fixed at the time the transaction is
negotiated. When-issued purchases and forward commitment transactions are
negotiated directly with the other party, and such commitments are not traded on
exchanges. The Funds will purchase securities on a when-issued basis or
purchase or sell securities on a forward commitment basis only with the
intention of completing the transaction and actually purchasing or selling the
securities. If deemed advisable as a matter of investment strategy, however,
the Funds may dispose of or negotiate a commitment after entering into it. A
Fund also may sell securities it has committed to purchase before those
securities are delivered to the Fund on the settlement date. The Funds may
realize a capital gain or loss in connection with these transactions. For
purposes of determining each Fund's average duration, the maturity of when-
issued or forward commitment securities will be calculated from the commitment
date. Each Fund is required to hold and maintain in a segregated account with
the Fund's custodian until the settlement date, cash or liquid, high grade debt
securities in an amount sufficient to meet the purchase price. Alternatively,
each Fund may enter into offsetting contracts for the forward sale of other
securities that it owns. Securities purchased or sold on a when-issued or
forward commitment basis involve a risk of loss if the value of the security to
be purchased declines prior to the settlement date or if the value of the
security to be sold increases prior to the settlement date.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with selected broker-
dealers, banks or other financial institutions. A repurchase agreement is an
arrangement under which a Fund purchases securities and the seller agrees to
repurchase the securities within a particular time and at a specified price.
Custody of the securities will be maintained by each Fund's custodian. The
repurchase price may be higher than the purchase price, the difference being
income to a Fund, or the purchase and repurchase prices may be the same, with
interest at a stated rate due to a Fund together with the repurchase price on
repurchase. In either case, the income to a Fund is unrelated to the interest
rate on the security subject to the repurchase agreement.
For purposes of the Act and for federal income tax purposes, a repurchase
agreement is deemed to be a loan from a Fund to the seller of the security. For
other purposes, it is not clear whether a court would consider the security
purchased by a Fund subject to a repurchase agreement as being owned by the Fund
or as being collateral for a loan by the Fund to the seller. In the event of
commencement of bankruptcy or insolvency proceedings with respect to the seller
of the security before repurchase of the security under a repurchase agreement,
a Fund may encounter delay
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and incur costs before being able to sell the security. Such a delay may
involve loss of interest or a decline in price of the security. If the court
characterizes the transaction as a loan and a Fund has not perfected a security
interest in the security, the Fund may be required to return the security to the
seller's estate and be treated as an unsecured creditor of the seller. As an
unsecured creditor, a Fund would be at risk of losing some or all of the
principal and interest involved in the transaction.
As with any unsecured debt instrument purchased for each Fund, the
applicable Adviser seeks to minimize the risk of loss from repurchase agreements
by analyzing the creditworthiness of the obligor, in this case the seller of the
security. Apart from the risk of bankruptcy or insolvency proceedings, there is
also the risk that the seller may fail to repurchase the security. However, if
the market value of the security subject to the repurchase agreement becomes
less than the repurchase price (including accrued interest), each Fund will
direct the seller of the security to deliver additional securities so that the
market value of all securities subject to the repurchase agreement equals or
exceeds the repurchase price. Certain repurchase agreements which provide for
settlement in more than seven days can be liquidated before the nominal fixed
term on seven days or less notice. Such repurchase agreements will be regarded
as liquid instruments.
In addition, the Funds, together with other registered investment companies
having advisory agreements with the Advisers or their affiliates, may transfer
uninvested cash balances into a single joint account, the daily aggregate
balance of which will be invested in one or more repurchase agreements.
INVESTMENT RESTRICTIONS
The Trust has adopted the following investment restrictions on behalf of
the Funds, none of which may be changed without the approval of the holders of a
majority of the outstanding voting securities of the applicable Fund. The
investment objective of each Fund and all other investment policies or practices
of the Funds, except for Short Duration Fund's policy to invest under normal
market conditions 80% of its net assets in Tax-Free Securities, are considered
by the Trust not to be fundamental and accordingly may be changed without
shareholder approval. See "INVESTMENT OBJECTIVE AND POLICIES" in the
Prospectuses. As defined in the Act, "a majority of the outstanding voting
securities" of a Fund means the vote (a) of 67% or more of the shares of the
Fund present at a meeting, if the holders of more than 50% of the outstanding
shares of the Fund are present or represented by proxy or (b) more than 50% of
the outstanding shares of the Fund, whichever is less.
For the purposes of the limitations (except for the 300% asset
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coverage requirement with respect to borrowings), any limitation which involves
a maximum percentage shall not be considered violated unless an excess over the
percentage occurs immediately after, and is caused by, an acquisition or
encumbrance of securities or assets of, or borrowings by, a Fund.
ADJUSTABLE RATE FUND MAY NOT:
(1) Purchase 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 Fund's total assets would be
invested in such issuer, except that (a) up to 25% of the value of the Fund's
total assets may be invested without regard to such 5% limitation, and (b) such
5% limitation shall not apply to repurchase agreements collateralized by
obligations of the U.S. Government, its agencies or instrumentalities.
(2) Borrow money, except as a temporary measure for extraordinary or
emergency purposes, provided that the Fund is required to maintain asset
coverage of at least 300% for all borrowings. For purposes of this investment
restriction, short sales, swap transactions, options, futures contracts and
options on futures contracts, and forward commitment transactions shall not
constitute borrowings.
(3) Invest more than 25% of the value of its total assets in the
securities of one or more issuers conducting their principal business activities
in the same industry. This limitation does not apply to investments in
obligations of the U.S. Government or any of its agencies or instrumentalities.
(4) Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings and to the extent related to the
segregation of assets in connection with the writing of covered put and call
options, swap transactions, the purchase of securities on a forward commitment
or delayed delivery basis and collateral and initial or variation margin
arrangements with respect to options, futures contracts and options on futures
contracts.
(5) Purchase securities on margin, except for such short-term credits as
are necessary for the clearance of transactions, but the Fund may make margin
deposits in connection with transactions in options, futures and options on
futures.
(6) Make short sales of securities, except short sales against-the-box, or
maintain a short position.
(7) Underwrite any issue of securities issued by others, except to the
extent that the sale of portfolio securities by the Fund may be deemed to be
underwriting.
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(8) Purchase, hold or deal in real estate, including limited partnership
interests, or oil and gas interests, although the Fund may purchase and sell
securities that are secured by real estate or interests therein and may purchase
mortgage-related securities and may hold and sell real estate acquired by the
Fund as a result of the ownership of securities.
(9) Invest in commodities or commodity futures contracts, except that the
Fund may (a) purchase and sell futures contracts, including those relating to
securities and indices, and options on any such futures contracts, and (b)
purchase and sell securities on a forward commitment or delayed delivery basis.
(10) Lend any funds or other assets except through repurchase agreements or
the purchase of all or a portion of an issue of securities or obligations of the
type in which it may invest; however, the Fund may lend portfolio securities in
an amount not to exceed one third of the value of its total assets.
(11) Issue any senior security (as such term is defined in Section 18(f) of
the 1940 Act) except as permitted in Investment Restriction Nos. (2), (5), (6)
and (10).
In addition to the investment restrictions mentioned above, the Trustees of
the Trust have voluntarily adopted the following policies and restrictions on
behalf of Adjustable Rate Fund which are observed in the conduct of its affairs.
These represent intentions of the Trustees based upon current circumstances.
They differ from fundamental investment restrictions in that they may be changed
or amended by action of the Trustees of the Trust without prior notice to or
approval of shareholders. Accordingly, Adjustable Rate Fund may not:
(a) invest more than 10% of its assets in securities of other investment
companies;
(b) purchase warrants of any issuer, except on a limited basis, if, as a
result, more than 2% of the value of its total assets would be invested in
warrants which are not listed on the New York Stock Exchange and more than 5% of
the value of its total assets would be invested in warrants, whether or not so
listed, such warrants in each case to be valued at the lesser of cost or market,
but assigning no value to warrants acquired by the Fund in shares or attached to
debt securities;
(c) purchase (i) securities of any issuer with a record of less than three
years' continuous operation, including predecessors, except U.S. Government
securities and securities guaranteed by any foreign government or its agencies
or instrumentalities, or (ii) common or preferred stocks that are not readily
marketable, if such purchase would cause the investment of the Fund in all such
securities to exceed 5% of the value of the
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total assets of the Fund; or
(d) purchase puts, calls, straddles, spreads and any combination thereof
if the value of the Fund's aggregate investment in such securities exceeds 5% of
its total assets.
SHORT-TERM FUND MAY NOT:
(1) Purchase the securities of issuers conducting their principal business
activity in the same industry if immediately after such purchase the value of
the Fund's investments in such industry would exceed 25% of the value of its
total assets, provided that (a), as to utility companies, the gas, electric,
water and telephone businesses will be considered separate industries, (b) all
finance companies as a group will not be considered a single industry, (c)
industry determinations with respect to Securitized Assets will be based on the
type of assets backing the security, and (d) there is no limitation with respect
to or arising out of investments in obligations issued or guaranteed by the U.S.
Government, its agencies and instrumentalities, repurchase agreements or loans
by the Fund of securities collateralized by such obligations or by cash. With
respect to both clauses (c) and (d), Securitized Assets which are issued or
guaranteed by the U.S. Government, its agencies or instrumentalities or backed
directly or indirectly by obligations so issued or guaranteed will be treated as
being within clause (d).
(2) Purchase the securities of any one issuer if, immediately after such
purchase, more than 5% of the value of the Fund's total assets would be invested
in such issuer, except that (a) up to 25% of the value of its total assets may
be invested without regard to such 5% limitation, and (b) such 5% limitation
shall not apply to securities which are issued or guaranteed by the U.S.
Government, its agencies or instrumentalities or backed directly or indirectly
by obligations so issued or guaranteed (including repurchase agreements
collateralized by obligations so issued or guaranteed).
(3) Make loans, except through (a) the purchase of debt obligations or
pass-through instruments in accordance with the Fund's investment objective and
policies, (b) repurchase agreements with banks, brokers, dealers and other
financial institutions; and (c) loans of securities.
(4) Borrow money, except (a) as a temporary measure, and then only in
amounts not exceeding 5% of the value of the Fund's net assets or (b) from
banks, provided that immediately after any such borrowing all borrowings of the
Fund do not exceed one-third of its net assets (excluding borrowings). The
exceptions to this restriction are not for investment leverage purposes but are
solely for extraordinary or emergency purposes or to facilitate management of
the Fund by enabling the Fund to meet redemption requests when the liquidation
of portfolio instruments is deemed to be
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disadvantageous or not possible. While the Fund has borrowings outstanding in
excess of 5% of the value of its net assets, it will not make any purchases of
portfolio instruments. If, due to market fluctuations or other reasons, the net
assets of the Fund fall below 300% of its borrowings, the Fund will promptly
reduce its borrowings in accordance with the Act. To do this, the Fund may have
to sell a portion of its investments at a time when it may be disadvantageous to
do so. For purposes of this restriction, neither the arrangements referred to
in restriction (5) below nor the purchase or sale of futures or related options
shall be regarded as involving the borrowing of money.
(5) Mortgage, pledge or hypothecate any assets except to secure permitted
borrowings. For purposes of this restriction, collateral arrangements with
respect to the writing of options, interest rate futures contracts, options on
futures contracts, and collateral arrangements with respect to initial and
variation margin are not deemed to be a mortgage, pledge or hypothecation of
assets.
(6) Purchase or sell real estate, but this restriction shall not prevent
the Fund from investing directly or indirectly in portfolio instruments secured
by real estate or interests therein or issued by companies which invest in real
estate or interests therein.
(7) Purchase or sell commodities or commodity contracts, except that the
Fund may purchase and sell interest rate futures contracts and related options,
or purchase or sell interests in oil, gas or other mineral exploration or
development programs.
(8) Purchase any voting securities or invest in companies for the purpose
of exercising control or management.
(9) Act as an underwriter of securities.
(10) Purchase any security on margin (except for delayed delivery or when-
issued transactions or such short-term credits as are necessary for the
clearance of transactions). The payment or deposit by the Fund of initial or
variation margin in connection with interest rate futures contracts or related
option transactions is not considered the purchase of a security on margin.
(11) Make short sales of securities or maintain a short position unless (a)
at all times when a short position is open the Fund owns an equal amount of such
securities or securities convertible into or exchangeable, without payment of
any further consideration, for securities of the same issue as, and equal in
amount to, the securities sold short or (b) for the purpose of hedging the
Fund's exposure to an actual or anticipated market decline in the value of its
investments.
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(12) Write, purchase or sell puts, calls or combinations thereof, except
that the Fund may purchase puts and write, purchase and sell call options with
respect to portfolio securities and with respect to interest rate futures
contracts.
For purposes of Short-Term Fund's investment restriction no. 1 above,
"Securitized Assets" denotes securities representing interests in pools of
assets.
Although it has the authority to do so, Short-Term Fund does not currently
intend to purchase or sell options with respect to portfolio securities,
purchase or sell interest rate futures contracts and related options, or
purchase or sell interests in oil, gas or other mineral exploration or
development programs.
SHORT DURATION FUND MAY NOT:
1. Purchase securities of any one issuer, other than obligations issued
or guaranteed by the U.S. Government or any of its agencies, authorities or
instrumentalities, if immediately after such purchase, more than 5% of the
Fund's total assets would be invested in such issuer or the Fund would hold more
than 10% of any class of the outstanding voting securities of such issuer,
except that (a) up to 25% of the Fund's total assets may be invested without
regard to such limitations and (b) such limitations shall not apply to
repurchase agreements collateralized by obligations of the U.S. Government or
any of its agencies, authorities or instrumentalities.
2. Invest more than 25% of the value of its total assets in the
securities of one or more issuers conducting their principal business activities
in the same industry. (For the purposes of this restriction, state and
municipal governments and their agencies and instrumentalities are not deemed to
be industries; telephone companies are considered to be a separate industry from
water, gas or electric utilities; personal credit finance companies and business
credit finance companies are deemed to be separate industries; and wholly owned
finance companies are considered to be in the industry of their parents if their
activities are primarily related to financing the activities of their parents).
This limitation does not apply to investments or obligations of, or to municipal
securities which have been pre-refunded by the use of obligations of, the U.S.
Government or any of its agencies or instrumentalities.
3. Borrow money, except: (a) from banks for temporary or short-term
purposes or for the clearance of transactions in amounts not exceeding one-third
of the Fund's total assets, not including the amount borrowed; (b) in connection
with the redemption of Fund shares or to finance failed settlements of portfolio
trades without immediately liquidating portfolio securities or other assets; and
(c) in order to fulfill commitments or plans to purchase additional
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securities pending the anticipated sale of other portfolio securities or assets,
but only if after each such borrowing there is asset coverage of at least 300%
as defined in the Act. For purposes of this investment restriction, short
sales, futures contracts, options on futures contracts, securities or indices
and forward commitment transactions shall not constitute borrowing.
4. Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings and to the extent related to the
deposit of assets in escrow in connection with the writing of covered put and
call options and the purchase of securities on a forward commitment or delayed-
delivery basis and collateral and initial or variation margin arrangements with
respect to futures contracts and options on futures contracts, securities or
indices.
5. Purchase securities on margin, except for such short-term credits as
are necessary for the clearance of transactions, but the Fund may make margin
deposits in connection with transactions in options, futures and options on
futures.
6. Make short sales of securities, except short sales against-the-box, or
maintain a short position.
7. Underwrite any issue of securities issued by others, except to the
extent that the sale of portfolio securities by the Fund may be deemed to be
underwriting.
8. Purchase, hold or deal in real estate (including real estate limited
partnerships) or oil, gas or mineral leases, although the Fund may purchase and
sell securities that are secured by real estate or interests therein and may
purchase mortgage-related securities and may hold and sell real estate acquired
by the Fund as a result of the ownership of securities.
9. Invest in commodities, except that the Fund may purchase and sell
futures contracts, including those relating to securities or indices, and
options on futures contracts and purchase and sell securities on a forward
commitment or delayed-delivery basis.
10. Lend any funds or other assets except through the purchase of all or a
portion of an issue of securities or obligations of the type in which it may
invest; however, the Fund may lend its portfolio securities in an amount not to
exceed 33-1/3% of the value of its total assets. Any loans of portfolio
securities will be made in accordance with guidelines established by the SEC and
the Trust's Board of Trustees.
11. Issue any senior security (as such term is defined in Section 18(f) of
the Act) except as permitted in Investment Restriction Nos. 3, 4, 9 and 10 and
except for any class or series of its shares of beneficial interest.
B-53
<PAGE>
In addition to the investment restrictions mentioned above, the Trustees of
the Trust have voluntarily adopted the following policies and restrictions on
behalf of short Duration Fund which are observed in the conduct of its affairs.
These represent intentions of the Trustees based upon current circumstances.
They differ from fundamental investment restrictions in that they may be changed
or amended by action of the Trustees of the Trust without prior notice to or
approval of shareholders. Accordingly, Short Duration Fund may not:
(a) Purchase or retain the securities of any issuers if the officers,
directors, partners or Trustees of the Trust, its investment adviser or manager
owning beneficially more than one-half of 1% of the securities of such issuer,
together own beneficially more than 5% of such securities.
(b) Invest more than 10% of its total assets, calculated at the time of
purchase, in the securities of other investment companies, invest more than 5%
of its total assets in the securities of any one investment company or acquire
more than 3% of the voting securities of any other investment company; or
purchase the securities of closed-end investment companies, except in the open
market where no commission or profit to a sponsor or dealer results from the
purchase, other than customary brokerage fees.
(c) Write covered calls or put options with respect to more than 25% of
the value of its total assets or invest more than 5% of its total assets in
puts, calls, spreads or straddles, other than protective put options. The
aggregate value of premiums paid on all options, other than protective puts,
held by the Fund at any time will not exceed 5% of its total assets.
(d) Invest (a) more than 15% of the Fund's net assets in illiquid
investments, including repurchase agreements maturing in more than seven days,
securities that are not readily marketable and restricted securities not
eligible for resale pursuant to Rule 144A under the 1933 Act; or (b) more than
15% of its net assets in restricted securities (including those eligible for
resale under Rule 144A).
(e) Purchase additional securities while the Fund's borrowings exceed 5%
of its total assets.
(f) Invest more than 5% of the Fund's total assets in the securities of
issuers which, together with predecessors, have a record of less than three
years of continuous operation.
Short Duration Fund may invest 25% or more of the value of its total assets
in Municipal Securities which are related in such a way that an economic,
business or political development or change affecting one Municipal Security
would also affect the other Municipal Securities. Short Duration Fund may so
invest in
B-54
<PAGE>
(a) Municipal Securities the interest on which is paid solely from revenues of
similar projects such as hospitals, electric utility systems, multi-family
housing, nursing homes, commercial facilities (including hotels), steel
companies or life care facilities, (b) Municipal Securities whose issuers are in
the same state, or (c) industrial development obligations.
For the purpose of applying Short Duration Fund's investment restrictions,
the identification of the issuer of a Municipal Security that is not a general
obligation is made by the Adviser based on the characteristics of the Municipal
Security, the most important of which is the source of funds for the payment of
principal and interest on such securities.
CORE FUND MAY NOT:
1. Purchase securities of any one issuer, other than obligations issued
or guaranteed by the U.S. Government or any of its agencies, authorities or
instrumentalities, if immediately after such purchase, more than 5% of the
Fund's total assets would be invested in such issuer or the Fund would hold more
than 10% of any class of the outstanding voting securities of such issuer,
except that (a) up to 25% of the Fund's total assets may be invested without
regard to such limitations and (b) such limitations shall not apply to
repurchase agreements collateralized by obligations of the U.S. Government or
any of its agencies, authorities or instrumentalities.
2. Invest more than 25% of the value of its total assets in the
securities of one or more issuers conducting their principal business activities
in the same industry. This limitation does not apply to investments or
obligations of the U.S. Government or any of its agencies or instrumentalities.
3. Borrow money, except: (a) from banks for temporary or short-term
purposes or for the clearance of transactions in amounts not exceeding one-third
of the Fund's total assets, not including the amount borrowed; (b) in connection
with the redemption of Fund shares or to finance failed settlements of portfolio
trades without immediately liquidating portfolio securities or other assets; (c)
in order to fulfill commitments or plans to purchase additional securities
pending the anticipated sale of other portfolio securities or assets, and (d)
transactions in mortgage dollar rolls which are accounted for as financings, but
only if after each such borrowing there is asset coverage of at least 300% as
defined in the Act. For purposes of this investment restriction, short sales,
mortgage dollar rolls that are not accounted for as financings, options,
transactions in currencies, forward contracts, currency, mortgage and interest
rate swaps (to the extent a segregated account has been established
collateralizing the Fund's swap obligations), interest rate caps and floors,
futures contracts, options on futures contracts and forward commitment
B-55
<PAGE>
transactions shall not constitute borrowing.
4. Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings and to the extent related to the
deposit of assets in escrow in connection with the writing of covered put and
call options and the purchase of securities on a forward commitment or delayed-
delivery basis and collateral and initial or variation margin arrangements with
respect to forward currency contracts, futures contracts and options on futures
contracts, securities or indices.
5. Purchase securities on margin, except for such short-term credits as
are necessary for the clearance of transactions, but the Fund may make margin
deposits in connection with transactions in options, futures contracts and
options on futures contracts.
6. Make short sales of securities, except short sales against-the-box, or
maintain a short position.
7. Underwrite any issue of securities issued by others, except to the
extent that the sale of portfolio securities by the Fund may be deemed to be
underwriting.
8. Purchase, hold or deal in real estate (including real estate limited
partnerships) or oil, gas or mineral leases, although the Fund may purchase and
sell securities that are secured by real estate or interests therein, may
purchase mortgage-related securities and may hold and sell real estate acquired
by the Fund as a result of the ownership of securities.
9. Invest in commodities, except that the Fund may purchase and sell
futures contracts, including those relating to securities, currencies or
indices, and options on futures contracts or currencies and purchase and sell
securities or currencies on a forward commitment or delayed-delivery basis.
10. Lend any funds or other assets except through repurchase agreements or
the purchase of all or a portion of an issue of securities or obligations of the
type in which it may invest; however, the Fund may lend its portfolio securities
in an amount not to exceed 33-1/3% of the value of its total assets.
11. Issue any senior security (as such term is defined in Section 18(f) of
the Act) except as permitted in Investment Restriction No. 3 and except for any
class or series of its shares of beneficial interest.
In addition to the investment restrictions mentioned above, the Trustees of
the Trust have voluntarily adopted the following policies and restrictions on
behalf of Core Fund which are observed in the conduct of its affairs. These
represent intentions of the Trustees based upon current circumstances. They
differ from
B-56
<PAGE>
fundamental investment restrictions in that they may be changed or amended by
action of the Trustees of the Trust without prior notice to or approval of
shareholders. Accordingly, Core Fund may not:
(a) Purchase or retain the securities of any issuers if the officers,
directors, partners or Trustees of the Trust, its investment adviser or manager
owning beneficially more than one-half of 1% of the securities of such issuer,
together own beneficially more than 5% of such securities.
(b) Write covered calls or put options with respect to more than 25% of
the value of its total assets or invest more than 5% of its total assets in
puts, calls, spreads or straddles, other than protective put options. The
aggregate value of premiums paid on all options, other than protective puts,
held by the Fund at any time will not exceed 5% of the Fund's total assets.
(c) Invest (a) more than 15% of the Fund's net assets in illiquid
investments, including repurchase agreements maturing in more than seven days,
securities which are not readily marketable and restricted securities not
eligible for resale pursuant to Rule 144A under the 1933 Act; or (b) more than
15% of its net assets in restricted securities (including those eligible for
resale pursuant to Rule 144A that the Trustees have determined to be liquid).
(d) Purchase additional securities while the Fund's borrowings exceed
(excluding covered mortgage dollar rolls) 5% of its total assets.
(e) Invest more than 5% of the Fund's total assets in the securities of
issuers which, together with predecessors, have a record of less than three
years of continuous operation.
MANAGEMENT
TRUSTEES AND OFFICERS
---------------------
Information pertaining to the Trustees and officers of the Trust is set
forth below together with their respective positions and a brief statement of
their principal occupations during the past five years. Trustees deemed to be
"interested persons" of the Trust for purposes of the Act are indicated by an
asterisk.
Paul C. Nagel, Jr., Age 72, 19223 Riverside Drive, Tequesta, Florida 33469.
Chairman of the Board of Trustees. Retired, Director and Chairman of the
---------------------------------
Finance and Audit Committees, Great Atlantic & Pacific Tea Co., Inc.; Director,
United Conveyor
B-57
<PAGE>
Corporation
Ashok N. Bakhru, Age 52, 1235 Westlakes Drive, Suite 385, Berwyn, PA 19312.
Trustee. President, ABN Associates, Inc., since June 1994. Retired, Senior Vice
-------
President, Scott Paper Company; Director, Arkwright Mutual Insurance Company;
Trustee, International House of Philadelphia; Member of Cornell University
Council; Trustee of Walnut Street Theater.
Marcia L. Beck,* Age 39, One New York Plaza, New York, New York 10004. President
---------
and Trustee. Director, Institutional Funds Group of GSAM since September 1992;
-----------
Vice President and Senior Portfolio Manager, GSAM from June 1988 to Present.
David B. Ford,* Age 49, One New York Plaza, New York, New York 10004. Trustee.
-------
General Partner, Goldman Sachs, since 1986; Chairman and Chief Executive
Officer, GSAM since December 1994.
Alan A. Shuch,* Age 45, One New York Plaza, New York, New York 10004. Trustee.
-------
Director and Vice President, Goldman Sachs Funds Management, Inc. from April
1990 to November 1994; President and Chief Operating Officer, GSAM from
September 1988 to November 1994; (overseeing GSAM's fixed income investment
management activities and financial, accounting, administrative and systems
functions). Limited Partner, Goldman Sachs since December 1994.
Jackson W. Smart, Jr., Age 64, One Northfield Plaza, #218, Northfield,
Illinois 60093. Trustee. Chairman and Chief Executive Officer, MSP
-------
Communications Inc. (a company engaged in radio broadcasting) since November
1988; Consultant, Thomas Industries, Inc. (a manufacturer of lighting fixtures,
home decorations and hardware items) from August 1987 to November 1988 and
Chairman and member of the Executive Committee prior thereto; Director, Federal
Express Corporation; and North American Private Equity Group (a venture capital
fund).
William H. Springer, Age 65, 701 Morningside Drive, Lake Forest, Illinois 60045.
Trustee. Vice Chairman, Ameritech (a telecommunications holding company)
-------
February 1987 to retirement in 1992 and Vice Chairman, Chief Financial and
Administrative Officer of Ameritech prior thereto; Director, Walgreen Co. (a
retail drugstore business); and Baker, Fentress & Co. (a closed-ended non-
diversified management investment company).
Richard P. Strubel, Age 55, 70 West Madison Street, Suite 1400, Chicago,
Illinois 60602. Trustee. Managing Director, Tandem Partners, Inc. (since
-------
1990); President and Chief Executive Officer, Microdot, Inc. (a diversified
manufacturer of fastening systems and connectors) since January 1984 to October
1994;
B-58
<PAGE>
Pauline Taylor,* Age 48, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs since June 1992; Consultant since 1989
---------
to June 1992; Senior Vice President, Fidelity Investments prior to 1989.
Nancy L. Mucker,* Age 45, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs; Co-Manager, Shareholder Services for
---------
GSAM.
John W. Mosior,* Age 56, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs; Co-Manager, Shareholder Services for
---------
GSAM.
Scott M. Gilman,* Age 35, One New York Plaza, New York, New York 10004.
Treasurer. Director, Mutual Funds Administration, GSAM since April 1994.
---------
Assistant Treasurer of Goldman Sachs Funds Management, Inc. since March 1993.
Vice President, Goldman Sachs since March, 1990; Assistant Treasurer of the
Trust from April 1990 until October 1991; Manager, Arthur Andersen LLP prior
thereto.
Michael J. Richman,* Age 34, 85 Broad Street, New York, New York 10004.
Secretary. Vice President and Assistant General Counsel, Goldman Sachs since
---------
June 1992; Associate General Counsel, GSAM, Counsel to the Funds Group of GSAM,
since June 1992; Partner, Hale and Dorr prior thereto.
Howard B. Surloff,* Age 29, 85 Broad Street, New York, New York 10004. Assistant
---------
Secretary. Vice President and Counsel, Goldman Sachs since November 1993 and
---------
May 1994, respectively; Counsel to the Funds Group, GSAM since November 1993;
formerly Associate of Shereff, Friedman, Hoffman & Goodman.
Steven E. Hartstein*, Age 31, 85 Broad Street, New York, New York 10004.
Assistant Secretary. Legal Products Analyst, Goldman Sachs (June 1993 to
-------------------
present); Funds Compliance Officer, Citibank Global Asset Management (August
1991 to June 1993); Legal Assistant, Brown & Wood (prior thereto).
Gail M. Shanley*, Age 26, 85 Broad Street, New York, New York 10004. Assistant
---------
Secretary. Legal Product Analyst, Goldman Sachs since June 1994. Formerly Blue
---------
Sky Legal Assistant at Smith Barney Shearson.
The Trustees and officers of the Trust hold comparable positions with
certain other investment companies of which Goldman Sachs, GSAM or FMLP is the
investment adviser, administrator and/or distributor. As of November 30, 1994,
the Trustees and officers as a group owned less than 1% of the outstanding
shares of beneficial interest of each Fund.
B-59
<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 October
31, 1994:
<TABLE>
<CAPTION>
Total
Pension or Compensation
Aggregate Retirement from Goldman
Compensation Benefits Accrued Sachs Mutual
from the as of Part of Funds (including
Name of Trustees Trust Trust's Expenses the Trust)*
--------------------- ------------ ---------------- ----------------
<S> <C> <C> <C>
Paul C. Nagel, Jr. $17,426 $ 0 $101,000
Ashok N. Bakhru $10,523 $ 0 $ 61,000
Marcia L. Beck $ 0 $ 0 $ 0
David B. Ford $ 0 $ 0 $ 0
Robert P. Mayo $10,523 $ 0 $61,000
Alan Shuch $ 0 $ 0 $ 0
Jackson W. Smart $10,523 $ 0 $61,000
William H. Springer $10,523 $ 0 $61,000
Richard P. Strubel $10,523 $ 0 $61,000
</TABLE>
* The Goldman Sachs Mutual Funds consisted of 32 mutual funds, including the
eleven series of the Trust, on October 31, 1994.
B-60
<PAGE>
INVESTMENT ADVISERS
-------------------
FMLP, One New York Plaza, New York, New York 10004, serves as the
investment adviser to Adjustable Rate Fund and Short-Term Fund pursuant to
separate investment advisory agreements. FMLP, a Delaware limited partnership,
is an affiliate of Goldman Sachs, 85 Broad Street, New York, New York 10004.
GSAM, One New York Plaza, New York, New York 10004, a separate operating
division of Goldman Sachs, serves as the investment adviser to Short Duration
Fund and Core Fund pursuant to separate investment advisory agreements. See
"MANAGEMENT -- Investment Adviser" in each Fund's Prospectus for a description
of the applicable Adviser's duties as investment adviser.
Founded in 1869, Goldman Sachs is among the oldest and largest
investment banking firms in the United States. Goldman Sachs is a leader in
developing strategies and in many fields of investing and financing,
participating in financial markets worldwide and serving individuals,
institutions, corporations and governments. Goldman Sachs is among the
principal market sources for current and thorough information on companies,
industrial sectors, markets, economies and currencies, and trades and makes
markets in a wide range of equity and debt securities 24 hours a day. The firm
is headquartered in New York and has offices throughout the United States and in
Beijing, Frankfurt, George Town, Hong Kong, London, Madrid, Milan, Montreal,
Osaka, Paris, Seoul, Shanghai, Singapore, Sydney, Taipei, Tokyo, Toronto,
Vancouver and Zurich. It has trading professionals throughout the United
States, as well as in London, Tokyo, Hong Kong and Singapore. The active
participation of Goldman Sachs in the world's financial markets enhances its
ability to identify attractive investments.
The Advisers are able to draw on the substantial research and market
expertise of Goldman Sachs, whose investment research effort is one of the
largest in the industry. With an annual equity research budget approaching
$120 million, Goldman Sachs' Investment Research Department covers approximately
1,700 companies, including approximately 1,000 U.S. corporations in 60
industries. The in-depth information and analyses generated by Goldman Sachs'
research analysts are available to the Advisers.
For more than a decade, Goldman Sachs has been among the top-ranked firms
in Institutional Investor's annual "All-America Research Team" survey. In
addition, many of Goldman Sachs' economists, securities analysts, portfolio
strategists and credit analysts have consistently been highly ranked in
respected industry surveys conducted in the U.S. and abroad. Goldman Sachs is
also among the leading investment firms using quantitative analytics (now used
by a growing number of investors) to structure and evaluate portfolios. For
example, Goldman Sachs' options evaluation model analyzes each security's term,
coupon and call option, providing an overall analysis of the security's value
B-61
<PAGE>
relative to its interest risk.
In planning Short Duration Fund's strategies, Short Duration Fund's
portfolio managers also evaluate and monitor individual issues by using
analytical techniques that have traditionally been applied to corporate bonds
and mortgage-backed securities. In particular, the Adviser's embedded option
valuation model provides a picture of an individual security's relative value
and the portfolio's overall interest rate risk. By constantly reviewing the
positions of securities with the portfolio, the Adviser looks for opportunities
to enhance Short Duration Fund's yields by fine-tuning the portfolio, using
quantitative tools designed for municipal portfolio management. The Adviser,
which currently manages approximately $3 billion in tax-free securities, has
assembled an experienced team of professionals for selection of Short Duration
Fund's portfolio securities. The Adviser manages money for some of the world's
largest institutional investors.
In structuring Adjustable Rate Fund's and Short-Term Fund's respective
securities portfolio, the Adviser will review the existing overall economic and
mortgage market trends. The Adviser will then study yield spreads, the implied
volatility and the shape of the yield curve. The Adviser will then apply this
analysis to a list of eligible securities that meet the respective Fund's
investment guidelines. With respect to Adjustable Rate Fund, this analysis is
used to plan a two-part portfolio, which will consist of a "core" portfolio of
ARMs and a "relative value" portfolio of other mortgage assets that can enhance
portfolio returns and lower risk (such as investments CMO floating rate tranches
and interest only stripped Mortgage-Backed Securities). The Mortgage-backed
securities team manages approximately $5.2 billion in assets.
With respect to Adjustable Rate Fund, Short-Term Fund and Core Fund,
the applicable Adviser expects to utilize Goldman Sachs' sophisticated option-
adjusted analytics to help make strategic asset allocations within the markets
for U.S. Government, Mortgage-Backed and other securities and to employ this
technology periodically to re-evaluate the Funds' investments as market
conditions change. Goldman Sachs has also developed a prepayment model designed
to estimate mortgage prepayments and cash flows under different interest rate
scenarios. Because a Mortgage-Backed Security incorporates the borrower's right
to prepay the mortgage, the Advisers use a sophisticated option-adjusted spread
(OAS) model to measure expected returns. A security's OAS is a function of the
level and shape of the yield curve, volatility and the applicable Adviser's
expectation of how a change in interest rates will affect prepayment levels.
Since the OAS model assumes a relationship between prepayments and interest
rates, the Advisers consider it a better way to measure a security's expected
return and absolute and relative values than yield to maturity. In using OAS
technology, the Advisers will first evaluate the absolute level of a security's
OAS considering its liquidity and its interest rate, volatility and
B-62
<PAGE>
prepayment sensitivity. The Advisers will then analyze its value relative to
alternative investments and to its own investments. The Advisers will also
measure a security's interest rate risk by computing an option adjusted duration
(OAD). The Advisers believe a security's OAD is a better measurement of its
price sensitivity than cash flow duration, which systematically misstates
portfolio duration. The Advisers also evaluate returns for different mortgage
market sectors and evaluate the credit risk of individual securities. This
sophisticated technical analysis allows the Advisers to develop portfolio and
trading strategies using mortgage-backed securities that are believed to be
superior investments on a risk-adjusted basis and which provide the flexibility
to meet the respective Fund's duration targets and cash flow pattern
requirements.
Because the OAS is adjusted for the differing characteristics of the
underlying securities, the OAS of different Mortgage-Backed Securities can be
compared directly as an indication of their relative value in the market. The
Advisers also expect to use OAS-based pricing methods to calculate projected
security returns under different, discrete interest rate scenarios, and Goldman
Sachs' proprietary prepayment model to generate yield estimates under these
scenarios. The OAS, scenario returns, expected returns, and yields of
securities in the mortgage market can be combined and analyzed in an optimal
risk-return matching framework.
The Advisers will use OAS analytics to choose what they believe is an
appropriate portfolio of investments for Adjustable Rate Fund, Short-Term Fund
and Core Fund from a universe of eligible investments. In connection with
initial portfolio selections, in addition to using OAS analytics as an aid to
meeting each Fund's particular composition and performance targets, the Advisers
will also take into account important market criteria like the available supply
and relative liquidity of various mortgage securities in structuring the
portfolio.
The Advisers also expect to use OAS analytics to evaluate the mortgage
market on an ongoing basis. Changes in the relative value of various Mortgage-
Backed Securities could suggest tactical trading opportunities for the Funds.
The Advisers will have access to both current market analysis as well as
historical information on the relative value relationships among different
Mortgage-Backed Securities. Current market analysis and historical information
is available in the Goldman Sachs database for most actively traded Mortgage-
Backed Securities.
Goldman Sachs has agreed to provide the Advisers, on a non-exclusive
basis, use of its mortgage prepayment model, OAS model and any other proprietary
services which it now has or may develop, to the extent such services are made
available to other similar customers. Use of these services by the Advisers
with respect to a Fund does not preclude Goldman Sachs from providing these
B-63
<PAGE>
services to third parties or using such services as a basis for trading for its
own account or the account of others. Provision of services to the Advisers
will in no way impinge on the ability of Goldman Sachs to trade for its own
account or to execute trades for the account of others, nor will Goldman Sachs
be obligated to provide the Advisers with all information regarding investment
opportunities or trading strategies that may come to Goldman Sachs' attention.
Furthermore, the Advisers will use the services of other banking and brokerage
firms in addition to Goldman Sachs. The involvement of Goldman Sachs, its
affiliates (including the Advisers), partners and officers, in the investment
activities and business operations of each Fund may present certain potential
conflicts of interest, as described in each Fund's Prospectus under "MANAGEMENT
-- Investment Adviser" and "Activities of Goldman Sachs and its Affiliates and
Other Accounts Managed by Goldman Sachs" in this Additional Statement.
Each Fund's advisory agreement (the "Advisory Agreements") was most
recently approved by the Trustees of the Trust, including a majority of the
Trustees of the Trust who are not parties to such agreements or "interested
persons" (as such term is defined in the Act) of any party thereto (the "non-
interested Trustees"), on April 26, 1994. The applicable Fund's Advisory
Agreement was approved by the shareholders of Adjustable Rate Fund on October
30, 1991, the shareholders of Short-Term Fund on March 27, 1989, the sole
initial shareholder of Short Duration Fund on September 25, 1992 and the sole
initial shareholder of Core Fund on October 29, 1993. Each Advisory Agreement
will remain in effect until June 30, 1995 and will continue in effect with
respect to the applicable Fund from year to year thereafter provided such
continuance is specifically approved at least annually by (a) the vote of a
majority of the outstanding voting securities of such Fund or a majority of the
Trustees of the Trust, and (b) the vote of a majority of the non-interested
Trustees of the Trust, cast in person at a meeting called for the purpose of
voting on such approval.
The Advisory Agreements provide that GSAM and FMLP, in their capacity
as Advisers, may each render similar services to others so long as the services
under the Advisory Agreements are not impaired thereby. Pursuant to the
Advisory Agreements with Adjustable Rate Fund and Short-Term Fund, respectively,
FMLP is entitled to receive a fee payable monthly by Adjustable Rate Fund equal
on an annual basis to .40 of 1% and by Short-Term Fund equal on an annual basis
to .50 of 1% of such Funds' respective average daily net assets. FMLP has
voluntarily agreed to reduce such fee by an amount equal to 0.10% annually of
such net assets. Pursuant to the Advisory Agreements with Core Fund and Short
Duration Fund, respectively, GSAM receives a monthly fee payable by each of
Short Duration Fund and Core Fund equal on an annual basis to .40 of 1% of each
such Fund's average daily net assets. The applicable Adviser has agreed
voluntarily to reduce or otherwise limit for the current fiscal
B-64
<PAGE>
year certain other expenses of Core Fund, Adjustable Rate Fund, Short-Term Fund
and Short Duration Fund to the extent that such other expenses (excluding
advisory fees, fees paid to Service Organizations (as defined below), taxes,
interest, brokerage, and litigation, indemnification and other extraordinary
expenses) would exceed 0.05% per annum of each such Fund's average daily net
assets. Such reduction or limits, if any, are calculated monthly on a
cumulative basis and may be discontinued or modified by the applicable Adviser
at its discretion at any time.
For the fiscal years ended October 31, 1994, 1993 and 1992, the amounts of
the investment advisory fees incurred by each Fund then in existence were as
follows:
<TABLE>
<CAPTION>
1994 1993 1992
----------------------------------------
<S> <C> <C> <C>
Adjustable Rate Fund* $6,798,185 $9,498,008 $4,799,416
Short-Term Fund** 1,063,867 1,311,347 1,009,499
Short Duration Fund*** 468,868 243,069 0
Core Fund**** 56,255 NA NA
</TABLE>
__________________________
* Had expense limitations not been in effect, Adjustable Rate Fund would
have paid advisory fees of $6,798,185, $9,498,008 and $5,148,731,
respectively, for such periods. In addition, the expenses of Adjustable
Rate Fund were reduced or otherwise limited in the amounts of $442,880,
$731,102, and $1,284,951, respectively, by the Adviser for such periods.
** Had expense limitations not been in effect, Short-Term Fund would have
paid advisory fees of $1,329,834, $1,639,184 and $1,250,089,
respectively, for such periods. In addition, the expenses of Short-Term
Fund were reduced or otherwise limited in the amounts of $115,389,
$139,186 and $342,116, respectively, by the Adviser for such periods.
*** Short Duration Fund commenced operations October 1, 1992. Had expense
limitations not been in effect, Short Duration Fund would have paid
advisory fees of $468,868, $272,283 and $4,388, respectively, for such
periods. In addition, the expenses of Short Duration Fund were reduced or
otherwise limited in the amount of $192,696, $412,548 and $24,469,
respectively, by the Adviser for such periods.
**** Core Fund commenced operations January 5, 1994. For the period January 5,
1994 to October 31, 1994, if expense limitation had not been in effect,
Core Fund would have paid an advisory fee of $56,255. In addition, the
expenses of Core Fund were reduced or otherwise limited in the amount of
$141,815 for such period.
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<PAGE>
Each Advisory Agreement terminates automatically if assigned (as defined in
the Act) and is terminable at any time without penalty by the Trustees of the
Trust or by vote of a majority of the outstanding voting securities of the
applicable Fund on 60 days' written notice to the applicable Adviser and by the
applicable Adviser on 60 days' written notice to the Trust.
As stated in the Prospectuses, each Fund is responsible for the payment of
all expenses other than those assumed by its Adviser. However, each Adviser has
agreed that if, in any fiscal year, the sum of a Fund's expenses otherwise
payable (including the fee payable to the Adviser, but excluding taxes,
interest, brokerage and, where permitted, extraordinary expenses such as for
litigation) would exceed the expense limitations applicable to a Fund imposed by
state securities administrators, as such limitations may be lowered or raised
from time to time, it will reduce its fee or make other arrangements to limit
Fund expenses to the extent required by such expense limitations. The most
restrictive expense limitation imposed by state securities administrators
provides that annual expenses (as defined) may not exceed 2 1/2% of the first
$30 million of the average value of each Fund's net assets, plus 2% of the next
$70 million of such assets, plus 1 1/2% of such assets in excess of $100
million.
Each Adviser performs administrative services for the applicable Funds
under the Advisory Agreements which include, subject to the general supervision
of the Trustees of the Trust, (a) providing supervision of all aspects of the
Funds' non-investment operations (other than certain operations performed by
others pursuant to agreements with the Funds), (b) providing the Funds, to the
extent not provided pursuant to such agreements, the agreement with the Trust's
custodian, transfer and dividend disbursing agent or agreements with other
institutions, with personnel to perform such executive, administrative and cleri
cal services as are reasonably necessary to provide effective administration of
the Funds, (c) arranging, to the extent not provided pursuant to such
agreements, for the preparation, at the Funds' expense, of each Fund's tax
returns, reports to shareholders, periodic updating of the Funds' prospectuses
and statements of additional information, and reports filed with the SEC and
other regulatory authorities, (d) providing the Funds, to the extent not
provided pursuant to such agreements, with adequate office space and certain
related office equipment and services, and (e) maintaining all of the Funds'
records other than those maintained pursuant to such agreements.
ACTIVITIES OF GOLDMAN SACHS AND ITS AFFILIATES AND OTHER ACCOUNTS MANAGED
-------------------------------------------------------------------------
BY GOLDMAN SACHS. The involvement of the Advisers and Goldman Sachs and their
----------------
affiliates, in the management of, or their interest in, other accounts and other
activities of Goldman Sachs may present conflicts of interest with respect to
the Funds or impede their investment activities.
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Goldman Sachs and its affiliates, including, without limitation, the
Advisers and their advisory affiliates, have proprietary interests in, and may
manage or advise with respect to, accounts or funds (including separate accounts
and other funds and collective investment vehicles) which have investment
objectives similar to those of the Funds and/or which engage in transactions in
the same types of securities and instruments as the Funds. Goldman Sachs and
its affiliates are major participants in the fixed income markets, in each case
on a proprietary basis and for the accounts of customers. As such, Goldman
Sachs and its affiliates are actively engaged in transactions in the same
securities and instruments in which the Funds invest. Such activities could
affect the prices and availability of the securities and instruments in which
the Funds will invest, which could have an adverse impact on each Fund's
performance. Such transactions, particularly in respect of proprietary accounts
or customer accounts other than those included in the Advisers' and their
advisory affiliates' asset management activities, will be executed independently
of the Funds' transactions and thus at prices or rates that may be more or less
favorable. When the Advisers and their advisory affiliates seek to purchase or
sell the same assets for their managed accounts, including the Funds, the assets
actually purchased or sold may be allocated among the accounts on a basis
determined in its good faith discretion to be equitable. In some cases, this
system may adversely affect the size or the price of the assets purchased or
sold for the Funds.
From time to time, the Funds' activities may be restricted because of
regulatory restrictions applicable to Goldman Sachs and its affiliates, and/or
their internal policies designed to comply with such restrictions. As a result,
there may be periods, for example, when the Advisers will not initiate or
recommend certain types of transactions in certain securities or instruments
with respect to which the Advisers and/or their affiliates are performing
services or when position limits have been reached.
In connection with their management of applicable Funds, the Advisers may
have access to certain fundamental analysis and proprietary technical models
developed by Goldman Sachs and other affiliates. The Advisers will not be under
any obligation, however, to effect transactions on behalf of the Funds in
accordance with such analysis and models. In addition, neither Goldman Sachs
nor any of its affiliates will have any obligation to make available any
information regarding their proprietary activities or strategies, or the
activities or strategies used for other accounts managed by them, for the
benefit of the management of the Funds and it is not anticipated that the
Advisers will have access to such information for the purpose of managing the
Funds. The proprietary activities or portfolio strategies of Goldman Sachs and
its affiliates or the activities or strategies used for accounts managed by them
or other customer accounts could conflict with the transactions and strategies
employed by the Advisers in
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managing the Funds.
The results of each Fund's investment activities may differ significantly
from the results achieved by the Advisers and their affiliates for their
proprietary accounts or accounts (including investment companies or collective
investment vehicles) managed or advised by them. It is possible that Goldman
Sachs and its affiliates and such other accounts will achieve investment results
which are substantially more or less favorable than the results achieved by a
Fund. Moreover, it is possible that a Fund will sustain losses during periods
in which Goldman Sachs and its affiliates achieve significant profits on their
trading for proprietary or other accounts. The opposite result is also
possible.
An investment policy committee which may include partners of Goldman Sachs
and its affiliates may develop general policies regarding a Fund's activities,
but will not be involved in the day-to-day management of such Fund. In such
instances, those individuals may, as a result, obtain information regarding the
Fund's proposed investment activities which is not generally available to the
public. In addition, by virtue of their affiliation with Goldman Sachs, any
such member of an investment policy committee will have direct or indirect
interests in the activities of Goldman Sachs and its affiliates in securities
and investments similar to those in which the Fund invests.
In addition, certain principals and certain of the employees of the
Advisers are also principals or employees of Goldman Sachs or their affiliated
entities. As a result, the performance by these principals and employees of
their obligations to such other entities may be a consideration of which
investors in the Funds should be aware.
Each Adviser may enter into transactions and invest in instruments on
behalf of the applicable Funds in which customers of Goldman Sachs serve as the
counterparty, principal or issuer. In such cases, such party's interests in the
transaction will be adverse to the interests of the Funds, and such party may
have no incentive to assure that the Funds obtain the best possible prices or
terms in connection with the transactions. Goldman Sachs and its affiliates may
also create, write or issue derivative instruments for customers of Goldman
Sachs or its affiliates, the underlying securities or instruments of which may
be those in which the Funds invest or which may be based on the performance of a
Fund. The Funds may, subject to applicable law, purchase investments which are
the subject of an underwriting or other distribution by Goldman Sachs or its
affiliates and may also enter into transactions with other clients of Goldman
Sachs or its affiliates where such other clients have interests adverse to those
of the Funds. To the extent affiliated transactions are permitted, the Funds
will deal with Goldman Sachs and its affiliates on an
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arm's-length basis.
Each Fund will be required to establish business relationships with its
counterparties based on the Fund's own credit standing. Neither Goldman Sachs
nor its affiliates will have any obligation to allow their credit to be used in
connection with a Fund's establishment of its business relationships, nor is it
expected that a Fund's counterparties will rely on the credit of Goldman Sachs
or any of its affiliates in evaluating the Fund's creditworthiness.
From time to time, Goldman Sachs or any of its affiliates may, but is not
required to, purchase and hold shares of a Fund in order to increase the assets
of the Fund. Increasing a Fund's assets may enhance investment flexibility and
diversification and may contribute to economies of scale that tend to reduce the
Fund's expense ratio. Goldman Sachs reserves the right to redeem at any time
some or all of the shares of a Fund acquired for its own account. A large
redemption of shares of a Fund by Goldman Sachs could significantly reduce the
asset size of the Fund, which might have an adverse effect on the Fund's
investment flexibility, portfolio diversification and expense ratio. Goldman
Sachs will consider the effect of redemptions on a Fund and other shareholders
in deciding whether to redeem its shares.
It is possible that a Fund's holdings will include securities of entities
for which Goldman Sachs performs investment banking services as well as
securities of entities in which Goldman Sachs makes a market. From time to
time, Goldman Sachs' activities may limit the Funds' flexibility in purchases
and sales of securities. When Goldman Sachs is engaged in an underwriting or
other distribution of securities of an entity, the Advisers may be prohibited
from purchasing or recommending the purchase of certain securities of that
entity for the Funds.
DISTRIBUTOR AND TRANSFER AGENT
------------------------------
Goldman Sachs serves as the distributor of shares of the Funds pursuant to
a "best efforts" arrangement as provided by a distribution agreement with the
Trust dated February 1, 1993. Pursuant to the distribution agreement, after the
Funds' Prospectuses and periodic reports have been prepared, set in type and
mailed to shareholders, Goldman Sachs will pay for the printing and distribution
of copies thereof used in connection with the offering to prospective investors.
Goldman Sachs will also pay for other supplementary sales literature and
advertising costs.
Goldman Sachs serves as the Trust's transfer and dividend disbursing agent.
Under its transfer agency agreement with the Trust, Goldman Sachs has undertaken
with the Trust with respect to each Fund to (i) record the issuance, transfer
and redemption of shares, (ii) provide confirmations of purchases and
redemptions,
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and quarterly statements, as well as certain other statements, (iii) provide
certain information to the Trust's custodian and the relevant subcustodian in
connection with redemptions, (iv) provide dividend crediting and certain
disbursing agent services, (v) maintain shareholder accounts, (vi) provide
certain state Blue Sky and other information, (vii) provide shareholders and
certain regulatory authorities with tax-related information, (viii) respond to
shareholder inquiries, and (ix) render certain other miscellaneous services.
As compensation for the services rendered to the Trust by Goldman Sachs as
transfer and dividend disbursing agent and the assumption by Goldman Sachs of
the expenses related thereto, Goldman Sachs is entitled to receive a fee with
respect to each Fund equal to .04% (on an annualized basis) of the average daily
net assets of the Fund.
For the fiscal years ended October 31, 1994, 1993 and 1992, the amounts of
transfer agency fees incurred by each Fund then in existence were as follows:
<TABLE>
<CAPTION>
1994 1993 1992
----------------------------------------------
<S> <C> <C> <C>
Adjustable Rate Fund $679,819 $949,645 $514,811
Short-Term Fund 0 0 0
Short Duration Fund* 46,887 27,248 439
Core Fund** 5,637 N/A N/A
</TABLE>
__________________________
* Short Duration Fund commenced operations on October 1, 1992.
** Core Fund commenced operations on January 5, 1994.
The foregoing distribution and transfer agency agreements each provide that
Goldman Sachs may render similar services to others so long as the services each
provides thereunder to the Funds are not impaired thereby. Each such agreement
also provides that the Trust will indemnify Goldman Sachs against certain
liabilities.
EXPENSES
--------
Except as set forth in the prospectuses under "MANAGEMENT --Investment
Adviser," the Trust, on behalf of each Fund, is responsible for the payment of
each Fund's respective expenses. The expenses borne by Institutional,
Administration and Service Shares of each Fund and Class A Shares of Adjustable
Rate Fund include, without limitation, the fees payable to GSAM or FMLP, as the
case may be, and Goldman Sachs, the fees and expenses of the Trust's custodian,
transfer agent fees, brokerage fees and commissions, filing fees for the
registration or qualification of the Trust's shares under federal or state
securities laws, expenses
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of the organization of the Trust, fees and expenses incurred by the Trust in
connection with membership in investment company organizations, taxes, interest,
costs of liability insurance, fidelity bonds or indemnification, any costs,
expenses or losses arising out of any liability of, or claim for damages or
other relief asserted against, the Trust for violation of any law, legal, tax
and auditing fees and expenses (including the cost of legal and certain
accounting services rendered by employees of Goldman Sachs, or its affiliates,
with respect to the Trust), expenses of preparing and setting in type
Prospectuses, Additional Statements, proxy material, reports and notices and the
printing and distributing of the same to the Trust's shareholders and regulatory
authorities, any administration or service fees paid to Service Organizations,
distribution expenses paid to Goldman Sachs (Class A Shares of Adjustable Rate
Fund only), any compensation and expenses of its "non-interested" Trustees and
extraordinary expenses, if any, incurred by the Trust. Except for any
administration or service fees of each Fund paid to Service Organizations and
distribution fees of Class A Shares of ARGA Fund, all Fund expenses are borne on
a non-class specific basis.
Fees and expenses of legal counsel, registering shares of each Fund,
holding meetings and communicating with shareholders may include an allocable
portion of the cost of maintaining an internal legal and compliance department.
Each Fund may also bear an allocable portion of the costs incurred by GSAM or
FMLP, as the case may be, in performing certain accounting services not being
provided by the Trust's custodian.
CUSTODIAN AND SUB-CUSTODIANS
----------------------------
State Street Bank and Trust Company ("State Street"), P.O. Box 1713,
Boston, Massachusetts 02105, is the custodian of the Trust's portfolio
securities and cash. State Street also maintains the Trust's accounting records.
State Street may appoint sub-custodians from time to time to hold certain
securities purchased by the Trust and to hold cash for the Trust.
INDEPENDENT PUBLIC ACCOUNTANTS
------------------------------
Arthur Andersen LLP, independent public accountants, One International
Place, 100 Oliver Street, Boston, Massachusetts 02110, have been selected as
auditors of the Trust. In addition to audit services, Arthur Andersen LLP
prepares the Trust's federal and state tax returns, and provides consultation
and assistance on accounting, internal control and related matters.
PORTFOLIO TRANSACTIONS
The portfolio transactions for the Funds are generally effected at a net
price without a broker's commission (i.e., a
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dealer is dealing with a Fund as principal and receives compensation equal to
the spread between the dealer's cost for a given security and the resale price
of such security). In connection with portfolio transactions, the Advisory
Agreements provide that the Advisers shall attempt to obtain the best net price
and the most favorable execution. The Advisory Agreements provide that, on
occasions when the Advisers deem the purchase or sale of a security to be in the
best interests of a Fund as well as its other customers (including any other
fund or other investment company or advisory account for which the Advisers or
an affiliate act as investment adviser), each Fund, to the extent permitted by
applicable laws and regulations, may aggregate the securities to be sold or
purchased for each Fund with those to be sold or purchased for such other
customers in order to obtain the best net price and most favorable 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 Adviser in the manner it
considers to be most equitable and consistent with its fiduciary obligations to
the applicable Fund and such other customers. In some instances, this procedure
may adversely affect the size and price of the position obtainable for a Fund.
To the extent that the execution and price offered by more than one dealer are
comparable, the Advisory Agreements permit each Adviser, in its discretion, to
purchase and sell portfolio securities to and from dealers who provide the Trust
with brokerage or research services.
For the fiscal years ended October 31, 1994, 1993 and 1992, the Funds then
in existence paid no brokerage commissions.
During the fiscal year ended October 31, 1994, the Funds acquired and sold
securities of their regular broker-dealers: Nomura Securities International,
Chemical Securities, J.P. Morgan & Co., Inc., UBS Philips Securities, Inc.,
Lehman Brothers, Inc., Nikko Securities, Inc., Morgan Stanley & Co., Smith
Barney, Shearson, Bankers Trust Company and Salomon Brothers, Inc. At October
31, 1994, Adjustable Rate Fund and Short Duration Fund held no securities of
their regular broker-dealers. As of the same date, Short-Term Fund and Core Fund
held the following amounts of securities of their regular broker-dealers, as
defined in Rule 10b-1 under the 1940 Act, or their parents ($ in thousands):
Short Term Fund: Salomon Brothers, Inc. ($17,840) and Lehman Brothers, Inc.
($14,520); Core Fund: Salomon Brothers, Inc. ($160) and Lehman Brothers, Inc.
($130).
SHARES OF THE TRUST
The Trust's Agreement and Declaration of Trust dated September 24, 1987, as
amended (the "Trust Agreement"), permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest of one or more
separate series, provided each share has a par value of $.001 per share,
represents an equal
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proportionate interest in that series with each other share of the same class
and is entitled to such dividends out of the income belonging to such series as
are declared by the Trustees.
The Trustees have authority under the Trust Agreement to create and
classify shares of beneficial interest in separate series of the Trust without
further action by shareholders. As of the date of this Additional Statement, the
Trustees have authorized shares of the Funds and three other series. The Trust
Agreement further authorizes the Trustees of the Trust to classify or reclassify
any series or portfolio of shares into one or more classes. Pursuant thereto,
the Board of Trustees has authorized the issuance of three classes of shares of
Short-Term Fund, Short Duration Fund and Core Fund: Institutional Shares,
Administration Shares and Service Shares. Also pursuant thereto, the Board of
Trustees has authorized the issuance of four classes of shares of Adjustable
Rate Fund: Institutional Shares, Administration Shares, Service Shares and Class
A Shares. As of October 31, 1994, no Service Shares of the Adjustable Rate Fund
and Short-Term Fund were outstanding; no Administration or Service Shares of
Core Fund were outstanding; and no Class A Shares of Adjustable Rate Fund were
outstanding.
Each Institutional Share, Administration Share, Service Share and Class A
Share (Adjustable Rate Fund only) of a Fund represents an equal proportionate
interest in the assets belonging to the Fund. All Fund expenses are based on a
percentage of a Fund's aggregate average net assets, except that the respective
account administration and service fees and, with respect to Adjustable Rate
Fund, distribution fees relating to a particular class will be borne exclusively
by that class. It is contemplated that most Administration Shares and Service
Shares will be held in accounts of which the record owner is a bank or other
institution acting, directly or through an agent, as nominee for its customers
who are the beneficial owners of the shares or another organization designated
by such bank or institution. Administration Shares and Service Shares will each
be marketed only to such investors, at net asset value with no sales load.
Institutional Shares may be purchased for accounts in the name of an investor or
institution that is not compensated by a Fund for services provided to the
institution's customers. Administration Shares may be purchased for accounts
held in the name of an institution that provides certain account administration
services to its customers, including maintenance of account records and
processing orders to purchase, redeem and exchange Administration Shares.
Administration Shares bear the cost of account administration fees at the annual
rate of up to 0.25% of the average daily net assets of such Administration
Shares. Service Shares may be purchased for accounts held in the name of an
institution that provides certain account administration and shareholder liaison
services to its customers, including maintenance of account records and
processing orders to purchase, redeem or exchange Service Shares, responding to
customer inquiries
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and assisting customers with investment procedures. Service Shares bear the
cost of service fees at the annual rate of up to 0.50 of 1% of the average daily
net assets of such Service Shares. (Institutions that provide services to
holders of Administration Shares or Service Shares are referred to in this
Additional Statement as "Service Organizations"). Class A Shares of Adjustable
Rate Fund are sold, with an initial sales charge of up to 1.50% through brokers
and dealers who are members of the National Association of Securities Dealers,
Inc. and certain other financial service firms that have sales agreements with
Goldman Sachs. Class A Shares of ARGA Fund bear the cost of distribution and
service (Rule 12b-1) fees at the aggregate rate of up to 0.50% of the average
daily net assets of such Class A Shares. Currently, Goldman Sachs has
voluntarily agreed to limit the amount of such fee to 0.25% of average daily net
assets attributable to Class A Shares. Goldman Sachs may discontinue or modify
such limitations at any time.
It is possible that an institution or its affiliate may offer different
classes of shares (i.e., Institutional, Administration, Service and, for
Adjustable Rate Fund, Class A Shares) to its customers and thus receive
different compensation with respect to different classes of shares of each Fund.
Administration Shares, Service Shares and, for Adjustable Rate Fund, Class A
Shares may each have certain exclusive voting rights on matters relating to
their respective plans. Shares of each class may be exchanged only for shares
of the same class in another fund and certain money market funds sponsored by
Goldman Sachs. Dividends paid by each Fund, if any, with respect to each class
of shares will be calculated in the same manner, at the same time on the same
day and will be in the same amount, except for differences caused by the fact
that the respective account administration, service and distribution (Class A
Shares of Adjustable Rate Fund only) fees relating to a particular class will be
borne exclusively by that class. Similarly, the net asset value per share may
differ depending upon the class of shares purchased.
Certain aspects of the shares may be altered, after advance notice to
shareholders, if it is deemed necessary in order to satisfy certain tax
regulatory requirements.
When issued, each Fund's shares are fully paid and non-assessable by the
Trust. In the event of liquidation of a Fund, shareholders of that Fund are
entitled to share pro rata in the net assets of that Fund available for
distribution to such shareholders. All shares entitle their holders to one vote
per share, are freely transferable and have no preemptive, subscription or
conversion rights.
As of February 17, 1995, the following entities and persons beneficially
owned 5% or more of the outstanding shares of the following Funds: Adjustable
Rate Fund - First Security Bank of
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Idaho, FBO: Idaho Housing Agency, P. O. Box 30007, Salt Lake City, UT 84130
(5.34%); St. Treasurer/Nebr. Invest. Council, Attn: Gayle Ducker, Fundex
Corporation, Attn: Mitsuru Hashimoto, 1875 South Grant Street, Suite 740, San
Mateo, CA 94402-2670 (8.24%); Short-Term Fund - West Virginia University
Foundation, Attn: Marie Amoyt, 3168 Collins Ferry Road, P. O. Box 4533,
Morgantown, WV 26504-4533 (5.56%); Scott Accounts, P. O. Box 8048,
Charlottesville, VA 22906-8048 (7.16%); Central Carolina Bank & Trust Co., Attn:
Norwood Thomas, Jr., P. O. Box 931, Durham, NC 27702 (8.34%); City of Oakland,
Attn: Gary Breaux, 475 14th Street, 10th Fl., Oakland, CA 94612 (9.32%) and
Richfield Bank & Trust Co., Attn: Judith Ferguson, 6625 Lyndale Ave., South
Richfield, MN 55423 (11.30%); Short Duration Fund - G-K-G Inc., Attn: Bernard
Gassin, 166 Oak Knoll Terrace, Highland Park, IL 60035 (5.05); Westport Bank &
Trust, Attn: Arnold Levine, P. O. Box 5177, Westport, CT 06881 (6.09%); Donald
R. Grant, 85 Broad Street, New York, NY 10004(8.55%); and MGIC, Attn: James
McGinnis, P. O. Box 297, Milwaukee, WI 53201 (28.85%).
SHAREHOLDER AND TRUSTEE LIABILITY
Under Massachusetts law, there is a remote possibility that shareholders of
a business trust could, under certain circumstances, be held personally liable
as partners for the obligations of such trust. The Trust Agreement contains an
express disclaimer of shareholder liability for acts or obligations of the Trust
and requires that notice of such disclaimer be given in each agreement,
obligation or instrument entered into or executed by the Trust or the Trustees.
The Trust Agreement provides for indemnification out of Trust property of any
shareholder charged or held personally liable for obligations or liabilities of
the Trust solely by reason of being or having been a shareholder of the Trust
and not because of such shareholder'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 shareholder as
such for any obligation or liability of the Trust and satisfy any judgment
thereon. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the Trust itself
would be unable to meet its obligations.
Rule 18f-2 under the Act provides that any matter required to be submitted
by the provisions of the Act, applicable state law or otherwise to the holders
of the outstanding voting securities of an investment company (such as the
Trust) shall not be deemed to have been effectively acted upon unless approved
by the holders of a majority of the outstanding shares of each class or series
affected by such matter. Rule 18f-2 further provides that a class or series
shall be deemed to be affected by a matter unless the interests of each class or
series in the matter are substantially identical or the matter does not affect
any interest of such class or series. However, Rule 18f-2 exempts the selection
of independent public
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accountants, the approval of principal distribution contracts and the election
of Trustees from the separate voting requirements of Rule 18f-2.
NET ASSET VALUE
Under the Act, the Trustees of the Trust are responsible for determining in
good faith the fair value of securities of the Funds. In accordance with
procedures adopted by the Trustees of the Trust, the net asset value per share
of each class of each Fund is calculated by determining the value of the the net
assets attributable to each class of that Fund and dividing by the number of
outstanding shares of that class. All securities are valued as of the close of
regular trading on the New York Stock Exchange (normally 4:00 p.m. New York
time) on each Business Day (as defined in each Fund's prospectus).
Portfolio securities for which accurate market quotations are readily
available will be valued on the basis of quotations provided by dealers in such
securities or furnished by a pricing service. Portfolio securities for which
accurate market quotations are not readily available and other assets will be
valued at fair value using methods determined in good faith by the Adviser under
the supervision of the Trustees and may include yield equivalents or a pricing
matrix.
TAXATION
The following is a summary of the principal U.S. federal income, and
certain state and local, tax considerations regarding the purchase, ownership
and disposition of shares in the Funds. This summary does not address special
tax rules applicable to certain classes of investors, such as tax-exempt
entities, insurance companies and financial institutions. Each prospective
shareholder is urged to consult his own tax adviser with respect to the specific
federal, state, local and foreign tax consequences of investing in the Funds.
This summary is based on the laws in effect on the date of this Additional
Statement, which are subject to change.
GENERAL
-------
Each series of the Trust, including each Fund, is a separate taxable
entity. Each Fund has qualified and elected to be treated and intends to
continue to qualify for each taxable year as a regulated investment company
under Subchapter M of the Code.
Qualification as a regulated investment company under the Code requires,
among other things, that (a) a Fund derive at least 90% of its annual gross
income (including tax-exempt interest) from dividends, interest, payments with
respect to securities loans and
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gains from the sale or other disposition of stocks or securities, or foreign
currencies or other income (including but not limited to gains from options,
futures and forward contracts) derived with respect to its business of investing
in such stock, securities or currencies (the "90% gross income test"); (b) a
Fund derive less than 30% of its annual gross income from the sale or other
disposition of any of the following which was held for less than three months:
(i) stock or securities, (ii) options, futures or forward contracts (other than
options, futures or forward contracts on foreign currencies) and (iii) foreign
currencies and foreign currency options, futures and forward contracts that are
not directly related to the Fund's principal business of investing in stocks or
securities or options and futures with respect to such stocks or securities (the
"short-short test"); and (c) a Fund diversify its holdings so that, at the close
of each quarter of its taxable year, (i) at least 50% of the market value of its
total (gross) assets is comprised of cash, cash items, United States Government
securities, securities of other regulated investment companies and other
securities limited in respect of any one issuer to an amount not greater in
value than 5% of the value of the Fund's total assets and to not more than 10%
of the outstanding voting securities of such issuer, and (ii) not more than 25%
of the value of its total assets is invested in the securities of any one issuer
(other than United States Government securities and securities of other
regulated investment companies) or two or more issuers controlled by the Fund
and engaged in the same, similar or related trades or businesses. Gains from
the sale or other disposition of foreign currencies (or options, futures or
forward contracts on foreign currencies) that are not directly related to Core
Fund's principal business of investing in stock or securities or options and
futures with respect to stock or securities will be treated as gains from the
sale of investments held for less than three months under the short-short test
(even though characterized as ordinary income for some purposes) if such
currencies or instruments were held for less than three months. In addition,
future Treasury regulations could expect to provide that qualifying income under
the 90% gross income test will not include gains from foreign currency
transactions that are not directly related to Core Fund's principal business of
investing in stock or securities or options and futures with respect to stock or
securities. Using foreign currency positions or entering into foreign currency
options, futures and forward contracts for purposes other than hedging currency
risk with respect to securities in Core Fund's portfolio or anticipated to be
acquired may not qualify as "directly related" under these tests.
As a regulated investment company, a Fund will not be subject to U.S.
federal income tax on the portion of its income and capital gains that it
distributes to its shareholders in any taxable year for which it distributes, in
compliance with the Code's timing requirements, at least 90% of its "investment
company taxable income" (which includes dividends, taxable interest, taxable
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original issue discount income, market discount income, income from securities
lending, net short-term capital gain in excess of net long-term capital loss,
and any other taxable income other than "net capital gain" as defined below and
is reduced by deductible expenses) and at least 90% of the excess of its gross
tax-exempt interest income over certain disallowed deductions ("net tax-exempt
interest"). A Fund may retain for investment its "net capital gain" (which
consists of the excess of its net long-term capital gain over its net short-term
capital loss). However, if a Fund retains any investment company taxable income
or net capital gain, it will be subject to tax at regular corporate rates on the
amount retained. If a Fund retains any net capital gain, the Fund may designate
the retained amount as undistributed net capital gain in a notice to its
shareholders who, if subject to U.S. federal income tax on long-term capital
gains, (i) will be required to include in income for federal income tax
purposes, as long-term capital gain, their shares of such undistributed amount,
and (ii) will be entitled to credit their proportionate shares of the tax paid
by the Fund against their U.S. federal income tax liabilities, if any, and to
claim refunds to the extent the credit exceeds such liabilities. For U.S.
federal income tax purposes, the tax basis of shares owned by a shareholder of
the Fund will be increased by an amount equal under current law to 65% of the
amount of undistributed net capital gain included in the shareholder's gross
income. Each Fund intends to distribute at least annually to its shareholders
all or substantially all of its investment company taxable income (if any), net
capital gain and any net tax-exempt interest. If for any taxable year a Fund
does not qualify as a regulated investment company, it will be taxed on all of
its investment company taxable income and net capital gain at corporate rates,
its net tax-exempt interest may be subject to the alternative minimum tax, and
its distributions to shareholders will be taxable as ordinary dividends to the
extent of its current and accumulated earnings and profits.
For federal income tax purposes, each Fund is permitted to carry forward a
net capital loss in any year to offset its own net capital gains, if any, during
the eight years following the year of the loss. At October 31, 1994, the
Adjustable Rate Fund had approximately $9,950,000 of capital loss carryforwards,
which expires as follows: $2,220,000 in 2000 and $7,730,000 in 2001. At
October 31, 1994, the Core Fund had approximately $458,000 of capital loss
carryforwards, which expires in 2002. At October 31, 1994, the Short-Term Fund
and Short Duration Fund had no captial loss carryforwards.
In order to avoid a 4% federal excise tax, each Fund must distribute or be
deemed to have distributed by December 31 of each calendar year at least 98% of
its taxable ordinary income for such year, at least 98% of the excess of its
realized capital gains over its realized capital losses (generally computed on
the basis of the one-year period ending on October 31 of such year) and 100% of
any
B-78
<PAGE>
taxable ordinary income and the excess of realized capital gains over realized
capital losses for the prior year that was not distributed during such year and
on which the Fund did not pay federal income tax. The Funds anticipate that
they will generally make timely distributions of income and capital gains in
compliance with these requirements so that they will generally not be required
to pay the excise tax.
For federal income tax purposes, dividends declared by a Fund in October,
November or December as of a record date in such a month which are actually paid
in January of the following year will be treated as if they were paid by the
Fund and received by shareholders on December 31 of the year declared.
Short Duration Fund may purchase Municipal Securities together with the
right to resell the securities to the seller at an agreed upon price or yield
within a specified period prior to the maturity date of the securities. Such a
right to resell is commonly known as a "put" and is also referred to as a
"standby commitment." Short Duration Fund may pay for a standby commitment
either separately, in cash, or in the form of a higher price for the securities
which are acquired subject to the standby commitment, thus increasing the cost
of securities and reducing the yield otherwise available. Additionally, the
Short Duration Fund may purchase beneficial interests in Municipal Securities
held by trusts, custodial arrangements or partnerships and/or combined with
third-party puts and other types of features such as interest rate swaps; those
investments may require the Fund to pay "tender fees" or other fees for the
various features provided.
The Internal Revenue Service (the "Service") has issued a regulated ruling
to the effect that, under specified circumstances, a registered investment
company will be the owner of tax-exempt municipal obligations acquired subject
to a put option. The Service has also issued private letter rulings to certain
taxpayers (which do not serve as precedent for other taxpayers) to the effect
that tax-exempt interest received by a regulated investment company with respect
to such obligations will be tax-exempt in the hands of the company and may be
distributed to its shareholders as exempt-interest dividends. The Service has
subsequently announced that it will not ordinarily issue advance rulings letters
as to the identity of the true owner of property in cases involving the sale of
securities or participation interests therein if the purchaser has the right to
cause the security, or the participation of interest therein, to be purchased by
either the seller or a third party. Short Duration Fund intends to take the
position that it is the owner of any municipal obligations acquired subject to a
standby commitment or other third party put and that tax-exempt interest earned
with respect to such municipal obligations will be tax-exempt in its hands.
There is no assurance that the Service will agree with such position in any
particular case. Additionally, the federal income tax treatment of certain
other
B-79
<PAGE>
aspects of these investments, including the treatment of tender fees paid by the
Short Duration Fund, in relation to various regulated investment company tax
provisions is unclear. However, the Adviser intends to manage the Short
Duration Fund's portfolio in a manner designed to minimize any adverse impact
from the tax rules applicable to these investments.
Gains and losses on the sale, lapse, or other termination of options and
futures contracts, options thereon and certain forward contracts (except certain
foreign currency options, forward contracts and futures contracts) will
generally be treated as capital gain and losses. Certain of the futures
contracts, forward contracts and options held by a Fund will be required to be
"marked-to-market" for federal income tax purposes, that is, treated as having
been sold at their fair market value on the last day of the Fund's taxable year.
Any gain or loss recognized on actual or deemed sales of these futures contracts
or options will (except for certain foreign currency options, forward contracts,
and futures contracts) be treated as 60% long-term capital gain or loss and 40%
short-term capital gain or loss. As a result of certain hedging transactions
entered into by a Fund, the Fund may be required to defer the recognition of
losses on futures contracts and options or underlying securities foreign
currencies to the extent of any unrecognized gains or related positions held by
the Fund and the characterization of gains or losses as long-term or short-term
may be changed. The short-short test described above may limit each Fund's
ability to use options, futures and forward transactions as well as its ability
to engage in short sales. The tax provisions described above applicable to
options, futures and forward contracts may affect the amount, timing and
character of a Fund's distributions to shareholders. Certain tax elections may
be available to the Funds to mitigate some of the unfavorable consequences
described in this paragraph.
Section 988 of the Code contains special tax rules applicable to certain
foreign currency transactions that may affect the amount, timing and character
of income, gain or loss recognized by Core Fund. Under these rules, foreign
exchange gain or loss realized by Core Fund with respect to foreign currencies
and certain futures and options thereon, foreign currency-denominated debt
instruments, foreign currency forward contracts, and foreign currency-
denominated payables and receivables will generally be treated as ordinary
income or loss, although in some cases elections may be available that would
alter this treatment. If a net foreign exchange loss treated as ordinary loss
under Section 988 of the Code were to exceed Core Fund's investment company
taxable income (computed without regard to such loss) for a taxable year, the
resulting loss would not be deductible by Core Fund or its shareholders in
future years. Net loss, if any, from certain foreign currency transactions or
instruments could exceed net investment income otherwise calculated for
accounting purposes with the result being either no dividends being paid or a
portion
B-80
<PAGE>
of Core Fund's dividends being treated as a return of capital for tax purposes,
nontaxable to the extent of a shareholder's tax basis in his shares and, once
such basis is exhausted, generally giving rise to capital gains.
Core Fund may be subject to foreign taxes on its income (possibly
including, in some cases, capital gains) from foreign securities. Tax
conventions between certain countries and the U.S. may reduce or eliminate such
taxes. Because more than 50% of Core Fund's total assets at the close of any
taxable year will generally not consist of stock or securities of foreign
corporations, Core Fund will generally not qualify to file an election with the
Internal Revenue Service pursuant to which shareholders of Core Fund would be
required to (i) include in ordinary gross income (in addition to taxable
dividends actually received) their pro rata shares of foreign income taxes paid
by Core Fund even though not actually received, and (ii) treat such respective
pro rata portions as foreign income taxes paid by them. Core Fund will, however,
be entitled to deduct such taxes in computing its investment company taxable
income.
If Core Fund acquires stock in certain non-U.S. corporations that receive
at least 75% of their annual gross income from passive sources (such as
interest, dividends, rents, royalties or capital gain) or hold at least 50% of
their assets in investments producing such passive income ("passive foreign
investment companies") Core Fund could be subject to federal income tax and
additional interest charges on "excess distributions" received from such
companies or gain from the sale of such stock in such companies, even if all
income or gain actually received by Core Fund is timely distributed to its
shareholders. Core Fund would not be able to pass through to its shareholders
any credit or deduction for such a tax. Certain elections may, if available,
ameliorate these adverse tax consequences, but any such election would require
Core Fund to recognize taxable income or gain without the concurrent receipt of
cash. Core Fund may limit and/or manage its holdings in passive foreign
investment companies to minimize its tax liability or maximize its return from
these investments.
A Fund's investment in zero coupon securities, deferred interest securities
or other securities bearing original issue discount or, if a Fund elects to
include market discount in income currently, market discount, as well as any
"mark-to-market" gain from options and futures contracts, as described below
will generally cause it to realize income or gain prior to the receipt of cash
payments with respect to these securities or contracts. In order to distribute
this income or gain, maintain its qualification as a regulated investment
company and avoid federal income or excise taxes, a Fund may be required to
liquidate portfolio securities that it might otherwise have continued to hold.
The federal income tax rules applicable to mortgage dollar
B-81
<PAGE>
rolls and interest rate and currency swaps, floors, caps and collars are unclear
in certain respects, and a Fund may also be required to account for these
instruments under tax rules in a manner that, under certain circumstances, may
limit its transactions in these instruments.
TAXABLE U.S. SHAREHOLDERS -- DISTRIBUTIONS
SHORT DURATION FUND. Short Duration Fund expects to qualify to pay "exempt-
interest dividends," as defined in the Code. To qualify to pay exempt-interest
dividends, Short Duration Fund must, at the close of each quarter of its taxable
year, have at least 50% of the value of its total assets invested in tax-exempt
Municipal Securities. In purchasing Municipal Securities, Short Duration Fund
intends to rely on opinions of nationally recognized bond counsel for each issue
as to the excludability of interest on such obligations from gross income for
federal income tax purposes. Short Duration Fund will not undertake independent
investigations concerning the tax-exempt status of such obligations, nor does it
guarantee or represent that bond counsels' opinions are correct. Bond counsels'
opinions will generally be based in part upon covenants by the issuers and
related parties regarding continuing compliance with federal tax requirements.
Tax laws enacted during the last decade not only had the effect of limiting the
purposes for which tax-exempt bonds could be issued and reducing the supply of
such bonds, but also increased the number and complexity of requirements that
must be satisfied on a continuing basis in order for bonds to be and remain tax-
exempt. If the issuer of a bond or a user of a bond-financed facility fails to
comply with such requirements at any time, interest on the bond could become
taxable, retroactive to the date the obligation was issued. In that event, a
portion of the Short Duration Fund's distributions attributable to interest the
Short Duration Fund received on such bond for the current year and for prior
years could be characterized or recharacterized as taxable income. The
availability of tax-exempt obligations and the value of Short Duration Fund's
portfolio may be affected by restrictive federal income tax legislation enacted
in recent years or by similar, future legislation. If Short Duration Fund
satisfies the applicable requirements, dividends paid by the Fund which are
attributable to tax exempt interest on Municipal Securities and designated by
Short Duration Fund as exempt-interest dividends in a written notice mailed to
its shareholders within sixty days after the close of its taxable year may be
treated by shareholders for all purposes as items of interest excludable from
their gross income under Section 103(a) of the Code. Exempt-interest dividends
Short Duration Fund receives from other regulated investment companies,
including exempt-interest dividends on auction rate preferred securities of such
companies held by Short Duration Fund, are treated as interest on Municipal
Securities and may be distributed by Short Duration Fund as exempt-interest
dividends. The recipient of tax-exempt income is required to report such
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<PAGE>
income on his federal income tax return. However, a shareholder is advised to
consult his tax adviser with respect to whether exempt-interest dividends retain
the exclusion under Section 103(a) if such shareholder would be treated as a
"substantial user" under Section 147(a)(1) with respect to some or all of the
tax-exempt obligations held by Short Duration Fund. The Code provides that
interest on indebtedness incurred or continued to purchase or carry shares of
Short Duration Fund is not deductible to the extent attributable to exempt-
interest dividends.
Although all or a substantial portion of the dividends paid by Short
Duration Fund may be excluded by shareholders of Short Duration Fund from their
gross income for federal income tax purposes, Short Duration Fund may purchase
specified private activity bonds, the interest from which may be a preference
item for purposes of the federal alternative minimum tax (both individual and
corporate). All exempt-interest dividends from Short Duration Fund, whether or
not attributable to private activity bond interest, may increase the "adjusted
current earnings" preference item for purposes of the corporate alternative
minimum tax, to the extent not already included in alternative minimum taxable
income as income attributable to private activity bonds, and will be taken into
account in determining the extent to which a shareholder's Social Security or
certain railroad retirement benefits are taxable.
ALL FUNDS. Distributions of investment company taxable income, as defined
above, are taxable to shareholders who are subject to tax as ordinary income
whether paid in cash or reinvested in additional shares. Taxable distributions
include distributions from any Fund, including Short Duration Fund, that are
attributable to (i) taxable income, including but not limited to dividends,
taxable bond interest, recognized market discount income, original issue
discount income accrued with respect to taxable bonds, income from repurchase
agreements, income from securities lending, income from dollar rolls, income
from interest rate or currency swaps, caps, floors and collars, and a portion of
the discount from certain stripped tax-exempt obligations or their investments
(including from the disposition of rights to when-issued securities prior to
issuance) or from options, futures or certain forward contracts. Any portion of
such taxable distributions that is attributable to a Fund's net capital gain, as
defined above, may be designated by the Fund as a "capital gain dividend,"
taxable to shareholders as long-term capital gain whether received in cash or
additional shares and regardless of the length of time their shares of a Fund
have been held.
It is expected that distributions made by the Funds will ordinarily not
qualify for the dividends-received deduction for corporations because qualifying
distributions may be made only from a Fund's dividend income that it receives
from stock in U.S. domestic corporations. The Funds do not intend to purchase
stock
B-83
<PAGE>
of domestic corporations other than limited investments in investment companies,
distributions from which may in rare cases qualify as dividends for this
purpose. The dividends-received deduction, if available, is reduced to the
extent the shares with respect to which the dividends are received are treated
as debt-financed under the federal income tax law and is eliminated if the
shares are deemed to have been held for less than a minimum period, generally 46
days. Receipt of certain distributions qualifying for the deduction may result
in reduction of the tax basis of the corporate shareholder's shares and may give
rise to or increase its liability for federal corporate alternative minimum tax.
Distributions in excess of a Fund's current and accumulated earnings and
profits, as computed for federal income tax purposes, will first reduce a
shareholder's basis in his shares and, after the shareholder's basis is reduced
to zero, will generally constitute capital gains to a shareholder who holds his
shares as capital assets. Amounts that are not allowable as a deduction in
computing taxable income, including expenses associated with earning tax-exempt
interest income, do not reduce current earnings and profits for these purposes.
Consequently, the portion, if any, of Short Duration Fund's distributions from
gross tax-exempt interest income that exceeds its net tax-exempt interest would
be taxable as ordinary income to the extent of such disallowed deductions even
though such excess portion may represent an economic return of capital.
Shareholders receiving a distribution in the form of newly issued shares
will be treated for U.S. federal income tax purposes as receiving a distribution
in an amount equal to the amount of cash that they would have received had they
elected to receive cash and will have a cost basis in the shares received equal
to such amount.
TAXABLE U.S. SHAREHOLDERS -- SALE OF SHARES
When a shareholder's shares are sold, redeemed or otherwise disposed of,
the shareholder will generally recognize gain or loss equal to the difference
between the shareholder's adjusted tax basis in the shares and the cash, or fair
market value of any property, received. Assuming the shareholder holds the
shares as a capital asset at the time of such sale or other disposition, such
gain or loss should be capital in character, and long-term if the shareholder
has a tax holding period for the shares of more than one year, otherwise short-
term. All or a portion of a sales charge paid in purchasing Class A shares of
Adjustable Rate Fund cannot be taken into account for purposes of determining
gain or loss on the redemption or exchange of such shares within 90 days after
their purchase to the extent shares of that Fund or another fund are
subsequently acquired without payment of a sales charge pursuant to the
reinvestment or exchange privilege. Any disregarded portion of such charge will
result in an increase in the shareholder's tax
B-84
<PAGE>
basis in the shares subsequently acquired. If a shareholder received a capital
gain dividend with respect to shares and such shares have a tax holding period
of six months or less at the time of the sale or redemption, then any loss the
shareholder realizes on the sale or redemption will be treated as a long-term
capital loss to the extent of such capital gain dividend. Also, any losses
realized by shareholders who dispose of shares of Short Duration Fund with a tax
holding period of six months or less are disallowed to the extent of any exempt-
interest dividends received with respect to such shares. Additionally, any loss
realized on a sale or redemption of shares of a Fund may be disallowed under
"wash sale" rules to the extent the shares disposed of are replaced within a
period of 61 days beginning 30 days before and ending 30 days after the shares
are disposed of, such as pursuant to a dividend reinvestment in shares of the
Fund. If disallowed, the loss will be reflected in an adjustment to the basis
of the shares acquired.
After the close of each calendar year, Short Duration Fund will inform
shareholders of the federal income tax status of its dividends and distributions
for such year, including the portion of such dividends that qualifies as tax-
exempt and the portion, if any, that should be treated as a tax preference item
for purposes of the federal alternative minimum tax. Shareholders who have not
held shares of Short Duration Fund for its full taxable year may have designated
as tax-exempt or as a tax preference item a percentage of distributions which
is not equal to the actual amount of tax-exempt income or tax preference item
income earned by Short Duration Fund during the period of their investment in
Short Duration Fund.
All distributions whether received in shares or in cash, as well as
redemptions and exchanges, must be reported by each shareholder who is required
to file a U.S. Federal income tax return.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions, and certain prohibited transactions is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their tax
advisers for more information.
BACKUP WITHHOLDING
Each Fund will be required to report to the Service all taxable
distributions, as well as gross proceeds from the redemption or exchange of Fund
shares, except in the case of certain exempt recipients, i.e., corporations and
certain other investors distributions to which are exempt from the information
reporting provisions of the Code. Under the backup withholding provisions of
Code Section 3406 and applicable Treasury
B-85
<PAGE>
regulations, all such reportable distributions and proceeds may be subject to
backup withholding of federal income tax at the rate of 31% in the case of non-
exempt shareholders who fail to furnish the Funds with their correct taxpayer
identification number and with certain required certifications or if the
Internal Revenue Service or a broker notifies the Funds that the number
furnished by the shareholder is incorrect or that the shareholder is subject to
backup withholding as a result of failure to report interest or dividend income.
However, any taxable distributions from Short Duration Fund will not be subject
to backup withholding if such Fund reasonably estimates that at least 95% of its
distributions will be exempt-interest dividends. A Fund may refuse to accept an
application that does not contain any required taxpayer identification number or
certification that the number provided is correct. If the backup withholding
provisions are applicable, any such distributions and proceeds, whether taken in
cash or reinvested in shares, will be reduced by the amounts required to be
withheld. Any amounts withheld may be credited against a shareholder's U.S.
federal income tax liability. Investors should consult their tax advisers about
the applicability of the backup withholding provisions.
NON-U.S. SHAREHOLDERS
The foregoing discussion relates solely to U.S. federal income tax law as
it applies to "U.S. persons" (i.e., U.S. citizens and residents and U.S.
domestic corporations, partnerships, trusts and estates) subject to tax under
such law. Dividends of investment company taxable income distributed by a Fund
to a shareholder who is not a U.S. person will be subject to U.S. withholding
tax at the rate of 30% (or a lower rate provided by an applicable tax treaty)
unless the dividends are effectively connected with a U.S. trade or business of
the shareholder, in which case the dividends will be subject to tax on a net
income basis at the graduated rates applicable to U.S. individuals or domestic
corporations. Distributions of net capital gain, including amounts retained by a
Fund which are designated as undistributed capital gains, to a shareholder who
is not a U.S. person will not be subject to U.S. income or withholding tax
unless the distributions are effectively connected with the shareholder's trade
or business in the United States or, in the case of a shareholder who is a
nonresident alien individual, the shareholder is present in the United States
for 183 days or more during the taxable year and certain other conditions are
met.
Any gain realized by a shareholder who is not a U.S. person upon a sale or
redemption of shares of a Fund will not be subject to U.S. federal income or
withholding tax unless the gain is effectively connected with the shareholder's
trade or business in the United States, or in the case of a shareholder who is a
nonresident alien individual, the shareholder is present in the United States
for 183 days or more during the taxable year and
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<PAGE>
certain other conditions are met.
Non-U.S. persons who fail to furnish a Fund with an IRS Form W-8 or
acceptable substitute may be subject to backup withholding at the rate of 31% on
capital gain dividends and the proceeds of redemptions and exchanges. Each
shareholder who is not a U.S. person should consult his or her tax adviser
regarding the U.S. and non-U.S. tax consequences of ownership of shares of and
receipt of distributions from a Fund.
STATE AND LOCAL TAXES
A Fund may be subject to state or local taxes in certain jurisdictions in
which the Fund may be deemed to be doing business. In addition, in those states
or localities which have income tax laws, the treatment of a Fund and its
shareholders under such laws may differ from their treatment under federal
income tax laws, and investment in a Fund may have tax consequences for
shareholders different from those of a direct investment in such Fund's
portfolio securities. Shareholders should consult their own tax advisers
concerning these matters.
PERFORMANCE INFORMATION
Each Fund may from time to time quote or otherwise use yield and total
return information in advertisements, shareholder reports or sales literature.
Thirty-day yield and average annual total return values are computed pursuant to
formulas specified by the SEC. Each Fund may also from time to time quote
distribution rates in reports to shareholders and in sales literature.
Thirty-day yield is derived by dividing net investment income per share
earned during the period by the maximum public offering price (i.e., net asset
value) per share on the last day of such period. Yield is then annualized by
assuming that yield is realized each month for twelve months and is reinvested
every six months. Net investment income per share is equal to the dividends and
interest earned during the period, reduced by accrued expenses for the period.
The calculation of net investment income for these purposes may differ from the
net investment income determined for accounting purposes.
Tax equivalent yield represents the yield an investor would have to earn to
equal, after taxes, Short Duration Fund's tax-free yield. Tax equivalent yield
is calculated by dividing Short Duration Fund's tax-exempt yield by one minus a
stated federal and/or state tax rate.
Distribution rate for a specified period is calculated by annualizing
distributions of net investment income for such period and dividing this amount
by the net asset value per share on the
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last day of the period.
Average annual total return for a specified period is derived by
calculating the actual dollar amount of the investment return on a $1,000
investment made at the maximum public offering price (i.e., net asset value) at
the beginning of the period, and then calculating the annual compounded rate of
return which would produce that amount, assuming a redemption at the end of the
period. This calculation assumes a complete redemption of the investment. It
also assumes that all dividends and distributions are reinvested at net asset
value on the reinvestment dates during the period.
Year-by-year total return and cumulative total return for a specified
period are each derived by calculating the percentage rate required to make a
$1,000 investment (made at the net asset value per share with all distributions
reinvested) at the beginning of such period equal to the actual total value of
such investment at the end of such period.
The following table presents thirty-day yield, tax equivalent yield (Short
Duration Fund only), distribution rate and average annual total return (capital
plus reinvestment of all distributions) for the periods indicated.
Thirty-day yield, tax equivalent yield (Short Duration Fund only),
distribution rate and average annual total return are calculated separately for
each class of shares in existence of each Fund. Each class of shares of each
Fund is subject to different fees and expenses and may have different returns
for the same period. There were no Service Shares of the Adjustable Rate Fund,
Short-Term Fund and Core Fund, no Class A Shares of Adjustable Rate Fund and no
Administration Shares of Core Fund outstanding during the periods presented
below. Accordingly, the following charts represent historical performance data
for the Institutional and Administration Shares of each Fund and for the Service
Shares of Short Duration Fund only.
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<PAGE>
YIELD
<TABLE>
<CAPTION>
Investment Pro-Forma
Fund Period Yield Yield/1/
---- ---------- ----- -------
<S> <C> <C> <C>
30-Days
ended
10/31/94
Adjustable Rate Fund
Institutional Shares 5.14% 5.08%
Administration Shares 4.89% 4.83%
Service Shares/2/ N/A N/A
Class A Shares/2/ N/A N/A
Short-Term Fund
Institutional Shares 5.76% 5.68%
Administration Shares 5.51% 5.43%
Service Shares/3/ N/A N/A
Short Duration Fund
Institutional Shares 5.03% 4.81%
Administration Shares 4.78% 4.56%
Service Shares/4/ 4.53% 4.31%
Core Fund
Institutional Shares 6.96% 6.24%
Administration Shares/5/ N/A N/A
Service Shares/5/ N/A N/A
</TABLE>
DISTRIBUTION RATE
<TABLE>
<CAPTION>
Pro-Forma
Investment Distribution Distribution
Fund Period Rate Rate/1/
----- ----------- ------------ -------
<S> <C> <C> <C>
30-Days
ended
10/31/94
Adjustable Rate Fund
Institutional Shares 5.51% 5.46%
Administration Shares 5.26% 5.21%
Service Shares/2/ N/A N/A
Class A Shares/2/ N/A N/A
Short-Term Fund
Institutional Shares 5.98% 5.90%
Administration Shares 5.73% 5.65%
Service Shares/3/ N/A N/A
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Pro-Forma
Investment Distribution Distribution
Fund Period Rate Rate/1/
---- ----------- ------------ -------
<S> <C> <C> <C>
30-Days
ended
10/31/94
Short Duration Fund
Institutional Shares 4.65% 4.43%
Administration Shares 4.40% 4.18%
Service Shares/4/ 4.15% 3.93%
Core Fund
Institutional Shares 7.01% 6.30%
Administration Shares/5/ N/A N/A
Service Shares/5/ N/A N/A
</TABLE>
TAX-EQUIVALENT YIELD/6/
<TABLE>
<CAPTION>
Pro-Forma
Investment Tax-Equivalent Tax-Equivalent
Fund Period Rate Yield
----------- ------------ ------------
<S> <C> <C> <C>
30-Days
ended
10/31/94
Short Duration
Institutional Shares 8.32% 7.96%
Administration Shares 7.91% 7.55%
Service Shares/4/ 7.50% 7.13%
</TABLE>
__________________________________
1 Yield, tax equivalent yield and distribution rate if the applicable Adviser
had not voluntarily agreed to maintain expenses at a specified level.
2 There were no Service Shares or Class A Shares of Adjustable Rate Fund
outstanding during the periods indicated.
3 There were no Service Shares of Short-Term Fund outstanding during the
periods indicated.
4 Service Share activity of Short Duration Fund commenced on September 20,
1994.
5 There were no Administration Shares or Service Shares of Core Fund
outstanding during the periods indicated.
6 The tax-equivalent rate of Short Duration Fund is computed based on the
39.6% federal income tax rate.
The above tables should not be considered a representation of future
performance.
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<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Ending Redeemable
Value of
Investment Investment Amount Investment at
Fund Date Period Invested Period End
---- ----------- ----------- ---------- -----------------------
<S> <C> <C> <C> <C> <C>
With Fee Without Fee
Reductions Reductions
and/or and/or
Expense Expense
Limitations Limitations
----------- -----------
Adjustable Rate Fund
Institutional Shares 7/17/91/1a/ ended 10/31/94 $1,000 $1153.41 $1145.71
11/1/93 one year ended
10/31/94 $1,000 $1018.84 $1018.52
Administration Shares 4/15/93/1b/ ended 10/31/94 $1,000 $1036.69 $1036.10
11/1/93 one year ended
10/31/94 $1,000 $1016.30 $1016.01
Service Shares/1c/ N/A N/A
Class A Shares/1c/ N/A N/A
Short-Term Fund
Institutional Shares 8/15/88/2a/ ended 10/31/94 $1,000 $1527.02 $1496.73
11/1/93 one year ended
10/31/94 $1,000 $1009.94 $1008.43
11/1/89 five years
ended $1,000 $1359.93 $1345.51
10/31/94
Administration Shares 4/15/93/2b/ ended 10/31/94 $1,000 $1024.91 $1020.31
11/1/93 one year ended
10/31/94 $1,000 $1007.32 $1004.08
Service Shares/2a/ N/A N/A
</TABLE>
<TABLE>
<CAPTION>
Cumulative Average Annual
------------------ -------------------
With Fee Without Fee With Fee Without Fee
Reductions Reduction Reductions Reduction
and/or and/or and/or and/or
Expense Expense Expense Expense
Limitations Limitations Limitations Limitations
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Adjustable Rate Fund
Institutional Shares 15.34% 14.57% 4.43% 4 .21%
Administration Shares 1.88% 1.85% 1.88% 1 .85%
3.67% 3.61% 2.36% 2 .32%
Service Shares/1c/
Class A Shares/1c/ 1.63% 1.60% 1.63% 1 .60%
N/A N/A N/A N/A
N/A N/A N/A N/A
Short-Term Fund
Institutional Shares 52.70% 49.67% 7.05% 6 .70%
Administration Shares 35.99% 34.99% 6.34% 6.09%
2.49% 2.03% 1.60% .65%
Service Shares/2a/ .73% .41% .73% .41%
N/A N/A N/A N/A
</TABLE>
B-91
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Investment Investment
Fund Date Period Invested
---- ---------- ---------- --------
<S> <C> <C> <C>
Short Duration Fund
Institutional Shares 10/31/92/3a/ ended 10/31/94 $1,000
11/1/93 one year ended
10/31/94 $1,000
Administration Shares 5/20/93/3b/ ended 10/31/94 $1,000
11/1/93 one year ended
10/31/94 $1,000
Service Shares 9/20/94/3c/ ended 10/31/94 $1,000
Core Fund
Institutional Shares 1/15/94/4a/ 10/31/94 $1,000
Administration Shares/4b/
Service Shares/4b/
</TABLE>
<TABLE>
<CAPTION>
Ending Redeemable
Value of
Investment at
Fund Period End Cumulative Average Annual
---- --------------------- ---------------------- --------------
<S> <C> <C> <C> <C> <C> <C>
With Fee Without Fee With Fee Without Fee With Fee Without Fee
Reductions Reductions Reductions Reductions Reductions Reductions
and/or and/or and/or and/or and/or and/or
Expense Expense Expense Expense Expense Expense
Limitations Limitations Limitations Limitations Limitations Limitations
----------- ----------- ----------- ----------- ----------- -----------
Short Duration Fund
Institutional Shares $1068.55 $1053.98 6.85% 5.40% 3.23% 2.55%
$1001.72 $1000.03 .17% 0% .17% 0%
Administration Shares $1021.74 $1016.80 2.17% 1.68% 1.49% 1.15%
$ 998.93 $ 994.63 -.11% -.54% -.11% -.54%
Service Shares $ 996.80 $ 996.61 -.32% -.34% -2.74% -2.91%
Core Fund
Institutional Shares $ 969.96 $ 954.99 -3.00% -4.50% -3.64% -5.45%
Administration Shares/4b/ N/A N/A N/A N/A N/A N/A
Service Shares/4b/ N/A N/A N/A N/A N/A N/A
</TABLE>
_____________________________________
1a Institutional Shares of Adjustable Rate Fund commenced operations on July
17, 1991.
1b Administration Shares of Adjustable Rate Fund commenced operations on April
15, 1993.
1c No Service Shares or Class A Shares of Adjustable Rate Fund were
outstanding during the periods indicated.
2a Institutional Shares of Short-Term Fund commenced operations on August 15,
1988.
2b Administration Shares of Short-Term Fund commenced operations on April 15,
1993.
2c No Service Shares of Short-Term Fund were outstanding during the periods
indicated.
3a Institutional Shares of Short Duration commenced operations on October 1,
1992.
3b Administration Shares of Short Duration commenced operations on May 20,
1993.
3c Service Shares of Short Duration commenced operations on September 20,
1994.
4a Institutional Shares of Core Fund commenced operations on January 5, 1994.
4b No Administration Shares or Service Shares of Core Fund were outstanding
during periods indicated.
The above table should not be considered a representation of future
performance.
B-92
<PAGE>
Occasionally statistics may be used to specify a Fund's volatility or risk.
Measures of volatility or risk are generally used to compare a Fund's net asset
value or performance relative to a market index. One measure of volatility is
beta. Beta is the volatility of a fund relative to the total market. A beta of
more than 1.00 indicates volatility greater than the market, and a beta of less
than 1.00 indicates volatility less than the market. Another measure of
volatility or risk is standard deviation. Standard deviation is used to measure
variability of net asset value or total return around an average, over a
specified period of time. The premise is that greater volatility connotes
greater risk undertaken in achieving performance.
Each Fund may from time to time advertise comparative performance as
measured by various independent sources, including, but not limited to, Lipper
------
Analytical Services, Inc., Barron's, The Wall Street Journal, Weisenberger
------------------------- -------- ----------------------- ------------
Investment Companies Service, Business Week, Changing Times, Financial World,
---------------------------- ------------- -------------- ---------------
Forbes, Fortune, Morningstar Mutual Funds and Money.
------ ------- ------------------------ -----
In addition, Adjustable Rate Fund and Short-Term Fund may from time to time
advertise their performance relative to certain indices and benchmark
investments, including: (a) the Shearson Lehman Government/Corporate (Total)
Index, (b) Shearson Lehman Government Index, (c) Merrill Lynch 1-3 Year Treasury
Index, (d) Merrill Lynch 2-Year Treasury Curve Index, (e) the Salomon Brothers
Treasury Yield Curve Rate of Return Index, (f) the Payden & Rygel 2 Year
Treasury Note Index, (g) 1 through 3 year U.S. Treasury Notes, (h) constant
maturity U.S. Treasury yield indices, (i) the Consumer Price Index, (j) the
London Interbank Offered Rate, (k) other taxable investments such as
certificates of deposit, money market deposit accounts, checking accounts,
savings accounts, money market mutual funds, repurchase agreements, commercial
paper and (l) historical data concerning the performance of adjustable and
fixed-rate mortgage loans.
Short Duration Fund may from time to time advertise its performance
relative to certain indices, any components of such indices and benchmark
investments, including but not limited to: (a) the Lipper Analytical Services,
Inc. Mutual Fund Performance Analysis, Fixed Income Analysis and Mutual Fund
Indices (which measure total return and average current yield for the mutual
fund industry and rank mutual fund performance); (b) the Lehman Brothers
Municipal Bond Indices; (c) the Merrill Lynch Municipal Bond Institutional Total
Rate of Return Indices; (d) Bond Buyer Indices; (e) IBC/Donoghue's Money Fund
Averages_/Institutional Only Tax Free; and constant maturity U.S. Treasury yield
indices.
Core Fund may from time to time advertise its performance relative to
certain indices and benchmark investments, including: (a) the Lipper Analytical
Services, Inc. Mutual Fund Performance Analysis, Fixed Income Analysis and
Mutual Fund Indices (which
B-93
<PAGE>
measure total return and average current yield for the mutual fund industry and
rank mutual fund performance); (b) the CDA Mutual Fund Report published by CDA
Investment Technologies, Inc. (which analyzes price, risk and various measures
of return for the mutual fund industry); (c) the Consumer Price Index published
by the U.S. Bureau of Labor Statistics (which measures changes in the price of
goods and services); (d) Stocks, Bonds, Bills and Inflation published by
Ibbotson Associates (which provides historical performance figures for stocks,
government securities and inflation); (e) the Salomon Brothers' World Bond Index
(which measures the total return in U.S. dollar terms of government bonds,
Eurobonds and foreign bonds of ten countries, with all such bonds having a
minimum maturity of five years); (f) the Lehman Brothers Aggregate Bond Index or
its component indices; (g) the Standard & Poor's Bond Indices (which measure
yield and price of corporate, municipal and U.S. Government bonds); (h) the J.P.
Morgan Global Government Bond Index; (i) other taxable investments including
certificates of deposit (CDs), money market deposit accounts (MMDAs), checking
accounts, savings accounts, money market mutual funds and repurchase agreements;
(j) historical investment data supplied by the research departments of Goldman
Sachs, Lehman Brothers Inc., First Boston Corporation, Morgan Stanley & Co.
Incorporated, Salomon Brothers, Inc., Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Donaldson Lufkin and Jenrette Securities Corporation; and (k)
Donoghue's Money Fund Report (which provides industry averages for 7-day
annualized and compounded yields of taxable, tax-free and U.S. Government money
funds).
The composition of the investments in such indices and the characteristics
of such benchmark investments are not identical to, and in some cases are very
different from, those of each Fund's portfolio. These indices and averages are
generally unmanaged and the items included in the calculations of such indices
and averages may not be identical to the formulas used by a Fund to calculate
its performance figures.
From time to time advertisements or communications to shareholders may
summarize the substance of information contained in shareholder reports
(including the investment composition of a Fund), as well as the views of
Goldman Sachs as to current market, economic, trade and interest rate trends,
legislative, regulatory and monetary developments, investment strategies and
regulated matters believed to be of relevance to a Fund.
The Trust may from time to time summarize the substance of discussions
contained in shareholder reports in advertisements and publish the Advisers'
views as to markets, the rationale for each applicable Fund's investments and
discussions of each applicable Fund's current asset allocation.
In addition, advertisements or shareholder communications may include a
discussion of certain attributes or benefits to be
B-94
<PAGE>
derived by an investment in a Fund. Such advertisements or information may
include symbols, headlines or other material which highlight or summarize the
information discussed in more detail therein.
Performance data is based on historical results and is not intended to
indicate future performance. Total return, thirty-day yield, tax equivalent
yield and distribution rate will vary based on changes in market conditions,
portfolio expenses, portfolio investments and other factors. The value of a
Fund's shares will fluctuate and an investor's shares may be worth more or less
than their original cost upon redemption. The Trust may also, at its
discretion, from time to time make a list of a Fund's holdings available to
investors upon request.
OTHER INFORMATION
The Trust assumed its current name on March 22, 1991. Prior thereto, the
Trust's name was "Goldman Sachs -- Short-Intermediate Government Fund." Short-
Term Fund assumed its current name in May 1991. Prior thereto, Short-Term Fund's
name was "GS Short-Intermediate Government Fund." Goldman Sachs licensed the
name "Goldman Sachs" and derivatives thereof to the Trust (and Fund) on a
royalty-free basis and Goldman Sachs has reserved to itself the right to grant
the non-exclusive right to use the name "Goldman Sachs" to any other person. At
such time as the Advisory Agreement for a Fund is no longer in effect, the Trust
on behalf of that Fund has agreed that such Fund will (to the extent it lawfully
can) cease using the name "Goldman Sachs."
A Fund will redeem shares solely in cash up to the lesser of $250,000 or 1%
of its net asset value of each Fund during any 90-day period for any one
shareholder. Each Fund, however, reserves the right to pay redemptions
exceeding $250,000 or 1% of the net asset value of each respective Fund at the
time of redemption by a distribution in kind of securities (instead of cash)
from such Fund. The securities distributed in kind would be readily marketable
and would be valued for this purpose using the same method employed in
calculating each Fund's net asset value per share. See "Net Asset Value." If a
shareholder receives redemption proceeds in kind, the shareholder should expect
to incur transaction costs upon the disposition of the securities received in
the redemption.
The right of a shareholder to redeem shares and the date of payment by a
Fund may be suspended for more than seven days for any period during which the
New York Stock Exchange is closed, other than the customary weekends or
holidays, or when trading on such Exchange is restricted as determined by the
SEC; or during any emergency, as determined by the SEC, as a result of which it
is not reasonably practicable for a Fund to dispose of securities owned by it or
fairly to determine the value of its net assets; or for such
B-95
<PAGE>
other period as the SEC may by order permit for the protection of shareholders
of a Fund.
The Prospectuses and this Additional Statement do not contain all the
information included in the Registration Statement filed with the SEC under the
1933 Act with respect to the securities offered by the Prospectuses. Certain
portions of the Registration Statement have been omitted from the Prospectuses
and this Additional Statement pursuant to the rules and regulations of the SEC.
The Registration Statement including the exhibits filed therewith may be
examined at the office of the SEC in Washington, D.C.
Statements contained in the Prospectuses or in this Additional Statement as
to the contents of any contract or other document referred to are not
necessarily complete, and, in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement of which the Prospectuses and this Additional Statement form a part,
each such statement being qualified in all respects by such reference.
Although each Fund is offering only its own shares, since the Funds use a
combined Additional Statement, it is possible that one Fund might become liable
for a misstatement or omission in this Additional Statement regarding another
Fund. The Trustees for each Fund have considered this factor in approving the
use of a combined Additional Statement.
FINANCIAL STATEMENTS
The audited financial statements and related report of Arthur Andersen LLP,
independent public accounts, for each Fund contained in each Fund's 1994 Annual
Report are hereby incorporated by reference and attached hereto. A copy of the
annual reports may be obtained without charge by writing Goldman, Sachs & Co.,
4900 Sears Tower, Chicago, Illinois 60606 or by calling Goldman, Sachs & Co., at
the telephone number on the inside cover of each Fund's Prospectus.
B-96
<PAGE>
SERVICE PLAN
Each Fund has adopted a service plan (the "Plan") with respect to its
Service Shares which authorizes it to compensate Service Organizations for
providing certain administration services and personal and account maintenance
services to their customers who are or may become beneficial owners of such
Shares. Pursuant to the Plan, a Fund will enter into agreements with Service
Organizations which purchase Service Shares of the Fund on behalf of their
customers ("Service Agreements"). Under such Service Agreements the Service
Organizations may perform some or all of the following services: (a) act,
directly or through an agent, as the sole shareholder of record and nominee for
all customers, (b) maintain account records for each customer who beneficially
owns Service Shares of a Fund, (c) answer questions and handle correspondence
from customers regarding their accounts, (d) process customer orders to
purchase, redeem and exchange Service Shares of a Fund, and handle the
transmission of funds representing the customers' purchase price or redemption
proceeds, (e) issue confirmations for transactions in shares by customers, (f)
provide facilities to answer questions from prospective and existing investors
about Service Shares of a Fund, (g) receive and answer investor correspondence,
including requests for prospectuses and statements of additional information,
(h) display and make prospectuses available on the Service Organization's
premises, (i) assist customers in completing application forms, selecting
dividend and other account options and opening custody accounts with the Service
Organization and (j) act as liaison between customers and a Fund, including
obtaining information from a Fund, working with a Fund to correct errors and
resolve problems and providing statistical and other information to a Fund. As
compensation for such services, a Fund will pay each Service Organization a
service fee in an amount up to 0.50% (on an annualized basis) of the average
daily net assets of the Service Shares of such Fund attributable to or held in
the name of such Service Organization; provided, however, that the fee paid for
personal and account maintenance services shall not exceed 0.25% such average
daily net assets. For the fiscal year ended October 31, 1994, no service fees
were accrued by Adjustable Rate Fund, Core Fund and Short-Term Fund since there
were no Service Shares outstanding. For the fiscal year ended October 31, 1994,
service fees in the amount of $325 were paid by Short Duration Fund.
Each Fund has adopted its Plan pursuant to Rule 12b-1 under the 1940 Act in
order to avoid any possibility that payments to the Service Organizations
pursuant to the Service Agreements might violate the 1940 Act. Rule 12b-1,
which was adopted by the SEC under the Act, regulates the circumstances under
which an investment company or series thereof may bear expenses associated with
the distribution of its shares. In particular, such an investment company or
series thereof cannot engage directly or
B-97
<PAGE>
indirectly in financing any activity which is primarily intended to result in
the sale of shares issued by the company unless it has adopted a plan pursuant
to, and complies with the other requirements of, such Rule. The Trust believes
that fees paid for the services provided in the Plan and described above are not
expenses incurred primarily for effecting the distribution of Service Shares.
However, should such payments be deemed by a court or the SEC to be distribution
expenses, such payments would be duly authorized by the Plan.
The Glass-Steagall Act prohibits all entities which receive deposits from
engaging to any extent in the business of issuing, underwriting, selling or
distribution securities, although institutions such as national banks are
permitted to purchase and sell securities upon the order and for the account of
their customers. In addition, under some state securities laws, banks and other
financial institutions purchasing Service Shares on behalf of their customers
may be required to register as dealers. Should future legislative or
administrative action or judicial or administrative decisions or interpretations
prohibit or restrict the activities of one or more of the Service Organizations
in connection with the Funds, such Service Organizations might be required to
alter materially or discontinue the services performed under their Service
Agreements. If one or more of the Service Organizations were restricted from
effecting purchases or sales of Service Shares automatically pursuant to pre-
authorized instructions, for example, effecting such transactions on a manual
basis might affect the size and/or growth of a Fund. Any such alteration or
discontinuance of services could require the Board of Trustees to consider
changing a Fund's method of operations or providing alternative means of
offering Service Shares of a Fund to customers of such Service Organizations, in
which case the operation of such Fund, its size and/or its growth might be
significantly altered. It is not anticipated, however, that any alternation of
a Fund's operations would have any effect on the net asset value per share or
result in financial losses to any shareholder.
Conflict of interest restrictions (including the Employee Retirement Income
Security Act of 1974) may apply to a Service Organization's receipt of
compensation paid by a Fund in connection with the investment of fiduciary
assets in Service Shares of such Fund. Service Organizations, including banks
regulated by the Comptroller of the Currency, the Federal Reserve Board or the
Federal Deposit Insurance Corporation, and investment advisers and other money
managers subject to the jurisdiction of the SEC, the Department of Labor or
state securities, are urged to consult legal advisers before investing fiduciary
assets in Service Shares of the Funds.
B-98
<PAGE>
The Plans with respect to Adjustable Rate Fund, Short-Term Fund, Short
Duration Fund and Core Fund was approved by The Goldman Sachs Group, L.P., as
the sole shareholder of Service Shares of each Fund. The Trustees, including a
majority of the Trustees who are not interested persons of the Trust and who
have no direct or indirect financial interest in the operation of the Plans or
the related Service Agreements, most recently voted to approve each Fund's Plan
and Service Agreements at a meeting called for the purpose of voting on such
Plans and Service Agreements on April 26, 1994. Each Plan and Service Agreement
will remain in effect until June 30, 1995 and will continue in effect thereafter
only if such continuance is specifically approved annually by a vote of the
Board of Trustees in the manner described above. No Plan may be amended to
increase materially the amount to be spent for the services described therein
without approval of the Service Shareholders of the applicable Fund, and all
material amendments of each Plan must also be approved by the Board of Trustees
in the manner described above. Each Plan may be terminated at any time by a
majority of the Board of Trustees as described above or by vote of a majority of
the outstanding Service Shares of the applicable Fund. The Service Agreements
may be terminated at any time, without payment of any penalty, by vote of a
majority of the Board of Trustees as described above or by a vote of a majority
of the outstanding Service Shares of the applicable Fund on not more than sixty
(60) days' written notice to any other party to the Service Agreements. The
Service Agreements will terminate automatically if assigned. So long as the
Plans are in effect, the selection and nomination of those Trustees who are not
interested persons will be committed to the discretion of the Trust's Nominating
Committee, which consists of all of the non-interested members of the Board of
Trustees. The Board of Trustees has determined that, in its judgment, there is a
reasonable likelihood that a Fund's Plan will benefit such Fund and its holders
of Service Shares. In the Board of Trustees' quarterly review of the Plans and
Service Agreements, the Board will consider their continued appropriateness and
the level of compensation provided therein.
B-99
<PAGE>
ADJUSTABLE RATE FUND
APPENDIX A
This Appendix provides certain information concerning the performance of
various types of securities over specified periods of time. However, the
characteristics of these securities are not identical to, and may be very
different from, those of the Fund's portfolio. The items included in these
performance figures may not be identical to those in the formulas used by the
Fund to calculate its performance figures. This information does not reflect the
Fund's actual portfolio composition or the fees or expenses associated with an
investment in the Fund. Past performance is not an indication of future
performance.
AVERAGE MONTHLY YIELDS
OF MONEY MARKET FUNDS IN IBC/DONOGHUE'S
MONEY FUND AVERAGE/TM//ALL TAXABLE INDEX
This table provides certain information concerning the average performance
of money market funds (other than tax-free money funds) tracked by Donoghue's
Money Fund Report for the periods indicated.
<TABLE>
<CAPTION>
DONOGHUE'S
YEAR AND ALL TAXABLE INDEX*
MONTH AVERAGE MONTHLY YIELD(%)
-------- ------------------------
YEAR 1988
---------
<S> <C>
JAN 6.50
FEB 6.17
MAR 6.05
APR 6.10
MAY 6.26
JUN 6.54
JUL 6.81
AUG 7.14
SEP 7.42
OCT 7.51
NOV 7.66
DEC 8.08
AVERAGE FOR 1988 6.86
YEAR 1989
---------
JAN 8.36
FEB 8.49
MAR 8.92
APR 9.16
MAY 9.14
JUN 8.93
JUL 8.65
</TABLE>
1-A
<PAGE>
<TABLE>
<S> <C>
AUG 8.32
SEP 8.26
OCT 8.19
NOV 8.00
DEC 7.93
AVERAGE FOR 1989 8.53
YEAR 1990
---------
JAN 7.75
FEB 7.65
MAR 7.66
APR 7.68
MAY 7.68
JUN 7.67
JUL 7.62
AUG 7.50
SEP 7.47
OCT 7.45
NOV 7.33
DEC 7.23
AVERAGE FOR 1990 7.56
YEAR 1991
---------
JAN 6.89
FEB 6.41
MAR 6.09
APR 5.84
MAY 5.58
JUNE 5.49
JULY 5.47
AUG 5.36
SEP 5.21
OCT 5.03
NOV 4.78
DEC 4.58
AVERAGE FOR 1991 5.56
YEAR 1992
---------
JAN 4.13
FEB 3.81
MAR 3.73
APR 3.65
MAY 3.51
JUNE 3.44
JULY 3.24
AUG 3.06
SEP 2.92
OCT 2.79
NOV 2.75
DEC 2.84
AVERAGE FOR 1992 3.32
</TABLE>
2-A
<PAGE>
<TABLE>
<CAPTION>
YEAR 1993
---------
<S> <C>
JAN 2.81
FEB 2.72
MAR 2.68
APR 2.65
MAY 2.60
JUNE 2.63
JULY 2.64
AUG 2.65
SEP 2.66
OCT 2.65
NOV 2.67
DEC 2.72
AVERAGE FOR 1993 2.67
YEAR 1994
---------
JAN 2.92
FEB 2.99
MAR 3.09
APR 3.28
MAY 3.59
JUN 3.83
JUL 3.99
AUG 4.18
SEP 4.48
OCT 4.54
NOV 4.84
DEC 5.24
AVERAGE FOR 1994 3.91
</TABLE>
*IBC/Donoghue's Money Fund Average(TM) All Taxable Index, as reported in
the IBC/Donoghue's Money Fund Report(R). The IBC/Donoghue's Money Fund
Average(TM) data is computed net of fees.
3-A
<PAGE>
APPENDIX A
This Appendix provides certain information concerning the performance of
various types of securities over specified periods of time. However, the
characteristics of these securities are not identical to, and may be very
different from, those of the Fund's portfolio. The items included in these
performance figures may not be identical to those in the formulas used by the
Fund to calculate its performance figures. This information does not reflect the
Fund's actual portfolio composition or the fees or expenses associated with an
investment in the Fund. Past performance is not an indication of future
performance.
PRICES AND YIELDS OF
CERTAIN U.S. TREASURY SECURITIES
AND
A FEDERAL HOME LOAN MORTGAGE CORPORATION
ONE-YEAR CONSTANT MATURITY TREASURY
ADJUSTABLE RATE MORTGAGE CERTIFICATE
The following table compares the Prices of a one-year and Yields of a six-
month on-the-run U.S. Treasury security and, a Federal Home Loan Mortgage
Corporation one-year constant maturity Treasury adjustable rate mortgage
certificate during the periods indicated. An "on-the-run" U.S. Treasury security
is a recently issued current coupon security quoted as representing the most
current and liquid security in its maturity category. A Federal Home Loan
Mortgage Corporation adjustable rate mortgage certificate is a type of mortgage
security eligible for investment by the Fund. Other securities in which the Fund
may invest may not have the same yield or volatility characteristics as these
securities. This data is based on the end of period values and for the yield
column, does not include any fees./1/
<TABLE>
<CAPTION>
ONE-YEAR ONE-YEAR ONE-YEAR ONE-YEAR
ON-THE-RUN ON-THE-RUN CMT ADJUSTABLE CMT ADJUSTABLE
U.S. TREAURY U.S. TREASURY RATE MORTGAGE RATE MORTGAGE
DATE SECURITY SECURITY CERTIFICATE CERTIFICATE
-----------------------------------------------------------------------------
YIELD PRICE PRICE PRICE
<S> <C> <C> <C> <C>
31 JAN 89 9.114 100.00 100.00 10.564
28 FEB 89 9.336 99.784 99.795 10.826
31 MAR 89 9.656 99.474 99.363 11.376
30 APR 89 9.441 99.682 99.370 11.361
31 MAY 89 9.044 100.065 99.796 10.814
3O JUN 89 8.491 100.605 100.298 10.171
31 JUL 89 7.948 101.139 100.684 9.678
</TABLE>
/1/ Historically, ARMs and PACs have offered yields that are higher than
those available from U.S. Treasury securities with comparable maturities.
4-A
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
31 AUG 89 8.227 100.864 100.441 9.987
30 SEP 89 8.255 100.836 100.474 9.945
31 OCT 89 8.034 101.054 100.705 9.654
30 NOV 89 7.793 101.292 101.007 9.273
31 DEC 89 7.749 101.334 101.098 9.159
31 JAN 90 7.951 101.135 100.906 9.401
28 FEB 90 8.155 100.933 100.785 9.555
31 MAR 90 8.395 100.696 100.645 9.735
30 APR 90 8.437 100.654 100.546 9.857
31 MAY 90 8.347 100.742 100.769 9.577
30 JUN 90 8.114 100.944 100.963 9.334
31 JUL 90 7.972 101.114 101.083 9.182
31 AUG 90 7.809 101.275 101.115 9.139
30 SEP 90 7.8 101.283 101.137 9.11
31 OCT 90 7.583 101.498 101.229 8.993
30 NOV 90 7.33 101.750 101.348 8.84
31 DEC 90 7.066 102.013 101.606 8.516
31 JAN 91 6.646 102.434 102.015 8.006
28 FEB 91 6.268 102.815 102.302 7.684
31 MAR 91 6.375 102.706 102.265 7.695
30 APR 91 6.21 102.873 102.406 7.52
31 MAY 91 6.098 102.986 102.554 7.338
30 JUN 91 6.332 102.750 102.414 7.512
31 JUL 91 6.285 102.798 102.535 7.365
31 AUG 91 5.754 103.337 102.940 6.864
30 SEP 91 5.554 103.540 103.152 6.604
31 OCT 91 5.305 103.795 103.289 6.435
30 NOV 91 4.863 104.248 103.617 6.033
31 DEC 91 4.341 104.789 104.221 5.301
31 JAN 92 4.111 105.028 104.461 5.011
28 FEB 92 4.246 104.888 104.357 5.136
31 MAR 92 4.603 104.515 104.044 5.513
30 APR 92 4.263 104.869 104.392 5.093
31 MAY 92 4.161 104.976 104.619 4.821
30 JUN 92 4.141 104.995 104.669 4.761
31 JUL 92 3.572 105.591 105.135 4.202
31 AUG 92 3.445 105.753 105.256 4.085
30 SEP 92 3.154 106.053 105.419 3.884
31 OCT 92 3.267 105.933 105.231 4.107
30 NOV 92 3.643 105.278 105.818 4.553
31 DEC 92 3.678 105.428 106.008 4.548
31 JAN 93 3.462 105.618 105.988 4.542
28 FEB 93 3.36 105.768 106.378 4.2
31 MAR 93 3.3 106.213 106.893 4.07
30 APR 93 3.212 105.836 106.416 4.082
31 MAY 93 3.344 105.573 106.223 4.114
30 JUN 93 3.507 105.638 106.008 4.227
31 JUL 93 3.439 105.548 106.198 4.239
31 AUG 93 3.415 105.468 106.468 4.195
30 SEP 93 3.327 105.863 106.503 4.137
31 OCT 93 3.362 105.648 106.288 4.182
30 NOV 93 3.541 105.548 106.208 4.381
31 DEC 93 3.575 105.448 106.148 4.325
31 JAN 94 3.38 96.883 103.20 4.54
28 FEB 94 3.83 96.484 102.30 5.11
31 MAR 94 4.30 96.021 102.07 5.60
30 APR 94 4.83 95.076 101.07 6.46
31 MAY 94 5.08 94.849 100.30 6.77
30 JUN 94 5.20 94.757 100.21 6.97
31 JUL 94 5.04 95.352 100.21 6.90
</TABLE>
5-A
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
31 AUG 94 5.25 94.794 100.25 7.00
30 SEP 94 5.62 94.494 100.01 7.60
31 OCT 94 5.81 94.324 99.25 7.81
30 NOV 94 6.47 93.71 98.30 8.59
31 DEC 94 6.73 93.55 98.30 8.80
</TABLE>
6-A
<PAGE>
APPENDIX B
GLOSSARY
MORTGAGE-BACKED SECURITIES
GUARANTEED MORTGAGE PASS-THROUGHS:
Securities which represent participation interests in pools of residential
mortgage loans originated by United States governmental or private lenders and
guaranteed by the United States government or one of its agencies or
instrumentalities.
* Ginnie Mae Certificates are guaranteed by the full faith and credit of
the United States government for timely payment of principal and
interest on the certificates.
* Fannie Mae Certificates are guaranteed by FNMA, a federally chartered
and privately-owned corporation for full and timely payment of
principal and interest on the certificates.
* Freddie Mac Certificates are guaranteed by FHLMC, a corporate
instrumentality of the United States government, for timely payment of
interest and the ultimate collection of all principal of the related
mortgage loans.
ALL GUARANTEED MORTGAGE PASS-THROUGHS ARE CONSIDERED TO BE OF THE SAME OR HIGHER
CREDIT QUALITY AS PRIVATELY-ISSUED SECURITIES RATED AAA.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"):
Multiclass securities that are issued by the United States government and
are collateralized by mortgage loans or mortgage pass-throughs. Typically, CMOs
are collateralized by Ginnie Mae, Fannie Mae or Freddie Mac Certificates but
also may be collateralized by other mortgage assets such as whole loans or
private mortgage pass-throughs.
* Payments of principal and interest on collateral of mortgage assets
and any reinvestment income thereon, provide the funds to pay debt
service on the CMOs.
ALL CMOS INCLUDED AS ASSETS OF THE FUND WILL BE ISSUED BY
1-B
<PAGE>
FANNIE MAE OR FREDDIE MAC.
STRIPPED MORTGAGE-BACKED SECURITIES ("SMBS"):
Securities which are usually structured with two classes that receive
different proportions of interest and principal distributions on a pool of
mortgage assets. A typical SMBS will have one class receiving some of the
interest and most of the principal, while the other class will receive most of
the interest and the remaining principal. In the most extreme case, one class
will receive all of the interest (the interest only class) while the other class
will receive all of the principal (the principal only class).
ALL SMBS INCLUDED AS ASSETS OF THE FUND WILL BE ISSUED BY FANNIE MAE OR FREDDIE
MAC.
CMO RESIDUALS:
CMO Residuals, other than REMIC Residuals, are essentially (i) the spread
between the higher interest rates on the mortgage collateral (e.g., Freddie Mac
Certificates) and the lower interest rates on the CMO classes and to a lesser
extent, (ii) the reinvestment income earned by investing the monthly mortgage
cash flows between CMO payment dates.
ALL CMO RESIDUALS INCLUDED AS ASSETS OF THE FUND WILL BE ISSUED BY FANNIE MAE OR
FREDDIE MAC.
2-B
<PAGE>
SHORT DURATION FUND
APPENDIX C
This Appendix provides certain information concerning the performance of
various types of securities over specified periods of time. However, the
characteristics of these securities are not identical to, and may be very
different from, those of the Fund's portfolio. The items included in these
performance figures may not be identical to those in the formulas used by the
Fund to calculate its performance figures. This information does not reflect the
Fund's actual portfolio composition or the fees or expenses associated with an
investment in the Fund. Past performance is not an indication of future
performance.
Average Yield
-------------
This table provides certain information concerning the monthly average
yield of certain tax-exempt money market funds, net of fees, compared to the
month-end yield of a 3-year constant maturity general obligation municipal bond,
exclusive of fees.
<TABLE>
<CAPTION>
IBC/Donoghue Municipal
MoneY Market Fund
Obligation Yields (Tax-Exempt/ 3-year General
Month/Year Institution Only) Municipal Bond (%)**
---------- ------------------- --------------------
<S> <C> <C>
Dec. 1984 5.67 6.52
Jan. 1985 5.58 6.34
Feb. 1985 5.03 6.48
Mar. 1985 4.84 6.54
Apr. 1985 4.84 6.26
May 1985 4.96 6.06
June 1985 4.72 5.90
July 1985 4.32 5.88
Aug. 1985 4.54 6.19
Sep. 1985 4.72 6.30
Oct. 1985 4.63 6.10
Nov. 1985 4.57 5.74
Dec. 1985 5.39 5.98
Jan. 1986 5.78 6.00
Feb. 1986 5.19 5.54
Mar. 1986 4.65 5.39
Apr. 1986 4.52 5.20
May 1986 4.32 5.26
Jun. 1986 3.99 5.40
Jul. 1986 3.89 5.32
Aug. 1986 4.27 5.22
</TABLE>
1-C
<PAGE>
<TABLE>
<S> <C> <C>
Sep. 1986 4.04 5.06
Oct. 1986 3.59 4.87
Nov. 1986 3.50 4.42
Dec. 1986 3.87 4.49
Jan. 1987 4.02 4.37
Feb. 1987 3.76 4.26
Mar. 1987 3.68 4.27
Apr. 1987 4.35 5.02
May 1987 4.63 5.52
Jun. 1987 3.94 5.23
Jul. 1987 3.81 5.15
Aug. 1987 3.95 5.16
Sep. 1987 4.25 5.75
Oct. 1987 4.67 6.32
Nov. 1987 4.67 5.74
Dec. 1987 4.85 5.72
Jan. 1988 4.67 5.63
Feb. 1988 4.37 5.33
Mar. 1988 4.31 5.35
Apr. 1988 4.30 5.45
May 1988 4.55 5.66
Jun. 1988 4.60 5.76
Jul. 1988 4.78 5.80
Aug. 1988 5.17 5.96
Sep. 1988 5.16 6.02
Oct. 1988 5.29 5.99
Nov. 1988 5.31 6.09
Dec. 1988 5.82 6.31
Jan. 1989 5.65 6.35
Feb. 1989 5.79 6.45
Mar. 1989 6.37 6.83
Apr. 1989 6.48 6.83
May 1989 6.55 6.56
Jun. 1989 6.12 6.32
Jul. 1989 5.81 6.08
Aug. 1989 5.72 6.02
Sep. 1989 5.73 6.14
Oct. 1989 5.75 6.11
Nov. 1989 5.68 6.06
Dec. 1989 5.88 5.94
Jan. 1990 5.48 6.01
Feb. 1990 5.26 6.03
Mar. 1990 5.46 6.16
Apr. 1990 5.76 6.38
May 1990 5.70 6.34
Jun. 1990 5.49 6.18
Jul. 1990 5.31 6.10
Aug. 1990 5.35 6.20
Sep. 1990 5.72 6.27
Oct. 1990 5.62 6.15
Nov. 1990 5.35 5.82
Dec. 1990 5.94 6.62
</TABLE>
2-C
<PAGE>
<TABLE>
<S> <C> <C>
Jan. 1991 4.96 5.63
Feb. 1991 4.35 5.28
Mar. 1991 4.46 5.48
Apr. 1991 4.40 5.42
May 1991 4.24 5.29
Jun. 1991 3.93 5.47
Jul. 1991 3.91 5.43
Aug. 1991 4.26 5.17
Sep. 1991 4.51 5.15
Oct. 1991 4.13 5.04
Nov. 1991 3.94 4.94
Dec. 1991 4.17 4.51
Jan. 1992 3.17 4.12
Feb. 1992 2.88 4.44
Mar. 1992 2.91 4.77
Apr. 1992 3.17 4.73
May 1992 3.25 4.66
Jun. 1992 2.70 4.46
Jul. 1992 2.34 4.09
Aug. 1992 2.44 4.00
Sep. 1992 2.77 4.01
Oct. 1992 2.51 3.89
Nov. 1992 2.41 4.10
Dec. 1992 2.60 4.05
Jan. 1993 2.23 4.05
Feb. 1993 2.11 3.50
Mar. 1993 2.08 3.75
Apr. 1993 2.17 3.70
May 1993 2.27 3.75
Jun. 1993 2.05 3.70
Jul. 1993 2.00 3.80
Aug. 1993 2.23 3.85
Sep. 1993 2.27 3.35
Oct. 1993 2.27 3.35
Nov. 1993 2.19 3.52
Dec. 1993 2.16 3.35
Jan. 1994 2.00 3.45
Feb. 1994 2.12 3.90
Mar. 1994 2.06 4.31
Apr. 1994 2.04 4.42
May 1994 2.55 4.37
Jun. 1994 2.39 4.46
Jul. 1994 2.38 4.32
Aug. 1994 2.60 4.34
Sep. 1994 2.27 4.55
Oct. 1994 2.68 4.73
Nov. 1994 2.96 5.25
Dec. 1994 3.42 5.34
</TABLE>
3-C
<PAGE>
_________________
* IBC/Donoghue's Money Fund Average/Tax-Exempt/Institutional Only
Index, as reported in the IBC/Donoghue's Money Market Fund
Report(R).
**Goldman, Sachs & Co.
4-C
<PAGE>
Monthly Prices
---------------
The following chart depicts the price volatility (100 base) of a 3-year
constant maturity municipal security compared to the price volatility of a 30-
year constant maturity municipal security.*
<TABLE>
<CAPTION>
3-Year 30-Year
Month/Year Municipal Security Municipal Security
---------- ------------------ ------------------
<S> <C> <C>
Dec. 1984 100.00 100.00
Jan. 1985 100.45 106.94
Feb. 1985 100.08 106.10
Mar. 1985 99.91 105.50
Apr. 1985 100.63 107.55
May 1985 101.16 112.61
Jun. 1985 101.59 114.61
Jul. 1985 101.64 113.93
Aug. 1985 100.79 110.83
Sep. 1985 100.49 107.68
Oct. 1985 101.04 109.67
Nov. 1985 101.98 118.25
Dec. 1985 101.32 119.43
Jan. 1986 101.28 124.47
Feb. 1986 102.92 134.63
Mar. 1986 102.92 141.45
Apr. 1986 103.42 137.64
May 1986 103.26 129.91
Jun. 1986 102.87 125.90
Jul. 1986 103.08 131.12
Aug. 1986 103.34 136.70
Sep. 1986 103.80 137.52
Oct. 1986 104.30 138.24
Nov. 1986 105.57 142.87
Dec. 1986 105.37 141.07
Jan. 1987 105.71 148.26
Feb. 1987 106.01 147.44
Mar. 1987 105.99 146.91
Apr. 1987 103.85 130.75
May 1987 102.48 123.76
Jun. 1987 103.25 127.52
Jul. 1987 103.47 127.45
Aug. 1987 103.44 126.28
Sep. 1987 101.83 118.02
Oct. 1987 100.29 113.29
Nov. 1987 101.83 123.37
Dec. 1987 101.88 124.02
Jan. 1988 102.11 127.61
Feb. 1988 102.93 129.47
Mar. 1988 102.87 126.28
Apr. 1988 102.57 124.57
</TABLE>
5-C
<PAGE>
<TABLE>
<S> <C> <C>
May 1988 102.00 124.30
Jun. 1988 101.72 125.17
Jul. 1988 101.61 125.76
Aug. 1988 101.17 124.95
Sep. 1988 101.01 126.79
Oct. 1988 101.09 130.26
Nov. 1988 100.80 130.64
Dec. 1988 100.21 128.10
Jan. 1989 100.12 132.05
Feb. 1989 99.83 130.38
Mar. 1989 98.83 127.80
Apr. 1989 98.84 129.71
May 1989 99.52 133.54
Jun. 1989 100.15 137.69
Jul. 1989 100.76 139.34
Aug. 1989 100.92 136.40
Sep. 1989 100.59 133.75
Oct. 1989 100.66 134.23
Nov. 1989 100.78 135.47
Dec. 1989 101.10 137.86
Jan. 1990 100.91 136.19
Feb. 1990 100.85 133.98
Mar. 1990 100.49 132.31
Apr. 1990 99.90 131.02
May 1990 100.00 132.12
Jun. 1990 100.43 134.25
Jul. 1990 100.63 134.39
Aug. 1990 100.37 132.01
Sep. 1990 100.18 130.67
Oct. 1990 100.46 130.00
Nov. 1990 101.33 135.10
Dec. 1990 101.88 137.33
Jan. 1991 101.84 136.99
Feb. 1991 102.80 140.82
Mar. 1991 102.23 136.96
Apr. 1991 102.39 138.11
May 1991 102.75 138.52
Jun. 1991 102.25 136.14
Jul. 1991 102.35 136.64
Aug. 1991 103.07 139.57
Sep. 1991 103.10 142.02
Oct. 1991 103.41 144.98
Nov. 1991 103.69 144.50
Dec. 1991 104.87 143.92
Jan. 1992 105.99 146.62
Feb. 1992 105.06 142.20
Mar. 1992 104.13 142.15
Apr. 1992 104.23 143.22
May 1992 104.44 144.56
Jun. 1992 105.00 146.61
Jul. 1992 106.04 153.93
Aug. 1992 106.03 153.77
</TABLE>
6-C
<PAGE>
<TABLE>
<S> <C> <C>
Sep. 1992 106.27 152.28
Oct. 1992 106.61 149.43
Nov. 1992 106.00 149.91
Dec. 1992 106.14 151.95
Jan. 1993 106.14 151.95
Feb. 1993 107.74 166.43
Mar. 1993 107.00 159.33
Apr. 1993 107.15 161.61
May. 1993 107.00 162.77
Jun. 1993 107.14 163.34
Jul. 1993 106.84 163.92
Aug. 1993 106.69 171.29
Sep. 1993 108.16 175.20
Oct. 1993 108.16 175.20
Nov. 1993 107.65 170.22
Dec. 1993 108.16 172.52
Jan. 1994 107.62 149.26
Feb. 1994 106.80 146.58
Mar. 1994 105.30 136.25
Apr. 1994 104.52 130.68
May 1994 104.24 130.71
Jun. 1994 104.81 132.08
Jul. 1994 104.38 129.67
Aug. 1994 104.54 130.93
Sep. 1994 104.30 129.12
Oct. 1994 103.89 125.38
Nov. 1994 102.39 118.32
Dec. 1994 102.14 121.81
Jan. 1995 102.30 124.65
</TABLE>
____________________
* Goldman, Sachs & Co.
7-C
<PAGE>
Appendix D
CORE FUND
DESCRIPTION OF BOND RATINGS/1/
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities .
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact
_________________________
1
The rating systems described herein are believed to be the most recent
ratings systems available from Moody's Investors Service, Inc. and Standard &
Poor's Ratings Group at the date of this Additional Statement for the securities
listed. Ratings are generally given to securities at the time of issuance. While
the rating agencies may from time to time revise such ratings, they undertake no
obligation to do so, and the ratings indicated no not necessarily represent
ratings which will be given to these securities on the date of the Fund's fiscal
year end.
1-D
<PAGE>
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
STANDARD & POOR'S RATINGS GROUP
AAA: Bonds rated AAA have the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA: Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the higher rated issues only in small degree.
A: Bonds rated A have a very strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than in higher rated categories.
FITCH INVESTORS SERVICE, CORP.
Bond Ratings
------------
The ratings represent Fitch's assessment of the issuer's ability to meet
the obligations of a specific debt issue or class of debt. The ratings take into
consideration special features of the issue, its relationship to other
obligations of the issuer, the current financial condition and operative
performance of the issuer and of any guarantor, as well as the political and
economic environment that might affect the issuer's future financial strength
and credit quality.
AAA: Bonds rated AAA are 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 rated AA are considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated F-1+.
A: Bonds rated A are considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay
2-D
<PAGE>
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 rated BBB are 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.
Plus (+) and minus (-) signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus and minus signs,
however, are not used in the AAA Category covering 12-36 months.
3-D
<PAGE>
CORE FUND
APPENDIX E
----------
This Appendix provides certain information concerning the performance of
various types of securities over specified periods of time. However, the
characteristics of these securities are not identical to, and may be very
different from, those of the Fund's portfolio. The items included in these
performance figures may not be identical to those in the formulas used by the
Fund to calculate its performance figures. This information does not reflect the
Fund's actual portfolio composition or the fees or expenses associated with an
investment in the Fund. Past performance is not an indication of future
performance.
Source: Lehman Brothers and Stocks, Bonds, Bills and Inflation 1992 Yearbook
(and 1993 updates), Ibbotson Associates, Inc. The indices and securities in
this chart reflect neither the fund's actual portfolio composition nor the fees
and expenses associated with investing in the fund. The S&P 500 is an unmanaged
index of 500 of the largest U.S. companies. Unlike the S&P 500 and Lehman
Index, Treasury bills are backed by the full faith and credit of the U.S.
government and are less volatile than equity or fixed income investments.
Because the fund can hold securities other than those in the Lehman Index, its
returns may be more volatile. Past performance is no guarantee of future
performance. Market and economic conditions, such as rapidly rising or falling
interest rates, may affect fixed income securities differently from Treasury
bills. Relative to Treasury bills, the market value of fixed income securities
may be adversely affected by sharp increases in market interest rates.
1-E
<PAGE>
ANNUAL VOLATILITY OF MONTHLY TOTAL RETURN
-----------------------------------------
<TABLE>
<CAPTION>
S&P 500 LEHMAN AGGR. 6-MO. T. BILL
YEAR TOTAL RETURN INDEX TOTAL RETURN
---- ------------ ------------ ------------
<S> <C> <C> <C>
1983 3.48 0.17 0.602
2.6 2.87 0.787
3.65 0.26 0.397
7.58 2.79 1.021
-0.52 -1.31 0.445
3.82 0.11 0.682
-3.13 -2.36 0.604
1.7 0.7 0.862
1.36 3.3 1.169
-1.34 0.36 0.826
2.33 1.14 0.664
-0.61 0.19 0.816
1984 -0.65 2.06 0.879
-3.28 -0.51 0.623
1.71 -1.12 0.641
0.69 -0.2 0.813
-5.34 -3.11 0.718
2.21 1.28 1.046
-1.43 4.5 0.933
11.25 1.69 0.996
0.02 2.37 1.048
0.26 4.24 1.438
-1.01 1.79 1.148
2.53 1.46 0.697
1985 7.68 2.28 0.746
1.37 -2.04 0.478
0.18 2.04 0.902
-0.32 2.07 1.01
6.15 5.23 1.127
1.59 1.06 0.692
-0.26 -0.35 0.499
-0.61 1.88 0.755
-3.21 0.6 0.637
4.47 2.1 0.579
7.160005 2.4 0.665
4.670001 3.06 0.713
1986 0.44 0.56 0.69
7.61 3.94 0.568
5.54 3.1 0.868
-1.24 0.53 0.628
5.49 -1.91 0.474
1.66 2.62 0.667
-5.69 0.89 0.635
7.48 2.48 0.794
-8.22 -0.99 0.396
5.56 1.44 0.569
</TABLE>
2-E
<PAGE>
<TABLE>
<S> <C> <C> <C>
2.56 1.4 0.396
-2.64 0.37 0.387
1987 13.43 1.41 0.547
4.13 0.69 0.49
2.72 -0.45 0.374
-0.88 -2.74 0.484
1.03 -0.39 0.517
4.99 1.38 0.64
4.98 -0.08 0.42
3.85 -0.53 0.476
-2.2 -2.13 0.306
-21.52 3.56 1.09
-8.19 0.8 0.507
7.38 1.36 0.582
1988 4.27 3.52 0.673
4.7 1.19 0.658
-3.02 -0.94 0.484
1.08 -0.54 0.421
0.78 -0.67 0.442
4.64 2.41 0.633
-0.4 -0.53 0.447
-3.31 0.26 0.55
4.24 2.27 0.684
2.73 1.88 0.689
-1.42 -1.22 0.455
1.81 0.11 0.583
1989 7.23 1.44 0.729
-2.49 -0.72 0.563
2.36 0.43 0.695
5.16 2.09 0.923
4.02 2.63 0.858
-0.54 3.04 0.954
8.98 2.13 0.832
1.93 -1.48 0.522
-0.39 0.51 0.616
-2.33 2.46 0.889
2.08 0.95 0.722
2.36 0.27 0.617
1990 -6.71 -1.19 0.659
1.29 0.32 0.596
2.63 0.07 0.632
-2.47 -0.92 0.651
9.75 2.96 0.805
-0.7 1.61 0.71
-0.32 1.38 0.805
-9.03 -1.34 0.626
-4.92 0.83 0.659
-0.37 1.27 0.744
6.44 2.15 0.627
2.74 1.56 0.861
</TABLE>
3-E
<PAGE>
<TABLE>
<S> <C> <C> <C>
1991 4.42 1.24 0.7
7.16 0.85 0.538
2.38 0.69 0.586
0.28 1.08 0.645
4.28 0.58 0.483
-4.57 -0.05 0.447
4.68 1.39 0.587
2.35 2.16 0.603
-1.64 2.03 0.57
1.34 1.11 0.564
-4.04 0.92 0.593
11.43 2.97 0.638
1992 -1.86 -1.36 0.34
1.28 0.65 0.292
-1.96 -0.56 0.306
2.909998 0.72 0.509
0.540067 1.89 0.38
-1.45397 1.38 0.399
4.030009 2.04 0.494
-2.02 1.01 0.316
1.149647 1.19 0.445
0.360365 -1.33 0.097
3.369855 0.02 0.212
1.310072 1.59 0.404
1993 0.730015 1.92 0.372
1.349953 1.75 0.257
2.149928 0.42 0.299
-2.45 0.7 0.266
2.7 0.13 0.161
0.33 1.81 0.302
1994 3.35 1.35 0.330
-2.70 -1.74 0.092
-4.35 -2.47 0.243
1.30 -0.80 0.161
1.63 -0.01 0.274
-2.47 -0.22 0.444
3.31 1.99 0.423
4.07 0.12 0.389
-2.44 -1.47 0.282
2.25 -0.09 0.452
-3.64 -0.22 0.297
1.48 0.69 0.430
</TABLE>
4-E
<PAGE>
ANNUAL REPORT
----------------------------
OCTOBER 31, 1994
GS ADJUSTABLE RATE GOVERNMENT AGENCY FUND
-------------------------------------------
<PAGE>
DEAR SHAREHOLDERS:
On behalf of Goldman Sachs, we welcome this opportunity to review the
performance and investment activities of the GS Adjustable Rate Government
Agency Fund during the 12 months ended October 31, 1994.
To review briefly, the fund seeks a high level of current income consistent
with low volatility of principal. The portfolio invests solely in securities
issued or guaranteed by the U.S. government, its agencies or instrumentalities,
with primary emphasis on adjustable rate mortgage securities (ARMs). The target
duration of the fund is six months to one year.
The Impact of Higher Short-Term Interest Rates on the Bond Market
During the period under review, the bond market has been extremely volatile,
with prices falling as the Federal Reserve moved aggressively in an effort to
head off inflation. From February 4 through October 31, 1994, the Fed raised
the federal funds rate five times by a total of 175 basis points to 4.75%.
What has been basically good news for the economy has translated into bad
news for the bond market this year. The U.S. economy recorded an annualized
growth rate of approximately 6.3% (as measured by Gross Domestic Product) for
the fourth quarter of 1993, serving as the catalyst for the first Fed
tightening in February. As 1994 progressed, economic growth continued well
above the targeted non-inflationary rate of 2.5% to 3.0%, which, combined with
a further weakening of the U.S. dollar, caused the Fed to continue to raise
interest rates.
Recently, a number of key economic indicators showed signs that robust growth
is continuing, keeping inflation fears alive. These include higher commodity
prices, gradually rising costs of intermediate goods, and plant capacity
utilization running at 84.9%, the highest level in well over a decade. In
addition, sales of existing homes held steady at relatively high levels and
unemployment declined to approximately 5.9%.
Meanwhile, long-term interest rates (as measured by 30-year Treasury bonds)
have also escalated, hovering around 8% recently compared with less than 6%
last October. As interest rates rose across the maturity spectrum, bond prices
fell.
How ARMs Fared
ARMs performed better than most fixed rate securities, such as corporate
bonds, intermediate and longer term Treasuries, and fixed rate mortgages, in
the rising interest rate environment. However, like other fixed income
investments, the price of ARMs generally declined as the Fed increased rates.
These price declines were partially offset as coupons on ARM securities reset
upwards, providing more income for the fund.
Performance Review
We are pleased to report that the Institutional shares of the GS Adjustable
Rate Government Agency Fund performed well compared with its peers, ranking
ninth in total return out of a
<PAGE>
universe of 78 adjustable rate mortgage funds tracked by Lipper Analytical
Services, Inc. for the 12-month period ended October 31, 1994. (Lipper rankings
do not take sales charges into account.)
While the average ARM fund returned -0.42% during the period as reported by
Lipper, our fund's Institutional shares had a positive total return of 1.88%
(4.58% in monthly distributions and -2.70% in share price depreciation)
compared with a total return of 2.74% for the fund's benchmark, the one-year
U.S. Treasury bill. For the same period, the fund's Administration shares had a
total return of 1.63% (4.32% in monthly distributions and -2.69% in share price
depreciation).
The fund's performance during the past 12 months reflected the negative
impact of rising interest rates, which caused its ARM spreads to widen and the
fund's net asset value (NAV) to decline.
. During the course of the year, the duration of the portfolio lengthened from
0.85 years to 1.4 years compared with 0.95 years for the one-year U.S.
Treasury bill, which means the fund is more sensitive to interest rate
movements than its benchmark. The fund's duration lengthened primarily
because as interest rates rose, the probability that ARMs would reach their
caps increased and their duration extended.
. During November and December of 1993, the fund felt the negative impact of
higher ARM prepayments, as homeowners refinanced from adjustable rate to
fixed rate mortgages due to the historically low level of interest rates on
fixed rate mortgages.
. In the wake of rising rates, we sold the securities with the longest
durations in our portfolio to lower the duration of the fund and to raise
cash. This included the Government National Mortgage Association (GNMA) and
teaser coupon ARM securities held in the portfolio last year.
Portfolio Composition and Investment Strategies
[ART - Pie Chart depicting portfolio composition
information as of October 31, 1994. See
information below.]
<TABLE>
<CAPTION>
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 1994
<S> <C>
ARMs 78.6%
CMOS 13.0%
SBAs 8.4%
</TABLE>
2
<PAGE>
. As of October 31, 1994, the fund's largest investment (78.6%) was in ARMs.
Our strategy focused on investing in fully indexed, one-year Constant
Maturity Treasury (CMT) ARMs. Because of their responsiveness to changes in
interest rates, CMT ARMs were one of the best performing ARM sectors and
helped our performance. Fully indexed CMT ARMs provided greater NAV stability
than other types of ARM securities, such as the Cost of Funds Index (COFI),
teaser or GNMA ARMs.
. The fund also held 13.0% in collateralized mortgage obligations (CMOs). The
fund held CMO positions in sequential pay mortgages (5.1%) and planned
amortization class (PAC) securities (1.1%), purchased at attractive option-
adjusted spreads relative to Treasuries of comparable duration. Sequentials,
which are backed by fixed rate mortgages, provide diversification and
predictable cash flows that contribute to the fund's principal stability.
. To manage duration, we sold all of the fixed rate mortgage securities the
fund held in October 1993. We have also sold our GNMA ARMs in favor of
Federal National Mortgage Association securities, which are typically about
half the duration of GNMA ARMs.
. We maintained a small position (8.4%) in small business administration (SBA)
securities because their coupons generally reset monthly and they therefore
have relatively low interest rate risk. They also provide diversification for
the fund.
Derivatives in the Fund
During the past year, there has been investor concern on the subject of
derivatives. In the broadest sense, any security that derives its value from
another security may be called a derivative. Mortgage derivatives can be
separated into two categories: those with lower volatility risk (sequential pay
CMOs, PAC CMOs and floaters, which represented 7.5% of the fund's portfolio)
and those with higher volatility risk (super floaters and inverse floaters,
which represented only 3.8% of the fund's portfolio). We used super floaters
for defensive purposes; super floaters are floating rate securities whose
coupons reset higher and more quickly than regular ARMs and are therefore
attractive in a rising rate environment. We held a very small position in
inverse floaters (1.4%), securities whose yields move in the opposite direction
from an index, for their potential to add incremental yield to the fund. In
addition, we have occasionally used mortgage dollar rolls (transactions that
involve selling mortgage securities owned by the fund and simultaneously
contracting to buy back similar mortgage securities with the same coupon on a
specified future date) to take advantage of short-term supply and demand
imbalances in the mortgage settlement process.
Outlook and Strategy Going Forward
On November 15, the Federal Reserve raised interest rates another 75 basis
points, and additional rate hikes are possible in coming months. In the near
term, the outlook for ARMs remains uncertain. However, we will continue our
successful strategy of identifying opportunities in the market and purchasing
attractive securities. We will also continue to manage the fund's duration with
the goal of reducing the fund's sensitivity to interest rate movements.
3
<PAGE>
Distribution Policy
During the period under review, the Institutional shares distributed $0.45
per share compared with $0.44 for the prior year. For the same period, the
Administration shares distributed $0.42 per share and $0.21 per share for the
period from April 15, 1993 to October 31, 1993.
The fund distributes substantially all of its investment company taxable
income. At the beginning of each month, we set the dividend based on the income
the fund is expected to generate. However, because the fund invests primarily
in mortgage securities that are subject to prepayments, we cannot precisely
predict the amount of principal and income the fund will receive. Therefore, at
times, the portfolio may distribute amounts above or below current income
levels. To date, however, our dividend policy and the method we use to estimate
prepayments have not affected the management of the fund nor significantly
affected its NAV per share.
As always, we value your support during this difficult period and we will
continue to do our best to help you meet your investment objectives.
Sincerely,
/s/ Jonathan A. Beinner
Jonathan A. Beinner
/s/ Theodore T. Sotir
Theodore T. Sotir
/s/ David L. Waldman
David L. Waldman
Portfolio Managers
GS Adjustable Rate Government Agency Fund
December 15, 1994
4
<PAGE>
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1994. The
performance for the GS Adjustable Rate Government Agency Fund based on an
initial investment of $50,000, is compared to its benchmark, the 1-year
Treasury Bill ("1-year T-Bill") and to the Lehman Brothers Mutual Fund
Adjustable Rate Mortgage Index ("Lehman ARM Index") and the Lehman Brothers
Mutual Fund Short (1-2) U.S. Government Index ("Lehman 1-2 Index"). All
performance data shown represents past performance and should not be considered
indicative of future performance which will fluctuate as market conditions
change. The investment return and principal value of an investment will
fluctuate with changes in market conditions so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
[ART - Two graphs, each depicting information for
Institutional and Administration Shares.
See information below.]
HYPOTHETICAL $50,000 INVESTMENT
<TABLE>
<CAPTION>
Institutional Shares
Institutional Shares 1 Year T-Bill Lehman ARM Index(c) Lehman 1--2 Index
-------------------- ------------- ------------------- -----------------
<S> <C> <C> <C> <C>
8/1/91(b) 50,000 50,000 50,000
10/31/91 51,041 50,753 51,581
1/1/92 52,750
10/31/92 54,171 53,715 53,674 55,506
10/31/93 56,408 55,732 57,230 58,365
10/31/94 57,468 57,257 57,370 59,511
Average Annual Total Return: One Year - 1.88%, Since Inception(a) - 4.43%
<CAPTION>
Administration Shares 1 Year T-Bill Lehman ARM Index(c) Lehman 1--2 Index
--------------------- ------------- ------------------- -----------------
<S> <C> <C> <C> <C>
5/1/93(b) $50,000 $50,000 $50,000 $50,000
10/31/93 $50,914 $50,960 $51,210 $50,931
10/31/94 $51,744 $52,355 $51,336 $51,931
Average Annual Total Return: One Year - 1.63%, Since Inception(a) - 2.36%
</TABLE>
(a) The Institutional and Administration shares commenced operations July 17,
1991 and April 15, 1993, respectively.
(b) For comparative purposes, initial investments are assumed to be made on the
first day of the month following the commencement of operations of each
class of shares.
(c) The calculation of this index was initiated for the month ending January
31, 1992. For comparative purposes, an initial investment for this index is
assumed on January 1, 1992, at a value equal to the Institutional shares'
investment value at such date.
5
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Trustees of
GS Adjustable Rate Government Agency Fund:
We have audited the accompanying statement of assets and liabilities of GS
Adjustable Rate Government Agency Fund (a portfolio of Goldman Sachs Trust, a
Massachusetts business trust), including the statement of investments as of
October 31, 1994, the related statements of operations, the statements of
changes in net assets and the financial highlights for the periods presented.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1994 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights
referred to above present fairly, in all material respects, the financial
position of the GS Adjustable Rate Government Agency Fund of the Goldman Sachs
Trust as of October 31, 1994, the results of its operations, the changes in its
net assets and the financial highlights for the periods presented, in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts,
December 12, 1994
6
<PAGE>
GS ADJUSTABLE RATE GOVERNMENT AGENCY FUND
--------------
STATEMENT OF INVESTMENTS
OCTOBER 31, 1994
($ IN THOUSANDS)
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY
AMOUNT RATE DATE VALUE
--------- -------- -------- -----
MORTGAGE BACKED OBLIGATIONS (99.7%)
Adjustable Rate Federal Home Loan Mortgage Corp. (FHLMC)(a) (15.8%)
<S> <C> <C> <C>
$ 2,544 6.22% 01/01/19 $ 2,592
440 6.47 10/01/19 438
71,886 6.32 02/01/22 73,461
11,709 5.92 08/01/22 11,829
16,193 6.52 11/01/22 16,476
14,757 6.17 10/01/23 15,032
7,236 6.06 07/01/29 7,309
2,981 6.35 05/01/31 3,045
19,802 6.42 08/01/31 20,166
--------
Total Adjustable Rate FHLMC....................... $150,348
--------
Adjustable Rate Federal National Mortgage
Association (FNMA)(a) (61.9%)
$ 9,228 6.27% 01/01/16 $ 9,414
9,012 5.51 03/01/17 8,969
6,109 4.96 03/01/18 6,008
1,394 7.13 05/01/18 1,427
7,054 6.14 07/01/18 7,175
8,876 6.20 08/01/18 8,991
5,840 6.34 10/01/18 5,922
9,555 6.51 11/01/18 9,690
17,953 5.58 12/01/18 18,458
2,427 7.35 02/01/19 2,379
4,722 5.91 06/01/19 4,778
6,172 7.20 07/01/19 6,269
6,340 6.34 09/01/19 6,432
4,132 6.87 01/01/20 4,227
3,965 6.40 03/01/20 4,073
12,261 6.30 07/01/20 12,463
6,666 6.53 02/25/21 6,782
7,258 6.06 04/01/21 7,348
99,734 6.39 09/01/21 101,897
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY
AMOUNT RATE DATE VALUE
--------- -------- -------- -----
MORTGAGE BACKED OBLIGATIONS--(CONTINUED)
Adjustable Rate FNMA--(Continued)
<S> <C> <C> <C>
$ 6,786 7.38% 11/01/21 $ 6,905
31,275 6.88 02/01/22 32,018
10,140 6.64 08/01/22 10,306
77,212 6.35 09/01/22 78,935
8,167 6.76 12/01/22 8,341
3,054 5.92 02/01/23 3,083
62,669 6.31 10/01/23 62,756
441 6.23 12/01/23 431
4,762 5.51 04/01/30 4,866
89,983 6.35 01/01/31 92,171
37,539 5.80 02/01/31 36,613
17,943 6.57 12/01/31 18,346
--------
Total Adjustable Rate FNMA ....................... $587,473
--------
Adjustable Rate Government National Mortgage Association (GNMA)(a) (0.6%)
$ 4,727 6.00% 07/20/22 $ 4,698
1,169 6.50 07/20/23 1,162
--------
Total Adjustable Rate GNMA ....................... $ 5,860
--------
Adjustable Rate Small Business Administration
(SBA)(a) (8.4%)
$ 1,864 6.25% 10/25/14 $ 1,880
3,183 6.25 02/25/15 3,210
4,037 6.25 03/25/15 4,072
3,091 6.25 04/25/15 3,118
3,692 6.25 05/25/15 3,723
2,048 6.25 08/25/15 2,066
2,952 6.25 09/25/15 2,978
2,167 6.25 10/25/15 2,186
1,616 6.25 09/25/16 1,614
5,609 5.88 07/25/17 5,602
14,025 5.88 08/25/17 14,008
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
GS ADJUSTABLE RATE GOVERNMENT AGENCY FUND
--------------
STATEMENT OF INVESTMENTS--(CONTINUED)
OCTOBER 31, 1994
($ IN THOUSANDS)
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY
AMOUNT RATE DATE VALUE
--------- -------- -------- -----
MORTGAGE BACKED OBLIGATIONS--(CONTINUED)
Adjustable Rate SBA--(Continued)
<S> <C> <C> <C>
$ 5,656 5.88% 09/25/17 $ 5,648
4,275 5.88 10/25/17 4,269
14,994 5.75 11/25/17 14,921
10,200 5.88 02/25/18 10,188
--------
Total Adjustable Rate SBA ........................ $ 79,483
--------
Collateralized Mortgage Obligations (CMOs) (13.0%)
Adjustable Rate Mortgage Obligations(a) (1.5%)
FNMA REMIC Trust 1990-145, Class A
$14,234 5.21% 12/25/20 $ 13,949
--------
Regular Floater CMOs(a) (1.5%)
FHLMC Series 1011, Class F
$13,892 6.03% 11/15/20 $ 13,996
--------
Inverse Floater CMOs(a) (1.4%)
FHLMC Series 1134, Class H
$ 2,120 17.88% 09/15/96 $ 2,310
FHLMC Series 1139, Class S
85 16.24 09/15/96 89
FHLMC Series 1151, Class G
418 12.53 10/15/96 421
FHLMC Series 1164, Class O
52 741.75 11/15/06 701
FHLMC Series 1296, Class H
3,206 14.29 07/15/99 3,222
FNMA REMIC Trust 1991-91, Class S
278 19.04 07/25/98 289
FNMA REMIC Trust 1991-113, Class S
1,959 20.12 03/25/02 2,038
FNMA REMIC Trust 1992-3, Class S
4,246 25.28 01/25/99 4,467
--------
Total Inverse Floater CMOs ....................... $ 13,537
--------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY
AMOUNT RATE DATE VALUE
--------- -------- -------- -----
<S> <C> <C> <C>
MORTGAGE BACKED OBLIGATIONS--(CONTINUED)
Planned Amortization Class (PAC) CMOs (5.7%)
FHLMC Series 1073, Class F
$12,735 8.00% 11/15/19 $ 12,759
FHLMC Series 1098, Class F
2,057 8.00 03/15/05 2,067
FHLMC Series 1278, Class E
1,627 7.00 12/15/18 1,627
FHLMC Series 1604, Class A
10,967 4.75 11/15/98 10,854
FNMA REMIC Trust 1989-50, Class E
3,160 8.63 07/25/18 3,200
FNMA REMIC Trust 1991-37, Class E
5,943 8.50 04/25/05 5,992
FNMA REMIC Trust 1991-82, Class PH
17,210 8.00 11/25/18 17,264
--------
Total PAC CMOs ................................. $ 53,763
--------
Sequential Fixed Rate CMOs (0.3%)
FNMA REMIC Trust 1991-140, Class C
$ 2,380 8.50% 05/25/20 $ 2,392
FNMA REMIC Trust 1992-71, Class B
601 8.25 10/25/13 600
--------
Total Sequential Fixed Rate CMOs ............... $ 2,992
--------
Super Floater CMOs(a) (2.4%)
FNMA REMIC Trust 1992-157, Class FA
$24,550 3.74%(b) 03/25/04 $ 22,955
--------
Targeted Amortization Class (TAC) CMOs (0.2%)
FNMA REMIC Trust 1991-116, Class Z
$ 2,189 8.50% 09/25/21 $ 2,192
--------
Total CMOs ..................................... $123,384
--------
Total Mortgage Backed Obligations (cost
$970,599) ..................................... $946,548
--------
Total Investments
(cost $970,599(c) )............................ $946,548
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
GS ADJUSTABLE RATE GOVERNMENT AGENCY FUND
--------------
STATEMENT OF INVESTMENTS--(CONTINUED)
OCTOBER 31, 1994
($ IN THOUSANDS)
<TABLE>
<S> <C>
FEDERAL INCOME TAX INFORMATION:
Gross unrealized gain for investments in
which value exceeds cost..................... $ 159
Gross unrealized loss for investments in
which cost exceeds value..................... (24,499)
--------
Net unrealized loss .......................... $(24,340)
========
</TABLE>
----------
(a) Variable rate securities. Coupon rates disclosed are those which are in
effect at October 31, 1994.
(b) The interest rate disclosed for this security represents the yield to
maturity.
(c) The aggregate cost for federal income tax purposes is $970,888.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
GS ADJUSTABLE RATE GOVERNMENT AGENCY FUND
--------------
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1994
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (cost $970,598,908)........ $ 946,547,726
Receivables:
Interest..................................................... 6,940,033
Investments sold............................................. 3,330,923
Fund shares sold............................................. 40,986
Deferred organization expenses, net............................ 50,229
Other assets................................................... 503,575
--------------
Total assets.............................................. 957,413,472
--------------
LIABILITIES
Payables:
Dividends.................................................... 2,574,670
Fund shares repurchased...................................... 1,014,855
Investment adviser fees...................................... 334,066
Transfer agent fees.......................................... 29,804
Cash overdraft................................................. 3,896,590
Accrued expenses and other liabilities......................... 80,207
--------------
Total liabilities......................................... 7,930,192
--------------
NET ASSETS
Paid-in capital................................................ 1,004,211,921
Accumulated undistributed net investment income................ 747,775
Accumulated net realized loss on investment transactions....... (31,425,234)
Net unrealized loss on investments............................. (24,051,182)
--------------
Net assets................................................ $ 949,483,280
==============
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
Institutional shares........................................... $9.74
=====
Administration shares.......................................... $9.74
=====
SHARES OUTSTANDING
Institutional shares........................................... 96,811,500
Administration shares.......................................... 714,847
--------------
Total shares of beneficial interest outstanding, $.001 par
value (unlimited number of shares authorized)............. 97,526,347
==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
GS ADJUSTABLE RATE GOVERNMENT AGENCY FUND
--------------
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1994
<TABLE>
<S> <C>
Investment income:
Interest income.................................................. $ 82,260,147
------------
Expenses:
Investment adviser fees.......................................... 6,798,185
Transfer agent fees.............................................. 679,819
Custodian fees................................................... 293,273
Registration fees................................................ 70,634
Professional fees................................................ 48,217
Trustee fees..................................................... 42,528
Amortization of deferred organization expenses................... 29,380
Other............................................................ 236,987
------------
Total expenses............................................... 8,199,023
Less-Expenses reimbursable by GSFM............................... (442,880)
------------
Net expenses................................................. 7,756,143
Administration share fees.................................... 17,648
------------
Net expenses and share fees.................................. 7,773,791
------------
Net investment income............................................ 74,486,356
Net realized loss on investment transactions..................... (21,946,744)
Net change in unrealized loss on investments..................... (23,081,906)
------------
Net increase in net assets resulting from operations............. $ 29,457,706
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
GS ADJUSTABLE RATE GOVERNMENT AGENCY FUND
--------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED OCTOBER 31,
--------------------------------
1994 1993
--------------- ---------------
<S> <C> <C>
From Operations:
Net investment income....................... $ 74,486,356 $ 103,642,942
Net realized loss on investment
transactions............................... (21,946,744) (8,321,462)
Net change in unrealized gain (loss) on in-
vestments.................................. (23,081,906) 200,601
--------------- ---------------
Net increase in net assets resulting from
operations................................. 29,457,706 95,522,081
--------------- ---------------
Distributions to Shareholders:
From net investment income
Institutional shares...................... (73,960,549) (103,569,536)
Administration shares..................... (304,939) (73,406)
In excess of net investment income
Institutional shares...................... -- (654,210)
Administration shares..................... -- (1,458)
--------------- ---------------
Total distributions to shareholders......... (74,265,488) (104,298,610)
--------------- ---------------
From Share Transactions:
Proceeds from sale of shares................ 1,013,097,417 3,101,978,249
Reinvestment of dividends................... 30,771,600 44,677,592
Cost of shares repurchased.................. (2,815,775,329) (2,516,745,929)
--------------- ---------------
Increase (decrease) in net assets resulting
from share transactions.................... (1,771,906,312) 629,909,912
--------------- ---------------
Total increase (decrease).................... (1,816,714,094) 621,133,383
Net Assets:
Beginning of year........................... 2,766,197,374 2,145,063,991
--------------- ---------------
End of year................................. $ 949,483,280 $ 2,766,197,374
=============== ===============
Accumulated undistributed net investment
income...................................... $ 747,775 $ 526,907
=============== ===============
Summary of Share Transactions:
Institutional shares:
Shares sold............................... 101,283,294 309,179,402
Reinvestment of dividends................. 3,103,267 4,456,949
Shares repurchased........................ (283,651,840) (251,286,168)
--------------- ---------------
(179,265,279) 62,350,183
--------------- ---------------
Administration shares:
Shares sold............................... 824,029 568,942
Reinvestment of dividends................. 10,167 3,963
Shares repurchased........................ (651,947) (40,307)
--------------- ---------------
182,249 532,598
--------------- ---------------
Increase (decrease) in shares outstanding.... (179,083,030) 62,882,781
=============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
GS ADJUSTABLE RATE GOVERNMENT AGENCY FUND
---------
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
DISTRIBUTIONS
INCOME FROM INVESTMENT OPERATIONS TO SHAREHOLDERS
----------------------------------------- --------------------
NET
NET ASSET REALIZED AND TOTAL FROM NET ASSET RATIO OF NET
VALUE AT NET UNREALIZED INCOME FROM NET IN EXCESS VALUE AT EXPENSES TO
BEGINNING INVESTMENT GAIN (LOSS) INVESTMENT INVESTMENT OF NET END TOTAL AVERAGE NET
OF PERIOD INCOME ON INVESTMENTS (a) OPERATIONS INCOME INCOME OF PERIOD RETURN (b) ASSETS
--------- ---------- ------------------ ----------- ---------- --------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEARS ENDED OCTOBER 31,
1994-
Institutional
Shares.......... $10.00 $0.4341 $(0.2455) $0.1886 ($0.4486) -- $9.74 1.88% 0.46%
1994-
Administration
Shares.......... 10.00 0.4211 (0.2572) 0.1639 (0.4239) -- 9.74 1.63 0.71
1993-
Institutional
Shares.......... 10.04 0.4397 (0.0376) 0.4021 (0.4397) (0.0024) 10.00 4.13 0.45
1993-
Administration
Shares (d)...... 10.02 0.2146 (0.0173) 0.1973 (0.2146) (0.0027) 10.00 2.01(f) 0.70(e)
1992-
Institutional
Shares.......... 10.03 0.5599 (0.0029) 0.5570 (0.5470) -- 10.04 6.12 0.42
FOR THE PERIOD JULY 17, 1991 (COMMENCEMENT OF OPERATIONS) THROUGH OCTOBER 31,
1991-Institu-
tional Shares... 10.00 0.1531 0.0322 0.1853 (0.1553) -- 10.03 2.14(f) 0.20(e)
<CAPTION>
RATIOS
ASSUMING NO
WAIVER OF
ADVISORY FEES
OR EXPENSE
LIMITATION
------------------------
RATIO OF NET NET RATIO OF NET
INVESTMENT ASSETS AT RATIO OF INVESTMENT
INCOME TO PORTFOLIO END EXPENSES TO INCOME TO
AVERAGE NET TURNOVER OF PERIOD AVERAGE NET AVERAGE NET
ASSETS RATE(c) (IN 000'S) ASSETS ASSETS
------------ ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
FOR THE YEARS ENDED OCTOBER 31,
1994-
Institutional
Shares.......... 4.38% 37.81% $ 942,523 0.49% 4.35%
1994-
Administration
Shares.......... 4.27 37.81 6,960 0.74 4.24
1993-
Institutional
Shares.......... 4.36 103.74 2,760,871 0.48 4.33
1993-
Administration
Shares (d)...... 3.81(e) 103.74 5,326 0.73(e) 3.78(e)
1992-
Institutional
Shares.......... 5.61 286.40 2,145,064 0.55 5.48
FOR THE PERIOD JULY 17, 1991 (COMMENCEMENT OF OPERATIONS) THROUGH OCTOBER 31,
1991-Institu-
tional Shares... 7.31(e) 145.67(e) 239,642 1.02(e) 6.49(e)
</TABLE>
----
(a) Includes balancing effect of calculating per share amounts.
(b) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions and a complete redemption
of the investment at the net asset value at the end of the period.
(c) Includes the effect of mortgage dollar roll transactions.
(d) Administration share activity commenced on April 15, 1993.
(e) Annualized.
(f) Not annualized.
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
GS ADJUSTABLE RATE GOVERNMENT AGENCY FUND
----------------
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1994
1. ORGANIZATION
GS Adjustable Rate Government Agency Fund (the "Fund") is a no-load,
diversified portfolio of Goldman Sachs Trust (the "Trust"), a Massachusetts
business trust. The Trust is registered under the Investment Company Act of
1940 (as amended) as an open-end, management investment company. The Fund
offers three classes of shares: Institutional shares, Administration shares and
Service shares. As of October 31, 1994, the Service shares had not been issued.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund which are in conformity with those generally accepted in
the investment company industry:
A. Investment Valuation
Investments in mortgage backed obligations are valued based on yield
equivalents, a pricing matrix or other sources, under valuation procedures
established by the Trust's Board of Trustees. Other portfolio securities for
which accurate market quotations are readily available are valued on the basis
of quotations furnished by a pricing service or provided by dealers in such
securities. Portfolio securities for which accurate market quotations are not
readily available are valued in accordance with the Trust's valuation
procedures. Short-term debt obligations maturing in sixty days or less are
valued at amortized cost.
B. Security Transactions and Investment Income
Security transactions are recorded on the trade date. Realized gains and
losses on sales of portfolio securities are calculated on the identified cost
basis. Interest income is recorded on the basis of interest accrued. Premiums
on interest-only securities and on collateralized mortgage obligations with
nominal principal amounts are amortized, on an effective yield basis, over the
expected lives of the respective securities, taking into account actual
principal prepayment experience and estimates of future principal prepayments.
Certain mortgage security paydown gains and losses are taxable as ordinary
income. Such paydown gains and losses increase or decrease taxable ordinary
income available for distribution and are classified as interest income in the
accompanying Statement of Operations. Original issue discounts on debt
securities are amortized to interest income over the life of the security with
a corresponding increase in the cost basis of that security.
C. Mortgage Dollar Rolls
The Fund may enter into mortgage "dollar rolls" in which the Fund sells
securities in the current month for delivery and simultaneously contracts with
the same counterparty to repurchase similar (same type, coupon and maturity)
but not identical securities on a specified future date. The Fund loses the
right to receive principal and interest paid on the securities sold. However,
the Fund benefits to the extent of any price received for the securities sold
and the lower forward price for the future purchase (often referred to as the
"drop") or fee income plus the interest earned on the
14
<PAGE>
GS ADJUSTABLE RATE GOVERNMENT AGENCY FUND
--------------
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
OCTOBER 31, 1994
2. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
cash proceeds of the securities sold until the settlement date of the forward
purchase. The Fund will hold and maintain in a segregated account, until the
settlement date, cash or liquid, high grade debt securities in an amount equal
to the forward purchase price. For financial reporting and tax reporting
purposes, the Fund treats mortgage dollar rolls as two separate transactions;
one involving the purchase of a security and a separate transaction involving a
sale.
D. Federal Taxes
It is the Fund's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute
each year substantially all of its investment company taxable income to its
shareholders. Accordingly, no federal tax provisions are required. The
characterization of distributions to shareholders for financial reporting
purposes is determined in accordance with income tax rules. Therefore, the
source of a portfolio's distributions may be shown in the accompanying
financial statements as either from or in excess of net investment income or
net realized gain on investment transactions, or from capital, depending on the
type of book/tax differences that may exist as well as timing differences
associated with having different book and tax year ends.
At October 31, 1994, the Fund had approximately $9,950,000 of capital loss
carryforward for U.S. Federal tax purposes. This amount is available to be
carried forward to offset future capital gains to the extent permitted by
applicable laws or regulations. The capital loss carryforward expires as
follows: $2,220,000 in 2000 and $7,730,000 in 2001.
E. Deferred Organization Expenses
Organization-related costs are being amortized on a straight-line basis over
a period of five years.
F. Expenses
Expenses incurred by the Trust that do not specifically relate to an
individual portfolio of the Trust are allocated to the portfolios based on each
portfolio's relative average net assets for the period.
Shareholders of Administration shares and Service shares bear all expenses
and fees paid to service organizations for their services with respect to such
shares as well as other expenses (subject to expense limitations) which are
directly attributable to such shares.
3. AGREEMENTS
Goldman Sachs Funds Management, L.P. ("GSFM"), an affiliate of Goldman, Sachs
& Co. ("Goldman Sachs"), serves as the Fund's investment adviser pursuant to an
Investment Advisory Agreement. Under the Investment Advisory Agreement, GSFM,
subject to the general supervision of the Trust's Board of Trustees, manages
the Fund's portfolio and provides for the administration of the Fund's other
affairs. As compensation for the services rendered under the Investment
15
<PAGE>
GS ADJUSTABLE RATE GOVERNMENT AGENCY FUND
--------------
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
OCTOBER 31, 1994
3. AGREEMENTS--(CONTINUED)
Advisory Agreement and the assumption of the expenses related thereto, GSFM is
entitled to a fee, computed daily and payable monthly, at an annual rate equal
to .40% of the Fund's average daily net assets.
GSFM has voluntarily agreed to limit certain of the Fund's expenses
(excluding the investment advisory fee payable to GSFM, taxes, interest,
brokerage, litigation, fees paid to service organizations, indemnification and
other extraordinary expenses) to the extent that such expenses exceed .05% per
annum of the Fund's average daily net assets. For the year ended October 31,
1994, GSFM voluntarily agreed to reimburse all such expenses. Included in
"Accrued expenses and other liabilities" in the accompanying Statement of
Assets and Liabilities at October 31, 1994 is $3,269 payable to GSFM.
Goldman Sachs serves as Distributor of the shares of the Fund pursuant to a
Distribution Agreement and receives no compensation in this capacity. Goldman
Sachs also serves as Transfer Agent of the Fund for a fee.
4. INVESTMENT TRANSACTIONS
Purchases and proceeds of sales or maturities of long-term securities for the
year ended October 31, 1994, were as follows:
<TABLE>
<S> <C>
Purchases of U.S. Government and agency obligations.......... $632,087,681
Sales or maturities of U.S. Government and agency
obligations................................................. $2,406,028,086
</TABLE>
5. REPURCHASE AGREEMENTS
During the term of a repurchase agreement, the value of the underlying
securities, including accrued interest, is required to equal or exceed the
value of the repurchase agreement. The underlying securities for all repurchase
agreements are held in safekeeping in the customer-only account of State Street
Bank & Trust Co., the Fund's custodian, or at subcustodians. GSFM monitors the
market value of the underlying securities by pricing them daily.
6. ADMINISTRATION AND SERVICE PLANS
The Fund has adopted Administration and Service Plans. These plans allow for
Administration shares and Service shares, respectively, to compensate service
organizations for providing varying levels of account administration and
shareholder liaison services to their customers who are beneficial owners of
such shares. The Administration and Service Plans provide for compensation to
the service organizations in an amount up to .25% and .50% (on an annualized
basis), respectively, of the average daily net asset value of the respective
shares.
16
<PAGE>
--------------------------------------------------------------------------------
THIS ANNUAL REPORT IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS
ONLY WHEN PRECEDED OR ACCOMPANIED BY THE GS ADJUSTABLE RATE GOVERNMENT AGENCY
FUND PROSPECTUS WHICH CONTAINS FACTS CONCERNING THE FUND'S OBJECTIVES AND
POLICIES, MANAGEMENT, EXPENSES AND OTHER INFORMATION.
<PAGE>
GS ADJUSTABLE RATE GOVERNMENT AGENCY FUND
ANNUAL REPORT
OCTOBER 31, 1994
TRUSTEES
Paul C. Nagel, Jr., Chairman
Ashok N. Bakhru
Marcia L. Beck
David B. Ford
Robert P. Mayo
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
OFFICERS
Marcia L. Beck President
Stephen H. Hopkins Vice President
John W. Mosior Vice President
Nancy L. Mucker Vice President
Pauline Taylor Vice President
Scott M. Gilman Treasurer
Michael J. Richman Secretary
Howard B. Surloff Assistant Secretary
INVESTMENT ADVISER
GOLDMAN SACHS FUNDS MANAGEMENT, L.P.
DISTRIBUTOR AND TRANSFER AGENT
GOLDMAN, SACHS & CO.
<PAGE>
ANNUAL REPORT
----------------------------
OCTOBER 31, 1994
GS SHORT-TERM GOVERNMENT AGENCY FUND
--------------------------------------
<PAGE>
DEAR SHAREHOLDERS:
On behalf of Goldman Sachs, we welcome this opportunity to review the
performance and investment activities of the GS Short-Term Government Agency
Fund during the 12-month period ended October 31, 1994. To put the fund's
performance in context, we'll also review the bond and mortgage markets during
the period.
To review briefly, the fund's primary investment objective is to provide a
high level of current income by investing in a portfolio that consists of
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities, including mortgage-backed securities. Secondarily, the fund
may also consider the potential for capital gain. To enhance principal
stability, the fund has a two-year target duration and a maximum six-year
average life for individual securities.
The Impact of Higher Short-Term Interest Rates on the Bond Market
During the period under review, the bond market has been extremely volatile,
with prices falling as the Federal Reserve moved aggressively in an effort to
head off inflation. From February 4 through October 31, 1994, the Fed raised
the federal funds rate five times by a total of 175 basis points to 4.75%.
What has been basically good news for the economy has translated into bad
news for the bond market this year. The U.S. economy recorded an annualized
growth rate of approximately 6.3% for the fourth quarter of 1993, serving as
the catalyst for the first Fed tightening in February. As 1994 progressed,
economic growth continued well above the targeted non-inflationary rate of 2.5%
to 3.0%, which, combined with a further weakening of the U.S. dollar, caused
the Fed to continue to raise interest rates.
Recently, a number of key economic indicators show signs that robust growth
is continuing, keeping inflation fears alive. These include higher commodity
prices, gradually rising costs of intermediate goods, and plant capacity
utilization running at 84.9%, the highest level in well over a decade. In
addition, sales of existing homes held steady at relatively high levels and
unemployment declined to approximately 5.9%.
Meanwhile, long-term interest rates (as measured by 30-year Treasury bonds)
have also escalated, hovering around 8% recently compared with less than 6%
last October. As interest rates rose across the maturity spectrum, bond prices
fell.
Performance Review
We are pleased to report that the Institutional shares of the GS Short-Term
Government Agency Fund performed well compared with its peers, ranking 14th in
total return out of a universe of 102 short-term U.S. government funds tracked
by Lipper Analytical Services, Inc. for the 12-month period ended October 31,
1994. (Lipper rankings do not take sales charges into account.)
For the period under review, the fund's Institutional shares had a positive
return of 0.99% (6.21% from distributions and -5.22% from share price
depreciation) compared with 0.94% for the two-year U.S. Treasury security, the
fund's benchmark, and -1.31% for the average fund in the Lipper short-term
government fund category. For the same period, the fund's Administration shares
returned 0.73% (5.97% from distributions and -5.24% from share price
depreciation.)
The fund's slight outperformance of its benchmark can be attributed to its
overweighting in collateralized mortgage securities (CMOs). In particular, our
holdings in sequential pay CMOs and planned amortization class (PAC) CMOs
helped performance through both the incremental yield the securities offered
relative to Treasuries and the spreads tightening during the period.
<PAGE>
Portfolio Composition and Investment Policies
As of October 31, 79.3% of the portfolio was invested in mortgage-backed
securities, with the remainder in repurchase agreements and other cash
equivalents.
[ART - Pie Chart depicting portfolio composition
information as of October 31, 1994. See
information below.]
<TABLE>
<CAPTION>
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 1994
<S> <C>
CMOS 58.9%
ARMS 13.1%
CASH 20.7%
Fixed Rate 7.3%
</TABLE>
. One of our most significant strategies this year has been to liquidate
our entire position in Treasuries (36.0% as of last October 31, 1993) to
help manage the duration extension of mortgage-backed securities. We used
some of the proceeds to increase our position in adjustable rate mortgage
securities (ARMs) to just over 13%. ARMs offer relative value over longer
maturity Treasuries in a rising interest rate environment because their
coupons reset periodically at the higher rates.
. The remainder of the proceeds was used to increase our cash position to
20.7%. In addition, we sold just over half of our fixed rate mortgages,
reducing our position to 7.3% from 17.0% to offset their lengthening
duration.
. We increased the portfolio's weighting in CMOs to 58.9% from 42.0% in
October 1993. As we noted previously, we maintained our position in PAC
CMOs and increased our weighting in sequential pay CMOs to 28.5% from 19%
last year. PACs and sequentials are backed by fixed rate mortgages and
provide more stable cash flows that help contribute to the fund's
principal stability.
. As of October 31, 1994, the fund's duration was 1.87 years, matching that
of the benchmark, and was slightly shorter than its duration of 2.14
years in October 1993.
. Because we invest primarily in government and agency securities, the fund
is rated AAAf by Standard & Poor's. In terms of issuer composition, the
portfolio primarily invests in securities issued by the Federal National
Mortgage Association, the Federal Home Loan Mortgage Corporation and the
Government National Mortgage Association.
2
<PAGE>
The Use of Derivatives in the Fund
During the past year, there has been a great deal of investor concern
regarding the use of derivatives. In the broadest sense, any security that
derives its value from another underlying security may be called a derivative.
Mortgage securities can be divided into two categories: those with lower
volatility risk (such as CMOs, which represented 58.9% of the fund's portfolio
as already noted) and those with higher risk (such as inverse floaters and PAC
IOs, which represented only 3.5% of the fund's portfolio and were held for
their incremental yield and potential incremental return). In addition, we have
occasionally used mortgage dollar rolls (transactions that involve selling
mortgage securities owned by the fund and simultaneously contracting to buy
back similar mortgage securities with the same coupon on a specified future
date) to take advantage of short-term supply and demand imbalances in the
mortgage settlement process.
Our Outlook and Strategy Going Forward
On November 15, the Federal Reserve raised interest rates another 0.75%, and
additional rate hikes are possible in the coming months. In the near term, the
outlook for the fixed income market remains uncertain. As a result, we will
continue to target the fund's duration to its two-year Treasury benchmark. And
we will also continue to emphasize ARMs with coupons that will reset higher as
the Fed increases interest rates and CMOs that offer incremental yield relative
to Treasuries of equal duration. Security selection as well as sector
weightings will be critical in the difficult markets that lie ahead. As always,
we will make full use of Goldman Sachs' extensive economic, fixed income and
mortgage research in managing the fund.
In conclusion, we appreciate your support during this difficult period and
look forward to helping you meet your investment objectives in the year ahead.
Sincerely,
/s/ Jonathan A. Beinner
Jonathan A. Beinner
/s/ Theodore T. Sotir
Theodore T. Sotir
Portfolio Managers
GS Short-Term Government Agency Fund
December 15, 1994
3
<PAGE>
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1994. The
performance for the GS Short-Term Government Agency Fund based on an initial
investment of $50,000, is compared to its benchmarks, the U.S. 2-Year Treasury
Bill ("2-Year T-Bill") and the Lehman Brothers Mutual Fund Short (1-3) U.S.
Government Index ("Lehman Short (1-3) Gov't Index"). All performance data shown
represents past performance and should not be considered indicative of future
performance which will fluctuate as market conditions change. The investment
return and principal value of an investment will fluctuate with changes in
market conditions so that an investor's shares, when redeemed, may be worth
more or less than their original cost.
[ART - Two graphs, each depicting information
for Institutional and Administration
shares. See information below.]
HYPOTHETICAL $50,000 INVESTMENT
<TABLE>
<CAPTION>
Lehman Short 1-3
Institutional Shares 2 Year T-Bill Gov't Index
-------------------- ------------- ----------------
<S> <C> <C> <C>
9/1/88(b) 50,000 50,000 50,000
10/31/88 51,286 51,057 51,091
10/31/89 55,943 55,412 55,919
10/31/90 60,547 59,876 60,861
10/31/91 67,165 66,615 67,699
10/31/92 71,356 72,161 73,208
10/31/93 75,944 76,335 77,446
10/31/94 76,696 77,058 78,339
Average Annual Total Return: One Year - .99%, Five Year - 6.34%, Since
Inception(a) - 7.05%
<CAPTION>
Lehman
Short (1-3)
Administration Shares 2-Year T-Bill Gov't Index
--------------------- ------------- ------------
<S> <C> <C> <C>
5/1/93(b) 50,000 50,000 50,000
10/31/93 50,588 50,992 51,057
10/31/94 51,229 51,473 51,647
Average Annual Total Return: One Year - .73%, Since Inception(a) - 1.60%
</TABLE>
(a) The Institutional and Administration shares commenced operations August 15,
1988 and April 15, 1993, respectively.
(b) For comparative purposes, initial investments are assumed to be made on the
first day of the month following the commencement of operations of each
class of shares.
4
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Trustees of
GS Short-Term Government Agency Fund:
We have audited the accompanying statement of assets and liabilities of GS
Short-Term Government Agency Fund (a portfolio of Goldman Sachs Trust, a
Massachusetts business trust), including the statement of investments as of
October 31, 1994, the related statement of operations, the statements of
changes in net assets and the financial highlights for the periods presented.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1994 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights
referred to above present fairly, in all material respects, the financial
position of the GS Short-Term Government Agency Fund of the Goldman Sachs Trust
as of October 31, 1994, the results of its operations, the changes in its net
assets and the financial highlights for the periods presented, in conformity
with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts,
December 12, 1994
5
<PAGE>
GS SHORT-TERM GOVERNMENT AGENCY FUND
--------------
STATEMENT OF INVESTMENTS
OCTOBER 31, 1994
($ IN THOUSANDS)
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY
AMOUNT RATE DATE VALUE
--------- -------- -------- -----
MORTGAGE BACKED OBLIGATIONS (78.7%)
Adjustable Rate Federal Home Loan Mortgage Corp. (FHLMC)(a) (13.0%)
<S> <C> <C> <C>
$12,394 6.32% 02/01/22 $ 12,666
4,553 5.92 08/01/22 4,600
8,078 5.97 07/01/23 8,028
--------
Total FHLMC...................................... $ 25,294
--------
Fixed Rate FNMAs (0.4%)
$ 753 9.00% 12/01/97 $ 774
--------
Fixed Rate GNMAs (6.8%)
$ 4,569 9.50% 03/15/16- $ 4,800
12/15/17
6,046 9.00 05/15/16- 6,186
05/15/17
2,102 9.00 09/15/19- 2,144
08/15/21
--------
Total Fixed Rate GNMAs........................... $ 13,130
--------
Collateralized Mortgage Obligations (CMOs) (58.5%)
Inverse Floater CMOs(a) (7.2%)
FHLMC Series 1134, Class H
$ 795 17.88% 09/15/96 $ 866
FHLMC Series 1134, Class I
1,023 17.88 09/15/96 1,135
FHLMC Series 1151, Class G
1,027 12.53 10/15/96 1,032
FNMA REMIC Trust 1991-127, Class S
68 14.29 09/25/98 67
FNMA REMIC Trust 1992-02, Class E
10,815 7.25 11/25/03 10,780
--------
Total Inverse Floater CMOs....................... $ 13,880
--------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY
AMOUNT RATE DATE VALUE
--------- -------- -------- -----
<S> <C> <C> <C>
MORTGAGE BACKED OBLIGATIONS--(CONTINUED)
Planned Amortization Class (PAC) CMOs (46.9%)
FHLMC Series 95, Class C
$ 3,446 9.00% 11/15/20 $ 3,491
FHLMC Series 1134, Class D
5,848 8.00 09/15/96 5,910
FHLMC Series 1167, Class F
12,561 7.50 11/15/21 12,449
FHLMC Series 1218, Class C
5,476 6.00 10/15/05 5,447
FHLMC Series 1252, Class D
3,602 6.60 03/15/13 3,591
FHLMC Series 1364, Class G
15,504 5.50 11/15/02 15,003
FHLMC Series 1506, Class PD
8,678 5.15 03/15/03 8,027
FHLMC Series 1512, Class DA
6,274 4.50 02/15/03 5,737
FNMA REMIC Trust 1988-16, Class B
1,933 9.50 06/25/18 2,007
FNMA REMIC Trust 1989-33, Class D
2,407 9.15 09/25/18 2,453
FNMA REMIC Trust 1991-84, Class S
1,913 15.90 02/25/06 1,951
FNMA REMIC Trust 1991-111, Class H
8,100 7.50 06/25/20 7,796
FNMA REMIC Trust 1992-135, Class B
1,067 5.85 05/25/06 1,062
FNMA REMIC Trust 1992-138, Class A
4,589 6.00 08/25/13 4,535
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
GS SHORT-TERM GOVERNMENT AGENCY FUND
--------------
STATEMENT OF INVESTMENTS--(CONTINUED)
OCTOBER 31, 1994
($ IN THOUSANDS)
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY
AMOUNT RATE DATE VALUE
--------- -------- -------- -----
MORTGAGE BACKED OBLIGATIONS--(CONTINUED)
<S> <C> <C> <C>
PAC CMOs--(Continued)
FNMA REMIC Trust 1993-59, Class D
$ 5,700 5.00% 11/25/03 $ 5,265
FNMA REMIC Trust 1993-63, Class PD
6,500 5.75 12/25/02 6,159
--------
Total PAC CMOs................................... $ 90,883
--------
Planned Amortization Class Interest Only
CMOs (PAC IOs) (4.4%)
FNMA REMIC Trust 1992-198, Class K(b)
$ 79 1007.50% 12/25/15 $ 1,608
FNMA REMIC TRUST 1993-39, Class A
6,877 8.75 03/25/18 6,976
--------
Total PAC IOs.................................... $ 8,584
--------
Total CMOs....................................... $113,347
--------
Total Mortgage Backed Obligations
(cost $158,240)................................. $152,545
--------
REPURCHASE AGREEMENTS (20.6%)
Joint Repurchase Agreement Account
$39,900 4.83% 11/01/94 $ 39,900
--------
Total Repurchase Agreements (cost $39,900)....... $ 39,900
--------
Total Investments
(cost $198,140(c)).............................. $192,445
========
</TABLE>
<TABLE>
<S> <C>
FEDERAL INCOME TAX INFORMATION:
Gross unrealized gain for investments in
which value exceeds cost.................... $ 18
Gross unrealized loss for investments in
which cost exceeds value.................... (5,746)
-------
Net unrealized loss.......................... $(5,728)
=======
</TABLE>
--------------------------------------------------------------------------------
(a) Variable rate securities. Coupon rates disclosed are those which are in
effect at October 31, 1994.
(b) Represents securities with notional or nominal principal amounts. The
actual effective yields of these securities are different than the stated
rates due to the amortization of related premiums.
(c) The aggregate cost for federal income tax purposes is $198,173.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
GS SHORT-TERM GOVERNMENT AGENCY FUND
--------------
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1994
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Investments in securities, at value (cost $198,140,263).......... $192,445,031
Receivables:
Interest........................................................ 1,080,900
Investment securities sold...................................... 526,753
Fund shares sold................................................ 1,535
Cash ............................................................ 65,516
Other assets .................................................... 237,381
------------
Total assets................................................ 194,357,116
------------
LIABILITIES
Payables:
Dividends....................................................... 299,124
Fund shares repurchased......................................... 145,780
Accrued expenses and other liabilities........................... 86,781
------------
Total liabilities........................................... 531,685
------------
NET ASSETS
Paid-in capital.................................................. 208,982,806
Accumulated undistributed net investment income.................. 481,675
Accumulated net realized loss on investment transactions ........ (9,943,818)
Net unrealized loss on investments .............................. (5,695,232)
------------
Net assets ................................................. $193,825,431
============
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
Institutional shares............................................. $9.64
=====
Administration shares............................................ $9.64
=====
SHARES OUTSTANDING
Institutional shares............................................. 20,039,280
Administration shares............................................ 75,701
------------
Total shares of beneficial interest outstanding, $.001 par
value
(unlimited number of shares authorized).................... 20,114,981
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
GS SHORT-TERM GOVERNMENT AGENCY FUND
--------------
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1994
<TABLE>
<S> <C>
Investment income:
Interest income .................................................. $16,329,801
-----------
Expenses:
Investment adviser fees(a)........................................ 1,063,867
Custodian fees.................................................... 80,029
Registration fees................................................. 77,226
Professional fees................................................. 19,613
Trustee fees...................................................... 5,889
Other............................................................. 65,615
-----------
Total expenses................................................ 1,312,239
Less--Expenses reimbursable by GSFM............................... (115,389)
-----------
Net expenses.................................................. 1,196,850
Administration share fees..................................... 28,422
-----------
Net expenses and share fees................................... 1,225,272
-----------
Net investment income............................................. 15,104,529
Net realized loss on investment transactions...................... (9,489,099)
Net change in unrealized loss on investments...................... (3,394,603)
-----------
Net increase in net assets resulting from operations.............. $ 2,220,827
===========
</TABLE>
-------
(a) For the year ended October 31, 1994, the Investment Adviser waived fees
of $265,967.
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
GS SHORT-TERM GOVERNMENT AGENCY FUND
--------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
OCTOBER 31,
----------------------------
1994 1993
------------- -------------
<S> <C> <C>
From Operations:
Net investment income........................... $ 15,104,529 $ 17,860,106
Net realized gain (loss) on investment
transactions................................... (9,489,099) 3,525,409
Net change in unrealized loss on investments.... (3,394,603) (4,068,556)
------------- -------------
Net increase in net assets resulting from
operations..................................... 2,220,827 17,316,959
------------- -------------
Distributions to Shareholders:
From net investment income
Institutional shares.......................... (14,220,333) (17,564,525)
Administration shares......................... (674,883) (295,581)
In excess of net investment income
Institutional shares.......................... -- (224,974)
From net realized gain on investment
transactions
Institutional shares.......................... (1,416,326) --
Administration shares......................... (66,034) --
------------- -------------
Total distributions to shareholders............. (16,377,576) (18,085,080)
------------- -------------
From Share Transactions:
Proceeds from sale of shares.................... 97,865,803 407,976,067
Reinvestment of dividends....................... 10,376,478 10,721,108
Cost of shares repurchased...................... (276,458,244) (319,657,651)
------------- -------------
Increase (decrease) in net assets resulting from
share transactions............................. (168,215,963) 99,039,524
------------- -------------
Total increase (decrease) ....................... (182,372,712) 98,271,403
Net Assets:
Beginning of year............................... 376,198,143 277,926,740
------------- -------------
End of year..................................... $ 193,825,431 $ 376,198,143
============= =============
Accumulated undistributed net investment income.. $481,675 $272,362
============= =============
Summary of Share Transactions:
Institutional shares:
Shares sold................................... 9,816,887 38,214,675
Reinvestment of dividends..................... 1,050,930 1,052,836
Shares repurchased............................ (26,290,525) (31,159,920)
------------- -------------
(15,422,708) 8,107,591
------------- -------------
Administration shares:
Shares sold................................... 12,803 1,852,208
Reinvestment of dividends..................... 276 --
Shares repurchased............................ (1,563,118) (226,468)
------------- -------------
(1,550,039) 1,625,740
------------- -------------
Increase (decrease) in shares outstanding........ (16,972,747) 9,733,331
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
GS SHORT-TERM GOVERNMENT AGENCY FUND
---------
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
DISTRIBUTIONS TO
INCOME FROM INVESTMENT OPERATIONS SHAREHOLDERS
---------------------------------------- -------------------------------------------
NET FROM
NET ASSET REALIZED AND TOTAL IN EXCESS NET REALIZED NET ASSET
VALUE AT NET UNREALIZED INCOME FROM FROM NET OF NET GAIN ON FROM VALUE AT
BEGINNING INVESTMENT GAIN (LOSS) INVESTMENT INVESTMENT INVESTMENT INVESTMENT PAID-IN END
OF PERIOD INCOME ON INVESTMENTS OPERATIONS INCOME INCOME TRANSACTIONS CAPITAL OF PERIOD
--------- ---------- -------------- ----------- ---------- ---------- ------------ -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEARS ENDED OCTOBER 31,
1994-
Institutional
shares.......... $10.14 $0.5628(f) $(0.4592)(f) $0.1036(f) $(0.5598) -- $(0.0438) -- $9.64
1994-
Administration
shares.......... 10.14 0.5329(f) 0.4539)(f) 0.0790(f) (0.5352) -- (0.0438) -- 9.64
1993-Institu-
tional shares... 10.16 0.5627 (0.0135)(a) 0.5492 (0.5627) (0.0065) -- -- 10.14
1993-
Administration
shares(d)....... 10.23 0.2725 (0.0900)(a) 0.1825 (0.2725) -- -- -- 10.14
1992-Institu-
tional shares... 10.22 0.6703 (0.0600)(a) 0.6103 (0.6703) -- -- -- 10.16
1991-Institu-
tional shares... 10.00 0.8020 0.2200 (a) 1.0220 (0.8020) -- -- -- 10.22
1990-Institu-
tional shares... 10.07 0.8300 (0.0700)(a) 0.7600 (0.8300) -- -- -- 10.00
1989-Institu-
tional shares... 10.10 0.8800 -- 0.8800 (0.8800) -- -- (0.0300) 10.07
FOR THE PERIOD AUGUST 15, 1988 (COMMENCEMENT OF OPERATIONS) THROUGH OCTOBER 31,
1988-Institu-
tional Shares... 10.00 0.1800 0.1000 0.2800 (0.1800) -- -- -- 10.10
<CAPTION>
RATIOS ASSUMING NO
WAIVER OF FEES OR
EXPENSE LIMITATION
------------------------
NET
RATIO OF NET ASSETS AT RATIO OF NET
RATIO OF NET INVESTMENT END RATIO OF INVESTMENT
EXPENSES TO INCOME TO PORTFOLIO OF PERIOD EXPENSES TO INCOME TO
TOTAL AVERAGE NET AVERAGE NET TURNOVER (IN AVERAGE NET AVERAGE NET
RETURN(b) ASSETS ASSETS RATE(c) 000'S) ASSETS ASSETS
--------- ------------ ------------ ----------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEARS ENDED OCTOBER 31,
1994-
Institutional
shares.......... 0.99% 0.45% 5.69% 289.79% $193,095 0.59% 5.55%
1994-
Administration
shares.......... 0.73 0.70 5.38 289.79 730 0.84 5.24
1993-Institu-
tional shares... 5.55 0.45 5.46 411.66 359,708 0.64 5.31
1993-
Administration
shares(d)....... 1.74 0.70(e) 4.84(e) 411.66 16,490 0.80(e) 4.74(e)
1992-Institu-
tional shares... 6.24 0.45 6.60 216.07 277,927 0.69 6.36
1991-Institu-
tional shares... 10.93 0.45 8.25 155.44 158,848 0.79 7.91
1990-Institu-
tional shares... 8.23 0.45 8.62 173.21 68,995 0.95 8.12
1989-Institu-
tional shares... 9.08 0.46 8.71 137.37 31,015 1.39 7.78
FOR THE PERIOD AUGUST 15, 1988 (COMMENCEMENT OF OPERATIONS) THROUGH OCTOBER 31,
1988-Institu-
tional Shares... 3.30 0.55(e) 8.55(e) 167.00(e) 39,052 1.42(e) 7.68(e)
</TABLE>
----
(a) Includes balancing effect of calculating per share amounts.
(b) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions and a complete redemption
of the investment at the net asset value at the end of the period.
(c) Includes effect of mortgage dollar roll transactions.
(d) Administration share activity commenced on April 15, 1993.
(e) Annualized.
(f) Calculated based on the average shares outstanding methodology.
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
GS SHORT-TERM GOVERNMENT AGENCY FUND
--------------
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1994
1. ORGANIZATION
GS Short-Term Government Agency Fund (the "Fund") is a no-load, diversified
portfolio of Goldman Sachs Trust (the "Trust"), a Massachusetts business trust.
The Trust is registered under the Investment Company Act of 1940 (as amended)
as an open-end management investment company. The Fund offers three classes of
shares: Institutional shares, Administration shares and Service shares. As of
October 31, 1994, the Service shares had not been issued.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund which are in conformity with those generally accepted in
the investment company industry:
A. Investment Valuation
Investments in mortgage backed obligations are valued based on yield
equivalents, a pricing matrix or other sources, under valuation procedures
established by the Trust's Board of Trustees. Other portfolio securities for
which accurate market quotations are readily available are valued on the basis
of quotations furnished by a pricing service or provided by dealers in such
securities. Portfolio securities for which accurate market quotations are not
readily available are valued in accordance with the Trust's valuation
procedures. Short-term debt obligations maturing in sixty days or less are
valued at amortized cost.
B. Security Transactions and Investment Income
Security transactions are recorded on the trade date. Realized gains and
losses on sales of portfolio securities are calculated on the identified cost
basis. Interest income is recorded on the basis of interest accrued. Premiums
on interest-only securities and on collateralized mortgage obligations with
nominal principal amounts are amortized, on an effective yield basis, over the
expected lives of the respective securities, taking into account actual
principal prepayment experience and estimates of future principal prepayments.
Certain mortgage security paydown gains and losses are taxable as ordinary
income. Such paydown gains and losses increase or decrease taxable ordinary
income available for distribution and are classified as interest income in the
accompanying Statement of Operations. Original issue discounts on debt
securities are amortized to interest income over the life of the security with
a corresponding increase in the cost basis of that security.
C. Mortgage Dollar Rolls
The Fund may enter into mortgage "dollar rolls" in which the Fund sells
securities in the current month for delivery and simultaneously contracts with
the same counterparty to repurchase similar (same type, coupon and maturity)
but not identical securities on a specified future date. The Fund loses the
right to receive principal and interest paid on the securities sold. However,
the Fund
12
<PAGE>
GS SHORT-TERM GOVERNMENT AGENCY FUND
--------------
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
OCTOBER 31, 1994
2. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
benefits to the extent of any price received for the securities sold and the
lower forward price for the future purchase (often referred to as the "drop")
or fee income plus the interest earned on the cash proceeds of the securities
sold until the settlement date of the forward purchase. The Fund will hold and
maintain in a segregated account, until the settlement date, cash or liquid,
high grade debt securities in an amount equal to the forward purchase price.
For financial reporting and tax reporting purposes, the Fund treats mortgage
dollar rolls as two separate transactions; one involving the purchase of a
security and a separate transaction involving a sale.
D. Federal Taxes
It is the Fund's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute
each year substantially all of its investment company taxable income to its
shareholders. Accordingly, no federal tax provisions are required. The
characterization of distributions to shareholders for financial reporting
purposes is determined in accordance with income tax rules. Therefore, the
source of a portfolio's distributions may be shown in the accompanying
financial statements as either from or in excess of net investment income or
net realized gain on investment transactions, or from capital, depending on the
type of book/tax differences that may exist as well as timing differences
associated with having different book and tax year ends.
E. Expenses
Expenses incurred by the Trust that do not specifically relate to an
individual portfolio of the Trust are allocated to the portfolios based on each
portfolio's relative average net assets for the period.
Shareholders of Administration and Service shares bear all expenses and fees
paid to service organizations for their services with respect to such shares as
well as other expenses (subject to expense limitations) which are directly
attributable to such shares.
3. AGREEMENTS
Goldman Sachs Funds Management, L.P. ("GSFM"), an affiliate of Goldman, Sachs
& Co. ("Goldman Sachs"), serves as the Fund's investment adviser pursuant to an
Investment Advisory Agreement. Under the Investment Advisory Agreement, GSFM,
subject to the general supervision of the Trust's Board of Trustees, manages
the Fund's portfolio, and provides for the administration of the Fund's other
affairs. As compensation for the services rendered under the Investment
Advisory Agreement and the assumption of the expenses related thereto, GSFM is
entitled to a fee, computed daily and payable monthly, at an annual rate equal
to .50% of the Fund's average daily net assets. Until further notice, GSFM has
voluntarily agreed not to impose .10% of its investment advisory fee. For the
year ended October 31, 1994, investment advisory fees of $265,967 were waived.
13
<PAGE>
GS SHORT-TERM GOVERNMENT AGENCY FUND
--------------
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
OCTOBER 31, 1994
3. AGREEMENTS--(CONTINUED)
GSFM has voluntarily agreed to limit certain of the Fund's expenses
(excluding the investment advisory fee payable to GSFM, taxes, interest,
brokerage, litigation, indemnification, fees paid to service organizations and
other extraordinary expenses) to the extent that such expenses exceed .05% per
annum of the Fund's average daily net assets. For the year ended October 31,
1994, GSFM voluntarily agreed to reimburse all such expenses. Included in
"Accrued expenses and other liabilities" in the accompanying Statement of
Assets and Liabilities at October 31, 1994 is $11,684 payable to GSFM.
Goldman Sachs serves as Distributor of the shares of the Fund pursuant to a
Distribution Agreement and receives no compensation in this capacity. Goldman
Sachs also serves as Transfer Agent of the Fund for a fee.
4. INVESTMENT TRANSACTIONS
Purchases and proceeds of sales or maturities of long-term securities for the
year ended October 31, 1994 were as follows:
<TABLE>
<S> <C>
Purchases of U.S. Government and agency obligations............. $722,474,169
Sales or maturities of U.S. Government and agency obligations... $921,984,729
</TABLE>
5. REPURCHASE AGREEMENTS
During the term of a repurchase agreement, the value of the underlying
securities, including accrued interest, is required to equal or exceed the
value of the repurchase agreement. The underlying securities for all repurchase
agreements are held in safekeeping in the customer-only account of State Street
Bank & Trust Co., the Fund's custodian, or at subcustodians. GSFM monitors the
market value of the underlying securities by pricing them daily.
6. JOINT REPURCHASE AGREEMENT ACCOUNT
The Fund, together with other registered investment companies having advisory
agreements with GSFM or its affiliates, transfers uninvested cash balances into
a joint account, the daily aggregate balance of which is invested in one or
more repurchase agreements. The underlying securities for the repurchase
agreements are U.S. Treasury obligations and mortgage-related securities issued
by the U.S. Government, its agencies or instrumentalities. As of October 31,
1994, the Fund had a 2.23% undivided interest in the repurchase agreements in
the following joint account which equalled $39,900,000 in principal amount.
14
<PAGE>
GS SHORT-TERM GOVERNMENT AGENCY FUND
---------------
STATEMENT OF INVESTMENTS--(CONTINUED)
OCTOBER 31, 1994
6. JOINT REPURCHASE AGREEMENT ACCOUNT--(CONTINUED)
As of October 31, 1994, the repurchase agreements in the joint account along
with the corresponding underlying securities (including the type of security,
principal amount, interest rate and maturity date) were as follows ($ in
thousands):
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY AMORTIZED
AMOUNT RATE DATE COST
--------- -------- -------- ----------
<S> <C> <C> <C> <C>
Lehman Brothers, Inc., dated 10/31/94,
repurchase price $175,024 (U.S.
Treasury Notes: $178,431, 3.875%-
11.250%, 05/15/95-12/31/95)........... $175,000 4.87% 11/01/94 $ 175,000
Lehman Brothers, Inc., dated 10/31/94,
repurchase price $401,154 (U.S.
Treasury Notes: $43,092, 6.00%-
11.625%, 11/15/94) (U.S. Treasury
Interest-Only Strips: $55,276,
02/15/98-08/15/01) (U.S. Principal-
Only Strips: $310,720, 7.25%-11.625%,
11/15/94-08/15/01).................... 401,100 4.85 11/01/94 401,100
Lehman Brothers, Inc., dated 10/31/94,
repurchase price $75,010 (U.S.
Treasury Notes: $76,477, 3.875%-
11.625%, 11/15/94-05/15/95)........... 75,000 4.90 11/01/94 75,000
Merrill Lynch Government Securities,
dated 10/31/94, repurchase price
$340,045 (U.S. Treasury Bills:
$277,384, 02/02/95-05/04/95) (U.S.
Treasury Interest-Only Strips: $9,217,
11/15/99) (U.S. Treasury Principal-
Only Strips: $60,201, 7.75%-8.875%,
11/15/99-08/15/01).................... 340,000 4.80 11/01/94 340,000
Salomon Brothers, Inc., dated 10/31/94,
repurchase price $800,107 (U.S.
Treasury Bills: $815,888, 03/23/95-
09/21/95) (U.S. Treasury Note: $205,
5.50%, 04/15/000)..................... 800,000 4.82 11/01/94 800,000
----------
Total Joint Repurchase Agreement Account........................... $1,791,100
==========
</TABLE>
7. ADMINISTRATION AND SERVICE PLANS
The Fund has adopted Administration and Service Plans. These plans allow for
Administration shares and Service shares, respectively, to compensate service
organizations for providing varying levels of account administration and
shareholder liaison services to their customers who are beneficial owners of
such shares. The Administration and Service Plans provide for compensation to
the service organizations in an amount up to .25% and .50% (on an annualized
basis), respectively, of the average daily net asset value of the respective
shares.
15
<PAGE>
--------------------------------------------------------------------------------
THIS ANNUAL REPORT IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS
ONLY WHEN PRECEDED OR ACCOMPANIED BY THE GS SHORT-TERM GOVERNMENT AGENCY FUND
PROSPECTUS WHICH CONTAINS FACTS CONCERNING THE FUND'S OBJECTIVES AND POLICIES,
MANAGEMENT, EXPENSES AND OTHER INFORMATION.
<PAGE>
GS SHORT-TERM GOVERNMENT AGENCY FUND
ANNUAL REPORT
OCTOBER 31, 1994
TRUSTEES
Paul C. Nagel, Jr., Chairman
Ashok N. Bakhru
Marcia L. Beck
David B. Ford
Robert P. Mayo
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
OFFICERS
Marcia L. Beck President
Stephen H. Hopkins Vice President
John W. Mosior Vice President
Nancy L. Mucker Vice President
Pauline Taylor Vice President
Scott M. Gilman Treasurer
Michael J. Richman Secretary
Howard B. Surloff Assistant Secretary
INVESTMENT ADVISER
GOLDMAN SACHS FUNDS MANAGEMENT, L.P.
DISTRIBUTOR AND TRANSFER AGENT
GOLDMAN, SACHS & CO.
<PAGE>
ANNUAL REPORT
----------------------------
OCTOBER 31, 1994
GS SHORT DURATION TAX-FREE FUND
---------------------------------
<PAGE>
DEAR SHAREHOLDERS:
On behalf of Goldman Sachs, we welcome this opportunity to review the
performance and activities of the GS Short Duration Tax-Free Fund. This report
will provide an overview of the economy and the municipal bond markets, as well
as a discussion of the fund's performance and investment strategies during the
12-month period ended October 31, 1994.
To review briefly, the fund seeks to provide a high level of current income
exempt from regular federal income tax, consistent with relatively low
principal volatility, through investments in municipal securities rated single-
A or better. The portfolio seeks to maintain an average duration of two to
three years and invests in securities with remaining effective maturities of
five years or less.
The Impact of Rising Interest Rates on Bond Prices
During the 12 months ended October 31, 1994, the U.S. bond markets were
extremely volatile. Bond prices fell as a result of significant increases in
both long-term and short-term interest rates. The most widely accepted
barometer of interest rates, the 30-year U.S. Treasury bond, rose from 5.79% to
over 8.00% between October 1993 and October 1994. In an effort to head off the
inflation that could result from an overheating economy, the Federal Reserve
raised short-term interest rates five times (a total of 1.75%) between February
and October of 1994.
Within the municipal bond market, the price of an average three-year
municipal security (as represented by the Lehman Brothers Three-Year Municipal
Bond Index) fell approximately 4.2%, reflecting an increase in yield from 3.30%
to 4.75%. During the 12-month period, the price of long-term municipal bonds
(with an average maturity of 30 years), as measured by the Bond Buyer Municipal
Bond Index, fell 17.60%, while yields rose from 5.59% to 7.36%.
Robust Economic Growth Continues Unabated
For the past year, the economy has continued to show healthy growth. The
fourth quarter of 1993 showed robust GDP growth of 6.3% (annualized), and was
followed by additional positive economic indicators through the first three
quarters of 1994. Over the last 12 months, strong consumer demand has caused
U.S. production of goods and services to expand. This expansion has pushed U.S.
manufacturers to 84.9% of their capacity, the highest level since 1989. In
addition to pressure on production lines, the U.S. unemployment rate fell to
5.9% in September 1994, a four-year low.
Although the inflation rate is running between only 2.5% and 3.0%, the
continuing strength of the economy has caused the Federal Reserve to launch a
preemptive strike against rising prices. Despite five interest rate increases
so far in 1994, the Federal Reserve has indicated that it is prepared to raise
short-term rates again over the next several months to accomplish its goal.
Fund Performance
For the 12-month period that ended October 31, the fund's Institutional
shares realized a total return of 0.17% (4.36% from monthly distributions and -
4.19% in price depreciation) compared with 1.36% for the fund's benchmark, the
Lehman Brothers Three-Year Municipal Bond Index. For the same period, the
Administration shares recorded a total return of -0.11% (4.76% in monthly
<PAGE>
distributions and -4.87% in share price depreciation). Service shares recorded
a total return of -0.32% (0.48% in distributions and -0.80% in share
depreciation) since their inception on September 20, 1994 through October 31,
1994.
The fund's performance reflected the effect of the higher interest rates
described previously. The fund underperformed its benchmark for two key
reasons. First, the fund's size fluctuated significantly during the last 12
months. Between November 1993 and February 1994 assets expanded by
approximately 50%, then fell back to the late 1993 levels from February through
April. As a consequence of the rapid expansion and contraction, we purchased
bonds in a low-interest-rate environment and, shortly thereafter, were forced
to quickly sell bonds in a difficult market.
Second, performance was hurt by characteristics of the bonds that we
purchased during the rapid asset growth. In the low-interest-rate environment
of late 1993 and early 1994, the new cash flow was invested in "current coupon"
bonds. Then, as interest rates rose dramatically in February and March of 1994,
these bonds became discounted. Due to tax implications that are unique to
discount municipal bonds, the value of these bonds in our portfolio fell faster
than the value of premium bonds. By June of 1994, we were able to shift most of
the portfolio out of discount bonds and into premium coupon bonds and, as a
result, have seen a substantial improvement in performance since then.
Portfolio Composition and Investment Strategies
In determining the portfolio composition, we used strategies that take into
consideration a security's characteristics such as its maturity, sector (i.e.,
general obligation, revenue backed, pre-refunded and insured bonds) and
geographical concentration.
[ART - Pie chart depicting portfolio composition
information as of October 31, 1994. See
information below.]
<TABLE>
<CAPTION>
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 1994
<S> <C>
Pre-refunded Bonds 51.5%
Insured Revenue Bonds 24.7%
Revenue Bonds 10.4%
General Obligation Bonds 8.2%
Insured General Obligation
Bonds 5.2%
-----
</TABLE>
. Pre-refunded Bonds: During the summer, we dramatically increased our
position in pre-refunded bonds, from 11.7% last year to just over half of
the portfolio currently. These bonds are more defensive and are part of a
strategy that anticipates higher interest rates. Pre-
2
<PAGE>
refunded bonds (bonds that are refunded in advance of their call dates)
are secured by U.S. government debt as collateral and are considered to be
among the highest quality of any municipal sector. Pre-refunded bonds are
currently the most liquid sector of the municipal market. Due to the
severe decline in new pre-refunded bond supply (pre-refundings are down
90% from last year), we expect the sector's potential long-term scarcity
and high credit quality to provide returns that will exceed the general
municipal market.
. Insured Revenue Bonds: We established a position of 24.7% in revenue
bonds that are insured by independent insurance agencies (e.g., AMBAC,
MBIA or FGIC) with respect to the timely payment of principal and
interest. Insured bonds tend to provide more liquidity than lower
quality bonds, which is a characteristic that we consider particularly
valuable in a rising interest rate environment.
. Revenue Bonds: During the course of the year, we have significantly
reduced our position in revenue bonds from 46.6% to 10.4%. Revenue bonds
are issued by municipalities to raise money for specific public projects
such as highways, hospitals, schools and bridges. Revenues generated
from the projects pay interest and principal on the debt.
. General Obligation (GO) Bonds: Since last October, our position in GO
bonds (bonds backed by the issuer's right to collect taxes) has been cut
significantly, from 41.7% to 13.4%, as we shifted assets into pre-
refunded bonds for the reasons described above.
. Although the fund is permitted by prospectus to use certain derivatives,
including futures and options, we have no derivatives in the portfolio
and do not expect to use them in the near future.
. The fund had no exposure to issuers in Orange County.
Duration
During the course of the year, we reduced the fund's duration to 2.67 years,
slightly under the benchmark's duration of 2.74 years, to help protect
shareholder capital from the impact of rising interest rates.
Credit Quality
To provide greater liquidity, we continued to focus primarily on high-quality
securities. As of October 31, the portfolio's credit mix was 75.7% in AAA-
rated, 10.7% in AA-rated and 13.6% in A-rated securities. The high percentage
of AAA-rated bonds was also the result of the emphasis on pre-refunded bonds,
which receive credit ratings based on their U.S. government debt security
escrow accounts.
Outlook for the Municipal Market: Lower Supply and Relatively Stable Demand
After this year's daunting first quarter, in terms of their prices municipal
bonds outperformed taxable bonds of the same maturities between April and
October of 1994. As we enter the last quarter of the year and anticipate early
1995, our outlook for municipal bonds is positive.
This optimism is due primarily to the municipal market's strong technical
balance: total supply of new municipal bonds has decreased dramatically over
the last 12 months (approximately 60% since last year), while demand, although
weaker than last year, has been relatively stable.
In addition, we look forward to the largest "January effect" in history. In
early January 1995, an estimated $30 to $35 billion in cash flow is expected to
enter the market from coupon payments, maturing bonds and refundings. This new
cash will become available for reinvestment, which is expected to boost demand
and help support prices of municipal bonds.
3
<PAGE>
One of 1993's most significant sources of new supply--pre-refundings of
current issues--is no longer a factor in the municipal bond market. The higher
interest rate environment has made pre-refunding of bonds economically
impractical, and it is no longer beneficial for most issuers to refinance debt.
Given current U.S. tax rates, municipal bonds remain attractive when compared
with taxable investments of similar quality.
Since the fund's fiscal year-end on October 31, Orange County, California has
filed for bankruptcy due to large losses in its investment portfolio. At the
time of this writing, those proceedings have not been concluded. Fortunately,
the fund had no exposure to issuers in Orange County. As events unfold, we will
closely monitor the impact of Orange County's situation on other municipal
issuers in California and elsewhere.
Our Current Strategy
By emphasizing higher coupon bonds with shorter durations, we are taking a
defensive stance in anticipation of rising interest rates. As discussed in
previous sections, we are making a substantial commitment to the pre-refunded
sector, significantly overweighting our portfolio compared with the Lehman
Brothers Three-Year Municipal Bond Index. This preference is based on our
belief that the sector will offer attractive relative value in the months
ahead. When and if the economy shows definitive signs of slowing down, we will
gradually extend maturities in an effort to enhance the fund's current yield.
In closing, we appreciate your support and will continue to do our best to
help you meet your investment goals.
Sincerely,
/s/ Mark G. Muller
Mark G. Muller
Portfolio Manager GS Short Duration Tax-Free Fund December 15, 1994
4
<PAGE>
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1994. The
performance for the GS Short Duration Tax-Free Fund based on an initial
investment of $50,000, is compared to its benchmark, the Lehman Brothers 3-Year
Municipal Bond Index ("3-Year Bond Index"). All performance data shown
represents past performance and should not be considered indicative of future
performance which will fluctuate as market conditions change. The investment
return and principal value of an investment will fluctuate with changes in
market conditions so that an investor's shares, when redeemed, may be worth
more or less than their original cost.
HYPOTHETICAL $50,000 INVESTMENT
[ART - Three graphs, each depicting information for
Institutional shares, Administration Shares
and Service Shares. See information below.]
<TABLE>
<CAPTION>
Institutional Shares 3-Year Bond Index
-------------------- -----------------
<S> <C> <C>
10/1/92 50,000 50,000
10/31/92 49,831 49,805
10/31/93 53,335 53,102
10/31/94 53,425 53,825
Average Annual Total Return: One Year - 0.17%, Since Inception(a) - 3.23%
<CAPTION>
Administration Shares 3-Year Bond Index
--------------------- -----------------
<S> <C> <C>
6/1/93(b) $50,000 $50,000
10/31/93 $51,092 $51,144
10/31/94 $51,036 $51,840
Average Annual Total Return: One Year - (0.11%), Since Inception(a) - 1.49%
<CAPTION>
Service Shares 3-Year Bond Index
-------------- -----------------
<S> <C> <C>
10/1/94(b) 50,000 50,000
10/31/94 49,696 49,880
Aggregate Total Return(c): Since Inception(a) - (0.32%)
</TABLE>
-------
(a) The Institutional, Administration and Service shares commenced operations
October 1, 1992, May 20, 1993 and September 20, 1994, respectively.
(b) For comparative purposes, initial investments are assumed to be made on the
first day of the month following the commencement of operations of the
Administration and Service share classes.
(c) An aggregate total return (not annualized) is shown instead of an average
annual total return since this class of shares has not completed a full
twelve months of operations.
5
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Trustees of
GS Short-Duration Tax-Free Fund:
We have audited the accompanying statement of assets and liabilities of GS
Short-Duration Tax-Free Fund (a portfolio of Goldman Sachs Trust, a
Massachusetts business trust), including the statement of investments as of
October 31, 1994, the related statement of operations, the statements of
changes in net assets and the financial highlights for the periods presented.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1994 by correspondence with the custodian and brokers. As to
securities purchased but not yet received, we requested confirmation from
brokers and, when replies were not received, we carried out alternative
auditing procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights
referred to above present fairly, in all material respects, the financial
position of the GS Short-Duration Tax-Free Fund of the Goldman Sachs Trust as
of October 31, 1994, the results of its operations, the changes in its net
assets and the financial highlights for the periods presented, in conformity
with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts,
December 12, 1994
6
<PAGE>
GS SHORT DURATION TAX-FREE FUND
--------------
STATEMENT OF INVESTMENTS
OCTOBER 31, 1994
($ IN THOUSANDS)
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY
AMOUNT RATE DATE VALUE
--------- -------- -------- -------
ARIZONA (6.1%)
Arizona State Certificates of Participation,
Series A (AMBAC) (AAA/Aaa)-Prerefunded(a)
<S> <C> <C> <C>
$4,200 5.25% 11/01/97 $ 4,222
1,115 5.45 05/01/98 1,125
-------
5,347
-------
CALIFORNIA (20.2%)
Sacramento, CA Municipal Electric Utility
Revenue Refunding Bond, Series R
(AAA/Aaa)-Prerefunded(a)
4,000 7.13 02/01/97 4,262
San Francisco, CA City and County Sewer
Revenue Bond (AMBAC) (AAA/Aaa)-
Prerefunded(a)
8,000 6.50 10/01/99 8,531
Santa Clara, CA Revenue Bond (MBIA)
(AAA/Aaa)
5,000 3.75 04/01/12 4,944
-------
17,737
-------
COLORADO (10.2%)
Aurora, CO Certificates of Participation
Refunding Bond (A/A)
1,500 5.05 12/01/97 1,476
Boulder County, CO Sales Tax Revenue Bonds (FGIC)(AAA/Aaa)
2,715 4.55 12/15/96 2,702
Jefferson County, CO School District Number
R-001 General Obligation Bond, Series A
(AA/Baa1)
5,000 3.90 12/15/97 4,771
-------
8,949
-------
FLORIDA (13.5%)
Florida State Board of Education Capital Outlay General Obligation Bond,
Series B (AAA/Aaa)- Prerefunded(a)
4,000 7.75 06/01/97 4,337
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY
AMOUNT RATE DATE VALUE
--------- -------- -------- -------
<S> <C> <C> <C>
FLORIDA--(Continued)
Florida State Certificates of Participation (A+/A)
$2,500 5.90% 11/15/96 $ 2,520
Miami, Florida Health Facilities Authority
Revenue Bond (NR/Aaa)-Prerefunded(a)
4,500 8.38 10/01/97 4,966
-------
11,823
-------
GEORGIA (6.2%)
Georgia State Municipal Electrical Authority
Revenue Bond, Series T (A+/A)-
Prerefunded(a)
4,550 7.25 01/01/99 4,941
Metropolitan Atlanta Rapid Transportation
Authority, GA Sales Tax Revenue
Refunding Bond, Series F (A+/A)
500 7.90 07/01/95 511
-------
5,452
-------
KANSAS (2.8%)
Johnson County, KS Union School District
No. 223 General Obligation Bond
(AMBAC) (AAA/Aaa)
2,230 8.00 09/01/98 2,441
-------
MASSACHUSETTS (8.6%)
Boston, MA General Obligation Bond (A/A)
420 7.75 10/01/95 425
1,815 9.50 03/01/96 1,873
Massachusetts State Industrial Financial Agency Revenue Bond (NR/Aaa)-
Prerefunded(a)
4,590 8.87 07/01/98 5,215
-------
7,513
-------
MICHIGAN (3.5%)
Kent Hospital Finance Authority, Michigan
Hospital Revenue Bond (AAA/Aaa)-
Prerefunded(a)
2,990 6.50 01/01/98 3,094
-------
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
GS SHORT DURATION TAX-FREE FUND
--------------
STATEMENT OF INVESTMENTS--(CONTINUED)
OCTOBER 31, 1994
($ IN THOUSANDS)
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY
AMOUNT RATE DATE VALUE
--------- -------- -------- -------
MISSOURI (4.0%)
Branson, MO Tax Allocation Revenue Refunding
Bond (CGIC)(AAA/Aaa)
<S> <C> <C> <C>
$3,540 5.15% 10/01/98 $ 3,512
-------
NEW JERSEY (5.4%)
New Jersey State Educational Facilities Authority Revenue Bond (MBIA)
(AAA/Aaa)
4,780 5.00 09/01/98 4,739
-------
NEW YORK (7.8%)
Erie County, New York General Obligation Bond (FGIC) (AAA/Aaa)
2,000 5.20 03/15/98 2,006
New York State Medical Care Facilities Finance
Agency Revenue Bond (AAA/Aaa)-
Prerefunded(a)
4,500 8.88 01/15/96 4,811
-------
6,817
-------
OKLAHOMA (3.6%)
Enid Oklahoma Hospital Authority Revenue
Bond (NR/Aa1)
3,100 6.20(b) 10/01/15 3,111
-------
TEXAS (4.8%)
Dallas, TX Waterworks and Sewer System
Revenue Refunding Bond (NR/Aaa)-
Prerefunded(a)
4,000 7.10 04/01/98 4,234
-------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY
AMOUNT RATE DATE VALUE
--------- -------- -------- -------
<S> <C> <C> <C>
WASHINGTON (1.5%)
Washington State Public Power Supply System
Nuclear Water Project Revenue Bond (AA/Aa)
$1,250 7.20% 07/01/99 $ 1,322
-------
Total Investments (cost $86,763(c)) $86,091
=======
</TABLE>
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
FEDERAL INCOME TAX INFORMATION:
Gross unrealized gain for investments in which value exceeds cost...... $ 89
Gross unrealized loss for investments in which cost exceeds value...... (767)
-----
Net unrealized loss.................................................... $(678)
=====
</TABLE>
--------------------------------------------------------------------------------
(a) Prerefunded bonds have been collateralized by U.S. Treasury securities
which are held in escrow and used to pay principal and interest on the tax-
exempt issue and to retire the bonds in full at the earliest refunding
date. The maturity date shown for these securities is the earliest
refunding date.
(b) Variable rate security. Coupon rate disclosed is that which is in effect at
October 31, 1994.
(c) The aggregate cost for federal income tax purposes is $86,769.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
--------------------------------------------------------------------------------
INVESTMENT ABBREVIATIONS:
AMBAC -- Insured by AMBAC, American Municipal Bond Assurance Corp.
CGIC -- Insured by CGIC, Capital Guaranty Insurance Co.
FGIC -- Insured by FGIC, Financial Guaranty Insurance Co.
MBIA -- Insured by MBIA, Municipal Bond Investors Assurance Corp.
NR -- Not rated
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
GS SHORT DURATION TAX-FREE FUND
--------------
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1994
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (cost $86,762,755)............ $86,091,053
Receivables:
Investment securities sold....................................... 5,281,596
Interest......................................................... 1,376,914
Fund shares sold................................................. 2,495
Deferred organization expenses, net............................... 66,156
Other assets...................................................... 101,525
-----------
Total assets................................................. 92,919,739
-----------
LIABILITIES
Payables:
Investment securities purchased.................................. 4,328,633
Dividends........................................................ 84,366
Investment adviser fees.......................................... 30,667
Fund shares repurchased.......................................... 20,000
Transfer agent fees.............................................. 3,040
Cash overdraft.................................................... 61,295
Accrued expenses and other liabilities............................ 777,199
-----------
Total liabilities............................................ 5,305,200
-----------
NET ASSETS
Paid-in capital................................................... 92,240,711
Accumulated undistributed net investment income................... 44,725
Accumulated net realized loss on investment transactions.......... (3,999,195)
Net unrealized loss on investments................................ (671,702)
-----------
Net assets................................................... $87,614,539
===========
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
Institutional shares.............................................. $9.79
=====
Administration shares............................................. $9.79
=====
Service shares.................................................... $9.79
=====
SHARES OUTSTANDING
Institutional shares.............................................. 8,548,943
Administration shares............................................. 395,007
Service shares.................................................... 4,496
-----------
Total shares of beneficial interest outstanding, $.001 par
value (unlimited number of shares authorized)............... 8,948,446
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
GS SHORT DURATION TAX-FREE FUND
--------------
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1994
<TABLE>
<S> <C>
Investment income:
Interest income.................................................... $4,909,238
----------
Expenses:
Investment adviser fees............................................ 468,868
Registration fees.................................................. 77,630
Transfer agent fees................................................ 46,887
Custodian fees..................................................... 41,334
Amortization of deferred organization expenses..................... 22,673
Trustee fees....................................................... 2,801
Other.............................................................. 60,016
----------
Total expenses................................................. 720,209
Less--Expenses reimbursable by GSAM................................ (192,696)
----------
Net expenses................................................... 527,513
Administration share fees ..................................... 13,825
Service share fees............................................. 325
----------
Net expenses and share fees.................................... 541,663
----------
Net investment income............................................... 4,367,575
Net realized loss on investment transactions........................ (3,998,966)
Net change in unrealized loss on investments........................ (773,951)
----------
Net decrease in net assets resulting from operations................ $ (405,342)
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
GS SHORT DURATION TAX-FREE FUND
--------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
OCTOBER 31,
--------------------------
1994 1993
------------ ------------
<S> <C> <C>
From Operations:
Net investment income............................. $ 4,367,575 $ 2,513,754
Net realized gain (loss) on investment
transactions..................................... (3,998,966) 960,540
Net change in unrealized gain (loss) on
investments...................................... (773,951) 182,054
------------ ------------
Net increase (decrease) in net assets resulting
from operations.................................. (405,342) 3,656,348
------------ ------------
Distributions to Shareholders from:
Net investment income
Institutional shares............................ (4,170,854) (2,507,576)
Administration shares........................... (193,928) (6,178)
Service shares.................................. (2,793) --
------------ ------------
(4,367,575) (2,513,754)
------------ ------------
Net realized gain on investments
Institutional shares............................ (931,790) --
Administration shares........................... (784) --
------------ ------------
(932,574) --
------------ ------------
Total distributions to shareholders.............. (5,300,149) (2,513,754)
------------ ------------
From Share Transactions:
Proceeds from sale of shares...................... 117,286,528 187,042,675
Reinvestment of dividends......................... 4,009,244 2,020,772
Cost of shares repurchased........................ (144,689,428) (88,093,734)
------------ ------------
Increase (decrease) in net assets resulting from
share transactions............................... (23,393,656) 100,969,713
------------ ------------
Total increase (decrease).......................... (29,099,147) 102,112,307
Net Assets:
Beginning of year................................. 116,713,686 14,601,379
------------ ------------
End of year....................................... $ 87,614,539 $116,713,686
============ ============
Accumulated undistributed net investment income.... $44,725 --
============ ============
Summary of Share Transactions:
Institutional shares:
Shares sold....................................... 9,879,219 18,266,650
Reinvestment of dividends......................... 399,664 198,140
Shares repurchased................................ (13,045,936) (8,619,557)
------------ ------------
(2,767,053) 9,845,233
------------ ------------
Administration shares:
Shares sold....................................... 1,221,381 100,388
Reinvestment of dividends......................... 517 228
Shares repurchased................................ (915,914) (11,593)
------------ ------------
305,984 89,023
------------ ------------
Service shares:
Shares sold....................................... 468,342 --
Reinvestment of dividends......................... 22 --
Shares repurchased................................ (463,868) --
------------ ------------
4,496 --
------------ ------------
Increase (decrease) in shares outstanding.......... (2,456,573) 9,934,256
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
GS SHORT DURATION TAX-FREE FUND
---------
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
RATIOS
ASSUMING NO WAIVER
DISTRIBUTIONS OF ADVISORY FEES
INCOME FROM INVESTMENT OPERATIONS TO SHAREHOLDERS FROM OR EXPENSE LIMITATIONS
------------------------------------------ ----------------------- ----------------------
TOTAL
NET ASSET NET REALIZED INCOME (LOSS) NET ASSET RATIO OF NET
<CAPTION> VALUE AT NET AND UNREALIZED FROM NET NET REALIZED VALUE AT EXPENSES TO
BEGINNING INVESTMENT GAIN (LOSS) ON INVESTMENT INVESTMENT GAIN ON END OF TOTAL AVERAGE NET
OF PERIOD INCOME INVESTMENTS OPERERATIONS INCOME INVESTMENTS PERIOD RETURN(C) ASSETS
--------- ---------- -------------- ------------ ---------- ----------- --------- -------- -----------
FOR THE YEARS ENDED OCTOBER 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1994-Institu-
tional shares... $10.23 $0.3787(a) $(0.3575)(a) $0.0212 (a) $(0.3787) $(0.0825) $9.79 0.17% 0.45%
1994-Administra-
tion shares..... 10.23 0.3537(a) (0.3575)(a) (0.0038)(a) (0.3537) (0.0825) 9.79 (0.11) 0.70
1994-Service
shares (b)...... 9.86 0.0475(a) (0.0700)(a) (0.0225)(a) (0.0475) -- 9.79 (0.32)(d) 0.95(e)
1993-Institu-
tional shares... 9.93 0.3834 0.3000 0.6834 (0.3834) -- 10.23 7.03 0.41
1993-Administra-
tion shares (b). 10.16 0.1555 0.0720 0.2275 (0.1555) -- 10.23 2.28 (d) 0.70(e)
FOR THE PERIOD OCTOBER 1, 1992 (COMMENCEMENT OF OPERATIONS) THROUGH OCTOBER
31,
1992-Institu-
tional shares... 10.00 0.0341 (0.0700) (0.0359) (0.0341) -- 9.93 (0.34)(d) 0.05(e)
<CAPTION>
RATIO OF NET RATIO OF NET
INVESTMENT NET ASSETS RATIO OF INVESTMENT
INCOME TO PORTFOLIO AT END OF EXPENSES TO INCOME TO
AVERAGE NET TURNOVER PERIOD AVERAGE NET AVERAGE NET
ASSETS RATIO (IN 000'S) ASSETS ASSETS
------------ ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
1994-Institu-
tional shares... 3.74% 354.00% $83,704 0.61% 3.58%
1994-Administra-
tion shares..... 3.51 354.00 3,866 0.86 3.35
1994-Service
shares (b)...... 4.30(e) 354.00 44 1.11(e) 4.14(e)
1993-Institu-
tional shares... 3.70 404.60 115,803 1.06 3.05
1993-Administra-
tion shares (b). 3.32(e) 404.60 911 1.07(e) 2.95(e)
FOR THE PERIOD OCTOBER 1, 1992 (COMMENCEMENT OF OPERATIONS) THROUGH OCTOBER
31,
1992-Institu-
tional shares... 4.58(e) 31.19(d) 14,601 2.68(e) 1.95(e)
</TABLE>
----
(a) Calculated based on the average shares outstanding methodology.
(b) Administration and service share activity commenced on May 20, 1993 and
September 20, 1994, respectively.
(c) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions and a complete redemption
of the investment at the net asset value at the end of the period.
(d) Not annualized.
(e) Annualized.
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
GS SHORT DURATION TAX-FREE FUND
--------------
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1994
1. ORGANIZATION
GS Short Duration Tax-Free Fund (the "Fund") is a no-load, diversified
portfolio of Goldman Sachs Trust (the "Trust"), a Massachusetts business trust.
The Trust is registered under the Investment Company Act of 1940 (as amended)
as an open-end, management investment company. The Fund offers three classes of
shares: Institutional shares, Administration shares and Service shares. The
Service shares commenced operations on September 20, 1994.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Fund which are in conformity with those generally accepted in the investment
company industry:
A. Investment Valuation
Investments in portfolio securities for which accurate market quotations are
readily available are valued on the basis of quotations provided by dealers in
such securities or furnished by a pricing service. Portfolio securities for
which accurate quotations are not readily available are valued at fair value
using methods determined in good faith under procedures established by the
Trust's Board of Trustees and may include yield equivalents or a pricing
matrix. Short-term debt obligations maturing in sixty days or less are valued
at amortized cost.
B. Security Transactions and Investment Income
Security transactions are recorded on the trade date. Realized gains and
losses on sales of portfolio securities are calculated on the identified cost
basis. Interest income is recorded on the basis of interest accrued. Market
premiums resulting from the purchase of long-term debt securities are amortized
to interest income over the life of the security with a corresponding decrease
in the cost basis of that security.
C. Federal Taxes
It is the Fund's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute
each year substantially all of its investment company tax-exempt and taxable
(if any) income to its shareholders. Accordingly, no federal tax provisions are
required.
D. Deferred Organization Expenses
Organization-related costs have been deferred and are being amortized on a
straight-line basis over a period of five years.
13
<PAGE>
GS SHORT DURATION TAX-FREE FUND
--------------
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
OCTOBER 31, 1994
2. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
E. Expenses
Expenses incurred by the Trust that do not specifically relate to an
individual portfolio of the Trust are allocated to the portfolios based on each
portfolio's relative average net assets for the period.
Shareholders of Administration and Service shares bear all expenses and fees
paid to service organizations for their services with respect to such shares as
well as other expenses (subject to expense limitations) which are directly
attributable to such shares.
3. AGREEMENTS
Goldman Sachs Asset Management ("GSAM"), a separate operating division of
Goldman, Sachs & Co. ("Goldman Sachs"), serves as the Fund's investment adviser
pursuant to an Investment Advisory Agreement. Under the Investment Advisory
Agreement, GSAM, subject to the general supervision of the Trust's Board of
Trustees, manages the Fund's portfolio and provides for the administration of
the Fund's other affairs. As compensation for the services rendered under the
Investment Advisory Agreement and the assumption of the expenses related
thereto, GSAM is entitled to a fee, computed daily and payable monthly, at an
annual rate equal to .40% of the Fund's average daily net assets.
GSAM has voluntarily agreed to limit certain of the Fund's expenses
(excluding the investment advisory fee payable to GSAM, taxes, interest,
brokerage and extraordinary expenses such as litigation, indemnification and
fees paid to service organizations) to the extent that such expenses exceed
.05% per annum of the Fund's average daily net assets. The amount reimbursable
to the Fund at October 31, 1994 was approximately $23,000 and is included in
"Other assets" in the accompanying Statement of Assets and Liabilities.
Goldman Sachs serves as Distributor of shares of the Fund pursuant to a
Distribution Agreement and receives no compensation in this capacity. Goldman
Sachs also serves as Transfer Agent of the Fund for a fee.
4. INVESTMENT TRANSACTIONS
Purchases and proceeds of sales or maturities of long-term securities for the
year ended October 31, 1994, were as follows:
<TABLE>
<S> <C>
Purchases of long-term securities.............................. $399,525,112
Sales or maturities of long-term securities.................... $420,819,449
</TABLE>
14
<PAGE>
GS SHORT DURATION TAX-FREE FUND
--------------
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
OCTOBER 31, 1994
5. ADMINISTRATION AND SERVICE PLANS
The Fund has adopted Administration and Service Plans. These plans allow for
Administration shares and Service shares, respectively, to compensate service
organizations for providing varying levels of account administration and
shareholder liaison services to their customers who are beneficial owners of
such shares. The Administration and Service Plans provide for compensation to
the service organizations in an amount up to .25% and .50% (on an annualized
basis), respectively, of the average daily net asset value of the respective
shares.
6. CERTAIN RECLASSIFICATIONS
In accordance with statement of Position 93-2, the Fund has reclassified
$44,725 from paid-in capital to accumulated undistributed net investment
income. These reclassifications have no impact on the net asset value of the
Fund and are designed to present the Fund's capital accounts on a tax basis.
15
<PAGE>
--------------------------------------------------------------------------------
THIS ANNUAL REPORT IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS
ONLY WHEN PRECEDED OR ACCOMPANIED BY THE GS SHORT DURATION TAX-FREE PROSPECTUS
WHICH CONTAINS FACTS CONCERNING THE FUND'S OBJECTIVES AND POLICIES, MANAGEMENT,
EXPENSES AND OTHER INFORMATION.
<PAGE>
GS SHORT DURATION TAX-FREE FUND
ANNUAL REPORT
OCTOBER 31, 1994
TRUSTEES
Paul C. Nagel, Jr., Chairman
Ashok N. Bakhru
Marcia L. Beck
David B. Ford
Robert P. Mayo
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
OFFICERS
Marcia L. Beck President
Stephen H. Hopkins Vice President
John W. Mosior Vice President
Nancy L. Mucker Vice President
Pauline Taylor Vice President
Scott M. Gilman Treasurer
Michael J. Richman Secretary
Howard B. Surloff Assistant Secretary
INVESTMENT ADVISER
GOLDMAN SACHS ASSET MANAGEMENT,
A SEPARATE OPERATING DIVISION OF GOLDMAN, SACHS & CO.
DISTRIBUTOR AND TRANSFER AGENT
GOLDMAN, SACHS & CO.
<PAGE>
ANNUAL REPORT
-----------------------------
OCTOBER 31, 1994
GS CORE FIXED INCOME FUND
---------------------------
<PAGE>
DEAR SHAREHOLDERS:
On behalf of Goldman Sachs, we welcome this opportunity to review the
performance and portfolio composition of the GS Core Fixed Income Fund for the
period from the fund's inception on January 5, 1994 through October 31, 1994.
We will also provide a brief overview of the bond market during the period.
To review briefly, the GS Core Fixed Income Fund seeks to achieve a total
return that exceeds the total return of its benchmark, the Lehman Brothers
Aggregate Bond Index. The fund may invest in a diversified portfolio of fixed
income securities that may include U.S. Treasury, agency, corporate, mortgage-
backed and asset-backed securities, as well as a limited amount of nondollar-
denominated fixed income securities. While the fund's performance will be
measured against the Index, its portfolio is not required to hold the same
securities or match the sector weightings of the Index. Every security in the
portfolio must be rated at least investment grade by an independent rating
agency, or be considered to be of equivalent quality by GSAM at the time it is
purchased.
The Impact of Higher Short-Term Interest Rates on the Bond Market
During the period under review, the bond market has been extremely volatile,
with prices falling as the Federal Reserve moved aggressively in an effort to
head off inflation. From February 4 through October 31, 1994, the Fed raised
the federal funds rate five times by a total of 175 basis points to 4.75%.
What has been basically good news for the economy has translated into bad
news for the bond market this year. The U.S. economy recorded an annualized
growth rate of approximately 6.3% for the fourth quarter of 1993, serving as
the catalyst for the first Fed tightening in February. As 1994 progressed,
economic growth continued well above the targeted non-inflationary rate of 2.5%
to 3.0%, which, combined with a weakening of the U.S. dollar, caused the Fed to
continue to raise interest rates.
Recently, a number of key economic indicators show signs that robust growth
is continuing, keeping inflation fears alive. These include higher commodity
prices, gradually rising costs of intermediate goods, and plant capacity
utilization running at 84.9%, the highest level in well over a decade. In
addition, unemployment has declined to approximately 5.9%.
Meanwhile, long-term interest rates (as measured by 30-year Treasury bonds)
have also escalated, hovering around 8% recently compared with less than 6%
last October. As interest rates rose across the maturity spectrum, bond prices
fell.
Fund Performance Review
In this turbulent environment, during the period under review the fund had a
total return of -3.00% based on net asset value (4.71% from monthly
distributions and -7.71% from share price depreciation) compared with a return
of -3.28% for the Lehman Brothers Aggregate Bond Index (the "Index").
The fund's performance reflects the negative impact of higher interest rates
on bond prices in general. However, we are pleased to note that the fund
outperformed the Index in accordance with
<PAGE>
its investment objective. That was accomplished primarily as a consequence of
our overweighting the corporate, mortgage and asset-backed sectors and
underweighting Treasuries and agency debentures relative to the Index. In
addition, our selection of individual securities, which provided superior
relative value within sectors, also helped performance.
Portfolio Composition and Investment Strategies
As of October 31, the fund was significantly overweighted in non-Treasury
sectors. The pie charts below show the fund's asset mix compared with its
benchmark as of October 31, 1994:
[ART - Two pie charts. One pie chart depicts the portfolio
composition of the GS Core Fixed Income Fund. The
other pie chart depicts the portfolio composition of
the Lehman Brothers Aggregate Bond Index. See
information below.]
<TABLE>
<CAPTION>
PORTFOLIO COMPOSITION PORTFOLIO COMPOSITION OF THE
OF THE GS CORE FIXED LEHMAN BROTHERS AGGREGATE
INCOME FUND BOND INDEX
--------------------- ----------------------------
<S> <C> <C> <C>
US. Treasuries 24.4% US. Treasuries 47.2%
Fixed Rate Mortgages 26.8% Fixed Rate Mortgages 28.4%
ARMS 1.9% Corporates 16.1%
PAC CMOs 1.7% Asset-backed 1.5%
Corporates 34.7% Agency Debentures 6.8%
Asset-backed 9.3%
Agency Debentures -
Cash 1.2%
</TABLE>
. Corporate bonds represented the fund's largest sector, accounting for
34.7% of the fund's assets--more than double the Index weighting. Our
strategy was based on the incremental yield offered by corporates, as well
as our positive outlook on the sector. Within the sector, we emphasized
the industrial (13.4%) and financial (18.5%) subsectors, while
significantly underweighting utilities (1.2%) compared with the Index.
2
<PAGE>
. During the second quarter, we added a new position in short-duration,
asset-backed securities (ABS) -- primarily credit card receivables -- of
9.3% versus 1.5% for the Index. ABS have high credit quality and offer
relatively stable spreads while providing incremental yield over
Treasuries.
. The portfolio's weighting of fixed rate, pass-through mortgages is
roughly similar to that of the Index (26.8% versus 28.4%). However, our
security selection differed from the Index. Using our proprietary
tactical trading model, we shifted our overweighting between coupons and
issuers (Government National Mortgage Association, Federal National
Mortgage Association and Federal Home Loan Mortgage Corporation)
according to our assessment of their relative values.
. We also had small positions in adjustable rate mortgages (ARMs) (1.9%)
and planned amortization class (PAC) collateralized mortgage obligations
(CMOs) (1.7%). ARMs provided flexibility to add yield in a rising rate
environment as their coupons periodically reset. PAC CMOs also provide
relatively stable cash flows.
. In terms of credit quality, more than half the portfolio is invested in
government securities, with an additional 9% in AAA and 2% in AA
securities. The fund is significantly overweighted in lower quality
credits -- A and BBB securities -- (34% versus 12% for the Index) because
of their potential to add incremental yield to the portfolio. GSAM has
full access to Goldman Sachs' extensive credit research.
. We will continue to target the fund's duration (4.76 years as of October
31) to that of the Index.
The Use of Derivatives in the Portfolio
During the past year, there has been a great deal of investor concern on the
subject of derivatives. In the broadest sense, any security that derives its
value from another security may be called a derivative. However, derivatives
vary with respect to their risk and how they are used. As mentioned, the fund
held a very small position in PAC CMOs (1.7%), considered to be a low-risk
mortgage derivative. As noted previously, the fund held 9.3% in asset-backed
securities. In addition, we have occasionally used covered mortgage dollar
rolls (transactions that involve selling mortgage securities owned by the fund
and simultaneously contracting to buy back similar mortgage securities with the
same coupon on a specified future date) to take advantage of short-term supply
and demand imbalances in the mortgage settlement process.
Our Outlook and Strategy Going Forward
On November 15, the Federal Reserve raised interest rates another 75 basis
points, and additional rate hikes are possible in the coming months. In the
near term, the outlook for the fixed income market remains uncertain. As a
result, we are targeting the fund's duration to the duration of its benchmark.
We will also continue to overweight the corporate and asset-backed sectors
relative to the Index. Security selection as well as sector weightings will be
critical in the difficult markets that lie ahead. We continue to use yield
curve strategies that will enable us to allocate cash flows at what we believe
will be the most advantageous place on the yield curve.
3
<PAGE>
As always, we will make full use of Goldman Sachs' extensive economic,
government, mortgage and credit research in managing the fund.
In conclusion, we thank you for your support during this difficult period. We
will continue to do our best to help you meet your investment goals in the year
ahead.
Sincerely,
/s/ Jonathan A. Beinner
Jonathan A. Beinner
/s/ Thomas F. Dunn
Thomas F. Dunn
/s/ Theodore T. Sotir
Theodore T. Sotir
Portfolio Managers
GS Core Fixed Income Fund
December 15, 1994
4
<PAGE>
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the period ended October 31, 1994. The
performance for the GS Core Fixed Income Fund based on the Fund's normal
minimum initial investment of $50,000, is compared to its benchmark, the Lehman
Brothers Aggregate Bond Index ("Lehman Aggregate Index"). All performance data
shown represents past performance and should not be considered indicative of
future performance which will fluctuate as market conditions change. The
investment return and principal value of an investment will fluctuate with
changes in market conditions so that an investor's shares, when redeemed, may
be worth more or less than their original cost.
[ART - One graph depicting information for the GS
Core Fixed Income Fund. See information
below.]
<TABLE>
<CAPTION>
Lehman
Aggregate
GS Core Fixed Income Index
-------------------- ---------
<S> <C> <C>
January 5, 1994 (a) $50,000 $50,000
October 31, 1994 $48,498 $46,980
Aggregate Total Return(b): Since Inception(a) - (3.00%)
</TABLE>
(a) Commenced operations January 5, 1994.
(b) An aggregate total return (not annualized) is shown instead of an average
annual total return since the Fund has not completed a full twelve months
of operations.
5
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Trustees of
GS Core Fixed Income Fund:
We have audited the accompanying statement of assets and liabilities of GS
Core Fixed Income Fund (a portfolio of Goldman Sachs Trust, a Massachusetts
business trust), including the statement of investments, as of October 31, 1994
and the related statement of operations, the statement of changes in net assets
and the financial highlights for the period from January 5, 1994 (commencement
of operations) to October 31, 1994. These financial statements and the
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1994 by correspondence with the custodian and brokers. As to
securities purchased but not yet received, we requested confirmation from
brokers and, when replies were not received, we carried out alternative
auditing procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights
referred to above present fairly, in all material respects, the financial
position of the GS Core Fixed Income Fund of the Goldman Sachs Trust as of
October 31, 1994, and the results of its operations, the changes in its net
assets and the financial highlights for the period from January 5, 1994
(commencement of operations) to October 31, 1994, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts,
December 12, 1994
6
<PAGE>
GS CORE FIXED INCOME FUND
---------------
STATEMENT OF INVESTMENTS
OCTOBER 31, 1994
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY
AMOUNT RATE DATE VALUE
--------- -------- -------- -----
CORPORATE BONDS--32.7%
FINANCE BONDS--18.3%
Bancponce Financial Corp.
<S> <C> <C> <C>
$ 500,000 5.17% 07/15/96 $ 483,655
BankAmerica Corp.
200,000 7.50 03/15/97 200,104
Chrysler Financial Corp.
450,000 7.32 11/04/96 449,980
Continental Bank N.A.
525,000 11.25 07/01/01 578,486
Countrywide Funding Corp.
200,000 7.71 08/09/01 193,904
First USA Bank
200,000 5.05 12/27/95 196,668
400,000 5.05 12/29/95 393,288
Ford Capital Corp.
200,000 9.38 01/01/98 209,726
250,000 9.50 07/01/01 265,755
Ford Motor Credit Corp.
200,000 9.13 12/15/95 204,706
General Motors Acceptance Corp.
125,000 5.50(a) 10/15/02 124,089
Golden West Financial Corp.
350,000 8.63 08/30/98 357,809
News America Holdings Inc.
50,000 9.13 10/15/99 51,162
700,000 7.50 03/01/00 665,105
Security Pacific Corp.
95,000 11.50 11/15/00 108,872
-----------
Total Finance Bonds........................... $ 4,483,309
-----------
INDUSTRIAL BONDS--13.3%
Auburn Hills Trust
$ 200,000 12.38% 05/01/20 $ 261,608
Coastal Corp.
250,000 10.38 10/01/00 269,403
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY
AMOUNT RATE DATE VALUE
--------- -------- -------- -----
<S> <C> <C> <C>
CORPORATE BONDS--(CONTINUED)
INDUSTRIAL BONDS--(CONTINUED)
Comdisco Inc.
$ 400,000 8.95% 05/15/95 $ 404,920
300,000 9.75 01/15/97 312,678
General Motors Corp.
150,000 8.95 07/02/09 150,345
RJR Nabisco Inc.
150,000 8.75 04/15/04 135,699
TKR Cable
250,000 10.50 10/30/07 262,035
Tele Communications Inc.
400,000 6.10 05/15/96 393,420
Tenneco Inc.
450,000 10.00 08/01/98 478,382
Time Warner Inc.
600,000 7.45 02/01/98 589,158
-----------
Total Industrial Bonds........................ $ 3,257,648
-----------
UTILITY BONDS--1.1%
Panhandle Eastern Pipeline
$ 275,000 9.88% 10/15/96 $ 282,208
-----------
Total Utility Bonds........................... $ 282,208
-----------
Total Corporate Bonds
(cost $8,160,922)............................ $ 8,023,165
-----------
GOVERNMENT BONDS--1.6%
Province of Ontario
$ 100,000 15.75% 03/15/12 $ 122,082
Province of Quebec
220,000 13.25 09/15/14 271,522
-----------
Total Government Bonds
(cost $405,810).............................. $ 393,604
-----------
MORTGAGE BACKED OBLIGATIONS--30.1%
Fixed Rate Federal National Mortgage
Association (FNMA)
$1,001,816 7.00% 06/01/24 $ 913,531
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
GS CORE FIXED INCOME FUND
---------------
STATEMENT OF INVESTMENTS--(CONTINUED)
OCTOBER 31, 1994
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY
AMOUNT RATE DATE VALUE
--------- -------- -------- -----
MORTGAGE BACKED OBLIGATIONS--(CONTINUED)
Fixed Rate Government National Mortgage
Association (GNMA)
<S> <C> <C> <C>
$ 103,650 9.00% 06/15/16 $ 106,047
2,063,546 7.50 10/15/22 1,920,387
3,001,992 7.00 09/15/23 2,696,164
1,000,045 6.50 11/15/23 865,351
FNMA Series 1993-58, Class G
500,000 5.50 12/25/20 419,695
Prudential Home Series 1992-94, Class A1(a)
453,451 7.50 09/25/22 459,532
-----------
Total Mortgage Backed Obligations
(cost $7,655,588)............................. $ 7,380,707
-----------
ASSET BACKED SECURITIES--9.1%
Discover Card Trust Series 1991-C, Class A
$ 1,020,000 7.20% 04/16/98 $ 1,024,141
Ford Credit Auto Loan Master Trust
Series 1992-3, Class A
200,000 5.63 10/15/97 198,250
Standard Credit Card Master Trust
Series 92-2A, Class A
440,000 5.88 07/07/95 438,627
Standard Credit Card Trust Series 90-5,
Class A
550,000 9.38 08/10/96 559,796
-----------
Total Asset Backed Securities
(cost $2,244,333)............................. $ 2,220,814
-----------
U.S. TREASURY OBLIGATIONS--24.2%
United States Treasury Bond
$ 200,000 7.88% 02/15/21 $ 194,718
United States Treasury Interest Only
Stripped Securities(b)
40,000 7.32 05/15/98 31,022
390,000 7.61 08/15/00 253,188
100,000 8.00 08/15/04 46,404
80,000 8.04 02/15/05 35,590
2,050,000 8.28 08/15/09 619,346
30,000 8.30 02/15/10 8,678
990,000 8.34 08/15/17 154,490
440,000 8.32 05/15/19 59,673
440,000 8.31 11/15/19 57,499
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY
AMOUNT RATE DATE VALUE
--------- -------- -------- -----
<S> <C> <C> <C>
U.S. TREASURY OBLIGATIONS--(CONTINUED)
United States Treasury Notes
$ 600,000 6.50% 05/15/97 $ 592,872
800,000 8.25 07/15/98 823,624
1,150,000 6.75 06/30/99 1,118,422
680,000 6.38 08/15/02 627,440
1,230,000 6.25 02/15/03 1,118,722
United States Treasury Principal Only
Stripped Securities(b)
820,000 8.30 02/15/19 114,292
500,000 8.27 02/15/20 64,650
-----------
Total U.S. Treasury Obligations
(cost $6,130,482)............................ $ 5,920,630
-----------
REPURCHASE AGREEMENTS--1.2%
Joint Repurchase Agreement Account
$ 300,000 4.83% 11/01/94 $ 300,000
-----------
Total Repurchase Agreements
(cost $300,000).............................. $ 300,000
-----------
Total Investments
(cost $24,897,135(c))........................ $24,238,920
===========
</TABLE>
<TABLE>
<S> <C>
FEDERAL INCOME TAX INFORMATION:
Gross unrealized loss for investments
in which cost exceeds value................. $(660,108)
Gross unrealized gain for investments
in which value exceeds cost................. 1,893
---------
Net unrealized loss.......................... $(658,215)
=========
</TABLE>
-------------------------------------------------------------------------------
(a) Variable rate securities. Coupon rates disclosed are those which are in
effect at October 31, 1994.
(b) The interest rates disclosed for these securities represent effective
yields to maturity.
(c) The amount stated also represents aggregate cost for federal income tax
purposes.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
GS CORE FIXED INCOME FUND
----------------
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1994
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (cost $24,897,135)............ $24,238,920
Receivables:
Investment securities sold....................................... 711,300
Interest......................................................... 350,471
Deferred organization expenses, net............................... 103,861
Other assets...................................................... 98,410
-----------
Total assets................................................. 25,502,962
-----------
LIABILITIES
Payables:
Investment securities purchased.................................. 935,884
Investment adviser fees.......................................... 10,376
Accrued expenses and other liabilities............................ 48,960
-----------
Total liabilities............................................ 995,220
-----------
NET ASSETS
Paid-in capital applicable to 2,652,854 outstanding Institutional
shares,
par value $.001 per share (unlimited number of shares autho-
rized)........................................................... 25,604,198
Accumulated undistributed net investment income................... 20,085
Accumulated net realized loss on investment transactions.......... (458,326)
Net unrealized loss on investments................................ (658,215)
-----------
Net assets................................................... $24,507,742
===========
Net asset value, offering and redemption price per Institutional
share
(net assets/shares outstanding).................................. $9.24
=====
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
GS CORE FIXED INCOME FUND
----------------
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED OCTOBER 31, 1994*
<TABLE>
<S> <C>
Investment income:
Interest income..................................................... $ 975,369
---------
Expenses:
Investment adviser fees............................................. 56,255
Professional fees................................................... 43,345
Registration fees................................................... 34,518
Custodian fees...................................................... 32,066
Amortization of deferred organization expenses...................... 20,418
Transfer agent fees................................................. 5,637
Trustee fees........................................................ 700
Other............................................................... 12,162
---------
Total expenses.................................................. 205,101
Less--Expenses reimbursable by GSAM................................. (141,815)
---------
Net expenses.................................................... 63,286
---------
Net investment income................................................ 912,083
Net realized loss on investment transactions......................... (458,326)
Net change in unrealized loss on investments......................... (658,215)
---------
Net decrease in net assets resulting from operations................. $(204,458)
=========
</TABLE>
--------
* For the period from January 5, 1994 (commencement of operations) to October
31, 1994.
The accompanying notes are an integral
part of these financial statements.
10
<PAGE>
GS CORE FIXED INCOME FUND
----------------
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD ENDED OCTOBER 31, 1994*
<TABLE>
<S> <C>
From Operations:
Net investment income............................................. $ 912,083
Net realized loss on investment transactions...................... (458,326)
Net change in unrealized loss on investments...................... (658,215)
-----------
Net decrease in net assets resulting from operations.............. (204,458)
-----------
Distributions to Institutional Shareholders:
From net investment income........................................ (912,083)
-----------
From Share Transactions:
Proceeds from sale of shares...................................... 24,765,017
Reinvestment of dividends......................................... 911,363
Cost of shares repurchased........................................ (52,097)
-----------
Increase in net assets resulting from share transactions.......... 25,624,283
-----------
Total increase..................................................... 24,507,742
Net Assets:
Beginning of period--Inception.................................... --
-----------
End of period..................................................... $24,507,742
===========
Accumulated undistributed net investment income.................... $20,085
===========
Summary of Institutional Share Transactions:
Shares sold....................................................... 2,561,774
Reinvestment of dividends......................................... 96,676
Shares repurchased................................................ (5,596)
-----------
Increase in shares outstanding..................................... 2,652,854
===========
</TABLE>
--------
* For the period from January 5, 1994 (commencement of operations) to October
31, 1994.
The accompanying notes are an integral
part of these financial statements.
11
<PAGE>
GS CORE FIXED INCOME FUND
---------
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
INCOME FROM INVESTMENT OPERATIONS
------------------------------------
NET ASSET NET REALIZED TOTAL DISTRIBUTIONS TO NET ASSET
VALUE AT NET AND UNREALIZED LOSS FROM SHAREHOLDERS FROM VALUE AT
BEGINNING INVESTMENT LOSS ON INVESTMENT NET INVESTMENT END OF TOTAL
OF PERIOD INCOME INVESTMENTS(A) OPERATIONS INCOME PERIOD RETURN(B)
--------- ---------- -------------- ---------- ----------------- --------- ---------
FOR THE PERIOD JANUARY 5, 1994 (COMMENCEMENT OF OPERATIONS) THROUGH OCTOBER 31,
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1994-
Institutional
Shares.......... $10.00 $0.4648 $(0.7617) $(0.2969) $(0.4648) $9.24 (3.00)%
<CAPTION>
RATIOS ASSUMING NO
EXPENSE LIMITATIONS
------------------------
RATIO OF NET RATIO OF NET
RATIO OF NET INVESTMENT NET ASSETS RATIO OF INVESTMENT
EXPENSES TO INCOME TO PORTFOLIO AT END OF EXPENSES TO INCOME TO
AVERAGE NET AVERAGE NET TURNOVER PERIOD AVERAGE NET AVERAGE NET
ASSETS ASSETS RATE(C) (IN 000'S) ASSETS ASSETS
------------ ------------ --------- ---------- ----------- ------------
FOR THE PERIOD JANUARY 5, 1994 (COMMENCEMENT OF OPERATIONS) THROUGH OCTOBER 31,
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1994-
Institutional
Shares.......... 0.45%(d) 6.48%(d) 288.25% $24,508 1.46%(d) 5.47%(d)
</TABLE>
----
(a) Includes balancing effect of calculating per share amounts.
(b) 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.
(c) Includes effect of mortgage dollar roll transactions.
(d) Annualized.
The accompanying notes are an integral
part of these financial statements.
12
<PAGE>
GS CORE FIXED INCOME FUND
----------------
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1994
1. ORGANIZATION
The GS Core Fixed Income Fund (the "Fund") is a no-load, diversified
portfolio of Goldman Sachs Trust (the "Trust"), a Massachusetts business trust.
The Trust is registered under the Investment Company Act of 1940 (as amended)
as an open-end, management investment company. The Fund offers three classes of
shares: Institutional shares, Administration shares and Service shares. As of
October 31, 1994, the Administration and Service shares had not been issued.
The Fund commenced operations on January 5, 1994.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Fund which are in conformity with those generally accepted in the investment
company industry:
A. Investment Valuation
Investments in corporate, mortgage backed, asset backed and U.S. Treasury
obligations are valued based on yield equivalents, a pricing matrix or other
sources, under valuation procedures established by the Trust's Board of
Trustees. Other portfolio securities for which accurate market quotations are
readily available are valued on the basis of quotations furnished by a pricing
service or provided by dealers in such securities. Portfolio securities for
which accurate market quotations are not readily available are valued in
accordance with the Trust's valuation procedures. Short-term debt obligations
maturing in sixty days or less are valued at amortized cost.
B. Security Transactions and Investment Income
Security transactions are recorded on the trade date. Realized gains and
losses on sales of portfolio securities are calculated on the identified cost
basis. Interest income is recorded on the basis of interest accrued. Premiums
on interest-only securities and on collateralized mortgage obligations with
nominal principal amounts are amortized, on an effective yield basis, over the
expected lives of the respective securities, taking into account actual
principal prepayment experience and estimates of future principal prepayments.
Certain mortgage security paydown gains and losses increase or decrease taxable
ordinary income available for distribution and are classified as interest
income in the accompanying Statement of Operations. Original issue discounts,
market discounts and market premiums, on debt securities are amortized to
interest income over the life of the security with a corresponding adjustment
in the cost basis of that security.
C. Mortgage Dollar Rolls
The Fund may enter into mortgage "dollar rolls" in which the Fund sells
securities in the current month for delivery and simultaneously contracts with
the same counterparty to repurchase similar (same type, coupon and maturity)
but not identical securities on a specified future date. The Fund loses the
right to receive principal and interest paid on the securities sold. However,
the Fund benefits to the extent of any price received for the securities sold
and the lower forward price for the future purchase (often referred to as the
"drop") or fee income plus the interest earned on the cash proceeds of the
securities sold until the settlement date of the forward purchase. The Fund
will hold and maintain in a segregated account, until the settlement date, cash
or liquid, high grade debt securities in an amount equal to the forward
purchase price. For financial reporting and tax
13
<PAGE>
GS CORE FIXED INCOME FUND
----------------
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
OCTOBER 31, 1994
2. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
reporting purposes, the Fund treats mortgage dollar rolls as two separate
transactions; one involving the purchase of a security and a separate
transaction involving a sale.
D. Federal Taxes
It is the Fund's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute
each year substantially all of its investment company taxable income to its
shareholders. Accordingly, no federal tax provisions are required.
At October 31, 1994, the Fund had approximately $458,000 of capital loss
carryforward for U.S. Federal tax purposes. This amount is available to be
carried forward to offset future capital gains to the extent permitted by
applicable laws or regulations. The capital loss carryforward will expire in
2002.
E. Deferred Organization Expenses
Organization-related costs are being amortized on a straight-line basis over
a period of five years. Included in "Accrued expenses and other liabilities" in
the accompanying Statements of Assets and Liabilities is approximately $10,000
payable to Goldman, Sachs & Co. ("Goldman Sachs") related to the estimated
organization costs for the portfolio.
F. Expenses
Expenses incurred by the Trust that do not specifically relate to an
individual portfolio of the Trust are allocated to the portfolios based on each
portfolio's relative average net assets for the period.
Shareholders of Administration and Service shares will bear all expenses and
fees paid to service organizations for their services with respect to such
shares as well as other expenses (subject to expense limitations) which are
directly attributable to such shares.
3. AGREEMENTS
Goldman Sachs Asset Management ("GSAM"), a separate operating division of
Goldman Sachs, serves as the Fund's investment adviser pursuant to an
Investment Advisory Agreement. Under the Investment Advisory Agreement, GSAM,
subject to the general supervision of the Trust's Board of Trustees, manages
the Fund's portfolio and provides for the administration of the Fund's other
affairs. As compensation for the services rendered under the Investment
Advisory Agreement and the assumption of the expenses related thereto, GSAM is
entitled to a fee, computed daily and payable monthly, at an annual rate equal
to .40% of the Fund's average daily net assets.
GSAM has voluntarily agreed to limit certain of the Fund's expenses
(excluding the investment advisory fee payable to GSAM, taxes, interest,
brokerage, litigation, indemnification, fees paid to service organizations and
other extraordinary expenses) to the extent that such expenses exceed
14
<PAGE>
GS CORE FIXED INCOME FUND
----------------
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
OCTOBER 31, 1994
3. AGREEMENTS--(CONTINUED)
.05% per annum of the Fund's average daily net assets. The amount reimbursable
to the Fund at October 31, 1994 was approximately $62,000 and is included in
""Other assets'' in the accompanying Statement of Assets and Liabilities.
Goldman Sachs serves as Distributor of the shares of the Fund pursuant to a
Distribution Agreement and receives no compensation in this capacity. Goldman
Sachs also serves as Transfer Agent of the Fund for a fee.
4. INVESTMENT TRANSACTIONS
Purchases and proceeds of sales or maturities of long-term securities
(excluding in-kind contributions of approximately $15.9 million in securities
(see Note 9)), for the period from January 5, 1994 to October 31, 1994, were as
follows:
<TABLE>
<S> <C>
Purchases of U.S. Government and agency obligations............. $43,476,774
Purchases (excluding U.S. Government and agency obligations).... $9,487,176
Sales or maturities of U.S. Government and agency obligations... $38,227,269
Sales or maturities (excluding U.S. Government and agency
obligations)................................................... $5,543,977
</TABLE>
5. REPURCHASE AGREEMENTS
During the term of a repurchase agreement, the value of the underlying
securities, including accrued interest, will equal or exceed the value of the
repurchase agreement. The underlying securities for all repurchase agreements
are held in safekeeping in the customer-only account of State Street Bank &
Trust Co., the Fund's custodian, or at subcustodians. GSAM monitors the market
value of the underlying securities by pricing them daily.
6. JOINT REPURCHASE AGREEMENT ACCOUNT
The Fund, together with other registered investment companies having advisory
agreements with GSAM or its affiliates, transfers uninvested cash balances into
a joint account, the daily aggregate balance of which is invested in one or
more repurchase agreements. The underlying securities for the repurchase
agreements are U.S. Treasury obligations and mortgage-related securities issued
by the U.S. Government, its agencies or instrumentalities. As of October 31,
1994, the Fund had a 0.02% undivided interest in the repurchase agreements in
the following joint account which equalled $300,000 in principal amount.
15
<PAGE>
GS CORE FIXED INCOME FUND
----------------
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
OCTOBER 31, 1994
6. JOINT REPURCHASE AGREEMENT ACCOUNT--(CONTINUED)
As of October 31, 1994, the repurchase agreements in the joint account along
with the corresponding underlying securities (including the type of security,
principal amount, interest rate and maturity date) were as follows:
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY
AMOUNT RATE DATE AMORTIZED COST
--------- -------- -------- --------------
<S> <C> <C> <C> <C>
Lehman Brothers, Inc., dated
10/31/94, repurchase price
$175,023,674 (U.S. Treasury
Notes: $178,431,295, 3.875%-
11.250%, 05/15/95-12/31/95).... $175,000,000 4.87% 11/01/94 $ 175,000,000
Lehman Brothers, Inc., dated
10/31/94, repurchase price
$401,154,037 (U.S. Treasury
Notes: $43,092,619, 6.00%-
11.625%, 11/15/94) (U.S.
Treasury Interest-Only Strips:
$55,276,283, 02/15/98-08/15/01)
(U.S. Principal-Only Strips:
$310,720,339, 7.25%-11.625%,
11/15/94-08/15/01)............. 401,100,000 4.85 11/01/94 401,100,000
Lehman Brothers, Inc., dated
10/31/94, repurchase price
$75,010,208 (U.S. Treasury
Notes: $76,477,159, 3.875%-
11.625%, 11/15/94-05/15/95).... 75,000,000 4.90 11/01/94 75,000,000
Merrill Lynch Government
Securities, dated 10/31/94,
repurchase price $340,045,333
(U.S. Treasury Bills:
$277,384,039, 02/02/95-
05/04/95) (U.S. Treasury
Interest-Only Strips:
$9,217,148, 11/15/99) (U.S.
Treasury Principal-Only Strips:
$60,201,060, 7.75%-8.875%,
11/15/99-08/15/01)............. 340,000,000 4.80 11/01/94 340,000,000
Salomon Brothers, Inc., dated
10/31/94, repurchase price
$800,107,111 (U.S. Treasury
Bills: $815,888,382, 03/23/95-
09/21/95) (U.S. Treasury Note:
$205,173, 5.50%, 04/15/00)..... 800,000,000 4.82 11/01/94 800,000,000
--------------
Total Joint Repurchase Agreement Account................... $1,791,100,000
==============
</TABLE>
7. ADMINISTRATION AND SERVICE PLANS
The Fund has adopted Administration and Service Plans. These plans allow for
Administration shares and Service shares, respectively, to compensate service
organizations for providing varying levels of account administration and
shareholder liaison services to their customers who are beneficial owners of
such shares. The Administration and Service Plans provide for compensation to
the service organizations in an amount up to .25% and .50% (on an annualized
basis), respectively, of the average daily net asset value of the respective
shares.
8. CERTAIN RECLASSIFICATIONS
In accordance with Statement of Position 93-2 the Fund has reclassified
$20,085 from paid-in capital to accumulated undistributed net investment
income. These reclassifications have no impact on the net asset value of the
Fund and are designed to present the Fund's capital account on a tax basis.
9. OTHER
For the period ended October 31, 1994, $15.9 million of the shareholder
subscriptions into the Fund were made through in-kind contributions of
securities.
16
<PAGE>
--------------------------------------------------------------------------------
THIS ANNUAL REPORT IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS
ONLY WHEN PRECEDED OR ACCOMPANIED BY THE GS CORE FIXED INCOME FUND PROSPECTUS
WHICH CONTAINS FACTS CONCERNING THE FUND'S OBJECTIVES AND POLICIES, MANAGEMENT,
EXPENSES AND OTHER INFORMATION.
<PAGE>
GS CORE FIXED INCOME FUND
ANNUAL REPORT
OCTOBER 31, 1994
TRUSTEES
Paul C. Nagel, Jr., Chairman
Ashok N. Bakhru
Marcia L. Beck
David B. Ford
Robert P. Mayo
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
OFFICERS
Marcia L. Beck President
Stephen H. Hopkins Vice President
John W. Mosior Vice President
Nancy L. Mucker Vice President
Pauline Taylor Vice President
Scott M. Gilman Treasurer
Michael J. Richman Secretary
Howard B. Surloff Assistant Secretary
INVESTMENT ADVISER
GOLDMAN SACHS ASSET MANAGEMENT
DISTRIBUTOR AND TRANSFER AGENT
GOLDMAN, SACHS & CO.
