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PART B
STATEMENT OF ADDITIONAL INFORMATION
CLASS A SHARES
CLASS B SHARES
GOLDMAN SACHS ADJUSTABLE RATE GOVERNMENT FUND
GOLDMAN SACHS MUNICIPAL INCOME FUND
GOLDMAN SACHS GOVERNMENT INCOME FUND
GOLDMAN SACHS GLOBAL 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 prospectus for the Class A Shares and Class B Shares of Goldman Sachs
Adjustable Rate Government Fund, Goldman Sachs Municipal Income Fund, Goldman
Sachs Government Income Fund, and Goldman Sachs Global Income Fund dated March
1, 1996, as amended and/or supplemented from time to time, which may be obtained
without charge from Goldman, Sachs & Co. by calling the telephone number, or
writing to one of the addresses, listed below. Goldman Sachs Adjustable Rate
Government Fund currently does not offer Class B Shares. This Additional
Statement describes each series of Goldman Sachs Trust, not all of which offer
Class A and Class B Shares.
TABLE OF CONTENTS
Introduction......................................... B-3
Other Investments and Practices...................... B-10
Investment Restrictions.............................. B-51
Management........................................... B-68
Portfolio Transactions............................... B-84
Shares of the Trust.................................. B-85
Net Asset Value...................................... B-89
Taxation............................................. B-90
Performance Information.............................. B-101
Other Information.................................... B-112
Financial Statements................................. B-113
Other Information Regarding Purchases, Redemptions,
Exchanges and Dividends............................ B-114
Distribution and Authorized Dealer Service Plans..... B-117
Appendix A........................................... 1-A
Appendix B........................................... 1-B
Appendix C........................................... 1-C
The date of this Additional Statement is March 1, 1996.
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GOLDMAN SACHS TRUST GOLDMAN, SACHS & CO.
4900 SEARS TOWER DISTRIBUTOR
CHICAGO, ILLINOIS 60606 85 BROAD STREET
NEW YORK, NY 10004
GOLDMAN SACHS ASSET MANAGEMENT
ADVISER TO GOLDMAN SACHS MUNICIPAL INCOME FUND
GOLDMAN SACHS GLOBAL INCOME FUND
GOLDMAN SACHS GOVERNMENT INCOME FUND
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
GOLDMAN SACHS FUNDS GOLDMAN, SACHS & CO.
MANAGEMENT, L.P. TRANSFER AGENT
ADVISER TO GOLDMAN SACHS ADJUSTABLE 4900 SEARS TOWER
RATE GOVERNMENT FUND CHICAGO, ILLINOIS 60606
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
GOLDMAN SACHS ASSET MANAGEMENT INTERNATIONAL
SUBADVISER TO GOLDMAN SACHS
GLOBAL INCOME FUND
140 FLEET STREET
LONDON EC4A 2BJ ENGLAND
TOLL FREE .......800-526-7384
<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 Fund
("Adjustable Rate Fund"), GS Core Fixed Income Fund ("Core Fund"), Goldman Sachs
Global Income Fund ("Global Income Fund"), Goldman Sachs Government Income Fund
("Government Income Fund"), Goldman Sachs Municipal Income Fund ("Municipal
Income Fund"), GS Short Duration Tax-Free Fund ("Short Duration Tax-Free Fund")
and GS Short Duration Government Fund ("Short Duration Government Fund").
Adjustable Rate Fund, Core Fund, Global Income Fund, Government Income Fund,
Municipal Income Fund, Short Duration Tax-Free Fund and Short Duration
Government Fund are each sometimes referred to herein as a "Fund" and
collectively as the "Funds." Short Duration Government Fund, Short Duration
Tax-Free Fund and Core Fund are each authorized to issue three classes of
shares: Institutional Shares, Administration Shares and Service Shares.
Adjustable Rate Fund is authorized to issue four classes of shares:
Institutional Shares, Administration Shares, Service Shares and Class A Shares.
Global Income Fund is authorized to issue four classes of shares: Institutional
Shares, Service Shares, Class A Shares and Class B Shares. Government Income
Fund and Municipal Income Fund are each authorized to issue two classes of
shares: Class A Shares and Class B Shares.
Goldman Sachs Asset Management ("GSAM"), a separate operating division
of Goldman, Sachs & Co. ("Goldman Sachs"), serves as the investment adviser to
Core Fund, Global Income Fund, Government Income Fund, Municipal Income Fund and
Short Tax-Free Duration Fund. In addition, GSAM serves as Global Income Fund's
administrator. Goldman Sachs Asset Management International ("GSAMI" or the
"Subadviser"), an affiliate of Goldman Sachs, serves as subadviser to the Global
Income Fund. Goldman Sachs Funds Management, L.P. ("FMLP"), an affiliate of
Goldman Sachs, serves as the investment adviser to Adjustable Rate Fund and
Short Duration Government Fund. GSAM, GSAMI 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.
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.
However, unlike certificates of deposits, shares of the Funds are not insured by
the Federal Deposit Insurance Corporation.
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The following information relates to and supplements the description of
each Fund's investment policies contained in the Prospectus. See the Prospectus
for a fuller description of each 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.
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.
ADJUSTABLE RATE FUND AND SHORT DURATION GOVERNMENT FUND
Adjustable Rate Fund and Short Duration Government Fund are both
designed for investors who seek a high level of high current income, relative
stability of principal and the high credit quality of securities issued or
guaranteed by the U.S. Government or its agencies, instrumentalities or
sponsored enterprises, without incurring the administrative and accounting
burdens involved in direct investment.
Market and economic conditions may affect the investments of Adjustable
Rate Fund and Short Duration Government 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 and Short Duration Government Funds
may invest may be adversely affected by increases in market interest rates.
Conversely, 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 and Short Duration Government
-------------------
Funds seek a higher current yield than a money market fund or than that offered
by bank certificates of deposit and money market accounts. However, the
Adjustable Rate and Short Duration Government Funds 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 of the Adjustable Rate and Short
Duration Government Funds 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 pass-through securities and other mortgage securities with periodic
interest rate resets, maintaining a maximum duration of two years and a target
duration equal to that of a six-month to one-year U.S. Treasury security,
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and utilizing certain active management techniques to seek to hedge interest
rate risk. Short Duration Government Fund seeks to minimize net asset value
fluctuations by utilizing certain interest rate hedging techniques and by
maintaining a maximum duration of not more than 3 years. The duration and
targeting of the 2-year U.S. Treasury Security plus or minus .5 years. There is
no assurance that these strategies for the Adjustable Rate Fund and Short
Duration Government Fund will always be successful.
PROFESSIONAL MANAGEMENT AND ADMINISTRATION. Investors who invest in
-------------------------------------------
securities of the Government National Mortgage Association ("Ginnie Mae") 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. Members of Goldman Sachs' highly
skilled portfolio management team bring together many years of experience in the
analysis, valuation and trading of U.S. fixed income securities.
GOVERNMENT INCOME FUND
Government Income Fund is designed for investors who seek the
relatively high current income, relative safety of principal and the high credit
quality of securities issued by the U.S. Government or its agencies,
instrumentalities or sponsored enterprises, without incurring the administrative
and account burdens involved in direct investment.
Government Income Fund's overall returns are generally likely to move
in the same direction as interest rates. Therefore, when interest rates
decline, Government Income Fund's return is also likely to decline. In exchange
for accepting a higher degree of share price fluctuation, investors have the
potential to achieve a higher return from the Government Income Fund's than from
shorter term investments.
High Current Income. Government Income Fund is designed to have a
-------------------
higher current yield than a money market fund, since it can invest in longer-
term, higher yielding securities, and may utilize certain investment techniques
not available to a money market fund. Similarly, Government Income Fund's yield
is expected to exceed that offered by bank certificates of deposit and money
market accounts. However, Government Income Fund does not maintain a constant
net asset value per share and is subject to greater fluctuation in the value of
its shares than a money market fund. Unlike bank certificates of deposit and
money market accounts, investments in shares of Government Income Fund are not
insured or guaranteed by any government agency. Government Income Fund seeks to
provide high current income without, however, sacrificing credit quality.
Liquidity. Because Government Income Fund's shares may be redeemed upon
---------
request of a shareholder on any business day at net
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asset value, Government Income Fund offers greater liquidity than many competing
investments such as certificates of deposit and direct investments in certain
securities in which Government Income Fund may invest.
A Sophisticated Investment Process. Government Income Fund's
----------------------------------
investment process starts with a review of trends for the overall economy as
well as for different sectors of the U.S. government and mortgage backed
securities markets. Goldman Sachs' portfolio managers then analyze yield
spreads, implied volatility and the shape of the yield curve. In planning the
Government Income 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 involving Goldman Sachs'
proprietary mortgage prepayment model and option-adjusted spread model to
structure and maintain the Government Income Fund's investment portfolio. In
determining the Government Income Fund's investment strategy and making market
timing decisions, the Adviser will have access to information from Goldman
Sachs' economists, fixed income analysts and mortgage specialists.
Convenience of a Fund Structure. Government Income Fund eliminates
-------------------------------
many of the complications that direct ownership of U.S. Government and mortgage-
backed securities entails. Government Income Fund automatically reinvests all
principal payments within the Fund and distributes only current income each
month, thereby conserving principal and eliminating the investor's need to
segregate and reinvest the principal portion of each payment on his own.
SHORT DURATION TAX-FREE AND MUNICIPAL INCOME FUNDS
Short Duration Tax-Free Fund and Municipal Income Fund (the "Tax Exempt
Funds") are not money market funds. Each 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 Tax Exempt Funds 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 Tax Exempt
Funds' increased investment flexibility permits their portfolios 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 that a
mutual fund structure offers some important advantages when
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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;
. Market expertise is also an important consideration for municipal
investors, and because the Tax Exempt Funds take relatively large
positions in different securities, the Tax Exempt Funds may be able
to obtain more favorable prices in the municipal securities market
than investors with relatively small positions; and
. Industry and geographical diversification are important
considerations for municipal investors. The Tax Exempt Funds are
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
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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 to achieve a higher return from Core Fund than
from shorter term investments.
A number of investment strategies will be used to achieve the Core
Fund's investment objective, including market sector selection, determination of
yield curve exposure, and issuer selection. In addition, the Adviser will
attempt to take advantage of pricing inefficiencies in the fixed income markets.
Market sector selection is the underweighting or overweighting of one or more of
the five market sectors (i.e., U.S. treasuries, U.S. government agencies,
corporate securities, mortgage-backed securities and asset-backed securities) in
which the Fund primarily invests. The decision to overweight or underweight a
given market sector is based on expectations of future yield spreads between
different sectors. Yield curve exposure strategy consists of overweighting or
underweighting different maturity sectors to take advantage of the shape of the
yield curve. Issuer selection is the purchase and sale of corporate securities
based on a corporation's current and expected credit standing. To take
advantage of price discrepancies between securities resulting from supply and
demand imbalances or other technical factors, the Fund may simultaneously
purchase and sell comparable, but not identical, securities. The Adviser will
have access to the research of, and proprietary technical models developed by,
Goldman Sachs and will apply quantitative and qualitative analysis in
determining the appropriate allocations among the categories of issuers and
types of securities.
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 specialists.
B-8
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GLOBAL INCOME FUND
Global Income Fund is designed for investors seeking a combination of
high income, capital appreciation, stability of principal, experienced
professional management, flexibility and liquidity. However, investing in the
Fund involves certain risks and there is no assurance that the Fund will achieve
its investment objective.
In selecting securities for the Fund, portfolio managers consider such
factors as the security's duration, sector and credit quality rating as well as
the security's yield and prospectus for capital appreciation. In determining
the countries and currencies in which the Fund will invest, the Fund's portfolio
mangers form opinions based primarily on the views of Goldman Sachs' economists
as well as information provided by securities dealers, including information
relating to factors such as interest rates, inflation, monetary and fiscal
policies, taxation, and political climate. The portfolio managers apply the
Black-Litterman Model (the "Model") to their views to develop a portfolio that
produces, in the view of the Adviser, the optimal expected return for a given
level of risk. The Model factors in the opinions of the portfolio managers,
adjusting for their level of confidence in such opinions, with the views implied
by an international capital asset pricing formula. The Model is also used to
maintain the level of portfolio risk within the guidelines established by the
Adviser.
High Income. Global Income Fund's portfolio managers will seek out
-----------
the highest yielding bonds in the global fixed income market that meet the
Global Income Fund's credit quality standards and certain other criteria.
Capital Appreciation. Investing in the foreign bond markets offers
--------------------
the potential for capital appreciation due to both interest rate and currency
exchange rate fluctuations. The portfolio managers attempt to identify
investments with appreciation potential by carefully evaluating trends affecting
a country's currency as well as a country's fundamental economic strength.
However, there is a risk of capital depreciation as a result of unanticipated
interest rate and currency fluctuations.
Portfolio Management Flexibility. Global Income Fund is actively
--------------------------------
managed. The Fund's portfolio managers invest in countries that, in their
judgment, meet the Fund's investment guidelines and often have strong currencies
and stable economies and in securities that they believe offer favorable
performance prospects.
Relative Stability of Principal. Global Income Fund may be able to
-------------------------------
reduce principal fluctuation by investing in foreign countries with economic
policies or business cycles different from those of the United States and in
foreign securities markets that do not necessarily move in the same direction or
magnitude as the U.S. market. Investing in a broad range of U.S. and foreign
fixed income securities and currencies reduces the dependence of the
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Fund's performance on developments in any particular market to the extent that
adverse events in one market are offset by favorable events in other markets.
The Fund's policy of investing primarily in high credit quality securities may
also reduce principal fluctuation. However, there is no assurance that these
strategies will always be successful.
Professional Management. Individual U.S. investors may prefer
-----------------------
professional management of their global bond and currency portfolios because a
well-diversified portfolio requires a large amount of capital and because the
size of the global market requires access to extensive resources and a
substantial commitment of time.
OTHER INVESTMENTS AND PRACTICES
OBLIGATIONS OF THE UNITED STATES, ITS AGENCIES, INSTRUMENTALITIES AND SPONSORED
ENTERPRISES
Each Fund may invest in U.S. Government securities, which are
obligations issued or guaranteed by the U.S. Government and its agencies,
instrumentalities or sponsored enterprises. 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, instrumentalities or sponsored
enterprises, 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 Federal National
Mortgage Association ("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,
instrumentalities or sponsored enterprises. No assurance can be given that the
U.S. Government will provide financial support to the U.S. Government agencies,
instrumentalities or sponsored enterprises in the future.
U.S. Government securities include (to the extent consistent with the
Investment Company Act of 1940, as amended (the "Act")) securities for which the
payment of principal and interest is backed by an irrevocable letter of credit
issued by the U.S. Government, its agencies, instrumentalities or sponsored
enterprises. U.S. Government securities also include (to the extent consistent
with the Act) participations in loans made to foreign governments or their
agencies that are guaranteed as to principal and interest by the U.S. Government
or its agencies, instrumentalities or sponsored enterprises. The secondary
market for certain of these participations is extremely limited. In the absence
of a substantial secondary market, such participations are regarded as illiquid.
Each Fund may also purchase U.S. Government
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securities in private placements, subject to the Fund's limitation on investment
in illiquid securities.
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 program ("STRIPS").
CUSTODIAL RECEIPTS
Each Fund may 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 Duration Government Fund, Core Fund,
Global Income Fund and Government Income Fund (collectively, the "Taxable
Funds") may each invest in mortgage loans and mortgage pass-through securities
and other securities representing an interest in or collateralized by adjustable
and fixed-rate mortgage loans ("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 Mortgaged Properties may also include residential investment properties and
second homes.
The investment characteristics of adjustable and fixed rate Mortgage-
Backed Securities differ from those of traditional fixed income securities. The
major differences include the payment of interest and principal on Mortgage-
Backed Securities on a more frequent (usually monthly) schedule, and the
possibility that principal may be prepaid at any time due to prepayments on the
underlying mortgage loans or other assets. These differences can result in
significantly greater price and yield volatility than is the case with
traditional fixed income securities. As a result, a faster than expected
prepayment rate will reduce both the market value and the yield to maturity from
those which were anticipated.
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A prepayment rate that is slower than expected will have the opposite effect of
increasing yield to maturity and market value. 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 cost of funds index or a moving
average of mortgage rates. Commonly utilized indices include the one-year,
three-year and five-year
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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 Taxable Fund's portfolio and therefore in the net asset
value of each Taxable 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.
Fixed Rate Mortgage Loans. Generally, fixed rate mortgage loans
-------------------------
included in a mortgage pool (the "Fixed Rate Mortgage Loans") will bear simple
interest at fixed annual rates and have original terms to maturity ranging from
5 to 40 years. Fixed Rate Mortgage Loans generally provide for monthly payments
of principal and interest in substantially equal installments for the term of
the mortgage note in sufficient amounts to fully amortize principal by maturity,
although certain Fixed Rate Mortgage Loans provide for a large final "balloon"
payment upon maturity.
LEGAL CONSIDERATIONS OF MORTGAGE LOANS. The following is a discussion
--------------------------------------
of certain legal and regulatory aspects of the mortgage loans in which the
Taxable Funds 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,
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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 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.
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. The Taxable Funds 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.
B-14
<PAGE>
GUARANTEED MORTGAGE PASS-THROUGH SECURITIES
GINNIE MAE CERTIFICATES. Ginnie Mae is a wholly-owned corporate
-----------------------
instrumentality of the United States 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, Ginnie Mae
is authorized to borrow from the U.S. Treasury in an unlimited amount.
FANNIE MAE CERTIFICATES. 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 FHA or guaranteed by the 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
B-15
<PAGE>
principal. The obligations of Freddie Mac under its guaranty of Freddie Mac
Certificates are obligations solely of Freddie Mac.
The mortgage loans underlying the Freddie Mac and Fannie Mae Certificates
consist of adjustable rate or fixed rate mortgage loans with original terms to
maturity of between five and thirty years. Substantially all of these mortgage
loans are secured by first liens on one- to four-family residential properties
or 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 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 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. The Taxable Funds 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.
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
B-16
<PAGE>
be made on a sequential, concurrent, pro rata or disproportionate basis, or any
--- ----
combination thereof. The stated interest rate on any such subclass of
certificates may be a fixed rate or one which varies in direct or inverse
relationship to an objective interest index.
Generally, each registered holder of a certificate will be entitled to
receive its pro rata share of monthly distributions of all or a portion of
--- ----
principal of the underlying mortgage loans or of interest on the principal
balances thereof, which accrues at the applicable mortgage pass-through rate, or
both. The difference between the mortgage interest rate and the related
mortgage pass-through rate (less the amount, if any, of retained yield) with
respect to each mortgage loan will generally be paid to the servicer as a
servicing fee. Since certain adjustable rate mortgage loans included in a
mortgage pool may provide for deferred interest (i.e., negative amortization),
the amount of interest actually paid by a mortgagor in any month may be less
than the amount of interest accrued on the outstanding principal balance of the
related mortgage loan during the relevant period at the applicable mortgage
interest rate. In such event, the amount of interest that is treated as
deferred interest will be added to the principal balance of the related mortgage
loan and will be distributed pro rata to certificate-holders as principal of
--- ----
such mortgage loan when paid by the mortgagor in subsequent monthly payments or
at maturity.
MULTIPLE CLASS MORTGAGE-BACKED SECURITIES AND COLLATERALIZED MORTGAGE
---------------------------------------------------------------------
OBLIGATIONS. Each Taxable Fund may invest in multiple class securities
- -----------
including collateralized mortgage obligations ("CMOs") and REMIC Certificates
issued by U.S. Government agencies, instrumentalities (such as Fannie Mae) and
sponsored enterprises (such as Freddie Mac) or, in the case of Core and
Government Income Funds, or by trusts formed by private originators of, or
investors in, mortgage loans, including savings and loan associations, mortgage
bankers, commercial banks, insurance companies, investment banks and special
purpose subsidiaries of the foregoing. In general, CMOs are debt obligations of
a legal entity that are collateralized by, and multiple class mortgage-backed
securities represent direct ownership interests in, a pool of mortgage loans or
mortgage-backed securities the payments on which are used to make payments on
the CMOs or multiple class mortgage-backed securities.
Fannie Mae REMIC Certificates are issued and guaranteed as to timely
distribution of principal and interest by Fannie Mae. In addition, Fannie Mae
will be obligated to distribute the principal balance of each class of REMIC
Certificates in full, whether or not sufficient funds are otherwise available.
Freddie Mac guarantees the timely payment of interest on Freddie Mac REMIC
Certificates and also guarantees the payment of principal as payments are
required to be made on the underlying mortgage participation certificates
("PCs"). PCs represent undivided interests in specified level payment,
residential
B-17
<PAGE>
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 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
B-18
<PAGE>
class certificates ("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, 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. The Taxable Funds 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, Government Income Fund and Global 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 each Fund's limitation on
investments in illiquid securities. The Adviser may determine that SMBS which
are U.S. Government securities are liquid for purposes of each Fund's limitation
on investments in illiquid securities in accordance with procedures adopted by
the Board of Trustees. The market value of the class consisting entirely of
principal payments generally is unusually volatile in response to changes in
interest rates. The yields on a class of SMBS that receives all or most of the
interest from Mortgage Assets are generally higher than prevailing market yields
on other Mortgage-Backed Securities because their cash flow patterns are more
volatile and there is a greater risk that the initial investment will not be
fully recouped.
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
B-19
<PAGE>
organization to a certificate does not address the remote possibility that, in
the event of the insolvency of the issuer of certificates where a subordinated
interest was retained, the issuance and sale of the senior certificates may be
recharacterized as a financing and, as a result of such recharacterization,
payments on such certificates may be affected.
CREDIT ENHANCEMENT. Credit support falls generally into two categories:
------------------
(i) liquidity protection and (ii) protection against losses resulting from
default by an obligor on the underlying assets. Liquidity protection refers to
the provision of advances, generally by the entity administering the pools of
mortgages, the provision of a reserve fund, or a combination thereof, to ensure,
subject to certain limitations, that scheduled payments on the underlying pool
are made in a timely fashion. Protection against losses resulting from default
ensures ultimate payment of the obligations on at least a portion of the assets
in the pool. Such credit support can be provided by among other things, payment
guarantees, letters of credit, pool insurance, subordination, or any combination
thereof.
SUBORDINATION; SHIFTING OF INTEREST; RESERVE FUND. In order to achieve
-------------------------------------------------
ratings on one or more classes of Mortgage Pass-Throughs, one or more classes of
certificates may be subordinate certificates which provide that the rights of
the subordinate certificate-holders to receive any or a specified portion of
distributions with respect to the underlying mortgage loans may be subordinated
to the rights of the senior certificate-holders. If so structured, the
subordination feature may be enhanced by distributing to the senior certificate-
holders on certain distribution dates, as payment of principal, a specified
percentage (which generally declines over time) of all principal payments
received during the preceding prepayment period ("shifting interest credit
enhancement"). This will have the effect of accelerating the amortization of
the senior certificates while increasing the interest in the trust fund
evidenced by the subordinate certificates. Increasing the interest of the
subordinate certificates relative to that of the senior certificates is intended
to preserve the availability of the subordination provided by the subordinate
certificates. In addition, because the senior certificate-holders in a shifting
interest credit enhancement structure are entitled to receive a percentage of
principal prepayments which is greater than their proportionate interest in the
trust fund, the rate of principal prepayments on the mortgage loans will have an
even greater effect on the rate of principal payments and the amount of interest
payments on, and the yield to maturity of, the senior certificates.
In addition to providing for a preferential right of the senior
certificate-holders to receive current distributions from the mortgage pool, a
reserve fund may be established relating to such 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
B-20
<PAGE>
to the subordinate certificate-holders or by excess servicing fees until the
Reserve Fund reaches a specified amount.
The subordination feature, and any Reserve Fund, are intended to enhance
the likelihood of timely receipt by senior certificate-holders of the full
amount of scheduled monthly payments of principal and interest due them and will
protect the senior certificate-holders against certain losses; however, in
certain circumstances the Reserve Fund could be depleted and temporary
shortfalls could result. In the event the Reserve Fund is depleted before the
subordinated amount is reduced to zero, senior certificate-holders will
nevertheless have a preferential right to receive current distributions from the
mortgage pool to the extent of the then outstanding subordinated amount. Unless
otherwise specified, until the subordinated amount is reduced to zero, on any
distribution date any amount otherwise distributable to the subordinate
certificates or, to the extent specified, in the Reserve Fund will generally be
used to offset the amount of any losses realized with respect to the mortgage
loans ("Realized Losses"). Realized Losses remaining after application of such
amounts will generally be applied to reduce the ownership interest of the
subordinate certificates in the mortgage pool. If the subordinated amount has
been reduced to zero, Realized Losses generally will be allocated pro rata among
--- ----
all certificate-holders in proportion to their respective outstanding interests
in the mortgage pool.
ALTERNATIVE CREDIT ENHANCEMENT. As an alternative, or in 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.
B-21
<PAGE>
ASSET-BACKED SECURITIES
Core Fund, Government Income Fund and Global Income 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, a Fund's ability to
maintain positions in such securities will be affected by reductions in the
principal amount of such securities resulting from prepayments, and its ability
to reinvest the returns of principal at comparable 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 by automobiles rather than
residential real property. Most issuers of automobile receivables permit the
loan servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
asset-backed securities. In addition, because of the large number of vehicles
involved in a typical issuance and technical requirements under state laws, the
trustee for the holders of the automobile receivables may not have a proper
security interest in the underlying automobiles. Therefore, there is the
possibility that, in some cases, recoveries on repossessed collateral may not be
available to support payments on these securities.
ZERO COUPON, DEFERRED INTEREST AND CAPITAL APPRECIATION BONDS
Each Fund may invest in zero coupon bonds, 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.
B-22
<PAGE>
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 each Fund may
invest are not fixed and may fluctuate based upon changes in market rates. A
variable rate obligation has an interest rate which is adjusted at predesignated
periods in response to changes in the market rate of interest on which the
interest rate is based. Variable and floating rate obligations are less
effective than fixed rate instruments at locking in a particular yield.
Nevertheless, such obligations may fluctuate in value in response to interest
rate changes if there is a delay between changes in market interest rates and
the interest reset date for the obligation. The absence of an unconditional
demand feature on variable and floating rate municipal securities exercisable
within seven days would, and the failure of the issuer or a third party to honor
its obligations under a demand or put feature might, require a variable or
floating rate obligation to be treated as illiquid for purposes of the Tax
Exempt Funds' limitation on illiquid investments.
Each Fund may invest in "leveraged" inverse floating rate debt instruments
("inverse floaters"), including "leveraged inverse floaters." The interest rate
on inverse floaters resets in the opposite direction from the market rate of
interest to which the inverse floater is indexed. An inverse floater may be
considered to be leveraged to the extent that its interest rate varies by a
magnitude that exceeds the magnitude of the change in the index rate of
interest. The higher the degree of leverage of an inverse floater, the greater
the volatility of its market value. Accordingly, the duration of an inverse
floater may exceed its stated final maturity. Certain inverse floaters may be
deemed to be illiquid securities for purposes of each Fund's limitation on
illiquid investments.
CORPORATE DEBT OBLIGATIONS
Core Fund, Global Income Fund and Government Income 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 meet principal and interest payments on the obligations
and may
B-23
<PAGE>
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
Global Income Fund and Core Fund may each invest in obligations issued or
guaranteed by United States and foreign banks. Bank obligations, including
without limitation time deposits, bankers' acceptances and certificates of
deposit, may be general obligations of the parent bank or may be 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. Foreign banks are subject to different regulations
and are permitted to engage in different activities than U.S. banks. 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, Municipal Income Fund and Short Duration Tax-Free Fund may
invest in 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
("Municipal Securities"), 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
income taxes of any state or local government). In addition, Municipal
Securities include participation 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
Core Fund, Municipal Income Fund and Short Duration Tax-Free Fund may revise
their definition of Municipal Securities in the future to include other types of
securities that currently exist the interest on which is or will be in the
opinion of such counsel, excluded from gross income for federal income tax
purposes, provided that investing in such securities is consistent with each
Fund's investment objective and policies.
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
B-24
<PAGE>
activity bonds" or industrial development bonds, which are issued by or on
behalf of public authorities to provide financing aid to acquire sites or
construct or equip facilities within a municipality for privately or publicly
owned corporations.
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 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 Tax-Free Fund,
Municipal Income 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
B-25
<PAGE>
principal of or interest on a Municipal Security may be materially affected.
Municipal Leases, Certificates of Participation and Other Participation
-----------------------------------------------------------------------
Interests. The Core, Municipal Income, and Short-Duration Tax-Free Funds may
- ---------
invest in municipal leases, certificates of participation and other
participation interests. A municipal lease is an obligation in the form of a
lease or installment purchase which is issued by a state or local government to
acquire equipment and facilities. Income from such obligations is generally
exempt from state and local taxes in the state of issuance. Municipal leases
frequently involve special risks not normally associated with general
obligations or revenue bonds. Leases and installment purchase or conditional
sale contracts (which normally provide for title to the leased asset to pass
eventually to the governmental issuer) have evolved as a means for governmental
issuers to acquire property and equipment without meeting the constitutional and
statutory requirements for the issuance of debt. The debt issuance limitations
are deemed to be inapplicable because of the inclusion in many leases or
contracts of "non-appropriation" clauses that relieve the governmental issuer of
any obligation to make future payments under the lease or contract unless money
is appropriated for such purpose by the appropriate legislative body on a yearly
or other periodic basis. In addition, such leases or contracts may be subject
to the temporary abatement of payments in the event the issuer is prevented from
maintaining occupancy of the leased premises or utilizing the leased equipment.
Although the obligations may be secured by the leased equipment or facilities,
the disposition of the property in the event of non-appropriation or foreclosure
might prove difficult, time consuming and costly, and result in a delay in
recovering or the failure to fully recover a Fund's original investment.
Certificates of participation represent undivided interests in municipal
leases, installment purchase agreements or other instruments. The certificates
are typically issued by a trust or other entity which has received an assignment
of the payments to be made by the state or political subdivision under such
leases or installment purchase agreements.
Certain municipal lease obligations and certificates of participation may
be deemed to be illiquid for the purpose of the Funds' limitation on investments
in illiquid securities. Other municipal lease obligations and certificates of
participation acquired by a Fund may be determined by the Adviser, pursuant to
guidelines adopted by the Trustees of the Trust, to be liquid securities for the
purpose of such limitation. In determining the liquidity of municipal lease
obligations and certificates of participation, the Adviser will consider a
variety of factors including: (1) the willingness of dealers to bid for the
security; (2) the number of dealers willing to purchase or sell the obligation
and the number of other potential buyers; (3) the frequency of trades or quotes
for the obligation; and (4) the nature of the marketplace trades. In addition,
the Adviser will
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consider factors unique to particular lease obligations and certificates of
participation affecting the marketability thereof. These include the general
creditworthiness of the issuer, the importance to the issuer of the property
covered by the lease and the likelihood that the marketability of the obligation
will be maintained throughout the time the obligation is held by a Fund.
The Core, Municipal Income and Short Duration Tax-Free Funds may purchase
participations in Municipal Securities held by a commercial bank or other
financial institution. Such participations provide a Fund with the right to a
pro rata undivided interest in the underlying Municipal Securities. In
addition, such participations generally provide a Fund with the right to demand
payment, on not more than seven days notice, of all or any part of such Fund's
participation interest in the underlying Municipal Security, plus accrued
interest. A Fund will only invest in such participations if, in the opinion of
bond counsel, counsel for the issuers of such participations or counsel selected
by the Adviser, the interest from such participations is exempt from regular
federal income tax.
Municipal Notes. Municipal Securities in the form of notes generally are
---------------
used to provide for short-term capital needs, in anticipation of an issuer's
receipt of other revenues or financing, and typically have maturities of up to
three years. Such instruments may include tax anticipation notes, revenue
anticipation notes, bond anticipation notes, tax and revenue anticipation notes
and construction loan notes. Tax anticipation notes are issued to finance the
working capital needs of governments. Generally, they are issued in
anticipation of various tax revenues, such as income, sales, property, use and
business taxes, and are payable from these specific future taxes. Revenue
anticipation notes are issued in expectation of receipt of other kinds of
revenue, such as federal revenues available under federal revenue sharing
programs. Bond anticipation notes are issued to provide interim financing until
long-term bond financing can be arranged. In most cases, the long-term bonds
then provide the funds needed for repayment of the notes. Tax and revenue
anticipation notes combine the funding sources of both tax anticipation notes
and revenue anticipation notes. Construction Loan Notes are sold to provide
construction financing. These notes are secured by mortgage notes insured by
the FHA; however, the proceeds from the insurance may be less than the economic
equivalent of the payment of principal and interest on the mortgage note if
there has been a default. The obligations of an issuer of municipal notes are
generally secured by the anticipated revenues from taxes, grants or bond
financing. An investment in such instruments, however, presents a risk that the
anticipated revenues will not be received or that such revenues will be
insufficient to satisfy the issuer's payment obligations under the notes or that
refinancing will be otherwise unavailable.
Tax-Exempt Commercial Paper. Issues of commercial paper typically
---------------------------
represent short-term, unsecured, negotiable promissory notes. These obligations
are issued by state and local governments
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<PAGE>
and their agencies to finance working capital needs of municipalities or to
provide interim construction financing and are paid from general revenues of
municipalities or are refinanced with long-term debt. In most cases, tax-exempt
commercial paper is backed by letters of credit, lending agreements, note
repurchase agreements or other credit facility agreements offered by banks or
other institutions.
Pre-Refunded Municipal Securities. The principal of and interest on pre-
---------------------------------
refunded Municipal Securities are no longer paid from the original revenue
source for the securities. Instead, the source of such payments is typically
an escrow fund consisting of U.S. Government securities. The assets in the
escrow fund are derived from the proceeds of refunding bonds issued by the same
issuer as the pre-refunded Municipal Securities. Issuers of Municipal
Securities use this advance refunding technique to obtain more favorable terms
with respect to securities that are not yet subject to call or redemption by the
issuer. For example, advance refunding enables an issuer to refinance debt at
lower market interest rates, restructure debt to improve cash flow or eliminate
restrictive covenants in the indenture or other governing instrument for the
pre-refunded Municipal Securities. However, except for a change in the revenue
source from which principal and interest payments are made, the pre-refunded
Municipal Securities remain outstanding on their original terms until they
mature or are redeemed by the issuer. Pre-refunded Municipal Securities are
usually purchased at a price which represents a premium over their face value.
Private Activity Bonds. Short Duration Tax-Free Fund, Municipal Income
----------------------
Fund and Core Fund may each invest in 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
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. The Tax Exempt Funds' 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.
Tender Option Bonds. A tender option bond is a Municipal Security
-------------------
(generally held pursuant to a custodial arrangement) having a relatively long
maturity and bearing interest at a fixed rate substantially higher than
prevailing short-term, tax-exempt rates. The bond is typically issued with the
agreement of a third party, such as a bank, broker-dealer or other financial
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institution, which grants the security holders the option, at periodic
intervals, to tender their securities to the institution and receive the face
value thereof. As consideration for providing the option, the financial
institution receives periodic fees equal to the difference between the bond's
fixed coupon rate and the rate, as determined by a remarketing or similar agent
at or near the commencement of such period, that would cause the securities,
coupled with the tender option, to trade at par on the date of such
determination. Thus, after payment of this fee, the security holder effectively
holds a demand obligation that bears interest at the prevailing short-term, tax-
exempt rate. However, an institution will not be obligated to accept tendered
bonds in the event of certain defaults or a significant downgrade in the credit
rating assigned to the issuer of the bond. The liquidity of a tender option
bond is a function of the credit quality of both the bond issuer and the
financial institution providing liquidity. Tender option bonds are deemed to be
liquid unless, in the opinion of the Adviser, the credit quality of the bond
issuer and the financial institution is deemed, in light of the Fund's credit
quality requirements, to be inadequate. The Tax Exempt Funds intend to invest
in tender option bonds the interest on which will, in the opinion of bond
counsel, counsel for the issuer of interests therein or counsel selected by the
Adviser, be exempt from regular federal income tax. However, because there can
be no assurance that the Internal Revenue Service (the "Service") will agree
with such counsel's opinion in any particular case, there is a risk that a Tax
Exempt Fund will not be considered the owner of such tender option bonds and
thus will not be entitled to treat such interest as exempt from such tax.
Additionally, the federal income tax treatment of certain other aspects of these
investments, including the proper tax treatment of tender option bonds and the
associated fees in relation to various regulated investment company tax
provisions is unclear. The Tax Exempt Funds intend to manage their portfolio in
a manner designed to eliminate or minimize any adverse impact from the tax rules
applicable to these investments.
Auction Rate Securities. The Core, Municipal Income and Short Duration
-----------------------
Tax-Free Funds 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"). Provided that
the 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
B-29
<PAGE>
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.
A 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. The Funds will indirectly bear their proportionate share of any
management and other fees paid by such closed-end funds in addition the advisory
fees payable directly by the Funds.
Insurance. The Funds may invest in "insured" tax-exempt Municipal
---------
Securities. Insured Municipal Securities are securities for which scheduled
payments of interest and principal are guaranteed by a private (nongovernmental)
insurance company. The insurance only entitles a Fund to receive the face or
par value of the securities held by the Fund. The insurance does not guarantee
the market value of the Municipal Securities or the value of the shares of a
Fund.
The Funds 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 Investors Service, Inc. ("Moody's") or AAA from Standard & Poor's
Ratings Group ("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-cancelable and continue in force as long as the
bonds are outstanding.
A secondary market insurance policy is purchased by an investor (such as a
Fund) subsequent to a bond's original issuance and generally insures a
particular bond for the remainder of its term. The Funds may purchase bonds
which have already been insured under a secondary market insurance policy by a
prior investor, or the Funds may directly purchase such a policy from insurers
for bonds which are currently uninsured.
An insured Municipal Security acquired by a Fund will typically be covered
by only one of the above types of policies. All of the insurance policies used
by a Fund will be obtained only from insurance companies rated, at the time of
purchase, Aaa by Moody's or AAA by Standard & Poor's.
Standby Commitments. In order to enhance the liquidity of Municipal
-------------------
Securities, the Tax Exempt Funds 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 a Fund pays for securities with
standby commitments may be higher than the price which otherwise would be paid
for the
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<PAGE>
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
a Tax Exempt 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 a Tax Exempt Fund. In considering whether a security meets a Tax Exempt
Fund's quality standards, the particular Tax Exempt 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.
The Tax Exempt Funds value 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 a Tax Exempt
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, a Tax Exempt
Fund's policy is to enter into standby commitment transactions only with banks,
brokers or dealers which present a minimal risk of default.
The Adviser understands that 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. The Tax Exempt Funds intend to take the position that they are 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 their
hands. There is no assurance that standby commitments will be available to the
Tax Exempt Funds nor have the Tax Exempt Funds assumed that such commitments
would continue to be available under all market conditions.
Call Risk and Reinvestment Risk. Municipal Securities may include "call"
-------------------------------
provisions which permit the issuers of such securities, at any time or after a
specified period, to redeem the securities prior to their stated maturity. In
the event that Municipal Securities held in a Fund's portfolio are called prior
to the maturity, the Fund will be required to reinvest the proceeds on such
securities at an earlier date and may be able to do so only at lower yields,
thereby reducing the Fund's return on its portfolio securities.
B-31
<PAGE>
FOREIGN INVESTMENTS
Core and Global Income Funds may invest in securities of foreign issuers
and in fixed income securities quoted or denominated in a currency other than
U.S. dollars. Investing in the securities of foreign issuers involves certain
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 and Global Income Fund may temporarily hold funds in bank deposits in
foreign currencies during completion of investment programs, Core Fund and
Global Income 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.
Foreign companies are not subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to U.S. companies. In addition, there may be less publicly available
information about a foreign company than about a comparable U.S. company.
Volume and liquidity in most foreign bond markets are less than in the United
States markets and securities of many foreign companies are less liquid and more
volatile than securities of comparable U.S. companies. Commissions on foreign
securities exchanges are often fixed and generally are higher than negotiated
commissions or dealer mark-ups in the U.S. markets, although each Fund endeavors
to achieve the most favorable net results on its portfolio transactions. There
is generally less government supervision and regulation of securities markets
and exchanges, brokers, dealers and listed companies than in the United States.
Mail service between the United States and foreign countries may be slower or
less reliable than within the United States, thus increasing the risk of delayed
settlement of portfolio transactions or loss of certificates for portfolio
securities.
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 or Global Income Fund is
uninvested and no return is earned thereon. The inability of Core Fund or
Global Income 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 or Global Income Fund due to subsequent
declines in value of the portfolio securities, or, if Core Fund or Global
Income 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
B-32
<PAGE>
adversely affect Core Fund's or Global Income 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, and Global
Income Fund may enter into forward foreign currency exchange contracts for
hedging purposes and to seek to increase total return. A forward foreign
currency exchange contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded in the interbank market conducted directly
between currency traders (usually large commercial banks) and their customers.
A forward contract generally has no deposit requirement, and no commissions are
generally charged at any stage for trades.
At the maturity of a forward contract, Global Income Fund and 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.
Global Income Fund or Core Fund may enter into forward foreign currency
exchange contracts in several circumstances. First, when Global Income Fund or
Core Fund enters into a contract for the purchase or sale of a security quoted
or denominated in a foreign currency, or when Global Income Fund or Core Fund
anticipates the receipt in a foreign currency of a dividend or interest payments
on such a security which it holds, Global Income Fund or 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 U.S. dollars,
of the amount of foreign currency involved in the underlying transactions,
Global Income Fund or 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 the Adviser believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar, it may
enter into a forward contract to sell, for a fixed amount of dollars, the amount
of foreign currency approximating the value of some or all of a Fund's portfolio
securities quoted or denominated in such foreign currency. The precise matching
of the forward contract amounts and the value of
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<PAGE>
the securities involved will not generally be possible because the future value
of such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the
contract is entered into and the date it matures. Using forward contracts to
protect the value of a Fund's portfolio securities against a decline in the
value of a currency does not eliminate fluctuations in the underlying prices of
the securities. It simply establishes a rate of exchange which a Fund can
achieve at some future point in time. The precise projection of short-term
currency market movements is not possible, and short-term hedging provides a
means of fixing the dollar value of only a portion of a Fund's foreign assets.
Global Income Fund may engage in cross-hedging by using forward contracts
in one currency to hedge against fluctuations in the value of securities
denominated or quoted in a different currency if the Adviser determines that
there is a pattern of correlation between the two currencies. The Global Income
Fund may also purchase and sell forward contracts to seek to increase total
return when the Adviser anticipates that the foreign currency will appreciate or
depreciate in value, but securities quoted or denominated in that currency do
not present attractive investment opportunities and are not held in the Global
Income Fund's portfolio.
Global Income Fund's and Core Fund's custodian will place cash or liquid,
high-grade debt securities (i.e., securities rated in one of the top three
rating categories by Moody's or Standard & Poor's or, if unrated by such rating
organizations, deemed by the Adviser to be of comparable credit quality) into a
segregated account of the Fund in an amount equal to the value of the Fund's
total assets committed to the consummation of forward foreign currency exchange
contracts requiring the Fund to purchase foreign currencies or in the case of
Global Income Fund, forward contracts entered into to increase total return. If
the value of the securities placed in the segregated account declines,
additional cash or securities will be placed in the account on a daily basis so
that the value of the account will equal the amount of the Fund's commitments
with respect to such contracts. The segregated account will be marked-to-market
on a daily basis. Although the contracts are not presently regulated by the
CFTC, the CFTC may in the future assert authority to regulate these contracts.
In such event, a Fund's ability to utilize forward foreign currency exchange
contracts may be restricted. The Global Income Fund and Core Fund will not
enter into a forward contract with a term of greater than one year.
While Global Income Fund and Core Fund may enter into forward contracts to
seek to reduce currency exchange rate risks, transactions in such contracts
involve certain other risks. Thus, while Global Income Fund and Core Fund may
benefit from such transactions, unanticipated changes in currency prices may
result in a poorer overall performance for a Fund than if it had not engaged in
any such transactions. Moreover, there may be imperfect correlation between a
Fund's portfolio holdings of securities
B-34
<PAGE>
quoted or denominated in a particular currency and forward contracts entered
into by Global Income Fund and Core Fund. Such imperfect correlation may cause
the Fund to sustain losses which will prevent the Fund from achieving a complete
hedge or expose the Fund to risk of foreign exchange loss.
Forward contracts are subject to the risk that the counterparty to such
contract will default on its obligations. Since a forward foreign currency
exchange contract is not guaranteed by an exchange or clearinghouse, a default
on the contract would deprive a Fund of unrealized profits, transaction costs or
the benefits of a currency hedge or force the Fund to cover its purchase or sale
commitments, if any, at the current market price. A Fund will not enter into
such transactions unless the credit quality of the unsecured senior debt or the
claims-paying ability of the counterparty is considered to be investment grade
by the Adviser.
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, Government Income, Short Duration
Government Fund and Global Income Fund may enter into mortgage swaps and Core
Fund and Global Income Fund may also enter into currency swaps. Each Fund may
enter into swap transactions for hedging purposes or to seek to increase total
return, except that the Core Fund will not enter into currency swaps 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, 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
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<PAGE>
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. The net amount of the excess, if any, of a Fund's
obligations over its entitlements with respect to each interest rate or currency
swap will be accrued on a daily basis and an amount of cash or liquid, high
grade debt securities having an aggregate net asset value at least equal to
such accrued excess will be maintained in a segregated account by a Fund's
custodian. In as much as these transactions are entered into for hedging
purposes or are offset by cash or liquid, high grade debt securities maintained
in a segregated account the Funds and the Advisers believe that swaps do not
constitute senior securities under the Act and, accordingly, will not treat them
as being subject to a Fund's borrowing 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 & Poor's or Aa or P-1 or better by
Moody's or their equivalent ratings. If there is a default by the other party
to such a transaction, a Fund will have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As
a result, the swap market has become relatively liquid in comparison with the
markets for other similar instruments which are traded in the interbank market.
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
a Fund's limitation on illiquid investments.
The use of interest rate, mortgage and currency swaps, as well as interest
rate caps, floors and collars, is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If the Adviser is incorrect in its forecasts
of market values, interest rates and currency exchange rates, the investment
performance of a fund would be less favorable than it would have been if this
investment technique were not used.
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<PAGE>
OPTIONS ON SECURITIES AND SECURITIES INDICES
WRITING COVERED OPTIONS. Each Fund may write (sell) covered call and put
-----------------------
options on any securities in which it may invest or on any securities index
based on securities in which it may invest. A Fund may purchase and write such
options on securities that are listed on national domestic securities exchange
or foreign securities exchanges or traded in the over-the-counter market. 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. 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.
All call and put options written by a Fund are covered. A written call
option or put option may be covered by (i) maintaining cash or liquid, high-
grade debt securities, either of which, in the case of Global Income Fund or
Core Fund, may be quoted or denominated in any currency, in a segregated account
maintained by the Fund's custodian with a value at least equal to the Fund's
obligation under the option, (ii) entering into an offsetting forward commitment
and/or (iii) 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.
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."
Each Fund may also write (sell) covered call and put options on any
securities index composed of securities in which it may invest. Options on
securities indices are similar to options on securities, except that the
exercise of securities index options requires cash settlement 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
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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.
PURCHASING OPTIONS. Each Fund may also purchase put and call options on
------------------
any securities in which it may invest or on any securities index based on
securities in which it may invest, and each 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 ("protective puts") 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 on the purchase of a call option 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 either no
gain or 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. The purchase of
protective puts is designed to offset or hedge against a decline in the market
value of a Fund's securities. Put options may also be purchased by a Fund for
the purpose of affirmatively benefiting from a decline in the price of
securities which it does not own. A Fund would ordinarily realize a gain if,
during the option period, the value of the underlying securities decreased below
the exercise price sufficiently to cover the premium and transaction costs;
otherwise the Fund would realize either no gain or a loss on the purchase of the
put option. Gains and losses on the purchase of 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. 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
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the securities market rather than price fluctuations in a single security.
Transactions by a Fund in options on securities and securities indices will
be subject to limitations established by each of the exchanges, boards of trade
or other trading facilities on which such options are traded 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, regardless of whether
the options are written or purchased on the same or different exchanges, boards
of trade or other trading facilities or are held or written in one or more
accounts or through one or more brokers. Thus, the number of options which a
Fund may write or purchase may be affected by options written or purchased by
other investment advisory clients of the Advisers. An exchange, board of trade
or other trading facility may order the liquidation of positions found to be in
excess of these limits, and it may impose certain other sanctions.
WRITING AND PURCHASING CURRENCY CALL AND PUT OPTIONS. Core Fund and
----------------------------------------------------
Global Income Fund may write covered put and call options and purchase put and
call options on foreign currencies in an attempt to protect against declines in
the dollar value of portfolio securities and against increases in the dollar
cost of securities to be acquired. Global Income Fund may use options on
currency to cross-hedge, which involves writing or purchasing options on one
currency to seek to hedge against changes in exchange rates for a different
currency with a pattern of correlation. In addition, Global Income Fund may
purchase call options on currency to seek to increase total return when the
Adviser anticipates that the currency will appreciate in value, but the
securities denominated or quoted in that currency do not present attractive
investment opportunities and are not including in Global Income Fund's
portfolio.
A call option written by Core Fund and Global Income Fund obligates the
Fund to sell specified currency to the holder of the option at a specified price
if the option is exercised at any time before the expiration date. A put option
written by a Fund obligates the Fund to purchase specified currency from the
option holder at a specified price if the option is exercised at any time before
the expiration date. The writing of currency options involves a risk that a
Fund will, upon exercise of the option, be required to sell currency subject to
a call at a price that is less than the currency's market value or be required
to purchase currency subject to a put at a price that exceeds the currency's
market value.
A Fund may terminate its obligations under a written call or put option by
purchasing an option identical to the one written. Such purchases are referred
to as "closing purchase transactions." A Fund would also be able to enter into
closing sale transactions in order to realize gains or minimize losses on
purchased options.
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Core Fund and Global Income Fund would normally purchase call options in
anticipation of an increase in the dollar value of currency in which securities
to be acquired by the Fund are denominated or quoted. The purchase of a call
option would entitle a Fund, in return for the premium paid, to purchase
specified currency at a specified price during the option period. A Fund would
ordinarily realize a gain if, during the option period, the value of such
currency exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise the Fund would realize either no gain or a loss on
the purchase of the call option.
Core Fund or Global Income 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 and Global Income Fund, in exchange for the
premium paid, to sell specified currency at a specified price during the option
period. The purchase of protective puts is designed merely to offset or hedge
against a decline in the dollar value of a Fund's portfolio securities due to
currency exchange rate fluctuations. A Fund would ordinarily realize a gain if,
during the option period, the value of the underlying currency decreased below
the exercise price sufficiently to more than cover the premium and transaction
costs; otherwise the Fund would realize either no gain or a loss on the purchase
of the put option. Gains and losses on the purchase of protective put options
would tend to be offset by countervailing changes in the value of underlying
currency.
In addition to using options for the hedging purposes described above,
Global Income Fund may use options on currency to seek to increase total return.
Global Income Fund may write (sell) covered put and call options on any currency
in an attempt to realize greater income than would be realized on portfolio
securities transactions alone. However, in writing covered call options for
additional income, Global Income Fund may forego the opportunity to profit from
an increase in the market value of the underlying currency. Also, when writing
put options, Global Income Fund accepts, in return for the option premium, the
risk that it may be required to purchase the underlying currency at a price in
excess of the currency's market value at the time of purchase.
Global Income Fund would normally purchase call options to seek to increase
total return in anticipation of an increase in the market value of a currency.
Global Income 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 Global Income Fund would realize either
no gain or a loss on the purchase of the call option. Put options may be
purchased by the Global Income Fund for the purpose of benefiting from a decline
in the value of currencies which it does not own. Global Income 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
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the premium and transaction costs. Otherwise Global Income Fund would realize
either no gain or a loss on the purchase of the put option.
YIELD CURVE OPTIONS. Each Fund may enter into options on the yield
-------------------
"spread," or yield differential between two securities. Such options 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.
Yield curve options may be used for the same purposes as other options on
securities. For example, a 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. A Fund may also purchase or write
yield curve options for other than hedging purpose (i.e., in an attempt to
increase its current income) if, in the judgment of the Adviser, the 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, or if the spread moves in a direction or
to an extent which was not anticipated.
Yield curve options written by a Fund must be "covered." A call (or put)
option is covered if the Fund holds another call (or put) option on the spread
between the same two securities and maintains in a segregated account with its
custodian cash or liquid, high-grade debt securities sufficient to cover the
Fund's net liability under the two options. Therefore, a Fund's liability for
such a covered option is generally limited to the difference between the amount
of the Fund's liability under the option written by the Fund less the value of
the option held by the Fund. Yield curve options may also be covered in such
other manner as may be in accordance with the requirements of the counterparty
with which the option is traded and applicable laws and regulations. Yield
curve options are traded over-the-counter, and because they have been only
recently introduced, established trading markets for these options have not yet
developed.
RISKS ASSOCIATED WITH OPTIONS TRANSACTIONS. There is no assurance that a
------------------------------------------
liquid secondary market on a domestic or foreign 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
currencies or dispose of assets held in a segregated
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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 or currencies.
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.
A Fund's 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.
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
To seek to increase total return or hedge against changes in interest rates
or securities prices or, in the case of Core Fund (but only for hedging
purposes) and Global Income Fund, currency exchange rates, each Fund may
purchase and sell various kinds of futures contracts, and purchase and write
call and put options on any of such futures contracts. Each Fund may also enter
into closing purchase and sale transactions with respect to any of such
contracts and options. The Futures contracts may be based on
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<PAGE>
various securities (such as U.S. Government securities), securities indices,
foreign currencies in the case of Global Income Fund and Core Fund, and any
other financial instruments and indices. A Fund will engage in futures and
related options transaction only for bona fide hedging purposes as defined below
or for purposes of seeking to increase total return to the extent permitted by
regulations of the CFTC. All futures contracts entered into by a Fund are trade
on U.S. exchanges or boards of trade that are licensed and regulated by the CFTC
or on foreign exchanges.
FUTURES CONTRACTS. A futures contract may generally be described as an
-----------------
agreement between two parties to buy and sell particular financial instruments
or currencies 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 and Global Income
Fund may each seek to offset anticipated changes in the value of a currency in
which its portfolio securities, or securities that it intends to purchase, are
quoted or denominated by purchasing and selling futures contracts on such
currencies.
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 or currency will
usually be liquidated in this manner, a Fund may instead make, or take, delivery
of the underlying securities or currency whenever it appears economically
advantageous to do so. A clearing corporation associated with the exchange on
which futures on securities or currency 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, or rate of return on portfolio securities or securities that a Fund
proposes to acquire or the exchange rate of currencies in which portfolio
securities are quoted or denominated. A Fund may, for example, take a "short"
position in the futures market by selling futures contracts in an attempt to
hedge against an anticipated rise in interest rates or a decline in market
prices or foreign currency rates that would adversely affect the dollar 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.
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<PAGE>
Similarly, Core Fund and Global Income Fund may each sell futures contracts on
any currencies in which its portfolio securities are quoted or 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 Advisers 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 portfolio securities. 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 or currency exchange rates then available in the applicable
market to be less favorable than prices that are currently available.
OPTIONS ON FUTURES CONTRACTS. The acquisition of put and call options on
----------------------------
futures contracts will give a Fund the right (but not the obligation) for a
specified price to sell or to purchase, respectively, the underlying futures
contract at any time during the option period. As the purchaser of an option on
a futures contract, a Fund obtains the benefit of the futures position if prices
move in a favorable direction but limits its risk of loss in the event of an
unfavorable price movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium
which may partially offset a decline in the value of a Fund's assets. By
writing a call option, a Fund becomes obligated, in exchange for the premium,
(upon exercise of the option) 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 (upon exercise of the option) 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
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the amount of the premium received. The 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. Each 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 which permit principals of an investment company
registered under the Act to engage in such transactions without registering as
commodity pool operators. 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 (or the currency in which they are quoted or
denominated) that a Fund owns or futures contracts will be purchased to protect
a Fund against an increase in the price of securities (or the currency in which
they are quoted or denominated) it intends to purchase. As evidence of this
hedging intent, each Fund expects that on 75% or more of the occasions on which
it takes a long futures or option position (involving the purchase of futures
contracts), the Fund will have purchased, or will be in the process of
purchasing, equivalent amounts of related securities (or assets denominated in
the related currency) in the cash 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."
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Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating a Fund to purchase securities or currencies, require the Fund to
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,
while a Fund may benefit from the use of futures and options on futures,
unanticipated changes in interest rates or securities prices or currency
exchange rates may result in a poorer overall performance for a Fund than if it
had not entered into any futures contracts or options transactions. In the
event of an imperfect correlation between a futures position and a portfolio
position which is intended to be protected, the desired protection may not be
obtained and a Fund may be exposed to risk of loss. In addition, it is not
possible to hedge fully or protect against currency fluctuations affecting he
value of securities denominated in foreign currencies because the value of such
securities is likely to fluctuate as a result of independent futures not related
to currency fluctuations.
Perfect correlation between a Fund's futures positions and portfolio
positions will be impossible to achieve. There are no futures contracts based
upon individual securities, except certain U.S. Government securities. The only
futures contracts available to hedge the Fund's portfolio are various futures on
U.S. Government securities, securities indices and foreign currencies. In
addition, it is not possible to hedge fully or perfectly against currency
fluctuations affecting the value of securities quoted or denominated in foreign
currencies because the value of such securities is likely to fluctuate as a
result of independent factors not related to currency fluctuations.
MORTGAGE DOLLAR ROLLS. The Taxable Funds may enter into mortgage
---------------------
"dollar rolls" in which a Fund sells securities for delivery in the current
month and simultaneously contracts with the same counterparty to repurchase
similar (same type, coupon and maturity), but not identical securities on a
specified future date. During the roll period, a Fund loses the right to
receive principal and interest paid on the securities sold. However, a Fund
would benefit to the extent of any difference between the 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. Unless such benefits exceed the income, capital appreciation and gain
or loss due to mortgage prepayments that would have been realized on the
securities sold as part of the mortgage dollar roll, the use of this technique
will diminish the investment performance of a Fund compared with what such
performance would have been without the use of mortgage dollar rolls. All cash
proceeds will be invested in instruments that are permissible investments for
the applicable
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Fund. Each 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
its forward purchase price.
For financial reporting and tax purposes, the Funds treat mortgage dollar
rolls as two separate transactions; one involving the purchase of a security and
a separate transaction involving a sale. The Funds do not currently intend to
enter into mortgage dollar rolls that are accounted for as a financing.
Mortgage dollar rolls involve certain risks including the following: if
the broker-dealer to whom a Fund sells the security becomes insolvent, the
Fund's right to purchase or repurchase the mortgage-related securities subject
to the mortgage dollar roll may be restricted and the instrument which the Fund
is required to repurchase may be worth less than an instrument which the Fund
originally held. Successful use of mortgage dollar rolls will depend upon the
Adviser's ability to manage its interest rate and mortgage prepayments exposure.
For these reasons, there is no assurance that mortgage dollar rolls can be
successfully employed.
CONVERTIBLE SECURITIES. Convertible securities may include corporate notes
----------------------
or preferred stock but are ordinarily a long-term debt obligation of the issuer
convertible at a stated exchange rate into common stock of the issuer. As with
all debt securities, the market value of convertible securities tends to decline
as interest rates increase and, conversely, to increase as interest rates
decline. Convertible securities generally offer lower interest or dividend
yields than non-convertible securities of similar quality. However, when the
market price of the common stock underlying a convertible security exceeds the
conversion price, the price of the convertible security tends to reflect the
value of the underlying common stock. As the market price of the underlying
common stock declines, the convertible security tends to trade increasingly on a
yield basis, and thus may not depreciate to the same extent as the underlying
common stock. Convertible securities in which the Core Fund invests will be
subject to the same rating criteria as its other investments in fixed income
securities.
LENDING OF PORTFOLIO SECURITIES
Each Fund may lend portfolio securities. Under present regulatory
policies, such loans may be made to institutions, such as brokers or dealers and
would be required to be secured continuously by collateral in cash, cash
equivalents, letters of credit or U.S. Government securities maintained on a
current basis in an amount at least equal to the market value of the securities
loaned. Cash collateral may be invested in cash equivalents. 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
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the loan in anticipation of an important vote to be taken among holders of the
securities or the giving or withholding of their consent on a material matter
affecting the investment. As with other extensions of credit there are risks
of delay in recovering, or even loss of rights in, the collateral should the
borrower of the securities fail financially. However, the loans 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. (Certain commercial paper issued in reliance on Section 4(2) of the
Securities Act of 1933 is treated like Rule 144A Securities.) 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 or Section 4(2) 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 a Fund 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.
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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 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 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 three days prior to 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.
OTHER INVESTMENT COMPANIES
Each Fund reserves the right to invest up to 10% of its total assets,
calculated at the time purchase, in the securities of other investment
companies, but may not 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. Pursuant to an exemptive order obtained from
the SEC, the Funds may invest in money market funds for which the Adviser or any
of its affiliates serves as investment adviser. A Fund will indirectly bear its
proportionate share of any management fees and other expenses paid by investment
companies in which it invests in addition to the advisory and administration
fees paid by the Fund. However, to the extent that a Fund invests in a money
market fund for which the Adviser acts as adviser, the advisory and
administration fees payable by the Fund to and Adviser will be reduced by an
amount equal to the Fund's proportionate share of the advisory and
administration fees paid by such money market fund to the Adviser or any of its
affiliates.
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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, generally for tax purposes, a repurchase
agreement is deemed to be a loan from a Fund to the seller of the security. For
other purposes, it is not clear whether a court would consider the security
purchased by a Fund subject to a repurchase agreement as being owned by the Fund
or as being collateral for a loan by the Fund to the seller. In the event of
commencement of bankruptcy or insolvency proceedings with respect to the seller
of the security before repurchase of the security under a repurchase agreement,
a Fund may encounter delay and incur costs before being able to sell the
security. Such a delay may involve loss of interest or a decline in price of
the security. If the court characterizes the transaction as a loan and a Fund
has not perfected a security interest in the security, 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.
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INVESTMENT IN UNSEASONED COMPANIES
Global Income Fund and Government Income Fund may each invest up to 5% of
its total assets, calculated at the time of purchase, in companies (including
predecessors) which have operated less than three years, excluding issuers whose
debt securities have been rated, at the time of investment, investment grade or
better by at least one nationally recognized statistical rating organization.
The securities of such companies may have limited liquidity, which can result in
their being priced higher or lower than might otherwise be the case. In
addition, investments in unseasoned companies are more speculative and entail
greater risk than do investments in companies with an established operating
record.
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 Tax-Free Fund's and Municipal Income
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 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. With respect to the Tax
Exempt Funds, 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.
AS A MATTER OF FUNDAMENTAL POLICY, 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
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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.
(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;
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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 in the securities of other investment companies, provided that
the Fund may make such an investment as part of a merger, consolidation, or
acquisition of assets, and provided further that the Fund may make such an
investment in the open market where no commission or profit to a sponsor or
dealer results from the purchase other than customary brokers' commissions and
then only to the extent permitted by the Act;
(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 total assets of the Fund;
(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;
(e) purchase additional securities which the amount of the Fund's
borrowings exceed 5% of the Fund's net assets; or
(f) 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
10% of its total assets
B-53
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in restricted securities (including those eligible for resale under Rule 144A).
AS A MATTER OF FUNDAMENTAL POLICY, GOVERNMENT INCOME FUND MAY NOT:
(1) Purchase securities of any one issuer, other than obligations issued or
guaranteed by the U.S. government, its agencies, instrumentalities or sponsored
enterprises, 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 or by its agencies,
instrumentalities or sponsored enterprises.
(2) 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, 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 securities
pending the anticipated sale of other portfolio securities or assets and (d)
transactions in mortgage dollar rolls, 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, 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, instrumentalities or sponsored
enterprises.
(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.
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<PAGE>
(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 limited partnership
interests, or in oil, gas or mineral interests, although the Fund may purchase
and sell securities that are secured by real estate or interests therein,
securities of real estate investment trusts and Mortgage-Backed 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 Act) except as permitted in Investment Restriction No. (2).
In addition, as non-fundamental policies, the Government Income Fund may
not:
(a) invest in the securities of other investment companies, provided that
the Fund may make such an investment as part of a merger, consolidation, or
acquisition of assets, and provided further that the Fund may make such an
investment in the open market where no commission or profit to a sponsor or
dealer results from the purchase other than customary brokers' commissions and
then only to the extent permitted by the Act;
(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) invest more than 5% of the Fund's total assets in (i) securities of any
issuer with a record of less than three years' continuous operation, including
predecessors, except Government Securities and securities guaranteed by any
foreign government or its agencies or instrumentalities;
B-55
<PAGE>
(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;
(e) purchase additional securities while the amount of the Fund's
borrowings exceeds 5% of the Fund's total assets; or
(f) 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
10% of its total assets in restricted securities (including those eligible for
resale under Rule 144A).
AS A MATTER OF FUNDAMENTAL POLICY, SHORT DURATION GOVERNMENT 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
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<PAGE>
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 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
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<PAGE>
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.
(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 Duration Government 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 Duration Government Fund does
not currently intend to purchase or sell interests in oil, gas or other mineral
exploration or development programs.
AS A MATTER OF FUNDAMENTAL POLICY, SHORT DURATION TAX-FREE 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 restriction is not applicable to investments in tax-
exempt securities issued by state and municipal governments and their agencies
and instrumentalities; 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. The 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. The Fund may so invest in (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
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(including hotels), steel companies or life care facilities, (b) Municipal
Securities whose issuers are in the same state or (c) industrial development
obligations.
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 of the Fund or to finance failed settlements
of portfolio trades without immediately liquidating portfolio securities or
other assets; and (c) in order to fulfill commitments or plans to purchase
additional securities pending the anticipated sale of other portfolio securities
or assets, but only if after each such borrowing there is asset coverage of at
least 300% as defined in the Act. For purposes of this investment restriction,
short sales, 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
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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.
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 Tax-Free 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 Tax-
Free 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 in the securities of other investment companies, provided that
the Fund may make such an investment as part of a merger, consolidation, or
acquisition of assets, and provided further that the Fund may make such an
investment in the open market where no commission or profit to a sponsor or
dealer results from the purchase other than customary brokers' commissions and
then only to the extent permitted by the Act.
(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
10% of its total 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, other than
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Municipal Securities that have been rated A or better by Moody's or Standard &
Poor's.
For the purpose of applying Short Duration Tax-Free 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. For purposes of the
foregoing limitations, any limitation which involves a maximum percentage shall
not be considered violated unless an excess over the percentage occurs
immediately after, and is caused by, an acquisition or encumbrance of securities
or assets of, or borrowings by, the Fund. With respect to fundamental
investment restriction No. 3, the Fund must maintain asset coverage of at least
300% (as defined in the Act), inclusive of any amounts borrowed.
AS A MATTER OF FUNDAMENTAL POLICY, MUNICIPAL 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 restriction is not applicable to investments in tax-exempt
securities issued by state and municipal governments and their agencies and
instrumentalities; 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.
The 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. The Fund may so invest in (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)
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<PAGE>
Municipal Securities whose issuers are in the same state, or (c) industrial
development obligations.
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 shares of the Fund or to finance failed settlements of
portfolio trades without immediately liquidating portfolio securities or other
assets; and (c) in order to fulfill commitments or plans to purchase additional
securities pending the anticipated sale of other portfolio securities or assets,
but only if after each such borrowing there is asset coverage of at least 300%
as defined in the Act. For purposes of this investment restriction, short
sales, 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 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
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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 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 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, the Municipal Income 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 that are not readily marketable and restricted securities not
eligible for resale pursuant to Rule 144A under the Securities Act of 1933; or
(b) more than 10% of its total assets in restricted securities (including those
eligible for resale under Rule 144A).
(d) Purchase additional securities while the Fund's borrowings exceed 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, other than Municipal Securities that have been
rated A or better by Moody's or Standard & Poor's.
(f) Invest in the securities of other investment companies, provided that
the Fund may make such an investment as part of a merger, consolidation, or
acquisition of assets, and provided further that the Fund may make such an
investment in the open market where no commission or profit to a sponsor or
dealer results from the purchase other than customary brokers' commissions and
then only to the extent permitted by the Act.
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<PAGE>
For the purpose of applying the Fund's investment restrictions, the
identification of the issuer of a Municipal Security that is not a general
obligation 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. For purposes of the foregoing
limitations, any limitation which involves a maximum percentage shall not be
considered violated unless an excess over the percentage occurs immediately
after, and is caused by, an acquisition or encumbrance of securities or assets
of, or borrowings by, the Fund. With respect to fundamental investment
restriction No. 3, the Fund must maintain asset coverage of at least 300% (as
defined in the Act), inclusive of any amounts borrowed.
AS A MATTER OF FUNDAMENTAL POLICY, 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
transactions shall not constitute borrowing.
B-64
<PAGE>
4. Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings and to the extent related to the
deposit of assets in escrow in connection with the writing of covered put and
call options and the purchase of securities on a forward commitment or delayed-
delivery basis and collateral and initial or variation margin arrangements with
respect to 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 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:
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<PAGE>
(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
10% of its total assets in restricted securities (including those eligible for
resale pursuant to Rule 144A).
(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.
(f) Invest in the securities of other investment companies, provided that
the Fund may make such an investment as part of a merger, consolidation, or
acquisition of assets, and provided further that the Fund may make such an
investment in the open market where no commission or profit to a sponsor or
dealer results from the purchase other than customary brokers' commissions and
then only to the extent permitted by the Act.
AS A MATTER OF FUNDAMENTAL POLICY, GLOBAL INCOME FUND MAY NOT:
(1) Borrow money, except from banks on a temporary basis, provided that the
Fund is required to maintain asset coverage of at least 300% for all borrowings.
For purposes of this investment restriction, short sales, transactions in
currency, forward contracts, options, futures contracts and options on futures
contracts, and forward commitment transactions shall not constitute borrowing.
(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 in obligations of
the U.S. Government or any of its agencies or instrumentalities.
(3) Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings and to the extent
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<PAGE>
related to the segregation of assets in connection with the writing of covered
put and call options and the purchase of securities or currencies on a forward
commitment or delayed-delivery basis and collateral and initial or variation
margin arrangements with respect to forward contracts, options, futures
contracts and options on futures contracts.
(4) Purchase securities on margin, except for such short-term credits as
are necessary for the clearance of transactions, but the Fund may make margin
deposits in connection with transactions in currencies, options, futures and
options on futures.
(5) Make short sales of securities, except short sales against-the-box, or
maintain a short position. (The Fund does not currently intend to make short
sales against-the-box.)
(6) 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.
(7) 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.
(8) Invest in commodities, except that the Fund may (a) purchase and sell
futures contracts, including those relating to securities, currencies and
indices, and options on any such futures contracts or currencies, and (b)
purchase and sell currencies or securities on a forward commitment or delayed-
delivery basis.
(9) Lend any funds or other assets except through the purchase of all or a
portion of an issue of securities or obligations of the type in which it may
invest; however, the Fund may lend portfolio securities in an amount not to
exceed 33-1/3% of the value of its total assets.
(10) Issue any senior security (as such term is defined in Section 18(f) of
the Act), except as permitted in Investment Restriction Nos. (1), (4), (5) and
(9).
In addition, as non-fundamental policies, Global Income Fund may not:
(a) Invest in the securities of other investment companies, provided that
the Fund may make such an investment as part of a merger, consolidation, or
acquisition of assets, and provided further that the Fund may make such an
investment in the open market where no commission or profit to a sponsor or
dealer results from the purchase other than customary brokers' commissions and
then only to the extent permitted by the Act.
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<PAGE>
(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) 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 Securities Act of 1933; or
(b) more than 10% of its total assets in restricted securities (including those
eligible for resale under Rule 144A).
(d) Purchase additional securities while the amount of the Fund's
borrowings exceeds 5% of the Fund's net 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 73, 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 Corporation.
Ashok N. Bakhru, Age 53, 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 40, One New York Plaza, New York, New York 10004. President
---------
and Trustee. Director, Mutual Funds Group of GSAM since September 1992; Vice
- -----------
President and Senior Portfolio Manager, GSAM from June 1988 to Present.
David B. Ford,* Age 50, 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.
B-68
<PAGE>
Alan A. Shuch,* Age 46, 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; Limited Partner, Goldman Sachs since December
1994.
Jackson W. Smart, Jr., Age 65, 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; Director,
Federal Express Corporation; and North American Private Equity Group (a venture
capital fund).
William H. Springer, Age 66, 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, American
Information Technologies Corporation; Director, Walgreen Co. (a retail drugstore
business); and Baker, Fentress & Co. (a closed-ended non-diversified management
investment company).
Richard P. Strubel, Age 56, 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) January 1984 to October 1994;
Pauline Taylor,* Age 49, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs since June 1992; Consultant since 1989
- ---------
to June 1992.
Nancy L. Mucker,* Age 46, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs; Co-Manager, Shareholder Services for
- ---------
GSAM Funds Group.
John W. Mosior,* Age 57, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs; Co-Manager, Shareholder Services for
- ---------
GSAM Funds Group.
Scott M. Gilman,* Age 36, 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.
Michael J. Richman,* Age 35, 85 Broad Street, New York, New York 10004.
Secretary. Vice President and Assistant General Counsel to the Funds Group,
- ---------
GSAM since February 1994; Partner, Hale and Dorr since September 1991 to June
1992; Attorney-at-Law, Gaston & Snow since September 1985 to September 1991.
Howard B. Surloff,* Age 30, 85 Broad Street, New York, New York 10004. Assistant
---------
Secretary. Vice President and Assistant General
- ---------
B-69
<PAGE>
Counsel, Goldman Sachs since November 1993 and May 1994, respectively; Counsel
to the Funds Group, GSAM since November 1993; Associate of Shereff, Friedman,
Hoffman & Goodman (prior thereto).
Steven E. Hartstein*, Age 32, 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).
Deborah A. Robinson*, Age 24, 85 Broad Street, New York, New York 10004.
Assistant Secretary. Administrative Assistant, Goldman Sachs since January
- -------------------
1994. Formerly at Cleary, Gottlieb, Stein and Hamilton.
Kaysie Uniacke*, Age 34, One New York Plaza, New York, New York 10004.
Assistant Secretary. Vice President and Portfolio Manager, GSAM 1988 to
- -------------------
Present.
Elizabeth Alexander*, Age 26, One New York Plaza, New York, New York 10004.
Assistant Secretary. Junior Portfolio Manager, 1995 to Present. Funds Trading
- -------------------
Assistant, GSAM 1993 - 1995. Formerly, Compliance Analyst, Prudential
Insurance, 1991 thru 1993.
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 December 31, 1995,
the Trustees and officers as a group owned less than 1% of the outstanding
shares of beneficial interest of each Fund.
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, 1995:
Total
Pension or Compensation
Aggregate Retirement from Goldman
Compensation Benefits Accrued Sachs Mutual
from the as of Part of Funds including
Trust Trust's Expenses the Trust)*
------------ ---------------- ---------------
Name of Trustees
Paul C. Nagel, Jr. $17,596 $0 $101,000
Ashok N. Bakhru $11,081 $0 $ 61,000
Marcia L. Beck $ 0 $0 $ 0
David B. Ford $ 0 $0 $ 0
Alan A. Shuch $ 0 $0 $ 0
Jackson W. Smart $11,081 $0 $ 61,000
William H. Springer $11,081 $0 $ 61,000
Richard P. Strubel $11,081 $0 $ 61,000
* The Goldman Sachs Mutual Funds consisted of 29 mutual funds, including the
seven series of the Trust, on October 31, 1995.
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<PAGE>
INVESTMENT ADVISERS
- -------------------
GSAM, One New York Plaza, New York, New York 10004, a separate operating
division of Goldman Sachs, serves as the investment adviser to Municipal Income
Fund, Government Income Fund, Global Income Fund, Short Duration Tax-Free Fund
and Core Fund pursuant to separate investment advisory agreements. FMLP, One New
York Plaza, New York, New York 10004, serves as the investment adviser to
Adjustable Rate Fund and Short Duration Government Fund pursuant to separate
investment advisory agreements. FMLP, a Delaware limited partnership, is an
affiliate of Goldman Sachs. GSAMI, 140 Fleet Street, London EC4A 2BJ, England,
acts as the Global Income Fund's subadviser. As a company with unlimited
liability under the laws of England, GSAMI is regulated by the Investment
Management Regulatory Organization Limited, a United Kingdom self-regulatory
organization in the conduct of its investment advisory business. GSAM also
serves as administrator to Municipal Income Fund, Government Income Fund and
Global Income Fund. See "MANAGEMENT" in the Fund's Prospectus for a description
of the applicable Adviser's duties as investment adviser or subadviser.
Founded in 1869, Goldman Sachs is among the oldest and largest investment
banking firms in the United States. Goldman Sachs is a leader in developing
portfolio strategies and in many fields of investing and financing,
participating in financial markets worldwide and serving individuals,
institutions, corporations and governments. Goldman Sachs is 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
$160 million, Goldman Sachs' Investment Research Department covers approximately
1,700 companies, including approximately 1,000 U.S. corporations in 60
industries. The in-depth information and analyses generated by Goldman Sachs'
research analysts are available to the Advisers.
For more than a decade, Goldman Sachs has been among the top-ranked firms in
Institutional Investor's annual "All-America Research Team" survey. In
addition, many of Goldman Sachs' economists, securities analysts, portfolio
strategists and credit analysts have consistently been highly ranked in
respected industry surveys conducted in the U.S. and abroad. Goldman Sachs is
also
B-71
<PAGE>
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 relative
to its interest risk.
In planning the Tax Exempt Funds' strategies, the 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 the Tax Exempt Funds'
yields by fine-tuning the portfolio, using quantitative tools designed for
municipal portfolio management. The Adviser, which managed approximately $3
billion in tax-free securities in 1995, has assembled an experienced team of
professionals for selection of the Tax Exempt Funds' portfolio securities. The
Adviser manages money for some of the world's largest institutional investors.
In structuring Adjustable Rate Fund's and Short Duration Government 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 in CMO
floating rate tranches and interest only stripped Mortgage-Backed Securities).
With respect to Adjustable Rate Fund, Government Income Fund, Short Duration
Government 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
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<PAGE>
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 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, Government Income
Fund, Short Duration Government 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
B-73
<PAGE>
customers. Use of these services by the Advisers with respect to a Fund does
not preclude Goldman Sachs from providing these services to third parties or
using such services as a basis for trading for its own account or the account of
others.
The fixed income research capabilities of Goldman Sachs are available to the
Advisers include the Goldman Sachs Fixed Income Research Department and the
Credit Department. The Fixed Income Research Department monitors developments
in U.S. and foreign fixed income markets, assesses the outlooks for various
sectors of the markets and provides relative value comparisons, as well as
analyzes trading opportunities within and across market sectors. The Fixed
Income Research Department is at the forefront in developing and using computer-
based tools for analyzing fixed income securities and markets, developing new
fixed income products and structuring portfolio strategies for investment policy
and tactical asset allocation decisions. The Credit Department tracks specific
governments, regions and industries and from time to time may review the credit
quality of a Fund's investments.
In addition to fixed income research and credit research, the Advisers in
managing Global Income Fund are supported by Goldman Sachs' economics research.
The Economics Research Department, based in London, conducts economic, financial
and currency markets research which analyzes economic trends and interest and
exchange rate movements worldwide. The Economics Research Department tracks
factors such as inflation and money supply figures, balance of trade figures,
economic growth, commodity prices, monetary and fiscal policies, and political
events that can influence interest rates and currency trends. The success of
Goldman Sachs' international research team has brought wide recognition to its
members. The team has earned top rankings in the annual "Extel Financial
Survey" of U.K. investment managers in the following categories: U.K. Economy
1989-1995; International Economies 1986, 1988-1995; International Government
Bond Market 1993-1995; and Currency Movements 1986-1993.
In allocating assets in the Global Income Fund's portfolio among
currencies, the Advisers will have access to the Global Asset Allocation Model.
The model is based on the observation that the prices of all financial assets,
including foreign currencies, will adjust until investors globally are
comfortable holding the pool of outstanding assets. Using the model, the
Advisers will estimate the total returns from each currency sector which are
consistent with the average investor holding a portfolio equal to the market
capitalization of the financial assets among those currency sectors. These
estimated equilibrium returns are then combined with Goldman Sachs' research
professionals' expectations to produce an optimal currency and asset allocation
for the level of risk suitable for the Fund's investment objective and criteria.
Each Fund's advisory agreement, and in the case of Global Income Fund, the
Subadvisory 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
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<PAGE>
agreements or "interested persons" (as such term is defined in the Act) of any
party thereto (the "non-interested Trustees"), on April 26, 1995. The
applicable Fund's Advisory Agreement including Global Income Fund's Subadvisory
Agreement was approved by the shareholders of Adjustable Rate Fund on October
30, 1991, the shareholders of Short Duration Government Fund on March 27, 1989,
the shareholders of Global Income Fund on December 5, 1991, the sole initial
shareholder of Short Duration Tax-Free Fund on September 25, 1992, the sole
initial shareholder of Government Income Fund on January 30, 1993, the sole
initial shareholder of Municipal Income Fund on July 16, 1993 and the sole
initial shareholder of Core Fund on October 29, 1993. Each Advisory Agreement
will remain in effect until June 30, 1996 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.
Each Advisory Agreement will terminate automatically if assigned (as defined
in the Act). Each Advisory Agreement is also terminable at any time without
penalty by the Trustees of the Trust or by vote of a majority of the outstanding
voting securities of a Fund on 60 days written notice to the applicable Adviser
or by the Adviser in 60 days written notice of the Trust.
The Advisory Agreements provide that GSAM, FMLP and GSAMI, in their
capacity as advisers and subadviser, respectively, 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, the Adviser is entitled
to receive the fee set forth below and the Adviser is currently limiting the fee
to the rate set forth below:
Contractual Current
Rate Rate
Adjustable Rate Fund 0.40% 0.40%
Short Duration Government Fund 0.50% 0.40%
Government Income Fund 0.50% 0.25%
Short Duration Tax-Free Fund 0.40% 0.40%
Municipal Income Fund 0.40% 0.40%
Core Fund 0.40% 0.40%
Global Income Fund
Advisory 0.25% 0.12%
Subadvisory 0.50% 0.32%
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. See "Expenses" for discussion of Global Income Fund's
other expense limitations.
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<PAGE>
For the fiscal years ended October 31, 1995, 1994 and 1993, the
amounts of the investment advisory fees incurred by each Fund then in existence
were as follows:
1995 1994 1993
---------- ---------- ----------
Adjustable Rate Fund $2,947,492 $6,798,185 $9,498,008
Short Duration Government 517,091 1,063,867 1,311,347
Fund/(1)/
Short Duration Tax-Free Fund/(2)/ 260,970 468,868 243,069
Core Fund/(3)/ 137,158 56,255 n/a
Global Income Fund/(4)/ 706,460 1,518,814 1,553,394
Government Income Fund/(5)/ 44,037 0 0
Municipal Income Fund/(6)/ 154,707 35,494 0
_________________________
/(1)/ Had expense limitations not been in effect, Short Duration Government Fund
would have paid advisory fees of $646,364, $1,329,834 and $1,639,184,
respectively, for such periods.
/(2)/ Short Duration Tax-Free Fund commenced operations October 1, 1992. Had
expense limitations not been in effect, Short Duration Tax-Free Fund would
have paid advisory fees of $272,283, for the period ended October 31,
1993.
/(3)/ Core Fund commenced operations January 5, 1994.
/(4)/ For the same periods, Global Income Fund paid GSAMI Subadvisory fees of
$1,412,921, $3,037,627 and $3,106,787, respectively, for such periods. If
expense limitations had not been in effect, Global Income Fund would have
paid advisory and subadvisory fees of $789,127 and $1,578,254,
respectively, for the period ended October 31, 1995.
/(5)/ Government Income Fund commenced operations February 10, 1993. Had
expense limitations not been in effect, Government Income Fund would have
paid advisory fees of $101,737, $65,604 and $28,306, respectively, for
such periods.
/(6)/ Municipal Income Fund commenced operations July 20, 1993. Had expense
limitations not been in effect, Municipal Income Fund would have paid
advisory fees of $200,207, $174,161 and $23,115, respectively, for such
periods.
Each Adviser performs administrative services for the applicable Funds
under the Advisory Agreements, except in the case of Global Income Fund,
Government Income Fund and Municipal Income Fund where GSAM performs
administrative services under a separate Administration Agreement. Such
administrative services 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
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<PAGE>
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.
For the service provided to these Funds under their respective
administration agreement, the Fund pays GSAM a monthly fee equal to 0.15% of 1%
of such Fund's average daily net assets on an annual basis. GSAM is currently
waiving its entire administration fee with respect to Government Income Fund.
Although it has no current intentions to do so, GSAM may modify or discontinue
such agreement at its discretion at any time.
For the fiscal years ended October 31, 1995, 1994 and 1993, the amounts of
the administration fees incurred by the Funds then in existence were as follows:
1995 1994 1993
------- ------- -------
Municipal Income Fund/(1)/ 75,077 55,277 0
Government Income Fund/(2)/ 0 0 0
Global Income Fund 473,476 911,288 932,036
_____________________
/(1) /For the fiscal year ended October 31, 1994, GSAM voluntarily agreed not to
impose a portion of its administration fee amounting to and $10,229. For
the period for July 20, 1993, (commencement of operations) through October
31, 1993, GSAM voluntarily agreed not to impose its administration fee,
which would have amounted to $8,668 for such period.
/(2)/ For the fiscal years ended October 31, 1995, October 31, 1994 and for the
period February 10, 1993 (commencement of operations) through October 31,
1993, GSAM voluntarily agreed not to impose its administration fees, which
would have amounted to $30,521, $19,681 and $8,492, respectively, for such
periods.
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, Goldman Sachs International ("GSI") and
J. Aron a & Co. ("ARON") have proprietary interests in, and may manage or advise
with respect to, accounts or funds (including separate accounts and other funds
and collective investment vehicles) which have investment objectives similar to
those of the Funds and/or which engage in transactions in the same types of
securities, currencies and instruments as the Funds. Goldman Sachs and its
affiliates are major participants in the global currency, equities, swap and
fixed income markets, in each case on a proprietary basis and for the accounts
of customers. As such, Goldman Sachs and its affiliates are actively engaged in
transactions in the same securities, currencies, and instruments in which the
Funds invest. Such activities could affect the prices and availability of the
securities, currencies, and instruments in which the Funds will invest, which
could have an adverse impact on 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 of such entitles to be equitable. In some cases, this system may
adversely affect the size or the price of the assets purchased or sold for the
Funds.
From time to time, the Funds' activities may be restricted because of
regulatory restrictions applicable to Goldman Sachs and its affiliates, and/or
their internal policies designed to comply with such restrictions. As a result,
there may be periods, for example, when the Advisers, and/or their affiliates
will not initiate or recommend certain types of transactions in certain
securities or instruments with respect to which, or in securities of issuers for
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, ARON 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 and Subadvisers 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
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<PAGE>
accounts could conflict with the transactions and strategies employed by the
Advisers and Subadviser in managing the Funds.
The results of each Fund's investment activities may differ significantly
from the results achieved by the Advisers and their affiliates for their
proprietary accounts or accounts (including investment companies or collective
investment vehicles) managed or advised by them. It is possible that Goldman
Sachs and its affiliates and such other accounts will achieve investment results
which are substantially more or less favorable than the results achieved by a
Fund. Moreover, it is possible that a Fund will sustain losses during periods
in which Goldman Sachs and its affiliates achieve significant profits on their
trading for proprietary or other accounts. The opposite result is also
possible.
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,
currencies 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, J. ARON and/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.
The Advisers may enter into transactions and invest in instruments and, in
the case of Global Income Fund and Core Fund, currencies 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 currencies 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. The Funds will deal with Goldman Sachs and its affiliates on an
arm's-length basis.
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<PAGE>
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.
DISTRIBUTOR AND TRANSFER AGENT
- ------------------------------
Goldman Sachs serves as the exclusive distributor of shares of the Funds
pursuant to a "best efforts" arrangement as provided by a distribution agreement
with the Trust dated February 1, 1993, as amended as of January 30, 1996.
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 has entered into sales agreements with certain investment dealers
and financial service firms (the "Authorized Dealers") to solicit subscriptions
for Class A and Class B Shares of each of the Funds that offer such classes of
shares. Goldman Sachs received a portion of the sales load imposed on the sale,
in the case of Class A Shares, or redemption in the case of Class B Shares, of
such Fund shares. No Class B Shares were outstanding during the fiscal years
ended October 31, 1993, 1994 and 1995. Goldman Sachs retained the following
commissions on sales of Class A shares during the following periods:
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<PAGE>
1995 1994 1993
------- ------- --------
Adjustable Rate Fund*** $40,000 n/a n/a
Municipal Income Fund 48,000 76,000 12,000*
Government Income Fund 22,000 5,000 7,000**
Global Income Fund 15,000 350,000 922,000
- ---------------------
* For the period July 20, 1993 (commencement of operations) through October
31, 1993
** For the period February 10, 1993 (commencement of operations) through
October 31, 1993.
*** Prior to May 15, 1995 Adjustable Rate Fund did not offer Class A Shares.
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, 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 from
the Short Duration Government Fund, Short Duration Tax-Free Fund and Core Income
Fund equal to (i) 0.04 of 1% (on an annualized basis) of the average daily net
assets attributable to the applicable class of the Fund; (ii) from the
Government Income, Global Income and Municipal Income Funds with respect to
Class A and Class B shares, $12,000 plus $7.50 per account, together with out-
of-pocket and transactions-related expenses (including those out-of-pocket
expenses payable to servicing agents; and (ii) from the Adjustable Rate Fund
equal to each class proportionate share of the total transfer agency fees borne
by the Fund, which are equal to $12,000 per year plus $7.50 per account,
together with out-of-pocket expenses (including those out-of-pocket expenses
payable to servicing agents) applicable to Class A shares and 0.04% of the
average daily net assets of the other classes of Adjustable Rate Government
Fund. Goldman Sachs is not entitled to receive a fee from the Institutional
Class of shares of Global Income Fund.
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<PAGE>
For the fiscal years ended October 31, 1995, 1994 and 1993 the amounts of
transfer agency fees incurred by each Fund then in existence were as follows:
1995 1994 1993
-------- -------- --------
Adjustable Rate Fund $306,662 $679,819 $949,645
Short Duration Government Fund 0 0 0
Short Duration Tax-Free Fund 26,098 46,887 27,248
Core Fund/(1)/ 13,716 5,637 n/a
Global Income Fund 106,764 132,123 127,834
Municipal Income Fund/(2)/ 63,695 70,811 17,500
Government Income Fund/(3)/ 94,095 57,960 44,012
- ------------------------
/(1)/ Core Fund commenced operations on January 5, 1994.
/(2)/ Municipal Income Fund commenced operations on July 20, 1993.
/(3)/ Government Income Fund commenced operations on February 10, 1993.
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" the Trust, on
behalf of each Fund, is responsible for the payment of each Fund's respective
expenses. The expenses borne by the outstanding classes of each Fund include,
without limitation, the fees payable to the Adviser 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 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, fees under any
distribution, authorized dealer service, administration or service plans
applicable to a particular class, any compensation and expenses of its "non-
interested" Trustees and extraordinary expenses, if any, incurred by the Trust.
Except for fees under any distribution, authorized dealer service,
administration or service plans applicable to a particular class and transfer
agency fees all Fund expenses are borne on a non-class specific basis.
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<PAGE>
The Advisers voluntarily have agreed to reduce or otherwise limit certain
Other Expenses (excluding transfer agency fees (except in the case of Global
Income Fund), advisory, subadvisory and administration fees, fees payable under
administration, distribution, service and authorized dealer service plans,
taxes, interest, brokerage fees and litigation, indemnification and other
extraordinary expenses) to the following percentage of each Fund's average daily
net assets:
Short Duration Government Fund 0.05%
Adjustable Rate Fund 0.05%
Municipal Income Fund 0.05%
Government Income Fund 0.00%
Short Duration Tax-Free Fund 0.05%
Core Fund 0.05%
Global Income Fund 0.06%
Such reductions or limits are calculated monthly on a cumulative basis.
Although the Advisers have no current intention of modifying or discontinuing
such expense limitation or the limitations on the advisory or subadvisory fees,
described above under "Advisory and Administrative Services -- Investment
Advisers and Administrator," each may do so in the future at its discretion.
For the fiscal year ended October 31, 1995, October 31, 1994 and October 31,
1993, Other Expenses of each Fund were reduced by the Advisers in the following
amounts:
1995 1994 1993
------- ------- -------
Adjustable Rate Fund 551,405 442,880 731,102
Short Duration
Government Fund 219,994 115,389 139,186
Short Duration
Tax-Free Fund 213,139 192,696 412,548
Core Fund* 176,469 141,815 n/a
Municipal Income Fund** 196,265 198,806 91,662
Government Income Fund***242,036 224,285 161,754
Global Income Fund**** 70,195 0 0
- ----------------------
* Core Fund commenced operations on January 5, 1994.
** Municipal Income Fund commenced operations on July 20, 1993.
*** Government Income Fund commenced operations on February 10, 1993.
**** For the fiscal years ended October 31, 1994 and October 31, 1993, there
were no expense limitations.
As stated in the Prospectuses, each Fund is responsible for the payment of
all expenses other than those assumed by its Adviser or Administrator. 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
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<PAGE>
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.
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 the
Advisers 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 in foreign countries and to hold cash
and currencies for the Trust.
INDEPENDENT PUBLIC ACCOUNTANTS
- ------------------------------
Arthur Andersen LLP, independent public accountants, One International
Place, 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 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 certain
foreign countries, debt securities in which the Global Income Fund and Core Fund
may invest are traded on exchanges at fixed commission rates. In connection
with portfolio transactions, the Advisory and Subadvisory 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), a Fund, to the extent permitted by applicable laws
and regulations, may aggregate the securities to be sold or purchased for the
Fund
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<PAGE>
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 the applicable 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 and Subadvisory 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. The fees received under
the Advisory and Subadvisory Agreement are not reduced by reason of the Advisor
or Subadviser receiving such brokerage and research services.
For the fiscal years ended October 31, 1995, 1994 and 1993, the Funds then
in existence paid no brokerage commissions.
During the fiscal year ended October 31, 1995, the Funds acquired and sold
securities of their regular broker-dealers: Chemcial Securities, Lehman
Brothers, Inc., Salomon Brothers, Inc., Merrill Lynch, Robert W. Baird, Daiwa
Securities, J.P. Morgan & Co., Inc., Donaldson, Lufkin, Jenrette, Nomura
Securities and Morgan Stanley & Co.
At October 31, 1995, Short Duration Tax-Free Fund, Global Income Fund and
Municipal Income Fund held no securities of their regular broker-dealers. As of
the same date, Short Duration Government Fund, Adjustable Rate Fund, Government
Income 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 Duration Government Fund: Lehman Brothers,
Inc. ($269) and Salomon Brothers, Inc. ($231); Adjustable Rate Fund: Lehman
Brothers, Inc. ($8602) and Salomon Brothers, Inc. ($7398); Government Income
Fund: Lehman Brothers, Inc. ($1559) and Salomon Brothers, Inc. ($1341); Core
Fund: Lehman Brothers, Inc. ($3011) and Salomon Brothers, Inc. ($2589).
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 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
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shares of the Funds. 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: (i) the
issuance of three classes of shares of Short Duration Government Fund, Short
Duration Tax-Free Fund and Core Fund: Institutional Shares, Administration
Shares and Service Shares; (ii) the issuance of four classes of shares of
Adjustable Rate Fund: Institutional Shares, Administration Shares, Service
Shares and Class A Shares; (iii) the issuance of four classes of shares of
Global Income Fund: Institutional Shares, Service Shares, Class A Shares and
Class B Shares; and (iv) the issuance of two classes of Municipal Income Fund
and Government Income Fund: Class A Shares and Class B Shares. As of October
31, 1995, no Service Shares of the Adjustable Rate Fund were outstanding; no
Service Shares of Short Duration Government Fund were outstanding no
Administration or Service Shares of Core Fund were outstanding; no Service
Shares or Class B Shares of Global Income Fund were outstanding; and no Class B
shares of Municipal Income Fund or Government Income Fund were outstanding.
Each Institutional Share, Administration Share, Service Share, Class A
Share and Class B Share of a Fund represents an equal proportionate interest in
the assets belonging to the Fund. All Fund expenses are allocated among classes
based on a percentage of a Fund's aggregate average net assets, except that
transfer agency fees and fees under distribution, authorized dealer service,
administration and service plans 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 and assisting customers with investment procedures. Service
Shares bear the cost of service fees at the annual rate of up to 0.50% of the
average daily net assets of such Service Shares. Institutions
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that provide services to holders of Administration Shares or Service Shares are
referred to in this Additional Statement as "Service Organizations".
Class A Shares are sold, with an initial sales charge of up to 1.50%,
in the case of Adjustable Rate Fund, and 4.50%, in the case of Municipal Income
Fund, Government Income Fund and Global Income Fund, 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 the Funds bear the cost of distribution (Rule 12b-1)
fees at the aggregate rate of up to 0.25% of the average daily net assets of
such Class A Shares. Class A Shares also bear the cost of an Authorized Dealer
Service Plan at an annual rate of up to 0.25% of average daily net assets
attributable to Class A Shares.
Class B Shares of the Funds are sold subject to a contingent deferred
sales charge of up to 5.0% through brokers and dealers who are members of the
National Association of Securities Dealers Inc. and certain other financial
services firms that have sales arrangements with Goldman Sachs. Class B shares
bear the cost of distribution (Rule 12b-1) fees at the aggregate rate of up to
0.75% of the average daily net assets attributable to Class B shares. Class B
shares also bear the cost of an Authorized Dealer Service Plan at an annual
rate of up to 0.25% of the average daily net assets attributable to Class B
shares.
It is possible that an institution or its affiliate may offer
different classes of shares (i.e., Institutional, Administration, Service, Class
A and Class B Shares) to its customers and thus receive different compensation
with respect to different classes of shares of each Fund. Shares of each class
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, authorized dealer service plan
and distribution 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
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share, are freely transferable and have no preemptive, subscription or
conversion rights.
As of November 30, 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 Idaho, FBO: Idaho Housing Agency,
P.O. Box 30007, Salt Lake City, UT 84130 (5.83%); St. Treasurer/Nebr. Invest.
Council, (5.12%); Fundex Corporation, Attn: Mitsuru Hashimoto, 1875 South Grant
Street, Suite 740, San Mateo, CA 94402-2670 (5.01%); Banco Bileao Vizcaya,
(7.67%); BankAmerica National Trust Co. ((8.92%); Meadows Foundation, Inc.
(5.27%); Short Duration Government Fund - West Virginia University Foundation,
Attn: Marie Amoyt, 3168 Collins Ferry Road, P.O. Box 4533, Morgantown, WV 26504-
4533 (7.39%); Central Carolina Bank & Trust Co., Attn: Norwood Thomas, Jr., P.O.
Box 931, Durham, NC 27702 (9.09%); Richfield Bank & Trust Co., Attn: Judith
Ferguson, 6625 Lyndale Ave., South Richfield, MN 55423 (14.86%); State Street
Bank & Trust Co., (30.64%); Short Duration Tax-Free Fund - G-K-G Inc., Attn:
Bernard Gassin, 166 Oak Knoll Terrace, Highland Park, IL 60035 (5.65%); Westport
Bank & Trust, Attn: Arnold Levine, P.O. Box 5177, Westport, CT 06881 (5.32%);
Donald R. Grant, 85 Broad Street, New York, NY 10004 (9.57%); MGIC, Attn: James
McGinnis, P.O. Box 297, Milwaukee, WI 53201 (27.16%); Indiana Trust & Investment
(5.09%); Global Income Fund - State Street Bank & Trust Trustee, Goldman Sachs
Profit Sharing Master Trust, Attn: Box 1992, Boston, MA 02105-1992 (99%).
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
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by such matter. Rule 18f-2 further provides that a class or series shall be
deemed to be affected by a matter unless the interests of each class or series
in the matter are substantially identical or the matter does not affect any
interest of such class or series. However, Rule 18f-2 exempts the selection of
independent public accountants, the approval of principal distribution contracts
and the election of 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 net assets attributable to each class of that Fund (assets,
including securities at value, minus liabilities) 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).
For the purpose of calculating the net asset value of the Funds,
investments in Mortgage-Backed Securities and other debt obligations are valued
at fair value based upon yield equivalents, a pricing matrix or other sources,
under valuation procedures established by the Trustees. Other portfolio
securities, other than money market instruments, for which accurate market
quotation are readily available are valued on the basis of quotations which may
be furnished by a pricing service or provided by dealers in such securities.
The prices derived by a pricing agent reflect broker/dealer-supplied valuations
and electronic data processing techniques. Options and futures contracts are
valued at the last sale price on the market where any such option or futures
contract is principally traded. Forward foreign currency exchange contracts are
valued at the mean between the last bid and asked quotations supplied by a
dealer in such contracts. Portfolio securities for which accurate market
quotation are not readily available and other assets are valued at fair value as
determined in good faith pursuant to procedures established by the Board of
Trustees. Money market instruments held by a Fund with a remaining maturity of
sixty days or less will be valued by the amortized cost method, which the
Trustees have determined approximates market value.
The value of all assets and liabilities expressed in foreign
currencies will be converted into U.S. dollar values at current exchange rates
of such currencies against U.S. dollars last quoted by any major bank. If such
quotations are not available, the rate of exchange will be determined in good
faith by or under procedures established by the Board of Trustees.
Generally, trading in foreign securities is substantially completed
each day at various times prior to the time the Global Income Fund and Core Fund
calculate their net asset value.
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Occasionally, events affecting the values of such securities may occur between
the times at which they are determined and the calculation of net asset value
which will not be reflected in the computation of the Fund's net asset value
unless the Trustees deem that such event would materially affect the net asset
value, in which case an adjustment would be made.
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 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
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value of its total (gross) 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 or Global Income 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 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 or Global
Income 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 or Global Income 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
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
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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. Exchange control or other foreign
laws, regulations or practices may restrict repatriation of investment income,
capital or the proceeds of securities sales by foreign investors such as Global
Income Fund and may therefore make it more difficult for Global Income Fund to
satisfy the distribution requirements described above, as well as the excise tax
distribution requirements described below. However, Global Income Fund
generally expects to be able to obtain sufficient cash to satisfy such
requirements from new investors, the sale of securities or other sources. If
for any taxable year a Fund 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,
1995, the Funds had approximately the following amounts of capital loss carry
forwards:
Years of
Amount Expiration
----------- ----------
Adjustable Rate Fund $38,311,000 2000-2002
Short Duration
Government Fund $11,136,000 2002
Short Duration
Tax-Free Fund $ 3,999,000 2002
Global Income Fund $10,295,502 2002
Municipal Income Fund $ 3,202,911 2002
Government Income Fund $ 735,561 2002
These amounts are available to be carried forward to offset future capital gains
to the extent permitted by applicable laws or regulations.
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 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.
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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.
The Tax Exempt Funds 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." The Tax Exempt Funds 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 Tax
Exempt Funds 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 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 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 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. The Tax Exempt Funds intend 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 aspects of these
investments, including the treatment of tender fees paid by the Tax Exempt Fund,
in relation to various regulated investment company tax provisions is unclear.
However, the Adviser intends to manage the Tax Exempt Funds' portfolios 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
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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 or forward
contracts and options or underlying securities or foreign currencies to the
extent of any unrecognized gains on 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 and Global Income
Fund. Under these rules, foreign exchange gain or loss realized by Core Fund or
Global Income 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 a Fund's investment company taxable income (computed without regard to
such loss) for a taxable year, the resulting loss would not be deductible by
the 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 of Core Fund's or Global Income 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 and Global Income Fund may be subject to foreign taxes on
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 Global Income Fund's total
assets at the close of any taxable year will generally consist of stock or
securities of foreign corporations, Global Income Fund will generally qualify to
file an election with the Internal Revenue Service pursuant to
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which shareholders of Global Income 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 Global Income Fund that are
treated as income taxes under U.S. tax regulations (which excludes, for example,
stamp taxes, securities transaction taxes, and similar taxes) even though not
actually received, and (ii) treat such respective pro rata portions as foreign
income taxes paid by them. Global Income Fund may or may not make this election
for any particular taxable year. Core Fund will not satisfy the 50% requirement
described above and therefore will not make this election. Core Fund and, if it
does not make the election, Global Income Fund will, however, be entitled to
deduct such taxes in computing investment company taxable income.
If Global Income Fund makes this election, its shareholders may then
deduct such pro rata portions of qualified foreign taxes in computing their
taxable incomes, or, alternatively, use them as foreign tax credits, subject to
applicable limitations, against their U.S. federal income taxes. Shareholders
who do not itemize deductions for federal income tax purposes will not, however,
be able to deduct their pro rata portion of qualified foreign taxes paid by
Global Income Fund, although such shareholders will be required to include their
shares of such taxes in gross income if Global Income Fund makes the election
referred to above.
If a shareholder chooses to take a credit for the foreign taxes deemed
paid by such shareholder as a result of any such election by Global Income Fund,
the amount of the credit that may be claimed in any year may not exceed the same
proportion of the U.S. tax against which such credit is taken which the
shareholder's taxable income from foreign sources (but not in excess of the
shareholder's entire taxable income) bears to his entire taxable income. For
this purpose, distributions from long-term and short-term capital gains or
foreign currency gains by Global Income Fund will generally not be treated as
income from foreign sources. This foreign tax credit limitation may also be
applied separately to certain specific categories of foreign-source income and
the related foreign taxes. As a result of these rules, which have different
effects depending upon each shareholder's particular tax situation, certain
shareholders of Global Income Fund not be able to claim a credit for the full
amount of their proportionate shares of the foreign taxes paid by such Fund.
Shareholders who are not liable for U.S. federal income taxes,
including tax-exempt shareholders, will ordinarily not benefit from this
election. Each year, if any, that Global Income Fund files the election
described above, its shareholders will be notified of the amount of (i) each
shareholder's pro rata share of qualified foreign income taxes paid by Global
Income Fund and (ii) the portion of Fund dividends which represents income from
each foreign country.
If Core Fund or Global Income Fund acquires stock in certain non-U.S.
corporations that receive at least 75% of their annual
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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 or Global
Income 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 or Global Income Fund is timely distributed to its
shareholders. Core Fund or Global Income 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 or Global Income Fund to recognize taxable
income or gain without the concurrent receipt of cash. Core Fund or Global
Income 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, capital appreciation bonds 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 certain
options, futures or forward contracts, as described above, will generally cause
it to realize income or gain prior to the receipt of cash payments with respect
to these securities 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 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
TAX EXEMPT FUNDS. Each Tax Exempt Fund expects to qualify to pay
"exempt-interest dividends," as defined in the Code. To qualify to pay exempt-
interest dividends, the 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 Municipal
Securities whose interest is excluded from gross income under Section 103(a) of
the Code. In purchasing Municipal Securities, each Tax Exempt 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. A Tax Exempt 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
B-96
<PAGE>
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 a Tax Exempt Fund's
distributions attributable to interest the 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 a
Tax Exempt Fund's portfolio may be affected by restrictive federal income tax
legislation enacted in recent years or by similar, future legislation. If a Tax
Exempt Fund satisfies the applicable requirements, dividends paid by the Fund
which are attributable to tax exempt interest on Municipal Securities and
designated by the 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 as items of interest excludable from their gross
income under Section 103(a) of the Code. Exempt-interest dividends a Tax Exempt
Fund receives from other regulated investment companies, including exempt-
interest dividends on auction rate preferred securities of such companies held
by the Fund, are treated as interest on Municipal Securities and may be
distributed by a Tax Exempt Fund as exempt-interest dividends. The recipient of
tax-exempt income is required to report such 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 a Tax Exempt Fund. The Code provides that interest on indebtedness incurred
or continued to purchase or carry shares of a Tax Exempt Fund is not deductible
to the extent attributable to exempt-interest dividends.
Although all or a substantial portion of the dividends paid by a Tax
Exempt Fund may be excluded by shareholders of the Fund from their gross income
for federal income tax purposes, each Tax Exempt Fund may purchase specified
private activity bonds, the interest from which (including the Fund's
distributions attributable to such interest) may be a preference item for
purposes of the federal alternative minimum tax (both individual and corporate).
All exempt-interest dividends from a Tax Exempt 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.
B-97
<PAGE>
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 Tax-
Free Fund and Municipal Income 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 coupons or (ii) capital gains
from the sale of securities or other 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 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 a Fund's
current earnings and profits for these purposes. Consequently, the portion, if
any, of Short Duration Tax-Free Fund's or Municipal Income 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.
B-98
<PAGE>
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 or Global Income 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 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 with other shares of the same Fund within a period of 61 days beginning
30 days before and ending 30 days after the shares are disposed of, such as
pursuant to a dividend reinvestment in shares of 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 Tax-Free Fund
and Municipal Income 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 Tax-Free Fund or Municipal Income Fund for the Fund's 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
B-99
<PAGE>
Short Duration Tax-Free Fund or Municiapl Income Fund during the period of their
investment in Short Duration Tax-Free Fund or Municipal Income Fund, as the case
may be.
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 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 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 Tax-Free Fund or Municipal Income Fund will not be subject to backup
withholding if such Funds reasonably estimate that at least 95% of their
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
B-100
<PAGE>
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. Non-U.S. shareholders may also be subject to U.S. withholding tax on
deemed income resulting from any election by Global Income Fund to treat
qualified foreign taxes it pays as passed through to shareholders (as described
above), but they may not be able to claim a U.S. tax credit or deduction with
respect to such taxes.
Any gain realized by a shareholder who is not a U.S. person upon a
sale or redemption of shares of a Fund will not be subject to U.S. federal
income or withholding tax unless the gain is effectively connected with the
shareholder's trade or business in the United States, or in the case of a
shareholder who is a nonresident alien individual, the shareholder is present in
the United States for 183 days or more during the taxable year and certain other
conditions are met.
Non-U.S. 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
B-101
<PAGE>
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 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, a Tax Exempt Fund's tax-free yield. Tax equivalent
yield is calculated by dividing a Tax Exempt 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 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 applicable to the relevant
class (i.e., net asset value in the case of each class other than Class A) at
the beginning of the period, and then calculating the annual compounded rate of
return which would produce that amount, assuming a redemption (and in the case
of Class B Shares payment of any contingent deferred sales charge) at the end of
the period. This calculation assumes a complete redemption of the investment.
It also assumes that all dividends and distributions are reinvested at net asset
value on the reinvestment dates during the period.
Year-by-year total return and cumulative total return for a specified
period are each derived by calculating the percentage rate required to make a
$1,000 investment (made at the maximum public offering price 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 Tax-Free and Municipal Income Funds only), distribution rate and
average annual total return (capital plus reinvestment of all distributions) for
each class of shares outstanding for the periods indicated.
Thirty-day yield, tax equivalent yield (Short Duration Tax-Free and
Municipal Income Funds 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
B-102
<PAGE>
each Fund is subject to different fees and expenses and may have different
returns for the same period. Any performance data for Class A or Class B Shares
which is based upon a Fund's net asset value per share would be reduced if a
sales charge were taken into account.
YIELD
Investment SEC 30-Day Pro-Forma
Fund Period Yield Yield/1/
- -------------------------------- ---------- ---------- ---------
30-Days
ended
10/31/95
ADJUSTABLE RATE FUND
Institutional Shares 6.12% 6.04%
Administration Shares 5.87% 5.79%
Service Shares/2/ n/a n/a
Class A Shares/2/
- Assumes 1.5% sales charge 5.78% 5.46%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 6.21% 5.89%
Administration Shares/3/ n/a n/a
Service Shares/3/ n/a n/a
SHORT DURATION TAX-FREE FUND
Institutional Shares 3.94% 3.60%
Administration Shares 3.68% 3.34%
Service Shares 3.44% 3.10%
CORE FUND
Institutional Shares 5.31% 5.05%
Administration Shares/4/ n/a n/a
Service Shares/4/ n/a n/a
GLOBAL INCOME FUND
Institutional Shares 5.54% 5.10%
Class A Shares
(Assumes 4.5% sales charge) 4.81% 4.40%
Service Shares/6/ n/a n/a
Class B Shares/6/ n/a n/a
MUNICIAPL INCOME FUND
Class A Shares 4.44% 3.88%
Class B Shares/7/ n/a n/a
GOVERNMENT INCOME FUND
Class A Shares 5.62% 4.22%
Class B Shares/8/ n/a n/a
B-103
<PAGE>
DISTRIBUTION RATE
30 Day Pro-Forma
Investment Distribution Distribution
Fund Period Rate Rate/1/
- -------------------------------- ----------------- ----------- -------------
30-Days
ended
10/31/95
ADJUSTABLE RATE FUND
Institutional Shares 6.37% 6.28%
Administration Shares 6.12% 6.03%
Service Shares/2/ n/a n/a
Class A Shares
- Assumes no sales charge 6.12% 5.79%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 7.49% 7.17%
Administration Shares/3/ n/a n/a
Service Shares/3/ n/a n/a
SHORT DURATION TAX-FREE FUND
Institutional Shares 4.00% 3.64%
Administration Shares 3.75% 3.39%
Service Shares 3.50% 3.14%
MUNICIPAL INCOME FUND
Class A Shares 4.46% 3.85%
Class B Shares/7/ n/a n/a
GOVERNMENT INCOME FUND
Class A Shares 6.11% 4.62%
Class B Shares/8/ n/a n/a
CORE FUND
Institutional Shares 5.81 5.53%
Administration Shares/4/ n/a n/a
Service Shares/4/ n/a n/a
GLOBAL INCOME FUND
Institutional Fund 7.25% 6.80%
Service Shares/6/ n/a n/a
Class A Shares
- Assumes no sales charge 6.74% 6.29%
Class B Shares/6/ n/a n/a
B-104
<PAGE>
TAX-EQUIVALENT YIELD/5/
Pro-Forma
Investment Tax-Equivalent Tax-Equivalent
Fund Period Rate Yield/1/
- ---------------------- ---------- ------------- -----------------
30-Days
ended
10/31/95
SHORT DURATION
TAX-FREE FUND
Institutional Shares 6.52% 5.96%
Administration Shares 6.09% 5.53%
Service Shares 5.70% 5.13%
MUNCIPAL INCOME FUND
Class A Shares 7.35% 6.42%
Class B Shares/7/ n/a n/a
_______________________________
/1/ Yield, tax equivalent yield and distribution rate if the applicable Adviser
had not voluntarily agreed to limit its advisory fees and to maintain
expenses at a specified level.
/2/ There were no Service Shares of Adjustable Rate Fund outstanding during the
periods indicated.
/3/ There were no Administration and Service Shares of Short Duration
Government Fund outstanding at October 31, 1995.
/4/ There were no Administration Shares or Service Shares of Core Fund
outstanding during the periods indicated.
/5/ The tax-equivalent rate of Short Duration Tax-Free Fund and Municipal
Income Fund is computed based on the 39.6% federal income tax rate.
/6/ There were no Service Shares or Class B Shares of Global Income Fund
outstanding during the period indicated.
/7/ There were no Class B Shares of Municipal Income Fund outstanding during
the period indicated.
/8/ There were no Class B Shares of Government Income Fund outstanding during
the period indicated.
The above tables should not be considered a representation of future
performance.
B-105
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
---------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Investment Expense Expense
Fund Date Period Limitations Limitations
- -------------------------------- ----------- -------------- --------------- ------------
<S> <C> <C> <C> <C>
ADJUSTABLE RATE FUND
Institutional Shares 7/17/91/1a/ ended 10/31/95 4.91% 4.82%
11/1/94 one year ended
10/31/95 6.75% 6.66%
Administration Shares 4/15/93/1b/ ended 10/31/95 3.96% 3.90%
11/1/94 one year ended
10/31/95 6.48% 6.40%
Class A Shares/1f/ 5/12/95/1d/ ended 10/31/95
Assumes 1.5% Sales Charge 1.17% 1.02%
Assumes No Sales Charge 2.74% 2.59%
Class B Shares/1e/ N/A N/A
Service Shares/1c/ N/A N/A
SHORT DURATION GOVERNMENT FUND
Institutional Shares 8/15/88/2a/ ended 10/31/95 7.31% 6.89%
11/1/94 one year ended
10/31/95 8.97% 8.68%
11/1/89 five years
ended 10/31/95 6.48% 6.23%
Administration Shares/2b/ N/A N/A
Service Shares/2c/ N/A N/A
</TABLE>
B-106
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
---------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Investment Expense Expense
Fund Date Period Limitations Limitations
- ------------------------------ -------------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
SHORT DURATION TAX-FREE FUND
Institutional Shares 10/1/92/3a/ ended 10/31/95 4.12% 3.64%
11/1/94 one year ended
10/31/95 5.98% 5.65%
Administration Shares 5/20/93/3b/ ended 10/31/95 3.21% 2.94%
11/1/94 one year ended
10/31/95 5.76% 5.43%
Service Shares 9/20/94/3c/ ended 10/31/95 4.70% 4.39%
11/1/94 one year ended
10/31/95 5.59% 5.26%
CORE FIXED INCOME FUND
Institutional Shares 1/15/94/4a/ 10/31/95 6.54% 5.76%
11/1/94 one year ended
10/31/95 15.72% 15.14%
Administration Shares/4b/ N/A N/A
Service Shares/4b/ N/A N/A
</TABLE>
B-107
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
---------------------------------------------------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Investment Expense Expense
Fund Date Period Limitations Limitations
- --------------------------------- ------------ --------------- ------------ ------------
<S> <C> <C> <C> <C>
GLOBAL INCOME FUND/5C/
Class A Shares 8/2/91/5a/ ended 10/31/95
Assumes 4.5% Sales Charge 6.16% 5.89%
Assumes No Sales Charge 7.32% 7.05%
11/1/94 ended 10/31/95
Assumes 4.5% Sales Charge 9.92% 9.64%
Assumes No Sales Charge 15.08% 14.78%
Class B Shares/5b/ N/A N/A
Institutional Shares/5d/ 8/1/95/5e/ ended 10/31/95 4.42% 4.31%
Service Shares/5b/ N/A N/A
MUNICIPAL INCOME FUND
Class A Shares 7/20/93/6a/ ended 10/31/95
Assumes 4.5% Sales Charge 2.80% 1.65%
Assumes No Sales Charge 4.89% 3.72%
11/1/94 ended 10/31/95
Assumes 4.5% Sales Charge 8.64% 7.86%
Assumes No Sales Charge 13.79% 12.97%
Class B Shares/6b/ N/A N/A
</TABLE>
B-108
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
---------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Investment Expense Expense
Fund Date Period Limitations Limitations
- --------------------------------- --------------- --------------- --------------- ------------
<S> <C> <C> <C> <C>
GOVERNMENT INCOME FUND
Class A Shares 2/10/93/7a/ ended 10/31/95
Assumes 4.5% Sales Charge 5.27% 2.41%
Assumes No Sales Charge 7.06% 4.16%
11/1/94 ended 10/31/95
Assumes 4.5% Sales Charge 9.76% 7.73%
Assumes No Sales Charge 14.90% 12.78%
Class B Shares/7b/ 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 commended operations on April
15, 1993.
1c No Service Shares of Adjustable Rate Fund were outstanding during the periods
indicated.
1d Class A shares were initially issued on May 12, 1995.
1e No Class B Shares were outstanding during the periods indicated.
2a Institutional Shares of Short Duration Government Fund commenced operations
on August 15, 1988.
2b No Administration Shares of Short Duration Government Fund were outstanding
as of October 31, 1995.
2c No Service Shares of Short Duration Government Fund were outstanding during
the periods indicated.
3a Institutional Shares of Short Duration Tax-Free Fund commenced operations on
October 1, 1992.
3b Administration Shares of Short Duration Tax-Free Fund commenced operations on
May 20, 1993.
3c Service Shares of Short Duration Tax-Free Fund 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.
5a Class A Shares of Global Income Fund commenced operations on August 2, 1991.
5b No Service Shares or Class B Shares of Global Income Fund were Outstanding
during the periods indicated.
5c On November 27, 1992, the maximum sales charge was changed from 3% to 4.5% of
the offering price. All performance figures in this table incorporate the
sales charge currently in effect.
5d An aggregate total return (not annualized) is shown instead of an
average annual total return since the Institutional Shares have not completed
a full 12 months of operation as of October 31, 1995.
5e Institutional Shares of Global Income Fund commenced operations on August 1,
1995.
6a Class A shares of Municipal Income Fund commenced operations on July 20,
1993.
6b No Class B Shares of Municipal Income Fund were outstanding during the
periods indicated.
7a Class A Shares of Government Income Fund commenced operations on February
10, 1993.
7b No Class B Shares of Government Income Fund were outstanding during the
periods indicated.
The above table should not be considered a representation of future
performance.
B-109
<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., Donaghues Money Fund Report, Barron's, The Wall
- ------------------------- --------------------------- -------- --------
Street Journal, Weisenberger Investment Companies Service, Business Week,
- -------------- ----------------------------------------- -------------
Changing Times, Financial World, Forbes, Fortune, Morningstar Mutual Funds The
- -------------- --------------- ------ ------- ------------------------ ---
New York Times, Personal Investor, Sylvia Porter's Personal Finance and Money.
- -------------- --------------------------------------------------- -----
In addition, Adjustable Rate Fund, Government Income Fund and Short
Duration Government 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 Tax-Free Fund and Municipal Income 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 and Global Income Fund may each from time to time advertise its
performance relative to certain indices and benchmark investments, including:
(a) the Lipper Analytical Services, Inc.
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Mutual Fund Performance Analysis, Fixed Income Analysis and Mutual Fund Indices
(which measure total return and average current yield for the mutual fund
industry and rank mutual fund performance); (b) the CDA Mutual Fund Report
published by CDA Investment Technologies, Inc. (which analyzes price, risk and
various measures of return for the mutual fund industry); (c) the Consumer Price
Index published by the U.S. Bureau of Labor Statistics (which measures changes
in the price of goods and services); (d) Stocks, Bonds, Bills and Inflation
published by Ibbotson Associates (which provides historical performance figures
for stocks, government securities and inflation); (e) the Salomon Brothers'
World Bond Index (which 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 the above referenced indices and
the characteristics of a Fund's benchmark investments are not identical to, and
in some cases may be very different from, those of a Fund's portfolio. These
indices and averages, as well as the averages set forth in the Appendices
hereto, are generally unmanaged and the items included in the calculations of
such indices and averages may not be identical to the formulas used by the 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.
In addition, from time to time, advertisements or information may include
a discussion of asset allocation models developed by GSAM and/or its affiliates,
certain attributes or benefits to be derived from asset allocation strategies
and the Goldman Sachs mutual funds that may be offered as investment options for
the strategic asset allocations. Such advertisements and information may also
include GSAM's current economic outlook and domestic and international market
views to suggest periodic tactical
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modifications to current asset allocation strategies. Such advertisements and
information may include other material which highlight or summarize the services
provided in support of an asset allocation program.
In addition, advertisements or shareholder communications may include a
discussion of certain attributes or benefits to be 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
Duration Government Fund assumed its current name in March 1996. Prior thereto,
Short Duration Government Fund's name was "GS Short-Intermediate Government
Fund" until May 1991 and "GS Short-Term Government Agency Fund" until March
1996. Adjustable Rate Government Fund assumed its current name in March 1996.
Prior thereto, Adjustable Rate Government Fund's name was "GS Adjustable Rate
Government Agency 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.
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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 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.
FINANCIAL STATEMENTS
The audited financial statements and related report of Arthur Andersen LLP,
independent public accounts, for each Fund contained in each Fund's 1995 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.
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OTHER INFORMATION REGARDING PURCHASES, REDEMPTIONS,
EXCHANGES AND DIVIDENDS
The following information supplements the information in the Prospectus
under the captions "How to Invest," "How to Sell Shares of the Funds" and
"Dividends." Please see the Prospectus for more complete information.
OTHER PURCHASE INFORMATION
==========================
If shares of a Fund are held in a "street name" account with an Authorized
Dealer, all recordkeeping, transaction processing and payments of distributions
relating to the beneficial owner's account will be performed by the Authorized
Dealer, and not by the Fund and its Transfer Agent. Since the Funds will have
no record of the beneficial owner's transactions, a beneficial owner should
contact the Authorized Dealer to purchase, redeem or exchange shares, to make
changes in or give instructions concerning the account or to obtain information
about the account. The transfer of shares in a "street name" account to an
account with another dealer or to an account directly with the Fund involves
special procedures and will require the beneficial owner to obtain historical
purchase information about the shares in the account from the Authorized Dealer.
RIGHT OF ACCUMULATION - (CLASS A)
=================================
A Class A shareholder qualifies for cumulative quantity discounts if the
current purchase price of the new investment plus the shareholder's current
holdings of existing Class A Shares (acquired by purchase or exchange) of the
Funds and Class A Shares of any other Goldman Sachs Portfolio (as defined in the
Prospectus) total the requisite amount for receiving a discount. For example,
if a shareholder owns shares with a current market value of $65,000 and
purchases additional Class A Shares of any Fund with a purchase price of
$45,000, the sales charge for the $45,000 purchase would be 3.0% (the rate
applicable to a single purchase of more than $100,000). Class A Shares
purchased without the imposition of a sales charge and shares of another class
of the Funds may not be aggregated with Class A Shares purchased subject to a
sales charge. Class A Shares of the Funds and any other Goldman Sachs Portfolio
purchased (i) by an individual, his spouse and his minor children, and (ii) by a
trustee, guardian or other fiduciary of a single trust estate or a single
fiduciary account, will be combined for the purpose of determining whether a
purchase will qualify for such right of accumulation and, if qualifying, the
applicable sales charge level. For purposes of applying the right of
accumulation, shares of the Funds and any other Goldman Sachs Portfolio
purchased by an existing client of the Private Client Services Division of
Goldman Sachs will be combined with Class A Shares held by any other account
over which such client or the client's spouse exercises investment or voting
power. In addition, Class A Shares
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of the Funds and Class A Shares of any other Goldman Sachs Portfolio purchased
by partners, directors, officers or employees of the same business organization
or by groups of individuals represented by and investing on the recommendation
of the same accounting firm or other similar organization (collectively,
"eligible persons") may be combined for the purpose of determining whether a
purchase will qualify for the right of accumulation and, if qualifying, the
applicable sales charge level. This right of accumulation is subject to the
following conditions: (i) the business organization's or firm's agreement to
cooperate in the offering of the Funds' shares to eligible persons; and (ii)
notification to the Funds at the time of purchase that the investor is eligible
for this right of accumulation.
STATEMENT OF INTENTION - (CLASS A)
==================================
If a shareholder anticipates purchasing at least $100,000 of Class A Shares
of a Fund alone or in combination with Class A Shares of any other Goldman Sachs
Portfolio within a 13-month period, the shareholder may purchase shares of the
Fund at a reduced sales charge by submitting a Statement of Intention (the
"Statement"). Shares purchased pursuant to a Statement will be eligible for the
same sales charge discount that would have been available if all of the
purchases had been made at the same time. The shareholder or his Authorized
Dealer must inform Goldman Sachs that the Statement is in effect each time
shares are purchased. There is no obligation to purchase the full amount of
shares indicated in the Statement. A shareholder may include the value of all
Class A Shares on which a sales charge has previously been paid as an
"accumulation credit" toward the completion of the Statement, but a price
readjustment will be made only on Class A Shares purchased within ninety (90)
days before submitting the Statement. The Statement authorizes the Transfer
Agent to hold in escrow a sufficient number of shares which can be redeemed to
make up any difference in the sales charge on the amount actually invested. For
purposes of satisfying the amount specified on the Statement, the gross amount
of each investment, exclusive of any appreciation on shares previously
purchased, will be taken into account.
CROSS-REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS
=================================================
A Fund shareholder should obtain and read the prospectus relating to any
other Fund, Goldman Sachs Portfolio or ILA Portfolio (as defined in the
Prospectus) and its shares or units and consider its investment objective,
policies and applicable fees before electing cross-reinvestment into that Fund
or Portfolio. The election to cross-reinvest dividends and capital gain
distributions will not affect the tax treatment of such dividends and
distributions, which will be treated as received by the shareholder and then
used to purchase shares of the acquired fund. Such reinvestment of dividends
and distributions in shares of other
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Goldman Sachs Portfolios or in units of ILA Portfolios is available only in
states where such reinvestment may legally be made.
AUTOMATIC EXCHANGE PROGRAM
==========================
A Fund shareholder may elect cross-reinvestment into an identical account
or an account registered in a different name or with a different address, social
security or other taxpayer identification number, provided that the account in
the acquired fund has been established, appropriate signatures have been
obtained and the minimum initial investment requirement has been satisfied. A
Fund shareholder should obtain and read the prospectus relating to any other
Goldman Sachs Portfolio and its shares and consider its investment objective,
policies and applicable fees and expenses before electing an automatic exchange
into that Goldman Sachs Portfolio.
SYSTEMATIC WITHDRAWAL PLAN
==========================
A systematic withdrawal plan (the "Systematic Withdrawal Plan") is
available to shareholders of a Fund whose shares are worth at least $5,000. The
Systematic Withdrawal Plan provides for monthly payments to the participating
shareholder of any amount not less than $50.
Dividends and capital gain distributions on shares held under the
Systematic Withdrawal Plan are reinvested in additional full and fractional
shares of the applicable Fund at net asset value. The Transfer Agent acts as
agent for the shareholder in redeeming sufficient full and fractional shares to
provide the amount of the systematic withdrawal payment. The Systematic
Withdrawal Plan may be terminated at any time. Goldman Sachs reserves the right
to initiate a fee of up to $5 per withdrawal, upon thirty (30) days written
notice to the shareholder. Withdrawal payments should not be considered to be
dividends, yield or income. If periodic withdrawals continuously exceed new
purchases and reinvested dividends and capital gains distributions, the
shareholder's original investment will be correspondingly reduced and ultimately
exhausted. The maintenance of a withdrawal plan concurrently with purchases of
additional Class A or Class B shares would be disadvantageous because of the
sales charge imposed on purchases of Class A shares or the imposition of a CDSC
on redemptions of Class A and Class B shares. The CDSC applicable to Class B
shares redeemed under a systematic withdrawal plan may be waived. See "How to
Invest--Waiver or Reduction of Contingent Deferred Sales Charge" in the
Prospectus. In addition, each withdrawal constitutes a redemption of shares,
and any gain or loss realized must be reported for federal and state income tax
purposes. A shareholder should consult his or her own tax adviser with regard
to the tax consequences of participating in the
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Systematic Withdrawal Plan. For further information or to request a Systematic
Withdrawal Plan, please write or call the Transfer Agent.
OFFERING PRICE OF CLASS A SHARES
================================
Class A Shares of each Fund are sold at a maximum sales charge of 4.5%.
Using the offering price as of October 31, 1995, the maximum offering price of
the class A shares of each Fund's shares would be as follows:
Net Asset Maximum Offering Price
Value Sales Charge to Public
----- ------------ --------------
Adjustable Rate Fund $ 9.77 $0.15 $ 9.92
Municipal Income Fund $14.17 $0.67 $14.84
Government Income Fund $14.47 $0.68 $15.15
Global Income Fund $14.45 $0.68 $15.13
DISTRIBUTION AND AUTHORIZED DEALER SERVICE PLANS
CLASS A DISTRIBUTION PLANS. As described in the Prospectus, the Trust
with respect to the Class A Shares of each Fund has adopted a distribution plan
(the "Class A Plans") pursuant to Rule 12b-1 under the Act. See "Distribution
and Authorized Dealer Service Plans" in the Prospectus.
The Class A Plans were most recently approved on April 26, 1995 by a
majority vote of the Trustees of the Trust, including a majority of the non-
interested Trustees of the Trust who have no direct or indirect financial
interest in the Class A Plans, cast in person at a meeting called for the
purpose of approving the Plans. The Plans were approved by the sole initial
shareholder of Class A Shares of Adjustable Rate Fund on May 12, 1995, Municipal
Income Fund on July 16, 1993, Government Income Fund on January 29, 1993 and
Global Income Fund on December 5, 1991.
The compensation payable under the Class A Plans may not exceed 0.25%
per annum of each Fund's average daily net assets attributable to its Class A
Shares. Currently, Goldman Sachs is waiving its entire fee under the Class A
Plans applicable to each Fund other than Global Income Fund and is limiting the
fee payable by Global Income Fund to 0.21% of average daily net assets
attributable to Class A Shares. Goldman Sachs has no current intention of
modifying or discontinuing such waivers and limitation, but may do so in the
future at its discretion.
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<PAGE>
Effective June 30, 1995, each Class A Plan was amended to reduce the
fee payable under the Plan from 0.50% to 0.25% of a Fund's average daily net
assets attributable to Class A Shares. At the same time, each Fund adopted an
Authorized Dealer Service Plan. See "Authorized Dealer Service Plans." For the
fiscal years ended October 31, 1995, 1994 and 1993, each Fund paid Goldman Sachs
the following amounts under the Class A Plans:
1995 1994 1993
-------- ---------- ----------
Adjustable Rate Fund(a) $ 0 N/A N/A
Municipal Income Fund(b) 70,023 $ 85,242 $ 0
Government Income Fund(c) 25,630 14,350 0
Global Income Fund(d) 645,259 1,518,814 1,553,394
- ------------------
(a) For the period May 12, 1995 (date of initial issues of Class A Shares)
through October 31, 1995, had Goldman Sachs' voluntary limitation not been in
effect, the Adjustable Rate Fund would have paid Goldman Sachs $17,967 under the
Class A Plan.
(b) For the fiscal years ended October 31, 1995 and October 31, 1994, had
Goldman Sachs' voluntary limitation not been in effect, the Municipal Income
Fund would have paid Goldman Sachs a total of $195,152 and $212,701,
respectively under the Class A Plan. For the period July 20, 1993 (commencement
of operations) through October 31, 1993, Goldman Sachs voluntarily agreed not to
impose its distribution fee for the Municipal Income Fund amounting to $28,893
for such period.
(c) For the fiscal years ended October 31, 1995, October 31, 1994, had Goldman
Sachs' voluntary limitation not been in effect, the Government Income Fund would
have paid a total of $76,499 and $65,604, respectively for such periods under
the Class A Plan. For the period February 10, 1993 (commencement of operations)
to October 31, 1993, Goldman Sachs voluntarily agreed not to impose its
distribution fee for the Government Income Fund amounting to $28,306 for such
period.
(d) For the fiscal years ended October 31, 1995, October 31, 1994 and October
31, 1993, had Goldman Sachs' voluntary limitation not been in effect, the Global
Income Fund would have paid Goldman Sachs $1,257,211, $3,037,628 and $3,106,788
for such periods under the Class A Plan.
Goldman Sachs may pay up to the entire amount of such fee under the Plans
to Authorized Dealers for providing services in connection with the sale of each
Fund's shares. To the extent such
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fee is not paid to such dealers, Goldman Sachs may retain such fee as
compensation for its services and expenses incurred in accordance with the Plans
of distributing a Fund's shares. If such fee exceeds its expenses, Goldman Sachs
may realize a profit from these arrangements.
The Plans are compensation plans which provide for the payment of a
specified fee without regard to the expenses actually incurred by Goldman Sachs.
If a Plan were terminated by the Trustees of the Trust and no successor plan
were adopted, the Fund would cease to make payments under the Plan to Goldman
Sachs and Goldman Sachs would be unable to recover the amount of any of its
unreimbursed expenditures. However, Goldman Sachs does not intend to make
expenditures for which it may be compensated under a Plan at a rate that
materially exceeds the rate of compensation received under the Plan.
During the fiscal year ended October 31, 1995, Goldman Sachs incurred the
following expenses in connection with distribution under the Plan on behalf of
each Fund (Goldman Sachs used the fees, if any, received under the Plan in the
same proportion to the amounts set forth below).
<TABLE>
<CAPTION>
Fiscal Year Compensation Compensation Allocable Printing and Preparation and
ended to Dealers and Expenses Overhead, Mailing of Distribution of
October 31, of the Telephone Prospectuses Sales Literature
1995 Distributor and Travel to Other than and Advertising
and its Sales Expenses Current
Personnel Shareholders
<S> <C> <C> <C> <C> <C>
Adjustable N/A N/A N/A N/A N/A
Rate Fund/1/
Municipal 59,763 43,145 48,500 15,404 6,208
Income Fund/2/
Government 12,167 32,662 33,750 15,562 22,483
Income Fund/2/
Global 31,617 502,510 96,167 20,916 47,940
Income Fund
- -------------------------
</TABLE>
/1/ No expenses are reflected for Class A shares of Adjustable Rate Fund.
Since inception of this class, Goldman Sachs has waived the 0.25% Class A Plan
fee; no revenue has therefore been earned for the period.
/2/ Expenses reflected above for these funds were incurred through May 31,
1995; at this point expenses incurred exceeded any revenues earned. Commencing
June 1, 1995, Goldman Sachs is waiving the 0.25% Class A Plan fee; no
additional revenue has therefore been earned after June 1, 1995.
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Under the Class A Plans, Goldman Sachs, as distributor of each Fund's Class A
Shares, will provide to the Trustees of the Trust for their review, and the
Trustees of the Trust will review at least quarterly a written report of the
services provided and amounts expended by Goldman Sachs under the Plans and the
purposes for which such services were performed and expenditures were made.
The Class A Plans will remain in effect until June 1, 1996 and from year to
year thereafter, provided such continuance is approved annually by a majority
vote of the Trustees of the Trust, including a majority of the non-interested
Trustees of the Trust who have no direct or indirect financial interest in the
Class A Plans. A Class A Plan may not be amended to increase materially the
amount to be spent for the services described therein without approval of a
majority of the outstanding Class A Shares of the applicable Fund. All material
amendments of the Class A Plan must also be approved by the Trustees of the
Trust in the manner described above. A Class A Plan may be terminated at any
time without payment of any penalty by a vote of a majority of the non-
interested Trustees of the Trust or by vote of a majority of the Class A Shares
of the applicable Fund. So long as a Class A Plan is in effect, the selection
and nomination of non-interested Trustees of the Trust shall be committed to the
discretion of the non-interested Trustees of the Trust. The Trustees of the
Trust have determined that in their judgment there is a reasonable likelihood
that the Plans will benefit the Funds and their Class A Shareholders.
AUTHORIZED DEALER SERVICE PLAN. As described in the Prospectus, the Trust
with respect to each Fund has adopted non-Rule 12b-1 Authorized Dealer Service
Plans (the "Service Plans") with respect to Class A Shares and Class B Shares.
See "Distribution and Authorized Dealer Service Plans" in the Prospectus.
The compensation under the Service Plans may not exceed 0.25% per annum of the
average daily net assets attributable to the class of shares to which the plan
relates. Up to the entire amount of the fee under the Service Plans may be paid
to Authorized Dealers for providing personal and account maintenance services in
connection with each Fund's Shares. Under the Service Plans, Goldman Sachs will
provide to the Trustees for their review at least quarterly a written report of
the services provided and amount expended under the Service Plans.
For the fiscal year ended October 31, 1995 each Fund paid Goldman Sachs the
following amounts under its Service Plan with respect to its Class A Shares (no
Class B Shares were outstanding during the period):
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1995
----
Adjustable Rate Fund $ 17,967
Municipal Income Fund 55,106
Government Income Fund 25,239
Global Income Fund 281,949
The Service Plans applicable to Class A Shares were approved on April 26,
1995. The Service Plans applicable to Class B Shares were approved on January
30, 1996. In each case, the Plans were approved by a majority of the Board of
Trustees of the Trust. The Service Plans will remain in effect until June 1,
1996 and from year to year thereafter, provided that such continuance is
approved annually by a majority vote of the Trustees, including a majority of
the non-interested Trustees who have no direct or indirect financial interest in
the Service Plans.
CLASS B DISTRIBUTION PLAN. As described in the Prospectus, the Trust has
adopted on behalf of Municipal Income Fund, Government Income Fund and Global
Income Fund, distribution plans (the "Class B Plans") pursuant to Rule 12b-1
under the Act with respect to Class B Shares. See "Distribution and Authorized
Dealer Service Plans" in the Prospectus.
The Class B Plans were approved on January 30, 1996 on behalf of the Trust by
a majority vote of the Trust's Board of Trustees, including a majority of the
Trustees who are not interested persons of the Trust and have no direct or
indirect financial interest in the Class B Plans (the "non-interested
Trustees"), cast in person at a meeting called for the purpose of approving the
Class B Plans.
With respect to each Fund, the compensation payable under the Class B Plans is
equal to 0.75% per annum of the average daily net assets attributable to Class B
Shares of that Fund. The fees received by Goldman Sachs under the Class B Plans
and contingent deferred sales charge on Class B Shares may be sold by Goldman
Sachs as distributor to entities which provide financing for payments to
Authorized Dealers in respect of sales of Class B Shares. To the extent such
fee is not paid to such dealers, Goldman Sachs may retain such fee as
compensation for its services and expenses of distributing the Funds' Class B
Shares. If such fee exceeds its expenses, Goldman Sachs may realize a profit
from these arrangements.
The Class B Plans are compensation plans which provide for the payment of a
specified distribution fee without regard to the distribution expenses actually
incurred by Goldman Sachs. If the Class B Plans were terminated by the Trust's
Board of Trustees and no successor plan were adopted, the Funds would cease to
make distribution payments to Goldman Sachs and Goldman Sachs would be unable to
recover the amount of any of its unreimbursed distribution expenditures.
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<PAGE>
Under the Class B Plans, Goldman Sachs, as distributor of the Funds' shares,
will provide to the Board of Trustees for its review, and the Board will review
at least quarterly, a written report of the services provided and amounts
expended by Goldman Sachs under the Class B Plans and the purposes for which
such services were performed and expenditures were made.
The Class B Plans will remain in effect with respect to the Funds from year to
year, provided such continuance is approved annually by a majority vote of the
Board of Trustees, including a majority of the non-interested Trustees. A Class
B Plan may not be amended to increase materially the amount to be spent for the
services described therein as to any Fund without approval of a majority of the
outstanding Class B Shares of that Fund. All material amendments of the Class B
Plan must also be approved by the Board of Trustees of the Trust in the manner
described above. With respect to any Fund, a Class B Plan may be terminated at
any time without payment of any penalty by a vote of the majority of the non-
interested Trustees or by vote of a majority of the outstanding voting
securities of the Class B Shares of that Fund. So long as a Class B Plan is in
effect, the selection and nomination of non-interested Trustees shall be
committed to the discretion of the non-interested Trustees. The Trustees have
determined that in their judgment there is a reasonable likelihood that the
Class B Plans will benefit each Fund and their respective Class B shareholders.
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APPENDIX A
The company may from time to time use comparisons, graphs or charts in
advertisements to depict the following types of information:
. The performance of various types of securities (taxable money market
funds, U.S. treasury securities, adjustable rate mortgage securities,
government securities, municipal bonds) over time. However, the
characteristics of these securities are not identical to, and may be very
different from, those of a Fund's portfolio;
. Volatility of total return of various market indices (i.e. Lehman
Government Bond Index, S&P 500, IBC/Donoghue's Money Fund Average/ All
Taxable Index) over varying periods of time.
. Credit Ratings of domestic government bonds in various countries
. Price volatility comparisons of types of securities over different periods
of time.
. Price and yield comparisons of a particular security over different periods
of time.
In addition, the Company may from time to time include rankings of
Goldman, Sachs & Co.'s research department by publications such as the
Institutional Investor and the Wall Street Journal in advertisements.
1-A
<PAGE>
APPENDIX B
CORE FUND
GLOBAL INCOME 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 have speculative characteristics as well.
- -----------------
/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-B
<PAGE>
Moody's also provides credit ratings for commercial paper. These are
promissory obligations (1) not having an original maturity in excess of nine
months, and (2) backed by commercial banks. Notes bearing the designation P-
1 have a superior capacity for repayment. Notes bearing the designation P-2
have a strong capacity for repayment.
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.
S&P's top ratings for notes issued after July 29, 1984 are SP-1 and SP-2.
The designation SP-1 indicates a very strong capacity to pay principal and
interest. A "+" is added for those issues determined to possess overwhelming
safety characteristics. An "SP-2" designation indicates a satisfactory
capacity to pay principal and interest.
Commercial paper rated A by S&P is regarded as having the greatest capacity
for timely payment. Commercial Paper rated A-1 is described as having an
overwhelming or very strong degree of safety regarding timely payment.
Commercial Paper rated A-2 by Standard & Poor's is described as having a
strong degree of safety regarding timely payment.
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
2-B
<PAGE>
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 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.
Investment Grade Short-Term Ratings
-----------------------------------
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
F-1+: Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely
payment.
F-1: Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated "F-1+".
3-B
<PAGE>
DUFF & PHELPS
-------------
Commercial Paper/Certificates of Deposits
-----------------------------------------
Category 1: Top Grade
Duff 1 plus: Highest certainty of timely payment. Short-term liquidity
including internal operating factors and/or ready access to
alternative sources of funds, is clearly outstanding, and
safety is just below risk-free U.S. Treasury short-term
obligations.
Duff 1:
Very high certainty of timely payment. Liquidity factors are
excellent and supported by strong fundamental protection factors.
Risk factors are minor.
Notes: Bonds which are unrated may expose the investor to risks with
respect to capacity to pay interest or repay principal which are
similar to the risks of lower-rated bonds. The Fund is dependent
on the Investment Adviser's judgment, analysis and experience in
the evaluation of such bonds.
Investors should note that the assignment of a rating to a bond
by a rating service may not reflect the effect of recent
developments on the issuer's ability to make interest and
principal payments.
Description of Municipal Securities Ratings
-------------------------------------------
The ratings of Moody's Investors Service, Inc. and Standard & Poor's Ratings
Group represent their opinions as to the quality of various Municipal
Securities. It should be emphasized, however, that ratings are not absolute
standards of quality. Consequently, Municipal Securities with the same
maturity, coupon and rating may have different yields while Municipal
Securities of the same maturity and coupon with different ratings may have
the same yield.
Description of Ratings of State and Municipal Bonds
---------------------------------------------------
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.
4-B
<PAGE>
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 risk appear somewhat larger than
the 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 medium grade obligations,
i.e. they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has
been suspended or withdrawn, it may be for reasons unrelated to the quality
of the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not
rated as a manner of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgement to be formed; if a
bond is called for redemption; or for other reasons.
NOTE: Those bonds in the Aa and A and Baa groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa
1, A 1 and Baa 1.
5-B
<PAGE>
STANDARD & POOR'S RATINGS GROUP
AAA: Debt rated AAA has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely
strong.
AA: Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in
small degree.
A: Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
debt in higher rated categories.
BBB: Debt rated BBB is regarding as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
Plus (+) or minus (-) for ratings from AA to CCC may be used to show
relative standing within the major rating categories.
Description of Ratings of State and Municipal Notes
---------------------------------------------------
MOODY'S INVESTORS SERVICE, INC.
Moody's ratings for state and municipal short-term obligations will
be designated Moody's Investment Grade ("MIG"). Such ratings
recognize the differences between short-term credit risk and long-
term risk. Factors affecting the liquidity of the borrower and short
term cyclical elements are critical in short-term ratings, while
other factors of major importance in bond risk, long-term secular
trends for example, may be less important over the short run.
Symbols used will be as follows:
MIG-1/VMIG-1 - This designation denotes best quality. There is
present strong protection by established cash flows, superior
liquidity support or demonstrated broad based access to the market
for refinancing.
MIG-2/VMIG-2 - This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding
group.
STANDARD & POOR'S RATINGS GROUP
A Standard & Poor's note rating reflects the liquidity concerns and
market access risks unique to notes. Notes due in 3 years or less
will likely receive a note rating. Notes maturing beyond 3 years
will most likely receive a long-term
6-B
<PAGE>
debt rating. The following criteria will be used in making that assessment.
- Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).
- Source of payment (the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1 Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will
be given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term
of the notes.
SP-3 Speculative capacity to pay principal and interest.
Description of Ratings of State and Municipal Commercial Paper
MOODY'S INVESTORS SERVICE, INC.
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually senior debt obligations which have an original maturity in
excess of nine months. Moody's two highest commercial paper rating
categories are as follows:
"PRIME-1" - Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations.
Prime-1 repayment ability will often be evidenced by many of the following
characteristics:
- Leading market positions in well established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance on
debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
- Well established access to a range of financial markets and assured
sources of alternate liquidity.
"PRIME-2" - Issuers rated Prime-2 (or supporting institutions) have a
strong ability for repayment of short-term debt
7-B
<PAGE>
obligations. This will normally be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and coverage ratios,
while sound may be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
STANDARD & POOR'S RATINGS GROUP
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt having an original maturity of no
more than 365 days. Standard & Poor's two highest commercial paper rating
categories are as follows:
A-1 - This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus sign (+) designation.
A-2 - Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
Description of Ratings of Preferred Stock
-----------------------------------------
MOODY'S INVESTORS SERVICE, INC.
Moody's utilizes a variation of its bond rating symbols in the quality
ranking of preferred stocks because of the fundamental differences between
preferred stock and bonds. Preferred stock occupies a junior position to
bonds within a particular capital structure and such securities are rated
within the universe of preferred stocks.
aaa: An issue which is rated "aaa" is considered to be a top-
quality preferred stock. This rating indicates good asset protection and the
least risk of dividend impairment within the universe of preferred stocks.
aa: An issue which is rated "aa" is considered a high-grade
preferred stock. This rating indicates that there is a reasonable assurance
the earnings and asset protection will remain relatively well maintained in
the foreseeable future.
a: An issue rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the
"aaa" and "aa" classification, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
8-B
<PAGE>
STANDARD & POOR'S RATINGS GROUP
A Standard & Poor's preferred stock rating is an assessment of the
capacity and willingness of an issuer to pay preferred stock dividends and
any applicable sinking fund obligations. A preferred stock rating differs
from a bond rating inasmuch as it is assigned to an equity issue, which issue
is intrinsically different from, and subordinated to, a debt issue.
Therefore, to reflect this difference, the preferred stock rating symbol will
normally not be higher than the debt of the same issuer.
The preferred stock ratings are based on the following considerations:
- Likelihood of payment - capacity and willingness of the issuer to meet the
timely payment of preferred stock dividends and any applicable sinking fund
requirements in accordance with the terms of the obligation;
- Nature of, and provisions of, the issue; and
- Relative position of the issue in the event of bankruptcy, reorganization,
or other arrangement under the laws of bankruptcy and other laws affecting
creditors' rights.
AAA: This is the highest rating that may be assigned by Standard &
Poor's to a preferred stock issue and indicates and extremely strong capacity
to pay the preferred stock obligations.
AA: A preferred stock issue rated AA also qualifies as a high-
quality fixed income security. The capacity to pay preferred Stock
obligations is very strong, although not as overwhelming as for issues rated
AAA.
A: An issue rated A is backed by a sound capacity to pay the
preferred stick obligations, although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions.
9-B
<PAGE>
APPENDIX C
BUSINESS PRINCIPLES OF GOLDMAN, SACHS & CO.
Goldman Sachs is noted for its Business Principles, which guide all of the
firm's activities and serve as the basis for its distinguished reputation among
investors worldwide.
OUR CLIENT'S INTERESTS ALWAYS COME FIRST. Our experience shows that if we serve
our clients well, our own success will follow.
OUR ASSETS ARE OUR PEOPLE, CAPITAL AND REPUTATION. If any of these assets
diminish, reputation is the most difficult to restore. We are dedicated to
complying fully with the letter and spirit of the laws, rules and ethical
principles that govern us. Our continued success depends upon unswerving
adherence to this standard.
WE TAKE GREAT PRIDE IN THE PROFESSIONAL QUALITY OF OUR WORK. We have an
uncompromising determination to achieve excellence in everything we undertake.
Though we may be involved in a wide variety and heavy volume of activity, we
would, if it came to a choice, rather be best than biggest.
WE STRESS CREATIVITY AND IMAGINATION IN EVERYTHING WE DO. While recognizing
that the old way may still be the best way, we constantly strive to find a
better solution to a client's problems. We pride ourselves on having pioneered
many of the practices and techniques that have become standard in the industry.
WE STRESS TEAMWORK IN EVERYTHING WE DO . While individual creativity is always
encouraged, we have found that team effort often produces the best results. We
have no room for those who put their personal interests ahead of the interests
of the firm and its clients.
INTEGRITY AND HONESTY ARE AT THE HEART OF OUR BUSINESS. We expect our people to
maintain high ethical standards in everything they do, both in their work for
the firm and in their personal lives.
1-C
<PAGE>
GOLDMAN, SACHS & CO.'S INVESTMENT BANKING AND SECURITIES ACTIVITIES
Goldman, Sachs & Co. is a leading global investment banking and securities firm
with a number of distinguishing characteristics.
. Privately owned and ranked among Wall Street's best capitalized firms, with
assets exceeding $70 billion and partners capital and subordinated
liabilities of over $4.9 billion as of November 24, 1995.
. With thirty-three offices around the world, Goldman Sachs employes over
8,000 professionals focused on opportunities in major markets.
. An equity research budget of $126 million for 1996.
. Premier lead manager of negotiated municipal bond offerings over the past
five years (1989-1994), aggregating $114 billion.
. The number one lead manager of U.S. common stock offerings for the past six
years (1989-1994), with 18% of the total dollar volume.*
* Source: Securities Data Corporation. Ranking
-----------------------------------
excludes REITS, Trusts, Rights and closed-end fund offerings.
2-C
<PAGE>
GOLDMAN, SACHS & CO.'S HISTORY OF EXCELLENCE
1865 End of Civil War
1869 Marcus Goldman opens Goldman Sachs for business
1890 Dow Jones Industrial Average first published
1896 Goldman Sachs joins New York Stock Exchange
1906 Dow Jones Industrial Average tops 100
1925 Goldman Sachs finances Warner Brothers, producer of the first talking
film
1956 Goldman Sachs co-manages Ford's public offering, the largest to date
1970 London office opens
1972 Dow Jones Industrial Average breaks 1000
1986 Goldman Sachs takes Microsoft public
1990 Provides advisory services for the largest privatization in the region
of the sale of Telefonos de Mexico
1992 Dow Jones Industrial Average breaks 3000
1993 Goldman Sachs is lead manager in taking Allstate public, largest
equity offering to date ($2.4 billion)
1995 Dow Jones Industrial Average breaks 4000
3-C
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
SERVICE SHARES
GS ADJUSTABLE RATE GOVERNMENT FUND
GS SHORT DURATION GOVERNMENT FUND
GS SHORT DURATION TAX-FREE FUND
GS CORE FIXED INCOME FUND
GOLDMAN SACHS GLOBAL 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
Fund, GS Short Duration Government Fund, GS Short Duration Tax-Free Fund, GS
Core Fixed Income and Goldman Sachs Global Income Fund, each dated March 1,
1996, 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
Introduction........................ B-3
Other Investments and Practices.. B-10
Investment Restrictions.......... B-51
Management....................... B-68
Portfolio Transactions........... B-84
Shares of the Trust.............. B-85
Net Asset Value.................. B-89
Taxation......................... B-90
Performance Information.......... B-101
Other Information................ B-112
Financial Statements............. B-113
Service Plan..................... B-114
Appendix A....................... 1-A
Appendix B....................... 1-B
Appendix C....................... 1-C
The date of this Additional Statement is March 1, 1996.
<PAGE>
GOLDMAN SACHS ASSET MANAGEMENT GOLDMAN, SACHS & CO.
ADVISER TO GS SHORT DURATION DISTRIBUTOR
TAX-FREE FUND, GS CORE FIXED 85 BROAD STREET
INCOME FUND AND GOLDMAN SACHS NEW YORK, NEW YORK 10004
GLOBAL INCOME FUND AND
ADMINISTRATOR TO GOLDMAN SACHS
GLOBAL INCOME FUND
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 FUND CHICAGO, ILLINOIS 60606
AND GS SHORT DURATION
GOVERNMENT FUND GOLDMAN SACHS ASSET MANAGEMENT
ONE NEW YORK PLAZA INTERNATIONAL
NEW YORK, NEW YORK 10004 SUBADVISER TO GOLDMAN SACHS
GLOBAL INCOME FUND
140 FLEET STREET
LONDON EC4A 2BJ, ENGLAND
TOLL FREE (IN U.S.) .......800-621-2550
<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 Fund
("Adjustable Rate Fund"), GS Core Fixed Income Fund ("Core Fund"), Goldman Sachs
Global Income Fund ("Global Income Fund"), Goldman Sachs Government Income Fund
("Government Income Fund"), Goldman Sachs Municipal Income Fund ("Municipal
Income Fund"), GS Short Duration Tax-Free Fund ("Short Duration Tax-Free Fund")
and GS Short Duration Government Fund ("Short Duration Government Fund").
Adjustable Rate Fund, Core Fund, Global Income Fund, Government Income Fund,
Municipal Income Fund, Short Duration Tax-Free Fund and Short Duration
Government Fund are each sometimes referred to herein as a "Fund" and
collectively as the "Funds." Short Duration Government Fund, Short Duration
Tax-Free Fund and Core Fund are each authorized to issue three classes of
shares: Institutional Shares, Administration Shares and Service Shares.
Adjustable Rate Fund is authorized to issue four classes of shares:
Institutional Shares, Administration Shares, Service Shares and Class A Shares.
Global Income Fund is authorized to issue four classes of shares: Institutional
Shares, Service Shares, Class A Shares and Class B Shares. Government Income
Fund and Municipal Income Fund are each authorized to issue two classes of
shares: Class A Shares and Class B Shares.
Goldman Sachs Asset Management ("GSAM"), a separate operating division of
Goldman, Sachs & Co. ("Goldman Sachs"), serves as the investment adviser to Core
Fund, Global Income Fund, Government Income Fund, Municipal Income Fund and
Short Tax-Free Duration Fund. In addition, GSAM serves as Global Income Fund's
administrator. Goldman Sachs Asset Management International ("GSAMI" or the
"Subadviser"), an affiliate of Goldman Sachs, serves as subadviser to the Global
Income Fund. Goldman Sachs Funds Management, L.P. ("FMLP"), an affiliate of
Goldman Sachs, serves as the investment adviser to Adjustable Rate Fund and
Short Duration Government Fund. GSAM, GSAMI 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.
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. However, unlike
certificates of deposits, shares of the Funds are not insured by the Federal
Deposit Insurance Corporation.
B-3
<PAGE>
The following information relates to and supplements the description of each
Fund's investment policies contained in the Prospectus. See the Prospectus for
a fuller description of each 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.
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.
ADJUSTABLE RATE FUND AND SHORT DURATION GOVERNMENT FUND
Adjustable Rate Fund and Short Duration Government Fund are both designed for
investors who seek a high level of high current income, relative stability of
principal and the high credit quality of securities issued or guaranteed by the
U.S. Government or its agencies, instrumentalities or sponsored enterprises,
without incurring the administrative and accounting burdens involved in direct
investment.
Market and economic conditions may affect the investments of Adjustable Rate
Fund and Short Duration Government 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 and Short Duration Government Funds
may invest may be adversely affected by increases in market interest rates.
Conversely, 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 and Short Duration Government Funds seek a
- -------------------
higher current yield than a money market fund or than that offered by bank
certificates of deposit and money market accounts. However, the Adjustable Rate
and Short Duration Government Funds 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 of the Adjustable Rate and Short Duration
Government Funds 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
pass-through securities and other mortgage securities with periodic interest
rate resets, maintaining a maximum duration of two years and a target duration
equal to that of a six-month to one-year U.S. Treasury security,
B-4
<PAGE>
and utilizing certain active management techniques to seek to hedge interest
rate risk. Short Duration Government Fund seeks to minimize net asset value
fluctuations by utilizing certain interest rate hedging techniques and by
maintaining a maximum duration of not more than 3 years. The duration and
targeting of the 2-year U.S. Treasury Security plus or minus .5 years. There is
no assurance that these strategies for the Adjustable Rate Fund and Short
Duration Government Fund will always be successful.
PROFESSIONAL MANAGEMENT AND ADMINISTRATION. Investors who invest in
-------------------------------------------
securities of the Government National Mortgage Association ("Ginnie Mae") 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. Members of Goldman Sachs' highly
skilled portfolio management team bring together many years of experience in the
analysis, valuation and trading of U.S. fixed income securities.
GOVERNMENT INCOME FUND
Government Income Fund is designed for investors who seek the relatively high
current income, relative safety of principal and the high credit quality of
securities issued by the U.S. Government or its agencies, instrumentalities or
sponsored enterprises, without incurring the administrative and account burdens
involved in direct investment.
Government Income Fund's overall returns are generally likely to move in the
same direction as interest rates. Therefore, when interest rates decline,
Government Income Fund's return is also likely to decline. In exchange for
accepting a higher degree of share price fluctuation, investors have the
potential to achieve a higher return from the Government Income Fund's than from
shorter term investments.
High Current Income. Government Income Fund is designed to have a higher
-------------------
current yield than a money market fund, since it can invest in longer-term,
higher yielding securities, and may utilize certain investment techniques not
available to a money market fund. Similarly, Government Income Fund's yield is
expected to exceed that offered by bank certificates of deposit and money market
accounts. However, Government Income Fund does not maintain a constant net
asset value per share and is subject to greater fluctuation in the value of its
shares than a money market fund. Unlike bank certificates of deposit and money
market accounts, investments in shares of Government Income Fund are not insured
or guaranteed by any government agency. Government Income Fund seeks to provide
high current income without, however, sacrificing credit quality.
Liquidity. Because Government Income Fund's shares may be redeemed upon request
- ---------
of a shareholder on any business day at net
B-5
<PAGE>
asset value, Government Income Fund offers greater liquidity than many competing
investments such as certificates of deposit and direct investments in certain
securities in which Government Income Fund may invest.
A Sophisticated Investment Process. Government Income Fund's investment process
- ----------------------------------
starts with a review of trends for the overall economy as well as for different
sectors of the U.S. government and mortgage backed securities markets. Goldman
Sachs' portfolio managers then analyze yield spreads, implied volatility and the
shape of the yield curve. In planning the Government Income 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 involving Goldman Sachs' proprietary mortgage
prepayment model and option-adjusted spread model to structure and maintain the
Government Income Fund's investment portfolio. In determining the Government
Income Fund's investment strategy and making market timing decisions, the
Adviser will have access to information from Goldman Sachs' economists, fixed
income analysts and mortgage specialists.
Convenience of a Fund Structure. Government Income Fund eliminates many of the
- -------------------------------
complications that direct ownership of U.S. Government and mortgage-backed
securities entails. Government Income Fund automatically reinvests all
principal payments within the Fund and distributes only current income each
month, thereby conserving principal and eliminating the investor's need to
segregate and reinvest the principal portion of each payment on his own.
SHORT DURATION TAX-FREE AND MUNICIPAL INCOME FUNDS
Short Duration Tax-Free Fund and Municipal Income Fund (the "Tax Exempt Funds")
are not money market funds. Each 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 Tax Exempt Funds 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 Tax Exempt Funds'
increased investment flexibility permits their portfolios 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 that a mutual fund
structure offers some important advantages when
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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;
. Market expertise is also an important consideration for municipal
investors, and because the Tax Exempt Funds take relatively large
positions in different securities, the Tax Exempt Funds may be able to
obtain more favorable prices in the municipal securities market than
investors with relatively small positions; and
. Industry and geographical diversification are important considerations
for municipal investors. The Tax Exempt Funds are 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
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<PAGE>
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 to achieve a higher return from Core Fund than
from shorter term investments.
A number of investment strategies will be used to achieve the Core Fund's
investment objective, including market sector selection, determination of yield
curve exposure, and issuer selection. In addition, the Adviser will attempt to
take advantage of pricing inefficiencies in the fixed income markets. Market
sector selection is the underweighting or overweighting of one or more of the
five market sectors (i.e., U.S. treasuries, U.S. government agencies, corporate
securities, mortgage-backed securities and asset-backed securities) in which the
Fund primarily invests. The decision to overweight or underweight a given
market sector is based on expectations of future yield spreads between different
sectors. Yield curve exposure strategy consists of overweighting or
underweighting different maturity sectors to take advantage of the shape of the
yield curve. Issuer selection is the purchase and sale of corporate securities
based on a corporation's current and expected credit standing. To take
advantage of price discrepancies between securities resulting from supply and
demand imbalances or other technical factors, the Fund may simultaneously
purchase and sell comparable, but not identical, securities. The Adviser will
have access to the research of, and proprietary technical models developed by,
Goldman Sachs and will apply quantitative and qualitative analysis in
determining the appropriate allocations among the categories of issuers and
types of securities.
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 specialists.
B-8
<PAGE>
GLOBAL INCOME FUND
Global Income Fund is designed for investors seeking a combination of high
income, capital appreciation, stability of principal, experienced professional
management, flexibility and liquidity. However, investing in the Fund involves
certain risks and there is no assurance that the Fund will achieve its
investment objective.
In selecting securities for the Fund, portfolio managers consider such factors
as the security's duration, sector and credit quality rating as well as the
security's yield and prospectus for capital appreciation. In determining the
countries and currencies in which the Fund will invest, the Fund's portfolio
mangers form opinions based primarily on the views of Goldman Sachs' economists
as well as information provided by securities dealers, including information
relating to factors such as interest rates, inflation, monetary and fiscal
policies, taxation, and political climate. The portfolio managers apply the
Black-Litterman Model (the "Model") to their views to develop a portfolio that
produces, in the view of the Adviser, the optimal expected return for a given
level of risk. The Model factors in the opinions of the portfolio managers,
adjusting for their level of confidence in such opinions, with the views implied
by an international capital asset pricing formula. The Model is also used to
maintain the level of portfolio risk within the guidelines established by the
Adviser.
High Income. Global Income Fund's portfolio managers will seek out the
-----------
highest yielding bonds in the global fixed income market that meet the Global
Income Fund's credit quality standards and certain other criteria.
Capital Appreciation. Investing in the foreign bond markets offers the
- --------------------
potential for capital appreciation due to both interest rate and currency
exchange rate fluctuations. The portfolio managers attempt to identify
investments with appreciation potential by carefully evaluating trends affecting
a country's currency as well as a country's fundamental economic strength.
However, there is a risk of capital depreciation as a result of unanticipated
interest rate and currency fluctuations.
Portfolio Management Flexibility. Global Income Fund is actively managed. The
- --------------------------------
Fund's portfolio managers invest in countries that, in their judgment, meet the
Fund's investment guidelines and often have strong currencies and stable
economies and in securities that they believe offer favorable performance
prospects.
Relative Stability of Principal. Global Income Fund may be able to reduce
- -------------------------------
principal fluctuation by investing in foreign countries with economic policies
or business cycles different from those of the United States and in foreign
securities markets that do not necessarily move in the same direction or
magnitude as the U.S. market. Investing in a broad range of U.S. and foreign
fixed income securities and currencies reduces the dependence of the
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<PAGE>
Fund's performance on developments in any particular market to the extent that
adverse events in one market are offset by favorable events in other markets.
The Fund's policy of investing primarily in high credit quality securities may
also reduce principal fluctuation. However, there is no assurance that these
strategies will always be successful.
Professional Management. Individual U.S. investors may prefer professional
- -----------------------
management of their global bond and currency portfolios because a well-
diversified portfolio requires a large amount of capital and because the size of
the global market requires access to extensive resources and a substantial
commitment of time.
OTHER INVESTMENTS AND PRACTICES
OBLIGATIONS OF THE UNITED STATES, ITS AGENCIES, INSTRUMENTALITIES AND SPONSORED
ENTERPRISES
Each Fund may invest in U.S. Government securities, which are obligations issued
or guaranteed by the U.S. Government and its agencies, instrumentalities or
sponsored enterprises. 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, instrumentalities or sponsored enterprises, 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 Federal National Mortgage Association ("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, instrumentalities or sponsored enterprises. No
assurance can be given that the U.S. Government will provide financial support
to the U.S. Government agencies, instrumentalities or sponsored enterprises in
the future.
U.S. Government securities include (to the extent consistent with the Investment
Company Act of 1940, as amended (the "Act")) securities for which the payment of
principal and interest is backed by an irrevocable letter of credit issued by
the U.S. Government, its agencies, instrumentalities or sponsored enterprises.
U.S. Government securities also include (to the extent consistent with the Act)
participations in loans made to foreign governments or their agencies that are
guaranteed as to principal and interest by the U.S. Government or its agencies,
instrumentalities or sponsored enterprises. The secondary market for certain of
these participations is extremely limited. In the absence of a substantial
secondary market, such participations are regarded as illiquid. Each Fund may
also purchase U.S. Government
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<PAGE>
securities in private placements, subject to the Fund's limitation on investment
in illiquid securities.
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 program ("STRIPS").
CUSTODIAL RECEIPTS
Each Fund may 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 Duration Government Fund, Core Fund, Global Income
Fund and Government Income Fund (collectively, the "Taxable Funds") may each
invest in mortgage loans and mortgage pass-through securities and other
securities representing an interest in or collateralized by adjustable and
fixed-rate mortgage loans ("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 Mortgaged
Properties may also include residential investment properties and second homes.
The investment characteristics of adjustable and fixed rate Mortgage-Backed
Securities differ from those of traditional fixed income securities. The major
differences include the payment of interest and principal on Mortgage-Backed
Securities on a more frequent (usually monthly) schedule, and the possibility
that principal may be prepaid at any time due to prepayments on the underlying
mortgage loans or other assets. These differences can result in significantly
greater price and yield volatility than is the case with traditional fixed
income securities. As a result, a faster than expected prepayment rate will
reduce both the market value and the yield to maturity from those which were
anticipated.
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<PAGE>
A prepayment rate that is slower than expected will have the opposite effect of
increasing yield to maturity and market value. 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 cost of funds index or a moving average of
mortgage rates. Commonly utilized indices include the one-year, three-year and
five-year
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<PAGE>
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 Taxable Fund's portfolio and therefore in the net asset
value of each Taxable 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.
Fixed Rate Mortgage Loans. Generally, fixed rate mortgage loans included in a
- -------------------------
mortgage pool (the "Fixed Rate Mortgage Loans") will bear simple interest at
fixed annual rates and have original terms to maturity ranging from 5 to 40
years. Fixed Rate Mortgage Loans generally provide for monthly payments of
principal and interest in substantially equal installments for the term of the
mortgage note in sufficient amounts to fully amortize principal by maturity,
although certain Fixed Rate Mortgage Loans provide for a large final "balloon"
payment upon maturity.
LEGAL CONSIDERATIONS OF MORTGAGE LOANS. The following is a discussion of
- --------------------------------------
certain legal and regulatory aspects of the mortgage loans in which the Taxable
Funds 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,
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<PAGE>
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 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.
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. The Taxable Funds 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.
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<PAGE>
GUARANTEED MORTGAGE PASS-THROUGH SECURITIES
GINNIE MAE CERTIFICATES. Ginnie Mae is a wholly-owned corporate instrumentality
- -----------------------
of the United States 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, Ginnie Mae is
authorized to borrow from the U.S. Treasury in an unlimited amount.
FANNIE MAE CERTIFICATES. 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 FHA or guaranteed by the 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
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<PAGE>
principal. The obligations of Freddie Mac under its guaranty of Freddie Mac
Certificates are obligations solely of Freddie Mac.
The mortgage loans underlying the Freddie Mac and Fannie Mae Certificates
consist of adjustable rate or fixed rate mortgage loans with original terms to
maturity of between five and thirty years. Substantially all of these mortgage
loans are secured by first liens on one- to four-family residential properties
or 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 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 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. The Taxable Funds 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.
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
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<PAGE>
be made on a sequential, concurrent, pro rata or disproportionate
--- ----
basis, or any combination thereof. The stated interest rate on any such
subclass of certificates may be a fixed rate or one which varies in direct or
inverse relationship to an objective interest index.
Generally, each registered holder of a certificate will be entitled to receive
its pro rata share of monthly distributions of all or a portion of principal of
--- ----
the underlying mortgage loans or of interest on the principal balances thereof,
which accrues at the applicable mortgage pass-through rate, or both. The
difference between the mortgage interest rate and the related mortgage pass-
through rate (less the amount, if any, of retained yield) with respect to each
mortgage loan will generally be paid to the servicer as a servicing fee. Since
certain adjustable rate mortgage loans included in a mortgage pool may provide
for deferred interest (i.e., negative amortization), the amount of interest
actually paid by a mortgagor in any month may be less than the amount of
interest accrued on the outstanding principal balance of the related mortgage
loan during the relevant period at the applicable mortgage interest rate. In
such event, the amount of interest that is treated as deferred interest will be
added to the principal balance of the related mortgage loan and will be
distributed pro rata to certificate-holders as principal of such mortgage loan
--- ----
when paid by the mortgagor in subsequent monthly payments or at maturity.
MULTIPLE CLASS MORTGAGE-BACKED SECURITIES AND COLLATERALIZED MORTGAGE
- ---------------------------------------------------------------------
OBLIGATIONS. Each Taxable Fund may invest in multiple class securities
- -----------
including collateralized mortgage obligations ("CMOs") and REMIC Certificates
issued by U.S. Government agencies, instrumentalities (such as Fannie Mae) and
sponsored enterprises (such as Freddie Mac) or, in the case of Core and
Government Income Funds, or by trusts formed by private originators of, or
investors in, mortgage loans, including savings and loan associations, mortgage
bankers, commercial banks, insurance companies, investment banks and special
purpose subsidiaries of the foregoing. In general, CMOs are debt obligations of
a legal entity that are collateralized by, and multiple class mortgage-backed
securities represent direct ownership interests in, a pool of mortgage loans or
mortgage-backed securities the payments on which are used to make payments on
the CMOs or multiple class mortgage-backed securities.
Fannie Mae REMIC Certificates are issued and guaranteed as to timely
distribution of principal and interest by Fannie Mae. In addition, Fannie Mae
will be obligated to distribute the principal balance of each class of REMIC
Certificates in full, whether or not sufficient funds are otherwise available.
Freddie Mac guarantees the timely payment of interest on Freddie Mac REMIC
Certificates and also guarantees the payment of principal as payments are
required to be made on the underlying mortgage participation certificates
("PCs"). PCs represent undivided interests in specified level payment,
residential
B-17
<PAGE>
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 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
B-18
<PAGE>
class certificates ("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, 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. The Taxable Funds 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, Government Income Fund and Global 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 each Fund's limitation on
investments in illiquid securities. The Adviser may determine that SMBS which
are U.S. Government securities are liquid for purposes of each Fund's limitation
on investments in illiquid securities in accordance with procedures adopted by
the Board of Trustees. The market value of the class consisting entirely of
principal payments generally is unusually volatile in response to changes in
interest rates. The yields on a class of SMBS that receives all or most of the
interest from Mortgage Assets are generally higher than prevailing market yields
on other Mortgage-Backed Securities because their cash flow patterns are more
volatile and there is a greater risk that the initial investment will not be
fully recouped.
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
B-19
<PAGE>
organization to a certificate does not address the remote possibility that, in
the event of the insolvency of the issuer of certificates where a subordinated
interest was retained, the issuance and sale of the senior certificates may be
recharacterized as a financing and, as a result of such recharacterization,
payments on such certificates may be affected.
CREDIT ENHANCEMENT. Credit support falls generally into two categories: (i)
- ------------------
liquidity protection and (ii) protection against losses resulting from default
by an obligor on the underlying assets. Liquidity protection refers to the
provision of advances, generally by the entity administering the pools of
mortgages, the provision of a reserve fund, or a combination thereof, to ensure,
subject to certain limitations, that scheduled payments on the underlying pool
are made in a timely fashion. Protection against losses resulting from default
ensures ultimate payment of the obligations on at least a portion of the assets
in the pool. Such credit support can be provided by among other things, payment
guarantees, letters of credit, pool insurance, subordination, or any combination
thereof.
SUBORDINATION; SHIFTING OF INTEREST; RESERVE FUND. In order to achieve ratings
- -------------------------------------------------
on one or more classes of Mortgage Pass-Throughs, one or more classes of
certificates may be subordinate certificates which provide that the rights of
the subordinate certificate-holders to receive any or a specified portion of
distributions with respect to the underlying mortgage loans may be subordinated
to the rights of the senior certificate-holders. If so structured, the
subordination feature may be enhanced by distributing to the senior certificate-
holders on certain distribution dates, as payment of principal, a specified
percentage (which generally declines over time) of all principal payments
received during the preceding prepayment period ("shifting interest credit
enhancement"). This will have the effect of accelerating the amortization of
the senior certificates while increasing the interest in the trust fund
evidenced by the subordinate certificates. Increasing the interest of the
subordinate certificates relative to that of the senior certificates is intended
to preserve the availability of the subordination provided by the subordinate
certificates. In addition, because the senior certificate-holders in a shifting
interest credit enhancement structure are entitled to receive a percentage of
principal prepayments which is greater than their proportionate interest in the
trust fund, the rate of principal prepayments on the mortgage loans will have an
even greater effect on the rate of principal payments and the amount of interest
payments on, and the yield to maturity of, the senior certificates.
In addition to providing for a preferential right of the senior certificate-
holders to receive current distributions from the mortgage pool, a reserve fund
may be established relating to such 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
B-20
<PAGE>
to the subordinate certificate-holders or by excess servicing fees until the
Reserve Fund reaches a specified amount.
The subordination feature, and any Reserve Fund, are intended to enhance the
likelihood of timely receipt by senior certificate-holders of the full amount of
scheduled monthly payments of principal and interest due them and will protect
the senior certificate-holders against certain losses; however, in certain
circumstances the Reserve Fund could be depleted and temporary shortfalls could
result. In the event the Reserve Fund is depleted before the subordinated
amount is reduced to zero, senior certificate-holders will nevertheless have a
preferential right to receive current distributions from the mortgage pool to
the extent of the then outstanding subordinated amount. Unless otherwise
specified, until the subordinated amount is reduced to zero, on any distribution
date any amount otherwise distributable to the subordinate certificates or, to
the extent specified, in the Reserve Fund will generally be used to offset the
amount of any losses realized with respect to the mortgage loans ("Realized
Losses"). Realized Losses remaining after application of such amounts will
generally be applied to reduce the ownership interest of the subordinate
certificates in the mortgage pool. If the subordinated amount has been reduced
to zero, Realized Losses generally will be allocated pro rata among all
--- ----
certificate-holders in proportion to their respective outstanding interests in
the mortgage pool.
ALTERNATIVE CREDIT ENHANCEMENT. As an alternative, or in 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.
B-21
<PAGE>
ASSET-BACKED SECURITIES
Core Fund, Government Income Fund and Global Income 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, a Fund's ability to maintain
positions in such securities will be affected by reductions in the principal
amount of such securities resulting from prepayments, and its ability to
reinvest the returns of principal at comparable 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 by automobiles rather than
residential real property. Most issuers of automobile receivables permit the
loan servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
asset-backed securities. In addition, because of the large number of vehicles
involved in a typical issuance and technical requirements under state laws, the
trustee for the holders of the automobile receivables may not have a proper
security interest in the underlying automobiles. Therefore, there is the
possibility that, in some cases, recoveries on repossessed collateral may not be
available to support payments on these securities.
ZERO COUPON, DEFERRED INTEREST AND CAPITAL APPRECIATION BONDS
Each Fund may invest in zero coupon bonds, 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.
B-22
<PAGE>
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 each Fund may invest
are not fixed and may fluctuate based upon changes in market rates. A variable
rate obligation has an interest rate which is adjusted at predesignated periods
in response to changes in the market rate of interest on which the interest rate
is based. Variable and floating rate obligations are less effective than fixed
rate instruments at locking in a particular yield. Nevertheless, such
obligations may fluctuate in value in response to interest rate changes if there
is a delay between changes in market interest rates and the interest reset date
for the obligation. The absence of an unconditional demand feature on variable
and floating rate municipal securities exercisable within seven days would, and
the failure of the issuer or a third party to honor its obligations under a
demand or put feature might, require a variable or floating rate obligation to
be treated as illiquid for purposes of the Tax Exempt Funds' limitation on
illiquid investments.
Each Fund may invest in "leveraged" inverse floating rate debt instruments
("inverse floaters"), including "leveraged inverse floaters." The interest rate
on inverse floaters resets in the opposite direction from the market rate of
interest to which the inverse floater is indexed. An inverse floater may be
considered to be leveraged to the extent that its interest rate varies by a
magnitude that exceeds the magnitude of the change in the index rate of
interest. The higher the degree of leverage of an inverse floater, the greater
the volatility of its market value. Accordingly, the duration of an inverse
floater may exceed its stated final maturity. Certain inverse floaters may be
deemed to be illiquid securities for purposes of each Fund's limitation on
illiquid investments.
CORPORATE DEBT OBLIGATIONS
Core Fund, Global Income Fund and Government Income 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 meet principal and interest payments on the obligations and may
B-23
<PAGE>
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
Global Income Fund and Core Fund may each invest in obligations issued or
guaranteed by United States and foreign banks. Bank obligations, including
without limitation time deposits, bankers' acceptances and certificates of
deposit, may be general obligations of the parent bank or may be 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. Foreign banks are subject to different regulations and are
permitted to engage in different activities than U.S. banks. 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, Municipal Income Fund and Short Duration Tax-Free Fund may invest in
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 ("Municipal
Securities"), 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 income
taxes of any state or local government). In addition, Municipal Securities
include participation 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 Core Fund,
Municipal Income Fund and Short Duration Tax-Free Fund may revise their
definition of Municipal Securities in the future to include other types of
securities that currently exist the interest on which is or will be in the
opinion of such counsel, excluded from gross income for federal income tax
purposes, provided that investing in such securities is consistent with each
Fund's investment objective and policies.
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
B-24
<PAGE>
activity bonds" or industrial development bonds, which are issued by or
on behalf of public authorities to provide financing aid to acquire sites or
construct or equip facilities within a municipality for privately or publicly
owned corporations.
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
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 Tax-Free Fund,
Municipal Income 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
B-25
<PAGE>
principal of or interest on a Municipal Security may be materially affected.
Municipal Leases, Certificates of Participation and Other Participation
- -----------------------------------------------------------------------
Interests. The Core, Municipal Income, and Short-Duration Tax-Free Funds may
- ---------
invest in municipal leases, certificates of participation and other
participation interests. A municipal lease is an obligation in the form of a
lease or installment purchase which is issued by a state or local government to
acquire equipment and facilities. Income from such obligations is generally
exempt from state and local taxes in the state of issuance. Municipal leases
frequently involve special risks not normally associated with general
obligations or revenue bonds. Leases and installment purchase or conditional
sale contracts (which normally provide for title to the leased asset to pass
eventually to the governmental issuer) have evolved as a means for governmental
issuers to acquire property and equipment without meeting the constitutional and
statutory requirements for the issuance of debt. The debt issuance limitations
are deemed to be inapplicable because of the inclusion in many leases or
contracts of "non-appropriation" clauses that relieve the governmental issuer of
any obligation to make future payments under the lease or contract unless money
is appropriated for such purpose by the appropriate legislative body on a yearly
or other periodic basis. In addition, such leases or contracts may be subject to
the temporary abatement of payments in the event the issuer is prevented from
maintaining occupancy of the leased premises or utilizing the leased equipment.
Although the obligations may be secured by the leased equipment or facilities,
the disposition of the property in the event of non-appropriation or foreclosure
might prove difficult, time consuming and costly, and result in a delay in
recovering or the failure to fully recover a Fund's original investment.
Certificates of participation represent undivided interests in municipal leases,
installment purchase agreements or other instruments. The certificates are
typically issued by a trust or other entity which has received an assignment of
the payments to be made by the state or political subdivision under such leases
or installment purchase agreements.
Certain municipal lease obligations and certificates of participation may be
deemed to be illiquid for the purpose of the Funds' limitation on investments in
illiquid securities. Other municipal lease obligations and certificates of
participation acquired by a Fund may be determined by the Adviser, pursuant to
guidelines adopted by the Trustees of the Trust, to be liquid securities for the
purpose of such limitation. In determining the liquidity of municipal lease
obligations and certificates of participation, the Adviser will consider a
variety of factors including: (1) the willingness of dealers to bid for the
security; (2) the number of dealers willing to purchase or sell the obligation
and the number of other potential buyers; (3) the frequency of trades or quotes
for the obligation; and (4) the nature of the marketplace trades. In addition,
the Adviser will
B-26
<PAGE>
consider factors unique to particular lease obligations and certificates of
participation affecting the marketability thereof. These include the general
creditworthiness of the issuer, the importance to the issuer of the property
covered by the lease and the likelihood that the marketability of the obligation
will be maintained throughout the time the obligation is held by a Fund.
The Core, Municipal Income and Short Duration Tax-Free Funds may purchase
participations in Municipal Securities held by a commercial bank or other
financial institution. Such participations provide a Fund with the right to a
pro rata undivided interest in the underlying Municipal Securities. In
addition, such participations generally provide a Fund with the right to demand
payment, on not more than seven days notice, of all or any part of such Fund's
participation interest in the underlying Municipal Security, plus accrued
interest. A Fund will only invest in such participations if, in the opinion of
bond counsel, counsel for the issuers of such participations or counsel selected
by the Adviser, the interest from such participations is exempt from regular
federal income tax.
Municipal Notes. Municipal Securities in the form of notes generally are used
- ---------------
to provide for short-term capital needs, in anticipation of an issuer's receipt
of other revenues or financing, and typically have maturities of up to three
years. Such instruments may include tax anticipation notes, revenue
anticipation notes, bond anticipation notes, tax and revenue anticipation notes
and construction loan notes. Tax anticipation notes are issued to finance the
working capital needs of governments. Generally, they are issued in
anticipation of various tax revenues, such as income, sales, property, use and
business taxes, and are payable from these specific future taxes. Revenue
anticipation notes are issued in expectation of receipt of other kinds of
revenue, such as federal revenues available under federal revenue sharing
programs. Bond anticipation notes are issued to provide interim financing until
long-term bond financing can be arranged. In most cases, the long-term bonds
then provide the funds needed for repayment of the notes. Tax and revenue
anticipation notes combine the funding sources of both tax anticipation notes
and revenue anticipation notes. Construction Loan Notes are sold to provide
construction financing. These notes are secured by mortgage notes insured by
the FHA; however, the proceeds from the insurance may be less than the economic
equivalent of the payment of principal and interest on the mortgage note if
there has been a default. The obligations of an issuer of municipal notes are
generally secured by the anticipated revenues from taxes, grants or bond
financing. An investment in such instruments, however, presents a risk that the
anticipated revenues will not be received or that such revenues will be
insufficient to satisfy the issuer's payment obligations under the notes or that
refinancing will be otherwise unavailable.
Tax-Exempt Commercial Paper. Issues of commercial paper typically represent
- ---------------------------
short-term, unsecured, negotiable promissory notes. These obligations are
issued by state and local governments
B-27
<PAGE>
and their agencies to finance working capital needs of municipalities or to
provide interim construction financing and are paid from general revenues of
municipalities or are refinanced with long-term debt. In most cases, tax-exempt
commercial paper is backed by letters of credit, lending agreements, note
repurchase agreements or other credit facility agreements offered by banks or
other institutions.
Pre-Refunded Municipal Securities. The principal of and interest on pre-
- ---------------------------------
refunded Municipal Securities are no longer paid from the original revenue
source for the securities. Instead, the source of such payments is typically
an escrow fund consisting of U.S. Government securities. The assets in the
escrow fund are derived from the proceeds of refunding bonds issued by the same
issuer as the pre-refunded Municipal Securities. Issuers of Municipal
Securities use this advance refunding technique to obtain more favorable terms
with respect to securities that are not yet subject to call or redemption by the
issuer. For example, advance refunding enables an issuer to refinance debt at
lower market interest rates, restructure debt to improve cash flow or eliminate
restrictive covenants in the indenture or other governing instrument for the
pre-refunded Municipal Securities. However, except for a change in the revenue
source from which principal and interest payments are made, the pre-refunded
Municipal Securities remain outstanding on their original terms until they
mature or are redeemed by the issuer. Pre-refunded Municipal Securities are
usually purchased at a price which represents a premium over their face value.
Private Activity Bonds. Short Duration Tax-Free Fund, Municipal Income Fund and
- ----------------------
Core Fund may each invest in 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 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. The Tax Exempt Funds'
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.
Tender Option Bonds. A tender option bond is a Municipal Security (generally
- -------------------
held pursuant to a custodial arrangement) having a relatively long maturity and
bearing interest at a fixed rate substantially higher than prevailing short-
term, tax-exempt rates. The bond is typically issued with the agreement of a
third party, such as a bank, broker-dealer or other financial
B-28
<PAGE>
institution, which grants the security holders the option, at periodic
intervals, to tender their securities to the institution and receive the face
value thereof. As consideration for providing the option, the financial
institution receives periodic fees equal to the difference between the bond's
fixed coupon rate and the rate, as determined by a remarketing or similar agent
at or near the commencement of such period, that would cause the securities,
coupled with the tender option, to trade at par on the date of such
determination. Thus, after payment of this fee, the security holder effectively
holds a demand obligation that bears interest at the prevailing short-term, tax-
exempt rate. However, an institution will not be obligated to accept tendered
bonds in the event of certain defaults or a significant downgrade in the credit
rating assigned to the issuer of the bond. The liquidity of a tender option bond
is a function of the credit quality of both the bond issuer and the financial
institution providing liquidity. Tender option bonds are deemed to be liquid
unless, in the opinion of the Adviser, the credit quality of the bond issuer and
the financial institution is deemed, in light of the Fund's credit quality
requirements, to be inadequate. The Tax Exempt Funds intend to invest in tender
option bonds the interest on which will, in the opinion of bond counsel, counsel
for the issuer of interests therein or counsel selected by the Adviser, be
exempt from regular federal income tax. However, because there can be no
assurance that the Internal Revenue Service (the "Service") will agree with such
counsel's opinion in any particular case, there is a risk that a Tax Exempt Fund
will not be considered the owner of such tender option bonds and thus will not
be entitled to treat such interest as exempt from such tax. Additionally, the
federal income tax treatment of certain other aspects of these investments,
including the proper tax treatment of tender option bonds and the associated
fees in relation to various regulated investment company tax provisions is
unclear. The Tax Exempt Funds intend to manage their portfolio in a manner
designed to eliminate or minimize any adverse impact from the tax rules
applicable to these investments.
Auction Rate Securities. The Core, Municipal Income and Short Duration Tax-Free
- -----------------------
Funds 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"). Provided that the 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
B-29
<PAGE>
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.
A 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. The Funds will indirectly bear their proportionate share of any
management and other fees paid by such closed-end funds in addition the advisory
fees payable directly by the Funds.
Insurance. The Funds may invest in "insured" tax-exempt Municipal Securities.
- ---------
Insured Municipal Securities are securities for which scheduled payments of
interest and principal are guaranteed by a private (nongovernmental) insurance
company. The insurance only entitles a Fund to receive the face or par value of
the securities held by the Fund. The insurance does not guarantee the market
value of the Municipal Securities or the value of the shares of a Fund.
The Funds 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 Investors Service, Inc. ("Moody's") or AAA from Standard & Poor's
Ratings Group ("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-cancelable and continue in force as long as the
bonds are outstanding.
A secondary market insurance policy is purchased by an investor (such as a Fund)
subsequent to a bond's original issuance and generally insures a particular bond
for the remainder of its term. The Funds may purchase bonds which have already
been insured under a secondary market insurance policy by a prior investor, or
the Funds may directly purchase such a policy from insurers for bonds which are
currently uninsured.
An insured Municipal Security acquired by a Fund will typically be covered by
only one of the above types of policies. All of the insurance policies used by a
Fund will be obtained only from insurance companies rated, at the time of
purchase, Aaa by Moody's or AAA by Standard & Poor's.
Standby Commitments. In order to enhance the liquidity of Municipal Securities,
- -------------------
the Tax Exempt Funds 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 a Fund pays for securities with standby commitments may be
higher than the price which otherwise would be paid for the
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<PAGE>
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 a Tax
Exempt 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 a Tax
Exempt Fund. In considering whether a security meets a Tax Exempt Fund's
quality standards, the particular Tax Exempt 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.
The Tax Exempt Funds value 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 a Tax Exempt 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, a Tax Exempt Fund's policy is to enter
into standby commitment transactions only with banks, brokers or dealers which
present a minimal risk of default.
The Adviser understands that 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. The Tax Exempt Funds intend to take the position that they are 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 their
hands. There is no assurance that standby commitments will be available to the
Tax Exempt Funds nor have the Tax Exempt Funds assumed that such commitments
would continue to be available under all market conditions.
Call Risk and Reinvestment Risk. Municipal Securities may include "call"
- -------------------------------
provisions which permit the issuers of such securities, at any time or after a
specified period, to redeem the securities prior to their stated maturity. In
the event that Municipal Securities held in a Fund's portfolio are called prior
to the maturity, the Fund will be required to reinvest the proceeds on such
securities at an earlier date and may be able to do so only at lower yields,
thereby reducing the Fund's return on its portfolio securities.
B-31
<PAGE>
FOREIGN INVESTMENTS
Core and Global Income Funds may invest in securities of foreign issuers and in
fixed income securities quoted or denominated in a currency other than U.S.
dollars. Investing in the securities of foreign issuers involves certain
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 and Global Income Fund may temporarily hold funds in bank deposits in
foreign currencies during completion of investment programs, Core Fund and
Global Income 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.
Foreign companies are not subject to uniform accounting, auditing and financial
reporting standards, practices and requirements comparable to those applicable
to U.S. companies. In addition, there may be less publicly available information
about a foreign company than about a comparable U.S. company. Volume and
liquidity in most foreign bond markets are less than in the United States
markets and securities of many foreign companies are less liquid and more
volatile than securities of comparable U.S. companies. Commissions on foreign
securities exchanges are often fixed and generally are higher than negotiated
commissions or dealer mark-ups in the U.S. markets, although each Fund endeavors
to achieve the most favorable net results on its portfolio transactions. There
is generally less government supervision and regulation of securities markets
and exchanges, brokers, dealers and listed companies than in the United States.
Mail service between the United States and foreign countries may be slower or
less reliable than within the United States, thus increasing the risk of delayed
settlement of portfolio transactions or loss of certificates for portfolio
securities.
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 or Global Income Fund is uninvested
and no return is earned thereon. The inability of Core Fund or Global Income
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 or Global Income Fund due to subsequent declines in value of the
portfolio securities, or, if Core Fund or Global Income 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
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<PAGE>
adversely affect Core Fund's or Global Income 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, and Global Income Fund
may enter into forward foreign currency exchange contracts for hedging purposes
and to seek to increase total return. A forward foreign currency exchange
contract involves an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract. These
contracts are traded in the interbank market conducted directly between currency
traders (usually large commercial banks) and their customers. A forward
contract generally has no deposit requirement, and no commissions are generally
charged at any stage for trades.
At the maturity of a forward contract, Global Income Fund and 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.
Global Income Fund or Core Fund may enter into forward foreign currency exchange
contracts in several circumstances. First, when Global Income Fund or Core Fund
enters into a contract for the purchase or sale of a security quoted or
denominated in a foreign currency, or when Global Income Fund or Core Fund
anticipates the receipt in a foreign currency of a dividend or interest payments
on such a security which it holds, Global Income Fund or 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 U.S. dollars,
of the amount of foreign currency involved in the underlying transactions,
Global Income Fund or 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 the Adviser believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar, it may
enter into a forward contract to sell, for a fixed amount of dollars, the amount
of foreign currency approximating the value of some or all of a Fund's portfolio
securities quoted or denominated in such foreign currency. The precise matching
of the forward contract amounts and the value of
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<PAGE>
the securities involved will not generally be possible because the future value
of such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the
contract is entered into and the date it matures. Using forward contracts to
protect the value of a Fund's portfolio securities against a decline in the
value of a currency does not eliminate fluctuations in the underlying prices of
the securities. It simply establishes a rate of exchange which a Fund can
achieve at some future point in time. The precise projection of short-term
currency market movements is not possible, and short-term hedging provides a
means of fixing the dollar value of only a portion of a Fund's foreign assets.
Global Income Fund may engage in cross-hedging by using forward contracts in
one currency to hedge against fluctuations in the value of securities
denominated or quoted in a different currency if the Adviser determines that
there is a pattern of correlation between the two currencies. The Global Income
Fund may also purchase and sell forward contracts to seek to increase total
return when the Adviser anticipates that the foreign currency will appreciate or
depreciate in value, but securities quoted or denominated in that currency do
not present attractive investment opportunities and are not held in the Global
Income Fund's portfolio.
Global Income Fund's and Core Fund's custodian will place cash or liquid, high-
grade debt securities (i.e., securities rated in one of the top three rating
categories by Moody's or Standard & Poor's or, if unrated by such rating
organizations, deemed by the Adviser to be of comparable credit quality) into a
segregated account of the Fund in an amount equal to the value of the Fund's
total assets committed to the consummation of forward foreign currency exchange
contracts requiring the Fund to purchase foreign currencies or in the case of
Global Income Fund, forward contracts entered into to increase total return. If
the value of the securities placed in the segregated account declines,
additional cash or securities will be placed in the account on a daily basis so
that the value of the account will equal the amount of the Fund's commitments
with respect to such contracts. The segregated account will be marked-to-market
on a daily basis. Although the contracts are not presently regulated by the
CFTC, the CFTC may in the future assert authority to regulate these contracts.
In such event, a Fund's ability to utilize forward foreign currency exchange
contracts may be restricted. The Global Income Fund and Core Fund will not
enter into a forward contract with a term of greater than one year.
While Global Income Fund and Core Fund may enter into forward contracts to seek
to reduce currency exchange rate risks, transactions in such contracts involve
certain other risks. Thus, while Global Income Fund and Core Fund may benefit
from such transactions, unanticipated changes in currency prices may result in a
poorer overall performance for a Fund than if it had not engaged in any such
transactions. Moreover, there may be imperfect correlation between a Fund's
portfolio holdings of securities
B-34
<PAGE>
quoted or denominated in a particular currency and forward contracts entered
into by Global Income Fund and Core Fund. Such imperfect correlation may cause
the Fund to sustain losses which will prevent the Fund from achieving a complete
hedge or expose the Fund to risk of foreign exchange loss.
Forward contracts are subject to the risk that the counterparty to such contract
will default on its obligations. Since a forward foreign currency exchange
contract is not guaranteed by an exchange or clearinghouse, a default on the
contract would deprive a Fund of unrealized profits, transaction costs or the
benefits of a currency hedge or force the Fund to cover its purchase or sale
commitments, if any, at the current market price. A Fund will not enter into
such transactions unless the credit quality of the unsecured senior debt or the
claims-paying ability of the counterparty is considered to be investment grade
by the Adviser.
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, Government Income, Short Duration
Government Fund and Global Income Fund may enter into mortgage swaps and Core
Fund and Global Income Fund may also enter into currency swaps. Each Fund may
enter into swap transactions for hedging purposes or to seek to increase total
return, except that the Core Fund will not enter into currency swaps 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, 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
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<PAGE>
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. The net amount of the excess, if any, of a Fund's
obligations over its entitlements with respect to each interest rate or currency
swap will be accrued on a daily basis and an amount of cash or liquid, high
grade debt securities having an aggregate net asset value at least equal to such
accrued excess will be maintained in a segregated account by a Fund's custodian.
In as much as these transactions are entered into for hedging purposes or are
offset by cash or liquid, high grade debt securities maintained in a segregated
account the Funds and the Advisers believe that swaps do not constitute senior
securities under the Act and, accordingly, will not treat them as being subject
to a Fund's borrowing 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 & Poor's or Aa or P-1 or better by
Moody's or their equivalent ratings. If there is a default by the other party
to such a transaction, a Fund will have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As
a result, the swap market has become relatively liquid in comparison with the
markets for other similar instruments which are traded in the interbank market.
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
a Fund's limitation on illiquid investments.
The use of interest rate, mortgage and currency swaps, as well as interest rate
caps, floors and collars, is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If the Adviser is incorrect in its forecasts
of market values, interest rates and currency exchange rates, the investment
performance of a fund would be less favorable than it would have been if this
investment technique were not used.
B-36
<PAGE>
OPTIONS ON SECURITIES AND SECURITIES INDICES
WRITING COVERED OPTIONS. Each Fund may write (sell) covered call and put options
- -----------------------
on any securities in which it may invest or on any securities index based on
securities in which it may invest. A Fund may purchase and write such options
on securities that are listed on national domestic securities exchange or
foreign securities exchanges or traded in the over-the-counter market. 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. 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.
All call and put options written by a Fund are covered. A written call option
or put option may be covered by (i) maintaining cash or liquid, high-grade debt
securities, either of which, in the case of Global Income Fund or Core Fund, may
be quoted or denominated in any currency, in a segregated account maintained by
the Fund's custodian with a value at least equal to the Fund's obligation under
the option, (ii) entering into an offsetting forward commitment and/or (iii)
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.
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."
Each Fund may also write (sell) covered call and put options on any securities
index composed of securities in which it may invest. Options on securities
indices are similar to options on securities, except that the exercise of
securities index options requires cash settlement 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
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<PAGE>
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.
PURCHASING OPTIONS. Each Fund may also purchase put and call options on any
- ------------------
securities in which it may invest or on any securities index based on securities
in which it may invest, and each 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 ("protective puts") 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 on the purchase of a call option 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 either no
gain or 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. The purchase of
protective puts is designed to offset or hedge against a decline in the market
value of a Fund's securities. Put options may also be purchased by a Fund for
the purpose of affirmatively benefiting from a decline in the price of
securities which it does not own. A Fund would ordinarily realize a gain if,
during the option period, the value of the underlying securities decreased below
the exercise price sufficiently to cover the premium and transaction costs;
otherwise the Fund would realize either no gain or a loss on the purchase of the
put option. Gains and losses on the purchase of 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. 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
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<PAGE>
the securities market rather than price fluctuations in a single security.
Transactions by a Fund in options on securities and securities indices will be
subject to limitations established by each of the exchanges, boards of trade or
other trading facilities on which such options are traded 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, regardless of whether the
options are written or purchased on the same or different exchanges, boards of
trade or other trading facilities or are held or written in one or more accounts
or through one or more brokers. Thus, the number of options which a Fund may
write or purchase may be affected by options written or purchased by other
investment advisory clients of the Advisers. An exchange, board of trade or
other trading facility may order the liquidation of positions found to be in
excess of these limits, and it may impose certain other sanctions.
WRITING AND PURCHASING CURRENCY CALL AND PUT OPTIONS. Core Fund and Global
- ----------------------------------------------------
Income Fund may write covered put and call options and purchase put and call
options on foreign currencies in an attempt to protect against declines in the
dollar value of portfolio securities and against increases in the dollar cost of
securities to be acquired. Global Income Fund may use options on currency to
cross-hedge, which involves writing or purchasing options on one currency to
seek to hedge against changes in exchange rates for a different currency with a
pattern of correlation. In addition, Global Income Fund may purchase call
options on currency to seek to increase total return when the Adviser
anticipates that the currency will appreciate in value, but the securities
denominated or quoted in that currency do not present attractive investment
opportunities and are not including in Global Income Fund's portfolio.
A call option written by Core Fund and Global Income Fund obligates the Fund to
sell specified currency to the holder of the option at a specified price if the
option is exercised at any time before the expiration date. A put option
written by a Fund obligates the Fund to purchase specified currency from the
option holder at a specified price if the option is exercised at any time before
the expiration date. The writing of currency options involves a risk that a
Fund will, upon exercise of the option, be required to sell currency subject to
a call at a price that is less than the currency's market value or be required
to purchase currency subject to a put at a price that exceeds the currency's
market value.
A Fund may terminate its obligations under a written call or put option by
purchasing an option identical to the one written. Such purchases are referred
to as "closing purchase transactions." A Fund would also be able to enter into
closing sale transactions in order to realize gains or minimize losses on
purchased options.
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<PAGE>
Core Fund and Global Income Fund would normally purchase call options in
anticipation of an increase in the dollar value of currency in which securities
to be acquired by the Fund are denominated or quoted. The purchase of a call
option would entitle a Fund, in return for the premium paid, to purchase
specified currency at a specified price during the option period. A Fund would
ordinarily realize a gain if, during the option period, the value of such
currency exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise the Fund would realize either no gain or a loss on
the purchase of the call option.
Core Fund or Global Income 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 and Global Income Fund, in exchange for the
premium paid, to sell specified currency at a specified price during the option
period. The purchase of protective puts is designed merely to offset or hedge
against a decline in the dollar value of a Fund's portfolio securities due to
currency exchange rate fluctuations. A Fund would ordinarily realize a gain if,
during the option period, the value of the underlying currency decreased below
the exercise price sufficiently to more than cover the premium and transaction
costs; otherwise the Fund would realize either no gain or a loss on the purchase
of the put option. Gains and losses on the purchase of protective put options
would tend to be offset by countervailing changes in the value of underlying
currency.
In addition to using options for the hedging purposes described above, Global
Income Fund may use options on currency to seek to increase total return. Global
Income Fund may write (sell) covered put and call options on any currency in an
attempt to realize greater income than would be realized on portfolio securities
transactions alone. However, in writing covered call options for additional
income, Global Income Fund may forego the opportunity to profit from an increase
in the market value of the underlying currency. Also, when writing put options,
Global Income Fund accepts, in return for the option premium, the risk that it
may be required to purchase the underlying currency at a price in excess of the
currency's market value at the time of purchase.
Global Income Fund would normally purchase call options to seek to increase
total return in anticipation of an increase in the market value of a currency.
Global Income 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 Global Income Fund would realize either
no gain or a loss on the purchase of the call option. Put options may be
purchased by the Global Income Fund for the purpose of benefiting from a decline
in the value of currencies which it does not own. Global Income 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
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<PAGE>
the premium and transaction costs. Otherwise Global Income Fund would
realize either no gain or a loss on the purchase of the put option.
YIELD CURVE OPTIONS. Each Fund may enter into options on the yield "spread,"
-------------------
or yield differential between two securities. Such options 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.
Yield curve options may be used for the same purposes as other options on
securities. For example, a 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. A Fund may also purchase or write
yield curve options for other than hedging purpose (i.e., in an attempt to
increase its current income) if, in the judgment of the Adviser, the 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, or if the spread moves in a direction or
to an extent which was not anticipated.
Yield curve options written by a Fund must be "covered." A call (or put) option
is covered if the Fund holds another call (or put) option on the spread between
the same two securities and maintains in a segregated account with its custodian
cash or liquid, high-grade debt securities sufficient to cover the Fund's net
liability under the two options. Therefore, a Fund's liability for such a
covered option is generally limited to the difference between the amount of the
Fund's liability under the option written by the Fund less the value of the
option held by the Fund. Yield curve options may also be covered in such other
manner as may be in accordance with the requirements of the counterparty with
which the option is traded and applicable laws and regulations. Yield curve
options are traded over-the-counter, and because they have been only recently
introduced, established trading markets for these options have not yet
developed.
RISKS ASSOCIATED WITH OPTIONS TRANSACTIONS. There is no assurance that a liquid
- ------------------------------------------
secondary market on a domestic or foreign 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
currencies or dispose of assets held in a segregated
B-41
<PAGE>
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 or currencies.
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.
A Fund's 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.
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
To seek to increase total return or hedge against changes in interest rates or
securities prices or, in the case of Core Fund (but only for hedging purposes)
and Global Income Fund, currency exchange rates, each Fund may purchase and sell
various kinds of futures contracts, and purchase and write call and put options
on any of such futures contracts. Each Fund may also enter into closing
purchase and sale transactions with respect to any of such contracts and
options. The Futures contracts may be based on
B-42
<PAGE>
various securities (such as U.S. Government securities), securities indices,
foreign currencies in the case of Global Income Fund and Core Fund, and any
other financial instruments and indices. A Fund will engage in futures and
related options transaction only for bona fide hedging purposes as defined below
or for purposes of seeking to increase total return to the extent permitted by
regulations of the CFTC. All futures contracts entered into by a Fund are trade
on U.S. exchanges or boards of trade that are licensed and regulated by the CFTC
or on foreign exchanges.
FUTURES CONTRACTS. A futures contract may generally be described as an
- -----------------
agreement between two parties to buy and sell particular financial instruments
or currencies 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 and Global Income Fund may each
seek to offset anticipated changes in the value of a currency in which its
portfolio securities, or securities that it intends to purchase, are quoted or
denominated by purchasing and selling futures contracts on such currencies.
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 or currency will usually be
liquidated in this manner, a Fund may instead make, or take, delivery of the
underlying securities or currency whenever it appears economically advantageous
to do so. A clearing corporation associated with the exchange on which futures
on securities or currency 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, or
rate of return on portfolio securities or securities that a Fund proposes to
acquire or the exchange rate of currencies in which portfolio securities are
quoted or denominated. A Fund may, for example, take a "short" position in the
futures market by selling futures contracts in an attempt to hedge against an
anticipated rise in interest rates or a decline in market prices or foreign
currency rates that would adversely affect the dollar 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.
B-43
<PAGE>
Similarly, Core Fund and Global Income Fund may each sell futures contracts on
any currencies in which its portfolio securities are quoted or 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 Advisers 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 portfolio securities. 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 or currency exchange rates then available in the applicable
market to be less favorable than prices that are currently available.
OPTIONS ON FUTURES CONTRACTS. The acquisition of put and call options on
----------------------------
futures contracts will give a Fund the right (but not the obligation) for a
specified price to sell or to purchase, respectively, the underlying futures
contract at any time during the option period. As the purchaser of an option on
a futures contract, a Fund obtains the benefit of the futures position if prices
move in a favorable direction but limits its risk of loss in the event of an
unfavorable price movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium which may
partially offset a decline in the value of a Fund's assets. By writing a call
option, a Fund becomes obligated, in exchange for the premium, (upon exercise
of the option) 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 (upon exercise of the option) 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
B-44
<PAGE>
the amount of the premium received. The 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. Each 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 which permit principals of an investment company
registered under the Act to engage in such transactions without registering as
commodity pool operators. 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 (or the currency in which they are quoted or
denominated) that a Fund owns or futures contracts will be purchased to protect
a Fund against an increase in the price of securities (or the currency in which
they are quoted or denominated) it intends to purchase. As evidence of this
hedging intent, each Fund expects that on 75% or more of the occasions on which
it takes a long futures or option position (involving the purchase of futures
contracts), the Fund will have purchased, or will be in the process of
purchasing, equivalent amounts of related securities (or assets denominated in
the related currency) in the cash 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."
B-45
<PAGE>
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating a Fund to purchase securities or currencies, require the Fund to
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,
while a Fund may benefit from the use of futures and options on futures,
unanticipated changes in interest rates or securities prices or currency
exchange rates may result in a poorer overall performance for a Fund than if it
had not entered into any futures contracts or options transactions. In the
event of an imperfect correlation between a futures position and a portfolio
position which is intended to be protected, the desired protection may not be
obtained and a Fund may be exposed to risk of loss. In addition, it is not
possible to hedge fully or protect against currency fluctuations affecting he
value of securities denominated in foreign currencies because the value of such
securities is likely to fluctuate as a result of independent futures not related
to currency fluctuations.
Perfect correlation between a Fund's futures positions and portfolio positions
will be impossible to achieve. There are no futures contracts based upon
individual securities, except certain U.S. Government securities. The only
futures contracts available to hedge the Fund's portfolio are various futures on
U.S. Government securities, securities indices and foreign currencies. In
addition, it is not possible to hedge fully or perfectly against currency
fluctuations affecting the value of securities quoted or denominated in foreign
currencies because the value of such securities is likely to fluctuate as a
result of independent factors not related to currency fluctuations.
MORTGAGE DOLLAR ROLLS. The Taxable Funds may enter into mortgage "dollar
----------------------
rolls" in which a Fund sells securities for delivery in the current month and
simultaneously contracts with the same counterparty to repurchase similar (same
type, coupon and maturity), but not identical securities on a specified future
date. During the roll period, a Fund loses the right to receive principal and
interest paid on the securities sold. However, a Fund would benefit to the
extent of any difference between the 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. Unless such
benefits exceed the income, capital appreciation and gain or loss due to
mortgage prepayments that would have been realized on the securities sold as
part of the mortgage dollar roll, the use of this technique will diminish the
investment performance of a Fund compared with what such performance would have
been without the use of mortgage dollar rolls. All cash proceeds will be
invested in instruments that are permissible investments for the applicable
B-46
<PAGE>
Fund. Each 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
its forward purchase price.
For financial reporting and tax purposes, the Funds treat mortgage dollar rolls
as two separate transactions; one involving the purchase of a security and a
separate transaction involving a sale. The Funds do not currently intend to
enter into mortgage dollar rolls that are accounted for as a financing.
Mortgage dollar rolls involve certain risks including the following: if the
broker-dealer to whom a Fund sells the security becomes insolvent, the Fund's
right to purchase or repurchase the mortgage-related securities subject to the
mortgage dollar roll may be restricted and the instrument which the Fund is
required to repurchase may be worth less than an instrument which the Fund
originally held. Successful use of mortgage dollar rolls will depend upon the
Adviser's ability to manage its interest rate and mortgage prepayments exposure.
For these reasons, there is no assurance that mortgage dollar rolls can be
successfully employed.
CONVERTIBLE SECURITIES. Convertible securities may include corporate notes or
- ----------------------
preferred stock but are ordinarily a long-term debt obligation of the issuer
convertible at a stated exchange rate into common stock of the issuer. As with
all debt securities, the market value of convertible securities tends to decline
as interest rates increase and, conversely, to increase as interest rates
decline. Convertible securities generally offer lower interest or dividend
yields than non-convertible securities of similar quality. However, when the
market price of the common stock underlying a convertible security exceeds the
conversion price, the price of the convertible security tends to reflect the
value of the underlying common stock. As the market price of the underlying
common stock declines, the convertible security tends to trade increasingly on a
yield basis, and thus may not depreciate to the same extent as the underlying
common stock. Convertible securities in which the Core Fund invests will be
subject to the same rating criteria as its other investments in fixed income
securities.
LENDING OF PORTFOLIO SECURITIES
Each Fund may lend portfolio securities. Under present regulatory policies,
such loans may be made to institutions, such as brokers or dealers and would be
required to be secured continuously by collateral in cash, cash equivalents,
letters of credit or U.S. Government securities maintained on a current basis in
an amount at least equal to the market value of the securities loaned. Cash
collateral may be invested in cash equivalents. 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
B-47
<PAGE>
the loan in anticipation of an important vote to be taken among holders of the
securities or the giving or withholding of their consent on a material matter
affecting the investment. As with other extensions of credit there are risks of
delay in recovering, or even loss of rights in, the collateral should the
borrower of the securities fail financially. However, the loans 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. (Certain commercial paper issued in reliance on Section 4(2) of the
Securities Act of 1933 is treated like Rule 144A Securities.) 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 or Section 4(2) 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 a Fund 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.
B-48
<PAGE>
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 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 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 three days prior to 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.
OTHER INVESTMENT COMPANIES
Each Fund reserves the right to invest up to 10% of its total assets,
calculated at the time purchase, in the securities of other investment
companies, but may not 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. Pursuant to an exemptive order obtained from
the SEC, the Funds may invest in money market funds for which the Adviser or any
of its affiliates serves as investment adviser. A Fund will indirectly bear its
proportionate share of any management fees and other expenses paid by investment
companies in which it invests in addition to the advisory and administration
fees paid by the Fund. However, to the extent that a Fund invests in a money
market fund for which the Adviser acts as adviser, the advisory and
administration fees payable by the Fund to and Adviser will be reduced by an
amount equal to the Fund's proportionate share of the advisory and
administration fees paid by such money market fund to the Adviser or any of its
affiliates.
B-49
<PAGE>
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, generally for tax purposes, a repurchase agreement
is deemed to be a loan from a Fund to the seller of the security. For other
purposes, it is not clear whether a court would consider the security purchased
by a Fund subject to a repurchase agreement as being owned by the Fund or as
being collateral for a loan by the Fund to the seller. In the event of
commencement of bankruptcy or insolvency proceedings with respect to the seller
of the security before repurchase of the security under a repurchase agreement,
a Fund may encounter delay and incur costs before being able to sell the
security. Such a delay may involve loss of interest or a decline in price of
the security. If the court characterizes the transaction as a loan and a Fund
has not perfected a security interest in the security, 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.
B-50
<PAGE>
INVESTMENT IN UNSEASONED COMPANIES
Global Income Fund and Government Income Fund may each invest up to 5% of its
total assets, calculated at the time of purchase, in companies (including
predecessors) which have operated less than three years, excluding issuers whose
debt securities have been rated, at the time of investment, investment grade or
better by at least one nationally recognized statistical rating organization.
The securities of such companies may have limited liquidity, which can result in
their being priced higher or lower than might otherwise be the case. In
addition, investments in unseasoned companies are more speculative and entail
greater risk than do investments in companies with an established operating
record.
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 Tax-Free Fund's and Municipal Income
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 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. With respect to the Tax
Exempt Funds, 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.
AS A MATTER OF FUNDAMENTAL POLICY, 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
B-51
<PAGE>
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.
(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;
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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 in the securities of other investment companies, provided that the
Fund may make such an investment as part of a merger, consolidation, or
acquisition of assets, and provided further that the Fund may make such an
investment in the open market where no commission or profit to a sponsor or
dealer results from the purchase other than customary brokers' commissions and
then only to the extent permitted by the Act;
(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 total assets of the Fund;
(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;
(e) purchase additional securities which the amount of the Fund's borrowings
exceed 5% of the Fund's net assets; or
(f) 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 10% of its
total assets
B-53
<PAGE>
in restricted securities (including those eligible for resale under Rule 144A).
AS A MATTER OF FUNDAMENTAL POLICY, GOVERNMENT INCOME FUND MAY NOT:
(1) Purchase securities of any one issuer, other than obligations issued or
guaranteed by the U.S. government, its agencies, instrumentalities or sponsored
enterprises, 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 or by its agencies,
instrumentalities or sponsored enterprises.
(2) 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, 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 securities pending
the anticipated sale of other portfolio securities or assets and (d)
transactions in mortgage dollar rolls, 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, 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, instrumentalities or sponsored
enterprises.
(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.
B-54
<PAGE>
(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 limited partnership
interests, or in oil, gas or mineral interests, although the Fund may purchase
and sell securities that are secured by real estate or interests therein,
securities of real estate investment trusts and Mortgage-Backed 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 Act) except as permitted in Investment Restriction No. (2).
In addition, as non-fundamental policies, the Government Income Fund may not:
(a) invest in the securities of other investment companies, provided that the
Fund may make such an investment as part of a merger, consolidation, or
acquisition of assets, and provided further that the Fund may make such an
investment in the open market where no commission or profit to a sponsor or
dealer results from the purchase other than customary brokers' commissions and
then only to the extent permitted by the Act;
(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) invest more than 5% of the Fund's total assets in (i) securities of any
issuer with a record of less than three years' continuous operation, including
predecessors, except Government Securities and securities guaranteed by any
foreign government or its agencies or instrumentalities;
B-55
<PAGE>
(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;
(e) purchase additional securities while the amount of the Fund's borrowings
exceeds 5% of the Fund's total assets; or
(f) 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 10% of its
total assets in restricted securities (including those eligible for resale under
Rule 144A).
AS A MATTER OF FUNDAMENTAL POLICY, SHORT DURATION GOVERNMENT 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
B-56
<PAGE>
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 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
B-57
<PAGE>
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.
(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 Duration Government 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 Duration Government Fund does not
currently intend to purchase or sell interests in oil, gas or other mineral
exploration or development programs.
AS A MATTER OF FUNDAMENTAL POLICY, SHORT DURATION TAX-FREE 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 restriction is not applicable to investments in tax-exempt
securities issued by state and municipal governments and their agencies and
instrumentalities; 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.
The 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. The Fund may so invest in (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
B-58
<PAGE>
(including hotels), steel companies or life care facilities, (b) Municipal
Securities whose issuers are in the same state or (c) industrial development
obligations.
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 of the Fund or to finance failed settlements of
portfolio trades without immediately liquidating portfolio securities or other
assets; and (c) in order to fulfill commitments or plans to purchase additional
securities pending the anticipated sale of other portfolio securities or assets,
but only if after each such borrowing there is asset coverage of at least 300%
as defined in the Act. For purposes of this investment restriction, short sales,
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
B-59
<PAGE>
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.
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 Tax-Free 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 Tax-
Free 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 in the securities of other investment companies, provided that the
Fund may make such an investment as part of a merger, consolidation, or
acquisition of assets, and provided further that the Fund may make such an
investment in the open market where no commission or profit to a sponsor or
dealer results from the purchase other than customary brokers' commissions and
then only to the extent permitted by the Act.
(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 10% of its
total 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, other than
B-60
<PAGE>
Municipal Securities that have been rated A or better by Moody's or Standard &
Poor's.
For the purpose of applying Short Duration Tax-Free 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. For purposes of the
foregoing limitations, any limitation which involves a maximum percentage shall
not be considered violated unless an excess over the percentage occurs
immediately after, and is caused by, an acquisition or encumbrance of securities
or assets of, or borrowings by, the Fund. With respect to fundamental
investment restriction No. 3, the Fund must maintain asset coverage of at least
300% (as defined in the Act), inclusive of any amounts borrowed.
AS A MATTER OF FUNDAMENTAL POLICY, MUNICIPAL 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 restriction is not applicable to investments in tax-exempt
securities issued by state and municipal governments and their agencies and
instrumentalities; 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.
The 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. The Fund may so invest in (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)
B-61
<PAGE>
Municipal Securities whose issuers are in the same state, or (c) industrial
development obligations.
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 shares of the Fund or to finance failed settlements of
portfolio trades without immediately liquidating portfolio securities or other
assets; and (c) in order to fulfill commitments or plans to purchase additional
securities pending the anticipated sale of other portfolio securities or assets,
but only if after each such borrowing there is asset coverage of at least 300%
as defined in the Act. For purposes of this investment restriction, short
sales, 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 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
B-62
<PAGE>
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 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 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, the Municipal Income 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
that are not readily marketable and restricted securities not eligible for
resale pursuant to Rule 144A under the Securities Act of 1933; or (b) more than
10% of its total assets in restricted securities (including those eligible for
resale under Rule 144A).
(d) Purchase additional securities while the Fund's borrowings exceed 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, other than Municipal Securities that have been rated A or
better by Moody's or Standard & Poor's.
(f) Invest in the securities of other investment companies, provided that the
Fund may make such an investment as part of a merger, consolidation, or
acquisition of assets, and provided further that the Fund may make such an
investment in the open market where no commission or profit to a sponsor or
dealer results from the purchase other than customary brokers' commissions and
then only to the extent permitted by the Act.
B-63
<PAGE>
For the purpose of applying the Fund's investment restrictions, the
identification of the issuer of a Municipal Security that is not a general
obligation 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. For purposes of the foregoing
limitations, any limitation which involves a maximum percentage shall not be
considered violated unless an excess over the percentage occurs immediately
after, and is caused by, an acquisition or encumbrance of securities or assets
of, or borrowings by, the Fund. With respect to fundamental investment
restriction No. 3, the Fund must maintain asset coverage of at least 300% (as
defined in the Act), inclusive of any amounts borrowed.
AS A MATTER OF FUNDAMENTAL POLICY, 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
transactions shall not constitute borrowing.
B-64
<PAGE>
4. Pledge, mortgage or hypothecate its assets, except to the extent necessary to
secure permitted borrowings and to the extent related to the deposit of assets
in escrow in connection with the writing of covered put and call options and the
purchase of securities on a forward commitment or delayed-delivery basis and
collateral and initial or variation margin arrangements with respect to 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 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:
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(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 10% of its
total assets in restricted securities (including those eligible for resale
pursuant to Rule 144A).
(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.
(f) Invest in the securities of other investment companies, provided that the
Fund may make such an investment as part of a merger, consolidation, or
acquisition of assets, and provided further that the Fund may make such an
investment in the open market where no commission or profit to a sponsor or
dealer results from the purchase other than customary brokers' commissions and
then only to the extent permitted by the Act.
AS A MATTER OF FUNDAMENTAL POLICY, GLOBAL INCOME FUND MAY NOT:
(1) Borrow money, except from banks on a temporary basis, provided that the Fund
is required to maintain asset coverage of at least 300% for all borrowings. For
purposes of this investment restriction, short sales, transactions in currency,
forward contracts, options, futures contracts and options on futures contracts,
and forward commitment transactions shall not constitute borrowing.
(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 in obligations of the
U.S. Government or any of its agencies or instrumentalities.
(3) Pledge, mortgage or hypothecate its assets, except to the extent necessary
to secure permitted borrowings and to the extent
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related to the segregation of assets in connection with the writing of covered
put and call options and the purchase of securities or currencies on a forward
commitment or delayed-delivery basis and collateral and initial or variation
margin arrangements with respect to forward contracts, options, futures
contracts and options on futures contracts.
(4) Purchase securities on margin, except for such short-term credits as are
necessary for the clearance of transactions, but the Fund may make margin
deposits in connection with transactions in currencies, options, futures and
options on futures.
(5) Make short sales of securities, except short sales against-the-box, or
maintain a short position. (The Fund does not currently intend to make short
sales against-the-box.)
(6) 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.
(7) 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.
(8) Invest in commodities, except that the Fund may (a) purchase and sell
futures contracts, including those relating to securities, currencies and
indices, and options on any such futures contracts or currencies, and (b)
purchase and sell currencies or securities on a forward commitment or delayed-
delivery basis.
(9) Lend any funds or other assets except through the purchase of all or a
portion of an issue of securities or obligations of the type in which it may
invest; however, the Fund may lend portfolio securities in an amount not to
exceed 33-1/3% of the value of its total assets.
(10) Issue any senior security (as such term is defined in Section 18(f) of the
Act), except as permitted in Investment Restriction Nos. (1), (4), (5) and (9).
In addition, as non-fundamental policies, Global Income Fund may not:
(a) Invest in the securities of other investment companies, provided that the
Fund may make such an investment as part of a merger, consolidation, or
acquisition of assets, and provided further that the Fund may make such an
investment in the open market where no commission or profit to a sponsor or
dealer results from the purchase other than customary brokers' commissions and
then only to the extent permitted by the Act.
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<PAGE>
(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) 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 Securities Act of 1933; or (b) more than
10% of its total assets in restricted securities (including those eligible for
resale under Rule 144A).
(d) Purchase additional securities while the amount of the Fund's borrowings
exceeds 5% of the Fund's net 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 73, 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 Corporation.
Ashok N. Bakhru, Age 53, 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 40, One New York Plaza, New York, New York 10004. President
---------
and Trustee. Director, Mutual Funds Group of GSAM since September 1992; Vice
- -----------
President and Senior Portfolio Manager, GSAM from June 1988 to Present.
David B. Ford,* Age 50, 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.
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<PAGE>
Alan A. Shuch,* Age 46, 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; Limited Partner, Goldman Sachs since December
1994.
Jackson W. Smart, Jr., Age 65, 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; Director,
Federal Express Corporation; and North American Private Equity Group (a venture
capital fund).
William H. Springer, Age 66, 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, American
Information Technologies Corporation; Director, Walgreen Co. (a retail drugstore
business); and Baker, Fentress & Co. (a closed-ended non-diversified management
investment company).
Richard P. Strubel, Age 56, 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) January 1984 to October 1994;
Pauline Taylor,* Age 49, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs since June 1992; Consultant since 1989
- ---------
to June 1992.
Nancy L. Mucker,* Age 46, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs; Co-Manager, Shareholder Services for
- ---------
GSAM Funds Group.
John W. Mosior,* Age 57, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs; Co-Manager, Shareholder Services for
- ---------
GSAM Funds Group.
Scott M. Gilman,* Age 36, 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.
Michael J. Richman,* Age 35, 85 Broad Street, New York, New York 10004.
Secretary. Vice President and Assistant General Counsel to the Funds Group,
- ---------
GSAM since February 1994; Partner, Hale and Dorr since September 1991 to June
1992; Attorney-at-Law, Gaston & Snow since September 1985 to September 1991.
Howard B. Surloff,* Age 30, 85 Broad Street, New York, New York 10004. Assistant
---------
Secretary. Vice President and Assistant General
- ---------
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<PAGE>
Counsel, Goldman Sachs since November 1993 and May 1994, respectively; Counsel
to the Funds Group, GSAM since November 1993; Associate of Shereff, Friedman,
Hoffman & Goodman (prior thereto).
Steven E. Hartstein*, Age 32, 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).
Deborah A. Robinson*, Age 24, 85 Broad Street, New York, New York 10004.
Assistant Secretary. Administrative Assistant, Goldman Sachs since January
- -------------------
1994. Formerly at Cleary, Gottlieb, Stein and Hamilton.
Kaysie Uniacke*, Age 34, One New York Plaza, New York, New York 10004.
Assistant Secretary. Vice President and Portfolio Manager, GSAM 1988 to
- -------------------
Present.
Elizabeth Alexander*, Age 26, One New York Plaza, New York, New York 10004.
Assistant Secretary. Junior Portfolio Manager, 1995 to Present. Funds Trading
- -------------------
Assistant, GSAM 1993 - 1995. Formerly, Compliance Analyst, Prudential
Insurance, 1991 thru 1993.
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 December 31, 1995,
the Trustees and officers as a group owned less than 1% of the outstanding
shares of beneficial interest of each Fund.
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, 1995:
Total
Pension or Compensation
Aggregate Retirement from Goldman
Compensation Benefits Accrued Sachs Mutual
from the as of Part of Funds including
Trust Trust's Expenses the Trust)*
--------------- ----------------- ----------------
Name of Trustees
Paul C. Nagel, Jr. $17,596 $0 $101,000
Ashok N. Bakhru $11,081 $0 $ 61,000
Marcia L. Beck $ 0 $0 $ 0
David B. Ford $ 0 $0 $ 0
Alan A. Shuch $ 0 $0 $ 0
Jackson W. Smart $11,081 $0 $ 61,000
William H. Springer $11,081 $0 $ 61,000
Richard P. Strubel $11,081 $0 $ 61,000
* The Goldman Sachs Mutual Funds consisted of 29 mutual funds, including the
seven series of the Trust, on October 31, 1995.
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<PAGE>
INVESTMENT ADVISERS
- -------------------
GSAM, One New York Plaza, New York, New York 10004, a separate operating
division of Goldman Sachs, serves as the investment adviser to Municipal Income
Fund, Government Income Fund, Global Income Fund, Short Duration Tax-Free Fund
and Core Fund pursuant to separate investment advisory agreements. FMLP, One New
York Plaza, New York, New York 10004, serves as the investment adviser to
Adjustable Rate Fund and Short Duration Government Fund pursuant to separate
investment advisory agreements. FMLP, a Delaware limited partnership, is an
affiliate of Goldman Sachs. GSAMI, 140 Fleet Street, London EC4A 2BJ, England,
acts as the Global Income Fund's subadviser. As a company with unlimited
liability under the laws of England, GSAMI is regulated by the Investment
Management Regulatory Organization Limited, a United Kingdom self-regulatory
organization in the conduct of its investment advisory business. GSAM also
serves as administrator to Municipal Income Fund, Government Income Fund and
Global Income Fund. See "MANAGEMENT" in the Fund's Prospectus for a description
of the applicable Adviser's duties as investment adviser or subadviser.
Founded in 1869, Goldman Sachs is among the oldest and largest investment
banking firms in the United States. Goldman Sachs is a leader in developing
portfolio strategies and in many fields of investing and financing,
participating in financial markets worldwide and serving individuals,
institutions, corporations and governments. Goldman Sachs is 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 $160 million,
Goldman Sachs' Investment Research Department covers approximately 1,700
companies, including approximately 1,000 U.S. corporations in 60 industries. The
in-depth information and analyses generated by Goldman Sachs' research analysts
are available to the Advisers.
For more than a decade, Goldman Sachs has been among the top-ranked firms in
Institutional Investor's annual "All-America Research Team" survey. In
addition, many of Goldman Sachs' economists, securities analysts, portfolio
strategists and credit analysts have consistently been highly ranked in
respected industry surveys conducted in the U.S. and abroad. Goldman Sachs is
also
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<PAGE>
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
relative to its interest risk.
In planning the Tax Exempt Funds' strategies, the 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 the Tax Exempt Funds'
yields by fine-tuning the portfolio, using quantitative tools designed for
municipal portfolio management. The Adviser, which managed approximately $3
billion in tax-free securities in 1995, has assembled an experienced team of
professionals for selection of the Tax Exempt Funds' portfolio securities. The
Adviser manages money for some of the world's largest institutional investors.
In structuring Adjustable Rate Fund's and Short Duration Government 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 in CMO
floating rate tranches and interest only stripped Mortgage-Backed Securities).
With respect to Adjustable Rate Fund, Government Income Fund, Short Duration
Government 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
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<PAGE>
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 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, Government Income
Fund, Short Duration Government 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
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<PAGE>
customers. Use of these services by the Advisers with respect to a Fund does
not preclude Goldman Sachs from providing these services to third parties or
using such services as a basis for trading for its own account or the account of
others.
The fixed income research capabilities of Goldman Sachs are available to the
Advisers include the Goldman Sachs Fixed Income Research Department and the
Credit Department. The Fixed Income Research Department monitors developments
in U.S. and foreign fixed income markets, assesses the outlooks for various
sectors of the markets and provides relative value comparisons, as well as
analyzes trading opportunities within and across market sectors. The Fixed
Income Research Department is at the forefront in developing and using computer-
based tools for analyzing fixed income securities and markets, developing new
fixed income products and structuring portfolio strategies for investment policy
and tactical asset allocation decisions. The Credit Department tracks specific
governments, regions and industries and from time to time may review the credit
quality of a Fund's investments.
In addition to fixed income research and credit research, the Advisers in
managing Global Income Fund are supported by Goldman Sachs' economics research.
The Economics Research Department, based in London, conducts economic, financial
and currency markets research which analyzes economic trends and interest and
exchange rate movements worldwide. The Economics Research Department tracks
factors such as inflation and money supply figures, balance of trade figures,
economic growth, commodity prices, monetary and fiscal policies, and political
events that can influence interest rates and currency trends. The success of
Goldman Sachs' international research team has brought wide recognition to its
members. The team has earned top rankings in the annual "Extel Financial
Survey" of U.K. investment managers in the following categories: U.K. Economy
1989-1995; International Economies 1986, 1988-1995; International Government
Bond Market 1993-1995; and Currency Movements 1986-1993.
In allocating assets in the Global Income Fund's portfolio among currencies,
the Advisers will have access to the Global Asset Allocation Model. The model
is based on the observation that the prices of all financial assets, including
foreign currencies, will adjust until investors globally are comfortable
holding the pool of outstanding assets. Using the model, the Advisers will
estimate the total returns from each currency sector which are consistent with
the average investor holding a portfolio equal to the market capitalization of
the financial assets among those currency sectors. These estimated equilibrium
returns are then combined with Goldman Sachs' research professionals'
expectations to produce an optimal currency and asset allocation for the level
of risk suitable for the Fund's investment objective and criteria.
Each Fund's advisory agreement, and in the case of Global Income Fund, the
Subadvisory 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
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<PAGE>
agreements or "interested persons" (as such term is defined in the Act) of any
party thereto (the "non-interested Trustees"), on April 26, 1995. The
applicable Fund's Advisory Agreement including Global Income Fund's Subadvisory
Agreement was approved by the shareholders of Adjustable Rate Fund on October
30, 1991, the shareholders of Short Duration Government Fund on March 27, 1989,
the shareholders of Global Income Fund on December 5, 1991, the sole initial
shareholder of Short Duration Tax-Free Fund on September 25, 1992, the sole
initial shareholder of Government Income Fund on January 30, 1993, the sole
initial shareholder of Municipal Income Fund on July 16, 1993 and the sole
initial shareholder of Core Fund on October 29, 1993. Each Advisory Agreement
will remain in effect until June 30, 1996 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.
Each Advisory Agreement will terminate automatically if assigned (as defined in
the Act). Each Advisory Agreement is also terminable at any time without
penalty by the Trustees of the Trust or by vote of a majority of the outstanding
voting securities of a Fund on 60 days written notice to the applicable Adviser
or by the Adviser in 60 days written notice of the Trust.
The Advisory Agreements provide that GSAM, FMLP and GSAMI, in their capacity as
advisers and subadviser, respectively, 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, the Adviser is entitled to
receive the fee set forth below and the Adviser is currently limiting the fee to
the rate set forth below:
Contractual Current
Rate Rate
Adjustable Rate Fund 0.40% 0.40%
Short Duration Government Fund 0.50% 0.40%
Government Income Fund 0.50% 0.25%
Short Duration Tax-Free Fund 0.40% 0.40%
Municipal Income Fund 0.40% 0.40%
Core Fund 0.40% 0.40%
Global Income Fund
Advisory 0.25% 0.12%
Subadvisory 0.50% 0.32%
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. See "Expenses" for discussion of Global Income Fund's
other expense limitations.
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<PAGE>
For the fiscal years ended October 31, 1995, 1994 and 1993, the amounts of the
investment advisory fees incurred by each Fund then in existence were as
follows:
1995 1994 1993
---- ---- ----
Adjustable Rate Fund $2,947,492 $6,798,185 $9,498,008
Short Duration Government 517,091 1,063,867 1,311,347
Fund/(1)/
Short Duration Tax-Free Fund/(2)/ 260,970 468,868 243,069
Core Fund/(3)/ 137,158 56,255 n/a
Global Income Fund/(4)/ 706,460 1,518,814 1,553,394
Government Income Fund/(5)/ 44,037 0 0
Municipal Income Fund/(6)/ 154,707 35,494 0
_________________________
/(1)/ Had expense limitations not been in effect, Short Duration Government Fund
would have paid advisory fees of $646,364, $1,329,834 and $1,639,184,
respectively, for such periods.
/(2)/ Short Duration Tax-Free Fund commenced operations October 1, 1992. Had
expense limitations not been in effect, Short Duration Tax-Free Fund would
have paid advisory fees of $272,283, for the period ended October 31,
1993.
/(3)/ Core Fund commenced operations January 5, 1994.
/(4)/ For the same periods, Global Income Fund paid GSAMI Subadvisory fees of
$1,412,921, $3,037,627 and $3,106,787, respectively, for such periods. If
expense limitations had not been in effect, Global Income Fund would have
paid advisory and subadvisory fees of $789,127 and $1,578,254,
respectively, for the period ended October 31, 1995.
/(5)/ Government Income Fund commenced operations February 10, 1993. Had expense
limitations not been in effect, Government Income Fund would have paid
advisory fees of $101,737, $65,604 and $28,306, respectively, for such
periods.
/(6)/ Municipal Income Fund commenced operations July 20, 1993. Had expense
limitations not been in effect, Municipal Income Fund would have paid
advisory fees of $200,207, $174,161 and $23,115, respectively, for such
periods.
Each Adviser performs administrative services for the applicable Funds under the
Advisory Agreements, except in the case of Global Income Fund, Government Income
Fund and Municipal Income Fund where GSAM performs administrative services under
a separate Administration Agreement. Such administrative services 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
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<PAGE>
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.
For the service provided to these Funds under their respective administration
agreement, the Fund pays GSAM a monthly fee equal to 0.15% of 1% of such Fund's
average daily net assets on an annual basis. GSAM is currently waiving its
entire administration fee with respect to Government Income Fund. Although it
has no current intentions to do so, GSAM may modify or discontinue such
agreement at its discretion at any time.
For the fiscal years ended October 31, 1995, 1994 and 1993, the amounts of the
administration fees incurred by the Funds then in existence were as follows:
1995 1994 1993
---- ---- ----
Municipal Income Fund/(1)/ 75,077 55,2770 0
Government Income Fund/(2)/ 0 0 0
Global Income Fund 473,476 911,288 932,036
_____________________
/(1)/ For the fiscal year ended October 31, 1994, GSAM voluntarily agreed not to
impose a portion of its administration fee amounting to and $10,229. For
the period for July 20, 1993, (commencement of operations) through October
31, 1993, GSAM voluntarily agreed not to impose its administration fee,
which would have amounted to $8,668 for such period.
/(2)/ For the fiscal years ended October 31, 1995, October 31, 1994 and for the
period February 10, 1993 (commencement of operations) through October 31,
1993, GSAM voluntarily agreed not to impose its administration fees, which
would have amounted to $30,521, $19,681 and $8,492, respectively, for such
periods.
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, Goldman Sachs International ("GSI") and J. Aron a
& Co. ("ARON") have proprietary interests in, and may manage or advise with
respect to, accounts or funds (including separate accounts and other funds and
collective investment vehicles) which have investment objectives similar to
those of the Funds and/or which engage in transactions in the same types of
securities, currencies and instruments as the Funds. Goldman Sachs and its
affiliates are major participants in the global currency, equities, swap and
fixed income markets, in each case on a proprietary basis and for the accounts
of customers. As such, Goldman Sachs and its affiliates are actively engaged in
transactions in the same securities, currencies, and instruments in which the
Funds invest. Such activities could affect the prices and availability of the
securities, currencies, and instruments in which the Funds will invest, which
could have an adverse impact on 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 of such entitles to be equitable. In some cases, this system may
adversely affect the size or the price of the assets purchased or sold for the
Funds.
From time to time, the Funds' activities may be restricted because of regulatory
restrictions applicable to Goldman Sachs and its affiliates, and/or their
internal policies designed to comply with such restrictions. As a result, there
may be periods, for example, when the Advisers, and/or their affiliates will not
initiate or recommend certain types of transactions in certain securities or
instruments with respect to which, or in securities of issuers for 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, ARON 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 and Subadvisers 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
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<PAGE>
accounts could conflict with the transactions and strategies employed by the
Advisers and Subadviser in managing the Funds.
The results of each Fund's investment activities may differ significantly from
the results achieved by the Advisers and their affiliates for their proprietary
accounts or accounts (including investment companies or collective investment
vehicles) managed or advised by them. It is possible that Goldman Sachs and its
affiliates and such other accounts will achieve investment results which are
substantially more or less favorable than the results achieved by a Fund.
Moreover, it is possible that a Fund will sustain losses during periods in which
Goldman Sachs and its affiliates achieve significant profits on their trading
for proprietary or other accounts. The opposite result is also possible.
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,
currencies 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, J. ARON and/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.
The Advisers may enter into transactions and invest in instruments and, in the
case of Global Income Fund and Core Fund, currencies 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 currencies 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. The Funds will deal with Goldman Sachs and its affiliates on an
arm's-length basis.
B-79
<PAGE>
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.
DISTRIBUTOR AND TRANSFER AGENT
- ------------------------------
Goldman Sachs serves as the exclusive distributor of shares of the Funds
pursuant to a "best efforts" arrangement as provided by a distribution agreement
with the Trust dated February 1, 1993, as amended as of January 30, 1996.
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 has entered into sales agreements with certain investment dealers
and financial service firms (the "Authorized Dealers") to solicit subscriptions
for Class A and Class B Shares of each of the Funds that offer such classes of
shares. Goldman Sachs received a portion of the sales load imposed on the sale,
in the case of Class A Shares, or redemption in the case of Class B Shares, of
such Fund shares. No Class B Shares were outstanding during the fiscal years
ended October 31, 1993, 1994 and 1995. Goldman Sachs retained the following
commissions on sales of Class A shares during the following periods:
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<PAGE>
1995 1994 1993
---- ---- ----
Adjustable Rate Fund*** $40,000 n/a n/a
Municipal Income Fund 48,000 76,000 12,000*
Government Income Fund 22,000 5,000 7,000**
Global Income Fund 15,000 350,000 922,000
_____________________
* For the period July 20, 1993 (commencement of operations) through October
31, 1993
** For the period February 10, 1993 (commencement of operations) through
October 31, 1993.
*** Prior to May 15, 1995 Adjustable Rate Fund did not offer Class A Shares.
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, 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 from
the Short Duration Government Fund, Short Duration Tax-Free Fund and Core Income
Fund equal to (i) 0.04 of 1% (on an annualized basis) of the average daily net
assets attributable to the applicable class of the Fund; (ii) from the
Government Income, Global Income and Municipal Income Funds with respect to
Class A and Class B shares, $12,000 plus $7.50 per account, together with out-
of-pocket and transactions-related expenses (including those out-of-pocket
expenses payable to servicing agents; and (ii) from the Adjustable Rate Fund
equal to each class proportionate share of the total transfer agency fees borne
by the Fund, which are equal to $12,000 per year plus $7.50 per account,
together with out-of-pocket expenses (including those out-of-pocket expenses
payable to servicing agents) applicable to Class A shares and 0.04% of the
average daily net assets of the other classes of Adjustable Rate Government
Fund. Goldman Sachs is not entitled to receive a fee from the Institutional
Class of shares of Global Income Fund.
B-81
<PAGE>
For the fiscal years ended October 31, 1995, 1994 and 1993 the amounts of
transfer agency fees incurred by each Fund then in existence were as follows:
1995 1994 1993
---- ---- ----
Adjustable Rate Fund $306,662 $679,819 $949,645
Short Duration Government Fund 0 0 0
Short Duration Tax-Free Fund 26,098 46,887 27,248
Core Fund/(1)/ 13,716 5,637 n/a
Global Income Fund 106,764 132,123 127,834
Municipal Income Fund/(2)/ 63,695 70,811 17,500
Government Income Fund/(3)/ 94,095 57,960 44,012
________________________
/(1)/Core Fund commenced operations on January 5, 1994.
/(2)/Municipal Income Fund commenced operations on July 20, 1993.
/(3)/Government Income Fund commenced operations on February 10, 1993.
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" the Trust, on behalf
of each Fund, is responsible for the payment of each Fund's respective expenses.
The expenses borne by the outstanding classes of each Fund include, without
limitation, the fees payable to the Adviser 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 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, fees under any
distribution, authorized dealer service, administration or service plans
applicable to a particular class, any compensation and expenses of its "non-
interested" Trustees and extraordinary expenses, if any, incurred by the Trust.
Except for fees under any distribution, authorized dealer service,
administration or service plans applicable to a particular class and transfer
agency fees all Fund expenses are borne on a non-class specific basis.
B-82
<PAGE>
The Advisers voluntarily have agreed to reduce or otherwise limit certain Other
Expenses (excluding transfer agency fees (except in the case of Global Income
Fund), advisory, subadvisory and administration fees, fees payable under
administration, distribution, service and authorized dealer service plans,
taxes, interest, brokerage fees and litigation, indemnification and other
extraordinary expenses) to the following percentage of each Fund's average daily
net assets:
Short Duration Government Fund 0.05%
Adjustable Rate Fund 0.05%
Municipal Income Fund 0.05%
Government Income Fund 0.00%
Short Duration Tax-Free Fund 0.05%
Core Fund 0.05%
Global Income Fund 0.06%
Such reductions or limits are calculated monthly on a cumulative basis.
Although the Advisers have no current intention of modifying or discontinuing
such expense limitation or the limitations on the advisory or subadvisory fees,
described above under "Advisory and Administrative Services -- Investment
Advisers and Administrator," each may do so in the future at its discretion.
For the fiscal year ended October 31, 1995, October 31, 1994 and October 31,
1993, Other Expenses of each Fund were reduced by the Advisers in the following
amounts:
1995 1994 1993
---- ---- ----
Adjustable Rate Fund 551,405 442,880 731,102
Short Duration Government
Fund 219,994 115,389 139,186
Short Duration
Tax-Free Fund 213,139 192,696 412,548
Core Fund* 176,469 141,815 n/a
Municipal Income Fund** 196,265 198,806 91,662
Government Income Fund*** 242,036 224,285 161,754
Global Income Fund**** 70,195 0 0
______________________
* Core Fund commenced operations on January 5, 1994.
** Municipal Income Fund commenced operations on July 20, 1993.
*** Government Income Fund commenced operations on February 10, 1993.
**** For the fiscal years ended October 31, 1994 and October 31, 1993, there
were no expense limitations.
As stated in the Prospectuses, each Fund is responsible for the payment of all
expenses other than those assumed by its Adviser or Administrator. 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
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<PAGE>
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.
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 the Advisers 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 in foreign countries and to hold cash and currencies for
the Trust.
INDEPENDENT PUBLIC ACCOUNTANTS
- ------------------------------
Arthur Andersen LLP, independent public accountants, One International Place,
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 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 certain
foreign countries, debt securities in which the Global Income Fund and Core Fund
may invest are traded on exchanges at fixed commission rates. In connection
with portfolio transactions, the Advisory and Subadvisory 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), a Fund, to the extent permitted by applicable laws
and regulations, may aggregate the securities to be sold or purchased for the
Fund
B-84
<PAGE>
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 the applicable 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 and Subadvisory 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. The fees received under
the Advisory and Subadvisory Agreement are not reduced by reason of the Advisor
or Subadviser receiving such brokerage and research services.
For the fiscal years ended October 31, 1995, 1994 and 1993, the Funds then in
existence paid no brokerage commissions.
During the fiscal year ended October 31, 1995, the Funds acquired and sold
securities of their regular broker-dealers: Chemcial Securities, Lehman
Brothers, Inc., Salomon Brothers, Inc., Merrill Lynch, Robert W. Baird, Daiwa
Securities, J.P. Morgan & Co., Inc., Donaldson, Lufkin, Jenrette, Nomura
Securities and Morgan Stanley & Co.
At October 31, 1995, Short Duration Tax-Free Fund, Global Income Fund and
Municipal Income Fund held no securities of their regular broker-dealers. As of
the same date, Short Duration Government Fund, Adjustable Rate Fund, Government
Income 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 Duration Government Fund: Lehman Brothers,
Inc. ($269) and Salomon Brothers, Inc. ($231); Adjustable Rate Fund: Lehman
Brothers, Inc. ($8602) and Salomon Brothers, Inc. ($7398); Government Income
Fund: Lehman Brothers, Inc. ($1559) and Salomon Brothers, Inc. ($1341); Core
Fund: Lehman Brothers, Inc. ($3011) and Salomon Brothers, Inc. ($2589).
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 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
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<PAGE>
shares of the Funds. 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: (i) the
issuance of three classes of shares of Short Duration Government Fund, Short
Duration Tax-Free Fund and Core Fund: Institutional Shares, Administration
Shares and Service Shares; (ii) the issuance of four classes of shares of
Adjustable Rate Fund: Institutional Shares, Administration Shares, Service
Shares and Class A Shares; (iii) the issuance of four classes of shares of
Global Income Fund: Institutional Shares, Service Shares, Class A Shares and
Class B Shares; and (iv) the issuance of two classes of Municipal Income Fund
and Government Income Fund: Class A Shares and Class B Shares. As of October 31,
1995, no Service Shares of the Adjustable Rate Fund were outstanding; no Service
Shares of Short Duration Government Fund were outstanding no Administration or
Service Shares of Core Fund were outstanding; no Service Shares or Class B
Shares of Global Income Fund were outstanding; and no Class B shares of
Municipal Income Fund or Government Income Fund were outstanding.
Each Institutional Share, Administration Share, Service Share, Class A Share and
Class B Share of a Fund represents an equal proportionate interest in the assets
belonging to the Fund. All Fund expenses are allocated among classes based on a
percentage of a Fund's aggregate average net assets, except that transfer agency
fees and fees under distribution, authorized dealer service, administration and
service plans 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 and
assisting customers with investment procedures. Service Shares bear the cost of
service fees at the annual rate of up to 0.50% of the average daily net assets
of such Service Shares. Institutions
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<PAGE>
that provide services to holders of Administration Shares or Service Shares are
referred to in this Additional Statement as "Service Organizations".
Class A Shares are sold, with an initial sales charge of up to 1.50%, in the
case of Adjustable Rate Fund, and 4.50%, in the case of Municipal Income Fund,
Government Income Fund and Global Income Fund, 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 the Funds bear the cost of distribution (Rule 12b-1) fees at
the aggregate rate of up to 0.25% of the average daily net assets of such Class
A Shares. Class A Shares also bear the cost of an Authorized Dealer Service
Plan at an annual rate of up to 0.25% of average daily net assets attributable
to Class A Shares.
Class B Shares of the Funds are sold subject to a contingent deferred sales
charge of up to 5.0% through brokers and dealers who are members of the National
Association of Securities Dealers Inc. and certain other financial services
firms that have sales arrangements with Goldman Sachs. Class B shares bear the
cost of distribution (Rule 12b-1) fees at the aggregate rate of up to 0.75% of
the average daily net assets attributable to Class B shares. Class B shares
also bear the cost of an Authorized Dealer Service Plan at an annual rate of up
to 0.25% of the average daily net assets attributable to Class B shares.
It is possible that an institution or its affiliate may offer different classes
of shares (i.e., Institutional, Administration, Service, Class A and Class B
Shares) to its customers and thus receive different compensation with respect to
different classes of shares of each Fund. Shares of each class 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, authorized dealer service plan and
distribution 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
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<PAGE>
share, are freely transferable and have no preemptive, subscription or
conversion rights.
As of November 30, 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 Idaho, FBO: Idaho Housing Agency, P.O. Box 30007,
Salt Lake City, UT 84130 (5.83%); St. Treasurer/Nebr. Invest. Council, (5.12%);
Fundex Corporation, Attn: Mitsuru Hashimoto, 1875 South Grant Street, Suite 740,
San Mateo, CA 94402-2670 (5.01%); Banco Bileao Vizcaya, (7.67%); BankAmerica
National Trust Co. ((8.92%); Meadows Foundation, Inc. (5.27%); Short Duration
Government Fund - West Virginia University Foundation, Attn: Marie Amoyt, 3168
Collins Ferry Road, P.O. Box 4533, Morgantown, WV 26504-4533 (7.39%); Central
Carolina Bank & Trust Co., Attn: Norwood Thomas, Jr., P.O. Box 931, Durham, NC
27702 (9.09%); Richfield Bank & Trust Co., Attn: Judith Ferguson, 6625 Lyndale
Ave., South Richfield, MN 55423 (14.86%); State Street Bank & Trust Co.,
(30.64%); Short Duration Tax-Free Fund - G-K-G Inc., Attn: Bernard Gassin, 166
Oak Knoll Terrace, Highland Park, IL 60035 (5.65%); Westport Bank & Trust, Attn:
Arnold Levine, P.O. Box 5177, Westport, CT 06881 (5.32%); Donald R. Grant, 85
Broad Street, New York, NY 10004 (9.57%); MGIC, Attn: James McGinnis, P.O. Box
297, Milwaukee, WI 53201 (27.16%); Indiana Trust & Investment (5.09%); Global
Income Fund - State Street Bank & Trust Trustee, Goldman Sachs Profit Sharing
Master Trust, Attn: Box 1992, Boston, MA 02105-1992 (99%).
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
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<PAGE>
by such matter. Rule 18f-2 further provides that a class or series shall be
deemed to be affected by a matter unless the interests of each class or series
in the matter are substantially identical or the matter does not affect any
interest of such class or series. However, Rule 18f-2 exempts the selection of
independent public accountants, the approval of principal distribution contracts
and the election of 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 net assets
attributable to each class of that Fund (assets, including securities at value,
minus liabilities) 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).
For the purpose of calculating the net asset value of the Funds, investments in
Mortgage-Backed Securities and other debt obligations are valued at fair value
based upon yield equivalents, a pricing matrix or other sources, under valuation
procedures established by the Trustees. Other portfolio securities, other than
money market instruments, for which accurate market quotation are readily
available are valued on the basis of quotations which may be furnished by a
pricing service or provided by dealers in such securities. The prices derived
by a pricing agent reflect broker/dealer-supplied valuations and electronic data
processing techniques. Options and futures contracts are valued at the last
sale price on the market where any such option or futures contract is
principally traded. Forward foreign currency exchange contracts are valued at
the mean between the last bid and asked quotations supplied by a dealer in such
contracts. Portfolio securities for which accurate market quotation are not
readily available and other assets are valued at fair value as determined in
good faith pursuant to procedures established by the Board of Trustees. Money
market instruments held by a Fund with a remaining maturity of sixty days or
less will be valued by the amortized cost method, which the Trustees have
determined approximates market value.
The value of all assets and liabilities expressed in foreign currencies will be
converted into U.S. dollar values at current exchange rates of such currencies
against U.S. dollars last quoted by any major bank. If such quotations are not
available, the rate of exchange will be determined in good faith by or under
procedures established by the Board of Trustees.
Generally, trading in foreign securities is substantially completed each day at
various times prior to the time the Global Income Fund and Core Fund calculate
their net asset value.
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Occasionally, events affecting the values of such securities may occur between
the times at which they are determined and the calculation of net asset value
which will not be reflected in the computation of the Fund's net asset value
unless the Trustees deem that such event would materially affect the net asset
value, in which case an adjustment would be made.
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 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
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value of its total (gross) 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 or
Global Income 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 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 or Global Income
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 or Global Income 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 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
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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. Exchange control or other foreign
laws, regulations or practices may restrict repatriation of investment income,
capital or the proceeds of securities sales by foreign investors such as Global
Income Fund and may therefore make it more difficult for Global Income Fund to
satisfy the distribution requirements described above, as well as the excise tax
distribution requirements described below. However, Global Income Fund generally
expects to be able to obtain sufficient cash to satisfy such requirements from
new investors, the sale of securities or other sources. If for any taxable year
a Fund 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, 1995, the Funds had
approximately the following amounts of capital loss carry forwards:
Years of
Amount Expiration
------ ----------
Adjustable Rate Fund $38,311,000 2000-2002
Short Duration Government Fund $11,136,000 2002
Short Duration Tax-Free Fund $ 3,999,000 2002
Global Income Fund $10,295,502 2002
Municipal Income Fund $ 3,202,911 2002
Government Income Fund $ 735,561 2002
These amounts are available to be carried forward to offset future capital gains
to the extent permitted by applicable laws or regulations.
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 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.
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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.
The Tax Exempt Funds 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." The Tax Exempt Funds 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 Tax
Exempt Funds 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 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 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 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. The Tax Exempt Funds intend 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 aspects of these investments, including the treatment of tender fees paid
by the Tax Exempt Fund, in relation to various regulated investment company tax
provisions is unclear. However, the Adviser intends to manage the Tax Exempt
Funds' portfolios 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
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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 or forward
contracts and options or underlying securities or foreign currencies to the
extent of any unrecognized gains on 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 and Global Income Fund. Under
these rules, foreign exchange gain or loss realized by Core Fund or Global
Income 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 a Fund's investment company taxable income (computed without regard to
such loss) for a taxable year, the resulting loss would not be deductible by
the 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 of Core Fund's or Global Income 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 and Global Income Fund may be subject to foreign taxes on 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 Global Income Fund's total assets at the close
of any taxable year will generally consist of stock or securities of foreign
corporations, Global Income Fund will generally qualify to file an election with
the Internal Revenue Service pursuant to
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which shareholders of Global Income 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 Global Income Fund that are
treated as income taxes under U.S. tax regulations (which excludes, for example,
stamp taxes, securities transaction taxes, and similar taxes) even though not
actually received, and (ii) treat such respective pro rata portions as foreign
income taxes paid by them. Global Income Fund may or may not make this election
for any particular taxable year. Core Fund will not satisfy the 50% requirement
described above and therefore will not make this election. Core Fund and, if it
does not make the election, Global Income Fund will, however, be entitled to
deduct such taxes in computing investment company taxable income.
If Global Income Fund makes this election, its shareholders may then deduct such
pro rata portions of qualified foreign taxes in computing their taxable incomes,
or, alternatively, use them as foreign tax credits, subject to applicable
limitations, against their U.S. federal income taxes. Shareholders who do not
itemize deductions for federal income tax purposes will not, however, be able to
deduct their pro rata portion of qualified foreign taxes paid by Global Income
Fund, although such shareholders will be required to include their shares of
such taxes in gross income if Global Income Fund makes the election referred to
above.
If a shareholder chooses to take a credit for the foreign taxes deemed paid by
such shareholder as a result of any such election by Global Income Fund, the
amount of the credit that may be claimed in any year may not exceed the same
proportion of the U.S. tax against which such credit is taken which the
shareholder's taxable income from foreign sources (but not in excess of the
shareholder's entire taxable income) bears to his entire taxable income. For
this purpose, distributions from long-term and short-term capital gains or
foreign currency gains by Global Income Fund will generally not be treated as
income from foreign sources. This foreign tax credit limitation may also be
applied separately to certain specific categories of foreign-source income and
the related foreign taxes. As a result of these rules, which have different
effects depending upon each shareholder's particular tax situation, certain
shareholders of Global Income Fund not be able to claim a credit for the full
amount of their proportionate shares of the foreign taxes paid by such Fund.
Shareholders who are not liable for U.S. federal income taxes, including tax-
exempt shareholders, will ordinarily not benefit from this election. Each year,
if any, that Global Income Fund files the election described above, its
shareholders will be notified of the amount of (i) each shareholder's pro rata
share of qualified foreign income taxes paid by Global Income Fund and (ii) the
portion of Fund dividends which represents income from each foreign country.
If Core Fund or Global Income Fund acquires stock in certain non-U.S.
corporations that receive at least 75% of their annual
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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 or Global Income 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 or Global Income Fund is timely distributed to
its shareholders. Core Fund or Global Income 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 or Global Income Fund to recognize taxable
income or gain without the concurrent receipt of cash. Core Fund or Global
Income 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,
capital appreciation bonds 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 certain options, futures or
forward contracts, as described above, will generally cause it to realize income
or gain prior to the receipt of cash payments with respect to these securities
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 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
TAX EXEMPT FUNDS. Each Tax Exempt Fund expects to qualify to pay "exempt-
interest dividends," as defined in the Code. To qualify to pay exempt-interest
dividends, the 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 Municipal Securities
whose interest is excluded from gross income under Section 103(a) of the Code.
In purchasing Municipal Securities, each Tax Exempt 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. A Tax Exempt 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
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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 a Tax Exempt Fund's
distributions attributable to interest the 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 a
Tax Exempt Fund's portfolio may be affected by restrictive federal income tax
legislation enacted in recent years or by similar, future legislation. If a Tax
Exempt Fund satisfies the applicable requirements, dividends paid by the Fund
which are attributable to tax exempt interest on Municipal Securities and
designated by the 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 as items of interest excludable from their gross income
under Section 103(a) of the Code. Exempt-interest dividends a Tax Exempt Fund
receives from other regulated investment companies, including exempt-interest
dividends on auction rate preferred securities of such companies held by the
Fund, are treated as interest on Municipal Securities and may be distributed by
a Tax Exempt Fund as exempt-interest dividends. The recipient of tax-exempt
income is required to report such 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 a
Tax Exempt Fund. The Code provides that interest on indebtedness incurred or
continued to purchase or carry shares of a Tax Exempt Fund is not deductible to
the extent attributable to exempt-interest dividends.
Although all or a substantial portion of the dividends paid by a Tax Exempt Fund
may be excluded by shareholders of the Fund from their gross income for federal
income tax purposes, each Tax Exempt Fund may purchase specified private
activity bonds, the interest from which (including the Fund's distributions
attributable to such interest) may be a preference item for purposes of the
federal alternative minimum tax (both individual and corporate). All exempt-
interest dividends from a Tax Exempt 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.
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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 Tax-Free Fund and
Municipal Income 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 coupons or (ii) capital gains from the sale of securities
or other 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 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 a Fund's current earnings and profits for these
purposes. Consequently, the portion, if any, of Short Duration Tax-Free Fund's
or Municipal Income 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.
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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 or Global Income 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 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 with other shares of the
same Fund within a period of 61 days beginning 30 days before and ending 30 days
after the shares are disposed of, such as pursuant to a dividend reinvestment in
shares of 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 Tax-Free Fund and
Municipal Income 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 Tax-Free Fund or
Municipal Income Fund for the Fund's 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
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Short Duration Tax-Free Fund or Municiapl Income Fund during the period of their
investment in Short Duration Tax-Free Fund or Municipal Income Fund, as the case
may be.
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 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 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 Tax-Free Fund or
Municipal Income Fund will not be subject to backup withholding if such Funds
reasonably estimate that at least 95% of their 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
B-100
<PAGE>
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. Non-U.S. shareholders may also be subject to U.S. withholding tax on deemed
income resulting from any election by Global Income Fund to treat qualified
foreign taxes it pays as passed through to shareholders (as described above),
but they may not be able to claim a U.S. tax credit or deduction with respect to
such taxes.
Any gain realized by a shareholder who is not a U.S. person upon a sale or
redemption of shares of a Fund will not be subject to U.S. federal income or
withholding tax unless the gain is effectively connected with the shareholder's
trade or business in the United States, or in the case of a shareholder who is a
nonresident alien individual, the shareholder is present in the United States
for 183 days or more during the taxable year and certain other conditions are
met.
Non-U.S. 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
B-101
<PAGE>
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 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, a Tax Exempt Fund's tax-free yield. Tax equivalent yield is
calculated by dividing a Tax Exempt 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 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 applicable to the relevant class (i.e., net asset
value in the case of each class other than Class A) at the beginning of the
period, and then calculating the annual compounded rate of return which would
produce that amount, assuming a redemption (and in the case of Class B Shares
payment of any contingent deferred sales charge) at the end of the period. This
calculation assumes a complete redemption of the investment. It also assumes
that all dividends and distributions are reinvested at net asset value on the
reinvestment dates during the period.
Year-by-year total return and cumulative total return for a specified period are
each derived by calculating the percentage rate required to make a $1,000
investment (made at the maximum public offering price 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 Tax-Free and Municipal Income Funds only), distribution rate and
average annual total return (capital plus reinvestment of all distributions) for
each class of shares outstanding for the periods indicated.
Thirty-day yield, tax equivalent yield (Short Duration Tax-Free and Municipal
Income Funds 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
B-102
<PAGE>
each Fund is subject to different fees and expenses and may have different
returns for the same period. Any performance data for Class A or Class B Shares
which is based upon a Fund's net asset value per share would be reduced if a
sales charge were taken into account.
YIELD
Investment SEC 30-Day Pro-Forma
Fund Period Yield Yield/1/
- ---- ---------- ---------- ---------
30-Days
ended
10/31/95
ADJUSTABLE RATE FUND
Institutional Shares 6.12% 6.04%
Administration Shares 5.87% 5.79%
Service Shares/2/ n/a n/a
Class A Shares/2/
- Assumes 1.5% sales charge 5.78% 5.46%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 6.21% 5.89%
Administration Shares/3/ n/a n/a
Service Shares/3/ n/a n/a
SHORT DURATION TAX-FREE FUND
Institutional Shares 3.94% 3.60%
Administration Shares 3.68% 3.34%
Service Shares 3.44% 3.10%
CORE FUND
Institutional Shares 5.31% 5.05%
Administration Shares/4/ n/a n/a
Service Shares/4/ n/a n/a
GLOBAL INCOME FUND
Institutional Shares 5.54% 5.10%
Class A Shares
(Assumes 4.5% sales charge) 4.81% 4.40%
Service Shares/6/ n/a n/a
Class B Shares/6/ n/a n/a
MUNICIAPL INCOME FUND
Class A Shares 4.44% 3.88%
Class B Shares/7/ n/a n/a
GOVERNMENT INCOME FUND
Class A Shares 5.62% 4.22%
Class B Shares/8/ n/a n/a
B-103
<PAGE>
DISTRIBUTION RATE
30 Day Pro-Forma
Investment Distribution Distribution
Fund Period Rate Rate/1/
- ---- ---------- ------------ ------------
30-Days
ended
10/31/95
ADJUSTABLE RATE FUND
Institutional Shares 6.37% 6.28%
Administration Shares 6.12% 6.03%
Service Shares/2/ n/a n/a
Class A Shares
- Assumes no sales charge 6.12% 5.79%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 7.49% 7.17%
Administration Shares/3/ n/a n/a
Service Shares/3/ n/a n/a
SHORT DURATION TAX-FREE FUND
Institutional Shares 4.00% 3.64%
Administration Shares 3.75% 3.39%
Service Shares 3.50% 3.14%
MUNICIPAL INCOME FUND
Class A Shares 4.46% 3.85%
Class B Shares/7/ n/a n/a
GOVERNMENT INCOME FUND
Class A Shares 6.11% 4.62%
Class B Shares/8/ n/a n/a
CORE FUND
Institutional Shares 5.81 5.53%
Administration Shares/4/ n/a n/a
Service Shares/4/ n/a n/a
GLOBAL INCOME FUND
Institutional Fund 7.25% 6.80%
Service Shares/6/ n/a n/a
Class A Shares
- Assumes no sales charge 6.74% 6.29%
Class B Shares/6/ n/a n/a
B-104
<PAGE>
TAX-EQUIVALENT YIELD/5/
Pro-Forma
Investment Tax-Equivalent Tax-Equivalent
Fund Period Rate Yield/1/
- ---- ---------- -------------- --------------
30-Days
ended
10/31/95
SHORT DURATION
TAX-FREE FUND
Institutional Shares 6.52% 5.96%
Administration Shares 6.09% 5.53%
Service Shares 5.70% 5.13%
MUNCIPAL INCOME FUND
Class A Shares 7.35% 6.42%
Class B Shares/7/ n/a n/a
_______________________________
/1/ Yield, tax equivalent yield and distribution rate if the applicable Adviser
had not voluntarily agreed to limit its advisory fees and to maintain
expenses at a specified level.
/2/ There were no Service Shares of Adjustable Rate Fund outstanding during the
periods indicated.
/3/ There were no Administration and Service Shares of Short Duration Government
Fund outstanding at October 31, 1995.
/4/ There were no Administration Shares or Service Shares of Core Fund
outstanding
during the periods indicated.
/5/ The tax-equivalent rate of Short Duration Tax-Free Fund and Municipal Income
Fund is computed based on the 39.6% federal income tax rate.
/6/ There were no Service Shares or Class B Shares of Global Income Fund
outstanding during the period indicated.
/7/ There were no Class B Shares of Municipal Income Fund outstanding during the
period indicated.
/8/ There were no Class B Shares of Government Income Fund outstanding during
the period indicated.
The above tables should not be considered a representation of future
performance.
B-105
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
- -------------------------------------------------------------------------------------------------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Investment Expense Expense
Fund Date Period Limitations Limitations
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ADJUSTABLE RATE FUND
Institutional Shares 7/17/91/1a/ ended 10/31/95 4.91% 4.82%
11/1/94 one year ended
10/31/95 6.75% 6.66%
Administration Shares 4/15/93/1b/ ended 10/31/95 3.96% 3.90%
11/1/94 one year ended
10/31/95 6.48% 6.40%
Class A Shares/1f/ 5/12/95/1d/ ended 10/31/95
Assumes 1.5% Sales Charge 1.17% 1.02%
Assumes No Sales Charge 2.74% 2.59%
Class B Shares/1e/ N/A N/A
Service Shares/1c/ N/A N/A
SHORT DURATION GOVERNMENT FUND
Institutional Shares 8/15/88/2a/ ended 10/31/95 7.31% 6.89%
11/1/94 one year ended
10/31/95 8.97% 8.68%
11/1/89 five years
ended 10/31/95 6.48% 6.23%
Administration Shares/2b/ N/A N/A
Service Shares/2c/ N/A N/A
</TABLE>
B-106
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
---------------------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Investment Expense Expense
Fund Date Period Limitations Limitations
- ------------------------------ -------------- --------------------- ------------ ------------
<S> <C> <C> <C> <C>
SHORT DURATION TAX-FREE FUND
Institutional Shares 10/1/92/3a/ ended 10/31/95 4.12% 3.64%
11/1/94 one year ended
10/31/95 5.98% 5.65%
Administration Shares 5/20/93/3b/ ended 10/31/95 3.21% 2.94%
11/1/94 one year ended
10/31/95 5.76% 5.43%
Service Shares 9/20/94/3c/ ended 10/31/95 4.70% 4.39%
11/1/94 one year ended
10/31/95 5.59% 5.26%
CORE FIXED INCOME FUND
Institutional Shares 1/15/94/4a/ 10/31/95 6.54% 5.76%
11/1/94 one year ended
10/31/95 15.72% 15.14%
Administration Shares/4b/ N/A N/A
Service Shares/4b/ N/A N/A
</TABLE>
B-107
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
---------------------------------------------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Investment Expense Expense
Fund Date Period Limitations Limitations
- ---- ---------- ------------------- ------------ ------------
<S> <C> <C> <C> <C>
GLOBAL INCOME FUND/5C/
Class A Shares 8/2/91/5a/ ended 10/31/95
Assumes 4.5% Sales Charge 6.16% 5.89%
Assumes No Sales Charge 7.32% 7.05%
11/1/94 ended 10/31/95
Assumes 4.5% Sales Charge 9.92% 9.64%
Assumes No Sales Charge 15.08% 14.78%
Class B Shares/5b/ N/A N/A
Institutional Shares/5d/ 8/1/95/5e/ ended 10/31/95 4.42% 4.31%
Service Shares/5b/ N/A N/A
MUNICIPAL INCOME FUND
Class A Shares 7/20/93/6a/ ended 10/31/95
Assumes 4.5% Sales Charge 2.80% 1.65%
Assumes No Sales Charge 4.89% 3.72%
11/1/94 ended 10/31/95
Assumes 4.5% Sales Charge 8.64% 7.86%
Assumes No Sales Charge 13.79% 12.97%
Class B Shares/6b/ N/A N/A
</TABLE>
B-108
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
---------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Investment Expense Expense
Fund Date Period Limitations Limitations
- --------------------------------- --------------- --------------- --------------- ------------
<S> <C> <C> <C> <C>
GOVERNMENT INCOME FUND
Class A Shares 2/10/93/7a/ ended 10/31/95
Assumes 4.5% Sales Charge 5.27% 2.41%
Assumes No Sales Charge 7.06% 4.16%
11/1/94 ended 10/31/95
Assumes 4.5% Sales Charge 9.76% 7.73%
Assumes No Sales Charge 14.90% 12.78%
Class B Shares/7b/ 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 commended operations on April
15, 1993.
1c No Service Shares of Adjustable Rate Fund were outstanding during the
periods indicated.
1d Class A shares were initially issued on May 12, 1995.
1e No Class B Shares were outstanding during the periods indicated.
2a Institutional Shares of Short Duration Government Fund commenced operations
on August 15, 1988.
2b No Administration Shares of Short Duration Government Fund were outstanding
as of October 31, 1995.
2c No Service Shares of Short Duration Government Fund were outstanding during
the periods indicated.
3a Institutional Shares of Short Duration Tax-Free Fund commenced operations on
October 1, 1992.
3b Administration Shares of Short Duration Tax-Free Fund commenced operations
on May 20, 1993.
3c Service Shares of Short Duration Tax-Free Fund 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.
5a Class A Shares of Global Income Fund commenced operations on August 2, 1991.
5b No Service Shares or Class B Shares of Global Income Fund were Outstanding
during the periods indicated.
5c On November 27, 1992, the maximum sales charge was changed from 3% to 4.5%
of the offering price. All performance figures in this table incorporate the
sales charge currently in effect.
5d An aggregate total return (not annualized) is shown instead of an
average annual total return since the Institutional Shares have not
completed a full 12 months of operation as of October 31, 1995.
5e Institutional Shares of Global Income Fund commenced operations on August 1,
1995.
6a Class A shares of Municipal Income Fund commenced operations on July 20,
1993.
6b No Class B Shares of Municipal Income Fund were outstanding during the
periods indicated.
7a Class A Shares of Government Income Fund commenced operations on February
10, 1993.
7b No Class B Shares of Government Income Fund were outstanding during the
periods indicated.
The above table should not be considered a representation of future
performance.
B-109
<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., Donaghues Money Fund Report, Barron's, The Wall
- ------------------------- --------------------------- -------- --------
Street Journal, Weisenberger Investment Companies Service, Business Week,
- -------------- ----------------------------------------- -------------
Changing Times, Financial World, Forbes, Fortune, Morningstar Mutual Funds The
- -------------- --------------- ------ ------- ------------------------ ---
New York Times, Personal Investor, Sylvia Porter's Personal Finance and Money.
- -------------- --------------------------------------------------- -----
In addition, Adjustable Rate Fund, Government Income Fund and Short
Duration Government 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 Tax-Free Fund and Municipal Income 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 and Global Income Fund may each from time to time advertise its
performance relative to certain indices and benchmark investments, including:
(a) the Lipper Analytical Services, Inc.
B-110
<PAGE>
Mutual Fund Performance Analysis, Fixed Income Analysis and Mutual Fund Indices
(which measure total return and average current yield for the mutual fund
industry and rank mutual fund performance); (b) the CDA Mutual Fund Report
published by CDA Investment Technologies, Inc. (which analyzes price, risk and
various measures of return for the mutual fund industry); (c) the Consumer Price
Index published by the U.S. Bureau of Labor Statistics (which measures changes
in the price of goods and services); (d) Stocks, Bonds, Bills and Inflation
published by Ibbotson Associates (which provides historical performance figures
for stocks, government securities and inflation); (e) the Salomon Brothers'
World Bond Index (which 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 the above referenced indices and
the characteristics of a Fund's benchmark investments are not identical to, and
in some cases may be very different from, those of a Fund's portfolio. These
indices and averages, as well as the averages set forth in the Appendices
hereto, are generally unmanaged and the items included in the calculations of
such indices and averages may not be identical to the formulas used by the 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.
In addition, from time to time, advertisements or information may include
a discussion of asset allocation models developed by GSAM and/or its affiliates,
certain attributes or benefits to be derived from asset allocation strategies
and the Goldman Sachs mutual funds that may be offered as investment options for
the strategic asset allocations. Such advertisements and information may also
include GSAM's current economic outlook and domestic and international market
views to suggest periodic tactical
B-111
<PAGE>
modifications to current asset allocation strategies. Such advertisements and
information may include other material which highlight or summarize the services
provided in support of an asset allocation program.
In addition, advertisements or shareholder communications may include a
discussion of certain attributes or benefits to be 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
Duration Government Fund assumed its current name in March 1996. Prior thereto,
Short Duration Government Fund's name was "GS Short-Intermediate Government
Fund" until May 1991 and "GS Short-Term Government Agency Fund" until March
1996. Adjustable Rate Government Fund assumed its current name in March 1996.
Prior thereto, Adjustable Rate Government Fund's name was "GS Adjustable Rate
Government Agency 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.
B-112
<PAGE>
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 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.
FINANCIAL STATEMENTS
The audited financial statements and related report of Arthur Andersen LLP,
independent public accounts, for each Fund contained in each Fund's 1995 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-113
<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. No Service Shares of Adjustable Rate Fund, Short Duration
Government Fund, Core Fund and Global Income Fund were outstanding during the
fiscal year ended October 31, 1995. For the fiscal year ended October 31, 1995,
service fees in the amount of $1,797 were paid by Short Duration Tax-Free Fund.
No Service Shares of Adjustable Rate Fund, Short Duration Government Fund, Core
Fund and Global Income Fund were outstanding at October 31, 1994. For the
fiscal year ended October 31, 1994, service fees in the amount of $325 were paid
by Short Duration Tax-Free Fund. No Service Shares of Adjustable Rate Fund,
Short Duration Government Fund, Short Duration Tax-Free Fund, Core Fund and
Global Incoment Fund were outstanding at October 31, 1993.
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
B-114
<PAGE>
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 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
B-115
<PAGE>
Department of Labor or state securities regulators, are urged to consult legal
advisers before investing fiduciary assets in Service Shares of the Funds.
The Plans with respect to Adjustable Rate Fund, Short Duration Government
Fund, Short Duration Tax-Free 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 (except Global Fund) at a meeting called
for the purpose of voting on such Plans and Service Agreements on April 26,
1995. The Trustees most recently voted to approve the Plan and Service
Agreements for the Global Fund at a meeting held on January 30, 1996. Each Plan
and Service Agreement will remain in effect until June 30, 1996 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-116
<PAGE>
APPENDIX A
The company may from time to time use comparisons, graphs or charts in
advertisements to depict the following types of information:
. The performance of various types of securities (taxable money market funds,
U.S. treasury securities, adjustable rate mortgage securities, government
securities, municipal bonds) over time. However, the characteristics of
these securities are not identical to, and may be very different from, those
of a Fund's portfolio;
. Volatility of total return of various market indices (i.e. Lehman
Government Bond Index, S&P 500, IBC/Donoghue's Money Fund Average/ All
Taxable Index) over varying periods of time.
. Credit Ratings of domestic government bonds in various countries
. Price volatility comparisons of types of securities over different periods
of time.
. Price and yield comparisons of a particular security over different periods
of time.
In addition, the Company may from time to time include rankings of
Goldman, Sachs & Co.'s research department by publications such as the
Institutional Investor and the Wall Street Journal in advertisements.
1-A
<PAGE>
APPENDIX B
CORE FUND
GLOBAL INCOME 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 have speculative characteristics as well.
- ------------------
/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-B
<PAGE>
Moody's also provides credit ratings for commercial paper. These are
promissory obligations (1) not having an original maturity in excess of nine
months, and (2) backed by commercial banks. Notes bearing the designation P-
1 have a superior capacity for repayment. Notes bearing the designation P-2
have a strong capacity for repayment.
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.
S&P's top ratings for notes issued after July 29, 1984 are SP-1 and SP-2.
The designation SP-1 indicates a very strong capacity to pay principal and
interest. A "+" is added for those issues determined to possess overwhelming
safety characteristics. An "SP-2" designation indicates a satisfactory
capacity to pay principal and interest.
Commercial paper rated A by S&P is regarded as having the greatest capacity
for timely payment. Commercial Paper rated A-1 is described as having an
overwhelming or very strong degree of safety regarding timely payment.
Commercial Paper rated A-2 by Standard & Poor's is described as having a
strong degree of safety regarding timely payment.
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
2-B
<PAGE>
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 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.
Investment Grade Short-Term Ratings
-----------------------------------
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
F-1+: Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely
payment.
F-1: Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated "F-1+".
3-B
<PAGE>
DUFF & PHELPS
-------------
Commercial Paper/Certificates of Deposits
-----------------------------------------
Category 1: Top Grade
Duff 1 plus: Highest certainty of timely payment. Short-term liquidity
including internal operating factors and/or ready access to
alternative sources of funds, is clearly outstanding, and
safety is just below risk-free U.S. Treasury short-term
obligations.
Duff 1: Very high certainty of timely payment. Liquidity factors are
excellent and supported by strong fundamental protection factors.
Risk factors are minor.
Notes: Bonds which are unrated may expose the investor to risks with
respect to capacity to pay interest or repay principal which
are similar to the risks of lower-rated bonds. The Fund is
dependent on the Investment Adviser's judgment, analysis and
experience in the evaluation of such bonds.
Investors should note that the assignment of a rating to a
bond by a rating service may not reflect the effect of recent
developments on the issuer's ability to make interest and
principal payments.
Description of Municipal Securities Ratings
-------------------------------------------
The ratings of Moody's Investors Service, Inc. and Standard & Poor's Ratings
Group represent their opinions as to the quality of various Municipal
Securities. It should be emphasized, however, that ratings are not absolute
standards of quality. Consequently, Municipal Securities with the same
maturity, coupon and rating may have different yields while Municipal
Securities of the same maturity and coupon with different ratings may have
the same yield.
Description of Ratings of State and Municipal Bonds
---------------------------------------------------
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.
4-B
<PAGE>
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 risk appear somewhat larger than
the 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 medium grade obligations,
i.e. they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
ABSENCE OF RATING: Where no rating has been assigned or where a rating
has been suspended or withdrawn, it may be for reasons unrelated to the
quality of the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not
rated as a manner of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgement to be formed; if a
bond is called for redemption; or for other reasons.
NOTE: Those bonds in the Aa and A and Baa groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa
1, A 1 and Baa 1.
5-B
<PAGE>
STANDARD & POOR'S RATINGS GROUP
AAA: Debt rated AAA has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in small
degree.
A: Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB: Debt rated BBB is regarding as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher rated categories.
Plus (+) or minus (-) for ratings from AA to CCC may be used to show relative
standing within the major rating categories.
Description of Ratings of State and Municipal Notes
---------------------------------------------------
MOODY'S INVESTORS SERVICE, INC.
Moody's ratings for state and municipal short-term obligations will
be designated Moody's Investment Grade ("MIG"). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower and short-term cyclical elements are
critical in short-term ratings, while other factors of major importance in
bond risk, long-term secular trends for example, may be less important over
the short run. Symbols used will be as follows:
MIG-1/VMIG-1 - This designation denotes best quality. There is
present strong protection by established cash flows, superior liquidity
support or demonstrated broad based access to the market for refinancing.
MIG-2/VMIG-2 - This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
STANDARD & POOR'S RATINGS GROUP
A Standard & Poor's note rating reflects the liquidity concerns and
market access risks unique to notes. Notes due in 3 years or less will
likely receive a note rating. Notes maturing beyond 3 years will most likely
receive a long-term
6-B
<PAGE>
debt rating. The following criteria will be used in making that assessment.
- Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).
- Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1 Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will
be given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term
of the notes.
SP-3 Speculative capacity to pay principal and interest.
Description of Ratings of State and Municipal Commercial Paper
MOODY'S INVESTORS SERVICE, INC.
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually senior debt obligations which have an original maturity in
excess of nine months. Moody's two highest commercial paper rating
categories are as follows:
"PRIME-1" - Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations.
Prime-1 repayment ability will often be evidenced by many of the following
characteristics:
- Leading market positions in well established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance on
debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
- Well established access to a range of financial markets and assured
sources of alternate liquidity.
"PRIME-2" - Issuers rated Prime-2 (or supporting institutions) have a
strong ability for repayment of short-term debt
7-B
<PAGE>
obligations. This will normally be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and coverage ratios,
while sound may be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
STANDARD & POOR'S RATINGS GROUP
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt having an original maturity of no
more than 365 days. Standard & Poor's two highest commercial paper rating
categories are as follows:
A-1 - This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus sign (+) designation.
A-2 - Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
Description of Ratings of Preferred Stock
-----------------------------------------
MOODY'S INVESTORS SERVICE, INC.
Moody's utilizes a variation of its bond rating symbols in the quality
ranking of preferred stocks because of the fundamental differences between
preferred stock and bonds. Preferred stock occupies a junior position to
bonds within a particular capital structure and such securities are rated
within the universe of preferred stocks.
aaa: An issue which is rated "aaa" is considered to be a top-
quality preferred stock. This rating indicates good asset protection and the
least risk of dividend impairment within the universe of preferred stocks.
aa: An issue which is rated "aa" is considered a high-grade
preferred stock. This rating indicates that there is a reasonable assurance
the earnings and asset protection will remain relatively well maintained in
the foreseeable future.
a: An issue rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the
"aaa" and "aa" classification, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
8-B
<PAGE>
STANDARD & POOR'S RATINGS GROUP
A Standard & Poor's preferred stock rating is an assessment of the
capacity and willingness of an issuer to pay preferred stock dividends and
any applicable sinking fund obligations. A preferred stock rating differs
from a bond rating inasmuch as it is assigned to an equity issue, which issue
is intrinsically different from, and subordinated to, a debt issue.
Therefore, to reflect this difference, the preferred stock rating symbol will
normally not be higher than the debt of the same issuer.
The preferred stock ratings are based on the following considerations:
- Likelihood of payment - capacity and willingness of the issuer to meet the
timely payment of preferred stock dividends and any applicable sinking fund
requirements in accordance with the terms of the obligation;
- Nature of, and provisions of, the issue; and
- Relative position of the issue in the event of bankruptcy, reorganization,
or other arrangement under the laws of bankruptcy and other laws affecting
creditors' rights.
AAA: This is the highest rating that may be assigned by Standard &
Poor's to a preferred stock issue and indicates and extremely strong capacity
to pay the preferred stock obligations.
AA: A preferred stock issue rated AA also qualifies as a high-
quality fixed income security. The capacity to pay preferred Stock
obligations is very strong, although not as overwhelming as for issues rated
AAA.
A: An issue rated A is backed by a sound capacity to pay the
preferred stick obligations, although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions.
9-B
<PAGE>
APPENDIX C
BUSINESS PRINCIPLES OF GOLDMAN, SACHS & CO.
Goldman Sachs is noted for its Business Principles, which guide all of the
firm's activities and serve as the basis for its distinguished reputation among
investors worldwide.
OUR CLIENT'S INTERESTS ALWAYS COME FIRST. Our experience shows that if we serve
our clients well, our own success will follow.
OUR ASSETS ARE OUR PEOPLE, CAPITAL AND REPUTATION. If any of these assets
diminish, reputation is the most difficult to restore. We are dedicated to
complying fully with the letter and spirit of the laws, rules and ethical
principles that govern us. Our continued success depends upon unswerving
adherence to this standard.
WE TAKE GREAT PRIDE IN THE PROFESSIONAL QUALITY OF OUR WORK. We have an
uncompromising determination to achieve excellence in everything we undertake.
Though we may be involved in a wide variety and heavy volume of activity, we
would, if it came to a choice, rather be best than biggest.
WE STRESS CREATIVITY AND IMAGINATION IN EVERYTHING WE DO. While recognizing
that the old way may still be the best way, we constantly strive to find a
better solution to a client's problems. We pride ourselves on having pioneered
many of the practices and techniques that have become standard in the industry.
WE STRESS TEAMWORK IN EVERYTHING WE DO . While individual creativity is always
encouraged, we have found that team effort often produces the best results. We
have no room for those who put their personal interests ahead of the interests
of the firm and its clients.
INTEGRITY AND HONESTY ARE AT THE HEART OF OUR BUSINESS. We expect our people to
maintain high ethical standards in everything they do, both in their work for
the firm and in their personal lives.
1-C
<PAGE>
GOLDMAN, SACHS & CO.'S INVESTMENT BANKING AND SECURITIES ACTIVITIES
Goldman, Sachs & Co. is a leading global investment banking and securities firm
with a number of distinguishing characteristics.
. Privately owned and ranked among Wall Street's best capitalized firms, with
assets exceeding $70 billion and partners capital and subordinated
liabilities of over $4.9 billion as of November 24, 1995.
. With thirty-three offices around the world, Goldman Sachs employes over
8,000 professionals focused on opportunities in major markets.
. An equity research budget of $126 million for 1996.
. Premier lead manager of negotiated municipal bond offerings over the past
five years (1989-1994), aggregating $114 billion.
. The number one lead manager of U.S. common stock offerings for the past six
years (1989-1994), with 18% of the total dollar volume.*
* Source: Securities Data Corporation. Ranking
-----------------------------------
excludes REITS, Trusts, Rights and closed-end fund offerings.
2-C
<PAGE>
GOLDMAN, SACHS & CO.'S HISTORY OF EXCELLENCE
1865 End of Civil War
1869 Marcus Goldman opens Goldman Sachs for business
1890 Dow Jones Industrial Average first published
1896 Goldman Sachs joins New York Stock Exchange
1906 Dow Jones Industrial Average tops 100
1925 Goldman Sachs finances Warner Brothers, producer of the
first talking film
1956 Goldman Sachs co-manages Ford's public offering, the
largest to date
1970 London office opens
1972 Dow Jones Industrial Average breaks 1000
1986 Goldman Sachs takes Microsoft public
1990 Provides advisory services for the largest privatization
in the region of the sale of Telefonos de Mexico
1992 Dow Jones Industrial Average breaks 3000
1993 Goldman Sachs is lead manager in taking Allstate public,
largest equity offering to date ($2.4 billion)
1995 Dow Jones Industrial Average breaks 4000
3-C
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
ADMINISTRATION SHARES
GS ADJUSTABLE RATE GOVERNMENT FUND
GS SHORT DURATION GOVERNMENT 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 Fund, GS Short Duration Government Fund, GS Short Duration Tax-Free
Fund and GS Core Fixed Income, each dated March 1, 1996, 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. Goldman Sachs Global Income Fund does not offer Administration
Shares.
TABLE OF CONTENTS
Introduction..................... B-3
Other Investments and Practices.. B-10
Investment Restrictions.......... B-51
Management....................... B-68
Portfolio Transactions........... B-84
Shares of the Trust.............. B-85
Net Asset Value.................. B-89
Taxation......................... B-90
Performance Information.......... B-101
Other Information................ B-112
Financial Statements............. B-113
Administration Plan.............. B-114
Appendix A....................... 1-A
Appendix B....................... 1-B
Appendix C....................... 1-C
The date of this Additional Statement is March 1, 1996.
<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 FUND CHICAGO, ILLINOIS 60606
AND GS SHORT DURATION
GOVERNMENT 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 Fund
("Adjustable Rate Fund"), GS Core Fixed Income Fund ("Core Fund"), Goldman Sachs
Global Income Fund ("Global Income Fund"), Goldman Sachs Government Income Fund
("Government Income Fund"), Goldman Sachs Municipal Income Fund ("Municipal
Income Fund"), GS Short Duration Tax-Free Fund ("Short Duration Tax-Free Fund")
and GS Short Duration Government Fund ("Short Duration Government Fund").
Adjustable Rate Fund, Core Fund, Global Income Fund, Government Income Fund,
Municipal Income Fund, Short Duration Tax-Free Fund and Short Duration
Government Fund are each sometimes referred to herein as a "Fund" and
collectively as the "Funds." Short Duration Government Fund, Short Duration
Tax-Free Fund and Core Fund are each authorized to issue three classes of
shares: Institutional Shares, Administration Shares and Service Shares.
Adjustable Rate Fund is authorized to issue four classes of shares:
Institutional Shares, Administration Shares, Service Shares and Class A Shares.
Global Income Fund is authorized to issue four classes of shares: Institutional
Shares, Service Shares, Class A Shares and Class B Shares. Government Income
Fund and Municipal Income Fund are each authorized to issue two classes of
shares: Class A Shares and Class B Shares.
Goldman Sachs Asset Management ("GSAM"), a separate operating division
of Goldman, Sachs & Co. ("Goldman Sachs"), serves as the investment adviser to
Core Fund, Global Income Fund, Government Income Fund, Municipal Income Fund and
Short Tax-Free Duration Fund. In addition, GSAM serves as Global Income Fund's
administrator. Goldman Sachs Asset Management International ("GSAMI" or the
"Subadviser"), an affiliate of Goldman Sachs, serves as subadviser to the Global
Income Fund. Goldman Sachs Funds Management, L.P. ("FMLP"), an affiliate of
Goldman Sachs, serves as the investment adviser to Adjustable Rate Fund and
Short Duration Government Fund. GSAM, GSAMI 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.
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.
However, unlike certificates of deposits, shares of the Funds are not insured by
the Federal Deposit Insurance Corporation.
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The following information relates to and supplements the description of
each Fund's investment policies contained in the Prospectus. See the Prospectus
for a fuller description of each 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.
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.
ADJUSTABLE RATE FUND AND SHORT DURATION GOVERNMENT FUND
Adjustable Rate Fund and Short Duration Government Fund are both
designed for investors who seek a high level of high current income, relative
stability of principal and the high credit quality of securities issued or
guaranteed by the U.S. Government or its agencies, instrumentalities or
sponsored enterprises, without incurring the administrative and accounting
burdens involved in direct investment.
Market and economic conditions may affect the investments of Adjustable
Rate Fund and Short Duration Government 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 and Short Duration Government Funds
may invest may be adversely affected by increases in market interest rates.
Conversely, 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 and Short Duration Government Funds
-------------------
seek a higher current yield than a money market fund or than that offered by
bank certificates of deposit and money market accounts. However, the Adjustable
Rate and Short Duration Government Funds 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 of the Adjustable Rate and Short
Duration Government Funds 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 pass-through securities and other mortgage securities with periodic
interest rate resets, maintaining a maximum duration of two years and a target
duration equal to that of a six-month to one-year U.S. Treasury security,
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and utilizing certain active management techniques to seek to hedge interest
rate risk. Short Duration Government Fund seeks to minimize net asset value
fluctuations by utilizing certain interest rate hedging techniques and by
maintaining a maximum duration of not more than 3 years. The duration and
targeting of the 2-year U.S. Treasury Security plus or minus .5 years. There is
no assurance that these strategies for the Adjustable Rate Fund and Short
Duration Government Fund will always be successful.
PROFESSIONAL MANAGEMENT AND ADMINISTRATION. Investors who invest in
-------------------------------------------
securities of the Government National Mortgage Association ("Ginnie Mae") 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. Members of Goldman Sachs' highly
skilled portfolio management team bring together many years of experience in the
analysis, valuation and trading of U.S. fixed income securities.
GOVERNMENT INCOME FUND
Government Income Fund is designed for investors who seek the relatively
high current income, relative safety of principal and the high credit quality of
securities issued by the U.S. Government or its agencies, instrumentalities or
sponsored enterprises, without incurring the administrative and account burdens
involved in direct investment.
Government Income Fund's overall returns are generally likely to move in
the same direction as interest rates. Therefore, when interest rates decline,
Government Income Fund's return is also likely to decline. In exchange for
accepting a higher degree of share price fluctuation, investors have the
potential to achieve a higher return from the Government Income Fund's than from
shorter term investments.
High Current Income. Government Income Fund is designed to have a higher
-------------------
current yield than a money market fund, since it can invest in longer-term,
higher yielding securities, and may utilize certain investment techniques not
available to a money market fund. Similarly, Government Income Fund's yield is
expected to exceed that offered by bank certificates of deposit and money
market accounts. However, Government Income Fund does not maintain a constant
net asset value per share and is subject to greater fluctuation in the value of
its shares than a money market fund. Unlike bank certificates of deposit and
money market accounts, investments in shares of Government Income Fund are not
insured or guaranteed by any government agency. Government Income Fund seeks to
provide high current income without, however, sacrificing credit quality.
Liquidity. Because Government Income Fund's shares may be redeemed upon request
- ---------
of a shareholder on any business day at net
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asset value, Government Income Fund offers greater liquidity than many competing
investments such as certificates of deposit and direct investments in certain
securities in which Government Income Fund may invest.
A Sophisticated Investment Process. Government Income Fund's investment
----------------------------------
process starts with a review of trends for the overall economy as well as for
different sectors of the U.S. government and mortgage backed securities markets.
Goldman Sachs' portfolio managers then analyze yield spreads, implied volatility
and the shape of the yield curve. In planning the Government Income 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 involving Goldman Sachs' proprietary mortgage
prepayment model and option-adjusted spread model to structure and maintain the
Government Income Fund's investment portfolio. In determining the Government
Income Fund's investment strategy and making market timing decisions, the
Adviser will have access to information from Goldman Sachs' economists, fixed
income analysts and mortgage specialists.
Convenience of a Fund Structure. Government Income Fund eliminates many
-------------------------------
of the complications that direct ownership of U.S. Government and mortgage-
backed securities entails. Government Income Fund automatically reinvests all
principal payments within the Fund and distributes only current income each
month, thereby conserving principal and eliminating the investor's need to
segregate and reinvest the principal portion of each payment on his own.
SHORT DURATION TAX-FREE AND MUNICIPAL INCOME FUNDS
Short Duration Tax-Free Fund and Municipal Income Fund (the "Tax Exempt
Funds") are not money market funds. Each 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 Tax Exempt Funds 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 Tax Exempt Funds'
increased investment flexibility permits their portfolios 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 that a mutual fund
structure offers some important advantages when
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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;
. Market expertise is also an important consideration for municipal
investors, and because the Tax Exempt Funds take relatively large
positions in different securities, the Tax Exempt Funds may be able to
obtain more favorable prices in the municipal securities market than
investors with relatively small positions; and
. Industry and geographical diversification are important considerations
for municipal investors. The Tax Exempt Funds are 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
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<PAGE>
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 to achieve a higher return from Core Fund than
from shorter term investments.
A number of investment strategies will be used to achieve the Core
Fund's investment objective, including market sector selection, determination of
yield curve exposure, and issuer selection. In addition, the Adviser will
attempt to take advantage of pricing inefficiencies in the fixed income markets.
Market sector selection is the underweighting or overweighting of one or more of
the five market sectors (i.e., U.S. treasuries, U.S. government agencies,
corporate securities, mortgage-backed securities and asset-backed securities) in
which the Fund primarily invests. The decision to overweight or underweight a
given market sector is based on expectations of future yield spreads between
different sectors. Yield curve exposure strategy consists of overweighting or
underweighting different maturity sectors to take advantage of the shape of the
yield curve. Issuer selection is the purchase and sale of corporate securities
based on a corporation's current and expected credit standing. To take advantage
of price discrepancies between securities resulting from supply and demand
imbalances or other technical factors, the Fund may simultaneously purchase and
sell comparable, but not identical, securities. The Adviser will have access to
the research of, and proprietary technical models developed by, Goldman Sachs
and will apply quantitative and qualitative analysis in determining the
appropriate allocations among the categories of issuers and types of securities.
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 specialists.
B-8
<PAGE>
GLOBAL INCOME FUND
Global Income Fund is designed for investors seeking a combination of
high income, capital appreciation, stability of principal, experienced
professional management, flexibility and liquidity. However, investing in the
Fund involves certain risks and there is no assurance that the Fund will achieve
its investment objective.
In selecting securities for the Fund, portfolio managers consider such
factors as the security's duration, sector and credit quality rating as well as
the security's yield and prospectus for capital appreciation. In determining the
countries and currencies in which the Fund will invest, the Fund's portfolio
mangers form opinions based primarily on the views of Goldman Sachs' economists
as well as information provided by securities dealers, including information
relating to factors such as interest rates, inflation, monetary and fiscal
policies, taxation, and political climate. The portfolio managers apply the
Black-Litterman Model (the "Model") to their views to develop a portfolio that
produces, in the view of the Adviser, the optimal expected return for a given
level of risk. The Model factors in the opinions of the portfolio managers,
adjusting for their level of confidence in such opinions, with the views implied
by an international capital asset pricing formula. The Model is also used to
maintain the level of portfolio risk within the guidelines established by the
Adviser.
High Income. Global Income Fund's portfolio managers will seek out the
-----------
highest yielding bonds in the global fixed income market that meet the Global
Income Fund's credit quality standards and certain other criteria.
Capital Appreciation. Investing in the foreign bond markets offers the
--------------------
potential for capital appreciation due to both interest rate and currency
exchange rate fluctuations. The portfolio managers attempt to identify
investments with appreciation potential by carefully evaluating trends
affecting a country's currency as well as a country's fundamental economic
strength. However, there is a risk of capital depreciation as a result of
unanticipated interest rate and currency fluctuations.
Portfolio Management Flexibility. Global Income Fund is actively managed. The
--------------------------------
Fund's portfolio managers invest in countries that, in their judgment, meet the
Fund's investment guidelines and often have strong currencies and stable
economies and in securities that they believe offer favorable performance
prospects.
Relative Stability of Principal. Global Income Fund may be able to reduce
-------------------------------
principal fluctuation by investing in foreign countries with economic policies
or business cycles different from those of the United States and in foreign
securities markets that do not necessarily move in the same direction or
magnitude as the U.S. market. Investing in a broad range of U.S. and foreign
fixed income securities and currencies reduces the dependence of the
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<PAGE>
Fund's performance on developments in any particular market to the extent that
adverse events in one market are offset by favorable events in other markets.
The Fund's policy of investing primarily in high credit quality securities may
also reduce principal fluctuation. However, there is no assurance that these
strategies will always be successful.
Professional Management. Individual U.S. investors may prefer
-----------------------
professional management of their global bond and currency portfolios because a
well-diversified portfolio requires a large amount of capital and because the
size of the global market requires access to extensive resources and a
substantial commitment of time.
OTHER INVESTMENTS AND PRACTICES
OBLIGATIONS OF THE UNITED STATES, ITS AGENCIES, INSTRUMENTALITIES AND SPONSORED
ENTERPRISES
Each Fund may invest in U.S. Government securities, which are
obligations issued or guaranteed by the U.S. Government and its agencies,
instrumentalities or sponsored enterprises. 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, instrumentalities or sponsored
enterprises, 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 Federal National
Mortgage Association ("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,
instrumentalities or sponsored enterprises. No assurance can be given that the
U.S. Government will provide financial support to the U.S. Government agencies,
instrumentalities or sponsored enterprises in the future.
U.S. Government securities include (to the extent consistent with the
Investment Company Act of 1940, as amended (the "Act")) securities for which the
payment of principal and interest is backed by an irrevocable letter of credit
issued by the U.S. Government, its agencies, instrumentalities or sponsored
enterprises. U.S. Government securities also include (to the extent consistent
with the Act) participations in loans made to foreign governments or their
agencies that are guaranteed as to principal and interest by the U.S. Government
or its agencies, instrumentalities or sponsored enterprises. The secondary
market for certain of these participations is extremely limited. In the absence
of a substantial secondary market, such participations are regarded as illiquid.
Each Fund may also purchase U.S. Government
B-10
<PAGE>
securities in private placements, subject to the Fund's limitation on investment
in illiquid securities.
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 program ("STRIPS").
CUSTODIAL RECEIPTS
Each Fund may 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 Duration Government Fund, Core Fund, Global
Income Fund and Government Income Fund (collectively, the "Taxable Funds") may
each invest in mortgage loans and mortgage pass-through securities and other
securities representing an interest in or collateralized by adjustable and
fixed-rate mortgage loans ("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 Mortgaged
Properties may also include residential investment properties and second homes.
The investment characteristics of adjustable and fixed rate Mortgage-Backed
Securities differ from those of traditional fixed income securities. The major
differences include the payment of interest and principal on Mortgage-Backed
Securities on a more frequent (usually monthly) schedule, and the possibility
that principal may be prepaid at any time due to prepayments on the underlying
mortgage loans or other assets. These differences can result in significantly
greater price and yield volatility than is the case with traditional fixed
income securities. As a result, a faster than expected prepayment rate will
reduce both the market value and the yield to maturity from those which were
anticipated.
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<PAGE>
A prepayment rate that is slower than expected will have the opposite effect of
increasing yield to maturity and market value. 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 cost of funds index or a moving
average of mortgage rates. Commonly utilized indices include the one-year,
three-year and five-year
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<PAGE>
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 Taxable Fund's portfolio and therefore in the net asset
value of each Taxable 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.
Fixed Rate Mortgage Loans. Generally, fixed rate mortgage loans included in a
- -------------------------
mortgage pool (the "Fixed Rate Mortgage Loans") will bear simple interest at
fixed annual rates and have original terms to maturity ranging from 5 to 40
years. Fixed Rate Mortgage Loans generally provide for monthly payments of
principal and interest in substantially equal installments for the term of the
mortgage note in sufficient amounts to fully amortize principal by maturity,
although certain Fixed Rate Mortgage Loans provide for a large final "balloon"
payment upon maturity.
LEGAL CONSIDERATIONS OF MORTGAGE LOANS. The following is a discussion of
- --------------------------------------
certain legal and regulatory aspects of the mortgage loans in which the Taxable
Funds 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,
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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 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.
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. The Taxable Funds 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.
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<PAGE>
GUARANTEED MORTGAGE PASS-THROUGH SECURITIES
GINNIE MAE CERTIFICATES. Ginnie Mae is a wholly-owned corporate instrumentality
- -----------------------
of the United States 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, Ginnie Mae is
authorized to borrow from the U.S. Treasury in an unlimited amount.
FANNIE MAE CERTIFICATES. 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 FHA or guaranteed by the 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
B-15
<PAGE>
principal. The obligations of Freddie Mac under its guaranty of Freddie Mac
Certificates are obligations solely of Freddie Mac.
The mortgage loans underlying the Freddie Mac and Fannie Mae Certificates
consist of adjustable rate or fixed rate mortgage loans with original terms to
maturity of between five and thirty years. Substantially all of these mortgage
loans are secured by first liens on one- to four-family residential properties
or 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 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 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. The Taxable Funds 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.
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
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<PAGE>
be made on a sequential, concurrent, pro rata or disproportionate
--- ----
basis, or any combination thereof. The stated interest rate on any such
subclass of certificates may be a fixed rate or one which varies in direct or
inverse relationship to an objective interest index.
Generally, each registered holder of a certificate will be entitled to receive
its pro rata share of monthly distributions of all or a portion of principal of
--- ----
the underlying mortgage loans or of interest on the principal balances thereof,
which accrues at the applicable mortgage pass-through rate, or both. The
difference between the mortgage interest rate and the related mortgage pass-
through rate (less the amount, if any, of retained yield) with respect to each
mortgage loan will generally be paid to the servicer as a servicing fee. Since
certain adjustable rate mortgage loans included in a mortgage pool may provide
for deferred interest (i.e., negative amortization), the amount of interest
actually paid by a mortgagor in any month may be less than the
amount of interest accrued on the outstanding principal balance of the related
mortgage loan during the relevant period at the applicable mortgage interest
rate. In such event, the amount of interest that is treated as deferred
interest will be added to the principal balance of the related mortgage loan and
will be distributed pro rata to certificate-holders as principal of such
--- ----
mortgage loan when paid by the mortgagor in subsequent monthly payments or at
maturity.
MULTIPLE CLASS MORTGAGE-BACKED SECURITIES AND COLLATERALIZED MORTGAGE
- ---------------------------------------------------------------------
OBLIGATIONS. Each Taxable Fund may invest in multiple class securities
- -----------
including collateralized mortgage obligations ("CMOs") and REMIC Certificates
issued by U.S. Government agencies, instrumentalities (such as Fannie Mae) and
sponsored enterprises (such as Freddie Mac) or, in the case of Core and
Government Income Funds, or by trusts formed by private originators of, or
investors in, mortgage loans, including savings and loan associations, mortgage
bankers, commercial banks, insurance companies, investment banks and special
purpose subsidiaries of the foregoing. In general, CMOs are debt obligations
of a legal entity that are collateralized by, and multiple class mortgage-
backed securities represent direct ownership interests in, a pool of mortgage
loans or mortgage-backed securities the payments on which are used to make
payments on the CMOs or multiple class mortgage-backed securities.
Fannie Mae REMIC Certificates are issued and guaranteed as to timely
distribution of principal and interest by Fannie Mae. In addition, Fannie Mae
will be obligated to distribute the principal balance of each class of REMIC
Certificates in full, whether or not sufficient funds are otherwise available.
Freddie Mac guarantees the timely payment of interest on Freddie Mac REMIC
Certificates and also guarantees the payment of principal as payments are
required to be made on the underlying mortgage participation certificates
("PCs"). PCs represent undivided interests in specified level payment,
residential
B-17
<PAGE>
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 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
B-18
<PAGE>
class certificates ("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, 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. The Taxable Funds 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, Government Income Fund and Global 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 each Fund's limitation on
investments in illiquid securities. The Adviser may determine that SMBS which
are U.S. Government securities are liquid for purposes of each Fund's limitation
on investments in illiquid securities in accordance with procedures adopted by
the Board of Trustees. The market value of the class consisting entirely of
principal payments generally is unusually volatile in response to changes in
interest rates. The yields on a class of SMBS that receives all or most of the
interest from Mortgage Assets are generally higher than prevailing market yields
on other Mortgage-Backed Securities because their cash flow patterns are more
volatile and there is a greater risk that the initial investment will not be
fully recouped.
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
B-19
<PAGE>
organization to a certificate does not address the remote possibility that, in
the event of the insolvency of the issuer of certificates where a subordinated
interest was retained, the issuance and sale of the senior certificates may be
recharacterized as a financing and, as a result of such recharacterization,
payments on such certificates may be affected.
CREDIT ENHANCEMENT. Credit support falls generally into two categories: (i)
- ------------------
liquidity protection and (ii) protection against losses resulting from default
by an obligor on the underlying assets. Liquidity protection refers to the
provision of advances, generally by the entity administering the pools of
mortgages, the provision of a reserve fund, or a combination thereof, to ensure,
subject to certain limitations, that scheduled payments on the underlying pool
are made in a timely fashion. Protection against losses resulting from default
ensures ultimate payment of the obligations on at least a portion of the assets
in the pool. Such credit support can be provided by among other things,
payment guarantees, letters of credit, pool insurance, subordination, or any
combination thereof.
SUBORDINATION; SHIFTING OF INTEREST; RESERVE FUND. In order to achieve ratings
- -------------------------------------------------
on one or more classes of Mortgage Pass-Throughs, one or more classes of
certificates may be subordinate certificates which provide that the rights of
the subordinate certificate-holders to receive any or a specified portion of
distributions with respect to the underlying mortgage loans may be subordinated
to the rights of the senior certificate-holders. If so structured, the
subordination feature may be enhanced by distributing to the senior certificate-
holders on certain distribution dates, as payment of principal, a specified
percentage (which generally declines over time) of all principal payments
received during the preceding prepayment period ("shifting interest credit
enhancement"). This will have the effect of accelerating the amortization of
the senior certificates while increasing the interest in the trust fund
evidenced by the subordinate certificates. Increasing the interest of the
subordinate certificates relative to that of the senior certificates is
intended to preserve the availability of the subordination provided by the
subordinate certificates. In addition, because the senior certificate-holders
in a shifting interest credit enhancement structure are entitled to receive a
percentage of principal prepayments which is greater than their proportionate
interest in the trust fund, the rate of principal prepayments on the mortgage
loans will have an even greater effect on the rate of principal payments and
the amount of interest payments on, and the yield to maturity of, the senior
certificates.
In addition to providing for a preferential right of the senior certificate-
holders to receive current distributions from the mortgage pool, a reserve fund
may be established relating to such 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
B-20
<PAGE>
to the subordinate certificate-holders or by excess servicing fees until the
Reserve Fund reaches a specified amount.
The subordination feature, and any Reserve Fund, are intended to enhance the
likelihood of timely receipt by senior certificate-holders of the full amount of
scheduled monthly payments of principal and interest due them and will protect
the senior certificate-holders against certain losses; however, in certain
circumstances the Reserve Fund could be depleted and temporary shortfalls could
result. In the event the Reserve Fund is depleted before the subordinated
amount is reduced to zero, senior certificate-holders will nevertheless have a
preferential right to receive current distributions from the mortgage pool to
the extent of the then outstanding subordinated amount. Unless otherwise
specified, until the subordinated amount is reduced to zero, on any distribution
date any amount otherwise distributable to the subordinate certificates or, to
the extent specified, in the Reserve Fund will generally be used to offset the
amount of any losses realized with respect to the mortgage loans ("Realized
Losses"). Realized Losses remaining after application of such amounts will
generally be applied to reduce the ownership interest of the subordinate
certificates in the mortgage pool. If the subordinated amount has been reduced
to zero, Realized Losses generally will be allocated pro rata among all
--- ----
certificate-holders in proportion to their respective outstanding interests in
the mortgage pool.
ALTERNATIVE CREDIT ENHANCEMENT. As an alternative, or in 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.
B-21
<PAGE>
ASSET-BACKED SECURITIES
Core Fund, Government Income Fund and Global Income 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, a Fund's ability to
maintain positions in such securities will be affected by reductions in the
principal amount of such securities resulting from prepayments, and its ability
to reinvest the returns of principal at comparable 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 by automobiles rather than
residential real property. Most issuers of automobile receivables permit the
loan servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
asset-backed securities. In addition, because of the large number of vehicles
involved in a typical issuance and technical requirements under state laws, the
trustee for the holders of the automobile receivables may not have a proper
security interest in the underlying automobiles. Therefore, there is the
possibility that, in some cases, recoveries on repossessed collateral may not be
available to support payments on these securities.
ZERO COUPON, DEFERRED INTEREST AND CAPITAL APPRECIATION BONDS
Each Fund may invest in zero coupon bonds, 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.
B-22
<PAGE>
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 each Fund may invest
are not fixed and may fluctuate based upon changes in market rates. A variable
rate obligation has an interest rate which is adjusted at predesignated periods
in response to changes in the market rate of interest on which the interest rate
is based. Variable and floating rate obligations are less effective than fixed
rate instruments at locking in a particular yield. Nevertheless, such
obligations may fluctuate in value in response to interest rate changes if there
is a delay between changes in market interest rates and the interest reset date
for the obligation. The absence of an unconditional demand feature on variable
and floating rate municipal securities exercisable within seven days would, and
the failure of the issuer or a third party to honor its obligations under a
demand or put feature might, require a variable or floating rate obligation to
be treated as illiquid for purposes of the Tax Exempt Funds' limitation on
illiquid investments.
Each Fund may invest in "leveraged" inverse floating rate debt instruments
("inverse floaters"), including "leveraged inverse floaters." The interest rate
on inverse floaters resets in the opposite direction from the market rate of
interest to which the inverse floater is indexed. An inverse floater may be
considered to be leveraged to the extent that its interest rate varies by a
magnitude that exceeds the magnitude of the change in the index rate of
interest. The higher the degree of leverage of an inverse floater, the greater
the volatility of its market value. Accordingly, the duration of an inverse
floater may exceed its stated final maturity. Certain inverse floaters may be
deemed to be illiquid securities for purposes of each Fund's limitation on
illiquid investments.
CORPORATE DEBT OBLIGATIONS
Core Fund, Global Income Fund and Government Income 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 meet principal and interest payments on the obligations and may
B-23
<PAGE>
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
Global Income Fund and Core Fund may each invest in obligations issued or
guaranteed by United States and foreign banks. Bank obligations, including
without limitation time deposits, bankers' acceptances and certificates of
deposit, may be general obligations of the parent bank or may be 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. Foreign banks are subject to different regulations and
are permitted to engage in different activities than U.S. banks. 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, Municipal Income Fund and Short Duration Tax-Free Fund may invest in
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 ("Municipal
Securities"), 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 income
taxes of any state or local government). In addition, Municipal Securities
include participation 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 Core Fund,
Municipal Income Fund and Short Duration Tax-Free Fund may revise their
definition of Municipal Securities in the future to include other types of
securities that currently exist the interest on which is or will be in the
opinion of such counsel, excluded from gross income for federal income tax
purposes, provided that investing in such securities is consistent with each
Fund's investment objective and policies.
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
B-24
<PAGE>
activity bonds" or industrial development bonds, which are issued by
or on behalf of public authorities to provide financing aid to acquire sites or
construct or equip facilities within a municipality for privately or publicly
owned corporations.
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
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 Tax-Free Fund,
Municipal Income 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
B-25
<PAGE>
principal of or interest on a Municipal Security may be materially affected.
Municipal Leases, Certificates of Participation and Other Participation
- -----------------------------------------------------------------------
Interests. The Core, Municipal Income, and Short-Duration Tax-Free Funds may
- ---------
invest in municipal leases, certificates of participation and other
participation interests. A municipal lease is an obligation in the form of a
lease or installment purchase which is issued by a state or local government to
acquire equipment and facilities. Income from such obligations is generally
exempt from state and local taxes in the state of issuance. Municipal leases
frequently involve special risks not normally associated with general
obligations or revenue bonds. Leases and installment purchase or conditional
sale contracts (which normally provide for title to the leased asset to pass
eventually to the governmental issuer) have evolved as a means for governmental
issuers to acquire property and equipment without meeting the constitutional
and statutory requirements for the issuance of debt. The debt issuance
limitations are deemed to be inapplicable because of the inclusion in many
leases or contracts of "non-appropriation" clauses that relieve the governmental
issuer of any obligation to make future payments under the lease or contract
unless money is appropriated for such purpose by the appropriate legislative
body on a yearly or other periodic basis. In addition, such leases or contracts
may be subject to the temporary abatement of payments in the event the issuer is
prevented from maintaining occupancy of the leased premises or utilizing the
leased equipment. Although the obligations may be secured by the leased
equipment or facilities, the disposition of the property in the event of non-
appropriation or foreclosure might prove difficult, time consuming and costly,
and result in a delay in recovering or the failure to fully recover a Fund's
original investment.
Certificates of participation represent undivided interests in municipal leases,
installment purchase agreements or other instruments. The certificates are
typically issued by a trust or other entity which has received an assignment of
the payments to be made by the state or political subdivision under such leases
or installment purchase agreements.
Certain municipal lease obligations and certificates of participation may be
deemed to be illiquid for the purpose of the Funds' limitation on investments in
illiquid securities. Other municipal lease obligations and certificates of
participation acquired by a Fund may be determined by the Adviser, pursuant to
guidelines adopted by the Trustees of the Trust, to be liquid securities for the
purpose of such limitation. In determining the liquidity of municipal lease
obligations and certificates of participation, the Adviser will consider a
variety of factors including: (1) the willingness of dealers to bid for the
security; (2) the number of dealers willing to purchase or sell the obligation
and the number of other potential buyers; (3) the frequency of trades or quotes
for the obligation; and (4) the nature of the marketplace trades. In addition,
the Adviser will
B-26
<PAGE>
consider factors unique to particular lease obligations and certificates of
participation affecting the marketability thereof. These include the general
creditworthiness of the issuer, the importance to the issuer of the property
covered by the lease and the likelihood that the marketability of the obligation
will be maintained throughout the time the obligation is held by a Fund.
The Core, Municipal Income and Short Duration Tax-Free Funds may purchase
participations in Municipal Securities held by a commercial bank or other
financial institution. Such participations provide a Fund with the right to a
pro rata undivided interest in the underlying Municipal Securities. In
addition, such participations generally provide a Fund with the right to demand
payment, on not more than seven days notice, of all or any part of such Fund's
participation interest in the underlying Municipal Security, plus accrued
interest. A Fund will only invest in such participations if, in the opinion of
bond counsel, counsel for the issuers of such participations or counsel selected
by the Adviser, the interest from such participations is exempt from regular
federal income tax.
Municipal Notes. Municipal Securities in the form of notes generally are used
- ---------------
to provide for short-term capital needs, in anticipation of an issuer's receipt
of other revenues or financing, and typically have maturities of up to three
years. Such instruments may include tax anticipation notes, revenue
anticipation notes, bond anticipation notes, tax and revenue anticipation notes
and construction loan notes. Tax anticipation notes are issued to finance the
working capital needs of governments. Generally, they are issued in
anticipation of various tax revenues, such as income, sales, property, use and
business taxes, and are payable from these specific future taxes. Revenue
anticipation notes are issued in expectation of receipt of other kinds of
revenue, such as federal revenues available under federal revenue sharing
programs. Bond anticipation notes are issued to provide interim financing
until long-term bond financing can be arranged. In most cases, the long-term
bonds then provide the funds needed for repayment of the notes. Tax and
revenue anticipation notes combine the funding sources of both tax
anticipation notes and revenue anticipation notes. Construction Loan Notes are
sold to provide construction financing. These notes are secured by mortgage
notes insured by the FHA; however, the proceeds from the insurance may be less
than the economic equivalent of the payment of principal and interest on the
mortgage note if there has been a default. The obligations of an issuer of
municipal notes are generally secured by the anticipated revenues from taxes,
grants or bond financing. An investment in such instruments, however, presents
a risk that the anticipated revenues will not be received or that such revenues
will be insufficient to satisfy the issuer's payment obligations under the notes
or that refinancing will be otherwise unavailable.
Tax-Exempt Commercial Paper. Issues of commercial paper typically represent
- ---------------------------
short-term, unsecured, negotiable promissory notes. These obligations are
issued by state and local governments
B-27
<PAGE>
and their agencies to finance working capital needs of municipalities or to
provide interim construction financing and are paid from general revenues of
municipalities or are refinanced with long-term debt. In most cases, tax-exempt
commercial paper is backed by letters of credit, lending agreements, note
repurchase agreements or other credit facility agreements offered by banks or
other institutions.
Pre-Refunded Municipal Securities. The principal of and interest on pre-
- ---------------------------------
refunded Municipal Securities are no longer paid from the original revenue
source for the securities. Instead, the source of such payments is typically
an escrow fund consisting of U.S. Government securities. The assets in the
escrow fund are derived from the proceeds of refunding bonds issued by the same
issuer as the pre-refunded Municipal Securities. Issuers of Municipal
Securities use this advance refunding technique to obtain more favorable terms
with respect to securities that are not yet subject to call or redemption by the
issuer. For example, advance refunding enables an issuer to refinance debt at
lower market interest rates, restructure debt to improve cash flow or eliminate
restrictive covenants in the indenture or other governing instrument for the
pre-refunded Municipal Securities. However, except for a change in the revenue
source from which principal and interest payments are made, the pre-refunded
Municipal Securities remain outstanding on their original terms until they
mature or are redeemed by the issuer. Pre-refunded Municipal Securities are
usually purchased at a price which represents a premium over their face value.
Private Activity Bonds. Short Duration Tax-Free Fund, Municipal Income Fund and
- ----------------------
Core Fund may each invest in 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 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. The Tax Exempt Funds' 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.
Tender Option Bonds. A tender option bond is a Municipal Security (generally
- -------------------
held pursuant to a custodial arrangement) having a relatively long maturity and
bearing interest at a fixed rate substantially higher than prevailing short-
term, tax-exempt rates. The bond is typically issued with the agreement of a
third party, such as a bank, broker-dealer or other financial
B-28
<PAGE>
institution, which grants the security holders the option, at periodic
intervals, to tender their securities to the institution and receive the face
value thereof. As consideration for providing the option, the financial
institution receives periodic fees equal to the difference between the bond's
fixed coupon rate and the rate, as determined by a remarketing or similar agent
at or near the commencement of such period, that would cause the securities,
coupled with the tender option, to trade at par on the date of such
determination. Thus, after payment of this fee, the security holder effectively
holds a demand obligation that bears interest at the prevailing short-term, tax-
exempt rate. However, an institution will not be obligated to accept tendered
bonds in the event of certain defaults or a significant downgrade in the credit
rating assigned to the issuer of the bond. The liquidity of a tender option bond
is a function of the credit quality of both the bond issuer and the financial
institution providing liquidity. Tender option bonds are deemed to be liquid
unless, in the opinion of the Adviser, the credit quality of the bond issuer and
the financial institution is deemed, in light of the Fund's credit quality
requirements, to be inadequate. The Tax Exempt Funds intend to invest in tender
option bonds the interest on which will, in the opinion of bond counsel, counsel
for the issuer of interests therein or counsel selected by the Adviser, be
exempt from regular federal income tax. However, because there can be no
assurance that the Internal Revenue Service (the "Service") will agree with such
counsel's opinion in any particular case, there is a risk that a Tax Exempt Fund
will not be considered the owner of such tender option bonds and thus will not
be entitled to treat such interest as exempt from such tax. Additionally, the
federal income tax treatment of certain other aspects of these investments,
including the proper tax treatment of tender option bonds and the associated
fees in relation to various regulated investment company tax provisions is
unclear. The Tax Exempt Funds intend to manage their portfolio in a manner
designed to eliminate or minimize any adverse impact from the tax rules
applicable to these investments.
Auction Rate Securities. The Core, Municipal Income and Short Duration Tax-Free
- -----------------------
Funds 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"). Provided that the
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
B-29
<PAGE>
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.
A 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. The Funds will indirectly bear their proportionate share of any
management and other fees paid by such closed-end funds in addition the advisory
fees payable directly by the Funds.
Insurance. The Funds may invest in "insured" tax-exempt Municipal Securities.
- ---------
Insured Municipal Securities are securities for which scheduled payments of
interest and principal are guaranteed by a private (nongovernmental) insurance
company. The insurance only entitles a Fund to receive the face or par value
of the securities held by the Fund. The insurance does not guarantee the
market value of the Municipal Securities or the value of the shares of a Fund.
The Funds 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 Investors Service, Inc. ("Moody's") or AAA from
Standard & Poor's Ratings Group ("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-cancelable and continue in force
as long as the bonds are outstanding.
A secondary market insurance policy is purchased by an investor (such as a Fund)
subsequent to a bond's original issuance and generally insures a particular bond
for the remainder of its term. The Funds may purchase bonds which have already
been insured under a secondary market insurance policy by a prior investor, or
the Funds may directly purchase such a policy from insurers for bonds which are
currently uninsured.
An insured Municipal Security acquired by a Fund will typically be covered by
only one of the above types of policies. All of the insurance policies used by a
Fund will be obtained only from insurance companies rated, at the time of
purchase, Aaa by Moody's or AAA by Standard & Poor's.
Standby Commitments. In order to enhance the liquidity of Municipal Securities,
- -------------------
the Tax Exempt Funds 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 a Fund pays for securities with standby commitments may be
higher than the price which otherwise would be paid for the
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<PAGE>
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 a Tax
Exempt 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 a Tax
Exempt Fund. In considering whether a security meets a Tax Exempt Fund's
quality standards, the particular Tax Exempt 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.
The Tax Exempt Funds value 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 a Tax Exempt 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, a Tax Exempt Fund's policy is to
enter into standby commitment transactions only with banks, brokers or dealers
which present a minimal risk of default.
The Adviser understands that 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. The Tax Exempt Funds intend to take the position that they are 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
their hands. There is no assurance that standby commitments will be available
to the Tax Exempt Funds nor have the Tax Exempt Funds assumed that such
commitments would continue to be available under all market conditions.
Call Risk and Reinvestment Risk. Municipal Securities may include "call"
- -------------------------------
provisions which permit the issuers of such securities, at any time or after a
specified period, to redeem the securities prior to their stated maturity. In
the event that Municipal Securities held in a Fund's portfolio are called prior
to the maturity, the Fund will be required to reinvest the proceeds on such
securities at an earlier date and may be able to do so only at lower yields,
thereby reducing the Fund's return on its portfolio securities.
B-31
<PAGE>
FOREIGN INVESTMENTS
Core and Global Income Funds may invest in securities of foreign issuers and in
fixed income securities quoted or denominated in a currency other than U.S.
dollars. Investing in the securities of foreign issuers involves certain
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 and Global Income Fund may temporarily hold funds in bank deposits in
foreign currencies during completion of investment programs, Core Fund and
Global Income 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.
Foreign companies are not subject to uniform accounting, auditing and financial
reporting standards, practices and requirements comparable to those applicable
to U.S. companies. In addition, there may be less publicly available
information about a foreign company than about a comparable U.S. company.
Volume and liquidity in most foreign bond markets are less than in the United
States markets and securities of many foreign companies are less liquid
and more volatile than securities of comparable U.S. companies. Commissions on
foreign securities exchanges are often fixed and generally are higher than
negotiated commissions or dealer mark-ups in the U.S. markets, although each
Fund endeavors to achieve the most favorable net results on its portfolio
transactions. There is generally less government supervision and regulation of
securities markets and exchanges, brokers, dealers and listed companies than in
the United States. Mail service between the United States and foreign countries
may be slower or less reliable than within the United States, thus increasing
the risk of delayed settlement of portfolio transactions or loss of
certificates for portfolio securities.
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 or Global Income Fund is uninvested
and no return is earned thereon. The inability of Core Fund or Global Income
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 or Global Income Fund due to subsequent declines in value of the
portfolio securities, or, if Core Fund or Global Income 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
B-32
<PAGE>
adversely affect Core Fund's or Global Income 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, and Global Income
Fund may enter into forward foreign currency exchange contracts for hedging
purposes and to seek to increase total return. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded in the interbank market conducted directly
between currency traders (usually large commercial banks) and their customers.
A forward contract generally has no deposit requirement, and no commissions are
generally charged at any stage for trades.
At the maturity of a forward contract, Global Income Fund and 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.
Global Income Fund or Core Fund may enter into forward foreign currency exchange
contracts in several circumstances. First, when Global Income Fund or Core Fund
enters into a contract for the purchase or sale of a security quoted or
denominated in a foreign currency, or when Global Income Fund or Core Fund
anticipates the receipt in a foreign currency of a dividend or interest payments
on such a security which it holds, Global Income Fund or 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 U.S. dollars,
of the amount of foreign currency involved in the underlying transactions,
Global Income Fund or 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 the Adviser believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar, it may
enter into a forward contract to sell, for a fixed amount of dollars, the amount
of foreign currency approximating the value of some or all of a Fund's
portfolio securities quoted or denominated in such foreign currency. The
precise matching of the forward contract amounts and the value of
B-33
<PAGE>
the securities involved will not generally be possible because the future value
of such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the
contract is entered into and the date it matures. Using forward contracts to
protect the value of a Fund's portfolio securities against a decline in the
value of a currency does not eliminate fluctuations in the underlying prices of
the securities. It simply establishes a rate of exchange which a Fund can
achieve at some future point in time. The precise projection of short-term
currency market movements is not possible, and short-term hedging provides a
means of fixing the dollar value of only a portion of a Fund's foreign assets.
Global Income Fund may engage in cross-hedging by using forward contracts in
one currency to hedge against fluctuations in the value of securities
denominated or quoted in a different currency if the Adviser determines that
there is a pattern of correlation between the two currencies. The Global Income
Fund may also purchase and sell forward contracts to seek to increase total
return when the Adviser anticipates that the foreign currency will appreciate or
depreciate in value, but securities quoted or denominated in that currency do
not present attractive investment opportunities and are not held in the Global
Income Fund's portfolio.
Global Income Fund's and Core Fund's custodian will place cash or liquid,
high-grade debt securities (i.e., securities rated in one of the top three
rating categories by Moody's or Standard & Poor's or, if unrated by such rating
organizations, deemed by the Adviser to be of comparable credit quality) into a
segregated account of the Fund in an amount equal to the value of the Fund's
total assets committed to the consummation of forward foreign currency exchange
contracts requiring the Fund to purchase foreign currencies or in the case of
Global Income Fund, forward contracts entered into to increase total return. If
the value of the securities placed in the segregated account declines,
additional cash or securities will be placed in the account on a daily basis so
that the value of the account will equal the amount of the Fund's commitments
with respect to such contracts. The segregated account will be marked-to-
market on a daily basis. Although the contracts are not presently regulated by
the CFTC, the CFTC may in the future assert authority to regulate these
contracts. In such event, a Fund's ability to utilize forward foreign currency
exchange contracts may be restricted. The Global Income Fund and Core Fund will
not enter into a forward contract with a term of greater than one year.
While Global Income Fund and Core Fund may enter into forward contracts to seek
to reduce currency exchange rate risks, transactions in such contracts involve
certain other risks. Thus, while Global Income Fund and Core Fund may benefit
from such transactions, unanticipated changes in currency prices may result in
a poorer overall performance for a Fund than if it had not engaged in any such
transactions. Moreover, there may be imperfect correlation between a Fund's
portfolio holdings of securities
B-34
<PAGE>
quoted or denominated in a particular currency and forward contracts entered
into by Global Income Fund and Core Fund. Such imperfect correlation may cause
the Fund to sustain losses which will prevent the Fund from achieving a complete
hedge or expose the Fund to risk of foreign exchange loss.
Forward contracts are subject to the risk that the counterparty to such contract
will default on its obligations. Since a forward foreign currency exchange
contract is not guaranteed by an exchange or clearinghouse, a default on the
contract would deprive a Fund of unrealized profits, transaction costs or the
benefits of a currency hedge or force the Fund to cover its purchase or sale
commitments, if any, at the current market price. A Fund will not enter into
such transactions unless the credit quality of the unsecured senior debt or the
claims-paying ability of the counterparty is considered to be investment grade
by the Adviser.
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, Government Income, Short Duration
Government Fund and Global Income Fund may enter into mortgage swaps and Core
Fund and Global Income Fund may also enter into currency swaps. Each Fund may
enter into swap transactions for hedging purposes or to seek to increase total
return, except that the Core Fund will not enter into currency swaps 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, 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
B-35
<PAGE>
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. The net amount of the excess, if any, of a Fund's
obligations over its entitlements with respect to each interest rate or currency
swap will be accrued on a daily basis and an amount of cash or liquid, high
grade debt securities having an aggregate net asset value at least equal to such
accrued excess will be maintained in a segregated account by a Fund's custodian.
In as much as these transactions are entered into for hedging purposes or are
offset by cash or liquid, high grade debt securities maintained in a segregated
account the Funds and the Advisers believe that swaps do not constitute senior
securities under the Act and, accordingly, will not treat them as being subject
to a Fund's borrowing 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 & Poor's or Aa or P-1 or better by
Moody's or their equivalent ratings. If there is a default by the other party
to such a transaction, a Fund will have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms
acting both as principals and as agents utilizing standardized swap
documentation. As a result, the swap market has become relatively liquid in
comparison with the markets for other similar instruments which are traded in
the interbank market. 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 a Fund's limitation on illiquid investments.
The use of interest rate, mortgage and currency swaps, as well as interest rate
caps, floors and collars, is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If the Adviser is incorrect in its forecasts
of market values, interest rates and currency exchange rates, the investment
performance of a fund would be less favorable than it would have been if this
investment technique were not used.
B-36
<PAGE>
OPTIONS ON SECURITIES AND SECURITIES INDICES
WRITING COVERED OPTIONS. Each Fund may write (sell) covered call and put options
- -----------------------
on any securities in which it may invest or on any securities index based on
securities in which it may invest. A Fund may purchase and write such options
on securities that are listed on national domestic securities exchange or
foreign securities exchanges or traded in the over-the-counter market. 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. 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.
All call and put options written by a Fund are covered. A written call option
or put option may be covered by (i) maintaining cash or liquid, high-grade debt
securities, either of which, in the case of Global Income Fund or Core Fund, may
be quoted or denominated in any currency, in a segregated account maintained by
the Fund's custodian with a value at least equal to the Fund's obligation
under the option, (ii) entering into an offsetting forward commitment and/or
(iii) 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.
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."
Each Fund may also write (sell) covered call and put options on any securities
index composed of securities in which it may invest. Options on securities
indices are similar to options on securities, except that the exercise of
securities index options requires cash settlement 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
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<PAGE>
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.
PURCHASING OPTIONS. Each Fund may also purchase put and call options on any
- ------------------
securities in which it may invest or on any securities index based on securities
in which it may invest, and each 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 ("protective puts") 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 on the purchase of a call option 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
either no gain or 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. The purchase
of protective puts is designed to offset or hedge against a decline in the
market value of a Fund's securities. Put options may also be purchased by a Fund
for the purpose of affirmatively benefiting from a decline in the price of
securities which it does not own. A Fund would ordinarily realize a gain if,
during the option period, the value of the underlying securities decreased below
the exercise price sufficiently to cover the premium and transaction costs;
otherwise the Fund would realize either no gain or a loss on the purchase of the
put option. Gains and losses on the purchase of 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. 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
B-38
<PAGE>
the securities market rather than price fluctuations in a single security.
Transactions by a Fund in options on securities and securities indices will be
subject to limitations established by each of the exchanges, boards of trade or
other trading facilities on which such options are traded 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, regardless of whether the
options are written or purchased on the same or different exchanges, boards of
trade or other trading facilities or are held or written in one or more accounts
or through one or more brokers. Thus, the number of options which a Fund may
write or purchase may be affected by options written or purchased by other
investment advisory clients of the Advisers. An exchange, board of trade or
other trading facility may order the liquidation of positions found to be in
excess of these limits, and it may impose certain other sanctions.
WRITING AND PURCHASING CURRENCY CALL AND PUT OPTIONS. Core Fund and Global
- ----------------------------------------------------
Income Fund may write covered put and call options and purchase put and call
options on foreign currencies in an attempt to protect against declines in the
dollar value of portfolio securities and against increases in the dollar cost
of securities to be acquired. Global Income Fund may use options on currency to
cross-hedge, which involves writing or purchasing options on one currency to
seek to hedge against changes in exchange rates for a different currency with a
pattern of correlation. In addition, Global Income Fund may purchase call
options on currency to seek to increase total return when the Adviser
anticipates that the currency will appreciate in value, but the securities
denominated or quoted in that currency do not present attractive investment
opportunities and are not including in Global Income Fund's portfolio.
A call option written by Core Fund and Global Income Fund obligates the Fund to
sell specified currency to the holder of the option at a specified price if the
option is exercised at any time before the expiration date. A put option
written by a Fund obligates the Fund to purchase specified currency from the
option holder at a specified price if the option is exercised at any time
before the expiration date. The writing of currency options involves a risk
that a Fund will, upon exercise of the option, be required to sell currency
subject to a call at a price that is less than the currency's market value or
be required to purchase currency subject to a put at a price that exceeds the
currency's market value.
A Fund may terminate its obligations under a written call or put option by
purchasing an option identical to the one written. Such purchases are referred
to as "closing purchase transactions." A Fund would also be able to enter into
closing sale transactions in order to realize gains or minimize losses on
purchased options.
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<PAGE>
Core Fund and Global Income Fund would normally purchase call options in
anticipation of an increase in the dollar value of currency in which securities
to be acquired by the Fund are denominated or quoted. The purchase of a call
option would entitle a Fund, in return for the premium paid, to purchase
specified currency at a specified price during the option period. A Fund
would ordinarily realize a gain if, during the option period, the value of such
currency exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise the Fund would realize either no gain or a loss on
the purchase of the call option.
Core Fund or Global Income 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 and Global Income Fund, in exchange for
the premium paid, to sell specified currency at a specified price during the
option period. The purchase of protective puts is designed merely to offset or
hedge against a decline in the dollar value of a Fund's portfolio securities due
to currency exchange rate fluctuations. A Fund would ordinarily realize a gain
if, during the option period, the value of the underlying currency decreased
below the exercise price sufficiently to more than cover the premium and
transaction costs; otherwise the Fund would realize either no gain or a loss on
the purchase of the put option. Gains and losses on the purchase of protective
put options would tend to be offset by countervailing changes in the value of
underlying currency.
In addition to using options for the hedging purposes described above, Global
Income Fund may use options on currency to seek to increase total return. Global
Income Fund may write (sell) covered put and call options on any currency in an
attempt to realize greater income than would be realized on portfolio securities
transactions alone. However, in writing covered call options for additional
income, Global Income Fund may forego the opportunity to profit from an increase
in the market value of the underlying currency. Also, when writing put options,
Global Income Fund accepts, in return for the option premium, the risk that it
may be required to purchase the underlying currency at a price in excess of the
currency's market value at the time of purchase.
Global Income Fund would normally purchase call options to seek to increase
total return in anticipation of an increase in the market value of a currency.
Global Income 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 Global Income Fund would realize either
no gain or a loss on the purchase of the call option. Put options may be
purchased by the Global Income Fund for the purpose of benefiting from a decline
in the value of currencies which it does not own. Global Income 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
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<PAGE>
the premium and transaction costs. Otherwise Global Income Fund would
realize either no gain or a loss on the purchase of the put option.
YIELD CURVE OPTIONS. Each Fund may enter into options on the yield "spread,"
-------------------
or yield differential between two securities. Such options 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.
Yield curve options may be used for the same purposes as other options on
securities. For example, a 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. A Fund may also purchase or write
yield curve options for other than hedging purpose (i.e., in an attempt to
increase its current income) if, in the judgment of the Adviser, the 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, or if the spread moves in a direction or
to an extent which was not anticipated.
Yield curve options written by a Fund must be "covered." A call (or put) option
is covered if the Fund holds another call (or put) option on the spread between
the same two securities and maintains in a segregated account with its custodian
cash or liquid, high-grade debt securities sufficient to cover the Fund's net
liability under the two options. Therefore, a Fund's liability for such a
covered option is generally limited to the difference between the amount of the
Fund's liability under the option written by the Fund less the value of the
option held by the Fund. Yield curve options may also be covered in such other
manner as may be in accordance with the requirements of the counterparty with
which the option is traded and applicable laws and regulations. Yield curve
options are traded over-the-counter, and because they have been only recently
introduced, established trading markets for these options have not yet
developed.
RISKS ASSOCIATED WITH OPTIONS TRANSACTIONS. There is no assurance that a liquid
- ------------------------------------------
secondary market on a domestic or foreign 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
currencies or dispose of assets held in a segregated
B-41
<PAGE>
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 or currencies.
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.
A Fund's 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.
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
To seek to increase total return or hedge against changes in interest rates or
securities prices or, in the case of Core Fund (but only for hedging purposes)
and Global Income Fund, currency exchange rates, each Fund may purchase and sell
various kinds of futures contracts, and purchase and write call and put options
on any of such futures contracts. Each Fund may also enter into closing
purchase and sale transactions with respect to any of such contracts and
options. The Futures contracts may be based on
B-42
<PAGE>
various securities (such as U.S. Government securities), securities indices,
foreign currencies in the case of Global Income Fund and Core Fund, and any
other financial instruments and indices. A Fund will engage in futures and
related options transaction only for bona fide hedging purposes as defined below
or for purposes of seeking to increase total return to the extent permitted by
regulations of the CFTC. All futures contracts entered into by a Fund are trade
on U.S. exchanges or boards of trade that are licensed and regulated by the CFTC
or on foreign exchanges.
FUTURES CONTRACTS. A futures contract may generally be described as an
- -----------------
agreement between two parties to buy and sell particular financial instruments
or currencies 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 and Global Income Fund may each
seek to offset anticipated changes in the value of a currency in which its
portfolio securities, or securities that it intends to purchase, are quoted or
denominated by purchasing and selling futures contracts on such currencies.
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 or currency will usually be
liquidated in this manner, a Fund may instead make, or take, delivery of the
underlying securities or currency whenever it appears economically advantageous
to do so. A clearing corporation associated with the exchange on which futures
on securities or currency 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, or
rate of return on portfolio securities or securities that a Fund proposes to
acquire or the exchange rate of currencies in which portfolio securities are
quoted or denominated. A Fund may, for example, take a "short" position in the
futures market by selling futures contracts in an attempt to hedge against an
anticipated rise in interest rates or a decline in market prices or foreign
currency rates that would adversely affect the dollar 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.
B-43
<PAGE>
Similarly, Core Fund and Global Income Fund may each sell futures contracts on
any currencies in which its portfolio securities are quoted or 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 Advisers 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 portfolio securities. 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 or currency exchange rates then available in the applicable
market to be less favorable than prices that are currently available.
OPTIONS ON FUTURES CONTRACTS. The acquisition of put and call options on
- ----------------------------
futures contracts will give a Fund the right (but not the obligation) for a
specified price to sell or to purchase, respectively, the underlying futures
contract at any time during the option period. As the purchaser of an option on
a futures contract, a Fund obtains the benefit of the futures position if prices
move in a favorable direction but limits its risk of loss in the event of an
unfavorable price movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium which may
partially offset a decline in the value of a Fund's assets. By writing a call
option, a Fund becomes obligated, in exchange for the premium, (upon exercise
of the option) 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 (upon exercise of the option) 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
B-44
<PAGE>
the amount of the premium received. The 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. Each 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 which permit principals of an investment company
registered under the Act to engage in such transactions without registering as
commodity pool operators. 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 (or the currency in which they are quoted or
denominated) that a Fund owns or futures contracts will be purchased to protect
a Fund against an increase in the price of securities (or the currency in which
they are quoted or denominated) it intends to purchase. As evidence of this
hedging intent, each Fund expects that on 75% or more of the occasions on which
it takes a long futures or option position (involving the purchase of futures
contracts), the Fund will have purchased, or will be in the process of
purchasing, equivalent amounts of related securities (or assets denominated in
the related currency) in the cash 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."
B-45
<PAGE>
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating a Fund to purchase securities or currencies, require the Fund to
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,
while a Fund may benefit from the use of futures and options on futures,
unanticipated changes in interest rates or securities prices or currency
exchange rates may result in a poorer overall performance for a Fund than if it
had not entered into any futures contracts or options transactions. In the
event of an imperfect correlation between a futures position and a portfolio
position which is intended to be protected, the desired protection may not be
obtained and a Fund may be exposed to risk of loss. In addition, it is not
possible to hedge fully or protect against currency fluctuations affecting he
value of securities denominated in foreign currencies because the value of
such securities is likely to fluctuate as a result of independent futures not
related to currency fluctuations.
Perfect correlation between a Fund's futures positions and portfolio positions
will be impossible to achieve. There are no futures contracts based upon
individual securities, except certain U.S. Government securities. The only
futures contracts available to hedge the Fund's portfolio are various futures on
U.S. Government securities, securities indices and foreign currencies. In
addition, it is not possible to hedge fully or perfectly against currency
fluctuations affecting the value of securities quoted or denominated in foreign
currencies because the value of such securities is likely to fluctuate as a
result of independent factors not related to currency fluctuations.
MORTGAGE DOLLAR ROLLS. The Taxable Funds may enter into mortgage "dollar
----------------------
rolls" in which a Fund sells securities for delivery in the current month and
simultaneously contracts with the same counterparty to repurchase similar (same
type, coupon and maturity), but not identical securities on a specified future
date. During the roll period, a Fund loses the right to receive principal and
interest paid on the securities sold. However, a Fund would benefit to the
extent of any difference between the 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. Unless such
benefits exceed the income, capital appreciation and gain or loss due to
mortgage prepayments that would have been realized on the securities sold as
part of the mortgage dollar roll, the use of this technique will diminish the
investment performance of a Fund compared with what such performance would have
been without the use of mortgage dollar rolls. All cash proceeds will be
invested in instruments that are permissible investments for the applicable
B-46
<PAGE>
Fund. Each 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 its forward purchase price.
For financial reporting and tax purposes, the Funds treat mortgage dollar rolls
as two separate transactions; one involving the purchase of a security and a
separate transaction involving a sale. The Funds do not currently intend to
enter into mortgage dollar rolls that are accounted for as a financing.
Mortgage dollar rolls involve certain risks including the following: if the
broker-dealer to whom a Fund sells the security becomes insolvent, the Fund's
right to purchase or repurchase the mortgage-related securities subject to the
mortgage dollar roll may be restricted and the instrument which the Fund is
required to repurchase may be worth less than an instrument which the Fund
originally held. Successful use of mortgage dollar rolls will depend upon the
Adviser's ability to manage its interest rate and mortgage prepayments exposure.
For these reasons, there is no assurance that mortgage dollar rolls can be
successfully employed.
CONVERTIBLE SECURITIES. Convertible securities may include corporate notes or
- ----------------------
preferred stock but are ordinarily a long-term debt obligation of the issuer
convertible at a stated exchange rate into common stock of the issuer. As with
all debt securities, the market value of convertible securities tends to decline
as interest rates increase and, conversely, to increase as interest rates
decline. Convertible securities generally offer lower interest or dividend
yields than non-convertible securities of similar quality. However, when the
market price of the common stock underlying a convertible security exceeds the
conversion price, the price of the convertible security tends to reflect the
value of the underlying common stock. As the market price of the underlying
common stock declines, the convertible security tends to trade increasingly on
a yield basis, and thus may not depreciate to the same extent as the underlying
common stock. Convertible securities in which the Core Fund invests will be
subject to the same rating criteria as its other investments in fixed income
securities.
LENDING OF PORTFOLIO SECURITIES
Each Fund may lend portfolio securities. Under present regulatory policies,
such loans may be made to institutions, such as brokers or dealers and would be
required to be secured continuously by collateral in cash, cash equivalents,
letters of credit or U.S. Government securities maintained on a current basis
in an amount at least equal to the market value of the securities loaned. Cash
collateral may be invested in cash equivalents. 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
B-47
<PAGE>
the loan in anticipation of an important vote to be taken among holders of the
securities or the giving or withholding of their consent on a material matter
affecting the investment. As with other extensions of credit there are risks of
delay in recovering, or even loss of rights in, the collateral should the
borrower of the securities fail financially. However, the loans 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. (Certain commercial paper issued in reliance on Section 4(2) of the
Securities Act of 1933 is treated like Rule 144A Securities.)
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 or Section 4(2) 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 a Fund 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.
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<PAGE>
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 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 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 three days prior to 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.
OTHER INVESTMENT COMPANIES
Each Fund reserves the right to invest up to 10% of its total assets, calculated
at the time purchase, in the securities of other investment companies, but may
not 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. Pursuant to an exemptive order obtained from the SEC, the
Funds may invest in money market funds for which the Adviser or any of its
affiliates serves as investment adviser. A Fund will indirectly bear its
proportionate share of any management fees and other expenses paid by investment
companies in which it invests in addition to the advisory and administration
fees paid by the Fund. However, to the extent that a Fund invests in a money
market fund for which the Adviser acts as adviser, the advisory and
administration fees payable by the Fund to and Adviser will be reduced by an
amount equal to the Fund's proportionate share of the advisory and
administration fees paid by such money market fund to the Adviser or any of its
affiliates.
B-49
<PAGE>
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, generally for tax purposes, a repurchase agreement
is deemed to be a loan from a Fund to the seller of the security. For other
purposes, it is not clear whether a court would consider the security purchased
by a Fund subject to a repurchase agreement as being owned by the Fund or as
being collateral for a loan by the Fund to the seller. In the event of
commencement of bankruptcy or insolvency proceedings with respect to the seller
of the security before repurchase of the security under a repurchase agreement,
a Fund may encounter delay and incur costs before being able to sell the
security. Such a delay may involve loss of interest or a decline in price of
the security. If the court characterizes the transaction as a loan and a Fund
has not perfected a security interest in the security, 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.
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INVESTMENT IN UNSEASONED COMPANIES
Global Income Fund and Government Income Fund may each invest up to 5% of its
total assets, calculated at the time of purchase, in companies (including
predecessors) which have operated less than three years, excluding issuers whose
debt securities have been rated, at the time of investment, investment grade or
better by at least one nationally recognized statistical rating organization.
The securities of such companies may have limited liquidity, which can result in
their being priced higher or lower than might otherwise be the case. In
addition, investments in unseasoned companies are more speculative and entail
greater risk than do investments in companies with an established operating
record.
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 Tax-Free Fund's and Municipal Income
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 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. With respect to the Tax
Exempt Funds, 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.
AS A MATTER OF FUNDAMENTAL POLICY, 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
B-51
<PAGE>
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.
(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;
B-52
<PAGE>
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 in the securities of other investment companies, provided that the
Fund may make such an investment as part of a merger, consolidation, or
acquisition of assets, and provided further that the Fund may make such an
investment in the open market where no commission or profit to a sponsor or
dealer results from the purchase other than customary brokers' commissions and
then only to the extent permitted by the Act;
(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 total assets of the Fund;
(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;
(e)purchase additional securities which the amount of the Fund's borrowings
exceed 5% of the Fund's net assets; or
(f)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 10% of its
total assets
B-53
<PAGE>
in restricted securities (including those eligible for resale under Rule 144A).
AS A MATTER OF FUNDAMENTAL POLICY, GOVERNMENT INCOME FUND MAY NOT:
(1)Purchase securities of any one issuer, other than obligations issued or
guaranteed by the U.S. government, its agencies, instrumentalities or sponsored
enterprises, 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 or by its agencies,
instrumentalities or sponsored enterprises.
(2)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, 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 securities pending
the anticipated sale of other portfolio securities or assets and (d)
transactions in mortgage dollar rolls, 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, 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, instrumentalities or sponsored
enterprises.
(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.
B-54
<PAGE>
(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 limited partnership
interests, or in oil, gas or mineral interests, although the Fund may purchase
and sell securities that are secured by real estate or interests therein,
securities of real estate investment trusts and Mortgage-Backed 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 Act) except as permitted in Investment Restriction No. (2).
In addition, as non-fundamental policies, the Government Income Fund may not:
(a)invest in the securities of other investment companies, provided that the
Fund may make such an investment as part of a merger, consolidation, or
acquisition of assets, and provided further that the Fund may make such an
investment in the open market where no commission or profit to a sponsor or
dealer results from the purchase other than customary brokers' commissions and
then only to the extent permitted by the Act;
(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)invest more than 5% of the Fund's total assets in (i) securities of any
issuer with a record of less than three years' continuous operation, including
predecessors, except Government Securities and securities guaranteed by any
foreign government or its agencies or instrumentalities;
B-55
<PAGE>
(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;
(e)purchase additional securities while the amount of the Fund's borrowings
exceeds 5% of the Fund's total assets; or
(f)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 10% of its
total assets in restricted securities (including those eligible for resale
under Rule 144A).
AS A MATTER OF FUNDAMENTAL POLICY, SHORT DURATION GOVERNMENT 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
B-56
<PAGE>
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 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
B-57
<PAGE>
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.
(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 Duration Government 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 Duration Government Fund does not
currently intend to purchase or sell interests in oil, gas or other mineral
exploration or development programs.
AS A MATTER OF FUNDAMENTAL POLICY, SHORT DURATION TAX-FREE 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 restriction is not applicable to investments in tax-exempt
securities issued by state and municipal governments and their agencies and
instrumentalities; 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.
The 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. The Fund may so invest in (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
B-58
<PAGE>
(including hotels), steel companies or life care facilities, (b)
Municipal Securities whose issuers are in the same state or (c) industrial
development obligations.
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 of the Fund or to finance failed settlements of
portfolio trades without immediately liquidating portfolio securities or other
assets; and (c) in order to fulfill commitments or plans to purchase additional
securities pending the anticipated sale of other portfolio securities or assets,
but only if after each such borrowing there is asset coverage of at least 300%
as defined in the Act. For purposes of this investment restriction, short
sales, 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
B-59
<PAGE>
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.
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 Tax-Free 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 Tax-
Free 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 in the securities of other investment companies, provided that the
Fund may make such an investment as part of a merger, consolidation, or
acquisition of assets, and provided further that the Fund may make such an
investment in the open market where no commission or profit to a sponsor or
dealer results from the purchase other than customary brokers' commissions and
then only to the extent permitted by the Act.
(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 10% of its
total 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, other than
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<PAGE>
Municipal Securities that have been rated A or better by Moody's or Standard &
Poor's.
For the purpose of applying Short Duration Tax-Free 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. For purposes of the
foregoing limitations, any limitation which involves a maximum percentage shall
not be considered violated unless an excess over the percentage occurs
immediately after, and is caused by, an acquisition or encumbrance of
securities or assets of, or borrowings by, the Fund. With respect to
fundamental investment restriction No. 3, the Fund must maintain asset coverage
of at least 300% (as defined in the Act), inclusive of any amounts borrowed.
AS A MATTER OF FUNDAMENTAL POLICY, MUNICIPAL 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 restriction is not applicable to investments in tax-exempt
securities issued by state and municipal governments and their agencies and
instrumentalities; 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.
The 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. The Fund may so invest in (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)
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Municipal Securities whose issuers are in the same state, or (c) industrial
development obligations.
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 shares of the Fund or to finance failed settlements of
portfolio trades without immediately liquidating portfolio securities or other
assets; and (c) in order to fulfill commitments or plans to purchase additional
securities pending the anticipated sale of other portfolio securities or assets,
but only if after each such borrowing there is asset coverage of at least 300%
as defined in the Act. For purposes of this investment restriction, short
sales, 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 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
B-62
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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 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 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, the Municipal Income 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
that are not readily marketable and restricted securities not eligible for
resale pursuant to Rule 144A under the Securities Act of 1933; or (b) more than
10% of its total assets in restricted securities (including those eligible for
resale under Rule 144A).
(d) Purchase additional securities while the Fund's borrowings exceed 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, other than Municipal Securities that have been rated A or
better by Moody's or Standard & Poor's.
(f) Invest in the securities of other investment companies, provided that the
Fund may make such an investment as part of a merger, consolidation, or
acquisition of assets, and provided further that the Fund may make such an
investment in the open market where no commission or profit to a sponsor or
dealer results from the purchase other than customary brokers' commissions and
then only to the extent permitted by the Act.
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<PAGE>
For the purpose of applying the Fund's investment restrictions, the
identification of the issuer of a Municipal Security that is not a general
obligation 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. For purposes of the foregoing
limitations, any limitation which involves a maximum percentage shall not be
considered violated unless an excess over the percentage occurs immediately
after, and is caused by, an acquisition or encumbrance of securities or assets
of, or borrowings by, the Fund. With respect to fundamental investment
restriction No. 3, the Fund must maintain asset coverage of at least 300% (as
defined in the Act), inclusive of any amounts borrowed.
AS A MATTER OF FUNDAMENTAL POLICY, 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
transactions shall not constitute borrowing.
B-64
<PAGE>
4.Pledge, mortgage or hypothecate its assets, except to the extent necessary to
secure permitted borrowings and to the extent related to the deposit of assets
in escrow in connection with the writing of covered put and call options and the
purchase of securities on a forward commitment or delayed-delivery basis and
collateral and initial or variation margin arrangements with respect to 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 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:
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<PAGE>
(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 10% of its
total assets in restricted securities (including those eligible for resale
pursuant to Rule 144A).
(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.
(f)Invest in the securities of other investment companies, provided that the
Fund may make such an investment as part of a merger, consolidation, or
acquisition of assets, and provided further that the Fund may make such an
investment in the open market where no commission or profit to a sponsor or
dealer results from the purchase other than customary brokers' commissions and
then only to the extent permitted by the Act.
AS A MATTER OF FUNDAMENTAL POLICY, GLOBAL INCOME FUND MAY NOT:
(1) Borrow money, except from banks on a temporary basis, provided that the Fund
is required to maintain asset coverage of at least 300% for all borrowings.
For purposes of this investment restriction, short sales, transactions in
currency, forward contracts, options, futures contracts and options on futures
contracts, and forward commitment transactions shall not constitute borrowing.
(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 in obligations of the
U.S. Government or any of its agencies or instrumentalities.
(3) Pledge, mortgage or hypothecate its assets, except to the extent necessary
to secure permitted borrowings and to the extent
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<PAGE>
related to the segregation of assets in connection with the writing of covered
put and call options and the purchase of securities or currencies on a forward
commitment or delayed-delivery basis and collateral and initial or variation
margin arrangements with respect to forward contracts, options, futures
contracts and options on futures contracts.
(4) Purchase securities on margin, except for such short-term credits as are
necessary for the clearance of transactions, but the Fund may make margin
deposits in connection with transactions in currencies, options, futures and
options on futures.
(5) Make short sales of securities, except short sales against-the-box, or
maintain a short position. (The Fund does not currently intend to make short
sales against-the-box.)
(6) 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.
(7) 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.
(8) Invest in commodities, except that the Fund may (a) purchase and sell
futures contracts, including those relating to securities, currencies and
indices, and options on any such futures contracts or currencies, and (b)
purchase and sell currencies or securities on a forward commitment or delayed-
delivery basis.
(9) Lend any funds or other assets except through the purchase of all or a
portion of an issue of securities or obligations of the type in which it may
invest; however, the Fund may lend portfolio securities in an amount not to
exceed 33-1/3% of the value of its total assets.
(10) Issue any senior security (as such term is defined in Section 18(f) of the
Act), except as permitted in Investment Restriction Nos. (1), (4), (5) and (9).
In addition, as non-fundamental policies, Global Income Fund may not:
(a) Invest in the securities of other investment companies, provided that the
Fund may make such an investment as part of a merger, consolidation, or
acquisition of assets, and provided further that the Fund may make such an
investment in the open market where no commission or profit to a sponsor or
dealer results from the purchase other than customary brokers' commissions and
then only to the extent permitted by the Act.
B-67
<PAGE>
(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) 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 Securities Act of 1933; or (b) more than
10% of its total assets in restricted securities (including those eligible for
resale under Rule 144A).
(d)Purchase additional securities while the amount of the Fund's borrowings
exceeds 5% of the Fund's net 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 73, 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 Corporation.
Ashok N. Bakhru, Age 53, 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 40, One New York Plaza, New York, New York 10004. President
---------
and Trustee. Director, Mutual Funds Group of GSAM since September 1992; Vice
- -----------
President and Senior Portfolio Manager, GSAM from June 1988 to Present.
David B. Ford,* Age 50, 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.
B-68
<PAGE>
Alan A. Shuch,* Age 46, 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; Limited Partner, Goldman Sachs since December
1994.
Jackson W. Smart, Jr., Age 65, 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; Director,
Federal Express Corporation; and North American Private Equity Group (a
venture capital fund).
William H. Springer, Age 66, 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, American
Information Technologies Corporation; Director, Walgreen Co. (a retail
drugstore business); and Baker, Fentress & Co. (a closed-ended non-diversified
management investment company).
Richard P. Strubel, Age 56, 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) January 1984 to October 1994;
Pauline Taylor,* Age 49, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs since June 1992; Consultant since
- ---------
1989 to June 1992.
Nancy L. Mucker,* Age 46, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs; Co-Manager, Shareholder Services for
- ---------
GSAM Funds Group.
John W. Mosior,* Age 57, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs; Co-Manager, Shareholder Services for
- ---------
GSAM Funds Group.
Scott M. Gilman,* Age 36, 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.
Michael J. Richman,* Age 35, 85 Broad Street, New York, New York 10004.
Secretary. Vice President and Assistant General Counsel to the Funds Group,
- ---------
GSAM since February 1994; Partner, Hale and Dorr since September 1991 to June
1992; Attorney-at-Law, Gaston & Snow since September 1985 to September 1991.
Howard B. Surloff,* Age 30, 85 Broad Street, New York, New York 10004. Assistant
---------
Secretary. Vice President and Assistant General
- ---------
B-69
<PAGE>
Counsel, Goldman Sachs since November 1993 and May 1994, respectively; Counsel
to the Funds Group, GSAM since November 1993; Associate of Shereff, Friedman,
Hoffman & Goodman (prior thereto).
Steven E. Hartstein*, Age 32, 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).
Deborah A. Robinson*, Age 24, 85 Broad Street, New York, New York 10004.
Assistant Secretary. Administrative Assistant, Goldman Sachs since January
- -------------------
1994. Formerly at Cleary, Gottlieb, Stein and Hamilton.
Kaysie Uniacke*, Age 34, One New York Plaza, New York, New York 10004.
Assistant Secretary. Vice President and Portfolio Manager, GSAM 1988 to
- -------------------
Present.
Elizabeth Alexander*, Age 26, One New York Plaza, New York, New York 10004.
Assistant Secretary. Junior Portfolio Manager, 1995 to Present. Funds Trading
- -------------------
Assistant, GSAM 1993 - 1995. Formerly, Compliance Analyst, Prudential
Insurance, 1991 thru 1993.
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 December 31, 1995,
the Trustees and officers as a group owned less than 1% of the outstanding
shares of beneficial interest of each Fund.
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, 1995:
<TABLE>
<CAPTION>
Total
Pension or Compensation
Aggregate Retirement from Goldman
Compensation Benefits Accrued Sachs Mutual
from the as of Part of Funds including
Trust Trust's Expenses the Trust)*
------------ ---------------- ---------------
<S> <C> <C> <C>
Name of Trustees
Paul C. Nagel, Jr. $17,596 $0 $101,000
Ashok N. Bakhru $11,081 $0 $ 61,000
Marcia L. Beck $ 0 $0 $ 0
David B. Ford $ 0 $0 $ 0
Alan A. Shuch $ 0 $0 $ 0
Jackson W. Smart $11,081 $0 $ 61,000
William H. Springer $11,081 $0 $ 61,000
Richard P. Strubel $11,081 $0 $ 61,000
</TABLE>
* The Goldman Sachs Mutual Funds consisted of 29 mutual funds, including the
seven series of the Trust, on October 31, 1995.
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<PAGE>
INVESTMENT ADVISERS
- -------------------
GSAM, One New York Plaza, New York, New York 10004, a separate operating
division of Goldman Sachs, serves as the investment adviser to Municipal Income
Fund, Government Income Fund, Global Income Fund, Short Duration Tax-Free Fund
and Core Fund pursuant to separate investment advisory agreements. FMLP, One New
York Plaza, New York, New York 10004, serves as the investment adviser to
Adjustable Rate Fund and Short Duration Government Fund pursuant to separate
investment advisory agreements. FMLP, a Delaware limited partnership, is an
affiliate of Goldman Sachs. GSAMI, 140 Fleet Street, London EC4A 2BJ, England,
acts as the Global Income Fund's subadviser. As a company with unlimited
liability under the laws of England, GSAMI is regulated by the Investment
Management Regulatory Organization Limited, a United Kingdom self-regulatory
organization in the conduct of its investment advisory business. GSAM also
serves as administrator to Municipal Income Fund, Government Income Fund and
Global Income Fund. See "MANAGEMENT" in the Fund's Prospectus for a description
of the applicable Adviser's duties as investment adviser or subadviser.
Founded in 1869, Goldman Sachs is among the oldest and largest investment
banking firms in the United States. Goldman Sachs is a leader in developing
portfolio strategies and in many fields of investing and financing,
participating in financial markets worldwide and serving individuals,
institutions, corporations and governments. Goldman Sachs is 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 $160 million,
Goldman Sachs' Investment Research Department covers approximately 1,700
companies, including approximately 1,000 U.S. corporations in 60 industries.
The in-depth information and analyses generated by Goldman Sachs' research
analysts are available to the Advisers.
For more than a decade, Goldman Sachs has been among the top-ranked firms in
Institutional Investor's annual "All-America Research Team" survey. In
addition, many of Goldman Sachs' economists, securities analysts, portfolio
strategists and credit analysts have consistently been highly ranked in
respected industry surveys conducted in the U.S. and abroad. Goldman Sachs is
also
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<PAGE>
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
relative to its interest risk.
In planning the Tax Exempt Funds' strategies, the 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 the Tax Exempt Funds'
yields by fine-tuning the portfolio, using quantitative tools designed for
municipal portfolio management. The Adviser, which managed approximately $3
billion in tax-free securities in 1995, has assembled an experienced team of
professionals for selection of the Tax Exempt Funds' portfolio securities. The
Adviser manages money for some of the world's largest institutional investors.
In structuring Adjustable Rate Fund's and Short Duration Government 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 in CMO
floating rate tranches and interest only stripped Mortgage-Backed Securities).
With respect to Adjustable Rate Fund, Government Income Fund, Short Duration
Government 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
B-72
<PAGE>
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 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, Government Income
Fund, Short Duration Government 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
B-73
<PAGE>
customers. Use of these services by the Advisers with respect to a Fund does
not preclude Goldman Sachs from providing these services to third parties or
using such services as a basis for trading for its own account or the account
of others.
The fixed income research capabilities of Goldman Sachs are available to the
Advisers include the Goldman Sachs Fixed Income Research Department and the
Credit Department. The Fixed Income Research Department monitors developments
in U.S. and foreign fixed income markets, assesses the outlooks for various
sectors of the markets and provides relative value comparisons, as well as
analyzes trading opportunities within and across market sectors. The Fixed
Income Research Department is at the forefront in developing and using
computer-based tools for analyzing fixed income securities and markets,
developing new fixed income products and structuring portfolio strategies for
investment policy and tactical asset allocation decisions. The Credit
Department tracks specific governments, regions and industries and from time to
time may review the credit quality of a Fund's investments.
In addition to fixed income research and credit research, the Advisers in
managing Global Income Fund are supported by Goldman Sachs' economics research.
The Economics Research Department, based in London, conducts economic, financial
and currency markets research which analyzes economic trends and interest and
exchange rate movements worldwide. The Economics Research Department tracks
factors such as inflation and money supply figures, balance of trade figures,
economic growth, commodity prices, monetary and fiscal policies, and political
events that can influence interest rates and currency trends. The success of
Goldman Sachs' international research team has brought wide recognition to its
members. The team has earned top rankings in the annual "Extel Financial
Survey" of U.K. investment managers in the following categories: U.K. Economy
1989-1995; International Economies 1986, 1988-1995; International Government
Bond Market 1993-1995; and Currency Movements 1986-1993.
In allocating assets in the Global Income Fund's portfolio among currencies,
the Advisers will have access to the Global Asset Allocation Model. The model
is based on the observation that the prices of all financial assets, including
foreign currencies, will adjust until investors globally are comfortable
holding the pool of outstanding assets. Using the model, the Advisers will
estimate the total returns from each currency sector which are consistent with
the average investor holding a portfolio equal to the market capitalization of
the financial assets among those currency sectors. These estimated equilibrium
returns are then combined with Goldman Sachs' research professionals'
expectations to produce an optimal currency and asset allocation for the level
of risk suitable for the Fund's investment objective and criteria.
Each Fund's advisory agreement, and in the case of Global Income Fund, the
Subadvisory 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
B-74
<PAGE>
agreements or "interested persons" (as such term is defined in the Act) of any
party thereto (the "non-interested Trustees"), on April 26, 1995. The
applicable Fund's Advisory Agreement including Global Income Fund's Subadvisory
Agreement was approved by the shareholders of Adjustable Rate Fund on October
30, 1991, the shareholders of Short Duration Government Fund on March 27, 1989,
the shareholders of Global Income Fund on December 5, 1991, the sole initial
shareholder of Short Duration Tax-Free Fund on September 25, 1992, the sole
initial shareholder of Government Income Fund on January 30, 1993, the sole
initial shareholder of Municipal Income Fund on July 16, 1993 and the sole
initial shareholder of Core Fund on October 29, 1993. Each Advisory Agreement
will remain in effect until June 30, 1996 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.
Each Advisory Agreement will terminate automatically if assigned (as defined in
the Act). Each Advisory Agreement is also terminable at any time without
penalty by the Trustees of the Trust or by vote of a majority of the outstanding
voting securities of a Fund on 60 days written notice to the applicable Adviser
or by the Adviser in 60 days written notice of the Trust.
The Advisory Agreements provide that GSAM, FMLP and GSAMI, in their capacity as
advisers and subadviser, respectively, 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, the Adviser is entitled to
receive the fee set forth below and the Adviser is currently limiting the fee to
the rate set forth below:
Contractual Current
Rate Rate
Adjustable Rate Fund 0.40% 0.40%
Short Duration Government Fund 0.50% 0.40%
Government Income Fund 0.50% 0.25%
Short Duration Tax-Free Fund 0.40% 0.40%
Municipal Income Fund 0.40% 0.40%
Core Fund 0.40% 0.40%
Global Income Fund
Advisory 0.25% 0.12%
Subadvisory 0.50% 0.32%
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. See "Expenses" for discussion of Global Income Fund's
other expense limitations.
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<PAGE>
For the fiscal years ended October 31, 1995, 1994 and 1993, the amounts of the
investment advisory fees incurred by each Fund then in existence were as
follows:
1995 1994 1993
---- ---- ----
Adjustable Rate Fund $2,947,492 $6,798,185 $9,498,008
Short Duration Government 517,091 1,063,867 1,311,347
Fund/(1)/
Short Duration Tax-Free Fund/(2)/ 260,970 468,868 243,069
Core Fund/(3)/ 137,158 56,255 n/a
Global Income Fund/(4)/ 706,460 1,518,814 1,553,394
Government Income Fund/(5)/ 44,037 0 0
Municipal Income Fund/(6)/ 154,707 35,494 0
_________________________
/(1)/Had expense limitations not been in effect, Short Duration Government Fund
would have paid advisory fees of $646,364, $1,329,834 and $1,639,184,
respectively, for such periods.
/(2)/Short Duration Tax-Free Fund commenced operations October 1, 1992. Had
expense limitations not been in effect, Short Duration Tax-Free Fund would
have paid advisory fees of $272,283, for the period ended October 31, 1993.
/(3)/Core Fund commenced operations January 5, 1994.
/(4)/For the same periods, Global Income Fund paid GSAMI Subadvisory fees of
$1,412,921, $3,037,627 and $3,106,787, respectively, for such periods. If
expense limitations had not been in effect, Global Income Fund would have
paid advisory and subadvisory fees of $789,127 and $1,578,254,
respectively, for the period ended October 31, 1995.
/(5)/Government Income Fund commenced operations February 10, 1993. Had expense
limitations not been in effect, Government Income Fund would have paid
advisory fees of $101,737, $65,604 and $28,306, respectively, for such
periods.
/(6)/Municipal Income Fund commenced operations July 20, 1993. Had expense
limitations not been in effect, Municipal Income Fund would have paid
advisory fees of $200,207, $174,161 and $23,115, respectively, for such
periods.
Each Adviser performs administrative services for the applicable Funds under the
Advisory Agreements, except in the case of Global Income Fund, Government Income
Fund and Municipal Income Fund where GSAM performs administrative services under
a separate Administration Agreement. Such administrative services 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
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<PAGE>
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.
For the service provided to these Funds under their respective administration
agreement, the Fund pays GSAM a monthly fee equal to 0.15% of 1% of such Fund's
average daily net assets on an annual basis. GSAM is currently waiving its
entire administration fee with respect to Government Income Fund. Although it
has no current intentions to do so, GSAM may modify or discontinue such
agreement at its discretion at any time.
For the fiscal years ended October 31, 1995, 1994 and 1993, the amounts of the
administration fees incurred by the Funds then in existence were as follows:
1995 1994 1993
---- ---- ----
Municipal Income Fund/(1)/ 75,077 55,277 0
Government Income Fund/(2)/ 0 0 0
Global Income Fund 473,476 911,288 932,036
_____________________
/(1)/For the fiscal year ended October 31, 1994, GSAM voluntarily agreed not to
impose a portion of its administration fee amounting to and $10,229. For
the period for July 20, 1993, (commencement of operations) through October
31, 1993, GSAM voluntarily agreed not to impose its administration fee,
which would have amounted to $8,668 for such period.
/(2)/For the fiscal years ended October 31, 1995, October 31, 1994 and for the
period February 10, 1993 (commencement of operations) through October 31,
1993, GSAM voluntarily agreed not to impose its administration fees, which
would have amounted to $30,521, $19,681 and $8,492, respectively, for such
periods.
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, Goldman Sachs International ("GSI") and J. Aron a
& Co. ("ARON") have proprietary interests in, and may manage or advise with
respect to, accounts or funds (including separate accounts and other funds and
collective investment vehicles) which have investment objectives similar to
those of the Funds and/or which engage in transactions in the same types of
securities, currencies and instruments as the Funds. Goldman Sachs and its
affiliates are major participants in the global currency, equities, swap and
fixed income markets, in each case on a proprietary basis and for the accounts
of customers. As such, Goldman Sachs and its affiliates are actively engaged in
transactions in the same securities, currencies, and instruments in which the
Funds invest. Such activities could affect the prices and availability of the
securities, currencies, and instruments in which the Funds will invest, which
could have an adverse impact on 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 of such entitles to be equitable. In some cases, this system
may adversely affect the size or the price of the assets purchased or sold for
the Funds.
From time to time, the Funds' activities may be restricted because of regulatory
restrictions applicable to Goldman Sachs and its affiliates, and/or their
internal policies designed to comply with such restrictions. As a result, there
may be periods, for example, when the Advisers, and/or their affiliates will not
initiate or recommend certain types of transactions in certain securities or
instruments with respect to which, or in securities of issuers for 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, ARON 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 and Subadvisers 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
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<PAGE>
accounts could conflict with the transactions and strategies employed by the
Advisers and Subadviser in managing the Funds.
The results of each Fund's investment activities may differ significantly from
the results achieved by the Advisers and their affiliates for their proprietary
accounts or accounts (including investment companies or collective investment
vehicles) managed or advised by them. It is possible that Goldman Sachs and its
affiliates and such other accounts will achieve investment results which are
substantially more or less favorable than the results achieved by a Fund.
Moreover, it is possible that a Fund will sustain losses during periods in
which Goldman Sachs and its affiliates achieve significant profits on their
trading for proprietary or other accounts. The opposite result is also
possible.
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,
currencies 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, J. ARON and/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.
The Advisers may enter into transactions and invest in instruments and, in the
case of Global Income Fund and Core Fund, currencies 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 currencies 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. The Funds will deal with Goldman Sachs and its affiliates
on an arm's-length basis.
B-79
<PAGE>
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.
DISTRIBUTOR AND TRANSFER AGENT
- ------------------------------
Goldman Sachs serves as the exclusive distributor of shares of the Funds
pursuant to a "best efforts" arrangement as provided by a distribution
agreement with the Trust dated February 1, 1993, as amended as of January 30,
1996. 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 has entered into sales agreements with certain investment dealers
and financial service firms (the "Authorized Dealers") to solicit
subscriptions for Class A and Class B Shares of each of the Funds that offer
such classes of shares. Goldman Sachs received a portion of the sales load
imposed on the sale, in the case of Class A Shares, or redemption in the case
of Class B Shares, of such Fund shares. No Class B Shares were outstanding
during the fiscal years ended October 31, 1993, 1994 and 1995. Goldman Sachs
retained the following commissions on sales of Class A shares during the
following periods:
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<PAGE>
1995 1994 1993
---- ---- ----
Adjustable Rate Fund*** $40,000 n/a n/a
Municipal Income Fund 48,000 76,000 12,000*
Government Income Fund 22,000 5,000 7,000**
Global Income Fund 15,000 350,000 922,000
_____________________
* For the period July 20, 1993 (commencement of operations) through October
31, 1993
** For the period February 10, 1993 (commencement of operations) through
October 31, 1993.
*** Prior to May 15, 1995 Adjustable Rate Fund did not offer Class A Shares.
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, 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 from
the Short Duration Government Fund, Short Duration Tax-Free Fund and Core Income
Fund equal to (i) 0.04 of 1% (on an annualized basis) of the average daily net
assets attributable to the applicable class of the Fund; (ii) from the
Government Income, Global Income and Municipal Income Funds with respect to
Class A and Class B shares, $12,000 plus $7.50 per account, together with out-
of-pocket and transactions-related expenses (including those out-of-pocket
expenses payable to servicing agents; and (ii) from the Adjustable Rate Fund
equal to each class proportionate share of the total transfer agency fees borne
by the Fund, which are equal to $12,000 per year plus $7.50 per account,
together with out-of-pocket expenses (including those out-of-pocket expenses
payable to servicing agents) applicable to Class A shares and 0.04% of the
average daily net assets of the other classes of Adjustable Rate Government
Fund. Goldman Sachs is not entitled to receive a fee from the Institutional
Class of shares of Global Income Fund.
B-81
<PAGE>
For the fiscal years ended October 31, 1995, 1994 and 1993 the amounts of
transfer agency fees incurred by each Fund then in existence were as follows:
1995 1994 1993
---- ---- ----
Adjustable Rate Fund $306,662 $679,819 $949,645
Short Duration Government Fund 0 0 0
Short Duration Tax-Free Fund 26,098 46,887 27,248
Core Fund/(1)/ 13,716 5,637 n/a
Global Income Fund 106,764 132,123 127,834
Municipal Income Fund/(2)/ 63,695 70,811 17,500
Government Income Fund/(3)/ 94,095 57,960 44,012
________________________
/(1)/ Core Fund commenced operations on January 5, 1994.
/(2)/ Municipal Income Fund commenced operations on July 20, 1993.
/(3)/ Government Income Fund commenced operations on February 10, 1993.
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" the Trust, on behalf
of each Fund, is responsible for the payment of each Fund's respective expenses.
The expenses borne by the outstanding classes of each Fund include, without
limitation, the fees payable to the Adviser 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 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, fees under any
distribution, authorized dealer service, administration or service plans
applicable to a particular class, any compensation and expenses of its "non-
interested" Trustees and extraordinary expenses, if any, incurred by the Trust.
Except for fees under any distribution, authorized dealer service,
administration or service plans applicable to a particular class and transfer
agency fees all Fund expenses are borne on a non-class specific basis.
B-82
<PAGE>
The Advisers voluntarily have agreed to reduce or otherwise limit certain Other
Expenses (excluding transfer agency fees (except in the case of Global Income
Fund), advisory, subadvisory and administration fees, fees payable under
administration, distribution, service and authorized dealer service plans,
taxes, interest, brokerage fees and litigation, indemnification and other
extraordinary expenses) to the following percentage of each Fund's average daily
net assets:
Short Duration Government Fund 0.05%
Adjustable Rate Fund 0.05%
Municipal Income Fund 0.05%
Government Income Fund 0.00%
Short Duration Tax-Free Fund 0.05%
Core Fund 0.05%
Global Income Fund 0.06%
Such reductions or limits are calculated monthly on a cumulative basis.
Although the Advisers have no current intention of modifying or discontinuing
such expense limitation or the limitations on the advisory or subadvisory fees,
described above under "Advisory and Administrative Services -- Investment
Advisers and Administrator," each may do so in the future at its discretion.
For the fiscal year ended October 31, 1995, October 31, 1994 and October 31,
1993, Other Expenses of each Fund were reduced by the Advisers in the following
amounts:
1995 1994 1993
---- ---- ----
Adjustable Rate Fund 551,405 442,880 731,102
Short Duration
Government Fund 219,994 115,389 139,186
Short Duration
Tax-Free Fund 213,139 192,696 412,548
Core Fund* 176,469 141,815 n/a
Municipal Income Fund** 196,265 198,806 91,662
Government Income Fund*** 242,036 224,285 161,754
Global Income Fund**** 70,195 0 0
______________________
* Core Fund commenced operations on January 5, 1994.
** Municipal Income Fund commenced operations on July 20, 1993.
*** Government Income Fund commenced operations on February 10, 1993.
**** For the fiscal years ended October 31, 1994 and October 31, 1993, there
were no expense limitations.
As stated in the Prospectuses, each Fund is responsible for the payment of all
expenses other than those assumed by its Adviser or Administrator. 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
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<PAGE>
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.
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 the Advisers 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 in foreign countries and to hold cash and currencies for
the Trust.
INDEPENDENT PUBLIC ACCOUNTANTS
- ------------------------------
Arthur Andersen LLP, independent public accountants, One International Place,
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 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 certain
foreign countries, debt securities in which the Global Income Fund and Core Fund
may invest are traded on exchanges at fixed commission rates. In connection
with portfolio transactions, the Advisory and Subadvisory 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), a Fund, to the extent permitted by
applicable laws and regulations, may aggregate the securities to be sold or
purchased for the Fund
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<PAGE>
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 the applicable 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 and Subadvisory 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. The fees received under
the Advisory and Subadvisory Agreement are not reduced by reason of the Advisor
or Subadviser receiving such brokerage and research services.
For the fiscal years ended October 31, 1995, 1994 and 1993, the Funds then in
existence paid no brokerage commissions.
During the fiscal year ended October 31, 1995, the Funds acquired and sold
securities of their regular broker-dealers: Chemcial Securities, Lehman
Brothers, Inc., Salomon Brothers, Inc., Merrill Lynch, Robert W. Baird, Daiwa
Securities, J.P. Morgan & Co., Inc., Donaldson, Lufkin, Jenrette, Nomura
Securities and Morgan Stanley & Co.
At October 31, 1995, Short Duration Tax-Free Fund, Global Income Fund and
Municipal Income Fund held no securities of their regular broker-dealers. As of
the same date, Short Duration Government Fund, Adjustable Rate Fund, Government
Income 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 Duration Government Fund: Lehman Brothers,
Inc. ($269) and Salomon Brothers, Inc. ($231); Adjustable Rate Fund: Lehman
Brothers, Inc. ($8602) and Salomon Brothers, Inc. ($7398); Government Income
Fund: Lehman Brothers, Inc. ($1559) and Salomon Brothers, Inc. ($1341); Core
Fund: Lehman Brothers, Inc. ($3011) and Salomon Brothers, Inc. ($2589).
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 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
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<PAGE>
shares of the Funds. 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: (i) the
issuance of three classes of shares of Short Duration Government Fund, Short
Duration Tax-Free Fund and Core Fund: Institutional Shares, Administration
Shares and Service Shares; (ii) the issuance of four classes of shares of
Adjustable Rate Fund: Institutional Shares, Administration Shares, Service
Shares and Class A Shares; (iii) the issuance of four classes of shares of
Global Income Fund: Institutional Shares, Service Shares, Class A Shares and
Class B Shares; and (iv) the issuance of two classes of Municipal Income Fund
and Government Income Fund: Class A Shares and Class B Shares. As of October 31,
1995, no Service Shares of the Adjustable Rate Fund were outstanding; no Service
Shares of Short Duration Government Fund were outstanding no Administration or
Service Shares of Core Fund were outstanding; no Service Shares or Class B
Shares of Global Income Fund were outstanding; and no Class B shares of
Municipal Income Fund or Government Income Fund were outstanding.
Each Institutional Share, Administration Share, Service Share, Class A Share and
Class B Share of a Fund represents an equal proportionate interest in the assets
belonging to the Fund. All Fund expenses are allocated among classes based on a
percentage of a Fund's aggregate average net assets, except that transfer agency
fees and fees under distribution, authorized dealer service, administration and
service plans 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
and assisting customers with investment procedures. Service Shares bear the
cost of service fees at the annual rate of up to 0.50% of the average daily net
assets of such Service Shares. Institutions
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<PAGE>
that provide services to holders of Administration Shares or Service Shares are
referred to in this Additional Statement as "Service Organizations".
Class A Shares are sold, with an initial sales charge of up to 1.50%, in the
case of Adjustable Rate Fund, and 4.50%, in the case of Municipal Income Fund,
Government Income Fund and Global Income Fund, 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 the Funds bear the cost of distribution (Rule 12b-1) fees at
the aggregate rate of up to 0.25% of the average daily net assets of such Class
A Shares. Class A Shares also bear the cost of an Authorized Dealer Service
Plan at an annual rate of up to 0.25% of average daily net assets attributable
to Class A Shares.
Class B Shares of the Funds are sold subject to a contingent deferred sales
charge of up to 5.0% through brokers and dealers who are members of the National
Association of Securities Dealers Inc. and certain other financial services
firms that have sales arrangements with Goldman Sachs. Class B shares bear the
cost of distribution (Rule 12b-1) fees at the aggregate rate of up to 0.75% of
the average daily net assets attributable to Class B shares. Class B shares
also bear the cost of an Authorized Dealer Service Plan at an annual rate of up
to 0.25% of the average daily net assets attributable to Class B shares.
It is possible that an institution or its affiliate may offer different classes
of shares (i.e., Institutional, Administration, Service, Class A and Class B
Shares) to its customers and thus receive different compensation with respect to
different classes of shares of each Fund. Shares of each class 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, authorized dealer service plan and
distribution 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
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share, are freely transferable and have no preemptive, subscription or
conversion rights.
As of November 30, 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 Idaho, FBO: Idaho Housing Agency, P.O. Box 30007,
Salt Lake City, UT 84130 (5.83%); St. Treasurer/Nebr. Invest. Council, (5.12%);
Fundex Corporation, Attn: Mitsuru Hashimoto, 1875 South Grant Street, Suite 740,
San Mateo, CA 94402-2670 (5.01%); Banco Bileao Vizcaya, (7.67%); BankAmerica
National Trust Co. ((8.92%); Meadows Foundation, Inc. (5.27%); Short Duration
Government Fund - West Virginia University Foundation, Attn: Marie Amoyt, 3168
Collins Ferry Road, P.O. Box 4533, Morgantown, WV 26504-4533 (7.39%); Central
Carolina Bank & Trust Co., Attn: Norwood Thomas, Jr., P.O. Box 931, Durham, NC
27702 (9.09%); Richfield Bank & Trust Co., Attn: Judith Ferguson, 6625 Lyndale
Ave., South Richfield, MN 55423 (14.86%); State Street Bank & Trust Co.,
(30.64%); Short Duration Tax-Free Fund - G-K-G Inc., Attn: Bernard Gassin, 166
Oak Knoll Terrace, Highland Park, IL 60035 (5.65%); Westport Bank & Trust,
Attn: Arnold Levine, P.O. Box 5177, Westport, CT 06881 (5.32%); Donald R.
Grant, 85 Broad Street, New York, NY 10004 (9.57%); MGIC, Attn: James McGinnis,
P.O. Box 297, Milwaukee, WI 53201 (27.16%); Indiana Trust & Investment (5.09%);
Global Income Fund - State Street Bank & Trust Trustee, Goldman Sachs Profit
Sharing Master Trust, Attn: Box 1992, Boston, MA 02105-1992 (99%).
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
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by such matter. Rule 18f-2 further provides that a class or series shall be
deemed to be affected by a matter unless the interests of each class or series
in the matter are substantially identical or the matter does not affect any
interest of such class or series. However, Rule 18f-2 exempts the selection of
independent public accountants, the approval of principal distribution contracts
and the election of 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 net assets
attributable to each class of that Fund (assets, including securities at value,
minus liabilities) 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).
For the purpose of calculating the net asset value of the Funds, investments in
Mortgage-Backed Securities and other debt obligations are valued at fair value
based upon yield equivalents, a pricing matrix or other sources, under valuation
procedures established by the Trustees. Other portfolio securities, other
than money market instruments, for which accurate market quotation are readily
available are valued on the basis of quotations which may be furnished by a
pricing service or provided by dealers in such securities. The prices derived
by a pricing agent reflect broker/dealer-supplied valuations and electronic
data processing techniques. Options and futures contracts are valued at the
last sale price on the market where any such option or futures contract is
principally traded. Forward foreign currency exchange contracts are valued at
the mean between the last bid and asked quotations supplied by a dealer in such
contracts. Portfolio securities for which accurate market quotation are not
readily available and other assets are valued at fair value as determined in
good faith pursuant to procedures established by the Board of Trustees. Money
market instruments held by a Fund with a remaining maturity of sixty days or
less will be valued by the amortized cost method, which the Trustees have
determined approximates market value.
The value of all assets and liabilities expressed in foreign currencies will be
converted into U.S. dollar values at current exchange rates of such currencies
against U.S. dollars last quoted by any major bank. If such quotations are not
available, the rate of exchange will be determined in good faith by or under
procedures established by the Board of Trustees.
Generally, trading in foreign securities is substantially completed each day at
various times prior to the time the Global Income Fund and Core Fund calculate
their net asset value.
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Occasionally, events affecting the values of such securities may occur between
the times at which they are determined and the calculation of net asset value
which will not be reflected in the computation of the Fund's net asset value
unless the Trustees deem that such event would materially affect the net asset
value, in which case an adjustment would be made.
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 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
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value of its total (gross) 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 or
Global Income 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 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 or Global Income
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 or Global Income 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 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
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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. Exchange control or other foreign
laws, regulations or practices may restrict repatriation of investment income,
capital or the proceeds of securities sales by foreign investors such as Global
Income Fund and may therefore make it more difficult for Global Income Fund to
satisfy the distribution requirements described above, as well as the excise tax
distribution requirements described below. However, Global Income Fund generally
expects to be able to obtain sufficient cash to satisfy such requirements from
new investors, the sale of securities or other sources. If for any taxable year
a Fund 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, 1995, the Funds had
approximately the following amounts of capital loss carry forwards:
Years of
Amount Expiration
------ ----------
Adjustable Rate Fund $38,311,000 2000-2002
Short Duration
Government Fund $11,136,000 2002
Short Duration
Tax-Free Fund $ 3,999,000 2002
Global Income Fund $10,295,502 2002
Municipal Income Fund $ 3,202,911 2002
Government Income Fund $ 735,561 2002
These amounts are available to be carried forward to offset future capital gains
to the extent permitted by applicable laws or regulations.
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 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.
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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.
The Tax Exempt Funds 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." The Tax Exempt Funds 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 Tax
Exempt Funds 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 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 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 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. The Tax Exempt Funds intend 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 aspects of these investments, including the treatment of tender fees paid
by the Tax Exempt Fund, in relation to various regulated investment company tax
provisions is unclear. However, the Adviser intends to manage the Tax Exempt
Funds' portfolios 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
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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 or forward contracts and options or underlying
securities or foreign currencies to the extent of any unrecognized gains on
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 and Global Income Fund. Under
these rules, foreign exchange gain or loss realized by Core Fund or Global
Income 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 a Fund's investment company taxable income (computed without regard to
such loss) for a taxable year, the resulting loss would not be deductible by
the 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 of Core Fund's or Global Income 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 and Global Income Fund may be subject to foreign taxes on 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 Global Income Fund's total assets at the close
of any taxable year will generally consist of stock or securities of foreign
corporations, Global Income Fund will generally qualify to file an election with
the Internal Revenue Service pursuant to
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which shareholders of Global Income 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 Global Income
Fund that are treated as income taxes under U.S. tax regulations (which
excludes, for example, stamp taxes, securities transaction taxes, and similar
taxes) even though not actually received, and (ii) treat such respective pro
rata portions as foreign income taxes paid by them. Global Income Fund may or
may not make this election for any particular taxable year. Core Fund will not
satisfy the 50% requirement described above and therefore will not make this
election. Core Fund and, if it does not make the election, Global Income Fund
will, however, be entitled to deduct such taxes in computing investment company
taxable income.
If Global Income Fund makes this election, its shareholders may then deduct such
pro rata portions of qualified foreign taxes in computing their taxable incomes,
or, alternatively, use them as foreign tax credits, subject to applicable
limitations, against their U.S. federal income taxes. Shareholders who do not
itemize deductions for federal income tax purposes will not, however, be able to
deduct their pro rata portion of qualified foreign taxes paid by Global Income
Fund, although such shareholders will be required to include their shares of
such taxes in gross income if Global Income Fund makes the election referred to
above.
If a shareholder chooses to take a credit for the foreign taxes deemed paid by
such shareholder as a result of any such election by Global Income Fund, the
amount of the credit that may be claimed in any year may not exceed the same
proportion of the U.S. tax against which such credit is taken which the
shareholder's taxable income from foreign sources (but not in excess of the
shareholder's entire taxable income) bears to his entire taxable income. For
this purpose, distributions from long-term and short-term capital gains or
foreign currency gains by Global Income Fund will generally not be treated as
income from foreign sources. This foreign tax credit limitation may also be
applied separately to certain specific categories of foreign-source income and
the related foreign taxes. As a result of these rules, which have different
effects depending upon each shareholder's particular tax situation, certain
shareholders of Global Income Fund not be able to claim a credit for the full
amount of their proportionate shares of the foreign taxes paid by such Fund.
Shareholders who are not liable for U.S. federal income taxes, including tax-
exempt shareholders, will ordinarily not benefit from this election. Each year,
if any, that Global Income Fund files the election described above, its
shareholders will be notified of the amount of (i) each shareholder's pro rata
share of qualified foreign income taxes paid by Global Income Fund and (ii)
the portion of Fund dividends which represents income from each foreign
country.
If Core Fund or Global Income Fund acquires stock in certain non-U.S.
corporations that receive at least 75% of their annual
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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 or Global
Income 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 or Global Income Fund is timely distributed to its
shareholders. Core Fund or Global Income 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 or Global Income Fund to recognize taxable
income or gain without the concurrent receipt of cash. Core Fund or Global
Income 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,
capital appreciation bonds 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 certain options, futures or
forward contracts, as described above, will generally cause it to realize
income or gain prior to the receipt of cash payments with respect to these
securities 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 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
TAX EXEMPT FUNDS. Each Tax Exempt Fund expects to qualify to pay "exempt-
interest dividends," as defined in the Code. To qualify to pay exempt-interest
dividends, the 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 Municipal Securities
whose interest is excluded from gross income under Section 103(a) of the Code.
In purchasing Municipal Securities, each Tax Exempt 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. A Tax Exempt 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
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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 a Tax Exempt Fund's
distributions attributable to interest the 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 a
Tax Exempt Fund's portfolio may be affected by restrictive federal income tax
legislation enacted in recent years or by similar, future legislation. If a Tax
Exempt Fund satisfies the applicable requirements, dividends paid by the Fund
which are attributable to tax exempt interest on Municipal Securities and
designated by the 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 as items of interest excludable from their gross income
under Section 103(a) of the Code. Exempt-interest dividends a Tax Exempt Fund
receives from other regulated investment companies, including exempt-interest
dividends on auction rate preferred securities of such companies held by the
Fund, are treated as interest on Municipal Securities and may be distributed by
a Tax Exempt Fund as exempt-interest dividends. The recipient of tax-exempt
income is required to report such 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 a
Tax Exempt Fund. The Code provides that interest on indebtedness incurred or
continued to purchase or carry shares of a Tax Exempt Fund is not deductible to
the extent attributable to exempt-interest dividends.
Although all or a substantial portion of the dividends paid by a Tax Exempt Fund
may be excluded by shareholders of the Fund from their gross income for federal
income tax purposes, each Tax Exempt Fund may purchase specified private
activity bonds, the interest from which (including the Fund's distributions
attributable to such interest) may be a preference item for purposes of the
federal alternative minimum tax (both individual and corporate). All exempt-
interest dividends from a Tax Exempt 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.
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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 Tax-Free Fund and
Municipal Income 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 coupons or (ii) capital gains from the sale of securities
or other 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 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 a Fund's current earnings and profits for these
purposes. Consequently, the portion, if any, of Short Duration Tax-Free Fund's
or Municipal Income 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.
B-98
<PAGE>
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 or Global Income 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 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 with
other shares of the same Fund within a period of 61 days beginning 30 days
before and ending 30 days after the shares are disposed of, such as pursuant to
a dividend reinvestment in shares of 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 Tax-Free Fund and
Municipal Income 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 Tax-Free
Fund or Municipal Income Fund for the Fund's 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
B-99
<PAGE>
Short Duration Tax-Free Fund or Municiapl Income Fund during the period of their
investment in Short Duration Tax-Free Fund or Municipal Income Fund, as the case
may be.
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 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 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 Tax-Free Fund or
Municipal Income Fund will not be subject to backup withholding if such Funds
reasonably estimate that at least 95% of their 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
B-100
<PAGE>
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. Non-U.S. shareholders may also be subject to U.S. withholding tax on deemed
income resulting from any election by Global Income Fund to treat qualified
foreign taxes it pays as passed through to shareholders (as described above),
but they may not be able to claim a U.S. tax credit or deduction with respect to
such taxes.
Any gain realized by a shareholder who is not a U.S. person upon a sale or
redemption of shares of a Fund will not be subject to U.S. federal income or
withholding tax unless the gain is effectively connected with the shareholder's
trade or business in the United States, or in the case of a shareholder who is a
nonresident alien individual, the shareholder is present in the United States
for 183 days or more during the taxable year and certain other conditions are
met.
Non-U.S. 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
B-101
<PAGE>
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 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, a Tax Exempt Fund's tax-free yield. Tax equivalent yield
is calculated by dividing a Tax Exempt 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 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 applicable to the relevant class (i.e., net asset
value in the case of each class other than Class A) at the beginning of the
period, and then calculating the annual compounded rate of return which would
produce that amount, assuming a redemption (and in the case of Class B Shares
payment of any contingent deferred sales charge) at the end of the period. This
calculation assumes a complete redemption of the investment. It also assumes
that all dividends and distributions are reinvested at net asset value on the
reinvestment dates during the period.
Year-by-year total return and cumulative total return for a specified period are
each derived by calculating the percentage rate required to make a $1,000
investment (made at the maximum public offering price 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 Tax-Free and Municipal Income Funds only), distribution rate and
average annual total return (capital plus reinvestment of all distributions) for
each class of shares outstanding for the periods indicated.
Thirty-day yield, tax equivalent yield (Short Duration Tax-Free and Municipal
Income Funds 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
B-102
<PAGE>
each Fund is subject to different fees and expenses and may have different
returns for the same period. Any performance data for Class A or Class B Shares
which is based upon a Fund's net asset value per share would be reduced if a
sales charge were taken into account.
YIELD
Investment SEC 30-Day Pro-Forma
Fund Period Yield Yield/1/
- -------------------------------- ---------- ---------- ---------
30-Days
ended
10/31/95
ADJUSTABLE RATE FUND
Institutional Shares 6.12% 6.04%
Administration Shares 5.87% 5.79%
Service Shares/2/ n/a n/a
Class A Shares/2/
- Assumes 1.5% sales charge 5.78% 5.46%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 6.21% 5.89%
Administration Shares/3/ n/a n/a
Service Shares/3/ n/a n/a
SHORT DURATION TAX-FREE FUND
Institutional Shares 3.94% 3.60%
Administration Shares 3.68% 3.34%
Service Shares 3.44% 3.10%
CORE FUND
Institutional Shares 5.31% 5.05%
Administration Shares/4/ n/a n/a
Service Shares/4/ n/a n/a
GLOBAL INCOME FUND
Institutional Shares 5.54% 5.10%
Class A Shares
(Assumes 4.5% sales charge) 4.81% 4.40%
Service Shares/6/ n/a n/a
Class B Shares/6/ n/a n/a
MUNICIAPL INCOME FUND
Class A Shares 4.44% 3.88%
Class B Shares/7/ n/a n/a
GOVERNMENT INCOME FUND
Class A Shares 5.62% 4.22%
Class B Shares/8/ n/a n/a
B-103
<PAGE>
DISTRIBUTION RATE
30 Day Pro-Forma
Investment Distribution Distribution
Fund Period Rate Rate/1/
- -------------------------------- ----------------- ----------- -------------
30-Days
ended
10/31/95
ADJUSTABLE RATE FUND
Institutional Shares 6.37% 6.28%
Administration Shares 6.12% 6.03%
Service Shares/2/ n/a n/a
Class A Shares
- Assumes no sales charge 6.12% 5.79%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 7.49% 7.17%
Administration Shares/3/ n/a n/a
Service Shares/3/ n/a n/a
SHORT DURATION TAX-FREE FUND
Institutional Shares 4.00% 3.64%
Administration Shares 3.75% 3.39%
Service Shares 3.50% 3.14%
MUNICIPAL INCOME FUND
Class A Shares 4.46% 3.85%
Class B Shares/7/ n/a n/a
GOVERNMENT INCOME FUND
Class A Shares 6.11% 4.62%
Class B Shares/8/ n/a n/a
CORE FUND
Institutional Shares 5.81 5.53%
Administration Shares/4/ n/a n/a
Service Shares/4/ n/a n/a
GLOBAL INCOME FUND
Institutional Fund 7.25% 6.80%
Service Shares/6/ n/a n/a
Class A Shares
- Assumes no sales charge 6.74% 6.29%
Class B Shares/6/ n/a n/a
B-104
<PAGE>
TAX-EQUIVALENT YIELD/5/
Pro-Forma
Investment Tax-Equivalent Tax-Equivalent
Fund Period Rate Yield/1/
- ---------------------- ---------- ------------- -----------------
30-Days
ended
10/31/95
SHORT DURATION
TAX-FREE FUND
Institutional Shares 6.52% 5.96%
Administration Shares 6.09% 5.53%
Service Shares 5.70% 5.13%
MUNCIPAL INCOME FUND
Class A Shares 7.35% 6.42%
Class B Shares/7/ n/a n/a
_______________________________
1 Yield, tax equivalent yield and distribution rate if the applicable Adviser
had not voluntarily agreed to limit its advisory fees and to maintain
expenses at a specified level.
2 There were no Service Shares of Adjustable Rate Fund outstanding during the
periods indicated.
3 There were no Administration and Service Shares of Short Duration Government
Fund outstanding at October 31, 1995.
4 There were no Administration Shares or Service Shares of Core Fund
outstanding during the periods indicated.
5 The tax-equivalent rate of Short Duration Tax-Free Fund and Municipal Income
Fund is computed based on the 39.6% federal income tax rate.
6 There were no Service Shares or Class B Shares of Global Income Fund
outstanding during the period indicated.
7 There were no Class B Shares of Municipal Income Fund outstanding during the
period indicated.
8 There were no Class B Shares of Government Income Fund outstanding during the
period indicated.
The above tables should not be considered a representation of future
performance.
B-105
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
-----------------------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Investment Expense Expense
Fund Date Period Limitations Limitations
- -------------------------------- ----------- -------------- --------------- ------------
<S> <C> <C> <C> <C>
ADJUSTABLE RATE FUND
Institutional Shares 7/17/91/1a/ ended 10/31/95 4.91% 4.82%
11/1/94 one year ended
10/31/95 6.75% 6.66%
Administration Shares 4/15/93/1b/ ended 10/31/95 3.96% 3.90%
11/1/94 one year ended
10/31/95 6.48% 6.40%
Class A Shares/1f/ 5/12/95/1d/ ended 10/31/95
Assumes 1.5% Sales Charge 1.17% 1.02%
Assumes No Sales Charge 2.74% 2.59%
Class B Shares/1e/ N/A N/A
Service Shares/1c/ N/A N/A
SHORT DURATION GOVERNMENT FUND
Institutional Shares 8/15/88/2a/ ended 10/31/95 7.31% 6.89%
11/1/94 one year ended
10/31/95 8.97% 8.68%
11/1/89 five years
ended 10/31/95 6.48% 6.23%
Administration Shares/2b/ N/A N/A
Service Shares/2c/ N/A N/A
</TABLE>
B-106
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
-----------------------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Investment Expense Expense
Fund Date Period Limitations Limitations
- -------------------------------- ----------- -------------- --------------- ------------
<S> <C> <C> <C> <C>
SHORT DURATION TAX-FREE FUND
Institutional Shares 10/1/92/3a/ ended 10/31/95 4.12% 3.64%
11/1/94 one year ended
10/31/95 5.98% 5.65%
Administration Shares 5/20/93/3b/ ended 10/31/95 3.21% 2.94%
11/1/94 one year ended
10/31/95 5.76% 5.43%
Service Shares 9/20/94/3c/ ended 10/31/95 4.70% 4.39%
11/1/94 one year ended
10/31/95 5.59% 5.26%
CORE FIXED INCOME FUND
Institutional Shares 1/15/94/4a/ 10/31/95 6.54% 5.76%
11/1/94 one year ended
10/31/95 15.72% 15.14%
Administration Shares/4b/ N/A N/A
Service Shares/4b/ N/A N/A
</TABLE>
B-107
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
-----------------------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Investment Expense Expense
Fund Date Period Limitations Limitations
- -------------------------------- ----------- -------------- --------------- ------------
<S> <C> <C> <C> <C>
GLOBAL INCOME FUND/5C/
Class A Shares 8/2/91/5a/ ended 10/31/95
Assumes 4.5% Sales Charge 6.16% 5.89%
Assumes No Sales Charge 7.32% 7.05%
11/1/94 ended 10/31/95
Assumes 4.5% Sales Charge 9.92% 9.64%
Assumes No Sales Charge 15.08% 14.78%
Class B Shares/5b/ N/A N/A
Institutional Shares/5d/ 8/1/95/5e/ ended 10/31/95 4.42% 4.31%
Service Shares/5b/ N/A N/A
MUNICIPAL INCOME FUND
Class A Shares 7/20/93/6a/ ended 10/31/95
Assumes 4.5% Sales Charge 2.80% 1.65%
Assumes No Sales Charge 4.89% 3.72%
11/1/94 ended 10/31/95
Assumes 4.5% Sales Charge 8.64% 7.86%
Assumes No Sales Charge 13.79% 12.97%
Class B Shares/6b/ N/A N/A
</TABLE>
B-108
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
-----------------------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Investment Expense Expense
Fund Date Period Limitations Limitations
- -------------------------------- ----------- -------------- --------------- ------------
<S> <C> <C> <C> <C>
GOVERNMENT INCOME FUND
Class A Shares 2/10/93/7a/ ended 10/31/95
Assumes 4.5% Sales Charge 5.27% 2.41%
Assumes No Sales Charge 7.06% 4.16%
11/1/94 ended 10/31/95
Assumes 4.5% Sales Charge 9.76% 7.73%
Assumes No Sales Charge 14.90% 12.78%
Class B Shares/7b/ 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 commended operations on April
15, 1993.
1c No Service Shares of Adjustable Rate Fund were outstanding during the periods
indicated.
1d Class A shares were initially issued on May 12, 1995.
1e No Class B Shares were outstanding during the periods indicated.
2a Institutional Shares of Short Duration Government Fund commenced operations
on August 15, 1988.
2b No Administration Shares of Short Duration Government Fund were outstanding
as of October 31, 1995.
2c No Service Shares of Sh ort Duration Government Fund were outstanding during
the periods indicated.
3a Institutional Shares of Short Duration Tax-Free Fund commenced operations on
October 1, 1992.
3b Administration Shares of Short Duration Tax-Free Fund commenced operations on
May 20, 1993.
3c Service Shares of Short Duration Tax-Free Fund 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.
5a Class A Shares of Global Income Fund commenced operations on August 2, 1991.
5b No Service Shares or Class B Shares of Global Income Fund were Outstanding
during the periods indicated.
5c On November 27, 1992, the maximum sales charge was changed from 3% to 4.5% of
the offering price. All performance figures in this table incorporate the
sales charge currently in effect.
5d An aggregate total return (not annualized) is shown instead of an
average annual total return since the Institutional Shares have not completed
a full 12 months of operation as of October 31, 1995.
5e Institutional Shares of Global Income Fund commenced operations on August 1,
1995.
6a Class A shares of Municipal Income Fund commenced operations on July 20,
1993.
6b No Class B Shares of Municipal Income Fund were outstanding during the
periods indicated.
7a Class A Shares of Government Income Fund commenced operations on February 10,
1993.
7b No Class B Shares of Government Income Fund were outstanding during the
periods indicated.
The above table should not be considered a representation of future
performance.
B-109
<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., Donaghues Money Fund Report, Barron's, The Wall
- ------------------------- --------------------------- -------- --------
Street Journal, Weisenberger Investment Companies Service, Business Week,
- -------------- ----------------------------------------- -------------
Changing Times, Financial World, Forbes, Fortune, Morningstar Mutual Funds The
- -------------- --------------- ------ ------- ------------------------ ---
New York Times, Personal Investor, Sylvia Porter's Personal Finance and Money.
- -------------- --------------------------------------------------- -----
In addition, Adjustable Rate Fund, Government Income Fund and Short
Duration Government 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 Tax-Free Fund and Municipal Income 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 and Global Income Fund may each from time to time advertise its
performance relative to certain indices and benchmark investments, including:
(a) the Lipper Analytical Services, Inc.
B-110
<PAGE>
Mutual Fund Performance Analysis, Fixed Income Analysis and Mutual Fund Indices
(which measure total return and average current yield for the mutual fund
industry and rank mutual fund performance); (b) the CDA Mutual Fund Report
published by CDA Investment Technologies, Inc. (which analyzes price, risk and
various measures of return for the mutual fund industry); (c) the Consumer Price
Index published by the U.S. Bureau of Labor Statistics (which measures changes
in the price of goods and services); (d) Stocks, Bonds, Bills and Inflation
published by Ibbotson Associates (which provides historical performance figures
for stocks, government securities and inflation); (e) the Salomon Brothers'
World Bond Index (which 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 the above referenced indices and
the characteristics of a Fund's benchmark investments are not identical to, and
in some cases may be very different from, those of a Fund's portfolio. These
indices and averages, as well as the averages set forth in the Appendices
hereto, are generally unmanaged and the items included in the calculations of
such indices and averages may not be identical to the formulas used by the 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.
In addition, from time to time, advertisements or information may include
a discussion of asset allocation models developed by GSAM and/or its affiliates,
certain attributes or benefits to be derived from asset allocation strategies
and the Goldman Sachs mutual funds that may be offered as investment options for
the strategic asset allocations. Such advertisements and information may also
include GSAM's current economic outlook and domestic and international market
views to suggest periodic tactical
B-111
<PAGE>
modifications to current asset allocation strategies. Such advertisements and
information may include other material which highlight or summarize the services
provided in support of an asset allocation program.
In addition, advertisements or shareholder communications may include a
discussion of certain attributes or benefits to be 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
Duration Government Fund assumed its current name in March 1996. Prior thereto,
Short Duration Government Fund's name was "GS Short-Intermediate Government
Fund" until May 1991 and "GS Short-Term Government Agency Fund" until March
1996. Adjustable Rate Government Fund assumed its current name in March 1996.
Prior thereto, Adjustable Rate Government Fund's name was "GS Adjustable Rate
Government Agency 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.
B-112
<PAGE>
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 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.
FINANCIAL STATEMENTS
The audited financial statements and related report of Arthur Andersen
LLP, independent public accounts, for each Fund contained in each Fund's 1995
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-113
<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, 1995,
administration fees of $12,632, $425 and $1,244 were accrued by Adjustable Rate
Fund, Short Duration Government Fund and Short Duration Tax-Free Fund,
respectively. For the fiscal year ended October 31, 1994, administration fees
of $17,648, $28,422 and $13,825 were accrued by Adjustable Rate Fund, Short
Duration Government Fund and Short Duration Tax-Free Fund, respectively. No
Administration Shares of Core Fund were outstanding at October 31, 1995, October
31, 1994 and October 31, 1993. For the fiscal year ended October 31, 1993,
Administration fees of $4,814, $15,264 and $464 were accrued by Adjustable Rate
Fund, Short Duration Government Fund and Short Duration Tax-Free 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.
B-114
<PAGE>
The Plans with respect to Adjustable Rate Fund, Short Duration
Government Fund, Short Duration Tax-Free Fund and Core Fund were approved by The
Goldman Sachs Group, L.P., as the sole shareholder of 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 Plan and Service Agreements at a meeting called
for the purpose of voting on such Plans and Service Agreements on April 25,
1995. The Plans and Service Agreements will remain in effect until June 30, 1996
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-115
<PAGE>
APPENDIX A
The company may from time to time use comparisons, graphs or charts in
advertisements to depict the following types of information:
. The performance of various types of securities (taxable money market funds,
U.S. treasury securities, adjustable rate mortgage securities, government
securities, municipal bonds) over time. However, the characteristics of
these securities are not identical to, and may be very different from,
those of a Fund's portfolio;
. Volatility of total return of various market indices (i.e. Lehman
Government Bond Index, S&P 500, IBC/Donoghue's Money Fund Average/ All
Taxable Index) over varying periods of time.
. Credit Ratings of domestic government bonds in various countries
. Price volatility comparisons of types of securities over different periods
of time.
. Price and yield comparisons of a particular security over different periods
of time.
In addition, the Company may from time to time include rankings of
Goldman, Sachs & Co.'s research department by publications such as the
Institutional Investor and the Wall Street Journal in advertisements.
1-A
<PAGE>
APPENDIX B
CORE FUND
GLOBAL INCOME 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 have speculative characteristics as well.
- ------------------------
/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-B
<PAGE>
Moody's also provides credit ratings for commercial paper. These are
promissory obligations (1) not having an original maturity in excess of nine
months, and (2) backed by commercial banks. Notes bearing the designation P-
1 have a superior capacity for repayment. Notes bearing the designation P-2
have a strong capacity for repayment.
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.
S&P's top ratings for notes issued after July 29, 1984 are SP-1 and SP-2.
The designation SP-1 indicates a very strong capacity to pay principal and
interest. A "+" is added for those issues determined to possess overwhelming
safety characteristics. An "SP-2" designation indicates a satisfactory
capacity to pay principal and interest.
Commercial paper rated A by S&P is regarded as having the greatest capacity
for timely payment. Commercial Paper rated A-1 is described as having an
overwhelming or very strong degree of safety regarding timely payment.
Commercial Paper rated A-2 by Standard & Poor's is described as having a
strong degree of safety regarding timely payment.
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
2-B
<PAGE>
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 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.
Investment Grade Short-Term Ratings
-----------------------------------
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
F-1+: Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely
payment.
F-1: Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated "F-1+".
3-B
<PAGE>
DUFF & PHELPS
-------------
Commercial Paper/Certificates of Deposits
-----------------------------------------
Category 1: Top Grade
Duff 1 plus: Highest certainty of timely payment. Short-term liquidity
including internal operating factors and/or ready access to
alternative sources of funds, is clearly outstanding, and
safety is just below risk-free U.S. Treasury short-term
obligations.
Duff 1: Very high certainty of timely payment. Liquidity factors are
excellent and supported by strong fundamental protection factors.
Risk factors are minor.
Notes: Bonds which are unrated may expose the investor to risks with respect
to capacity to pay interest or repay principal which are similar to
the risks of lower-rated bonds. The Fund is dependent on the
Investment Adviser's judgment, analysis and experience in the
evaluation of such bonds.
Investors should note that the assignment of a rating to a bond by a
rating service may not reflect the effect of recent developments on
the issuer's ability to make interest and principal payments.
Description of Municipal Securities Ratings
-------------------------------------------
The ratings of Moody's Investors Service, Inc. and Standard & Poor's Ratings
Group represent their opinions as to the quality of various Municipal
Securities. It should be emphasized, however, that ratings are not absolute
standards of quality. Consequently, Municipal Securities with the same
maturity, coupon and rating may have different yields while Municipal
Securities of the same maturity and coupon with different ratings may have
the same yield.
Description of Ratings of State and Municipal Bonds
---------------------------------------------------
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.
4-B
<PAGE>
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 risk appear somewhat larger than
the 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 medium grade obligations,
i.e. they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
ABSENCE OF RATING: Where no rating has been assigned or where a rating
has been suspended or withdrawn, it may be for reasons unrelated to the
quality of the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not
rated as a manner of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgement to be formed; if a
bond is called for redemption; or for other reasons.
NOTE: Those bonds in the Aa and A and Baa groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa
1, A 1 and Baa 1.
5-B
<PAGE>
STANDARD & POOR'S RATINGS GROUP
AAA: Debt rated AAA has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in small
degree.
A: Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB: Debt rated BBB is regarding as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher rated categories.
Plus (+) or minus (-) for ratings from AA to CCC may be used to show relative
standing within the major rating categories.
Description of Ratings of State and Municipal Notes
---------------------------------------------------
MOODY'S INVESTORS SERVICE, INC.
Moody's ratings for state and municipal short-term obligations will
be designated Moody's Investment Grade ("MIG"). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower and short-term cyclical elements are
critical in short-term ratings, while other factors of major importance in
bond risk, long-term secular trends for example, may be less important over
the short run. Symbols used will be as follows:
MIG-1/VMIG-1 - This designation denotes best quality. There is
present strong protection by established cash flows, superior liquidity
support or demonstrated broad based access to the market for refinancing.
MIG-2/VMIG-2 - This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
STANDARD & POOR'S RATINGS GROUP
A Standard & Poor's note rating reflects the liquidity concerns and
market access risks unique to notes. Notes due in 3 years or less will
likely receive a note rating. Notes maturing beyond 3 years will most likely
receive a long-term
6-B
<PAGE>
debt rating. The following criteria will be used in making that assessment.
- Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).
- Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1 Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will
be given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term
of the notes.
SP-3 Speculative capacity to pay principal and interest.
Description of Ratings of State and Municipal Commercial Paper
MOODY'S INVESTORS SERVICE, INC.
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually senior debt obligations which have an original maturity in
excess of nine months. Moody's two highest commercial paper rating
categories are as follows:
"PRIME-1" - Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations.
Prime-1 repayment ability will often be evidenced by many of the following
characteristics:
- Leading market positions in well established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance on
debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
- Well established access to a range of financial markets and assured
sources of alternate liquidity.
"PRIME-2" - Issuers rated Prime-2 (or supporting institutions) have a
strong ability for repayment of short-term debt
7-B
<PAGE>
obligations. This will normally be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and coverage ratios,
while sound may be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
STANDARD & POOR'S RATINGS GROUP
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt having an original maturity of no
more than 365 days. Standard & Poor's two highest commercial paper rating
categories are as follows:
A-1 - This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus sign (+) designation.
A-2 - Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
Description of Ratings of Preferred Stock
-----------------------------------------
MOODY'S INVESTORS SERVICE, INC.
Moody's utilizes a variation of its bond rating symbols in the quality
ranking of preferred stocks because of the fundamental differences between
preferred stock and bonds. Preferred stock occupies a junior position to
bonds within a particular capital structure and such securities are rated
within the universe of preferred stocks.
aaa: An issue which is rated "aaa" is considered to be a top-
quality preferred stock. This rating indicates good asset protection and the
least risk of dividend impairment within the universe of preferred stocks.
aa: An issue which is rated "aa" is considered a high-grade
preferred stock. This rating indicates that there is a reasonable assurance
the earnings and asset protection will remain relatively well maintained in
the foreseeable future.
a: An issue rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the
"aaa" and "aa" classification, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
8-B
<PAGE>
STANDARD & POOR'S RATINGS GROUP
A Standard & Poor's preferred stock rating is an assessment of the
capacity and willingness of an issuer to pay preferred stock dividends and
any applicable sinking fund obligations. A preferred stock rating differs
from a bond rating inasmuch as it is assigned to an equity issue, which issue
is intrinsically different from, and subordinated to, a debt issue.
Therefore, to reflect this difference, the preferred stock rating symbol will
normally not be higher than the debt of the same issuer.
The preferred stock ratings are based on the following considerations:
- Likelihood of payment - capacity and willingness of the issuer to meet the
timely payment of preferred stock dividends and any applicable sinking fund
requirements in accordance with the terms of the obligation;
- Nature of, and provisions of, the issue; and
- Relative position of the issue in the event of bankruptcy, reorganization,
or other arrangement under the laws of bankruptcy and other laws affecting
creditors' rights.
AAA: This is the highest rating that may be assigned by Standard &
Poor's to a preferred stock issue and indicates and extremely strong capacity
to pay the preferred stock obligations.
AA: A preferred stock issue rated AA also qualifies as a high-
quality fixed income security. The capacity to pay preferred Stock
obligations is very strong, although not as overwhelming as for issues rated
AAA.
A: An issue rated A is backed by a sound capacity to pay the
preferred stick obligations, although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions.
9-B
<PAGE>
APPENDIX C
BUSINESS PRINCIPLES OF GOLDMAN, SACHS & CO.
Goldman Sachs is noted for its Business Principles, which guide all of the
firm's activities and serve as the basis for its distinguished reputation among
investors worldwide.
OUR CLIENT'S INTERESTS ALWAYS COME FIRST. Our experience shows that if we serve
our clients well, our own success will follow.
OUR ASSETS ARE OUR PEOPLE, CAPITAL AND REPUTATION. If any of these assets
diminish, reputation is the most difficult to restore. We are dedicated to
complying fully with the letter and spirit of the laws, rules and ethical
principles that govern us. Our continued success depends upon unswerving
adherence to this standard.
WE TAKE GREAT PRIDE IN THE PROFESSIONAL QUALITY OF OUR WORK. We have an
uncompromising determination to achieve excellence in everything we undertake.
Though we may be involved in a wide variety and heavy volume of activity, we
would, if it came to a choice, rather be best than biggest.
WE STRESS CREATIVITY AND IMAGINATION IN EVERYTHING WE DO. While recognizing
that the old way may still be the best way, we constantly strive to find a
better solution to a client's problems. We pride ourselves on having pioneered
many of the practices and techniques that have become standard in the industry.
WE STRESS TEAMWORK IN EVERYTHING WE DO . While individual creativity is always
encouraged, we have found that team effort often produces the best results. We
have no room for those who put their personal interests ahead of the interests
of the firm and its clients.
INTEGRITY AND HONESTY ARE AT THE HEART OF OUR BUSINESS. We expect our people to
maintain high ethical standards in everything they do, both in their work for
the firm and in their personal lives.
1-C
<PAGE>
GOLDMAN, SACHS & CO.'S INVESTMENT BANKING AND SECURITIES ACTIVITIES
Goldman, Sachs & Co. is a leading global investment banking and securities firm
with a number of distinguishing characteristics.
. Privately owned and ranked among Wall Street's best capitalized firms, with
assets exceeding $70 billion and partners capital and subordinated
liabilities of over $4.9 billion as of November 24, 1995.
. With thirty-three offices around the world, Goldman Sachs employes over
8,000 professionals focused on opportunities in major markets.
. An equity research budget of $126 million for 1996.
. Premier lead manager of negotiated municipal bond offerings over the past
five years (1989-1994), aggregating $114 billion.
. The number one lead manager of U.S. common stock offerings for the past six
years (1989-1994), with 18% of the total dollar volume.*
* Source: Securities Data Corporation. Ranking
-----------------------------------
excludes REITS, Trusts, Rights and closed-end fund offerings.
2-C
<PAGE>
GOLDMAN, SACHS & CO.'S HISTORY OF EXCELLENCE
1865 End of Civil War
1869 Marcus Goldman opens Goldman Sachs for business
1890 Dow Jones Industrial Average first published
1896 Goldman Sachs joins New York Stock Exchange
1906 Dow Jones Industrial Average tops 100
1925 Goldman Sachs finances Warner Brothers, producer of the
first talking film
1956 Goldman Sachs co-manages Ford's public offering, the
largest to date
1970 London office opens
1972 Dow Jones Industrial Average breaks 1000
1986 Goldman Sachs takes Microsoft public
1990 Provides advisory services for the largest privatization
in the region of the sale of Telefonos de Mexico
1992 Dow Jones Industrial Average breaks 3000
1993 Goldman Sachs is lead manager in taking Allstate public,
largest equity offering to date ($2.4 billion)
1995 Dow Jones Industrial Average breaks 4000
3-C
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PART B
STATEMENT OF ADDITIONAL INFORMATION
INSTITUTIONAL SHARES
GS ADJUSTABLE RATE GOVERNMENT FUND
GS SHORT DURATION GOVERNMENT FUND
GS SHORT DURATION TAX-FREE FUND
GS CORE FIXED INCOME FUND
GOLDMAN SACHS GLOBAL 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 describes each series of Goldman Sachs
Trust, not all of which currently offer Institutional Shares. This Additional
Statement should be read in conjunction with the prospectus for the
Institutional Shares of GS Adjustable Rate Government Fund, GS Short Duration
Government Fund, GS Short Duration Tax-Free Fund, GS Core Fixed Income and
Goldman Sachs Global Income Fund, dated March 1, 1996, as amended and/or
supplemented from time to time (the 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
Introduction B-3
Other Investments and Practices B-10
Investment Restrictions B-51
Management B-68
Portfolio Transactions B-84
Shares of the Trust B-85
Net Asset Value B-89
Taxation B-90
Performance Information B-101
Other Information B-112
Financial Statements B-113
Appendix A 1-A
Appendix B 1-B
Appendix C 1-C
The date of this Additional Statement is March 1, 1996.
<PAGE>
GOLDMAN SACHS ASSET MANAGEMENT GOLDMAN, SACHS & CO.
ADVISER TO GS SHORT DURATION DISTRIBUTOR
TAX-FREE FUND; GS CORE 85 BROAD STREET
FIXED INCOME FUND AND NEW YORK, NEW YORK 10004
GOLDMAN SACHS GLOBAL INCOME
FUND AND ADMINISTRATOR TO
GOLDMAN SACHS GLOBAL INCOME
FUND
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
GOLDMAN SACHS FUNDS GOLDMAN, SACHS & CO.
MANAGEMENT, L.P. TRANSFER AGENT
ADVISER TO GS ADJUSTABLE 4900 SEARS TOWER
RATE GOVERNMENT FUND CHICAGO, ILLINOIS 60606
AND GS SHORT DURATION
GOVERNMENT FUND
ONE NEW YORK PLAZA GOLDMAN SACHS ASSET
NEW YORK, NEW YORK 10004 MANAGEMENT INTERNATIONAL
SUBADVISER TO GOLDMAN SACHS
GLOBAL INCOME FUND
140 FLEET STREET
LONDON EC4A 2BJ, ENGLAND
TOLL FREE (IN U.S.) .......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 Fund
("Adjustable Rate Fund"), GS Core Fixed Income Fund ("Core Fund"), Goldman Sachs
Global Income Fund ("Global Income Fund"), Goldman Sachs Government Income Fund
("Government Income Fund"), Goldman Sachs Municipal Income Fund ("Municipal
Income Fund"), GS Short Duration Tax-Free Fund ("Short Duration Tax-Free Fund")
and GS Short Duration Government Fund ("Short Duration Government Fund").
Adjustable Rate Fund, Core Fund, Global Income Fund, Government Income Fund,
Municipal Income Fund, Short Duration Tax-Free Fund and Short Duration
Government Fund are each sometimes referred to herein as a "Fund" and
collectively as the "Funds." Short Duration Government Fund, Short Duration
Tax-Free Fund and Core Fund are each authorized to issue three classes of
shares: Institutional Shares, Administration Shares and Service Shares.
Adjustable Rate Fund is authorized to issue four classes of shares:
Institutional Shares, Administration Shares, Service Shares and Class A Shares.
Global Income Fund is authorized to issue four classes of shares: Institutional
Shares, Service Shares, Class A Shares and Class B Shares. Government Income
Fund and Municipal Income Fund are each authorized to issue two classes of
shares: Class A Shares and Class B Shares.
Goldman Sachs Asset Management ("GSAM"), a separate operating division
of Goldman, Sachs & Co. ("Goldman Sachs"), serves as the investment adviser to
Core Fund, Global Income Fund, Government Income Fund, Municipal Income Fund and
Short Tax-Free Duration Fund. In addition, GSAM serves as Global Income Fund's
administrator. Goldman Sachs Asset Management International ("GSAMI" or the
"Subadviser"), an affiliate of Goldman Sachs, serves as subadviser to the Global
Income Fund. Goldman Sachs Funds Management, L.P. ("FMLP"), an affiliate of
Goldman Sachs, serves as the investment adviser to Adjustable Rate Fund and
Short Duration Government Fund. GSAM, GSAMI 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.
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. However, unlike certificates of deposits, shares of the Funds are not
insured by the Federal Deposit Insurance Corporation.
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The following information relates to and supplements the description of
each Fund's investment policies contained in the Prospectus. See the Prospectus
for a fuller description of each 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.
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.
ADJUSTABLE RATE FUND AND SHORT DURATION GOVERNMENT FUND
Adjustable Rate Fund and Short Duration Government Fund are both
designed for investors who seek a high level of high current income, relative
stability of principal and the high credit quality of securities issued or
guaranteed by the U.S. Government or its agencies, instrumentalities or
sponsored enterprises, without incurring the administrative and accounting
burdens involved in direct investment.
Market and economic conditions may affect the investments of Adjustable
Rate Fund and Short Duration Government 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 and Short Duration Government Funds
may invest may be adversely affected by increases in market interest rates.
Conversely, 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 and Short Duration Government
-------------------
Funds seek a higher current yield than a money market fund or than that offered
by bank certificates of deposit and money market accounts. However, the
Adjustable Rate and Short Duration Government Funds 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 of the Adjustable Rate and Short
Duration Government Funds 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 pass-through securities and other mortgage securities with periodic
interest rate resets, maintaining a maximum duration of two years and a target
duration equal to that of a six-month to one-year U.S. Treasury security,
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and utilizing certain active management techniques to seek to hedge interest
rate risk. Short Duration Government Fund seeks to minimize net asset value
fluctuations by utilizing certain interest rate hedging techniques and by
maintaining a maximum duration of not more than 3 years. The duration and
targeting of the 2-year U.S. Treasury Security plus or minus .5 years. There is
no assurance that these strategies for the Adjustable Rate Fund and Short
Duration Government Fund will always be successful.
PROFESSIONAL MANAGEMENT AND ADMINISTRATION. Investors who invest in
-------------------------------------------
securities of the Government National Mortgage Association ("Ginnie Mae") 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. Members of Goldman Sachs' highly
skilled portfolio management team bring together many years of experience in the
analysis, valuation and trading of U.S. fixed income securities.
GOVERNMENT INCOME FUND
Government Income Fund is designed for investors who seek the
relatively high current income, relative safety of principal and the high credit
quality of securities issued by the U.S. Government or its agencies,
instrumentalities or sponsored enterprises, without incurring the administrative
and account burdens involved in direct investment.
Government Income Fund's overall returns are generally likely to move
in the same direction as interest rates. Therefore, when interest rates
decline, Government Income Fund's return is also likely to decline. In exchange
for accepting a higher degree of share price fluctuation, investors have the
potential to achieve a higher return from the Government Income Fund's than from
shorter term investments.
High Current Income. Government Income Fund is designed to have a
-------------------
higher current yield than a money market fund, since it can invest in longer-
term, higher yielding securities, and may utilize certain investment techniques
not available to a money market fund. Similarly, Government Income Fund's yield
is expected to exceed that offered by bank certificates of deposit and money
market accounts. However, Government Income Fund does not maintain a constant
net asset value per share and is subject to greater fluctuation in the value of
its shares than a money market fund. Unlike bank certificates of deposit and
money market accounts, investments in shares of Government Income Fund are not
insured or guaranteed by any government agency. Government Income Fund seeks to
provide high current income without, however, sacrificing credit quality.
Liquidity. Because Government Income Fund's shares may be redeemed upon
---------
request of a shareholder on any business day at net
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asset value, Government Income Fund offers greater liquidity than many competing
investments such as certificates of deposit and direct investments in certain
securities in which Government Income Fund may invest.
A Sophisticated Investment Process. Government Income Fund's
----------------------------------
investment process starts with a review of trends for the overall economy as
well as for different sectors of the U.S. government and mortgage backed
securities markets. Goldman Sachs' portfolio managers then analyze yield
spreads, implied volatility and the shape of the yield curve. In planning the
Government Income 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 involving Goldman Sachs'
proprietary mortgage prepayment model and option-adjusted spread model to
structure and maintain the Government Income Fund's investment portfolio. In
determining the Government Income Fund's investment strategy and making market
timing decisions, the Adviser will have access to information from Goldman
Sachs' economists, fixed income analysts and mortgage specialists.
Convenience of a Fund Structure. Government Income Fund eliminates
-------------------------------
many of the complications that direct ownership of U.S. Government and mortgage-
backed securities entails. Government Income Fund automatically reinvests all
principal payments within the Fund and distributes only current income each
month, thereby conserving principal and eliminating the investor's need to
segregate and reinvest the principal portion of each payment on his own.
SHORT DURATION TAX-FREE AND MUNICIPAL INCOME FUNDS
Short Duration Tax-Free Fund and Municipal Income Fund (the "Tax Exempt
Funds") are not money market funds. Each 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 Tax Exempt Funds 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 Tax Exempt
Funds' increased investment flexibility permits their portfolios 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 that a
mutual fund structure offers some important advantages when
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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;
. Market expertise is also an important consideration for municipal
investors, and because the Tax Exempt Funds take relatively large
positions in different securities, the Tax Exempt Funds may be able
to obtain more favorable prices in the municipal securities market
than investors with relatively small positions; and
. Industry and geographical diversification are important
considerations for municipal investors. The Tax Exempt Funds are
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
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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 to achieve a higher return from Core Fund than
from shorter term investments.
A number of investment strategies will be used to achieve the Core
Fund's investment objective, including market sector selection, determination of
yield curve exposure, and issuer selection. In addition, the Adviser will
attempt to take advantage of pricing inefficiencies in the fixed income markets.
Market sector selection is the underweighting or overweighting of one or more of
the five market sectors (i.e., U.S. treasuries, U.S. government agencies,
corporate securities, mortgage-backed securities and asset-backed securities) in
which the Fund primarily invests. The decision to overweight or underweight a
given market sector is based on expectations of future yield spreads between
different sectors. Yield curve exposure strategy consists of overweighting or
underweighting different maturity sectors to take advantage of the shape of the
yield curve. Issuer selection is the purchase and sale of corporate securities
based on a corporation's current and expected credit standing. To take
advantage of price discrepancies between securities resulting from supply and
demand imbalances or other technical factors, the Fund may simultaneously
purchase and sell comparable, but not identical, securities. The Adviser will
have access to the research of, and proprietary technical models developed by,
Goldman Sachs and will apply quantitative and qualitative analysis in
determining the appropriate allocations among the categories of issuers and
types of securities.
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 specialists.
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GLOBAL INCOME FUND
Global Income Fund is designed for investors seeking a combination of
high income, capital appreciation, stability of principal, experienced
professional management, flexibility and liquidity. However, investing in the
Fund involves certain risks and there is no assurance that the Fund will achieve
its investment objective.
In selecting securities for the Fund, portfolio managers consider such
factors as the security's duration, sector and credit quality rating as well as
the security's yield and prospectus for capital appreciation. In determining
the countries and currencies in which the Fund will invest, the Fund's portfolio
mangers form opinions based primarily on the views of Goldman Sachs' economists
as well as information provided by securities dealers, including information
relating to factors such as interest rates, inflation, monetary and fiscal
policies, taxation, and political climate. The portfolio managers apply the
Black-Litterman Model (the "Model") to their views to develop a portfolio that
produces, in the view of the Adviser, the optimal expected return for a given
level of risk. The Model factors in the opinions of the portfolio managers,
adjusting for their level of confidence in such opinions, with the views implied
by an international capital asset pricing formula. The Model is also used to
maintain the level of portfolio risk within the guidelines established by the
Adviser.
High Income. Global Income Fund's portfolio managers will seek out
-----------
the highest yielding bonds in the global fixed income market that meet the
Global Income Fund's credit quality standards and certain other criteria.
Capital Appreciation. Investing in the foreign bond markets offers
--------------------
the potential for capital appreciation due to both interest rate and currency
exchange rate fluctuations. The portfolio managers attempt to identify
investments with appreciation potential by carefully evaluating trends affecting
a country's currency as well as a country's fundamental economic strength.
However, there is a risk of capital depreciation as a result of unanticipated
interest rate and currency fluctuations.
Portfolio Management Flexibility. Global Income Fund is actively
--------------------------------
managed. The Fund's portfolio managers invest in countries that, in their
judgment, meet the Fund's investment guidelines and often have strong currencies
and stable economies and in securities that they believe offer favorable
performance prospects.
Relative Stability of Principal. Global Income Fund may be able to
-------------------------------
reduce principal fluctuation by investing in foreign countries with economic
policies or business cycles different from those of the United States and in
foreign securities markets that do not necessarily move in the same direction or
magnitude as the U.S. market. Investing in a broad range of U.S. and foreign
fixed income securities and currencies reduces the dependence of the
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Fund's performance on developments in any particular market to the extent that
adverse events in one market are offset by favorable events in other markets.
The Fund's policy of investing primarily in high credit quality securities may
also reduce principal fluctuation. However, there is no assurance that these
strategies will always be successful.
Professional Management. Individual U.S. investors may prefer
-----------------------
professional management of their global bond and currency portfolios because a
well-diversified portfolio requires a large amount of capital and because the
size of the global market requires access to extensive resources and a
substantial commitment of time.
OTHER INVESTMENTS AND PRACTICES
OBLIGATIONS OF THE UNITED STATES, ITS AGENCIES, INSTRUMENTALITIES AND SPONSORED
ENTERPRISES
Each Fund may invest in U.S. Government securities, which are
obligations issued or guaranteed by the U.S. Government and its agencies,
instrumentalities or sponsored enterprises. 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, instrumentalities or sponsored
enterprises, 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 Federal National
Mortgage Association ("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,
instrumentalities or sponsored enterprises. No assurance can be given that the
U.S. Government will provide financial support to the U.S. Government agencies,
instrumentalities or sponsored enterprises in the future.
U.S. Government securities include (to the extent consistent with the
Investment Company Act of 1940, as amended (the "Act")) securities for which the
payment of principal and interest is backed by an irrevocable letter of credit
issued by the U.S. Government, its agencies, instrumentalities or sponsored
enterprises. U.S. Government securities also include (to the extent consistent
with the Act) participations in loans made to foreign governments or their
agencies that are guaranteed as to principal and interest by the U.S. Government
or its agencies, instrumentalities or sponsored enterprises. The secondary
market for certain of these participations is extremely limited. In the absence
of a substantial secondary market, such participations are regarded as illiquid.
Each Fund may also purchase U.S. Government
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securities in private placements, subject to the Fund's limitation on investment
in illiquid securities.
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 program ("STRIPS").
CUSTODIAL RECEIPTS
Each Fund may 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 Duration Government Fund, Core Fund,
Global Income Fund and Government Income Fund (collectively, the "Taxable
Funds") may each invest in mortgage loans and mortgage pass-through securities
and other securities representing an interest in or collateralized by adjustable
and fixed-rate mortgage loans ("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 Mortgaged Properties may also include residential investment properties and
second homes.
The investment characteristics of adjustable and fixed rate Mortgage-
Backed Securities differ from those of traditional fixed income securities. The
major differences include the payment of interest and principal on Mortgage-
Backed Securities on a more frequent (usually monthly) schedule, and the
possibility that principal may be prepaid at any time due to prepayments on the
underlying mortgage loans or other assets. These differences can result in
significantly greater price and yield volatility than is the case with
traditional fixed income securities. As a result, a faster than expected
prepayment rate will reduce both the market value and the yield to maturity from
those which were anticipated.
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A prepayment rate that is slower than expected will have the opposite effect of
increasing yield to maturity and market value. 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 cost of funds index or a moving
average of mortgage rates. Commonly utilized indices include the one-year,
three-year and five-year
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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 Taxable Fund's portfolio and therefore in the net asset
value of each Taxable 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.
Fixed Rate Mortgage Loans. Generally, fixed rate mortgage loans
-------------------------
included in a mortgage pool (the "Fixed Rate Mortgage Loans") will bear simple
interest at fixed annual rates and have original terms to maturity ranging from
5 to 40 years. Fixed Rate Mortgage Loans generally provide for monthly payments
of principal and interest in substantially equal installments for the term of
the mortgage note in sufficient amounts to fully amortize principal by maturity,
although certain Fixed Rate Mortgage Loans provide for a large final "balloon"
payment upon maturity.
LEGAL CONSIDERATIONS OF MORTGAGE LOANS. The following is a discussion
--------------------------------------
of certain legal and regulatory aspects of the mortgage loans in which the
Taxable Funds 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,
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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 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.
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. The Taxable Funds 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.
B-14
<PAGE>
GUARANTEED MORTGAGE PASS-THROUGH SECURITIES
GINNIE MAE CERTIFICATES. Ginnie Mae is a wholly-owned corporate
-----------------------
instrumentality of the United States 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, Ginnie Mae
is authorized to borrow from the U.S. Treasury in an unlimited amount.
FANNIE MAE CERTIFICATES. 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 FHA or guaranteed by the 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
B-15
<PAGE>
principal. The obligations of Freddie Mac under its guaranty of Freddie Mac
Certificates are obligations solely of Freddie Mac.
The mortgage loans underlying the Freddie Mac and Fannie Mae Certificates
consist of adjustable rate or fixed rate mortgage loans with original terms to
maturity of between five and thirty years. Substantially all of these mortgage
loans are secured by first liens on one- to four-family residential properties
or 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 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 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. The Taxable Funds 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.
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
B-16
<PAGE>
be made on a sequential, concurrent, pro rata or disproportionate basis, or any
--- ----
combination thereof. The stated interest rate on any such subclass of
certificates may be a fixed rate or one which varies in direct or inverse
relationship to an objective interest index.
Generally, each registered holder of a certificate will be entitled to
receive its pro rata share of monthly distributions of all or a portion of
--- ----
principal of the underlying mortgage loans or of interest on the principal
balances thereof, which accrues at the applicable mortgage pass-through rate, or
both. The difference between the mortgage interest rate and the related
mortgage pass-through rate (less the amount, if any, of retained yield) with
respect to each mortgage loan will generally be paid to the servicer as a
servicing fee. Since certain adjustable rate mortgage loans included in a
mortgage pool may provide for deferred interest (i.e., negative amortization),
the amount of interest actually paid by a mortgagor in any month may be less
than the amount of interest accrued on the outstanding principal balance of the
related mortgage loan during the relevant period at the applicable mortgage
interest rate. In such event, the amount of interest that is treated as
deferred interest will be added to the principal balance of the related mortgage
loan and will be distributed pro rata to certificate-holders as principal of
--- ----
such mortgage loan when paid by the mortgagor in subsequent monthly payments or
at maturity.
MULTIPLE CLASS MORTGAGE-BACKED SECURITIES AND COLLATERALIZED MORTGAGE
---------------------------------------------------------------------
OBLIGATIONS. Each Taxable Fund may invest in multiple class securities
- -----------
including collateralized mortgage obligations ("CMOs") and REMIC Certificates
issued by U.S. Government agencies, instrumentalities (such as Fannie Mae) and
sponsored enterprises (such as Freddie Mac) or, in the case of Core and
Government Income Funds, or by trusts formed by private originators of, or
investors in, mortgage loans, including savings and loan associations, mortgage
bankers, commercial banks, insurance companies, investment banks and special
purpose subsidiaries of the foregoing. In general, CMOs are debt obligations of
a legal entity that are collateralized by, and multiple class mortgage-backed
securities represent direct ownership interests in, a pool of mortgage loans or
mortgage-backed securities the payments on which are used to make payments on
the CMOs or multiple class mortgage-backed securities.
Fannie Mae REMIC Certificates are issued and guaranteed as to timely
distribution of principal and interest by Fannie Mae. In addition, Fannie Mae
will be obligated to distribute the principal balance of each class of REMIC
Certificates in full, whether or not sufficient funds are otherwise available.
Freddie Mac guarantees the timely payment of interest on Freddie Mac REMIC
Certificates and also guarantees the payment of principal as payments are
required to be made on the underlying mortgage participation certificates
("PCs"). PCs represent undivided interests in specified level payment,
residential
B-17
<PAGE>
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 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
B-18
<PAGE>
class certificates ("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, 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. The Taxable Funds 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, Government Income Fund and Global 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 each Fund's limitation on
investments in illiquid securities. The Adviser may determine that SMBS which
are U.S. Government securities are liquid for purposes of each Fund's limitation
on investments in illiquid securities in accordance with procedures adopted by
the Board of Trustees. The market value of the class consisting entirely of
principal payments generally is unusually volatile in response to changes in
interest rates. The yields on a class of SMBS that receives all or most of the
interest from Mortgage Assets are generally higher than prevailing market yields
on other Mortgage-Backed Securities because their cash flow patterns are more
volatile and there is a greater risk that the initial investment will not be
fully recouped.
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
B-19
<PAGE>
organization to a certificate does not address the remote possibility that, in
the event of the insolvency of the issuer of certificates where a subordinated
interest was retained, the issuance and sale of the senior certificates may be
recharacterized as a financing and, as a result of such recharacterization,
payments on such certificates may be affected.
CREDIT ENHANCEMENT. Credit support falls generally into two categories:
------------------
(i) liquidity protection and (ii) protection against losses resulting from
default by an obligor on the underlying assets. Liquidity protection refers to
the provision of advances, generally by the entity administering the pools of
mortgages, the provision of a reserve fund, or a combination thereof, to ensure,
subject to certain limitations, that scheduled payments on the underlying pool
are made in a timely fashion. Protection against losses resulting from default
ensures ultimate payment of the obligations on at least a portion of the assets
in the pool. Such credit support can be provided by among other things, payment
guarantees, letters of credit, pool insurance, subordination, or any combination
thereof.
SUBORDINATION; SHIFTING OF INTEREST; RESERVE FUND. In order to achieve
-------------------------------------------------
ratings on one or more classes of Mortgage Pass-Throughs, one or more classes of
certificates may be subordinate certificates which provide that the rights of
the subordinate certificate-holders to receive any or a specified portion of
distributions with respect to the underlying mortgage loans may be subordinated
to the rights of the senior certificate-holders. If so structured, the
subordination feature may be enhanced by distributing to the senior certificate-
holders on certain distribution dates, as payment of principal, a specified
percentage (which generally declines over time) of all principal payments
received during the preceding prepayment period ("shifting interest credit
enhancement"). This will have the effect of accelerating the amortization of
the senior certificates while increasing the interest in the trust fund
evidenced by the subordinate certificates. Increasing the interest of the
subordinate certificates relative to that of the senior certificates is intended
to preserve the availability of the subordination provided by the subordinate
certificates. In addition, because the senior certificate-holders in a shifting
interest credit enhancement structure are entitled to receive a percentage of
principal prepayments which is greater than their proportionate interest in the
trust fund, the rate of principal prepayments on the mortgage loans will have an
even greater effect on the rate of principal payments and the amount of interest
payments on, and the yield to maturity of, the senior certificates.
In addition to providing for a preferential right of the senior
certificate-holders to receive current distributions from the mortgage pool, a
reserve fund may be established relating to such 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
B-20
<PAGE>
to the subordinate certificate-holders or by excess servicing fees until the
Reserve Fund reaches a specified amount.
The subordination feature, and any Reserve Fund, are intended to enhance
the likelihood of timely receipt by senior certificate-holders of the full
amount of scheduled monthly payments of principal and interest due them and will
protect the senior certificate-holders against certain losses; however, in
certain circumstances the Reserve Fund could be depleted and temporary
shortfalls could result. In the event the Reserve Fund is depleted before the
subordinated amount is reduced to zero, senior certificate-holders will
nevertheless have a preferential right to receive current distributions from the
mortgage pool to the extent of the then outstanding subordinated amount. Unless
otherwise specified, until the subordinated amount is reduced to zero, on any
distribution date any amount otherwise distributable to the subordinate
certificates or, to the extent specified, in the Reserve Fund will generally be
used to offset the amount of any losses realized with respect to the mortgage
loans ("Realized Losses"). Realized Losses remaining after application of such
amounts will generally be applied to reduce the ownership interest of the
subordinate certificates in the mortgage pool. If the subordinated amount has
been reduced to zero, Realized Losses generally will be allocated pro rata among
--- ----
all certificate-holders in proportion to their respective outstanding interests
in the mortgage pool.
ALTERNATIVE CREDIT ENHANCEMENT. As an alternative, or in 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.
B-21
<PAGE>
ASSET-BACKED SECURITIES
Core Fund, Government Income Fund and Global Income 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, a Fund's ability to
maintain positions in such securities will be affected by reductions in the
principal amount of such securities resulting from prepayments, and its ability
to reinvest the returns of principal at comparable 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 by automobiles rather than
residential real property. Most issuers of automobile receivables permit the
loan servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
asset-backed securities. In addition, because of the large number of vehicles
involved in a typical issuance and technical requirements under state laws, the
trustee for the holders of the automobile receivables may not have a proper
security interest in the underlying automobiles. Therefore, there is the
possibility that, in some cases, recoveries on repossessed collateral may not be
available to support payments on these securities.
ZERO COUPON, DEFERRED INTEREST AND CAPITAL APPRECIATION BONDS
Each Fund may invest in zero coupon bonds, 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.
B-22
<PAGE>
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 each Fund may
invest are not fixed and may fluctuate based upon changes in market rates. A
variable rate obligation has an interest rate which is adjusted at predesignated
periods in response to changes in the market rate of interest on which the
interest rate is based. Variable and floating rate obligations are less
effective than fixed rate instruments at locking in a particular yield.
Nevertheless, such obligations may fluctuate in value in response to interest
rate changes if there is a delay between changes in market interest rates and
the interest reset date for the obligation. The absence of an unconditional
demand feature on variable and floating rate municipal securities exercisable
within seven days would, and the failure of the issuer or a third party to honor
its obligations under a demand or put feature might, require a variable or
floating rate obligation to be treated as illiquid for purposes of the Tax
Exempt Funds' limitation on illiquid investments.
Each Fund may invest in "leveraged" inverse floating rate debt instruments
("inverse floaters"), including "leveraged inverse floaters." The interest rate
on inverse floaters resets in the opposite direction from the market rate of
interest to which the inverse floater is indexed. An inverse floater may be
considered to be leveraged to the extent that its interest rate varies by a
magnitude that exceeds the magnitude of the change in the index rate of
interest. The higher the degree of leverage of an inverse floater, the greater
the volatility of its market value. Accordingly, the duration of an inverse
floater may exceed its stated final maturity. Certain inverse floaters may be
deemed to be illiquid securities for purposes of each Fund's limitation on
illiquid investments.
CORPORATE DEBT OBLIGATIONS
Core Fund, Global Income Fund and Government Income 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 meet principal and interest payments on the obligations
and may
B-23
<PAGE>
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
Global Income Fund and Core Fund may each invest in obligations issued or
guaranteed by United States and foreign banks. Bank obligations, including
without limitation time deposits, bankers' acceptances and certificates of
deposit, may be general obligations of the parent bank or may be 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. Foreign banks are subject to different regulations
and are permitted to engage in different activities than U.S. banks. 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, Municipal Income Fund and Short Duration Tax-Free Fund may
invest in 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
("Municipal Securities"), 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
income taxes of any state or local government). In addition, Municipal
Securities include participation 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
Core Fund, Municipal Income Fund and Short Duration Tax-Free Fund may revise
their definition of Municipal Securities in the future to include other types of
securities that currently exist the interest on which is or will be in the
opinion of such counsel, excluded from gross income for federal income tax
purposes, provided that investing in such securities is consistent with each
Fund's investment objective and policies.
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
B-24
<PAGE>
activity bonds" or industrial development bonds, which are issued by or on
behalf of public authorities to provide financing aid to acquire sites or
construct or equip facilities within a municipality for privately or publicly
owned corporations.
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 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 Tax-Free Fund,
Municipal Income 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
B-25
<PAGE>
principal of or interest on a Municipal Security may be materially affected.
Municipal Leases, Certificates of Participation and Other Participation
-----------------------------------------------------------------------
Interests. The Core, Municipal Income, and Short-Duration Tax-Free Funds may
- ---------
invest in municipal leases, certificates of participation and other
participation interests. A municipal lease is an obligation in the form of a
lease or installment purchase which is issued by a state or local government to
acquire equipment and facilities. Income from such obligations is generally
exempt from state and local taxes in the state of issuance. Municipal leases
frequently involve special risks not normally associated with general
obligations or revenue bonds. Leases and installment purchase or conditional
sale contracts (which normally provide for title to the leased asset to pass
eventually to the governmental issuer) have evolved as a means for governmental
issuers to acquire property and equipment without meeting the constitutional and
statutory requirements for the issuance of debt. The debt issuance limitations
are deemed to be inapplicable because of the inclusion in many leases or
contracts of "non-appropriation" clauses that relieve the governmental issuer of
any obligation to make future payments under the lease or contract unless money
is appropriated for such purpose by the appropriate legislative body on a yearly
or other periodic basis. In addition, such leases or contracts may be subject
to the temporary abatement of payments in the event the issuer is prevented from
maintaining occupancy of the leased premises or utilizing the leased equipment.
Although the obligations may be secured by the leased equipment or facilities,
the disposition of the property in the event of non-appropriation or foreclosure
might prove difficult, time consuming and costly, and result in a delay in
recovering or the failure to fully recover a Fund's original investment.
Certificates of participation represent undivided interests in municipal
leases, installment purchase agreements or other instruments. The certificates
are typically issued by a trust or other entity which has received an assignment
of the payments to be made by the state or political subdivision under such
leases or installment purchase agreements.
Certain municipal lease obligations and certificates of participation may
be deemed to be illiquid for the purpose of the Funds' limitation on investments
in illiquid securities. Other municipal lease obligations and certificates of
participation acquired by a Fund may be determined by the Adviser, pursuant to
guidelines adopted by the Trustees of the Trust, to be liquid securities for the
purpose of such limitation. In determining the liquidity of municipal lease
obligations and certificates of participation, the Adviser will consider a
variety of factors including: (1) the willingness of dealers to bid for the
security; (2) the number of dealers willing to purchase or sell the obligation
and the number of other potential buyers; (3) the frequency of trades or quotes
for the obligation; and (4) the nature of the marketplace trades. In addition,
the Adviser will
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consider factors unique to particular lease obligations and certificates of
participation affecting the marketability thereof. These include the general
creditworthiness of the issuer, the importance to the issuer of the property
covered by the lease and the likelihood that the marketability of the obligation
will be maintained throughout the time the obligation is held by a Fund.
The Core, Municipal Income and Short Duration Tax-Free Funds may purchase
participations in Municipal Securities held by a commercial bank or other
financial institution. Such participations provide a Fund with the right to a
pro rata undivided interest in the underlying Municipal Securities. In
addition, such participations generally provide a Fund with the right to demand
payment, on not more than seven days notice, of all or any part of such Fund's
participation interest in the underlying Municipal Security, plus accrued
interest. A Fund will only invest in such participations if, in the opinion of
bond counsel, counsel for the issuers of such participations or counsel selected
by the Adviser, the interest from such participations is exempt from regular
federal income tax.
Municipal Notes. Municipal Securities in the form of notes generally are
---------------
used to provide for short-term capital needs, in anticipation of an issuer's
receipt of other revenues or financing, and typically have maturities of up to
three years. Such instruments may include tax anticipation notes, revenue
anticipation notes, bond anticipation notes, tax and revenue anticipation notes
and construction loan notes. Tax anticipation notes are issued to finance the
working capital needs of governments. Generally, they are issued in
anticipation of various tax revenues, such as income, sales, property, use and
business taxes, and are payable from these specific future taxes. Revenue
anticipation notes are issued in expectation of receipt of other kinds of
revenue, such as federal revenues available under federal revenue sharing
programs. Bond anticipation notes are issued to provide interim financing until
long-term bond financing can be arranged. In most cases, the long-term bonds
then provide the funds needed for repayment of the notes. Tax and revenue
anticipation notes combine the funding sources of both tax anticipation notes
and revenue anticipation notes. Construction Loan Notes are sold to provide
construction financing. These notes are secured by mortgage notes insured by
the FHA; however, the proceeds from the insurance may be less than the economic
equivalent of the payment of principal and interest on the mortgage note if
there has been a default. The obligations of an issuer of municipal notes are
generally secured by the anticipated revenues from taxes, grants or bond
financing. An investment in such instruments, however, presents a risk that the
anticipated revenues will not be received or that such revenues will be
insufficient to satisfy the issuer's payment obligations under the notes or that
refinancing will be otherwise unavailable.
Tax-Exempt Commercial Paper. Issues of commercial paper typically
---------------------------
represent short-term, unsecured, negotiable promissory notes. These obligations
are issued by state and local governments
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and their agencies to finance working capital needs of municipalities or to
provide interim construction financing and are paid from general revenues of
municipalities or are refinanced with long-term debt. In most cases, tax-exempt
commercial paper is backed by letters of credit, lending agreements, note
repurchase agreements or other credit facility agreements offered by banks or
other institutions.
Pre-Refunded Municipal Securities. The principal of and interest on pre-
---------------------------------
refunded Municipal Securities are no longer paid from the original revenue
source for the securities. Instead, the source of such payments is typically
an escrow fund consisting of U.S. Government securities. The assets in the
escrow fund are derived from the proceeds of refunding bonds issued by the same
issuer as the pre-refunded Municipal Securities. Issuers of Municipal
Securities use this advance refunding technique to obtain more favorable terms
with respect to securities that are not yet subject to call or redemption by the
issuer. For example, advance refunding enables an issuer to refinance debt at
lower market interest rates, restructure debt to improve cash flow or eliminate
restrictive covenants in the indenture or other governing instrument for the
pre-refunded Municipal Securities. However, except for a change in the revenue
source from which principal and interest payments are made, the pre-refunded
Municipal Securities remain outstanding on their original terms until they
mature or are redeemed by the issuer. Pre-refunded Municipal Securities are
usually purchased at a price which represents a premium over their face value.
Private Activity Bonds. Short Duration Tax-Free Fund, Municipal Income
----------------------
Fund and Core Fund may each invest in 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
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. The Tax Exempt Funds' 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.
Tender Option Bonds. A tender option bond is a Municipal Security
-------------------
(generally held pursuant to a custodial arrangement) having a relatively long
maturity and bearing interest at a fixed rate substantially higher than
prevailing short-term, tax-exempt rates. The bond is typically issued with the
agreement of a third party, such as a bank, broker-dealer or other financial
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institution, which grants the security holders the option, at periodic
intervals, to tender their securities to the institution and receive the face
value thereof. As consideration for providing the option, the financial
institution receives periodic fees equal to the difference between the bond's
fixed coupon rate and the rate, as determined by a remarketing or similar agent
at or near the commencement of such period, that would cause the securities,
coupled with the tender option, to trade at par on the date of such
determination. Thus, after payment of this fee, the security holder effectively
holds a demand obligation that bears interest at the prevailing short-term, tax-
exempt rate. However, an institution will not be obligated to accept tendered
bonds in the event of certain defaults or a significant downgrade in the credit
rating assigned to the issuer of the bond. The liquidity of a tender option
bond is a function of the credit quality of both the bond issuer and the
financial institution providing liquidity. Tender option bonds are deemed to be
liquid unless, in the opinion of the Adviser, the credit quality of the bond
issuer and the financial institution is deemed, in light of the Fund's credit
quality requirements, to be inadequate. The Tax Exempt Funds intend to invest
in tender option bonds the interest on which will, in the opinion of bond
counsel, counsel for the issuer of interests therein or counsel selected by the
Adviser, be exempt from regular federal income tax. However, because there can
be no assurance that the Internal Revenue Service (the "Service") will agree
with such counsel's opinion in any particular case, there is a risk that a Tax
Exempt Fund will not be considered the owner of such tender option bonds and
thus will not be entitled to treat such interest as exempt from such tax.
Additionally, the federal income tax treatment of certain other aspects of these
investments, including the proper tax treatment of tender option bonds and the
associated fees in relation to various regulated investment company tax
provisions is unclear. The Tax Exempt Funds intend to manage their portfolio in
a manner designed to eliminate or minimize any adverse impact from the tax rules
applicable to these investments.
Auction Rate Securities. The Core, Municipal Income and Short Duration
-----------------------
Tax-Free Funds 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"). Provided that
the 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
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<PAGE>
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.
A 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. The Funds will indirectly bear their proportionate share of any
management and other fees paid by such closed-end funds in addition the advisory
fees payable directly by the Funds.
Insurance. The Funds may invest in "insured" tax-exempt Municipal
---------
Securities. Insured Municipal Securities are securities for which scheduled
payments of interest and principal are guaranteed by a private (nongovernmental)
insurance company. The insurance only entitles a Fund to receive the face or
par value of the securities held by the Fund. The insurance does not guarantee
the market value of the Municipal Securities or the value of the shares of a
Fund.
The Funds 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 Investors Service, Inc. ("Moody's") or AAA from Standard & Poor's
Ratings Group ("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-cancelable and continue in force as long as the
bonds are outstanding.
A secondary market insurance policy is purchased by an investor (such as a
Fund) subsequent to a bond's original issuance and generally insures a
particular bond for the remainder of its term. The Funds may purchase bonds
which have already been insured under a secondary market insurance policy by a
prior investor, or the Funds may directly purchase such a policy from insurers
for bonds which are currently uninsured.
An insured Municipal Security acquired by a Fund will typically be covered
by only one of the above types of policies. All of the insurance policies used
by a Fund will be obtained only from insurance companies rated, at the time of
purchase, Aaa by Moody's or AAA by Standard & Poor's.
Standby Commitments. In order to enhance the liquidity of Municipal
-------------------
Securities, the Tax Exempt Funds 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 a Fund pays for securities with
standby commitments may be higher than the price which otherwise would be paid
for the
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<PAGE>
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
a Tax Exempt 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 a Tax Exempt Fund. In considering whether a security meets a Tax Exempt
Fund's quality standards, the particular Tax Exempt 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.
The Tax Exempt Funds value 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 a Tax Exempt
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, a Tax Exempt
Fund's policy is to enter into standby commitment transactions only with banks,
brokers or dealers which present a minimal risk of default.
The Adviser understands that 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. The Tax Exempt Funds intend to take the position that they are 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 their
hands. There is no assurance that standby commitments will be available to the
Tax Exempt Funds nor have the Tax Exempt Funds assumed that such commitments
would continue to be available under all market conditions.
Call Risk and Reinvestment Risk. Municipal Securities may include "call"
-------------------------------
provisions which permit the issuers of such securities, at any time or after a
specified period, to redeem the securities prior to their stated maturity. In
the event that Municipal Securities held in a Fund's portfolio are called prior
to the maturity, the Fund will be required to reinvest the proceeds on such
securities at an earlier date and may be able to do so only at lower yields,
thereby reducing the Fund's return on its portfolio securities.
B-31
<PAGE>
FOREIGN INVESTMENTS
Core and Global Income Funds may invest in securities of foreign issuers
and in fixed income securities quoted or denominated in a currency other than
U.S. dollars. Investing in the securities of foreign issuers involves certain
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 and Global Income Fund may temporarily hold funds in bank deposits in
foreign currencies during completion of investment programs, Core Fund and
Global Income 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.
Foreign companies are not subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to U.S. companies. In addition, there may be less publicly available
information about a foreign company than about a comparable U.S. company.
Volume and liquidity in most foreign bond markets are less than in the United
States markets and securities of many foreign companies are less liquid and more
volatile than securities of comparable U.S. companies. Commissions on foreign
securities exchanges are often fixed and generally are higher than negotiated
commissions or dealer mark-ups in the U.S. markets, although each Fund endeavors
to achieve the most favorable net results on its portfolio transactions. There
is generally less government supervision and regulation of securities markets
and exchanges, brokers, dealers and listed companies than in the United States.
Mail service between the United States and foreign countries may be slower or
less reliable than within the United States, thus increasing the risk of delayed
settlement of portfolio transactions or loss of certificates for portfolio
securities.
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 or Global Income Fund is
uninvested and no return is earned thereon. The inability of Core Fund or
Global Income 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 or Global Income Fund due to subsequent
declines in value of the portfolio securities, or, if Core Fund or Global
Income 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
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<PAGE>
adversely affect Core Fund's or Global Income 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, and Global
Income Fund may enter into forward foreign currency exchange contracts for
hedging purposes and to seek to increase total return. A forward foreign
currency exchange contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded in the interbank market conducted directly
between currency traders (usually large commercial banks) and their customers.
A forward contract generally has no deposit requirement, and no commissions are
generally charged at any stage for trades.
At the maturity of a forward contract, Global Income Fund and 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.
Global Income Fund or Core Fund may enter into forward foreign currency
exchange contracts in several circumstances. First, when Global Income Fund or
Core Fund enters into a contract for the purchase or sale of a security quoted
or denominated in a foreign currency, or when Global Income Fund or Core Fund
anticipates the receipt in a foreign currency of a dividend or interest payments
on such a security which it holds, Global Income Fund or 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 U.S. dollars,
of the amount of foreign currency involved in the underlying transactions,
Global Income Fund or 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 the Adviser believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar, it may
enter into a forward contract to sell, for a fixed amount of dollars, the amount
of foreign currency approximating the value of some or all of a Fund's portfolio
securities quoted or denominated in such foreign currency. The precise matching
of the forward contract amounts and the value of
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<PAGE>
the securities involved will not generally be possible because the future value
of such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the
contract is entered into and the date it matures. Using forward contracts to
protect the value of a Fund's portfolio securities against a decline in the
value of a currency does not eliminate fluctuations in the underlying prices of
the securities. It simply establishes a rate of exchange which a Fund can
achieve at some future point in time. The precise projection of short-term
currency market movements is not possible, and short-term hedging provides a
means of fixing the dollar value of only a portion of a Fund's foreign assets.
Global Income Fund may engage in cross-hedging by using forward contracts
in one currency to hedge against fluctuations in the value of securities
denominated or quoted in a different currency if the Adviser determines that
there is a pattern of correlation between the two currencies. The Global Income
Fund may also purchase and sell forward contracts to seek to increase total
return when the Adviser anticipates that the foreign currency will appreciate or
depreciate in value, but securities quoted or denominated in that currency do
not present attractive investment opportunities and are not held in the Global
Income Fund's portfolio.
Global Income Fund's and Core Fund's custodian will place cash or liquid,
high-grade debt securities (i.e., securities rated in one of the top three
rating categories by Moody's or Standard & Poor's or, if unrated by such rating
organizations, deemed by the Adviser to be of comparable credit quality) into a
segregated account of the Fund in an amount equal to the value of the Fund's
total assets committed to the consummation of forward foreign currency exchange
contracts requiring the Fund to purchase foreign currencies or in the case of
Global Income Fund, forward contracts entered into to increase total return. If
the value of the securities placed in the segregated account declines,
additional cash or securities will be placed in the account on a daily basis so
that the value of the account will equal the amount of the Fund's commitments
with respect to such contracts. The segregated account will be marked-to-market
on a daily basis. Although the contracts are not presently regulated by the
CFTC, the CFTC may in the future assert authority to regulate these contracts.
In such event, a Fund's ability to utilize forward foreign currency exchange
contracts may be restricted. The Global Income Fund and Core Fund will not
enter into a forward contract with a term of greater than one year.
While Global Income Fund and Core Fund may enter into forward contracts to
seek to reduce currency exchange rate risks, transactions in such contracts
involve certain other risks. Thus, while Global Income Fund and Core Fund may
benefit from such transactions, unanticipated changes in currency prices may
result in a poorer overall performance for a Fund than if it had not engaged in
any such transactions. Moreover, there may be imperfect correlation between a
Fund's portfolio holdings of securities
B-34
<PAGE>
quoted or denominated in a particular currency and forward contracts entered
into by Global Income Fund and Core Fund. Such imperfect correlation may cause
the Fund to sustain losses which will prevent the Fund from achieving a complete
hedge or expose the Fund to risk of foreign exchange loss.
Forward contracts are subject to the risk that the counterparty to such
contract will default on its obligations. Since a forward foreign currency
exchange contract is not guaranteed by an exchange or clearinghouse, a default
on the contract would deprive a Fund of unrealized profits, transaction costs or
the benefits of a currency hedge or force the Fund to cover its purchase or sale
commitments, if any, at the current market price. A Fund will not enter into
such transactions unless the credit quality of the unsecured senior debt or the
claims-paying ability of the counterparty is considered to be investment grade
by the Adviser.
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, Government Income, Short Duration
Government Fund and Global Income Fund may enter into mortgage swaps and Core
Fund and Global Income Fund may also enter into currency swaps. Each Fund may
enter into swap transactions for hedging purposes or to seek to increase total
return, except that the Core Fund will not enter into currency swaps 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, 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
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<PAGE>
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. The net amount of the excess, if any, of a Fund's
obligations over its entitlements with respect to each interest rate or currency
swap will be accrued on a daily basis and an amount of cash or liquid, high
grade debt securities having an aggregate net asset value at least equal to
such accrued excess will be maintained in a segregated account by a Fund's
custodian. In as much as these transactions are entered into for hedging
purposes or are offset by cash or liquid, high grade debt securities maintained
in a segregated account the Funds and the Advisers believe that swaps do not
constitute senior securities under the Act and, accordingly, will not treat them
as being subject to a Fund's borrowing 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 & Poor's or Aa or P-1 or better by
Moody's or their equivalent ratings. If there is a default by the other party
to such a transaction, a Fund will have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As
a result, the swap market has become relatively liquid in comparison with the
markets for other similar instruments which are traded in the interbank market.
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
a Fund's limitation on illiquid investments.
The use of interest rate, mortgage and currency swaps, as well as interest
rate caps, floors and collars, is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If the Adviser is incorrect in its forecasts
of market values, interest rates and currency exchange rates, the investment
performance of a fund would be less favorable than it would have been if this
investment technique were not used.
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<PAGE>
OPTIONS ON SECURITIES AND SECURITIES INDICES
WRITING COVERED OPTIONS. Each Fund may write (sell) covered call and put
-----------------------
options on any securities in which it may invest or on any securities index
based on securities in which it may invest. A Fund may purchase and write such
options on securities that are listed on national domestic securities exchange
or foreign securities exchanges or traded in the over-the-counter market. 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. 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.
All call and put options written by a Fund are covered. A written call
option or put option may be covered by (i) maintaining cash or liquid, high-
grade debt securities, either of which, in the case of Global Income Fund or
Core Fund, may be quoted or denominated in any currency, in a segregated account
maintained by the Fund's custodian with a value at least equal to the Fund's
obligation under the option, (ii) entering into an offsetting forward commitment
and/or (iii) 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.
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."
Each Fund may also write (sell) covered call and put options on any
securities index composed of securities in which it may invest. Options on
securities indices are similar to options on securities, except that the
exercise of securities index options requires cash settlement 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
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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.
PURCHASING OPTIONS. Each Fund may also purchase put and call options on
------------------
any securities in which it may invest or on any securities index based on
securities in which it may invest, and each 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 ("protective puts") 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 on the purchase of a call option 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 either no
gain or 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. The purchase of
protective puts is designed to offset or hedge against a decline in the market
value of a Fund's securities. Put options may also be purchased by a Fund for
the purpose of affirmatively benefiting from a decline in the price of
securities which it does not own. A Fund would ordinarily realize a gain if,
during the option period, the value of the underlying securities decreased below
the exercise price sufficiently to cover the premium and transaction costs;
otherwise the Fund would realize either no gain or a loss on the purchase of the
put option. Gains and losses on the purchase of 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. 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
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the securities market rather than price fluctuations in a single security.
Transactions by a Fund in options on securities and securities indices will
be subject to limitations established by each of the exchanges, boards of trade
or other trading facilities on which such options are traded 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, regardless of whether
the options are written or purchased on the same or different exchanges, boards
of trade or other trading facilities or are held or written in one or more
accounts or through one or more brokers. Thus, the number of options which a
Fund may write or purchase may be affected by options written or purchased by
other investment advisory clients of the Advisers. An exchange, board of trade
or other trading facility may order the liquidation of positions found to be in
excess of these limits, and it may impose certain other sanctions.
WRITING AND PURCHASING CURRENCY CALL AND PUT OPTIONS. Core Fund and
----------------------------------------------------
Global Income Fund may write covered put and call options and purchase put and
call options on foreign currencies in an attempt to protect against declines in
the dollar value of portfolio securities and against increases in the dollar
cost of securities to be acquired. Global Income Fund may use options on
currency to cross-hedge, which involves writing or purchasing options on one
currency to seek to hedge against changes in exchange rates for a different
currency with a pattern of correlation. In addition, Global Income Fund may
purchase call options on currency to seek to increase total return when the
Adviser anticipates that the currency will appreciate in value, but the
securities denominated or quoted in that currency do not present attractive
investment opportunities and are not including in Global Income Fund's
portfolio.
A call option written by Core Fund and Global Income Fund obligates the
Fund to sell specified currency to the holder of the option at a specified price
if the option is exercised at any time before the expiration date. A put option
written by a Fund obligates the Fund to purchase specified currency from the
option holder at a specified price if the option is exercised at any time before
the expiration date. The writing of currency options involves a risk that a
Fund will, upon exercise of the option, be required to sell currency subject to
a call at a price that is less than the currency's market value or be required
to purchase currency subject to a put at a price that exceeds the currency's
market value.
A Fund may terminate its obligations under a written call or put option by
purchasing an option identical to the one written. Such purchases are referred
to as "closing purchase transactions." A Fund would also be able to enter into
closing sale transactions in order to realize gains or minimize losses on
purchased options.
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Core Fund and Global Income Fund would normally purchase call options in
anticipation of an increase in the dollar value of currency in which securities
to be acquired by the Fund are denominated or quoted. The purchase of a call
option would entitle a Fund, in return for the premium paid, to purchase
specified currency at a specified price during the option period. A Fund would
ordinarily realize a gain if, during the option period, the value of such
currency exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise the Fund would realize either no gain or a loss on
the purchase of the call option.
Core Fund or Global Income 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 and Global Income Fund, in exchange for the
premium paid, to sell specified currency at a specified price during the option
period. The purchase of protective puts is designed merely to offset or hedge
against a decline in the dollar value of a Fund's portfolio securities due to
currency exchange rate fluctuations. A Fund would ordinarily realize a gain if,
during the option period, the value of the underlying currency decreased below
the exercise price sufficiently to more than cover the premium and transaction
costs; otherwise the Fund would realize either no gain or a loss on the purchase
of the put option. Gains and losses on the purchase of protective put options
would tend to be offset by countervailing changes in the value of underlying
currency.
In addition to using options for the hedging purposes described above,
Global Income Fund may use options on currency to seek to increase total return.
Global Income Fund may write (sell) covered put and call options on any currency
in an attempt to realize greater income than would be realized on portfolio
securities transactions alone. However, in writing covered call options for
additional income, Global Income Fund may forego the opportunity to profit from
an increase in the market value of the underlying currency. Also, when writing
put options, Global Income Fund accepts, in return for the option premium, the
risk that it may be required to purchase the underlying currency at a price in
excess of the currency's market value at the time of purchase.
Global Income Fund would normally purchase call options to seek to increase
total return in anticipation of an increase in the market value of a currency.
Global Income 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 Global Income Fund would realize either
no gain or a loss on the purchase of the call option. Put options may be
purchased by the Global Income Fund for the purpose of benefiting from a decline
in the value of currencies which it does not own. Global Income 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
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the premium and transaction costs. Otherwise Global Income Fund would realize
either no gain or a loss on the purchase of the put option.
YIELD CURVE OPTIONS. Each Fund may enter into options on the yield
-------------------
"spread," or yield differential between two securities. Such options 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.
Yield curve options may be used for the same purposes as other options on
securities. For example, a 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. A Fund may also purchase or write
yield curve options for other than hedging purpose (i.e., in an attempt to
increase its current income) if, in the judgment of the Adviser, the 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, or if the spread moves in a direction or
to an extent which was not anticipated.
Yield curve options written by a Fund must be "covered." A call (or put)
option is covered if the Fund holds another call (or put) option on the spread
between the same two securities and maintains in a segregated account with its
custodian cash or liquid, high-grade debt securities sufficient to cover the
Fund's net liability under the two options. Therefore, a Fund's liability for
such a covered option is generally limited to the difference between the amount
of the Fund's liability under the option written by the Fund less the value of
the option held by the Fund. Yield curve options may also be covered in such
other manner as may be in accordance with the requirements of the counterparty
with which the option is traded and applicable laws and regulations. Yield
curve options are traded over-the-counter, and because they have been only
recently introduced, established trading markets for these options have not yet
developed.
RISKS ASSOCIATED WITH OPTIONS TRANSACTIONS. There is no assurance that a
------------------------------------------
liquid secondary market on a domestic or foreign 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
currencies or dispose of assets held in a segregated
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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 or currencies.
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.
A Fund's 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.
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
To seek to increase total return or hedge against changes in interest rates
or securities prices or, in the case of Core Fund (but only for hedging
purposes) and Global Income Fund, currency exchange rates, each Fund may
purchase and sell various kinds of futures contracts, and purchase and write
call and put options on any of such futures contracts. Each Fund may also enter
into closing purchase and sale transactions with respect to any of such
contracts and options. The Futures contracts may be based on
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various securities (such as U.S. Government securities), securities indices,
foreign currencies in the case of Global Income Fund and Core Fund, and any
other financial instruments and indices. A Fund will engage in futures and
related options transaction only for bona fide hedging purposes as defined below
or for purposes of seeking to increase total return to the extent permitted by
regulations of the CFTC. All futures contracts entered into by a Fund are trade
on U.S. exchanges or boards of trade that are licensed and regulated by the CFTC
or on foreign exchanges.
FUTURES CONTRACTS. A futures contract may generally be described as an
-----------------
agreement between two parties to buy and sell particular financial instruments
or currencies 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 and Global Income
Fund may each seek to offset anticipated changes in the value of a currency in
which its portfolio securities, or securities that it intends to purchase, are
quoted or denominated by purchasing and selling futures contracts on such
currencies.
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 or currency will
usually be liquidated in this manner, a Fund may instead make, or take, delivery
of the underlying securities or currency whenever it appears economically
advantageous to do so. A clearing corporation associated with the exchange on
which futures on securities or currency 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, or rate of return on portfolio securities or securities that a Fund
proposes to acquire or the exchange rate of currencies in which portfolio
securities are quoted or denominated. A Fund may, for example, take a "short"
position in the futures market by selling futures contracts in an attempt to
hedge against an anticipated rise in interest rates or a decline in market
prices or foreign currency rates that would adversely affect the dollar 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.
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<PAGE>
Similarly, Core Fund and Global Income Fund may each sell futures contracts on
any currencies in which its portfolio securities are quoted or 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 Advisers 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 portfolio securities. 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 or currency exchange rates then available in the applicable
market to be less favorable than prices that are currently available.
OPTIONS ON FUTURES CONTRACTS. The acquisition of put and call options on
----------------------------
futures contracts will give a Fund the right (but not the obligation) for a
specified price to sell or to purchase, respectively, the underlying futures
contract at any time during the option period. As the purchaser of an option on
a futures contract, a Fund obtains the benefit of the futures position if prices
move in a favorable direction but limits its risk of loss in the event of an
unfavorable price movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium
which may partially offset a decline in the value of a Fund's assets. By
writing a call option, a Fund becomes obligated, in exchange for the premium,
(upon exercise of the option) 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 (upon exercise of the option) 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
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the amount of the premium received. The 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. Each 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 which permit principals of an investment company
registered under the Act to engage in such transactions without registering as
commodity pool operators. 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 (or the currency in which they are quoted or
denominated) that a Fund owns or futures contracts will be purchased to protect
a Fund against an increase in the price of securities (or the currency in which
they are quoted or denominated) it intends to purchase. As evidence of this
hedging intent, each Fund expects that on 75% or more of the occasions on which
it takes a long futures or option position (involving the purchase of futures
contracts), the Fund will have purchased, or will be in the process of
purchasing, equivalent amounts of related securities (or assets denominated in
the related currency) in the cash 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."
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Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating a Fund to purchase securities or currencies, require the Fund to
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,
while a Fund may benefit from the use of futures and options on futures,
unanticipated changes in interest rates or securities prices or currency
exchange rates may result in a poorer overall performance for a Fund than if it
had not entered into any futures contracts or options transactions. In the
event of an imperfect correlation between a futures position and a portfolio
position which is intended to be protected, the desired protection may not be
obtained and a Fund may be exposed to risk of loss. In addition, it is not
possible to hedge fully or protect against currency fluctuations affecting he
value of securities denominated in foreign currencies because the value of such
securities is likely to fluctuate as a result of independent futures not related
to currency fluctuations.
Perfect correlation between a Fund's futures positions and portfolio
positions will be impossible to achieve. There are no futures contracts based
upon individual securities, except certain U.S. Government securities. The only
futures contracts available to hedge the Fund's portfolio are various futures on
U.S. Government securities, securities indices and foreign currencies. In
addition, it is not possible to hedge fully or perfectly against currency
fluctuations affecting the value of securities quoted or denominated in foreign
currencies because the value of such securities is likely to fluctuate as a
result of independent factors not related to currency fluctuations.
MORTGAGE DOLLAR ROLLS. The Taxable Funds may enter into mortgage
---------------------
"dollar rolls" in which a Fund sells securities for delivery in the current
month and simultaneously contracts with the same counterparty to repurchase
similar (same type, coupon and maturity), but not identical securities on a
specified future date. During the roll period, a Fund loses the right to
receive principal and interest paid on the securities sold. However, a Fund
would benefit to the extent of any difference between the 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. Unless such benefits exceed the income, capital appreciation and gain
or loss due to mortgage prepayments that would have been realized on the
securities sold as part of the mortgage dollar roll, the use of this technique
will diminish the investment performance of a Fund compared with what such
performance would have been without the use of mortgage dollar rolls. All cash
proceeds will be invested in instruments that are permissible investments for
the applicable
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Fund. Each 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
its forward purchase price.
For financial reporting and tax purposes, the Funds treat mortgage dollar
rolls as two separate transactions; one involving the purchase of a security and
a separate transaction involving a sale. The Funds do not currently intend to
enter into mortgage dollar rolls that are accounted for as a financing.
Mortgage dollar rolls involve certain risks including the following: if
the broker-dealer to whom a Fund sells the security becomes insolvent, the
Fund's right to purchase or repurchase the mortgage-related securities subject
to the mortgage dollar roll may be restricted and the instrument which the Fund
is required to repurchase may be worth less than an instrument which the Fund
originally held. Successful use of mortgage dollar rolls will depend upon the
Adviser's ability to manage its interest rate and mortgage prepayments exposure.
For these reasons, there is no assurance that mortgage dollar rolls can be
successfully employed.
CONVERTIBLE SECURITIES. Convertible securities may include corporate notes
----------------------
or preferred stock but are ordinarily a long-term debt obligation of the issuer
convertible at a stated exchange rate into common stock of the issuer. As with
all debt securities, the market value of convertible securities tends to decline
as interest rates increase and, conversely, to increase as interest rates
decline. Convertible securities generally offer lower interest or dividend
yields than non-convertible securities of similar quality. However, when the
market price of the common stock underlying a convertible security exceeds the
conversion price, the price of the convertible security tends to reflect the
value of the underlying common stock. As the market price of the underlying
common stock declines, the convertible security tends to trade increasingly on a
yield basis, and thus may not depreciate to the same extent as the underlying
common stock. Convertible securities in which the Core Fund invests will be
subject to the same rating criteria as its other investments in fixed income
securities.
LENDING OF PORTFOLIO SECURITIES
Each Fund may lend portfolio securities. Under present regulatory
policies, such loans may be made to institutions, such as brokers or dealers and
would be required to be secured continuously by collateral in cash, cash
equivalents, letters of credit or U.S. Government securities maintained on a
current basis in an amount at least equal to the market value of the securities
loaned. Cash collateral may be invested in cash equivalents. 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
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the loan in anticipation of an important vote to be taken among holders of the
securities or the giving or withholding of their consent on a material matter
affecting the investment. As with other extensions of credit there are risks
of delay in recovering, or even loss of rights in, the collateral should the
borrower of the securities fail financially. However, the loans 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. (Certain commercial paper issued in reliance on Section 4(2) of the
Securities Act of 1933 is treated like Rule 144A Securities.) 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 or Section 4(2) 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 a Fund 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.
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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 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 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 three days prior to 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.
OTHER INVESTMENT COMPANIES
Each Fund reserves the right to invest up to 10% of its total assets,
calculated at the time purchase, in the securities of other investment
companies, but may not 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. Pursuant to an exemptive order obtained from
the SEC, the Funds may invest in money market funds for which the Adviser or any
of its affiliates serves as investment adviser. A Fund will indirectly bear its
proportionate share of any management fees and other expenses paid by investment
companies in which it invests in addition to the advisory and administration
fees paid by the Fund. However, to the extent that a Fund invests in a money
market fund for which the Adviser acts as adviser, the advisory and
administration fees payable by the Fund to and Adviser will be reduced by an
amount equal to the Fund's proportionate share of the advisory and
administration fees paid by such money market fund to the Adviser or any of its
affiliates.
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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, generally for tax purposes, a repurchase
agreement is deemed to be a loan from a Fund to the seller of the security. For
other purposes, it is not clear whether a court would consider the security
purchased by a Fund subject to a repurchase agreement as being owned by the Fund
or as being collateral for a loan by the Fund to the seller. In the event of
commencement of bankruptcy or insolvency proceedings with respect to the seller
of the security before repurchase of the security under a repurchase agreement,
a Fund may encounter delay and incur costs before being able to sell the
security. Such a delay may involve loss of interest or a decline in price of
the security. If the court characterizes the transaction as a loan and a Fund
has not perfected a security interest in the security, 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.
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INVESTMENT IN UNSEASONED COMPANIES
Global Income Fund and Government Income Fund may each invest up to 5% of
its total assets, calculated at the time of purchase, in companies (including
predecessors) which have operated less than three years, excluding issuers whose
debt securities have been rated, at the time of investment, investment grade or
better by at least one nationally recognized statistical rating organization.
The securities of such companies may have limited liquidity, which can result in
their being priced higher or lower than might otherwise be the case. In
addition, investments in unseasoned companies are more speculative and entail
greater risk than do investments in companies with an established operating
record.
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 Tax-Free Fund's and Municipal Income
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 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. With respect to the Tax
Exempt Funds, 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.
AS A MATTER OF FUNDAMENTAL POLICY, 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
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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.
(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;
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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 in the securities of other investment companies, provided that
the Fund may make such an investment as part of a merger, consolidation, or
acquisition of assets, and provided further that the Fund may make such an
investment in the open market where no commission or profit to a sponsor or
dealer results from the purchase other than customary brokers' commissions and
then only to the extent permitted by the Act;
(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 total assets of the Fund;
(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;
(e) purchase additional securities which the amount of the Fund's
borrowings exceed 5% of the Fund's net assets; or
(f) 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
10% of its total assets
B-53
<PAGE>
in restricted securities (including those eligible for resale under Rule 144A).
AS A MATTER OF FUNDAMENTAL POLICY, GOVERNMENT INCOME FUND MAY NOT:
(1) Purchase securities of any one issuer, other than obligations issued or
guaranteed by the U.S. government, its agencies, instrumentalities or sponsored
enterprises, 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 or by its agencies,
instrumentalities or sponsored enterprises.
(2) 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, 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 securities
pending the anticipated sale of other portfolio securities or assets and (d)
transactions in mortgage dollar rolls, 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, 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, instrumentalities or sponsored
enterprises.
(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.
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<PAGE>
(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 limited partnership
interests, or in oil, gas or mineral interests, although the Fund may purchase
and sell securities that are secured by real estate or interests therein,
securities of real estate investment trusts and Mortgage-Backed 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 Act) except as permitted in Investment Restriction No. (2).
In addition, as non-fundamental policies, the Government Income Fund may
not:
(a) invest in the securities of other investment companies, provided that
the Fund may make such an investment as part of a merger, consolidation, or
acquisition of assets, and provided further that the Fund may make such an
investment in the open market where no commission or profit to a sponsor or
dealer results from the purchase other than customary brokers' commissions and
then only to the extent permitted by the Act;
(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) invest more than 5% of the Fund's total assets in (i) securities of any
issuer with a record of less than three years' continuous operation, including
predecessors, except Government Securities and securities guaranteed by any
foreign government or its agencies or instrumentalities;
B-55
<PAGE>
(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;
(e) purchase additional securities while the amount of the Fund's
borrowings exceeds 5% of the Fund's total assets; or
(f) 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
10% of its total assets in restricted securities (including those eligible for
resale under Rule 144A).
AS A MATTER OF FUNDAMENTAL POLICY, SHORT DURATION GOVERNMENT 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
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<PAGE>
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 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
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<PAGE>
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.
(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 Duration Government 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 Duration Government Fund does
not currently intend to purchase or sell interests in oil, gas or other mineral
exploration or development programs.
AS A MATTER OF FUNDAMENTAL POLICY, SHORT DURATION TAX-FREE 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 restriction is not applicable to investments in tax-
exempt securities issued by state and municipal governments and their agencies
and instrumentalities; 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. The 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. The Fund may so invest in (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
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<PAGE>
(including hotels), steel companies or life care facilities, (b) Municipal
Securities whose issuers are in the same state or (c) industrial development
obligations.
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 of the Fund or to finance failed settlements
of portfolio trades without immediately liquidating portfolio securities or
other assets; and (c) in order to fulfill commitments or plans to purchase
additional securities pending the anticipated sale of other portfolio securities
or assets, but only if after each such borrowing there is asset coverage of at
least 300% as defined in the Act. For purposes of this investment restriction,
short sales, 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
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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.
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 Tax-Free 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 Tax-
Free 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 in the securities of other investment companies, provided that
the Fund may make such an investment as part of a merger, consolidation, or
acquisition of assets, and provided further that the Fund may make such an
investment in the open market where no commission or profit to a sponsor or
dealer results from the purchase other than customary brokers' commissions and
then only to the extent permitted by the Act.
(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
10% of its total 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, other than
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Municipal Securities that have been rated A or better by Moody's or Standard &
Poor's.
For the purpose of applying Short Duration Tax-Free 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. For purposes of the
foregoing limitations, any limitation which involves a maximum percentage shall
not be considered violated unless an excess over the percentage occurs
immediately after, and is caused by, an acquisition or encumbrance of securities
or assets of, or borrowings by, the Fund. With respect to fundamental
investment restriction No. 3, the Fund must maintain asset coverage of at least
300% (as defined in the Act), inclusive of any amounts borrowed.
AS A MATTER OF FUNDAMENTAL POLICY, MUNICIPAL 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 restriction is not applicable to investments in tax-exempt
securities issued by state and municipal governments and their agencies and
instrumentalities; 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.
The 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. The Fund may so invest in (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)
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<PAGE>
Municipal Securities whose issuers are in the same state, or (c) industrial
development obligations.
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 shares of the Fund or to finance failed settlements of
portfolio trades without immediately liquidating portfolio securities or other
assets; and (c) in order to fulfill commitments or plans to purchase additional
securities pending the anticipated sale of other portfolio securities or assets,
but only if after each such borrowing there is asset coverage of at least 300%
as defined in the Act. For purposes of this investment restriction, short
sales, 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 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
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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 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 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, the Municipal Income 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 that are not readily marketable and restricted securities not
eligible for resale pursuant to Rule 144A under the Securities Act of 1933; or
(b) more than 10% of its total assets in restricted securities (including those
eligible for resale under Rule 144A).
(d) Purchase additional securities while the Fund's borrowings exceed 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, other than Municipal Securities that have been
rated A or better by Moody's or Standard & Poor's.
(f) Invest in the securities of other investment companies, provided that
the Fund may make such an investment as part of a merger, consolidation, or
acquisition of assets, and provided further that the Fund may make such an
investment in the open market where no commission or profit to a sponsor or
dealer results from the purchase other than customary brokers' commissions and
then only to the extent permitted by the Act.
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<PAGE>
For the purpose of applying the Fund's investment restrictions, the
identification of the issuer of a Municipal Security that is not a general
obligation 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. For purposes of the foregoing
limitations, any limitation which involves a maximum percentage shall not be
considered violated unless an excess over the percentage occurs immediately
after, and is caused by, an acquisition or encumbrance of securities or assets
of, or borrowings by, the Fund. With respect to fundamental investment
restriction No. 3, the Fund must maintain asset coverage of at least 300% (as
defined in the Act), inclusive of any amounts borrowed.
AS A MATTER OF FUNDAMENTAL POLICY, 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
transactions shall not constitute borrowing.
B-64
<PAGE>
4. Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings and to the extent related to the
deposit of assets in escrow in connection with the writing of covered put and
call options and the purchase of securities on a forward commitment or delayed-
delivery basis and collateral and initial or variation margin arrangements with
respect to 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 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:
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<PAGE>
(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
10% of its total assets in restricted securities (including those eligible for
resale pursuant to Rule 144A).
(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.
(f) Invest in the securities of other investment companies, provided that
the Fund may make such an investment as part of a merger, consolidation, or
acquisition of assets, and provided further that the Fund may make such an
investment in the open market where no commission or profit to a sponsor or
dealer results from the purchase other than customary brokers' commissions and
then only to the extent permitted by the Act.
AS A MATTER OF FUNDAMENTAL POLICY, GLOBAL INCOME FUND MAY NOT:
(1) Borrow money, except from banks on a temporary basis, provided that the
Fund is required to maintain asset coverage of at least 300% for all borrowings.
For purposes of this investment restriction, short sales, transactions in
currency, forward contracts, options, futures contracts and options on futures
contracts, and forward commitment transactions shall not constitute borrowing.
(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 in obligations of
the U.S. Government or any of its agencies or instrumentalities.
(3) Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings and to the extent
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<PAGE>
related to the segregation of assets in connection with the writing of covered
put and call options and the purchase of securities or currencies on a forward
commitment or delayed-delivery basis and collateral and initial or variation
margin arrangements with respect to forward contracts, options, futures
contracts and options on futures contracts.
(4) Purchase securities on margin, except for such short-term credits as
are necessary for the clearance of transactions, but the Fund may make margin
deposits in connection with transactions in currencies, options, futures and
options on futures.
(5) Make short sales of securities, except short sales against-the-box, or
maintain a short position. (The Fund does not currently intend to make short
sales against-the-box.)
(6) 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.
(7) 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.
(8) Invest in commodities, except that the Fund may (a) purchase and sell
futures contracts, including those relating to securities, currencies and
indices, and options on any such futures contracts or currencies, and (b)
purchase and sell currencies or securities on a forward commitment or delayed-
delivery basis.
(9) Lend any funds or other assets except through the purchase of all or a
portion of an issue of securities or obligations of the type in which it may
invest; however, the Fund may lend portfolio securities in an amount not to
exceed 33-1/3% of the value of its total assets.
(10) Issue any senior security (as such term is defined in Section 18(f) of
the Act), except as permitted in Investment Restriction Nos. (1), (4), (5) and
(9).
In addition, as non-fundamental policies, Global Income Fund may not:
(a) Invest in the securities of other investment companies, provided that
the Fund may make such an investment as part of a merger, consolidation, or
acquisition of assets, and provided further that the Fund may make such an
investment in the open market where no commission or profit to a sponsor or
dealer results from the purchase other than customary brokers' commissions and
then only to the extent permitted by the Act.
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<PAGE>
(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) 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 Securities Act of 1933; or
(b) more than 10% of its total assets in restricted securities (including those
eligible for resale under Rule 144A).
(d) Purchase additional securities while the amount of the Fund's
borrowings exceeds 5% of the Fund's net 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 73, 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 Corporation.
Ashok N. Bakhru, Age 53, 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 40, One New York Plaza, New York, New York 10004. President
---------
and Trustee. Director, Mutual Funds Group of GSAM since September 1992; Vice
- -----------
President and Senior Portfolio Manager, GSAM from June 1988 to Present.
David B. Ford,* Age 50, 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.
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<PAGE>
Alan A. Shuch,* Age 46, 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; Limited Partner, Goldman Sachs since December
1994.
Jackson W. Smart, Jr., Age 65, 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; Director,
Federal Express Corporation; and North American Private Equity Group (a venture
capital fund).
William H. Springer, Age 66, 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, American
Information Technologies Corporation; Director, Walgreen Co. (a retail drugstore
business); and Baker, Fentress & Co. (a closed-ended non-diversified management
investment company).
Richard P. Strubel, Age 56, 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) January 1984 to October 1994;
Pauline Taylor,* Age 49, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs since June 1992; Consultant since 1989
- ---------
to June 1992.
Nancy L. Mucker,* Age 46, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs; Co-Manager, Shareholder Services for
- ---------
GSAM Funds Group.
John W. Mosior,* Age 57, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs; Co-Manager, Shareholder Services for
- ---------
GSAM Funds Group.
Scott M. Gilman,* Age 36, 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.
Michael J. Richman,* Age 35, 85 Broad Street, New York, New York 10004.
Secretary. Vice President and Assistant General Counsel to the Funds Group,
- ---------
GSAM since February 1994; Partner, Hale and Dorr since September 1991 to June
1992; Attorney-at-Law, Gaston & Snow since September 1985 to September 1991.
Howard B. Surloff,* Age 30, 85 Broad Street, New York, New York 10004. Assistant
---------
Secretary. Vice President and Assistant General
- ---------
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<PAGE>
Counsel, Goldman Sachs since November 1993 and May 1994, respectively; Counsel
to the Funds Group, GSAM since November 1993; Associate of Shereff, Friedman,
Hoffman & Goodman (prior thereto).
Steven E. Hartstein*, Age 32, 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).
Deborah A. Robinson*, Age 24, 85 Broad Street, New York, New York 10004.
Assistant Secretary. Administrative Assistant, Goldman Sachs since January
- -------------------
1994. Formerly at Cleary, Gottlieb, Stein and Hamilton.
Kaysie Uniacke*, Age 34, One New York Plaza, New York, New York 10004.
Assistant Secretary. Vice President and Portfolio Manager, GSAM 1988 to
- -------------------
Present.
Elizabeth Alexander*, Age 26, One New York Plaza, New York, New York 10004.
Assistant Secretary. Junior Portfolio Manager, 1995 to Present. Funds Trading
- -------------------
Assistant, GSAM 1993 - 1995. Formerly, Compliance Analyst, Prudential
Insurance, 1991 thru 1993.
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 December 31, 1995,
the Trustees and officers as a group owned less than 1% of the outstanding
shares of beneficial interest of each Fund.
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, 1995:
Total
Pension or Compensation
Aggregate Retirement from Goldman
Compensation Benefits Accrued Sachs Mutual
from the as of Part of Funds including
Trust Trust's Expenses the Trust)*
------------ ---------------- ---------------
Name of Trustees
Paul C. Nagel, Jr. $17,596 $0 $101,000
Ashok N. Bakhru $11,081 $0 $ 61,000
Marcia L. Beck $ 0 $0 $ 0
David B. Ford $ 0 $0 $ 0
Alan A. Shuch $ 0 $0 $ 0
Jackson W. Smart $11,081 $0 $ 61,000
William H. Springer $11,081 $0 $ 61,000
Richard P. Strubel $11,081 $0 $ 61,000
* The Goldman Sachs Mutual Funds consisted of 29 mutual funds, including the
seven series of the Trust, on October 31, 1995.
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<PAGE>
INVESTMENT ADVISERS
- -------------------
GSAM, One New York Plaza, New York, New York 10004, a separate operating
division of Goldman Sachs, serves as the investment adviser to Municipal Income
Fund, Government Income Fund, Global Income Fund, Short Duration Tax-Free Fund
and Core Fund pursuant to separate investment advisory agreements. FMLP, One New
York Plaza, New York, New York 10004, serves as the investment adviser to
Adjustable Rate Fund and Short Duration Government Fund pursuant to separate
investment advisory agreements. FMLP, a Delaware limited partnership, is an
affiliate of Goldman Sachs. GSAMI, 140 Fleet Street, London EC4A 2BJ, England,
acts as the Global Income Fund's subadviser. As a company with unlimited
liability under the laws of England, GSAMI is regulated by the Investment
Management Regulatory Organization Limited, a United Kingdom self-regulatory
organization in the conduct of its investment advisory business. GSAM also
serves as administrator to Municipal Income Fund, Government Income Fund and
Global Income Fund. See "MANAGEMENT" in the Fund's Prospectus for a description
of the applicable Adviser's duties as investment adviser or subadviser.
Founded in 1869, Goldman Sachs is among the oldest and largest investment
banking firms in the United States. Goldman Sachs is a leader in developing
portfolio strategies and in many fields of investing and financing,
participating in financial markets worldwide and serving individuals,
institutions, corporations and governments. Goldman Sachs is 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
$160 million, Goldman Sachs' Investment Research Department covers approximately
1,700 companies, including approximately 1,000 U.S. corporations in 60
industries. The in-depth information and analyses generated by Goldman Sachs'
research analysts are available to the Advisers.
For more than a decade, Goldman Sachs has been among the top-ranked firms in
Institutional Investor's annual "All-America Research Team" survey. In
addition, many of Goldman Sachs' economists, securities analysts, portfolio
strategists and credit analysts have consistently been highly ranked in
respected industry surveys conducted in the U.S. and abroad. Goldman Sachs is
also
B-71
<PAGE>
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 relative
to its interest risk.
In planning the Tax Exempt Funds' strategies, the 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 the Tax Exempt Funds'
yields by fine-tuning the portfolio, using quantitative tools designed for
municipal portfolio management. The Adviser, which managed approximately $3
billion in tax-free securities in 1995, has assembled an experienced team of
professionals for selection of the Tax Exempt Funds' portfolio securities. The
Adviser manages money for some of the world's largest institutional investors.
In structuring Adjustable Rate Fund's and Short Duration Government 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 in CMO
floating rate tranches and interest only stripped Mortgage-Backed Securities).
With respect to Adjustable Rate Fund, Government Income Fund, Short Duration
Government 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
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<PAGE>
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 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, Government Income
Fund, Short Duration Government 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
B-73
<PAGE>
customers. Use of these services by the Advisers with respect to a Fund does
not preclude Goldman Sachs from providing these services to third parties or
using such services as a basis for trading for its own account or the account of
others.
The fixed income research capabilities of Goldman Sachs are available to the
Advisers include the Goldman Sachs Fixed Income Research Department and the
Credit Department. The Fixed Income Research Department monitors developments
in U.S. and foreign fixed income markets, assesses the outlooks for various
sectors of the markets and provides relative value comparisons, as well as
analyzes trading opportunities within and across market sectors. The Fixed
Income Research Department is at the forefront in developing and using computer-
based tools for analyzing fixed income securities and markets, developing new
fixed income products and structuring portfolio strategies for investment policy
and tactical asset allocation decisions. The Credit Department tracks specific
governments, regions and industries and from time to time may review the credit
quality of a Fund's investments.
In addition to fixed income research and credit research, the Advisers in
managing Global Income Fund are supported by Goldman Sachs' economics research.
The Economics Research Department, based in London, conducts economic, financial
and currency markets research which analyzes economic trends and interest and
exchange rate movements worldwide. The Economics Research Department tracks
factors such as inflation and money supply figures, balance of trade figures,
economic growth, commodity prices, monetary and fiscal policies, and political
events that can influence interest rates and currency trends. The success of
Goldman Sachs' international research team has brought wide recognition to its
members. The team has earned top rankings in the annual "Extel Financial
Survey" of U.K. investment managers in the following categories: U.K. Economy
1989-1995; International Economies 1986, 1988-1995; International Government
Bond Market 1993-1995; and Currency Movements 1986-1993.
In allocating assets in the Global Income Fund's portfolio among
currencies, the Advisers will have access to the Global Asset Allocation Model.
The model is based on the observation that the prices of all financial assets,
including foreign currencies, will adjust until investors globally are
comfortable holding the pool of outstanding assets. Using the model, the
Advisers will estimate the total returns from each currency sector which are
consistent with the average investor holding a portfolio equal to the market
capitalization of the financial assets among those currency sectors. These
estimated equilibrium returns are then combined with Goldman Sachs' research
professionals' expectations to produce an optimal currency and asset allocation
for the level of risk suitable for the Fund's investment objective and criteria.
Each Fund's advisory agreement, and in the case of Global Income Fund, the
Subadvisory 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
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<PAGE>
agreements or "interested persons" (as such term is defined in the Act) of any
party thereto (the "non-interested Trustees"), on April 26, 1995. The
applicable Fund's Advisory Agreement including Global Income Fund's Subadvisory
Agreement was approved by the shareholders of Adjustable Rate Fund on October
30, 1991, the shareholders of Short Duration Government Fund on March 27, 1989,
the shareholders of Global Income Fund on December 5, 1991, the sole initial
shareholder of Short Duration Tax-Free Fund on September 25, 1992, the sole
initial shareholder of Government Income Fund on January 30, 1993, the sole
initial shareholder of Municipal Income Fund on July 16, 1993 and the sole
initial shareholder of Core Fund on October 29, 1993. Each Advisory Agreement
will remain in effect until June 30, 1996 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.
Each Advisory Agreement will terminate automatically if assigned (as defined
in the Act). Each Advisory Agreement is also terminable at any time without
penalty by the Trustees of the Trust or by vote of a majority of the outstanding
voting securities of a Fund on 60 days written notice to the applicable Adviser
or by the Adviser in 60 days written notice of the Trust.
The Advisory Agreements provide that GSAM, FMLP and GSAMI, in their
capacity as advisers and subadviser, respectively, 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, the Adviser is entitled
to receive the fee set forth below and the Adviser is currently limiting the fee
to the rate set forth below:
Contractual Current
Rate Rate
Adjustable Rate Fund 0.40% 0.40%
Short Duration Government Fund 0.50% 0.40%
Government Income Fund 0.50% 0.25%
Short Duration Tax-Free Fund 0.40% 0.40%
Municipal Income Fund 0.40% 0.40%
Core Fund 0.40% 0.40%
Global Income Fund
Advisory 0.25% 0.12%
Subadvisory 0.50% 0.32%
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. See "Expenses" for discussion of Global Income Fund's
other expense limitations.
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<PAGE>
For the fiscal years ended October 31, 1995, 1994 and 1993, the
amounts of the investment advisory fees incurred by each Fund then in existence
were as follows:
1995 1994 1993
---------- ---------- ----------
Adjustable Rate Fund $2,947,492 $6,798,185 $9,498,008
Short Duration Government 517,091 1,063,867 1,311,347
Fund/(1)/
Short Duration Tax-Free Fund/(2)/ 260,970 468,868 243,069
Core Fund/(3)/ 137,158 56,255 n/a
Global Income Fund/(4)/ 706,460 1,518,814 1,553,394
Government Income Fund/(5)/ 44,037 0 0
Municipal Income Fund/(6)/ 154,707 35,494 0
_________________________
/(1)/ Had expense limitations not been in effect, Short Duration Government Fund
would have paid advisory fees of $646,364, $1,329,834 and $1,639,184,
respectively, for such periods.
/(2)/ Short Duration Tax-Free Fund commenced operations October 1, 1992. Had
expense limitations not been in effect, Short Duration Tax-Free Fund would
have paid advisory fees of $272,283, for the period ended October 31,
1993.
/(3)/ Core Fund commenced operations January 5, 1994.
/(4)/ For the same periods, Global Income Fund paid GSAMI Subadvisory fees of
$1,412,921, $3,037,627 and $3,106,787, respectively, for such periods. If
expense limitations had not been in effect, Global Income Fund would have
paid advisory and subadvisory fees of $789,127 and $1,578,254,
respectively, for the period ended October 31, 1995.
/(5)/ Government Income Fund commenced operations February 10, 1993. Had
expense limitations not been in effect, Government Income Fund would have
paid advisory fees of $101,737, $65,604 and $28,306, respectively, for
such periods.
/(6)/ Municipal Income Fund commenced operations July 20, 1993. Had expense
limitations not been in effect, Municipal Income Fund would have paid
advisory fees of $200,207, $174,161 and $23,115, respectively, for such
periods.
Each Adviser performs administrative services for the applicable Funds
under the Advisory Agreements, except in the case of Global Income Fund,
Government Income Fund and Municipal Income Fund where GSAM performs
administrative services under a separate Administration Agreement. Such
administrative services 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
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<PAGE>
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.
For the service provided to these Funds under their respective
administration agreement, the Fund pays GSAM a monthly fee equal to 0.15% of 1%
of such Fund's average daily net assets on an annual basis. GSAM is currently
waiving its entire administration fee with respect to Government Income Fund.
Although it has no current intentions to do so, GSAM may modify or discontinue
such agreement at its discretion at any time.
For the fiscal years ended October 31, 1995, 1994 and 1993, the amounts of
the administration fees incurred by the Funds then in existence were as follows:
1995 1994 1993
------- ------- -------
Municipal Income Fund/(1)/ 75,077 55,277 0
Government Income Fund/(2)/ 0 0 0
Global Income Fund 473,476 911,288 932,036
_____________________
/(1) /For the fiscal year ended October 31, 1994, GSAM voluntarily agreed not to
impose a portion of its administration fee amounting to and $10,229. For
the period for July 20, 1993, (commencement of operations) through October
31, 1993, GSAM voluntarily agreed not to impose its administration fee,
which would have amounted to $8,668 for such period.
/(2)/ For the fiscal years ended October 31, 1995, October 31, 1994 and for the
period February 10, 1993 (commencement of operations) through October 31,
1993, GSAM voluntarily agreed not to impose its administration fees, which
would have amounted to $30,521, $19,681 and $8,492, respectively, for such
periods.
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, Goldman Sachs International ("GSI") and
J. Aron a & Co. ("ARON") have proprietary interests in, and may manage or advise
with respect to, accounts or funds (including separate accounts and other funds
and collective investment vehicles) which have investment objectives similar to
those of the Funds and/or which engage in transactions in the same types of
securities, currencies and instruments as the Funds. Goldman Sachs and its
affiliates are major participants in the global currency, equities, swap and
fixed income markets, in each case on a proprietary basis and for the accounts
of customers. As such, Goldman Sachs and its affiliates are actively engaged in
transactions in the same securities, currencies, and instruments in which the
Funds invest. Such activities could affect the prices and availability of the
securities, currencies, and instruments in which the Funds will invest, which
could have an adverse impact on 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 of such entitles to be equitable. In some cases, this system may
adversely affect the size or the price of the assets purchased or sold for the
Funds.
From time to time, the Funds' activities may be restricted because of
regulatory restrictions applicable to Goldman Sachs and its affiliates, and/or
their internal policies designed to comply with such restrictions. As a result,
there may be periods, for example, when the Advisers, and/or their affiliates
will not initiate or recommend certain types of transactions in certain
securities or instruments with respect to which, or in securities of issuers for
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, ARON 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 and Subadvisers 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
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<PAGE>
accounts could conflict with the transactions and strategies employed by the
Advisers and Subadviser in managing the Funds.
The results of each Fund's investment activities may differ significantly
from the results achieved by the Advisers and their affiliates for their
proprietary accounts or accounts (including investment companies or collective
investment vehicles) managed or advised by them. It is possible that Goldman
Sachs and its affiliates and such other accounts will achieve investment results
which are substantially more or less favorable than the results achieved by a
Fund. Moreover, it is possible that a Fund will sustain losses during periods
in which Goldman Sachs and its affiliates achieve significant profits on their
trading for proprietary or other accounts. The opposite result is also
possible.
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,
currencies 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, J. ARON and/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.
The Advisers may enter into transactions and invest in instruments and, in
the case of Global Income Fund and Core Fund, currencies 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 currencies 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. The Funds will deal with Goldman Sachs and its affiliates on an
arm's-length basis.
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<PAGE>
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.
DISTRIBUTOR AND TRANSFER AGENT
- ------------------------------
Goldman Sachs serves as the exclusive distributor of shares of the Funds
pursuant to a "best efforts" arrangement as provided by a distribution agreement
with the Trust dated February 1, 1993, as amended as of January 30, 1996.
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 has entered into sales agreements with certain investment dealers
and financial service firms (the "Authorized Dealers") to solicit subscriptions
for Class A and Class B Shares of each of the Funds that offer such classes of
shares. Goldman Sachs received a portion of the sales load imposed on the sale,
in the case of Class A Shares, or redemption in the case of Class B Shares, of
such Fund shares. No Class B Shares were outstanding during the fiscal years
ended October 31, 1993, 1994 and 1995. Goldman Sachs retained the following
commissions on sales of Class A shares during the following periods:
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<PAGE>
1995 1994 1993
------- ------- --------
Adjustable Rate Fund*** $40,000 n/a n/a
Municipal Income Fund 48,000 76,000 12,000*
Government Income Fund 22,000 5,000 7,000**
Global Income Fund 15,000 350,000 922,000
- ---------------------
* For the period July 20, 1993 (commencement of operations) through October
31, 1993
** For the period February 10, 1993 (commencement of operations)
through October 31, 1993.
*** Prior to May 15, 1995 Adjustable Rate Fund did not offer Class A Shares.
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, 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 from
the Short Duration Government Fund, Short Duration Tax-Free Fund and Core Income
Fund equal to (i) 0.04 of 1% (on an annualized basis) of the average daily net
assets attributable to the applicable class of the Fund; (ii) from the
Government Income, Global Income and Municipal Income Funds with respect to
Class A and Class B shares, $12,000 plus $7.50 per account, together with out-
of-pocket and transactions-related expenses (including those out-of-pocket
expenses payable to servicing agents; and (ii) from the Adjustable Rate Fund
equal to each class proportionate share of the total transfer agency fees borne
by the Fund, which are equal to $12,000 per year plus $7.50 per account,
together with out-of-pocket expenses (including those out-of-pocket expenses
payable to servicing agents) applicable to Class A shares and 0.04% of the
average daily net assets of the other classes of Adjustable Rate Government
Fund. Goldman Sachs is not entitled to receive a fee from the Institutional
Class of shares of Global Income Fund.
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<PAGE>
For the fiscal years ended October 31, 1995, 1994 and 1993 the amounts of
transfer agency fees incurred by each Fund then in existence were as follows:
1995 1994 1993
-------- -------- --------
Adjustable Rate Fund $306,662 $679,819 $949,645
Short Duration Government Fund 0 0 0
Short Duration Tax-Free Fund 26,098 46,887 27,248
Core Fund/(1)/ 13,716 5,637 n/a
Global Income Fund 106,764 132,123 127,834
Municipal Income Fund/(2)/ 63,695 70,811 17,500
Government Income Fund/(3)/ 94,095 57,960 44,012
- ------------------------
/(1)/ Core Fund commenced operations on January 5, 1994.
/(2)/ Municipal Income Fund commenced operations on July 20, 1993.
/(3)/ Government Income Fund commenced operations on February 10, 1993.
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" the Trust, on
behalf of each Fund, is responsible for the payment of each Fund's respective
expenses. The expenses borne by the outstanding classes of each Fund include,
without limitation, the fees payable to the Adviser 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 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, fees under any
distribution, authorized dealer service, administration or service plans
applicable to a particular class, any compensation and expenses of its "non-
interested" Trustees and extraordinary expenses, if any, incurred by the Trust.
Except for fees under any distribution, authorized dealer service,
administration or service plans applicable to a particular class and transfer
agency fees all Fund expenses are borne on a non-class specific basis.
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<PAGE>
The Advisers voluntarily have agreed to reduce or otherwise limit certain
Other Expenses (excluding transfer agency fees (except in the case of Global
Income Fund), advisory, subadvisory and administration fees, fees payable under
administration, distribution, service and authorized dealer service plans,
taxes, interest, brokerage fees and litigation, indemnification and other
extraordinary expenses) to the following percentage of each Fund's average daily
net assets:
Short Duration Government Fund 0.05%
Adjustable Rate Fund 0.05%
Municipal Income Fund 0.05%
Government Income Fund 0.00%
Short Duration Tax-Free Fund 0.05%
Core Fund 0.05%
Global Income Fund 0.06%
Such reductions or limits are calculated monthly on a cumulative basis.
Although the Advisers have no current intention of modifying or discontinuing
such expense limitation or the limitations on the advisory or subadvisory fees,
described above under "Advisory and Administrative Services -- Investment
Advisers and Administrator," each may do so in the future at its discretion.
For the fiscal year ended October 31, 1995, October 31, 1994 and October 31,
1993, Other Expenses of each Fund were reduced by the Advisers in the following
amounts:
1995 1994 1993
------- ------- -------
Adjustable Rate Fund 551,405 442,880 731,102
Short Duration
Government Fund 219,994 115,389 139,186
Short Duration
Tax-Free Fund 213,139 192,696 412,548
Core Fund* 176,469 141,815 n/a
Municipal Income Fund** 196,265 198,806 91,662
Government Income Fund*** 242,036 224,285 161,754
Global Income Fund**** 70,195 0 0
- ----------------------
* Core Fund commenced operations on January 5, 1994.
** Municipal Income Fund commenced operations on July 20, 1993.
*** Government Income Fund commenced operations on February 10, 1993.
**** For the fiscal years ended October 31, 1994 and October 31, 1993, there
were no expense limitations.
As stated in the Prospectuses, each Fund is responsible for the payment of
all expenses other than those assumed by its Adviser or Administrator. 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
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<PAGE>
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.
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 the
Advisers 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 in foreign countries and to hold cash
and currencies for the Trust.
INDEPENDENT PUBLIC ACCOUNTANTS
- ------------------------------
Arthur Andersen LLP, independent public accountants, One International
Place, 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 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 certain
foreign countries, debt securities in which the Global Income Fund and Core Fund
may invest are traded on exchanges at fixed commission rates. In connection
with portfolio transactions, the Advisory and Subadvisory 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), a Fund, to the extent permitted by applicable laws
and regulations, may aggregate the securities to be sold or purchased for the
Fund
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<PAGE>
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 the applicable 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 and Subadvisory 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. The fees received under
the Advisory and Subadvisory Agreement are not reduced by reason of the Advisor
or Subadviser receiving such brokerage and research services.
For the fiscal years ended October 31, 1995, 1994 and 1993, the Funds then
in existence paid no brokerage commissions.
During the fiscal year ended October 31, 1995, the Funds acquired and sold
securities of their regular broker-dealers: Chemcial Securities, Lehman
Brothers, Inc., Salomon Brothers, Inc., Merrill Lynch, Robert W. Baird, Daiwa
Securities, J.P. Morgan & Co., Inc., Donaldson, Lufkin, Jenrette, Nomura
Securities and Morgan Stanley & Co.
At October 31, 1995, Short Duration Tax-Free Fund, Global Income Fund and
Municipal Income Fund held no securities of their regular broker-dealers. As of
the same date, Short Duration Government Fund, Adjustable Rate Fund, Government
Income 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 Duration Government Fund: Lehman Brothers,
Inc. ($269) and Salomon Brothers, Inc. ($231); Adjustable Rate Fund: Lehman
Brothers, Inc. ($8602) and Salomon Brothers, Inc. ($7398); Government Income
Fund: Lehman Brothers, Inc. ($1559) and Salomon Brothers, Inc. ($1341); Core
Fund: Lehman Brothers, Inc. ($3011) and Salomon Brothers, Inc. ($2589).
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 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
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shares of the Funds. 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: (i) the
issuance of three classes of shares of Short Duration Government Fund, Short
Duration Tax-Free Fund and Core Fund: Institutional Shares, Administration
Shares and Service Shares; (ii) the issuance of four classes of shares of
Adjustable Rate Fund: Institutional Shares, Administration Shares, Service
Shares and Class A Shares; (iii) the issuance of four classes of shares of
Global Income Fund: Institutional Shares, Service Shares, Class A Shares and
Class B Shares; and (iv) the issuance of two classes of Municipal Income Fund
and Government Income Fund: Class A Shares and Class B Shares. As of October
31, 1995, no Service Shares of the Adjustable Rate Fund were outstanding; no
Service Shares of Short Duration Government Fund were outstanding no
Administration or Service Shares of Core Fund were outstanding; no Service
Shares or Class B Shares of Global Income Fund were outstanding; and no Class B
shares of Municipal Income Fund or Government Income Fund were outstanding.
Each Institutional Share, Administration Share, Service Share, Class A
Share and Class B Share of a Fund represents an equal proportionate interest in
the assets belonging to the Fund. All Fund expenses are allocated among classes
based on a percentage of a Fund's aggregate average net assets, except that
transfer agency fees and fees under distribution, authorized dealer service,
administration and service plans 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 and assisting customers with investment procedures. Service
Shares bear the cost of service fees at the annual rate of up to 0.50% of the
average daily net assets of such Service Shares. Institutions
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that provide services to holders of Administration Shares or Service Shares are
referred to in this Additional Statement as "Service Organizations".
Class A Shares are sold, with an initial sales charge of up to 1.50%,
in the case of Adjustable Rate Fund, and 4.50%, in the case of Municipal Income
Fund, Government Income Fund and Global Income Fund, 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 the Funds bear the cost of distribution (Rule 12b-1)
fees at the aggregate rate of up to 0.25% of the average daily net assets of
such Class A Shares. Class A Shares also bear the cost of an Authorized Dealer
Service Plan at an annual rate of up to 0.25% of average daily net assets
attributable to Class A Shares.
Class B Shares of the Funds are sold subject to a contingent deferred
sales charge of up to 5.0% through brokers and dealers who are members of the
National Association of Securities Dealers Inc. and certain other financial
services firms that have sales arrangements with Goldman Sachs. Class B shares
bear the cost of distribution (Rule 12b-1) fees at the aggregate rate of up to
0.75% of the average daily net assets attributable to Class B shares. Class B
shares also bear the cost of an Authorized Dealer Service Plan at an annual
rate of up to 0.25% of the average daily net assets attributable to Class B
shares.
It is possible that an institution or its affiliate may offer
different classes of shares (i.e., Institutional, Administration, Service, Class
A and Class B Shares) to its customers and thus receive different compensation
with respect to different classes of shares of each Fund. Shares of each class
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, authorized dealer service plan
and distribution 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
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share, are freely transferable and have no preemptive, subscription or
conversion rights.
As of November 30, 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 Idaho, FBO: Idaho Housing Agency,
P.O. Box 30007, Salt Lake City, UT 84130 (5.83%); St. Treasurer/Nebr. Invest.
Council, (5.12%); Fundex Corporation, Attn: Mitsuru Hashimoto, 1875 South Grant
Street, Suite 740, San Mateo, CA 94402-2670 (5.01%); Banco Bileao Vizcaya,
(7.67%); BankAmerica National Trust Co. ((8.92%); Meadows Foundation, Inc.
(5.27%); Short Duration Government Fund - West Virginia University Foundation,
Attn: Marie Amoyt, 3168 Collins Ferry Road, P.O. Box 4533, Morgantown, WV 26504-
4533 (7.39%); Central Carolina Bank & Trust Co., Attn: Norwood Thomas, Jr., P.O.
Box 931, Durham, NC 27702 (9.09%); Richfield Bank & Trust Co., Attn: Judith
Ferguson, 6625 Lyndale Ave., South Richfield, MN 55423 (14.86%); State Street
Bank & Trust Co., (30.64%); Short Duration Tax-Free Fund - G-K-G Inc., Attn:
Bernard Gassin, 166 Oak Knoll Terrace, Highland Park, IL 60035 (5.65%); Westport
Bank & Trust, Attn: Arnold Levine, P.O. Box 5177, Westport, CT 06881 (5.32%);
Donald R. Grant, 85 Broad Street, New York, NY 10004 (9.57%); MGIC, Attn: James
McGinnis, P.O. Box 297, Milwaukee, WI 53201 (27.16%); Indiana Trust & Investment
(5.09%); Global Income Fund - State Street Bank & Trust Trustee, Goldman Sachs
Profit Sharing Master Trust, Attn: Box 1992, Boston, MA 02105-1992 (99%).
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
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by such matter. Rule 18f-2 further provides that a class or series shall be
deemed to be affected by a matter unless the interests of each class or series
in the matter are substantially identical or the matter does not affect any
interest of such class or series. However, Rule 18f-2 exempts the selection of
independent public accountants, the approval of principal distribution contracts
and the election of 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 net assets attributable to each class of that Fund (assets,
including securities at value, minus liabilities) 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).
For the purpose of calculating the net asset value of the Funds,
investments in Mortgage-Backed Securities and other debt obligations are valued
at fair value based upon yield equivalents, a pricing matrix or other sources,
under valuation procedures established by the Trustees. Other portfolio
securities, other than money market instruments, for which accurate market
quotation are readily available are valued on the basis of quotations which may
be furnished by a pricing service or provided by dealers in such securities.
The prices derived by a pricing agent reflect broker/dealer-supplied valuations
and electronic data processing techniques. Options and futures contracts are
valued at the last sale price on the market where any such option or futures
contract is principally traded. Forward foreign currency exchange contracts are
valued at the mean between the last bid and asked quotations supplied by a
dealer in such contracts. Portfolio securities for which accurate market
quotation are not readily available and other assets are valued at fair value as
determined in good faith pursuant to procedures established by the Board of
Trustees. Money market instruments held by a Fund with a remaining maturity of
sixty days or less will be valued by the amortized cost method, which the
Trustees have determined approximates market value.
The value of all assets and liabilities expressed in foreign
currencies will be converted into U.S. dollar values at current exchange rates
of such currencies against U.S. dollars last quoted by any major bank. If such
quotations are not available, the rate of exchange will be determined in good
faith by or under procedures established by the Board of Trustees.
Generally, trading in foreign securities is substantially completed
each day at various times prior to the time the Global Income Fund and Core Fund
calculate their net asset value.
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Occasionally, events affecting the values of such securities may occur between
the times at which they are determined and the calculation of net asset value
which will not be reflected in the computation of the Fund's net asset value
unless the Trustees deem that such event would materially affect the net asset
value, in which case an adjustment would be made.
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 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
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value of its total (gross) 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 or Global Income 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 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 or Global
Income 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 or Global Income 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
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
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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. Exchange control or other foreign
laws, regulations or practices may restrict repatriation of investment income,
capital or the proceeds of securities sales by foreign investors such as Global
Income Fund and may therefore make it more difficult for Global Income Fund to
satisfy the distribution requirements described above, as well as the excise tax
distribution requirements described below. However, Global Income Fund
generally expects to be able to obtain sufficient cash to satisfy such
requirements from new investors, the sale of securities or other sources. If
for any taxable year a Fund 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,
1995, the Funds had approximately the following amounts of capital loss carry
forwards:
Years of
Amount Expiration
----------- ----------
Adjustable Rate Fund $38,311,000 2000-2002
Short Duration
Government Fund $11,136,000 2002
Short Duration
Tax-Free Fund $ 3,999,000 2002
Global Income Fund $10,295,502 2002
Municipal Income Fund $ 3,202,911 2002
Government Income Fund $ 735,561 2002
These amounts are available to be carried forward to offset future capital gains
to the extent permitted by applicable laws or regulations.
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 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.
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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.
The Tax Exempt Funds 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." The Tax Exempt Funds 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 Tax
Exempt Funds 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 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 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 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. The Tax Exempt Funds intend 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 aspects of these
investments, including the treatment of tender fees paid by the Tax Exempt Fund,
in relation to various regulated investment company tax provisions is unclear.
However, the Adviser intends to manage the Tax Exempt Funds' portfolios 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
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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 or forward
contracts and options or underlying securities or foreign currencies to the
extent of any unrecognized gains on 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 and Global Income
Fund. Under these rules, foreign exchange gain or loss realized by Core Fund or
Global Income 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 a Fund's investment company taxable income (computed without regard to
such loss) for a taxable year, the resulting loss would not be deductible by
the 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 of Core Fund's or Global Income 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 and Global Income Fund may be subject to foreign taxes on
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 Global Income Fund's total
assets at the close of any taxable year will generally consist of stock or
securities of foreign corporations, Global Income Fund will generally qualify to
file an election with the Internal Revenue Service pursuant to
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which shareholders of Global Income 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 Global Income Fund that are
treated as income taxes under U.S. tax regulations (which excludes, for example,
stamp taxes, securities transaction taxes, and similar taxes) even though not
actually received, and (ii) treat such respective pro rata portions as foreign
income taxes paid by them. Global Income Fund may or may not make this election
for any particular taxable year. Core Fund will not satisfy the 50% requirement
described above and therefore will not make this election. Core Fund and, if it
does not make the election, Global Income Fund will, however, be entitled to
deduct such taxes in computing investment company taxable income.
If Global Income Fund makes this election, its shareholders may then
deduct such pro rata portions of qualified foreign taxes in computing their
taxable incomes, or, alternatively, use them as foreign tax credits, subject to
applicable limitations, against their U.S. federal income taxes. Shareholders
who do not itemize deductions for federal income tax purposes will not, however,
be able to deduct their pro rata portion of qualified foreign taxes paid by
Global Income Fund, although such shareholders will be required to include their
shares of such taxes in gross income if Global Income Fund makes the election
referred to above.
If a shareholder chooses to take a credit for the foreign taxes deemed
paid by such shareholder as a result of any such election by Global Income Fund,
the amount of the credit that may be claimed in any year may not exceed the same
proportion of the U.S. tax against which such credit is taken which the
shareholder's taxable income from foreign sources (but not in excess of the
shareholder's entire taxable income) bears to his entire taxable income. For
this purpose, distributions from long-term and short-term capital gains or
foreign currency gains by Global Income Fund will generally not be treated as
income from foreign sources. This foreign tax credit limitation may also be
applied separately to certain specific categories of foreign-source income and
the related foreign taxes. As a result of these rules, which have different
effects depending upon each shareholder's particular tax situation, certain
shareholders of Global Income Fund not be able to claim a credit for the full
amount of their proportionate shares of the foreign taxes paid by such Fund.
Shareholders who are not liable for U.S. federal income taxes,
including tax-exempt shareholders, will ordinarily not benefit from this
election. Each year, if any, that Global Income Fund files the election
described above, its shareholders will be notified of the amount of (i) each
shareholder's pro rata share of qualified foreign income taxes paid by Global
Income Fund and (ii) the portion of Fund dividends which represents income from
each foreign country.
If Core Fund or Global Income Fund acquires stock in certain non-U.S.
corporations that receive at least 75% of their annual
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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 or Global
Income 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 or Global Income Fund is timely distributed to its
shareholders. Core Fund or Global Income 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 or Global Income Fund to recognize taxable
income or gain without the concurrent receipt of cash. Core Fund or Global
Income 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, capital appreciation bonds 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 certain
options, futures or forward contracts, as described above, will generally cause
it to realize income or gain prior to the receipt of cash payments with respect
to these securities 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 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
TAX EXEMPT FUNDS. Each Tax Exempt Fund expects to qualify to pay
"exempt-interest dividends," as defined in the Code. To qualify to pay exempt-
interest dividends, the 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 Municipal
Securities whose interest is excluded from gross income under Section 103(a) of
the Code. In purchasing Municipal Securities, each Tax Exempt 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. A Tax Exempt 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
B-96
<PAGE>
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 a Tax Exempt Fund's
distributions attributable to interest the 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 a
Tax Exempt Fund's portfolio may be affected by restrictive federal income tax
legislation enacted in recent years or by similar, future legislation. If a Tax
Exempt Fund satisfies the applicable requirements, dividends paid by the Fund
which are attributable to tax exempt interest on Municipal Securities and
designated by the 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 as items of interest excludable from their gross
income under Section 103(a) of the Code. Exempt-interest dividends a Tax Exempt
Fund receives from other regulated investment companies, including exempt-
interest dividends on auction rate preferred securities of such companies held
by the Fund, are treated as interest on Municipal Securities and may be
distributed by a Tax Exempt Fund as exempt-interest dividends. The recipient of
tax-exempt income is required to report such 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 a Tax Exempt Fund. The Code provides that interest on indebtedness incurred
or continued to purchase or carry shares of a Tax Exempt Fund is not deductible
to the extent attributable to exempt-interest dividends.
Although all or a substantial portion of the dividends paid by a Tax
Exempt Fund may be excluded by shareholders of the Fund from their gross income
for federal income tax purposes, each Tax Exempt Fund may purchase specified
private activity bonds, the interest from which (including the Fund's
distributions attributable to such interest) may be a preference item for
purposes of the federal alternative minimum tax (both individual and corporate).
All exempt-interest dividends from a Tax Exempt 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.
B-97
<PAGE>
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 Tax-
Free Fund and Municipal Income 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 coupons or (ii) capital gains
from the sale of securities or other 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 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 a Fund's current earnings and profits for these
purposes. Consequently, the portion, if any, of Short Duration Tax-Free Fund's
or Municipal Income 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.
B-98
<PAGE>
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 or Global Income 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 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 with other shares of the same Fund within a period of 61 days beginning
30 days before and ending 30 days after the shares are disposed of, such as
pursuant to a dividend reinvestment in shares of 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 Tax-Free Fund
and Municipal Income 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 Tax-Free Fund or Municipal Income Fund for the Fund's 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
B-99
<PAGE>
Short Duration Tax-Free Fund or Municiapl Income Fund during the period of their
investment in Short Duration Tax-Free Fund or Municipal Income Fund, as the case
may be.
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 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 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 Tax-Free Fund or Municipal Income Fund will not be subject to backup
withholding if such Funds reasonably estimate that at least 95% of their
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
B-100
<PAGE>
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. Non-U.S. shareholders may also be subject to U.S. withholding tax on
deemed income resulting from any election by Global Income Fund to treat
qualified foreign taxes it pays as passed through to shareholders (as described
above), but they may not be able to claim a U.S. tax credit or deduction with
respect to such taxes.
Any gain realized by a shareholder who is not a U.S. person upon a
sale or redemption of shares of a Fund will not be subject to U.S. federal
income or withholding tax unless the gain is effectively connected with the
shareholder's trade or business in the United States, or in the case of a
shareholder who is a nonresident alien individual, the shareholder is present in
the United States for 183 days or more during the taxable year and certain other
conditions are met.
Non-U.S. 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
B-101
<PAGE>
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 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, a Tax Exempt Fund's tax-free yield. Tax equivalent
yield is calculated by dividing a Tax Exempt 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 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 applicable to the relevant
class (i.e., net asset value in the case of each class other than Class A) at
the beginning of the period, and then calculating the annual compounded rate of
return which would produce that amount, assuming a redemption (and in the case
of Class B Shares payment of any contingent deferred sales charge) at the end of
the period. This calculation assumes a complete redemption of the investment.
It also assumes that all dividends and distributions are reinvested at net asset
value on the reinvestment dates during the period.
Year-by-year total return and cumulative total return for a specified
period are each derived by calculating the percentage rate required to make a
$1,000 investment (made at the maximum public offering price 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 Tax-Free and Municipal Income Funds only), distribution rate and
average annual total return (capital plus reinvestment of all distributions) for
each class of shares outstanding for the periods indicated.
Thirty-day yield, tax equivalent yield (Short Duration Tax-Free and
Municipal Income Funds 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
B-102
<PAGE>
each Fund is subject to different fees and expenses and may have different
returns for the same period. Any performance data for Class A or Class B Shares
which is based upon a Fund's net asset value per share would be reduced if a
sales charge were taken into account.
YIELD
Investment SEC 30-Day Pro-Forma
Fund Period Yield Yield/1/
- -------------------------------- ---------- ---------- ---------
30-Days
ended
10/31/95
ADJUSTABLE RATE FUND
Institutional Shares 6.12% 6.04%
Administration Shares 5.87% 5.79%
Service Shares/2/ n/a n/a
Class A Shares/2/
- Assumes 1.5% sales charge 5.78% 5.46%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 6.21% 5.89%
Administration Shares/3/ n/a n/a
Service Shares/3/ n/a n/a
SHORT DURATION TAX-FREE FUND
Institutional Shares 3.94% 3.60%
Administration Shares 3.68% 3.34%
Service Shares 3.44% 3.10%
CORE FUND
Institutional Shares 5.31% 5.05%
Administration Shares/4/ n/a n/a
Service Shares/4/ n/a n/a
GLOBAL INCOME FUND
Institutional Shares 5.54% 5.10%
Class A Shares
(Assumes 4.5% sales charge) 4.81% 4.40%
Service Shares/6/ n/a n/a
Class B Shares/6/ n/a n/a
MUNICIAPL INCOME FUND
Class A Shares 4.44% 3.88%
Class B Shares/7/ n/a n/a
GOVERNMENT INCOME FUND
Class A Shares 5.62% 4.22%
Class B Shares/8/ n/a n/a
B-103
<PAGE>
DISTRIBUTION RATE
30 Day Pro-Forma
Investment Distribution Distribution
Fund Period Rate Rate/1/
- -------------------------------- ----------------- ----------- -------------
30-Days
ended
10/31/95
ADJUSTABLE RATE FUND
Institutional Shares 6.37% 6.28%
Administration Shares 6.12% 6.03%
Service Shares/2/ n/a n/a
Class A Shares
- Assumes no sales charge 6.12% 5.79%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 7.49% 7.17%
Administration Shares/3/ n/a n/a
Service Shares/3/ n/a n/a
SHORT DURATION TAX-FREE FUND
Institutional Shares 4.00% 3.64%
Administration Shares 3.75% 3.39%
Service Shares 3.50% 3.14%
MUNICIPAL INCOME FUND
Class A Shares 4.46% 3.85%
Class B Shares/7/ n/a n/a
GOVERNMENT INCOME FUND
Class A Shares 6.11% 4.62%
Class B Shares/8/ n/a n/a
CORE FUND
Institutional Shares 5.81 5.53%
Administration Shares/4/ n/a n/a
Service Shares/4/ n/a n/a
GLOBAL INCOME FUND
Institutional Fund 7.25% 6.80%
Service Shares/6/ n/a n/a
Class A Shares
- Assumes no sales charge 6.74% 6.29%
Class B Shares/6/ n/a n/a
B-104
<PAGE>
TAX-EQUIVALENT YIELD/5/
Pro-Forma
Investment Tax-Equivalent Tax-Equivalent
Fund Period Rate Yield/1/
- ---------------------- ---------- ------------- -----------------
30-Days
ended
10/31/95
SHORT DURATION
TAX-FREE FUND
Institutional Shares 6.52% 5.96%
Administration Shares 6.09% 5.53%
Service Shares 5.70% 5.13%
MUNCIPAL INCOME FUND
Class A Shares 7.35% 6.42%
Class B Shares/7/ n/a n/a
_______________________________
1 Yield, tax equivalent yield and distribution rate if the applicable Adviser
had not voluntarily agreed to limit its advisory fees and to maintain
expenses at a specified level.
2 There were no Service Shares of Adjustable Rate Fund outstanding during the
periods indicated.
3 There were no Administration and Service Shares of Short Duration Government
Fund outstanding at October 31, 1995.
4 There were no Administration Shares or Service Shares of Core Fund
outstanding during the periods indicated.
5 The tax-equivalent rate of Short Duration Tax-Free Fund and Municipal Income
Fund is computed based on the 39.6% federal income tax rate.
6 There were no Service Shares or Class B Shares of Global Income Fund
outstanding during the period indicated.
7 There were no Class B Shares of Municipal Income Fund outstanding during the
period indicated.
8 There were no Class B Shares of Government Income Fund outstanding during the
period indicated.
The above tables should not be considered a representation of future
performance.
B-105
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
----------------------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Investment Expense Expense
Fund Date Period Limitations Limitations
- -------------------------------- ----------- -------------- --------------- ------------
<S> <C> <C> <C> <C>
ADJUSTABLE RATE FUND
Institutional Shares 7/17/91/1a/ ended 10/31/95 4.91% 4.82%
11/1/94 one year ended
10/31/95 6.75% 6.66%
Administration Shares 4/15/93/1b/ ended 10/31/95 3.96% 3.90%
11/1/94 one year ended
10/31/95 6.48% 6.40%
Class A Shares/1f/ 5/12/95/1d/ ended 10/31/95
Assumes 1.5% Sales Charge 1.17% 1.02%
Assumes No Sales Charge 2.74% 2.59%
Class B Shares/1e/ N/A N/A
Service Shares/1c/ N/A N/A
SHORT DURATION GOVERNMENT FUND
Institutional Shares 8/15/88/2a/ ended 10/31/95 7.31% 6.89%
11/1/94 one year ended
10/31/95 8.97% 8.68%
11/1/89 five years
ended 10/31/95 6.48% 6.23%
Administration Shares/2b/ N/A N/A
Service Shares/2c/ N/A N/A
</TABLE>
B-106
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
--------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Investment Expense Expense
Fund Date Period Limitations Limitations
- ------------------------------ -------------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
SHORT DURATION TAX-FREE FUND
Institutional Shares 10/1/92/3a/ ended 10/31/95 4.12% 3.64%
11/1/94 one year ended
10/31/95 5.98% 5.65%
Administration Shares 5/20/93/3b/ ended 10/31/95 3.21% 2.94%
11/1/94 one year ended
10/31/95 5.76% 5.43%
Service Shares 9/20/94/3c/ ended 10/31/95 4.70% 4.39%
11/1/94 one year ended
10/31/95 5.59% 5.26%
CORE FIXED INCOME FUND
Institutional Shares 1/15/94/4a/ 10/31/95 6.54% 5.76%
11/1/94 one year ended
10/31/95 15.72% 15.14%
Administration Shares/4b/ N/A N/A
Service Shares/4b/ N/A N/A
</TABLE>
B-107
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
--------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Investment Expense Expense
Fund Date Period Limitations Limitations
- --------------------------------- ------------ --------------- ------------ ------------
<S> <C> <C> <C> <C>
GLOBAL INCOME FUND/5C/
Class A Shares 8/2/91/5a/ ended 10/31/95
Assumes 4.5% Sales Charge 6.16% 5.89%
Assumes No Sales Charge 7.32% 7.05%
11/1/94 ended 10/31/95
Assumes 4.5% Sales Charge 9.92% 9.64%
Assumes No Sales Charge 15.08% 14.78%
Class B Shares/5b/ N/A N/A
Institutional Shares/5d/ 8/1/95/5e/ ended 10/31/95 4.42% 4.31%
Service Shares/5b/ N/A N/A
MUNICIPAL INCOME FUND
Class A Shares 7/20/93/6a/ ended 10/31/95
Assumes 4.5% Sales Charge 2.80% 1.65%
Assumes No Sales Charge 4.89% 3.72%
11/1/94 ended 10/31/95
Assumes 4.5% Sales Charge 8.64% 7.86%
Assumes No Sales Charge 13.79% 12.97%
Class B Shares/6b/ N/A N/A
</TABLE>
B-108
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
---------------
With Fee Without Fee
Reduction Reductions
and/or and/or
Investment Investment Expense Expense
Fund Date Period Limitations Limitations
- --------------------------------- --------------- --------------- --------------- ------------
<S> <C> <C> <C> <C>
GOVERNMENT INCOME FUND
Class A Shares 2/10/93/7a/ ended 10/31/95
Assumes 4.5% Sales Charge 5.27% 2.41%
Assumes No Sales Charge 7.06% 4.16%
11/1/94 ended 10/31/95
Assumes 4.5% Sales Charge 9.76% 7.73%
Assumes No Sales Charge 14.90% 12.78%
Class B Shares/7b/ 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 commended operations on April
15, 1993.
1c No Service Shares of Adjustable Rate Fund were outstanding during the periods
indicated.
1d Class A shares were initially issued on May 12, 1995.
1e No Class B Shares were outstanding during the periods indicated.
2a Institutional Shares of Short Duration Government Fund commenced operations
on August 15, 1988.
2b No Administration Shares of Short Duration Government Fund were outstanding
as of October 31, 1995.
2c No Service Shares of Sh ort Duration Government Fund were outstanding during
the periods indicated.
3a Institutional Shares of Short Duration Tax-Free Fund commenced operations on
October 1, 1992.
3b Administration Shares of Short Duration Tax-Free Fund commenced operations on
May 20, 1993.
3c Service Shares of Short Duration Tax-Free Fund 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.
5a Class A Shares of Global Income Fund commenced operations on August 2, 1991.
5b No Service Shares or Class B Shares of Global Income Fund were Outstanding
during the periods indicated.
5c On November 27, 1992, the maximum sales charge was changed from 3% to 4.5% of
the offering price. All performance figures in this table incorporate the
sales charge currently in effect.
5d An aggregate total return (not annualized) is shown instead of an
average annual total return since the Institutional Shares have not completed
a full 12 months of operation as of October 31, 1995.
5e Institutional Shares of Global Income Fund commenced operations on August 1,
1995.
6a Class A shares of Municipal Income Fund commenced operations on July 20,
1993.
6b No Class B Shares of Municipal Income Fund were outstanding during the
periods indicated.
7a Class A Shares of Government Income Fund commenced operations on February 10,
1993.
7b No Class B Shares of Government Income Fund were outstanding during the
periods indicated.
The above table should not be considered a representation of future
performance.
B-109
<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., Donaghues Money Fund Report, Barron's, The Wall
- ------------------------- --------------------------- -------- --------
Street Journal, Weisenberger Investment Companies Service, Business Week,
- -------------- ----------------------------------------- -------------
Changing Times, Financial World, Forbes, Fortune, Morningstar Mutual Funds The
- -------------- --------------- ------ ------- ------------------------ ---
New York Times, Personal Investor, Sylvia Porter's Personal Finance and Money.
- -------------- --------------------------------------------------- -----
In addition, Adjustable Rate Fund, Government Income Fund and Short
Duration Government 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 Tax-Free Fund and Municipal Income 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 and Global Income Fund may each from time to time advertise its
performance relative to certain indices and benchmark investments, including:
(a) the Lipper Analytical Services, Inc.
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Mutual Fund Performance Analysis, Fixed Income Analysis and Mutual Fund Indices
(which measure total return and average current yield for the mutual fund
industry and rank mutual fund performance); (b) the CDA Mutual Fund Report
published by CDA Investment Technologies, Inc. (which analyzes price, risk and
various measures of return for the mutual fund industry); (c) the Consumer Price
Index published by the U.S. Bureau of Labor Statistics (which measures changes
in the price of goods and services); (d) Stocks, Bonds, Bills and Inflation
published by Ibbotson Associates (which provides historical performance figures
for stocks, government securities and inflation); (e) the Salomon Brothers'
World Bond Index (which 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 the above referenced indices and
the characteristics of a Fund's benchmark investments are not identical to, and
in some cases may be very different from, those of a Fund's portfolio. These
indices and averages, as well as the averages set forth in the Appendices
hereto, are generally unmanaged and the items included in the calculations of
such indices and averages may not be identical to the formulas used by the 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.
In addition, from time to time, advertisements or information may include
a discussion of asset allocation models developed by GSAM and/or its affiliates,
certain attributes or benefits to be derived from asset allocation strategies
and the Goldman Sachs mutual funds that may be offered as investment options for
the strategic asset allocations. Such advertisements and information may also
include GSAM's current economic outlook and domestic and international market
views to suggest periodic tactical
B-111
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modifications to current asset allocation strategies. Such advertisements and
information may include other material which highlight or summarize the services
provided in support of an asset allocation program.
In addition, advertisements or shareholder communications may include a
discussion of certain attributes or benefits to be 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
Duration Government Fund assumed its current name in March 1996. Prior thereto,
Short Duration Government Fund's name was "GS Short-Intermediate Government
Fund" until May 1991 and "GS Short-Term Government Agency Fund" until March
1996. Adjustable Rate Government Fund assumed its current name in March 1996.
Prior thereto, Adjustable Rate Government Fund's name was "GS Adjustable Rate
Government Agency 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.
B-112
<PAGE>
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 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.
FINANCIAL STATEMENTS
The audited financial statements and related report of Arthur Andersen
LLP, independent public accounts, for each Fund contained in each Fund's 1995
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-113
<PAGE>
APPENDIX A
The company may from time to time use comparisons, graphs or charts in
advertisements to depict the following types of information:
. The performance of various types of securities (taxable money market funds,
U.S. treasury securities, adjustable rate mortgage securities, government
securities, municipal bonds) over time. However, the characteristics of
these securities are not identical to, and may be very different from, those
of a Fund's portfolio;
. Volatility of total return of various market indices (i.e. Lehman
Government Bond Index, S&P 500, IBC/Donoghue's Money Fund Average/ All
Taxable Index) over varying periods of time.
. Credit Ratings of domestic government bonds in various countries
. Price volatility comparisons of types of securities over different periods
of time.
. Price and yield comparisons of a particular security over different periods
of time.
In addition, the Company may from time to time include rankings of
Goldman, Sachs & Co.'s research department by publications such as the
Institutional Investor and the Wall Street Journal in advertisements.
1-A
<PAGE>
APPENDIX B
CORE FUND
GLOBAL INCOME 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 have speculative characteristics as well.
- --------------------
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-B
<PAGE>
Moody's also provides credit ratings for commercial paper. These are
promissory obligations (1) not having an original maturity in excess of nine
months, and (2) backed by commercial banks. Notes bearing the designation P-1
have a superior capacity for repayment. Notes bearing the designation P-2 have a
strong capacity for repayment.
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.
S&P's top ratings for notes issued after July 29, 1984 are SP-1 and SP-2.
The designation SP-1 indicates a very strong capacity to pay principal and
interest. A "+" is added for those issues determined to possess overwhelming
safety characteristics. An "SP-2" designation indicates a satisfactory
capacity to pay principal and interest.
Commercial paper rated A by S&P is regarded as having the greatest capacity
for timely payment. Commercial Paper rated A-1 is described as having an
overwhelming or very strong degree of safety regarding timely payment.
Commercial Paper rated A-2 by Standard & Poor's is described as having a
strong degree of safety regarding timely payment.
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
2-B
<PAGE>
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 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.
Investment Grade Short-Term Ratings
-----------------------------------
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
F-1+: Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely
payment.
F-1: Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated "F-1+".
3-B
<PAGE>
DUFF & PHELPS
-------------
Commercial Paper/Certificates of Deposits
-----------------------------------------
Category 1: Top Grade
Duff 1 plus: Highest certainty of timely payment. Short-term liquidity
including internal operating factors and/or ready access to
alternative sources of funds, is clearly outstanding, and
safety is just below risk-free U.S. Treasury short-term
obligations.
Duff 1: Very high certainty of timely payment. Liquidity factors are
excellent and supported by strong fundamental protection factors.
Risk factors are minor.
Notes: Bonds which are unrated may expose the investor to risks with
respect to capacity to pay interest or repay principal which are
similar to the risks of lower-rated bonds. The Fund is dependent on
the Investment Adviser's judgment, analysis and experience in the
evaluation of such bonds.
Investors should note that the assignment of a rating to a
bond by a rating service may not reflect the effect of recent
developments on the issuer's ability to make interest and
principal payments.
Description of Municipal Securities Ratings
-------------------------------------------
The ratings of Moody's Investors Service, Inc. and Standard & Poor's Ratings
Group represent their opinions as to the quality of various Municipal
Securities. It should be emphasized, however, that ratings are not absolute
standards of quality. Consequently, Municipal Securities with the same
maturity, coupon and rating may have different yields while Municipal
Securities of the same maturity and coupon with different ratings may have
the same yield.
Description of Ratings of State and Municipal Bonds
---------------------------------------------------
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.
4-B
<PAGE>
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 risk appear somewhat larger than
the 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 medium grade obligations,
i.e. they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
ABSENCE OF RATING: Where no rating has been assigned or where a rating
has been suspended or withdrawn, it may be for reasons unrelated to the
quality of the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not
rated as a manner of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgement to be formed; if a
bond is called for redemption; or for other reasons.
NOTE: Those bonds in the Aa and A and Baa groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa
1, A 1 and Baa 1.
5-B
<PAGE>
STANDARD & POOR'S RATINGS GROUP
AAA: Debt rated AAA has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in small
degree.
A: Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB: Debt rated BBB is regarding as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher rated categories.
Plus (+) or minus (-) for ratings from AA to CCC may be used to show relative
standing within the major rating categories.
Description of Ratings of State and Municipal Notes
---------------------------------------------------
MOODY'S INVESTORS SERVICE, INC.
Moody's ratings for state and municipal short-term obligations will
be designated Moody's Investment Grade ("MIG"). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower and short-term cyclical elements are
critical in short-term ratings, while other factors of major importance in
bond risk, long-term secular trends for example, may be less important over
the short run. Symbols used will be as follows:
MIG-1/VMIG-1 - This designation denotes best quality. There is
present strong protection by established cash flows, superior liquidity
support or demonstrated broad based access to the market for refinancing.
MIG-2/VMIG-2 - This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
STANDARD & POOR'S RATINGS GROUP
A Standard & Poor's note rating reflects the liquidity concerns and
market access risks unique to notes. Notes due in 3 years or less will
likely receive a note rating. Notes maturing beyond 3 years will most likely
receive a long-term
6-B
<PAGE>
debt rating. The following criteria will be used in making that assessment.
- Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).
- Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1 Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will
be given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term
of the notes.
SP-3 Speculative capacity to pay principal and interest.
Description of Ratings of State and Municipal Commercial Paper
MOODY'S INVESTORS SERVICE, INC.
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually senior debt obligations which have an original maturity in
excess of nine months. Moody's two highest commercial paper rating
categories are as follows:
"PRIME-1" - Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations.
Prime-1 repayment ability will often be evidenced by many of the following
characteristics:
- Leading market positions in well established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance on
debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
- Well established access to a range of financial markets and assured
sources of alternate liquidity.
"PRIME-2" - Issuers rated Prime-2 (or supporting institutions) have a
strong ability for repayment of short-term debt
7-B
<PAGE>
obligations. This will normally be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and coverage ratios,
while sound may be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
STANDARD & POOR'S RATINGS GROUP
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt having an original maturity of no
more than 365 days. Standard & Poor's two highest commercial paper rating
categories are as follows:
A-1 - This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus sign (+) designation.
A-2 - Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
Description of Ratings of Preferred Stock
-----------------------------------------
MOODY'S INVESTORS SERVICE, INC.
Moody's utilizes a variation of its bond rating symbols in the quality
ranking of preferred stocks because of the fundamental differences between
preferred stock and bonds. Preferred stock occupies a junior position to
bonds within a particular capital structure and such securities are rated
within the universe of preferred stocks.
AAA: An issue which is rated "aaa" is considered to be a top-
quality preferred stock. This rating indicates good asset protection and the
least risk of dividend impairment within the universe of preferred stocks.
AA: An issue which is rated "aa" is considered a high-grade
preferred stock. This rating indicates that there is a reasonable assurance
the earnings and asset protection will remain relatively well maintained in
the foreseeable future.
A: An issue rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the
"aaa" and "aa" classification, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
8-B
<PAGE>
STANDARD & POOR'S RATINGS GROUP
A Standard & Poor's preferred stock rating is an assessment of the
capacity and willingness of an issuer to pay preferred stock dividends and
any applicable sinking fund obligations. A preferred stock rating differs
from a bond rating inasmuch as it is assigned to an equity issue, which issue
is intrinsically different from, and subordinated to, a debt issue.
Therefore, to reflect this difference, the preferred stock rating symbol will
normally not be higher than the debt of the same issuer.
The preferred stock ratings are based on the following considerations:
- Likelihood of payment - capacity and willingness of the issuer to meet the
timely payment of preferred stock dividends and any applicable sinking fund
requirements in accordance with the terms of the obligation;
- Nature of, and provisions of, the issue; and
- Relative position of the issue in the event of bankruptcy, reorganization,
or other arrangement under the laws of bankruptcy and other laws affecting
creditors' rights.
AAA: This is the highest rating that may be assigned by Standard &
Poor's to a preferred stock issue and indicates and extremely strong capacity
to pay the preferred stock obligations.
AA: A preferred stock issue rated AA also qualifies as a high-
quality fixed income security. The capacity to pay preferred Stock
obligations is very strong, although not as overwhelming as for issues rated
AAA.
A: An issue rated A is backed by a sound capacity to pay the
preferred stick obligations, although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions.
9-B
<PAGE>
APPENDIX C
BUSINESS PRINCIPLES OF GOLDMAN, SACHS & CO.
Goldman Sachs is noted for its Business Principles, which guide all of the
firm's activities and serve as the basis for its distinguished reputation among
investors worldwide.
OUR CLIENT'S INTERESTS ALWAYS COME FIRST. Our experience shows that if we serve
our clients well, our own success will follow.
OUR ASSETS ARE OUR PEOPLE, CAPITAL AND REPUTATION. If any of these assets
diminish, reputation is the most difficult to restore. We are dedicated to
complying fully with the letter and spirit of the laws, rules and ethical
principles that govern us. Our continued success depends upon unswerving
adherence to this standard.
WE TAKE GREAT PRIDE IN THE PROFESSIONAL QUALITY OF OUR WORK. We have an
uncompromising determination to achieve excellence in everything we undertake.
Though we may be involved in a wide variety and heavy volume of activity, we
would, if it came to a choice, rather be best than biggest.
WE STRESS CREATIVITY AND IMAGINATION IN EVERYTHING WE DO. While recognizing
that the old way may still be the best way, we constantly strive to find a
better solution to a client's problems. We pride ourselves on having pioneered
many of the practices and techniques that have become standard in the industry.
WE STRESS TEAMWORK IN EVERYTHING WE DO . While individual creativity is always
encouraged, we have found that team effort often produces the best results. We
have no room for those who put their personal interests ahead of the interests
of the firm and its clients.
INTEGRITY AND HONESTY ARE AT THE HEART OF OUR BUSINESS. We expect our people to
maintain high ethical standards in everything they do, both in their work for
the firm and in their personal lives.
1-C
<PAGE>
GOLDMAN, SACHS & CO.'S INVESTMENT BANKING AND SECURITIES ACTIVITIES
Goldman, Sachs & Co. is a leading global investment banking and securities firm
with a number of distinguishing characteristics.
. Privately owned and ranked among Wall Street's best capitalized firms, with
assets exceeding $70 billion and partners capital and subordinated
liabilities of over $4.9 billion as of November 24, 1995.
. With thirty-three offices around the world, Goldman Sachs employes over
8,000 professionals focused on opportunities in major markets.
. An equity research budget of $126 million for 1996.
. Premier lead manager of negotiated municipal bond offerings over the past
five years (1989-1994), aggregating $114 billion.
. The number one lead manager of U.S. common stock offerings for the past six
years (1989-1994), with 18% of the total dollar volume.*
* Source: Securities Data Corporation. Ranking
-----------------------------------
excludes REITS, Trusts, Rights and closed-end fund offerings.
2-C
<PAGE>
GOLDMAN, SACHS & CO.'S HISTORY OF EXCELLENCE
1865 End of Civil War
1869 Marcus Goldman opens Goldman Sachs for business
1890 Dow Jones Industrial Average first published
1896 Goldman Sachs joins New York Stock Exchange
1906 Dow Jones Industrial Average tops 100
1925 Goldman Sachs finances Warner Brothers, producer of the
first talking film
1956 Goldman Sachs co-manages Ford's public offering, the
largest to date
1970 London office opens
1972 Dow Jones Industrial Average breaks 1000
1986 Goldman Sachs takes Microsoft public
1990 Provides advisory services for the largest privatization
in the region of the sale of Telefonos de Mexico
1992 Dow Jones Industrial Average breaks 3000
1993 Goldman Sachs is lead manager in taking Allstate public,
largest equity offering to date ($2.4 billion)
1995 Dow Jones Industrial Average breaks 4000
3-C
<PAGE>
- --------------------------------------------------------------------------------
LETTER TO SHAREHOLDERS
DEAR SHAREHOLDERS:
We are pleased to have the opportunity to review the performance and activity
of the Goldman Sachs Fixed Income Portfolios for the 12-month period ended
October 31, 1995. To help put the portfolios' performance in perspective, we are
also providing a brief overview of the U.S. economy and bond market during the
period.
BONDS RALLIED STRONGLY AS RATES FELL
The U.S. bond market began the period under review (November 1, 1994, through
October 31, 1995) still feeling the impact of rising rates. By year-end 1994,
however, the bond market showed signs of strength and gained further momentum in
1995, primarily due to the slowing economy and subdued inflation. For the 12
months ended October 31, bonds enjoyed one of their best years ever, with the
30-year Treasury recording a total return of approximately 29%, competitive with
the soaring stock market.
THE ECONOMY STARTED STRONG, SLOWED IN SPRING, THEN RECOVERED
The 12-month period began with the economy exhibiting robust growth and a wide
range of indicators pointing to continued acceleration. The 1994 fourth-quarter
real Gross Domestic Product (GDP) grew 5.1%, with employment, real disposable
income, consumer spending and sales of new and existing homes all displaying
impressive strength.
While 1995 began with real GDP increasing by 2.7% during the first quarter,
the pace of growth had clearly moderated. That trend became more pronounced as a
host of weak or declining indicators during the spring revealed that the economy
abruptly slowed during the second quarter of 1995. Significantly, the growth of
second-quarter real GDP was an anemic 1.3%.
By August, the economy appeared to revive. Employment, housing, construction
spending and several other indicators showed signs of improvement that persisted
into the fall. The flow of positive economic data appeared to indicate that the
prior slowdown was largely due to a short-term inventory correction.
Third-quarter GDP growth was reported at an unexpectedly high 4.2%, which many
interpreted as a result of one-time events. By the end of October, however, key
economic reports were sending mixed signals regarding the health of the economy
once again. Firmness in interest-rate-sensitive areas such as housing, motor
vehicle sales and durable goods orders suggested steady growth, but retail sales
and industrial output indicators were weak. Though the condition of the economy
appeared uncertain, most observers agreed that inflation remained contained,
with the Producer Price Index (PPI) and Consumer Price Index (CPI) up 2.6% and
2.8%, respectively, for the 12-month period ended October 31, 1995.
FED RAISED RATES TWICE DURING THE PERIOD, THEN CUT AS INFLATION FEARS EASED
The U.S. Federal Reserve Board raised the federal funds rate (the rates banks
charge one another for overnight borrowing) by 75 basis points in November 1994
and by 50 basis points in February 1995. Including those two hikes, the Fed
raised rates a total of seven times in its tightening cycle (from February 1994
through February 1995) by a total of 300 basis points to 6.00%.
The Fed remained neutral until early July 1995, when receding inflationary
pressures and a weakening economy prompted it to cut the federal funds rate 25
basis points to 5.75%.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C> <C> <C>
Market Overview 1 Financial Statements 22
Goldman Sachs Government Income Fund 3 Notes to Financial Statements 26
Goldman Sachs Global Income Fund 9 Financial Highlights 33
Goldman Sachs Municipal Income Fund 15
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
LETTER TO SHAREHOLDERS (continued)
During the period under review, the yield curve flattened dramatically. The
yield on six-month Treasury bills declined only slightly, from 5.66% on October
31, 1994, to 5.55% on October 31, 1995. However, for the same time period the
yield on the 30-year U.S. Treasury bond fell more dramatically, from 7.97% a
year ago to 6.33%.
HISTORICAL TREASURY YIELD CURVE
[CHART]
Years to Maturity 10/31/94 10/31/95
----------------- -------- --------
3-Month 5.14% 5.49%
6-Month 5.66% 5.55%
1 6.14% 5.55%
2 6.82% 5.61%
3 7.05% 5.68%
5 7.48% 5.81%
10 7.81% 6.02%
30 7.97% 6.33%
Source: Bloomberg, L.P.
The yield curve flattened considerably as the yields on longer-term Treasuries
fell more than the yields on shorter-term Treasuries, which shifted the curve
downward at the longer end. The yield difference between two-year Treasury notes
and 30-year Treasury bonds narrowed significantly.
DOLLAR REBOUNDED AFTER FALLING TO POST-WORLD WAR II LOWS
The U.S. dollar remained relatively strong from November 1994 through year-end
1994, due in large part to the Federal Reserve's tightening, then weakened
signifi-cantly starting in January 1995. The U.S.-Japan trade imbalance, the
Mexican peso devaluation and weakness in the U.S. economy (which led to reduced
expectations of rising rates) contributed to the precipitous drop. By April, the
dollar had declined to new postwar lows against the Deutsche mark and Japanese
yen.
The dollar rallied against the yen and the Deutsche mark during the summer and
early fall. Among the factors contributing to the dollar's rebound were the
resolution of the U.S.-Japan trade dispute, the Japanese Ministry of Finance's
package of measures to encourage foreign investment, the intervention of U.S.
and foreign central banks in support of the dollar and Japan's discount rate
cut. The dollar rallied from its April levels by approx-imately 26% against the
yen and by approximately 4% against the Deutsche mark through the end of
October.
ECONOMIC OUTLOOK: SIGNALS MIXED AS ECONOMY MODERATES AND BUDGET DEBATE CONTINUES
While the economy continues to show relative strength in some sectors such as
housing, durable goods orders and employment, and the stock market remains
strong, evidence of weakness has begun to emerge. Most notably, retail sales
declined amid increasing levels of consumer debt, and industrial production was
basically flat in October. With inflation under control, many expect the Fed to
ease rates again in December if further weakening occurs. The favorable
resolution of the federal budget debate, anticipated by year-end, is also a key
factor in influencing further rate cuts. Near term, a healthy bond market is
likely to persist. Longer term, economic growth is generally expected to pick up
gradually by mid-1996.
We thank you for making the Goldman Sachs Fixed Income Portfolios part of your
investment program and we look forward to continuing to serve your investment
needs.
Sincerely,
/s/ David B. Ford
David B. Ford
Chief Executive Officer
/s/ Sharmin Mossavar-Rahmani
Sharmin Mossavar-Rahmani
Chief Investment Officer - Fixed Income Investments
Goldman Sachs Asset Management
November 30, 1995
2
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GOLDMAN SACHS GOVERNMENT INCOME FUND
INVESTMENT OBJECTIVE
The Goldman Sachs Government Income Fund seeks to provide shareholders with a
high level of current income consistent with safety of principal. Under normal
conditions, at least 65% of the portfolio's total assets will be invested in
U.S. government securities and in repurchase agreements collateralized by U.S.
government securities. The fund may also invest in securities of nongovernmental
issuers, including asset-backed securities, privately issued mortgage-backed
securities and corporate debt obligations. Such securities will be rated triple-
A at the time of investment or, if unrated, deemed to be of comparable quality
by Goldman Sachs Asset Management, the fund's investment adviser.
PERFORMANCE REVIEW
For the 12-month period ended October 31, the fund had a total return of
14.90% based on net asset value (NAV) (7.23% in monthly distributions and 7.67%
in share price appreciation) as compared with a return of 15.12% for the fund's
benchmark, the Lehman Brothers Government/Mortgage Index (the "Index"). The
fund's NAV rose $1.00 during the past 12 months as interest rates declined.
The fund underperformed the benchmark primarily due to its overweighting in
mortgage-backed securities (MBS) (47.5% versus 34.5% for the benchmark). MBSs
came under pressure as interest rates fell and homeowners opted to prepay their
mortgages, which in turn depressed mortgage-backed security prices. We believe
much of the prepayment risk has been factored into the market at this point and
the fund is well positioned for a rebound in this sector.
During the period, the fund performed well versus its peers. Based on total
return, the fund ranked 16th out of 93 (in the top 20%) intermediate U.S.
government income funds tracked by Lipper Analytical Services, Inc., for the 12
months ended October 31 and significantly outperform-ed the category average of
12.92%. (Please note that Lipper rankings do not take sales charges into account
and that past performance is not a guarantee of future results.)
PORTFOLIO COMPOSITION AND INVESTMENT STRATEGIES
As noted, the fund's sector weightings differed significantly from that of the
Index as of October 31, 1995. The greatest differences were the fund's
overweighting in mortgage-backed securities and underweighting in U.S.
Treasuries. In addition, the fund also held a position in asset-backed
securities, which are not included as part of the benchmark.
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 1995*
[GRAPHIC]
Fixed Rate Mortgage Pass-Throughs ...... 39.8%
U.S. Treasuries ........................ 31.5%
Asset-Backed Securities ................ 14.3%
CMOs ................................... 7.7%
Agency Debentures ...................... 4.1%
Repos/Cash Equivalents ................. 2.6%
* The percentages shown are of total portfolio investments that have settled
and include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
. Fixed Rate Mortgage Pass-Throughs. The fund was overweighted in this sector as
compared with the Index (39.8% versus 34.5%) in order to benefit from the
potentially higher return of mortgage-backed securities relative to similar-
duration securities. However, as mortgage-backed securities came under pressure
in the declining interest rate environment and prepayment risk increased, this
sector's performance was somewhat disappointing.
3
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GOLDMAN SACHS GOVERNMENT INCOME FUND (continued)
. U.S. Treasuries and Repurchase Agreements/Cash Equivalents. As was the case
last year, the fund's sector weighting in U.S. Treasuries on October 31, 1995
was significantly less than the Index (31.5% as compared with 57.0%). We used
U.S. Treasuries and repurchase agreements/cash equivalents (2.6%) to manage the
portfolio's duration, weighting one relative to the other according to our need
to shorten or lengthen the portfolio's duration to target the benchmark. Using
this strategy, the fund matched the benchmark's duration of 4.6 years at the end
of the period.
. Asset-Backed Securities (ABSs). The portfolio's 14.3% position in triple-A-
rated ABSs (including those backed by credit card debt and automobile and home
equity loans) reflected their attractive yields compared with equal-duration
Treasuries. The fund's ABS allocation, approximately the same as last year's,
was not included in the benchmark.
. Agency Debentures. During the year, we increased the fund's holdings in
agency debentures, because they represented attractive relative value versus
Treasuries. Despite increasing the allocation, the fund was still underweighted
relative to the benchmark (4.1% compared with 8.5%).
. Portfolio Composition by Issuer. The portfolio composition of the fund's
mortgage-backed security holdings by issuer was: the Federal Home Loan Mortgage
Corporation (26.6%), the Government National Mortgage Association (13.0%), the
Federal National Mortgage Association (4.9%) and non-agency (3.0%).
. Credit Quality. As of October 31, the fund was primarily invested in U.S.
government and agency securities (80.1%), with the remainder in triple-A-rated
securities (17.3%) and repurchase agreements/cash equivalents (2.6%).
. Prudent Use of Derivatives. As of October 31, the fund held a 6.3% position
in planned amortization class (PAC) CMOs that contributed incremental return
relative to Treasuries and pass-through mortgages. We also added a position in
inverse floaters (1.4%), whose yields move in the opposite direction from an
index, for their potential to add incremental yield to the fund. These
securities performed well as interest rates declined.
The fund has occasionally used mortgage dollar rolls to take advantage of
short-term supply and demand imbalances in the mortgage settlement process.
(Mortgage dollar rolls refer to transactions that involve selling mortgage
securities owned by the fund and simul-taneously contracting to buy back similar
mortgage securities with the same coupon on a specified future date - usually
one month forward.) At all times, we "cover" the mortgage dollar rolls by
keeping cash or high-grade liquid debt securities equal to the dollar amount of
the forward commitment in a segregated account with the fund's custodian.
FUND OUTLOOK
We will continue to utilize Goldman Sachs' extensive economic, fixed income
and mortgage research to help manage the fund and identify attractive
opportunities as they occur. In the near term, we are cautiously optimistic
about the mortgage pass-through sector. Though mortgage prepayments may
potentially rise at year-end, widening yield spreads of mortgage pass-throughs
relative to Treasuries may create attractive investment opportunities. When the
pace of prepayments slows, we expect to use our proprietary analytical models to
help us identify securities with the best potential for future gains.
Additionally, we have a neutral outlook for the ABS sector over the next
quarter. Near term, the sector may experience an increase in consumer debt
delinquencies and year-end selling. Strong investor demand, however, is likely
to support prices over the longer term.
4
<PAGE>
- --------------------------------------------------------------------------------
GOLDMAN SACHS GOVERNMENT INCOME FUND (continued)
DISTRIBUTION POLICY
The fund paid out monthly distributions of approximately $0.94 per share
during the 12-month period ended October 31, 1995. Dividends are declared daily
and paid on a monthly basis. The fund intends to distribute substantially all of
its investment company taxable income, as is required by tax law.
We value your continued confidence in the Goldman Sachs Government Income Fund
and look forward to reporting on the fund's progress in the coming year.
Sincerely,
/s/ Jonathan A. Beinner
Jonathan A. Beinner
/s/ Theodore T. Sotir
Theodore T. Sotir
Portfolio Managers
Goldman Sachs Government Income Fund
November 30, 1995
5
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
GOLDMAN SACHS GOVERNMENT INCOME FUND
October 31, 1995
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1995. The
performance for the Goldman Sachs Government Income Fund ("Goldman Sachs
Government Income") (assuming both the maximum sales charge of 4.5% and no sales
charge), is compared with its benchmarks--the Lehman Brothers Mutual Fund
Government/Mortgage Index ("Lehman Gov't/MBS Index") and the Lehman Brothers
Mutual Fund General U.S. Government Index ("Lehman U.S. 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.
HYPOTHETICAL $10,000 INVESTMENT/(a)/
[CHART]
Goldman Sachs Goldman Sachs Lehman Lehman
Government Income Government Income Gov't/MBS U.S. Gov't
(no sales charge) (w/sales charge) Index Index
----------------- ----------------- --------- ----------
3/1/93 10,000 9,550 10,000 10,000
10/31/93 10,506 10,033 10,584 10,699
10/31/94 10,192 9,734 10,267 10,220
10/31/95 11,710 11,183 11,819 11,792
Average Annual Total Return
---------------------------------
One Year Since Inception/(b)/
-------- --------------------
GS Government Income, 14.90% 7.06%
excluding sales charge
GS Government Income, 9.76% 5.27%
including sales charge
/(a)/ For comparative purposes, initial investments are assumed to be made on
the first day of the month following the Fund's commencement of
operations.
/(b) Commenced operations February 10, 1993.
6
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GOLDMAN SACHS GOVERNMENT INCOME FUND
October 31, 1995
Principal Interest Maturity
Amount Rate Date Value
- ---------- -------- -------- -----------
MORTGAGE BACKED OBLIGATIONS--47.3%
FEDERAL HOME LOAN MORTGAGE CORP.--27.0%
$ 110,000 8.20% 01/16/98 $ 113,057
2,000,000 8.00 TBA-30 year/(a)/ 2,050,624
745,844 9.00 04/01/04 781,504
951,570 9.00 02/01/25 994,985
2,000,000 7.50 08/01/25 2,022,501
2,000,000 7.00 09/01/25 1,983,751
- -------------------------------------------------------------------------
$ 7,946,422
- -------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION--12.7%
$ 654,909 9.00% 10/15/19 - 07/15/21 $ 691,748
928,887 9.50 05/15/25 1,005,521
1,998,192 8.00 09/15/25 2,057,515
- -------------------------------------------------------------------------
$ 3,754,784
- -------------------------------------------------------------------------
INVERSE FLOATER COLLATERALIZED MORTGAGE OBLIGATIONS--1.4%
Federal National Mortgage Association Remic Trust Series 1993-62,
Class S
$ 404,038 8.83% 05/25/99 $ 405,808
- -------------------------------------------------------------------------
FIXED RATE COLLATERALIZED MORTGAGE OBLIGATIONS--6.2%
Federal National Mortgage Association Remic Trust Series 1993-58,
Class G
$1,000,000 5.50% 12/25/20 $ 952,200
GE Capital Mortgage Services, Inc. 1994-11,
Class A1
882,484 6.50 03/25/24 883,111
- -------------------------------------------------------------------------
$ 1,835,311
- -------------------------------------------------------------------------
TOTAL MORTGAGE BACKED OBLIGATIONS
(Cost $13,894,498) $13,942,325
- -------------------------------------------------------------------------
ASSET-BACKED SECURITIES--14.0%
Chemical Bank Master Credit Card Trust, Series 1995-2,
Class A
$ 720,000 6.23% 06/15/03 $ 722,153
First Chicago Master Trust II, Series 1992-E,
Class A
500,000 6.25 08/15/99 502,045
General Motors Acceptance Corp. Grantor Trust, Series 1994-A,
Class A
122,242 6.30 06/15/99 122,535
MBNA Master Credit Card Trust, Series
1991-1, Class A
490,000 7.75 10/15/98 497,355
Premier Auto Trust Series 1993-6,
Class A2
768,284 4.65 11/02/99 757,421
Premier Auto Trust Series 1994-1,
Class A3
640,000 4.75 02/02/00 632,665
Principal Interest Maturity
Amount Rate Date Value
- ---------- -------- -------- -----------
ASSET-BACKED SECURITIES(CONTINUED)
Standard Credit Card Trust, Series 1990-3,
Class A
860,000 9.50 07/10/98 903,284
- -------------------------------------------------------------------------
TOTAL ASSET-BACKED SECURITIES
(Cost $4,161,356) $ 4,137,458
- -------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS--3.7%
Federal National Mortgage Association
$ 70,000 8.79% 01/30/02 $ 71,213
Student Loan Marketing Association
980,000 7.76 04/17/00 1,008,479
- -------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCY
OBLIGATIONS (Cost $1,051,036) $ 1,079,692
- -------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS--31.4%
United States Treasury Bonds
$ 320,000 11.13% 08/15/03 $ 420,749
560,000 8.75 08/15/20 718,635
United States Treasury Notes
100,000 7.25 11/15/96 101,625
880,000 7.38 11/15/97 908,743
2,570,000 7.50 10/31/99 2,723,403
1,490,000 6.25 02/15/03 1,516,313
United States Treasury Principal-Only Stripped Securities/(b)/
3,100,000 6.17 11/15/04 1,790,715
5,550,000 6.63 08/15/20 1,100,564
- -------------------------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $8,924,525) $ 9,280,747
- -------------------------------------------------------------------------
REPURCHASE AGREEMENT--9.8%
Joint Repurchase Agreement Account/(c)/
$2,900,000 5.93% 11/01/95 $ 2,900,000
- -------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $2,900,000) $ 2,900,000
- -------------------------------------------------------------------------
Total Investments
(Cost $30,931,415/(d)/) $31,340,222
=========================================================================
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GOLDMAN SACHS GOVERNMENT INCOME FUND (continued)
October 31, 1995
FEDERAL INCOME TAX INFORMATION:
Gross unrealized gain for investments in which value
exceeds cost $ 456,535
Gross unrealized loss for investments in which cost exceeds
value (54,364)
- -------------------------------------------------------------------------
Net unrealized gain $ 402,171
=========================================================================
/(a)/ TBA (To Be Assigned) securities are purchased on a forward commitment
basis with an approximate (generally + / -2.5%) principal amount and no
definite maturity date. The actual principal amount and maturity date will
be determined upon settlement when the specific mortgage pools are
assigned.
/(b)/ The interest rate disclosed for these securities represents effective
yields to maturity.
/(c)/ Portions of these securities are being segregated for mortgage dollar
rolls and/or open TBA purchases.
/(d)/ The aggregate cost for federal income tax purposes is $30,938,051.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of net assets.
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GOLDMAN SACHS GLOBAL INCOME FUND
INVESTMENT OBJECTIVE
The Goldman Sachs Global Income Fund seeks high total return, composed of both
current income and capital appreciation. The fund is permitted to invest in
govern-ment and other high-quality (double-A or better) fixed income securities
issued in the United States and in foreign markets. Since June 1, 1995, the fund
has had the additional flexibility to invest in sovereign (government) debt
rated single-A or better or deemed to be of comp-arable quality. In addition,
the maximum duration the fund can target has been increased to 7.5 years from
five years. Under normal market conditions, the fund's neutral position is to be
fully hedged into U.S. dollars to best serve the needs of U.S. shareholders.
However, the fund may engage in currency transactions, both to hedge exchange
rate risk and enhance returns. The fund added an Institutional share class on
August 1, 1995.
GLOBAL BOND MARKETS RALLIED
Foreign bond markets recorded impressive gains during the past 12 months,
following the lead of the U.S. bond market. Bond markets in dollar bloc
countries, including New Zealand and Canada, continued to perform well. In
Europe, the "core" and "near core" bond markets (e.g., Germany, Holland,
Belgium, France and Denmark) rallied, due to a supportive bond environment
characterized by slowing economic activity, relatively low inflation and
declining interest rates. In contrast, the European higher-yielding markets
(Italy, Spain and Sweden) were affected by political uncertainties and inflation
fears sparked by large budget deficits. The economic concerns of these and other
European countries triggered a flight to quality as investors sought the
perceived safety of the Deutsche mark and the Swiss franc. Currency weakness
raised doubts about the readiness of some countries, particularly Italy, to
participate in the European monetary union.
The Japanese economy remained weak during the period under review and appeared
in danger of falling into a deflationary spiral. The Japanese government
responded with a monetary and fiscal stimulus package, which included a discount
rate cut on September 8, 1995. The government's continuing efforts to introduce
liquidity into the Japanese economy triggered a market rally and resulted in the
yen's decline relative to the U.S. dollar.
PERFORMANCE REVIEW
For the 12 months ended October 31, 1995, the fund's Class A shares had a
total return of 15.08% based on net asset value (NAV) (7.23% from monthly
distributions and 7.85% from share price appreciation) compared with a return of
15.37% for the fund's benchmark, the J. P. Morgan Global Government Bond Index
(hedged into U.S. dollars) (the "Index").
From their inception on August 1, 1995, through October 31, 1995, the fund's
Institutional shares returned 4.42% (1.85% from monthly distributions and 2.57%
from share price appreciation) compared with 3.51% for the Index. The Index
covers 14 major bond markets and reflects their currency exposures.
NAV NAV Change 30-Day SEC
Share Class (10/31/95) (10/31/94-10/31/95) Yield (10/31/95)
- ----------- ---------- ------------------- ----------------
Class A $14.45 +$1.02 4.81%
Institutional $14.45 +$0.36* 5.54%
* From Institutional shares' inception on August 1, 1995 through October 31,
1995.
The fund performed well relative to its peers. According to Lipper Analytical
Services, Inc., the fund's Class A shares ranked 31st out of 131 general world
income funds, based on total return for the 12 months ended October 31, 1995.
The fund's Class A shares far outperformed the Lipper general world income fund
average of 11.52% for the period. (Please note that Lipper rankings do not take
sales charges into account and that past performance is not a guarantee of
future results. Institutional shares are not ranked by Lipper for this period
because they were not available for the full year.)
The fund's Class A shares slightly underperformed the Index, due to the
portfolio's underweighting in the higher-yielding bond markets of Europe. Though
the portfolio is typically fully hedged into dollars, we
9
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GOLDMAN SACHS GLOBAL INCOME FUND (continued)
employed several currency strategies during the period that contributed to the
fund's positive performance. In August, when the dollar appreciated against the
yen, the fund took a short position in the yen and a long position in the U.S.
dollar, successfully positioning the portfolio. Earlier in the period, we
correctly anticipated that the dollar would decline and unhedged part of the
fund's yen and Deutsche mark exposure.
PORTFOLIO COMPOSITION AND INVESTMENT STRATEGIES
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 1995*
[GRAPH]
U.S. ...................... 27.5%
Cash Equivalents .......... 16.4%
U.K. ...................... 13.2%
Japan ..................... 12.2%
France .................... 8.1%
Canada .................... 7.7%
Germany ................... 6.4%
Spain ..................... 5.0%
Belgium ................... 3.5%
* The percentages shown are of total portfolio investments that have settled
and include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
. U.S. As was the case a year ago, the fund's single largest country position
continued to be in U.S. Treasury notes, which represented 27.5% of the portfolio
as of October 31, 1995. The fund is still significantly under-weighted versus
the Index, which allocates 39.2% to the United States, because we believe that
U.S. bond yields do not adequately compensate the fund for the inflationary risk
given the pickup in commodity prices and the growth in the U.S. economy.
. Other Dollar Bloc Countries. In general, during the period we favored dollar
bloc countries, with a preference for Canada and New Zealand based on the yield
advantage they offered over U.S. Treasuries. As of October 31, the fund had a
7.7% position in Canada, significantly overweighting the Index (2.7%) but lower
than its 12% position six months ago. At the time of the Quebec referendum in
late October, the fund sold its Canadian holdings, because we determined that
the Canadian bond risk/return trade-off had become unattractive during the
Quebec election period. Following the Quebec vote, we reestablished the fund's
position in the belief that the Canadian bond environment appeared favorable.
Due in part to our concern about Australia's large current account deficit, we
sold the fund's position in that country in March. In contrast, although the
fund is not currently invested in New Zealand, it has held New Zealand bonds at
various times during the past 12 months and we view its bond market favorably.
. Europe. Bond markets throughout Europe were affected by a number of
uncertainties, ranging from perceived government instability to potential
inflationary pressures. As a result of the unfavorable risk/return trade-off, we
reduced last year's overweighting in Europe to 36.2% of the fund (as of October
31) compared with 41.4% for the benchmark.
[RIGHT ARROW] Germany. We view Germany, the leading "core" European market, as
attractive, due to its relatively low inflation and weak monetary growth. The
fund was underweighted in Germany relative to the Index (6.4% compared with
9.7%), however, because we favored the "near core" European markets of France
and Belgium. We believe these countries offer better value than Germany and will
behave as proxies in the event of a German bond rally.
10
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GOLDMAN SACHS GLOBAL INCOME FUND (continued)
[RIGHT ARROW] U.K. In October, the fund had a 13.2% position in the U.K.,
overweighted versus the Index position of 5.9%. During the period, the U.K. was
attractive due to its slowing economic growth and subdued inflation, which
created a supportive environment for bonds.
[RIGHT ARROW] France. France's political instability caused us to cut the fund's
position approximately in half during the past six months. The fund is still
slightly overweighted in France with an 8.1% position, compared with 7.4% for
the Index. Going forward, we are somewhat encouraged by President Chirac's
apparent commitment to reduce France's budget deficit and reform its Social
Security system.
[RIGHT ARROW] Belgium. We expect Belgium (3.5%) to emerge as one of the key
members of the European monetary union and therefore added a small position in
June.
[RIGHT ARROW] Italy and Spain. We remain cautious about European higher-yielding
bonds in general. However, we added a 5.0% position in Spain in October, because
we believe Spain's economic and political risks are fully reflected in its bond
prices. We sold the fund's position in Italy, due to that country's political
and economic uncertainty.
- - Japan. We increased the fund's position in Japan during the past year, because
its weak economy and low inflation appeared favorable for Japanese bonds. As of
October 31, the fund had a 12.2% position in Japanese bonds, slightly
underweighted versus the Index allocation of 15.5%. We have recently been
reducing the fund's Japanese holdings, however, due to the government's
aggressive monetary easing and expansionist fiscal policy. In addition, we are
concerned by the extent to which the Bank of Japan has become the dominant buyer
of Japanese bonds, creating artificial support for the market that may be
unsustainable.
. Cash Equivalents. During the period, we raised the fund's cash equivalent
position to 16.4%, up from 3.5% a year earlier, as a defensive move which also
helped reduce the fund's duration. Going forward, we expect to reduce this
position as attractive opportunities arise.
. Credit Quality. The portfolio was 100% invested in triple-A-rated securities
as of October 31, and we will continue to stress high-quality bonds.
. Duration. As of October 31, the fund's duration was shorter than that of the
Index (4.33 years compared with 4.94 years), largely due to its underweighting
in Japan and its cash equivalent position. (Duration is a measurement of the
fund's sensitivity to interest rate movements; the shorter the duration, the
less the fund's NAV will move in relation to interest rate fluctuations.)
DISTRIBUTION POLICY
The fund declares and pays dividends on a monthly basis. During the period
under review, the fund's Class A shares paid out distributions of $0.94 per
share. From its inception on August 1, 1995, through October 31, 1995, the
fund's Institutional shares paid out distributions of $0.26 per share. The fund
intends to distribute substantially all of its investment company taxable
income, as is required by tax law.
FUND OUTLOOK
Due to uncertainty concerning U.S. bond yield levels, for the near term we
intend to keep the fund underweighted in U.S. Treasuries. Within the dollar
bloc, we continue to prefer Canada and New Zealand, because of their wide yield
spreads over U.S. Treasuries. In our opinion, New Zealand is particularly
attractive and therefore we anticipate reestablishing the fund's position there.
After three years of strong growth, that economy is showing signs of slowing and
it has a credible central bank. In general, Europe appears poised for a rally as
11
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GOLDMAN SACHS GLOBAL INCOME FUND (continued)
economic growth slows. We intend to keep a neutral weighting in Europe compared
with the benchmark, and we currently favor Belgium and France. In the U.K.,
financial markets may be affected by political instability stemming from the
unpopularity of the Conservative government and the possibility of increased
wage-based inflation. Consequently, we expect to reduce the fund's U.K. position
to be approximately in line with the benchmark. We also anticipate continuing to
reduce the fund's exposure in Japan, based on our concern that the government's
economic stimulus may lead to economic growth and higher interest rates, which
would further erode bond prices.
We will continue to utilize the resources of Goldman, Sachs & Co.'s London-based
Economics Research Group for economic and market trend analysis, as well as the
Goldman Sachs Asset Allocation Model to allocate the portfolio's assets and
manage risk. We value your investment in the Goldman Sachs Global Income Fund
and look forward to continuing our relationship in the future.
Sincerely,
/s/ Stephen C. Fitzgerald
Stephen C. Fitzgerald
Portfolio Manager, Fixed Income Investments
/s/ Gareth I. Evans
Gareth I. Evans
Portfolio Manager, Currency
Goldman Sachs Global Income Fund
London, November 30, 1995
12
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
GOLDMAN SACHS GLOBAL INCOME FUND
October 31, 1995
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1995. The
performance for the Goldman Sachs Global Income Fund (assuming both the maximum
sales charge of 4.5% and no sales charge for the Class A shares and at net asset
value for the Institutional shares), is compared with its benchmark--the J.P.
Morgan Global Government Bond Index hedged to U.S. Dollars ("J.P. Morgan GGB
Index-$ Hedged"). 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.
<TABLE>
<CAPTION>
HYPOTHETICAL $10,000 INVESTMENT/(a)/ HYPOTHETICAL $10,000 INVESTMENT
Class A Shares Institutional Shares
[CHART] [CHART]
J.P. Morgan J.P. Morgan
Class A Shares Class A Shares GGB Index- Institutional GGB Index-
(no sales charge) (w/sales charge) $ Hedged Shares $ Hedged
----------------- ---------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
9/1/91 10,000 9,550 10,000 8/1/95 10,000 10,000
10/31/91 10,144 9,688 10,263 10/31/95 10,442 10,351
10/31/92 11,094 10,594 11,156
10/31/93 12,286 11,733 12,509
10/31/94 11,734 11,206 12,051
10/31/95 13,503 12,895 13,903
</TABLE>
Average Annual Total Return
--------------------------------
One Year Since Inception/(b)/
-------- --------------------
GS Global Income-Class A,
excluding sales charge 15.08% 7.32%
GS Global Income-Class A,
including sales charge 9.92% 6.16%
GS Global Income,
Institutional Class N/A 4.42%/(c)/
/(a)/ For comparative purposes, initial investments are assumed to be made on
the first day of the month following the Fund's commencement of operations
of the Class A shares.
/(b)/ The Class A shares commenced operations August 2, 1991 and the
Institutional shares commenced operations on August 1, 1995.
/(c)/ An aggregate total return (not annualized) is shown instead of an average
annual total return since the Institutional Class has not completed a full
twelve months of operations.
13
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GOLDMAN SACHS GLOBAL INCOME FUND
October 31, 1995
Principal Interest Maturity
Amount/(a)/ Rate Date Value
- ----------- -------- -------- ------------
DEBT OBLIGATIONS--81.7%
BELGIAN FRANC--3.3%
Kingdom of Belgium
BEF 277,000,000 6.50% 03/31/05 $ 9,265,385
- -------------------------------------------------------------------------
BRITISH POUND STERLING--12.9%
United Kingdom Conversion
BPS 4,000,000 9.00% 03/03/00 $ 6,698,546
United Kingdom Treasury
17,700,000 8.50 12/07/05 29,046,495
- -------------------------------------------------------------------------
$ 35,745,041
- -------------------------------------------------------------------------
CANADIAN DOLLAR--7.6%
Government of Canada
CAD 28,000,000 7.50% 09/01/00 $ 21,191,223
- -------------------------------------------------------------------------
DEUTSCHE MARK--6.2%
Government of Germany
DEM 21,750,000 8.38% 05/21/01 $ 17,299,872
- -------------------------------------------------------------------------
FRENCH FRANC--7.7%
Government of France
FRF 58,000,000 8.50% 03/28/00 $ 12,741,948
39,500,000 8.25 02/27/04 8,614,701
- -------------------------------------------------------------------------
$ 21,356,649
- -------------------------------------------------------------------------
JAPANESE YEN--12.1%
Japanese Development Bank
JPY 1,820,000,000 6.60% 06/20/01 $ 21,924,730
1,100,000,000 4.10 12/22/03 11,705,218
- -------------------------------------------------------------------------
$ 33,629,948
- -------------------------------------------------------------------------
SPANISH PESETA--4.7%
Government of Spain
ESP 1,670,000,000 10.00% 02/28/05 $ 12,922,986
- -------------------------------------------------------------------------
UNITED STATES DOLLAR--27.2%
United States Treasury Notes
USD 10,000,000 6.88% 07/31/99 $ 10,360,900
16,700,000 6.25 05/31/00 16,984,401
22,000,000 6.13 09/30/00 22,271,478
14,200,000 6.25 02/15/03 14,450,772
10,000,000 7.88 11/15/04 11,270,300
- -------------------------------------------------------------------------
$ 75,337,851
- -------------------------------------------------------------------------
TOTAL DEBT OBLIGATIONS
(Cost $227,304,485) $226,748,955
- -------------------------------------------------------------------------
Principal Interest Maturity
Amount/(a)/ Rate Date Value
- ----------- -------- -------- ------------
SHORT-TERM OBLIGATIONS--16.7%
Euro-Time Deposit-State Street Bank & Trust Co.
USD 46,196,597 5.81% 11/01/95 $ 46,196,597
- -------------------------------------------------------------------------
TOTAL SHORT-TERM OBLIGATIONS
(Cost $46,196,597) $ 46,196,597
- -------------------------------------------------------------------------
TOTAL INVESTMENTS
(Cost $273,501,082/(b)/) $272,945,552
=========================================================================
=========================================================================
FEDERAL INCOME TAX INFORMATION:
Gross unrealized gain for investments in which value
exceeds cost $ 5,186,935
Gross unrealized loss for investments in which cost
exceeds value (5,893,905)
- -------------------------------------------------------------------------
Net unrealized loss $ (706,970)
=========================================================================
/(a)/ The principal amount of each security is stated in the currency in which
the bond is denominated. See below.
BEF = Belgian Franc FRF = French Franc
BPS = British Pound Sterling JPY = Japanese Yen
CAD = Canadian Dollar ESP = Spanish Peseta
DEM = Deutsche mark USD = United States Dollar
/(b)/ The aggregate cost for federal income tax purposes is $273,652,522.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of net assets.
The accompanying notes are an integral part of these financial statements.
14
<PAGE>
Letters to Shareholders
- --------------------------------------------------------------------------------
GOLDMAN SACHS MUNICIPAL INCOME FUND
INVESTMENT OBJECTIVE
The Goldman Sachs Municipal Income Fund seeks to provide a high level of
current income that is exempt from regular federal income tax, consistent with
the preser-vation of capital. In pursuit of its objective, the fund invests in a
diversified portfolio of municipal securities with an average credit quality of
double-A or better. Under normal market conditions the fund will maintain an
average portfolio maturity approximately equal to the average maturity of the
Lehman Brothers 15-Year Municipal Bond Index.
MUNICIPAL BONDS RALLY AMID UNCERTAINTY
The municipal bond market performed well during the period under review
(November 1, 1994, through October 31, 1995), with the average price of a 15-
year municipal bond (as calculated from data provided by Municipal Market Data,
an independent municipal market information provider) rising 9% while yields
fell from 6.30% on November 1, 1994, to 5.35% on October 31, 1995. However,
during the past 12 months the yield curve for municipal bonds became quite steep
compared with Treasuries, and 15-year municipal bonds underperformed similar-
duration Treasuries.
The first month of the fund's fiscal year coincided with the bottom of the
1994 bear market, as 30-year U.S. Treasury yields rose to 8.13% and long-term
municipal bond yields rose to over 7%. In December 1994, however, the bond
market stabilized. Fueled by strong municipal bond demand and a significant
decrease in supply, municipal bonds surged from January through early April.
Though municipals continued to record positive performance, the rally's momentum
slowed from mid-April onward, reflecting investors' concern surrounding various
tax reform proposals (e.g., the flat tax and a reduction in capital gains taxes)
and the growing allure of the rallying equity market.
By midyear, short-term municipal bonds became more expensive as investors
favored defensive maturities that provided greater liquidity, while demand for
long-term bonds stagnated. By the end of October, however, growing bullish
sentiment in the municipal bond market and a flattening municipal bond yield
curve made longer term bonds increasingly attractive.
PERFORMANCE REVIEW
For the 12-month period ended October 31, 1995, the fund had a total return of
13.79%, based on net asset value (NAV) (5.26% from income distributions and
8.53% from share price appreciation) compared with a return of 15.76% for the
Lehman Brothers 15-Year Municipal Bond Index (the "Index"), the fund's
benchmark. The fund's NAV rose $1.09 during the period to $14.17 as of October
31, 1995, benefiting from the rallying bond market.
The portfolio underperformed the Index, primarily because it was defensively
positioned early in the period in response to last year's volatility. The
portfolio held a higher percentage of premium coupon bonds, which tend to
perform well in a declining bond market. These premiums, which typically have
optional call features, performed like shorter-maturity bonds when interest
rates fell this year, because of the increased likelihood of their calls being
exercised prior to maturity. As this occurred, the durations of the callable
bonds shortened, which was undesirable because longer duration bonds appreciated
faster than those with shorter durations. In contrast, the Index held a higher
percentage of deeper discount bonds, which outperformed premium bonds as
interest rates fell.
15
<PAGE>
Letters to Shareholders
- --------------------------------------------------------------------------------
GOLDMAN SACHS MUNICIPAL INCOME FUND (continued)
PORTFOLIO COMPOSITION AND INVESTMENT STRATEGIES
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 1995*
[GRAPHIC]
Insured Revenue Bonds ......... 40.1%
Revenue Bonds ................. 23.4%
General Obligations............ 16.6%
Insured General Obligations.... 12.6%
Variable Rate Demand Notes..... 7.3%
* The percentages shown are of total portfolio investments that have settled
and include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
. Insured Revenue and General Obligation Bonds. During the period, we continued
to emphasize insured bonds because of their liquidity and availability. Insured
bonds allow the portfolio to capitalize on a security's other features such as
coupon and callability, while removing the credit quality variable. We stressed
securities from Texas and New York that we determined to be undervalued due to a
temporary lack of demand. We anticipate that these securities will appreciate as
supplies tighten and flat tax issues are resolved. As of October 31, we
overweighted the fund's holdings in insured bonds relative to the Index (52.7%
as compared with 32.0%), approximately the same allocation as a year ago.
. Revenue Bonds. Noninsured revenue bonds, generally single-A- and
double-A-rated debt, accounted for 23.4% of the portfolio, underweighted
compared with the benchmark allocation of 31.0%. (Revenue bonds pay interest and
principal out of a specific revenue stream, which includes sales taxes, hospital
charges, tolls, electric rates and airport fees.) The allocation to sectors with
high credit sensitivity fluctuates over time, based on specific securities and
overall credit spreads. We currently view overall credit spreads as rich, and
beyond unique situations we are not emphasizing credit-sensitive sectors.
. General Obligation (GO) Bonds. When credit quality spreads tightened during
the period, we dramatically increased the fund's investment in the GO sector to
16.6%, tripling last year's position. Uninsured GOs are generally of higher
credit quality than uninsured revenue bonds, because they are backed by the
general taxing power of the municipality.
. Variable Rate Demand Notes (VRDNs). VRDNs are high-quality cash equivalents
and were used to manage the portfolio's duration to approximate that of the
Index at 8.76 years.
. Credit Quality. During the period, we emphasized higher credit quality debt
over lower quality. As of October 31, 69.6% of the portfolio was invested in
triple-A-rated bonds, up from approximately 59% a year ago, while the positions
in double-A-rated securities (18.0%) and single-A-rated securities (12.4%) were
reduced since last year. The bias toward triple-A-rated securities is the direct
result of the emphasis on insured bonds.
. Term Structure. The portfolio's term structure contributed to its performance
in the declining interest rate environment. The portfolio was "barbelled,"
emphasizing bonds with maturities of 20 years on the long end and bonds with
maturities of five years or less on the short end. Approximately one-third of
the portfolio was invested in maturities of 18 years or longer, a segment which
performed well when the yield curve flattened during the period.
16
<PAGE>
- --------------------------------------------------------------------------------
GOLDMAN SACHS MUNICIPAL INCOME FUND (continued)
. We added a very small position in a call option in March (less than 1% of the
portfolio) for its potential incremental return. This position contributed to
the portfolio's positive performance during the period and the fund continues to
hold it.
MARKET OUTLOOK: IMPROVED TECHNICALS EXPECTED
Going forward, the municipal bond market appears to be entering a period of
potential technical strength. We estimate that over $80 billion in coupon and
principal payments will be distributed to municipal investors between November
1995 and February 1996, a significant percentage of which may be reinvested into
municipal bonds. In contrast, we expect just over $37 billion in new municipal
debt to be issued over the same four-month period, creating a potential supply
and demand imbalance that could increase municipal bond prices. That scenario,
coupled with the likelihood of an even flatter yield curve near term, should
benefit the fund's longer-term bonds. In addition, yields on long-term
municipals are relatively high in relation to Treasury securities and short-term
municipals. Regarding security selection, we anticipate concentrating on bonds
issued by states that have high taxes, high wealth concentration and large
populations (e.g., New York, California and Michigan).
Distribution Policy
The fund paid out distributions of $0.67 per share during the period under
review. Dividends are declared daily and paid on a monthly basis. The fund
intends to distribute substantially all of its investment company tax-exempt and
taxable income, as required by tax law.
Your investment in the Goldman Sachs Municipal Income Fund means a great deal
to us and we look forward to continuing our relationship.
Sincerely,
/s/ Benjamin S. Thompson
Benjamin S. Thompson
/s/ Theodore T. Sotir
Theodore T. Sotir
Portfolio Managers
Goldman Sachs Municipal Income Fund
November 30, 1995
17
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
GOLDMAN SACHS MUNICIPAL INCOME FUND
October 31, 1995
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1995. The
performance for the Goldman Sachs Municipal Income Fund ("Goldman Sachs
Municipal Income") (assuming both the maximum sales charge of 4.5% and no sales
charge), is compared with its benchmark--the Lehman Brothers 15-Year Municipal
Bond Index ("Lehman 15-Year Muni 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 $10,000 INVESTMENT/(a)/
[CHART]
GOLDMAN SACHS GOLD SACHS
MUNICIPAL INCOME MUNICIPAL INCOME LEHMAN 15-YEAR
(NO SALES CHARGE) (W/SALES CHARGE) MUNI INDEX
----------------- ---------------- ---------------
8/1/93 10,000 9,550 10,000
10/31/93 10,454 9,984 10,385
10/31/94 9,879 9,434 9,860
10/31/95 11,241 10,735 11,414
Average Annual Total Return
--------------------------------
One Year Since Inception/(b)/
-------- --------------------
GS Muni Income,
excluding sales charge 13.79% 4.89%
GS Muni Income,
including sales charge 8.64% 2.80%
/(a)/ For comparative purposes, initial investments are assumed to be made on
the first day of the month following the Fund's commencement of
operations.
/(b)/ Commenced operations July 20, 1993.
18
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GOLDMAN SACHS MUNICIPAL INCOME FUND
October 31, 1995
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------
DEBT OBLIGATIONS--105.8%
ALABAMA--2.3%
Alabama Mental Health Finance Authority RB (MBIA)
(AAA/Aaa)
$1,200,000 5.00% 05/01/04 $ 1,215,912
- -------------------------------------------------------------------------
CALIFORNIA--6.7%
Rancho, CA Water District Financing Authority RB (FGIC)
(AAA/Aaa)
$1,000,000 5.88% 11/01/10 $ 1,036,700
Riverside County, CA Transportation Services (AMBAC)
(AAA/Aaa)
2,400,000 6.50 06/01/09 2,577,456
- -------------------------------------------------------------------------
$ 3,614,156
- -------------------------------------------------------------------------
COLORADO--4.0%
Westminster County Multi Family Housing (FNMA)
(AAA/Aaa)/(a)/
$2,145,000 5.35% 12/01/25 $ 2,139,530
- -------------------------------------------------------------------------
DISTRICT OF COLUMBIA--2.6%
District of Columbia, Series E- Insured GO (MBIA)
(AAA/Aaa)
$1,370,000 6.00% 06/01/10 $ 1,384,399
- -------------------------------------------------------------------------
FLORIDA--16.5%
Dade County, FL Guaranteed Entitlement Pre-refunded zero
coupon RB (AMBAC) (AAA/Aaa)
$3,500,000 5.15/(b)/% 08/01/10 $ 1,548,925
Escambia County, FL Housing Financing Authority, Single
Family Multi-County Progress (GNMA/FNMA)
(NR/Aaa)
2,300,000 6.80 10/01/15 2,419,232
Florida Board of Education GO (AA/Aa)
2,330,000 5.75 01/01/13 2,357,075
Lakeland, FL Electric & Water Revenue Refunding, Jr. Sub
Lien (FGIC) (AAA/Aaa)/(a)/
2,500,000 5.25 10/01/97 2,537,525
- -------------------------------------------------------------------------
$ 8,862,757
- -------------------------------------------------------------------------
ILLINOIS--4.0%
Illinois Health Facilities Authority RB (MBIA) (AAA/Aaa)/(c)/
$2,000,000 6.25% 08/15/13 $ 2,130,818
- -------------------------------------------------------------------------
KENTUCKY--3.8%
Nelson County, KY Industrial Building RB for Mabex
Universal Corp. Project AMT (NR/A3)/(c)/
$1,900,000 6.50% 04/01/05 $ 2,034,710
- -------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------
DEBT OBLIGATIONS (CONTINUED)
MAINE--1.7%
Maine Educational Loan Authority, RB Series A-1 (NR/Aaa)/(c)/
$ 845,000 6.80% 12/01/07 $ 895,489
- -------------------------------------------------------------------------
MASSACHUSETTS--1.8%
Lowell, MA Series B GO (FSA) (AAA/Aaa)
$1,000,000 5.60% 11/01/12 $ 989,920
- -------------------------------------------------------------------------
MICHIGAN--5.3%
Goodrich Area School District Refunding GO (AMBAC)
(AAA/Aaa)
$1,000,000 7.65% 05/01/11 $ 1,194,040
Grand Ledge Public Schools District GO (MBIA)
(AAA/Aaa)/(a)/
1,640,000 5.45 05/01/11 1,642,821
- -------------------------------------------------------------------------
$ 2,836,861
- -------------------------------------------------------------------------
NEBRASKA--0.9%
Omaha, NE Package Facilities Corp. RB (AAA/Aa1)
$ 500,000 5.70% 09/15/15 $ 507,340
- -------------------------------------------------------------------------
NEW JERSEY--1.9%
New Jersey Turnpike Authority Series A RB (A/A)
$1,000,000 5.70% 01/01/01 $ 1,046,360
- -------------------------------------------------------------------------
NEW YORK--10.2%
New York City IDA USTA National Tennis Control Project
AMT (FSA) (AAA/Aaa)
$ 800,000 6.60% 11/15/11 $ 879,408
New York State GO (A-/A)
2,000,000 5.63 03/01/13 1,983,440
New York State Local Government Assistance Corp.
(A+/A)/(c)/
2,575,000 5.90 04/01/13 2,609,016
- -------------------------------------------------------------------------
$ 5,471,864
- -------------------------------------------------------------------------
OHIO--4.6%
Ohio State Water Development Authority Pollution Control
Facilities (MBIA) (AAA/Aaa)
$2,500,000 5.25% 12/01/09 $ 2,469,725
- -------------------------------------------------------------------------
OKLAHOMA--8.1%
Grand River Dam Authority RB (MBIA) (AAA/Aaa)
$3,000,000 5.50% 06/01/03 $ 3,169,200
19
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GOLDMAN SACHS MUNICIPAL INCOME FUND (continued)
October 31, 1995
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------
DEBT OBLIGATIONS (CONTINUED)
OKLAHOMA (CONTINUED)
Tulsa, OK GO (AA/Aa)
$1,140,000 6.50% 02/01/15 $ 1,217,360
- -------------------------------------------------------------------------
$ 4,386,560
- -------------------------------------------------------------------------
PENNSYLVANIA--4.1%
Delaware River Bridge Authority RB (AMBAC) (AAA/Aaa)
$2,000,000 7.38% 01/01/07 $ 2,219,800
- -------------------------------------------------------------------------
TEXAS--18.6%
Bexar County, TX Health Facilities Development Corp,
Revenue Refunding- Baptist Memorial Hospital Systems
Project RB (MBIA) (AAA/Aaa)
$1,245,000 6.90% 08/15/14 $ 1,368,803
Goose Creek Independent School District GO (PSF)
(AAA/Aaa)
2,825,000 5.00 02/15/16 2,600,865
Richardson, TX GO (AA/Aa)
3,260,000 5.00 02/15/11 3,120,309
Southwestern Texas State University RB (CAPGTY)
(AAA/Aaa)
1,375,000 5.10 08/15/14 1,285,006
Texas State AMT- Veterans Land GO (AA/Aa)/(c)/
1,555,000 6.30 12/01/14 1,614,199
- -------------------------------------------------------------------------
$ 9,989,182
- -------------------------------------------------------------------------
VERMONT--4.4%
Vermont Student Assistance Corp., Education Loan RB,
Series B (FSA) (AAA/Aaa)
$2,250,000 6.70% 12/15/12 $ 2,377,418
- -------------------------------------------------------------------------
WISCONSIN--4.3%
Wisconsin Housing & Economic Development Authority,
Series B AMT (AA/Aa)
$2,200,000 7.10% 09/01/15 $ 2,326,544
- -------------------------------------------------------------------------
TOTAL DEBT OBLIGATIONS
(Cost $55,551,381) $56,899,345
- -------------------------------------------------------------------------
SHORT-TERM OBLIGATIONS--8.4%
Harris County, TX Health Facilities Hospital
VRDN (A-1+/NR)
$ 700,000 4.00%/(d)/ 11/01/95 $ 700,000
200,000 4.00/(d)/ 11/07/95 200,000
Monroe County, GA Pollution Control
VRDN (A-1/VMIG-1)
1,100,000 3.90/(d)/ 11/07/95 1,100,000
- -------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------
SHORT-TERM OBLIGATIONS (CONTINUED)
New York, NY Series VRDN (A-1+/VMIG-1)
$1,000,000 4.05%/(d)/ 11/01/95 $ 1,000,000
New York City Muni Water Finance Authority VRDN Fiscal
1993 Series C (FGIC) (A-1+/MIG-1)
1,500,000 4.00/(d)/ 11/01/95 1,500,000
- -------------------------------------------------------------------------
TOTAL SHORT-TERM OBLIGATIONS
(Cost $4,500,000) $ 4,500,000
- -------------------------------------------------------------------------
WARRANTS--0.9%
$5,000,000 Intermountain Power Agency, Utah
Certificates of Beneficial Interest @
90.306 expiring 05/07/96/(e)/ $ 500,000
- -------------------------------------------------------------------------
TOTAL WARRANTS
(Cost $343,750) $ 500,000
- -------------------------------------------------------------------------
Total Investments
(Cost $60,395,131/(f)/) $61,899,345
=========================================================================
=========================================================================
FEDERAL INCOME TAX INFORMATION:
Gross unrealized gain for investments in which value
exceeds cost $ 1,544,592
Gross unrealized loss for investments in which cost exceeds
value (40,378)
- -------------------------------------------------------------------------
Net unrealized gain $ 1,504,214
=========================================================================
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
- --------------------------------------------------------------------------------
GOLDMAN SACHS MUNICIPAL INCOME FUND (continued)
October 31, 1995
/(a)/ When issued security.
/(b)/ The interest rate disclosed for this security represents effective yield
to maturity.
/(c)/ Portions of these securities are being segregated for when-issued
securities.
/(d)/ Variable rate security. Coupon rate disclosed is that which is in effect
at October 31, 1995.
/(e)/ Non-income producing security.
/(f)/ 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 net assets.
INVESTMENT ABBREVIATIONS:
AMBAC - Insured by American Municipal Bond Assurance Corp.
AMT - Alternative Minimum Tax
CAPGTY - Capital Guaranty Insurance Co.
FGIC - Insured by Financial Guaranty Insurance Co.
FNMA - Federal National Mortgage Association
FSA - Financial Security Assurance Co.
GNMA - Government National Mortgage Association
GO - General Obligation
IDA - Industrial Development Authority
MBIA - Insured by Municipal Bond Investors Assurance
NR - Not rated
PSF - Permanent School Fund
RB - Revenue Bond
VRDN - Variable Rate Demand Note
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES
October 31, 1995
<TABLE>
<CAPTION>
GOLDMAN GOLDMAN GOLDMAN
SACHS SACHS SACHS
GOVERNMENT GLOBAL MUNICIPAL
INCOME INCOME INCOME
FUND FUND FUND
------------ ------------ -----------
<S> <C> <C> <C>
ASSETS:
Investments in securities, at value
(cost $30,931,415, $273,501,082 and $60,395,131) $ 31,340,222 $272,945,552 $61,899,345
Receivables:
Investment securities sold -- 20,579,927 5,791,250
Interest 210,018 5,814,585 851,486
Forward foreign currency exchange contracts -- 2,950,813 --
Foreign tax withheld -- 675,843 --
Fund shares sold 59,203 51,644 71,355
Cash 4,974 1,232 42,845
Deferred organization expenses, net 42,846 46,256 47,683
Other assets 79,092 111,218 56,881
------------ ------------ -----------
Total assets 31,736,355 303,177,070 68,760,845
------------ ------------ -----------
LIABILITIES:
Payables:
Investment securities purchased 2,144,668 21,461,760 14,753,768
Forward foreign currency exchange contracts -- 3,825,677 --
Fund shares repurchased 11,371 50,000 44,777
Investment adviser fees 6,127 93,769 18,167
Administration fees -- 35,163 6,813
Authorized dealer service fees 6,127 51,936 11,354
Distribution fees -- 51,936 --
Transfer agent fees 13,928 26,305 13,779
Accrued expenses and other liabilities 51,535 126,175 114,953
------------ ------------ -----------
Total liabilities 2,233,756 25,722,721 14,963,611
------------ ------------ -----------
NET ASSETS:
Paid in capital 29,150,881 272,761,135 54,514,862
Accumulated undistributed net investment income 36,251 16,641,827 42,738
Accumulated net realized loss on investment
transactions (93,340) (13,043,346) (2,264,580)
Accumulated net realized foreign currency gain -- 2,443,547 --
Net unrealized gain on investments 408,807 4,810,713 1,504,214
Net unrealized loss on translation of assets and
liabilities denominated in foreign currencies -- (6,159,527) --
----------- ------------ -----------
Net assets $29,502,599 $277,454,349 $53,797,234
=========== ============ ===========
</TABLE>
<TABLE>
<CAPTION>
CLASS A INSTITUTIONAL
------- -------------
<S> <C> <C> <C> <C>
Net asset value and redemption price per share
(net assets/shares outstanding) $14.47 $14.45 $14.45 $14.17
========= ========== ========= =========
Maximum public offering price per share
(NAV per share x 1.0471)/(a)/ $15.15 $15.13 $14.45 $14.84
========= ========== ========= =========
Shares outstanding, $.001 par value
(unlimited number of shares authorized) 2,038,356 17,008,968 2,188,371 3,796,312
========= ========== ========= =========
</TABLE>
/(a)/ The Goldman Sachs Global Income Fund's Institutional shares maximum public
offering price per share is equivalent to the net asset value per share.
The accompanying notes are an integral part of these financial statements.
22
<PAGE>
- --------------------------------------------------------------------------------
Statements of Operations
For the Year Ended October 31, 1995
<TABLE>
<CAPTION>
GOLDMAN GOLDMAN GOLDMAN
SACHS SACHS SACHS
GOVERNMENT GLOBAL MUNICIPAL
INCOME INCOME INCOME
FUND FUND FUND
------------ ------------ -----------
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest/(a)/ $1,452,092 $ 23,662,535 $2,846,866
---------- ------------ ----------
Total income 1,452,092 23,662,535 2,846,866
---------- ------------ ----------
EXPENSES:
Investment adviser fees 101,737 2,367,381 200,207
Administration fees 30,521 473,476 75,077
Authorized dealer service fees 25,239 281,949 55,106
Distribution fees 76,499 1,257,211 195,152
Custodian fees 36,551 179,346 25,915
Transfer agent fees 94,095 106,764 63,695
Professional fees 39,836 70,511 53,407
Registration fees 37,256 75,289 21,406
Amortization of deferred organization expenses 18,796 61,394 17,545
Trustee fees 597 11,034 1,258
Other 14,808 49,443 38,062
---------- ------------ ----------
TOTAL EXPENSES 475,935 4,933,798 746,830
Less--expenses reimbursable and fees waived
by Goldman Sachs (381,105) (930,147) (366,894)
---------- ------------ ----------
NET EXPENSES 94,830 4,003,651 379,936
---------- ------------ ----------
NET INVESTMENT INCOME 1,357,262 19,658,884 2,466,930
---------- ------------ ----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT,
OPTIONS AND FOREIGN CURRENCY TRANSACTIONS:
Net realized gain from:
Investment transactions 603,048 5,556,002 938,332
Foreign currency related transactions -- 18,804,029 --
Net change in unrealized gain (loss) on:
Investments 902,391 14,759,004 3,055,111
Translation of assets and liabilities denominated
in foreign currencies -- (15,288,240) --
---------- ------------ ----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENT,
OPTIONS AND FOREIGN CURRENCY TRANSACTIONS 1,505,439 23,830,795 3,993,443
---------- ------------ ----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $2,862,701 $ 43,489,679 $6,460,373
========== ============ ==========
</TABLE>
/(a)/ Net of $101,514 in foreign withholding tax for the Global Income Fund.
The accompanying notes are an integral part of these financial statements.
23
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
For the Year Ended October 31, 1995
<TABLE>
<CAPTION>
GOLDMAN GOLDMAN GOLDMAN
SACHS SACHS SACHS
GOVERNMENT GLOBAL MUNICIPAL
INCOME INCOME INCOME
FUND FUND FUND
------------ ------------ -----------
<S> <C> <C> <C>
FROM OPERATIONS:
Net investment income $ 1,357,262 $ 19,658,884 $ 2,466,930
Net realized gain from investment transactions 603,048 5,556,002 938,332
Net realized gain from foreign currency
related transactions -- 18,804,029 --
Net change in unrealized gain on investments 902,391 14,759,004 3,055,111
Net change in unrealized loss on translation of
assets and liabilities denominated
in foreign currencies -- (15,288,240) --
----------- ------------ -----------
Net increase in net assets resulting
from operations 2,862,701 43,489,679 6,460,373
----------- ------------ -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (1,361,620) (20,883,123)/(a)/ (2,466,930)
----------- ------------ -----------
Total distributions to shareholders (1,361,620) (20,883,123) (2,466,930)
----------- ------------ -----------
FROM SHARE TRANSACTIONS:
Net proceeds from sales of shares 15,973,014 53,349,100 11,879,853
Reinvestment of dividends and distributions 1,123,498 13,008,610 1,551,121
Cost of shares repurchased (3,546,816) (208,094,050) (11,000,210)
----------- ------------ -----------
Net increase (decrease) in net assets
resulting from share transactions 13,549,696 (141,736,340) 2,430,764
----------- ------------ -----------
Total increase (decrease) 15,050,777 (119,129,784) 6,424,207
----------- ------------ -----------
NET ASSETS:
Beginning of year 14,451,822 396,584,133 47,373,027
----------- ------------ -----------
End of year $29,502,599 $277,454,349 $53,797,234
=========== ============ ===========
Accumulated undistributed net investment income $ 36,251 $ 16,641,827 $ 42,738
=========== ============ ===========
SUMMARY OF SHARE TRANSACTIONS:
Shares sold 1,139,008 3,822,903 876,447
Reinvestment of dividends and distributions 80,152 935,191 113,767
Shares repurchased (253,583 ) (15,079,626) (816,569)
----------- ------------ -----------
Net increase (decrease) in shares outstanding 965,577 (10,321,532) 173,645
=========== ============ ===========
</TABLE>
/(a)/ The Global Income Fund distributed $20,322,640 and $560,483 from net
investment income for the Class A and Institutional class of shares,
respectively.
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS (continued)
For the Year Ended October 31, 1994
<TABLE>
<CAPTION>
GOLDMAN GOLDMAN GOLDMAN
SACHS SACHS SACHS
GOVERNMENT GLOBAL MUNICIPAL
INCOME INCOME INCOME
FUND FUND/(a)/ FUND
------------ ------------ -----------
<S> <C> <C> <C>
FROM OPERATIONS:
Net investment income $ 794,938 $ 34,832,452 $ 2,300,535
Net realized loss from investment,
option and futures transactions (693,341) (29,399,159) (3,202,912)
Net realized loss from foreign currency
related transactions -- (12,649,508) --
Net change in unrealized loss on
investments and options (502,522) (31,154,593) (1,799,359)
Net change in unrealized gain on translation
of assets and liabilities denominated in
foreign currencies -- 7,363,987 --
----------- ------------- ------------
Net decrease in net assets resulting
from operations (400,925) (31,006,821) (2,701,736)
----------- ------------- ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (794,938) (8,807,313) (2,300,535)
In excess of net investment income (17,584) -- --
Net realized gain on investment,
option and futures transactions (106,548) (7,198,898) (108,139)
In excess of net realized gain on investment,
option and futures transactions (3,047) -- --
Paid-in capital -- (25,765,213) --
----------- ------------- ------------
Total distributions to shareholders (922,117) (41,771,424) (2,408,674)
----------- ------------- ------------
FROM SHARE TRANSACTIONS:
Net proceeds from sales of shares 8,616,512 133,966,890 40,579,374
Reinvestment of dividends and distributions 762,895 26,726,504 1,557,330
Cost of shares repurchased (6,464,527) (366,992,820) (19,819,419)
----------- ------------- ------------
Net increase (decrease) in net assets
resulting from share transactions 2,914,880 (206,299,426) 22,317,285
----------- ------------- ------------
Total increase (decrease) 1,591,838 (279,077,671) 17,206,875
NET ASSETS:
Beginning of year 12,859,984 675,661,804 30,166,152
----------- ------------- ------------
End of year $14,451,822 $ 396,584,133 $ 47,373,027
=========== ============= ============
Accumulated undistributed net investment income $ 22,212 $ 1,318,755 $ 25,593
=========== ============= ============
SUMMARY OF SHARE TRANSACTIONS:
Shares sold 615,568 9,067,823 2,852,822
Reinvestment of dividends and distributions 54,242 1,870,918 112,990
Shares repurchased (460,162) (26,266,551) (1,404,132)
----------- ------------- ------------
Net increase (decrease) in shares outstanding 209,648 (15,327,810) 1,561,680
=========== ============= ============
</TABLE>
/(a)/ For the year ended October 31, 1994 only Class A shares were outstanding.
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
October 31, 1995
1. ORGANIZATION
Goldman Sachs Trust (the "Trust") is a Massachusetts business trust registered
under the Investment Company Act of 1940 (as amended) as an open-end, management
investment company. Included in this report are the financial statements for
the Goldman Sachs Government Income Fund (Government Income), the Goldman Sachs
Global Income Fund (Global Income) and the Goldman Sachs Municipal Income Fund
(Municipal Income), collectively, "the Funds" or individually a "Fund".
Government Income and Municipal Income are diversified portfolios whereas Global
Income is a separate non-diversified portfolio. The Global Income Fund currently
offers two classes of shares - Class A and Institutional shares.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Funds which are in conformity with those generally accepted in
the investment company industry:
A. Investment Valuation
- ------------------------
Investments in debt securities, other than money market instruments, held by
Global Income are valued on the basis of dealer-supplied quotations or by a
pricing service approved by the Board of Trustees if such prices are believed by
the investment adviser to accurately represent market value. The prices derived
by a pricing agent reflect broker/dealer-supplied valuations and electronic data
processing techniques. If those prices are not deemed by the Fund's Investment
Adviser to be representative of the market values at the time the net asset
value is calculated, then such securities will be valued at fair value as
described below. Options and futures contracts are valued at the last sale
price on the market where any such option or futures contract is principally
traded. Forward foreign currency exchange contracts are valued at the mean
between the last bid and asked quotations supplied by a dealer in such
contracts. All other securities and other assets, including debt securities,
for which prices are supplied by a pricing agent but are not deemed by the
Fund's Investment Adviser to be representative of market values, restricted
securities and securities for which no market quotation is available, but
excluding money market instruments with a remaining maturity of sixty days or
less, are valued at fair value as determined in good faith pursuant to
procedures established by the Board of Trustees. Money market instruments held
by the Fund with a remaining maturity of sixty days or less will be valued by
the amortized cost method, which approximates market value.
Investments in portfolio securities held by the Government Income and Municipal
Income Funds 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 held by the Government Income
and Municipal Income Funds, for which accurate market 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. Exchange traded options and futures contracts
will be valued by the investment adviser at the last sale price on the exchange
where such contracts and options are principally traded. Short-term debt
obligations maturing in sixty days or less are valued at amortized cost.
B. SecurityTransactions 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 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
26
<PAGE>
for distribution and are classified as interest income in the accompanying
Statements 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. For the Municipal Income Fund,
market premiums on other long-term debt securities are amortized to interest
income while for the Global Income Fund, market discounts on other long-term
debt securities are accreted to interest income.
C. Foreign Currency Translations
- ---------------------------------
Amounts denominated in foreign currencies are translated into U.S. dollars on
the following basis: (i) investment valuations, other assets and liabilities
initially expressed in foreign currencies are converted each business day into
U.S. dollars based upon current exchange rates; (ii) purchases and sales of
foreign investments, income and expenses are converted into U.S. dollars based
upon currency exchange rates prevailing on the respective dates of such
transactions.
Net realized and unrealized gain (loss) on foreign currency transactions will
represent: (i) foreign exchange gains and losses from the sale and holdings of
foreign currencies and investments; (ii) gains and losses between trade date and
settlement date on investment securities transactions and forward exchange
contracts; and (iii) gains and losses from the difference between amounts of
interest recorded and the amounts actually received.
D. Forward Foreign Currency Exchange Contracts
- -----------------------------------------------
The Global Income Fund may enter into forward foreign exchange contracts for the
purchase or sale of a specific foreign currency at a fixed price on a future
date as a hedge or cross-hedge against either specific transactions or portfolio
positions. The Global Income Fund may also purchase and sell forward contracts
to seek to increase total return. The aggregate principal amounts of the
contracts for which delivery is anticipated are reflected in the Fund's
accounts, while the aggregate principal amounts are reflected net in the
accompanying Statements of Assets and Liabilities if the Fund intends to settle
the contract prior to delivery. All commitments are "marked-to-market" daily at
the applicable translation rates and any resulting unrealized gains or losses
are recorded in the Fund's financial statements. The Fund records realized
gains or losses at the time the forward contract is offset by entry into a
closing transaction or extinguished by delivery of the currency. Risks may
arise upon entering into these contracts from the potential inability of
counterparties to meet the terms of their contracts and from unanticipated
movements in the value of a foreign currency relative to the U.S. dollar.
E. Mortgage Dollar Rolls
- -------------------------
The Government Income 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
but 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.
F. Options
- -----------
When call or put options are written, an amount equal to the premium received is
recorded as an asset and as an equivalent liability. The amount of the liability
is subsequently marked-to-market to reflect the current market value of the
option written. When a written option expires on its stipulated expiration date,
or a closing
27
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
October 31, 1995
purchase transaction has been entered into, a gain or loss is realized
without regard to any unrealized gain or loss on the underlying security, and
the liability related to such option is extinguished. When a written call
option is exercised, a gain or loss is realized from the sale of the underlying
security, and the proceeds of the sale are increased by the premium originally
received. When a written put option is exercised, the amount of the premium
originally received will reduce the cost of the security purchased upon
exercise.
Upon the purchase of a call option or a protective put option, the premium paid
is recorded as an investment, and subsequently marked-to-market to reflect the
current market value of the option. If an option which has been purchased
expires on the stipulated expiration date, a loss is realized in the amount of
the cost of the option. If a closing sale transaction has been entered into, a
gain or loss is realized, depending on whether the sale proceeds from the
closing sale transaction are greater or less than the cost of the option. If a
purchased put option is exercised, a gain or loss from the sale of the
underlying security is realized, and the proceeds from such sale will be
decreased by the premium originally paid. If a purchased call option is
exercised, the cost of the security purchased upon exercise will be increased by
the premium originally paid. In the case of index options, there is a risk of
loss from a change in value of such options which may exceed the related
premiums received.
G. Futures Contracts
- ---------------------
Upon entering into a futures contract, the Funds are required to deposit with a
broker an amount of cash or securities equal to the minimum "initial margin"
requirement of the futures exchange on which the contract is traded. Subsequent
payments ("variation margin") are made or received by the Funds each day,
dependent on the daily fluctuations in the value of the contract, and are
recorded for financial reporting purposes, as unrealized gains or losses. When
entering into a closing transaction, the Funds will realize a gain or loss equal
to the difference between the value of the futures contract to sell and the
futures contract to buy. Futures contracts are valued at the most recent
settlement price, unless such price does not reflect the fair market value of
the contract, in which case the position will be valued using methods as
approved by the Funds' Board of Trustees. Certain risks may arise upon entering
into futures contracts. These risks may include changes in the value of the
futures contract that may not directly correlate with changes in the value of
the underlying securities, or that the counterparty to a contract may default on
its obligations to perform.
H. Federal Taxes
- -----------------
It is each Fund's policy to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute each year
substantially all investment company tax-exempt and 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 paid-in capital, depending on the type
of book/tax differences that may exist.
At October 31, 1995, the Funds had approximately the following amounts of
capital loss carryforward for U.S. Federal tax purposes:
Fund Amount Year of Expiration
- ---- ----------- ------------------
Government Income Fund $ 735,561 2002
Global Income Fund $10,295,502 2002
Municipal Income Fund $ 3,202,911 2002
28
<PAGE>
I. Deferred Organization Expenses
- ----------------------------------
Organization-related costs are being amortized on a straight-line basis over a
period of five years.
J. 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.
Class A shareholders of the Global Income Fund bear all expenses and fees
relating to the distribution and authorized dealer service plans as well as
other expenses which are directly attributable to such shares. The Class A and
Institutional shareholders separately bear transfer agency fees.
3. AGREEMENTS
Goldman Sachs Asset Management ("GSAM"), a separate operating division of
Goldman, Sachs & Co. ("Goldman Sachs"), serves as each Fund's investment adviser
pursuant to Investment Advisory Agreements. Goldman Sachs Asset Management
International ("GSAM International"), an affiliate of Goldman Sachs, acts as
subadviser under a Subadvisory Agreement for the Global Income Fund. Under the
Investment Advisory and Subadvisory Agreements, GSAM and GSAM International,
subject to the general supervision of the Trust's Board of Trustees, manage the
Funds' portfolios. As compensation for the services rendered pursuant to the
Investment Advisory Agreements and the assumption of the expenses related
thereto, GSAM is entitled to a fee, computed daily and payable monthly at an
annual rate equal to .50%, .25% and .40% of average daily net assets of the
Government Income, Global Income and Municipal Income Funds, respectively. As
compensation for the services rendered pursuant to the Subadvisory Agreement,
GSAM International is entitled to a subadvisory fee from the Global Income Fund
of .50% of the average daily net assets. For the year ended October 31, 1995,
GSAM voluntarily agreed to waive a portion of its investment advisory fees
amounting to approximately $57,700, $248,000 and $45,500 for the Government
Income, Global Income and Municipal Income Funds, respectively.
GSAM serves as each Fund's administrator pursuant to an Administration
Agreement. Under the Administration Agreement, GSAM administers the Funds'
business affairs, including providing facilities. As compensation for the
services rendered pursuant to the Administration Agreement, GSAM is entitled to
a fee, computed daily and payable monthly at an annual rate equal to .15% of
each Fund's average daily net assets. For the year ended October 31, 1995, GSAM
voluntarily agreed to waive a portion of its administration fee amounting to
approximately $30,500 for the Government Income Fund.
GSAM has voluntarily agreed to limit certain of the Funds'expenses (excluding
advisory, administration, distribution and authorized dealer service fees,
taxes, interest, brokerage, litigation, indemnification and other extraordinary
expenses and with respect to the Global Income Fund, transfer agent fees) to the
extent such expenses exceed .30%, .06% and .05% per annum of the Government
Income, Global Income and Municipal Income Funds, respectively. For the year
ended October 31, 1995, GSAM voluntarily agreed to reimburse all such expenses
for the Government Income Fund. For the year ended October 31, 1995 the amount
of reimbursed expenses for the Government Income, Global Income and Municipal
Income Funds were approximately $242,000, $70,000 and $196,000, respectively.
The amounts reimbursable to the Government Income, Global Income and Municipal
Income Funds at October 31, 1995 are approximately $49,000, $40,000 and $54,000,
respectively, and are included in "Other Assets" on the accompanying Statements
of Assets and Liabilities.
Goldman Sachs serves as the Distributor of shares of the Funds pursuant to a
Distribution Agreement and as such may receive a portion of the sales load
imposed on the sale of Fund shares. During the year ended October 31, 1995,
29
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
October 31, 1995
Goldman Sachs retained approximately $22,000, $15,000 and $48,000 of sales loads
related to the Government Income, Global Income and Municipal Income Funds,
respectively.
The Trust, on behalf of each Fund, has adopted a Distribution Plan (the
"Distribution Plan") pursuant to Rule 12b-1. Under the Distribution Plan,
Goldman Sachs is entitled to a quarterly fee from each Fund for distribution
services equal, on an annual basis, to .25% of each Fund's average daily net
assets (or, in the case of Global Income Fund, the average daily net assets
attributable to the Class A shares). Currently, Goldman Sachs has voluntarily
agreed to waive the entire amount of such fee for the Government Income and
Municipal Income Funds. Effective June 1, 1995, each Fund's Distribution Plan
was amended to reduce the contractual fee from .50% to .25% of average daily net
assets and to eliminate the provision of certain services under the Distribution
Plan which are currently provided under the Authorized Dealer Service Plan.
Distribution fees waived for the period amounted to $50,869, $611,952 and
$125,129 for the Government Income, Global Income and Municipal Income Funds,
respectively.
Effective June 1, 1995, the Company on behalf of each Fund adopted an Authorized
Dealer Service Plan (the "Service Plan") pursuant to which Goldman Sachs and
Authorized Dealers are compensated for providing personal and account
maintenance services. Each Fund pays a fee under its Service Plan equal, to on
an annual basis, to .25% of each Fund's average daily net assets (or, in the
case of Global Income Fund, the average daily net assets attributable solely to
the Class A shares). Goldman Sachs also serves as the Transfer Agent of the
Funds for a fee.
4. LINE OF CREDIT FACILITY
The Funds participate in a $100,000,000 uncommitted, unsecured revolving line of
credit facility. In addition, the Global Income Fund has an $8,000,000
committed, unsecured revolving line of credit facility available. Both
facilities are to be used solely for temporary or emergency purposes. The
interest rate on borrowings is based on the federal funds rate. The committed
facility also requires a fee to be paid based on the amount of the commitment
which has not been utilized. For the year ended October 31, 1995, the Funds did
not have any borrowings under these facilities.
5. INVESTMENT TRANSACTIONS
Purchases and proceeds of sales or maturities of long-term securities for the
year ended October 31, 1995, were as follows:
GOVERNMENT GLOBAL MUNICIPAL
FUND INCOME INCOME INCOME
- ----------------------------------------------------------------------------
Purchases of U.S.
Government and
agency obligations $100,296,354 $ 83,722,782 $ --
- ----------------------------------------------------------------------------
Purchases (excluding
U.S. Government and
agency obligations) 3,011,921 656,349,335 174,160,831
- ----------------------------------------------------------------------------
Sales or maturities of
U.S. Government and
agency obligations 87,845,570 196,872,555 --
- ----------------------------------------------------------------------------
Sales or maturities
(excluding U.S.
Government and
agency obligations) 1,887,472 704,661,927 166,318,514
- ----------------------------------------------------------------------------
For the year ended October 31, 1995, option transactions in the Global Income
Fund were as follows:
PREMIUMS
OPTIONS WRITTEN RECEIVED
- ----------------------------------------------------------------------------
Balance outstanding, beginning of year $ --
Options written 130,440
Options exercised (130,440)
- ----------------------------------------------------------------------------
Balance outstanding, end of year $ --
- ----------------------------------------------------------------------------
30
<PAGE>
OPTIONS PURCHASED COST
- ----------------------------------------------------------------------------
Balance outstanding, beginning of year $ --
Options purchased 84,446
Options exercised (84,446)
- ----------------------------------------------------------------------------
Balance outstanding, end of year $ --
============================================================================
Certain risks related to written call or put options arise from the possible
inability of counterparties to meet the terms of their contracts and from
movement in currency values and interest rates.
At October 31, 1995, the Global Income Fund had outstanding forward foreign
currency exchange contracts, both to purchase and sell foreign currencies as
follows:
VALUE ON
FOREIGN CURRENCY SETTLEMENT CURRENT UNREALIZED
PURCHASE CONTRACTS DATE VALUE GAIN/(LOSS)
- ----------------------------------------------------------------------------
DEUTSCHE MARK
Expiring 11/16/95 $ 268,323 $ 281,721 $ 13,398
Expiring 9/9/96/(a)/ 14,435,171 15,391,612 956,441
- ----------------------------------------------------------------------------
Total Foreign Currency
Purchase Contracts $ 14,703,494 $ 15,673,333 $ 969,839
============================================================================
============================================================================
VALUE ON
FOREIGN CURRENCY SETTLEMENT CURRENT UNREALIZED
PURCHASE CONTRACTS DATE VALUE GAIN/(LOSS)
- ----------------------------------------------------------------------------
BELGIAN FRANC
Expiring 2/28/96 $ 9,255,202 $ 9,165,116 $ 90,086
Expiring 9/9/96/(a)/ 14,435,171 15,409,951 (974,780)
BRITISH POUND STERLING
Expiring 12/11/95 35,559,013 36,300,525 (741,512)
DEUTSCHE MARK
Expiring 1/24/96 18,148,618 18,165,060 (16,442)
Expiring 1/31/96 144,844 144,844 --
FRENCH FRANC
Expiring 11/30/95 21,550,856 22,041,337 (490,481)
JAPANESE YEN
Expiring 12/18/95 13,687,026 13,561,625 125,401
Expiring 1/17/96 34,125,931 33,541,512 584,419
SPANISH PESETA
Expiring 11/27/95 13,646,350 13,953,670 (307,320)
- ----------------------------------------------------------------------------
Total Foreign Currency
Sale Contracts $160,553,011 $162,283,640 $(1,730,629)
============================================================================
/(a)/ Represents a cross-currency forward foreign exchange contract.
The contractual amounts of forward foreign currency exchange contracts do not
necessarily represent the amounts potentially subject to risk. The measurement
of the risks associated with these instruments is meaningful only when all
related and offsetting transactions are considered.
At October 31,1995, the Global Income Fund had sufficient cash and/or securities
to cover any commitments under these contracts.
The Global Income Fund has recorded a "Receivable for forward foreign currency
exchange contracts" and "Payable for forward foreign currency exchange
contracts" resulting from open and closed but not settled forward foreign
currency exchange contracts of $2,950,813 and $3,825,677, respectively, in the
accompanying Statement of Assets and Liabilities. Included in the "Receivable
and payable for forward foreign currency exchange contracts" are $1,181,068 and
$1,295,142, respectively, related to forward contracts closed but not settled as
of October 31, 1995.
6. SUMMARY OF SHARE TRANSACTIONS
GLOBAL INCOME FUND DOLLARS SHARES
- -----------------------------------------------------------------------------
Class A Shares:
Shares sold $ 22,864,336 1,659,380
Reinvestment of dividends and distributions 12,448,128 895,996
Shares repurchased (207,889,246) (15,065,279)
------------- -----------
(172,576,782) (12,509,903)
------------- -----------
Institutional Shares:
Shares sold 30,484,764 2,163,523
Reinvestment of dividends and distributions 560,482 39,195
Shares repurchased (204,804) (14,347)
------------- -----------
30,840,442 2,188,371
------------- -----------
Total $(141,736,340) (10,321,532)
============= ===========
7. REPURCHASE AGREEMENTS
During the term of a repurchase agreement, the value of the underlying
securities, including accrued interest, is
31
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
October 31, 1995
required to equal or exceed the value of the repurchase agreement. The
underlying securities for all repurchase agreements are held in safekeeping in
the customer-only account of State Street Bank & Trust Co., the Funds'
custodian, or at subcustodians. GSAM monitors the market value of the underlying
securities by pricing them daily.
8. JOINT REPURCHASE AGREEMENT ACCOUNT
The Government Income 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, 1995, the Government Income Fund had a 0.16% undivided interest
in the repurchase agreement in the joint account which equaled $2,900,000, in
principal amount. As of October 31, 1995, the repurchase agreement in the joint
account along with the corresponding underlying securities (including the type
of security, market value, interest rate and maturity date) were as follows:
PRINCIPAL INTEREST MATURITY AMORTIZED
AMOUNT RATE DATE COST
- --------------------------------------------------------------------------------
Lehman Brothers, Inc. dated 10/31/95, repurchase price $965,159,225 (U.S.
Treasury Notes: $955,186,569, 4.25%-9.50%, 11/15/95-08/15/02; U.S. Treasury
Interest-Only Strips:$19,548,855, 11/15/00-08/15/02; U.S. Treasury Principal-
Only Strips:$6,376,719, 6.38%-8.50%, 11/15/00-08/15/02))
$965,000,000 5.94% 11/01/95 $ 965,000,000
Salomon Brothers, Inc. dated 10/31/95, repurchase price $830,136,489 (U.S.
Treasury Notes: $383,210,541, 4.25%-8.87%, 11/15/95-08/31/00; U.S. Treasury
Interest-Only Strips: $356,333,527, 11/15/95-08/15/02; U.S. Treasury
Principal-Only Strips: $107,445,042, 6.38%-9.50%, 11/15/95-08/15/02)
830,000,000 5.92 11/01/95 830,000,000
- --------------------------------------------------------------------------------
Total Joint Repurchase Agreement Account $1,795,000,000
================================================================================
9. CERTAIN RECLASSIFICATIONS
In accordance with Statement of Position 93-2, the Government Income, Global
Income and Municipal Income Funds have reclassified $18,397, $61,394 and
$17,145, respectively, from paid-in capital to accumulated undistributed net
investment income. Additionally, the Global Income Fund has reclassified
$16,485,917 from accumulated net realized foreign currency gain to accumulated
undistributed net investment income. These reclassifications have no impact on
the net asset values of the Funds and are designed to present the Funds' capital
accounts on a tax basis.
10. OTHER
As of October 31, 1995, Goldman, Sachs & Co. Employees Profit Sharing and
Retirement Income Plan was the beneficial owner of approximately 9% of the
outstanding shares of the Goldman Sachs Global Income Fund.
32
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Selected Data for a Share Outstanding Throughout Each Period
<TABLE>
<CAPTION>
INCOME (LOSS) FROM INVESTMENT OPERATIONS
-----------------------------------------------------------------------------------
NET REALIZED NET REALIZED
AND UNREALIZED AND UNREALIZED TOTAL
GAIN (LOSS) GAIN (LOSS) INCOME
NET ASSET ON INVESTMENT, ON FOREIGN (LOSS)
VALUE AT NET OPTION AND CURRENCY FROM
BEGINNING INVESTMENT FUTURES RELATED INVESTMENT
OF PERIOD INCOME TRANSACTIONS/(a)/ TRANSACTIONS/(a)/ OPERATIONS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the Years Ended
October 31,
- --------------------------
1995...................... $13.47 $ 0.94 $ 1.00 $ -- $ 1.94
1994...................... 14.90 0.85 (1.28) -- (0.43)
For the Period February
10, 1993/(e)/ through
October 31,
- --------------------------
1993...................... 14.32 0.56 0.58 -- 1.14
<CAPTION>
GLOBAL INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the Years Ended
October 31,
- --------------------------
1995 - Class A shares 13.43 0.89 0.92 0.15 1.96
1995 - Institutional
shares/(f)/ 14.09 0.22 0.34 0.06 0.62
1994 - Class A shares 15.07 0.84 (1.37) (0.12) (0.65)
1993 - Class A shares 14.69 0.85 1.07 (0.42) 1.50
1992 - Class A shares 14.60 1.14 0.45 (0.36) 1.23
For the Period August 2,
1991/(e)/ through
October 31,
- --------------------------
1991 - Class A shares 14.55 0.25 0.23 (0.19) 0.29
<CAPTION>
MUNICIPAL INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the Years Ended
October 31,
- --------------------------
1995...................... 13.08 0.67 1.09 -- 1.76
1994...................... 14.64 0.73 (1.51) -- (0.78)
For the Period July 20,
1993/(e)/ through
October 31,
- --------------------------
1993...................... 14.32 0.22 0.32 -- 0.54
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTIONS TO SHAREHOLDERS
------------------------------------------------------------------------------------------------------
IN EXCESS OF
FROM NET NET REALIZED
REALIZED GAIN GAIN ON
ON INVESTMENT, IN EXCESS INVESTMENT, FROM TOTAL
FROM NET OPTION OF NET OPTION AND PAID DISTRIBUTIONS
INVESTMENT AND FUTURES INVESTMENT FUTURES IN TO
INCOME TRANSACTIONS INCOME TRANSACTIONS CAPITAL SHAREHOLDERS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Years Ended
October 31,
- --------------------------
1995...................... $(0.94) $ -- $ -- $ -- $ -- $(0.94)
1994...................... (0.85) (0.12) (0.02) (0.01) -- (1.00)
For the Period February
10, 1993/(e)/ through
October 31,
- --------------------------
1993...................... (0.56) -- -- -- -- (0.56)
<CAPTION>
GLOBAL INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Years Ended
October 31,
- --------------------------
1995 - Class A shares (0.94) -- -- -- -- (0.94)
1995 - Institutional
shares/(f)/ (0.26) -- -- -- -- (0.26)
1994 - Class A shares (0.22) (0.16) -- -- (0.61) (0.99)
1993 - Class A shares (0.85) (0.27) -- -- -- (1.12)
1992 - Class A shares (1.14) -- -- -- -- (1.14)
For the Period August 2,
1991/(e)/ through
October 31,
- --------------------------
1991 - Class A shares (0.24) -- -- -- -- (0.24)
<CAPTION>
MUNICIPAL INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Years Ended
October 31,
- --------------------------
1995...................... (0.67) -- -- -- -- (0.67)
1994...................... (0.73) (0.05) -- -- -- (0.78)
For the Period July 20,
1993/(e)/ through
October 31,
- --------------------------
1993...................... (0.22) -- -- -- -- (0.22)
</TABLE>
<TABLE>
<CAPTION>
RATIOS ASSUMING
NO VOLUNTARY WAIVER
OF FEES OR
EXPENSE LIMITATIONS
------------------------
RATIO OF RATIO OF
NET NET NET NET
INCREASE RATIO OF INVESTMENT ASSETS INVESTMENT
(DECREASE) NET ASSET NET INCOME AT END RATIO OF INCOME
IN NET VALUE AT EXPENSES (LOSS) PORTFOLIO OF EXPENSES (LOSS)
ASSET END OF TOTAL TO AVERAGE TO AVERAGE TURNOVER PERIOD TO AVERAGE TO AVERAGE
VALUE PERIOD RETURN/(b)/ NET ASSETS NET ASSETS RATE/(d)/ (IN 000S) NET ASSETS NET ASSETS
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
For the Years Ended
October 31,
- --------------------------
1995...................... $ 1.00 $14.47 14.90% 0.47% 6.67% 449.53% $ 29,503 2.34% 4.80%
1994...................... (1.43) 13.47 (2.98) 0.11 6.06 654.90 14,452 2.86 3.31
For the Period February
10, 1993/(e)/ through
October 31,
- --------------------------
1993...................... 0.58 14.90 8.03 0.00/(c)/ 4.87/(c)/ 725.41 12,860 4.00/(c)/ 0.87/(c)/
<CAPTION>
GLOBAL INCOME FUND
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
For the Years Ended
October 31,
- --------------------------
1995 - Class A shares 1.02 14.45 15.08 1.29 6.23 265.86 245,835 1.58 5.94
1995 - Institutional
shares/(f)/ 0.36 14.45 4.42 0.65/(c)/ 6.01/(c)/ 265.86 31,619 1.08/(c)/ 5.58/(c)/
1994 - Class A shares (1.64) 13.43 (4.49) 1.28 5.73 343.74 396,584 1.53 5.48
1993 - Class A shares 0.38 15.07 10.75 1.30 5.78 313.88 675,662 1.55 5.53
1992 - Class A shares 0.09 14.69 8.77 1.37 7.85 270.75 588,893 1.62 7.60
For the Period August 2,
1991/(e)/ through
October 31,
- --------------------------
1991 - Class A shares 0.05 14.60 2.00 0.38/(g)/ 1.72/(g)/ 34.22 388,744 0.44/(g)/ 1.66/(g)/
<CAPTION>
MUNICIPAL INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
For the Years Ended
October 31,
1995...................... 1.09 14.17 13.79 0.76 4.93 335.55 53,797 1.49 4.20
1994...................... (1.56) 13.08 (5.51) 0.45 5.28 357.54 47,373 1.55 4.18
For the Period July 20,
1993/(e)/ through
October 31,
- --------------------------
1993...................... 0.32 14.64 3.73 0.00/(c)/ 5.15/(c)/ 99.99 30,166 2.42/(c)/ 2.73/(c)/
</TABLE>
/(a)/ Includes the 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, a complete redemption of
the investment at the net asset value at the end of the period and no
sales charges. For the Retail classes total return would be reduced if a
sales charge were taken into account.
/(c)/ Annualized.
/(d)/ Includes effect of mortgage dollar roll transactions for the Government
Income Fund.
/(e)/ Commencement of operations.
/(f)/ Institutional shares commenced operations on August 1, 1995.
/(g)/ Not annualized.
The accompanying notes are an integral part of these financial statements.
33
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Trustees of the Goldman Sachs Government Income
Fund, Goldman Sachs Global Income Fund and Goldman Sachs Municipal Income Fund:
We have audited the accompanying statements of assets and liabilities of the
Goldman Sachs Government Income Fund, Goldman Sachs Global Income Fund and
Goldman Sachs Municipal Income Fund, (portfolios of Goldman Sachs Trust, a
Massachusetts Business Trust) including the statements of investments, as of
October 31, 1995, and the related statements of operations, the statements of
changes in net assets and the financial highlights for each of the periods
presented. These financial statements and the financial highlights are the
responsibility of the Funds' management. Our responsibility is to express an
opinion on these financial statements and the financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1995 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and the financial highlights referred
to above present fairly, in all material respects, the financial position of the
Goldman Sachs Government Income Fund, Goldman Sachs Global Income Fund and
Goldman Sachs Municipal Income Fund as of October 31, 1995, the results of their
operations and the changes in their net assets and the financial highlights for
each of the periods presented, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Boston, Massachusetts
December 8, 1995
34
<PAGE>
- --------------------------------------------------------------------------------
This Annual Report is authorized for distribution to prospective investors only
when preceded or accompanied by a Goldman Sachs Trust Prospectus which contains
facts concerning the Fund's objectives and policies, management, expenses and
other information.
- --------------------------------------------------------------------------------
35
<PAGE>
Goldman Sachs
1 New York Plaza
New York, NY 10004
TRUSTEES
Paul C. Nagel, Jr., Chairman
Ashok N. Bakhru
Marcia L. Beck
David B. Ford
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
OFFICERS
Marcia L. Beck, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
GOLDMAN SACHS
Investment Adviser, Administrator,
Distributor and Transfer Agent
GST/AR/1095(RET)
The Goldman Sachs
Fixed Income
Portfolios
- -------------------------
Annual Report
October 31, 1995
Goldman Sachs Government Income Fund
Goldman Sachs Global Income Fund
Goldman Sachs Municipal Income Fund
Goldman
Sachs
36
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders
- --------------------------------------------------------------------------------
Dear Shareholders:
We are pleased to have the opportunity to review the performance and
activity of the Goldman Sachs Fixed Income Portfolios for the 12-month period
ended October 31, 1995. To help put the portfolios' performance in perspective,
we are also providing a brief overview of the U.S. economy and bond market
during the period.
Bonds Rallied Strongly as Rates Fell
The U.S. bond market began the period under review (November 1, 1994
through October 31, 1995) still feeling the impact of rising rates. By year-end
1994, however, the bond market showed signs of strength and gained further
momentum in 1995, primarily due to the slowing economy and subdued inflation.
For the 12 months ended October 31, bonds enjoyed one of their best years ever,
with the 30-year Treasury recording a total return of approximately 29%,
competitive with the soaring stock market.
The Economy Started Strong, Slowed in Spring, Then Recovered
The 12-month period began with the economy exhibiting robust growth and a
wide range of indicators pointing to continued acceleration. The 1994 fourth-
quarter real Gross Domestic Product (GDP) grew 5.1%, with employment, real
disposable income, consumer spending and sales of new and existing homes all
displaying impressive strength.
While 1995 began with real GDP increasing by 2.7% during the first quarter,
the pace of growth had clearly moderated. That trend became more pronounced as a
host of weak or declining indicators during the spring revealed that the economy
abruptly slowed during the second quarter of 1995. Significantly, the growth of
second-quarter real GDP was an anemic 1.3%.
By August, the economy appeared to revive. Employment, housing,
construction spending and several other indicators showed signs of improvement
that persisted into the fall. The flow of positive economic data appeared to
indicate that the prior slowdown was largely due to a short-term inventory
correction.
Third-quarter GDP growth was reported at an unexpectedly high 4.2%, which
many interpreted as a result of one-time events. By the end of October, however,
key economic reports were sending mixed signals regarding the health of the
economy once again. Firmness in interest-rate-sensitive areas such as housing,
motor vehicle sales and durable goods orders suggested steady growth, but retail
sales and industrial output indicators were weak. Though the condition of the
economy appeared uncertain, most observers agreed that inflation remained
contained, with the Producer Price Index (PPI) and Consumer Price Index (CPI) up
2.6% and 2.8%, respectively, for the 12-month period ended October 31, 1995.
Fed Raised Rates Twice During the Period, Then Cut as Inflation Fears Eased
The U.S. Federal Reserve Board raised the federal funds rate (the rates
banks charge one another for overnight borrowing) by 75 basis points in November
1994 and by 50 basis points in February 1995. Including those two hikes, the Fed
raised rates a total of seven times in its tightening cycle (from February 1994
through February 1995) by a total of 300 basis points to 6.00%.
The Fed remained neutral until early July 1995, when receding inflationary
pressures and a weakening economy prompted it to cut the federal funds rate 25
basis points to 5.75%.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Table of Contents
<S> <C> <C> <C>
Market Overview 1 GS Core Fixed Income Fund 21
GS Adjustable Rate Government Agency Fund 3 Financial Statements 28
GS Short-Term Government Agency Fund 9 Notes to Financial Statements 32
GS Short Duration Tax-Free Fund 15 Financial Highlights 39
- -------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders (continued)
- --------------------------------------------------------------------------------
During the period under review, the yield curve flattened dramatically. The
yield on six-month Treasury bills declined only slightly, from 5.66% on October
31, 1994, to 5.55% on October 31, 1995. However, for the same time period the
yield on the 30-year U.S. Treasury bond fell more dramatically, from 7.97% a
year ago to 6.33%.
Historical Treasury Yield Curve
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
10/31/94 10/31/95
<S> <C> <C>
3-Month 5.14% 5.49%
6-Month 5.66% 5.55%
1 6.14% 5.55%
2 6.82% 5.61%
3 7.05% 5.68%
5 7.48% 5.81%
10 7.81% 6.02%
30 7.97% 6.33%
</TABLE>
Source: Bloomberg, L.P.
The yield curve flattened considerably as the yields on longer-term Treasuries
fell more than the yields on shorter-term Treasuries, which shifted the curve
downward at the longer end. The yield difference between two-year Treasury notes
and 30-year Treasury bonds narrowed significantly.
Economic Outlook: Signals Mixed as Economy Moderates and Budget Debate Continues
While the economy continues to show relative strength in some sectors such
as housing, durable goods orders and employment, and the stock market remains
strong, evidence of weakness has begun to emerge. Most notably, retail sales
declined amid increasing levels of consumer debt, and industrial production was
basically flat in October. With inflation under control, many expect the Fed to
ease rates again in December if further weakening occurs. The favorable
resolution of the federal budget debate, anticipated by year-end, is also a key
factor in influencing further rate cuts. Near term, a healthy bond market is
likely to persist. Longer term, economic growth is generally expected to pick up
gradually by mid-1996.
We thank you for making the Goldman Sachs Fixed Income Portfolios part of
your investment program and we look forward to continuing to serve your
investment needs.
Sincerely,
/s/ David B. Ford
David B. Ford
Chief Executive Officer
/s/ Sharmin Mossavar-Rahmani
Sharmin Mossavar-Rahmani
Chief Investment Officer - Fixed Income Investments
Goldman Sachs Asset Management
November 30, 1995
- --------------------------------------------------------------------------------
2
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Agency Fund
- --------------------------------------------------------------------------------
Investment Objective
The GS Adjustable Rate Government Agency Fund seeks a high level of current
income consistent with low volatility of principal. The portfolio ordinarily
invests substantially all of its assets 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
between six months and one year.
Special Events
On April 28, 1995, the GS Government Agency Portfolio (for Financial
Institutions) was reorganized into the GS Adjustable Rate Government Agency
Fund. In addition, on May 15, 1995, the Goldman Sachs Adjustable Rate Mortgage
Fund (ARM Fund) was reorganized into the GS Adjustable Rate Government Agency
Fund. Shareholders of the ARM Fund were issued GS Adjustable Rate Government
Agency Class A shares in exchange for their ARM Fund shares.
A Challenging ARM Market
Interest rate fluctuations during the period under review had a direct
impact on the ARM market. As a result, ARMs experienced three distinct phases:
. At the start of the fund's fiscal year on November 1, 1994, spreads between
ARMs and Treasuries were relatively wide, due to a fear that ARMs would reach
their periodic caps (the maximum their coupons can be raised within a specified
time period) in the rising interest rate environment.
. That situation generally persisted through January 1995, at which point the
ARM market entered a second phase: interest rates stabilized, cap risk declined
and the prospects for ARMs brightened. This favorable ARM environment continued
through late spring, until interest rates began to decline.
. Starting approximately in June 1995, spreads between ARMs and Treasuries
began widening again, this time as a result of increased prepayment risk based
on the assumption homeowners would refinance their mortgages at lower rates. For
the first time since 1989, it became possible for homeowners to switch from an
ARM to a fixed-rate mortgage and lower their effective coupon payments. ARM
spreads continued to be wide as of the end of the period, though there were
indications of stabilization as winter's seasonably slower prepayment period
approached.
Performance Review
For the 12-month period ended October 31, 1995, the fund's Institutional
shares had a total return of 6.75% (6.39% in monthly distributions and 0.36% in
share price appreciation) and its Administration shares had a total return of
6.48% (6.12% in monthly distributions and 0.36% in share price appreciation).
Both share classes outperformed the 6.21% return of the six-month U.S. Treasury
bill but underperformed the 6.98% return of the one-year U.S. Treasury bill. As
of the end of the period, the fund maintained a duration of approximately 0.7
years, about midway between that of the six-month U.S. Treasury bill and the
one-year U.S. Treasury bill. When the yield curve flattened during the period,
the fund's performance benefited more from the rise in bond prices than the six-
month U.S. Treasury bill, but not as much as the one-year U.S. Treasury bill.
From their inception on May 15, 1995, through October 31, 1995, the fund's
Class A shares returned 2.74% based on NAV (2.93% in monthly distributions and
- -0.19% in share price depreciation). For the same period, the six-month Treasury
bill returned 2.81% and the one-year Treasury bill returned 3.08%. The fund's
Class A shares underperformed the six-month and one-year Treasury bills during
the five and a half months they have been available because the ARM market
experienced a high level of volatility and prepayment risk during that brief
period.
- --------------------------------------------------------------------------------
3
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Agency Fund (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NAV NAV Change 30-Day SEC
Share Class (10/31/95) (10/31/94-10/31/95) Yield (10/31/95)
- ----------- ---------- ------------------- ----------------
<S> <C> <C> <C>
Institutional $9.77 +$0.03 6.12%
Administration $9.77 +$0.03 5.87%
Class A $9.77 -$0.02* 5.78%
</TABLE>
* From Class A shares' inception on May 15, 1995 through October 31, 1995.
Portfolio Composition and Investment Strategies
Portfolio composition remained quite similar to a year ago, with the
exception of a slight increase in the fund's repurchase agreement/cash
equivalent position and a decrease in its CMO position.
Portfolio Composition as of October 31, 1995*
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
ARMs 80.2%
Agency Debentures 8.9%
CMOs 7.7%
Repos/Cash Equivalents 3.2%
</TABLE>
* The percentages shown are of total portfolio investments that have settled
and include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
. ARMs. As of October 31, 1995, the fund's primary investment continued to be
in ARMs (80.2%), in approximately the same weighting as a year ago (78.6%). We
continued to stress fully indexed, one-year Constant Maturity Treasury (CMT)
ARMs. The rates on these CMT ARMs adjust annually, based on the yield of the
one-year U.S. Treasury bill and, as a result, they provide greater income
stability than ARMs linked to some other indexes.
We favored seasoned ARMs, which have lower prepayment risk than nonseasoned
ARMs. Seasoned ARMs are adjustable rate mortgages that have been in existence
for several years. They are preferred in a high-prepayment environment because
it is assumed that homeowners who did not refinance their mortgages in prior
periods of lower rates are less likely to refinance in the future.
. Agency Debentures. The fund's 8.9% position in agency debentures were
short-duration Small Business Administration (SBA) securities, held because they
offered attractive spreads relative to Treasuries.
. CMOs. The fund held a 7.7% position in collateralized mortgage obligations
(CMOs). We reduced the fund's position in sequential-pay CMOs to 1.9%, when they
became expensive relative to other sectors. The sequential-pay CMOs provided
diversification and relatively predictable cash flows that helped contribute to
the fund's principal stability.
The fund's CMO position also included CMO floaters (1.7% of the portfolio),
which added an incremental return over Treasuries. The remaining CMOs were
primarily super floaters and inverse floaters, as discussed below.
. Prudent Use of Derivatives. We used higher-risk derivatives very sparingly
during the period. As of October 31, 1995, the fund held super floaters and
inverse floaters representing 2.5% and 1.4% of the portfolio, respectively.
Super floaters are floating-rate securities whose coupons reset higher and more
quickly than regular ARMs. The super floaters performed well when rates were
rising at the beginning of the period under review, but they did not work in our
favor when rates declined. Inverse floaters were held for their potential
incremental yield and benefited the fund when rates fell. We also held small
positions in interest-only (IO) and inverse IOs.
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Agency Fund (continued)
- --------------------------------------------------------------------------------
. Duration. As of October 31, 1995, the duration of the fund was 0.7 years,
approximately half its duration last year. Since January 13, 1995, the fund has
been permitted to hold financial futures, which we used as a tool to shorten the
fund's duration.
. Credit Quality. The fund invests solely in securities issued by the U.S.
government and its agencies or instrumentalities.
ARM Outlook
We are currently cautiously optimistic regarding the ARM market, but we
will continue to carefully monitor the sector's prepayment risk. Going forward,
we expect the recent spate of bank mergers to increase supply and further widen
yield spreads between ARMs and Treasuries. (Merging banks typically need to
raise funds, so they tend to securitize more of their mortgages.) Conversely,
because of the flattened yield curve, new ARM production is expected to be
stable or to decline, as homeowners opt for fixed-rate mortgages. As always, we
will use our proprietary models to identify individual ARM securities with
attractive coupons, average lives and option-adjusted spreads that are expected
to offer the most value for the fund.
Distribution Policy
The fund's Institutional and Administration shares distributed $0.60 per
share and $0.58 per share, respectively, for the 12-month period ended October
31. From their inception on May 15, 1995, through October 31, 1995, the fund's
Class A shares distributed $0.28 per share.
The fund distributes substantially all of its investment company taxable
income. The dividend is set at the start of each month, 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 interest that a portfolio will receive. Therefore,
at times a portfolio may distribute amounts above or below current income
levels. To date, however, our dividend policy has not affected the management of
the fund or significantly affected its NAV per share.
Thank you for your support during the past year's challenging ARM market.
Looking ahead, our team of experienced mortgage specialists will continue to do
their best to seek out attractive fixed income investment opportunities. We look
forward to serving your investment needs in the future.
Sincerely,
/s/ Jonathan A. Beinner
Jonathan A. Beinner
/s/ Theodore T. Sotir
Theodore T. Sotir
Portfolio Managers
GS Adjustable Rate Government Agency Fund
November 30, 1995
- --------------------------------------------------------------------------------
5
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Agency Fund
October 31, 1995
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1995. The
performance for the GS Adjustable Rate Government Agency Fund based on each
classes normal minimum initial investment, is compared to its benchmarks--the
Lehman Brothers Mutual Fund Short (1-2) U.S. Government Index ("Lehman 1-2
Index") and the six month and one year U.S. Treasury Bills ("6-Month T-Bill / 1-
Year T-Bill). 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 INVESTMENTS(a)
Institutional Shares
<TABLE>
<CAPTION>
Institutional Shares Lehman 1-2 Index One Yr. T-Bill Six Mo. T-Bill
<S> <C> <C> <C> <C>
8/1/91 $50,000 $50,000 $50,000 $50,000
10/31/91 $51,041 $51,581 $51,179 $50,870
10/31/92 $54,171 $55,506 $54,161 $53,376
10/31/93 $56,408 $58,368 $56,198 $55,197
10/31/94 $57,468 $59,511 $57,744 $57,257
10/31/95 $61,347 $64,343 $61,766 $60,819
</TABLE>
Administration Shares
<TABLE>
<CAPTION>
Administration Shares Lehman 1-2 Index One Yr. T-Bill Six Mo. T-Bill
<S> <C> <C> <C> <C>
5/1/93 50,000 50,000 50,000 50,000
10/31/93 50,914 50,931 50,785 50,780
10/31/94 51,744 51,931 52,182 52,675
10/31/95 55,097 56,148 55,835 55,951
</TABLE>
<TABLE>
<CAPTION>
Class A Shares
Class A Shares (no sales charge) Class A Shares (w/sales charge) Lehman 1-2 Index One Year T-Bill Six Month T-Bill
<S> <C> <C> <C> <C> <C>
6/1/95 $10,000 $ 9,850 $10,000 $10,000 $10,000
10/31/95 $10,222 $10,093 $10,277 $10,260 $10,246
</TABLE>
<TABLE>
<CAPTION>
-------------------------------
Average Annual Total Return
-------------------------------
One Year Since Inception (b)
- ------------------------------------------------------------
<S> <C> <C>
Institutional Shares 6.75% 4.91%
- ------------------------------------------------------------
Administration Shares 6.48% 3.96%
- ------------------------------------------------------------
Class A Shares(c)
excluding sales charge N/A 2.74%
- ------------------------------------------------------------
Class A Shares(c)
including sales charge N/A 1.17%
- ------------------------------------------------------------
</TABLE>
(a) For comparative purposes, initial investments are assumed to be made on the
first day of the month following the commencement of operations.
(b) The Institutional, Administration and Class A shares commenced operations
July 17, 1991, April 15, 1993 and May 15, 1995, respectively.
(c) An aggregate total return (not annualized) is shown instead of an average
annual total return since the Class A shares have not completed a full
twelve months of operations. The maximum sales charge for Class A shares
is 1.5%.
- --------------------------------------------------------------------------------
6
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Agency Fund
October 31, 1995
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Mortgage Backed Obligations--96.5%
Adjustable Rate Federal Home Loan Mortgage Corp. (FHLMC)(a)--9.8%
================================================================================
<S> <C> <C> <C>
$ 2,286,145 7.93% 01/01/19 $ 2,355,804
35,588,623 7.87 02/01/22 36,672,652
5,131,911 7.59 08/01/22 5,251,844
12,952,109 7.78 06/01/24 13,319,819
5,903,309 7.92 07/01/29 5,979,048
2,627,614 7.92 05/01/31 2,691,543
- --------------------------------------------------------------------------------
$ 66,270,710
- --------------------------------------------------------------------------------
<CAPTION>
Adjustable Rate Federal National Mortgage Association
(FNMA)(a)--63.4%
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C>
$7,600,334 7.07% 03/01/17 $ 7,673,601
4,287,117 7.53 03/01/17 4,396,139
5,080,289 6.82 03/01/18 5,100,103
8,001,888 7.84 04/01/18 8,230,262
1,196,631 8.12 05/01/18 1,227,887
6,091,151 7.63 07/01/18 6,265,845
8,464,646 8.11 07/01/18 8,723,749
7,825,996 7.72 08/01/18 8,022,507
4,348,196 7.88 08/01/18 4,500,774
4,642,121 7.75 10/01/18 4,775,443
8,203,755 7.61 11/01/18 8,395,231
1,179,065 7.36 12/01/18 1,207,434
15,102,048 7.58 12/01/18 (b) 15,607,060
2,048,926 7.39 02/01/19 2,045,726
4,073,221 7.43 06/01/19 4,169,472
2,244,571 7.48 07/01/19 2,300,192
5,416,257 7.68 07/01/19 5,575,116
5,484,231 7.66 09/01/19 5,634,992
3,357,086 7.69 01/01/20 3,439,268
3,583,590 7.83 03/01/20 3,705,647
10,824,349 7.72 07/01/20 11,063,675
6,085,401 7.79 02/25/21 6,269,302
6,387,980 7.41 04/01/21 6,541,356
81,692,876 7.71 09/01/21 84,086,477
5,601,363 7.89 11/01/21 5,751,760
26,823,840 8.03 02/01/22 27,726,462
17,754,998 7.80 06/01/22 18,328,662
8,302,252 7.96 08/01/22 8,561,199
47,443,395 7.87 09/01/22 48,930,745
2,497,584 7.66 02/01/23 2,554,104
$ 342,692 6.39% 12/01/23 $ 343,442
3,020,694 7.45 10/01/27 3,092,738
1,515,283 7.59 07/01/29 1,544,209
3,943,016 7.56 04/01/30 4,036,623
71,072,722 7.82 01/01/31 73,466,451
15,159,963 6.39 02/01/31 15,212,083
- --------------------------------------------------------------------------------
$428,505,736
- --------------------------------------------------------------------------------
Adjustable Rate Government National
Mortgage Association
(GNMA)(a)--4.8%
$31,667,582 6.50% 06/20/25 $ 32,170,147
- --------------------------------------------------------------------------------
Adjustable Rate Small Business
Administration(a)--8.8%
$ 1,641,659 7.25% 10/25/14 $ 1,679,622
2,630,491 7.25 02/25/15 2,691,321
3,945,429 7.25 03/25/15 4,036,667
3,020,766 7.25 04/25/15 3,090,621
3,024,506 7.25 05/25/15 3,094,448
2,003,530 7.25 08/25/15 2,051,114
2,887,210 7.25 09/25/15 2,955,781
2,120,643 7.25 10/25/15 2,171,008
1,512,192 6.87 09/25/16 1,532,039
5,114,360 6.87 07/25/17 5,184,682
11,831,402 6.87 08/25/17 11,980,008
4,926,385 6.87 09/25/17 4,994,123
4,065,626 6.87 10/25/17 4,112,912
9,922,169 6.87 02/25/18 10,064,801
- --------------------------------------------------------------------------------
$59,639,147
- --------------------------------------------------------------------------------
Fixed Rate GNMA--0.0%
$57,790 9.00% 04/15/20 $ 61,040
- --------------------------------------------------------------------------------
Collateralized Mortgage Obligations
(CMOs)--9.7%
Adjustable Rate CMOs(a)--2.0%
FNMA REMIC Trust 1990-145, Class A
$13,294,521 6.77% 12/25/20 $13,250,383
- --------------------------------------------------------------------------------
Inverse Floater CMOs(a)--1.5%
FHLMC Series 1134, Class H
$1,682,751 14.71% 09/15/96 $ 1,767,677
FHLMC Series 1727, Class O
11,000,000 3.56 05/15/24 5,993,999
FNMA REMIC Trust 1991-113, Class S
1,754,306 16.55 03/25/02 1,859,838
</TABLE>
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
7
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Agency Fund (continued)
October 31, 1995
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C>
Mortgage Backed Obligations (continued)
Collateralized Mortgage Obligations (CMOs) (continued)
Inverse Floater CMOs(a) (continued)
FNMA REMIC Trust 1991-91, Class S
$ 218,226 15.96% 07/25/98 $ 243,970
- --------------------------------------------------------------------------------
$ 9,865,484
- --------------------------------------------------------------------------------
Inverse Floating Rate - Interest Only(a)--0.0%
FNMA REMIC Trust 1992-157, Class SA
$ 3,636,650(c) 11.38% 03/25/04 $ 325,902
- --------------------------------------------------------------------------------
Inverse IOette--0.1%
FHLMC Series 1164, Class O
$ 45,215(c) 612.25% 11/15/06 $ 501,671
- --------------------------------------------------------------------------------
IOette--0.1%
FNMA REMIC Trust 1990-145, Class B
$ 32,669(c) 1005.00% 12/25/20 $ 841,215
- --------------------------------------------------------------------------------
Regular Floater CMOs(a)--1.7%
FHLMC Series 1011, Class F
$11,485,217 6.84% 11/15/20 $ 11,566,865
- --------------------------------------------------------------------------------
Sequential Fixed Rate CMOs--1.8%
FHLMC Series 1056, Class G
$ 41,612 8.00% 12/15/18 $ 41,747
FHLMC Series 1316, Class D
155,830 8.00 09/15/17 155,541
FHLMC Series 1098, Class F
1,319,769 8.00 03/15/05 1,322,725
FNMA REMIC Trust 1990-143, Class H
1,000,000 9.25 10/25/19 1,019,160
FNMA REMIC Trust 1990-65, Class U
1,850,249 9.50 11/25/06 1,878,688
FNMA REMIC Trust 1991-140, Class C
1,179,822 8.50 05/25/20 1,183,126
FNMA REMIC Trust 1991-37, Class E
3,936,872 8.50 04/25/05 3,982,461
FNMA REMIC Trust 1991-82, Class PH
2,916,118 8.00 11/25/18 2,906,116
- --------------------------------------------------------------------------------
$ 12,489,564
- --------------------------------------------------------------------------------
Super Floater CMOs(a)--2.5%
FNMA REMIC Trust 1992-157, Class FA
$17,903,510 2.72% 03/25/04 $ 17,032,448
- --------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations $ 65,873,532
- --------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $660,175,134) $652,520,312
- --------------------------------------------------------------------------------
Repurchase Agreement--2.4%
Joint Repurchase Agreement Account
$16,000,000 5.93% 11/01/95 $ 16,000,000
- --------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $16,000,000) $ 16,000,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $676,175,134(d)) $668,520,312
================================================================================
</TABLE>
Futures contracts open at October 31, 1995 are as follows:
<TABLE>
<CAPTION>
Contracts Settlement Month Unrealized
Type Long (Short)(e) Gain (Loss)
- --------------------------- ----------------- --------------------------------
<S> <C> <C> <C>
Euro Dollars 807 December 1995 $(200,200)
Euro Dollars 350 March 1996 105,250
Euro Dollars 136 June 1996 28,050
Euro Dollars 90 September 1996 13,500
Euro Dollars (50) December 1996 (41,250)
Euro Dollars (50) March 1997 (41,250)
2-Year U.S. Treasury Notes 80 December 1995 80,000
5-Year U.S. Treasury Notes (183) December 1995 (194,516)
10-Year U.S. Treasury Notes (15) December 1995 (23,438)
U.S. Treasury Bond (122) December 1995 (400,312)
- --------------------------------------------------------------------------------
$(674,166)
================================================================================
</TABLE>
<TABLE>
<CAPTION>
Federal Income Tax Information:
<S> <C>
Gross unrealized gain for investments in which value exceeds
cost $ 1,648,951
Gross unrealized loss for investments in which cost exceeds
value (9,507,811)
- --------------------------------------------------------------------------------
Net unrealized loss $(7,858,860)
================================================================================
</TABLE>
(a) Variable rate security. Coupon rate disclosed is that which is in effect
at October 31, 1995.
(b) Portions of these securities are being segregated for futures margin
requirements.
(c) Represents security with notional or nominal principal amount. The actual
effective yields of these securities are different from the stated rates
due to the amortization of related premiums.
(d) The aggregate cost for federal income tax purposes is $676,379,172.
(e) Each 2-Year U.S. Treasury Note contract represents $200,000, in notional par
value. Each 5-Year U.S. Treasury Note, 10-Year U.S. Treasury Note and U.S.
Treasury Bond contract represents $100,000 in notional par value. Each Euro
Dollar contract represents $1,000,000 in notional par value. The total net
notional amount and net market value at risk are $1,267,000,000 and
$283,579,706, respectively. The determination of notional amounts does not
consider market risk factors and therefore notional amounts as presented
here are indicative only of volume of activity and not a measure of market
risk.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short-Term Government Agency Fund
- --------------------------------------------------------------------------------
Investment Objective
The GS Short-Term Government Agency Fund's primary 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 as well as repurchase
agreements collateralized by such instruments. To enhance principal stability,
the fund has a two-year target duration and a maximum duration of three years.
Performance Review
For the 12 months ended October 31, the fund's Institutional shares had a
total return of 8.97% (7.00% in distributions and 1.97% from share price
appreciation) compared with 9.02% for the fund's benchmark, the two-year U.S.
Treasury security. During the period, the fund's net asset value (NAV) rose
$0.18 per share to $9.82 as the bond market rallied.
The fund's slight underperformance versus the benchmark was primarily due
to its large position in mortgage-backed securities (an allocation not reflected
in the benchmark), which felt the impact of rising prepayment risk during the
second half of the period.
The fund's term structure helped offset some of the decline. During the
period, the fund held mortgage-backed securities with a range of maturities that
provided cash flows along the yield curve. As the yield curve flattened, the
mortgage-backed securities at the longer end of the curve performed better than
Treasury securities concentrated in the two-year maturity range, thus benefiting
the fund.
Portfolio Composition and Investment Strategies
While the fund continued to emphasize mortgage-backed securities, which
accounted for 58.2% of the portfolio on October 31, its combined holdings in
Treasuries and repurchase agreements/cash equivalents approximately doubled
during the period to 41.8%.
- ------------------------------------------------------------------------------
[GRAPH APPEARS HERE]
Portfolio Composition as of October 31, 1995*
Fixed Rate Mortgage
Pass Throughs 9.1%
Repos/Cash Equivalents 4.7%
U.S. Treasuries 37.1%
CMOs 25.4%
ARMs 23.7%
* The percentages shown are of total portfolio investments that have settled
and include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
. U.S. Treasuries and Repurchase Agreements/Cash Equivalents. We used these
positions to manage the portfolio's duration, weighting one relative to the
other according to our need to shorten or lengthen the portfolio's duration
relative to that of the benchmark, which were both 1.9 years as of October 31,
1995. At the end of the period, 37.1% of the portfolio was invested in U.S.
Treasuries and 4.7% was in repurchase agreements/cash equivalents, as compared
with no position in Treasuries and 20.9% in repurchase agreements/cash
equivalents last October.
. CMOs. We reduced the fund's collateralized mortgage obligations (CMO)
position during the first half of 1995 when CMOs appeared fully priced relative
to other sectors that offered greater yield and return potential. CMOs accounted
for 25.4% of the portfolio as of October 31, 1995, less than half the fund's
position a year ago. Within the CMO sector, 10.4% was invested in sequential-pay
CMOs (down from 28.5% last year) and
- --------------------------------------------------------------------------------
9
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short-Term Government Agency Fund (continued)
- --------------------------------------------------------------------------------
1.9% was invested in planned amortization
class (PAC) CMOs (down from 26.7% last year). Sequentials and PACs added to the
portfolio's principal stability, due to their relatively stable cash flows.
. ARMs. During the past 12 months, we added to the fund's position in
adjustable rate mortgage securities (ARMs), particularly during May and June,
when they traded at attractive option-adjusted spreads relative to Treasuries
and appeared cheap. As of October 31, 1995, ARMs accounted for 23.7% of the
portfolio, compared with 13.1% a year ago. We focused on ARMs that are indexed
to the one-year Constant Maturity Treasury (CMT) Index and adjust faster to
changing interest rates than ARMs based on other indexes. Following our
purchases, however, ARM spreads continued to widen, making ARMs even cheaper. We
view this as a short-term decline resulting from prepayment fears (mortgage
prepayments tend to rise as interest rates fall) and expect ARMs to perform well
when prepayments slow. In the interim, ARMs added incremental yield over
Treasuries.
. Fixed Rate Mortgage Pass-Throughs. The fixed rate pass-through sector
accounted for 9.1% of the portfolio as of October 31, 1995, a slight increase
from last year's 7.3% allocation. We focused on seasoned mortgages, which are
attractive because they typically experience fewer prepayments relative to newly
issued mortgages.
. Issuer Composition. The portfolio's mortgage-backed securities composition by
issuer was: 27.0% in Federal National Mortgage Association (FNMA) issues, 22.8%
in Federal Home Loan Mortgage Corporation (FHLMC) issues and 8.4% in Government
National Mortgage Association (GNMA) issues.
. Credit Quality. The fund invests exclusively in securities issued by the U.S.
government and its agencies or instrumentalities.
. Prudent Use of Derivatives. The fund held selected lower-risk derivatives,
including sequential-pay CMOs (10.4%), floaters (6.3%) and PAC CMOs (1.9%). In
addition, the fund also took small positions in higher-risk securities,
including inverse floaters (4.1%) and PAC IOs (2.5%), which the fund held for
their incremental yield and potential incremental return. We used higher-risk
derivatives sparingly in an effort to enhance returns without taking undue risk.
During the declining rate environment of the second half of the period, the
inverse floaters performed well, while the PAC IOs were basically unchanged. We
have also occasionally used mortgage dollar rolls to take advantage of short-
term supply and demand imbalances in the mortgage settlement process. (Mortgage
dollar rolls refer to 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.) At all times, we
"cover" the mortgage dollar rolls by keeping cash or high-grade liquid debt
securities equal to the dollar amount of the forward commitment in a segregated
account with the fund's custodian. In addition, since September 29, 1995, the
fund has been permitted to hold futures, which we used in conjunction with
Treasuries and repurchase agreements/cash equivalents to manage the portfolio's
duration.
Fund Outlook
We expect to continue to emphasize mortgage-backed securities, because they
offer favorable performance potential, but we will carefully monitor potential
risks. These include rising prepayments, which we believe are largely reflected
in current prices, as well as an increased ARM supply resulting from bank
mergers. (Merging banks typically need to raise funds, so they tend to
securitize more of their mortgages.) Conversely, because of the flatter yield
curve, new ARM issuance is expected to stabilize or decline, which should help
offset other negative technical events. We are currently cautious regarding the
CMO sector, which has performed well in recent months and now appears fully
priced.
- --------------------------------------------------------------------------------
10
<PAGE>
- --------------------------------------------------------------------------------
GS Short-Term Government Agency Fund (continued)
- --------------------------------------------------------------------------------
Distribution Policy
During the period under review, the fund distributed $0.65 per share to
Institutional shareholders. Dividends are declared daily and paid on a monthly
basis. The fund intends to distribute substantially all of its investment
company taxable income, as required by tax law.
We value your continued confidence in the GS Short-Term Government Agency
Fund and look forward to reporting on the fund's progress in the coming year.
Sincerely,
/s/ Jonathan A. Beinner
Jonathan A. Beinner
/s/ Theodore T. Sotir
Theodore T. Sotir
Portfolio Managers
GS Short-Term Government Agency Fund
November 30, 1995
- --------------------------------------------------------------------------------
11
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Trust
GS Short-Term Government Agency Fund
October 31, 1995
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1995. The
performance for the GS Short-Term Government Agency Fund based on the Fund's
normal minimum 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.
HYPOTHETICAL $50,000 INVESTMENT(a)
<TABLE>
<CAPTION>
GS STGA Fund Lehman Short (1-3) 2 Year T-Bil
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
9/1/88 50000 50000 50000
10/31/88 51286 51091 51057
10/31/89 55943 55919 55412
10/31/90 60547 60861 59876
10/31/91 67165 67699 66615
10/31/92 71356 73208 72161
- --------------------------------------------------------------------------------
</TABLE>
Average Annual Total Return
- --------------------------------------------------------------------------------
One Year Five Year Since Inception (b)
- --------------------------------------------------------------------------------
8.97% 6.48% 7.31%
- --------------------------------------------------------------------------------
(a) For comparative purposes, initial investments are assumed to be made on the
first day of the month following the Fund's commencement of operations.
(b) The Institutional shares commenced operations August 15, 1988.
- --------------------------------------------------------------------------------
12
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Short-Term Government Agency Fund
October 31, 1995
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Mortgage Backed Obligations--57.7%
Adjustable Rate Federal Home Loan Mortgage Corp.
(FHLMC)(a)--12.8%
$2,479,915 7.51% 12/01/18 $ 2,534,200
10,467,242 7.87 02/01/22 10,786,074
- --------------------------------------------------------------------------------
$13,320,274
- --------------------------------------------------------------------------------
Adjustable Rate Federal National Mortgage
Association (FNMA)(a)--10.8%
$3,255,463 7.93% 11/01/14 $ 3,361,265
2,320,167 7.93 07/01/19 2,381,280
5,309,603 7.91 08/01/22 (b) 5,429,494
- --------------------------------------------------------------------------------
$11,172,039
- --------------------------------------------------------------------------------
Fixed Rate
FNMA--0.7%
$688,776 9.00% 12/01/97 $ 704,919
- --------------------------------------------------------------------------------
Fixed Rate Government National Mortgage Association--8.3%
$2,845,341 10.00% 12/15/17 $ 3,113,870
5,108,882 9.50 05/15/25 5,530,364
- --------------------------------------------------------------------------------
$ 8,644,234
- --------------------------------------------------------------------------------
Collateralized Mortgage Obligations (CMOs)--25.1%
Inverse Floater CMOs(a)--4.2%
FHLMC Series 1134, Class H
$631,031 14.71% 09/15/96 $ 662,879
FHLMC Series 1134, Class I
2,404,687 14.71 09/15/96 2,552,443
FHLMC Series 1325, Class C
1,028,325 6.39 07/15/97 1,034,752
FNMA REMIC Trust 1991-127, Class S
67,973 11.38 09/25/98 71,340
- --------------------------------------------------------------------------------
$ 4,321,414
- --------------------------------------------------------------------------------
Inverse Floating Rate - Interest Only--0.1%
FNMA REMIC Trust 1993-110, Class SC
$4,046,398(c) 3.17% 04/25/19 $ 161,366
- --------------------------------------------------------------------------------
Planned Amortization Class (PAC)
CMOs--1.9%
FNMA REMIC Trust 1992-138, Class A
$1,990,971 6.00% 08/25/13 $ 1,980,519
- --------------------------------------------------------------------------------
Planned Amortization Class Interest-
Only (PAC IO) CMOs--1.4%
FHLMC Series 1552, Class JE
$16,170,393 (c) 7.00% 02/15/14 $ 1,422,348
- --------------------------------------------------------------------------------
Planned Amortization Class IOette
CMOs--0.9%
FNMA REMIC Trust 1992-198, Class K
$61,237(c) 1008.00% 12/25/15 $ 895,808
- --------------------------------------------------------------------------------
Regular Floater CMOs(a)--6.2%
FHLMC Series 1325, Class B
$2,416,565 6.56% 07/15/97 $ 2,427,137
FNMA REMIC Trust 1993-110, Class FC
4,046,398 5.83 04/25/19 4,030,593
- --------------------------------------------------------------------------------
$ 6,457,730
- --------------------------------------------------------------------------------
Sequential Fixed Rate CMOs--10.4%
FHLMC Series 1033, Class G
$2,000,000 8.00% 01/15/06 $ 2,081,360
FNMA REMIC Trust 1988-12, Class A
2,635,634 10.00 02/25/18 2,834,783
FNMA REMIC Trust 1988-12, Class B
2,635,634 4.86 02/25/18 2,445,684
FNMA REMIC Trust 1992-44, Class CA
3,000,000 12.00 08/25/20 3,394,920
- --------------------------------------------------------------------------------
$10,756,747
- --------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations $25,995,932
- --------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $59,921,535) $59,837,398
- --------------------------------------------------------------------------------
U.S. Treasury Obligations--36.1%
United States Treasury Notes
$36,270,000 7.38% 11/15/97 $37,448,776
- --------------------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $37,398,446) $37,448,776
- --------------------------------------------------------------------------------
Repurchase Agreement--0.5%
Joint Repurchase Agreement Account
$500,000 5.93% 11/01/95 $ 500,000
- --------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $500,000) $ 500,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $97,819,981(d)) $97,786,174
================================================================================
- --------------------------------------------------------------------------------
13
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Short-Term Government Agency Fund (continued)
October 31, 1995
================================================================================
Futures contracts open at October 31, 1995 are as follows:
<TABLE>
<CAPTION>
Number of
Contracts Settlement Month
Long (Short) Unrealized
Type (e) Gain (Loss)
- ---------------------------- ------------ ----------------- ------------
<S> <C> <C> <C>
Euro Dollars 10 March 1997 $750
Euro Dollars 10 June 1997 250
2-Year U.S. Treasury Notes 284 December 1995 126,859
5-Year U.S. Treasury Notes (70) December 1995 (53,593)
- --------------------------------------------------------------------------------
$ 74,266
================================================================================
================================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $ 416,484
Gross unrealized loss for investments in which
cost exceeds value (450,291)
- --------------------------------------------------------------------------------
Net unrealized loss ($33,807)
================================================================================
</TABLE>
(a) Variable rate security. Coupon rate disclosed is that which is in
effect at October 31, 1995.
(b) Portions of these securities are being segregated for futures margin
requirements.
(c) Represents security with notional or nominal principal amount. The actual
effective yields of these securities are different from the stated rates due
to the amortization of related premiums.
(d) The amount stated also represents aggregate cost for federal
income tax purposes.
(e) Each 2-Year U.S. Treasury Note, 5-Year U.S. Treasury Note and Euro Dollar
contract represents $200,000, $100,000 and $1,000,000, respectively, in
notional par value. The total net notional amount and net market value at
risk for the futures contracts shown above are $69,800,000 and $56,296,812,
respectively. The determination of notional amounts does not consider market
risk factors and therefore notional amounts as presented here are indicative
only of volume of activity and not a measure of market risk.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
14
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund
- --------------------------------------------------------------------------------
Investment Objective
The GS Short Duration Tax-Free 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 or deemed to be of comparable quality. 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.
Municipal Bonds Rally Amid Uncertainty
The municipal bond market performed well during the period under review
(November 1, 1994 through October 31, 1995), with the average price of a three-
year municipal bond (as calculated from data provided by Municipal Market Data,
an independent municipal market information provider) rising approximately 2%,
while yields fell from 4.85% on November 1, 1994, to 4.10% on October 31, 1995.
During the past 12 months the yield curve for municipal bonds became quite steep
compared with Treasuries, and three-year municipal bonds outperformed similar-
duration Treasuries.
The first month of the fund's fiscal year coincided with the bottom of the
1994 bear market, as 30-year U.S. Treasury yields rose to 8.13% and long-term
municipal bond yields rose to over 7%. In December 1994, however, the bond
market stabilized. Fueled by strong municipal bond demand and a significant
decrease in supply, municipal bonds surged from January through early April.
Though municipals continued to record positive performance, the rally's momentum
slowed from mid-April onward, reflecting investors' concern surrounding various
tax reform proposals (e.g., the flat tax and a reduction in capital gains taxes)
and the growing allure of the strong equity rally.
By midyear, short-term municipal bonds became more expensive as investors
favored defensive maturities that provided greater liquidity, while demand for
long-term bonds stagnated. At the end of October, however, growing bullish
sentiment in the municipal bond market and a flattening municipal bond yield
curve made longer-term bonds increasingly attractive in terms of price.
Performance Review
For the 12 months ended October 31, 1995, the fund's Institutional shares
achieved a total return of 5.98% (4.42% from monthly distributions and 1.56%
from share price appreciation) compared with a return of 7.80% for the Lehman
Brothers Three-Year Municipal Bond Index (the "Index"), the fund's benchmark.
For the same period, the fund's Administration shares realized a total return of
5.76% (4.16% from monthly distributions and 1.60% from share price appreciation)
and its Service shares recorded a total return of 5.59% (3.90% from monthly
distributions and 1.69% from share price appreciation).
Though the fund performed well in the bond rally, it underperformed the
Index, primarily because it was more defensively positioned early in the period
in response to last year's volatility. We favored premium (higher coupon,
callable) bonds that offered greater liquidity and were less likely to suffer
from adverse tax consequences associated with short-term discount securities,
which can have a significant impact in the short-term market. Though premium
bonds typically retain principal better than discount bonds when interest rates
rise as they did in 1994, they tend to lag when rates fall, as was the case
during 1995. In contrast, the benchmark's allocation included a higher
percentage of discount bonds, which typically outperform as interest rates fall.
In general, higher coupon bonds were less desirable in the declining rate
environment because they tended to be called, shortening the portfolio's
duration at a time when it would have been more advantageous to extend it.
Another aspect of our defensive strategy was that we stressed higher credit
quality securities (triple- and double-A-rated) over lower quality. The Index,
however, held a greater percentage of lower-rated securities, which added to its
performance when credit spreads tightened during the year and lower-quality
bonds appreciated more than those of higher quality.
- --------------------------------------------------------------------------------
15
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund (continued)
- --------------------------------------------------------------------------------
Portfolio Composition and Investment Strategies
Portfolio Composition as of October 31, 1995*
[PIE CHART APPEARS HERE]
Pre-refunded Bonds 9.8%
General Obligations 34.8%
Insured Revenue Bonds 18.2%
Insured General Obligations 16.2%
Revenue Bonds 11.0%
Variable Rate Demand Notes 10.0%
* The percentages shown are of total portfolio investments that have settled
and include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
. Insured Revenue and General Obligation Bonds. Insured municipal bonds
continued to be attractive because of their liquidity and availability. Insured
bonds allow the portfolio to capitalize on a security's other features such as
coupon and callability, while removing the credit quality variable. Also, there
was a larger supply of insured bonds in states with high taxes and high savings
rates. In general, we emphasized securities from California, New York and
Michigan that we determined to be undervalued due to a temporary lack of demand.
We anticipate that these securities will appreciate as demand improves and yield
spreads tighten. As of October 31, we had overweighted the fund's holdings in
insured bonds relative to the Index (34.4% versus 22.2%).
. General Obligation (GO) Bonds. GOs, which are typically higher credit
quality and lower yielding than revenue bonds, are backed by the general taxing
power of a municipality. When credit spreads tightened during the period, the
additional income from lower-quality bonds did not warrant taking additional
risk. As a result, we significantly increased the fund's investment in GOs to
34.8%, approximately four times the level of last year's allocation. Also, the
short-duration municipal bond market has a larger percentage of uninsured GOs
than uninsured revenue bonds, due to the nature of the issuers.
. Revenue Bonds. Noninsured revenue bonds, generally single-A- and double-A-
rated debt, accounted for 11.0% of the portfolio, half of the benchmark's
weighting in the sector. (Revenue bonds pay interest and principal out of a
specific revenue stream, which includes sales taxes, hospital charges, tolls,
electric rates and airport fees.) Revenue bond allocations reflect security-
specific opportunities, which are more closely tied to credit quality than
sector preference.
. Variable Rate Demand Notes (VRDNs). VRDNs, a 10.0% portfolio position, are
high-quality cash equivalents. We used VRDNs to manage the portfolio's duration
to be neutral to the Index.
. Pre-refunded Bonds. The portfolio was 9.8% invested in pre-refunded bonds
as of October 31, 1995 (versus just over 50% last year), slightly overweighted
versus the Index's 8.2%. We sold the majority of the fund's large position in
pre-refunded bonds during the past year as spreads of pre-refunded bonds over
other higher-grade debt tightened significantly and they provided little
relative value.
. Forward Contracts. During April, the fund bought a forward contract (a
commitment to take possession of a financial instrument at a specified date and
price), which functioned as a long-dated settlement of a purchase. Because of
its unconventional structure, the forward was available at a more attractive
price than a conventional bond.
- --------------------------------------------------------------------------------
16
<PAGE>
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund (continued)
- --------------------------------------------------------------------------------
. Duration. As of October 31, the fund's duration was 2.86 years, slightly
longer than the Index's duration of 2.77 years. During the course of the year,
the fund's duration was neutral to the Index. In general, we manage the fund's
duration to approximate the Index's, rather than attempting to make interest
rate predictions. Instead, we look for opportunities to outperform the Index
through coupon, state, security and sector allocations.
. Credit Quality. The portfolio's overall credit quality was not
significantly changed during the period. As of October 31, the portfolio was
77.1% invested in triple-A-rated bonds, 16.1% in double-A's and 6.8% in single-
A's.
Market Outlook: Improved Technicals Expected
Going forward, the municipal bond market appears to be entering a period of
potential technical strength. We estimate that over $80 billion in coupon and
principal payments will be distributed to municipal investors between November
1995 and February 1996, a significant percentage of which may be reinvested into
municipal bonds. In contrast, we expect just over $37 billion in new municipal
debt securities to be issued over the same four-month period, creating a
potential supply and demand imbalance that could increase municipal bond prices.
That scenario, coupled with the likelihood of an even flatter yield curve near
term, should benefit our longer term bonds. In addition, yields on long-term
municipals are relatively high in relation to Treasury securities and short-term
municipals. Regarding security selection, we anticipate concentrating on bonds
issued by states that have high taxes, high wealth concentration and large
populations (e.g., New York, California and Michigan).
Distribution Policy
The fund's Institutional, Administration and Service shares distributed
monthly distributions totaling approximately $0.42, $0.40 and $0.37 per share,
respectively, during the 12-month period ended October 31, 1995. Dividends are
declared daily and paid on a monthly basis. The fund intends to distribute
substantially all of its investment company tax-exempt income, as required by
tax law.
Your investment in the GS Short Duration Tax-Free Fund means a great deal
to us and we look forward to continuing our relationship.
Sincerely,
/s/ Benjamin S. Thompson
Benjamin S. Thompson
/s/ Theodore T. Sotir
Theodore T. Sotir
Portfolio Managers
GS Short Duration Tax-Free Fund
November 30, 1995
- --------------------------------------------------------------------------------
17
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund
October 31, 1995
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1995. The
performance for the GS Short Duration Tax-Free Fund based on the Fund's normal
minimum 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.
<TABLE>
<CAPTION>
HYPOTHETICAL $50,000 INVESTMENT/(a)/
Institutional Shares
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
10/31/93 53,425 53,825
10/31/95 56,620 58,023
</TABLE>
<TABLE>
<CAPTION>
Administration Share
Administrative Shares 3-Year Bond Index
<S> <C> <C>
6/1/93 50,000 50,000
10/31/93 51,092 51,144
10/31/94 51,036 51,840
10/31/95 53,976 55,884
</TABLE>
<TABLE>
<CAPTION>
Service Shares
Service Shares 3-Year Bond Index
<S> <C> <C>
10/1/94 50,000 50,000
10/31/94 49,696 49,880
10/31/95 52,474 53,771
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Return
------------------------------
One Year Since Inception (b)
- ----------------------------------------------------------------
<S> <C> <C>
Institutional Shares 5.98% 4.12%
- ----------------------------------------------------------------
Administration Shares 5.76% 3.21%
- ----------------------------------------------------------------
Service Shares 5.59% 4.70%
- ----------------------------------------------------------------
</TABLE>
(a) 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.
(b) The Institutional, Administration and Service shares commenced operations
October 1, 1992, May 20, 1993 and September 20, 1994, respectively.
18
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund
October 31, 1995
- ----------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
============================================================================
Debt Obligations-- 104.9%
Alabama--3.6%
Alabama State GO/(a)/ (AA/Aa)
$2,000,000 5.90% 03/01/99 $2,094,940
- ----------------------------------------------------------------------------
California--13.4%
California State Revenue Anticipation
Warrants (Sp1/MIG1)
$1,500,000 5.75% 04/25/96 $1,514,280
Sacramento County, CA Tax and Revenue
Anticipation Notes(a) (Sp1+/MIG1)
3,000,000 4.75 10/04/96 3,024,270
San Francisco, CA City and County GO
Series 1995 A and B (FGIC) (AAA/Aaa)
1,450,000 7.25 06/15/99 1,607,644
1,570,000 7.25 06/15/00 1,771,211
- ----------------------------------------------------------------------------
$7,917,405
- ----------------------------------------------------------------------------
Connecticut--5.2%
Connecticut State Series A GO/(a)/
(AA-/Aa)
$3,000,000 5.00% 03/15/00 $3,077,520
- ----------------------------------------------------------------------------
Florida--15.9%
Florida State Certificates of
Participation Equipment Financing
Program (A+/A)
$1,115,000 5.90% 11/15/96 $1,132,929
Lakeland, FL Electric and Water RB
(FGIC)/(b)/ (AAA/Aaa)
2,640,000 5.25 10/01/97 2,679,626
5,415,000 5.25 10/01/98 5,521,460
- ----------------------------------------------------------------------------
$9,334,015
- ----------------------------------------------------------------------------
Illinois--3.8%
Illinois Health Facilities Authority
Revenue- Lutheran Healthcare System
Prerefunded/(c)/ (AAA/NR)
$2,000,000 7.50% 04/01/99 $2,232,140
- ----------------------------------------------------------------------------
Kansas--4.5%
Kansas City, KS GO Series A (MBIA)
(AAA/Aaa)
$1,000,000 5.25% 09/01/99 $1,037,780
Topeka, KS GO Notes (NR/MIG1)
1,620,000 4.25 07/15/96 1,624,082
- ----------------------------------------------------------------------------
$2,661,862
- ----------------------------------------------------------------------------
Louisiana--3.8%
Lafayette Parish, LA School Board Sales
Tax GO (FGIC) (AAA/Aaa)
$2,130,000 6.00% 04/01/99 $2,242,272
- ----------------------------------------------------------------------------
Massachusetts--5.4%
Boston, MA GO (A/A)
$ 595,000 9.50% 03/01/96 $ 604,199
Boston, MA GO (MBIA) (AAA/Aaa)
2,500,000 5.25 10/01/99 2,586,375
- ----------------------------------------------------------------------------
$3,190,574
- ----------------------------------------------------------------------------
Michigan--5.1%
Michigan Municipal Bond Authority
Revenue Notes (Sp1+/NR)
$3,000,000 5.00% 05/03/96 $3,018,570
- ----------------------------------------------------------------------------
Nevada--2.2%
Nevada State GO/(b)/ (AA/Aa)
$1,170,000 8.00% 11/01/99 $1,321,375
- ----------------------------------------------------------------------------
New Jersey--9.9%
New Jersey Healthcare Facilities
Financing Authority Prerefunded/(c)/
(AAA/Aaa)
$2,380,000 8.38% 02/01/98 $2,637,611
New Jersey State Turnpike Authority
Series A RB (A/A)
3,000,000 6.20 01/01/00 3,187,590
- ----------------------------------------------------------------------------
$5,825,201
- ----------------------------------------------------------------------------
New Mexico--2.1%
Albuquerque City, New Mexico GO Series
C (AA/Aa)
$1,200,000 5.10% 07/01/00 $1,231,980
- ----------------------------------------------------------------------------
New York--3.5%
Erie County, New York GO Series A
(MBIA)/(a)/ (AAA/Aaa)
$2,000,000 5.50% 06/01/99 $2,080,060
- ----------------------------------------------------------------------------
Ohio--2.6%
Ohio State Building Authorities Series
A Escrowed-To-Maturity/(c)/ (NR/Aaa)
$1,400,000 7.15% 08/01/99 $1,536,500
- ----------------------------------------------------------------------------
Oklahoma--6.7%
Enid, OK Hospital Authority RB (Societe
General LOC)/(a)/ (NR/Aa1)
$2,800,000 7.20%/(d)/ 10/01/15 $2,880,640
Oklahoma County, OK Independent School
District GO (A+/Aa)
1,000,000 5.40 02/01/99 1,034,440
- ----------------------------------------------------------------------------
$3,915,080
- ----------------------------------------------------------------------------
Pennsylvania--1.9%
Philadelphia, PA Water and Sewer RB
(MBIA) (AAA/Aaa)
$1,000,000 6.85% 10/01/99 $1,094,610
- ----------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund (continued)
October 31, 1995
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
South Carolina--7.2%
Chester County, South Carolina School
District GO (AMBAC) (AAA/Aaa)
$1,275,000 6.50% 02/01/00 $ 1,384,102
South Carolina State GO (AA+/Aaa)
2,700,000 6.50 03/01/98 2,841,642
- -------------------------------------------------------------------------------
$ 4,225,744
- -------------------------------------------------------------------------------
Virginia--3.8%
Arlington County, Virginia GO (AAA/Aaa)
$2,160,000 5.00% 06/01/00 $ 2,216,743
- -------------------------------------------------------------------------------
Washington--4.3%
Clark County, Washington Public Utility
District (FGIC) (AAA/Aaa)
$2,500,000 5.00% 01/01/99 $ 2,545,875
- -------------------------------------------------------------------------------
Total Debt Obligations
(Cost $61,163,971) $61,762,466
===============================================================================
Short-Term Obligations-- 18.0%
Gulf Coast Waste Disposal Authority TX
VRDN/(e)/ (A-1+/VMIG-1)
$3,000,000 3.90% 11/01/95 $ 3,000,000
Harris County Health Facility, TX Healthcare
System VRDN/(e)/ (A-1+/NR)
1,800,000 4.00 11/01/95 1,800,000
Monroe County, GA Pollution Control VRDN/(e)/
(A-1/VMIG-1)
1,200,000 3.90 11/07/95 1,200,000
1,000,000 3.90 11/01/95 1,000,000
Nassau County, New York Industrial
Development VRDN/(e)/ (A-1+/NR)
300,000 3.95 11/01/95 300,000
New York , NY Series C VRDN/(e)/ (A-1+/VMIG-1)
3,300,000 4.05 11/01/95 3,300,000
- -------------------------------------------------------------------------------
Total Short-Term Obligations
(Cost $10,600,000) $10,600,000
===============================================================================
Total Investments
(Cost $71,763,971/(f)/) $72,362,466
===============================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in
which value exceeds cost $611,530
Gross unrealized loss for investments in
which cost exceeds value (13,035)
- -------------------------------------------------------------------------------
Net unrealized gain $598,495
===============================================================================
</TABLE>
/(a)/Portions of these securities are being segregated for when-issued
securities.
/(b)/When-issued security.
/(c)/Pre-refunded and escrowed-to-maturity 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 redeem the bonds in full upon
the refunding date. The maturity date shown for these securities is the
refunding date.
/(d)/Variable rate security. Coupon rate disclosed is that which is in effect at
October 31, 1995.
/(e)/Securities with "Put" features with resetting interest rates. Maturity
dates disclosed are the next reset interest dates.
/(f)/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 net assets.
Investment Abbreviations:
AMBAC Insured by American Municipal Bond Assurance Corp.
FGIC -Insured by Financial Guaranty Insurance Co.
GO -General Obligation
LOC -Letter of Credit
MBIA -Insured by Municipal Bond Investors Assurance
NR -Not Rated
RB -Revenue Bond
VRDN -Variable Rate Demand Note
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
Letter to Shareholders
- -------------------------------------------------------------------------------
GS Core Fixed Income Fund
Investment Objective
The GS Core Fixed Income Fund seeks to achieve a total return that exceeds
the total return of the Lehman Brothers Aggregate Bond Index (the "Index")
through a diversified portfolio of fixed income securities. The fund may invest
in U.S. Treasury, agency, corporate, mortgage-backed and asset-backed
securities, as well as in a limited amount of nondollar-denominated fixed income
securities. While the fund's performance will be measured against the Index, the
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 Goldman Sachs Asset Management at the time it is
purchased.
Performance Review
For the 12 months ended October 31, 1995, the fund's total return was 15.72%
(7.20% from monthly distributions and 8.52% from share price appreciation)
compared with a return of 15.65% for the Lehman Brothers Aggregate Bond Index,
the fund's benchmark. The fund's NAV as of October 31 was $10.00 per share, up
$0.76 from last year.
The fund outperformed the Index by seven basis points during the period,
primarily due to its sector allocations. The fund was significantly overweighted
versus the benchmark in corporate bonds, which added incremental yield and
return as spreads tightened. The fund also held a small position in emerging
market debt that performed well, a sector not included in the benchmark. In
addition, the fund benefited from being significantly overweighted in asset-
backed securities, which also performed well during the period.
Portfolio Composition and Investment Strategies
Portfolio Composition as of October 31, 1995*
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Fixed Rate Mortgage Pass-Throughs 30.2%
Corporate Bonds 28.1%
U.S. Treasuries 24.7%
Asset-Backed Securities 9.9%
Emerging Market Debt 2.6%
Agency Debentures 2.1%
CMOs 2.0%
Repos/Cash Equivalents 0.4%
</TABLE>
* The percentages shown are of total portfolio investments that have settled
and include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
. Fixed Rate Mortgage Pass-Throughs. As of October 31, the portfolio's largest
sector holding was 30.2% in fixed rate mortgage pass-throughs, slightly
overweighting the Index allocation of 28.2%. We increased the fund's position in
fixed-rate mortgages when they became relatively inexpensive during the summer.
Subsequently, mortgages have continued to get even cheaper based on prepayment
fears. However, we still believe they represent good value that may be realized
when the rate of prepayments begins to slow. In our opinion, they continue to
offer attractive spreads relative to Treasuries.
21
<PAGE>
Letter to Shareholders
- -------------------------------------------------------------------------------
GS Core Fixed Income Fund (continued)
Our security selection within the sector continued to be significantly
different from that of the Index. During the early part of the period under
review, the fund underweighted 15-year mortgage-backed securities and
consequently didn't fully participate when the 15-year sector outperformed. We
also emphasized seasoned mortgages, which tended to help the portfolio,
particularly during the latter part of the period, because they are less prone
to prepayments than newly issued mortgages.
As anticipated in the April semiannual report, we shifted the fund's
emphasis to favor securities issued by the Government National Mortgage
Association (GNMA) and the Federal Home Loan Mortgage Corporation (FHLMC) over
the Federal National Mortgage Association (FNMA), as the former were more
attractively priced.
. Corporate Bonds. We continued to emphasize corporate bonds during the period
because they offered incremental yield. Corporates represented 28.1% of the
portfolio on October 31 compared with 17.1% for the Index.
. Asset-Backed Securities (ABSs). We found the ABS sector attractive due to
its high credit quality debt and incremental yield over Treasuries. As a result,
we overweighted the sector relative to the Index, 9.9% versus 1.3%. Our ABS
holdings included credit card receivables (5.8%) and automobile loan receivables
(4.1%).
. Emerging Market Debt. During the period, we added a 2.6% allocation in
emerging market debt. We intend to keep the position relatively small and to
carefully manage risk by emphasizing higher-credit, short-duration bonds
(typically with average maturities of under five years). Thus far we have
focused primarily on Latin American corporate debentures. In particular, we
stressed Colombian bonds that were inexpensive relative to comparably rated U.S.
credits. In our view, some Latin American debt had been unfairly penalized and
therefore offered attractively priced bonds that the fund continued to own as of
the end of the period. The fund also briefly held a Republic of Poland bond that
was subsequently sold at a profit.
. Agency Debentures. We established a small position in agency debentures
(2.1%) in April, because we believed that they represented better relative value
than Treasuries. During most of the period, the fund's underweighting in agency
debentures versus the Index worked in its favor, because this sector
underperformed Treasuries as spreads widened.
. PAC CMOs and ARMs. The fund's position in planned amortization class
collateralized mortgage obligations (PAC CMOs) declined from 1.7% of the
portfolio a year ago to 0.9% on October 31, 1995. The percentage of PAC
securities fell relative to total portfolio assets as the fund attracted new
investments. During the period, we liquidated the portfolio's 1.9% position in
adjustable rate mortgage securities (ARMs) in favor of other sectors that
appeared to offer greater yield and return potential.
. Duration. We have targeted the fund's duration to approximate that of the
Index. Both were 4.8 years as of October 31.
. Credit Quality. As of October 31, 58.9% of the portfolio was invested in
government and agency securities, 9.9% in AAA securities and 0.4% in cash
equivalents. To add incremental yield potential, 30.8% of the portfolio was
invested in A and BBB securities, a significant overweighting versus the Index.
. Prudent Use of Derivatives. As noted previously, the fund held a 9.9%
position in asset-backed securities and a 0.9% position in PAC CMOs, both
considered to be lower risk derivatives. During the period, we added very small
positions in higher risk interest only (IO) and principal only (PO) CMOs (0.3%
and 0.8% of the portfolio, respectively) for their potential incremental return.
The fund also used covered mortgage dollar rolls (where
22
<PAGE>
- -------------------------------------------------------------------------------
GS Core Fixed Income Fund (continued)
- -------------------------------------------------------------------------------
mortgage securities owned by the fund are sold and the fund simultaneously
contracts to buy back similar mortgage securities with the same coupon on a
specified future date) to provide incremental yield. At all times, we "cover"
the mortgage dollar rolls by keeping cash or high-grade liquid debt securities
equal to the dollar amount of the forward commitment in a segregated account
with the fund's custodian.
Portfolio Outlook
Looking forward, we are still cautiously optimistic regarding the corporate
debt sector, based on the continuation of relatively strong corporate earnings
despite the softening economy. Within the sector, we continue to favor
industrial and financial issues over Yankees (dollar-denominated bonds issued in
the U.S. by foreign banks and corporations) and utility bonds. We are also
cautiously optimistic about the mortgage-backed securities market. Yield spreads
of mortgage pass-throughs relative to Treasuries are currently very wide, but we
remain concerned about prepayment risk. Additionally, we have a neutral outlook
for the ABS sector over the next quarter. Though strong investor demand is
likely to continue longer term, we believe the ABS sector may be affected by
increases in consumer debt delinquencies and by year-end selling.
We will continue to look for attractive investment opportunities in emerging
markets. For the near term, we tend to favor Latin American debt over
investment-grade bonds in Asia and eastern Europe, which we currently consider
too expensive.
Distribution Policy
During the 12-month period under review, the fund distributed $0.64 per
share. Dividends are declared daily and paid on a monthly basis. The fund
intends to distribute substantially all of its investment company taxable
income, as required by tax law.
We value your continued confidence in the GS Core Fixed Income Fund and look
forward to reporting on the fund's progress in the coming year.
Sincerely,
/s/ Jonathan A. Beinner
Jonathan A. Beinner
/s/ Richard H. Buckholz
Richard H. Buckholz
/s/ C. Richard Lucy
C. Richard Lucy
/s/ Theodore T. Sotir
Theodore T. Sotir
Portfolio Managers
GS Core Fixed Income Fund
November 30, 1995
- -------------------------------------------------------------------------------
23
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
GS Core Fixed Income Fund
October 31, 1995
- -------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1995. 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.
HYPOTHETICAL $50,000 INVESTMENT/(a)/
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
GS Core Lehman
Fixed Income Fund Aggregate Index
<S> <C> <C>
1/5/94 50,000 50,000
10/31/94 48,498 46,980
10/31/95 56,122 54,332
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Return
--------------------------------
One Year Since Inception/(a)/
--------------------------------
<S> <C>
15.72% 6.54%
</TABLE>
/(a)/ Commenced operations January 5, 1994.
- -------------------------------------------------------------------------------
24
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
GS Core Fixed Income Fund
October 31, 1995
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Corporate Bonds--28.2%
Finance Bonds--19.1%
Bancponce Financial Corp.
$ 500,000 5.17% 07/15/96 $ 496,150
BankAmerica Corp.
200,000 4.99 05/17/99 199,118
Capital One Bank
600,000 8.63 01/15/97 616,830
500,000 8.13 02/27/98 518,910
Chrysler Financial Corp.
50,000 6.22 10/27/97 50,136
500,000 6.10 11/02/97 500,000
Comdisco Inc.
600,000 9.75 01/15/97 624,798
200,000 7.33 03/06/97 202,722
Continental Bank N.A.
525,000 11.25 07/01/01 586,924
Corp. Andina de Fomento
280,000 7.25 04/30/98 279,370
60,000 7.38 07/21/00 60,167
Countrywide Funding Corp.
125,000 6.08 07/14/99 123,881
250,000 8.43 11/16/99 267,858
Financiera Energy Nacional
530,000 6.63 12/13/96 526,025
First USA
200,000 5.05 12/27/95 199,674
400,000 5.05 12/29/95 399,324
400,000 6.88 09/12/96 402,804
Ford Capital Corp.
200,000 9.38 01/01/98 213,388
600,000 9.50 07/01/01 686,688
General Motors Acceptance Corp.
400,000 7.50 11/04/97 410,344
275,000 7.63 03/09/98 283,740
200,000 7.13 05/10/00 205,652
Golden West Financial Corp.
600,000 8.62 08/30/98 635,418
Maybank, New York
975,000 7.13 09/15/05 991,030
Security Pacific Corp.
695,000 11.50 11/15/00 843,070
Corporate Bonds (continued)
Finance Bonds (continued)
Signet Banking Corp.
$ 240,000 9.63% 06/01/99 $ 262,387
- -------------------------------------------------------------------------------
$10,586,408
- -------------------------------------------------------------------------------
Industrial Bonds--8.5%
Auburn Hills Trust
$ 360,000 12.00% 05/01/20 $ 539,770
Empresa Col Petroleos
250,000 7.25 07/08/98 245,000
News America Holdings Inc.
350,000 9.13 10/15/99 382,659
500,000 7.50 03/01/00 517,620
RJR Nabisco Inc.
175,000 8.00 07/15/01 176,444
350,000 8.62 12/01/02 359,594
Tele-Communications Inc.
400,000 6.10 05/15/96 399,532
Tenneco Inc.
575,000 10.00 08/01/98 628,320
Time Warner Inc.
1,225,000 7.95 02/01/00 1,273,473
175,000 7.98 08/15/04 179,776
- -------------------------------------------------------------------------------
$ 4,702,188
- -------------------------------------------------------------------------------
Utility Bonds--0.6%
Central Maine Power Co.
$ 330,000 7.45% 08/30/99 $ 335,521
- -------------------------------------------------------------------------------
Total Corporate Bonds
(Cost $15,375,809) $15,624,117
- -------------------------------------------------------------------------------
Asset-Backed Securities--9.7%
Discover Card Trust Series 1991-C, Class A
$1,035,000 7.20% 04/16/98 $ 1,035,135
Ford Credit Auto Loan Master Trust Series
1995-1, Class A
650,000 6.50 08/15/02 657,378
General Motors Acceptance Corp. Series 1994,
Class A(a)
831,244 6.30 06/15/99 833,239
General Motors Acceptance Corp. Series 1995,
Class A
185,548 7.15 03/15/00 187,487
Premier Auto Trust Series 1994-1, Class A3
120,000 4.75 02/02/00 118,625
Premier Auto Trust Series 1995-1, Class A4
360,000 7.85 02/04/98 368,132
</TABLE>
25
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
GS Core Fixed Income Fund (continued)
October 31, 1995
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Asset-Backed Securities (continued)
Premier Auto Trust Series 1995-1, Class A5
$80,000 7.90% 05/04/99 $ 82,566
Sears Credit Card Master Trust, Series 1995-2, Class A
550,000 8.10 06/15/04 589,914
Sears Credit Card Master Trust, Series 1995-3, Class A
300,000 7.00 10/15/04 309,900
Standard Credit Card Trust, Series 1990-3, Class A
1,120,000 9.50 07/10/98 1,176,370
- -------------------------------------------------------------------------------
Total Asset-Backed Securities
(Cost $5,346,628) $ 5,358,746
- -------------------------------------------------------------------------------
Government Bonds--1.2%
Province of Quebec
$ 520,000 13.25% 09/15/14 $ 656,250
- -------------------------------------------------------------------------------
Total Government Bonds
(Cost $656,517) $ 656,250
- -------------------------------------------------------------------------------
Mortgage Backed Obligations--32.0%
Federal Home Loan Mortgage Corp. (FHLMC)
$2,000,000 7.50% TBA-30 year(b) $ 2,050,624
3,000,002 7.00 09/01/25 2,975,627
500,000 7.50 10/01/25 505,625
1,000,000 8.00 10/15/25 1,025,313
2,000,000 8.00 TBA-30 year(b) 2,022,500
Federal National Mortgage Association (FNMA)
831,998 9.00 08/01/06 872,558
578,679 7.00 11/01/24 573,616
FNMA Remic Trust Series 1993-58, Class G
500,000 5.50 12/25/20 476,100
FNMA Remic Trust Series 189, Class 1 Principal Only Strips
519,544 4.55(c) 11/25/19 414,843
FNMA Remic Trust Series 189, Class 2 Principal Only Strips
660,175 9.50(c) 11/01/19 151,698
Government National Mortgage Association
1,000,000 7.50 TBA-30 year(b) 1,012,812
1,005,000 9.50 06/15/17 1,081,318
879,262 9.00 07/15/17 932,292
525,920 9.00 02/15/21 555,503
2,998,514 8.00 08/15/24 3,087,534
- --------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $17,570,371) $17,737,963
- --------------------------------------------------------------------------------
Sovereign Debt--0.5%
Republic of Colombia
$ 260,000 9.25% 02/15/00 $ 261,542
- --------------------------------------------------------------------------------
Total Sovereign Debt
(Cost $260,400) $ 261,542
- --------------------------------------------------------------------------------
U.S. Government Agency Obligations--2.1%
FHLMC
$ 300,000 8.20% 01/16/98 $ 308,337
250,000 6.83 09/18/02 252,455
FNMA Medium Term Notes
170,000 8.79 01/30/02 172,946
Resolution Funding Corp. Principal Only Strips(c)
1,160,000 6.78 10/15/20 219,194
1,140,000 6.78 01/15/21 212,359
- --------------------------------------------------------------------------------
Total U.S. Government Agency Obligations
(Cost $1,116,619) $ 1,165,291
- --------------------------------------------------------------------------------
U.S. Treasury Obligations--24.7%
United States Treasury Bonds
$ 100,000 6.40% 08/15/20 $ 128,125
100,000 8.75 08/15/20 128,125
120,000 7.88 02/15/21 141,263
60,000 8.00 11/15/21(d) 71,719
United States Treasury Interest Only Stripped Securities(c)
2,250,000 6.43 08/15/09 943,313
350,000 6.48 11/15/10 134,537
United States Treasury Notes
750,000 7.25 11/15/96 762,188
2,790,000 7.38 11/15/97 2,881,121
830,000 7.75 01/31/00 889,528
2,080,000 6.25 02/15/03 2,116,733
United States Treasury Principal Only Stripped Securities(c)
40,000 5.65 11/15/97 35,706
400,000 6.15 11/15/04 231,060
6,320,000 6.17 11/15/04 3,650,748
1,010,000 6.63 05/15/20 203,576
6,940,000 6.63 08/15/20 1,376,203
- --------------------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $13,147,205) $13,693,945
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
- -------------------------------------------------------------------------------
GS Core Fixed Income Fund (continued)
October 31, 1995
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Repurchase Agreement--10.1%
Joint Repurchase Agreement Account(a)
$5,600,000 5.93% 11/01/95 $ 5,600,000
- -------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $5,600,000) $ 5,600,000
- -------------------------------------------------------------------------------
Total Investments
(Cost $59,073,549(e)) $60,097,854
===============================================================================
</TABLE>
Futures contracts open at October 31, 1995 are as follows:
<TABLE>
<CAPTION>
Number of
Contracts
Long (Short) Settlement Month Unrealized
Type (f) Gain (Loss)
- ------------------------------ ------------- ------------------ -------------
<S> <C> <C> <C>
Euro Dollars 3 September 1997 ($150)
Euro Dollars 3 December 1997 (225)
2-Year U.S. Treasury Notes 3 December 1995 188
5-Year U.S. Treasury Notes 6 December 1995 5,281
10-Year U.S. Treasury Notes 12 December 1995 10,875
U..S. Treasury Bond (5) December 1995 (35,313)
- --------------------------------------------------------------------------------
($19,344)
================================================================================
</TABLE>
<TABLE>
<CAPTION>
Federal Income Tax Information:
================================================================================
<S> <C>
Gross unrealized gain for investments in which value exceeds cost $1,035,697
Gross unrealized loss for investments in which cost exceeds value (15,571)
- --------------------------------------------------------------------------------
Net unrealized gain $1,020,126
================================================================================
</TABLE>
(a) Portions of these securities are being segregated for open TBA purchases and
mortgage dollar rolls.
(b) TBA (To Be Assigned) securities are purchased on a forward commitment basis
with an approximate (generally + / -2.5%) principal amount and no definite
maturity date. The actual principal amount and maturity date will be
determined upon settlement when the specific mortgage pools are assigned.
(c) The interest rate disclosed for these securitites represents effective
yields to maturity.
(d) Portions of these securities are being segregated for futures margin
requirements.
(e) The aggregate cost for federal income tax purposes is $59,077,728.
(f) Each 2-Year U.S. Treasury Note contract represents $200,000, in notional par
value. Each 5-Year U.S. Treasury Note, 10-Year U.S. Treasury Note and U.S.
Treasury Bond contract represents $100,000 in notional par value. Each Euro
Dollar contract represents $1,000,000 in notional par value. The total net
notional amount and net market value at risk for the futures contracts shown
above are $7,900,000 and $3,447,201, respectively. The determination of
notional amounts does not consider market risk factors and therefore
notional amounts as presented here are indicative only of volume of activity
and not a measure of market risk.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities
October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GS Adjustable GS Short-Term GS Short GS Core
Rate Government Duration Fixed
Government Agency Tax-Free Income
Agency Fund Fund Fund Fund
=======================================================
<S> <C> <C> <C> <C>
Assets:
Investments in securities, at value (cost $676,175,134, $97,819,981,
$71,763,971 and $59,073,549, respectively) $668,520,312 $ 97,786,174 $72,362,466 $60,097,854
Receivables:
Investment securities sold 2,522,537 7,389,364 7,084,752 501,611
Interest 4,758,629 1,877,430 810,907 693,394
Fund shares sold 1,816,089 -- -- --
Cash 834,124 24,111 58,457 46,820
Deferred organization expenses, net 20,848 -- 43,483 77,914
Other assets 363,405 227,642 116,718 76,278
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets 678,835,944 107,304,721 80,476,783 61,493,871
- ----------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Payables:
Dividends 1,964,420 262,952 80,916 --
Investment securities purchased -- 3,077,455 21,417,313 5,942,377
Fund shares repurchased 350,373 139,117 1,099 --
Investment adviser fees 230,618 35,221 20,005 18,684
Transfer agent fees 79,466 -- 2,000 1,868
Authorized dealer service fees 3,162 -- -- --
Accrued expenses and other liabilities 74,887 29,946 66,141 28,664
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 2,702,926 3,544,691 21,587,474 5,991,593
- ----------------------------------------------------------------------------------------------------------------------------------
Net Assets:
Paid in capital 733,171,454 116,985,113 62,694,923 53,994,311
Accumulated undistributed (distributions in excess of) net
investment income (2,129,902) 708,450 67,398 40,202
Accumulated net realized gain (loss) on investment and futures
transactions (46,579,546) (13,973,992) (4,471,507) 462,804
Net unrealized gain (loss) on investments and futures (8,328,988) 40,459 598,495 1,004,961
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets $676,133,018 $103,760,030 $58,889,309 $55,502,278
==================================================================================================================================
Net asset value, offering and redemption price per share
Institutional shares $9.77 $9.82 $9.94 $10.00
Administration shares $9.77 -- $9.94 --
Service shares -- -- $9.95 --
Class A shares(a) $9.77 -- -- --
==================================================================================================================================
Shares Outstanding:
Institutional shares 67,312,163 10,567,526 5,871,894 5,549,690
Administration shares 365,725 -- 4,614 --
Service shares -- -- 45,968 --
Class A shares 1,556,301 -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total shares of beneficial interest outstanding, $.001 par value
(unlimited number of shares authorized) 69,234,189 10,567,526 5,922,476 5,549,690
==================================================================================================================================
</TABLE>
(a) Maximum public offering price per share (NAV per share *1.0152) for Class A
shares of GS Adjustable Rate Government Agency Fund is $9.92.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
- --------------------------------------------------------------------------------
Statements of Operations
For the Year Ended October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GS Adjustable GS Short-Term GS Short GS Core
Rate Government Duration Fixed
Government Agency Tax-Free Income
Agency Fund Fund Fund Fund
=======================================================
<S> <C> <C> <C> <C>
Investment income:
Interest $45,991,431 $ 9,467,818 $3,112,135 $2,402,498
- ---------------------------------------------------------------------------------------------------------------------------------
Total income 45,991,431 9,467,818 3,112,135 2,402,498
- ---------------------------------------------------------------------------------------------------------------------------------
Expenses:
Investment adviser fees 2,947,492 646,364 260,970 137,158
Distribution fees 17,967 -- -- --
Authorized dealer service fees 17,967 -- -- --
Administration share fees 12,632 425 1,244 --
Service share fees -- -- 2,847 --
Transfer agent fees 306,662 -- 26,098 13,716
Custodian fees 202,330 53,175 40,586 46,412
Professional fees 73,276 79,913 37,300 49,918
Printing fees 84,609 30,942 42,972 37,167
Registration fees 7,192 71,103 42,630 12,708
Amortization of deferred organization expenses 29,381 -- 22,673 25,947
Trustees' fees 53,525 6,783 1,989 690
Other 221,317 42,713 31,511 7,056
- ---------------------------------------------------------------------------------------------------------------------------------
Total expenses 3,974,350 931,418 510,820 330,772
Less--expenses reimbursable and fees waived by Goldman Sachs (569,372) (349,267) (213,139) (176,469)
- ---------------------------------------------------------------------------------------------------------------------------------
Net expenses 3,404,978 582,151 297,681 154,303
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income 42,586,453 8,885,667 2,814,454 2,248,195
- ---------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment and
futures transactions:
Net realized gain (loss) from:
Investment transactions (6,834,903) (4,027,343) (472,312) 908,346
Futures transactions (5,165,576) (2,831) -- 12,784
Net change in unrealized gain (loss) on:
Investments 16,816,889 5,661,425 1,270,197 1,682,520
Futures (678,522) 74,266 -- (19,344)
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investment and futures
transactions 4,137,888 1,705,517 797,885 2,584,306
- ---------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $46,724,341 $10,591,184 $3,612,339 $4,832,501
=================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
29
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GS Adjustable GS Short-Term GS Short GS Core
Rate Government Duration Fixed
Government Agency Tax-Free Income
Agency Fund Fund Fund Fund
===========================================================
<S> <C> <C> <C> <C>
From Operations:
Net investment income $ 42,586,453 $ 8,885,667 $ 2,814,454 $ 2,248,195
Net realized gain (loss) from investment and futures transactions (12,000,479) (4,030,174) (472,312) 921,130
Net change in unrealized gain on investments and futures 16,138,367 5,735,691 1,270,197 1,663,176
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 46,724,341 10,591,184 3,612,339 4,832,501
- ----------------------------------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (42,629,917) (8,684,213) (2,771,793) (2,253,625)
Administration shares (278,448) (11,164) (20,584) --
Service shares -- -- (22,077) --
Class A shares (425,863) -- -- --
In excess of net investment income
Institutional shares (2,124,188) -- -- --
Administration shares (13,875) -- -- --
Class A shares (21,220) -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (45,493,511) (8,695,377) (2,814,454) (2,253,625)
- ----------------------------------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 456,762,969 49,034,023 36,468,900 30,256,879
Proceeds from reorganizations 37,593,780 -- -- --
Reinvestment of dividends and distributions 21,273,685 4,993,443 1,873,154 2,232,160
Cost of shares repurchased (790,211,526) (145,988,674) (67,865,169) (4,073,379)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
shares transactions (274,581,092) (91,961,208) (29,523,115) 28,415,660
- ----------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) (273,350,262) (90,065,401) (28,725,230) 30,994,536
Net Assets:
Beginning of year 949,483,280 193,825,431 87,614,539 24,507,742
- ----------------------------------------------------------------------------------------------------------------------------------
End of year $ 676,133,018 $ 103,760,030 $ 58,889,309 $55,502,278
==================================================================================================================================
Accumulated undistributed (distributions in excess of) net investment
income $ (2,129,902) $ 708,450 $ 67,398 $ 40,202
==================================================================================================================================
Summary of Share Transactions:
Shares sold 46,809,171 5,072,030 3,733,382 3,077,397
Shares exchanged in reorganizations 3,843,169 -- -- --
Reinvestment of dividends and distributions 2,181,117 516,178 190,942 230,595
Shares repurchased (81,125,615) (15,135,663) (6,950,294) (411,156)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding (28,292,158) (9,547,455) (3,025,970) 2,896,836
==================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets (continued)
For the Year Ended October 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GS Adjustable GS Short-Term GS Short GS Core
Rate Government Duration Fixed
Government Agency Tax-Free Income
Agency Fund Fund Fund Fund(a)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
From Operations:
Net investment income $ 74,486,356 $ 15,104,529 $ 4,367,575 $ 912,083
Net realized loss from
investment and futures
transactions (21,946,744) (9,489,099) (3,998,966) (458,326)
Net change in unrealized
loss on investments (23,081,906) (3,394,603) (773,951) (658,215)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in
net assets resulting from
operations 29,457,706 2,220,827 (405,342) (204,458)
- ----------------------------------------------------------------------------------------------------------------------------------
Distributions to
Shareholders from:
Net investment income
Institutional shares (73,960,549) (14,220,333) (4,170,854) (912,083)
Administration shares (304,939) (674,883) (193,928) --
Service shares -- -- (2,793) --
Net realized gain on
investment and futures
transactions
Institutional shares -- (1,416,326) (931,790) --
Administration shares -- (66,034) (784) --
- ----------------------------------------------------------------------------------------------------------------------------------
Total distributions to
shareholders (74,265,488) (16,377,576) (5,300,149) (912,083)
- ----------------------------------------------------------------------------------------------------------------------------------
From Share Transactions:
Proceeds from sales of
shares 1,013,097,417 97,865,803 117,286,528 24,765,017
Reinvestment of dividends
and distributions 30,771,600 10,376,478 4,009,244 911,363
Cost of shares repurchased (2,815,775,329) (276,458,244) (144,689,428) (52,097)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in
net assets resulting from
share transactions (1,771,906,312) (168,215,963) (23,393,656) 25,624,283
- ----------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) (1,816,714,094) (182,372,712) (29,099,147) 24,507,742
Net Assets:
Beginning of period 2,766,197,374 376,198,143 116,713,686 --
- ----------------------------------------------------------------------------------------------------------------------------------
End of period $ 949,483,280 $ 193,825,431 $ 87,614,539 $24,507,742
==================================================================================================================================
Accumulated undistributed
net investment income $ 747,775 $ 481,675 $ 44,725 $ 20,085
==================================================================================================================================
Summary of Share
Transactions:
Shares sold 102,107,323 9,829,690 11,568,942 2,561,774
Reinvestment of dividends
and distributions 3,113,434 1,051,206 400,203 96,676
Shares repurchased (284,303,787) (27,853,643) (14,425,718) (5,596)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease)
in shares outstanding (179,083,030) (16,972,747) (2,456,573) 2,652,854
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a)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.
31
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
October 31, 1995
- --------------------------------------------------------------------------------
1. Organization
Goldman Sachs Trust (the "Trust") is a Massachusetts business trust
registered under the Investment Company Act of 1940 (as amended) as an open-end,
management investment company. Included in this report are the financial
statements for the GS Adjustable Rate Government Agency Fund, GS Short-Term
Government Agency Fund, GS Short Duration Tax-Free Fund and GS Core Fixed Income
Fund, collectively, ("the Funds"). The Funds are diversified portfolios of the
Trust offering three classes of shares - Institutional shares, Administration
shares and Service shares. In addition, the GS Adjustable Rate Government Agency
Fund offers Class A shares.
2. Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Funds which are in conformity with those generally accepted in
the investment company industry:
A. Investment Valuation
------------------------
Investments in 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 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
Statements 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. 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 for GS Short Duration Tax-Free Fund. Market discounts and market
premiums on debt securities, other than mortgage backed securities, are
amortized to interest income over the life of the security with a corresponding
adjustment in the cost basis of that security for GS Core Fixed Income Fund.
C. Mortgage Dollar Rolls
-------------------------
The Funds, with the exception of the GS Short Duration Tax-Free 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
32
<PAGE>
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. Futures Contracts
---------------------
The Funds may enter into futures transactions for hedging purposes or,
except for futures transactions on currencies by the GS Core Fixed Income Fund,
to seek to increase total return as permitted by CFTC regulations. The Funds may
also use futures contracts to manage their exposure to fluctuations in interest
rates and in the case of the GS Core Fixed Income Fund, currency values. The use
of futures contracts involve, to varying degrees, elements of market risk which
may exceed the amounts recognized in the Statements of Assets and Liabilities.
The underlying total net notional amount and net market value at risk for
outstanding futures contracts at October 31, 1995 are noted on the appropriate
Schedules of Investments.
Upon entering into a futures contract, a Fund is required to deposit with a
broker an amount of cash or securities equal to the minimum "initial margin"
requirement of the futures exchange on which the contract is traded. Subsequent
payments ("variation margin") are made or received by the Fund each day,
dependent on the daily fluctuations in the value of the contract, and are
recorded for financial reporting purposes as unrealized gains or losses by the
Fund. When entering into a closing transaction, the Fund will realize, for book
purposes, a gain or loss equal to the difference between the value of the
futures contract to sell and the futures contract to buy. Futures contracts are
valued at the most recent settlement price, unless such price does not reflect
the fair market value of the contract, in which case the position will be valued
using methods as approved by the Board of Trustees.
Certain risks may arise upon entering into futures contracts. The
predominant risk is that the changes in the value of the futures contract may
not directly correlate with changes in the value of the underlying securities.
This risk may decrease the effectiveness of the Funds' hedging strategies and
may also result in a loss to the Funds.
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. For the GS Adjustable Rate Government
Agency Fund, shareholders of Class A shares bear all expenses and fees relating
to the distribution and authorized dealer service plans as well as other
expenses which are directly attributable to such shares.
G. Federal Taxes
-----------------
It is each Fund's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute each
year substantially all of its investment company taxable and tax-exempt income
to its shareholders. Accordingly, no federal tax provisions are required. The
characterization of distributions to shareholders for financial statement
purposes as either from or in excess of net investment income or net realized
gain on investment transactions, or from capital, depends on the type of
book/tax differences that may exist as well as timing differences associated
with having different book and tax year ends.
33
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1995
- -------------------------------------------------------------------------------
At October 31, 1995, the Funds had approximately the following amounts of
capital loss carryforward for U.S. Federal tax purposes:
<TABLE>
<CAPTION>
Years of
Fund Amount Expiration
- ------------------------------ ----------- -----------
<S> <C> <C>
GS Adjustable Rate
Government Agency Fund $38,311,000 2000-2002
GS Short-Term Government
Agency Fund $11,136,000 2002
GS Short Duration Tax-Free
Fund $ 3,999,000 2002
</TABLE>
These amounts are available to be carried forward to offset future capital
gains to the extent permitted by applicable laws or regulations.
3. Agreements
Goldman Sachs Funds Management, L.P. ("GSFM"), an affiliate of Goldman,
Sachs & Co. ("Goldman Sachs"), serves as the investment adviser for the GS
Adjustable Rate Government Agency and GS Short-Term Government Agency Funds
pursuant to Investment Advisory Agreements. Goldman Sachs Asset Management
("GSAM"), a separate operating division of Goldman Sachs, serves as the
investment adviser for the GS Short Duration Tax-Free and GS Core Fixed Income
Funds pursuant to Investment Advisory Agreements. Under the Investment Advisory
Agreements, the adviser, subject to the general supervision of the Trust's Board
of Trustees, manages the Funds' portfolios and provides for the administration
of the Funds' other affairs. As compensation for the services rendered under the
Investment Advisory Agreements and the assumption of the expenses related
thereto, the adviser is entitled to a fee, computed daily and payable monthly at
an annual rate equal to .40% of average daily net assets of GS Adjustable Rate
Government Agency, GS Short Duration Tax-Free and GS Core Fixed Income Funds and
.50% of average daily net assets of GS Short-Term Government Agency Fund. Until
further notice, GSFM has voluntarily agreed not to impose .10% of its investment
advisory fee for the GS Short-Term Government Agency Fund. For the period ended
October 31, 1995, investment advisory fees of $129,273 were waived for the GS
Short-Term Government Agency Fund.
The adviser has voluntarily agreed to limit certain of the Funds' expenses
(excluding investment advisory fees, taxes, interest, brokerage, litigation,
administrative and service fees, indemnification and other extraordinary
expenses and with respect to GS Adjustable Rate Government Agency Class A
shares, distribution and authorized dealer service fees) to the extent that such
expenses exceed .05% per annum of each Fund's average daily net assets. For the
year ended October 31, 1995, the amount of reimbursed expenses for the GS
Adjustable Rate Government Agency, GS Short-Term Government Agency, GS Short
Duration Tax-Free and GS Core Fixed Income Funds were $551,405, $219,994,
$213,139 and $176,469, respectively. The amounts reimbursable to the GS
Adjustable Rate Government Agency, GS Short-Term Government Agency, GS Short
Duration Tax-Free and the GS Core Fixed Income Funds at October 31, 1995 were
approximately $178,000, $79,000, $18,000 and $41,000, respectively, and are
included in "Other assets" in the accompanying Statements of Assets and
Liabilities.
Goldman Sachs serves as Distributor of the shares of the Funds pursuant to a
Distribution Agreement and receives no compensation in this capacity with the
exception of GS Adjustable Rate Government Agency Fund Class A shares. At
October 31, 1995, Goldman Sachs retained approximately $40,000 of sales load
related to Class A shares. Goldman Sachs also serves as Transfer Agent of the
Funds.
The Trust, on behalf of the GS Adjustable Rate Government Agency Fund, has
adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1 for the Class A
shares. Under the Plan, Goldman Sachs is entitled to receive a quarterly
distribution fee equal, on an annual basis, to .25% of the average daily net
assets of Class A shares. Currently, Goldman Sachs has agreed to voluntarily
waive this distribution fee. Distribution fees waived for the period amounted
to $17,967.
34
<PAGE>
The Trust, on behalf of the GS Adjustable Rate Government Agency Fund, has
adopted a non-Rule 12b-1 Authorized Dealer Service Plan (the "Service Plan")
pursuant to which Goldman Sachs and Authorized Dealers are compensated for
providing personal and account maintenance services. GS Adjustable Rate
Government Agency Fund pays a fee under the Service Plan equal, on an annual
basis, to .25% of its average daily net assets attributable to Class A shares.
For the period ended October 31, 1995, GS Adjustable Rate Government Agency
Fund, GS Short-Term Government Agency Fund and GS Core Fixed Income Fund
incurred commissions expense of approximately $91,000, $2,800, and $900,
respectively, in connection with futures contracts entered into with Goldman
Sachs.
4. Line of Credit Facility
The Funds participate in a $100,000,000 uncommitted, unsecured revolving
line of credit facility to be used solely for temporary or emergency purposes.
Under the most restrictive arrangement, each fund must own securities having a
market value in excess of 300% of the total bank borrowings. The interest rate
on the borrowings is based on the Federal Funds rate. During fiscal year 1995,
the Funds did not have any borrowings under this facility.
5. Investment Transactions
Purchases and proceeds of sales or maturities of long-term securities for
the year ended October 31, 1995, were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
GS Adjustable GS GS
Rate Short-Term Short GS
Government Government Duration Core Fixed
Agency Agency Tax-Free Income
Fund Fund Fund Fund
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Purchases of U.S.
Government and
agency obligations $ 168,570,797 $363,854,703 $ -- $132,227,192
- ----------------------------------------------------------------------------------------------
Purchases (excluding
U.S. Government and
agency obligations) -- -- 160,557,538 26,393,743
- ----------------------------------------------------------------------------------------------
Sales or maturities of
U.S. Government and
agency obligations 496,940,962 420,674,507 -- 114,081,532
- ----------------------------------------------------------------------------------------------
Sales or maturities
(excluding U.S.
Government and
agency obligations) -- -- 185,231,508 16,705,497
- ----------------------------------------------------------------------------------------------
</TABLE>
6. Summary of Share Transactions
Share activity for the period ended October 31, 1995 is as follows:
<TABLE>
<CAPTION>
Fund Dollars Shares
- --------------------------------------------------------------------------------------
<S> <C> <C>
GS Adjustable Rate Government Agency Fund
Institutional Shares:
Shares sold $ 445,293,934 45,635,666
Shares exchanged in reorganization 18,823,725 1,926,438
Reinvestment of dividends and distributions 20,730,137 2,125,494
Shares repurchased (771,265,543) (79,186,935)
----------------------------
(286,417,747) (29,499,337)
----------------------------
Administration Shares:
Shares sold 648,042 66,628
Shares exchanged in reorganization 1,561,584 159,814
Reinvestment of dividends and distributions 124,368 12,743
Shares repurchased (5,731,937) (588,307)
----------------------------
(3,397,943) (349,122)
----------------------------
Class A Shares:
Shares sold 10,820,993 1,106,877
Shares exchanged in reorganization 17,208,471 1,756,917
Reinvestment of dividends and distributions 419,180 42,880
Shares repurchased (13,214,046) (1,350,373)
----------------------------
15,234,598 1,556,301
----------------------------
$(274,581,092) (28,292,158)
============================
GS Short-Term Government Agency Fund
Institutional Shares:
Shares sold $ 49,032,419 5,071,865
Reinvestment of dividends and distributions 4,993,225 516,155
Shares repurchased (145,260,300) (15,059,774)
----------------------------
(91,234,656) (9,471,754)
----------------------------
Administration Shares:
Shares sold 1,604 165
Reinvestment of dividends and distributions 218 23
Shares repurchased (728,374) (75,889)
----------------------------
(726,552) (75,701)
----------------------------
$ (91,961,208) (9,547,455)
============================
</TABLE>
35
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
GS Short Duration Tax-Free Fund
Institutional Shares:
Shares sold $ 18,780,011 1,920,432
Reinvestment of dividends and distributions 1,860,104 189,624
Shares repurchased (46,762,899) (4,787,105)
------------------------------
(26,122,784) (2,677,049)
------------------------------
Administration Shares:
Shares sold -- --
Reinvestment of dividends and distributions 2,483 246
Shares repurchased (3,800,930) (390,639)
------------------------------
(3,798,447) (390,393)
------------------------------
Service Shares:
Shares sold 17,688,889 1,812,950
Reinvestment of dividends and distributions 10,567 1,072
Shares repurchased (17,301,340) (1,772,550)
------------------------------
398,116 41,472
------------------------------
$ (29,523,115) (3,025,970)
==============================
</TABLE>
- -------------------------------------------------------------------------------
Share activity for the year ended October 31, 1994 is as follows:
<TABLE>
<CAPTION>
Fund Dollars Shares
- -------------------------------------------------------------------------------
<S> <C> <C>
GS Adjustable Rate Government Agency Fund
Institutional Shares:
Shares sold $ 1,004,949,426 101,283,294
Reinvestment of dividends and distributions 30,671,269 3,103,267
Shares repurchased (2,809,311,423) (283,651,840)
------------------------------
(1,773,690,728) (179,265,279)
------------------------------
Administration Shares:
Shares sold 8,147,991 824,029
Reinvestment of dividends and distributions 100,331 10,167
Shares repurchased (6,463,906) (651,947)
------------------------------
1,784,416 182,249
------------------------------
$(1,771,906,312) (179,083,030)
==============================
GS Short-Term Government Agency Fund
Institutional Shares:
Shares sold $ 97,738,708 9,816,887
Reinvestment of dividends and distributions 10,373,791 1,050,930
Shares repurchased (261,183,718) (26,290,525)
------------------------------
$ (153,071,219) (15,422,708)
------------------------------
Administration Shares:
Shares sold $ 127,095 12,803
Reinvestment of dividends and distributions 2,687 276
Shares repurchased (15,274,526) (1,563,118)
------------------------------
(15,144,744) (1,550,039)
------------------------------
$ (168,215,963) (16,972,747)
==============================
GS Short Duration Tax-Free Fund
Institutional Shares:
Shares sold $ 100,275,689 9,879,219
Reinvestment of dividends and distributions 4,003,867 399,664
Shares repurchased (130,867,805) (13,045,936)
------------------------------
(26,588,249) (2,767,053)
------------------------------
Administration Shares:
Shares sold 12,399,454 1,221,381
Reinvestment of dividends and distributions 5,160 517
Shares repurchased (9,256,757) (915,914)
------------------------------
3,147,857 305,984
------------------------------
Service Shares:
Shares sold 4,611,385 468,342
Reinvestment of dividends and distributions 217 22
Shares repurchased (4,564,866) (463,868)
------------------------------
46,736 4,496
------------------------------
$ (23,393,656) (2,456,573)
==============================
</TABLE>
7. Repurchase Agreements
During the term of a repurchase agreement, the value of the underlying
securities, including accrued interest, is required to equal or exceed the value
of the repurchase agreement. The underlying securities for all repurchase
agreements are held in safekeeping in the customer-only account of State Street
Bank & Trust Co., the Fund's custodian, or at subcustodians. GSFM and GSAM
monitor the market value of the underlying securities by pricing them daily.
8. Joint Repurchase Agreement Account
The Funds, together with other registered investment companies having
advisory agreements with GSFM and
36
<PAGE>
GSAM or their affiliates, transfer 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, 1995, the GS
Adjustable Rate Government Agency, GS Short-Term Government Agency and GS Core
Fixed Income Funds had an 0.89%, 0.03% and 0.31%, respectively, undivided
interest in the repurchase agreements in the following joint account which
equaled $16,000,000, $500,000 and $5,600,000, respectively, in principal amount.
As of October 31, 1995, the repurchase agreements in the joint account along
with the corresponding underlying securities (including the type of security,
market value, interest rate and maturity date) were as follows:
Principal Interest Maturity Amortized
Amount Rate Date Cost
- --------------------------------------------------------------------------------
Lehman Brothers, Inc. dated 10/31/95, repurchase price $965,159,225 (U.S.
Treasury Notes: $955,186,569, 4.25%-9.50%, 11/15/95-08/15/02; U.S. Treasury
Interest-Only Strips:$19,548,855, 11/15/00-08/15/02; U.S. Treasury Principal-
Only Strips:$6,376,719, 6.38%-8.50%, 11/15/00-08/15/02))
$965,000,000 5.94% 11/01/95 $ 965,000,000
Salomon Brothers, Inc. dated 10/31/95, repurchase price $830,136,489 (U.S.
Treasury Notes: $383,210,541, 4.25%-8.87%, 11/15/95-08/31/00; U.S. Treasury
Interest-Only Strips: $356,333,527, 11/15/95-08/15/02; U.S. Treasury Principal-
Only Strips: $107,445,042, 6.38%-9.50%, 11/15/95-08/15/02)
$830,000,000 5.92% 11/01/95 $ 830,000,000
- --------------------------------------------------------------------------------
Total Joint Repurchase Agreement Account $ 1,795,000,000
================================================================================
9. 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.
10. Other Matters
On April 28, 1995, the GS Adjustable Rate Government Agency Fund acquired
the assets of GS Government Agency Portfolio (For Financial Institutions) in
exchange solely for (i) the issuance of Institutional shares and Administration
shares of beneficial interest of the GS Adjustable Rate Government Agency Fund
and (ii) the assumption by GS Adjustable Rate Government Agency Fund of the
liabilities of GS Government Agency Portfolio (For Financial Institutions).
Following this transfer, GS Government Agency Portfolio (For Financial
Institutions) was liquidated and GS Adjustable Rate Government Agency Fund's
Institutional and Administration shares were distributed to the former
shareholders of GS Government Agency Portfolio (For Financial Institutions).
The Reorganization was accomplished by a tax-free transfer of assets whereby
each shareholder of GS Government Agency Portfolio (For Financial Institutions)
received a number of full and fractional shares of GS Adjustable Rate Government
Agency Fund having a total net asset value of their shares of GS Government
Agency Portfolio (For Financial Institutions) held on April 28, 1995. The net
assets, including $370,489 of unrealized depreciation for the GS Government
Agency Portfolio (For Financial Institutions), net asset values per share and
shares outstanding as of April 28, 1995 were:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
GS Government
Agency
Portfolio GS Adjustable GS Adjustable
(For Financial Rate Government Rate Government
Institutions) Agency Fund Agency Fund
(Pre- (Pre- (Post-
Reorganization) Reorganization) Reorganization)
--------------- --------------- ---------------
<S> <C> <C> <C>
Net Assets $20,385,309 $673,292,455 $693,677,764
Shares Outstanding
Institutional Shares 1,912,506 68,506,367 70,432,805
Administration Shares 158,661 401,122 560,936
Net Asset Value Per Share
Institutional Shares 9.84 9.77 9.77
Administration Shares 9.84 9.77 9.77
- -------------------------------------------------------------------------------
</TABLE>
37
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1995
- --------------------------------------------------------------------------------
On May 11, 1995, shareholders of the GS Adjustable Rate Mortgage Fund
approved a Plan of Reorganization (the Plan) which was completed on May 12,
1995. Under the Plan, GS Adjustable Rate Mortgage Fund was reorganized as a
separate class (Class A) of the GS Adjustable Rate Government Agency Fund. GS
Adjustable Rate Mortgage Fund's assets were acquired by GS Adjustable Rate
Government Agency Fund in exchange solely for (i) the issuance of Class A shares
of beneficial interest of GS Adjustable Rate Government Agency Fund and (ii) the
assumption by GS Adjustable Rate Government Agency Fund of the liabilities of GS
Adjustable Rate Mortgage Fund. Following this transfer, GS Adjustable Rate
Mortgage Fund was liquidated and the GS Adjustable Rate Government Agency Fund
Class A shares were distributed to the former shareholders of GS Adjustable Rate
Mortgage Fund.
The Reorganization was accomplished by a tax-free transfer of assets whereby
each shareholder of GS Adjustable Rate Mortgage Fund received a number of Class
A full and fractional shares of GS Adjustable Rate Government Agency Fund having
a total net asset value of their shares of GS Adjustable Rate Mortgage Fund held
as of May 12, 1995. The net assets, including $45,684 of net unrealized
depreciation for the GS Adjustable Rate Mortgage Fund, net asset values per
share and shares outstanding as of May 12, 1995 were:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
GS Adjustable GS Adjustable GS Adjustable
Rate Mortgage Rate Government Rate Government
Fund Agency Fund Agency Fund
(Pre- (Pre- (Post-
Reorganization) Reorganization) Reorganization)
--------------- --------------- ---------------
<S> <C> <C> <C>
Net Assets $17,208,471 $727,300,372 $744,508,843
Shares Outstanding
Institutional Shares -- 73,743,084 73,743,084
Administration Shares -- 561,352 561,352
Class A Shares 3,552,167 -- 1,756,917
Net Asset Value Per Share
Institutional Shares -- 9.79 9.79
Administration Shares -- 9.79 9.79
Class A Shares 4.84 -- 9.79
- -------------------------------------------------------------------------------
</TABLE>
The total amount of capital loss carryforward brought on to the books of the
GS Adjustable Rate Government Agency Fund due to these reorganizations was
approximately $3,154,000.
For the period ended October 31, 1994, $15.9 million of the GS Core Fixed
Income Fund shareholder subscriptions were made through in-kind contributions of
securities.
As of October 31, 1995, the Goldman, Sachs & Co. Employees Profit Sharing
and Retirement Income Plan and the Goldman Sachs Asset Management Retirement
Plan were the beneficial owners of approximately 31% of the outstanding shares
of the GS Short-Term Government Agency Fund.
11. Certain Reclassifications
In accordance with Statement of Position 93-2, the GS Adjustable Rate
Government Agency Fund, GS Short-Term Government Agency Fund, GS Short Duration
Tax-Free Fund and GS Core Fixed Income Fund have reclassified $29,381, $36,485,
$22,673 and $25,547, respectively, 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 Funds' capital
accounts on a tax basis.
38
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations Distributions to shareholders
--------------------------------------------------------- --------------------------------------
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment, In excess
value at Net option and currency from From net option of net
beginning investment futures related investment investment and futures investment
of period income transactions transactions operations income transactions income
------------------------------------------------------------------------------------------------------------
GS Adjustable Rate Government Agency Fund
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
For the Years Ended October 31,
- -------------------------------
1995-Institutional
Shares........... $ 9.74 $0.5630/(c)/ $0.0717/(c)/ - $0.6347(c) $(0.5759) $ -- $(0.0287)
1995-Administration
Shares........... 9.74 0.5366/(c)/ 0.0737/(c)/ - 0.6103(c) (0.5528) -- (0.0275)
1995-Class A
Shares/(d)/...... 9.79 0.2721/(c)/ (0.0090)/(c)/ - 0.2631(c) (0.2697) -- (0.0134)
1994-Institutional
Shares........... 10.00 0.4341/(c)/ (0.2455)/(c)/ - 0.1886(c) (0.4486) -- --
1994-Administration
Shares........... 10.00 0.4211/(c)/ (0.2572)/(c)/ - 0.1639(c) (0.4239) -- --
1993-Institutional
Shares........... 10.04 0.4397 (0.0376)/(a)/ - 0.4021 (0.4397) -- (0.0024)
1993-Administration
Shares/(f)/...... 10.02 0.2146 (0.0173)/(a)/ - 0.1973 (0.2146) 0.0000 (0.0027)
1992-Institutional
Shares........... 10.03 0.5599 (0.0029)/(a) - 0.5570 (0.5470) -- --
For the Period July 17, 1991/(g)/through October 31,
- ----------------------------------------------------
1991-Institutional
Shares........... 10.00 0.1531 0.0322/(a)/ - 0.1853 (0.1553) -- --
<CAPTION>
Distributions to shareholders
-------------------------------------
In excess of Ratio of
net realized Net net
gain on increase Ratio of investment
investment, From Total (decrease) Net asset net income
option and paid distributions in net value at expenses (loss)
futures in to asset end of Total to average to average
transactions capital shareholders value period return/(b)/ net assets net assets
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
For the Years Ended October 31,
- -------------------------------
1995-Institutional
Shares........... $ -- $ -- $(0.6046) $ 0.0301 $ 9.77 6.75% 0.46% 5.77%
1995-Administration
Shares........... -- -- (0.5803) 0.0300 9.77 6.48 0.71 5.50
1995-Class A
Shares/(d)/...... -- -- (0.2831) (0.0200) 9.77 2.74 0.69/(e)/ 5.87/(e)/
1994-Institutional
Shares........... -- -- (0.4486) (0.2600) 9.74 1.88 0.46 4.38
1994-Administration
Shares........... -- -- (0.4239) (0.2600) 9.74 1.63 0.71 4.27
1993-Institutional
Shares........... -- -- (0.4421) (0.0400) 10.00 4.13 0.45 4.36
1993-Administration
Shares/(f)/...... -- -- (0.2173) (0.0200) 10.00 2.01/(k)/ 0.70/(e)/ 3.81/(e)/
1992-Institutional
Shares........... -- -- (0.5470) 0.0100 10.04 6.12 0.42 5.61
For the Period July 17, 1991/(g)/through October 31,
- ----------------------------------------------------
1991-Institutional
Shares........... -- -- (0.1553) 0.0300 10.03 2.14(k) 0.20/(e)/ 7.31/(e)/
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
-----------------------
Ratio of
Net net
assets investment
at end Ratio of income
Portfolio of expenses (loss)
turnover period to average to average
rate/(j)/ (in 000s) net assets net assets
------------------------------------------------
<S> <C> <C> <C> <C>
For the Years Ended October 31,
- -------------------------------
1995-Institutional
Shares........... 24.12% $ 657,358 0.53% 5.70%
1995-Administration
Shares........... 24.12 3,572 0.78 5.43
1995-Class A
Shares/(d)/...... 24.12 15,203 1.01/(e)/ 5.55/(e)/
1994-Institutional
Shares........... 37.81 942,523 0.49 4.35
1994-Administration
Shares........... 37.81 6,960 0.74 4.24
1993-Institutional
Shares........... 103.74 2,760,871 0.48 4.33
1993-Administration
Shares/(f)/...... 103.74 5,326 0.73/(e)/ 3.78/(e)/
1992-Institutional
Shares........... 286.40 2,145,064 0.55 5.48
For the Period July 17, 1991/(g)/through October 31,
- ----------------------------------------------------
1991-Institutional
Shares........... 145.67/(e)/ 239,642 1.02(e) 6.49/(e)/
</TABLE>
The accompanying notes are an integral part of these financial statements.
39
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations Distributions to shareholders
--------------------------------------------------------- --------------------------------------
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment, In excess
value at Net option and currency from From net option of net
beginning investment futures related investment investment and futures investment
of period income transactions transactions operations income transactions income
------------------------------------------------------------------------------------------------------------
GS SHORT-TERM GOVERNMENT AGENCY FUND
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
For the Years Ended October 31,
- -------------------------------
1995-Institutional
Shares........... $ 9.64 $0.6652/(c)/ $ 0.1666/(c)/ $ -- $0.8318/(c)/ $(0.6518) $-- $--
1995-Administration
Shares........... 9.64 0.2384/(c)/ (0.0433)/(c)/ -- 0.1951/(c)/ (0.2051) -- --
1994-Institutional
Shares........... 10.14 0.5628/(c)/ (0.4592)/(c)/ -- 0.1036/(c)/ (0.5598) (0.0438) --
1994-Administration
Shares........... 10.14 0.5329/(c)/ (0.4539)/(c)/ -- 0.0790/(c)/ (0.5352) (0.0438) --
1993-Institutional
Shares........... 10.16 0.5627 (0.0135)/(a)/ -- 0.5492 (0.5627) -- (0.0065)
1993-Administration
Shares/(f)/...... 10.23 0.2725 (0.0900)/(a)/ -- 0.1825 (0.2725) -- --
1992-Institutional
Shares........... 10.22 0.6703 (0.0600)/(a)/ -- 0.6103 (0.6703) -- --
1991-Institutional
Shares........... 10.00 0.8020 0.2200/(a)/ -- 1.0220 (0.8020) -- --
1990-Institutional
Shares........... 10.07 0.8300 (0.0700)/(a)/ -- 0.7600 (0.8300) -- --
1989-Institutional
Shares........... 10.10 0.8800 -- -- 0.8800 (0.8800) -- --
For the Period August 15, 1988/(g)/through October 31,
- ------------------------------------------------------
1988-Institutional
Shares........... 10.00 0.1800 0.1000/(a)/ -- 0.2800 (0.1800) -- --
<CAPTION>
In excess of Ratio of
net realized Net net
gain on increase Ratio of investment
investment, From Total (decrease) Net asset net income
option and paid distributions in net value at expenses (loss)
futures in to asset end of Total to average to average
transactions capital shareholders value period return/(b)/ net assets net assets
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
For the Years Ended October 31,
- -------------------------------
1995-Institutional
Shares........... $ -- $-- $(0.6518) $ 0.1800 $ 9.82 8.97% 0.45% 6.87%
1995-Administration
Shares........... -- -- (0.2051) (0.0100) 9.63/(h)/ 2.10 0.70/(e)/ 7.91/(e)/
1994-Institutional
Shares........... -- -- (0.6036) (0.5000) 9.64 0.99 0.45 5.69
1994-Administration
Shares........... -- -- (0.5790) (0.5000) 9.64 0.73 0.70 5.38
1993-Institutional
Shares........... -- -- (0.5692) (0.0200) 10.14 5.55 0.45 5.46
1993-Administration
Shares/(f)/...... -- -- (0.2725) (0.0900) 10.14 1.74 0.70/(e)/ 4.84/(e)/
1992-Institutional
Shares........... -- -- (0.6703) (0.0600) 10.16 6.24 0.45 6.60
1991-Institutional
Shares........... -- -- (0.8020) 0.2200 10.22 10.93 0.45 8.25
1990-Institutional
Shares........... -- -- (0.8300) (0.0700) 10.00 8.23 0.45 8.62
1989-Institutional
Shares........... -- (0.0300) (0.9100) (0.0300) 10.07 9.08 0.46 8.71
For the Period August 15, 1988/(g)/through October 31,
- ------------------------------------------------------
1988-Institutional
Shares........... -- -- (0.1800) 0.1000 10.10 3.30 0.55/(e)/ 8.55/(e)/
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
-----------------------
Ratio of
Net net
assets investment
at end Ratio of income
Portfolio of expenses (loss)
turnover period to average to average
rate/(j)/ (in 000s) net assets net assets
------------------------------------------------
<S> <C> <C> <C> <C>
For the Years Ended October 31,
- -------------------------------
1995-Institutional
Shares........... 292.56% $103,760 0.72% 6.60%
1995-Administration
Shares........... 292.56 -- 0.90/(e)/ 7.71/(e)/
1994-Institutional
Shares........... 289.79 193,095 0.59 5.55
1994-Administration
Shares........... 289.79 730 0.84 5.24
1993-Institutional
Shares........... 411.66 359,708 0.64 5.31
1993-Administration
Shares/(f)/...... 411.66 16,490 0.80/(e)/ 4.74/(e)/
1992-Institutional
Shares........... 216.07 277,927 0.69 6.36
1991-Institutional
Shares........... 155.44 158,848 0.79 7.91
1990-Institutional
Shares........... 173.21 68,995 0.95 8.12
1989-Institutional
Shares........... 137.37 31,015 1.39 7.78
For the Period August 15, 1988/(g)/through October 31,
- ------------------------------------------------------
1988-Institutional
Shares........... 167.00(e) 39,052 1.42/(e)/ 7.68/(e)/
</TABLE>
40
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations Distributions to shareholders
--------------------------------------------------------- --------------------------------------
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment, In excess
value at Net option and currency from From net option of net
beginning investment futures related investment investment and futures investment
of period income transactions transactions operations income transactions income
------------------------------------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
For the Years Ended October 31,
- -------------------------------
1995-Institutional
Shares........... $ 9.79 $0.4235/(c)/ $0.1500/(c)/ $ -- $0.5735/(c)/ $(0.4235) $-- $ --
1995-Administration
Shares........... 9.79 0.3989/(c)/ 0.1500/(c)/ -- 0.5489/(c)/ (0.3989) -- --
1995-Service Shares.. 9.79 0.3744/(c)/ 0.1600/(c)/ -- 0.5344/(c)/ (0.3744) -- --
1994-Institutional
Shares........... 10.23 0.3787/(c)/ (0.3575)/(c)/ -- 0.0212/(c)/ (0.3787) (0.0825) --
1994-Administration
Shares........... 10.23 0.3537/(c)/ (0.3575)/(c)/ -- (0.0038)/(c)/ (0.3537) (0.0825) --
1994-Service
Shares/(i)/...... 9.86 0.0475/(c)/ (0.0700)/(c)/ -- (0.0225)/(c)/ (0.0475) -- --
1993-Institutional
Shares........... 9.93 0.3834 0.3000/(a)/ -- 0.6834 (0.3834) -- --
1993-Administration
Shares/(i)/...... 10.16 0.1555 0.0720/(a)/ -- 0.2275 (0.1555) -- --
For the Period October 1, 1992/(g)/through October 31,
- ------------------------------------------------------
1992-Institutional
Shares........... 10.00 0.0341 (0.0700)/(a)/ -- (0.0359) (0.0341) -- --
<CAPTION>
In excess of Ratio of
net realized Net net
gain on increase Ratio of investment
investment, From Total (decrease) Net asset net income
option and paid distributions in net value at expenses (loss)
futures in to asset end of Total to average to average
transactions capital shareholders value period return/(b)/ net assets net assets
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
For the Years Ended October 31,
- -------------------------------
1995-Institutional
Shares........... $ -- $ -- $(0.4235) $ 0.1500 $ 9.94 5.98% 0.45% 4.31%
1995-Administration
Shares........... -- -- (0.3989) 0.1500 9.94 5.76 0.70 4.14
1995-Service Shares.. -- -- (0.3744) 0.1600 9.95 5.59 0.95 3.87
1994-Institutional
Shares........... -- -- (0.4612) (0.4400) 9.79 0.17 0.45 3.74
1994-Administration
Shares........... -- -- (0.4362) (0.4400) 9.79 (0.11) 0.70 3.51
1994-Service
Shares/(i)/...... -- -- (0.0475) (0.0700) 9.79 (0.32)/(k)/ 0.95/(e)/ 4.30/(e)/
1993-Institutional
Shares........... -- -- (0.3834) 0.3000 10.23 7.03 0.41 3.70
1993-Administration
Shares/(i)/...... -- -- (0.1555) 0.0720 10.23 2.28/(k)/ 0.70/(e)/ 3.32/(e)/
For the Period October 1, 1992/(g)/ through October 31,
- -------------------------------------------------------
1992-Institutional
Shares........... -- -- (0.0341) (0.0700) 9.93 (0.34)/(k)/ 0.05/(e)/ 4.58/(e)/
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
-----------------------
Ratio of
Net net
assets investment
at end Ratio of income
Portfolio of expenses (loss)
turnover period to average to average
rate/(j)/ (in 000s) net assets net assets
------------------------------------------------
<S> <C> <C> <C> <C>
For the Years Ended October 31,
- -------------------------------
1995-Institutional
Shares........... 259.52% $ 58,389 0.77% 3.99%
1995-Administration
Shares........... 259.52 46 1.02 3.82
1995-Service Shares.. 259.52 454 1.27 3.55
1994-Institutional
Shares........... 354.00 83,704 0.61 3.58
1994-Administration
Shares........... 354.00 3,866 0.86 3.35
1994-Service
Shares/(i)/...... 354.00 44 1.11/(e)/ 4.14/(e)/
1993-Institutional
Shares........... 404.60 115,803 1.06 3.05
1993-Administration
Shares/(i)/...... 404.60 911 1.07/(e)/ 2.95/(e)/
For the Period October 1, 1992/(g)/ through October 31,
- -------------------------------------------------------
1992-Institutional
Shares........... 31.19/(k)/ 14,601 2.68/(e)/ 1.95/(e)/
</TABLE>
41
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations Distributions to shareholders
--------------------------------------------------------- --------------------------------------
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment, In excess
value at Net option and currency from From net option of net
beginning investment futures related investment investment and futures investment
of period income transactions transactions operations income transactions income
------------------------------------------------------------------------------------------------------------
GS Core Fixed Income Fund
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended October 31,
- ------------------------------
1995-Institutional
Shares........... $ 9.24 $0.6423 $ 0.7610 $ -- $ 1.4033 $(0.6433) $ -- $ --
For the Period January 5, 1994/(g)/ through October 31,
- -------------------------------------------------------
1994-Institutional
Shares........... 10.00 0.4648 (0.7617) -- (0.2969) (0.4648) -- --
<CAPTION>
In excess of Ratio of
net realized Net net
gain on increase Ratio of investment
investment, From Total (decrease) Net asset net income
option and paid distributions in net value at expenses (loss)
futures in to asset end of Total to average to average
transactions capital shareholders value period return/(b)/ net assets net assets
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended October 31,
- ------------------------------
1995-Institutional
Shares........... $ -- $ -- $(0.6433) $ 0.7600 $10.00 15.72% 0.45% 6.56%
For the Period January 5, 1994/(g)/ through October 31,
- -------------------------------------------------------
1994-Institutional
Shares........... -- -- (0.4648) (0.7617) 9.24 (3.00) 0.45/(e)/ 6.48/(e)/
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
-----------------------
Ratio of
Net net
assets investment
at end Ratio of income
Portfolio of expenses (loss)
turnover period to average to average
rate/(j)/ (in 000s) net assets net assets
------------------------------------------------
<S> <C> <C> <C> <C>
For the Year Ended October 31,
- ------------------------------
1995-Institutional
Shares........... 383.26% $55,502 0.96% 6.05%
For the Period January 5, 1994/(g)/ through October 31,
- -------------------------------------------------------
1994-Institutional
Shares........... 288.25 24,508 1.46/(e)/ 5.47/(e)/
</TABLE>
- ------------------
(a) Includes the 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, a complete redemption of
the investment at the net asset value at the end of the period. For Class A
shares only, total return would be reduced if a sales charge were taken into
account.
(c) Calculated based on the average shares outstanding methodology.
(d) Class A shares commenced operations on May 15, 1995.
(e) Annualized.
(f) Administration share activity commenced on April 15, 1993.
(g) Commencement of operations.
(h) GS Short-Term Government Agency Administration shares were redeemed in full
on February 23, 1995. Amount shown represents net asset value on February
23, 1995.
(i) Administration and service share activity commenced on May 20, 1993 and
September 20, 1994, respectively.
(j) Includes the effect of mortgage dollar roll transactions.
(k) Not annualized.
42
<PAGE>
- -------------------------------------------------------------------------------
Report of Independent Public Accountants
- -------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of the GS Adjustable Rate Government
Agency Fund, GS Short-Term Government Agency Fund, GS Short Duration Tax-Free
Fund and GS Core Fixed Income Fund:
We have audited the accompanying statements of assets and liabilities of the
GS Adjustable Rate Government Agency Fund, GS Short-Term Government Agency Fund,
GS Short Duration Tax-Free Fund and GS Core Fixed Income Fund (portfolios of
Goldman Sachs Trust, a Massachusetts Business Trust) including the statements of
investments, as of October 31, 1995, and the related statements of operations,
the statements of changes in net assets and the financial highlights for each of
the periods presented. These financial statements and the financial highlights
are the responsibility of the Funds' management. Our responsibility is to
express an opinion on these financial statements and the financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1995 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and the financial highlights referred
to above present fairly, in all material respects, the financial position of the
GS Adjustable Rate Government Agency Fund, GS Short-Term Government Agency Fund,
GS Short Duration Tax-Free Fund and GS Core Fixed Income Fund as of October 31,
1995, the results of their operations and the changes in their net assets and
the financial highlights for each of the periods presented, in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
December 8, 1995
43
<PAGE>
[This Page Intentionally Left Blank]
44
<PAGE>
[This Page Intentionally Left Blank]
45
<PAGE>
[This Page Intentionally Left Blank]
46
<PAGE>
- -------------------------------------------------------------------------------
This Annual Report is authorized for distribution to prospective investors only
when preceded or accompanied by a Goldman Sachs Trust Institutional Funds
Prospectus which contains facts concerning each Fund's objectives and policies,
management, expenses and other information.
- -------------------------------------------------------------------------------
47
<PAGE>
The Goldman Sachs
Fixed Income
Portfolios
Annual Report
October 31, 1995
[ ]
GS Adjustable Rate Government Agency Fund
GS Short-Term Government Agency Fund
GS Short Duration Tax-Free Fund
GS Core Fixed Income Fund
Goldman Sachs
1 New York Plaza
New York, NY 10004
Trustees
Paul C. Nagel, Jr., Chairman
Ashok N. Bakhru
Marcia L. Beck
David B. Ford
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
Officers
Marcia L. Beck, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
Goldman Sachs
Investment Adviser, Administrator,
Distributor and Transfer Agent
GST/AR/1095(INST)
===============================================================================
